MICHAEL STELLA, Plaintiff and Appellant, v. ASSET MANAGEMENT CONSULTANTS, INC., et al., Defendants and Respondents.
No. B269207
Second Dist., Div. Seven
Jan. 17, 2017
181
Catanzarite, Kenneth J. Catanzarite, Nicole M. Catanzarite-Woodward and Eric V. Anderton for Plaintiff and Appellant.
Jackson Tidus, M. Alim Malik and Charles M. Clark for Defendants and Respondents Asset Management Consultants, Inc., James R. Hopper, Gloria Hopper, AMC-Hamilton LLC, AMC-Baker-Cal LLC, AMC-Overland LLC, AMC-Wilnaldi LLC, AMC-Capom LLC, AMC-Arbor Square LLC and AMC-Packard LLC.
Jampol Zimet, Marc J. Zimet and Steven J. Markowitz for Defendants and Respondents Property Mangement Associates, Inc., LM Property Service, Inc., Thomas Spear and Joshua Fein.
Goshgarian & Marshall, John A. Marshall and Mark S. Reusch for Defendants and Respondents Davies Lemmis Raphaely Law Corporation, Merton Randel Davies and Rosemary Lemmis.
Cadden & Fuller, Thomas H. Cadden and John B. Taylor for Defendants and Respondents Allen L. Basso, Smith, Linden & Basso, LLP, Allen A. Basso and August Real Estate Enterprises, LP.
Greenwald & Hoffman, Paul A. Hoffman and John R. Flocken for Defendants and Respondents Hamilton Venture, L.P., Baker-Cal Venture, L.P., Overland Venture, L.P., Wilnaldi Venture, L.P., Capom Venture, L.P., Arbor Square Venture, L.P., and Packsard Venture, L.P.
OPINION
PERLUSS, P. J.—Michael Stella appeals from the judgment of dismissal entered after a judicial referee, appointed pursuant to
FACTUAL AND PROCEDURAL BACKGROUND
1. The Limited Partnership Investments
From February 2007 through February 2009 Stella invested in seven limited partnerships, each of which was formed to acquire ownership of specific real property either as a tenant in common or as the sole owner of the property.2 Stella had previously made multiple investments over a period of approximately 20 years with defendants Asset Management Consultants, Inc. (AMC), and its principals James Hopper and Gloria Hopper.
Stella was solicited to invest in the limited partnerships through a separate private placement memorandum prepared for each of the investments by
According to Stella‘s description of the role of various entities and individuals named as defendants in his lawsuit, Property Management Associates, Inc., LM Property Services, Inc., Thomas Spear and Joshua Fein were responsible for overseeing the due diligence for each of the real property acquisitions by the limited partnerships. Davies Lemmis Raphaely Law Corporation, Merton Randel Davies and Rosemary Lemmis (lawyer defendants) were legal counsel for AMC. Kevin Hopper also provided legal services to AMC and acted, either directly or indirectly, as manager for the general partners of the limited partnerships. Smith, Linden & Basso, LLP, and Allen L. Basso acted as accountants for the various entities, and Allen L. Basso and Allen A. Basso, as well as August Real Estate Enterprises, L.P., provided real estate services in connection with the investment transactions.
a. The private placement memoranda
Using the documents for Hamilton Venture, L.P., as the exemplar, as Stella does in his opening brief,5 the private placement memorandum explained the limited partnership was being formed to acquire, operate and sell a two-story office building in Torrance, California, over a six-to-nine-year period. The total purchase price for the property was $14,735,000.
The offering was for 332 limited partnership units at $10,000 per unit with a minimum subscription of two units. In addition to the $3.32 million to be contributed by the limited partnership, co-owners of the property would contribute $949,400; and a loan for $10,845,000 secured by a first deed of trust would be obtained, “which is approximately 73.60% of the Purchase
The private placement memorandum stated the business plan for the acquisition was, in part, to “[a]cquire the Property at a price that is below the replacement cost.” The total funding for the project was $15,114,400. The use of proceeds section of the private placement memorandum repeated that the purchase price of the property was $14,735,000 and described organizational fees, general and administrative costs, legal fees, acquisition and due diligence fees of $75,000; miscellaneous closing costs of $110,513; loan origination fees and costs of $138,450; and working capital and reserves of $55,437. The discussion of use of funds also stated, in the event the fees and costs described were less than estimated, “the excess will be added to operating reserves or returned to Partners at the discretion of the General Partner.”
The risk factors section of the private placement memorandum contained the following caution in its listing of “operating risks“: ”Market Value of Property. The purchase price of the Property has been negotiated to include a commission to be paid to Manager of the General Partner of the General Partner‘s Manager by the Seller (see ‘General Partner‘s Compensation and Fees‘) in addition to other brokerage commissions owed by the Seller. Accordingly, the Seller would have sold the Property for a lower Purchase Price if it were not obligated to pay such commission. Although the General Partner believes that the Purchase Price fairly corresponds to the market value of the Property, and it is expected that the Property will be appraised for that amount by the lender financing the acquisition, there is no assurance that the Partnership will be able to sell the Property for such amount.”
On page 4 of the private placement memorandum, in all capital letters, investors were warned, “THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AS DESCRIBED IN THIS MEMORANDUM UNDER THE CAPTION ‘RISK FACTORS.‘” On the following page, also in all capital letters, the investors were again advised, “SEE ‘RISK FACTORS’ FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH THIS OFFERING.” Paragraph 1.B. of the representations and acknowledgments in the subscription agreement, initialed by Stella, provided, “I have reviewed the Confidential Private Placement Memorandum that accompanies this Subscription Agreement, including the discussion of the Risk Factors contained in that Memorandum.”
Paragraph 6.6.2 of each of the seven limited partnership agreements repeated the private placement memorandum‘s description of the real estate commission. The Hamilton Venture, for example, provided, “Brokerage Commission upon Acquisition. At the closing of the acquisition of the Property, Asset Management Consultants, Inc. (‘AMC‘), which is the manager of the General Partner‘s manager, will receive a real estate commission in the amount of Five Hundred Sixty Five Thousand Dollars ($565,000) from the seller of the property. This commission will be distributed in part by AMC to the General Partner, its principals and affiliates and/or other parties and entities who have assisted in the purchase of the Property and/or the funding of the Partnership.”
Each limited partnership agreement also contained in paragraph 13.8 a dispute resolution provision that mandated use of a judicial reference pursuant to
c. Stella‘s investments
Stella purchased four limited partnership units ($40,000) in Hamilton Venture, L.P., in March 2007. He completed his acquisitions of limited partnership units in the other six limited partnerships in July 2007 ($40,000), May 2008 ($20,000), August 2008 ($20,000), October 2008 ($20,000), January 2009 ($20,000) and February 2009 ($20,000).
2. Stella‘s Lawsuit
On May 6, 2013—more than six years after the close of the Hamilton Venture, L.P., offering and more than four years after the close of the Packard Venture, L.P., the last of the seven limited partnership investments—Stella filed a 41-page putative class action complaint for intentional misrepresentation, fraud by concealment and related common law and statutory causes of action on behalf of himself and other limited partner investors against AMC, the seven limited partnerships, their general partners and the various entities and individuals Stella believed were responsible for the preparation and distribution of the private placement memoranda used to solicit the limited
The gravamen of the lawsuit was that the private placement memoranda‘s description of a real estate commission to be paid by the seller of the property at closing ($565,000 in the Hamilton Venture transaction) was false.7 In fact, the payment was not a real estate commission but a syndication fee or markup, the economic burden of which was borne by the purchasers of the limit partnership units, not the seller of the real property. That is, the purported real estate commission did not reduce the negotiated purchase price received by the seller, as it would if the seller truly paid the commission, but was added to the negotiated price so that its economic burden was shifted to the investors, thereby diluting the value of the investment. As a result of this fundamental misrepresentation, Stella alleged the private placement memoranda contained additional false representations or misleading half-truths concerning the fair market value of the property, the appraised value of the property, the loan-to-cash value ratio and the compensation to be received by the general partner of the limited partnership.8
Stella alleged AMC and the other defendants knew these representations were false and intended the investors to rely on them. He also alleged he and the investor classes he sought to represent read the private placement memoranda and reasonably relied on the misrepresentations contained in them.
3. Appointment of the Judicial Referee
Following the filing of the original complaint, all defendants filed or joined motions for a general reference pursuant to
4. Defendants’ Demurrers
Stella filed his first amended complaint after the appointment of the referee. All defendants demurred or joined in the demurrers filed by other defendants. After briefing and oral argument the referee issued a statement of decision, reported to the trial court pursuant to
Defendants moved for entry of judgment pursuant to
DISCUSSION
1. Standard of Review
A demurrer tests the legal sufficiency of the factual allegations in a complaint. We independently review the superior court‘s ruling on a demurrer and determine de novo whether the complaint alleges facts sufficient to state a cause of action or discloses a complete defense. (Loeffler v. Target Corp. (2014) 58 Cal.4th 1081, 1100 [171 Cal.Rptr.3d 189, 324 P.3d 50]; Committee for Green Foothills v. Santa Clara County Bd. of Supervisors (2010) 48 Cal.4th 32, 42 [105 Cal.Rptr.3d 181, 224 P.3d 920].) We assume the truth of the properly pleaded factual allegations, facts that reasonably can be inferred from those expressly pleaded and matters of which judicial notice has been taken. (Evans v. City of Berkeley (2006) 38 Cal.4th 1, 20 [40 Cal.Rptr.3d 205, 129 P.3d 394]; Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081 [6 Cal.Rptr.3d 457, 79 P.3d 569].) We liberally construe the pleading with a view to substantial justice between the parties (
Although a general demurrer does not ordinarily reach affirmative defenses, it “will lie where the complaint ‘has included allegations that clearly disclose some defense or bar to recovery.’ ” (Casterson v. Superior Court (2002) 101 Cal.App.4th 177, 183 [123 Cal.Rptr.2d 637]; accord, Nolte v. Cedars-Sinai Medical Center (2015) 236 Cal.App.4th 1401, 1406 [187 Cal.Rptr.3d 737]; Favila v. Katten Muchin Rosenman LLP (2010) 188 Cal.App.4th 189, 224 [115 Cal.Rptr.3d 274].) “Thus, a demurrer based on an affirmative defense will be sustained only where the face of the complaint discloses that the action is necessarily barred by the defense.” (Casterson, at p. 183; accord, Favila, at p. 224; see Aryeh v. Canon Business Solutions, Inc. (2013) 55 Cal.4th 1185, 1191 [151 Cal.Rptr.3d 827, 292 P.3d 871] [application of a statute of limitations based on facts alleged in a complaint is a legal question subject to de novo review].)
2. All of Stella‘s Causes of Action Are Time-barred
Traditionally, a claim accrues ” ’ “when [it] is complete with all of its elements“—those elements being wrongdoing[ or breach], harm, and causation.’ ” (Aryeh v. Canon Business Solutions, Inc., supra, 55 Cal.4th at p. 1191; accord, Howard Jarvis Taxpayers Assn. v. City of La Habra (2001) 25 Cal.4th 809, 815 [107 Cal.Rptr.2d 369, 23 P.3d 601].) “This is [known as] the ‘last element’ accrual rule . . . .” (Aryeh, at p. 1191; see ibid. [“ordinarily, the statute of limitations runs from ‘the occurrence of the last element essential to the cause of action’ “]; Howard Jarvis, at p. 815 [same]; Quarry v. Doe I (2012) 53 Cal.4th 945, 960 [139 Cal.Rptr.3d 3, 272 P.3d 977].)
An exception to the general rule of accrual is the delayed discovery rule, “which postpones accrual of a cause of action until the plaintiff
Stella alleged the misrepresentations and material omissions occurred at the time of each limited partnership transaction and, as a result, has acknowledged all his causes of action, whether governed by a two-, three- or four-year statute of limitations, are time-barred absent application of the delayed discovery rule to postpone accrual of the statutes of limitations. That is, unless the discovery rule applies, Stella was injured and the statute of limitations on his various causes of action began to run when he purchased limited partnership units in each of the seven investment transactions based on what he now deems to be an artificially inflated purchase price for the commercial properties acquired by the limited partnerships. (See WA Southwest 2, LLC v. First American Title Ins. Co. (2015) 240 Cal.App.4th 148, 156, fn. 6 [192 Cal.Rptr.3d 423] (WA Southwest) [“[r]eceipt of investment disclosures can trigger the statute of limitations in appropriate cases“].) However, Stella argues he adequately pleaded facts demonstrating he was unaware of the false representations concerning the nature of the “real estate commission” to be paid to AMC until April 2012 and could not have discovered the true nature of that charge any earlier despite exercising reasonable diligence. (See Fox v. Ethicon Endo-Surgery, Inc., supra, 35 Cal.4th at p. 815 [“[a] plaintiff seeking to utilize the discovery rule must plead facts to show his or her inability to have discovered the necessary information earlier despite reasonable diligence“].)
As discussed, Stella pleaded he first discovered the misrepresentations regarding the purchase price and seller-paid commissions in the transactions at issue in this case on April 14, 2012—slightly more than one year before he filed his original complaint—following a conversation with counsel for investors in another limited partnership transaction sponsored by several of the defendants. Stella also alleged he had no reason to suspect the private placement memoranda were materially false prior to that time because he trusted the Hoppers and AMC, with whom he had a 20-year investment relationship, and further alleged a reasonable investigation at the time of the
When a plaintiff reasonably should have discovered facts for purposes of the accrual of a cause of action or application of the delayed discovery rule is generally a question of fact, properly decided as a matter of law only if the evidence (or, in this case, the allegations in the complaint and facts properly subject to judicial notice) can support only one reasonable conclusion. (Jolly v. Eli Lilly & Co., supra, 44 Cal.3d at p. 1112; Broberg v. The Guardian Life Ins. Co. of America (2009) 171 Cal.App.4th 912, 921 [90 Cal.Rptr.3d 225] (Broberg).) That is the case here: Stella‘s allegations fail, as a matter of law, to trigger the delayed discovery rule given the clear and specific statements in the private placement memoranda, which Stella admits he read and relied on, that the purchase price for the properties acquired by the limited partnerships had been negotiated to include the commission to be paid to AMC and related entities in addition to other brokerage commissions owed by the seller and the additional unambiguous explanation, “the Seller would have sold the Property for a lower Purchase Price if it were not obligated to pay such commission.” Those disclosures provided actual notice that the investors, not the sellers of the real property being acquired for the limited partnerships, bore the economic burden of the challenged “real estate commission.” At the very least, those statements put Stella and other sophisticated investors who received the private placement memoranda on notice that further inquiry was necessary. “Reasonable diligence in such circumstances does not consist of ignoring a private placement memorandum received prior to making an investment.” (WA Southwest, supra, 240 Cal.App.4th at p. 157.)10
Contesting this conclusion by relying on language in Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97 [55 Cal.Rptr.3d 621] (Fremont Indemnity), Stella argues it was improper for the referee on
Stella misconstrues the holding of Fremont Indemnity and misstates its applicability to the delayed discovery issue presented by defendants’ demurrers. In Fremont Indemnity the plaintiff alleged, in part, that the defendants had misappropriated certain funds and that their conduct was not excused by the terms of a July 2, 2002 letter agreement among the parties. The complaint did not detail the terms of the purported agreement or attach a copy of the letter agreement to the pleading. (Fremont Indemnity, supra, 148 Cal.App.4th at pp. 112–113.) The demurring parties requested judicial notice of a July 2, 2002 letter agreement and argued under the terms of the agreement they had been released from any liability to the plaintiff for the purported misappropriation. (Id. at p. 113.) That interpretation of the July 2, 2002 letter agreement was disputed. (Id. at p. 115.) After the trial court sustained the demurrer, our colleagues in Division Three of this court held the trial court had improperly taken judicial notice of the meaning and enforceability of the letter agreement, noting that the plaintiff had not alleged the letter agreement was an enforceable contract: “For a court to take judicial notice of the meaning of a document submitted by a demurring party based on the document alone, without allowing the parties an opportunity to present extrinsic evidence of the meaning of the document, would be improper . . . . [A] court cannot by means of judicial notice convert a demurrer into an incomplete evidentiary hearing in which the demurring party can present documentary evidence and the opposing party is bound by what that evidence appears to show.” (Id. at pp. 114–115.) Because the plaintiff “d[id] not rely on the letter dated July 2, 2002, to support a cause of action and did not attach a copy of the letter to its complaint, [it was] not precluded from presenting extrinsic evidence concerning the enforceability and proper interpretation of the letter.” (Id. at p. 118.)
Unlike Fremont Indemnity the case at bar does not concern the interpretation of the terms of an agreement or enforceability of a contract. Indeed, Stella has never suggested extrinsic evidence was required to properly construe the provisions of the private placement memoranda upon which he
Similarly, this court‘s decision in Broberg, supra, 171 Cal.App.4th 912, upon which Stella places heavy reliance, does not require a different result. In Broberg we reversed the dismissal of an insured‘s lawsuit for fraud and unfair competition against his insurer and the insurer‘s agent after the trial court sustained demurrers without leave to amend. The insured had alleged he had been falsely promised by the agent the earnings from a whole life insurance policy would be sufficient to pay the premium costs after the 11th year and had been given misleading marketing materials that similarly represented that out-of-pocket premium costs would be eliminated in the 12th year of the policy‘s life—a “vanishing premium” policy. (Id. at p. 915.) The lawsuit was filed 11 years after the policy had been sold; the insured alleged he had not discovered the misrepresentations until billed for additional premium for year 12. (Id. at p. 916.) The trial court sustained the insurer‘s and the agent‘s demurrers, ruling the claims had accrued when the policy was purchased and disclaimers in the policy gave the insured at least inquiry notice that earnings from the policy were not guaranteed, thus precluding application of the delayed discovery rule. (Id. at pp. 916, 918.)12
We reversed, holding there was a question for the trier of fact whether the insured‘s reliance on the insurer‘s deceptive policy illustration and its agent‘s promise that out-of-pocket premiums would not be required after the 11th
Here, in sharp contrast to Broberg, there was no allegation that any of the defendants made a false promise to Stella. Rather, his claims of fraud and other actionable misconduct rest on his understanding that a seller-paid commission generally would not affect the fair market value/selling price of property, thus the description of the markup to be paid to AMC as a commission paid by the seller was false or misleading. Whether, as in Broberg, nonconspicuous disclaimers are adequate to negate an express promise and misleading marketing materials as a matter of law is very different from the question in this case whether an investor‘s subjective understanding of the meaning of a phrase in an investment document must be accepted at face value or whether, at the very least, an obligation to inquire further arose when the investment disclosures themselves contained information that directly contradicted that understanding.
Stella and the other limited partner investors were cautioned on the first page of each private placement memorandum that the partnership units being offered “are speculative and involve a high degree of risk” and were encouraged to retain their own counsel and accountant to review the investment. That high-risk warning was repeated on page 4 of the private placement memorandum and then again on page 9 with specific directions to the potential investor to review the “risk factors” included in the memorandum. The risk factors, in turn, disclosed that the price paid to acquire the property had been increased beyond what the seller would have otherwise accepted to accommodate the commission to be paid to AMC. When he signed the subscription agreements for each limited partnership offering, Stella acknowledged he had reviewed this section of the private placement memoranda. His failure to conduct any further inquiry into the meaning of that disclosure or the relationship between the increase in the purchase price caused by the
The clear import of the market value risk factor disclosure is not made less certain, as Stella suggests, by the additional statement that the general partner “believes that the Purchase Price fairly corresponds to the market value of the Property, and it is expected that the Property will be appraised for that amount by the lender financing the acquisition . . . .” First, as Stella necessarily acknowledges, the statement goes on to caution “there is no assurance that the Partnership will be able to sell the Property for such amount.” Second, the private placement memoranda each contained a warning concerning forward-looking statements, which were defined as “statements containing the words ‘believes,’ ‘assume,’ ‘will,’ ‘may,’ ‘might’ and words of similar importance,” cautioning that such forward-looking statements involved known and unknown risks and uncertainties that might cause actual results to be materially different from the performance expressed or implied by those statements. Given the explicit notice that the commission figure had been added to the price the seller would have accepted for the property, any suggested relationship between the ultimate purchase price and the market value or anticipated lender appraised value for the property, expressed as a belief or expectation, could not be accepted without further inquiry—an inquiry that Stella conceded he never made.13
In sum, the private placement memoranda attached as exhibits to Stella‘s first amended complaint, rather than the conclusory allegations in the pleading itself, establish that Stella had inquiry notice, if not actual notice, of the alleged wrongdoing at the time the transactions closed. The delayed discovery rule does not apply, and the demurrers were properly sustained without leave to amend.14
Stella advances several grounds to argue the trial court erred in ordering a general reference pursuant to
Even if Stella were correct on one or more of these points, however, the error in appointing a referee is grounds for reversal only if it resulted in a “miscarriage of justice“—that is, that a different result would have been probable if the error had not occurred. (
We have reviewed the ruling on the demurrers de novo and determined each cause of action alleged in the first amended complaint is time-barred as a matter of law. Accordingly, whether the initial decision to sustain the demurrers was made by a referee pursuant to
The judgment of dismissal is affirmed. Defendants are to recover their costs on appeal.
Zelon, J., and Segal, J., concurred.
A petition for a rehearing was denied February 6, 2017, and respondents’ petition for review by the Supreme Court was denied April 19, 2017, S240318.