Case Name: Zhiwei Xu, et al. v. Chen Chi Wang, et al.
Case No.: 18CV321297

I. Factual Background and Procedural History

A. Factual Background

Plaintiffs Zhiwei Xu, Xiaohua Yang, Zhen Yang, and Xuanming Lu (collectively, “Plaintiffs”) allege defendants Bei Qin (“Qin”) and Chen Chi Wang (“Wang”) defrauded them into investing in real property in the Mojave Desert. Qin and Wang allegedly formed various entities to perpetrate the fraud, namely defendants ACEH Capital, LLC doing business as ACE Capital Group (“ACE”), ACEQ Investment Group, Inc. (“ACEQ Investment”), and 230 East Street and Avenue B, LLC (collectively, the “Entities”).

According to the allegations in the second amended complaint (“SAC”), ACE originally purchased undeveloped real property in an unincorporated area of the Mojave Desert (the “Property”) for $605,000 in 2006. (SAC, ¶ 20.) One year later, Qin, who was ACE’s real estate broker, arranged for it to sell the Property to his company 230 East Street and Avenue B, LLC (“Purchaser”) for $1,353,158.40. (SAC, ¶¶ 21–24 & Ex. A [sale agreement], Ex. B [Purchaser’s Articles of Organization], Ex. C [Purchaser’s Operating Agreement].)

Qin thereafter solicited investments in Purchaser by circulating a Private Placement Memorandum. (SAC, ¶ 26 & Ex. D.) Qin offered for sale and each of the plaintiffs ultimately purchased a 6.67 percent interest in Purchaser for the price of $93,991.00 each. (SAC, ¶¶ 26–27.) Shortly thereafter, Wang, as Chief Executive Officer and Managing Member of ACE, executed a grant deed transferring the Property to Purchaser. (SAC, ¶ 35 & Ex. E.) Several months later, Purchaser issued a check to ACE for the full purchase price. (SAC, ¶ 36.)

Plaintiffs claim Qin tricked them into investing in the Property, which was actually worth only $330,000. (SAC, ¶¶ 37–38, 40.) Plaintiffs allege Qin misrepresented the true value and development potential of the Property. (SAC, ¶ 30.) Plaintiffs purportedly did not learn about the value of the Property until June 2017 when Qin held a member meeting and furnished copies of financial statements for Purchaser and the sale agreement. (SAC, ¶¶ 47–50.)

Plaintiffs assert causes of action against Qin, Wang, and the Entities for: (1) breach of fiduciary duty (against Qin); (2) fraud (against Qin); (3) violation of California’s Unfair Competition Law (against Qin and Purchaser); (4) accounting (against Qin, Purchaser, and ACEQ Investment); and (5) conspiracy to commit fraud (against Wang, ACE, and ACEQ Investment).

B. Procedural History

Plaintiffs commenced this action in December 2017. They amended their complaint once as a matter of right in April 2018. Wang and ACE (collectively, “Defendants”) demurred to the second cause of action for fraud in the first amended complaint. The Court (Hon. James L. Stoelker) sustained the demurrer to the second cause of action with leave to amend because Plaintiffs did not adequately allege intentional misrepresentations or acts of concealment. On November 13, 2018, Plaintiffs filed the operative SAC, which contains an additional fifth cause of action for “[c]onspiracy to commit fraud.” (SAC at p. 1:17.) Defendants demur to the fifth cause of action on the ground of failure to state facts sufficient to constitute a cause of action and filed a request for judicial notice in support.

II. Request for Judicial Notice

Defendants request judicial notice of a grant deed recorded in Los Angeles County as well as information from the website of the Los Angeles County Registrar-Recorder. In support, they cite Evidence Code section 452, subdivision (c), which authorizes judicial notice of “[o]fficial acts of the legislative, executive, and judicial departments of the United States and of any state of the United States.” Official documents and records prepared by a government agency are subject to judicial notice under subdivision (c). (See, e.g., Field v. Bowen (2011) 199 Cal.App.4th 346, 370, fn. 5.) For example, a court may take judicial notice of information provided by an agency on its official website. (See, e.g., Placerville Historic Preservation League v. Judicial Council of California (2017) 16 Cal.App.5th 187, 191, fn. 1.) Additionally, a court may take judicial notice of the existence and undisputed facial contents of recorded instruments. (Yvanova v. New Century Mortgage Corp. (2016) 62 Cal.4th 919, 924, fn. 1, citing Evid. Code, § 452, subds. (c) & (h).) With that said, a matter must be relevant to a material issue for a court to take judicial notice of it. (Silverado Modjeska Recreation and Park Dist. v. County of Orange (2011) 197 Cal.App.4th 282, 307, fn. 18.) The grant deed and information from the official website of the Los Angeles County Registrar-Recorder are not relevant to a material issue presented by the demurrer. Accordingly, the Court does not take judicial notice of those matters. Defendants’ request for judicial notice is therefore DENIED
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III. Demurrer

Defendants argue the demurrer to the fifth cause of action for conspiracy to commit fraud should be sustained because Plaintiffs do not allege all of the essential elements of their claim with particularity.

In the fifth cause of action, Plaintiffs incorporate by reference all of the preceding allegations in the complaint and additionally allege Defendants knew Qin planned to defraud them and “agreed and conspired” to perpetrate the fraud. (SAC, ¶¶ 96–97.) Thus, Plaintiffs’ fraud claim as asserted against Defendants rests exclusively on attributing Qin’s misconduct to them based on a conspiracy theory of liability. Defendants argue Plaintiffs do not adequately allege Qin misrepresented or concealed facts and that they relied on Qin’s misrepresentations and acts of concealment.
To state a claim for fraud based on intentional misrepresentation, a plaintiff must allege “the defendant made a false representation as to a past or existing material fact….” (West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 792, citing Lazar v. Super. Ct. (1996) 12 Cal.4th 631, 638.) A plaintiff may also state a claim for fraud based on the defendant’s concealment of or failure to disclose a material fact that he or she had a duty to disclose. (Linear Technology Corp. v. Applied Materials, Inc. (2007) 152 Cal.App.4th 115, 131.) The factual allegations supporting a fraud claim must be pleaded with particularity. (Lazar, supra, 12 Cal.4th at pp. 644–45; Cansino v. Bank of America, N.A. (2014) 224 Cal.App.4th 1462, 1472.) “[G]eneral and conclusory allegations do not suffice.” (Lazar, supra, 12 Cal.4th at p. 645.)

To plead with particularity a claim based on an intentional misrepresentation, a plaintiff must allege “how, when, where, to whom, and by what means the representations were tendered.” (Lazar, supra, 12 Cal.4th at p. 645 [internal quotation marks and citation omitted].) Plaintiffs generally allege Qin misled them about the value and security of their investment, the reasonableness of the purchase price for the Property, and the Property’s development potential. (SAC, ¶ 64.) But as Defendants articulate, Plaintiffs still do not allege specific facts about Qin’s purported misrepresentations and the circumstances of those misrepresentations, such as when and to whom they were made. Their allegations are nearly identical to the allegations in the first amended complaint in this regard. Thus, the allegations are still insufficient to state a claim for fraud based on intentional misrepresentations.

With that said, Plaintiffs have attempted to clarify their allegations of concealment. For the most part, Plaintiffs’ amendments consist of inserting the word “concealed” so as to actually identify the facts purportedly concealed by Qin. (SAC, ¶¶ 69–70, 71–72, 74.) Plaintiffs now allege Qin concealed: the purchase price of the Property in 2006; the fact that title to the Property was transferred from ACE to 230 East Street and Avenue B, LLC before ACE received payment; Qin’s status as a dual agent that received a commission; and the fact that the defendants previously conspired to defraud other investors with a similar scheme. (SAC, ¶¶ 69–70, 71–72, 74.)

Defendants assert the concealment allegations also lack particularity based on the standard described above for claims based on intentional misrepresentations. In opposition, Plaintiffs argue there is a different specificity requirement for a fraud claim based on an act of concealment or nondisclosure as compared to a claim based on an intentional misrepresentation. Although they cite no authority to support their position, it has merit. Courts have recognized that applying the same particularity standard to claims based on concealment or nondisclosure would require plaintiffs to plead a negative, i.e. how, when, and by what means something was never said. (Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1384.) Thus, with respect to facts necessarily within a defendant’s knowledge, the same level of particularity is not required. (Ibid.)

With this clarification in mind, “there are four circumstances in which nondisclosure or concealment may constitute actionable fraud: (1) when the defendant is in a fiduciary relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material facts not known to the plaintiff; (3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the defendant makes partial representations but also suppresses some material facts.” (OCM Principal Opportunities Fund, L.P. v. CIBC World Markets Corp. (2007) 157 Cal.App.4th 835, 859 [internal quotation marks and citations omitted]; see also Linear Technology Corp., supra, 152 Cal.App.4th at p. 132.)

Here, although Plaintiffs use the word “concealed” they do not allege facts about active concealment by Qin. Additionally, they do not clearly or explicitly allege Qin failed to disclose material facts in Qin’s exclusive knowledge or made partial disclosures while suppressing other material facts. Instead, Plaintiffs allege Qin breached a duty to disclose arising from the fiduciary relationship with them as the managing member of the LLC they invested in. (SAC, ¶¶ 41, 53–54.) Defendants do not address whether Plaintiffs adequately allege facts to support this theory.

Instead, they seem to focus on whether Plaintiffs adequately plead a fraud claim based on the second circumstance identified above. For example, they dispute whether the prior purchase price was within Qin’s exclusive knowledge and argue it could have been located in public records. As another example, they challenge the materiality of facts such as the timing of and procedure for the previous sale of the Property. These points do not justify sustaining the demurrer because they are not substantiated by legal authority and do not address the entirety of Plaintiffs’ claim. (See PHII, Inc. v. Super. Ct. (1995) 33 Cal.App.4th 1680, 1682 [demurrer does not lie to a portion of a cause of action].) For these reasons and because Defendants do not rely on or provide analysis of the correct particularity standard, they do not demonstrate Plaintiffs’ concealment or nondisclosure allegations are insufficient.

In consideration of the foregoing, Defendants do not substantiate their argument that Plaintiffs fail to properly plead the first element of their fraud claim.

Defendants also argue Plaintiffs’ reliance allegations are insufficient because they signed agreements acknowledging they were sophisticated investors participating in a speculative and risky development project. Reliance is an essential element of a fraud claim, including a claim based on concealment or nondisclosure. (OCM Principal Opportunity Fund, L.P., supra, 157 Cal.App.4th at pp. 863–64.) This element encompasses two distinct components, namely actual reliance and reasonable reliance. (Ibid.) “The reasonableness of the plaintiff’s reliance is judged by reference to the plaintiff’s knowledge and experience.” (Id. at p. 864.) And so, although not clearly articulated by Defendants, perhaps they intended to argue the acknowledgment clauses establish Plaintiffs’ reliance was not reasonable. But courts typically do not resolve that question of fact at the pleading stage. (See ibid.) Additionally, Defendants do not cite any authority establishing that acknowledgment clauses like those at issue here preclude reliance or render reliance unreasonable as a matter of law. Accordingly, Defendants do not demonstrate Plaintiffs do not properly plead the element of reliance.

Based on the foregoing, the demurrer to the fifth cause of action is OVERRULED.