Case Number: BC614772 Hearing Date: May 15, 2019 Dept: 50

THE TENTATIVE FOR THE MERHI MSJ APPEARS BELOW. WITH REGARD TO THE PENDING RULING ON THE DOUMANI MSJ, THE COURT HAS REVIEWED THE ISSUES RAISED BY PLAINTIFF REGARDING THE ATTORNEY FEES EVIDENCE SUBMITTED WITH THE REPLY BRIEF. THE COURT HAS QUESTIONS FOR THE PARTIES REGARDING THE IMPACT OF THAT EVIDENCE ON THE ANALYSIS OF THE USURY CAUSE OF ACTION THAT WILL BE DISCUSSED AT TOMORROW’S HEARING.

Superior Court of California

County of Los Angeles

Department 50

epafrodito a. pascua,

Plaintiff,

vs.

youssef t. merhi, et al.

Defendants.

Case No.:

BC 614772

Hearing Date:

May 15, 2019

Hearing Time:

8:30 a.m.

[TENTATIVE] ORDER RE:

DEFENDANT YOUSSEF T. MERHI’S MOTION FOR SUMMARY ADJUDICATION

Background

On March 25, 2016, Plaintiff Epafrodito A. Pascua (“Pascua”) filed this action against various defendants asserting 15 causes of action. The operative Second Amended Complaint (“SAC”) was filed on December 12, 2016.

Defendant Youssef T. Merhi (“Merhi”) now moves for summary adjudication of the sixth cause of action for breach of contract, the eleventh cause of action for conversion, the thirteenth cause of action for usury, and the fifteenth cause of action for declaratory relief. Pascua opposes.

Evidence

The Court grants Merhi’s request for judicial notice as to Exhibits 1, 2, and 3.

The Court rules on Merhi’s objections to the Declaration of Richard J. Cowles as follows:

Objection 1: sustained as to the portion “informed me that Defendant, YOUSSEF T. MERHI, was not able to provide the Note or Deed of Trust” and overruled as to the remainder

Objection 2: sustained as to “Mr. Leonard’s employer” and overruled as to the remainder

Objection 3: sustained

Objection 4: sustained

The Court notes that Pascua has interposed evidentiary objections to some of the evidence submitted by Merhi in Pascua’s opposition/response to Merhi’s separate statement. However, pursuant to rule 3.1354 of the California Rules of Court, written objections to evidence in support of an opposition to a motion for summary judgment must be served and filed separately from the other papers. ((Cal. Rules of Court, rule 3.1354(b).) Pascua’s evidentiary objections are not in conformity with rule 3.1354, and so the Court declines to consider them.

Legal Standard

“[A] motion for summary judgment shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” ((Code Civ. Proc., § 437c (c).) The moving party bears the initial burden of production to make a prima facie showing that there are no triable issues of material fact. ((Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850.) If the moving party carries this burden, the burden shifts to the opposing party to make a prima facie showing that a triable issue of material fact exists. ((Ibid. .) Courts “liberally construe the evidence in support of the party opposing summary judgment and resolve doubts concerning the evidence in favor of that party.” ((Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 389.)

When a defendant seeks summary judgment, he/she must show either (1) that one or more elements of the cause of action cannot be established; or (2) that there is a complete defense to that cause of action. ((Code Civ. Proc., § 437c(p)(2).) “If the defendant fails to make this initial showing, it is unnecessary to examine the plaintiff’s opposing evidence, and the motion must be denied.” ((Powell v. Kleinman (2007) 151 Cal.App.4th 112, 121.)

Discussion

As an initial matter, the Court finds that the instant motion is procedurally proper notwithstanding that the Court denied Merhi’s previously filed motion for summary judgment.[1] Merhi is now moving for summary adjudication of discrete causes of action. Code of Civil Procedure section 437c, subdivision (f)(2) prohibits a party from moving for summary judgment based on issues asserted in a prior motion for summary adjudication and denied by the court unless there are newly discovered facts or circumstances or a change of law; therefore, it does not apply. Similarly, the instant motion is not one for reconsideration or renewal because Merhi is now moving for summary adjudication of discrete causes of action rather than summary judgment of the entire action against him. (See Code Civ. Proc., § 1008(a), (b) [reconsideration is appropriate when a party seeks an order modifying, amending, or revoking a prior order and renewal is appropriate when a party has made a motion, had it denied, and subsequently seeks to make the same motion on new or different facts, circumstances or law].) The Court also finds that Merhi has complied with California Rules of Court, rule 3.1350, subdivision (b), because the notice of motion and the separate statement clearly identify the causes of action for which summary adjudication is sought.

Statement of Undisputed Facts

Pascua purchased a multi-unit property in West Hollywood in the 1990’s (the “Property”). (Merhi’s Undisputed Material Fact (“UMF”) 1).) In 2013, Pascua was in danger of losing the Property through foreclosure due to loans in excess of $1 million secured by the Property. (UMF 2.) On or about June 18, 2014, Pascua entered into a written loan agreement with Merhi (the “Agreement”), pursuant to which up to $250,000 would be provided to Pascua to improve the Property, which would then be sold, with Merhi’s wife, Dahlia acting as the listing agent. (UMF 10[2]; SAC, ¶¶ 27, Ex. B, ¶¶ 3, 18.) The Agreement provides that it, “together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in [the] Agreement.” (UMF 13.) The Related Documents include a Secured Promissory Note dated June 18, 2014 by Pascua in favor of Merhi (the “Note”) and a Deed of Trust dated June 18, 2014 (the “Deed of Trust”). (UMF 14, Exs. C-D.)

The Agreement also provides that after repayment by Pascua of a separate loan (by Merhi’s brother-in-law and co-defendant Lorenzo Doumani to Pascua), the amounts advanced under the Agreement, and the closing costs, 70% of the remaining proceeds of the sale of the Property would be paid to Pascua and 30% would be paid to Merhi. (UMF 11.[3]) However, Pascua testified that he was not aware of the terms of the Agreement, including that the proceeds of the sale of the Property would be split 70/30 after payment of the loans and closing costs. (UMF 21.)

Pascua received $439,000 from Merhi and Dahlia in connection with the Agreement. (UMF 30.[4])

In October 2014, Pascua accepted an offer to purchase the Property for $3,495,000. (UMF 31.) On or about December 17, 2014, Merhi submitted a beneficiary demand in the amount of $427,000 with respect to the money provided in connection with the Agreement. (UMF 33.)

On or about December 17, 2014, Pascua signed an Escrow Amendment with an instruction for Merhi to receive $500,000 at the close of escrow. (UMF 36.) The Escrow Amendment indicated that Merhi’s payment was for a “consulting fee,” but that fee represented Merhi’s estimated 30% take of the profits from the sale of the Property. (UMF 37.[5]) The sale of the Property did not close until March 26, 2015. (UMF 40.) The escrow company calculated the amount Merhi was entitled to pursuant to the Agreement’s 70/30 split, which it determined to be $501,790.50. (UMF 41.[6]) Pascua signed an Escrow Amendment dated March 18, 2015 that included an instruction for Merhi to receive $501,790.50 at the close of escrow. (UMF 42.) On or about March 18, 2015, Pascua signed the Seller’s Estimated Settlement Statement, which included payment to Merhi of $427,000 to pay off the loan principal and for an additional payment of $501,790.50. (UMF 44.) In March 2015, Pascua believed that Dahlia and Merhi had loaned him about $427,000 (and up to $439,000) for improving the property. (UMF 30, 45, Pascua Depo. Vol 1, 90:4-24.) The escrow company made an error in computing the payment to Merhi, and the Seller’s Final Settlement Statement indicates that Merhi received $427,000 to pay off the loan principal and an additional $488,320.50. (UMF 47[7], 48.) Pascua received $990,446.80 in proceeds from the sale of the Property. (UMF 50.)

Pascua engaged City National Bank (“CNB”) to act as his qualified intermediary in connection with a 1031 exchange[8], and the $990,446.80 he received in connection with the sale of the Property was deposited with CNB. (UMF 52.) CNB informed Pascua that he had 45 days from the closing of the sale of the Property to identify properties for the 1031 exchange. (UMF 54.) On June 11, 2015, Pascua’s accountant informed him that he would owe taxes totaling about $900,000 if a 1031 exchange was not effectuated. (UMF 59.) On July 10, 2015, CNB sent an email intended for Pascua stating that it was too late for him to identify replacement properties for the 1031 exchange. (UMF 68.) Pascua decided to withdraw the money from CNB, and CNB told Pascua that he would need to hire an attorney in order to receive the money. (UMF 69.)

Breach of Contract

In support of the breach of contract cause of action, Pascua alleges that he and Merhi entered into a written loan contract as evidenced by the Note, the Deed of Trust, and the Agreement. (SAC, ¶ 132.) Pascua alleges that Merhi “breached the contract by charging interest and fees and amounts that exceed those specified in the agreement.” (SAC, ¶ 134.) Pascua alleges that Merhi further breached the contract by failing to properly advise Pascua as to the 1031 exchange, and in demanding a payoff on the Note that exceeded the obligation.” (SAC, ¶ 134.)

Merhi argues that Pascua cannot establish that Merhi was paid in excess of the express terms of the Agreement, specifically paragraph 18.1.[9] Merhi contends that the undisputed evidence shows that Merhi and Dahlia had loaned Pascua about $427,000 to remodel the Property and that pursuant to the Agreement, they were entitled to repayment of their loan upon sale of the Property. Merhi contends that the undisputed evidence shows that Merhi was entitled to 30% of the remaining proceeds, which the escrow company calculated to be approximately $500,000. Pascua even signed an Escrow Amendment and a Seller’s Estimated Settlement Statement affirming that Merhi would be entitled to payment of $427,000 and an additional $501,790.50 upon the close of escrow. (UMF 36, 44.)

Pascua argues in opposition that the Note is the operative contract, and the Note only provides for a loan of $250,000 at 8% interest with no profit split. However, as noted by Merhi, Pascua has made a judicial admission in the SAC that the operative contract is the Agreement, Note, and Deed of Trust. (SAC, ¶ 132; see St. Paul Mercury Ins. Co. v. Frontier Pacific Ins. Co. (2003) 111 Cal.App.4th 1234, 1248 [“[a]dmissions of material facts made in an opposing party’s pleadings are binding on that party as ‘judicial admissions.’”].) Therefore, the Court finds that there is no triable issue of fact that the profit split was a valid term of the underlying agreement between Pascua and Merhi. Pascua next argues that “[a]ny amount that MERHI disbursed to PASCUA over $250,000 would constitute an irrelevant second unsecured loan or line of credit.” (Opp’n, p. 8: 28.) Pascua also argues that to the extent that the Agreement is operative, the Agreement also defines the loan as no more than $250,000 with interest. In other words, even though Pascua has admitted that he received approximately $427,000 pursuant to the Agreement, because the Agreement sets the maximum amount of the loan at $250,000, Merhi was not entitled to repayment (by way of the proceeds of the sale of the Property) of the amount in excess of $250,000 (plus interest). This argument is not supported by any legal authority, and the Court is unaware of any such authority.

Pascua does cite to statutory authority in support of an alternative argument that any amount Merhi received in excess of $427,000 constitutes a breach of contract. Civil Code section 2943, subdivision (d)(1) provides that “[a] beneficiary statement or payoff demand statement may be relied upon by the entitled person . . . in accordance with its terms . . . .” (Civ. Code,

§ 2943(d)(1). Therefore, Pascua contends that because Merhi’s beneficiary demand stated a payoff amount of $427,000, he was entitled to rely on that statement. However, Civil Code section 2943, subdivision (d)(3) provides that “. . . any sums that were due and for any reason not included in the statement . . . shall continue to be recoverable by the beneficiary as an unsecured obligation of the obligor pursuant to the terms of the note and existing provisions of law.” ((Civ. Code, § 2943(d)(3).) The approximately $500,000 Merhi received in excess of $427,000 was pursuant to an express term of the Agreement, and this would fit within the scope of Civil Code section 2943(d)(3).

Finally, Pascua argues that the Agreement, and specifically, the 70/30 split provision is unconscionable and therefore, Merhi is not entitled to enforce the Agreement. “Unconscionability is one ground on which a court may refuse to enforce a contract.” ((Gatton v. T-Mobile USA, Inc. (2007) 152 Cal.App.4th 571, 579, citing Civ. Code, § 1670.5.) “Because unconscionability is a contract defense, the party asserting it bears the burden of proof.” ((Magno v. The College Network, Inc. (2016) 1 Cal.App.5th 277, 284.) “Unconscionability consists of both procedural and substantive elements.” (Ibid. .) “Procedural unconscionability ‘addresses the circumstances of contract negotiation and formation, focusing on oppression or surprise due to unequal bargaining power.’” (Magno v. The College Network, Inc., supra, at page 284.) “‘Substantive unconscionability pertains to the fairness of an agreement’s actual terms and to assessments of whether they are overly harsh or one-sided.’” ((Id. at pp. 284-285.) Although both elements must be present in order for a court to refuse to enforce a contract, the elements are evaluated on a “sliding scale.” ((Id. at p. 285.)

Pascua argues that because the loan was originally for $250,000, with a maturity date of 134 days from inception, the fact that Merhi demanded $915,320 from Pascua means that the interest rate on the loan was essentially more than 700% per annum. Pascua argues that this is substantively unconscionable because it is overly harsh and one-sided. As to procedural unconscionability, Pascua contends that there was substantial unequal bargaining power between Pascua and Merhi because 1) Pascua did not read the Agreement (UMF 15), 2) Pascua was not aware of any profit split (UMF 21), and 3) Merhi was in a superior financial position.

Merhi counters that there is no procedural unconscionability because Pascua was not unfairly surprised. Pascua testified that he has no trouble reading or writing English, but that he did not read the Agreement. (UMF 15-16.) Pascua testified that he did not have an attorney or his son, a loan officer, read the Agreement. (UMF 19-20.) Further, Pascua testified that he would have understood the terms of the Agreement had he read the Agreement. (UMF 21.) “Oppression occurs where a contract involves lack of negotiation and meaningful choice, surprise where the allegedly unconscionable provision is hidden within a prolix printed form.” ((Ibid. .) Pascua has not presented any evidence of lack of negotiation or lack of meaningful choice. There is no evidence that the circumstances were such that Merhi (and Doumani) were the only options for a loan or the only options for dealing with Pascua’s cash flow problems. Pascua’s main argument is that he did not know about the profit split provision because it was “buried” in the Agreement, but as noted by Merhi, “ordinarily one who signs an instrument which on its face is a contract is deemed to assent to all its terms.” ((Marin Storage & Trucking, Inc. v. Benco Contracting & Engineering, Inc. (2001) 89 Cal.App.4th 1042, 1049 [“A party cannot avoid the terms of a contract on the ground that he or she failed to read it before signing.”].) Therefore, the Court finds that Pascua has failed to demonstrate any procedural unconscionability associated with the profit split provision of the Agreement.

Merhi argues that Pascua has failed to demonstrate substantive unconscionability as well, asserting that when the loan was made, there was no guarantee that the property could be sold for a profit. “A contract term is not substantively unconscionable when it merely gives one side a greater benefit; rather, the term must be so one-sided as to shock the conscience.” (Carmona v. Lincoln Millennium Car Wash, Inc. (2014) 226 Cal.App.4th 74, 85 (quotations and citation omitted).) “[T]he paramount consideration in assessing [substantive] conscionability is mutuality.” (Ibid. (brackets in original).) Here, the Court finds that Pascua has only demonstrated a low level of substantive unconscionability. The amount of money that Merhi eventually received upon the sale of the property far exceeded what was contemplated in the original Agreement ($250,000 plus 8% interest) and what was actually loaned ($439,000). However, the additional 30% of the profit was conditioned on there being a profit at all on the sale of the property. Furthermore, even assuming that the profit split was substantively unconscionable, without any procedural unconscionability, there is no basis for refusing to enforce the Agreement. Accordingly, the Court finds that Pascua has failed to satisfy his burden of demonstrating that the Agreement was unconscionable.

Merhi also contends that Pascua cannot establish that a breach of contract occurred on the basis that Merhi failed to properly advise Pascua as to the 1031 exchange. Merhi presents undisputed evidence that there was no provision in the Agreement, Note, or Deed of Trust that required Merhi to properly advise Pascua as to the 1031 exchange. Pascua offers no evidence or argument in opposition. Therefore, the Court finds that Merhi has met his burden of establishing that Pascua cannot prove the element of breach on the breach of contract claim. The Court further finds that Pascua has failed to raise a triable issue of fact on the breach issue. Summary adjudication on the breach of contract cause of action is thus granted.

Conversion

In support of the conversion cause of action, Pascua alleges that Merhi converted the sale proceeds of the Property because he was not entitled to any consulting fees. (SAC, ¶¶ 165, 167.) Merhi contends that the conversion cause of action is improperly predicated on the same conduct as alleged in the breach of contract cause of action. “Conduct amounting to a breach of contract becomes tortious only when it also violates an independent duty arising from principles of tort law.” ((Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 515.)

In opposition, Pascua contends that he is entitled to plead “alternative theories of relief” under both breach of contract and conversion. ((Gebert v. Yank (1985) 172 Cal.App.3d 544, 554.) Even so, the undisputed evidence shows that Pascua specifically authorized Merhi’s receipt of the money in question when he signed the Escrow Amendment and the Seller’s Estimated Settlement Statement. “[T]he law is well settled that there can be no conversion where an owner either expressly or impliedly assents to or ratifies the taking, use or disposition of his property.” ((Farrington v. A. Teichert & Son, Inc. (1943) 59 Cal.App.2d 468, 474.) Accordingly, the Court finds that Pascua has failed to raise a triable issue of fact as to the conversion cause of action. Summary adjudication on the conversion cause of action is granted.

Usury

Pascua alleges that the amount of money received by Merhi at the close of escrow represents a usurious transaction because Merhi received his loan principal and additional funds that exceed the statutory maximum for interest. (SAC, ¶¶ 180-181.)

Merhi contends that the cause of action for usury must fail because the Agreement is exempt from usury laws. Civil Code section 1916.1 provides that the interest rate restrictions contained in the California Constitution “shall not apply to any loan or forbearance made or arranged by any person licensed as a real estate broker by the State of California, and secured, directly or collaterally, in whole or in part by liens on real property.” ((Civ. Code, § 1916.1) The term “made or arranged” includes “any loan made by a person licensed as a real estate broker as a principal or as an agent for others, and whether or not the person is acting within the course and scope of such license.” ((Civ. Code, § 1916.1.) “In common parlance, the person who makes the loan of money is the lender.” ((Winnett v. Roberts (1986) 179 Cal.App.3d 909, 917.) Merhi presents evidence that Dahlia was a licensed real estate broker at the time the payments were made to Pascua. (UMF 29.) Merhi also presents evidence that Pascua testified that he understood that Dahlia and Merhi were loaning money to Pascua under the Agreement. (UMF 28.) Furthermore, there is evidence that all of the money loaned to Pascua came from Merhi and Dahlia’s joint bank accounts. (UMF 26.) Dahlia’s name also appears on each check provided to Pascua. (UMF 27.)

Pascua disputes Dahlia’s status as a principal on the loan by asserting that Dahlia is not a party to the Note, the Deed of Trust, or the Loan Agreement. (Response to UMF 70.) Pascua argues that Dahlia could not have “made” the loan if she was not a party to the underlying Agreement, characterizing Dahlia’s position as merely someone who may have had a community property interest in the funds lent. Pascua also cites to Winnett in support of his position and focuses on the statement therein that a broker is exempted from usury laws “when the broker acts as a principal in the transaction by lending his own money.” (Emphasis added.) ((Ibid. .) Pascua notes that Dahlia does not testify in her supporting declaration that she made the loan or was a principal on the loan.

The Court finds that Pascua has raised a triable issue of fact as to whether the broker’s exemption to the usury law applies here. Although Pascua may have understood that the funds for the loan were coming from Merhi and Dahlia jointly, there is no evidence that Dahlia herself “made” a loan or lent her own money to Pascua. Therefore, summary adjudication on the usury cause of action is denied.

Declaratory Relief

In support of the declaratory relief cause of action, Pascua alleges that the profit split provision of the Agreement is unconscionable, ambiguous, and unenforceable. (SAC, ¶ 192.) Pascua also alleges that the amounts charged to him contain interest in excess of the statutory maximum. (SAC, ¶ 192.) Pascua seeks a judicial declaration that that he is entitled to return of his funds from Merhi (and Doumani). (SAC, ¶ 194.)

Merhi contends that the declaratory relief cause of action has no merit because the Agreement is not unconscionable or ambiguous. As discussed above, the Court finds that Pascua has not demonstrated that the profit split provision of the Agreement renders the Agreement unconscionable or unenforceable. As to ambiguity, Merhi argues that there is nothing ambiguous about the 70/30 split. In any event, because the Court finds that Pascua has raised a triable issue of fact as to the usury cause of action, the Court finds that Merhi cannot demonstrate that there is no triable issue of fact as to the declaratory relief cause of action. Therefore, summary adjudication of the declaratory relief cause of action is denied.

Conclusion

For the reasons set forth above, the Court grants in part and denies in part Merhi’s motion for summary adjudication. Summary adjudication is granted as to the breach of contract cause of action and conversion cause of action asserted against Merhi. Summary adjudication is denied as to the usury cause of action and the declaratory relief cause of action asserted against Merhi.

Merhi is ordered to give notice of this ruling.

DATED: May 15, 2019 ________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court

[1] Although Merhi’s previous motion was captioned as a motion for summary judgment, or in the alternative, summary adjudication, Merhi had failed to specifically identify the causes of action for which adjudication was sought in his notice of motion and in his separate statement, and therefore, the Court construed that motion as one solely for summary judgment. (RFJN, Ex. 3.)

[2] Pascua disputes this fact and states that the Note (as identified infra) was the operative contract. (Response to UMF 10.) However, Pascua cites to no evidence in support of his response. Further, the Court does not find that Pascua’s response actually creates a dispute as to the fact in UMF 10.

[3] Pascua disputes this fact by stating that the Note was the operative contract, and that the “beneficiary demand” and the Deed of Trust contradicts this fact. (Response to UMF 11.) The Court presumes that Pascua means to reference the Note, and not the “beneficiary demand.” UMF 11 purports to set forth a provision of the Agreement, and there is nothing in the Note (Merhi’s Ex. C) or the Deed of Trust (Merhi’s Ex. D) that contradicts the fact that the Agreement provides for a 70/30 split of remaining proceeds. (Merhi’s Ex. B, ¶ 18.1.)

[4] Pascua disputes this fact by again stating that the Note was the operative contract and that the Note and Deed of Trust contradict this fact. (Response to UMF 30.) However, the Court finds nothing in the Note or the Deed of Trust that contradicts the fact that Pascua received $439,000 from Dahlia and Merhi in connection with the Agreement.

[5] Pascua disputes this fact “as to the alleged actual reason for the ‘Consulting Fee,’” but offers no argument or evidence in support. (Response to UMF 37.) Instead, Pascua cites to his own additional statement of undisputed fact (“PSSUF”) 77. Notwithstanding that citing to the PSSUF does not conform with the requirements of California Rules of Court, rule 3.1350(f), there is no PSSUF 77.

[6] Pascua disputes this fact but offers no evidence or argument in support. (Response to UMF 41.) Moreover, Pascua’s citation to PSSUF 77 does not establish a controverted fact.

[7] Pascua disputes this fact but offers no evidence or argument in support. (Response to UMF 47.) Moreover, Pascua’s citation to PSSUF 77 does not establish a controverted fact.

[8] Pascua alleges that the purpose of the 1031 exchange was to allow him to avoid capital gains taxes on the sale of the Property. (SAC, ¶ 25.)

[9] Paragraph 18.1 provides: “Escrow Instruction(s). Borrower shall instruct escrow that after payment in full of the First Trust Deed, the Loan and all closing costs, the remaining [sic] of funds to Borrower from the sale of the Property shall be paid out as follows: seventy percent (70%) to Borrower and thirty percent (30%) to Lender.” (Merhi’s Ex. B, ¶ 18.1.)