18CV321297

Zhiwei Xu et al vs Chen Wang et al

I. Introduction

Plaintiffs Zhiwei Xu, Xiaohua Yang, Zhen Yang, and Xuanming Lu (collectively, “Plaintiffs”) allege defendants Bei Qin (“Qin”) and Chen Chi Wang (“Wang”), along with associated entities, tricked them into investing in “raw land in the Mojave Desert” through limited liability companies. (Third Amended Complaint (“TAC”), ¶1.) The Court previously sustained the demurrer by Wang and defendant ACEH Capital, LLC to the fifth cause of action (conspiracy to commit fraud) and gave Plaintiffs one last opportunity to amend their claim. Plaintiffs filed the TAC. Wang and ACEH Capital, LLC (collectively, “Defendants”) once again demur to the fifth cause of action, arguing Plaintiffs still fail to state a viable claim against them.

II. Background

A. Factual

ACEH Capital, LLC (doing business as Ace Capital Group) (“ACE”) originally purchased undeveloped real property in an unincorporated area of the Mojave Desert (the “Property”) for about $600,000 in 2006. (TAC, ¶ 23.) One year later, Qin, who was ACE’s real estate broker, arranged for it to sell the Property to her company, 230 East Street and Avenue B, LLC (“Purchaser”) for about $1.35 million. (TAC, ¶¶ 25–28 & Ex. A [sale agreement], Ex. B [Purchaser’s Articles of Organization], Ex. C [Purchaser’s Operating Agreement].)

Qin thereafter solicited investments in Purchaser and circulated a Private Placement Memorandum. (TAC, ¶¶ 29–30 & Ex. D.) In 2007, Qin offered for sale, and each of the plaintiffs ultimately purchased, a 6.67 percent interest in Purchaser for the price of about $94,000 each. (TAC, ¶¶ 30, 34–39.) Shortly thereafter, Wang, as Chief Executive Officer and Managing Member of ACE, executed a grant deed transferring the Property to Purchaser. (TAC, ¶ 44.) Oddly, this transfer occurred several months before Purchaser issued a check to ACE for the full purchase price. (TAC, ¶ 45.)

Plaintiffs claim Qin tricked them into investing in the Property, which was actually worth only $330,000 or less. (TAC, ¶¶ 5, 31–42.) In the TAC, they allege many new details about the representations made by Qin to solicit their investments. (TAC, ¶¶ 31–42.) For example, Qin made a PowerPoint presentation in which she represented that an investment property would only be purchased if ten key indicators were met, namely: usable land, abundant water, adequate utilities, accessible through modern means of travel, an educational system, proximity to a large population, existing development, existing and planned commerce, “[a]uthoritative population projections,” and a development plan. (TAC, ¶ 31 & Ex. E [PowerPoint presentation].) And yet, despite these representations, Qin facilitated the purchase of property that met none of these requirements. (TAC, ¶ 32.) Plaintiffs purportedly did not learn about the true value of the Property until June 2017 when Qin held a member meeting and furnished copies of financial statements for Purchaser as well as the sale agreement. (TAC, ¶¶ 47–54.)

B. Procedural History

Plaintiffs commenced this action in December 2017 and amended their complaint in April 2018. Defendants demurred to the second cause of action for fraud in the first amended complaint. The Court (the Honorable James L. Stoelker) sustained the demurrer to that claim (with leave to amend) because Plaintiffs did not adequately allege intentional misrepresentations or acts of concealment. In the second amended complaint, Plaintiffs dropped the fraud claim against Defendants, but added a conspiracy to commit fraud claim (the fifth cause of action) against them. Defendants filed a demurrer to the fifth cause of action, which was sustained with leave to amend. The Court ruled that Plaintiffs did not allege facts with particularity sufficient to state a claim based on intentional misrepresentations as well as facts showing Qin owed them a fiduciary duty for the purpose of a claim based on concealment or nondisclosure. Plaintiffs filed the TAC on April 12, 2019. Defendants once again demur to the fifth cause of action. Plaintiffs oppose the demurrer.

III. Discussion

In the fifth cause of action, Plaintiffs incorporate by reference all of the preceding allegations in the complaint and additionally allege ACE and Wang knew Qin planned to defraud them and “agreed and conspired” to perpetrate the fraud. (TAC, ¶¶ 100–101.) 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 the underlying fraud claim is defective as a matter of law, which would render the conspiracy to defraud claim likewise defective.

A. Legal Standard

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….[Citation.]” (West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 792.) The factual allegations supporting a fraud claim must be pleaded with particularity. (Lazar v. Super. Ct. (1996) 12 Cal.4th 631, 644–45 (Lazar); Cansino v. Bank of America, N.A. (2014) 224 Cal.App.4th 1462, 1472.) That means 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].)

A plaintiff may also state a claim for fraud based on concealment. (Linear Technology Corp. v. Applied Materials, Inc. (2007) 152 Ca1.App.4th 115, 131 (Linear Technology).) The essential elements of a fraudulent concealment claim are: (1) the defendant concealed or suppressed a material fact; (2) the defendant had a duty to disclose the fact to the plaintiff; (3) the defendant intentionally concealed or suppressed the fact with intent to defraud the plaintiff; (4) the plaintiff was unaware of the fact and would not have acted in the same manner if he or she knew of the fact; (5) the plaintiff suffered damages as a result of the defendant’s concealment or suppression of the fact. (Ibid., citing Civ. Code, § 1710, subd. (3).)

A duty to disclose may arise from a fiduciary or confidential relationship. (Linear Technology, supra, 152 Ca1.App.4th at p. 131.) Where there is no fiduciary or confidential relationship, a duty to disclose arises when “(1) the defendant makes representations but does not disclose facts which materially qualify the facts disclosed, or which render his disclosure likely to mislead; (2) the facts are known or accessible only to defendant, and defendant knows they are not known to or reasonably discoverable by the plaintiff; (3) the defendant actively conceals discovery from the plaintiff.” (Ibid. [internal quotation marks and citations omitted].)

B. Analysis

Let’s start with supposed intentional misrepresentations. While Plaintiffs did not previously allege sufficient facts about what misrepresentations were made to them, they have cured this deficiency in their amended pleading. Defendants’ argument to the contrary is unavailing. Defendants primarily mischaracterize Plaintiffs’ allegations as vague. They also attempt to create a specter of insufficiency by posing questions about the true characteristics of the Property such as: “What was the actual state of the ‘utilities’ in the area as of 2007?” (Mem. of Pts. & Auth. at p. 12:18.) They assert a plaintiff must allege, not just the misrepresentations that were made, but the true state of facts in existence. For example, Defendants state Plaintiffs’ allegations are deficient because they allege Qin misrepresented that $2200 to $2300 per acre was the cheapest price for land in the area but do not allege what the actual land prices were. This is not the law. To be sure, Defendants cite no authority to support their approach. Plaintiffs are not required to plead evidentiary facts to establish the falsity of Defendants’ alleged statements at this juncture. The true state of facts, and in turn, whether Defendants’ statements were false may be established at trial.

Let’s now turn to fraud based on alleged concealment. In the second amended complaint, Plaintiffs alleged that Qin concealed the following facts: a) the purchase price of the Property in 2006; b) title to the Property was transferred from ACE to Purchaser before ACE received payment; c) Qin’s status as a “dual agent” and that Qin received a commission; and d) the defendants previously conspired to defraud other investors with a similar scheme. (SAC, ¶¶ 69–70, 71–72, 74.) In other words, Plaintiffs alleged Qin concealed facts prior to their investment in the LLC (Purchaser). But they did not allege facts to support their theory that she owed them a fiduciary duty at that time.

Plaintiffs now allege and argue that Qin owed them a fiduciary duty prior to their investment as a promoter of the LLC. The authority they cite in the pleading and their opposition supports their theory. (Eisenbaum v. Western Energy Resources, Inc. (1990) 218 Cal.App.3d 314, 322 [“A promoter or insider, or a seller of a limited partnership interest, owes a fiduciary duty to the prospective purchaser of such an interest.”]; accord Cleveland v. Johnson (2012) 209 Cal.App.4th 1315, 1339; see e.g., Apollo Capital Fund, LLC v Roth Capital Partners, LLC (2007) 158 Cal.App.4th 226, 245, fn. 6 [distinguishing promoter from broker of bridge notes].) Yet, Defendants do not address Plaintiffs’ new allegation and authority in their memorandum of points and authorities. They erroneously state the allegations remain unchanged. While Defendants state for the first time in their reply that Eisenbaum is distinguishable because, in this case, the facts withheld were public knowledge and were not exclusively known to Qin—repeating unsubstantiated points from a prior demurrer—the Court will not make such a determination at this juncture. The determination of whether facts were in Qin’s exclusive knowledge is a factual determination, and Defendants do not provide matters that may properly be considered in the context of the demurrer to support their position. Also, in advancing this argument, Defendants appear to confuse distinct issues, such as the existence of a duty and the materiality of a fact. More significantly, they do not dispute the principle that a promoter may owe a fiduciary duty such that the existence of a duty to disclose here need not rest on exclusive knowledge. (See Linear Technology, supra, 152 Cal.App.4th at p. 131.) And so, Defendants’ renewed challenge to the sufficiency of Plaintiffs’ allegations regarding the fiduciary relationship prior to the investment is not well-taken.

Plaintiffs also clarify that they are alleging Qin concealed and failed to disclose that the Property decreased in value after they invested. (TAC, ¶¶ 48, 51.) Defendants do not address these allegations.

In summary, Defendants do not demonstrate Plaintiffs’ allegations about intentional misrepresentations and Qin’s duty to disclose remain defective.

Next, Defendants argue Plaintiffs fail to allege reasonable reliance particularly because there are acknowledgments and disclaimers in the Private Placement Memorandum and Operating Agreement they admittedly signed.

The element of reliance has two components that must be established, namely that the plaintiff actually relied and was reasonable in doing so. (OCM Principal Opportunity Fund, L.P. v. CIBC World Markets Corp. (2007) 157 Cal.App.4th 835, 863.) “A plaintiff asserting fraud by misrepresentation is obliged to plead and prove actual reliance, that is, to establish a complete causal relationship between the alleged misrepresentations and the harm claimed to have resulted therefrom.” (Id. at p. 864 [internal quotation marks and citations omitted].) “‘Besides actual reliance, [a] plaintiff must also show “justifiable” reliance, i.e., circumstances were such to make it reasonable for [the] plaintiff to accept [the] defendant’s statements without an independent inquiry or investigation.’” (Id. at p. 865, quoting Wilhelm v. Pray, Price, Williams & Russell (1986) 186 Cal.App.3d 1324, 1332 [alterations in original].) “‘Except in the rare case where the undisputed facts leave no room for a reasonable difference of opinion, the question of whether a plaintiff’s reliance is reasonable is a question of fact.’ [Citations.]” (OCM Principal Opportunity Fund, L.P., supra, 157 Cal.App.4th at pp. 864–65.)

The question of whether Plaintiffs reasonably relied is a question of fact that is not suitable for determination at this juncture. Defendants do not persuade the Court that this is a rare case where this issue may be determined as a matter of law. They do not cite any California case in which a court made such a determination on the pleadings; the sole California case upon which they rely involved a post-trial motion. (See, e.g., Hasso v. Hapke (2014) 227 Cal.App.4th 107.) Moreover, while Defendants seem to proceed as though an acknowledgement or a disclaimer necessarily negates the element of reasonable reliance, that is not the law. Rather, acknowledgements and disclaimers must be assessed and evaluated along with other facts about a plaintiff’s experience and information; the assessment is holistic. (OCM Principal Opportunity Fund, L.P., supra, 157 Cal.App.4th at p. 865.) For these reasons, Defendants’ argument about reasonable reliance is not persuasive.

In addressing reasonable reliance, Defendants also assert mere puffery is not actionable. Arguably, this assertion goes to the issue of whether a misrepresentation was made rather than the element of reasonable reliance. In any event, Defendants provide a number of quotations about puffery from federal cases without actually connecting those cases to the allegations pleaded here. In other words, Defendants do not identify the allegations that purportedly constitute mere puffery. More significantly, Plaintiffs allege Qin misrepresented specific details about the Property and not just whether the investment was profitable in the abstract. (TAC, ¶¶ 31–41.) And so, Defendants’ argument is unavailing.

IV. Conclusion

The demurrer to the fifth cause of action is OVERRULED.