Filed 10/31/19 U.S. Fund and Investment Consultants, Inc. v. McCauly CA3

NOT TO BE PUBLISHED

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

THIRD APPELLATE DISTRICT

(Sacramento)

—-

U.S. FUND AND INVESTMENT CONSULTANTS, INC.,

Plaintiff and Appellant,

v.

DOUG MCCAULY as Acting Director, etc.,

Defendant and Respondent.

C083140

(Super. Ct. No. 34201400162237CUBCGDS)

A party’s lack of standing constitutes a jurisdictional issue that may be raised at any time. (Applera Corp. v. MP Biomedicals, LLC (2009) 173 Cal.App.4th 769, 785.) Thus, we consider an argument by respondent, the Department of Housing and Community Development (Department), that appellant, U.S. Fund and Investment Consultants, Inc. (U.S. Fund), lacked standing to bring this derivative litigation on behalf of Willow Family Housing, LP (Willow). As the Department points out, the evidence is undisputed that U.S. Fund brought this action in its capacity as a limited partner even though it was opposed by the general partner, the Central Valley Coalition for Affordable Housing (CVCAH). We conclude that as a matter of law on undisputed facts U.S. Fund lacked standing to bring the present action on behalf of the partnership. Accordingly, we affirm the judgment in favor of the Department and against U.S. Fund as well as the post-judgment award of attorney fees and costs to the Department.

FACTUAL AND PROCEDURAL HISTORY

The Operative Complaint

In June 2014, U.S. Fund filed its first amended complaint (the operative complaint) against the Department. The operative complaint also names the partnership, Willow, as a nominal defendant. U.S. Fund’s operative complaint contains the following allegations:

U.S. Fund brought the action after making repeated demands on the general partner, CVCAH, to support the action on behalf of Willow. Willow refused to act and continued demands by U.S. Fund would be futile.

Willow is a single-asset partnership formed to own and operate a housing project in Clovis, California. One of the sources of funding for the project was the Serna Program that is administered by the Department. The original documents for the loan under the Serna Program consisted of a note, deed of trust, and regulatory agreement. Under the regulatory agreement, Willow had a duty to ensure that designated farmworker units were occupied by qualifying households that maintained their farmworker status. Paragraph 10(b) of the regulatory agreement required Willow to include in all rental agreements for farmworker households: “Provisions requiring good cause for termination of tenancy. One or more of the following constitutes ‘good cause’: [¶] (A) Failure by the tenant to maintain applicable eligibility requirements under the Program or other eligibility requirements approved by the State . . . .”

In December 2011, the terms of agreement for the original Serna Program were amended. The Department accepted a 0.42 percent interest payment. In exchange the Department stated it “will give up the regulatory requirements for farmworker occupancy in 34 of the 37 currently designated farmworker units. As a result, only 3 units will continue to be restricted to farmworkers . . . .” The Department stated that, “[b]ased on our agreement, we will begin drafting the amendments to our loan documents.”

Despite the amendment, the Department continued to insist that 37 of the units be occupied by farmworker households at all times. Because the project was never occupied by 37 farmworker households, the Department threatened to record a notice of default on the project.

U.S. Fund indicated to the Department that it would present the matter for a temporary restraining order on March 11, 2014. During the hearing, the Department informed the trial court that it had filed a notice of default earlier that same day. U.S. Fund stated to the trial court the notice of default would place the entire project at risk because it would require other lenders to also record notices of default.

U.S. Fund’s operative complaint requested damages, declaratory relief, and an injunction.

U.S. Fund’s Motion for Summary Judgment

In March 2015, U.S. Fund moved for summary judgment and/or adjudication primarily on grounds the Department breached the original agreement, Willow had not defaulted on any of its obligations under the Serna Program, and the Department’s notice of default was a slander on title.

The trial court denied the motion for summary judgment brought by U.S. Fund. In denying the motion, the trial court found triable issues of material fact and that “the motion must be denied in its entirety for that reason.” The trial court reasoned that “even if [U.S. Fund] is correct that the documents only required [Willow] to make 37 units available to farmworker households, there are triable issues of material fact regarding whether [U.S. Fund] has performed pursuant to this requirement, or was excused from performance.”

The trial court further found triable issues of material fact in whether U.S. Fund had standing to bring the derivative action. Specifically, the trial court found: The Department “presented evidence that [CVCAH] decided not to bring this action because ‘in our opinion it was our fiduciary duty to protect the partnership, and we believed that we should sit down and try to work it out with [the Department] in order not to incur costs and to work together . . . for the long-term benefit of the project.’ CVCAH favors resolution by signing a loan modification that [the Department] has offered. This creates a triable issue of material fact regarding [the Department’s] affirmative defenses as to [U.S. Fund’s] standing to bring a derivative action and the business judgment rule. In addition, it creates a direct dispute as to [undisputed material fact number 2] which states that a demand has been made on CVCAH but it has refused to act. On this additional basis [U.S. Fund’s] motion for summary judgment must be denied.”

The Department’s Motion for Summary Judgment

The Department filed its own motion for summary judgment and/or adjudication. The Department argued Willow was in breach of its contractual obligations, the amended agreement was not binding, Willow’s breach authorized the Department’s notice of default, U.S. Fund lacked standing because the general partner’s decision not to pursue legal action was entitled to deference, and counsel for U.S. Fund had improperly “taken control of Willow, which is an indispensable party in this action.” As part of its motion, the Department argued Willow breached its contractual duties by omitting from its rental agreements for farmworker households required language advising of the consequences for losing farmworker household status.

U.S. Fund opposed the Department’s motion for summary judgment by arguing it had complied with all obligations under its agreements with the Department. U.S. Fund further argued the amendment to the agreement was effective and Willow had complied with all of its amended obligations. Regarding the alleged breach for lack of required language in the rental agreements, U.S. Fund asserted the deletion had come at the insistence of one of the Department’s inspectors and Willow had never received notice to cure the alleged violation.

The trial court granted the motion for summary judgment brought by the Department. In granting summary judgment, the trial court reasoned as follows:

“Paragraph 10(b) of the Regulatory Agreement requires ‘[a]ll rental or occupancy agreements for Assisted Units’ to include: ‘(1) Provisions requiring good cause for termination of tenancy. One or more of the following constitutes “good cause”: (A) Failure by the tenant to maintain applicable eligibility requirements under the [Serna] Program or other eligibility requirements approved by the State. . . .’ [¶] The Project’s original rental agreement lease addendum for Assisted Units included this required term. However, the addendum was later modified to strike out the term. And [U.S. Fund] does not dispute that [Willow] has used rental agreements for Assisted Units without the required language.”

The trial court further found U.S. Fund “has not shown that the lack of Notice of Default prevents [the Department] from citing the breach defensively, in seeking summary judgment on [U.S. Fund’s] breach of contract claim. [¶] For the stated reasons, [the Department] has shown there is no triable issue of material fact concerning [Willow’s] breach of the Original Agreement, specifically paragraph 10(b) of the Regulatory Agreement. . . . [¶] In light of this ruling, the Court need not reach [Defendant’s] additional arguments concerning whether [Willow] breached the Original Agreement by leasing Available Units to non-farmworker households and/or whether [the Department] breached the Original Agreement.”

The trial court also rejected U.S. Fund’s second cause of action for breach of contract based on the amended agreement. The trial court found the Department’s letter confirming an amended agreement was not sufficient to satisfy the original agreement’s term the loan conditions could be modified only by written agreement signed by all parties. Having concluded U.S. Fund could not maintain its breach of contract actions based on the original or the amended agreements, the trial court denied declaratory and injunctive relief. The trial court denied U.S. Fund’s cause of action for slander of title on grounds the Department had established it “filed the Notice of Default based upon a perceived violation of the Regulatory Agreement’s occupancy requirements.”

The trial court issued its tentative ruling on the motions for summary judgment on May 12, 2016. On June 2, 2016, U.S. Fund filed a motion for reconsideration based on a declaration by the project’s property manager that stated all four farmworker household tenants had re-signed lease addendums that restored the Serna Program eligibility clause as a basis for termination of tenancy. The property manager declared she had secured all of the revised lease agreements by May 26, 2016.

The trial court entered judgment in favor of the Department and against U.S. Fund in July 2016.

DISCUSSION

I

Lack of Standing

The Department argues U.S. Fund lacked standing to bring its claims on behalf of the partnership. The Department’s argument U.S. Fund lacks standing rests on two prongs: (1) U.S. Fund’s failure to comply with statutory procedural pleading requirements in Corporations Code section 15910.04 precluded standing, and (2) CVCAH, as general partner, is entitled to deference under the business judgment rule. As this opinion explains, the second prong is meritorious and requires affirmance because U.S. Fund lacked standing since the prerogative to bring this action lay solely with the general partner, CVCAH. The merit of the second prong obviates the need to consider the Department’s standing argument insofar as it depends on Corporations Code section 15910.04. Although the argument is clearly presented in the respondent’s brief, U.S. Fund does not address this jurisdictional issue in its reply brief.

A.

Cognizability

Although the issue of standing was analyzed by the trial court in its order denying U.S. Fund’s motion for summary judgment, we determine the Department may now raise the jurisdictional challenge even though it has not appealed from the denial of U.S. Fund’s motion for summary judgment. “Standing is a threshold issue necessary to maintain a cause of action, and the burden to allege and establish standing lies with the plaintiff.” (Mendoza v. JPMorgan Chase Bank, N.A. (2016) 6 Cal.App.5th 802, 810.) For this reason, “[a] party’s standing can be raised at any time in the litigation, even for the first time on appeal.” (Applera Corp. v. MP Biomedicals, LLC, supra, 173 Cal.App.4th at p. 785.) Because “contentions based on a lack of standing involve jurisdictional challenges and may be raised at any time in the proceeding,” (Common Cause v. Board of Supervisors (1989) 49 Cal.3d 432, 438), we proceed to consider the Department’s challenge to U.S. Fund’s standing.

B.

U.S. Fund’s Allegations Relating to Demand Upon CVCAH

U.S. Fund is a limited partner in Willow. The general partner, CVCAH, has refused to sue on behalf of Willow. Rather than serving as plaintiff, Willow is a nominal defendant. U.S. Fund’s operative complaint alleges the following regarding its standing to bring this action:

“This action is being brought as a derivative action under §§ 15910.02 and 15910.03 of the California Corporations Code. [¶] . . . U.S. fund has made repeated demands upon CVCAH to bring or support this action on behalf of [Willow], beginning in September 2013 and continuing until today, but CVCAH has refused to act. A copy of CVCAH’s communications regarding the decision not to support this action is attached as Exhibit ‘G,’ titled ‘Demand Upon CVCAH.’ [¶] . . . A continued demand would be futile based upon CVCAH’s communications.”

Attached to the first amended complaint, Exhibit G showed CVCAH informed U.S. Fund: “As you are fully aware, Central Valley Coalition for Affordable Housing is the General Partner of [Willow]. Management of the Partnership is its right and responsibility. . . . Without our consent, you, have filed a lawsuit against the State of California and its Department of Housing and Community Development and further have sought a temporary restraining order. We have not even seen the moving papers. [¶] The following actions must be taken by you immediately: 1) dismiss the complaint in case number 2013-00152367; 2) take the TRO off calendar; and 3) communicate both actions to counsel for [the Department] and [chief executive officer of CVCAH].”

C.

Statutory Prerequisites for Derivative Action by Limited Partner

A partnership constitutes a legal entity that is separate from its constituent partners. (Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, 424 (Everest).) As a general rule, only a general partner has authority to act on behalf of a limited corporation. (Corp. Code, §§ 15904.02, subd. (a) [providing that “[a]n act of a general partner, including the signing of a record in the partnership’s name, for pparently carrying on in the ordinary course the limited partnership’s activities or activities of the kind carried on by the limited partnership binds the limited partnership . . .”], 15903.02 [“A limited partner does not have the right or the power as a limited partner to act for or bind the limited partnership”].) Thus, a limited partnership’s claims must ordinarily be enforced by the general partner on behalf of the limited partnership. “When a partnership has a claim, the real party in interest is the partnership and not an individual member of the partnership.” (Wallner v. Parry Professional Bldg., Ltd. (1994) 22 Cal.App.4th 1446, 1449 (Wallner), citing Code Civ. Proc., § 369.5, subd. (a).)

In some circumstances, however, a limited partner may file a derivative action. Corporations Code section 15910, provides that “[a] partner may bring a derivative action to enforce a right of a limited partnership.” “ ‘The purpose of a limited partner’s derivative action is to enforce a claim which the limited partnership possesses against others [including the general partners] but which the partnership refuses to enforce. [Citations.] Like a shareholder’s derivative action, a limited partner’s derivative suit is filed in the name of a limited partner, and the partnership is named as a defendant. Although a limited partner is named as the plaintiff, it is the limited partnership which derives the benefits of the action.’ ” (Everest, supra, 114 Cal.App.4th at p. 425, quoting Wallner, supra, 22 Cal.App.4th at p. 1449, original brackets.)

Thus, a limited partner may file a derivative action when the general partner has a conflict or has engaged in self-dealing in converting partnership assets. (Wallner, supra, 22 Cal.App.4th at p. 1452.) However, a limited partner may not sue to vindicate partnership rights whenever the limited partner disagrees with a refusal of the general partner to bring a proposed legal action. Instead, a general partner is entitled to deference under the business judgment rule. (Bader v. Anderson (2009) 179 Cal.App.4th 775, 789 (Bader).) “The business judgment rule is premised on the notion that management of the corporation is best left to those to whom it has been entrusted, not to the courts. (Gaillard v. Natomas Co., supra, 208 Cal.App.3d at p. 1263.) The rule requires judicial deference to the business judgment of corporate directors so long as there is no fraud or breach of trust, and no conflict of interest exists.” (Desaigoudar v. Meyercord (2003) 108 Cal.App.4th 173, 183.) Regarding litigation, a general partner may properly consider “the expense of enforcing the right or the furtherance of the general business of the corporation in determining whether to waive or insist upon the right” and therefore determine whether litigation is appropriate. (Bader, supra, 179 Cal.App.4th at p. 789.)

A limited partner may also bring a derivative action where the limited partner has “suffer[ed] an injury to its interest without the occurrence of any injury to the partnership entity or to the partnership assets because the interest of a limited partner in a partnership is separate and apart from the partnership’s ownership interest in its assets.” (Everest, supra, 114 Cal.App.4th at p. 428.) In Everest, for example, a limited partners’ derivative action was allowed where the limited partner alleged the general partner had “used its management and control of the [partnership] to structure a merger transaction which afforded benefits and opportunities for itself from which the limited partners were excluded.” (Id. at p. 429.)

The question of whether pleadings suffice to overcome the business judgment rule so that a derivative action may be maintained “presents us with a pure question of law to which we apply our independent review.” (Desaigoudar v. Meyercord, supra, 108 Cal.App.4th at p. 183.)

D.

U.S. Fund’s Lack of Standing

U.S. Fund lacked standing to bring this derivative action. CVCAH, the general partner, is entitled to deference for its decisions under the business judgment rule. (Gaillard v. Natomas Co. (1989) 208 Cal.App.3d 1250, 1263.) The record shows CVCAH exercised its business judgment in deciding not to support this action against the Department. The general partner decided its fiduciary duty to the partnership required that it “should sit down and try to work it out with [the Department] in order not to incur costs and to work together . . . for the long-term benefit of the project.’ ” The record further indicates CVCAH’s approach yielded an offer by the Department for a loan modification.

CVCAH considered the adverse consequences of cost and time spent on litigation in relation to the benefits of a solution that is mutually acceptable to the Department. This is a legitimate and proper consideration. (Robbins v. Alibrandi (2005) 127 Cal.App.4th 438, 451; Bader, supra, 179 Cal.App.4th at p. 789.) U.S. Fund’s operative complaint does not allege CVCAH engaged in fraud or that a conflict of interest existed in the decision to avoid litigation with the Department. U.S. Fund also did not allege CVCAH acted only for its benefit and to the detriment of U.S. Fund. Instead, U.S. Fund alleges only that it demanded CVCAH sue the Department and that CVCAH refused to do so or support U.S. Fund’s action. The operative complaint does not contain any allegations that undermine the deference accorded to a general partner acting on behalf of the partnership.

The trial court properly acknowledged the deference to which CVCAH is entitled under the business judgment rule. Nonetheless, the trial court erred in determining the issue of standing presented triable issues of material fact. CVCAH’s assertion that it sought to avoid the disadvantages of litigation in favor of a settlement does not pose a triable issue of material fact because the operative complaint does not suffice to overcome the presumption of deference to the decisions of the general partner. (Mendoza v. JPMorgan Chase Bank, N.A., supra, 6 Cal.App.5th at p. 810.) Likewise, CVCAH’s refusal to support the litigation brought by U.S. Fund also does not create a triable issue of fact. There is no dispute CVCAH refused to sue or support the litigation. Whether or not U.S. Fund tendered a proper demand to the general partner to bring a legal action against the Department has no bearing on whether CVCAH’s decision not to sue is entitled to deference. (Ibid.) Consequently, the operative complaint does not create any triable issue of fact regarding U.S. Fund’s standing to bring this action.

DISPOSITION

The judgment and post-judgment award of attorney fees and costs to Doug McCauley as Acting Director of the Department of Housing and Community Development are affirmed. Doug McCauley as Acting Director of the Department of Housing and Community Development shall recover costs, if any, on appeal. (Cal. Rules of Court, rule 8.278(a)(1) & (2).)

/s/

HOCH, J.

We concur:

/s/

HULL, Acting P. J.

/s/

DUARTE, J.