Case Name: Hernon v. Delamore Lake Shore, LLC

Case No.: 17CV306373

Defendant Delamore Lakeshore, LLC (“Defendant” or “Delamore”) demurs to the Second Amended Complaint (“SAC”) filed by plaintiff Joseph Hernon (“Plaintiff”) and moves to strike portions contained therein.

I. Background
II.

A. Factual
B.

Delamore Lakeshore L.P. (the “Partnership”) is a California limited partnership that owns an apartment complex in Michigan. (SAC, ¶ 7.) Plaintiff, individually and through his wholly-owned entity, Hernon Lake Shore, LLC, owns a 13.77% interest in the partnership. (Id., ¶ 8.) Plaintiff was first introduced to the Partnership investment in 2007 and at that time he understood the investment would be adequately capitalized and that then-general partner Delamore and main fundraiser Byron Meo could meet their $7 million fund raise commitments. (Id., ¶ 10.) In consideration of his financial investment, which exceeded $1 million, Plaintiff was given special rights and powers, enumerated as “Extraordinary Decisions” under the Partnership Agreement, which included the right to improve any general partner change, development or sale of the property, refinance, etc. (Id., Exhibit A.)

In late 2008, Plaintiff learned that the Partnership was at a crisis point, unable to meets its loan commitments. (SAC, ¶ 12.) The members of general partner Delamore could not raise additional funds on their own and therefore Plaintiff was asked to help save the project by investing more money. (Id., ¶ 13.)

In October 2008, the Partnership was in default on its loan. Delamore was able to secure a loan workout with lender Arbor bank, but that arrangement was conditioned upon the Partnership meeting certain large payment obligations in 2008 and 2009. (SAC, ¶ 15.) In order to meet these commitments, Delamore agreed to reduce its share of “Article 6” (either net cash from operations or nonliquidating net sales proceeds) proceeds from 50% to 10%, with the 40% being used to save the project by encouraging new investments (“New Money Limited Partners”). (Id., ¶ 17.) A January 14, 2009 Memorandum of Actions (the “Memorandum”) which provided for the foregoing was executed by Delamore. (Id., Exhibit B.) Delamore acknowledged the enactment of the Memorandum with a formal resolution. (Id., ¶ 19, Exhibit C.)

In reliance on the Memorandum and the understanding that Delamore intended to honor its promises, Plaintiff invested additional monies and is therefore entitled to a pro rata share of 40% of the “Article 6” New Money Limited Partners proceeds. (SAC, ¶ 20.) Also in reliance on the Memorandum, Plaintiff abstained from a more lucrative arrangement whereby he would have become the general partner. (Id., ¶ 22.) In March 2019, Plaintiff became the assignee of a number of the aforementioned New Money Limited Partners’ right, title and interest in the Memorandum. (Id., ¶ 24.) By assignment, Plaintiff has all right, title and interest in any pro rata share of the Article 6 proceeds belonging to a number of new investors. (Id., ¶ 21, Exhibit D.)

In July 2014, after years of the Partnership simply working to meet its obligations and thus not distributing any returns, Delamore attempted to “strong-arm” Plaintiff into signing a release of the Memorandum in exchange for an owed commission payment. (SAC, ¶¶ 26.) When Plaintiff refused, Delamore insisted that the Memorandum “never happened” due to “lack of performance” and “lack of ever being written and signed.” (Id.) Plaintiff refused to sign the “release” demanded by Delamore in exchange for a commission. (Id.)

On October 28, 2016, the Partnership closed on a refinance of its HUD loan, which resulted in refinance proceeds in excess of $8 million. (SAC, ¶ 27.) Thereafter, Delamore offered to buy out the limited partners with the re-finance monies, telling them that the Partnership was worth no more than $68.4 million. (Id., ¶ 28.) Plaintiff objected and took issue that the valuation gave zero value to an adjacent 105 acres of excess land, and also asked Delamore to make calculations based on the Memorandum. (Id.) At the December 10, 2016 Partnership meeting, the limited partners (with the concurrence of the general partner) voted to distribute the proceeds from the refinancing of the property to all limited partners in proportion to their capital accounts. (Id., ¶ 29.) Immediately thereafter, Delamore circulated a proposed Third Amendment that would tie distribution of the foregoing proceeds to the limited partners giving up their rights to any future cash flows unless required by a court, thereby invalidating the Memorandum. (Id., ¶ 30.) Plaintiff again objected and refused to approve the proposal. (Id.)

Beginning in December 2016, Delamore paid itself 50% of the refinance proceedings, refusing to honor the Memorandum. (SAC, ¶ 32.) Later, following its removal as general partner, Delamore denied that its buy out price was reduced to 10% and that Plaintiff and other New Money Limited Partners were entitled to a pro rate share of the remaining 40%. (Id., ¶ 33.)

On November 2, 2017, Delamore filed an action entitled Delamore Lake Shore LLC v. Delamore Lake Shore LP (the “OC Action”), in which it alleged that its interest in the Partnership automatically converted to a special limited partnership unit having the same interest in the Partnership’s income, losses, distribution and capital as was attributable to Plaintiff’s General Partnership Interest. (SAC, ¶ 35.) The court entered judgment against Delamore and in favor of the Partnership, determining that Delamore’s interest had not been converted to a special limited partnership interest. (Id., ¶ 35.) In accordance with the Partnership Agreement, the Partnership accepted Delamore’s proposed market value of assets ($78 million), tendering a promissory note for Delamore’s buyout pursuant to the terms of the Memorandum. (Id., ¶ 36.) Plaintiff now seeks his pro rata share (both individually and as assignee) of the 40% New Money Limited Partners component that Delamore distributed to itself in December 2016 as well as a declaration of his rights to any further or additional proceeds. (Id., ¶ 37.)

C. Procedural
D.

Based on the foregoing, Plaintiff filed the original complaint in February 2017, asserting claims for (1) breach of contract, (2) breach of fiduciary duty and (3) declaratory relief. In May 2019, Plaintiff filed the First Amended Complaint (“FAC”) asserting the following causes of action: (1) breach of contract; (2) fraud (count I); (3) fraud (count II); (4) breach of fiduciary duty; and (5) declaratory relief.

In June 2019, Delamore filed a demurrer to the fraud claims in the FAC on the ground of failure to state facts sufficient to constitute a cause of action. (Code Civ. Proc., § 430.10, subd. (e).) Delamore also filed a motion to strike portions of the FAC. (Id., §§ 435 and 436.) The thrust of Delamore’s demurrer was that Plaintiff’s fraud claims were time-barred and were not pleaded with the requisite level of specificity. On September 4, 2019, the Court found Delamore’s arguments regarding the timeliness of Plaintiff’s claims unpersuasive, but agreed that the fraud claims were not pleaded with sufficient particularity and sustained the demurrer with leave to amend on this basis.

On September 24, 2019, Plaintiff filed the operative SAC, asserting the same claims as the FAC. On October 28, 2019, Delamore filed the instant demurrer to the second and third causes of action for fraud on the ground of failure to state facts sufficient to constitute a cause of action. (Code Civ. Proc., § 430.10, subd. (e).) Delamore also again moves to strike portions of Plaintiff’s pleading. Plaintiff opposes both motions.

III. Demurrer
IV.

As it did in its preceding demurrer to the fraud claims asserted in Plaintiff’s FAC, Delamore maintains that the fraud causes of action in the SAC are clearly time-barred and therefore its demurrer must be sustained without leave to amend.

Generally speaking, a cause of action accrues at the time when the cause of action is “complete with all of its elements. [Citation.] An important exception to the general rule of accrual is the ‘discovery rule,’ which postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action. [Citation.]” (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 806-807 [internal quotation marks omitted] (Fox).) “Rather than examining whether the plaintiffs suspect facts supporting each specific legal element of a particular cause of action, we look to whether the plaintiffs have reason to at least suspect that a type of wrongdoing has injured them.” (Id. at 806.) Once a cause of action accrues, the limitations period begins to run. (Id.)

Claims predicated on fraud are subject to a three-year statute of limitations. (Code Civ. Proc., § 338, subd. (d).) Such a cause of action does not accrue “until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake.” (Id.) Thus, fraud claims are subject to discovery rule discussed above.

In its preceding demurrer to the FAC, Delamore argued that Plaintiff’s claims accrued, at the very latest, in July 2014, based on his allegations that Delamore attempted to “strong-arm” him at that time into signing a release of the Memorandum and, when he refused, insisting that the Memorandum never happened due to “lack of performance” and “lack of ever being written and signed.” (FAC, ¶ 23.) Delamore insisted that such conduct would have raised in Plaintiff a suspicion of wrongdoing on its part.

The Court rejected this argument, noting that whether statements by Delamore that the Memorandum “never happened” due to “lack of performance” and “lack of ever being written and signed” were enough to place a prudent person on inquiry with respect to a potential fraud claim was a question of fact and thus could not be decided on demurrer. (See Broberg b. The Guardian Life Ins. Co. of America (2009) 171 Cal.App.4th 912, 921.) The Court continued that even assuming, for the sake of argument, that the discovery rule was satisfied by the FAC’s allegations, it did not necessarily mean that the three-year limitations period had been triggered because in order for a fraud claim to accrue, the following two conditions both had to be met: (1) the discovery rule had to be satisfied (e.g., the plaintiff must have had reason to suspect that wrongdoing caused him/her injury); and (2) all elements underlying the claim must have occurred. (See Fox, supra, 35 Cal.4th at 806-807.) Actual damages as a result of the alleged misrepresentation/concealment are a necessary element of a fraud claim, and said damages must have actually been sustained in order to trigger accrual. (See City of Vista v. Robert Thomas Securities, Inc. (2000) 84 Cal.App.4th 882, 886-887.)

Plaintiff alleged in the FAC that he did not suffer actual damages until Delamore failed to honor the Memorandum and properly distribute the refinance proceeds in 2016. Delamore nevertheless argued that Plaintiff sustained actual damages in 2009, when he invested additional funds in the Partnership in reliance on the Memorandum, reasoning that Plaintiff could have sought rescission at that the time and attempted to get his money back. But the Court found this argument unpersuasive, explaining that Plaintiff is entitled to choose his remedy, and was not required to settle for rescission if he wanted to pursue a fraud claim. (See City of Vista, supra, 84 Cal.App.4th at 889.) Ultimately, the Court held that it was not necessary to reach the issue of when Plaintiff actually accrued damages as a result of Delamore’s alleged misrepresentations because it was not persuaded in the first instance that the allegations in the FAC established clearly and affirmatively that the fraud claims accrued in July 2014. The demurrer was nonetheless sustained to the fraud claims because the Court agreed with Delamore that Plaintiff had failed to sufficiently plead reliance and resulting damages.

The SAC is nearly identical to the FAC, with the exception of several additional paragraphs which specify the damages suffered by Plaintiff as a result of being fraudulently induced to enter into the Memorandum in 2009. In these paragraphs, Plaintiff alleges that he was injured in the “out-of-pocket costs expended as a New Money Limited Partner Finder … uncompensated time attempting to raise funds for Delamore … loss of the benefit of his bargain in receiving a pro rate share of [Partnership distributions] … [and] lost the opportunity to become the sole general partner- or to combine with other limited partners- to share in a greater portion of the [Partnership distributions].” (SAC, ¶¶ 23, 58.) The allegations contained in these paragraphs address the problems that compelled the Court to sustain the preceding demurrer.

But nothing has changed to alter the Court’s prior analysis regarding whether it appears, clearly and affirmatively, from the face of the SAC that the fraud claims are time-barred. More specificity regarding the nature of the damages suffered by Plaintiff as a result of Delamore’s alleged fraud has no bearing on the previously discussed uncertainty in the pleading as to when Plaintiff discovered, or should have discovered, Delamore’s alleged wrongdoing in connection with the execution of the Memorandum. As the Court noted in its order, “[w]hen 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 … can support only one reasonable conclusion.” (Broberg v. The Guardian Life Ins. Co. of America, supra, 171 Cal.App.4th at 921.) The “evidence,” as pled in the SAC, does not support only one reasonable conclusion regarding the accrual of the claim or the delayed discovery rule. Consequently, Delamore’s demurrer to these claims on the ground of failure to state facts sufficient to constitute a cause of action is OVERRULED.

V. Motion to Strike
VI.

With the instant motion, Delamore moves to strike, as it did with its preceding motion to strike, portions of the SAC which relate to misrepresentations purportedly made by it to Plaintiff and serve as a basis for his breach of fiduciary duty claim. Delamore argues that these allegations should be stricken for the same reason it argues the demurrer to the fraud claims should be sustained, namely that they involve conduct that is not actionable due to the statute of limitations having expired.

Here, Plaintiff’s breach of fiduciary duty claim is predicated, at least in part, on allegations that Delamore made misrepresentations and/or concealed its intentions with regards to its performance under the Memorandum. (SAC, ¶ 56.) The Court has already rejected Delamore’s assertions that Plaintiff’s fraud claims are time-barred. This claim is similar to those fraud claims, as all of them are based—at least in part—on these alleged misrepresentations and concealment. Consequently, Delamore’s motion to strike is DENIED.