Case Name: Hernon v. Delamore Lake Shore, LLC

Case No.: 17CV306373

Defendant Delamore Lakeshore, LLC (“Defendant” or “Delamore”) demurs to the First Amended Complaint (“FAC”) filed by plaintiff Joseph Hernon (“Plaintiff”) and moves to strike portions 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. (FAC, ¶ 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 meet its loan commitments. (FAC, ¶ 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. (FAC, ¶ 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., ¶ 16.) A January 14, 2009 Memorandum of Actions (the “Memorandum”) which provided for the foregoing was executed by Delamore. (Id., ¶ 17, 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. (FAC, ¶ 20.) In March 2019, Plaintiff became the assignee of a number of the aforementioned New Money Limited Partners’ right, title and interest in the Memorandum. (FAC, ¶ 21.) 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. (FAC, ¶ 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. (FAC, ¶¶ 22-23.) When Plaintiff refused, Delamore insisted that the Memorandum “never happened” due to “lack of performance” and “lack of ever being written and signed.” (Id., ¶ 23.) 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. (FAC, ¶ 24.) 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., ¶ 25.) 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., ¶ 26.) 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., ¶ 27.) Plaintiff again objected and refused to approve the proposal. (Id., ¶ 28.)

Beginning in December 2016, Delamore paid itself 50% of the refinance proceedings, refusing to honor the Memorandum. (FAC, ¶ 29.) 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., ¶ 30.)

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. (FAC, ¶ 31.) 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., ¶ 32.) 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.) 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., ¶ 33.)

C. Procedural
D.

Based on the foregoing allegations, Plaintiff filed the original complaint on February 14, 2017, asserting claims for (1) breach of contract, (2) breach of fiduciary duty and (3) declaratory relief. Over two years later, on May 22, 2019, Plaintiff filed the 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. Plaintiff’s fraud claims are predicated on allegations that Delamore entered into the Memorandum with knowledge that it would not perform the promises made therein and that Delamore prepared a document entitled “First Amendment” following the execution of the Memorandum with the intention of using it to later argue that Plaintiff and other New Money Limited Partners were not entitled to any of the 40% monies. (FAC, ¶¶ 42-43.) Delamore allegedly misled Plaintiff regarding the meaning and purpose of the document. (Id.)

On June 17, 2019, Delamore filed the instant 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 the motion to strike portions of the FAC. Plaintiff opposes both motions.

III. Discussion
IV.

A. Demurrer
B.

As stated above, Delamore demurs to both of the fraud claims added to the FAC. The thrust of Delamore’s demurrer to these causes of action is that both are time-barred and further, that Plaintiff has not pleaded all of the required elements with the necessary level of specificity.

1. Timeliness
2.

As a general matter, 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, and thus trigger the limitations period, “until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake.” (Id.) The limitations period commences when “the plaintiff suspects or should suspect that her injury was caused by wrongdoing.” (Jolly v. Eli Lilly & Co. (1988) 44 Cal. 3d 1103, 1110; see also Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal. 4th 797, 807 [“we look to whether the plaintiffs have reason to suspect that a type of wrongdoing has injured them”].)

Delamore argues that Plaintiff’s fraud claims accrued, at the very latest, in July 2014 and that Plaintiff has not and cannot plead delayed discovery. Delamore bases its accrual argument on Plaintiff’s allegations that in July 2014 it “attempted to strong-arm [Plaintiff] into signing a release of the Memorandum in exchange for an admittedly owed commission payment. When [Plaintiff] refused, Delamore insisted that the memorandum ‘never happened’ due to ‘lack of performance’ and ‘lack of ever being written and signed.’” (FAC, ¶ 23.) These allegations, Delamore explains, clearly would have raised in Plaintiff a suspicion of wrongdoing on its part, thereby triggering the three-year limitations period.

In his opposition, Plaintiff responds that Delamore is conflating two distinct principles: (1) the accrual of a cause of action and (2) the discovery rule. He argues that the fraud claims had not accrued in July 2014 because he had yet to suffer resulting injury. Generally, a cause of action accrues when it is “complete with all of its elements.” (Fox v. Ethicon Endo-Surgery, Inc., supra, 35 Cal.4th at 807.) As actual damages as a result of the alleged misrepresentation/concealment is an element of a fraud cause of action, the claim does not accrue until damages have been sustained. (City of Vista v. Robert Thomas Securities, Inc. (2000) 84 Cal.App.4th 882, 886-887.) The mere threat, or even probability, of future harm is inadequate to trigger accrual. (Id.)

Plaintiff maintains that he did not suffer actual damages until Delamore failed to honor the Memorandum and properly distribute the refinance proceeds in 2016 pursuant to its terms whereas Delamore, by arguing that the claim accrued in 2014, appears to believe that damages were incurred prior to that point in 2009, when Plaintiff invested further money in the Partnership in reliance on the Memorandum. Ultimately, it is not necessary for the Court to reach the issue of when Plaintiff actually incurred damages as a result of Delamore’s alleged misrepresentations because the Court is not persuaded in the first instance that the allegations contained in paragraph 23 of the FAC establish that the fraud claims accrued in July 2014. The question of whether statements by Delamore that the Memorandum “never happened” due to “lack of performance” and “lack of ever being written and signed” are enough to have placed a prudent man upon inquiry with respect to his fraud claim is one of fact for the trier of fact. (See Broberg v. The Guardian Life Ins. Co. of America (2009) 171 Cal.App.4th 912, 921 [“When 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”].) Thus, Delamore’s assertions do not establish that Plaintiff’s fraud claims are time-barred.

Delamore additionally argues that Plaintiff fails to plead delayed discovery and cannot “credibly” argue under the circumstances that the delayed discovery rule applies. In making this argument, however, Delamore evidences a misunderstanding of the rule of accrual for fraud claims in that delayed discovery is the rule of accrual, by statute, for all such claims and not an exception that must be pleaded in order to apply. Further, a plaintiff need only specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence (i.e., the applicability of the discovery rule) if the complaint show on its face that the claim would be barred without the benefit of the discovery rule. (Fox v. Ethicon Endo-Surgery, Inc., supra, 35 Cal.4th at 808.) The Court is not persuaded that the FAC shows on its face that the fraud claims are time-barred, and thus that Plaintiff needs to specifically set forth when he discovered the fraud, in order to sufficiently state such claims.

For the foregoing reasons, Delamore’s contention that that the fraud claims are untimely is without merit and does not provide a basis upon which to sustain its demurrer.

3. Relation Back
4.

Delamore also argues that Plaintiff’s fraud claims do not relate back to the filing of the original complaint. “The relation-back doctrine deems a later-filed pleading to have been filed at the time of an earlier complaint which met the applicable limitations period, thus avoiding the bar.” (Quiroz v. Seventh Ave. Center (2006) 140 Cal.App.4th 1256, 1278.) In order for the relation-back doctrine to apply, “the amended complaint must (1) rest on the same general set of facts, (2) involve the same injury, and (3) refer to the same instrumentality, as the original one.” (Norgart v. Upjohn Co. (1999) 21 Cal.4th 383, 408-409.) If Plaintiff’s fraud claims do relate back to the original filing in February 2017, then they would have been asserted within three years of when Delamore argues that they accrued, making them timely. While Plaintiff argues that FAC does relate back to the original complaint if the Court were to apply the three-part test, it is his primary position that his claims did not accrue until 2018 and thus that the doctrine is not even necessary to render his added claims timely.

The Court agrees. It is not apparent to the Court, solely from the face of the pleadings, exactly when Plaintiff’s fraud claims accrued. Because the Court cannot say with any certainty that the fraud claims accrued over three years prior to when the FAC was filed in May 2019, it need not determine whether the FAC relates back to the filing of the original complaint. Consequently, the demurrer will not be sustained on this basis.

5. Elements of Fraud Claim
6.

Lastly, Delamore asserts that Plaintiff has not pleaded all the required elements of a fraud claim nor set forth allegations which meet the necessary level of particularity.

In order to state a claim for fraud, a plaintiff must plead the following elements: (1) misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (or ‘scienter’); (3) intent to defraud, i.e., to induce reliance; (4) justifiable reliance; and (5) resulting damage.” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.) “Fraud actions are subject to strict requirements of particularity in pleading. … Accordingly, the rule is everywhere followed that fraud must be specifically pleaded.” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 216.) This requirement “necessitates pleading facts which ‘show how, when, where, to whom, and by what means the representations were tendered.’ A plaintiff’s burden in asserting a claim against a corporate employer is even greater. In such a case, the plaintiff must ‘allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.” (Lazar, supra, 12 Cal.4th at 645.)

With respect to the first fraud claim, Delamore persuasively contends that Plaintiff has not adequately pleaded the elements of reliance and resulting damages. Plaintiff alleges that Delamore intentionally misled him as to the true purpose of the “First Amendment” but does not articulate how he relied on those misrepresentations to his detriment. Plaintiff’s boilerplate allegation that he “suffered damages proximately caused by Defendant’s conduct” falls well short of the necessary standard. Consequently, the claim is insufficiently pleaded.

In contrast, as to the second fraud claim, Delamore’s assertion that Plaintiff has also failed to sufficiently plead reliance and resulting damages here is without merit. Plaintiff pleads that in reliance on Delamore’s misrepresentations or concealment of its true intentions regarding the Memorandum, he contributed additional sums to the Partnership. (FAC, ¶ 51.) This is sufficient to plead the foregoing elements.

In accordance with the foregoing analysis, Delamore’s demurrer to the second and third causes of action on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED IN PART and OVERRULED IN PART. The demurrer is SUSTAINED WITH 20 DAYS’ LEAVE TO AMEND as to the second cause of action and OVERRULED as to the third cause of action.

C. Motion to Strike
D.

With the instant motion, Delamore moves to strike portions of paragraph 55 of the FAC which relate to misrepresentations purportedly made by it to Plaintiff and serve as a newly-pleaded 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: because they are time-barred and do not relate back to the filing of the original complaint.

The applicable limitations period for a breach of fiduciary duty is generally four years (see Code Civ. Proc., § 343) except where the claim is based on concealment or misrepresentation of facts, i.e., actual fraud on the part of the defendant. (Stalberg v. Western Title Ins. Co. (1991) 230 Cal.App.3d 1223, 1230.) In such a circumstance, the applicable statute of limitations is the three-year limitations period provided by Code of Civil Procedure section 338, subdivision (d). 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. (FAC, ¶ 55.) Thus, the three-year limitations period for fraud applies, as does all of the Court’s analysis rejecting Delamore’s assertions that Plaintiff’s new claims are time-barred. Consequently, Delamore’s motion to strike is DENIED.