Case Number: GC046849    Hearing Date: September 12, 2014    Dept: B

GC046849
LILY Y. WONG vs PARK CENTER PARTNERSHIP
Demurrer to Cross-Complaint
Demurrer to First Amended Complaint in Intervention
Case Management Conference/ Trial Setting Conference

In 1989, Lily Wong entered into a partnership agreement under which Lily Wong agreed to make an initial capital contribution of $280,000. The Cross-Complainant discovered on September 20, 2013 that Lily Wong breached her fiduciary duties by not making the capital contribution. The Cross-Complainant seeks damages and declaratory relief regarding Lily Wong’s partnership interest.

a. Demurrer to Cross-Complaint

The causes of action in the Cross-Complaint are for:1) Breach of Fiduciary Duty
and 2) Declaratory Relief
This hearing concerns the demurrer and motion to strike of Cross-Defendant, Lily Wong, to the Cross-Complaint.

The Cross-Defendant argues that the statute of limitations bars the Cross-Complaint. Where the dates alleged in the complaint show the action is barred by the statute of limitations, a demurrer lies. Saliter v. Pierce Bros. Mortuaries (1978) 81 Cal.App.3d 292, 300.
The Cross-Complainant pleads in paragraph 6 that on August 16, 1989, the Cross-Defendant, Lily Wong, entered into a partnership agreement under which Lily Wong had an obligation to make an initial capital contribution of $280,000. The Cross-Complainant alleges that the written agreement is attached as exhibit A to the Plaintiff’s Complaint. The Cross-Complainant alleges in paragraph 6 that Lily Wong breached this duty by not making the contribution.
A review of the original Complaint reveals that no copy of the agreement is attached. However, the First Amended Complaint, which was filed on September 21, 2011, includes a copy of the agreement in exhibit B. Article 3.1 on page 11 of the agreement states that concurrent with the formation of the partnership, the partners shall each contribute capital in the amount set forth next to the partner’s name. The amount of $280,000 is set forth next to Lily Wong’s name.
Article 1.1 on page 1 of the agreement states that the formation of the partnership occurred when the partners executed the agreement. The agreement is dated August 16, 1989 and the signature page indicates that the parties, including Lily Wong, signed it on that date. This indicates that Lily Wong was required to make the $280,000 capital contribution on August 16, 1989 when she signed the agreement and the partnership was formed.
The Cross-Complaint includes two causes of action. Both are based on the claim that Lily Wong failed to make the initial capital contribution. The first cause of action seeks damages under the theory that this was a breach of her fiduciary duty and the second cause of action seeks declaratory relief regarding Lily Wong’s rights under the partnership agreement in light of her failure to make the initial capital contribution.
These causes of action are based on the breach of a written agreement. Under CCP section 337, a claim based on the breach of a written agreement must be commenced within four years. This required any claim based on Lily Wong’s failure to perform her duty to make the $280,000 capital contribution to be commenced within four years of August 16, 1989.
A review of the Cross-Complaint reveals that it was filed on September 27, 2013. Since this was 24 years after August 16, 1989, the dates in the Cross-Complaint demonstrate that its two causes of action are barred by the four year statute of limitations for claims based on the breach of a written agreement.
In paragraph 7, the Cross-Complainant alleged that it discovered that Lily Wong did not make the initial capital contribution on September 20, 2013. This appears to be an attempt to plead the discovery rule in order to toll the statute.
When the dates in the complaint show that the action is barred by the statute of limitations, a party may plead that the accrual of a cause of action was delayed because the party did not discover the claim. Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal. 4th 797, 808. The party must specifically plead the following facts:

1) the time and manner of discovery; and
2) the inability to have made earlier discovery despite reasonable diligence.
Id.

In assessing the sufficiency of the allegations of delayed discovery, the Court places the burden on the plaintiff to show diligence; conclusory allegations will not withstand demurrer. Id.
There are no specific allegations that identify the manner of discovery or the inability to have made an earlier discovery of Lily Wong’s failure to make a $280,000 capital contribution despite reasonable diligence. This is insufficient to plead the discovery rule.

Therefore, the Court sustains the demurrer to the first and second causes of action because they are both based on the breach of a written agreement and the dates in the pleadings indicate that the causes of action were not commenced within the four year statute of limitations. If the Plaintiff can plead with specificity the requirements for delayed discovery, 10 days leave to amend will be granted.

b. Demurrer to First Amended Complaint in Intervention

The First Amended Complaint in Intervention alleges that Plaintiff is a limited Partner in Park City Partnership (“the Partnership”). California Forefront, LLC, and Larry Sue were managers of the Partnership. The Partnership owns a commercial building at 221 East Walnut St., Pasadena, CA. California Forefront, LLC, and Larry Sue breached their duties by engaging in stock market speculation, by entering into self-dealing transactions, and by neglecting to secure fair market value for the office leases in the building.

The causes of action in the First Amended Complaint-in- Intervention are for:
1) Accounting
2) Conversion
3) Breach of Fiduciary Duty
4) Breach of Contract
5) Gross Negligence
6) Good Faith and Fair Dealing
7) Intentional or Negligent Misrepresentation
8) Declaratory Relief

This hearing concerns the Defendants California Forefront Inc (“CFI”) and Larry Sue’s demurrer directed at the First Amended Complaint-in-Intervention.

1. Demurrer Based on Lack of Standing
The Defendants argue that the Plaintiff does not have standing to bring the second, third, fourth, fifth, sixth, and seventh causes of action because the injuries are to the partnership. When any person other than a real party in interest brings an action, the action is subject to general demurrer. Pillsbury v. Karmgard (1994) 22 Cal. App. 4th 743, 753.
Corporation Code section 15910.01(a) authorizes a partner, subject to subdivision (b), to maintain a direct against the limited partnership or another partner for legal or equitable relief, with or without an accounting as to the partnership’s activities, to enforce the rights and otherwise protect the interests of the partner, including rights and interests under the partnership agreement or this chapter or arising independently of the partnership relationship. Subsection (b) requires that the partner bringing a direct action to plead and prove “an actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the limited partnership.”
In the alternative, Corporation Code section 15910.02 authorizes a partner to bring a derivative action to enforce a right of a limited partnership if:

1) the partner first makes a demand on the general partners, requesting that they cause the limited partnership to bring an action to enforce the right, and the general partners do not bring the action within a reasonable time; or
2) a demand would be futile.

This statutory scheme indicates that a partner may bring a direct action under section 15910.01, but must plead that the injury is not solely the result of an injury suffered or threatened to be suffered by the limited partnership, i.e., there is a direct injury to the partner. Otherwise, the partner may bring a derivative action to enforce a right held by the partnership. This is consistent with California law regarding standing, i.e., the person injured is the real party in interest.
CCP section 367 provides that every action must be prosecuted in the name of the real party in interest. Wallner v. Parry Professional Bldg., Ltd. (1994) 22 Cal. App. 4th 1446, 1449-1450. When a partnership has a claim, the real party in interest is the partnership and not an individual member of the partnership. Id. A partner may bring a derivative action to enforce which the partnership possesses against others but which the partnership refuses to enforce. Id. 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. Id.
In Wallner, a partnership was formed to acquire, operate, and lease an office building. A limited partner brought a derivative action against the general partners to allege that the general partners had engaged in self-dealing and had breached their fiduciary duties of due care and loyalty to the limited partnership by leasing partnership property to themselves without making rental payments. The general partners filed a demurrer on the ground that a limited partner could not bring a derivative action. The trial court agreed and sustained the demurrer. The Court of Appeal reversed because it found that a limited partner may bring a derivative action on behalf of a partnership.

In the pending case, the pleadings allege in paragraphs 3 and 4 that the Park Center Partnership, a limited partnership, was formed to acquire, operate, and lease an office building. The pleadings allege in paragraph 8 that the Plaintiff, Wyman Ip, is a limited partner. The Complaint-in-Intervention is brought in the name of Wyman Ip and does not plead that it is a derivative action.

The second cause of action for conversion alleges in paragraphs 43 to 48 that the Defendant has wrongfully exercised control over the partnership’s money to make investments in the stock market and that hundreds of thousands of dollars have been lost. Further, the cause of action alleges that the Defendants have failed to pay rent for spaces they occupy, have diverted funds to themselves, and have paid themselves a management fee in violation of the limited partnership agreement. The cause of action seeks to enforce a claim that the partnership possesses, i.e., a claim to recover damages for the partnership funds that the Defendant converted. The partnership is the real party in interest. Since the real party in interest is the partnership, a limited partner must bring a derivative action to seek the remedy for the Defendant’s conduct in the second cause of action.
The third cause of action for breach of fiduciary duty incorporates that alleges in paragraphs 11 to 54. These allegations indicate that the Defendant wrongfully exercised control over the partnership’s money to make investments in the stock market and that hundreds of thousands of dollars have been lost. Further, the allegations plead that the Defendants have failed to pay rent for spaces they occupy, have diverted funds to themselves, and have paid themselves a management fee in violation of the limited partnership agreement. The cause of action seeks to enforce a claim that the partnership possesses, i.e., a claim to recover damages caused to the partnership by the Defendant’s conduct. The partnership is the real party in interest. Since the real party in interest is the partnership, a limited partner must bring a derivative action to seek the remedy for the Defendant’s conduct in the third cause of action.
The fourth cause of action for breach of contract alleges that it is based on the partnership agreement that formed the limited partnership. However, there are no allegations that identify any damages to the Plaintiff-in-Intervention. Instead, the cause of action is based on allegations in paragraph 66 that the Defendant engaged in unauthorized speculation on the stock market with partnership money, made sub-market leases, failed to secure proper value for the parking spaces, paid a management fee to itself, and engaged in irregularities when managing lease payments to the partnership. These are damages to the partnership and the cause of action seeks to enforce a claim that the partnership possesses, i.e., a claim to recover damages caused to the partnership by the Defendant’s conduct. The partnership is the real party in interest. Since the real party in interest is the partnership, a limited partner must bring a derivative action to seek the remedy for the Defendant’s conduct in the fourth cause of action.
The fifth cause of action for gross negligence alleges that the Defendants owed a duty of care to the Plaintiff-in-Intervention. However, there are no allegations that identify damages to the Plaintiff-in-Intervention. Instead, the cause of action is based on allegations in paragraph 69 that the Defendant failed to pay rent to the partnership, converted parking funds without reporting the funds to the partnership, secretly invested partnership funds, generated less than $2,000 per month in parking rentals, lost building value, and took management fees for themselves. These are damages to the partnership and the cause of action seeks to enforce a claim that the partnership possesses, i.e., a claim to recover damages caused to the partnership by the Defendant’s conduct. The partnership is the real party in interest. Since the real party in interest is the partnership, a limited partner must bring a derivative action to seek the remedy for the Defendant’s conduct in the fifth cause of action.
The sixth cause of action for breach of good faith and fair dealing alleges that the Defendant owed a duty to the Plaintiff-in-Intervention. However, there are no allegations that identify damages to the Plaintiff-in-Intervention. Instead, the cause of action is based on allegations in paragraph 76 that the Defendant failed to pay rent to the partnership, converted parking funds without reporting the funds to the partnership, secretly invested partnership funds, generated less than $2,000 per month in parking rentals, lost building value, and took management fees for themselves. These are damages to the partnership and the cause of action seeks to enforce a claim that the partnership possesses, i.e., a claim to recover damages caused to the partnership by the Defendant’s conduct. The partnership is the real party in interest. Since the real party in interest is the partnership, a limited partner must bring a derivative action to seek the remedy for the Defendant’s conduct in the sixth cause of action.
The seventh cause of action for intentional or negligent misrepresentation claimed that the Defendants made a false representation that harmed the Plaintiff-in-Intervention. The pleadings allege in paragraph 82 that the Defendants represented that the partnership needed to retain reserves of $1,200,000 to secure a loan. The pleadings allege in paragraphs 88 and 89 that this was not true and that the funds were used for stock speculation. The prior allegations indicate that these partnership funds were lost when the Defendants used them to engage in stock speculation. The loss of the funds constitutes damages to the partnership and the cause of action seeks to enforce a claim that the partnership possesses, i.e., a claim to recover damages caused to the partnership by the Defendant’s conduct. The partnership is the real party in interest. Since the real party in interest is the partnership, a limited partner must bring a derivative action to seek the remedy for the Defendant’s conduct in the seventh cause of action.

This review of the second through seventh causes of action indicates that they seek remedies for injuries to the partnership. The real party in interest is the partnership. The pleadings do not satisfy the requirement for a direct action in Corporation Code section 15910.01(b) that there is an actual injury to the Plaintiff-in-Intervention that is not solely the result of an injury suffered by the limited partnership. Further, the pleadings do not satisfy the requirement for a derivative action in Corporation Code section 15910.02 because the Plaintiff did not identify the causes of action as derivative actions brought to enforce rights held by the partnership.

In the opposition, the Plaintiff-in-Intervention argues that a direct action may be brought under California law and cites to Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93 and Jara v. Supreme Meats, Inc. (2004) 121 Cal.App.4th 1238. Both cases involve corporations and not partnerships. Further, the following review indicates that neither case contains law that supports the attempt by the Plaintiff-in-Intervention to bring a direct action.
In Jones, the Court found that a shareholder may bring a direct action to seek a declaration that he was entitled to maintain his proportionate interest in the corporation. The Court found that the reduction in the shareholder’s proportionate interest in the corporation was an actual injury to the shareholder and that his claim was not a derivative action.
In the pending case, the Plaintiff-in-Intervention is not claiming that the Defendant’s conduct has reduced or damaged his proportionate interest in the partnership. Accordingly, there is no law in Jones that supports the attempt by the Plaintiff-in-Intervention to bring a direct action for damages suffered by the partnership.
In Jara, the Court found that the gravamen of the complaint was that the plaintiff had been deprived of a fair share of the corporation’s profits as a result of the defendants’ payment of executive compensation to themselves. The Court found that the record in Jara indicated that the corporation paid bonuses to the defendants with the objective of reducing the amount of profit in the corporation that had to be shared to with the plaintiff. This reduction in the profit paid to the plaintiff could be sought in a direct action.
In the pending case, the Plaintiff-in-Intervention is not claiming that the Defendant’s conduct was intended to harm his share of profits. Instead, the Complaint-in-Intervention seeks remedies for the losses suffered by the partnership. Accordingly, there is no law in Jara that supports the attempt by the Plaintiff-in-Intervention to bring a direct action.
This analysis indicates that the second, third, fourth, fifth, sixth, and seventh causes of action in the Complaint-in-Intervention are derivative claims because the partnership is the real party in interest. Accordingly, there are grounds for a demurrer to the second, third, fourth, fifth, sixth, and seventh causes of action. It is reasonably possible for the Plaintiff-in-Intervention to correct the defects by amending the pleadings to either:

1) plead causes of action that seek relief for actual injury to the Plaintiff-in-Intervention that is not solely the result of an injury suffered by the limited partnership; or
2) plead derivative causes of action to enforce rights held by the partnership.

However, as discussed in the next section, the statute of limitations bars the second, third, fifth, sixth, and seventh causes of action and it is not reasonably possible to plead around this defect.

2. Demurrer Based on Statute of Limitations
As a general proposition, the relation back rule does not apply to Complaints in Intervention. See Weil and Brown et al, CAL. PRACTICE GUIDE: CIVIL PROCEDURE BEFORE TRIAL (The Rutter Group 2013) §2:450 and the cases cited therein.
The Defendant argues that the statute of limitations bars the second, third, fifth, sixth, and seventh causes of action because the claims in the Complaint-in-Intervention do not relate back to the filing of the initial Complaint by Lily Wong on February 15, 2011. Where the dates alleged in the complaint show the action is barred by the statute of limitations, a demurrer lies. Saliter v. Pierce Bros. Mortuaries (1978) 81 Cal.App.3d 292, 300. A complaint in intervention, like any other complaint, is subject to an affirmative defense based on an applicable statute of limitations and, if it asserts a new cause of action, the application for leave to intervene must be filed within the pertinent limitations period. Basin Constr. Corp. v. Dep’t of Water & Power (1988) 199 Cal. App. 3d 819, 825. When a Complaint in Intervention tenders significant new issues, such as the damages suffered by the intervener, it is an action to enforce an independent right and it does not relate back to the original Complaint. Id. at 825 to 826.

The Complaint in Intervention alleges in paragraph 8 that it is factually identical to Lily Wong’s Complaint and that the same facts, issues, events, transactions, occurrences, claims, and damages apply. Paragraph 8 also contains the allegation that it relates back to the original filing date of Lily Wong’s Complaint.
A copy of Lily Wong’s Complaint and First Amended Complaint is in the Defendant’s request for judicial notice, exhibits A and B. A review of the Complaint and the First Amended Complaint reveals that they seek damages for losses to Lily Wong. Nevertheless, these are personal and separate causes of action and can be barred by the statute of limitations even though based on the same facts. Anderson v. Barton Memorial Hospital., Inc. (1985) 166 Cal. App 3d 678,682.
The statute of limitations for the causes of action in the Complaint-In-Intervention are the following:

1) three years for the second cause of action for conversion (CCP section 338(c));
2) three years for the third cause of action for breach of fiduciary duty to recover damages for the lost personal property and for the alleged fraudulent conduct (CCP section 338(c) and 338(d);
3) three years for the fifth cause of action for negligence to recover damages for the lost personal property (CCP section 338(c);
4) three years for the sixth breach of good faith and fair dealing, which is based on an alleged violation of a duty imposed by Corporation Code section 15904.08(d) (CCP section 339); and
5) three years for the seventh cause of action for fraud (CCP section 338(d);

The Complaint by Wong was filed on February 15, 2011. The Complaint-in-Intervention was filed on June 12, 2014.
In his opposition, the Plaintiff-in-Intervention argues that the statute of limitations has not begun to run because his claims are for continuing wrongs. The Plaintiff-in-Intervention cites to Wyatt v. Union Mortgage Co. (1979) 24 Cal. 3d 773, 788. In Wyatt, the Court found that there was substantial evidence that the defendants were involved in perfecting a scheme whose purpose was to trap the plaintiffs on a financial “treadmill” from which they could not escape. The underlying fraud was a continuing wrong and the statute of limitations was tolled because there was “sheer economic duress or undue influence embedded in the fraud” that held the plaintiff in place. Id.
In the pending case, there are no allegations that the underlying conduct was a continuing wrong. Instead, the pleadings indicate that the injuries have been completed, e.g., the Defendants failed to pay rent to the partnership, the Defendants converted parking funds without reporting the funds to the partnership, the Defendants secretly invested partnership funds, or the Defendants took management fees for themselves. Further, there are no allegations that the Defendants engaged in conduct that involved economic duress or undue influence to prevent the Plaintiff from bringing a claim. Accordingly, there are no allegations that toll the statute of limitations.

Therefore, the demurrer to the second, third, fifth, sixth, and seventh causes of action is sustained based on the statute of limitations because these claims are independent claims that do not relate back to the filing of the Complaint. It does not appear reasonably possible to correct these defects by amendment because the pleadings in the Complaint indicates that the claims were discovered at least three years ago and the dates indicate that the claims are barred. Accordingly, the Court does grant leave to amend.

3. Demurrer to Fourth Cause of Action by Defendant, Larry Sue
The Defendant, Larry Sue, argues that there are insufficient facts to plead that he is a party to the contract at issue. Ordinarily on demurrer the allegations of the complaint must be accepted as true. But this does not apply to allegations expressing mere conclusions of law, or allegations contradicted by the exhibits to the complaint or by matters of which judicial notice may be taken. Vance v. Villa Park Mobilehome Estates (1995) 36 Cal. App. 4th 698, 709. Facts appearing in exhibits attached to the complaint are given precedence over inconsistent allegations in the complaint. Dodd v. Citizens Bank (1990) 222 Cal.App.3d 1624, 1627.

In the fourth cause of action, the Complaint-in-Intervention includes allegations in paragraph 63 and 66 that the partners entered into a partnership agreement and that the Defendants breached their duties.
A copy of the partnership agreement is attached as exhibit B. The agreement is between California Forefront Inc., Lily Wong, and Wyman Ip. The Defendant, Larry Sue, is not a party. The facts in the exhibit, i.e., the contract, demonstrating that Larry Sue is not a party to the contract are given precedence over the inconsistent allegations in the Complaint-in-Intervention. Since the facts demonstrate that Larry Sue is not a party to the contract, the cause of action does not plead a claim for breach of contract against Larry Sue.
In the opposition, the Plaintiff-in-Intervention argues that Larry Sue is liable because he is liable for his own torts. However, this argument is inapplicable because the fourth cause of action is a contract claim.
Contract and tort are different branches of law. Contract law exists to enforce legally binding agreements between parties; tort law is designed to vindicate social policy. Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 683. The Supreme Court has cited to Professor Prosser to describe the essential difference between contract and tort law as follows:

[Whereas] [c]ontract actions are created to protect the interest in having promises
performed,’ ‘[t]ort actions are created to protect the interest in freedom from
various kinds of harm. The duties of conduct which give rise to them are imposed
by law, and are based primarily on social policy, and not necessarily based upon
the will or intention of the parties ‘
Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167, 176.

In the pending case, there are no grounds to find that the Larry Sue was intended to be a party to the contract or that the parties intended to impose any duties on Larry Sue, as an individual. Accordingly, there are no grounds to hold that Larry Sue is liable under the contract.
Accordingly, the Court sustains Larry Sue’s demurrer to the fourth cause of action. It appears reasonable possible for the Plaintiff to correct this defect because the Plaintiff claims that Larry Sue was using California Forefront Inc. as his alter ego. Therefore, the Court grants 10 days leave to amend to add allegations to the fourth cause of action that indicate that Larry Sue is liable for the breach of contract because he was using California Forefront Inc. as his alter ego.

4. Demurrer to Eighth Cause of Action for Declaratory Relief
The Defendant argues that the Wyman Ip has no standing to seek declaratory relief in the eighth cause of action.
It is general rule that in an action for declaratory relief the complaint is sufficient if it sets forth facts showing the existence of an actual controversy relating to the legal rights and duties of the respective parties under a contract and requests that the rights and duties be adjudged. City Of Tiburon v. Northwestern Pac. R.R. Co. (1970) 4 Cal. App. 3d 160, 170; see CCP section 1060 (identifying the remedy of declaratory relief). If these requirements are met, the Court must declare the rights of the parties whether or not the facts alleged establish that the plaintiff is entitled to a favorable declaration. Declaratory relief is a broad remedy, and the rule that a complaint is to be liberally construed is particularly applicable to one for declaratory relief.
Further, a demurrer is a procedurally inappropriate method for disposing of a complaint for declaratory relief. Lockheed Martin Corp. v. Continental Ins. Co. (2005) 134 Cal. App. 4th 187, 221. This is based on the reasoning that an order sustaining the demurrer would leave the parties where they were, with no binding determination of their rights, to await an actual breach and ensuing litigation. This would defeat a fundamental purpose of declaratory relief, which is to remove uncertainties as to legal rights and duties before breach and without the risks and delays that it involves. The object of declaratory relief is not necessarily a beneficial judgment; instead, it is a determination, favorable or unfavorable, that enables the plaintiff to act with safety. This reasoning has established the rule that the defendant cannot, on demurrer, attack the merits of the plaintiff’s claim. Thus, a complaint is sufficient if it shows an actual controversy; it need not show that plaintiff is in the right.
The Complaint-in-Intervention includes allegations in paragraph 95 of the eighth cause of action that there are three controversies between the parties arising from the partnership agreement:

1) whether Wyman Ip has a right to select a new general partner based on the effect of Lily Wong’s death on her partnership interest;
2) whether Park Center had to obtain approval for expenses that it claims do not fall within the provision requiring approval for “extraordinary expenses”; and
3) whether distributions of profits to the partners may be withheld and invested in the stock market.

In paragraph 96, the Plaintiff-in-Intervention seeks a judicial determination of the rights and duties of the parties related to these controversies.
These allegations identify the actual controversy and request an adjudication of the parties’ rights and duties. This is sufficient to plead the declaratory relief cause of action.

Accordingly, the Court overrules the demurrer to the eighth cause of action.