Case Number: BC531278 Hearing Date: June 11, 2014 Dept: 46

Posted 6-10-2014 11:50 a.m.

Case Number: BC531278
MANTRA ENTERTAINMENT LLC VS LOIS E HODGES ET AL
Filing Date: 12/19/2013
Case Type: Contractual Fraud (General Jurisdiction)
Status: Pending
Future Hearings

06/11/2014 at 08:32 am in department 46 at 111 North Hill Street, Los Angeles, CA 90012
Hearing on Demurrer to Compliant

Lois E. Hodges; Lois E. Hodges & Jonathan William Hodges, Trustees and Jonathan William Hodges Demurrer to Complaint.

TENTATIVE RULING: Demurrer to the 1st through 10th causes of action are OVERRULED; Demurrer to the 11th cause of action is sustained with 15 days leave to amend. Defendant’s time to answer is extended per CRC 3.1320(j).

1st-3rd Causes of Action for (1) Fraud—Concealment; (2) Fraud—Intentional Misrepresentation; and, (3) Fraud—Negligent Misrepresentation

“The elements of actual fraud, whether as the basis of the remedy in contract or tort, have been stated as follows: There must be (1) a false representation or concealment of a material fact (or, in some cases, an opinion) susceptible of knowledge, (2) made with knowledge of its falsity or without sufficient knowledge on the subject to warrant a representation, (3) with the intent to induce the person to whom it is made to act upon it; and this person must (4) act in reliance upon the representation (5) to his or her damage.” 1 Witkin, Summary 10th (2005) Contracts, § 286, p. 315 (emphasis theirs). Plaintiff has adequately alleged facts meeting each of these elements. As such the demurrer is overruled.

The elements of a cause of action for negligent misrepresentation are: (1) the standard elements of negligence, duty of care, and breach; (2) the negligent misrepresentation of a material fact; (3) made with the intent to induce reliance by plaintiff; (4) reasonable actual reliance by the plaintiff on the misrepresentation; and (5) damages proximately (legally) caused by the misrepresentation and reliance. Cicone v. URS Corp. (1986) 183 C.A.3d 194, 211. Plaintiff has adequately alleged facts meeting each of these elements. As such the demurrer is overruled.

Knowledge of defective condition: Plaintiff has sufficiently alleged the necessary element of knowledge of the defective condition. The court disagrees with Defendant’s’ argument that “[t]he Complaint fails to explain why or how Defendants possessed information about the alleged latent conditions of the Subject Premise or estimate costs of alterations” and that it “fails to provide a basis to believe Defendants had knowledge of any allegedly misrepresented facts” (Demurrer, 9:15-17 and 9:19-20). Plaintiff has, in fact, alleged that “Jonathan Hodges had been in possession of and had been operating the Premises as a recording studio, as his father before him had, for many years.” (Complaint, ¶ 16, 5:22-24). Plaintiff has further alleged that Hodges “failed to disclose—and materially misrepresented—that the Premises had an array of unobservable structural, electrical, plumbing and HVAC problems (including the facts that the HVAC units did not work and there was no heat or gas lines onto the Premises), numerous building and safety code violations, fire hazards, and a variety of other dangerous and/or ultra hazardous conditions which had been concealed and/or covered up.” (Id., ¶ 17, 5:27-6:4). Plaintiff has also alleged it “was presented with several drafts of the lease prepared by counsel for Defendants prior to the execution of the actual Lease. None of the drafts prior to the final version contained an ‘as is’ clause—notably, the February 23, 2012 and February 24, 2012 drafts have no such provision. However, when Jonathan Hodges insisted that the Lease needed to be executed on Sunday, February 26, 2012…, Defendants had surreptitiously inserted an ‘as is’ clause at § 6.01. (Id., ¶ 20, 6:22-71). These allegations are sufficient, at the pleading stage, to establish that Ds knew about the property’s condition.

Positive assertions and representations: The court also disagrees with Defendant’s contention in the demurrer that “[t]he Complaint fails to allege a positive assertion of any representation by Defendants.” (Demurrer, 9:18-19). Plaintiff has alleged that “Defendant Jonathan Hodges represented to Mantra’s Debra Rodman and Celina Denkins, on numerous occasions prior to execution of the Lease—including during a walk-through of the Property—that the electrical, structural, floors, walls, HVAC, soundproofing, acoustic engineering, roof, everything inside the studio and inside the building were all in perfect working order. With respect to the HVAC, Jonathan Hodges even took Mantra’s Debra Rodman and Celina Denkins to the roof of the Premises to point out the HVAC units that were supposedly operational. Jonathan Hodges claimed that everything was great…” (Complaint, ¶ 15, 5:5-12). These allegations constitute “positive assertions of representations.”

The “as is” sales provision: Defendant’s then claim that the lease states that the premises are being leased in an “as-is” condition to include the soundproofing and wiring capability and other features in existence at the execution of this lease, and that the lease does not make any representations “as to the quality of the soundproofing or wiring capability.” (Demurrer, 9:22-27). However, as Plaintiff points out, “any sale of property ‘as is’ is a sale of the property in its ‘present or existing condition’; the use of the phrase ‘as is’ relieves a seller of real property from liability for defects in that condition. The only exception to this principle is when a seller, through fraud or misrepresentation, intentionally conceals material defects not otherwise visible or observable to the buyer. (Lingsch v. Savage [(1963)] 213 C.A.2d [729,] at pp. 740-742).” Shapiro v. Hu (1986) 188 C.A.3d 324, 333-334.

Parole Evidence Rule: Defendants’ citation to the parole evidence rule (i.e., CCP § 1856) is not dispositive. As subsection (g) therein states that “[t]his section does not exclude other evidence of the circumstances under which the agreement was made or to which it relates, as defined in Section 1860, or to explain an extrinsic ambiguity or otherwise interpret the terms of the agreement, or to establish illegality or fraud.” See also, Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Ass’n (2013) 55 C.4th 1169 (i.e., parol evidence rule does not bar evidence of fraudulent promises at variance with terms of the writing).

Defendants’ argument that “[t]here is no allegation that Defendants promised or guaranteed the estimated alterations costs, and thereafter refused to perform” (Demurrer, 9:20-21) is irrelevant to a fraud cause of action as it is not a necessary element of the claim..

4th COA: Breach of the Implied Covenant of Good Faith and Fair Dealing

“The covenant of good faith and fair dealing, implied by law in every contract, exists merely to prevent one contracting party from unfairly frustrating the other party’s right to receive the benefits of the agreement actually made. (E.g., Waller v. Truck Ins. Exchange, Inc. (1995) 11 C.4th 1, 36). The covenant thus cannot ‘”be endowed with an existence independent of its contractual underpinnings.”’ (Ibid., quoting Love v. Fire Ins. Exchange (1990) 221 C.A.3d 1136, 1153). It cannot impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement.” Guz v. Bechtel Nat. Inc. (2000) 24 C.4th 317, 349-350.

CACI 325, entitled “Breach of Covenant of Good Faith and Fair Dealing—Essential Factual Elements,” states as follows:

“In every contract or agreement there is an implied promise of
good faith and fair dealing. This means that each party will not
do anything to unfairly interfere with the right of any other party
to receive the benefits of the contract; however, the implied
promise of good faith and fair dealing cannot create obligations
that are inconsistent with the terms of the contract. [Name of
plaintiff] claims that [name of defendant] violated the duty to act
fairly and in good faith. To establish this claim, [name of plaintiff]
must prove all of the following:
1 That [name of plaintiff] and [name of defendant] entered into a
contract;
2 That [name of plaintiff] did all, or substantially all of the
significant things that the contract required [him/her/it] to do [or
that [he/she/it] was excused from having to do those things];
[3 That all conditions required for [name of defendant]’s
performance [had occurred/ [or] were excused];]
4 That [name of defendant] unfairly interfered with [name of
plaintiff]’s right to receive the benefits of the contract; and
5 That [name of plaintiff] was harmed by [name of defendant]’s
conduct.”

Defendants’ fail to support the argument that “facts supporting Plaintiff’s statement that ‘Mantra performed all of its obligations in connection with the Lease, except those that were excused or prevented from being performed by Defendants’” (Demurrer, 13:11-13) is necessary in support of this cause of action. Defendant assertion that the element of “unfair interference” is missing because of the “as is” clause is incorrect – the clause does not insulate Defendants from misstating and concealing the true state of the property.

5th COA: Negligence

“Actionable negligence is traditionally regarded as involving the following: (a) a legal duty to use due care; (b) a breach of such legal duty; (c) the breach as the proximate or legal cause of the resulting injury.” Seo v. All-Makes Overhead Doors (2002) 97 C.A.4th 1193, 1202. These elements have all been sufficiently pled in this cause of action.

6th & 7th COAs: Reformation Based on Fraud/Mistake (Respectively)

CC § 3399 states as follows:

“When contract may be revised. When, through fraud or a
mutual mistake of the parties, or a mistake of one party, which
the other at the time knew or suspected, a written contract does
not truly express the intention of the parties, it may be revised
on the application of a party aggrieved, so as to express that
intention, so far as it can be done without prejudice to rights
acquired by third persons, in good faith and for value.”

Plaintiff has alleged that it believed (based on Ds’ fraud) that the property was in good condition at the time the lease was made. It has alternatively alleged that “there was a mistake regarding the condition of the Premises” and that this mistake “Was either a mutual mistake or the mistake of Mantra which Defendants…knew or suspected.” (Complaint, ¶¶ 68 & 69). Plaintiff has alleged that there were multiple prior versions of the lease, none of which included the “as-is” provision that was inserted into the final version of the lease. Plaintiff has alleged that “[t]he written Lease does not truly express the intentions of the parties, because Mantra reasonably understood that the Premises were in good condition.” (Id., ¶ 61).

8th & 9th COAs: Rescission Based on Fraud/Mistake (Respectively)
CC § 1689 states, in relevant part, as follows:

“(b) A party to a contract may rescind the contract in the
following cases:
(1) If the consent of the party rescinding, or of any party jointly
contracting with him, was given by mistake, or obtained through
duress, menace, fraud, or undue influence, exercised by or with
the connivance of the party as to whom he rescinds, or of any
other party to the contract jointly interested with such party…”

Plaintiff has sufficiently pled fraud or, in the alternative, mistake regarding the condition of the property.

10th COA: Rescission Based on Commercial Frustration

The doctrine [of commercial frustration] operates when a not reasonably foreseeable supervening event totally or nearly totally destroys the value of counter-performance in a contract or lease. Lloyd v. Murphy (1944) 25 C.2d 48, 54; 20th Century Lites, Inc. v. Goodman (1944) 64 C.A.2d Supp. 938, 940-941).” Federal Leasing Consultants, Inc. v. Mitchell Lipsett Co. (1978) 85 C.A.3d Supp. 44, 47.

Plaintiff has alleged that Defendants knew about the property’s defects that required Plaintiff to spend enormous sums of money to fix, which costs were not foreseeable since Plaintiff believed the property was in good condition. This allegation is sufficient.

11th COA: Unfair Business Practices

“Business and Professions Code section 17200…establishes three varieties of unfair competition-acts or practices which are unlawful, or unfair, or fraudulent.” Podolsky v. First Healthcare Corp. (1996) 50 C.A.4th 632, 647. “ Plaintiff has not pled an unlawful, unfair or fraudulent business practice, so the demurrer must be sustained. Plaintiff shall be given 20 days leave to amend.