GC046810

Cross-Defendants Phase 2 Holdings, LLC and Kevin Doherty’s Motion for Summary Judgment or, in the Alternative, Motion for Summary Adjudication

TENTATIVE:
Motion for summary judgment, or, in the alternative, summary adjudication is DENIED.
ISSUE #1 Fraud and ISSUE #2 Negligent Misrepresentation: Motion is DENIED.
Cross-complainants have raised triable issues of fact, as Mangianpane maintains that cross-complainants were never made aware that the originating fee had been borrowed, were not aware that Elie was involved at the time the originating fee was transferred and did not understand that Elie was not a part of Phase 2, its mainland representative, but a third party. [See Response to UMF Nos. 43, 44, 50-53, and evidence cited; Exhibit 1, Mangiapane Depo., pp. 65, 216-217, 629].

ISSUE #3 Breach of Contract. Motion is DENIED.
Cross-complainants have raised triable issues of material fact concerning whether they can establish performance under the agreement, by attempting to return the $300,000 originating fee as required, and whether they can establish that cross-defendants breached the agreement by refusing to accept the performance with prejudice, as required under paragraph 7 of the Agreement. [See Responses to UMF Nos. 84, 85, and evidence cited, Additional Fact No. 7, and evidence cited; Ex. 2, Mangiapane Decl., para. 5, Ex. 1, Mangiapane Depo., pp. 173, 584-584].

ISSUE #4 Equitable Indemnity. Motion is DENIED.
Cross-defendants have failed to meet initial burden of establishing that no tort liability can be established by the moving parties as to plaintiffs, as opposed as to cross-complainants. Even if this burden is met, triable issues have been raised concerning the legitimacy of the borrowing of the originating fee as part of the transaction as to all parties. [See Issue 1, above].

Additional Issue (Not separately addressed in Separate Statement): Liability of Defendant Doherty as an individual: Motion is DENIED.
Moving parties have failed to establish as a matter of law that Doherty as an agent of Phase 2 cannot be held personally responsible for tortious misconduct. See Corporations Code § 17703.04(c), Civil Code § 2343; Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003, 2nd Dist.) 107 Cal.App.4th 54, 68.

BACKGROUND:
MOVING PARTY: Cross-Defendants Phase 2 Holdings, LLC and Kevin Doherty

RESPONDING PARTY: Cross-Complainants Bear Resources, LLC, Josephine Rita Mangiapane and Michael A. Fedoris

RELIEF REQUESTED:
Summary judgment in favor of Cross-Defendants
In the alternative, summary adjudication of any or all of the causes of action
Order granting summary adjudication that Kevin Doherty be dismissed from this action as in improper cross-defendant

Causes of Action: from Cross-Complaint
1. Fraud
2. Negligent Misrepresentation
3. Breach of Contract
4. Equitable Indemnity

FACTUAL and PROCEDURAL BACKGROUND:
Plaintiff Mehrdad Elie alleges that he is the assignee of claims from third party Phase 2 Holdings, LLC dba Phase 2 International. Plaintiff alleges that in July of 2009, Phase 2 initiated discussions with defendant Byron G. Best, doing business as B.G. Best Company, an investment banker, concerning obtaining financing for expanding Phase 2’s business and obtaining operating capital. On July 20, 2009, Best entered a Conventional Mortgage Funding and/or Guaranteed Takeout Agreement to provide funding to Phase 2, which Best has not in fact provided.

On September 11, 2009, Best introduced Phase 2 to Best’s associate, defendant Josephine Mangiapane, who held herself out as a mortgage broker and real estate broker. Best represented that Mangiapane was an officer working on behalf of third party Bear Resources, LLC (allegedly since discovered to have been a shell company), and that she would be able to assist in procuring the funding required by Phase 2, as Best had been previously involved in multiple, similar successful business transactions with Mangiapane. Mangiapane informed Phase 2 that it had been approved for funding, that Mangiapane had access to $5.5 million required, and that the funds would be provided if Phase 2 would sign documentation and advance to Bear an “issuance fee” of $300,000. Based on these representations, on September 16, 2009, Elie advanced Phase 2 the principal sum of $300,000, which Phase 2 agreed to repay within 60 days with interest pursuant to a Note and Loan Agreement.

On September 20, 2009, Phase 2 and Bear, through Bear’s purported representative, defendant Michael Fedoris, entered into a Financial Services and Escrow Agreement with defendant All Pro Escrow Services, an escrow company located in Pasadena. The Escrow Agreement purported to memorialize the fact that Bear would provide Phase 2 with the financing in exchange for the $300,000 fee and that if Bear were unable to obtain the financing, the fee would be returned to Phase 2 with prejudice. The complaint alleges that defendants have failed to perform under the agreement, have failed to obtain the financing and have failed to return the fee.

Plaintiff further alleges that Mangiapane was representing both plaintiff and Bear in the transaction, did not have previous successful transactions, is not a licensed broker, and that Bear was not an appropriate legal entity, but that much information concerning Bear in the Escrow Agreement was false. It is also alleged that defendants attempted to implement a modified plan to obtain funding to which Phase 2 never assented. The complaint alleges various causes of action for fraud, breach of fiduciary duty, negligence, breach of contract, interference with prospective economic advantage, conversion and RICO violations.

Defendants Mangiapane, Fedoris and Bear have filed a cross-complaint against Phase 2 and its owner, Kevin Doherty, alleging that under the proposed terms of the transaction to obtain financing for Phase 2, Bear agreed to issue a Standby Letter of Credit which would be used as collateral to obtain a loan on behalf of Phase 2 in an amount of $5.5 million. In order to engage the Standby Letter of Credit, Phase 2 was required to provide a $300,000 origination fee, which Doherty represented to Mangiapane he would be able to provide. In September, 2009, Phase 2 Bear and All Pro Escrow entered into the Financial Services and Escrow Agreement, but, unknown to cross-defendants, Phase 2 had entered into a Loan Agreement and Promissory Note with Elie for a loan of the origination fee, which was required to be repaid within 60 days in addition to 10% in interest fees.

Cross-Complainants allege that Phase 2 represented that the $300,000 origination fee was from their own funds, not third party funds, and that had cross-complainants known the true facts, they would not have entered into the Agreement, as they do not become involved in third party transactions wherein third parties are not directly subject to the terms and conditions of the originating agreement, nor do they become involved in transactions in which third party funds are involved. Cross-complainants allege that they only became aware of Elie’s involvement when Elie’s attorney began contacting All Pro Escrow demanding information concerning the transaction and escrow account and demanding that the escrow agent transfer the $300,000 originating fee to Elie.

Cross-complainants allege that they paid $150,000 for due diligence in connection with the financing, which they would not have paid had they known of Elie or the transaction concerning the originating fee. It is also alleged that cross-complainants, to satisfy their obligation to return the $300,000 originating fee has made more than four attempts to return the fee to Phase 2, which efforts have been rejected by Phase 2. It is also alleged that as the result of the conduct of cross-defendants, cross-complainants have been required to defend against the allegations asserted by Elie.

First Cause of Action—Fraud and Second Cause of Action—Negligent Misrepresentation
Cross-defendants argue here that these causes of action cannot be established because cross-complainants will be unable to establish the element of a false statement or omission. They argue that cross-defendants did not make any false representation either by suggestion, misrepresentation, or omission, but that at all times Phase 2 and its managing members were extremely transparent about the fact that they could not afford to pay the $300,000 originating fee on their own, and that Mangiapane and Best were fully aware that Phase 2 borrowed the originating fee.

The evidence presented in support of this argument consists in part of evidence showing that Best was aware that cross-defendants did not have the fee and suggested that he or someone else could fund the fee, but, as pointed out in the opposition, it is not established that Mangiapane and Bear were ever made aware of these communications with Best. [See UMF Nos. 19-31, 35-39].

The evidence also includes evidence that during a conversation with Mangiapane in September 2009, the managing members of Phase 2 informed Mangiapane that the originating fee would have to be borrowed from a third party, and that she responded that it did not matter to her where the originating fee came from, only that she receive it so that she could begin her fundraising letters. [UMF Nos. 43]. Cross-defendants rely on a declaration by Gary Gray, a managing member of Phase 2, in which he states:
‘Sometime following my initial conversation, I had a conference call with Best, Mangiapane and Mr, Devine. We discussed the potential for her to fundraise Phase 2 using her offshore structure. We discussed the initial fee explicitly. I told her that the initial fee was going to be impossible for Phase 2 and she stated that she didn’t care, so long as we provided the Initial Fee from somewhere.”
[Gray Decl., para. 24].

The Devine Declaration does not mention this conference call, but states that “Although I don’t recall the specific circumstance of Mangiapane learning about Mr. Elie during this time frame, I do know that she was aware that Phase 2 had a lender for the Initial Fee.” [Devine Decl., para. 27].

There is also evidence submitted purporting to show that Mangiapane was aware that the $300,000 had been transferred by Elie, and that she was demanding to speak to him by name when Doherty informed her the wire had gone through. [UMF No. 42, and evidence cited]. Cross-defendants also submit an email from ElieCorp., Elie’s corporation, which stated that the wire transfer had been completed, which was forwarded to Mangiapane, and which cross-defendants argue made Mangiapane clearly aware that the wire transfer had come from an entity other than Phase 2. [See UMF No. 53, Ex. 18].

The opposition argues that there are triable issues of fact, as Mangianpane maintains that cross-complainants were never made aware that the fee had been borrowed, were not aware that Elie was involved at the time the originating fee was transferred and that at the time of the receipt of the email forwarded from Elie’s assistant did not understand that Elie was not a part of Phase 2, but a third party. [See Response to UMF Nos. 43, 44, 50-53, and evidence cited]. Specifically, cross-complainants rely on Mangiapane’s deposition testimony in which she states that she did not know anything about Elie at the time she entered the agreement with Phase 2 and did not know about him until sometime later the next year, and, in essence, that it would have made no sense for her to have entered into the agreement when escrow required unrestricted use of the originating fee but there was some agreement with Elie containing conditions. [See Ex. 1, pp. 65, 216-217]. Mangiapane testifies that if the originating fee had been borrowed and subject to an agreement with Elie, “if it’s real, I wish I knew about it. It would have been a nonstarter. What would be the purpose of doing all the work if effectively the man couldn’t use the money?” [Ex. 1, Mangiapane Depo, 217:4-12]. The testimony also seems to suggest that cross-defendants were told that a “mainland representative” of Phase 2 would be providing the transfer, not a completely separate third party. [See Ex. 1, Mangiapane Depo pp. 271, 629].

This appears sufficient to create triable issues of fact with respect to whether there was a fraudulent representation or failure to disclose the fact that the originating fee was borrowed, and the trier of fact must weigh the credibility of each of these versions of the transaction. The motion is therefore denied.

Third Cause of Action—Breach of Contract
Cross-defendants argue that this cause of action cannot be established because cross-complainants cannot establish their performance or that cross-defendants breached the agreement. The argument is that Mangiapane took Phase 2’s $300,000, failed to complete the transaction, and then refused to return the $300,000 as required under the agreement, and that Phase 2 did not breach the agreement as there was no requirement under the agreement that the initial fee be paid from funds which were not borrowed.

Cross-complainants argue that they can establish performance under the agreement, as they attempted to return the $300,000 on four occasions, which were all rebuffed by Phase 2. [See Response to UMF Nos. 84, 85, and evidence cited, Additional Fact No. 7]. The evidence submitted is a declaration of Mangiapane in which she states:
“Bear Resources was able to cause the issuance of a standby letter of credit pursuant to the terms of the Financial Services and Escrow Agreement to Include Schedule 1. However, despite the issuance of the standby letter of credit, as a result of various events beyond Defendants’ control, Bear Resources was unable to obtain the $5.5 million financing on behalf of Phase 2. Pursuant to the terms of the Financial Services and Escrow Agreement to Include Schedule 1, Bear Resources, for its part, has since tried to return the $300,000, with prejudice, originating fee, FOUR times (to Phase 2, to Phase 2’s attorney, to Plaintiff, and to Plaintiff’s attorney). Each of Bear Resources attempts to return the $300,000 originating fee was rejected.”
[Ex. 2, Mangiapane Decl., para. 5].

Mangiapane also states in her deposition testimony that there were efforts to return the funds. [See Ex. 1, Mangiapane Depo., pp. 173, 584-584].

Although this showing is not particularly detailed, it does appear to raise triable issues with respect to whether the efforts made by cross-complainants to perform their obligations under the agreement to return the $300,000 were sufficient and appropriate, an issue of fact.

Cross-complainants also argue that the breach of contract claimed here is not that the money was borrowed, but that cross-defendants failed to accept return of the deposit as satisfaction of the obligations under the contract. The Financial Services Agreement at issue provides:
“In the event of and for whatever reason that the Lender is unable to fulfill its obligation as herein stated, the Lender shall return the initial fee for the issuance of the SBLC in the amount of, US $[300,000] with prejudice.”
[Ex 17, para. 7].

The facts set forth by cross-complainants, that the funds have been offered but refused, appear sufficient to raise issues of fact concerning whether a breach occurred on the part of cross-defendants in failing to accept the agreed upon sum with prejudice, and without further conditions, and the motion is therefore denied.

Fourth Cause of Action—Equitable Indemnity
Cross-defendants argue that a claim for equitable indemnity can only be maintained against a joint tortfeasor, and since cross-defendants have established that they have no liability for fraud or negligent misrepresentation, this claim must also fail. See BFG Architects Planners, Inc. v. Forcum/Mackey Construction, Inc. (2004) 119 Cal.App.4th 848, 852.

(Although not expressly argued, there is an argument here, particularly under the authority cited, that this argument fails to meet cross-defendants’ initial burden, as the argument fails to negate any element of an equitable indemnity claim, which would not depend on whether cross-defendants had perpetrated a fraud on cross-complainants, but on whether they had committed a tort on plaintiff.).

As discussed above, cross-complainants have submitted evidence which, if credited by the trier of fact, could support a finding that cross-defendants engaged in fraud or negligent misrepresentation, and the facts, even those presented by cross-defendants, suggest that if there was not full disclosure of Elie’s role to cross-complainant, there may have been some wrong perpetrated on plaintiff with an intention to deprive him of what he believed were his rights in the funds and the interest to be paid, for which cross-defendants would bear some portion of responsibility. The motion on this ground is therefore denied.

Claims Against Individual Defendant Kevin Doherty
As an initial matter, this argument is not addressed in the Separate Statement, and may be denied on this ground.

Cross-defendant Kevin Doherty argues that the causes of action for fraud and negligent misrepresentation brought against him individually must fail because he at all time was acting on behalf of Phase 2, a limited liability company, and there are no allegations of alter ego.

Doherty relies on Corporations Code §17158, which has been repealed. The new statute, section 17703.04 provides:
“(a) All of the following apply to debts, obligations, or other liabilities of a limited liability company, whether arising in contract, tort, or otherwise:

(1) They are solely the debts, obligations, or other liabilities of the limited liability company to which the debts, obligations, or other liabilities relate.

(2) They do not become the debts, obligations, or other liabilities of a member or manager solely by reason of the member acting as a member or manager acting as a manager for the limited liability company….

(c) Nothing in this section shall be construed to affect the liability of a member of a limited liability company to third parties for the member’s participation in tortious conduct, or pursuant to the terms of a written guarantee or other contractual obligation entered into by the member, other than an operating agreement.”

Doherty argues that the contract between Phase 2 and Mangiapane was executed by Doherty, as “manager” of Phase 2. [Ex. 17, p. 3].

The opposition argues that cross-complainants are not seeking to hold Doherty personally responsible under the contract, as the breach of contract cause of action is not alleged against him, and are not seeking to impose liability on him as a manager, but seek to impose liability on him as an agent for his affirmative conduct in engaging in fraud and tortious conduct.

Civil Code section 2343 provides;
“One who assumes to act as an agent is responsible to third persons as a principal for his acts in the course of his agency, in any of the following cases, and in no others:
1. When, with his consent, credit is given to him personally in a transaction;
2. When he enters into a written contract in the name of his principal, without believing, in good faith, that he has authority to do so; or
3. When his acts are wrongful in their nature.”
(Emphasis added).

As argued in the opposition, it is held that “wrongful” acts of an agent under the statute include fraud, for which the agent may be held personally liable. See Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003, 2nd Dist.) 107 Cal.App.4th 54, 68.

If the theory here that Doherty committed fraud by failing to disclose that the originating fee was borrowed is credited, the claim would not be barred as against Doherty as an individual as a matter of law. The motion is therefore denied.