2017-00211836-CU-BC

Realty Advisors, Inc. vs. P2O Hot Pilates & Fitness

Nature of Proceeding: Hearing on Demurrer to Cross-Complaint

Filed By: Kirby II, James R.

*** If oral argument is requested, the parties must at the time oral argument is

requested notify the clerk and opposing counsel of the specific causes of action and/or issues that will be addressed at the hearing. Counsel are also reminded that pursuant to local rules, only limited oral argument is permitted on law and motion matters. ***

Plaintiff Realty Advisors, Inc.’s (“RAI”) demurrer to defendants’ cross-complaint (“X-C”) is SUSTAINED IN PART and OVERRULED IN PART, with leave to amend, as follows.

Both moving and opposing counsel failed to comply with CRC Rule 3.1110(b)(3).

Factual Background

This action arises out of a 10 year commercial lease of property owned by RAI. The lease was signed in January 2016 and commenced on March 1, 2016. The lease to defendant P2O Pilates & Fitness, Inc. (“P2O”) was secured by guaranties by defendants Hobbs and Castillo. According to the complaint, P2O vacated the property in March 2017 and thereafter repudiated the lease. RAI filed suit against defendants alleging breach of the lease agreement as well as the guaranties.

Defendants have filed a cross-complaint against RAI as well as others, asserting claims of fraud (mixing distinct claims of misrepresentation and failure to disclose), negligence, rescission based on fraudulent inducement and mistake (although monetary damages are also alleged), unfair business practices and breach of contract.

Moving Papers. RAI demurs to all causes of action in the X-C on the ground they fail to plead facts sufficient to state a valid claim against RAI. In short, RAI maintains that

(1) the X-C does not state facts which establish the element of causation necessary for damages, rescission or restitution; (2) the fraud-based claims fail to specifically identify who made the alleged representations or what those representations actually were and do not plead recoverable special damages; (3) the alleged failure to disclose asbestos is not actionable since there is no duty to disclose facts already known and the X-C admits that it is “common knowledge” asbestos was used in constructing buildings at the time the leased property was built; (4) the extra month it took for removal of the asbestos is not actionable because it was not proximately caused by the alleged failure to disclose and because the lease agreement provides for an exclusive remedy (i.e., “free rent”); (5) the failure to disclose various conditions is not actionable since they was readily observable by the tenant who under the lease not only accepted the property “as is” but also become solely responsible for ensuring compliance with such laws; and (6) the unfair business practices claim is deficient because it fails to identify any misleading statement or any other unfair or unlawful conduct and because it fails to plead facts necessary to establish entitlement to any of the few remedies specifically permitted under Business & Professions Code §17200 et seq.

Opposition. Defendants oppose, essentially arguing that each of RAI’s contentions is incorrect but if the Court disagrees, defendants request leave to amend the X-C.

Analysis

Fraud-based Claims. California recognizes three primary forms of fraud and deceit:

Misrepresentation, concealment/failure to disclose and false promise. Although these

claims are similar, each has its own unique prima facie elements and because all forms of fraud must be pled with a heightened degree of factual particularity, claims for misrepresentation should ordinarily be alleged separately from claims for concealment and/or false promise. Additionally, when misrepresentation is pled against a corporation like RAI or another type of alleged, the plead must identify “the names of the persons who made the allegedly fraudulent misrepresentations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.” ( Tarmann v. State Farm Mut. Auto. Ins. Co. (1991) 2 Cal.App.4th 153, 157-158.) Of course, such particularity is both impossible and unnecessary for a claim of concealment/failure to disclose where there was no affirmative (mis)representation but a claim for concealment must be supported by facts establishing that the party against whom the claim is asserted had a duty to disclose; without such a duty, the claim fails as a matter of law. Regardless of the theory of fraud alleged, the party asserting the claim must plead recoverable out-of-pocket damages which were proximately caused by its alleged reasonable and justifiable reliance on the other party’s conduct in the form of misrepresentation, failure to disclose or false promise. (See, e.g., CACI 1923; Auerbach v. Great Western Bank (1999) 74 Cal.App.4th 1172.)

Distinguished from claims for monetary damages based on misrepresentation, concealment and false promise are claims for fraudulent inducement. Where a party’s assent to a contract is induced by fraud, a contract is formed but it is voidable and the party may pursue a claim for fraudulent inducement which, if successful, may result in the rescission of the contract; however, no monetary damages are awarded on a fraudulent inducement claim. (See, e.g., Hinesley v. Oakshade Town Center (2005) 135 Cal.App.4th 289; Rosenthal v. Great Western Financial Securities Corp. (1996) 14 Cal.4th 394.) A party seeking rescission based on fraudulent inducement must provide the other party to the contract with prompt notice of the intent to rescind and offer to restore the consideration received, if any. (See, e.g., Village Northridge Homeowners Association v. State Farm Fire and Casualty Co. (2010) 50 Cal.4th 913.)

To the extent the X-C purports to assert a misrepresentation claim against RAI, such claim is deficient in that the X-C fails to identify the names of the persons at RAI who made the allegedly fraudulent misrepresentations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written. Moreover, according to the opposition, it appears that defendants are not actually alleging that RAI itself made any misrepresentations but rather that others who were acting on RAI’s behalf made misrepresentations. However, the fact remains that the X-C fails to adequately allege its misrepresentation claim since it does not include the details required by Tarmann and to the extent the claim is asserted against RAI, it should be pled clearly and concisely. To the extent the X-C seems to identify only three specific misrepresentations (as distinguished from the six matters which were allegedly not disclosed), the Court finds nothing particular onerous about the requirement to plead the misrepresentations with specificity and adds there does not appear to be any requirement to plead each and every occurrence of the same misrepresentation.

To the extent the X-C purports to assert a failure to disclose/concealment claim against RAI, such claim is not inadequate on account of defendants’ failing to identify names, statements, authority to speak, etc. inasmuch as these details cannot be provided where there was an absence of communication. While RAI suggests that defendants must also identify the person(s) who “failed to speak” and make certain disclosures is fatal to the failure to disclose claims, RAI has not cited any legal authority for this proposition which, as explained above, does not withstand scrutiny. A

concealment claim is fundamentally premised on the allegation that no one actually disclosed a material fact and thus, there is no need to identify who “failed to speak;” if someone had, the claim would presumably be for misrepresentation rather than concealment and additional information must then be pled.

The Court finds that the distinct misrepresentation and failure to disclose claims are equally deficient in that the X-C fails to plead the existence of any recoverable out-of-pocket damages as a result reliance on the alleged misrepresentations and/or failures to disclose. (See, e.g., CACI 1923; Auerbach, supra.) Instead, defendants merely generically allege they “have been damaged in amounts to be proven at trial” but this is insufficient for purposes of these fraud and deceit claims which must be pled to a heightened degree of factual particularity.

Causation. RAI’s argument relates exclusively to the repeated allegation that defendants “were unaware of the true intentions, fraudulent acts and misrepresentations of Cross-Defendants at the time they were made.” (X-C, ¶32.) Although this sentence is awkwardly phrased and subject to various interpretations some of which may undermine the necessary causal link, the Court holds that the X-C does otherwise plead the essential element of causation to the extent Paragraph 33, among others, assert that defendants “reasonably and justifiably relied on the false representations, promises and acts of Cross-Defendants in entering into the…lease agreement and personal guarantees… Had [defendants] known of the true facts and circumstances, they would not have entered into the…lease agreement or provided the…personal guarantees.” To interpret the inaccuracy and ambiguities in Paragraph 32 under these circumstances as an admission defendants were unaware of any of the alleged representations or the failures to disclose would be to ignore the remainder to the allegations throughout the X-C but it would nevertheless be prudent for defendants to be more careful and precise when drafting their pleadings.

For the same reasons, the Court finds the X-C adequately pleads the element of causation in connection with the remaining causes of action for negligence, rescission based on fraudulent inducement and mistake (although monetary damages are alleged), unfair business practices and breach of contract.

Failure to Disclose Asbestos. RAI maintains it had no duty to disclose the presence of asbestos because it was presumptively known equally to defendants inasmuch as the X-C itself admits it is “common knowledge” that asbestos was used in construction at the time the leased property was built and because defendants expressly accepted the property “as is.” According to Limandri v. Judkins, there are four situation where a failure to disclose may constitute actionable fraud: (1) When there is a fiduciary relationship between the parties; (2) when one party has exclusive knowledge of material facts not known to the other; (3) when one actively conceals a material fact from the other; and (4) when one makes partial representations but suppresses some material facts from the other. (Limandri v. Judkins (1997) 52 Cal.App.4th 326, 336-337.) None of these scenarios fairly describes what is alleged in the present case and thus, coupled with the X-C’s explicit allegation about it being “common knowledge” that asbestos was used in construction at the time the subject property was built and the lease provision stating the defendants are accepting the property “as is,” the Court concludes the X-C fails to state valid claim for failure to disclose asbestos.

Failure to Disclose Delays in Asbestos Removal. According to RAI, the X-C alleges that the asbestos remediation which was originally scheduled to be completed

in two months actually took three but this claim is not actionable because (1) there is no allegation RAI knew the remediation would take an extra month or failed to disclose this with an intent to defraud; (2) the sole remedy under the lease is “free rent” and (3) defendants improperly allege this alleged failure to disclose induced them to enter into the lease agreement and personal guarantees, both of which had been signed months before. Since the opposition effectively concedes that the X-C, as pled, does not accurately identify what defendants are alleging and that as pled, it is deficient in several respects, the demurrer to this claim must be sustained.

Failure to Disclose Non-Compliance with ADA. RAI contends this claim fails because (1) the X-C does not identify what was out of compliance, (2) defendants were on notice that a building built in the 1960s might not comply with the ADA enacted in 1990, (3) the lease specifies that defendants accepted the property in “as is” condition and may therefore not rely on an alleged failure to disclose, and (4) the lease also expressly provides that defendants are solely responsible for ensuring compliance with applicable laws, statutes, ordinances, etc. While the opposition suggests RAI’s fraudulent concealment or intentional non-disclosure of the ADA accessibility violations effectively nullifies the “as is” clause in the lease, neither the X-C nor the opposition identifies how RAI concealed or could have theoretically concealed from defendants any ADA violation prior to their execution of the lease and guarantees and since there was no fiduciary relationship between the parties, the Court concludes defendants cannot state a valid concealment claim which might otherwise supersede the “as is” provision in the lease and defendants’ agreement to comply with all laws at their sole expense.

Failure to Disclose Fire Code Issues. Although fire code violations would not ordinarily be subsumed by a contract’s “as is” provision, the Court will sustain the demurrer to this claim because it is not entirely clear what exactly defendants are alleging with respect to the fire code and moreover, it the X-C does not include facts sufficient to determine whether RAI knew or should have known of these issues so as to potentially give rise to a duty to disclose same to defendants at or before the lease agreement and guarantees were signed. Without first establishing the existence of a duty to disclose the condition, there can be no liability for the failure to disclose.

Failure to Disclose Necessary Mechanical Equipment Upgrades. RAI contends this claim fails because (1) the X-C does not identify mechanical updates at issue, (2) defendants do not state whether the alleged deficiencies were or were not readily observable upon reasonable inspection, (3) defendants were on notice that an older building might need certain mechanical upgrades, and (4) the lease specifies that defendants accepted the property in “as is” condition. This demurrer will also be sustained since it is impossible to ascertain what defendants are alleging here and whether these issues could be considered “material” under the circumstances, especially when the lease states defendants accepted the property “as is.”

Failure to Disclose Necessary Structural Engineering Work. The Court sustains the demurrer to this claim for the same reasons set forth in the preceding paragraph. Defendants are again reminded that all claims of fraud including failure to disclose must be pled with a heightened level of factual particularity, a standard clearly not satisfied here.

Misrepresentation of Necessary Demolition Work. According to the X-C, defendants contracted for but did not receive a “shell premises” devoid of interior walls,

fixtures and features remaining from the prior tenant such that defendants could immediately commence their improvements to the property. Additionally, the X-C asserts that RAI misrepresented “the nature and scope of necessary demolition work” to create a “shell premises.” However, not only do both the X-C and the opposition fail to identify any express contract provision ostensibly obligating RAI to provide merely a “shell premises” devoid of interior walls, fixtures and features but as pointed out above, the lease agreement plainly states that defendants were taking the property “as is.” The mere fact RAI may have been “actually and constructively aware” that defendants intended to use the premises for Pilates and other fitness purposes does not, without more, obligate RAI to provide a “shell premises” where the lease agreement contains a clear “as is” provision. Accordingly, this alleged misrepresentation does not appear actionable under the present circumstances.

Misrepresentation of Square Footage. This claim fails as a matter of law not only because the square footage of the lease premises was something defendants could have readily ascertained for themselves prior to signing the lease and guarantees but also because the lease explicitly states that tenant (1) has confirmed and accepted the square footage and (2) accepts the property is “as is” condition.

Unfair Business Practices. In this cause of action, defendants generally allege that cross-defendants including RAI engaged in unfair, unlawful or fraudulent conduct by failing to disclose and misrepresenting various facts relating to the leased premises or its condition (see examples above). RAI demurs on the grounds that (1) defendants lack standing to assert this cause of action because they fail to identify any loss of money or property as a result of an unfair, unlawful or fraudulent business practice; (2) defendants failed to identify any particular statement or alleged failure to disclose would mislead an ordinary consumer; (3) defendants fail to allege facts establishing that any business practice was unfair, unlawful or fraudulent but instead rely solely on their inadequately pled claims of failures to disclose and misrepresentation; and (4) defendants are not under Business & Professions Code §17200 et seq. entitled to damages, attorney fees or disgorgement and their claim for restitution is not sufficiently alleged.

The Court will sustain the demurrer to this cause of action in part. Under California law all statutory causes of action such as those under §17200 must be pleaded with particularity, showing every fact essential to the existence of liability under the relevant statutes. (See, Covenant Care, Inc. v. Superior Court (Inclan) (2004) 32 Cal.4th 771, 790 (citing Lopez v. Southern Cal. Rapid Trans. Dist. (1985) 40 Cal.3d 780, 795) (emphasis added).) Defendants allegations here do little more than reiterate the claims based on various failures to disclose and misrepresentations discussed above and as such, the reiteration of these defectively-pled claims in connection with this statutory cause of action fails for the same reasons. Among other things, the X-C does not properly plead any misrepresentation by RAI and does not allege with sufficient particularity any failure to disclose by RAI. This cause of action fails to state facts showing that defendants and each of them suffered the actual loss of money or property as a result of the claimed unfair, unlawful or fraudulent business practices.

To the extend RAI contends the X-C’s prayer for relief includes remedies not available under §17200, RAI should have but did not file a motion to strike. That said, it is true that one asserting a claim under this statute is not entitled to recover either monetary/compensatory damages, attorney fees or “nonrestitutionary disgorgement of profits” (as discussed in citing Korea Supply Co. v. Lockheed Martin Corp. (2003) 29

Cal.4th 1134, 1147-1148) but to be clear, restitution of money or property lost by an individual claimant due to unfair, unlawful or fraudulent business practices is certainly permitted under the statute. (See, e.g., Inline, Inc. v. Apace Moving Systems, Inc. (2005) 125 Cal.App.4th 895; Korea Supply Co., at 1144.)

Conclusion

In light of the foregoing, RAI’s demurrer to the X-C is sustained in part and overruled in part.

Since this is the first challenge to the X-C, leave to amend is granted. Defendants may file and serve an amended X-C no later than 2/9/2018. Although not required by court rule or statute, defendants are directed to present a copy of this order when the amended X-C is presented for filing.

RAI to respond within 30 days if the amended X-C is personally served, 35 days if served by mail.

If any cross-defendant intends to demur to the amended X-C or move to strike, it shall determine if any other cross-defendant who has appeared in this action also intends to demur or move to strike. If so, all such cross-defendants shall coordinate a single hearing date for the demurrers and motions to strike. Additionally, a copy of the amended X-C shall be included with the moving papers.