Case Name: True Solar USA, Inc. v. Jean D. Chen, et al.
Case No.: 17-CV-311092

I. Background

This is an action for legal malpractice and fraud arising from a sale of real property. Plaintiffs True Solar USA, Inc. and Jones Development Project, LLC (collectively, “Plaintiffs”) sought to purchase and develop real estate in the Bay Area to obtain immigrant investor visas, also known as employment-based fifth preference (“EB-5”) visas. (First Amended Complaint (“FAC”), ¶¶ 14-15.) Plaintiffs hired defendant the Law Offices of Jean D. Chen, a practice operated by defendants Jean D. Chen (an attorney) and Tony Ye (her husband and assistant), to represent them in making the real estate investment and applying for EB-5 visas. (FAC, ¶ 14.)

Plaintiffs allege Ms. Chen and Mr. Ye persuaded them to purchase a property in San Francisco. (FAC, ¶¶ 15-16.) Unbeknownst to them, the property had recently been purchased by Mr. Ye’s company, defendant Tree Lined Properties, LLC (“TLP”) and/or its successor in interest defendant Tree Lined Holdings, LLC (“TLH”) “to be ‘flipped’. . . for a profit of no less than $600,000 (based on the purchase price [it] had paid just three months earlier).” (FAC, ¶¶ 15-21.)

Plaintiffs claim neither Ms. Chen nor Mr. Ye disclosed that Mr. Ye’s company was involved in the real estate transaction. (FAC, ¶¶ 21-22.) On this basis, Plaintiffs assert causes of action against Ms. Chen and her practice for professional negligence and breach of fiduciary duty. (FAC, ¶¶ 35-40, 47-51.) Plaintiffs assert a cause of action against Mr. Ye and his companies, TLP and TLH, for breach of fiduciary duty based on an aiding and abetting theory of liability. (FAC, ¶¶ 41-46.)

Additionally, Plaintiffs allege Mr. Ye represented that the price for the target property was “reasonable,” but that the purchase price of $2,900,000 was actually unreasonable. (FAC, ¶ 17.) Plaintiffs also allege Mr. Ye misrepresented that the seller had received an annual rate of return on the property of 6 percent over the course of ten years. (FAC, ¶ 27.) Although it is not entirely clear, it appears Plaintiffs are alleging Mr. Ye’s representations about the rate of return and duration of ownership were false because his company, not the previous owner, was in fact the seller, and his company held the property for only three months and made a profit of 100 percent. (FAC, ¶ 27.) Plaintiffs assert a cause of action for fraud against Ms. Chen, her practice, Mr. Ye, TLP, and TLH (collectively, “Defendants”) based on these misrepresentations about the price and history of the investment property. (FAC, ¶¶ 24-34.)

Currently before the Court is Defendants’ demurrer to the fraud cause of action.

II. Discussion

Defendants demur to the first cause of action for fraud on the ground it is barred by the statute of limitations. (Dem. at p. 2:6-8.) This is not a statutory ground for demurrer. “The grounds for a demurrer are those listed in Code of Civil Procedure section 430.10, including among others the failure to state facts sufficient to constitute a cause of action (id., subd. (e)).” (Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 111.) “The grounds for a demurrer differ from the reasons for sustaining a demurrer on a particular ground.” (Ibid.) Here, the purported ground is actually a supporting argument. Based on this supporting argument, and because Defendants cite Code of Civil Procedure section 430.10, subdivision (e), it appears the demurrer is actually on the ground of failure to state facts sufficient to constitute a cause of action.

In general, a party may demur on the ground of failure to state facts sufficient to constitute a cause of action if “‘the complaint shows on its face that the statute [of limitations] bars the action.’ [Citation.]” (E-Fab, Inc. v. Accountants, Inc. Services (2007) 153 Cal.App.4th 1308, 1315.) A court may only sustain a general demurrer on this basis if the challenged cause of action is clearly and affirmatively barred by the statute of limitations based on the allegations on the face of the pleading. (Id. at p. 1316.) In evaluating a demurrer on this basis, a court must determine (1) which statute of limitations applies and (2) when the claim accrued. (Ibid.)

Neither party disputes the statute of limitations for a fraud cause of action is three years. (Alfaro v. Comm. Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1391, citing Code Civ. Proc., § 338, subd. (d).) Thus, the central issue is whether it is clear from the face of the pleading that Plaintiffs commenced this action more than three years after the fraud cause of action accrued.

A fraud cause of action “is not deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake.” (Alfaro, supra, 171 Cal.App.4th at p. 1391, citing Code Civ. Proc., § 338, subd. (d).) “‘It is necessary for a plaintiff to allege facts showing that suit was brought within a reasonable time after discovery of the fraud without unnecessary delay and that failure to make the discovery sooner was not due to negligence.’ [Citation.]” (Alfaro, supra, 171 Cal.App.4th at p. 1391.) A plaintiff “‘must specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence. The burden is on the plaintiff to show diligence, and conclusory allegations will not withstand demurrer.’ [Citation.]” (E-Fab, supra, 153 Cal.App.4th at p. 1324-25, original italics.)

Defendants argue Plaintiffs do not allege facts sufficient to show they brought suit in a reasonable time after discovery of the fraud. The misrepresentations were made before Plaintiffs purchased the property in April 2013, which was more than three years before they commenced this action. Plaintiffs allege Defendants “actively concealed the true facts from them.” (FAC, ¶¶ 17, 31.) Plaintiffs further allege that “[they], exercising reasonable diligence, were first put on inquiry notice regarding [D]efendants’ wrongdoing significantly less than 3 years prior to the date of this [pleading].” (FAC, ¶ 31.) Nevertheless, Plaintiffs do not actually allege any facts to support their conclusory allegations. Plaintiffs do not specifically allege how and when they discovered the fraud or facts demonstrating they could not have made the discovery sooner despite their diligence.

In their opposition, Plaintiffs argue they may be less diligent because they were entitled to rely on Mr. Ye’s representations due to the fiduciary duty he owed them. Although not entirely clear, it appears perhaps Plaintiffs’ position is that they need not exercise any diligence. As a preliminary matter, this position is inconsistent with their inclusion of a conclusory allegation about their diligence. Additionally, Mr. Ye is not an attorney, and Plaintiffs cite no authority to support the proposition that he owed them a fiduciary duty. Furthermore, Plaintiffs misinterpret and mistakenly rely on cases addressing the accrual of causes of action for breach of fiduciary duty, not fraud, to support their argument. (See, e.g., Eisenbaum v. Western Energy Resources, Inc. (1990) 218 Cal.App.3d 314, 325 [distinguishing delayed discovery of fraud from delayed discovery of breach of fiduciary duty].)

Contrary to Plaintiffs’ representation, the existence of a fiduciary duty does not absolve them from exercising reasonable diligence or otherwise relax the requirements for pleading facts to support application of the delayed discovery rule. (See, e.g., WA Southwest 2, LLC v. First Am. Title Insurance Co. (2015) 192 Cal.App.4th 148, 157.) Put differently, “even assuming for the sake of argument that each of the [defendants] had a fiduciary duty to plaintiffs, this does not mean that plaintiffs had no duty of inquiry if they were put on notice of a breach of such duty.” (Ibid.) Courts have not held the existence of a fiduciary duty further reduces the standard of diligence required under the delayed discovery rule; rather, courts have held the existence of the fiduciary duty justifies application of the discovery rule to a cause of action for breach of fiduciary duty in the first instance. (Ibid.) Plaintiffs do not otherwise cite any cases that actually support their argument. Moreover, even if Plaintiffs had done so, they do not explain how their argument supports the conclusion that they are also excused from pleading how and when they discovered the fraud.

In conclusion, Plaintiffs’ conclusory allegations about their discovery of the fraud are insufficient. The demurrer to the first cause of action for fraud is therefore SUSTAINED with 10 days’ leave to amend.