Case Name: Zhiwei Xu, et al. v. Chen Chi Wang, et al.
Case No.: 18CV321297

I. Background

Plaintiffs Zhiwei Xu, Xiaohua Yang, Zhen Yang, and Xuanming Lu (collectively, “Plaintiffs”) allege defendants Bei Qin (“Qin”) and Chen Chi Wang (“Wang”) defrauded them into investing in real property in the Mojave Desert. Qin and Wang allegedly formed various entities to perpetrate the fraud, namely defendants ACEH Capital, LLC doing business as ACE Capital Group (“ACE”), ACEQ Investment Group, Inc. (“ACEQ Investment”), and 230 East Street and Avenue B, LLC (collectively, the “Entities”).

According to the allegations in the first amended complaint (“FAC”), ACE originally purchased undeveloped real property in an unincorporated area of the Mojave Desert (the “Property”) for $605,000 in 2006. (FAC, ¶ 20.) One year later, Qin, who was ACE’s real estate broker, arranged for it to sell the Property to his company 230 East Street and Avenue B, LLC (“Purchaser”) for $1,353,158.40. (FAC, ¶¶ 21-24 & Ex. A [sale agreement], Ex. B [Purchaser’s Articles of Organization], Ex. C [Purchaser’s Operating Agreement].)

Qin thereafter solicited investments in Purchaser by circulating a Private Placement Memorandum (the “Memorandum”). (FAC, ¶ 26 & Ex. D.) Qin offered for sale and each of the plaintiffs ultimately purchased a 6.67 percent interest in Purchaser for the price of $93,991.00 each. (FAC, ¶¶ 26-27.) Shortly thereafter, Wang, as Chief Executive Officer and Managing Member of ACE, executed a grant deed transferring the Property to Purchaser. (FAC, ¶ 29 & Ex. E.) Several months later, Purchaser issued a check to ACE for the full purchase price. (FAC, ¶ 30.)

Plaintiffs claim Qin tricked them into investing in the Property, which was actually worth only $330,000. (FAC, ¶¶ 31-34.) Plaintiffs allege Qin misrepresented the true value and development potential of the Property. (FAC, ¶¶ 32-36.) Plaintiffs purportedly did not learn about the value of the Property until June 2017 when Qin held a member meeting and furnished copies of financial statements for Purchaser and the sale agreement. (FAC, ¶¶ 42-45.)

Plaintiffs assert causes of action against Qin, Wang, and the Entities for: (1) breach of fiduciary duty (against Qin); (2) fraud (against Qin, Wang, and the Entities); (3) violation of California’s Unfair Competition Law (against Qin and Purchaser); and (4) accounting (against Qin, Purchaser, and ACEQ Investment).

Currently before the Court is a demurrer by Wang and ACE (collectively, “Defendants”). Plaintiffs oppose the demurrer and filed a request for judicial notice in support.

II. Request for Judicial Notice

Plaintiffs request judicial notice of Defendants’ cross-complaint. The matters of law and fact that are proper subjects of judicial notice are set forth in Evidence Code sections 451 and 452. A matter must be relevant to a material issue in order for a court to take judicial notice of it. (Silverado Modjeska Recreation & Park Dist. v. County of Orange (2011) 197 Cal.App.4th 282, 307, fn. 18.) Although the cross-complaint is a court record subject to judicial notice under Evidence Code section 452, subdivision (d), it is not relevant to a material issue before the Court. Accordingly, the cross-complaint is not a proper subject of judicial notice. Plaintiffs’ request for judicial notice is therefore DENIED.

III. Demurrer

Defendants demur to the second cause of action for fraud on the ground of failure to state facts sufficient to constitute a cause of action (Code Civ. Proc., § 430.10, subd. (e)). In support, they argue Plaintiffs do not allege all of the essential elements of their claim with particularity and that the claim is time-barred. The Court addresses each argument in turn.

A. Failure to Plead Elements with Particularity

In the second cause of action, Plaintiffs allege Qin made false, incomplete, and misleading representations about the Property. They also allege Wang, the Chief Executive Officer and Managing Member of ACE, conspired with Qin to defraud them. Defendants argue these allegations are insufficient to state a claim against them directly or based on a conspiracy theory of liability.

The essential elements of a fraud claim based on an intentional misrepresentation are: “(1) the defendant made a false representation as to a past or existing material fact; (2) the defendant knew the representation was false at the time it was made; (3) in making the representation, the defendant intended to deceive the plaintiff; (4) the plaintiff justifiably relied on the representation; and (5) the plaintiff suffered resulting damages.” (West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 792, citing Lazar v. Super. Ct. (1996) 12 Cal.4th 631, 638.)

A plaintiff may also state a claim for fraud based on concealment. (Linear Technology Corp. v. Applied Materials, Inc. (2007) 152 Cal.App.4th 115, 131.) The essential elements of a fraudulent concealment claim are: (1) the defendant concealed or suppressed a material fact; (2) the defendant had a duty to disclose the fact to the plaintiff; (3) the defendant intentionally concealed or suppressed the fact with intent to defraud the plaintiff; (4) the plaintiff was unaware of the fact and would not have acted in the same manner if he or she knew of the fact; (5) the plaintiff suffered damages as a result of the defendant’s concealment or suppression of the fact. (Ibid., citing Civ. Code, § 1710, subd. (3).) A duty to disclose may arise from a fiduciary or confidential relationship. (Linear Technology Corp., supra, 152 Cal.App.4th at p. 131.) Additionally, “[i]n transactions which do not involve fiduciary or confidential relations,” a duty arises when “(1) the defendant makes representations but does not disclose facts which materially qualify the facts disclosed, or which render his disclosure likely to mislead; (2) the facts are known or accessible only to defendant, and defendant knows they are not known to or reasonably discoverable by the plaintiff; (3) the defendant actively conceals discovery from the plaintiff.” (Ibid. [internal quotation marks and citations omitted].)

The essential elements of a fraud claim based on either intentional misrepresentation or concealment must be pleaded with particularity. (Lazar, supra, 12 Cal.4th at pp. 644-45.) “[G]eneral and conclusory allegations do not suffice.” (Id. at p. 645.)

Defendants first assert Plaintiffs do not plead with particularity what misrepresentations were made. To comply with the particularity requirement, a plaintiff must allege “how, when, where, to whom, and by what means the representations were tendered.” (Lazar, supra, 12 Cal.4th at p. 645 [internal quotation marks and citation omitted].) “A plaintiff’s burden in asserting a fraud claim against a corporate employer is even greater.” (Ibid.) “In such a case, the plaintiff must ‘allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.’” (Ibid., quoting Tarmann v. State Farm Mutual Automobile Insurance Co. (1991) 2 Cal.App.4th 153, 157.)

Here, Plaintiffs do not allege Wang made false, incomplete, or misleading representations attributable to himself as an individual or to ACE. Instead, Plaintiffs’ claim is based exclusively on representations made by Qin. But Plaintiffs do not allege specific facts about the misrepresentations that were made. Although it appears the misrepresentations generally concerned the value and security of their investment, the reasonableness of the purchase price for the Property, and the Property’s development potential (FAC, ¶¶ 56-57), it is not apparent what exactly Qin said to each plaintiff, when Qin made the representations, and how the representations were made. Accordingly, Plaintiffs do not adequately allege intentional misrepresentations or acts of concealment by Defendants or Qin sufficient to state a claim against Defendants directly or based on a conspiracy theory.

Next, Defendants argue Plaintiffs cannot allege they reasonably relied on representations about the value of the Property because they agreed they received certain information and were satisfied with the information and their ability to ask questions about the investment at the time they invested. This argument does not justify sustaining the demurrer for several reasons.

First, for the purpose of a demurrer, the pleading defect must be apparent from the face of the pleading or matters subject to judicial notice. (Code Civ. Proc., § 430.30, subd. (a).) Defendants do not request judicial notice of the Subscription Agreement upon which they rely, and it is not otherwise apparent from the face of the pleading that Plaintiffs executed this agreement. Although the Memorandum attached to the FAC does contain an unexecuted Subscription Agreement that may have been distributed along with other information about Purchaser (FAC, Ex. D), Defendants do not provide any legal justification for their request that the Court simply “assume” Plaintiffs executed that agreement (Mem. of Pts. & Auth. at p. 9, fn. 2). For this reason, and especially given Plaintiffs allege they did not receive other information purportedly accompanying the Memorandum, there is no basis for assuming Plaintiffs assented to the Subscription Agreement. The factual basis for Defendants’ argument is, thus, unsubstantiated.

Second, Defendants do not cite or analyze any case law addressing the element of reliance as a general matter or the requirement of reasonableness in particular. (See generally OCM Principal Opportunity Fund, L.P. v. CIBC World Markets Corp. (2007) 157 Cal.App.4th 835, 863-64 [discussing distinct requirements of actual and reasonable reliance].) Defendants do not explain and it is not obvious how a determination can be made that no reasonable reliance occurred given Plaintiffs do not specifically allege what representations they relied upon in the first instance. (See, e.g., OCM Principal Opportunity Fund, L.P., supra, 157 Cal.App.4th at pp. 864-69 [evaluating justifiable reliance in light of disclaimers in investment prospectus].) Thus, Defendants do not substantiate the legal basis for their argument or demonstrate how the facts alleged here are insufficient in light thereof.

Finally, although Plaintiffs do not specifically plead what misrepresentations they relied upon, the general categories of information they identify in the second cause of action include, not just the value of the Property at the time of investment, but also the potential for developing the Property and the security of their investment. Defendants’ reliance argument appears to be directed to the unspecified representations about the original value of the Property alone, and so their argument does not address the entirety of the claim. A demurrer cannot be sustained as to only a portion of a cause of action. (PHII, Inc. v. Super. Ct. (1995) 33 Cal.App.4th 1680, 1682.) Consequently, Defendants’ argument does not independently justify sustaining the demurrer.

Defendants also argue Plaintiffs’ conspiracy allegations are insufficient.

“Civil conspiracy is not an independent tort.” (Berg & Berg Enterprises, LLC v. Sherwood Partners, Inc. (2005) 131 Cal.App.4th 802, 823.) “Rather, it is a legal doctrine that imposes liability on persons who, although not actually committing a tort themselves, share with the immediate tortfeasors a common plan or design in its perpetration.” (Ibid. [internal quotation marks and citations omitted].) “The essence of the [theory] is that it is merely a mechanism for imposing vicarious liability; it is not itself a substantive basis for liability.” (Ibid.) “Each member of the conspiracy becomes liable for all acts done by others pursuant to the conspiracy, and for all damages caused thereby.” (Ibid.)

To state a claim based on a conspiracy theory of liability, “a plaintiff must allege the following elements: ‘(1) the formation and operation of the conspiracy, (2) wrongful conduct in furtherance of the conspiracy, and (3) damages arising from the wrongful conduct.’ [Citations.]” (AREI II Cases (2013) 216 Cal.App.4th 1004, 1022.) Due to the “very nature of a conspiracy, ‘its existence must often be inferentially and circumstantially derived from the character of the acts done, the relations of the parties and other facts and circumstances suggestive of concerted action.’ [Citation.]” (Ibid.) “While a complaint must contain more than a bare allegation the defendants conspired, a complaint is sufficient if it apprises the defendant of the ‘character and type of facts and circumstances upon which [the plaintiff] was relying to establish the conspiracy.’ [Citations.]” (Ibid.)

Defendants assert Plaintiffs make a “bare allegation” that they conspired with Qin. (Mem. of Pts. & Auth. at p. 7:17-18.) Defendants’ characterization is inaccurate (see FAC, ¶¶ 8-9, 14-15, 17, 29-30, 32, 40, 46), and they do not otherwise address the substance of Plaintiffs’ allegations. Accordingly, the demurrer is not sustainable on the additional basis that Plaintiffs do not adequately plead facts to support their conspiracy theory of liability for fraud.

B. Statute of Limitations

Defendants argue the second cause of action is time-barred.

A court may sustain a demurrer 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 demurrer is only sustainable 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.)

To substantiate their statute of limitations argument, Defendants must demonstrate (1) which statute of limitations applies and (2) when the claim accrued. (E-Fab, supra, 153 Cal.App.4th at p. 1316.)

As Defendants correctly articulate, the statute of limitations for a fraud cause of action is three years pursuant to Code of Civil Procedure section 338, subdivision (d). (Alfaro v. Comm. Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1391.) Accordingly, Plaintiffs’ claim is time-barred if more than three years elapsed from the time their claim accrued until the time they commenced this action on December 29, 2017.

Turning to the issue of accrual, Defendants first argue Plaintiffs’ claim accrued in 2007 when they invested because that is when their claim became complete with all of its elements. It is true that “[g]enerally, the limitations period starts running when the last element of a cause of action is complete.” (NBCUniversal Media, LLC v. Super. Ct. (2014) 225 Cal.App.4th 1222, 1231.) But here, it is not apparent the claim became complete with all of its elements at the time of their investment. Although not articulated by Defendants, it appears their argument is based on the assumption that the claim is based exclusively on representations made to solicit their investment. Although Plaintiffs do focus on the solicitation process, it is not apparent their claim is based exclusively on representations made during that time (see FAC, ¶ 42), particularly given the absence of specific factual allegations as discussed above.

More significantly, Plaintiffs allege they did not discover the fraud until 2017. (FAC, ¶ 45.) “By statute, the discovery rule applies to fraud actions.” (E-Fab, supra, 153 Cal.App.4th at p. 1318, citing Code Civ. Proc., § 338, subd. (d).) Thus, a fraud cause of action does not accrue “‘until the plaintiff discovers, or has reason to discover the cause of action.’ [Citation.]” (E-Fab, supra, 153 Cal.App.4th at p. 1318.) The plaintiff must allege when he or she discovered the cause of action and that it could not be discovered sooner despite reasonable diligence. (Grisham v. Philip Morris U.S.A., Inc. (2007) 40 Cal.4th 623, 638.)

Defendants assert in a conclusory manner that “[t]he FAC contains no allegations that Plaintiffs could not have discovered their [claim] despite the exercise of reasonable diligence.” (Mem. of Pts. & Auth. at p. 6:1-2.) This statement is not true. Plaintiffs devote nearly four pages of the FAC to allegations about their delayed discovery of the fraud. For example, they allege Qin refused, despite repeated requests, to provide membership and financial information about Purchaser. (FAC, ¶¶ 36-39.) They also allege Qin asked them to approve a sale of the Property for only $330,000 in June 2017, and that she only provided financial statements and some additional information about the Property in response to the concerns they voiced about her request. (FAC, ¶¶ 42-45.) Defendants do not address these allegations or cite any authority to support the conclusion that the allegations are insufficient to plead delayed discovery of the fraud claim.

In conclusion, Defendants do not demonstrate the second cause of action is clearly and affirmatively time-barred based on the allegations on the face of the pleading. Consequently, the demurrer is not sustainable on this basis.

C. Conclusion

As reflected above, Plaintiffs fail to state a claim for fraud because they do not allege with particularity the misrepresentations made or facts concealed by Defendants or by their purported coconspirator Qin. Defendants’ demurrer to the second cause of action is therefore SUSTAINED with 10 days’ leave to amend.