Case Name: Rajkumar Potuneedi v. Venkat Rayapati; Vijayasri Rayapati, et al.
Case No.: 16CV301420

This is an action for fraud brought by plaintiff Rajkumar Potuneedi (“Plaintiff”) against defendants Venkat Rayapati (“Venkat”), Vijayasri Rayapati (“Vijayasri”), and SAI Technology (“SAIT”) (collectively, “Defendants”). Plaintiff alleges he became acquainted with Venkat and Vijayasri through a cousin. Emphasizing this family connection and their membership in the same caste, Venkat and Vijayasri then allegedly tricked Plaintiff into investing a total of $125,000.00 in their company, SAIT, based on false representations about the company’s products, valuation, investors, and success in the marketplace. Defendants subsequently offered Plaintiff employment on the condition they be allowed to change the terms of his investment such that he would be paid back over the course of five years with an additional 15 percent interest as compensation for the additional time. Plaintiff accepted, but Defendants never paid him back or compensated him. In the operative First Amended Complaint (“FAC”), Plaintiff asserts a single cause of action against Defendants for fraud.

Currently before the Court is Defendants’ motion for summary judgment/adjudication.

The pleadings limit the issues presented for summary judgment/adjudication and such a motion may not be granted or denied based on issues not raised by the pleadings. (See Government Employees Ins. Co. v. Sup. Ct. (2000) 79 Cal.App.4th 95, 98; Laabs v. City of Victorville (2008) 163 Cal.App.4th 1242, 1258; Nieto v. Blue Shield of Calif. Life & Health Ins. (2010) 181 Cal.App.4th 60, 73 [“the pleadings determine the scope of relevant issues on a summary judgment motion.”].) The moving party bears the initial burden of production to make a prima facie showing that there are no triable issues of material fact. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850.) A motion for summary adjudication shall be granted only if it completely disposes of a cause of action, an affirmative defense, a claim for damages, or an issue of duty. (See CCP §437c(f)(1); McClasky v. California State Auto. Ass’n (2010) 189 Cal.App.4th 947, 975 [“If a cause of action is not shown to be barred in its entirety, no order for summary judgment—or adjudication—can be entered.”]; Palm Spring Villas II Homeowners Association, Inc. v. Parth (2016) 248 Cal.App.4th 268, 288.)

Summary adjudication of general “issues” or of facts is not permitted. (See Raghavan v. The Boeing Company (2005) 133 Cal.App.4th 1120, 1136.) The only “claim for damages” that can be independently summarily adjudicated under CCP §437c(f)(1) is a claim for punitive damages. (See DeCastro West Chodorow & Burns, Inc. v. Superior Court (1996) 47 Cal.App.4th 410 [Summary adjudication statute does not permit summary adjudication of one or more components of compensatory damages which does not dispose of entire cause of action; punitive damage claim is only type of damage claim which may be summarily adjudicated without disposing of entire cause of action]. See also Chavez v. Glock, Inc. (2012) 207 Cal.App.4th 1283, 1312; Jameson v. Desta (2013) 215 Cal.App.4th 1144, 1169; Paramount Petroleum Corp. v. Superior Court (2014) 227 Cal.App.4th 226, 240-241.)

The moving party’s declarations and evidence will be strictly construed in determining whether they negate or disprove an essential element of a plaintiff’s claim “in order to resolve any evidentiary doubts or ambiguities in plaintiff’s (or opposing party’s) favor.” (Johnson v. American Standard, Inc. (2008) 43 Cal.4th 56, 64, parentheses added.) While the same standards of admissibility govern both, the opposition declarations are liberally construed while the moving party’s evidence is strictly scrutinized. (Saelzler v. Advanced Group 400 (2001) 25 Cal.4th 763, 768.) The evidence must be liberally construed in support of the opposing party, resolving any doubts in favor of that party. (Yanowitz v. L’Oreal USA, Inc. (2005) 36 Cal.4th 1028, 1037; Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 389.) The moving party may generally not rely on additional evidence filed with its reply papers. (See Jay v. Mahaffey (2013) 218 Cal.App.4th 1522, 1537-38 [“The general rule of motion practice . . . is that new evidence is not permitted with reply papers. This principle is most prominent in the context of summary judgment motions . . .”]; see also Nazir v. United Airlines, Inc. (2009) 178 Cal.App.4th 243, 252.)

“Summary judgment is properly granted when no triable issue of material fact exists and the moving party is entitled to judgment as a matter of law. A defendant moving for summary judgment bears the initial burden of showing that a cause of action has no merit by showing that one or more of its elements cannot be established or that there is a complete defense. Once the defendant has met that burden, the burden shifts to the plaintiff ‘to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto.’ ‘There is a triable issue of material fact if, and only if, the evidence would allow a reasonable trier of fact to find the underlying fact in favor of the party opposing the motion in accordance with the applicable standard of proof.’” (Madden v. Summit View, Inc. (2008) 165 Cal.App.4th 1267, 1272 [internal citations omitted].)

As an initial matter Defendants’ motion is one for summary judgment only, as they have not complied with Rule of Court 3.1350(b), stating in pertinent part, “If summary adjudication is sought, whether separately or as an alternative to the motion for summary judgment, the specific cause of action, affirmative defense, claims for damages, or issues of duty must be stated specifically in the notice of motion and be repeated, verbatim, in the separate statement of undisputed material facts.” Defendants’ Separate Statement does not repeat any of the “issues” or “claims for damages” proposed for adjudication “verbatim,” or at all. Therefore the motion is one for summary judgment on the basis that the statute of limitations and/or illegality provide a complete defense, as this is the only basis for summary judgment listed in the notice of motion. (See Notice of Motion at p. 1:8-10.)

Defendants’ motion for summary judgment is DENIED as follows.

Statute of Limitations defense: Defendants’ own evidence (Plaintiff’s verified discovery responses attached as exhibit C to the declaration of Defense Counsel Jennifer Gilbert) demonstrates that triable issues of material fact remain as to the statute of limitations defense—both as to whether there was an oral modification of a written contract in June 2011 extending the term of the loan for five years and as to when Plaintiff knew or should have suspected fraud such that the three-year limitations period for fraud (CCP § 338(d)) began running. “When the issue is accrual, belated discovery is usually a question of fact, but may be decided as a matter of law where reasonable minds cannot differ.” (Blanks v. Seyfarth Shaw LLP (2009) 171 Cal.App.4th 336, 374-375, internal citations omitted.) If there was a modification of the loan term to five years than Plaintiff’s allegations in the FAC that he did not have reasons to suspect the fraud until the money was due in 2016 are not clearly unreasonable and might be believed by a jury.

Civil Code §1698 clearly allows for an oral modification of the type that Plaintiff claims occurred. Subdivision (b) states: “A contract in writing may be modified by an oral agreement to the extent that the oral agreement is executed by the parties.” Subdivision (c) states: “Unless the contract otherwise expressly provides, a contract in writing may be modified by an oral agreement supported by new consideration. The statute of frauds (Section 1624) is required to be satisfied if the contract as modified is within its provisions.” Witkin notes that the current version of §1698(c) “codifies in part the holding of D.L. Godbey & Sons Const. Co v. Deane (1952) 39 Cal.2d 429: ‘Unless the contract otherwise expressly provides, a contract in writing may be modified by an oral agreement supported by new consideration.’ But the Godbey requirement of execution by the party relying on the modification was not carried over in the new section.” (1 Witkin, Summary of Cal. Law (11th ed. 2017) Contracts § 999 p. 1044.)

The individual Defendants’ statements in their declarations that they did not agree to any modification of the loan agreement(s) do not establish an absence of triable issues of material fact given Plaintiff’s verified discovery responses essentially restating his allegations of a fraudulently induced oral modification of the original loan contract extending the loan term. To the extent the loan “contract” was ever in writing (the written receipts attached as exhibit A to both of the individual Defendants’ declarations are the only submitted evidence of this) the “writing” does not have any language barring modifications or requiring any modifications to be in writing. Credibility cannot be evaluated on summary judgment and a reasonable trier of fact might choose to believe Plaintiff’s assertion that in June 2011 Defendants, unable to pay back the loan at the original due date, made Plaintiff an oral offer to extend the term of the loan for five years in return for an increase in the interest rate and offering Plaintiff a job, which he then performed for several months. Plaintiff agreeing to forbear from suing on the unpaid loan and to extend the loan term on the one hand, and Defendants agreeing to additional interest and hiring Plaintiff on the other can serve as the new consideration for the oral modification. Plaintiff clearly originally expected to be paid for this job, as Defendants’ own evidence (exhibits B-D to the declaration of Venkat Rayapati) demonstrates that he successfully brought an action to recover the wages he should have received in 2012. A reasonable finder of fact could conclude that Plaintiff did not have reason to suspect fraud as to the modified extended loan until the repayment date approached in 2016.

The fact that the oral modification may have violated the Statute of Frauds does not provide Defendants a defense in this particular context as Plaintiff is alleging fraudulent inducement of the original loans and the oral modification of the contract. Plaintiff is not trying to affirm the contract and sue for breach; he is suing for the fraud. The Supreme Court in Tenzer v. Superscope, Inc. (1985) 39 Cal.3d 18, 29-31 held that an action for fraud may be maintained even where the allegedly fraudulent promise would be unenforceable as a contract because of the contract of frauds. The Court noted that the prior approach (which it expressly disapproved) was “inconsistent with the general rule ‘‘that the statute of frauds, having been enacted for the purpose of preventing fraud, shall not be made the instrument of shielding, protecting or aiding the party who relied upon it in the perpetration of a fraud or in the consummation of a fraudulent scheme.’’” (Id. at p. 30, internal citation omitted.)

The Supreme Court re-affirmed Tenzer in Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assoc. (2013) 55 Cal.4th 1169, which held that the parol evidence rule could also not be used as a shield to prevent the proof of fraud, even if the evidence shows a promise directly at variance with the promise of the writing. The Court in Riverisland noted that “Tenzer disapproved a 44-year-old line of cases to bring California law into accord with the Restatement Second of Torts, holding that a fraud action is not barred when the allegedly fraudulent promise is unenforceable under the statute of frauds. . . . It noted the principle that a rule intended to prevent fraud, in that case the statute of frauds, should not be applied so as to facilitate fraud. The court further reasoned that restricting fraud claims was not necessary to prevent nullification of the statute of frauds, because promissory fraud is not easily established.” (Id. at p. 1183, internal citations omitted.)

Illegality defense: Defendants’ argument that the illegality of the loan agreement provides them a complete defense is incorrect as a matter of law. As a result the motion on this ground—that the purported illegality of the loan contract provides a complete defense to the fraud claim—fails to even meet the initial burden. A loan to a corporation with a usurious interest rate (above 10%) does not have an illegal “object,” as the loan of the principal amount is perfectly legal, it simply has an impermissible interest rate. “The object of a contract is the thing which it is agreed, on the part of the party receiving the consideration, to do or not to do.” (Civil Code, §1595; emphasis added.)

The impermissible interest rate does not void the entire loan agreement. As Witkin notes, “[t]he usurious interest provision is void, but the principal of the loan is unaffected. Because the principal of the loan is unaffected, the usurious interest provision results in a note payable at maturity without interest; and the creditor-payee is entitled to interest at the legal rate from the date of maturity to the date of judgment.” (1 Witkin, Summary of Cal. Law (11th ed. 2017) Contracts § 469, p. 495, internal citations omitted but citing among others Mark McDowell Corp. v. LSM 128 (1989) 214 Cal.App.3d 1427, 1432 [since usurious interest provision is void, contract ‘does not stipulate a legal rate of interest’ within meaning of Civil Code § 3289(b), and accordingly bears interest at 10% after breach].)