Case Number: SC127714 Hearing Date: July 07, 2020 Dept: O
Case Name: Country Acres, LP, et al. v. Ross, et al.
Case No.: SC127714
Hearing Date: 7-7-20
SUBJECT: MOTION FOR SUMMARY JUDGMENT, OR IN THE ALTERNATIVE, SUMMARY ADJUDICATION
MOVING PARTY: Defendants Deane Earl Ross, et al.
RESP. PARTY: Plaintiffs Country Acres, LP, et al.
Defendants’ Motion for Summary Judgment, or in the Alternative, Summary Adjudication is DENIED. The Court finds there are triable issues of material fact regarding when Plaintiffs discovered their alleged injury and the cause thereof, and when Plaintiffs should have discovered the injury and the cause thereof. In addition, there are triable issues of material fact as to whether Malvern’s purchase of the Note breached the Partnership Agreement and interfered with the Partnership Agreement.
Defendants’ Evidentiary Objections to Dec. of L. Penn—OVERRULE
Plaintiffs’ Evidentiary Objection to Dec. of Hefling—OVERRULE
Plaintiffs’ Evidentiary Objection to Supp. Dec. of Mangels—SUSTAINED
I. Triable issues of fact remain as to whether Plaintiffs’ causes of action are time barred
A. Applicable Law
“Resolution of the statute of limitations issue is normally a question of fact. It is plaintiff's burden to show he was not negligent in failing to discover his injury sooner, and whether he exercised reasonable diligence is a question of fact for the court or jury to decide.” Cleveland v. Internet Specialties West, Inc. (2009) 171 Cal.App.4th 24, 31. (Grant of summary judgment reversed because an issue of material fact existed as to when a prudent person would have suspected plaintiff’s investment was lost due to a wrongful cause rather than the ordinary vagaries of business.) Where a defendant is moving for summary judgment based on the statute of limitations and a plaintiff alleges delayed discovery, “the issue is whether the only reasonable inference to be drawn from those facts that are undisputed” is that the plaintiff knew or should have known of the facts essential to the plaintiff’s claims by some later date outside the limitations period. Id. at 31. “Circumstances that are dubious or equivocal are not sufficient to take the place of actual notice.... The rule imputes notice only of those facts that are naturally and reasonably connected with the fact known, and of which the known fact or facts can be said to furnish a clue. It does not impute notice of every conceivable fact and circumstance however remote which might come to light by exhausting all possible means of knowledge.” Id. at 33.
In addition, the duty to inquire into the circumstances surrounding a defendant's alleged fraud is “relaxed” where the plaintiff and defendant are in a fiduciary relationship. See Lee v. Escrow Consultants, Inc. (1989) 210 Cal.App.3d 915, 921; Indeed, “’[w]here there is a duty to disclose, the disclosure must be full and complete, and any material concealment or misrepresentation will amount to fraud sufficient to entitle the party injured thereby to an action.” (citation) ‘Where a fiduciary relationship exists the [plaintiffs'] usual duty of diligence to discover facts does not exist.” (citation.) Put simply, if the “delay in commencing an action is induced by the conduct of the defendant, he cannot avail himself of the defense of the statute [of limitations].” (Citation.)” Cross v. Bonded Adjustment Bureau (1996) 48 Cal.App.4th 266, 281
B. Application to Facts
Defendants fail to demonstrate that the statute of limitations affirmative defense can be resolved as an issue of law. Defendants’ evidence does not show Plaintiffs discovered their alleged injury and the cause thereof in 1999 or 2005. Nor does that evidence show Plaintiffs should have discovered the injury and the cause thereof by 1999 or 2005. Plaintiffs allege Defendants were Plaintiffs’ fiduciaries and the alleged injury arose from Defendants’ breach of their fiduciary duties to act in Plaintiff’s best interest and to fully and fairly disclose the opportunity to purchase the Note for pennies on the dollar. Given this relationship, under the relaxed duty of inquiry, Defendants’ evidence falls far short of meeting their burden on summary judgment. In order to meet their burden on summary judgment, Defendants must establish that, based on undisputed facts and evidence, the only reasonable inference to be drawn is that Plaintiffs had actual or constructive knowledge of both their injury and its cause before the limitations period expired.
The nature of Plaintiffs’ alleged injury defines the “delayed discovery” analysis. Plaintiffs’ alleged injury flows from Defendants’ misappropriation of a “corporate opportunity” in violation of Ross and Wilshire’s fiduciary duties to Plaintiffs. “The law has long recognized the doctrine of corporate opportunity which prohibits one who occupies a fiduciary relationship to a corporation from acquiring, in opposition to the corporation, property in which the corporation has an interest or tangible expectancy or which is essential to its existence…. Under any test, a corporate opportunity exists when a proposed activity is reasonably incident to the corporation's present or prospective business and is one in which the corporation has the capacity to engage. Whether or not a given opportunity meets the requisite relationship is largely a question of fact to be determined from the objective facts and surrounding circumstances existing at the time the opportunity arises. Whether or not an officer has misappropriated a corporate opportunity does not depend on any single factor.” Kelegian v. Mgrdichian (1995) 33 Cal.App.4th 982, 988–989.
Plaintiffs’ alleged “injury” is not the sale of the Note from AHP to Malvern; but rather, Plaintiffs’ continued indebtedness on the Note and payment of attendant loan servicing fees to the present day, when Plaintiffs could have purchased the debt and extinguished it 21 years ago. See Dec. of R. Mangels, Ex. 6, SAC filed on 4-26-18, ¶14, Prayer for Relief, ¶¶3 and 4. The alleged “cause” of Plaintiffs’ injury is not simply Defendants’ acquisition of the Note. The alleged cause of Plaintiffs’ injury is Defendants’ surreptitious misappropriation of the corporate opportunity to purchase the Note for $200,000 in 1999, which would have allowed Plaintiffs to extinguish Plaintiffs’ outstanding balance on the Note in the amount of $5,429,093. Id. at ¶14. Based on this theory of liability, bare knowledge of Malvern’s ownership of the Note does not establish actual or constructive knowledge of Plaintiffs’ injury or its cause as a matter of law on summary judgment.
Similarly, Lawrence Penn’s 8-31-99 Letter does not establish, as an issue of law, Plaintiffs’ actual or constructive knowledge of both their alleged injury (unnecessarily prolonging Country Acres, LP’s indebtedness under the Note) and the cause (Malvern’s purchase of the Note for only $200,000 when the outstanding balance was approximately $5.4 million) thereof:
• When Penn drafted that letter in 8-31-99, he was not a decisionmaker of Plaintiffs, but the President of PL Acquisitions, Inc. Penn therefore acquired knowledge of Malvern’s ownership of the Note when he was not an agent or decisionmaker of the Plaintiffs and in the process of purchasing Plaintiff American Pacific Housing Corporation. See Dec. of R. Mangels, Ex. 35.
• Penn’s letter only lists the Note and Malvern as the owner of the Note. There is nothing in the letter indicating that Penn knew that (1) Malvern purchased the Note from American Housing Partners in 1998, when Ross was the principal of both Malvern and Wilshire, who was the general partner of Plaintiff Country Partners, LP; (2) that Malvern purchased the Note from AHP for $200,000 or “pennies on the dollar”; and (3) that Ross, as principal of Wilshire, did not fully and fairly disclose to Plaintiffs the opportunity to purchase the Note from AHP at this price before taking that opportunity for his own corporation, Malvern. Id.
• Penn denies any knowledge of the terms of Malvern’s purchase of the Note until September 2015 and denies that he committed to memory the information set forth in his 1999 letter. See Dec. of L. Penn, ¶¶14 and 19.
In addition, reasonable minds could conclude that Penn’s bare knowledge of Malvern’s ownership or purchase of the Note would not reasonably trigger Plaintiffs’ inquiry into the terms of Malvern’s purchase of the Note, or knowledge that Malvern’s purchase injured Plaintiffs, particularly in light of Plaintiffs’ “relaxed” duty of inquiry. Such a conclusion would also be supported by Defendants’ own argument that transactions like Malvern’s purchase of the Note are not expressly prohibited under §8.07 of Plaintiff Country Acres, LP’s Partnership Agreement. See SAC, Ex. A, §8.07.
For the same reasons, the Court cannot find as a matter of law that Plaintiffs had actual or constructive knowledge of their injury and the cause of that injury based on (1) Quinn’s informing Penn in 1999 that Malvern owned the Note; (2) Berger’s execution of the 8-1-05 Note on behalf of Intercoastal, Country Acres, LP’s general partner in 2005, which listed Malvern as the owner of the Note; or (3) the emails between Steven Ross and Berger and Berger and Penn dated 1-28-10, 8-2-11 and 9-9-11 regarding the Note. See Dec. of R. Mangels, Exs. 22 and 24. At best, these documents, like Penn’s 8-31-99 letter, may be construed as establishing Plaintiffs’ knowledge of Malvern’s ownership of the Note. Knowledge of this single fact alone is insufficient to impute Plaintiffs’ actual or constructive knowledge of the alleged injury and its cause as an issue of law on summary judgment. Defendants’ Motion for Summary Judgment or Adjudication based on statute of limitations is DENIED.
II. Triable issues of fact remain as to whether Malvern’s purchase of the Note breached the Partnership Agreement and tortiously interfered with the Partnership Agreement
Plaintiffs’ 3rd c/a for breach of contract is based on Wilshire’s breach of Plaintiff Country Acres, LP’s Partnership Agreement. Plaintiffs’ 4th c/a for tortious interference with contract is based on Ross and Malvern’s interference with Plaintiff Country Acres, LP Partnership Agreement by inducing Wilshire’s breach thereof. Plaintiffs allege Wilshire’s breach of §§8.01 and 8.07 of the Partnership Agreement. Defendants argue Wilshire’s approval of Malvern’s purchase of the Note did not breach either §8.01 or §8.07, such a purchase was not expressly disallowed under those provisions and §8.07. Defendants also argue transfer of the Note was not contrary to Plaintiff Country Acres, LP’s interest.
Defendants fail to establish as an issue of law that §8.07 imposed no contractual duties as to Wilshire’s approval of Malvern’s purchase of the Note or Malvern’s purchase of the Note. Under §8.07, “[a]ny contract or dealing between the Partnership, the General Partners or their affiliates shall be fully disclosed to the Limited Partners in the next regular report from the General Partners to the Limited Partners.” See SAC, Ex. A, §8.07. The sale of the Note issued by the Partnership to Malvern would reasonably qualify as “any contract or dealing between the Partnership, the General Partners or their affiliates.” Defendants attempt to narrow the applicability of §8.07 to “service” contracts based on a reference to “services” in that section is contradicted by the “any contract or dealing” language in that same section. At best, Defendants establish that it is ambiguous whether the sale to Malvern triggered their duties of disclosure under §8.07, but they fail to present any evidence that would establish their interpretation is the only reasonable interpretation of this ambiguity as an issue of law. Further, Plaintiffs present evidence that Defendants failed to fulfill their obligation to disclose the sale to Malvern and Wilshire’s approval of it. According to Plaintiffs’ evidence, Ross never disclosed the opportunity to purchase the Note or Malvern’s acquisition of the Note to the Limited Partners, nor were there any financial statements for Country Acres, LP for 1998 or 1999, the years in which Malvern’s purchase of the Note would have been disclosed. See Plaintiff’s Additional Undisputed Facts Nos. 17, 69, 72-74; Dec. of L. Penn, ¶¶11-17, Dec. of F. Mok, ¶5, Ex. J-2, Reponses to Rog Nos. 7, 14 and 16.
In addition, triable issues of fact remain as to whether §8.01 was breached by Defendant Wilshire approved the sale of the Note to Malvern without first disclosing the opportunity to Plaintiffs. Defendant Wilshire was required under §8.01 to use its powers as general partner of Plaintiff Country Partners, LP in the interests of Country Partners, LP and where any conflict existed, the conflict would be resolved in favor of Plaintiff Country Partners, LP: “All decisions by the General Partners shall be made in the interests of the Partnership and, in cases where the interest of the General Partners and Limited Partners shall be in conflict, the interest of the Limited Partners shall in all cases prevail.” See SAC, Ex. A, §8.01. According to Defendants, the decision to approve the sale to Malvern because Plaintiffs are paying on the Note in the same way they would have been regardless of who owned it. Defendants’ assertion simply ignores Plaintiffs’ theory of the case, the doctrine of “lost corporate opportunity” and the conflict of interest that arose from the potential for Plaintiffs to extinguish Country Partners’ debt and all attendant costs if Plaintiffs’ purchased the Note and the potential for Ross to gain an investment by keeping the Note alive and collecting on it. The mere fact that Plaintiffs’ are paying on the Note in the same way as it would if the Note were owned by someone else does not negate Plaintiffs’ allegation of breach or injury.
Triable issues of fact remain as to Plaintiffs’ 3rd and 4th causes of action. Defendants’ Motion for Summary Judgment is DENIED. Defendants’ motion for summary adjudication of the 3rd and 4th c/a is DENIED.