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This case was last updated from Los Angeles County Superior Courts on 05/04/2021 at 11:39:20 (UTC).

RAYOND SHOFLER ET AL VS ALAN C FOX ET AL

Case Summary

On 10/13/2017 RAYOND SHOFLER filed a Contract - Other Contract lawsuit against ALAN C FOX. This case was filed in Los Angeles County Superior Courts, Stanley Mosk Courthouse located in Los Angeles, California. The Judges overseeing this case are MICHELLE WILLIAMS COURT, SAMANTHA JESSNER, TERESA A. BEAUDET, DAVID J. COWAN, LAURA A. SEIGLE, JAMES C. CHALFANT and KENNETH R. FREEMAN. The case status is Pending - Other Pending.

Case Details Parties Documents Dockets

 

Case Details

  • Case Number:

    ****9693

  • Filing Date:

    10/13/2017

  • Case Status:

    Pending - Other Pending

  • Case Type:

    Contract - Other Contract

  • Court:

    Los Angeles County Superior Courts

  • Courthouse:

    Stanley Mosk Courthouse

  • County, State:

    Los Angeles, California

Judge Details

Presiding Judges

MICHELLE WILLIAMS COURT

SAMANTHA JESSNER

TERESA A. BEAUDET

DAVID J. COWAN

LAURA A. SEIGLE

JAMES C. CHALFANT

KENNETH R. FREEMAN

 

Party Details

Plaintiffs and Petitioners

THE RAYMOND SHOFLER IRA

SHOFLER BARBARA INDIVIDUALLY AND ON

SHOFLER RAYMOND

THE RAYMOND AND BARBARA SHOFLER FAMILY TRUST AND THE RAYMOND SHOFLER IRA

SHOFLER BARBARA

Defendants and Respondents

FOX ALAN C.

ACF PROPERTY MANAGEMENT INC

DOES 1 TO 100

Not Classified By Court

PRAGER RONALD S.

LOCKIE STEPHEN

Attorney/Law Firm Details

Plaintiff and Petitioner Attorneys

LEONARD RICHARD C. ESQ.

LEONARD RICHARD

LEONARD RICHARD C.

Defendant and Respondent Attorneys

TURKEN JAMES H. ESQ.

TURKEN JAMES HENRY ESQ.

LEVIN DANIEL BENJAMIN

ESTRADA ESTEBAN MARTIN

BEDELL A. ZOE

YOHALEM MARK R

Not Classified By Court Attorney

TESSER BRANDON M

 

Court Documents

Response - RESPONSE TO PLAINTIFFS' STATEMENT OF DISQUALIFICATION OF DISCOVERY REFEREE

4/28/2021: Response - RESPONSE TO PLAINTIFFS' STATEMENT OF DISQUALIFICATION OF DISCOVERY REFEREE

Minute Order - MINUTE ORDER (HEARING ON MOTION FOR SUMMARY ADJUDICATION)

8/20/2019: Minute Order - MINUTE ORDER (HEARING ON MOTION FOR SUMMARY ADJUDICATION)

Opposition - OPPOSITION DEFENDANTS' OPPOSITION TO PLAINTIFFS' EX PARTE APPLICATION FOR AN ORDER CALENDARING AND SHORTENING HEARING ON MOTIONS TO COMPEL

10/2/2019: Opposition - OPPOSITION DEFENDANTS' OPPOSITION TO PLAINTIFFS' EX PARTE APPLICATION FOR AN ORDER CALENDARING AND SHORTENING HEARING ON MOTIONS TO COMPEL

Supplemental Declaration - SUPPLEMENTAL DECLARATION OF STEVEN A. SCHUMAN RE: EX PARTE APPLICATION FOR AN ORDER CALENDARING MOTIONS TO COMPEL

10/11/2019: Supplemental Declaration - SUPPLEMENTAL DECLARATION OF STEVEN A. SCHUMAN RE: EX PARTE APPLICATION FOR AN ORDER CALENDARING MOTIONS TO COMPEL

Response - OPPOSITION DEFENDANTS' RESPONSE TO PLAINTIFFS' FOURTH EX PARTE APPLICATION FOR AN ORDER CALENDARING AND SHORTENING HEARING ON MOTION TO COMPEL

11/7/2019: Response - OPPOSITION DEFENDANTS' RESPONSE TO PLAINTIFFS' FOURTH EX PARTE APPLICATION FOR AN ORDER CALENDARING AND SHORTENING HEARING ON MOTION TO COMPEL

Notice of Lodging - NOTICE OF LODGING NOTICE OF LODGMENT

11/8/2019: Notice of Lodging - NOTICE OF LODGING NOTICE OF LODGMENT

Declaration - DECLARATION OF JERRY ROSS IN SUPPORT OF MOTION FOR APPOINTMENT OF A RECEIVER

11/8/2019: Declaration - DECLARATION OF JERRY ROSS IN SUPPORT OF MOTION FOR APPOINTMENT OF A RECEIVER

Order Appointing Court Approved Reporter as Official Reporter Pro Tempore

12/18/2019: Order Appointing Court Approved Reporter as Official Reporter Pro Tempore

Certificate of Mailing for - CERTIFICATE OF MAILING FOR (COURT ORDER RE. COMPLEX CIVIL CASE QUESTIONNAIRE;) OF 01/29/2020

1/29/2020: Certificate of Mailing for - CERTIFICATE OF MAILING FOR (COURT ORDER RE. COMPLEX CIVIL CASE QUESTIONNAIRE;) OF 01/29/2020

Certificate of Mailing for - CERTIFICATE OF MAILING FOR (COURT ORDER) OF 06/16/2020, ORDER

6/16/2020: Certificate of Mailing for - CERTIFICATE OF MAILING FOR (COURT ORDER) OF 06/16/2020, ORDER

Minute Order - MINUTE ORDER (COURT ORDER)

7/1/2020: Minute Order - MINUTE ORDER (COURT ORDER)

Notice - NOTICE OF DISCOVERY REFEREE'S RECOMMENDED RULING ON PLAINTIFFS' MOTION TO COMPEL FURTHER RESPONSES TO FORM INTERROGATORIES

9/30/2020: Notice - NOTICE OF DISCOVERY REFEREE'S RECOMMENDED RULING ON PLAINTIFFS' MOTION TO COMPEL FURTHER RESPONSES TO FORM INTERROGATORIES

Reply - REPLY TO PLAINTIFFS' RESPONSE TO EVIDENTIARY OBJECTIONS

1/12/2021: Reply - REPLY TO PLAINTIFFS' RESPONSE TO EVIDENTIARY OBJECTIONS

Declaration - DECLARATION EXHIBITS TO DECLARATION OF MARK R. YOHALEM ISO DEFENDANTS' MOTION FOR DISQUALIFICATION - VOLUME I

7/17/2019: Declaration - DECLARATION EXHIBITS TO DECLARATION OF MARK R. YOHALEM ISO DEFENDANTS' MOTION FOR DISQUALIFICATION - VOLUME I

Declaration - DECLARATION OF MARK R. YOHALEM ISO DEFENDANTS OPPOSITION TO PLAINTIFFS' MOTION FOR SUMMARY ADJUDICATION PURSUANT TO THE FIRST CAUSE OF ACTION OF THE COMPLAINT

8/6/2019: Declaration - DECLARATION OF MARK R. YOHALEM ISO DEFENDANTS OPPOSITION TO PLAINTIFFS' MOTION FOR SUMMARY ADJUDICATION PURSUANT TO THE FIRST CAUSE OF ACTION OF THE COMPLAINT

Order - Order Advancing Hearing on Motion to Compel PMK Deposition

11/9/2018: Order - Order Advancing Hearing on Motion to Compel PMK Deposition

Notice of Case Management Conference

1/22/2019: Notice of Case Management Conference

NOTICE OF ORDER TO SHOW CAUSE HEARING AND CASE MANAGEMENT CONFERENCE

11/3/2017: NOTICE OF ORDER TO SHOW CAUSE HEARING AND CASE MANAGEMENT CONFERENCE

604 More Documents Available

 

Docket Entries

  • 07/07/2021
  • Hearing07/07/2021 at 09:30 AM in Department 50 at 111 North Hill Street, Los Angeles, CA 90012; Jury Trial

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  • 06/17/2021
  • Hearing06/17/2021 at 09:30 AM in Department 50 at 111 North Hill Street, Los Angeles, CA 90012; Final Status Conference

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  • 06/10/2021
  • Hearing06/10/2021 at 16:00 PM in Department 50 at 111 North Hill Street, Los Angeles, CA 90012; Non-Appearance Case Review

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  • 06/07/2021
  • Hearing06/07/2021 at 10:00 AM in Department 50 at 111 North Hill Street, Los Angeles, CA 90012; Hearing on Motion to Bifurcate

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  • 06/03/2021
  • Hearing06/03/2021 at 14:00 PM in Department 50 at 111 North Hill Street, Los Angeles, CA 90012; Hearing on Motion for Summary Judgment

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  • 05/25/2021
  • Hearing05/25/2021 at 13:30 PM in Department 85 at 111 North Hill Street, Los Angeles, CA 90012; Hearing on Motion - Other for Appointment of Receiver

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  • 04/28/2021
  • DocketDeclaration (of Mark R. Yohalem in Support of Defendants' Response to Plaintiffs' Statement of Disqualification of Discovery Referee); Filed by ACF PROPERTY MANAGEMENT INC (Defendant); Alan C. Fox (Defendant)

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  • 04/28/2021
  • DocketResponse (to Plaintiffs' Statement of Disqualification of Discovery Referee); Filed by ACF PROPERTY MANAGEMENT INC (Defendant); Alan C. Fox (Defendant)

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  • 04/27/2021
  • Docketat 1:30 PM in Department 85, James C. Chalfant, Presiding; Status Conference - Held

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  • 04/27/2021
  • DocketMinute Order ( (Status Conference)); Filed by Clerk

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831 More Docket Entries
  • 11/03/2017
  • DocketNOTICE OF ORDER TO SHOW CAUSE HEARING AND CASE MANAGEMENT CONFERENCE

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  • 11/03/2017
  • DocketNotice; Filed by Plaintiff/Petitioner

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  • 10/26/2017
  • DocketNotice of Case Management Conference; Filed by Clerk

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  • 10/26/2017
  • DocketOSC-Failure to File Proof of Serv; Filed by Clerk

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  • 10/26/2017
  • DocketORDER TO SHOW CAUSE HEARING

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  • 10/26/2017
  • DocketNOTICE OF CASE MANAGEMENT CONFERENCE

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  • 10/13/2017
  • DocketVERIFIED COMPLAINT FOR: (1) BREACH OF FIDUCIARY DUTY; ETC

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  • 10/13/2017
  • DocketSUMMONS

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  • 10/13/2017
  • DocketComplaint; Filed by Barbara Shofler (Plaintiff); Raymond Shofler (Plaintiff); The Raymond and Barbara Shofler Family Trust and the Raymond Shofler IRA (Plaintiff)

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  • 01/09/2015
  • DocketNotice; Filed by ACF PROPERTY MANAGEMENT INC (Defendant); Alan C. Fox (Defendant)

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Tentative Rulings

Case Number: BC679693    Hearing Date: April 20, 2021    Dept: 85

Raymond Shofler, et al. v. Alan C. Fox, et al., BC679693

Tentative decision on (1) motion to seal: denied; (2) motion for appointment of receiver: probable grant, but notice must be given to other investors

Plaintiffs Raymond Shofler (“Raymond”) and Barbara Shofler (“Barbara”), individually and on behalf of the Raymond and Barbara Shofler Family Trust (“Shofler Trust”) and the Raymond Shofler IRA (“IRA”), move for the appointment a receiver to take over management of the following entities in which Plaintiffs own a continuing interest: (1) Cave Springs Shopping Center 12, LLC; (2) College Marketplace 16, LLC; (3) Deer Creek Lot 4 07A, LLC; (4) Fenton Commons 16, LLC; (5) Overland Crossing 13A, LLC (“Overland Crossing”); (6) Paradise Valley Festival 04A, LLC; (7) Pipeline 13A, LLC; (8) Shafer Plaza 06A, LLC (“Shafer Plaza”); (9) Shops at Cicero 13 A, LLC; (10) TJM Shopping Center 05, L.P.; (11) Yosemite Park Shopping Center 05A, LLC; and (12) Tower Plaza 12, LLC (collectively, “Investment Entities”).

The court has read and considered the moving papers, opposition, and reply, and renders the following tentative decision.

A. Statement of the Case

1. Complaint

Plaintiffs commenced this proceeding on October 13, 2017. The operative pleading is the Fourth Amended Complaint (“FAC”) filed on August 20, 2020, against Defendant Alan C. Fox (“Fox”), individually and as Trustee of the Alan C. Fox Revocable Trust (“Fox Trust”), and ACF Property management, Inc. (“ACF”), alleging causes of action for: (1) breach of fiduciary duty; (2) fraud (misrepresentation); (3) fraud (concealment); (4) securities fraud, and (5) violation of Corporations Code section 17704.10. The verified FAC alleges in pertinent part as follows.

During the period from October 2004 through the present, Plaintiffs invested over $1,750,000 in 20 separate shopping center investments, including the Investment Entities. Plaintiffs have yet to receive their money back, even though the majority of the shopping centers have been sold. Each of Plaintiffs' investments was fraudulently induced by the Defendants.

Defendants begin by placing an investment property, usually a shopping center, under contract, sometimes using a third party to act as the buyer. Historically, that third party was Gary Dragul (“Dragul”), who used one of his entities (e.g., GOA Real Estate), to enter into the purchase contract.

While the escrow for the purchase of a shopping center was open, Defendants formed one or more single purpose entities, usually limited liability companies (LLCs), but sometimes limited partnerships. The Investment Entities ultimately assumed the purchase contract and closed the escrow. Defendants never bought any of the shopping centers and never sold any of the shopping centers; the Investment Entities bought and sold the shopping centers.

While the escrow was open, Defendants (and until recently, Dragul as well) began to solicit investments from third parties, including Plaintiffs. Defendants solicited investments by sending prospective investors an Executive Summary and Financial Projections, always in the same format, which purported to summarize the investment (collectively, the "Offering Materials"). Defendants also sometimes sent photographs of the property with the Offering Materials. Sometimes a cover letter or e-mail with additional information touting the investment was sent to investors. The material information was almost exclusively contained in the Offering Materials, which were in the same format for each of the investments in which the Plaintiffs invested.

The Offering Materials told potential investors the "Price" or "Purchase Price" of the shopping center, as well as the amount of the loan(s) against the property, the anticipated closing costs, and the amount needed for an operating reserve. Based on those figures, the Offering Materials calculated the "Cash Required" to close escrow and fund the operating reserve. The Offering Materials also referred to the "Cash Required" as the "Net Investment." All of the investments at issue followed this pattern.

The Offering Materials misrepresented the Purchase Price, allowing Defendants to defraud investors for the difference between the Purchase Price as represented and the actual price. Defendants were able to defraud investors for additional amounts by misrepresenting the funds necessary to fund an operating reserve. Fox’s refusal to answer or evasion of questions regarding the Purchase Price represented in the Offering Materials corroborates the existence of the scheme.

Defendants also took active steps to prevent potential investors, such as Plaintiffs, from finding out that the Purchase Prices shown in the Offering Materials were false. Defendants also misrepresented to investors that Defendants had the ability to buy properties at a discount for the benefit of investors.

In addition to their misrepresentations when investment properties were purchased and sold, Defendants committed various forms of fraud and breach of fiduciary duty while the investment properties were held. In violation of the Operating Agreements (or limited partnership agreements) of the Investment Entities, Defendants commingled the funds of the Investment Entities without disclosing that fact to Plaintiffs.

Plaintiffs are informed and believe, and on that basis allege, that Defendants made distributions to investors, including the Plaintiffs, in amounts that were greater than the cash flow earned from those investments. This was done during the early years of the investments so that the investors would not balk at the inaccuracies of the projections in the Offering Materials.

Plaintiffs are further informed and believe, and on that basis allege, that the money to pay some of these additional distributions was improperly borrowed from other investment entities. Plaintiffs are further informed and believe, and on that basis allege, that the Operating Agreements of some of the loaning Investment Entities expressly barred loans to the borrowing Investment Entity and required the loaning Investment Entity to distribute all available cash to investors.

2. Course of Proceedings

According to a proof of service on file, counsel for Defendants were electronically served with the moving papers for the instant motion on February 23, 2021.

B. Motion to Seal

Defendants move to file under seal Exhibits 5, 7-11, and 13 to the Declaration of Daniel Ray in support of Defendants’ opposition to the motion or appointment of a receiver.

1. Applicable Law

CRC Rules 2.550 and 2.551 set forth the standards and procedures for sealing court records.

The rules are derived from the holding in NBC Subsidiary (KNBC-TV), Inc. v. Superior Court, (1999) 20 Cal.4th 1178. Unless confidentiality is required by law, court records are presumed to be open. CRC 2.550(c).

A court may order records sealed only if it expressly finds all of the following: (1) there exists an overriding interest that overcomes the right of public access to the record; (2) the overriding interest supports sealing the record; (3) a substantial probability exists that the overriding interest will be prejudiced if the record is not sealed; (4) the proposed sealing is narrowly tailored; and (5) no less restrictive means exist to achieve the overriding interest. CRC 2.550(d).

As to procedures, CRC 2.551(b) provides: (1) a party requesting that a record be filed under seal must file a noticed motion for an order sealing the record. The motion must be accompanied by a memorandum of points and authorities and a declaration containing facts sufficient to justify the sealing; (2) the party requesting that a record be filed under seal must lodge it with the court under (d) when the motion is made, unless good cause exists for not lodging it. Pending the determination of the motion, the lodged record will be conditionally under seal; (3) if necessary to prevent disclosure, the motion, any opposition, and any supporting documents must be filed in a public redacted version and lodged in a complete version conditionally under seal; (4) if the court denies the motion to seal, the clerk must return the lodged record to the submitting party and must not place it in the case file.

A record filed publicly in the court must not disclose material contained in a record that is sealed, conditionally under seal, or subject to a pending motion to seal. CRC 2.551(c).

The party requesting that a record be filed under seal must put it in a manila envelope or other appropriate container, seal the envelope or container, and lodge it with the court. CRC 2.551(d)(1). The envelope or container lodged with the court must be labeled “CONDITIONALLY UNDER SEAL.” CRC 2.551(d)(2). The party submitting the lodged record must affix to the envelope or container a cover sheet that: (i) contains all the information required on a caption page under rule 201; and (ii) states that the enclosed record is subject to a motion to file the record under seal. CRC 2.551(d)(3).

Upon receipt of a record lodged under this rule, the clerk must endorse the affixed cover sheet with the date of its receipt and must retain but not file the record unless the court orders it filed. CRC 243.2(d)(4).

The Advisory Committee Comment to Rule 2.550 provides that the rules recognize the First Amendment Right of Access to documents used at trial or as a basis of adjudication, but do not apply to records that courts must keep confidential by law.

Before sealing a record, a court must find an “overriding interest” that support the sealing. KNBC-TV, supra, 20 Cal.4th at 1217-18.

Under appropriate circumstances, such interests may include protection of minor victims of sex crimes from further trauma and embarrassment; privacy interests of a prospective juror during individual voir dire; protection of witnesses from embarrassment or intimidation so extreme that it would traumatize them or render them unable to testify; of trade secrets, protection of information within the attorney-client privilege, and enforcement of binding contractual obligations not to disclose; safeguarding national security, ensuring the anonymity of juvenile offenders in juvenile court; and ensuring the fair administration of justice, and preservation of confidential investigative information. Id. at 1222, n. 46.

The leading case with respect to sealing orders under CRC 243.1 et seq. is Universal City Studios, Inc. v. Superior Court, (2003) 110 Cal.App.4th 1273.

To determine whether records should be sealed, the court must hold a hearing and expressly find that (i) there exists an overriding interest supporting closure and/or sealing; (ii) there is a substantial probability that the interest will be prejudiced absent closure and/or sealing; (iii) the proposed closure and/or sealing is narrowly tailored to serve the overriding interest; and (iv) there is no less restrictive means of achieving the overriding interest. Universal City Studios, supra, 110 Cal.App.4th at 1279.

2. Analysis

Defendants assert that Exhibits 5, 7-11, and 13 contain private financial and personal identifying information, such as bank statements and bank account numbers. Defendants argue that they have an overriding interest in the confidentiality of this information and that their interest in this confidentiality would be prejudiced absent a motion to seal. The proposed sealing is narrowly tailored, seeking to maintain the confidentiality of only a limited number of bank statements that contain detailed, sensitive financial and personal identifying information, and is the least restrictive means to protect Defendants’ privacy interests. Mot. at 4; Reply at 6.

Plaintiffs failed to file an opposition to sealing the exhibits, instead only providing a declaration from their counsel. As Defendants correctly note, this improper. Reply at 3-4. In his declaration, Plaintiffs’ counsel argues that Defendants only seek to seal these exhibits to shield themselves from liability and to conceal details of their fraudulent activities. Schuman Seal Decl., ¶¶ 4-6. Defendants also use sealing and protective orders to badger opposing counsel and to seek sanctions. Schuman Seal Decl., ¶7. The bank statement Exhibits are for a closed account of an Investment Entity and are not private or confidential. Schuman Seal Decl., ¶3.

The exhibits are bank statements for the account of Shafer Plaza 06 A, LLC, one of the Investment Entities. Because it is an entity and not an individual, Shafer Plaza 06 A, LLC does not have a right of privacy. The bank statements do include account numbers, deposits, balances, and some check payable information which could be the type of financial information subject to an overriding interest in confidentiality. See Cassidy v. California Bd. of Accountancy, (2013) 220 Cal.App.4th 620, 625 (“Cassidy”) (recognizing company’s “overriding interest” in the confidentiality of its tax and financial records). The accounts are closed, but Defendants correctly state that Plaintiffs’ counsel provides no authority that an entity’s interest in the confidentiality of its financial information expires when an account is closed.

The Exhibits do not contain confidential financial information subject to sealing. Unlike tax returns, financial statements, or a general ledger, there is nothing about the bank statements for a closed account that reveals Shafer Plaza 06 A, LLC’s confidential financial information, and Defendants point to none.

Defendants note that Department 50 previously ordered the same documents sealed (Yohalem Decl., Ex. Q) and Plaintiffs also previously sought to seal one of the same documents. Reply at 1, 4-5; Yohalem Decl., Ex. W. Department 50 ordered sealing on both occasions. This court is not bound on this motion to appoint a receiver by Dept. 50’s ruling on sealing for another motion. There is a value in the consistency of rulings in a single case and there is a colorable basis to seal, particularly since Plaintiffs’ counsel sought sealing of one of the same bank statements. Nonetheless, it is insufficient to justify sealing documents for which Defendants have made no showing of a need for confidentiality.

3. Conclusion

Defendants’ application to seal the Exhibits is denied. Defendants may either elect to file them unsealed or the Exhibits will be returned.

C. Motion for Appointment of Receiver

1. Applicable Law

CCP section 564(b) provides that the court has authority to appoint a receiver in any of the following pertinent circumstances: (1) in an action between partners or others jointly owning or interested in any property or fund, on the application of the plaintiff, or of any party whose right to or interest in the property or fund, or the proceeds thereof, is probable, and where it is shown that the property or fund is in danger of being lost, removed, or materially injured; and (9) in all other cases where necessary to preserve the property or rights of any party.

A plaintiff who seeks appointment of a receiver of certain property under CCP section 564(b)(1) has the burden to establish by a preponderance of the evidence that plaintiff has a joint interest with defendant in the property, that the property is in danger of being lost, removed or materially injured, and that plaintiff's right to possession is probable. Alhambra Shumway Mines, Inc. v. Alhambra Gold Mine Corp., (1953) 116 Cal.App.2d 869, 873.

The appointment of a receiver is a drastic remedy to be utilized only in “exceptional cases.” As such, a receiver should not be appointed unless absolutely essential and because no other remedy will serve its purpose. City & County of San Francisco v. Daley, (1993) 16 Cal.App.4th 734, 744. However, California courts have followed the longstanding tradition to appoint receivers over property in cases of fraud and misconduct. See Galich v. Brkich, (1951) 103 Cal.App.2d 187; Neider v. Dardi, (1955) 130 Cal.App.2d 646; Moore v. Oberg, (1943) 61 Cal.App.2d 216.

2. Statement of Facts

a. Plaintiffs’ Evidence

The Investments

From 2004 through 2016, Plaintiffs invested approximately $1,793,750 with Defendants. Raymond Decl., ¶3. Each investment was made in a single-purpose entity, usually an LLC, that owned a single shopping center property. Id. Plaintiffs received a membership interest in each LLC and, according to the Defendants, each membership interest represented that Plaintiffs owned a beneficial interest in the property owned by that LLC. Id., Ex. 11.

Plaintiffs invested in the Investment Entities for 12 shopping centers. Schuman Decl., ¶3. For each investment, Defendants listed a false purchase price for the shopping center, inflating the cash required and thus the price for the membership interests. Schuman Decl., ¶¶ 4-14; Exs. 5-7, 11-14; Raymond Decl., ¶4; Ross Decl., ¶3. Defendants overstated the prices of all or almost all the properties and took fees for the acquisition and/or sale of many of those properties. Raymond Decl., ¶6; Albert Decl., ¶¶ 2-5; Ross Decl., ¶¶ 4-6. Plaintiffs were not aware that the prices of the shopping center properties were marked up and that Defendants were taking these fees. Id. Fox has repeatedly testified that none of the plaintiffs in any of the related cases ever knew that the "Price" and "Purchase Price" in the offering materials for the investments were inflated. Schuman Decl., ¶14, Ex. 15.

When asked why the asking price for the Bell Creek Shopping Center listed on Costar.com was lower than the purchase price in the Offering Materials, Fox lied to investors in writing. Schuman Decl., ¶¶ 15-17, Ex. 23; Ross Decl., ¶¶ 7-9. Fox’s son, Steven Fox (“Steven”), who was directly involved in preparing some of the Offering Materials, testified that the words "Price" and "Purchase Price" in the Offering Materials is a “notional price” that includes the loan, cash purchase price, costs (broker’s fees, etc.), and profit for ACF. Schuman Decl., ¶¶ 18-20, Ex. 17. This notional price in some cases was several million dollars. Schuman Decl., ¶20.

Schafer Plaza Sale

Defendants syndicated the Schafer Plaza Shopping Center (“Schafer Plaza”) at the end of 2006. Schuman Decl, ¶23. Fox made more than $6,000,000 on the syndication of Shafer Plaza by inflating the purchase price from less than $42,500,000 to $48,500,000. Schuman Decl., ¶44. Fox paid ACF an illegal commission of $600,000 through escrow. Schuman Decl., ¶44. Fox also caused the Investment Entity to pay GOA, the company owned by Dragul, a commission of $500,000. Schuman Decl., ¶30.

As part of the purchase, Shafer Plaza 06A, LLC assumed two loans totaling $32,485,320.63. Schuman Decl., ¶24. The loans matured in 2014 and had to be refinanced. Schuman Decl., ¶25, Ex. 18.

In 2017, Defendants caused Shafer Plaza to be sold for $32,500,000. Schuman Decl., ¶26, Ex. 8. To obtain investor approval, Fox wrote them a letter stating that the sale price of $33,250,000 would be used up by the loan payoff of $32,485,321 and cost of sale of approximately $750,000. Schuman Decl., ¶27, Ex. 9. This was false; the only loan for Shafer Plaza was the refinanced loan with a balance of $21,026,736.54. Schuman Decl., ¶28.

Fox used the monies from the sale to pay ACF, which did not have a real estate license or a written contract for a fee, an illegal commission of $600,000. Schuman Decl., ¶29. Fox also caused the Investment Entity to pay Dragul’s company, GDA, a commission of $500,000. Schuman Decl., ¶30. Fox has repeatedly called Dragul his partner. Schuman Decl., ¶30. Dragul has two felony indictments pending, has fled, and is in receivership in Colorado. Schuman Decl., ¶30.

The remaining $9,555,774.15 was wired to the operating account of Shafer Plaza 06A, LLC, and then to Fox’s personal account. Schuman Decl., ¶¶ 32-34. Exs. 8,10. Fox testified in deposition that the $9,555,774.15 was repayment of a loan he had made to the Investment Entity. Schuman Decl., ¶35, Ex. 15. However, Fox’s letter for the sale of Shafer Plaza states that the sale would not result in any cash to repay a different loan of $4,029,184. Schuman Decl., ¶35. Neither purported loan exists on any Shafer Plaza 06A, LLC records. Schuman Decl., ¶¶ 36, 43. Nor is it listed as an asset on Fox’s personal financial statement, even though another personal loan to Shoppes at Bedford Mall does. Shuman Decl., ¶37. Fox did take $4 million from 15 different Investment Entities, run the money through Shafer Plaza 06A, LLC and then put it in his own account. Schuman Decl., ¶¶ 40-42, Ex. 24, 26. Fox had no meaningful explanation for these transactions in his deposition. Schuman Decl., ¶42.

Fox took $9,555,774.15 when Shafer Plaza was sold. Schuman Decl., ¶44. Finally, Fox further took another $4,000,000 on January 31, 2014, although that money was from other shopping centers that he ran through the Shafer Plaza 06A, LLC operating account. Schuman Decl., ¶44. Even if Fox did advance some money to Shafer Plaza, Fox obtained a significant profit. Id. In contrast, the investors lost most of their money. Id. Defendants do not dispute that Plaintiffs invested $84,000 in Shafer Plaza, and got back $11,760, a loss of over 80% of their investment. Id.

Southpark

Fox similarly defrauded investors in relation to the investment into Southpark 09, LLC, making over $10 million whereas the investors, including Plaintiffs, received a return of less than 1% per year. Schuman Decl., ¶¶ 45. In 2009, Market at Southpark 09, LLC bought Market at Southpark Shopping Center (“Southpark”) for $22 million. Schuman Decl., ¶46, Ex. 14. Defendants told investors that the Purchase Price was $24,750,000. Schuman Decl., ¶46, Ex. 14. Thus, Fox pocketed at least $2,750,000 on the purchase. Schuman Decl., ¶46.

Two years later, on November 15, 2011, the shopping center sold for $30 million. Schuman Decl., ¶47, Ex. 29. The closing statement shows that Market at Southpark 09, LLC sold 83% of the property for $24,900,000. Schuman Decl., ¶49. There was another purported seller, Village Crossroads 11, LLC, which was formed on July 27, 2011 and dissolved on September 18, 2011. Schuman Decl., ¶48, Ex. 30. The other $5,100,000 of the sale price apparently went to the now dissolved Village Crossroads 11, LLC. Schuman Decl., ¶49; -54. Ex. 31. At his deposition, Fox could not explain what had transpired. Schuman Decl., ¶49, Ex. 15.

Market at Southpark 09, LLC paid a $498,000 commission to ACF and another $249,000 commission to GDA (Dragul’s company). Schuman Decl., ¶50, Ex. 31. Neither commission was lawful. Schuman Decl., ¶50. Fox rolled the remaining proceeds into two shopping centers, Loggins Corners and Tower Plaza, as part of a purported 1031 exchange. Schuman Decl., ¶51. Fox caused escrow to pay ACT another fee – an “exchange fee” --- of $1,937,500. Schuman Decl., ¶51, Ex. 33.

In sum, Fox stole $2,750,000 in the marked-up sale price for Market at Southpark, $5,100,000 that went to Fox’s short-lived Village Crossroads 11, LLC, a $498,000 commission on the sale, and a $1,937,500 exchange fee, a total of more than $10 million. Schuman Decl., ¶53. Plaintiffs invested $52,500 in Market at Southpark and received $57, 218.73, a return of less than $5000 over ten years. Schuman Decl., ¶54.

Defendants have failed to produce certain records, such as the bank accounts for Southpark 09, LLC at Citi Smith Barney and Nationwide Bank, and continue to fail to do so despite representations from their counsel that they would ensure such production. Schuman Decl., ¶¶ 55-61. The unproduced records relate to numerous unexplained transactions for Southpark 09, LLC. Schuman Decl., ¶¶ 62-66, Exs. 35, 37.

Tax Returns

Defendants provided fraudulent tax returns for one of the Investment Entities, Loggins Corners 12, LLC. Schuman Decl., ¶¶ 67-69, Exs. 38-39. Ed Delava, who prepared all the relevant tax returns for ACF, confirmed that the returns were not genuine and had not been filed with the IRS. Schuman Decl., ¶70. There are numerous tax returns for other entities and/or time periods that Defendants failed to produce. Schuman Decl., ¶¶ 71-73, Exs. 41.

Shopping Center Sales

On August 31, 2020, Defendants sent a letter to all investors in the Parker Hilltop Shopping Center (“Parker Hilltop”), stating their intent to sell the property to an unnamed buyer who had made an unsolicited offer of $9,490,000. Schuman Decl., ¶74, Ex. 3. The Price/Purchase Price for Parker Hilltop in May 2010 was $10,460,000. Schuman Decl., ¶75. The purchase occurred during the bottom of the real estate recession and Plaintiffs believe the actual value of the property is substantially higher. Schuman Decl., ¶75. Fox’s December 31, 2016 financial statement shows Parker Hilltop having a value of $11,920,000. Schuman Decl., ¶76, Ex. 43. Fox’s letter falsely claims that the total original May 2010 investment in Parker Hilltop was $2,880,000. Schuman Decl., ¶79. It also asserts that there will be a broker’s commission of $381,500, even though the property was not listed for sale and the offer was unsolicited. Schuman Decl., ¶80.

On August 31, 2020, Defendants sent a similar letter to investors of Overland Crossing, stating their intent to sell the property to an unnamed buyer at an undisclosed price, resulting in a profit of $1,700,000. Schuman Decl., ¶¶ 88-91, Ex. 1. Based on review of documents provided by Defendants, they appear to be selling the property at a price substantially below what it is worth. Schuman Decl., ¶¶ 92-101, Exs. 4, 48-49. The exhibits show a purchase of the shopping center for $30,000,000, a loan of $18,850,000, and an operating reserve of $700,000. Schuman Decl., ¶92. According to Fox, the investment was $12,150,000. In fact, the Investment Entity paid $29,300,000. Schuman Decl., ¶¶ 92-93, Ex. 50. According to Fox’s December 31, 2016 financial statement, Overland Crossing had a value of $31,000,000 and a loan balance of less than $18,000,000, meaning more than $13,000,000 in equity. Schuman Decl., ¶99. To result in a mere profit of $1,700,000 would mean a sale price of $20,000,000. Schuman Decl., ¶100. This is a terrible deal, compounded by Fox’s record of paying himself. Schuman Decl., ¶101.

When Plaintiffs’ counsel inquired about the sale of Parker Hilltop without naming the property, Defendants indicated that other sales are pending. Schuman Decl., ¶¶ 102-103, Exs. 52-53. Defendants have refused to provided documents regarding the proposed sales of Overland Crossing and Parker Hilltop and Plaintiffs are unaware of the status of the sales. Schuman Decl., ¶¶ 104-07.

Other Lawsuits

Defendants are currently named defendants in at least 17 other pending cases alleging the same fraudulent scheme. Schuman Decl., ¶¶ 108-09, 118-21.

b. Defendants’ Evidence

Plaintiffs invested in Shafer Plaza 06A, LLC, which sold its property in 2017 and is no longer active. Fox Decl., ¶2, Ex. A. Plaintiffs are investors in Overland Crossing 13A, LLC. Fox Decl., ¶4. Plaintiffs never invested in, and were never members of, the Parker Hilltop LLC or Regency Square North Shopping Center 14, LLC. Fox Decl., ¶¶ 3-4. Overland Crossing 13A LLC and Regency Square North Shopping Center 14 LLC are different entities that own different shopping centers in Overland Park, Kansas. Fox Decl., ¶5, Ex. B.

Shafer Plaza Purchase

The Settlement Statement dated December 28, 2006 prepared by Fidelity National Title Insurance Company (“Fidelity”) shows a “Contract Sales Price” of $42,274,220 for the purchase of Shafer Plaza. Ray Decl., ¶8, Ex. 3. To fund this purchase, as reflected on the Credit side of the Settlement Statement, the Buyers assumed two loans described as “Note A” for $30,515,488 and “Note B” for $1,969,832, a total of $32,485,320. Ray Decl., ¶9, Ex. 4. There are additional costs identified on the Settlement Statement which increase the total Acquisition Cost to $45,990,357. Ray Decl., ¶8, Ex. 3.

The Executive Summary/Financial Projections shows an Investment Purchase Price of $48,500,000 and total existing loans of $32,584,325. Ray Decl., ¶9, Ex. 4. The two loans listed on the Settlement Statement total $32,485,320, which is $99,000 less than the loan stated in the Executive Summary/Financial Projections as $32,584,325. Ray Decl., ¶11. It appears this difference to due to a transposition error with the “584” and “485.” Id. The correct loan amount is $32,485,320, which is the total of the loans on the Settlement Statement. Id.

The Executive Summary includes the following statement: “The two existing loans include amortization of loan principal. To attain the projected cash distribution of 7.00%+ we have arranged to borrow the principal portion of each payment so that for our investors the loans will be effectively interest only.” Ray Decl., ¶12.

Because the loans are amortizing, the loan balances shown on the Settlement Statements for the refinance and the subsequent sale will show reduced loan balances. Ray Decl., ¶13. However, the Buyers still owe the initial balance because they arranged to borrow the principal portion of each payment. Id. This borrowing must be paid back, which will happen outside of the Settlement Statements for both the refinance and sale. Id.

Plaintiffs’ counsel incorrectly compares the Contract Sales Price of $42,274,220 on the Settlement Statement to the Executive Summary’s Purchase Price of $48,500,000. Ray Decl., ¶10. This comparison is incorrect for two reasons: (1) the Contract Sales Price does not include the rest of the Settlement Statement costs, which together bring the full Acquisition Cost to $45,990,357; and (2) this comparison is not “apples-to-apples” as it compares the purchase of real property to the purchase of an entity interest. Ray Decl., ¶10.

An analysis of the Shafer Plaza 06A, LLC general ledger shows that the monthly payment on Note A (the GEMSA loan) was $185,414 and the monthly payment on Note B (the Wells Fargo loan) was $21,770, a monthly total of $207,184. Ray Decl., ¶14. This included both interest and principal. Ray Decl., ¶14. Because these loans were to be interest-only for the members, Fox made monthly payments of $30,719 to Shafer Plaza 06A, LLC from his personal account to reimburse the entity for the principal portion of the monthly debt payments. Ray Decl., ¶15.

After reimbursement of $30,719 to the monthly debt service payment of $207,184, the net monthly debt service payment was $176,465. Ray Decl., ¶16. This net debt service payment amount is the precise amount listed as “Interest Portion of Amortized Loans” in the Financial Projections portion of the Executive Summary. Id. The Shafer Plaza, LLC general ledger shows that Fox made principal payments through the sale date of Shafer Plaza. Ray Decl., ¶17.

The Shafer Plaza, LLC general ledger also shows that the outstanding balance on Note A and Note B remained constant at $32,485,320. Ray Decl., ¶18. Because the debt service payments included principal, the outstanding balances to the lender were reduced. Id. Because of this, prior to the refinance, the amount of Shafer Plaza 06A, LLC’s obligation to Fox for the advances he made for the principal portion of the loans was $3,785,222. Id.

Shafer Plaza Refinancing

On January 31, 2014, Shafer Plaza was refinanced with a new loan of $22,250,000. Ray Decl., ¶19, Ex. 6. As reflected in the Closing Statement, this refinance transaction resulted in the payoff of both Note A (GEMSA)’s balance of $26,757,902 and Note B (Wells Fargo)’s balance of $1,942,195. The total unpaid balance for these two loans was $28,700,097. Id.

There were additional items that impacted the total payoff besides the loan balances. Ray Decl., ¶20. The total amount required to close this refinance transaction was $29,063,644. Ray Decl., ¶21. The sub-total provided for this refinance via cash deposits and new loan was $22,730,000. Ray Decl., ¶22.

As reflected in the Closing Statement, the “Balance Due From Buyer” was $6,333,644. Ray Decl., ¶23. The requirement to pay these additional funds to refinance appears to have been ignored by Plaintiff’s counsel. Id. Plaintiff’s counsel recognizes that $445,000 was transferred from the bank account of Shafer Plaza 06A, LLC to Fidelity for the Rate Lock Deposit, but he makes no mention of the payment of $6,333,644 to Fidelity close the transaction. Ray Decl., ¶24.

Plaintiff’s counsel asserts that Fox took $4 million from various entities and deposited these funds into his personal account, but the $4 million advanced by other entities was combined with other funds to close this refinance transaction. Ray Decl., ¶25.

The City National Bank (“CNB”) month-end statement for Shafer Plaza 06A, LLC (account #xxxx4459) dated January 31, 2014 reflects deposits from other entities totaling $4 million. Ray Decl., ¶26, Ex. 7. All the deposits, which appear as credits on the bank statement, occurred on January 29, 2014. Id. Following the receipt of these funds, the bank statement reflects a transfer of $4 million on January 31, 2014 to the account of the Fox Trust. Id.

The $4 million used to help pay the required $6,333,644 to close the refinance transaction came from 21 different bank accounts that are believed to be other entities. Ray Decl., ¶27, Exs. 8-11. The bank statement for Shafer Plaza 06A, LLC identifies these account numbers. Id. Based upon the documents reviewed to date, four of the account numbers belong to Investment Entities in which Plaintiffs claim a membership interest: Pipeline 13A, Paradise Valley Festival 04A, LLC, TJM Shopping Center 05A, L.P., and Shops at Cicero 13A, L.P. Id.

The remaining $2,333,644 in funds needed to close the refinance transaction ($6,333,644 minus $4,000,000) were advanced by Fox, who was repaid when the property was sold. Ray Decl., ¶28.

Shafer Plaza Sale

Shafer Plaza was sold on or about November 8, 2017 with a selling price of $32,500,000. Ray Decl., ¶30, Ex. 12. In addition to the sales price, there are other items on the Sellers Settlement Statement including credit amounts for escrow and reserve items increasing the total price to $33,253,850. Id. The Settlement Statement reflects a portion of the sales proceeds were used to repay the outstanding loan balance of $21,026,736. Ray Decl., ¶31. The debit side of the Settlement Statement reflects the payoff of the Barclays Bank loan of $21,026,736, as well as other items including brokerage fees, prorated taxes and rents, and legal fees. The net amount due to the seller was $9,555,774. Ray Decl., ¶32.

Plaintiff’s counsel incorrectly states that the only existing loan on Shafer Plaza was $21,026,736. Ray Decl., ¶33. This loan is the only loan listed on the Settlement Statement but was not the only loan that needed to be satisfied. Id. Shafer Plaza 06A, LLC still owed the original loan with a combined balance of $32,485,320. Id. This is because the members made interest only payments, while the principal payments were made from funds advanced by Fox. Id. The principal was reduced by $3,785,222 from these advanced funds. Id. In addition, the entity still owed the $6,333,644 paid to close the refinance transaction. Ray Decl., ¶34.

During the operation of Shafer Plaza, Fox made advances to Shafer Plaza 06A, LLC of $3,785,222 for a variety of other purposes. Ray Decl., ¶35. These advances were recorded in a general ledger account called Temporary Financing (G/L Acct. #2850-0000). Id. At time of sale, Shafer Plaza 06A, LLC owed Fox $3,904,184 for these advances. Id.

The sum of $9,555,774 was deposited into Shafer Plaza 06A, LLC’s CNB account (xxxx4459) on November 8, 2017. Ray Decl., ¶36, Ex. 13. Shafer Plaza 06A, LLC retained $10,000 of the sale proceeds and then transferred $9,545,774 to The Alan C Fox Revocable Trust (account # xxxx5762). There were two transfers: one in the amount of $5,275,774 and a second in the amount of $4,270,000. Ray Decl., ¶37.

Following the refinance transaction, Shafer Plaza 06A, LLC owed $10,235,320 -- the difference between the $32,485,320 of the original two loans and the new loan amount of $22,250,00. Ray Decl., ¶38. As of the date of the sale, the principal amount of the $22,250,000 refinanced loan had decreased to $21,026,737. Id. Therefore, Shafer Plaza 06A, LLC’s obligation increased to $11,458,583 ($32,485,320 minus $21,026,737), not including the liability for additional advances. Id.

The initial cash transfer of $5,275,774 plus an additional $365,815 was combined and was used to make a principal debt repayment to Fox of $5,641,589. Ray Decl., ¶39. The second cash transfer of $4,270,000, less the $365,815 added to the first cash transfer leaving a net amount $3,904,184 was used to zero out the Temporary Financing general ledger account of Shafer Plaza 06A, LLC. Id.

Sales of Shopping Centers

In 2020, ACF received the offer to buy the Regency Square Shopping Center (“Regency Square”) and asked all investors in the Regency Square North Shopping Center 14, LLC to vote to approve the sale. Fox Decl., ¶6. A majority of the membership voted to approve the sale,

In 2020, ACF also received an offer to buy Parker Hilltop. Fox Decl., ¶7. ACF asked all investors in the Parker Hilltop LLC to vote to approve the sale. Id. A majority of the membership voted to approve the sale, but the sale did not go through. Id.

In 2020, ACF did not receive an offer to buy the property owned by Overland Crossing 13A LLC, but it did receive such an offer in February 2021. Fox Decl., ¶8. Assuming it proceeds, ballots will be sent to all investors in the Overland Crossing LLC, including Plaintiffs. Id.

There are currently no offers to purchase any of the other shopping centers owned by the Investment Entities in which Plaintiffs are investors. Fox Decl., ¶9. Nor are there any pending sales of those properties. Id. If there are offers, all investors in the relevant Investment Entity, including Plaintiffs, will be notified and sent ballots. Id.

c. Reply Evidence

The Operating Agreement for Shafer Plaza 06 A, LLC states that ACF may earn a commission on the sale of real property, subject to the approval of a majority in interest of the “Remaining Members.” Schuman Reply Decl., ¶2, Ex. 80, p.11. The verified Fourth Amended Complaint alleges that all commissions were undisclosed. Id. There is no evidence that the members approved a commission for ACF. Id.

3. Analysis

Plaintiffs move for the appointment of a receiver to take over management of the Investment Entities pursuant to CCP sections 564(b)(1) and (b)(9). Defendants oppose.

a. Laches

Defendants argue that Plaintiffs unreasonably delayed in filing the instant motion and that it would be inequitable to permit Plaintiffs, who hold minuscule interests in the Investment Entities, to pursue the remedy of receivership after they delayed in making the motion, all to Defendants’ prejudice. Opp. at 9.

Defendants note that Plaintiffs initially filed a motion to appoint a receiver on November 8, 2019, setting hearing for June 10, 2020, and also sending the motion to Fox’s family, friends, and investors pursuant to a client solicitation letter that asked the recipients to review the motion and reconsider asserting claims against Fox and ACF. Fox Decl., Ex. D. Plaintiffs twice declined to advance the hearing on the initial motion before taking it off calendar on May 27, 2020. Yohalem Decl., Exs. O, P. Plaintiffs claimed that they would refile the motion in the near future, and subsequently stated that they would be filing a new lawsuit instead. Yohalem Decl., Exs. Q, R. Plaintiffs did not file a new lawsuit and instead refiled the motion to appoint a receiver almost six months later, on November 16, 2020. Opp. at 9-10.

Defendants assert that this delay was unreasonable and prejudicial. Defendants were prejudiced because Plaintiffs’ circulation of the allegations against Fox and delay of resolution of those claims resulted in reputational harm to Defendants. Opp. at 10. Plaintiffs also unduly delayed resolution of the matter, thereby wasting the resources of Defendants and the court. Id. Plaintiffs do not address this argument.

A claim is barred by the affirmative defense of laches where the plaintiff is guilty of unreasonable delay in commending litigation plus either the plaintiff acquiesces to the defendant’s alleged wrongful act or the defendant is prejudiced by the delay. Johnson v. City of Loma Linda, (2000) 24 Cal.4th 61, 68; Conti v. Board of Civil Service Commissioners, (1969) 1 Cal.3d 351, 359 60.

It is undisputed that Plaintiffs delayed resolution of the receivership issue and do not provide any explanation for doing so. On the other hand, laches applies to a delay in commencing a lawsuit, not a delay in filing a particular motion during the lawsuit. Defendants provide no authority that a delay in presenting a motion to appoint a receiver can justify its denial. Indeed, a motion to appoint a receiver, like any provisional remedy, can be made at any time during a lawsuit; a motion to appoint a receiver can even be made post-judgment. Additionally, Defendants’ claim of prejudice is unsupported by any evidence, and the purported the reputational harm stems from Plaintiffs’ circulation of their allegations against Fox to other investors, not from Plaintiff’s delay in pursuing the motion to appoint a receiver.

The motion is not barred by laches.

b. Merits

The court has authority to appoint a receiver in an action by a creditor to subject any property or fund to the creditor’s claim, or of any party whose right to or interest in the property or fund, or the proceeds thereof, is probable, where it is shown that the property or fund is in danger of being lost, removed or materially injured. CCP §564(b)(1). The court also has authority to appoint a receiver in all other cases where necessary to preserve the property rights of any party. CCP §564(b)(9).

Plaintiffs assert that they are entitled to appointment of a receiver because Defendants have stolen investor money and engaged in self-dealing from the Investment Entities that will continue unless a receiver is appointed. Mot. at 9. Plaintiffs claim that Fox stole over $10 million from Shafer Plaza during the pendency of the instant action. Fox now is selling other Investment Entities in which Plaintiffs have an interest at a fire sale price substantially below market value.

(i.) The Investments

Plaintiffs present evidence that they invested approximately $1,793,750 with Defendants. Raymond Decl., ¶3. Plaintiffs invested in the Investment Entities for 12 shopping centers. Schuman Decl., ¶3. For each investment, Defendants listed a false purchase price for the shopping center, inflating the Cash Required and thus the price for membership interests. Schuman Decl., ¶¶ 4-14; Exs. 5-7, 11-14; Raymond Decl., ¶4; Ross Decl., ¶3. Defendants overstated the prices of all or almost all the properties and took fees for the acquisition and/or sale of many of those properties. Raymond Decl., ¶6; Albert Decl., ¶¶ 2-5; Ross Decl., ¶¶ 4-6. Fox’s son, Steven testified that the words "Price" and "Purchase Price" in the Offering Materials is a “notional price” that includes the loan, cash purchase price, costs (broker’s fees, etc.), and profit for ACF. Schuman Decl., ¶¶ 18-20, Ex. 17. This notional price in some cases was several million dollars. Schuman Decl., ¶20. Plaintiffs were not aware that the prices of the shopping center properties were marked up and that these fees were being taken. Raymond Decl., ¶6; Albert Decl., ¶¶ 2-5; Ross Decl., ¶¶ 4-6.

For Shafer Plaza, the Executive Summary states that the Purchase Price is $48,500,000. Schuman Decl., ¶19, Ex. 5. That was not the actual purchase price which, as Defendants’ expert acknowledges, was $42,274,220. Ray Decl., ¶8, Ex. 3. Shafer Plaza 06A, LLC assumed two loans: Note A for $30,515,488 and Note B for $1,969,832, a total of $32,485,320. Ray Decl., ¶9, Ex. 4. The additional costs included a “consideration fee” to Dragul’s entity (GDA) of $210,000 and a consideration fee to Fox’s entity (ACF) of $1.2 million. Defendants’ expert describes a total “Acquisition Cost” of $45,990,357. Ray Decl., ¶8, Ex. 3. Nothing in the Offering Materials suggests that the additional fees of approximately $1.5 million paid to Fox and Dragul were disclosed.

Defendants’ opposition does not attempt to defend this self-dealing. While fraud in inducing a party to invest does not necessarily mean that the defendant will mismanage the business, it does reflect on the defendant’s intent and credibility as a manager.

(ii.) Shafer Plaza Sale

Plaintiffs present evidence that in 2017, Defendants caused Shafer Plaza to be sold for $32,500,000. Schuman Decl., ¶26, Ex. 8. To obtain investor approval, Fox wrote a letter stating that the sale price proceeds of $33,250,000 would be used up by the loan payoff of $32,485,321 and cost of sale of approximately $750,000. Schuman Decl., ¶27, Ex. 9. This was false; the only loan for Shafer Plaza was the refinanced loan with a balance of $21,026,736.54. Schuman Decl., ¶28.

Fox used the sale proceeds to pay ACF, which did not have a real estate license or a written contract for a fee, an illegal commission of $600,000. Schuman Decl., ¶29. Fox also caused the Investment Entity to pay the company of his partner, Dragul, a commission of $500,000. Schuman Decl., ¶30. Dragul has two felony indictments pending, has fled, and is in receivership in Colorado. Schuman Decl., ¶30.

The remaining $9,555,774.15 was wired to the operating account of Shafer Plaza 06A, LLC, and then to Fox’s personal account. Schuman Decl., ¶¶ 32-34, 44. Exs. 8,10. Fox testified in deposition that he received the $9,555,774.15 as repayment of a loan he had made to the Investment Entity. Schuman Decl., ¶35, Ex. 15. However, Fox’s letter seeking sale approval states that the sale would not result in any cash to repay a different loan from him of $4,029,184. Schuman Decl., ¶35. Neither of Fox’s purported loan exists on any Shafer Plaza 06A, LLC records. Schuman Decl., ¶¶ 36, 43. Nor is it listed as an asset on Fox’s personal financial statement, even though another personal loan to Shoppes at Bedford Mall does. Shuman Decl., ¶37. Fox did take $4 million from 15 different Investment Entities, run the money through Shafer Plaza 06A, LLC and then put the $4 million in his own account. Schuman Decl., ¶¶ 40-42, Ex. 24, 26. Fox had no meaningful explanation for these transactions in his deposition. Schuman Decl., ¶42.

Even if Fox did advance some money to Shafer Plaza, Fox obtained a significant profit. Schuman Decl., ¶44. In contrast, the investors lost most of their money. Id. Defendants do not dispute that Plaintiffs invested $84,000 in Shafer Plaza, and got back $11,760, a loss of over 80% of their investment. Id.

Defendants’ expert Ray explains the Shafer sale in detail. On January 31, 2014, Shafer Plaza was refinanced with a new loan of $22,250,000. Ray Decl., ¶19, Ex. 6. This refinancing paid off two loans totaling $28,700,097: Note A with a balance of $26,757,902 and Note B with a balance of $1,942,195. Id. Including other items required, the total amount to close this refinancing was $29,063,644. Ray Decl., ¶21.

The refinancing loan was only for $22,730,000 and credits were given for a rate lock deposit of $334,000 and a good faith deposit of $35,000. Ray Decl., ¶22, Ex. 6. An additional $6,333,644 was due from the buyer to meet the prior loan payoff requirement. Ray Decl., ¶23. This $6,333,644 came from $4 million from 21 different bank accounts believed to be other Investment Entities whose funds were deposited into Shafer Plaza 06A, LLC’s account. Ray Decl., ¶27, Exs. 8-11. According to Ray, Fox advanced the remaining $2,333,644 needed to close the refinancing ($6,333,644 minus $4,000,000). Ray Decl., ¶28.

Shafer Plaza was sold on or about November 8, 2017 for a sale price of $32,500,000. Ray Decl., ¶30, Ex. 12. Credits for escrow and reserve items increasing the total price to $33,253,850. Id. The Settlement Statement reflects that a portion of the sales proceeds paid the outstanding loan balance of $21,026,736. Ray Decl., ¶31. Ray acknowledges that the debit side of the Settlement Statement reflects other items, including DGA’s fee of $500,000, ACF’s fee of $600,000, brokerage fees, prorated taxes and rents, and legal fees. Ray Decl., ¶31, Ex. 12. The net amount due to Shafer Plaza 06A, LLC was $9,555,774. Ray Decl., ¶32.

Ray notes that Shafer Plaza 06A, LLC owed the principal paydown of the original loans, which he states was loaned by Fox in the amount of $3,785,222. Id. Shafer Plaza 06A, LLC also owed the $1,223,263 principal paydown of the $22,250,000 refinanced loan, which had decreased to $21,026,737. Id. In addition, Shafer Plaza 06A, LLC still owed the $6,333,644 paid to close the refinance transaction. Ray Decl., ¶34. Ray claims that Fox made other loans to Shafer Plaza 06A, LLC during its operation in the amount of $3,785,222 which were recorded in a general ledger account called Temporary Financing. Ray Decl., ¶35. Virtually all these monies were paid by a $9,555,774 deposit into Shafer Plaza 06A, LLC’s CNB account on November 8, 2017 and then transferred to Fox. Ray Decl., ¶36, Ex. 13. The $9,555,774 transfers left a net amount of $3,904,184, which was used to zero out the Temporary Financing general ledger account of Shafer Plaza 06A, LLC Ray Decl., ¶39. See Opp. at 11-13.

From this evidence, Defendants argue that Fox injected $3,904,184 of his own money into Shafer Plaza 06A, LLC and he was owed millions of dollars more than the $9,5454,774 that Shafer Plaza 06A, LLC paid him. Far from stealing money, he was only partially repaid. Opp. at 13-14. Moreover, the management fees taken by Fox were not theft and were authorized by the Shafer Plaza 06A, LLC Operating Agreement. In any event, the high cost of fees in a real estate transaction does not justify a receivership. Opp. at 14.

While Ray shows that Plaintiffs are wrong in that there were two original loans for Shafer Plaza and not one, Plaintiffs are correct that the rest of his analysis relies on Fox’s word that he made loans to Shafer Plaza 06A, LLC without any supporting loan documentation. Defendants provide no loan source documents and even the general ledger account (Temporary Financing) relied on by Ray relies is not provided. Apparently, the general ledger was not even reviewed by Ray. See Ray Decl., Ex 2. As a result, some of Ray’s opinions are unsupported by evidence.

Ray acknowledges that Fox transferred $4 million from other Investment Entities to Shafer Plaza 06A, LLC for the Shafer Plaza refinancing. Yet, there is no supporting documentation for the transfer and nothing indicating that the investors in those entities agreed to the transfer. Ray shows (without identifying them as such) that DGA was paid $500,000 and ACF was paid $600,000 from the Shafer Plaza sale. Defendants rely on the Shafer Plaza 06A, LLC Operating Agreement to authorize commissions to a manager, but Plaintiffs demonstrate that such commissions require member approval and Defendants fail to show that Fox’s commission was approved by the entity’s members. Schuman Reply Decl., ¶2, Ex. 80, p.11. Nor would such approval justify the commission to Fox’s partner Dragul, who was not a manager.

Plaintiffs also rely on Fox’s September 1, 2017 letter to the members of Shafer Plaza 06A, LLC, in which he stated that the sale price of $33,250,000 would be used for the loan payoff of $32,485,321 and cost of sale of approximately $750,000, leaving no money to distribute to investors. Schuman Decl., ¶27, Ex. 9. Fox’s letter did not explain that the lender had loaned only $22,250,000 and that the remaining $9,555,774.15 would be used to repay Fox for (a) loan principal advances, (b) $3,785,222 in other undocumented loans, and (c) $6,333,644 paid for the refinancing ($4 million from 21 Investment Entities and $2,333,644 advanced by Fox in an undocumented loan).

Neither Ray nor Defendants’ opposition mention Fox’s letter, which clearly was misleading. As Plaintiffs point out (Reply at 5), Fox’s letter expressly states that his personal $4,029,184 loan to Shafer Plaza 06A, LLC would not be repaid. Ex. 9. It does not state that monies would be transferred from the closing to Shafer Plaza 06A, LLC and then to Fox’s personal account. Nor do Defendants show that Fox used a portion of the $9,555,774 to repay $4 million to the Investment Entities.

Defendants also completely fail to address Plaintiffs’ evidence that Fox stole $2,750,000 in the marked-up sale price for Market at Southpark: $5,100,000 that went to Fox’s short-lived entity Village Crossroads 11, LLC, a $498,000 commission on the sale, and a $1,937,500 exchange fee, a total of more than $10 million. Schuman Decl., ¶53.

At best, Fox is guilty of serious mismanagement, failure to document, and self-dealing in operating Shafer Plaza 06A, LLC, Village Crossroads 11, LLC, and other Investment Entities. At worst, he is guilty of criminal misappropriation and fraud.

(iii.) Sales of Shopping Centers

Plaintiffs argue that Defendants have sold, and are continuing to sell, other shopping centers similar to the sale of Shafer Plaza. Mot. at 5-6.

On August 31, 2020, Defendants sent a letter to all investors in Parker Hilltop stating their intent to sell the property to an unnamed buyer who had made an unsolicited offer of $9,490,000. Schuman Decl., ¶74, Ex. 3. The letter falsely claims that the 2010 total investment in Parker Hilltop was $2,880,000. Schuman Decl., ¶79. The May 2010 Price/Purchase Price for Parker Hilltop actually was $10,460,000. Schuman Decl., ¶75. The letter also asserts that there will be a broker’s commission of $381,500, even though the property was not listed for sale and the offer was unsolicited. Schuman Decl., ¶80. Since the purchase occurred during the bottom of the real estate recession, Plaintiffs believe the actual value of the property is substantially more. Schuman Decl., ¶75. Fox’s December 31, 2016 financial statement shows Parker Hilltop as having a value of $11,920,000. Schuman Decl., ¶76, Ex. 43.

On August 31, 2020, Defendants sent a similar letter to investors of Overland Crossing, stating their intent to sell the property to an unnamed buyer at an undisclosed price, resulting in a profit of $1,700,000. Schuman Decl., ¶¶ 88-91, Ex. 1. Defendants appear to be selling the property at a price substantially below its worth. Schuman Decl., ¶¶ 92-101, Exs. 4, 48-49. The exhibits show a purchase of the shopping center for $30,000,000 with a loan of $18,850,000 and an operating reserve of $700,000. Schuman Decl., ¶92. According to Fox, the investment was $12,150,000. In fact, the Investment Entity paid $29,300,000. Schuman Decl., ¶¶ 92-93, Ex. 50. According to Fox’s December 31, 2016 financial statement, Overland Crossing had a value of $31,000,000 and a loan balance of less than $18,000,000, meaning more than $13,000,000 in equity. Schuman Decl., ¶99. A mere profit of $1,700,000 would mean a sale price of $20,000,000, which would be a terrible deal. Schuman Decl., ¶¶ 100-01.

When Plaintiffs’ counsel inquired about the sale of Parker Hilltop without naming the property, Defendants indicated that other sales are pending. Schuman Decl., ¶¶ 102-103, Exs. 52-53. Defendants have refused to provided documents regarding the proposed sales of Overland Crossing and Parker Hilltop and Plaintiffs are unaware of the status of the sales. Schuman Decl., ¶¶ 104-07.

Defendants point out that Plaintiffs never invested in either Parker Hilltop LLC or Regency Square North Shopping Center 14, LLC. Fox Decl., ¶¶ 3-4. Plaintiffs are investors in Overland Crossing 13A LLC. Fox Decl., ¶4. Overland Crossing 13A LLC and Regency Square North Shopping Center 14 LLC are different entities that own different shopping centers in Overland Park, Kansas. Fox Decl., ¶5, Ex. B. Plaintiffs’ evidence concerning the proposed sale of Overland Crossing actually is for Regency Square. Opp. at 14-15.

Defendants acknowledge that in 2020 ACF received the offer to buy Regency Square and asked all investors in Regency Square North Shopping Center 14, LLC to vote to approve the sale. Fox Decl., ¶6. A majority of the membership voted to approve the sale, which closed on March 31, 2020. On 2020, ACF received an offer to buy Parker Hilltop. Fox Decl., ¶7. Again, ACF asked all investors in the Parker Hilltop LLC to vote to approve the sale. Id. The sale did not go through. Id. Finally, ACF received an offer to buy Overland Crossing in 2021, not 2020. Fox Decl., ¶8. Assuming it proceeds, ballots will be sent to all investors in the Overland Crossing LLC, including Plaintiffs. Id. Defendants state that there are currently no offers to purchase or escrows any of the other shopping centers owned by the Investment Entities in which Plaintiffs are investors. Fox Decl., ¶9. Nor are there any pending sales of those properties. Id.

Since Plaintiffs never invested in Parker Hilltop or Regency Square, Plaintiffs’ evidence concerning the proposed sale of the entities owning those shopping centers is relevant only to show a pattern and practice of misconduct, a point which Plaintiffs admit. Reply at 9. Defendants fail to address Plaintiffs’ contention that the proposed sales of Parker Hilltop and Regency Square are fire sales designed to generate unauthorized fees for Fox. See Opp. at 14-16.

Plaintiffs have demonstrated a recent pattern of misdealing by selling off shopping centers to generate fees and profit for Fox to the detriment of investors.

(iv.) Withholding of Records and Production of False Tax Records

Plaintiffs assert that Defendants refuse to allow them to inspect the records of the Investment Entities in violation of their rights under the Corporations Code and the Operating Agreements. Mot. at 7; Reply at 11. The tax returns that Defendants did provide were phony as ACF’s CFO, Ed Delava, confirmed. Mot. at 7.

Defendants dispute that they have refused to produce records. Defendants note that they have previously provided documents, including those containing sensitive financial and personal information, which Plaintiffs abused by publicly filing, resulting in the documents being stricken by the court. Opp. at 16-17; Yohalem Decl., Exs. U-X. Contrary to Plaintiffs’ representation that Defendants never sent a proposed confidentiality agreement, Defendants sent multiple such agreements that Plaintiffs rejected. Opp. at 17; Yohalem Decl., Ex. Y. Defendants add that, even if the allegations are true, they are not a basis for appointment of a receiver. Opp. at 16.

The court agrees that a refusal to produce documents is not a basis to appoint a receiver. Plaintiffs have better remedies of discovery or mandamus to compel member inspection. However, the production of a fictitious tax return supports a conclusion that cannot be trusted to operate the Investment Entities in the fiduciary manner required.

(v.) Lack of Alternative Remedies

Defendants argue that Plaintiffs fail to show a lack of adequate alternative remedies, including damages or injunctive relief. Opp. at 17-18.

The availability of other remedies does not, in and of itself, preclude a receivership, especially in cases where a defendant consented to the appointment of a receiver. Gold v. Gold, (2003) 114 Cal.App.4th 791, 807; Barclays Bank of Cal. v. Superior Court, (“Barclays Bank”) (1977) 69 Cal.App.3d 593. However, the court will not appoint a receiver when a lesser remedy will adequately protect the property interests and rights of all parties. See A.G. Col Co. v. Superior Court, (1925) 196 Cal. 604, 613.

While Plaintiffs do not address this argument, Defendants’ argument is unavailing. Plaintiffs have an interest in the Investment Entities owning shopping centers. The issue for receivership is the proper management of the Investment Entities and shopping centers in which Plaintiffs have an ownership interest. This is a forward-looking issue and damages are a backward-looking remedy for historical conduct. Should the Investment Entities all fail, Plaintiffs will lose their investments and will have to look to Defendants for damages. The purpose of a receivership is to help prevent that from occurring. Additionally, given the number of lawsuits pending, it is unclear whether Fox or ACF will be financially able to pay any damages awarded.

(vi.) Harm from Appointment of Receiver

Defendants contend that Plaintiffs’ motion should fail because it does not address the harm that would result from the appointment of a receiver. Opp. at 18. A receiver would damage Defendants’ reputation and could result in a breach of the Investment Entities’ express warranties to their lenders, resulting in an Event of Default on their loans. Opp. at 18. This could lead to the failure of the Investment Entities if the lenders declare the unpaid principal immediately due. Opp. at 18.

Defendants’ allegations of harm are speculative and unsupported by any evidence. The balance of equities clearly shows that Defendants’ mismanagement and self-dealing requires appointment of a receiver who then can meet and confer with lenders to avoid the failure of the Investment Entities.

(vii.) Notice to Other Investors

There remains an issue of notice not addressed by the parties. Plaintiffs present no evidence that the investors were notified of this motion, and the only notice given to other investors was a request that they join Plaintiffs’ lawsuit. Defendants note that Plaintiffs’ investment is relatively minor (Opp. at 9), and Plaintiffs’ small interest in the Investment Entities raises the issue as to who should bear the costs of the receiver. Normally, the business -- meaning the Investment Entities -- would bear this cost. This is another reason to give notice to the other investors.

The other investors in the Investment Entities are entitled to notice and the right to object to (a) the appointment of a receiver and (b) payment of receivership costs by the Investment Entities. Plaintiffs must give notice to the other investors by email or U.S. mail, no later than the end of April 2021, attaching a copy of this tentative.

4. Conclusion

The evidence establishes that Defendants misled Plaintiffs and other investors in soliciting investments for Investment Entities. Defendants improperly paid commissions to Dragul and ACF for the sale of Shafe Plaza and Market at Southpark and fail to explain the discrepancies in the financial records. The evidence supports Plaintiffs’ allegations that Defendants misled investors, acted by self-dealing, and failed to meet their fiduciary duties in operating the Investment Entities. The appointment of a receiver is necessary to protect Plaintiffs’ interests in the remaining Investment Entities.

Before the court will make a final decision on the issue, Plaintiffs must give notice to the other investors that the court is inclined to grant a receiver for the Investment Entities and that the Investment Entities will be required to bear the cost of the receiver, but they will have an opportunity to object at the next hearing.

The hearing is continued to May 25. 2021 at 1:30 p.m. At that hearing, the court will make a final decision on receiver appointment. Assuming a receiver is appointed, Plaintiffs fail to identify a proposed receiver as required by CRC 3.1177. The parties are ordered to meet and confer before the next hearing to identify a mutually acceptable receiver. Otherwise, at the May 25 each side may propose a receiver who submits a declaration discussing his or her proposed fees and the issue of prohibited contracts in CRC 3.1179(b). Finally, the court will have to impose a receiver’s bond and issue a preliminary injunction in aid of the receiver, which also requires a bond. The parties should be prepared to discuss the bonds at the May 25 hearing.

Case Number: BC679693    Hearing Date: March 05, 2021    Dept: 50

 

 

Superior Court of California

County of Los Angeles

Department 50

raymond shofler, et al.,

Plaintiffs,

vs.

alan c. fox, et al.

Defendants.

Case No.:

BC 679693

Hearing Date:

March 5, 2021

Hearing Time:

10:00 a.m.

ORDER RE:

DEFENDANTS’ AND NONPARTY DR. STEVEN FOX’S DISCOVERY MOTION FOR COSTS AND FEES PURSUANT TO CCP §§ 2023.010, 2023.030, 2025.420, 2025.480, 2030.290, 2030.300

Defendants Alan C. Fox, individually and as Trustee of the Alan C. Fox Revocable Trust (“Fox”) and ACF Property Management, Inc. (“ACF”) (jointly, “Defendants”) and nonparty Dr. Steven Fox move for an award of costs and fees against Plaintiffs Raymond Shofler and Barbara Shofler, individually and on behalf of The Raymond and Barbara Shofler Family Trust and The Raymond Shofler IRA (collectively, “Plaintiffs”) and their counsel pursuant to Code of Civil Procedure section 2023.010, 2023.030, 2025.420, 2025.480, 2030.290, and 2030.300.

Defendants indicate in their notice of motion that they take the position that the instant motion should be taken off calendar because it falls within the reference to the Discovery Referee. The Court agrees. The Discovery Referee was appointed for “[a]ll discovery purposes in this action,” and further, the Discovery Referee has the authority to rule on a sanctions request. ((See Sauer v. Superior Court (1987) 195 Cal.App.3d 213, 225 [upholding referee’s award of sanctions on a discovery motion].) The Court notes that Plaintiffs contend that Defendants’ motion may not be heard by the Discovery Referee because Defendants seek sanctions arising from a demurrer and motion to strike. The Court does not find that any of the sanctions sought by Defendants arise solely out of a demurrer or motion to strike. The only motion related to a demurrer and motion to strike is Defendants’ motion for a protective order to prevent discovery into facts that Defendants were also challenging by way of demurrer and motion to strike. Therefore, the issue of whether or not Defendants are entitled to sanctions based on the result of the motion for protective order is within the purview of the Discovery Referee.

Accordingly, the Court takes the discovery motion for costs and fees off calendar and orders Defendants and nonparty Dr. Steven Fox to file their motion with the Discovery Referee.

DATED: March 4, 2021 ________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court

Case Number: BC679693    Hearing Date: January 14, 2021    Dept: 50

 

 

 

Superior Court of California

County of Los Angeles

Department 50

raymond shofler et al.,

Plaintiffs,

vs.

ALAN C. FOX et al.

Defendants.

Case No.:

BC 679693

Hearing Date:

January 14, 2022

Hearing Time:

10:00 a.m.

ORDER RE:

PLAINITFFS’ MOTION FOR APPOINTMENT OF A RECEIVER

Plaintiffs Raymond Shofler and Barbara Shofler, individually and on behalf of The Raymond and Barbara Shofler Family Trust and The Raymond Shofler IRA (collectively, “Plaintiffs”) move pursuant to Code of Civil Procedure section 564, subdivision (b) for the appointment of a receiver to manage various entities in which Plaintiffs own a continuing interest and which are the subject of the instant action.

Defendants Alan C. Fox, individually and as Trustee of the Alan C. Fox Revocable Trust (“Fox”) and ACF Property Management, Inc. (“ACF”) (collectively, “Defendants”) oppose. However, the Court notes that Defendants have scheduled a hearing on a motion to seal certain exhibits filed in support of their opposition, which is set to be heard on February 1, 2021, at 10:00 a.m. The Court further notes that Defendants have interposed voluminous evidentiary objections as part of their opposition.

Accordingly, the Court orders the parties to meet and confer by telephone or in person in a serious and good faith effort to resolve and eliminate the objections. The only objections that should remain are those that pertain to material evidence regarding material issues. Keeping the rules of evidence in mind, the parties should be able to reduce the objections to just a few. If any material objections remain unresolved, the parties are to set them forth in a joint statement with the text, the objection, and the argument of each side in favor of their respective positions regarding the remaining material objections.

The joint statement must be filed and a separate ruling sheet must be lodged directly in Department 50 by noon on January 25, 2021.

The Court continues the hearing on Plaintiffs’ motion for appointment of a receiver to February 1, 2021, at 10:00 a.m., in Department 50.

Plaintiffs are ordered to give notice of this ruling.

DATED: January 12, 2021 ________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court

Case Number: BC679693    Hearing Date: December 09, 2020    Dept: 50

THERE ARE THREE SECTIONS BELOW:

FIRST, THE COURT HAS CONSIDERED THE FIVE OUTSTANDING RECOMMENDATIONS OF THE DISCOVERY REFEREE, COPIES OF WHICH ARE ATTACHED TO PLAINTIFFS' OBJECTIONS THERETO, THE PLAINTIFFS' OBJECTIONS THEMSELVES, THE RESPONSE TO  PLAINTIFFS' OBJECTIONS, THE PLAINTIFFS' RENEWED OBJECTIONS THERETO AND TO THE REFEREE APPOINTMENT AND THE RESPONSE THERETO.  THE COURT OVERRULES THE OBJECTIONS AND AGREES WITH THE FIVE RECOMMENDED RULINGS. THE COURT HAS SIGNED THE ORDERS TO THAT EFFECT AND ORDERED DEFENDANTS TO GIVE NOTICE.  THE ORDERS WILL BE FILED AND WILL APPEAR IN THE DOCKET FOR THIS CASE WITHIN A DAY OR TWO.

SECOND, THE COURT HAS REVIEWED THE CENTER OF HEALTHCARE EDUCATION CASE ATTACHED TO PLAINTIFFS' NOTICE OF RECENTLY PUBLISHED OPINION.  THE COURT THANKS PLAINTIFFS FOR BRINGING THE CASE TO THE ATTENTION OF THE COURT.  THE COURT HAS REVIEWED THE CASE AND DOES NOT NEED BRIEFING REGARDING THE CASE.

THIRD, THE COURT HAS ISSUED THE FOLLOWING TENTATIVE REGARDING THE DEFENDANTS' DEMURRER TO THE FOURTH AMENDED COMPLAINT AND THE MOTION TO STRIKE:

 

Superior Court of California

County of Los Angeles

Department 50

raymond shofler et al.,

Plaintiffs,

vs.

ALAN C. FOX et al.

Defendants.

Case No.:

BC 679693

Hearing Date:

December 9, 2020

Hearing Time:

2:30 p.m.

[TENTATIVE] ORDER RE:

DEFENDANTS’ DEMURRER TO FOURTH AMENDED COMPLAINT AND MOTION TO STRIKE ALLEGATIONS IN FOURTH AMENDED COMPLAINT

Background

Plaintiffs Raymond Shofler and Barbara Shofler, individually and on behalf of The Raymond and Barbara Shofler Family Trust and The Raymond Shofler IRA (collectively, “Plaintiffs”) filed this action against Defendants Alan C. Fox, individually and as Trustee of the Alan C. Fox Revocable Trust (“Fox”) and ACF Property Management, Inc. (“ACF”) (collectively, “Defendants”), alleging that Defendants made false representations regarding certain investment opportunities.

The operative Fourth Amended Complaint (“4AC”) was filed on August 20, 2020 and asserts causes of action for breach of fiduciary duty, fraud (misrepresentation), fraud (concealment), securities fraud, and violation of Corporations Code section 17704.10. The fraud causes of action are further split into 16 causes of action for fraud (misrepresentation) and 16 causes of action for fraud (failure to disclose).

Defendants now demur to each of the causes of action on the grounds that each is uncertain and that each fails to state facts sufficient to constitute a cause of action. Defendants also move to strike certain allegations from the 4AC. Plaintiffs oppose both.

Demurrer

A demurrer can be used only to challenge defects that appear on the face of the pleading under attack or from matters outside the pleading that are judicially noticeable. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “To survive a demurrer, the complaint need only allege facts sufficient to state a cause of action; each evidentiary fact that might eventually form part of the plaintiff's proof need not be alleged.” (C.A. v. William S. Hart Union High School Dist. (2012) 53 Cal.4th 861, 872.) For the purpose of testing the sufficiency of the cause of action, the demurrer admits the truth of all material facts properly pleaded. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 966-967.) A demurrer “does not admit contentions, deductions or conclusions of fact or law.” (Daar v. Yellow Cab Co. (1967) 67 Cal.2d 695, 713.) A demurrer for uncertainty may lie if the failure to label the parties and claims renders the complaint so confusing defendant cannot tell what he or she is supposed to respond to. (Williams v. Beechnut Nutrition Corp. (1986) 185 Cal.App.3d 135, 139, fn. 2.)

In the 4AC, Plaintiffs allege the following:

During the period from October 2004 through the present, Plaintiffs invested more than $1,750,000 in 20 separate shopping center investments. (4AC, ¶ 5.) These investments were fraudulently induced; Plaintiffs have yet to receive their money back even though the majority of the shopping centers have been sold. (4AC, ¶¶ 6, 8.)

The fraudulent scheme begins with Defendants placing an investment property, usually a shopping center, under contract, sometimes using a third party to act as the buyer. (4AC, ¶ 10.) While the escrow for the purchase of a shopping center is open, Defendants form limited liability companies (LLCs) or limited partnerships that ultimately assume the purchase contract and close the escrow. (4AC, ¶ 11.) Thus, Defendants never bought any of the shopping centers at issue in this case, instead the “investment entities” bought them. (4AC, ¶ 11.) While escrow is still open, Defendants begin to solicit investments from third parties, like Plaintiffs, by sending them, among other things, an Executive Summary and Financial Projections (collectively, the “Offering Documents”), which purport to summarize the investment. (4AC, ¶ 12.) The Offering Documents tell potential investors the “price” or “purchase price” of the shopping center, as well as the amount of the loan(s) against the property, the anticipated closing costs, and the amount needed for an operating reserve. (4AC, ¶ 13.) Based on these figures, a “Cash Required” or “Net Investment” amount is set forth in the Offering Documents. (4AC, ¶ 13.)

The problem was that the Offering Documents contained false information, including the “price” or “purchase price.” (4AC, ¶ 18.) The escrow settlement statements showed that the actual purchase price for the property was much lower than that represented in the Offering Documents. (4AC, ¶¶ 19, 36.) By making these misrepresentations, Defendants were able to inflate the amount charged to investors for their interests and take a secret profit of millions of dollars in the form of commissions and other fees (such as an undisclosed consulting fee) on the purchase and sale of each shopping center. (4AC, ¶¶ 21-23, 26, 58.) The lies about the investments were repeated throughout the course of the investments, including when it was time to sell certain shopping centers, in order to induce a sale of a shopping center. (4AC, ¶ 28.) Moreover, Defendants also actively prevented investors from finding out the truth about the purchase prices. (4AC, ¶ 32.)

In addition to affirmative misrepresentations, Plaintiffs allege that Defendants also fraudulently concealed material information from them. Defendants characterize these fraud claims as “operational” in that these claims relate to the management and operation of the investment entities. Defendants contend that these “operational fraud” claims, now specifically labeled as fraud/failure to disclose claims in the 4AC, must fail because they (1) fail to provide the legally required particularity as to any of the elements of fraud, (2) allege legally nonactionable omissions about future events, and (3) are claims of harm to the investment entities that must be brought derivatively.

In the 4AC, Plaintiffs allege that Defendants failed to disclose material facts relating to their investments in each of the shopping centers. These omissions include: (i) the actual purchase price of the specific shopping center, (ii) the fact that Defendants and their associate, Gary Dragul, were profiting in numerous ways from the investment, and that their interests were in direct conflict with investors’ interests, (iii) the fact that ACF and other related entities were charging a fee or commission in connection with the acquisition of each shopping center, (iv) the fact that it was illegal for ACF to be paid a commission in connection with the acquisition of the shopping centers, (v) the actual cash needed to acquire each shopping center, (vi) the actual closing costs to be incurred in connection with the acquisition of the shopping center, as well as the existence of prorations such as rent and property taxes, (vii) the fact that Fox and ACF had a conflict of interest in connection with the acquisition, sale, refinancing and management of the shopping center investment, (viii) the fact that Fox was receiving interests in the investment entity that owned the shopping center without paying any or a reduced consideration for that interest, (ix) the fact that Fox and ACF were selling membership interests in the investment entity that was acquiring the shopping center at different prices to different individuals and entities, including selling membership interests at reduced prices to Fox’s family members, and (x) the fact that Defendants had no intention to fund the operating reserve in the amount stated in the Offering Documents and no intention of complying with the operating agreements and honoring their obligations stated in the Offering Documents and as manager of the investment entities. (See, e.g., 4AC, ¶ 137.) For some of the transactions, Plaintiffs additionally allege that Defendants concealed the fact that ACF and Dragul would take massive fees from the sale of the shopping center. (See, e.g., 4AC, ¶ 222.) Plaintiffs allege that these omissions were not disclosed when Plaintiffs were first advised of the investments. (See, e.g., 4AC, ¶ 138.) Plaintiffs further allege that Defendants’ omissions were done in order to induce Plaintiffs to invest in the shopping centers. (See, e.g., 4AC, ¶ 139.) Plaintiffs allege that they were unaware of the omissions and if the omissions had been disclosed, Plaintiffs would not have invested in the investment entities. (See, e.g., 4AC, ¶¶ 139-140.)

First, Defendants contend that Plaintiffs have failed to allege with specificity the facts supporting their fraudulent concealment causes of action.[1] The elements of an action for fraud based on concealment are “(1) the defendant must have concealed or suppressed a material fact, (2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage.” (Marketing West, Inc. v. Sanyo Fisher Corp. (1992) 6 Cal.App.4th 603, 612-613.)  

Defendants argue that Plaintiffs fail to allege what specific fact was concealed from them. Defendants argue that the nine categories of omissions (as identified, for example in paragraph 137) are too general to sustain a cause of action for fraudulent concealment. But there is at least one omission that the Court finds is specific enough—that the actual purchase price of each shopping center was not disclosed to Plaintiffs. (4AC, ¶ 137, (i).)

Defendants next contend that Plaintiffs fail to allege reliance, causation, and damages resulting from the specific omission. But the Court finds that the allegation that Plaintiffs would not have invested if they had been informed of the actual purchase price of each shopping center (4AC, ¶ 140) satisfies the pleading requirements for a concealment claim. Moreover, Defendants’ contention that Plaintiffs lack standing does not appear to be applicable to the omission concerning the actual purchase price of the shopping centers because this omission has no relation to the management or operation of the LLCs.

Here, the Court notes the well-settled principle that “a general demurrer should not be sustained if the pleading, liberally construed, states a cause of action on any theory.” (Brousseau v. Jarrett (1977) 73 Cal.App.3d 864, 870-871; see also Barquis v. Merchants Collection Assn. (1972) 7 Cal.3d 94, 103 [“The courts of this state have, of course, long since departed from holding a plaintiff strictly to the ‘form of action’ he has pleaded and instead have adopted the more flexible approach of examining the facts alleged to determine if a demurrer should be sustained”].) Additionally, a demurrer cannot be sustained as to a portion of a cause of action. (PH II, Inc. v. Superior Court (1995) 33 Cal.App.4th 1680, 1682.) Thus, the more appropriate vehicle for addressing the purported defects in the concealment causes of action is Defendants’ motion to strike. (Id. at pp. 1682-1683 [“We conclude that when a substantive defect is clear from the face of a complaint, such as a violation of the applicable statute of limitations or a purported claim of right which is legally invalid, a defendant may attack that portion of the cause of action by filing a motion to strike.”].)

The Court overrules Defendants’ general demurrer to the first and second through thirty-third causes of action. The Court notes that there is no separate argument in the demurrer with respect to the thirty-fourth cause of action (securities fraud) and thirty-fifth cause of action (violations of Corporations Code sections 17704.10 and 15903.04). Therefore, the demurrer to those causes of action is overruled. The Court also overrules Defendants’ special demurrer to all of the causes of action of the 4AC, including the twenty-fourth, twenty-fifth, and twenty-sixth causes of action. The Court does not find that any of the causes of action are ambiguous or unintelligible.

Motion to Strike

A court may strike any “irrelevant, false, or improper matter inserted in any pleading” or any part of a pleading “not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court.” (Code Civ. Proc., § 436.) “The grounds for a motion to strike shall appear on the face of the challenged pleading or from any matter of which the court is required to take judicial notice.” (Code Civ. Proc., § 437.) Irrelevant matter is any “immaterial” allegation that is “not essential to the statement of a claim or defense” or “neither pertinent to nor supported by an otherwise sufficient claim or defense.” (Code Civ. Proc., § 431.10.) In line with the statutory definition of “immaterial,” the Court notes that using a motion to strike to address a substantive defect “should be cautious and sparing” and should not create a “procedural ‘line item veto’ for the civil defendant.” (PH II, Inc. v. Superior Court, supra, 33 Cal.App.4th at p. 1683.)

The first “category” of allegations targeted by Defendants are allegations that are offered as specific examples of certain conduct. (Defendants’ Appx. A, § 1.) Defendants contend that alleging conduct as an example is improper because the inclusion of the “example” qualifier suggests other conduct that could be the basis for the claim. But the Court finds that the “examples” are pertinent to or supported by an otherwise sufficient claim for fraudulent misrepresentation or fraudulent concealment. Defendants’ argument regarding specificity appears directed to the tactic by Plaintiffs of incorporating by reference previous portions of the 4AC into each and every cause of action. Nevertheless, “[i]t is axiomatic that a civil plaintiff may for the sake of convenience incorporate by reference previous portions of his pleading for informational purposes only.” (Cal-West Nat. Bank v. Superior Court (1986) 185 Cal.App.3d 96, 101.) Here, it is clear which misrepresentations and which omissions are at issue because they are explicitly set forth in the 4AC. (See, e.g., 4AC, ¶¶ 132 [misrepresentations], 137 [omissions].) That specific facts concerning some of the transactions are alleged in the general allegations section of the 4AC only supports those causes of action.

The second “category” of allegations targeted by Defendants are allegations relating to what Defendants call nonactionable future predictions. (Defendants’ Appx., A, § 2.) In support of each cause of action for fraudulent misrepresentation, Plaintiffs allege five misrepresentations upon which the claim is based. Defendants argue that the fifth (“the projected earnings from the operation of the Shopping Center” contained in the Offering Documents) is nonactionable because it involves a future prediction. The Court agrees. “It is hornbook law that an actionable misrepresentation must be made about past or existing facts . . . .” (San Francisco Design Center Associates v. Portman Companies (1995) 41 Cal.App.4th 29, 43-44.) Therefore, subsection (v) of paragraphs 132, 144, 156, 168, 180, 192, 204, 216, 229, 243, 257, 276, 315, 333, 348, and 360 is appropriately stricken.

Next, Defendants argue that certain allegations in support of the fraudulent concealment causes of action are also nonactionable for involving future predictions. In paragraphs 222, 235, 249, 263, 341, 353, and 365, Plaintiffs allege a number of omissions of material fact, one of which is the fact that “ACF and Dragul would take massive fees from the sale of the Shopping Center.” (Subsection xi.) The Court finds that the inclusion of the word “would” suggests that this is an omission about a future event. In paragraphs 249 and 263, Plaintiffs include the allegation that Defendants concealed the fact that “Fox was buying back Plaintiffs’ interest in the Shopping Center at less than its fair market value.” This allegation is clearly as to a future event, since as noted by Defendants, Plaintiffs could not have been induced to invest in these particular shopping centers based on something that had not happened. Therefore, subsections (xii) of paragraphs 249 and 263 are appropriately stricken. For the same reason, the Court finds that paragraph 219 is appropriately stricken as involving a future event.

The third “category” of allegations targeted by Defendants are allegations for which Defendants contend Plaintiffs have no standing to make because they are derivative claims belonging to the LLCs. (Defendants’ Appx. A, § 2.) These encompass the allegations that Defendants concealed that fact that ACF and Dragul would take massive fees from the sales of the various shopping centers, as well as paragraphs 77-114 and Plaintiffs’ prayer for non-restitutionary disgorgement.

The Court notes that although Defendants discuss the specific allegations in support of each of the fraudulent concealment causes of action (and more generally, the breach of fiduciary duty cause of action), Defendants do not identify any specific allegation in support of the discrete concealment causes of action to be stricken. For example, Defendants repeatedly cite to paragraph 149, subsection (x), where Plaintiffs allege that Defendants concealed the fact that they had no intention to “comply[] with the operating agreements and honor[] their obligations as manager of the Investment Entities.” Defendants argue that Plaintiffs do not have standing to bring a concealment claim based on this omission, but it is unclear whether Defendants seek to strike this allegation because Defendants do not include paragraph 149, subsection (x) in their list of allegations to be stricken. Instead, Defendants target paragraphs 77-114, which are part of Plaintiffs’ general allegations. In any event, the Court agrees that Plaintiffs do not have standing to bring any claims for either fraudulent concealment or breach of fiduciary duty that implicate injury to the LLCs. The only direct injury supported by the allegations of the 4AC is the injury to Plaintiffs as a result of being fraudulently induced into making the initial investment in the LLCs. (See, e.g., 4AC, ¶¶ 133-134, 139-140.) Allegations relating to Defendants’ failure to comply with the operating agreements or honor their obligations as manager of the LLCs, allegations relating to self-dealing, allegations relating to the effect of Defendants’ conduct on the market value of the LLCs, and allegations relating to any proceeds that are due to the LLCs are not pertinent to nor supported by the existing causes of action. For the same reason, the prayer for nonrestitutionary disgorgement to the extent that Plaintiffs seek disgorgement for money taken from the entities, charged to the entities, loaned by the entities, commingled from accounts belonging to the entities, or subject to a direct claim by the entities or a derivative claim by their shareholders is appropriately stricken. Therefore, the Court grants the motion to strike as to these allegations. But the Court will require Defendants to clarify exactly which allegations are sought to be stricken based on the above discussion.

The fourth category of allegations that Defendants seek to strike are those relating to Loggins Corners, Tower Plaza, and TJ Maxx. The Court previously ruled that any claims relating to those shopping centers was time-barred. Defendants contend that Plaintiffs have violated the Court’s previous order by including those three investments in the 4AC. The Court grants the motion to strike as to paragraphs 66, 67, 68, 69, 70, 71, 76 (line 27), 103 (lines 26-4), 104, 105, 119.12 (lines 23-25), 383 (lines 16-17), and 384 (lines 23-28).

Lastly, Defendants move to strike paragraph 119.16 as irrelevant. The Court grants the motion to strike as to this paragraph.

Conclusion

Based on the foregoing, the Court rules as follows:

Defendants’ demurrer is overruled in its entirety.

Defendants’ motion to strike is granted as to the following:

Defendants’ motion to strike is otherwise denied.

Defendants’ Answer to the 4AC must be filed and served within 10 days of the date of this Order.

Defendants are ordered to give notice of this ruling.

DATED: December 9, 2020 ________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court

[1] The Court notes that although Defendants refer to these causes of action as the “fraud” causes of action, because the elements of a fraudulent misrepresentation claim are different from the elements for a fraudulent concealment claim, the Court will refer to the “fraud” causes of action as either misrepresentation or concealment claims.

Case Number: BC679693    Hearing Date: October 20, 2020    Dept: 50

THE COURT NEEDS ADDITIONAL TIME TO CONSIDER THE DEMURRER AND MOTION TO STRIKE RE THE FOURTH AMENDED COMPLAINT ALONG WITH  THE OPPOSITION AND REPLY. ADDITIONALLY,THE COURT REQUESTS THAT AS SOON AS POSSIBLE, THE PLAINTIFFS PROVIDE THE COURT WITH A REDLINED COPY OF THE FOURTH AMENDED COMPLAINT THAT SHOWS ALL CHANGES MADE FROM THE THIRD AMENDED COMPLAINT, INCLUDING ANY DELETIONS.  PLAINTIFFS ARE TO COORDINATE EMAILING OF THE REDLINED COPY WITH SALLY.  SALLY ALSO WILL FOLLOW UP WITH  THE PARTIES AT A LATER DATE TO SET A NEW DATE FOR THE HEARING ON THE DEMURRER AND MOTION TO STRIKE. THE COURT ALSO HAS BECOME AWARE THAT THE REFEREE HAS FILED A NUMBER OF RECOMMENDATIONS AND THERE ARE OBJECTIONS THERETO.  THE COURT ALSO INTENDS TO REVIEW AND RULE ON THOSE RECOMMENDATIONS AND OBJECTIONS. NO HEARING WILL TAKE PLACE TOMORROW.

Case Number: BC679693    Hearing Date: July 27, 2020    Dept: 50

 

 

 

Superior Court of California

County of Los Angeles

Department 50

raymond shofler et al.,

Plaintiffs,

vs.

ALAN C. FOX et al.

Defendants.

Case No.:

BC679693

Hearing Date:

July 27, 2020

Hearing Time:

3:30 p.m.

[TENTATIVE] ORDER RE:

DEFENDANTS’ DEMURRER TO THIRD AMENDED COMPLAINT;

MOTION TO STRIKE ALLEGATIONS IN THIRD AMENDED COMPLAINT

Background

Plaintiffs Raymond Shofler and Barbara Shofler, individually and on behalf of The Raymond and Barbara Shofler Family Trust and The Raymond Shofler IRA (collectively, “Plaintiffs”) filed this instant action against defendants Alan C. Fox, individually and as Trustee of the Alan C. Fox Revocable Trust (“Fox”) and ACF Property Management, Inc. (“ACF”) (collectively, “Defendants”) alleging Defendants made false representations regarding investment opportunities.

The operative Third Amended Complaint (“TAC”) was filed on March 5, 2020 and asserts causes of action for (1) breach of fiduciary duty, (2) fraud (misrepresentation), (3) fraud (concealment), (4) securities fraud, and (5) violation of Corporations Code section 17704.10.

Defendants now demur to each of the causes of action on the grounds that each is uncertain and that each fails to state facts sufficient to constitute a cause of action. Defendants also move to strike certain allegations from the TAC. Plaintiffs oppose both.

Discussion

A demurrer can be used only to challenge defects that appear on the face of the pleading under attack or from matters outside the pleading that are judicially noticeable. ((Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “To survive a demurrer, the complaint need only allege facts sufficient to state a cause of action; each evidentiary fact that might eventually form part of the plaintiff's proof need not be alleged.” ((C.A. v. William S. Hart Union High School Dist. (2012) 53 Cal.4th 861, 872.) For the purpose of testing the sufficiency of the cause of action, the demurrer admits the truth of all material facts properly pleaded. ((Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 966-967.) A demurrer “does not admit contentions, deductions or conclusions of fact or law.” ((Daar v. Yellow Cab Co. (1967) 67 Cal.2d 695, 713.) A demurrer for uncertainty may lie if the failure to label the parties and claims renders the complaint so confusing defendant cannot tell what he or she is supposed to respond to. ((Williams v. Beechnut Nutrition Corp. (1986) 185 Cal.App.3d 135, 139, fn. 2.)

A court may strike any “irrelevant, false, or improper matter inserted in any pleading” or any part of a pleading “not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court.” ((Code Civ. Proc., § 436.)

Discussion

In the TAC, Plaintiffs allege the following:

During the period from October 2004 through the present, Plaintiffs invested more than $1,750,000 in 20 separate shopping center investments. (TAC, ¶ 5.) Plaintiffs’ investments were fraudulently induced by Defendants, as Plaintiffs have yet to receive their money back even though the majority of the shopping centers have been sold. (TAC, ¶ 6.) The fraudulent scheme begins with Defendants placing an investment property, usually a shopping center, under contract, sometimes using a third party to act as the buyer. (TAC, ¶ 10.) While the escrow for the purchase of a shopping center is open, Defendants form limited liability companies (LLCs) or limited partnerships that ultimately assume the purchase contract and close the escrow. (TAC, ¶ 11.) Thus, Defendants never bought any of the shopping centers at issue in this case, instead the “investment entities” bought them. (TAC, ¶ 11.) While escrow is still open, Defendants begin to solicit investments from third parties, like Plaintiffs, by sending them, among other things, an Executive Summary and Financial Projections (collectively, the “Offering Documents”), which purport to summarize the investment. (TAC, ¶ 12.) The Offering Documents tell potential investors the “price” or “purchase price” of the shopping center, as well as the amount of the loan(s) against the property, the anticipated closing costs, and the amount needed for an operating reserve. (TAC, ¶ 13.) Based on these figures, a “Cash Required” or “Net Investment” amount is set forth in the Offering Documents. (TAC, ¶ 13.)

The problem was that the Offering Documents contained false information, including the “price” or “purchase price.” (TAC, ¶ 18.) The escrow settlement statements would show that the actual purchase price for the property was much lower than that represented in the Offering Documents. (TAC, ¶¶ 19, 36.) By making these misrepresentations, Defendants were able to inflate the amount charged to investors for their interests and take a secret profit of millions of dollars in the form of commissions and other fees on the purchase and sale of each shopping center. (TAC, ¶¶ 21, 26, 58, 112-113.) The form of the secret profit included taking an undisclosed “consulting fee” of more than $1 million out of escrow and giving Fox an ownership interest in the LLCs without requiring a capital contribution. (TAC, ¶¶ 22-23, 58.) The lies about the investments were repeated throughout the course of the investments, including when it was time to sell certain shopping centers, in order to induce a sale of a shopping center. (TAC, ¶¶ 28, 67-79.) Moreover, Defendants also actively prevented investors from finding out the truth about the purchase prices. (TAC, ¶ 32.)

Defendants’ misrepresentations also included statements made to potential investors about the nature and details of Defendants’ own interests in pursuing these shopping center investments. (TAC, ¶¶ 48-54.) Defendants told investors that their interests are aligned with the interests of the investors. (TAC, ¶ 55.) Defendants told investors that ACF earns a management fee of 4% of gross rent for managing the shopping centers, and that Fox makes money by investing in the shopping centers on the same terms as other investors. Defendants told investors that they do not take a promotional interest or otherwise profit from the investments. (TAC, ¶ 60.)

Defendants’ wrongdoing was not limited to the time of purchase and the time of sale of the shopping centers. During the time the investment properties were being held, Defendants commingled the funds of the various investment entities without disclosing that fact to Plaintiffs and in violation of the Operating Agreements of the investment entities. (TAC, ¶ 94.) Defendants also made loans to certain investment entities that allowed it to make distributions to investors even though the distributions did not come from the operations of the borrowing entity. (TAC, ¶¶ 94-96.) Defendants also commingled the funds of the various investment entities with their own funds and with their outside investments. (TAC, ¶¶ 97-103.) Defendants have charged the investment entities for their own expenses. (TAC, ¶¶ 104-106.) Defendants have also taken money from the investment entities in a manner that does not appear in the general ledgers. (TAC, ¶¶ 107-110.)

As a result of Defendants’ fraudulent actions, Plaintiffs’ investments were less profitable than they should have been. (TAC, ¶¶ 114-118.) Plaintiffs had no reason to suspect any wrongdoing on the part of Defendants until December 15, 2016, when Plaintiffs received a letter relating to litigation by other investors against Defendants. (TAC, ¶¶ 119-120.) Plaintiffs would never have invested in any of the investments if they had known about Defendants’ wrongful conduct. (TAC, ¶ 123.) Thus, Plaintiffs seek to rescind the transactions by which they purchased their interests in the various investment entities. (TAC, ¶ 129.) Plaintiffs also seek damages, including “benefit of the bargain” damages or, alternatively, a fair return on their investment or nonrestitutionary disgorgement. (TAC, ¶¶ 130-134.)

Separate Causes of Action

Defendants contend that Plaintiffs are required to plead separate causes of action for each of the 20 different investment transactions of which they seek rescission. This would mean that Plaintiffs would need to state 20 different causes of action for breach of fiduciary duty, 20 different causes of action for intentional misrepresentation, and 20 different causes of action for fraudulent concealment.

In support, Defendants cite to the legal encyclopedia, 54 California Jurisprudence Third (2020) Real Estate, section 436, where it is stated that “[w]here a party seeks to obtain relief based on rescission of two different contracts for the purchase of two different parcels of real property, entered into at different times, each contract constitutes a different transaction, though the same misrepresentations induced the purchaser to enter into both, and the contracts should be stated in separate counts.” Although the contracts at issue are not for purchases of real property, Plaintiffs do not argue that there is any reason not to apply this general rule to all claims for rescission.

Next, the Court notes that Defendants assert that the failure to separate out the causes of action subjects the first three causes of action to demurrer on the basis of uncertainty and failure to state facts sufficient to constitute a cause of action. (Dem., p. 14:19-21.) But the three cases cited and relied upon by Defendants in support of their position make it clear that the only applicable demurrer is the special demurrer for uncertainty. ((See Wilson v. Rigali & Veselich (1934) 138 Cal.App. 760, 767 [noting that the objection that the rescission claims were not separately stated was made pursuant to a special demurrer]); (Lee v. Folcey (1930) 110 Cal.App. 607, 610 [noting that the objection that the cancellation claims were not separately stated was made pursuant to a special demurrer]); (Ormerod v. Security-First Nat'l Bank (1937) 21 Cal.App.2d 362, 366-367 [noting that one ground for demurrer was that “several causes of action had been united and not separately stated” and a different ground was that the amended complaint “does not state facts sufficient to constitute a cause of action”].) As noted by Plaintiffs, at least one of these three cases approved of the requirement to state separate causes of action for each transaction of which a plaintiff sought rescission based on a statute that had been repealed, effective 1972. Moreover, more recent authority regarding special demurrers supports the conclusion that the requirement need not be construed so strictly. ((See Williams v. Beechnut Nutrition Corp., supra, 185 Cal.App.3d at p. 139, fn. 2 [“Although inconvenient, annoying and inconsiderate, the lack of labels for plaintiff’s causes of action does not substantially impair Beechnut’s ability to understand the complaint.”].)

Here, it is clear what transactions are at issue, and Defendants do not argue that they are unable to understand the basis of Plaintiffs’ claims. Nevertheless, Defendants contend that the “lumping” together of all 20 transactions with regard to the fraud causes of action deprives them of notice as to what purported misrepresentations or omissions allegedly induced Plaintiffs to enter into each transaction. Because fraud must be pleaded with specificity, Defendants also contend that alleging, for example, only one cause of action for misrepresentation insulates Plaintiffs from transaction-specific attacks (either by demurrer or summary adjudication).

Plaintiffs counter that their fraud claims are not separate at all but constitute one entire fraudulent scheme. ((Conger v. White (1945) 69 Cal.App.2d 28, 41 [“In an action for damages for fraud, a complaint which alleges a series of fraudulent acts committed in the execution of an entire scheme to divest plaintiff of his property states a single cause of action.”].) But as noted by Defendants, the claims at issue in Conger were not claims for rescission. In addition, in Conger, the Court of Appeal found certain factors that militated in favor of finding a common fraud “scheme,” including that there was an allegation of conspiracy, that “[t]he transactions were interwoven so that it would have been impossible for plaintiff to prove fraud in the second or third purchases without first proving fraud in the first one[,]” and that “[t]he three transactions were so closely related as to time and as to the manner of their accomplishment as to indicate that each activity was a part of the original plan and not a new one.” (Ibid.) In the instant case, there is no allegation of conspiracy, there is no allegation that all 20 transactions are so interwoven that proving one requires proving all of the others, and there is no allegation that the 20 transactions were closely related in time and manner of accomplishment.

Therefore, considering the arguments set forth by the parties, the Court sustains the special demurrer to the second and third causes of action, with leave to amend. The Court overrules the special demurrer to the first cause of action. To the extent that a general demurrer is asserted against the first, second, and third causes of action because the claims are not separately stated, the general demurrer is overruled.

Standing

Next, Defendants contend that, to the extent that Plaintiffs’ causes of action for breach of fiduciary duty, misrepresentation, concealment, and securities fraud are based on the allegation that Defendants mismanaged the investment entities’ funds (what Defendants characterize as “operational fraud claims”), Plaintiffs do not have the requisite standing because Plaintiffs’ claims are actually derivative claims that belong to the LLCs.

Presumably recognizing that a demurrer cannot be sustained as to a portion of a cause of action, Defendants argue that because Plaintiffs “do not allege separate causes of action for these allegations, but rather have made these improper allegations central to their existing fraud and fiduciary duty claims[,] [] the now-commingled claims fail to state a valid cause of action.” (Dem., p. 15:1-3.) Although Defendants are correct in noting that a derivative action and a direct action are “mutually exclusive,” (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 312) that does not mean that a derivative action and a direct action may not be pursued in the same case. ((Denevi v. LGCC, LLC (2004) 121 Cal.App.4th 1211, 1221 [“[I]t is settled that one who has suffered injury both as an owner of a corporate entity and in an individual capacity is entitled to pursue remedies in both capacities.”].) In any event, Plaintiffs dispute that any of their claims are derivative in nature, so the Court begins with that analysis.

Defendants contend that the following allegations constitute derivative claims: (1) that Fox took money from the entities in the form of fees, commissions, bank transfers, and improper charges (TAC, ¶¶ 80-92, 98-103), (2) that Defendants commingled the funds of the various investment entities (TAC, ¶ 94), and (3) that Defendants charged the investment entities for personal expenses (TAC, ¶¶ 104-106). Defendants argue that these are textbook examples of derivative claims belonging to the entity.

An action is derivative “if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property without any severance or distribution among individual holders.” ((Paclink Communications Internat. v. Superior Court (2001) 90 Cal.App.4th 958, 964.) “A personal claim, in contrast, asserts a right against the corporation which the shareholder possesses as an individual apart from the corporate entity: ‘If the injury is not incidental to an injury to the corporation, an individual cause of action exists.’” ((Denevi v. LGCC, LLC, supra, 121 Cal.App.4th at p. 1222.)

Plaintiffs counter that the allegations of Defendants’ misconduct vis-à-vis the investment entities are not meant to and thus do not allege an injury to the investment entities. Rather, Plaintiffs make those allegations to underscore the continuing nature of their fraud claims. Indeed, Plaintiffs allege that they would not have invested their money in the LLCs if they had known of Defendants’ improper conduct, such as paying themselves illegal commissions. (TAC, ¶¶ 123-123.10.) In other words, the gravamen of the claim is injury to Plaintiffs themselves. ((See Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 107 [finding that the allegation that the value of an individual stockholder’s stock was diminished by the defendants’ actions could properly be brought as a direct action because the plaintiff “[did] not contend that the diminished value reflects an injury to the corporation and resultant depreciation in the value of the stock”].) Therefore, the Court finds that Defendants have failed to show that Plaintiffs’ claims are derivative in nature and thus failed to show that Plaintiffs do not have standing to proceed on any of their claims.

Fraud Claims

Next, Defendants argue that the “operational fraud” claims are not pleaded with the requisite specificity. In light of the fact that the Court has sustained Defendants’ special demurrer to the fraud causes of action, and other than agreeing with the well-settled rule that fraud claims must be pleaded with factual particularity, the Court need not and does not consider whether a sub-set of the fraud claims are sufficiently specific. For the same reason, the Court denies the motion to strike what Defendants characterize as “open-ended and non-specific ‘catch-all’ fraud allegations” as moot.

Statute of Limitations

Defendants contend that Plaintiffs included three new investments in the TAC, and that all claims relating to those three investments (Loggins Corners, Tower Plaza, and TJ Maxx) are time-barred. These investments were made in 2012 and 2013. (TAC, ¶ 5.) In support of delayed discovery, Plaintiffs allege that they were placed on notice of Defendants’ alleged fraudulent conduct on or around December 15, 2016. (TAC, ¶ 119.) But because these three investments made their first appearance in 2020 when the TAC was filed, the applicable statutes of limitations have already run. ((See Code Civ. Proc., § 338, subd. (d) [three-year statute of limitations for fraud]); (American Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451, 1479 [three-year statute of limitations for breach of fiduciary duty claims based on fraud]); (Code Civ. Proc., § 338, subd. (a) [three-year statute of limitations for an action upon a liability created by statute].)

Defendants also contend that the relation-back doctrine does not apply to the newly-added investments. “Under the relation-back doctrine, an amendment relates back to the original complaint if the amendment (1) rests on the same general set of facts; (2) involves the same injury; and (3) refers to the same instrumentality.” ((Pointe San Diego Residential Community, L.P. v. Procopio, Cory, Hargreaves & Savitch, LLP (2011) 195 Cal.App.4th 265, 276.) “In determining whether the amended complaint alleges facts that are sufficiently similar to those alleged in the original complaint, the critical inquiry is whether the defendant had adequate notice of the claim based on the original pleading.” ((Id. at p. 277.) Plaintiffs contend that Defendants had adequate notice of Loggins Corners and Tower Plaza because those two were purchased through a 1031 exchange from Market at Southpark, which was an investment that was referenced in the earlier complaints. Plaintiffs also contend that Defendants had adequate notice of all three because the parties exchanged discovery about all three. The Court does not find that Defendants had adequate notice of Loggins Corners, Tower Plaza, and TJ Maxx based on the original pleading. As Defendants point out, Plaintiffs have offered no authority for the proposition that what happens in discovery has any bearing on the relation-back doctrine. Further, any notice Defendants may have had as to Loggins Corners and Tower Plaza is oblique at best and entirely speculative at worst. The Loggins Corners, Tower Plaza, and TJ Maxx investments also do not involve the same injury or the same instrumentality. The injuries as to Loggins Corners, Tower Plaza, and TJ Maxx are different from the injuries as to the other 17 investments because they were entirely different investments. Similarly, while Plaintiffs allege a general “scheme” of fraudulent activity that induced them into investing in these entities, the actual “instrumentality” must have been different. In other words, Plaintiffs could not have relied on the allegedly false statements in the Offering Documents for any other investment when deciding to invest in Loggins Corners, Tower Plaza, and TJ Maxx. Accordingly, the Court finds that the addition of Loggins Corners, Tower Plaza, and TJ Maxx do not relate back to the date of the filing of the original Complaint, and thus, the claims as to these three investments are barred by the statute of limitations. The motion to strike as to the allegations pertaining to Loggins Corners, Tower Plaza, and TJ Maxx is granted.[1]

Next, Defendants contend that most of Plaintiffs’ securities fraud claim is time-barred. In support of the fourth cause of action for securities fraud, Plaintiffs allege that Defendants violated Corporations Code sections 25401, 25501, 25504, and 25504.1 by making sales of the investments to Plaintiffs by (1) employing devices, schemes, and artifices to defraud, (2) making untrue statements of material facts, (3) failing to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, and (4) engaging in acts, practices and courses of business which operated as a fraud and deceit upon Plaintiffs. (TAC, ¶ 156.) This claim is subject to a five-year statute of repose. ((Corp. Code, § 25506, subd. (b) [“For proceedings commencing on or after January 1, 2005, no action shall be maintained to enforce any liability created under Section 25500, 25501, or 25502 (or Section 25504 or Section 25504.1 insofar as they related to those sections) unless brought before the expiration of five years after the act or transaction constituting the violation or the expiration of two years after the discovery by the plaintiff of the facts constituting the violation, whichever shall first expire.”].) Thus, Defendants cannot be held liable for violations occurring before October 13, 2012.[2] But the only portion of the TAC that Defendants single out to be stricken based on this argument is paragraph 155 in full, which is the standard allegation incorporating all prior allegations by reference. Because Defendants acknowledge that some of the 17 investments are not time-barred, striking the entirety of paragraph 155 would be an overreach. Therefore, the Court grants the motion to strike as to paragraph 155 insofar as it pertains to the time-barred portions of the securities fraud cause of action.

Securities Fraud

Defendants argue that the securities fraud cause of action fails anyway because Plaintiffs have failed to allege facts showing that the transactions at issue qualify as a sale of a security. ((See AREI II Cases (2013) 216 Cal.App.4th 1004, 1012 [“Of particular importance to this dispute is section 25401 of the Act, which prohibits misrepresenting or omitting material facts in connection with the purchase or sale of securities.”].) Defendants acknowledge that interest in a limited liability company or limited partnership can be a security, but Defendants contend that Plaintiffs have failed to plead that the subject transactions qualify. The Court finds that this element has been adequately pleaded—Plaintiffs allege that they were sold investments in the investment entities. Next, Defendants contend that those investments that involved section 1031 exchanges are not securities. The version of section 1031 in effect at the time of these real estate exchanges took place provides that the tax benefit for the exchange of in-kind real property “shall not apply to any exchange of . . . other securities or evidences of indebtedness or interest.” (26 U.S.C. section 1031, subd. (a)(2)(C) [version effective through December 21, 2017].) According to Defendants, because Plaintiffs received tax benefits from 1031 exchanges, the transactions could not have involved securities. But Plaintiffs do not allege that they invested in real property, and the securities fraud claim is not based on any allegation of transactions involving the exchange of real property. Therefore, the demurrer to the fourth cause of action is overruled.

Requests for Relief

Defendants move to strike Plaintiffs’ prayer for nonrestitutionary disgorgement, “actual damages” for the securities fraud claim, and benefit-of-the-bargain damages as part of rescission.

First, Defendants argue that the prayer for nonrestitutionary disgorgement is improper for the same reasons they argue that Plaintiffs lack standing—that the underlying claims are derivative in nature. Because the Court finds that Plaintiffs have not alleged a derivative action, the Court also finds that the prayer for nonrestitutionary disgorgement is proper.

Second, Defendants argue that Plaintiffs cannot recover actual damages for the securities fraud claim because Plaintiffs allege that they still own the subject securities. ((See Corp. Code, § 25501 [a plaintiff may only sue for damages under section 25401 if they no longer own the security]); TAC, ¶ 7 [alleging that Plaintiffs still own interests in Cave Springs, Overland Crossing, Shops at Cicero, Fenton Commons, and College Marketplace].) Plaintiffs do not offer a rebuttal to this argument, which the Court construes as a concession of its merits. Therefore, the motion to strike as to the prayer for actual damages under the fourth cause of action (TAC, ¶ 161) is granted.

Third, Defendants argue that Plaintiffs are not entitled to benefit-of-the-bargain damages as a component of their prayer for rescission. (Prayer for Relief, ¶¶ 2, 2.2 [prayer for relief “[t]hat this Court declare that Plaintiffs’ investments in the real estate syndications sponsored by Defendants and invested in by Plaintiffs be rescinded and that: . . . 2.2 Plaintiffs are awarded their consequential damages in an amount representing a fair and reasonable rate of return on the investments from the time the investments were made.” (emphasis added)].) Defendants argue that Plaintiffs’ proposed rescission remedy essentially includes benefit-of-the-bargain damages. ((See Salahutdin v. Valley of California, Inc. (1994) 24 Cal.App.4th 555, 564 [“The ‘benefit of the bargain’ measure of damages is the difference between the actual value of what the plaintiff has received and that which he expected to receive.”].) Defendants contend that California law precludes “giving [Plaintiffs] the benefits they would have obtained had the rescinded contract been performed.” ((Sharabianlou v. Karp (2010) 181 Cal.App.4th 1133, 1148.) In other words, the award of rescission precludes the award of benefit-of-the-bargain damages. Defendants clarify that they are not moving to strike Plaintiffs’ prayer for rescission or their separate prayer for compensatory damages. In response, Plaintiffs points out that Civil Code section 1692 provides that “[a] claim for damages is not inconsistent with a claim for relief based upon rescission.” But as correctly noted by Defendants, Sharabianlou explicitly held that benefit-of-the-bargain damages are “not legally permissible under Civil Code section 1692.” (Ibid.) Therefore, the Court grants the motion to strike as to paragraph 2.2 of the prayer for relief.

Irrelevant Allegations

Lastly, Defendants move to strike what they characterize as irrelevant allegations, of which there are three categories: (1) allegations that do not relate to Plaintiffs’ own investments or investment decisions, (2) allegations that concern legal issues and discovery disputes, (3) miscellaneous factually irrelevant allegations.

The Court grants the motion to strike for the reasons set forth by Defendants as to the following: paragraphs 10 (lines 18-20), 61-62, 63 (lines 1-6), 64, 92 (lines 14-20), 100 (lines 19-21), 124-128, 130 (17-23).

Conclusion

Based on the foregoing, the Court rules as follows:

Defendants’ special demurrer to the second and third causes of action is sustained, with leave to amend.

Defendants’ special demurrer to the first cause of action is overruled.

Defendants’ general demurrer to the first, second, third, and fourth causes of action is overruled.

Defendants’ motion to strike is granted as to the following: the references to Loggins Corner, Tower Plaza, and TJ Maxx in paragraphs 5 and 36, paragraph 155 insofar as it pertains to the time-barred portions of the fourth cause of action, paragraph 161, paragraph 2.2 of the prayer for relief, and paragraphs 10 (lines 18-20), 61-62, 63 (lines 1-6), 64, 92 (lines 14-20), 100 (lines 19-21), 124-128, 130 (17-23). Defendants’ motion to strike is otherwise denied.

Defendants are ordered to give notice of this ruling.

DATED: July 27, 2020 ________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court


[1] The Court notes that Defendants attach an Appendix A to their motion to strike that groups together the portions of the TAC that apply to each “category” of allegations that they seek to strike. Accordingly, the Court grants the motion to strike as to § 1 of Appendix A, except for paragraph 155.

[2] The original Complaint was filed October 13, 2017.

Case Number: BC679693    Hearing Date: March 12, 2020    Dept: 50

 

Superior Court of California

County of Los Angeles

Department 50

raymond shofler et al.,

Plaintiffs,

vs.

ALAN C. FOX et al.

Defendants.

Case No.:

BC679693

Hearing Date:

March 12, 2020

Hearing Time:

8:30 a.m.

[TENTATIVE] ORDER RE:

PLAINTIFFS’ MOTION FOR SANCTIONS PURSUANT TO CODE OF CIVIL PROCEDURE SECTION 128.5

Background

Plaintiffs Raymond Shofler and Barbara Shofler, individually and on behalf of The Raymond and Barbara Shofler Family Trust and The Raymond Shofler IRA (collectively, “Plaintiffs”) filed this instant action against defendants Alan C. Fox, individually and as Trustee of the Alan C. Fox Revocable Trust (“Fox”) and ACF Property Management, Inc. (“ACF”) (collectively, “Defendants”) alleging Defendants made false representations regarding investment opportunities.

Plaintiffs now move for an order imposing sanctions pursuant to Code of Civil Procedure section 128.5 against Defendants and counsel for Defendants (specifically, Daniel B. Levin, E. Martin Estrada, and Mark R. Yohalem of the law firm Munger, Tolles & Olson LLP). Defendants oppose.

Discussion

Code of Civil Procedure section 128.5, subdivision (a) provides: “A trial court may order a party, the party’s attorney, or both, to pay the reasonable expenses, including attorney’s fees, incurred by another party as a result of actions or tactics, made in bad faith, that are frivolous or solely intended to cause unnecessary delay.” The statute defines frivolous as “totally and completely without merit or for the sole purpose of harassing an opposing party.” ((Code Civ. Proc., § 128.5, subd. (b)(2).) An objective standard applies in determining whether a lawsuit is frivolous. ((See Finnie v. Town of Tiburon (1988) 199 Cal.App.3d 1, 12 [“a suit indisputably has no merit only where any reasonable attorney would agree that the action is totally and completely without merit” (internal quotations omitted)].) Sanctions are imposed only for the “most egregious conduct” and in the “clearest of cases.” ((Luke v. Baldwin-United Corp. (1985) 167 Cal.App.3d 664, 668-669.) On a motion for sanctions under Code of Civil Procedure section 128.5, the moving party has the burden of proof. ((Weisman v. Bower (1987) 193 Cal.App.3d 1231, 1236.)

Plaintiffs seek to impose sanctions against Defendants for the filing of a motion to disqualify counsel, namely, the motion to disqualify filed by Defendants on July 17, 2019. That motion was denied on October 1, 2019. (See 10/1/19 Order Re: Defendants’ Motion for Disqualification Based on Indirect Communication with a Represented Party.) Defendants’ motion to disqualify was based on the assertion that counsel for Plaintiffs, Leonard, Dicker, & Schreiber LLP (“LDS”), indirectly communicated with Fox regarding subject matter on which LDS knew Fox to be represented by counsel. The communications were characterized as “indirect” because the communications were purportedly made through an intermediary, Carl Albert, another one of Fox’s investors. Essentially, Defendants contended that Mr. Albert was directed by LDS attorneys to meet with Fox and to discuss a pending lawsuit against Fox similar to the instant one (Ross v. ACF, Case No. BC576879). The Court ultimately found that there was insufficient evidence of any “direction” by LDS attorneys—the evidence being, namely, that LDS and Mr. Albert had some communications about the Ross v. ACF case, and that subsequently, Mr. Albert met with Fox in person to discuss Mr. Albert’s concerns about the allegations in the Ross v. ACF case and whether Fox had defrauded Mr. Albert.

Plaintiffs contend that the motion to disqualify was frivolous because Defendants did not have evidence to support their conclusions about the nature of the relationship between Mr. Albert and LDS at the time of Mr. Albert’s meeting with Fox. Plaintiffs argue that no meaningful legal authority was cited in Defendants’ motion, that no declaration of Alan Fox was filed in support of the motion, that no factual bases existed for the motion, and that Defendants (through their counsel) intentionally misrepresented evidence.

Without completely rehashing the evidence presented in support of and in opposition to the motion to disqualify, the Court concludes that Plaintiffs have not demonstrated that the motion to disqualify was bad faith or totally and completely without merit, or that the motion was filed solely to delay or to harass Plaintiffs. The motion to disqualify was not replete with citations to legal authority, but it is unclear how the number of citations in a brief supports a finding of lack of merit. Plaintiffs do not identify any cases that should have been cited but were not, nor do Plaintiffs identify any cases that would have directly challenged Defendants’ position as to disqualification. It is also unclear how including a new[1] declaration from Alan Fox was necessary to the motion to disqualify, as there is no evidence that Fox’s testimony had changed or that Fox’s previous declaration was unreliable for any reason. The Court also disagrees that there was no factual basis for the motion to disqualify. Defendants’ evidence of the timeline of events was the factual basis for the motion. That the Court determined that Defendants’ proffered evidence was insufficient to prove LDS’s direct involvement in Mr. Albert’s meeting with Fox does not mean that there was no evidence of LDS’s direct involvement in Mr. Albert’s meeting with Fox. Plaintiffs assert that Defendants misrepresented and misread the evidence and that they relied on speculation, innuendo, and misstatements, but the Court does not find that Plaintiffs have shown that Defendants and their counsel acted in bad faith or “for the sole purpose of harassing” Plaintiffs. While Defendants’ counsel may have taken an aggressive stance in moving to disqualify LDS as counsel for Plaintiffs, and while the Court ultimately found that the motion to disqualify was unmeritorious, the Court does not find that the motion was frivolous or that it was filed in bad faith or to cause delay.

Conclusion

Based on the foregoing, Plaintiffs’ motion for sanctions pursuant to Code of Civil Procedure section 128.5 is denied.

Defendants are ordered to give notice of this ruling.

DATED: March 12, 2020 ________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court


[1] As noted by Defendants, a declaration from Alan Fox was attached to the motion to disqualify, but it was a declaration filed previously and in support of an altogether different motion. (Yohalem Decl., ¶ 3, Ex. B, Ex. 12.)

Case Number: BC679693    Hearing Date: March 04, 2020    Dept: 50

Superior Court of California

County of Los Angeles

Department 50

raymond shofler, et al.,

Plaintiffs,

vs.

alan c. fox, et al.

Defendants.

Case No.:

BC 679693

Hearing Date:

March 4, 2020

Hearing Time:

8:30 a.m.

[TENTATIVE] ORDER RE:

PLAINTIFFS’ AMENDED MOTION FOR LEAVE TO FILE THIRD AMENDED COMPLAINT

Background

Plaintiffs Raymond Shofler and Barbara Shofler, individually and on behalf of The Raymond and Barbara Shofler Family Trust and The Raymond Shofler IRA (collectively, “Plaintiffs”) filed this action on October 13, 2017 against Defendants Alan C. Fox, individually and as Trustee of the Alan C. Fox Revocable Trust (“Fox”) and ACF Property Management, Inc. (“ACF”) (jointly, “Defendants”). The operative Second Amended Complaint (“SAC”) was filed on March 5, 2018, and asserts causes of action for breach of fiduciary duty, fraud (misrepresentation), fraud (concealment), securities fraud, and violation of Corporations Code section 17704.10. Plaintiffs allege that they were fraudulently induced by Defendants into making certain commercial real estate investments.

Plaintiffs now move for leave to file a Third Amended Complaint, which adds allegations that describe the various misrepresentations and omissions allegedly made by Defendants and a specific request for the remedies of nonrestitutionary disgorgement and benefit of the bargain damages. Defendants oppose.

Legal Standard

Pursuant to Code of Civil Procedure section 473(a)(1), “[t]he court may, in furtherance of justice, and on any terms as may be proper, allow a party to amend any pleading.” Amendment may be allowed at any time before or after commencement of trial. ((Code Civ. Proc., § 576.) “[T]he court’s discretion will usually be exercised liberally to permit amendment of the pleadings. The policy favoring amendment is so strong that it is a rare case in which denial of leave to amend can be justified.” (Howard v. County of San Diego (2010) 184 Cal.App.4th 1422, 1428 (internal citations omitted).) “If the motion to amend is timely made and the granting of the motion will not prejudice the opposing party, it is error to refuse permission to amend….” (Morgan v. Sup. Ct. (1959) 172 Cal.App.2d 527, 530.) Prejudice includes “delay in trial, loss of critical evidence, or added costs of preparation.” (Solit v. Tokai Bank, Ltd. New York Branch (1999) 68 Cal.App.4th 1435, 1448.)

A motion to amend a pleading before trial must include a copy of the proposed amendment or amended pleading, which must be serially numbered to differentiate it from previous pleadings or amendments. ((Cal. Rules of Court, rule 3.1324(a).) The motion must also state what allegations are proposed to be deleted or added, by page, paragraph, and line number. ((Ibid. .) Finally, a separate supporting declaration specifying the effect of the amendment, why the amendment is necessary and proper, when the facts giving rise to the amended allegations were discovered, and the reason why the request for amendment was not made earlier must also accompany the motion. (Cal. Rules of Court, rule 3.1324(b).)

Discussion

The Court finds that Plaintiffs have complied with the procedural requirements of CRC 3.1324. Plaintiff have submitted a declaration from counsel setting forth the basis for adding the new allegations—essentially that during the litigation of this case, the parties have taken various positions as to the scope of discovery that necessitate amending the operative complaint to clarify and narrow the issues. (Leonard Decl., ¶¶ 3-6.) Plaintiffs assert that Defendants will not be prejudiced by the amendments because there are no new claims being added to the case, and the factual bases for the amendments have long been known to Defendants.

Defendants contend that the filing of the proposed Third Amended Complaint will result in a delay and will require the parties to expend additional time and expense on discovery and motion practice. The Court notes that the final status conference and trial dates were recently vacated. (See 2/25/20 Minute Order.) Therefore, to the extent that Defendants’ argument is based on the closeness of a trial date, any prejudice has been mitigated. Defendants also argue that the amendments are essentially futile (e.g., that Plaintiffs are improperly adding new claims, that the statute of limitations bars these “new” claims, and that Plaintiffs do not have standing to raise these “new” claims), but the legal deficiency of the proposed amendment does not warrant denial of leave to amend. ((See Kittredge Sports Co. v. Superior Court (1989) 213 Cal.App.3d 1045, 1048 [“the preferable practice would be to permit the amendment and allow the parties to test its legal sufficiency by demurrer, motion for judgment on the pleadings or other appropriate proceedings”].)

Defendants separately argue that leave to amend the fifth cause of action for violations of Corporations Code section 17704.10 should be denied because an order striking that cause of action was issued on May 17, 2018. However, as noted by Plaintiffs, on May 30, 2018, Defendants’ filed an answer to the Second Amended Complaint wherein Defendants answered the fifth cause of action. Plaintiffs contend that the parties have since treated the fifth cause of action as if it were at issue and that Plaintiffs have conducted discovery as to the fifth cause of action. Based on this, Plaintiffs argue that Defendants have waived any objection to the fifth cause of action. But Plaintiffs offer no authority for this proposition, and the Court is unaware of any authority stating that answering a cause of action that has been ordered stricken revives the cause of action. The Court also notes that Plaintiffs do not offer, even in reply, an explanation for why adding the cause of action for violations of Corporations Code section 17704.10 is necessary and proper.

The Court notes that Defendants filed a sur-reply on February 20, 2020, which addresses what Defendants characterize as “false statements of fact” made by Plaintiffs in their reply and requests sanctions pursuant to Code of Civil Procedure section 128.5. Because the arguments contained in the sur-reply are not necessary to the disposition of the instant motion for leave to amend, and because Plaintiffs have not had the opportunity to respond to the request for sanctions, the Court will set a separate hearing on Defendants’ request for sanctions and will also set a complete briefing schedule for that request. ((See Code Civ. Proc., § 128.5, subd. (c) [“Expenses pursuant to this section shall not be imposed except on notice contained in a party’s moving or responding papers or, on the court’s own motion, after notice and opportunity to be heard.”].)

Conclusion

For the foregoing reasons, Plaintiffs’ motion is granted, except as to the addition of the fifth cause of action for violations of Corporations Code section 17704.10.

The Court orders Plaintiffs to file and serve the Third Amended Complaint in accordance with this order within 3 days of the date of this order.

The Court sets the hearing on Defendants’ motion for sanctions under Code of Civil Procedure section 128.5 for ___________, at 8:30 a.m., in Dept. 50. Plaintiffs are to file any opposition by ___________, and Defendants are to file any reply by __________.

Plaintiffs are ordered to give notice of this ruling.

DATED: March 4, 2020 ________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court

Case Number: BC679693    Hearing Date: January 09, 2020    Dept: 50

Superior Court of California

County of Los Angeles

Department 50

raymond shofler, et al.,

Plaintiffs,

vs.

alan c. fox, et al.,

Defendants.

Case No.:

BC 679693

Hearing Date:

January 9, 2020

Hearing Time:

8:30 a.m.

[TENTATIVE] ORDER RE:

APPLICATION FOR ADMISSION PRO HAC VICE

A. Zoe Bedell (“Movant”) applies to the Court for admission pro hac vice to appear in this action on behalf of Defendants Alan C. Fox and ACF Property Management, Inc. (“Defendants”). The application is submitted with declarations by Movant and by local counsel John L. Schwab made under penalty of perjury.

The Application is submitted with a declaration by A. Zoe Bedell and John L. Schwab made under penalty of perjury and is in compliance with the requirements set forth in California Rules of Court Rule 9.40(d). Accordingly, the unopposed Application is granted.

Defendants are ordered to give notice of this ruling.

DATED: January 9, 2020

________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court

Case Number: BC679693    Hearing Date: December 18, 2019    Dept: 50

Superior Court of California

County of Los Angeles

Department 50

RAYMOND SHOFLER, et al.

Plaintiffs,

vs.

ALAN C. FOX., et al.

Defendants.

Case No.:

BC 679693(and related cases)

Hearing Date:

December 18, 2019

Hearing Time:

8:30 a.m.

[TENTATIVE] ORDER RE:

COURT’S MOTION TO APPOINT A DISCOVERY REFEREE

Background

Plaintiffs Raymond Shofler and Barbara Shofler, individually and on behalf of The Raymond and Barbara Shofler Family Trust and The Raymond Shofler IRA (collectively, “Plaintiffs”) filed this action on October 13, 2017 against Defendants Alan C. Fox, individually and as Trustee of the Alan C. Fox Revocable Trust (“Fox”) and ACF Property Management, Inc. (“ACF”) (jointly, “Defendants”). The operative Second Amended Complaint (“SAC”) was filed on March 5, 2018, and asserts causes of action for breach of fiduciary duty, fraud (misrepresentation), fraud (concealment), securities fraud, and violation of Corporations Code section 17704.10. Plaintiffs allege that they were fraudulently induced by Defendants into making certain commercial real estate investments. This case is one of ten related cases involving similar claims against Defendants.

Numerous discovery disputes have arisen between the parties, resulting in many ex parte applications, informal discovery conferences and discovery motions. As a result, the Court has on its own motion proposed the appointment of a discovery referee to hear and determine all discovery motions and disputes in this action pursuant to CCP §639(a)(5).

Discussion

“Implicit in the statutory requirement that the reference be ‘necessary’ is the Legislature's acknowledgment of a litigant's right of access to the courts without the payment of a user's fee, and the concomitant notion that there ought to be a finding of something out of the ordinary before the services of a referee are forced upon a nonconsenting party.” (Hood v. Superior Court (1999) 72 Cal.App.4th 446, 449.)

But a court may direct discovery motions to a discovery referee where a majority of the following factors are present: “(1) there are multiple issues to be resolved; (2) there are multiple motions to be heard simultaneously; (3) the present motion is only one in a continuum of many; (4) the number of documents to be reviewed (especially in issues based on assertions of privilege) make the inquiry inordinately time-consuming.” (Taggares v. Superior Court (1998) 62 Cal.App.4th 94, 105.)

Here, the parties themselves have identified numerous discovery disputes that have arisen. At least twelve pending motions regarding discovery were identified in the “Joint Ex Parte Application for an Order Calendaring a Status Conference” recently filed in this matter on December 11, 2019. These include multiple motions to compel or compel further and motions for protective orders. The discussion of the discovery issues set forth in Defendants’ Response to this Court’s Order to Show Cause Why the Court Should Not Order a Discovery Referee further illustrates the extensive nature of the discovery disputes pending before this Court. The Court already has spent an extraordinary amount of time at ex parte hearings and informal discovery conferences trying to assist the parties in resolving their disputes, along with ruling on various discovery motions.

Appointment of a discovery referee is necessary in light of the complexity and time-consuming nature of the discovery disputes. Contrary to the assertion of Plaintiffs, the Court does not find that appointment of a discovery referee will be costlier than resolving the discovery disputes through motion practice.

The Court finds that a majority of the factors identified in Taggares, supra, are present. There are multiple discovery issues to be resolved; some of these issues may need to be heard simultaneously; and resolution of these issues are likely to be extremely time-consuming.

Conclusion

Based on the foregoing, the Court’s own motion to appoint a discovery referee for all discovery is granted. The Court appoints Hon. Ronald S. Prager, Ret. as referee at the hourly rate of $690 hour. The referee may be contacted at Judicate West, 1851 E. First Street, Suite 1600, Santa Ana, CA 92705; telephone number (714) 834-1340. The parties are to share the costs and fees of the referee equally (i.e., one-half by Plaintiffs and one-half by Defendants). This cost allocation is without prejudice to adjustment depending upon the outcome of the case. No party has established an economic inability to pay a pro rata share of the referee’s fee.

Plaintiffs are ordered to give notice.

DATED: December 18, 2019 ________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court

Case Number: BC679693    Hearing Date: November 01, 2019    Dept: 50

Superior Court of California

County of Los Angeles

Department 50

raymond shofler, et al.,

Plaintiffs,

vs.

alan c. fox, et al.

Defendants.

Case No.:

BC 679693

Hearing Date:

November 1, 2019

Hearing Time:

8:30 a.m.

[TENTATIVE] ORDER RE:

DEFENDANTS’ MOTION TO COMPEL FURTHER RESPONSES TO SECOND SET OF REQUESTS FOR PRODUCTION AND FIRST SET OF SPECIAL INTERROGATORIES

Background

Defendants Alan C. Fox, individually and as Trustee of the Alan C. Fox Revocable Trust (“Fox”) and ACF Property Management, Inc. (“ACF”) (jointly, “Defendants”) move for an order compelling further responses from Plaintiffs Raymond Shofler and Barbara Shofler, individually and on behalf of The Raymond and Barbara Shofler Family Trust and The Raymond Shofler IRA (collectively, “Plaintiffs”) to Defendants’ Requests for Production of Documents, Set Two, Nos. 59, 60 and Special Interrogatories, Set One, No. 16.

The Court notes that Plaintiffs filed their opposition on October 30, 2019 with no explanation for its exceptional untimeliness. In any event, the Court notes that Defendants filed a supplemental reply addressing the substantive arguments made in the late-filed opposition (in addition to objection to its untimeliness). Therefore, the Court exercises its discretion to consider the late-filed opposition and the supplemental reply. But the Court admonishes the parties that strict compliance with the Code of Civil Procedure and applicable rules of court will be expected going forward.

Discussion

Code of Civil Procedure section 2031.310, subdivision (a) permits a propounding party to move for an order compelling a further response to a demand for inspection if the propounding party deems that a statement of compliance is incomplete, a representation of inability to comply is inadequate, incomplete, or evasive, or an objection is without merit or too general. (Code Civ. Proc., § 2031.310, subd. (a).) A motion to compel further responses to a demand for inspection must set forth specific facts showing good cause for the discovery sought and must be accompanied by a meet and confer declaration. ((Code Civ. Proc., § 2031.310, subd. (b).)

Code of Civil Procedure section 2030.300, subdivision (a) permits a propounding party to move for an order compelling a further response to an interrogatory if the propounding party deems that an answer is “evasive or incomplete” or that an objection is “without merit or too general.” (Code Civ. Proc., § 2030.300(a).) Such a motion must be accompanied by a meet and confer declaration. (Code Civ. Proc., § 2030.300(b)(1).)

Request for Production No. 59: All DOCUMENTS that constitute, reflect, or relate to any COMMUNICATIONS relating to YOUR investments in the ENTITIES between YOU and any PERSON who advised YOU about such investments.

In response to this request, Plaintiffs objected that the request fails to specify a single category of documents with reasonable particularity, that the request invades the attorney-client and work product privileges, and that the term “relating” is ambiguous and unintelligible. Plaintiffs also provided a substantive response agreeing to produce all communications between the Shoflers and any other persons who advised the Shoflers about their investments with the Defendants concerning such investments. Plaintiffs also stated that they would not be producing any tax returns, attorney-client communications, bank statements, or canceled checks reflecting money invested and money repaid pursuant to the financial privacy privilege.

Request for Production No. 60: All e-mails between YOU and any PERSON relating to YOUR investments in the ENTITIES.

Plaintiffs interposed the same objections as those in response to Request No. 59. Plaintiffs also agreed to produce all communications between the Shoflers and Defendants and all documents that mention Alan Fox, ACF Property Management, Inc., or any of the shopping centers or shopping center investments.

Defendants contend that Plaintiffs have only produced a limited number of letters that Defendants sent Plaintiffs but have yet to produce any email communications regarding their investments with Defendants. Defendants contend that Plaintiffs’ failure to produce documents means that Plaintiffs have not conducted a reasonable search for communications (that Defendants know exist). Plaintiffs do not dispute that responsive emails exist and were not produced to Defendants. Instead, Plaintiffs argue that “by definition,” Defendants already have these emails. (Opp’n, p. 5:10-11.) But Plaintiffs did not object on this basis in responding to these requests.

The Court notes that Defendants do not argue that Plaintiffs’ objections are meritless and do not appear to be seeking further responses without objections. Rather, Defendants seek an order compelling Plaintiffs to “conduct a diligent search and produce all non-privileged, responsive documents in response to RFPs Nos. 59-60 that are in Plaintiffs’ possession, custody, or control.” (Mot. pp. 9:28 – 10:2.) Code of Civil Procedure section 2031.310 does not give the Court authority to make such an order. Moreover, since the parties agree that Plaintiffs agreed to produce documents, the only basis upon which the Court can order a further response pursuant to section 2031.310 is if there is a showing that Plaintiffs’ statement of compliance is incomplete. Defendants have failed to demonstrate that Plaintiffs’ statement of compliance is incomplete. Instead, it appears that Defendants are arguing that Plaintiffs’ statement of compliance is untrue—that Plaintiffs stated that they undertook a diligent search but had not actually done so. Even so, the only basis upon which Defendants seek relief is Code of Civil Procedure section 2031.310. Because the Court finds that Defendants have failed to establish that they are entitled to relief pursuant to section 2031.310, the motion is denied as to Request Nos. 59 and 60.

Special Interrogatory No. 16: Please IDENTIFY all investments that YOU have made.

Plaintiffs objected to this interrogatory on the grounds that it is compound and unlimited as to time. Plaintiffs also substantively responded by listing the 20 shopping center investments with Defendants. Plaintiffs expressly stated that they were limiting their answer to the investments at issue in this case.

Defendants contend that a further response is required because Plaintiffs failed to provide an answer with regard to non-ACF investments. Defendants agreed during the meet and confer process to limit this interrogatory to the time period during which Plaintiffs invested with Defendants, but Plaintiffs did not agree to provide a further response even with this limitation. Plaintiffs counter that they produced over 1,000 pages of documents that are responsive to this interrogatory. But Plaintiffs did not invoke Code of Civil Procedure section 2030.230 (or otherwise comply with its requirements) in their responses to Special Interrogatory No. 16 as required by Code of Civil Procedure section 2030.210. Therefore, the Court finds that a further response is required.

Conclusion

For the foregoing reasons, Defendants’ motion to compel further responses is denied in part and granted in part.

Plaintiffs are ordered to serve complete verified responses, without objections, to Special Interrogatory No. 16 within 20 days of the date of service of this Order.

Defendants are ordered to give notice of this ruling.

DATED: November 1, 2019 ________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court

Case Number: BC679693    Hearing Date: October 30, 2019    Dept: 50

Superior Court of California

County of Los Angeles

Department 50

raymond shofler, et al.,

Plaintiffs,

vs.

alan c. fox, et al.

Defendants.

Case No.:

BC 679693

Hearing Date:

October 30, 2019

Hearing Time:

8:30 a.m.

[TENTATIVE] ORDER RE:

DEFENDANTS’ MOTION TO COMPEL FURTHER RESPONSES TO FIRST SET FO REQUESTS FOR PRODUCTION

Background

Defendants Alan C. Fox, individually and as Trustee of the Alan C. Fox Revocable Trust (“Fox”) and ACF Property Management, Inc. (“ACF”) (jointly, “Defendants”) move for an order compelling further responses from Plaintiffs Raymond Shofler and Barbara Shofler, individually and on behalf of The Raymond and Barbara Shofler Family Trust and The Raymond Shofler IRA (collectively, “Plaintiffs”) to Defendants’ Requests for Production of Documents, Set One, Nos. 21, 22, 23, 24, 25, 26, and 27. Plaintiffs oppose.

Discussion

On receipt of a response to a demand for inspection, the demanding party may move for an order compelling a further response if the demanding party deems that the response is deficient. (Code Civ. Proc., § 2031.310, subd. (a).) The motion must be accompanied by a meet and confer declaration under Code of Civil Procedure section 2016.040. (Code Civ. Proc., § 2031.310, subd. (b)(2).)

A motion to compel further responses to a demand for inspection must also set forth specific facts showing good cause justifying the discovery sought by the inspection demand. (Code Civ. Proc., § 2031.310, subd. (b)(1).) It is not necessary for the motion to show that the material sought will be admissible in evidence. “Good cause” may be found to justify discovery where specific facts show that the discovery is necessary for effective trial preparation or to prevent surprise at trial. (Associated Brewers Distributing Co. v. Superior Court of Los Angeles County (1967) 65 Cal.2d 583, 586-588; see also Code Civ. Proc., §§ 2017.010, 2019.030, subd. (a)(1) [information is discoverable if it is itself admissible in evidence or appears reasonably calculated to lead to the discovery of admissible evidence and it is not unreasonably cumulative or duplicative, or is obtainable from some other source that is more convenient, less burdensome, or less expensive]; Lipton v. Superior Court (1996) 48 Cal.App.4th 1599, 1611-1612 [noting a “party may obtain discovery regarding any matter, not privileged, that is relevant to the subject matter involved in the pending action . . . if the matter either is itself admissible in evidence or appears reasonably calculated to lead to the discovery of admissible evidence . . . .”].)

The seven requests at issue seek documents relating to Plaintiffs’ other investments and potential investments during the time they invested in the LLCs, including documents with information regarding Plaintiffs’ process for identifying potential investments, their due diligence in assessing investments, the rate of return and projected rate of return of their investments and potential investments, the scope and diversification of their investments, and their tax returns.[1] Plaintiffs objected to these requests on the grounds of lack of specificity, vagueness, irrelevance, attorney-client and work product privilege, and privacy (financial, taxpayer, and personal). Defendants contend that good cause exists to compel Plaintiffs to provide further responses and to produce responsive documents because these requests are directly relevant to Plaintiffs’ claim of consequential damages in the form of putative lost investment income. In other words, Plaintiffs would not have invested with Defendants if they knew Defendants took a markup and would have instead invested elsewhere. In order to test this claim, Defendants assert that they need information about Plaintiffs’ actual investment history.

Plaintiffs contend that, through the meet and confer process, Plaintiffs have agreed to produce records regarding their other investments for the relevant time-frame.[2] Therefore, the only remaining category of documents at issue is Plaintiffs’ tax returns. Plaintiffs argue that their tax returns are not relevant to their claim for consequential damages.

The California Supreme Court has approved of the framework set forth in Hill v. National Collegiate Athletic Assn. (1994) 7 Cal.4th 1, 35, for evaluating potential invasions of privacy. “The party asserting a privacy right must establish a legally protected privacy interest, an objectively reasonable expectation of privacy in the given circumstances, and a threatened intrusion that is serious.” (Williams v. Superior Court (2017) 3 Cal.5th 531, 552.) “The party seeking information may raise in response whatever legitimate and important countervailing interests disclosure serves, while the party seeking protection may identify feasible alternatives that serve the same interests or protective measures that would diminish the loss of privacy.” (Ibid.) “A court must then balance these competing considerations.” (Ibid.) The right of privacy includes the right to privacy in financial matters, including personal tax returns. (Fortunato v. Superior Court (2003) 114 Cal.App.4th 475, 480-481; see also Pioneer Electronics, Inc. v. Superior Court (2007) 40 Cal.4th 360, 372 [noting that disclosure of contact information was not “particularly sensitive” as compared to disclosure of medical history or “details regarding one’s personal finances or other financial information”].)

Here, Plaintiffs argue that they have an objectively reasonable expectation of privacy in the given circumstances, in that Plaintiffs have not placed their tax returns at issue in this lawsuit, citing Wilson Superior Court, 63 Cal. App. 3e 825 (1976). Plaintiffs assert that they are not seeking damages based on taxes that were or were not incurred or the tax effects on their losses. Defendants counter that Plaintiffs have placed tax issues at issue by claiming that they were fraudulently induced to participate in 1031 exchanges due to “income tax” benefits, citing to paragraph 21.3 of the Second Amended Complaint. (See SAC, ¶ 21.3 [“Third, Defendants urge their investors to use their proceeds from each sale to invest in new shopping center investments, where Defendants again mark-up the purchase price, and the cycle starts over again. Defendants often inform investors that they may owe income tax if they do not buy a new investment through a 1031 exchange offered by Defendants. Plaintiffs are informed and believe, and on that basis allege, that Defendants recommend 1031 exchanges into new shopping center investments, even when there is little or no gain to be deferred, for the sole purpose of continuing to churn investor funds.”] Separately, Defendants argue that Plaintiffs have placed their tax returns at issue more broadly because the tax benefits received by Plaintiffs from their investments with Defendants relate to the value of the investments and would potentially reveal why Plaintiffs decided to invest. Finally, Defendants note that Plaintiffs may designate the tax returns as confidential pursuant to the parties’ stipulated protective order.

Based on the foregoing, the Court finds that Plaintiffs have shown that they have an objectively reasonable expectation of privacy in their personal tax returns and they have not placed their tax returns at issue in the litigation. Placing one’s tax returns at issue is not the same as a case with tax issues. Here, it appears that Defendants can explore the tax issues they identify without requiring Plaintiffs to produce their tax returns. Thus, the Court sustains Plaintiffs’ objections to the requests at issue on the basis of privacy and privilege. With regard to Plaintiffs’ remaining objections, they appear to be moot in light of the parties’ agreement limiting the scope of the request to a certain time period.

Conclusion

For the foregoing reasons, Defendants’ motion to compel further responses is denied with regard to the tax returns and granted with regard to the remaining responses based upon the agreements of the parties.

Plaintiffs are ordered to serve complete verified responses, without objections, consistent with the ruling above, regarding Defendants’ Requests for Production of Documents, Set One, Nos. 21, 22, 23, 24, 25, 26, and 27 within 20 days of the date of service of this Order.

Defendants are ordered to give notice of this ruling.

DATED: October 30, 2019 ________________________________

Hon. Teresa A. Beaudet

Judge, Los Angeles Superior Court


[1] Request for Production No. 21: All DOCUMENTS relating to the overall rate of return of YOUR investments, including on an annual basis and in aggregate form.

Request for Production No. 22: All DOCUMENTS relating to each investment made by YOU.

Request for Production No. 23: All DOCUMENTS relating to the scope of investment and diversification of YOUR investment.

Request for Production No. 24: All DOCUMENTS relating to the identity and processes of any third-parties that advised YOU regarding YOUR investment in the ENTITIES.

Request for Production No. 25: All DOCUMENTS relating to YOUR process for identifying a potential investment, including but not limited to the factors considered by YOU prior to making or declining to make an investment.

Request for Production No. 26: All DOCUMENTS relating to YOUR due diligence of investments or potential investments, including but not limited to any policies and procedures regarding such diligence.

Request for Production No. 27: All DOCUMENTS relating to projections of rate of return of investments made by YOU, including the projections made for each investment with the ENTITIES.

[2] The Court notes that the scope of the requests at issue has been limited by agreement of the parties to the time period of Plaintiffs’ investments with Defendants.

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