NOT TO BE PUBLISHED IN OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
WILLIAM MCCREADY et al.,
Plaintiffs and Appellants,
CBRE, INC., et al.,
Defendants and Respondents.
G050316, G050317, & G050667
(Super. Ct. No. 30-2013-00632262)
O P I N I O N
Appeal from judgments of the Superior Court of Orange County, Steven L. Perk, Judge. Affirmed in part, reversed in part.
Catanzarite Law, Kenneth J. Catanzarite, Nicole M. Catanzarite-Woodward, and Eric V. Anderton for Plaintiffs and Appellants.
Liner, Maribeth Annaguey, Kathryn L. McCann, and Dana P. Tykocinski for Defendant and Respondent CBRE, Inc.
Fingal, Fahrney & Clark and Richard L. Fahrney II for Defendant and Respondent Lee & Associates Commercial Real Estate Services, Inc. – El Toro.
Norton Rose Fulbright US, Robert M. Dawson and Tarifa B. Laddon for Defendants and Respondents Cushman & Wakefield, Inc., Cushman & Wakefield of California, Inc., and Cushman & Wakefield of San Diego, Inc.
* * *
The trial court sustained demurrers filed by the five respondents to this appeal. Plaintiffs appeal the ensuing judgments of dismissal. We reverse as to two of the respondents because their demurrers should have been overruled or sustained with leave to amend. We affirm with regard to the other three respondents.
This case concerns plaintiffs’ failed investments in commercial real estate. Two of the investments were structured as tenancies in common: (1) the “Amlap Property,” sited in Anaheim, California; and (2) the “Aero Vault Property,” sited in Kearny Mesa, California.
Interests in other properties — (1) “Overland” in San Dimas, California; (2) “Fiesta” in Texas; (3) “Packard” in Texas; and (4) a Textron building in Arizona — were made available in the form of limited partnership investments. These properties are collectively referred to as the “LP Investments.”
Plaintiff William McCready invested $250,000 in the LP Investments. McCready, acting through plaintiff Amlap McCready, LLC, also invested $1.25 million in exchange for a tenancy in common ownership interest in the Amlap Property.
Plaintiff Richard Johnston, acting through plaintiff Amlap Johnston, LLC, invested $900,000 in exchange for a tenancy in common ownership interest in the Amlap Property. Johnston, acting through plaintiff Aero Vault Johnston, LLC, invested $377,000 in exchange for a tenancy in common ownership interest in the Aero Vault Property.
There are 23 defendants named in the operative complaint. This appeal does not concern most of the defendants. Excluded from the scope of this appeal are the organizers, promoters, accountants, and attorneys that structured the investments and marketed them to plaintiffs.1
The respondents to this appeal are real estate brokerage firms: (1) CBRE, Inc. (CBRE), the broker for the seller of the Amlap Property, as well as the leasing broker for plaintiffs and the other tenants in common following their acquisition of the Amlap Property; (2) Lee & Associates Commercial Real Estate Services, Inc. – El Toro (Lee), a real estate brokerage firm playing a role in facilitating all of the investments; (3) Cushman & Wakefield, Inc.; (4) Cushman & Wakefield of California, Inc., and (5) Cushman & Wakefield of San Diego, Inc. (collectively, Cushman). Cushman was sued as the successor in interest to Burnham Real Estate Services, which acted as the seller’s broker in the Aero Vault Property sale.
Key Allegations Concerning Plaintiffs’ Investments in the Properties
In the summer of 2006, some of the defendants (not respondents) convinced Johnston to sell a tenant in common interest he owned in Los Angeles so he could reinvest the proceeds ($1.277 million) in the Amlap Property and the Aero Vault Property. These defendants also convinced McCready to invest (in the Amlap Property and in the LP Investments) $1.5 million McCready had available from a recent sale of real estate.
Along with standard investment objectives, an additional purpose of the tenant in common investments was to defer payment of capital gains taxes owed on plaintiffs’ profitable sales of real estate by purchasing a like-kind property. Certain defendants (not respondents), whom we shall call the “advisor defendants,” asserted that the investments would satisfy all of these objectives; they were “tax-advantaged, tax deferred passive investments . . . .” The advisor defendants “would provide all underwriting and due diligence and related investment structuring services for the combined purchases of the” tenant in common interests.
Central to plaintiffs’ “decision to invest or not in the particular tax-advantaged transaction was whether the up-front costs . . . were true and accurate when balanced against a capital gains tax they sought to defer of 15% . . . .” Had plaintiffs been told the up-front costs of their investments exceeded 15 percent of their cash invested, “they would never have considered” the investments.
The advisor defendants represented in writing that investors would pay 6 percent of their gross investment in tenant in common properties as a fee, at the close of escrow on the investments, as well as several other fixed fees for accounting ($1,500), escrow ($1,000), and organizational expenses ($2,500). The disclosure form (included as an exhibit to the operative complaint) also indicated an annual 1 percent fee would be paid for asset management to BH & Sons. These fees were well under the 15 percent capital gains tax plaintiffs sought to defer by their investments.
But there was a “secret additional amount” extracted from plaintiffs and the other investors, which resulted in the true up-front costs or “sales loads” exceeding 15 percent of the cash investments. According to plaintiffs, this fee was not sufficiently disclosed in the offering memoranda provided to plaintiffs prior to closing.
In the Amlap Property offering memorandum2 and related disclosures, the Amlap Property purchase price was represented to plaintiffs as $34.55 million, with the seller paying the buyers’ real estate commission of $1.3 million (i.e., 3.76 percent of the stated purchase price).3 But the actual purchase price negotiated from the seller as an initial matter was $33.25 million. Defendants added $1.3 million to the purchase price in order to extract extra fees from plaintiffs. In other words, the $1.3 million was an additional investment fee (or package of fees), not part of the standard real estate commission often paid with the proceeds of a real estate sale at escrow. The true fair market price negotiated with the seller was $33.25 million, not $34.55 million. Contrary to appearances, the $1.3 million was not a standard buyer side real estate broker commission, paid by the seller out of the purchase price at escrow. Instead, the buyers of the Amlap Property were actually paying the $1.3 million (so-called) commission.4 “The scheme exploited the conventional and standard practices and procedures in the real estate industry . . . .” Taking into consideration the $1.3 million fee, the actual sales load was 15.7 percent of the cash invested, not 6 percent.
E-mails attached to the operative complaint provide additional detail. A June 2006 e-mail from an employee of AMC to a CBRE employee stated, “[P]lease make the seller aware of our intention to ‘gross up’ the purchase price by $1,300,000 to cover certain [tenant in common] and startup costs. Buyer will cover any costs which seller may incur as a result of this procedure. This is a normal procedure in our [tenant in common] transactions, and has been acceptable to all other sellers we have dealt with, but wanted to give you and the seller a ‘heads up’ that this price adjustment will appear . . . .” A July 2006 e-mail from an attorney for AMC to an attorney for the seller of the Amlap Property stated, “[H]ere is the explanation for the [AMC] fee which was added to the purchase price: [¶] My client has historically organized limited partnerships for its real estate investments, and has a pool of investors. In that context AMC would receive a profit split from the partnership. [¶] Some AMC investors sold other properties and wanted to invest their 1031 proceeds in a tax deferred exchange, but due to the ‘like-kind’ requirements, they must take title as Tenants in Common (TICs) rather than invest in a partnership. [¶] For a long time, there were concerns that the IRS would characterize a group of TICs as a partnership, and then disallow the 1031 exchange. . . . Then the IRS issued Rev. Proc. 2002-22, which listed guidelines for TICs to follow that would reduce the chance of being treated as a partnership. [¶] One of the guidelines is that the sponsor (AMC) cannot participate in a profit split. However, it is okay for the sponsor to receive a portion of the purchase price paid by the TIC investors — in fact, some companies actually buy properties as inventory and resell interests to TICs. We have found this to be an easy way to deal with this combination of issues, without any economic [e]ffect to the Seller. Of course, the commission is full[y] disclosed to investors.” The attorney for the seller responded with thanks for the explanation “and confirmation of full disclosure to investors.”
Much the same story is alleged by plaintiffs with regard to the Aero Vault Property. The Aero Vault offering memorandum disclosed the purchase price as $27,885,000, with a buyers’ real estate commission of $1.25 million paid by the seller (i.e., 4.48 percent of the stated purchase price).5 But in reality, the negotiated purchase price was $26.6 million, and the tenant in common buyers (including Aero Vault Johnston, LLC) paid the $1.25 million “commission.” This meant that the true sales load was 18.5 percent, “an amount greater than the capital gains taxes sought to be deferred.”
Cushman and CBRE benefitted from this transaction structure because they received commissions based on a higher purchase price and because they were able to keep all of the listing commission rather than sharing it with an actual buyer’s broker. Lee worked with other defendants to assist them in recommending and facilitating the sale of the investments to plaintiffs, despite knowing about the marked up purchase prices, and Lee also received a share of the fees charged to plaintiffs.
“[T]he LP Investments had a similar misrepresentation in that the selling price and who was in fact paying the buyers’ brokers commission was not disclosed.” It was represented to McCready “that the purchase price of each of the properties acquired . . . was paid to an unaffiliated third party at a set price and that the seller was paying all real estate commissions including commissions payable to the limited partnerships’ real estate broker. It was also represented that no part of the seller-paid commission . . . would be paid out of the LP Investments ‘Offering’ proceeds, including the funds received from Plaintiffs’ investment in the limited partnership units.” The LP Investments’ offering memorandum “disclosed no sales load or commission but instead touted that the general partners would be paid a ‘carried interest’ or ‘back end’ of 50% of the returns realized by management of the real property . . . after the limited partner investors received their money back plus 8% per annum ‘Priority Return.’” But the actual purchase price was less than the price represented to McCready. “[S]ecret profits” were added to the sales price, and the limited partners (such as McCready) were actually paying the buyers’ real estate broker commissions. Had McCready known about these up-front costs, he would not have purchased the LP Investments.
The Amlap Property investments were total losses because the lender foreclosed on an unspecified date. The Aero Vault Property investments were “virtually a total loss because the anchor tenant . . . has indicated it will not renew its lease for the specialized building.” The status of the LP Investments was not alleged, but McCready would not have acquired them had he known about the hidden fees.
Plaintiffs invested in 2006. Any harm allegedly caused by respondents was suffered immediately upon their investments. The allegedly unfair fees were paid upon the close of escrow on the various investments, when plaintiffs purchased something they would not have had they known the stated purchase price had been inflated by disguised investment syndication fees. The initial complaint was not filed until February 2013, more than six years later. Thus, plaintiffs attempted to demonstrate they did not discover facts putting them on notice of wrongdoing until shortly before the filing of their complaint.
“At the time of the respective property offerings, a reasonable investigation would not have revealed the underlying misrepresentation because the offerings were sold as private placement offerings with the only sources of information being from the parties to the conspiracy making the respective offerings and participating in the fraud. Indeed a reasonable investigation would show only that the false purchase price was used in escrow as if the true purchase price, used in determining the amount for title insurance, reported . . . to the local taxing authority for property tax purposes, used to calculate all customary prorations and used annually in the accountings provided and tax reporting of the [tenant in common] interests. There was never a disclosure of the Actual Purchase Price to Plaintiffs.” “[T]he defendants controlled the original property purchase negotiations and related source documents that would have disclosed the fraud and then hid behind the fake double escrow that cut the Plaintiffs and other tenant in common investors off from receiving accurate information.”
Plaintiffs never received information before April 2012 that would have led them to suspect that defendants had structured the investments in the manner that they had. The fact that, prior to April 2012, the investment properties suffered difficulties in leasing to tenants and foreclosures did not provide notice to plaintiffs of the wrongdoing they allege in this case. The overall problems in the economy and real estate market were convenient excuses for the failure of plaintiffs’ investments.
Plaintiffs did not discover “defendants’ fraud and deceit” until April 2012. “Plaintiffs first learned of facts which made them suspicious when contacted by counsel [in the Los Angeles Action]. The Plaintiffs could not with diligence have discovered the fraud and deceit . . . until on or about this date because the true facts were known only to defendants, further, Plaintiffs reasonably believed [defendants’] representations of the purchase price for the respective real estate interest[s] and that the seller was paying the commissions to buyers’ broker.”6 DISCUSSION
The operative complaint contains a lengthy list of claims, many of which are alleged against respondents. All defendants (including respondents) are charged with: intentional misrepresentation, negligent misrepresentation, fraud by concealment, negligence, and unfair business practices under Business and Professional Code section 17200 (section 17200).7 As against CBRE and Lee, breach of fiduciary duty of real estate brokers and constructive fraud are also alleged. Finally, Johnston brings an elder abuse claim against CBRE.
Demurrers to prior complaints filed by parties other than respondents were sustained with leave to amend. The court sustained respondents’ demurrers to the third amended complaint (the first time respondents demurred) on numerous grounds, including the running of applicable statutes of limitations. The court entered judgments of dismissal as to each of the respondents.
Our review is de novo with regard to the court’s decision to sustain the demurrers. (WA Southwest 2, LLC v. First American Title Ins. Co. (2015) 240 Cal.App.4th 148, 151 (WA Southwest).) “As a general rule in testing a pleading against a demurrer the facts alleged in the pleading are deemed to be true, however improbable they may be. [Citation.] The courts, however, will not close their eyes to situations where a complaint contains allegations of fact inconsistent with attached documents, or allegations contrary to facts which are judicially noticed.” (Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 604.) We review for an abuse of discretion the court’s denial of plaintiffs’ request for leave to amend. (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.) “If we find that an amendment could cure the defect, we conclude that the trial court abused its discretion and we reverse; if not, no abuse of discretion has occurred.” (Ibid.)
Statutes of Limitations
Boiled down to its essence, plaintiffs claim is that they overpaid for the various properties at issue. Had the negotiated prices not been “grossed up” to extract additional fees, the purchase prices would have been lower. And had defendants disclosed what they were actually doing to obtain their additional fees, plaintiffs would not have invested.
The common defense of all respondents is that the applicable statutes of limitations have run as to all claims. The relevant investments were made in 2006 and the initial complaint was not filed until 2013. Plaintiffs concede that any applicable statutes of limitations have run if they began accruing in 2006. But plaintiffs claim the discovery rule rescues their lawsuit. The discovery rule “postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action.” (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 807.) “The discovery rule only delays accrual until the plaintiff has, or should have, inquiry notice of the cause of action.” (Ibid.)
This case is almost identical to a recent opinion of this court, WA Southwest, supra, 240 Cal.App.4th 148. Both cases concern failed real estate investments, in which investors sought to defer payment of capital gains taxes by investing in tenant in common interests in real property marketed by investment firms. In both cases, the investors lost their money and (represented by the same law firm) sued seemingly every entity or individual with any connection whatsoever to the investments, claiming they would not have invested had they known about hidden fees which increased the sales load above the capital gains tax rate. And in both cases, the trial court sustained demurrers and entered judgment for certain defendants based on, among other things, the applicable statutes of limitations.
In WA Southwest, we affirmed the judgment of dismissal, holding that the plaintiffs were on inquiry notice of their injury at the time of their investments because of detailed disclosures in the private placement memoranda they received prior to investing. (WA Southwest, supra, 240 Cal.App.4th at pp. 157-158.) The disclosures in WA Southwest revealed that the negotiated purchase price of the property was $11.6 million, but $13.17 million was being raised so that other expenses could also be paid, including a $505,000 fee payable to an investment organizer/promoter company. (Id. at pp. 153-154.) The disclosures did not suggest the seller of the property was paying the $505,000 fee or any of the other expenses making up the difference between the negotiated purchase price and the total investment cost. (Ibid.)
In the instant case, however, plaintiffs allegedly were never told about the negotiated purchase price of the various properties at issue (the Amlap Property, the Aero Vault Property, or the LP Investments). Instead, defendants grossed up the purchase price paid to the seller so that an additional fee could be extracted by AMC and BH & Sons. As confirmed in the investment documents put before the court in various requests for judicial notice, the fee itself was disclosed to plaintiffs (at least in the tenant in common transactions), but it was stated that the fee was paid by the seller. The disclosures arguably implied the fee was paid in the typical manner of real estate brokerage fees, i.e., out of the negotiated purchase price. In reality, the fee was not provided for in the seller’s listing agreement; it was really paid by plaintiffs because the negotiated purchase price of the property was grossed up to pay the fee. In essence, plaintiffs allege defendants hid a kickback in plain sight by calling it a real estate fee and stating it was a seller paid commission. Plaintiffs’ allegations suggest they were unaware of any basis for inquiring into whether defendants had hidden an extra fee in the price of the properties. WA Southwest, supra, 240 Cal.App.4th 148 is not on all fours with this case; the disclosures here did not clearly put plaintiffs on inquiry notice like those made in WA Southwest.
Defendants nonetheless contend plaintiffs did not adequately describe “‘(1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence.’” (E-Fab, Inc. v. Accountants, Inc. Servs. (2007) 153 Cal.App.4th 1308, 1319; id. at p. 1324 [plaintiffs required to “allege ‘facts showing the time and surrounding circumstances of the discovery of the cause of action upon which they rely’”].) “‘The purpose of this requirement is to afford the court a means of determining whether or not the discovery of the asserted invasion was made within the time alleged, that is, whether plaintiffs actually learned something they did not know before.’” (Id. at p. 1324.) “[T]he uniform California rule is that a limitations period dependent on discovery of the cause of action begins to run no later than the time the plaintiff learns, or should have learned, the facts essential to his claim. [Citations.] It is irrelevant that the plaintiff is ignorant of his legal remedy or the legal theories underlying his cause of action.” (Gutierrez v. Mofid (1985) 39 Cal.3d 892, 897-898.)
As to the time and manner of discovery, the LA Action plaintiffs informed plaintiffs of defendants’ alleged wrongdoing in April 2012. Details are absent, however, as to how the LA Action plaintiffs discovered this alleged malfeasance, allowing them in turn to inform plaintiffs of the wrongdoing. Indeed, the LA Action complaint is also vague as to how the LA Action plaintiffs were able to discover the alleged scheme. The LA Action plaintiffs reference an investigation into the tax consequences of the foreclosure on the Amlap Property, but do not state when they received new factual materials that allowed them to conclude they had been wronged.
Plaintiffs add in their reply brief that they could amend the operative complaint to specifically allege they were informed in April 2012 of the actual purchase price of the Amlap Property (which presumably led them to suspect that the actual purchase price of the Aero Vault Property and LP Investments were lower than the price represented to plaintiffs). Plaintiffs point to exhibit G of their complaint, a list of broker sales in which the sales price of the Amlap Property was represented as $33.25 million. Plaintiffs also claim the appraised price of the Amlap Property was $33.25 million on August 16, 2006, days before the offering memorandum was provided to plaintiffs. It seems the LA Action plaintiffs (and their agents) took a closer look at the deal and somehow figured out that the $1.3 million fee was added to the sales price of the Amlap Property (rather than being costless to plaintiffs). Perhaps the LA Action plaintiffs obtained the documents now referenced by plaintiffs.