Cascarano v. Carnesale

Filed 4/17/06 Cascarano v. Carnesale CA2/6

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION SIX

Defendant Louis Carnesale was the general partner of defendant Financial Plaza North (FPN), a real estate development venture in which plaintiffs Lew and Louise Cascarano and Frank and Rosalind Nitti were limited partners. Following a court trial, plaintiffs were awarded compensatory and punitive damages on their claims of breach of contract and breach of fiduciary duty. Carnesale and FPN contend: (1) plaintiffs did not have standing to recover on their individual claims and the sole remedy for the alleged injury was a derivative suit on behalf of the partnership; (2) the statute of limitations barred the recovery of damages for acts committed before 1995; (3) the trial judge was unfairly prejudiced against the defense; (4) Carnesale's failure to maintain partnership records was not a breach of fiduciary duty; and (5) the award of punitive damages was not supported by substantial evidence. We affirm.

BACKGROUND

Carnesale is a real estate developer who for $10,000 obtained an option to purchase a five-acre parcel of land in Oxnard. In 1977, he formed FPN to own and develop the property. Carnesale was the general partner with a 50 percent ownership interest. The remaining 50 percent interest consisted of eight limited partnership shares of 6.25 percent each. Plaintiffs were the owners of some of these limited partnership shares, which required a $50,000 investment per share. Carnesale made a capital contribution of a portion of his option to purchase the land, which the parties agreed had a value of $296,000.

The partnership agreement signed by plaintiffs and Carnesale provided for the construction of a 72-unit garden condominium project on the property. After selling the units and paying third party creditors, the limited partners would be entitled to receive the return of their initial investment plus a 7 percent annual interest rate on that money; after that money had been paid, Carnesale would be entitled to payment for his $296,000 capital investment plus 7 percent annual interest. The remaining profits would be split 50-50 between Carnesale and the limited partners. As the general partner, Carnesale was responsible for maintaining the partnership's financial records and was authorized to take out loans on its behalf. He was not entitled to receive a salary but could obtain reimbursement for expenses incurred in the course of the partnership, as well as a developer's fee equal to 10 percent of the cost of constructing the condominium project. Carnesale represented to plaintiff Lew Cascarano that the project would be completed within one and one-half years at a cost of $2.4 million.

The proposed condominium project was rejected by the City of Oxnard and Carnesale decided to build three office buildings instead. The construction was financed through loans secured by the property which were arranged by Carnesale. A business owned by Carnesale was the builder of the property, but he did not disclose to the limited partners that he was the general contractor. By the time construction was completed in 1984, a total of $6.2 million in loans had been obtained. The cost of construction for the same period was $3.5 million. By 1983, FNP had begun leasing space. The buildings were fully occupied by 1989 and FPN received an annual income averaging about $1 million per year throughout the 1990's.

The limited partners did not receive any return on their investment. Carnesale took over a million dollars from the partnership in the form of developer's fees, loans due or notes payable. Funds from FNP were commingled with funds from other companies owned by Carnesale. A company that Carnesale owned managed the property and was paid approximately $825,000 in management fees. Carnesale could not produce records of these or any other partnership transactions. He maintained that he had shipped the partnership's records to Las Vegas in 1998 to be placed on microfiche, but after the shipment had been made, he discovered the microfiche procedure was too costly and had the records destroyed. The only records of the partnership's finances were the income tax returns filed every year, which had been prepared based on information provided to the accountant by Carnesale.

Carnesale did not disclose to the limited partners that he or his company was receiving money from FNP accounts. When he was asked about the project in 1984, Carnesale told the limited partners that he expected it to be profitable within about five years. The limited partners relied on these assurances but, by the early 1990's, began pressing Carnesale for details about their investment. He assured them that efforts would be made to sell the property. At a meeting of the partners in 1992, Carnesale's son reassured the limited partners that the project was on track. By 1998, however, they were not receiving any communications from Carnesale and began demanding financial information from him. Carnesale provided some tax returns to the limited partners and they received K-1 statements describing the status of their capital accounts, but they were given no other financial documentation.

During a meeting in 1999, Carnesale disclosed to the limited partners that he had been acting as the property manager and was paying himself fees. The property was in financial trouble at that time because several of the tenants were dissatisfied with the rundown condition of the buildings and were moving out of the property. The main loan on the property, which was held by John Hancock, was in default. FNP declared bankruptcy. Carnesale did not cooperate with the bankruptcy receiver, but proposed a plan to the bankruptcy court in which he would buy the property as an individual. John Hancock would not agree to this plan and foreclosed on the property, after which the bankruptcy proceedings were dismissed.

Meanwhile, the plaintiffs filed suit against Carnesale for breach of contract and breach of fiduciary duty. They alleged that Carnesale had violated the terms of the partnership agreement by self-dealing and commingling partnership funds, by taking fees for property management that amounted to a salary in violation of the partnership agreement, by drawing money from the partnership account in the form of unauthorized developer fees and loans, by mismanaging the property and causing the tenants to leave, and by destroying or withholding partnership records. Carnesale maintained that any money transferred to him from FPN was for reimbursement of costs or loans made to the partnership.

Following a bench trial, the court awarded plaintiffs Lew and Louise Cascarano compensatory damages of $184,241, which reflected the amount of their initial $62,500 investment in the limited partnership plus the 7 percent interest called for in the partnership agreement from the inception of the partnership. Plaintiffs Frank and Rosalind Nitti were awarded $104,968.75 in compensatory damages, reflecting the amount of their initial $37,500 investment plus 7 percent interest. The court also awarded punitive damages of $200,000 each to the Cascaranos and the Nittis.

DISCUSSION

Necessity of Derivative Suit

Carnesale argues that the judgment awarding damages to the individual plaintiffs must be reversed because the exclusive remedy for the claims in this case was a derivative action on behalf of the partnership. We disagree.

An action is derivative and must be brought on behalf of a limited partnership or corporation when the gravamen of the complaint is an injury to the business entity as a whole. "'The purpose of a limited partner's derivative action is to enforce a claim which the limited partnership possesses against others [including the general partners] but which the partnership refuses to enforce.'" (Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, 425.) By contrast, a limited partner or shareholder may bring a lawsuit to enforce a right that he or she possesses as an individual. (Id. at pp. 426-428; see also Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, 107.)

While aspects of the plaintiffs' claims might also have been appropriate in a derivative action on behalf of FPN (the allegation, for example, that Carnesale's mismanagement of the tenants ultimately resulted in foreclosure on the partnership's property), the court did not award damages based on injury to the limited partnership. Rather, plaintiffs were compensated for the loss of their initial investment and the 7 percent annual return called for in the partnership agreement. These damages did not reflect a loss to the business as a whole or per se result in a diminution of company assets--they were based instead on the losses suffered by plaintiffs as individual investors as a result of Carnesale's breach of contract and breach of fiduciary duty.

Statute of Limitations

The court calculated plaintiffs' compensatory damages as the amount of their initial investment plus the 7 percent annual interest called for in the partnership agreement for each of the years that the partnership was in existence. Carnesale argues that the damages must be reduced because they are based in part on actions and omissions occurring outside the statute of limitations period.

The limitations period for a claim of breach of written contract and breach of fiduciary duty arising from that contract is four years. (Code Civ. Proc., §§ 337, 343; David Welch Co. v. Erskine & Tulley (1988) 203 Cal.App.3d 884, 893.) Plaintiffs filed this action on December 13, 1999, and, ordinarily, their recovery would be limited to amounts attributable to acts committed by Carnesale on or after December 13, 1995. Here, however, the trial court concluded that by virtue of Carnesale's fiduciary relationship to the plaintiffs, the ordinary statute of limitation did not apply.

The court explained its reasoning in its statement of decision: "The Court finds that the Delayed Discovery Rule applies to this action. Defendant held a fiduciary role to the plaintiffs. The plaintiffs were reasonable to rely upon the defendant and were not under a legal duty to investigate their general partner. The Court finds that the plaintiffs were repeatedly ignored, delayed and rebuffed in their requests to have partnership meetings with the Defendant. They began to make those requests in 1998 and despite promises by the defendant to produce partnership records, he did not do so or, if he did, provided them in a begrudging and limited fashion. . . . [¶] A fiduciary who actively conceals material facts from his limited partners cannot complain that they did not begin their quest earlier than they did. Furthermore, the Court finds that the Continuing Violation doctrine would also apply as the defendant's conduct evidences a continuing pattern and practice over the years to conceal and suppress material facts to the limited partners. The Court credits the testimony of the Plaintiffs . . . , limited partners, that they were not informed of the self-dealing. Nor did the limited records provided to the limited partners, the K-1s, place them on notice of these activities or create a duty of inquiry sooner than it occurred."

Under the delayed discovery rule applicable to a claim for breach of fiduciary duty, a cause of action does not accrue until the plaintiff (1) actually discovered the injury and its negligent cause, or (2) could have discovered the injury through the exercise of due diligence. (April Enterprises, Inc. v. KTTV (1983) 147 Cal.App.3d 805, 826.) If the plaintiff is in a fiduciary relationship with the defendant, his burden of discovery is reduced and he is entitled to rely on the statements and advice provided by the defendant. (Sherman v. Lloyd (1986) 181 Cal.App.3d 693, 698-699.)

When the trial court resolves a statute of limitations issue based on disputed facts, we will uphold that ruling if it is supported by substantial evidence. (Enfield v. Hunt (1984) 162 Cal.App.3d 302, 310; see also People v. Zamora (1976) 18 Cal.3d 538, 565.) Under this deferential standard, "'when two or more inferences can reasonably be deduced from the facts, a reviewing court is without power to substitute its deductions for those of the [trier of fact].'" (Los Angeles County Office of the Dist. Attorney v. Civil Service Com. (1997) 55 Cal.App.4th 187, 199.)

Viewed in the light most favorable to the trial court's ruling, the evidence established that Carnesale was the general partner and fiduciary of plaintiffs, the limited partners. He received unauthorized fees during his tenure, but the limited partners did not discover this until after 1995. The trial court could reasonably conclude that the limited partners lacked actual notice of Carnesale's unauthorized usurpation of partnership funds. It could further find that the facts known to them would not have put them on constructive notice of Carnesale's activities and that they were not under a duty to inquire further because they were entitled to trust their general partner as a fiduciary. Although plaintiffs knew they were not receiving any return on their investment before 1995, the critical question is whether they would have known that the reason for this was Carnesale's misfeasance rather than unfavorable business conditions.

"Prejudice" of Trial Judge

Carnesale argues that the judgment against him must be reversed because the court was unfairly prejudiced against him. We reject the claim.

Before the defense began presenting its case in chief, counsel for the plaintiffs discussed the possibility that Carnesale would be out ill for part of the proceedings. The trial judge commented, "Things are not going all that well for him, and I think it would be in his best interests to be here. If I were in your position, I'd just as soon he didn't show up." Counsel for Carnesale later mentioned that he was worried that the court was predisposed against his client based on those comments. The court responded that it had not decided anything, but there had been a lot of negative evidence against Carnesale.

These remarks do not demonstrate that the trial court was unfairly prejudiced against Carnesale. It was simply commenting that the plaintiffs' evidence against him was significant and opining that it would be in his best interest to be present during the trial. Reversal is not required.

Duty to Maintain Partnership Records

Paragraph 4.1 of the partnership agreement provided, "The General Partner shall cause to be maintained full and accurate accounts of all transactions of the partnership in proper books of account, and such books and all other records of the partnership shall be kept at the partnership place of business . . . and said books shall be accessible to the parties or their duly authorized representatives for inspection and examination at all reasonable times." Carnesale testified that he had those records until 1998 but then destroyed them after sending them to Nevada to be microfiched and learning that the cost was prohibitive. The trial court concluded that Carnesale breached his duty to the limited partners to maintain records.

Carnesale argues that the judgment must be reversed because under Corporations Code section 15615, he was not obligated to keep the records for more than six years. Even if we assume the statute trumps the terms of the partnership agreement, which placed no time limit on Carnesale's duty to maintain records, Carnesale violated the statute because, assuming the records were destroyed in the manner he described, they included documents created within the six-year period. Moreover, a former employee testified that she had seen partnership records in Carnesale's office as late as 1999, and the court did not find credible Carnesale's testimony to the contrary. The evidence supported an inference that Carnesale was purposefully withholding the records from the plaintiffs during the litigation, and the court was fully justified in concluding that Carnesale had breached his fiduciary duty with respect to those records.

Punitive Damages

Carnesale contends the award of punitive damages must be reversed because there is no substantial evidence he acted maliciously in his dealings with the plaintiffs. We disagree.

Civil Code section 3294 provides that a plaintiff may recover punitive damages by presenting clear and convincing evidence that the defendant was guilty of oppression, fraud or malice. The court found in its statement of decision that Carnesale had engaged in fraudulent fiduciary breaches. "Fraud" is "an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury." (Id., subd. (c)(3).) The court concluded that Carnesale's failure to account for partnership funds, his commingling of partnership funds with those from other enterprises and his self-dealings were fraudulent. This was a reasonable interpretation of the evidence, which amply supports a punitive damages award.

The judgment is affirmed. Costs are awarded to respondents.

NOT TO BE PUBLISHED.

COFFEE, J.

We concur:

GILBERT, P.J.

YEGAN, J.

Charles R. McGrath, Judge

Superior Court County of Ventura

______________________________

Hathaway, Perrett, Webster, Powers, Chrisman & Gutierrez, Robert A. Bartosh and Greg W. Jones for Defendants and Appellants Louis J. Carnesale and Financial Plaza North, LLP.

Law Offices of Donald M. Adams, Jr. and Donald M. Adams, Jr. for Plaintiffs and Respondents Lew Cascarano, Louise Cascarano, Frank Nitti and Rosalind Nitti.

Publication Courtesy of California attorney referral.

Analysis and review provided by Vista Apartment Manager Attorneys.