Coliseo Housing v.
Village
Development
Filed 5/6/13 Coliseo
Housing v. POZ Village Development CA2/5
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 This opinion has not been
certified for publication or ordered published for purposes of rule 8.1115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
SECOND APPELLATE DISTRICT
DIVISION FIVE
COLISEO
HOUSING PARTNERSHIP,
Plaintiff, Appellant and Cross-Respondent,
v.
POZ VILLAGE
DEVELOPMENT, INC.,
Defendants, Respondents and Cross-Appellants.
B236713
(Los Angeles County
Super. Ct. No.
BC419577)
APPEAL
from an order of the Superior Court of
County, Michael C. Solner, Judge. Affirmed.
Reuben
Raucher & Blum, Timothy D. Reuben, Stephen L. Raucher and K. Cannon Brooks, for
Plaintiff, Appellant and Cross-Respondent.
Kennedy
Kamrowski and J. Grant Kenney for Defendants, Respondents and Cross-Appellants.
I. INTRODUCTION
Plaintiff Coliseo Housing
Partnership appeals from an August 18, 2011 judgment in
favor of defendants POZ Village Development Inc. (“POZâ€) and The Bedford Group
(“Bedfordâ€). Plaintiff sought to cancel
a promissory note payable to defendant POZ (“Developer’s Noteâ€) and declaratory
relief related to the note’s validity.
Plaintiff argues the trial court erred in ruling the cancellation claim
was barred by the statute of limitations.
In addition, plaintiff contends the Developer’s Note was superseded by
the amended partnership agreement’s integration clause and thus void. Plaintiff also asserts the trial court erred
in finding the Developer’s Note was supported by consideration. Furthermore, plaintiff argues it was error
to find the Developer’s Note was enforceable given Bedford’s admission
that the note was the result of tax evasion.
On cross-appeal, defendants argue they were entitled to costs as the
prevailing party under Code of Civil Procedure section 1032. We find no error and affirm the judgment.
II. BACKGROUND
A. Original Partnership Agreement
Plaintiff
is a limited partnership that was formed in December 1988 to develop and
operate a 137 unit low-income housing project, which became known as the
Gilbert Lindsay Manor. Plaintiff’s
general partners were United Housing Preservation Corporation (“Unitedâ€),
D&S Development Company and defendants Bedford and POZ.
Housing Preservation Partners, entered into Agreement of Limited Partnership of
Coliseo Housing Partnership on December 16, 1988. The partners contemplated funding the project
by putting in some equity and obtaining a $4,743,000 first mortgage and a
Community Redevelopment Agency (“CRAâ€) loan of $3,954,000.
Under
the agreement, Bedford and D&S Development Company were responsible for the
development and construction of the housing project. Bedford and POZ would develop and manage all
advertising and public relations. POZ
also would serve as a liaison between the partnership, the CRA, and the City of
Los Angeles. United would advance the
start-up costs of the development. In
addition, United would maintain the partnership bank accounts and books and
records, including the preparation of periodic financial statements and
projections. Housing Preservation
Partners, plaintiff’s limited partner, agreed to contribute capital to the
partnership and was responsible for selling limited partnership interests after
completion of the project. Associated
Financial Corporation (“AFCâ€), an affiliate of both United and limited partner
Housing Preservation Partners, agreed to guarantee United and Housing
Preservation Partners’ contribution obligation.
The general partners agreed to pay POZ and Bedford “a development
incentive fee in such amount as agreed to by the Partners for their [role] in
negotiations with the CRA, the lenders, the City of Los Angeles, the
Department of Housing and Urban Development for a Section 8 contract and other
development related functions.â€
At
a breakfast meeting held on March 29, 1989, the general
partners considered two options to fund the project development. They ultimately agreed Housing Preservation
Partners would contribute five million dollars with AFC guaranteeing the
capital contribution. Bedford and POZ
would receive $500,000 in cash when the construction loan funded and promissory
notes totaling $1,743,000.
On May 2, 1989, the general partners entered into the Surplus Cash Disposition
Agreement. They agreed to pay POZ and
Bedford a development incentive fee consisting of a $500,000 payment and
$1,743,000 represented by two promissory notes, each in the amount of
$871,500. One promissory note was
payable to Bedford and the other note was payable to POZ. Both promissory notes were dated May 2, 1989 and carried an annual 10% interest rate.
On April 26, 1989, plaintiff entered into a Disposition and Development Agreement
with the CRA to effectuate the redevelopment plan for the housing project. Under the agreement, the CRA was entitled
to 50% of the residual receipts as repayment for its loan to plaintiff. In addition, the CRA was to receive another
10% of the residual receipts under a ground lease agreement with plaintiff
dated May 15,
1990.
B. Amended Partnership Agreement
On May 1, 1990, the general partners entered into the Amended and Restated
Agreement of Limited Partnership of Coliseo Housing Partnership (“Amended
Partnership Agreementâ€). Section 1.16 of
the Amended Partnership Agreement contains the following debt paydown reserve
provision: “Debt Paydown Reserve†shall
mean the amount (not to exceed $1,743,000) which is equal to the difference
between $4,743,000 and the actual amount of the first mortgage on the
Property. The Debt Paydown Reserve shall
earn interest at the same rate as the first mortgage. All earned interest on the Debt Paydown
Reserve will be paid on a monthly basis prior to the determination of Residual
Receipts as defined in the [Disposition and Development Agreement]. Interest paid on the Debt Paydown Reserve
shall be paid to POZ until it has achieved its Priority Return and return of
its Capital Contributions and then shall be distributed to the other Partners
in the same fashion as Net Cash in Section 5.02 below.†Section 1.49 defines “Priority Return†as
“Cash Distributions from Operations and Cash Distributions from Sales or
Refinancing to POZ equal to a 10% compounded annual return on its total capital
contributions, less any prior Cash Distributions from Operations and Cash
Distributions from Sales or Refinancing.â€
In addition, the Amended
Partnership Agreement contains a provision concerning general partners’ loans
under section 4.06. That section
states: “[Except] for loans existing at
the funding of the construction loan, no Partner may loan money to the
Partnership without the written consent of a majority of the Management
Board. Any loan by a Partner to the
Partnership shall be separately entered on the books of the Partnership, shall
be upon terms as determined by a majority of the Management Board, and shall
bear interest from the date of the loan until paid at the lesser of (a) one
percent (1%) over the prime rate of the interest of Citicorp Bank, New York, in
effect on the date of the loan (and from time to time adjusted); or (b) the
maximum rate permitted by law for loans made in the State. Each such loan shall be evidence by a
promissory note, or on book and records of the Partnership delivered to the
lending Partner and executed in the name of the Partnership by the other
Partners.â€
Furthermore, the Amended
Partnership Agreement contains the following development incentive fee
provision in section 6.03: “The
Partnership will pay POZ the sum of Two Million Six Hundred Forty-Seven
Thousand Six Hundred Dollars ($2,647,600) at the closing of the construction
loan in consideration of POZ’s efforts in the development of the Project,
obtaining the necessary approvals and permits from the County of Los Angeles
and the City of Los Angeles, arranging the loan commitment and necessary
approvals from the CRA, the construction and permanent loans, payment of any
and all brokerage fees, interfacing with local, federal and state agencies, and
development oversight duties.†POZ later
assigned one-half of its development incentive fee and distribution under the
priority return to Bedford in an instruction letter to plaintiff on May 25, 1990.
The Amended Partnership
Agreement also contains an integration clause in section 14.13: “This Agreement constitutes the entire
understanding and Agreement among the parties hereto with respect to the
subject matter hereof, and there are no agreements, understandings,
restrictions, representations or warranties among the parties other than those
set forth herein or herein provided for.
Following is a description of the other agreements entered into by and
among the parties which are merged into and superseded by the agreement: [¶]
1. Surplus Cash Distribution
Agreement, dated May 2, 1989; [¶] 2.
Debt Paydown Reserve Agreement, dated May 2, 1989; [¶] 3. Promissory Notes to POZ and Bedford, dated May 2, 1989; [¶] 4. Contingency Fund Agreement, dated May 2, 1989; [¶] 5. Agreement (re: Broker Fees), dated May 2, 1989; [¶] 6. Letter dated May 5, 1989 to Reverend Hardwick from AFC regarding management.â€
C. Complaint
On August 11, 2009, plaintiff sued POZ to cancel the promissory note in the amount of
$1,743,000 payable to POZ (the “Developer’s Noteâ€) based on the Amended
Partnership Agreement’s integration clause.
In addition, plaintiff sought declaratory relief to resolve the parties’
dispute concerning the Developer’s Note.
On October 27, 2009, plaintiff amended its complaint to add Bedford as a
defendant on the declaratory cause of action because Bedford claimed a 50%
interest on the Developer’s Note.
Plaintiff also added a cancellation claim based on forgery. On April 9, 2010, plaintiff filed a second
amended complaint containing the same causes of action.
D. Summary Judgment
On February 5, 2010,
plaintiff moved for summary judgment.
Plaintiff argued the Developer’s Note was voided by the Amended
Partnership Agreement. The trial court
denied the summary judgment motion on July 28, 2010. The trial court ruled: “The Court finds that a triable issue of
material fact exists as to the proper interpretation of Section 14.13 of the
Amended and Restated Partnership Agreement, specifically its reference to
“Promissory Notes to POZ and Bedford, dated May 2, 1989.†. . .
It is not clear whether the challenged note . . . which is to POZ only, not POZ and Bedford,
falls within the integration clause.â€
E. Trial Evidence
The trial court received
trial exhibits and heard testimony from Max Perry, Richard Devine, Barry
Richlin, Richard Tell, Reverend Joel B. Hardwick and Charles Quarles.
Seaberg, an accountant with the CRA, and James E. Blanco, defendant’s forensic
handwriting expert. Plaintiff also
submitted deposition testimony from Joseph Daniel Simms, an accountant who
audited plaintiff’s financial statements beginning in 1994.
Mr. Perry testified he
has been an in-house attorney with AFC and its subsidiaries since 1983. AFC is the parent corporation of United, one
of plaintiff’s general partners. AFC
buys and rehabilitates low-income housing properties. For the Gilbert Lindsay Manor, AFC applied
and received tax credits from the California tax credit allocation
committee. AFC then raised capital from
investors who bought low-income housing tax credits generated by the housing
project.
Mr. Perry testified he
created plaintiff’s partnership documents.
He stated he first saw the Developer’s Note in November 2005 when Mr.
Quarles, Bedford’s president, sent it to him by fax. The Developer’s Note to POZ, dated May 2,
1989, in the amount of $1,743,000, carried an 8.501% annual interest rate. The Developer’s Note specified the following
payment to POZ: “Payments to be made
monthly in accordance with Section 1.16 of the Amended and Restated Agreement
of Limited Partnership of Coliseo Housing Partnership and the Debt Paydown
Reserve Agreement referred to therein.
Monthly payment in the amount of Twelve Thousand Dollars ($12,000). All payments shall be applied to interest and
the balance to principal.†The
Developer’s Note was signed by: Mr.
Quarles, Bedford’s president; Reverend J.B. Hardwick, board chairman of POZ;
and Richard Tell, executive vice president of United.
because it was dated May 2, 1989 and all notes from that date were superseded
by the Amended Partnership Agreement. He
testified the two prior promissory notes, each in the amount of $871,500, were
converted to POZ’s capital account. Mr.
Perry was not aware of any other promissory note given to POZ and Bedford.
Mr. Perry admitted he
investigated payments to POZ and Bedford after CRA sent a notice of default in
1996. POZ and Bedford paid themselves at
least $342,000 ahead of CRA’s loan. On
March 25, 1996, the CRA sent plaintiff a notice of default because plaintiff’s
December 31, 1994 audited financial statements revealed a distribution of
$66,000 to the partnership in 1994.
Mr. Perry spoke with
Lawrence Penn, an accountant who provided accounting services to plaintiff,
about the CRA default in 1996. On April
24, 1996, Mr. Penn wrote a letter to plaintiff’s auditor, Mr. Simms, concerning
the CRA dispute. Mr. Penn wrote: “The dispute with the CRA, in part, related
to the interpretation of the first mortgage.
Is it limited to the SAMCO loan regardless of the amount, or does the
partnership loan of $1,743,000.00 also come in front of, and to be included in,
the calculation of net distributable cash “residual receiptsâ€? [¶]
Please prepare an amortization schedule assuming that the SAMCO loan
were in two parts, one for $3,000,000.00, and the other part $1,743,000.00,
assuming same terms and interest rate on the second part as on the first part
currently has.†Mr. Perry testified the
actual SAMCO loan was $3.5 million, not $3 million. He was not aware of a partnership loan for
$1,743,000 and believed Mr. Penn’s letter was incorrect. Mr. Perry stated in 1996 Mr. Quarles took the
position that the Developer’s Note had priority over the CRA loan because CRA
had agreed its loan would be subordinate up to $4,743,000 under the Disposition
and Development Agreement.
Mr. Seaberg, CRA’s
Director of Audit and Compliance, testified he sent Housing Preservation
Associates, Inc. a letter on July 22, 2004 enclosing a review by CRA’s outside
auditor, Macias, Gini & Company. The
auditors concluded plaintiff owed $195,677 to the CRA for loan and ground lease
obligations prior to 1996. The April 28,
2004 audit review identified plaintiff’s four long-term debts based on the
auditor’s review of debt agreements and plaintiff’s audited financial statement
from 1996 through 2003. Plaintiff had
a first mortgage with SAMCO in the amount of $3,500,000. Plaintiff also had a second mortgage with the
CRA in the amount of $3,954,000 and a 50-year ground lease with the CRA. Finally, the audit review listed a note
payable to the general partners. The
audit review states: “This note, in the
amount of $1,743,000 carries the same terms as the 1st mortgage and is
subordinated to both the 1st and 2nd mortgage.
Based on our review of the financial statements, no payments (principal
or interest) were made to the General Partners on this note during the years
ended December 31, 1996 through December 31, 2003.†The audit review summarized interest expense
on the first and second mortgages and the note, relying on plaintiff’s
financial statements. The audit review
states: “The Partnership recognized
$1,185,377 of interest expense and made no interest payments on the note
payable to general partners.†The
interest expense summary in Attachment A of the audit review showed interest
expense of $148,172 on the note to general partners for 1996 through 2003.
Mr. Seaberg’s letter was
attached to a letter from Mr. Perry to Mr. Quarles dated August 2, 2004. Mr. Perry wrote: “CRA recently completed an audit of the
project for compliance with the CRA documentation. The auditors concluded that the partnership
still owes the agency for loan and ground lease obligations. . . . [¶] If
you recall, you, Larry Penn and I spent some time on these issues in 1996, and
the CRA has now renewed its request for reimbursement. I believe that the CRA at that time disputed
your right to payments made on your subordinated note. The partners have asked to forward Mr.
Seaberg’s letter to you and demand to be held harmless from CRA’s
demands.†Mr. Perry testified he wrote
“subordinated note†because that was what the CRA had said. He asserted it was a mistake. Mr. Perry stated: “I in 2004 wrote this letter because the CRA
had demanded reimbursement for the money that was taken in 1996. Now, if they had said subordinated note in
2004, eight years later I just parroted what they said.†He testified United later paid CRA
$195,000. Mr. Perry acknowledged the
Developer’s Note was listed as a long-term liability but neither POZ nor
Bedford made a demand on payment of the note.
Mr. Richlin was an
accountant who prepared plaintiff’s 1990-1991 and 1991-1992 financial
statements. He later became Bedford’s
controller from 1996 through October 2009.
The 1990-1991 and 1991-1992 financial statements identified “notes payableâ€
in the amount of $1,743,000. “The notes
payable are due to the general partners.
They carry the same terms and amortization as the first mortgage.†Mr. Richlin testified, “Notes payable is a
generic term and could refer to one or more notes.†In addition, plaintiff’s 1993 financial
statements prepared by the subsequent accountant, Amie Ursabia, referenced
“notes payable†in the amount of $1,743,000.
Beginning in 1994,
plaintiff’s financial statements were prepared by Mr. Simms, an auditor employed
by Habif, Arogeti & Wynne. The
accounting firm was engaged by AFC to audit plaintiff’s financial
statements. Mr. Simms referred to a
“note payable†to general partners in the amount of $1,743,000 in the 1995-1996
financial statements. But Mr. Simms
stated he was only aware of two promissory notes dated May 2, 1989, each in the
amount of $871,500, to Bedford and POZ.
A 1995 independent audit
of plaintiff by KPMG Peat Marwick LLP conducted at the request of the CRA
indentified a note payable to the general partners. The 1995 KPMG Peat Marwick audit report
states: “Note Payable to General
Partners [¶] At December 31, 1995, the balance
of the note payable due to the general partners equaled $1,743,00. Such note carries the same terms and amortization
as the first mortgage to SAMCO. As of
December 31, 1995, accrued interest totaled $228,000. During 1995, $36,000 was paid for interest.â€
In 2004, Habif, Arogeti
& Wynn removed the “note payable†reference from the 2003-2004 financial statements. The 2003-2004 financial statement states in
part: “During 2004, it was discovered
that the general partners notes totaling $1,743,000 were not valid notes and
should never have been recorded on the books of the Partnership.†Mr. Perry testified for 15 years,
plaintiff’s financial statements incorrectly referred to a note or notes
payable to the general partners.
Reverend Hardwick,
chairman of POZ’s board and long-time pastor of Praises of Zion Church,
testified POZ became involved in the housing project after he was contacted by
Councilman Gilbert Lindsay. Reverend
Hardwick stated the Developer’s Note replaced the two prior promissory
notes. He was not knowledgeable about
the financial details of the housing project.
Instead, Reverend Hardwick focused:
on getting the community to accept the housing project; renting out the
apartment units; and managing the project.
Mr. Quarles testified AFC and United’s capital
contribution to the housing project was $5.2 million including $1,623,000 in
equity required by the CRA and a promissory note of $1,743,000. Because Bedford and POZ were receiving
promissory notes instead of cash, there was phantom income on the notes. To address this issue, the two promissory
notes were combined and the new note was made payable only to POZ. POZ as a nonprofit corporation did not pay
taxes on the phantom income.
Mr. Quarles stated the
Developer’s Note was signed in 1991, not May 2, 1989. But the Developer’s Note was backdated to
the date of the two previous notes because POZ and Bedford did not want to lose
the interest that had accrued from 1989 to 1991. In addition, POZ and Bedford agreed to
reduce the interest from 10% to 8.5% so it would be the same as the interest
rate on the first mortgage. Because the
partnership did not know what the first mortgage interest rate was until 1991,
it was not until then that the parties signed the Developer’s Note.
Mr. Quarles testified
plaintiff issued the Developer’s Note because United and AFC did not have the
cash to pay Bedford and POZ. He
explained: “The equity partners had to
pay what I considered an entry fee, to be involved in the project. They were supposed to come in, with a minimum
capital contribution of $5.2 million dollars.
It was supposed to be all cash.
And, because of what was alleged to be the shortage of cash, they
provided some cash and the balance in a note.
So, the consideration for the $5.2 million dollars was allowing them
into the deal.†Mr. Quarles testified the
only payments on the note were the payments POZ and Bedford took in the amount
of $342,000.
He admitted he signed a
receipt of cash collateral and agreement dated August 2, 1990. That agreement states: “Coliseo Housing Partnership (“the Partnershipâ€)
hereby acknowledges contribution in the sum of $700,000 by the limited partners
. . . . This constitutes the final installment
of the limited partners’ capital contribution obligation and total capital
contribution of $5,200,000 pursuant to the Amended and Restated Agreement of
Limited Partnership of the Partnership, dated as of May 1, 1990 . . . .â€
In two declarations
submitted in the case, Mr. Quarles stated the partnership agreed to pay POZ and
Bedford a developer’s fee pursuant to section 6.03 of the Amended Partnership
Agreement. POZ and Bedford agreed to a
deferral of a $1,743,000 developer’s fee by accepting two promissory notes that
later became a single promissory note issued to POZ.
F. Statement of Decision and Judgment
On December 10, 2010, the
trial court issued its statement of decision.
The court described the financing for the housing development and the
promissory notes issued to POZ and Bedford.
The trial court found:
“Defendants Bedford and POZ were to be involved in the development of
the project, and in return for their efforts, were to receive a development
incentive fee, which was reflected in a document called a “Surplus Cash
Disposition Agreement dated May 2, 1989 [Trial Exhibit 68]. Under the terms of that agreement, there were
to be two promissory notes, each in the amount of $871,500, with one of the
notes to be payable to Bedford and the other to be payable to POZ. The total development incentive fee to be
paid to POZ and Bedford was listed as $2,243,000 and was broken down into a
$500,000 cash payment and the remaining $1,743,000 was to be deferred in the
form of the above mentioned promissory notes.
A promissory note incorporating both notes was reflected in a document
bearing the date of May 2, 1989, but, according to testimony at trial, may not
have been created until 1991. This was
signed by Charles Quarles on behalf of Bedford, Richard Tell on behalf of
United Housing Preservation Corporation (although that was disputed by
plaintiff and Mr. Tell at trial could not recall if he signed it) and by
Reverend J.B. Hardwick on behalf of POZ.
Interest on the note was to be $8.501% and payments were to be made in
the amount of $12,000 per month.â€
Next, the trial court
detailed the parties’ arguments concerning the Developer’s Note. The trial court wrote: “Plaintiff claims that this promissory note,
if in fact it was executed on the date of the document, was superseded by the
May 1, 1990 Amended and Restated Agreement of Limited Partnership [Trial
Exhibit 73], which plaintiff alleges dispensed with any promissory notes for
the development incentive fee. In
paragraph 14.13 of said agreement, the parties agreed that the promissory notes
payable to Poz and Bedford and dated May 2, 1989, were merged into and superseded
by the agreement. Defendants allege that
paragraph 4.06 of the agreement, dealing with general partner loans, allows
for, and is the basis of the single note in the amount of $1,743,000 payable to
Poz. In support of this, and explaining
why said note would be payable to Poz only, Mr. Quarles testified at trial that
Poz, unlike Bedford, was a non-profit and could receive phantom income and not
have to pay taxes on it. Mr. Quarles,
who holds an MBA from Harvard, was a credible, effective witness who was able
to explain many of the details of this project in an intelligible,
comprehensive manner. [¶] According to plaintiff, the fact that the May
1, 1990 agreement dispensed with existing promissory notes is borne out, at
least in part, by the financial statements for the partnerships for 1989 and
1990 which contain no reference to the notes [Trial Exhibit 80]. However, financial statements for 1991,
prepared by a different accountant, reflect notes (plural) payable in the
amount of $1,743,000 [Trial Exhibit 85].
This figure was carried forward in subsequent financial
statements.â€
The trial court found the
Developer’s Note was not forged. The
court ruled: “The ultimate question is
whether the note for $1,743,000 should be canceled, and, if so, for what
reason? Plaintiff attempted to establish
that the promissory note of May 2, 1989 [Trial Exhibit 36] bears the forged
signature of Richard Tell, but the expert testimony on that issue was
inconclusive, or at best established that in all likelihood the signature was
that of Mr. Tell. There is no basis for
cancelling the note on the basis of forgery.
The weight of the evidence is that the note was indeed carried forward
and the provisions of the Amended and Restated Agreement of Limited Partnership
effective May 1, 1990 did not extinguish the obligation. The financial statements through the years,
with the exception of 1989 and possibly 1990, reveal the continued existence of
the obligation.â€
In addition, the trial
court ruled the action was barred by the statute of limitations. The trial court explained: “Plaintiff claims that the statute began to
run in November, 2005, when Mr. Quarles sent a copy of the note to Max
Perry. Prior to that time, plaintiff
asserts, there was no indication that the note existed. Since the 2 notes had been canceled, and the
amounts were changed to capital contributions, the argument goes, there would
have been no need for the note to even exist.
However, anyone looking at the financial statements would have been
aware of it. For example, Trial Exhibit
97, a financial statement from [KPMG] for Coliseo for 1995 directly reflects
the note for $1,743,000.â€
The trial court ruled in
defendants’ favor. “[P]laintiff has
failed to carry its burden of proof that the note should be canceled. The note dated May 2, 1989 in the amount of
$1,743,000 was not superseded by the May 1, 1990 Amended and Restatement
Agreement of Limited Partnership of Coliseo Housing Partnership. The consideration given for the note was the involvement
of Poz, through Rev. Hardwick’s contacts, activities and tenant generation, and
Bedford, through its assistance in the development and management of the
project. It is the determination of the
court that the note is valid, and Poz may seek to enforce it. [¶]
Judgment is for defendants. Each
side to bear its own costs.â€
Plaintiff objected to the
statement of decision on several grounds including that the Developer’s Note
was an illegal instrument because it was used by Bedford to evade taxes. Defendants also objected to the statement of
decision because they were not awarded costs as the prevailing parties. On February 23, 2011, the trial court
overruled the parties’ objections to the statement of decision. The trial court ruled: “[P]laintiff takes issue with the court’s
finding, arguing and including, inter alia, that there was evidence of tax
evasion (as opposed to legal tax avoidance) and that the decision is
unclear. The objections and argument
thereon are without merit and are overruled.
[¶] Defendants[’] objection to
the Statement of Decision is likewise overruled. Section 1032 of the Code of Civil Procedure
allows the court discretion to allow costs or not allow costs when any party
recovers other than monetary relief, as is the case here.†The trial court later entered judgment in
favor of defendants on August 18, 2011.
G. Plaintiff’s Motion to Vacate Judgment and
Motion for New Trial
On September 2, 2011
plaintiff moved to vacate the judgment and for a new trial. Both motions argued the Developer’s Note
was void and unenforceable because the purpose of the note was illegal tax
evasion. In support of its motion,
plaintiff submitted the declaration of J. Nicholson Thomas, a tax attorney from
Gibson, Dunn & Crutcher, LLP. Mr.
Thomas opined as an accrual basis taxpayer, Bedford was required to recognize
interest accrued on the promissory note, regardless of whether such interest
was actually received during the tax year.
Mr. Thomas states: “I conclude
that the IRS would likely find that the issuance of the Replacement Note solely
in the name of POZ was transacted for no legitimate business or economic
purpose apart from facilitating Bedford’s attempt to avoid recognizing, and
paying tax on, the phantom income generated by the Original Bedford Note by
funneling the income through POZ, a non-profit entity.â€
In opposition to
plaintiff’s motions to vacate judgment and for a new trial, defendants
submitted the declaration of Mr. Quarles.
In the declaration, he explained how Bedford’s auditors treated the
Developer’s Note. Mr. Quarles
stated: “In 1991 when the two notes of
$871,500 each were combined into a single note of $1,743,000, I did say that it
was done for the purpose to avoid Phantom Income on the interest; however,
after the notes were combined, and I discussed this idea with our independent
auditors, I was informed that since the note was already on Bedford’s balance
sheet and had been properly taken into income and that the prior years[’]
interest income had already been recognized, both on Bedford’s financial
statements and income tax returns, although no interest payments had been paid.
. . . I was informed that combining the
notes would not be the proper way of handling the Phantom Income issue. However, since the notes had already been
combined, we did not unwind and separate the notes. . . . [D]espite the
considerations to avoid the tax consequences of Phantom Income by combining the
two notes, it was irrelevant, because the initial interest on the prior note
(prior to the combination) had already been recognized and accounted for
properly and Bedford’s auditors would not allow the questionability of the
collectability of the interest on Bedford’s 50% share of the combined note to
be recognized without an associated deferred income account associated with the
note.â€
On October 13, 2011, the
trial court denied plaintiff’s motions to vacate judgment and for new
trial. On October 17, 2011, plaintiff
filed a notice of appeal. Defendants filed their cross-appeal on
October 27, 2011.
III. DISCUSSION
A. Statute of Limitations
The statute of
limitations, which operates as an affirmative defense, prescribes the period
beyond which a plaintiff may not bring a cause of action. (Fox v.
Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 806; accord
383, 395-396.) Once a cause of action
accrues, the plaintiff must bring a claim within the limitations period. (Fox v.
Ethicon Endo-Surgery, Inc., supra, 35 Cal.4th at p. 806; Code Civ. Proc. §
312 [“Civil actions, without exception, can only be commenced within the
periods prescribed in this title, after the cause of action shall have accrued,
unless where, in special cases, a different limitation is prescribed by statuteâ€].) The determination of the accrual of a cause
of action is a question of fact. (
35 Cal.4th at p. 810; Bookout v. State ex
rel. Dept. of Transportation (2010) 186 Cal.App.4th 1478, 1484.) We defer to the trial court’s factual
findings if supported by substantial evidence.
(In re Charlisse C. (2008) 45
Cal.4th 145, 159; Kavanaugh v. West
Sonoma County Union High School Dist. (2003) 29 Cal.4th 911, 916.) But if the facts are undisputed, application
of the statute of limitations is a matter of law and subject to de novo
review. (Aryeh v. Canon Business Solutions, Inc. (2013) 55 Cal.4th 1185,
1191; Internat. Engine Parts, Inc. v.
Feddersen & Co. (1995) 9 Cal.4th 606, 611-612.)
Civil Code section 3412
permits the cancellation of a written instrument. Section 3412 provides: “A written instrument, in respect to which
there is reasonable apprehension that if left outstanding may cause serious
injury to a person against whom it is void or voidable, may, upon his application,
be so adjudged, and ordered to be delivered up or canceled.†The statute of limitations on a cause of
action for cancellation is governed by the four-year limitations period under
Code of Civil Procedure section 343.
v. Moss (1942) 20 Cal.2d 640; 645; Robertson
v. Superior Court (2001) 90 Cal.App.4th 1319, 1326; Zakaessian v. Zakaessian (1945) 70 Cal.App.2d 721, 725;
limitations on promissory note].)
“The limitations period
for declaratory relief claims depends on ‘the right or obligation sought to be
enforced, and the [statute of limitations’s] application generally follows its
application to actions for damages or injunction on the same rights or
obligations.’†(Ginsberg v. Gamson (2012) 205 Cal.App.4th 873, 883 quoting
Habra (2001) 25 Cal.4th 809, 821.)
Plaintiff’s declaratory relief claims seek resolution of the validity of
the Developer’s Note based on alleged forgery, lack of consideration, and
whether the note was superseded by the Amended Partnership Agreement. These are the same bases for plaintiff’s
cancellation claim. Thus, we apply the
four-year statute of limitations under Code of Civil Procedure section 343 to
the declaratory relief claims.
Plaintiff contends the
four-year statute of limitations on the cancellation claim did not accrue until
November 21, 2005 when Mr. Quarles sent Mr. Perry a copy of the Developer’s
Note. Plaintiff argues the trial court
erred in finding the statute of limitations began to run before defendants made
any demand on the Developer’s Note relying on Garver v. Brace (1996) 47 Cal.App.4th 995, 999. Plaintiff’s reliance is misplaced.
In Garver v. Brace, the buyers signed a promissory note containing a
prepayment fee clause payable to the sellers in 1989. (47 Cal.App.4th at p. 998.) In November 1993, the buyers sold the
property and prepaid the note incurring a prepayment fee of $184,000. (Id. at
p. 999.) The buyers filed a lawsuit on
May 1994 seeking restitution of the prepayment fee. (Ibid.) The appellate court held the statute of
limitations on the buyers’ cause of action did not run until the sellers
demanded the prepayment fee. (
court reasoned: “The buyers were not
required to pay the prepayment fee until the sellers demanded it. That is the date upon which the buyers
suffered appreciable and actual harm and, therefore, the date on which their
cause of action to challenge the validity of the prepayment fee clause
accrued.†(Id. at pp. 1000-1001.)
In Garver v. Brace, the prepayment provision only triggered when the
buyers prepaid the promissory note.
Thus, the buyers’ cause of action did not accrue until the sellers
demanded the prepayment fee.
the present case.
Here, plaintiff seeks to
cancel the entire promissory note, filing its first complaint on August 11,
2009. But the date upon which plaintiff
suffered appreciable and actual harm, and therefore, the date their
cancellation claim accrued arose when defendants first took interest payments
on the Developer’s Note in the 1990s.
Substantial evidence
supports the trial court’s finding that the cancellation and declaratory relief
claims accrued before August 2005. From
1991 through 2003, plaintiff’s financial statements reflected a $1,743,000
“note†or “notes†payable to the general partners. A 1995 independent audit of plaintiff by KPMG
Peat Marwick LLP conducted at the request of the CRA identified a note payable
to the general partners. An audit
conducted by Macias Gini & Company for the CRA-- which reviewed plaintiff’s
audited financial statements from 1996 through 2003-- referenced a note, in the
amount of $1,743,000 that carried the same terms as the first mortgage and was
subordinated to both the first and second mortgage. Also, Mr. Perry admitted in 1996 he
investigated payments to defendants after the CRA sent a notice of default
because defendants had paid themselves $342,000. Furthermore, in 2004, plaintiff’s auditor
Habif, Arogeti & Wynn, LLP, determined the general partner notes were not
valid and removed them from plaintiff’s financial statements. Substantial evidence supports the finding
that plaintiff was aware of the Developer’ Note and suffered appreciable and
actual harm more than four years before plaintiff filed its complaint. Based on the foregoing evidence, we conclude
plaintiff’s cancellation and declaratory relief claims are barred by the
four-year statute of limitations
under Code of Civil Procedure section 343.
Because plaintiff’s
claims are barred, we declined to discuss whether the Developer’s Note was
superseded by the Amended Partnership Agreement. In addition, we find no need to address
plaintiff’s argument concerning lack of consideration for the Developer’s
Note. We also decline to discuss
plaintiff’s contention that the Developer’s Note is unenforceable because of
alleged tax evasion.
B. Award of Costs
Code of Civil Procedure
section 1032, subdivision (a)(4) provides:
“‘Prevailing party’ includes the party with a net monetary recovery, a
defendant in whose favor a dismissal is entered, a defendant where neither plaintiff
nor defendant obtains any relief, and a defendant as against those plaintiffs
who do not recover any relief against the defendant. When any party recovers other than monetary
relief and in situations other than as specified, the ‘prevailing party’ shall
be as determined by the court, and under those circumstances, the court, in its
discretion, may allow costs or not and, if allowed may apportion costs between
the parties on the same or adverse sides pursuant to rules adopted under
Section 1034.†We review for abuse of
discretion the trial court’s determination of the prevailing party and its
award of fees and costs. (
1327, 1332; Arias v. Katella Townhouse
Homeowners Assn., Inc. (2005) 127 Cal.App.4th 847, 856.)
Defendants argue they
were entitled to costs as the prevailing party under Code of Civil Procedure
section 1032, subdivision (a)(4). But
defendants did not recover any monetary relief.
Thus the award of costs was discretionary, not mandatory. Section 1032, subdivision (a)(4) permits the
trial court to allow or not allow costs at its discretion “when any party
recovers other than monetary relief.†We
find no clear abuse of discretion and miscarriage
of justice as to warrant reversal. (
(1996) 50 Cal.App.4th 1367, 1395.)
IV. DISPOSITION
We affirm the
judgment. Plaintiff Coliseo Housing
Partnership and defendants POZ Village Development Inc. and The Bedford Group
are to bear their own appeal costs.
NOT
TO BE PUBLISHED IN THE OFFICIAL REPORTS
O’NEILL,
J.
We concur:
TURNER,
P. J.
KRIEGLER, J.
and POZ were general partners until 2006, when they were removed as general
partners and became limited partners.
grant plaintiff’s motion to correct the record based on typographical errors
contained in the reporter’s transcript.
