Veta v. HDN Group
Filed 6/12/13 Veta v. HDN Group CA1/5
NOT TO BE
PUBLISHED IN OFFICIAL REPORTS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opinion has not been certified for publication or ordered published for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
FIRST APPELLATE
DISTRICT
DIVISION FIVE
VETA,
Plaintiff, Cross-Defendant
and Appellant,
v.
HDN GROUP,
Defendant, Cross-complainant
and Respondent;
MARC HARRIS et al.,
Defendants and
Respondents;
SENATOR O’BRIEN et al.,
Cross-Defendants and Appellants.
A134197
(
Super.
Veta,
a partnership, appeals from the trial court’s judgment in favor of HDN Group
(HDN), also a partnership, on Veta’s first amended complaint against HDN and on
HDN’s first amended cross-complaint against Veta.
concluding Veta’s first amended complaint failed to state claims for fraud and
breach of the implied covenant of good faith and fair dealing, in striking
allegations from Veta’s first amended complaint under the statute of frauds and
parol evidence rule, in failing to grant Veta leave to amend, and in
restricting trial on HDN’s cross-complaint to the issue of damages owed to
it. On the other hand, the trial court
properly concluded Veta failed to state a claim for
Background
In
January 2009, Veta entered into negotiations with HDN to lease commercial
property (Property) located on Healdsburg Plaza. Veta intended to operate a dinner club and
music venue at the Property. The
Property required significant improvements in order for it to be used for
Veta’s intended purpose.
On
March 23, 2009, Veta and HDN executed a 10-year lease (Lease) for the Property,
with a start date of June 1, 2009. The
Lease required HDN to install a sprinkler system and elevator on the
Property. The Lease contemplated that
the sprinkler system would be completed by July 1 and the elevator would be
completed by August 1.
Following
execution of the Lease, HDN failed to commence construction of the improvements
to the Property, but assured Veta the improvements would be completed on
schedule. HDN also requested additional
money from Veta to fund completion of the improvements required under the
Lease, at one point requesting $70,000.
Subsequently, Veta learned, contrary to HDN’s previous representation,
HDN had not applied for an improvement loan from the City of Healdsburg.
As
of June 1, 2009, HDN had not started construction of the promised
improvements. On that date, HDN informed
Veta the sprinkler system would not be completed until October 1.
Later
in June 2009, HDN served Veta with a three-day notice to pay rent or quit.
filed suit against HDN, alleging one cause of action for fraud. On September 4, 2009, HDN filed a separate
action for unlawful detainer against Veta.
The parties stipulated to an order granting possession to HDN and all
remaining issues were reserved for determination in Veta’s action.
In
February 2009, HDN filed a cross-complaint against Veta and its individual
partners for breach of contract.
In
December 2009, HDN demurred to Veta’s complaint, primarily for lack of
specificity. Veta did not oppose. The trial court sustained with leave to
amend.
In
January 2010, Veta filed its first amended complaint (FAC).
fraud (fraud and deceit, negligent misrepresentation, and false promise), and
causes of action for breach of contract and breach of the implied covenant of
good faith and fair dealing. The FAC
named HDN and its individual partners.
HDN
moved to strike the FAC on various grounds.
The trial court granted the motion and subsequently granted HDN’s motion
for a judgment of dismissal of the FAC.
Arguing
the order in the unlawful detainer action was a determination Veta breached the
Lease, HDN requested the trial on its cross-complaint be limited to the issue
of the damages owed to it. The trial
court entered an order to that effect and the parties eventually stipulated to
the amount of damages owed to HDN. In
October 2011, the trial court entered a judgment in favor of HDN on the FAC and
awarded HDN $150,000 on its cross-complaint against Veta. This appeal followed.
Discussion
I. The
Sham Pleading Doctrine Is Inapplicable
In
the trial court’s order on HDN’s motion to strike the FAC, the court found the
FAC was a sham pleading because the FAC included allegations different from the
allegations in the original complaint.
Veta’s counsel submitted a declaration averring the allegations in the
FAC were based on counsel’s independent factual investigation and an attempt to
provide more detail than the original complaint, and any apparent
inconsistencies were either not actual inconsistencies or not material
differences. The trial court concluded
the declaration was inadmissible and that it “fail[ed] to explain the
discrepancies and omissions between the original and first amended complaint.â€
“Under
the sham pleading doctrine, plaintiffs are precluded from amending complaints
to omit harmful allegations, without explanation, from previous complaints to
avoid attacks raised in demurrers or motions for summary judgment. [Citations.]
A noted commentator has explained, ‘Allegations in the original pleading
that rendered it vulnerable to demurrer or other attack cannot simply be
omitted without explanation in the amended pleading. The policy against sham pleadings requires
the pleader to explain satisfactorily
any such omission.’ [Citation.]†(Deveny
v. Entropin, Inc. (2006) 139 Cal.App.4th 408, 425-426, fn. omitted.) We conclude the trial court abused its
discretion (Berman v. Bromberg (1997)
56 Cal.App.4th 936, 951 (Berman)) in
striking the FAC as a sham pleading.
Although
there is no absolute rule against applying the sham pleading doctrine where the
original pleading is unverified, the circumstances must justify applying the
doctrine in that situation. Thus, the
general rule is, “ ‘Where a verified
complaint contains allegations destructive of a cause of action, the defect
cannot be cured in subsequently filed pleadings by simply omitting such
allegations without explanation.’
[Citations.] ‘In such a case the
original defect infects the subsequent pleading so as to render it vulnerable
to a demurrer.’ [Citation.]†(Reichert
v. General Ins. Co. (1968) 68 Cal.2d 822, 836 (Reichert), italics added; see also Tostevin v. Douglas (1958) 160 Cal.App.2d 321, 327 [“It is well
settled that facts once alleged under oath cannot be withdrawn from
consideration by merely filing an amended pleading eliminating them without
explanation.â€].) Reichert held the doctrine could justify holding a plaintiff to an
allegation in an unverified complaint where the prior “allegation appears as
well established as if the original complaint had been verified.†(Reichert,
at p. 837.)
In
Reichert, the plaintiff alleged in
his original complaint that he was previously adjudicated bankrupt, but
plaintiff omitted that allegation in the first four causes of action in his
first and second amended complaints. (
The Supreme Court held the trial court could sustain a demurrer to those
four causes of action based on the omitted bankruptcy allegation, which meant
that the causes of action were actually vested in plaintiff’s trustee in bankruptcy. (Id.
at pp. 829, 837.) That was proper,
despite the omission of the allegation in those causes of action and despite
the fact that the original complaint was unverified, because the remaining
causes of action in the amended complaint did
contain the allegation of bankruptcy and because the plaintiff told the trial
court “the second amended complaint was as well pleaded as he could make
it.†(Id. at p. 837.) On that
record, Reichert concluded, “for our
present purposes the bankruptcy allegation appears as well established as if
the original complaint had been verified.
In view of the foregoing, we are satisfied that in examining the four
common counts, we can consider plaintiff’s
prior allegation that he was adjudicated a bankrupt on the date given.†(Ibid.)
In
Hendy v. Losse (1991) 54 Cal.3d 723,
743, the Supreme Court concluded the trial court did not err in denying the
plaintiff leave to amend to omit an allegation that a defendant was an
employee, and to allege the defendant was an independent contractor, even
though the original allegation was not verified. The court reasoned, “While plaintiff’s
allegation that [the defendant] was an employee was made on information and
belief, he did not suggest to the trial court that a factual basis existed for
amendment of the complaint to allege that [the defendant] was an independent
contractor, and he has not demonstrated to this court either that the
allegation that [the defendant] was an employee was the result of inadvertence
or mistake, or that he has since discovered a factual basis for alleging that
[the defendant] was an independent contractor.
[Citation.]â€
In
the present case and unlike in Reichert,
no circumstances justify a conclusion the allegations in the original,
unverified complaint should be given conclusive effect. And the declaration of Veta’s counsel, which
avers that the allegations in the FAC are the product of his independent
investigation, demonstrates a factual basis exists for the allegations in the
FAC. The trial court abused its
discretion in striking the FAC as a sham pleading.
II. The
Trial Court Erred in Striking Allegations in the FAC Under the Statute of
Frauds and Parol Evidence Rule
The
trial court concluded the FAC’s “allegations concerning [HDN’s] alleged oral
promises to perform certain material terms which fall outside the four corners
of the lease violate the [s]tatute of [f]rauds and must be stricken.†“The statute of frauds ‘demands that every
material term of an agreement within its provisions be reduced to written form,
whether the parties desire to do so or not.’
[Citation.]†(
Cal.4th 336, 345 (Casa Herrera); see
also Civ. Code, § 1624.) However, the
trial court’s reasoning was in error, because the statute of frauds does not
bar a cause of action based on a fraudulent promise. Under Tenzer
v. Superscope, Inc. (1985) 39 Cal.3d 18 (Tenzer), “[t]he doctrine of estoppel to plead the statute of frauds
may be applied where necessary to prevent either unconscionable injury or
unjust enrichment.†(
Fresno-Madera Production Credit Assn. (2013) 55 Cal.4th 1169, 1183 (
HDN
argues that, even if Veta’s claims based on the alleged oral promises are not
barred by the statute of frauds, those claims are barred under the parol
evidence rule. Under that rule, “all
prior or contemporaneous ‘oral negotiations are merged in the written contract,
which is conclusive in the absence of a plea of actual fraud or mistake.’ [Citation.]
The written agreement supersedes these negotiations and becomes the
parties’ sole agreement [citation], and extrinsic evidence may not ‘add to,
detract from, or vary the terms of’
that agreement [citation]. As such, the
rule ‘applies to any type of contract, and its purpose is to make sure that the
parties’ final understanding, deliberately expressed in writing, shall not be
changed.’ [Citation.]†(Casa
Herrera, supra, 32 Cal.4th at p.
345; see also Civ. Code, § 1625.)
Until
recently, the parol evidence rule precluded “promissory fraud claims premised
on prior or contemporaneous statements at variance with the terms of a written
integrated agreement.†(
258.) But in Riverisland, the California Supreme Court overruled
that the limitation on the fraud exception to the parol evidence rule was
“plainly out of step with established California law†(Riverisland supra, 55 Cal.4th at p. 1181), and also “inconsistent
with the terms of†section 1856 of
the Code of Civil Procedure (Riverisland,
at p. 1182). In overruling
venerable maxim [that] ‘[i]t was never intended that the parol evidence rule be
used as a shield to prevent the proof of fraud.’ †(Riverisland,
at p. 1182.)
Thus,
under Tenzer and Riverisland, the trial court erred in concluding that Veta could
not rely on alleged oral promises to perform in support of the fraud causes of
action in the FAC, where it is further alleged that HDN never intended to
perform such promises.
III. The
Trial Court Erred in Striking All of
the Causes of Action in the FAC for Failure to State a Claim
One
of the trial court’s primary grounds for granting the motion to strike was its
conclusion that the causes of action in the FAC were without merit. This was not a proper basis to grant a motion
to strike. As explained in
(1989) 216 Cal.App.3d 340, 342, “a motion to strike is generally used to reach
defects in a pleading which are not subject to demurrer. A motion to strike does not lie to attack a
complaint for insufficiency of allegations to justify relief; that is a ground
for general demurrer. [Citation.]†Nevertheless, “[a] motion for judgment on
pleadings is made on the same grounds and decided on the same basis as a
general demurrer,†and, to the extent the trial court found the allegations in
the FAC insufficient, we treat the court’s order as one granting judgment on
the pleadings. (Ibid.)
We
independently review the trial court’s ruling to determine whether the FAC
states a cause of action. (
Richard Ellis Real Estate Services, Inc., supra, 138 Cal.App.4th at p. 1220.)
“In doing so, we accept as true the plaintiff’s factual allegations and construe them liberally. [Citation.]
If the trial court’s ruling on a motion for judgment on the pleadings is
correct upon any theory of law applicable to the case, we will affirm it, even
if we may disagree with the trial court’s rationale. [Citation.]â€
(Ibid.)
A.
Fraud Claims
The
trial court concluded the fraud allegations in the FAC were inadequate because
Veta could not demonstrate HDN’s intent not to perform by alleging only its
nonperformance. (Tenzer, supra, 39 Cal.3d at p. 30.)
But the FAC contained various other allegations supporting the inference
of fraudulent inducement, including
that HDN lied about having been approved for an improvement loan when HDN had
never applied for the loan; that HDN lied about having sufficient capital to
pay for the improvements and about having retained subcontractors; and that HDN
demanded additional funds from Veta to pay for the promised improvements. Those allegations were sufficient. (Tenzer,
at p. 30.)
The
trial court also concluded Veta could not show HDN induced it to enter the
Lease without intending to perform because the Lease contained a provision the
court called an “escape hatch†that protected Veta’s interests in the event of
HDN’s nonperformance. Specifically, the
trial court relied on language in the Lease providing for cancellation of the
Lease and refund of Veta’s security deposit “ ‘[i]n the event that [HDN]
is unable to obtain necessary permits for the installation of sprinklers and
elevator . . . .’ â€
The trial court believed the provision “removed all economic incentive
and advantage†to HDN of entering the Lease without an intention to
perform. However, we disagree the
provision clearly applies on the facts alleged in the FAC. The FAC does not allege HDN was unable to
obtain the necessary permits; under the facts alleged, it is unclear whether
HDN even attempted to obtain permits.
Nevertheless,
the Lease did offer some protection to Veta, because separate language provided
Veta was entitled to a credit for rent for any period during which HDN was
delinquent in completing the promised improvements. (See, post,
part III.B.) That provision, however,
does not defeat Veta’s fraud claims as a matter of law. Under the allegations in the FAC, the
provision did not mean there would be no advantage to HDN in inducing Veta to
enter the Lease without an intent to complete the improvements. The FAC alleges that, after execution of the
Lease, HDN asked Veta to contribute financially toward the improvements; HDN
may have believed it would be able to extract such contributions once Veta had
committed to the Lease and invested in developing its business at that
location. Moreover, the FAC alleges
that, after execution of the Lease, HDN was “able to obtain copies of all the
architectural renderings and schematics prepared by [Veta], which†HDN is “now
using to [its] sole benefit.†The Lease
also failed to provide Veta a right to cancel the Lease and obtain a refund of
its security deposit in the event of delays not due to permitting
problems. Thus, the so-called “escape
hatch†did not remove all advantage
of the Lease to HDN as a matter of law.
The
trial court also appeared to conclude Veta’s fraud allegations were inadequate
because Veta filed suit on July 1, 2009, which was the same day that HDN was
due to have completed installation of a sprinkler system and before the August 1,
2009 due date for installation of an elevator.
From that timing, the court reasoned that Veta “cannot allege
nonperformance on the face of the pleadings.â€
However, as we point out above, the fraud claims were not based on
nonperformance alone and, in any event, the FAC alleged various facts
supporting the allegation of nonperformance.
At the most basic level, the FAC alleged HDN never started work on the
improvements; if work had not even been commenced on the sprinkler system by
the July 1 deadline, Veta could allege in a lawsuit filed that same day that
the deadline was missed. Moreover, the
FAC alleged that HDN told Veta on June 1 that the sprinkler system would not be
completed until October 2009. Thus, the
trial court erred in concluding that the allegations in the FAC were inadequate
to show nonperformance, as relevant to the fraud claims.
Finally,
the trial court’s reasoning that various provisions in the Lease undermine the
fraud causes of action fails in light of the alleged oral promises, which may
support the fraud claims under Riverisland,
supra, 55 Cal.4th 1169. The Lease provisions relied upon by the trial
court do not address those alleged promises.
B.
Breach of Contract Claim
The
trial court concluded Veta failed to state a claim for breach of contract
because it filed suit before passage of the July 1, 2009 deadline for
construction of the sprinkler system and because Veta could not state a breach
of contract claim based on anticipatory repudiation. We agree the FAC fails to state a claim for
breach of contract, but not for the reasons given by the trial court. Instead, we conclude the claim fails because
the Lease as written contains no enforceable promise of completion of the
improvements by any particular date.
Paragraph 5.4 of the Lease states in part: “Lessor shall install, at Lessor’s cost and
expense, an elevator that shall provide access to Lessee’s premises subject to
all necessary approvals . . . .
Lessor shall install, at Lessor’s cost and expense, a sprinkler system for
the entire building . . . .
In the event that the Lessor is unable to complete installation of
sprinklers on or before July 1, 2009, and elevator on or before August 1, 2009
and all of Lessee’s tenant improvements are completed by Lessee at that time,
then Lessee shall be given a pro rated credit for rent until Lessor’s
installation is complete.†Thus, under
the plain language of the contract, failure to complete the improvements on
schedule was not a breach; it simply provided an entitlement to a rent credit
until completion of the improvements.
C.
Breach of the Implied Covenant of
Good Faith and Fair Dealing
On
the other hand, the trial court erred in concluding Veta failed to state a
claim for breach of the implied covenant of good faith and fair dealing. “Generally, every contract, including
commercial leases, ‘ “ ‘imposes upon each party a duty of good faith
and fair dealing in its performance and its enforcement.’ [Citation.]†’ [Citations.]â€
(McClain v. Octagon Plaza, LLC
(2008) 159 Cal.App.4th 784, 798.) “[T]he
implied covenant is a supplement to an existing contract.†(Id.
at p. 799.) In the present case, the FAC
alleges HDN was aware Veta urgently needed the improvements to be completed on
schedule, and HDN repeatedly misled Veta into believing the improvements would
be completed, causing it to expend substantial resources in preparing for a
planned September 2009 opening. Thus,
the FAC states a claim for breach of the
implied covenant of fair dealing, even though it was not a breach for HDN
to fail to meet the improvement schedule in the Lease.
IV. The
Trial Court Should Have Granted Veta Leave to Amend
In
the trial court’s order granting the motion to strike, the trial court
concluded the FAC went beyond the proper scope of amendment following the
sustaining of the demurrers to the original complaint. In particular, the FAC included three fraud
causes of action instead of the one in the original complaint, added causes of
action for breach of contract and breach of the implied covenant of good faith,
and added Harris and DiNapoli as defendants.
We need not decide whether the court properly granted the motion to
strike on that ground because, in any event, the court abused its discretion in
failing to grant Veta leave to amend.
In
opposing HDN’s motion for judgment of
dismissal following grant of the motion to strike, Veta argued the court
should have granted leave to amend in granting the motion to strike and
requested that the court grant it such leave instead of entering a judgment of
dismissal. “ ‘ “When a request
to amend has been denied, an appellate court is confronted by two conflicting policies. On the one hand, the trial court’s discretion
should not be disturbed unless it has been clearly abused; on the other, there
is a strong policy in favor of liberal allowance of amendments. This conflict ‘is often resolved in favor of
the privilege of amending, and reversals are common where the appellant makes a
reasonable showing of prejudice from the ruling.’ †[Citation.]
If the original pleading has not framed the issues in an articulate and
precise manner, a plaintiff should not be precluded from having a trial on the
merits.’ [Citation.]†(Berman,
supra, 56 Cal.App.4th at p.
945.) Thus, “ ‘it is an abuse of
discretion to deny leave to amend where the opposing party was not misled or
prejudiced by the amendment. [Citation.] . . . Moreover, it is irrelevant that new legal
theories are introduced as long as the proposed amendments “relate to the same
general set of facts.†’
[Citation.]†(
Under California’s “liberal rules of pleading, ‘the right of a party to
amend to correct inadvertent misstatements of facts or erroneous allegations of
terms cannot be denied.’
[Citation.]†(
Although
the amendments in the FAC arguably went beyond the scope of that normally
permissible in response to the sustaining of a demurrer (see
Cal.App.4th 995, 1015), the new legal theories are clearly based on the same
set of general facts as the fraud cause of action in the original complaint
(see Berman, supra, 56 Cal.App.4th at p. 946).
Indeed, the trial court’s order granting the motion to dismiss states
regarding the three fraud causes of action, “[t]he two new claims duplicate the
allegations under the original claim; and all three causes of action are, in
fact, species of the same tort of fraud.â€
Moreover, Harris and DiNapoli were effectively already in the action as
the partners in HDN. (See
260, 266-267.) HDN does not argue on
appeal it would have been misled or prejudiced had the trial court allowed Veta
to amend the FAC, and the trial court did not make any such finding.
Because,
as explained above, the trial court erred in concluding the FAC failed to state
claims for fraud and breach of the implied covenant of good faith and fair
dealing, the court abused its discretion in failing to permit Veta to file a
second amended complaint.
V. The
Trial Court Erred in Limiting the Trial on HDN’s Cross-Complaint
Following
dismissal of the FAC, the trial court issued an order limiting trial on HDN’s
breach of contract claim in its cross-complaint to the question of damages owed
to HDN. The court based its ruling on an
assumption that the order of possession issued in favor of HDN by a
detainer action included a finding of Veta’s liability to HDN for breach of
contract. That assumption was mistaken.
As
a general proposition, judgments in unlawful detainer actions have only “very
limited res judicata effect.†(
255.) This is because “the proceeding is
summary in character,†“ordinarily, only claims bearing directly upon the right
of immediate possession are cognizable,†and “cross-complaints and affirmative
defenses, legal or equitable, are permissible only insofar as they would, if
successful, ‘preclude removal of the tenant from the premises.’ [Citation.]â€
(Ibid.) Consequently, a judgment in a unlawful
detainer action “will not prevent one who is dispossessed from bringing a
subsequent action to resolve questions of title [citations], or to adjudicate
other legal and equitable claims between the parties [citations].†(Ibid.)
Moreover,
the record of the hearing in the unlawful detainer action makes it clear the
order of possession did not resolve any liability issues under the Lease. In fact, the unlawful detainer court did not
even take any evidence on the issue of HDN’s right to possession. Instead, Veta stipulated to issuance of the
order of possession in HDN’s favor, based on the express assurance that issues
as to liability under the Lease would be resolved in the present action. Thus, in asking Veta whether it would be
willing to agree to issuance of an order of possession, the court stated, “It’s
one thing to give [HDN] possession; it’s another thing to order [Veta] to pay
[HDN] rent if [Veta] truly w[as] prejudiced by [HDN’s] unwillingness to go
ahead and fix the place up. [¶] If
that would meet [Veta’s] needs, can we enter into an agreement on this, or do
we need evidence?†Subsequently, one of
the Veta partners asked the court, “In layman’s terms, are you offering the idea
that we give up our restaurant space that we’ve never even had access to?†The court answered in the affirmative, and
the Veta partner continued, “So we essentially gave them nearly $15,000 and got
nothing out of it. They turned around
and pretty much locked us out of our space.â€
The court responded, “If you’re correct in that position, they may owe
you the money again. But the fact is the
space lies vacant while these legal actions proceed. They have a right to go forward on an
unlawful detainer.†Ultimately, Veta
agreed to issuance of the order of possession and the court stated, “I will
issue an order of possession.
[¶] . . .
[¶] The action will be consolidated for all purposes with the other
case, and the remaining issue is rent, in this case, which I will hear at the
time I hear the other case.â€
Thus,
as a matter of law and based on the particular unlawful detainer proceedings in
the present case, the trial court below erred in limiting the trial on HDN’s
breach of contract claim to determination of the amount of damages owed to HDN.
Disposition
The
trial court’s judgment is reversed. The
trial court is directed to grant Veta leave to file a second amended complaint
consistent with this decision. Veta is
awarded its costs on appeal.
SIMONS,
Acting P.J.
We concur.
NEEDHAM, J.
BRUINIERS, J.
refer to both Veta alone as well as Veta and its three individual partners,
Senator O’Brien, Nicole O’Brien, and Juan Jaime Dillon Macias. Similarly, we use the name “HDN†to refer to
both HDN alone as well as HDN and its two individual partners, Marc Harris and
William DiNapoli.
causes of action for failure to state a claim, the trial court effectively
treated HDN’s motion to strike as a motion for judgment on the pleadings. On appeal from such a ruling, “we accept as
true the plaintiff’s factual
allegations and construe them liberally.â€
(Stevenson Real Estate Services,
Inc. v. CB Richard Ellis Real Estate Services, Inc. (2006) 138 Cal.App.4th
1215, 1220.) Our factual summary
reflects that standard of review. (See
1051, 1056, fn. 1.)
