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REED SMITH LLP
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REED SMITH LLP
JESSE L. MILLER (SBN 183229)
JesseMiller@reedsmith.com
JENNIFER R. FEARNOW (SBN 246007)
jfearnow@reedsmith.com
MATTHEW T. PETERS (SBN 256739)
mtpeters@reedsmith.com
101 Second Street, Suite 1800
San Francisco, CA 94105-3569
Telephone: 415.543.8700
Facsimile: 415.391.8269
ARNOLD & PORTER LLP
SEAN M. SELEGUE (SBN 155249)
Sean.SeLegue@aporter.com
SHARON D. MAYO (SBN 150469)
Sharon.Mayo@aporter.com
3 Embarcadero Center, [0th Floor
San Francisco, CA 94111-4024
Telephone: 415.471.3100
Facsimile: 415.471.3400
Attorneys for Plaintiff JUSTICE INVESTORS, LP
ELECTRONICALLY
FILED
Superior Court of California,
County of San Francisco
JAN 15 2015
Clerk of the Court
BY: EDNALEEN JAVIER
Deputy Clerk
SUPERIOR COURT OF THE STATE OF CALIFORNIA
CITY AND COUNTY OF SAN FRANCISCO
JUSTICE INVESTORS, LP, a California limited
partnership,
Plaintiff,
ve
JUSTICE HOLDINGS, LLC, a California limited
liability company; EVON CORPORATION, a
California corporation; RICHARD HOWARD
ALBERT, an individual; BRENDA A. ALBERT,
an individual; CHESTER JUDAH, Jr, an
individual; STEPHEN B. ALBERT, an
individual; CARROLL PARKER ALBERT, an
individual; BRUCE A. ALBERT, an individual;
BALBOA PACIFIC PARTNERS, LP, a limited
partnership; MOOSE GREAT-
GRANDCHILDREN GST, a trust;
BRAUNSTEIN FAMILY TRUST, dtd 2/2/04
SPH, a trust; OSKAR KLAUSENSTOCK
TRUST, a trust; JEFFREY TODD
BRAUNSTEIN & PAMELA JANE
BRAUNSTEIN REVOCABLE TRUST dtd
4/30/06 SPH, a trust, HOWARD MAIBACH
No.. CGC-14-540282
PLAINTIFF JUSTICE INVESTORS, LP’S
MEMORANDUM OF POINTS AND
AUTHORITIES IN SUPPORT OF
DEMURRER TO CROSS-COMPLAINT
Date: June 5, 2015
Time: 9:30 a.m.
Dept.: 302
Hon. Ernest H. Goldsmith
Reservation No. 011215-10
[Filed concurrently with Notice of Demurrer
and Demurrer; [Proposed] Order]
MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTREED SMITH LLP
A lensitos Tiability parmership firmed in the Stare of Delaware
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TRUST, a trust; FIDANQUE FAMILY TRUST,
a trust; JAY AND PAT CAHILL FAMILY HOIT
U/T/A dated 7/5/07, a trust; MAICARKEN 1992
IRREVOCABLE TRUST, a trust; SP TORPEDO
TRUST, a trust; CIRCLE BAR TRUST, a trust:
EILEEN JUDAH STAFFORD, an individual;
GLENN & JACQUELINE BRAUNSTEIN
TRUST, a trust; JEFFREY R. GREENDORFER,
an individual; ANTHONY SELESNICK, an
individual; and DOES 1-100, inclusive,
Defendants.
EVON CORPORATION, a California
Corporation
Cross-Complainant,
vy.
JUSTICE INVESTORS, LP, a California limited
partnership, and DOES 101-200, inclusive,
Cross-Defendants.
MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTREED SMITH LLP
A lensitos Tiability parmership firmed in the Stare of Delaware
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TABLE OF CONTENTS
I. RELEVANT FACTUAL AND PROCEDURAL BACKGROUND wuu.cccesccscseeseesnsneseesees
Page
A. The Parties ....c.cesceccsccsseeseesecssissnssnsncesessssnsenessessssnssnesecsssseeseesessssueersessessesesaneesseussneenens 3
B. The Offer to Redeem and Alternative Redemption Structure
Cc. Justice’s FAC ence ences nensnnesscsneasenssssssenssnenessscssennenestscsesnatentecssaneenes
D. Evon’s Cross Complaint 0.0... cccceceecesseseeeescsesnesesecscsesneneeeasaeseeueaseneaceeeneneanenceneeeneane 6
TT. = LEGAL ARGUMENT oo. ecesce cece eeeseeseeeenesseensecssesstescescseesseescsecsessssseeseescesssnseneeseeveaesaes 7
A. Legal Standard for Fraud-Based Demutrets 00.0.0. eecsse ners eensrsceserseenavensserseeeavene F
B. Evon’s Fraudulent Concealment Claim Fails for Lack of Specificity 0.0. 8
Cc. Evon’s Promissory Fraud Claim Fails for Lack of Specificity... eee LE
TV. CONCLUSION wi ceieccisisiessisesissetrerieamicsesimemicscersemsnasnssensnanseserssenee 12
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MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTREED SMITH LLP
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TABLE OF AUTHORITIES
Page(s)
Cases
Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC,
162 Cal. App. 4th 858 (2008) o....cesecieerseeeeersesnenerneeneseeneeneereesaneeneer tasers LO
Boschma v. Home Loan Center, Inc.,
198 Cal. App. 4th 230 (2011) ceccccsssssssscssessessevssssssesssssnssssssssssessssssansmessunssnsussssssssnssssseseessessassaneee 9
Cansino v. Bank of America,
224 Cal. App. 4th 1462 (2014) ooo ecceerescetecsnereesnenenseereesneneseresseeneesiereseeneeseenesrneneene 9
Goldrich v. Natural Y Surgical Specialties,
25 Cal. App. 4th 772 (1994) woeccescccseectectecsscsseessessecnessnessessnecsecsicssessessecsscsicsneesessssssessessessees By OD
tharra v. Ca. Coastal Comm’n,
182 Cal. App. 3d 687 (1986) w.ccccccccce cesses neseeneenesnesnesessessssnesessssassussesessesseeneenesaesneensiees 8
Lazar v. Superior Court,
12 Cal. 4th 631 (1962) ooo eccentrics b, 8, 12
Lovejoy v. AT&T Corp.,
119 Cal. App. 4th 151 (2004) oo ececceeccccsccscsseeeecsecsnsesesssesneesnessecsessecsicsscsseasseessscsscsneesssseseeneesee D
Marketing West, Inc. v. Sanvo-Fisher (USA) Corp.,
6 Cal.App.4th 603 (1992)
Rakestraw v. Cal. Physicians’ Serv.,
81 Cal. App. 4th 39 (2000) occas ce reaceneesenereseeneesensredeeneesecseeatensenseseetensenseies 8, 10
Rossberg v. Bank of America, N.A.,
219 Cal. App. 4th 1481 (2013) veccccccccsccsccssesscsssssvessssssseeessessesseesessessessssnsssssnsssssseseereereeseesserseee LE
Rutherford Holdings LLC v. Plaza Del Rey,
223 Cal. App. 4th 221 (2014) cocccecsessessessssnesesecstesseseseessenssseessessssssseeseeseessneensensaesnesnneneenessesnee 1h
Tarmann vy. State Farm Mut. Ins. Co.,
2 Cal. App. 4th 153 (1991) oer c eee aieeseeeerceneeieereteeieee 1, 8,9, LE
West v. J.P. Morgan Chase Bank, N..
214 Cal. App. 4th 780 (2014)...
Young v. Gannon,
97 Cal. App. 4th 209 (2002) .....ccccsecssecseesesseesseesseseenseesneesicenessnsessesneessesseesseenesseessseerenseessessiceneses 8
Zumbrun v. Univ. of So. Cal.,
25 Cal. App. 3d 1 (1972) vecscseessersesssecrensrserssnecesscssseesnsessavecssnecesacssoesssnseavecsurseansessnsensavecascsieneanee 7
Statutes
Cal. Civ, Code § 1572(3) wiccceecicnesnenocennnesnetonanenesienareaeceresnseenene nnn B
Cal. Civ, Code § 1710038) occ eesececcsesrsresesessesssvenesescasevsnsnasscissesesnasecursessenessentesssarenesetesreareresetesrsarenee 8
Cal. Code Civ. Proc. § 430. 10( 0) eee eesesesessesssnesesesrestsnssesessesssnsscneasanssnsscneercutecseenearsatecseensarsntecseanenee 2
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MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTREED SMITH LLP
A lensitos Tiability parmership firmed in the Stare of Delaware
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L INTRODUCTION
Grasping for a chance to play offense in this declaratory relief action, Defendant Evon
Corporation (“Evon’”) has asserted a Cross-Complaint for fraud. As with many fraud claims,
however, Evon’s Cross-Complaint is long on accusations and short on facts to support them.
California law requires more than that. It is well-established that parties alleging fraud must satisfy
stringent pleading standards before they may proceed with their claims. As our Supreme Court
stated in one frequently-cited case, plaintiffs who assert fraud must plead specific facts that show
“how, when, where, to whom, and by what means” the allegedly fraudulent statements were made.
Lazar v. Superior Court, 12 Cal. 4th 631, 645 (1962). Where, as here, the defendant is an entity and
not an individual, those requirements increase even further: they require the plaintiff to specify “the
names of the persons who made the allegedly fraudulent representations, their authority to speak, to
whom they spoke, what they said or wrote, and when it was said or written.” Tarmann v. State Farm
Mut. Ins. Co., 2 Cal. App. 4th 153, 157 (1991). Evon’s Cross-Complaint comes nowhere close.
The Cross-Complaint stems from a disputed contractual provision concerning profit and loss
allocations among current and former partners. Evon was once a co-general partner in Justice
investors, LP (“Justice”), the Plaintiff and Cross-Defendant in this action. Justice formerly owned
the Hilton Hotel in San Francisco’s financial district (“the Hotel”), and now owns a subsidiary
company that owns the Hotel. In 2013, Justice’s partners agreed to restructure the partnership and to
offer Justice’s limited partners an opportunity to redeem their partnership interests. Pursuant to the
restructuring, Evon chose to redeem its partnership interest for cash. Several limited parmers in
Justice (the “Optionees”), however, chose to pursue a complex, alternative method for redeeming
their interests, at Evon’s insistence. Evon has now Cross-complained on behalf of the Optionees,
claiming that the Optionees were misled about how profits and losses were to be allocated following
the partnership’s restructuring.
Evon asserts that when negotiating the partnership restructuring, the parties discussed the
partnership’s post-restructuring profit and loss allocations, and that Justice “understood” that those
allocations had “important tax consequences” for the Optionees. Evon claims that it made a
proposal for allocating profits and losses, and that Justice “represented to Evon and the Optionees
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MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTREED SMITH LLP
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that it agreed with this proposal and understood its importance.” Evon then contends that Justice
allocated partnership profits and losses inconsistent with the proposal when reporting profits and
losses in its 2013 tax documents.
Based on these contentions, Evon asserts two causes of action for fraud: one for fraudulent
concealment and one for promissory fraud. Neither cause of action can withstand demurrer, because
Evon has failed to plead either claim with sufficient specificity.
The Fraudulent Concealment Claim: With respect to fraudulent concealment, Evon must
plead specific facts alleging that Justice concealed or suppressed a material fact. Evon has not
alleged that the profit and loss allocations were material. While Evon claims that Justice understood
the allocation provisions carried “important tax consequences” for the Optionees, nowhere does
Evon state what those consequences were, or how or why they were “important.” Moreover, Evon
provides no specificity regarding how Justice “understood” that importance. Indeed, the Cross-
Complaint is devoid of any detail regarding the purported negotiations about profits and losses,
beyond stating that those discussions occurred at some unspecified time “during the parties’
negotiations.” Evon does not allege who at Justice purportedly “understood” the allocation
provisions’ importance, when that “understanding” was conveyed, how it was conveyed, or to whom
it was conveyed.
Further, Justice fails to allege the elements of intent and damages, both of which are required
to state a fraudulent concealment claim. For intent, Evon alleges in conclusory fashion that Justice
“intended to deceive” the Optionees about the allocations, but it does not allege that Justice did so
with the intent to induce any action or inaction by the Optionees. That inducement aspect is the key
focus when assessing intent in the fraudulent concealment context. Evon must plead specific facts to
show that Justice harbored some intent to induce the Optionees to take some action, It has not done
so.
For damages, Evon alleges—again with no supporting facts—that had the Optionees known
how Justice would allocate profits and losses, they would not have agreed to the restructuring and
would have “compelled a sale of the Hotel, which would have yielded the Optionees a much higher
pay out.” Nowhere, however, does Evon plead any facts to show that a forced sale of the Hotel was
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feasible or that the Optionees had the power to compel a sale. There are also no details regarding
how such a compelled sale would be more profitable, beyond Evon’s bare assertion that a sale would
have provided a “higher pay out.”
Promissory Fraud: With respect to promissory fraud, Evon’s allegations simply do not
provide the “how, when, where, to whom, and by what means” any allegedly fraudulent promise was
made. The closest Evon comes is asserting that Joseph Fletcher, Justice’s purported
266,
“representative,” “agreed to the Optionees’ and Evon’s” proposal for profit and loss allocations. The
deficiencies in that allegation are manifold. Evon does not articulate when Mr. Fletcher supposedly
made that “agreement,” to whom it was made, when it was made, or in what manner it was tendered.
Evon also fails to allege Mr. Fletcher’s authority for making that purported agreement, beyond
stating that he acted in some unspecified representative capacity. This lack of basic details regarding
the allegedly false promise defeats Evon’s promissory fraud claim.
Moreover, Evon’s damages allegations regarding promissory fraud mirror its deficient
damages allegations for fraudulent concealment. The lack of specificity regarding damages thus
defeats the promissory fraud claim as well.
The absence of detail in Evon’s Cross-Complaint is striking. While Evon boldly claims that
Justice agreed to its profit and loss allocation proposal and understood its importance, it is telling
that Evon fails to specify how, when, where, by whom, or to whom any such agreement was made.
it is similarly telling that Evon fails to explain the purported tax consequences of the allocation
provisions, why they were important, or the specific basis for asserting that Justice “understood”
those provisions’ supposed importance to the Optionees. Simply put, Evon’s claims fall far short of
the detail needed to state a claim for fraud, and the Court should sustain Justice’s Demurtrer to both
causes of action,
i. RELEVANT FACTUAL AND PROCEDURAL BACKGROUND
A. The Parties
Justice is a limited partnership originally formed to acquire property in San Francisco for the
development, management, operation, and lease of the Hotel. (First Amended Complaint for
Declaratory Relief, “FAC” § 3).
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Evon was once a general partner in Justice, but withdrew in December 2013 after redeeming
its partnership interest for cash.
The Optionees are a combination of individuals and trust entities, consisting of some current
and some former limited partners in Justice. Each Optionee participated in the “Alternative
Redemption Structure” that prompted this lawsuit, and which is explained in greater detail below.
B. The Offer to Redeem and Alternative Redemption Structure
In October 2013, Justice offered its limited partners an opportunity to redeem their limited
partnership interests. (FAC § 15). In addition to an option to redeem those interests for cash, the
Optionces insisted on creating an “Alternative Redemption Structure.” (FAC 4 16). The Alternative
Redemption Structure was designed by—and the relevant documents drafted by—the Optionees’
counsel, Lou Weller of Bryan Cave, LLP (who is described in the Cross-Complaint as both Evon
and the Optionees’ “representative.”) (FAC € 16-17; Cross-Complaint § 28). In short, the
Alternative Redemption Structure provided that Justice would refinance the Hotel, after which it
would deposit with a separate entity the amount of money that the Optionees would have received
had they redeemed their interests for cash. (FAC 4 17). Then, the Optionees had the option to
locate and designate properties for the entity holding the funds to purchase, provided the Optionees
followed certain procedures, and subject to certain restrictions on the properties they selected. (FAC
4| 17). Ifthe property qualified under the terms of the Alternative Redemption Structure, and if the
Optionees followed the required procedures, the entity holding the Hotel refinancing funds would
purchase the property in its own name, and the Optionees could then direct that entity to distribute
the property to them in redemption of their partnership interests. (FAC 18).
Pursuant to these terms, Justice sent its limited partners a document entitled “Offer to
Redeem Any and All Outstanding Limited Partnership Interests and Consent Solicitation by Justice
Investors” (the “Offer to Redeem”). In parallel, Justice received the required consents and proxies
from its limited partners to take additional steps to consummate the Alternative Redemption
Structure. Specifically, Justice received consent to (1) amend Justice’s Limited Partnership
Agreement; (2) approve refinancing of the Hotel; (3) redeem the limited partners’ partnership
interests either via cash payments or under the Alternative Redemption Structure; and (4) take other
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actions reasonably necessary to implement the Hotel’s refinancing, and implement the Offer to
Redeem after the close of that refinancing. (FAC § 20).
Cc Justice’s FAC
Justice’s FAC seeks declarations regarding the interpretation of two agreements prepared in
connection with the Alternative Redemption Structure. For purposes of this Denwurrer, however,
Justice will discuss only the aspect of the dispute that relates to Evon’s Cross-Complaint: the
provisions of the parties’ “Amended and Restated Agreement of Limited Partnership” (the
“Amended Partnership Agreement”) that identify how partnership profits and losses were to be
allocated following the partnership’s restructuring.
With respect to the profit and loss allocation issue, the parties dispute the meaning of two
provisions contained in the Amended Partnership Agreement concerning how Justice’s income and
losses are to be allocated. Those provisions (the “Allocation Provisions”) were drafted by Mr.
Weller (Evon and the Optionee Defendants’ “representative”), and appear in Sections 7.1.1 and 7.1.2
of the Amended Partnership Agreement.
Section 7.1.1 states:
“7.1.1 Commencing January 1, 2013, and for so long as [Holdings] has any assets
(i) Net Profits allocable to activities of the Partnership relating to operation of the
Property, related to the conduct of any trade or business other than the business
associated with operation of a hotel located on the Property or conducted through
Hotel SPE shall be allocated ninety percent (90%) to those Partners who are not
Optionees, and ten percent (10%) to those Partners who are Optionees, in each case
pro rata to their respective Participation Percentages.”"
Justice’s FAC seeks resolution of two disputes regarding the Allocation Provisions. The first
dispute relates to whether profits or losses (a) from the operation of the Hotel or (b) profits or losses
related to business “other than the business...conducted through Hotel SPE” are to be allocated
under the allocation provisions. (FAC {fj 22-23 (emphasis supplied)). The reference to “Hotel SPE”
refers to a “special purpose entity” created to operate the Hotel as part of the restructuring
transaction. The name of that entity is Justice Operating, LLC (“Operating”). Operating is wholly
owned by Justice.
‘ Section 7.1.2 contains identical language, but relates to losses rather than profits.
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The second issue related to these allocation provisions is when they became effective:
whether they are to be applied retroactively (or “relate back”) from the Amended Partnership
Agreement’s December 18, 2013 effective date to January |, 2013. Justice contends the parties
agreed to an “interim closing of the books” as of December 17, 2013, which means that all profits
and losses up to that date were locked-in pursuant to the terms of the then-existing partnership
agreement. (FAC § 41 (B) (C)). Accordingly, the allocation provisions in the Amended Partnership
Agreement, which took effect on December 18, 2013, apply only to income and losses from
December 18, 2013 onward. By contrast, Evon and at least certain Optionee Defendants assert that
the allocation provisions retroactively changed allocation of profits and losses for the period January
1, 2013 to December 18, 2013.
D. Eyon’s Cross Complaint
On December 9, 2014, Evon asserted a Cross-Complaint for fraud acting on its own behalf
and as the purported “assignee” of the Optionee Defendants. (Cross-Complaint § 6). The Cross-
Complaint contains two causes of action for fraud, both of which relate to the Allocation Provisions.
Evon claims that the Optionees were misled during the negotiations of the Allocation Provisions,
and that they expected to receive 10% of the Hotel’s profits and losses. As noted, Evon also claims
that the Allocation Provisions apply retroactively, and change profit and loss allocations for the
period of January 1, 2013 to December 18, 2013.
Evon claims that at some unspecified point “during the patties’ negotiations regarding the
terms of the Alternative Redemption Structure,” Evon and the Optionees proposed an allocation
structure under which the Optionees would receive 10% of the Hotel’s profits and losses (as opposed
to 10% of profits and losses only from business other than that conducted through the Hotel SPE).
(Cross-Complaint {| 16). Evon alleges that the provisions were “specifically discussed by Justice’s
and Evon’s counsel.” and that “Justice understood that the provisions had important tax
consequences for the Optionees.” (/d.). Evon then alleges that “Justice represented to Evon and the
Optionees that it agreed with [Evon and the Optionees’] proposal and understood its importance,”
Ud.). Evon then claims that Justice reported its profits and losses inconsistently with the purported
allocation proposal in its 2013 tax documents. (/d. 417). Evon contends that had the Optionees
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known Justice would report profits and losses the way that it did, they would not have agreed to the
Amended Partnership Agreement and would not have participated in the Alternative Redemption
Structure. Ud. §§ 25, 33). Instead, according to Evon, the Optionees would have “compelled a sale
of the Hotel, which would have yielded the Optionees a much higher pay out.” (éd.).
Nowhere in the Cross-Complaint does Evon detail the specific discussions regarding the
Allocation Provisions. Evon does not identify when those discussions occurred, other than saying
that they occurred “during the parties’ negotiations.” (/d. 4 16). Evon does not allege who
participated in those discussions, how many discussions there were, or the manner in which the
discussions took place (i.e., via telephone, letters, e-mails, in-person conversations, or otherwise).
The closest Evon comes is in its Second Cause of Action for promissory fraud, where Evon alleges
that Joseph Fletcher, a purported Justice “representative” stated that he “agreed to the Optionees’
and Evon’s proposal” on Justice’s behalf. (id. $28). Again, Evon does not allege the manner in
which Mr. Fletcher supposedly conveyed this “agreement,” on what specific authority he was acting,
to whom he conveyed the agreement, or when he conveyed the agreement.
Similarly, the Cross-Complaint does not contain any detail regarding the alleged importance
of the Allocation Provisions to the Optionees, other than broadly asserting that the provisions had
“important tax consequences.” Nor does the Cross-Complaint contain any detail explaining how
Justice supposedly “understood” that unspecified “importance.” Finally, beyond alleging that the
Optionees would have “compelled a sale” of the Hotel had they known about Justice’s interpretation
of the Allocation Provisions, the Cross~Complaint contains no details regarding the feasibility of
such an approach or the Optionees’ ability to even take that action.
HE = =LEGAL ARGUMENT
A, Legal Standard for Fraud-Based Demurrers
A demurrer lies where a “pleading does not state facts sufficient to constitute a cause of
action.” Cal. Code Civ. Proc. § 430.10(e). To survive a demurrer, a plaintiff must plead the
essential factual elements necessary to support a cause of action, leaving nothing to surmise.
Zumbrun v. Univ. of So. Cal., 25 Cal. App. 3d 1, 8 (1972). No principle of liberal pleading
construction allows courts to insert “averments which are neither directly made nor within the fair
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import of those which are set forth.” /barra v. Ca, Coastal Comm’n, 182 Cal. App. 3d 687, 692
(1986). “On the contrary, facts necessary to a cause of action but not alleged must be taken as
having no existence.” /d. As to those facts that are alleged, courts accept material facts as true, but
need not accept “contentions, deductions, or conclusions of fact or law.” Young v. Gannon, 97 Cal.
App. 4th 209, 220 (2002). Thus, the facts stated must be “specific, not vague or conclusory.”
Rakestraw v. Cal. Physicians’ Serv., 81 Cal. App. 4th 39, 43 (2000).
These pleading requirements heighten where, as here, a complaint alleges fraud. Plaintiffs
must plead fraud “with specificity, to provide the defendants with the fullest possible details of the
charge so they are able to prepare a defense to this serious attack.” Goldrich v. Natural Y Surgical
Specialties, 25 Cal. App. 4th 772, 782 (1994). “To withstand demurrer, the facts constituting every
element of the fraud must be alleged with particularity, and the claim cannot be salvaged by
references to the general policy favoring liberal construction of pleadings.” Jd. Thus, a plaintiff
must plead facts that “show how, when, where, to whom, and by what means the representations
were tendered.” Lazar, 12 Cal. 4" at 645.
This already-heightened pleading standard increases even further where plaintiffs allege
fraud against entity defendants such as Justice. In such cases, plaintiffs must “allege the names of
the persons who made the allegedly fraudulent representations, their authority to speak, to whom
they spoke, what they said or wrote, and when it was said or written.” Tarmann, 2 Cal. App. 4" at
157; see also West v. J.P. Morgan Chase Bank, N.A., 214 Cal. App. 4th 780, 793 (2014) (citing
enhanced pleading standard for fraud alleged against national banking association).
B. Evon’s Fraudulent Concealment Claim Fails for Lack of Specificity
Evon’s first cause of action—for fraudulent nondisclosure / concealment—fails to meet the
heightened pleading requirements for such claims, Concealment is a species of fraud. Cal. Civ.
Code §§ 1710(3), 1572(3). The elements of a concealment-based fraud claim are: (1) the defendant
must have concealed or suppressed a material fact; (2) the defendant must have been under a duty to
disclose the fact to the plaintiff; (3) the defendant must have intentionally concealed or suppressed
the fact with the intent to defraud the plaintiff; (4) the plaintiff must have been unaware of the fact
and would not have acted as he did if he had known of the concealed or suppressed fact; and (5) as a
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result of the concealment or suppression of the fact, the plaintiff must have sustained damage.
Marketing West, Inc. v. Sanyo-Fisher (USA) Corp., 6 Cal.App.4th 603, 612-13 (1992); Lovejoy v.
AT&T Corp., 119 Cal. App. 4th 151, 158 (2004).
As with all fraud-based claims, a plaintiff alleging concealment or nondisclosure must satisfy
the heightened pleading requirements necessary to state a claim for fraud. Cansino v. Bank of
America, 224 Cal. App. 4th 1462, 1472 (2014) (finding that plaintiff failed to state a claim for
concealment and noting that “the requirement that “fraud must be pled with specificity’ applies
equally to a cause of action for fraud and deceit based on concealment.”), citing Boschma v. Home
Loan Center, Inc., 198 Cal. App. 4th 230, 890 (2011). In Boschma, for example, the court found
that the plaintiffs had “satisfied the enhanced pleading burden of a fraud claim” because they
attached to their complaint relevant mortgage documents, which provided the “specific content of
the allegedly false representations,” as well as the date and place of the alleged fraud, and the
mortgage documents underpinned plaintiffs’ claims that the defendant concealed material facts. Jd.
Evon’s concealment allegations fail from the start. Again, a plaintiff attempting to allege
fraud must plead with particularity the specific facts underlying each element of the claim.
Goldrich, 25 Cal. App. 4th at 782. As noted, the first element of a concealment claim is that the
defendant suppressed or concealed a material fact. Marketing West, 6 Cal. App. 4th at 612-13.
Here, Evon claims that Justice did not disclose how it planned to apply the Allocation Provisions.
(Cross-Complaint § 21). The Cross-Complaint, however, contains no facts explaining why the profit
and loss provisions were material to Evon and the Optionees. Evon generally asserts that the
allocation provisions had “important tax consequences,” but fails to articulate what those tax
consequences were or why they were important. Evon also claims that Justice “represented to Evon
and the Optionees that it agreed with [the Allocation Provision] and understood its importance.” But
Evon does not specify when that purported representation was made, who made it, fo whom it was
purportedly made, where it was purportedly made, or the manner in which the statement was
supposedly tendered, Such allegations are required when plaintiffs seek to allege misrepresentations
by an entity defendant. Tarmann, 2 Cal. App. 4th at 157.
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MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTBw ow
Although Evon claims in conclusory fashion that the treatment of the allocation provisions
constitutes a “material fact,” such conclusory allegations are not even sufficient to withstand
demurrer when fraud is not alleged. Rakestraw, 81 Cal. App. 4th 43. They certainly are not enough
to meet the stringent pleading requirements for fraud. Given the absence of any facts demonstrating
why or how the allocation provisions were material, Evon’s concealment claim fatls.
Evon also fails to allege the third element of concealment: that Justice intentionally
concealed the fact with the intent to defraud. In fraudulent concealment cases, this intent
requirement focuses on whether the defendant suppressed a material fact with the intent to induce
certain conduct. Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC, 162 Cal. App. 4th 858,
869 (2008) (“In the context of fraud by concealment, the more precise formula is probably intent to
induce conduct—action or inaction—that differs from what the plaintiff would have done if
informed of the concealed fact”) (emphasis in original).
Here, Evon alleges that Justice “intended to deceive the Optionees by not disclosing how it
planned to apply the Special Allocation Provisions and therefore how it planned to allocate its
income.” (Cross-Complaint 23). Evon also alleges that had the Optionees known this purportedly
material fact, they would not have entered into the Amended Partnership Agreement or the
Alternative Redemption Structure. (/d.). There is, however, no allegation that Justice intended to
induce the Optionces to do anything. In other words, Evon fails to allege that any supposed
intentional deceit was designed for the purpose of securing the Amended Partnership Agreement or
participation in the Alternative Redemption Structure. And Evon certainly does not allege any
specific facts to establish as much.
Finally, Evon also fails to allege facts to show that Evon suffered damages proximately
caused by the alleged concealment. Evon claims that had Justice disclosed the treatment of profit
and loss allocations, the Optionees would not have entered into the Amended Partnership Agreement
or the Alternative Redemption Structure, but would have instead “compelled a sale of the Hotel,
which would have yielded the Optionees a much higher pay out.” (Cross-Complaint § 25). But
Evon does not allege that the Optionees even had the power to “compe!” a sale of the Hotel, or
whether such an option was feasible. Nor does Evon explain how compelling a sale of the Hotel
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MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTBw ow
would have yielded a pay out to the Optionees higher than the ownership interests they redeemed. If
those allegations have any conceivable basis in truth, Evon is required to spell that out in detail when
asserting a claim for fraud. Evon has not done so.
Evon’s fraudulent concealment claim fails to allege concealment of a material fact, intent to
induce action, or damages with adequate specificity. Any one of these failures defeats the claim, and|
the Court should sustain Justice’s demurrer to the First Cause of Action.
Cc Evyon’s Promissory Fraud Claim Fails for Lack of Specificity
Evon’s Second Cause of Action—for promissory fraud—also fails. Plaintiffs asserting
promissory fraud must allege: (1) a promise made without any intention of performing it; (2) the
existence of an intent not to perform at the time the promise was made; (3) intent to deceive or
induce the promisee to enter into a transaction; (4) reasonable reliance by the promisee; (5)
nonperformance by the promisee; and (6) resulting damage to the promisee. Rossberg v. Bank of
America, N.A., 219 Cal. App. 4th 1481, 1498 (2013). Again, a promissory fraud claim implicates
the heightened pleading requirements applicable to all species of fraud. Rutherford Holdings LLC v.
Plaza Del Rey, 223 Cal. App. 4th 221, 234-35 (2014) (applying heightened pleading requirements to
promissory fraud claim and deeming plaintiff's reliance allegations insufficient under that standard).
Evon’s promissory fraud theory is that Joseph Fletcher, “Justice’s representative” with
respect fo the Alternative Redemption Transaction, agreed to Evon and the Optionees’ proposal for
allocating profits and losses. (Cross-Complaint 28). This generalized allegation fails to provide
the detail required to state a promissory fraud claim, because Evon does not allege any further details
regarding Mr. Fletcher’s supposed agreement. When was the alleged agreement made? What
exactly was said in the alleged agreement? In what format was it tendered? Was it by e-mail
message? In-person? Over the telephone? Was there only one agreement? Were there further
discussions about the profit and loss allocations after the alleged agreement? Who were the
recipients of the alleged agreement? On what authority was Mr. Fletcher acting? What was the
on >
nature of his purportedly “representative status?” Did anyone other than Mr. Fletcher “agree
These are precisely the types of details required to allege fraud with specificity. See, e.g., Tarmann,
2 Cal. App. 4th at 157 (plaintiff must allege the names of those making allegedly fraudulent
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MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTBw ow
statements, their authority to speak, to whom they spoke, what they said or wrote, and when it was
said or written); see also Lazar,12 Cal. 4th at 645.
Elsewhere in the Cross-Complaint, Evon contends that “Justice understood that the [profit
and loss allocation provisions] had important tax consequences for the Optionees,” and that “Justice
represented to Evon and the Optionees that it agreed with [Evon and the Optionees’] proposal and
understood its importance.” (Cross-Complaint € 16). Once again, these allegations also raise more
questions than they answer. What were the “tax consequences” to the Optionees? Why were they
“important?” Who from “Justice” represented that Justice understood the provision’s importance?
Was it Mr. Fletcher or someone else? How was this purported understanding conveyed? When was
it conveyed? To whom was it conveyed?
Thus, Evon’s allegations fail to satisfy the threshold requirement for a promissory fraud
claim: they fail to allege specific facts identifying the “who, what, when, where, and how” of the
allegedly false promise.
Further, Evon’s damages allegations for the promissory fraud claim suffer from the same
defects as the concealment claim discussed above. Evon recites the same purported damage—that
had the Optionees known how profits and losses would be allocated, they would have forced a sale
of the Hotel and allegedly obtained a “much higher pay out.” Evon again fails to allege specifics
regarding whether such a sale was a viable or realistic option, or how the Optionees could be sure
that they would have received a greater pay out.
Given the lack of specificity regarding the most basic elements of promissory fraud, Evon’s
Second Cause of Action fails.
IV. CONCLUSION
Evon’s Cross-Complaint leaves open far too many questions to withstand demurrer, The
claim for fraudulent concealment fails to allege the concealment of any material fact, fails to allege
intent with sufficient specificity, and fails to identify damages adequately. The claim for promissory
fraud fares even worse, because Evon fails to provide basic details regarding the allegedly false
promise. Justice therefore requests that the Court sustain its demurrer to both of Evon’s causes of
action.
-~12-
MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTDATED: January 12, 2015
REED SMITH LLP
Bw ow
By: /s/ Jesse L. Miller
Jesse L. Miller
Jennifer R. Fearnow
Matthew T. Peters
—~13-
MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINT
Preview
REED SMITH LLP A lensitos Tiability parmership firmed in the Stare of Delaware Bw ow REED SMITH LLP JESSE L. MILLER (SBN 183229) JesseMiller@reedsmith.com JENNIFER R. FEARNOW (SBN 246007) jfearnow@reedsmith.com MATTHEW T. PETERS (SBN 256739) mtpeters@reedsmith.com 101 Second Street, Suite 1800 San Francisco, CA 94105-3569 Telephone: 415.543.8700 Facsimile: 415.391.8269 ARNOLD & PORTER LLP SEAN M. SELEGUE (SBN 155249) Sean.SeLegue@aporter.com SHARON D. MAYO (SBN 150469) Sharon.Mayo@aporter.com 3 Embarcadero Center, [0th Floor San Francisco, CA 94111-4024 Telephone: 415.471.3100 Facsimile: 415.471.3400 Attorneys for Plaintiff JUSTICE INVESTORS, LP ELECTRONICALLY FILED Superior Court of California, County of San Francisco JAN 15 2015 Clerk of the Court BY: EDNALEEN JAVIER Deputy Clerk SUPERIOR COURT OF THE STATE OF CALIFORNIA CITY AND COUNTY OF SAN FRANCISCO JUSTICE INVESTORS, LP, a California limited partnership, Plaintiff, ve JUSTICE HOLDINGS, LLC, a California limited liability company; EVON CORPORATION, a California corporation; RICHARD HOWARD ALBERT, an individual; BRENDA A. ALBERT, an individual; CHESTER JUDAH, Jr, an individual; STEPHEN B. ALBERT, an individual; CARROLL PARKER ALBERT, an individual; BRUCE A. ALBERT, an individual; BALBOA PACIFIC PARTNERS, LP, a limited partnership; MOOSE GREAT- GRANDCHILDREN GST, a trust; BRAUNSTEIN FAMILY TRUST, dtd 2/2/04 SPH, a trust; OSKAR KLAUSENSTOCK TRUST, a trust; JEFFREY TODD BRAUNSTEIN & PAMELA JANE BRAUNSTEIN REVOCABLE TRUST dtd 4/30/06 SPH, a trust, HOWARD MAIBACH No.. CGC-14-540282 PLAINTIFF JUSTICE INVESTORS, LP’S MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINT Date: June 5, 2015 Time: 9:30 a.m. Dept.: 302 Hon. Ernest H. Goldsmith Reservation No. 011215-10 [Filed concurrently with Notice of Demurrer and Demurrer; [Proposed] Order] MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTREED SMITH LLP A lensitos Tiability parmership firmed in the Stare of Delaware Bw ow TRUST, a trust; FIDANQUE FAMILY TRUST, a trust; JAY AND PAT CAHILL FAMILY HOIT U/T/A dated 7/5/07, a trust; MAICARKEN 1992 IRREVOCABLE TRUST, a trust; SP TORPEDO TRUST, a trust; CIRCLE BAR TRUST, a trust: EILEEN JUDAH STAFFORD, an individual; GLENN & JACQUELINE BRAUNSTEIN TRUST, a trust; JEFFREY R. GREENDORFER, an individual; ANTHONY SELESNICK, an individual; and DOES 1-100, inclusive, Defendants. EVON CORPORATION, a California Corporation Cross-Complainant, vy. JUSTICE INVESTORS, LP, a California limited partnership, and DOES 101-200, inclusive, Cross-Defendants. MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTREED SMITH LLP A lensitos Tiability parmership firmed in the Stare of Delaware Bw ow TABLE OF CONTENTS I. RELEVANT FACTUAL AND PROCEDURAL BACKGROUND wuu.cccesccscseeseesnsneseesees Page A. The Parties ....c.cesceccsccsseeseesecssissnssnsncesessssnsenessessssnssnesecsssseeseesessssueersessessesesaneesseussneenens 3 B. The Offer to Redeem and Alternative Redemption Structure Cc. Justice’s FAC ence ences nensnnesscsneasenssssssenssnenessscssennenestscsesnatentecssaneenes D. Evon’s Cross Complaint 0.0... cccceceecesseseeeescsesnesesecscsesneneeeasaeseeueaseneaceeeneneanenceneeeneane 6 TT. = LEGAL ARGUMENT oo. ecesce cece eeeseeseeeenesseensecssesstescescseesseescsecsessssseeseescesssnseneeseeveaesaes 7 A. Legal Standard for Fraud-Based Demutrets 00.0.0. eecsse ners eensrsceserseenavensserseeeavene F B. Evon’s Fraudulent Concealment Claim Fails for Lack of Specificity 0.0. 8 Cc. Evon’s Promissory Fraud Claim Fails for Lack of Specificity... eee LE TV. CONCLUSION wi ceieccisisiessisesissetrerieamicsesimemicscersemsnasnssensnanseserssenee 12 -j- MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTREED SMITH LLP A lensitos Tiability parmership firmed in the Stare of Delaware Bw ow TABLE OF AUTHORITIES Page(s) Cases Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC, 162 Cal. App. 4th 858 (2008) o....cesecieerseeeeersesnenerneeneseeneeneereesaneeneer tasers LO Boschma v. Home Loan Center, Inc., 198 Cal. App. 4th 230 (2011) ceccccsssssssscssessessevssssssesssssnssssssssssessssssansmessunssnsussssssssnssssseseessessassaneee 9 Cansino v. Bank of America, 224 Cal. App. 4th 1462 (2014) ooo ecceerescetecsnereesnenenseereesneneseresseeneesiereseeneeseenesrneneene 9 Goldrich v. Natural Y Surgical Specialties, 25 Cal. App. 4th 772 (1994) woeccescccseectectecsscsseessessecnessnessessnecsecsicssessessecsscsicsneesessssssessessessees By OD tharra v. Ca. Coastal Comm’n, 182 Cal. App. 3d 687 (1986) w.ccccccccce cesses neseeneenesnesnesessessssnesessssassussesessesseeneenesaesneensiees 8 Lazar v. Superior Court, 12 Cal. 4th 631 (1962) ooo eccentrics b, 8, 12 Lovejoy v. AT&T Corp., 119 Cal. App. 4th 151 (2004) oo ececceeccccsccscsseeeecsecsnsesesssesneesnessecsessecsicsscsseasseessscsscsneesssseseeneesee D Marketing West, Inc. v. Sanvo-Fisher (USA) Corp., 6 Cal.App.4th 603 (1992) Rakestraw v. Cal. Physicians’ Serv., 81 Cal. App. 4th 39 (2000) occas ce reaceneesenereseeneesensredeeneesecseeatensenseseetensenseies 8, 10 Rossberg v. Bank of America, N.A., 219 Cal. App. 4th 1481 (2013) veccccccccsccsccssesscsssssvessssssseeessessesseesessessessssnsssssnsssssseseereereeseesserseee LE Rutherford Holdings LLC v. Plaza Del Rey, 223 Cal. App. 4th 221 (2014) cocccecsessessessssnesesecstesseseseessenssseessessssssseeseeseessneensensaesnesnneneenessesnee 1h Tarmann vy. State Farm Mut. Ins. Co., 2 Cal. App. 4th 153 (1991) oer c eee aieeseeeerceneeieereteeieee 1, 8,9, LE West v. J.P. Morgan Chase Bank, N.. 214 Cal. App. 4th 780 (2014)... Young v. Gannon, 97 Cal. App. 4th 209 (2002) .....ccccsecssecseesesseesseesseseenseesneesicenessnsessesneessesseesseenesseessseerenseessessiceneses 8 Zumbrun v. Univ. of So. Cal., 25 Cal. App. 3d 1 (1972) vecscseessersesssecrensrserssnecesscssseesnsessavecssnecesacssoesssnseavecsurseansessnsensavecascsieneanee 7 Statutes Cal. Civ, Code § 1572(3) wiccceecicnesnenocennnesnetonanenesienareaeceresnseenene nnn B Cal. Civ, Code § 1710038) occ eesececcsesrsresesessesssvenesescasevsnsnasscissesesnasecursessenessentesssarenesetesreareresetesrsarenee 8 Cal. Code Civ. Proc. § 430. 10( 0) eee eesesesessesssnesesesrestsnssesessesssnsscneasanssnsscneercutecseenearsatecseensarsntecseanenee 2 -ii- MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTREED SMITH LLP A lensitos Tiability parmership firmed in the Stare of Delaware Bw ow L INTRODUCTION Grasping for a chance to play offense in this declaratory relief action, Defendant Evon Corporation (“Evon’”) has asserted a Cross-Complaint for fraud. As with many fraud claims, however, Evon’s Cross-Complaint is long on accusations and short on facts to support them. California law requires more than that. It is well-established that parties alleging fraud must satisfy stringent pleading standards before they may proceed with their claims. As our Supreme Court stated in one frequently-cited case, plaintiffs who assert fraud must plead specific facts that show “how, when, where, to whom, and by what means” the allegedly fraudulent statements were made. Lazar v. Superior Court, 12 Cal. 4th 631, 645 (1962). Where, as here, the defendant is an entity and not an individual, those requirements increase even further: they require the plaintiff to specify “the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.” Tarmann v. State Farm Mut. Ins. Co., 2 Cal. App. 4th 153, 157 (1991). Evon’s Cross-Complaint comes nowhere close. The Cross-Complaint stems from a disputed contractual provision concerning profit and loss allocations among current and former partners. Evon was once a co-general partner in Justice investors, LP (“Justice”), the Plaintiff and Cross-Defendant in this action. Justice formerly owned the Hilton Hotel in San Francisco’s financial district (“the Hotel”), and now owns a subsidiary company that owns the Hotel. In 2013, Justice’s partners agreed to restructure the partnership and to offer Justice’s limited partners an opportunity to redeem their partnership interests. Pursuant to the restructuring, Evon chose to redeem its partnership interest for cash. Several limited parmers in Justice (the “Optionees”), however, chose to pursue a complex, alternative method for redeeming their interests, at Evon’s insistence. Evon has now Cross-complained on behalf of the Optionees, claiming that the Optionees were misled about how profits and losses were to be allocated following the partnership’s restructuring. Evon asserts that when negotiating the partnership restructuring, the parties discussed the partnership’s post-restructuring profit and loss allocations, and that Justice “understood” that those allocations had “important tax consequences” for the Optionees. Evon claims that it made a proposal for allocating profits and losses, and that Justice “represented to Evon and the Optionees -|- MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTREED SMITH LLP A lensitos Tiability parmership firmed in the Stare of Delaware Bw ow that it agreed with this proposal and understood its importance.” Evon then contends that Justice allocated partnership profits and losses inconsistent with the proposal when reporting profits and losses in its 2013 tax documents. Based on these contentions, Evon asserts two causes of action for fraud: one for fraudulent concealment and one for promissory fraud. Neither cause of action can withstand demurrer, because Evon has failed to plead either claim with sufficient specificity. The Fraudulent Concealment Claim: With respect to fraudulent concealment, Evon must plead specific facts alleging that Justice concealed or suppressed a material fact. Evon has not alleged that the profit and loss allocations were material. While Evon claims that Justice understood the allocation provisions carried “important tax consequences” for the Optionees, nowhere does Evon state what those consequences were, or how or why they were “important.” Moreover, Evon provides no specificity regarding how Justice “understood” that importance. Indeed, the Cross- Complaint is devoid of any detail regarding the purported negotiations about profits and losses, beyond stating that those discussions occurred at some unspecified time “during the parties’ negotiations.” Evon does not allege who at Justice purportedly “understood” the allocation provisions’ importance, when that “understanding” was conveyed, how it was conveyed, or to whom it was conveyed. Further, Justice fails to allege the elements of intent and damages, both of which are required to state a fraudulent concealment claim. For intent, Evon alleges in conclusory fashion that Justice “intended to deceive” the Optionees about the allocations, but it does not allege that Justice did so with the intent to induce any action or inaction by the Optionees. That inducement aspect is the key focus when assessing intent in the fraudulent concealment context. Evon must plead specific facts to show that Justice harbored some intent to induce the Optionees to take some action, It has not done so. For damages, Evon alleges—again with no supporting facts—that had the Optionees known how Justice would allocate profits and losses, they would not have agreed to the restructuring and would have “compelled a sale of the Hotel, which would have yielded the Optionees a much higher pay out.” Nowhere, however, does Evon plead any facts to show that a forced sale of the Hotel was -2- MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTBw ow feasible or that the Optionees had the power to compel a sale. There are also no details regarding how such a compelled sale would be more profitable, beyond Evon’s bare assertion that a sale would have provided a “higher pay out.” Promissory Fraud: With respect to promissory fraud, Evon’s allegations simply do not provide the “how, when, where, to whom, and by what means” any allegedly fraudulent promise was made. The closest Evon comes is asserting that Joseph Fletcher, Justice’s purported 266, “representative,” “agreed to the Optionees’ and Evon’s” proposal for profit and loss allocations. The deficiencies in that allegation are manifold. Evon does not articulate when Mr. Fletcher supposedly made that “agreement,” to whom it was made, when it was made, or in what manner it was tendered. Evon also fails to allege Mr. Fletcher’s authority for making that purported agreement, beyond stating that he acted in some unspecified representative capacity. This lack of basic details regarding the allegedly false promise defeats Evon’s promissory fraud claim. Moreover, Evon’s damages allegations regarding promissory fraud mirror its deficient damages allegations for fraudulent concealment. The lack of specificity regarding damages thus defeats the promissory fraud claim as well. The absence of detail in Evon’s Cross-Complaint is striking. While Evon boldly claims that Justice agreed to its profit and loss allocation proposal and understood its importance, it is telling that Evon fails to specify how, when, where, by whom, or to whom any such agreement was made. it is similarly telling that Evon fails to explain the purported tax consequences of the allocation provisions, why they were important, or the specific basis for asserting that Justice “understood” those provisions’ supposed importance to the Optionees. Simply put, Evon’s claims fall far short of the detail needed to state a claim for fraud, and the Court should sustain Justice’s Demurtrer to both causes of action, i. RELEVANT FACTUAL AND PROCEDURAL BACKGROUND A. The Parties Justice is a limited partnership originally formed to acquire property in San Francisco for the development, management, operation, and lease of the Hotel. (First Amended Complaint for Declaratory Relief, “FAC” § 3). —3- MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTBw ow Evon was once a general partner in Justice, but withdrew in December 2013 after redeeming its partnership interest for cash. The Optionees are a combination of individuals and trust entities, consisting of some current and some former limited partners in Justice. Each Optionee participated in the “Alternative Redemption Structure” that prompted this lawsuit, and which is explained in greater detail below. B. The Offer to Redeem and Alternative Redemption Structure In October 2013, Justice offered its limited partners an opportunity to redeem their limited partnership interests. (FAC § 15). In addition to an option to redeem those interests for cash, the Optionces insisted on creating an “Alternative Redemption Structure.” (FAC 4 16). The Alternative Redemption Structure was designed by—and the relevant documents drafted by—the Optionees’ counsel, Lou Weller of Bryan Cave, LLP (who is described in the Cross-Complaint as both Evon and the Optionees’ “representative.”) (FAC € 16-17; Cross-Complaint § 28). In short, the Alternative Redemption Structure provided that Justice would refinance the Hotel, after which it would deposit with a separate entity the amount of money that the Optionees would have received had they redeemed their interests for cash. (FAC 4 17). Then, the Optionees had the option to locate and designate properties for the entity holding the funds to purchase, provided the Optionees followed certain procedures, and subject to certain restrictions on the properties they selected. (FAC 4| 17). Ifthe property qualified under the terms of the Alternative Redemption Structure, and if the Optionees followed the required procedures, the entity holding the Hotel refinancing funds would purchase the property in its own name, and the Optionees could then direct that entity to distribute the property to them in redemption of their partnership interests. (FAC 18). Pursuant to these terms, Justice sent its limited partners a document entitled “Offer to Redeem Any and All Outstanding Limited Partnership Interests and Consent Solicitation by Justice Investors” (the “Offer to Redeem”). In parallel, Justice received the required consents and proxies from its limited partners to take additional steps to consummate the Alternative Redemption Structure. Specifically, Justice received consent to (1) amend Justice’s Limited Partnership Agreement; (2) approve refinancing of the Hotel; (3) redeem the limited partners’ partnership interests either via cash payments or under the Alternative Redemption Structure; and (4) take other —4- MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTBw ow actions reasonably necessary to implement the Hotel’s refinancing, and implement the Offer to Redeem after the close of that refinancing. (FAC § 20). Cc Justice’s FAC Justice’s FAC seeks declarations regarding the interpretation of two agreements prepared in connection with the Alternative Redemption Structure. For purposes of this Denwurrer, however, Justice will discuss only the aspect of the dispute that relates to Evon’s Cross-Complaint: the provisions of the parties’ “Amended and Restated Agreement of Limited Partnership” (the “Amended Partnership Agreement”) that identify how partnership profits and losses were to be allocated following the partnership’s restructuring. With respect to the profit and loss allocation issue, the parties dispute the meaning of two provisions contained in the Amended Partnership Agreement concerning how Justice’s income and losses are to be allocated. Those provisions (the “Allocation Provisions”) were drafted by Mr. Weller (Evon and the Optionee Defendants’ “representative”), and appear in Sections 7.1.1 and 7.1.2 of the Amended Partnership Agreement. Section 7.1.1 states: “7.1.1 Commencing January 1, 2013, and for so long as [Holdings] has any assets (i) Net Profits allocable to activities of the Partnership relating to operation of the Property, related to the conduct of any trade or business other than the business associated with operation of a hotel located on the Property or conducted through Hotel SPE shall be allocated ninety percent (90%) to those Partners who are not Optionees, and ten percent (10%) to those Partners who are Optionees, in each case pro rata to their respective Participation Percentages.”" Justice’s FAC seeks resolution of two disputes regarding the Allocation Provisions. The first dispute relates to whether profits or losses (a) from the operation of the Hotel or (b) profits or losses related to business “other than the business...conducted through Hotel SPE” are to be allocated under the allocation provisions. (FAC {fj 22-23 (emphasis supplied)). The reference to “Hotel SPE” refers to a “special purpose entity” created to operate the Hotel as part of the restructuring transaction. The name of that entity is Justice Operating, LLC (“Operating”). Operating is wholly owned by Justice. ‘ Section 7.1.2 contains identical language, but relates to losses rather than profits. —5- MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTBw ow The second issue related to these allocation provisions is when they became effective: whether they are to be applied retroactively (or “relate back”) from the Amended Partnership Agreement’s December 18, 2013 effective date to January |, 2013. Justice contends the parties agreed to an “interim closing of the books” as of December 17, 2013, which means that all profits and losses up to that date were locked-in pursuant to the terms of the then-existing partnership agreement. (FAC § 41 (B) (C)). Accordingly, the allocation provisions in the Amended Partnership Agreement, which took effect on December 18, 2013, apply only to income and losses from December 18, 2013 onward. By contrast, Evon and at least certain Optionee Defendants assert that the allocation provisions retroactively changed allocation of profits and losses for the period January 1, 2013 to December 18, 2013. D. Eyon’s Cross Complaint On December 9, 2014, Evon asserted a Cross-Complaint for fraud acting on its own behalf and as the purported “assignee” of the Optionee Defendants. (Cross-Complaint § 6). The Cross- Complaint contains two causes of action for fraud, both of which relate to the Allocation Provisions. Evon claims that the Optionees were misled during the negotiations of the Allocation Provisions, and that they expected to receive 10% of the Hotel’s profits and losses. As noted, Evon also claims that the Allocation Provisions apply retroactively, and change profit and loss allocations for the period of January 1, 2013 to December 18, 2013. Evon claims that at some unspecified point “during the patties’ negotiations regarding the terms of the Alternative Redemption Structure,” Evon and the Optionees proposed an allocation structure under which the Optionees would receive 10% of the Hotel’s profits and losses (as opposed to 10% of profits and losses only from business other than that conducted through the Hotel SPE). (Cross-Complaint {| 16). Evon alleges that the provisions were “specifically discussed by Justice’s and Evon’s counsel.” and that “Justice understood that the provisions had important tax consequences for the Optionees.” (/d.). Evon then alleges that “Justice represented to Evon and the Optionees that it agreed with [Evon and the Optionees’] proposal and understood its importance,” Ud.). Evon then claims that Justice reported its profits and losses inconsistently with the purported allocation proposal in its 2013 tax documents. (/d. 417). Evon contends that had the Optionees -6- MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTBw ow known Justice would report profits and losses the way that it did, they would not have agreed to the Amended Partnership Agreement and would not have participated in the Alternative Redemption Structure. Ud. §§ 25, 33). Instead, according to Evon, the Optionees would have “compelled a sale of the Hotel, which would have yielded the Optionees a much higher pay out.” (éd.). Nowhere in the Cross-Complaint does Evon detail the specific discussions regarding the Allocation Provisions. Evon does not identify when those discussions occurred, other than saying that they occurred “during the parties’ negotiations.” (/d. 4 16). Evon does not allege who participated in those discussions, how many discussions there were, or the manner in which the discussions took place (i.e., via telephone, letters, e-mails, in-person conversations, or otherwise). The closest Evon comes is in its Second Cause of Action for promissory fraud, where Evon alleges that Joseph Fletcher, a purported Justice “representative” stated that he “agreed to the Optionees’ and Evon’s proposal” on Justice’s behalf. (id. $28). Again, Evon does not allege the manner in which Mr. Fletcher supposedly conveyed this “agreement,” on what specific authority he was acting, to whom he conveyed the agreement, or when he conveyed the agreement. Similarly, the Cross-Complaint does not contain any detail regarding the alleged importance of the Allocation Provisions to the Optionees, other than broadly asserting that the provisions had “important tax consequences.” Nor does the Cross-Complaint contain any detail explaining how Justice supposedly “understood” that unspecified “importance.” Finally, beyond alleging that the Optionees would have “compelled a sale” of the Hotel had they known about Justice’s interpretation of the Allocation Provisions, the Cross~Complaint contains no details regarding the feasibility of such an approach or the Optionees’ ability to even take that action. HE = =LEGAL ARGUMENT A, Legal Standard for Fraud-Based Demurrers A demurrer lies where a “pleading does not state facts sufficient to constitute a cause of action.” Cal. Code Civ. Proc. § 430.10(e). To survive a demurrer, a plaintiff must plead the essential factual elements necessary to support a cause of action, leaving nothing to surmise. Zumbrun v. Univ. of So. Cal., 25 Cal. App. 3d 1, 8 (1972). No principle of liberal pleading construction allows courts to insert “averments which are neither directly made nor within the fair -7- MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTBw ow import of those which are set forth.” /barra v. Ca, Coastal Comm’n, 182 Cal. App. 3d 687, 692 (1986). “On the contrary, facts necessary to a cause of action but not alleged must be taken as having no existence.” /d. As to those facts that are alleged, courts accept material facts as true, but need not accept “contentions, deductions, or conclusions of fact or law.” Young v. Gannon, 97 Cal. App. 4th 209, 220 (2002). Thus, the facts stated must be “specific, not vague or conclusory.” Rakestraw v. Cal. Physicians’ Serv., 81 Cal. App. 4th 39, 43 (2000). These pleading requirements heighten where, as here, a complaint alleges fraud. Plaintiffs must plead fraud “with specificity, to provide the defendants with the fullest possible details of the charge so they are able to prepare a defense to this serious attack.” Goldrich v. Natural Y Surgical Specialties, 25 Cal. App. 4th 772, 782 (1994). “To withstand demurrer, the facts constituting every element of the fraud must be alleged with particularity, and the claim cannot be salvaged by references to the general policy favoring liberal construction of pleadings.” Jd. Thus, a plaintiff must plead facts that “show how, when, where, to whom, and by what means the representations were tendered.” Lazar, 12 Cal. 4" at 645. This already-heightened pleading standard increases even further where plaintiffs allege fraud against entity defendants such as Justice. In such cases, plaintiffs must “allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.” Tarmann, 2 Cal. App. 4" at 157; see also West v. J.P. Morgan Chase Bank, N.A., 214 Cal. App. 4th 780, 793 (2014) (citing enhanced pleading standard for fraud alleged against national banking association). B. Evon’s Fraudulent Concealment Claim Fails for Lack of Specificity Evon’s first cause of action—for fraudulent nondisclosure / concealment—fails to meet the heightened pleading requirements for such claims, Concealment is a species of fraud. Cal. Civ. Code §§ 1710(3), 1572(3). The elements of a concealment-based fraud claim are: (1) the defendant must have concealed or suppressed a material fact; (2) the defendant must have been under a duty to disclose the fact to the plaintiff; (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff; (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact; and (5) as a —8- MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTBw ow result of the concealment or suppression of the fact, the plaintiff must have sustained damage. Marketing West, Inc. v. Sanyo-Fisher (USA) Corp., 6 Cal.App.4th 603, 612-13 (1992); Lovejoy v. AT&T Corp., 119 Cal. App. 4th 151, 158 (2004). As with all fraud-based claims, a plaintiff alleging concealment or nondisclosure must satisfy the heightened pleading requirements necessary to state a claim for fraud. Cansino v. Bank of America, 224 Cal. App. 4th 1462, 1472 (2014) (finding that plaintiff failed to state a claim for concealment and noting that “the requirement that “fraud must be pled with specificity’ applies equally to a cause of action for fraud and deceit based on concealment.”), citing Boschma v. Home Loan Center, Inc., 198 Cal. App. 4th 230, 890 (2011). In Boschma, for example, the court found that the plaintiffs had “satisfied the enhanced pleading burden of a fraud claim” because they attached to their complaint relevant mortgage documents, which provided the “specific content of the allegedly false representations,” as well as the date and place of the alleged fraud, and the mortgage documents underpinned plaintiffs’ claims that the defendant concealed material facts. Jd. Evon’s concealment allegations fail from the start. Again, a plaintiff attempting to allege fraud must plead with particularity the specific facts underlying each element of the claim. Goldrich, 25 Cal. App. 4th at 782. As noted, the first element of a concealment claim is that the defendant suppressed or concealed a material fact. Marketing West, 6 Cal. App. 4th at 612-13. Here, Evon claims that Justice did not disclose how it planned to apply the Allocation Provisions. (Cross-Complaint § 21). The Cross-Complaint, however, contains no facts explaining why the profit and loss provisions were material to Evon and the Optionees. Evon generally asserts that the allocation provisions had “important tax consequences,” but fails to articulate what those tax consequences were or why they were important. Evon also claims that Justice “represented to Evon and the Optionees that it agreed with [the Allocation Provision] and understood its importance.” But Evon does not specify when that purported representation was made, who made it, fo whom it was purportedly made, where it was purportedly made, or the manner in which the statement was supposedly tendered, Such allegations are required when plaintiffs seek to allege misrepresentations by an entity defendant. Tarmann, 2 Cal. App. 4th at 157. —9- MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTBw ow Although Evon claims in conclusory fashion that the treatment of the allocation provisions constitutes a “material fact,” such conclusory allegations are not even sufficient to withstand demurrer when fraud is not alleged. Rakestraw, 81 Cal. App. 4th 43. They certainly are not enough to meet the stringent pleading requirements for fraud. Given the absence of any facts demonstrating why or how the allocation provisions were material, Evon’s concealment claim fatls. Evon also fails to allege the third element of concealment: that Justice intentionally concealed the fact with the intent to defraud. In fraudulent concealment cases, this intent requirement focuses on whether the defendant suppressed a material fact with the intent to induce certain conduct. Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC, 162 Cal. App. 4th 858, 869 (2008) (“In the context of fraud by concealment, the more precise formula is probably intent to induce conduct—action or inaction—that differs from what the plaintiff would have done if informed of the concealed fact”) (emphasis in original). Here, Evon alleges that Justice “intended to deceive the Optionees by not disclosing how it planned to apply the Special Allocation Provisions and therefore how it planned to allocate its income.” (Cross-Complaint 23). Evon also alleges that had the Optionees known this purportedly material fact, they would not have entered into the Amended Partnership Agreement or the Alternative Redemption Structure. (/d.). There is, however, no allegation that Justice intended to induce the Optionces to do anything. In other words, Evon fails to allege that any supposed intentional deceit was designed for the purpose of securing the Amended Partnership Agreement or participation in the Alternative Redemption Structure. And Evon certainly does not allege any specific facts to establish as much. Finally, Evon also fails to allege facts to show that Evon suffered damages proximately caused by the alleged concealment. Evon claims that had Justice disclosed the treatment of profit and loss allocations, the Optionees would not have entered into the Amended Partnership Agreement or the Alternative Redemption Structure, but would have instead “compelled a sale of the Hotel, which would have yielded the Optionees a much higher pay out.” (Cross-Complaint § 25). But Evon does not allege that the Optionees even had the power to “compe!” a sale of the Hotel, or whether such an option was feasible. Nor does Evon explain how compelling a sale of the Hotel —10— MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTBw ow would have yielded a pay out to the Optionees higher than the ownership interests they redeemed. If those allegations have any conceivable basis in truth, Evon is required to spell that out in detail when asserting a claim for fraud. Evon has not done so. Evon’s fraudulent concealment claim fails to allege concealment of a material fact, intent to induce action, or damages with adequate specificity. Any one of these failures defeats the claim, and| the Court should sustain Justice’s demurrer to the First Cause of Action. Cc Evyon’s Promissory Fraud Claim Fails for Lack of Specificity Evon’s Second Cause of Action—for promissory fraud—also fails. Plaintiffs asserting promissory fraud must allege: (1) a promise made without any intention of performing it; (2) the existence of an intent not to perform at the time the promise was made; (3) intent to deceive or induce the promisee to enter into a transaction; (4) reasonable reliance by the promisee; (5) nonperformance by the promisee; and (6) resulting damage to the promisee. Rossberg v. Bank of America, N.A., 219 Cal. App. 4th 1481, 1498 (2013). Again, a promissory fraud claim implicates the heightened pleading requirements applicable to all species of fraud. Rutherford Holdings LLC v. Plaza Del Rey, 223 Cal. App. 4th 221, 234-35 (2014) (applying heightened pleading requirements to promissory fraud claim and deeming plaintiff's reliance allegations insufficient under that standard). Evon’s promissory fraud theory is that Joseph Fletcher, “Justice’s representative” with respect fo the Alternative Redemption Transaction, agreed to Evon and the Optionees’ proposal for allocating profits and losses. (Cross-Complaint 28). This generalized allegation fails to provide the detail required to state a promissory fraud claim, because Evon does not allege any further details regarding Mr. Fletcher’s supposed agreement. When was the alleged agreement made? What exactly was said in the alleged agreement? In what format was it tendered? Was it by e-mail message? In-person? Over the telephone? Was there only one agreement? Were there further discussions about the profit and loss allocations after the alleged agreement? Who were the recipients of the alleged agreement? On what authority was Mr. Fletcher acting? What was the on > nature of his purportedly “representative status?” Did anyone other than Mr. Fletcher “agree These are precisely the types of details required to allege fraud with specificity. See, e.g., Tarmann, 2 Cal. App. 4th at 157 (plaintiff must allege the names of those making allegedly fraudulent -t- MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTBw ow statements, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written); see also Lazar,12 Cal. 4th at 645. Elsewhere in the Cross-Complaint, Evon contends that “Justice understood that the [profit and loss allocation provisions] had important tax consequences for the Optionees,” and that “Justice represented to Evon and the Optionees that it agreed with [Evon and the Optionees’] proposal and understood its importance.” (Cross-Complaint € 16). Once again, these allegations also raise more questions than they answer. What were the “tax consequences” to the Optionees? Why were they “important?” Who from “Justice” represented that Justice understood the provision’s importance? Was it Mr. Fletcher or someone else? How was this purported understanding conveyed? When was it conveyed? To whom was it conveyed? Thus, Evon’s allegations fail to satisfy the threshold requirement for a promissory fraud claim: they fail to allege specific facts identifying the “who, what, when, where, and how” of the allegedly false promise. Further, Evon’s damages allegations for the promissory fraud claim suffer from the same defects as the concealment claim discussed above. Evon recites the same purported damage—that had the Optionees known how profits and losses would be allocated, they would have forced a sale of the Hotel and allegedly obtained a “much higher pay out.” Evon again fails to allege specifics regarding whether such a sale was a viable or realistic option, or how the Optionees could be sure that they would have received a greater pay out. Given the lack of specificity regarding the most basic elements of promissory fraud, Evon’s Second Cause of Action fails. IV. CONCLUSION Evon’s Cross-Complaint leaves open far too many questions to withstand demurrer, The claim for fraudulent concealment fails to allege the concealment of any material fact, fails to allege intent with sufficient specificity, and fails to identify damages adequately. The claim for promissory fraud fares even worse, because Evon fails to provide basic details regarding the allegedly false promise. Justice therefore requests that the Court sustain its demurrer to both of Evon’s causes of action. -~12- MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINTDATED: January 12, 2015 REED SMITH LLP Bw ow By: /s/ Jesse L. Miller Jesse L. Miller Jennifer R. Fearnow Matthew T. Peters —~13- MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEMURRER TO CROSS-COMPLAINT