The Heights Residence, LLC v. Victoria Soboleva, et al.

Between November 2020 and March 2022, Jae Shin and Victoria Soboleva fraudulently opened accounts in the name of The Heights Residence, LLC (“The Heights”), misrepresented themselves as officers of The Heights to Aureus, and caused Aureus to fund a $5.25 million loan secured by real property located at 2051 Waverley Street, Palo Alto, California. (FACC ¶¶ 10- 24, 30-42). On March 15, 2022, immediately after loan proceeds were wired to a Bank of America account controlled by Soboleva, approximately $4.536 million was transferred to an account at Paxos held in The Heights’ name by an individual using the name “Paul Michael Peterson.” (FACC ¶¶ 31-33, 43-50). Within hours, Peterson

converted all funds to approximately 116 Bitcoin and initiated withdrawal through ChipMixer.com, a darknet cryptocurrency mixing service. (Id. at ¶ 50).

On November 2, 2022, after nearly eight months of non-payment on the loan, Aureus executed an “Assignment of Deed of Trust,” assigning its beneficial interest in the Deed of Trust (recorded March 14, 2022, as Instrument Number 25259166) to U.S. Bank Trust National Association, solely as trustee of HOF Grantor Trust 1. (FACC ¶¶ 26-28). Contemporaneously, Aureus assigned its right, title, and interest in the Secured Note. (Id.) The Assignment was recorded in Santa Clara County on January 9, 2023, as Instrument Number 25423960. (Id.)

Also on November 2, 2022, HOF Grantor Trust 1 executed an “Assignment of Deed of Trust,” assigning its beneficial interest to USB Trust 3 (the Cross-Complainant). (FACC ¶ 27). Contemporaneously, HOF Grantor Trust 1 assigned its right, title, and interest in the Secured Note. (Id.) The Assignment from HOF Grantor Trust 1 to USB Trust 3 was recorded on January 9, 2023, as Instrument Number 25423961. (Id.)

The FACC alleges that as a result of these assignments, USB Trust 3 “succeeded Aureus with respect to the loan and deed of trust, including to all claims made herein, because the accrued causes of action, whether in contract or tort, cannot be asserted apart from the Secured Note and Deed of Trust or are essential to a complete and adequate enforcement of the Secured Note and Deed of Trust.” (FACC ¶ 28).

USB Trust 3 did not learn of Paxos’s role until 2024, when subpoenas to Bank of America (served February 2024, responded March 2024) revealed the transfer path to Paxos, followed by subpoenas to Paxos (March and May 2024) producing account documents. (FACC ¶ 31-32).

II. DEMURRER

A. Legal Standards on Demurrer

A demurrer tests whether the pleading states facts sufficient to constitute a cause of action. (Code Civ. Proc., § 430.10, subd. (e).) The court treats the demurrer as admitting all material facts properly pleaded, but not contentions, deductions, or conclusions of fact or law. (William L. Lyon & Associates, Inc. v. Superior Court (2012) 204 Cal.App.4th 1294; Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) The Court also considers matters subject to judicial notice.

The burden falls on the demurring party to demonstrate that the complaint is legally insufficient on its face; if any reasonable interpretation of the pleading states a cause of action, the demurrer must be overruled. (Sheen v. Wells Fargo Bank (2022) 12 Cal.5th 905.)

A plaintiff or cross-complainant who fails to allege facts showing it is the real party in interest fails to state a cause of action, and that defect is properly tested by demurrer

under Code of Civil Procedure section 430.10, subdivision (e). (Lazar v. Bishop (2024) 107 Cal.App.5th 668.)

Importantly here, a pleading asserting assigned rights “must describe the subject matter of the assignment with sufficient particularity to identify the rights assigned.” (Heritage Pacific Financial v. Monroy CA1/2 (2013) 215 Cal.App.4th 972, 988). Failure to do so warrants sustaining a demurrer for lack of standing. (Id. at 993).

Under California law, even if a demurrer is sustained, leave to amend the complaint is routinely granted. “Liberality in permitting amendment is the rule, if fair opportunity to correct any defect has not been given.” (Angie M. v. Superior Court (1995) 37 Cal. App. 4th 1217, 1227.) “Unless the complaint shows on its face that it is incapable of amendment, denial of leave to amend constitutes an abuse of discretion, irrespective of whether leave to amend is requested or not.” (McDonald v. Sup. Ct. (Flintkote Co.) (1986) 180 Cal. App. 3d 297, 303-304.)

B. Analysis of the Demurrer

1. Assignment of Tort Claims Under California Law

USB Trust 3 does not dispute that the assignment agreements here do not contain express language assigning Aureus’s tort claims against third parties. Instead, USB Trust 3 contends that the tort claims passed automatically as “incidents” of the assignment of the Secured Note and Deed of Trust under Civil Code section 1084, which provides that “[t]he transfer of a thing transfers also all its incidents, unless expressly excepted[.]” Civil Code § 1984.

California law does not support USB Trust 3’s position. In Heritage Pacific Financial v. Monroy CA1/2 (2013) 215 Cal.App.4th 972, the Court of Appeal held that assignment of a promissory note does not automatically transfer the original lender’s accrued tort claims against third parties, because such claims are not incidents of the note as a matter of law. (Id. at 989-990). The Heritage Pacific court explained that “[f]raud rights are not, as a matter of law, incidental to the transfer of” contractual rights and thus must be specifically identified as a right being assigned. (Id. at 991).

The assignment agreement at issue in Heritage Pacific—which provided that the seller “does hereby sell, assign and convey to Buyer, its successors and assigns, all right, title and interest in the loan”—only “showed an assignment of [the] promissory note” and “did not carry with it a transfer of [the original lender’s] tort rights.” (Id. at 989-990).

The Heritage Pacific court rejected the assignee’s reliance on National Reserve Co. of America v. Metropolitan Trust Co. (1941) 17 Cal.2d 827, 833, which held that “[i]f an accrued cause of action cannot be asserted apart from the contract out of which it arises or is essential to a complete and adequate enforcement of the contract, it passes with an assignment of the contract as an incident thereof.” The Court of Appeal in Heritage Pacific held that National Reserve did not help the plaintiff, because fraud is an “ancillary,” not an “incidental,” cause of action to the contract. (Heritage Pacific, 215 Cal. App. 4th at 992- 993).

Here, the FACC’s allegations mirror the deficient pleading in Heritage Pacific. USB Trust 3 alleges only a conclusory legal assertion that the tort claims “cannot be asserted apart from the Secured Note and Deed of Trust or are essential to a complete and adequate enforcement of the Secured Note and Deed of Trust.” (FACC at ¶ 28). This is a legal conclusion, not a factual allegation showing express assignment or identifying any contractual provision describing the alleged assignment of tort claims with “sufficient particularity.” (Heritage Pacific, 215 Cal.

App. 4th at 988, 991). USB Trust 3’s burden is to plead facts showing an assignment of the right to pursue tort claims allegedly committed against Aureus. (Id. at 988). And USB Trust 3 does not dispute that it “has not pointed to any contractual provision describing the alleged assignment of tort claims[,]” (Opp. at 12:4- 5, cleaned up), but rather wrongly (in light of Heritage Pacific, supra at 988) insists that is “not required.” (Opp. at 12:5-6).

2. SMS Financial Does Not Compel a Different Result

USB Trust 3 relies heavily on SMS Fin. XXIII, LLC v. Cornerstone Title Co. (2018) 19 Cal.App.5th 1092, arguing that it establishes an exception to Heritage Pacific where tort claims are essential to enforcement of the assigned instrument. (Opp. at 10:21-28.) The Court finds this reliance misplaced.

SMS Financial is materially distinguishable. In SMS Financial, the assignee asserted a claim under Civil Code section 2941, subdivision (b)(6), which provides a statutory cause of action to “any party” damaged by a title company’s improper release of a mortgage or deed of trust. (Id. at 1095-1096, citing Civ. Code § 2941). Section 2941 expressly authorizes “the person affected by the violation”—including those who hold deeds of trust by assignment—to sue the title company. (Id. at 1097, citing Civ. Code § 2941(b)(6) & (d)) The SMS Financial court held that “[b]y virtue of holding the deed of trust by assignment from [the assignor], SMS has its own potential claim against [the title company] under section 2941, subdivision (b)(6), regardless of any claims that [the assignor] may have been or may still be able to assert.” (Id. at 1100).

The SMS Financial court itself expressly distinguished Heritage Pacific, explaining that Heritage Pacific concerned “whether a lender’s preexisting fraud claims, which arose from misrepresentations made to the lender in a loan application, were incidental to the transfer of the loan,” and confirming “that as a matter of law they were not.” (Id. at 1100) The key distinction is that SMS Financial involved a statutory right that vested in the current holder of the deed of trust by operation of the statute itself, not an assignment of a common-law tort claim that accrued to the assignor before the assignment.

Here, USB Trust 3 asserts no claim under Civil Code section 2941 or any other statute that confers an independent right on the current holder of the instrument. Instead, USB Trust 3 seeks to pursue Aureus’s common-law tort claims for negligence, negligence per se, aiding and abetting fraud, and aiding and abetting conversion—claims that accrued to Aureus in March 2022, months before the November 2, 2022 assignments. (FACC at ¶¶ 27-28). These are precisely the type of “ancillary” tort claims that Heritage Pacific held do

not pass automatically with an assignment of contractual rights. (Heritage Pacific, 215 Cal. App. 4th at 992).

3. The Tort Claims Are Not Essential to Enforcement of the Note and Deed of Trust

USB Trust 3’s allegation that the tort claims are “essential to a complete and adequate enforcement” of the Secured Note and Deed of Trust fails under Heritage Pacific’s analysis. (FACC ¶ 28). As Paxos correctly argues in its reply, National Reserve Co. explained that claims for “rescission” or “reformation” of the contract would be essential to the enforcement of the contract. (National Reserve Co. of America v. Metropolitan Trust Co. of California (1941) 17 Cal. 2d 827, 833). Tort claims against third parties for wrongful diversion of loan proceeds are not claims to rescind or reform the Note or Deed of Trust; they are independent claims for damages.

To be sure, USB Trust 3 may assert its contractual rights to recover the loan proceeds from those in contractual privity with it. But USB Trust 3 has not adequately alleged that it was assigned Aureus’s separate tort rights against Paxos, a non-party to the loan transaction. The fact that both the tort claims and the contract relate to the same underlying loan proceeds does not make the tort claims “essential to enforcement” of the contract as that phrase is understood under Heritage Pacific and National Reserve Co.

Moreover, Paxos correctly observes that “[t]ort claims do not ‘enforce’ a contract.” (Reply at 9:11, citing Exxess Electronixx v. Heger Realty Corp. (1998) 64 Cal. App. 4th 698, 709). Here, USB Trust 3 does not seek to rescind or reform the deed of trust. So its tort claims against a non-party to its contract do not enforce that contract and do not automatically pass with that contract under Civil Code section 1084.

4. USB Trust 3 Has Not Met Its Pleading Burden To Establish Standing To Sue Paxos

As explained above, California law requires that an assignment agreement “must describe the subject matter of the assignment with sufficient particularity to identify the rights assigned.” (Heritage Pacific, 215 Cal. App. 4th at 988, 991). USB Trust 3 bears the burden of proving an assignment of the right to pursue tort claims allegedly committed against Aureus. (Id.). Again, USB Trust 3 does not dispute that that it “has not pointed to any contractual provision describing the alleged assignment of tort claims.” ((Opp. at 12:4- 5, cleaned up), Reply in Supp.) Instead, USB Trust 3 relies solely on the conclusory allegation that the tort claims “cannot be asserted apart from” or “are essential to” enforcement of the Note and Deed of Trust. (FACC ¶ 28).

Under Heritage Pacific, this conclusory allegation is insufficient. The assignment agreement in Heritage Pacific was “completely silent regarding any tort claim” and the plaintiff “cannot allege general custom and practice to expand the assignment agreement to include ancillary rights not specified.” (Heritage Pacific, 215 Cal. App. 4th at 992). The same deficiency exists here. Without factual allegations showing express assignment of the tort claims or identifying specific contractual language assigning those rights with sufficient

particularity, USB Trust 3 has not met its pleading burden here under Code of Civil Procedure section 430.10, subdivision (e).

5. The Assignment Defect Affects All Four Challenged Causes of Action at the Pleading Stage

The standing defect affects all four causes of action challenged in Paxos’s demurrer. The First Cause of Action (Negligence) and Second Cause of Action (Negligence Per Se) allege that Paxos owed a duty of care to USB Trust 3 and breached that duty by failing to prevent its institution from being used to facilitate criminal activity. (FACC ¶¶ 62-66, 78- 81) These are tort claims seeking to recover damages for injuries Aureus allegedly suffered when the loan proceeds were diverted through Paxos in March 2022—before the assignments to USB Trust 3. (FACC ¶¶ 26-27). .

Likewise, the Fifth Cause of Action (Aiding and Abetting Fraud) and Sixth Cause of Action (Aiding and Abetting Conversion) are tort claims alleging that Paxos knowingly assisted Shin and Soboleva in defrauding Aureus and converting Aureus’s loan proceeds. (FACC ¶¶ 112-114, 121-124). These claims, too, are based on conduct directed at Aureus and injuries that accrued to Aureus in March 2022. The fact that USB Trust 3 later acquired the Note and Deed of Trust does not automatically vest USB Trust 3 with standing to pursue these accrued tort claims absent adequate allegations of express assignment.

III. CONCLUSION AND ORDER

Having carefully considered the Demurrer, Opposition, Reply, supporting declarations, and judicially noticeable materials, the Court SUSTAINS the Demurrer WITH LEAVE TO AMEND on the ground that the FACC does not adequately allege facts showing assignment of the accrued tort claims to establish standing.

The Court sustains the demurrer with leave to amend. While the current pleading is deficient, it is possible that USB Trust 3 may be able to cure the defect by alleging additional facts. (McDonald, supra, 180 Cal. App. 3d at 303-304.) USB Trust 3 may, if it can do so truthfully and in good faith, allege: (1) specific contractual language in the assignment agreements expressly assigning Aureus’s tort claims against third parties; (2) facts showing that the parties to the assignment agreements intended to transfer tort claims in addition to contractual rights; (3) a separate written agreement assigning the tort claims; or (4) other facts demonstrating that USB Trust 3 has standing to pursue these tort claims against Paxos.

Note well that the Court makes no determination at this time whether such allegations, if made, would be sufficient to withstand demurrer, or whether USB Trust 3 can make such allegations consistent with its obligations under Code of Civil Procedure section 128.7. The Court notes only that the current pleading does not adequately allege assignment of the tort claims under Heritage Pacific Financial, LLC v. Monroy and related authorities, and that leave to amend is appropriate to afford USB Trust 3 an opportunity to cure this deficiency if possible.

Accordingly, for the foregoing reasons, the Court SUSTAINS Cross-Defendant Paxos Trust Company, LLC’s Demurrer to the First Amended Cross-Complaint as to the First Cause of Action (Negligence), Second Cause of Action (Negligence Per Se), Fifth Cause of Action (Aiding and Abetting Fraud), and Sixth Cause of Action (Aiding and Abetting Conversion) WITH LEAVE TO AMEND.

Specifically, Cross-Complainant U.S. Bank Trust National Association, solely as Trustee of HOF Grantor Trust 3, shall have fifteen (15) days from the date of service of this order to file a Second Amended Cross-Complaint curing the deficiencies identified herein. If no Second Amended Cross-Complaint is filed within that time, the demurrer will be deemed sustained without leave to amend as to the challenged causes of action. All other parties, in turn, may answer or otherwise respond to the SAC in any manner allowed, and within the time allowed, by the Code of Civil Procedure.

Because the Court sustains the Demurrer on the threshold ground of lack of standing because of inadequate fact allegations of assignment, the Court need not and does not reach Paxos’s alternative grounds for Demurrer based on statute of limitations or legal insufficiency. Those issues may be raised in a subsequent demurrer if USB Trust 3 files a Second Amended Cross-Complaint.

SO ORDERED.

Date: August 7, 2026 Hon. Vincent I. Parrett Superior Court of the State of California, County of Santa Clara

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