Lillibridge v. Kennington CA4/1 (2014) · DecisionDepot
Lillibridge v. Kennington CA4/1
California Court of Appeal Jun 27, 2014 No. D062020Unpublished
Filed 6/27/14 Lillibridge v. Kennington CA4/1 NOT TO BE PUBLISHED IN OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
RICHARD WILLIAM LILLIBRIDGE et al., D062020, D062935
Plaintiffs and Appellants,
v. (Super. Ct. No. 37-2011-00056194-CU-BC-NC) JIM KENNINGTON et al.,
Defendants and Respondents.
CONSOLIDATED APPEALS from a judgment and order of the Superior Court of
San Diego County, Timothy M. Casserly, Judge. Affirmed.
Niddrie, Fish & Addams, David A. Niddrie; Testa & Associates, James A. Testa
and Deborah A. Ries for Plaintiffs and Appellants.
Soden & Steinberger and Jason W. Coberly for Defendants and Respondents.
Plaintiffs Richard William Lillibridge and American Motorhead, Inc. (together
Plaintiffs) appeal a judgment entered in favor of defendants Jim Kennington, Spectrum
Enterprises, LLC, and Augur Consulting, Ltd. (collectively Defendants) after the trial
court sustained, without leave to amend, Defendants' demurrer to six causes of action
alleged in Plaintiffs' first amended complaint. The trial court sustained the demurrer to
the breach of contract and fraud/false promise causes of action as barred by applicable
statutes of limitations. On appeal, Plaintiffs contend: (1) their first amended complaint
alleged sufficient facts to state timely breach of contract and fraud/false promise causes
of action; and (2) the trial court abused its discretion by sustaining the demurrer without
leave to amend.
In a second appeal we have consolidated with their first, Plaintiffs challenge a
postjudgment order awarding Defendants attorney fees and costs incurred in defending
against Plaintiffs' action. Plaintiffs contend the trial court erred by awarding attorney
fees to Defendants based on a provision in a promissory note.
FACTUAL AND PROCEDURAL BACKGROUND
Because the main appeal is from a judgment of dismissal following an order
sustaining a demurrer without leave to amend, our factual background accepts as true the
facts alleged in the complaint, together with facts that may be inferred from those
expressly alleged. (Barnett v. Fireman's Fund Ins. Co. (2001) 90 Cal.App.4th 500, 504-
505.) However, we do not accept the truth of contentions or conclusions of fact or law.
(Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) Furthermore, as we stated in Barnett, "to
the extent the factual allegations conflict with the content of the exhibits to the complaint,
we rely on and accept as true the contents of the exhibits and treat as surplusage the
pleader's allegations as to the legal effect of the exhibits." (Barnett, at p. 505.)
Since 2002, Lillibridge has been the sole shareholder, officer, and director of
American Motorhead, Inc. (AM) and its predecessor or affiliated corporations (apparently
2
American Passion, Inc. (API) and Harley's House of Harleys, Inc. (HHH)). Prior to
September 2003, Lillibridge also controlled HHH Staffing, Inc. (HSI), a wholly owned
subsidiary of HHH, and Spectrum Enterprises, LLC (SE), a wholly owned subsidiary of
HSI.1 Kennington was Lillibridge's financial consultant and the sole manager of SE.
In 2002, Lillibridge owned a residential property located at 330 Justina Drive in
Oceanside (Property). Lillibridge decided to sell the Property to obtain funds for the
down payment to purchase a new residence in Valley Center. On or about December 24,
2002, Lillibridge and SE entered into a real estate purchase agreement (Agreement),
pursuant to which SE agreed to buy, and Lillibridge agreed to sell, the Property for a
purchase price of $480,000. Pursuant to the Agreement, SE gave Lillibridge a check for
$130,000 as a deposit toward the purchase price. The Agreement contained an
integration clause, providing that the Agreement, including its incorporated addendum,
"supercedes any and all prior agreements between the parties regarding the Property.
Neither [SE nor Lillibridge] shall be bound by any understanding, agreement, or
representation, express or implied, not specified herein." The Agreement was signed by
Lillibridge, individually as the seller, and also on behalf of SE, the buyer, as its president.
Attached to the Agreement was an addendum (Addendum), which restated the purchase
price of $480,000 and the down payment of $130,000. The Addendum also described a
"[w]rap loan," stating: "[Lillibridge] agrees to wrap the existing 1st Trust Deed in the
1 Lillibridge was the sole shareholder of AM's stock. AM's ESOP (i.e., employee stock ownership plan) held all of the outstanding shares of stock of HSI, which held all of the membership interests in SE.
3
amount of THREE HUNDRED FIFTY [sic] and 00/1000 Dollars with Countrywide
Home Loans [Countrywide] and will enter into a new loan with [SE] which has terms and
conditions identical with said existing 1st Trust Deed."2 The Addendum further provided
a "[c]losing date," stating: "This purchase agreement shall be fully exercised no later than
April 30, 2002 [sic]."3
Also, on or about the time of the Agreement, SE, by its manager Kennington,
signed a fixed/adjustable rate note (Note) in the principal amount of $350,000, payable to
Lillibridge. The Note provided that interest would accrue on the unpaid principal amount
at the yearly rate of 5.75 percent, subject to adjustment after five years. The Note
provided that the amount of SE's payments would initially be $2,042.50 per month,
subject to change. Importantly, for purposes of this appeal, the Note provided:
"I [SE] will pay principal and interest by making a payment every month. [¶] I will make my monthly payments on the first day of each month beginning on January 01, 2003. I will make these payments every month until I have paid all of the principal and interest and any other charges described below that I may owe under this Note. . . . If, on DECEMBER 01, 2032, I still owe amounts under this Note, I will pay those amounts in full on that date, which is called the 'Maturity Date.' [¶] I will make my monthly payments at 9875 Old Castel Road, Valley Center, CA or directly to Countrywide Home
2 We presume the $350 amount of the loan cited in the Addendum was a typographical error and that the parties intended to provide that the existing Countrywide loan was $350,000 and that Lillibridge would give SE a new loan in that amount with the same terms and conditions as the existing Countrywide loan.
3 We presume the April 30, 2002, date was a typographical error and that the parties intended that date to be April 30, 2003, which was after the date on which the parties signed the Agreement (i.e., December 24, 2002).
4
Loans, PO Box 10219, Van Nuys, CA 91910 for credit to the loan #021418660 or at a different place if required by the Note Holder."
Finally, section 7(E) of the Note set forth an attorney fees provision, stating: "If the Note
Holder has required me to pay immediately in full as described above, the Note Holder
will have the right to be paid back by me for all of its costs and expenses in enforcing this
Note to the extent not prohibited by applicable law. Those expenses include, for
example, reasonable attorneys' fees."
Also, on or about December 24, 2002, Lillibridge executed a quitclaim deed that
conveyed title to the Property to SE (Deed). The Deed includes a notary public's
acknowledgement of Lillibridge's signature. The Deed shows that $0 is the amount of the
documentary transfer tax due, explaining the transfer of the Property is to a "wholey [sic]
owned" transferee (i.e., SE). Lillibridge apparently delivered the Deed to SE at or about
the time the Agreement was executed (i.e., December 24, 2002).
In or about September 2003, Kennington purchased all of the stock of HSI, which
was the sole member (i.e., owner) of SE. On March 29, 2006, SE recorded the Deed with
the San Diego County Recorder's Office.
In or about December 2008, Kennington discontinued providing financial
consulting services to Lillibridge. In November 2009, Lillibridge discovered that SE was
in escrow to sell the Property to a third party. Lillibridge filed a complaint against
Defendants in San Diego County Superior Court case No. 37-2009-00061965-CU-CL-
NC (Prior Action) and recorded a lis pendens against the Property. The parties thereafter
stipulated that the lis pendens would be released, the pending sale of the Property to the
5
third party buyer could be closed, and the sale proceeds of approximately $140,000
would be held in escrow pending their mutual written instructions or further order of the
court. Lillibridge apparently voluntarily dismissed the Prior Action in July 2011.
On or about July 12, 2011, Lillibridge filed a complaint against Defendants in the
instant case (San Diego County Superior Court case No. 37-2011-00056194-CU-BC-NC)
(Original Complaint), alleging eight causes of action: (1) breach of contract; (2) quiet
title; (3) cancellation of deed; (4) breach of fiduciary duty; (5) fraud (promise without
intent to perform); (6) fraud (promise without intent to perform); (7) common count to
recover money paid by mistake; and (8) declaratory relief. The Original Complaint
alleged that:
"11. In or around December 2002, [Kennington], by and through his company, [SE], entered into an agreement for the purchase of the . . . Property. Pursuant to the parties' agreement, Defendants agreed to purchase the . . . Property for $480,000. However, Defendants were unable to secure financing immediately. As a result, Defendants persuaded Plaintiff to permit [Kennington] to move into the . . . Property as long as he made the existing mortgage payments as rent until such time as Defendants could secure financing to take out the existing loan against the . . . Property. At the same time, in or around December 2002, Plaintiff executed a Quitclaim Deed for the . . . Property in favor of [SE] to be held until such time as all conditions of the sale had been satisfied and Defendants obtained a new loan, removing Plaintiff from liability on the existing loan on the . . . Property.
"12. Defendants prepared documentation to reflect the proposed transaction. The parties thereafter executed the relevant purchase and sale documents. A copy of the executed purchase and sale documents are attached hereto as Exhibit 1 and incorporated herein by this reference.
"13. The parties agreed that [Kennington] would hold the Quitclaim Deed in trust until such time as all conditions of the sale had been
6
completed, including the take-out loan and payment of the purchase price in full. In or around March 2006, Defendants recorded the Quitclaim Deed without Plaintiff's permission to do so. Plaintiff did not discover the fact that the Quitclaim Deed had been recorded until after Defendants terminated their financial consulting services and advisement to Plaintiff in or around December 2008.
"14. To date, Defendants have never paid any consideration for the . . . Property. The loan on the . . . Property remains in the name of Plaintiff and Defendants never paid any consideration toward the purchase price of the . . . Property. Through a series of transactions orchestrated by Defendants, by and through their various entities, Defendants initially provided a check to Plaintiff in the amount of $130,000 . . . . [P]laintiff never received any consideration for the purchase and sale of the . . . Property . . . ."4 (Italics added.)
It further alleged: "Defendants have breached the parties' written agreement by failing to
pay the agreed upon consideration for the [P]roperty, failing to obtain the necessary wrap
loan, and secretly recording the [Deed] for the [P]roperty."
Defendants demurred to the first and fifth causes of action in the Original
Complaint (i.e., breach of contract and fraud/false promise claims), asserting the
applicable statutes of limitations had run based on the complaint's factual allegations and
attached exhibits. They argued that because Plaintiffs alleged Defendants had "never
paid any consideration for" the Property, the four-year statute of limitations for a breach
of written contract claim had run during the eight-year period since they had delivered the
$130,000 check to Lillibridge in December 2002. They further argued SE had obtained
4 The Original Complaint also included an allegation that Defendants caused Plaintiffs to simultaneously issue a $180,000 check to them, thereby allowing Defendants to purchase the Property with no money down and giving them a $50,000 windfall. However, because Plaintiffs' subsequent first amended complaint omitted that allegation, we do not include that allegation in the portion of the Original Complaint quoted above.
7
the necessary wrap loan by entering into a new loan with Lillibridge as shown by the
Note attached to the Original Complaint. Finally, they argued the Agreement did not
prohibit SE from recording the Deed, and the Agreement's integration clause precluded
any oral or other agreement to the contrary. The trial court sustained Defendants'
demurrer with leave for Plaintiffs to amend as to their breach of contract and fraud/false
promise causes of action.
Plaintiffs filed the instant first amended complaint (Amended Complaint), alleging
12 causes of action for: (1) breach of contract; (2) quiet title; (3) cancellation of deed; (4)
breach of fiduciary duty; (5) fraud (promise without intent to perform); (6) fraud
(promise without intent to perform); (7) common count to recover money paid by
unjust enrichment; (11) reformation; and (12) constructive trust. The Amended
Complaint's breach of contract cause of action repeated most of the allegations set forth
in the Original Complaint. However, instead of alleging Defendants "have never paid
any consideration" for the Property as alleged in the Original Complaint, the Amended
Complaint alleged Defendants "have never paid the full consideration" for the Property.
(Italics added.) Also, instead of alleging Defendants provided Lillibridge with the
$130,000 check through "their various entities" as alleged in the Original Complaint, the
Amended Complaint alleged that because Defendants did not have the funds available to
make the $130,000 down payment, AM transferred funds to HSI, which, in turn,
transferred funds to SE and that SE used those funds to tender a $130,000 check to
Lillibridge. Also, instead of alleging Defendants breached the Agreement by failing to
8
obtain the wrap loan and by recording the Deed without paying any consideration as
alleged in the Original Complaint, the Amended Complaint alleged Defendants breached
the Agreement by recording the Deed and selling the Property without paying the full
amount of the purchase price (i.e., $480,000). The fifth cause of action for fraud/false
promise alleged Defendants never intended to keep their promise to pay the $480,000
purchase price for the Property. The Amended Complaint, like the Original Complaint,
attached as exhibits the Agreement, the Addendum, and the Note.
Defendants demurred to the Amended Complaint, asserting that the first and fifth
causes of action were barred by applicable statutes of limitations. Regarding the four
new causes of action alleged in the Amended Complaint (i.e., the ninth, 10th, 11th, and
12th causes of action), they asserted the trial court had not granted Plaintiffs leave to
amend their Original Complaint to add new causes of action, and, in any event,
applicable statutes of limitations barred those causes of action. Defendants also argued
the trial court should apply the "sham pleading doctrine" to preclude Plaintiffs from
amending the Original Complaint to omit harmful factual allegations or add inconsistent
factual allegations without providing satisfactory explanations, and that the court should
read into the Amended Complaint those omitted allegations. Defendants argued
Plaintiffs should not be allowed to amend the Original Complaint to omit the allegation
that Defendants "have never paid any consideration" for the Property and to instead
allege in the Amended Complaint that Defendants "have never paid the full
consideration" for the Property.
9
After hearing arguments of counsel, the trial court sustained Defendants' demurrer
without leave for Plaintiff to amend the Amended Complaint. The trial court stated:
"As the statute of limitations for breach of a written contract is four years, and over eight years have passed since the [Agreement] was executed until the complaint was filed, the cause of action fails. [Citations.] The original verified complaint alleged that '[t]o date, Defendants have never paid any consideration for the . . . Property.' [Citation.] During oral argument, Plaintiffs' counsel confirmed Defendants 'never paid the purchase price.' [Citation.] Here, Plaintiffs simply omit the allegation without explanation, now stating '[a]s a result of the above transactions, Defendants have never paid the full consideration representing the purchase price of the . . . Property.' [Citation.] Allegations in the original complaint that rendered it vulnerable to demurrer cannot be simply omitted without explanation in the amended pleading. The policy against sham pleadings requires the pleader to explain any such omission. Here, the original defect infects the [Amended Complaint] as well. [Citation.] The allegations pertaining to the statute of limitations are read into the [Amended Complaint], rendering it subject to demurrer on the same ground as the [Original Complaint]. [Citation.] As the statute of limitations for fraud based upon a false promise is three years, and over eight years have passed since the [Agreement] was executed until the complaint was filed, the cause of action fails. [Citations.]
"As for the ninth through twelfth causes of action, Plaintiffs did not have leave to add them to the pleading and the demurrer is therefore sustained without leave to amend as to those causes of action."5
The trial court entered a judgment dismissing the six causes of action to which it
sustained Defendants' demurrer (i.e., the first, fifth, ninth, 10th, 11th, and 12th causes of
action). Plaintiffs timely filed a notice of appeal in case No. D062020.
5 In the same order, the trial court granted Defendants' motion to compel arbitration of the unrelated claims set forth in the second, third, fourth, sixth, seventh, and eighth causes of action in the Amended Complaint. That ruling is not challenged by Plaintiffs in the instant appeal.
10
After the judgment was entered, Defendants filed a Civil Code section 17176
motion for an award of their attorney fees pursuant to a contractual attorney fees
provision. The trial court awarded Defendants attorney fees of $97,180 based on an
attorney fee provision in the Note. Plaintiffs timely filed a notice of appeal of the
attorney fee order in case No. D062935.
DISCUSSION
Case No. D062020
I
Demurrer Standard of Review
General standard of review. "A demurrer tests the legal sufficiency of the
complaint. [Citation.] Therefore, we review the complaint de novo to determine whether
it contains sufficient facts to state a cause of action. [Citation.] 'We treat the demurrer as
admitting all material facts properly pleaded, but not contentions, deductions or
conclusions of fact or law.' [Citation.] The trial court exercises its discretion in declining
to grant leave to amend. [Citation.] If it is reasonably possible the pleading can be cured
by amendment, the trial court abuses its discretion by not granting leave to amend.
[Citation.] The plaintiff has the burden of proving the possibility of cure by amendment."
(Grinzi v. San Diego Hospice Corp. (2004) 120 Cal.App.4th 72, 78.)
In reviewing an order sustaining a demurrer in whole or in part, "courts must
assume the truth of the complaint's properly pleaded or implied factual allegations.
6 All statutory references are to the Civil Code unless otherwise specified.
11
[Citation.] Courts must also consider judicially noticed matters. [Citation.] In addition,
we give the complaint a reasonable interpretation, and read it in context." (Schifando v.
City of Los Angeles (2003) 31 Cal.4th 1074, 1081.) A complaint that is otherwise good
on its face is nevertheless subject to demurrer when facts judicially noticed show it is
defective. (Evans v. City of Berkeley (2006) 38 Cal.4th 1, 6; Joslin v. H.A.S. Ins.
Brokerage (1986) 184 Cal.App.3d 369, 374.) An affirmative defense may be raised on
demurrer and, if that defense appears on the face of the complaint, with consideration of
judicially noticed facts, to necessarily bar one or more causes of action, the demurrer
must be sustained in whole or in part. (Marshall v. Gibson, Dunn & Crutcher (1995) 37
doctrine, admissions in an original complaint that has been superseded by an amended
pleading remain within the court's cognizance and the alteration of such statements by
amendment designed to conceal fundamental vulnerabilities in a plaintiff's case will not
be accepted." (Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020,
1043, fn. 25.) Alternatively stated, "plaintiffs are precluded from amending complaints
to omit harmful allegations, without explanation, from previous complaints to avoid
attacks raised in demurrers . . . ." (Deveny v. Entropin, Inc. (2006) 139 Cal.App.4th 408,
425.) "If a party files an amended complaint and attempts to avoid the defects of the
original complaint by either omitting facts which made the previous complaint defective
or by adding facts inconsistent with those of previous pleadings, the court may take
13
judicial notice of prior pleadings and may disregard any inconsistent allegations."
(Colapinto v. County of Riverside (1991) 230 Cal.App.3d 147, 151.)
"Allegations in the original pleading that rendered it vulnerable to demurrer or
other attack cannot simply be omitted without explanation in the amended pleading. The
policy against sham pleadings requires the pleader to explain satisfactorily any such
omissions. Otherwise, the original defect 'infects' the subsequent pleading as well. I.e.,
the self-destructive allegations of the original pleading will be 'read into' the amended
pleading as well." (Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial
(The Rutter Group 2013) ¶ 6.708, p. 6-178 (rev. #1, 2011).) " 'Where a verified
complaint contains allegations destructive of a cause of action, the defect cannot be cured
in subsequently filed pleadings by simply omitting such allegations without explanation.'
[Citations.] 'In such a case the original defect infects the subsequent pleading so as to
render it vulnerable to a demurrer.' [Citation.] However, we have also made it clear that
'a party should be allowed to correct a pleading by omitting an allegation which, it
appears, was made as the result of mistake or inadvertence.' " (Reichert v. General Ins.
Co. (1968) 68 Cal.2d 822, 836.) Therefore, "[a]bsent an explanation for the
inconsistency [of facts alleged in amended complaint with those alleged earlier], a court
will read the original defect into the amended complaint, rendering it vulnerable to
demurrer again." (Banis Restaurant Design, Inc. v. Serrano (2005) 134 Cal.App.4th
1035, 1044.)
In the context of proposed amendments, "the trial court has discretion to deny
leave to amend when the proposed amendment omits or contradicts harmful facts pleaded
14
in a prior pleading unless a showing is made of mistake or other sufficient excuse for
changing the facts. Absent such a showing, the proposed pleading may be treated as a
sham. [Citations.] 'The well-established rule is that a proposed amendment which
contradicts allegations in an earlier pleading will not be allowed in the absence of "very
satisfactory evidence" upon which it is "clearly shown that the earlier pleading is the
result of mistake or inadvertence." ' " (Sanai v. Saltz (2009) 170 Cal.App.4th 746, 768.)
II
Order Sustaining the Demurrer to the Amended Complaint
Plaintiffs contend the trial court erred by sustaining Defendants' demurrer to the
Amended Complaint because it alleged facts sufficient to state timely causes of action for
breach of contract, fraud/false promise, and quasi-contract relief. Plaintiffs assert the
"sham pleading doctrine" should not be applied to their allegations in the Original
Complaint and Amended Complaint.
A
Plaintiffs assert the sham pleading doctrine should not be applied because the
Amended Complaint merely corrected their legal theory regarding their breach of
contract cause of action and the factual allegations in the Amended Complaint were
consistent with the allegations in the Original Complaint.
Based on our independent review of the Original Complaint, including the
incorporated exhibit, and the Amended Complaint, including the incorporated exhibit, we
conclude the Amended Complaint did not state a timely cause of action for breach of
contract. First, as the trial court concluded, the allegations regarding payment of
15
consideration by Defendants in the two complaints are inconsistent. The Original
Complaint alleged Defendants "have never paid any consideration" for the Property, and
the Amended Complaint alleged Defendants "have not paid the full consideration" for the
Property. (Italics added.) Although it is possible the two phrases could be read literally
to be consistent with each other, we believe the only reasonable reading of those
respective allegations in the context of the complaints is that the Original Complaint
alleged Defendants had not paid any consideration and the Amended Complaint alleged,
in effect, that Defendants had paid some, but not all, of the consideration for the
Property.7
More importantly, we conclude the exhibits attached to both complaints
contradict, and therefore we disregard, Plaintiffs' contrary allegations regarding payment
of consideration for the Property. Exhibit 1 to the Original Complaint and the Amended
Complaint consists of the same documents: (1) the Agreement; (2) the Addendum; and
(3) the Note. Under the Agreement and the Addendum incorporated into both
complaints, SE agreed to buy the Property from Lillibridge for a total purchase price of
$480,000, to be paid in two parts: (1) a down payment of $130,000; and (2) a new
promissory note from SE to Lillibridge in the amount of $350,000. The Addendum
described the new note as a "wrap loan," stating: "Seller [Lillibridge] agrees to wrap the
7 A literal reading of those phrases alone arguably could support their consistency; specifically, if the Amended Complaint's allegation was read as meaning broadly that Defendants had paid less than all of the consideration (i.e., either none or only some of the consideration) for the Property. However, in the context of Plaintiffs' other allegations, we conclude that interpretation would not be reasonable. 16
existing 1st Trust Deed in the amount of THREE HUNDRED FIFTY [sic] and 00/1000
Dollars with Countrywide Home Loans [Countrywide] and will enter into a new loan
with Buyer [SE] which has terms and conditions identical with said existing 1st Trust
Deed."8 (Italics added.) The Note attached to both complaints is consistent with the
Addendum's description of the new note. The Note is in the principal amount of
$350,000, payable by SE to Lillibridge, with interest accruing on the unpaid principal
amount at the yearly rate of 5.75 percent, subject to adjustment after five years. The Note
specifically provides that the amount of SE's payments to Lillibridge will initially be
$2,042.50 per month, subject to change, with the first monthly payment due on January 1,
2003. If any unpaid principal amount remained due on December 1, 2032, all unpaid
principal and accrued interest would be payable in full on that date. It further provides
that SE is to pay its monthly payments to a Valley Center address (presumably the
address of Lillibridge's new residence) or directly to an address for Countrywide
(presumably Lillibridge's lender). Therefore, the express terms and conditions of the
Addendum and the Note provided that Lillibridge would, in effect, give SE "seller
financing" for the $350,000 amount remaining after SE's $130,000 down payment.
Those documents provided, in effect, that Lillibridge's existing loan from Countrywide
would remain outstanding, while Lillibridge gave SE a new "wrap loan" for $350,000
8 As noted above, we presume the $350 amount cited in the Addendum was a typographical error and that the parties intended to provide that the existing Countrywide loan was $350,000 and that Lillibridge would give SE a new loan in that amount with the same terms and conditions as the existing Countrywide loan.
17
and received monthly payments from SE thereunder sufficient for him to, in turn, pay his
monthly installments to Countrywide. Accordingly, on delivery to Lillibridge of a check
for $130,000 and delivery to Lillibridge of the executed Note, SE paid in full the
$480,000 purchase price for the Property and the sale of the Property to SE was
completed.
We disregard any allegations in the Original Complaint or Amended Complaint to
the contrary. (Holland v. Morse Diesel Internat., Inc., supra, 86 Cal.App.4th at p. 1447
["If facts appearing in the exhibits contradict those alleged [in the complaint], the facts in
the exhibits take precedence."]; Breneric Associates v. City of Del Mar, supra, 69
Cal.App.4th at p. 180 [we disregard allegations contradicted by the express terms of an
exhibit incorporated into the complaint]; Dodd v. Citizens Bank of Costa Mesa, supra,
222 Cal.App.3d at p. 1627 ["[F]acts appearing in exhibits attached to the complaint will
also be accepted as true and, if contrary to the allegations in the pleading, will be given
precedence."]; Hoffman v. Smithwoods RV Park, LLC, supra, 179 Cal.App.4th at p. 400
[" 'False allegations of fact, inconsistent with annexed documentary exhibits [citation] or
contrary to facts judicially noticed [citation], may be disregarded . . . .' "].) Therefore, we
disregard both the Original Complaint's allegation that SE had never paid any
consideration for the Property, as well as the Amended Complaint's allegation that SE did
not pay in full the consideration/purchase price for the Property. We further disregard
Plaintiffs' allegations that Kennington, and not SE, was the buyer of the Property. All of
the documents attached to the complaints (i.e., the Agreement, the Addendum, and the
Note) expressly identify the buyer (or borrower) as SE and not Kennington. Because the
18
complaints' allegations to the contrary are superseded by express provisions in those
attached documents and the Agreement's integration clause (discussed below), Plaintiffs
cannot state a breach of contract cause of action against Kennington.9
Furthermore, we disregard Plaintiff's allegation that the Agreement did not specify
the time for payment of the purchase price for the Property, because the Addendum
expressly provided the date by which that purchase price must be paid. The Addendum
set forth the "[c]losing date," stating: "This purchase agreement shall be fully exercised
no later than April 30, 2002 [sic]."10 Because the documents attached to both complaints
include a copy of a check, dated December 24, 2002, signed by Kennington on behalf of
SE and payable to Lillibridge in the amount of $130,000 and the Note, bearing the date
November 25, 2002, signed by Kennington on behalf of SE and payable to Lillibridge in
the amount of $350,000, we presume both the check and the Note were delivered by SE
to Lillibridge on or about December 24, 2002, thereby satisfying the Addendum's
requirement that the sale transaction be "closed" (i.e., completed) on or before April 30,
2003.
9 Assuming arguendo the Amended Complaint sufficiently alleged Kennington was SE's alter ego, we nevertheless conclude, as discussed below, the four-year statute of limitations ran on any breach of contract cause of action alleged against Kennington before Plaintiffs filed the Original Complaint.
10 As noted above, we presume the April 30, 2002, date was a typographical error and that the parties intended that date to be April 30, 2003, which was after the date on which the parties signed the Agreement (i.e., December 24, 2002).
19
We further disregard, as contrary to the documents attached to the complaints,
Plaintiffs' allegation that SE secretly recorded the Deed before paying in full the purchase
price for the Property. First, as we concluded above, Defendants did, in fact, pay in full
the $480,000 purchase price for the Property when SE delivered to Lillibridge the
$130,000 down payment check and the Note in the amount of $350,000. Second, none of
the documents attached to the complaints (i.e., the Agreement, the Addendum, and the
Note) set forth any provision that could reasonably be construed as precluding SE from
recording the Deed until the Note was paid in full. Furthermore, the Agreement
contained an integration clause, providing that the Agreement, including its incorporated
Addendum, "supercedes any and all prior agreements between the parties regarding the
Property. Neither [SE nor Lillibridge] shall be bound by any understanding, agreement,
or representation, express or implied, not specified herein." Therefore, to the extent
Lillibridge alleges SE agreed not to record the Deed until the Note was paid in full, the
integration clause precludes such agreement as contrary to the Agreement.
We conclude Plaintiffs' allegation that SE breached the Agreement by recording
the Deed before paying in full the purchase price for the Property is contradicted by the
documents attached to the Original Complaint and the Amended Complaint and therefore
we disregard that allegation. The Amended Complaint's allegation that the parties agreed
SE would pay the purchase price in full when SE was able to obtain third party financing
and would hold the Deed unrecorded in trust for Lillibridge until the purchase price (or,
alternatively, the Note) was paid in full, is contrary to the documents attached to the
Amended Complaint and we therefore disregard that allegation. Likewise, to the extent
20
the Amended Complaint alleges SE breached the Agreement by selling the Property
without Lillibridge's consent before paying in full the purchase price for the Property,
that allegation is also contradicted by the documents attached to the Original Complaint
and the Amended Complaint and we therefore disregard it. Plaintiffs do not allege, and
the documents attached to the Amended Complaint do not show, SE breached the Note
by not timely making monthly payments to Lillibridge. The Amended Complaint's first
cause of action for breach of contract does not state a cause of action for breach of the
Note.
Finally, the new allegation in the Amended Complaint that SE's monthly payments
of $2,042.50 under the Note were "rent," and not loan, payments is also contradicted by
the documents attached to the Amended Complaint. As discussed above, the Addendum
expressly provided that Lillibridge will make "a new loan" to SE, and the Note expressly
provided that SE would make monthly loan payments to Lillibridge toward the loan's
principal amount of $350,000. The Note stated: "In return for a loan that I have received,
I [SE] promise to pay U.S. $350,000 . . . , plus interest, to the order of Lender
[Lillibridge]." (Italics added.) The Note cannot reasonably be interpreted as meaning the
"loan" is, instead, a rental agreement, and the "Lender" is, instead, a landlord.
Furthermore, by providing that interest would accrue on the unpaid principal balance of
the Note, the parties clearly expressed their mutual intent that the instrument was, in fact,
a loan and not a rental agreement. Plaintiffs do not explain how "interest" can accrue on
rent, much less on an unpaid principal "rental" amount of $350,000. Accordingly, we
21
disregard Plaintiffs' allegation that the parties agreed SE's monthly payments would be
rent, and not loan, payments.
Because the documents attached to the Original Complaint and the Amended
Complaint contradict the allegations in the Amended Complaint's first cause of action for
breach of contract, we disregard those contrary allegations. We disregard Plaintiffs'
assertion that their breach of contract cause of action did not arise until late 2009 when
they purportedly discovered SE had secretly recorded the Deed and attempted to sell the
Property without Lillibridge's consent. On the contrary, the Agreement, the Addendum,
and the Note, which are attached to the Amended Complaint, show, as we concluded
above, SE paid the $480,000 purchase price in full when it delivered, on or about
December 24, 2002, to Lillibridge the $130,000 check and the Note in the amount of
$350,000, and that SE was not precluded from recording the Deed or selling the Property
thereafter. The four-year statute of limitations for any breach of the written contract
(Code Civ. Proc., § 337) ran long before Plaintiffs filed the Original Complaint in July
2011.11 Therefore, the trial court correctly concluded the first cause of action alleged in
11 In so concluding, we need not, and do not, rely solely on the "sham pleading doctrine" as the trial court did. Rather, we note that doctrine provides further support for our conclusion, which is based primarily on the documents attached to the Original Complaint and the Amended Complaint that supersede the contrary allegations in the complaints.
22
the Amended Complaint for breach of contract was barred by the applicable statute of
limitations. Plaintiffs have not carried their burden on appeal to persuade us otherwise.12
B
Plaintiffs also assert the trial court erred by concluding the Amended Complaint's
fifth cause of action for fraud/false promise was barred by the applicable statute of
limitations. That cause of action for fraud/false promise was based on the agreement
between Lillibridge and SE for the sale and purchase of the Property. It alleged
Kennington, as the buyer, represented to Lillibridge, as the seller, that he would pay the
full purchase price (i.e., $480,000) for the Property, including the $130,000 down
payment, at a future date when he "could come up with the funds to do so." It further
alleged that at the time "Defendants made these promises, they had no intention of
performing them and these promises were false. The true facts were that Defendants
never intended to pay Plaintiff[s] for the . . . Property, that they intended to acquire legal
title to the . . . Property without payment therefor, and that they intended [to] deprive
[Lillibridge] of the . . . Property." It alleged Plaintiffs justifiably relied on Defendants'
false promises, did not know and could not have known of their falsity, and relied to their
12 Likewise, to the extent Plaintiffs assert the Amended Complaint's allegations merely corrected erroneous legal conclusions in the Original Complaint and did not contradict the facts shown in the documents attached to the Original Complaint and the Amended Complaint, we disagree. The facts shown in those documents clearly contradict the factual allegations of the two complaints and therefore the documents superseded the complaints' contrary factual allegations.
23
detriment on those false promises (e.g., by executing the Deed and allowing Kennington
to move into the Property).
However, the documents attached to the Original Complaint and the Amended
Complaint contradict certain allegations in the Amended Complaint and, as discussed
above, supersede those contrary allegations. The buyer was SE and not Kennington.
More importantly, SE paid the $480,000 purchase price in full on delivery, on or about
December 24, 2002, to Lillibridge of the $130,000 check and the Note in the amount of
$350,000. Therefore, the documents attached to the Amended Complaint contradict the
implied, if not express, allegation in the fifth cause of action for fraud/false promise that
the purchase price had not been paid in full when Plaintiffs discovered the false promise
in November 2009. In any event, to the extent the Amended Complaint alleged SE's
promise was false when made (i.e., on or about December 24, 2002), the three-year
statute of limitations for fraud (Code Civ. Proc., § 338, subd. (d)) had run long before
Plaintiffs filed the Original Complaint in July 2011.
Furthermore, contrary to Plaintiffs' assertion, the delayed discovery rule does not
apply in the circumstances of this case to toll the running of the statute of limitations until
November 2009, when Plaintiffs alleged they first discovered the false promise. As we
stated above, based on our review of the documents attached to the Amended Complaint,
SE paid the $480,000 purchase price on or about December 24, 2002, and therefore there
was no false promise to discover in November 2009. Assuming arguendo, as Plaintiffs
assert, that Kennington owed Lillibridge a fiduciary duty as his financial advisor or
otherwise, the delayed discovery rule would not apply in the circumstances of this case.
24
Therefore, the trial court correctly concluded the fifth cause of action alleged in the
Amended Complaint for fraud/false promise was barred by the applicable statute of
limitations. Plaintiffs do not carry their burden to persuade us otherwise.
C
Plaintiffs assert the trial court erred by sustaining Defendants' demurrer to the
quasi-contract causes of action alleged in the Amended Complaint (i.e., ninth, 10th, 11th,
and 12th causes of action). Their quasi-contract causes of action are based on a purported
oral agreement that SE would not record the Deed or sell the Property until it paid the
$480,000 purchase price in full. They argue that because Defendants would be unjustly
enriched by accepting the benefits of that oral agreement with Plaintiffs, the statute of
frauds should not be applied to preclude relief based on that oral contract. In effect,
Plaintiffs argue their written contracts with Defendants (i.e., the Agreement, the
Addendum, and the Note) were subject to that oral agreement, which, under their quasi-
contract theory, should be enforceable despite the statute of frauds that requires an
agreement for the sale of real property to be in writing.
First, the trial court, as Defendants assert, expressly sustained the demurrer to
those causes of action because it had not granted leave for Plaintiffs to amend the
Original Complaint to add new causes of action (e.g., quasi-contract causes of action).
The court stated: "As for the ninth through twelfth causes of action, Plaintiffs did not
have leave to add them to the pleading and the demurrer is therefore sustained without
leave to amend as to those causes of action." Plaintiffs did not carry their burden below,
and do not carry their burden on appeal, to show there is a reasonable possibility the
25
Original Complaint (or the Amended Complaint) could be amended to state quasi-
contract causes of action.
More importantly, as stated above, based on our review of the documents attached
to the Amended Complaint that supersede contrary allegations in the Amended
Complaint, SE paid the $480,000 purchase price on or about December 24, 2002, and
therefore there could be no breach of the purported oral agreement that SE could not
record the Deed or sell the Property until it had paid the purchase price in full.
Furthermore, because any breach of that oral agreement would have occurred more than
two years before July 2011 when Plaintiffs filed the Original Complaint, the two-year
statute of limitations for oral contracts (Code Civ. Proc., § 339) applies to bar the quasi-
contract causes of action. To the extent Plaintiffs assert the three-year fraud statute of
limitations (Code Civ. Proc., § 338, subd. (d)) applies instead of the two-year statute of
limitations, we likewise conclude that statute of limitations also had run by the time the
Original Complaint was filed in July 2011. Finally, as Defendants assert, there can be no
quasi-contract cause of action where an express written agreement exists that defines the
parties' rights. (California Medical Assn. v. Aetna U.S. Healthcare of California, Inc.
(2001) 94 Cal.App.4th 151, 172-173; Hedging Concepts, Inc. v. First Alliance Mortgage
sustained the demurrers to the Amended Complaint's quasi-contract causes of action.
Plaintiffs do not carry their burden to persuade us otherwise.
26
III
Trial Court's Denial of Leave to Amend
Plaintiffs contend the trial court abused its discretion by denying them leave to
amend the Amended Complaint when it sustained Defendant's demurrer. They argue it is
reasonably possible they can amend the Amended Complaint to timely state a breach of
contract cause of action against Defendants. They cite the testimony of Ernest S. Ryder,
apparently Lillibridge's tax attorney, set forth in the transcript from his deposition
involving unrelated claims in the instant action. They argue that testimony is judicially
noticeable and shows: (1) SE's failure to pay consideration for the Property first became a
breach when SE recorded the Deed and sold the Property without Lillibridge's consent;
and (2) Lillibridge did not discover that breach until November 2009 because he
reasonably relied on Kennington's actions as his financial advisor and fiduciary.
However, our review of that deposition testimony does not support Plaintiffs' argument
they could amend the Amended Complaint to timely state a breach of contract cause of
action. That testimony, in general, discusses the circumstances of and reasons for
forming SE and Kennington's relationship to that and other entities. It does not show
there is any further information to support amendments to the Amended Complaint.
More importantly, that testimony does not refute our conclusion above that SE paid the
$480,000 purchase price in full on or about December 24, 2002, when it delivered to
Lillibridge the $130,000 check and the Note in the amount of $350,000. Therefore, there
could be no breach of contract thereafter for recording the Deed or selling the Property
without first paying the purchase price in full. Likewise, to the extent Plaintiffs assert
27
they could amend the Amended Complaint to allege SE's monthly payments pursuant to
the Note are "rent," and not loan payments, we concluded above the documents attached
to the Amended Complaint show those payments are loan payments and therefore
supersede any contrary allegations. Plaintiffs have not carried their burden on appeal to
show it is reasonably possible to amend the Amended Complaint to state a breach of
contract cause of action. (Grinzi v. San Diego Hospice Corp., supra, 120 Cal.App.4th at
p. 78.)
Case No. D062935
IV
Order Awarding Attorney Fees to Defendants
In their appeal in case No. D062935, Plaintiffs contend the trial court erred by
awarding attorney fees to Defendants pursuant to an attorney fee provision in the Note.
They argue that contractual provision does not apply to Defendants' defense of the instant
causes of action.
A
After the trial court sustained Defendants' demurrer and the judgment was entered
in their favor, Defendants filed a section 1717 motion for an award of their attorney fees
pursuant to an attorney fees provision in the Note. Defendants cited section 7(E) of the
Note, which states:
"If the Note Holder has required me to pay immediately in full as described above, the Note Holder will have the right to be paid back by me for all of its costs and expenses in enforcing this Note to the extent not prohibited by applicable law. Those expenses include, for example, reasonable attorneys' fees."
28
Defendants argued that because Plaintiffs would have been entitled thereunder to recover
their attorney fees had they prevailed on their claim that Defendants had failed to pay for
the Property, they are entitled to an award of attorney fees for successfully defending
against that claim.
In opposing Defendants' motion, Plaintiffs argued the Note's attorney fee provision
applied only to defaults under the Note, citing sections 7(B) and 7(C) of the Note, which
state:
"(B) Default [¶] If I do not pay the full amount of each monthly payment on the date it is due, I will be in default.
"(C) Notice of Default [¶] If I am in default, the Note Holder may send me a written notice telling me that if I do not pay the overdue amount by a certain date, the Note Holder may require me to pay immediately the full amount of Principal that has not been paid and all the interest that I owe on that amount. . . ."
Plaintiffs argued that section 7(E) of the Note restricted attorney fee awards to only
actions for default "as described above," which necessarily means only defaults under
sections 7(B) and 7(C) of the Note. They argue that because their action against
Defendants did not involve an action for default under the Note (i.e., an action after
acceleration of the unpaid principal and interest amounts under the Note), section 7(E) of
the Note did not support an award of attorney fees under section 1717.
In reply, Defendants argued that Plaintiffs' action did, in effect, accelerate the
amount due under the Note because Plaintiffs sought immediate payment in full of the
$350,000 Note amount as a portion of the $480,000 purchase price that allegedly was not
paid. They further argued that by incorporating the Note along with the Agreement and
29
the Addendum, Plaintiffs' breach of contract cause of action was based on all of those
documents, not just the Agreement, and therefore the Note's attorney fee provision
applied to Plaintiffs' action on the contract.
On October 22, 2012, the trial court awarded Defendants attorney fees of $97,180
based on the attorney fee provision in the Note. The court quoted section 1717 and stated
that it "changes a one-way attorney's fee provision to a two-way fee provision where the
non-specified party is the prevailing party. Here, the purchase agreements include a one-
way attorney's fees provision in favor of [Lillibridge]. The [Original Complaint] and
[Amended Complaint] had an exhibit including the [Property purchase documents], one
of which was the [Note]." The court then quoted section 7(E) of the Note and concluded:
"The provision speaks to the situation in which [Lillibridge] accelerates the [Note]. Even
though there was no written demand to accelerate the [Note], filing this lawsuit
constitutes an attempt to do so. [Lillibridge], as the [Note] holder, would have therefore
been entitled to an award of attorney's fees if he had prevailed on his claims that
Defendants failed to pay for the [Property]. Defendants are the prevailing [party] because
they obtained a judgment dismissing Plaintiffs' claims regarding the [Property].
Defendants are therefore entitled to attorney's fees pertaining to the relevant causes of
action." The court rejected Plaintiffs' argument that their action was solely on the
Agreement (which did not include an attorney fee provision) and not on the Note, stating
that argument "ignores the express allegations set forth by [P]laintiffs in the [Amended
Complaint] at paragraphs 12 and 13, and in particular paragraph 13, which incorporates
by reference a copy of the executed purchase and sale documents attached as Exhibit 1 to
30
the [Amended Complaint]." Accordingly, the court awarded Defendants $97,180 for
reasonable attorney fees incurred in "litigating the claims that Defendants did not pay for
the [Property] and issues common to all causes of action." The court's award was against
only Lillibridge.
B
Section 1717, subdivision (a), provides:
"In any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to other costs.
"Where a contract provides for attorney's fees, as set forth above, that provision shall be construed as applying to the entire contract, unless each party was represented by counsel in the negotiation and execution of the contract, and the fact of that representation is specified in the contract. . . ." (Italics added.)
"[S]ection 1717 applies to contracts containing reciprocal as well as unilateral attorney
fee provisions, including provisions . . . authorizing recovery of attorney fees by a
Community Assn. v. Torley (1992) 5 Cal.App.4th 343, 346-349.)
C
Plaintiffs argue on appeal, as they did below, that because the Note's attorney fee
provision expressly applies only to defaults under section 7 of the Note, their breach of
contract cause of action, which sought damages for nonpayment of the full $480,000
purchase price for the Property, was not a "default" action under the Note that would
support an attorney fee award. However, as discussed above, under section 1717 a
contractual attorney fee provision that expressly limits an attorney fee award to one party
and/or to only certain types of action (e.g., default actions) is instead to be applied to both
parties and to the entire contract (i.e., all actions thereon) and not to just certain types of
actions.13 (§ 1717, subd. (a); Ganey v. Doran, supra, 191 Cal.App.3d at p. 911 [attorney
13 Section 1717 provides an exception to this general rule when both parties are "represented by counsel in the negotiation and execution of the contract, and the fact of that representation is specified in the contract." (§ 1717, subd. (a).) Plaintiffs do not, and cannot reasonably, argue that exception applies to this case.
32
fee provision that expressly applied only to default actions was applied to the entire
contract under section 1717]; Beeman v. Burling, supra, 216 Cal.App.3d at pp. 1607-
1608; Sears v. Baccaglio, supra, 60 Cal.App.4th at pp. 1147-1148; Harbor View Hills
Community Assn. v. Torley, supra, 5 Cal.App.4th at pp. 346-349.) Therefore, we
conclude the trial court correctly applied the Note's attorney fees provision to all actions
on the entire contract and not just defaults under section 7 of the Note.
Plaintiffs further argue, as they did below, that the Note's attorney fees provision
did not apply to their breach of contract cause of action, because the Agreement did not
contain an attorney fees provision and they did not claim any default under the Note.
However, we conclude, as the trial court did, that because the Note was included in the
documents attached to the Amended Complaint and constituted part of the express
written agreements for the sale of the Property to SE that Plaintiffs alleged were
breached, the Note's attorney fees provision applies to Plaintiffs' breach of contract cause
of action. Furthermore, as the trial court concluded, Plaintiffs, in effect, accelerated the
amounts payable under the Note by filing the instant action for recovery of the $350,000
amount of the Note Plaintiffs alleged was part of the unpaid $480,000 purchase price for
the Property allegedly now due as a result of SE's wrongful recording of the Deed and
sale of the Property. Accordingly, we conclude the trial court did not abuse its discretion
by awarding Defendants the reasonable attorney fees they incurred in defending
Plaintiffs' contract causes of action.
33
DISPOSITION
The judgment is affirmed. The order awarding attorney fees to Defendants is
affirmed. Defendants shall recover their costs on appeal.
McDONALD, J.
WE CONCUR:
BENKE, Acting P. J.
McINTYRE, J.
34
AI Brief
AI-generated · verify before citing
Holding. The court held that the plaintiffs' breach of contract and fraud claims were barred by the statute of limitations, as the plaintiffs failed to explain inconsistent factual allegations regarding consideration that triggered the sham pleading doctrine.
Issues
Whether the trial court properly sustained a demurrer to breach of contract and fraud claims based on the statute of limitations.
Whether the sham pleading doctrine permits the court to disregard inconsistent factual allegations in an amended complaint.
Whether the trial court abused its discretion in denying leave to amend the complaint.
Disposition. Affirmed
Quotations verified verbatim against the opinion
“Allegations in the original complaint that rendered it vulnerable to demurrer cannot be simply omitted without explanation in the amended pleading.”
“The policy against sham pleadings requires the pleader to explain satisfactorily any such omissions.”
“As the statute of limitations for breach of a written contract is four years, and over eight years have passed since the [Agreement] was executed until the complaint was filed, the cause of action fails.”