Jones v. Wells Fargo Bank

• Decision Date: 31 October 2003
• Docket Number: No. B166655.,B166655.
• Citation: 5 Cal.Rptr.3d 835,112 Cal.App.4th 1527
• Court: California Court of Appeals Court of Appeals
• Parties: Michael JONES, Plaintiff and Appellant, v. WELLS FARGO BANK et al., Defendants and Respondents.

5 Cal.Rptr.3d 835

112 Cal.App.4th 1527

Michael JONES, Plaintiff and Appellant, v. WELLS FARGO BANK et al., Defendants and Respondents.

No. B166655.

Court of Appeal, Second District, Division 4.

October 31, 2003.

Osborn & Associates and Richard G. Osborn, Los Angeles, for Plaintiff and Appellant.

Ervin, Cohen & Jessup, Randall S. Leff and Andres F. Quintana, Beverly Hills, for Defendants and Respondents Wells Fargo Bank and Lauren L. Reager, M.D.

Litwak & Havkin and Stella A. Havkin, for Defendant and Respondent PPM III, L.P.

Law Offices of Phillip E. Koehnke and Phillip E. Koehnke, San Diego, for Defendants and Respondents David Wolfe and Public Properties Management, Inc.

EPSTEIN, J.

Plaintiff Michael Jones appeals from a judgment of dismissal following the sustaining of a demurrer in a suit involving a shared appreciation loan made to a partnership of which he is a limited partner. Jones alleged that the loan and a later forbearance agreement were usurious, unconscionable, and unfair, and that arranging them breached defendants' fiduciary duty to the partnership and its limited partners. The trial court sustained the defendants' demurrer to all causes of action, without leave to amend. We find no error in the trial court's ruling. We affirm the judgment.

FACTUAL AND PROCEDURAL SUMMARY

Jones is a limited partner of PPM III Partnership LP (PPM III), a Tennessee limited partnership. Defendants include Wells Fargo Bank, as trustee of the Lauren L. Reager, M.D. Pension Plan Trust (Reager Trust); Lauren L. Reager (Reager), an individual and beneficiary of the Reager Trust; Public Properties Management, Inc. (Public), a corporation that is the managing general partner of PPM III; and David Wolfe, an individual alleged to be a limited partner of PPM III and a corporate officer and controlling stockholder of Public (collectively, defendants).

The following summary is taken from the allegations of the second amended complaint, which we accept as true for purposes of this appeal. In February 1996, PPM III arranged to purchase improved real property in Pico Rivera, California for $1,650.000.¹ In April 1996, Wells Fargo, as trustee for the Reager Trust, loaned $1,700,000 of trust assets to PPM III to purchase the property. This loan was evidenced by a promissory note secured by a deed of trust on the property, payable by April 9, 1998. The note promised repayment of the loan principal plus 10 percent annual interest and "Excess Value Contingent Interest." The contingent interest was 50 percent of the appreciated value of the property at future sale or refinancing, up to a limit of $750,000 and excluding a reserve of up to $300,000 for renovation costs. PPM III was to manage and improve the property in expectation of dramatic property appreciation. Defendants believed the property was worth more than the purchase price and that it would appreciate further, so that the note would yield a return much higher than 10 percent.

In January 1997, after the borrowing was arranged and the property purchased, Jones became a limited partner of PPM III. Before the April 1998 due date, defendants arranged a forbearance agreement extending the note's maturity date six years and raising the excess interest limit to $1,750,000. From the beginning of 1998 onward, the property's fair market value was high enough that the actual interest rate under both the original note and later forbearance agreement greatly exceeded 10 percent.

In June 2002, Jones sued defendants individually and derivatively on behalf of PPM III. He alleged that the note and forbearance agreement were usurious, unconscionable, and unfair. There were nine causes of action in his complaint: declaratory relief, usury, breach of fiduciary duty, breach of written contract, inducing breach of contract, gross negligence, restitution, cancellation of instruments, and to quiet title to the property. Defendants moved to stay, dismiss, or transfer the action, alleging that Jones's suit was part of a campaign of bad-faith litigation to delay or obstruct the sale of the property. This motion was denied without explanation.

Defendants then demurred. Jones filed a first amended complaint substantially identical to the original, but changing the date Jones became a limited partner to a date after the loan was arranged. Wells Fargo and Reager again demurred, and the other defendants later joined their demurrer. The trial court, without explanation, sustained the demurrer without leave to amend as to the causes of action for declaratory relief, usury, cancellation of instruments, and to quiet title; it granted leave to amend the other causes of action. Jones filed a second amended complaint (the charging pleading), which dropped one named defendant and four causes of action, but repeated the five remaining causes of action (breach of fiduciary duty, breach of written contract, inducement of breach of contract, gross negligence, and restitution) now renumbered almost verbatim.

Wells Fargo and Reager again demurred, and the other defendants again joined. As they had before, defendants argued that the note and forbearance agreement were not usurious or illegal because shared appreciation loans, and loans made by national banks acting in a fiduciary capacity, are exempt from the California usury law; that Jones lacked standing because he was not a limited partner of PPM III when the loan was made; that he failed to allege any fiduciary duty or duty of care owed him by defendants; and that his complaint failed to state a cause of action. Jones filed no opposition to the demurrer or joinders. The trial court sustained the demurrer without leave to amend and entered judgment against Jones. Jones filed this timely appeal as to the five causes of action in the second amended complaint.

DISCUSSION

I

Following established rules for such review, we treat the demurrer as admitting all material facts properly pleaded as amended, but not contentions, deductions, or conclusions of fact or law. (Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126, 119 Cal.Rptr.2d 709, 45 P.3d 1171.) We review the complaint de novo, to determine whether, reasonably read, it states facts sufficient to constitute a cause of action. (Ibid.; Hernandez v. City of Pomona (1996) 49 Cal.App.4th 1492, 1497, 57 Cal.Rptr.2d 406.)

The transactions in this case involve a classic shared appreciation loan arrangement, in which a lender shares in the appreciated value of property the borrower is purchasing. The gist of Jones's argument is that any shared appreciation loan designed to yield an actual interest rate higher than the rate specified in article XV of the California Constitution (10 percent) is usurious, unconscionable, and unfair per se, particularly if the value of the property at the time of the transaction makes the realization of the contingent interest a near certainty. Jones argues he has standing to sue defendants individually and derivatively regarding the note and forbearance agreement; that both the note and forbearance agreement are illegal under California's usury law; that even if they are not, they are unconscionable and unfair; that certain defendants are liable for breach of fiduciary duty, duty of due care, or contractual obligations, while the others share that liability under "vicarious liability and conspiracy theories"; and that defendants owe restitution to PPM III and its limited partners. We address each of these arguments in turn.

II

To have standing to bring a derivative suit on behalf of a limited partnership, a partner-plaintiff must allege status as a partner "at the time of the transaction or any part thereof of which plaintiff complains...." (Corp.Code, § 15702, subd (a)(1).) Although Jones was not a limited partner of PPM III when the original loan was made, he alleges (and defendants do not dispute) that he was a partner when defendants arranged the forbearance agreement. That is sufficient, at least to challenge the forbearance agreement.

III

Jones claims the note and forbearance agreement violate the California usury law. The California Constitution sets a maximum annual interest rate of seven percent on loans and forbearances, but allows parties by written contract to set the interest rate at up to 10 percent, or at the level of the Federal Reserve's discount rate plus 5 percent, on loans or forbearances involving real property. (Cal. Const, art. XV, § 1, subds. (1)-(2).) The Constitution also provides numerous exceptions to this general usury law. These include loans or forbearances made or arranged by banks or by "any other class of persons authorized by statute...." (Cal. Const, art. XV, § 1, subd. (2), 3d par.; see Carter v. Seaboard Finance Co. (1949) 33 Cal.2d 564, 580, 203 P.2d 758.) A panoply of statutes creates further exemptions from the general usury law. (See, e.g., Fin.Code, § 1504; Civ.Code, §§ 1917.005, 1917.220.) "[T]he usury law ... is riddled with so many exceptions that the law's application itself seems to be the exception rather than the rule." (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 807, 35 Cal.Rptr.2d 418, 883 P.2d 960.)

Financial Code section 1504 is one of these.² It provides that the constitutional interest rate restrictions "shall not apply to any obligations of, loans made or arranged by, or forbearances" of any California state bank, or any national bank or foreign state-chartered bank with a main or branch office in California, if the bank is "authorized to engage in the trust business" and is "acting in its fiduciary capacity." (Fin.Code, § 1504.) The pleadings and stipulated facts establish that Wells Fargo is a national bank whose main office is in California; it is authorized to engage in the trust business; and it acted in its fiduciary capacity for the Reager Trust in arranging the note and forbearance agreement. These features place it squarely within the section 1504 exemption.³ (Fin. Code, § 1504, subd. (b).)

Jones...