KL Fenix Corp. v. Hwang

Docket NumberB309138
Decision Date09 December 2021
PartiesKL FENIX CORPORATION, Plaintiff and Appellant, v. JASON S. HWANG, Defendant and Respondent.
CourtCalifornia Court of Appeals Court of Appeals


APPEAL from a judgment of the Superior Court of Los Angeles County No. 19STCV41765, Michael L. Stern, Judge. Reversed.

Park &Lim, S. Young Lim and Jessie Y. Kim for Plaintiff and Appellant.

Freeman Mathis &Gary, Elizabeth A. Lowery and Caroline J Wu for Defendant and Respondent.



Spring Mountain and Rainbow Investment, LLC agreed to lease space in a commercial property to Greenland Super Market, Inc. to operate a supermarket. Greenland's monthly rent was based on its gross monthly sales. Spring Mountain later sold the property to KL Vegas, LLC, which assumed Spring Mountain's rights under the lease.

KL Vegas's assignee, KL Fenix Corporation, filed this action for fraud against Jason S. Hwang, a certified public accountant who prepared financial statements for Greenland. KL Fenix alleged Hwang, at Greenland's direction prepared financial statements with knowingly false information, which Greenland in turn provided to KL Vegas to calculate Greenland's rent.

The trial court sustained Hwang's demurrer without leave to amend and dismissed the action. Because KL Fenix alleged sufficient facts to constitute a cause of action for fraud against Hwang, we reverse.

A. KL Fenix Files This Action Against Hwang

According to the allegations in KL Fenix's complaint, in July 2009 Spring Mountain and Greenland entered into a percentage rent commercial lease for premises for a supermarket. The lease included a rent schedule providing that Greenland's monthly rent would be based on its gross monthly sales. Greenland agreed to pay Spring Mountain a monthly base rent (based on estimated sales) and submit quarterly financial statements to Spring Mountain showing its gross sales from the prior three months. If base rent paid by Greenland exceeded the rent owed under the rent schedule, Greenland would earn a credit to apply toward future months' base rent.

In 2013 KL Vegas purchased the property from Spring Mountain and assumed Spring Mountain's rights under the lease. A dispute later arose between KL Vegas and Greenland over what kind of financial information Greenland had to provide to obtain rent credits.

In November 2019 KL Fenix, KL Vegas's assignee, filed this action against Jason Hwang, a certified public accountant who prepared financial statements for Greenland, asserting a single cause of action for fraud. KL Fenix alleged that, beginning in 2016, Hwang at Greenland's direction prepared quarterly statements that "contained false information" and that "did not accurately reflect the financial conditions of Greenland." In particular, KL Fenix alleged that Hwang knowingly listed false inventory values on the financial statements and that Hwang knew Greenland would forward the financial statements to KL Vegas to "induce KL Vegas to issue Rent Credits to Greenland." KL Fenix claimed that, as a result of the false statements, it issued Greenland over $208, 000 in improper rent credits.

B. Hwang Files a Demurrer, Which the Trial Court Sustains Without Leave To Amend

Hwang demurred to the complaint, arguing KL Fenix failed to allege facts sufficient to constitute a cause of action for fraud. Hwang argued KL Fenix failed to state a cause of action because it did not allege he personally made any representations to KL Vegas and did not allege the fraud cause of action with sufficient specificity. Hwang also argued that transcripts of Hwang's trial testimony in a prior lawsuit involving Greenland and KL Vegas-transcripts Hwang asked the trial court take judicial notice of-established as a matter of law that KL Vegas's reliance on the financial statements was not reasonable.

The trial court sustained the demurrer to the cause of action for fraud "without leave to amend as to . . . Hwang," ruling without further explanation "there [was] no intentional misrepresentation." The court, however, gave KL Fenix leave to file an amended complaint (presumably either to assert nonfraud causes of actions against Hwang or to assert causes of action against someone else). After KL Fenix declined to a file an amended complaint, the court, in a signed order, dismissed the action with prejudice. KL Fenix timely appealed.

A. Standard of Review

"'In reviewing an order sustaining a demurrer, we examine the operative complaint de novo to determine whether it alleges facts sufficient to state a cause of action under any legal theory.'" (Mathews v. Becerra (2019) 8 Cal.5th 756, 768; accord, T.H. v. Novartis Pharmaceuticals Corp. (2017) 4 Cal.5th 145, 162; see Ko v. Maxim Healthcare Services, Inc. (2020) 58 Cal.App.5th 1144, 1149.) "'"'"We treat the demurrer as admitting all material facts properly pleaded . . . [and] consider matters which may be judicially noticed." . . . Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context.'"'" (Mathews, at p. 768; see Turner v. Victoria (2021) 67 Cal.App.5th 1099, 1117, review granted Nov. 10, 2021, S271054; Ko, at p. 1150.)

B. The Trial Court Erred in Sustaining the Demurrer

"The elements of fraud, which give rise to the tort action for deceit, are (1) a misrepresentation, (2) with knowledge of its falsity, (3) with the intent to induce another's reliance on the misrepresentation, (4) justifiable reliance, and (5) resulting damage." (Conroy v. Regents of University of California (2009) 45 Cal.4th 1244, 1255; accord, Cohen v. Kabbalah Centre Internat., Inc. (2019) 35 Cal.App.5th 13, 20.) KL Fenix sufficiently pleaded each of these elements.

KL Fenix alleged (1) Hwang made misrepresentations by preparing financial statements containing false information about Greenland's finances that were forwarded to KL Vegas; (2) Hwang knew the information in the financial statements was inaccurate; (3) Hwang knew that "the sole purpose of the Financial Statements was [for Greenland] to earn Rent Credits" and "that KL Vegas would use" the financial statements "to calculate the Rent Credits"; and (4) and (5) "based on the false Financial Statements prepared by . . . Hwang," KL Vegas issued "Rent Credits in the sum of $208, 192" to Greenland, which KL Vegas would not have issued had it known the financial statements were inaccurate. (See Murphy v. BDO Seidman (2003) 113 Cal.App.4th 687, 693 (Murphy) [investors stated a cause of action for fraud against accountants by alleging they prepared a financial statement containing false information about a company's assets and shareholder equity that induced investors to purchase company stock]; Nutmeg Securities, Ltd. v. McGladrey &Pullen (2001) 92 Cal.App.4th 1435, 1439-1440, 1450 [underwriter stated a cause of action for fraud against accountants by alleging they prepared a false financial statement showing a company obtained $11 million in proceeds from a sale, which induced the underwriter to agree to underwrite the company's initial public offering].)

None of Hwang's arguments has merit. Hwang first contends KL Fenix did not allege he made a misrepresentation because it was Greenland, not Hwang, who ultimately provided the allegedly fraudulent financial statements to KL Vegas. But a defendant "will not escape liability" for fraud "if he makes a misrepresentation to one person intending that it be repeated and acted upon by the plaintiff." (Geernaert v. Mitchell (1995) 31 Cal.App.4th 601, 605; see The MEGA Life &Health Ins. Co. v. Superior Court (2009) 172 Cal.App.4th 1522, 1530 ["California follows section 533 of the Restatement Second of Torts in imposing liability upon the maker of a fraudulent misrepresentation to A who intends that A repeat it to B, where B is the actor and injured party."]; Lovejoy v. AT&T Corp. (2001) 92 Cal.App.4th 85, 94 ["a knowingly false statement is no less actionable because it was made to an intermediary who then conveyed it to the party ultimately injured"].) KL Fenix alleged Hwang prepared the fraudulent financial statements for Greenland, knowing that "each of the Financial Statements that he prepared would be forwarded to, and relied upon[, ] by KL Vegas." Those allegations were sufficient. (See Murphy, supra, 113 Cal.App.4th at p. 776 [for purposes of fraud, the "duty for accountants who prepare inaccurate financial statements" extends to "anyone whom the auditor should have reasonably foreseen would rely on the misrepresentations"].)

Next, Hwang argues KL Fenix did not allege "falsity on matters at issue." In its complaint, KL Fenix specifically identified only one category of information in the financial statements that it claims was false-the value of Greenland's inventory. According to Hwang, "the inventory numbers are irrelevant" because the lease provided that Greenland's monthly rent would be based on gross sales, and KL Fenix did not allege Hwang misstated the gross sales. Hwang argues that whether Greenland "had 10 apples in its inventory, or 5, 000 apples in its inventory, would make no difference to [whether Greenland] sold only 3 apples."

Hwang's argument, though creative, misses the mark. To state a cause of action for fraud, KL Fenix need only allege Hwang made a misrepresentation that Hwang intended KL Vegas to rely on and that KL Vegas in fact reasonably relied on (and that KL Vegas suffered resulting damages). Hwang's alleged misrepresentations were about Greenland's finances, which KL Fenix alleged were "completely false, untrue and incorrect." KL Fenix also alleged the lease required Greenland to send KL Vegas financial statements-presumably accurate ones-to enable the parties to...

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