Munoz v. Patel

CourtCalifornia Court of Appeals
Citation81 Cal.App.5th 761,297 Cal.Rptr.3d 574
Docket NumberD078215
Parties Luis MUNOZ et al., Plaintiffs and Appellants, v. Rajesh PATEL et al., Defendants and Respondents.
Decision Date28 July 2022

Spierer, Woodward, Corbalis & Goldberg and Stephen B. Goldberg, Redondo Beach, for Plaintiffs and Appellants.

Bradley L. Jacobs, San Diego, for Defendants and Respondents.



Luis Munoz and LR Munoz Real Estate Holdings, LLC (LRM Holdings) (together, Munoz) bought a hotel from a company owned and managed by Rajesh Patel (Rajesh) and his son, Shivam Patel (Shivam). Before escrow closed, the parties negotiated a leaseback arrangement requiring Munoz to lease the hotel back to the Patels’ company after the sale. Escrow closed and the parties thereafter executed the previously-negotiated lease—or so Munoz thought. According to Munoz, the Patels secretly swapped out the agreed-upon lease for a different one—a lease substantially more beneficial to the Patels and worse for Munoz—and then tricked him into signing it.

Munoz filed the present action against the Patels, an alleged alter ego entity of the Patels called Inn Lending, LLC (Inn Lending), and other defendants involved in the sale, asserting causes of action for breach of contract, breach of the covenant of good faith and fair dealing (hereafter, bad faith), promissory fraud (hereafter, fraud), and elder financial abuse, among other causes of action. Rajesh and Inn Lending demurred to the operative second amended complaint, the trial court sustained the demurrer without leave to amend, and Munoz appealed the ensuing judgment. In a prior opinion, this court reversed the judgment and determined, among other things, that Munoz alleged a viable fraud cause of action based on a theory of fraud in the execution.

Rajesh and Inn Lending petitioned the Supreme Court for review, arguing that rehearing was required under Government Code section 68081 because this court's decision was based upon an unbriefed issue—fraud in the execution. The Supreme Court granted review and transferred the matter back to our court with directions that we vacate our decision and rehear the case after allowing the parties to file supplemental briefs addressing whether the complaint stated a cause of action for fraud in the execution. We followed the Supreme Court's instructions and the parties have filed supplemental briefs addressing whether the complaint adequately alleges fraud in the execution.

With the benefit of these supplemental briefs, we now conclude the operative complaint alleges facts sufficient to state a viable cause of action for fraud in the execution against Rajesh, but not against Inn Lending. Additionally, we conclude the complaint pleads facts sufficient to state an elder financial abuse cause of action against both Rajesh and Inn Lending. Finally, we conclude Munoz has failed to establish that the trial court erred in dismissing his breach of contract and bad faith causes of action.

In light of these determinations, we reverse the judgment and remand the matter with instructions that the trial court vacate its order sustaining the demurrer to the entire complaint and enter a new order: (1) sustaining without leave to amend the demurrer to the first cause of action for breach of contract and the eighth cause of action for bad faith; (2) overruling the demurrer to the third cause of action for financial elder abuse; (3) sustaining without leave to amend the demurrer to the seventh cause of action for fraud against Inn Lending; and (4) overruling the demurrer to the seventh cause of action for fraud against Rajesh.

AFactual Background

Because this is an appeal from a judgment entered after the sustaining of a demurrer, we accept as true the following allegations from the operative complaint. ( Dudek v. Dudek (2019) 34 Cal.App.5th 154, 160, fn. 4, 246 Cal.Rptr.3d 27.)

The Sale and Lease

The Patels own and manage PL Hotel Group, LLC (PL), which owned a hotel and restaurant in Ridgecrest, California (the Hotel) prior to the events giving rise to this lawsuit. The Hotel was closed for years and needed renovations. The Patels began renovating the property, but were unable to obtain conventional financing to complete the project.

The Patels decided to sell the Hotel and enter a leaseback arrangement with the buyer, which would allow PL to remain in possession of the property after the sale. An offering memorandum circulated to prospective buyers stated the sale would be subject to a "New 20 Year Absolute NNN Lease" starting at the close of escrow. A NNN lease, also known as a triple-net lease, is one in which the lessee pays a property's operation and maintenance costs including taxes, utilities, and insurance. ( Tin Tin Corp. v. Pacific Rim Park, LLC (2009) 170 Cal.App.4th 1220, 1226, fn. 3, 88 Cal.Rptr.3d 816 ; 2A Miller & Starr, Cal. Real Est. Forms (2d ed. 2020) Ch. 2 Summary.) The Patels used the promise of a triple-net lease to lure in prospective buyers and inflate the Hotel's sale price, but they never intended to execute a triple-net lease.

Luis Munoz is an 80-year old real estate investor and the owner of LRM Holdings. In June 2018, the Patels’ agent, Steven Davis, sent the Hotel's offering memorandum to Munoz's agent, Ryan Cassidy.1 In early July, the parties agreed on a $2.875 million purchase price for the Hotel (which they later reduced to $2.835 million).

Cassidy drafted the purchase agreement for the sale, which required PL to provide Munoz a "fully executed lease" with "an annual rent payment of $230,000 NNN paid monthly." It required PL to provide the executed lease within five days of the effective date of the purchase agreement. On or about July 12, Munoz (on his own behalf) and Shivam (acting on behalf of PL) executed the purchase agreement and the property went into escrow.

On July 17, Davis sent a proposed but unexecuted triple-net lease to Cassidy. In an accompanying email, Davis reserved PL.’s right to "make further edits in case there was an error or oversight" with the lease. This lease, which the parties refer to as the "July 17 lease," was circulated "multiple times without change" during the 60-day escrow. It was the only lease circulated before the close of escrow. At no time before the close of escrow did the Patels or anyone else associated with PL contend there was an "error or oversight" with the lease.

The July 17 lease was for a 20-year term, with options to renew. Rent began at $19,167 per month and periodically increased over the 20-year term. The tenant (PL) was solely responsible for maintenance and repairs, insurance, utilities, and taxes.

On August 29, Davis sent an email to Cassidy attaching the July 17 lease and stating it was the version that would "be signed at closing." By the scheduled close of escrow, the parties still had not executed the July 17 lease; all the same, escrow closed on September 11.

On September 13, two days after escrow closed, Shivam sent an email to Cassidy stating, "Attached is the lease for Ridgecrest," and requesting Munoz's countersignature—thus making it appear as though he had signed the July 17 lease. But the lease Shivam circulated, which the parties refer to as the "September 13 lease," differed from the July 17 lease in several ways. For example:

Maintenance and Repair : Under the July 17 lease, the landlord (Munoz) had no obligation to maintain or repair the premises. But the September 13 lease provides that the landlord "shall have the duty to repair" everything beyond normal wear and tear.
Renovations : Under the July 17 lease, the tenant (PL) was obligated to complete the half-finished renovations on the property. Under the September 13 lease, the landlord bore that responsibility.
Taxes : The July 17 lease required the tenant to pay taxes relating to the premises. The September 13 lease limits that obligation to taxes "attributable solely to any business property or personal property of the Tenant" on the premises.
Assignment and Subletting : The July 17 lease allowed the tenant to sublease the premises to a nonaffiliated entity only with the landlord's consent. The September 13 lease allows a sublease "at any time" without the landlord's consent.
Tenant's Continuing Liability : Under the July 17 lease, an assignment or sublease did not release the tenant's liability, including for rent. But under the September 13 lease, a permitted assignment or sublease "eliminate[s]" the tenant's liability.
Landlord's Remedy : The September 13 lease adds a new provision that makes retaking possession the landlord's sole remedy on tenant's default.

Munoz countersigned the September 13 lease after only a cursory review, believing it was the July 17 lease the parties had circulated numerous times and approved before the close of escrow.

The Loan

Meanwhile, the Patels put into action a separate but related plan to obtain security interests in the Hotel, as well as Munoz's other properties. In short, they hoped to force Munoz into default on a loan he took out to buy the Hotel, which would then enable them—as security interest holders—to foreclose on his properties. To achieve this end, the Patels secretly positioned themselves as Munoz's secured lenders for the Hotel purchase.

Specifically, Davis (the Patels’ agent) contacted Cassidy (Munoz's agent) and recommended that he hire David Hamilton of Pacific Southwest Realty Services (collectively, Hamilton) as a loan broker for the purchase of the Hotel. Based on this recommendation, Munoz retained Hamilton to help him find a lender.

On July 25, Hamilton told Munoz that a private lender, Inn Lending, would finance the Hotel purchase at six percent annual interest, secured by a deed of trust on the Hotel only. Munoz would need to execute a personal guarantee, but he would not have to pledge collateral in connection with the guarantee. These proposed terms were presented to Munoz in a letter of intent, which he signed on...

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