Munoz v. PL Hotel Grp., LLC

• Decision Date: 03 January 2022
• Docket Number: D078215
• Citation: 288 Cal.Rptr.3d 644,73 Cal. App. 5th 543
• Parties: Luis MUNOZ et al., Plaintiffs and Appellants, v. PL HOTEL GROUP, LLC, et al., Defendants and Respondents.
• Court: California Court of Appeals

73 Cal.App.5th 543

288 Cal.Rptr.3d 644

Luis MUNOZ et al., Plaintiffs and Appellants,

v.PL HOTEL GROUP, LLC, et al., Defendants and Respondents.

D078215

Court of Appeal, Fourth District, Division 1, California.

Filed January 3, 2022

As Modified on Denial of Rehearing January 19, 2022

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

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

DATO, J.

This appeal involves a form of fraud rarely seen in day to day litigation.It goes by various names—fraud in the factum, fraud in the execution, fraud in the inception—but they all describe the same genre of deceit.It occurs where, after parties have agreed upon certain contract terms, one of them surreptitiously substitutes a document for signature that looks the same as the earlier draft but contains materially different terms.Fraud in the execution is distinct from promissory fraud, which involves false representations that induce one to enter into a contract containing agreed-upon terms.

This case, on appeal after a demurrer was sustained without leave to amend, involves the purchase and leaseback of a vacant hotel and restaurant.The nub of the lawsuit is the buyers'/plaintiffs' claim that the sellers/defendants surreptitiously substituted altered versions of the lease and financing instruments containing terms extremely adverse to the buyers, and which they allege were neither bargained for nor agreed to.

As we explain, these allegations state, quite literally, a textbook cause of action for fraud in the execution, as this illustration from the Restatement Second of Contracts demonstrates:

"A and B reach an understanding that they will execute a written contract containing terms on which they have agreed.It is properly prepared and is read by B, but A substitutes a writing containing essential terms that are different from those agreed upon and thereby induces B to sign it in the belief that it is the one he has read.B's apparent manifestation of assent is not effective."(Rest.2d, Contracts(1981)§ 163, illus.2.)

But acting under the misapprehension that plaintiffs' theory was promissory fraud, the superior court sustained a demurrer brought by defendantsInn Lending LLC(Inn Lending) and Rajesh Patel(Rajesh) on the grounds that "[i]nsufficient facts" were alleged showing they"made promises" upon which plaintiffs relied.The court also determined that related causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and financial elder abuse also failed.We reverse the resulting judgment of dismissal.

FACTUAL AND PROCEDURAL BACKGROUND¹

Shivam Patel and his son, Rajesh (collectively, the Patels), owned a hotel and restaurant (Hotel).The Hotel had been closed for years and the property needed substantial repairs.When renovations were about half completed, the Patels determined the project was not viable because "there was no way to get conventional financing with a half-finished Hotel that had no financial history."

The Patels formed PL Hotel Group, LLC(PL) to hold title and listed the property for sale.They structured the transaction to remain in possession after the sale.Toward that end, the sale included a leaseback to the Patels under a triple net lease.²From the buyer/landlord's perspective, the difference between the monthly rent under the lease and cost of financing would be the return on investment.

Luis Munoz is an 80-year-old real estate investor and sole owner of LR Munoz Real Estate Holdings, LLC(collectively, Munoz).In June 2018, the Patels' agent, Steven Davis, sent an offering memorandum to Munoz's agent, Ryan Cassidy.³Among other terms, it stated the transaction would include a "[n]ew 20-year absolute NNN [l]ease" to start at close of escrow.

In early July, the parties agreed on a $2.8 million purchase price.Cassidy drafted the purchase agreement, under which the Patels were to provide Munoz a "fully executed lease that should include an annual rent payment of $230,000 NNN paid monthly ...."⁴

On July 17, the Patels (via Davis) sent a proposed but unexecuted triple net lease to Cassidy.In an accompanying e-mail, Davis reserved the Patels' right to "make further edits in case there was an error or oversight."This lease, which the parties refer to as the "July 17 lease," was circulated "multiple times" during the 60-day escrow.It was the only lease agreement ever circulated before close of escrow.It contained the agreed lease terms, and at no time before escrow closed did the Patels ever contend there was an "error or oversight" in it.

The July 17 lease was for a 20 year term, with specified options to renew.Rent began at $19,167 per month, and periodically increased over the 20 year term.The tenants (Patels) were solely responsible for (1) maintenance and repairs; (2) insurance; (3) utilities; and (4) taxes.

On August 29, Davis sent an e-mail to Cassidy attaching the July 17 lease, indicating it is the version that "will be signed at closing."On September 13(two days after escrow closed), Shivam sent an e-mail to Cassidy stating, "Attached is the lease," thus making it appear he had signed the July 17 lease.But the September 13 lease attached to Shivam's e-mail was materially different.

Unfortunately for Munoz, the differences between the two leases "were not so numerous to be obvious."For instance, the provision a landlord might be expected to check—rent payments—was unchanged.Munoz signed the September 13 lease after only a cursory review, believing it was the same triple-net lease the parties had circulated and approved numerous times.

But as Munoz would soon learn, the September 13 lease was anything but a triple net lease.For example:

• Maintenance and Repair : Under the July 17 lease, the landlord (Munoz) has no obligation to maintain or repair the premises.But the September 13 lease provides the landlord "shall have the duty to repair" everything beyond normal wear and tear.

• Renovations : Under the July 17 lease, the tenant (Patels) were obligated to complete renovations.Under the September 13 lease, the landlord is.

• Taxes : The July 17 lease provides the tenant pays 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 allows the tenant to sublease to a nonaffiliated entity only with the landlord's consent.The September 13 lease allows a sublease "without Landlord's consent at any time."

• Tenant's Continuing Liability: Under the July 17 lease, an assignment or sublease does not release tenant's liability, including for rent.But under the September 13 lease, a permitted assignment or sublease "eliminate[s]" tenants' 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.

Meanwhile, as the Patels' plan with regard to the altered lease was put in place, Munoz was unable to obtain financing from a conventional lender because the Hotel had been closed for two years.Expecting this, the Patels initiated the second phase of their plan.Not only would they be the seller/tenant in the transaction, but also the secured lender.

On the Patels' behalf, Davis contacted Cassidy (Munoz's agent) and recommend he hire David Hamilton of Pacific Southwest Realty Services (collectively, Hamilton) as loan broker.But this was all an illusion for Munoz's consumption.Hamilton had no intention of shopping around for a loan.Instead, he placed the loan with Inn Lending—an alter ego entity of the Patels created just for this purpose.

On July 25, Hamilton told Munoz that a private lender, Inn Lending, would finance the purchase at six percent per annum interest, secured by a deed of trust only on the Hotel (plus an unsecured personal guarantee by Munoz).These terms were presented in an August 6"letter of intent" Munoz signed.Munoz paid Hamilton a $7,500 "administrative" fee to have loan documents drawn on those terms.During this whole time, Inn Lending did not even exist.It was "simply Rajesh and Shivam."

Inn Lending did not come into existence until August 23.The next day, Hamilton sent loan documents to Munoz.In a sense, it was deja vu.Like the leaseback, the loan was another bait and switch.The approximately 300 pages of loan documents materially varied from the letter of intent:

• The interest rate was "disguised" and was actually 7.3 percent;

• The payoff amount was $300,000 more than it should have been;

• The loan was secured not only by the Hotel, but also by Munoz's other real estate holdings "worth several millions of dollars" and a security interest in his personal property.

On September 4, Munoz signed the loan documents, unaware of these changes.For the Patels, everything was now in place.They"always intended to surreptitiously alter the lease knowing that the real estate agents would cooperate and/or would not be diligent enough to catch the fraud."The transaction was manipulated to make sure "it would be so burdensome and unfair" that Munoz would quickly default on his loan, allowing the Patels, through Inn Lending, to foreclose on not only the Hotel, but also Munoz's other real property.

It took less than a month for the other shoe to drop.On October 1, Munoz asked the Patels for the first rent check.In response, Shivam claimed no rent was due, stating, "The landlord is supposed to reimburse the Tenant for all renovation costs."Three weeks later, PL's attorney demanded Munoz reimburse for all renovation expenses.Not surprisingly, this litigation ensued.

In November, Munoz filed a superior court complaint against the Patels, Inn Lending, and others.After demurrers to the original and later the first amended complaint were sustained with leave to amend, in December 2019 Munoz filed the...