Ross v. Fox

• Decision Date: 25 August 2021
• Docket Number: B298873
• Court: California Court of Appeals Court of Appeals
• Parties: JERRY ROSS et al., Plaintiffs and Appellants, v. ALAN FOX et al., Defendants and Appellants.

JERRY ROSS et al., Plaintiffs and Appellants, v. ALAN FOX et al., Defendants and Appellants.

B298873

California Court of Appeals, Second District, Seventh Division

August 25, 2021

NOT TO BE PUBLISHED

APPEALS from an order and judgment of the Superior Court of Los Angeles County No. BC576879, Michelle Williams Court Judge. Affirmed in part; reversed in part with directions.

Leonard, Dicker & Schreiber, Richard C. Leonard and Steven A. Schuman for Plaintiffs and Appellants.

Munger, Tolles & Olson, Mark R. Yohalem and Maggie H. Thompson for Defendants and Appellants.

FEUER J.

Jerry Ross and his children Eric Ross and Jenny Zipkin (collectively, the Rosses) appeal from an order granting the motion for a new trial filed by Alan C. Fox and ACF Property Management, Inc. (collectively, the Fox defendants) and denying Jerry's motion for judgment notwithstanding the verdict on his claim for financial elder abuse.^[1] The Rosses, who invested more than $4.7 million in 13 commercial real estate investment companies syndicated by the Fox defendants over a 14-year period, filed this action for breach of fiduciary duty, fraud, securities fraud, and financial elder abuse (of Jerry), alleging the Fox defendants made misrepresentations in the investment offering materials to conceal their taking of millions of dollars of profits, fees, and commissions. The jury returned a verdict for the Rosses on fraud, securities fraud, and breach of fiduciary duty and for the Fox defendants on financial elder abuse. The jury awarded more than $12.3 million to the Rosses, including $8 million in punitive damages. The trial court also awarded over $800, 000 for rescission. On appeal, the Rosses contend the trial court erred in granting the Fox defendants' new trial motion based on an inconsistent verdict (finding the Fox defendants liable for fraud and related claims, but not financial elder abuse), instead of entering judgment in Jerry's favor for financial elder abuse.

The Fox defendants filed a protective cross-appeal from the judgment, in which they contend the trial court abused its discretion in allowing a key witness the Rosses concealed during discovery to testify and in allowing improper expert testimony. The Fox defendants also argue instructional error and the trial court's approval of erroneous verdict forms proposed by the Rosses. Further, they challenge the consequential and punitive damages awards and the trial court's award of prejudgment interest.

We reverse the trial court's order granting a new trial and affirm the court's order denying the Rosses' motion for judgment notwithstanding the verdict. We also reverse the punitive damages award against ACF. We otherwise affirm. We remand to the trial court with instructions to enter judgment in favor of the Rosses, but to strike the punitive damages award against ACF.

FACTUAL AND PROCEDURAL BACKGROUND

A. The Rosses' Investments with the Fox Defendants

Jerry is a retired television writer who began investing in real estate, including three small apartment buildings, in the late 1990s. Jerry was born in August 1941. Jerry's son Eric also invested in apartment buildings and helped manage his father's properties. Jerry's daughter Zipkin is a pediatrician.

Fox trained as a lawyer and is the principal and founder of ACF, which he incorporated in 1968. The Fox defendants are primarily engaged in syndicating commercial real estate, particularly suburban shopping centers. As part of their syndication business, the Fox defendants identify investment opportunities, conduct due diligence and negotiate terms for the acquisition and debt financing of a shopping center, and then set up a limited liability company (LLC) or series of LLC's to take title to each shopping center that is acquired. The Fox defendants sell shares in the LLC's to accredited investors^[2] before, during, or after the property acquisition. ACF serves as the managing member of each LLC and usually acts as the manager of the underlying property. Investors in ACF's syndications receive ordinary distributions from shopping center operations through the LLC and larger special distributions when a shopping center is sold or refinanced. Syndication allows investors to benefit from the income, appreciation, and tax advantages of owning a large commercial property that would be unavailable to them if they invested individually.

Jerry and Fox first met in approximately July 2004, when Jerry was considering selling three apartment buildings in which he had about $4 million in equity and investing the proceeds with ACF in shopping centers. Jerry sent an email to Fox explaining as to the $4 million, “It's most of my kids' inheritance, with some left over for some charities. What I ask is that you not put me into anything you wouldn't put your own children into, and that we spread the risk around.” Fox suggested a few different shopping centers that ACF was in various stages of syndicating. After further discussions and an in-person meeting, Jerry purchased for Eric and Zipkin a $150, 000 interest in the LLC that acquired the Provinces shopping center in Chandler, Arizona. Eric and Zipkin were not materially involved in the transaction; rather, Jerry communicated directly with Fox and provided the investment money. On May 19, 2005 Jerry made his first personal investment with ACF when he purchased a $900, 000 interest in the LLC that acquired the Highlands Ranch shopping center in Denver, Colorado. Jerry was 63 at the time.

Between 2004 and 2012 the Rosses cumulatively invested approximately $4.7 million in 13 ACF syndications.^[3] Provinces and Highlands Ranch were the only syndications in which the Rosses invested before Jerry turned 65 in August 2006. Jerry received all documents from the Fox defendants related to Eric's and Zipkin's investments and directed Eric's and Zipkin's investment decisions. Zipkin testified she did “not really” read the investment documents she signed and instead relied on her father's advice. Eric read the documents and discussed the investments with Jerry, but ultimately Eric “pretty much” accepted Jerry's decisions.

Before the Rosses invested in each syndication, the Fox defendants provided them two documents related to the offering: a single-page executive summary and a single-page table of financial projections (the offering documents).

The executive summary for each offering included entries for: “Location, ” “Price, ” “Property Description, ” “Area Description, ” “Demographics, ” “Year Built, ” “Projected Annual Net Operating Income, ” “Cash Required, ” “Projected Return, ” and “Minimum Investment.” The financial projections included the monthly gross income and expenses of the shopping center projected over a five-year period and the projected return on the investment. The projections were based on assumptions as to the “Net Investment, ” which was the sum of the “Purchase Price, ” “Loan and Closing Costs, ” and “Operating Reserves, ” less “Loans Payable.” For all of the Rosses' investments, the “Price” listed on the executive summary was identical to the “Purchase Price” in the financial projections, and the “Cash Required” in the executive summary was identical to the “Net Investment” in the financial projections.

As of June 30, 2018 the Rosses had received nearly $3.7 million in distributions from their cumulative investment of $4.7 million over the prior 14 years. They still held interests in six syndications that generated an additional $207, 000 between July 1, 2018 and March 13, 2019.

B. The Complaint

The Rosses filed this action on March 26, 2015. The operative first amended complaint asserted causes of action against the Fox defendants for breach of fiduciary duty, fraud, securities fraud, financial elder abuse as to Jerry (elder abuse), and an accounting.^[4] The complaint alleged the Fox defendants made numerous intentional misrepresentations in the executive summary and financial projections for each syndication and in other oral and written communications with the Rosses, including statements about (a) purchase prices; (b) projected expenses, including closing costs; (c) actual performance of the investments; (d) the reasons for the investments' performance; (e) the reasons “[d]efendants were recommending the purchase and sale of various properties (i.e., [d]efendants... were only interested in creating more transactions so that they could take more illegal fees and commissions)”; (f) the costs and benefits of refinancing; and (g) defendants' earnings from the investments.

The Rosses alleged the misrepresentations were part of a scheme among the Fox defendants and associated brokers to mislead investors about the cost of the properties acquired in each syndication and then to “pay themselves a series of commissions and fees that approximately make up the difference between the stated purchase price and the actual purchase price. Some of the fees were charged as closing costs in connection with the purchase; some fees were charged during the ownership of the property, usually during refinancing; and some fees were charged in connection with the sale of the properties.” The complaint included detailed allegations as to syndications for Writer Square, the Market at Southpark, Loggins Corners, Tower Plaza, and Knox Street Promenade shopping centers and alleged on information and belief that the Fox defendants engaged in the “same or similar conduct” with respect to all of the syndications in which the Rosses invested.

On July 17, 2017 the Rosses filed an amendment to their prayer for relief to include a prayer for rescission and the return of the money they invested, less any distributions, plus “consequential damages in an amount representing a fair and reasonable rate of...