Semler v. Gen. Elec. Capital Corp.

• Decision Date: 19 October 2011
• Docket Number: No. B221103.,B221103.
• Court: California Court of Appeals Court of Appeals
• Parties: Ronald H. SEMLER, Plaintiff and Appellant, v. GENERAL ELECTRIC CAPITAL CORPORATION, Defendant and Respondent.

196 Cal.App.4th 1380

127 Cal.Rptr.3d 794

11 Cal. Daily Op. Serv. 8111

2011 Daily Journal D.A.R. 9705

Ronald H. SEMLER, Plaintiff and Appellant,

v.GENERAL ELECTRIC CAPITAL CORPORATION, Defendant and Respondent.

No. B221103.

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

June 29, 2011.

Rehearing Denied July 19, 2011.

Review Denied Oct. 19, 2011.

Law Office of Kathryn M. Davis and Kathryn M. Davis for Plaintiff and Appellant.

Sheppard, Mullin, Richter & Hampton, Costa Mesa, Alan H. Martin and Scott B. Lieberman for Defendant and Respondent.

MALLANO, P.J.

This appeal raises the question of whether a commercial lending institution, which is also an equity investor in a borrower's venture, violated the Unruh Civil Rights Act (Act) (Civ.Code, § 51) by declining to make a loan to a limited liability company because its managing member included a felon who had conspired to falsify customs documents and sell munitions to Syria.

We conclude that being a felon is not a personal characteristic similar to those enumerated in the Act; the lending institution had legitimate business reasons justifying its decision—the repayment of the loan and making a return on its equity investment; and the potential consequences of allowing such a claim would improperly involve the courts in second-guessing a lending institution's expertise in determining loan and investment criteria.

IBACKGROUND

The facts in this appeal are taken from the allegations of the complaint, which we accept as true. (See Hensler v. City of Glendale (1994) 8 Cal.4th 1, 8, fn. 3, 32 Cal.Rptr.2d 244, 876 P.2d 1043.)

A. Complaint

The complaint, filed on May 13, 2009, alleged as follows. On or about November 2, 2005, plaintiff Ronald H. Semler, in his capacity as trustee of the Semler family trust, was invited pursuant to a private placement memorandum to invest in ARI Overland Management, LLC (Overland Management), a limited liability company. Overland Management was the managing member of another limited liability company, ARI Overland, LLC (ARI Overland), which was formed to purchase real property located in San Dimas, California. Adler Realty Investment, Inc. (Adler Realty), was the managing member of Overland Management.

There were 10.58 “membership units” available for investment in Overland Management at a cost of $50,000 per unit. Semler intended to purchase five units, paying $250,000. According to the complaint, “[T]he investment [was] set to close on November 10, 2005.” Semler was to be a “passive” investor, with no management authority and no personal liability to repay the loan. His investment was to be paid “up front.”

The private placement memorandum stated that defendant General Electric Capital Corporation (GE Capital), acting through its wholly owned subsidiary, GEBAM, Inc., had agreed to provide a mezzanine loan to ARI Overland in the approximate amount of $6.58 million. As alleged, by making a mezzanine loan, GE Capital not only acted as a lender but also became an “equity participant” by making an “equity investment” in ARI Overland.

On or about November 11, 2005, GE Capital informed Adler Realty that it would provide the requested financing but would not accept Semler as a member of Overland Management because he had been convicted of felonies in 1988. In response to GE Capital's demand, ARI Overland excluded Semler as a member of Overland Management and did not allow him to invest in the venture. Thereafter, GE Capital made the loan to, and invested in, ARI Overland. ¹

The complaint described Semler's felonies as “technical tax violations, as well as export violations committed by a corporationof which, at the time the violations occurred, [Semler] was an employee, officer and shareholder.”

After soliciting the parties' views on the issue (see Evid.Code, §§ 459, 455), we decided to take judicial notice of the official federal court records concerning Semler's convictions. Those records disclosed that, by way of a superseding four-count information filed in the United States District Court for the Central District of California on February 10, 1988, Semler was charged with (1) a conspiracy (see 18 U.S.C. § 371) allegedly involving (2) the knowing falsification of customs documents regarding the exportation of “Hughes model 500 E helicopters” (see 18 U.S.C. § 1001), (3) the “export [ation] from the United States to Syria [of] components, parts and accessories specifically designed for use, and currently used with, AN/PRC–77 military radios, articles on the U.S. Munitions List, without first having obtained the required license ... and written approval from the Department of State” (see 22 U.S.C. § 2778(c); 22 C.F.R. §§ 121.1–121.16), and (4) willfully impeding the functions of the Internal Revenue Service to assess and collect taxes. Pursuant to a plea agreement, filed in federal court on February 10, 1988, Semler agreed to plead guilty to the charges. In accordance with a “Judgment and Probation/Commitment Order,” dated February 10, 1988, Semler received a sentence of three years on three counts and two years on the remaining count, all to run concurrently. He was also ordered to pay $10,000 per count for a total of $40,000. The federal court recommended that Semler serve his sentence at the Lompoc Prison Camp at Lompoc, California.

The complaint asserted one cause of action, for violation of the Act, identified as “Civ.Code, § 51, et. seq.” The cause of action alleged that GE Capital, acting through GEBAM, Inc., had violated the Act by declining to make a loan to ARI Overland because Semler, who wanted to invest in, and become a member of, Overland Management, was a felon.

B. Demurrer

GE Capital filed a demurrer, contending the action was barred by the two-year statute of limitations for personal injuries set forth in section 335.1 of the Code of Civil Procedure and, alternatively, the complaint failed to allege a violation of the Act.

In his opposition, Semler argued that a three-year limitations period applied (see Code Civ. Proc., § 338, subd. (a)) because his claim was not recognized at common law but was created by statute, that is, the Act.² Semler further argued that the Act protects felons from arbitrary discrimination and that GE Capital's decision to oust him from membership in Overland Management as a condition of making a loan and an equity investment in the venture served no legitimate business purpose.

The demurrer was heard on September 17, 2009. In a written tentative ruling, the trial court concluded that the action was barred by the two-year statute of limitations for personal injuries (Code Civ. Proc., § 335.1). The tentative ruling did not address whether the complaint alleged a violation of the Act. After argument, the trial court adopted its tentative ruling as its final ruling. On October 16, 2009, an order of dismissal was entered. Semler appealed.

IIDISCUSSION

“In reviewing the ruling on a demurrer, ‘we are guided by long-settled rules. “We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.... We also consider matters which may be judicially noticed.” ... When a demurrer is sustained [without leave to amend], we determine whether the complaint states facts sufficient to constitute a cause of action.’ ” ( August Entertainment, Inc. v. Philadelphia Indemnity Ins. Co. (2007) 146 Cal.App.4th 565, 573, 52 Cal.Rptr.3d 908.)

On appeal, the parties debate whether the complaint is barred by the statute of limitations and whether GE Capital violated the Act. As the parties acknowledge, the courts are divided as to which statute of limitations governs a claim under the Act: the two-year limitations period for personal injuries (Code Civ. Proc., § 335.1) or the three-year limitations period for a liability created by statute ( id.,§ 338, subd. (a)). (See Gatto v. County of Sonoma (2002) 98 Cal.App.4th 744, 754–760, 120 Cal.Rptr.2d 550;Stamps v. Superior Court (2006) 136 Cal.App.4th 1441, 1449, fn. 8, 39 Cal.Rptr.3d 706.) We see no need to contribute to the ongoing discourse as to the appropriate statute of limitations. Instead, we address whether the complaint alleged a violation of the Act. “Unruh Act issues are often decided on demurrer or motion for summary judgment when the business practice appears to be valid on its face as bearing a reasonable relation to appropriate commercial objectives for a public enterprise.” ( Lazar v. Hertz Corp. (1999) 69 Cal.App.4th 1494, 1509, 82 Cal.Rptr.2d 368.) That is the situation here.

Applying the three-part analysis adopted in Harris v. Capital Growth Investors XIV (1991) 52 Cal.3d 1142, 278 Cal.Rptr. 614, 805 P.2d 873( Harris ), we conclude that being a felon is not a personal characteristic similar to those enumerated in the Act; GE Capital had legitimate business reasons justifying its decision—the repayment of the loan and making a return on its equity investment; and the potential consequences of allowing Semler's claim would improperly involve the courts in second-guessing a lending institution's expertise in determining loan and investment criteria. In sum, GE Capital, acting through GEBAM, Inc., could permissibly deny a loan to, and decline to invest in, a limited liability company where a member of its management was a felon. The trial court therefore properly dismissed the case on demurrer.

A. Unruh Civil Rights Act

“[E]arly common law decisions regarded certain enterprises as ‘public’ or ‘common’ callings, or, to use a later phrase, ‘affected with a public interest.’ These undertakings ‘held themselves out’ as providing a particular product or service to the community.... The common law attached to these enterprises ‘certain obligations, including—at various stages of doctrinal development—the duty to serve all customers on reasonable terms without discrimination and the duty to provide the kind of product or service reasonably to be expected from their economic role. Such...