Filed 9/12/13
Chokatos v. Magnate Fund # 1 CA1/3
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
relying on opinions not certified for publication or ordered published, except
as specified by rule 8.1115(b). This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115.
IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST
APPELLATE DISTRICT
DIVISION
THREE
JOHN N.
CHOKATOS,
Plaintiff and Appellant,
v.
MAGNATE
FUND #1 LLC et al.,
Defendants and Respondents.
|
A137174
(City & County of San Francisco
Super. Ct. No. CGC 10-500839)
|
GIANCARLO
MARANGHI,
Plaintiff
and Appellant,
v.
MAGNATE FUND #1 LLC et al.,
Defendants
and Respondents.
|
A137187
(City & County of San Francisco
Super. Ct. No. CGC 09-487944)
|
Plaintiffs
John N. Chokatos and Giancarlo Maranghi appeal judgments of dismissal in favor
of several defendants following orders sustaining without leave to amend
demurrers to plaintiffs’ third amended complaints for fraud (complaints). We
consolidated the appeals for review.
Plaintiffs
allege individuals and related corporations conspired to operate a “Ponzi
scheme” in which money was borrowed from plaintiffs with false promises that
the loans were secured by deeds of trust. We conclude the court rightly
sustained demurrers brought by several limited liability companies because
plaintiffs failed to allege adequately facts that support the alter ego or
single enterprise doctrine under which plaintiffs seek to hold the affiliated
companies responsible for the acts of other companies. The deficiency may be
cured, however, and we thus conclude that the court erred in denying plaintiffs
leave to amend their pleadings.
background
Plaintiffs
allege that defendant Benny Chetcuti, Jr., represented himself as an
experienced real estate developer offering safe investment opportunities in his
projects when, in fact, he was operating a Ponzi scheme with z and their
related companies.
According
to plaintiffs’ complaints, Chetcuti and his company Chetcuti & Associates,
Inc. (collectively, Chetcuti) “borrowed money from his victims, usually short
term loans, with the promise of high . . . returns.” Chetcuti signed
promissory notes and issued deeds of trust to properties owned by himself or
“other entities” to secure the loans. Before recording the lenders’ deeds of
trust, Chetcuti issued and recorded deeds of trust in favor of Simonse and
related entities on unfunded sham loans “that would totally encumber the
property.” “Simonse and his other entities would then foreclose on the
properties, leaving the victims without any security for their loans, and
defendant Simonse and his entities would have free and clear title to the
properties, without actually making any loans. Defendant Simonse would then
create new entities, and transfer title of the foreclosed properties to the
newly created entities, without any consideration, to make the properties even
more removed and difficult for the creditors and victims of defendant Chetcuti
to recover the security for their loans.” “When defendant Chetcuti could not
find enough investors to pay for various other loans, the scheme collapsed,
leaving his victims with unpaid promissory notes with no security for their
loans.” Chetcuti filed for bankruptcy. According to plaintiff Chokatos,
Chetcuti perpetrated fraud upon at least 114 victims who suffered an aggregate
loss of $28 million or more.
Plaintiff
Maranghi loaned Chetcuti $250,000 secured by a lien in the form of a trust deed
on a Woodward Street property. Chetcuti defaulted on the loan and Maranghi has
not been able to collect because Chetcuti did not record the deed of trust and
Magnate Fund #2 LLC, managed by Simonse, made sham loans and recorded deeds of
trust on the Woodward Street property before Maranghi could record his deed of
trust. Magnate Fund #2 then foreclosed on the property and transferred
title to 55 Woodward LLC, another Simonse entity.
Plaintiff
Chokatos’s allegations are similar. Chokatos says he contributed $500,000
toward a $2.8 million loan to Chetcuti secured by a deed of trust on a
Parkridge Drive property. Before Chokatos’s deed of trust was recorded, Magnate
#2 made a sham loan to Chetcuti secured by a recorded deed of trust. Magnate
Fund #2 foreclosed the Parkridge Drive property pursuant to the “scheme and
plan” of Chetcuti and Simonse “to leave plaintiff and others with an unsecured
loan.” Magnate Fund #2 then transferred title to 20 Parkridge LLC, another
Simonse entity.
Plaintiffs
sued the individuals and entities directly involved in the disputed real estate
transactions as well as other entities. At issue here are claims for fraud,
declaratory relief, and elder financial abuse (pled by Chokatos alone) against
eight defendants that successfully demurred to the complaint: Magnate Fund #1
LLC, Magnate Fund #3 LLC, JWS Capital Management, Inc., LHJS Investments LLC,
27th Street Associates LLC, South Van Ness Street Associates LLC, 55 Woodward
LLC, and 20 Parkridge LLC.
Plaintiffs allege that each of these entities was formed and controlled by
defendant Simonse. We shall hereafter follow the complaints’ convention in
referring to these eight defendants as the “Simonse Entities.”
Plaintiffs
allege the Simonse Entities were “participants, aiders and abettors in the
wrongful activities alleged herein . . . , and the
liability of each arises from the fact that each has engaged in all or part of
the improper acts, plans, schemes or transactions, which operate a fraud
against plaintiff.” They “had actual knowledge of the acts and conduct
complained of herein and participated in the furtherance of the fraudulent
acts.” The Simonse Entities “have participated as members of the conspiracy, or
acted in furtherance of it, or aided or assisted in carrying out the fraudulent
purposes . . . , and have performed acts and made statements or
representation in furtherance of the conspiracy and in so doing aided and
abetted the fraudulent conduct” of Chetcuti, Simonse and other defendants.
It
is further alleged the Simonse Entities “are being sued as alter egos of
defendant Simonse.” Plaintiffs allege, on information and belief, that there
exists “a unity of interest between defendants Simonse and the Simonse
Entities, such that any individuality and separateness between defendant[]
Simonse and defendants Simonse Entities have ceased, and each defendant Simonse
entity is the alter ego of defendant Simonse, in that the defendants Simonse
Entities are not adequately capitalized, or the capitalization was completely
illusory; defendant Simonse commingled and used assets of the defendants
Simonse Entities for his personal use; and that the defendants Simonse Entities
were mere shells, instrumentalities, or conduits through which defendant
Simonse carried on his business and affairs.” The complaints continue, stating
that “Adherence to the fiction of the separate existence of each of the
defendants Simonse Entities . . . would sanction fraud and
promote injustice” in that Chetcuti has transferred money borrowed from
individuals to the Simonse Entities and Simonse has transferred assets to the
Simonse Entities. Also, “defendant Simonse can transfer title to the subject
property to any one of the defendants Simonse Enterprises at any time to
perpetrate the fraud,” as he did in transferring title to the properties
securing plaintiffs’ loans “without any consideration and without regard to any
company formalities.” Plaintiff Chokatos alleges that the Magnate Fund
companies among the Simonse Entities were once lien holders on at least 100
properties and, a year later, were lien holders on only five properties,
suggesting that they transferred assets to other entities.
The
Simonse Entities demurred to plaintiffs’ third amended complaints. The
demurrers were sustained without leave to amend. The court found: “Plaintiff
has not alleged facts showing that an injustice would result if the separate
existence of the moving defendants is respected. Plaintiff has alleged that an
injustice might result in the future, but this [is] insufficient to pierce the
corporate veil. Moreover, plaintiff seeks reverse piercing, which is not
available in California. (Postal Instant
Press, Inc. v. Kasawa Corp. (2008) 162 Cal.App.4th 1510). Amendment is most
unlikely to cure these defects.”
discussion
On
appeal “from a judgment of dismissal following the sustaining of a demurrer
without leave to amend, we give the complaint a reasonable interpretation, and
treat the demurrer as admitting all material facts properly pleaded.” (Joseph v. Johnson (2009) 178 Cal.App.4th
1404, 1409.) “The denial of leave to amend is appropriate only when it
conclusively appears that there is no possibility of alleging facts under which
recovery can be obtained. ‘A demurrer should not be sustained without leave to
amend if the complaint, liberally construed, can state a cause of action under
any theory or if there is a reasonable possibility the defect can be cured by
amendment.’ ” (Cabral v. Soares (2007)
157 Cal.App.4th 1234, 1240-1241.)
The
central claim here is fraud. “The elements of common law fraud are: ‘(1) a
misrepresentation (false representation, concealment, or nondisclosure);
(2) knowledge of falsity (or scienter); (3) intent to defraud, i.e.,
to induce reliance; (4) justifiable reliance; and (5) resulting
damage.’ ” (AREI II Cases (2013)
216 Cal.App.4th 1004, 1021-1022.) It is undisputed that the complaints
adequately state causes of action for fraud against Chetcuti, Simonse and the
companies that borrowed money from plaintiffs, recorded deeds of trust,
received title to disputed properties or otherwise directly participated in
allegedly fraudulent transactions. In dispute is the liability of companies
allegedly controlled by Simonse, the Simonse Entities. The Simonse Entities
argue that the allegations are insufficient to establish their liability for
acts of fraud committed by others.
Plaintiffs
assert that the Simonse Entities are the alter egos of defendant Simonse and,
in the only argument they advance on appeal, seek to impose liability on that
basis.Traditionally,
the alter ego doctrine is used to establish liability upon an individual for
the acts of a corporation and not, as here, to establish liability upon a
corporation for the acts of an individual. (Postal
Instance Press, Inc. v. Kasawa Corp., supra, 162 Cal.App.4th at
p. 1513.) “Ordinarily, a corporation is regarded as a legal entity,
separate and distinct from its stockholders, officers and directors, with
separate and distinct liabilities and obligations. [Citations.] A corporate identity
may be disregarded—the ‘corporate veil’ pierced—where an abuse of the corporate
privilege justifies holding the equitable ownership of a corporation liable for
the actions of the corporation. [Citation.] Under the alter ego doctrine, then,
when the corporate form is used to perpetrate a fraud, circumvent a statute, or
accomplish some other wrongful or inequitable purpose, the courts will ignore
the corporate entity and deem the corporation’s acts to be those of the persons
or organizations actually controlling the corporation, in most instances the
equitable owners.” (Sonora Diamond Corp.
v. Superior Court (2000) 83 Cal.App.4th 523, 538.)
The
Simonse Entities correctly argue that plaintiffs’ allegations do not present a
traditional use of the alter ego doctrine. Plaintiffs allege that the corporate
Simonse Entities “are being sued as alter egos of defendant Simonse,” which
reverses the usual case of an individual held responsible for the acts of a
corporation. A California court has emphatically rejected third party “reverse
piercing of the corporate veil, by which the corporate veil is pierced to
permit a third party creditor to reach corporate assets to satisfy claims
against an individual shareholder.” (Postal
Instance Press, Inc. v. Kasawa Corp., supra, 162 Cal.App.4th at
p. 1513.) The court noted that “Traditional piercing of the corporate veil
is justified as an equitable remedy when the shareholders have abused the
corporate form to evade individual liability, circumvent a statute, or
accomplish a wrongful purpose. [Citations.] [¶] The same abuse of the
corporate form does not exist when the judgment debtor is the shareholder. In
that situation, the corporate form is not being used to evade a shareholder’s
personal liability, because the shareholder did not incur the debt through the
corporate guise and misuse that guise to escape personal liability for the
debt.” (Id. at p. 1522.)
Plaintiffs’
arguments, in large measure, attempt third party reverse piercing of the
corporate veil, which is foreclosed by Postal
Instance Press, Inc. v. Kasawa Corp., supra, 162 Cal.App.4th 1510. The
trial court was correct in this regard. But the trial court was incorrect in
denying leave to amend because “there is a reasonable possibility an amendment
could cure the defect.” (AREI II Cases,
supra, 216 Cal.App.4th at p. 1012.) The cure lies in another variant
of vicarious liability known as the single enterprise rule.
“[U]nder
the single-enterprise rule, liability can be found between sister companies” or
other affiliated companies. (Las Palmas
Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220,
1249.) “The theory has been described as follows: ‘ “In effect what
happens is that the court, for sufficient reason, has determined that though
there are two or more personalities, there is but one enterprise; and that this
enterprise has been so handled that it should respond, as a whole, for the
debts of certain component elements of it.” ’ ” (Id. at pp. 1249-1250.) The single enterprise rule recognizes
that “it would be unjust to permit those who control companies to treat them as
a single or unitary enterprise and then assert their corporate separateness in
order to commit frauds and other misdeeds with impunity.” (Id. at p. 1249.)
We
reject the Simonse Entities’ argument that amendment should not be permitted
because alter ego liability under the single enterprise rule is inconsistent
with plaintiffs’ “theory of their cases at the trial court level.” It is true
that plaintiffs’ allegations focus on corporate liability for Simonse’s acts,
rather than liability between corporations, and thus the allegations fail to
support a single enterprise theory as presently stated. But the allegations are
consistent with the single enterprise rule and, in fact, mirror many of the
factors used to establish liability upon corporations engaged in a single
enterprise. “Factors for the trial court to consider” when assessing alter ego
liability under the single enterprise rule “include the commingling of funds
and assets of the two entities, identical equitable ownership in the two
entities, use of the same offices and employees, disregard of corporate
formalities, identical directors and officers, and use of one as a mere shell
or conduit for the affairs of the other.” (
Troyk
v. Farmers Group, Inc. (2009) 171 Cal.App.4th 1305, 1342; accord
Greenspan v. LADT LLC (2010) 191
Cal.App.4th 486, 512-513 [listing factors].) Plaintiffs allege the Simonse
Entities “engaged in all or part of the improper acts, plans, schemes or
transactions, which operate a fraud against plaintiff”; acted in concert; have
“a unity of interest”; “commingled and used assets” are controlled by the same
individual (Simonse); lack adequate capitalization; and are “mere shells,
instrumentalities, or conduits through which defendant Simonse carried on his
business and affairs.” The complaints also allege that Magnate Fund #2 LLC,
which remains a defendant in the case, transferred property to 55 Woodward LLC
in one case, and to 20 Parkridge LLC in the other, without consideration in a
concerted effort to defraud plaintiffs. Further, the complaints allege that
“Chetcuti himself transferred money borrowed from individuals like [plaintiffs]
to the other Simonse Entities directly, like Magnate Fund #3 and LHJS.” The allegations
suggest the
Simonse Entities and other defendants acted as a single enterprise.
Amendment of the pleadings will permit plaintiffs an opportunity to develop
that claim.
Disposition
The
judgments are reversed. The cases are remanded to the trial court with
directions to grant plaintiffs leave to amend their complaints. Plaintiffs
shall recover costs incurred on appeal upon timely application in the trial
court. (Cal. Rules of Court, rule 8.278.)
_________________________
Pollak,
J.
We concur:
_________________________
McGuiness, P. J.
_________________________
Siggins, J.
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