McCLAIN v. OCTAGON PLAZA, LLC No. B194037.
71 Cal.Rptr.3d 885 (2008)
159 Cal.App.4th 784
Kelly McCLAIN, Plaintiff and Appellant, v. OCTAGON PLAZA, LLC, Defendant and Respondent.
Court of Appeal of California, Second District, Division Four.
January 31, 2008.
Law Office of Joseph R. Brown and Joseph R. Brown, Sherman Oaks, for Plaintiff and Appellant.
Law Offices of J. Steven Kennedy and J. Steven Kennedy, Pasadena, for Defendant and Respondent.
In appellant Kelly McClain's action against respondent Octagon Plaza, LLC, (Octagon), the trial court sustained a demurrer without leave to amend to her claims for misrepresentation, breach of the covenant of good faith and fair dealing, and declaratory relief. Following a trial, the court concluded that she had failed to establish her remaining claims for violation of the Consumer Credit Reporting Agencies Act (Civ.Code, § 1785.1 et seq.) (CCRAA) and an accounting. We affirm the rulings regarding the claims for breach of the covenant of good faith and fair dealing and violation of the CCRAA, and otherwise reverse.
RELEVANT FACTUAL AND PROCEDURAL BACKGROUND
McClain operates a business known as "A+ Teaching Supplies." Ted and Wanda
Paragraph 1.2(a) of the lease describes the size of the unit leased by McClain as "approximately 2,624 square feet," and attached to the lease is a diagram of the shopping center that represents the size of the unit as 2,624 square feet. Paragraph 2.1 states: "... Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating Rent, is an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less." Paragraph 2.4 further provides: "Lessee acknowledges that: (a) it has been advised by Lessor ... to satisfy itself with respect to the condition of the Premises ..., and their suitability for Lessee's intended use, [and] (b) Lessee had made such investigation as its deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises...."
With qualifications not relevant here, Paragraph 1.5 of the lease obliges McClain to pay $3,804 per month as "Base Rent." In addition, Paragraphs 1.6 and 4.1 require McClain to pay as additional rent 23 percent of the "Common Area Operating Expenses" (common expenses), which are defined in Paragraph 4.2 as costs incurred by Octagon for enumerated purposes "relating to the ownership and operation" of the shopping center. Paragraph 4.2 provides that McClain's share of the common expenses is due no later than 10 days after Octagon provides her with "a reasonably detailed statement of actual expenses." Paragraph 4.2 also permits Octagon, at its option, to estimate the common expenses for the upcoming calendar year and to require McClain to pay a prorated share of the estimate with her monthly base rent during the year. Under this option, Octagon is obliged to provide McClain with a "reasonably detailed statement" showing her share of the actual annual common expenses within 60 days after the end of the calendar year. If McClain underpays her share of the common expenses, she must pay the balance owing no later than 10 days after receiving the statement; if McClain overpays her share, she is to receive a credit against her share of the common expenses for the forthcoming year.
After a dispute arose concerning McClain's share of the common expenses, she filed an action in small claims court, which was eventually transferred to superior court. The action was resolved by a settlement in November 2004.
On June 17, 2005, McClain initiated the underlying action against Octagon. After the trial court sustained a demurrer with leave to amend to the claims for misrepresentation and declaratory relief asserted in her complaint, McClain filed a first amended complaint (FAC), which contained claims for negligent or intentional misrepresentation, breach of the covenant of good faith and fair dealing, declaratory relief, violation of the CCRAA, and an accounting. Regarding the first three claims, the FAC alleged that the Charanians induced her to agree to pay excessive rent by
On November 11, 2005, the trial court sustained Octagon's demurrer to the first three claims, concluding that the lease, by its plain language, barred McClain from asserting the claims. Following a bench trial, the trial court determined that the Charanians had not violated the CCRAA in obtaining McClain's credit report, and that McClain had no right to an accounting under the lease. Judgment in Octagon's favor was entered on August 15, 2006.
McClain contends that the trial court erred in sustaining the demurrer without leave to amend and in denying her remaining claims after trial.
1. Standard of Review
"Because a demurrer both tests the legal sufficiency of the complaint and involves the trial court's discretion, an appellate court employs two separate standards of review on appeal. [Citation.] ... Appellate courts first review the complaint de novo to determine whether or not the ... complaint alleges facts sufficient to state a cause of action under any legal theory, [citation], or in other words, to determine whether or not the trial court erroneously sustained the demurrer as a matter of law. [Citation.]" (Cantu v. Resolution Trust Corp. (1992)
"Second, if a trial court sustains a demurrer without leave to amend, appellate courts determine whether or not the plaintiff could amend' the complaint to state a cause of action. [Citation.]" (Cantu v. Resolution Trust Corp., supra, 4 Cal. App.4th at p. 879, fn. 9,
Under the first standard of review, "we examine the complaint's factual allegations to determine whether they state a cause of action on any available legal theory. [Citation.] We treat the demurrer as admitting all material facts which were properly pleaded. [Citation.] However, we will not assume the truth of contentions, deductions, or conclusions of fact or law [citation], and we may disregard any allegations that are contrary to the law or to a fact of which judicial notice may be taken. [Citation.]" (Ellenberger v. Espinosa (1994)
Under the second standard of review, the burden falls upon the plaintiff to show what facts he or she could plead to cure the existing defects in the complaint. (Cantu v. Resolution Trust Corp., supra, 4 Cal.App.4th at p. 890,
McClain contends that the FAC adequately alleges a claim for fraud in the inducement, that is, misrepresentation involving a contract in which "the promisor knows what he or she is signing but consent
Regarding the fraud claim, the FAC alleges the following facts: In January 2003, when McClain investigated leasing space in the shopping center, Octagon informed her that the unit in which she was interested comprised exactly 2,624 square feet. Because the base rent in the shopping center was $1.45 per square foot per month, McClain's total base rent would be $3,804 per month. Moreover, because the unit occupied 23 percent of the shopping center, McClain would be responsible for this share of the common expenses.
Prior to entering into the lease, McClain attempted to confirm the size of the unit. The Charanians, who purported to be offended by her inquiries, responded that measuring the area would be unreasonably costly due to the unit's unusual angles. They insisted that they had intimate knowledge of every detail Of the shopping center, and that McClain could rely on their representations regarding the sizes of the unit and the shopping center. Due to the Charanians' pretense that they were offended by her request to confirm the size of the unit and their repeated assurances that McClain could rely on their honesty and accuracy, McClain was induced to accept their representations, and she placed reasonable reliance upon the representations in executing the lease.
The Charanians knew, or had reason to know, that the representations were materially inaccurate. In early 2005, McClain obtained a copy of Octagon's application for earthquake insurance, which disclosed that the correct size of the shopping center was 12,800 square feet, rather than the 11,835 square feet the Charanians had used in calculating McClain's share of the common expenses. Upon investigation, she also discovered that her unit occupied approximately 2,438 square feet, rather than the 2,624 square feet represented. Had she known the correct sizes, she would not have agreed to the base rent and share of the common expenses stated in the lease. Under the agreed-upon rental rate of $1.45 per square foot, the base rent for the unit should have been $3,535.10 per month, rather than $3,804, as recited in the lease; moreover, McClain should have been allocated 19 percent of the common expenses, rather than the 23 percent share that she accepted under the lease. As a result of Octagon's misrepresentations, she was induced to enter into a
These allegations, considered in isolation, are sufficient to establish the elements of a claim for intentional or negligent misrepresentation. In O'Hara v. Western Seven Trees Corp. (1977)
The key issue, therefore, is whether the terms of the lease rendered McClain's fraud claim untenable.
Under these principles, California courts have concluded that a variety of contract terms neither bar fraud claims nor establish as a matter of law that reliance upon the defendant's misrepresentations was unjustifiable. (See Hinesley v. Oakshade Town Center (2005)
It is well established that the kind of disclaimer in Paragraph 2.4, which asserts that McClain had an adequate opportunity to examine the leased unit, does not insulate Octagon from liability for fraud or prevent McClain from demonstrating justified reliance on the Charanians' representations. (City of Salinas v. Souza & McCue Construction Co. (1967)
In our view, this provision does not insulate Octagon from liability for fraud or establish that McClain's reliance on the Charanians' alleged misrepresentations was unjustifiable as a matter of law. Our view is informed by our Supreme Court's decision in E.H. Morrill Co. v. State of California (1967)
Here, the Charanians' alleged pre-contractual figures for the unit's size and McClain's share of the common expenses—respectively, 2,624 square feet and 23 percent-were repeated (with qualifying
This conclusion finds additional support in Furla v. Jon Douglas Co. (1998)
On appeal, the owner and brokers did not assert that paragraph 18F operated as an exculpatory clause, but contended that it established that the buyer's reliance on the pre-sale representations of size was unreasonable because he was on notice that they were "approximations only." (Furla, supra, 65 Cal.App.4th at p. 1080,
Here, McClain alleges that the Charanians exaggerated the size of her unit by 186 square feet, or 7.6 percent of its actual size, and increased her share of the common expenses by 4 percent through a calculation that understated the size of the shopping center by 965 square feet, or 8.1 percent of its actual size. Although these discrepancies are smaller than those at issue in Furla, they cannot be regarded as de minimis or necessarily "near to" the actual sizes as a matter of law. As alleged in the complaint, they operated to increase the rental payments incurred by McClain's retail business by more than $90,000 over the term of the lease. In view of Furla, the fact that Paragraph 2.1 put McClain on notice that the Charanians' representations of size were approximations does not preclude her from showing that they were,
In an apparent effort to distinguish Furla, Octagon argues that Paragraph 2.1 not only uses the term "approximation," but states (1) that the parties agreed the approximations were "reasonable" and (2) that McClain's rent was not subject to revision regardless of the actual sizes. These clauses do not aid Octagon. As to element (1), a stipulation intended to bar a party's fraud claims does not bind the party, and thus the insertion of language agreeing that a material misrepresentation is reasonable is of no effect. (1 Witkin, Summary of Cal. Law, supra, Contracts, § 303, p. 330.) If, as McClain asserts, the Charanians assured her that the square footage represented was accurate and dissuaded her from taking her own measurements, any agreement that the measurement set forth in the lease was reasonable reflects nothing more than a belief induced by such misrepresentations.
Similarly, to the extent element (2) purports to insulate Octagon from liability for any discrepancy—no matter how great— between the actual square footage and that represented in the lease, it is akin to an "as is" clause. California courts have routinely rejected such clauses as ineffective in insulating a contracting party from fraud claims regarding nonobvious defects in goods. (See, e.g., Orlando v. Berkeley (1963)
3. Breach of the Implied Covenant of Good Faith and Fair Dealing
We reach the contrary conclusion regarding McClain's related claim for breach of the implied covenant. Generally, every contract, including commercial leases, "`"imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement." [Citation.]'" (Carma Developers (Cal), Inc. v. Marathon Development California, Inc. (1992)
Regarding this claim, the FAC alleges that Octagon breached the implied covenant
The FAC also alleges that Octagon breached the implied covenant "by negotiating the [common expenses] charges with her on a per-square foot basis, which Octagon held out as a reflection of the ratio which the Premises held to [the] size of the Shopping Center as a whole. Octagon falsely represented the ratio to be 23 [percent]. Octagon induced McClain to enter into the Lease which provided that her proportional share of the annual [common] expenses were [sic ] 23 [percent], when it knew or had reason to know that the true ratio was substantially less." Finally, the FAC alleges that Octagon breached the implied covenant because the Charanians repeatedly assured McClain that their representations were trustworthy.
Insofar as these allegations assert that Octagon violated the implied covenant during the negotiations of the lease, they fail to state a claim. As the court explained in Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992)
In an apparent effort to avoid the operation of this principle, McClain contends that the FAC alleges—or can be amended to allege—that before the parties executed the lease, they entered into another agreement with materially different terms regarding McClain's rent. She argues that Octagon breached the implied covenant by "inserting erroneous figures for the base rent and the [common expense] charges into the [l]ease which did not reflect the contract terms upon which the parties had mutually agreed and which McClain had intended."
No such allegation can cure the deficiency explained above. It contradicts the allegations in the FAC and McClain's original complaint that McClain accepted the Charanians' representations about the size of her unit and her share of the common expenses, which were incorporated into the lease. Generally, "[a] plaintiff may not avoid a demurrer by pleading facts or positions in an amended complaint that contradict the facts pleaded in the original complaint or by suppressing facts which prove the pleaded facts false. [Citation.] Likewise, the plaintiff may not plead facts that contradict the facts or positions that the plaintiff pleaded in earlier actions or suppress facts that prove the pleaded facts false. [Citation.]" (Cantu v. Resolution Trust Corp., supra, 4 Cal. App.4th at p. 877,
4. Declaratory Relief
Because the FAC adequately alleges a fraud claim based on misrepresentations about her proper base rent and share of the common expenses under the lease (see pt. A.2., ante), the trial court erred in sustaining the demurrer to McClain's claim for declaratory relief. As the court explained in Ludgate Ins. Co. v. Lockheed Martin Corp. (2000)
B. CCRAA Claim
McClain contends that the trial court erred in determining that she failed to establish her claim under the CCRAA. For the reasons explained below, we disagree.
Generally, the CCRAA "limits the dissemination of consumer credit information." (Olson v. Six Rivers National Bank (2003)
Section 1785.11 authorizes consumer credit reporting agencies to provide a consumer credit report without the consumer's prior written consent only in enumerated circumstances. Pertinent here is subdivision (a)(3)(F), which permits an agency to provide a consumer credit report to a person it has reason to believe "has a legitimate business need for the information in connection with a business transaction involving the consumer." Also of importance here are subdivisions (a)(1) and (a)(2) of section 1785.19, which authorize the imposition of a civil penalty not exceeding $2,500 on any person who "knowingly and willfully" obtains access to or data from a consumer's credit file "other than as provided in Section 1785.11."
Only "[c]onsumer credit reporting" is subject to the CCRAA. (§ 1785.41.) Section 1785.41 provides: "Commercial credit reports, which differ significantly, are not subject to [the CCRAA]. The circumstances, business practices, and reports themselves differ sufficiently to make it impractical to include commercial credit reports under the [CCRAA]." With exceptions not relevant here, section 1785.42 defines a commercial credit report as "any report provided to a commercial enterprise for a legitimate business purpose, relating to the financial status or payment habits of
At trial, McClain contended that the Charanians violated the CCRAA by improperly obtaining her credit report without her consent. The evidence at trial established that in February 2005, Ted Charanian opened an online credit information account with Citi Credit Bureau (Citi), and that in March 2005, he obtained a credit report on McClain from Citi. McClain testified that she never authorized the Charanians to gain access to her personal credit information. In addition, she submitted testimony from Jimmy Yu, a Citi employee, and records from Citi, indicating that Ted Charanian had stated that his purpose in opening the Citi account was "Tenant screening, management for self."
Ted Charanian testified as follows: When McClain sought to lease her unit, she submitted a personal financial statement that identified her annual income from A + Teaching Supplies as $25,000 per year, and also stated that her husband's annual income was $170,000. Reassured by McClain's substantial financial resources, the Charanians permitted her to lease the second largest unit in the shopping center. Subsequently, at a deposition in September 2004, Ted Charanian learned that McClain's husband had opened a small business and no longer earned $170,000 per year. In December 2004, McClain paid her rent in an unusual manner: she submitted two checks, only one of which was drawn on her business account.
In February 2005, Ted Charanian decided to open the Citi account to "get a better handle on, if possible, the economic viability of both current and prospective ... [commercial tenants." He explained his purposes to Citi's representative during phone conversations and filled out the Citi application in accordance with the representative's advice. In view of McClain's unusual rent payment and an apparent reduction in the number of her customers, the Charanians became concerned she would not be able to pay her rent. Ted Charanian obtained the credit report, determined that McClain's credit was in good order, placed the report in his files, and "forgot about it."
In denying McClain's CCRAA claim, the trial court found that the Charanians had a legitimate business need for the report, and that McClain failed to show that Ted Charanian breached his agreement with Citi in obtaining the report. On appeal, McClain argues that the trial court erred as a matter of law in applying the CCRAA. She contends that the record establishes that Octagon obtained access to McClain's credit data in a manner "other than as provided in Section 1785.11" (§ 1785.19, subds.(a)(1), (a)(2)), and that Octagon is subject to a civil penalty under the CCRAA. The crux of this contention is that because the credit report was indisputably obtained in connection with a commercial transaction, it is not a "consumer credit report," as defined in section 1785.3, subdivision (c), and thus falls outside the scope of section 1785.11.
This contention fails in the face of sections 1785.41 and 1785.42. Although the parties did not raise or discuss these provisions before the trial court, we will affirm the judgment on any ground properly supported by the record.
In view of the trial court's findings and the undisputed facts, the credit report that Ted Charanian obtained falls within the definition of a "[c]ommercial credit report" in section 1785.42. The record establishes that the tenant on the lease was a commercial enterprise, namely, "Kelly McClain dba A + Teaching Supplies," and that Ted Charanian obtained the credit report to determine whether McClain could meet her financial obligations under the lease.
Pointing to Bakker v. McKinnon (8th Cir.1998)
Additionally, Bakker is materially distinguishable. There, an attorney representing the plaintiffs in a dental malpractice action obtained credit reports on the defendant and his daughters in order to obtain information that would force the defendant to enter into a settlement. (Bakker, supra, 152 F.3d at pp. 1009-1011.) When the defendant and his daughters sued the attorney under the Fair Credit Reporting Act (15 U.S.C. § 1681 et seq.) (FCRA), the trial court found that the reports were consumer credit reports protected by the FCRA, and that the attorney had not obtained them for a legitimate business purpose. On appeal, the Eighth Circuit affirmed these determinations, and rejected the attorney's contention that the reports were not consumer credit reports because they had been obtained for what she characterized
McClain also attacks the trial court's finding that she failed to show that Ted Charanian violated the Citi agreement. On this matter, she argues that Jimmy Yu testified that the Citi agreement obliged Ted Charanian to obtain McClain's written consent prior to obtaining her credit report, and that Ted Charanian conceded that he never acquired this consent.
The record does not support this contention.
Ted Charanian testified that the Citi agreement admitted into evidence was not the one to which he had agreed. He also testified that he informed Citi of his purposes in opening the account, that he supplied all the documents they required to open the account, that Citi never asked him for a consent form from McClain and that he had learned that Citi closed his account only because McClain and her husband had been "harassing" Citi.
The trial court found that McClain had failed to show that Ted Charanian breached any of the terms of his agreement with Citi. In view of the testimony from Yu and Ted Charanian—including the latter's testimony that he did not execute the standard Citi agreement—the trial court could reasonably infer that McClain never established the terms of the agreement. In sum, the trial court properly concluded that Octagon had not violated the CCRAA.
McClain contends that the trial court erred in denying her request for a declaration that under the lease she is entitled to an accounting of her share of the common expenses. She argues that the express provisions of the lease, together with the implied covenant, oblige Octagon to permit her to examine its records to verify her share of the common expenses.
Regarding this claim, the record establishes that in February 2005, Octagon sent McClain a letter stating her share of the actual common expenses for the 2004 calendar year and her share of these expenses for the 2005 calendar year. When she requested "a reasonably detailed statement" regarding these expenses pursuant to the lease, Octagon provided a more elaborate description of the common expenses for the 2004 calendar year. McClain's husband responded to the statement in a letter dated April 7, 2005. Asserting that a landlord owed a fiduciary duty to a tenant, the letter questioned certain expenditures, disputed the need for others, and sought documentation beyond that verifying the actual expenses incurred. In addition, the letter requested permission for an auditor to examine Octagon's records and obtain answers to the questions raised in the letter. Octagon did not agree to the request. The. trial court determined that neither the express language of the lease nor the implied covenant of good faith and fair dealing accorded McClain the right to such an audit.
For the reasons explained below, we conclude that McClain is not entitled to dispute the need for expenses or to audit Octagon's records. Rather, she is entitled only to disclosure of the documents supporting the Charanians' "reasonably detailed statement" of her share of the common expenses, for the limited purpose of verifying that the listed expenses were incurred and that the listed amounts are accurate. Octagon may fulfill this obligation in any reasonable manner it elects, as by providing copies of the relevant documents or permitting McClain to examine the originals.
On appeal, McClain argues only that the implied covenant supports her request for an accounting, and does not suggest that the lease imposes fiduciary duties upon Octagon regarding the common expenses. Generally, the implied covenant operates to protect the express covenants or promises of the contract. (Racine & Laramie, Ltd. v. Department of Parks & Recreation, supra, 11 Cal. App.4th at pp. 1031-1032,
California courts have long recognized that when two parties enter into an agreement for the sharing of profits that accords one party exclusive access and control over financial records bearing on the profits, the implied covenant accords the other party the right to an accounting of the profits. In Nelson v. Abraham (1947) 29 Cal.2d 745, 747, 177 P.2d 931 (Nelson ), the defendant, who manufactured ice, entered into a profit-sharing agreement with the plaintiff. Under the terms of the agreement, the plaintiff was to sell ice for the defendant in San Francisco in exchange for one third of the net profits from his sales operation; the plaintiff otherwise acquired no interest in the defendant's business. (Ibid.) When the defendant sold his business, including the San Francisco operation, to a third party, the plaintiff filed an action for an accounting and division of profits. (Id. at p. 749, 177 P.2d 931.) The trial court determined that the parties had not formed a partnership or joint venture and rejected the plaintiffs claim for an accounting. (Id. at p. 747, 177 P.2d 931.)
In reversing, our Supreme Court concluded that under the circumstances, the implied covenant obliged the defendant to provide an accounting, even if the agreement did not create a partnership or other form of fiduciary relationship. (Nelson, supra, 29 Cal.2d at p. 750, 177 P.2d 931.) It reasoned: "[U]nder an agreement calling for a division of profits, whether the contract is one of copartnership, joint venture, or employment, good faith and fair dealing require that neither party may be permitted to take an unfair advantage or enjoy greater rights than called for by the terms of the agreement. One may not obtain a secret profit or undue benefit. The one who is entrusted with the rights of another is charged with the duty of guarding those rights with the utmost good faith. [Citations.]" (Id. at p. 751, 177 P.2d 931.)
In a later case, Waverly Productions, Inc. v. RKO General, Inc. (1963)
In Wolf v. Superior Court (2003)
In rejecting the author's contention that the parties' agreements created a fiduciary relationship, the court in Wolf acknowledged the continuing vitality of Nelson: "The duty to provide an accounting of profits under the profit-sharing agreement in Waverly is appropriately premised on the principle, also expressed in Nelson, that a party to a profit-sharing agreement may have a right to an accounting, even absent a fiduciary relationship, when such a right is inherent in the nature of the contract itself. As the court in Nelson observed, the right to obtain equitable relief in the form of an accounting is not confined to partnerships but can exist in contractual relationships requiring payment by one party to another of profits received. That right can be derived not from a fiduciary duty, but simply from the implied covenant of good faith and fair dealing inherent in every contract, because without an accounting, there may be no way "`"by which such [a] party [entitled to a share in profits] could determine whether there were any profits...."'"" (Wolf, supra, 107 Cal.App.4th at p. 34,
In our view, the principle asserted in Nelson also encompasses the cost-sharing provisions of the lease. Like the courts in Nelson, Waverly and Wolf, we see no basis in these provisions for concluding that the lease imposes fiduciary duties upon Octagon regarding the common expenses. (See also Korens v. R.W. Zukin Corp. (1989)
In so concluding, we do not suggest that McClain's limited right to the documents underlying the "reasonably detailed statement" accords her greater control over the shopping center and its management than authorized by the express terms of the lease.
The judgment is reversed solely with respect to McClain's claims for misrepresentation, an accounting, and declaratory relief, and the matter is remanded for further proceedings in accordance with this opinion. The judgment is otherwise affirmed in all other respects. The parties are to bear their own costs on appeal.
We concur: WILLHITE, Acting P.J., and SUZUKAWA, J.
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