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Court Expands Reach of Fiduciary Duty Law to Include Third Parties Aiding and Abetting

Court Expands Reach of Fiduciary Duty Law to Include Third Parties Aiding and Abetting – Jonathan Finke


In American Master Lease v. Idanta Partners, Roberts formed American Master Lease (“AML”) based on a proprietary business method he developed. To generate capital, Roberts invited Andrews, Runnels and Franklin to invest and become members of AML, with Roberts serving as the managing member, and Andrews, Runnels and Franklin serving as operational management. Each member was subject to a non-competition provision contained in AML’s operating agreement.


AML entered into negotiations with Idanta Partners to procure an investment in AML. After the negotiations were unsuccessful, Runnels, without the knowledge of Roberts, secretly formed a new company, FPI, using AML’s business method. Runnels brought Franklin in, and in their capacity as operational managers of AML, granted FPI a license to use AML’s business method. FPI then entered into negotiations with Idanta to obtain the same investment AML had sought.


When Roberts discovered the existence of FPI, he emailed Runnels and Franklin to remind them of their non-competition obligations. Runnels and Franklin forwarded the email to David Dunn, Idanta’s principal. Roberts also sent a letter to Dunn’s son, informing him of the non-competition agreement and the potential breach of fiduciary duty. Despite being provided such knowledge, Idanta purchased an 85% interest in FPI, allowing FPI to enter into several transactions using AML’s proprietary business method.


AML sued Runnels and Franklin in Los Angeles County Superior Court for breach of fiduciary duty, and also sued Idanta for aiding and abetting Runnels and Franklin’s breach of fiduciary duty to AML. Idanta argued it could not be liable under such theory because it did not owe a fiduciary duty to AML. The court rejected the argument, holding that liability exists if the defendant 1) knows the other person’s conduct constitutes a breach of fiduciary duty and 2) provides substantial assistance to that breach. Here, Idanta had been given notice of the potential breach by Runnels and Franklin, yet still provided them substantial assistance towards their breach. As a result, Idanta could be liable for aiding and abetting Runnels and Franklin’s breach of their fiduciary duty to AML.


This decision should serve as a warning to parties entering business relationships to be aware of their business partners’ fiduciary duties to others and be cautious about conduct that could be harmful to those interests.


American Master Lease, LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451

BRE Wrongfully Denies Broker’s License to Applicant Who Established Rehabilitation After Fraud Conviction

Dave Singh was born in India, became a U.S. citizen at age 21, and worked for the FBI and later as a police officer. He was the head of household of extended family members, many of whom did not speak English. Singh’s elderly father received government assistance to cover the cost of receiving care at home from another family member. With Singh’s knowledge, these payments continued even during three months when Singh’s father returned to India. After a fraud investigation, Singh was convicted of grand theft.


In 2006, Singh applied for a real estate broker’s license, which application was denied because he did not show remorse for his actions—specifically he refused to admit to the crime. Singh reapplied in 2008 but the BRE (Bureau of Real Estate) filed a statement opposing his application, citing his misdemeanor conviction and prior license denial.


The Commissioner can deny a license to an applicant convicted of a crime substantially related to the qualifications, functions or duties of a real estate licensee. (B&P Code §§ 480(a) and 1077(b).) However, the license cannot be denied if the applicant has shown rehabilitation. The BRE has developed 14 criteria to determine rehabilitation of an applicant who committed a crime, arguably the most important being change in attitude.


The Commissioner denied the application because Singh refused to admit responsibility for his crime and was thus held not sufficiently rehabilitated.


After a hearing, an Administrative Law Judge (ALJ) found that Singh had complied with many of the rehabilitation criteria by paying restitution, completing probation, maintaining a stable family and community life, and assuming responsibility and for his crime. Notwithstanding these findings, the ALJ denied Singh’s application given the dishonest nature of his crime which was committed while he was a police officer sworn to uphold the law. The ALJ ruled it would not be in the public’s interest to allow him to start his career as an unsupervised broker.


The BRE adopted the ALJ’s ruling and Singh appealed, arguing the BRE abused his discretion. The trial court agreed with Singh and ordered the BRE to issue a broker’s license to Singh.


The BRE appealed. The Court of Appeal affirmed the trial court’s order, finding that the Commissioner’s decision to deny Singh a broker’s license was improperly based solely on the nature of his prior crime, rather than his inadequate rehabilitation.


Singh v. Davi (2012) 211 Cal.App.4th 141

Intermittent Possession Puts Owner On Notice Of Prescriptive Easement

Intermittent Possession Puts Owner On Notice Of Prescriptive Easement – Jonathan Finke


In 1960, Fred and Viola Fluckiger purchased their home in a quiet neighborhood outside of Los Angeles. Shortly thereafter, they poured a concrete driveway partially encroaching on their neighbor’s property. The Kings subsequently purchased the property from the Fluckigers in 1994 and used the encroaching driveway to access their garage.


In 1963, the Wus had purchased the property adjacent to the Fluckigers property and containing the encroaching driveway. Up until 2009, they leased their property out, but had intermittent possession of the property in between lease terms. Near the end of 2009, the Wus began constructing a guardrail over the piece of the driveway that encroached on their property. The Kings sued for their right to use the encroaching driveway, asserting a claim of a prescriptive easement.


To prove a right to a prescriptive easement, the Kings must have used the property for the statutory period of five years, which use has been 1) open and notorious; 2) continuous and uninterrupted; 3) hostile to the true owner; and 4) under claim of right.


Prior to trial, the Wus did not offer any evidence to negate the factors needed to prove the existence of a prescriptive easement. Instead, they argued that they had used the property as a leasehold since 1965, and therefore, they had not been in continuous possession of the property for the five years required under statute for the Kings to have a claim against their right to the property.


According to the Court of Appeal, California law does not require the actual owners of the encroached land to have been in continuous possession of the property for five years. Instead, if at any point during the adverse use an owner or landlord has been in possession, including constructively at the expiration of a renewable lease, that possession starts the clock, and he or she could and should have taken action to interrupt such use.


In finding for the Kings, the Court held that the Wus were in actual possession of their property for nearly two years between 1963 and 1965, and for a period of a year between 1966 and 2008. Additionally, the Wus had many tenants at the property over the years, meaning that they had numerous gaps in leases. As a result of those gaps, the Wus also had constructive possession at the expiration of each lease.


Based on actual and constructive possession by the Wus, the Court of Appeal ruled that this possession started the clock and the Wus did in fact “have possession of the property for the statutory period of five years.” Therefore, the Kings had a prescriptive easement by their use of the driveway, enjoining the Wus from building the guardrail.



King v. Wu (2013) 13 Cal. Daily Op. Serv. 8910

Right to Repair Act Requires Notice to Builder Prior to Repair of Damage

Right to Repair Act Requires Notice to Builder Prior to Repair of Damage – P. Kurt Peterson

Dipak Roy purchased a home in 2004 constructed by KB Home Coastal, Inc. KB’s corporate address for notice of defect claims was listed in the purchase materials. In March, 2010, Roy discovered a water leak in the home and reported it to his home insurer, Allstate, but not to KB. Allstate repaired the water damage in June, 2010, and then sent a letter in July advising KB that Allstate would pursue its subrogation rights against KB to recover the $80,985 in repair costs. The letter was not sent to KB’s listed address and KB did not respond. Later, Allstate sent a settlement demand letter to KB in November, 2010, demanding payment of the full cost of repair. This letter was mailed to KB’s listed address. KB did not respond. In March, 2011, Allstate filed a complaint against KB. After some procedural maneuvering by the parties, demurrers, opposing motions for summary judgment, appellate court intervention, and the filing of two amended complaints, the case again went up on appeal before the Second Appellate District.

On appeal, Allstate relied on the holding in the recent Liberty Mutual case (Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC (2013) 219 Cal.App.4th 98) that the Right to Repair Act (Civ. Code, §895 et seq.) (the “Act”) does not provide the exclusive remedy in cases of actual property damage, and therefore Allstate had valid common law tort and subrogation claims. For procedural reasons, however, the Court of Appeals determined it did not need to address Liberty Mutual because the issue on KB’s appeal pertained only to Allstate’s cause of action pled under the Act. The issue the Court did address was whether the Act required notice to be given to a builder before repairs were made, and whether Allstate’s letters sent in July and November, 2010 constituted proper notice. The Court held that under the Act notice is required before repairs are made, and that proper notice was not given by Allstate to KB to afford an opportunity to inspect and repair the defect before the damage was repaired by the homeowner.

On the issue of notice, the Court looked to the plain language of the statute. Allstate argued that the statutory language of Section 910 of the Act does not expressly require notice to the builder before repairs are made. The Court reasoned, however, that the code section could not be read in isolation, and in harmonizing it with the other prelitigation procedures of the Act, determined that the sequential nature of the procedures mandates notice of defect be given before repairs are made in order to give the builder the Act’s intended opportunity to inspect and repair. The Court further found Allstate’s July and November, 2010 letters to be wanting because they did not comply with Section 912 of the Act requiring the notice to “provide the claimant’s name, address, and preferred method of contact”, to “state that the claimant alleges a violation pursuant to this part against the builder”, and to “describe the claim in reasonable detail sufficient to determine the nature and location, to the extent known, of the claimed violation”. Allstate’s letters also failed to refer to the Act, and the construction defect described was no longer in existence due to the repair. The Court also held that the insured homeowner, not Allstate, was required to provide KB with proper notice under the Act, and no such notice was given.             Allstate’s subrogation claim failed because it could not have greater rights under subrogation than the homeowner would have had in his own right.

The Court did not reach the issue of notice in an emergency repair circumstance in its holding, but did discuss the matter briefly in dicta, observing that the provisions of the Act, particularly the liability a builder has for consequential damages under the Act, gives the builder the incentive to complete the repairs as quickly as possible in a catastrophic damage scenario, so long as the builder receives the statutorily required notice.

Because KB did not receive notice and had no opportunity to repair under the Act, the Court saw “no injustice in interpreting the statute as altogether barring the claim for damages” and excusing KB’s liability for damages under the Act. As such the Court of Appeal directed the trial court to grant KB’s motion for summary judgment against Allstate.

KB Home Greater Los Angeles v. Superior Court (Allstate Insurance Company) 223 Cal.App.4th 1471



Listing Agent and Property Owner Have Duty to Notify Visitors of Concealed Dangerous Condition of Which Agent Has Actual or Constructive Knowledge

Aurora Loan Services owned a foreclosed residence in Lafayette and retained Rockville Realty as the listing broker. The home had an attic that was converted into a “bonus room” with a pull-down stairway ladder hinged with metal brackets. Hall, a real estate agent showing the home to a prospective buyer, fell and was injured when the hinge broke.


The home had previously been inspected by a licensed contractor who prepared an estimate of repairs that was provided to the listing agent. Under a heading entitled “Health and Safety Required Repairs-Group 1”, the report listed both cosmetic or minor items along with health and safety items. One item on the list was “Stair-remove and replace attic stair”. During Hall’s visit with her client, a copy of the report was on the kitchen counter.


Hall and her husband sued the owner and listing agent for negligence, premises liability and loss of consortium. The trial court (Contra Costa County, Judge Judith Craddick) entered summary judgment for defendants, agreeing they did not have notice of a defective condition. The Court of Appeal (First Appellate District) reversed, finding there were triable issues of fact regarding whether defendants had actual or constructive knowledge of a concealed dangerous condition and satisfied their duty to notify plaintiff.


The court began by discussing the legal responsibilities imposed on real estate agents and property owners, and the legal relationship between them, which is governed by both contract and agency law. Owners must maintain their properties in reasonably safe condition and use ordinary care to prevent injury to others. For liability to attach, the owner must have actual or constructive notice of a defective condition. Agents owe a duty of care to all persons within the area of foreseeable risk. Liability is determined by whether a reasonable person would have foreseen a risk of harm and whether the agent exercised ordinary care under the circumstances. The conduct of and information known to the agent is imputed to the property owner.


Relying on these legal principles as well as two decades-old cases addressing the specific issue, the Court of Appeal held that a real estate agent has a duty to notify visitors of marketed property of concealed dangerous conditions of which the agent has actual or constructive knowledge. Any such knowledge and resulting liability are imputed to the property owner.


Here, the inspection report suggested at least a possibility that the stairway ladder was in disrepair, yet there was no indication that the listing agent followed up with the inspector to inquire about its safety. Even though the inspector later testified at his deposition that he could not recall a specific danger, a jury could still conclude that a reasonable person who received the report might have believed the stairway needed to be replaced. As such, there were triable issues of fact regarding whether defendants had actual or constructive knowledge of the dangerous condition of the stairway ladder and satisfied their duty to notify Hall.


Hall v. Aurora Loan Services (2013) 215 Cal.App.4th 1134

Commercial Lease Allowed Only One Extension of Term Absent Clear and Explicit Language Granting Perpetual Extensions

The commercial property lease in this case gave tenant “the option to extend the term of the lease for additional five year periods upon the same terms and conditions contained in the lease”. After the first term was up, the tenant elected to extend the lease for an additional term and thereafter attempted to do so for a second additional term. The landlord brought an action for declaratory relief to establish that the tenant was entitled to only one extension of the leasing term. The tenant, on the other hand, argued that the language clearly provided for extensions in perpetuity. The Los Angeles County Superior Court agreed with tenant. The landlord appealed and the Court of Appeal, Second Appellate District, reversed the trial court.


The court noted that lease provisions which appear to create a right to perpetual renewals are disfavored and will be upheld only where the parties’ intent to create a perpetual right is explicit and clear. Examples of such explicit and clear wording could include language like “in perpetuity, forever, or for all time, except as limited by statute.” Here, there was no such clear language. While the court acknowledged that the leasing language discussed term periods in the plural, it nonetheless found the language ambiguous. Accordingly, the tenant was entitled to only one extension of the original lease term.


Ginsberg v. Gamson (2012) 205 Cal.App.4th 873

Strict Adherence to Lease Not Required Where Counsel Instructs Otherwise

DW August Co. (“DW”), landlord, rented commercial property to Eucasia Schools Worldwide, Inc. (“Eucasia”), on which Eucasia operated a private school. DW and Eucasia had a strained relationship involving prior litigation. Starting in April of 2010, DW always communicated with Eucasia through DW’s counsel.


In April of 2010, DW listed the property for sale with a real estate broker, and intended to have the property inspected by a building inspector to facilitate a sale. The lease between the parties provided that DW had a right to inspect the property “at reasonable times after reasonable notice.” The lease also provided that all notices to Eucasia must be in writing and delivered or mailed to the property. A month prior, DW’s counsel wrote a letter to Eucasia concerning the security deposit and other matters. Eucasia’s counsel responded to the letter with: “Please have NO DIRECT CONTACT with our client without the express permission of this office.”


So, when the time came to notify Eucasia of the pending inspection, pursuant to Eucasia’s counsel’s request, DW’s counsel wrote a letter to Eucasia’s counsel asking whom they should contact to notify regarding property inspections. A month later, after receiving no response, DW’s counsel mailed the notice of inspection to Eucasia’s counsel’s office. The building inspector, after a locksmith picked the lock, conducted its inspection at the appointed date and time.


Four days later, Eucasia filed a complaint against DW arising out of the inspection. Eucasia argued that DW had breached the lease by failing to provide Eucasia proper notice to perform an inspection. The jury found in favor of DW. The appellate court affirmed on the grounds that even though the lease provision literally requires that notices must be mailed to Eucasia at the property, it would be “absurd” if the law required strict adherence to the letter of the contract in total disregard of counsel’s explicit instructions to not contact Eucasia directly, and to punish DW for following instructions of counsel. Given the animosity between the parties, and the failure of Eucasia’s counsel to respond to DW counsel’s query of who to notify, DW’s counsel was reasonable in and lawfully permitted to mail the notice to Eucasia’s counsel instead of Eucasia itself.


Eucasia Schools Worldwide, Inc. v. DW August Co., et al. (2013) 218 CA4th 146

Servient Tenement Owner’s Refusal to Authorize Necessary Improvements to Access Road Was Interference With Easement

Servient Tenement Owner’s Refusal to Authorize Necessary Improvements to Access Road Was Interference With Easement– Angela J. Okamura


Plaintiff Flora Dolnikov purchased undeveloped property in the Hollywood Hills. The property had an existing recorded easement running with the land for access by way of the adjacent parcel, or servient property.  After obtaining permits from the Los Angeles Department of Building and Safety (LADBS), Plaintiff began construction of two homes on her property.


During construction, Defendant bought the servient property, with full knowledge of the easement and Plaintiff’s development.  Meanwhile, LADBS approved a grading plan for Plaintiff to improve the easement, which was then unsuitable for ingress and egress to her property.  Plaintiff sought a permit to build a retaining wall, but Defendant complained to the LADBS and questioned Plaintiff’s right to do the work on his property.  LADBS then revoked the approval to improve the easement.


After continuing efforts to resolve the dispute failed, Plaintiff filed suit seeking declaratory relief and damages.  The trial court held that the grading and retaining walls were necessary for the expressly intended purpose of the easement; that their presence was not inconsistent with the nature of the easement; and that the improvements were in fact necessary to allow for ingress and egress.  After the decision, LADBS issued a retaining wall permit, but then revoked it because Defendant refused to sign off or give the necessary permission.


The appellate court affirmed the trial court’s holding that Defendant’s refusal to sign the permit constituted interference with Plaintiff’s use and enjoyment of the easement.  Easements, the court reasoned, should be interpreted liberally in favor of their holders.  A grant of an easement gives the easement holder both express interests and secondary interests incident thereto—that is, “the right to do such things as are necessary for the full enjoyment of the easement itself.”  The actions of the easement holder and the owner of the servient property must be reasonable.


Here, the proposed improvements were necessary for the easement to be functional and Defendant, in refusing to sign the permit which LADBS required, effectively halted Plaintiff’s construction. Defendant’s refusal to sign the permit impeded Plaintiff’s rights and rendered the easement utterly useless for the purpose for which it was intended.  Moreover, allowing the improvements in no way imposed a burden on Defendant.  Therefore, even though Defendant did not physically obstruct the easement, his actions nonetheless constituted unreasonable interference.


Dolnikov v. Ekizian (2013) 222 Cal.App.4th 419

Lis Pendens Insufficient to Bind Assignee Bank on Quiet Title Judgment

This case involved a unique set of facts which arose due to the convergence of a fraudulent loan transaction and the subsequent bankruptcy of a bank. Plaintiff Mary McGurk had fallen behind on her mortgage when defendant Kim convinced her to “refinance” by deeding her home to him and leasing the property back to her. Kim obtained a new mortgage with New Century and pulled out equity which was to be used to pay McGurk’s lease payments. McGurk had the option to repurchase within a year but, by that time, her money was gone and she no longer had title to her home.

McGurk filed suit against Kim, New Century and others alleging fraud. She also sought to quiet title to the property and recorded a lis pendens. Kim stipulated to judgment being entered against him. New Century filed a cross-complaint, alleging it was a bona fide encumbrancer for value and that its deed of trust was a valid lien or that, alternatively, it had an equitable lien against the property. New Century subsequently filed for bankruptcy, which automatically stayed the proceedings as against it. McGurk opted to proceed against New Century in bankruptcy court, dismissing New Century from the original litigation and obtaining a judgment quieting title as against the remaining defendants. New Century’s bankruptcy estate settled with McGurk for $10,000.

The problem arose a year later when Deutsche Bank stepped forward to assert ownership of the deed of trust which New Century had, unbeknownst to McGurk, assigned to it prior to the judgment quieting title. Deutsche Bank, which inexplicably failed to record the assignment for some five months, filed a new suit against McGurk for declaratory relief to establish the validity of its deed of trust. The court determined that Deutsche Bank’s interest in the property had been extinguished by the judgment quieting title in favor of McGurk. Key to this determination was that Deutsche Bank had failed to timely record its assignment while McGurk had, in fact, recorded her lis pendens.

Deutsche Bank appealed and the Court of Appeal, Second Appellate District, reversed the judgment of the Los Angeles County Superior Court. Because New Century’s deed of trust was both of record and actually known to McGurk, her dismissal of New Century rendered the quiet title judgment meaningless as against New Century and therefore also as to Deutsche Bank, which were both at the time strangers to the action. Correct practice would have been to obtain relief from stay from the bankruptcy court, then obtain judgment against New Century in the original litigation, which would have been binding as against its successor, Deutsch Bank, as well.

            Comment: While the court appeared sympathetic to McGurk’s position, she appeared to have been doomed by her lawyer’s failure to follow the precise language of the statutes governing quiet title actions and lis pendens.

Deutsche Bank National Trust Co. v. McGurk (2012) 206 Cal.App.4th 201

Equitable Indemnity Claim Did Not Arise Until Claimant Aware of Grounds

In Centex Homes, the Homeowners’ association (HOA) brought action against builder for violations of various statutory building standards. Builder moved for leave to file a cross-complaint against city for, among other things, equitable indemnification. City argued that builder’s claim for equitable indemnity was untimely. The trial court agreed and dismissed the claim against city; the appellate court, however, reversed.


The City relied upon Government Code section 901 which provides that “a cause of action for equitable indemnity or partial equitable indemnity accrues shall be the date upon which a defendant is served with the complaint giving rise to the defendant’s claim for equitable indemnity or partial equitable indemnity against the public entity.” As builder had been sued by the HOA long before it brought a claim for equitable indemnity against city, city argued that builder’s claim was barred.


The appellate court, however, saw things differently. As stated by the appellate court, while the HOA’s complaint made a number of construction defect claims, it did not specifically “contain any allegations related to defects in the Project’s cast iron waste line” (i.e., the basis for builder’s indemnity claim against city). In fact, as further stated by the court, “the [] complaint does not allege any defects that could be construed as constituting violations of the building standard related more generally to the plumbing or sewer standards.”


Accordingly, the court concluded, “Because there is no allegation in the Association’s April 2009 complaint pertaining to plumbing or sewer standards, that complaint does not give rise to Centex’s equitable indemnity claim seeking to apportion potential liability” for the claims brought against it.


(It is interesting to note, however, that a claim for equitable indemnity generally requires proof that the parties caused the “same harm.” In the instant case, builder is able to avoid application of the statute of limitations by arguing essentially a different harm caused by the city. Thus, while its argument may have won the battle concerning statute of limitations, it may nonetheless have set itself up to lose the war on liability.)


Centex Homes v. City of San Diego (2013) 214 Cal.App.4th 1090