Opinion
D079309
03-22-2023
FRANKLYN DE MARCO, JR. Plaintiff and Respondent, v. LEE P. JOHNSON, Defendant and Appellant.
Lee P. Johnson, in pro. per., for Defendant and Appellant. Solomon Ward Seidenwurm & Smith and Levi Y. Silver, for Plaintiff and Respondent.
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of San Diego County No. 37-2019-00004556-CU-FR-CTL, John S. Meyer, Judge.
Lee P. Johnson, in pro. per., for Defendant and Appellant.
Solomon Ward Seidenwurm & Smith and Levi Y. Silver, for Plaintiff and Respondent.
HUFFMAN, J.
Franklyn De Marco, Jr., filed a complaint against Dot VN, Inc., (Dot VN), Thomas M. Johnson, and Lee P. Johnson (collectively, defendants) for fraud and deceit based on "investments" he made in Dot VN. In December 2020, after reviewing a declaration and attached evidence supplied by De Marco to prove the damages alleged in the complaint, the court entered a default judgment against the defendants, jointly and severally.
We refer to Thomas and Lee by their first names for clarity, because they share a surname.
Lee appeals the default on two bases. First, he contends the court improperly awarded damages. Lee primarily argues that the court incorrectly failed to apply the measure of damages outlined in the Corporations Code. He also contends the evidence De Marco supplied is insufficient to meet his pleading burden. Second, he contends the complaint insufficiently pleads facts to support a claim for fraud and deceit because there are no allegations regarding the stock purchases that form the basis of the damages awarded.
Lee's request for judicial notice of an Edgar print-out of Dot VN's Security & Exchange Commission filings from 2009-2010 is denied. It is not clear that this information was available to the trial court; nor is it relevant to the issues Lee has presented on appeal.
We conclude the Civil Code, and not the Corporations Code, applies to evaluate damages in this matter. We nonetheless agree with Lee that De Marco failed to provide sufficient evidence to meet his burden of proof on damages, and we reverse the judgment against Lee. Because we reverse the judgment on this basis, we need not reach Lee's second argument, that the complaint fails to plead facts with sufficient specificity to apprise Lee to the nature of the grounds upon which the fraud cause of action arises.
BACKGROUND AND PROCEDURAL FACTS
A. The 2013 Action
In April 2013, De Marco filed a complaint for action on amended debenture and for fraud and deceit against Dot VN, Thomas, and Lee in San Diego Superior Court case No. 37-2013-00046276-CU-CO-CTL. In that complaint, De Marco alleged he had entered a debenture in the principal amount of $100,000 in April 2010. When Dot VN defaulted on the terms of the debenture, the parties entered an amended debenture agreement in the principal amount of $125,000, with $25,000 to account for interest and fees. The complaint alleged that Dot VN had failed to make the payments under the amended debenture.
The 2013 complaint alleged in its second cause of action for fraud and deceit that Thomas and Lee made knowing or reckless misrepresentations to induce him to execute the debenture and otherwise invest money in Dot VN.The complaint sought $125,000 in damages, plus interest.
Other than the debenture, the complaint does not identify the investments.
The court granted De Marco's unopposed motion for summary adjudication on his claim for breach of amended debenture.
The motion is not in the record. The order references the "defendant," in the singular. The court granted the motion because the defendant failed to oppose it. It is not clear if the motion was brought against Dot VN only or all defendants.
In May 2014, the parties entered a stipulated, conditional settlement agreement in which Dot VN agreed to pay De Marco $150,000 plus five percent interest. Under the terms of the agreement, De Marco had the right to judgment on an ex parte basis if Dot VN defaulted by failing to make any payments, and Dot VN waived its right to trial or appeal. The agreement also tolled the statute of limitations for any unsettled claims, which it defined as the first cause of action on amended debenture against Thomas and Lee and the second cause of action for fraud and deceit against all defendants. The court entered the stipulation June 19, 2014.
After paying $136,197.34, Dot VN defaulted. De Marco sought judgment on the stipulation for agreement, and the court granted the request on December 19, 2018, entering judgment in the amount of $16,984.17 against Dot VN.
B. The 2019 Action
On January 24, 2019, De Marco filed a complaint against the defendants for amended debenture (the first cause of action) and fraud and deceit (the second cause of action).
The complaint alleged that in 2009 and 2010, Thomas and Lee had represented that Dot VN was the exclusive longterm registrant for all Vietnamese websites, so anyone with a Vietnamese website had to register it with Dot VN. Although it was initially allowing free registrations, Dot VN planned to begin charging, at which time its revenue would increase. Thomas and Lee also represented that Dot VN was the exclusive registrant for such websites and that several multi-billion dollar entities and individuals were bidding to acquire an ownership interest in the company. They told De Marco that revenue was guaranteed, so there was no risk that Dot VN would fail to generate substantial revenue.
In reliance on the information Thomas and Lee provided, De Marco invested in a debenture April 14, 2010, for $100,000, which was replaced by an amended debenture for $125,000 on March 31, 2012.
De Marco learned not all Vietnamese websites are required to register with Dot VN, and Dot VN could not charge substantial registration fees without a dramatic drop off in the number of websites it registered. Additionally, there were no multi-billion dollar entities or individuals conducting due diligence of Dot VN. Thus, the projected revenues were false, which Thomas and Lee knew.
In the first cause of action for amended debenture, De Marco alleged that Dot VN had failed to make payments on the amended debenture and was in breach. He alleged damages against Thomas and Lee for $125,000 plus interest and fees.
De Marco's second cause of action alleged fraud and deceit, based on Thomas's and Lee's knowing misrepresentations. De Marco claimed he would not have invested at least $300,000 in Dot VN had he known the truth. He also alleged he could not have discovered the falsities, even with reasonable diligence. He sought general damages according to proof for the second cause of action, in an amount not less than $300,000.
On March 29, 2019, the clerk entered default against Dot VN and Lee.
In October 2019, Thomas filed a motion to quash. The court denied the motion and ordered Thomas to file a responsive pleading within 15 days of service of notice of its ruling. Thomas did not respond, and the clerk entered a default on December 18, 2019.
On December 15, 2020, De Marco filed for a default judgment in which he sought $348,870.86, comprised of $200,000 plus interest and costs. He concurrently filed a request for dismissal of the debenture cause of action.
In his related declaration, De Marco highlighted allegations from his complaint, including his claim that he "made a series of investments into Dot VN-totaling at least $300,000." He clarified that he paid $100,000 for 750,000 shares of Dot VN on March 23, 2010, and an additional $100,000 on May 26, 2010, for 333,335 more shares, purchased in reliance on misrepresentations. He also paid $100,000 for a debenture. He stated that the instant action was filed to address the "unsettled claims" remaining from the 2013 lawsuit. He sought $200,000 in damages plus interest and costs jointly and severally from Dot VN, Thomas, and Lee.
He attached to his declaration a final, 2016 decision from the Securities and Exchange Commission (SEC), In the Matter of Dot VN, Inc. and Global Health Voyager (Jul. 15, 2016) S.E.C. Release No. 78336, 114 S.E.C. Docket 3706, 2016 WL 4363827 (Matter of Dot VN). In it, the SEC revoked the registrations of Dot VN's registered securities. It also found that Dot VN was delinquent in its periodic filings, having not filed any required reports since the period ending January 31, 2012. That report showed a net loss of $510,590 for the period.
The court considered De Marco's written declaration, and on February 2, 2021, it entered a judgment against the defendants in the amount of $348,870.86, comprised of $200,000 in damages plus $147,863.01 in interest and $1,007.85 in costs.
Lee timely appealed.
DISCUSSION
Lee contends the judgment must be reversed because the court improperly awarded damages without requiring De Marco to prove he relinquished the shares of stock, as required by Corporations Code section 25501. Thus, Lee maintains that De Marco failed to meet his evidentiary burden.
A. Civil Code Section 3343 Applies
De Marco argues the damages here are governed by the Civil Code, not the Corporations Code. Thus, we first ask which statute defines the measure of damages in the case before us. "Questions of law relate to the selection of a rule; their resolution is reviewed independently." (Crocker National Bank v. City and County of San Francisco (1989) 49 Cal.3d 881, 888.)
Corporations Code section 25401 makes it" 'unlawful for any person to offer or sell a security in this state . . . by means of any written or oral communication which includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in the light of the circumstances under which the statements were made, not misleading.'" It is a statutory prohibition on negligent misrepresentation. (See Bowden v. Robinson (1977) 67 Cal.App.3d 705, 715 (Bowden).) The civil remedy for violating Corporations Code section 25401 is rescission or, if the plaintiff no longer owns the security, damages. (Corp. Code, § 25501; Viterbi v. Wasserman (2011) 191 Cal.App.4th 927, 937.)
"[Corporations Code] [s]ections 25401 and 25501, which authorize private civil actions for violation of section 25401, are modeled after provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. [Citation.]" (People v. Simon (1995) 9 Cal.4th 493, 510 (Simon).) Violation of Corporations Code section 25401 may also be subject to criminal prosecution and penalized as detailed in Corporations Code section 25540. (See Simon, supra, 9 Cal.4th at p. 507 [discussing criminal penalty for violating section 25401].)
Because De Marco does not reveal, either in the complaint or his declaration, the status of his Dot VN shares, Lee contends he has not met the pleading burden under Corporations Code section 25501, which provides an election of remedies. Lee is correct that De Marco fails to reveal the ownership status of the shares he purchased in March and May 2010. If De Marco claimed that Lee violated securities law, that information would be necessary to assess damages. However, De Marco does not allege securities violations in his complaint. Nor was he required to. Although the Corporate Securities Law of 1968 created statutory liability to address fraudulent practice in securities transactions, the statutory scheme does not supersede common law fraud actions. (Bowden, supra, 67 Cal.App.3d at pp. 711, 716; see Corp. Code, § 25510 ["Nothing in this chapter shall limit any liability which may exist by virtue of any other statute or under common law if this law were not in effect."].) The two causes of action differ.
This is not fatal to De Marco's complaint for fraud because he does not allege a securities violation. (See Goodworth Holdings, Inc. v. Suh (N.D. Cal. 2002) 239 F.Supp.2d 947, 962-963 [explaining a complaint does not state a claim for securities law violations under Corporations Code section 25401 when it does not allege that there is a sale of a purchase or stock]).
Corporations Code section 25401, which addresses negligent misrepresentation, does not require proof of reliance or causation, and a "plaintiff need not plead defendant's negligence." (Bowden, supra, 67 Cal.App.3d at p. 715.) Under corporate securities laws, the "legislative intent is to provide for actions and remedies for corporate securities victims far less burdensome than those available under common law." (Id. at p. 716.)
De Marco pled common law fraud and deceit, as was his choice. (See Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 174 ["When . . . misrepresentations have occurred in connection with the sale of corporate stock, the California courts have entertained common law actions for fraud or negligent misrepresentation."].) Accordingly, his remedies are not limited to-or prescribed by-the Corporations Code.
B. Application of Civil Code Section 3343
"Although some cases have recited a 'general rule that sufficiency of the evidence [tendered in a default proceeding] cannot be reviewed on an appeal from a default judgment' [citation], that rule applies only 'as to matters for which no proof is required by virtue of the admission by default of the allegations of the complaint.' [Citation.] 'However, as to damages which, despite default, require proof the general rule does not apply.' [Citation.]" (Kim v. Westmoore Partners, Inc. (2011) 201 Cal.App.4th 267, 288.) Damages are reviewable where they are not supported by sufficient evidence. (Scognanillo v. Herrick (2003) 106 Cal.App.4th 1139, 1150.)
When a complaint seeks monetary relief in an amount that requires additional evidence (beyond the complaint) or the court must exercise its judgment to determine the amount, the plaintiff must request entry of judgment by the court. (Code Civ. Proc., § 585, subd. (b).) The plaintiff bears the burden of affirmatively establishing entitlement to the specific judgment requested. (Holloway v. Quetel (2015) 242 Cal.App.4th 1425, 1432.) Code of Civil Procedure section 585, subdivision (d) authorizes the court to use affidavits for this purpose. (Holloway, at p. 1432.)
Civil Code section 3343 applies to fraud claims, including those regarding stock transactions (Persson v. Smart Inventions, Inc. (2005) 125 Cal.App.4th 1141, 1165), and it entitles a person who is defrauded in the purchase of property to "recover the difference between the actual value of that with which the defrauded person parted and the actual value of that which he received...." (Civ. Code, § 3343, subd. (a).) "[It] is settled law that if a defrauded party is induced by false representations to execute a contract, the party has the option of rescinding the contract or affirming it and recovering damages for the fraud." (Persson, at p. 1153.) In fraud cases that involve the purchase of property, the out-of-pocket measure of damages applies. (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 12401241; Civ. Code, § 3343, subds. (a), (b)(1).)
The defrauded person is also entitled to "an amount which will compensate him for any loss of profits or other gains which were reasonably anticipated and would have been earned by him from the purchase or sale of the property had it possessed the characteristics fraudulently attributed to it by the party committing the fraud," if the defrauded party acquired the property for the purpose of reselling it for a profit, relied on the fraud when entering the transaction and in anticipating profits from the subsequent sale or use of the property, and the loss of profits were proximately caused by the fraud and the defrauded party's reliance on it. (Civ. Code, § 3343, subd. (a)(4).) De Marco did not seek these damages, instead asking only for the purchase price of the shares, along with prejudgment interest and costs.
Consequential damages are available "only in conjunction with a claim for rescission." (Strebel v. Brenlar Investments, Inc. (2006) 135 Cal.App.4th 740, 747.)
It was De Marco's burden to provide evidence of the purchase price of the stock and its actual value. (Harold v. Pugh (1959) 174 Cal.App.2d 603, 610 [Civil Code section 3343 entitles the plaintiff to retain the property received and recover the difference between what they parted with and what they obtained]; see Zinn v. Ex-Cell-O Corp. (1944) 24 Cal.2d 290, 297 [measure of damage for fraud inducing sale of corporate stock is worth of corporate assets, not market value of stock].) To meet this burden, De Marco was required to establish a prima facie case in the trial court. (Johnson v. Stanhiser (1999) 72 Cal.App.4th 357, 361.)" '[W]here a cause of action is stated in the complaint and evidence is introduced to establish a prima facie case the trial court may not disregard the same, but must hear the evidence offered by the plaintiff and must render judgment in his favor for such sum, not exceeding the amount stated in the complaint, or for such relief, not exceeding that demanded in the complaint, as appears from the evidence to be just. [Citations.]' [Citation.]" (Ibid., quoting Taliaferro v. Davis (1963) 216 Cal.App.2d 398, 408-409.)
" '[D]amages for fraud are to be assessed as of the date of the fraudulent transaction.' [Citation.] In determining the difference between the actual value of that which a defrauded person received and that with which he parted as the result of a fraudulent sale, the value of property received should be determined as of the date of the sale [citation], taking into consideration subsequent material circumstances." (McCue v. Bruce Enterprises, Inc. (1964) 228 Cal.App.2d 21, 31-32.)
De Marco provided evidence that he purchased 1,083,335 shares of Dot VN stocks, represented by stock certificates in two transactions, on March 23, 2010 and May 26, 2010. In the attached SEC final decision in Matter of Dot VN, the SEC found Dot VN was delinquent in its periodic filings because it had not filed any required reports since the period ending January 31, 2012. That report showed a net loss of $510,590 for the period. Explaining that the purpose of the reporting requirements was to supply investors with current and accurate financial information about an issuer, and noting that Dot VN failed to participate in the proceedings or address whether they had undertaken efforts to address past violations, the SEC revoked the registrations of Dot VN's registered securities.
The SEC decision indicates Dot VN shares had no value as early as 2011, when the business was operating at a net loss. It also shows Dot VN shares hold no value now because the registered securities have been revoked. However, it is not clear what value, if any, the shares De Marco purchased in 2010 held at the time of purchase. And De Marco does not offer any evidence to address this requirement. Such information is necessary to demonstrate the difference between that which De Marco parted with, his $200,000, and the actual value of that which he received, the Dot VN shares. (Civ. Code, § 3343.) Accordingly, De Marco failed to meet his prima facie burden on damages, and the court erred in awarding them.
Because we conclude that the judgment must be reversed for failure to meet the evidentiary requirements for damages, we do not reach Lee's contention that the complaint lacked the required specificity.
DISPOSITION
The judgment against Lee Johnson is reversed. Respondent to bear costs on appeal.
WE CONCUR: McCONNELL, P. J. DATO, J.