Opinion
B307422
11-02-2022
JOSEPH HOURANY et al., Plaintiffs and Appellants, v. RAHUL PALIWAL et al., Defendants and Appellants; MUCH SHELIST P.C. et al., Defendants and Respondents.
Chang & Cote, Steven J. Cote, Rodney W. Bell, Audrey L. Khoo, Lewis Brisbois Bisgaard & Smith and Roy G. Weatherup for Plaintiffs and Appellants Joseph Hourany, Veronique Hourany and Urvashi Sura. AlvaradoSmith, W. Michael Hensley and Marc D. Alexander for Defendants and Appellants Rahul Paliwal and Yogesh Paliwal; Rahul Paliwal, in pro. per., and Yogesh Paliwal, in pro. per. Much Shelist, Isaac R. Zfaty and Kaeleen E. N. Korenaga for Defendants and Appellants Indus Manager Corp. and Indus-Chino Hills, L.P. Jeffer Mangels Butler & Mitchell, Mark S. Adams, Joseph J. Mellema and Susan Allison for Defendants and Respondents Much Shelist P.C. and Glenn Taxman.
NOT TO BE PUBLISHED
APPEALS from a judgment of the Superior Court of Los Angeles County, No. KC068076 Peter A. Hernandez, Judge. Affirmed in part, reversed in part and remanded.
Chang & Cote, Steven J. Cote, Rodney W. Bell, Audrey L. Khoo, Lewis Brisbois Bisgaard & Smith and Roy G. Weatherup for Plaintiffs and Appellants Joseph Hourany, Veronique Hourany and Urvashi Sura.
AlvaradoSmith, W. Michael Hensley and Marc D. Alexander for Defendants and Appellants Rahul Paliwal and Yogesh Paliwal; Rahul Paliwal, in pro. per., and Yogesh Paliwal, in pro. per.
Much Shelist, Isaac R. Zfaty and Kaeleen E. N. Korenaga for Defendants and Appellants Indus Manager Corp. and Indus-Chino Hills, L.P.
Jeffer Mangels Butler & Mitchell, Mark S. Adams, Joseph J. Mellema and Susan Allison for Defendants and Respondents Much Shelist P.C. and Glenn Taxman.
PUBLIC-REDACTED VERSION OF OPINION
Redacts material from sealed record.[*](Civ. Code, § 3426.5; Cal. Rules of Court, Rules 8.45, 8.46(f)(1) & (2).)
PERLUSS, P. J.
Dr. Joseph Hourany, Dr. Veronique Hourany and Dr. Urvashi Sura sued Indus Manager Corp., Indus-Chino Hills, L.P. (collectively entity defendants), Rahul Paliwal and Dr. Yogesh Paliwal for fraud in connection with the Houranys' and Sura's investments in a failed real estate venture. The Houranys and Sura also sued the Paliwals and entity defendants' attorneys, Much Shelist P.C. and Glenn Taxman (collectively attorney defendants), for conspiracy. Following a 24-day jury trial and posttrial motions, the trial court entered an amended judgment against, in varying amounts, the entity defendants and Rahul and in favor of the Houranys for a total of $875,000, including prejudgment interest and punitive damages; in favor of Sura for a total of $200,000, including punitive damages; and in favor of the attorney defendants based on the court's earlier grant of their motion for a directed verdict. The court concurrently granted, in part, the Houranys and Sura's motion for a new trial on several causes of action against certain defendants.
Because Rahul Paliwal and his father, Yogesh Paliwal, share the same surname, we refer to them by their first names for clarity. We do the same for husband and wife Joseph Hourany and Veronique Hourany.
All parties except the attorney defendants filed notices of appeal from the judgment, amended judgment and/or the order partially granting a new trial. We affirm the amended judgment as to the Houranys and Sura, as well as the order granting a new trial. We reverse the amended judgment as to Much Shelist and Taxman and remand for further proceedings.
FACTUAL AND PROCEDURAL BACKGROUND
1. The Indus-Chino Hills Project
Indus-Chino Hills was formed as a limited partnership in 2005 for the purpose of developing a 13.8-acre parcel of land in Chino Hills. Rahul is the president of the limited partnership's sole general partner, Indus Manager Corp. (IMC). Rahul is also a principal of Indus Investment Group, which is the sole shareholder of IMC. When the 13.8-acre parcel was initially purchased in 2005, the intent was to build a large retail shopping center. At some point the goal became the construction of two medical office buildings, a retail complex, a hotel and an industrial area.
Between 2005 and 2008 Indus-Chino Hills sold Class A, Class B and Class E limited partnership interests for which it received $8.3 million. Sura invested a total of $1 million in Class B and Class E interests. Of that amount, Sura invested $200,000 in her individual capacity, $500,000 as trustee of the Urvashi Sura, Inc. Defined Benefit Plan and $300,000 as trustee of the Urvashi Sura, M.D., Inc. Retirement Plan.
The partnership also issued a certain number of Class D interests to Rahul.
By 2010 the land was still undeveloped, and Indus-Chino Hills had run out of money. Facing foreclosure, the partnership initiated a Class F offering to raise the approximately $4 million needed to pay off the loan secured by the property. The Houranys invested a total of $500,000 during the Class F offering, and Sura invested a total of $120,000 in her individual capacity during the Class F offering.
In late 2013 no progress had been made on the development, and Rahul informed the investors the partnership would be selling the land. The 13.8 acres were divided into two parcels. The partnership entered an agreement in October 2013 to sell nine acres for $4 million. After loans, taxes and fees were paid, Indus-Chino Hills received proceeds of $1.3 million when the transaction closed in June 2014. The partnership entered a contract in April 2014 to sell the remaining property for $2.4 million. That transaction closed in November 2016, with Indus-Chino Hills receiving $1.9 million in proceeds. The $3.2 million in total proceeds was not distributed to investors. At least $1.4 million was invested or loaned in 2016 to another limited partnership controlled by Rahul.
2. The Second Amended Complaint
The Houranys and Sura filed their complaint on December 2, 2015, first amended complaint on March 22, 2016 and second amended complaint on October 1, 2018. The second amended complaint alleged causes of action against Indus-Chino Hills, IMC and the Paliwals for fraud (intentional misrepresentation), fraudulent concealment, violation of state corporate securities laws and negligent misrepresentation, and against Taxman and Much Shelist for conspiring with their clients to fraudulently induce investments.
Sura filed the complaint in her individual capacity and as trustee for the benefit and retirement plans.
The initial complaint named the Paliwals, the partnership and IMC as defendants. Subsequently, the Houranys and Sura sought and obtained leave from the trial court pursuant to Civil Code section 1714.10 to file the first amended complaint, adding Taxman and Much Shelist as defendants. On appeal we affirmed the trial court's order permitting amendment. (See Hourany v. Taxman (Dec. 19, 2017, B271343) [nonpub. opn.].)
The second amended complaint also alleged causes of action for breach of fiduciary duty, for an accounting and for a preliminary and permanent injunction. Those causes of action are not at issue on appeal.
3. The Houranys and Sura's Theory at Trial
The Houranys and Sura's theory at trial was that, while soliciting the Class F investments, Yogesh, Rahul and the entity defendants knowingly made a series of material misrepresentations to, and concealed material information from, investors. They contended the fraudulent conduct included valuing the property at $8 million despite having reason to believe it was worth less than half that amount; stating Class F investors would receive priority payment before other investors; representing no loans would be secured by the property, thus guaranteeing recovery of the $4.1 million of Class F investments if the property were sold, despite negotiating for a new $2 million loan in the midst of solicitations; and promising Joseph and Sura seats on the IMC board of directors with voting rights regarding financing or sale of the property but then borrowing money secured by the property and selling the property without any notice to Joseph and Sura.
4. The Evidence at Trial
a. Sura's testimony
Sura testified she had known Yogesh professionally since 1984 when they were on staff at the same hospital. In 2005 Yogesh told Sura that his son was developing land in Chino Hills and she should consider investing. After discussing it with Yogesh briefly, Sura agreed to invest $50,000 in the Indus-Chino Hills partnership. Over the next few years Yogesh repeatedly encouraged Sura to invest additional funds, even suggesting she use her retirement funds. He told her it was "a really good project . . . and there's no way of losing any money on this project." By July 2008 Sura had invested a total of $1 million in the partnership. When Sura would see Yogesh at the hospital, she would ask him how the project was proceeding. He always told her, "It's going very good. Don't worry about it. You're going to get all your money back, plus 200 to 300 percent." Sura believed him because he was a member of the Brahmin caste, which she believed meant he was honest and would not cheat.
In February 2010 Yogesh approached Sura in the hospital hallway and told her the partnership was soliciting investments for Class F. He said the partnership owed $5.3 million on a loan secured by the property, but Rahul was negotiating with the bank to pay off the loan for $4.1 million. The partnership planned to raise $4.1 million in Class F, which would be used to pay off the loan. Yogesh explained that Class F investments would receive priority payment over earlier investments when there was a cash distribution or when the property was sold. In addition, if Sura invested $120,000 in Class F, her earlier investments would receive the same priority payout. If she did not invest in Class F, she would not be "first in line to get the money." Yogesh told Sura the property was worth $8 million and, once the current loan balance was paid, the property would be owned "free and clear" of any debt. Accordingly, Sura understood that, if the development failed and the property had to be sold, there would be sufficient proceeds to reimburse the $4.1 million Class F investments in addition to her prior $1 million investment.
Before agreeing to invest in Class F, Sura invited Yogesh and Rahul to her home to discuss the project further. Both Yogesh and Rahul told her, "Once we pay the bank off, the property is free and clear. The value of the property is about $8 million. The only thing we have to pay after this would be property taxes, and the people, the F share people, would get their money first." Rahul and Yogesh also told Sura she would be on the board of directors of IMC so that she could have some control over the project.
Sura agreed to invest $120,000 in Class F: $100,000 in March 2010, and the remaining $20,000 at a later date. She testified she made the additional investment because she was concerned that she had not received any return on her earlier investment and she wanted to ensure she would be first in line to receive any payouts in the future.
On April 28, 2010 Sura received an email from Rahul, which appeared to have been sent to all Indus-Chino Hills investors. The email stated IMC had decided to establish a board of directors comprised of the top four shareholders, which would hold monthly calls to discuss the status of the project. The email further explained the priority afforded to Class F investments: "[A]n existing investor who invests $100,000 in Class F, his or her previous investment comes to the front of the line right behind Class F, meaning after Class F has been repaid existing investors who invested $100,000 in Class F will have their previous investment returned and those who do not invest in Class F will have their principal returned last."
Attached to Rahul's email was a memorandum dated April 20, 2010 authored by Gary Auerbach, an attorney with Much Shelist, with the word "DRAFT" written at the top. The memorandum stated the shareholders of IMC agreed to elect Yogesh, Rahul, Sura and two other investors to the board of directors of IMC. The memorandum further stated IMC's authority as general partner of Indus-Chino Hills would be subject to the approval of the board of directors with respect to the sale of partnership property or the acquisition of loans secured by the property. The memorandum also stated any sale of the partnership property must be approved by the limited partners.
Sura understood this memorandum to confirm what Rahul and Yogesh had told her-that she was on the IMC board of directors. However, over the next three years, no meetings took place. Sura testified she asked Yogesh on several occasions when a board meeting would be held and he assured her he would talk to Rahul about it.
In June 2014 Sura attended a meeting of investors with Rahul and Yogesh. Sura testified the investors were upset and wanted to know what was happening with the project. Rahul informed the investors that the partnership had entered a contract to sell nine acres of the parcel and he asked the investors for approval to invest the proceeds into another project. He also said he was working on a deal to sell the remaining five acres. The investors were surprised and angry at Rahul's announcement. Sura was particularly upset given that she believed she was entitled to vote on any potential sale of property.
b. The Houranys' testimony
Joseph testified he had known Yogesh professionally for more than 20 years, during which time they occasionally ran into each other at various hospitals where they both practiced medicine. In April 2010 Yogesh approached Joseph and asked him whether he would be interested in investing in a real estate development project. Joseph agreed to meet with Yogesh and Rahul to discuss the project further. The meeting took place at a restaurant in May 2010 with Joseph, Veronique, Yogesh, Rahul and another son of Yogesh. Rahul explained the $4 million raised in Class F would be used to pay off the current loan, at which point the land would be held "free and clear." Rahul and Yogesh also said the Class F investors would be paid first if the land was sold or if there were any cash disbursement. According to Joseph, Yogesh told him the land value "was above what all F share people invested, far above. He did not mention any number. But Rahul at that moment jumped in to say $8 million." Joseph understood that valuation to be for the undeveloped land. He testified the valuation played a "major role" in his decision to invest because, "unless another crisis happened, and the land lose completely more than half its value . . . because I am . . . the last to invest, I would be the first to receive . . ." "there was no reason whatsoever to lose a penny on this land."
Rahul sent an email to Joseph the next day with additional information on the project. The email reiterated the loan secured by the property would be paid off with Class F funds and stated, "[Y]ou will be investing into land that will be free and clear therefore securing your principal." The email purported to attach a private placement memorandum for the Class F offering, but Joseph testified he had been unable to open it. He subsequently received the private placement memorandum sometime before October 2010. He reviewed the memorandum but did not read every line.
Joseph attended another meeting for potential investors in late June 2010, after which he invested $100,000 in Indus-Chino Hills.
In early October 2010 Yogesh told Joseph the partnership was $500,000 short of reaching its $4.1 million goal for Class F. Yogesh asked Joseph to invest the final $500,000. Joseph agreed to invest $200,000. He testified that, at the time of this October 2010 investment, Yogesh and Rahul continued to represent the land would not be burdened with any loans. If Joseph had known the partnership was soliciting loans for the property at that time, he would not have invested the additional $200,000.
Yogesh approached Joseph again in January 2011 and said the partnership needed additional capital to manage the business. If Joseph would invest another $200,000, Yogesh told him he would have a seat on the IMC board of directors. Rahul confirmed this representation at a meeting shortly thereafter. According to Joseph, Rahul and Yogesh told him that, once he was on the board, he would have a vote in the major decisions of the partnership.
Joseph agreed to invest the additional $200,000. However, he asked Rahul to first give him something in writing confirming Joseph was a member of the IMC board. Rahul came to Joseph's home on January 10, 2011 to pick up the check, but Rahul did not bring any paperwork with him. Joseph wrote Rahul a check but dated it for the following day. He told Rahul, if he did not receive the paperwork the next day, he would stop payment on the check.
The next day Rahul arrived at Joseph's house with a one-page memorandum. The memorandum was substantially similar to the one that had been emailed to Sura in April 2010: It stated it was authored by Auerbach but did not have the "DRAFT" designation at the top. Dated January 12, 2011, it stated, "Rahul Paliwal has elected to The Board of Directors of Indus Manager Corp., the general partner of Indus-Chino Hills: [¶] Dr. Joseph Hourany." The memorandum also stated IMC's authority as general partner of Indus-Chino Hills was subject to the approval of the board with respect to sale or financing of property. Joseph understood the document to have been written by Auerbach and believed it meant he had officially been elected to the IMC board and would have a vote in major decisions regarding the partnership.
Based on this memorandum, Joseph allowed the $200,000 check to clear. He was not aware at the time that the partnership had taken out a $2 million loan secured by the property in late 2010. If he had known about the loan, he would not have invested in 2011.
Joseph testified that, over the next three years, he attended several meetings with Rahul and other investors or potential developers/joint venturers, but there were never formal board meetings. During that time, Joseph estimated there were approximately five development proposals that the partnership attempted to pursue but none of them got past the development stage. According to Joseph, by late 2013 the investors were upset about the lack of progress. They repeatedly asked for the partnership's financial records, but Rahul and Yogesh were reluctant to share any information.
In July 2014 Joseph learned from another investor that the partnership had sold, or entered contracts to sell, the land. Joseph had never voted on selling the land and was not aware of any potential sales contracts. He thought perhaps a joke was being played on him.
Joseph's wife, Veronique, corroborated Joseph's version of events. She recalled Rahul explaining in May 2010 that the property would be held "free and clear" of any loans. Like her husband, she did not know at the time of their January 2011 investment that a $2 million loan was secured by the property. Further, she understood the Auerbach memorandum to mean Joseph had been officially placed on the IMC board of directors.
c. Rahul's testimony
Rahul testified the partnership had purchased the 13.8-acre parcel for $8.2 million in 2005, using approximately $3 million raised from Class A investments. The remainder of the purchase price was paid with a loan secured by the property. Funds raised during Class B and Class E were used to pay an approximately $3.1 million deposit on another parcel of land. However, the partnership was unable to complete the purchase, and the deposit was forfeited. After spending $2.5 million on taxes, consultants and other expenses, the partnership had $1,500 cash on hand at the end of 2009.
By the end of 2009 the partnership was in default on the secured loan, with a foreclosure sale scheduled for April 2010. In late 2009 the partnership began soliciting for Class F investments to pay off the loan, while simultaneously negotiating with its lender, JPMorgan Chase Bank, N.A. (Chase), for a reduced payoff amount. In April 2010 Chase agreed to a $4.1 million payoff with the final payment due on June 30, 2010. The partnership was unable to raise enough funds to meet that deadline, and it was extended to August 31, 2010 and again to September 30, 2010.
Rahul testified that at some point in August 2010 he began to suspect the partnership would not be able to raise the remaining amount due on the loan by the payoff date. Rahul, with Taxman's assistance, began to seek a new loan to be secured by the property to pay the balance of the Chase loan. On October 13, 2010 the partnership received a $2 million loan from Chino Hills Finance, LLC with the note secured by a deed of trust on the property. The maturity date of the Chino Hills loan was November 1, 2011. The Chino Hills loan proceeds were used to pay off the Chase loan. In late 2011 or early 2012 the partnership took out a $1 million loan from an individual named Kishan Thapar. The Thapar loan was secured by a deed of trust, and the partnership used the proceeds to pay the balance due on the Chino Hills loan. In January 2012 the partnership borrowed $185,000 from Taxman secured by a deed of trust on the property. In May 2013 the partnership borrowed $2 million from Eagle Group Finance, L.P. secured by a deed of trust. The Eagle Group loan proceeds were used to pay the balances due on the Thapar loan and the Taxman loan. The partnership received $212,000 in loan proceeds.
When asked about his discussions with the Houranys and Sura in 2010 and 2011, Rahul denied making any misrepresentations or concealing information. He denied telling the Houranys or Sura the property was worth $8 million; rather, he told them the property had been purchased for approximately $8 million. He also denied telling the Houranys or Sura the property would be held "free and clear" of any secured loans. He stated he had intended not to have any loans secured by the property, but "it became apparent that by the end of summer [2010] we were not going to be able to get all the money in time, we had to go out and get a lender for $2 million." Rahul admitted he had decided to borrow $2 million from Chino Hills Finance by the time of the Houranys' October 2010 and January 2011 investments; however, Rahul did not recall whether he informed the Houranys about the loan. He stated, "My recollection is that they were not asking." Likewise, Rahul admitted he did not tell Sura at the time of her October 2010 investment that a new loan had been obtained.
Regarding the IMC board of directors, Rahul denied promising Sura or Joseph seats on the board. Rahul admitted he and Sura had discussed the possibility of her joining the board, and he sent her the April 2010 draft memorandum authored by Auerbach. However, Rahul testified Sura never raised the issue again, and he presumed she did not want to assume the potential liability that came with board membership. Rahul later testified he discussed board membership with Sura in October 2010, at which time he told her, "Other people are expressing concern about the liability about a board, and it seems like it might be transitioning more into an advisory board." Rahul understood from that conversation that Sura did not want to be on the board.
Likewise, Rahul admitted he had discussed the possibility of a board seat with Joseph in early 2011. Rahul testified, "I had said I was thinking about creating a board, and I wanted to ask [Joseph] if he would join, and he said, well, what would that entail?" In response, Rahul altered the April 2010 draft memorandum prepared by Auerbach by removing the "DRAFT" designation at the top and stating Joseph had been elected to the IMC board. Rahul testified, "I created a memo for him to show them what-if someone served on the board, what that would entail." Rahul told Joseph the memorandum "was for discussion purposes only, and this was a draft memo and that we'd be having more conversations about this." According to Rahul, Joseph subsequently decided he did not want to be on the board because he did not want to be subject to increased liability.
Ultimately, Rahul testified, based on the concerns of Sura, Joseph and another investor, it was collectively decided that the board would be an advisory one. Rahul explained he was the only director of IMC, as well as its president, and as such, he had unilateral control over the decision to borrow money on behalf of the Indus-Chino Hills partnership.
d. Yogesh's testimony
Yogesh testified he was involved in the initial discussions of the Indus-Chino Hills project, assisting Rahul in identifying a property to purchase and creating a plan for its development. Rahul was to handle the main operations of the project. Yogesh's role was to find investors and assist raising money. He had briefly been a shareholder of IMC but was not involved in its operations as general partner of Indus-Chino Hills. Yogesh invested in the project repeatedly "as needed." Between 2005 and 2010 he invested approximately $2.3 million, none of which resulted in any return on investment. Yogesh also loaned the partnership more than $400,000 over the years, approximately $200,000 of which he said had not been repaid.
In 2010 Rahul told Yogesh he was going to elect certain investors to the IMC board of directors. Yogesh was offered a seat on the board, and he confirmed Sura was included as an initial board member. However, Yogesh testified, "None of the board members wanted to take the responsibility of general partner so it became advisory board later on." According to Yogesh, it was Rahul's decision to make the board advisory only. Yogesh did not recall speaking to the potential board members directly regarding this issue; his understanding was based on Rahul's explanations.
When Yogesh approached Sura and Joseph for investments in 2010, he was aware the partnership was already in default on the Chase loan. He told Sura in 2010 that, if the partnership could not raise enough money in Class F to pay the bank, the land would be foreclosed upon and her earlier investment would be lost.
5. The Jury Verdict and Judgment
After the trial court granted Taxman and Much Shelist's motion for a directed verdict on the conspiracy claim, the remaining claims were submitted to the jury with a 144-question special verdict form.
On the intentional misrepresentation cause of action the jury found in favor of the Houranys and Sura against Rahul and the entity defendants but found Yogesh not liable because he had no intent to defraud. The jury found the Houranys' damages were $500,000 and Sura's damages to be $320,000 in her individual capacity and $800,000 in her capacity as trustee for the retirement and benefit plans. When the jury was polled, the vote was eight to four regarding whether Rahul and the entity defendants had intended to defraud Sura in her individual and trustee capacities.
On the fraudulent concealment cause of action the jury found in favor of the Houranys and Sura against Rahul and the entity defendants but again found Yogesh not liable because he lacked the requisite intent. The damage amounts found by the jury on this cause of action were the same as those found on the misrepresentation cause of action.
The jury found the entity defendants liable to the Houranys for violations of state corporate securities laws. The jury found damages for this cause of action were $200,000, plus prejudgment interest.
On the negligent misrepresentation cause of action the jury found Rahul, Yogesh and the entity defendants had a reasonable basis for making any misrepresentations. Nevertheless, the jury awarded damages to the Houranys and Sura in the same amounts as the intentional misrepresentation cause of action.
Finally, the jury found Rahul liable for punitive damages in the amounts of $125,000 to Joseph, $125,000 to Veronique, $80,000 to Sura in her individual capacity, and $200,000 to Sura as trustee of the retirement and benefit plans.
Prior to entering judgment the trial court informed the parties it would not enter a judgment in favor of Sura on the intentional misrepresentation cause of action based on the jury poll. Likewise, the court stated it would not enter judgment in favor of plaintiffs on the negligent misrepresentation claim because the jury had not found all the elements had been proved. The court invited the parties to address how to proceed on the remaining causes of action during an upcoming hearing.
On July 8, 2020, after a hearing regarding the proposed judgment, the trial court entered judgment in favor of the Houranys against Rahul and the entity defendants for $500,000 on the intentional misrepresentation and fraudulent concealment causes of action; in favor of the Houranys against the entity defendants for $200,000 in damages on the corporate securities laws cause of action; in favor of the Houranys against Indus-Chino Hills for $126,613.70 in prejudgment interest on the corporate securities cause of action; in favor of Joseph and Veronique individually for $125,000 each against Rahul as punitive damages; in favor of Sura in her individual capacity for $320,000 against Rahul and the entity defendants on the fraudulent concealment cause of action; in favor of Sura in her capacity as trustee for the retirement plan for $300,000 against Rahul and the entity defendants on the fraudulent concealment cause of action and in favor of Sura as trustee of the defined benefit plan for $500,000 against Rahul and the entity defendants on the fraudulent concealment cause of action.
6. The Posttrial Motions and Amended Judgment
After the judgment was entered, the parties filed a series of posttrial motions. The Houranys and Sura moved to vacate the judgment, arguing judgment should be entered against Yogesh on the negligent misrepresentation cause of action despite the jury's failure to find true all elements of the claim. They also argued the judgment failed to include the punitive damage award the jury had found in favor of Sura against Rahul. In the alternative the Houranys and Sura sought a new trial against Yogesh on the intentional misrepresentation, fraudulent concealment and negligent misrepresentation claims.
The Paliwals and the entity defendants moved for a new trial and for judgment notwithstanding the verdict (JNOV). Both motions argued, in part, the punitive damages awarded were not supported by the evidence and were excessive, Sura should not be able to recover damages based on investments she made prior to Class F, and the Houranys' recovery of $200,000 on the corporate securities law claim was duplicative of their recovery on the fraud claims.
The trial court heard argument on the motions on September 8, 2020. During argument counsel for Sura explained that, in the event the trial court granted the defendants' JNOV motion and found Sura could not recover pre-Class F investments on the concealment claim, then Sura also sought a new trial against Rahul and the entity defendants on the intentional misrepresentation claim.
On September 11, 2020 the court granted the Houranys and Sura's motion for a new trial as to Yogesh on the negligent misrepresentation cause of action. The court also granted a new trial as to Sura only (in her individual and trustee capacities) against Rahul and the entity defendants on the intentional misrepresentation cause of action.
On the same date the trial court entered an amended judgment that omitted the $200,000 award to the Houranys on the statutory claim (presumably in response to the argument that the award was duplicative), reducing Sura's damages award to $120,000 in her individual capacity only (presumably in response to defendants' argument she could not recover for pre-Class F investments) and including the previously omitted $80,000 punitive damages award to Sura.
DISCUSSION
1. Substantial Evidence Supports the Liability Findings Against Rahul, IMC and Indus-Chino Hills
a. Standard of review
"'When a party contends insufficient evidence supports a jury verdict, we apply the substantial evidence standard of review.'" (Duncan v. Kihagi (2021) 68 Cal.App.5th 519, 541; see Flagship Theatres of Palm Desert, LLC v. Century Theatres, Inc. (2020) 55 Cal.App.5th 381, 413.) "'We must "view the evidence in the light most favorable to the prevailing party, giving it the benefit of every reasonable inference and resolving all conflicts in its favor.'"" (Duncan, at p. 541; see Flagship Theatres, at p. 413 [in reviewing a verdict for substantial evidence, "we must resolve all conflicts in the evidence in favor of the respondent, and 'indulge[] in' 'all legitimate and reasonable inferences . . . to uphold the verdict if possible'"].) "'"We may not reweigh the evidence and are bound by the [factfinder's] credibility determinations. [Citations.] Moreover, findings of fact are liberally construed to support the judgment."'" (Tribeca Companies, LLC v. First American Title Ins. Co. (2015) 239 Cal.App.4th 1088, 1102; accord, Sav-On Drug Stores, Inc. v. Superior Court (2004) 34 Cal.4th 319, 334 ["'questions as to the weight and sufficiency of the evidence, the construction to be put upon it, the inferences to be drawn therefrom, the credibility of witnesses . . . and the determination of [any] conflicts and inconsistencies in their testimony are matters for the [jury] to resolve'"]; Western States Petroleum Assn. v. Superior Court (1995) 9 Cal.4th 559, 571 ["'[w]hen two or more inferences can be reasonably deduced from the facts, the reviewing court is without power to substitute its deductions for those of the trial court'"].)
Still, the term "substantial evidence" is not synonymous with "any" evidence. (People v. Bassett (1968) 69 Cal.2d 122, 138139; see Frank v. County of Los Angeles (2007) 149 Cal.App.4th 805, 816.) To support the judgment, the evidence must be reasonable in nature, credible and of solid value. (Conservatorship of O.B. (2020) 9 Cal.5th 989, 1006 ["[s]ubstantial evidence is evidence that is 'of ponderable legal significance,' 'reasonable in nature, credible, and of solid value,' and '"substantial" proof of the essentials which the law requires in a particular case'"]; Quigley v. McClellan (2013) 214 Cal.App.4th 1276, 1283.) Moreover, "'"[a] judgment may be supported by inference, but the inference must be a reasonable conclusion from the evidence and cannot be based upon suspicion, imagination, speculation, surmise, conjecture or guesswork."'" (Joaquin v. City of Los Angeles (2012) 202 Cal.App.4th 1207, 1219; accord, Quigley, at p. 1283; Frank, at p. 816.)
b. The Houranys and Sura presented substantial evidence of reliance and scienter on their claims against Rahul
To succeed on their claim for intentional misrepresentation, the Houranys were required to prove "(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." (Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 990.) Although fraudulent intent often can be established only by circumstantial evidence, that evidence must nevertheless be sufficient to support such an inference. (See Tenzer v. Superscope, Inc. (1985) 39 Cal.3d 18, 30.)
On the fraudulent concealment cause of action the Houranys and Sura were required to prove, "(1) the defendant concealed or suppressed a material fact; (2) the defendant was under a duty to disclose the fact to the plaintiff; (3) the defendant intentionally concealed or suppressed the fact with the intent to defraud the plaintiff; (4) the plaintiff was unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact; and (5) as a result of the concealment or suppression of the fact, the plaintiff sustained damage." (Burch v. CertainTeed Corp. (2019) 34 Cal.App.5th 341, 348.)
Rahul does not dispute he had a duty to disclose material facts to investors he solicited for investments on behalf of the partnership. (See Eisenbaum v. Western Energy Resources, Inc. (1990) 218 Cal.App.3d 314, 322 ["[a] promoter or insider, or a seller of a limited partnership interest, owes a fiduciary duty to the prospective purchaser of such an interest"].)
Rahul argues the Houranys and Sura failed to prove both the reliance and scienter elements of their claims. Regarding reliance, Rahul cites to Joseph's and Sura's testimony stating they relied on certain statements made by Yogesh prior to making investments in the partnership. However, Rahul ignores other testimony in which Joseph and Sura stated they also relied on statements (and omissions) by Rahul. For example, when describing his meeting with Yogesh and Rahul in May 2010, Joseph testified Rahul said the land was worth $8 million and would be held "free and clear" of any loans. Joseph's counsel then asked whether those representations had an impact on Joseph's analysis of the investment risk, to which Joseph replied, "100 percent....So that was a major role for me to say, yes, I want to put money." Joseph further explained why the statements contained in Rahul's May 2010 email regarding the land being held "free and clear" of any loans was an important factor in his decision to invest. Veronique also testified Rahul's statements the property would be held "free and clear" was crucial in evaluating the investment. Likewise Sura testified Rahul told her the land was worth $8 million and would be held free and clear and those representations were important to her in evaluating the investment. This testimony amply supported the jury's finding the Houranys and Sura relied on Rahul's statements when deciding to invest in the partnership.
The Houranys and Sura argue Rahul has forfeited these arguments because he did not raise them in the trial court. However, challenges to the sufficiency of the evidence may be raised for the first time on appeal. (See Tahoe National Bank v. Phillips (1971) 4 Cal.3d 11, 23, fn. 17 [although arguments not presented to the trial court may ordinarily not be raised on appeal, the "contention that a judgment is not supported by substantial evidence, however, is an obvious exception to the rule"].)
Rahul next argues there was insufficient evidence to support a finding of fraudulent intent or scienter. He argues he did not knowingly make misrepresentations to the Houranys or Sura because he intended to perform his promises and he believed his representations were true. Further, he argues he did not conceal any material facts. For example, Rahul testified the $8 million property valuation was not a misrepresentation because he believed the land could be worth that amount "if we got approval from the city, if we were able to build the buildings, if we were able to sell them, rent them out." However, Joseph testified his understanding from Rahul was that the property was worth $8 million as it was-without any development.
Rahul's insistence his valuation was based on future development (and that this understanding demonstrates his good faith belief in the representations he made) is belied by the fact that the partnership purchased the undeveloped land for approximately $8 million in 2005 and that Indus-Chino Hills listed the land value on its December 31, 2009 balance sheet at $7.2 million. Furthermore, there was evidence Rahul actually believed the property value to be closer to $3 million: When he was negotiating a reduced loan payoff with Chase in 2010, Rahul obtained a valuation from a local real estate broker, who stated the land's value to be approximately $2.7 million to $3 million. Rahul emailed that opinion to Chase and wrote that, if Chase were to foreclose and sell the land, it would recover less than $4 million. It is undisputed Rahul never shared the broker opinion with the Houranys or Sura. Even accounting for some uncertainty as to value due to fluctuating market conditions, this evidence supported the reasonable inference Rahul was aware in early 2010 that the land was worth far less than the $8 million he represented to Joseph and Sura. That Rahul was facing imminent foreclosure on the land at the time he made the representations further supported the inference he knew his statements were false and made to induce reliance. (See Tenzer v. Superscope, Inc., supra, 39 Cal.3d at p. 30 ["fraudulent intent has been inferred from such circumstances as defendant's insolvency, his hasty repudiation of the promise, his failure even to attempt performance, or his continued assurances after it was clear he would not perform"].)
Even if not forfeited because first raised in his reply brief (Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App.4th 847, 894-895, fn. 10 [arguments raised by appellant for first time in reply brief generally not considered absent good reason for failing to present them earlier]), Rahul's argument his statement of property value constituted nonactionable opinion lacks merit. When, as here, the parties were in a fiduciary relationship, statements of opinion may be actionable as fraud. (See Brakke v. Economic Concepts, Inc. (2013) 213 Cal.App.4th 761, 769 [fraud claim may be based on opinion "'(1) where a party holds himself out to be specially qualified and the other party is so situated that he may reasonably rely upon the former's superior knowledge; (2) where the opinion is by a fiduciary or other trusted person; [or] (3) where a party states his opinion as an existing fact or as implying facts which justify a belief in the truth of the opinion'"]; Borba v. Thomas (1977) 70 Cal.App.3d 144, 152 [same].)
c. The findings against Rahul are imputed to the entity defendants
Indus-Chino Hills and IMC do not dispute that they may be vicariously liable for Rahul's fraud-IMC because Rahul is its president and agent (see Secci v. United Independent Taxi Drivers, Inc. (2017) 8 Cal.App.5th 846, 855 ["[a] corporation may be held vicariously liable as a principal for the torts of its agents"]), and Indus-Chino Hills because it is liable for the wrongful acts of its general partner (see Corp. Code, § 15904.03, subd. (a) ["[a] limited partnership is liable for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a general partner acting in the ordinary course of activities of the limited partnership or with authority of the limited partnership"]).
Instead, the entity defendants argue, in a brief almost identical to Rahul's, that there was no evidence the Houranys or Sura relied on Rahul or that Rahul had the requisite intent to mislead or conceal material information. The entity defendants also argue the verdict on the corporate securities fraud claim should be reversed for the same reasons. As discussed, ample evidence supported the jury's findings of reliance and scienter to uphold the fraud and corporate securities verdicts.
Corporations Code section 25401 makes it unlawful "for any person to offer or sell a security in this state, or to buy or offer to buy a security in this state, by means of any written or oral communication that 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."
2. The Trial Court Properly Granted the Motion for JNOV Regarding Sura's Damages
a. Relevant proceedings
It was undisputed at trial that the alleged fraud began during the Class F offering in 2010. Thus, Sura's $1 million investment prior to Class F was not the result of any intentional misrepresentations or concealments. Nevertheless, Sura argued in the trial court that she was entitled to recover her $1 million investment, in addition to her $120,000 Class F investment, based on a benefit-of-the-bargain theory. The benefit she had been promised was that, by investing in Class F, she was ensuring her entire $1.12 million could be reimbursed if the property were sold. Rahul, Yogesh and the entity defendants disputed Sura's position at trial, arguing she was not entitled to any benefit-of-the-bargain damages because she received the benefit she was promised-Class F shares and priority payment of any return on her earlier investment. They argued only out of pocket damages were applicable.
The trial court had several discussions with the parties regarding how the jury should be instructed on the measure of damages. Ultimately, the court instructed the jury on a benefit-of-the-bargain theory of damages for the intentional misrepresentation claim but not on the concealment claim. Relying on Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226 (Alliance Mortgage), the court stated it would give the benefit-of-the-bargain instruction based on "a specific case that provides for this instruction to be given only in intentional misrepresentation cases.... I don't see anything out there that says it should be applied to a concealment theory." Accordingly, the jury was instructed on the out-of-pocket measure of damages as to all causes of action and on benefit-of-the-bargain damages as to Sura's claim for intentional misrepresentation.
The jury was instructed with a modified version of CACI No. 1923: "If you decide that any one of the plaintiffs has proved his or her claim or claims against one or more of the defendants, you must also decide how much money will reasonably compensate each such plaintiff for the harm.... To decide the amount of damages, you must determine the fair market value of what each such plaintiff gave and subtract from that amount the fair market value of what he or she received."
The jury was instructed with a modified version of CACI No. 1924: "If you decide that Urvashi Sura, M.D. [individually and as trustee] has proved her or its claim of intentional misrepresentation against any or all [defendants], you must decide how much money will reasonably compensate those plaintiffs for the harm.... To determine the amount of damages, you must, one, determine the fair market value that the Sura plaintiffs or any of them would have received if the representations made by defendants would have been true, and, two, subtract the fair market value of what she or they did receive."
Notwithstanding these distinct instructions, the jury awarded Sura her benefit-of-the-bargain damages ($1.12 million) on the concealment claim against Rahul and the entity defendants. The initial judgment reflected that award.
In their motion for JNOV Rahul and the entity defendants requested the court vacate the $1.12 million judgment for Sura and enter a judgment reflecting only her out-of-pocket damages of $120,000. After hearing arguments from counsel, the trial court granted in part the motion for JNOV and entered the amended judgment, which reduced Sura's damages to $120,000. The amended judgment also included the $80,000 in punitive damages awarded to Sura individually but omitted the additional $200,000 in punitive damages awarded to Sura in her capacity as trustee because those punitive damages were based on benefit-of-the-bargain damages. The trial court did not state the reasons for its ruling.
b. Governing law and standard of review
i. Damages for fraud
There are two measures of damages for fraud: out-of-pocket and benefit of the bargain. (Alliance Mortgage, supra, 10 Cal.4th at p. 1240.) "The 'out-of-pocket' measure of damages 'is directed to restoring the plaintiff to the financial position enjoyed by him prior to the fraudulent transaction, and thus awards the difference in actual value at the time of the transaction between what the plaintiff gave and what he received. The "benefit-of-the-bargain" measure, on the other hand, is concerned with satisfying the expectancy interest of the defrauded plaintiff by putting him in the position he would have enjoyed if the false representation relied upon had been true; it awards the difference in value between what the plaintiff actually received and what he was fraudulently led to believe he would receive.'" (Ibid.; accord, Moore v. Teed (2020) 48 Cal.App.5th 280, 287; see also Civ. Code, §§ 1709 ["[o]ne who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers"] & 3333 ["[f]or the breach of an obligation not arising from contract, the measure of damages, except where otherwise expressly provided by this code, is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not"].)
"Whether a plaintiff 'is entitled to a particular measure of damages is a question of law subject to de novo review. [Citations.] The amount of damages, on the other hand, is a fact question . . . [and] an award of damages will not be disturbed if it is supported by substantial evidence.'" (Rony v. Costa (2012) 210 Cal.App.4th 746, 753.)
ii. Review of an order granting JNOV
"A motion for judgment notwithstanding the verdict may be granted only if it appears from the evidence, viewed in the light most favorable to the party securing the verdict, that there is no substantial evidence in support." (Sweatman v. Department of Veterans Affairs (2001) 25 Cal.4th 62, 68; accord, Wolf v. Walt Disney Pictures &Television (2008) 162 Cal.App.4th 1107, 1138.) On review of an order granting JNOV, we resolve any conflicts in the evidence and draw all reasonable inferences in favor of the jury's verdict. (Hansen v. Sunnyside Products, Inc. (1997) 55 Cal.App.4th 1497, 1510.) If the appeal challenging the granting of the motion for judgment notwithstanding the verdict raises purely legal questions, however, our review is de novo. (See Lopez v. City of Los Angeles (2020) 55 Cal.App.5th 244, 253; Wolf, at p. 1138.) Thus, in reviewing the trial court's order granting the motion for JNOV regarding Sura's damages, we would decide de novo, if necessary, whether a benefit-of-the-bargain measure of damages was available on a cause of action for fraudulent concealment by a fiduciary but evaluate for substantial evidence the jury's award of those damages even if it was legally proper.
c. The jury's damages award to Sura on the concealment cause of action was not supported by substantial evidence
Sura argues the jury's award of her benefit-of-the-bargain damages was proper under Alliance Mortgage for fraud committed by a fiduciary without distinction between claims based on intentional misrepresentation and those for fraudulent concealment. Rahul and the entity defendants contend it is not settled whether benefit-of-the-bargain damages are available for any type of fiduciary fraud and, if they are, only for intentional misrepresentation. In addition, they argue Sura did not adequately prove benefit-of-the-bargain damages.
In Alliance Mortgage, supra, 10 Cal.4th 1226 Alliance sued a real estate appraiser and broker, among others, for intentional misrepresentation related to an alleged scheme to fraudulently induce Alliance to lend money for the purchase of nine homes. The trial court granted defendants' motion for judgment on the pleadings, and the court of appeal reversed. The issue on appeal was whether Alliance could allege actual damages after purchasing the property at a foreclosure sale. After describing the out-of-pocket and benefit-of-the-bargain measures of damages generally available on a fraud claim, the court explained, "In fraud cases involving the 'purchase, sale or exchange of property,' the Legislature has expressly provided that the 'out-of-pocket' rather than the 'benefit-of-the-bargain' measure of damages should apply." (Id. at p. 1240; see Civ. Code, § 3343.) However, the Court continued, Civil Code section 3343 does not apply "when a victim is defrauded by its fiduciaries. In this situation the 'broader' measure of damages provided by sections 1709 and 3333 applies." (Alliance Mortgage, at p. 1241, fns. omitted.) Accordingly, the Court stated, "[w]hile the measure of damages under section 3333 might be greater [than out-of-pocket losses] for a fiduciary's intentional misrepresentation, we need not address that issue here" because Alliance had adequately alleged sufficient out-of-pocket damages to survive a motion for judgment on the pleadings. (Alliance Mortgage, at p. 1250.)
Since Alliance Mortgage was decided, there has been disagreement among courts of appeal regarding the availability of benefit-of-the-bargain damages when fraud has been committed by a fiduciary, with the majority of courts holding such damages are recoverable. (See, e.g., Moore v. Teed, supra, 48 Cal.App.5th at p. 291 [benefit-of-the-bargain damages recoverable on intentional misrepresentation claim against fiduciary in connection with a real property transaction]; Fragale v. Faulkner (2003) 110 Cal.App.4th 229, 239 [same]; but see, e.g., Hensley v. McSweeney (2001) 90 Cal.App.4th 1081, 1086 [benefit-of-the-bargain damages not recoverable on intentional fraud claim against fiduciary in connection with a real property transaction].)
Apparently relying on the Alliance Mortgage Court's statement that benefit-of-the-bargain damages may be available on an intentional misrepresentation claim against a fiduciary, but its failure to specifically state such damages are available for concealment claims against a fiduciary, the trial court ruled only out-of-pocket damages were available for concealment. While we are not necessarily convinced by the trial court's narrow reading of the dicta in Alliance Mortgage, nor is it apparent that cases analyzing Civil Code section 3343 are applicable here, where the fraud was in connection with investment in a partnership and not as part of the purchase, sale or exchange of property, we need not decide these questions because the evidence presented by Sura did not support an award of benefit-of-the-bargain damages on her concealment claim.
In her reply brief Sura asserts benefit-of-the-bargain damages are justified because, "had Rahul honored his promise to Sura that he would keep the property free and clear of encumbrances as security for her investments, there would have been enough money to pay off all of the Class F investors and to pay back Dr. Sura's pre-Class F $1 million in full." In other words, she seeks to recover the amount she would have received if Rahul's statements about the property's value and the lack of loans had been true. That may be a proper measure of benefit-of-the-bargain damages on an intentional misrepresentation claim. However, it does not apply to Sura's concealment claim. Had Rahul not concealed the true value of the property or the existence of the loans (or concealed any other material information), the result would not have been recovery of Sura's prior investments but her refusal to invest the final $120,000. Accordingly, the trial court did not err in granting the motion for judgment notwithstanding the verdict and reducing Sura's damages claim to $120,000 and her punitive damage claim to $80,000.
3. The Trial Court's Order Granting the Motion for a New Trial on the Negligent Misrepresentation Claim Against Yogesh Was Proper
a. Standard of review
"The authority of a trial court in this state to grant a new trial is established and circumscribed by statute." (Oakland Raiders v. National Football League (2007) 41 Cal.4th 624, 633 (Oakland Raiders).) Code of Civil Procedure section 657 (section 657) identifies seven grounds for a new trial motion, including where "the verdict or other decision is against law" or includes an "error in law." (§ 657, subds. 6 &7.) If the trial court grants a new trial motion, "additional requirements are imposed by statute. In pertinent part, section 657 provides that whenever the motion is granted 'the court shall specify the ground or grounds upon which it is granted and the court's reason or reasons for granting the new trial.'" (Sanchez-Corea v. Bank of America (1985) 38 Cal.3d 892, 899.) "California courts have consistently required strict compliance with section 657.... Substantial compliance with the statute is not sufficient." (Oakland Raiders, at p. 634; accord, Linhart v. Nelson (1976) 18 Cal.3d 641, 644 ["'[a]s the motion for a new trial finds both its source and its limitations in the statutes [citation], the procedural steps prescribed by law for making and determining such a motion are mandatory and must be strictly followed'"].)
Generally, an order granting a new trial is reviewed for an abuse of discretion. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 859-860; Lane v. Hughes Aircraft Co. (2000) 22 Cal.4th 405, 409.) However, when the trial court orders a new trial but does not provide a statement of its reasons pursuant to section 657, we independently review the order. (See Oakland Raiders, supra, 41 Cal.4th at p. 636 ["when there is no statement of reasons, an appellate court's use of an abuse of discretion standard of review would subvert the purposes . . . underlying section 657's statement of reasons requirement"].) In such a case, an order granting a new trial "may still be sustained if a new trial should have been granted upon any ground set out in section 657 except the grounds of insufficiency of the evidence or inadequate or excessive damages." (Ibid.; see § 657 ["[o]n appeal from an order granting a new trial the order shall be affirmed if it should have been granted upon any ground stated in the motion, whether or not specified in the order or specification of reasons, except that (a) the order shall not be affirmed upon the ground of the insufficiency of the evidence to justify the verdict or other decision, or upon the ground of excessive or inadequate damages, unless such ground is stated in the order granting the motion"].)
b. Governing law
"Inconsistent verdicts are "'against the law,'" and the proper remedy is a new trial." (Shaw v. Hughes Aircraft Co. (2000) 83 Cal.App.4th 1336, 1344; accord, Kurtin v. Elieff (2013) 215 Cal.App.4th 455, 481.) "Where the jury's findings are so inconsistent that they are incapable of being reconciled and it is impossible to tell how a material issue is determined, the decision is '''against law'" within the meaning of Code of Civil Procedure section 657." (Oxford v. Foster Wheeler LLC (2009) 177 Cal.App.4th 700, 716; see § 657, subd. 6.) "'The inconsistent verdict rule is based upon the fundamental proposition that a factfinder may not make inconsistent determinations of fact based on the same evidence ....' [Citations.] An inconsistent verdict may arise from an inconsistency between or among answers within a special verdict [citation] or irreconcilable findings." (City of San Diego v. D.R. Horton San Diego Holding Co., Inc. (2005) 126 Cal.App.4th 668, 682.) Where a verdict is inconsistent, one party is "no more entitled than [the other] to have the favorable verdict credited and the unfavorable one disregarded." (Shaw, at p. 1346; accord, Stillwell v. The Salvation Army (2008) 167 Cal.App.4th 360, 375.)
However, in analyzing a verdict to determine if it is inconsistent or otherwise defective, "'"[a] verdict should be interpreted so as to uphold it and to give it the effect intended by the jury, as well as one consistent with the law and the evidence."'" (OCM Principal Opportunities Fund, L.P. v. CIBC World Markets Corp. (2007) 157 Cal.App.4th 835.) Only "if the verdict is hopelessly ambiguous, hopelessly inconsistent or incomprehensible" must it be set aside. (Mixon v. Riverview Hospital (1967) 254 Cal.App.2d 364, 375.)
c. The jury verdict on the negligent misrepresentation claim against Yogesh was hopelessly inconsistent
Although the trial court did not specify the grounds for granting the Houranys and Sura's motion for a new trial on their negligent misrepresentation claim against Yogesh, the parties agree it was likely based on a determination the special verdict was inconsistent and, therefore, against the law. That was the theory advanced in the new trial motion: The jury found one of the elements of the tort had not been proved but nonetheless awarded damages.
Question 134 of the special verdict form asked whether Yogesh "negligently [made] any material misrepresentations of fact." The jury answered affirmatively. Question 135 asked whether Yogesh had "a reasonable basis for making the material misrepresentation." The jury again answered affirmatively. The jury further found the Houranys and Sura relied on the misrepresentations and awarded damages. The Houranys and Sura's position in the trial court was that the jury's conclusion Yogesh had a reasonable basis for the misrepresentation was irreconcilable with its finding he made a negligent misrepresentation, given that absence of a reasonable basis for the representation is an element of a claim for negligent misrepresentation. In addition, they argued, the jury's decision to award damages indicated a finding of liability in conflict with the answer to question 135. Thus, they maintained a new trial was warranted.
"'The elements of negligent misrepresentation are (1) a misrepresentation of a past or existing material fact, (2) made without reasonable ground for believing it to be true, (3) made with the intent to induce another's reliance on the fact misrepresented, (4) justifiable reliance on the misrepresentation, and (5) resulting damage.'" (Bock v. Hansen (2014) 225 Cal.App.4th 215, 231; see Thrifty Payless, Inc. v. The Americana at Brand, LLC (2013) 218 Cal.App.4th 1230, 1239.)
On appeal the Houranys and Sura take a slightly different approach. In their opening brief they argue the trial court erred by denying their motion to vacate the judgment and to enter a judgment against Yogesh on the negligent misrepresentation claim. They argue question 135 was superfluous because the answer to question 134 (that the misrepresentation was negligent) necessarily means the jury found there was no reasonable basis for the representation. The Houranys and Sura suggest that the inconsistency raised by the answer to question 135 should be ignored and judgment entered against Yogesh. Yogesh, unsurprisingly, argues it is question 134 that should be ignored, thus rendering an unambiguous verdict in his favor.
We are not permitted to speculate as to how the jury arrived at its finding that Yogesh negligently misrepresented material information but also had a reasonable basis for the misrepresentations. Nor can we presume the award of damages should be credited as the jury's true finding rather than its finding that Yogesh had a reasonable basis for the misrepresentations. Given the circumstances presented in this case, the jury's special verdict as to Yogesh on the negligent misrepresentation claim is irreconcilable. (See Trujillo v. North County Transit Dist. (1998) 63 Cal.App.4th 280, 289 [special verdict was "too inconsistent to be enforced" where jury found defendant had not committed "essential foundational predicate" of claim but still awarded damages to plaintiff]; see also Zagami, Inc. v. James A. Crone, Inc. (2008) 160 Cal.App.4th 1083, 1092 ["there is no presumption in favor of upholding a special verdict when the inconsistency is between two questions"]; City of San Diego v. D.R. Horton San Diego Holding Co., Inc., supra, 126 Cal.App.4th at p. 682 ["[t]he appellate court is not permitted to choose between inconsistent answers" in a special verdict].)
d. Yogesh's remaining challenges to the granting of a new trial are without merit
Yogesh also argues the order granting a new trial was error because the evidence could not support a claim for negligent misrepresentation when the alleged misrepresentations pertained to future events. This argument is unavailing for several reasons. First, because the factual issues will be retried, we cannot issue an advisory opinion regarding whether yet unargued facts will support a judgment. Second, Yogesh disregards the evidence at trial of misrepresentations of existing material facts, such as the promise the land would be held "free and clear" of any secured loans when an undisclosed loan had already been obtained. Third, Yogesh ignores that a fiduciary may be liable for a negligent misrepresentation as to opinions or future events. (See Brakke v. Economic Concepts, Inc., supra, 213 Cal.App.4th at p. 769; Borba v. Thomas, supra, 70 Cal.App.3d at p. 152.)
Yogesh also requests that, if we find a new trial was properly granted, we should "provide guidance" to the trial court regarding its previous refusal to instruct the jury regarding comparative negligence. We decline to provide this type of advisory opinion. (See Huff v. Securitas Security Services USA, Inc. (2018) 23 Cal.App.5th 745, 764 [refusing to interpret statute prior to retrial].)
4. Rahul and the Entity Defendants' Standing Argument Lacks Merit
Rahul and the entity defendants contend, for the first time on appeal, that the Houranys and Sura lack standing to sue because their claims are derivative and should have been brought on behalf of the partnership rather than individually.
Arguments not raised in the trial court are generally forfeited on appeal. (Sea & Sage Audubon Society, Inc. v. Planning Com. (1983) 34 Cal.3d 412, 417.) However, a party may raise the issue of standing for the first time on appeal. (Steadman v. Osborne (2009) 178 Cal.App.4th 950, 954-955.)
An "'action is derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock or property without any severance or distribution among individual holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets.'" (Jones v. H. F. Ahmanson & Co. (1969) 1 Cal.3d 93, 106 (Jones).) "[W]here conduct . . . causes damage to the corporation, . . . the individual shareholder may not bring an action for indirect personal losses (i.e., decrease in stock value) sustained as a result of the overall harm to the entity. [Citations.] A contrary rule 'would "authorize multitudinous litigation and ignore the corporate entity."'" (Bader v. Anderson (2009) 179 Cal.App.4th 775, 788.)
"An individual cause of action exists only if damages to the shareholders were not incidental to damages to the corporation." (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 313; accord, Jones, supra, 1 Cal.3d at p. 107 ["[i]f the injury is not incidental to an injury to the corporation, an individual cause of action exists"].) "[A] stockholder may sue as an individual where he is directly and individually injured although the corporation may also have a cause of action for the same wrong." (Sutter v. General Petroleum Corp. (1946) 28 Cal.2d 525, 530; see Orozco v. WPV San Jose, LLC (2019) 36 Cal.App.5th 375, 404 ["'[i]t is settled that one who has suffered injury both as an owner of a corporate entity and in an individual capacity is entitled to pursue remedies in both capacities'"].)
"The principles governing derivative actions in the context of corporations apply to limited liability companies and limited partnerships." (Schrage v. Schrage (2021) 69 Cal.App.5th 126, 150; see also Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, 428 ["a limited partner may suffer an injury to its interest without the occurrence of any injury to the partnership entity or to the partnership assets because the interest of a limited partner in a partnership is separate and apart from the partnership's ownership interest in its assets"].)
The Houranys and Sura have alleged they relied on fraudulent misrepresentations and concealments when deciding whether to invest in Class F. These misrepresentations and concealments were directed to them personally, not to the partnership. Rahul, Indus-Chino Hills and IMC argue the "lost investment values for shareholders . . . is a harm inflicted upon the corporation." While this may be true, the allegations in this case do not arise from unrealized investment values. The damages sought are recovery of the amounts the individual plaintiffs lost as a result of the alleged fraud, not losses suffered by the partnership or partnership assets. Rahul and the entity defendants have failed to explain any other theory by which the misrepresentations made to the plaintiffs caused harm to the partnership. Likewise, Rahul and the entity defendants' argument that the same misrepresentations and concealments were made to all Class F members is unavailing. Even if true, the fact that others were victims of the same fraud does not transmute an individual injury into a partnership injury. (See Jones, supra, 1 Cal.3d at p. 107, fn. omitted ["The individual wrong necessary to support a suit by a shareholder need not be unique to that plaintiff. The same injury may affect a substantial number of shareholders"].)
5. The Punitive Damages Awards Were Proper
a. Relevant proceedings
Prior to trial the Houranys and Sura requested production of documents depicting Rahul's "financial condition between January 1, 2010 and the present, including his earnings and his present net worth. Such documents include, but are not limited to, balance sheets, income statements, income tax returns, account statements from banks, credit unions and brokerages, IRS form W-2s, IRS form 1099s, documents of title, deeds, deeds of trust, promissory notes, stock certificates, limited liability company agreements, limited partnership agreements, [and] general partnership agreements ...." After Rahul objected and refused to produce any documents in response to the request, the Houranys and Sura moved to compel production of the documents, arguing the documents were necessary for the jury to properly make an award of punitive damages. In August 2019 the trial court granted the motion in part, ordering Rahul to produce "monthly income and debt balance sheets and statements, including all bank and loan account monthly balances . . . from 2018 up until the date of trial." Rahul then produced bank statements for the 24 months prior to the trial.
During the bifurcated punitive damages trial, counsel for the Houranys and Sura questioned Rahul regarding his finances. Rahul testified he did consulting work for Yogesh for which he received a salary of approximately $60,000 per year. He lived in a condominium owned by Yogesh for which he did not pay rent, but he paid the homeowners' association fees. Rahul had a monthly car payment of $600 and had a balance on his credit card for which he paid approximately $500 each month. Rahul insisted he had no other income or assets. However, Rahul stated he was a 50 percent owner of Pacific Collective LLC, which was a minority owner and general partner of three partnerships. Rahul claimed not to recall the percentage ownership Pacific Collective had in each partnership other than that it was a minority shareholder. Each of those partnerships owns one retail building, and each building is in various stages of development. One property generated rental income of approximately $10,000 per month at the time of trial, but Rahul could not recall the purchase price from three or four years earlier. Another property, Rahul testified, was purchased "some time ago" for approximately $500,000. The third property was purchased for less than $100,000. Rahul claimed not to know the current approximate value of the properties. The financial records produced by Rahul were not entered into evidence. Rahul did not present any evidence regarding his financial position.
The jury awarded punitive damages against Rahul in favor of the Hournays for $250,000, in favor of Sura individually for $80,000 and in favor of Sura as trustee for $200,000. Because the court struck the compensatory damages for Sura in her capacity as trustee, the amended judgment awarded punitive damages for Sura in her individual capacity only.
b. Governing law and standard of review
Civil Code section 3294, subdivision (a), provides, "In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant."
In Adams v. Murakami (1991) 54 Cal.3d 105 the Supreme Court explained, "[b]ecause the quintessence of punitive damages is to deter future misconduct by the defendant, the key question before the reviewing court is whether the amount of damages 'exceeds the level necessary to properly punish and deter.'" (Id. at p. 110.) A plaintiff seeking punitive damages must introduce meaningful evidence of the defendant's then-current financial condition so an award will be sufficient to deter future misconduct by the defendant without being so disproportionate to the defendant's ability to pay that it is excessive. (Id. at pp. 110112; accord, Simon v. San Paolo U.S. Holding Co., Inc. (2005) 35 Cal.4th 1159, 1185 ["defendant's financial condition is an essential factor in fixing the amount that is sufficient to serve these goals without exceeding the necessary level of punishment"].)
Although the defendant's net worth is often the best measure of its ability to pay a punitive damage award, the Supreme Court has "decline[d] . . . to prescribe any rigid standard for measuring a defendant's ability to pay." (Adams v. Murakami, supra, 54 Cal.3d at p. 116, fn. 7 ["[w]e cannot conclude on the record before us that any particular measure of ability to pay is superior to all others or that a single standard is appropriate in all cases"]; accord, Bankhead v. ArvinMeritor, Inc. (2012) 205 Cal.App.4th 68, 72 ["there is no legal requirement that punitive damages must be measured against a defendant's net worth"].) "'[W]hat is required is evidence of the defendant's ability to pay the damage award.'" (Baxter v. Peterson (2007) 150 Cal.App.4th 673, 680.) "'Normally, evidence of liabilities should accompany evidence of assets, and evidence of expenses should accompany evidence of income.'" (Doe v. Lee (2022) 79 Cal.App.5th 612, 621, italics omitted.)
"[T]he plaintiff has the burden of proving the defendant's financial condition, for purposes of an award of punitive damages." (Pfeifer v. John Crane, Inc. (2013) 220 Cal.App.4th 1270, 1307; accord, Farmers & Merchants Trust Co. v. Vanetik (2019) 33 Cal.App.5th 638, 647 ["'[e]vidence of a defendant's financial condition is a legal precondition to the award of punitive damages'"].) On review of a punitive damage award, we "examine the record to determine whether the challenged award rests upon substantial evidence. [Citations.] If it does not, and if the plaintiffs had a full and fair opportunity to make the requisite showing, the proper remedy is to reverse the award." (Soto v. BorgWarner Morse TEC Inc. (2015) 239 Cal.App.4th 165, 195.) We reverse "'as excessive only those judgments which the entire record, when viewed most favorably to the judgment, indicates were rendered as the result of passion and prejudice.'" (Neal v. Farmers Insurance Exchange (1978) 21 Cal.3d 910, 927; accord, Doe v. Lee, supra, 79 Cal.App.5th at p. 618.)
c. Rahul is estopped from arguing the punitive damages awards are excessive
Rahul argues the punitive damage awards were improper because the Houranys and Sura did not provide sufficient evidence of his net worth and his ability to pay the amounts awarded. Rahul contends the evidence presented showed he earned a salary of $60,000 per year, had few assets and carried a balance on his credit card. Accordingly, Rahul argues, a punitive damage award of $330,000 is impossible for him to pay.
Rahul's argument ignores his testimony that, through a series of corporations and partnerships, he had a 50 percent interest in an unknown minority interest in three properties of unknown value. Information regarding the percentages of ownership, the value of the properties, the payout protocols for the entities, and the liabilities on the properties would have been located in balance sheets, partnership agreements and limited liability company agreements-all documents Rahul refused to produce in discovery. Exacerbating this lack of information, Rahul was unable (or unwilling) to testify regarding the value of his interest in the corporation and partnerships.
Having failed to comply with his discovery obligations to disclose his financial condition, Rahul cannot now complain about the lack of evidence. "A defendant is in the best position to know his or her financial condition, and cannot avoid a punitive damage award by failing" to produce meaningful evidence. (Fernandes v. Singh (2017) 16 Cal.App.5th 932, 942; accord, Garcia v. Myllyla (2019) 40 Cal.App.5th 990, 995 ["a defendant who thwarts a plaintiff's ability [to present evidence of defendant's financial condition] may forfeit the right to complain about the lack of evidence of his or her financial condition"]; Corenbaum v. Lampkin (2013) 215 Cal.App.4th 1308, 1338 ["[i]n light of Lampkin's failure to comply with the subpoena for records, we conclude that he is estopped from challenging the punitive damage awards based on lack of evidence of his financial condition or insufficiency of the evidence to establish his ability to pay the amount awarded"]; Green v. Laibco, LLC (2011) 192 Cal.App.4th 441, 453 ["we cannot leave this subject without comment on what may be described colloquially as defendant's chutzpah in insisting that plaintiff failed to meet her burden to prove defendant's financial condition.... The jury did not have information about defendant's net worth because defendant's CEO engaged in stonewalling, pure and simple, from beginning to end"]; Mike Davidov Co. v. Issod (2000) 78 Cal.App.4th 597, 608-609 ["by failing to bring in any records which would reflect his financial condition, despite being ordered to do so, and by failing to challenge that ruling on appeal, defendant has waived any right to complain of the lack of such evidence"].)
Rahul argues estoppel should not apply because he complied with the trial court's order to produce two years of bank statements. However, the trial court's order was overly limited in scope as it excluded any documents pertaining to the value of Rahul's interests in partnerships and corporations. Income and liabilities alone may not present a meaningful picture of a defendant's financial condition. (See Lara v. Cadag (1993) 13 Cal.App.4th 1061, 1064 [evidence of defendant's income without evidence of assets and liabilities is "wholly inadequate"]; see also Robert L. Cloud & Associates, Inc. v. Mikesell (1999) 69 Cal.App.4th 1141, 1152 [punitive damages award requires consideration of all the defendant's assets and liabilities].) Notwithstanding the trial court's order, the lack of evidence in the possession of the Houranys and Sura was a result of Rahul's failure to produce evidence and failure to provide any meaningful testimony at trial. (See Caira v. Offner (2005) 126 Cal.App.4th 12, 41 ["assuming there is any insufficiency in the record as to [defendant's] financial condition, such insufficiency would be attributable solely to" the information provided by defendant]; Green v. Laibco, LLC, supra, 192 Cal.App.4th at p. 453 ["even if the record were 'completely devoid of any meaningful evidence' of defendant's financial condition . . . any deficiency may be laid at the door of defendant, whose chief executive officer purported to be both ignorant of his company's financial condition and unable to read its financial statements"].)
Having refused to produce documents in response to a discovery request and having forced the Houranys and Sura to file a motion to compel, Rahul cannot exploit the trial court's overly limited discovery ruling to create a ground for appeal. (See Horsemen's Benevolent & Protective Assn. v. Valley Racing Assn. (1992) 4 Cal.App.4th 1538, 1555 ["[w]here a party by his conduct induces the commission of error, he is estopped from asserting it as a ground for reversal. This application of the estoppel principle is generally known as the doctrine of invited error"]; see also Chakalis v. Elevator Solutions, Inc. (2012) 205 Cal.App.4th 1557, 1570 [plaintiff estopped from arguing defendant failed to prove breach of standard of care because trial court erroneously sustained plaintiff's objection to evidence]; Kessler v. Gray (1978) 77 Cal.App.3d 284, 290 [defendant estopped from raising insufficient evidence argument on appeal when evidence excluded by his own objection and erroneous ruling].)
Because Rahul prevented the Houranys and Sura from having a full and fair opportunity to present evidence of his financial condition, Rahul is estopped from raising the issue on appeal.
6. The Trial Court Erred in Finding Certain Communications Between the General Partner (IMC) and Its Attorneys Could Be Withheld Based on the Lawyer-client Privilege and, as a Result, the Order Granting a Directed Verdict Must Be Reversed
a. Relevant proceedings
During discovery in this matter the Houranys and Sura filed a motion pursuant to Code of Civil Procedure section 2031.285 contesting the attorney defendants' designation of two documents as subject to the lawyer-client privilege. As explained in the motion, Much Shelist had inadvertently produced two email exchanges between Rahul and Auerbach from March 2011; and, after being notified of the production, counsel for Much Shelist maintained the emails were protected from disclosure by the lawyer-client privilege. Relying on McCain v. Phoenix Resources, Inc. (1986) 185 Cal.App.3d 575 (McCain), the Houranys and Sura argued the lawyer-client privilege did not preclude disclosure of records relating to partnership business to members of the partnership. The emails at issue were filed under seal with the trial court.
Code of Civil Procedure section 2031.285 provides a mechanism by which a producing party may notify the receiving party that documents inadvertently produced in discovery are subject to a claim of privilege. (§ 2031.285, subd. (a).) The receiving party "shall immediately sequester the information and either return the specified information and any copies that may exist or present the information to the court conditionally under seal for a determination of the claim." (§ 2031.285, subd. (b).) "If the receiving party contests the legitimacy of a claim of privilege or protection, he or she may seek a determination of the claim from the court by making a motion within 30 days of receiving the claim and presenting the information to the court conditionally under seal." (§ 2031.285, subd. (d)(1).)
The emails have also been filed under seal on appeal.
Prior to opposing the Houranys and Sura's motion the attorney defendants moved to disqualify plaintiffs' counsel, contending plaintiffs' counsel should not have reviewed the allegedly privileged documents and should not have "used" them in its motion disputing privilege. In support of the motion to disqualify, the attorney defendants filed a declaration of Joseph Mellema, one of the attorneys representing Taxman and Much Shelist in this matter. Mellema's declaration stated, "The Disputed Emails are dated March 15, 2011; they are only between Much Shelist attorney Gary Auerbach and Rahul Paliwal; and they reflect statements of Mr. Auerbach's opinions, advice and conclusions written in direct response to questions from his client about partnership matters." The Houranys and Sura opposed the motion to disqualify.
The trial court denied the motion to disqualify on January 9, 2019. The court, which did not review the emails in ruling on the disqualification motion, found the emails "were not 'obviously or clearly privileged' because the emails were between a general partner and the attorneys for the partnership. Plaintiffs are limited partners of the partnership. Defendants admit that the emails concerned 'partnership matters.'"
In April 2019 the attorney defendants filed a response to the still-pending motion challenging the privilege designation of the emails. The attorney defendants argued, in part, that McCain did not preclude application of the lawyer-client privilege here because the emails did not pertain to partnership business but instead concerned purely private or personal matters of the general partner. In an accompanying declaration Mellema repeated his earlier statement that the emails related to partnership matters, adding that "[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED] [REDACTED]." Mellema's declaration attached a portion of Much Shelist's privilege log, which contained 21 entries of emails between Rahul, Taxman and Auerbach from 2004 and 2011. Mellema indicated the emails came from Rahul's Indus-Chino Hills email account.
After a hearing, the trial court found the disputed emails were subject to the lawyer-client privilege. The court acknowledged the holding in McCain that communications between a general partner and its attorney regarding partnership matters could not be withheld from other partners. Accordingly, the court stated it could not determine whether the emails were subject to the privilege based solely on the nonprivileged facts such as the sender and recipient. The court, therefore, reviewed the two disputed email exchanges and found, [REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED].
The privilege issue was briefly revisited prior to trial when the Houranys and Sura moved to compel production of approximately 240 documents identified as privileged on the attorney defendants' privilege log because there was no indication they concerned personal matters of the general partner and not partnership business. The attorney defendants opposed the motion. The trial court denied the motion on the ground the Houranys and Sura had failed to carry their burden to show the documents were not privileged. (See Costco Wholesale Corp. v. Superior Court (2009) 47 Cal.4th 725, 733 (Costco) ["The party claiming the privilege has the burden of establishing the preliminary facts necessary to support its exercise, i.e., a communication made in the course of an attorney-client relationship. [Citations.] Once that party establishes facts necessary to support a prima facie claim of privilege, the communication is presumed to have been made in confidence and the opponent of the claim of privilege has the burden of proof to establish the communication was not confidential or that the privilege does not for other reasons apply"]; accord, Bank of America, N.A. v. Superior Court (2013) 212 Cal.App.4th 1076, 1099.)
b. Governing law and standard of review
The lawyer-client privilege authorizes a client to refuse to disclose, and prevent others from disclosing, confidential communications between the client and his or her lawyer. (Evid. Code, § 954.) "'[T]he privilege is absolute and disclosure may not be ordered, without regard to relevance, necessity or any particular circumstances peculiar to the case.'" (Costco, supra, 47 Cal.4th at p. 732.)
Generally, a court cannot require disclosure of information claimed to be privileged in order to resolve a disputed claim of privilege. (Evid. Code, § 915, subd. (a); Costco, supra, 47 Cal.4th at p. 736.) "The rule against in camera review, however, is not absolute.... '[C]ourts have recognized, if necessary to determine whether an exception to the privilege applies, the court may conduct an in camera hearing notwithstanding section 915. [Citation.]' [Citation.] Generally, in camera hearings should be limited to a determination whether there is an exception to, or waiver of, the privilege, and 'whether the exception or waiver depends on the content of the communication. [Citation.]' [Citation.] '[W]here an exception to a privilege depends upon the content of a communication, the court may require disclosure in camera in making its ruling.'" (Oxy Resources California LLC v. Superior Court (2004) 115 Cal.App.4th 874, 895, italics omitted; see also Costco, at p. 740 ["after the court has determined the privilege is waived or an exception applies generally, the court to protect the claimant's privacy may conduct or order an in camera review of the communication at issue to determine if some protection is warranted notwithstanding the waiver or exception"].) In addition, Code of Civil Procedure section 2031.285 explicitly states the potentially privileged material should be submitted to the court for determination of the claim.
None of the parties has objected to the trial court's review of the allegedly privileged emails or argued we should not review them on appeal.
Discovery orders are generally reviewed for abuse of discretion. (See Seahaus La Jolla Owners Assn. v. Superior Court (2014) 224 Cal.App.4th 754, 766 ["'"[t]he trial court's determination will be set aside only when it has been demonstrated that there was 'no legal justification' for the order granting or denying the discovery in question"'"]; accord, Costco, supra, 47 Cal.4th at p. 733.) "However, when the facts asserted in support of and in opposition to the motion are in conflict, the trial court's factual findings will be upheld if they are supported by substantial evidence." (Costco, at p. 733; accord, DP Pham, LLC v. Cheadle (2016) 246 Cal.App.4th 653, 665.)
c. The communications at issue concern partnership business
As the parties and the trial court recognized, the dispute here falls squarely within the analysis provided in McCain, supra, 185 Cal.App.3d 575. In that case the plaintiffs, limited partners in a partnership, requested the inspection of records in possession of two law firms that had acted as attorneys for the general partner. The general partner and the law firm refused to allow inspection, arguing the documents were not records of the partnership and were subject to the lawyer-client privilege. The court found the plaintiffs were entitled to review the records because the general partner had a fiduciary duty to disclose all matters affecting the partnership and plaintiffs had a statutory right to demand access to information "pertaining to partnership affairs." (Id. at p. 579.)
The court then specifically addressed the general partner's privilege claim, stating, "A partnership can be a client of a law firm and a lawyer may transact business on behalf of the partnership. [Citations.] Under such circumstances, it is foreseeable that a law firm would have information in its possession relating to partnership affairs. If, on the other hand, the law firm holds records which represent the purely private or personal interests of one of the partners, the attorney-client privilege can be asserted to resist production of these records.... [T]he attorney-client privilege will not bar disclosure of matters related to a partnership business simply because such business was conducted through a law firm." (McCain, supra, 185 Cal.App.3d at pp. 580-581; see also Wortham & Van Liew v. Superior Court (1987) 188 Cal.App.3d 927, 932 ["[a]ll partners are entitled to access to a wide range of partnership information, whether or not that information is generated under the aegis of the partnership's attorney.... Only matters involving purely private or personal interests of one of the partners may be privileged"], italics omitted.) The attorney defendants here attempt to distinguish the holding in McCain, but they implicitly acknowledge there is no lawyer-client privilege protection as to members of a partnership for communications between one partner and an attorney regarding partnership affairs.
The deciding factor here, as it was in the trial court, is whether the inadvertently disclosed emails concerned the business of the Indus-Chino Hills limited partnership. In concluding they did not, the trial court misstated the contents and import of the emails and, as a result, erred in ruling they could not be disclosed to the limited partners.
As to first email, the court characterized it as simply stating [REDACTED]
[REDACTED]. However, the email actually stated
[REDACTED]
[REDACTED]
[REDACTED],"-that is, it concerned [REDACTED].
Moreover, omitted from the trial court's analysis was the portion of the email that [REDACTED].
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]. None of the defendants has articulated any "purely private or personal interests" of IMC or Rahul implicated by the email.
As for the second disputed email, it contained [REDACTED], as the trial court stated. Contrary to the trial court's conclusion, however, [REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]. There is no suggestion, nor could there be, [REDACTED]
[REDACTED]
[REDACTED].
In sum, the lawyer-client privilege did not prohibit disclosure to the Houranys and Sura of the inadvertently produced emails. Because we remand for a new trial against the attorney defendants, all documents referred to in the attorney defendants' privilege log as to which the Houranys or Sura sought production at trial (and any other withheld documents potentially impacted by this opinion) must be reexamined to determine if they concern partnership business. If so, they must be produced.
d. The error was not harmless
"A judgment may not be reversed on appeal, . . . unless 'after an examination of the entire cause, including the evidence,' it appears the error caused a 'miscarriage of justice.' (Cal. Const., art. VI, § 13.) When the error is one of state law only, it generally does not warrant reversal unless there is a reasonable probability that in the absence of the error, a result more favorable to the appealing party would have been reached. (People v. Watson (1956) 46 Cal.2d 818, 835.)" (Soule v. General Motors Corp. (1994) 8 Cal.4th 548, 574; accord, Kline v. Zimmer, Inc. (2022) 79 Cal.App.5th 123, 134-135 [reversal based on erroneous exclusion of evidence requires finding "'different result was probable if the evidence had been admitted'"].) The Supreme Court has "made clear that a 'probability' in this context does not mean more likely than not, but merely a reasonable chance, more than an abstract possibility." (College Hospital Inc. v. Superior Court (1994) 8 Cal.4th 704, 715, italics omitted; accord, Kinsman v. Unocal Corp. (2005) 37 Cal.4th 659, 682 [same].) In granting the attorney defendants' motion for a directed verdict, the trial court found there was insufficient evidence the attorney defendants were aware of Rahul's intentions in removing financial information from documents provided to the limited partner investors or that he intended to give the memoranda regarding board seats to the Houranys and Sura. On appeal the Houranys and Sura marshal the evidence supporting their trial theories and argue it was sufficient to support a judgment in their favor. It might be, but we need not reach that decision because it is impossible to know what discussions regarding these matters may be contained in improperly withheld documents. [REDACTED]
[REDACTED], we must at least assign a significant probability to the likelihood those documents would have supported the Houranys and Sura's allegations. Accordingly, there is a reasonable chance the outcome would be different if the documents had been produced.
DISPOSITION
The order for a new trial as to Yogesh Paliwal on the negligent misrepresentation cause of action is affirmed. The amended judgment in favor of the Houranys and against Rahul Paliwal, IMC and Indus-Chino Hills is affirmed. The amended judgment in favor of Glenn Taxman and Much Shelist is reversed. The matter is remanded for a new trial, in addition to the new trial ordered for Sura against Rahul Paliwal, IMC and Indus-Chino Hills on the cause of action for intentional misrepresentation that was not appealed, as to Yogesh Paliwal, Glenn Taxman and Much Shelist as set forth in this opinion.
The parties are to bear their own costs on appeal.
We concur: FEUER, J. STRATTON, J. [*]
[*]This case involves material from a sealed record. In accordance with Civil Code section 3426.5 and California Rules of Court, rules 8.45, 8.46(f)(1) and (2), we have prepared both public (redacted) and sealed (unredacted) versions of this opinion. We order the unredacted version of this opinion sealed.
[*] Presiding Justice of the Court of Appeal, Second Appellate District, Division Eight, assigned to Division Seven, by the Chief Justice pursuant to article VI, section 6 of the California Constitution.