Source: https://genius.com/Court-of-appeal-of-california-second-district-mcclain-v-octagon-plaza-llc-annotated
Timestamp: 2019-04-21 02:41:30+00:00

Document:
159 Cal.App.4th 784, 71 Cal.Rptr.3d 885 (2008).
In appellant Kelly McClain's action against respondent Octagon Plaza, LLC, (Octagon), the trial court sustained a demurrer without leave to amend to her claims for misrepresentation, breach of the covenant of good faith and fair dealing, and declaratory relief. Following a trial, the court concluded that she had failed to establish her remaining claims for violation of the Consumer Credit Reporting Agencies Act (Civ.Code, § 1785.1 et seq.) (CCRAA) and an accounting. We affirm the rulings regarding the claims for breach of the covenant of good faith and fair dealing and violation of the CCRAA, and otherwise reverse.
With qualifications not relevant here, Paragraph 1.5 of the lease obliges McClain to pay $3,804 per month as “Base Rent.” In addition, Paragraphs 1.6 and 4.1 require McClain to pay as additional rent 23 percent of the “Common Area Operating Expenses” (common expenses), which are defined in Paragraph 4.2 as costs incurred by Octagon for enumerated purposes “relating to the ownership and operation” of the shopping center. Paragraph 4.2 provides that McClain's share of the common expenses is due no later than 10 days after Octagon provides her with “a reasonably detailed statement of actual expenses.” Paragraph 4.2 also permits Octagon, at its option, to estimate the common expenses for the upcoming calendar year and to require McClain to pay a prorated share of the estimate with her monthly base rent during the year. Under this option, Octagon is obliged to provide McClain with a “reasonably detailed statement” showing her share of the actual annual common expenses within 60 days after the end of the calendar year. If McClain underpays her share of the common expenses, she must pay the balance owing no later than 10 days after receiving the statement; if McClain overpays her share, she is to receive a credit against her share of the common expenses for the forthcoming year.
After a dispute arose concerning McClain's share of the common expenses, she filed an action in small claims court, which was eventually transferred to superior court. The action was resolved by a settlement in November 2004.
On June 17, 2005, McClain initiated the underlying action against Octagon. After the trial court sustained a demurrer with leave to amend to the claims for misrepresentation and declaratory relief asserted in her complaint, McClain filed a first amended complaint (FAC), which contained claims for negligent or intentional misrepresentation, breach of the covenant of good faith and fair dealing, declaratory relief, violation of the CCRAA, and an accounting. Regarding the first three claims, the FAC alleged that the Charanians induced her to agree to pay excessive rent by intentionally or negligently misstating the size of her unit prior to the execution of the lease. The FAC further alleged that Octagon violated the CCRAA by improperly obtaining her credit report in March 2005. Finally, it sought an accounting and declaratory relief with respect to the statement that she received in February 2005 regarding her share of the common expenses for the 2004 calendar year.
On November 11, 2005, the trial court sustained Octagon's demurrer to the first three claims, concluding that the lease, by its plain language, barred McClain from asserting the claims. Following a bench trial, the trial court determined that the Charanians had not violated the CCRAA in obtaining McClain's credit report, and that McClain had no right to an accounting under the lease. Judgment in Octagon's favor was entered on August 15, 2006.
McClain contends that the trial court erred in sustaining the demurrer without leave to amend and in denying her remaining claims after trial.
Regarding the fraud claim, the FAC alleges the following facts: In January 2003, when McClain investigated leasing space in the shopping center, Octagon informed her that the unit in which she was interested comprised exactly 2,624 square feet. Because the base rent in the shopping center was $1.45 per square foot per month, McClain's total base rent would be $3,804 per month. Moreover, because the unit occupied 23 percent of the shopping center, McClain would be responsible for this share of the common expenses.
Prior to entering into the lease, McClain attempted to confirm the size of the unit. The Charanians, who purported to be offended by her inquiries, responded that measuring the area would be unreasonably costly due to the unit's unusual angles. They insisted that they had intimate knowledge of every detail of the shopping center, and that McClain could rely on their representations regarding the sizes of the unit and the shopping center. Due to the Charanians' pretense that they were offended by her request to confirm the size of the unit and their repeated assurances that McClain could rely on their honesty and accuracy, McClain was induced to accept their representations, and she placed reasonable reliance upon the representations in executing the lease.
The Charanians knew, or had reason to know, that the representations were materially inaccurate. In early 2005, McClain obtained a copy of Octagon's application for earthquake insurance, which disclosed that the correct size of the shopping center was 12,800 square feet, rather than the 11,835 square feet the Charanians had used in calculating McClain's share of the common expenses. Upon investigation, she also discovered that her unit occupied approximately 2,438 square feet, rather than the 2,624 square feet represented. Had she known the correct sizes, she would not have agreed to the base rent and share of the common expenses stated in the lease. Under the agreed-upon rental rate of $1.45 per square foot, the base rent for the unit should have been $3,535.10 per month, rather than $3,804, as recited in the lease; moreover, McClain should have been allocated 19 percent of the common expenses, rather than the 23 percent share that she accepted under the lease. As a result of Octagon's misrepresentations, she was induced to enter into a lease that obliged her to pay excess rent of more than $90,000 over the term of the lease.
These allegations, considered in isolation, are sufficient to establish the elements of a claim for intentional or negligent misrepresentation. In O'Hara v. Western Seven Trees Corp. (1977) 75 Cal.App.3d 798, 804–806, 142 Cal.Rptr. 487, a tenant asserted a fraud claim against her landlord, alleging that the landlord induced her to rent an apartment by misrepresenting the existence of security measures in the building, and that she suffered injuries as a result of the absence of these measures. The court held that the fraud claim was adequately pleaded, reasoning that “[s]ince [the tenant] did not know the true facts and since [the landlord] had superior knowledge, the allegations, if proved, would support a finding of justifiable reliance.” ( Id. at p. 805, 142 Cal.Rptr. 487.) We reach the same conclusion here.
Here, the Charanians' alleged pre-contractual figures for the unit's size and McClain's share of the common expenses—respectively, 2,624 square feet and 23 percent-were repeated (with qualifying language) in the lease. In view of the similarity between the lease and the agreement in E.H. Morrill Co., we conclude that the terms of the lease—including the exculpatory provisions in Paragraph 2.1—do not bar McClain from asserting her fraud claim or showing that the misrepresentations reasonably induced her to accept the lease.
Here, McClain alleges that the Charanians exaggerated the size of her unit by 186 square feet, or 7.6 percent of its actual size, and increased her share of the common expenses by 4 percent through a calculation that understated the size of the shopping center by 965 square feet, or 8.1 percent of its actual size. Although these discrepancies are smaller than those at issue in Furla, they cannot be regarded as de minimis or necessarily “near to” the actual sizes as a matter of law. As alleged in the complaint, they operated to increase the rental payments incurred by McClain's retail business by more than $90,000 over the term of the lease. In view of Furla, the fact that Paragraph 2.1 put McClain on notice that the Charanians' representations of size were approximations does not preclude her from showing that they were, in fact, materially and unreasonably inaccurate.
During oral argument, Octagon's counsel suggested that the term “approximation” in Paragraph 2.1 gave any prospective lessee notice that no firm or actionable representations about size were made in the lease. However, the question is not whether the term puts a prospective lessee on notice that the stated size may not be precisely accurate. It does. The question is whether it necessarily renders any deviation from the stated size immaterial. It does not. Where, as here, the deviations cannot be said to be immaterial as a matter of law, the use of the term “approximation” cannot insulate a lessor from potential liability for misrepresentations about size.
In an apparent effort to distinguish Furla, Octagon argues that Paragraph 2.1 not only uses the term “approximation,” but states (1) that the parties agreed the approximations were “reasonable” and (2) that McClain's rent was not subject to revision regardless of the actual sizes. These clauses do not aid Octagon. As to element (1), a stipulation intended to bar a party's fraud claims does not bind the party, and thus the insertion of language agreeing that a material misrepresentation is “reasonable” is of no effect. (1 Witkin, Summary of Cal. Law, supra, Contracts, § 304, p. 330.) If, as McClain asserts, the Charanians assured her that the square footage represented was accurate and dissuaded her from taking her own measurements, any agreement that the measurement set forth in the lease was reasonable reflects nothing more than a belief induced by such misrepresentations.
Similarly, to the extent element (2) purports to insulate Octagon from liability for any discrepancy—no matter how great—between the actual square footage and that represented in the lease, it is akin to an “as is” clause. California courts have routinely rejected such clauses as ineffective in insulating a contracting party from fraud claims regarding nonobvious defects in goods. (See, e.g., Orlando v. Berkeley (1963) 220 Cal.App.2d 224, 228–229, 33 Cal.Rptr. 860 [contractual clause that provides, “ ‘Buyer agrees to waive termite clearance and to absolve seller of any warranty, accepting house AS IS ’ ” does not bar claim for concealment of termite infestation in house].) In sum, the trial court erred in sustaining the demurrer with respect to McClain's misrepresentation claim.
The FAC also alleges that Octagon breached the implied covenant “by negotiating the [common expenses] charges with her on a per-square foot basis, which Octagon held out as a reflection of the ratio which the Premises held to [the] size of the Shopping Center as a whole. Octagon falsely represented the ratio to be 23 [percent]. Octagon induced McClain to enter into the Lease which provided that her proportional share of the annual [common] expenses were [ sic ] 23 [percent], when it knew or had reason to know that the true ratio was substantially less.” Finally, the FAC alleges that Octagon breached the implied covenant because the Charanians repeatedly assured McClain that their representations were trustworthy.
Insofar as these allegations assert that Octagon violated the implied covenant during the negotiations of the lease, they fail to state a claim. As the court explained in Racine & Laramie, Ltd. v. Department of Parks & Recreation (1992) 11 Cal.App.4th 1026, 1031–1035, 14 Cal.Rptr.2d 335, the implied covenant is a supplement to an existing contract, and thus it does not require parties to negotiate in good faith prior to any agreement.
No such allegation can cure the deficiency explained above. It contradicts the allegations in the FAC and McClain's original complaint that McClain accepted the Charanians' representations about the size of her unit and her share of the common expenses, which were incorporated into the lease. Generally, “[a] plaintiff may not avoid a demurrer by pleading facts or positions in an amended complaint that contradict the facts pleaded in the original complaint or by suppressing facts which prove the pleaded facts false. Likewise, the plaintiff may not plead facts that contradict the facts or positions that the plaintiff pleaded in earlier actions or suppress facts that prove the pleaded facts false. (Cantu v. Resolution Trust Corp., supra, 4 Cal.App.4th at p. 877, 6 Cal.Rptr.2d 151, italics omitted.) That is the case here.
Because the FAC adequately alleges a fraud claim based on misrepresentations about her proper base rent and share of the common expenses under the lease (see pt. A.2., ante ), the trial court erred in sustaining the demurrer to McClain's claim for declaratory relief. As the court explained in Ludgate Ins. Co. v. Lockheed Martin Corp. (2000) 82 Cal.App.4th 592, 605, 98 Cal.Rptr.2d 277: “The existence of an ‘actual controversy relating to the legal rights and duties of the respective parties,’ suffices to maintain an action for declaratory relief. [Citation.] Code of Civil Procedure section 1060 is clear: ‘Any person interested under a written instrument, ... or under a contract, or who desires a declaration of his or her rights or duties with respect to another, or in respect to, in, over or upon property, ... may, in cases of actual controversy relating to the legal rights and duties of the respective parties, bring an original action or cross-complaint in the superior court ... for a declaration of his or her rights and duties in the premises, including a determination of any question of construction or validity arising under the instrument or contract.’ ” Here, the FAC adequately alleges an “actual controversy” regarding McClain's obligations to pay rent and other expenses under the lease, and thus pleads a claim for declaratory relief.
McClain contends that the trial court erred in determining that she failed to establish her claim under the CCRAA. For the reasons explained below, we disagree.
Ted Charanian testified as follows: When McClain sought to lease her unit, she submitted a personal financial statement that identified her annual income from A+ Teaching Supplies as $25,000 per year, and also stated that her husband's annual income was $170,000. Reassured by McClain's substantial financial resources, the Charanians permitted her to lease the second largest unit in the shopping center. Subsequently, at a deposition in September 2004, Ted Charanian learned that McClain's husband had opened a small business and no longer earned $170,000 per year. In December 2004, McClain paid her rent in an unusual manner: she submitted two checks, only one of which was drawn on her business account.
In denying McClain's CCRAA claim, the trial court found that the Charanians had a legitimate business need for the report, and that McClain failed to show that Ted Charanian breached his agreement with Citi in obtaining the report. On appeal, McClain argues that the trial court erred as a matter of law in applying the CCRAA. She contends that the record establishes that Octagon obtained access to McClain's credit data in a manner “other than as provided in Section 1785.11” (§ 1785.19, subds.(a)(1), (a)(2)), and that Octagon is subject to a civil penalty under the CCRAA. The crux of this contention is that because the credit report was indisputably obtained in connection with a commercial transaction, it is not a “consumer credit report,” as defined in section 1785.3, subdivision (c), and thus falls outside the scope of section 1785.11.
In view of the trial court's findings and the undisputed facts, the credit report that Ted Charanian obtained falls within the definition of a “[c]ommercial credit report” in section 1785.42. The record establishes that the tenant on the lease was a commercial enterprise, namely, “Kelly McClain dba A+ Teaching Supplies,” and that Ted Charanian obtained the credit report to determine whether McClain could meet her financial obligations under the lease. The report was thus “provided to a commercial enterprise for a legitimate business purpose, relating to the financial status or payment habits of a commercial enterprise which is the subject of the report.” (§ 1785.42.) Because the report is exempt from the provisions of the CCRAA under section 1785.41, the trial court did not err in rejecting McClain's claim.
Pointing to Bakker v. McKinnon (8th Cir.1998) 152 F.3d 1007 ( Bakker ), McClain argues that the report obtained by Ted Charanian is not a commercial credit report because Citi does not characterize or identify itself as a commercial credit reporting agency. We disagree. In construing a statute, we look first to “the words of the statute, giving effect to their plain meaning. If those words are clear, we may not alter them to accomplish a purpose that does not appear on the face of the statute or from its legislative history.” (In re Jerry R. (1994) 29 Cal.App.4th 1432, 1437, 35 Cal.Rptr.2d 155.) The definition of a “[c]ommercial credit report” in section 1785.42 encompasses “any report” that has the specified features, but does not require such reports to originate from a self-designated commercial credit reporting agency. Moreover, subdivision (b) of section 1785.42 defines a commercial credit reporting agency as “any person who, for monetary fees, dues, or on a cooperative nonprofit basis, provides commercial credit reports to third parties.” This definition identifies providers of commercial credit reports as commercial credit reporting agencies regardless of how they characterize themselves. In view of the plain language of section 1785.42, McClain's contention fails.
Additionally, Bakker is materially distinguishable. There, an attorney representing the plaintiffs in a dental malpractice action obtained credit reports on the defendant and his daughters in order to obtain information that would force the defendant to enter into a settlement. (Bakker, supra, 152 F.3d at pp. 1009–1011.) When the defendant and his daughters sued the attorney under the Fair Credit Reporting Act (15 U.S.C. § 1681 et seq.) (FCRA), the trial court found that the reports were consumer credit reports protected by the FCRA, and that the attorney had not obtained them for a legitimate business purpose. On appeal, the Eighth Circuit affirmed these determinations, and rejected the attorney's contention that the reports were not consumer credit reports because they had been obtained for what she characterized as a commercial purpose. (Bakker, at pp. 1011–1013.) Unlike Bakker, however, where the trial court found the attorney's repeated attempts to “ ‘dig up as much dirt’ ” as possible on the defendant constituted a “ ‘blatant attempt to extract a settlement,’ ” that “ ‘grossly crossed the line’ ” of proper litigation conduct ( id. at pp. 1009–1011), here the trial court found that Ted Charanian had a legitimate business purpose in obtaining the reports to determine the continued financial viability of his commercial tenant. Moreover, unlike Bakker, where the attorney sought to use the information for purposes other than those agreed to (id. at p. 1012), here the trial court found McClain had not shown that Ted Charanian had violated his agreement with Citi. Finally, we note that Bakker involved the FCRA which, unlike the CCRAA, lacks provisions akin to sections 1785.41 and 1785.42, which define commercial credit reports and expressly exempt them from the CCRAA.
McClain also attacks the trial court's finding that she failed to show that Ted Charanian violated the Citi agreement. On this matter, she argues that Jimmy Yu testified that the Citi agreement obliged Ted Charanian to obtain McClain's written consent prior to obtaining her credit report, and that Ted Charanian conceded that he never acquired this consent.
The record does not support this contention. Yu, Citi's custodian of records, testified that Citi had purged all its personal documents regarding Ted Charanian's account, that none of the documents from Citi's records admitted into evidence defined the terms of “tenant screening” that Ted Charanian had accepted, and that he did not know whether Ted Charanian had filled out the standard Citi agreement. He nonetheless testified that the standard Citi agreement required landlords “to get a consent or some kind of rental application” before Citi would run a report. In addition, Yu stated that after Ted Charanian obtained McClain's report, Citi repeatedly asked him to provide a consent form from McClain, and it terminated his account when he failed to provide it.
Ted Charanian testified that the Citi agreement admitted into evidence was not the one to which he had agreed. He also testified that he informed Citi of his purposes in opening the account, that he supplied all the documents they required to open the account, that Citi never asked him for a consent form from McClain and that he had learned that Citi closed his account only because McClain and her husband had been “harassing” Citi.
The trial court found that McClain had failed to show that Ted Charanian breached any of the terms of his agreement with Citi. In view of the testimony from Yu and Ted Charanian—including the latter's testimony that he did not execute the standard Citi agreement—the trial court could reasonably infer that McClain never established the terms of the agreement. In sum, the trial court properly concluded that Octagon had not violated the CCRAA.
McClain contends that the trial court erred in denying her request for a declaration that under the lease she is entitled to an accounting of her share of the common expenses. She argues that the express provisions of the lease, together with the implied covenant, oblige Octagon to permit her to examine its records to verify her share of the common expenses.
Regarding this claim, the record establishes that in February 2005, Octagon sent McClain a letter stating her share of the actual common expenses for the 2004 calendar year and her share of these expenses for the 2005 calendar year. When she requested “a reasonably detailed statement” regarding these expenses pursuant to the lease, Octagon provided a more elaborate description of the common expenses for the 2004 calendar year. McClain's husband responded to the statement in a letter dated April 7, 2005. Asserting that a landlord owed a fiduciary duty to a tenant, the letter questioned certain expenditures, disputed the need for others, and sought documentation beyond that verifying the actual expenses incurred. In addition, the letter requested permission for an auditor to examine Octagon's records and obtain answers to the questions raised in the letter. Octagon did not agree to the request. The trial court determined that neither the express language of the lease nor the implied covenant of good faith and fair dealing accorded McClain the right to such an audit.
For the reasons explained below, we conclude that McClain is not entitled to dispute the need for expenses or to audit Octagon's records. Rather, she is entitled only to disclosure of the documents supporting the Charanians' “reasonably detailed statement” of her share of the common expenses, for the limited purpose of verifying that the listed expenses were incurred and that the listed amounts are accurate. Octagon may fulfill this obligation in any reasonable manner it elects, as by providing copies of the relevant documents or permitting McClain to examine the originals.
In our view, the principle asserted in Nelson also encompasses the cost-sharing provisions of the lease. Like the courts in Nelson, Waverly and Wolf, we see no basis in these provisions for concluding that the lease imposes fiduciary duties upon Octagon regarding the common expenses. (See also Korens v. R.W. Zukin Corp. (1989) 212 Cal.App.3d 1054, 1058–1059, 261 Cal.Rptr. 137 [lease term requiring tenant to make security deposit does not impose fiduciary duty on landlord].) The lease obliges the parties to share the common expenses of the shopping mall, as enumerated in the lease, but accords Octagon exclusive management and control over those expenses while requiring it to provide McClain with a reasonably detailed statement of the expenses. Because McClain's share of the common expenses under the lease is determined by the actual expenses incurred by Octagon, she is entitled to verify that such expenses were, in fact, incurred and that the listed amounts are accurate. Accordingly, if requested, Octagon must provide McClain with the documents it used in preparing the “reasonably detailed statement”; to hold otherwise would necessarily “ ‘frustrate [ ] [McClain's] rights to the benefits of the contract.’ ” (Racine & Laramie, Ltd. v. Department of Parks & Recreation, supra, 11 Cal.App.4th at pp. 1031–1032, 14 Cal.Rptr.2d 335, quoting Love v. Fire Ins. Exchange, supra, 221 Cal.App.3d at p. 1153, 271 Cal.Rptr. 246.) Octagon may discharge this obligation in any reasonable manner it selects, including providing McClain with copies of the pertinent documents or giving her an opportunity to view the original documents.
In so concluding, we do not suggest that McClain's limited right to the documents underlying the “reasonably detailed statement” accords her greater control over the shopping center and its management than authorized by the express terms of the lease. As our Supreme Court explained in Carma Developers (Cal.), Inc. v. Marathon Development California, Inc., supra, 2 Cal.4th at page 374, 6 Cal.Rptr.2d 467, 826 P.2d 710, “ ‘[a]s to acts and conduct authorized by the express provisions of the contract, no covenant of good faith and fair dealing can be implied which forbids such acts and conduct.’ ” (Quoting VTR, Incorporated v. Goodyear Tire & Rubber Company (S.D.N.Y.1969) 303 F.Supp. 773, 777–778.) We hold only that Octagon may not prevent her from examining the records supporting its statements regarding actual common expenses incurred.
The judgment is reversed solely with respect to McClain's claims for misrepresentation, an accounting, and declaratory relief, and the matter is remanded for further proceedings in accordance with this opinion. The judgment is otherwise affirmed in all other respects. The parties are to bear their own costs on appeal.
Landlords have a duty to supply correct information to tenants. If they breach this duty, landlords can be held liable for negligent misrepresentation. Unlike intentional misrepresentation, or fraud, negligent misrepresentation requires only that the person making the statement or omission did not have a reasonable basis for believing its truthfulness.
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