Court Opinion

ID: 5141394
Source: CourtListenerOpinion
Date Created: 2021-12-29 19:02:37.198865+00
Date Added: 2024-06-11T08:24:28.905515
License: Public Domain

Filed 12/29/21 Sohmer v. Kerwin CA2/3
   NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                         SECOND APPELLATE DISTRICT

                                      DIVISION THREE

 DAVID SOHMER,                                                 B309139

           Plaintiff and Appellant,                            (Los Angeles County
                                                               Super. Ct. No. BC642263)
           v.

 SHAWN KERWIN et al.,

      Defendants and
 Respondents.

      APPEAL from a judgment of the Superior Court of Los
Angeles County, Stephanie M. Bowick, Judge. Affirmed.
      Law Offices of David M. Wolf and David M. Wolf for
Plaintiff and Appellant.
      Eric D. Anderson Law and Eric D. Anderson for Defendants
and Respondents Justin Urich and On The Thirty “2”, Inc.
      No appearance for Defendant and Respondent Shawn
Kerwin.
                      ——————————
      After the parties’ business venture failed, plaintiff David
Sohmer sued two of his co-investors, defendants Shawn Kerwin
and Justin Urich, seeking the return of his investment in
defendant restaurant, On The Thirty “2”, Inc. (OTT2). Plaintiff’s
appeal from the defense judgment challenges the trial court’s
findings that he failed to prove that defendants violated the
Corporate Securities Law of 1968 (Corp. Code,1 § 25000 et seq.)
by selling him OTT2 shares without “qualifying” or registering
them, and that in any event, the sale of those shares was exempt
from the qualification requirement pursuant to section 25102,
subdivision (f). Plaintiff also asks us to rescind two agreements
for failure of consideration. We conclude that the evidence
supports the court’s section 25102, subdivision (f) exemption
finding, and we decline to address plaintiff’s consideration
argument, raised for the first time on appeal. Accordingly, we
affirm the judgment.
                         BACKGROUND
I.    The parties
      Urich owned and operated a successful restaurant called
On The Thirty, Inc. (OTT). Urich and Kerwin have been good
friends for many years. Kerwin and Timothy Licata, aka Kirin
Stone, were good friends and partners in the construction
business. Kerwin introduced Licata to Urich more than 15 years
ago.
      Kerwin had been good friends with plaintiff’s father for
about 10 years when, in 2014, the father asked Kerwin to mentor
his 22-year-old son during plaintiff’s breaks from college in Paris.

      1All further statutory references are to the Corporations
Code, unless otherwise noted.

                                 2
Kerwin agreed and he and plaintiff instantly became “great
friends.” Plaintiff was introduced to Urich. Kerwin and plaintiff
met daily in a private dining room at the back of OTT, which they
used as their office. OTT issued plaintiff two paychecks,
although he did nothing in exchange for that money. Licata
frequented OTT and became friendly with plaintiff.
II.   OTT2
      Urich and Kerwin wanted to open a second restaurant.
Urich filed articles of incorporation for OTT2 in November 2014,
authorizing the issuance of 10,000 shares of common stock. He
and Kerwin prepared by-laws and issued the outstanding stock to
themselves, knowing they could always increase the number of
shares.
      Once they started talking about OTT2, plaintiff stated he
wanted to be part of opening a restaurant. Around mid-2015,
Licata mentioned an Oak Park site for OTT2. The four viewed
the property and agreed it would be a good location.
Conversations about OTT2 became more earnest and the four
began meeting at least every other day. As discussions
progressed, plaintiff volunteered that he wanted to be a part of
the deal and to participate in the business venture; no one told
him there was an investment opportunity.
      The parties entered into an oral agreement under which
plaintiff would invest $100,000 in return for which OTT2 would
issue him 10 percent of the stock and the parties would enter into
a shareholders’ agreement and elect a board of directors (the oral
investment agreement).
      No one asked, and plaintiff did not say, what he intended to
do with his OTT2 stock, or whether he was purchasing it for his
own account. Plaintiff did not tell Urich that he was investing in

                                3
OTT2 for someone else’s benefit and gave Urich no reason to
believe he was investing for anyone else. Plaintiff testified he
invested because he was hoping to make some money and
because it would be helpful for the corporation to have the cash.
      Plaintiff is the beneficiary of a trust fund that was large
enough to cover his $100,000 investment in OTT2 along with
another $380,000 investment he made in a Palm Springs
restaurant in 2016, which also did poorly and closed.2 Plaintiff
was often out of town, in New York or at college in Paris where
he was studying for a degree in international business
administration. When he was in Los Angeles, however, he and
Urich frequently talked about opening OTT2.
       Plaintiff paid his $100,000 investment in five installments:
in July 2015; September 2015; October 2015, and then later. He
made the first two installments before the parties executed the
shareholders’ agreement and before OTT2 issued stock
certificates. After plaintiff made the second installment, the
parties all felt that he was an owner, shareholder, and board
member. Plaintiff knew he was an owner, director, and board
member. Although he had the power, plaintiff never called a
board meeting, even to demand the issuance of a stock certificate.
       In the summer of 2015, the parties had a friendly and
cooperative relationship. They had dinner and drinks together.
They were like “schoolboys really excited to go out and have a
great time and open up a restaurant. Everyone was in really
great spirits in the beginning of July.”
       The parties executed the shareholders’ agreement on
September 30, 2015. The agreement recited that plaintiff, Urich,

      2Plaintiff is not suing his business partner in the Palm
Springs venture.

                                4
Kerwin, and Licata’s construction company, Praxis Project
Management, Inc. (Praxis), owned 10 percent, 35 percent, 35
percent, and 20 percent respectively, of OTT2’s outstanding
shares. The agreement did not state when stock certificates
would issue. Urich never advertised or posted any announcement
for the sale of OTT2 shares.
       The parties’ various relationships started falling apart
during Praxis’ delayed buildout of OTT2. There were staffing
disagreements. Plaintiff discovered that he was not named on
the liquor license, which was issued shortly before OTT2 opened.
He was in Paris when Urich filed the license application and
unavailable to submit his fingerprints for the live scan. Urich
always intended to add plaintiff to the license once plaintiff
returned to the area. Plaintiff became angry that he was not on
the license. He had the chance to appear on the cover of a
magazine as an owner of an Oak Park restaurant, but could not
call himself an owner if he was not named on OTT2’s liquor
license or the Department of Alcoholic Beverage Control would
revoke the license. Plaintiff retained counsel shortly after the
restaurant opened for business.
       OTT2 opened in February 2016, and ran as “a mom and
pop business.” Plaintiff admitted he did not work much at OTT2.
He received one distribution of $4,000 from the restaurant.
       Seven months after OTT2 opened, on September 30, 2016,
its board of directors held a meeting and amended the articles of
incorporation to increase the number of authorized shares from
10,000 to 50,000. The same day, OTT2 issued share certificate
No. CS-004 showing that plaintiff owned 1,429 shares of OTT2
common stock. Plaintiff’s attorney rejected the stock certificate.
Until plaintiff hired counsel, having a stock certificate was not

                                5
important to him. The only document important for plaintiff was
the shareholders’ agreement because he wanted to be on the
board of directors and protect his investment. Until he met with
an attorney, the fact he did not have a stock certificate did not
bother plaintiff. In Urich’s view, plaintiff did not need to possess
a stock certificate to be an owner. Plaintiff did not know whether
he needed a stock certificate to be an owner.
      OTT2 struggled financially. Upon learning that the
restaurant owed back rent, plaintiff and Licata considered asking
the landlord to change the locks so that they could take over the
restaurant. OTT2 closed at the end of 2016, 10 months after
opening, burdened with more than $100,000 in debts, and
thousands of dollars that OTT had loaned it to keep it afloat.
Plaintiff never attempted to sell or distribute his interest in
OTT2.
III.   The lawsuit
       After rejecting the stock certificate, plaintiff filed his
complaint that did not name Licata or Praxis as defendants.
Cast in five causes of action, the complaint sought (1) restitution
and rescission, (2) fraud and punitive damages, (3) money had
and received, (4) rescission and restitution for defendants’
violation of the statutory qualification requirements to issue
stock (§ 25503), and (5) to hold defendants jointly and severally
liable for violating the statutory qualification requirements
(§ 25504).
       At the close of trial to the bench, the trial court issued a
tentative statement of decision finding in favor of defendants.
The court stated that “this case simply involves friends investing
into a restaurant together and sharing ownership. The company
was run more informally than formally, and plaintiff failed to

                                 6
complain until he discovered that his name was not on the liquor
license.” Plaintiff filed objections. The court issued its final
statement of decision modifying the earlier version without
changing the result. Plaintiff timely appealed from the ensuing
judgment.
                          DISCUSSION
I.    The sale of OTT2 securities was exempt from the
qualification requirement.
      Section 25110 prohibits the sale of securities in an issuer
transaction unless the sale has been “qualified” according to state
or federal statutory requirements, or unless the security or
transaction is exempted from, or not subject to, qualification.3 A
defendant’s lack of knowledge that qualification was required is
not a defense to liability for the unlawful issuance or sale of
securities. (57 Cal.Jur.3d (2021) Securities Regulations, § 134.)
The prohibited act is the sale of securities that must be qualified,
without having obtained the necessary qualification, irrespective
of good faith. (Ibid.)
      Focusing his appeal only on the securities qualification
causes of action, plaintiff contends he proved that OTT2 violated
section 25110 by issuing shares to him without qualifying them.
He argues that defendants’ responses to his requests for

      3 Section 25110 reads in pertinent part: “It is unlawful for
any person to offer or sell in this state any security in an issuer
transaction . . . whether or not by or through underwriters,
unless such sale has been qualified under Section 25111, 25112
or 25113 . . . or unless such security or transaction is exempted or
not subject to qualification under Chapter 1 (commencing with
Section 25100) of this part.”

                                 7
admission (RFAs)4 constitute conclusive concessions, with the
result that the trial court erred in finding that plaintiff failed to
establish every element of those causes of action. Assuming
without deciding plaintiff is correct, the result here is the same
as below because the evidence supports the court’s additional
finding that the transaction and shares were exempt from section
25110 qualification pursuant to section 25102, subdivision (f).
      Exempted securities and transactions are addressed in
sections 25100 through 25105. The burden of proving that a
transaction is exempted is an affirmative defense that falls on the
person claiming it. (§ 25163.)
      At issue here is section 25102, subdivision (f)(1) to (4)
which, in relevant part, exempts from section 25110 any “offer or
sale of any security in a transaction . . . that meets each of the
following criteria: [¶] (1) Sales of the security are not made to
more than 35 persons . . . . [¶] (2) All purchasers . . . have a
preexisting personal or business relationship with the
offeror . . . . [¶] (3) Each purchaser represents that the purchaser
is purchasing for the purchaser’s own account . . . and not with a
view to or for sale in connection with any distribution of the
security. [¶] (4) The offer and sale of the security is not
accomplished by the publication of any advertisement. . . . [¶]

      4 We deny Plaintiff’s motion filed on February 22, 2021 to
take additional evidence under Code of Civil Procedure section
909 because the evidence is neither relevant nor necessary.
(Chinn v. KMR Property Management (2008) 166 Cal.App.4th
175, 180, fn. 3, disapproved on another ground in DeSaulles v.
Community Hospital of Monterey Peninsula (2016) 62 Cal.4th
1140, 1144; cf. Campbell v. Superior Court (2008) 159
Cal.App.4th 635, 647 [appellate court may consider new evidence
to extent necessary].)

                                 8
The failure to file the notice or the failure to file the notice within
the time specified by the rule of the commissioner [of Business
Oversight (§ 25005)] shall not affect the availability of the
exemption.” (Italics added.)
       Preliminarily, plaintiff contends, as he argued to the trial
court, that defendants forfeited this affirmative defense because
they did not allege it in their answer and so he was not given
notice. But defendants gave plaintiff actual notice in their
answers to plaintiff’s RFAs by denying that the stock was not
exempt from qualification under section 25102. A denial puts the
subject of the RFA at issue. (See City of Glendale v. Marcus
Cable Associates, LLC (2015) 235 Cal.App.4th 344, 353
[admissions eliminate issues for trial].) Furthermore, both
parties discussed the defense in their trial briefs, and defendants
adduced evidence about the exemption defense at trial, without
objection. The court then considered the defense, effectively
exercising its considerable discretion to deem the answer
amended to conform to proof, as defendants had suggested to the
trial court. (Code Civ. Proc., § 473, subd. (a)(1); Howard v.
County of San Diego (2010) 184 Cal.App.4th 1422, 1428.) Thus,
defendants did not forfeit the affirmative defense and plaintiff
had ample notice.
       Turning to the evidence, plaintiff contends that defendants
failed to prove subdivision (f)(3) of section 25102, italicized above.
He does not dispute that the remaining elements of the
exemption were satisfied. Specifically, plaintiff argues there is
no evidence that he “represented” that he purchased the OTT2
shares for his “own account . . . and not with a view to or for sale
in connection with any distribution of the security.” (See § 25102,
subd. (f)(3).)

                                  9
       The trial court found that plaintiff’s “investment was
personal, and not for the purpose of the sale or distribution of his
interest to others”; plaintiff “did not invest for the purpose of
selling his shares later”; and the “evidence showed that Plaintiff
was not intending to sell or distribute his shares.”
Notwithstanding plaintiff’s insistence to the contrary, we apply
the substantial evidence standard of review to the trial court’s
factual findings. (Thompson v. Asimos (2016) 6 Cal.App.5th 970,
981.) We consider the evidence in the light most favorable to the
defendants as prevailing party, drawing all reasonable inferences
in support of the factual findings, and liberally construing them
to support the judgment. (Ibid.)
       Applying this standard, we conclude that the evidence
supports the trial court’s factual findings. First, plaintiff, who
was an owner of another restaurant, told Urich he wanted to be
involved and to participate in the OTT2 business venture. He
testified the shareholder’s agreement was the only document he
was interested in because it enabled him to be part of OTT2’s
management. He was, after all, studying business management.
Second, plaintiff considered himself an owner of OTT2. He
wanted to be on the cover of a magazine as the restaurant’s
owner, was angry that he was not on the liquor license, and
contemplated changing OTT2’s locks to take it over. These are
the acts of someone planning to hold onto the stock, not to sell it.
And plaintiff never represented otherwise. Indeed, he never
demanded a share certificate until the business suffered losses
and he retained counsel. Plaintiff testified that his lack of a
certificate did not bother him. And, he never tried to sell his
ownership interest, leading inexorably to the further inference
that he never intended to transfer his shares. Therefore, the trial

                                10
court reasonably found from the testimony, and logically inferred
from plaintiff’s conduct, that plaintiff invested in OTT2 for his
own account and not with a view to selling the shares to anyone
else. (Evid. Code, § 600, subd. (b) [“inference is a deduction of
fact that may logically and reasonably be drawn from another
fact or group of facts found or otherwise established in the
action”]; Pinto v. Farmers Insurance Exchange (2021) 61
Cal.App.5th 676, 689 [inferences must be product of logic and
reason and not speculation or conjecture].)
       Plaintiff argues that according to Apollo Capital Fund LLC
v. Roth Capital Partners, LLC (2007) 158 Cal.App.4th 226, 243, it
is improper to draw inferences about his plans for the stock.
Rather, plaintiff believes that for the exemption to apply, the
record must contain an “affirmative” statement of intent under
section 25102, subdivision (f)(3), whereas the testimony was
about what he did not say: defendants admitted he made no
written representations, and Urich testified that plaintiff did not
state that he was investing for anyone else. However, Apollo is
inapt. The questions there were whether the complaint stated
causes of action for common law fraud and negligent
misrepresentation (Apollo, at p. 243–244), both of which torts
require affirmative statements (id. at p. 244), and whether the
defendant issuer violated section 25401 (Apollo, at p. 249), which
prohibits misrepresentations in connection with the purchase or
sale of securities (§ 25401), also requiring evidence of an
affirmative statement. Apollo says nothing about the section
25102, subdivision (f) exemption or the type of evidence necessary
for a court to make a finding under subdivision (f)(3). Otherwise
plaintiff cites us to no authority on point. The trial court’s

                                11
finding that plaintiff purchased the stock for his own account and
not to sell it is amply supported by substantial evidence.
       We reject plaintiff’s contention, citing People v. Corey
(1995) 35 Cal.App.4th 717, 729 (disapproved by People v. Salas
(2006) 37 Cal.4th 967, 981 & fn. 7), that the trial court erred in
basing its ruling on equity where a violation of the Corporate
Securities Law of 1968 is a strict liability offense. A quick review
of the statement of decision reveals that the court’s equity
reference is contained in the conclusion, after the court made its
findings against plaintiff in connection with his causes of action
under the Corporate Securities Law of 1968, and where some of
the complaint’s causes of action sounded in equity. In our view,
the trial court understood this case correctly: the corporate
formalities were not important or material to plaintiff until after
the restaurant failed, no profits were to be had, and he had
retained counsel. It seems plaintiff was in for the profit but not
for the loss.5
II.    We decline to address plaintiff’s new theory, raised for the
first time on appeal.
       Plaintiff asks this court to rescind the oral investment and
written shareholders’ agreements for failure of consideration.
(Civ. Code, § 1689, subd. (b)(4).) Plaintiff did not allege this
theory in the complaint or raise it in the trial court and so he has
forfeited it here. “ ‘It is the general rule that a party to an action
may not, for the first time on appeal, change the theory of the
cause of action.’ ” (Krechuniak v. Noorzoy (2017) 11 Cal.App.5th
713, 725.) Although we have discretion to address forfeited

      5
      As the result of our holding here, we need not address the
remainder of plaintiff’s contentions.

                                  12
arguments that raise pure questions of law on undisputed facts
(Key v. Tyler (2019) 34 Cal.App.5th 505, 540), we decline to do so
here. “ ‘[F]airness is at the heart of a [forfeiture]
claim. . . . [Citation.] In our adversarial system, each party has
the obligation to raise any issue or infirmity that might subject
the ensuing judgment to attack. [Citation.] Bait and switch on
appeal not only subjects the parties to avoidable expense, but also
wreaks havoc on a judicial system too burdened to retry cases on
theories that could have been raised earlier.’ ” (Wittenberg v.
Bornstein (2020) 51 Cal.App.5th 556, 567, italics added;
Eisenberg et al., Cal. Practice Guide: Civil Appeals and Writs
(The Rutter Group 2010) ¶ 8:229.)
       Moreover, plaintiff’s new contention is meritless. His
theory is that OTT2 lacked the power to issue any shares at the
time the parties entered into the oral investment agreement to
issue plaintiff 10 percent of the stock, because at that time, OTT2
had already issued all of its 10,000 shares to Kerwin and Urich.
Thus, plaintiff reasons, we should rescind the oral investment
and written shareholders’ agreements for failure of consideration.
However, corporations are empowered to issue their own shares.
(See § 400; Cal.Civ.Prac. Business Litigation § 6:2.) As executed
by the parties, the shareholders’ agreement recited that plaintiff
“owns 10 [percent] of the outstanding shares of Common Stock in
the Corporation.” Section 2.5(p) of the shareholders’ agreement
authorized the issuance of stock with board approval, and
significantly, did not specify when the shares to plaintiff would
issue. The articles of incorporation were amended on
September 30, 2016 to increase the number of shares to 50,000,
enough for OTT2 to issue plaintiff the stock certificate that he
rejected. In short, plaintiff owned the stock by virtue of the

                                13
shareholders’ agreement and his payment of consideration (see
Mitchell v. Beckman (1883) 64 Cal. 117, 121; see also Mindenberg
v. Carmel Film Productions, Inc. (1955) 132 Cal.App.2d 598, 608–
609 [the issuance of certificates is not necessary to ownership]),
and defendants performed their promise. Accordingly, there was
no failure of consideration.
                         DISPOSITION
      The judgment is affirmed. Defendants are awarded their
costs on appeal.
      NOT TO BE PUBLISHED.

                                          HILL, J.*

We concur:

             LAVIN, Acting P. J.

             EGERTON, J.

      *Judge of the Santa Barbara Superior Court, assigned by
the Chief Justice pursuant to article VI, section 6 of the
California Constitution.

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