Court Opinion

ID: 8488347
Source: CourtListenerOpinion
Date Created: 2022-11-21 20:02:24.699844+00
Date Added: 2024-06-11T16:50:10.393331
License: Public Domain

Filed 11/21/22 Farzam v. Anthony Mason Associates CA2/2
   NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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
not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion
has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                         SECOND APPELLATE DISTRICT

                                        DIVISION TWO

SIROOS FARZAM et al.,                                             B311890

Plaintiffs and Appellants,                                        (Los Angeles County
                                                                  Super. Ct. No.
         v.                                                       20STCV16404)

ANTHONY MASON
ASSOCIATES, INC.,

Defendant and Respondent.

      APPEAL from a judgment of the Superior Court of
Los Angeles County, Rupert A. Byrdsong, Judge. Affirmed.
      Andrade Gonzalez, Sean A. Andrade, Henry H. Gonzalez
and Stephen V. Masterson for Plaintiffs and Appellants.
      Akerman, Brenda K. Radmacher and Christine B. Gardner
for Defendant and Respondent.
            ______________________________________
       A luxury hotel was built in Santa Monica, without approval
by the California Coastal Commission (CCC). In 2019, the CCC
imposed monetary sanctions and room-rate restrictions, as a
condition of issuing an after-the-fact permit for the hotel. Two
lenders who funded construction of the hotel sued a construction
manager, claiming the manager is responsible for impairing the
value of their security, caused by the room-rate restrictions. The
trial court sustained demurrers, without leave to amend.
       On de novo review, we conclude that the lenders,
appellants Siroos and Gina Farzam, cannot state a claim. In
2009, appellants’ son—on behalf of the property owner—applied
for, and the CCC authorized, construction of a “low to moderate
priced Travelodge.” Appellants had no reasonable expectation
their loan would be secured by a “boutique luxury hotel.” The
construction manager is not responsible for the hotel owner’s
excessive room rates. We affirm the judgment.
               FACTS AND PROCEDURAL HISTORY 1
       In 2011, appellants loaned $58 million (Loan) to their own
entity, Sunshine Enterprises, L.P. (Sunshine), to finance
construction of the Shore Hotel (Hotel) on Ocean Avenue in Santa
Monica. The trial court took judicial notice of Sunshine’s
Certificate of Limited Partnership, which was signed by Siroos
Farzam and filed with the California Secretary of State. The
Loan is secured by a first deed of trust on Hotel. Sunshine built
and operates Hotel.
       Respondent Anthony Mason Associates, Inc. (AMA) is a
manager hired to oversee construction of Hotel. AMA allegedly
represented that it has extensive experience navigating the

      1   The facts are from the first amended complaint (FAC).

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approval process and would oversee and coordinate planning
approvals, building permits, and similar jurisdictional agency
requirements. AMA promised to “ ‘continually oversee[] the
quality of work generated by the entire team throughout the
duration of the project.’ ”2
       Relying on these assurances, Sunshine constructed Hotel
“under the mistaken belief that Defendants had secured all
appropriate permits, approvals, and authorizations” from the
City of Santa Monica and the CCC. Contrary to Sunshine’s
belief, the permits were never issued.
       The FAC states, “On January 15, 2014, the California
Coastal Commission issued a Notice of Violation [NOV] of the
California Coastal Act stating that . . . no coastal permits had
been issued for the demolition of two previous motels or for the
construction of the Shore Hotel, and that, rather than the
moderately priced Travel Lodge that had been conditionally
permitted, the Shore Hotel was an unauthorized luxury boutique
hotel that did not serve the Coastal Act’s goal of assuring
affordable overnight accommodations along the coast.” The NOV
“threatened a cease and desist order and penalties of up to
$15,000 per day of violation.” The CCC “encouraged Sunshine to
negotiate a resolution including payment of an appropriate
penalty and conditions on future operation of the Shore Hotel
designed to foster public access to the coast.”
       The CCC and Sunshine negotiated a resolution of their
dispute. In May 2019, the CCC set the monetary penalty at
$15,581,000, which Sunshine paid in August 2019. The CCC

      2 At the trial court hearing, the parties said they have no
copy of a written contract between AMA and Sunshine.

                                 3
issued an after-the-fact permit allowing Hotel to operate, subject
to conditions that run with the land and are binding on future
owners. One condition is that Sunshine is limited to charging
$150 per night for 72 of Hotel’s 164 rooms. Appellants allege,
“These perpetual Conditions—caused by Defendants’ negligent
failures to timely obtain all required government agency permits
and approvals—impaired the Farzams’ security by significantly
reducing the market value” of Hotel.
       Sunshine and appellants filed suit in April 2020 against
AMA, the contractor that built Hotel, and the architect who
designed it. Appellants’ sole claim against AMA is for negligent
impairment of security.
       AMA demurred. As to the impairment of security claim,
AMA asserted that appellants failed to show the elements of
actionable negligence because there is no duty of care, breach of a
duty, causation, or injury. AMA asked the court to take judicial
notice of the NOV as “official government acts and records.” The
court granted the request for judicial notice.
       At the hearing on the demurrer, counsel agreed that in
2009 the CCC conditionally authorized a coastal development
permit (CDP), which limited room rates, before appellants made
the Loan. In 2014, the CCC learned that Sunshine was charging
excessive room rates. The court observed that there is no
contract between appellants and AMA, and no facts “were alleged
or could be alleged that would be beyond speculation that
somehow the Loan has suffered some detriment.” Appellants
argued that loss in value of a security is a question of fact. The
court noted that the room rate restrictions dated to 2009, so “this
was always established, always going to be the deal,” regardless
of what the defendants did.

                                 4
       The court sustained a demurrer to appellants’ impairment
of security claim, without leave to amend. It found appellants did
not show they are damaged by the CCC’s restrictions. They did
not assert facts showing how the restriction impaired their first
trust deed: There is no allegation that Sunshine is in default or
unable to make payments on the Loan. The court noted “a
potential statute of limitations issue” because the NOV issued in
2014, six years before appellants filed suit.
       On January 12, 2021, the court entered judgment in favor
of AMA. The Farzams appeal the judgment of dismissal.3
                            DISCUSSION
       1. Appeal and Review
       Appeal lies from a judgment of dismissal after demurrers
are sustained without leave to amend. (Code Civ. Proc., §§ 581d,
904.1, subd. (a)(1); Serra Canyon Co. v. California Coastal Com.
(2004) 120 Cal.App.4th 663, 667.) “For purposes of reviewing a
demurrer, we accept the truth of material facts properly pleaded
in the operative complaint, but not contentions, deductions, or
conclusions of fact or law. We may also consider matters subject
to judicial notice.” (Yvanova v. New Century Mortgage Corp.
(2016) 62 Cal.4th 919, 924 (Yvanova).)
       2. We May Consider the Contents of the NOV
       The NOV is alleged in paragraphs 36 to 38 of the FAC.
Appellants do not discuss it in their opening brief, except with
respect to the statute of limitations. Not until their reply brief do
appellants assert that this court cannot consider the contents of

      3  Sunshine was listed on the notice of appeal but did not
file a brief. On November 9, 2021, this court dismissed the
appeal with respect to codefendants Benchmark Contractors,
Inc., and M. Arthur Gensler Jr. & Associates, Inc.

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the NOV. We disagree with their belated claim that only the
existence of the NOV can be considered.
       Courts may “consider material documents referred to in the
allegations of the complaint.” (City of Port Hueneme v. Oxnard
Harbor Dist. (2007) 146 Cal.App.4th 511, 514.) On demurrer,
when the superior court grants a request for judicial notice of
official documents, we “take notice of their existence and
contents, though not of disputed or disputable facts stated
therein.” (Yvanova, supra, 62 Cal.4th at p. 924, fn. 1 [court
considered the existence and contents of a recorded deed of trust,
assignment, substitution of trustee, notices of default and sale,
and trustee’s deed upon sale].) Appellants do not dispute the
veracity of the NOV, which falls within an exception to the
hearsay rule. (Evid. Code, § 1280.)
       The FAC alleges more than the bare existence of the NOV;
it describes portions of the NOV for the truth of its statements.
The NOV led to Sunshine’s settlement with the CCC and
appellants’ alleged injury. As alleged in the FAC, the NOV states
that “no coastal permits had been issued for the demolition of the
two previous motels or for the construction of the Shore Hotel,
and that, rather than the moderately priced Travel Lodge that
had been conditionally permitted, the Shore Hotel was an
unauthorized luxury boutique hotel.”
       Evidence Code section 356 “prevent[s] the use of selected
aspects of a conversation, act, declaration, or writing, so as to
create a misleading impression on the subjects addressed.”
(People v. Arias (1996) 13 Cal.4th 92, 156.) When applying this
rule of completeness, “ ‘the courts do not draw narrow lines
around the exact subject of inquiry’ ” and the entirety is placed in
evidence if it has “ ‘ “some bearing upon, or connection with” ’ ”

                                 6
the part the proponent cites. (People v. Zapien (1993) 4 Cal.4th
929, 959, italics omitted.) Appellants described part of the NOV
in their pleading, opening the door to an examination of the
entirety of this public record.
       3. The FAC Does Not State An Impairment Claim
       “Real property, as security, affords a mortgagee his
primary, and in many cases his sole, means of repayment of a
debt should the mortgagor default. Generally speaking,
impairment of security is that circumstance where the mortgaged
property’s value no longer assures satisfaction of the debt.”
(Brown v. Critchfield (1980) 100 Cal.App.3d 858, 869; Pacific
Inland Bank v. Ainsworth (1995) 41 Cal.App.4th 277, 281.)
       Trust deed beneficiaries may sue a third party tortfeasor
for negligent impairment of their security. (U. S. Financial v.
Sullivan (1974) 37 Cal.App.3d 5, 13–14.) A claim requires “acts
of negligence where it is reasonably foreseeable that such
negligence would result in the impairment of the security
interest.” (Baldwin v. Marina City Properties, Inc. (1978) 79
Cal.App.3d 393, 403 (Baldwin).)
       The FAC alleges that AMA owed a duty to Sunshine to
secure and maintain compliance with all necessary permits while
assisting in the development of the Hotel. AMA’s duty “extended
to the Farzams as beneficiaries of a deed of trust securing their
loan to Sunshine.” AMA’s breach of its duty resulted in an
unpermitted development; appellants were harmed because the
value of their security was impaired by the CCC’s imposition of
conditions and restrictions limiting room rates to no more than
$150 per night, with no resort fees and reduced parking rates.

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             a. No Showing of a Duty
       Appellants’ claim requires “acts of negligence.” (Baldwin,
supra, 79 Cal.App.3d at p. 403.) “[A] duty to the plaintiff is an
essential element” of negligence, and “[t]hat duty may be imposed
by law, be assumed by the defendant, or exist by virtue of a
special relationship.” (Potter v. Firestone Tire & Rubber Co.
(1993) 6 Cal.4th 965, 984, 985.) Appellants’ opening brief states,
“AMA was negligent in its duty to timely obtain all required
government agency permits and approvals for the Shore Hotel.”
The quoted sentence is the entire discussion of “duty.”
       Appellants admitted in the trial court and to this court that
there is no written contract between Sunshine and AMA. Absent
a contract, appellants’ claim about AMA’s duty to obtain a permit
modification from the CCC is pure speculation. Sunshine applied
for a permit in 2009, not AMA. The CCC required “the property
owners to obtain an amendment to the CDP for any deviation
from the project description.” (Italics added.) Sunshine (i.e., the
Farzams) had to be involved in the amendment process.
Appellants have failed to show a basis for imposing a duty on
AMA that is “imposed by law, . . . assumed by the defendant, or
exist[s] by virtue of a special relationship.” (Potter v. Firestone
Tire & Rubber Co., supra, 6 Cal.4th at p. 985.)
             b. No Impairment of Value Occurred
       Plaintiffs suing third party wrongdoers for impairment of a
security interest must plead facts showing impairment of the
value of the security. Without this showing, there is no damage.
(Baldwin, supra, 79 Cal.App.3d at p. 404.) Appellants cannot
allege that the value of their security was impaired by CCC’s
imposition of restricted room rates: Low to moderate room rates
were a feature of Sunshine’s application to build Hotel and were

                                 8
central to the CCC’s authorization of a CDP in 2009, two years
before appellants made the Loan.
       The NOV shows that Michael Farzam signed an application
in 2009, proposing to replace two small motels with “a single
limited-amenity moderate priced Travelodge Hotel [that will]
increase the number of affordable moderate-priced guestrooms
from 87 to 164.” (Italics omitted.) His letter to the CCC states,
“[T]he Farzams, consistent with City and State policies for the
Coastal Zone, elected to pursue a replacement moderately-priced
Travelodge rather than yet another new luxury hotel in the
Coastal Zone. The Farzams made this decision even though . . . a
luxury hotel would be more profitable than a moderately priced
Travelodge.” (Italics omitted.)
       On June 11, 2009, the CCC approved a CDP conditionally
authorizing “demolition of two existing motels and construction of
a low to moderately priced hotel.” Michael Farzam agreed to the
terms. The NOV states, “[R]ather than the affordable,
moderately-priced Travelodge proposed in [the] CDP application
and considered by the Commission, a ‘luxury boutique’ hotel was
constructed on the properties.” (Fn. omitted.) The CCC wrote,
“The fact that the applicant proposed an affordable, moderately
priced hotel was central to the Commission’s review of the
project.” Amendment was not in the cards. (Cal. Code Regs.,
tit. 14, § 13166, subd. (a) [director of the CCC “shall reject an
application for an amendment to an approved permit if he or she
determines that the proposed amendment would lessen or avoid
the intended effect of an approved or conditionally approved
permit”].)
       The NOV dooms the Farzams’ claim. They funded
construction of a hotel permitted to have 164 “low to moderately

                                9
priced” rooms. Michael Farzam “impaired” the value of the
property in 2009 when he applied for a CDP on behalf of
Sunshine. The CDP application had to contain “proof that all
holders or owners of any interests of record in the affected
property have been notified in writing of the permit application
and each invited to join as a co-applicant.” (Cal. Code Regs.,
tit. 14, § 13053.5, subd. (b).) Before loaning $58 million,
appellants had constructive knowledge of the limitations imposed
by the publicly available CDP. The pleading does not show AMA
had anything to do with the CDP.
       Sunshine violated the CDP, created a luxury hotel, and
charged high rates. The CCC discovered the bait-and-switch and
held Sunshine to the terms of its agreement. This is not an
unforeseeable impairment of appellants’ security. If anything,
they came out ahead: They funded construction of a hotel with
few amenities and 164 moderately priced rooms. Under the
negotiated settlement with the CCC, the Hotel has amenities and
the low-to-moderate rate applies to 72 rooms, not 164 rooms. If
appellants believe Sunshine misled them about the type of hotel
the CCC authorized, their remedy is to sue Sunshine for
fraudulently inducing them to make the Loan.4 But, such a suit
is improbable as Sunshine is their own entity.
       4. Leave to Amend
       Appellants argue that the court abused its discretion by
denying leave to amend. (Code Civ. Proc., § 472c, subd. (a);
Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 971.)
Appellants have the burden of showing a reasonable possibility

      4 In light of our conclusion that the FAC does not state a
claim for negligent impairment of security, we need not decide
whether the claim is barred by the statute of limitations.

                                10
that the complaint’s defects can be cured by amendment. (King v.
CompPartners, Inc. (2018) 5 Cal.5th 1039, 1050; T.H. v. Novartis
Pharmaceuticals Corp. (2017) 4 Cal.5th 145, 162.)
       Appellants propose to amend their pleading to “allege much
more detail to demonstrate that the value of their security—the
Shore Hotel—has been severely impaired by the severe [CCC]
permanent restrictions imposed.” They cite loss of income in
2020 and diminution of the Hotel’s market value.
       The proposed amendment does not, and cannot, reach the
heart of the problem. The problem is that Michael Farzam
obtained a CDP by telling the CCC that his family “elected” to
build a “moderately-priced Travelodge rather than yet another
new luxury hotel in the Coastal Zone . . . even though . . . a
luxury hotel would be more profitable than a moderately priced
Travelodge.” Affordability was the key factor in the CCC’s
approval. Appellants cannot complain about lost profits or lower
value; a moderately priced Travelodge is what they funded.
       There is no indication that Michael Farzam’s 2009
application for a CDP was the fault of AMA, and there is no
contract showing AMA had a duty to obtain CCC approval of a
different or amended CDP. As appellants’ reply states, the CCC
told Sunshine that “should the project ‘change from the project
description’ of a moderately priced hotel, Sunshine could obtain a
new or amended CDP permit.” The record shows that Sunshine
agreed to build an affordable hotel, then charged excessive rates
once the Hotel was in operation, without CCC approval.

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                            DISPOSITION
       The judgment is affirmed. Anthony Mason Associates, Inc.,
is entitled to its costs on appeal.
       NOT TO BE PUBLISHED.

                                         LUI, P. J.
We concur:

     CHAVEZ, J.

     HOFFSTADT, J.

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