Court Opinion

ID: 9390581
Source: CourtListenerOpinion
Date Created: 2023-04-27 20:03:07.368398+00
Date Added: 2024-06-11T17:18:35.559734
License: Public Domain

Filed 4/27/23 Sushi KJ Corp. v. Hana Escrow Co. 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   NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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has not been certified for publication or ordered published for purposes of rule 8.1115.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

 SUSHI KJ CORPORATION et                                      B321923
 al.,                                                         (Los Angeles County Super.
                                                              Ct. No. 20STCV41331)
           Plaintiffs and Appellants,

           v.

 HANA ESCROW COMPANY
 INC.,

      Defendant and
 Respondent.

     APPEAL from a judgment of the Superior Court of Los
Angeles County, Holly J. Fujie, Judge. Affirmed.
     Law Offices of Gregory S. Kim, Gregory S. Kim and Vincent
Chan for Plaintiffs and Appellants.

      Glenn A. Williams for Defendant and Respondent.

                               ******
       In the midst of the sale of a restaurant, the seller lied to the
buyer about having more than $200,000 in unpaid sales taxes.
As pertinent here, the buyer sued the escrow company for
negligent misrepresentation. The trial court dismissed this claim
on demurrer. The buyer appeals. Because the dismissal was
proper, we affirm.
           FACTS & PROCEDURAL BACKGROUND
I.     Facts
       A.     Yamato Kura, LLC (Yamato) sells its
restaurant, and uses Hana Escrow Company, Inc. (Hana)
as the escrow agency
       In 2017, Yamato owned a restaurant in Agoura Hills,
California. On December 14, 2017, Yamato signed a contract
agreeing to sell the restaurant to Sang Woo Lee (Lee) for
$910,000.
       Yamato and Lee agreed to use Hana as the escrow agent
for the transaction.
       In the initial escrow instructions dated December 20, 2017,
Yamato and Lee tasked Hana with conducting a “UCC-3” search
for financing statements and “liens against” the restaurant, but
explicitly declined to hold Hana “responsible for the sufficiency or
correctness of the searches nor for any liens which may have been
filed after the date of said searches.” The escrow instructions
placed the ultimate responsibility for assuring payments of any

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outstanding tax bills on Yamato, which was tasked with
“deposit[ing] into escrow” the appropriate certificates indicating
that any such bills and any outstanding liens were paid off.
Hana’s “duties,” by contrast, were “limited to the safekeeping of
such money, instruments or other documents received by the
escrow holder, and of the disposition of same in accordance with
the written instructions accepted in this escrow.”
       On the same day as the initial escrow instructions were
signed, Yamato’s principal executed a document entitled
“Transfer Disclosure Statement for Business Opportunity Sales”
(Transfer Disclosure Statement). Among other things, Yamato’s
principal represented that Yamato had not “ever delayed E.D.D.
Tax/Sales Tax for more than 3 months.”
       Hana performed the required lien searches in January
2018, and they revealed no outstanding sales tax liens for
Yamato or its restaurant.
       Yamato and Lee amended the initial escrow instructions
several more times; two of those amendments are pertinent here:
       ●     On January 19, 2018, Lee assigned “all rights, title,
interest in and to the” restaurant to Sushi KJ Corporation
(Sushi).
       ●     On April 11, 2018, Yamato and Sushi signed a
further amendment that (1) required escrow to close that very
same day; (2) required Yamato to “guarantee[] and warrant[]”
that there were no liens not previously disclosed by the lien
searches performed by Hana in January 2018, and absolved
Hana of any “further . . . liabi[lity]” for conducting those searches;
(3) required Yamato to “warrant[] and guarantee[]” that Yamato
will pay “any/all” sales taxes due to the state; (4) required Hana
to withhold $75,000 of the purchase price from Yamato until such

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time as Yamato delivered the certificates showing it had no tax
liabilities with the state, which would occur “outside of escrow
after close of escrow,” and provided that Hana is “NOT to be
further concerned with and liable for same”; and (5) specified that
the “valu[e]” of “fixtures and equipment” that Sushi was buying
as part of the restaurant sale was $20,000 and that Sushi
“agree[d] to pay 9.50% of said amount”—which comes to $1,900—
“to the California Department of Tax and Fee Administration
through escrow.”
       The “Buyer’s Final Settlement Statement” prepared by
Hana on April 11, 2018, contained the following entry as a “debit”
that the buyer—Sushi—had to pay: “California Department of
Tax and Fee Administration for Sales Tax 9.50% on $20,000
Furniture, Fixtures and Equipment.”
       B.    After escrow closes, Sushi learns of a massive
unpaid tax liability
       On April 25, 2019, just over a year after escrow closed, the
California Department of Tax and Fee Administration sent Sushi
a notice indicating that Yamato owed the state $285,137.08 in
past taxes, interest, and penalties, and that Sushi—as the
successor in interest to Yamato—now owed that amount.
II.    Procedural Background
       On October 27, 2020, Sushi sued Yamato and its principal,
the broker and brokerage company that represented Yamato and
Lee in the transaction, and Hana. In the operative third
amended complaint,1 Sushi and Lee (its predecessor in interest)

1     The trial court sustained Hana’s unopposed demurrer to
Sushi’s initial complaint, Sushi filed but superseded its first
amended complaint with a second amended complaint, and the

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(collectively, plaintiffs) sued Hana in a single claim for negligent
misrepresentation. In particular, Sushi alleged that (1) Hana
“warranted and represented” in the Transfer Disclosure
Statement that Yamato had never been more than three months
in arrears on tax payments; (2) Yamato and its principal
“warranted and represented” in the escrow instructions that they
would pay taxes with the $75,000 Hana withheld during escrow;
(3) Hana provided Sushi with an “inaccurate closing statement”
that “showed . . . only $1,900.00 was due” to the state rather than
the $285,137.08 actually due; and (4) Hana “with[held]
information” of an unspecified nature that somehow made the
“above described” “statements” “misleading” and “incomplete.”
       Hana demurred to this iteration of the complaint.
Following a full round of briefing and a hearing, the trial court
sustained the demurrer without leave to amend. The trial court
reasoned that Lee was not a proper plaintiff because he had
assigned away all of his rights in the deal, and that Sushi had not
“adequately allege[d] a claim for negligent misrepresentation.”
The court also denied leave to amend.
       After the trial court entered judgment for Hana, plaintiffs
filed this timely appeal.
                             DISCUSSION
       Although both Sushi and Lee filed a notice of appeal from
the trial court’s judgment for Hana, they concede that Sushi—as
the assignee of the purchase contract—is the only proper
plaintiff. We therefore limit our discussion to Sushi’s arguments.
       Sushi argues that the trial court erred in dismissing the
negligent misrepresentation claim against Hana without leave to

trial court sustained a demurrer to the second amended
complaint with leave to amend.

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amend. In assessing whether the trial court erred in this ruling,
we ask two questions: “(1) Was the demurrer properly sustained;
and (2) Was leave to amend properly denied?” (Shaeffer v. Califia
Farms, LLC (2020) 44 Cal.App.5th 1125, 1134 (Shaeffer).) In
answering the first question, “we ask whether the operative
complaint ‘“states facts sufficient to constitute a cause of action”’
[citation].” (Cal. Dept. of Tax & Fee Admin. v. Superior Court
(2020) 48 Cal.App.5th 922, 929 (Tax & Fee Admin.); Loeffler v.
Target Corp. (2014) 58 Cal.4th 1081, 1100; Code Civ. Proc., §
430.10, subd. (e).) In undertaking that inquiry, “we accept as
true all ‘“‘“material facts properly pleaded”’”’” in the operative
complaint (Tax & Fee Admin., supra, at p. 929) as well as facts
appearing in the exhibits attached to it, giving “precedence” to
the facts in the exhibits if they “contradict the allegations” (Gray
v. Dignity Health (2021) 70 Cal.App.5th 225, 236, fn. 10 (Gray);
Brakke v. Economic Concepts, Inc. (2013) 213 Cal.App.4th 761,
767 (Brakke)).
       In answering the second question, we ask “‘“whether
‘“‘there is a reasonable possibility that the defect [in the operative
complaint] can be cured by amendment.’”’”’” (Shaeffer, supra, 44
Cal.App.5th at p. 1134.) We review the trial court’s ruling
regarding the first question de novo (so, we are not bound by the
court’s construction of the complaint (Rodas v. Spiegel (2001) 87
Cal.App.4th 513, 517)), and review its ruling regarding the
second for an abuse of discretion. (People ex rel. Harris v. Pac
Anchor Transportation, Inc. (2014) 59 Cal.4th 772, 777; Branick
v. Downey Savings & Loan Assn. (2006) 39 Cal.4th 235, 242.)
I.     Was the Demurrer Properly Sustained?
       To state a claim for negligent misrepresentation, Sushi was
required to allege that (1) Hana made a “‘“misrepresentation”’”

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through a “‘“false representation, concealment, or
nondisclosure”’”; (2) Hana should have known of the falsity of the
statement; (3) Hana acted to induce reliance; (4) Sushi justifiably
relied on the misrepresentation; and (5) Sushi suffered resulting
damage. (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167,
173 (Small); Conroy v. Regents of Univ. of Cal. (2009) 45 Cal.4th
1244, 1255; Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 407-
408.) While the operative third amended complaint alleges four
misrepresentations, none supports a claim against Hana.
       The first two misrepresentations Sushi alleges are not
actionable because they were not made by Hana. Specifically,
Sushi’s allegations regarding Yamato’s representations in the
Transfer Disclosure Statement and Yamato’s representations in
the escrow instructions do not provide a basis to sue Hana for the
simple reason that they are not Hana’s representations.
Although Sushi’s operative complaint at points alleges that Hana
made those representations, the exhibits themselves trump
Sushi’s counterfactual allegations. (Gray, supra, 70 Cal.App.5th
at p. 236, fn. 10 [facts in exhibits trump contradictory allegations
in complaint]; Brakke, supra, 213 Cal.App.4th at p. 767 [same].)
As such, they are not actionable against Hana.
       The third misrepresentation Sushi alleges is itself a
misrepresentation of the facts we must take as established.
Specifically, Sushi alleges that Hana misrepresented, in the
Buyer’s Final Settlement Statement, that Yamato’s total
outstanding tax liability was only $1,900. This allegation flatly
contradicts what the Buyer’s Final Settlement Statement
actually says. What the document says is that Hana was
withholding $1,900 of the funds deposited by Sushi to pay the
sales tax owed by Sushi for the furniture and equipment Sushi

                                 7
was buying from Yamato as part of the purchase of the
restaurant. Indeed, this entry corresponds with Yamato’s and
Sushi’s agreement, in the original escrow instructions, to
withhold 9.50 percent of the $20,000 value they assigned to the
furniture and equipment Sushi was buying. This entry says
nothing about how much Yamato owes in sales taxes generally.
Again, where the exhibits attached to the complaint show its
allegations to be untrue, we must disregard them.
      The fourth and final misrepresentation Sushi alleges
cannot support a claim for negligent misrepresentation.
Specifically, Sushi alleges that Hana “with[held] information”
that somehow made the “above described” “statements”—which
we have independently concluded are not actionable—
“misleading” and “incomplete.” But Sushi does not allege what
information was withheld or that Hana had any duty to disclose
that information; without these additional allegations, Hana’s
alleged withholding is not actionable. (Daugherty v. American
Honda Motor Co., Inc. (2006) 144 Cal.App.4th 824, 835 [“to be
actionable the omission must be contrary to a representation
actually made by the defendant, or an omission of a fact the
defendant was obligated to disclose”]; see also Small, supra, 30
Cal.4th at p. 184 [negligent misrepresentation must be “pled with
the same specificity required in a[n] . . . action for fraud”].) To
the extent the theory that Hana withheld information is based on
allegations Sushi had previously made about the “UCC-3” search
in prior iterations of the complaint, Sushi omitted—and hence
abandoned—those allegations in the operative complaint before
us now. (State Comp. Insurance Fund v. Superior Court (2010)
184 Cal.App.4th 1124, 1130-1131 [“the amended complaint
furnishes the sole basis for the cause of action, and the original

                                 8
complaint ceases to have any effect either as a pleading or as a
basis for judgment”].)
       For these reasons, the trial court properly sustained Hana’s
demurrer. We accordingly need not reach the parties’ other
arguments regarding other elements of the negligent
misrepresentation claim, which would at most supply additional
reasons to uphold the trial court’s demurrer ruling.
II.    Should Leave to Amend Have Been Granted?
       The trial court did not abuse its discretion in denying Sushi
leave to amend its third amended complaint. It is Sushi’s burden
to “show in what manner [it] can amend [its] complaint and how
that amendment will change the legal effect of [its] pleading,” but
it has not articulated—either before the trial court or before us
now—how it would amend the complaint, after four unsuccessful
attempts, to state a viable cause of action against Hana.
(Goodman v. Kennedy (1976) 18 Cal.3d 335, 349.) Indeed,
Sushi’s ever-changing theories in the various iterations of its
complaint seeking to hold Hana liable in its role as the escrow
company are inconsistent with the very role of an escrow
company, which is limited to complying strictly with the
instructions of the parties; its role is not to “police the affairs” of
the parties, not to participate in those affairs, and not to act as an
insurer of what turned out to be an improvident deal. (Summit
Financial Holdings, Ltd. v. Continental Lawyers Title Co. (2002)
27 Cal.4th 705, 711; Schaefer v. Manufacturers Bank (1980) 104
Cal.App.3d 70, 77-79; Claussen v. First American Title Guaranty
Co. (1986) 186 Cal.App.3d 429, 435-436.)

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                       DISPOSITION
     The judgment is affirmed. Hana is entitled to its costs on
appeal.
     NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.

                                     ______________________, J.
                                     HOFFSTADT
We concur:

_________________________, Acting P. J.
ASHMANN-GERST

_________________________, J.
CHAVEZ

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