Court Opinion

ID: 1040669
Source: CourtListenerOpinion
Date Created: 2013-09-12 21:20:06.638902+00
Date Added: 2024-06-11T15:26:06.227814
License: Public Domain

Filed 9/12/13 Chokatos v. Magnate Fund # 1 CA1/3
                      NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication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

                                       FIRST APPELLATE DISTRICT

                                                DIVISION THREE

JOHN N. CHOKATOS,
         Plaintiff and Appellant,                                        A137174

v.                                                                       (City & County of San Francisco
MAGNATE FUND #1 LLC et al.,                                              Super. Ct. No. CGC 10-500839)
         Defendants and Respondents.

GIANCARLO MARANGHI,
         Plaintiff and Appellant,                                        A137187
v.
                                                                         (City & County of San Francisco
MAGNATE FUND #1 LLC et al.,                                              Super. Ct. No. CGC 09-487944)
         Defendants and Respondents.

         Plaintiffs John N. Chokatos and Giancarlo Maranghi appeal judgments of
dismissal in favor of several defendants following orders sustaining without leave to
amend demurrers to plaintiffs’ third amended complaints for fraud (complaints). We
consolidated the appeals for review.
         Plaintiffs allege individuals and related corporations conspired to operate a “Ponzi
scheme” in which money was borrowed from plaintiffs with false promises that the loans
were secured by deeds of trust. We conclude the court rightly sustained demurrers
brought by several limited liability companies because plaintiffs failed to allege
adequately facts that support the alter ego or single enterprise doctrine under which

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plaintiffs seek to hold the affiliated companies responsible for the acts of other
companies. The deficiency may be cured, however, and we thus conclude that the court
erred in denying plaintiffs leave to amend their pleadings.
                                    BACKGROUND
       Plaintiffs allege that defendant Benny Chetcuti, Jr., represented himself as an
experienced real estate developer offering safe investment opportunities in his projects
when, in fact, he was operating a Ponzi scheme with John Simonse and their related
companies.
       According to plaintiffs’ complaints, Chetcuti and his company Chetcuti &
Associates, Inc. (collectively, Chetcuti) “borrowed money from his victims, usually short
term loans, with the promise of high . . . returns.” Chetcuti signed promissory notes and
issued deeds of trust to properties owned by himself or “other entities” to secure the
loans. Before recording the lenders’ deeds of trust, Chetcuti issued and recorded deeds of
trust in favor of Simonse and related entities on unfunded sham loans “that would totally
encumber the property.” “Simonse and his other entities would then foreclose on the
properties, leaving the victims without any security for their loans, and defendant
Simonse and his entities would have free and clear title to the properties, without actually
making any loans. Defendant Simonse would then create new entities, and transfer title of
the foreclosed properties to the newly created entities, without any consideration, to make
the properties even more removed and difficult for the creditors and victims of defendant
Chetcuti to recover the security for their loans.” “When defendant Chetcuti could not find
enough investors to pay for various other loans, the scheme collapsed, leaving his victims
with unpaid promissory notes with no security for their loans.” Chetcuti filed for
bankruptcy. According to plaintiff Chokatos, Chetcuti perpetrated fraud upon at least 114
victims who suffered an aggregate loss of $28 million or more.
       Plaintiff Maranghi loaned Chetcuti $250,000 secured by a lien in the form of a
trust deed on a Woodward Street property. Chetcuti defaulted on the loan and Maranghi
has not been able to collect because Chetcuti did not record the deed of trust and Magnate
Fund #2 LLC, managed by Simonse, made sham loans and recorded deeds of trust on the

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Woodward Street property before Maranghi could record his deed of trust. Magnate
Fund #2 then foreclosed on the property and transferred title to 55 Woodward LLC,
another Simonse entity.
       Plaintiff Chokatos’s allegations are similar. Chokatos says he contributed
$500,000 toward a $2.8 million loan to Chetcuti secured by a deed of trust on a Parkridge
Drive property. Before Chokatos’s deed of trust was recorded, Magnate #2 made a sham
loan to Chetcuti secured by a recorded deed of trust. Magnate Fund #2 foreclosed the
Parkridge Drive property pursuant to the “scheme and plan” of Chetcuti and Simonse “to
leave plaintiff and others with an unsecured loan.” Magnate Fund #2 then transferred title
to 20 Parkridge LLC, another Simonse entity.
       Plaintiffs sued the individuals and entities directly involved in the disputed real
estate transactions as well as other entities. At issue here are claims for fraud, declaratory
relief, and elder financial abuse (pled by Chokatos alone) against eight defendants that
successfully demurred to the complaint: Magnate Fund #1 LLC, Magnate Fund #3 LLC,
JWS Capital Management, Inc., LHJS Investments LLC, 27th Street Associates LLC,
South Van Ness Street Associates LLC, 55 Woodward LLC, and 20 Parkridge LLC.1
Plaintiffs allege that each of these entities was formed and controlled by defendant
Simonse. We shall hereafter follow the complaints’ convention in referring to these eight
defendants as the “Simonse Entities.”
       Plaintiffs allege the Simonse Entities were “participants, aiders and abettors in the
wrongful activities alleged herein . . . , and the liability of each arises from the fact that
each has engaged in all or part of the improper acts, plans, schemes or transactions, which
operate a fraud against plaintiff.” They “had actual knowledge of the acts and conduct
complained of herein and participated in the furtherance of the fraudulent acts.” The
Simonse Entities “have participated as members of the conspiracy, or acted in furtherance

1
  Most defendants were dismissed from both lawsuits. However, 55 Woodward LLC
remains a defendant in Maranghi’s suit over the Woodward Street property. Likewise,
20 Parkridge LLC remains a defendant in Chokatos’s suit over the Parkridge Drive
property.

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of it, or aided or assisted in carrying out the fraudulent purposes . . . , and have performed
acts and made statements or representation in furtherance of the conspiracy and in so
doing aided and abetted the fraudulent conduct” of Chetcuti, Simonse and other
defendants.
       It is further alleged the Simonse Entities “are being sued as alter egos of defendant
Simonse.” Plaintiffs allege, on information and belief, that there exists “a unity of interest
between defendants Simonse and the Simonse Entities, such that any individuality and
separateness between defendant[] Simonse and defendants Simonse Entities have ceased,
and each defendant Simonse entity is the alter ego of defendant Simonse, in that the
defendants Simonse Entities are not adequately capitalized, or the capitalization was
completely illusory; defendant Simonse commingled and used assets of the defendants
Simonse Entities for his personal use; and that the defendants Simonse Entities were
mere shells, instrumentalities, or conduits through which defendant Simonse carried on
his business and affairs.” The complaints continue, stating that “Adherence to the fiction
of the separate existence of each of the defendants Simonse Entities . . . would sanction
fraud and promote injustice” in that Chetcuti has transferred money borrowed from
individuals to the Simonse Entities and Simonse has transferred assets to the Simonse
Entities. Also, “defendant Simonse can transfer title to the subject property to any one of
the defendants Simonse Enterprises at any time to perpetrate the fraud,” as he did in
transferring title to the properties securing plaintiffs’ loans “without any consideration
and without regard to any company formalities.” Plaintiff Chokatos alleges that the
Magnate Fund companies among the Simonse Entities were once lien holders on at least
100 properties and, a year later, were lien holders on only five properties, suggesting that
they transferred assets to other entities.
       The Simonse Entities demurred to plaintiffs’ third amended complaints. The
demurrers were sustained without leave to amend. The court found: “Plaintiff has not
alleged facts showing that an injustice would result if the separate existence of the
moving defendants is respected. Plaintiff has alleged that an injustice might result in the
future, but this [is] insufficient to pierce the corporate veil. Moreover, plaintiff seeks

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reverse piercing, which is not available in California. (Postal Instant Press, Inc. v.
Kasawa Corp. (2008) 162 Cal.App.4th 1510). Amendment is most unlikely to cure these
defects.”
                                        DISCUSSION
          On appeal “from a judgment of dismissal following the sustaining of a demurrer
without leave to amend, we give the complaint a reasonable interpretation, and treat the
demurrer as admitting all material facts properly pleaded.” (Joseph v. Johnson (2009) 178
Cal.App.4th 1404, 1409.) “The denial of leave to amend is appropriate only when it
conclusively appears that there is no possibility of alleging facts under which recovery
can be obtained. ‘A demurrer should not be sustained without leave to amend if the
complaint, liberally construed, can state a cause of action under any theory or if there is a
reasonable possibility the defect can be cured by amendment.’ ” (Cabral v. Soares (2007)
157 Cal.App.4th 1234, 1240-1241.)
          The central claim here is fraud. “The elements of common law fraud are: ‘(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.’ ” (AREI II Cases (2013) 216 Cal.App.4th 1004, 1021-1022.) It
is undisputed that the complaints adequately state causes of action for fraud against
Chetcuti, Simonse and the companies that borrowed money from plaintiffs, recorded
deeds of trust, received title to disputed properties or otherwise directly participated in
allegedly fraudulent transactions. In dispute is the liability of companies allegedly
controlled by Simonse, the Simonse Entities. The Simonse Entities argue that the
allegations are insufficient to establish their liability for acts of fraud committed by
others.
          Plaintiffs assert that the Simonse Entities are the alter egos of defendant Simonse
and, in the only argument they advance on appeal, seek to impose liability on that basis. 2

2
 Plaintiffs’ complaints also contain conspiracy allegations but they make no effort on
appeal to assert conspiracy as a basis for liability. We therefore do not reach the issue of
whether plaintiffs have alleged, or could sufficiently allege, a basis for imposing liability

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Traditionally, the alter ego doctrine is used to establish liability upon an individual for the
acts of a corporation and not, as here, to establish liability upon a corporation for the acts
of an individual. (Postal Instance Press, Inc. v. Kasawa Corp., supra, 162 Cal.App.4th at
p. 1513.) “Ordinarily, a corporation is regarded as a legal entity, separate and distinct
from its stockholders, officers and directors, with separate and distinct liabilities and
obligations. [Citations.] A corporate identity may be disregarded—the ‘corporate veil’
pierced—where an abuse of the corporate privilege justifies holding the equitable
ownership of a corporation liable for the actions of the corporation. [Citation.] Under the
alter ego doctrine, then, when the corporate form is used to perpetrate a fraud, circumvent
a statute, or accomplish some other wrongful or inequitable purpose, the courts will
ignore the corporate entity and deem the corporation’s acts to be those of the persons or
organizations actually controlling the corporation, in most instances the equitable
owners.” (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538.)
       The Simonse Entities correctly argue that plaintiffs’ allegations do not present a
traditional use of the alter ego doctrine. Plaintiffs allege that the corporate Simonse
Entities “are being sued as alter egos of defendant Simonse,” which reverses the usual
case of an individual held responsible for the acts of a corporation. A California court has
emphatically rejected third party “reverse piercing of the corporate veil, by which the
corporate veil is pierced to permit a third party creditor to reach corporate assets to satisfy
claims against an individual shareholder.” (Postal Instance Press, Inc. v. Kasawa Corp.,
supra, 162 Cal.App.4th at p. 1513.) The court noted that “Traditional piercing of the
corporate veil is justified as an equitable remedy when the shareholders have abused the
corporate form to evade individual liability, circumvent a statute, or accomplish a
wrongful purpose. [Citations.] [¶] The same abuse of the corporate form does not exist
when the judgment debtor is the shareholder. In that situation, the corporate form is not

on these entities grounded on a conspiracy theory. Nothing in our opinion should be
construed to endorse or to preclude conspiracy allegations in future pleadings. (See
AREI II Cases, supra, 216 Cal.App.4th at pp. 1021-1025 [setting forth elements of
conspiracy to defraud].)

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being used to evade a shareholder’s personal liability, because the shareholder did not
incur the debt through the corporate guise and misuse that guise to escape personal
liability for the debt.” (Id. at p. 1522.)
       Plaintiffs’ arguments, in large measure, attempt third party reverse piercing of the
corporate veil, which is foreclosed by Postal Instance Press, Inc. v. Kasawa Corp., supra,
162 Cal.App.4th 1510. The trial court was correct in this regard. But the trial court was
incorrect in denying leave to amend because “there is a reasonable possibility an
amendment could cure the defect.” (AREI II Cases, supra, 216 Cal.App.4th at p. 1012.)
The cure lies in another variant of vicarious liability known as the single enterprise rule.
       “[U]nder the single-enterprise rule, liability can be found between sister
companies” or other affiliated companies. (Las Palmas Associates v. Las Palmas Center
Associates (1991) 235 Cal.App.3d 1220, 1249.) “The theory has been described as
follows: ‘ “In effect what happens is that the court, for sufficient reason, has determined
that though there are two or more personalities, there is but one enterprise; and that this
enterprise has been so handled that it should respond, as a whole, for the debts of certain
component elements of it.” ’ ” (Id. at pp. 1249-1250.) The single enterprise rule
recognizes that “it would be unjust to permit those who control companies to treat them
as a single or unitary enterprise and then assert their corporate separateness in order to
commit frauds and other misdeeds with impunity.” (Id. at p. 1249.)
       We reject the Simonse Entities’ argument that amendment should not be permitted
because alter ego liability under the single enterprise rule is inconsistent with plaintiffs’
“theory of their cases at the trial court level.” It is true that plaintiffs’ allegations focus on
corporate liability for Simonse’s acts, rather than liability between corporations, and thus
the allegations fail to support a single enterprise theory as presently stated. But the
allegations are consistent with the single enterprise rule and, in fact, mirror many of the
factors used to establish liability upon corporations engaged in a single enterprise.
“Factors for the trial court to consider” when assessing alter ego liability under the single
enterprise rule “include the commingling of funds and assets of the two entities, identical
equitable ownership in the two entities, use of the same offices and employees, disregard

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of corporate formalities, identical directors and officers, and use of one as a mere shell or
conduit for the affairs of the other.” (Troyk v. Farmers Group, Inc. (2009) 171
Cal.App.4th 1305, 1342; accord Greenspan v. LADT LLC (2010) 191 Cal.App.4th 486,
512-513 [listing factors].) Plaintiffs allege the Simonse Entities “engaged in all or part of
the improper acts, plans, schemes or transactions, which operate a fraud against
plaintiff”; acted in concert; have “a unity of interest”; “commingled and used assets” are
controlled by the same individual (Simonse); lack adequate capitalization; and are “mere
shells, instrumentalities, or conduits through which defendant Simonse carried on his
business and affairs.” The complaints also allege that Magnate Fund #2 LLC, which
remains a defendant in the case, transferred property to 55 Woodward LLC in one case,
and to 20 Parkridge LLC in the other, without consideration in a concerted effort to
defraud plaintiffs. Further, the complaints allege that “Chetcuti himself transferred money
borrowed from individuals like [plaintiffs] to the other Simonse Entities directly, like
Magnate Fund #3 and LHJS.” The allegations suggest the Simonse Entities and other
defendants acted as a single enterprise. Amendment of the pleadings will permit plaintiffs
an opportunity to develop that claim.

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                                     DISPOSITION
       The judgments are reversed. The cases are remanded to the trial court with
directions to grant plaintiffs leave to amend their complaints. Plaintiffs shall recover costs
incurred on appeal upon timely application in the trial court. (Cal. Rules of Court,
rule 8.278.)

                                                  _________________________
                                                  Pollak, J.

We concur:

_________________________
McGuiness, P. J.

_________________________
Siggins, J.

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