Berman v. Bromberg (56 Cal. App. 4th 936, 1997)

Opinion

LILLIE, P. J.

Plaintiff appeals from a judgment entered in favor of defendants after the court denied plaintiff’s motion for leave to file a third amended complaint for violation of the Corporate Securities Act and breach of fiduciary duty. The principal issue is whether the trial court properly denied leave to amend on the ground that the proposed verified third amended complaint contained allegations contradicting prior verified complaints, rendering the third amended complaint a sham pleading.

Procedural Background

On July 18, 1995, Jack Berman (Berman) filed a complaint for accounting, audit, breach of contract, intentional and negligent misrepresentation, and declaratory relief arising out of his investment in Spakor Oil and Gas Associates, a limited partnership. A verified first amended complaint was filed on August 28, 1995, and contained essentially the same causes of action as the original complaint.

The first amended complaint alleged that Berman and defendant Leo Edwin Bromberg (Bromberg) have had a personal relationship going back 55 years and Berman trusted Bromberg; Bromberg “completely controlled” and was the alter ego of Spakor, Inc.; Bromberg also “completely controlled and as general partner” became the alter ego of Spakor Oil and Gas Associates, a limited partnership (Spakor Oil and Gas). Sometime prior to January 21, 1985, Bromberg told plaintiff that a $200,000 investment in Spakor Oil and Gas would develop an asset for him greater than his pension. On January 21, 1985, Berman executed an agreement of limited partnership; Bromberg requested Berman forward his check in the amount of $200,000 to defendants and offered to obtain a loan for this purpose at prime plus 3 percent. On March 4, 1986, defendants sent Berman a letter requesting that he sign a promissory note for $200,000 payable to Spakor Oil and Gas, and due on June 30, 1988; Berman executed the note on March 13, 1986.

In August 1987, defendants “forwarded to Berman a check for $100,000 and asked that it be returned. Berman received the $100,000 check on April 20, 1987 and deposited [it] in his account. Berman immediately returned his personal check in the sum of $100,000 to defendants . . . .” In May 1988, defendants requested that Berman send them $75,000, which he did; Berman was under the impression that the $75,000 was a loan to defendants. In December 1988, Berman received the sum of $25,000, and in May 1989, Berman received the sum of $20,000. In 1989, defendants told Berman that all capital had been returned to the investors.

On July 11,1994, and prior thereto, Berman asked for an accounting from defendants and also copies of financial statements, but he received nothing even though the original partnership agreement provided for preparation of annual financial statements to be supplied to each limited partner; even though the partnership agreement provided for an audit on five days’ written notice, defendants’ accountant stated that he had never seen any books or records and in preparing the annual reports for tax purposes he had relied on information supplied by Bromberg. On July 18, 1994, Bromberg responded by sending Berman a check for $30,000, stating on its face that the moneys purchased Berman’s interest in Spakor Oil and Gas; accompanying the check was a letter from Bromberg stating that “I am enclosing my check in the amount of $30,000 to purchase your interest in Spakor Oil & Gas Associates as of January 1, 1994.”

In March 1995, Berman again requested defendants send financial information about the partnership, and defendants responded by letter dated March 21, 1995, stating that “you no longer have any interest in Spakor Oil and Gas Associates.”

Berman “was obligated to defendants in the sum of $200,000, pursuant to his promissory note at all relevant times,” and paid taxes on the moneys received from defendants, but received no interest or return on capital.

The first cause of action sought an accounting, the second cause of action sought an audit of the partnership books and records, and the third cause of action sought damages for breach of written contract on the theory that the partnership generated income and capital to which Berman is entitled under the provisions of the limited partnership agreement. The fourth cause of action, captioned negligent misrepresentation, alleged that defendants’ representation that his investment would be worth more than his pension was untrue and that defendants made the representation without any reasonable grounds for believing it to be true and to induce Berman to rely upon it and to execute the promissory note. The fifth cause of action, captioned intentional misrepresentation, alleged that defendants held themselves out as possessing superior knowledge and special information, and their representations were treated as representations of fact and not opinion; Berman reasonably relied upon those representations as fact, and sustained damage. This cause of action also contains a concealment theory, alleging that defendants concealed and suppressed material facts relating to the profit of the entity involved with the intent to defraud plaintiff.

Defendants filed an answer to the first amended complaint. As an affirmative defense, defendants alleged that they tendered payment in full to Berman for his entire interest in the partnership; Berman accepted payment and has never tendered return, or returned the payment to defendants; since July 18, 1994, plaintiff has not been a member of the partnership.

In February 1996, defendants filed a motion for judgment on the pleadings on numerous grounds, including the ground that Berman was not entitled to any relief pertaining to an act or omission of Spakor Oil and Gas because he sold his entire interest to Bromberg by cashing the $30,000 purchase check, which stated on its face it was for “Purchase of Jack Berman’s Interest in Spakor Oil & Gas Associates.” Plaintiff filed opposition to the motion for judgment on the pleadings, and also filed a motion for leave to file a second amended complaint. The request for leave to file a second amended complaint expressly stated that plaintiff intended to abandon all of the causes of action in the first amended complaint, and intended to assert two causes of action based on the same general set of facts but premised on two legal theories: (1) violation of California Corporations Code section 25401, untrue statements or omissions in connection with purchase or sale of security (asserted against Spakor, Inc., and Spakor Oil and Gas), and (2) a claim against Bromberg captioned “Joint and several liability of management principals or materially aiding personnel.”

The proposed second amended complaint, also verified, alleged that the limited partnership agreement constitutes a security within the meaning of California Corporations Code section 25019; paragraph 26 alleged that “Berman, at no time intended a sale of his interest in the limited partnership nor did he agree to such a sale. However, if Berman did so, he did so based upon untrue statements or omissions made by defendants, and each and all of them, on or around July 18, 1994, in connection with the purported sale of his interest in [Spakor Oil and Gas].” The first cause of action thus alleged that on July 21,1994, Bromberg bought Berman’s interest in Spakor Oil and Gas, retroactively as of January 1,1994, for a total price of $30,000; Berman sold his interest when he cashed the check; defendants’ written communication included an untrue statement or omitted to state a material fact necessary to make the statements made not misleading, i.e., that Berman’s interest in the limited partnership was in fact valued as of January 1, 1994, at $30,000; the communication was untrue and omitted to state that the value of Berman’s interest in the limited partnership “far exceeded $30,000.” The first cause of action sought, “in lieu of rescission,” damages as a result of plaintiff’s disposition of the security; on information and belief, plaintiff alleged that the value of the security on January 1,1994, exceeded $500,000. The second cause of action alleged that Bromberg materially assisted in making the untrue statements and deceived or defrauded Berman by depriving him of his rights in his partnership interest and the true value thereof.

At a hearing on March 20, 1996, the court apparently elected to treat the motion for judgment on the pleadings as a demurrer to the first amended complaint and sustained the demurrer as to all causes of action with 20 days’ leave to amend. At the hearing on the motion for leave to file the second amended complaint, on April 17, 1996, the court denied the motion without prejudice “based on language in paragraph 26.1 agree that that’s not the way to plead a claim. Sort of a contingent form of pleading, and you can’t do it that way.”

On May 6, 1996, Berman filed a motion for leave to file a third amended verified complaint. The proposed third amended complaint was substantially similar to the second amended complaint, except that it added a third cause of action against Spakor, Inc., and Bromberg for “constructive fraud— breach of fiduciary duty owed limited partner by general partner and president of limited partnership.” The proposed third amended complaint also did not contain the language in paragraph 26 of the proposed second amended complaint relating to Berman’s subjective intent not to sell his interest for $30,000. Rather, the third amended complaint, in paragraph 16 alleged that “Berman cashed the check on July 21,1994. Said July 21,1994, transaction constituted a ‘sale’ of a ‘security’ within the meaning of Cal. Corp. Code §§ 25401 and 25019, respectively.” Paragraph 24, part of the first cause of action, also unequivocally alleged that a sale of a security occurred on July 21, 1994, when Berman cashed the $30,000 check.

In opposition to the motion for leave to file the third amended complaint, defendants maintained that because the allegations concerning the sale of a security contradict prior allegations that there was no sale of Berman’s interest, the third amended complaint is a sham and the fatal defect cannot be cured by simply omitting the earlier allegations in a later pleading without explanation. The motion was heard and taken under submission on May 29, 1996; the court stated that it would rule on the matter at the status conference scheduled for May 30, 1996. On May 30, 1996, the status conference was held and continued to June 13, 1996; the court stated that it would issue a ruling on Berman’s motion on June 13.

On June 13, 1996, the court denied Berman’s motion for leave to file a third amended complaint, applying the “sham pleading rule” to the third amended complaint and reasoning as follows: “The policy against sham pleadings permits the court to take judicial notice of the prior pleading and require that the pleader explain the inconsistency. If he fails to do so, if he fails to give a satisfactory explanation, the court may disregard the omitted or inconsistent allegations and read into the complaint the allegations of the superseded complaint. „„,[!] So, we go from version one, the original complaint, Berman didn’t intend a sale, and he didn’t agree to a sale. [IQ Version two, Berman didn’t. . . agree with [a] sale. [