Opinion
B292662
01-27-2020
ROBERT CHRISTOPHER CHATHAM, Plaintiff and Appellant, v. SHEPPARD, MULLIN, RICHTER & HAMPTON, LLP et al., Defendants and Respondents.
Joshua R. Furman Law Corp. and Joshua R. Furman for Plaintiff and Appellant. Sheppard, Mullin, Richter & Hampton, Charles F. Barker, Michael D. Stewart and Jacqueline G. Luther for Defendants and Respondents.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Los Angeles County Super. Ct. No. BC696006) APPEAL from a judgment of the Superior Court for the County of Los Angeles, Daniel S. Murphy, Judge. Affirmed. Joshua R. Furman Law Corp. and Joshua R. Furman for Plaintiff and Appellant. Sheppard, Mullin, Richter & Hampton, Charles F. Barker, Michael D. Stewart and Jacqueline G. Luther for Defendants and Respondents.
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Robert Christopher Chatham sued Dean Matthew Richardson and his former law firm, Sheppard, Mullin, Richter & Hampton (collectively the Sheppard Mullin parties), for breach of fiduciary duty, negligent misrepresentation and related torts. The Sheppard Mullin parties demurred to the complaint primarily on the ground Chatham had previously executed a release of his claims against them. The trial court sustained the demurrer with leave to amend. After Chatham filed a notice of intent not to amend, the trial court entered judgment in favor of the Sheppard Mullin parties. On appeal Chatham's principal contention is the release relied upon by the Sheppard Mullin parties does not apply to his claims against them. We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
1. Chatham's Complaint Against the Sheppard Mullin Parties
Chatham's lawsuit arises from alleged misrepresentations by Richardson, a tax attorney who at the time was a partner with Sheppard Mullin, on behalf of the firm's client Mary Carole McDonnell. Chatham, an attorney who also represented McDonnell, alleges he relied on Richardson's statements regarding the assets of McDonnell and her family trusts in deciding to participate in McDonnell's investment program, which proved to be a fraudulent Ponzi scheme. After discovering the representations concerning McDonnell's assets were false, Chatham filed a complaint against the Sheppard Mullin parties on February 26, 2018.
As alleged in the complaint or stated in its exhibits, in early 2013 Chatham was contacted by McDonnell and offered a chance to invest in a "gifting program" that would provide tax benefits to McDonnell and her family trusts and favorable returns for the investor. Because Chatham was disinclined to invest absent proof of McDonnell's assets, the nature of her trusts and her ability to repay, McDonnell provided him with a letter dated February 15, 2013 signed by Richardson on Sheppard Mullin letterhead. In his letter, which was attached as an exhibit to Chatham's complaint, Richardson stated he had represented McDonnell since the mid-1990's primarily in connection with her estate planning matters and was very familiar with the Mary Carole McDonnell Trust, of which McDonnell was the trustee, and its assets. Richardson acknowledged he was unqualified to value assets. He nevertheless represented, based on his knowledge as of the date of the letter, the value of the trust assets was "quite substantial" and, based on his conversations with others who were qualified, McDonnell's business holdings "should represent many millions of dollars' worth of value."
Although Richardson's February 15, 2013 letter was addressed only to McDonnell, Chatham alleged it was intended as a "'To Whom It May Concern' letter" and was in fact an opinion letter prepared for the purpose of providing documentation of McDonnell's assets to persons interested in her investment proposals. Richardson concluded the February 2013 letter by requesting McDonnell refer anyone with questions about her trust assets to him. After receiving the letter Chatham contacted Richardson. In the course of their communications, which were by telephone and email, Richardson repeatedly confirmed to Chatham he was McDonnell's attorney.
In 2014, after Chatham had already started investing in McDonnell's program, McDonnell proposed Chatham increase the frequency and amount of his investments. Although Chatham had been reluctant to increase his investments given the financial risk, his concerns were allayed by a telephone conversation with Richardson on May 28, 2014. During that conversation Chatham told Richardson he was considering whether to participate in another series of McDonnell's investment program and wanted to determine whether Richardson's letter verifying McDonnell's net worth was accurate. Richardson responded by affirming the accuracy of his February 15, 2013 letter.
Chatham participated in the series of McDonnell's investment program occurring between July 2013 and August 2014. Chatham alleged he would not have invested in McDonnell's program absent Richardson's confirmation that McDonnell had the assets to comply with the investments' repayment terms. Chatham's investments in the July 2013 to August 2014 series of the program were repaid pursuant to their terms.
Although Chatham characterized participation in McDonnell's program as investments, he also alleged each series of the investment program had been secured by promissory notes obligating repayment by McDonnell.
Subsequently, in a September 2014 email Richardson and Chatham "discussed that McDonnell had a net worth of $80 million to $100 million." To ease Chatham's continued concerns regarding McDonnell's assets and ability to repay any investments, McDonnell provided Chatham with another purported opinion letter, dated December 15, 2014, from Richardson on Sheppard Mullin letterhead. The December 15, 2014 letter, summarized in and attached as an exhibit to the complaint, set forth, among other matters, Richardson's understanding of McDonnell's status as a beneficiary of a trust with assets valued at more than $400 million, as well as the amount and timing of expected trust distributions to McDonnell. According to Chatham, the information provided about McDonnell's assets in the December 15 letter was consistent with the other representations Richardson had made to Chatham.
The December 15, 2014 letter contained no addressee. In the letter Richardson, again explaining he had represented McDonnell since the mid-1990's, described himself as a "practicing tax attorney, rated AV Preeminent 5.0/5.0 by Martindale, with nearly 30 years of experience." He further stated, "This letter is to confirm for you my understanding that Ms. McDonnell is the beneficiary of an irrevocable trust established by her parents many years ago that holds assets (primarily, real estate), the value of which is well in excess of $400 million, of which Ms. McDonnell's share exceeds $80 million. . . . [¶] It has also been my understanding from Ms. McDonnell that, pursuant to the terms of the trust, she will be entitled to a distribution of the trust assets over a period of two years, starting in June 2015, and that the total amount of such distributions will be in excess of $80 million."
From April 3, 2015 to May 19, 2016 Chatham participated in another series of McDonnell's investment program. As before, the investments were secured by promissory notes.
By July 2016 McDonnell had defaulted on the outstanding notes in the amount of $1,899,260.60. In his complaint Chatham alleged, to resolve McDonnell's default, he entered into an agreement, executed on July 25, 2016, which established new repayment terms. He further alleged that, "[i]n entering into the July 25, 2016 agreement, [he] relied on the multiple representations made by Richardson concerning McDonnell's assets"; he "would never have consented to yet another agreement with McDonnell if he was not convinced, based on the information that Richardson had provided and the solid reputation of Richardson and Sheppard Mullin, that he had been provided with an accurate portrayal of McDonnell's assets."
By February 2017 McDonnell had breached the July 25, 2016 agreement. Pursuant to the terms of that agreement, Chatham filed a demand for arbitration against McDonnell. Chatham prevailed and on September 20, 2017 obtained a superior court judgment confirming the arbitration award in the amount of $3,400,282.20. Sheppard Mullin represented McDonnell in the arbitration and subsequent court proceedings to confirm the arbitration award.
After September 20, 2017 Chatham conducted postjudgment enforcement efforts that led him to conclude McDonnell was insolvent and never had $80 million or more in assets. Chatham's postjudgment investigation included an interview with McDonnell's nephew in which he explained his family neither had a $400 million trust nor wealth in the vicinity of that amount and could not comprehend why anyone would falsely represent otherwise to Chatham. Chatham alleged the Sheppard Mullin parties' representations regarding McDonnell having a right to assets worth more than $80 million were false. He further alleged Richardson, who had recommended participation in McDonnell's program to others, was fully versed in McDonnell's investment system, and there was no excuse for the Sheppard Mullin parties' false statements.
Chatham alleged causes of action for legal malpractice, negligent misrepresentation and breach of fiduciary duty against the Sheppard Mullin parties. He also alleged a cause of action for fraud against Richardson. Each cause of action was based on alleged misrepresentations by the Sheppard Mullin parties (or Richardson) regarding McDonnell's assets.
2. The Sheppard Mullin Parties' Demurrer and Request for Judicial Notice
a. The July 25, 2016 confidential settlement agreement attached to the request for judicial notice
On April 16, 2018 the Sheppard Mullin parties demurred generally to the complaint on the ground, for each of his causes of action, Chatham had failed to state facts sufficient to constitute a cause of action. Concurrently with their demurrer they requested the trial court take judicial notice of the following documents: (1) a copy of the petition to confirm contractual arbitration award filed by Chatham on August 21, 2017 in Robert C. Chatham v. Mary Carole McDonnell, et al., Los Angeles Superior Court Case No. BS170675, which included among its attachments the confidential settlement agreement executed by Chatham and McDonnell on July 25, 2016; (2) a copy of the August 18, 2017 final award in the arbitration between Chatham and McDonnell; and (3) a copy of the notice of ruling filed by Chatham in Case No. BS170675, which attached a copy of that court's September 20, 2017 (adopted) tentative ruling confirming the August 18, 2017 final arbitration award.
Chatham's notice of ruling in Case No. BS170675 stated the court had adopted its tentative ruling in its entirety, granting Chatham's petition to confirm the arbitration award and denying McDonnell's request to vacate the award.
The July 25, 2016 confidential settlement agreement attached to the Sheppard Mullin parties' request for judicial notice stated, in its introductory paragraph, it was entered into between Chatham and McDonnell, the Mary McDonnell Trust and the McDonnell Family Trust (with the McDonnell parties collectively referred to as "McDonnell"). In a parenthetical it contained the following definition: "[A]ll parties to the Agreement collectively referred to herein as the 'Parties,' or individually, as a 'Party.'"
The agreement's recitals included the following: "[T]o avoid further expense and the cost and uncertainty of litigation, the Parties have agreed to resolve any and all claims either Party could have relating to these Promissory Notes and any alleged past conduct by any other Party (collectively, 'Claims'), without any admission of liability whatsoever." Section 1 of the agreement, titled "Purpose of the Confidential Settlement Agreement," also provided, "This Agreement is entered into in good faith by the Parties to avoid the expense and uncertainties of litigation with respect to the Claims and any other dispute between the Parties (the 'Dispute')."
Section 4 of the agreement set forth mutual releases, with the McDonnell parties' release of claims in section 4(A) and Chatham's release of claims in section 4(B). Section 4(B) of the agreement provided, "As of the Effective Date, Chatham acknowledges, understands, and agrees that except as specifically set forth herein, Chatham will and hereby does release, discharge and waive any and all claims it may have, whether known or unknown, against McDonnell and all of her representatives, indemnitors, indemnitees, insurers, heirs, attorneys, agents, and spouses or domestic partners, if any (collectively, the 'McDonnell Released Parties'), with respect to any losses, debts, charges, damages, demands, obligations, causes of action, claims, lawsuits, liabilities, breaches of duty, misfeasance, malfeasance, promises, controversies, contracts, judgments, awards, penalties, costs, and expenses, of whatever nature, type, kind, description or character, whether known or unknown, which Chatham does, did, or might have, own, or hold, on or before the Effective Date, in connection with any matter, cause, fact, thing, act, or omission whatsoever, and Chatham will not now or in the future accept any recovery in any forum from the McDonnell Released Parties with respect to such matters released herein."
In section 4(C) the "Parties" acknowledged they understood the provisions of Civil Code section 1542 and waived "every right or benefit that they had, have or may have under Section 1542." Section 4(C) of the agreement further provided, "In connection with the releases being granted hereunder, the Parties acknowledge that they are aware that they may discover facts in addition to or different from those that they may know or believe to be true with respect to the Claims, or the subject matter of this Agreement, and that such facts may give rise to claims which are presently unknown, unanticipated and unsuspected. It is the Parties' intention to hereby fully, finally, and forever settle and release all released claims and that, in furtherance of such intention, the releases given herein will be and remain full and complete releases notwithstanding the discovery or existence of any such additional or different facts." In section 4(E) the "Parties" each represented that they understood the releases and that they had been advised to consult, and had consulted with, their attorneys about the releases and waivers before executing the agreement.
The agreement set forth the following in all capital letters as constituting the provisions of Civil Code section 1542 in effect at the time: "'A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.'" Although section 1542 has since been amended, the current statutory provision is not materially different from its predecessor. (See Stats. 2018, ch. 157, § 2.)
Section 5, titled "Acknowledgements, Warranties and Representations," contained, at section 5(B), a provision in which the "Parties" agreed, warranted and represented that, "except as herein expressly set forth, no representations or promises have been made to them, or by or on behalf of them, to induce the execution of this Agreement." It stated they understood, agreed and "expressly assume[d] the risk" that any fact recited in, or relied on by them in executing, the agreement "may turn out to be other than, different from, or contrary to the facts now known to them or believed by them to be true"; they further agreed that "this Agreement shall be effective in all respects notwithstanding any such difference in facts and shall not be subject to termination, modification or rescission by reason of any such difference in facts."
Section 7(A) included the following language: "The terms of this Agreement, including the fact of this settlement, shall remain strictly confidential and shall not be revealed to anyone by Chatham and McDonnell or their attorneys, except: (1) to attorneys, tax preparers/advisors or others who reasonably need to know the information in order to provide professional services to the Parties or their counsel; (2) as otherwise required by law; (3) to the Parties' spouses or domestic partners, if any; or (4) as necessary to enforce the terms of this Agreement. Such confidentiality is of the essence to and a material term of this Agreement."
The agreement, at section 8 (titled "Entire Agreement"), included a statement it constituted "the entire agreement and understanding of the Parties hereto" and also provided that "[e]ach Party acknowledges that it has read this Agreement and has signed it freely and voluntarily without reliance on any representations made by any of the other Parties hereto, or their attorneys or representatives, other than as expressly set forth herein." In section 12 the agreement included a requirement any notices for the McDonnell parties be sent to McDonnell and to Andrew Goodman at Garvey Schubert Barer, the firm that represented McDonnell in negotiating the settlement agreement. Section 13, titled "Admissibility of Agreement," provided, "This Agreement may be disclosed and is admissible in any action to enforce any provision herein, pursuant to California Evidence Code § 1123."
Notices to Chatham were to be sent to Christopher Chatham at the Chatham Law Group.
b. The Sheppard Mullin parties' demurrer
The Sheppard Mullin parties, in support of their demurrer, argued the July 25, 2016 confidential settlement agreement—which, as Chatham alleged in the complaint, allowed him to successfully demand contractual arbitration and obtain an arbitration award in excess of $3 million against McDonnell—contained a comprehensive release that barred all of Chatham's causes of action against them. They explained the representations regarding McDonnell's assets on which Chatham based his complaint were allegedly made in 2013 and 2014, but Chatham executed the settlement agreement, with its comprehensive release of all known and unknown claims, in July 2016 without preserving any claims based on those prior representations.
In support of their demurrer the Sheppard Mullin parties also contended Chatham was judicially estopped from seeking to invalidate the settlement agreement and its release because he had successfully prevailed in the arbitration proceedings against McDonnell by relying on the enforceability of both. In addition, they argued Chatham could not seek to rescind the agreement because he had accepted benefits under it, keeping McDonnell's partial repayments pursuant to the agreement's terms while simultaneously avoiding liability on McDonnell's arbitration counterclaim for usury through the agreement's global release of claims.
They further demurred to Chatham's fraud and negligent misrepresentation causes of action on the independent ground Chatham's reliance on the alleged misrepresentations was unreasonable as a matter of law and to the breach of fiduciary duty cause of action on the additional ground Chatham was not their client and thus, as a matter of law, they had no fiduciary relationship with him.
3. Chatham's Opposition to the Demurrer and the Sheppard Mullin Parties' Reply
On May 10, 2018 Chatham filed his opposition to the demurrer. He also opposed in part the Sheppard Mullin parties' request for judicial notice to the extent they sought to establish the truth of facts set forth in the documents to be judicially noticed.
In opposing the demurrer Chatham argued the release did not bar his claims against the Sheppard Mullin parties because they were neither contracting parties nor third party beneficiaries of the July 25, 2016 settlement agreement. As to the latter point Chatham asserted, in essence, he and McDonnell could not have intended the Sheppard Mullin parties to be third party beneficiaries because the agreement's confidentiality provision (section 7(A)) prohibited disclosure to them. Citing Epic Communications, Inc. v. Richwave Technology, Inc. (2015) 237 Cal.App.4th 1342 (Epic), which he claimed involved a confidentiality provision containing identical language, Chatham argued the exception to nondisclosure contained in section 7(A), subsection (4)—"as necessary to enforce the terms of this Agreement"—did not permit disclosure to the Sheppard Mullin parties.
Chatham explained the Sheppard Mullin parties did not represent McDonnell in negotiating the settlement agreement or in connection with the dispute leading up to it, as reflected by section 12 of the agreement, which required any notices for McDonnell be sent to Garvey Schubert Barer. He argued the agreement's release (in section 4(B)) of McDonnell's "attorneys" and "agents" unambiguously referred only to the law firm of Garvey Schubert Barer. Alternatively, to the extent the court were to disagree with his interpretation, Chatham contended the language of the release was ambiguous, he should be allowed to introduce extrinsic evidence to interpret it, and the demurrer should have been overruled.
In their reply brief, filed May 16, 2018, the Sheppard Mullin parties argued the broad release provision of the July 25, 2016 settlement agreement clearly included claims against them and the agreement's confidentiality provision did not prohibit disclosure to them, as shown by section 7(A), subsection (1), which provided an exception to nondisclosure allowing "Chatham and McDonnell or their attorneys" to reveal its terms "to attorneys." They argued the second reference to "attorneys" necessarily referred to a different set of attorneys from the first reference.
4. The Trial Court's Order Sustaining the Demurrer with Leave To Amend and Subsequent Entry of Judgment
At the May 23, 2018 hearing on the demurrer, Chatham again argued extending the release to the claims he asserted against the Sheppard Mullin parties, given the settlement agreement's confidentiality language, would be directly contrary to the holding in Epic, supra, 237 Cal.App.4th 1342. After taking the matter under submission, on May 29, 2018 the trial court granted the Sheppard Mullin parties' request for judicial notice and sustained the demurrer with leave to amend, ruling the July 25, 2016 settlement agreement released all of Chatham's claims against the Sheppard Mullin parties. The court found the release specifically allowed McDonnell and her then attorneys to reveal the terms of the settlement agreement to McDonnell's other attorneys, including the Sheppard Mullin parties. Moreover, permitting Chatham's lawsuit to proceed would conflict with the express terms of the settlement agreement, which was intended "to resolve any and all claims each Party could have relating to the Promissory Notes." The court rejected Chatham's argument the release was ambiguous as to the terms "attorneys" and "agents" and should be limited to Garvey Schubert Barer as contrary to the literal meaning of the language of the release, which was not reasonably susceptible to the interpretation urged by Chatham.
On June 25, 2018 Chatham filed a "Notice of Intent Not To File Amended Complaint," stating he "declines to file an amended complaint pursuant to the Court's Order sustaining demurrer with leave to amend dated May 29, 2018." On July 26, 2018, after the deadline to file an amended complaint expired without Chatham having filed an amended pleading, the court entered judgment in favor of the Sheppard Mullin parties. Chatham filed a timely notice of appeal. (Code Civ. Proc., § 904.1, subd. (a)(1).)
"'When a demurrer is sustained with leave to amend, and the plaintiff chooses not to amend but to stand on the complaint, an appeal from the ensuing dismissal order may challenge the validity of the intermediate ruling sustaining the demurrer.'" (Lee v. Hanley (2015) 61 Cal.4th 1225, 1232.)
DISCUSSION
1 . Standard of Review
A demurrer tests the legal sufficiency of the factual allegations in a complaint. We independently review the superior court's ruling on a demurrer and determine de novo whether the complaint alleges facts sufficient to state a cause of action or discloses a complete defense. (T.H. v. Novartis Pharmaceuticals Corp. (2017) 4 Cal.5th 145, 162; Loeffler v. Target Corp. (2014) 58 Cal.4th 1081, 1100; Committee for Green Foothills v. Santa Clara County Bd. of Supervisors (2010) 48 Cal.4th 32, 42.) We assume the truth of the properly pleaded factual allegations; facts that reasonably can be inferred from those expressly pleaded; and matters of which judicial notice has been or may be taken, including any factual concessions by the plaintiff. (Hernandez v. City of Pomona (2009) 46 Cal.4th 501, 506, fn. 1 [based on facts conceded by the plaintiffs in briefing and oral argument, the Supreme Court concluded defense of collateral estoppel precluded relitigation of issues raised by the plaintiffs' complaint; "[b]ecause this appeal arises in connection with a demurrer, we look to the 'properly pleaded factual allegations' of the operative complaint 'read in light of' any 'judicially noticeable facts' and 'factual concessions' of the plaintiff"]; Evans v. City of Berkeley (2006) 38 Cal.4th 1, 20); Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081; see Code Civ. Proc., § 430.30, subd. (a) [authorizing demurrer to a complaint when the ground for objection appears on the face of the pleading or from any matter of which the court is required to or may take judicial notice].)
We do not assume the truth of allegations contradicted by attached exhibits or matters judicially noticed. (Evans v. City of Berkeley, supra, 38 Cal.4th at p. 20 ["a demurrer assumes the truth of the complaint's properly pleaded allegations, but not of . . . assertions contradicted by judicially noticeable facts"]; Brakke v. Economic Concepts, Inc. (2013) 213 Cal.App.4th 761, 767 ["[w]hile the 'allegations [of a complaint] must be accepted as true for purposes of demurrer,' the 'facts appearing in exhibits attached to the complaint will also be accepted as true and, if contrary to the allegations in the pleading, will be given precedence'"]; Hoffman v. Smithwoods RV Park, LLC (2009) 179 Cal.App.4th 390, 400 ["[u]nder the doctrine of truthful pleading, the courts 'will not close their eyes to situations where a complaint contains allegations of fact inconsistent with attached documents, or allegations contrary to facts which are judicially noticed'"].) We are also not required to accept the truth of the legal conclusions pleaded in the complaint. (Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126; Tepper v. Wilkins (2017) 10 Cal.App.5th 1198, 1203.)
A demurrer based on an affirmative defense will be sustained only where the face of the complaint and matters judicially noticed clearly disclose the defense or bar to recovery. (Favila v. Katten Muchin Rosenman LLP (2010) 188 Cal.App.4th 189, 224 [demurrer based on an affirmative defense will not lie unless it clearly appears on the face of the complaint and matters of which the court may properly take judicial notice that the cause of action is necessarily barred]; accord, Stella v. Asset Management Consultants, Inc. (2017) 8 Cal.App.5th 181, 191 ["[a]lthough a general demurrer does not ordinarily reach affirmative defenses, it 'will lie where the complaint "has included allegations that clearly disclose some defense or bar to recovery"'"]; see Marina Tenants Assn. v. Deauville Marina Development Co. (1986) 181 Cal.App.3d 122, 130, 131-132 [where trial court properly took judicial notice of master lease agreement, master lease was treated "as having been pled in its entirety"]; Helix Land Co. v. City of San Diego (1978) 82 Cal.App.3d 932, 937 ["relevant matters of which the trial court could have taken notice" may be treated "as having been pleaded" for purposes of demurrer].) "'Where the complaint's allegations or judicially noticeable facts reveal the existence of an affirmative defense, the "plaintiff must 'plead around' the defense, by alleging specific facts that would avoid the apparent defense. Absent such allegations, the complaint is subject to demurrer for failure to state a cause of action."'" (Esparza v. County of Los Angeles (2014) 224 Cal.App.4th 452, 459.) Release is an affirmative defense. (Anderson v. Fitness Internat. LLC (2016) 4 Cal.App.5th 867, 877, fn. 3.)
Although ordinarily we construe the pleading liberally with a view to substantial justice between the parties (Code Civ. Proc., § 452; Ivanoff v. Bank of America, N.A. (2017) 9 Cal.App.5th 719, 726), "'[i]t is the rule that when a plaintiff is given the opportunity to amend his complaint and elects not to do so, strict construction of the complaint is required and it must be presumed that the plaintiff has stated as strong a case as he can.'" (Reynolds v. Bement (2005) 36 Cal.4th 1075, 1091, disapproved on another ground in Martinez v. Combs (2010) 49 Cal.4th 35, 62-66; accord, Davis v. Fresno Unified School Dist. (2015) 237 Cal.App.4th 261, 274-275; see O'Hara v. Los Angeles County Flood Control Dist. (1941) 19 Cal.2d 61, 64 ["[b]y declining to amend after the sustaining of the demurrer by the trial court, plaintiffs took the position that whatever facts they might prove in support of their action were alleged in the complaint"].)
2. Chatham Released His Claims Against the Sheppard Mullin Parties
a. Governing law
Pursuant to Civil Code section 1559, a "contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it." (See Spinks v. Equity Residential Briarwood Apartments (2009) 171 Cal.App.4th 1004, 1021 (Spinks) ["'California law permits third party beneficiaries to enforce the terms of a contract made for their benefit'"].) "'The test for determining whether a contract was made for the benefit of a third person is whether an intent to benefit a third person appears from the terms of the contract. [Citation.] If the terms of the contract necessarily require the promisor to confer a benefit on a third person, then the contract, and hence the parties thereto, contemplate a benefit to the third person.'" (Id. at p. 1022.) The third person need not be expressly identified in the contract. (Lucas v. Hamm (1961) 56 Cal.2d 583, 591; Garratt v. Baker (1936) 5 Cal.2d 745, 748.) He or she must simply demonstrate membership in the class of persons for whose benefit the contract was made. (Spinks, at p. 1023.)
"Ultimately, the determination turns on the manifestation of intent to confer a benefit on the third party. [Citation.] 'Ascertaining this intent is a question of ordinary contract interpretation.'" (Spinks, supra, 171 Cal.App.4th at p. 1023; accord, Hess v. Ford Motor Co. (2002) 27 Cal.4th 516, 524, 528.) "Under long-standing contract law, a 'contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful.'" (Hess, at p. 524.) That intent is interpreted according to objective, rather than subjective, criteria. (Wolf v. Walt Disney Pictures & Television (2008) 162 Cal.App.4th 1107, 1126); and the "intention of the parties is to be ascertained from the writing alone, if possible" (Civ. Code, § 1639; see Hess, at p. 524). Nevertheless, "[a] contract may be explained by reference to the circumstances under which it was made, and the matter to which it relates." (Civ. Code, § 1647; see Hess, at p. 524.)
"When the facts are undisputed, as they are deemed to be in connection with a demurrer, the interpretation of a contract, including the resolution of any ambiguity, is a question of law." (Sprinkles v. Associated Indemnity Corp. (2010) 188 Cal.App.4th 69, 76; see City of Hope National Medical Center v. Genentech, Inc. (2008) 43 Cal.4th 375, 395 ["[i]nterpretation of a written instrument becomes solely a judicial function only when it is based on the words of the instrument alone, when there is no conflict in the extrinsic evidence, or when a determination was made based on incompetent evidence"]; Wolf v. Walt Disney Pictures & Television, supra, 162 Cal.App.4th at p. 1134 [when extrinsic evidence is not in conflict, interpretation of a contract is a question of law]; Benedek v. PLC Santa Monica (2002) 104 Cal.App.4th 1351, 1357 ["[i]n the absence of extrinsic evidence, the scope of a release is determined by the express language of the release"].)
"'An ambiguity exists when a party can identify an alternative, semantically reasonable, candidate of meaning of a writing. [Citations.] An ambiguity can be patent, arising from the face of the writing, or latent, based on extrinsic evidence.'" (Benedek v. PLC Santa Monica, supra, 104 Cal.App.4th at p. 1357; accord, Eriksson v. Nunnink (2015) 233 Cal.App.4th 708, 722; see Dore v. Arnold Worldwide, Inc. (2006) 39 Cal.4th 384, 391 ["'[a]n ambiguity arises when language is reasonably susceptible of more than one application to material facts'"].) "Courts will not strain to create an ambiguity where none exists." (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18-19.)
b. The agreement is not reasonably susceptible to Chatham's interpretation
Chatham contends the trial court erred in ruling the Sheppard Mullin parties were not excluded from the scope of the release in the July 25, 2016 settlement agreement based on the agreement's statement of purpose and confidentiality provision. Relying on Epic, supra, 237 Cal.App.4th 1342, as he did in the trial court, Chatham argues a third party barred from knowledge of a contract cannot be a third party beneficiary of that contract and the July 25, 2016 settlement agreement prohibited the contracting parties from disclosing its terms to the Sheppard Mullin parties. According to Chatham, although section 4(B) of the agreement provides he has released any and all claims against McDonnell and "all of her . . . attorneys," and the Sheppard Mullin parties come within that language if construed literally and in isolation, the scope of the release must be read in conjunction with, and narrowed by, the confidentiality language in section 7(A). Chatham argues the reference to attorneys in the confidentiality clause limits disclosure to Garvey Schubert Barer, the firm that represented McDonnell in negotiating the agreement, and to attorneys who reasonably need to know the contents of the settlement agreement to provide professional services to McDonnell or Chatham, a much more limited set of attorneys that does not include Sheppard Mullin. He asserts in the alternative, even if the agreement does not clearly support his construction, it is ambiguous for the same reasons.
For the first time on appeal Chatham also argues construing the reference in section 4(B) to "McDonnell and all of her . . . attorneys" to include McDonnell's attorneys "for all time" would entail "an absurd result" of Chatham releasing himself of liability because he was also McDonnell's attorney at one time. Even if this argument were not forfeited, any absurdity lies in its unstated premise that Chatham has sued himself, not in the conclusion that, if he has, he has also released himself.
We agree with the trial court the July 25, 2016 settlement agreement is not reasonably susceptible to the interpretation advanced by Chatham. Under the plain and unambiguous language of section 4(B), Chatham released his claims against the Sheppard Mullin parties. To be sure, there is a confidentiality provision (section 7(A)), which provides the terms of the agreement "shall not be revealed to anyone by Chatham and McDonnell or their attorneys, except: (1) to attorneys, tax preparers/advisors or others who reasonably need to know the information in order to provide professional services to the Parties or their counsel; (2) as otherwise required by law; (3) to the Parties' spouses or domestic partners, if any; or (4) as necessary to enforce the terms of this Agreement." The plain language of section 7(A), subsection (4) ("as necessary to enforce the terms of this Agreement"), however, provides an unambiguous exception to confidentiality that permits McDonnell and her then attorneys to disclose the terms of the agreement to any of the McDonnell released parties (including the Sheppard Mullin parties) to enforce the release. (See Civ. Code, § 1644 ["[t]he words of a contract are to be understood in their ordinary and popular sense, rather than according to their strict legal meaning"]; see also id., § 1638 ["[t]he language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity"].) Far from effecting "an absurdity," construing section 7(A), subsection (4), as required under its plain language, to allow disclosure to released parties would support the agreement's purpose, as set forth in the recitals, of avoiding the expense and uncertainties of litigation, as well as ensure Chatham's compliance with the requirement, as set forth in section 4(B), that he "will not now or in the future accept any recovery in any forum from the McDonnell Released Parties with respect to such matters released herein." (See Civ. Code, § 1641 ["[t]he whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other"].)
Notably, Chatham did not in his appellate briefing contend the agreement, although clear on its face, contains a latent ambiguity that can only be revealed by extrinsic evidence.
Because section 7(A), subsection (4), permits the agreement's disclosure by McDonnell and her then attorneys at Garvey Schubert Barer to the McDonnell released parties (including to McDonnell's other attorneys, the Sheppard Mullin parties), we need not address whether the reference in section 7(A), subsection (1), to "attorneys" also provides an exception allowing disclosure to the Sheppard Mullin parties.
The construction proposed by Chatham, in contrast, violates fundamental principles of contract interpretation by effectively requiring the rewriting of the clear, express language of the release. (See Retired Employees Assn. of Orange County, Inc. v. County of Orange (2011) 52 Cal.4th 1171, 1179 ["'as a general matter, implied terms should never be read to vary express terms'"]; Chisom v. Board of Retirement of Fresno County Employees' Retirement Assn. (2013) 218 Cal.App.4th 400, 415 ["fundamental rule of contract law that an implied term may not be found where it would contradict the express terms of the contract"]; In re Mission Ins. Co. (1995) 41 Cal.App.4th 828, 837-838 ["'[w]hen the language of a contract is plain and unambiguous it is not within the province of a court to rewrite or alter by construction what has been agreed upon'"].)
Epic, supra, 237 Cal.App.4th 1342 does not compel a contrary result. In Epic the court of appeal reversed an order granting summary judgment in favor of defendants Richwave Technology, Inc. and Shyh-Chyi Wong, who had relied on a broad release provision in a settlement agreement between plaintiff Epic Communications, Inc. and defendant ALi Corporation, an agreement to which Richwave and Wong were not parties. The court held, even assuming the release clause viewed in isolation expressed an intent to benefit a class of persons that included Richwave and Wong, the settlement agreement construed as a whole did not unambiguously express the intent to do so. (Id. at p. 1349.)
In reaching its conclusion, the court of appeal relied on the settlement agreement's introductory recitals stating its purpose, as well as a provision entitled "Successors and Assigns," which contained what the court characterized as "something of a smoking gun." That provision stated, "'This Agreement shall be binding upon, inure to the benefit of and be enforceable by Epic and ALi, and their respective successors and assigns but may not be assigned by either Party without the prior consent in writing of the other Party. No other person or entity other than the Parties hereto shall be entitled to claim any right or benefit under this.'" (Epic, supra, 237 Cal.App.4th at p. 1350.) The court interpreted this language as an express declaration of the contracting parties' intent not to confer enforceable rights on third parties (other than successors and agreed-upon assigns), which it determined arguably conflicted with the broad language of the release provision. (Id. at pp. 1351-1352.) In light of that potential conflict, the Epic court looked to the settlement agreement's confidentiality provision, which it described as barring Epic and ALi from disclosing the terms of the settlement agreement "except under legal compulsion to any but a tiny class of persons," a class that did not include Richwave and Wong. (Id. at p. 1352.) The court then stated, "The contracting parties could hardly expect that persons thus barred from knowledge of the agreement . . . would be able to take advantage of the release," and determined the trial court had erred in concluding the settlement agreement on its face barred Epic's claims against Richwave and Wong. (Id. at pp. 1352, 1354.)
According to the court of appeal, Wong was not even arguably a successor or an assign; Richwave was not an assignee of rights under the settlement agreement; and it was "highly doubtful" and "[a]t best" ambiguous whether Richwave could be deemed a successor. (Epic, supra, 237 Cal.App.4th at p. 1351.)
Here, unlike in Epic, there is no provision expressly limiting the class of persons with the right to enforce, or otherwise claim any right or benefit under, the settlement agreement. Moreover, contrary to Chatham's contention, the settlement agreement at issue in Epic did not contain a similar provision regarding its purpose. As explained by the court of appeal, the Epic settlement agreement had a "limited purpose"; its "introductory recitals acknowledge the existence of Epic's claims against Wong and Richwave, yet describe the purpose of the settlement agreement in terms too narrow to cover those claims." (Epic, supra, 237 Cal.App.4th at pp. 1347, 1350 ["[h]ad the parties intended [the extinction of Epic's claims against Wong and Richwave], they might have been expected to express the purpose of the settlement agreement more broadly, e.g., as extinguishing all existing and potential claims arising from the events giving rise to the suit"].) In contrast, as discussed, the recitals of the instant July 25, 2016 agreement expressed the broad purpose of "avoid[ing] further expense and the cost and uncertainty of litigation." Under section 1, read in conjunction with the recitals, that purpose included avoiding litigation with respect to "any and all claims" relating to McDonnell's promissory notes and past conduct. The agreement's purpose was thus described in terms broad enough to encompass Chatham's litigation against the Sheppard Mullin parties for their alleged acts in facilitating McDonnell's investment-promoting activities.
Finally, Chatham's argument the settlement agreement in Epic contained an exception in its confidentiality provision with the same language as section 7(A), subsection (4), is based on a misperception. The relevant exception in Epic ("as may be necessary to enforce the rights contained herein in an appropriate process or legal proceeding to appropriate legal authority") is more narrowly tailored than the one in the agreement between Chatham and McDonnell ("as necessary to enforce the terms of this Agreement"). The Epic exception only provides for disclosure "to appropriate legal authority" and "in an appropriate process or legal proceeding"; no such limitation is present in the more broadly worded provision of subsection (4) that would preclude disclosure to the McDonnell released parties, including the Sheppard Mullin parties. (See Epic, supra, 237 Cal.App.4th at p. 1352, fn. 9.)
In sum, the confidentiality provision of section 7(A) does not prohibit disclosure of the terms of the settlement agreement to the Sheppard Mullin parties. It thus does not conflict with the scope of the release, nor does it render the clear and express language of the agreement releasing Chatham's claims against the Sheppard Mullin parties ambiguous. The trial court did not err in sustaining the Sheppard Mullin parties' demurrer on this ground.
3. Chatham's Fraud Claims Fall Within the Scope of the Release
Chatham contends, even if the Sheppard Mullin parties may claim the benefit of the release, their fraud in inducing the agreement was not released. In support of this argument he cites Civil Code section 1668, which states, "All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law." He also argues the release (section 4(B) of the agreement) applies only to claims "which Chatham does, did, or might have, own, or hold, on or before the Effective Date," and contends, because his fraud claims had not accrued and did not exist as of the effective date of the agreement, they were not released.
"Effective Date" was defined in the agreement as "[t]he day after the Parties exchange executed versions of this Agreement."
Civil Code section 1668 "prohibits exculpation from future torts," and "the weight of authority recogniz[e] that section 1668 applies only to concurrent or future torts." (SI 59 LLC v. Variel Warner Ventures, LLC (2018) 29 Cal.App.5th 146, 152-153 (SI 59) ["[w]e are not aware of any case law applying section 1668 to torts where all elements are past events"].) As explained by Division Two of this court in SI 59, although cases have applied Civil Code section 1668 to fraudulent inducement claims (see, e.g., Blankenheim v. E.F. Hutton & Com. (1990) 217 Cal.App.3d 1463) and "fraudulent inducement occurs before a contract is signed," "the reliance is not a past event" and "damages are either concurrent or prospective"; thus, fraudulent inducement claims "in a real sense . . . cannot be considered past torts given that the reliance and damages elements of fraud cannot possibly be past events." (SI 59, at pp. 152-153.) "Accordingly, as Witkin explains: 'A party to a contract who has been guilty of fraud in its inducement cannot absolve himself or herself from the effects of his or her fraud by any stipulation in the contract, either that no representations have been made, or that any right that might be grounded upon them is waived. Such a stipulation or waiver will be ignored, and parol evidence of misrepresentations will be admitted, for the reason that fraud renders the whole agreement voidable, including the waiver provision.'" (McClain v. Octagon Plaza, LLC (2008) 159 Cal.App.4th 784, 794.)
"'The elements of fraud . . . are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or "scienter"); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.'" (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.) "To establish a claim of fraudulent inducement, one must show that the defendant did not intend to honor its contractual promises when they were made." (Food Safety Net Services v. Eco Safe Systems USA, Inc. (2012) 209 Cal.App.4th 1118, 1131; see Lazar, at p. 638 ["[a]n action for promissory fraud may lie where a defendant fraudulently induces the plaintiff to enter into a contract"].)
Chatham argues any claims of fraudulent inducement against the Sheppard Mullin parties had not accrued prior to the execution of the release because the elements of reliance and resulting damage only occurred at or after the time Chatham executed the agreement. He is mistaken. The complaint is silent as to when the Sheppard Mullin parties first became aware of the settlement agreement and does not include allegations they knew about it prior to its execution, let alone made misrepresentations to induce Chatham to enter into it. Any fraud claims alleged in the complaint are based entirely on the Sheppard Mullin parties' (or Richardson's) alleged misrepresentations regarding McDonnell's assets. Those claims accrued well prior to Chatham's execution of the July 25, 2016 settlement agreement: The last of the alleged misrepresentations concerning McDonnell's assets identified in the complaint occurred in December 2014. Chatham alleges no misrepresentations after 2014 and, in particular, none after he entered into the April 3, 2015 to May 19, 2016 series of investments. Essentially, as pleaded, the alleged misrepresentations in 2013 and 2014 regarding McDonnell's assets on which Chatham relied to participate in McDonnell's investment program are the same ones he now contends he relied upon when entering the settlement agreement. But because he relied on those misrepresentations in making investments through May 2016 and was damaged as a result when McDonnell defaulted on the promissory notes securing those investments by July 2016—the events that led to the July 25, 2016 settlement agreement—the elements of reliance and resulting damage were present before execution of the settlement agreement, thereby making any alleged claim of fraud against the Sheppard Mullin parties a past tort. That Chatham may have again relied on those earlier misrepresentations regarding McDonnell's assets when he executed the settlement agreement on July 25, 2016 and was again damaged when McDonnell breached the agreement by February 2017 does not convert claims of past fraud into new fraud claims. (See Choi v. Sagemark Consulting (2017) 18 Cal.App.5th 308, 336 ["Each claimed injury traces to, and is not distinct from, the same source of wrongful conduct—namely defendants' bad advice concerning establishment of the IRC section 412(i) Plan and purchase of the life insurance policies. The fact that . . . damages accrued in stages, does not transform one primary right into many"].)
To be sure, under the "'discovery rule,'" accrual of a cause of action is postponed "until the plaintiff discovers, or has reason to discover, the cause of action." (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 807.) Chatham, however, did not raise in his appellate briefing the applicability of the discovery rule to postpone accrual of any alleged fraudulent inducement claim. (Badie v. Bank of America (1998) 67 Cal.App.4th 779, 784-785 ["[w]hen an appellant fails to raise a point, or asserts it but fails to support it with reasoned argument and citations to authority, we treat the point as waived"].) In any event, Chatham did not allege in his complaint he was unable earlier to have reasonably discovered any alleged fraud despite diligent investigation, let alone plead facts sufficient to make the requisite showing. (See Fox, at pp. 808-809 ["[i]n order to adequately allege facts supporting a theory of delayed discovery, the plaintiff must plead that, despite diligent investigation of the circumstances of the injury, he or she could not have reasonably discovered facts supporting the cause of action"; "'conclusory allegations will not withstand demurrer'"]; Czajkowski v. Haskell & White, LLP (2012) 208 Cal.App.4th 166, 175.) As was true of the other causes of action pleaded by Chatham, the trial court did not err in sustaining the demurrer to his claim of fraud. The lawsuit was properly dismissed when Chatham declined to file an amended complaint.
Chatham had the burden of pleading and proving the applicability of the discovery rule. (Investors Equity Life Holding Co. v. Schmidt (2011) 195 Cal.App.4th 1519, 1533 ["the burden of pleading and proving belated discovery of a cause of action falls on the plaintiff"]; see Fox v. Ethicon Endo-Surgery, Inc., supra, 35 Cal.4th at p. 808; cf. Aryeh v. Canon Business Solutions, Inc. (2013) 55 Cal.4th 1185, 1197 ["Canon bears the initial burden of proving Aryeh's claims are barred by section 17208's four-year limitations period. [Citation.] Thereafter, the burden shifts to Aryeh to demonstrate his claims survive based on one or more nonstatutory exceptions to the basic limitations period. [Citation.] That burden may be imposed even at the pleading stage"].)
Because we conclude the trial court did not err in sustaining the demurrer on the ground all of Chatham's claims against the Sheppard Mullin parties were released under the July 25, 2016 settlement agreement, we need not address the remaining issues raised by Chatham's appeal, including whether any of Chatham's contentions were barred by judicial estoppel and the viability of his breach of fiduciary duty cause of action.
DISPOSITION
The judgment is affirmed. The Sheppard Mullin parties are to recover their costs on appeal.
PERLUSS, P. J.
We concur:
ZELON, J.
FEUER, J.