Law Review: Fraud on execution Louis Munoz and hotel and restaurant in San Diego
Today’s case involves fraud. The old-time full-on deceit fraud. The trial court got it wrong, fortunately the Court of Appeal got it right.
The lead paragraph of the Fourth Appellate District Court of Appeal Opinion: “This appeal involves a form of fraud rarely seen in day-to-day litigation. It goes by various names – fraud in the factum, fraud in the execution, fraud in the inception – but they all describe the same genre of deceit. It occurs where, after parties have agreed upon certain contract terms, one of them surreptitiously substitutes a document for signature that looks the same as an earlier draft but contains materially different terms.”
I have to say, in my almost fifty years of practicing law, I have never had a lawyer or opposing party surreptitiously substitute the terms of a contract, lease or other document at the time of signing. Lucky me; 80-year-old Louis Munoz was not so lucky.
PURCHASE AND LEASEBACK AGREEMENT
Shivam and Rajesh Patel owned a hotel and restaurant in San Diego which had been closed for years. The property needed substantial repairs which the Patels were unable to accomplish. The Patels listed the property for sale. They structured the transaction to remain in possession after the sale and lease back from the new owner, Munoz.
The Patels and Munoz through their real estate agent circulated a triple net lease which is a lease in which the lessee pays taxes, insurance, utilities, and is responsible for maintenance. The tenant takes on all costs of the property. The Patels circulated a draft lease which went back and forth multiple times, ultimately representing the last draft was ready for signature. As all of the terms had been agreed upon, Mr. Munoz only made a cursory review of the final lease which had been informally approved by the Patels and him. What Munoz did not know is that the Patels had secretly and cleverly changed the material terms. For example, making Munoz responsible for maintenance and repairs and renovations and taxes, etc.
Worst yet, the Patels pretended to have found an independent lender to assist Munoz which was actually their alter ego. The so-called lender misleadingly described the terms of Munoz loan agreement and as such the Patels again defrauded him.
TRIAL COURT GETS IT WRONG
When Munoz discovered he had been taken, he filed suit. The trial court dropped the ball essentially ruling he should have read the contract terms more closely.
FRAUD IN EXECUTION
The Court of Appeal reviewed the facts and determined that Munoz’s ignorance in not noticing the substituted key terms of the lease was excusable. They cited a California Supreme Court ruling which read in part, “No rogue should enjoy his ill-gotten plunder for the simple reason that his victim is by chance a fool.”
The Court determined that the lease had been circulated by the Patels as a “final lease” at least four times with the last confirmation just days before close of escrow. They concluded that the Patels all along planned to “surreptitiously switch the lease through trickery” by substituting an altered version of the lease and the same with their loan terms to Munoz. Right on Court of Appeal.
Just to rub it in, the Court of Appeal found Patels guilty of elder abuse of Munoz which essentially occurs when someone obtains property of someone over the age of 65 with intent to defraud or for wrongful use. Take that Patels.
Jim Porter is an attorney with Porter Simon licensed in California and Nevada, with offices in Truckee and Tahoe City, California, and Reno, Nevada. Jim’s practice areas include: real estate, development, construction, business, HOAs, contracts, personal injury, accidents, mediation and other transactional matters. He may be reached at email@example.com or http://www.portersimon.com
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