Appeal court affirms fraud ruling in Berkeley co-op suit

A California appellate court has affirmed a lower-court order, finding that officials of a Berkeley senior housing co-op fraudulently planned to use the co-op’s assets to pay their debt to the co-op under an offer settling a lawsuit against them.

San Francisco, 29 April 2015 (edited for clarity 2 May 2015)

An appellate court today let stand a lower court ruling that former officials of a 60-unit Berkeley senior housing cooperative, Berkeley Town House, had committed “promissory fraud” in accepting a proposal to settle a lawsuit against them.

Affirming the Alameda County Superior Court’s order tossing out a $224,415 judgment, the Court of Appeal in San Francisco rejected the officials’ claim that if contractors being sued by the co-op paid the co-op then the officials and their insurance company would not have to pay the agreed amount. Once the officials’ attorney had signed the settlement, the co-op had negotiated an agreement by contractors Garry Secrest and Esteban Cardiel to pay the co-op the same $224,415 amount, a portion of the $404,000 in damages claimed by the co-op against the contractors. The co-op officials had treated the contractors’ payment as a satisfaction of their debt, even though the settlement prohibited them from accepting any reimbursement from the co-op.

“Substantial evidence supports the conclusion that, by accepting the … Offer, the Individual Defendants induced the … settlement by making a promise they had no intent to perform”, wrote the three-justice panel, concluding “Substantial evidence—based on the admissions of the Individual Defendants’ counsel to these facts—supported the court’s conclusion that the elements of fraudulent inducement of a contract by false promise had been met. Accordingly, the court did not err in vacating the judgment on this ground.”

In its unanimous opinion, the panel of the Court of Appeal likewise affirmed the ruling of Superior Court Judge George C. Hernandez, Jr., that there was a second basis for voiding the judgment that the settlement triggered: Any settlement would have required a review by the court to protect the other co-op members.

Agreeing with co-op member Jonathan Pool, the court found that his lawsuit against the officials included “derivative” claims, seeking “to recover assets for the corporation”. The justices reiterated the lower court’s rulings that a settlement of the suit’s derivative claims would require approval by the court and possibly an opportunity for the co-op’s other members to object. They also noted that the defendants’ interpretation of the settlement appeared to involve a conflict of interest and would likely have failed to win the court’s approval.

Fred M. Feller, representing seven former directors of the co-op, filed the appeal in March 2014. David H. Schwartz, representing Pool, argued against the appeal. The Court of Appeal heard their oral arguments on 26 March.

Another issue, raised by Pool, was whether the settlement offer covered all claims in the case or only monetary claims. The Court of Appeal noted the dispute over this question but found it unnecessary to resolve it.

Pool filed the suit in March 2012 against eight officials and former officials of the co-op, claiming that they had illegally and wastefully spent the corporation’s money on Secrest and Cardiel’s defective construction, ignored warnings about possible seismic weaknesses in the co-op’s 9-story 1960s building, and violated many of the co-op members’ democratic rights. The complaint asked the court to order the defendants to pay damages to the co-op, deal with the seismic risks, and stop the procedural violations.

Justice Henry E. Needham, Jr., authored the opinion, and Justices Barbara J.R. Jones and Terence L. Bruiniers concurred.

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