SI 59, LLC v. Variel Warner Ventures, LLC

SI 59 LLC (appellant) appeals from a judgment of dismissal

following a demurrer to its Second Amended Complaint (SAC) by

Variel Warner Ventures, LLC (Variel Warner), Variel Builders,

LLC, (Variel Builders), Verdugo Management & Investment, Inc.

(Verdugo), Troxler Residential Ventures XIX, LLC (Troxler), and

Troxler Venture Partners, Inc. (Troxler Venture) (collectively

respondents). Also, appellant appeals the postjudgment award of

$81,420.25 in attorney fees to Variel Warner, Variel Builders,

Troxler, and Troxler Venture. Appellant posits that the trial

court erred when it ruled that the SAC was barred by a general

release, and that appellant is not entitled to a declaration that

the general release is unenforceable pursuant to Civil Code

section 1668.1 In the alternative, appellant avers that the trial

court abused its discretion by not granting leave to amend the

pleading, and that it violated appellant’s due process right to

notice and an opportunity to be heard by raising new cases and

issues at the demurrer hearing. If we reverse the dismissal,

appellant asks that we reverse the award of attorney fees. We

find no error and affirm.

In affirming, we hold that section 1668 negates a

contractual clause exempting a party from responsibility for

fraud or a statutory violation only when all or some of the

elements of the tort are concurrent or future events at the time

the contract is signed. Contrariwise, we hold that section 1668

does not negate such a clause when all the elements are past



1 All further statutory references are to the Civil Code unless

otherwise indicated.

Section 1668 establishes that a contract that exempts

anyone from responsibility for his or her own fraud or violation of

the law is against public policy.

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events. Regarding the element of damages, which is necessary

for tort liability, this means that at least some form of economic

or physical damage has occurred.

FACTS

The SAC

The SAC alleged: Variel Warner, Variel Builders, Troxler

and Troxler Venture are affiliated with each other. The precise

nature of their affiliation is unknown. Verdugo is a general

building contractor.

In 2005, Variel Warner entered into a general construction

contract with Verdugo to construct improvements at an 85-unit

apartment complex (Property). Under the terms of the general

construction contract, Verdugo agreed to construct the

improvements in a good and workmanlike manner in strict

compliance with all drawings and specifications. Verdugo also

agreed to comply with all laws. It proceeded to construct the

improvements. In doing so, it employed subcontractors to

construct the structural concrete slab and then waterproof it.

The work of the subcontractors was defective because, inter alia,

they violated the California Building Code sections pertaining to

flashing, counterflashing, waterproofing, and roof membranes.

The City of Los Angeles issued a Certificate of Occupancy

for the Property on December 6, 2007.

On December 17, 2007, Sobrato Interests III (Sobrato)

entered into an agreement (Purchase Agreement) to acquire the

Property from Variel Warner. Per the Purchase Agreement,

Sobrato was not obligated to close escrow until “Final

Completion,” which was defined to mean, among other things:

“(i) all Improvements have been constructed in substantial

accordance with all plans and specifications and other applicable

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provisions of the General Construction Contract . . . and [Sobrato]

has been notified that completion of construction has occurred,

. . . [and] (v) all requirements in the General Construction

Contract for final completion to have occurred thereunder shall

have occurred. . . .”

The Purchase Agreement contained a general release

stating that Sobrato “shall rely solely upon [its] own knowledge of

the Property based on its investigation of the Property and its

own inspection of the Property in determining the Property’s

physical condition, except with respect to . . . [the]

representations, warranties and covenants [made by Variel

Warner in the Purchase Agreement]. . . .” Sobrato released, inter

alia, Variel Warner, Variel Builders, Troxler, Troxler Venture,

and Verdugo (except to the extent of Verdugo’s general contractor

warranty) from all claims arising out of any condition of the

Property, including construction errors, omissions or defects.

Excluded from the release were any claims that Sobrato may

have against Variel Warner for breach of the representations,

warranties and covenants in the Purchase Agreement or for

fraud.

Prior to escrow, Variel Warner “represented to Sobrato that

final completion of construction had occurred and that all

requirements of the General Construction Contract for final

completion had been satisfied.” Variel Warner knew or should

have known the representations were untrue. Sobrato

reasonably relied on these representations by proceeding with the

close of escrow.

In 2008, Sobrato assigned all of its interests in the Property

to SI XX, LLC. In 2015, SI XX, LLC assigned all of its interests

in the Property to appellant. SI XX, LLC and appellant observed

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water leaking from the podium and pool deck into the parking

garage and causing damage.

Against all respondents, the SAC alleged causes of action

for negligence and declaratory relief. Against Variel Warner,

Variel Builders, Troxler and Troxler Venture, the SAC also

alleged breach of contract.

The negligence cause of action posited that Verdugo

negligently constructed or inspected the structural concrete slab

and slab waterproofing, and that Variel Warner, Variel Builders,

Troxler and Troxler Venture negligently managed, inspected and

developed the Property. Because the negligence cause of action

incorporated the SAC’s general allegations, it included the

allegation that Variel Warner made a negligent representation.

The breach of contract cause of action alleged that Variel

Warner, Variel Builders, Toxler and Troxler Venture breached

the Purchase Agreement by failing to deliver the Property with

all improvements having been “constructed in substantial

accordance with all plans and specifications” and “the General

Construction Contract.”

Finally, the SAC sought a declaration that section 1668

renders the general release unenforceable because it purports to

exempt respondents from responsibility for their statutory

violations and fraud.

Trial Court Proceedings

Respondents demurred to the negligence and breach of

contract causes of action on the ground they were barred by the

general release, and to the declaratory relief cause of action

based on the absence of a present controversy regarding the

application of section 1668.

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At the hearing, sua sponte, the trial court raised two cases

it believed were controlling: Lingsch v. Savage (1963) 213

Cal.App.2d 729 (Lingsch) and Orlando v. Berkeley (1963) 220

Cal.App.2d 224 (Orlando). It interpreted those cases to mean

that section 1668 prohibits a contract that exempts a party from

responsibility for its fraudulent failure to disclose a condition

that was not observable to the other party. In contrast, the trial

court interpreted those cases to hold that section 1668 does not

prohibit a contract that exempts a party from responsibility for

misrepresentation, whether it is intentional or negligent. The

trial court concluded that because appellant did not plead

fraudulent nondisclosure, it did not plead around the general

release and therefore did not successfully plead causes of action

for negligence, breach of contract and declaratory relief.

Also sua sponte, the trial court raised the issue of whether

Sobrato’s fraud cause of action was assignable and whether it

had, in fact, been assigned.

When appellant’s counsel suggested that section 1668

rendered the general release unenforceable to the degree it

purported to exempt respondents from negligent violations of the

building code, the trial court replied, “No, not in this context, not

according to those cases.” It concluded that Lingsch and Orlando

cover the application of section 1668 to contracts concerning “as

is” sales of property.2

During the hearing, the trial court recognized that it had

raised issues without notice, and that it should allow appellant to

supplement its papers. At one point, the trial court gave the

parties an opportunity to read Lingsch and Orlando and then



2 The parties do not dispute that the Purchase Agreement

provided for an “as is” sale.

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argue them. Regarding the assignment issue, it stated, “[I]t

might mean that [appellant] would have to go and get an

assignment from their seller of all claims . . . , but that would

come with leave to amend because the [trial court] has interjected

these issues by giving you [Lingsch and Orlando].” Then the trial

court stated that the parties needed to shepardize Lingsch and

Orlando, adding, “I’ll give you a chance to have a further hearing

on this point[.]” According to the trial court, it planned to be

guided by Lingsch. Nonetheless, it explained that it would take

the matter under submission for 10 days, and said, “File

whatever you want. And if I don’t hear anything from anybody,

then I’m going to make a ruling[.]”

Neither party filed supplement briefs.

The trial court sustained the demurrer without leave to

amend and “dismissed the action without prejudice to [appellant]

seeking reconsideration if appropriate within the time frame

provided by law.” The minute order explained that appellant

failed to plead facts showing a knowing and intentional failure to

disclose existing negative conditions at the time of the general

release, as required by Lingsch and Orlando. It added that

“[t]hese cases . . . rely upon the element of fraud as a necessary

factor to be proven before the elimination of the efficacy [of the

general release] can be established[.]” Last, it averred that

appellant failed to show that a fraud claim can be or has been

assigned.

Appellant appealed the judgment.

Attorney Fees

The trial court awarded $81,420.25 in attorney fees to

Variel Warner, Variel Builders, Troxler and Troxler Venture.

Appellant appealed the award.

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DISCUSSION

I. Standard of Review.

We apply de novo review to an order sustaining a

demurrer. A trial court’s decision to deny leave to amend will be

left undisturbed unless we conclude that there was an abuse of

discretion. (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962,

966–967; Montclair Parkowners Assn. v. City of Montclair (1999)

76 Cal.App.4th 784, 790.)

II. Section 1668.

Section 1668 provides: “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.”

The statute prohibits exculpation from future torts. In fact,

multiple cases state that the statute applies only if a future tort

is involved. (Health Net of California, Inc. v. Department of

Health Services (2003) 113 Cal.App.4th 224, 227 [section 1668

prevents a party from imposing a contractual prohibition against

the recovery of damages for any future violations of statutory or

regulatory law]; Frittelli, Inc. v. 350 North Canon Drive, LP

(2011) 202 Cal.App.4th 35, 43 [“[T]he public policy disfavoring

attempts by contract to limit liability for future torts . . . finds

expression in” section 1668]; Watkins v. Wachovia Corp. (2009)

172 Cal.App.4th 1576, 1587, fn. 12 [section 1668 only applies to

contracts that release liability for future torts].)

Whether section 1668 might apply to past torts is a slippery

question. It has been applied to negate exemption clauses that

would otherwise proscribe liability for fraudulent inducement of

the very contracts with the exemption clauses. (Blankenheim v.

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E. F. Hutton & Co. (1990) 217 Cal.App.3d 1463, 1471—1473

(Blankenheim) [plaintiffs were fraudulently induced into signing

agreements with hold harmless clauses; section 1668 prevented

the defendant from relying on the hold harmless clauses to

exempt it from “responsibility for its own misrepresentations”];

Simmons v. Ratterree Land Co. (1932) 217 Cal. 201, 204 [citing

section 1668 and stating “a seller cannot escape liability for”

fraudulent inducement of a contract by inserting a release of

liability into the contract].) Undeniably, fraudulent inducement

occurs before a contract is signed. But the reliance is not a past

event; the reliance is the signing of the contract and the changing

of legal positions, which is concurrent with the exemption

clauses. Moreover, the damages are either concurrent or

prospective. Therefore, in a real sense, the fraud in cases like

Blankenheim cannot be considered past torts given that the

reliance and damages elements of fraud cannot possibly be past

events. (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th

1226, 1239 [reliance and damages are elements of a fraud claim].)

We are not aware of any case law applying section 1668 to torts

where all elements are past events. Under these circumstances,

we follow the weight of authority recognizing that section 1668

applies only to concurrent or future torts.

Appellant suggests that Halliday v. Greene (1966) 244

Cal.App.2d 482 (Halliday) establishes that section 1668 applies

to proscribe limitations on liability for past statutory violations.

Appellant misreads the case. In that case, a contractor built an

apartment complex, sold it, and leased it back from the buyer as

a general lessee. The plaintiffs entered into a sublease that

contained a hold harmless clause. Subsequently, the complex

caught fire. The plaintiffs fell on or near an exterior staircase

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while evacuating from their apartment and suffered injuries.

They sued the contractor for, inter alia, negligent construction

and design of the staircase. The trial court granted nonsuit after

finding that the hold harmless clause precluded recovery. (Id. at

p. 485.) Because the construction defect constituted a violation of

a safety order, the reviewing court concluded that section 1668,

rendered the hold harmless clause ineffective. (Halliday, supra,

at p. 488.)

Halliday offers appellant no assistance. Although the

negligent construction of the stairway preceded the hold

harmless clause, there was a continuing dangerous condition.

More importantly, that dangerous condition did not cause harm

to the plaintiffs until after the hold harmless clause was

executed. Thus, for purposes of section 1668, the negligence in

Halliday was a future tort because the causation and damages

elements were future events.

III. Sufficiency of the Negligence Allegations.

The negligence cause of action contains two claims, one for

negligence and one for negligent misrepresentation. As we

discuss below, the negligence claim is barred by the general

release and the negligent misrepresentation claim is not pleaded

with the requisite specificity. Consequently, the demurrer was

properly sustained.

A. Negligence.

Based on the allegations, Variel Warner was economically

damaged when Verdugo and the subcontractors negligently

constructed and waterproofed the structural concrete slab by

failing to comply with the building code. Whether Variel Warner

knew it at the time, the Property’s value was diminished due to

the defects. Thus, for purposes of public policy under section

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1668, the alleged negligent noncompliance with the law as well as

some damages were past events when Sobrato signed the

Purchase Agreement. In this context, it does not matter that the

negligence may have had future consequences. The result is that

section 1668 does not prohibit application of the general release

as it relates to that negligence.

The alleged negligence of Variel Warner, Variel Builders,

Troxler and Troxler Venture in failing to inspect, manage and

develop the property was, if anything, a breach of a common law

duty of care rather than a statutory violation. As a matter of

public policy, there is a difference between Verdugo and the

subcontractors directly violating the law versus Variel Warner,

Variel Builders, Troxler and Troxler Venture failing to detect

that violation. Therefore, as to this alleged negligence, the

general release is enforceable.

Appellant suggests that it can sue Verdugo because it

obtained an assignment of rights that came from Variel Warner

through Sobrato and SI XX, LLC. This argument is a

non sequitur. The general release limits Verdugo’s liability to its

general contractor warranty.

B. Negligent Misrepresentation.

Negligent misrepresentation requires an assertion of fact,

falsity of that assertion, and the tortfeasor’s lack of reasonable

grounds for believing the assertion to be true. It also requires the

tortfeasor’s intent to induce reliance, justifiable reliance by the

person to whom the false assertion of fact was made, and

damages to that person. (B.L.M. v. Sabo & Deitsch (1997) 55

Cal.App.4th 823, 834.) An implied assertion of fact is “not

enough” to support liability. (Wilson v. Century 21 Great Western

Realty (1993) 15 Cal.App.4th 298, 306.)

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Contrary to what the trial court concluded, section 1668

does apply to nullify the general release of the negligent

misrepresentation cause of action. (Blankenheim, supra, 217

Cal.App.3d at pp. 1471–1473.)3 Respondents do not dispute this.

The question remains, however, whether the demurrer was

nonetheless properly sustained because appellant failed to

otherwise allege sufficient facts to state a cause of action for

negligent misrepresentation.

Though respondents suggest to the contrary, the SAC

alleges an assertion of fact. Because “Final Completion” was

defined in the Purchase Agreement to mean that the Property

had been built in substantial compliance with the plans,

specifications and provisions of the construction contract, Variel

Warner’s alleged assertion of “Final Completion” was a

shorthand assertion that the defined substantial compliance had

in fact occurred. In other words, the assertion was not implied; it

had an agreed meaning.

But there are several problems for appellant. Number one,

the cause of action was not alleged with sufficient particularity

because it did not identify, among other things, who made the

representation on behalf of Variel Warner. (Charnay v. Cobert

(2006) 145 Cal.App.4th 170, 184–185, fn. 14 (fraud and negligent

misrepresentation must be pleaded with particularity, with facts

showing “‘“how, when, where, to whom, and by what means the



3 Lingsch and Orlando analyzed the scope of “‘as is’” clauses

in real estate transactions and interpreted them so as not to

conflict with the policy embodied in section 1668. (Lingsch,

supra, 213 Cal.App.2d at p. 742 [an as is provision “is ineffective

to relieve the seller of either his ‘affirmative’ or ‘negative’ fraud”];

Orlando, supra, 220 Cal.App.2d at pp. 228–229.) They are

consistent with Blankenheim.

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representations were tendered”’”].) Number two, there was no

allegation as to why Variel Warner reasonably should have

known the representation was false.

IV. Breach of Contract.

Based on section 1668, appellant argues that the general

release does not bar the breach of contract claim because the

breach was accompanied by a negligent misrepresentation that

there was final completion. But the alleged breach—failure to

deliver the Property in compliance with the plans, specifications

and the requirements of the general construction contract—was

not itself a negligent misrepresentation. Thus, section 1668 is

not triggered in this context. It was appropriate for the trial

court to sustain the demurrer.

V. Declaratory Relief.

Given that the negligence and breach of contract claims are

defective, and given that the SAC does not establish that the

general release is unenforceable, appellant was not entitled to

declaratory relief in its favor. Moreover, the trial court was not

required to issue a declaration that the general release is, in fact,

enforceable. (Collins v. Collins (1957) 48 Cal.2d 325, 333 [where

a ruling on one cause of action resolved a controverted issue

against plaintiff, declaratory relief regarding that same issue was

not required].)

We conclude that the demurrer was properly sustained as

to declaratory relief.

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VI. Denial of Leave to Amend.

Appellant suggests the trial court abused its discretion

when it declined to allow appellant to amend its pleading. The

suggestion does not prevail.

The negligence and breach of contract claims are barred by

the general release. As for the negligent misrepresentation and

declaratory relief causes of action, we do not see how their defects

can be ameliorated.

We note that appellant informs us that, given a chance, it

would allege that on December 10, 2007, Mac Chandler

(Chandler), acting on behalf of Variel Warner, sent an e-mail to

Sobrato agents stating that “on Thursday [December 13, 2007],

we anticipate sending you a notice that [Variel] has met the

conditions of final completion.” But appellant does not indicate

that Chandler ever sent the notice of Final Completion to

Sobrato. In our view, Chandler’s statement about anticipating

sending notice of Final Completion does not equate to actual

notice of Final Completion. In other words, it is merely a

statement of his anticipation; it is not a statement that Final

Completion had occurred.

Another problem is the justifiable reliance element. In the

Purchase Agreement, Variel Warner expressly disclaimed

“Knowledge of any material default” by Variel Warner, thereby

disclaiming any knowledge of the condition of the Property. The

Purchase Agreement also expressly tasked Sobrato with

conducting its own investigation and inspection in determining

the physical condition of the Property. Thus, even if Variel

Warner misrepresented final completion, appellant has not

established—by argument or by authority on point—that its

reliance could be justified in the face of the foregoing provisions.

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We need not analyze this issue further because “[i]t is not our

responsibility to develop an appellant’s argument.” (Alvarez v.

Jacmar Pacific Pizza Corp. (2002) 100 Cal.App.4th 1990, 1206, fn. 11.)

VII. Due Process.

According to appellant, the trial court denied it due process

when it sustained the demurrer based solely on cases and issues

raised sua sponte by the trial court at the demurrer hearing.

(Traverso v. People ex rel. Dept. of Transportation (1993) 6

Cal.4th 1152, 1169 [due process requires, at a minimum, notice

and an opportunity to be heard].) We disagree. The trial court

provided appellant with a 10-day opportunity to supplement its

briefing. Appellant cannot be heard to complain after it did not

embrace the opportunity.

The judgment is affirmed. Respondents shall recover their costs on appeal.