Kai Hou Liang v. Ji Li

KAI HOU LIANG, Plaintiff, Cross-defendant, and Appellant, v. JI LI, Defendant, Cross-complainant, and Appellant;

BCP, INC., Cross-defendant and Respondent.

B305549, B307349

California Court of Appeals, Second District, First Division

November 10, 2022

NOT TO BE PUBLISHED

APPEALS from judgments of the Superior Court of Los Angeles County, No. BC710478 Michael Linfield, Judge. Affirmed in part; reversed in part.

Fernald Law Group and Brandon C. Fernald for Plaintiff Cross-defendant, and Appellant.

Park & Lim, S. Young Lim, Dennis McPhillips, and Jessie Y. Kim for Defendant, Cross-complainant, and Appellant.

Steinbrecher & Span, Geoffrey T. Stover, and Andrew Huang for Cross-defendant and Respondent.

KELLEY, J. ^[*]

These appeals arise from litigation between Kai Hou Liang, who lives in China, and Ji Li, who lives in the United States. In 2016, Li approached Liang about investing in a venture that would acquire and then develop a parcel of land in Hollywood, located at 6140 Hollywood Boulevard (6140 Property). The 6140 Property had been the subject of a purchase contract executed by Li in 2014. Despite several extensions of the escrow, Li had been unable to accumulate the funds necessary to complete the purchase at the contractual price of $9.5 million. In March 2016, Li, Liang and a third investor named Yong Bai^[1] reached agreement on the terms under which an entity named Hollywood Garden LLC (Hollywood Garden) would be formed to acquire and develop the 6140 Property. They executed an agreement which provided for the three investors to make prescribed contributions of invested capital and made Li the managing shareholder. Liang agreed to and did invest an initial $5.48 million into the project. Based on Li's written representations, Liang believed that Li had already invested $1.3 million in the project and would invest an initial $3.53 million, which, combined with Liang's investment, would be sufficient to consummate the purchase of the 6140 Property. In derogation of the investors' agreement, Li failed to contribute his funds, proceeded to use Liang's contributed capital of $5.48 million to place substantial non-refundable deposits on the 6140 Property and ultimately obtained a $4 million loan in Hollywood Garden's name (secured by the 6140 Property) in order to finance the purchase. The loan had a term of only one year, with an option to extend for a second year. Li also caused Hollywood Garden to expend substantial sums paying fees and points associated with the loan, interest on the loan, and later to extend the term of the loan to two years. In addition, Li withdrew money from Hollywood Garden's account for his own purposes. As a result, Hollywood Garden's finances were depleted and its only substantial asset was the 6140 Property, burdened by a short-term $4 million loan.

In 2018, BCP, Inc., a California corporation, acquired the promissory note for Hollywood Garden's loan and declined to extend the loan term. Hollywood Garden defaulted on the loan.

Liang filed suit against Li alleging fraud and various other causes of action. Li cross-complained against Liang and BCP, alleging the existence of an oral contract that he could finance his equity in the venture through a loan secured by the property, and alleging that Liang and another Chinese national, Ying Wei Lu, wrongfully colluded to form BCP to acquire the $4 million promissory note and trigger its default.

The trial court granted Liang's and BCP's motions for judgment on Li's cross-complaint under Code of Civil Procedure section 631.8. A jury returned a verdict for Liang on his complaint against Li and awarded Liang $2 million in compensatory damages for his lost profits up to the time of trial on the $5.48 million he had invested and also awarded $200,000 in punitive damages. Through various posttrial briefing, Liang sought imposition of a constructive trust over Li's 40.3 percent interest in Hollywood Garden as a remedy for Li's unjust enrichment. The trial court entered judgment for Liang and BCP against Li on the cross-complaint, and entered a judgment for Liang on the complaint, which included $200,000 (the punitive damages component of the jury award) and a constructive trust on all of Li's interest in Hollywood Garden. The judgment also included attorney fees and costs to both Liang and BCP. However, the court denied Liang's request to include the jury's $2 million compensatory damages award in the final judgment.

Li contends that the trial court erred by imposing a constructive trust on his interest in Hollywood Garden, and that we should reverse the judgment because of erroneous rulings the trial court made leading to and during trial. On cross-appeal, Liang contends that the trial court erred when it declined to both impose a constructive trust on Li's interest in Hollywood Garden and award a $2 million monetary judgment.

We find no error in the court's judgment against Li on his cross-complaint and in the court's decision to award a constructive trust. However, we reverse the court's judgment denying Liang the $2 million compensatory damages award rendered by the jury in its verdict.

BACKGROUND

A. Hollywood Garden

Liang and Li met in 2014, when Liang made his first trip to the United States. The two were introduced by a mutual friend, who recommended Li to Liang as a potential investment partner for real estate in the United States. After their meeting, Liang invested with Li in property in Yorba Linda in 2015. Li first contacted Liang about the Hollywood Garden project in March 2016.

Liang testified that Li called him "urgently," asking for a favor-to "invest in [the Hollywood Garden] project by sending money in quickly, because [another] investor was not reliable." Liang flew to Los Angeles the next day to meet with Li about the project. Over the following three days, Liang, Li, and Yong Bai negotiated the terms of the parties' investment in the Hollywood Garden project.

Liang and Li signed a document on March 25, 2016, that outlined the terms of their agreement, which was to be funded in three parts. It represented that Yong Bai and Li had already jointly invested $2.6 million ($1.3 million apiece) in the project. The agreement referred to the $2.6 million as "the first phase" of the project, and represented that "[t]he funding for this phase is complete."

"Funding for the second phase," the agreement stated, was to total $12 million, and was to be provided by Liang and Li. Liang was to fund $7.3 million, and Li was to provide $4.7 million. Each was to provide their share of funds "in two separate transactions each." Liang was to contribute in transactions of $5.48 million and $1.82 million, and Li was to contribute $3.53 million and $1.17 million. "After the second phase of funding is complete," the agreement said, "[Liang] will have invested [$7.3 million] in total, [Li] will have invested [$6 million] in total, and [Yong Bai] will have invested [$1.3 million] in total. So [Liang] will have 51 [percent] equity, [Li] will have 40.3 [percent] equity, and [Yong Bai] will have 8.7 [percent] equity in the project." "Should one party fail to contribute," the agreement provided, "the corresponding shares are to be adjusted in accordance with the actual invested amount."

Liang wired $5.48 million to Hollywood Garden's bank account on March 28, 2016. Li never contributed any of the funds to Hollywood Garden that he had agreed to contribute.

In March and April 2016, Li wired $4.8 million of Liang's $5.48 million to an escrow company as non-refundable deposits for the purchase of the 6140 Property.

B. Li's Loan

Liang's contribution, without any of the additional promised capital from Li, was not sufficient to close escrow on the 6140 Property. In May 2016, Li inserted Liang's electronic signature on a Hollywood Garden corporate resolution allowing Hollywood Garden (through Li) to acquire a $4 million loan secured by the 6140 Property.^[2] The loan was for a term of one year with the option to extend for another year for $50,000.

Escrow closed on the 6140 Property on May 13, 2016, funded almost entirely by Liang's investment and the $4 million loan. Hollywood Garden made the required payments on the loan each month.

Liang became suspicious about the Hollywood Garden project when he requested capital statements for the project and Li never provided them. In December 2016, one of Li's friends visiting China told Liang about a loan that "Li had successfully obtained" on the Hollywood Garden project. Liang contacted others who had invested in the earlier Yorba Linda project, and together they invited Li to Beijing for a meeting in March 2017 to discuss the projects. Li admitted to the assembled group that he had taken out the loan, but told the group that the loan was a personal guarantee loan. Liang "requested strongly" that Li pay back the loan, and Li promised to do so. Li never paid back any of the money.

Rather than making any personal payment on the loan, however, in May 2017, Li paid $50,000 from a Hollywood Garden account to exercise the option to extend the term of the $4 million loan to May 2018.

In July 2017, the Hollywood Garden investors met in California and voted to remove Li as manager of Hollywood Garden and to remove him from all of the entity's bank accounts.

BCP bought the loan at some point between July 2017 and its maturity in May 2018. Hollywood Garden defaulted on the loan in May 2018.

C. The Litigation

Liang filed a complaint in the trial court on June 15, 2018, and a first amended complaint on June 26, 2018, alleging fraud negligent misrepresentation, unfair business practices (Bus & Prof. Code, § 17200 et seq.), breach of contract, breach of the covenant of good faith and fair...