California Court of Appeal Reminds LLCs and Title Companies to Do Their Due Diligence

Apr 23, 2024

The California Court of Appeal recently reversed a trial court’s decision in a real estate fraud case involving a two-partner limited liability company. The court’s decision underscores the importance of conducting thorough title research in real estate transactions and the potential liability of the escrow agents and title companies involved in these transactions. The case demonstrates that thorough research, diligent documentation, and proactive legal counsel are essential to preventing disputes and protecting clients’ rights in the event of litigation.

The Facts

Sam v. Kwan et al., 4/19/24 CA2/8 (Cal. Ct. App. 2024) concerns a dispute between Anthony Sam and Renee Kwan, who formed a limited liability company (“2013 LLC”) to buy a parking lot. Sam and Kwan were named as the company’s managers. Kwan’s company owned 49% of the LLC. Sam controlled three other companies that owned the remaining 51% of the company. 2013 LLC bought a parking lot in 2014, and Sam signed two recorded documents in the parking lot’s chain of title identifying himself as the company’s manager.

The business relationship between Sam and Kwan deteriorated. In 2015, Kwan negotiated the sale of the parking lot to the Board of Fire and Police Pension Commissioners for the City of Los Angeles (“Board”) for $3.8 million. The Board used a law firm as outside counsel and First American Title Company (“First American”) as the title insurer and escrow agent for the real estate transaction.

Sam alleged this sale was done without his knowledge, and that Kwan had “fabricated” and “forged” documents to remove him from the LLC. Sam sued Kwan, her companies, First American, and the Board after discovering the sale of the parking lot. He claimed Kwan fraudulently removed him from the company and pocketed the sale proceeds. The trial court ruled in favor of the defendants on various pretrial motions, effectively denying Sam a legal remedy.

The Court of Appeal affirmed some of the trial court’s rulings but reversed others, finding that the trial court erred in granting summary judgment in favor of the Board. The court held the Board’s title research was deficient because of the inconsistences between the recorded documents and the version of the operating agreement provided by Kwan.

The Board’s attorney’s failure to carefully review the title report and recorded documents was a major factor in the Court of Appeal’s decision. The ruling also demonstrates the potential liability of escrow agents and title companies in real estate deals. While First American was not the focus of the ruling, the case serves as a reminder of the critical role these entities play and the legal obligations they have.

Key Takeaways

This case serves as a cautionary tale for real estate investors, business partners, and the professionals who advise them. Thorough title research, careful attention to corporate governance, and robust legal protections can help prevent disputes and minimize the risk of litigation. Attorneys must be diligent in reviewing title reports and other recorded documents, and they must be alert to any inconsistencies or red flags that could lead to problems.

The ruling also calls attention to the potential for fraud within LLCs and how difficult it is to prove fraudulent intent. When relationships within an LLC break down, disputes often lead to litigation. To avoid disputes, attorneys advising business partners must direct their effort to best practices for internal governance and documentation. Additionally, this case shows the difficulty of proving fraudulent intent. Though Sam’s allegations may have been believable, they did not meet the high legal standard for pleading a claim for fraud.

For individuals involved in complex real estate transactions and limited liability companies, Sam v. Kwan ruling provides valuable insights. Thorough research, careful documentation, and proactive legal counsel can help prevent disputes and position clients for success if litigation arises. As the stakes continue to rise in the world of business law, attorneys must be vigilant in their practice and committed to the highest standards of professional excellence.

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