California Cases March 27, 2020: Johnston v. Novelo

Case Description

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

(Alameda County Super. Ct. No. RG17862130)

Stewart Johnston appeals after the trial court sustained without leave to amend a demurrer to his cross-complaint based on the doctrine of in pari delicto and dismissed two cross-defendants from the action. We conclude the cross-complaint is not barred by in pari delicto. We also conclude the demurrer was properly sustained as to two causes of action based on other grounds.

Johnston owns a property (the Property or Premises) in the City of Berkeley (the City) located in one of the limited areas the City allows medical cannabis dispensaries. BTHHM Berkeley, LLC (BTHHM) brought an action against Johnston alleging he breached a contract to lease his property to BTHHM for use as a cannabis dispensary. BTHHM alleges it submitted to

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the City an application for a permit to operate a dispensary; one of the requirements to be considered for a permit was to have a location secured at which the dispensary would operate. BTHHM entered into a letter of intent with Johnston, through his property manager, Landmark Real Estate Management (Landmark) to lease space in the Property. In broad terms, the letter of intent (and four amendments) required Johnston to hold the Property vacant pending approval of the application, during which BTHHM would pay Johnston $1,600 per month, and to execute a lease upon approval for an initial term of three years, with an option to renew for a total of seven additional years. After the City issued a permit to BTHHM, Johnston refused to enter into the lease on the ground he did not want the Property used as a dispensary. On these alleged facts, BTHHM states causes of action against Johnston for breach of contract, breach of contract to negotiate in good faith, breach of the implied covenant of good faith and fair dealing, false promise, and unjust enrichment.

Johnston cross-complained against several parties, including, as pertinent to this appeal, Landmark and Holda M. Novelo (collectively, respondents). We accept the allegations of the operative amended cross-complaint (the cross-complaint) as true for purposes of a demurrer. ( Lazar v . Hertz Corp . (1999) 69 Cal.App.4th 1494, 1501 ( Lazar )

The cross-complaint alleges Novelo acted as Johnston's real estate and property manager for his residential properties, and that she was Landmark's sole shareholder. However, Novelo was never a leasing agent for the Property and did not have authority to agree to lease the Property to anyone, to make an agreement concerning the Property for a term of more than one year, or to agree to lease the Property for a purpose that violates federal law. The cross-complaint also alleges that the City and its permit

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application "require the consent of a real property owner as a condition of granting a permit for a dispensary to operate at a particular location."

Crucially, the cross-complaint alleges cross-defendants, "knowing that [Johnston] did not want a medical marijuana dispensary to operate from his property under any circumstances, but knowing that he was willing to accept consideration from them to only use the Premises address, a description of the address only, for the purpose of applying for and/or securing a permit to operate a dispensary in the City of Berkeley (and, if issued a permit, to then operate such a dispensary from another location not owned by Johnston)," conspired to execute documents purporting to obligate Johnston to enter into a lease for BTHHM to operate a marijuana dispensary and "to deceive him into believing that payments would be made to him solely for the use of the Premises address description and for no other purpose ." (Italics added.) In order to ensure the Property was not rented to someone else, Novelo told Johnston that BTHHM "only needed and wanted to use the Premises address description so that they could apply for a permit from the City of Berkeley, since only certain addresses could be involved in the process[.] . . . [Johnston] told Cross-defendant Novelo that the Premises address could be used for this purpose, but only for this purpose, and that he would have to be paid in return."

The cross-complaint alleges that, unbeknownst to Johnston and without authorization, Novelo decided to sign the letter of intent purporting to agree to lease the Property for use as a dispensary. Johnston did not see or sign the letter of intent or its amendments until more than a year later, even though he asked Novelo several times to provide him with any documents she signed concerning the Premises. Novelo also falsely told the City in a writing that a lease had been executed authorizing the Property to

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be used as a dispensary. According to the cross-complaint, had Johnston known that the letter of intent and amendments purported to obligate him to allow the dispensary to operate at the Property, he would have told the City he was unwilling to allow this use.

Johnston asserts causes of action against Landmark and Novelo for declaratory relief, breach of fiduciary duty, negligence, fraud, and indemnity. Landmark and Novelo demurred to the cross-complaint on the ground, in part, that Johnston's claims are barred by the doctrine of unclean hands. The trial court sustained the demurrer without leave to amend and dismissed Landmark and Novelo from the action.

I. Legal Standards

We review a trial court's order sustaining a demurrer de novo, exercising our independent judgment on whether the complaint states a cause of action as a matter of law. We assume the truth of all material facts pled in the complaint, as well as those that may be inferred from those expressly alleged. ( Lazar , supra , 69 Cal.App.4th at pp. 1500-1501.) We also consider matters that may be judicially noticed. ( Holiday Matinee , Inc . v . Rambus , Inc . (2004) 118 Cal.App.4th 1413, 1421.) A complaint that includes " ' "allegations that clearly disclose some defense or bar to recovery" ' " is subject to demurrer. ( Ibid .) "Thus, a demurrer based on an affirmative defense will be sustained only where the face of the complaint discloses that the action is necessarily barred by the defense." ( Casterson v . Superior Court (2002) 101 Cal.App.4th 177, 183 ( Casterson ).) On demurrer, we do not determine "the truth of disputed facts or what inferences should be drawn where competing inferences are possible." ( CrossTalk Productions , Inc . v . Jacobson (1998) 65 Cal.App.4th 631, 635 ( CrossTalk ).)

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We review the denial of leave to amend for abuse of discretion, reversing if the Cross-complainant shows a reasonable possibility that the cross-complaint's defects may be cured by amendment. (See Lazar , supra , 69 Cal.App.4th at p. 1501.)

II. In Pari Delicto

The sole basis of the trial court's order was the doctrine of in pari delicto. This equitable defense, a variant of unclean hands, " 'dictates that when a participant in illegal, fraudulent, or inequitable conduct seeks to recover from another participant in that conduct, the parties are deemed in pari delicto , and the law will aid neither, but rather, will leave them where it finds them.' " ( Casey v . U . S . Bank Nat . Assn . (2005) 127 Cal.App.4th 1138, 1143, fn. 1 ( Casey ).)

An early example of a California court applying this doctrine is found in Moore v . Moore (1900) 130 Cal. 110 ( Moore ), a case that, like the one before us, involves allegations of false statements in a government application. The plaintiff there occupied certain public land and was qualified to obtain title to the land by homesteading it. His son made a fraudulent homestead entry on the land at the United States land office, attesting the entry was made for the exclusive use and benefit of the plaintiff's son, at a time the land was not open to homestead entry by anyone other than the plaintiff. When the plaintiff learned of it and objected, his son told him that if the plaintiff did not contest the fraudulent entry, the son would convey title to the plaintiff when he obtained it. The plaintiff consented to his son proceeding under the entry, making proofs, and acquiring title. The son died after acquiring title but before fulfilling his promise to the plaintiff. The plaintiff then brought an action seeking a decree that he held legal title to the land, on the theory the son held title in trust for him. ( Id . at pp. 111-112.) Our high court held the

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complaint alleging these facts was subject to demurrer: the son carried out an active fraud on the government of the United States to gain title to the land, and the plaintiff consented to the fraud. ( Id . at p. 112.) The court noted: " 'The test whether a demand connected with an illegal transaction is capable of being enforced is whether the plaintiff requires the aid of the illegal transaction to establish his case. If the plaintiff cannot establish his case without showing that he has broken the law, the court will not assist him, whatever his claim in justice may be upon the defendant.' " ( Id . at pp. 112-113.)

Relying on Moore , the trial court found the doctrine of in pari delicto applicable here. It reasoned that Johnston "openly alleges that he believed the parties' contract provided for BTHHM to pay him for his help in perpetrating a fraud on the City of Berkeley in connection with a permit application, by letting BTHHM make misrepresentations to the City that it would be able to lease his property for use as a dispensary," and that the facts in the cross complaint "plainly establish that [Johnston's] causes of action against Novelo, for allegedly double-crossing him in their pursuit of an alleged scheme to profit from helping a third party defraud the City, are barred as a matter of law by the in pari delicto doctrine." Because "a party to an agreement to bring about a fraud on the government is in pari delicto with other parties to that agreement, and cannot come into court to seek relief if they allegedly double-cross him," the trial court sustained the demurrer.

This is a plausible interpretation of the facts alleged in the cross-complaint. But in our review, we are cognizant of the warning expressed in CrossTalk that, "[s]ince the doctrine of unclean hands is heavily fact dependent, it is a uniquely poor candidate to support a demurrer." ( CrossTalk , supra , 65 Cal.App.4th at p. 641.) Bearing in mind that in pari

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delicto is an affirmative defense ( Casey , supra , 127 Cal.App.4th at p. 1143), we are not persuaded that the cross-complaint necessarily establishes the complaint is barred ( Casterson , supra , 101 Cal.App.4th at p. 183).

In discussing the doctrine of in pari delicto, our high court has explained that "if a plaintiff does not bear equal responsibility for establishing the illegal scheme . . . , he cannot be barred from recovering because he participated therein." ( Mailand v . Burckle (1978) 20 Cal.3d 367, 381.) An aspect of this principle is found in the rule that, "[w]hen the parties to the fraudulent transaction occupy a fiduciary relationship in regard thereto, such as client and attorney, and the client relies upon the advice and counsel of his attorney in relation thereto, it is held that the client is not in pari delicto with his attorney. Under such circumstances the attorney is deemed to be more culpable than his client, and equity may then relieve the client from the burden of an unjust and fraudulent judgment thus procured." ( Sontag v . Denio (1937) 23 Cal.App.2d 319, 323; accord, Clark v . Milsap (1926) 197 Cal. 765, 783 ["Certainly the law will not hold a client in pari delicto with her attorney who, acting under his influence and advice, places her property in his name and possession for purposes of concealment. As between the two the client is not, in the eyes of the law, as culpable as the legal advisor"].)

Another example of this limitation on the doctrine of in pari delicto is found in Warren v . Merrill (2006) 143 Cal.App.4th 96 ( Warren ). There, a real estate agent and client engaged in a scheme to obtain a loan fraudulently by using the agent's daughter as a front for securing it. ( Id . at pp. 99-100.) In an action to quiet title, the client prevailed; the appellate court then rejected the agent's argument that the doctrine of unclean hands automatically precluded relief, noting that, although the client's behavior was "far from

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exemplary," he and the agent were not equally at fault: although the client agreed to the improper plan, it was the agent who proposed the plan, the scheme was unsuccessful, and the agent had defrauded the client out of real property and money. ( Id . at p. 115.)

There are limits to this fiduciary exception to the doctrine of in pari delicto. Where a client, for example, follows an attorney's advice to lie at a deposition, it has been held that the exception does not apply. The plaintiff in Blain v . Doctor's Co . (1990) 222 Cal.App.3d 1048, alleged he was exposed to greater liability, suffered emotional distress, and was precluded from working as a physician after he followed insurance defense counsel's advice to lie at his deposition in a medical malpractice action. ( Id . at p. 1052.) The trial court sustained a demurrer brought in part on the ground that the claims were barred by "the doctrine known as unclean hands or in pari delicto." ( Id . at p. 1057.) In affirming the ensuing judgment, the appellate court found the fiduciary exception inapplicable in the circumstances: "Laypersons may be confused about the legality of sham transactions employed to frustrate creditors. But there is little legal plausibility in the claim that one was confused about the legality of lying in the teeth of the oath just sworn." ( Id . at p. 1062.)

With these authorities in mind, we examine the allegations of the cross-complaint. Novelo and Landmark were Johnston's property manager and agent—at least with respect to his residential rental property—and owed him fiduciary duties. (See Warren , supra , 143 Cal.App.4th at p. 109 [real estate agent owes client undivided service and loyalty].) Colluding with the other cross-defendants, Novelo allegedly devised the scheme to sign the letter of intent with BTHHM and amendments purporting to bind Johnston to lease the Property, falsely informing Johnston the dispensary needed only the

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address for purposes of its permit application. Misinformed by his agent, Johnston agreed, saying he would need to be paid in return. (See Warren , at p. 115 [agent proposed plan].) As part of the collusion, Novelo then falsely, and without informing Johnston, told the City, in a writing addressed to its Medical Cannabis Commission, that a lease allowing the Property to be used as a dispensary had been executed. And she failed to comply with Johnston's repeated requests for any documents she signed concerning the Premises. These allegations do not necessarily establish that Johnston was equally as culpable as Novelo and her company. (See Warren , at p. 115 [defense of unclean hands inapplicable where client and agent not equally at fault].) And they are not necessarily inconsistent with a theory that Novelo advised Johnston that the dispensary could legitimately use a placeholder address on an application and later update its application and operate a dispensary at another authorized address, and that he relied on her advice in good faith.

This case is thus distinguishable from Moore and Blain . The plaintiff in Moore was aware of and consented to his son making false proofs and acquiring title to the land himself ( Moore , supra , 130 Cal. at p. 112); Johnston, on the other hand, alleges he was kept in the dark about the letter of intent, and there is no allegation he knew Novelo told the City in writing that a lease had been executed on his behalf. Also, a theory that Johnston relied on Novelo's counsel about the propriety of the dispensary using the Property's address does not carry with it the same implausibility as in Blain , where the plaintiff lied in a deposition after taking an oath. ( Blain , supra , 222 Cal.App.3d at p. 1062.) Although Johnston may not succeed in overcoming the defense of in pari delicto once the facts are further developed, the cross-complaint does not, on its face, preclude him from doing so. The trial court therefore erred in sustaining the demurrer on this ground.

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III. Other Grounds for Demurrer

Although the trial court's decision rested solely on the doctrine of in pari delicto, respondents asserted a number of other grounds for their demurrer. On appeal, we review the trial court's decision rather than its reasoning, and affirm if it is correct on any theory. ( Berg & Berg Enterprises , LLC v . Boyle (2009) 178 Cal.App.4th 1020, 1034-1035.)

A . Declaratory Relief

Johnston's second cause of action seeks a declaration that the letter of intent and its amendments are invalid and unenforceable because Novelo and Landmark lacked authority to execute them; that the parties are not obligated to execute a lease for the Property based on the letter of intent and amendments; and that the letter of intent and amendments are void and unenforceable as products of collusion and conspiracy among the cross-defendants.

Respondents contend this cause of action fails because declaratory relief is available to declare future rights, not to redress past wrongs. (See County of San Diego v . State of California (2008) 164 Cal.App.4th 580, 607; Canova v . Trustees of Imperial Irrigation Dist . Employee Pension Fund (2007) 150 Cal.App.4th 1487, 1497.) This point is well taken.

Johnston points out correctly that " 'questions relating to the formation of a contract, its validity, its construction and effect, excuses for

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nonperformance, and termination are proper subjects for declaratory relief.' " ( Caira v . Offner (2005) 126 Cal.App.4th 12, 24.) But while a proper subject of declaratory relief is necessary, it is not sufficient. Rather, a cause of action for declaratory relief requires both a proper subject and an "actual controversy." ( Wilson & Wilson v . City Council of Redwood City (2011) 191 Cal.App.4th 1559, 1582; Code Civ. Proc., § 1060 [action for declaratory relief may be brought "in cases of actual controversy relating to the legal rights and duties of the respective parties"].) Courts interpret the "actual controversy" requirement to mean the action must not be purely "backward-looking," seeking to redress past wrongs; rather, it must also govern the future conduct of the parties. ( Osseous Technologies of America , Inc . v . DiscoveryOrtho Partners LLC (2010) 191 Cal.App.4th 357, 368, 372; Ermolieff v . R . K . O . Radio Pictures , Inc . (1942) 19 Cal.2d 543, 546-549; Travers v . Louden (1967) 254 Cal.App.2d 926, 932.) "Declaratory relief is therefore a remedy that ' "operates prospectively ." ' " ( Orcilla v . Big Sur , Inc . (2016) 244 Cal.App.4th 982, 1014, quoting Babb v . Superior Court (1971) 3 Cal.3d 841, 848.)

Here, the cross-complaint shows no manner in which declaratory relief would operate prospectively. Johnston requests a declaration that he is not obligated to execute a lease for the Premises, but he does not allege that BTHHM now seeks to compel him to do so. BTHHM's complaint against him seeks damages, not specific performance, so even the existence of this controversy between the parties does not support the need for forward-looking relief. Indeed, in connection with an earlier ruling, the trial court explained that—as Johnston acknowledged—BTHHM had "repeatedly, unequivocally disavowed any intent to seek . . . an order compelling Johnston to execute a lease." The inescapable conclusion is that the only function of the cross-complaint is to settle liability for past wrongs. In these

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circumstances, Johnston's remedy lies not in declaratory relief, but in his defense to BTHHM's complaint and in the other causes of action in his cross-complaint.

B . Duty to Johnston

Respondents contend the causes of action for negligence and breach of fiduciary duty fail because Johnston has not alleged they owe him a duty of care or fiduciary duty. Respondents downplay the plain language of paragraph 36 of the cross-complaint, which begins, "The Novelo Cross-Defendants were at all times mentioned herein the real estate agent and property manager for Cross-complainant. As such they owed the following fiduciary duties to Cross-complainant," including a duty to act in a manner consistent with Johnston's best interests; a duty not to obtain advantage over Johnston by misrepresenting facts; a duty of care, integrity, and loyalty in dealings with third parties; and a duty of honesty, fair dealing, and good faith.

Respondents counter that the cross-complaint fails to state a duty of care because the allegations that they acted as Johnston's real estate agent and that he agreed to let them enter into an agreement with BTHHM to use the Property's address are inconsistent with the allegations that Novelo was not a leasing agent with regard to the Property and that respondents were not authorized to lease the Property to anyone or to make an agreement concerning the Property for a period of more than one year. We do not agree either that these allegations are necessarily inconsistent or that they negate a duty of care. The cross-complaint adequately alleges respondents had a duty of care, as well as a fiduciary duty as Johnston's real estate agent. (See Warren , supra , 143 Cal.App.4th at p. 109 [real estate agent owed fiduciary to

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client]; Assilzadeh v . California Federal Bank (2000) 82 Cal.App.4th 399, 415 [same].)

Nor are we convinced that, because the cross-complaint alleges the signatures on the letter of intent and amendments may not all be Novelo's, it fails to allege a breach of duty. Whether or not Novelo signed the documents, Johnston has alleged she colluded with BTHHM to prepare the letter of intent without his knowledge and that she falsely told the City that a lease had been executed.

C . Fraud

Respondents argue Johnston failed to plead the elements of fraud. This argument is largely predicated on the erroneous theory that no fiduciary duty has been alleged.

A fiduciary may be held liable to a principal for fraud based not only on a traditional theory of intentional or actual fraud, but also on constructive fraud, which " 'comprises any act, omission or concealment involving a breach of legal or equitable duty, trust or confidence which results in damage to another even though the conduct is not otherwise fraudulent . Most acts by an agent in breach of his [or her] fiduciary duties constitute constructive fraud. The failure of the fiduciary to disclose a material fact to his [or her] principal which might affect the fiduciary's motives or the principal's decision, which is known (or should be known) to the fiduciary, may constitute constructive fraud. Also, a careless misstatement may constitute constructive fraud even though there is no fraudulent intent ." ( Salahutdin v . Valley of California , Inc . (1994) 24 Cal.App.4th 555, 562.) Respondents contend this theory of fraud is inapplicable because Johnston failed to plead the existence of a fiduciary duty. We have already rejected this argument.

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Respondents also argue the cause of action for fraud fails to allege reliance or damages. ( Alliance Mortgage Co . v . Rothwell (1995) 10 Cal.4th 1226, 1239, fn. 4 [justifiable reliance and actual damages are elements of constructive fraud].) But the cross-complaint alleges Novelo told Johnston that BTHHM needed to use the Property's address only for purposes of making its application and that he agreed only to this use; that Novelo nevertheless decided to sign a letter of intent for a lease and kept Johnston ignorant of the deal; that she informed the City that a lease had been executed; and that if Johnston had known the true facts, he would have told the City he was unwilling to have a dispensary operate from the Property, thus preventing the issuance of a permit. And, although the cross-complaint alleges that the City will not grant a permit unless the property owner consents to a dispensary operating there, Johnston does not allege he was aware of that fact at the time; thus, this allegation does not refute an inference from the other allegations that Johnston relied on Novelo's misrepresentations or omissions. The cross-complaint adequately alleges reliance.

As to damages, Johnston contends he is entitled to damages under the " 'tort of another' " theory because respondents' breach of fiduciary duty caused him to incur attorney fees in defending against BTHHM's action. (See Gray v . Don Miller & Associates , Inc . (1984) 35 Cal.3d 498, 505-508.) Respondents' only answer to this point is that the costs of a lawsuit under this theory are only allowable as damages if there has been a "clear violation of a traditional tort duty" between the tortfeasor required to pay attorney fees and the person seeking compensation for those fees ( Sooy v . Peter (1990) 220 Cal.App.3d 1305, 1310), and that Johnston has not alleged they owed him a

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duty of care. We have already concluded that the cross-complaint alleges a fiduciary duty, and we accordingly reject this argument.

Having rejected respondents' challenge to the fraud cause of action on a theory of constructive fraud, we need not consider their contentions that the cause of action does not adequately plead either actual fraud or fraudulent concealment.

D . Indemnity

In his cause of action for indemnity, Johnston alleges respondents negligently, fraudulently, or in breach of their fiduciary duty, executed documents purporting to obligate him to allow the Property to be used as a dispensary; that Johnston "rightfully refused" to do so and was sued for damages as a result; and that Johnston was exposed to the possibility of a judgment for damages and had incurred legal fees.

Equitable indemnity is available "among tortfeasors who are jointly and severally liable to the plaintiff," and can extend to "acts that are concurrent or successive, joint or several, as long as they create a detriment caused by several parties." ( BFGC Architects Planners , Inc . v . Forcum/Mackey Construction , Inc . (2004) 119 Cal.App.4th 848, 852; see Stonegate Homeowners Assn . v . Staben (2006) 144 Cal.App.4th 740, 751.) As our high court has explained, "Indemnity does not invariably follow fault; it is premised on a joint legal obligation to another for damages." ( Western Steamship Lines , Inc . v San Pedro Peninsula Hospital (1994) 8 Cal.4th 100, 114.)

Respondents argue the indemnity cause of action fails because Johnston does not plead that respondents had or breached any duty to BTHHM (rather than to Johnston), as is needed for equitable indemnity. On this point, we agree with respondents. The cross-complaint alleges not that

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respondents breached a duty to BTHHM and were thereby jointly liable for its losses, but that respondents and BTHHM together formed and carried out a plan to deceive Johnston. While the complaint alleges other grounds for respondents' liability, the demurrer was properly sustained as to the cause of action for indemnity. In Johnston's surviving causes of action, nothing we say prevents him from seeking to recover as damages amounts for which he is held liable to BTHHM.

Respondents suggest this cause of action is premature because Johnston has not yet sustained a loss. On the contrary, it is well established that a claim of indemnity against a third party may properly be raised in a cross-complaint. (See, e.g., Paragon Real Estate Group of San Francisco v . Hanson (2009) 178 Cal.App.4th 177, 186; Stop Loss Ins . Brokers , Inc . v . Brown & Toland Medical Group (2006) 143 Cal.App.4th 1036, 1039; Platt v . Coldwell Banker Residential Real Estate Services (1990) 217 Cal.App.3d 1439, 1444; Code Civ. Proc., § 428.10, subd. (b).)

Finally, because the trial court based its ruling solely on the doctrine of in pari delicto, it had no occasion to exercise its discretion as to whether Johnston should be granted leave to amend his cross-complaint to cure the defects we have identified in the causes of action for declaratory relief and indemnity. Nothing we say is intended to preclude the court from doing so on remand.

The judgment is affirmed to the extent it sustained the demurrer as to the second cause of action, for declaratory relief, and the eighth cause of action, for indemnity. It is reversed to the extent it sustained the demurrers as to the remaining causes of action against respondents and dismissed them from the action. Respondents shall bear costs on appeal.

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/s/ _________
TUCHER, J.

WE CONCUR:

/s/ _________
POLLAK, P. J.

/s/ _________
BROWN, J.