Sam v. Kwan (2024) 101 Cal. App. 5th 556.

The California Court of Appeal, Second Appellate District reversed a trial court’s decision in a real estate case of breach of fiduciary duty between two partners of an LLC. The case demonstrates that the bona fide purchaser doctrine will not protect a third-party buying the property when the buyer negligently ignored the obvious disputes regarding the seller LLC’s true managing manager. The ruling also 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 Trial Court Erred in Granting Summary Judgment in Favor of the Board

Anthony Sam and Renee Kwan formed a limited liability company (“2013 LLC”) to buy a parking lot, but their business relationship 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, which reaped more than $2 million in profit in less than a year and a half. 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 did not share the gains from the sale. He alleged this sale was done without his knowledge, and that Kwan had “fabricated” and “forged” documents to remove him from the 2013 LLC, as well as pocketing the sale proceeds. Sam sued Kwan, her companies, First American, and the Board after discovering the sale of the parking lot. The trial court ruled in favor of the defendants on various pretrial motions, effectively denying Sam a legal remedy.

There were two versions of the operating agreement which revealed contradictory information – one named Kwan as the managing manager and the other named Sam as the manager. The two operating agreements bored the same date “October 13, 2013” and the two partners developed conflicting explanations. Kwan said it was a simple and innocent “mistake” while Sam charged Kwan forged her version by altering the names, and fraudulently created it to make it look like she had authority she did not possess. Because Kwan’s proof of consent document appeared to have several problems, and the Board’s ignorance of such suspect and closing the deal rendered inadequate diligence, the court of appeal ruled that the summary judgment in the Board’s favor was inappropriate, and a fact finder must decide who was telling the truth.

Bona Fide Purchaser Doctrine

The bona fide purchaser (“BFP”) doctrine enables a buyer to keep the purchased property if the property is bought for value and the buyer lacked knowledge or notice of another’s claim. When the buyer has actual, constructive or inquiry notice of a prior interest, however, the buyer takes the property subject to those other interests. For a buyer to claim BFP protection, he must demonstrate that he has conducted research with due diligence to see if the title of the property-to-purchase would be good. California’s quiet title laws put this duty of inquiry on buyers of real estate transactions, and they must inquire into the validity of their prospective ownership claim. Even if the buyer does not have actual notice of the prior interest, if he negligently caused the lack of knowledge, or he would have known the dispute had he done the research, he would not be able to use the BFP doctrine.

More specifically, the buyer cannot claim as a BFP if he failed to do the due diligence. In the present case, there were apparent inconsistencies in the documented deed showing who was the managing manager, however, the Board’s lawyer entirely skipped the portion of the preliminary report that stressed the need, in the case of a limited liability company, to examine the company’s operating agreement and to obtain proof the company was properly operating through its manager. The Board’s attorney also failed to review the deed of trust and the assignment of rents. This suspect claim of authority would have caused a reasonable and prudent buyer to inquire further, and it is a standard practice to review the operating agreement during an LLC involved real estate transactions. But instead of pausing to figure out the details and suspects of the disputes, the Board went ahead and closed the transaction. Therefore, it cannot be qualified as a BFP and avoided possible damage or litigation, when the managing manager got challenged in a later claim.

Fiduciary Duty Between Partners of an LLC

As a joint venturer in an LLC, each partner owes the other one a fiduciary duty, even for a non-managing member, and one of the duties included is the duty to disclose material information. Sam alleged that Kwan, as his fiduciary, was under a duty to disclose material facts that she concealed: namely, her fabrication of a false operating agreement, her sale of the property without proper approval, and her failure properly to account for the funds. Sam also adequately alleged a claim for fraud based on concealment. A claim for fraud based on concealment will lie where the defendant concealed a material fact; the defendant was under a duty to disclose the fact to the plaintiff; the defendant concealed the fact with the intent to defraud the plaintiff; the plaintiff was unaware of the fact and would have acted differently if plaintiff knew; and the concealment harmed the plaintiff. Since Sam adequately alleged harm, the trial court erroneously granted judgment on the pleadings to the LLC’s managing member on Sam’s breach of fiduciary claim and it should be reversed.


A third-party buying property from a manager-managed LLC does not qualify as a BFP on summary judgment if there are factual disputes regarding the identity of the LLC’s manager and the buyer acted negligently in its due diligence to discover the obvious disputes.  It is the buyer’s duty to make a reasonable inquiry regarding the identity of the LLC’s manager. The court’s holding also indicates the potential liability of escrow agents and title companies in real estate deals, although it was not the focus of the ruling of the present case.

Glen C. Hansen is Senior Counsel and Simyllina Chen is a Law Clerk at Abbott & Kindermann, Inc.  For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, Inc. at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, Inc., or the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.