Judge: Gail Killefer, Case: 19STCV41315, Date: 2024-01-25 Tentative Ruling

Case Number: 19STCV41315    Hearing Date: January 25, 2024    Dept: 37

HEARING DATE:                 Thursday, January 25, 2024

CASE NUMBER:                   19STCV41315

CASE NAME:                        Sean Michaels, et al. v. Chrstopher M. Stevens, et al.

MOVING PARTY:                 Defendant LKPP Global Law

OPPOSING PARTY:             Plaintiffs Sean Michaels and PB Consulting, LLC

TRIAL DATE:                        17 September 2024

PROOF OF SERVICE:           OK

PROCEEDING:                      Motion for Judgment on the Pleadings

OPPOSITION:                        10 January 2024

REPLY:                                  17 January 202

TENTATIVE:                         Defendant LKP’s Motion for Judgment on the Pleadings is granted with leave to amend. Plaintiffs are granted 30 days leave to amend from this date.

Background

On November 15, 2019, Sean Michaels (“Michaels”) and PB Consulting, LLC (collectively “Plaintiffs”) filed a Complaint against Christopher M. Stevens; the Law Office of Christopher M. Stevens (collectively “Stevens”); LKP Global Law (“LKP”) and Does 1 to 10.)

The operative Complaint alleges a single cause of action for Professional Negligence. According to the Complaint, in 2015 Michaels retained LKP and later, Stevens, to represent him in a dispute against his business partner Daniel Cooper (“Cooper”) regarding the business entity Reliant Life Shares, LLC (“Reliant”) in an action entitled Reliant Life Shares, LLC v. Daniel B. Cooper,et al. (LASC Case No. BC604858) (the “Underlying Action”).

On April 16 2021, this court granted a stay of this action pending completion of the appeal of the Underlying Action. On April 4, 2023, the Second District issued a published opinion, Reliant Life Shares, LLC v. Cooper (2023) 90 Cal.App.5th 14.

On December 27, 2023, Defendant LKP filed a Motion for Judgment of Pleadings (MJOP) arguing that Plaintiffs were collateral estopped from bringing this action against LKP. Plaintiffs oppose the Motion. The matter is now before the court.

Plaintiffs are collaterally estopped from bringing their sole claim for legal malpractice because the Court of Appeal affirmed the findings of fact and conclusion of law made by the trial court in the underlying litigation at issue [i.e., Reliant Life Shares, LLC v. Daniel B. Cooper, et al. (LASC Case No. BC604858)] and its related cross-complaint], wherein Plaintiffs were found to have engaged in contemptible conduct by improperly withholding and diverting money owed to a rightful member of a limited liability company.

Motion for judgment on the pleadings[1]

I.         Legal Standard

“A motion for judgment on the pleadings performs the same function as a general demurrer, and hence attacks only defects disclosed on the face of the pleadings or by matters that can be judicially noticed.” (Burnett v. Chimney Sweep (2004) 123 Cal.App.4th 1057, 1064.) “In deciding or reviewing a judgment on the pleadings, all properly pleaded material facts are deemed to be true, as well as all facts that may be implied or inferred from those expressly alleged.” (Fire Ins. Exchange v. Superior Court (2004) 116 Cal.App.4th 446, 452.) When considering demurrers and judgment on the pleadings, courts read the allegations liberally and in context. (Wilson v. Transit Authority of City of Sacramento (1962) 199 Cal.App.2d 716, 720-21.) A motion for judgment on the pleadings does not lie as to a portion of a cause of action. (Id.) “In the case of either a demurrer or a motion for judgment on the pleadings, leave to amend should be granted if there is any reasonable possibility that the plaintiff can state a good cause of action.” (Gami v. Mullikin Medical Ctr. (1993) 18 Cal.App.4th 870, 876.) A non-statutory motion for judgment on the pleadings may be made any time before or during trial. (Stoops v. Abbassi (2002) 100 Cal.App.4th 644, 650.) 

II.        Request for Judicial Notice

The Court may take judicial notice of records of any court of record of the United States. (Evid. Code, § 452(d)(2).) However, the court may only judicially notice the existence of the record, not that its contents are the truth. (Sosinsky v. Grant (1992) 6 Cal.App.4th 1548, 1565.) 

Defendant LKP requests judicial notice of the following:

1)     Exhibit A: The published Court of Appeal Decision in Reliant Life Shares, LLC v. Cooper (2023) 90 Cal.App.5th 14.

2)     Exhibit B: The Complaint filed by Plaintiffs Sean Michaels and PB Consulting, LLC on or about November 15, 2019.

Defendant LKP’s request for judicial notice is granted.

III.      Discussion

A.        Summary of Allegations in Complaint

The Complaint alleges that Stevens and LKP failed to disclose a conflict of interest between LKP’s former partner, Scott Grady (“Grady”), and the representation of Plaintiffs in the case entitled Reliant Life Shares, LLC v. Daniel B. Cooper, et al. (LASC Case No. BC604858) (the “Underlying Action”). (Compl. ¶¶ 12, 20.)  On November 20, 2018, Defendant Stevens left LKP but retained Plaintiffs as clients with the substitution of attorney forms being executed on November 20, 2019. (Compl. ¶¶ 17, 29.)

Plaintiffs allege that during phase one of the trial in the Underlying Action, it became obvious that Defendants committed legal malpractice in representing Plaintiffs by (a) failing to inform Plaintiffs about potential and actual conflicts, (b) failed to conduct discovery directed at and related to the Plaintiffs’ interest and defenses, (c) failed to file motions aimed at reducing or eliminating claims levied directly against Plaintiffs, (d) failed to establish a separate theory of defense that did not rely on a jointly advanced defense with Grady, (e) failed to seek an early resolution for Plaintiffs that was separate and apart from a resolution that benefitted RLS and Grady, (f) failed to inform Michaels that he was being sued for the imposition of a constructive trust over his personal assets, (g) consequently Plaintiff Michaels was unable to take certain efforts to protect his personal assets which have now been frozen and exposed to potential loss, (h) Defendants concentrated their defense toward RLS rather than Plaintiffs because RLS could pay their legal bills, (i) Stevens surprised Plaintiffs with his departure from LKP and presented the substitution of attorney form one or two weeks in advance of phase 1 of the trial in the underlying action, (j) depriving Plaintiffs of the opportunity to seek and retain separate independent counsel, (k) Steven failed to seek dismissal of the tort claims alleged against Michaels that were to be dismissed based on Michaels performic of an Arbitration Settlement Agreement (the “Agreement”) executed in December 2017, (l) Stevens failed to produce said Agreement during phase 1 of the trail in connection with the constructive trust claim, (m) Stevens did not prepare Michaels for his trial testimony or cross-examination, (n) none of the defenses presented by Stevens focused on Michaels but were instead directed at defending RLS, (o) Stevens failed to present evidence in defense of the allegation that Michaels was the alter ego of RLS, (p) Stevens took a position of employment with RLS that prevented Stevens from effectively defending Plaintiffs, (q) Stevens failed to oppose motions in limine filed by Cooper in connection with face two of the trial; and (r) Stevens failed to provide Plaintiffs litigation file to new counsel. (Compl. ¶ 24(a)-(r).)

As set forth above, Defendant failed to exercise reasonable care and skill in advising Plaintiff and performing legal services for Plaintiffs resulting in damages to Plaintiffs. (Compl. ¶ 30.)

B.        Collateral Estoppel Applies

“Collateral estoppel, or issue preclusion, precludes relitigation of issues argued and decided in prior proceedings.” (Mycogen Corp. v. Monsanto Co. (2002) 28 Cal.4th 888, 889.)  “Issue preclusion prohibits the relitigation of issues argued and decided in a previous case, even if the second suit raises different causes of action. [Citation.]  Under issue preclusion, the prior judgment conclusively resolves an issue actually litigated and determined in the first action. [Citation.] There is a limit to the reach of issue preclusion, however. In accordance with due process, it can be asserted only against a party to the first lawsuit, or one in privity with a party. [Citation.]” (DKN Holdings LLC, supra, 61 Cal.4th at p. 824 [italics original].) “Issue preclusion differs from claim preclusion in two ways. First, issue preclusion does not bar entire causes of action. Instead, it prevents relitigation of previously decided issues. Second, unlike claim preclusion, issue preclusion can be raised by one who was not a party or privy in the first suit.” (Ibid.) 

Defendant LKP’s MJOP asserts that Plaintiffs are collaterally estopped from bringing their sole claim for legal malpractice because the Court of Appeal affirmed the finding and conclusions of law made by the trial court in the Underlying Action and the related cross-complaint in Reliant Life Shares, LLC v. Cooper (2023) 90 Cal.App.5th 14 (Reliant). “‘Defensive use of collateral estoppel precludes a plaintiff from relitigating identical issues by merely ‘switching adversaries.’ ” (Dailey v. City of San Diego (2013) 223 Cal.App.4th 237, 256 citing Parklane Hosiery Co. v. Shore (1979) 439 U.S. 322, 329, 99 S.Ct. 645, 58 L.Ed.2d 552.)

Here, Defendant LKP seeks to use issue preclusion defensively to bar the Plaintiffs’ action and prevent the Plaintiffs from negating the fact that the Court of Appeal found that the Plaintiffs were alter egos of each other such that obtaining conflict waivers or developing separate theories of defense for Plaintiffs separate and apart from Reliant would have been futile. The Court of Appeal also found that Plaintiff Michaels, as an alter ego for Reliant and PB Consulting, LLC, and Grady, violated the express terms of Reliant’s operating agreement by seeking to wrongfully oust Cooper and swindling him of his rightful share of the profits in Reliant as a co-owner. (Reliant, supra, 90 Cal.App.5th at p. 31.)

In opposition, Plaintiffs argue that collateral estoppel does not apply and that even if it does, it does not absolve Defendant LKP for its professional negligence. “ ‘[A] nonparty may invoke collateral estoppel against a party to a prior action only if three conditions are met: (1) the issue necessarily decided in the prior action is identical to the issue sought to be relitigated in the current action; (2) there was a final judgment on the merits in the previous action; and (3) the party against whom collateral estoppel is asserted was a party, or in privity with a party, to the previous suit. [Citations.]’ ” (Direct Shopping Network, LLC v. James (2012) 206 Cal.App.4th 1551, 1559 citing United States Golf Assn. v. Arroyo Software Corp. (1999) 69 Cal.App.4th 607, 615–616.)

i.          The Issue of Alter Ego Liability was Conclusively Decided in the Underlying Action

The Court of Appeal found that there was substantial evidence to support the finding that the Plaintiffs along with Grady and Reliant were alter egos of each other:

We note, and agree with, the trial court's denial of Michaels's JNOV motion on this issue: ‘There was also substantial evidence, indeed admissions, that Michaels and Grady created shell companies such as PB Consulting LLC (for Michaels) and LaForce Holdings LLC (for Grady) as conduits through which they could funnel money from Reliant to other entities, such as the Friwat policy, for their own benefit. These shell companies were part of the fraud determined by the jury that prevented Cooper from discovering all sums paid to Michaels and Grady.’ The trial court also stated in its JNOV ruling, that ‘there was ample evidence that an injustice would result, given that Cooper demonstrated that Michaels and Grady had used the corporate coffers of Reliant as their own personal piggy banks.’

(Reliant, supra, 90 Cal.App.5th at p. 39.)

The court agrees that the issue of alter ego liability was conclusively decided by the trial court in the Underlying Action and upheld by the court of appeal. In opposition, Plaintiffs argue that applying collateral estoppel would be unfair because Plaintiffs did not have a full and fair opportunity to litigate the issue. The issue of fairness, meaning “whether the party against whom the earlier decision is asserted had a ‘full and fair’ opportunity to litigate the issue, is a consideration that is usually applied when collateral estoppel is applied “offensively” rather than defensively, as LKP does here. (Roos v. Red (2005) 130 Cal.App.4th 870, 880.)

“The failure of a litigant to introduce relevant available evidence on an issue does not necessarily defeat a plea of collateral estoppel.” (Murray v. Alaska Airlines, Inc. (2010) 50 Cal.4th 860, 871 (Murray).) Plaintiffs’ Complaint alleges that Defendants failed to conduct reasonable discovery but the allegation is devoid of facts showing what exculpatory evidence the discovery would have uncovered or what separate theory of defense was available to Plaintiffs’ that Defendants failed to plead. For purposes of collateral estoppel, what matters “is the opportunity to litigate that is important in these cases, not whether the litigant availed himself or herself of the opportunity.” (Murray at p. 869 [italics original].)

The court finds that the first element for the application of collateral estoppel is met because the issue of Plaintiffs’ alter ego liability was necessarily decided in the Underlying Action. Furthermore, Plaintiffs’ opposition does not challenge that the remaining two factors of collateral estoppel are met, (2) that there was a final judgment on the merits in the pervious action and (3) that Plaintiffs, as the party against whom collateral estoppel is assert, were parties’ in the Underlying Action. Accordingly, the court agrees the collateral estoppel applies.

Therefore, because the trial court and the Court of Appeal in the Underlying Action found that the Plaintiffs were alter-egos of the parties, the fact that Defendant LKP did not obtain conflict waivers or develop separate theories of defense for the Plaintiffs that were separate and apart from the other parties, is insufficient to establish breach and proximate causation to support a professional negligence cause of action. Moreover, the Complaint is devoid of facts as to what negligent acts or omissions LKP failed to do that would have precluded the finding of alter-ego liability in the underlying action.

The Complaint further fails to state what specific law and motion LKP failed to bring that would have reduced or eliminated the claims Cooper brought against the Plaintiffs. The Complaint fails to state what specific defenses existed that were separate and apart from the defenses to be used by Reliant and Grady. The Complaint also fails to state what early resolution LKP failed to seek that was separate and apart from the resolution that benefitted Reliant and Grady. Lastly, the Complaint fails to state what efforts Plaintiff Michaels could have taken to safeguard his personal assets from the imposition of a constructive trust. In this manner, Plaintiffs’ Complaint is conclusory, and thus deficient because it is devoid of facts. (See Interior Systems, Inc. v. Del E. Webb Corp. (1981) 121 Cal.App.3d 312, 31 [“These are but legal conclusions which the trial court was authorized to ignore conclusory allegations without facts to support them are ambiguous and may be disregarded”].)

The court concludes that Plaintiffs’ complaint is deficient as pled and does not survive Defendant LKP’s MJOP.

C.        LKP was not the Plaintiffs’ Counsel During Phase One of the Trial in the Underlying Action

The Complaint admits that LKP stopped being the Plaintiffs’ counsel on November 20, 2019, meaning that Stevens handled phase one of the trial. (Compl. ¶¶ 17, 29.) Therefore, Stevens leaving LKP and becoming the Plaintiffs’ counsel was a superseding cause that breaks LKP’s liability for acts or actions that occurred during phase one of the trial. This includes the fact that “Stevens failed to produce said Arbitration agreement as evidence during phase one of the trial” which would have presumably resulted in the dismissal of Cooper’s constructive trust claims against Plaintiffs. (Compl. ¶ 24(l).)

According to the Court of Appeal, an Arbitration and Settlement Agreement was executed between Michaels and Cooper wherein:

The parties released each other from all claims and liabilities relating to the separation agreement, the lawsuits and ancillary disputes, with the exception of the claims alleged in this case. As to this ‘non-released matter,’ the parties agreed that Cooper would ‘dismiss without prejudice Michaels, in his individual capacity only,' as to the tort causes of action (as relevant now, fraud, breach of the duty of loyalty, fraudulent transfer, and constructive trust).

(Reliant, supra, 90 Cal.App.5th at p. 52.)

Had Plaintiff Michaels obtained a release, it would have applied only to Michaels and not Plaintiff PB Consulting, LLC. Therefore, this would not have precluded the court in the Underlying Action from finding that PB Consulting, LLC was an alter ego of Grady and Reliant. Moreover, Cooper did not dismiss the claims and dismissal would have been “without prejudice” meaning that Cooper could have refiled the claims. (Ibid.) Plaintiffs failed to show that the Arbitration and Settlement Agreement would have resulted in the dismissal of Cooper’s constructive trust claims. Moreover, according to the Court of Appeal, the reason that the enforcement of the Settlement and Arbitration Agreement was  not decided was because the trial court in the Underly Action chose to wait for Stevens to bring a “ ‘more substantial, motion’ motion in the other action on the issue of enforcement of the settlement agreement, a conclusion with which counsel concurred.” (Reliant, supra, 90 Cal.App.5th at p. 54.)

Plaintiffs’ request leave to amend the Complaint to allege facts regarding the December 17, 2017 settlement agreement but fail to specify what those facts would be and why the amendment would be successful. Nevertheless, the court agrees that the Plaintiffs should be granted leave to amend to assert facts regarding the December 17, 2017, settlement agreement.

Accordingly, Defendant LKP’s MJOP is granted with leave to amend.

Conclusion

Defendant LKP’s Motion for Judgment on the Pleadings is granted with leave to amend. Plaintiffs are granted 30 days leave to amend from this date.

Defendant to give notice.