Judge: Jon R. Takasugi, Case: 20STCV24741, Date: 2022-07-26 Tentative Ruling

Case Number: 20STCV24741    Hearing Date: July 26, 2022    Dept: 17

Superior Court of California

County of Los Angeles

DEPARTMENT 17

TENTATIVE RULING

            SMRH Defendants’ motion for sanctions is GRANTED. 

On July 1, 2020, Plaintiff Karish & Bjorgum, P.C. (K&B) filed suit against Brian Kennedy (Kennedy) and Kennedy Outdoor Advertising, LLC, alleging: (1) breach of written contract; and (2) quantum meruit.

On 7/24/2020, Brian Kennedy filed a lawsuit against Karish & Bjorgum PC (KB), Alfred Eric Bjorgum, LTL Attorneys LLP, Sheppard, Mullin, Richter & Hampton, LLP (SMRH), and Joseph Francis Coyne, Jr., alleging: (1) professional negligence; (2) breach of written contract; (3) breach of fiduciary duty; and (4) California Financial Elder Abuse.

Now, Defendants/Cross-Complainants SMRH and Coyne (collectively, SMRH Defendants) seek sanctions of no less than $444,173.50, pursuant to CCP sections 128.5 and 128.7.

Legal Standards

CCP Section 128.5 

CCP section 128.5 provides that “[a] trial court may order a party, the party’s attorney, or both, to pay the reasonable expenses, including attorney’s fees, incurred by another party as a result of actions or tactics, made in bad faith, that are frivolous or solely intended to cause unnecessary delay.”  (Code Civ. Proc., § 128.5(a).)  “ ‘Actions or tactics’ include, but are not limited to, the making or opposing of motions or the filing and service of a complaint, cross-complaint, answer, or other responsive pleading.”  (Id., § 128.5(b)(1).)  “ ‘Frivolous’ means totally and completely without merit or for the sole purpose of harassing an opposing party.”  (Id., § 128.5(b)(2).) 

CCP Section 128.7 

CCP section 128.7(b) provides that by signing and filing a pleading, an attorney “is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, all of the following conditions are met: (1) [i]t is not being presented primarily for an improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation[;] (2) [t]he claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law[;] (3) [t]he allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery[;] (4) [t]he denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief.”  (Code Civ. Proc., § 128.7(b).) CCP section 128.7 authorizes the court to impose appropriate sanctions upon attorneys or parties that have violated subsection (b).  (Id., § 128.7(c).) 

Factual Background

In the predecessor case to this one (Kennedy 1), Plaintiff’s brother, Drake Kennedy, alleged that Plaintiff engaged in a variety of misconduct that prevented Drake from exercising his oversight rights concerning the brothers’ jointly owned companies and misappropriated a variety of assets belonging to several of the companies. Drake asserted a number of different causes of action, including “a cause of action for involuntary dissolution of the corporations and limited liability companies.” (Id. at p. 1479.) After Drake dismissed his cause of action for involuntary dissolution, Plaintiff filed a motion to stay dissolution. Judge Richard Rico denied Plaintiff’s motion to stay dissolution given Drake Kennedy’s dismissal of the cause of action. Plaintiff appealed, and the Court of Appeal affirmed Judge Rico’s ruling. The ruling became final when the Supreme Court denied review on 7/8/2015.

Kennedy 1 was ultimately settled pursuant to a Binding Term Sheet (BTS) executed on 4/1/2017. The BTS was an agreement between all shareholders/members of certain, specified companies to, among other things, conditionally sell the Company’s assets.

            Subsequently, Drake Kennedy initiated Kennedy 2 and filed an application for appointment of a receiver to, among other things, “take control of the operation of the Company and its property and assets in order to effectuate the sale of the Company’s assets [pursuant to the BTS] and operate the Company and preserve and protect the Company’s assets pending a sale,” (the Receiver Application). Drake alleged Brian had obstructed the asset sale process prescribed by the BTS and also sought a temporary restraining order against Brian and his agents to preserve the status quo and to prevent them from interfering with an appointed receiver. Judge James Chalfant considered and granted the application, writing: “Brian has breached both the express provision of the [BTS] and the covenant of good faith and fair dealing in refusing to participate in the sale of the Company. By itself, this breach warrants appointment of a receiver to pursue the sale of the Company in compliance with the parties’ contractual obligations under the [BTS].” (Id. at p. 27 – last paragraph.) Plaintiff appealed this decision, yet the Court of Appeal affirmed Judge Chalfant’s ruling.

Discussion

            SMRH Defendants argue that sanctions are warranted because Plaintiff and his counsel have engaged in “actions or tactics, made in bad faith, that are frivolous or solely intended to cause unnecessary delay” and pursued claims against SMRH and Mr. Coyne as well as defenses to SMRH’s cross-claims for unpaid legal fees “primarily for an improper purpose,” that were not “warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law,” and did not “have evidentiary support.” (Motion, 2: 19-17.)

SMRH Defendants contend that Plaintiff’s claims were in bad faith because: (1) they were based solely on a clearly fallacious legal theory that California Corporations Code section 2000 applied in the underlying lawsuit; and (2) even if section 2000 had applied in the underlying lawsuit, Plaintiff did not retain SMRH Defendants until after the time had passed for Plaintiff to invoke section 2000.

The Court agrees. Kennedy’s entire opposition to SMRH Defendants’ 5/10/22 motion for summary adjudication rested on a contention that Plaintiff could have asserted section 2000 in Kennedy 2 because the case there was, in fact, a suit for involuntary dissolution. However, as noted by SMRH Defendants, Kennedy did not offer any legal support for it: “not a single case, not a single statute, nothing that purportedly stands for the proposition that “a suit for involuntary dissolution” does not require a cause of action for involuntary dissolution.” (Motion, 8: 19-21.) By contrast, SMRH Defendants submitted extensive case law wherein Courts had expressly concluded that a party’s right to invoke section 2000 depended entirely on the existence of a cause of action for involuntary dissolution of a corporation, and without such a cause of action, a party could not bring a motion pursuant to section 2000. (See e.g. Schrage v. Schrage (2021) 69 Cal.App.5th 126, 144; Panakosta, Partners, LP v. Hammer Lane Management, LLC (2011) 199 Cal.App.4th 612.) 

Moreover, even assuming Corp. Code section 2000 had applied, the SMRH Defendants could not have raised Section 2000 for the first time on appeal, given that “new theories of defense, just like new theories of liability, may not be asserted for the first time on appeal.” (Nellie Gail Ranch Owners Assn. v. McMullin (2016) 4 Cal.App.5th 982, 997.)

An action is frivolous if under an objective standard “any reasonable attorney would agree it is totally and completely without merit.” (In re Marriage of Sahafzadeh-Taeb & Taeb (2019) 39 Cal.App.5th 124, 135.) When an action utterly lacks merit, the trial court is entitled to infer that action was taken in bad faith.” (In re Marriage of Drake (1997) 53 Cal.App.4th 1139, 1169)

Here, Kennedy and counsel pursued a position (i.e., that Corp. Code section 2000 applied in the underlying action) which was legally unsupported and which would not have imposed liability on SMRH Defendants even if it was. Any reasonable attorney would have agreed that the claim was without merit. As such, the Court concludes Kennedy’s claims and defenses were asserted in bad faith. 

The Court also concludes that Kennedy’s claims were objectively frivolous. CCP section 128.7 requires that for each paper presented to the court, the attorney presenting such paper certify that they have undertaken a reasonable inquiry and:

(b)(1) It is not being presented primarily for an improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;

(2) The claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law. (3) The allegations and other factual contentions have evidentiary support....

Regardless of whether a claim or defense is factually or legally frivolous under section 128.7, “to obtain sanctions, the moving party must show the party's conduct in asserting the claim was objectively unreasonable.” (Bucur v. Ahmad (2016) 244 Cal. App. 4th 175, 189.)

Here, as set forth above, Kennedy’s causes of actions and defenses were objectively unreasonable. Established case law provides that Corp. Code section 2000 only applies in claims where a cause of action for involuntary dissolution is asserted. Kennedy 2 did not include a cause of action for involuntary dissolution, and Kennedy did not offer any legal support for his contention that Kennedy 2 had a claim for involuntary dissolution “in fact.” Kennedy also did not offer any support that could show that the SMRH Defendants could have raised Corp. Code section 2000 at the point they began their representation, or that could show that SMRH Defendants were responsible for the actions of previous attorneys or had a duty to make Plaintiff aware of untenable defenses.

The Court’s conclusion that Kennedy’s claims and defenses were asserted for bad faith purposes is compounded by Kennedy’s conduct subsequent to the Court’s ruling on the 5/10/22 motion for summary adjudication. Following the Court’s ruling, SMRH Defendants argued that they were entitled to summary judgment/summary adjudication of Plaintiff’s Complaint and SMRH Defendants’ Cross-Complaint because Plaintiff’s causes of action against the SMRH Defendants were based entirely on Corp. Code section 2000, and the Court had concluded that section 2000 did not apply in the underlying action.

In opposition, Kennedy argued that his claims against SMRH Defendants were based on misconduct other than failing to invoke section 2000, and submitted evidence to show that SMRH Defendants had engaged in unconscionable billing practices. While the Court initially concluded that this evidence was sufficient to create triable issues, it became clear in oral argument and from SMRH Defendants’ reply that Kennedy was raising these issues for the first time. Indeed, SMRH Defendants submitted extensive support to show that throughout discovery Kennedy had repeatedly identified the sole basis of his claims as the failure to invoke section 2000 and a vague reference to “block-billing.” As such, Kennedy’s opposition misrepresented the substance of his claims in a last-ditch effort to avoid summary judgment/adjudication of his claims and defenses.

            Taken together, the evidence indicates that Kennedy advanced unsubstantiated legal positions, and misrepresented the substance of his claims and defenses to the Court to avoid an adverse ruling. The motion to vacate the stipulation to bifurcate summary adjudication motions fits into this pattern. As such, Kennedy’s claims and defenses were presented for improper purposes such as to harass, cause unnecessary delay, and to require SMRH Defendants to incur unnecessary litigation costs.

CCP sections 128.5(f)(2) and 128.7(d) both provide that sanctions are appropriate if they are in an amount “sufficient to deter repetition of the action or tactic or comparable action or tactic by others similarly situated.” Further, sanctions may be properly awarded if the sum is “selected in part for its deterrent value and in part as a reflection of the cost reasonably incurred in defending against [a] meritless motion and bringing the motion for sanctions.” (Hopkins & Carley v. Gens (2011) 200 Cal. App. 4th 1401, 1418.)

In Hopkins & Carley v. Gens, a law firm, which previously represented the defendant-client, moved for sanctions under CCP section 128.7 after defendant filed a frivolous motion for relief from the judgment. (Ibid.) The appellate court affirmed the lower court’s grant of sanctions, finding that the amount of sanctions was proper given that it was an amount “sufficient to deter repetition of the violation of Code of Civil Procedure 128.7 identified herein, or comparable conduct by others similarly situated in that the amount of 9000 imposed as a sanction [was] based upon the time expended by [the law firm] in defending the motion and bringing the motion for sanctions.” (Ibid.)

Unlike Hopkins, Kennedy and his counsel’s misconduct is not limited to a single, frivolous motion. Rather all of Kennedy’s claims against the SMRH Defendants and his entire defense to liability for SMRH’s unpaid legal fees has been meritless and frivolous from the beginning. Kennedy and his counsel knew at the time of filing that Kennedy’s claims and defenses rested on a single theory – that Section 2000 applied in KVK2 – that lacked legal support and was actually contradicted by a published decision in a case where Kennedy was a party. As such, limiting sanctions to the value of time spent on a motion for sanctions, is inadequate and would not have the deterrence effect intended by CCP §§ 128.5 and 128.7.

Given the nature and scope of Kennedy’s actions, and to deter Kennedy’s actions in the future, the Court finds that SMRH Defendants’ requested sanctions of $444,173.50—half the value of the SMRH Defendants’ attorney time spent on this case—to be reasonable.

Based on the foregoing, SMRH Defendants’ motion for sanctions is granted.

It is so ordered.

Dated:  July    , 2022

   Hon. Jon R. Takasugi
   Judge of the Superior Court

Parties who intend to submit on this tentative must send an email to the court at smcdept17@lacourt.org by 4 p.m. the day prior as directed by the instructions provided on the court website at www.lacourt.org.  If a party submits on the tentative, the party’s email must include the case number and must identify the party submitting on the tentative.  If all parties to a motion submit, the court will adopt this tentative as the final order.  If the department does not receive an email indicating the parties are submitting on the tentative and there are no appearances at the hearing, the motion may be placed off calendar. 

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