Judge: Kevin C. Brazile, Case: 23STCV03606, Date: 2023-10-05 Tentative Ruling

Case Number: 23STCV03606    Hearing Date: October 5, 2023    Dept: 20

Tentative Ruling

Judge Kevin C. Brazile

Hearing Date:                         Thursday, October 5, 2023

Case Name:                             Omanoff, et al. v. Cohen, et al.

Case No.:                                23STCV03606

Motion:                                  Demurrer without Motion to Strike

Moving Party:                         Defendants Cynthia Cohen and Brown, White & Osborn, LLP (“Defendants”)

Responding Party:                  Plaintiffs Rodney Omanoff, VOIP, LLC, and VOIP Guardian Partners II, LLC(“Plaintiffs”)

Notice:                                    OK

Ruling:                                    Defendants’ Demurrer is SUSTAINED WITH LEAVE TO AMEND.

Defendants to give notice.

If counsel do not submit on the tentative, they are strongly encouraged to appear by LACourtConnect rather than in person due to the COVID-19 pandemic.

BACKGROUND

            This is an action for legal malpractice and breach of contract. Defendants Cynthia Cohen and Brown, White & Osborn, LLP (“Defendants”) demur to the Complaint as to the causes of action for professional malpractice and breach of contract on the grounds that they fail to state facts sufficient to state a cause of action against Defendants. Specifically, Defendants argue that the Complaint is barred by the Statute of Limitations and there is no applicable basis to toll Plaintiffs’ claims.

            The Complaint arises out of two adversary actions in the United States Bankruptcy Court in which Plaintiffs were sued: Timothy Yoo, Chapter 7 Trustee v. VOIP Guardian LLC et al., USBC Central District of California Adv. No. 2:21-ap-01044-BR; and Timothy Yoo, Chapter 7 Trustee v. Wavecrest (UK) Ltd et al., USBC Central District of California Adv. No. 2:21-ap-01046-BR. (the “Underlying Actions”). The Complaint alleges as follows: Plaintiffs they tendered their defense and indemnity against the Underlying Actions to Certain Underwriters at Lloyds (“Lloyd’s”) and XL Specialty Insurance Company who accepted the tenders under a reservation of rights. (Compl. ¶ 8.) Plaintiffs retained Cynthia Cohen of Brown, White & Osborn as independent defense counsel for the Underlying Actions under California Civil Code section 2860. (Id. ¶ 9.) On December 30, 2021, Cohen scheduled a call with Plaintiffs’ coverage counsel Mikaela Whitman of Pasich, LLP and advised Ms. Whitman that: 1) a December 10, 2021, Settlement Demand from counsel for the chapter 7 trustee was a “sham” offer and not a real offer; and 2) Cohen and Jason Komorsky, of BG Law, special counsel for the chapter 7 trustee, knew the insurers would not accept the Settlement Demand but it was to set up a bad faith claim against the Insurers, get it on the record, and gage the insurers’ reaction. This telephone call was Plaintiffs’ first notice of these actions by Cohen. (Id. ¶ 10.) Cohen’s actions presented a substantial risk to Plaintiffs in that the insurers could claim that there was collusion between Plaintiffs and the chapter 7 trustee and that the pursuit of the claim for coverage and the settlement demand were fraudulent. Given the pendency of the coverage action, there also was a substantial risk that Plaintiffs' credibility, as well as the substantive merits of their claim, would be adversely affected. Because of these risks, no reasonable attorney in Cohen’s position would have taken her actions. (Id. ¶ 12.) In order to reasonably mitigate their damages and the possibility of adverse determinations, Plaintiffs needed to disclose Cohen’s actions to the insurers. Not surprisingly, when these facts were disclosed to the insurers, the insurers immediately reserved their rights to deny or limit coverage on this issue for the Underlying Actions. Thereafter, while still reserving their rights on these issues, the insurers subsequently filed a motion for summary judgment. Plaintiffs decided not to contest the summary judgment motion or pursue coverage from the insurers for the Underlying Actions. Plaintiffs’ decision was premised, in part, upon the fact that even if they prevailed on the motion for summary judgment, they could still lose the coverage litigation because of Cohen's actions, as well as face the possibility of other prejudice, such as possible claims of insurance fraud and damage to their credibility affecting their defense against other claims. (Id. ¶ 12.)

            On September 1, 2023, Defendants filed this demurrer to the Complaint.

            On September 21, 2023, Plaintiffs filed an opposition.

            On September 28, 2023, Defendants filed a reply.

REQUEST FOR JUDICIAL NOTICE

            Defendants’ Requests for Judicial Notice are GRANTED in full.

DISCUSSION

When considering demurrers, courts read the allegations liberally and in context, and “treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law.” (Serrano v. Priest (1971) 5 Cal.3d 584, 591.)  “A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action.” (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.)  It is error “to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment.” (Aubry v. Tri-City Hospital Dist. (1992) 2 Cal.4th 962, 967.)

The statute of limitations for legal malpractice actions is contained in Code of Civil Procedure section 340.6(a). Under this statute, the one-year limitations period commences when the plaintiff actually or constructively discovers the facts of the wrongful act or omission, but no later than four years. However, this limitations period is tolled until the plaintiff suffers actual loss or damage resulting from the allegedly negligent actions and/or while the attorney continues to represent the client in the same matter. For purposes of the tolling rule, the test for “actual injury” under Code of Civil Procedure section 340.6 is whether the plaintiff has sustained any damages compensable in an action. Under this standard, the fact of damage rather than the amount, is the critical factor. (Pointe San Diego Residential Community, L.P. v. Procopio, Cory, Hargreaves & Savitch, LLP (2011) 195 Cal.App.4th 265, 275.)

Defendants argue that Plaintiff’s first cause of action fails because it is time-barred by the aforementioned statute of limitations. Defendants contend that Plaintiff’s legal malpractice claim accrued prior to February 2, 2022 when the filing of the substitutions of attorneys occurred. According to the Complaint, Defendants allegedly engaged in wrongdoing in connection with the trustee’s December 10, 2021 settlement demand and provided assistance to counsel for the trustee in drafting an amended complaint, purportedly to implicate insurance coverage. (Compl. ¶10.) Plaintiffs contend that they learned of these actions in a December 30, 2021 telephone call between Defendants and Plaintiffs’ coverage counsel, Mikaela Whitman. (Id.) Defendants claim that the allegations in the Complaint establish that Plaintiffs not only knew of Defendants’ alleged actions at that time, but Plaintiffs also appreciated that the actions were allegedly wrongful since Plaintiffs disclosed the actions of Defendants which presented a substantial risk to Plaintiffs. (Compl. ¶¶ 11, 12.) Plaintiffs’ Complaint was not filed until February 17, 2023, well over a year after they incurred attorneys’ fees of new counsel1 (Compl. ¶13), and well over a year after the December 30, 2021 telephone call.

As to tolling, Defendants claim that Plaintiffs learned of the insurance-related conduct as of December 30, 2021 and sustained immediate harm to Plaintiff’s coverage position. Plaintiffs also sustained damages when they incurred fees and costs in obtaining replacement counsel, which they filed substitutions for on February 2, 2022 and made further filings on February 9, 2022. Finally, Defendants state that continuity of representation is not a ground for tolling here since Plaintiffs filed a substitution of attorney and the docket for the Underlying Adversary Proceedings reflects immediate takeover of the representation by Plaintiffs’ new counsel. (Newcomb Decl. ¶¶5-8.)

            Plaintiffs do not dispute that they were aware of Defendants’ malpractice more than one year before the complaint was filed but claims that the limitations period was tolled until Plaintiff sustained actual injury, which was the loss of insurance coverage for the defense and indemnity of the bankruptcy actions. Plaintiffs assert this could not have occurred prior to February 22 or 23, 2022, which is the date Plaintiff Omanoff informed Lloyd’s of Defendant Cohen’s actions. Plaintiff states when Lloyd’s learned of Cohen’s actions it reserved its rights to deny or limit coverage for the bankruptcy actions based on her conduct, but did not withdraw coverage. There was thus, still no “actual damages” at this point and even if there was, Lloyd’s reserved rights less than a year before the complaint in this action was filed, so the limitations period did not run. Plaintiffs claim they were not actually damaged until when faced with the summary judgment motion Plaintiff Omanoff decided it was not worthwhile to oppose it. As to Defendant’s argument that replacement counsel fees constitutes actual damages which would trigger the statute of limitations, Plaintiffs claim that they did not actually pay for replacement counsel’s work because Lloyd’s agreed to pay for Plaintiff Omanoff’s defense and it was not until March 14, 2023 that Lloyd’s informed Omanoff that it would not pay replacement counsel’s fees to get up to speed (following Defendants’ representation of Plaintiffs).

            In reply, Defendants argue that Plaintiffs sustained their alleged damages in December 2021 following Cohen’s call with Plaintiff’s coverage counsel because Plaintiffs attempted to mitigate damages and the possibility of adverse determinations. As a result of Cohen’s actions, Plaintiffs assert they needed to disclose Cohen’s actions to the insurers. The Court agrees that this shows Plaintiffs sustained damages as of December 2021 since they allege that they disclosed Cohen’s actions in order to reasonably mitigate their damages. However, the Court finds that the Complaint does not establish that Plaintiffs suffered actual injury in February 2 or 9, 2022, when they substituted counsel because Plaintiffs were not made aware that they would have to pay replacement counsel’s fees until March 14, 2023, when Lloyd’s informed Plaintiffs that it would not pay those fees incurred to get replacement counsel up to speed. Plaintiffs reasonably believed that they did not incur those fees because Lloyd’s agreed to pay for Omanoff’s defense and Omanoff submitted the invoice from replacement counsel to Lloyd’s for payment.

            Thus, the demurrer is SUSTAINED WITH LEAVE TO AMEND as to the allegations that Plaintiffs mitigated damages following the December 31, 2021 phone call.

CONCLUSION

Defendants’ demurrer is SUSTAINED WITH LEAVE TO AMEND.

Defendants to give notice.     

If counsel do not submit on the tentative, they are strongly encouraged to appear by LACourtConnect rather than in person due to the COVID-19 pandemic.