Judge: Mark H. Epstein, Case: 24SMCV03538, Date: 2025-04-30 Tentative Ruling

Case Number: 24SMCV03538    Hearing Date: April 30, 2025    Dept: I

The court is inclined to STAY the matter, at least pending the hearing on May 8, 2025.  

This is a complaint alleging malpractice and breach of fiduciary duty by plaintiff against defendants, who plaintiff asserts was essentially former counsel (something defendants dispute).  Plaintiff asserts that in 2013, defendants presented to plaintiff a draft promissory note for $2.5 million reflecting a loan by plaintiff, a trust, to S&W.  At the time, plaintiff alleges that the lender was under the control of a long time client of the defense.  According to plaintiff, although the defense did present plaintiff with a conflict waiver, and although plaintiff did have independent counsel to assist it in deciding whether to agree to the loan, there was more.  Plaintiff alleges that the defendant was aware that the note contained a flaw: it was usurious.  (To be clear, plaintiff does not agree that the 12% interest rate was in fact usurious; plaintiff contends only that defendants thought that it was.)  Plaintiff argues that defendants had an obligation not to present a proposed note with that known potential defect to a client—waiver or no.  The defense contends that it was not giving plaintiff a booby-trapped document (that is plaintiff’s term), and that the conflict waiver addressed any issues there would be even if there otherwise would have been a conflict, which defendants deny.  In any event, as the astute reader has probably surmised, the note was not repaid.  Instead, the S&W venture seems to have gone bust.  The investors lost their investment and plaintiff did not get its money back.  S&W filed for bankruptcy protection and asserted, among other things, that the note in favor of plaintiff is usurious under California law and therefore that no interest can be collected (although the principal remains due).  That assertion led plaintiff to file the instant suit.  This case was then removed to federal court, but it was remanded.  The Bankruptcy Judge concluded that plaintiff’s allegation here—that there was a breach of duty and that defendants’ actions amounted to elder abuse—is not at issue in the Bankruptcy case.  That case is about the merits of the loan, but not whether the lawyer parties violated a duty to the client.  Upon remand, defendants demurred and sought a stay pending the outcome of the Bankruptcy case.

The court agrees with plaintiff that the matter was remanded, and that the reasons for remand were that the instant case is not the same as the Bankruptcy matter.  But that does not mean that they are unrelated.  The scope of this case changes a lot, one would think, depending on the merits of the usury argument.  If plaintiff prevails in the Bankruptcy Court on that matter, it might not necessarily absolve the defense here, but it would mean at a minimum that the damages are very different.  Under those circumstances, the harm alleged would be the cost of litigating the motion in the Bankruptcy Court, not the lost interest.  While that number is likely not zero, it would mark the far end of the economic injury to plaintiff.  There remain the torts, of course, but the scope of those torts is also diminished.  On the other hand, if S&W prevails and the note is deemed usurious, then at least the scope of damages is larger.  And there is some possibility that the Bankruptcy Court’s decision will have preclusive effect here.  It depends on the court’s logic and reasoning and whether that would give rise to an estoppel argument, as has been articulated in papers filed in the case before this court.

At a minimum, the court believes that it could gain significant insight from the Bankruptcy Court’s ruling.  And since the hearing is only about a week away, the court sees little downside in waiting for the Bankruptcy Court to rule on the matter.  In any event, the court will CONTINUE the demurrer to a date by which the Bankruptcy Court will have ruled and will STAY the matter until that time.  The court will discuss dates with the parties.

The court also notes that the reply included a supplemental request for judicial notice clocking in at a whopping 474 pages.  While the court understands the need for the supplemental filing regarding documents that did not exist when the moving papers were filed, it is not appropriate to submit new evidence on reply as a general matter.  The reason is obvious and salutary.  Evidence in moving papers can be opposed or explained in the opposition.  Evidence in reply papers must go unrebutted.  That is patently unfair to the opposing party.  There are exceptions, of course.  Evidence that did not exist at the time the moving papers were filed obviously could not have been included in the moving papers.  And sometimes the opposition will raise an unexpected issue that could not reasonably have been foreseen when the motion was filed.  The court is not sure that at least some of the papers in reply here fit that category.