Judge: Michael E. Whitaker, Case: 24SMCV02548, Date: 2024-07-31 Tentative Ruling

Case Number: 24SMCV02548    Hearing Date: July 31, 2024    Dept: 207

TENTATIVE RULING

MOTION

On May 29, 2024, Plaintiff Beverly Spalding Court Homeowners’ Association, by and through its Court-Appointed Receiver Stephen Donell (“Plaintiff”) filed suit against Defendants Yang Professional Law Corporation and Rey S. Yang (“Defendants”) alleging two causes of action for (1) legal malpractice and (2) breach of fiduciary duty. 

Defendants now move to strike Plaintiff’s request for punitive damages. Plaintiff opposes the motion and Defendants reply. 

ANALYSIS

1.     MOTION TO STRIKE

Any party, within the time allowed to respond to a pleading, may serve and file a motion to strike the whole pleading or any part thereof.  (Code Civ. Proc., § 435, subd. (b)(1); Cal. Rules of Court, rule 3.1322, subd. (b).)  On a motion to strike, the court may: (1) strike out any irrelevant, false, or improper matter inserted in any pleading; or (2) strike out all or any part of any pleading not drawn or filed in conformity with the laws of California, a court rule, or an order of the court.  (Code Civ. Proc., § 436, subd. (a)-(b); Stafford v. Shultz (1954) 42 Cal.2d 767, 782.)  Here, Defendants move to strike from the complaint, references to and claims for punitive damages.    

In ruling on a motion to strike punitive damages, “judges read allegations of a pleading subject to a motion to strike as a whole, all parts in their context, and assume their truth.”  (Clauson v. Superior Court (1998) 67 Cal.App.4th 1253, 1255.)  To state a prima facie claim for punitive damages, a plaintiff must allege the elements set forth in the punitive damages statute, Civil Code section 3294.  (College Hosp., Inc. v. Superior Court (1994) 8 Cal.4th 704, 721.)  Per Civil Code section 3294, a plaintiff must allege that the defendant has been guilty of oppression, fraud, or malice.  (Civ. Code, § 3294, subd. (a).)   As set forth in the Civil Code,

(1) “Malice” means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.  (2) “Oppression” means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights.  (3) “Fraud” means an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.

(Civ. Code, § 3294, subd. (c)(1)-(3), emphasis added.) 

Further, a plaintiff must assert facts with specificity to support a conclusion that a defendant acted with oppression, fraud or malice.  To wit, there is a heightened pleading requirement regarding a claim for punitive damages.  (See Smith v. Superior Court (1992) 10 Cal.App.4th 1033, 1041-1042.)  “When nondeliberate injury is charged, allegations that the defendant’s conduct was wrongful, willful, wanton, reckless or unlawful do not support a claim for exemplary damages; such allegations do not charge malice.  When a defendant must produce evidence in defense of an exemplary damage claim, fairness demands that he receive adequate notice of the kind of conduct charged against him.” (G. D. Searle & Co. v. Superior Court (1975) 49 Cal.App.3d 22, 29 [cleaned up].)  In Anschutz Entertainment Group, Inc. v. Snepp, the Court of Appeal noted that the plaintiffs’ assertions related to their claim for punitive damages were “insufficient to meet the specific pleading requirement.”  (Anschutz Entertainment Group, Inc. v. Snepp (2009) 171 Cal.App.4th 598, 643 [plaintiffs alleged “the conduct of Defendants was intentional, and done willfully, maliciously, with ill will towards Plaintiffs, and with conscious disregard for Plaintiff's rights. Plaintiff's injuries were exacerbated by the malicious conduct of Defendants. Defendants' conduct justifies an award of exemplary and punitive damages”]; see also Grieves v. Superior Court (1984) 157 Cal.App.3d 159, 166 [“The mere allegation an intentional tort was committed is not sufficient to warrant an award of punitive damages.  Not only must there be circumstances of oppression, fraud, or malice, but facts must be alleged in the pleading to support such a claim”].) 

Moreover, “the imposition of punitive damages upon a corporation is based upon its own fault.  It is not imposed vicariously by virtue of the fault of others.”  (City Products Corp. v. Globe Indemnity Co. (1979) 88 Cal.App.3d 31, 36.)  “Corporations are legal entities which do not have minds capable of recklessness, wickedness, or intent to injure or deceive.  An award of punitive damages against a corporation therefore must rest on the malice of the corporation’s employees.  But the law does not impute every employee’s malice to the corporation.  Instead, the punitive damages statute requires proof of malice among corporate leaders:  the officers, directors, or managing agents.”  (Cruz v. Home Base (2000) 83 Cal.App.4th 160, 167 [cleaned up].) 

Defendants argue that Plaintiffs have only alleged conduct that rises to the level of negligence, but have not alleged malice, oppression or fraud.

The Complaint alleges:

3. Yang only first learned of horizontal cracks in a cast iron drain pipe some three years into the representation. Prior to that time, Yang’s defense of the HOA derived from their incorrect understanding of California law and the governing documents relative to obligations to maintain, repair and replace elements of the common areas, exclusive use common area, and individual units. Yang erroneously asserted plaintiffs were responsible to repair all of the damage to their units and that the HOA had no responsibility to do so.

4. Yang did not advise the HOA it would be prudent and appropriate to conduct a comprehensive evaluation of the Building’s condition and take immediate corrective action to prevent further water intrusion and damage to the Building, even if that meant making a special assessment or an emergency special assessment under California Civil Code § 5610. Nor did Yang advise the HOA of the consequences and ever growing exposure it faced by allowing water to continue to flood two owner’s units and damage common areas. Yang was, instead, content to allow the water intrusion to continue, resulting in additional harm to the Building and the HOA responsible for maintaining and repairing the Building.

5. While the underlying lawsuit eventually settled, the financial harm that Yang caused for the HOA was not the product of a bad settlement, nor does the HOA herein allege that but for Yang’s negligence it would have enjoyed a better settlement. Rather, due to Yang’s delay in identifying the source of the water intrusion, the Building suffered additional and increasing damage that could have been avoided had Yang advised the HOA – as they should have – that it was responsible to repair or replace a cracked cast iron drainage pipe as well as multiple other Building elements for which the Association was responsible to maintain, repair and replace. Further, due to Yang’s failure to do so, the plaintiffs sought the appointment of a receiver to take control over the HOA and repair the damage to the Building. But for Yang’s erroneous advice and dilatory conduct, the HOA would have been able to rehabilitate the Building much sooner and at a much lower costs, and it would not have been compelled to incur the costs associated with the receivership.

[…]

9. Defendant REY YANG (“R. Yang”) is an individual licensed to practice law in the State of California. R. Yang maintains his primary place of business within the State of California, County of Los Angeles. R. Yang is an officer, director, and shareholder of Yang PLC. R. Yang practices law with and through Yang PLC. R. Yang was actively involved in providing legal services to the HOA.

[…]

17. Saks filed suit against the HOA and his upstairs neighbor, Pink, on February 14, 2019, in a matter styled as Saks v. Pink, Los Angeles County Superior Court Case No. 19SMCV00289 (the “Saks Lawsuit”).

18. In his suit, Saks alleged, among other things: Water continues to leak since at least October 2018, directly into the Unit through a rotted out drainage system which allows for the water drained from the roof, the air conditioning condensers on the roof and the water from Pink’s rooftop gardens to run both into the Unit and to seep through the exterior walls into the Unit.

* * *

The following repairs have been neglected by the HOA, the Board, and Pink:

a. a rotted out and non-existent gutter system, which directly contributes to the continued damages to the Unit;

b. a rotted out and non-existent scupper draining directly into the Unit and allows water to seep into the Unit through the exterior walls;

c. overwatering by the Pink Defendants located directly above the Unit at the Property at 4:00 a.m. for approximately forty-five (45) minutes, “draining” through the rotted drainage system into the Unit and seeping into the walls of the Unit;

d. leaks in the roof;

e. water intrusion into the elevator, which has been closed on multiple occasions;

f. unlit staircases;

g. untreated mold caused by the excessive water; and

h. dry rot in the walls, windows and doors caused by the lack of any drainage system and Pink’s incessant 4:00 a.m. watering barrage.

19. Yang was appointed as defense counsel for the HOA in the Saks Lawsuit. Yang first appeared in the Saks lawsuit in April 2019.

20. Sniderman, who owns the unit directly below Saks, filed suit against the HOA and others on September 19, 2019, styled as Sniderman v. Pink, Los Angeles County Superior Court Case No. 20STCV01637 (the “Sniderman Lawsuit”).

21. Yang was also appointed as defense counsel for the HOA in the Sniderman Lawsuit.

22. Both lawsuits arose from allegations that a “rotted out” gutter system, a “rotted out scupper draining,” deteriorated waterproofing, roof leaks, and other defects allowed water to damage the units owned by Mr. Saks and Ms. Sniderman.

23. Yang inspected the exterior of the Building in October 2019. During that visit, Yang was accompanied by representatives of the HOA. They were not accompanied by any contractors, engineers, or other leak detection professionals. Yang did not enter any of the affected units during this external inspection. It would be over two years before Yang returned to the Building to view the inside of Pink’s, Saks’, and Sniderman’s units.

24. Over a year after first appearing in the Saks Lawsuit, Yang finally and belatedly inquired of the HOA’s general counsel regarding the HOA’s responsibility with regard to rain gutters, drainage systems, and other common area Building elements. At that time, Yang had not conducted any meaningful investigation of, nor understood, the Building’s drainage systems. Nor had Yang carefully analyzed either governing law or the HOA’s governing documents. Thus, not surprisingly, Yang inaccurately described the physical characteristics of the Building in seeking counsel’s opinion:

Troy

I am available tomorrow to discuss.

I am referring to certain rain or drainage gutters. The condominium complex has three levels. There is a specific gutter system that drains the excess water from the top level, which is above the balcony of the second floor unit. The gutter system over the second floor balcony flows down to the ground level. The allegation is that the gutter system above the second floor balcony was rotted, but the second floor homeowner did not remedy the issue or otherwise report the issue to the HOA until October 2018. The HOA immediately replaced the rotted portion of gutter. I believe that the rotted rain gutter over the second floor balcony, which services only the second floor resident, is the sole responsibility of the second floor homeowner. The portion of the gutter system is for the exclusive use of the three residents, and more specifically to the second floor resident.

I can provide you with more information, including the allegations in the Complaint and the photographs of the specific gutters.

Rey

25. Yang’s description of the gutter system was incorrect. Yang did not understand nor appreciate that the gutter system serviced the entirety of the Building, as opposed to just some of the units. Nor did Yang understand or appreciate that water collected on the roof was flowed through drainpipes from the roof through the common area floor/ceiling diaphragm above Saks’ ceiling and below Pink’s floor. From there, the water carried through these pipes flowed into an exterior rain gutter system, which was immediately below the balcony on the fourth floor, not the second-floor balcony.

26. The HOA’s general counsel advised Yang the HOA was responsible for the repair and replacement of any exclusive common use areas and the maintenance, repair, and replacement of common areas. To this end, HOA counsel advised Yang that under any scenario, the HOA was responsible to repair or replace both common use and exclusive common use areas. Furthermore, HOA counsel recognized the drainage system may be properly characterized as common area, in which event the HOA would be responsible for maintenance, repair, and replacement.

Rey,

Photos would be helpful in my assessment; I have been looking at the Building via Google street view and satellite.

The CCRS do not specifically list drains as part of the common area or exclusive use common area. Based on how you have described the drain, if it serves one or more units, but not all units, then it is an exclusive use common area (per Art. I, Section 28). The Association’s CCRS do not state whether owners or the Association is responsible for this kind of exclusive use common area. The exclusive use common area mentioned in the CCRS relate to exclusive use common areas identified in the condo plan, and the condo plan does not mention drains. Therefore, we would have to rely on Civil Code 4775(a)(3), which makes owners responsible for maintaining exclusive use common areas and the Association responsible for repairing and replacing exclusive use common areas.

However, if the drain were to be considered a part of the common area, then per CC&R Article VII, Section 1.A.4, the Association would be responsible for maintaining, repairing, restoring, replacing and making necessary improvements to the drain.

Please let me know if you have any questions.

Best,

Troy A. Kennedy, Esq.

27. While correct in finding that the HOA had the obligation to repair and replace the drainage pipes, whether denominated as common area or exclusive use common area, the HOA’s general counsel’s suggestion that drainage systems may be exclusive use common area was incorrect. The drainage systems were neither designated as exclusive use common areas, nor would they be. The drainage systems did not service only a single unit.

28. By letter dated May 12, 2020, Yang reported to the insurance carrier that the information provided to him by the HOA’s outside counsel provided little guidance because counsel had used the terms “maintain” and “repair” interchangeably.

[…]

34. As such, Yang’s suggestion that Kennedy’s advice did not provide “much guidance” and that Kennedy had used the words “‘maintain’ and ‘repair’ interchangeably” was erroneous.

35. Though Yang still had yet to evaluate and identify the source of the water intrusion, in January 2022, Yang filed a motion for summary judgment on behalf of the HOA. Therein, Yang argued the HOA had no obligation to repair or maintain the drainage systems. The gist of the argument Yang presented was that the CCR’s adopted the relevant portions of Sections 4145 and 4775 for purposes of defining “exclusive use common area” and, as such, the HOA had no obligation to remedy the water intrusion.

36. When Yang filed the summary judgment motion, despite having been counsel to the HOA for nearly two years, Yang still did not appreciate that the drainage pipes serviced all of the units by removing water from the common area roof and were not identified in the governing documents as exclusive use common areas. Meaning, the drainpipes were actually common areas and within the maintenance, repair, and replace obligations assigned to the HOA. Further, even if the drainage pipes were exclusive common use area, the HOA was still required to repair or replace them. Rotted pipes cannot be maintained, nor can they be repaired. They must be replaced.

37. In the motion, Yang argued “exclusive use common area” meant any portion of the common area that was for “exclusive use of one or more, but fewer than all, of the owners.”

38. Yang did not appreciate that, pursuant to Civil Code § 4145, “exclusive use common area” is defined as follows: (a) “Exclusive use common area” means a portion of the common area designated by the declaration for the exclusive use of one or more, but fewer than all, of the owners of the separate interests and which is or will be appurtenant to the separate interest or interests.

39. The term “declaration” referred to in Section 4145 is defined in Civil Code § 4135 as a document that contains certain information required by statute:

“Declaration” means the document, however denominated, that contains the information required by Sections 42501 and 4255.2

40. The CCRS and Condo Plan for the HOA designated only four areas as “exclusive common use areas.” The designated areas did not include drainage systems. Rather, the CCRS expressly stated that drainage was within the responsibility of the HOA.

41. The CCRS provide the HOA was to “A. maintain, repair, restore, replace and make necessary improvements to the Common Area or Community Facilities including without limitation, the following: . . . 2. That portion of the project identified on the Condominium Plan as Exclusive Use Common Areas, for the exclusive use of a particular unit shown on the Plan by the Unit Number and an appropriate letter designation, . . . 4. drainage facilities. . . ..” Article VII, § 1, A. 3, 4.

42. Thus, the argument Yang presented in the summary judgment motion was erroneous. Merely because a portion of the Building was accessible or used by only one unit did not saddle the owner of the unit with maintenance, repair, and replacement obligations. Rather, a unit owner was only obligated to maintain those portions of the Building designated within the CCRS only in the event the CCRS expressly designated those portions as exclusive common use. Even then, the HOA remained responsible to repair or replace those areas as necessary.

43. In May 2022, over three years after Yang was assigned to defend the Saks Lawsuit and nearly 2 years and 6 months after Yang’s initial exterior inspection, Yang attended a preliminary visual inspection of the Building with a “leak inspection expert,” John Shepard. During this visit, Mr. Shepard recommended retaining “a plumbing expert to scope/map the roof drains and see if there’s any potential corrosion.”

44. In August 2022, Yang attended a site inspection of Pink’s residence, Unit 402, which was on the top floor of the Building. During this visit, Mr. Shepard opined that it was “more likely that the design of the southside drainage system itself was the problem, but it appears that after the repairs this issue is now resolved.”

45. In September 2022, during destructive testing of the affected units, a plumber retained by the plaintiffs “scope the drain lines from the roof level . . ..” He noted “there is a negative slope which allows water to pool, while the pipe itself is corroded and spalling.” Yang interpreted this to mean “water is coming through the area of the corroded pipe and dripping down into the lower wall areas of the Building.”

46. Shortly thereafter, in October 2022, experts designated by Saks and Sniderman, construction expert witness Stephen Cook and homeowner’s association expert witness Daniel Nordberg, provided their expert witness reports.

[…]

48. Mr. Cook’s October 18, 2022, report also includes numerous other images of rusty and heavily corroded drainage pipes running through the ceiling cavity above Saks’ unit, including images of two cracked pipes:  […]

49. Yang acknowledged in the November 2022 report that experts’ reports “suggest possible liability as to our clients.” But Yang did not provide a standalone liability analysis in that report.

50. The liability analysis Yang provided in their December 2022 report did not address the cracked and corroded drainpipes.

51. Within their February 2023 report, Yang reported that due to heavy rains in January, Saks had observed water leaking from the cast iron pipe. Yang also noted an additional inspection was conducted on January 16, 2023, during which plaintiffs’ construction expert “noted a large crack (possibly 8 feet long) which extended horizontally near the top of the main cast iron pipe.” Despite having received Mr. Cook’s prior report containing annotated photographs of cracks in the cast iron pipes, which images appear above, Yang wrote, “(Again, we note that Mr. Cook did not previously identify or photograph this extensive horizontal crack in the main cast iron pipe . . ..”)

52. Finally, in email correspondence dated February 22, 2023, Yang wrote “we continue to believe that liability is probable . . ..”

53. Despite this conclusion, Yang did not raise the risks the HOA faced when asked to weigh in on a memorandum to be distributed to the HOA members concerning a vote for an assessment to repair the Building. Thus, when the condominium owners were asked to vote to make a special assessment to repair damage to the premises, they were not advised of the significant cracks in the common area drainage pipes.

54. In May 2023, Yang communicated that the HOA faced liability because “there is no means to dispute that the water leaks from the common area cast iron pipe which runs through the ceiling of Unit 303 did not contribute to the water intrusion and damage to Unit 303, Unit 203, and the Building.”

55. Eventually, the Saks and Sniderman Lawsuits resolved by way of settlement. As part of that settlement, the HOA was obligated to rehabilitate the damaged portions of the Building.

[…]

66. As counsel appointed by the HOA’s insurance carrier, Yang had a relationship with the insurance carrier.

67. While representing the HOA and serving at the request of the HOA’s insurance carrier, Yang were laboring under a significant conflict of interest, the byproduct of which is Yang did not provide to the HOA proper advice because doing so would compromise the interests of the insurance carrier.

68. On the one hand, it was in the best interest of the HOA to promptly remedy the Buildings’ broken drainage systems to mitigate against further damages and decay resulting from continued water intrusion.

69. On the other hand, if Yang had informed the HOA that it had liability to repair the damage caused by the water intrusion and recommended that it do so, that would compromise the insurance carrier with regard to its exposure to and negotiating leverage with Saks and Sniderman, by conceding the HOA to be at fault.

70. As such, the HOA is informed and believes, and based thereon alleges, that rather than promptly conduct the necessary factual investigation and legal analysis, Yang instead concocted an unsound legal argument premised on an incorrect interpretation of the facts and law. By asserting that the HOA had zero responsibility to repair and replace drainage systems and pipes, Yang was able to placate the HOA that it need not conduct necessary repairs, thereby protecting the insurance carrier. Furthermore, given the advice from the HOA’s counsel in 2020 that the HOA was required to repair and replace the common area and exclusive use common area – which repairs were outside the scope of insurance coverage – the HOA is informed and believes and based thereon alleges that Yang knew the HOA was going to pay for the repairs eventually and concluded that it would suffer no harm by virtue of his erroneous legal advice.

71. As a direct and proximate result of representing two different clients with divergent interests, Yang failed to provide necessary and appropriate advice to the HOA. Among other things, the HOA was not informed of its obligation to conduct the necessary repairs, but rather mislead to believe it had no obligation to do so and that only certain HOA members would be responsible for the physical damage to the Building.

72. Yang breached the fiduciary duties they owed to the HOA by taking legal positions that benefitted the insurance carrier, at the expense of the HOA.

(Complaint,  ¶¶ 3-5, 9, 17-28, 34-46, 48-55, 66-72.)

            Thus, the Complaint alleges with particularity facts regarding when Defendants knew or should have known about the leak, Defendants’ years-long delay in hiring an expert to investigate the source of the leak, and Defendants’ erroneous legal arguments.  The Complaint further alleges that this conduct was done intentionally to favor the insurance carrier at the HOA’s expense.  (Complaint, ¶¶ 66-72.)  As such, the Complaint’s allegations are sufficient to support the request for punitive damages.  In particular, the Court finds that Plaintiff’s allegations amount to establishing malice on the part of Defendants -- conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.

CONCLUSION AND ORDER

For the reasons stated, the Court denies Defendants’ motion to strike punitive damages from the complaint. 

Further, the Court orders Defendants to file and serve an Answer to the Complaint on or before August 21, 2024.

Defendants shall provide notice of the Court’s ruling and file the notice with a proof of service forthwith. 

DATED:  July 31, 2024                                                          ___________________________

                                                                                          Michael E. Whitaker

                                                                                          Judge of the Superior Court