Judge: Stephen P. Pfahler, Case: 24STCV05304, Date: 2025-04-23 Tentative Ruling

Case Number: 24STCV05304    Hearing Date: April 23, 2025    Dept: 68

Dept. 68

Date: 4-23-25

Case: 24STCV05304

Trial Date: Not Set

MOTION TO STRIKE

MOVING PARTY: Cross-Defendant, Biggins Law, Inc.

RESPONDING PARTY: Defendant/Cross-Complainant, Vertical Computer Systems, Inc.

RELIEF REQUESTED

Motion to Strike the Cross-Complaint: Allegations in Support of, and Claim for, Punitive Damages

SUMMARY OF ACTION

Plaintiff James Salz alleges a relationship with Defendant Vertical Computer Systems, Inc. (Vertical) as in house counsel. Vertical was a publicly traded company until January 2021, when the Securities and Exchange Commission revoked registration. Plaintiff alleges both an agreed upon salary as well as non-salary incentives. Plaintiff alleges non-payment of both salary and non-salary incentives amounting to $2.54 million. Plaintiff also identifies Defendants Now Solutions Inc., Priority Time Systems, Inc. (Priority), and Leonard “Len” Chermack in the 170 paragraph complaint.

On March 1, 2024, Plaintiff filed a complaint for 1. Breach of Contract; 2. Breach of Implied Covenant of Good Faith and Fair Dealing; 3. Failure to Pay Wages in Violation of California Labor Code §§ 200 and 204, and Wage Order No. 5-2001; 4. Failure to Indemnify Work Related Expenses; 5. Unfair Competition and Unfair Business Practices in Violation of California Business & Professions Code §§ 17200 et seq.; 6. Book Account/Account Stated; 7. Violation of California Labor Code § 558.1; 8. Accounting; 9. Failure to Allow Employee to Return to Work After Medical Leave and/or to Engage Plaintiff In An Interactive Process Regarding His Return; and 10.Declaratory Relief. On May 31, 2024, Vertical, Priority, and Chermack answered the complaint. On May 31, and June 5, 2024, Vertical filed a cross-complaint against both Salz and Biggins Law, Inc. for 1. Breach of Fiduciary Duty; 2. Legal Malpractice; 3. Fraud; 4. Breach of Implied Covenant of Good Faith and Fair Dealing; and 5. Violation of Books & Records Demand. Salz answered the cross-complaint on July 5, 2024. On August 15, 2024, the court entered the parties’ stipulation to “withdraw” the redundantly filed June 5, 2024, cross-complaint, thereby designating the May 31, 2024, cross-complaint as the operative cross-complaint.

On October 18, 2024, Vertical filed a first amended cross-complaint for 1. Breach Of Fiduciary Duty; 2. Legal Malpractice; 3. Breach of Implied Covenant of Good Faith and Fair Dealing; and 4. Violation of Books & Records Demand. The court record shows no leave to amend for the filing of the first amended cross-complaint following the July 5, 2024, filing of the answer by Salz. Salz answered the first amended cross-complaint on November 20, 2024.

RULING: Granted.

Cross-Defendant Biggins Law Inc. (Biggins) brings a motion to strike the allegations in support of, and claim for, punitive damages in the first amended cross complaint of Vertical Computer Systems, Inc. (Vertical), as pled in the breach of fiduciary cause of action and prayer for relief. [First Amend. Comp., ¶¶ 47, Prayer, ¶ 4.] Biggins challenges the claim for punitive damages based on a lack of any showing of malicious or oppressive conduct. Vertical in opposition contends the breach of fiduciary duty cause of action articulates malicious and fraudulent conduct supporting the claim for punitive damages. Biggins in reply maintains the cross-complaint and opposition contain fabricated allegations. Biggins also includes a new, alternative request for 30 days leave to answer the cross-complaint in order to also drat a cross-complaint against Vertical, and possibly others, for malicious prosecution and perhaps more, should the court deny the motion.

Civil Code section 3294, subdivision (c) authorizes punitive damages upon a showing of malice, oppression, or fraud, which are defined as follows:

(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.

As to a corporate employer, Civil Code section 3294, subdivision (b) states:

An employer shall not be liable for damages pursuant to subdivision (a), based upon acts of an employee of the employer, unless the employer had advance knowledge of the unfitness of the employee and employed him or her with a conscious disregard of the rights or safety of others or authorized or ratified the wrongful conduct for which the damages are awarded or was personally guilty of oppression, fraud, or malice. With respect to a corporate employer, the advance knowledge and conscious disregard, authorization, ratification or act of oppression, fraud, or malice must be on the part of an officer, director, or managing agent of the corporation.

The operative cross-complaint depends on allegations of self-dealing and conflicts of interest based on Plaintiff/Cross-Defendant Salz both purportedly performing work as “in house” counsel for Vertical while also performing work for the Biggins firm. Said external work was not disclosed, thereby compromising certain business operations. [First Amend. Cross-Comp., ¶¶ 4-6, 17-18, 26-29.]

The Biggins firm is named as a cross-defendant in their role as outside counsel recommended by Salz. Vertical also offers allegations questioning the quality of representation, which apparently led to Salz engaging in conduct compromising client interests. [First Amend. Cross-Comp., ¶¶ 30-34.] While Salz took unpaid medical leave, Biggins continued to represent Vertical in the “Lakeshore” action, whereby Vertical was advised to prioritize a certain financial position held by Salz. [First Amend. Cross-Comp., ¶ 36.] The failure to disclose said conflicts and subsequent costs of litigation by Biggins constitute the basis of the punitive damages claim. [First Amend. Cross-Comp., ¶¶ 42, 44, 45.]

The punitive damages claim depends on both the conduct of Salz as well as the subsequent independent representation of Biggins following Salz taking medical leave. Vertical admits to the approval of the Biggins firm as outside counsel, and an allegedly undisclosed conflict of interest by Salz. The position against Biggins appears to rely on the inflexion point when Biggins recommended prioritizing said conflicting position of Salz. Vertical relies on said advice as demonstrating some form of endorsement of Salz’s allegedly wrongful conduct, thereby providing the punitive damages link. The court finds said implied nexus lacking.

While the court must accept allegations pled in the operative pleading regarding the existence of some form of cooperation or embrace of Salz’s prior to medical leave, factual support anchoring the facts to the punitive damages standard against former counsel Biggins still requires greater tethering foundation. Given the standard required for punitive damages, especially under the circumstances of a breach of fiduciary duty, the court finds the allegations insufficiently pled. Vertical may very well seek to intentionally avoid alleging a conspiracy claim against Biggins, which would require leave from the court. The court still requires adherence to a stricter pleading standard for punitive damages. The motion to strike is therefore granted without prejudice/with leave to amend.

Notwithstanding the request of Biggins to grant with prejudice/without leave to amend, as this is the first review of the action, court policy favors leave to amend. The motion to strike is therefore granted without prejudice/with 30 days leave to amend. If Vertical elects to forego the filing of a second amended cross-complaint, Biggins is ordered to answer the operative cross-complaint within 10 days of the lapse of the amendment date. If Biggins still wishes to file a cross-complaint upon any lapse, Biggins has sufficient time during the interim period to consider the options.

The court will concurrently conduct the Case Management Conference. Motion to Stay and Motion to Disqualify Counsel scheduled for June 24 and August 26, 2025.

Biggins to give notice.