Opinion
NOT TO BE PUBLISHED
Appeal from a judgment of the Superior Court of Orange County, Robert D. Monarch, Judge. Super. Ct. Nos. 03CC07380 & 03CC07383
Andres & Andres, Eugen C. Andres and Herbert J. Patt, for Plaintiffs and Appellants Tony Shahbaz, I/O Magic Corporation, and IOM Holdings, Inc.
Cameron, Pearlson & Foster, Paul R. Pearlson and Susan R. Loh, for Plaintiff and Appellant IOM Holdings, Inc.
Hinshaw & Culbertson, John W. Sheller and Wendy W. Chang, for Defendants and Appellants Lawrence W. Horwitz and Lawrence M. Cron.
Gregory B. Beam & Associates, Gregory B. Beam and Ralph R. Loyd, for Defendant and Appellant Horwitz & Beam, Inc.
Tisdale & Nicholson, Guy C. Nicholson and Michael D. Stein, for Defendant and Respondent Kevin J. Senn and Defendant and Appellant Senn Palumbo Meulemans, LLP.
OPINION
IKOLA, J.
This legal malpractice case presents two appeals and two cross-appeals involving three plaintiffs and five defendants. The plaintiffs are Tony Shahbaz, I/O Magic Corporation (Magic), and IOM Holdings, Inc. (Holdings). The defendants are Lawrence Horwitz, Lawrence Cron, Horwitz & Beam, Inc. (Horwitz & Beam), Kevin J. Senn, and Senn Palumbo Meulemans LLP (Senn Palumbo).
Plaintiffs made three sets of malpractice claims. They alleged defendants (1) negligently represented them in an unsuccessful arbitration against their accountants (the Ernst & Young arbitration claims), (2) negligently represented them in two business deals with Mark Vakili that led to litigation, which plaintiffs settled after a jury found they had breached contracts and defrauded Vakili (the Vakili litigation claims), and (3) negligently failed to tender Shahbaz’s defense of the Vakili litigation to Magic’s insurer (the insurance tender claim).
The jury found for defendants on the Ernst & Young arbitration claims. It found for plaintiffs on the Vakili litigation claims, though the court entered judgment notwithstanding the verdict for Senn and Senn Palumbo. And the court granted nonsuit for defendants on the insurance tender claim.
Horwitz & Beam, Horwitz, and Cron appeal. They challenge the jury verdict for plaintiffs regarding the Vakili litigation claims. Plaintiffs cross-appeal. They challenge the jury verdict for defendants on the Ernst & Young arbitration claims, the judgment notwithstanding the verdict for Senn and Senn Palumbo on the Vakili litigation claims, and the nonsuit for defendants on the insurance tender claims. Senn Palumbo filed a protective cross-appeal. If they lose their judgment notwithstanding the verdict on the Vakili litigation claims, they challenge the underlying jury verdict.
We affirm the judgment for defendants on the Ernst & Young arbitration claims. The court properly excluded the only evidence plaintiffs offered to show defendants caused their damages. We also affirm the judgment for defendants on the insurance tender claims, entered after the court granted their motion for nonsuit. Magic’s directors and officers insurance policy did not cover Shahbaz’s defense of the Vakili litigation.
But we reverse the judgment for plaintiffs on the Vakili litigation claims. As to the first underlying deal, plaintiffs failed to offer substantial evidence of causation. While defendants may have negligently failed to seek a release from Vakili, only speculative evidence suggests he would have granted the release. As to the second underlying deal, public policy bars Shahbaz from looking to defendants to recover for liability he incurred by defrauding Vakili.
FACTS
The Ernst & Young Arbitration
Shahbaz founded Magic in the early 1990’s to sell computer products. He retained Horwitz and his law firm, Horwitz & Beam, to advise Magic. Cron, a litigation associate at Horwitz & Beam, also worked on matters for Shahbaz and Magic.
Shahbaz retained Horwitz & Beam to initiate a binding arbitration against Magic’s accountants, Ernst & Young, in 1998 (the Ernst & Young arbitration). Magic had retained Ernst & Young to prepare its 1997 audited financial statement, which its underwriter, Meridian, needed to finance a public offering. Magic contended Ernst & Young failed to complete the financial statement before Meridian’s financing commitment expired. It further contended it suffered over $4 million in damages from delaying its public offering due to the loss of the Meridian underwriting commitment.
In the liability phase of the arbitration, the arbitrators found Ernst & Young had breached its contract with Magic. After the liability phase, Horwitz and Cron left Horwitz & Beam to join Senn Palumbo. They and Senn represented Magic during the damages phase.
Magic’s damages theory unraveled during discovery for the damages phase of the arbitration. Meridian’s president testified at a deposition that Meridian may not have financed Magic’s public offering, even if it had timely received the audited financial statement from Ernst & Young. But Shahbaz testified at a deposition that Magic could have obtained financing for the public offering from another investor, BTC, had Ernst & Young timely completed the audited financial statement. Senn, Horwitz, and Cron decided to base their damages theory on the possibility of BTC funding. But they did not immediately seek to amend the arbitration demand to identify the loss of BTC funding as an item of damages.
During the arbitration’s damages phase, Magic offered a letter from BTC handwritten in Chinese (Exhibit 58). According to a purported translation (Exhibit 58A), the letter stated BTC needed Magic’s “most recent financial statement,” “verified by the signature of the CPA,” before considering Magic’s request to increase funding.
At the end of the arbitration, the arbitrators granted Ernst & Young’s motion to exclude evidence concerning BTC because Magic’s arbitration demand identified only the loss of the Meridian underwriting commitment as a source of damages. Defendants moved for leave to amend the arbitration demand, which the arbitrators denied. The arbitrators awarded zero damages to Magic.
The Vakili Litigation—Deal No. 1, Deal No. 2, and the Alex Properties Amendment
Shahbaz formed Holdings in 1999 to acquire the assets of Vakili’s company, Hi-Val, pursuant to a purchase and sale agreement drafted by Horwitz (Deal No. 1). In exchange for Hi-Val’s assets, Holdings agreed to transfer 2 million Magic shares to Hi-Val and assume Hi-Val’s liability for a $1.5 million loan from Vakili. Vakili would serve as Hi-Val’s president and CEO of Holdings.
According to Shahbaz, he discovered Hi-Val had serious problems with its creditors and its lender, Finova. Shahbaz told Vakili in November 1999 that he was terminating Deal No. 1 pursuant to a contract term allowing Holdings to approve Hi-Val’s financing. Vakili urged Shahbaz to come up with some new acquisition deal. In the meantime, Shahbaz directed Horwitz to obtain a release from Vakili and Hi-Val of any potential liability that he and Holdings may have incurred under Deal No. 1.
According to Vakili, Shahbaz never mentioned terminating Deal No. 1. Shahbaz instead reassured Vakili that he would be paid pursuant to the deal’s terms, though Shahbaz wanted to negotiate new terms with Finova. Vakili never would have agreed to release Holdings from its contractual obligations under Deal No. 1: “Why should I?”
In any event, Shahbaz negotiated with Finova, striking a new deal in March 2000 that comprised several transactions (Deal No. 2). Finova agreed to extend $25 million in credit to Holdings and reduce the amount of Vakili’s personal guaranty of debt Hi-Val owed to Finova. To secure the credit, Holdings issued promissory notes to Finova, and Shahbaz pledged Magic stock. Finova also placed a lien on a warehouse that Holdings acquired from Vakili’s partnership, Alex Properties. In exchange for the warehouse, Holdings agreed to transfer 1 million Magic shares to Vakili when the lien was released, and up to an additional 1 million Magic shares if Vakili sold inventory or collected receivables. Hi-Val executed a general assignment for the benefit of creditors, whereby it assigned its assets to a third party chosen by the lender. The third party, in turn, sold the assets to Holdings.
Shahbaz believed Deal No. 2 superseded Deal No. 1, effectuating a release of any liability he and Holdings may have incurred under it. Horwitz told him that the general assignment would both prevent Hi-Val from performing its contractual obligations under Deal No. 1 and assign away Hi-Val’s contractual rights under the deal. Horwitz told Shahbaz he did not need an express release from Vakili and Hi-Val.
In September 2000, Shahbaz told Horwitz they needed to restructure Deal No. 2 due to Vakili’s concerns about tax liability and the deal’s effect on some other litigation. Horwitz prepared an amendment to the Alex Properties partnership agreement (the Alex Properties amendment). Horwitz backdated the amendment to make it appear it had been executed in February 2000, before the effective date of the Alex Properties deal. Shahbaz and Horwitz claim Vakili knew about the backdating. The amendment added Shahbaz as a partner and required him to contribute 1.5 million Magic shares to the partnership as of February 2000. The agreement provided that the partnership would be dissolved in no more than 18 months, at which point the partnership would transfer the warehouse to Shahbaz and 1 million Magic shares would be transferred to Vakili when Finova released the lien on the warehouse. An additional 500,000 Magic shares would be transferred “at the sole discretion of Tony Shahbaz provided it is deemed earned.”
In 2001, as noted above, Horwitz and Cron left Horwitz & Beam to join Senn Palumbo. They continued to represent Shahbaz, Magic, and Holdings in their dealings with Vakili.
Cron drafted a declaration for Vakili to sign in June 2001, in connection with some other litigation. The draft declaration stated that Deal No. 1 concerned an “anticipated sale” of Hi-Val—it strongly implied the deal never closed. Vakili thought this “was a lie.” He soon demanded 1.5 million Magic shares from Shahbaz pursuant to the Alex Properties amendment. Shahbaz refused, maintaining Holdings owed Vakili only 1 million Magic shares pursuant to Deal No. 2. In August, a Senn Palumbo associate sent a letter to Vakili enclosing 1 million Magic shares.
Vakili sued Shahbaz in August 2001 (the Vakili litigation). He alleged Holdings and Shahbaz breached Deal No. 1. He further alleged Shahbaz committed fraud by falsely promising to transfer 1.5 million Magic shares to Alex Properties.
Shahbaz was not a party to Deal No. 1. Presumably, Vakili relied upon alter ego allegations to sue Shahbaz for breaching Deal No. 1.
Magic had a claims-made, directors and officers (D&O) policy for the period of February 2001 to February 2002. Shahbaz was an officer and director of Magic at that time. Horwitz, Cron, and Senn reviewed the original and amended complaints in the Vakili litigation and determined there was no coverage. In May 2002, Shahbaz ordered Horwitz to tender the defense to the insurer, upon the advice of other attorneys. Horwitz did so, and the insurer denied the claim as untimely.
Plaintiffs lost the Vakili litigation. A jury found Holdings breached Deal No. 1, awarding approximately $3.5 million in damages. The jury also found Shahbaz fraudulently induced Vakili into entering the Alex Properties amendment, made negligent misrepresentations, and breached the amendment. It awarded a total of approximately $6.9 million in damages against Shahbaz: $2 million in compensatory damages for the fraud, $2.15 million for the negligent misrepresentation, $1.43 million for the breach of contract, and $1.35 million in punitive damages.
The parties settled before judgment was entered. Magic agreed to give approximately $4 million to Vakili and Hi-Val to settle Holdings’ Deal No. 1 liability. To settle his personal liability, Shahbaz agreed to surrender his interest in the warehouse, turn over certain bank accounts to Vakili, and transfer some of his personal Magic shares to third parties to settle their claims against Vakili. Shahbaz estimated the total value of his settlement payment to Vakili was approximately $3 million.
This Legal Malpractice Action
Soon after the Vakili litigation settled, plaintiffs sued defendants for breach of contract and legal malpractice. Plaintiffs asserted defendants negligently represented them by, among other things: (1) failing to draft or amend the Ernst & Young arbitration demand to mention BTC; (2) failing to obtain a release from Vakili from any liability plaintiffs may have incurred in connection with Deal No. 1; (3) failing to draft the Alex Properties amendment to conform in substance with Deal No. 2—i.e., by impossibly requiring Shahbaz to contribute 1.5 million Magic shares to the partnership as of February 2000—and counseling plaintiffs to breach the amendment; and (4) failing to timely tender the defense of the Vakili litigation to Magic’s insurer. Horwitz & Cron filed a cross-complaint seeking unpaid fees.
Shahbaz filed one action (Case No. 03CC07380); Magic and Holdings filed another (Case No. 03CC07383). The court consolidated the two actions.
The court granted nonsuit for defendants on causes of action arising from the insurance tender claim. It found Magic’s policy did not cover the Vakili litigation defense costs as a matter of law.
Plaintiffs presented their damages analysis during closing argument. They sought to recover $4 million for Magic’s lost damages in the Ernst & Young arbitration; $4 million for Magic’s payment to settle Holdings’ Deal No. 1 liability; and $2.46 million for Shahbaz’s payment to settle his personal liability regarding the Alex Properties amendment.
Plaintiffs sought to recover 81 percent of Shahbaz’s $3 million settlement payment. The Vakili jury awarded approximately $6.9 million in damages to Vakili, including $1.35 million in punitive damages—around 19 percent of the total judgment. Plaintiffs did not seek to recover any part of the settlement payment that could be allocated to Shahbaz’s punitive damages liability. Thus, they reduced Shahbaz’s $3 million settlement payment by approximately 19 percent, and sought to recover only $2.46 million. Plaintiffs’ arithmetic is itself approximate.
A jury returned a special verdict finding defendants negligently represented Magic during the Ernst & Young arbitration, but also finding Magic would not have obtained a better result absent the negligence. The jury found defendants negligently represented plaintiffs during the two business deals underlying the Vakili litigation. It awarded $3 million for Magic’s payment of Holdings’ liability under Deal No. 1 and $2.46 million for Shahbaz’s liability under the Alex Properties amendment.
The court entered judgment accordingly. The court then granted a motion for judgment notwithstanding the verdict for Senn and Senn Palumbo, finding they were not liable for the Vakili litigation malpractice. The court entered an amended judgment.
DISCUSSION
The Jury Properly Found Defendants Were Not Liable for the Alleged Ernst & Young Arbitration Malpractice Because the Court Properly Excluded Exhibit 58
The elements of a legal malpractice cause of action include “a proximate causal connection between the breach and the resulting injury.” (Ambriz v. Kelegian (2007) 146 Cal.App.4th 1519, 1531.) “In a legal malpractice claim, the method for proving the element of causation has been likened to a ‘trial within a trial’ or a ‘case within a case.’ [Citations.] ‘The case-within-a-case or trial-within-a-trial approach applied in legal malpractice cases [is] an objective approach to decide what should have been the result in the underlying proceeding or matter.’” (Ibid.)
Here, plaintiffs used the “case within a case” procedure and essentially re-litigated the Ernst & Young arbitration in the trial court. They attempted to show they would have obtained a better result in arbitration had defendants added the BTC funding commitment to the arbitration demand. The jury found in a special verdict that plaintiffs failed to make any such showing, apparently discrediting plaintiffs’ evidence that BTC would have financed the public offering. Plaintiffs now contend they would have been able to make this showing if the court had admitted documentary evidence supporting the BTC funding commitment.
Specifically, plaintiffs contend the court wrongly excluded Exhibits 58 and 58A, the Chinese BTC letter and its purported translation. Cron testified that Shahbaz “surprise[d]” him during his deposition for the Ernst & Young arbitration damages phase by testifying that he could have obtained financing for the public offering from BTC. Shahbaz later told Cron he was going to visit BTC in China to look for supporting documentation. Shahbaz returned with Exhibit 58, which he said was found in the files of a BTC employee, Twee-Fun. Defendants offered Exhibit 58 and Ms. Fun’s deposition testimony at the arbitration. The arbitrators initially heard the evidence, but later excluded it.
Plaintiffs showed Exhibit 58 to Shahbaz during his testimony in the malpractice trial. He explained Fun found it in her files and told him who had created it, though Shahbaz did not identify the author. Plaintiffs offered Exhibit 58 into evidence. Defendants counsel objected, “No foundation. It is hearsay. And it is not in English.” Plaintiffs counsel replied, “That is true. 58A is the translation.” Defense counsel stated, “And I object to that as well.” The court sustained the objection. Plaintiffs’ counsel continued examining Shahbaz on other matters.
Plaintiffs do not dispute Exhibit 58 is hearsay. It is an out of court statement offered to prove the truth of the matter asserted: namely, that BTC would have financed Magic’s public offering if Ernst & Young had timely completed the audited financial statement. (Evid. Code, § 1200, subd. (a).) It is relevant, if at all, to the issue of causation in this case—plaintiffs would have prevailed in the Ernst & Young arbitration by showing Ernst & Young’s negligence lost the BTC funding commitment, but for defendants’ failure to amend the arbitration demand to mention BTC.
Plaintiffs instead contend various hearsay exceptions apply. They claim Exhibit 58 is evidence of BTC’s state of mind—i.e., it was willing to finance Magic’s public offering—and that its mental state is an issue in this action and relevant to explaining BTC’s subsequent conduct. (Evid. Code, § 1250, subd. (a)(1), (2).) They also claim Exhibit 58 is an adopted admission because defendants offered it at the Ernst & Young arbitration, manifesting their belief in its truth. (Evid. Code, § 1221.) Finally, they claim Exhibit 58 is admissible because “[s]uch hearsay is routinely allowed in an arbitration proceeding,” and would have been admitted in the Ernst & Young arbitration but for defendants’ negligence.
Plaintiffs waived these contentions by not raising them below. “By appealing, [plaintiffs] assumed ‘the burden of showing reversible error by an adequate record.’ [Citation.] One aspect of that burden requires that the appellant develop the fullest possible evidentiary record before seeking review. Thus, an appellant must make an offer of proof in the trial court in order to claim on appeal that evidence was wrongly excluded. [Citation.] Similarly, if an appellant wishes to argue a point on appeal, it must first make a record by raising the point in the trial court.” (Tudor Ranches, Inc. v. State Comp. Ins. Fund (1998) 65 Cal.App.4th 1422, 1433.)
Plaintiffs cannot raise hearsay exceptions for the first time on appeal. “The proponent of hearsay has to alert the court to the exception relied upon and has the burden of laying the proper foundation.” (People v. Livaditis (1992) 2 Cal.4th 759, 778 (Livaditis).) This is particularly true for the state-of-mind exception, which requires a showing of trustworthiness. (Evid. Code, §§ 1250, subd. (a), 1252 [“Evidence of a statement is inadmissible under this article if the statement was made under circumstances such as to indicate its lack of trustworthiness”].) Had plaintiffs raised the state-of-mind exception at trial, the court would have had discretion to find Exhibit 58 untrustworthy. It well might have done so: Exhibit 58 was not properly authenticated, Shahbaz’s deposition testimony about the BTC commitment surprised his own lawyer, and Shahbaz arguably had motive and opportunity to fabricate the letter. But “[s]ince the court was never asked to exercise this discretion, the issue is not properly before us.” (Livaditis, at p. 780.)
Plaintiffs also cannot contend for the first time on appeal that Exhibit 58 was not offered to prove the truth of the matter asserted. “Defendant now contends that the statements were not hearsay. . . . We agree. . . . As nonhearsay evidence relevant to a disputed issue . . . it should have been admitted. . . . [¶] Defendant’s trial counsel did not, however, specifically raise this ground of admissibility. In these circumstances he is precluded from complaining on appeal.” (People v. Fauber (1992) 2 Cal.4th 792, 854.)
Plaintiffs’ wrongly assert Evidence Code section 354 excuses their failure to raise hearsay objections at trial. That statute requires them, in order to obtain a reversal, to show the court knew Exhibit 58’s relevance. (Evid. Code, § 354, subd. (a).) While that showing is necessary for a reversal, it is not sufficient. They also must raise an applicable hearsay objection. (Livaditis, supra, 2 Cal.4th at pp. 778-780.)
Insufficient Evidence Supports the Jury Verdict for Plaintiffs on Deal No. 1
The Vakili jury found Holdings breached Deal No. 1, and awarded approximately $3.5 million in damages. The parties later settled. In this case, plaintiffs claim defendants caused this liability by negligently failing to obtain a release from Vakili concerning Deal No. 1. The jury apparently agreed, finding defendants acted negligently with regard to Deal No. 1.
Defendants challenge the jury verdict, claiming plaintiffs failed to show “cause in fact” causation. “Causation analysis in tort law generally proceeds in two stages: determining cause in fact and considering various policy factors that may preclude imposition of liability.” (Viner v. Sweet (2003) 30 Cal.4th 1232, 1235, fn. 1 (Viner).) Defendants contend insufficient evidence showed Vakili would have released plaintiffs from their Deal No. 1 obligations or potential liability, even if defendants had asked him to do so.
To show causation in fact, plaintiffs “must show that but for the alleged malpractice, it is more likely than not that [they] would have obtained a more favorable result” in the Vakili litigation or the subsequent settlement. (Viner, supra, 30 Cal.4th at p. 1244.) “Clients predictably attempt to shift some part of the loss and disappointment of a deal that goes sour onto the shoulders of persons who were responsible for the underlying legal work. Before the loss can be shifted, however, the client has an initial hurdle to clear. It must be shown that the loss suffered was in fact caused by the alleged attorney malpractice. (Id. at p. 1241.) “The purpose of [the “but for” causation] requirement, which has been in use for more than 120 years, is to safeguard against speculative and conjectural claims.” (Ibid.) “‘It is far too easy to make the legal advisor a scapegoat for a variety of business misjudgments unless the courts pay close attention to the cause in fact element, and deny recovery where the unfavorable outcome was likely to occur anyway.’” (Ibid.)
Thus, plaintiffs must show that Vakili would have actually granted the release, resulting in a more favorable judgment or settlement of the Vakili litigation. (Viner, supra, 30 Cal.4th at pp. 1239, 1244 [requiring the plaintiffs to show that, but for their attorney’s negligence, they would have entered into better agreement or no agreement at all].) Viner relied upon cases applying the “but for” causation requirement to claims that an attorney’s negligence resulted in an unfavorable settlement. (Id. at p. 1242.) These cases required the plaintiffs to show that the opposing party in the underlying case would have actually agreed to a more favorable settlement. (Marshak v. Ballesteros (1999) 72 Cal.App.4th 1514, 1519 [plaintiff alleging his attorney negligently settled his marital dissolution case “must also prove that his ex-wife would have settled for less than she did”]; Thompson v. Halvonik (1995) 36 Cal.App.4th 657, 663 [plaintiff failed to “demonstrate that but for [the attorney’s] delay, [the plaintiff’s] underlying case would have settled at all, let alone at an earlier date, for the same amount, or with the same structure”].)
See also Orrick Herrington & Sutcliffe v. Superior Court (2003) 107 Cal.App.4th 1052, 1058, fn. omitted [the plaintiff “produced no evidence showing his ex-wife would have settled for less than she did, or that following a trial, he would have obtained a judgment more favorable than the settlement. [The plaintiff] also proffered no evidence showing his ex-wife would have agreed to a settlement that included the terms he claims were omitted.”].)
Plaintiffs offered no direct evidence that Vakili would have granted the release. Vakili testified to the contrary. He thought Deal No. 1 had been consummated, and he expected to be paid under it. He denied Shahbaz terminated the deal. The Vakili jury agreed with him, finding Holdings breached Deal No. 1. Vakili testified he would not have released Holdings from its contractual duties under Deal No. 1: “Absolutely not. Why should I?” When asked, “Would you have given up your right to be paid under the contract of June [i.e., Deal No. 1] to be relieved” of his personal guaranty to Finova, he answered, “No.”
Plaintiffs instead rely on circumstantial evidence. In malpractice cases, “the plaintiff may use circumstantial evidence to satisfy his or her burden. An express concession by the other parties to the negotiation that they would have accepted other or additional terms is not necessary.” (Viner, supra, 30 Cal.4th at pp. 1242-1243.) Even so, plaintiffs still must present evidence sufficient to “‘“afford[] a reasonable basis for the conclusion that it is more likely than not that the conduct of the defendant[s] was a cause in fact of the result.”’” (Id. at p. 1243.) “‘Substantial evidence’ is evidence of ponderable legal significance, evidence that is reasonable, credible and of solid value. [Citation.] ‘Substantial evidence . . . is not synonymous with “any” evidence.’ Inferences may constitute substantial evidence, but they must be the product of logic and reason. Speculation or conjecture alone is not substantial evidence.” (Roddenberry v. Roddenberry (1996) 44 Cal.App.4th 634, 651.)
That the jury may have discredited Vakili’s testimony does not constitute substantial evidence that Vakili would have granted the release. The Viner plaintiffs raised a similar argument on remand, which the court rejected. (Viner v. Sweet (2004) 117 Cal.App.4th 1218, 1229.) It held, “disbelief of [a witness’s] testimony does not constitute affirmative evidence of the contrary proposition.”
Plaintiffs claim the record shows Vakili “would have signed anything” to be relieved of his personal guaranty to Finova. They note Horwitz testified that he knew Vakili’s “primary concern” was being relieved of his personal guaranty. They also note Shahbaz testified that Vakili’s “primary requirement” was being relieved of his personal guaranty, and that he would be “flexible” and “willing to change the deal just as long as he can get off of this personal guaranty.” Plaintiffs also note Vakili released any claims he had against Finova as part of Deal No. 2, and conclude he would have similarly released Holdings had defendants asked.
Plaintiffs’ evidence fails to show Vakili would have granted the release. Plaintiffs leap too far in concluding Vakili would “sign anything” to be relieved of his personal guaranty, even if he was willing to be “flexible” in structuring a new deal. Neither Horwitz nor Shahbaz testified that Vakili ever indicated he would release Holdings. To the contrary, Horwitz thought asking Vakili to sign a release would “set off red flags in [Vakili’s] mind that he might have recourse against Mr. Shahbaz.” Shahbaz, despite all his direct negotiations with Vakili, never asked him for a release. While being relieved of his personal guaranty may have been Vakili’s primary goal, no substantial evidence suggests it blinded him or trumped all other concerns. Moreover, Vakili owed his personal guaranty to Finova, not Holdings. Finova was his creditor. It is unsurprising Finova obtained a release from Vakili in exchange for relieving him of his personal guaranty. It is speculative to conclude Vakili or Hi-Val would have released anyone else—especially Holdings, who owed Hi-Val 2 million shares of Magic stock under Deal No. 1. And plaintiffs point to no evidence showing that Finova had any liability to Vakili. Releasing Finova from nonexistent liability would have cost Vakili nothing, but releasing Holdings would have cost Hi-Val its proceeds under Deal No. 1. Plaintiffs thus failed to offer substantial, affirmative evidence that Vakili or Hi-Val would have released Holdings, Magic, or Shahbaz. They failed to show defendants caused their damages.
Holding Defendants Liable for the Fraud Verdict Against Shahbaz Violates Public Policy
The Vakili jury found Shahbaz fraudulently induced Vakili into entering the Alex Properties amendment, made negligent misrepresentations, and breached the amendment. It awarded $2 million in compensatory damages for the fraud, $2.15 million for the negligent misrepresentation, $1.43 million for the breach of contract, and $1.35 million in punitive damages, though the parties later settled. In this case, Shahbaz claims defendants caused this liability by negligently drafting the Alex Properties amendment so that it deviated from the terms of Deal No. 2. The jury apparently agreed, finding defendants acted negligently with regard to the Alex Properties transaction. It also found Shahbaz did not have unclean hands regarding the Alex Properties transaction.
Defendants challenge the jury verdict because it imposes liability against defendants based on Shahbaz’s fraud liability in the Vakili litigation. Horwitz & Beam contends Shahbaz seeks indemnification from defendants for liability caused by his own intentional wrongdoing, in violation of public policy. They raised this issue below in a written motion in limine to exclude evidence of Shahbaz’s fraud liability. Horwitz and Cron contend the “innocent principal” jury instruction misstates California law and violates public policy. The court instructed the jury, over defendants’ objection: “Plaintiff is entitled to argue that Mr. Shahbaz was an ‘innocent principle [sic],” that Mr. Horwitz acted as his agent in drafting documents in the Vakili matter, that Plaintiff was unaware of the legal effects of the document and that this created his liability in the Vakili action and that the finding of fraud and oppression against him was a result of Mr. Horwitz’s actions.”
Senn Palumbo makes the same contention in their protective cross-appeal. They further contend the instruction was argumentative and confusing.
Defendants’ contentions reduce to an attack on proximate causation. The causation element includes “determining cause in fact and considering various policy factors that may preclude imposition of liability.” (Viner, supra,30 Cal.4th at p. 1235, fn. 1, italics added.) “[T]he law must impose limitations on liability other than simple causality. These additional limitations are related not only to the degree of connection between the conduct and the injury, but also with public policy. [Citation.] As Justice Traynor observed, proximate cause ‘is ordinarily concerned, not with the fact of causation, but with the various considerations of policy that limit an actor’s responsibility for the consequences of his conduct.’” (PPG Industries, Inc. v. Transamerica Ins. Co. (1999) 20 Cal.4th 310, 315-316 (PPG).)
Public policy forbids intentional tortfeasors like Shahbaz from shifting their liability for intentional wrongdoing to their negligent attorneys. The California Supreme Court embraced this public policy in PPG, where it barred an intentional tortfeasor from obtaining insurance coverage for its punitive damages liability, even though the insurer’s negligent failure to settle was a cause in fact of the liability. (PPG, supra, 20 Cal.4th at pp. 313, 319.) It based its holding on policy considerations, including “the policy of not allowing liability for intentional wrongdoing to be offset or reduced by the negligence of another.” (Id. at p. 316; accord Weidenfeller v. Star & Garter (1991) 1 Cal.App.4th 1, 6-7 (Weidenfeller) [“an intentional actor cannot rely on someone else’s negligence to shift responsibility for his or her own conduct”].)
This public policy comports with “the commonsense notion that a more culpable party should bear the financial burden caused by its intentional act.” (Weidenfeller, supra,1 Cal.App.4th at p. 6.) Thus, an intentional tortfeasor cannot obtain contribution from a negligent joint tortfeasor. (Code Civ. Proc., § 875, subd. (d).) Nor can a party obtain indemnity or insurance for intentional wrongdoing. (Civ. Code, § 1668 [voiding contracts exempting persons from liability for fraud, willful injury, or willful or negligent violation of law]; Ins. Code, § 533 [voiding insurance coverage for intentional acts]; Allen v. Sundean (1982) 137 Cal.App.3d 216, 226-227 [intentional tortfeasor may not seek partial indemnity from negligent joint tortfeasor under comparative fault doctrine].)
Relying on this public policy, one court barred a malpractice action alleging the attorney’s negligent advice led the client to willfully violate a statute. (Chapman v. Superior Court (2005) 130 Cal.App.4th 261.) In Chapman, a former public agency board member pleaded guilty to willfully violating Government Code section 1090, which bars board members from having financial interests in a contract involving their agencies. (Chapman, at p. 266.) He sued his agency and its in-house counsel for providing negligent advice concerning the improper business relationships. (Id. at p. 270.) The court issued a writ of mandate directing the trial court to enter summary judgment for the defendants. (Id. at p. 278.) It noted, “For public policy reasons, courts may preclude particular types of actions,” citing PPG, supra, 20 Cal.4th at page 316. (Chapman, at p. 275.) Holding that intentional wrongdoers should not shift liability to merely negligent attorneys, it observed, “‘[a]lthough the public interest is served by discouraging attorney misconduct,’ a ‘court should not encourage others to commit illegal acts upon their lawyer’s advice by allowing the perpetrators to believe that a suit against the attorney will allow them to obtain relief from any damage they might suffer if caught.’” (Id. at p. 277.) Thus, “allegations that [the lawyer’s] negligent advice caused [the client] to commit a crime and plead guilty are immaterial, as [the client] cannot obtain indemnity for his willful criminal wrongdoing.” (Id. at p. 276; accord Blain v. Doctor’s Co. (1990) 222 Cal.App.3d 1048, 1063 [client cannot recover for emotional distress suffered by following attorney’s advice to lie at deposition].)
Other states have barred intentional wrongdoers from bringing malpractice actions against negligent attorneys under the doctrine, in pari delicto. (See Quick v. Samp (S.D. 2005) 697 N.W.2d 741, 745-747 [client claimed attorney negligently advised him to commit forgery]; General Car & Truck v. Lane & Waterman (Iowa 1996) 557 N.W.2d 274, 280-281, 282-283 [client claimed attorney negligently advised it to defraud Patent and Trademark Office]; Pantely v. Garris, Garris & Garris (Mich.App. 1989) 447 N.W.2d 864, 867-869 [client claimed attorney negligently advised her to commit perjury]; Evans v. Cameron (Wis. 1985) 360 N.W.2d 25, 28-29 [same]; Buttitta v. Newell (Ill.App. 1988) 531 N.E.2d 957, 959-960 [client claimed attorney negligently failed to counsel against intentionally violating statute].)
This well-established public policy applies equally here. A jury found Shahbaz fraudulently induced Vakili into entering the Alex Properties amendment, and assessed punitive damages against Shahbaz. Shahbaz may not shift the liability he incurred for his intentional wrongdoing to his attorneys as a matter of public policy, even if the attorneys drafted the amendment negligently. (PPG, supra, 20 Cal.4th at p. 316 [embracing “the policy of not allowing liability for intentional wrongdoing to be offset or reduced by the negligence of another”]; Weidenfeller, supra,1 Cal.App.4th at pp. 6-7 [“an intentional actor cannot rely on someone else’s negligence to shift responsibility for his or her own conduct”]; Chapman, supra,130 Cal.App.4th at p. 277 [a “‘court should not encourage others to commit illegal acts upon their lawyer’s advice by allowing the perpetrators to believe that a suit against the attorney will allow them to obtain relief from any damage they might suffer if caught’”].)
The same public policy analysis applies to the negligent misrepresentation cause of action. (Civ. Code, §§ 1668 [voiding contracts exempting persons from liability for fraud, willful injury, or willful or negligent violation of law], 1710, subd. (2) [listing “Elements of Actionable Fraud” and defining “deceit” to include negligent misrepresentation]; Blankenheim v. E.F. Hutton & Co. (1990) 217 Cal.App.3d 1463, 1472-1473 (Blankenheim) [Civil Code section 1668 voids hold-harmless contract exempting party from liability for negligent misrepresentation]; cf. Gagne v. Bertran (1954) 43 Cal.2d 481, 487-488 & fn. 5 [deceit includes negligent misrepresentation; the relevant intent is the intent to induce reliance, not the intent to deceive].)
Plaintiffs unpersuasively claim the public policy is inapplicable here. They contend Shahbaz committed no illegal act (unlike the client in Chapman), Shahbaz was an “innocent principal” who lacked any intent to deceive Vakili, and the Vakili litigation did not lead to a judgment against Shahbaz.
Plaintiffs’ contentions fail. First, the “crime versus intentional tort” claim raises a distinction without a difference in this context. Public policy forbids shifting to merely negligent persons the liability incurred by any intentional wrongdoer, whether criminal or tortfeasor. (See PPG, supra, 20 Cal.4th at p. 316 [applying policy to intentional tortfeasor].) The salient distinction here is between intentional and negligent actors. “Intentional ‘conduct differs from negligence . . . in the social condemnation attached to it.’” (Weidenfeller, supra,1 Cal.App.4th at p. 7.) Second, the Vakili jury did not find Shahbaz was an innocent principal. Plaintiffs do not contend they even raised this issue or otherwise asserted defendants’ negligence as a defense in the Vakili litigation. And the Vakili jury awarded punitive damages against Shahbaz, reflecting his direct, personal liability for the fraud. (Civ. Code, § 3294, subd. (b); Weeks v. Baker & McKenzie (1998) 63 Cal.App.4th 1128, 1154.) Third, the lack of a judgment against Shahbaz is irrelevant. Plaintiffs expressly premised their damages for defendants’ negligence on the Vakili settlement, which was based on the Vakili jury verdict, which reflected Shahbaz’s intentional wrongdoing.
Contrary to plaintiffs’ claims, this is not the rare case posing “‘legal matters so complex and ethical dilemmas so profound that a client could follow an attorney’s advice, do wrong and still maintain suit on the basis of not being equally at fault.’” (Chapman, supra, 130 Cal.App.4th at p. 277.) The Alex Properties amendment is only two pages. In conspicuous, well-spaced columns, the first page plainly sets forth Shahbaz’s duty to contribute 1.5 million Magic shares to the partnership as of February 29, 2000.
Plaintiffs’ invocation of agency theory is misplaced. The Vakili jury did not impute liability to Shahbaz based on the attorney’s negligence. The attorneys were not defendants in the Vakili litigation, and nothing in the record suggests plaintiffs were found liable under respondeat superior.
Public policy and simple arithmetic demand reversal of the entire $2.46 million judgment against defendants. The $2.46 million judgment reflects Shahbaz’s testimony that he paid approximately $3 million to settle his Vakili litigation liability, with a deduction for the proportion of that $3 million attributable to his punitive damages liability. But the Vakili jury did not assess $3 million in damages against Shahbaz—it assessed more than twice as much. The Vakili jury awarded $2 million in damages for fraud, $2.15 million for negligent misrepresentation, $1.43 million for breach of contract, and $1.35 million in punitive damages. Why would Vakili settle a $6.93 million verdict for $3 million? One reason is that Vakili could not have obtained a judgment for $6.9 million. He would have had to undertake an election of remedies. He could have affirmed the contract and obtained a judgment sounding in contract for $1.43 million. Or he could have disavowing the contract and obtaining a judgment sounding in tort for, at most, $3.35 million (fraud plus punitive damages). The $3 million settlement thus must be premised on Vakili’s ability to disavow the fraudulently induced Alex Properties amendment and obtain a judgment against Shahbaz exceeding $3 million based on fraud. Because the entire $3 million settlement is attributable to the fraud verdict against Shahbaz, so must the entire $2.46 judgment he obtained against defendants.
“‘“If a given state of facts entitles one to recover damages upon the theory of tort, and the same state of facts entitles him to recover upon the theory of contract, it would seem plain that recovery could not be twice had simply because the facts would support recovery upon either theory.”’” (DuBarry Internat., Inc. v. Southwest Forest Industries, Inc. (1991) 231 Cal.App.3d 552, 564.)
“[I]t is well settled that punitive damages are not recoverable for negligent misrepresentation.” (PM Group, Inc. v. Stewart (2007) 154 Cal.App.4th 55, 69.)
Because we reverse the judgment against defendants due to lack of causation and public policy, we need not reach their claims that the court wrongly admitted hearsay, character evidence, and expert testimony, or that insufficient evidence supports Cron’s liability. Nor will we reach plaintiffs’ appeal from the court’s entry of judgment notwithstanding the verdict, or its claim that substantial evidence supports Senn’s and Senn Palumbo’s liability.
The Court Properly Entered Nonsuit for Defendants on the Insurance Tender Claims
The court granted nonsuit to defendants on plaintiffs’ insurance tender claims. It interpreted Magic’s D&O policy, and found as a matter of law that it did not cover the defense of the Vakili litigation. Thus, defendants were not negligent in failing to tender the defense to the insurer.
“‘A defendant is entitled to a nonsuit if the trial court determines that, as a matter of law, the evidence presented by plaintiff is insufficient to permit a jury to find in his favor.’” (Saunders v. Taylor (1996) 42 Cal.App.4th 1538, 1541.) “Since motions for nonsuit raise issues of law [citation], we review the rulings on those motions de novo, employing the same standard which governs the trial court [citation]. We may sustain the granting of the motion on any ground specified in the motion, whether or not it was the ground relied upon by the trial court.” (Id. at pp. 1541-1542.)
“D&O insurance is ‘a specialized form of coverage for (i) claims against corporate directors and officers based on acts committed in their corporate capacities; [and] (ii) the corporation’s indemnification obligations to its directors and officers for such claims . . . . [¶] . . . [¶] [U]nlike general liability insurance, which is typically written on standard forms, D&O policy provisions often vary depending on a number of factors, including the nature of the insured’s business, the insured’s financial condition, and [the] insured’s status as a public or private company. Cases must therefore be reviewed in the context of the specific policy language at issue.’” (August Entertainment, Inc. v. Philadelphia Indemnity Ins. Co. (2007) 146 Cal.App.4th 565, 573-574 (August).)
Magic’s D&O policy covers any “Loss which [Shahbaz] is legally obligated to pay arising solely by reason of any Wrongful Act . . . alleged in a Claim . . . .” It defines “Loss” to include “damages, judgments, settlements, and reasonable and necessary Defense Expenses . . . incurred in the defense of any Claim . . . .” It defines “Wrongful Act” as “any actual or alleged breach of duty, error, misstatement, misleading statement, or omission done or attempted by [Shahbaz] in the capacity as director or officer of [Magic].” It defines “Claim” as “a written demand for monetary damages, including the institution of a suit . . . .”
The policy defines “Insured” as any “duly elected Director of [Magic]” or “duly elected or duly appointed Officer of [Magic].” Defendants concede that Shahbaz was an officer and director of Magic and an insured under the policy.
Shahbaz contends the policy covered his defense of the Alex Property amendment-related claims against him in the Vakili litigation, and so defendants should have tendered his defense to Magic’s insurer. In his opening brief, he asserts the allegations of Vakili’s first amended complaint triggered coverage. But that pleading contains no allegation that Shahbaz acted as a Magic director or officer with regard to the Alex Properties amendment. Its allegation that Shahbaz acted as a Magic agent or representative is insufficient to trigger coverage under Magic’s D&O policy.
Plaintiffs do not contend defendants should have tendered Holdings’ defense against the Vakili litigation (in which the jury found Holdings had breached Deal No. 1) to the insurer. They do not claim Holdings was insured under the policy.
In his reply brief, Shahbaz contends Vakili’s second amended complaint “clarified” the allegations of the first amended complaint, and shows why the first amended complaint triggered coverage. He cannot mean this literally—the second amended complaint superseded the first amended complaint. Instead, he must be claiming that the second amended complaint triggered coverage. Sure enough, the second amended complaint alleges that Shahbaz acted as a Magic director and/or officer when he fraudulently induced Vakili into entering the Alex Property amendment. Unlikely as those allegations may be, the policy broadly covers any alleged breach of duty or misleading statement by Shahbaz in the capacity as a Magic director or officer.
Points raised for the first time in a reply brief are waived. (Reichardt v. Hoffman (1997) 52 Cal.App.4th 754, 764-765.)
Plaintiffs offered no evidence that Shahbaz entered into the Alex Properties Amendment in his capacity as a Magic director or officer. The evidence is to the contrary. Magic’s board of directors rebuffed Shahbaz’s suggestion that Magic acquire Hi-Val, which is why he formed Holdings—to pursue his own deal with Vakili.
Nonetheless, the policy does not cover Shahbaz’s defense costs. Exclusion L of the policy excludes coverage for any claims “based upon, arising from, or in consequence of [Shahbaz] having gained in fact any personal profit, remuneration, or advantage to which [he] was not legally entitled.” The second amended complaint sufficiently alleges that Shahbaz profited from defrauding Vakili into entering the Alex Property amendment and breaching the amendment. The Vakili litigation verdict showed he did personally profit therefrom. And the evidence in this case is similar. No evidence suggests Magic profited from the Alex Property amendment instead of Shahbaz.
Shahbaz contends the Vakili litigation verdict is irrelevant to whether he personally profited from his fraud because the case settled before the entry of judgment. His complaint rings hollow, as he based his damages claims on the settlement amount.
In addition, the same public policy that prevents Shahbaz from shifting his fraud liability to defendants also bars him from obtaining insurance coverage for it. (Ins. Code, § 533; Civ. Code, § 1668; Blankenheim, supra,217 Cal.App.3d at pp. 1472-1473; accord Employers Ins. of Wausau v. Musick, Peeler, & Garrett (S.D.Cal. 1994) 871 F.Supp. 381, 386 [“Under California Civil Code 1688, Insurance Code 533 and the case law interpreting those provisions, insurance may not indemnify anyone from fraud or from negligent misrepresentation”]; Allstate Ins. Co. v. Hansten (N.D.Cal. 1991) 765 F.Supp. 614, 616 [“Under California law, no contractual agreement may indemnify anyone from his own fraud. . . . Negligent misrepresentation is included within the definition of fraud”].)
This public policy applies to the causes of action against Shahbaz for fraud, negligent misrepresentation, and rescission based on fraud. It does not apply to the breach of contract cause of action, but there is no coverage for that claim, either. D&O policies “effectively exclude contract liability for two reasons. First, an officer acting in an official capacity cannot be held liable for breach of a corporate contract. [Citations.] Second, an officer who breaches a contract in an individual capacity is excluded from coverage because he or she was not acting in an official capacity.” (August, supra, 146 Cal.App.4th at p. 576.) The public policy also does not apply to the breach of fiduciary duty cause of action, but plaintiffs do not suggest how Shahbaz could have breached the fiduciary duty he owed to the Alex Properties partnership while acting in his capacity as a Magic director or officer
DISPOSITION
The judgment in favor of defendants on the Ernst & Young arbitration claims and the insurance tender claims is affirmed. The judgment in favor of plaintiffs on the Vakili litigation claims is reversed. Defendants shall recover their costs on appeal.
WE CONCUR: RYLAARSDAM, ACTING P. J., ARONSON, J.