Opinion
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of Los Angeles County D Zaven V. Sinanian, Judge.
Lee B. Ackerman for Cross-Complainants and Appellants.
Gaglione, Dolan & Kaplan, Robert T. Dolan and Deborah A. Smillie, for Cross-Defendants and Respondents.
Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.
I. INTRODUCTION
This appeal arises from a lawsuit by several plaintiffs for damages arising out of a financial investment in 265 Bellefontaine, LLP. Plaintiffs sued a number of parties including Brad S. Kaye and BSK Holdings, Inc. (collectively referred to as “appellants”), who are limited and general partners of 265 Bellefontaine, LLP (“the partnership”) respectively. Through a cross-complaint, appellants sought equitable indemnification from individual attorneys, cross-defendants, Joseph Petro, Mindy Sheps, and Michael Rabkin and their law firm, Wolf, Rifkin, Shapiro & Schulman, LLP, (“attorneys”) for their alleged wrongful conduct in funding the partnership’s real property asset.
Appellants challenge an order dismissing their third amended cross-complaint after the trial court sustained a demurrer to appellants’ third amended cross-complaint without leave to amend. We affirm.
II. BACKGROUND
In reviewing an order sustaining a demurrer without leave to amend, we assume the truth of all well-pled factual allegations. (Naegele v. R.J. Reynolds Tobacco Co. (2002) 28 Cal.4th 856, 864-865.) The third amended cross-complaint alleged appellants and others were sued by plaintiffs on theories of securities violations, fraud, negligent misrepresentation, breach of fiduciary duty and breach of contract in connection with the funding of a real estate investment. Among appellants’ co-defendants were the partnership, and appellants’ co-partners David Zuckerman, (a limited partner) and Mr. Zuckerman’s corporation, Private Properties, Inc., (a general partner).
In the third amended cross-complaint, appellants named the attorneys as well as Mr. Zuckerman and Private Properties, Inc., as cross-defendants. The third amended cross-complaint alleged Private Properties, Inc is merely a shell and instrumentality belonging to Mr. Zuckerman. In 2004, Mr. Kaye and Mr. Zuckerman formed the partnership with Private Properties, Inc. and BSK, Inc. as general partners and Mr. Kaye and Mr. Zuckerman were the limited partners of the partnership. The attorneys drafted the partnership agreement. The partnership’s sole asset was improved property located at 265 Bellefontaine in Pasadena.
In July 2004, the attorneys drafted an amended partnership agreement. The partnership agreement as amended provided that Private Properties, Inc. would act as the managing general partner subject to Mr. Kaye’s sole discretion to have BSK, Inc. act as a managing partner. In January 2005, Mr. Kaye gave written notice of BSK, Inc.’s intention to serve as a co-managing general partner. The attorneys were provided a copy of the written notice.
Mr. Kaye made a $526,000 loan to the partnership, for which he received a note secured by a deed of trust. Mr. Kaye’s trust deed was allegedly second only to an all inclusive first deed of trust. Because Mr. Zuckerman failed to contribute the funds required under the original partnership agreement, under the amended agreement Mr. Zuckerman guaranteed $284,000 of the partnership’s obligation owed to the limited partners. Mr. Zuckerman also allegedly agreed to contribute an additional $125,000 to the partnership.
Mr. Zuckerman allegedly solicited plaintiffs to furnish money to the partnership through loans evidenced by promissory notes and secured by nine trust deeds on the real property. The notes and trusts deeds were executed by Mr. Zuckerman without appellants’ knowledge or consent and in violation of the partnership agreement. Instead of contributing his own funds to the partnership, Mr. Zuckerman substituted plaintiffs’ funds. The attorneys allegedly recorded the trust deeds on the property without appellants’ knowledge or consent.
The third amended cross-complaint alleged that, when the original and amended partnership agreements were prepared, appellants understood the attorneys were acting as their counsel. But, the attorneys were also representing Mr. Zuckerman, Private Properties, Inc. and the Partnership, without advising the parties of a potential conflict of interest.
Mr. Zuckerman and Private Properties, Inc. requested the attorneys to prepare and review the promissory notes executed in favor of plaintiffs and prepare and record the trust deeds securing the notes. The request was made on behalf of Mr. Zuckerman and Private Properties, Inc. “and on purported behalf of the Partnership....” Plaintiffs were advised that the trust deeds would be second only to the first all-inclusive trust deed. The attorneys allegedly participated in the transactions with plaintiffs so to clothe the loans with legitimacy. The attorneys knew the notes contained an unenforceable usurious interest rate. The attorneys also delayed and withheld recording plaintiffs’ trust deeds in order to conceal the number and amount of existing liens and to facilitate the sale of additional notes.
The attorneys allegedly knew or should have known the transactions with plaintiffs were not on behalf of the partnership but were for Mr. Zuckerman and Private Properties, Inc. so as to avoid the obligation to contribute funds to the partnership.
As a result of over-encumbering the property, the partnership was unable to sell or refinance the real property or to make the payment on the first all-inclusive trust deed. The partnership filed a Chapter 7 bankruptcy petition in August 2005. Appellants brought claims for equitable indemnity and implied contractual indemnity against the attorneys.
The attorneys demurred to the third amended complaint on the grounds of insufficient facts and uncertainty. The attorneys asserted the cross-complaint was an improper derivative malpractice action brought by individual partners against the partnership lawyers without a waiver of the partnership’s attorney-client privilege. Alternatively, the attorneys argued the action was barred as a matter of law by the attorney exception to equitable indemnity claims or the agent’s immunity rule.
The trial court sustained the demurrer to the equitable indemnity claim on the ground the remedy required tortfeasors, who are jointly and severally liable to plaintiffs. Because the attorneys owed no duties to plaintiffs, there was no possibility of liability making them joint tortfeasors. The trial court overruled the demurrer to the contractual indemnity claim.
On October 29, 2009, we issued an alternative writ of mandate directing the trial court to vacate the order overruling the demurrer to the third amended cross-complaint and enter a new order sustaining the demurrer without leave to amend or show cause why a peremptory writ should not issue. (Wolf, Rifkin, Shapiro & Schulman, LLP. v. Superior Court (Oct. 29, 2009, B218375).) The trial court complied with the alternative writ by sustaining the demurrer to the third amended complaint without leave to amend. After the trial court dismissed the action, this timely appeal followed.
III. DISCUSSION
A. Standard of Review
“On review from an order sustaining a demurrer, ‘we examine the complaint de novo to determine whether it alleges facts sufficient to state a cause of action under any legal theory, such facts being assumed true for this purpose. [Citations.]’ [Citation.]” (Committee For Green Foothills v. Santa Clara County Bd. of Supervisors (2010) 48 Cal.4th 32, 42.) The complaint is given a reasonable interpretation by reading it as a whole and with all its parts in their context. (City of Dinuba v. County of Tulare (2007) 41 Cal.4th 859, 865.) However, the assumption of truth does not apply to contentions, deductions, or conclusions of law and fact. (Ibid.) Furthermore, any allegations that are contrary to the law or to a fact of which judicial notice may be taken will be treated as a nullity. (Interinsurance Exchange v. Narula (1995) 33 Cal.App.4th 1140, 1143; Fundin v. Chicago Pneumatic Tool Co. (1984) 152 Cal.App.3d 951, 955.)
B. The Demurrer
Appellants assert the third amended cross-complaint sufficiently alleged (or could have been amended to assert) a claim for implied equitable indemnity predicated on the attorneys’ incompetent representation of appellants as well as aiding and abetting the Zuckerman defendants in injuring plaintiffs. For the reasons stated below, we disagree.
1. There is no joint and several liability.
“In general, indemnity refers to ‘the obligation resting on one party to make good a loss or damage another party has incurred.’ [Citation.]” (Prince v. Pacific Gas & Electric Co. (2009) 45 Cal.4th 1151, 1157.) Our Supreme Court recently explained that there are only two basic types of indemnity: express or equitable. (Ibid.)
At issue in this case is equitable indemnity which is predicated on a joint obligation to another for damages. (Prince v. Pacific Gas & Electric Co., supra, 45 Cal.4th at p. 1158.) “‘[U]nless the prospective indemnitor and indemnitee are jointly and severally liable to the plaintiff there is no basis for indemnity. [Citation.]’” (Major Clients Agency v. Diemer (1998) 67 Cal.App.4th 1116, 1126.) “This rule ‘is often expressed in the shorthand phrase “... there can be no indemnity without liability.”’ [Citation.]” (Prince v. Pacific Gas & Electric Co., supra, 45 Cal.4th at p. 1159.) The rationale of the rule is that equitable principles do not allow a tortfeasor to recover where the injured party lacked the right to recover. (Children’s Hospital v. Sedgwick (1996) 45 Cal.App.4th 1780, 1786.) And, the equitable indemnity doctrine is subject to allocation of fault principles as well as comparative apportionment of damages. (Ibid.)
But, “on matters of substantive law, the doctrine is ‘wholly derivative and subject to whatever immunities or other limitations on liability would otherwise be available’ against the injured party. [Citations.]” (Prince v. Pacific Gas & Electric Co., supra, 45 Cal.4th at pp. 1158-1159.) Thus, an indemnitor is entitled to invoke any substantive defense to liability against an indemnitee that could be raised against the injured party. (Ibid; Western Steamship Lines, Inc. v. San Pedro Peninsula Hospital (1994) 8 Cal.4th 100, 114.)
One such substantive defense is the undivided duty of loyalty owed by an attorney to a client, which provides an exception to the ordinary rule of equitable indemnity. (California State Auto Ass’n Interinsurance Bureau v. Bales (1990) 221 Cal.App.3d 227, 230.) “[T]he ordinary rules of implied equitable indemnity in tort do not apply when the claim for indemnity is made against an attorney, is based on a breach of the attorney’s duty to his or her client, and is brought by an adverse party in litigation which is the same as or related to that in which the alleged negligence took place.” (Ibid.) This exception resulted from case law where the perception was attorneys would be reluctant to take cases which might result in indemnity claims. (Ibid.) In such cases, the attorney would have to choose between self-preservation and his or her duty of undivided loyalty to the client where an indemnity issue arose. (Ibid.) “[E]ven where there is but one course of action for an attorney to follow, the attorney must be free from the threat of potential liability in order to devote undivided loyalty to the client.... If an attorney is saddled with a duty to a potentially adverse party, then his loyalty to the client cannot be undivided. [Citations.]” (Major Clients Agency v. Diemer, supra, 67 Cal.App.4th at pp. 1124-1125.)
Here, the complaint alleges plaintiffs were injured by the partnership, and its limited and general partners. The third amended cross-complaint alleged as follows. The Zuckerman defendants, purportedly on behalf of the partnership, requested the attorneys to prepare and review the promissory notes and to prepare, review and record the trust deeds. The attorneys knew or should have known that the Zuckerman defendants were representing to each of the plaintiffs that their respective deed would be junior only to the first deed of trust. The attorneys delayed recording the trust deeds to conceal Mr. Zuckerman’s conduct and to facilitate the sale of additional notes. Mr. Zuckerman’s actions were designed to defraud plaintiffs of funds in order to satisfy his obligation to contribute to the partnership. The attorneys acted either knowingly or with presumptive knowledge that Mr. Zuckerman’s conduct was wrongful. The attorneys’ conduct contributed to plaintiffs’ injury, which resulted in over-encumbering the real property, and led to the partnership’s bankruptcy.
Assuming the truth of the allegations, these facts do not provide a basis for liability to plaintiffs. There can be no liability to plaintiffs “unless [the attorneys] owed a duty to plaintiffs to avoid the asserted wrongdoings.” (Goodman v. Kennedy (1976) 18 Cal.3d 335, 342.) As a general rule “‘the existence of a legal duty of care in a given factual situation presents a question of law which is to be determined by the courts alone.’ [Citation.]” (Century Sur. Co. v. Crosby Ins., Inc. (2004) 124 Cal.App.4th 116, 127, quoting Nichols v. Keller (1993) 15 Cal.App.4th 1672, 1682.)
In J’Aire Corp. v. Gregory (1979) 24 Cal.3d 799, the Supreme Court explained the duty concept as follows: “A duty of care may arise through statute or by contract. Alternatively, a duty may be premised upon the general character of the activity in which the defendant engaged, the relationship between the parties or even the interdependent nature of human society. [Citation.] Whether a duty is owed is simply a shorthand way of phrasing what is ‘“the essential question -- whether plaintiff’s interests are entitled to legal protection against the defendant’s conduct.”’ [Citations.]” (Id. at p. 803.) Resolution of the legal question of duty depends “upon a judicial weighing of the policy considerations for and against the imposition of liability under the circumstances.” (Goodman v. Kennedy, supra, 18 Cal.3d at p. 342; Moore v. Anderson Zeigler Disharoon Gallagher & Gray, P.C. (2003) 109 Cal.App.4th 1287.)
There are six factors relevant to a determination of whether a defendant owed a plaintiff a duty of care: “Those criteria are (1) the extent to which the transaction was intended to affect plaintiff, (2) the foreseeability of harm to plaintiff, (3) the degree of certainty that plaintiff suffered injury, (4) the closeness of the connection between the defendant’s conduct and the injury suffered, (5) the moral blame attached to the defendant’s conduct and (6) the policy of preventing future harm.” (J’Aire Corp. v. Gregory, supra, 24 Cal.3d at p. 804, citing Biakanja v. Irving (1958) 49 Cal.2d 647, 650.) Stated another way: “‘The determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of [the six previously identified factors].’” (Goodman v. Kennedy, supra, 18 Cal.3d at p. 343, quoting Biakanja v. Irving, supra, 49 Cal.2d at p. 650.)
More specifically, an attorney’s duty of care depends upon the existence of an attorney-client relationship. (Fox v. Pollack (1986) 181 Cal.App.3d 954, 959.) The third amended complaint alleges that the attorneys were acting on behalf of the partnership or the Zuckerman defendants in obtaining funding from plaintiffs. There are no allegations to establish the attorneys were acting as plaintiffs’ counsel in these transactions. Nor does the record show plaintiffs were intended beneficiaries of the partnership’s actions in funding the partnership.
Instead, the purported liability in this case is predicated on failing to disclose true facts or participating with the Zuckerman defendants in wrongfully funding the partnership. At most, the third amended cross-complaint alleged a duty arising from the attorneys’ constructive fraud in failing to disclose to third parties the clients’ wrongful conduct. No liability can be imposed on the attorneys for failing to disclose facts to plaintiffs because the duty of disclosure was only owed to their clients. (Skarbrevik v. Cohen, England & Whitfield (1991) 231 Cal.App.3d 692, 711.) The attorneys cannot be held liable to plaintiffs for acting on the partnership’s behalf in seeking funding from the plaintiffs. To paraphrase Goodman, “plaintiffs were not persons upon whom [the attorneys] had any wish or obligation to confer a benefit in the transaction. Plaintiffs’ only relationship in the proposed transaction was that of parties with whom [the attorneys] might negotiate a bargain at arm’s length.” (Goodman v. Kennedy, supra, 18 Cal.3d at p. 344.) The arms length transaction involved in this case between the partnership (via the attorneys) and plaintiffs does not establish a relationship between plaintiffs and the partnership’s attorneys.
The attorneys are correct that appellants’ equitable indemnity claim does not have the element of common liability to the injured parties (plaintiffs). Plaintiffs would have no basis for imposing liability against the partnership’s attorneys. As a result, the attorneys owed no duty to plaintiffs on which to impose joint and several liability.
2. Allegations the attorneys were aiders and abettor does not save the equitable indemnity claim.
Appellants argue that the equitable indemnity claim was not barred because the third amended cross-complaint alleged the attorneys aided and abetted the Zuckerman defendants in breaching a fiduciary duty owed to plaintiffs by engaging in fraudulent conduct. A person may be liable for aiding and abetting the commission of an intentional tort if the person knows the other party’s conduct was a breach of duty and the person provides substantial assistance or encouragement to the other party to act in such a manner. (Austin B. v. Escondido Union School Dist. (2007) 149 Cal.App.4th 860, 879.) However, “[m]ere knowledge that a tort is being committed and the failure to prevent it does not constitute aiding and abetting. [Citation.] ‘As a general rule, one owes no duty to control the conduct of another....’ [Citations.]” (Fiol v. Doellstedt (1996) 50 Cal.App.4th 1318, 1326.)
We agree with the attorneys that the allegations of the third amended cross-complaint fall within the agent’s immunity rule. “The relationship of attorney and client is one of agent and principal.” (Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003) 107 Cal.App.4th 54, 69.) Under the agent’s immunity rule, an agent cannot be held liable for aiding and abetting his or her principal. (Fiol v. Doellstedt, supra, 50 Cal.App.4th at p. 1326.)
The agent’s immunity rule is based on the notion an agent cannot be held liable for conspiring with the principal when the agent is acting in the official capacity on behalf of his or her principal. (Berg v. Berg Enterprises, Inc. v. Sherwood Partners, Inc. (2005) 131 Cal.App.4th 802, 817.) “Conspiracy is a concept closely allied with aiding and abetting. A conspiracy generally requires agreement plus an overt act causing damage. [Citation.] Aiding and abetting requires not agreement, but simply assistance. The common basis for liability for both conspiracy and aiding and abetting, however, is concerted wrongful action. [Citations.] A corporate employee cannot conspire with his or her corporate employer; that would be tantamount to a person conspiring with himself. Thus when a corporate employee acts in his or her authorized capacity on behalf of his or her corporate employer, there can be no claim of conspiracy between the corporate employer and the corporate employee. [Citations.] In such a circumstance, the element of concert is missing. [¶] Similar reasoning applies to aiding and abetting.” (Janken v. GM Hughes Electronics (1996) 46 Cal.App.4th 55, 78.)
This is an action for equitable indemnity where a limited partner is seeking to hold the attorneys accountable for actions taken by the partnership and the Zuckerman defendants against third parties. The only allegations were that the attorneys aided and abetted the partnership and/or the Zuckerman defendants in defrauding plaintiffs by failing to disclose true facts and by delaying recording trust deeds. But, the third amended cross-complaint also shows the attorneys were acting as agents and principals for the partnership in an official capacity in transactions with third parties. Under the agent’s immunity rule, an agent cannot be held liable for aiding and abetting his or her principal. (Fiol v. Doellstedt, supra, 50 Cal.App.4th at p. 1326.)
Furthermore, appellants are incorrect that the legal distinction between a civil conspiracy and an aiding and abetting claim requires a different result. The distinction is that a civil conspiracy claim must be supported by an “‘independent duty’” whereas an aiding and abetting claim does not require such a duty. (See Casey v. United States Bank Nat. Assn. (2005) 127 Cal.App.4th 1138, 1145, fn. 2.)
As a general rule, “a cause of action for civil conspiracy may not arise ‘if the alleged conspirator, though a participant in the agreement underlying the injury, was not personally bound by the duty violated by the wrongdoing and was acting only as the agent or employee of the party who did have that duty.’ [Citation.]” (Skarbrevik v. Cohen, England & Whitfield (1991) 231 Cal.App.3d 692, 709.) “By its nature, tort liability arising from conspiracy presupposes that the coconspirator is legally capable of committing the tort, i.e., that he or she owes a duty to plaintiff recognized by law and is potentially subject to liability for breach of that duty.” (Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 511.)
In a civil conspiracy claim, an attorney may be held liable either for violation of a duty owed by the client to another where the attorney owes an independent duty or where the attorney’s acts go beyond performance of a professional duty owed to the client and are done for the attorney’s own financial gain. (Doctors’ Co. v. Superior Court (1989) 49 Cal.3d 39, 48; see also Skarbrevik v. Cohen, England & Whitfield, supra, 231 Cal.App.3d at p. 710.) Moreover, it has been held “an attorney has ‘an independent legal duty’ not to defraud individuals engaged in business transactions with his or her client.” (Favila v. Katten Muchin Rosenman LLP (2010) 188 Cal.App.4th 189, 209, citing Doctors’ Co. v. Superior Court, supra, 49 Cal.3d at p. 39.)
As we previously concluded, the third amended cross-complaint alleged nothing more than the attorneys failed to disclose the Zuckerman defendants’ fraudulent conduct. In the absence of a duty or a personal financial interest in the matter, an attorney cannot be liable for failing to disclose facts his or her client intentionally concealed. (Doctors’ Co. v. Superior Court, supra, 49 Cal.3d at p. 49; Skarbrevik v. Cohen, England & Whitfield, supra, 231 Cal.App.3d at p. 711.) With or without the independent duty distinction, the attorneys could not be held liable for failing to disclose the Zuckerman defendants’ conduct as alleged in the third amended cross-complaint.
We need not resolve the issue of whether the attorney-client privilege would be violated if the action were to proceed.
3. Leave to amend was properly denied.
Appellants claim they should have been allowed to amend the third amended cross-complaint to develop the fraud theory. The third amended cross-complaint alleges the attorneys failed to disclose or prevent their client’s fraudulent conduct against third parties. No specific facts are alleged showing the attorneys engaged in any conduct for which a duty to the plaintiffs was owed whereby liability could be imposed. Appellants have the burden of demonstrating how they could cure the pleading after four failed attempts. (Goodman v. Kennedy, supra, 18 Cal.3d at pp. 349-350.) No additional facts have been offered which would establish either fraud by the attorneys or a duty to plaintiffs. Accordingly, the trial court did not abuse its discretion refusing to allow a fifth round of pleadings. (Hernandez v. City of Pomona (2009) 46 Cal.4th 501, 520, fn. 16.)
IV. DISPOSITION
The order dismissing the third amended cross-complaint is affirmed. Respondents are awarded their costs on appeal.
I concur: ARMSTRONG, ACTING P. J.
MOSK, J., Concurring.
I concur.
Equitable Indemnity must be based on joint liability to the plaintiff. (Prince v. Pacific Gas & Electric Co. (2009) 45 Cal.4th 1151, 1157-1158.) Cross-complainant’s attorney said at oral argument that the indemnity claim here is not for fraud by cross-defendants, but for cross-defendants “aiding and abetting, ” the acts alleged in the complaint. The complaint stated causes of action for violation of the Corporate Securities Act, fraud, negligent misrepresentation, breach of fiduciary duty and breach of contract.
In recent years, there has been increasing attention devoted to the question of civil liability of lawyers for aiding and abetting their clients in wrongdoing. Section 56 of the Restatement (Third) of the Law Governing Lawyers (2000) provides that “a lawyer is subject to liability to a nonclient when a nonlawyer would be in similar circumstances.” Cases have applied civil aiding and abetting concepts to lawyers in the same way as applied to others. (See Schiltz, “Civil Liability for Aiding and Abetting: Should Lawyers Be ‘Privileged to Assist their Clients’ Wrongdoing?” (2008) 29 Pace L.Rev. 75, 77, fn. 11 (Schiltz). Yet, some cases have virtually immunized attorneys from liability. (Id. at p. 78.)
The Restatement (Second) of Agency (1958) section 343, comment (d) provides that “[a]n agent who assists another agent or the principal to commit a tort is normally himself liable as a joint tortfeasor for the entire damage.” (See Fiol v. Doellstedt (1996) 50 Cal.App.4th 1318, 1325-1326 [“‘Liability may... be imposed on one who aids and abets the commission of an intentional tort if the person (a) knows the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act or (b) gives substantial assistance to the other in accomplishing a tortious result and the person's own conduct, separately considered, constitutes a breach of duty to the third person’”].)
After a number of cases were filed against lawyers for conspiring with their clients, the Legislature enacted Civil Code section 1714.10 barring the filing of such suits without a preliminary finding that the claim had a reasonable chance of succeeding. Whether “aiding and abetting” is covered by this statute is unclear. (See generally Berg & Berg Enterprises, LLC v. Sherwood Partners, Inc. (2005) 131 Cal.App.4th 802; Pavicich v. Santucci (2000) 85 Cal.App.4th 382.) The parties have not raised the applicability of Civil Code section 1714.10 in the procedural posture of this case even though it is alleged that the cross-defendants represented, inter alia, cross-complainants.
“[T]here are plenty of cases in which courts have upheld claims against lawyers for aiding and abetting fraud. Many of these cases arise in the securities context, but the complaints often contain common law counts in addition to the statutory claims.” (Schiltz, supra, at p. 126.) Professor Schiltz has argued that lawyers should not be “privileged” or immune from aiding and abetting claims, including in connection with fraud and breach of fiduciary duty (Schiltz, supra, at pp. 125-126, 133-138, 149-150.) It has been said, “The attorney aider-abettor decisions draw a line between the mere rendering of advice to a wrongdoer, on the one hand, and actively misleading or affirmative conduct directed toward a third party on the other. The attorney, as counselor, almost certainly will receive better protection than the attorney who acts as the public and active agent of a wrongdoer.” (Mason, Civil Liability for Aiding and Abetting (2006) 61 Bus. Law 1135, 1166.)
I recognize that the California Supreme Court observed some time ago, “Liability imposed upon agents for active participation in tortious acts of the principal have been mostly restricted to cases involving physical injury, not pecuniary harm, to third persons (see Rest.2d Agency, §§ 352, 354, Appendix, Reporter's Notes, § 354, p. 600). More must be shown than breach of the officer’s duty to his corporation to impose personal liability to a third person upon him.” (United States Liability Ins. v. Haidinger-Hayes, Inc. (1970) 1 Cal.3d 586, 595; see generally Nasrawi v. Buck Consultants, LLC (E.D. Cal. 2010) 713 F.Supp.2d 1080.) But the law in this area has taken various twists and turns since that opinion. Without further discourse and analysis on this subject, I cannot join in any discussion suggesting that a lawyer is somehow free to engage in tortious activity with impunity.
The issue here is a matter of pleading. As to the fraud claim, the cross-complainants have not complied with pleading requirements, including allegations that cross-defendants knew, as opposed to should have known, of the falsity of the statements or omissions and had the intent to deceive. (See 5 Witkin, Cal. Procedure (5th ed. 2008) Pleading, § 710, p. 125.) Moreover, the required specificity in pleading for fraud claims is lacking. (Id. at §§ 711-712, pp. 126-128; Citizens of Humanity, LLC v. Costco Wholesale Corp. (2009) 171 Cal.App.4th 1, 20, disapproved on other grounds in Kwikset Corp. v. Superior Court (2011) 51 Cal.4th 310. 335; Tarmann v. State Farm Mutual Auto Ins. (1991) 2 Cal.App.4th 153, 157.) Had these allegations been sufficient, cross-complainants might have stated a cause of action. (Favila v. Katten Muchin Rosenman LLP (2010) 188 Cal.App.4th 189, 209.)
Whether cross-complainants stated facts sufficient to state a cause of action based on aiding and abetting violations of the Corporate Securities Act, negligent misrepresentation or breach of fiduciary duty is a closer question. A claim of aiding and abetting other torts, such as breach of fiduciary duty, also requires the plaintiff to allege actual knowledge, substantial assistance and proximate causation. (In re Agape Litigation (E.D.N.Y., March 29, 2011) __ F.Supp.__ [2011 WL 1136173].) The problem with the cross-complaint is that the allegations against cross-defendants is that cross-defendants “knew or should have known” suggest negligence. (See Casey v. U.S. Bank Nati. Assn. (2005) 127 Cal.App.4th 1138, 1144.) As stated in Casey, “California courts have long held that liability for aiding and abetting depends on proof the defendant had actual knowledge of the specific primary wrong the defendant substantially assisted.” (Id. at p. 1145, italics added.) Even if actual knowledge can be based on conscious avoidance, there must be “facts supporting an inference that the defendant acted with a culpable state of mind.” (In re Agape Litigation, supra.)
The closest cross-complaints come is their allegation that the “one or more of the attorneys was responsible for recording the deeds of trust. And, therefore knew that such statements and representations were false and misleading.” But earlier in the paragraph, cross-complainants allege that the “attorneys knew, or should have known” of the statements. This is not sufficient. Cross-complainants do not only fail to allege the required knowledge, but do not identify the primary wrongs, and they do not specifically allege the ultimate fact of aiding and abetting.
Cross-complainants may have been able to amend to state a cause of action. But they did not seek to do so before the trial court. They correctly assert that this court could give them leave to amend. Had they specified how they might amend, I would have considered the possibility. But they did not. The legal issues posed by the parties concerning the liability of attorneys for aiding and abetting are difficult ones. They should be addressed, however, only if the cross-complaint includes all necessary allegations.