Opinion
B307487 B310865
01-19-2024
MICHAEL GOLDBERG, as Trustee, etc., Plaintiff and Appellant, v. SIDLEY AUSTIN LLP et al., Defendants and Respondents.
Miller Barondess, Louis R. Miller, Brian A. Procel, Mira Hashmall and Christopher D. Beatty for Plaintiff and Appellant. Munger, Tolles &Olson, Xiaonan April Hu, Brad D. Brian, Mark R. Yohalem, and Benjamin Horwich for Defendants and Respondents Sidley Austin and Neal Sullivan.
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County, No. 19STCV42900 Amy Hogue, Judge. Affirmed.
Miller Barondess, Louis R. Miller, Brian A. Procel, Mira Hashmall and Christopher D. Beatty for Plaintiff and Appellant.
Munger, Tolles &Olson, Xiaonan April Hu, Brad D. Brian, Mark R. Yohalem, and Benjamin Horwich for Defendants and Respondents Sidley Austin and Neal Sullivan.
RUBIN, P. J.
INTRODUCTION
This appeal arises from a massive Ponzi scheme perpetrated by non-party Robert Shapiro through Woodbridge Group of Companies, LLC and its affiliated entities. Shapiro has pleaded guilty to wire fraud and tax evasion. Woodbridge declared bankruptcy in 2017. As part of the bankruptcy plan, the bankruptcy court approved the creation of the Woodbridge Liquidation Trust. Plaintiff and appellant Michael Goldberg is the trustee of the trust. On December 2, 2019, the trustee brought suit against a number of law firms and their respective attorneys, alleging they aided and abetted Shapiro's and Woodbridge's Ponzi scheme by, among other things, preparing false and negligent legal memoranda and revising offering documents to mislead investors.
Shapiro controlled a number of investment companies that bear the Woodbridge name and that were part of the Ponzi scheme. When the parties refer to "Woodbridge," they generally refer to Woodbridge Group of Companies, LLC, apparently the principal entity. For purposes of this opinion, it is generally not necessary to distinguish among the numerous Woodbridge companies. We therefore refer to the collection of Shapiro-controlled companies that are a part of the bankruptcy proceedings as "Woodbridge." We will identify any specific Woodbridge entity by name when necessary.
Respondents Sidley Austin LLP (Sidley) and Neal Sullivan, a partner at Sidley, filed a special motion to strike under the anti-SLAPP law (Code Civ. Proc., § 425.16). The trial court granted Sidley's special motion to strike in its entirety and awarded attorney fees under the statute. The trustee appeals from these orders. We affirm the anti-SLAPP order and the award of attorney fees.
Because their interests in this matter are aligned, from time to time, we refer to both Sidley and Sullivan as Sidley. All further section references are to the Code of Civil Procedure unless otherwise specified.
We set out the specific facts of Sidley's representation of Woodbridge in the Discussion section.
Shapiro, the central figure in the Ponzi scheme, owned and operated Woodbridge, which "marketed promissory notes and other offerings as low-risk, high yield investments backed by high-interest real-estate loans to third-party commercial borrowers."
Woodbridge primarily sold two types of products: (1) a 12-to-18-month promissory note called First Position Commercial Mortgages (Note or Notes); and (2) a five-year private-placement security that served as an investment into pooled Notes (Pooled Notes).
Woodbridge told investors the Notes were based on shortterm, hard money loans, between $1 million and $100 million, that were made to independent third-party property borrowers. According to Woodbridge these loans carried high rates of interest (approximately 11 to 15 percent) and were secured by a first lien on the property (with 60 to 70 percent loan-to-value ratios). At the end of the term, typically one year, the third-party borrowers were required to repay Woodbridge the principal amount of the loan. If they defaulted, Woodbridge could foreclose on the property to recover the amount owed. Woodbridge promised to pay Note investors five to eight percent annual interest, along with a return of the investor's principal at the end of the term. Woodbridge explained to investors that Woodbridge would profit from the spread between the interest it received on the mortgages and interest it owed to the investors.
From August 2012 through December 2017, Woodbridge sold Pooled Notes through Funds 1, 2, 3, 3A, and 4, and Bridge Loan Funds 1 and 2. Woodbridge allegedly limited each of the Pooled Note offerings to accredited investors with a $50,000 minimum subscription and provided for a five-year term with a six to ten percent aggregate annual return paid monthly and a two percent "accrued preferred dividend." At the end of the five-year term, Pooled Note holders would also be entitled to a distribution based on Woodbridge's profits.
"Bridge Loan Funds" were investments that were also secured by Pooled Notes.
In 2013, Woodbridge and Shapiro came under regulatory scrutiny. Ultimately, over two dozen state agencies and the Securities and Exchange Commission (SEC) launched investigations into Woodbridge's operations. Initially, state investigators appeared to be concerned with whether Notes were securities under federal and state law. Woodbridge took the position that Notes were not securities, and it did not need to comply with the rules regarding the sale of securities, including disclosure and registration requirements. Although Woodbridge conceded Pooled Notes were securities, it took the position that they were also exempt from the rules regarding the sale of securities because the underlying investments, the Notes, were not securities. Woodbridge retained law firms, including Sidley, to represent it in the various regulatory investigations.
It was later revealed that Woodbridge had been operating a massive Ponzi scheme. It made almost no loans to independent borrowers. Woodbridge instead made sham loans to affiliated entities that were secretly controlled by Shapiro. Woodbridge had minimal revenue other than money raised from new investors, which it used to pay false returns to earlier investors in a classic Ponzi scheme. In total, Woodbridge raised over $1.3 billion through its sale of Notes and Pooled Note offerings.
On December 4, 2017, Woodbridge's 278 affiliated companies entered into bankruptcy proceedings. On January 23, 2018, the bankruptcy court approved a settlement between Woodbridge, its investors, other creditors, and the SEC under which Woodbridge would be governed by a new board of directors. The bankruptcy court also approved creating a trust to assist investors in recovering their losses from third parties who contributed to the Ponzi scheme. Approximately 4,600 Woodbridge investors assigned their claims to the trust. In 2019, Shapiro pleaded guilty to wire fraud and tax evasion. He was sentenced to 25 years in federal prison.
On December 2, 2019, the trustee brought suit against a number of law firms and individual attorneys, including Sidley and Sullivan. The trustee alleged causes of action against Sidley and Sullivan for aiding and abetting securities fraud, aiding and abetting fraud, aiding and abetting breach of fiduciary duty, negligent misrepresentation, professional negligence, and aiding and abetting conversion.
In particular, the trustee alleged Sidley's and Sullivan's liability principally rested on drafting misleading letters of rescission to investors, revising Woodbridge's offering documents to include fraudulent or negligent statements regarding Woodbridge's operations, helping Woodbridge to create new product offerings to avoid regulatory scrutiny, and drafting memoranda concluding Notes were not securities to alleviate investor concerns. The trustee additionally sought to recover the alleged fraudulent transfer of assets from Woodbridge in the form of the legal fees Woodridge had paid to Sidley.
In response to the complaint, Sidley filed an anti-SLAPP motion. Sidley argued the legal services it provided to Woodbridge were protected activity because they related to ongoing regulatory investigations, and the trustee had not shown a sufficient probability of prevailing on the merits. The trial court granted Sidley's motion, awarded it attorney fees in a separate order, and the Trustee timely appealed both orders.
DISCUSSION
A. Standard of Review
"We review de novo the grant or denial of an anti-SLAPP motion. [Citation.] We exercise independent judgment in determining whether, based on our own review of the record, the challenged claims arise from protected activity. [Citations.] In addition to the pleadings, we may consider affidavits concerning the facts upon which liability is based. [Citations.] We do not, however, weigh the evidence, but accept plaintiff's submissions as true and consider only whether any contrary evidence from the defendant establishes its entitlement to prevail as a matter of law." (Park v. Board of Trustees of California State University (2017) 2 Cal.5th 1057, 1067 (Park); Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 820.)
B. Overview of Anti-SLAPP Statute
The anti-SLAPP statute was enacted to curtail lawsuits "brought primarily to chill the valid exercise of the constitutional rights of freedom of speech and petition ...." (§ 425.16, subd. (a).) "[A] special motion to strike under section 425.16 involves a two-step process. First, the moving defendant must make a prima facie showing 'that the act or acts of which the plaintiff complains were taken "in furtherance of the [defendant]'s right of petition or free speech under the United States or California Constitution in connection with a public issue," as defined in the statute.' [Citation.] If the defendant makes this initial showing of protected activity, the burden shifts to the plaintiff at the second step to establish a probability it will prevail on the claim. [Citation.] The plaintiff need only state and substantiate a legally sufficient claim. [Citation.] The plaintiff's evidence is accepted as true; the defendant's evidence is evaluated to determine if it defeats the plaintiff's showing as a matter of law. [Citation.] The procedure is meant to prevent abusive SLAPP suits, while allowing 'claims with the requisite minimal merit [to] proceed.'" (City of Montebello v. Vasquez (2016) 1 Cal.5th 409, 420.)
To satisfy the first prong, the moving defendant must establish that the cause of action arises from protected activity, as defined by section 425.16, subdivision (e). Subdivision (e) of section 425.16 describes four categories of protected speech and conduct, the first two of which are relevant to our analysis: "(1) any written or oral statement or writing made before a legislative, executive, or judicial proceeding, or any other official proceeding authorized by law, (2) any written or oral statement or writing made in connection with an issue under consideration or review by a legislative, executive, or judicial body, or any other official proceeding authorized by law." Courts deciding an anti-SLAPP motion must consider the claim's elements, the actions alleged to establish those elements, and whether those actions are protected. (Park, supra, 2 Cal.5th at p. 1063.)
To establish the second prong of the anti-SLAPP analysis, the plaintiff must state and substantiate a legally sufficient claim. (Briggs v. Eden Council for Hope & Opportunity (1999) 19 Cal.4th 1106, 1122-1123 (Briggs).) "Put another way, the plaintiff 'must demonstrate that the complaint is both legally sufficient and supported by a sufficient prima facie showing of facts to sustain a favorable judgment if the evidence submitted by the plaintiff is credited.'" (Wilson v. Parker, Covert & Chidester (2002) 28 Cal.4th 811, 821.) If the plaintiff makes this showing, the motion to strike under the anti-SLAPP statute must be denied. (Timothy W. v. Julie W. (2022) 85 Cal.App.5th 648, 657-658.)
A plaintiff cannot shield "particular allegations of protected activity, themselves sufficient to give rise to a claim for relief, from a motion to strike by intermingling them with unprotected acts." (Bonni v. St. Joseph Health System (2021) 11 Cal.5th 995, 1010 (Bonni).) Bonni directs courts to "analyze each claim for relief - each act or set of acts supplying a basis for relief, of which there may be several in a single pleaded cause of action - to determine whether the acts are protected and, if so, whether the claim they give rise to has the requisite degree of merit to survive the motion." (Ibid.) Allegations of protected activity that merely provide context, without supporting a claim for recovery, cannot be stricken under the anti-SLAPP statute. (Baral v. Schnitt (2016) 1 Cal.5th 376, 394.)
C. Step One: Sidley Must Establish the Trustee's Claims for Relief Arise from Protected Activity
1. The Trustee Has Forfeited His Argument the Trial Court Should Have Considered Woodbridge's Conduct in the Step One Analysis
At the outset, the parties dispute which act or set of acts supply the basis for the trustee's claims for relief. According to the trustee, we must look to Woodbridge's and Shapiro's tortious activities because the focus of the protected activity analysis in vicarious liability cases must be on the underlying torts - that is, the illegal conduct committed in furtherance of the Ponzi scheme.
Sidley contends the trustee has forfeited this argument because it was not raised below. The trustee denies the issue is forfeited because he "strenuously objected to the proposition that aiding or abetting a Ponzi scheme could be considered protected activity," citing to nine lines in the reporter's transcript. In those nine lines, the trustee argued that "it's offensive to notions of fair play and justice" that "creat[ing] a fund that raises $200 million" is protected activity. We do not interpret these few lines as preserving the issue of whose conduct - Sidley's or Woodbridge's - should be the focus of the court's anti-SLAPP analysis. The trustee has forfeited this argument for failure to raise it below.(Keener v. Jeld-Wen, Inc. (2009) 46 Cal.4th 247, 264.) We now turn to consider whether Sidley's conduct falls within the definition of protected activity provided by section 425.16, subdivision (e).
The trustee alternately urges us to exercise our discretion to consider this legal question. (Husman v. Toyota Motor Credit Corp. (2017) 12 Cal.App.5th 1168, 1187.) We decline to do so.
The Supreme Court has stated that an anti-SLAPP analysis generally begins with a consideration of "the elements of the challenged claim and what actions by the defendant supply those elements and consequently form the basis for liability." (Park, supra, 2 Cal.5th at p. 1063.) Aside from the dispute about whether the firststep analysis requires consideration of Woodbridge's tortious conduct, which we concluded has been forfeited, the parties do not dispute what actions by Sidley supply the elements of the challenged claims and form the basis for its liability. We therefore need not set out the elements for all eight causes of action against Sidley.
2. Sidley's Conduct Falls Within the Definition of Protected Activities
In 2014, Woodbridge retained Sidley to represent it in connection with an investigation by the Massachusetts Securities Division. Respondent Sullivan was Sidley's primary contact with Woodbridge. He was Chief of the Massachusetts Securities Division from 1990 to 1993 and had been a partner at Sidley since 2013. Sidley's representation of Woodbridge later expanded to investigations by state regulators in Texas, Arkansas, and California. On October 25, 2016, Sidley withdrew from its representation of Woodbridge.
The trustee asserts Sidley's liability for each of the eight causes of action against it are based on its activity: (1) preparing a September 2015 opinion memorandum that concluded Notes were not securities under federal law (the Texas memo); (2) drafting rescission letters in connection with the Massachusetts and Texas regulatory investigations; (3) reviewing and advising Woodbridge on its offering documents for Fund 3A; and (4) working with another law firm, Davis Graham &Stubbs LLP (Davis Graham) on a new product offering by Woodbridge. The trial court found each of these categories of activity to be protected.
a. Sidley's Work on the 2015 Texas Memorandum Was Protected Activity
In response to an emergency order by Texas regulators, Sidley drafted the Texas memo, which addressed whether Notes were securities under federal law. The trustee contends Sidley's work on the Texas memo was not protected activity under section 425.16, subdivision (e), because it was intended to be distributed to investors and financial advisors as well as Texas regulators. Sidley submitted evidence demonstrating the Texas memo was created solely for Texas regulators in response to an emergency cease and desist order. Sidley has met its burden to make a prima facie showing that the Texas memo was a writing "before" an official proceeding. (§ 425.16.)
(1) The Allegations and Evidence on the Texas Memo
In March 2015, Sidley agreed to represent Woodbridge before the Texas State Securities Board, which had initiated an inquiry into whether Notes were securities. On July 17, 2015, the Texas Securities Board issued an emergency cease and desist order against Woodbridge, concluding Notes were securities under Texas law, and Woodbridge had offered them for sale in violation of the Texas Securities Act.
In an attempt to have the emergency order withdrawn, Sidley attorneys, including Sullivan, met with the Texas Securities Board staff on October 21, 2015. At the meeting, they presented the Board's staff members with the Texas memo, which concluded Notes issued by Woodbridge Mortgage Investment Fund 3, LLC were not securities under federal law.
On its first page and prior to any analysis, the Texas memo expressly stated: "This memorandum was prepared solely for Woodbridge's benefit and may not be relied upon by any other person, firm or entity for any purpose or used, circulated, quoted or otherwise referred to for any purpose without our prior express written consent, except that it may be disclosed to: (a) the Texas Securities Board and its staff and (b) Woodbridge's professional advisors and auditors." (Italics added.) Sidley negotiated a settlement with Texas in March 2016.
(2) Analysis
The record reflects Sidley presented the Texas memo to the Texas regulators in an effort to convince the regulators to withdraw the emergency order. We have little trouble finding the memo was a communication before an official proceeding authorized by law. (§ 425.16, subd. (e).)
The trustee seizes on the inclusion of "Woodbridge's professional advisors and auditors" in the distribution advisement to argue the Texas memo was not solely intended for Texas regulators. The trustee also submits that the Sidley attorney who prepared the memorandum was a transactional attorney, and the memo discusses federal securities law, not Texas law, indicating it was intended to be distributed beyond Texas.
Even crediting all of the trustee's evidence that the Texas memo was prepared by a transactional lawyer and discusses federal law, the contrary evidence from Sidley has made a prima facie showing its work on the Texas memo was protected.
Sidley submitted uncontradicted evidence that it specifically told Woodbridge four months after the Texas memo was presented to the regulators and one month before it reached a settlement in Texas that Woodbridge could not share the memo with its customers. Sidley explained to Woodbridge in a February 9, 2016 email: "Sidley as a general practice does not issue legal opinions and in this specific situation expressly declined to do so. [Woodbridge] then asked us instead to prepare a piece of legal advocacy, arguing only those points that favored Woodbridge's position that the product is not a security, while staying silent on any arguments to contrary that may be raised by a regulator. The final work product was to be for the limited and exclusive use of providing that piece of written advocacy to the Texas Securities Board following the TSSB's entry of the Emergency Cease and Desist Order against the Firm. In providing that document to the TSSB, we expressly disclosed to them the limited nature of the document." Woodbridge's in-house counsel responded that he understood and that Woodbridge was "on the same page." The trustee submits no evidence to dispute the contemporaneous communications regarding Sidley's stated intent for the Texas memo and Woodbridge's understanding of it.
b. Sidley's Work on the Massachusetts and Texas Rescission Letters Was Protected Activity
As part of its settlement with Massachusetts and Texas, Woodbridge agreed to offer to rescind the investments made by those states' respective investors. The trustee contends Sidley's work on the Massachusetts and Texas rescission letters to Woodbridge investors was not protected activity to the extent the letters sought to convince investors to keep their money in Woodbridge investments. The trustee takes issue with the same language in both letters: "Woodbridge will continue to meet its obligations under the Loan Agreement(s), making monthly interest payments to you [the investor] for the full term of the agreement" if the investor chooses not to cancel the Note. Additionally, the trustee claims the letters failed to fully disclose the terms of the settlements. We are not persuaded.
(1) The Allegations and Evidence on the Rescission Letters
In December 2014, the Massachusetts Securities Division's Enforcement Section issued a subpoena to Woodbridge regarding its Notes. The Securities Division expressed doubt that a Note was not a security. If it was a security, Massachusetts believed the sale of Notes had been unlawful because they were not registered or sold pursuant to an exemption from registration under Massachusetts law. Woodbridge Structured Funding, LLC retained Sidley to address the Massachusetts inquiry.
In May 2015, Woodbridge and the Massachusetts Securities Division entered into a consent order under which Woodbridge would offer rescission to any Massachusetts investors. Sidley drafted the rescission offer letter and submitted it to the Massachusetts Securities Division for comment. The letter was then sent to Woodbridge's Massachusetts investors. The approved rescission letter contained the challenged language that Woodbridge would continue to meet its obligations.
As we have described, in March 2016, Sidley negotiated a settlement in Texas. Under that settlement, Woodbridge also agreed to offer rescission to Texas residents who had purchased Notes. A similarly-worded letter was sent to Texas investors containing the same assurance that Woodbridge would continue to meet its obligations. Woodbridge also agreed to provide Texas regulators with documentation relevant to the settlement, including who accepted or rejected the rescission offer.
(2) Analysis
After independent review of the allegations and evidence, we conclude Sidley has met its burden to demonstrate each letter qualifies as a "writing made before . . . any other official proceeding authorized by law" or a "writing made in connection with an issue under consideration or review [in an] official proceeding authorized by law" (§ 425.16, subd. (e)(1)-(2)).
The Massachusetts and Texas investigations were "official proceedings authorized by law." (See ComputerXpress, Inc. v. Jackson (2001) 93 Cal.App.4th 993, 1009.) "[A]ll communicative acts performed by attorneys as part of their representation of a client in a judicial proceeding or other petitioning context are per se protected as petitioning activity by the anti-SLAPP statute." (Contreras v. Dowling (2016) 5 Cal.App.5th 394, 409.) "[L]egal advice and settlement made in connection with litigation are within section 425.16, and may protect defendant attorneys from suits brought by third parties on any legal theory or cause of action 'arising from' those protected activities." (Thayer v. Kabateck Brown Kellner LLP (2012) 207 Cal.App.4th 141, 154; (Thayer), see also Suarez v. Trigg Laboratories, Inc. (2016) 3 Cal.App.5th 118 [The protection of the anti-SLAPP statute applies "even against allegations of fraudulent promises made during the settlement process"].)
Woodbridge's settlement of the Texas and Massachusetts official proceedings required offers of rescission be made to the residents of each State. The rescission letter, containing the challenged language, was submitted to and approved by the Massachusetts regulators in 2015. In 2016, Woodbridge entered into a similar settlement with Texas regulators, and Sidley drafted a letter containing the same language as in the previously approved Massachusetts letter. The inclusion of the challenged provision - that Woodbridge would continue to make payments to those individuals who declined the rescission offer - addressed an "issue under consideration" because both settlements contemplated that the offer could be declined. In both cases, Woodbridge agreed the regulatory agency would continue to exercise oversight regarding the rescission offer. Texas specifically required Woodbridge to provide it with information upon request about who accepted or declined the offer.
c. Sidley's Work on the Fund 3A Disclosures Was Protected Activity
The trustee contends that in the course of its representation of Woodbridge, Sidley advised Woodbridge regarding incomplete disclosures in its Fund 3A documents. According to the trustee, Sidley's advice was not protected activity because it applied to a product offering that was not the subject of an official inquiry. Again, Sidley has submitted evidence to the contrary that demonstrates its work was protected activity, meeting its burden to make a prima facie showing.
(1) The Allegations and Evidence on Fund 3A
On December 1, 2015, the Arkansas Securities Department issued a subpoena to Shapiro and Woodbridge Mortgage Investment Fund 3, LLC concerning the sale of Fund 3 Pooled Notes. Sidley agreed to represent Woodbridge in this investigation and negotiated a settlement whereby Woodbridge would offer full rescission to the one Arkansas investor in Fund 3.
During the course of its communications, the Arkansas regulators told Sidley they were concerned with the failure to disclose the Massachusetts and Texas administrative orders in the offering materials for Woodbridge's Fund 3 Pooled Notes. In reviewing the Fund 3 offering materials, a Sidley attorney noticed that Section 4.7 of the Subscription Agreement stated there was "no administrative proceeding or investigation pending [or] threatened" against Woodbridge, and the agreement did not disclose the Massachusetts and Texas proceedings.
On a February 19, 2016 call, the Arkansas regulator took the position that the Massachusetts and Texas investigations made the Section 4.7 representation in the Subscription Agreement misleading. Sidley noted that it was a moot point since there was only one Arkansas investor who purchased Fund 3 Pooled Notes, and, since the Fund 3 offering was closed, there would be no additional investors in that fund.
In a report to Woodbridge about the status of the Arkansas investigation, Sidley advised Woodbridge to update section 4.7 in future offerings: "Importantly, if there are other offers out there, especially any general solicitation offers, it is critical that you update those disclosures immediately. You should expect that AR will look for subsequent offerings made by Woodbridge to refute the argument that any possible harm caused by the omission in the WMIF III offering materials is moot now that the offering is closed."
On May 23, 2016, after the settlement, the Arkansas Securities Department advised Sidley and Woodbridge in a "letter of caution" that "[s]ince Woodbridge extended a rescission offer, which disclosed both [the Massachusetts and Texas] orders to the Arkansas investor, the Staff has decided not to pursue a formal enforcement action concerning this matter at this time." The letter stressed that Woodbridge had to disclose the Massachusetts and Texas settlements "in writing as part of any current or future securities offering .... If such disclosure is not made in writing to all Arkansas investors, then the Staff will be not as lenient. [Emphasis added.]"
(2) Analysis
The trustee contends Sidley's advice to update the section 4.7 disclosure for "other offers out there" was not protected activity because the Arkansas regulators only inquired about Fund 3 Pooled Notes and no others. According to the trustee, this advice regarding "other offers" not related to Fund 3 was thus not related to the Arkansas inquiry and did not address an issue under consideration by the Arkansas Securities Department. The record is to the contrary.
The Arkansas settlement was premised, in part, on full disclosure of the Massachusetts and Texas settlements in future Woodbridge offerings. Sidley allayed the Arkansas regulators' concern about the deficient section 4.7 disclosure by pointing out that Woodbridge had offered rescission to the lone Arkansas Fund 3 investor and, since Fund 3 was closed, the issue was moot because there would be no other Arkansas Fund 3 investors. Sidley conveyed to Woodbridge that its mootness argument, made in the course of settlement negotiations with Arkansas regulators, would be refuted if Woodbridge did not update the section 4.7 disclosure in subsequent offerings made to Arkansas residents. Arkansas regulators agreed: In the letter of caution, the regulators warned Woodbridge about providing adequate disclosures in "future securities offerings." Under these circumstances, we conclude Sidley's advice on the section 4.7 disclosure addressed an issue under consideration by the Arkansas investigators.
d. Sidley's Work on the New Product Was Protected Activity
The trustee also asserts Sidley's participation in creating a new product proposed by S. Lee Terry, Jr., a partner at Davis Graham, fell outside of the protected activity outlined in section 425.16. Sidley denied any involvement in creating the new product beyond receiving communications about it. Even accepting the trustee's assertion that Sidley substantially contributed to the creation of the new product, the uncontradicted evidence shows the new product was created as part of a settlement strategy for the Colorado investigation and was intended to extend to other state investigations, including the California regulatory proceedings for which Sidley was hired.
(1) The Allegations and Evidence on the New Product
On July 23, 2016, Terry sent an email to Woodbridge's inhouse counsel suggesting "Colorado can be an opportunity for us to reform the product and relieve the regulatory burden in all states." Over the next six to nine months, Terry worked on creating a new product that would purportedly conform to the regulatory landscape. By September 29, 2016, Woodbridge's inhouse counsel was working with Davis Graham and Sidley "in an effort to develop refinements to some of Woodbridge's financial products adequate to satisfy [] [the] regulators."
Contemporaneous communications and documents show it was primarily Terry who came up with the structure and marketing plan for the new product. On November 7, 2016, in a memorandum to Shapiro, Terry set out a goal for Woodbridge to have "one or more securities regulators sign off on the proposed new business and marketing plan as being compliant with securities laws and then leverage that acceptance into obtaining similar acceptances in other jurisdictions, including states that have previously investigated or sanctioned Woodbridge."
The new product was never presented to the Colorado investigators. The trustee claimed Woodbridge implemented the new product, evidenced by its use of a participation agreement drafted by Davis Graham as part of the extensive documentation for the new product, and its adoption of a payment plan suggested by Davis Graham for the new product.
(2) Analysis
The contemporaneous communications and documents demonstrate the strategy from the start was to use the new product as part of a regulatory settlement, beginning in Colorado and extending to California and other states. "[B]ecause settlement negotiations are regarded as an exercise of the right to petition, communications during such negotiations are regarded as having been made in connection with the underlying lawsuit for purposes of section 425.16, subdivision (e)(2). [Citation.] The protection of the anti-SLAPP statute applies 'even against allegations of fraudulent promises made during the settlement process.'" (Optional Capital, Inc. v. Akin Gump Strauss, Hauer &Feld LLP (2017) 18 Cal.App.5th 95, 113-114; see Thayer, supra, 207 Cal.App.4th at p. 154 ["[L]egal advice and settlement made in connection with litigation are within section 425.16, and may protect defendant attorneys from suits brought by third parties on any legal theory or cause of action 'arising from' those protected activities."].)
Sidley's alleged work on the new product was made in connection with an issue under review in an official proceeding and thus was protected activity.
We reject the trustee's characterization of the new product as transactional work prepared to avoid future regulatory scrutiny. In support of his theory, the trustee points to evidence that the new product was never presented to Colorado regulators, and that Woodbridge used the new product's participation agreement and payment plan in its other offerings. The trustee argues an inference may be drawn from this evidence that the new product was not intended to be part of a settlement proposal at all but was intended only as a product that would be sold and that would pass regulatory scrutiny. Even accepting as true the trustee's evidence that the new product was created to be sold, these facts do not override the contemporaneous communications showing the new product was created to be a part of a regulatory settlement.
That the new product was not shown to the Colorado regulators does not render it unprotected activity. Section 425.16, subdivisions (e), does not require that all communications occur before an official proceeding so long as they are in connection with an issue "under review" in an official proceeding. While the new product may never have been "before" the Colorado authorities, it nevertheless was in connection with an issue under review. Much like cases that hold the anti-SLAPP statute covers legal advice given to a client in connection with ongoing or potential litigation (see Briggs, supra, 19 Cal.4th at p. 1115 [counseling of client in anticipation of litigation was within the protection of section 425.16]; Contreras, supra, 5 Cal.App.5th at p. 411 ["giving advice to a client" in connection with litigation was "unquestionably" protected activity]), the advice here was sufficiently connected to ongoing regulatory review that it warrants the same protection.
Nor are we persuaded that Woodbridge's subsequent use of the new product's payment structure or offering documents renders the activity unprotected. Again, this evidence does not override the contemporaneous communications showing the new product was created to be a part of a regulatory settlement.
The case authorities cited by the trustee in support of the argument that transactional work in anticipation of litigation is not protected activity are distinguishable. In People ex rel. 20th Century Ins. Co. v. Building Permit Consultants, Inc. (2000) 86 Cal.App.4th 280, 284 (20th Century Ins. Co.), the plaintiffs alleged the defendants prepared false insurance reports of earthquake damage. The defendants moved to strike under the anti-SLAPP statute, asserting these insurance claims frequently led to litigation and the reports were often used as evidence. The trial court denied the defendant's anti-SLAPP motion and the appellate court affirmed, reasoning, "At the time defendants created and submitted their reports and claims, there was no 'issue under consideration' pending before any official proceeding. If we protect the reports and claims under section 425.16 because they eventually could be used in connection with an official proceeding, we would effectively be providing immunity for any kind of criminal fraud so long as the defrauding party was willing to take its cause to court." (Id. at p. 285.)
There was likewise no ongoing litigation or official proceeding in Peregrine Funding, Inc. v. Sheppard Mullin Richter &Hampton LLP (2005) 133 Cal.App.4th 658, 665, when a law firm drafted two "comfort letters" for its client that set forth "strategies to avoid federal and state registration requirements." The client collapsed in a Ponzi scheme. In a lawsuit against the law firm by investors of the client, the law firm essentially conceded the comfort letters were not protected activity under the section 425.16 because they predated any SEC investigation. The Peregrine court agreed, finding "plaintiffs' allegations concerning these letters described garden variety transactional malpractice, which typically does not trigger the protections of section 425.16." (Id. at p. 670.)
In contrast to 20th Century and Peregrine, the new product was created in response to an investigation that was already underway and was part of a documented strategy to resolve those proceedings.
D. Step Two: The Trustee Must Demonstrate a Probability of Prevailing
Having found that Sidley's conduct constituted protected activity, we now address step two of the anti-SLAPP analysis: whether the trustee" 'demonstrate[d] that the complaint is both legally sufficient and supported by a sufficient prima facie showing of facts to sustain a favorable judgment if the evidence submitted by the plaintiff is credited.'" (Wilson v. Parker, Covert & Chidester, supra, 28 Cal.4th at p. 821.) Sidley asserts the trustee's claims against it are barred by the litigation privilege.For his part, the trustee argues the litigation privilege does not apply to his claim because Sidley's communications were based on non-litigation, transactional work. We begin with an overview of the litigation privilege within the anti-SLAPP context.
Because we conclude the litigation privilege applies to foreclose the trustee's claims, we need not reach Sidley's alternative arguments that the trustee has failed to meet his second-prong burden in other ways.
In the 37th cause of action, the trustee alleged claims against Sidley for aiding and abetting securities fraud in violation of Corporations Code sections 25401 and 25504.1. As to this cause of action, the trustee contends the litigation privilege is inapplicable because it conflicts with the language and purpose of the Securities Fraud Statute. The trustee has forfeited this argument due to his admitted failure to raise it below. (Wisner v. Dignity Health (2022) 85 Cal.App.5th 35, 44-45.)
1. The Litigation Privilege and Anti-SLAPP
"The litigation privilege is . . . relevant to the second step in the anti-SLAPP analysis in that it may present a substantive defense a plaintiff must overcome to demonstrate a probability of prevailing." (Flatley v. Mauro (2006) 39 Cal.4th 299, 323.) "The litigation privilege, codified at Civil Code section 47, subdivision (b), provides that a 'publication or broadcast' made as part of a 'judicial proceeding' is privileged. This privilege is absolute in nature, applying 'to all publications, irrespective of their maliciousness.' [Citation.] 'The usual formulation is that the privilege applies to any communication (1) made in judicial or quasi-judicial proceedings; (2) by litigants or other participants authorized by law; (3) to achieve the objects of the litigation; and (4) that [has] some connection or logical relation to the action.' [Citation.] The privilege 'is not limited to statements made during a trial or other proceedings, but may extend to steps taken prior thereto, or afterwards.'" (Action Apartment Assn., Inc. v. City of Santa Monica (2007) 41 Cal.4th 1232, 1241.) The privilege also"' "exists to protect citizens from the threat of litigation for communications to government agencies whose function it is to investigate and remedy wrongdoing." '" (Wang v. Heck (2012) 203 Cal.App.4th 677, 684; Civ. Code, § 47, subd. (b) [privilege extends to "other official proceeding authorized by law"].)
"The litigation privilege is a statutory protection that has been interpreted expansively." (Dziubla v. Piazza (2020) 59 Cal.App.5th 140, 155.)" '[D]oubts are resolved in favor of the privilege.'" (Wang v. Heck (2012) 203 Cal.App.4th 677, 684.) The privilege grants" 'litigants and witnesses free access to the courts without fear of being harassed subsequently by derivative tort actions, to encourage open channels of communication and zealous advocacy, to promote complete and truthful testimony, to give finality to judgments, and to avoid unending litigation.'" (Jacob B. v. County of Shasta (2007) 40 Cal.4th 948, 955-956.)
2. The Litigation Privilege Bars Claims Against Sidley
We conclude the trustee has failed to overcome the litigation privilege in his claims against Sidley. The trustee alleged eight causes of action against Sidley based on four categories of communication: the Texas memo, the Massachusetts and Texas rescission letters, Fund 3A disclosures, and the proposed new product. We consider the "usual formulation" set out by Action Apartment Assn., Inc. v. City of Santa Monica, supra, 41 Cal.4th at page 1241 to determine whether the litigation privilege applies.
First, we have determined each of these categories of communication were either "before" a regulatory agency or "in connection with an issue under consideration or review by" a regulatory agency. "[C]ourts have applied the privilege to eliminate the threat of liability for communications made during all kinds of truth-seeking proceedings: judicial, quasi-judicial, legislative and other official proceedings." (Silberg v. Anderson (1990) 50 Cal.3d 205, 213 (Silberg); see Hansen v. California Department of Corrections &Rehabilitation (2008) 171 Cal.App.4th 1537, 1546 (Hansen) [litigation privilege applies to communications made to a "regulatory agency"]; King v. Borges (1972) 28 Cal.App.3d 27, 31-32 [investigation conducted by Real Estate Commissioner].) The "judicial or quasi-judicial proceedings" requirement under Civil Code section 47 is thus fulfilled.
Second, it is undisputed that all of the communications were made by attorneys representing one or more parties to the regulatory proceedings. (Kimmel v. Goland (1990) 51 Cal.3d 202, 209 [litigation privilege shielded litigants, attorneys, and witnesses from liability for "virtually all torts except malicious prosecution"]; Rusheen v. Cohen (2006) 37 Cal.4th 1048, 1063.)
Third and fourth, each category of communication was made to achieve the objects of the action and had some connection to the action. The Texas memo was drafted for and presented to Texas regulators in an effort to resolve a regulatory proceeding. The rescission letters, although sent to third parties, were a negotiated part of the resolution to the Texas and Massachusetts investigations. Sidley's communications regarding the Fund 3A disclosures related to the Arkansas authorities' "caution letter" to update the disclosures in "any current or future securities offerings" by Woodbridge.
"The Supreme Court has characterized the third prong of the [litigation privilege] test, the requirement that a communication be in furtherance of the objects of the litigation, as being 'simply part of' the fourth, the requirement that the communication be connected with, or have some logical relation to, the action." (Rothman v. Jackson (1996) 49 Cal.App.4th 1134, 1141, citing to Silberg, supra, 50 Cal.3d at pp. 219-220.)
As to the new product, Sidley's communications regarding it were also privileged because the communications were made to achieve a regulatory settlement with Colorado, California, and other states. The settlement had more than "some" connection or logical relation to the proceedings-it was the stated goal for how to resolve the regulatory proceedings against Woodbridge. "[The litigation privilege] applies to any publication required or permitted by law in the course of a judicial proceeding to achieve the objects of the litigation, even though the publication is made outside the courtroom and no function of the court or its officers is involved." (Silberg, supra, 50 Cal.3d at p. 212.)
For the same reasons as stated in our step-one protected-activity analysis, we reject the trustee's argument that the work on the new product was transactional and not litigation-related. We also find unpersuasive the trustee's reliance on Stacy & Witbeck v. City and County of San Francisco (1995) 36 Cal.App.4th 1074, 1090 (Stacy I) for the proposition that the litigation privilege does not apply when a communication is made for dual purposes. Relying on Stacy I, the trustee argues the new product communications had the dual purpose of selling the new product and using it to settle the Colorado investigation. Thus, the privilege did not apply to the new product communications to the extent they were for sales purposes. Stacy I does not reverse the well-established rule that "[f]or well over a century, communications with 'some relation' to judicial proceedings [or other official proceedings] have been absolutely immune from tort liability by the privilege codified as section 47(b)." (Rubin v. Green (1993) 4 Cal.4th 1187, 1193.)
In Stacy I, a contractor submitted a false claim after it had won a city public works contract. The contractor asserted the claim represented an effort to avoid litigation that could result from the city's multiple change-order requests. Litigation ensued; the contractor sued the city for breach of contract, and the city cross-complained, alleging a cause of action under the False Claims Act. The trial court granted summary adjudication in favor of the contractor on the city's False Claims Act cause of action, finding the claim was privileged because it was submitted in anticipation of litigation. (Stacy I, supra, 36 Cal.App.4th at p. 1080.)
Meanwhile, the Public Utilities Commission brought a separate administrative action against the contractor and enjoined it from bidding on future public works projects. (Stacy I, supra, 36 Cal.App.4th at pp. 1081-1082.) The contractor petitioned for injunctive relief, which was denied. The court found the litigation privilege did not bar the commission from bringing its administrative action as it had the civil action. The Stacy I court reasoned, "To rule that the litigation privilege would bar administrative actions by public entities when the publication was submitted to the entity for a nonlitigation purpose does not make sense. An agency should not be hamstrung from fulfilling its oversight duties simply because the target of the administrative action also contemplated litigation." (Id. at p. 1091.)
The Stacy I court recognized the Supreme Court had reached a different conclusion for civil cases: "We realize that in Rubin v. Green[, supra, 4 Cal.4th at p. 1187,] the Supreme Court resolved that the litigation privilege should also bar injunctive relief if based on the same communicative act that would bar a tort suit. However, that rule is still couched within the context of civil litigation. To expand the statutory immunity to bar the use of otherwise privileged communications in disciplinary and related administrative proceedings reaches too far." (Stacy I, supra, 36 Cal.App.4th at p. 1091.)
Unlike in Stacy I, the litigation privilege is not being used in this case to bar an administrative or disciplinary action filed by a state regulatory agency against Woodbridge. Instead, it serves as a defense to civil litigation in connection with an anti-SLAPP motion to prevent "the evils" of "retaliatory suits based on litigation-related communications." (Rubin v. Green, supra, 4 Cal.4th at p. 1198.)
In his reply brief, the trustee, for the first time, cites to Stacy & Witbeck, Inc. v. City and County of San Francisco (1996) 47 Cal.App.4th 1 (Stacy II) for the proposition that the "dual purpose rule" extends to civil litigation. Stacy II does not help the trustee.
Stacy II stemmed from the appeal of the summary adjudication ruling in favor of the contractor as to the city's False Claims Act (FCA) cause of action. (Stacy II, supra, 47 Cal.App.4th at p. 6.) The Stacy II court held that the FCA cause of action was not barred by the litigation privilege even though the action was based on a claim for payment under a public works project that was filed in anticipation of litigation. The court observed that the claim was required under the parties' contract, and thus "had a life of its own wholly apart from any judicial action," even though it "also served a litigation purpose." (Id. at pp. 6, 7.)
The court explained, "The paper trail of contractual performance and course of dealing between parties under a contract cannot be immunized from use in later judicial proceedings just because that paper trail is also a publication that serves a litigation purpose. If that same paper trail amounts to wrongful performance or conduct under the contract, it escapes section 47(b) . The litigation privilege encompasses only the communicative act; it does not privilege tortious courses of conduct. [Citations.] [¶] . . . The litigation privilege was never meant to spin out from judicial action a party's performance and course of conduct under a contract." (Stacy II, supra, 47 Cal.App.4th at pp. 8-9, emphasis added.)
Although Stacy II acknowledged there was a dual purpose behind the false claim to the city, the court did not create a new "dual purpose" exception to the litigation privilege. Stacy II instead rested on existing law that differentiates between a publication or statement, which is privileged, and wrongful conduct under a contract, which is not.
We also reject the trustee's reliance on Cole v. Patricia A. Meyer & Assocs., APC (2012) 206 Cal.App.4th 1095, 1121 for the dual-purpose theory. Cole merely stands for the long-established rule that "the litigation privilege does not apply to the republication of privileged statements to nonparticipants in the action." (Ibid.) Here, the trustee does not allege Sidley republished its statements regarding the new product.
E. Attorney Fees Award
"Subdivision (c) of Code of Civil Procedure section 425.16 provides that 'a prevailing defendant on a special motion to strike shall be entitled to recover his or her attorney's fees and costs.'" (Cabral v. Martins (2009) 177 Cal.App.4th 471, 490.) "The language of the anti-SLAPP statute is mandatory; it requires a fee award to a defendant who brings a successful motion to strike. Accordingly, our Supreme Court has held that under this provision, 'any SLAPP defendant who brings a successful motion to strike is entitled to mandatory attorney fees.'" (Ibid.) At the same time, "a defendant who brings a successful special motion to strike is entitled only to reasonable attorney fees, and not necessarily to the entire amount requested." (Id. at p. 491.)
The trustee and Sidley agree that attorney fees are required pursuant to section 425.16. The trustee does not challenge the amount of the fee award. Rather, his sole argument on the attorney fees awarded to Sidley is that the trial court erred in granting the anti-SLAPP motion. Because we affirm the order granting the anti-SLAPP motion, we also affirm the award of attorney fees.
DISPOSITION
We affirm the orders granting Sidley and Sullivan's special motion to strike and awarding attorney fees under the anti-SLAPP statute. Sidley and Sullivan shall recover their costs on appeal.
This opinion adjudicates the appeal only as to Sidley and Sullivan and no other respondents. The Clerk of this court is directed to issue a partial remittitur as to Sidley and Sullivan under California Rules of Court, rule 8.272.
The appeal remains pending as to respondents Rome McGuigan, P.C. and Brian Courtney. The appeal as to those parties is subject to this court's order to show cause dated December 29, 2023. Under the terms of the order to show cause, this court will dismiss the appeal as to respondents Rome McGuigan, P.C. and Brian Courtney on February 6, 2024, unless a party shows cause on or before February 6, 2024, why the appeal as to those respondents should not be dismissed.
I CONCUR:
ASHMANN-GERST, J. [*]
BAKER, J, Concurring
I join the opinion for the court with the exception of its discussion of whether Michael Goldberg, suing as trustee of the Woodbridge Liquidation Trust (the Trustee), has demonstrated a probability of prevailing on the claims arising from what the parties refer to as the "new product" work for Woodbridge. On that issue, I have some doubts about the correctness of the majority's litigation privilege analysis, but I conclude I need not resolve the question of whether the privilege applies. The Trustee's argument for reversal falls short for a more fundamental reason.
At the second step of anti-SLAPP analysis, the Trustee has the burden to establish a probability of success on his claims arising from the "new product" work-and this burden can be carried only by way of "competent admissible evidence." (See, e.g., Monster Energy Co. v. Schechter (2019) 7 Cal.5th 781, 788.) The Trustee has not met that burden on this record. Though there is enough to conclude the prima facie proof of protected activity threshold at stage one of anti-SLAPP inquiry has been cleared (see generally Wilson v. Cable News Network, Inc. (2019) 7 Cal.5th 871, 888), there is insufficient competent, admissible evidence in the record to establish the Trustee has a probability of prevailing on his claims arising from what (perhaps the better word here is whatever) Sidley Austin did in connection with Woodbridge's "new product" offering. Because the Trustee did not carry his evidentiary burden, I agree we must affirm the trial court's anti-SLAPP ruling.
[*]Associate Justice of the Court of Appeal, Second Appellate District, Division Two, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.