Opinion
NOT TO BE PUBLISHED
Super. Ct. No. 02AS07030
RAYE, J.This case involves the application of section 128.7 of the Code of Civil Procedure, a section allowing sanctions for filing frivolous actions. The trial court imposed monetary sanctions against plaintiff Hi-Voltage Wire Works, Inc. (Hi-Voltage) and its lawyer for naming defendant Ed Herman in its causes of action for interference with contractual relations and prospective economic advantage and dismissed Herman from the complaint because the allegations against him lacked evidentiary support. We conclude the trial court abused its discretion by ignoring reasonable inferences that could be drawn from the evidence suggesting that the inclusion of Herman was short of frivolous. We reverse.
All further statutory references are to the Code of Civil Procedure.
THE LAW
Herman moved for monetary sanctions and dismissal pursuant to section 128.7. Subdivision (b) of that section provides that:
“By . . . filing . . . a pleading . . ., an attorney or unrepresented party is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, all of the following conditions are met:
“(1) It is not being presented primarily for an improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.
“(2) The claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law.
“(3) The allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery.”
BACKGROUND
The original complaint in this action was filed on November 15, 2002. Herman was added as a party defendant in an amended complaint filed on January 7, 2004. Subsequent amendments were thereafter filed.
In each iteration of its complaint, Hi-Voltage asserted that defendants stole its company assets, property, employees, and customers; used them to create a new company, Elite Power, Inc.; and then misled customers, vendors, and unions by representing that Elite Power, Inc., was a mere extension of Hi-Voltage. Ultimately, defendants’ malfeasance led to Hi-Voltage’s demise. Defendant Walter Zacharias had been the president of Hi-Voltage from September 1999 until he resigned in November 2001. Herman was Zacharias’s good friend and a vendor to Hi-Voltage for many years.
Following the filing of the fourth amended complaint on February 14, 2005, Herman filed his first motion for sanctions, based on assertions that (1) the complaint was filed to harass or cause unnecessary delay or needlessly increase the cost of litigation, (2) the legal contentions were not warranted by existing law or nonfrivolous argument to change existing law, and (3) the complaint was without factual support. The court denied the request, observing: “As for lack of evidence, defendant concedes that he was aware of some contracts. Further, a pleader must be permitted significant leeway with respect to a defendant’s knowledge and intent.” Herman thereafter conducted extensive discovery. In June 2005 he served special interrogatories and a request for production of documents to determine what evidentiary support Hi-Voltage had for its causes of action against him. Hi-Voltage produced over 7,000 pages in response. Hi-Voltage responded to the interrogatories with references to the allegations set forth in the fourth amended complaint and the admonition that “[d]iscovery in this matter is in its infancy.”
In November 2005 Herman filed a second notice of motion and motion for sanctions pursuant to section 128.7. Whereas the prior motion was based on Hi-Voltage’s failure to obtain leave of court to amend the complaint as well as on the lack of legal support for the allegations, the second motion was based exclusively on the lack of evidentiary support for Hi-Voltage’s factual allegations. The first motion requested monetary sanctions of $5,335.15 as a result of Hi-Voltage and Eidson’s filing the fourth amended complaint, but the second motion requested $47,120.38 in sanctions because by then Herman claimed that Hi-Voltage lacked evidentiary support for its allegations from the inception of the lawsuit, and thus he argued he was entitled to all the fees he had spent to defend a vacuous lawsuit.
In support of his November sanctions motion, Herman summarized the specific contention interrogatories he asked and the answers Hi-Voltage provided as to four essential elements of the outstanding causes of action: 1) knowledge of the existence of the contracts/economic relationships at the time of his alleged interference, 2) intent to interfere with Hi-Voltage’s contracts/economic relationships with third parties, 3) actual interference with Hi-Voltage’s contracts/economic relationships with third parties, and 4) duty of care and special relationship with Hi-Voltage. He insisted that Hi-Voltage’s responses to both the interrogatories as well as the responses to the request for documents were devoid of any evidentiary support for each of the four requisite elements. Since, in his view, Hi-Voltage lacked the evidentiary support to justify filing the complaint against him, Herman urged the court to impose monetary sanctions and to dismiss the action against him.
Hi-Voltage asserts that Herman’s deposition testimony provides ample evidentiary support to preclude section 128.7 sanctions. He testified he had been in the electrical supply business for 17 years and knew all the electrical contractors in the area. As a vendor, he supplied products to electrical contractors such as Hi-Voltage. He prided himself on building good business relationships with his vendees and earned their loyalty by delivering electrical supplies quickly and reliably.
By 2001 Herman knew that Hi-Voltage was in financial trouble. Its accounting department disappeared, it stopped paying its bills, management would not return his calls, and he believed the company was headed toward bankruptcy. He also knew of at least three contracts Hi-Voltage had with third parties.
Herman’s good friend Zacharias told him that he and Steve Zinnel were starting up a new company, Elite Power. In October 2001 Herman loaned Zacharias $200,000 to capitalize Elite Power. They did not enter into a written agreement, nor did they agree on any terms of repayment. He advanced an additional $300,000 in $50,000 increments with no idea how the business was doing, without any payments on the outstanding debt, and without any terms of repayment. He stopped doing business with Hi-Voltage and began doing business with Elite Power.
The trial court granted Herman’s second request for monetary sanctions and dismissed him from the action. The court ruled: “Plaintiff alleges two causes of action against this defendant: intentional interference with contractual relations (12th) and intentional/negligent interference with prospective economic advantage (13th). In order to prevail on these causes of action, plaintiff must prove the defendant had knowledge, at the time he allegedly interfered, of an existing contract (12th) or of an existing economic relationship (13th). Further, intentional interference with contract requires, of course, intent. Interference with prospective economic advantage requires wrongful conduct in addition to the interference. In response to defendant’s special interrogatories, which asked plaintiff to state facts supporting its contention that defendant knew of contracts or relationships, plaintiff referenced the complaint’s allegations. None of the allegations, however, address the issue of defendant’s knowledge. Further, in response to this motion, plaintiff must present evidence; reliance on the pleadings alone is insufficient. Plaintiff attempts to meet that burden by citing testimony from defendant’s deposition. Of defendant’s citations, however, only one, 31:10-32:5, is relevant to the issue of knowledge. That testimony, however, only demonstrates that defendant knew plaintiff had three contracts. The testimony does not establish, however, when plaintiff knew about the contracts or that those contracts were interfered with. Further, the testimony does not establish intent or wrongful conduct. Indeed, not one of the other citations demonstrates wrongful conduct by defendant.”
The trial court imposed a monetary sanction of $6,835.05 against Hi-Voltage and its lawyer and dismissed Herman from the action. Hi-Voltage appeals. Herman cross-appeals, claiming he was entitled to recover all the attorney fees he incurred in defending against the lawsuit, an amount in excess of $40,000.
DISCUSSION
The dispositive issue in the present appeal is whether the trial court abused its discretion by invoking the punitive provisions of section 128.7 to dismiss Herman and to impose monetary sanctions on Hi-Voltage and its lawyer. (In re Keegan Management Co. (9th Cir. 1996) 78 F.3d 431, 433-434.) We decide this issue against the background of well-established and fundamental principles allowing liberality in pleading as well as the opportunity to develop the facts through discovery, particularly those within the knowledge and possession of the opposing party, and within the framework of section 128.7, which imposes certain obligations on attorneys and permits a court to impose sanctions for their violation. (Dillard v. County of Kern (1943) 23 Cal.2d 271, 279; Mack v. Soung (2000) 80 Cal.App.4th 966, 972; Dieckmann v. Superior Court (1985) 175 Cal.App.3d 345, 352.)
Under subdivision (b) of section 128.7, an attorney who files or later advocates a pleading is held to certify that he or she conducted a reasonable inquiry and that to the best of the attorney’s knowledge, information, and belief the allegations and other factual contentions have evidentiary support or are likely to have evidentiary support after reasonable opportunity for discovery. The conduct warranting sanction is not the filing or advocacy of a complaint that is ultimately determined to lack evidentiary support, but doing so without a reasonable inquiry and basis to believe evidence exists to support the allegations of the complaint.
Like its federal counterpart, rule 11 of the Federal Rules of Civil Procedure (28 U.S.C.), Code of Civil Procedure section 128.7 should be utilized only in “the rare and exceptional case where the action is clearly frivolous, legally unreasonable or without legal foundation, or brought for an improper purpose.” (Operating Engineers Pension Trust v. A-C Co. (9th Cir. 1988) 859 F.2d 1336, 1344; see Hart v. Avetoom (2002) 95 Cal.App.4th 410, 413 (Hart).) Although the word “frivolous” does not appear in the section itself, courts have used it as shorthand “to denote a filing that is both baseless and made without a reasonable and competent inquiry.” (Townsend v. Holman Consulting Corp. (9th Cir. 1990) 914 F.2d 1136, 1140; see, e.g., In re Keegan Management Co., supra, 78 F.3d at p. 434.)
Section 128.7 is “‘modeled, almost word for word, on rule 11 of the Federal Rules of Civil Procedure (28 U.S.C.). In examining the provisions of section 128.7, California courts may look to federal decisions interpreting the federal rule.’ [Citations.]” (Hart, supra, 95 Cal.App.4th at p. 413.)
It is true, as Herman suggests, that there are few hard facts to implicate him in any wrongdoing. But Hi-Voltage’s evidentiary burden to escape sanctions under section 128.7 is light. It need not amass even enough evidence to create a triable issue of fact as would be required if Herman had brought a motion for summary judgment. Rather, Hi-Voltage must produce a sufficient evidentiary showing to demonstrate that it made a reasonable inquiry into the facts and entertained a good faith belief in the merits of the claim. We believe that Hi-Voltage sustained its burden.
Herman was not named in the original complaint. After Hi-Voltage’s then-attorneys discovered bank documents that indicated Herman had capitalized Elite Power, they deposed him. Based on his testimony, they named him as a Doe defendant. That testimony, as described above, included the suspicious disclosure that Herman knew Hi-Voltage was struggling financially, knew of some of its contracts, and knew that his good friend was starting a new company that would presumably compete for the same contracts. Yet he loaned his friend a total of $500,000 without any guarantees or terms of payment. Thus, at the early stage of drafting an amended complaint, reasonable attorneys could infer that Herman bore some responsibility for Hi-Voltage’s business demise.
Yet the trial court concluded that Hi-Voltage’s new lawyer should have expedited discovery while engaged in a battle of demurrers and should have been able to offer a more substantial evidentiary showing in response to the motion for sanctions. We disagree and believe the trial court’s ruling misconstrues the scope of section 128.7 and sets a dangerous precedent for lawyers and their clients. (Guillemin v. Stein (2002) 104 Cal.App.4th 156, 167-168.) There is nothing in the record to support a finding that Herman was named in bad faith. Nor do we find that his inclusion in the lawsuit was baseless. Indeed, his relationship with Hi-Voltage’s president, his role as a long-time vendor, and his expertise in the field all give rise to the reasonable inference that he knew his financial involvement would be at Hi-Voltage’s expense and thereby deprive it of contractual commitments and economic opportunities. Whether Hi-Voltage is ultimately able to prove the causes of action at trial remains to be seen. If, as Herman insists, Hi-Voltage is unable to marshal evidence to support its allegations, summary judgment provides an appropriate remedy. We simply conclude that naming Herman as a Doe defendant, based on the bank records and his deposition testimony, was not frivolous, was not filed for an improper purpose, and did not justify the imposition of any type of sanction under section 128.7.
Herman analogizes his role to that of a bank, insisting that a bank does not engage in tortious conduct by loaning money to a start-up company even if, as here, the start-up drives its competitor out of business. His analogy fails. He is not a disinterested financial institution, but a close personal friend of the former president of the company from which his friend assertedly pillaged resources and interfered with the performance of its existing contracts and prospective economic opportunities. He did not execute loan documents as a bank would demand, but advanced his friend a half-million dollars without any terms of repayment. He did not investigate, as a bank surely would have, how the new company was performing before doubling the amount of the loan. Thus, we reject Herman’s naked assertion that his role as a mere lender shields him from tort liability.
DISPOSITION
The judgment is reversed, and the cross-appeal is dismissed as moot. The motions for sanctions filed by Herman and Eidson are denied. Herman shall recover costs on appeal.
We concur: SCOTLAND, P.J., ROBIE, J.