Opinion
A148963
10-31-2018
VLADIMIR KATS et al., Cross-complainants and Appellants, v. LODGEPOLE INVESTMENTS et al., Cross-defendants and Respondents.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Contra Costa County Super. Ct. No. MSC14-01979)
Vladimir and Rozaliya Kats and their counsel Nabil Abu-Assal and his firm Cypress LLP (collectively, appellants) appeal a sanctions order entered pursuant to Code of Civil Procedure section 128.7 striking their cross-complaint and ordering the attorneys to pay $750 to the court and $7,500 to Lodgepole Investments, LLC and Lodgepole Fund No. 1, LLC (collectively, Lodgepole). We find no merit in appellants' procedural or substantive contentions and shall affirm the order.
All statutory references are to the Code of Civil Procedure unless otherwise noted.
Background
Lodgepole's first amended complaint seeks recovery under theories of restitution and unjust enrichment of amounts allegedly embezzled by the Katses' son, Gennady Barsky, used by Barsky to pay mortgage and credit card debt totaling approximately $938,000 owed by the Katses. Among their defenses, the Katses contend that portions of their debt was incurred to pay obligations of Lodgepole so that the payment of their debt with Lodgepole's funds gave rise to no unjust enrichment. The two Lodgepole entities, both limited liability companies, had been formed and were co-managed by Barsky and Margaret Taylor. The Katses filed the cross-complaint at issue against Taylor and 45 other investors in one or both of the Lodgepole entities, seeking equitable indemnity from them to the extent they (the Katses) are held liable to Lodgepole.
The record also reflects that Lodgepole asserted a claim against Barsky that was resolved in a settlement reached in bankruptcy proceedings involving Barsky and a company owned and controlled by him, in which Lodgepole recovered a portion of the amount claimed to have been misappropriated. Criminal proceedings are pending against Barsky.
The cross-complaint alleged that Taylor knew or should have known that Barsky "was using the credit cards that were in his parents' (the Katses) names to pay for the Lodgepole entities' business expenses," that Taylor's knowledge "is imputed to each and every cross-defendant," that "[t]o the extent any charges on the credit cards that were in the Katses' names were for the benefit of the Lodgepole entities, the Katses' obligation to make payments on those charges were secondary to that of each and every member of the Lodgepole Entities with ownership interests. The right to indemnity flows from payment of a joint legal obligation on another's behalf," and that "if the Katses are compelled to pay any money to the Lodgepole Entities for payments made on the credit cards that were in the Katses' names, the Katses are entitled to recoup that amount, or any portion thereof, according to proof, from the cross-defendants."
The cross-complaint also contained allegations that Taylor and her sister had travelled to Paris "using the reward points that Mr. Barsky had accumulated on the credit cards that were in the Katses' names," and suggesting that Taylor had made sexual advances to Barsky that Barsky had rejected.
Shortly after learning that the cross-complaint had been filed, Lodgepole sought a restraining order to enjoin appellants from serving it on the cross-defendants, arguing that the pleading was frivolous and would cause unnecessary burden and expense to the Lodgepole investors and embarrassment to Lodgepole and Taylor. Lodgepole also advised appellants of the intention to file a motion for sanctions if the cross-complaint were not withdrawn. At an ex parte hearing on April 19, 2016, the court denied the application for a restraining order but set a briefing schedule on the anticipated sanctions motion, and appellants waived their right to the 21-day opportunity to withdraw the cross-complaint otherwise required by section 128.7 before the motion could be filed. Appellants did not withdraw the cross-complaint and following the filing of the sanctions motion and briefing, on June 2 the court issued an extensive tentative ruling. At the postponed hearing on June 10, the court adopted the tentative ruling, granting the motion, striking the cross-complaint and imposing monetary sanctions. The court rejected appellants' contention that Lodgepole lacked standing to bring the motion because Lodgepole is not named as a cross-defendant, and found "that the legal contentions in the cross-complaint are not warranted by existing law or by a nonfrivolous argument for an extension of the law, that the allegations that there is a basis on which to require equitable indemnity from [Lodgepole's] members do not have evidentiary support and are not likely to have evidentiary support, and that the assertion of the claims in the cross-complaint is objectively unreasonable and goes beyond permissible zealous advocacy."
The order is appealable. (§ 904.1, subd. (a)(12).)
Discussion
Appellants contend that the "primary issue on appeal" is "whether sanctions under section 128.7 were available when Lodgepole did not comply with the strict procedural requirement of section 128.7's safe harbor provision in subdivision (c)(1) that a motion for sanctions 'shall be made separately from other motions or requests.' " It does not appear that appellants made this argument to the trial court but in any event the argument lacks merit. While Lodgepole might have made a motion to strike the cross-complaint under section 435, a pleading may also be stricken and a claim dismissed as a sanction for the violation of section 128.7, subdivision (a). (Peake v. Underwood (2014) 227 Cal.App.4th 428.) That is what Lodgepole requested and the court granted. No procedural requirement was violated.
Nor, as the trial court held, was Lodgepole restricted from bringing a motion under section 128.7 because it was not named as a cross-defendant in the cross-complaint. As the plaintiff in the action, Lodgepole had a very real interest in preventing the defendants from delaying the proceedings and inconveniencing the Lodgepole investors with the prosecution of a frivolous cross-complaint.
And, finally, the cross-complaint was indeed frivolous. Section 128.7, subdivision (b) provides as follows: By filing a pleading an attorney is certifying that "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. [¶] (4) The denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief." Sanctions are authorized if these conditions are not met. (§ 128.7, subd. (c).)
As the trial court held, there was no objective or good faith basis for the cross-complaint. Any ground for denying the relief requested in the complaint could properly be raised by an answer to the complaint, and provides no conceivable basis for obtaining indemnity from the investors in the limited liability companies. The investors are in no sense principals of the companies or their employees subject to liability under principles of respondeat superior. (Corp. Code, § 17703.04, subd. (a); see 9 Witkin, Summary of Cal. Law (11th ed. 2017) Partnership, § 157, p. 727.) The members of a limited liability company may incur personal liability if they participate in tortious conduct (Corp. Code, § 17703.04, subd. (c); see 9 Witkin, supra, § 157, pp. 728-729), but there is no suggestion that any of the investors participated in any way in Barsky's embezzlement. To whatever extent, if any, obligations on the Katses' credit cards were assumed for the benefit of Lodgepole, Lodgepole's right to recover may be reduced, but that fact will provide no basis for obtaining equitable indemnity from Lodgepole's members.
The trial court correctly added, "even if the cross-complaint alleged some basis to conclude that Taylor's knowledge of Barsky's activities was imputed to the members, it fails to allege any factual basis to impose a duty on the members to act on any such imputed knowledge."
Appellants acknowledge that "members of a limited liability company are generally not liable for the debts, obligations, or other liabilities of the limited liability company" but they argue that the attorneys "relied on Corporations Code section 17704.03, subdivision (d), which provides that '[n]othing in this section shall be construed to affect the rights of third-party creditors of the limited liability company to seek equitable remedies.' " That section, however, addresses the right of creditors of a limited liability company to enforce the obligation of its members to make contributions to the company. Appellants are not creditors of Lodgepole, and that provision provides no basis on which they could reasonably rely in filing their cross-complaint.
In short, we agree with the trial court that "[t]he filing of the cross-complaint was not objectively reasonable. This is evident on a number of grounds, including that [appellants] have not cited a single case in which an alleged tortfeasor was permitted, or even attempted, to obtain indemnity from the shareholders of the very entity that the tortfeasor is alleged to have harmed."
Platt v. Coldwell Banker Residential Real Estate Services (1990) 217 Cal.App.3d 1439, emphasized by counsel at oral argument, provides no support for appellants' position. The court there reaffirmed that there is no basis for an equitable indemnity claim against parties who are not joint tortfeasors when equivalent relief is available by an affirmative defense. Moreover, here the trial court expressly stated that its order did not "preclude defendants from filing a motion for leave to amend pursuant to [section] 473 if defendants in good faith can allege a theory to seek equitable indemnity from some specific member on some theory based upon active participation by that member in tortious conduct." Appellants made no such motion.
Disposition
The order is affirmed.
/s/_________
Pollak, J. We concur: /s/_________
Siggins, P.J. /s/_________
Ross, J.
Judge of the San Francisco Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution. --------