Opinion
B152611.
7-1-2003
DONALD I. METCALF, et al., Plaintiffs and Appellants, v. NASH & EDGERTON, et al., Defendants and Respondents.
James A. Shalvoy for Plaintiffs and Appellants. Nash & Edgerton, Samuel Y. Edgerton, III, Shelley Nash and David Maurer; Isaacs, Clouse & Crose and John A. Crose, Jr., for Defendants and Respondents.
BACKGROUND
This case is the second action by appellants, Donald I. Metcalf, Janet Metcalf and Production Photo/Graphics, Inc., brought to prosecute a claim for conspiracy to defraud arising out of a repurchase transaction dated May 13, 1998. The prior action is Los Angeles Superior Court case No. YC032614, which was filed by the law firm of Nash & Edgerton on behalf of Christer Wernerdal and Adbox, Inc. against appellants based upon claims arising from the repurchase transaction. We will refer to the prior action as the Wernerdal action. We generally summarize the pertinent portions of the Wernerdal action for later reference.
We judicially notice the unpublished opinion from Division Seven involving the Wernerdal action, No. B145735, filed May 30, 2002. It is from this opinion that the following facts are summarized.
Before May 13, 1998, Adbox, Inc. was owned 50 percent by Christer Wernerdal and 50 percent by the Metcalfs. On that date, Wernerdal agreed that Adbox would repurchase the 50 percent ownership of the Metcalfs under certain terms which included interest payments to the Metcalfs. Wernerdal agreed to personally guarantee the promissory note. Wernerdal was represented in this transaction by attorneys with the firm of Nash & Edgerton, one of the respondents to this appeal.
Shortly after the repurchase agreement was finalized, the Wernerdal action was filed. One of the claims asserted by Wernerdal and Adbox was that the an interest rate called out in the terms of the repurchase agreement was usurious. Based on this claim, Wernerdal and Adbox sought a declaration that they owed no further payments to the Metcalfs for the repurchase.
Appellants cross-complained against Wernerdal and Adbox alleging, among others, causes of action for fraud and for conspiracy to defraud in connection with the repurchase agreement. The fraud related to the claim of usury asserted by Wernerdal and Adbox. It was alleged that Wernerdal never had any intent of paying appellants when he entered into the repurchase transaction and that he and his attorneys concocted the usury theory before the repurchase transaction was concluded so that they could later file suit and seek to avoid the payments called out in the transaction.
The Wernerdal action went to trial on the various causes of action alleged in the complaint and the cross-complaint. The trial court concluded that there had been a novation of the terms of the original repurchase transaction which voided the original agreement upon which the claim of usury was based. It awarded contract damages to appellants on their cross-complaint against Wernerdal and Adbox for repurchase of the Adbox shares. But it concluded that appellants had failed to prove their claims of fraud and conspiracy to defraud alleged in the cross— complaint and entered judgment in favor of Wernerdal and Adbox on those claims.
Except for the amount of damages awarded to appellants based on the contract, the Court of Appeal affirmed the trial court. In connection with the causes of action for fraud and conspiracy to defraud, the court wrote:
"Defendants contend Wernerdal misrepresented and omitted to disclose the fact that he did not intend to pay the amounts he agreed to pay under the Redemption Agreement and the Consulting Agreement when he caused the purchase of Adbox stock. They also contend Wernerdal conspired with his attorneys to commit this fraud. The trial court concluded the evidence is so evenly balanced that the Court is unable to say that the evidence on either side of the fraud issue preponderates, and therefore the Court must find in favor of [plaintiffs] on all fraud and conspiracy causes of action in the cross-complaint. Plaintiffs argue the trial courts finding is supported by substantial evidence.
"As the trial court correctly noted in its Statement of Decision, a party must prove fraud by a preponderance of the evidence. We agree with defendants statement a party must often use circumstantial evidence to establish fraudulent intent. We do not agree, however, with defendants assertion plaintiffs subsequent failure to perform under one or more of the agreements warrants the inference plaintiffs did not intend to perform at the time they signed the agreements. Something more than nonperformance is required to prove [plaintiffs] intent not to perform [the] promise. It is this something more defendants failed to prove by a preponderance of the evidence.
"Defendants argue Wernerdal and his attorneys formulated their plan to sue defendants for usury before the closing. Wernerdal testified he did not conduct any investigation before he signed the Consulting Agreement concerning potential usury under the Loan Commitment. Nash testified he conducted research on usury before the closing, but the research related to the Corporation Note and not the Loan Commitment. At a May 11, 1998 meeting between the parties, Nash told defendants counsel the 11.5% interest rate on the Corporation Note was usurious. Defendants counsel agreed to reduce the interest rate to 10%. The record does not reflect any discussion at the May 11 meeting about usury related to the Loan Commitment. According to Nash, neither he nor his daughter discussed usury under the Loan Commitment with Wernerdal (or each other) before the closing.
"Nash testified he may have considered a usury lawsuit later on May 14, 1998, after the closing, but he did not discuss it with Wernerdal at that time. According to Nash, on May 15, he discussed with his daughter something about the loan arrangement or the amount due under the Consulting Agreement. Shelley Nash testified she discussed the usury issue related to the Loan Commitment with her father on May 15, at the earliest. Before the closing, any discussions she had with her father about usury related only to the Corporation Note. She testified she did not conduct any research on usury and the Loan Commitment until after the closing.
"Two days after the closing, on May 16, 1998, Wernerdal wrote a letter to Nash asking him to explain how a lawsuit against defendants would proceed. Wernerdal testified he was only concerned at that time about recovery of the $ 10,000 payment to Davis. He had not contemplated filing a claim for usury. On May 19, Nash responded to Wernerdals letter and outlined a plan for a lawsuit based on usury, not recovery of the $ 10,000 payment.
"Substantial evidence supports the trial courts finding defendants did not prove by a preponderance of the evidence Wernerdal intended to sue defendants to get out of paying the amount due under the Consulting Agreement at or before the time he signed it. Defendants did not even prove Wernerdal knew about the usury issue under the Loan Commitment before or at the time of the closing. Even if the evidence would support the inference Nash or his daughter thought about or researched this issue before the closing, defendants did not prove either one of them discussed the issue with Wernerdal before the closing. Accordingly, substantial evidence supports the trial courts finding defendants did not prove their fraud or conspiracy (to commit fraud) claims by a preponderance of the evidence." (Opinion No. B145735, May 30, 2002, pp. 17-20, fns. omitted.)
We turn now to the facts of this case. On April 16, 2001, appellants filed a petition pursuant to Civil Code section 1714.10 , subdivision (a), for leave to file a proposed complaint against respondents alleging that they conspired against appellants with their clients, Wernerdal, Adbox and Wernerdals wife Robin Whitburn.
In relevant part, section 1714.10, subdivision (a) reads: "No cause of action against an attorney for a civil conspiracy with his or her client arising from any attempt to contest or compromise a claim or dispute, and which is based upon the attorneys representation of the client, shall be included in a complaint or other pleading unless the court enters an order allowing the pleading that includes the claim for civil conspiracy to be filed after the court determines that the party seeking to file the pleading has established that there is a reasonable probability that the party will prevail in the action."
The proposed complaint alleges that prior to 1993, appellants were the sole shareholders of Adbox, Inc. In 1993, they transferred 50 percent of the shares to Christer Wernerdal and entered into an agreement whereby they would lend money and services to Adbox, and Adbox would repay the money and value of the services with interest. Appellants and Wernerdal all served as both officers and directors of Adbox. In early 1998, appellants and Wernerdal began negotiating a purchase by Wernerdal of appellants shares.
Respondents Savery Nash and Shelly Nash are attorneys. The proposed complaint alleges that Wernerdal retained respondents and their law firm to advise him with regard to the shareholder agreement he had entered into with appellants, and to determine whether he might gain a controlling interest in the corporation. It is alleged that in furtherance of this employment, respondents researched Wernerdals rights and advised him how to use appellants marital difficulties to gain control of Adbox, and that they further advised him not to let appellants know of his plans.
The proposed complaint goes on to allege that when the plan to take over Adbox in appellants marital dissolution action did not work out, appellants and Wernerdal asked respondent Savery Nash to review the loan agreement between appellants and Adbox. Nash complied, and erroneously concluded that appellants loan to the corporation had been made at a usurious interest rate. Wernerdal paid respondents for extensive research with regard to this usury issue. It is alleged that when Wernerdal ultimately purchased appellants shares on May 14, 1998, he secretly intended to file a lawsuit based upon the usury claim, in order to avoid paying anything to appellants for their controlling share of the company.
The proposed complaint concludes that the alleged facts amount to a conspiracy between respondents and Wernerdal to gain control of Adbox fraudulently, to violate Corporations Code sections 309, 1507, and 25401, to breach Wernerdals contract with appellants, and to breach Wernerdals fiduciary duty to appellants. It is alleged that in furtherance of the conspiracy, respondents conferred with Wernerdal by telephone, researched usury issues, advised Wernerdal to sign the closing documents, and after Wernerdal had gained control of Adbox, counseled Wernerdal to file a lawsuit alleging usury against appellants, and then filed the lawsuit on his behalf.
It is further alleged that appellants filed a cross-complaint against Wernerdal in that lawsuit and obtained a judgment against Wernerdal in the sum of $ 97,476.36, which was modified to $ 115,139.36 by Division Seven of this court and affirmed as modified on May 30, 2002, in Case No. B145735.
On July 30, 2001, the Superior Court denied appellants petition and appellants filed a timely notice of appeal from that order.
The court also found that the proposed complaint and appellants cross-complaint in Case No. YC032614 alleged the same conspiracy between Wernerdal and his attorneys, that the cause of action was rejected by Judge Willet in Case No. YC032614.
DISCUSSION
Appellants contend that the trial court erred in denying their petition. An order denying a petition filed pursuant to section 1714.10 is an appealable final judgment. (Civ. Code, § 1714.10, subd. (d).)
After this matter was on appeal, Division Seven issued its opinion in the Wernerdal action. We sent a Government Code letter to the parties requesting supplemental briefing on how the opinion in B145735 may affect the issues raised in this appeal. Respondents contend that we should give collateral estoppel effect to the opinion in B145735. They argue that because their clients were exonerated from the conspiracy and fraud charges, they cannot be prosecuted for the same claims.
Relying on McCutchen v. City of Montclair (1999) 73 Cal.App.4th 1138, 1444, appellants contend that they were not provided a full and fair opportunity to litigate the claim of conspiracy in the Wernerdal action and thus it would be unfair to them to apply collateral estoppel to preclude them from relitigating the claims against respondents. They argue that the conspiracy only came to light two weeks into the Wernerdal trial after respondents inadvertently produced privileged documents and after all pretrial discovery had been completed.
In support of their arguments on appeal, appellant ask that we judicially notice the trial record and the opinion in Case No. B145735. We have previously noted that we judicially notice the opinion in that action. (See fn. 1.) One of the arguments made by appellants is that we should review the entire appellate record, including the reporters transcript of the trial, and make an independent determination that the evidence presented in that action establishes a probability that they will succeed in proving their case against respondents in this action. Consideration of the entire underlying record is appropriate where the issue of collateral estoppel is before the court. (7 Witkin, Cal. Procedure (4th ed. 1997) Judgment, § 357, p. 921.) We will therefore take judicial notice of the entire action to determine if collateral estoppel applies. If it does, it precludes this action by appellants against respondents.
"The doctrine of collateral estoppel or issue preclusion is a secondary form of res judicata. [Citation.] It prevents a party who had a full and fair opportunity to litigate a particular issue in a prior proceeding from relitigating it in a subsequent proceeding. [Citation.] A prior determination by a tribunal will be given collateral estoppel effect when (1) the issue is identical to that decided in a former proceeding; (2) the issue was actually litigated and (3) necessarily decided; (4) the doctrine is asserted against a party to the former action or one who was in privity with such a party; and (5) the former decision is final and was made on the merits. [Citation.]" (McCutchen v. City of Montclair , supra, 73 Cal.App.4th at p. 1144.) It cannot be disputed that each of these elements is present in this case.
It was appellants who initiated the claims of fraud against Wernerdal and conspiracy between Wernerdal and his attorneys in their cross-complaint to the Wernerdal action. After reviewing the conspiracy claim asserted in that action and the claims alleged here, there can be no serious dispute but that they are the same, satisfying the first element. Because appellants were the ones who initiated the claims for fraud and conspiracy in the Wernerdal action, it was appellants who had the burden of gathering and presenting evidence to establish the validity of those claims. After a full trial, the trial court concluded that appellants had failed to prove the claims of fraud and conspiracy by a preponderance of the evidence and entered judgment in favor of Wernerdal, a decision on the merits. This satisfies the second and third elements of collateral estoppel. That portion of the judgment was affirmed by the Court of Appeal, satisfying the fifth element. The only difference between the claims asserted in the Wernerdal action and the conspiracy claim here is that respondents and Wernerdals wife were not parties to that action. But that is of no moment because the fourth element requires only that the doctrine is asserted against a party to the former action or one who was in privity with such a party. Appellants are the same parties to the prior action, thus satisfying the fourth element. Thus collateral estoppel precludes appellants from prosecuting this action.
But there is an additional basis for upholding the decision of the trial court. It would be an absurd result if the alleged principal conspirator could be exonerated from a claim of conspiracy but the attorneys who represented him in that successful defense could thereafter be sued for the same underlying conspiracy. That is a basic principle recognized by the Legislature in enacting section 1714.10.
Section 1714.10 was amended in 1991 with the addition of subdivision (c), which created a pleading hurdle which appellants have failed to clear. That subdivision reads: "This section shall not apply to a cause of action against an attorney for a civil conspiracy with his or her client, where (1) the attorney has an independent legal duty to the plaintiff, or (2) the attorneys acts go beyond the performance of a professional duty to serve the client and involve a conspiracy to violate a legal duty in furtherance of the attorneys financial gain." Since such elements are essential to a meritorious conspiracy claim against an attorney in any event (see Doctors Co. v. Superior Court (1989) 49 Cal.3d 39, 44, 260 Cal. Rptr. 183, 775 P.2d 508), the first determination to be made in ruling on a petition is whether the proposed complaint alleges a viable cause of action. (Pavicich v. Santucci (2000) 85 Cal.App.4th 382, 392-395.) If a legally sufficient conspiracy cause of action is stated, no petition is required at all, and if it is not, the petition must be denied. (Id. at pp. 392, 396.) Thus, we consider whether appellants have stated a viable cause of action against respondents.
"The elements of an action for civil conspiracy are the formation and operation of the conspiracy and damage resulting to plaintiff from an act or acts done in furtherance of the common design. . . . It is a general and well-settled principle of law that, where two or more persons are sued for a civil wrong, it is the civil wrong resulting in damage, and not the conspiracy, which constitutes the cause of action. [Citations.] In such an action the major significance of the conspiracy lies in the fact that it renders each participant in the wrongful act responsible as a joint tort-feasor for all damages ensuing from the wrong, irrespective of whether or not he was a direct actor and regardless of the degree of his activity. [Citations.]" (Mox Incorporated v. Woods (1927) 202 Cal. 675, 677— 678, 262 P. 302.)
"A cause of action for civil conspiracy may not arise, however, 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." (Doctors Co. v. Superior Court, supra, 49 Cal.3d at p. 44.) Thus, no cause of action arises against an attorney who, while acting only in the performance of a professional duty to serve a client, and not to further his or her own personal interest, conspires with the client to violate a duty owed only by the client. It follows that appellants cause of action against respondents for conspiring to breach the contract to which only Wernerdal, Adbox, and appellants were parties, may not be maintained. (Id. at pp. 45-47; Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 576, 108 Cal. Rptr. 480, 510 P.2d 1032.)
Appellants contend that they stated a common-law fraud cause of action against respondents by alleging that Wernerdal falsely stated that he would fulfill the terms of the parties agreements, that he failed to disclose his intent to sue on the usury claim, and that the misrepresentation and nondisclosure were done with the advice and counsel of respondents. To charge respondents with conspiring with their client to commit fraud, however, appellants were required to allege that respondents uttered the misrepresentation, or that they remained silent in violation of their own duty to speak. (See Doctors Co. v. Superior Court, supra, 49 Cal.3d at p. 47.) Appellants have done neither. In addition, the appellate opinion in the Wernerdal action demonstrates the failure of appellants to establish the necessary elements of fraud and conspiracy.
A duty of disclosure, such as that arising from a fiduciary duty, must be owed by the attorneys to the injured party, not simply by the client to the injured party. (Doctors Co. v. Superior Court, supra, 49 Cal.3d at pp. 47-48.) The proposed complaint does not allege that respondents had a fiduciary relationship with appellants, or that they made any representations to them.
Appellants also contend that the facts alleged in the proposed complaint amount to a violation of Corporations Code sections 309, 1507, and 25401.
Section 309 charges the director of a corporation to perform his or her duties in good faith and with due care. Since it imposes no duty on the directors personal attorney, respondents cannot be held liable for conspiring with Wernerdal to breach his duty to appellants under that statute. (See Doctors Co. v. Superior Court, supra, 49 Cal.3d at pp. 47-48.)
Section 1507 imposes joint and several liability on agents of the corporation who participate with officers, directors, or employees in making false reports or entries respecting the corporation or its shares, assets, liabilities, capital, dividends, business, earnings or accounts. There is no allegation, however, that any such entries were made or that respondents were agents of the corporation, and there is no suggestions that the complaint can be amended to so allege.
Section 25401 makes it unlawful for any person to offer or sell a security by means of the misrepresentation or omission of a material fact. It is also unlawful to knowingly provide substantial assistance to one who violates section 25401. (Corp. Code, § 25403.) There are no facts alleged in the proposed complaint to support its bare conclusion that the parties transactions amounted to a sale of securities.
Although a "security" includes any "evidence of indebtedness," the transaction must involve "an investment of money in a common enterprise with profits to come solely from the efforts of others [citation]"; or an investment of risk capital where persons other than the investor will be primarily responsible for managing the business. (People ex rel. Bender v. Wind River Mining Project (1990) 219 Cal. App. 3d 1390, 1399-1400, fn. 4, 269 Cal. Rptr. 106.) Appellants were officers and directors of Adbox, not mere investors. Appellant does not contend that the proposed complaint can be amended to allege otherwise.
Appellants contend that the proposed complaint can now be amended to add a cause of action for malicious prosecution, since the judgment against Wernerdal and Adbox, rejecting the usury claim, has been affirmed on appeal. We cannot reach this contention, since we have no pleading before us. In any event, if appellants have a meritorious cause of action against respondents for malicious prosecution, they do not need to amend their petition or file another in order to commence an action. (See Pavicich v. Santucci, supra, 85 Cal.App.4th at pp. 392— 393, 396.)
At oral argument counsel for appellants suggested that there are further facts that may be alleged, especially in connection with Wernerdals wife, and that they should be given an opportunity to return to the trial court to amend their pleading. Given our conclusion that collateral estoppel precludes any further litigation on the conspiracy, a return to the trial court to further amend the complaint would be a waste of time.
DISPOSITION
The judgment is affirmed. Respondents shall have their costs on appeal.
We concur: VOGEL (C.S.), P.J., and CURRY, J.