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Morisaki v. Wallace

California Court of Appeals, Fourth District, Third Division
Jul 10, 2008
No. G038681 (Cal. Ct. App. Jul. 10, 2008)

Opinion

NOT TO BE PUBLISHED

Appeal from a judgment of the Superior Court of Orange County No. 06CC00174, Stephen J. Sundvold, Judge.

Catanzarite Law Corporation, Kenneth J. Catanzarite and Jim Travis Tice for Plaintiffs and Appellants.

Hinshaw & Culbertson, John W. Sheller and Wendy Wen Yun Chang for Defendant and Respondent.


OPINION

IKOLA, J.

Plaintiff Fred Morisaki appeals from a judgment entered after the court sustained a demurrer to his complaint without leave to amend. He had alleged defendant Ogden Murphy Wallace, a law firm advising the underwriter of a municipal bond offering, negligently “acquiesced” in misrepresentations concerning bonds sold to plaintiff. But defendant owed no duty of care to plaintiff. We affirm.

The briefs and the notice of appeal list Stanley Behrens as a plaintiff and appellant. But he is not named as a plaintiff in the complaint or mentioned in the judgment.

FACTS

According to plaintiff’s class action complaint, defendant is a law firm that represented the underwriter of various municipal bond issuances. The underwriter helped to prepare an “Official Statement” regarding the bonds. The Official Statement contained an opinion from the bond issuer’s counsel — not from defendant — that the interest on the bonds would be exempt from federal income tax. The Official Statement was delivered to stockbrokers, who marketed the bonds to potential investors. Plaintiff and other investors bought the bonds based on the stockbrokers’ representations the bonds would be tax-exempt. The Internal Revenue Service later ruled the bonds were non-qualified private activity bonds, which are not exempt from federal taxation.

“Before 1968, municipal bonds were exempt from federal income tax regardless of their purpose. In 1968, Congress restricted tax-exempt status to bonds benefiting the general public, and eliminated the tax exemption for ‘private activity bonds.’” (Scott, Take Us Back To The Ball Game: The Laws And Policy Of Professional Sports Ticket Prices (2005) 39 U.Mich. J.L. Reform 37, 49.) “A municipal bond [is] a private activity bond if: (1) the proceeds of the bond offering [are] ‘to be used for any private business use’; and (2) more than 10% of the bond [is] secured by, or more than 10% of the interest payments would be derived from, property used for private business purposes . . . .” (Ibid.; see also 26 U.S.C. § 141.)

Plaintiff sued defendant for negligence and negligent misrepresentation. He alleged defendant knew or should have known that (1) the bonds would not be tax-exempt; (2) the stockbrokers would reasonably rely upon the incorrect legal opinion in the Official Statement, and represent the bonds were tax-exempt; and (3) the investors would reasonably rely on the stockbrokers’ representations. The court sustained defendant’s demurrer without leave to amend and entered judgment for defendant.

DISCUSSION

“When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm.” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318 (Blank).)

The analysis begins with the negligence cause of action. “The threshold element of a cause of action for negligence is the existence of a duty to use due care toward an interest of another that enjoys legal protection against unintentional invasion.” (Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 397 (Bily).) Thus, “there can be no [negligence] liability unless defendant owed a duty to plaintiffs to avoid the asserted wrongdoings. Whether such a duty existed is a question of law and depends on a judicial weighing of the policy considerations for and against the imposition of liability under the circumstances.” (Goodman v. Kennedy (1976) 18 Cal.3d 335, 342 (Goodman).)

“The determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant’s conduct and the injury suffered, the moral blame attached to the defendant’s conduct, and the policy of preventing future harm.” (Biakanja v. Irving (1958) 49 Cal.2d 647, 650 (Biakanja); accord Bily, supra, 3 Cal.4th at p. 397 [reciting Biakanja factors]; Goodman, supra,18 Cal.3d at pp. 343-344 [same].)

Plaintiff does not contend these factors show defendant owed a duty of care to him. Defendant analyzed these factors in its demurrer papers, citing Bily and Goodman. The trial court did so, too, in its order sustaining the demurrer. Defendant again relies upon Bily and Goodman in its respondent’s brief. Yet plaintiff failed to address Bily, Goodman, or the Biakanja factors in its written opposition to the demurrer or its appellate briefing. We will not do so for it. Plaintiff, as the appellant, bears the burden to “support the claim of error with reasoned argument and citation to authority.” (R. P. Richards, Inc. v. Chartered Construction Corp. (2000) 83 Cal.App.4th 146, 153, fn. 4.)

At any rate, “[w]ith certain exceptions, an attorney has no obligation to a nonclient for the consequences of professional negligence.” (Fox v. Pollack (1986) 181 Cal.App.3d 954, 960.) The California Supreme Court has held a corporation’s lawyer owes no duty of care to third parties buying the corporation’s securities at arm’s length when advising corporate officers about the legal effect of the securities sales. (Goodman, supra,18 Cal.3d at pp. 343-344.) The buyers “were not persons upon whom [the lawyer’s] clients had any wish or obligation to confer a benefit in the transaction. [The buyers’] only relationship to the proposed transaction was that of parties with whom [the lawyer’s] clients might negotiate a bargain at arm’s length. Any buyers’ ‘potential advantage’ from the possible purchase of the stock ‘was only a collateral consideration of the transaction’ [citation] and did not put such potential buyers into any relationship with [the lawyer] as ‘intended beneficiaries’ of his clients’ anticipated sales.” (Id. at p. 344; accord Bily, supra,3 Cal.4th at p. 398 [accountant owes no duty of care to “merely foreseeable third party users” of its audit report].)

This fundamental gulf between defendant and plaintiff — the lack of a legally meaningful relationship between an underwriter’s counsel and a bond purchaser — equally disposes of the negligent misrepresentation cause of action. To impose negligent misrepresentation liability upon “a professional who offers an opinion, information, or advice” (Bily, supra, 3 Cal.4th at p. 411), “California courts have consistently required some manifestation on the part of [the] professional . . . that he or she is acting to benefit a third party or defined group of third parties in a specific and circumscribed transaction.” (Id. at pp. 411-412.) “By confining what might otherwise be unlimited liability to those persons whom the engagement is designed to benefit, [this] rule requires that the supplier of information receive notice of potential third party claims, thereby allowing it to ascertain the potential scope of its liability and make rational decisions regarding the undertaking.” (Id. at p. 409.)

The complaint contains no such allegations to bridge the gulf between plaintiff and defendant. Plaintiff alleges the issuer’s counsel — not defendant — misrepresented the bond’s tax-exempt status in the Official Statement sent to stockbrokers, who repeated the misrepresentations to investors like plaintiff. Plaintiff further alleges defendant “acquiesced” in the misrepresentations. But the complaint makes clear that defendant itself made no misrepresentations to plaintiff or other investors — defendant’s role was to advise the underwriter. Plaintiff does not allege defendant was “acting to benefit [plaintiff] in a specific and circumscribed transaction.” (Bily, supra,3 Cal.4th at p. 412.) Nor does plaintiff allege he is among “those persons whom the engagement [i.e., the underwriter’s engagement of defendant] is designed to benefit.” (Id. at p. 409.)

Plaintiff thus fails to state any cause of action against defendant. Given the allegations demarking defendant’s role as underwriter’s counsel, no reasonable possibility exists that an amendment can cure the defects. (Blank, supra,39 Cal.3d at p. 318.) The court correctly sustained the demurrer without leave to amend.

DISPOSITION

The judgment is affirmed. Defendant shall recover its costs on appeal.

WE CONCUR: MOORE, ACTING P. J., FYBEL, J.


Summaries of

Morisaki v. Wallace

California Court of Appeals, Fourth District, Third Division
Jul 10, 2008
No. G038681 (Cal. Ct. App. Jul. 10, 2008)
Case details for

Morisaki v. Wallace

Case Details

Full title:FRED MORISAKI et al., Plaintiffs and Appellants, v. OGDEN MURPHY WALLACE…

Court:California Court of Appeals, Fourth District, Third Division

Date published: Jul 10, 2008

Citations

No. G038681 (Cal. Ct. App. Jul. 10, 2008)