Reilly v. Greenwald & Hoffman
Filed 9/10/13 Reilly v. Greenwald & Hoffman CA4/1
California Rules of Court, rule 8.1115(a), prohibits courts
and parties from citing or relying on opinions not certified for publication or
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publication or ordered published for purposes of rule 8.1115
COURT
OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION
ONE
STATE
OF CALIFORNIA
MARK S. REILLY,
Plaintiff and Appellant,
v.
GREENWALD & HOFFMAN, LLP et
al.,
Defendants and Respondents.
D062046
(Super. Ct.
No. 37-2011-00059543-CU-FR-NC)
APPEAL from
a judgment of the Superior Court
of
County, Jacqueline M. Stern, Judge. Affirmed.
John F.
Bannon for Plaintiff and Appellant.
Gordon
& Rees and Richard R. Spirra for Defendants and Respondents.
Mark S.
Reilly appeals the judgment entered against him on claims he asserted against
Greenwald & Hoffman, LLP and Paul E. Greenwald (collectively,
Greenwald) in a shareholder derivative action against Greenwald and
others. The trial court sustained
Greenwald's demurrer to the complaint without leave to amend on the ground the
judgment we affirmed in Reilly v.
Greenwald & Hoffman, LLP (2011) 196 Cal.App.4th 891 (
I.
FACTUAL
BACKGROUND
"This
case comes to us after the sustaining of a general demurrer; accordingly, the
rule is that we accept as true all the material allegations of the
complaint." (Shoemaker v. Myers (1990) 52 Cal.3d 1, 7.) The pertinent facts alleged in Reilly's
complaint are as follows.
Reilly and
Lena Brion agreed to operate Brion Reilly, Inc. (BRI) to provide architectural
and interior design services. Brion
owned 51 percent of the shares of BRI and Reilly owned 49 percent, but they
agreed to share BRI's income and profits equally. After Brion informed Reilly she intended to
terminate their business relationship, she wrongfully excluded him from BRI's
premises and misappropriated BRI's assets.
Greenwald, who had been retained to provide legal services to BRI,
assisted Brion in her misconduct.
II.
PROCEDURAL
BACKGROUND
A. Reilly's Prior Action
Against Greenwald
Reilly
filed a prior action against Greenwald, which was the subject of our decision
in Reilly, supra, 196 Cal.App.4th 891.
As pertinent to this appeal, we described the claims in the prior action
as follows:
"In August 2009 Reilly filed
an amended complaint . . . against BRI; Brion and an entity of hers,
Brion Design, Inc. (BDI); Greenwald, who was BRI's outside counsel; [and other
defendants]. The first [count], titled
'Shareholder Derivative Action,' names all defendants. It alleges that between June 2006 and the end
of 2008, Brion excluded Reilly from BRI's premises 'and converted and
misappropriated to herself the monies, receivables, personal property, and work
in progress of BRI'; Brion engaged in this conduct with the cooperation and
assistance of defendants; and as a result of defendants' misconduct BRI has
suffered damages.
Greenwald. The seventh [count], for
constructive fraud and negligent misrepresentation, alleges Greenwald, while
acting as BRI's counsel, 'advised BRI that . . . Brion and BDI had no
duty or obligation, in connection with the termination of the business and
dissolution of BRI, to account for the monies, receivables, personal property
and work in progress of BRI as of the date of the termination of the business
by BRI.' Further, it alleges Greenwald
'counseled and advised BRI that defendants Brion and BDI were entitled to
appropriate such assets of BRI to their own use without any duty
. . . to distribute to [Reilly] his proportionate share of such
assets.' The eighth [count], for legal
malpractice, alleges Greenwald breached the standard of care owed BRI, and
violated rules of professional conduct, by facilitating Brion's
misconduct. The ninth [count], for
breach of contract, alleges Greenwald's conduct was a breach of his written
agreement with BRI for legal services.
and Greenwald. It alleges they conspired
to exclude Reilly from the business premises of BRI, and misappropriated to
their own use the monies, receivables and work in progress of BRI, and as a
consequence BRI was damaged." (
Greenwald demurred to the complaint
on the ground it was barred as to him under McDermott,
Will & Emery v. Superior Court (2000) 83 Cal.App.4th 378 (
"because BRI has not waived the attorney-client privilege covering
communications between him and Brion during his representation of BRI, and thus
he cannot mount any meaningful defense." (Reilly, supra, 196
Cal.App.4th at p. 898.) The trial
court agreed, sustained the demurrer, and entered a
(Id. at p. 906.)
B. Reilly's Present Action
Against Greenwald
Reilly
filed the present action against Greenwald and others on November 8,
2011. The counts alleged against
Greenwald are very similar to those alleged against him in the prior action.
In the
first count, again entitled "Shareholder Derivative Action," Reilly
alleged that Brion, "with the cooperation and assistance of [Greenwald and
other defendants], excluded [Reilly] from the business premises of BRI
. . . and subsequently converted and misappropriated to herself and
[BDI] the monies, receivables, personal property, work in progress and goodwill
of BRI." Reilly further alleged
that Brion, again with Greenwald's cooperation and assistance, had filed with
the California Secretary of State a certificate of dissolution that falsely
stated that BRI's debts had been paid and its assets distributed to those
entitled to them. According to Reilly,
this alleged misconduct of Greenwald damaged BRI.
In the fourth
count, entitled "Fraud and
Deceit," Reilly alleged that Greenwald prepared for Brion
"majority shareholder consents" and other documents that terminated
Reilly's authority to act on behalf of BRI and permitted Brion to convert BRI's
assets. Reilly further alleged that the
preparation and use of these documents was "part of a conspiracy"
among Brion, Greenwald, and other defendants that damaged BRI. For relief on this count, Reilly sought
damages for "the monetary losses resulting from the unrestricted use and
misappropriation by [Brion] of the funds in the accounts of BRI."
In the
fifth count, entitled "Aiding and Abetting Breach of Fiduciary Duty,"
Reilly alleged that Greenwald violated his own fiduciary duty to BRI and
assisted other defendants in violating their fiduciary duties to BRI by
"collaborati[ng]" with them in the preparation of false and
misleading documents concerning the dissolution of BRI. Reilly further alleged that such
"collaboration" was "part of a conspiracy among [Greenwald and
other defendants] . . . for the exclusion of [Reilly] from the
business premises of BRI and the misappropriation of monies, receivables,
personal property, work in progress and goodwill of BRI." On this count, Reilly sought damages for
"the monetary losses resulting from the misappropriation by [Brion] of the
monies, receivables, personal property, work in progress and goodwill of
BRI."
Greenwald
demurred to the complaint on the ground, among others, that Reilly's claims
were barred by the doctrine of res judicata.
Greenwald requested the trial court take judicial notice of the amended
complaint, the order sustaining the demurrer, the judgment, and the appellate
opinion that were filed in the prior action.
The court granted the request for judicial
notice, sustained the demurrer without leave to amend, and entered a
judgment against Reilly.
III.
DISCUSSION
Reilly
contends the judgment against him in his prior action against Greenwald, which
we affirmed in Reilly,
this action. Specifically, he argues the
prior judgment has no preclusive effect in this action because the prior
judgment was not on the merits and the present action involves facts and
remedies different from those involved in the prior action. As we shall explain, these arguments have no
merit.
A.
Res judicata is a defense that may
be raised by demurrer where, as here, the judgment and pleadings from the prior
action are presented to the court by a request for judicial notice. (Code Civ. Proc., § 430.30,
subd. (a); Estate of Dito (2011)
198 Cal.App.4th 791, 795; Carroll v.
Puritan Leasing Co. (1978) 77 Cal.App.3d 481, 486.) Whether the defense applies is a question of
law, which we review de novo. (
Operations, LLC (2009) 178 Cal.App.4th 1544, 1553; Nicholson v. Fazeli (2003) 113 Cal.App.4th 1091, 1100.)
B. Analysis
" 'Res judicata' describes
the preclusive effect of a final judgment on the merits. Res judicata, or claim preclusion, prevents
relitigation of the same cause of action in a second suit between the same
parties or parties in privity with them. . . . Under the doctrine
of res judicata, . . . a judgment for the defendant serves as a
bar to further litigation of the same cause of action." (Mycogen
Corp. v. Monsanto Co. (2002) 28 Cal.4th 888, 896-897, citation & fn.
omitted (Mycogen).) "To operate as a bar a judgment must be
final, on the same claim or cause of action, between the same parties, and must
be an adjudication on the merits."
(McKinney v. County of Santa Clara
(1980) 110 Cal.App.3d 787, 794 (McKinney).) These requirements are satisfied here.
There is no
dispute the judgment in the prior action is final. Finality for purposes of res judicata occurs
when "an appeal from the trial court judgment has been exhausted or the
time to appeal has expired." (
Owners for Fair Franchising (2000) 85 Cal.App.4th 1168, 1174.) We issued our opinion affirming the judgment
on May 23, 2011 (Reilly,
for review having been filed, the judgment became final 30 days later (Cal.
Rules of Court, rule 8.366(b)(1)).
The judgment in the prior action was therefore final for res judicata
purposes when Reilly filed the present action on November 8, 2011.
There is
also no dispute the two actions involve the same parties. Reilly asserted claims against Greenwald in
both actions.
Reilly
contends, however, the prior judgment was not on the merits and therefore does
not preclude his present action against Greenwald. Reilly starts from the general rule that a
judgment based on a demurrer sustained for technical or procedural reasons does
not have res judicata effect. (See,
e.g., Goddard v. Security Title
Ins. & Guar. Co. (1939) 14 Cal.2d 47, 52 ["a judgment on
general demurrer may not be on the merits, for the defects set up may be
technical or formal"].) He then
asserts this rule applies to the judgment entered in the prior action, where
the demurrer was sustained on the procedural ground that it would have been
"fundamentally unfair to proceed against Greenwald" in the absence of
a waiver of BRI's attorney-client privilege because Reilly's claims, " 'by [their] very nature,
necessitated that [Greenwald] disclose privileged or confidential information
in order to present "a[] meaningful defense." ' " (
Reilly's
"argument ignores the principle that a judgment on a general demurrer will
have the effect of a bar in a new action in which the complaint states the same
facts which were held not to constitute a cause of action on the former
demurrer or, notwithstanding differences in the facts alleged, when the ground
on which the demurrer in the former action was sustained is equally applicable
to the second one." (
sustained in the prior action — that the action could not proceed against
Greenwald because in the absence of a waiver of the attorney-client privilege
by BRI, Greenwald could not "adequately defend himself against claims he
facilitated Brion's wrongdoing" (Reilly,
supra, 196 Cal.App.4th at
p. 903) — is equally applicable to this action. As in the prior action, "[t]he complaint
alleges Greenwald's . . . tortious conduct facilitated Brion's
conversion of BRI's assets to her own use.
Obviously, his confidential communications with her are highly material
to his defenses." (
did not allege any waiver of the attorney-client privilege by BRI (
present action, "the defect in the complaint filed in the former action
was not cured." (
Thus, with respect to his present claims against Greenwald, Reilly
"is barred from prosecuting them under the doctrine of res
judicata." (Ibid.)
Reilly
contends res judicata does not apply because he cured the defect in the prior
complaint by including in the present complaint counts for "Fraud and
Deceit" and "Aiding and Abetting Breach of Fiduciary Duty." According to Reilly, the inclusion of these
counts triggered exceptions to the attorney-client privilege for communications
that aided the commission of a fraud (Evid. Code, § 956) or that are
relevant to an issue of breach of a duty arising out of the attorney-client
relationship (id., § 958). We disagree.
Reilly's inclusion
of a count for aiding and abetting breach of fiduciary duty in his present
complaint did not trigger application of Evidence Code section 958. Under that statute, there is no
attorney-client privilege "as to a communication relevant to an issue of
breach, by the lawyer or by the client, of a duty arising out of the
lawyer-client relationship." (
We held in Reilly's prior action that section 958 does not apply to
a derivative action for legal malpractice against outside counsel. (Reilly,
supra, 196 Cal.App.4th at
p. 903.) In support of this
holding, we cited McDermott, which
had explained that although the client's filing of a malpractice action against
its attorney results in the waiver of the attorney-client privilege and thereby
enables the attorney to disclose otherwise privileged attorney-client
communications as necessary to defend the action, a shareholder's filing of a
derivative action does not similarly result in the corporation's waiver of the
attorney-client privilege. (83 Cal.App.4th
at pp. 383-384.) A derivative
action thus "has the dangerous potential for robbing the attorney
defendant of the only means he or she may have to mount any meaningful defense. It effectively places the defendant attorney
in the untenable position of having to 'preserve the attorney[-]client
privilege (the client having done nothing to waive the privilege) while trying
to show that his representation of the client was not negligent.' " (Id. at
p. 384.) The same problem exists
here: If Reilly's action for aiding and
abetting breach of fiduciary duty were allowed to proceed, Greenwald would be
placed in the "untenable position" of having to preserve BRI's
attorney-client privilege while trying to show he did not breach his own
fiduciary duty to BRI or assist other defendants in breaching their fiduciary
duties to BRI. (Ibid.) Hence, the
section 958 exception to the attorney-client privilege did not become
applicable merely because Reilly changed his theory from breach of the duty of
competence in the prior action to breach of the duty of loyalty in the present
action.
Nor did Reilly trigger the
applicability of Evidence Code section 956 simply by adding a count for
fraud to the complaint he filed in the present action. Under section 956, the attorney-client
privilege does not apply "if the services of the lawyer were sought or
obtained to enable or aid anyone to commit or plan to commit a crime or a
fraud." "To invoke the
crime-fraud exception, the proponent must make a prima facie showing that the
services of the attorney were sought or obtained to aid someone in committing a
crime or fraud." (
188 Cal.App.4th 189, 220.) Reilly
asserts the exception applies because in his "Fraud and Deceit"
count, he alleged that Greenwald facilitated Brion's conversion of BRI's assets
by preparing "majority shareholder consents" falsely stating that
Brion had authority to act independently on behalf of BRI, which Brion then
signed and delivered to BRI's banks, clients, and vendors and which those
entities relied on to terminate Reilly's involvement in the business. To be actionable as fraud, however, the
misrepresentations ordinarily must be made to and relied on by
v. Regents of University of California (2009) 45 Cal.4th 1244, 1255, 1256;
279, 289.) Here, the allegedly false
statements were made to and relied on
parties. Reilly's contention he may
sue for fraud on a theory of indirect deception because those third parties
were acting as BRI's agents has no merit.
The indirect deception theory, under which a plaintiff may sue for fraud
based on a misrepresentation made to an agent, requires that the defendant
intend or have reason to expect that the misrepresentation will be repeated to
and acted on by the plaintiff. (See,
e.g., Lovejoy v. AT&T Corp. (2001)
92 Cal.App.4th 85, 94; Shapiro v.
Sutherland (1998) 64 Cal.App.4th 1534, 1548.) This theory does not apply here because,
according to Reilly's fraud count, the allegedly false "majority
shareholder consents" were intended to, and actually did, induce action
BRI. Hence, by failing to plead a
legally sufficient fraud claim, Reilly cannot make the prima facie showing
needed to invoke the crime-fraud exception to the attorney-client privilege.
Next,
Reilly contends res judicata does not apply because his two actions against
Greenwald do not involve the same cause of action. He contends the facts and the legal remedies
alleged in the present action are different from those alleged in the prior
action. According to Reilly, the causes
of action asserted against Greenwald in the prior action arose from his
malpractice in advising BRI that Brion had no duty in connection with BRI's
dissolution to account for its assets and distribute a proportionate share to
Reilly. Thus, Reilly asserts, the prior
judgment dismissing his claims on the basis of McDermott, supra, 83
Cal.App.4th 378, "arguably may
have res judicata effect as to a later derivative malpractice
action." But, he maintains, the
prior judgment does not preclude the present action, which "includes only
causes of action for fraud and aiding and abetting breach of fiduciary duty to
which the McDermott policy is not
applicable." Reilly also argues the
two actions involve different causes of action because he alleged in the
present action new facts concerning the "majority shareholder
consents" and other documents Greenwald prepared to assist Brion in converting
BRI's assets. Again, we disagree.
" 'In California the phrase "cause of
action" is often used indiscriminately . . . to mean
different legal theories] the same cause of
action . . . .'
[Citation.] But for purposes of
applying the doctrine of res judicata, the phrase 'cause of action' has a more
precise meaning: The cause of action is
the right to obtain redress for a harm suffered, regardless of the specific
remedy sought or the legal theory (common law or statutory)
advanced." (Boeken v. Philip Morris USA, Inc. (2010) 48 Cal.4th 788, 798 (
same if based on the same primary right."
(Citizens for Open Government v.
City of Lodi (2012) 205 Cal.App.4th 296, 325.) " '[T]he primary right is simply the plaintiff's
right to be free from the particular injury suffered.' "
(Mycogen, supra, 28 Cal.4th at p. 904.)
"Thus, under the primary rights theory, the determinative factor is
the harm suffered. When two actions
involving the same parties seek compensation for the same harm, they generally
involve the same primary right." (
Reilly's
two actions against Greenwald involved the same cause of action because in both
Reilly sought compensation for the same harm.
In the prior action, Reilly sought to recover damages for harm to BRI
caused by Greenwald's counseling and advising BRI that Brion could exclude
Reilly from the business and appropriate BRI's assets to her own use without
any duty to distribute to Reilly his proportionate share of the assets, and by
Greenwald's conspiring with Brion and other defendants to deprive Reilly of his
rightful share of the assets. (
damages for harm to BRI caused by Greenwald's preparation of false and
misleading documents to help Brion exclude Reilly from the business and
misappropriate BRI's assets, and by Greenwald's conspiracy with Brion and other
defendants to deprive Reilly of his rightful share of the assets. (See pt. II.B., ante.) In both actions
Greenwald's alleged misconduct resulted in the same harm to BRI, namely, the
conversion of its assets by Brion. The
two actions therefore assert the same cause of action for purposes of res
judicata. (Boeken, supra, 48 Cal.4th
at p. 798; Mycogen,
The causes of action asserted in
the two actions are not different simply because Reilly changed the legal
labels on some of the counts alleged in the pleadings he filed in the two
actions. In the prior action, Reilly
asserted counts entitled "Constructive Fraud and Negligent
Misrepresentation" and "Legal Malpractice," which were based on
Greenwald's provision of allegedly unsound advice that Brion had no duty in
connection with BRI's dissolution to account for its assets, and could
appropriate those assets to her own use without giving Reilly a proportionate
share. In the present action, Reilly
omitted those counts and added ones entitled "Fraud and Deceit" and
"Aiding and Abetting Breach of Fiduciary Duty," which were based on
Greenwald's preparation of allegedly false and misleading documents that
allowed Brion to exclude Reilly from the business and misappropriate BRI's
assets. Although Reilly changed his
legal theories from negligence in the prior action to intentional
both actions he alleged Greenwald inflicted the same harm on BRI by
"facilitat[ing] Brion's conversion of BRI's assets to her own
use." (Reilly, supra, 196
Cal.App.4th at p. 904.) Hence, for
purposes of res judicata the cause of action did not change, because
"[e]ven where there are multiple legal theories upon which recovery might
be predicated, one injury gives rise to only one claim for relief." (Slater
v. Blackwood (1975) 15 Cal.3d 791, 795; see also Balasubramanian v. San Diego Community College Dist. (2000) 80
Cal.App.4th 977, 991 ["a single cause of action is based on the harm
suffered, rather than on the particular legal theory asserted"].)
The causes
of action asserted in the two actions also did not become different by Reilly's
inclusion in the complaint filed in the present action of new factual
allegations regarding the "majority shareholder consents" and other
false and misleading documents Greenwald prepared for Brion's use in
misappropriating BRI's assets.
"[I]f two actions involve the same injury to the plaintiff and the
same wrong by the defendant then the same primary right is at stake even if in
the second suit the plaintiff . . . adds new facts supporting
recovery." (Eichman v. Fotomat Corp. (1983) 147 Cal.App.3d 1170, 1174 (
right is at stake because in both actions Reilly alleged that Greenwald injured
BRI by facilitating Brion's conversion of its assets. The factual allegations in the present action
about the various documents Greenwald prepared for Brion merely add
"greater detail" about how he facilitated her wrongdoing and thereby
caused BRI's injury. (
Reilly's cause of action against Greenwald, notwithstanding Reilly's contrary
contention.
We also
reject Reilly's related argument that the prior judgment does not bar his
present action against Greenwald because Reilly did not learn of Greenwald's
involvement in the preparation of the "majority shareholder consents"
until after the trial court had entered the prior judgment. In support of this argument, Reilly relies
exclusively on Allied Fire Protection v.
Diede Construction, Inc. (2005) 127 Cal.App.4th 150. There, the court held a prior judgment does
not bar a plaintiff's claim against a defendant if at the time the first action
was filed "the plaintiff [was] unaware of the facts giving rise to [the]
claim due to [the] defendant's fraud," and "it cannot be said that
[the] plaintiff knew or should have known of the claim when the first action
was filed." (Id. at p. 156.) This
holding appears to conflict with the prior holding of this court that "a
judgment does not lose its res judicata effect because it was entered while
evidence was being suppressed." (
p. 1176; see also Cedars-Sinai
Medical Center v. Superior Court (1998) 18 Cal.4th 1, 10 [citing
under doctrine of res judicata, "a judgment may not be collaterally
attacked on the ground that evidence was falsified or destroyed"].) We need not resolve any conflict, however,
because the predicate for application of the Allied Fire Protection holding is absent. Although Reilly alleged that he did not learn
until after the dismissal of his prior action that Greenwald had prepared the
"majority shareholder consents" Brion used to convert BRI's assets,
Reilly did not allege that his ignorance of that fact was due to Greenwald's
fraud or that he could not have discovered that fact earlier. Hence, Allied
Fire Protection does not allow Reilly to avoid the preclusive effect of the
prior judgment.
In sum, we
hold the judgment in Reilly's prior action against Greenwald bars this action
under principles of res judicata. The
trial court correctly sustained Greenwald's demurrer on that ground and entered
judgment against Reilly. Since we must
affirm the judgment if it is correct on any ground asserted in the demurrer (
2 Cal.4th 962, 967; Henderson v.
Newport-Mesa Unified School Dist. (2013) 214 Cal.App.4th 478, 490), we need
not address the other grounds asserted in Greenwald's demurrer and discussed in
the parties' briefs.
Alternatively,
even if this action were not barred under the doctrine of res judicata, the
judgment would still have to be affirmed because, as we have explained, the
same defect that led to the dismissal of the complaint in Reilly's prior action
against Greenwald exists in the complaint filed in this action. Although the legal labels assigned to the
claims differed, in both actions Reilly alleged claims that " 'by [their] very nature,
necessitated that [Greenwald] disclose privileged or confidential information
in order to present "a[] meaningful defense." ' " (
action, Reilly's current action cannot go forward because in the absence of a
waiver of the attorney-client privilege by BRI, Greenwald could not
"adequately defend himself against claims he facilitated Brion's
wrongdoing," and "it would be fundamentally unfair to proceed against
[him]." (Id. at pp. 903, 904.)
Finally, we do not address Reilly's
challenge to the order imposing $6,215 in sanctions against his counsel for
filing a frivolous complaint in violation of Code of Civil Procedure
section 128.7. That order is not
properly before us because Reilly has no standing to challenge it, and his
counsel did not file a separate notice of appeal. (Id.,
§§ 902, 904.1, subd. (a)(12); Laborde
v. Aronson (2001) 92 Cal.App.4th 459, 465; Calhoun v. Vallejo City Unified School Dist. (1993) 20 Cal.App.4th
39, 42.)
DISPOSITION
The judgment is affirmed.
IRION, J.
WE CONCUR:
BENKE,
Acting P. J.
McINTYRE, J.
name="_ftn1" title="">[1] The issue in McDermott
was whether a shareholder's derivative action against the corporation's outside
counsel for legal malpractice could go forward.
(83 Cal.App.4th at p. 380.)
The Court of Appeal held that in the absence of a waiver of the
attorney-client privilege by the corporation, the action could not proceed
because counsel would be effectively foreclosed from mounting any meaningful
defense. (Id. at p. 381.)
