Sternberg v. Horner

Filed 8/13/09 Sternberg v. Horner CA2/3

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION THREE

Appeal from an order of the Superior Court of Los Angeles County, Mark V. Mooney, Judge. Affirmed.

John F. Wolcott and Brenton L. Horner for Defendants and Appellants.

Robert A. Sternberg; Niebow Law and Steven N. Niebow for Plaintiff and Respondent.

_______________________________________

Defendants Brenton L. Horner, an attorney at law, and Horner & Associates, a Professional Law Corporation (Horner, H&A, and together, defendants) appeal from an order denying their special motion to strike the complaint of plaintiff Robert A. Sternberg (Sternberg). The motion to strike was brought under Code of Civil Procedure section 425.16, the anti-SLAPP statute ( 425.16). In denying the motion, the trial court determined that the evidence presented to the court in connection with the motion to strike demonstrated that Sternberg has a probability of prevailing in this suit against defendants for malicious prosecution. The trial courts analysis was correct and its order will be affirmed.[1]

BACKGROUND OF THE CASE

1. The Instant Case

Sternbergs suit for malicious prosecution was filed on September 6, 2007. The complaint alleges all of the following matters. In January 2007, during the pendency of a lawsuit entitled Matare v. Antoniello (Los Angeles Superior Court case BC355731), Horner, acting by and through his attorneys (H&A and Horner himself), filed a cross‑complaint for indemnity against Sternberg and based the cross-complaint on Labor Code section 2802, Corporations Code section 16306, subdivision (a), and California Rules of Court, Law Corporation Rules of the State Bar of California, rule IV B(3). The trial court sustained Sternbergs demurrer to the cross-complaint with leave to amend, ruling that none of the three authorities upon which defendants relied as a basis for their cross-complaint applied to the cross-complaint. Thereafter, defendants voluntarily dismissed the cross-complaint. In cross-complaining against Sternberg for indemnity, defendants acted maliciously and without probable cause because they knew that Sternberg was not responsible for indemnifying them, they knew that the three authorities upon which they relied did not apply to their cross-complaint, their motive was to force Sternberg to contribute to a settlement of the lawsuit for which indemnity was sought from him, and they acted to annoy Sternberg and do him harm. As a proximate result of defendants actions, plaintiff incurred expenses in defending the cross-complaint.

Defendants answered Sternbergs complaint by filing a general denial with 34 affirmative defenses, and then filed their section 425.16 special motion to strike.[2] The motion to strike was heard and denied on January 9, 2008. Thereafter, defendants filed this timely appeal.

2. The Underlying Action

The underlying action to the instant case is actually cross-complaints (original and amended)that were filed against Sternberg in Los Angeles County Superior Court case BC355731. In that case, the plaintiffs were Vitus Matare, an individual, and Bayten‑Szwic, Inc., and they sued a business by the name of Antoniello & Co. (Antoniello). They also sued Horner, and they sued the law corporation of Sternberg, Horner & Associates (SHA), and three associate attorneys in the SHA firm (Curtis Molloy, James Moser, and Christine Lyden). Sternberg was not sued as an individual.

Matare and Bayten-Szwic filed their suit in July 2006. Their sole cause of action was for malicious prosecution. Their complaint alleged that SHA represented Antoniello in a suit that Antoniello brought against Matare and Bayten-Szwic to collect money for construction work performed on certain real property, and that the four individual defendant attorneys (Horner, Molloy, Moser and Lyden) worked on prosecuting Antoniellos suit. The complaint further alleged that the suit brought against Matare and Bayten-Szwic by Antoniello was terminated in Matare and Bayten-Szwics favor on each of the five causes of action against them but then Antoniello, SHA, Horner and the three other attorneys instituted yet another collection suit against Matare and Bayten-Szwic, entitled Antoniello & Co. v. Alzheimers Brothers Construction, Inc., which (1) alleged the same primary rights as the first collection suit against Matare and Bayten-Szwic, (2) was brought to evade the adverse judgment against Antoniello in that first collection suit, and (3) was also terminated on the merits in favor of Matare and Bayten-Szwic as to each cause of action.

An answer to Vitus Matare and Bayten-Szwics complaint was filed on behalf of SHA and Horner by a law firm identified in the answer as Horner & Associates.[3] Horner & Associates filed a separate answer on behalf of Curtis Molloy.

Cross-complaints were also filed in case BC355731. Antoniello filed a cross‑complaint against the same defendants sued by Matare and Bayten-Szwicthe law firm SHA, Horner, and the three associate attorneys (Molloy, Moser and Lyden). Sternberg was not sued as an individual. Antoniellos cross‑complaint alleged causes of action for equitable indemnification, comparative indemnification, and declaratory relief. Horner &Associates filed an answer to Antoniellos cross-complaint on behalf of SHA and Horner, and a separate answer on behalf of Molloy.

Horner &Associates filed a cross-complaint in case BC355731 on behalf of both Horner and SHA. Sternberg was the sole named cross‑defendant. The cross-complaint alleged causes of action for equitable indemnification, comparative indemnification, and declaratory relief. Sternberg demurred to the cross‑complaint. Prior to the hearing on the demurrer, however, a first amended cross‑complaint was filed against Sternberg byHorner &Associates on behalf of SHA and Horner. The amended cross-complaint added causes of action for equitable contribution, negligence and breach of fiduciary duty.[4]

Sternberg demurred to the amended cross-complaint and at a hearing on May 11, 2007, the trial court sustained the demurrers to the causes of action for equitable contribution, equitable indemnity, partial or comparative indemnity, negligence and breach of fiduciary duty, with 20 days leave to amend, and sustained the demurrer to the cause of action for declaratory relief without leave to amend. On May 30, 2007, SHA and Horner filed a voluntary dismissal without prejudice of their amended cross‑complaint against Sternberg.

Defendants also filed a cross-complaint and amended cross-complaint against Sternberg on behalf of Curtis Molloy in case BC355731. Sternberg demurred to each, and at the request of Horner, the demurrer to Molloys amended cross‑complaint was dismissed without leave to amend. As noted in footnote 1, ante, the litigation between Molloy and Sternberg has settled.

These various cross‑complaints and amended cross-complaints against Sternberg constitute the underlying action against him on which the instant suit for malicious prosecution is based. [5]

DISCUSSION

1. Standard of Review

In reviewing defendants special motion to strike we use our independent judgment, examining the motion under the same process as the trial court did. We determine whether the defendant has made a threshold showing that the challenged cause of action is one arising from protected activity. The moving defendants burden is to demonstrate that the act or acts of which the plaintiff complains were taken in furtherance of the [defendant]s right of petition or free speech under the United States or California Constitution in connection with a public issue, as defined in the statute. ( 425.16, subd. (b)(1).) (Equilon Enterprises v. Consumer Cause, Inc. (2002) 29 Cal.4th 53, 67, (Equilon).)  A defendant meets this burden by demonstrating that the act underlying the plaintiffs cause fits one of the categories spelled out in section 425.16, subdivision (e) [citation]. (Navellier v. Sletten (2002) 29 Cal.4th 82, 88.)

If the defendant makes its threshold showing, the burden shifts to the plaintiff to demonstrate a probability that it will prevail on its cause of action. ( 425.16, subd. (b)(1).) Because a special motion to strike is generally filed early in a lawsuit and section 425.16, subdivision (g) generally stays discovery until the motion is decided, the plaintiffs burden of establishing a probability of prevailing is not high. (Overstock.com, Inc. v. Gradient Analytics, Inc. (2007) 151 Cal.App.4th 688, 699.) The plaintiff must show that its suit has at least minimal merit. (Navellier v. Sletten, supra, 29 Cal.4th at p. 93. Thus, when the plaintiff demonstrates a probability of prevailing on any part of its claim, the plaintiff has met its burden of showing the cause of action is not meritless, the entire cause of action remains intact at that point in time and the special motion to strike is defeated. (Mann v. Quality Old Time Service, Inc. (2004) 120 Cal.App.4th 90, 106.)

Both the defendant moving party and the plaintiff are required to make a prima facie showing with respect to their respective section 425.16, subdivision (b)(1) burdens. (Church of Scientology v. Wollersheim (1996) 42 Cal.App.4th 628, 646, disapproved on another point in Equilon, supra, 29 Cal.4th at p. 68, fn.5.) In determining whether they make their showings, we consider the pleadings, and supporting and opposing affidavits stating the facts upon which the liability or defense is based. ( 425.16, subd. (b)(2).) We do not determine credibility nor weigh the evidence presented by the parties. The evidence favorable to the plaintiff is accepted as true, and the defendants evidence is evaluated to determine if it defeats plaintiffs evidence as a matter of law. (Flatley v. Mauro 2006)39 Cal.4th 299, 326.)

2. Plaintiff Has Alleged Acts That Arise from Protected Activity

We are inclined to give short shrift to the question as to whether defendants engaged in a protected activity when they filed the subject cross-complaints against Sternberg in case BC355731. Filing a lawsuit, or in this case a cross-complaint in an existing lawsuit, is exercising ones constitutional right of petition and thus a cause of action for malicious prosecution based on such activity meets the first prong of section 425.16 and shifts the analysis of a special motion to strike to the second prongwhether there is a probability of prevailing on the malicious prosecution cause of action. (Sycamore Ridge Apartments LLC v. Naumann (2007) 157 Cal.App.4th 1385, 1397‑1398.)

At this point, we decline to do anything more than acknowledge the argument made by H&A, in its special motion to strike, that it is not a proper party in this suit because it has never transacted business nor even completed the State Bar procedures for certification as a professional law corporation. H&A asserts that it did not file the cross‑actions against Sternberg on behalf of Molloy, Horner and SHA in case BC355731 but rather, it was Horners sole proprietorship law firmHorner and Associatesthat filed them. (See fn. 3, ante.) At the hearing on the special motion to strike, the trial court observed that Sternberg responded to that position taken by H&A by arguing that if H&A did not do anything in connection with the subject cross‑complaints against Sternberg, then H&A has no standing to bring a special motion to strike and claim that it is protected from the instant suit by section 425.16. H&A countered that it is the allegations in the complaint that count with respect to the protection provided by a section 425.16 special motion to strike and here, the complaint in the instant case alleges that H&A did file the subject cross-complaints against Sternberg in case BC355731, and therefore H&A was entitled to file a section 425.16 special motion to strike.

We disagree with H&As assertion on appeal that the trial court wrongly concluded that H&A is not entitled to invoke the anti-SLAPP statute. The reporters transcript of the courts remarks at the section 425.16 hearing shows that the court came to quite the opposite conclusion. The court began the hearing by stating that the first prong of the two-step analysis of the section 425.16 motion probably is not really an issue. The main issue is whether or not plaintiffs have [sic] shown that theres a probability of prevailing in this matter. The courts remarks about the question whether H&A was properly alleged in Sternbergs complaint to be the law firm that filed the subject cross-complaints against him in case BC355731 were simply, in the courts own words, an observation about an interesting argument and about a pretty interesting counter-argument made by Sternberg. The court added that it thought they [sic] have established enough in their [sic] papers that the corporate entity is properly a defendant in this case.

The question of proper parties can be addressed as needed in the trial court upon remand for further proceedings.

3. Plaintiff Demonstrated a Probability of Prevailing on the Merits

a. Elements of a Cause of Action for Malicious Prosecution

A cause of action for malicious prosecution involves a prior suit that was (1) initiated by or at the direction of the party that is the defendant in the malicious prosecution action and was legally terminated in the plaintiffs favor, (2) initiated without probable cause, and (3) initiated with malice. (Siebel v. Mittlesteadt (2007) 41 Cal.4th 735, 740.)

b. The Cross-Complaints Against Sternberg Were Initiated
by Or at the Direction of Defendants and Were Legally
Terminated in Plaintiffs Favor

The first element of a cause of action for malicious prosecution is met in this case. Horner was both a plaintiff in a cross-action against Sternberg in case BC355731 and he was the attorney who filed that cross-action. H&A is alleged to be the law firm through which Horner acted in filing the cross-complaint. Further, Horner and H&A filed Molloys cross-action against Sternberg.

Moreover, the cross-actions were legally terminated in Sternbergs favor. The element of a favorable termination for the plaintiff tends to indicate the plaintiffs innocence. (Siebel v. Mittlesteadt, supra, 41 Cal.4th at p. 741.) Here, the amended cross‑complaint against Sternberg that was filed by Horner and H&A on behalf of Horner and SHA was terminated by a voluntary dismissal without prejudice after Sternbergs demurrer to the amended cross-complaint was sustained with leave to amend. Molloys amended cross-complaint against Sternberg was terminated when, at the request of Horner, the trial court sustained Sternbergs demurrer to it without leave to amend. That was essentially a voluntary dismissal with prejudice. Termination by voluntary dismissal is considered a termination in favor of the plaintiff because it reflects on the merits of the underlying action. There is a natural assumption that a party does not abandon a lawsuit it has filed if the suit is meritorious. (Lackner v. LaCroix (1979) 25 Cal.3d 747, 750‑751.) In Sycamore Ridge Apartments LLC v. Naumann, supra, 157 Cal.App.4th at pp. 1399‑1400, the court observed that [a] voluntary dismissal is presumed to be a favorable termination on the merits, unless otherwise proved to a jury.) A voluntary dismissal, even one without prejudice, reflects on the merits. (5 Witkin, Summary of Cal. Law (10th ed. 2005) 501, p. 735.)

This analysis is not defeated as a matter of law by defendants assertion that they only filed a request for dismissal of the SHA/Horner cross-complaint against Sternberg, and only asked that the demurrer to Molloys amended cross-complaint against Sternberg be sustained without leave to amend, because of remarks made by the trial court at the hearing on Sternbergs demurrer to Molloys amended cross-complaint. Defendants assert that the trial courts lack of enthusiasm for having both the claims in the cross‑complaints and the claims in Matare and Bayten-Szwics complaint heard in the same trial effectively drove Horner out of the courtroom. Defendants further assert that Horners request that Sternbergs demurrer to Molloys cross-complaint be sustained without leave to amend reflected [Horners] exasperation at [the trial courts] intolerance for his claims. These rationales do not preclude a finding that the voluntary dismissal of defendants amended cross-complaint, and Horners request to have the demurrer to Molloys amended cross‑complaint sustained without leave to amend, reflected on the merits of those cross‑complaints. Moreover, a request to have Sternbergs demurrer to Molloys cross‑complaint sustained without leave to amend reflects on the merits of defendants own cross‑complaint against Sternberg since both cross-complaints allege similar causes of action based on similar alleged facts.

H&A asserts that different conclusions must be drawn with respect to it. H&A argues that it did not file and prosecute the cross-complaints against Sternberg but rather they were filed and prosecuted by the sole proprietorship Horner and Associates. Therefore, H&As argues, there can be no cause of action for malicious prosecution against H&A. This argument is in direct contrast to H&As abovementioned position that it has the right to bring a section 425.16 special motion to strike because Sternberg alleges in his complaint that H&A was the law firm that filed the cross‑complaints. H&A cannot have it both ways for the same motion. Section 425.16, subdivision (b) states that special motions to strike are brought by persons who have been sued because of acts taken by them in furtherance of their right of petition or free speech. Having attempted to extricate itself from this lawsuit by asking the court to strike the complaint against it because of the allegation in the complaint that it engaged in an activity that is protected, rather than attempting to remove itself from the suit by bringing some other pretrial motion, H&A is, for purposes of the entirety of its special motion to strike, the law firm that engaged such activity.

c. The Probable Cause and Malice Requirements

Malicious prosecution is a disfavored cause of action because of its potential chilling effect of dissuading ordinary citizens from bringing lawsuits to resolve disputes and seek redress for injuries. For that reason, the elements of the tort have historically been carefully circumscribed so that litigants with potentially valid claims will not be deterred from bringing their claims to court by the prospect of a subsequent malicious prosecution action. (Sheldon Appel Co. v. Albert & Oliker (1989) 47 Cal.3d 863, 872, Sheldon Appel.)

Whether there was probable cause to bring a lawsuit is always a question of law for the court to decide based on the facts established in a case. (Sheldon Appel, supra,47 Cal.3d at pp. 874‑875.) Determining whether there was probable cause to initiate a lawsuit requires a sensitive evaluation of legal principles and precedents and courts must distinguish between an unsuccessful claim and a legally untenable claim. (Sheldon Appel, supra, 47 Cal.3d at p. 875.) The trial court must determine whether, on the basis of the facts known to the defendant [in the malicious prosecution suit], the institution of the prior action was legally tenable. The resolution of that question of law calls for the application of an objective standard to the facts on which the defendant acted. . . .  [I]f the trial court determines that the prior action was objectively reasonable, the plaintiff has failed to meet the threshold requirement of demonstrating an absence of probable cause and the defendant is entitled to prevail. (Id. at p. 878.)

The defendants subjective belief in, or evaluation of, the legal tenability of the prior suit is not an element of probable cause, but the defendants subjective belief in, or knowledge of, a given state of facts may be relevant. (Sheldon Appel, supra, 47 Cal.3d at p. 879.) Where there is a dispute as to the state of the defendants knowledge and the existence of probable cause turns on resolution of that dispute, . . . the jury must resolve the threshold question of the defendants factual knowledge or belief. Thus . . . the jury must determine what facts the defendant knew before the trial court can determine the legal question whether such facts constituted probable cause to institute the challenged proceeding. (Id. at p. 881.) Moreover, if the trial court determines that the resolved, or undisputed, preliminary facts demonstrate that the prior suit was objectively tenable, there is no cause of action for malicious prosecution even if the plaintiff can show that its adversarys law firm did not realize how tenable the prior claim actually was, the adversary could have consulted a more legally astute law firm to bring an identical claim. (Id. at p. 882.) The quality of an attorneys legal research on the reasonableness of a prospective lawsuit is not relevant to the issue whether such suit was brought with probable cause. (Id. at pp. 882-883.) Nor is expert testimony on the issue whether a claim was tenable, since it is a question of law for the trial court to decide. (Id. at p. 884.)

A cause of action for malicious prosecution will lie when the underlying suit charged multiple grounds of liability and some but not all of them were asserted or pursued without probable cause and with malice. (Crowley v. Katleman (1994) 8 Cal.4th 666, 671, 679. However, [a] plaintiff remains free to allege any and all inconsistent counts that a reasonable attorney would find legally tenable on the basis of the facts known to the plaintiff at the time. (Id. at p. 691.)

The determination of the question whether institution of a prior suit was legally tenable is determined by resolving the question whether any reasonable attorney would have thought that the prior lawsuit was tenable, tak[ing] into account the evolutionary potential of legal principles so as to avoid[] the chilling of novel or debatable legal claims. (Sheldon Appel, supra, 47 Cal.3d at pp. 885-886.) Thus, for example, [c]laims that have succeeded at a hearing on the merits, even if that result is subsequently reversed by the trial or appellate court, are not so lacking in potential merit that a reasonable attorney or litigant would necessarily have recognized their frivolousness. (Wilson v. Parker, Covert & Chidester (2002) 28 Cal.4th 811, 818, holding that just as a denial of a defense motion for summary judgment in an underlying case establishes the probable cause to file that case, the denial of a defense section 425.16 special motion to strike in an underlying suit also establishes probable cause to bring a suit, absent proof the special motion to strike ruling was obtained by fraud (id. at p. 815 et seq.).)

The lack of probable cause to bring a suit can be tied to the element of malice. If the trial court concludes that the prior action was not objectively tenable, evidence that the defendant attorney did not subjectively believe that the action was tenable would clearly be relevant to the question of malice. (Sheldon Appel, supra, 47 Cal.3d at p. 881.) However, the inference of malice from the absence of probable cause to file suit is not automatic. (5 Witkin, supra, at p. 761.) Also, as with the question of the defendants subjective belief in the tenability of the claim, if the trial court determines that the prior action was not objectively tenable, the extent of a defendant attorneys investigation and research may be relevant to the . . . question of whether or not the attorney acted with malice. (Id. at p. 883.) However, if a court finds a suit was brought with probable cause, the cause of action for malicious prosecution fails even if there is evidence such suit was motivated by malice. (Id. at p. 875.)

The element of malice relates to the subjective intent or purpose with which the defendant acted in initiating the prior action and such motivation is a question of fact for the trier of fact to determine. (Sheldon Appel, supra, 47 Cal.3d a at p. 874.) Malice may range anywhere from open hostility to indifference.  (Soukup v. Law Offices of Herbert Hafif (2006) 39 Cal.4th 260, 292.) Because it is not improper to file an action for personal ends, the plaintiff in a suit for malicious prosecution must plead and prove either actual ill will or some ulterior purpose distinct from that of enforcement of the alleged cause of action. (5 Witkin, supra, at p. 760.) Malice is usually demonstrated by circumstantial evidence or inferences drawn from evidence. (Id. at p. 761.)

d. Evidence Submitted by Sternberg on the Elements of
Probable Cause and Malice

The question whether defendants filed the cross-complaints against Sternberg without probable cause and with malice was addressed in the declarations filed by plaintiff, Horner and Molloy. We focus on Sternbergs declaration because he has the burden of a prima facie showing that he will prevail on his cause of action for malicious prosecution, and in our analysis of the elements of probable cause and malice, we add evidence from the other declarations as needed.

In his declaration, Sternberg stated that he and Horner were both employees of SHA, Sternberg was not the employer of Horner, and Horner does not contest those facts. Their arrangement for their law firm SHA was that Sternberg would head the firms transactional department and manage the firm, and Horner would head the litigation department. Sternberg notes that Horner stated in his (Horners) own declaration filed in support of the special motion to strike that Sternberg is a transactional lawyer and Sternberg sought Horners assistance when the law firms transactional clients had litigation matters, that Horner stated in his deposition in a Ventura County case that Sternberg does not do litigation, and that associate attorney Lisa Gallo stated in her deposition that Sternberg did not involve himself in the firms litigation matters. Horner has over 25 years of experience in litigation.

Regarding the Antoniello collection suits against Matare and Bayten-Szwic, Sternberg stated he took no part in them. Initially, the only thing he knew about those cases was that SHA was handling a litigation matter for Antoniello, Horner was in charge of it, and Horner assigned associate attorneys to the case that reported to, and took direction from Horner, not Sternberg. Horner continued to represent Antoniello in those two collection cases after Horner left SHA. It was only just recently that Sternberg learned that (1) the Antoniello cases involved Antoniellos claim against Vitus Matare in a construction matter, (2) a judgment was entered against Antoniello on all of its causes of action in the first case, and then (3) Horner and H&A filed another suit against Matare on Antoniellos behalf, on the same claims, and a demurrer to that complaint was sustained without leave to amend.

Neither Horner nor Molloy ever informed Sternberg that the Antoniello suits were improperly handled and had they done so, Sternberg would have taken steps to ensure that SHA informed its insurance carrier of a potential claim against it. Not until he received service of process on behalf of SHA in the malicious prosecution suit that Matare and Bayten-Szwic, Inc. filed in case BC355731 did Sternberg become aware that anything had been mishandled in the Antoniello cases, and Sternberg was not named as a defendant in that suit nor in Antoniellos cross-complaint in that suit is because he had no involvement with the Antoniello actions. After receiving service of process in that case, he wrote to Horner telling Horner he was not aware of any errors and omissions coverage for the claims by the plaintiffs in case BC355731, and telling Horner that Horner caused the problem and should clean up [his] own mess. Horner has never denied that the Antoniello problems were his own fault and never accused Sternberg of any wrongdoing with regard to the Antoniello actions.

Sternberg notes that at the hearing on his demurrer to Horner and SHAs amended cross‑complaint against him, the trial court found that with respect to the causes of action for contribution and indemnity, those causes of action have no basis in fact because those doctrines apply when you have joint tortfeasors of unequal liability obligated to a person that recovers damage. The court added: Theres no comparative fault here insofar as the malicious prosecution action [filed by Matare and Bayten-Szwic] is concerned.[6]

With respect to the issue of malice, Sternberg noted in his declaration that at the hearing on his demurrer to Molloys amended cross-complaint in case BC355731 the trial court stated: I think that its obvious that theres a lot of hard feelings among the former lawyers at [SHA], and thats driving a lotthat animosity is driving a lot of whats going on. Sternberg also noted in his declaration that at that same hearing Horner asked the court to sustain the demurrer without leave to amend, and the court obliged him, and then a week later Horner dismissed his and SHAs amended cross-complaint against Sternberg even though Sternbergs demurrer to their amended cross-complaint had been sustained with leave to amend.

Sternberg stated that in December 2004 he discovered that Horner had been running a competing law firm the entire time Horner was an employee and shareholder of SHA, and Horner used SHAs funds, assets (office and equipment), and employees in handling cases for his personal benefit, and after Sternberg learned of this, he and Horner agreed that Horner would terminate his employment with SHA. Horner took many of SHAs matters with him to his personal law firm. One of the SHA associates, Lisa Gallo, also resigned from SHA. At the time of their resignations, many of SHAs original documents disappeared from the SHA office. After Horner left SHA, Sternberg learned that Horner and Gallo had billed SHA clients for time spent on Horners personal matters, and Horner had accepted construction work by Antoniello & Co. on his own personal residence in lieu of the client paying SHA for SHAs services. The value to Horner of the construction work is $101,433.70, and although Horner agreed to pay SHA half of that sum, he never did so. Sternberg estimates that the damage to himself and SHA from Horners activities exceeds $1 million. Sternberg observes that in his declaration filed in support of the special motion to strike, Horner admitted that he has been running a sole proprietorship law firm since 1990 in Los Angeles and in 2000 he formed the joint venture practice with Sternberg in Westlake Village (SHA), and it began operating in January 2001.

Sternberg asserts that Horner instituted defensive actions against Sternberg to cover up his theft and embezzlement from SHA. Specifically, in May 2005, Horner and SHA sued Sternberg, a former secretary of SHA, and Sternberg & Leon, LLP, the law firm of which Sternberg was a partner at that time, alleging 17 causes of action, and then dismissed the entire suit, without prejudice, the following month. Then in August 2005, Horner sued Sternberg, SHA and Sternberg & Leon, LLP. Both of those suits were filed in Ventura County. Thereafter, in October 2007, in the instant suit, Horner filed the abovementioned cross-complaint against Sternberg for malicious prosecution, which he then dismissed without prejudice in November 2007.

Also, in a November 2006 letter from Horner to Sternberg, Horner acknowledged that if indemnity is owed to Horner because of the malicious prosecution suit against Horner filed by Matare and Bayten-Szwic, then under Labor Code section 2802 it would be SHA that is obligated to indemnify Horner, and Horner did not suggest that Sternberg had an obligation to indemnify him. Also, as a shareholder of SHA, Horner knew that SHA had never purchased tail end insurance policies for departing employees and Horner never requested that SHA purchase such insurance.

Additionally, Horner testified at a deposition that he offered to provide both a defense and indemnity to SHAs associate attorneys who were sued by Matare and Bayten-Szwic for malicious prosecution, including Molloy, and thus, Horner knew that Molloy had no exposure in that suit but nevertheless Horner filed a cross-complaint against Sternberg anyway on behalf of Molloy for indemnification. Also, Molloy, in a letter to Sternberg and Horner dated November 20, 2006, stated his belief that under Labor Code section 2800 et seq. it would be SHA that was required to defend and indemnify him in his capacity as a former employee of SHA, and not in that letter nor at any time prior to Horner filing Molloys cross-complaint against Sternberg did Molloy insinuate that Sternberg himself had such a duty to him or a duty to provide tail insurance.

Sternberg stated he has expended over $50,000 in attorneys fees to defend Horner and Molloys cross-complaints, as well as a great deal of time and other non-monetary resources and suffered a great deal of stress, and he denied that he ever misrepresented his understanding of SHAs financial condition to Horner, Molloy, or the court in case BC355731.

e. There is Sufficient Evidence of Lack of Probable Cause
to Sue for Indemnity and Contribution

Like the trial court, we find that the record contains sufficient evidence showing that causes of action against Sternberg in case BC355731 were brought without probable cause and with malice. Specifically, we are speaking of the indemnity and contribution claims.[7] Thus, because there is at least one cause of action that lacks probable cause and demonstrates malice in its inception, those elements of a cause of action for malicious prosecution have been met, and coupled with the favorable termination of the cross‑complaints, demonstrate that defendants special motion to strike was properly denied.

Horner and SHA alleged in their amended cross-complaint that SHA is the joint venture of Sternberg and Horner, it operates as a professional law corporation, and its directors and officers are Sternberg and Horner and each is a 50% shareholder. In his declaration, Sternberg added that he and Horner were also each employees of SHA. The legal fiction of the corporation as an independent entity was never intended to insulate officers and directors from liability for their own tortious conduct. . . .  A corporate officer or director, like any other person, owes a duty to refrain from injuring others. (PMC, Inc. v. Kadisha (2000) 78 Cal.App.4th 1368, 1380-1381.) Corporate status does not per se subject a person to vicarious liability. (Id. at p. 1378.) Personal liability of an officer, director or shareholder for the torts of the corporation comes from having actively participated in some meaningful sense in the tortious conduct, authorized it, directed it, had knowledge of it or consented to it. (Id. at pp. 1379‑1380.) Liability also results from intentional torts that directors, officers or shareholders of a corporation knew of or had reason to know of but failed to stop. (Id. at pp. 1387-1388.)

Here, Sternberg stated in his declaration that (1) he was not involved with SHAs litigation cases and thus not involved in the collection suits that SHA filed against Matare and Bayten-Szwic on behalf of SHAs client Antoniello, (2) it was instead Horner and other SHA attorneys who filed and pursued those collection cases, (3) after Horner left SHA Horner continued to represent Antoniello in those cases, and (4) he (Sternberg) only recently became aware of the suits and what they entailed. It is to be noted that in Matare and Bayten-Szwics suit for malicious prosecution, SHA, Horner and other SHA attorneys were named as defendants but Sternberg was not named. Evidence in Curtis Molloys declaration, which was filed in support of his joinder in defendants special motion to strike, that disputes Sternbergs representation of what he knew and when he knew it does not defeat Sternbergs declaration as a matter of law. Thus, limited as this state of evidence is by the early status of the case, and the rule that we do not judge credibility or weigh evidence, when Sternbergs evidence is taken together with established law on indemnity, it leads us to the conclusion that no reasonable attorney would have asserted a cause of action against Sternberg for traditional or comparative indemnity. While defendants assert that their claims against Sternberg in their cross‑complaints were grounded in the evidence that Sternberg had some level of participation in the [Antoniello m]atters, that issue of fact is left for the trier of fact to decide. We accept as true evidence favorable to Sternberg.

Nor have defendants made a case that Labor Code section 2802 provides a basis for indemnity against Sternberg in favor of themselves or Molloy. Section 2802 was cited by defendants in their original cross-complaint for indemnity against Sternberg but not their amended cross-complaint; and defendants cited section 2802 in the cross‑complaints for indemnity that were filed against Sternberg on behalf of Molloy. That statute requires employers to indemnify their employees for necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful. Here, SHA, not Sternberg, was Molloys employer and Horners employer. Although Horner relies on Bradstreet v. Wong (2008) 161 Cal.App.4th 1440, 1459, to support his contention that [c]orporate officers may be personally liable for sums due by the employer corporation to employees under certain circumstances, the portion of the Bradstreet opinion upon which Horner relies addressed an employees rights under Californias Unfair Competition Law (Bus. & Prof. Code, 17200 et seq.) and the Bradstreet court stated that such law does not require defendants in a section 17200 case to pay back wages to employees of a corporation if the defendants had not required the employees to work for them personally and had not misappropriated corporate funds for their own use. Bradstreet did not address Labor Code section 2802. The other case upon which Horner relies is a bankruptcy case in which a president of a corporation who was also its largest shareholder was found to have dual employer status with the corporation because of his direct supervision of an employee and his contract with the employee which controlled the scope and everyday aspects of the employees employment. Here, Sternbergs evidence, although it is disputed, is that he did not have control over Molloy with respect to client Antoniellos suits against Matare and Bayten-Szwic. Moreover, we reject defendants claim that because associate attorney James Moser also sued Sternberg (and SHA and Horner) for indemnity under Labor Code section 2802, this makes the section 2802 claims in defendants and Molloys cross-complaints against Sternberg per se tenable.

Nor do Business and Professions Code section 6171 and Law Corporation Rules of the State Bar of California, rule IV B (3) provide cover for Horner and H&A. Section 6171, subdivision (b) gives the California State Bar the authority to direct [t]hat a law corporation, as a condition of obtaining a certificate pursuant to the Professional Corporation Act and this article, shall provide and maintain security by insurance or otherwise for claims against itby its clients for errors and omissions arising out of the rendering of professional services. (Italics added.) Law Corporation Rule IVB(3) is the rule enacted under section 6171, subdivision (b). It states that for a law corporation that applied to the State Bar for a Certificate of Registration on or after October 27, 1971, such as SHA, security for claims against the corporationby its clients for errors and omissions that arise out of the practice of law shall consist of a written agreement executed by each shareholder of the law corporation in which they jointly and severally guarantee payment by the corporation of claims established against it by its clients, up to a specified financial limit, which can be offset by an amount paid by an insurer providing malpractice insurance for the corporation or any of its shareholders.

Clearly this rule and section 6171 were enacted for the benefit of a law corporations clients and they give clients recourse against the law corporation and its shareholders for legal malpractice. Thus, Horner and Sternberg have joint and several liability to their law firms clients as guarantors for the firms financial responsibility for malpractice. (Beane v. Paulsen (1993) 21 Cal.App.4th 89, 95-96, disapproved on another point in Beal Bank, SBB v. Arter & Hadden, LLP (2007) 42 Cal.4th 503, 514.) But here, neither of Horner and SHAs causes of action for indemnity in their cross-complaint against Sternberg asserts rights based on damages which a court may find to have been suffered by SWAs client, Antoniello. The same is true for Horner and SHAs cause of action for equitable indemnity in their amended cross‑complaint against Sternberg.[8]

Moreover, Horner and SHA could have no cause of action against Sternberg for contribution. Sternberg was not named as a defendant by Matare and Bayten-Szwic in their suit for malicious prosecution, nor was he named a cross-defendant in Antoniellos cross-complaint. Therefore, there could not be a judgment rendered jointly against Sternberg and Horner and SHA and in favor of Matare and Bayten-Szwic, and/or in favor of Antoniello, a requirement for a cause of action for contribution. (Code Civ. Proc.,  875.)

f. There Is Sufficient Evidence of Malice

For at least the purposes of the special motion to strike, there is sufficient evidence that it was malice that prompted Horner to file the cross-complaints against Sternberg in case BC355731. Indeed, the trial court in ruling on one of Sternbergs demurrers observed that its obvious that theres a lot of hard feelings among the former lawyers at [SHA], and thats driving a lotthat animosity is driving a lot of whats going on. We will recite some of the other evidence from which malice can be inferred.

There is evidence that Horner had so little regard for Sternberg and SHA that he ran his own private law firm the entire time he was an employee and shareholder of SHA, without informing Sternberg of what he was doing, and he used SHAs funds, assets, and employees in handling cases for his personal benefit. After Sternberg learned of this and Horner left SHA, Sternberg discovered that many of SHAs original documents had disappeared from the SHA office, that Horner and another attorney in the SHA firm had billed SHA clients for time spent on Horners personal matters, and that Horner had accepted construction work by Antoniello on his own personal residence in lieu of the client paying SHA for SHAs services and the value to Horner of the construction work was $101,433.70.

Additionally, Horner, who has over 25 years of litigation experience, sued Sternberg for causes of action (contribution and indemnity) that have no basis in fact. Further, in a three-year period, Horner filed four suits or cross-complaints against Sternberg, or Sternberg and SHA, or Sternberg, SHA and Sternberg & Leon, LLP, and he dismissed three of them. Additionally, at the hearing `on Sternbergs demurrer to Molloys amended cross-complaint, Horner asked the court to sustain the demurrer without leave to amend and the court obliged him, and a week later Horner dismissed his and SHAs own amended cross-complaint against Sternberg even though Sternbergs demurrer to it was sustained with leave to amend.

Also, Horner acknowledged in a letter to Sternberg that if indemnity is owed to Horner because of the malicious prosecution against Horner filed by Matare and Bayten‑Szwic, then under Labor Code section 2802 it would be SHA that is obligated to indemnify Horner, and Horner did not suggest that Sternberg also had an obligation to indemnify him. And, as a shareholder of SHA, Horner knew that SHA had never purchased tail end insurance policies for departing employees and Horner never requested that SHA purchase such insurance.

g. An Unclean Hands Defense Is Not Helpful to Defendants

In support of their special motion to strike, defendants asserted they have an affirmative defense to Sternbergs malicious prosecution suit. The claimed defense is Sternbergs own unclean hands and it is based on a statement made by Sternbergs attorney at a demurrer hearing in case BC355731, and on testimony given by Sternberg at a deposition.

Defendants assert that at the hearing on Sternbergs demurrer to their first amended cross-complaint in case BC355371, Sternberg gave misleading information to the trial court. Specifically, when the court suggested that Sternberg and Horner try to settle the suit for malicious prosecution brought against SHA, Horner and the other three attorneys with whatever are the assets after creditor claims are paid of the old law firm, meaning SHAs creditor claims, Horner replied that [t]here are no assets left of the old law firm, according to declarations and documents that have been submitted in the other case. To that, Sternbergs attorney, Don Lanson, replied: Thats not a correct statement, but, . . .  at which point the trial court cut off Mr. Lanson and agreed with him. The court said: I dont think thats correct.

Defendants also cite to a deposition taken of Sternberg in the instant case in which Sternberg testified he worked as an accountant for three or four years, and further testified that the term insolvent means having liabilities in excess of assets, and also means not having money to pay bills as they come due. Then, he was asked about Curtis Molloys request that SHA indemnify and defend him in Matare and Bayten‑Szwics suit against Molloy. The question put to Sternberg was: Now, when Curtis Molloy asked to be indemnified or defended, SHA didnt have the money on hand to take care of that because of some of the obligations of which youve previously testified; is that correct? Stenberg answered: SH&A did not. Correct. Thats correct.

In addition to this asserted contradiction regarding SHAs financial status, defendants also assert unclean hands based on (1) deposition testimony during which Sternberg was asked about his attempts to locate SHAs files pertaining to Antoniellos two suits, and which defendants assert shows that Sternberg suppressed or made half‑hearted attempts to locate files that were needed to help SHA defend itself against the complaint and Antoniellos cross-complaint in case BC355731, and (2) deposition testimony during which, defendants assert, Sternberg produced grossly incomplete billing records relating to these two [Antoniello] matters so as to support his claim that he had no responsibility in handling the Antoniello matters.

Assuming for arguments sake that any of the published cases upon which defendants rely to support their claim of an unclean hands defense to a suit for malicious prosecution would otherwise be applicable to support their section 425.16 special motion to strike, there is no factual basis for applying those cases here. It was Sternbergs attorney, not Sternberg, who represented to the court at the demurrer hearing that Horners statement about SHAs assets was not correct, and the attorney was about to make a further statement when the trial court cut him off and so we have no way of knowing if his statement was about to be clarified in some manner. This impacts the issue of Sternbergs answer at his deposition that SHA did not have money on hand to indemnify and defend Molloy.

Whether Sternbergs deposition testimony demonstrates he did not conscientiously attempt to locate the Antoniello files is a question of fact and not decisive to the special motion to strike. And Sternbergs testimony during which he was not able to explain the billing records relating to these two Antoniello matters is arguably simply in keeping with his assertion that he did not work on those matters and his further testimony at the deposition that even though he was in the SHA office four or five days a week during the time Antoniellos suits against Matare and Bayten-Szwic were ongoing, he could not recall ever having a substantive conversation about those cases.

DISPOSITION

The order denying defendants section 425.16 special motion to strike is affirmed. Costs on appeal to plaintiff.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

CROSKEY, J.

We Concur:

KLEIN, P. J. KITCHING, J.

Publication courtesy of California pro bono legal advice.

Analysis and review provided by La Mesa Property line attorney.

San Diego Case Information provided by www.fearnotlaw.com

[1] A third person, one Curtis Molloy, was also named as a defendant in this suit. He joined in Horner and H&As special motion to strike and was also denied section 425.16 relief by the trial court. He has since settled with Sternberg and is not a party to this appeal.

[2] In the instant case, Horner also filed a cross-complaint against Sternberg for malicious prosecution, which was based on one of the causes of action in a suit that Sternberg brought against Horner in Ventura County. That cause of action was for invasion of privacy, and Horner had successfully had it stricken from the Ventura County complaint by means of a section 425.16 special motion to strike. Horner then dismissed the cross-complaint without prejudice after Sternberg wrote a letter to him stating that (1) no cause of action for malicious prosecution could be stated since the Ventura County suit was ongoing and thus Horner had not received a favorable termination in the case, and (2) by filing the cross-complaint Horner violated the stay order that had been issued in the Ventura County case.

[3] As discussed below, one of the grounds for defendants section 425.16 special motion to strike is that defendant Horner & Associates, a Professional Law Corporation (i.e., H&A), is not the same entity as Horner & Associates.

[4] The original cross-complaint filed by defendants against Sternberg in Case BC355731 contains sparse allegations: the plaintiffs damages in that case, if any, were caused entirely or in part by Sternbergs acts or failure to act and if Horner and SHA are found to be liable to the plaintiffs (Matare and Bayten-Szwic), their liability is imputed and passive and attaches solely because of Sternbergs conduct and on those grounds Horner and SHA are entitled to be indemnified by Sternberg based on principles of equity, comparative fault and entitled to a declaration by the court so stating. The only statute mentioned in this cross-complaint is Labor Code section 2802.

The amended cross-complaint alleges the following. SHA is the joint venture of Sternberg and Horner, it operates as a professional law corporation, and its directors and officers are Sternberg and Horner and each is 50% shareholder; SHA ceased ongoing business operations on March 31, 2005; as a condition for registration as a law corporation, SHA agreed to provide security for errors and omissions claims against it by its clients; Sternberg is the managing partner with a fiduciary duty to protect and preserve SHAs assets until it dissolved and Sternberg breached that duty by failing to maintain proper errors and omissions insurance and allowed such insurance to lapse in November 2005 without prior notice to Horner; case BC355731 was filed in July 2006; Horner and SHA agreed to provide their client Antoniello, and their former employees, Molloy, Moser and Lyden with a defense and indemnification in case BC355731; when Sternberg was served with the complaint in case BC355731, as SHAs agent for service of process, Sternberg told Horner that Horner is in the best position to defend SHA and should take appropriate action to do so; and Sternberg and Horner have not yet settled SHAs affairs. The amended cross-complaint further alleges Sternberg was negligent in carrying out his fiduciary duties to SHA and Horner to maintain adequate insurance coverage to satisfy SHAs liability to its clients and protect SHAs assets, and breached those fiduciary duties, in that Sternberg allowed insurance coverage to lapse without prior notice to Horner; Sternberg, Horner and SHA are jointly and severally liable for any damages for which SHA and Horner may be found to be liable to the plaintiffs (Matare and Bayten‑Szwic), to Antoniello, and to Molloy, Moser and Lyden in case BC355731 and thus Horner and SHA would be entitled to contribution, equitable indemnification, or comparative indemnification from Sternberg. No statutes were alleged in the amended cross-complaint to be applicable.

In ruling on Sternbergs demurrer to the amended complaint, the court stated: Cross-complainant charges Sternberg with failing to purchase errors & omissions insurance that includes claims made following Horners withdrawal from the firm. From what source is this duty derived? Claims and [sic] contribution and indemnity arise between joint or several tortfeasors causing injury to a plaintiff. Cross‑complainants do not allege that situation: they allege that Sternberg failed to discharge a duty that is independent of the Matare plaintiffs claim but which caused injury to cross-complaints. [] The court accordingly SUSTAINS a demurrer to the cross-complaint with 20 days leave to amend.

[5] In December 2007, a summary judgment on the complaint in case BC355731 was signed and filed in favor of SHA, Horner and Molloy. The judgment states that plaintiffs Vitus Matare and Bayten-Szwic, Inc. filed no opposition to the motion for summary judgment and made no appearance at the hearing on the motion.

[6] The trial court also stated its analysis of Sternbergs demurrer to Horner and SHAs causes of action that allege that Sternberg failed to maintain adequate errors and omissions insurance (causes of action four and five, for negligence and breach of fiduciary duty, respectively) and their cause of action for declaratory relief. However, because a claim for malicious prosecution lies when at least one of the causes of action in the underlying action lacked probable cause and was asserted with malice, we will concentrate this opinion on the causes of action for indemnity and contribution.

[7] Indemnity is the obligation of one party to pay the loss or damage that another party has incurred. Equitable indemnity (as distinguished from implied contractual indemnity), permits one of two tortfeasors to shift the entire loss to the other when, without active fault on the claimants part, he has been compelled by reason of som