Wise v. DLA Piper
Filed 10/8/13 Wise v. DLA Piper 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
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 This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115
COURT
OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION
ONE
STATE
OF CALIFORNIA
DENNIS WISE et al.,
Plaintiffs and Respondents,
v.
DLA PIPER LLP (US),
Defendant and Appellant.
D062150, D062661
(Super. Ct.
No.
37-2010-00090600-CU-PN-CTL)
APPEAL from
a judgment of the Superior Court
of
County, Frederick L. Link, Judge. Reversed.
Law Offices
of Martin N. Buchanan, Martin N. Buchanan; Coughlan, Semmer, Fitch & Pott,
R. J. Coughlan, Jr., and Cathleen G. Fitch for Defendant and Appellant.
Wolfe Legal
Group, Deborah A. Wolfe and Lann G. McIntyre for Plaintiffs and Respondents.
Dennis Wise and Joan Macfarlane (together the Wises) were
represented by the law firm, defendant DLA Piper LLC (US),
that aided them in obtaining a judgment in 1994 against William Cheng. However, DLA did not advise the Wises of the
necessity to renew the judgment, and after 2004 the judgment became
unenforceable. The Wises brought this
action alleging malpractice and obtained a judgment against DLA. On appeal, DLA contends the evidence is
insufficient to support the judgment against it because there was no evidence
the Wises' judgment against Cheng would have been collectable even had it been
renewed. DLA also contends on appeal (1)
there was no substantial evidence the statute
of limitations on the malpractice claim had been tolled by continuous
representation, (2) the special verdict form was fatally flawed because it did
not submit to the jury the issue of whether there had been continuous
representation within four years of filing the complaint, and (3) even assuming
the judgment as to liability and damages was proper, there was no legal basis
for the award of attorney fees against DLA.
We do not reach these contentions because of our conclusion that there
was no substantial evidence the judgment against Cheng was collectable.
I
FACTUAL
BACKGROUND
A. DLA's Representation of the Wises in the Cheng
Matter
In 1987, the Wises loaned $350,000 to Cheng, who signed
two promissory notes. However, Cheng
defaulted on the notes, and later filed for bankruptcy.
The Wises
retained their attorney, Robert Copeland, for assistance. Copeland, a DLA attorney, referred the matter
to Mr. Breslauer (a fellow DLA attorney) to handle the bankruptcy issues. DLA filed a complaint in the bankruptcy court
contesting the dischargeability of the debt owed by Cheng, alleging the loans
were intended to be used for Cheng's business but Cheng had embezzled the money
for his own use. The Wises and Cheng
ultimately settled the complaint, with Cheng agreeing (1) to reaffirm the debt,
(2) to commence making payments on the new obligation commencing in mid-1994,
and (3) to stipulate that a judgment be entered against Cheng in state court in
the event he defaulted on his new payment obligations.
Cheng made
no payments on the debt. Accordingly,
DLA obtained a state court judgment against Cheng, entered on August 1, 1994, for $605,184.50. DLA attorney Breslauer, who represented the
Wises in obtaining the judgment, told them "we have got this judgment,
it's good forever, until the cows come home." Breslauer also told the Wises "[w]e will
keep our ears to the ground" and "we can come back and bring in Mr.
Cheng for examinations from time to time, every six months, or surely once a
year, if we want, just for harassment purposes even, if you want to." However, DLA did not inform the Wises the
judgment would become invalid if not renewed within 10 years.
In 1994, DLA
pursued collection efforts but determined Cheng was "dead broke," and
a report from an asset search firm reported Cheng had no assets, had numerous
other creditors, had been sued in numerous other proceedings, and had state and
federal tax liens filed against him.
Breslauer sent the asset search report to the Wises, and stated that if
they were aware of any banking relationships not reflected in the report, they
should contact Breslauer and DLA would "follow up." The Wises did not ask DLA to do anything
further to collect the judgment, because there was nothing else to do unless
something new came up.
Copeland
left DLA in mid-1995 and took some of the Wises' matters with him to his new
firm. However, the Wises instructed that
the Cheng bankruptcy issues were to remain with Breslauer at DLA. When Breslauer left DLA at the end of 1995,
the Cheng bankruptcy matters apparently remained with DLA, because DLA attorney
Rubin wrote to the Wises in April 1996 explaining the status of the Cheng
bankruptcy and told them they would receive a final distribution check later in
the year, and that the "remainder of your judgment will survive this
bankruptcy and is enforceable against Cheng's post-bankruptcy
assets." Rubin stated she would
"continue to monitor this case" but told the Wises "it is likely
you will not receive any further notices except the one to allow the creditor
distribution."
In late
1996, DLA attorney Zander sent a letter to the Wises enclosing a check from the
bankruptcy trustee for $21,578.63, "representing the final distribution on
your claim in the [Cheng] bankruptcy case." DLA sent no further bills to the Wises on the
Cheng matter, although Rubin did send another letter to them in March 1998 that
enclosed a small check from the bankruptcy trustee and stated
"[a]pparently, this is the final distribution. . . . Give me a call if there is anything else we
can do for you."
The Wises
had no further contact with DLA until 2009.
Although DLA closed the Cheng file administratively, DLA did not notify
the Wises it had ceased representing them.
B. Subsequent Events
The Wises
divorced in 1998. When dividing their
marital assets, they contacted Copeland at his new firm to help accomplish the
division and assignment of the Cheng judgment, with each receiving
one-half. Copeland's new firm appeared
as counsel of record for the Wises in the state court lawsuit in which the
judgment against Cheng had been obtained and accomplished the division and
assignment later in 1998. Copeland did
not advise the Wises of the need to renew the judgment within 10 years.
In 2004,
the judgment expired as a matter of law. At trial, DLA stipulated its representation
of the Wises fell below the standard of care because it did not inform them of
the need to renew the judgment or calendar the 10-year expiration date on the
judgment. In 2009, the Wises discovered
the judgment had been allowed to expire, and filed the present action against
DLA within one year of that discovery.
C. Evidence of Collectability: Cheng's Postbankruptcy
Financial Condition
At trial,
Cheng testified he has not owned any bank accounts, real estate, or any other
assets since his bankruptcy proceedings.
He previously was licensed as a CPA, but relinquished that license in
the 1990's in part because he could not afford to pay for the continuing
education requirements. He had not filed
a personal tax return in 17 years.
name="_ftnref2" title="">[2] Since his bankruptcy, the "only
money" he has received to support his lifestyle was derived from three
sources: (1) financial support from his parents (until they passed away six
years before trial without leaving any estate to Cheng), (2) social security
payments of approximately $2000 per month, and (3) funds from investors in
corporations Cheng had formed. Cheng
also testified that, for the foreseeable future, the only money he would have
coming to him would be social security payments and proceeds from investors in
the corporations. Although Cheng also
stated he would be paid from "IBM sales," he testified he (1) had a
nonexclusive arrangement to market IBM products and services and would be paid
only if he sold an IBM product, (2)
had no commitments from any customers to purchase IBM products, and (3) had
been working with IBM for 20 years and had never been paid anything by IBM.
Cheng has a
proven ability to convince investors to invest in corporate entities he has
formed. Between 2003 and 2011, he raised
at least $1.3 million from investors in OSCN and its subsidiaries, although
Cheng estimated it was closer to $2 million.
All of these investment monies, in return for which the investors
received stock in the entities, were paid into the corporations and were spent
on operating expenses for the entities.
The operating expenses paid for by funds invested in OCSN included the
rent on the La Jolla house where Cheng lived, and his multiple trips to
China. None of the funds were given to
Cheng personally. By the time of trial,
OSCN had less than $100 in its bank account.
Cheng's biggest investor, Mr. White, had invested approximately $900,000
over the years and, although he had put other investors in contact with Cheng,
he cautioned them they had to be willing to take a 100% risk on any funds
invested. By the time of trial, White
had written off most of his investments because "[t]here was no viable
evidence that it was worth anything at that point," and White had told an
investigator that "nothing has happened since the beginning of the stock,
so I consider it worthless." Cheng
agreed the stock was "worthless" and "could be used to wallpaper
bathrooms."
Cheng
testified that, "if any of these businesses . . . takes off and
makes money," he would receive millions in back salary. However, none of the companies have any
contracts or agreements, and Cheng described the companies as "dead"
without an infusion of new investment funds.
Since the stock market crash of 2008, Cheng has had difficulty raising
money from investors. Cheng was
specifically asked about solicitation materials he gave to a potential investor
in 2009 seeking to persuade new investments in his companies. Cheng conceded the companies listed in those
solicitation materials were dead, dormant, or had never even been formed. Until "2016 or thereabouts" the
only money Cheng could count on receiving was from social security.
D. Expert Opinions on "Collectability"
Plaintiff's Expert
Joel Selik,
a collection attorney, testified for the Wises that the Cheng judgment (1)
could have been collected in the past and (2) might be collectable in the
future. Selik premised his opinion on
"past collectability" on several facts. First, Selik testified "it appears that
Cheng had at least $2 million dollars, probably more since he gave a million to
Ohio State," because Mr. White had invested approximately $900,000 so it
was "absolutely uncontroverted that [Cheng] had money" that could
have been reached by "piercing the corporate veil . . . and all
that money we'd be able to collect," and piercing would have been
"very easy in this particular case."
Second,
Selik testified that although he had seen neither the deed to nor lease for the
La Jolla home in which Cheng lived, there was "a probability" (based
on the length of time Cheng had lived there and the amount of rent paid) he had
an "ownership interest" in the home on which a creditor could
levy. Third, Selik relied on Cheng's
statement that he donated $1 million to his alma mater as indicative that Cheng
had substantial assets after the bankruptcy, although Selik conceded he did not
independently verify either the accuracy of Cheng's claim, or whether donations
were made after (rather than before) Cheng's bankruptcy. Cheng, a 1967 graduate of Ohio State
University, testified he donated over $1 million to the university "[o]ver
the years," and had also raised significant funds for Ohio State. However, there was no evidence these funds
were donated after the Wises' judgment had lapsed. Indeed, although Cheng received a
"Pacesetter" award from Ohio State's Fisher College of Business, that
award was conferred in 1986, and Cheng testified he had left the board of an
Ohio State alumni group after the bankruptcy.
Fourth,
Selik relied on Cheng's testimony that he (Cheng) had made multiple trips to
China after the bankruptcy as indicating he was "spending a lot of
money." The only evidence for the
funding of these trips was that Cheng used investor money for them, and Selik's
testimony contained no mention of any factual basis for his belief that Cheng
used personal resources for them. Indeed,
Selik conceded he had not conducted an asset search on Cheng, but nevertheless
stated (when asked how Cheng could have paid the judgment in response to
pressure from his investors) that "[w]e have a few possible sources and a
few out there in the [ether] that I suspect."
Fifth,
Selik expressed the opinion that Cheng had money hidden in foreign bank
accounts, although he conceded "we have no evidence of that." Finally, Selik believed a determined
collections effort could have included subpoenas requiring Cheng's investors to
appear at third-party debtor examinations, and these examinations would have
induced the investors either to put pressure on Cheng to pay the judgment or,
alternatively, to loan Cheng the money to pay the Wises.
On appeal,
the Wises claim (without citation to the record) Cheng "testified that if
he had been aggressively pursued, he would have come up with [enough money to
fully] satisfy the judgment." We
disregard this "testimony" in our analysis for several reasons. First, the Wises' malpractice claim was not
that DLA should have aggressively pursued collection efforts
2004, and therefore Cheng's purported ability to raise funds to pay the
judgment before that date has no
relevance to whether the Wises showed the judgment would have been collectable
had it not expired.
Second,
Cheng's "what if" surmises are doubly speculative, because it asks
him to speculate both as to what he
would have done, and to how others
would have reacted to what he might have done (cf. Sargon Enterprises, Inc. v. University of Southern California (2012)
55 Cal.4th 747, 780-781) and "speculation is not evidence, less still
substantial evidence." (
1048, 1081, disapproved on other grounds by People
v. Hill (1998) 17 Cal.4th 800, 823, fn. 1.)
Finally,
and most importantly, Cheng did not testify
he would have come up with enough money to fully satisfy the judgment had he
been pursued after 2004. Instead, the
Wises apparently refer to a declaration (not included in the record on appeal)
prepared by their counsel and signed by Cheng that stated "I am certain
that if I had asked, I could have and would have obtained stock equity
investments from [OCSN investors] to satisfy the entire judgment . . . ." Cheng's actual testimony, however, was that by the time he signed the declaration
he was not getting much money anymore from investors because of the
recession. Moreover, when specifically
asked about the statement that he would have obtained money from investors to
pay the judgment, Cheng actually testified he "wouldn't ask my investors to take their money and . . .
satisfy the judgment" (italics added), nor would he have "gotten
anywhere with [such a request]," nor would he have used investments made
in the corporations to pay the Wises because "[t]hat's what Ponzi schemes
do."
Selik's
opinion on "future collectability" was based on a single overarching
theme: because Cheng had been able to convince some "very important
men" to invest in his business proposals in the past, Cheng would likely
be able to obtain investors in his new business schemes in the future. After describing the various business schemes
being touted by Cheng as future avenues for investors,
Selik stated Cheng is either "the person to make them go or he is a scam
artist [and] I don't know the answer to that question." Although Selik conceded "there are a lot
of indices of scam artistry" by Cheng, Selik explained it made no
difference to his opinion on future collectability "whether or not
. . . Cheng is a scam artist or if he's for real," because
"[i]f he's really going forward, then we might have something
. . . in the millions and millions and millions to go after. If he's just a scam artist, it's probably
just a few million dollars in investments that we will be going
after." Specifically, Selik
explained "[i]f he's scamming people for business deals, my obligation [as
a collection attorney] is [to] the client.
I will be there to get the money that he's scamming from somebody
else."
Defendant's Expert
Miles
Grant, a collection attorney, testified for DLA that the judgment could not
have been collected in the past or in the future. Grant conducted an extensive investigation of
Cheng's assets, which Selik described as "excellent," and determined
that Cheng has "been broke" and has "never had any assets"
since 1991. Cheng owns no bank accounts
in his name, drives a car--registered in the name of one of his companies--against
which debt is owed, and lives in a rental unit (in which he had no ownership
interest) not in good condition and furnished with "quite old"
furniture.
Grant
explained that a primary theme of Selik's opinion regarding collectability--a
creditor may use "reverse alter ego" to reach corporate assets to satisfy
debts incurred by a shareholder of the corporate entity--is an incorrect theory
because the theory is no longer available to creditors. Grant also testified Selik's theory that the
creditor could have subpoenaed Cheng's investors for third-party debtor
examinations and thereby pressured his investors to lend money to Cheng (or
pressured Cheng to pay the judgment) faced numerous factual and legal
obstacles: first, the identities of the investors would be unknown to the
creditor unless Cheng cooperated with the creditor; second, many judges would
not permit a creditor to subpoena third-party investors because of the
statutory limitations on such subpoenas; finally, it is purely speculative that
investors would then have given or loaned Cheng an additional $1 million with
which to pay the judgment.
II
RELEVANT
LEGAL PRINCIPLES
A. Substantive Law: The Issue of Collectability
"The
elements of a cause of action in tort for professional negligence are: (1) the
duty of the professional to use such skill, prudence, and diligence as other
members of his profession commonly possess and exercise; (2) a breach of that
duty; (3) a proximate causal connection between the negligent conduct and the
resulting injury; and (4) actual loss or damage resulting from the professional's
negligence." (Budd v. Nixen (1971) 6 Cal.3d 195, 200.) A showing of the last element of damage
requires the plaintiff to prove that careful management of a lawsuit would have
resulted in a favorable judgment and
collection thereof because there is no damage in the absence of these
latter elements. (Campbell v. Magana (1960) 184 Cal.App.2d 751, 754; accord,
1499, 1507 (DiPalma) [where alleged
malpractice consists of mishandling a client's claim plaintiff must show proper
prosecution would have resulted in favorable judgment and collection thereof].)
"The
element of collectibility requires a showing of the debtor's solvency. ' ["W]here a claim is alleged to
have been lost by an attorney's negligence, . . . to recover more
than nominal damages it must be shown that it was a valid subsisting debt, and
that the debtor was solvent."
[Citation.]' [Quoting
788, italics added by DiPalma;
citations.] The loss of a collectible
judgment 'by definition means the lost opportunity to collect a money judgment
from a solvent [defendant] and is certainly legally sufficient evidence of
actual damage.' [Quoting
1350, 1369, dis. opn. of Johnson, J.]"
(DiPalma, supra, 27
Cal.App.4th at p. 1509.)
The
plaintiff in a malpractice action must establish that the underlying judgment
lost as the result of the attorney's error could have been collected. (Garretson
v. Harold I. Miller (2002) 99 Cal.App.4th 563, 571.)
court explained in Hecht, Solberg, Robinson, Goldberg &
Bagley, LLP v. Superior Court
(2006) 137 Cal.App.4th 579, 591:
"Although such a plaintiff is not required to
offer proof that establishes causation 'with absolute certainty,' a plaintiff
is still required to ' " 'introduce evidence which affords a
reasonable basis for the conclusion that it is more likely than not that the
conduct of the defendant was a cause in fact of the result.' " [Citation.]'
[Quoting Viner v. Sweet (2003)
30 Cal.4th 1232, 1243.] . . .
In this sense, collectibility of the hypothetical underlying judgment
against the named defendant is a component of the plaintiff's current case
relating to damages, as caused by the current negligent attorney defendant, and
is a fact-intensive inquiry.
"It is useful to consider the various factors
bearing upon the issue of collectibility of an underlying judgment,
. . . to establish the proper guidelines for discovery. Collectibility is part of the plaintiff's
case, and a component of the causation and damages showing, rather than an
affirmative defense which the Attorney Defendants must demonstrate. [Citations.]
Collectibility is not a question only of the solvency of the defendant
in an underlying case, such as in bankruptcy, but rather pertains to the
defendant's ability to pay a judgment or some part of it. [Citing 4 Mallen & Smith, Legal
Malpractice (2006 ed.) § 30.17, pp. 490-491.] . . . . Collectibility thus 'looks to the actual
circumstances to determine whether the judgment "would have been
collectable." ' (Id. at p.
494, fn. 40.) It is not enough for a plaintiff to present speculation or assumptions
about an underlying defendant's ability to respond in damages, as opposed to
proof of same. [Citation.] Admissible evidence on collectibility can
include information about the basic solvency of the defendant in the underlying
case, as shown by its assets, net worth or available proceeds from
investments." (Italics added.)
When the
plaintiff does not introduce evidence from which a trier of fact could
conclude, to a reasonable degree of certainty, the judgment would have been
collectable, a verdict in favor of the plaintiff must be reversed. (Filbin
v. Fitzgerald (2012) 211 Cal.App.4th 154, 166; accord, Garretson v. Harold I. Miller, supra, 99 Cal.App.4th at
pp. 571-575 [affirming grant of JNOV where no evidence of collectability
introduced].)
B. Standard of Appellate Review
On appeal,
a jury's findings on collectability are reviewed for substantial evidence. (Garretson
v. Harold I. Miller, supra, 99 Cal.App.4th at p. 569.) We review the evidence most favorably to the
findings, resolving all conflicts and indulging all inferences in support of
the judgment. (In re Marriage of Mix (1975) 14 Cal.3d 604, 614.) Although it is true that the testimony of a
single witness, including the testimony of an expert, may be sufficient to
constitute substantial evidence (Leslie
G. v. Perry & Associates (1996) 43 Cal.App.4th 472, 487), when an
expert bases his or her conclusion on factors that are "speculative,
remote or conjectural," or on "assumptions . . . not
supported by the record," the expert's opinion "cannot rise to the
dignity of substantial evidence" and a judgment based solely on that
opinion "must be reversed for lack of substantial evidence." (Pacific
Gas & Electric Co. v. Zuckerman (1987) 189 Cal.App.3d 1113, 1135-1136 (
assumes an incorrect legal theory cannot constitute substantial
evidence." (Corrales v. Corrales (2011) 198 Cal.App.4th 221, 226 (
III
ANALYSIS
A
demonstration of collectability here--whether Cheng was able to pay some or all
of the judgment--required the Wises to introduce admissible evidence (rather
than speculation or assumptions) as to " 'the actual circumstances to
determine whether the judgment "would have been
collectable[]" ' " and "can include information about
the basic solvency of the defendant in the underlying case, as shown by [his or
her] assets, net worth or available proceeds from investments." (Hecht, Solberg, Robinson, Goldberg & Bagley LLP v. Superior Court,
supra, 137 Cal.App.4th at p. 591.)
It appears the only evidence concerning Cheng's personal net
worth, income, or other assets came from the testimonies of Cheng, Grant, and
Selik. Grant's asset search revealed
Cheng owns no bank accounts in his own name, has "been broke since
1991," and has had no assets since 1991.
Cheng's trial testimony, confirming this assessment, also verified he
has not filed a personal income tax return in 17 years, and has funded his
lifestyle over those years from social security, gifts from his parents, and
money invested by third parties in his various corporate entities. The Wises' contrary showing contained no
affirmative evidence Cheng has owned any assets in his own name since
1991. On appeal, the Wises argue the
testimony of one witness can be substantial evidence and the jury could have
"decided that Cheng was lying" when he denied having any assets or
any current ability to pay the judgment.
"True as that may be, disbelief of [his] testimony does not
constitute affirmative evidence of the contrary proposition" (
1218, 1229), and hence the determination that Cheng was not credible simply
means his testimony has " 'no more effect than if it had not been
given. It disappears from the
case . . . .' "
(Hicks v. Reis (1943) 21
Cal.2d 654, 660.)
The Wises
rely principally on Selik's testimony that the judgment against Cheng was
collectable in the past and would be collectable in the future, to assert there
was substantial evidence to support the finding of collectability. We have examined all of the bases on which
Selik relied for his opinions and conclude, for the following reasons, his
opinion does not provide substantial evidence to support the finding of
collectability.
The
principal thrust of Selik's testimony regarding past and future collectability
was that the Wises could have used "reverse piercing" and obtained
funds placed in the corporate entities by third-party investors to satisfy the
judgment against Cheng. On appeal, the
Wises assert reverse piercing was not the only, or "arguably not even a
significant basis," for Selik's opinion.
However, the first example they cited on appeal for Selik's
"other" bases for his opinion on collectability was Selik's testimony
that a creditor can file a motion to amend the judgment to include the
corporate entity or file a separate lawsuit.
Selik did not state those were alternatives
to reverse corporate piercing, but instead testified those were the
whether reverse piercing was the principal predicate for Selik's opinion, or
was merely one of many bases for his opinion, because our evaluation of whether
substantial evidence supports the judgment requires an examination of whether
he had some basis for concluding the
judgment would have been collectable.
However, as
DLA's appellate brief convincingly argues, the law precludes the Wises from
employing "reverse piercing" to obtain funds paid by third party
investors into Cheng's corporate entities to satisfy Cheng's personal debts. (Postal
Instant Press, Inc. v. Kaswa Corp. (2008) 162 Cal.App.4th 1510, 1512-1513
["a third party creditor may not pierce the corporate veil to reach
a shareholder's personal liability"].)
Because the Wises provide neither argument nor authority to the
contrary, we deem the point conceded.
(Cf. Badie v. Bank of America
(1998) 67 Cal.App.4th 779, 784-785.)
When an expert premises an opinion on the assumption that an incorrect
legal theory applies, the opinion is entitled to no weight and cannot
constitute substantial evidence. (See,
e.g., Corrales, supra, 198
Cal.App.4th at p. 226.) To the extent
Selik's testimony that the judgment could have been collectable in the past
assumed the Wises could have pursued funds placed in the corporate entities by
third-party investors, Selik's opinion is premised on an incorrect legal theory
that cannot provide substantial evidence to support the finding of
collectability. The Wises provide
neither argument nor authority undermining this legal argument and,
accordingly, we deem the point conceded.
(Cf. Badie v. Bank of America
(1998) 67 Cal.App.4th 779, 784-785.)
They appear to argue, however, that DLA's expert testified about the bar
against reverse piercing and the jury, as trier of fact, was entitled to weigh
the evidence and elect to credit the Wises' expert and discredit DLA's
expert. However, although the jury does
decide factual issues, the Wises cite
nothing to suggest a jury is entitled to credit an erroneous
Selik's
other predicates for his opinion on past collectability fare no better. He relied, for example, on his speculation
that it is "probab[le] that [Cheng] has an ownership interest" in the
La Jolla home in which he lived.
name="_ftnref4" title="">[4] However, Selik conceded a creditor cannot
levy on rental property, and admitted he had seen neither the deed nor the
lease agreement for that property. The
asset search by Grant, which Selik described as "excellent,"
uncovered the recorded deeds to the property and showed Cheng did
property. There was apparently no
evidence suggesting the recorded owner and lessor was a straw man acting for
Cheng. Selik also relied on his
speculation that it is "likely" Cheng had or has money hidden in
foreign bank accounts, although Selik candidly admitted that "we have no
evidence of that." He also relied
on Cheng's claim he donated $1 million to his alma mater of "over the
years," but neither independently verified the accuracy of this claim nor
(more importantly) could testify to whether any of those donations had been
made after the judgment lapsed in 2004.
Finally, Selik's opinion on past collectability also appeared to assume
that, because Cheng made multiple expensive trips to China over the years, he must
have had significant financial resources to afford those trips. However, the only evidence as to the source
of funds to pay for these trips was that his corporate entities used corporate
funds (obtained by capital infusions from investors) to pay for those trips,
and Selik cited no facts suggesting Cheng had personal assets he used for these
trips. Because each of these predicates
to Selik's opinion relied purely on speculation or assumptions unsupported by
the record, Selik's opinion on past collectability (to the extent it was based
on the forgoing assumptions and speculations) "cannot rise to the dignity
of substantial evidence" and a judgment based solely on that opinion
"must be reversed for lack of substantial evidence." (Pacific
Gas, supra, 189 Cal.App.3d at pp. 1135-1136.)
The only
remaining factor cited by Selik in support of his opinion on past
collectability was his conclusion that an aggressive collection effort could
have included subpoenaing Cheng's investors under third-party judgment debtor
examination procedures, and these examinations would have exerted pressure on
these investors to loan Cheng the money to pay the Wises.
past collectability cannot serve as an adequate foundation for his opinion both
because it is rooted in an incorrect legal theory and because it rests on speculation or assumptions unsupported by
the record. The Wises could not have
even lawfully obtained a subpoena requiring investors to appear unless their
application for the subpoenas proved to the court, by affidavit or otherwise,
that the specific investor possessed or controlled property in which Cheng had
an interest, or that the specific investor was indebted to Cheng. (Code Civ. Proc., § 708.120, subd.
(a).) Selik never suggested, much less
with any evidentiary support, that the Wises could have satisfied these legal
impediments to obtaining the subpoenas necessary to begin applying
"pressure" on the investors.
Selik, although admitting the statute contains these limitations on the
creditor's ability to obtain a subpoena, testified judges issue these subpoenas
regardless of the statutory requirements.
We decline
to accord testimony any weight when it is premised on the assumption that the
law will not be followed by the courts.
Moreover, even assuming a judge would have disregarded the law and
issued the subpoena, this aspect of the foundational facts relied on by Selik
to conclude the judgment would have been collected in the past (i.e. from loans
by investors to Cheng because the investors "are going to want to protect
their investment") is speculative on multiple levels: it assumes the Wises
would have discovered the identities of the investors to be subpoenaed before
investments dried up as a result of the 2008 stock market crash
more importantly, it required Selik to speculate as to what investors might
have done (e.g. loaned money to Cheng personally) under a hypothetical set of
historical facts without any evidence that Cheng's investors would have in fact
reacted as surmised by Selik. Selik
apparently never spoke to any investors to ask whether they would have loaned
money to Cheng personally had they learned of his indebtedness to the Wises. Although Jack White (who appears to have been
Cheng's largest investor) was a witness at trial, the Wises never asked him
whether he would have loaned money to Cheng personally had he learned of
Cheng's indebtedness to them.
Because all
of the predicates for Selik's opinion on past collectability rely on
speculation, factual assumptions unsupported by the record, or fallacious legal
assumptions, his opinion "cannot rise to the dignity of substantial
evidence" and a judgment based solely on his opinion "must be
reversed for lack of substantial evidence." (Pacific
Gas, supra, 189 Cal.App.3d at pp. 1135-1136.)
The Wises
also rely on Selik's testimony that the judgment would have been collectable in
the future to assert there was substantial evidence to support the finding of
collectability. However, Selik's opinion
on "future collectability," premised on his prediction that Cheng
would continue to convince investors to invest in his business schemes,
explained that (1) if Cheng succeeded in getting new investors and the business
became successful "we might have something in the . . . millions
and millions and millions to go after," and (2) even if the businesses
continued to fail "it's probably just a few million dollars in investments
that we will be going after." The
latter basis for Selik's opinion on future collectability merely restates his
"reverse piercing" theory and we conclude, for the reasons already
discussed, it is entitled to no weight and cannot constitute substantial
evidence. (Corrales, supra, 198 Cal.App.4th at p. 226.) We conclude, for distinct reasons, the former
basis for Selik's opinion on future collectability is also entitled to no
weight and cannot constitute substantial evidence to support the finding of
collectability. The trial evidence
showed none of the companies have any existing contracts or agreements, none of
the companies have any assets, and the companies were "dead" without
an infusion of new investment funds, which (Cheng conceded) had largely dried
up. Selik's prediction of "millions and millions and millions [for
the Wises] to go after," notwithstanding the absence of capital and
Cheng's historical record of failed enterprises, is entirely speculative.
In
Southern California, supra, 55 Cal.4th 747, our Supreme Court recently
cautioned against admitting such expert testimony predicting the amount of lost
profits for a start-up business, reasoning that:
"World history is replete with fascinating 'what
ifs.' What if Alexander the Great had
been killed early in his career at the Battle of the Granicus River, as he
nearly was? What if the Saxon King
Harold had prevailed at Hastings, and William, later called the Conqueror, had
died in that battle rather than Harold? . . . Many serious, and not-so-serious, historians
have enjoyed speculating about these what ifs.
But few, if any, claim they are considering what would have
happened rather than what might have happened. Because it is inherently difficult to
accurately predict the future or to accurately reconstruct a counterfactual
past, it is appropriate that trial courts vigilantly exercise their gatekeeping
function when deciding whether to admit testimony that purports to prove such
claims.
might be able to determine with reasonable precision what [plaintiff's] profits
would have been if it had achieved a [certain] market
share . . . . The
problem here, however, is that the expert's testimony provided no logical basis
to infer that [plaintiffs] would have achieved that market
share." (Id. at p. 781.)
Similarly,
in Greenwich S.F., LLC v. Wong (2010)
190 Cal.App.4th 739 (Greenwich), the
court rejected an award of damages based on an expert's projection of lost
profits because the claimed lost profits were "uncertain, hypothetical and
entirely speculative." (
breach of a real property sales agreement, and "presented evidence of lost
profits through the testimony of [a] real estate appraiser," who testified
about what the property would have been worth had it been developed according
to the intended plans and specifications.
(Id. at p. 749.) On appeal, the court found the resulting
award of $600,000 in lost profits was without substantial evidentiary support
because the "occurrence and extent of the projected lost profits were not
proven with the requisite reasonable certainty in this case." (Id.
at p. 760.) The court noted that,
"The evidence in this case was insufficient to show that [either
plaintiff] was an established business or
had a track record of successfully developing or redeveloping properties. . . . [¶] . . . The existence of plans for a development does
not supply substantial evidence that the development is reasonably certain to
be built, much less that it is reasonably certain to produce profits." (Id.
at p. 763, italics added.)
In
reversing the award, the court stated that "[t]he lost profits claim was
based on the assumption that [plaintiffs] would have constructed the residence
according to the plans and specifications without changes and that the venture
would have been profitable. These
assumptions were inherently uncertain, contingent, unforeseeable and
speculative. The proposed real estate
development project here involved numerous variables that made any calculation
of lost profits inherently uncertain."
(Greenwich, supra, 190
Cal.App.4th at p. 766, fn. omitted.)
Other cases are in accord. (See, e.g.,
Kids' Universe v. In2Labs (2002) 95 Cal.App.4th 870, 877-878 [finding
expert testimony insufficient to demonstrate lost profits where a small toy
store claimed flood damage to the store caused by defendant led to $50 million
in lost profits because plaintiff's new website would have allowed it to
compete in the Internet toy marketing business]; Vestar Development II, LLC v. General Dynamics Corp. (9th Cir.
2001) 249 F.3d 958, 962 [applying California law and holding too speculative
award of lost profits for breach of agreement to negotiate where plaintiff
sought "future profits that it hoped to earn from the shopping center it
had planned to build on the parcel it was attempting to buy"].)
Selik's
opinion that the Wises could collect their judgment in the future likewise
rested on the hope that, notwithstanding Cheng's track record over the
preceding two decades, one or more of Cheng's entities would earn future
profits in an undeveloped business for which no capital had yet
materialized. Selik's opinion is based
on projections so "uncertain, hypothetical and entirely speculative"
(Greenwich, supra, 190 Cal.App.4th at
p. 743) that it cannot provide substantial evidence to support the judgment.
We conclude
there was no substantial evidence introduced by the Wises to support a finding
that the judgment against Cheng would have been collectable, either in the past
or in the future, had it been renewed.
Accordingly, we reverse the judgment against DLA, and direct that
judgment be entered in its favor. (
910, 919.)
DISPOSITION
The
judgment is reversed. DLA is entitled to
costs on appeal.
McDONALD,
J.
WE CONCUR:
BENKE,
Acting P. J.
McINTYRE,
J.
name="_ftn1" title="">[1] During the relevant time, the Wises were represented by the
law firm known as Gray, Cary, Ames & Frye, and later known as Gray Cary
Ames & Friedenrich. DLA Piper LLC
(US) is the successor in interest to that firm.
For ease of reference, we refer to the firm as DLA regardless of time
frame.
name="_ftn2" title="">[2] Although Cheng testified at his deposition he received $5000
per month from Cheng Consulting Services for his services, he denied that at
trial. Instead, he testified that
Overseas Chinese Net (OSCN), a Nevada corporation Cheng formed, in return for
the services provided by Cheng Consulting Services to OSCN, used OSCN funds to
pay the rent on the property Cheng occupies and that houses the office of Cheng
Consulting Services and OSCN. OSCN is
the sole source of the monthly funds for Cheng Consulting Services. Because OSCN and its subsidiaries apparently
have never generated any revenue, it appears the source of funds was limited to
money from investors into OSCN. Indeed,
after testifying that his companies had "less than $100" in its
accounts, Cheng was asked how he expected to pay the next month's expenses, and
he responded he was "looking for investors," but "[n]o one has
written a check yet."
