Case Name: San Francisco Spine Surgeons, PC v. Brian Blatz, et al.
Case No.: 16CV300473

I. Background

This is a legal malpractice action brought by plaintiff San Francisco Spine Surgeons, PC (“Plaintiff”) against defendants Brian Blatz (“Blatz”), Bay Area Surgical Management, LLC (“BASM”), and Payroll Express, LLC (“Payroll Express”) (collectively “Defendants”).

According to the operative First Amended Complaint (“FAC”), Plaintiff was introduced to Blatz in 2014, who was general counsel for BASM. At all times, Blatz acted as an agent and employee of BASM and Payroll Express.

Blatz proposed that he serve as legal counsel for corporate matters and Plaintiff agreed, believing he would safeguard its interests going forward. Blatz prepared the corporate documents for Plaintiff. He also listed himself as the agent for service of process and identified himself as Plaintiff’s legal counsel in its Operating Agreement.

Blatz also began negotiating partnerships between Plaintiff and surgery centers like Hayes Valley Surgery Center. However, Blatz had an ownership interest in the group that owns it. Therefore, Blatz abandoned his professional responsibilities to Plaintiff by pushing it towards a partnership that financially benefitted him.

During this time, Plaintiff informed Blatz it required assistance in management and billing. Blatz introduced it to Claim Works, LLC (“Claim Works”), which provided management and billing services. Blatz was an agent of Claim Works.

Blatz purportedly began negotiating a contract between Claim Works and Plaintiff. During the supposed negotiations, Blatz repeatedly told Plaintiff that Claim Works was capable of providing the management and billing services, which Plaintiff later found out was untrue. Blatz eventually presented a contract to Plaintiff and advised Plaintiff to sign it. Blatz never explained the terms or legal consequences of certain provisions. He even went so far as to offer his legal services free of charge to induce Plaintiff into signing the contract. Plaintiff signed the contract, trusting that Blatz would not act adverse to its interests. Blatz signed on behalf of Claim Works. Blatz never informed Plaintiff of his conflict of interest in writing.

Claim Works began providing the agreed-upon services but issues quickly arose. For example, Claim Works submitted a late Medicare application for Plaintiff, failed to submit an application for durable medical equipment, and failed to provide billing and collection services per the industry standard. Plaintiff eventually terminated Claim Works’ services effective September 2015 due to these continued issues.

In October 2015, Plaintiff contacted Blatz, who it still believed to be its attorney, about its trouble communicating with Claim Works regarding moving billing in-house. However, at this point, Blatz was working against Plaintiff’s interests. He instead attempted to persuade Plaintiff to sign a settlement document and general release for claims against Claim Works. Because of this, Plaintiff became wary of Blatz’s ability to represent both entities and effectively terminated his representation when it hired new counsel in November 2015. Blatz never notified Plaintiff that he was no longer its attorney.

In December 2015, with its new counsel, Plaintiff initiated arbitration of Claim Works’ alleged breach of contract pursuant to the mandatory arbitration clause in the contract. The arbitrator issued an award stating neither side recovered. He found Claim Works in breach of multiple obligations under the contract but also stated Plaintiff had not established causation and damages. Specifically, the arbitrator wrote in the award that Plaintiff’s evidence did not establish that Claim Works’ conduct was a substantial factor in causing it to lose money on reimbursable claims. Plaintiff incurred attorney fees and costs in the course of the arbitration.

Plaintiff asserts the following causes of action against Defendants: professional negligence; negligence per se; breach of fiduciary duty; fraudulent concealment; intentional misrepresentation; and negligent misrepresentation.

Presently before the Court are two demurrers, one filed by Blatz and one filed by BASM and Payroll Express. Plaintiff opposes both demurrers. Defendants filed replies thereto, and Blatz’s reply in particular is accompanied by a request for judicial notice.

II. Request for Judicial Notice

Blatz requests judicial notice of two documents.

First, Blatz requests judicial notice of a tentative ruling regarding Plaintiff’s petition to vacate an arbitration award in Santa Clara County Superior Court Case No. 18CV328347 pursuant to Evidence Code section 452, subdivision (c) and (d), stating that he believes it is “confirmed.” (RJN, p. 1:22.) However, a tentative ruling is not final absent court action, and no evidence is presented as to what happened at the hearing. (Cal. Rules of Court, rules 3.1308, 3.1590(b).) Moreover, in most instances the court expects a formal order to be prepared following a hearing. Therefore, the tentative ruling proffered by Blatz is not final and cannot be considered “confirmed,” as Blatz states.

Additionally, Blatz requests that the Court take judicial notice of the facts contained within the tentative ruling. But a trial court can only take judicial notice of the truth of the results in court records such as orders and judgments. (People v. Woodell (1998) 17 Cal.4th 448, 455.) As previously discussed, the tentative is neither. Moreover, the court does not keep copies of tentative rulings in the court file, and for that reason, does not consider it a court record. Consequently, the Court will not take judicial notice of the tentative ruling.

Second, Blatz requests judicial notice of a contract between Plaintiff and Claim Works pursuant to Evidence Code section 452, subdivision (h), which authorizes judicial notice of “facts…not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy.”

A contract between private parties is usually not subject to judicial notice. (Gould v. Maryland Sound Industries, Inc. (1995) 31 Cal.App.4th 1137, 1145.) Moreover, a court cannot judicially notice a contract’s proper interpretation. (Fremont Indemnity Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 115.) For these reasons, the Court will not take judicial notice of the contract.
Accordingly, Blatz’s request for judicial notice, first filed with the reply papers, is DENIED.

III. Blatz’s Demurrer

Blatz demurs to the entire FAC on the ground of failure to state facts sufficient to constitute a cause of action. (See Code Civ. Proc., § 430.10, subd. (e).) Specifically, he argues the action is barred by the doctrine of res judicata and Plaintiff fails to adequately plead causation.

A. Res Judicata

“The doctrine of res judicata gives certain conclusive effect to a former judgment in subsequent litigation involving the same controversy.” (Boeken v. Philip Morris USA, Inc. (2010) 48 Cal.4th 788, 797 [internal quotations and citations omitted].) There are two aspects of res judicata, claim preclusion and issue preclusion. (Alpha Mechanical, Heating & Air Conditioning, Inc. v. Travelers Casualty & Surety Co. of America (2005) 133 Cal.App.4th 1319, 1326.) Here, Blatz relies on claim preclusion. “Claim preclusion ‘prevents relitigation of the same cause of action in a second suit between the same parties or parties in privity with them.’ [Citation.]” (DKN Holdings, LLC v. Faerber (2015) 61 Cal.4th 813, 824 (“DKN Holdings”).)

The elements of claim preclusion are “(1) the decision in the prior proceeding is final and on the merits; (2) the present action is on the same cause of action as the prior proceeding; and (3) the parties in the present action or parties in privity with them were parties to the prior proceeding.” (Zevnik v. Superior Court (2008) 159 Cal.App.4th 76, 82.) “ ‘If all of the facts necessary to show that an action is barred by res judicata are within the complaint or subject to judicial notice, a trial court may properly sustain a general demurrer.’ [Citation.]” (Planning & Conservation League v. Castaic Lake Water Agency (2009) 180 Cal.App.4th 210, 225.)

Blatz’s res judicata argument is predicated on the arbitration proceeding between Plaintiff and Claim Works referenced in the FAC.

1. Final Judgment on the Merits

The first element of claim preclusion requires a final judgment on the merits in the prior action. (Cal Sierra Development, Inc. v. George Reed, Inc. (2017) 14 Cal.App.5th 663, 678 (“Cal Sierra”).) In the context of arbitration, a confirmed arbitration award constitutes final judgment. (Sartor v. Superior Court (1982) 136 Cal.App.3d 322, 328.) Under the appropriate circumstances, unconfirmed awards can also constitute final judgment. (Cal Sierra, supra, 14 Cal.App.5th at 678-679; Bucur v. Ahmad (2016) 244 Cal.App.4th 175, 186.)

In his demurrer, Blatz does not specifically address whether the arbitration award constitutes a final judgment on the merits in the prior action. Rather, he merely refers to the arbitration award as final without further discussion, and as noted above, no evidence was presented to support an argument that the tentative ruling in the action to confirm the arbitration award is final. He only addresses the final judgment element in his reply because Plaintiff addresses this issue in its opposition. As such, Blatz preliminarily fails to substantiate his position that the action is barred by res judicata.

In any event, Plaintiff persuasively argues that the arbitration award is not a final judgment on the merits. In support, Plaintiff relies on Kahn v. Pelissetti (1968) 260 Cal.App.2d 832 (“Kahn”).
The court in Kahn stated that, under the particular circumstances of the case, an unconfirmed arbitration award was not a final judgment for purposes of collateral estoppel but instead was a contract between the parties. (Kahn, supra, 260 Cal.App.2d at 835.) There, the plaintiff was injured while on a bus when the uninsured driver crashed into it. She went to arbitration with her automobile liability policy insurer and lost. The insurer did not confirm the award. The plaintiff then sued the uninsured driver, who argued that the arbitration award was a final judgment and her claim was barred by res judicata. The court disagreed because neither of the parties at arbitration intended to benefit the defendant and the award did not affect his interests either. Thus, the unconfirmed award constituted a contract and the defendant could not take advantage of it because he was neither a party nor a third party beneficiary. (Id., at 834-835.)

Here, Plaintiff persuasively argues that the unconfirmed arbitration award is not a final judgment on the merits because the arbitrating parties did not intend to benefit Blatz and the award did not affect his interests. Nothing in the arbitration award or FAC alleges that the parties and arbitrator considered Blatz’s interests or liability in the arbitration. Thus, the factual situation here is similar to the particular circumstances in Kahn. The arbitration award is simply a contract that Blatz cannot take advantage of because he is not a party or a third party beneficiary. (See also Thibodeau v. Crum (1992) 4 Cal.App.4th 749, 761 [unconfirmed award held to be final judgment because parties at arbitration anticipated involvement of third parties in the future and it intended to resolve disputes involving those third parties].)

Consequently, the arbitration award does not constitute a final judgment on the merits for the purposes of the first element of claim preclusion.

2. Identity of Claims

For purposes of determining whether the present action is on the same cause of action as the former, courts apply the primary rights theory. (Boeken v. Philip Morris USA, Inc., supra, 48 Cal.4th at 797.) “The plaintiff’s primary right is the right to be free from a particular injury, regardless of the legal theory on which liability for the injury is based. [Citation.] The scope of the primary right therefore depends on how the injury is defined. A cause of action comprises the plaintiff’s primary right, the defendant’s corresponding primary duty, and the defendant’s wrongful act in breach of that duty. Thus, under the bar rule [of claim preclusion], a complaint may contain several counts, each of which relies on a different legal theory, yet collectively assert only a single violation of a specific primary right, that is, a single cause of action.” (Boyd v. Freeman (2017) 18 Cal.App.5th 847, 855, internal quotation marks and citations omitted.) If a plaintiff seeks recovery for the same harm in two separate actions, the actions involve the same primary right. (Ibid.; see also Agarwal v. Johnson (1979) 25 Cal.3d 932, 954.) If a claim could have been raised in the previous action but was not, the claim is still barred by res judicata. (Thibodeau v. Crum, supra, 4 Cal.App.4th at 755.)

Here, Blatz contends the FAC involves the same primary right as the arbitration proceeding between Plaintiff and Claim Works because both concern the same harm, particularly harm resulting from Claim Works’ breach of contract. In support, Blatz argues the arbitrator likely already considered the misrepresentations he purportedly made in connection with the negotiations for the Claim Works’ contract and found that Plaintiff could not prove his misrepresentations caused any damage. Blatz also contends the misrepresentations could have been raised in the arbitration. Blatz further argues that the FAC alleges the harm he caused was in the form of unrecovered losses and incurred fees and costs from the arbitration.

In opposition, Plaintiff argues the proceedings do not involve the same primary right because the harms suffered are different. According to Plaintiff, the arbitration concerned Claim Works’ breach of contract and resulting damages while the instant action arises from Blatz’s dereliction of his duties as Plaintiff’s counsel. Plaintiff’s position is well-taken. The present case and prior arbitration proceeding clearly involve two distinct harms arising from distinct rights and duties of different parties.

Moreover, although Blatz argues the legal malpractice claims could have been raised at the arbitration, there is nothing to suggest the legal malpractice arguments against Blatz were within the scope of the arbitrator’s decision on breach of contract. The FAC clearly alleges that the only issue in the arbitration was Claim Works’ breach of contract. Nothing else in the FAC or arbitration award suggests the arbitrator also considered whether Blatz violated his duties towards Plaintiff as its attorney. Therefore, the argument that the legal malpractice claims could have or should have been raised in the arbitration is unsupported. (See Thibodeau v. Crum, supra, 4 Cal.App.4th at 755.)

Accordingly, there is no basis to conclude this case is on the same cause of action as the prior arbitration proceeding.

3. Same Parties or Parties in Privity

The parties in the arbitration were Plaintiff and Claim Works. Neither Blatz nor the other defendants in this action were parties to the arbitration. However, Blatz contends he is in privity with Claim Works for purposes of claim preclusion.

Parties are in privity if they share “ ‘an identity or community of interest,’ with ‘adequate representation’ of that interest in the first suit, and circumstances such that the nonparty ‘should reasonably have expected to be bound’ by the first suit. [Citations.]” (DKN Holdings, supra, 61 Cal.4th at 826.) The definition of privity is expansive, and it is well-settled that derivative liability is a proper basis upon which to find privity. (Bernhard v. Bank of America Nat. Trust & Savings Assn. (1942) 19 Cal.2d 807, 812-813.) In considering if a party’s liability is derivative of another’s, “the separate defendants’ interests [must so closely align] that they are treated as identical parties.” (DKN Holdings, supra, 61 Cal.4th at 828.)
Here, Blatz argues he is an agent of Claim Works and the allegations of the FAC hinge on this relationship. He concludes his liability is derivative of Claim Works’ liability. In support, he relies on Cal Sierra, supra, 14 Cal.App.5th 663.)

In Cal Sierra, the court considered whether privity based on derivative liability existed between two parties for the purposes of res judicata. There, a gold mining company and aggregates company arbitrated a contract dispute. The gold mining company then sued the aggregates company’s licensee for the same claims addressed in the arbitration. The court stated the licensee’s liability was wholly derivative of the licensor’s because the licensee only acted with the licensor’s consent. Thus, the gold mining company’s complaint was barred because the licensor and licensee were in privity based on derivative liability. (Cal Sierra, supra, 14 Cal.App.5th at 675-676.) Here, Blatz argues he is like a licensee because the FAC relies on his status as Claim Works’ agent and he is therefore in privity with Claim Works.

In opposition, Plaintiff argues that Blatz misstates the allegations in its FAC in order to support his derivative liability argument. This argument is persuasive. Blatz is not being sued for breach of contract as Claim Works’ agent, but for his independent professional negligence as Plaintiff’s attorney. His liability as Plaintiff’s attorney is not at all dependent on Claim Works’ breach of contract. Thus, Cal Sierra is not applicable.

In reply, Blatz cites to Brinton v. Bankers Pension Services, Inc. (1999) 76 Cal.App.4th 550, to further support his argument that derivative liability exists between himself and Claim Works. (See Brinton, supra, 76 Cal.App.4th 550.) The court in Brinton determined derivative liability existed between a corporation and its agent. The agent had arbitrated a fraud, negligent misrepresentation, and breach of fiduciary duty dispute with the plaintiff and prevailed. The plaintiff then sued the corporation for the same causes of action. The corporation argued the claim was barred by res judicata because its liability was wholly derivative of its agent’s misrepresentations. The court agreed and stated the parties were in privity on this ground. (Id. at 557-558.)

Blatz contends that here, as in Brinton, his liability for legal malpractice is wholly derivative of Claim Works’ breach of contract. This argument is not meritorious. As previously stated, Blatz’s liability is based on his direct actions against Plaintiff. His liability is not based on Claim Works’ breach of contract.

Consequently, there is not a basis for concluding there is privity between Blatz and Claim Works. As a result, Blatz cannot satisfy the third element of claim preclusion.

3. Conclusion

In consideration of the foregoing, the demurrer is not sustainable on the basis of res judicata.

B. Causation

Blatz argues that Plaintiff fails to state a cause of action because it does not adequately allege that, but for his misconduct, the arbitrator would have ruled differently. This argument is predicated on the causation element of a legal malpractice claim.

“ ‘To show damages proximately caused by the breach, the plaintiff must allege facts establishing that, ‘but for the alleged malpractice, it is more likely than not the plaintiff would have obtained a more favorable result.’ [Citations.]” (Charnay v. Cobert (2006) 145 Cal.App.4th 170, 179.) Blatz states this causation requirement also applies to the remaining causes of action for breach of fiduciary duty and fraud. However, “[b]ecause legal malpractice involves negligent conduct on the part of an attorney [Citation], causation for legal malpractice is analyzed differently than causation for the intentional torts of fraudulent concealment…” (Knutson v. Foster (2018) 25 Cal.App.5th 1075, 1091.)

Blatz argues that Plaintiff’s intentional fraud claims are subject to the same causation requirement as the other causes of action. This argument is plainly not true. As a result, Blatz’s demurrer to the entire complaint on this ground only applies to five of Plaintiff’s seven causes of action. A demurrer to an entire complaint is sustainable only if all claims are defective. (Warren v. Atchison, Topeka & Santa Fe Railway Co. (1971) 19 Cal.App.3d 24, 29.) For this reason alone, Blatz’s demurrer fails.

Blatz’s argument fails for an additional reason. His causation argument is limited to damages Plaintiff lost at arbitration. However, Plaintiff also alleges damages in the form of attorney fees and costs when it had to arbitrate the contract. Blatz does not discuss these damages in his demurrer. The law is well-settled that a demurrer does not lie “as to a portion of a cause of action.” (Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1167.)

Thus, Blatz’s demurrer to the FAC is not sustainable on the basis Plaintiff failed to adequately allege causation.

C. Conclusion

In consideration of the foregoing, Blatz’s demurrer to the FAC on the ground of failure to state sufficient facts is OVERRULED.

IV. BASM and Payroll Express’ Demurrer

Payroll Express individually demurs to each cause of action on the ground of uncertainty. (See Code Civ. Proc., § 430.10, subd. (f).) BASM and Payroll Express jointly demur to each cause of action on the ground failure to state facts sufficient to constitute a cause of action. (See Code Civ. Proc., § 430.10, subd. (e).)

A. Uncertainty

Payroll Express argues that all causes of action are uncertain because they do not contain specific factual allegations about it.
A pleading is subject to a demurrer if it is uncertain; the term “ ‘uncertain includes ambiguous and unintelligible.” (Code Civ. Proc., § 430.10, subd. (f).) “[D]emurrers for uncertainty are disfavored and are granted only if the pleading is so incomprehensible that a defendant cannot reasonably respond.” (Lickiss v. Financial Industry Reg. Authority (2012) 208 Cal.App.4th 1125, 1135.)

Here, Payroll Express contends that because there are no specific allegations as to its conduct or role in the case, it is not reasonably apprised of the nature of Plaintiff’s claims against it. However, the FAC is clear that Payroll Express is being sued on the basis of vicarious liability as Blatz’s employer such that any conduct of Blatz is attributed to it. Therefore, the pleading is not fatally uncertain.

Accordingly, Payroll Express’ demurrer to each cause of action on the ground of uncertainty is OVERRULED.

B. Failure to State Facts Sufficient to Constitute a Cause of Action

BASM and Payroll Express argue that Plaintiff does not plead facts entitling it to recover its arbitration losses and attorney fees. They advance multiple arguments in support, but do not explicitly tie these arguments to any element of each cause of action or pleading standard. Presumably, they intended to address causation and damages, which are elements of each cause of action. (See Knutson v. Foster, supra, 25 Cal.App.5th at 1091 [causation required for legal malpractice, breach of fiduciary duty, and fraud claims].)

First, BASM and Payroll Express argue that no legal authority exists to support Plaintiff’s attempt to recover arbitration losses from non-parties to the arbitration. Second, they argue Plaintiff cannot recover such losses because the arbitrator said it suffered no damages. They conclude there are no damages for Plaintiff to recover. Lastly, they argue the arbitrator already determined that Claim Works is responsible for Plaintiff’s injuries, such that they cannot be responsible for Plaintiff’s damages.

Plaintiff’s entire argument in opposition is misdirected because it states BASM and Payroll Express are making an issue preclusion argument, which is not true.

In any event, the arguments raised by BASM and Payroll Express lack legal support; they cite no legal authority whatsoever in support of their positions. The arguments are therefore unsubstantiated and will not be further addressed. (See People v. Dougherty (1982) 138 Cal.App.3d 278, 282 [a point asserted without authority in support is without foundation and requires no discussion].)
Next, BASM and Payroll Express argue that Plaintiff cannot recover attorney fees from the arbitration because such relief is barred by Code of Civil Procedure section 1021, which states a party must ordinarily pay its own attorney fees absent an agreement between the parties or statutory authorization. (Code Civ. Proc., § 1021; Prentice v. North Am. Tit. Guaranty Corp. (1963) 59 Cal.2d 618, 620.)

In opposition, Plaintiff argues that attorney fees are recoverable under the tort of another doctrine. The tort of another doctrine is an exception to section 1021. (Prentice v. North Am. Tit. Guaranty Corp., supra, 59 Cal.2d at 620.) It is an “established rule that attorney fees incurred as a direct result of another’s tort are recoverable damages.” (Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison (1998) 18 Cal.4th 739, 751.) Thus, “[a] person who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover compensation for the reasonably necessary loss of time, attorney’s fees, and other expenditures thereby suffered or incurred.” (Prentice, supra, 59 Cal.2d at 620.)

Here, the FAC alleges Plaintiff incurred attorney fees and costs as damages because it had to arbitrate a breach of contract claim against Claim Works due to Defendants’ wrongful conduct. Thus, Plaintiff pleads sufficient facts for recovery of attorney fees under the tort of another doctrine.

In reply, BASM and Payroll argue that the tort of another doctrine is inapplicable because Plaintiff has not pleaded it was required to arbitrate the contract dispute as the natural consequence of their behavior. However, that is exactly what the FAC states. Plaintiff clearly alleges it would not have had to arbitrate the dispute if Defendants’ had fulfilled their duties to it.

Finally, for the first time in reply, BASM and Payroll Express argue Plaintiff’s claims are barred by res judicata. This argument is untimely and therefore disregarded. (See In re Tiffany Y. (1990) 223 Cal.App.3d 298, 302-303 [“ ‘The general rule is that points raised in a reply brief for the first time will not be considered unless good cause is shown for the failure to present them before’ [Citations.]”]; see also Reichardt v. Hoffman (1997) 52 Cal.App.4th 754, 764; REO Broadcasting Consultants v. Martin (1999) 69 Cal.App.4th 489, 500].) The argument is otherwise flawed on the merits; BASM and Payroll Express advance the same arguments raised by Blatz, which do not demonstrate the elements of res judicata are satisfied.

For the foregoing reasons, BASM and Payroll Express’s demurrer to each cause of action on the ground of failure to state sufficient facts is OVERRULED.

The Court will prepare the Order.