Case Number: BC706172 Hearing Date: September 10, 2019 Dept: 47

Arenas Entertainment LLC v. Katz Cassidy Accountancy Corporation, et al.

MOTION FOR SUMMARY ADJUDICATION

MOVING PARTY: Defendant Katz Cassidy Accountancy Corporation

RESPONDING PARTY(S): Plaintiff Arenas Entertainment, LLC

STATEMENT OF MATERIAL FACTS AND/OR PROCEEDINGS:

Plaintiff alleges that Defendant accountants billed Plaintiff for accounting services but failed to advise Plaintiff that its former controller was stealing money from Plaintiff, although Defendants knew Plaintiff was relying on them to monitor for such activity.

Defendant Ronald A. Stein Accountancy Corporation filed a cross-complaint for indemnification and apportionment of fault, and Defendant Katz Cassidy Accountancy Corporation filed a cross-complaint for indemnification and other claims, including negligent and intentional interference with prospective economic advantage and with contractual relations.

Defendant Katz Cassidy Accountancy Corporation moves for summary adjudication.

TENTATIVE RULING:

Defendant Katz Cassidy Accountancy Corporation’s motion for summary adjudication is DENIED in its entirety.

DISCUSSION:

Documents Conditionally Filed Under Seal

On August 22, 2019, the Court continued the hearing on this motion to this date to give Plaintiff the opportunity to formally withdraw any of the documents that had been filed conditionally under seal (on 8/8/19) within 10 days. (CRC 2.511(b)(6).) Plaintiff did not do so, and therefore the documents filed conditionally under seal have been “unsealed” and shall be placed in the public file, and as such, the Court has reviewed and considered them, to the extent needed, for purposes of this motion.

As to the documents lodged “conditionally under seal” (on 8/16/19), there was no timely application filed thereto. Additionally, the party which lodges those documents has not requested that they be withdrawn in a timely fashion. Therefore those documents filed conditionally under seal have been “unsealed” and shall be placed in the public file, and as such, the Court has reviewed and considered them, to the extent needed, for purposes of this motion.

Plaintiff’s Evidentiary Objections

Plaintiff’s evidentiary objections do not comply with CRC 3.1354. The objections are not “numbered consecutively.” (CRC 3.1354(b).) The objections must be consecutively numbered (consecutively, beginning with “1”), not just the paragraphs or exhibits the party is objecting to. Plaintiff also did not file a proposed order that includes “a place for the signature of the judge.” (CRC 3.1354(c).) Including “sustained” or “overruled” next to each objection is not the only requirement.

Accordingly, the Court has declined to consider Plaintiff’s evidentiary objections.

Defendant’s Evidentiary Objections

Pursuant to CCP§ 437c (q), the Court only rules upon those evidentiary objections as to the following evidence which the Court deems to be material to the disposition of this action:

Exhibits Filed in Support of Opposition

Nos. 28-35, 37, 44: OVERRULED. Not hearsay; not inadmissible opinion; sufficient foundation; document may be authenticated before trial. (Sweetwater Union High School Dist. v. Gilbane Building Co. (2019) 6 Cal.5th 931, 947-949.)

Motion for Summary Adjudication

As an initial matter, the Court expresses frustration with Defendant’s method of dumping a morass of facts upon the Court, instead of making an effort to cut to the chase. The Court doubts that each of the 374 allegedly undisputed facts set forth in Defendant’s separate statement are truly material to this motion. Indeed, Defendant relies on less than half of the purportedly material facts related to its first issue in its argument related to that issue.

Further, Plaintiff submits a separate statement of “Undisputed Material Facts” in support of its opposition. An opposing party may take the position that there are undisputed facts that defeat the motion, but typically, parties who oppose summary judgment or summary adjudication motions note that there are “additional disputed material facts.” (See CCP § 437c (b)(3) [“The opposition papers shall include a separate statement . . . The statement shall also set forth plainly and concisely any other material facts the opposing party contends are disputed.” (bold emphasis added)].) It is also odd for Plaintiff to complain that there are “too many” facts in Defendant’s Separate Statement. (Oppo., at p. 5.) That is true, as noted above, but the fact that Defendant included so many facts helps Plaintiff, because it is that much more likely Plaintiff will find facts to dispute that Defendant contends are material. Presenting an alternative set of undisputed facts to “assist the Court” in determining the opposing party’s motion for summary adjudication does not make much sense. Of course, it also does not make much sense for Defendant to dispute those facts without also arguing that they are immaterial, given that any disputes of material fact defeat the motion.

The Court also notes that Defendant has chosen to present its arguments in a confusing and self-contradictory manner. Its notice of motion purports to seek “summary adjudication as to each or all of Arenas’ causes of action against KCA,” but Defendant did not move for summary judgment, which is what summary adjudication of “all” causes of action would be. (Notice, at p. 2.) Likewise, Defendant’s first issue relates to two purported elements of two causes of action (though it turns out that this issue relates to only one element); its second issue relates to an additional purported element of the same causes of action; and the third issue purports to raise the same argument as the second issue but as to two additional causes of action. (Ibid.) And then Defendant asks only for summary adjudication of the first, second, and fifth causes of action in its conclusion. (Motion, at p. 27.) Defendant also critically omits the word “not” in the statement “KCA would audit or render opinions on Arenas’ financial statements” (Motion, at p. 13 (bold emphasis added)) – a statement which, if true, defeats its own motion. When asking the Court to summarily adjudicate causes of action, it is best to be as clear and non-contradictory as possible.

1. Issue No. 1: “Arenas’ first and second causes of action for breach of fiduciary duty and professional negligence, respectively, fail because there is no triable issue of fact with respect to Arenas’ inability to establish the requisite elements of Arenas’ justifiable reliance on the services for which it contracted KCA and which KCA agreed to, and did perform, and KCA’s causation of the damages Arenas claims to have suffered in those causes of action.”

As stated, this issue is essentially four issues in one: (1) the first cause of action for breach of fiduciary duty fails due to lack of justifiable reliance; (2) the first cause of action for breach of fiduciary duty fails due to lack of causation; (3) the second cause of action for professional negligence fails due to lack of justifiable reliance; and (4) the second cause of action fails due to lack of causation. As discussed below, however, sub-issues (1) and (2) and sub-issues (3) and (4) are essentially one sub-issue: that Plaintiff cannot show causation because Plaintiff cannot show justifiable reliance.

Breach of Fiduciary Duty

“Justifiable reliance” is not commonly stated as one of the elements of a cause of action for breach of fiduciary duty. Rather, the “elements of a cause of action for breach of fiduciary duty are: (1) the existence of a fiduciary duty; (2) the breach of that duty; and (3) damage proximately caused by the breach.” (IIG Wireless, Inc. v. Yi (2018) 22 Cal.App.5th 630, 646.) Despite the framing of its statement of the issue as related to multiple “elements,” Defendant also does not separately argue that there is a “justifiable reliance” element to breach of fiduciary duty. Rather, Defendant argues that Plaintiff must show justifiable reliance “to establish the essential element of causation” and cannot do so. (Reply, at p. 4; Motion, at pp. 17-18.)

In the first cause of action for breach of fiduciary duty, Plaintiff alleges that Defendants, including the moving Defendant, caused it damages in excess of $1,413,699.42 by allowing in excess of $1 million “to be stolen from Arenas Ent.” by its former financial controller, Antonia De Leon. (Complaint ¶¶ 17, 31, 35.)

Defendant argues that Plaintiff cannot show justifiable reliance (and therefore causation) because “Arenas knew very well that, aside from the tax-related services for which it engaged KCA, it separately engaged and paid Kopf for the services, including reconciliations, which it contends would have detected the alleged embezzlement.” (Defendant’s Separate of Undisputed Facts (“UF”) Nos. 3-4.)

Ultimately, despite 132 allegedly material facts, this issue boils down to (1) whether Kopf was acting as an agent of Defendant or independently in performing services for Plaintiff through which he should have discovered the alleged embezzlement, and (2) whether Defendant was engaged to perform services (whether through Kopf or otherwise) through which it should have discovered the embezzlement.

Plaintiff alleges that Kopf “was a partner or employee of KCA (or both) and KCA . . . authorized, ratified, and approved the working relationship between Kopf and Arenas Ent. KCA further authorized Kopf, as an employee and partner of KCA, to be instrumental in preparing Arenas Ent.’s Tax Returns and in advising Arenas Ent., on business and financial matters. KCA charged for such services.” (Complaint ¶ 34.) Plaintiff also alleges, as noted above, that all Defendants caused it to lose the amount that was embezzled by virtue of their actions. (Id. ¶ 35.)

Defendant presents evidence that:

Kopf was already working for Plaintiff before Defendant was hired. (UF Nos. 21-22.)

Defendant was hired only to perform tax and tax return preparation and related services. (UF Nos. 24, 41.)

Unbeknownst to Defendant, Kopf had a separate oral agreement with Plaintiff to perform bank reconciliations and other services. (UF No. 25.)

Kopf individually billed Plaintiff for performing reconciliations. (UF No. 27.)

Kopf never told Pozo that Defendant would perform services outside the scope of the limited tax services in the engagement agreement and never told Defendant what he was doing until after the alleged embezzlement was discovered. (UF Nos. 30, 33-34.)

Kopf provided services to Plaintiff between 1998 and 2002, when Defendant was not Plaintiff’s accountant, and for nine months in 2001 when Kopf was not employed by Defendant. (UF Nos. 38-39.)

Defendant had no duty to audit Plaintiff’s financial statements or to detect fraud. (UF No. 44.)

Plaintiff paid Defendant and Kopf separately for their services, and Defendant’s bills were not for bank reconciliations or fraud detection. (UF Nos. 69-73, 75-78.)

Plaintiff had no specific knowledge of how Defendants divided up their work and never sought clarification of that or asked questions about their bills. (UF Nos. 48-49, 64.)

The foregoing evidence is sufficient to demonstrate that Defendant did not proximately cause any damages to Plaintiff because Plaintiff could not have reasonably relied on Defendant to detect the alleged embezzlement, in light of its agreement with Plaintiff and the “moonlighting” work that Plaintiff knew Kopf was performing. The burden therefore shifts to Plaintiff to raise a triable issue of material fact.

Here, Plaintiff has done so by presenting evidence that:

Defendant agreed to perform services beyond tax return preparation and related services and invoiced Plaintiff for those services. (SS Nos. 24-25, 30, 33; Katz Ex. A, 71:11-72:11, 72:25-73:13, 84:1-13, 116:11-117:5; Katz Ex. 9, 4:6-13, 5:13-21, Arenas Ex. 24-31.)

Defendant invoiced Plaintiff for services performed by Kopf. (SS No. 27; Katz Ex. 8, 15:2-4; Katz Ex. A, 105:22-106:3.)

Plaintiff’s agreement with Defendant states that Defendant “will notify [Plaintiff] if anything appears to be unusual or abnormal.” (SS No. 44; Katz Ex. 4.)

Plaintiff asked for clarification regarding Defendant’s invoices. (SS Nos. 64, 70; Arenas Ex. 44.)

Defendant did invoice Plaintiff for “tax return bookkeeping” and note, as part of the billing worksheet, “reconciliation of investments in Holdings and arenas Entertainment.” (SS No. 73; Katz Ex. 15; Arenas Ex. 2, 33.)

Plaintiff believed that Kopf and Defendant were the same. (SS No. 78; Katz Ex. A, 108:20-24, 68:13-17, 73:11-13, 76:6-8, 196:20, 217:15.)

Plaintiff has therefore shown that there are triable issues of material fact as to his understanding of the relationship between Kopf and Defendant and their respective services. Accordingly, Defendant has not shown that it is entitled to summary adjudication of Plaintiff’s first cause of action for breach of fiduciary duty on the ground that Plaintiff cannot show causation.

Professional Negligence

Defendant also argues that Plaintiff cannot show causation in connection with its professional negligence cause of action.

The elements of a cause of action for professional negligence are (1) the existence of the duty of the professional to use such skill, prudence, and diligence as other members of the profession commonly possess and exercise; (2) breach of that duty; (3) a causal connection between the negligent conduct and the resulting injury; and (4) actual loss or damage resulting from the professional negligence. (Ibid.)

(Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 821.)

For the reasons discussed above, a triable issue of fact exists as to whether Defendant’s actions caused Plaintiff’s damages.

Accordingly, the motion for summary adjudication as to Issue No. 1 is DENIED.

2. Issue No. 2: “Arenas’ first and second causes of action for breach of fiduciary duty and professional negligence, respectively, fail because there is no triable issue of fact with respect to Arenas’ inability to establish the requisite element of a duty owed to it by KCA to perform the services Arenas alleges would have enabled the defendants in this case to detect the alleged embezzlement by Arenas’ employee, Antonia De Leon.”

As discussed above, the “elements of a cause of action for breach of fiduciary duty are: (1) the existence of a fiduciary duty; (2) the breach of that duty; and (3) damage proximately caused by the breach.” (IIG Wireless, Inc. v. Yi (2018) 22 Cal.App.5th 630, 646.)

The elements of a cause of action for professional negligence are (1) the existence of the duty of the professional to use such skill, prudence, and diligence as other members of the profession commonly possess and exercise; (2) breach of that duty; (3) a causal connection between the negligent conduct and the resulting injury; and (4) actual loss or damage resulting from the professional negligence.

(Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 821.)

The complaint alleges that Defendants “stood in a fiduciary relationship” to Plaintiff as tis “financial advisors, business advisors, tax advisors, and accountants.” (Complaint ¶ 33.) The complaint also alleges that Defendants “had a duty to . . . use such skill, prudence and diligence as other members of their profession commonly possess and exercise.” (Id. ¶ 38.) Defendants allegedly breached that duty by “look[ing] the other way and/or perform[ing] their agreed upon work in a sloppy and unprofessional manner while preparing Tax Returns so as to avoid and/or miss the observation of irregularities in the Arenas Ent., books and records.” (Id. ¶ 39.) Defendant also allegedly “permitted Kopf . . . to assume an instrumental role in preparing the Tax Returns but did not require that the Arenas Ent. accounts were reconciled.” (Ibid.)

Defendant argues that it owed Plaintiff no duty because it was only hired to perform tax return preparation services. (UF Nos. 155-157.) As discussed above, however, Plaintiff has shown that there is a triable issue of fact as to the scope of Defendant’s services. (SS Nos. 24-25, 30, 33; Katz Ex. A, 71:11-72:11, 72:25-73:13, 84:1-13, 116:11-117:5; Katz Ex. 9, 4:6-13, 5:13-21, Arenas Ex. 24-31.)

Accordingly, due to the existence of triable issues of material fact, the motion for summary adjudication as to Issue No. 2 is DENIED.

3. Issue No. 3: “Arenas’ third and fourth causes of action for breach of professional negligence against KCA, respectively, fail because, insofar as they incorporate and are based on allegations regarding the alleged embezzlement by De Leon, there is no triable issue of fact with respect to Arenas’ inability to establish the requisite element of a duty owed to it by KCA to perform the services Arenas alleges would have enabled the defendants in this case to detect the alleged embezzlement by Arenas’ employee, Antonia De Leon.”

As stated, Defendant argues it is entitled to summary adjudication of the third and fourth causes of action “insofar as they incorporate and are based on allegations regarding the alleged embezzlement by De Leon.” (Bold emphasis added.) Unfortunately for Defendant, those causes of action are not based solely on those allegations (as acknowledged by the phrase “insofar as”), which may be why Defendant at some point realized it should not include the third and fourth causes of action in its request for relief. (Motion, at p. 27.)

“A motion for summary adjudication shall be granted only if it completely disposes of a cause of action, an affirmative defense, a claim for damages, or an issue of duty.” (CCP § 437c(f)(1) (bold emphasis added).)

In addition to incorporating previous allegations, Plaintiff’s third cause of action alleges:

During the course of its relationship with Arenas Ent., KCA sought out and voluntarily accepted the responsibility to prepare annual Los Angeles business tax returns (herein the “Business Returns”) for Arenas. KCA charged Arenas Ent. thousands of dollars to prepare the Business Returns. As a CPA firm, KCA owed Arenas a duty to prepare the Business Returns accurately. KCA owed a further duty to Arenas Ent., to determine the revenue of Arenas Ent. that had been earned in the City of Los Angeles and to include only “City of Los Angeles revenue” in the Business Returns. However, on information and belief, KCA breached these duties to Arenas Ent., by including the total revenue received by Arenas Ent., in the Business Returns, which resulted in inappropriately increased tax liabilities to the City of Los Angeles, which, as advised by KCS, Arenas Ent. paid.

(Complaint ¶ 44.) These allegations have nothing to do with the alleged embezzlement, and Defendant has made no attempt – in over 130 allegedly material facts related to this issue – to show that there is no dispute of material fact as to these allegations. (UF Nos. 238-369.)

Likewise, Plaintiff’s fourth cause of action alleges:

During the course of its relationship with Arenas Ent., KCA sought out and voluntarily accepted the responsibility to prepare annual Los Angeles personal property tax returns (herein the “571 Returns”) for Arenas. KCA charged Arenas Ent. thousands of dollars to prepare the 571 Returns. As a CPA firm, KCA owed Arenas a duty to prepare the 571 Returns accurately. KCA owed a further duty to Arenas Ent., to ensure that the information incorporated into the 571 Returns correctly reflected the personal property held by Arenas Ent. and did not falsely increase taxes for Arenas Ent. by incorrectly reporting property that had been disposed of by Arenas Ent. But KCA did not bother to determine what personal property had been disposed of by Arenas Ent. Instead, KCA breached its duty to Arenas Ent. by carrying over the entirety of Arenas Ent.’s personal property on the 571 returns from year to year to year without bothering to delete from the list those pieces of personal property which Arenas Ent. had disposed of. Hence, as a direct and proximate result of the breach of duty by KCA, Arenas paid more money per the 571 Returns than was required.

(Complaint ¶ 48.) Like the allegations in the third cause of action, these allegations have nothing to do with the alleged embezzlement, and Defendant made no attempt to show that there is no dispute of material fact as to these allegations. (UF Nos. 238-369.)

Because Defendant has made no attempt to completely dispose of the third and fourth causes of action, it has not met its initial burden to show that there is no triable issue of fact as to any required element of those causes of action. Accordingly, the motion for summary adjudication as to Issue No. 3 is DENIED.

4. Issue No. 4: “Arenas’ fifth cause of action for disgorgement fails as against KCA, as a matter of law, because there is no separate cause of action for disgorgement under California law. Furthermore, there is no triable issue of fact with respect to Arenas’ receipt of the benefits for which it contracted with KCA, making Arenas’ cause of action based on restitution legally improper.”

Defendant argues that disgorgement is not a separate cause of action and, even if it is, Plaintiff is not entitled to disgorgement because it received the benefits for which it contracted with Defendant.

Although Defendant cites Dinosaur Development, Inc. v. White (1989) 216 Cal.App.3d 1310 for the proposition that “[u]njust enrichment is synonymous with restitution or disgorgement” (Motion, at p. 26), that case never mentions disgorgement, which “as a remedy is broader than restitution or restoration of what the plaintiff lost.” (Meister v. Mensinger (2014) 230 Cal.App.4th 381, 398.) There are, in fact, “two types of disgorgement: restitutionary disgorgement, which focuses on the plaintiff’s loss, and nonrestitutionary disgorgement, which focuses on the defendant’s unjust enrichment.” (Ibid.) “In particular, a person acting in conscious disregard of the rights of another should be required to disgorge all profit because disgorgement both benefits the injured parties and deters the perpetrator from committing the same unlawful actions again.” (Id. at 398-399.)

In the complaint, Plaintiff pleads both types of disgorgement: Plaintiff’s “losses in excess of $1,072,927.79” as a result of their actions, and Defendants’ unjust enrichment in an amount “in excess of $137,100” as a result of “charging vast fees for the ‘work’ alleged herein, which was really no work at all.” (Complaint ¶¶ 52, 53.) Plaintiff’s prayer for relief on the fifth cause of action seeks only the latter amount of damages. Thus, as pled here, Plaintiff is seeking disgorgement based on unjust enrichment.

Defendant is correct that “[t]here is no freestanding cause of action for ‘restitution’ in California. (Munoz v. MacMillan (2011) 195 Cal.App.4th 648, 661.) “Common law principles of restitution require a party to return a benefit when the retention of such benefit would unjustly enrich the recipient; a typical cause of action involving such remedy is ‘quasi-contract.’” (Ibid.) The “equitable remedy of restitution when unjust enrichment has occurred ‘is an obligation (not a true contract . . .) created by the law without regard to the intention of the parties, and is designed to restore the aggrieved party to his or her former position by return of the thing or its equivalent in money.’” (Ibid. (bold emphasis added).) Thus, Defendant is also correct that disgorgement cannot be based on the parties’ contract. (See id. [granting the plaintiffs leave to amend to “state causes of action under a quasi-contractual theory of liability”].) But that does not mean that a plaintiff may not sue on a contract and also seek restitution. (See id. [“[W]e are unaware of any authority for the proposition that the existence of a remedy in restitution precludes a plaintiff from suing on an express contract.”].)

Defendant also argues that Plaintiff cannot seek disgorgement because it received the benefit of its bargain, but Plaintiff disputes that fact, presenting evidence that Defendant did not perform all of the services it agreed to perform. (Plaintiff’s Response to Defendant’s Separate Statement (“SS”) No. 374[1]; Katz Ex. 2, ¶¶ 16, 19-23; Katz Ex. 15.)

As such, the motion for summary adjudication as to Issue No. 4 is DENIED.

Moving Party to give notice, unless waived.

IT IS SO ORDERED.

Dated: September 10, 2019 ___________________________________

Randolph M. Hammock

Judge of the Superior Court

Any party may submit on the tentative ruling by contacting the courtroom via email at Smcdept47@lacourt.org by no later than 4:00 p.m. the day before the hearing. All interested parties must be copied on the email. It should be noted that if you submit on a tentative ruling the court will still conduct a hearing if any party appears. By submitting on the tentative you have, in essence, waived your right to be present at the hearing, and you should be aware that the court may not adopt the tentative, and may issue an order which modifies the tentative ruling in whole or in part.

[1] Defendant has not shown that this response is evasive or otherwise improper by including it in a long list of allegedly objectionable responses to its separate statement. (See Defendant’s Objections to Plaintiff’s Response to Separate Statement of Undisputed Material Facts in Support of Motion for Summary Adjudication.) Indeed, this response relies exclusively on evidence that Defendants submitted with their motion.