2019-00257623-CU-PN

Emily Walker vs. Walter R. Dahl

Nature of Proceeding: Motion to Strike Amended Complaint

Filed By: Gomez, Gregory G.

Effective September 23, 2019, official court reporters will not be available in Departments 53 and 54, with exceptions listed in the Court’s Policy Regarding Availability and Unavailability of Official Court Reporters. Additional information regarding this policy can be found on the Court’s website at www.saccourt.ca.gov.

Defendants Walter Dahl and Dahl Law’s motion to strike portions of Plaintiffs Emily and Clinton Walker’s first amended complaint (“FAC”) is ruled upon as follows.

The parties’ requests for judicial notice are granted.

In this legal malpractice action Plaintiffs allege causes of action for professional negligence, breach of fiduciary duty and breach of contract against Defendants. Plaintiffs allege that Defendants represented them in connection with a bankruptcy proceeding.

Plaintiffs allege that Ms. Walker’s father Frank Ribbel was the general partner of Warehouse Way Associates, Ltd., VIII (“Warehouse”) which managed commercial property. They allege that the property was sold and that Brian Kraft, another partner in Warehouse, instituted an action against Warehouse and the general partner, Mr. Ribbel (“Kraft Action”). Mr. Ribbel passed away and Ms. Walker intervened on his behalf. Plaintiffs (the Walkers) allege that they consulted with Mr. Dahl regarding options that filing a bankruptcy petition could provide in resolving the Kraft Action or winding down Warehouse. (FAC ¶¶ 5-8.) Plaintiffs allege that Mr. Dahl held himself out as a bankruptcy specialist and that he could serve as Plaintiffs’ counsel.

He allegedly advised Walkers to file an involuntary bankruptcy petition against Warehouse in the Oakland Division of the Northern District [federal court] (Id. ¶ 9.) Mr. Dahl allegedly failed to disclose material risks of the petition including that the bankruptcy trustee has the right to claim and control the debtor’s privileges and also represented that the bankruptcy trustee would be satisfied to use and disburse to creditors the money the receiver in the Kraft Action had collected and deposited with the Court and also that the trustee would not sue Plaintiffs. (Id. ¶ 10.)

Plaintiffs allege that in furtherance of Mr. Dahl’s recommendation and strategy to file an involuntary bankruptcy petition against Warehouse, he prepared an assignment for Plaintiffs to purchase a creditor’s claim to $23,000 in proceeds owed to Warehouse. (Id. ¶ 11.) They allege that by mid-June 2018 Mr. Dahl “reversed course” and indicated that Plaintiffs could not initiate the previously recommended bankruptcy proceeding. Rather, he announced he would represent creditor Marianne McDonald in an involuntary bankruptcy proceeding against Warehouse and that he transferred the $10,000 Plaintiffs had advanced to him to compensate for his representation of Ms. McDonald. (Id. ¶ 12.) They allege that Mr. Dahl failed to obtain their written consent of any conflicts of interest associated with his representation of Ms. McDonald, or for using their retainer to pay for her representation and that he abandoned his representation of them in favor of representing Ms. McDonald whose interests were not aligned with theirs. Plaintiffs allege that when Mr. Dahl entered into an attorney-client relationship with Ms. McDonald he misrepresented that he did not have a

relationship with any other party interested in the subject matter. (Id. ¶¶ 12, 13.)

Plaintiffs allege that Mr. Dahl then proceeded to file an involuntary petition on behalf of Ms. McDonald in the San Jose Division of the Northern District despite his representation that he would file on their behalf in the Oakland Division. They allege that Mr. Dahl continued to request information from them regarding the identity of Warehouse’s limited partners, tenants, vendors, etc. (Id. ¶¶ 14, 15.) Mr. Dahl also allegedly continued to bill Plaintiffs but never accounted for any fees or services and never refunded the $10,000 advance retainer. (Id. ¶15.) Plaintiffs alleges that the bankruptcy trustee aggressively sought and obtained financial discovery related to them and ultimately initiated an adversary action against them seeking $2.2 million in damages in addition to punitive damages. (Id. ¶ 17.) Plaintiffs allege that they were forced to defend that action and ultimately had no choice but to agree to a one million dollar settlement. (Id. ¶¶ 18, 19.)

Punitive Damages

Defendants first move to strike Plaintiffs’ punitive damages allegations on the basis that they failed to plead facts showing an entitlement to such damages.

In order to plead an entitlement to punitive damages a plaintiff must allege that the defendant is guilty of “oppression, fraud, or malice.” (Civil Code §3294(a).) As a threshold proposition, plaintiffs may recover punitive damages in a legal malpractice action if the attorneys, themselves, are guilty of “oppression, fraud, or malice” ( Ferguson v. Lieff, Cabraser, Heimann & Bernstein (2003) 30 Cal.4th 1037, 1053, fn.3). “Malice” under Civil Code §3294(c)(1) means conduct intended to injure the plaintiff or despicable conduct by the defendant with a willful and conscious disregard of others. Malice “based on a conscious disregard of the plaintiff’s rights, requires proof that the defendant’s conduct is ‘despicable’ and ‘willful.’” (Lackner v. North (2006) 135 Cal.App.4th 1188, 1211.) “‘[D]espicable’ connotes conduct that is ‘…so vile, base, contemptible, miserable, wretched or loathsome that it would be looked down upon and despised by ordinary decent people.’” (Id. [citations omitted].) Despicable conduct includes “that which is in blatant violation of law or policy.” (American Airlines, Inc. v. Sheppard, Mullin, Richter, & Hampton (2002) 96 Cal.App.4th 1017, 1050.) Indeed, “[e]ven ‘nonintentional torts’ may form the basis for punitive damages when the conduct constitutes conscious disregard of the rights or safety of other. [citation omitted] ‘Nonintentional conduct comes within the definition of malicious acts punishable by the assessment of punitive damages when a party intentionally performs an act from which he knows, or should know, it is highly probable harm will result.’ [citation omitted].” (Skf Farms v. Superior Court (1984) 153 Cal.App.3d 902, 907.) Nonetheless, the cases have uniformly recognized that proof of negligence, even gross negligence, or recklessness is insufficient to warrant an award of punitive damages. (E.g., G. D. Searle & Co. v. Superior Court (1975) 49 Cal.App.3d 22, 31; see Taylor v. Superior Court, (1979) 24 Cal.3d 890, 895, 900 [conc. opn. of Bird, C.J.], 907 [dis. opn. of Clark, J.]; Nolin v. National Convenience Stores, Inc. (1979) 95 Cal.App.3d 279, 285-286.)

Here the Court finds that, at least for pleading purposes, Plaintiffs have pled sufficient facts to show an entitlement to punitive damages. It is clear that a breach of fiduciary duty cause of action may support the imposition of punitive damages. (Heller v.

Pillsbury, Madison & Sutro (1996) 50 Cal.App.4th 1367, 1390.) In connection with the second cause of action for breach of fiduciary duty, Plaintiffs alleged, for example, that

Defendants failed to disclose conflicts of interest, failed to disclose the risks that placing Warehouse into bankruptcy posed to Plaintiffs. (FAC ¶ 25.) They allege that Mr. Dahl made affirmative representations that he would take a specific course of action, that his loyalties were to Plaintiffs, that he represented that he would not provide legal services to any third party without their written consent, but then, for example, informed Plaintiffs that he would represent creditor Ms. McDonald (adverse to plaintiffs) and used Plaintiffs’ $10,000 advance retainer to pay for Ms. McDonald’s representation without their consent. They allege that Ms. McDonald’s interests were not aligned with theirs and that Defendants essentially abandoned Plaintiffs and began representing Ms. McDonald. Plaintiffs allege that Defendants took the specific action to “extract and retain $10,000” from them and continued to solicit information from them even after undertaking to represent Ms. McDonald in the same matter they believed Defendants represented Plaintiffs. (FAC ¶ 26.)

The breach of fiduciary duty cause of action thus contains allegations of representations and non-disclosures. “A fiduciary’s failure to share material information with the principle is constructive fraud, a term of art obviating actual fraudulent intent.” (Michel v. Moore & Associates, Inc. (2007) 156 Cal.App.4th 756, 762.) Constructive fraud can support punitive damages. (Day v. Rosenthal (1985) 170 Cal.App.3d 1125, 1160.) Allegations that an attorney made certain representations with respect to a course of action recommended to the client without disclosure of the risks involved allegedly designed to obtain a $10,000 retainer which was then used to fund an third party’s litigation whose interests are allegedly adverse to the client without the client’s consent are more than sufficient for pleading purposes to plead an entitlement to punitive damages. Such conduct could meet any of the three definitions set forth in Civil Code § 3294. In addition, Plaintiffs allege that Defendants committed numerous egregious breaches of the Rules of Professional Conduct. (Id. ¶ 28.) As set forth above, conduct “which is in blatant violation of law or policy” may support punitive damages. (American Airlines, Inc., supra, 96 Cal.App.4th at 1050.)

While Defendants argue that there are no specifics as to what exactly they represented and/or failed to disclose, the allegations are sufficient for pleading purposes. The thrust of Defendants’ arguments are factual ones which cannot be resolved at the pleading stage.

The motion to strike punitive damages is denied.

General Damages

Defendants next move to strike Plaintiffs’ request for general damages. From the pleadings, it appears that Plaintiffs only seek general damages in connection with the second cause of action for breach of fiduciary duty.

Defendants’ motion is premised on the general rule that emotional distress damages are generally not recoverable in connection with a legal malpractice action where the alleged injury is solely economic in nature. (Merenda v. Superior Court (1992) 3 Cal.App.4th 1, 8, 11 [disapproved on other grounds].) However, where a plaintiff alleges intentional or affirmative misconduct by an attorney or noneconomic injury resulting from the attorney’s professional negligence, recovery of emotional distress damages is permitted. (Smith v. Superior Court (1994) 10 Cal.App.4th 1033, 1040.) Defendants’ focus on Merenda and the “primary interest” to be avoided is misplaced as Merenda only involved professional negligence and as stated, Plaintiffs are not seeking emotional distress damages in connection with that cause of action.

A breach of fiduciary duty claim is distinct from a professional negligence cause of action and emotional distress damages may be recoverable. (Stanley v. Richmond (1995) 35 Cal.App.4th 1070, 1086, 1097; see also Knutson v. Foster (2018) 25 Cal.App.5th 1075, 1096.) In Stanley, the court stated that “[i]f credited by the jury, appellant’s testimony about the extreme pressure she was under and her state of mind during the last few weeks of Richmond’s representation-including feelings of abandonment and betrayal by her attorney, anxiety over her possible loss of her family home, and undue pressure to obtain financing on a timetable established for the benefit of her attorney and opposing counsel-as well as her loss of lifetime health benefits, may well be sufficient to support an award of damages for emotional distress from the alleged breaches of fiduciary duty.” (Stanley, supra, 10 Cal.App.4th at 1097.) The cases recognizing the availability of emotional distress damages in connection with a breach of fiduciary duty cause of action focused on the wrongful conduct, not the primary interest to be protected by the duty to avoid malpractice. Plaintiffs have alleged that they experienced “humiliation, betrayal, anger, stress” and other emotional distress. (FAC ¶ 32.) Stanley and Knutson make clear that such damages may be sought in connection with a breach of fiduciary duty cause of action against an attorney.

Defendants argue in reply that the subject plaintiff unsuccessfully argued in Smith, supra, 10 Cal.App.4th 1033 that she could recover general damages because the attorneys’ negligence breached their fiduciary duties that arise from the attorney-client relationship. They then argue that the Smith Court “specifically addressing the Breach of Fiduciary Duty cause of action” held that negligence cannot support recovery for the mental suffering where the defendant’s conduct only caused economic injury. (Reply 6:17-20.) Defendants are incorrect; there was no breach of fiduciary duty cause of action in Smith. “Plaintiff filed an action against petitioners in the superior court seeking damages for professional negligence. Her first amended complaint contains one cause of action entitled ‘Negligence–Legal Malpractice.” (Smith, supra, 10 Cal.App.4th at 1036 [emphasis added].) Smith did not address a breach of fiduciary cause of action and the above cases make clear that it is a distinct cause of action and that general damages are available.

The motion to strike is denied.

The minute order is effective immediately. No formal order pursuant to CRC Rule 3.1312 or further notice is required.