Case Name: Parimala Bhakta v. Martin Deutsch
Case No.: 16-CV-300540

Currently before the Court is the demurrer and motion to strike by defendant Martin R. Deutsch (“Defendant”).

Factual and Procedural Background

This is a legal malpractice and rescission of contract action initiated by plaintiff Parimala Bhakta (“Plaintiff”) against Defendant. On August 9, 2007, Plaintiff retained Defendant to represent her in connection with the case of Bhakta v. Bhakta, et al. (Santa Clara County Superior Court, Case No. 2007-1-CV097613) (“Underlying Action”), which arose out of a business dispute regarding the Bhakta Riley Corporation (the “Corporation”). (First Amended Complaint (“FAC”), ¶ 4.) The written fee agreement executed by Plaintiff and Defendant provided that Plaintiff would pay Defendant for his legal services on an hourly basis, Defendant’s hourly rate was $200, and Plaintiff would also pay a $10,000 retainer. (Id., at ¶¶ 4, 10, Ex. A.)

In October 2008, Plaintiff and Defendant entered into a new written fee agreement. (FAC, ¶ 5, Ex. B.) Under the terms of the new agreement, Plaintiff agreed to pay Defendant on a contingency fee basis whereby Defendant would receive 25 percent of the gross recovery. (Ibid.) This agreement allegedly modified the nature and extent of Defendant’s representation of Plaintiff as it stated that Defendant was to represent Plaintiff “in connection with claims against BHAKTA.” (Ibid.) “At no time prior to entering into this new … arrangement, had Defendant advised Plaintiff of how the contingent fee agreement would apply to her case, the potential conflict of interest or her right to obtain advice from other independent counsel as to the advisability of her entering into this new … agreement … .” (Ibid.) Defendant failed to make the foregoing disclosures in order to induce Plaintiff to enter into the new agreement. (Id., at ¶¶ 5-6.)

Actual conflicts of interest arose between Plaintiff and Defendant as of August 10, 2009, when Defendant became corporate counsel for the Corporation. (FAC, ¶¶ 7-8.) Defendant billed $200 per hour for his services to the Corporation. (Id., at ¶¶ 8, 11.)

Actual conflicts of interest also arose between Plaintiff and Defendant on or about December 22, 2009, at the time when the Underlying Action was settled. (FAC, ¶¶ 7-8.) Under the terms of the settlement agreement, which was executed on December 22, 2009, Plaintiff was to receive $50,000 and 47.5 shares of the Corporation. (Id., at ¶ 7, Ex. C.) Defendant advised Plaintiff that pursuant to the contingency fee agreement, “he was entitled to the entire $50,000 … and an ownership interest in the Corporation … .” (Id., at ¶ 9.) This representation was false and Defendant should not have taken an interest in the Corporation without full written disclosures made to Plaintiff and advising her in writing to obtain the advice of independent legal counsel pursuant to the State Bar Rules. (Ibid.) At the time she entered into the contingency fee agreement and settled the Underlying Action, “Plaintiff did not know the representations were false and/or misleading, was unaware of any conflict of interest or failure to disclose, but believed them to be true and reasonably relied on them, as Defendant was her attorney … .” (Ibid.) “Pursuant to Defendant’s representation that he … owned 12% of the shares of … [the] Corporation under the terms of the Contingent Fee Agreement, Plaintiff paid him dividends from the Corporation about every 4 months from 2010 to 2014 in the total sum of approximately $94,000, in addition to the $50,000 from the settlement … .” (Id., at ¶ 11.)

“In connection with the implementation of the terms of the Settlement Agreement … and payment to Defendant as he represented pursuant to the terms of the Contingent Fee Agreement, substantial legal work was required after December 22, 2009.” (FAC, ¶ 9.) “Defendant remained as attorney for Plaintiff pursuant to the terms of the Contingent Fee Agreement at least through April 2016.” (Id., at ¶ 12.) “Neither Plaintiff nor Defendant terminated Defendant’s representation of Plaintiff in connection with the Contingent Fee Agreement before April[ ] 2016.” (Ibid.) Defendant was eventually discharged as corporate counsel in April 2016. (Ibid.)

Based on the foregoing allegations, Plaintiff filed the operative FAC against Defendant on May 16, 2017, alleging causes of action for: (1) rescission; (2) professional misconduct and malpractice; (3) breach of fiduciary duty; (4) declaratory relief; (5) violation of Business & Professions Code section 17200, et seq.; and (6) common counts.
On July 18, 2018, Defendant filed the instant demurrer and motion to strike. Plaintiff filed papers in opposition to the matters on August 1, 2018. On August 3, 2018, Defendant filed a reply in support of his demurrer and motion to strike.

Discussion

I. Request for Judicial Notice

Defendant asks the Court to take judicial notice of Plaintiff’s original complaint; the moving, opposition, and reply papers filed in connection with his demurrer to the complaint; and the court order on his demurrer to the complaint.

These documents are proper subjects of judicial notice because they are court records relevant to the arguments raised in connection with the pending demurrer and motion to strike. (See Evid. Code, § 452, subd. (d) [permitting judicial notice of court records]; see also People ex rel. Lockyer v. Shamrock Foods Co. (2000) 24 Cal.4th 415, 422, fn. 2 [“There is … a precondition to the taking of judicial notice in either its mandatory or permissive form—any matter to be judicially noticed must be relevant to a material issue.”]; People v. Woodell (1998) 17 Cal.4th 969B, 455 [“Evidence Code sections 452 and 453 permit the trial court to ‘take judicial notice of the existence of judicial opinions and court documents, along with the truth of the results reached-in the documents such as orders, statements of decision, and judgments-but [the court] cannot take judicial notice of the truth of hearsay statements in decisions or court files, including pleadings, affidavits, testimony, or statements of fact.’ ”].)
Accordingly, Defendant’s request for judicial notice is GRANTED as to the existence of the subject court records and the truth of the results reached in the court order on Defendant’s demurrer to the complaint.

II. Demurrer

Defendant demurs to each and every cause of action of the FAC on the ground of failure to allege facts sufficient to constitute a cause of action. (See Code Civ. Proc., § 430.10, subd. (e).)

A. Legal Standard

The function of a demurrer is to test the legal sufficiency of a pleading. (Trs. Of Capital Wholesale Elec. Etc. Fund v. Shearson Lehman Bros. (1990) 221 Cal.App.3d 617, 621.) Consequently, “[a] demurrer reaches only to the contents of the pleading and such matters as may be considered under the doctrine of judicial notice.” (South Shore Land Co. v. Petersen (1964) 226 Cal.App.2d 725, 732 (South Shore), internal citations and quotations omitted; see Code Civ. Proc., § 430.30, subd. (a).) “It is not the ordinary function of a demurrer to test the truth of the [ ] allegations [in the challenged pleading] or the accuracy with which [the plaintiff] describes the defendant’s conduct. [ ] Thus, [ ] the facts alleged in the pleading are deemed to be true, however improbable they may be.” (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 958, internal citations and quotations omitted.) However, while “[a] demurrer admits all facts properly pleaded, [it does] not [admit] contentions, deductions or conclusions of law or fact.” (George v. Automobile Club of Southern California (2011) 201 Cal.App.4th 1112, 1120.)

B. Statute of Limitations

As a preliminary matter, Defendant argues that the first through sixth causes of action of the FAC are time-barred by the applicable statute of limitations. Defendant initially contends that the limitations periods for the causes of action are governed by various sections of the Code of Civil Procedure. (D’s Mem. Ps. & As., p. 10:16-22.) However, Defendant subsequently provides analysis of the statute of limitations issue only with respect to Code of Civil Procedure section 340.6. (Id., at pp. 10:23-14-15.) After his analysis of the statute of limitations issue with respect to Code of Civil Procedure section 340.6, Defendant concludes that “Plaintiff’s First, Third, Fourth, Fifth, and Sixth causes of action of the FAC must be dismissed as they are barred by the Statute of Limitations.” (Id., at p. 14:12-15.)

To the extent Defendant intended to argue that some of Plaintiff’s claims are time-barred by statutes other than Code of Civil Procedure section 340.6, he fails to support his position with reasoned argument and legal authority. Consequently, that position is deemed to be without foundation and requires no discussion. (See Badie v. Bank of America (1998) 67 Cal.App.4th 779, 784-785; see also Schaeffer Land Trust v. San Jose City Council (1989) 215 Cal.App.3d 612, 619, fn. 2 [“[A] point which is merely suggested by a party’s counsel, with no supporting argument or authority, is deemed to be without foundation and requires no discussion.”].)

Next, to the extent Defendant intended to argue that the first through sixth causes of action are time-barred by Code of Civil Procedure section 340.6, his argument is not well-taken. Defendant apparently contends Plaintiff’s claims accrued as of August 27, 2009, and the statute of limitations expired on August 27, 2013. (D’s Mem. Ps. & As., pp. 12:7-13:8.) Defendant asserts Plaintiff has not alleged sufficient facts showing that the statute of limitations was tolled by his continued representation of her because the only representation alleged subsequent to December 22, 2009, is representation of the Corporation.

Code of Civil Procedure section 340.6 sets forth the statute of limitations for any action against an attorney arising from the performance of professional services. (See Khodayari v. Mashburn (2011) 200 Cal.App.4th 1184, 1190.) It equally applies to other causes of action arising from the professional negligence. (Stoll v. Super. Ct. (1992) 9 Cal.App.4th 1362, 1368.) The statute provides that such an action must be initiated within one year “after the plaintiff discovers, or through the use of reasonable diligence should have discovered, the facts constituting the wrongful act or omission, or four years from the date of the wrongful act or omission, whichever occurs first.” (Code Civ. Proc., § 340.6, subd. (a).)

However, the limitations period is tolled when the “attorney continues to represent the plaintiff regarding the specific subject matter in which the alleged wrongful act or omission occurred.” (Code Civ. Proc. § 340.6, subd. (a)(2).) Continuous representation requires “an ongoing relationship and activities in furtherance of the relationship.” (Jocer Enters., Inc. v. Price (2010) 183 Cal.App.4th 559, 571; Worthington v. Rusconi (1994) 29 Cal.App.4th 1488, 1498.) “So long as there are unsettled matters tangential to a case, and the attorney assists the client with these matters, he is acting as his representative.” (Ibid.; see Gurkewitz v. Haberman (1982) 137 Cal.App.3d 328, 333.) “This continuous representation rule was adopted in order to avoid the disruption of an attorney-client relationship by a lawsuit while enabling the attorney to correct or minimize an apparent error, and to prevent an attorney from defeating a malpractice cause of action by continuing to represent the client until the statutory period has expired.” (Laird v. Blacker (1992) 2 Cal.4th 606, 618.)
An objective standard is used to determine whether an attorney’s representation has ended. (Nielsen v. Beck (2007) 157 Cal.App.4th 1041, 1049.) Courts have held, “continuous representation should be viewed objectively from the client’s perspective.” (Laclette v. Galindo (2010) 184 Cal.App.4th 919, 928.) “An attorney’s representation of a client ordinarily ends when the client discharges the attorney or consents to a withdrawal, the court consents to the attorney’s withdrawal, or upon completion of the tasks for which the client retained the attorney.” (Id., at p. 927.)

Here, Plaintiff adequately alleges that Defendant continued to represent her, as an individual, after the settlement agreement was executed on December 22, 2009, and until April 2016. Specifically, Plaintiff alleges that “substantial legal work was required after December 22, 2009,” in “connection with the implementation of the terms of the Settlement Agreement.” (FAC, ¶ 9.) She further alleges that Defendant remained her attorney “pursuant to the terms of the Contingent Fee Agreement at least through April 2016.” (Id., at ¶ 12.) Lastly, Plaintiff alleges that neither party “terminated Defendant’s representation … in connection with the Contingent Fee Agreement before April[ ] 2016.” (Ibid.) When liberally construed, these allegations permit the reasonable inference that all agreed tasks for which Plaintiff retained Defendant were not completed until April 2016. (See Rickley v. Goodfriend (2013) 212 Cal.App.4th 1136, 1141-42 [when analyzing a demurrer, a court must liberally construe the complaint and draw all reasonable inferences in favor of its allegations].)

Defendant’s assertion to the contrary—that “no substantial legal work was required after the Settlement Agreement was signed on December 22, 2009” (D’s Mem. Ps. & As., p. 14:9-11)—is beyond the scope of demurrer. (See South Shore, supra, 226 Cal.App.2d at p. 732 [“[a] demurrer reaches only to the contents of the pleading and such matters as may be considered under the doctrine of judicial notice.”].)

As the statute of limitations is the only argument raised by Defendant with respect to the first cause of action for rescission, the demurrer to the first cause of action is OVERRULED.

C. Second, Third, Fourth, and Fifth Causes of Action

Defendant asserts that the second through fifth causes of action do not to allege sufficient facts to state a claim because he had no duty to disclose a conflict of interest under California Rules of Professional Conduct (“CRPC”) rule 3-300. Defendant contends that CRPC rule 3-300 generally does not apply to an attorney-client fee agreement unless the agreement confers on the attorney an ownership, possessory, security, or other pecuniary interest adverse to the client. He further asserts that a contingent fee based on the client’s recovery is not a pecuniary or financial interest adverse to the client’s interest within the meaning of the rule.

Defendant’s argument fails to dispose of the second, fourth, and fifth causes of action in their entirety. The second cause of action for professional misconduct and malpractice is not based solely on the alleged non-disclosure. That claim is predicated, in part, on Defendant’s alleged charging of excessive fees. (FAC, ¶ 17.) Similarly, the fourth cause of action for declaratory relief seeks a declaration regarding Defendant’s breach of his professional responsibilities, which according to the second cause of action includes charging excessive fees. (Id., at ¶¶ 17 and 26.) Lastly, the fifth cause of action for violation of Business and Professions Code section 17200 is predicated generally on “Defendant’s wrongful acts or practices.” (Id., at ¶ 30.) When this allegation is liberally construed, it can be read as including Defendant’s alleged charging of excessive fees. Because Defendant’s argument does not dispose of the second, fourth, and fifth causes of action in their entirety, the demurrer cannot be sustained based on that argument. (See PHII, Inc. v. Super. Ct. (1995) 33 Cal.App.4th 1680, 1682 [a demurrer does not lie to only a portion of a claim].)

Accordingly, the demurrer to the second, fourth, and fifth causes of action is OVERRULED.

Defendant’s argument is well-taken as to the third cause of action for breach of fiduciary duty. That claim, as currently pleaded, is predicated solely upon the alleged non-disclosure. (FAC, ¶¶ 22-23.) Here, the alleged non-disclosure occurred in connection with the contingency fee agreement and CRPC rule 3-300 does not apply to such agreements. (See Lanz v. Goldstone (2015) 243 Cal.App.4th 441, 464 [“But Bolio’s only contract with Lanz was a “Contingency Fee Contract,” and no reasonable attorney would assert a violation of rule 3-300 in that setting, as that rule does not apply to a contingent fee agreement, as held in Plummer v. Day/Eisenberg, LLP (2010) 184 Cal.App.4th 38 … . ”]; see also Tuft & Peck, Cal. Practice Guide: Professional Responsibility (The Rutter Group 2017) Ch. 5-B, ¶ 5:85; Shopoff & Cavallo LLP v. Hyon (2008) 167 Cal.App.4th 1489, 1522.)

Accordingly, the demurrer to the third cause of action is SUSTAINED, with 10 days’ leave to amend.

D. Sixth Cause of Action

Defendant argues that the sixth cause of action does not to allege sufficient facts to state a claim because the first through fifth causes of action fail and the sixth cause of action is predicated on the same facts.

This argument lacks merit as the first, second, fourth, and fifth causes of action survive Defendant’s demurrer.

Accordingly, the demurrer to the sixth cause of action is OVERRULED.

III. Motion to Strike

Defendant moves to strike portions of the FAC on the grounds that some of Plaintiff’s allegations run afoul of the sham pleading doctrine and the FAC does not allege sufficient facts to support an award of punitive damages or attorney fees.
A. Legal Standard

Under Code of Civil Procedure section 436, a court may strike out any irrelevant, false, or improper matter inserted into any pleading or strike out all or part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court. (Code Civ. Proc., § 436.) The grounds for a motion to strike must appear on the face of the challenged pleading or from matters of which the court may take judicial notice. (Code Civ. Proc., § 437, subd. (a).) In ruling on a motion to strike, the court reads the pleading as a whole, all parts in their context, and assuming the truth of all well-pleaded allegations. (See Turman v. Turning Point of Central California, Inc. (2010) 191 Cal.App.4th 53, 63 citing Clauson v. Super. Ct. (1998) 67 Cal.App.4th 1253, 1255.)

B. Sham Pleading

Defendant contends that numerous allegations in the FAC must be stricken under the sham pleading doctrine because the allegations are inconsistent with prior allegations in Plaintiff’s complaint.

The sham pleading doctrine holds, as a general rule, that an amended pleading that contradicts an admission in an earlier complaint will not be allowed. (Henry v. Losse (1991) 54 Cal.3d 723, 742-743.) The rationale behind this rule is clear: “[a] pleader may not attempt to breathe life into a complaint by omitting relevant facts which made his previous complaint defective.” (Vallejo Development Co. v. Beck Development Co. (1994) 24 Cal.App.4th 929, 946.) To the extent that there are inconsistencies with prior pleadings, they “must be explained; if the pleader fails to do so, the court may disregard the inconsistent allegations.” (Vallejo Development Co., supra, 24 Cal.App.4th at 946.) The rule “is intended to prevent sham pleadings omitting an incurable defect in the case.” (Berman v. Bromberg (1997) 56 Cal.App.4th 936, 946.) However, the rule “cannot be mechanically applied” and is not intended to prevent complainants from correcting erroneous allegations in the complaint. (Id., citing Contreras v. Blue Cross of California (1988) 199 Cal.App.3d 945, 950.)

Here, Defendant fails to establish that the subject allegations in the FAC contradict an admission in the original complaint. First, Defendant points out that the complaint alleged that Plaintiff entered into the contingency fee agreement because she owed him attorney fees while the FAC alleges that he induced her to enter into the contingency fee agreement after discovering that her recovery in the Underlying Action would be substantial. These allegations do not contradict one another. It is possible that Plaintiff entered into the contingency fee agreement because she owed Defendant attorney fees and Defendant also induced her to enter into the contingency fee agreement after discovering that her recovery in the Underlying Action would be substantial.

Second, Defendant notes that the FAC alleges that the contingency fee agreement modified the nature and extent of his representation of Plaintiff. Defendant asserts that this allegation conflicts with paragraph 9 of the original complaint. But that paragraph does not discuss what effect, if any, the contingency fee agreement had on the nature and extent of the legal representation.

Third, Defendant states that Plaintiff previously alleged in the complaint that his representation of her ended on April 19, 2009, and the allegations of the FAC are contradictory. However, no such allegation appears in the original complaint.

Fourth, Defendant points out that the FAC alleges that Plaintiff and Defendant had an ongoing dispute regarding the fee agreements after December 22, 2009. But Defendant does not identify any allegation in the complaint that contradicts the allegations of the FAC.

Finally, Defendant argues that the allegations in the FAC regarding legal work required after December 22, 2009, constitute a sham pleading because the complaint alleged that the Underlying Action settled on April 10, 2009, and the settlement agreement was executed on December 22, 2009. The fact that the case settled, in and of itself, does not mean that no further work by Defendant was required on the matter. Thus, the allegations are not inconsistent.

Accordingly, the motion to strike portions of the FAC under the sham pleading doctrine is DENIED.

C. Punitive Damages

Defendant argues that the Court should strike Plaintiff’s request for punitive damages because Plaintiff does not allege sufficient facts demonstrating that he is guilty of malice, oppression, or fraud.

The right to punitive damages requires proof of “oppression, fraud, or malice” on the part of the defendant by “clear and convincing evidence.” (Civ. Code, § 3294, subd. (a).) For pleading purposes, in order to support a prayer for punitive damages, the complaint must allege “ultimate facts of the defendant’s oppression, fraud or malice.” (Cyrus v. Haveson (1976) 65 Cal.App.3d 306, 316-317.) Simply pleading the statutory terms “oppression, fraud or malice” is insufficient to adequately allege punitive damages, but only to the extent that the complaint pleads facts to support those allegations. (Blegen v. Super. Ct. (1986) 176 Cal.App.3d 503, 510-511.) Therefore, specific factual allegations demonstrating oppression, fraud or malice are required. (Brousseau v. Jarrett (1977) 73 Cal.App.3d 864, 872.)

Here, Plaintiff does not allege a claim for fraud. Additionally, there are no allegations in the FAC providing that Defendant’s acts were done maliciously, intentionally, despicably, or with conscious disregard for the rights and safety of others. Furthermore, Plaintiff’s causes of action sound in negligence and such claims cannot support an award of punitive damages. (See Ebaugh v. Rabkin (1972) 22 Cal.App.3d 891, 894; see also Lackner v. North (2006) 135 Cal.App.4th 1188, 1211-12.)

For these reasons, the motion to strike the request for punitive damages is GRANTED, with 10 days’ leave to amend.

D. Attorney Fees

Defendant states that the request for attorney fees should be stricken from the FAC because Plaintiff has not pleaded any basis for the recovery of attorney fees.

“Under California law, ‘each party to a lawsuit must pay its own attorney fees unless a contract or statute or other law authorizes a fee award.’ [Citations.] Thus, unless specifically provided by statute or agreement, attorney fees are not recoverable.” (K.I. v. Wagner (2014) 225 Cal.App.4th 1412, 1420-21.) The contractual or statutory basis for such fees, where requested, are to be alleged within the body of the complaint. (Wiley v. Rhodes (1990) 223 Cal.App.3d 1470, 1474.)

Upon review of the FAC, it is readily apparent that a contractual or statutory basis for the request for attorney fees has not been alleged. Thus, the request for attorney fees is not adequately pleaded.

Accordingly, the motion to strike the request for attorney fees is GRANTED, with 10 days’ leave to amend.