Case Number: BC491633    Hearing Date: July 09, 2014    Dept: 46

Posted 7-8-2014 10-40 a.m.

Case Number: BC491633
STEPHEN A BALDWIN ET AL VS JEFFER MANGELS BUTLER ET AL
Filing Date: 09/07/2012

07/09/2014

TENTATIVE RULING: Defendant’s Jeffer Mangels Butler & Mitchell, LLP and Daniel M. Grisbys’ Demurrers and Motions to Strike portions of the Third Amended Complaint. Based upon the following analysis and discussion, the demurrers are SUSTAINED WIITHOUT LEAVE TO AMEND. The motions to strike are ordered off calendar as they are moot. Defendants are ordered to prepare an order and judgment of dismissal. Trial setting conference is ordered off calendar.

1. On 9/16/13, Stephen A. Baldwin and Spyridon C. Contogouris [hereinafter “Ps”] filed their Third Amended Complaint [“TAC”] for (1) Fraud by Concealment; (2) Professional Negligence and (2) Breach of Fiduciary Duty against Ds Jeffer Mangels Butler & Mitchell LLP (hereinafter, the “Firm”), Daniel M. Grigsby (hereinafter, “Grigsby”) and DOES 1-25.

2. Plaintiffs alleged that Ocean Therapy Solutions, LLC (hereinafter, “OTS”) was formed to market an oil and water separation technology. Ps contend that, just as OTS was on the verge of entering into a $52 million deal (which would pay the LLC $18.2 million up front), certain OTS members (with knowledge of the deal) convinced other members (who were unaware of the existence and/or details of the deal) to sell their OTS membership interests at a price reflecting their lack of knowledge. Certain of the “buying” members were represented by the Firm and Grigsby, who also purported to represent OTS itself in connection with the negotiation and documentation of the deal.

3. Firm and Grigsby demur, per CCP § 430.10(e), to the 1st-3rd Causes of Action [“COA”] in Ps’ TAC, on the basis that they each fail to state facts sufficient to constitute COAs. Defendants contend that the 1st-3rd COA are all barred by the doctrine of collateral estoppel, and because the TAC fails to allege facts sufficient to establish either a duty of disclosure, an attorney-client relationship between Ps and the Firm or Grigsby, or any other basis for a duty of any kind to be owed by the Firm or Grigsby to Ps. Defendants further contend that the 2nd and 3rd COAs are also time barred by the applicable statute of limitations [“SOL”] CCP §340.6.

4.Defendants’ Request for Judicial Notice is: GRANTED as to Exhibit “A” (i.e., certified copy of Petition for Damages filed 6/17/11 in case styled Contogouris, et al. v. Ocean Therapy Solutions, LLC, et al., Case No. 2011-6489 [hereinafter, the “Louisiana State Court Action”]; GRANTED as to Exhibit “B” (i.e., certified copy of First Amended Complaint filed 3/4/11 in case styled Contogouris, et al. v. WestPac Resources, LLC, et al., Case No. 2:10-cv-04609-MLCF-SS [hereinafter, the “Louisiana Federal Action”]); GRANTED as to Exhibit “C” (i.e., certified copy of judgment filed 6/18/12 in the Louisiana Federal Action); GRANTED as to Exhibit “D” (i.e., certified copy of verdict filed 6/14/12 in the Louisiana Federal Action).; GRANTED as to Exhibit “E” (i.e., Second Amended Complaint 6/18/13 in this case); and, GRANTED as to Exhibit “F” (i.e., First Amended Complaint filed 6/18/13 in this case). Additionally, the supplemental Request for Judicial Notice (filed concurrently with Defendants reply brief is also GRANTED (i.e. the order filed 12/17/13 in the U.S. Court of Appeals—5th Circuit in the Louisiana Federal Action) should likewise be GRANTED, inasmuch as this event occurred after the demurrer was filed.

5. The information contained in the Third Amended Complaint and in the matters of which the court has taken judicial notice clearly demonstrate that the Ps’ COAs are barred by the doctrine of collateral estoppel as the matters clearly show that Ps are attempting to relitigate the same cause of action as has been previously determined in a final judgment. “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. (Carroll v. Puritan Leasing Co. (1978) 77 C.A.3d 481, 485). In ruling on a demurrer based on res judicata, a court may take judicial notice of the official acts or records of any court in this state. (Id. at p. 481; Safeco Insurance Co. v. Tholen (1981) 117 C.A.3d 685, 696; Evid. Code, § 452).” Frommhagen v. Board of Supervisors 197 C.A.3d 1292, 1299.

6. “The doctrine of res judicata has a double aspect. First, it precludes parties or their privies from relitigating the same cause of action that has been finally determined by a court of competent jurisdiction. Second, although a second suit between the same parties on a different cause of action is not precluded by a prior judgment, the first judgment operates as an estoppel or conclusive adjudication as to such issues in the second action as were actually litigated and determined in the first action. (Safeco Insurance Co. v. Tholen, supra, 210 C.A.3d 1215; 7 Witkin, Cal. Procedure (3d ed. 1985) Judgment, §§ 243, 249, 253; see also, Commissioner v. Sunnen (1948) 333 U.S. 591, 597-598). This second aspect of res judicata is commonly referred to as collateral estoppel. (117 C.A.3d at p. 697; 7 Witkin, Cal. Procedure, supra, § 253.).” Id. at 1299 (emphasis theirs). “’The prerequisite elements for applying the doctrine to either an entire cause of action or one or more issues are the same: (1) A claim or issue raised in the present action is identical to a claim or issue litigated in a prior proceeding; (2) the prior proceeding resulted in a final judgment on the merits; and (3) the party against whom the doctrine is being asserted was a party or in privity with a party to the prior proceeding. [Citations.]’ (Brinton v. Bankers Pension Services, Inc. (1999) 76 C.A.4th 550, 556).” People v. Barragan (2004) 32 C.4th 236, 253.

7. The court concludes that Ps’ TAC in this action raises the same issues which were already litigated and decided against Ps on the merits after trial in the Louisiana Federal Action. In the Federal Action, Ps asserted claims of securities fraud against OTS member Pacific West resources, LLC (hereinafter, “Pacific West”), and two of Pacific West’s alleged members, Patrick Smith (hereinafter, “Smith” and Kevin Costner (hereinafter, “Costner”), in connection with Ps’ sale of their OTS interests.

8. As an initial matter, Ps’ attempt to alter and suppress certain material factual admissions in the FAC is rejected. For instance, Ps have removed allegations suggesting that their sale of OTS interests was based on the misrepresentations and omissions of Kevin Costner (i.e., compare FAC, ¶19: “Smith and Costner both maintained that there was no deal with BP, only a non-binding letter of intent” with SAC, ¶19 and TAC, ¶ 20: “Smith and Costner both maintained that there was no deal with BP”) to create the misleading and false inference that Ps sold their interests solely because of Ds’ conduct (i.e., compare FAC, ¶21: “When Contogouris spoke by phone with Grigsby on June 9, 20120, Grigsby confirmed to Contogouris that no agreement had been reached with BP. Grigsby implored Contogouris not to share that information with anyone” with SAC, ¶22 and TAC, ¶ 23: “When Contogouris spoke by phone with Grigsby on June 9, 2010, he explained that he had heard Costner’s testimony [i.e., in which he “indicated that BP had placed an order for a number of units”], and asked Grigsby the following question: ‘Does OTS have a deal with BP?’ In response Grigsby stated: ‘Do not tell anyone that there is not a deal.’ Grigsby deliberately crafted this statement to create the impression that he was letting Contogouris in on a confidential secret, one that ought not be disclosed to anyone further…in making this statement to Contogouris, and withholding the true information of which Grigsby was aware, Grigsby sought to keep Plaintiffs ‘in the dark’ in order to ensure that they did not attempt to terminate the sale of their OTS ownership interests…”).[italics added.]

By contrast, Ps are now alleging that Grigsby impliedly represented that there was a deal with BP. This purported fact, however, is contradicted by the earlier pleadings.

9. Prior admissions in pleadings are binding on Ps. As such, Ps cannot avoid the prior admission, made in ¶19 of their FAC and in the Louisiana Federal Action (RJN, Exhibit “B,” p. 16), that Plaintiffs knew of the signed letter of intent. They likewise alleged in the Louisiana Federal Action, as they do here, that they were not told that BP agreed to an $18 million advance deposit and “verbally committed to purchase 32 units.” (Id., p. 19). They also alleged, in the Louisiana Federal Action, that “Smith and Costner’s attorney” Grigsby told Contogouris that Smith could only make a 10% deposit on June 11, but would pay the balance of the purchase price on June 18. (Id. at pp. 19-20). “Generally, ‘[a] plaintiff may not avoid a demurrer by pleading facts or positions in an amended complaint that contradict the facts pleaded in the original complaint or by suppressing facts which prove the pleaded facts false. [Citation.] Likewise, the plaintiff may not plead facts that contradict the facts or positions that the plaintiff pleaded in earlier actions or suppress facts that prove the pleaded facts false. [Citation.]’ (Cantu v. Resolution Trust Corp. [(1992)] 4 C.A.4th [857,] at p. 877, italics omitted.).” McClain v. Octagon Plaza, LLC (2008) 159 C.A.4th 784, 799.

10. On 6/18/12, the jury returned a verdict in the Louisiana Federal Action, in favor of the Ds there as to all claims, and the court entered judgment against Ps. Question #3 of the verdict form asked, “[d]id the defendant knowingly, and with the intent to deceive, make a misrepresentation of material fact, or omit a material fact, in connection with the sale of plaintiffs’ ownership interests in OTS?” (RJN, Exhibit “D,” p. 2). The jurors answered “No” as to each defendant. (Id.). Question #14 asked, “[w]ere plaintiffs in error with respect to a cause for the sale of their interests in OTS without with they would not have made the agreement?” (Id., p. 5). Again, the jurors answered, “no.” (Id.). Question #17 asked, “[d]id plaintiffs confirm the sale of their interests in OTS by continuing to perform their contractual obligations despite having knowledge of the defendants’ misrepresentation, suppression or omission, or of plaintiffs’ own error?” (Id., p. 6). The jurors answered, “yes.” (Id.).

The jurors’ responses demonstrates that: (1) there were no misrepresentations or omissions in connection with Ps’ sale of their OTS interests; (2) Ps did not sell their OTS interests as a result of any erroneous or incomplete fact, and that (3) Ps moved forward with the buyout of their interests despite having knowledge of the very same alleged omissions, misrepresentations, and errors underlying their claims in this case. These issues are the precise issues raised in this instant lawsuit.

11. Additionally, Ps’ 2nd and 3rd COAs are time-barred by CCP 340.6 which prescribes a one-year statute of limitations period for any action against an attorney for wrongful conduct in connection with the performance of professional services, including claims for breach of fiduciary duty. Quintilliani v. Mannerino (1998) 62 Cal.App.4th 54, 67-69.

11.a. Ps filed this action on 9/7/12.

11.b. Ps’ admissions in the pleadings reflect that Plaintiffs had actual knowledge of the existence and terms of the BP deal on 7/12/10—more than two years earlier—when they learned of the $18.2 million advance. (TAC, ¶39).

11.c. The TAC alleges the “injury” is that Ps “transferred their OTS ownership interests for substantially insufficient consideration.” (Id., ¶92).

11.d. “Under the discovery rule, the statute of limitations begins to run when the plaintiff suspects or should suspect that her injury was caused by wrongdoing, that someone has done something wrong to her. As we said in Sanchez and reiterated in Gutierrez, the limitations period begins once the plaintiff ‘”’has notice or information of circumstances to put a reasonable person on inquiry ….’”’ (Gutierrez v. Mofid (1985) 39 C.3d [892,] quoting Sanchez v. South Hoover Hospital (1976) 18 C.3d 93, at p. 101 (italics added by the Gutierrez court).) A plaintiff need not be aware of the specific ‘facts’ necessary to establish the claim; that is a process contemplated by pretrial discovery. Once the plaintiff has a suspicion of wrongdoing, and therefore an incentive to sue, she must decide whether to file suit or sit on her rights. So long as a suspicion exists, it is clear that the plaintiff must go find the facts; she cannot wait for the facts to find her.” Jolly v. Eli Lilly & Co. (1988) 44 C.3d 1103, 1110-1111. By Ps’ admissions it is clear to the court that Ps discovered their ‘injury’ by 7/12/10, at latest and that the cause of action accrued on 7/12/10 requiring that the action be filed not later than one year later.

11.e. The amendment to the First Amended Complaint to allege that prior to December 2011, “plaintiffs had been under the misimpression that one or more attorneys in New Orleans had negotiated and drafted and concluded the OTS-BP agreement” (SAC, ¶ 49; TAC, ¶ 51) is not sufficient to delay accrual of the cause of action.“[I]gnorance of the identity of the wrongdoer—as distinguished from ignorance of the wrongdoing itself—does not delay the running of the limitations period.” (See Demurrer, 13:27-14:2; see also Jolly, supra, 44 C.3d at 1110). Also, as Ds point out, Ps “were not ‘injured’ by Defendants’ drafting of the BP agreement; they were injured by the fact that they sold their OTS interests for too little. They knew this in July 2010…” (Demurrer, 14:3-5).

12. Ps have also failed to demonstrate any duty owed by Ds to them. As this is an essential element of negligence and breach of fiduciary claims, the demurrer must be sustained on this basis as well. “One of the requisite elements of a legal malpractice claim is the existence of an attorney-client relationship or other basis for a duty of care owed by the attorney.” Jager v. County of Alameda (1992) 8 C.A.4th 294, 297. ’An attorney generally will not be held liable to a third person not in privity of contract with him since he owes no duty to anyone other than his client…’” Skarbrevik v. Cohen, England & Whitfield (1991) 231 C.A.3d 692, 701.

12.a. Although Ps aver that Ds were “attorneys for OTS” in their TAC (see ¶96), these allegations have not incorporated into the COA for professional negligence. As such, this COA may be construed as based upon the existence of an “other basis for a duty of care owed by the attorney.” The allegations appear to indicate that Ps base this “duty” on the following: (1) that Ds represented OTS; and (2) that Contogouris was a 28% owner of OTS, which at the time was the single largest ownership stake. Ps have alleged that “Grigsby was duty bound” to make certain disclosures to Contogouris “as the largest percentage owner of OTS.” (TAC, ¶80). They further allege that “as OTS’ counsel, defendants were duty bound to each owner therein to share the same information pertaining to OTS, especially upon reasonable requests for such information.” (Id. at ¶ 81).

12.b. The concept of “majority” under CA law implies an ability to control the corporation. An owner or group of owners cannot control a corporate entity without having more than a 50% ownership interest. At any rate, even if Ps were the majority owners of OTS, they would still not have been owed any duty. Ps have repeatedly alleged that Ds represented OTS. “An attorney representing a corporation does not become the representative of its stockholders merely because the attorney’s actions on behalf of the corporation also benefit the stockholders; as attorney for the corporation, counsel’s first duty is to the corporation. (Meehan v. Hopps (1956) 144 C.A.2d 284, 293).” Id. at 703. “[T]he attorney’s continuing duty is to the organization he or she represents, even where the organization acts or intends to act improperly.” Id. at 704. In Skarbrevrik, P minority shareholder in a closely held corporation sued the corporation’s attorney for professional negligence and conspiracy to defraud. P claimed that the other three shareholders, with the attorney’s assistance, covertly amended the bylaws and issued additional shares of stock so that the value of his shares was diminished. The jury rendered a verdict in favor of P and against D; however, the 2nd District, Division 4 Court of Appeal reversed with directions to enter judgment in favor of D, on the basis that D, as corporate counsel, owed no duty to P as a minority shareholder. Similarly, Ps here were minority shareholders of OTS, with Contogouris holding 28% and Baldwin holding 10% (TAC, ¶ 12). Even if, then Ds represented OTS, then they owed duties of care, loyalty and disclosure to OTS only. La Jolla Cove Motel and Hotel Apartments, Inc. v. Superior Court (2004) 121 C.A.4th 773, 784 [“… individual shareholders or directors cannot presume that corporate counsel is protecting their interests.”]

12.c. Also, Ps cannot establish that Ds owned them a fiduciary duty because they drafted the OTS operating agreement, which “creates and imposes a fiduciary duty amongst and between members” (TAC, ¶ 96; emphasis added) but Ps do not allege that Ds were ever members of OTS.

13. Motion to Strike is off calendar as it is moot in light of ruling on demurrer.

14. Plaintiff has had adequate opportunity to amend the pleading and the court finds no reasonable possibility that the pleading may be amended to cure the matters upon which the demurrer is sustained. As such the demurrer is sustained without leave to amend.

IT IS SO ORDERED:

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Frederick C. Shaller, Judge