Case Number: KC068076 Hearing Date: January 03, 2019 Dept: O

1. Disqualify Counsel

Defendants Glenn Taxman and Much Shelist, P.C.’s motion to disqualify plaintiffs’ counsel is DENIED.

Defendants Glenn Taxman and Much Shelist, P.C. (“defendants”) move to disqualify plaintiffs’ counsel, Chang & Cote LLP.

According to defendants, plaintiffs’ counsel disclosed certain “disputed emails,” which contained attorney-client work product in their Motion in Limine No. 4. The emails were dated March 15, 2011, between defendant Rahul Paliwal and defendant Much Shelist’s attorney Gary Auerbach, and reflect Mr. Auerbach’s opinions regarding “partnership matters.” (See Declaration of Joseph J. Mellama (“Mellama Decl.”) ¶ 5.) The emails were inadvertently produced in discovery and listed on Much Shelist’s Privilege Log. (Id.) Defendants contend that plaintiffs’ counsel must be disqualified because he is privy to information contained in the “disputed emails” and rely on State Comp. Ins. Fund v. WPS, Inc. (1999) 70 Cal.App.4th 644 and McDermott Will & Emery LLP v. Superior Court (2017) 10 Cal.App.5th 1083. At the same time, defendants have declined to allow the Court to conduct an in camera review of the “disputed emails” to resolve the privilege issue. (See Motion to Disqualify Plaintiffs’ Counsel at 20; see also League of Calif. Cities v. Superior Court (2015) 241 Cal.App.4th 976, 990 (“while a trial court may not order disclosure of a communication claimed to be privileged to allow a ruling on the claim of privilege, the holder of the privilege may request an in camera review of alleged privileged communications to aid the trial court in making the preliminary fact determination that a communication was made during the course of an attorney-client relationship or to attempt to prevent disclosure of the communication.”)

In opposition, plaintiffs’ counsel contends that this issue is governed by Code of Civil Procedure (“CCP”) Section 2031.285’s “clawback” provision, delineating specific procedures to be undertaken if electronically stored information produced in discovery is subject to a claim of attorney work product privilege. According to plaintiffs, they followed procedures expressly authorized by CCP Section 2031.285. Within the 30-day period allotted by the statute, on November 21, 2018, plaintiffs filed both a motion in limine and a noticed a CCP Section 2031.285 motion on November 27, 2018, presenting the information to the court conditionally under seal. (CCP § 2031.285(d)(1).)

In McDermott Will & Emery LLP v. Superior Court (2017) 10 Cal.App.5th 1083, the court distinguished between two standards that apply when privileged information is inadvertently disclosed. The first, more stringent standard, provides that “when an attorney receives materials that obviously or clearly appear to be privileged and it is reasonably apparent the materials were inadvertently disclosed, the attorney receiving the materials must refrain from examining them any more than is necessary to determine their privileged nature, immediately notify the privilege holder the attorney has received materials that appear to be privileged, attempt to reach an agreement with the privilege holder about the materials’ privileged nature and their appropriate use, and resort to the court for guidance if an agreement cannot be reached. The attorney must not further review or use the materials for any purpose while the issue remains in dispute.” (McDermott, supra, 10 Cal.App.5th at 1108.) The second, lower standard, provides that “when an attorney ascertains that he or she received materials that are not obviously or clearly privileged… a lower standard” applies, and “triggers a more limited response. In this situation, the attorney’s duty is simply to notify the privilege holder that the attorney may have privileged documents that were inadvertently disclosed. At that point, the onus shifts to the privilege holder to take appropriate steps to protect the materials if the holder believes the materials are privileged and were inadvertently disclosed.” (McDermott Will & Emery LLP, supra, 10 Cal.App.5th at 1108.)

Here, unlike in McDermott, the “disputed emails” were not “obviously or clearly privileged” because the emails were between a general partner and the attorneys for the partnership. Plaintiffs are limited partners of the partnership. Defendants admit that the emails concerned “partnership matters.” (See Mellama Decl. ¶ 5.) Pursuant to McCain v. Phoenix Res. (1986) 185 Cal.App.3d 576, the communications held by the partnership attorneys are not protected from disclosure to the limited partners through claims of privilege:

A partnership can be a client of a law firm and a lawyer may transact business on behalf of the partnership. [citation omitted] Under such circumstances, it is foreseeable that a law firm would have information in its possession relating to partnership affairs. If, on the other hand, the law firm holds records which represent the purely private or personal interests of one of the partners, the attorney-client privilege can be asserted to resist production of these records. It will be the task of the trial court to determine to what extent the attorney-client privilege applies to the documents sought by plaintiffs herein, but the attorney-client privilege will not bar disclosure of matters related to a partnership business simply because such business was conducted through a law firm.

(Id. at 580-81.)

Defendants contend that McCain is distinguishable because it “expressly preserved the Defendant’s right to assert any claim of privilege.” (See Motion at 18.) This argument, however, is misleading. The McCain court actually held that the limited partners had a “right to disclosure… to any information in the possession of attorneys for the general partner,” and that claims of privilege that are “purely private or personal” to the general partner may be preserved. (McCain, supra, 185 Cal.App.3d 581.) Defendants do not assert that the information contained in the “disputed emails” were of a purely private or personal nature and admit that the emails discussed “partnership matters.” (See Mellama Decl. ¶ 5.)

Defendants also argue that McCain is distinguishable because it dealt with Corporations Code Section 15510(b)(1), which has since been superseded by statute. However, the court’s rationale in McCain regarding the attorney-client relationship between the partnership and the law firm was not based exclusively on the Corporations Code. Corporations Code Section 15510 was cited to support the conclusion that a broad policy of openness and disclosure prevails in the relationship between limited partners and the general partner. Indeed, the disclosure provisions of Corporations Code Section 15903.04, which supplanted Section 15510, are even more extensive and permissive than its predecessor. McCain is proper legal authority because it addresses disclosure of partnership records in the hands of the partnership’s counsel.

Defendants also cite Johnson v. Sup. Ct. (1995) 38 Cal.App.4th 463 for the proposition that “it is not always the case that the partnership’s attorney always represents the individual.” (See Motion at 19.) However, Johnson does not support defendants’ motion. In Johnson, the court determined that, despite having no direct contact and no oral or written contract with the limited partners, the attorneys performed legal services and rendered advice to the partnership, and thus assumed a duty of care and an obligation of loyalty to the partnership and to all partners, not just the general partner. (Id. at 479.) Therefore, the limited partners were properly deemed to be co-clients.

Defendants also cite Responsible Citizens v. Sup. Ct. (1993) 16 Cal.App.4th 1717 for the proposition that the attorney-client relationship is only created by some form of contract. (See Motion at 19.) However, as addressed in Johnson (which also discussed and analyzed Responsible Citizens), a contract is not the sole factor in determining whether an attorney-client relationship exists. As in Johnson, the attorneys in Responsible Citizens had no contract as well with the limited partners. Yet, an attorney-client relationship was still established between the attorneys and the limited partners because the attorneys provided legal advice and counsel to the partnership generally. (Responsible, supra, 16 Cal.App.4th at 765-67.) Here, defendants admit that the “disputed emails” discussed “partnership matters.” (See Mellama Decl. ¶ 5.)

Thus, in this particular situation, the lower standard is triggered because the emails do not obviously or clearly appear to be privileged. Plaintiffs’ counsel met his obligations by notifying defendants that he is in possession of the documents, and sought the Court’s guidance regarding the privileged nature of the documents.

More importantly, and even under the more stringent standard, defendants have not established that plaintiffs’ counsel failed to refrain from examining the emails “more than is necessary to determine their privileged nature.” (See McDermott, supra, 10 Cal.App.5th at 1108.) There is no evidence, other than conjecture, to substantiate this accusation. This Court is not privy to the information contained in the emails. (See Motion at 20.) It is unclear how long or short the emails are, how much detail is contained in the emails, or whether a cursory review or a closer reading of the emails would have been necessary to reveal the privileged nature of the documents. Defendants therefore failed to establish that plaintiffs’ counsel examined the emails “more than is necessary” to determine their privileged nature.

Furthermore, unlike other inadvertent disclosure scenarios that were present in defendants’ authorities, this particular disclosure is specifically governed by CCP Section 2031.285, which deals with privilege claims relating to electronically-stored information (“ESI”) produced in discovery. Defendants conceded that the document was produced during an “ESI production” and stated in an email message to plaintiffs’ counsel on November 1, 2018 that “the issue between us is squarely governed in the first instance by the “clawback” provisions in CCP Section 2031.285.” (See Declaration of Rodney W. Bell (“Bell Decl.”) Exhibit 2.) Because defendants invoked the “clawback” provision on November 1, 2018, plaintiffs may contest the legitimacy of the claim of privilege “by making a motion within 30 days of receiving the claim and presenting the information to the court conditionally under seal.” (CCP § 2031.285(d)(1).) Plaintiffs timely “present[ed] the information to the court conditionally under seal” by making a motion in limine on November 21, 2018 and a noticed motion on November 27, 2018. Plaintiffs therefore followed procedures expressly authorized by statute.

Because defendants declined to allow the court to view the “disputed emails” in camera, the documents will remain under seal pending the resolution of Motion in Limine No. 4. Based on the limited factual evidence and legal authority submitted to this Court to suggest disqualification is appropriate, the defendants’ concession that the “disputed emails” disclosure is governed by CCP Section 3031.285 and the plaintiffs apparent adherence to applicable statutory provision, the Court finds that defendants failed to establish that disqualification under these circumstances is appropriate.

The motion is DENIED.

2. Anti-SLAPP

Cross-Defendants J. and V. Hourany, and Sura’s special motion to strike cross-complaint is DENIED.

Cross-defendants Joseph Hourany, M.D., Veronique Hourany, M.D., and Urvashi Sura’s (“limited partners” or “cross-defendants”) move for an order striking cross-complainants Indus Manager Corp. (“general partner”) and Indus-Chino Hills, L.P.’s (“partnership” and collectively, “cross-complainants”) cross-complaint pursuant to Code of Civil Procedure (“CCP”) Section 425.16.

Objections

Cross-Complainants’ evidentiary objections are overruled.

Timeliness

As an initial matter, cross-complainants argue that cross-defendants service of the motion to strike was late pursuant to CCP Section 1013 because service by overnight delivery must be extended by an additional two “court” days.

Cross-complainants’ reliance on CCP Section 1013 is incorrect. CCP Section 1005(a)(13) governs the instant special motion to strike because it is a “proceeding under this code in which notice is required and no other time or method is prescribed.” A special motion to strike pursuant to CCP Section 425.16 does not prescribe another “time or method” for notice.

CCP Section 1005(b) provides that motions must be served at least 16 “court” days plus 2 “calendar” days if served by overnight delivery. CCP Section 1005(c) specifically states that CCP 1013 “does not apply to a notice of motion.”

“The time in which any act provided by law is to be done is computed by excluding the first day, and including the last, unless the last day is a holiday, and then it is also excluded.” (CCP § 12.) “Where any law requires an act to be performed no later than a specified number of days before a hearing date, the last day to perform that act shall be determined by counting backward from the hearing date, excluding the day of the hearing as provided by Section 12.” (CCP § 12c(a).) “Any additional days added to the specified number of days because of a particular method of service shall be computed by counting backward from the day determined in accordance with subdivision (a). (CCP § 12c(b).)

Here, the hearing date is set for January 3, 2019. Counting backwards from the hearing date, and excluding the last day (January 3, 2019) and excluding court holidays (January 1, 2019 and December 25, 2018), the sixteenth court day lands on December 10, 2018. Because the motion was served on December 7, 2018, cross-defendants properly gave 16 “court” days plus more than two “calendar” days of notice. The motion is TIMELY.

The Court notes that cross-complainants assert that “this Court’s recent ruling requir[e] the parties to strictly conform to all service rules.” (See Opposition to Special Motion to Strike Cross-Complaint (“Opposition”), at 1.) However, this contention concerned multiple motions for summary judgment, which mandate strict compliance with filing procedures. As noted in this Court’s prior ruling, “in light of the express, mandatory statutory language” contained in CCP 437c, this Court has no discretion “to shorten the minimum notice period for summary judgment hearings.” (McMahon v. Superior Court (2003) 106 Cal.App.4th 112, 115-118.) As to other motions, including this one, “unless otherwise ordered or specifically provided by law” as in the case of motions for summary judgment per CCP Section 437c, this Court retains broad discretion under California Rules of Court 3.1300(d) to consider late-filed papers.

Cross-Defendants’ Burden of Proof

The moving party bears the initial burden of showing that the action falls within the class of suits subject to the special motion to strike. (Matson v. Dvorak (1995) 40 Cal.App.4th 539, 548; Dixon v. Superior Court (1994) 30 Cal.App.4th 733, 742; Wilcox v. Superior Court (1994) 17 Cal.App.4th 809, 819.) A defendant need not first establish that his actions are constitutionally protected under the First Amendment as a matter of law. (Wilcox, supra, 17 Cal.App.4th at 820.) However, a defendant is required to make a prima facie showing that plaintiff’s suit arises from any act of defendant in furtherance of his right to petition or his right of free speech under the federal or state constitution in connection with an issue of public interest. (CCP § 425.16(e); Equilon Enterprises v. Consumer Cause (2002) 29 Cal.4th 53, 67.) The act which forms the basis for the plaintiff’s cause of action must itself have been an act in furtherance of the right of petition or free speech. (City of Cotati v. Cashman (2002) 29 Cal.4th 69, 76-78; ComputerXpress, Inc. v. Jackson (2001) 93 Cal.App.4th 993, 1003; Dowling v. Zimmerman (2001) 85 Cal.App. 4th 1400, 1417; Braun v. Chronicle Publishing Co. (1997) 52 Cal.App.4th 1036, 1043.)

A defendant may meet this burden by showing that the act which forms the basis for the plaintiff’s suit was (1) any written or oral statement made before a legislative, executive or judicial proceeding; (2) a statement or writing made in connection with an issue under consideration in such a proceedings or “any other official proceeding authorized by law;” (3) any written or oral statement made in a place open to the public or a public forum in connection with an issue of public interest; or (4) any other conduct in furtherance of the exercise of the constitutional right of petition or the constitutional right of free speech in connection with an issue of public interest. (CCP § 425.16(e); Equilon Enterprises, supra, 29 Cal.4th at 66; Dixon, supra, 30 Cal.App.4th at 742.)

Whether the anti-SLAPP statute applies is determined by the “principal thrust or gravamen” of plaintiff’s claim. It cannot be invoked where allegations of protected activity are only incidental to a cause of action based on nonprotected activity. (Martinez v. Metabolife Int’l, Inc. (2003) 113 Cal.App.4th 181, 187.)

Cross-defendants’ burden is to show that the action falls within the class of suits subject to the special motion to strike. Cross-defendants contend that the cross-complainants are attempting to punish them for filing the underlying complaint, which is an exercise of their constitutional right to petition. The underlying complaint (amended) alleges a variety of fraud claims against various defendants, including cross-complainants, for misrepresentations made during the investment period concerning the partnership.

The cross-complainants seeks contractual indemnification against cross-defendants for relying on representations made other than as set forth in the Subscription Agreement. (See Cross-Complaint ¶ 18.) The Subscription Agreement contains a clause that provides that “the undersigned has not relied upon any representations or other information (whether oral or written) other than as set forth” in the documents furnished to him/her. (Id.) The Subscription Agreement also contains an indemnity clause for any breach of warranty made by the undersigned. (See Subscription Agreement ¶ 4.) Cross-complainants contend that if cross-defendants relied on statements made outside what is set forth in the agreement, then they breached their warranty, and they are liable to cross-complainants for indemnity.

Stated another way, cross-complainants’ theory is as follows:

If cross-defendants prevail on their fraud claims in the underlying action, then they would have breached their warranty to cross-complainants to not rely on statements outside of the agreement, and therefore, they are liable to cross-complainants on the cross-complaint for indemnity. The “principal thrust or gravamen” of the cross-complaint is therefore based on cross-defendants’ petitioning acts.

Accordingly, the Court finds that cross-defendants have met their burden of establishing that the “principal thrust or gravamen” of the cross-complaint arises from cross-defendants’ filing of their complaint, which is in furtherance of their right of petition. (CCP § 425.16(e); Equilon Enterprises, supra, 29 Cal.4th at 67.) The cross-complaint therefore falls within the class of suits subject to the special motion to strike. (Matson, supra, 40 Cal.App.4th at 548; Dixon, supra, 30 Cal.App.4th at 742; Wilcox, supra, 17 Cal.App.4th at 819.)

Cross-Complainants’ Burden of Proof

Cross-complainants now have the burden of proof to establish a probability that they will prevail on whatever claims are asserted against cross-defendants. (CCP § 425.16(b).) The cross-complainants must demonstrate that the complaint is both legally sufficient and supported by a sufficient prima facie showing of facts to sustain a favorable judgment. (Premier Med. Mgmt. Systems, Inc. v. California Ins. Guar. Ass’n (2006) 136 Cal.App.4th 4464, 476.)

Express indemnity refers to an obligation that arises by virtue of express contractual language establishing a duty in one party to save another harmless upon the occurrence of specified circumstances. Express indemnity generally is not subject to equitable considerations or a joint legal obligation to the injured party; rather, it is enforced in accordance with the terms of the contracting parties’ agreement. (Prince v. Pacific Gas & Electric Co. (2009) 45 Cal.4th 1151, 1158.)

Cross-complainants present evidence that cross-defendants entered into a Subscription Agreement that contains a clause that provides that “the undersigned has not relied upon any representations or other information (whether oral or written) other than as set forth” in the documents furnished to him/her. (See Cross-Complaint ¶ 18.) The Subscription Agreement also contains an indemnity clause for any breach of warranty made by the undersigned. (See Subscription Agreement ¶ 4.) Cross-complainants contend that if cross-defendants relied on statements made outside what is set forth in the agreement, then they breached their warranty, and are liable to cross-complainants for indemnity.

Cross-defendants contend that this provision is unenforceable as against public policy pursuant to Civil Code Section 1668, which provides that “[a]ll contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.”

In Blankenheim v. E.F. Hutton & Co. (1990) 217 Cal.App.3d 1463, an investment broker was sued by investors for losses that they sustained in connection with a partnership. The brokers’ defense centered on language in documents that were provided to the investors. Similar to the case at hand, the documents provide that the brokers made “no representations on the merit of these investments” and the investors agreed to hold the brokers harmless from any loss. (Blankenheim, supra, 217 Cal.App.3d at 1469-1470.) The Blankenheim trial court granted the brokers’ motion for summary judgment, and the appellate court reversed, finding that the hold harmless agreement was unenforceable under California law as a matter of public policy: “a contract which exempts a party from liability for his own positive assertions, made in a manner not warranted by the information, which are untrue, is against the policy of the law. In the present case, the hold-harmless agreements attempted to exempt E. F. Hutton from all responsibility for its own misrepresentations. It follows that such an agreement is void as against the policy of the State of California.” (Blankenheim, supra, 217 Cal.App.3d at 1473.)

Further, “a party to a contract who has been guilty of fraud in the inducement cannot absolve himself or herself from the effects of his or her fraud by any stipulation in the contract, either that no representations have been made, or that any right that might be grounded upon them is waived. Such a stipulation or waiver will be ignored, and parol evidence of misrepresentations will be admitted, for the reason that fraud renders the whole agreement voidable, including the waiver provisions.” (1 Witkin, Summary of Cal. Law, Contract, § 304, at 330.)

Here, the amended complaint alleges that the cross-complainants made fraudulent statements to induce them to invest in the partnership. Thus, according to cross-defendants, the exculpatory clause contained in the Subscription Agreement was tainted by the fraud of cross-complainants to induce cross-defendants to purchase their Class F shares in the first place.

Although cross-defendants raise valid statutory and legal authorities to support the unenforceability of the indemnity provision as against public policy, such determination is not proper at this stage in the litigation. At the present time, this Court is solely focused on whether cross-complainants met their burden of establishing a probability that they will prevail on whatever claims are asserted against Cross-Defendants. (CCP § 425.16(b).) Cross-complainants need only show that their claim has legal sufficiency and that they possess evidence supporting the claim.

Here, cross-complainants have produced a contract containing a warranty and an indemnification clause. This evidence is enough to support their claim for indemnification. Given the procedural posture of this case at this time, whether this Court will ultimately decide if the agreement is unenforceable as against public policy is a determination that is proper after the Court considers all the evidence offered by both parties at trial.

The Court is unaware, and the parties have not cited any case law that allows this Court to make such a finding at this juncture of the litigation on an anti-SLAPP motion. This is because in order to find that the clause is unenforceable and void as against public policy, this Court must first determine that cross-defendants have established fraud in the inducement. Such a finding is premature on the limited evidence before this court.

Accordingly, the motion is DENIED.