Case Name: Afnani, et al. v. The Fuller Law Firm, et al.
Case No.: 17-CV-306307

Defendants Fuller Law Firm, Lars T. Fuller and Saman Taherian (collectively, “Defendants”) demur to the second amended complaint (“SAC”) filed by plaintiffs Sasan Afnani (“Sasan”) and Nasim Afnani (“Nasim”) (collectively, “Plaintiffs”) and move to strike portions contained therein.

This is an action for legal malpractice arising out of the provision of legal services in a bankruptcy proceeding. According to the allegations of the SAC, Plaintiffs, a married couple, held title as joint tenants with a right of survivorship to a property located in San Jose (the “Property”). (SAC, ¶ 10.) Although Plaintiffs did not reside in the Property at the time of foreclosure, it had been their family home in 2003 and 2004, and they intended to raise their children there. (Id. ¶ 11.) First Federal Bank of California held a deed of trust on the Property in the amount of $392,905.88 (“First Federal Lien”), while JP Morgan Chase Bank (“JP Morgan”) held a second deed of trust on the Property in the amount of $93,507 (the “Second Lien”). (Id., ¶ 12.)

Plaintiffs each separately retained and employed Defendants to represent them in Chapter 13 bankruptcy proceedings. (SAC, ¶ 13.) Defendants agreed to represent Plaintiffs in all work usually and customarily included in such a representation, including obtaining appropriate court orders relating to the Property. (Id.) The scope of Defendants’ employment also included giving notice of the automatic stay imposed by the bankruptcy filing on all lienholders who had a claim against any of Plaintiffs’ real property, as well as maintaining the stay in force against such lienholders for as long as necessary to secure for Plaintiffs the relief they sought with the filing. (Id., ¶ 14.)

Rather than filing a joint bankruptcy petition for Plaintiffs as husband and wife, Defendants chose to file two separate petitions (hereafter “Sasan’s Case” and “Nasim’s Case”) and maintained each plaintiff’s records in separate files. (SAC, ¶ 16.) Despite the fact that the Property was jointly held by Plaintiffs, Defendants negligently failed to list it as an asset in Nasim’s Case indicating, incorrectly, that it was Sasan’s property. (Id., ¶ 17.) Defendants also negligently failed to list the Second Lien in Nasim’s Case in the list of creditors holding secured claims. (Id.) In Sasan’s petition, the Property is listed as having a value of $355,000; as the First Federal Lien was $392,905.88 at the time of the bankruptcy filing, it was not fully supported by the equity in the Property, and the Second Lien was not supported by any equity at all. (Id., ¶ 18.)

U.S. Bankruptcy law includes a procedure, sometimes called “avoiding” or “stripping,” under which a debtor can obtain an order or judgment removing a lien from real property if that lien is found by the court not to be supported by equity in that property. (SAC, ¶ 19.) If this procedure is not properly followed, the lienholder retains a legal right to foreclose on the lien, with the result that the debtor-client might lose the property and all benefits of ownership, including the value of past payments made, any equity growth and any future stream of rental payments. (SAC, ¶ 20.) On August 30, 2010 and October 19, 2010, Defendants filed and then re-filed a motion in Sasan’s Case to value the Second Lien at zero dollars, which the court determined to be the case. (Id., ¶ 19.) There is no doubt that had such a motion been filed in Nasim’s Case, it also would have valued the Second Lien at zero dollars, and her subsequent completed plan would not have required her to pay anything toward the Second Lien because its valuation would have been zero as it was it Sasan’s Case. (Id.)

On December 3, 2010, the court issued an order in Sasan’s Case which directed that for the purposes of Sasan’s Chapter 13 plan, the Second Lien was valued at zero, JP Morgan did not have a secured claim, and the lien could not be enforced. (SAC, ¶ 22.) However, the order was contingent on Defendants also obtaining a zero valuation on the Second Lien in Nasim’s Case. (Id.) Further, the order provided that if Sasan’s Case was dismissed or converted to one under another chapter before Sasan obtained a discharge or completed the plan, the order would cease to be effective and the lien could be restored upon application by the lienholder. (Id.)

Ultimately, Defendants failed to complete or even start the process of valuing the Second Lien on the Property at zero in Nasim’s Case as provided by the court’s order, and also failed to give the court the required notice of that. Additionally, Defendants negligently failed to do the following: notify the court in Sasan’s Case that Nasim had completed her Chapter 13 plan; obtain a judgment voiding the Second Lien on the Property in Sasan’s Case or otherwise before the Property was foreclosed on; record any judgment voiding the lien because they never obtained a judgment voiding the lien in the first place; and oppose a motion for relief from the automatic stay by the holder of the Second Lien against the Property. (SAC, ¶ 23.) The motion for relief from the stay was granted by the court, thereby enabling the lienholder of the Second Lien to proceed to foreclose on the Property. Defendants did not inform Plaintiffs about the motion or its result, i.e., that the Property was now at risk of foreclosure if they did not resume making payments on the Second Lien. (Id., ¶ 24.) Sasan’s Chapter 13 plan called for no payments to be made on the Second Lien and Defendants advised him that such payments would not be necessary because the lien was going to be avoided through the bankruptcy procedure. (Id., ¶ 25.) Plaintiffs allege that Defendants intentionally concealed the foregoing failings from them, as well as the fact that they needed to continue making payments on the Second Lien in order to avoid foreclosure. (Id., ¶¶ 26, 31.) Had they known, Plaintiffs allege, they would have continued making such payments, and maintained possession of the Property. (Id., ¶ 31.)

Defendants negligently allowed the court to enter the discharge of Sasan’s bankruptcy on July 7, 2014 and close the case on August 19, 2014, without obtaining a judgment removing the Second Lien. (Id., ¶ 27.) The foregoing failures fell below Defendants’ professional standard of care and left the Property exposed to foreclosure. (Id., ¶¶ 28-29.)

Prior to April 6, 2016, Plaintiffs were completely unaware that Defendants failed to take the required actions to protect their ownership interests and rights in the Property and were unaware of the foreclosure risk. (SAC, ¶ 37.) Defendants advised Plaintiffs that they had completed their work for them without verifying that this was in fact the case. (SAC, ¶ 39.)

On April 3, 2016, a successor owner of the Second Lien recorded a trustee’s deed in its favor and then, on April 6, 2016, sold the Property at a trustee’s sale to Duke Partners LLC. (Id., ¶ 34.) On April 14, 2016, Defendants reopened Sasan’s Case in an effort to enjoin any re-sale of the Property and undo the foreclosure sale; they were unsuccessful. (Id., ¶ 42.)

On June 29, 2017, Plaintiffs filed the first amended complaint (“FAC”) asserting the following causes of action: (1) attorney malpractice; (2) breach of fiduciary duty (concealment); (3) breach of fiduciary duty; and (4) attorney malpractice (conflict of interest). Defendants subsequently demurred to the second, third and fourth causes of action on the ground of failure to state facts sufficient to constitute a cause of action, and moved to strike portions of the FAC. (Code Civ. Proc., §§ 430.10, subd. (e), 435 and 436.) On November 1, 2017, the Court sustained the demurrer without leave to amend as to the third and fourth causes of action and sustained it with 10 days’ leave to amend as to the second cause of action.

On November 13, 2017, Plaintiffs filed the SAC asserting claims for: (1) attorney malpractice; and (2) breach of fiduciary duty (concealment). On January 5, 2018, Defendants filed the instant demurrer to the second cause of action on the ground of failure to state facts sufficient to constitute a cause of action, as well as the motion to strike portions contained therein. (Code Civ. Proc., §§ 430.10, subd. (e), 435 and 436.) Plaintiffs oppose the motions.

I. Defendants’ Request for Judicial Notice

In support of their demurrer and motion to strike, Defendants request that the Court take judicial notice of the following items: (1) the Court’s order on Defendants’ Demurrer and Motion to Strike Portions of the First Amended Complaint, dated November 1, 2017 (Exhibit A); (2) the FAC (Exhibit B); and (3) the initial Complaint (Exhibit C). All of these items are court records and therefore proper subjects of judicial notice pursuant to Evidence Code section 452, subdivision (d). Accordingly, Defendants’ request for judicial notice is GRANTED.

II. Demurrer

The thrust of Defendants’ demurrer to the second cause of action in the SAC is that it is a sham pleading that amounts to an abuse of process, and therefore should be disregarded by the Court.

Plaintiffs’ second cause of action for breach of fiduciary duty based on fraudulent concealment is predicated on allegations that Defendants breached the fiduciary duties that they owed to Plaintiffs by concealing from them the following facts: that they had failed to complete all work required to void the Second Lien; that they had failed to oppose OneWest’s motion for relief from the automatic stay imposed by the bankruptcy filing; that the motion had been granted, enabling the holder of the Second Lien to foreclose on the Property; and that because the stay had been lifted, Plaintiffs needed to resume making payments on the Second Lien in order to protect their interest in the Property. (SAC, ¶¶ 54-57.) Plaintiffs further allege that they did not become aware that Defendants had failed to take the required actions to protect their interest in the Property and thus that their ownership of the Property was at risk until April 6, 2016, when the Property was sold at a trustee’s sale to a third party. (Id., ¶ 57.)

In their demurrer to this claim in the FAC, Defendants contended, and the Court agreed, that Plaintiffs had not sufficiently stated a claim based on fraudulent concealment because they had failed to plead the necessary element of Defendants’ intent to defraud them. (See Hahn v. Mirda (2007) 147 Cal.App.4th 740, 748 [stating that elements for a claim for fraud and deceit based on concealment are: “(1) the defendant must have concealed or suppressed a material fact, (2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage”].) The Court found that Plaintiffs’ pleading in the FAC that Defendants had an intent to defraud them by concealing their alleged acts of professional negligence was “entirely incompatible with and defeated by the allegation that Defendants only learned of their purported failure to remove the Second Lien on the Property upon Plaintiffs informing them.” It logically followed that if Defendants had no knowledge of their failings with respect to the Second Lien on the Property, they could not be alleged to have had an intent to conceal those failings from Plaintiffs. Thus, the demurrer was sustained, although with leave to amend, which was requested by Plaintiffs.

In the SAC, Plaintiffs have now omitted the allegation that Defendants did not realize that they had failed to remove the Second Lien until Plaintiff’s brought it to their attention on or around April 6, 2016. In their demurrer, Defendants maintain that this omission implicates the sham pleading doctrine, which precludes parties from amending complaints to omit harmful allegations, without explanation, from previous complaints to avoid attacks raised in demurrers or motions for summary judgment. (See, e.g., Deveny v. Entropin, Inc. (2006) 139 Cal.App.4th 408, 425.) Generally, “[i]f a party files an amended complaint and attempts to avoid the defects of the original complaint by either omitting facts which made the previous complaint defective or by adding facts inconsistent with those previous pleading, the court may take judicial notice of prior pleadings and may disregard any inconsistent allegations.” (Colapinto v. County of Riverside (1991) 230 CAL.App.3d 147, 151.) Defendants assert that Plaintiffs’ now-omitted allegations about Defendants’ knowledge of their purported failure to remove the Second Lien was a binding judicial admission that defeats their claim. A judicial admission is a party’s “unequivocal concession of the truth of a matter, and removes the matter as an issue in the case. [Citations.]” (Gelfo v. Lockheed Martin Corp. (2006) 140 Cal.App.4th 34, 48.) Judicial admissions can be made in pleadings, and where so made, cannot be contradicted by the party against whom the pleadings are used. (Myers v. Trendwest Resorts, Inc. (2009) 178 Cal.App.4th 735, 746 [explaining that a pleader “cannot blow hot and cold as to the facts positively pleaded”].) The omission of the aforementioned allegations, Defendants argue, is a clear attempt by Plaintiffs to evade the negative effect of their judicial admission.

However, “the doctrine of judicial admissions … does not apply to allegations in pleadings that have been superseded by amendments, especially where the initial pleading was not verified and the court granted permission to file the amended pleading to correct a potentially damaging admission in the initial pleading that was the result of mistake, inadvertence, or inadequate knowledge of the facts.” (Minish v. Hanuman Fellowship (2013) 214 Cal.App.4th 437, 456.) As the Court stated in its order on Defendants’ demurrer to the FAC, it has the inherent power to relieve a party from the effects of judicial admissions by amendments to the pleadings (see Valerio v. Andrew Younquist Construction (2002) 103 Cal.App.4th 1264, 1272), and elected to grant Plaintiffs’ request for such leave. It is therefore incumbent on Plaintiffs, per both the sham pleading doctrine and the doctrine of judicial admission, to explain the omission from the SAC of the allegations that Defendants did not realize that they had failed to remove the Second Lien until Plaintiff’s brought it to their attention on or around April 6, 2016.

To this end, Plaintiffs assert that further review of additional documents in the bankruptcy cases disclosed facts to them demonstrating that Defendants “must have been aware” that they did not complete the lien avoidance procedure which they had a duty to do prior to April 6, 2016, and they specifically set forth in their opposing memorandum the particular documents and what each document establishes with regards to Defendants’ knowledge of their purported failings.

First, Plaintiffs note that a proposed “Order Valuing Lien of JP Morgan Chase Bank NA” submitted to the court by Defendants in Sasan’s Case concerning the Second Lien was returned to them because it was not signed, and included a notation from the court requesting that Sasan file a memorandum of points and authorities “dealing with the issue of a debtor’s ability to value real property, essentially stripping the lien, on real property co-owned by a non-filing co-obligor.” Next, in a Motion to Value Lien filed in Sasan’s Case, Defendants advised that they would also be moving to “value the Property for the purpose of avoiding the 2nd Trust Deed” in Nasim’s Case, and admitted that “the lien may not be avoidable if Nasim Afnani does not file such motion or if Nasim Afnani’s motion is not successful.” In the order granting the foregoing motion, which was drafted by Defendants, it stated that the Second Lien was to be voided for all purposes, and that the court would enter an appropriate form of judgment doing so upon Sasan’s application, “provided that similar relief is also granted in the Chapter 13 case of Nasim Afnani, co-owner of property.” The subsequent “Judgment Voiding Lien of JP Morgan Chase Bank NA,” which was also drafted by Defendants, was stamped “unsigned” by the court, which explained that it was not granting the relief requested because the order granting the motion to avoid the Second Lien in Susan’s Case was contingent on similar relief being granted in Nasim’s Case, and a review of Nasim’s Case showed that she had not filed such a motion. According to Plaintiffs, all of the foregoing items, which were filed before April 6, 2016, establish Defendants’ knowledge of their failings with respect to removing the Second Lien independent of Plaintiffs’ communications to them. Thus, they maintain, they have proffered the required explanation for the omission of the prior judicial admission and the SAC should therefore not be deemed a sham pleading.

While an explanation for the omission has been provided in Plaintiffs’ opposing memorandum, it has not been pleaded in the SAC as required. (See Deveny, supra, 139 Cal.App.4th at 425 [stating that “[a]llegations in the original pleading that rendered it vulnerable to demurrer or other attack cannot simply be omitted without explanation in the amended pleading”] [emphasis added].) Leave to amend to address this deficiency is appropriate, provided that Defendants’ remaining arguments in support of their demurrer prove unpersuasive.

Defendants lastly argue that Plaintiffs have failed to plead the second cause of action with the requisite specificity, particularly with respect to the elements of knowledge of falsity and intent to defraud. No facts have been pleaded, they assert, which establish the foregoing components of the fraud claim.

Defendants’ argument is unavailing because knowledge of falsity and intent to deceive are both facts, and thus are sufficiently pleaded by the general averment that a defendant knew a representation to be false when made and intended to defraud the plaintiff. (See, e.g., Hall v. Mitchell (1922) 9 Cal.App. 743; see also 5 Witkin, California Procedure (5th ed. 2008) Pleading, §§ 726, 728.) With Plaintiffs having made such allegations here (see SAC, ¶¶ 58-59), this argument does not provide a basis upon which to sustain the demurrer.

In accordance with the foregoing analysis, Defendants’ demurrer to the second cause of action on the ground of failure to state facts sufficient to constitute a cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.

III. Motion to Strike

With the instant motion, Defendants move to strike allegations relating to Plaintiffs’ intentions with regards to their ownership of the Property, Plaintiffs’ request for punitive damages and damages for emotional distress.
First, as they asserted previously, it is Defendants’ contention that emotional distress damages are not recoverable in this action, i.e., where an attorney’s alleged malpractice has lead only to economic loss.

As Defendants contend, generally an attorney’s ordinary negligence will not support recovery of emotional distress damages where the misconduct only causes the client economic loss or property damage; this is so regardless of whether the alleged malpractice occurs in a litigation or nonlitigation context. (Merenda v. Superior Court (1992) 3 Cal.App.4th 1, 10.) Such damages are recoverable in a legal malpractice action only where the distress “naturally ensues from the acts complained of,” and importantly, emotional distress is “not an inevitable consequence of the loss of money.” (Id.; see also Smith v. Superior Court (1992) 10 Cal.App.4th 1033, 1038-1039.) However, where the attorney’s conduct goes beyond mere negligence (i.e., intentional or affirmative misconduct) or results in noneconomic injury, recovery of emotional distress damages is permitted. (Smith v. Superior Court, 10 Cal.App.4th at 1040; see also McDaniel v. Gile (1991) 230 Cal.App.3d 363, 373-375.)

Here, Plaintiffs’ still have not adequately pleaded intentional misconduct by Defendants for the reasons set forth above. In its prior order on Defendants’ motion to strike portions of the FAC, the Court concluded that Plaintiffs had not pleaded that they suffered damages other than economic loss and property damages as a result of Defendants’ purported conduct. Plaintiffs had argued that such damages were nevertheless warranted because while the Property was not their residence at the time of the bankruptcy filing, it was where they initially raised their children and where they intended to reside in the future. The Court was not persuaded that the foregoing entitled Plaintiffs to recover emotional distress damages for two reasons. First, none of the foregoing was actually pleaded in the FAC. Second, while the Court acknowledged that California law in other areas has recognized the uniqueness of real property, particularly homes as Plaintiffs contended, Plaintiffs acknowledged in the FAC that they did not reside in the Property at the time it was foreclosed on and instead were utilizing it merely as an investment. In short, Plaintiffs’ damages as pleaded in the FAC arose only out of economic loss or property damages caused by negligence. Consequently, the Court found that there was no basis to recover emotional distress damages.

In the SAC, Plaintiffs have omitted allegations previously contained in the FAC that the Property was rented out and held for appreciation and equity growth, and now plead that the Property had been their first home and they intended to move back there to raise their children. (SAC, ¶ 11.) Defendants assert that the omission of these allegations without explanation renders the SAC a sham pleading, with Plaintiffs clearly attempting to evade their admission that the Property was held primarily for investment purposes. The Court agrees. Plaintiffs previously made it clear that while they had at one time resided in the Property, they continued to possess it for economic purposes. To have now omitted that admission and replaced it with an assertion that the home was held for sentimental purposes and with an intent to reside there in the future without any explanation regarding the omission is troublesome and, without such explanation, a sham. Plaintiffs provide no explanation regarding the omission in their opposition, or suggest that such an explanation even exists. Consequently, the Court will not provide leave to amend to address the omission, and finds that allegations relating to Plaintiffs’ intentions towards the home should be stricken. Thus to the extent that Defendants’ motion seeks to strike allegations pertaining to emotional damages (SAC, ¶¶ 11, 35), the motion is GRANTED WITHOUT LEAVE TO AMEND.

Defendants also again move to strike Plaintiffs’ request for punitive damages and allegations relating thereto, arguing that they still have not pleaded sufficient facts to warrant recovery of such damages.

The right to exemplary or 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 or exemplary 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. Superior Court (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.) However, the complaint will be read as a whole so that even conclusory allegations may suffice when read in context with facts alleged as to the defendant’s wrongful conduct. (Perkins v. Super. Ct. (1981) 117 Cal.App.3d 1, 6-7; Clauson v. Super. Ct. (1998) 67 Cal.App.4th 1253, 1255).

Here, as in the FAC, malice, fraud and oppression all serve as the foundation for Plaintiffs’ punitive damages requests. Under the punitive damages statute, Civil Code section 3294, “malice” is defined as conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others.” (Civ. Code, § 3294, subd. (c)(1).) “Oppression” is defined as “despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights.” (Id., § 3294, subd. (c)(2).) “Despicable conduct,” in turn, has been described as conduct that is “so vile, base, contemptible, miserable, wretched or loathsome that it would be looked down upon and despised by ordinary decent people.” (Mock v. Michigan Millers Mutual Ins. Co. (1992) 4 Cal.App.4th 306, 331.) Finally, “fraud” is defined as “an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.” (Civ. Code, § 3294, subd. (c)(3).)

As articulated above in the analysis of Defendants’ demurrer, Plaintiffs have not sufficiently pleaded intentional conduct by Defendants in connection with their representation of Plaintiffs in the underlying bankruptcy cases due to their failure to explain the omission of the claim-defeating judicial admission. All that is currently pleaded in the FAC is negligent conduct, and punitive damages may only be recovered for intentional acts. (See City of Hope Nat. Medical Center v. Genentech, Inc. (2008) 43 Cal.4th 375, 392.) There are otherwise no facts pleaded which demonstrate oppressive or malicious conduct on the part of Defendants towards Plaintiffs. Consequently, to the extent that Defendants’ motion to strike seeks to remove Plaintiffs’ requests for punitive damages and allegations relating thereto (i.e. ¶ 64 and in Prayer), it is GRANTED WITH 10 DAYS’ LEAVE TO AMEND.

Defendants lastly move to strike Plaintiffs’ request for attorney’s fees under a disgorgement theory, asserting that under California law attorney’s fees paid to an attorney in connection with the underlying representation which gave rise to a legal malpractice claim in the first place are not recoverable, while fees paid to an attorney to correct the malpractice are. Indeed, fees paid to the purportedly negligent attorney are not recoverable as tort damages. (Orrick Herrington & Sutcliffe LLP v. Superior Court (2003) 107 Cal.App.4th 1052, 1058-1060.) The Court previously granted Defendants’ motion to strike these damages in the FAC without leave to amend, yet they remain in the SAC. Thus, to the extent that Defendants’ motion to strike seeks to remove Plaintiffs’ request for disgorgement of fees paid to Defendants in connection with the legal representation provided by them in the underlying bankruptcy action (Prayer), it is GRANTED WITHOUT LEAVE TO AMEND.