COAST INTELLIGEN, INC. v. LESSER No. D052612.
COAST INTELLIGEN, INC., Defendant, Cross-complainant and Appellant, v. DAVID LESSER, Defendant and Respondent; WAYNE RAFFESBERGER, Cross-defendant and Appellant.
Court of Appeals of California, Fourth District, Division One.
Filed April 15, 2010.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
Wayne Raffesberger (Wayne) is an attorney. Wayne's father (Ray) and brother (Glenn) founded, owned, and operated a business known as Coast Intelligen (Coast), and Wayne performed various services, both as a lawyer and in nonlegal capacities, to assist his family in operating the business. In 1998 the business was sold to investors, and in late 2000 the investors sold Coast's assets to Coast Intelligen, Inc., a Delaware Corporation (Coast Delaware), a company formed by David Lesser. After Coast Delaware's acquisition of Coast's assets, Ray and Glenn remained with and operated the business for Coast Delaware through mid-2006, and Wayne continued to perform various services for Coast Delaware during the same period.
Lesser discovered Ray and Glenn had been diverting assets belonging to Coast Delaware for their personal benefit, and Lesser terminated their relationship with, and Wayne's legal representation of, Coast Delaware. This legal action was commenced by Ray and Glenn alleging various contractual claims against Coast Delaware, which cross-complained, alleging numerous claims against Ray, Glenn and Wayne.
After a lengthy trial, the court found in favor of Coast Delaware on numerous claims against Ray and Glenn, and awarded damages to Coast Delaware of nearly $950,000. The court also found in favor of Coast Delaware on its claims against Wayne for legal malpractice and breach of fiduciary duty, but concluded Wayne was not a coconspirator with Ray and Glenn in connection with their tortious conduct. The court's judgment in favor of Coast Delaware and against Wayne was limited to damages of $142,551, representing the disgorgement of the legal fees paid to Wayne during his tenure as Coast Delaware's attorney.
Although all parties originally appealed the judgment, with each party contending that various errors required reversal of discrete components, a settlement entered during the pendency of this appeal between Ray, Glenn, and Coast Delaware has limited the appeal to two parties—Wayne and Coast Delaware—and has potentially narrowed the issues remaining for appellate resolution. Wayne's appeal raises numerous arguments that fall into two broad categories. First, Wayne raises numerous arguments claiming the evidence was insufficient to support the conclusion he breached his fiduciary duties or committed legal malpractice. Second, Wayne raises numerous arguments that alternatively contend the separate damages award against him was unsupported by the evidence.
The Parties and Related Entities
Coast Delaware, a Delaware company formed by Lesser in 2001, acquired Coast's assets from the investors. Lesser, President of Coast Delaware and its sole director, relied on Ray's technical and business acumen to operate Coast Delaware's business. Ray wanted to retire but agreed to be a consultant to help Lesser find professional management and increase Coast Delaware's business.
Shortly before Coast Delaware was formed, Pete Bonacic (a former Coast employee and friend of Ray) formed Western Energy Marketers LLC (WEM). At various relevant times, Ray was involved in WEM as a half-owner and/or consultant. WEM acted as a middleman on many Coast Delaware projects, and received a 10 percent commission on projects outsourced for Coast Delaware.
The Raffesbergers' Employment by Coast Delaware
Coast Delaware initially employed Ray as a consultant, and agreed to pay him a monthly consulting fee and to reimburse him for expenses incurred in connection with his job performance. However, in the fall of 2001, Ray threatened to quit unless Lesser agreed to reemploy him as the Chief Operating Officer (COO) for the business, and Lesser yielded to Ray's demand. As part of Ray's obligations under the contract employing him as COO, he agreed to assist Lesser in locating and training Ray's successor.
Glenn was initially employed by Coast Delaware as Vice President of Engineering. However, in July 2004, Ray informed Lesser that he was retiring, Glenn would be the successor COO for the business, and Ray would shift back to the role of consultant with compensation paid to him on an hourly basis.
Wayne served as attorney for Coast Delaware from 2001 through April 2006. He received legal fees in the total amount of $142,551. Wayne had previously represented Coast, and did not obtain a conflict waiver before or during the time he provided legal representation to Coast Delaware.
Ray's and Glenn's Alleged Malfeasance
Coast Delaware alleged, and the trial court found, that Ray and Glenn engaged in numerous improprieties concerning Coast Delaware's assets and funds, including paying personal expenses using company credit cards and checks, using company personnel on outside business interests, using company assets and personnel to provide personal benefits for themselves and other family members, and selling company assets and keeping the proceeds.
The two specific transactions involving alleged malfeasance that remain relevant to this appeal
In the Custom Foods transaction, WEM sold a turnkey installation of five cogeneration units to Custom Foods. Although WEM was to receive $2 million on the Custom Foods contract, Coast Delaware (which provided both the equipment and performed the installation) was only to receive $1.6 million. The additional profit was to be divided between Ray, at that time still acting as a consultant for Coast Delaware, and Bonacic. After disputes arose between Bonacic and Ray over the division of these additional profits, Glenn entered into a settlement agreement with WEM (without Lesser's knowledge) that lowered Coast Delaware's share for the project to only $1,525,000. Glenn entered into that agreement knowing Ray and WEM were splitting the additional profit. Ray ultimately received $250,000 of the additional profits.
Wayne's Alleged Malfeasance
Wayne provided legal representation to Coast Delaware from 2001 until April 2006. During that period, Wayne seldom talked with Lesser but instead took his direction from Ray and Glenn. Wayne did not seek or obtain any waiver of the conflicts of interest that may have arisen because of Ray and Glenn's involvement in Coast Delaware.
Wayne billed Coast Delaware a set amount each month regardless of the amount of work he performed, and either Ray or Glenn would sign the checks to pay Wayne's monthly bill. At trial, Wayne conceded his billing arrangement was loose and was between himself and his father, and Wayne was unable to tell what services, if any, he had provided for the retainer he received for any given month.
For the last couple of years before his services were terminated by Lesser, Wayne also assisted Ray and Glenn by inputting data for Coast Delaware into Quickbooks.
Wayne's involvement in the Fairmont Hotel and Custom Foods transactions, apparently limited to making certain bookkeeping adjustments, occurred in the spring of 2006 shortly before Lesser terminated Coast Delaware's relationship with Ray, Glenn and Wayne. In early April 2006, Glenn told Mr. Bellone (Lesser's East Coast manager of operations) that Coast Delaware needed an infusion of cash from Lesser because the business was having cash flow issues or was out of money. Lesser sent Bellone to investigate the problems, and Bellone questioned Glenn about a March 2006 invoice (which apparently included amounts due on the Fairmont Hotel and Custom Foods jobs) reflecting that WEM owed nearly $490,000 to Coast Delaware. Glenn told Bellone the amount shown was a mistake and that Bellone would have to talk to Ray.
Shortly thereafter, Wayne was directed by Ray to zero out the amount purportedly owed by WEM to Coast Delaware in connection with the Fairmont Hotel project.
Lesser Terminates the Raffesbergers
Because of Lesser's concerns over Ray's and Glenn's conduct, he decided to end their involvement with Coast Delaware. Lesser's termination of his relationship with Ray and Glenn effectively ended Wayne's representation of Coast Delaware.
Ray and Glenn filed an action against Coast Delaware and others alleging numerous claims sounding in both contract and tort. Coast Delaware's cross-complaint alleged numerous claims against Ray and Glenn, also asserted claims against Wayne for breach of fiduciary duty and legal malpractice, and alleged Wayne was a coconspirator with Ray and Glenn in connection with their misconduct.
After a lengthy trial to the court, the court entered a statement of decision that found in Coast Delaware's favor on numerous of its tort and contract claims against Ray and Glenn, and awarded Coast Delaware damages of nearly $950,000 against them. The court also found in Coast Delaware's favor on its claims that Wayne had breached his fiduciary duties and committed legal malpractice, and entered an award against Wayne in the amount of $142,551. However, the court rejected Coast Delaware's claim that Wayne was a coconspirator with Ray and Glenn.
ANALYSIS OF COAST DELAWARE'S APPEAL
Coast Delaware raises numerous claims of error insofar as the trial court limited its judgment against Wayne to an award of $142,551. However, most of Coast Delaware's arguments
A claim of civil conspiracy is not a separate cause of action, and its only significance is that each member may be held responsible as a joint tortfeasor for torts committed pursuant to the conspiracy, regardless of whether or not he or she directly participated in the act. (See, e.g., Richard B. LeVine, Inc. v. Higashi (2005)
Although the requisite knowledge and intent "' "' may be inferred from the nature of the acts done, the relation of the parties, the interests of the alleged conspirators, and other circumstances'" '" (Wyatt v. Union Mortgage Co. (1979)
Whether the knowledge and intent elements of a civil conspiracy claim have been established are quintessential factual questions. (See, e.g., Peterson v. Cruickshank (1956)
When evaluating a challenge to the sufficiency of the evidence, we review the whole record most favorably to the judgment to determine whether there is substantial evidence from which a reasonable trier of fact could have made the requisite findings. (In re Ryan N. (2001)
The trial court, addressing Coast Delaware's conspiracy allegations, found the pattern of conduct between Ray and Glenn over many years that resulted in personal benefits to themselves convinced the court they possessed the requisite knowledge and intent to establish coconspirator liability between them, but "the evidence is just not sufficient to conclude [Wayne] was a [coconspirator]." Coast Delaware argues this finding with regard to Wayne must be reversed.
To the extent Coast Delaware's argument is based on a claim that the evidence compelled a contrary conclusion, we reject this argument for two reasons. First, although Coast Delaware recites in detail the evidence from which an inference could be drawn that Wayne knew of Ray and Glenn's misconduct and intended to assist them, Coast Delaware is silent on the evidence that supports a contrary finding. Accordingly, Coast Delaware's challenge to the sufficiency of the evidence to support the finding is waived. (Doe v. Roman Catholic Archbishop of Cashel & Emly (2009)
Even assuming Coast Delaware's claim was preserved, there is evidence to support the finding. The only active participation by Wayne cited by Coast Delaware on appeal was that Wayne entered adjustments on Quickbooks for the amounts owed by WEM to Coast Delaware in connection with the Fairmont Hotel and Custom Foods transactions. However, Wayne testified he did so at Ray's and Glenn's direction, and the trial court was entitled to accept Wayne's innocent explanation (e.g. that he relied on the veracity of his father and brother) rather than Coast Delaware's more sinister inferences.
On appeal, Coast Delaware's claim of error as to the coconspirator finding appears to largely overlook the trial court's express findings on that issue. Instead, Coast Delaware's appellate claim cites extensively from the trial court's findings on a distinct claim raised by Coast Delaware, i.e. that Wayne's conflicts of interest—in providing legal representation to both Coast Delaware and his family members without disclosure or obtaining waivers—breached his fiduciary duties and was negligent. Coast Delaware cites the trial court's findings that Wayne's conflicts violated his duties and was negligent because Lesser "relied on [Wayne] as the one who could look out for the best interests of [Coast Delaware]" but that Wayne instead "sat idly by while his family members were acting contrary to [Coast Delaware's] interests," and this "failure to perform his obligations . . . put him in the position of helping his father and brother deplete [Coast Delaware's] assets."
Although Coast Delaware now appears to contend that these findings on its different claim are inconsistent with the determination that Wayne was not a coconspirator, the appellate record contains no showing that Coast Delaware objected to the statement of decision or otherwise brought the alleged inconsistency to the trial court's attention. Accordingly, Coast Delaware has waived any contention that the alleged inconsistency mandates vacating the determination on the coconspirator claim. (See, e.g., In re Marriage of Arceneaux (1990)
Moreover, we conclude the two sets of findings can be reconciled. Coconspirator liability requires both actual knowledge of the tort conduct and an intent to aid the tortfeasors in achieving their objectives. (Schick v. Lerner, supra, 193 Cal.App.3d at p. 1328.) The trial court's findings on the breach of fiduciary duty and negligence claims included the express finding that, notwithstanding the fact Wayne was negligent by "[sitting] idly by" while Ray and Glenn acted, "[t]he evidence, however, does not support the conclusion there was an intent to defraud." (Italics added.) We interpret the trial court's judgment (see In re Marriage of Arceneaux, supra, 51 Cal.3d at pp. 1133-1134 [appellate court may imply findings when party has not raised objection below]) as encompassing factual findings that, although Wayne's conflicts of interest induced inadequate vigilance that prevented him from discovering and thereby preventing Ray's and Glenn's misconduct, Wayne was not liable as a coconspirator because he did not actually know of or intend to aid their misconduct. Because coconspirator liability requires actual knowledge and intent, and Coast Delaware cites no authority for the contention that failure to discover and prevent misconduct (even if the failure can be characterized as the result of gross negligence) gives rise to coconspirator liability (contra, Schick v. Lerner, supra, 193 Cal.App.3d at p. 1328 [allegation that defendant "`should have known' " his conduct would harm plaintiff insufficient for coconspirator claim because that "allegation sounds in negligence while the main thrust of the [coconspirator claim] sounds in intentional tort"]), we hold the trial court's finding exonerating Wayne of coconspirator liability is supported by the evidence and is not fatally inconsistent with other findings.
ANALYSIS OF WAYNE'S APPEAL
Coast Delaware alleged, and the trial court found, Wayne was negligent and breached his fiduciary duties to Coast Delaware by (1) undertaking to represent Coast Delaware without disclosing to it the potential conflicts of interest and obtaining waivers from disinterested persons; (2) providing representation to Coast Delaware at the same time Wayne was engaged in representing others, which created actual conflicts of interest; (3) providing accounting assistance for Coast Delaware's business without disclosing to Lesser the financial issues in which Ray and Glenn were engaged; and (4) advocating positions on behalf of his family in direct conflict with the interests of Coast Delaware. The trial court concluded Wayne's conflicts of interest constituted serious breaches of his fiduciary obligations and warranted disgorgement of all fees paid to him by Coast Delaware.
On appeal, Wayne asserts (1) as a matter of law he did not breach his fiduciary obligations or violate any rules of professional conduct in representing Coast Delaware, (2) there was no evidence Coast Delaware suffered any harm from his conduct, (3) it was error to order disgorgement because any alleged breaches were not "serious" and did not cause any actual injury to Coast Delaware, and (4) the amount of the disgorgement was excessive.
Substantial Evidence Supports the Finding Wayne Committed Serious Breaches of His Fiduciary Obligations
Wayne contests the trial court's finding that he breached his fiduciary duty to Coast Delaware and was negligent. "It is fundamental to the attorney-client relationship that an attorney have an undivided loyalty to his clients. [Citation.] This loyalty should not be diluted by a duty owed to some other person . . . ." (Mason v. Levy & Van Bourg (1978)
Here, Coast Delaware submitted expert testimony that Wayne undertook to represent Coast Delaware without satisfying his obligation to provide written disclosure to Lesser (or any other disinterested person at Coast Delaware) that Wayne's representation of Coast, as well as his continued relationship with and legal assistance to Ray and Glenn and their other businesses (as well as other family members), raised potential conflicts of interest from the inception of his representation of Coast Delaware. Additionally, the expert testified that (considering these potential conflicts) Wayne was required to disclose the potential conflicts and obtain a waiver by a disinterested person of those potential conflicts, and his failure to do so breached his fiduciary obligations.
Additionally, there was some evidence to support the conclusion that the dangers posed by those potential conflicts subsequently ripened into actual conflicts: Wayne represented WEM (in which Ray had some interest) during the same period he was representing Coast Delaware; Wayne charged Coast Delaware fees to draft certain vehicle leases in which Ray leased vehicles to Coast Delaware (and which Ray "agreed to" on his own behalf and on Coast Delaware's behalf) that allowed Ray to collect nearly $160,000 from Coast Delaware without disclosing his conflict or obtaining a waiver from Lesser; Wayne provided advice to Glenn concerning a separate company (Feedermates) that Glenn apparently owned and the business of which was conducted by Glenn on Coast Delaware time and using Coast Delaware's resources;
On this evidentiary showing, an expert (relying in part on Rules Prof. Conduct, rules 3-600, 3-310) provided uncontradicted opinion evidence that Wayne breached his fiduciary duties to, and was negligent in representing, Coast Delaware. Wayne asserts, however, that the trial court's finding must be reversed because, having represented Coast prior to its merger with Coast Delaware, he was entitled to continue representing Coast Delaware without any disclosures or waivers. We reject Wayne's claim because it is factually inaccurate, relies on legally inapt authority, and is largely irrelevant to whether substantial evidence supported the conclusion that he breached his fiduciary obligations. As a factual matter, Coast was not acquired by or merged into Coast Delaware; instead, the evidence showed Coast Delaware merely acquired many of Coast's assets.
We conclude the evidence supports the determination that Wayne breached his fiduciary duties to Coast Delaware and was negligent by (1) undertaking to represent Coast Delaware without disclosing the potential conflicts to Lesser or obtaining Lesser's agreement to continue using Wayne notwithstanding the potential conflicts, and (2) continuing to represent Coast Delaware despite the actual conflicts that arose during the course of Wayne's representation of Coast Delaware.
Substantial Evidence Supports the Remedy of Disgorgement of Fees
Wayne next raises a series of challenges to the court's determination that the appropriate remedy for his numerous and serious breaches of his fiduciary obligations and his negligent representation of Coast Delaware was to require him to refund all of the fees Coast Delaware paid to him during his tenure as its attorney.
It is well settled that when an attorney breaches his or her fiduciary obligations by representing a client despite serious conflicts of interest, and the client suffers harm, the attorney may be denied any fees for his or her services (Day v. Rosenthal (1985)
Wayne argues the evidence does not support disgorgement because there was no evidence his acts and omissions were "serious" violations of his fiduciary obligations. Wayne correctly notes that courts have approved orders requiring forfeiture of fees when the attorney committed serious ethical breaches (see, e.g., Cal Pak Delivery, Inc. v. United Parcel Service, Inc. (1997)
Wayne also argues disgorgement cannot be ordered because there was no evidence of actual harm from his acts and omissions. Even assuming some showing of actual harm is a predicate to obtaining a refund of the fees paid to Wayne,
Additionally, there was substantial evidence from which the trial court could have found Coast Delaware was harmed because it paid Wayne for legal services that, because of Wayne's conflicting loyalties, were effectively worthless. Although Wayne argues on appeal that previously paid attorney fees are not recoverable in tort but instead must be sought by a claim for breach of contract (Orrick Herrington & Sutcliffe v. Superior Court (2003)
Wayne finally contends that, even if disgorgement of some amount was proper, it was error to require him to refund all fees but instead should have been limited to disgorging those fees earned after November 2002. The factual predicate for this contention is that Wayne's actual conflicts first arose when he represented WEM in November 2002, but his representation of Coast Delaware prior to that time involved no breach of any of his fiduciary obligations, and therefore he should be entitled to retain all fees up until November 2002. Wayne correctly notes that, in Cal Pak Delivery, Inc. v. United Parcel Service, Inc., supra,
We conclude the trial court's determination that Wayne should disgorge all fees is supported by the facts and law, and affirm the judgment against Wayne.
The judgment is affirmed. Each party shall bear its own costs on appeal.
HUFFMAN, Acting P. J.
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