Fair v. Bakhtiari

• Decision Date: 24 May 2011
• Docket Number: No. A126844.,A126844.
• Citation: 125 Cal.Rptr.3d 765,195 Cal.App.4th 1135,11 Cal. Daily Op. Serv. 6185,2011 Daily Journal D.A.R. 7455
• Parties: R. Thomas FAIR, Plaintiff, Cross-defendant and Appellant, v. Karl E. BAKHTIARI et al., Defendants, Cross-complainants and Respondents.
• Court: California Court of Appeals Court of Appeals

195 Cal.App.4th 1135

125 Cal.Rptr.3d 765

11 Cal. Daily Op. Serv. 6185

2011 Daily Journal D.A.R. 7455

R. Thomas FAIR, Plaintiff, Cross-defendant and Appellant,

v.Karl E. BAKHTIARI et al., Defendants, Cross-complainants and Respondents.

No. A126844.

Court of Appeal, First District, Division 2, California.

May 24, 2011.

Nunziato Buckley Weber, Ton A. Nunziato, Illece Buckley Weber, Los Angeles, for Appellant.

Eisenberg and Hancock LLP, Jon B. Eisenberg, Oakland, William N. Hancock, Shartsis Friese LLP, Arthur J. Shartsis, Erick C. Howard, San Francisco, for Respondents.

KLINE, P.J.

INTRODUCTION

“The relation between attorney and client is a fiduciary relation of the very highest character, and binds the attorney to most conscientious fidelity— uberrima fides.

” ( Cox v. Delmas (1893) 99 Cal. 104, 123, 33 P. 836; accord, Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 821, 124 Cal.Rptr.3d 256, 250 P.3d 1115.) Accordingly, “ ‘[a]ll dealings between an attorney and his client that are beneficial to the attorney will be closely scrutinized with the utmost strictness for any unfairness.’ [Citations.].” ( Ritter v. State Bar (1985) 40 Cal.3d 595, 602, 221 Cal.Rptr. 134, 709 P.2d 1303( Ritter ).) In Ritter, the court held that although the terms of the transaction entered into by the attorney and his clients were fair and reasonable, the attorney was subject to discipline for failing to provide his clients with a reasonable opportunity to discuss the transaction with independent counsel, as required by the predecessor to rule 3–300 of the California Rules of Professional Conduct.¹ In so doing, the court rejected the attorney's claim that failure to comply with the rule was a mere “ ‘technical’ ” violation. ( Ritter, at p. 602, 221 Cal.Rptr. 134, 709 P.2d 1303.) In this case, we consider whether an attorney who entered into very successful business transactions with his clients, but did not provide them the written disclosures required under rule 3–300, was properly denied leave to amend his complaint to state a cause of action for the reasonable value of his services. We shall conclude the trial court did not err in concluding that the attorney's fiduciary breach precluded such recovery.

Plaintiff and cross-defendant R. Thomas Fair (Fair) appeals from a judgment of the San Mateo County Superior Court in favor of respondents Karl E. Bakhtiari, Maryann E. Fair, Stonesfair Management Company, Stonesfair Corporation and Stonesfair Financial Corporation.² The court found business agreements between Fair and his client Bakhtiari were properly voided at the election of Bakhtiari and/or the Stonesfair entities, and were unenforceable based on Fair's violation of rule 3–300 and violation of his fiduciary duties under Probate Code section 16004, subdivision (c).³ It therefore granted judgment in favor of respondents and against Fair. On appeal, Fair does not challenge the court's voiding of the agreements. Rather, he contends the court erred in denying him leave to file a fourth and supplemental complaint to add a cause of action for quantum meruit for the reasonable value of the services he provided to Bakhtiari and the Stonesfair entities. We shall affirm the judgment.

FACTS AND PROCEDURAL BACKGROUND

In 1990, Fair was a partner at Hoge, Fenton, Jones & Appel, Inc. and an experienced business attorney, with an expertise in the formation and structure of syndications. He was also a licensed real estate broker. Bakhtiari had inherited a substantial sum of money and had begun looking for real estate investment opportunities. Bakhtiari first met with Fair in December 1989 or January 1990, when Bakhtiari sought and obtained legal advice concerning his potential investments in one such opportunity (Chartwell). At their meeting, Fair took possession of the Chartwell contracts and told Bakhtiari that he would review them and look out for Bakhtiari's best interests. An attorney-client relationship was formed at this meeting and continued until December 2000.

In April 1990, Fair and Bakhtiari went into business together, forming Stonesfair Corporation. Fair approached Bakhtiari with the proposal that they form a real estate investment business. The two orally agreed to divide ownership of Stonesfair Corporation, 70 percent to Bakhtiari and 30 percent to Fair, with the former serving as president and the latter as vice president. According to Bakhtiari, this arrangement reflected each partner's contribution: “[Fair] brought his legal expertise, and I brought the money.” The trial court found that, despite Bakhtiari being a highly intelligent man, the depth of Fair's professional training created a “substantial inequality in the two men's backgrounds and level of experience and expertise when they went into business together.”

Bakhtiari and Fair formed two additional partnerships together: Stonesfair Financial Corporation in 1993 and Stonesfair Management Co., LLC, in 1996, in which Fair acquired minority ownership shares of 27.5 percent and 5 percent, respectively.⁴ These business relationships lasted until mid–2001. Fair represented each business from its inception and performed similar services for each of the Stonesfair entities. Fair claimed to have provided business and real estate-related services, including analyzing and identifying markets, finding acquisition targets, forming relationships, soliciting investors and negotiating deals with owners and lenders. He provided all legal services for these entities between 1990 and 2000. He rendered legal opinion letters, provided legal advice relating to their real estate transactions, documents and contracts, and drafted all of the Stonesfair entities' partnership, real estate purchase, subscription, and loan agreements. He also conducted all loan agreement negotiations for the Stonesfair entities. Fair provided the Stonesfair entities with legal services such as these in at least 15 different real estate transactions.⁵ The trial court found that an attorney-client relationship existed between Fair and each of the Stonesfair entities, as well as with Bakhtiari, that did not terminate until December 2000. For his services, Fair received “substantial compensation and profit distributions.” Fair claimed that, despite holding only a minority stake in each Stonesfair entity, he and Bakhtiari had orally agreed to split back-end profits and other revenue generated by these entities 50/50. The trial court found the parties had not reached any such agreement.

In late 1993, Fair began receiving a salary from Stonesfair Corporation. Maryann Fair became an employee of Stonesfair Financial Corporation in November 1993. Fair left the law firm in August 1994. Fair was employed by, worked full-time for, and received a salary from Stonesfair Financial Corporation. Additionally, he negotiated for, claimed entitlement to, and/or received other monetary benefits from all three of the Stonesfair entities based on his specific contributions to their respective businesses. Stonesfair FinancialCorporation paid his bar dues and continuing legal education course fees so that he could retain good standing with the State Bar.⁶

Fair and Bakhtiari entered into the business agreements without first agreeing on many essential terms, including their respective rights to compensation, shareholder rights, division of profits, and other monetary benefits to be derived from their joint efforts. Fair and Bakhtiari discussed, debated, and disagreed about the most basic terms of their business transactions throughout the course of their relationship. Fair never gave advice against himself to Bakhtiari. The failure to reach agreement on essential terms of the relationship was a constant source of debate and disagreement throughout the course of their business relationship and contributed to its demise. Fair ceased receiving compensation as a Stonesfair Financial Corporation employee in June 2001.

Because Fair was representing Bakhtiari and the Stonesfair entities when he entered into the various business transactions with them, he was required to comply with rule 3–300. At all relevant times the rule provided:

“Rule 3–300. Avoiding Interests Adverse to a Client

“A member shall not enter into a business transaction with a client; or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client, unless each of the following requirements has been satisfied:

“(A) The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and

“(B) The client is advised in writing that the client may seek the advice of an independent lawyer of the client's choice and is given a reasonable opportunity to seek that advice; and

“(C) The client thereafter consents in writing to the terms of the transaction or the terms of the acquisition.”

Fair was aware of the requirements of rule 3–300 before he went into business with Bakhtiari, but Fair did not comply with the rule upon entering into business with Bakhtiari, not later, with the Stonesfair entities, and not at any time thereafter. The court found Fair knowingly acquired interests adverse to Bakhtiari and/or each of the Stonesfair entities, his clients. In doing so, Fair failed to disclose in writing the terms of the business transactions being entered into with his clients. He did not advise them in writing of their right to seek independent legal advice. Nor did he obtain his clients' written consent to the terms of the transactions. In his dealings with Bakhtiari and the Stonesfair entities, Fair did not carefully separate out his client relationships, but instead represented individuals and entities that had potential conflicts of interest in business transactions.⁷ The trial court found, and Fair does not dispute, that Fair violated rule 3–300.

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