Barbary Coast Furniture Co. v. Sjolie

• Decision Date: 25 April 1985
• Citation: 213 Cal.Rptr. 168,167 Cal.App.3d 319
• Court: California Court of Appeals Court of Appeals
• Parties: BARBARY COAST FURNITURE COMPANY, INC. et al., Plaintiffs and Appellants, v. Robert H. SJOLIE et al., Defendants and Respondents. A015083.

Page 168

213 Cal.Rptr. 168

167 Cal.App.3d 319

BARBARY COAST FURNITURE COMPANY, INC. et al., Plaintiffs and Appellants, v. Robert H. SJOLIE et al., Defendants and Respondents.

A015083.

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

April 25, 1985.

Certified for Partial Publication ^*

Review Denied Aug. 1, 1985. ^**

Steven Kazan, Oakland, William Barry Balamuth, Fonda Karelitz, Stark, Stewart, Wells & Robinson, Oakland, for plaintiffs and appellants.

Kurt W. Melchior, Severson, Werson, Berke & Melchior, San Francisco, Bernard J. Allard, Michael Ackerman, Popelka, Allard, McCowan & Jones, San Jose, for defendants and respondents.

ROUSE, Associate Justice.

Plaintiffs Barbary Coast Furniture Company, Inc. (Barbary Coast) and Stuart and Carolyn Kadas appeal from a summary judgment in favor of defendant Daniel Cowans and two law firms of which he was a member. ¹

A. The Complaint

Plaintiffs' first amended complaint contained the following allegations pertinent to this appeal: ² The first count alleged that on February 2, 1978, Barbary Coast ³ filed a chapter XI bankruptcy petition and that defendant Cowans acted as Barbary Coast's attorney in that proceeding. At the time of the commencement of the bankruptcy proceeding, Robert Sjolie was Barbary Coast's president and a member of its board of directors, and he and his family owned all of the common stock in Barbary Coast. On May 9, 1978, the bankruptcy court approved a plan of arrangement proposed by Barbary Coast and its counsel. It was further alleged that Barbary Coast had at all times engaged in the production and sale of furniture specially designed for the waterbed industry and that Sjolie, in his capacity as Barbary Coast's president and as a member of its board of directors, and Cowans, in his capacity as Barbary Coast's attorney, each had access to Barbary Coast's trade secrets and other confidential information, including Barbary Coast's customer list, special design concepts, production techniques and key personnel. It was also alleged that Sjolie and Cowans both owed continuing fiduciary duties to Barbary Coast and to its unpaid creditors and that in late 1978, while Barbary Coast's plan of arrangement was still being implemented, Sjolie and Cowans breached those fiduciary duties by forming a new corporation, Country Craft Woodworks, Inc. (Country Craft) which entered into direct competition with Barbary Coast. Country Craft was alleged to have (1) produced products with the same design concepts, ideas and techniques developed by Barbary Coast; (2) solicited Barbary Coast's customers by offering to sell its products to them; and (3) induced key personnel of Barbary Coast to leave their jobs with Barbary Coast and go to work for Country Craft. Defendant Cowans allegedly owned 50 percent of Country Craft's common stock and was chairman of its board of directors. Sjolie was Country Craft's president. It was alleged that defendant Cowans' involvement with Country Craft had resulted in the following breaches of the fiduciary duty which he owed to Barbary Coast: (1) participating in a business in direct competition with Barbary Coast; (2) impairing Barbary Coast's ability to pay its creditors pursuant to the plan of arrangement; (3) failing to fully disclose his participation in a competing business; (4) acting contrary to the interests of Barbary Coast; and (5) using in a rival business confidential information obtained during his representation of Barbary Coast.

The second count of the complaint reincorporated the factual allegations of the first count and further alleged that defendant Cowans had breached his duties as an attorney and agent of Barbary Coast and had failed to act in good faith and to protect Barbary Coast's best interests when he participated in a rival business after having negotiated, prepared and obtained confirmation of Barbary Coast's plan of arrangement.

The third count of the complaint purported to state a cause of action on behalf of plaintiffs Stuart Kadas and his wife, Carolyn. It was alleged that during the 60-day period prior to the confirmation of Barbary Coast's plan of arrangement by the bankruptcy court on May 9, 1978, defendants Sjolie and Cowans conspired together and, pursuant to that conspiracy, used fraudulent misrepresentations and concealments in order to induce plaintiffs Kadas and a second couple named Thomas to purchase two-thirds of the stock in Barbary Coast from defendant Sjolie for the sum of $70,000. Specifically, Sjolie and Cowans were charged with having made the following misrepresentations to plaintiff Stuart Kadas: (1) Sjolie would cooperate and work with Kadas, using his sales contacts, marketing and production abilities and his best efforts to make Barbary Coast a sound and profitable corporation; (2) Barbary Coast would be a successful business; (3) Barbary Coast's creditors would be paid pursuant to the proposed plan of arrangement; (4) 70 percent of the face value of Barbary Coast's outstanding accounts receivable were collectible; and (5) Sjolie would do nothing to interfere with Barbary Coast's successful operation and its financial ability to meet its obligations. Also, Sjolie and Cowans were alleged to have concealed or omitted to inform Kadas of the following material facts: (1) that Sjolie and Cowans intended to establish a corporation which would engage in direct competition with Barbary Coast; (2) that they would solicit Barbary Coast's customers and divert business from Barbary Coast; (3) that they would use confidential information obtained from Barbary Coast for their own benefit and enrichment; (4) that they intended to pirate key employees from Barbary Coast; and (5) that only 30 percent of the face value of Barbary Coast's accounts receivable were collectible.

In the fourth count of the complaint, as an alternative theory of recovery, plaintiffs Kadas alleged that the material misrepresentations and omissions charged in the third count were the result of negligence, rather than fraud, on the part of Sjolie and Cowans.

The fifth count of the complaint alleged that defendants had formed and carried out an intentional plan to appropriate Barbary Coast's business for themselves through the use of Barbary Coast's trade secrets and confidential information. This unfair competition by defendants was alleged to have deprived Barbary Coast of many customers who would otherwise have continued to patronize it.

The sixth and final count of the complaint alleged that defendants' wrongful acts had been performed pursuant to a conspiracy between defendants to injure and destroy Barbary Coast's business and plaintiff Kadas' investment therein and to appropriate Barbary Coast's business for defendants.

Plaintiffs Barbary Coast and Kadas prayed for actual damages in an amount over $700,000 and punitive damages in an amount over $1,000,000.

B. The Answer

In his answer to the complaint, defendant Cowans took the position that he had agreed to represent Barbary Coast for the sole purpose of obtaining approval of Barbary Coast's plan of arrangement from the bankruptcy court and that, once such approval was obtained, Cowans' fiduciary duties to Barbary Coast and its creditors had ceased to exist. Cowans admitted that he and codefendant Sjolie had formed Country Craft, that they were both members of its board of directors and that Cowans owned 50 percent of Country Craft's stock. However, Cowans denied having engaged in any wrongful or tortious conduct and he likewise denied that Barbary Coast had been damaged in any amount.

In response to the Kadases' purported causes of action, defendant Cowans admitted that Sjolie and his family owned all the stock in Barbary Coast when the bankruptcy proceeding was commenced, and Cowans also admitted that plaintiffs Kadas had purchased stock in Barbary Coast. However, Cowans denied all the allegations to the effect that material facts had been misrepresented or concealed, either fraudulently or negligently, and likewise denied that plaintiffs Kadas had been damaged in any amount.

Defendant Cowans also raised a number of affirmative defenses, including the allegation that plaintiffs had expressly consented to competition by defendant Sjolie and had thereby abandoned any right to claim unfair competition.

C. The Summary Judgment Motion

On August 19, 1981, Cowans filed a motion for judgment on the pleadings as to the first four counts of the first amended complaint, for summary judgment as to all counts of the complaint and, in the alternative, for a summary adjudication of certain issues. Pursuant to this latter request, Cowans sought to have it adjudicated that (1) plaintiffs Kadas were not entitled to base any claim against Cowans upon his conduct while representing Barbary Coast in the bankruptcy action because such conduct was absolutely privileged; (2) Cowans owed no duties which, if breached, would subject him to tort liability under the State Bar Rules of Professional Conduct applicable to attorneys or otherwise; and (3) that by virtue of having entered into a consulting agreement with Sjolie, plaintiffs Kadas were estopped from complaining of any conduct specifically or impliedly authorized by that agreement.

Plaintiffs Barbary Coast and Kadas filed a lengthy memorandum of points and authorities in which they opposed the granting of any of the relief requested by Cowans.

Both sides also filed various declarations and excerpts from depositions, as well as letters and a contract, supportive of their respective positions.

Through the deposition testimony of plaintiff, Stuart Kadas, defendant Cowans established that, prior to investing in Barbary Coast, Kadas had been one of its largest creditors and that he served as chairman of the creditors' committee in the bankruptcy proceeding.

Defendant Cowans also established that on December 29, 1978, after Stuart Kadas had invested in Barbary Coast, that corporation entered into a written...