Berg & Berg Enter. v. Sherwood Partners

• Citation: 32 Cal.Rptr.3d 325,131 Cal.App.4th 802
• Decision Date: 29 July 2005
• Docket Number: No. H026821.,H026821.
• Court: California Court of Appeals
• Parties: BERG & BERG ENTERPRISES, LLC, Plaintiff and Respondent, v. SHERWOOD PARTNERS, INC., et al., Defendants and Appellants.

32 Cal.Rptr.3d 325

131 Cal.App.4th 802

BERG & BERG ENTERPRISES, LLC, Plaintiff and Respondent, v. SHERWOOD PARTNERS, INC., et al., Defendants and Appellants.

No. H026821.

Court of Appeal, Sixth District.

July 29, 2005.

SulmeyerKupetz, Alan G. Tippie, Steven R. Wainess, Los Angeles, for Appellant Sherwood Partners, Inc.

Sedgwick, Detert, Moran, & Arnold, Randall A. Miller, Robert S. Silver, Bijan Esfandiari, SulmeyerKupetz, Hall R. Marston, Los Angeles, for Appellant SulmeyerKupetz.

Allen Matkins Leck Gamble & Mallory Robert R. Moore Michael J. Betz, San Francisco, for Respondent.

McADAMS, J.

In this aggressively litigated business dispute between a major creditor and the assignee for the benefit of creditors of a troubled company, the creditor moved to amend its complaint to name the assignee's attorney as a defendant and to add a cause of action against the attorney and the assignee alleging an attorney-client conspiracy to deplete the assets of the assignor corporation.

We face the question of whether California law allows this plaintiff to pursue such conspiracy claims based solely on allegations of unnecessary and excessive fees charged by assignee's counsel that derive from the contention that counsel for an assignee for the benefit of creditors also owes a fiduciary duty to creditors, including a creditor that is adverse to the client assignee.

We reject this contention.

INTRODUCTION

Plaintiff Berg & Berg Enterprises, LLC (Berg) sued defendant Sherwood Partners, Inc. (Sherwood) in this action for breach of fiduciary duty and related causes of action concerning Sherwood's performance as an assignee for the benefit of creditors. Berg was the largest creditor of the assignor, Pluris, Inc. Berg later sought leave to file a second amended complaint that named the law firm representing Sherwood, SulmeyerKupetz (Sulmeyer), as a defendant in causes of action for declaratory relief, accounting, waste of corporate assets, and conspiracy to waste corporate assets. The gist of the allegations against Sulmeyer was that it had acted in concert with its client, Sherwood, to deplete Pluris's assets by performing unnecessary legal services that were adverse to Berg and by excessively billing Sherwood for those services, which were paid for from the assigned assets. There were no allegations of fraud against Sulmeyer and the proposed pleading did not allege that Sulmeyer, as Sherwood's counsel, owed any duty to Berg either singly as the largest creditor or generally as one member of the class of creditors.

Sherwood, through its counsel, Sulmeyer, opposed the motion to amend on numerous grounds, including that Berg had not complied with or met its burden under Civil Code section 1714.10¹—the gatekeeping statute that generally requires a prima facie showing prior to the assertion of a claim for conspiracy against an attorney and client. In deciding the motion, the trial court did not apply section 1714.10, and declined to assess whether the proposed pleading stated facts sufficient to constitute a cause of action against Sulmeyer. Instead, it treated the motion as one for leave to amend where great liberality in matters of pleading is afforded, and it allowed the amendment as Berg had requested, subject to further challenge by demurrer or otherwise. Sherwood and Sulmeyer then both appealed from the order under section 1714.10.²

To resolve the appeal, we examine whether under California law, by virtue solely of an attorney's representation of the assignee for the benefit of creditors, the attorney owes a duty of care to a particular creditor or to the class of creditors as a whole, absent allegations of fraud or a financial interest in the assigned assets beyond as a source for payment of fees earned in the course of that representation. We hold that counsel for the assignee owes no such independent duty to these third parties as a matter of law. We further hold that the exception to the application of section 1714.10 provided in subdivision (c)(2) thereof, which allows the filing of an action for conspiracy without prefiling approval where "the attorney's acts go beyond the performance of a professional duty to serve the client and involve a conspiracy to violate a legal duty in furtherance of the attorney's financial gain," means that the economic benefit derived by the attorney is over and above monetary compensation received in exchange for professional fees earned for the representation of his or her client.

We accordingly reverse the trial court's order that allowed Berg's amended complaint alleging attorney-client conspiracy-based claims against Sulmeyer and Sherwood.

STATEMENT OF THE CASE³

Berg, a real estate developer, agreed to construct two commercial office buildings in San Jose and then lease them to Pluris, Inc., a network router developer.⁴ The parties entered into a written lease but Pluris repudiated the agreement even before taking possession of the buildings. Berg then sued Pluris for $100 million. After Pluris represented that it could realize new financing of at least $50 million but for the lawsuit, the parties entered into a settlement that included Pluris's agreement to pay Berg $16 million, evidenced by a promissory note that was secured by certain Pluris assets. Berg made known that it would seek Pluris's involuntary bankruptcy if the financing deal failed because it perceived in this a beneficial opportunity to acquire Pluris's net operating losses.

Pluris raised some money, but not what it had represented it could and not enough to either keep it in business or satisfy its obligation to Berg. Pluris then generally assigned all of its assets to Sherwood for the benefit of its creditors under Code of Civil Procedure sections 493.010 and 1802. The assets consisted of $4.5 million cash, tangible property worth between $300,000 and $700,000, and intellectual property worth between $100,000 and $300,000.

After some initial discussion and disagreement between Sherwood and Berg over Berg's claim and the manner in which Pluris's assets might be best marshaled and distributed, Berg, along with two other Pluris creditors, attempted to force Pluris into involuntary bankruptcy under section 303 of title 11 of the United States Code. As part of this effort, Berg offered a plan in which it would pay the estate $150,000, reduce its claim by $1.5 million in exchange for Pluris's stock, and further reduce its claim by $2.5 million in exchange for Pluris's tangible and intellectual property.

Sherwood, through Sulmeyer's representation, successfully defeated Pluris's creditors' efforts to force it into bankruptcy and the bankruptcy court ultimately dismissed the involuntary petition. One of the reasons the court gave for declining to authorize an involuntary bankruptcy was that Berg appeared to have been primarily motivated by the possibility of acquiring Pluris's net operating losses—not necessarily a proper basis for forcing a debtor into involuntary bankruptcy.

There were other disputes between Berg and Sherwood in connection with the administration of Pluris's assets, the details of which are not material here. Suffice it to say that the parties were adverse and that Sulmeyer represented Sherwood in its ongoing battle against Berg that was being waged on several fronts.

In an expansion of the theater, after the bankruptcy court dismissed the involuntary proceedings initiated against Pluris, Berg sued Sherwood in this action. The complaint pleaded causes of action all surrounding the alleged breach of the fiduciary duty owed by Sherwood, as assignee, to Berg as one of Pluris's creditors. It claimed that Sherwood's actions had resulted in the depletion of Pluris's assets that would otherwise have been available to satisfy Pluris's debt to Berg. Sulmeyer appeared in the action as counsel for Sherwood, which answered and filed a cross-complaint against Berg that in essence sought to avoid Berg's claims of a priority lien affecting Pluris's assigned assets.

Escalating the hostilities, Sherwood, through Sulmeyer, also filed an application in the bankruptcy court for reimbursement of $187,642.43 in attorney fees and costs it had incurred in connection with its successful opposition to Berg's earlier efforts to place Pluris into involuntary bankruptcy, and for $500,000 in sanctions against Berg for its conduct in connection with those efforts. Not only did the bankruptcy court deny Sherwood's motion, but the judge excoriated Sulmeyer at the hearing over the $175,000 in fees it had charged in connection with a "straightforward" motion.

Apparently emboldened by that development, Berg then filed its motion in this action for leave to amend its complaint. Berg sought to name Sulmeyer as a defendant in three existing causes of action and to add a claim for conspiracy against Sulmeyer and Sherwood arising from their joint conduct that had been adversarial to Berg's efforts to advance its creditor's claim against the Pluris assets. Though Berg did not file a petition to obtain prefiling approval under section 1714.10, the motion to amend argued that it met the requirements of this section as to the conspiracy claim. Accompanying the motion was the declaration of Berg's counsel, attached to which was the proposed pleading and a copy of the transcript from the bankruptcy court hearing described above at which the judge had disparaged Sulmeyer's billings. Also accompanying the motion was the declaration of Berg's principal, Carl Berg, who averred some of its contents about the defendants' actions and motives on "information and belief."

Berg's proposed pleading alleged that Sulmeyer had acted as counsel to Berg's adversary, Sherwood, who, as assignee, owed a fiduciary duty to all of Pluris's creditors and "especially [to] Berg" as the largest creditor. It named Sulmeyer in existing causes of action labeled declaratory relief, accounting and return, and waste of corporate assets, and in the single new...