Cornerstone Realty Advisors, LLC v. Summit Healthcare Reit, Inc.

• Decision Date: 28 October 2020
• Docket Number: G057176
• Citation: 56 Cal.App.5th 771,270 Cal.Rptr.3d 653
• Court: California Court of Appeals Court of Appeals
• Parties: CORNERSTONE REALTY ADVISORS, LLC, et al., Plaintiffs and Respondents, v. SUMMIT HEALTHCARE REIT, INC., et al., Defendants and Appellants; Winget Spadafora & Schwartzberg, LLP, Objector and Respondent.

56 Cal.App.5th 771

270 Cal.Rptr.3d 653

CORNERSTONE REALTY ADVISORS, LLC, et al., Plaintiffs and Respondents,

v. SUMMIT HEALTHCARE REIT, INC., et al., Defendants and Appellants;Winget Spadafora & Schwartzberg, LLP, Objector and Respondent.

G057176

Court of Appeal, Fourth District, Division 3, California.

Filed October 28, 2020

As Modified November 4, 2020

As Modified November 20, 2020

Thompson Coburn and Helen B. Kim, Los Angeles, for Defendants and Appellants.

No appearance for Plaintiffs and Respondents.

Winget Spadafora & Schwartzberg, Timothy W. Fredricks and Jared M. Ahern, Los Angeles, for Objector and Respondent.

OPINION

FYBEL, J.

INTRODUCTION

The trial court concluded that the plaintiffs in this action had violated several court orders requiring them to produce critical financial documents and, pursuant to Code of Civil Procedure section 2023.030, imposed well justified terminating and monetary sanctions for their discovery abuses. Imposition of terminating sanctions, though significant, is not the subject of this appeal; indeed, plaintiffs' appeal challenging the terminating sanctions has been dismissed.

The subject of this appeal is the monetary sanctions imposed by the trial court, and the appeal is pursued by defendants, the parties that sought and received those sanctions. Defendants were awarded over $586,600 in sanctions on top of terminating sanctions, yet contend the trial court did not award them enough to cover their attorney fees and costs incurred as a result of plaintiffs' discovery abuses and erred by not making plaintiffs' trial counsel jointly and severally liable for the monetary sanctions imposed.

The Parties

Plaintiffs/Respondents are Cornerstone Realty Advisors, LLC (CRA) and Cornerstone Ventures, Inc. (CVI), referred to collectively as Plaintiffs. Plaintiffs have not filed a respondent's brief. Respondent Winget Spadafora & Schwartzberg, which was counsel for Plaintiffs during most of the trial court litigation, is referred to as WSS. Defendants/Appellants are Summit Healthcare REIT, Inc. (Summit), Paul L. Danchik, Daniel Johnson, Dominic Petrucci, Kairos Partners, Inc., and Kent Eikanas. Defendants, when referred to collectively, are called Defendants. Throughout the litigation in the trial court, Eikanas had separate counsel from the other defendants, but litigation actions significant to this appeal were taken or joined in by all Defendants.

Summary of Facts Leading to Sanctions

The facts and history leading to the terminating and monetary sanctions, though long and complicated, can be summarized as follows. Defendants sought production of CRA's and CVI's financial and accounting records, including their general ledgers. Those records were critical to Plaintiffs' complaint and Defendants' cross-complaint. Plaintiffs had access to the financial and accounting records sought by Defendants, and could and should have produced them forthwith without objection or delay. Instead, Plaintiffs carried out a protracted and costly campaign of discovery abuse, which included disobeying several court orders to produce the documents, with the successful aim of never, ever, producing the requested documents. The trial court responded to this history of misconduct by imposing monetary sanctions of $586,600 and ordering Plaintiffs' complaint be dismissed as a terminating sanction.

Questions on Appeal and Conclusions

The questions for us are whether the trial court should have imposed a larger amount of monetary sanctions against Plaintiffs and whether the court should have made WSS jointly and severally liable for those sanctions.

As to the first question, we conclude that, with one exception, the trial court's decision to impose monetary sanctions in the amount of $586,600 is consistent with the relevant law and principles governing discovery sanctions and is a reasonable exercise of the court's discretion. Of the principles governing discovery sanctions, three—the principle of compulsion, the principle of causation, and the principle of reasonableness—are relevant here and guide our decision. Although Defendants had requested over $2 million in monetary sanctions, the trial court was not required to accept that figure, and had the authority and the duty under these principles to determine for itself the reasonable amount of attorney fees resulting from the misuses of discovery to impose as monetary sanctions. The amount of monetary sanctions awarded, while substantially less than the amount requested, was three times greater than that recommended by the discovery referee. We reject Defendants' assertion that the trial court acted arbitrarily and shirked its duty in setting the amount of monetary sanctions.

As to the second question, we conclude substantial evidence supports the trial court's finding that WSS did not advise the misconduct resulting in the discovery sanctions. The trial court read and considered the discovery referee's report, which had recommended making WSS liable for the monetary sanctions, but exercised its authority to reach a different conclusion based on the court's own assessment of the credibility of the declarants and the weight of the evidence. The court did not err in so doing.

FACTS AND PROCEDURAL HISTORY

I. Events Leading to This Litigation; the Pleadings

Summit is a publicly registered, non-traded real estate investment trust. Defendants Danchik and Johnson are members of the Summit board of directors, Petrucci is Summit's chief financial officer, Kairos Partners, Inc. is Petrucci's company, and Eikanas is Summit's president.

CRA was Summit's advisor and asset manager pursuant to an advisory agreement. CRA had no employees of its own and relied upon CVI to provide office space and employees to perform CRA's obligations under the advisory agreement. CVI was the managing member of CRA's managing member, Cornerstone Industrial Properties (CIP).

On March 17, 2014, Summit gave CRA 60-days' written notice of its intent to terminate the advisory agreement, as it permitted. Two weeks later, several CVI employees resigned when the company failed to meet payroll. The next day, Summit hired some of these former CVI employees in an effort to avert the disruption that might arise from CVI's inability to continue to provide services for Summit. That same day, Plaintiffs, represented by WSS, commenced this lawsuit by filing a complaint against Defendants.

The complaint asserted causes of action for declaratory relief, breach of contract, tortious interference with contractual relations, intentional and negligent interference with prospective economic advantage, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and unfair competition. The gist of the complaint was that Summit and the other defendants were carrying out a conspiracy to "suffocate and cripple CRA's and CVI's cash flow and business operations in order to render them insolvent and unable to pay their employees/agents and meet their financial obligations."

Defendants filed a cross-complaint against Plaintiffs, and others, for breach of contract, conversion, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, accounting, and indemnification. The cross-complaint alleged that Plaintiffs had failed to reimburse Summit for various organizational and operating costs, management fees, and operating expenses as required by the advisory agreement, and that CVI had converted over $13,000 that Summit had paid CVI to cover rent.

II. Defendants' Discovery Requests

In May 2014, just a little over a month after Plaintiffs had filed their complaint, Summit served CRA and CVI each with a set of requests for production of documents. Summit asked for CRA's and CVI's financial records, data, and information, including documents related to "cash flow and business operations," "financial conditions," "financial statements or compilations," and "accounts payable" for the period from January 1, 2009 to "the present." Summit defined the term documents to include "data processing files and other computer-readable records or programs." CRA and CVI each served a verified response representing that all responsive and nonprivileged documents in their custody, control, or possession would be produced.

In September 2014, Summit served a second set of requests for production of documents on both CRA and CVI. The second sets requested "all accounting records" of CRA and CVI relating to Summit from January 1, 2009 to "the present." WSS, as counsel for Plaintiffs, objected to the requests as "overbroad and unduly burdensome," "burdensome and oppressive," "not reasonably calculated to lead to the discovery of admissible evidence," and seeking information "equally available to or within the possession or control or knowledge of Defendants." Both CRA and CVI responded that no documents would be produced.

Eikanas propounded on CRA special interrogatories asking, among other things, that it identify the amounts that Summit had paid or reimbursed Plaintiffs for various expenses from March 2013 through March 2014. The interrogatories asked CRA to identify all documents supporting its responses. At the same time, Eikanas served a request for production of documents requesting that CRA produce all documents identified in its interrogatory responses.

CRA responded to the interrogatories regarding expense reimbursements by stating: "Pursuant to Code of Civil Procedure section 2030.230, Eikanas may ascertain the requested information from a review of documents entitled ‘General Ledger. ’ CRA will produce those documents." (Italics added.) Although CRA did produce some documents and a Dropbox link to about 700 pages of documents, few, if any, of the documents were relevant or responsive to the interrogatories.

Plaintiffs' failure to produce the documents entitled "General Ledger" became the focal point of the discovery dispute. Neither CRA nor CVI ever produced a general ledger. Defendants ultimately learned that both CRA and CVI maintained...