Favila v. Llp

• Citation: 115 Cal.Rptr.3d 274,10 Cal. Daily Op. Serv. 11, 734,188 Cal.App.4th 189
• Decision Date: 15 December 2010
• Docket Number: Nos. B215096, B216822.,s. B215096, B216822.
• Court: California Court of Appeals
• Parties: Sandra Corrales FAVILA, as Executor, etc., Plaintiff and Appellant, v. KATTEN MUCHIN ROSENMAN LLP et al., Defendants and Respondents. Sandra Corrales Favila, as Executor, etc., Plaintiff and Appellant, v. Katten Muchin Rosenman LLP et al., Defendants and Respondents.

188 Cal.App.4th 189

115 Cal.Rptr.3d 274

10 Cal. Daily Op. Serv. 11,734

2010 Daily Journal D.A.R. 14,093

Sandra Corrales FAVILA, as Executor, etc., Plaintiff and Appellant,

v.KATTEN MUCHIN ROSENMAN LLP et al., Defendants and Respondents.

Sandra Corrales Favila, as Executor, etc., Plaintiff and Appellant,

v.Katten Muchin Rosenman LLP et al., Defendants and Respondents.

Nos. B215096, B216822.

Court of Appeal, Second District, Division 7, California.

Sept. 3, 2010.

As Modified on Denial of Rehearing Sept. 22, 2010.

Review Denied Dec. 15, 2010.

**280 Sands & Associates, Leonard S. Sands, Heleni E. Suydam, Beverly Hills, and Diallo K. Scott; James K. Cameron & Associates and James K. Cameron, Encino, for Plaintiff and Appellant.

Katten Muchin Rosenman, Daniel A. Platt and Gloria C. Franke, Los Angeles, for Defendants and Respondents.

PERLUSS, P.J.

*197 The assets of Motion Graphix, Inc. were sold to Get Flipped, Inc. after the death of Motion Graphix's founder and shareholder, Richard Corrales. The Estate of Richard Corrales (Estate) through its executor Sandra Corrales Favila, Corrales's sister, sued Get Flipped and its founder, Raleigh Souther, who was Motion Graphix's only other shareholder, for claims including conversion, breach of fiduciary duty and fraud (the individual action). The Estate appeals from the trial court's order denying its petition and motion for leave to amend the complaint in the individual action to allege a conspiracy claim against Motion Graphix's corporate counsel, Katten Muchin Rosenman LLP (Katten Muchin), and two attorneys at the Katten Muchin firm, Gavin Galimi and James Thompson (collectively attorneys).

*198 The Estate also filed a separate derivative action against the attorneys, Souther and Get Flipped on behalf of Motion Graphix asserting claims for professional negligence, breach of fiduciary duty and unjust enrichment arising from the asset sale transaction (the derivative action). That action was dismissed as to the attorneys after the trial court sustained their demurrer and the Estate elected not to amend its complaint. The Estate appeals from that order, as well.

We reverse the order denying the Estate's petition and motion in the individual action and remand with direction to permit the Estate to file a revised first amended complaint, alleging a cause of action against the attorneys for conspiracy to commit fraud. We reverse the order dismissing the derivative action as to the attorneys and remand with directions to redetermine whether the lawyer-client privilege prevents the attorneys from meaningfully defending the action or whether, because of the crime-fraud exception or waiver by the privilege holder, the privilege is no bar to the derivative action.

FACTUAL AND PROCEDURAL BACKGROUND

1. The Sale of Motion Graphix's Assets to Get Flipped

In February 2000 Corrales, an inventor, organized and incorporated Motion Graphix to license and sell photographic and imaging technologies he had developed or improved. In May 2000 the company issued 51 percent of its 1,000 shares of common stock to Corrales (510 shares) and 49 percent (490 shares) to Souther, and the board of directors approved bylaws requiring the approval of a majority of the shares represented and voting to validate an action taken by the company unless a greater number was required by law.¹ In **281 2001 Corrales assigned to Motion Graphix his rights in two pending patents. In August 2004 Katten Muchin began representing Motion Graphix.

In early August 2005, following a dispute between Corrales and Souther over Corrales's right to engage in personal business uses of Motion Graphix software codes, Corrales agreed to sell 80 percent of his shares in Motion Graphix to the company and resign from his positions as director and officer. Corrales, on behalf of himself, and Souther, on behalf of himself and as chief *199 executive officer of Motion Graphix, signed a ratification and release agreement drafted by Galimi that incorporated a term sheet providing, " [Corrales] will have access to the code 'iPhotoBooth' "; "[Corrales] will have any future contract with Eurolink & Lugovco & Kodak"; and "[Corrales] will receive 20% of gross profits after the first year, and still retain[ ] a silent 20% ownership." ² The term sheet also stated, "Raleigh Souther becomes majority partner and shareholder for Motion Graphix when document is signed by both parties." The term sheet appears to have been prepared by Corrales or Souther, not by counsel.

On August 18, 2005 Corrales complained in an email to Galimi that he had not been provided access to the full software code as promised and not received any explanation from Souther: "It has been a week since final papers were signed, and five days since my registered dispute over incomplete code made available. [Souther] has not answered repeated requests for [explanations] from myself and my client Eurolink that requires the requested code. [¶] Also, the question of code for the [K]odak contract has also not been addressed. [¶] Even as the stock exchanges ownership, my continued 20 percent share of the company should be respected and these questions need to be answered. [¶] I appeal to your duty to Motion Graphix to have [Souther] address these issues, and simply stonewalling is not acceptable." Galimi responded to Corrales, "As you correctly point out, I have a duty to Motion Graphix, as counsel to Motion Graphix, and not to you or [Souther] as individuals. I'm not in a position to address disputes between the two of you. That said, [Souther] has been out of town so he probably has not been accessing email. I don't believe he is stonewalling."

Corrales died in November 2005, and his shares in Motion Graphix passed to the Estate. On February 24, 2006 Souther sent an email—the cornerstone of the Estate's complaint against the attorneys—to Galimi and Joan Green, an accountant, stating Get Flipped should be incorporated as soon as possible and acknowledging the possibility of a lawsuit by the Estate:

"Well, I'm sorry to get everyone's hope's [ sic ] up last night regarding Get Flipped's standing. Reviewing the documents, my mindset at the time was to **282 keep Get Flipped under the MG umbrella until I could get control of the company, it is also using the same Fed tax id number.... Regrettably, my thinking also was liability for our event photography, our insurance policy was under the MG name. In my mind, however, the two we're [ sic ] entirely separate, but this doesn't do us much good at the moment.

*200 "Also, I found the 2000 corporate tax return, and unfortunately we made more money than I thought, actually $156,000 for that year, so going back to the first year wouldn't work. If we took the actually first full year the company was in business, 2001 we only made $61,200 for that year but I'm sure that wouldn't fly.

"So, damn the torpedoes, let's incorporate Get Flipped^TM Inc and sell the MG assets over and dissolve MG as quick as possible. As far as [Corrales's] estate wanting the 20% gross, gross of what we can say. I think if we can use Joan's [the accountant's] valuation for the shares at the time [Corrales] signed them over, we can offer that up as payment for his share after we dissolve the company.

"I realize this doesn't get me out of a possible personal lawsuit with the Corrales estate, but that nasty business can be dealt with after we dissolve the company. I think as a settlement incentive we'd need to have the Corrales estate be willing to take payment for the shares and agree to not sue by accepting payment. [¶] ... [¶]

"I'll follow with a list of assets I want GF to purchase from M.G. Wish I had better news guys. Thanks very much for your efforts last night."

In March 2006 Souther incorporated Get Flipped. Souther was Get Flipped's sole shareholder, officer and director. On February 7, 2007 Souther, as president of Motion Graphix, sent the Estate a letter stating a majority of Motion Graphix's shareholders had voted to sell the company's assets to Get Flipped.³ According to Souther, he did not receive a response or objection from the Estate; thus, on February 27, 2007 he executed a "Quitclaim Assignment" transferring Motion Graphix's assets to Get Flipped for $5,000. Souther testified at his deposition the $5,000 price was for hardware, and no value was placed on customers, product or software.⁴ In a letter dated March 26, 2007 the Estate was informed "that the Board of Directors and the holders of a majority of the outstanding shares of Motion Graphix ... have acted by *201 written consent ... to approve the wind up and dissolution of the Corporation." On April 20, 2007 Motion Graphix was dissolved. Katten Muchin represented Motion Graphix in connection with the sale. (Galimi had resigned from the firm in November 2006 and was replaced by Thompson.) **283 According to Souther, the law firm of Stradling Yocca Carlson & Rauth represented Get Flipped in the transaction.

2. The Individual Action

On October 30, 2007 the Estate filed a complaint asserting claims including conversion, breach of fiduciary duty, fraud and breach of contract against Souther, Get Flipped and fictitiously named Doe defendants. The complaint alleged Corrales still held 51 percent of the shares of Motion Graphix when he died, those shares passed to the Estate, the Estate never approved the sale of Motion Graphix's assets to Get Flipped or the company's dissolution, the fair market value of Motion Graphix's intellectual property ranged between $8 and $12 million and Souther engaged in wrongdoing, including violating the Corporations Code, by orchestrating the fraudulent and unauthorized sale of Motion Graphix's assets to Get Flipped for $5,000.⁵

On June 23, 2008 the Estate amended the complaint by substituting Galimi for one of the fictitiously named Doe defendants; on July 14, 2008 it filed another Doe amendment naming Katten Muchin.⁶ Galimi demurred on July 28, 2008, primarily contending he had left Katten...