Sheldon Appel Co. v. Albert & Oliker

• Decision Date: 12 January 1989
• Citation: 254 Cal.Rptr. 336,765 P.2d 498,47 Cal.3d 863
• Court: California Supreme Court
• Parties: , 765 P.2d 498, 57 USLW 2450 SHELDON APPEL COMPANY, Cross-complainant and Respondent, v. ALBERT & OLIKER, Cross-defendant and Appellant. L.A. 32267.

Page 336

254 Cal.Rptr. 336

47 Cal.3d 863, 765 P.2d 498, 57 USLW 2450

SHELDON APPEL COMPANY, Cross-complainant and Respondent, v.ALBERT & OLIKER, Cross-defendant and Appellant.

L.A. 32267.

Supreme Court of California In Bank.

Jan. 12, 1989.

Shirley M. Hufstedler, Hufstedler, Miller, Kaus & Beardsley, Los Angeles, for cross-defendant and appellant.

R. Wicks Stephen, II, Los Angeles, for cross-complainant and respondent.

ARGUELLES, Justice.

Albert & Oliker (A & O), a law firm, appeals from a judgment entered against it in a malicious prosecution action.¹The law firm contends that the trial court erred in permitting the case to go to the jury, asserting that the court should have concluded, on the basis of the uncontroverted facts, that Sheldon Appel Company(Sheldon Appel) had failed to establish one of the essential elements of a malicious prosecution action--namely, that the prior action, on which the malicious prosecution claim was based, had been brought "without probable cause."The Court of Appeal rejected the law firm's claim, and we granted review to consider a number of issues relating to the proper determination of the probable cause element in a malicious prosecution action, including the question whether a plaintiff may establish an absence of probable cause by proving that its former adversary's attorney failed to perform adequate legal research before filing the prior action.

As we shall explain, we conclude that when, as in this case, there is no dispute as to the facts upon which an attorney acted in filing the prior action, the question whether there was probable cause to institute the prior action is purely a legal question, to be determined by the trial court on the basis of whether, as an objective matter, the prior action was legally tenable or not.If the court determines that the prior action was not objectively tenable--and thus concludes that the action was brought without probable cause--evidence of the extent of an attorney's legal research may be relevant to the further question of whether the prior action was instituted with malice, but if the court finds that the prior action was in fact tenable, probable cause is established--and the malicious prosecution action fails--without regard to the adequacy or inadequacy of the attorney's legal research efforts.

The trial court in this case did not resolve the probable cause issue in this manner, but improperly left the probable cause determination to the jury for resolution under an erroneous standard.We need not return the case to the trial court, however, for we are in as good a position as that court to make the required legal determination, and we conclude, in light of the underlying facts and relevant legal precedents, that the prior action in question here was objectively tenable and thus was not brought without probable cause.Accordingly, we shall reverse the decision of the Court of Appeal with directions to order the entry of judgment in favor of A & O.

I

In August 1978, three of A & O's clients--M.J. Choppin, J.P. Kinzer, Jr., and Donald Miller(collectively, CKM)--sold a 42-unit apartment building to Sheldon Appel.During the negotiations which preceded the signing of the escrow agreement, Sheldon Appel represented that it would do a "first class" job of converting the building into condominiums and selling the units, and CKM ultimately agreed to sell the building for $2.75 million cash plus "47% of the excess, if any, of gross sales receipts to [Sheldon Appel] of the condominium units over 3,750,000 dollars."The escrow agreement contained a clause providing that all terms of the sale agreement which were to be performed by Sheldon Appel but which were incapable of performance before the close of escrow would survive the close of escrow and would be binding on Sheldon Appel and its "successors or assigns," but neither the sale agreement nor the escrow agreement contained any provision expressly declaring that the property was to constitute security for Sheldon Appel's obligations.

Shortly after the close of escrow on February 5, 1979, CKM learned that Sheldon Appel was offering to sell the entire building in bulk for $4 million.The loan prospectus for this offer contained detailed estimates of expected resale prices for individual condominium units, totaling well over $4.9 million.The sale of the building in bulk would have produced a quick profit for Sheldon Appel, sparing it the effort and expense associated with the sale of individual units.At the same time, however, CKM feared that such a sale would deprive it of its anticipated share of the profits attributable to the sale of the apartments as individual units rather than as a single piece of property.

After learning of Sheldon Appel's bulk sale offer, CKM consulted its attorneys, defendant A & O.On February 23, 1979, A & O filed a complaint on behalf of CKM against Sheldon Appel, seeking a declaration of CKM's rights under the sales contract and the imposition of an equitable lien on the property in question; at the same time, A & O recorded a notice of lis pendens on the property on behalf of CKM.

A little more than a month thereafter, on March 30, 1979, Sheldon Appel filed a motion to expunge the notice of lis pendens, contending that CKM's action did not affect "title to or right of possession of" the real property in question and thus that the lis pendens was not valid (seeCode Civ.Proc., § 409.1); in addition to expungement, the motion sought an award of attorneys' fees as a sanction for CKM's alleged misuse of the lis pendens procedure (seeCode Civ.Proc., § 409.3).Three weeks later, on April 19, 1979, the trial court granted the motion and expunged the lis pendens; the court declined, however, to impose attorneys' fees on CKM.CKM sought a writ of mandate to vacate the expungement order, but the Court of Appeal denied the writ petition and this court denied a petition for hearing.Eventually, all of the causes of action in CKM's original lawsuit were terminated in Sheldon Appel's favor.²

During the period between the recording of the lis pendens and its expungement, Sheldon Appel abandoned its plan to make a bulk sale of the apartment building and began to sell individual condominium units, incurring extra interest costs because of the cloud on the title resulting from the lis pendens.On December 4, 1979, after Sheldon Appel had sold enough condominiums to generate receipts in excess of $3.75 million but had not paid any of the excess to CKM, A & O filed a new action on CKM's behalf seeking damages for breach of contract.

On January 3, 1980, Sheldon Appel filed an answer to the breach of contract action and, at the same time, filed a cross-complaint against both CKM and A & O seeking damages for malicious prosecution.In support of its malicious prosecution claim, Sheldon Appel alleged that CKM and A & O had knowingly asserted an untenable lien claim and recorded an impermissible lis pendens to force it to sell individual units.

The trial court severed the malicious prosecution cross-complaint from the breach of contract complaint, and the contract action went to trial first.On April 24, 1984, CKM obtained a judgment of over $720,000 against Sheldon Appel in the breach of contract action.

Sheldon Appel's cross-complaint for malicious prosecution then proceeded to a separate trial.CKM moved in limine for a ruling by the trial court on the question whether the challenged lien claim and lis pendens had been filed and recorded without probable cause, asserting that the uncontradicted facts established that the prior action was instituted with probable cause.The trial court denied the motion and permitted the malicious prosecution action to go to trial.

At trial, the court, over objection, permitted an attorney called by Sheldon Appel to testify as an expert witness on the question of the legal tenability of the prior action.The court also admitted evidence with respect to the adequacy of the legal research that had been performed by A & O prior to the filing of the initial complaint and the recording of the lis pendens.John Zemanek, an attorney employed by A & O who at that point had been a member of the bar for less than a year, had prepared and filed the complaint and had recorded the notice of lis pendens on behalf of CKM.Zemanek initially reported spending slightly over four hours performing all of these tasks, but later testified that he had spent more time than he had reported.Sheldon Appel asserted that Zemanek had spent unreasonably little time researching the legal basis for the lien claim.

In submitting the probable cause issue to the jury, the trial court instructed the jury that "[t]o constitute probable cause for the prosecution of a civil proceeding against [Sheldon Appel] ... the evidence must establish that: [A & O], after a reasonable investigation and industrious search of legal authority, had an honest belief that their clients' claims were tenable, and that [A & O] prosecuted claims which a reasonable lawyer would regard as tenable, or did not unreasonably neglect to investigate the facts and law in making their determination to proceed with the prior action."As so instructed, the jury found in favor of Sheldon Appel on the malicious prosecution action, and awarded it $82,000 in compensatory damages and $1 million in punitive damages.³

A & O appealed from the judgment, and a divided Court of Appeal upheld the finding of liability and the compensatory damage award.⁴The majority opinion in the Court of Appeal found that the governing authorities did not support CKM's assertion of a lien in this case, that "[a]n unreasonably deficient research of the applicable law can indeed lead to a finding of no probable cause," that the trial court had properly admitted expert testimony on the probable cause issue, and finally that the trial court had properly left the probable cause issue to the jury under...