Smith v. Hunt & Henriques

Decision Date02 March 2021
Docket NumberD076278
CourtCalifornia Court of Appeals Court of Appeals
PartiesRUSSELL SMITH, Plaintiff, v. HUNT & HENRIQUES, Defendant and Respondent; ABBAS KAZEROUNIAN et al., Objectors and Appellants.

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

(Super. Ct. No. 37-2017-0001062-CU-NP-CTL)

APPEAL from an order of the Superior Court of San Diego County, Richard L. Strauss, Judge. Reversed with directions.

Kazerouni Law Group, Robert L. Hyde and Mike Kazerouni for Objectors and Appellants.

Simmonds & Narita, Tomio B. Narita and Jeffrey A. Topor for Defendant and Respondent.

No appearance for Plaintiff.

Abbas Kazerounian, Matthew Loker, Joshua Swigart, and Daniel Shay (collectively, Attorneys) appeal from an order imposing $125,690.56 in sanctions against them under Code of Civil Procedure1 section 128.5 for prosecuting litigation the superior court found to be frivolous and in bad faith. On appeal, Attorneys contend: (1) the finding that the action was frivolous is not supported by substantial evidence; (2) the superior court applied an incorrect legal standard of bad faith; (3) the moving party, Hunt & Henriques (H&H), failed to comply with safe harbor provisions in section 128.5, subdivision (f)(1)(B); (4) sanctions are improper because Attorneys sought to dismiss and later to amend the complaint; (5) the order lacks required specificity; and (6) the sanctions "violate California public policy."

We conclude that an essential finding—that the challenged action be objectively frivolous—is not supported by substantial evidence. Accordingly, we reverse with directions to deny sanctions, making it unnecessary to consider Attorneys' remaining contentions.

In addition to granting H&H's sanctions motion, the trial court also denied Attorneys' request for sanctions against H&H for their filing the sanctions motion. We dismiss that aspect of Attorneys' appeal for lack of jurisdiction. (McCluskey v. Henry (2020) 56 Cal.App.4th 1197, 1210, fn. 2 (McCluskey).)

FACTUAL AND PROCEDURAL BACKGROUND
A. H&H Sends a Collection Letter to Smith

H&H is a law firm representing clients seeking to recover delinquent consumer debt. In August 2016, H&H wrote to Russell Smith stating that Capital One Bank (USA), N.A. (Capital One) had engaged the firm to collect$2,871.45 on his account (the Letter). The Letter informs Smith he may dispute the debt "by mailing a notice" to H&H within 30 days.

B. Smith Sues Capital One

About three weeks later, Smith filed a limited civil action against Capital One, Smith v. Capital One Services, LLC (Super. Ct. San Diego County, 2016, No. 37-2016-00030378-CL-MC-CTL) (the Cap One action). Smith alleged that Capital One violated the Rosenthal Fair Debt Collection Practices Act (Civ. Code, § 1788 et seq.) (the Rosenthal Act) and other laws by repeatedly contacting him about his accounts despite knowing he was represented by counsel. In the Cap One action Smith was represented by Abbas Kazerounian (Kazerouni Law Group), Daniel G. Shay (Law Office of Daniel G. Shay), and Joshua Swigart (Hyde & Swigart). Capital One was represented by Doll, Amir & Eley, LLP—not by H&H.

C. Smith Settles the Cap One Action with a Broadly Worded Release

In December 2016, Smith settled the Cap One action. Capital One paid Smith $6,000 and waived amounts due on his accounts. Kazerounian signed the settlement agreement (Agreement) as Smith's attorney, agreeing to "form and confidentiality."

The Agreement contains a broadly worded provision releasing Smith's claims against Capital One and its "attorneys" (the Release):

"[Smith] . . . hereby releases and forever discharges [Capital One and other enumerated entities] and each of their respective past, present, and future employees, stockholders, officers, directors, partners, agents, brokers, contractors, servants, affiliates, subsidiaries, parents, departments, divisions, insurers, attorneys, predecessors, successors and assigns . . . from any and all claims or counterclaims, causes of action, remedies, damages, liabilities, debts, suits, demands, actions, costs, expenses, fees, controversies, set-offs, third party actions or proceedings of whatever kind or nature . . . whether knownor unknown, foreseen or unforeseen, accrued or unaccrued, suspected or unsuspected, which [Smith] . . . may now have, have ever had, or in the future have against [the released parties], without exception or limitation, including but not limited to any and all claims arising directly or indirectly from or in any way related to [Smith's Capital One accounts] and/or [the Cap One action] . . . ." (Italics and bold added.)
D. Smith Files a Putative Class Action Against H&H

In January 2017, Smith filed a putative class action against H&H entitled Smith v. Hunt & Henriques, Inc. (Super. Ct. San Diego County, 2017, No. 37-2017-00001062-CU-NP-CTL) (the Class action).2 Represented by the same lawyers who had represented him in the Cap One action (plus Matthew Locker of the Kazerounian firm), Smith alleged that the Letter unlawfully limited his ability to dispute the debt by "mail only." Smith filed the action individually and on behalf of a class generally defined as those to whom H&H had sent such demand letters within one year prior to filing the action.

Apparently H&H's involvement with Smith was limited to sending the Letter. As a result, H&H and its defense counsel were unaware of the Cap One action. Moreover, Smith deflected H&H's attempts to elicit such information in discovery. For example, H&H propounded interrogatories asking Smith to identify writings "reflecting any dispute relating to the financial obligation" identified in the demand letter. Although the Cap One action would be responsive, Smith (through counsel) responded that he" 'lacks sufficient information to respond to this Interrogatory.' "3 In another interrogatory, H&H asked Smith if he "contacted" Capital One "at any time to dispute" his account. Again Smith responded he "lacks sufficient information to respond to this Interrogatory." H&H also requested that Smith produce documents "reflecting any dispute" regarding his Capital One accounts. Although the Agreement is responsive, Smith stated he "lacks responsive documents."4

E. H&H's Lawyers Obtain the Cap One Settlement

While preparing for Smith's deposition in September 2018, H&H's lawyers learned of the Cap One action, and that the same firms representing Smith there also represented him in the Class action. In October 2018, counsel for H&H issued a subpoena to Capital One to produce certain documents, including the Agreement. Capital One objected on the grounds that the Agreement was confidential, and also asserted several "general objections"—including attorney-client privilege. After Smith's lawyers refused to stipulate to a protective order, the court entered a protective order and Capital One produced the Agreement.

F. Smith Unsuccessfully Attempts to Dismiss the H&H Action and Files a Bankruptcy Petition

In January 2019, Attorneys filed a request for dismissal without prejudice of the Class action. In an accompanying declaration, counsel stated the action was being dismissed because the court had denied a motion to compel H&H to produce financial records, and as a result, "the superiority element will be unmet." However, the clerk declined to enter the dismissal without a court order. (Cal. Rules of Court, rule 3.770(c); Fidelity National Home Warranty Company Cases (2020) 46 Cal.App.5th 812, 826 [a putative class action may be dismissed without notice to the class members if the court finds that the dismissal will not prejudice them].)

Later the same month, Smith filed a bankruptcy petition. His asset schedules include the Class action; however, Smith stated he "wishes to dismiss the class case via a 'mutual walkaway.' "

G. H&H Serves and Later Files a Motion for Sanctions

In February 2019, H&H served Attorneys with an unfiled motion seeking $112,653.50 in sanctions against Attorneys (but not against Smith). Purporting to comply with section 128.5's safe harbor provisions, H&H indicated the motion for sanctions would be filed unless Smith dismissed the Class action and paid $112,635.50 as H&H's attorneys' fees and costs incurred in defending the Class action.

After Attorneys failed to pay the $112,653.50, H&H filed the sanctions motion. The thrust of the motion was that Smith had released H&H, as Capital One's attorneys. Because the same law firms who filed the Class action also represented Smith in the Cap One action, H&H asserted that Attorneys "had to know that this case was legally unfounded from the start." H&H further asserted that Attorneys acted in bad faith—evidenced by their attempt to conceal the Release by evasive discovery responses.

Citing San Diegans for Open Government v. City of San Diego (2016) 247 Cal.App.4th 1306, 1316 (San Diegans), H&H asserted that under section 128.5, the court should apply an " 'objective reasonable attorney standard' " and "[n]o showing of subjective bad faith is required."5 Without citing any law, H&H's lawyers further asserted that the "wholly improper" Class action "cannot be cured by . . . substitution of a new named plaintiff."6

Attorneys opposed the motion on several different grounds, one of which was that H&H was not a party to the Release. They asserted that H&H "would need to . . . prove that the Release . . . was made for its benefit and that the intent to do so appears in the language of the [A]greement." According to Attorneys, there was no evidence that Smith and Capital One had intended to include H&H among the unnamed "attorneys" released:

"H&H is a law firm that is retained by creditors to recover delinquent debts; nothing more,
...

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