LIABILITY UPDATE
December 14, 2007
In Philipson & Simon v. Gulsvig 2007 Daily Journal D.A.R 13383, the Fourth Appellate District of the California Court of Appeal held that each of a law firm’s causes of action fell within the protection of the anti-SLAPP statute, where each of them was based substantially upon a client’s petitioning activity—first her initiation of a fee arbitration proceeding under the Mandatory Fee Arbitration Act (“MFAA”), and then her initiation of a cross-complaint against the law firm in the present action.
Lori Gulsvig was a shareholder, officer and employee of California Shirt Sales, Inc., a California Corporation (CSS California). CSS California entered into an agreement with Tultex, Inc., pursuant to which CSS California sold assets to Tultex. Tultex formed a Virginia corporation, also called California Shirt Sales, Inc. (CSS Virginia) for the purpose of owning those assets. Prior to the asset sale, CSS California had an account receivable, owed by a company called Color Spot, and hired defendant, the law firm of Philipson & Simon (Philipson), to collect it. Philipson was able to obtain a judgment against Color Spot on behalf of CSS California. In October of 2001, Philipson obtained a settlement of the Color Spot judgment. The total amount to be paid by Color Spot was $85,000, of which $15,000 was designated as “attorney fees.” Philipson remitted $70,000 of the funds to Gulsvig, and made clear its intention to keep the remaining $15,000 for itself.
After Gulsvig filed her request to arbitrate the dispute, Philipson informed her that it questioned her right to retain any part of the settlement funds, and further that Campbell Advisors, P.C. (the plaintiff in this case) had asserted its own claim to the funds as successor in interest to Tultex. Philipson requested that Gulsvig remit back to it the $70,000 she had already received from the Color Spot settlement, and offered to retain those funds in its trust account pending a determination of which party was entitled to them.
When Gulsvig did not accede to Philipson’s request that she return the settlement funds she had already received, it threatened her with a lawsuit, and even provided her with a proposed complaint. The complaint accused Gulsvig of breach of contract, conversion and fraud, and sought damages stemming from her retention of settlement funds which allegedly belonged to Campbell. Approximately three months later, Philipson itself, then acting as counsel for Campbell, filed the complaint against Gulsvig. Gulsvig responded with a demurrer and a motion to disqualify Philipson from further representing Campbell. Gulsvig also filed a cross-complaint against Philipson, alleging causes of action for breach of fiduciary duty, negligence, breach of contract and conversion.
Philipson then filed its own cross-complaint against Gulsvig. It is the second-amended version of that cross-complaint that is at issue in this appeal. Gulsvig responded to Philipson’s second amended cross-complaint by a motion to strike it, and each of the causes of action contained in it, as a SLAPP action. The trial court denied the motion. Gulsvig appealed and the Court of Appeal ordered the trial court to grant the motion as to Philipson’s fraud and negligent misrepresentation causes of action.
Code of Civil Procedure section 425.16, subdivision (b)(1), requires a two-step process for determining whether a defendant’s section 425.16 motion to strike should be granted. “First, the court decides whether the defendant has made a threshold showing that the challenged cause of action is one arising from protected activity. The moving defendant’s burden is to demonstrate that the act or acts of which the plaintiff complains were taken ‘in furtherance of the [defendant]’s right of petition or free speech under the United States or California Constitution in connection with a public issue,’ as defined in the statute.” (Equilon Enterprises v. Consumer Cause, Inc. (2002) 29 Cal.4th 53, 67.) Then, if the court finds that such a showing has been made, the burden shifts to plaintiff to demonstrate “there is a probability that the plaintiff will prevail on the claim.” (§ 425.16, subd. (b)(1).)
The court began its de novo review with the proposition that filing a lawsuit does qualify as “petitioning” under the anti-SLAPP law. (Chavez v. Mendoza (2001) 94 Cal.App.4th 1083, 1087.) “Further, we have little trouble concluding that the initiation of a State Bar sponsored fee arbitration proceeding is likewise covered; after all, it is an official proceeding established by statute to address a particular type of dispute.” Next, the court noted that “where a cause of action alleges both protected and unprotected activity, the cause of action will be subject to section 425.16 unless the protected conduct is ‘merely incidental’ to the unprotected conduct [citation].” “Here, Philipson alleges as part of its fraud and negligent misrepresentation causes of action, that as a result of Gulsvig’s misepresentations, it had been ‘sued in this action,’ and was facing ‘possible exposure, attorneys fees and costs.’ . . . Of course, the only one who has sued Philipson is Gulsvig herself, and thus these damage allegations are based on Gulsvig’s own petitioning activity. . . .”
The court next turned to the issue of whether Philipson sustained its burden of demonstrating a probability of success on the merits of these causes of action. This means it must demonstrate it has “ ‘stated and substantiated a legally sufficient claim.’ ”
The court first considered Philipson’s fraud and negligent misrepresentation causes of action and found that this claim was insufficient to state a cause of action for fraud. “What Philipson alleges here is that Gulsvig consistently represented to it, after the sale of CSS California to Tultex, that Tultex owned the Color Spot receivable. . . . [¶] We cannot view this story, as told by Philipson in its own pleading, as demonstrating anything like ‘reasonable reliance.’ Philipson’s role, as Tultex’s attorney, simply does not allow it to unquestioningly abandon its professional obligations to that client, simply because an officer of the company (who has previously stated consistently that a particular asset belongs to Tultex) suddenly claims that she has personally owned that asset all along. . . . This is exactly the sort of case in which we can ‘ “ ‘determine whether, on the facts pleaded, there is any foundation, prima facie at least, for the charge of fraud.’ [Citation.]” ’ . . . There is not. Any reliance would have been unreasonable.”
Addressing the contract causes of action, the court reached a different conclusion. The court found that Philipson had failed to properly serve Gulsvig with the required arbitration notice. It nonetheless concluded that Gulsvig waived her right to arbitrate those distinct fee claims. Under subdivision (d) of Business and Professions Code section 6201, a client waives her arbitration rights under the statute by “commencing an action or filing any pleading seeking either of the following: [¶] (1) Judicial resolution of a fee dispute to which this article applies. [¶] (2) Affirmative relief against the attorney for damages or otherwise based upon alleged malpractice or professional misconduct.” (Italics added.) “In this case, Gulsvig had already filed her own cross-complaint, seeking affirmative relief against Philipson based upon various alleged breaches of professional obligations, when Philipson filed its second amended cross-complaint. As the trial court pointed out, the contract claims stated in Philipson’s second amended cross-complaint may be properly used to offset the damage claims alleged against it by Gulsvig, and are thus a proper subject for inclusion in the same lawsuit. (§ 426.30.)”
----Andrea Lynn Rice
December 14, 2007
In Philipson & Simon v. Gulsvig 2007 Daily Journal D.A.R 13383, the Fourth Appellate District of the California Court of Appeal held that each of a law firm’s causes of action fell within the protection of the anti-SLAPP statute, where each of them was based substantially upon a client’s petitioning activity—first her initiation of a fee arbitration proceeding under the Mandatory Fee Arbitration Act (“MFAA”), and then her initiation of a cross-complaint against the law firm in the present action.
Lori Gulsvig was a shareholder, officer and employee of California Shirt Sales, Inc., a California Corporation (CSS California). CSS California entered into an agreement with Tultex, Inc., pursuant to which CSS California sold assets to Tultex. Tultex formed a Virginia corporation, also called California Shirt Sales, Inc. (CSS Virginia) for the purpose of owning those assets. Prior to the asset sale, CSS California had an account receivable, owed by a company called Color Spot, and hired defendant, the law firm of Philipson & Simon (Philipson), to collect it. Philipson was able to obtain a judgment against Color Spot on behalf of CSS California. In October of 2001, Philipson obtained a settlement of the Color Spot judgment. The total amount to be paid by Color Spot was $85,000, of which $15,000 was designated as “attorney fees.” Philipson remitted $70,000 of the funds to Gulsvig, and made clear its intention to keep the remaining $15,000 for itself.
After Gulsvig filed her request to arbitrate the dispute, Philipson informed her that it questioned her right to retain any part of the settlement funds, and further that Campbell Advisors, P.C. (the plaintiff in this case) had asserted its own claim to the funds as successor in interest to Tultex. Philipson requested that Gulsvig remit back to it the $70,000 she had already received from the Color Spot settlement, and offered to retain those funds in its trust account pending a determination of which party was entitled to them.
When Gulsvig did not accede to Philipson’s request that she return the settlement funds she had already received, it threatened her with a lawsuit, and even provided her with a proposed complaint. The complaint accused Gulsvig of breach of contract, conversion and fraud, and sought damages stemming from her retention of settlement funds which allegedly belonged to Campbell. Approximately three months later, Philipson itself, then acting as counsel for Campbell, filed the complaint against Gulsvig. Gulsvig responded with a demurrer and a motion to disqualify Philipson from further representing Campbell. Gulsvig also filed a cross-complaint against Philipson, alleging causes of action for breach of fiduciary duty, negligence, breach of contract and conversion.
Philipson then filed its own cross-complaint against Gulsvig. It is the second-amended version of that cross-complaint that is at issue in this appeal. Gulsvig responded to Philipson’s second amended cross-complaint by a motion to strike it, and each of the causes of action contained in it, as a SLAPP action. The trial court denied the motion. Gulsvig appealed and the Court of Appeal ordered the trial court to grant the motion as to Philipson’s fraud and negligent misrepresentation causes of action.
Code of Civil Procedure section 425.16, subdivision (b)(1), requires a two-step process for determining whether a defendant’s section 425.16 motion to strike should be granted. “First, the court decides whether the defendant has made a threshold showing that the challenged cause of action is one arising from protected activity. The moving defendant’s burden is to demonstrate that the act or acts of which the plaintiff complains were taken ‘in furtherance of the [defendant]’s right of petition or free speech under the United States or California Constitution in connection with a public issue,’ as defined in the statute.” (Equilon Enterprises v. Consumer Cause, Inc. (2002) 29 Cal.4th 53, 67.) Then, if the court finds that such a showing has been made, the burden shifts to plaintiff to demonstrate “there is a probability that the plaintiff will prevail on the claim.” (§ 425.16, subd. (b)(1).)
The court began its de novo review with the proposition that filing a lawsuit does qualify as “petitioning” under the anti-SLAPP law. (Chavez v. Mendoza (2001) 94 Cal.App.4th 1083, 1087.) “Further, we have little trouble concluding that the initiation of a State Bar sponsored fee arbitration proceeding is likewise covered; after all, it is an official proceeding established by statute to address a particular type of dispute.” Next, the court noted that “where a cause of action alleges both protected and unprotected activity, the cause of action will be subject to section 425.16 unless the protected conduct is ‘merely incidental’ to the unprotected conduct [citation].” “Here, Philipson alleges as part of its fraud and negligent misrepresentation causes of action, that as a result of Gulsvig’s misepresentations, it had been ‘sued in this action,’ and was facing ‘possible exposure, attorneys fees and costs.’ . . . Of course, the only one who has sued Philipson is Gulsvig herself, and thus these damage allegations are based on Gulsvig’s own petitioning activity. . . .”
The court next turned to the issue of whether Philipson sustained its burden of demonstrating a probability of success on the merits of these causes of action. This means it must demonstrate it has “ ‘stated and substantiated a legally sufficient claim.’ ”
The court first considered Philipson’s fraud and negligent misrepresentation causes of action and found that this claim was insufficient to state a cause of action for fraud. “What Philipson alleges here is that Gulsvig consistently represented to it, after the sale of CSS California to Tultex, that Tultex owned the Color Spot receivable. . . . [¶] We cannot view this story, as told by Philipson in its own pleading, as demonstrating anything like ‘reasonable reliance.’ Philipson’s role, as Tultex’s attorney, simply does not allow it to unquestioningly abandon its professional obligations to that client, simply because an officer of the company (who has previously stated consistently that a particular asset belongs to Tultex) suddenly claims that she has personally owned that asset all along. . . . This is exactly the sort of case in which we can ‘ “ ‘determine whether, on the facts pleaded, there is any foundation, prima facie at least, for the charge of fraud.’ [Citation.]” ’ . . . There is not. Any reliance would have been unreasonable.”
Addressing the contract causes of action, the court reached a different conclusion. The court found that Philipson had failed to properly serve Gulsvig with the required arbitration notice. It nonetheless concluded that Gulsvig waived her right to arbitrate those distinct fee claims. Under subdivision (d) of Business and Professions Code section 6201, a client waives her arbitration rights under the statute by “commencing an action or filing any pleading seeking either of the following: [¶] (1) Judicial resolution of a fee dispute to which this article applies. [¶] (2) Affirmative relief against the attorney for damages or otherwise based upon alleged malpractice or professional misconduct.” (Italics added.) “In this case, Gulsvig had already filed her own cross-complaint, seeking affirmative relief against Philipson based upon various alleged breaches of professional obligations, when Philipson filed its second amended cross-complaint. As the trial court pointed out, the contract claims stated in Philipson’s second amended cross-complaint may be properly used to offset the damage claims alleged against it by Gulsvig, and are thus a proper subject for inclusion in the same lawsuit. (§ 426.30.)”
----Andrea Lynn Rice
No comments:
Post a Comment