Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

R. Thomas Fair v. Karl E. Bakhtiari et al

May 24, 2011


(San Mateo County Super. Ct. Nos. CIV 417058, 434863)

The opinion of the court was delivered by: Kline, P.J.



"The relation between attorney and client is a fiduciary relation of the very highest character, and binds the attorney to most conscientious fidelity--uberrima fides." (Cox v. Delmas (1893) 99 Cal. 104, 123; accord, Oasis West Realty, LLC v. Goldman (May 16, 2011, No. S181781) ___ Cal.4th ___ [2011 W.L. 1833208, *5].) Accordingly, " '[a]ll dealings between an attorney and his client that are beneficial to the attorney will be closely scrutinized with the utmost strictness for any unfairness.' [Citations.]." (Ritter v. State Bar (1985) 40 Cal.3d 595, 602 (Ritter).) In Ritter, the court held that although the terms of the transaction entered into by the attorney and his clients were fair and reasonable, the attorney was subject to discipline for failing to provide his clients with a reasonable opportunity to discuss the transaction with independent counsel, as required by the predecessor to rule 3-300 of the California Rules of Professional Conduct.*fn1 In so doing, the court rejected the attorney's claim that failure to comply with the rule was a mere " 'technical' " violation. (Ritter, at p. 602.) In this case, we consider whether an attorney who entered into very successful business transactions with his clients, but did not provide them the written disclosures required under rule 3-300, was properly denied leave to amend his complaint to state a cause of action for the reasonable value of his services. We shall conclude the trial court did not err in concluding that the attorney's fiduciary breach precluded such recovery.

Plaintiff and cross-defendant R. Thomas Fair (Fair) appeals from a judgment of the San Mateo County Superior Court in favor of respondents Karl E. Bakhtiari, Maryann E. Fair, Stonesfair Management Company, Stonesfair Corporation and Stonesfair Financial Corporation.*fn2 The court found business agreements between Fair and his client Bakhtiari were properly voided at the election of Bakhtiari and/or the Stonesfair entities, and were unenforceable based on Fair's violation of rule 3-300 and violation of his fiduciary duties under Probate Code section 16004, subdivision (c).*fn3 It therefore granted judgment in favor of respondents and against Fair. On appeal, Fair does not challenge the court's voiding of the agreements. Rather, he contends the court erred in denying him leave to file a fourth and supplemental complaint to add a cause of action for quantum meruit for the reasonable value of the services he provided to Bakhtiari and the Stonesfair entities. We shall affirm the judgment.


In 1990, Fair was a partner at Hoge, Fenton, Jones & Appel, Inc. and an experienced business attorney, with an expertise in the formation and structure of syndications. He was also a licensed real estate broker. Bakhtiari had inherited a substantial sum of money and had begun looking for real estate investment opportunities. Bakhtiari first met with Fair in December 1989 or January 1990, when Bakhtiari sought and obtained legal advice concerning his potential investments in one such opportunity (Chartwell). At their meeting, Fair took possession of the Chartwell contracts and told Bakhtiari that he would review them and look out for Bakhtiari's best interests. An attorney-client relationship was formed at this meeting and continued until December 2000.

In April 1990, Fair and Bakhtiari went into business together, forming Stonesfair Corporation. Fair approached Bakhtiari with the proposal that they form a real estate investment business. The two orally agreed to divide ownership of Stonesfair Corporation, 70 percent to Bakhtiari and 30 percent to Fair, with the former serving as president and the latter as vice president. According to Bakhtiari, this arrangement reflected each partner's contribution: "[Fair] brought his legal expertise, and I brought the money." The trial court found that, despite Bakhtiari being a highly intelligent man, the depth of Fair's professional training created a "substantial inequality in the two men's backgrounds and level of experience and expertise when they went into business together."

Bakhtiari and Fair formed two additional partnerships together: Stonesfair Financial Corporation in 1993 and Stonesfair Management Co., LLC, in 1996, in which Fair acquired minority ownership shares of 27.5 percent and 5 percent, respectively.*fn4 These business relationships lasted until mid-2001. Fair represented each business from its inception and performed similar services for each of the Stonesfair entities. Fair claimed to have provided business and real estate-related services, including analyzing and identifying markets, finding acquisition targets, forming relationships, soliciting investors and negotiating deals with owners and lenders. He provided all legal services for these entities between 1990 and 2000. He rendered legal opinion letters, provided legal advice relating to their real estate transactions, documents and contracts, and drafted all of the Stonesfair entities' partnership, real estate purchase, subscription, and loan agreements. He also conducted all loan agreement negotiations for the Stonesfair entities. Fair provided the Stonesfair entities with legal services such as these in at least 15 different real estate transactions.*fn5 The trial court found that an attorney-client relationship existed between Fair and each of the Stonesfair entities, as well as with Bakhtiari, that did not terminate until December 2000. For his services, Fair received "substantial compensation and profit distributions." Fair claimed that, despite holding only a minority stake in each Stonesfair entity, he and Bakhtiari had orally agreed to split back-end profits and other revenue generated by these entities 50/50. The trial court found the parties had not reached any such agreement.

In late 1993, Fair began receiving a salary from Stonesfair Corporation. Maryann Fair became an employee of Stonesfair Financial Corporation in November 1993. Fair left the law firm in August 1994. Fair was employed by, worked full-time for, and received a salary from Stonesfair Financial Corporation. Additionally, he negotiated for, claimed entitlement to, and/or received other monetary benefits from all three of the Stonesfair entities based on his specific contributions to their respective businesses. Stonesfair Financial Corporation paid his bar dues and continuing legal education course fees so that he could retain good standing with the State Bar.*fn6

Fair and Bakhtiari entered into the business agreements without first agreeing on many essential terms, including their respective rights to compensation, shareholder rights, division of profits, and other monetary benefits to be derived from their joint efforts. Fair and Bakhtiari discussed, debated, and disagreed about the most basic terms of their business transactions throughout the course of their relationship. Fair never gave advice against himself to Bakhtiari. The failure to reach agreement on essential terms of the relationship was a constant source of debate and disagreement throughout the course of their business relationship and contributed to its demise. Fair ceased receiving compensation as a Stonesfair Financial Corporation employee in June 2001.

Because Fair was representing Bakhtiari and the Stonesfair entities when he entered into the various business transactions with them, he was required to comply with rule 3-300. At all relevant times the rule provided:

"Rule 3-300. Avoiding Interests Adverse to a Client

"A member shall not enter into a business transaction with a client; or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client, unless each of the following requirements has been satisfied:

"(A) The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and

"(B) The client is advised in writing that the client may seek the advice of an independent lawyer of the client's choice and is given a reasonable opportunity to seek that advice; and

"(C) The client thereafter consents in writing to the terms of the transaction or the terms of the acquisition."

Fair was aware of the requirements of rule 3-300 before he went into business with Bakhtiari, but Fair did not comply with the rule upon entering into business with Bakhtiari, not later, with the Stonesfair entities, and not at any time thereafter. The court found Fair knowingly acquired interests adverse to Bakhtiari and/or each of the Stonesfair entities, his clients. In doing so, Fair failed to disclose in writing the terms of the business transactions being entered into with his clients. He did not advise them in writing of their right to seek independent legal advice. Nor did he obtain his clients' written consent to the terms of the transactions. In his dealings with Bakhtiari and the Stonesfair entities, Fair did not carefully separate out his client relationships, but instead represented individuals and entities that had potential conflicts of interest in business transactions.*fn7 The trial court found, and Fair does not dispute, that Fair violated rule 3-300.

This litigation

On May 30, 2001, Fair filed a complaint against Bakhtiari for personal injuries and alleged causes of action for assault and battery (Super. Ct., San Mateo County (2001) No. CIV. 417058). Fair amended his complaint to name the remaining defendants and to add additional claims. His third amended complaint alleged 13 causes of action, and sought compensatory and punitive damages, injunctive relief, restitution and disgorgement of profits, dissolution, attorney fees and costs.*fn8

On October 15, 2003, while a pending appeal stayed proceedings in that case, Bakhtiari and the Stonesfair entities filed a complaint against Fair (Super. Ct., San Mateo County (2003) No. CIV 434863). In a first amended complaint they alleged causes of action for: (1) declaratory relief; (2) rescission; (3) imposition of constructive trust; (4) legal malpractice; (5) breach of fiduciary duty; (6) indemnity; and (7) accounting. Among other things, they sought a declaration that Fair's interests in the Stonesfair entities were void as against public policy. On August 10, 2007, the two actions were consolidated.

On July 17, 2008, after the stay pending appeal had been lifted, Bakhtiari and the Stonesfair entities filed their second amended cross-complaint against Fair in case No. CIV 417058, alleging the same seven causes of action previously alleged in their complaint, expanding the cause of action for breach of fiduciary duty, and adding three new causes of action. The prayer sought a declaration that Fair's interests in the Stonesfair entities were void; restitution and disgorgement of profits; imposition of a constructive trust; an accounting; compensatory, statutory and punitive damages; indemnity; injunctive relief; attorney fees and costs.

On July 22, 2008, the date for which trial had been set, Fair moved for leave to amend his complaint to add causes of action for quantum meruit and an accounting. On July 24, 2008, the court granted Fair's motion as to the accounting claim and deferred ruling on the quantum meruit claim until the court's concerns were answered, regarding whether quantum meruit would be legally available if the court ultimately determined the subject agreements were void and unenforceable based on a violation of rule 3-300 and, if so, whether cross-complainants would be prejudiced by the need for expert opinion to establish the reasonable value of Fair's services under such quantum meruit claim. Fair dropped his prayer for dissolution and Bakhtiari and the Stonesfair entities withdrew their legal malpractice claim.

On July 24, 2008, the court also bifurcated the claims, conducting a bench trial first on equitable claims alleged in Bakhtiari and the Stonesfair entities' second amended cross-complaint for declaratory relief, rescission, imposition of constructive trust, accounting and breach of fiduciary duty, and including Fair's defenses to those equitable claims based on the statute of limitations, laches and ratification.

The bench trial began on July 31, and ended on August 20, 2008. During closing arguments, counsel for respondents clarified that Bakhtiari and the Stonesfair entities were seeking to prevent enforcement of the various agreements Fair contended existed, but they were no longer seeking any return of monies that Fair had already obtained during the business transactions, nor any accounting thereof. Following the trial, the Honorable Carol L. Mittlesteadt found in a comprehensive and thoughtful statement of decision that Fair had violated rule 3-300, raising a presumption of undue influence under section 16004, subdivision (c). The court found that Fair had failed to rebut that presumption. Although Fair had established that "each of the subject business transactions was fair and reasonable," and that Stonesfair Financial Corporation's business was "tremendously successful," the material terms and conditions of these business transactions were not fully explained to and understood by Bakhtiari at the time. Consequently, the court found the presumption of undue influence under section 16004 was not rebutted. The court granted cross-complainants' request for declaratory relief and rescission under the first and second causes of action of their first amended complaint and second amended cross-complaint, and declared the business agreements between Fair and cross-complainants to be void and unenforceable.

Thereafter, the parties briefed the quantum meruit issue. At a hearing on December 19, 2008, the court denied Fair's motion for leave to amend to add a quantum meruit claim. The court filed its 29-page statement of decision on January 6, 2009. The statement of decision did not address the quantum meruit issue, other than noting that the court had deferred ruling on the claim "until certain concerns expressed by the court could be more fully addressed."

On August 10, 2009, the court entered judgment in favor of cross-complainants Bakhtiari and the Stonesfair entities on the first and second causes of action for declaratory relief and rescission of their first amended complaint and second amended cross-complaint. Cross-complainants had waived other affirmative claims for relief. Based upon the court's ruling on cross-complainants' declaratory relief and rescission causes of action, the court entered judgment in favor of respondents on the remaining causes of action of Fair's third amended complaint. The judgment related that the parties had entered into a settlement agreement under which Fair would dismiss his fourth, fifth and eighth causes of action for assault, battery, and intentional infliction of emotional distress. This timely appeal followed.*fn9


I. Standard of ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.