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Fremont Reorganizing Corporation v. Alan W. Faigin

August 30, 2011

FREMONT REORGANIZING CORPORATION, CROSS-COMPLAINANT AND APPELLANT,
v.
ALAN W. FAIGIN, CROSS-DEFENDANT AND RESPONDENT.



APPEAL from orders of the Superior Court of Los Angeles County, Susan Bryant-Deason, Judge. (Los Angeles County Super. Ct. No. BC405550)

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

CERTIFIED FOR PUBLICATION

Order granting special motion to strike affirmed in part and reversed in part; order awarding attorney fees reversed with directions.

Alan I. Faigin sued Fremont Reorganizing Corporation (FRC) alleging that he was jointly employed by both FRC and Fremont General Corporation (Fremont General) as in-house counsel. Faigin alleges several counts against FRC relating to the termination of his employment. FRC filed a cross-complaint against Faigin alleging that he wrongfully informed the Insurance Commissioner (Commissioner), as liquidator of a related company, Fremont Indemnity Company (Fremont Indemnity), that his former clients were planning to auction certain artworks that he claimed were owned by Fremont Indemnity. The Commissioner then commenced an adversary action against Fremont General and FRC in the liquidation proceeding.

Faigin filed a special motion to strike the cross-complaint under the anti-SLAPP statute (Code Civ. Proc., § 425.16).*fn1 The trial court concluded that each count alleged in the cross-complaint arose from protected activity under the anti-SLAPP statute, that FRC had failed to demonstrate a probability of prevailing on its claims, and that the litigation privilege applied. The court therefore granted the motion, striking the cross-complaint in its entirety. FRC appeals the order granting the special motion to strike and an order awarding Faigin attorney fees as the prevailing cross-defendant on the motion.

We conclude that each count alleged in the cross-complaint arises from protected activity under the anti-SLAPP statute and that FRC has not shown that Faigin's conduct was "illegal as a matter of law" under the rule from Flatley v. Mauro (2006) 39 Cal.4th 299 (Flatley) so as to make the anti-SLAPP statute inapplicable. We also conclude that FRC established a probability of prevailing on its counts for breach of confidence and breach of fiduciary duty and that the litigation privilege is inapplicable in an action by a former client against an attorney arising from breach of professional duties. FRC, however, failed to establish a probability of prevailing on two other counts. We therefore will affirm in part and reverse in part the order granting the special motion to strike and will reverse the order awarding attorney fees with directions to the trial court to determine whether Faigin's partial success entitles him to a fee award and, if so, the amount of the award.

FACTUAL AND PROCEDURAL BACKGROUND

1. Factual Background

FRC, formerly known as Fremont Investment & Loan, was a bank until it ceased doing business in July 2008 and changed its name to Fremont Reorganizing Corporation. FRC and Fremont Indemnity are subsidiaries of Fremont General.

Faigin began to work as in-house counsel for Fremont General in approximately 1983. As in-house counsel, he provided legal services to Fremont General and its subsidiaries, including FRC and Fremont Indemnity.

The Commissioner commenced an involuntary liquidation proceeding against Fremont Indemnity in June 2003. Fremont Indemnity was declared insolvent and the Commissioner was appointed its liquidator in June 2003, and Faigin ceased acting as counsel for Fremont Indemnity at that time. The court issued an order in July 2003 prohibiting Fremont Indemnity, its officers, directors, agents, and employees from disposing of or transferring the assets of Fremont Indemnity. The order also directed Fremont Indemnity, its officers, directors, agents, and employees to deliver immediately to the Commissioner all assets and records of Fremont Indemnity in their custody or control and to disclose to the Commissioner the whereabouts of all assets and records not in their custody or control. In addition, the order directed all of Fremont Indemnity's affiliates to cooperate with the Commissioner in the performance of his duties and to turn over to the Commissioner all records of Fremont Indemnity's assets.

Faigin and Fremont General entered into a written employment agreement in April 2007 appointing him as general counsel for Fremont General. However, it hired Donald E. Royer to replace Faigin as its general counsel in November 2007. Royer assumed Faigin's former duties, while Faigin continued to work as in-house counsel. Faigin notified Fremont General in November 2007 that these changes to his job duties entitled him to certain accelerated compensation payments.

Fremont General notified Faigin on March 12, 2008, that his employment was terminated for cause effective that day. Faigin informed the Commissioner the following day that FRC and Fremont General were planning to auction certain artworks that purportedly belonged to Fremont Indemnity. As a result, the Commissioner commenced an adversary action against FRC, Freemont General, and others in May 2008 in the then-pending liquidation proceeding. Fremont General filed a voluntary chapter 11 bankruptcy petition in June 2008.

FRC, Fremont General, another Fremont entity, and the Commissioner entered into a settlement agreement in April 2009 providing for payment to the Commissioner of the proceeds from the sale of the artworks and payment of an additional $5 million by FRC to Fremont Indemnity.

2. Complaint

Faigin filed a complaint against FRC on January 15, 2009, and filed a first amended complaint on January 23, 2009. He alleges that he was jointly employed by Fremont General and FRC pursuant to a written employment agreement. He alleges that the agreement provided for certain payments if there was a significant change in his job duties and that such a change occurred in late 2007 when he was replaced as general counsel. He also alleges that his employment was wrongfully terminated in March 2008 because of his requests for payments allegedly due to him under the agreement.

Faigin alleges counts against FRC for breach of the employment agreement, wrongful termination in violation of public policy, and Labor Code violations, among other counts.*fn2

3. Cross-complaint

FRC filed a cross-complaint against Faigin in April 2009 alleging that Faigin was employed by Fremont General alone. FRC alleges that Faigin also provided legal services to FRC and other subsidiaries of Fremont General and that FRC and Fremont General both were his clients, but that FRC was not his joint employer. FRC also alleges, "on March 13, 2008, Faigin, in breach of his lawyer/client legal, fiduciary and ethical obligations, advised the California Insurance Commissioner, acting in his capacity as the liquidator of Fremont Indemnity Company, that Faigin's former clients were in the process of auctioning certain artworks that Faigin falsely asserted were owned by Fremont Indemnity." FRC alleges that the Commissioner commenced an adversary action against Fremont General, FRC, and others in May 2008 as a result of Faigin's statements made to the Commissioner.

FRC alleges that because Faigin acted as counsel for FRC and Fremont General he owed both entities, as his former clients, a duty to preserve their confidences and other fiduciary duties. FRC alleges that Faigin breached those duties by informing the Commissioner that FRC and Fremont General were planning to auction artworks purportedly belonging to Fremont Indemnity. FRC also alleges that the interests of FRC and "Faigin's other clients" were in conflict with respect to Faigin's statements made to the Commissioner and that it had never consented to Faigin's dual representation of FRC and Fremont General, or any of Fremont General's subsidiaries, as required by rule 3-310(C) of the Rules of Professional Conduct (rule 3-310(C)). FRC alleges further that if it is liable to Faigin on his complaint in this action, it is entitled to equitable indemnity from Faigin because he breached his fiduciary duties owed to FRC as his former client by making the statements to the Commissioner, resulting in damages to FRC. FRC alleges counts against Faigin for (1) breach of confidence; (2) breach of fiduciary duty; (3) violation of rule 3-310(C); and (4) equitable indemnity.

4. Special Motion to Strike

Faigin filed a special motion to strike the cross-complaint in May 2009. He argued that FRC's allegations in its cross-complaint regarding his statements to the Commissioner were "inaccurate in many respects," but stated, "for purposes of this Motion only Faigin assumes [FRC's] allegations about that conversation to be true."*fn3 He argued that each count alleged in the cross-complaint arose from his statements made to the Commissioner in connection with the liquidation proceeding and therefore arose from protected activity under the anti-SLAPP statute. He also argued that the litigation privilege and official proceeding privilege precluded his liability on each count, and that FRC could not establish a probability of prevailing on its counts for violation of rule 3-310(C) and equitable indemnity for other reasons. Faigin filed his own declaration in support of the motion and requested judicial notice of several documents.

FRC argued in opposition to the special motion to strike that Faigin violated his duty under Business and Professions Code section 6068, subdivision (e) and rules 3-100 and 3-600 of the Rules of Professional Conduct to maintain his client's confidences, and that his conduct therefore was illegal. FRC argued that an illegal act cannot be protected activity under the anti-SLAPP statute as a matter of law, citing Flatley, supra, 39 Cal.4th 299, and that its cross-complaint therefore did not arise from protected activity. FRC also argued that Faigin's conduct was not protected by either the litigation privilege or the official proceeding privilege and that its counts for breach of rule 3-310(C) and equitable indemnity were legally sufficient.

FRC filed a declaration by Royer in opposition to the special motion to strike. Royer declared that a letter from the Commissioner stated that Faigin had informed the Commissioner on March 12, 2008, "that Fremont General was in the process of auctioning certain artworks that Faigin asserted were owned by Fremont Indemnity Corporation." Royer also declared, "At no time did I, or anyone else on behalf of Fremont General Corporation or [FRC], authorize Faigin to divulge any information to any third party, including the California Insurance Commissioner, about the ownership of this artwork or the fact that it was being auctioned."

Faigin asserted in reply, among other arguments, that his statements to the Commissioner were neither illegal within the meaning of Flatley, supra, 39 Cal.4th 299, nor improper. He filed his own supplemental declaration stating that he became aware of Freemont Indemnity's possession and ownership of the artworks from non-confidential sources, including his personal observation of the artworks on display in Fremont Indemnity's offices and a newspaper article. He also filed an evidentiary objection asserting that the statement in the Royer declaration regarding the information in the letter from the Commissioner was inadmissible hearsay.

At the hearing on the special motion to strike, FRC argued that the trial court should disregard Faigin's arguments and evidence presented for the first time in reply and should allow FRC time to file a supplemental opposition to the motion. The court denied the request and took the matter under submission. In a minute order filed on June 19, 2009, the court sustained Faigin's evidentiary objection to the Royer declaration, granted his request for judicial notice, and granted the special motion to strike. The order stated that each count alleged in the cross-complaint arose from protected speech and that FRC "has failed to demonstrate that it has a reasonable ...


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