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Christopher A. Cole v. Patricia A. Meyer & Associates

June 8, 2012

CHRISTOPHER A. COLE, PLAINTIFF AND APPELLANT,
v.
PATRICIA A. MEYER & ASSOCIATES, APC, ET AL., DEFENDANTS AND APPELLANTS. CHRISTOPHER A. COLE, PLAINTIFF AND APPELLANT,
v.
KIESEL, BOUCHER, & LARSON ET AL., DEFENDANTS AND RESPONDENTS.



APPEAL from orders of the Superior Court of Los Angeles County, Richard Fruin, Judge. Affirmed in part, reversed in part, and remanded with directions. (Los Angeles County Super. Ct. No. BC436506)

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

CERTIFIED FOR PUBLICATION

This case involves causes of action for malicious prosecution and defamation against attorneys of record in a prior case. As to the causes of action for malicious prosecution, we hold, among other things, that the attorneys' anti-SLAPP*fn1 special motions to strike (Code Civ. Proc., § 425.16.) were improperly granted, and that attorneys who appear on all of the pleadings and papers filed for the plaintiffs in the underlying case cannot avoid liability for malicious prosecution merely by showing that they took a passive role in that case as standby counsel who would try the case in the event it went to trial.

Christopher A. Cole filed a complaint for malicious prosecution and defamation against the following defendants: Patricia A. Meyer & Associates, APC (formerly known as Aguirre & Meyer, hereafter Meyer & Associates), Patricia A. Meyer and Michael Aguirre (collectively the Meyer defendants); Kiesel, Boucher, & Larson, and Raymond P. Boucher (collectively the Boucher defendants); and Robert P. Ottilie. Defendants were the attorneys of record for the plaintiffs in a prior shareholder action against Cole and other directors of Peregrine Systems, Inc. (Peregrine), a software company that declared bankruptcy after engaging in massive accounting fraud.

The trial court granted the anti-SLAPP motions by the Boucher defendants and Ottilie to strike Cole's complaint. The court denied the Meyer defendants' anti-SLAPP motion, except as to the defamation claim against Aguirre. Cole appeals the striking of his malicious prosecution claims against the Boucher defendants and Ottilie. The Meyer defendants cross-appeal from the partial denial of their anti-SLAPP motion.

We find that Cole has shown the requisite likelihood that he will prevail on his malicious prosecution claims against all defendants, and on his defamation claim against Meyer and Meyer & Associates. We reverse the court's September 9, 2010 order to the extent it struck the malicious prosecution claims against the Boucher defendants and Ottilie and awarded Ottilie attorney fees and costs. We affirm the order in all other respects.

Cole also appeals from the separate order awarding the Boucher defendants attorney fees and costs for their anti-SLAPP motion. We reverse this award and remand the matter for further proceedings consistent with this opinion.

FACTUAL AND PROCEDURAL SUMMARY

Cole founded Peregrine in San Diego, California, in 1981.*fn2 Throughout the 1980's, he held management positions and served as the company's president before resigning in 1989. His subsequent involvement with the company was largely as a shareholder and outside director.

Peregrine became a publicly traded company in 1997. Some of its revenue growth was due to software sales to resellers, known as "channel sales." In 1999, the company began recognizing revenue at the time of the original sale to a reseller, known as a "sale in" to the channel, rather than at the time of sale to the end user, known as a "sale through" the channel. It improperly recognized revenue from sales into a channel without an end user's firm commitment to buy or with side agreements. These and other contingencies made revenue collection highly uncertain. To cover uncollectible receivables, the company sold them to banks with recourse and disguised large write offs as acquisition costs. It also engaged in inflated "barter transactions" with other software companies, structured so that both companies could recognize revenue.

After improper transactions came to light in 2002, the Peregrine board of directors commissioned an independent investigation into the company's practices. The investigation resulted in a report by the law firm Latham & Watkins (the Latham report). This report was based on approximately 86 interviews, 897,000 e-mail messages generated between 1996 and 2002, and analysis of 170 suspect transactions. The Latham report found no evidence that the outside directors knew of management's improper business and accounting practices. It also found that Cole had sold Peregrine stock whenever trading was allowed in order to fund his other software startup companies. During the investigation, Peregrine announced that it would restate its earnings since 2000. It then filed for bankruptcy and in 2005 was acquired by Hewlett-Packard.

In 2003, defendants sued Cole and other Peregrine directors on behalf of individual Peregrine shareholders. The action was filed in San Diego County Superior Court. The first amended complaint was the first charging pleading actually served on Cole. It included eight common law and statutory fraud and fraud-related causes of action: fraud and deceit by active concealment, fraud and deceit based upon omission and misrepresentations of material facts, violations of the Corporate Securities Law of 1968 (Corp. Code, § 25000 et seq.), aiding and abetting, and conspiracy. Four causes of action were for negligent misrepresentation, breach of fiduciary duty, aiding and abetting that breach, and violation of the Unfair Competition Law (Bus. & Prof. Code, § 17200 et seq.). The same twelve state law causes of action were carried over into subsequent amendments of the complaint.*fn3

The first amended complaint alleged that Cole was actively involved in the day-to-day operations of Peregrine and advised management about the company's operations; he set aggressive financial goals for the company by encouraging false or misleading revenue recognition reporting; he attended 38 board meetings from 1999 through 2002, at which false or misleading revenue recognition was discussed; and in the same period, he sold 1.2 million shares of stock for a total of over $28.8 million, thus becoming one of the principal beneficiaries of the fraud. In 2004, the second amended complaint expanded these allegations in several directions: it alleged that the board of directors encouraged channel sales in 1997, approved a sell-in rather than sell-through recognition of revenue from such sales in April 1999, and was aware of the increase of unsold inventory in the channel in October 1999. Cole was alleged to have been instrumental in developing Peregrine's business model and in establishing its revenue recognition policy. He was alleged to have shredded materials distributed at board meetings and approved "doctoring" the minutes to eliminate any incriminating information. Cole was specifically alleged to have engaged in insider trading with respect to Peregrine's acquisition of the Harbinger Corporation in April 2000 and the Department of Justice's investigation of Peregrine's business partner Critical Path in February 2002.

The fourth amended complaint, filed at the end of 2005, restated these allegations against Cole without a significant substantive change. Since Aguirre had left private practice, his name did not appear on this complaint or subsequent filings, and his former law firm appeared under the name Meyer & Associates. Cole's motion for summary judgment was tentatively granted in 2006, but a final decision did not issue until the end of 2007 because the matter was repeatedly continued upon the request of the plaintiffs' attorneys. The court concluded that the plaintiffs had failed to raise a triable issue of material fact that, between 1999 and 2001, Cole knew of the fraud at Peregrine, had day-to-day control over its operations, or had a special relationship with the company. In ruling on the motion, the court specifically rejected as irrelevant the declarations of two former Peregrine employees who claimed Cole engaged in dishonest business practices when he managed Peregrine in the 1980's.

The summary judgment in favor of Cole and two other outside directors was affirmed in Bains v. Moores (2009) 172 Cal.App.4th 445 (Bains). The appellate court concluded that the plaintiffs had failed to raise a genuine issue of material fact on any fraud or fraud-related claim. (Id. at p. 454.) Specifically, the court found that Cole's sale of stock in February 2000 was not suspicious and therefore was not evidence of scienter for the purpose of establishing fraud. (Id. at pp. 464-465.) The court found that, at most, the plaintiffs had shown the Peregrine board of directors had been advised about concerns over the company's prospects and its method of recognizing revenue for channel sales, but not of any discrete piece of information material to the company's share price. (Id. at p. 461.) The court noted that even the plaintiffs' expert did not conclude the outside directors knew of the fraud at Peregrine. (Id. at p. 468.) The court deemed speculative the plaintiffs' argument that they had been hampered in discovery because 28 key witnesses had exercised their privilege against self-incrimination. (Id. at pp. 480, 486.)

In April 2010, Cole sued the attorneys of record in Bains for malicious prosecution and defamation. On September 9, 2010, the trial court granted the Boucher defendants' and Ottilie's anti-SLAPP motions based on their representation that they did not participate in Bains, having been associated in the case only for purposes of trial. The court denied Cole's request for limited discovery into these defendants' actual participation in the case. It granted the motion to strike the defamation claim as to the Boucher defendants, Ottilie, and Aguirre because they were not liable for the posting of the fourth amended complaint on the website of Meyer & Associates, where it could be accessed even after Bains was no longer pending. The court ruled that the Boucher defendants and Ottilie were entitled to attorney fees for their anti-SLAPP motions and awarded Ottilie $7,895 in fees. The court concluded that Cole was likely to prevail on his malicious prosecution claim against the Meyer defendants (including Aguirre). Cole timely appealed and the Meyer defendants cross-appealed.

On November 15, 2010, the court granted the Boucher defendants' and Aguirre's motions for attorney fees and costs. Cole submitted on the court's tentative award of fees and costs to Aguirre, which was limited to the defamation claim. Cole then noticed an appeal from the minute order. The signed order awarding attorney fees to the Boucher defendants was filed on November 22, 2010.

DISCUSSION

I

Code of Civil Procedure section 425.16 provides that a cause of action arising from a defendant's act in furtherance of a constitutionally protected right of free speech may be stricken unless the plaintiff is likely to prevail on the merits. (Code Civ. Proc., § 425.16, subd. (b)(1).) The analysis of an anti-SLAPP motion under this section is two-fold: the trial court decides first "'whether the defendant has made a threshold showing that the challenged cause of action is one arising from protected activity. . . . If the court finds such a showing has been made, it then determines whether the plaintiff has demonstrated a probability of prevailing on the claim.' [Citation.]" (Jarrow, supra, 31 Cal.4th at 733.)

To meet his burden, the plaintiff "'must demonstrate that the complaint is both legally sufficient and supported by a sufficient prima facie showing of facts to sustain a favorable judgment if the evidence submitted by the plaintiff is credited.' [Citations.] In deciding the question of potential merit, the trial court considers the pleadings and evidentiary submissions of both the plaintiff and the defendant [citation]; though the court does not weigh the credibility or comparative probative strength of competing evidence, it should grant the motion if, as a matter of law, the defendant's evidence supporting the motion defeats the plaintiff's attempt to establish evidentiary support for the claim. [Citation.]" (Wilson v. Parker, Covert & Chidester (2002) 28 Cal.4th 811, 821 [Italics omitted.], superseded by statute on other grounds as noted in Hutton v. Hafif (2007) 150 Cal.App.4th 527, 547.)

We review an order granting an anti-SLAPP motion de novo, applying the same two-step procedure as the trial court. (Alpha & Omega Development, LP v. Whillock Contracting, Inc. (2011) 200 Cal.App.4th 656, 663.) We look at the pleadings and declarations, accepting as true the evidence that favors the plaintiff and evaluating the defendant's evidence "'only to determine if it has defeated that submitted by the plaintiff as a matter of law.' [Citation.]" (Soukup v. Law Offices of Herbert Hafif (2006) 39 Cal.4th 260, 269, fn. 3 (Soukup).) The plaintiff's cause of action needs to have only '"minimal merit' [citation]" to survive an anti-SLAPP motion. (Id. at p. 291.)

II

Cole concedes that a cause of action for malicious prosecution is subject to an anti-SLAPP motion. (See Jarrow, supra, 31 Cal.4th at p. 735.) His complaint contains two such causes of action: one based on the filing of the Bains case and another based on the plaintiffs' opposition to his summary judgment motion in Bains. The question is whether he has made a prima facie evidentiary showing of a probability of prevailing on one or both of these causes of action.

To prevail, Cole must demonstrate that, as to him, the Bains case "(1) was commenced by or at the direction of the defendant[s] and was pursued to a legal termination favorable to [Cole]; (2) was brought without probable cause; and (3) was initiated with malice. [Citation.]" (Soukup, supra, 39 Cal.4th at p. 292.) He also may prevail by showing that defendants maliciously continued to prosecute the case against him, in the trial court and on appeal, without probable cause. (Zamos v. Stroud (2004) 32 Cal.4th 958, 969, 973 (Zamos).)

There is no dispute that Bains was favorably terminated as to Cole, but the Meyer defendants have cross-appealed from the trial court's finding that they instituted and continued to prosecute the case against Cole without probable cause and with malice. The Boucher defendants and Ottilie argue they cannot be liable for malicious prosecution because they did not take an active part in Bains and reasonably relied on the Meyer defendants' decision to sue Cole. We conclude that Cole has shown the requisite likelihood of prevailing on his malicious prosecution claims against all defendants.

A. Probable Cause

Probable cause exists when a lawsuit is based on facts reasonably believed to be true, and all asserted theories are legally tenable under the known facts. (Soukup, supra, 39 Cal.4th at p. 292.) Thus, Cole may prevail by making a prima facie showing that any one of the theories in Bains was legally untenable or based on facts not reasonably believed to be true. (See ibid.) This objective standard of review is similar to the standard for determining whether a lawsuit is frivolous: whether "any reasonable attorney would have thought the claim tenable." (Sheldon Appel Co. v. Albert & Oliker (1989) 47 Cal.3d 863, 885-886 (Sheldon Appel).)

The parties' dispute focuses on the fraud and fraud-related claims in Bains. Specifically, the parties disagree whether the attorneys in that case had probable cause to believe that Cole knew of, encouraged, or participated in the fraud at Peregrine. A common law fraud cause of action requires: "'"(a) misrepresentation (false representation, concealment or nondisclosure); (b) knowledge of falsity (or 'scienter'); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage."' [Citations.]" (Philipson & Simon v. Gulsvig (2007) 154 Cal.App.4th 347, 363.) Scienter also is necessary for liability under Corporations Code sections 25400 and 25500, which together require "an intent to defraud through a knowingly false statement" designed to manipulate the securities markets. (California Amplifier, Inc. v. RLI Ins. Co. (2001) 94 Cal.App.4th 102, 108, 112.) Actual knowledge and concurrence in a planned ...


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