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Prakashpalan v. Engstrom, Li[scomb & Lack

California Court of Appeals, Second District, First Division

February 11, 2014

MURUGANANDAN PRAKASHPALAN et al., Plaintiffs and Appellants,
ENGSTROM, LIPSCOMB AND LACK et al., Defendants and Respondents.

APPEAL from a judgment of the Superior Court of Los Angeles County No. SC112882, John H. Reid, Judge.

Dion-Kindem & Crockett and Peter R. Dion-Kindem for Plaintiffs and Appellants Muruganandan Prakashpalan and Navamalar Prakashpalan.

Engstrom, Lipscomb & Lack, Robert T. Bryson and Edward P. Wolfe for Defendants and Respondents Engstrom, Lipscomb & Lack, Jerry Ramsey, Walter Lack and Robert Wolfe.


Plaintiffs Muruganandan Prakashpalan and Navamalar Prakashpalan were clients of defendant law firm Engstrom, Lipscomb and Lack and the individual defendants Walter Lack, Jerry Ramsey, and Robert Wolfe, who are attorneys with the firm (collectively Engstrom). Plaintiffs appeal judgment entered after the trial court sustained Engstrom’s demurrer to their complaint based on Engstrom’s representation of plaintiffs. We affirm in part and reverse in part.


1. Factual Allegations of the Second Amended Complaint

Plaintiffs’ claims arise out of three separate representations undertaken by Engstrom: the Allegro Matter, the Malibu Construction Matter, and the Perlmutter Matter. The second amended complaint (SAC) alleged 13 causes of action: (1) professional negligence/legal malpractice/conflict of interest; (2) breach of fiduciary duty; (3) fraudulent concealment of conflict of interest; (4) fraudulent concealment of embezzlement; (5) intentional fraud; (6) constructive fraud; (7) unjust enrichment; (8) unfair business practices (Allegro Matter); (9) unfair business practices (Perlmutter Matter); (10) conversion; (11) civil conspiracy to commit intentional fraud; (12) civil conspiracy to commit conversion; and (13) accounting. Plaintiffs’ complaint alleged the following:

(a) The Allegro Matter

Plaintiffs’ home was severely damaged in the 1994 Northridge earthquake. From January 1995 to January 30, 1998, Engstrom and two other law firms represented plaintiffs and other property owners in a bad faith and property damage claim against their insurer, State Farm. The action was not a class action, and plaintiffs were specifically assigned to Engstrom. In or around November 1997, Engstrom entered into a settlement with State Farm and obtained over $100 million for 93 insured families. Plaintiffs allege that Engstrom received $245, 000, about one-third of plaintiffs’ settlement share, and distributed the remaining $500, 000 to plaintiffs. In February 2012, plaintiffs were able to randomly contact 17 of the plaintiffs in the Allegro Matter. Based on their discussions with the Allegro plaintiffs, it was clear to plaintiffs that Engstrom had instructed all plaintiffs in the Allegro Matter not to discuss the settlement funds with anyone. However, plaintiffs concluded, after conducting a mathematical analysis of the settlement and of the overall litigation, that there was over $22 million of settlement funds unaccounted for. Based upon this discrepancy, plaintiffs calculated that Engstrom had withheld funds from plaintiffs’ share of the settlement funds.

(b) The Malibu Construction Matter

From January 1995 through January 30, 1998, Engstrom represented plaintiffs in connection with the Malibu Construction Matter. In late 1994, plaintiffs purchased land in Malibu, California, a fact which Engstrom knew. In early 1995, due to a contractor’s negligence, the Malibu property sustained “hill cut failure.” Engstrom provided representation to plaintiffs in connection with the contractor’s negligence, plaintiffs’ insurance claim against its insurer, State Farm, and other construction matters. State Farm provided a defense to plaintiffs in connection with the hill cut failure; this defense was provided at the same time as the Allegro Matter was being litigated. As a result, Engstrom requested that plaintiffs permit Engstrom to review all of plaintiffs’ documents and discovery responses prior to submission to State Farm.

Engstrom requested that plaintiffs estimate the cost to repair the hill cut failure, including the cost of importing dirt. Plaintiffs had learned they could obtain free dirt from the Los Angeles County Public Works Department (Public Works), and Engstrom knew of plaintiffs’ plans to import dirt to repair the hill cut failure. Plaintiffs requested that Engstrom keep this information confidential.

During the Malibu Construction Matter, Engstrom provided legal advice regarding plaintiffs’ neighbors the Perlmutters in connection with a nuisance, and also assisted in getting a restraining order against Jacob Perlmutter, who allegedly hired thugs to harass plaintiff Navamalar Prakashpalan.

(c) The Perlmutter Matter

In January 2005, plaintiffs’ Malibu property sustained damages due to a landslide originating on the Perlmutters’ property. In 2006, plaintiffs learned the Perlmutters were involved in unpermitted construction activity and illegal construction that caused the landslide, including abandonment of their 25 feet deep septic pits. Plaintiffs filed a complaint against the Perlmutters for negligence arising from the landslide, and the Perlmutters filed a cross-complaint against plaintiffs alleging that plaintiffs’ Malibu construction was the cause of the landslide. The Perlmutters’ insurer hired the Law Office of Paul Wright to represent them in this matter.

In early 2009, allegedly after discovering their case had no merit, the Perlmutters retained Engstrom on a contingency basis as their additional attorneys. Although they knew the Perlmutter Matter was substantially related to the Malibu Construction Matter, Engstrom did not notify plaintiffs of the representation or obtain their consent, and Engstrom knew that the Perlmutters were claiming that plaintiffs’ slope repair was the cause of the landslide. Yet Engstrom failed to disclose the conflict of interest and during the litigation, Engstrom and their expert claimed that the 3, 800 cubic yards of dirt plaintiffs imported caused the landslide. Engstrom used attorneys who did not have direct communication with plaintiffs in the Malibu Construction Matter and Allegro Matter, all of which was a clever plan to conceal the conflict of interest from plaintiffs.

Sometime after the Perlmutters retained Engstrom, the Perlmutters’ insurance company hired the law firm of Gibbs, Giden, Locher, Turner & Senet (Gibbs) to join as additional attorneys to represent the Perlmutters in settling the Perlmutter Matter. During the Perlmutter Matter, the Perlmutters revealed that their unpermitted construction activities were performed by entities collectively known as “the McDermott contractors.” Plaintiffs amended their complaint to add the McDermott contractors as defendants, including McDermott Plumbing (represented by Skapik Law Group) and McDermott Pumping (represented by Walters, McClusky & Boehle).

After pretrial discovery, Gibbs wanted to settle the matter on behalf of the Perlmutters with plaintiffs, and the Perlmutters made a Code of Civil Procedure section 998 offer. Plaintiffs declined the offer. Gibbs requested continuance of the trial to settle with plaintiffs, and the court granted a continuance to permit mediation. At a mediation held December 3, 2010, defendant Wolfe revealed the damaging information that plaintiffs intended to import dirt from Public Works. The next day, plaintiffs realized the significance of Wolfe’s revelation to their case. Plaintiffs “caved in” and accepted the Code of Civil Procedure section 998 offer, although plaintiffs’ loss was over $4 million and the offer was $500, 000. When the McDermott contractor entities—who were motivated to settle because their negligence caused the landslide—learned of the settlement, plaintiffs were likewise forced to settle with the McDermott parties for $500, 000.

Plaintiffs allege they did not discover the conflict of interest until April 2011 while in court on the Perlmutter Matter. At that time, plaintiffs observed a familiar face in the courtroom gallery among the spectators, and recognized the individual as defendant attorney Ramsey. In early May, plaintiffs wrote to Engstrom regarding the conflict of interest, and on May 3, 2011, received a letter in response from Engstrom in which Engstrom denied any conflict of interest, stated that plaintiffs waived the conflict, any contact with plaintiffs’ adversaries was insignificant and minimal, and the two matters were not substantially related. Plaintiffs further allege that “[o]n May 16, 2011, [Engstrom] emailed [their] attorney threatening [them] with a debtor examination to effectuate a lien on PLAINTIFFS’ property and thereby [Engstrom] collected over $1.3 million.” Elsewhere in the SAC, plaintiffs allege the $1.3 million constituted the judgment against them in the Perlmutter Matter.

2. Procedural Background

On June 6, 2011, plaintiffs commenced this lawsuit, alleging six causes of action for professional negligence and malpractice; breach of fiduciary duty and conflict of interest; fraudulent concealment; constructive fraud, fiduciary fraud, intentional fraud and conspiracy to commit fraud; unjust enrichment; and unfair business practices under Business & Professions Code section 17500 (UCL). Plaintiffs filed a first amended complaint on January 17, 2012, alleging eight causes of action (the same six as the original complaint plus claims for conversion and civil conspiracy).

On April 12, 2012, the trial court overruled defendant’s demurrer to the first cause of action and sustained the demurrer as to the second, third, fourth, fifth, sixth, seventh, and eighth causes of action of the first amended complaint, with leave to amend. Plaintiffs filed their SAC on April 30, 2012.

Engstrom demurred to the SAC, arguing the alleged confidential information about the source of the dirt used in the Malibu Construction Matter was a matter of public record and therefore not confidential; Engstrom was entitled to dismissal of the Allegro Matter claims because it could not mount an adequate defense without breaching the attorney-client privilege with respect to the other Allegro Matter plaintiffs under Solin v. O’Melveny & Myers (2001) 89 Cal.App.4th 451 (Solin); plaintiffs did not plead fraud with sufficient particularity; plaintiffs could not seek restitution because their claims were made under an enforceable contract; plaintiffs failed to allege recoverable damages under the UCL; plaintiffs’ conversion claim failed to allege an identifiable sum of money; plaintiffs failed to allege all elements of a civil conspiracy; plaintiffs failed to state facts sufficient to state a claim for accounting; and certain of plaintiffs’ claims relating to the Allegro Matter (the second, fourth, seventh, eighth, tenth causes of action) were time-barred. Engstrom requested judicial notice of the grading permit plaintiffs obtained from the City of Malibu in 1998 connection with installation of a “manufactured fill slope” and the Permit issued to the County of Los Angeles for the purpose of entering the plaintiffs’ property to deposit fill material.

Engstrom also moved to strike certain portions of plaintiffs’ SAC that requested punitive damages and attorney fees and costs on the grounds that the SAC failed to allege malice, fraud or oppression and the cause of action for accounting did not permit the recovery of damages, and the UCL did not provide for attorney fees.

In opposition, [1] plaintiffs generally contended the Public Works documents were expired permits and had been obtained as a result of a privileged communication with plaintiffs. Further, plaintiffs argued the documents were not public records because Public Works does not provide information over the phone or over the counter unless a party is aware of the information and makes a request in writing. Plaintiffs further distinguished the case from Solin, supra, 89 Cal.App.4th 451, in which the clients intervened in a case to prevent disclosure of confidential information; here, the other parties in the Allegro Matter were coming forward and volunteering information, and thus the evidence was available. Further, the statute of limitations was not a bar to plaintiffs’ claims because Engstrom’s actions were committed in secret.

Plaintiffs also opposed the motion to strike, contending the fraud alleged was sufficient under Civil Code section 3294, pointing to Engstrom’s alleged conduct in representing adverse interests without disclosing same to plaintiffs and in disclosing confidential information, and by taking settlement funds to which they were not entitled.

In reply, Engstrom asserted that plaintiffs’ failure to plead facts sufficient to entitle them to equitable tolling of the statute of limitations under the discovery rule in the Allegro Matter because there was nothing preventing plaintiffs from discovering any alleged misconduct in the 15 years since the settlement of the Allegro Matter. Further, unless all the Allegro plaintiffs waived the attorney-client privilege, plaintiffs would not be able to demonstrate how the settlement monies were disbursed. With respect to the Public Works document, Engstrom contended plaintiffs shared this allegedly confidential information with a public entity long before Engstrom allegedly improperly informed their adversaries.

The court granted Engstrom’s request for judicial notice and granted plaintiffs’ request for judicial notice only as to the final approved plan from the City of Malibu.

The court sustained the demurrer without leave to amend. The court found that with respect to those claims based on the Allegro Matter (second, fourth, seventh, eighth, tenth, twelfth and thirteenth causes of action), the statute of limitations did not bar those claims even under the delayed discovery rule because plaintiffs alleged sufficient facts to show they did not discover their claim until November 2011.[2] However, plaintiffs’ claims based on the Allegro Matter settlement were barred under Solin, supra, 89 Cal.App.4th 451, which held that where a lawsuit is incapable of complete resolution without breaching the attorney-client privilege, the suit may not proceed, if a balancing of certain factors set forth in Solin and explained in Dietz v. Meisenheimer Herron (2009) 177 Cal.App.4th 771 is satisfied. Here, the trial court found the plaintiffs had failed to satisfy those factors because although some of the Allegro plaintiffs had come forward, Engstrom would be forced to reveal confidential information relating to the other Allegro plaintiffs in order to defend the action, and thus demurrer was sustained as to those claims on that basis. Further, plaintiffs’ claims that a portion of the Allegro Matter settlement proceeds were unaccounted for was entirely based on speculation.

With respect to claims based on the Perlmutter Matter (first, third, fifth, sixth, ninth, and eleventh causes of action), the trial court found that although Engstrom’s judicially noticed documents did not establish plaintiffs’ importation of fill dirt was a matter of public record, plaintiffs nonetheless failed to explain how they were damaged by this disclosure.

The court also addressed the specific merits of certain of plaintiffs’ claims, as more fully discussed below.

The trial court denied leave to amend because plaintiffs failed to show how they could correct the deficiencies in their complaint. In addition, because plaintiffs failed to plead any viable causes of action to support ...

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