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Klotz v. Milbank, Tweed, Hadley & McCloy

California Court of Appeals, Second District, First Division

June 30, 2015

ADAM M. KLOTZ et al., Plaintiffs and Respondents,
MILBANK, TWEED, HADLEY & McCLOY et al., Defendants and Appellants.


APPEAL from an order of the Superior Court of Los Angeles County No. BC517937, Joseph R. Kalin, Judge.

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Caldwell Leslie & Proctor, Christopher G. Caldwell, Joan Mack and Julia J. Bredrup for Defendants and Appellants.

Fox Rothschild and Michael Eidel for Plaintiffs and Respondents.



Defendants Milbank, Tweed, Hadley & McCloy (Milbank) and Deborah Festa (Festa) appeal the trial court’s order overruling their demurrer and denying their motion to strike the first amended complaint under Civil Code section 1714.10.[1] Plaintiffs SageMill LLC (SageMill), Adam M. Klotz (Klotz) and Richard Spitz (Spitz) alleged that a former business associate of theirs, Stephen Bruce (Bruce), who was a client of defendants, conspired with defendants to unlawfully withdraw from SageMill and to usurp a nascent business opportunity of SageMill. Plaintiffs alleged claims for breach of fiduciary duty, conspiracy, and legal malpractice, and defendants moved to strike the entire complaint as to the individual plaintiffs Klotz and Spitz because defendants had no independent legal duty to plaintiffs nor did they act for their personal financial gain. The trial court denied the motion. We reverse the trial court’s order on plaintiffs’ second cause of action for conspiracy as to the individual plaintiffs Klotz and Spitz, finding that any advice defendants gave Bruce arose from an attempt to contest or compromise a claim or dispute, and thus was within the ambit of section 1714.10, and affirm the trial court’s order on plaintiffs’ other claims for breach of fiduciary duty and legal malpractice.


1. Plaintiffs’ Initial Complaint

Plaintiffs’ complaint filed August 12, 2013, alleged claims for breach of fiduciary duty, conspiracy in breach of fiduciary duty, and legal malpractice

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against Festa and Milbank. Plaintiffs sought compensatory and punitive damages. The complaint alleged that, in or around December 2009, Klotz, Spitz, and Stephen Bruce commenced working together in a partnership they named “SageMill.” The work of the partnership led to the formation of a limited liability company known as SageMill Capital Advisors LLC (SageMill), whose certificate of formation was filed with the Delaware Secretary of State on August 15, 2011. Klotz, Spitz, and Bruce were partners in the partnership until formation of SageMill, and are and have since formation been the sole managers of SageMill.[2]

In founding SageMill, Klotz, Spitz and Bruce sought to capitalize on their trading portfolio management, structured finance, and capital markets experience, and utilize their skills to benefit SageMill’s clients. SageMill’s primary focus was to craft tailored, short-term investment strategies, not available from leading banks or asset managers, for select investors holding large positions in cash and near-cash securities, and to achieve returns surpassing those of U.S. Treasuries without taking risk exceeding that of AAA-type corporate debt. SageMill also envisioned it would function as an investment advisor bye drawing upon the collective expertise of Klotz, Spitz and Bruce and employing rigorous methodologies for identifying, selecting, and monitoring opportunities suitable for delivering carefully and conservatively targeted returns, as well as for crafting optimized blends of these opportunities based upon characteristics such as volatility and correlation.

SageMill is governed by an operating agreement that was signed on July 19, 2012, and, by its terms, was effective retroactively to January 1, 2012. Among other provisions, the operating agreement provides that a member may not withdraw without the consent of SageMill’s managers, and prohibits Klotz, Spitz and Bruce from engaging in the business of rendering services to anyone that owns or operates a competitive business as defined in the operating agreement.

Sometime in or about late 2010, when Festa was with the law firm of O’Melveny & Meyers, she commenced representation of SageMill. While at the O’Melveny Firm, Festa represented Bruce individually prior to undertaking the representation of SageMill. Beginning in or about late 2010, Festa and her O’Melveny partners also consulted with Klotz, Spitz, and Bruce on multiple occasions, both via email and in individual and group phone calls, regarding SageMill’s business. These communications contained statements by Festa indicating that Sage Mill Capital Advisors was her client, and reflected that they contained privileged attorney-client communications.

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With respect to the nature of the representation, Festa sent a February 28, 2011 email to Bruce and Klotz in which Festa specifically referred to “our client/counsel arrangement” and stated: “‘As we continue to make progress on the structuring front, we should think about formalizing our client/counsel arrangement. Has SageMill been formed yet? If so, please send me copies of the formation documents (certificate of incorporation; bylaws) and general/organizational resolutions. If not, we might consider starting the formation process, and in the interim moving forward under our [O’Melveny & Myers’s] existing engagement letter with [Bruce].’”

In response to this email, Klotz and Festa discussed that the SageMill partners would not require O’Melveny’s assistance with the formation or operating agreement of SageMill. Klotz and Festa also discussed that O’Melveny would continue to provide advice to SageMill, and defer billing until SageMill commenced generating revenue, as opposed to legal fees being funded from capital contributions. Following this conversation, Festa never sent a formal written engagement agreement, and instead continued to represent the SageMill Partnership (and later SageMill) without one. Festa also never sent any conflict letter regarding her representation of multiple parties, namely, the three partners.

On January 17, 2012, Festa sent Klotz and Spitz, and presumably Bruce, an email announcing that she was leaving O’Melveny and joining the Milbank Firm as a partner. Festa continued her representation of SageMill at the Milbank Firm.

In mid-2012, SageMill began to develop a new business opportunity, a venture with Invest AD, an entity owned by the Abu Dhabi government. SageMill believed the venture would generate $110 million of EBITDA[3] by its third year. Sometime in July 2012, Bruce sent the SageMill operating agreement to Festa for the purpose of seeking legal advice about it. However, Bruce’s consultation with Festa was not on behalf of SageMill, but rather on behalf of himself personally, and Festa provided legal advice to Bruce that was adverse to SageMill, Klotz, and Spitz. Festa did not disclose to Klotz or Spitz that she had ...

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