California Court of Appeals, First District, Fourth Division
O&C CREDITORS GROUP, LLC, et al., Cross-complainants and Appellants,
v.
STEPHENS & STEPHENS XII, LLC, et al., Cross-defendants and Respondents. Stephens & Stephens XII, LLC, et al., Plaintiffs, Cross-defendants and Appellants,
v.
O&C Creditors Group, LLC, et al., Defendants, Cross-complainants and Respondents. O&C Creditors Group, LLC, et al., Cross-complainants and Appellants,
v.
Akin Gump Strauss Hauer & Feld, LLP, et al., Cross-defendants and Respondents.
[Certified
for Partial Publication.][*]
As Modified 12/17/2019
[255
Cal.Rptr.3d 602] Trial Court: City & County of San
Francisco Superior Court, Trial Judge: Hon. Harold J. Kahn
(San Francisco City & County Super. Ct. No.
CGC-17-556475)
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COUNSEL
Danko
Meredith, Michael S. Danko, Los Angeles, Claire Y. Choo; Law
Office of Gary Simms, Gary L. Simms for Cross-complainants
and Appellants in No. A151789.
Lubin
Olson & Niewiadomski, Jonathan E. Sommer, Kyle A. Withers,
San Francisco, for Cross-defendants and Respondents Stephens
& Stephens XII, LLC, et al. in No. A151789.
Akin
Gump Strauss Hauer & Feld, LLP, Robert B. Humphreys, Rex S.
Heinke, Los Angeles, for Cross-defendants and Respondents
Fireman’s Fund et al. in No. A151789.
Lubin
Olson & Niewiadomski, Jonathan E. Sommer, Kyle A. Withers,
San Francisco, for Plaintiffs, Cross-defendants and
Appellants in No. A152002.
Danko
Meredith, Michael S. Danko, Los Angeles, Claire Y. Choo; Law
Office of Gary Simms, Gary L. Simms for Defendants,
Cross-complainants and Respondents in No. A152002.
Danko
Meredith, Michael S. Danko, Los Angeles, Claire Y. Choo; Law
Office of Gary Simms, Gary L. Simms for Cross-complainants
and Appellants in No. A152762.
Akin
Gump Strauss Hauer & Feld, LLP, Robert B. Humphreys, Rex S.
Heinke, Los Angeles, for Cross-defendants and Respondents in
No. A152762.
OPINION
BROWN,
J.
Page 553
These
consolidated appeals arise from an insurance coverage dispute
that resulted in a $5.8 million settlement in favor of the
insured. At the center of the dispute is the enforceability
of a lien for attorney’s fees filed by the insured’s former
attorney, who is now deceased. Prior to his death, the
attorney for the insured became subject to an involuntary
bankruptcy. The largest creditor of the bankruptcy estate,
also an attorney, purchased the attorney fee claim and
received all of the debtor-attorney’s client files, including
the insured’s [255 Cal.Rptr.3d 603] file. After the insured
sought declaratory relief, the attorney-creditor assigned his
interest in the fee claim to a newly formed corporate entity,
of which the attorney-creditor is the sole member.
In
these consolidated appeals and cross-appeals, the parties
dispute whether the trial court erred in (1) denying the
insured’s motion to disqualify the attorney-creditor from
representing the corporate entity, (2) granting a protective
discovery order regarding the insured’s client file, and (3)
granting an anti-SLAPP special motion to strike in favor of
the insurer and awarding attorney fees to the insurer as the
prevailing party. Finding no such errors, we affirm.
I. BACKGROUND
A. Insurance Coverage Dispute
Fireman’s
Fund Insurance Company (Fireman’s Fund) issued an insurance
policy covering property damage at an industrial warehouse
owned by Stephens & Stephens XII, LLC and its
affiliates[1] (collectively, Stephens or the
Stephens entities). (Stephens & Stephens XII, LLC v.
Fireman’s Fund Ins. Co. (2014) 231 Cal.App.4th 1131,
1134-1135, 180 Cal.Rptr.3d 683 (Stephens XII ).)
Three days after the policy became effective, Stephens
discovered that burglars stripped the property of all
electrical and conductive material. (Ibid. )
Stephens filed a claim with Fireman’s Fund for coverage. The
claim was not resolved, prompting Stephens to file an
insurance coverage suit. (Ibid. )
Page 554
B. Stephens Retains Counsel
Stephens retained attorney Terry O’Reilly and his firm
O’Reilly & Collins (O’Reilly) to represent them in the
lawsuit with Fireman’s Fund. The two-page retainer agreement
provided that O’Reilly would receive 40 percent of any
recovery obtained after trial, granted a first lien to assure
payment of fees, and provided: "In the event that there
is no money recovered, attorneys shall recover nothing for
their services." O’Reilly, however, did not provide
Stephens with a copy of the retainer agreement signed by
counsel.
a. O’Reilly is Defeated at Trial, Allegedly Abandons
the Case, and is Forced into Bankruptcy
The
insurance coverage lawsuit proceeded to trial. The law firm
of Akin Gump Strauss Hauer & Feld, LLP (Akin Gump)
represented Fireman’s Fund at all relevant times. The jury
rendered a verdict in favor of Stephens, but the trial court
entered judgment notwithstanding the verdict (JNOV), awarding
Stephens nothing. (Stephens XII, supra, 231 Cal.App.4th at
pp. 1139-1142, 180 Cal.Rptr.3d 683.) Thereafter, O’Reilly no
longer represented Stephens in the case. On October 25, 2012,
Michael Danko, an attorney and former O’Reilly partner, filed
a Chapter 7 (11 U.S.C. � 701 et seq.) involuntary bankruptcy
petition against O’Reilly. Danko was the largest creditor,
with a claim of more than $6 million against the bankruptcy
estate.
On
November 6, 2012, Credit Management Associates (CMA)—
an entity claiming to be the assignee of O’Reilly—
filed a notice of attorney lien in the trial court docket.
CMA asserted that it had a "lien on any recovery in the
[insurance coverage lawsuit]." CMA apparently used the
wrong zip code on the service copy for Akin Gump, however,
and the attorney lien was never received.
C. Appeal and Settlement
After
the O’Reilly firm ceased representing the Stephens entities,
they retained [255 Cal.Rptr.3d 604] Nina Shapirshteyn, a
former O’Reilly associate, to represent them in the insurance
coverage lawsuit. In November 2014, our colleagues in
Division One of this court reversed the JNOV in favor of
Fireman’s Fund. (Stephens XII, supra, 231
Cal.App.4th at pp. 1146-1148, 1151, 180 Cal.Rptr.3d 683.)
However, the court did not reinstate the jury verdict.
Instead, the court interpreted the jury verdict as a
conditional verdict, entitling the Stephens entities to
compensation only if they actually made repairs to the
insured warehouse. (Id. at p. 1143, 180 Cal.Rptr.3d 683.)
Based on that interpretation, this court remanded the case
for further proceedings. (Id. at p. 1151, 180 Cal.Rptr.3d
683.)
Page 555
In
December 2015, the Stephens entities and Fireman’s Fund
settled their dispute for $5.8 million.[2] The written
settlement agreement expressly determined the allocation of
the settlement proceeds— specifically, that the
proceeds would be paid solely to the Stephens entities and
Shapirshteyn. The Stephens entities represented during the
negotiations and in the agreement that no one else was
entitled to any portion of the settlement. The Stephens
entities further agreed to indemnify and hold Fireman’s Fund
harmless if anyone claimed that they were entitled to any of
the proceeds of the settlement.
D. Stephens and the Bankruptcy Trustee Agree to Hold
the Proceeds in Escrow
In
February 2016, Shapirshteyn provided a copy of the settlement
agreement to the trustee in the O’Reilly bankruptcy. The
trustee claimed that the estate was entitled to 40 percent of
the settlement, while Stephens contended that nothing was
owed to the estate. Shapirshteyn stated that she would
deposit 40 percent of the settlement funds with the
bankruptcy court and file an interpleader complaint. However,
the trustee instead directed Shapirshteyn to hold the 40
percent in her client trust account until the estate’s claim
was resolved. She agreed to do so.[3]
E. Danko Obtains Stephens’s Litigation File From the
Trustee
In June
2016, Stephens requested the trustee to return "all
client papers and property, including but not limited to all
emails and billing records," to Stephens under rule
3-700(D) of the Rules of Professional Conduct [4] (Rule
3-700(D)), which then required the return of all client
materials and property upon the termination of
representation. Despite several follow-up requests, the
trustee did not return the file to Stephens or acknowledge
that he possessed it.
In
August 2016, the trustee gave Danko full access to O’Reilly’s
electronic servers and physical documents, including
Stephens’s confidential client file, without notifying
Stephens. Danko then used "specific search
criteria" to identify "correspondence related to
the claim against Stephens and the underlying Fireman’s Fund
litigation," including "emails by O’Reilly [ ] to
outside counsel, internal [255 Cal.Rptr.3d 605] emails
discussing the case, emails with experts and
Page 556
consultants, as well as emails from the firm to and from
Stephens."[5] Danko "immediately set about
reviewing" those documents because they were "the
only source of evidence available" to him regarding the
value of the estate’s claim.
F. Danko Purchases the Attorney Fee Claim
In
August 2016, Stephens and the trustee reached an $800,000
settlement on the O’Reilly estate’s attorney fee claim. When
the trustee submitted the settlement for bankruptcy court
approval, he explained that the settlement was beneficial
because there was significant uncertainty as to whether the
estate could prevail on its claim for fees.
In
October 2016, Danko objected to settlement and offered to
purchase the claim for $850,000. In November 2016, counsel
for Stephens notified counsel for Danko and the trustee that
Stephens would void the retainer agreement as soon as the
bankruptcy stay was no longer applicable "and thereby
void any attorney lien on settlement proceeds from the
Fireman’s Fund litigation." On December 2, 2016, Danko
purchased the bankruptcy estate’s interest in the Fireman’s
Fund settlement proceeds on an "as-is" basis.
G. State Court Litigation Commences
On
December 22, 2016, based on O’Reilly’s failure to sign the
retainer agreement, Stephens sent Danko’s counsel a letter
voiding the retainer agreement in its entirety, including
that portion of the agreement that provided for an attorney
lien. Stephens then filed a declaratory relief action against
Danko to determine whether Stephens owed money to Danko as
the assignee of O’Reilly’s fee claim.
In
February 2017, Danko formed a limited liability company, O&C
Creditors Group, LLC (O&C Creditors), with himself as the
sole member, manager, organizer, and agent for service of
process. Danko purported to assign his claims against
Stephens to the limited liability company. Stephens then
filed a first amended complaint naming both Danko and O&C
Creditors as defendants in the declaratory relief action. On
behalf of O&C Creditors, Danko filed a cross-complaint for
$2.32 million against Stephens (for unpaid legal fees) and
against Akin Gump and Fireman’s Fund (for settling the
insurance coverage lawsuit in derogation of the alleged
attorney lien).
Page 557
In
their answer to the cross-complaint, the Stephens entities
raised an affirmative defense for offset based on their
damages from O’Reilly’s alleged malpractice in the Fireman’s
Fund litigation. That defense was based solely on O’Reilly’s
refusal in open court to introduce evidence of a certain
category of damages when given the opportunity to do so by
the trial court.
H. Discovery Begins
In
early March 2017, Stephens served subpoenas on the trustee
and his attorneys seeking various documents, including the
trustee’s communications with Danko. The subpoenas did not
seek the production of Stephens’s client file. Indeed, at
that time, Stephens believed that the trustee did not have
the client file based on the trustee’s failure to return that
file to Stephens.
In
late March 2017, pursuant to a request for production, Danko
produced [255 Cal.Rptr.3d 606] roughly 170,000 pages of
Stephens’s privileged and confidential documents, including
Stephens’s privileged communications with O’Reilly. Prior to
this production, neither Stephens nor their attorneys knew
that Danko had any of Stephens’s privileged and confidential
documents.
Danko
later responded to written discovery based on his review of
Stephens’s client file. For example, Danko denied a request
for admission that O’Reilly Collins failed to sign the
retainer agreement because, according to Danko,
"O’Reilly Collins sent a signed letter, confirming the
terms of the retainer agreement ... to Stephens."
In
April 2017, the trustee served objections to the subpoenas,
including an objection based on attorney-client privilege,
and the trustee produced less than 200 unprivileged
documents. Eleven days later, in response to inquiries
regarding the location of the client file, the trustee
informed Stephens that he had produced Stephens’s client file
to the deposition officer. Stephens demanded that the trustee
stop the production of privileged and confidential documents
and, if the production had already occurred, Stephens
demanded that the deposition officer destroy the production
or return it to the trustee unopened.
I. Trial Court Issues Temporary Restraining
Order
Upon
discovering that Danko possessed their privileged
communications and confidential client file, the Stephens
entities immediately demanded that Danko return them and,
when he refused, the Stephens entities obtained a temporary
restraining order preventing Danko from "reviewing,
...