O&C Creditors Group, LLC v. Stephens & Stephens XII, LLC

         [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.

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          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. )

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          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.)

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          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

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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).

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          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, ...