>>>>>>>>>>>>>>>
Much earlier:
Superior Court, Los Angeles County, California.
Los Angeles County
CORONA CORPORATION; Reid Breitman; Dlane Breiman; George A. Hormel II; robert
G. Rifkin, DDS individualy, as trustee of the Robert G. Rifkin Profit Sharing
Plan and Dr. Robert Rifkin Sep and as guardian ad litem for Samantha rifkin;
Susan Rifkin; Laurence Rifkin, DDS individually and as trustee of the Laurence
Rifkin, DDS IRA Account; Samsu, Inc.; Jerry Goldstine, Plaintiff,
v.
GLOBAL CAPITAL PARTNERS, INC., Deloitte Touche Tohmatsu LLP formerly known as
Deloitte & Touche, LLP; spicer Jeffries & Co.; Martin A. sumichrast; Michael
Sumichrast; Kevind D. McNeil; Lawrence Chimerine; Frank Devine; Pauf. Mccurdy;
Jay R. Schifferli; Belle Holdings, Inc.; American Stock Transfer & Trust
Company; First Union National Bank; Kelley Drye & Warren LLP; Does 1-1000
inclusive, Defendants.
Case No. BC 271898.
January 20, 2004.
Reply Memorandum of Points and Authorities in Support of Demurrer of Kelley
Drye & Warren LLP to Third Amended Complaint
Assigned For All Purposes to Dept. 34-Hon. Paul Gutman.
Defendant Kelley Drye & Warren LLP ("Kelley Drye") hereby submits its Reply Memorandum of Points and Authorities in Support of its Demurrer to Plaintiffs' Third Amended Complaint ("TAC"), as follows:
I. INTRODUCTION
Desperate to save its Nineteenth Cause of Action for Negligence, Twenty-Third Cause of Action for Conversion, and Twenty-Fourth Cause of Action for Violation of Commercial Code Section 8407, Plaintiff Corona Corporation ("Corona"): (1) misstates the Court's ruling in its Order dated October 30, 2003 (the "Order"); (2) ignores the facts contained in the prior versions of the Complaint; and (3) obscures its failure to allege the essential elements of its purported causes of action. Nonetheless, Corona cannot state a cause of action against Kelley Drye, and Kelley Drye is entitled to an Order sustaining its Demurrer without leave to amend.
Corona was not given leave to amend the Nineteenth Cause of Action for Negligence, and yet chose to do so. This, of course, vests Kelley Drye with the right to challenge the allegations of the cause of action, despite Corona's attempt to characterize those amendments as "house keeping" [sic] or "correct [[ions][ofl inadvertent misstatements of facts or erroneous allegations of terms]." [FN1] As is discussed more fully below, the Nineteenth Cause of Action fails to state a cause of action against Kelley Drye.
FN1. Of course, Corona's claim in this regard is disingenuous. By way of the new allegations in the Third Amended Complaint, Corona attempts to hold Kelley Drye liable for the acts of two of GCAP's directors under a theory of vicarious liability, despite the fact that Kelley Drye is not named in any of the causes of action against the directors. This is more than "housekeeping."
The Twenty-Third Cause of Action for Conversion asserts, for the first time, "facts" which contradict the factual allegations present in every prior version of Plaintiffs' Complaint. Because the allegations of intent to convert the stock certificate are a sham, the Court must disregard them. Moreover, Corona cannot allege that Kelley Drye assumed ownership of or applied the stock certificate to its own use. This is fatal to the conversion cause of action.
The Twenty-Fourth Cause of Action for Violation of Commercial Code Section 8407 cannot be asserted against Kelley Drye because Kelley Drye is not subject to the requirements of that section. Kelley Drye was not GCAP's stock transfer agent, and was not acting GCAP's agent for registration. Therefore, Kelley Drye cannot be liable under Section 8407.
II. DISCUSSION
A. THE NINETEENTH CAUSE OF ACTION FOR NEGLIGENCE FAILS AS A MATTER OF LAW.
1. Corona Has Either Misstated Or Misconstrued The Court's Order Dated October 30, 2003.
Corona's Opposition argues that the Court previously rejected Kelley Drye's argument that no attorney-client relationship existed between Kelley Drye and Corona Corporation. See Opposition, page 8, lines 13-15. That argument is a clear misstatement of the Court's Order. Rather, the Court previously denied Kelley Drye's challenge to the negligence cause of action because the prior Motion for Judgment on the Pleadings did not address the theory that Kelley Drye had lost or misplaced the stock certificate. See Order, page 3, lines 9- 13.
By amending the cause of action (albeit without leave to do so), Corona has opened itself to a further challenge to the allegations contained therein. Kelley Drye's Demurrer properly challenges the three theories upon which the TAC is based, including the theory that Kelley Drye lost or misplaced the stock certificates.
2. Corona Has Failed To Allege The Essential Elements Of A Cause Of Action For Negligence Aeainst Kelley Drye.
Corona's claim of negligence is premised upon three theories: (1) that Kelley Drye committed professional negligence (see TAC, 206); (2) that Kelley Drye breached a duty to issue an opinion letter in favor of Corona with respect to removal of a restrictive legend on the GCAP stock certificate (see TAC, 207); and (3) that Kelley Drye lost or misplaced the original stock certificate (see TAC, 205). See also Order, page 3, lines 2-5. Corona cannot state a cause of action under any of these theories, and therefore, the Demurrer should be sustained without leave to amend.
a. Corona's Allegations Concerning Professional Negligence Or Breach Of Fiduciary Duty Fail To State A Cause Of Action For Negligence.
In ruling on the motion for judgment on the pleadings as to the Breach of Fiduciary Duty Cause of Action, the Court found that "[t]here is, however, no fiduciary duty which requires a law firm to issue a legal opinion which the firm believes is false and/or unsupported by the law or the facts." See Order, page 3, line 28 - page 4, line 2. As set forth in the moving papers, this ruling bars Corona's professional negligence claim against Kelley Drye.
The Negligence Cause of Action also is deficient because Corona has failed to allege any facts which would give rise to any contractual relationship or the existence of an attorney-client relationship between Kelley Drye and Corona. "Except for those situations where an attorney is appointed by the court, the attorney-client relationship is created by some form of contract, express or implied, formal or informal." Strasbourger Pearson Tulcin Wolff, Inc. v. Wiz Technology, Inc. (1999) 69 Cal.App.4h 1399, 1404. Corona vehemently argues that the Strasbourger case does not apply. However, the case is directly on point because it involved the analysis of the factors considered by courts in assessing whether an attorney-client relationship exists. In Strasbourger, the opposing counsel was attempting to disqualify counsel based upon an alleged existence of an implied attorney-client relationship between opposing counsel and moving counsel's client. Therefore, this Court should consider the authorities cited in the moving papers as they are not only instructive, but clearly pertinent to the issue before this Court.
Here, the facts are undisputed. Corona expressly acknowledges that Kelley Drye was general counsel for GCAP. TAC, 50(a)(i). Therefore, Corona cannot in good faith allege that Kelley Drye was Corona's counsel. Moreover, neither an express nor formal contract is alleged as the basis for the alleged attorney-client relationship between Kelley Drye and Corona. The TAC does not allege that Corona hired or retained Kelley Drye, paid Kelley Drye for any services, or sought Kelley Drye's legal advice.
In its Opposition, Corona argues that an attorney-client relationship may arise from conduct. See, e.g., Lister v. State Bar (1990) 51 Cal.3d 1117 (where the Court found there was an attorney-client relationship where the attorney drafted the complaint and took possession of the complainant's files but then refused to file the complaint before the expiration of the statute of limitations because the complainant failed to pay him for his services); Streit v. Covington & Crowe (2000) 82 Cal.App.4th 441 (where the Court found an attorney-client relationship and ensuing duties existed when a law firm appeared in the place of plaintiff's retained counsel to represent her at a hearing of a motion for summary judgment). However, in the cases cited by Corona, there were facts alleged concerning a good faith belief that a relationship existed between counsel and the putative client. Here, the TAC alleges no facts which conceivably could give rise to a good faith belief that an attorney-client relationship existed between Corona and Kelley Drye.
None of Corona's authorities support the allegations that the corporate counsel for the company in which Corona owned stock was also Corona's counsel merely because corporate counsel may have prepared SEC filings for the shareholder relative to its holdings in the corporation. Despite six attempts to plead its causes of action, Corona has failed to allege any facts giving rise to a good faith belief that Kelley Drye ever acted as its counsel. Corona does not allege any exchange of confidential information, any legal advice rendered by Kelley Drye [FN2], or any confirmation or acknowledgment by Kelley Drye that it was acting as Corona's counsel. At most, the TAC alleges that Corona believed that Kelley Drye was its attorneys because Kelley Drye prepared securities filings for Corona. However, the mere fact that Kelley Drye prepared securities filings for Corona in connection with the stock transaction Corona entered into with Kelley Drye's client - even if true - does not provide a basis for Corona's allegation that it had a "reasonable perception" that Kelley Drye was its counsel. "The state of mind of one claiming he was an attorney's client, unless reasonably induced by representations or conduct of the attorney, is not sufficient to create an attorney-client relationship; such state of mind cannot establish it unilaterally." Fox v. Pollack, (1986) 181 Cal.App.3d 954, 955.
FN2. Corona does make the conclusory allegation in Paragraph 50(a)(l) that Kelley Drye advised Corona, but provides no factual support therefore. This cannot form the basis of the finding of an implied attorney-client relationship.
Because the pleading is insufficient to give rise to an inference that an attorney-client relationship existed between Kelley Drye and Corona, Corona cannot establish that Kelley Drye owed Corona any duty. Without pleading duty, Corona has failed to state a negligence cause of action based upon.an alleged attorney-client relationship or the breach of a fiduciary duty.
b. Corona Cannot Establish The Essential Element Of Damages Resulting From Any Alleged Negligence.
Finally, aside from Corona's failure to adequately allege Kelley Drye owed it a duty of any kind, Corona completely skirts the issue regarding lack of damages alleged in the TAC. Corona correctly recites the requisite elements of negligence, and argues that injury proximately caused by a breach of a legal duty and damages resulting from the breach are necessary at the pleading stages. However, in response to the argument that the TAC fails to allege damages that were proximately caused by Kelley Drye, Corona asserts that "this argument flies in the face of the allegations in the TAC, since other Causes of Action show that the loss may have been deliberate." Opposition at page 11, lines 3-4. This does not satisfy Corona's burden. The alleged loss or misplacement of the stock certificate did not result in damages; Corona could easily have requested reissuance of the stock certificate. Without any substantive opposition that addresses the pleading deficiency, this Court should sustain the demurrer without leave to amend as it is clear that this particular defect cannot be cured by amendment.
B. THE CONVERSION CAUSE OF ACTION FAILS BECAUSE THE AUTHORITIES RELIED UPON BY CORONA ESTABLISH THAT KELLEY DRYE CANNOT BE LIABLE FOR CONVERSION, AND THE ALLEGATIONS OF INTENT ARE SHAM ALLEGATIONS.
In opposing the Demurrer to the Twenty-Third Cause of Action for Conversion, Corona cites Igauye v. Howard (1952) 114 Cal.App.2d 122, 126, which states that conversion requires a showing of "an assumption of control or ownership over the property, or that the alleged converter has applied the property to his own use." Corona cannot make a showing that Kelley Drye asserted ownership over the stock certificate. [FN3] The stock certificate was in Corona's name, and could not have been negotiated by Kelley Drye. Kelley Drye could not have assumed any ownership of the stock certificate. Similarly, Kelley Drye could not have applied the stock certificate to its own use. There is nothing Kelley Drye could have done to reap the benefits of any assertion of control or ownership over the stock certificate. Simply stated, Corona cannot allege facts which would impose upon Kelley Drye any liability for conversion.
FN3. Despite Corona's allegation that Kelley Drye lost or misplaced the original stock certificate, if this case continues the evidence will establish that the original stock certificate was never even sent to Kelley Drye; it was always in the possession of the stock transfer agent.
Moreover, the allegations of Kelley Drye's intent to convert the stock certificate are sham allegations that are inconsistent with the allegations of the prior versions of the Complaint as well as other portions of the TAC. The Court has discretion to refuse to allow an amendment that omits or contradicts harmful facts in an earlier pleading. Amid v. Hawthorne Comm. Med. Group (1989) 212 Cal.App.3d 1383, 1390. Prior versions of the complaint allege only that Kelley Drye "lost or misplaced" the stock certificates. The new allegations hastily inserted in the conversion cause of action of the TAC are inconsistent with other allegations of the TAC. Throughout the TAC, Corona alleges that Kelley Drye "lost or misplaced" the stock certificates. See TAC, 50(b)(i), 51(b), 55(c), 204, 205, and 207. Nonetheless, the conversion cause of action (for which leave to amend was granted) alleges that Kelley Drye conspired with other defendants to deprive Corona of its ownership of the stock certificates. Because the loss or misplacement of the stock certificates z 16 as repeated throughout the other causes of action - is inconsistent with an intentional exercise of dominion over a chattel which seriously interferes with the right of another to control it, (see Ananda Church of Self Realization v. Massachusetts Bay Ins. Co. (2002) 95 Cal.App.4th 1273, 1281), the Court should refuse to consider the new allegations.
Corona cites Rader Co. v. Stone (1986) 178 Cal.App.3d 10, 29, for the proposition that a party may allege inconsistent theories so long as the facts are consistent. Here, the facts are not consistent. Kelley Drye's alleged loss or misplacement of the stock certificate is factually inconsistent with an intent to assert ownership over the stock certificate. Therefore, the sham allegations of the TAC should be disregarded.
C. CORONA CANNOT STATE A CAUSE OF ACTION UNDER COMMERCIAL CODE SECTION 8407, AND THE OPPOSITION DOES NOT ADDRESS THE DEMURRER OR THE COURT'S FINDING THAT KELLEY DRYE WAS NOT THE TRANSFER AGENT.
Commercial Code Section 8407 does not apply to Kelley Drye. The Court previously ruled that "this cause of action may only be brought against the authenticating trustee, transfer agent, registrar or other agent for an issuer." See Order, page 6, lines 7-9 (emphasis added).
In opposition to the demurrer, Corona argues that Kelley Drye was the agent of GCAP because Kelley Drye was GCAP's attorney. Corona apparently believes, without recitation to any authority, that an attorney is also an agent with respect to the stock transfer. The TAC contains no such facts, nor can Corona allege any such facts. The TAC makes clear that American Stock Transfer was the transfer agent.
In desperation, Corona argues that because Kelley Drye took possession of the stock certificate (a false assumption that Kelley Drye must accept as true at the demurrer stage), Kelley Drye is subject to liability under Commercial Code Section 8407. What Corona overlooks is that the statute says no such thing. Possession of a stock certificate alone does not impose liability under the statute. Because the functions of GCAP's stock transfer agent were being performed by American Stock Transfer, Corona cannot in good faith allege that Kelley Drye was acting as a stock transfer agent. Corona cites not one case imposing the duties of Commercial Code Section 8407 upon corporate counsel, much less in a situation where a separate transfer agent is involved. Accordingly, this Court should sustain the demurrer to this cause of action without leave to amend.
III. CONCLUSION
The meritless arguments advanced by Corona's Opposition notwithstanding, the TAC fails to plead facts sufficient to constitute any cause of action against Kelley Drye. Accordingly, Kelley Drye respectfully requests that the Court sustain without leave to amend the Demurrer to the Nineteenth, Twenty-Third and Twenty-Fourth Causes of Action in the TAC.
END OF DOCUMENT
+++++++++++++
Superior Court, Los Angeles County, California.
Los Angeles County
CORONA CORPORATION; Reid Breitman; Diane Breitman; George A. Hormel II; Robert
G. Rifkin, DDS individually, as trustee of the Robert G. Rifkin Profit Sharing
Plan and Dr. Robert Rifkin Sep and as guardian ad litem for Samantha Rifkin;
Susan Rifkin; Laurence Rifkin, DDS individually and as trustee of the Laurence
Rifkin, DDS Ira Account; Samsu, Inc.; Jerry Goldstine, Plaintiffs,
v.
GLOBAL CAPITAL PARTNERS, INC.; Deloitte Touche Tohmatsu LLP; Spicer Jeffries &
Co; Martin A. Sumichrast; Michael Sumichrast; Kevin D. McNeil; Lawrence
Chimerine; Frank Devine; Paul F. McCurdy; Jay R. Schifferli; Belle Holdings,
Inc.; American Stock Transfer & Trust Company; First Union National Bank;
Kelley Drye & Warren LLP; Does 1-1000 inclusive (including Deloitte & Touche,
LLP as Doe 1 and D & T Partnership LLP as Doe 2), Defendants.
Case No. BC271898.
December 30, 2003.
Memorandum of Points And Authorities In Support of Outside Directors' Motion to
Strike Allegations In Plaintiffs' Third Amended Complaint And For Sanctions
Assigned for all purposes to the Honorable Paul Gutman, Department 34.
TABLE OF CONTENTS
I. INTRODUCTION ... 1
II. STATEMENT OF FACTS RELEVANT TO THIS MOTION ... 3
A. The Court Denies Plaintiffs Leave to Amend Their Complaint to Add Allegations Changing Their Theory of Liability ... 3
B. The Court Grants Plaintiff Corona Corporation Leave to Amend Two of Its Claims Against Kelley Drye ... 4
C. Plaintiffs' Third Amended Complaint Includes New Allegations Against the Outside Directors, Which The Court Has Already Ruled May Not Be Asserted ... 5
III. THE NEW ALLEGATIONS IN PLAINTIFFS' THIRD AMENDED COMPLAINT ARE A BLATANT VIOLATION OF THIS COURT'S EXPRESS ORDERS AND SHOULD BE STRICKEN ... 7
IV. PLAINTIFFS SHOULD BE SANCTIONED FOR FILING THEIR THIRD AMENDED COMPLAINT ... 9
V. CONCLUSION ... 10
I. INTRODUCTION
Defendants Lawrence Chimerine, Frank Devine, Paul McCurdy, Jay Schifferli and Michael Sumichrast, the former "Outside Directors" of defendant Global Capital Partners, Inc. ("GCAP"), move for an order striking allegations in plaintiffs' Third Amended Complaint ("TAC"), and sanctioning plaintiffs for their willful violation of two Court Orders that refused to allow plaintiffs to make the amendments that they have now sneaked into their TAC.
The need for this motion arises from a Motion for Judgment on the Pleadings filed by another defendant, Kelley, Drye & Warren. Kelley Drye's Motion for Judgment on the Pleadings challenged six causes of action in plaintiffs' Second Amended Complaint. On October 30, 2003, this Court granted in part Kelley Drye's motion and allowed plaintiff Corona Corporation ("Corona") leave to amend only two causes of action, which alleged that Kelley Drye wrongfully refused to remove a restrictive legend on Corona's stock certificate and later misplaced or lost that certificate. The Court did not grant leave to amend the other four causes of action that were the subject of Kelley Drye's motion.
Those two claims against Kelley Drye concerned Corona's stock certificate and had nothing to do with the Outside Directors, who were not even named in those causes of action. Yet plaintiffs vastly exceeded the Court's ruling on Kelley Drye's motion by filing their TAC with entirely new factual allegations and claims against GCAP, its management and the Outside Directors. The new allegations completely change plaintiffs' theory of liability against these defendants. Nothing in the Court's October 30, 2003, Order permitted plaintiffs to make such sweeping changes to their complaint, and their unilateral granting to themselves leave to amend threatens to cause additional unnecessary delay and wasted discovery; indeed, the filing of the TAC has already forced this Court to vacate the longstanding April 19, 2004, trial date.
This is not the first time plaintiffs attempted to plead the claims in the TAC. Last June 2003, plaintiffs sought leave to file a very similar "Proposed Revised Third Amended Complaint." (See July 21, 2003, Order). This Court denied plaintiffs leave to file their "Proposed Revised Third Amended Complaint," specifically finding that all defendants would suffer substantial prejudice if plaintiffs were allowed to abandon their original theory of liability at such a late date. (Id. at 3). Thus, plaintiffs are in direct contravention of two orders of this Court.
Like their failed "Proposed Revised Third Amended Complaint," plaintiffs' TAC omits the references to their claim that GCAP misrepresented its ownership interest in its indirect European subsidiary WMP Bank. Also like their "Proposed Revised Third Amended Complaint," plaintiffs' TAC instead alleges that GCAP concealed a "stockkiting" scheme at WMP Bank. More egregious still, plaintiffs' TAC contains entirely new allegations that plaintiffs never raised before. All of these new allegations relate to events that allegedly occurred in Austria more than three years ago and will, if allowed, require months of new discovery to investigate.
The only appropriate relief for plaintiffs' deliberate disregard of the Court's October 30, 2003, and July 21, 2003, Orders is to strike all of the new allegations in plaintiffs' TAC that do not directly relate to Corona's two claims against Kelley Drye for which leave was granted. The Court should also sanction plaintiffs $1,500.00, for the costs associated with this motion.
II. STATEMENT OF FACTS RELEVANT TO THIS MOTION
A. The Court Denies Plaintiffs Leave to Amend Their Complaint to Add Allegations Changing Their Theory of Liability.
Plaintiffs commenced this action on April 12, 2002. (Request for Judicial Notice ("RFJN") at Exh. 1). Plaintiffs amended their complaint twice, first in December 2002, before the Outside Directors' demurrer to the original complaint could be heard, and again on March 27, 2003, after this Court sustained various demurrers to the First Amended Complaint. (Id. at Exhs. 1 & 2). Their chronic vagueness aside, all three complaints alleged, inter alia, that GCAP defrauded plaintiffs by misrepresenting that it held a 51% ownership interest in its indirect European subsidiary WMP Bank, but it really held only a 23% interest either because WMP Bank's assets had been "hypothecated" or because WMP Bank had surreptitiously transferred 23% of the bank's stock in January 2000. (See, e.g., id. at Exh. 2 at 11-13, 18).
In June 2003, after a full year of discovery and multiple motions and demurrers, plaintiffs sought leave to file their "Proposed Revised Third Amended Complaint." (RFJN at Exh. 3). In the declaration accompanying their motion for leave to amend, plaintiffs explained that through an investigation they had recently completed in Austria they determined that their "hypothecation" theory of liability was erroneous and sought permission to state an entirely new theory of liability: that GCAP concealed the fact that WMP Bank was involved in a "stock-kiting" or "Ponzi-scheme" in which it traded stock of various "related" entities and falsely reported income derived from the "float." (Id. at Exh. 4). Numerous defendants opposed plaintiffs' motion arguing that they would be severely prejudiced if plaintiffs were allowed to abandon their original allegations in favor of a new theory of liability 15 months after the case began. On July 21, 2003, the Court issued an Order denying plaintiffs' motion for leave to file their "Proposed Revised Third Amended Complaint." (Id. at Exh. 5).
In denying plaintiffs leave to amend, this Court ruled that many of the new allegations "directly contradict[ ] plaintiffs' earlier pleadings." (RFJN at Exh. 5 at 2). "For example, whereas the SAC and its predecessors allege that GCAP misrepresented that it owned 51% of WMP Bank, the proposed revised Third Amended Complaint alleges affirmatively that Eastbrokers actually owned 51% of WMP...." (Id. (Italics by Court)). Recognizing that "hundreds of hours" spent on discovery would be wasted if plaintiffs were given leave to start over with a new theory of liability, the Court denied plaintiffs' motion, holding:
A review of the defendants' opposition to this motion clearly indicates and the court is persuaded that all of the defendants would suffer prejudice by increased costs of trial preparation and incalculable added time and expense by reason of newly created and required additional burdens of discovery.
(Id. at 3).
Plaintiffs challenged the Court's order denying them leave to amend by filing a Petition for Writ of Mandate with the Court of Appeal. (See RFJN at Exh. 6). On September 18, 2003, the Court of Appeal denied the Petition. (Id.).
Defendants relied on the clear guidance from this Court (and the Court of Appeal) confirmed in written Orders and continued to conduct discovery as to the issues presented by the Second Amended Complaint. For example, the Outside Directors propounded Special Interrogatories, Requests for Admission, Document Demands and Form Interrogatories to each of the 13 plaintiffs in October 2003, focusing on the allegations in the Second Amended Complaint.
B. The Court Grants Plaintiff Corona Corporation Leave to Amend Two of Its Claims Against Kelley Drye.
While discovery was well underway, on September 26, 2003, defendant Kelley Drye filed a Motion for Judgment on the Pleadings as to the six causes of action in plaintiffs' Second Amended Complaint pled against that law firm defendant. (RFJN at Exh. 7). None of those causes of action were pled against the Outside Directors, nor were they even remotely related to the Outside Directors, who remain in the case in only one cause of action for allegedly concealing GCAP's ownership interest in WMP. (See id. at Exh. 2). The six causes of action against Kelley Drye generally alleged that Corona owned a stock certificate bearing a legend that restricted its sale and that, at a time when Corona was entitled to removal of the legend, Kelley Drye wrongfully issued an opinion that the "restrictive legend" need not be removed and then "lost" or "misplaced" the certificate. (See id. at 232, 239).
On October 30, 2003, the Court granted in part Kelley Drye's Motion for Judgment on the Pleadings and gave plaintiffs thirty days leave to amend the Twenty-Third (for Conversion) and the Twenty-Fourth cause of action (for violations of Commercial Code § 8407). (RFJN at Exh. 8). The Court's October 30, 2003, Order addressed each of the contested causes of action separately and explained exactly what Corona would need to allege to state a viable claim against Kelley Drye. (Id.). The Court granted Corona -- and only Corona -- leave to amend those two claims. (Id.). Nothing in the Order authorized Corona -- let alone all plaintiffs -- to amend their other claims against Kelley Drye or their other unrelated claims against the other defendants, who were not parties to the Kelley Drye motion. (See id.).
C. Plaintiffs' Third Amended Complaint Includes New Allegations Against the Outside Directors, Which The Court Has Already Ruled May Not Be Asserted.
On December 1, 2003, plaintiffs filed their TAC. (RFJN at Exh. 9). [FN1] Rather than confine their amendments to the two causes of action the Court permitted them to amend as to Kelley Drye, plaintiffs drastically changed the course of this litigation by amending almost every claim in their pleading. (See id.). [FN2]
FN1. Plaintiffs apparently filed an incomplete version of their TAC on December 1, 2003. (RFJN at Exh. 9). Two days later, plaintiffs served additional pages of the TAC on defendants. (Id. at Exh. 10).
FN2. Pursuant to California Rule of Court 329, the Outside Directors' Notice of Motion includes a copy of plaintiffs' TAC and highlights every new allegation defendants seek to have stricken. In addition, for the Court's convenience, a "redlined" version of the TAC, showing all of the new allegations it contains as well as all of the allegations plaintiffs omitted from the Second Amended Complaint is attached to the Declaration of Robert M. Swerdlow filed concurrently herewith.
Plaintiffs' TAC contains new allegations tracking the allegations plaintiffs previously were denied leave to add to this case. For example, paragraph 19 of the TAC alleges, inter alia, "GCAP and the other DIRECTOR DEFENDANTS knew that significant assets of WMP Bank were in large part artificially inflated by the actions of WMP Bank by WMP Group Companies and when the scheme collapsed the value of the assets collapsed." (RFJN at Exh. 9 at 19). Similarly, paragraph 21 alleges "Hypo Alpe-Adria Bank complained to the Ministry of Finance about WMP Bank and ... in January 2001, a 'surveillor' was appointed." (Id.). These are thinly-disguised references to the socalled "Moore Stephens Report" that plaintiffs previously sought to add to their "Proposed Revised Third Amended Complaint," but which this Court expressly rejected. (See id. at Exh. 4 at 5-6). No reasonable interpretation of this Court's October 30, 2003, Order can support the inclusion of those allegations at this time.
The TAC also contains new allegations that plaintiffs assert for the first time. For example, paragraph 17(f) of the TAC (a subparagraph that did not even exist in the Second Amended Complaint), alleges that "GCAP failed to disclose that it had neither sought nor obtained permission from the Austrian Takeover Commission or the Ministry of Finance" when it sold its European Operations in the summer of 2000. (RFJN at Exh. 9 at 17(f). Similar to the failed "Proposed Revised Third Amended Complaint," plaintiffs' new pleading omits their allegations related to the alleged misrepresentation of GCAP's ownership interest in WMP Bank. For example, paragraph 3 of the Second Amended Complaint alleged that "GCAP's filings misrepresented that GCAP owned 51% of WMP[,]" but the same paragraph of plaintiffs' TAC omits this allegation. (Compare RFJN at Exh. 2 at 1 with Exh. 9 at 2). Similar allegations are omitted from paragraphs 28, 46(a), 73, 91, 133(c), and 172 of the TAC. (See id.). Perhaps the most glaring example of plaintiffs' wholesale revision of their complaint is their decision to delete paragraphs 88-102 of the Second Amended Complaint in their entirety from the TAC. (Compare id. at Exh. 2 at 45-51 with Exh. 9 at 44-49).
When plaintiffs served their TAC, defendants were busy preparing their motions for summary judgment. Based on the April 19, 2004, trial date, summary judgment motions were due January 2, 2004. Plaintiffs' addition of the wholly improper new allegations threw the trial date and consequential summary judgment filing deadline into turmoil, and on December 9, 2003, this Court vacated the April 19, 2004, trial date and scheduled the hearing on this motion.
III. THE NEW ALLEGATIONS IN PLAINTIFFS' THIRD AMENDED COMPLAINT ARE A BLATANT VIOLATION OF THIS COURT'S EXPRESS ORDERS AND SHOULD BE STRICKEN.
This Court has the unquestionable power to strike "all or any part of any pleading not drawn or filed in conformity with ... an order of the court." Cal.Civ.Pro. § 436(b). [FN3] "[M]otions to strike ... are designed to eliminate sham or facially meritless allegations, at the pleading stage...." Simmons v. Allstate Ins. Co., 92 Cal. App. 4th 1068, 1073 (2001). "Sham" pleadings include those filed to circumvent a prior court order, which is precisely what plaintiffs have done here. See Ricard v. Grobstein, Goldman, Stevenson, Siegel, LeVine & Mangel, 6 Cal. App. 4th 157, 162 (1992).
FN3. Code of Civil Procedure § 436 provides in full:
The court may, upon a motion made pursuant to Section 435, or at any time in its discretion, and upon terms it deems proper: (a) Strike out any irrelevant, false, or improper matter inserted in any pleading[;] (b) Strike out all or any part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court.
Of particular significance on this Motion to Strike is the rule that courts may strike an amended pleading when "no request for permission to amend was sought." Leader v. Health Industries of America, Inc., 89 Cal. App. 4th 603, 613 (2001). As the Leader court explained: "A litigant does not have a positive right to amend his pleading after a demurrer thereto has been sustained. His leave to amend afterward is always of grace, not of right." Id. at 612 (quoting Gautier v. General Tel. Co., 234 Cal. App. 2d 302, 310(1965)).
Plaintiffs may amend their complaint once, as a matter of right, before an answer is filed or a demurrer is sustained. Cal.Civ.Pro. § 472. After that, a "pleading can only be amended by obtaining permission of the court." Leader, 89 Cal. App. 4th at 613. Where, as here, a plaintiff has filed an amended pleading without first obtaining leave of court, the amended pleading is properly subject to a motion to strike. Id.
In ruling on Kelley Drye's Motion for Judgment on the Pleadings, the Court only granted plaintiff Corona - and only Corona - leave to amend only the Twenty-Third and Twenty-Fourth causes of action in the Second Amended Complaint. (RFJN at Exh. 8 at 3-4). Neither of those causes of action were pled against the Outside Directors, nor did they involve any allegations about WMP Bank or anything resembling the other far reaching new allegations that pervade the TAC. (See id. at Exh. 2).
Nonetheless, all plaintiffs now assert new allegations directed at the Outside Directors relating to the alleged fraud at WMP Bank. (See, e.g., id. at Exh. 9 at 17, 171 (c)). All of these allegations go well beyond the scope of the Court's October 30, 2003, Order and are therefore impermissible. Leader, 89 Cal. App. 4th at 612. This Court has not granted plaintiffs leave to add any new allegations against the Outside Directors, and hence all of the new allegations in the TAC against them are improper and should be stricken.
Plaintiffs sought leave to amend their complaint last summer, but this Court ruled that plaintiffs would not be allowed to change their theory of liability at such an advanced stage in the proceedings. (RFJN at Exh. 5). Plaintiffs defiantly marched to the Court of Appeal, but it too denied plaintiffs the relief they sought. (Id. at Exh. 6). In denying plaintiffs leave to amend, this Court held that the addition of new allegations and theories 15 months into this litigation would be improper, unfair and prejudicial. (Id. at Exh. 5). The prejudice to defendants is even more manifest now, six months after the last time plaintiffs attempted to reverse field and change the course of this litigation.
Counsel for the Outside Directors spent substantial time at considerable expense conducting discovery directed to the allegations in the Second Amended Complaint. Allowing plaintiffs to introduce these entirely new allegations at this stage of the litigation will force all of the defendants to begin expensive new discovery, much of which will likely occur in Austria, and will delay the resolution of this case, at a minimum, for several months. Defendants are entitled to a clear presentation of the claims against them and a swift resolution. Plaintiffs should not be allowed to rehash allegations previously rejected.
IV. PLAINTIFFS SHOULD BE SANCTIONED FOR FILING THEIR THIRD AMENDED COMPLAINT.
This Court may impose monetary sanctions of up to $1,500.00, payable to the County, "for any violation of a lawful court order by a person, done without good cause or substantial justification." Cal.Civ.Pro. § 177.5. [FN4] The imposition of sanctions under this section does not require a showing of bad faith or a "willful" violation. Rather, such sanctions may be imposed whenever a party has no "valid excuse" for violating a court order. In re Woodham, 95 Cal. App. 4th 438, 446 (2001).
FN4. Code of Civil Procedure section 177.5 provides:
A judicial officer shall have the power to impose reasonable money sanctions, not to exceed fifteen hundred dollars ($1,500), notwithstanding any other provision of law, payable to the county in which the judicial officer is located, for any violation of a lawful court order by a person, done without good cause or substantial justification. This power shall not apply to advocacy of counsel before the court. For the purposes of this section, the term "person" includes a witness, a party, a party's attorney, or both.
Sanctions pursuant to this section shall not be imposed except on notice contained in a party's moving or responding papers; or on the court's own motion, after notice and opportunity to be heard. An order imposing sanctions shall be in writing and shall recite in detail the conduct or circumstances justifying the order.
Here, plaintiffs had no valid excuse for violating not one but two Court orders. The Court's October 30, 2003, Order granted Corona, and only Corona, leave to amend two causes of action against Kelley Drye. There was simply no excuse for plaintiffs' filing a TAC that contains new allegations against all defendants on behalf of all plaintiffs, let alone a TAC that contains claims this Court expressly denied plaintiffs leave to file on July 21, 2003. By doing so, plaintiffs forced this Court to hear this motion and the Outside Directors' Ex Parte Application to vacate the trial date and schedule this hearing. The state-wide budget crisis has placed severe financial burdens on our trial courts, and there should be no tolerance for the blatant violation of two court orders. Neither the Court nor the taxpayers should be forced to cover these costs.
V. CONCLUSION
For the foregoing reasons, the Court should strike all of the new allegations in plaintiffs' Third Amended Complaint that do not relate to plaintiffs' Twenty-Third and Twenty-Fourth causes of action, as set forth in the copy of the TAC attached to the Outside Directors' Notice of Motion. In addition, the Court should order plaintiffs to pay $1,500 in sanctions to the County pursuant to Code of Civil Procedure § 177.5. |
