Anderson Private Investors v. Colak CA2/2 ( 2013 )

Filed 5/16/13 Anderson Private Investors v. Colak CA2/2
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
KAYNE ANDERSON PRIVATE B239111
INVESTORS et al.,
(Los Angeles County
Plaintiffs and Appellants, Super. Ct. No. BC462778)
v.
MUSTAFA COLAK,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of Los Angeles County.
Joanne B. O’Donnell, Judge. Affirmed.
Valle Makoff, Jeffrey T. Makoff, Brandon M. Carr; Nagler & Associates,
Lawrence Nagler and Charles Avrith for Plaintiffs and Appellants.
Lurie, Zepeda, Schmalz & Hogan, Andrew W. Zepeda and Shawn M. Ogle for
Defendant and Respondent.
******
Plaintiffs and appellants Kayne Anderson Private Investors, L.P., Kayne Anderson
Private Investors II, L.P. and Kayne Anderson Private Advisors, L.P. appeal from a
judgment entered following the trial court’s order sustaining a demurrer without leave to
amend filed by defendant and respondent Mustafa Colak (Colak). Appellants sought
equitable indemnity, recovery of attorney fees and declaratory relief, alleging that Colak
should bear proportionate responsibility for a multi-million dollar arbitration award
entered against them. After the demurrer was sustained, the trial court also denied
appellants’ motion for leave to amend to allege a breach of contract claim against Colak.
We affirm. The trial court properly sustained the demurrer without leave to
amend. Appellants failed to state a cause of action for equitable indemnity because they
were not mutually liable with Colak for the same injury. They likewise failed to state a
claim for tort of another because they incurred attorney fees defending allegations of their
own fraud. Finally, their declaratory relief action failed because it was merely derivative
of their other claims. The trial court properly exercised its discretion in denying
appellants’ motion for leave to amend and in construing the motion as an unsupported
motion for reconsideration.
FACTUAL AND PROCEDURAL BACKGROUND
The Arbitration.
In 1994, Siamak (“Mack”) Katal (Katal) and his wife Ingrid Katal founded
Detection Logic, Inc. (Detection Logic), a life safety and security contracting company.
Appellants are private equity fund groups that had invested over $35 million in Detection
Logic between 2005 and 2008. Colak was Detection Logic’s president and chief
executive officer in 2007 and 2008.
In 2008, after an accounting firm had conducted an internal audit and issued an
opinion that Detection Logic’s 2007 financial statements were materially correct and
complied with generally accepted accounting principles (GAAP), appellants and Katal
initiated efforts to sell the company. Integrated Products and Services, Inc. (IPS)
submitted a $150 million bid in October 2008. Because appellants and Katal required
2
that the sale close by the end of 2008, Detection Logic’s September 2008 financial
statements (September financials) formed the basis for the $140 million purchase price.
The parties executed the securities purchase agreement (SPA) for the sale of the company
on December 12, 2008.
IPS retained Colak as Detection Logic’s president. In connection with the
company’s sale, Colak executed a contingent payment agreement (Reimbursement
Agreement) which entitled him to receive a pro forma percentage—specified as
1.4173 percent in a separate agreement—of the amounts actually received by appellants
and Katal under the SPA and correspondingly obligated him to pay back to Detection
Logic the same pro forma percentage of any amount that appellants and Katal were
required to pay IPS as a result of financial adjustments under the SPA.1
Following the sale, IPS discovered that the September financials were not
materially correct, did not comply with GAAP and overstated Detection Logic’s
earnings. In accordance with the terms of the SPA, in September 2009 IPS filed a
demand for arbitration, seeking damages for breach of warranty and fraud. In August
2010, IPS filed an amended complaint in the arbitration that alleged claims for breach of
contract, fraud and unfair competition. Appellants and Katal asserted counterclaims.
The arbitration was conducted in October 2010. In a July 2011 award, the
arbitrator determined that Detection Logic misrepresented its financial position and
thereby breached the SPA and engaged in an unfair business practice. He expressly
found that Katal lacked credibility and that Colak was credible, despite appellants’ and
Katal’s efforts to discredit his testimony. The arbitrator further determined that
appellants did not engage in fraud, finding that they offered evidence they “reasonably
relied on the Company’s senior management and accounting department with respect to
the September Financials” and there was no evidence they participated in creating or
knew of the manipulated financial statements. Nonetheless, it found they were liable for
1 The Reimbursement Agreement gave Detection Logic the right to offset the
payments owing by the pro forma percentage or, in the event it elected not to offset, to
assign the right to receive such payment to appellants and Katal.
3
Detection Logic’s breach pursuant to section 10.1(a)(i) of the SPA, which provided that
each seller, including appellants, “shall be jointly and severally liable for ‘any breach of
any warranty or the inaccuracy of any representation of the Company contained in this
Agreement.’” On the basis of its establishing multiple breaches of the SPA, the arbitrator
awarded IPS over $33 million, payable by appellants and Katal jointly and severally.
Complaint and Demurrer.
In June 2011, appellants filed their original complaint against Colak and others,
alleging causes of action for comparative equitable indemnity, contribution, tort of
another and declaratory relief. Colak demurred, and appellants filed a first amended
complaint before the matter was heard. Alleging the same four causes of action, the
operative complaint sought equitable indemnity and reimbursement of attorney fees from
Colak to the extent that appellants’ liability to IPS in connection with the sale of
Detection Logic was caused by Colak’s conduct.2 They alleged that Colak knowingly
participated in the fraud and misconduct committed by Katal. They specifically alleged
that “Colak’s alleged fraud is detailed in the sworn testimony he gave in the JAMS
Arbitration and includes testimony and documents that he alleges shows he personally
manipulated financial data, provided information he knew was incorrect to Detection
Logic’s financial personnel charged with making disclosures to IPS and signed the SPA
(which included financial misrepresentations and warranties).”
Colak again demurred, asserting that appellants failed to allege facts sufficient to
state a cause of action. More specifically, he argued that equitable indemnity was
unavailable because he and appellants were not joint tortfeasors, the “tort of another”
doctrine did not apply where appellants defended themselves against allegations
involving their own tortious conduct and declaratory relief was duplicative of their other
claims. In support of his demurrer, he sought judicial notice of the arbitration award, the
second amended complaint in the arbitration and the SPA.
2 Appellants’ second cause of action for contribution was not alleged against Colak.
4
Appellants opposed the demurrer. At the conclusion of their opposition, they
requested leave to amend and further indicated they intended to add claims to their
complaint seeking Colak’s payment under the Reimbursement Agreement. They
attached exhibits showing that they had previously demanded payment of Colak’s
pro forma percentage under the Reimbursement Agreement, calculated as approximately
$340,000.
At the conclusion of a December 5, 2011 hearing, the trial court sustained the
demurrer without leave to amend for the reasons outlined in its tentative ruling. It
determined that because appellants had been held liable only under the SPA, no
indemnity claim arose because they were not joint tortfeasors with Colak. The trial court
further determined that attorney fees under the “tort of another” theory could not be
recovered by exonerated parties who incurred fees in defending themselves from a
codefendant found liable. Finally, it found that appellants’ declaratory relief claim was
insufficient, as it was wholly derivative of the other claims.
Motion for Leave to Amend.
Though they did not submit it to the trial court at the time of the hearing,
appellants filed a motion for leave to file a second amended complaint on the same day.
They sought to add a cause of action for breach of contract and sought recovery of
Colak’s pro forma percentage under the Reimbursement Agreement. Colak opposed the
motion, characterizing it as an unsupported motion for reconsideration and arguing that
the only reason appellants had not included the breach of contract claim in their original
pleading was because it would have undermined their indemnity claim. In reply,
appellants argued that the contract and indemnity claims were unrelated, and the only
reason they delayed in asserting breach of contract was to allow time for Colak to comply
with their demand for performance.
Following a January 11, 2012 hearing, the trial court denied the motion. It agreed
with Colak that the breach of contract claim could and should have been alleged
originally, issuing a minute order which provided in part: “[P]laintiffs chose in both the
original complaint and the first amended complaint not to allege breach of contract
5
against Colak, choosing instead to put all their eggs in the one basket of their equitable
indemnity theory of recovery. This is not, therefore, a case where plaintiffs only recently
discovered their breach of contract claim against Colak; they have known of it from the
beginning and elected, for strategic reasons, not to allege it. When the court sustained
Colak’s demurrer to the first amended complaint without leave to amend, plaintiffs’
strategy failed.” Also because of the order sustaining the demurrer without leave to
amend, the trial court concluded that appellant’s motion was one for reconsideration,
made without new or different facts, law or circumstances.
The trial court entered a judgment of dismissal in favor of Colak. Appellants
timely appealed. Thereafter, the trial court denied Colak’s motion for sanctions.3
DISCUSSION
Appellants maintain that the trial court erred in sustaining the demurrer without
leave to amend and abused its discretion in denying their motion for leave to amend. We
find no merit to their contentions.
I. The Trial Court Properly Sustained the Demurrer Without Leave to Amend.
A. Standard of Review.
We review de novo a trial court’s sustaining of a demurrer, exercising our
independent judgment as to whether the complaint alleges sufficient facts to state a cause
of action. (Zelig v. County of Los Angeles (2002) 27 Cal. 4th 1112, 1126.) We assume
the truth of properly pleaded allegations in the complaint and give the complaint a
reasonable interpretation, reading it as a whole and with all its parts in their context.
(Aubry v. Tri-City Hospital Dist. (1992) 2 Cal. 4th 962, 966–967.) “We do not, however,
assume the truth of the legal contentions, deductions or conclusions; questions of law,
3 After briefing, Colak moved to strike untimely arguments raised in appellants’
reply brief. Though we deny the motion, we need not consider arguments raised for the
first time in a reply brief. (Mansur v. Ford Motor Co. (2011) 197 Cal. App. 4th 1365,
1387–1388; Reichardt v. Hoffman (1997) 52 Cal. App. 4th 754, 764.)
6
such as the interpretation of a statute, are reviewed de novo.” (Caliber Bodyworks, Inc. v.
Superior Court (2005) 134 Cal. App. 4th 365, 373; accord, Blank v. Kirwan (1985) 39
Cal. 3d 311, 318.) We may also disregard allegations which are contrary to law or to a
fact of which judicial notice may be taken. (Wolfe v. State Farm Fire & Casualty Ins.
Co. (1996) 46 Cal. App. 4th 554, 559–560.)
We apply the abuse of discretion standard in reviewing a trial court’s denial of
leave to amend. (Blank v. Kirwan, supra, 39 Cal.3d at p. 318.) Although leave to amend
should be liberally granted, the trial court has discretion to sustain a demurrer without
leave to amend where there is no reasonable probability that its defects could be cured by
amendment. (Ibid.; Green v. Travelers Indemnity Co. (1986) 185 Cal. App. 3d 544, 556.)
It is appellants’ burden to show either that the trial court erred in sustaining the demurrer
or abused its discretion in denying leave to amend. (Kong v. City of Hawaiian Gardens
Redevelopment Agency (2002) 108 Cal. App. 4th 1028, 1038.)
B. Equitable Indemnity.
In their first cause of action, appellants alleged they were entitled to “comparative
equitable indemnity” in an amount believed to exceed $39 million.4 In support of their
claim, they alleged on information and belief that the claims on which IPS prevailed
“were based upon allegations/admissions of fraudulent conduct by defendant Colak, to
the effect that he knowingly participated in the fraudulent preparation of Detection
Logic’s Financial Documents, including the September Financials, which IPS relied upon
to purchase Detection Logic.” They added that “Colak’s admissions, if true, render him
liable as a joint tortfeasor along with the other defendants . . . .” On this basis, they
alleged: “The IPS claims and any liability of plaintiffs were caused by acts and
omissions of defendants Colak . . . (including particular acts and omissions arising out of
and in connection with defendants’ obligations under the SPA and by law). To the extent
4 This figure took into account an approximate $6.4 million accounting arbitration
award entered against appellants in August 2010.
7
plaintiffs’ liability to IPS in connection with the sale of Detection Logic was caused by
the acts of Colak . . . , those defendants are responsible for any damages.”
“Equitable indemnity is an equitable doctrine that apportions responsibility among
tortfeasors responsible for the same indivisible injury on a comparative fault basis.
[Citation.] ‘[T]he equitable indemnity doctrine originated in the common sense
proposition that when two individuals are responsible for a loss, but one of the two is
more culpable than the other, it is only fair that the more culpable party should bear a
greater share of the loss.’ [Citation.] A right of equitable indemnity can arise only if the
prospective indemnitor and indemnitee are mutually liable to another person for the same
injury. [Citation.]” (Fremont Reorganizing Corp. v. Faigin (2011) 198 Cal. App. 4th
1153, 1176–1177; accord, BFGC Architects Planners, Inc. v. Forcum/Mackey
Construction, Inc. (2004) 119 Cal. App. 4th 848, 852 [the doctrine of equitable indemnity
“applies only among defendants who are jointly and severally liable to the plaintiff”];
Children’s Hospital v. Sedgwick (1996) 45 Cal. App. 4th 1780, 1786 [“California common
law recognizes a right of partial indemnity under which liability among multiple
tortfeasors may be apportioned according to the comparative negligence of each”].)
Emphasizing one of the key elements necessary for equitable indemnity, the court
in Stop Loss Ins. Brokers, Inc. v. Brown & Toland Medical Group (2006) 143
Cal. App. 4th 1036, 1040 (Stop Loss) stated: “It is well-settled in California that equitable
indemnity is only available among tortfeasors who are jointly and severally liable for the
plaintiff’s injury.” Amplifying that principle, the court explained that “California law
does not permit equitable apportionment of damages for breach of contract” and declined
to follow a New Mexico decision which adopted a contrary rule. (Id. at p. 1041, fn. 2.)
While the concurring opinion in Stop Loss advocated for the application of indemnity
principles on the ground that the indemnitor’s conduct could also be construed as a
breach of duty, it acknowledged the inherent difficulties in applying equitable indemnity
principles among parties liable in tort and for breach of contract because of the different
measure of damages flowing from each form of liability. (Id. at p. 1054 (Pollak, J.,
concurring).) In view of those complications, the concurrence conceded that any change
8
in the law should come from the Legislature or the Supreme Court and, absent such
change, “we must adhere to the rule that equitable indemnity may be obtained only from
one who is jointly and severally liable to the injured party based on the commission of a
tort, i.e., based on the breach of a duty imposed by law.” (Id. at p. 1055 (Pollak, J.,
concurring).)
Stop Loss affirmed an order sustaining a demurrer without leave to amend where
the proposed indemnitor was liable, at most, for breach of contract. (Stop Loss, supra,
143 Cal.App.4th at pp. 1042–1043.) Thereafter, the court in In re Medical Capital
Securities Litigation (C.D. Cal. 2012) 842 F. Supp. 2d 1208, 1213, relied on Stop Loss to
affirm the dismissal of a complaint where the proposed indemnitee sought equitable
indemnification for a breach of contract. According to the court, “California state law, as
set forth by intermediate appellate courts, is clear. Equitable indemnity is only available
between joint tortfeasors. Stop Loss Insurance Brokers, Inc. v. Brown & Toland Medical
Group is exactly on point. . . . The Banks attempt to distinguish this case because the
contractual defendant in Stop Loss was the third-party defendant, not the third-party
plaintiff, as is the case here. This distinction does not control. As the Stop Loss court
made clear, both the party seeking indemnification and the party from which it seeks
indemnification must be tortfeasors. [Citation.]” (In re Medical Capital Securities
Litigation, supra, at p. 1213; see also Travelers Casualty and Surety Co. of America v.
Desert Gold Ventures, LLC (C.D. Cal. 2010) 2010 WL 5017798 at *15 [holding, as a
matter of law, defendants could not seek equitable indemnity from cross-defendants
because the claim against defendants was one for breach of contract and “whatever losses
[defendants] incur as a result of their breach of the [contract] are theirs alone, not subject
to apportionment”].)
Here, appellants’ liability was based on breach of contract. In its order sustaining
Colak’s demurrer without leave to amend, the trial court took judicial notice of the
arbitration award. In that award, the arbitrator expressly determined that appellants did
not engage in fraud with respect to the preparation of the September financials, nor did
they fraudulently induce IPS to enter into the SPA. Instead, they were contractually
9
liable for Detection Logic’s breach of the SPA: “Section 10.1(a)(i) of the SPA provides
that each Seller, which includes each of the Respondent Sellers herein, shall be jointly
and severally liable for ‘any breach of any warranty or the inaccuracy of any
representation of the Company contained in this Agreement.’” As the trial court
explained, “the arbitrator found plaintiffs liable for breaching a contract term in the sales
agreement in which the defendants affirmed that financial representations in the
agreement were correct when in fact they were not and so plaintiffs became liable for the
damage that was caused by the breach.” According to Stop Loss and its progeny,
appellants cannot seek equitable indemnification from Colak because their liability was
premised on their breach of contract, and the parties therefore were not joint tortfeasors
responsible for a single injury.5
We are unpersuaded that the authorities on which appellants rely require a
different result. The discussion in Prince v. Pacific Gas & Electric Co. (2009) 45 Cal. 4th
1151 does not support appellants’ suggestion that the case eliminated the joint tortfeasor
element of equitable indemnity. There, in order “to provide context to [the plaintiff’s]
claim of a right to implied contractual indemnity,” (id. at p. 1158) the court described the
three historical forms of indemnity: “(1) indemnity expressly provided for by contract
(express indemnity); (2) indemnity implied from a contract not specifically mentioning
5 The arbitrator also found that Detection Logic’s breach of the SPA was sufficient
to support a claim for unfair business practices under Business and Professions Code
section 17200, and determined that IPS’s damage were recoverable as restitution under
this theory as well. The trial court ruled that the arbitrator’s finding appellants liable
under this quasi-contract theory could not be the basis for an equitable indemnity claim
because it did not render them joint tortfeasors with Colak. In their opening brief,
appellants did not address the trial court’s unfair competition ruling and we therefore
deem any challenge to that ruling waived. (E.g., Paulus v. Bob Lynch Ford, Inc. (2006)
139 Cal. App. 4th 659, 685 [“Courts will ordinarily treat the appellant’s failure to raise an
issue in his or her opening brief as a waiver of that challenge”]; Christoff v. Union Pacific
Railroad Co. (2005) 134 Cal. App. 4th 118, 125 [“an appellant’s failure to discuss an issue
in its opening brief forfeits the issue on appeal”]; Reyes v. Kosha (1998) 65 Cal. App. 4th
451, 466 [issues not properly raised in appellant’s brief are deemed forfeited or
abandoned].)
10
indemnity (implied contractual indemnity); and (3) indemnity arising from the equities of
particular circumstances (traditional equitable indemnity). [Citation.]” (Id. at p. 1157,
fn. omitted.) It explained that while “not extinguished, implied contractual indemnity is
now viewed simply as ‘a form of equitable indemnity.’” (Id. at p. 1157.) Nonetheless,
the court acknowledged that both types of indemnity retained distinct characteristics, as
“‘traditional equitable indemnity’ . . . [was] not based on the existence of a contractual
relationship between the indemnitor and the indemnitee,” while implied contractual
indemnity continued to require that the indemnitor and indemnitee be in a contractual
relationship with one another. (Id. at pp. 1157, fn. 2 & 1159.) In the context of resolving
whether the plaintiff’s claim for implied contractual indemnity could be subject to
statutory immunities, the Prince court reaffirmed the principle that traditional equitable
indemnity is available only between joint tortfeasors. (Id. at p. 1160 [“traditional
equitable indemnity differs significantly from express contractual indemnity, in that the
former is not available in the absence of a joint legal obligation to the injured party”].)
The other two cases on which appellants principally rely, Considine Co. v. Shadle,
Hunt & Hager (1986) 187 Cal. App. 3d 760 (Considine) and Card Constr. Co. v. Ledbetter
(1971) 16 Cal. App. 3d 472 (Card), likewise addressed indemnity between parties in a
contractual relationship. In Considine, a tenant sued his landlord for breach of contract
and misrepresentation, and the landlord sought indemnity from counsel who had
previously represented the landlord and tenant jointly. (Considine, supra, at pp. 763–
764.) Addressing whether the landlord could seek indemnity in the event he was found
liable only for breach of contract, the court distinguished between implied contractual
indemnity and traditional equitable indemnity. It explained: “A defendant sued for
breach of contract may have a right of implied indemnity against a third person whose
wrong caused the defendant’s breach. [Citations.] This implied right of indemnity,
however, is distinct from the equitable indemnity among tortfeasors which was the
11
subject of AMA.” (Id. at pp. 769–770.)6 Confirming that its reference to “implied
indemnity” did not involve traditional equitable indemnity, the court cited County of Los
Angeles v. Superior Court (1984) 155 Cal. App. 3d 798, 803, disapproved by Bay
Development, Ltd. v. Superior Court (1990) 50 Cal. 3d 1012, 1032, fn. 12, and Nomellini
Construction Co. v. Harris (1969) 272 Cal. App. 2d 352, 359, both of which involved
issues related to implied contractual indemnity. (Considine, supra, at pp. 769–770.) The
balance of the discussion concerned the application of implied contractual indemnity
principles to a breach of contract and the application of traditional equitable indemnity to
an alleged breach of the duty of care. (Id. at pp. 770–771.) Contrary to appellants’
position, Considine did not apply traditional equitable indemnity to a breach of contract.
Similarly, Card, supra, 16 Cal. App. 3d 472 involved a series of subcontractors in
contractual relationships. The lowest level subcontractors submitted false invoices,
causing mid-level subcontractor Card to pay a lower level subcontractor, who in turn
never paid the lowest level subcontractors. (Id. at p. 475.) They successfully sued the
general contractor and were paid by its bonding company. Pursuant to a bonding
indemnity agreement, Card was required to satisfy the bonding company’s judgment.
(Id. at p. 476.) Card then sought indemnity from the lowest level subcontractors on the
ground that their conduct had forced it to pay twice—first when it paid the lower level
subcontractor and again when it satisfied the judgment. (Id. at pp. 476–477.) Reversing
an order sustaining a demurrer without leave to amend, the Card court characterized the
claim as one for “implied indemnity,” explaining that because Card’s responsibility to
pay was contractual and the subcontractor’s alleged responsibility was based on tortious
misrepresentations, “we think appellant Card stated a cause of action against respondents
in implied indemnity. [Citations.]” (Id. at p. 478.)
“The right to implied indemnity may arise from contract or from equitable
considerations. [Citations.]” (Standard Oil Co. v. Oil, Chemical etc. Internat. Union
6 The court’s reference to “AMA” is an abbreviation for American Motorcycle Assn.
v. Superior Court (1978) 20 Cal. 3d 578, a case which first applied comparative fault
principles to equitable indemnity.
12
(1972) 23 Cal. App. 3d 585, 588.) The Card court emphasized that the indemnity claim
involved two distinct forms of liability—breach of contract and tortious
misrepresentation. (Card, supra, 16 Cal.App.3d at p. 478.) Because there was no
indication in Card that the court intended to dispense with joint tortfeasor requirement
necessary for a claim of equitable indemnity, we conclude that the “implied indemnity”
referenced in Card arose from contract. Accordingly, we do not construe the case to
support appellants’ argument that they stated a valid cause of action for equitable
indemnity against Colak.
Finally, appellants’ belated citation in their reply brief to County of San Mateo v.
Berney (1988) 199 Cal. App. 3d 1489 does not assist them. In that case, the court held that
a public entity sued for inverse condemnation may bring a cross-complaint for equitable
indemnity against “third parties whose negligent or fraudulent acts were causative factors
in the damaging or taking of private property.” (Id. at p. 1494.) But a cause of action for
inverse condemnation is unlike one for breach of contract, as “when the government
takes or damages property, it is strictly liable to pay compensation therefor, unless an
exception to strict liability applies. [Citation.]” (Paterno v. State of California (1999) 74
Cal. App. 4th 68, 82.) Thus, the case was an application of the general principle “that
equitable indemnity may also be used to apportion liability where ‘“one or more
tortfeasors’ liability rests on the principle of strict liability.”’ [Citations.]” (Greystone
Homes, Inc. v. Midtec, Inc. (2008) 168 Cal. App. 4th 1194, 1208–1209.)
C. Tort of Another.
In their third cause of action, appellants sought attorney fees and costs, alleging:
“Due to the torts of the defendants, plaintiffs have been forced to protect their interests by
defending litigation brought by IPS and by filing this action against defendants. To
protect their interests, plaintiffs have incurred, and continue to incur, attorneys’ fees,
costs and statutory prejudgment interest owed to IPS.” The trial court ruled that the
doctrine did not apply here, where appellants incurred fees in defending themselves
against allegations for which Detection Logic was found liable.
13
The “tort of another” doctrine is one of several equitable exceptions to the general
rule that each party bears the cost of employing an attorney unless a statute or agreement
provides otherwise. (See Prentice v. North Amer. Title Guar. Corp. (1963) 59 Cal. 2d
618, 620 (Prentice); Heckert v. McDonald (1989) 208 Cal. App. 3d 832, 837.) The
doctrine provides: “A person who through the tort of another has been required to act in
the protection of his interests by bringing or defending an action against a third person is
entitled to recover compensation for the reasonably necessary loss of time, attorney’s
fees, and other expenditures thereby suffered or incurred. [Citations.]” (Prentice, supra,
at p. 620.) In Davis v. Air Technical Industries, Inc. (1978) 22 Cal. 3d 1, our Supreme
Court cautioned that “the Prentice exception was not meant to apply in every case in
which one party’s wrongdoing causes another to be involved in litigation with a third
party. If applied so broadly, the judicial exception would eventually swallow the
legislative rule that each party must pay for its own attorney. [Citations.]” (Id. at p. 7,
fn. omitted; see also David v. Hermann (2005) 129 Cal. App. 4th 672, 689 [“The courts
have refrained from expanding the rule in a way that would undermine the general rule
that a party bears his own attorney fees”].)
Accordingly, the tort of another doctrine has not been extended to enable a
defendant to recover fees and expenses incurred in defending against allegations of his or
her own wrongdoing. (Davis v. Air Technical Industries, Inc., supra, 22 Cal.3d at p. 6
[“Since Davis defended exclusively against allegations of his own negligence, he is not
entitled to recover attorney’s fees” under Prentice or any other doctrine]; accord, Santa
Clara Valley Water Dist. v. Olin Corp. (2009) 655 F. Supp. 2d 1048, 1063 [“Under Davis
. . . , the ‘tort of another’ doctrine of damages recognized in Prentice does not extend to
allow recovery of legal expenses by a defendant who was defending against allegations
of its own negligence”].) Nor is it of any consequence that the party seeking fees
ultimately prevails in the underlying litigation. As the court in Watson v. Department of
Transportation (1998) 68 Cal. App. 4th 885, 894, explained: “The extension of the
Prentice rule to the commonplace case of an exonerated alleged tortfeasor would go a
long way toward abrogation of the American rule that each party to a lawsuit must
14
ordinarily pay his or her own attorney’s fees. It would substantially expand the notion of
duty under the law of torts to compensation of the litigation expenses incurred by all
persons, however connected to any tortious event, whom the injured plaintiff elects to sue
who succeed in establishing lack of liability.”
Here, the judicially-noticed second amended complaint filed in the arbitration
established that IPS’s allegations were directed against Katal and appellants collectively
as the “sellers” of Detection Logic. The arbitration award confirmed that appellants
defended against allegations of their own fraud and fraudulent inducement. The record
fails to demonstrate the “‘exceptional circumstances’” found to be present in Manning v.
Sifford (1980) 111 Cal. App. 3d 7, 12, a case relied on by appellants. There, buyers sued
an adjacent property owner and their real estate brokers when the property owner,
Sifford, blocked an easement that the brokers had represented permitted access. (Id. at
p. 9.) After the trial court confirmed the existence of the easement, the brokers sought
recovery of attorney fees from Sifford, and the appellate court reversed the denial of fees,
reasoning: “In this instance, brokers’ litigation expenses were incurred solely on behalf
of the innocent prevailing parties who were the victims of Sifford’s wrongful conduct.
Brokers were innocent of any wrongdoing but were compelled to prove the [buyers’] case
against Sifford to protect themselves from liability. Under such circumstances, it is only
fair that Sifford be required to compensate the brokers for their reasonable litigation
expenses, including attorney’s fees.” (Id. at p. 12.)
Though appellants now attempt to cast themselves in the role of the innocent
brokers forced to help IPS prove its case against Katal, the arbitration award belies their
position. (See Martinez v. Socoma Companies, Inc. (1974) 11 Cal. 3d 394, 399
[allegations constituting conclusions of law or contrary to matters subject to judicial
notice not deemed true for purposes of demurrer]; Interinsurance Exchange v. Narula
(1995) 33 Cal. App. 4th 1140, 1143 [same].) According to the arbitrator, IPS’s evidence
of fraud involved Katal’s acts and omissions that were established, in part, by Colak’s
testimony. Unlike the brokers who helped prove the buyers’ case, appellants instead
“presented evidence designed to discredit Colak.” The arbitrator found such evidence
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unpersuasive, noting that “the evidence showed that Katal often used threats and
intimidation with the Company’s employees” and that Colak had reason to fear Katal
would withhold a promised stock payment. Thus, appellants tried to protect themselves
from liability by assailing Colak’s credibility. To apply the tort of another doctrine under
these circumstances would essentially turn the doctrine on its head. The trial court
properly ruled that “[a] tort of another claim cannot be brought by an exonerated party
against a codefendant who is found liable for the fees that the party incurred in defending
itself.”
D. Declaratory Relief.
In their fourth cause of action, appellants sought a declaration concerning the
proportionate fault of all parties involved in the arbitration. The trial court sustained
Colak’s demurrer without leave to amend on the ground the claim was wholly derivative
and duplicative of appellants’ other claims.
“Generally, an action in declaratory relief will not lie to determine an issue which
can be determined in the underlying tort action. ‘The declaratory relief statute should not
be used for the purpose of anticipating and determining an issue which can be determined
in the main action. The object of the statute is to afford a new form of relief where
needed and not to furnish a litigant with a second cause of action for the determination of
identical issues.’ [Citation.]” (California Ins. Guarantee Assn. v. Superior Court (1991)
231 Cal. App. 3d 1617, 1623–1624.) Here, the language of appellants’ declaratory relief
cause of action shows that it was wholly derivative of the other causes of action and
therefore the demurrer was properly sustained as to this claim. (See Ochs v. PacifiCare
of California (2004) 115 Cal. App. 4th 782, 794.) Specifically, appellants alleged they
were entitled to comparative equitable indemnity and attorney fees and costs under the
tort of another doctrine, and sought “a determination of defendant Colak’s liability and
proportionate fault with respect to the IPS claims.” The declaration they sought was thus
no different than what would have been determined in their underlying claims.
Contrary to appellants’ assertion, Ball v. FleetBoston Financial Corp. (2008) 164
Cal. App. 4th 794 supports the trial court’s determination. There, the court held that the
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plaintiff’s declaratory relief cause of action was wholly derivative of its failed statutory
claim where “[t]he only declaration sought by the cause of action is a judicial declaration
that the arbitration provisions of the credit card agreement are illegal and unconscionable,
and violate public policy,” and the statutory cause of action “requests that the
enforcement of the arbitration provisions of the credit card agreement be enjoined,
because they are unlawful and/or unconscionable.” (Id. at p. 800.) Here, similarly,
appellants’ cause of action for comparative equitable indemnity sought a judgment
against Colak “in an amount proportionate” to his fault and their cause of action for tort
of another sought to hold Colak responsible for their attorney fees and costs. The
determination sought by appellant’s declaratory relief claim was no different.
Accordingly, the trial court properly sustained Colak’s demurrer to the fourth cause of
action.
II. The Trial Court Properly Exercised Its Discretion in Denying Leave to
Amend.
Appellants challenge the trial court’s denial of leave to amend in two contexts.
First, they argue that, at a minimum, the demurrer should have been sustained with leave
to amend. Second, they argue that their separate motion for leave to file a second
amended complaint should have been granted. We address each claim in turn.
A. Amendment to Complaint.
In their opposition to the demurrer and at the hearing, appellants requested leave to
amend. They bore the burden of showing that an amendment would cure the defects in
their pleading. (Arce v. Childrens Hospital Los Angeles (2012) 211 Cal. App. 4th 1455,
1497, fn. 19.) A plaintiff seeking to satisfy that burden “‘“must show in what manner he
can amend his complaint and how that amendment will change the legal effect of his
pleading.” [Citation.] The assertion of an abstract right to amend does not satisfy this
burden.’ [Citation.] The plaintiff must clearly and specifically state ‘the legal basis for
amendment, i.e., the elements of the cause of action,’ as well as the ‘factual allegations
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that sufficiently state all required elements of that cause of action.’ [Citation.]” (Maxton
v. Western States Metals (2012) 203 Cal. App. 4th 81, 95.)
Beyond mentioning the proposed addition of facts relating to the Reimbursement
Agreement, appellants have not articulated either any factual allegations or legal bases
for leave to amend. On appeal, though appellants have renewed their request for leave to
amend, they have similarly failed to show how an amendment would cure the multiple
defects in their complaint. “Where the appellant offers no allegations to support the
possibility of amendment and no legal authority showing the viability of new causes of
action, there is no basis for finding the trial court abused its discretion when it sustained
the demurrer without leave to amend. [Citations.]” (Rakestraw v. California Physicians’
Service (2000) 81 Cal. App. 4th 39, 44.) The trial court properly exercised its discretion in
denying leave to amend in connection with its order sustaining the demurrer.
B. Motion for Leave to Amend.
On the same day that the trial court sustained Colak’s demurrer without leave to
amend, appellants filed a motion for leave to file a second amended complaint. For the
first time, they alleged a breach of contract cause of action, seeking recovery from Colak
under the Reimbursement Agreement. They alleged that the total amount due under the
Reimbursement Agreement became final on October 24, 2011 after the parties reached a
stipulation concerning costs, they immediately made a demand on Colak that he pay his
pro forma percentage, and he rejected the demand on November 17, 2011.
In its order denying appellants’ motion, the trial court described at length how the
record established appellants were aware of their breach of contract claim at the time they
filed their earlier pleadings, but for strategic reasons elected to omit it. The trial court
further explained that because appellants had filed their motion after it had already
sustained Colak’s demurrer without leave to amend, the motion must be treated as one for
reconsideration. So construed, the trial court found the motion had no merit: “Plaintiffs
were plainly aware of their potential breach of contract against Colak when they filed
their opposition to Colak’s demurrer—they were aware of it when they filed their original
and first amended complaints. Because plaintiffs had knowledge of the breach of
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contract theory at the time they opposed the Colak demurrer, they have failed to offer
new or different facts, circumstances or law that they could not with reasonable diligence
have discovered and produced at the time of the hearing on Colak’s demurrer and
reconsideration under CCP Section 1008 is thus improper.” The trial court concluded its
order by declining to reconsider the order sustaining Colak’s demurrer on its own motion,
“because it wishes to discourage the kind of gamesmanship that plaintiffs have engaged
in.”
We review the denial of a motion for reconsideration for an abuse of discretion.
(California Correctional Peace Officers Assn. v. Virga (2010) 181 Cal. App. 4th 30, 42;
New York Times Co. v. Superior Court (2005) 135 Cal. App. 4th 206, 212.) “Where a
demurrer has been sustained without leave to amend, it is proper to seek reconsideration
based on a proposed amended complaint alleging different facts than the complaint to
which the demurrer was sustained. The amended pleading itself constitutes a ‘different
state of facts’ to permit reconsideration under CCP § 1008(a).” (Weil & Brown, Cal.
Practice Guide: Civil Procedure Before Trial (The Rutter Group 2012) ¶ 7:155.6,
p. 7(1)-65 (rev. # 1, 2012), citing Rains v. Superior Court (1984) 150 Cal. App. 3d 933,
944 (Rains).) Also relying on Rains, the court in Careau & Co. v. Security Pacific
Business Credit, Inc. (1990) 222 Cal. App. 3d 1371, 1386, seemed to suggest that the trial
court abused its discretion in the event it denied such a motion: “Under Rains v. Superior
Court (1984) 150 Cal. App. 3d 933, 943–944, plaintiffs were entitled to submit proposed
second amended complaints by way of a motion for reconsideration. If those second
amended complaints stated any causes of action, then the trial court was obligated to
(1) vacate its order which sustained the demurrers without leave to amend and (2) make a
different order granting plaintiffs leave to file an amended complaint, which would
include the causes of action which the trial court, in deciding the merits of the motion for
reconsideration, determined were valid. [Citation.]”
In Rains, psychiatric patients brought several causes of action against psychiatrists
in a residential treatment program. In connection with their claim for battery, the
plaintiffs alleged that although they had consented to certain types of physical violence
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for treatment purposes, the assaults were used to control their behavior under the guise of
treatment. (Rains, supra, 150 Cal.App.3d at pp. 936–937.) On demurrer, the defendants
argued that the plaintiffs’ admission of consent barred their battery claim, and the trial
court sustained the demurrer without leave to amend. (Id. at p. 937.) The plaintiffs
moved for reconsideration and submitted a proposed complaint that contained additional
allegations showing that the defendants had withheld information concerning the purpose
of the assaults and batteries, and the appellate court concluded that the plaintiffs stated a
valid claim. (Id. at p. 938.)
In connection with its determination that sanctions were not warranted for the
plaintiffs’ procedural use of a motion for reconsideration, the Rains court determined that
the “different facts” alleged in the proposed pleading sufficed as the “new or different
facts” required under Code of Civil Procedure 1008, subdivision (a). (Rains, supra, 150
Cal.App.3d at p. 944.) Finding that the plaintiffs satisfied the statutory requirements, the
court held there was no basis for the imposition of sanctions; it did not, however,
mandate that a motion for reconsideration must be granted in every instance where a
proposed amended pleading sets forth different facts. (Id. at pp. 944–945.)
Importantly, more recent cases construing Code of Civil Procedure section 1008
have held that “[a] motion for reconsideration must be based on new or different facts,
circumstances or law [citation], and facts of which the party seeking reconsideration was
aware at the time of the original ruling are not ‘new or different.’ [Citation.]” (In re
Marriage of Herr (2009) 174 Cal. App. 4th 1463, 1468; see Hennigan v. White (2011) 199
Cal. App. 4th 395, 405–406 [motion for reconsideration of summary judgment properly
denied where, at the time of the original ruling, the plaintiff was aware of the information
in the new declarations she sought to offer]; Garcia v. Hejmadi (1997) 58 Cal. App. 4th
674, 688–690 [same].) Here, the record unambiguously shows that—at the latest—
appellants were aware of all facts necessary to allege their breach of contract claim at the
time of the hearing on the demurrer. Thus, their breach of contract allegations were
insufficient to serve as new or different facts necessary for reconsideration.
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We find it equally significant that the Rains court observed it was “not apparent
that plaintiffs sought such reconsideration in bad faith or that the contentions there
advanced were believed by them to be frivolous.” (Rains, supra, 150 Cal.App.3d at
p. 944.) Here, in contrast, the trial court expressly found that appellants had engaged in
“gamesmanship” by deliberately omitting the breach of contract cause of action from
their first two complaints and electing “to put all their eggs in the one basket of their
equitable indemnity theory of recovery.” As Colak pointed out in his opposition to the
motion for leave to amend, appellants’ strategy was obvious: They sought over
$39 million in their comparative equitable indemnity claim as compared to the $340,000
dictated by the Reimbursement Agreement. But, their claim under the Reimbursement
Agreement would potentially bar their comparative equitable indemnity claim. (See
Markley v. Beagle (1967) 66 Cal. 2d 951, 961 [“Since the parties expressly contracted
with respect to the contractors’ duty to indemnify the owners, the extent of that duty must
be determined from the contract and not from the independent doctrine of equitable
indemnity”].) The trial court therefore determined that appellants “elected, for strategic
reasons, not to allege” their breach of contract claim, even though they were aware of it
from the beginning.
The trial court properly exercised its discretion to conclude that appellants’ tactics
rendered them unable to offer a valid basis for failing to raise the breach of contract claim
before the demurrer had been sustained without leave to amend. (See Forrest v.
Department of Corporations (2007) 150 Cal. App. 4th 183, 202 [a motion for
reconsideration requires a strong showing of diligence] disapproved on another point in
Shalant v. Girardi (2011) 51 Cal. 4th 1164, 1172, fn. 3; Mink v. Superior Court (1992) 2
Cal. App. 4th 1338, 1342 [the party seeking reconsideration must offer a satisfactory
explanation for the failure to produce the new or different facts at an earlier time].)
Likewise, on appeal appellants have failed to offer a satisfactory explanation for failing to
bring the breach of contract claim earlier, instead asserting that their motion should not
have been characterized as one for reconsideration. We conclude they have failed to
meet their burden to show an abuse of discretion.
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DISPOSITION
The judgment is affirmed. Colak is entitled to his costs on appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.
_____________________, J. *
FERNS
We concur:
____________________________, Acting P. J.
ASHMANN-GERST
____________________________, J.
CHAVEZ
* Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to
article VI, section 6 of the California Constitution.
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