Sprengel v. Zbylut ( 2019 )

Filed 11/4/19 (unmodified opinion attached)
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
JEAN SPRENGEL, B282129
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BC535584)
v.
ORDER MODIFYING
GREGORY ZBYLUT, et al., OPINION
(NO CHANGE IN
Defendants and Respondents. JUDGMENT)
THE COURT:
IT IS ORDERED that the opinion filed September 10, 2019,
modified on September 17, 2019 be corrected as follows:
1. Page 1 third paragraph, attorneys for Defendant and
Respondent Gregory Zbylut, Miller Law Associates,
Zachary Mayer shall include Lisa D. Mallinson
____________________________________________________________
PERLUSS, P. J., ZELON, J., SEGAL, J.
Filed 9/10/19 (unmodified opn. attached); Ordered Published 10/7/19 (order attached);
Nonpub. opn. modified 9/17/19 (order attached)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
JEAN SPRENGEL, B282129
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BC535584)
v.
GREGORY ZBYLUT, et al.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of Los
Angeles County, Elizabeth Allen White, Judge. Affirmed.
Knez Law Group and Fred J. Knez, for Plaintiff and
Appellant.
Miller Law Associates, Randall A. Miller, Lisa D. Mallinson
and Amy A. Breyer for Defendant and Respondent Gregory A.
Zbylut.
Nemecek & Cole, Michael McCarthy, Mark Schaeffer and
Tammy Q. Gallardo, for Defendants and Respondents Vincent
Cox and Leopold, Petrich & Smith.
__________________________
Jean Sprengel and Lanette Mohr established “Purposeful
Press LLC” to market a guidebook that Sprengel had written
about the side effects of chemotherapy. After a management
dispute arose between them, Sprengel filed an action to dissolve
the company, and a separate action alleging that Mohr had
infringed her copyrights to the guidebook. Mohr, acting in her
representative capacity as the manager of Purposeful Press,
retained Gregory Zbylut, Vincent Cox and Cox’s firm, Leopold,
Petrich & Smith (LPS), to advise the company with respect to
Sprengel’s copyright claims and various other issues.
After the dissolution and copyright suits were resolved,
Sprengel filed a malpractice action against Zbylut, Cox and LPS
alleging they had violated their professional duties by
undertaking representation of Purposeful Press without her
consent, and rendering legal advice in the underlying lawsuits
that was adverse to her interests.
Defendants filed motions for summary judgment arguing
that their representation of Purposeful Press did not create an
attorney-client relationship with Sprengel in her individual
capacity. Sprengel, however, argued that defendants owed her a
professional duty of care based on her status as a 50 percent
shareholder of Purposeful Press. The trial court granted the
motions, and entered judgments in defendants’ favor. We affirm.
FACTUAL BACKGROUND
A. Formation of Purposeful Press
In 2008, Jean Sprengel and Lanette Mohr agreed to form a
limited liability company to adapt and market “Kaye’s Chemo
Book,” a guidebook Sprengel had written about treating the side
3
effects of chemotherapy. 1 Sprengel and Mohr retained Kenneth
Stream to assist them in forming the corporation, which they
named Purposeful Press.
Purposeful Press’s operating agreement stated that
Sprengel and Mohr were each 50 percent owners of the company,
and that neither of them had “the authority to bind the Company
without the consent and/or approval of the other.” The
agreement further provided that Sprengel would make an initial
investment of $5,000 in the company, and that Mohr would
provide “organizational and business planning services with an
agreed-upon value of $5,000.” The agreement identified Mohr as
“the sole manager of the company,” which authorized her to
“Keep the books and records of the Company; “Open bank
accounts in the name of the Company”; “Execute instruments and
documents”; and “do and perform all other acts as may be
necessary or appropriate to the conduct of the Company’s
Business.” Sprengel and Mohr were not entitled to any
compensation from the company other than equal profit
distributions.
Acting pursuant to her role as manager, Mohr negotiated a
deal with Merck Pharmaceuticals to produce a commercialized
version of “Kaye’s Chemo Book.” During 2008 and 2009, Mohr
and Sprengel worked to transform the original work into two
commercial guidebooks named the “ChemoCompanion Care
Guide” and the “ChemoCompanion Pocket Guide” (collectively the
ChemoCompanion guides).
1 This is the second appeal in this matter. In Sprengel v.
Zbylut (2015) 241 Cal. App. 4th 140, we affirmed the trial court’s
order denying defendants’ special motion to strike brought
pursuant to Code of Civil Procedure section 425.16.
4
B. Sprengel and Mohr’s Management Disputes
In December 2010, Mohr informed Sprengel she could not
continue to serve as manager unless she began receiving a salary.
In response, Sprengel told Mohr she was willing to take over
managerial duties, and requested that Mohr turn over the
corporate records. Mohr, however, retained the records, and
began to exclude Sprengel from discussions about Purposeful
Press’s business operations. Sprengel monitored Purposeful
Press’s checking account, and became concerned Mohr was using
corporate funds to pay for personal expenses. That same month,
Rosen contacted defendant Gregory Zbylut about representing
Purposeful Press. According to Zbylut’s declaration, during their
initial consultation, Mohr told him she and Sprengel were in a
dispute regarding Mohr’s compensation and business
expenditures. Mohr then retained Zbylut to prepare Purposeful
Press’s tax filings and K-1 forms.
In August 2011, Mohr and Rosen met with Vincent Cox to
discuss representation of Purposeful Press regarding the
company’s intellectual property. According to Cox’s declaration,
Mohr told him that Sprengel had threatened to terminate
Purposeful Press’s right to sell the ChemoCompanion guides.
Cox and Mohr then spoke at length about the history of
Purposeful Press, and the ChemoCompanion guides. Mohr and
Cox signed a retainer agreement stating that Cox’s firm, Leopold
Petrich & Smith (LPS), would provide Purposeful Press legal
services regarding the “[c]onfirmation of client’s intellectual
property rights in certain published and unpublished works.”
Based on his discussions with Mohr and his review of Purposeful
Press’s operation agreement, Cox formed the belief that Sprengel
and Mohr had received “incorrect and incomplete legal advice by
5
Mr. Stream” regarding the company’s ownership of the copyrights
to the ChemoCompanion guides.
On September 16, 2011, Cox sent a letter to Sprengel’s
personal attorney, Michael Kerbs, stating that Purposeful Press
had retained LPS “in connection with its intellectual property
rights.” The letter acknowledged the dispute between Sprengel
and Mohr, and asserted that Purposeful Press had the right to
continue marketing and selling the ChemoCompanion guides,
and develop other derivative works. The letter also cautioned
Sprengel against pursuing legal action, asserting that any such
litigation would be costly for herself and the company.
Immediately after learning that Mohr had retained Zbylut
and LPS to represent Purposeful Press, Sprengel withdrew
$162,000 from the company’s bank account, and deposited the
funds into a trust account maintained by her attorney. Sprengel
asserted that the transfer was necessary “to prevent future
improper expenditure[s],” and notified Mohr she could seek
repayment “for any appropriate business expenses.”
Sprengel also sent Mohr a letter stating that she was
revoking any implied copyright license she had granted to
Purposeful Press to exploit “Kaye’s Chemo Guide.” Shortly after
receiving the letter, Cox and LPS assisted Mohr in preparing a
copyright registration for the ChemoCompanion guides that
listed herself, Sprengel and Purposeful Press as claimants.
C. Sprengel’s Filing of the Dissolution and Copyright
Actions
In September 2011, Sprengel filed an involuntary
dissolution action against Mohr and Purposeful Press. The
complaint alleged Purposeful Press could no longer carry out its
duties “in conformity with the . . . Operating Agreement” because
6
the “management of the company [had become] deadlocked or
subject to internal dissension.”
Sprengel also filed a federal copyright infringement action
against Mohr asserting that she owned the copyright to the Kay
Chemo Guide and the derivative ChemoCompanion guides. The
complaint alleged that although Sprengel had initially granted
Purposeful Press an implied license to sell the original and
derivative works, she had subsequently revoked the license. The
complaint further alleged that Mohr, acting through Purposeful
Press, had continued to market and sell the works, despite
Sprengel’s revocation of the license.
After the suits were filed, Cox and Mohr signed an
amendment to the Purposeful Press retainer agreement that
expanded the scope of LPS’s legal services to include pursuing a
declaratory relief action regarding the company’s “rights in its
intellectual property,” and filing claims against Sprengel for
unlawfully transferring funds from Purposeful Press’s bank
accounts.
D. The Federal Copyright Proceedings
1. Mohr’s motion to disqualify counsel for Purposeful
Press
In the copyright action, Mohr requested that Purposeful
Press be joined in the proceedings as a necessary party. (See
Fed. Rules Civ. Proc., rule 19). In response, Sprengel filed an
amended complaint naming Purposeful Press as a nominal
defendant, and retained Thomas Foley to serve as the “neutral”
company attorney. Mohr filed a motion to disqualify Foley,
asserting that Sprengel had no authority to select the company’s
attorney.
7
The district court granted the motion, concluding that
because Sprengel and Mohr were both 50 percent owners of the
company, conflict of interest principles precluded either of them
from unilaterally selecting corporate counsel: “[U]nder California
law an attorney-client relationship arguably has been formed
between . . . Foley and Sprengel in her representative capacity as
a member of the Company. Given the dispute between Sprengel
and Mohr, it is not clear that . . . Foley as counsel for the
Company adequately can represent the interests of all members
in the Company – i.e., Sprengel and Mohr. . . . Foley presumably
has been compensated by Sprengel. . . . It very well may be
that . . . Foley would be able to maintain his independence of
professional judgment. But his representation of the Company
still would interfere with the attorney-client relationship between
him and each of the parties in their representative capacity as a
member of the Company. And, to the extent Mohr can be
considered [] Foley’s ‘client’ (again, through her 50% membership
interest in the Company), she does not consent to [] Foley’s
representation.” (Sprengel v. Mohr (C.D. Cal., May 30, 2012, No.
CV 11-8742 (2012 WL 12886207, at *2.)
The court further explained that the company did not
appear to need counsel because it had no discernible “interest
independent of its owners.” The court advised, however, that if “a
legitimate need were to arise for the Company to . . . actively
participate in this action, the parties [could] stipulate to the
appointment of independent counsel.”
2. The parties’ discovery disputes
Sprengel served Mohr with discovery requests seeking any
communications Mohr had with Zbylut, Cox or LPS regarding
Purposeful Press. Mohr objected to the requests based on
8
attorney-client privilege. Sprengel brought a motion to compel
arguing that Mohr was not authorized to invoke the company’s
privilege against the other 50 percent owner of the company.
After reviewing California authorities, the district court
concluded that a corporation’s privilege “can be asserted or
waived only by [current] management.” (Sprengel v. Mohr (C.D.
Cal., Sept. 14, 2012, No. CV 11-8742) 2012 WL 12885115, at *4.)
The court then analyzed who qualified as Purposeful Press’s
management for purposes of asserting the privilege: “Although
Mohr is the sole manager, the Operating Agreement . . . does not
provide that Mohr will have total control of the Company of
which she is only a 50 percent owner. On the contrary, the
[Agreement] states that the business of the Company shall be
managed by the members, and that no member has the authority
to bind the Company without the approval of the other
member. . . . In short, Sprengel is as much a controlling member
– is as much ‘current management’–of the Company as Mohr.”
(Ibid.)
The court further held that “where, as here, the LLC is
owned and managed by two coequal members, neither can assert
the LLC’s privilege against the other. Accordingly, Mohr cannot
assert the attorney-client privilege on behalf of the Company here
against Sprengel.”
3. The district court’s ruling in the copyright action
In February 2013, the district court issued its findings of
fact and conclusions of law in the copyright action. The court
found Sprengel owned the copyrights to both the Kay Chemo
Guide and the ChemoCompanion guides. The court further
found, however, that Sprengel had granted Mohr and Purposeful
Press an implied license to exploit those copyrights, which
9
provided a complete defense to Sprengel’s infringement claims.
The court also found that Mohr and Purposeful Press needed
Sprengel’s authorization to “develop [any] additional derivative
works that incorporate protected elements of the [original
works].”
E. The Current Malpractice Action
1. Summary of the Complaint
In September 2013, Sprengel filed the current lawsuit
against Zbylut, Cox and LPS. The complaint alleged that when
Mohr retained the defendants to represent Purposeful Press,
there was an understanding that they would “provide legal
services for the benefit of Mohr, and to the prejudice of
[Sprengel], under the pretext that the legal services were for the
benefit of the [c]ompany.” The complaint further alleged that
defendants had “solicited payment from the [c]ompany for their
legal services in conjunction with the [d]issolution [c]ase and the
[c]opyright [c]ase without [Sprengel’s] knowledge or consent. The
legal services provided by [d]efendants in the [d]issolution [c]ase
and the [c]opyright [c]ase were primarily devoted to the best
interests of Mohr and assisting [Mohr’s attorney Rosen] in his
representation of Mohr in those cases, at the [c]ompany’s
expense.”
Sprengel alleged four causes of action: (1) professional
negligence (malpractice); (2) breach of fiduciary duties; (3)
constructive fraud; and (4) “common count for money had and
received.” In the negligence claim, Sprengel asserted that “[b]y
undertaking to provide legal services and soliciting payment from
[Purposeful Press] in the [dissolution and copyright cases],
[d]efendants became obligated to [Sprengel] to exercise
reasonable care and skill with the standard of care for
10
attorneys. . . .” She further alleged defendants had breached
those professional obligations by “fail[ing] to communicate with
[Sprengel] and inform [her] of material facts and information
relating to the legal services provided and charged to [Purposeful
Press],” and “violat[ing] Rules of Professional Responsibility
governing . . . conflicts of interest including the failure to obtain
written waivers from [Sprengel] and Mohr.”
Sprengel’s claim for breach of fiduciary duty similarly
alleged that “by undertaking to provide legal services regarding
the affairs of [Purposeful Press] including the disputes between
the [c]ompany’s two 50 percent owners and causing the
[c]ompany to pay for those legal services, a fiduciary relationship
existed between [Sprengel] and [d]efendants such that
[d]efendants owed to [Sprengel] the duties of honesty, good faith,
undivided loyalty and full disclosure of material facts . . . and
were obligated to comply with all of the Rules of Professional
Conduct. . . .” Defendants allegedly breached their fiduciary
duties by “concealing a conflict of interest,” failing to obtain
Sprengel’s consent for payment of legal services and charging
Purposeful Press for legal services “calculated to benefit the
interests of Mohr and prejudice [Sprengel].”
Sprengel’s third and fourth claims for constructive fraud
and “common count for money had and received” were similarly
based on defendants’ alleged breach of professional duties they
owed to Sprengel.
2. The summary judgment proceedings
a. The defendants’ motions and supporting evidence
Zbylut and the LPS defendants (Cox and LPS) filed motions
for summary judgment arguing that there were two reasons
Sprengel’s claims failed as a matter of law. First, the LPS
11
defendants contended that Sprengel lacked standing to pursue
her claims in a direct action because Purposeful Press “[wa]s the
real party in interest.” More specifically, the LPS defendants
asserted the allegations in Sprengel’s complaint showed she was
seeking reimbursement of the funds Purposeful Press had paid to
defendants, claiming that those fees should be disgorged because:
(1) she had not consented to the legal services, as was required
under the operating agreement; and (2) the services were
intended to benefit Mohr, rather than the company. According to
defendants, these claims had to be brought as a derivative action
rather than a direct action because they effectively sought
recovery of the company’s assets.
Second, both defendants argued that “[a]ll of Sprengel’s
claims” were predicated on “the existence of an attorney-client
relationship between her and [defendants].” Defendants
asserted, however, that under “California law[,] . . . an attorney
for a corporate entity does not owe a duty of care to the
company’s members by virtue of representing the company.”
Thus, Sprengel’s status as a 50 percent owner of Purposeful Press
was, standing alone, insufficient to establish an attorney-client
relationship.
Zbylut, Cox and Mohr provided declarations in support of
the motions clarifying that Mohr had retained the defendants to
represent Purposeful Press, and retained separate counsel
(Rosen) to represent her in her individual capacity. Zbylut and
Cox’s declarations described the nature of the work they had
performed for the company. Zbylut asserted his work had
consisted solely of tax preparation services, while Cox stated that
he had provided advice regarding Purposeful Press’s copyright
12
interests to the chemotherapy guidebooks. Both defendants
asserted they had never spoken directly with Sprengel.
b. Sprengel’s opposition and supporting evidence
Sprengel’s opposition argued that, by undertaking
representation of a corporate entity comprised of two 50 percent
owners, the defendants necessarily entered into an implied
attorney-client relationship with each of the owners in their
individual capacities. Sprengel further asserted that as a result
of her implied attorney-client relationship with defendants, they
were required to obtain her consent prior to performing any legal
services on behalf of Purposeful Press, and were precluded from
taking any legal positions that were adverse to her personal
interests. Sprengel contended defendants had violated those
obligations by accepting payment from Purposeful Press without
obtaining her consent, and advising Mohr with respect to
Sprengel’s claims in the dissolution and copyright actions. 2
Sprengel did not directly address the LPS defendants’
contention that her claims were derivative in nature, meaning
she lacked standing to assert her claims in a direct action.
Although Sprengel argued she had “standing” based on her
implied attorney-client relationship with the defendants, she did
not explain why her claims were direct, rather than derivative,
nor did she identify any harms she had suffered in her individual
capacity.
2 Sprengel’s opposition also argued the defendants were
collaterally estopped from denying the existence of an attorney-
client relationship based on the district court’s orders in the
federal copyright action. The trial court rejected Sprengel’s
estoppel argument, and Sprengel has not challenged that portion
of the ruling in this appeal.
13
In support of her opposition, Sprengel provided
declarations asserting that Mohr had not obtained her consent
prior to hiring defendants to represent Purposeful Press, and that
she had never spoken with defendants regarding their
representation of the company. Sprengel further asserted that
after learning of defendants’ retention, she transferred
Purposeful Press’s funds out of its bank account so that no
further payments could be made to them.
3. The trial court’s ruling
In February 2017, the court issued orders granting
defendants’ motions for summary judgment. The court agreed
that Sprengel lacked standing because her claims were
derivative, rather than individual, in nature. In its analysis, the
court explained that Sprengel’s claims were predicated on the
theory that “the use of Company funds to pay for Defendants’
legal services was, in essence, using Plaintiff’s money to pay for
such services.” The court further explained that the members of
a limited liability company do not hold any “direct ownership
interest in the company’s assets, [and are not] . . . directly injured
when the company is improperly deprived of those assets.” Thus,
the court continued, “the use of Company funds . . . to pay for
Defendants’ legal services . . . did not cause Plaintiff direct
financial injury. Instead, such injury would be derivative. . . . [¶]
. . . [¶] As such, Plaintiff does not have standing to assert any of
the causes of action as [a] direct claim.”
The court also found Sprengel had failed to establish any
triable issue of fact regarding the existence of an attorney-client
relationship between herself and defendants. The court
concluded that under California law, defendants’ representation
14
of Purposeful Press did not, standing alone, give rise to a
professional duty of care toward Sprengel.
DISCUSSION
Sprengel argues the trial court erred in concluding that she
lacked standing to bring her claims as a direct action, and that
she failed to identify any evidence that would support a finding of
an attorney-client relationship between herself and defendants.
A. Summary Judgment and Standard of Review
“‘Summary judgment is appropriate “if all the papers
submitted show that there is no triable issue as to any material
fact and that the moving party is entitled to a judgment as a
matter of law.” [Citation.]. . . . [¶] Our review is de novo.
[Citation.] We liberally construe the opposing party’s evidence
and resolve all doubts in favor of the opposing party. [Citation.]
We consider all evidence in the moving and opposition papers,
except that to which objections were properly sustained.’
[Citation.]” (Brown v. Goldstein (2019) 34 Cal.App.5th 418; 246
Cal. Rptr. 3d 161, 171-172.)
B. Sprengel Does Not Dispute She Lacks Standing to
Seek Reimbursement of Purposeful Press’s Funds
The trial court concluded Sprengel was required to bring
her claims as a derivative, rather than a direct, action because
the allegations in her complaint demonstrated she was seeking
redress for injuries to Purposeful Press, rather than for any
injury she had suffered in her individual capacity. More
specifically, the Court found Sprengel was seeking
reimbursement of the fees Purposeful Press had paid to
defendants for their legal services.
15
“Because a corporation exists as a separate legal entity, the
shareholders have no direct cause of action or right of recovery
against those who have harmed it. The shareholders may,
however, bring a derivative suit to enforce the corporation’s
rights and redress its injuries when the [corporation] fails or
refuses to do so.” (Grosset v. Wenaas (2008) 42 Cal. 4th 1100,
1108.) “An action is deemed derivative ‘“if the gravamen of the
complaint is injury to the corporation, or to the whole body of its
stock and property without any severance or distribution among
individual holders, or it seeks to recover assets for the
corporation or to prevent the dissipation of its assets.”’
[Citation.]” (Ibid. [fn. Omitted].) “A personal claim, in contrast,
asserts a right against the corporation which the shareholder
possesses as an individual apart from the corporate entity: ‘If the
injury is not incidental to an injury to the corporation, an
individual cause of action exists.’ [Citation.]” (Denevi v. LGCC,
LLC (2004) 121 Cal. App. 4th 1211, 1222 (Denevi).) “[T]he
principles of derivative lawsuits applicable to corporations
likewise apply to a limited liability compan[ies].” (PacLink
Communications Intern., Inc. v. Superior Court (2001) 90
Cal. App. 4th 958, 963 (PacLink).)
Sprengel’s appellate briefing does not challenge the court’s
conclusion that she cannot bring a direct action to recover the
corporate funds that Purposeful Press paid to defendants for
their legal services. This apparent concession is well taken.
Claims seeking to recover corporate assets from a third party are
generally deemed to be derivative in nature. (PacLink, supra, 90
Cal.App.4th at p. 964 [claim alleging LLC had been “improperly
deprived of . . . assets,” causing a “diminution in the value of
[individual member’s] interest” was derivative]; see also Marsh et
16
al., Marsh’s Cal. Corp. Law (4th ed. 2000) § 15.11[A][1], pp. 15-
61, 64.) Thus, to the extent defendants unlawfully solicited and
accepted payment from Purposeful Press for legal services that
were not authorized by the company’s management, or were
otherwise intended to benefit Mohr in her personal capacity, a
derivative action is the appropriate remedy.
Sprengel disputes, however, the trial court’s finding that
the only form of injury she has alleged in this case consists of
“fraudulent use of Company funds for [payment of legal services
intended for] Mohr’s benefit.” According to Sprengel, her claims
also allege defendants breached their duty of loyalty to her by
providing advice and counsel to Mohr regarding the company’s
use of Sprengel’s copyrights to the chemotherapy guidebooks,
which forced Sprengel to expend funds to litigate the copyright
and dissolution actions. Stated more simply, Sprengel contends
the legal services defendants provided to Mohr forced her to incur
expenses to defend her personal copyrights.
Although Sprengel’s complaint does not expressly identify
the expenses she incurred in litigating the underlying actions as
a form of damages, those claims are fairly implied from her
pleadings and the materials she submitted in opposition to the
motions for summary judgment. Sprengel’s complaint repeatedly
asserts that, by providing legal services “in conjunction with the
[d]issolution [c]ase and the [c]opyright [c]ase,” defendants
breached their duty of loyalty to Sprengel, and violated their duty
to avoid conflicts of interest. The declarations Sprengel provided
in the summary judgment proceedings further assert that, as a
result of defendants’ conduct, she was “forced to retain attorneys
and incur fees and costs.” These allegations make clear that
17
Sprengel is seeking redress for the fees that defendants allegedly
caused her to incur in defending her copyrights.
It is also clear that this form of injury is personal, rather
than derivative, because it involves rights that Sprengel allegedly
possessed as “an individual apart from the corporate entity.”
(Denevi, supra, 121 Cal.App.4th at p. 1222.) Specifically, she
alleges that as a result of the defendants’ breach of their
professional duties, she was forced to defend copyrights she
owned in her personal capacity.
C. Sprengel Has Presented No Evidence that Would
Support a Finding of an Implied Attorney-Client
Relationship
Sprengel acknowledges that, to prevail on the aspects of
her claims that she has standing to pursue, she must establish
the existence of an attorney-client relationship between herself
and defendants. She further concedes that she never entered into
an express agreement with any of the defendants. She contends,
however, that an “implied” attorney-client relationship existed
between herself and defendants based on her status as a 50
percent owner of Purposeful Press.
The existence of an attorney-client relationship involves a
question of law that we review de novo. However, any conflict in
the evidence of an attorney-client relationship is a question of
fact for the trial court to decide, which we uphold if supported by
substantial evidence. (See Responsible Citizens v. Superior Court
(1993) 16 Cal. App. 4th 1717, 1733 (Responsible Citizens); Meehan
v. Hopps (1956) 144 Cal. App. 2d 284, 287 (Meehan.)
18
1. Summary of applicable law
a. General rule of no duty to shareholders
Generally, when “representing a corporation, an attorney’s
client is the corporate entity, not individual shareholders or
directors, and the individual shareholders or directors cannot
presume that corporate counsel is protecting their interests.” (La
Jolla Cove Motel & Hotel Apartments, Inc. v. Superior Court
(2004) 121 Cal. App. 4th 773, 784.) “An attorney representing a
corporation does not become the representative of its stockholders
merely because the attorney’s actions on behalf of the corporation
also benefit the stockholders; as attorney for the corporation,
counsel’s first duty is to the corporation.” (Skarbrevik v. Cohen,
England & Whitfield (1991) 231 Cal. App. 3d 692, 703
(Skarbrevik); see also Meehan, supra, 144 Cal.App.2d at p. 290
[“The attorney for a corporation represents the corporation. . . .
He in nowise represents the officers personally”]).)
These principles are reflected in California’s Rules of
Professional Conduct, former Rule 3-600, which governed the
representation of an organization at the time the events at issue
in this case occurred. (See Cal. Rules of Prof. Conduct, former
Rule 3-600 [effective September 14, 1992 to October 31, 2018].) 3
Subdivision (A) of former Rule 3-600 provided, in relevant part:
“In representing an organization, a [lawyer] shall conform his or
her representation to the concept that the client is the
3 During the pendency of this appeal, the Supreme Court
approved new Rules of Professional Conduct. The current rule
governing the representation of an organization, Rule 1.13,
contains language that is substantially identical to the
subdivisions of former Rule 3-600 that we cite here. (See Cal.
Rules of Prof. Conduct, Rule 1.13(a) and (f).)
19
organization itself . . . .” Subdivision (D) further provided that,
“In dealing with an organization’s directors, officers, employees,
members, shareholders, or other constituents, a [lawyer] shall
explain the identity of the client for whom the [lawyer] acts,
whenever it is or becomes apparent that the organization’s
interests are or may become adverse to those of the constituent(s)
with whom the [lawyer] is dealing.”
In Skarbrevik, supra, 231 Cal. App. 3d 692, the court applied
these principles in concluding that a corporate attorney owed no
professional duty to a minority shareholder who claimed that the
value of his shares had been fraudulently diluted. The evidence
at trial showed the majority shareholders had initially agreed to
purchase plaintiff’s 25 percent share of the company for $500,000.
Several months later, however, the majority shareholders refused
to make the payment, asserting that the company’s attorney had
advised them they were not legally required to make the
payment. The attorney then advised the majority shareholders
with respect to a stock issuance plan that substantially diluted
the value of plaintiff’s ownership interest. A jury found the
attorney and his law firm had breached their professional duties
to the plaintiff.
The appellate court reversed, explaining that a “corporate
counsel’s direct duty is to the client corporation, not to the
shareholders individually, even though the legal advice rendered
to the corporation may affect the shareholders.” (Skarbrevik,
supra, 231 Cal.App.3d at p. 704.) The court acknowledged case
law from other jurisdictions holding that an attorney for a
closely-held corporation may owe professional duties to individual
owners with whom he or she has had “close interaction.” (Id. at
p. 705.)
20
The court concluded, however, that no such interaction had
occurred in the current case. Instead, the evidence showed the
plaintiff had “no contact” with the corporate attorney, and had no
“basis . . . to place faith, confidence or trust in [the attorney] to
protect his interests . . ., particularly after he was told . . . [the]
attorney[ had] advi[sed the majority shareholders] . . . not to pay
him for his shares.” (Skarbrevik, supra, 231 Cal.App.3d at
p. 705.) The court further explained that “[t]he fact that the
[attorney] could have foreseen the adverse consequences of his
advice and its impact on plaintiff [was] not sufficient justification
for fixing liability on him to a nonclient shareholder under these
circumstances.” (Id. at p. 707.)
b. Case law addressing implied attorney-client
relationships in the context of partnerships
In Responsible Citizens, supra, 16 Cal. App. 4th 1717, the
court held that, at least under some circumstances, an attorney’s
representation of a partnership may create an implied attorney-
client relationship with the individual partners. The defendant
in Responsible Citizens sought to disqualify the plaintiff’s
attorney because the attorney had previously represented the
defendant’s partnership in an unrelated matter. The trial court
granted the disqualification order “based on . . . the legal
conclusion that representation of a partnership automatically
creates an attorney-client relationship with the individual
partners.” (Id. at p. 1721.)
The appellate court reversed, concluding that the trial
court had erred in finding that an attorney’s representation of a
partnership “necessarily includes representation of the individual
partners.” (Responsible Citizens, supra, 16 Cal.App.4th at
p. 1735.) The court further held, however, that an attorney for a
21
partnership may, through his or her conduct, enter into an
“implied” attorney-client relationship to represent the interests of
the individual partners. (Id. at p. 1732.) The court set forth a
“[non]exhaustive” list of “factors which might support, or
undercut, implication of an attorney-client relationship with an
individual partner in any particular case. The type and size of
the partnership obviously have a bearing. . . . So do the nature
and scope of the attorney’s engagement by the partnership. The
kind and extent of contacts, if any, between the attorney and the
individual partner might be important factors. The same is true
as to the attorney’s access to information (e.g., partnership
financial information) relating to the individual partner’s
interests.” (Id. at p. 1733.)
The court emphasized that “primary attention should be
given to whether the totality of the circumstances, including the
parties’ conduct, implies an agreement by the partnership
attorney not to accept other representations adverse to the
individual partner’s personal interests.” (Responsible Citizens,
supra, 16 Cal.App.4th at p. 1733.) The court remanded the
matter with directions that the trial court weigh those factors in
assessing whether an implied attorney-client relationship had
been formed.
In Johnson v. Superior Court (1995) 38 Cal. App. 4th 463
(Johnson), the court applied Responsible Citizens’s multi-factor
test in assessing whether there was sufficient evidence to support
a finding that the attorney for a partnership had an implied
attorney-client relationship with each of the partners. The
partnership at issue in Johnson owned a single asset that
consisted of a lease to an industrial park. During the lease
period, the general partner, acting on behalf of the partnership,
22
entered into an option to purchase the property from the
landowner on terms that were beneficial to the partnership.
Shortly thereafter, the general partner sent the limited partners
a letter stating that they needed to contribute additional capital
to the partnership, or, alternatively, sell their interest back to the
partnership. The letter did not disclose the partnership’s option
agreement with the landowner.
The general partner retained the defendant attorney to
advise him and the partnership whether any additional
disclosures had to be made to the limited partners regarding the
option to purchase the land. The attorney drafted a second letter
informing the limited partners that they were required to either
provide additional capital, or accept the general partner’s buyout
proposal. The general partner sent the letter out on his
letterhead; there was no indication that the letter had been
prepared or reviewed by the defendant. The limited partners
elected to sell their partnership interests back to the general
partner; the general partner then executed the option to purchase
the property, and subsequently resold the property for a
substantial profit.
The limited partners filed suit against the general partner
and the attorney for failing to disclose the land purchase
agreement. The attorney moved for summary judgment, arguing
that he had been retained to represent the general partner and
partnership, and had no attorney-client relationship with the
limited partners. The trial court granted the motion, noting that
there was no express agreement to represent the plaintiffs, and
that plaintiffs had never had ever had any contact with the
defendant, or otherwise relied on his advice.
23
The appellate court reversed, concluding there were triable
issues of fact whether the plaintiffs and defendant had an
implied attorney-client relationship. The court acknowledged
that several of the factors set forth in Responsible Citizens
weighed against an attorney-client relationship. Specifically, the
evidence showed the limited partners had not had any contact
with the attorney, they had not directly relied on the attorney’s
advice and had no prior relationship with him. Moreover, there
was no evidence the attorney had access to any confidential
information regarding the partner’s individual finances, or their
desire to remain in the partnership.
The court concluded, however, that other factors
nonetheless raised a triable issue of fact regarding the existence
of an attorney-client relationship. First, the attorney knew the
limited partners had no knowledge of the partnership’s option to
purchase the property. Second, the attorney also knew the
limited partners were likely to rely on the letter he had drafted,
and that the omission of material facts might affect their decision
whether to sell their partnership interest. Third, the court found
that the “primary factor” weighing in favor of an attorney-client
relationship consisted of “the nature of representation that [the
attorney] had rendered” to the partnership. (Johnson, supra, 38
Cal.App.4th at p. 478.) The court explained that the attorney
had specifically been “retained to represent the partnership
interests” with respect to the land sale. (Ibid.) The evidence
indicated, however, that the attorney’s actions were intended to
benefit the general partner at the expense of the limited
partners. As stated by the court, “This is a case, we are
convinced, in which the undertaking by [the attorney] to
represent the partnership, generally, imposed upon him an
24
obligation of loyalty to the partnership and to all partners in
terms of their entitlement to benefits from the partnership. . . .”
(Id. at p. 479.)
2. Sprengel has presented no evidence that would
support the finding of an implied attorney-client
relationship
Sprengel argues that, under the factors and analysis set
forth in Responsible Citizens, there are triable issues of fact
whether she had an implied attorney-client relationship with
defendants based on their representation of Purposeful Press.
Sprengel’s argument relies primarily on the first factor set forth
in Responsible Citizens, effectively asserting that defendants’
decision to undertake representation of an LLC that was owned
by two 50 percent shareholders necessarily gave rise to an
individual client-attorney relationship with each of the two
shareholders.
Defendants do not challenge Responsible Citizens’s and
Johnson’s holdings that an implied attorney-client relationship
may be formed between the attorney for a corporate entity and
the entities’ individual constituents. 4 They argue, however, that
applying the factors set forth in those decisions, Sprengel has
produced no evidence that would support a finding of an
attorney-client relationship between herself and defendants. We
agree.
4 Although Responsible Citizens involved a partnership, the
decision does not contain any language limiting its holding to
partnerships, and substantial portions of the decision analyze
corporations and partnerships interchangeably. (Responsible
Citizens, supra, 16 Cal.App.4th at pp. 1726-1729.)
25
As Sprengel correctly notes, Purposeful Press’s status as an
entity comprised of only two 50 percent shareholders is a factor
that weighs in support of an attorney-client relationship. (See
also Johnson, supra, 38 at p. 476 [“The argument is that
representation of [an entity with] few members may suggest an
individual representation of the members”]; see also Woods v.
Superior Court (1983) 149 Cal. App. 3d 931, 936 [“the attorney of a
. . . business [owned by a husband and a wife] . . . should not
represent one owner against the other in a dissolution action”].)
Several other factors, however, clearly “undercut the implication”
of an implied attorney-client relationship between Sprengel and
defendant. (Responsible Citizens, supra, 16 Cal.App.4th at
p. 1733.)
First, it is important to clarify the nature of the implied
attorney-client relationship that Sprengel alleges she formed
with defendants. Unlike in Johnson, Sprengel is not merely
asserting that, as attorneys for Purposeful Press, defendants had
a professional duty to protect the individual interests and
benefits she held in Purposeful Press as a shareholder. (Compare
Johnson, supra, 38 Cal.App.4th at p. 479 [“the undertaking . . . to
represent the partnership, generally, imposed [the attorney] . . .
an obligation of loyalty to . . . all partners in terms of their
entitlement to benefits from the partnership. . . .”].) Indeed,
aside from the derivative claims that seek recovery of the
corporate funds defendants received from Purposeful Press,
which Sprengel lacks standing to pursue (see ante, pp. 14-16),
Sprengel has not identified any harm that defendants’
representation of Purposeful Press is alleged to have caused to
her in her representative capacity as a shareholder.
26
She does not assert, for example, that defendants aided
Mohr in devaluing her share of the company, or otherwise
negatively affected any benefits she derived from Purposeful
Press. 5 Instead, Sprengel alleges defendants caused harm to
personal interests that she held separate from the corporation,
and that were adverse to the corporation. Specifically, she
alleges defendants breached their duty of loyalty by assisting
Mohr and Purposeful Press in claiming ownership over
copyrights that Sprengel owned in her personal capacity, causing
her to expend funds to defend those personally-held copyrights.
Sprengel has cited no authority suggesting that, standing alone,
an attorney’s representation of a closely-held corporation gives
rise to professional duties to the individual shareholders with
respect to personally-held rights that are both separate from, and
adverse to, the corporation itself.
Second, even if there were circumstances under which a
corporate attorney might owe such a duty to individual
shareholders, no such circumstances are present here. When
5 Sprengel’s appellate briefing contends there is evidence
that defendants aided Mohr in attempting to “force” Sprengel out
of the company. The only evidence she cites in support of that
claim, however, is an email from Zbylut to Mohr’s personal
attorney confirming that the operating agreement contained no
mechanism that permitted Sprengel or Mohr to unilaterally eject
the other from the company. The email proposed, however, that
Mohr offer Sprengel the corporation’s existing funds, then
$162,000, in exchange for Sprengel’s ownership interests in the
company and the copyrights. The contents of the email make
clear Zbylut was simply proposing a potential settlement offer
that could resolve the management dispute. There is no evidence
this proposal was ever acted upon, and Sprengel has not set forth
any injury she suffered as a result of the proposal.
27
assessing the existence of an implied attorney-client relationship
between a corporate attorney and the entity’s individual
members, the key inquiry is whether “the totality of the
circumstances” implies an agreement that the corporate attorney
will not act adversely to the individual shareholder’s interests
with respect to the issues in dispute. (Responsible Citizens,
supra, 16 Cal.App.4th at p. 1733.) Stated differently, we must
assess whether the parties conducted themselves in a way that
would reasonably cause a shareholder to believe the attorney
would protect the shareholder’s individual interests. (See
Skarbrevik, supra, 231 Cal.App.3d at p. 707.)
The evidence in this case demonstrates that Sprengel never
believed, or had any reason to believe, defendants were acting to
protect her personal interests, or had impliedly agreed to avoid
representations that were adverse to those interests. Shortly
after the LPS defendants agreed to represent Purposeful Press,
they sent Sprengel’s attorney a letter asserting that she was not
the sole owner of the copyrights, and that she had no authority to
unilaterally withdraw the company’s right to publish the
guidebooks. The attorneys made clear to Sprengel from the
outset that their representation to her was adverse in nature.
Moreover, Sprengel’s declarations assert that upon
learning Mohr had retained defendants to represent Purposeful
Press, she immediately transferred the company’s assets out of
its bank account to block any further payments to defendants.
She then filed multiple lawsuits against Mohr in which she was
represented by her own attorney. Sprengel’s declarations confirm
she never spoke with defendants directly, never relied on their
legal advice and never shared any confidential information with
28
them. Indeed, to the extent she had any interactions with
defendants, those interactions were adversarial in nature.
This is simply not a case where the parties’ conduct could
be deemed to imply an agreement that defendants would not
undertake representation that was adverse to Sprengel. The
adversarial nature of their relationship was clear from the time
they were retained by Purposeful Press.
DISPOSITION
The judgment is affirmed. Respondents shall recover their
costs on appeal.
ZELON, J.
We concur:
PERLUSS, P. J.
SEGAL, J.
29
Filed 9/17/19 (order modifying nonpub. opn.)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
JEAN SPRENGEL, B282129
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BC535584)
v.
ORDER MODIFYING
GREGORY ZBYLUT, et al., OPINION
(NO CHANGE IN
Defendants and Respondents. JUDGMENT)
THE COURT:
IT IS ORDERED that the opinion filed September 10, 2019
be corrected as follows:
2. Page 1 third paragraph, attorneys for Defendant and
Respondent Gregory Zbylut, Miller Law Associates,
Zachary Mayer shall replace Lisa D. Mallison.
3. Page 1 fourth paragraph, attorney Tammy Q. Gallardo
of Nemecek & Cole shall be corrected to read Tommy Q.
Gallardo.
____________________________________________________________
PERLUSS, P. J., ZELON, J., SEGAL, J.
Filed 10/7/19
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
JEAN SPRENGEL, B282129
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. BC535584)
v.
ORDER CERTIFIYING
GREGORY ZBYLUT, et al., OPINION FOR
PUBLICATION
Defendants and Respondents.
THE COURT:
The opinion in this case filed September 10, 2019 and
modified on September 17, 2019 was not certified for publication.
It appearing the opinion meets the standards for publication
specified in California Rules of Court, rule 8.1105(c), the request
by a non-party pursuant to California Rules of Court, rule
8.1120(a) for publication is granted.
IT IS HEREBY CERTIFIED that the opinion meets the
standards for publication specified in California Rules of Court,
rule 8.1105(c); and
ORDERED that the words “Not to be Published in the
Official Reports” appearing on page 1 of said opinion be deleted
and the opinion herein be published in the Official Reports.
____________________________________________________________
PERLUSS, P. J., ZELON, J., SEGAL, J.
2