A&B Market Plus, Inc. v. Arabo CA4/1 ( 2021 )

Filed 3/25/21 A&B Market Plus, Inc. v. Arabo CA4/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not
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COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
A&B MARKET PLUS, INC., et al., D073850
Plaintiffs and Respondents,
(Super. Ct. No. 37-2015-
v. 00032389-CU-OE-CTL)
MARK ARABO,
Defendant and Appellant.
APPEALS from a judgment and orders of the Superior Court of
San Diego County, Richard E. L. Strauss, Judge. Affirmed. Motions
for sanctions denied.
Niddrie Addams Fuller Singh, David A. Niddrie and Victoria E.
Fuller for Defendant and Appellant.
LiMandri & Jonna, Charles S. LiMandri, Paul M. Jonna, Jeffrey
M. Trissell and B. Dean Wilson for Plaintiffs and Respondents.
This is a derivative action filed by A&B Market Plus, Inc., LS &
SLG, Inc., Wall First Venture, Inc. and OB Star, Inc. (collectively,
plaintiffs), as members or former members of the Neighborhood Market
Association (NMA) against NMA1 and NMA’s former President and
CEO Mark Arabo, and NMA’s treasurer and secretary, Amir Oram.
Plaintiffs sought to remove Arabo and Oram from NMA’s board of
directors (the board), disgorgement of at least $463,322.63 obtained
through Arabo’s alleged misdeeds, and other damages for tax evasion
and lost business opportunities.
The sole matter at issue in this appeal is a $210,000 bonus (the
bonus) that the board awarded Arabo for his work in facilitating the
sale of NMA’s building. After a bench trial, the court ordered Arabo to
return the bonus.2
Arabo appeals, claiming that plaintiffs’ addition of a new fraud-
based theory of liability before trial, but after the close of discovery,
violated his due process rights. He also asserts that the trial court
erred in admitting documents prepared by plaintiffs’ counsel for
litigation. As we shall explain, Arabo did not suffer a due process
violation and Arabo forfeited the alleged error regarding admission of
the challenged documents.3 We also deny the parties’ cross motions for
1 In a derivative action the corporation is an indispensable party
and must be joined as a nominal defendant because its rights are being
litigated. (Keeler v. Schulte (1957) 47 Cal.2d 801, 803.) Accordingly,
plaintiffs named NMA as a defendant to all causes of action and we
occasionally refer to NMA as a defendant.
2 The court entered a defense judgment for Oram.
3 Should we agree that the trial court improperly ordered him to
return the bonus, Arabo argues that no alternative grounds support
affirmance of the court’s judgment regarding the bonus. Our
conclusion that the trial court did not err when it ordered Arabo to
return the bonus moots this argument and we do not address it.
2
sanctions, and plaintiffs’ request for attorney’s fees under the private
attorney general statute.4 (Code Civ. Proc., § 1021.5.)
I.
FACTUAL AND PROCEDURAL BACKGROUND
Overview of the Litigation
NMA is a non-profit mutual benefit corporation that is a trade
association for independent retail convenience stores. Arabo worked as
NMA’s President and CEO under a written employment contract. This
derivative action arose after NMA did not allow plaintiffs to inspect its
records and failed to provide plaintiffs with the NMA membership list.
As summarized by plaintiffs’ trial brief, the first two causes of
action for breach of fiduciary duty and “illegal compensation” were
derivative claims that focused on purported misconduct that occurred
4 Arabo seeks to augment the record to include certain portions of
the videotaped deposition testimony of two witnesses played during
trial. Respondents admit that the video clips were played at trial, but
submit that the motion should be denied because Arabo provided no
explanation for his delay in bringing this motion. Arabo responds that
the augmentation is relevant to issues raised in respondents’ brief and
sanctions motion. Arabo cites the interruption of normal operations
occasioned by the pandemic as contributing to the delay.
“At any time, on motion of a party . . ., the reviewing court may
order the record augmented to include: [¶] . . . [a]ny document filed or
lodged in the case in superior court.” (Cal. Rules of Court, rule
8.155(a)(1)(A).) Augmentation requests “made after a reasonable time
has expired from receiving the [appellate] record . . . will be denied
absent a strong showing of unusual or unavoidable circumstances
giving rise to the delay.” (People v. Preslie (1977) 70 Cal.App.3d 486,
492.) Respondents filed their sanctions motion in early February 2020.
and Arabo filed his augmentation motion in early June 2020. We
believe that the global pandemic declared in March 2020 created
unusual circumstances excusing any delay in filing the motion. The
motion is granted.
3
between 2013 and 2014, when NMA lost over $1,600,000.5 These
claims addressed, among other things, “Defendants’: gross
overpayments to Mark Arabo; tax violations and false tax reporting;
misappropriation of funds from the NMA Education Foundation, a
related charity; failure to disclose serious conflicts of interest; improper
political contributions and lobbying expenses; use of NMA funds for
personal use (while coding them as business expenses); falsely
representing that the NMA’s books were audited; and transferring
control of the NMA to an outside organization – in violation of the
bylaws, and pursuant to an unlawful contract.” The complaint also
contained two causes of action for injunctive relief to address
defendants’ failure to allow inspection of NMA records, and attempted
retaliation against a NMA member.
After trial, the court issued a 40-page statement of decision which
concluded, among other things, that a new board needed to be elected
and a receiver appointed pending election of the new board. The trial
court also concluded that Arabo breached his fiduciary duty and
required him to return the bonus to NMA.
As we have stated, this appeal focuses exclusively on Arabo’s
right to the bonus. Accordingly, the balance of our discussion focuses
on the facts relevant to the bonus claim.
Facts Relevant to the Bonus Claim
In late 2013, NMA was having financial problems and the board
later decided to sell its only asset, an office building located on Friars
Road (the building). The board hired Mike Habib as its broker for the
5 The parties agreed that these two causes of action would be
merged at trial based on the overlap between the claims.
4
transaction. Keller Williams SD Central Coastal (Keller Williams), is a
commercial real estate agency and, in 2013, was a tenant in NMA’s
building. A broker from Keller Williams, licensed California attorney
Toni-Diane Donnet, saw the for sale sign and approached Habib with
an offer to purchase the building for $2.6 million.
Habib showed Donnet a competing offer for $3.32 million. Keller
Williams matched the competing offer and purchased the building for
$3.32 million. Habib created a letter dated September 22, 2014 (the
letter), congratulating Arabo on the sale. The letter stated:
“Dear Mark,
“I wanted to congratulate you and thank you again
for your efforts in successfully negotiating and closing
the sale of The NMA building. The transaction was
complex and problematic, but the way you held it all
together was BRILLIANT!
“We started out with an offer from your tenant,
Keller Williams, at $2,600,000. I remember what you
told me they said they were going to offer $2,100,000
and you were right! Then you went back and forth
with them, tirelessly, until the written offer finally
came in at $2,600,000. It still amazes me how you
worked them up from $2,600,000 to $3,320,000!
Amazing!
“Your idea to the Buyer of buying all three buildings
is what clinched the deal. You had nerves of steel
when it came to the hard negotiating of the key
points of the deal. The payoff was evident in the fact
that the Buyer closed escrow and paid a higher price
to you for your building than what they paid for
either of the two adjacent buildings, purchased
concurrently with your building. I respect you and
admire how you saw the big picture.
5
“The real work was closing the deal, not just in
negotiating the initial terms of the offer. After you
signed the deal, for over six months, the Buyer kept
coming back relentlessly trying to hit you up with
changes that they needed and had to have in order to
close the deal. You held firm and the only changes
that were made, benefitted The NMA!
“I am grateful for the way you led and how you
skillfully made strategic decisions at key moments in
the transaction. Mark, I still can’t figure out how you
managed to do what you did with this deal, in the
midst of becoming the one to stand up and
courageously create solutions for Iraqi Christians in a
way that makes Americans proud. My hat is off to
you and here’s wishing you all my best as you
continue your good work.
“With respect and grateful appreciation,
“Mike Habib, CClM
“Coldwell Banker Commercial”
After the sale closed, the board discussed giving Arabo a bonus.
The letter was presented at the board meeting and the minutes reflect
the directors’ belief that Arabo “worked for months and hundreds of
hours to persuade the [buyer] to pay $3.32 million.” The board voted to
give Arabo a $210,000 bonus.
The Complaint and Pre-Trial Proceedings Regarding the Bonus
In September 2015, plaintiffs filed this shareholder derivative
suit against NMA that included direct claims against Arabo. The first
cause of action alleged that Arabo breached his fiduciary duty to NMA
by improperly authorizing or approving certain expenses, including
(1) a “ ‘finder’s fee’ ” of $210,000 paid to Arabo even though Arabo was
not a broker on the transaction or otherwise entitled to this
6
compensation, and (2) approximately $38,000 in reimbursement for
travel and costs not associated with NMA business. The second cause
of action, entitled as a claim for “illegal compensation”, contains similar
allegations. Plaintiffs’ first amended complaint and the operative
second amended complaint, repeated these allegations.6
In late August 2017, plaintiffs’ counsel had a telephone
conversation with Habib. In early September 2017, three of plaintiffs’
other counsel, including Bryan Wilson, participated in a conference call
with Habib. Wilson took contemporaneous notes during the call, which
he e-mailed to the two other attorneys on the call. The notes indicated
that Arabo made no decisions about the sale and that Habib did not
give much credit to Arabo for the sale. That same day, one of plaintiffs’
attorneys e-mailed Habib a draft declaration based on Wilson’s notes.
Later that same day, Habib returned a printed and marked-up copy of
the declaration.
On September 19, 2017, and a mere three weeks before trial, one
of plaintiffs’ attorneys wrote the following memo to the file:
“I spoke today to Mike Habib. He confirmed that he
will be able to fully testify as to everything he told us
on the phone (and which is summarized in the
attached declaration). He is concerned about putting
it in writing because he believes the folks on the
other side are nasty and will do everything they can
to attack him. He encouraged us to ‘ask the right
questions’ at trial so that we can elicit his full and
complete testimony. He will probably send us a
watered down version of his declaration tomorrow
(which will still be accurate), but he will answer more
fully at trial.”
6 Although the trial court ordered Arabo to return the $38,000, he
does not challenge this part of the court’s decision.
7
The following day, Habib returned the proposed declaration to
plaintiffs’ counsel with certain language stricken. The language not
stricken by Habib stated: “I am not a party to this case. I have
personal knowledge of the matters set forth below and could and would
competently testify thereto if called upon to do so in court”; “I was the
commercial Real Estate agent for the Neighborhood Market Association
(“NMA”) in 2014 when it sold its property located at 7050 Friars Road,
San Diego, California 92108”; “I understand that Mr. Arabo contends
he spent hundreds of hours working on this transaction”; “I advertised
the property and developed the relationship with the buyer’s agent, and
negotiated the price”; “I did communicate with Mr. Arabo near to the
time the sale was completed to discuss my commission from the sale”;
and “following the sale, Mr. Arabo asked me to write a letter of
recommendation to him that he wanted to share with the NMA Board.
He did not tell me the purpose of the letter, but I gladly agreed to write
one, as I would for any other client.”
In late 2017, the parties filed their trial briefs. Plaintiffs argued
that they were not limited to the two breaches of fiduciary duty
identified in the complaint (the $210,000 bonus and $38,000 in
expenses), and were seeking an additional $215,000 in damages for
Arabo’s alleged wrongdoing.
According to plaintiffs, they could seek leave to amend their
complaint to conform to proof at trial. Arabo’s trial brief complained
that plaintiffs were requesting the court to “decide a host of newly
asserted claims that were never alleged” in plaintiffs’ complaints.
8
Trial Testimony Regarding the Bonus
Donnet worked exclusively with Habib in closing the sale and she
had no interaction with Arabo. Donnet testified that the statements in
Habib’s letter regarding Arabo’s purported role in the sale were false.
Habib, who the parties did not depose, testified that he dealt
primarily with Donnet regarding the sale of the building, but that he
had contact with Arabo and was able to reach him as needed. He
admitted that Arabo asked him to write a letter of recommendation for
an unknown purpose and stated that he “gladly” did so. Habib claimed
that Arabo did not tell him what to write.
At one point, plaintiffs’ counsel refreshed Habib’s recollection
with Habib’s September 1, 2017 e-mail regarding the proposed
declaration that counsel had prepared for Habib’s signature. After the
court overruled Arabo’s leading and lack of foundation objections,
Habib denied telling plaintiffs’ counsel that Arabo told him what to put
in his letter “ ‘word-for-word.’ ” Plaintiffs then called attorney Wilson
as a rebuttal witness to testify regarding prior inconsistent statements
Habib made during Habib’s telephone conversations with plaintiffs’
counsel.
Later, Arabo’s counsel sought to recall Habib because Habib had
given him “a different story.” He explained that when plaintiffs called
Habib to testify, he anticipated that Habib would retract the letter, but
this did not occur. Instead, Habib affirmed the truth of the letter.
Arabo’s counsel explained that he needed to recall Habib to rebut
Wilson’s testimony. Plaintiffs’ counsel responded that if Habib was
recalled, he would call multiple attorneys who participated in the
telephone calls with Habib to impeach Habib. The court indicated that
9
if Habib was recalled, then it wanted to hear further testimony from
Donnet.
When recalled, Habib testified that everything in his letter was
“100 percent true.” He claimed that Arabo did not provide even a
single word of the letter. After his conversation with plaintiffs’ counsel,
Habib stated that he did not sign the proposed declaration because he
was “unwilling to sign something that wasn’t accurate.” Habib found
Wilson’s notes in relation to the telephone conversations “humorous”
because the notes bore no relation to the conversations, stating “It’s
what that person -- whoever wrote that, . . . Wilson, it’s what he wanted
to believe.” Habib claimed that the declaration prepared for his
signature by plaintiffs’ counsel did not bear any relation to the truth or
what had been discussed. The parties stipulated that each of plaintiffs’
attorneys would testify consistent with Wilson.
Plaintiffs recalled Donnet. Donnet testified she and Habib spoke
in the hallway on the day they both initially testified, and Habib
explained to her that Arabo had dictated the letter to him. She
testified that the statements in Habib’s letter regarding Arabo’s
involvement in the transaction were false. Arabo then had Habib
testify a third time. Habib essentially claimed that Donnet was lying
because Arabo told him “not one word” to put in the letter.
Plaintiffs’ expert witness opined that Arabo breached his
fiduciary duty by misrepresenting his involvement in the sale of the
building to the board. The defense expert testified that as a NMA
officer, Arabo owed a fiduciary duty to NMA. If Arabo knew that
Habib’s letter was false, then Arabo was obligated to disclose this to the
board.
10
During cross-examination, the defense expert agreed that
corporate officers have a duty of care to accurately convey information
to the board of directors that could impact the officer’s entitlement to
compensation. Assuming the information in Habib’s letter was false
and that Arabo had “spoon-fed” the false information to Habib, the
defense expert opined that Arabo breached his fiduciary duty to NMA,
specifically “the duty of loyalty and the duty of candor and the duty of
full disclosure.”
Closing Arguments and Decision Regarding the Bonus
During closing argument, plaintiffs’ counsel argued that Habib’s
letter was a lie and that Donnet’s testimony was truthful. Arabo’s
counsel claimed that plaintiffs wanted to make Arabo’s entitlement to
the bonus “all about” Habib’s letter, arguing that the board had
multiple reasons to grant Arabo a bonus. Arabo’s counsel pointed out
that what Habib told plaintiffs’ counsel during the telephone calls was
not under penalty of perjury and that Habib consistently testified
regarding the truth of the letter under penalty of perjury.
The court gave its tentative decision immediately after closing
argument. The court prefaced its decision by stating, “This is one of the
most unusual cases I’ve had in my 22 years on the bench. I’ve never
heard so much fiction under oath. It’s really unbelievable. I don’t even
know where to start.” The court stated it did not believe Habib’s
testimony, and believed Donnet’s. The court found that the letter was
“the driving force” for the bonus, the letter amounted to a false
representation to the board, and that Arabo participated in the false
representation. Accordingly, the court ruled that Arabo must disgorge
the bonus.
11
Over Arabo’s objection, the trial court adopted plaintiffs’ proposed
statement of decision. The trial court entered judgment in favor of
plaintiffs.
Post-Trial Proceedings Regarding the Bonus
Arabo filed a motion for new trial on multiple grounds, including
surprise and irregularity in the proceedings. Among other things,
Arabo asserted he was “prevented from having a fair decision” because
plaintiffs never pled their misrepresentation theory. Arabo explained
that had he known plaintiffs’ theory of liability, he would have deposed
Habib, and he would have called board members as additional
witnesses to testify that they did not rely on Habib’s letter when voting
to approve the bonus. Arabo also asserted that a new trial was
necessary because plaintiffs concealed that they paid Donnet in
connection with her testimony. Since Donnet’s credibility was a key
factor in the court’s ultimate decision, Arabo argued that plaintiffs’
failure to disclose the payment resulted in extreme prejudice. The trial
court denied the motion, stating that Arabo failed to establish any of
the statutory grounds for a new trial.
II.
DISCUSSION
A. Arabo Suffered No Due Process Violation.
“ ‘In a contested proceeding, no court may render judgment
without conforming to the constitutional guarantees which afford due
process of law. [Citation.] Due process requires that all parties be
notified of the facts and issues in dispute, that each party be afforded a
fair opportunity to present evidence in open court, and that judgment
be rendered based on an evaluation of the evidence on each side,
12
findings of fact and conclusions of law.’ ” (Carr v. Kamins (2007) 151
Cal.App.4th 929, 936.) We independently consider whether the
proceedings below complied with the constitutional guarantee of
procedural due process. (Conservatorship of Christopher A. (2006) 139
Cal.App.4th 604, 609-610.)
One of Arabo’s overarching contentions is that the operative
complaint failed to plead a breach of fiduciary duty cause of action
based in fraud with specificity.
“[C]orporate officers and directors have fiduciary duties of due
care and loyalty to the corporation and its shareholders. . . .”
(Friedman et al., Cal. Practice Guide: Corporations (The Rutter Group
2020) ¶ 2:19.1, p. 2-5, italics deleted.) “[B]reach of fiduciary duty can
be based upon either negligence or fraud, depending on the
circumstances.” (Tribeca Companies, LLC v. First American Title Ins.
Co. (2015) 239 Cal.App.4th 1088, 1114.) “[T]here is no clear line
establishing when a fiduciary’s breach of the duty of care will be merely
negligent and when it may be characterized as constructive fraud.”
(Salahutdin v. Valley of California, Inc. (1994) 24 Cal.App.4th 555,
563.) Breach of a fiduciary duty usually constitutes constructive fraud.
(Ibid.)
Arabo’s misrepresentations could have exposed him to liability
for constructive fraud (and punitive damages). (Day v. Rosenthal
(1985) 170 Cal.App.3d 1125, 1160 [constructive fraud is an appropriate
basis for an award of punitive damages].) However, Arabo cited no
authority that a plaintiff is required to allege a separate constructive
fraud cause of action where a fiduciary allegedly commits a
misrepresentation.
13
Arabo’s citation to Schauer v. Mandarin Gems of Cal., Inc. (2005)
125 Cal.App.4th 949 (Schauer) for the proposition that a claim for
breach of fiduciary duty that is fraud-based must be specifically pled is
similarly misplaced. Schauer examined whether the plaintiff had pled
facts sufficient to state a claim for constructive fraud. (Id. at pp. 960-
961.) Schauer did not involve a cause of action for breach of fiduciary
duty and our independent research has not uncovered a case stating
that a breach of fiduciary cause of action based in fraud must be
specifically pled.7
Arabo asserts that plaintiffs’ misrepresentation theory surprised
him at trial because no version of the complaint alleged that Habib’s
letter was false, that Arabo misrepresented his involvement in the real
estate transaction, or otherwise misled the board. Arabo also
complains that plaintiffs did not disclose their misrepresentation
theory until after the close of discovery, thus he never had an
opportunity to depose key witnesses such as Habib, Donnet and other
board members. Accordingly, Arabo contends that the judgment
7 Arabo’s citation to Robison v. Caster (7th Cir. 1966) 356 F.2d 924for this proposition is inapt because federal law requires that plaintiffs
allege any claim that contains averments of fraud, including a
fraudulent breach of fiduciary duty, with particularity. (Id. at p. 925,
citing Fed. Rule Civ. Proc., § 9(b); see also Borsellino v. Goldman Sachs
Grp., Inc. (7th Cir. 2007) 477 F.3d 502, 507 [“Rule 9(b) applies to
‘averments of fraud,’ not claims of fraud, so whether the rule applies
will depend on the plaintiffs’ factual allegations.”].)
14
violated his right to due process. As we shall explain, no due process
violation occurred.8
A “cause of action” is comprised of three core elements, namely
(1) “a ‘primary right’ of the plaintiff”; (2) “a corresponding ‘primary
duty’ of the defendant”; and (3) “a wrongful act by the defendant
constituting a breach of that duty.” (Mycogen Corp. v. Monsanto Co.
(2002) 28 Cal.4th 888, 904.) “ ‘[T]he primary right is simply the
plaintiff’s right to be free from the particular injury suffered.
[Citation.] It must therefore be distinguished from the legal theory on
which liability for that injury is premised: “Even where there are
multiple legal theories upon which recovery might be predicated, one
injury gives rise to only one claim for relief.” ’ ” (Ibid.)
“A change of theory as to the basis of recovery or as to the
measure of damages is not a change of cause of action or the
substitution of a new and different action for the original.” (Wells v.
Lloyd IV (1936) 6 Cal.2d 70, 88.) For example, in addressing whether
an amended complaint was barred by the statute of limitations, our
high court stated that “the only substantial difference between the
factual situations set forth in the original and the fifth amended
complaint is that the former charged that the representations were
negligently made while the latter charges that they were made with
knowledge of their falsity. Despite the change in legal theory from an
8 In his opening brief, under “statement of appealability” Arabo
contends we may review the trial court’s order denying his new trial
motion on appeal from the underlying judgment. Arabo, however,
never argued that the trial court erred in denying his new trial motion
and we deem the argument forfeited. (Collin v. CalPortland Co. (2014)
228 Cal.App.4th 582, 600 [contention not presented under separate
heading, with supporting factual analysis, forfeited].)
15
action for negligence to one for fraud, it cannot be said that an entirely
different cause of action is stated.” (Wennerholm v. Stanford University
School of Medicine (1942) 20 Cal.2d 713, 718.) Accordingly, “a shifting
from one theory of liability to another” does not require amendment to
conform to proof “when the basic facts are the same.” (Bruckman v.
Parliament Escrow Corp. (1987) 190 Cal.App.3d 1051, 1060
(Bruckman).)
The parties dispute whether the controversy surrounding the
veracity of Habib’s letter was uncovered before or after discovery
closed. We are unable to ascertain from the record the date discovery
closed. Nonetheless, the record reflects that during the discovery
process Arabo had notice of plaintiffs’ theory that he breached his
fiduciary duty to NMA by misrepresenting his participation in the sale
of the building. Briefly, in March 2017, plaintiffs’ prior counsel sent a
letter to defense counsel as part of settlement negotiations arguing that
Arabo misrepresented material facts to the board. The head of plaintiff
LS & SLG, Inc. also testified at his deposition that Arabo participated
in presenting facts to the board regarding the bonus and that these
facts influenced the board’s vote.
Arabo acknowledged plaintiffs’ misrepresentation theory in his
trial brief stating: “Plaintiffs apparently intend to rely exclusively on
their false contention that Mr. Arabo misrepresented his involvement
with the sale of the NMA building to the board. However, the evidence
at trial will show that Mr. Arabo made no such misrepresentation, and
that the NMA board knew exactly how Mr. Arabo’s participation in the
sale process resulted in an increase in the sales price ultimately
received.”
16
Any variance between the allegation in the operative complaint
and the proof presented at trial with respect to the bonus was not
material under the circumstances of this case because Arabo was not
“actually misled” to his prejudice. (Code Civ. Proc., §§ 469, 470; Cal.
Const., art. VI, § 13 [“No judgment shall be set aside . . . as to any
matter of pleading, . . . unless, after an examination of the entire cause,
including the evidence, the court shall be of the opinion that the error
complained of has resulted in a miscarriage of justice.”].) Arabo knew
about plaintiffs’ misrepresentation theory and the controversy
surrounding the truth of Habib’s letter.9 When the issue exploded at
trial, the court allowed the parties to question Habib and Donnet at
length.10
Arabo’s right to retain the bonus had been at issue since the
inception of this action. The circumstances show that any variance
between the pleading and proof was not material and that the case was
fairly tried on the merits as though the variance had not existed.
(Buxbom v. Smith (1944) 23 Cal.2d 535, 543 [“the matter of pleading
becomes unimportant when a case is fairly tried upon the merits and
under circumstances which indicate that nothing in the pleadings
9 When trial commenced, both sides believed Habib would disavow
his letter. Habib’s testimony affirming the truth of the letter surprised
both sides.
10 Neither side deposed Habib, or sought leave to depose him after
the close of discovery. Additionally, Arabo could have requested leave
to call other board members to testify but did not do so.
17
misled the unsuccessful litigant to his injury”].)11 To the extent
plaintiffs’ theory of liability may have shifted based on evidence
uncovered after the close of discovery, this shift did “not require
amendment to conform to proof when the basic facts [were] the same.”
(Bruckman, supra, 190 Cal.App.3d at p. 1060; Smith v. Los Angeles
Bookbinders Union (1955) 133 Cal.App.2d 486, 495 (Smith) [“When the
basic facts are the same a shifting from one theory of liability to
another is not the substitution of a new cause of action.”], Smith
disapproved on other grounds in MacLeod v. Tribune Pub. Co., Inc.
(1959) 52 Cal.2d 536, 551.)
On this record, we conclude that Arabo did not suffer a violation
of his right to due process.
11 Arabo’s citation to cases for the proposition that a trial court
cannot enter judgment on a claim outside the issues framed in the
pleadings is misplaced because these cases all involved situations
where the pleadings did not inform the defendant of the relief
ultimately awarded by the trial court, or the trial court allowed
evidence of damages disavowed by the plaintiff during discovery. (See
Campain v. Safeway Stores, Inc. (1972) 29 Cal.App.3d 362, 364-366
[defendant’s defense prejudiced when trial court allowed evidence on
lost earnings when plaintiff stated during discovery that she was not
seeking damages based on lost earnings]; Brown v. North Ventura Road
Development Company (1963) 216 Cal.App.2d 227, 234 [appellate court
reversed damages award because damages never requested in
pleading]; Clark v. Redlich (1957) 147 Cal.App.2d 500, 505-506 [trial
court erred by awarding defendants damages based on improper
issuance of a preliminary injunction where no pleading sought
damages]; Sharp v. Big Jim Mines (1940) 39 Cal.App.2d 435, 442-443
[trial court erred by enjoining the levy of further corporate assessments
where the “sole question presented by the pleadings” was validity of a
meeting].)
18
B. Alleged Hearsay Violation
1. Additional Background
During trial, plaintiffs’ counsel showed Habib an e-mail that
Habib sent to him on September 1, 2017. The e-mail pertained to a
declaration that plaintiffs’ counsel had prepared for Habib’s signature.
When Arabo objected that the document had not been produced during
discovery, plaintiffs’ counsel stated that the document could be used to
refresh the witness’s recollection and was also a prior inconsistent
statement. The trial court overruled Arabo’s leading and lack of
foundation objections and plaintiffs’ counsel used the document to
refresh Habib’s recollection. Habib denied telling plaintiffs’ counsel
that Arabo told him what to put in the letter “ ‘word-for-word.’ ”
Plaintiffs then called attorney Wilson as a rebuttal witness to
testify regarding prior inconsistent statements Habib made during the
telephone conversations with plaintiffs’ counsel. Oram tendered a
hearsay objection and argued that Wilson was not listed as a witness.
Arabo argued that because Habib had not been cross-examined, that
there was nothing to rebut. The trial court overruled these objections.
Wilson testified that he took contemporaneous notes of the
conference call with Habib and e-mailed those notes to another
attorney immediately after the call ended. Plaintiffs’ counsel asked to
display the notes to impeach Habib. Arabo did not object, but
complained that he had never seen the exhibit. The trial court allowed
plaintiffs’ counsel to display the notes to impeach Habib. Later, the
court overruled Arabo’s hearsay objections to two questions asking
Wilson whether he had written what was displayed. During cross-
19
examination, Arabo’s counsel asked Wilson numerous questions that
Wilson answered by referring to the document.
During Habib’s further direct examination, Arabo’s counsel
questioned Habib regarding the veracity of his letter. During cross-
examination, plaintiffs’ counsel extensively referred to four exhibits
without objection and Habib testified regarding portions of these
exhibits. The exhibits were: (1) Wilson’s e-mail with notes taken
during a telephone conference with Habib (Exhibit 591); (2) an
unsigned declaration prepared by plaintiffs’ counsel for Habib’s
signature with Habib’s handwritten revisions (Exhibit 592); (3) a
version of Habib’s unsigned declaration with portions stricken out by
Habib (Exhibit 607); and (4) an e-mail from one of plaintiffs’ attorneys
memorializing a conversation with Habib (Exhibit 608). We collectively
refer to the four exhibits as “the exhibits.”12
The following day, plaintiffs’ counsel sought to admit the exbibits.
NMA objected to exhibits 591 and 592 on hearsay grounds. Plaintiffs’
counsel responded that the exhibits were admissible under Evidence
Code13 sections 1235 and 1241 as hearsay exceptions for prior
inconsistent statements and contemporaneous statements. The court
admitted the two exhibits as impeachment documents and under
exceptions to the hearsay rule. Later, the trial court admitted exhibits
607 and 608 after plaintiffs used these exhibits without objection
during trial.
12 In response to Habib’s testimony, and instead of calling all of
plaintiffs’ attorneys to testify, the parties stipulated that the testimony
of each of plaintiffs’ attorneys would be consistent with Wilson’s
testimony.
13 Undesignated statutory references are to the Evidence Code.
20
2. Analysis
Arabo asserts that the trial court erred in admitting the exhibits
because they (1) improperly made plaintiffs’ counsel a witness at trial
and (2) did not qualify for admission under an exception to the hearsay
rule. Plaintiffs respond that Arabo forfeited this challenge by failing to
object to the exhibits at trial and not providing any meaningful
argument to support his claim that an objection would have been futile.
Generally, “ ‘the failure to object to errors committed at trial
relieves the reviewing court of the obligation to consider those errors on
appeal.’ ” (In re Seaton (2004) 34 Cal.4th 193, 198.) Although we are
usually “not prohibited from reaching a question that has not been
preserved for review by a party” and may often exercise our discretion
to do so (People v. Williams (1998) 17 Cal.4th 148, 161, fn. 6), this
general rule does not apply “when the issue involves the admission
(Evid. Code, § 353) or exclusion (id., § 354) of evidence.” (Ibid.)14 This
case presents an example of why objections need to be specifically and
timely presented to the trial court to preserve the issue on appeal.
Plaintiffs’ counsel refreshed Habib’s recollection using an e-mail
that Habib sent to plaintiffs’ counsel on September 1, 2017, regarding
the declaration counsel had prepared for Habib’s signature. Upon
reviewing the document, Habib admitted that he made the blue
markings on the document. The court overruled Arabo’s leading and
lack of foundation objections.
14 Section 353, subdivision (a) provides: “A verdict or finding shall
not be set aside, nor shall the judgment or decision based thereon be
reversed, by reason of the erroneous admission of evidence unless: [¶]
(a) There appears of record an objection to or a motion to exclude or to
strike the evidence that was timely made and so stated as to make clear
the specific ground of the objection or motion . . . .” (Italics added.)
21
A witness is permitted to “use[] a writing to refresh his memory
with respect to any matter about which he testifies.” (§ 771, subd. (a).)
A witness’s “[m]emory may be refreshed using a writing that is not
admissible into evidence.” (In re Berman (1989) 48 Cal.3d 517, 525.)
Additionally, leading questions are permissible on direct examination
to stimulate a witness’s recollection. (People v. Williams (1997) 16
Cal.4th 635, 672.) Here, the trial court allowed plaintiffs’ counsel to
use the document to refresh Habib’s recollection, a ruling not
challenged by Arabo on appeal. (Howard v. County of San Diego (2010)
184 Cal.App.4th 1422, 1432 [issue not raised before the trial court
forfeited].)
Thereafter, the trial court allowed Wilson to testify. In his reply
brief, Arabo argues that the trial court erred by allowing testimony
from plaintiffs’ attorneys. Arabo claims that the testimony created
chaos that deprived him of due process. Presumably, Arabo tendered
this argument in his reply brief because plaintiffs argued in their
respondent’s brief that attorneys may provide impeachment evidence in
support of their own clients. (American Indian Model Schools v.
Oakland Unified School Dist. (2014) 227 Cal.App.4th 258, 275-276
[although appellate courts will not ordinarily consider issues newly
raised in the reply brief, an issue is not new if it rebuts arguments
made by the respondent in respondent’s brief].)
Arabo cited no authority directly supporting his argument that
the court erred in permitting Wilson to provide impeachment
22
testimony.15 Rather, Arabo relies on the California Rules of
Professional Conduct, which are “intended to regulate professional
conduct of lawyers” and provide that “[a] willful violation of any of
these rules is a basis for discipline.” (Cal. Rules of Prof. Conduct, rule
1.0, subds. (a), (b).) Arabo overlooks section 700, which provides,
“Except as otherwise provided by statute, every person, irrespective of
age, is qualified to be a witness and no person is disqualified to testify
to any matter.” Moreover, our high court recently reaffirmed that “ ‘a
trial court may not deny the defendant the right to present . . . evidence
through the testimony of his counsel, notwithstanding the provisions
relating to testimony by counsel in the Rules of Professional Conduct.’ ”
(People v. Silveria and Travis (2020) 10 Cal.5th 195, 278-279.)
An attorney has a duty to represent a client zealously within the
bounds of the law. (Hawk v. Superior Court (1974) 42 Cal.App.3d 108,
126.) Under the unusual circumstances of this case, we cannot
conclude that the trial court erred in admitting Wilson’s testimony for
impeachment.
Significantly, Arabo did not object to plaintiffs’ request to display
Wilson’s written notes of the conference call with Habib on hearsay
15 A witness’s credibility may be attacked by any party, including
the party calling the witness. (§ 785.) Additionally, except as
otherwise provided by statute, the trier of fact may consider in
determining the credibility of a witness “any matter that has any
tendency in reason to prove or disprove the truthfulness of his [or her]
testimony at the hearing.” (§ 780, italics added.) Arabo did not argue
to the trial court that Wilson’s testimony did not qualify as
impeachment evidence and forfeited any such challenge on appeal.
(§ 353, subd. (a); People v. Boyette (2002) 29 Cal.4th 381, 424
[“ ‘Specificity is required both to enable the court to make an informed
ruling on the motion or objection and to enable the party proffering the
evidence to cure the defect in the evidence.’ ”].)
23
grounds and failed to preserve this challenge on appeal. (Roe v. Halbig
(2018) 29 Cal.App.5th 286, 309-310 [plaintiff forfeited “any challenge to
hearsay statements contained in the declaration . . . by failing to object
on that basis below”].)16 During cross-examination, Arabo’s counsel
then asked Wilson numerous questions which Wilson answered by
referring to the document. Finally, while cross-examining Habib,
plaintiffs’ counsel extensively referred to the exhibits without objection,
and Habib testified regarding portions of the exhibits without objection.
The following day, when plaintiffs’ counsel sought to admit the
exbibits, NMA objected to exhibits 591 and 592 (Wilson’s e-mail with
notes taken during a telephone conference with Habib and Habib’s
unsigned declaration with his handwritten revisions) on hearsay
grounds, Arabo did not join in this objection. (See People v. Wilson
(2008) 44 Cal.4th 758, 793 [“Generally, failure to join in the objection or
motion of a codefendant constitutes a waiver of the issue on appeal.”].)
The court admitted the two exhibits as impeachment documents and
under exceptions to the hearsay rule. The trial court also admitted
exhibits 607 and 608 (Habib’s unsigned declaration with portions
stricken out by Habib and an e-mail from one of plaintiffs’ attorneys
memorializing a conversation with Habib) after plaintiffs used these
exhibits without objection during trial.
Arabo argues that a joint in limine motion seeking to exclude
“evidence outside the facts/issues presented in Plaintiffs’ Second
16 During Wilson’s testimony, the court overruled Arabo’s hearsay
objections to two questions asking Wilson whether he had written what
was displayed. Arabo does not argue that the trial court erred in
overruling these two objections and forfeited any such challenge on
appeal.
24
Amended Complaint. . . .” preserved a hearsay objection to the exhibits
on appeal. We disagree.
A motion in limine to exclude evidence is sufficient to preserve an
objection if the motion (1) is directed to a particular, identifiable body of
evidence; (2) states a specific legal ground for exclusion that is
subsequently raised on appeal; and (3) is made at a time before or
during trial when the trial court can determine the evidentiary issue in
its appropriate context. (People v. Morris (1991) 53 Cal.3d 152, 190
(Morris), disapproved on another ground in People v. Stansbury (1995)
9 Cal.4th 824, 830, fn. 1.) If each of these conditions is satisfied,
defense counsel would be “justified in concluding that a mere repetition
of the same objection advanced on the motion in limine would serve no
useful purpose.” (Morris, at p. 189.)
In this matter, the motion in limine was wholly insufficient to
preserve a hearsay objection to the exhibits for appeal. As a
preliminary matter, Oram filed the motion in limine, not Arabo.
Although Arabo claims that he joined in the motion, he failed to provide
a record cite to the purported joinder. (Cal. Rules of Court, rule
8.204(a)(1)(C) [appellate brief must “[s]upport any reference to a matter
in the record by a citation to the volume and page number of the record
where the matter appears.”].)17 Assuming, for the sake of analysis,
that a proper joinder exists, the motion sought to exclude irrelevant
evidence and evidence not relevant to the transactions contained in the
operative complaint. The motion was not directed to a particular
identifiable body of evidence that would have allowed the trial court to
17 Undesignated rule references are to the California Rules of
Court.
25
determine the evidentiary question in the same context as it was
presented at trial. (Morris, supra, 53 Cal.3d at p. 190.) Nor did the
motion raise a hearsay objection. (Ibid.) Accordingly, the in limine
motion failed to preserve a hearsay objection to the exhibits for
appellate review.
Finally, even assuming the trial court erred by admitting the
exhibits, the error was harmless because the trial court, sitting as the
trier of fact, had already heard extensive testimony regarding the
exhibits from both Wilson and Habib without objection. (See Huang v.
L.A. Haute (2003) 106 Cal.App.4th 284, 292, fn. 9 [alleged error in
refusing to admit medical records showing what plaintiff told her
doctor was harmless because records duplicated plaintiff’s testimony].)
Accordingly, we reject Arabo’s argument that the trial court
prejudicially erred when it admitted the exhibits into evidence.
C. Remaining Arguments
In an abundance of caution, should we agree that the trial court
improperly ordered him to return the bonus, Arabo argues that no
alternative grounds support affirmance of the court’s order regarding
the bonus. Because we rejected Arabo’s arguments and affirmed the
trial court’s order that Arabo must return the bonus to NMA, the
parties’ arguments whether alternative grounds exist to support the
court’s order are moot and we need not address them.
In his reply brief, Arabo argues that an undisclosed payment to
Donnet created prejudicial error that requires reversal because it is
reasonably probable that a result more favorable to him would have
been reached in the absence of the error. Arabo did not tender this
argument in his opening brief under a separate heading or subheading.
26
(Rule 8.204(a)(1)(B).) Nonetheless, because plaintiffs argued this issue
in their respondent’s brief, we will consider the argument on its merits.
After Donnet’s initial testimony, and before Habib’s second round
of testimony, the trial court stated that if Habib testified again it
wanted further testimony from Donnet. In their post-trial costs
memorandum, plaintiffs sought to recover $3,125 in fees paid to Donnet
for her second round of testimony. Plaintiffs’ counsel represented to
the trial court that, because they called Donnet a second time at the
trial court’s request, plaintiffs agreed to compensate her for her time
going forward. The trial court taxed these costs finding that because
Donnet was not an expert witness, she was only entitled to the ordinary
witness fee of $35. The court also concluded that the undisclosed
payment did not warrant a new trial.
Relying on federal authority, Arabo contends that the payment to
Donnet was inappropriate. Arabo’s reliance on these federal cases is
inapt because the California Rules of Professional Conduct address the
issue.18 Specifically, the California Rules of Professional Conduct, rule
3.4 (formerly rule 5-310) states, “A lawyer shall not: [¶] . . . [¶]
(d) directly or indirectly pay, offer to pay, or acquiesce in the payment
18 See Mataya v. Kingston (7th Cir. 2004) 371 F.3d 353, 359 [paying
a witness, other than an expert witness, for testimony unlawful in
federal trials, 18 U.S.C. § 201(c)(2)]; Golden Door Jewelry Creations,
Inc. v. Lloyds Underwriters (S.D.Fla.1994) 865 F.Supp. 1516, 1524
[improper to pay an occurrence witness any fee for testifying under
Florida Rules of Professional Conduct]; U.S. v. Cervantes-Pacheco (5th
Cir. 1987) 826 F.2d 310, 315 [jury must evaluate the testimony of a
compensated witness]; Skin Pathology Associates, Inc. v. Morgan
Stanley & Co. Inc. (S.D.N.Y. 2014) 27 F.Supp.3d 371, 377-378
[nondisclosure of fee-sharing arrangement a crime under federal
regulations].
27
of compensation to a witness contingent upon the content of the
witness’s testimony or the outcome of the case.” (See also, State Bar of
California, Committee on Professional Responsibility and Conduct,
Formal Opinion No. 1997-149 (1997) [attorney may pay non-expert
witness for the time spent preparing for a deposition or a trial, but the
attorney must comply with the requirements of rule 5-310(B) of the
California Rules of Professional Conduct].)
Arabo cites absolutely no evidence showing that plaintiffs’
payment to Donnet was contingent upon the content of her testimony
or the outcome of the case. Rather, in a sworn declaration, plaintiffs’
counsel states that Donnet submitted an invoice for her time spent
reviewing documents prior to her second court appearance. On this
record, we reject Arabo’s implied contention that plaintiffs’ counsel and
Donnet (who is also a licensed attorney), agreed that plaintiffs’ $3,125
payment was contingent upon the content of Donnet’s testimony or the
outcome of the case.
D. Sanctions Motions
Plaintiffs request sanctions against Arabo and his appellate
counsel for pursuing a frivolous appeal. (Code Civ. Proc., § 907; rule
8.276.) Arabo argues that plaintiffs’ motion should be stricken and
lacks merit. Should we agree with this assertion, Arabo suggests we
consider sanctions against plaintiffs and their appellate counsel for
filing the motion.
Code of Civil Procedure section 907 provides that “[w]hen it
appears to the reviewing court that the appeal was frivolous or taken
solely for delay, it may add to the costs on appeal such damages as may
be just.” Additionally, rule 8.276(a)(1) allows the court to impose
28
sanctions on a party or an attorney for the taking of a frivolous appeal
or appealing solely to cause delay.
“[S]anctions should be used sparingly to deter only the most
egregious conduct.” (Kleveland v. Siegel & Wolensky, LLP (2013) 215
Cal.App.4th 534, 557 (Kleveland).) “ ‘[A]ny definition [of a frivolous
appeal] must be read so as to avoid a serious chilling effect on the
assertion of litigants’ rights on appeal. Counsel and their clients have
a right to present issues that are arguably correct, even if it is
extremely unlikely that they will win on appeal. An appeal that is
simply without merit is not by definition frivolous and should not incur
sanctions.’ ” (In re Reno (2012) 55 Cal.4th 428, 513.) “An unsuccessful
appeal, . . . ‘ “should not be penalized as frivolous if it presents a unique
issue which is not indisputably without merit, or involves facts which
are not amenable to easy analysis in terms of existing law, or makes a
reasoned argument for the extension, modification, or reversal of
existing law.” ’ ” (Kleveland, at p. 557.) Whether to impose appellate
sanctions is a matter within our broad discretion. (Winick Corp. v.
County Sanitation Dist. No. 2 (1986) 185 Cal.App.3d 1170, 1181-1182.)
“[A]n appeal should be held to be frivolous only when it is
prosecuted for an improper motive—to harass the respondent or delay
the effect of an adverse judgment—or when it indisputably has no
merit—when any reasonable attorney would agree that the appeal is
totally and completely without merit.” (In re Marriage of Flaherty
(1982) 31 Cal.3d 637, 650 (Flaherty).) “In determining whether an
appeal indisputably has no merit, California cases have applied both
subjective and objective standards. The subjective standard looks to
the motives of the appealing party and his or her attorney, while the
29
objective standard looks at the merits of the appeal from a reasonable
person’s perspective. [Citation.] Whether the party or attorney acted
in an honest belief there were grounds for appeal makes no difference if
any reasonable person would agree the grounds for appeal were totally
and completely devoid of merit.” (Kleveland, supra, 215 Cal.App.4th at
pp. 556-557.) The subjective and objective “standards are often used
together, with one providing evidence of the other. Thus, the total lack
of merit of an appeal is viewed as evidence that appellant must have
intended it only for delay.” (Flaherty, at pp. 649-650.)
Applying these standards, we are not convinced that this appeal
is totally and indisputably without merit. Although we ultimately
determined that Arabo’s due process and hearsay arguments lacked
merit, we cannot say they were objectively devoid of any merit as to
warrant sanctions. Because the appeal was not objectively frivolous,
we also conclude it was not taken solely for delay. Exercising our broad
discretion, we therefore conclude that plaintiffs are not entitled to
sanctions in this case.
Arabo requests monetary sanctions against plaintiffs and their
appellate counsel for filing the sanctions motion. (Rule 8.276(a)(3).)
Arabo makes this request in his opposition to plaintiffs’ sanctions
motion and did not serve and file a separate motion under the rules
governing appellate motion procedure, as required by rules 8.54(a) and
8.276(b). We therefore deny the request for sanctions. (Saltonstall v.
City of Sacramento (2014) 231 Cal.App.4th 837, 858 [respondent’s
request for sanctions made in brief denied because the respondent did
not file a separate motion for sanctions].)
30
E. Attorney’s Fees Under the Private Attorney General Statute
As an alternative to sanctions, plaintiffs seek their attorney’s fees
under the private attorney general statute. (Code Civ. Proc., § 1021.5.)
Plaintiffs admit that they did not seek an attorney’s fee award before
the trial court based on the private attorney general statute and Arabo
correctly argues they forfeited this claim by not making it before the
trial court. (California Teachers Ass’n v. Mendocino Unified School
Dist. (2001) 92 Cal.App.4th 522, 530 [party cannot raise request for
attorney’s fees under Code of Civil Procedure section 1021.5 for first
time on appeal]; Dowling v. Farmers Ins. Exchange (2012) 208
Cal.App.4th 685, 696 [“We generally will not consider an argument
asserted for the first time on appeal.”].) In their reply, plaintiffs clarify
their argument, stating that they are “not seeking their trial fees on
the basis of the Private Attorney General Statute—merely their
appellate fees.”
Code of Civil Procedure section 1021.5 permits a court to award
attorney’s fees to a successful party in any action which has resulted in
the enforcement of an important right affecting the public interest if
certain prerequisites are satisfied. “ ‘An award of attorney fees under
[Code of Civil Procedure] section 1021.5 requires the applicant to meet
three criteria: (1) the action resulted in the enforcement of an
important right affecting the public interest; (2) a significant pecuniary
or nonpecuniary benefit was conferred on a large class of persons; and
(3) the necessity of private enforcement and the attendant financial
burden thereof make the award appropriate. Whether the applicant
has proved each of these criteria is a matter primarily vested in the
31
trial court.’ ” (Hogar Dulce Hogar v. Community Development Com. of
City of Escondido (2007) 157 Cal.App.4th 1358, 1364.)
Plaintiffs’ claim for appellate attorney’s fees is based on the trial
court’s suspension of the board and appointment of a receiver for NMA.
Plaintiffs argue this relief enforced important rights affecting the
public interest. Plaintiffs fail to explain how this relief, which was not
at issue in this appeal, entitles them to recover their appellate
attorney’s fees. We reject the argument and deny plaintiffs’ request for
an award of appellate attorney’s fees.
DISPOSITION
The judgment is affirmed. All requests for sanctions are denied.
Plaintiffs are entitled to recover their costs on appeal.
IRION, J.
WE CONCUR:
BENKE, Acting P. J.
DO, J.
32