Wednesday, November 18, 2009
Court Tosses $2.4 Million Verdict Against Ex-Attorney
By SHERRI M. OKAMOTO, Staff Writer
This district’s Court of Appeal yesterday threw out a $2.4 million punitive damage award against a former tax lawyer, ruling that Christopher Gruys was effectively deprived of his fundamental right to a fair trial by discovery sanctions imposed after he asserted his constitutional privilege against self-incrimination.
In its unpublished decision, Div. Seven explained that Los Angeles Superior Court Judge Rolf M. Treu abused his discretion by preventing Gruys from presenting any evidence or cross-examining any witnesses, which “had the effect of denying Gruys the right to defend the action at all.”
Gruys—who resigned from the State Bar in 2007 with charges pending—was sued by a former client, Jon Gunderson, for asserted violations of the California Uniform Fraudulent Transfer Act.
Gunderson had consulted with Gruys about a possible tax savings plan after Gunderson sold the assets of his family-owned business in 2003. He claimed that he and Gruys had agreed to a plan under which he would transfer the proceeds from the sale to a company formed by Gruys called I.R.S.C.E. and that Gruys would then cause I.R.S.C.E. to return those funds to Gunderson.
Over a six month period, Gunderson sent approximately $39 million to Gruys’ company but Gruys allegedly refused to return $7.5 million of Gunderson’s funds.
Gruys also allegedly caused I.R.S.C.E. to issue checks of over $1.3 million payable to a company owned by another client and longtime friend, Richard Wall.
In March 2004, Gunderson filed suit against Gruys and I.R.S.C.E., asserting causes of action for fraud, breach of contract, breach of fiduciary duty and conversion. Judgment was eventually entered in favor of Gunderson in the amount of $11,099,261, plus costs of suit.
While that action was still pending, Gunderson a separate civil suit against Gruys, Wall and Wall’s company for fraudulent transfer.
During the fraudulent transfer action, Gunderson served written discovery demands on Gruys, including form interrogatories, special interrogatories, and requests for production of documents.
Felony Tax Charges
At this time, the California Attorney General’s Office was prosecuting both Gruys and Gunderson on felony tax charges in connection with their 2003 tax shelter plan and Gruys refused to provide any substantive responses or to produce any documents in response to the discovery requests, citing his privilege against self-incrimination.
Treu found sufficient grounds for Gruys’ invocation of his Fifth Amendment privilege, but he opined that “the knowledge that Gruys may possess that would otherwise be discoverable should not…be available to him to adduce favorable evidence at trial from witnesses or exhibits.”
At trial, Treu did not permit Gruys to make an opening statement, testify on his own behalf, present any documentary or testimonial evidence, or cross-examine any witnesses.
The jury found that Gruys, Wall and Wall’s company had engaged in a fraudulent transfer which caused Gunderson to suffer $1,712,381 in damages, including pre-judgment interest. The jury also awarded Gunderson punitive damages of $2.4 million against Gruys, $600,000 against Wall and $100,000 against his company.
On appeal, Gruys challenged the discovery sanction and Justice Laurie D. Zelon agreed that Treu’s order was not reasonably tailored to the circumstances of the case.
She explained that once Gruys properly invoked the privilege against self-incrimination, the trial court had a duty to balance the interests of both parties and issue an order that could fairly accommodate their competing interests.
“The sanction order issued in this case clearly protected Gunderson’s right to be safeguarded from unfair surprise at trial, but it did not give due consideration to Gruys’ constitutional right to remain silent,” Zelon opined.
Zelon reasoned that the trial court “effectively forced Gruys to choose between his Fifth Amendment privilege and any meaningful chance to defend against Gunderson’s claims.”
New Trial Ordered
Joined by Justices Fred Woods and Frank Y. Jackson, Zelon ordered the judgment against Gruys remanded for a new trial and directed the trial court to set aside its discovery sanction order.
As for Wall and his company, the panel concluded that the jury had a rational basis for finding liability, but that the award of punitive damages was not supported by sufficient evidence.
“[T]he inconsistencies in Wall’s trial testimony reasonably could support a finding by the jury that Wall was not a credible witness and that he thus had failed to prove his affirmative defense of good faith,” Zelon wrote. “But none of the inconsistencies supported the inference that, at the time [his company] received the two transfers from Gruys, Wall knew or had reason to know that Gruys had stolen those funds from someone else.”
Rickey Ivie, Jennifer R. Jacobs and Davida M. Frieman of Ivie, McNeill & Wyatt represented Wall and Welded Fixtures Inc.
Jacobs said she was “disappointed” that the court did not reach their argument regarding whether punitive damages are available in California under the Uniform Fraudulent Transfer Act, because she “was really hoping the court would decide that you can’t get punitive damages.”
However, Ivie suggested that this case “opened the door to that question,” and even though the issue was not decided yesterday, “others are going to pick that argument up” in the future, emphasizing that there was “no doubt” that the argument against making punitive damages available “weighed heavy” in the justices’ minds.
Thomas M. Brown, Kenneth P. White, and Jennifer S. Keh of Brown & White represented Gruys.
White expressed regret that the decision was not published since it “points the direction that courts will go in the future on the fact that trial courts have to be very cautious in framing sanctions when a litigant asserts his Fifth Amendment privileges.”
Jeffrey A. Tidus, David P. Crochetiere and Patrick M. Maloney of Baute & Tidus represented Gunderson. They could not be reached for comment.
The case is Gunderson v. Wall, B204268.
Copyright 2009, Metropolitan News Company