Review Denied in Suit Claiming Firm Helped Cheat Estate

Thursday, December 16, 2010

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Review Denied in Suit Claiming Firm Helped Cheat Estate

By a MetNews Staff Writer

The California Supreme Court yesterday declined to review an order that gave new life to a pair of actions charging a law firm with helping its client cheat the estate of his former business partner.

The justices, at their weekly conference in San Francisco, voted unanimously to leave intact the decision of this district’s Div. Seven in Favila v. Katten Muchin Rosenman LLP, 188 Cal.App.4th 189, and to deny an insurance company’s request for depublication.

In its Sept. 3 decision, the appellate panel reinstated an action by the estate of inventor Richard Corrales against Katten Muchin Rosenman LLP and attorneys Gavin Galimi and James Thompson, and sent the case back to the Los Angeles Superior Court so that the estate can file an amended complaint charging the defendants with fraud.

The court also reinstated a derivative suit charging the lawyers with helping to defraud a corporation founded by the decedent.

The suits were brought by Sandra Corrales Favila, as executor of the estate of her brother, onetime Los Angeles Times photographer Rick Corrales.

Corrales, a Times staff photographer from 1981 to 1995, held patents on a panoramic camera and two special handles he invented to support it, and reportedly sold about 1,000 units before digital photography became popular. Corrales and Raleigh Souther, a former Times photo editor, established Motion Graphix, Inc. in 2000.

The Orange-based company specialized in animation and marketed “Get Flipped” software, which uses dual images and animation techniques to create two-view photographs that can be used as souvenirs, party favors or identification badges.

Corrales originally owned 51 percent of the company stock and Souther 49 percent, and Corrales assigned his rights in pending patents to the company. Katten Muchin became the corporation’s counsel in 2004.

In 2005, allegedly after a dispute regarding personal use of the corporation’s software codes, Corrales agreed to sell 80 percent of his stock to the company and resign as an officer and director. A release agreement expressly reserved certain rights to Corrales, including access to certain software code.

Corrales died of stomach cancer in November 2005. Several months later, Souther incorporated Get Flipped Inc. and notified the estate that a majority of the shareholders of Motion Graphix had voted to sell the company’s assets to Get Flipped; he subsequently assigned the assets to Get Flipped for $5,000.

He testified at a subsequent deposition that the price was for hardware and did not place a value on customers, product and software. Motion Graphix was dissolved in April 2007, following the sale, and the estate sued Souther and Get Flipped for conversion, fraud, breach of contract and breach of duty later that year.

Complaint Amended

The complaint alleged that Corrales still owned 51 percent of the Motion Graphix shares at the time of his death, that the asset sale and dissolution of the company were illegal because they were never approved by the estate, and that Motion Graphix owned intellectual property worth $8 million to $12 million. The complaint was subsequently amended to add Katten Muchin and Galimi as defendants.

The lawyers’ demurrers were sustained by Los Angeles Superior Court Judge Mary Ann Murphy, who ruled that the plaintiff was inferentially claiming that the lawyers conspired with their client, subjecting the action to Civil Code Sec. 1714.10(a). The statute provides, with certain exceptions, that such a suit can only be brought with leave of court upon a showing that the plaintiff is likely to prevail.

The plaintiff’s subsequent motion to allow an amendment under the statute, naming Galimi, Thompson, and the firm as defendants, was denied. In the derivative action, the judge ruled that the dissolution of the corporation meant the estate was not a shareholder and lacked standing, and also that as outside counsel for a corporation, the defendants could not be sued absent a waiver of the corporation’s attorney-client privilege.

But Presiding Justice Dennis Perluss, writing for the Court of Appeal, said the motion to amend should have been granted under Sec. 1714.10(c), which says that the Sec. 1714.10(a) requirements do not apply to a claim that the lawyer breached an independent legal duty owed to the plaintiffs. Perluss reasoned that lawyers owe independent duties to those with whom their clients do business, including a duty not to assist the clients in committing fraud.

As for the derivative suit, the presiding justice explained that a dissolved corporation has a continuing existence for certain purposes, including litigation to recover money owed to, or property owned by, the corporation. “As a shareholder of the dissolved corporation the Estate is entitled to pursue a derivative action on its behalf, provided the other requirements for such an action have been satisfied,” he wrote.

Further proceedings, he went on to say, are necessary to determine whether the attorneys’ inability to disclose privileged information bars the derivative suit.

In other conferences news, the justices yesterday:

•Declined a request to block Proposition 14 in Field v. Superior Court (Bowen), S188436. Approved by voters in June, the law puts all candidates on the same ballot regardless of party affiliation, and then the top two vote-getters face off. Gov. Arnold Schwarzenegger, who backed Proposition 14, said yesterday that the measure was “an important step in reforming the political process” and he applauded the court’s decision.

•Denied review of an unpublished decision tossing a Maryland lawyer’s suit against the State Bar of California over its exam grading review procedures. Joel Joseph filed suit following his third failed attempt to pass the bar exam in February 2009 when the State Bar declined to have his exam answers reread or to provide him with an opportunity to review graders’ notes. Only 34 percent of applicants passed that exam.

This district’s Div. Two ruled in September in Joseph v. State Bar of California, B221236 that the California Supreme Court was the sole venue in which Joseph could seek a hearing regarding the exam, and sternly rebuked him for his attack. Joseph, whose website indicates that he has practiced law for 36 years, previously indicated that he would appeal to the U.S. Supreme Court if necessary.

•Left standing a judgment against a venture capitalist and philanthropist who is reportedly one of Los Angeles’ wealthiest residents for looting two trusts he was administering for a young widow. This district’s Div. Three in Uzyel v. Kadisha B196045 upheld a trial judge’s findings that Neil Kadisha—a principal of Omninet Capital Group and a former director of Qualcomm Inc. whose net worth reportedly exceeds $900 million—used the trusts for his own benefit.

The plaintiffs’ lead trial attorney told the MetNews in September that the decision left Kadisha facing nearly $94 million in compensatory and punitive damages and prejudgment and postjudgment interest.

•Declined to address an unpublished ruling in favor of a scientist who said an environmental activist committed libel by accusing him of altering under-oath testimony about a conservative think tank’s payment for a revision of a mold toxicity study..

Bruce Kelman, who heads Washington-based environmental risk management firm GlobalTox, sued Sharon Kramer, an activist who addresses mold-related injuries, after she posted the allegation on the Internet. The Fourth District’s Div. One rejected Kramer’s appeal in Kelman v. Kramer, D055496.

•Denied review of the Fourth District Court of Appeal’s ruling that a fired sales executive who had to walk with a cane and suffered from a speech impairment after suffering a stroke was disabled within the meaning of the Fair Employment and Housing Act.

Robert Sandell suffered the stroke in 2004, months after he became vice president of sales for Taylor-Listug Inc., which manufacturers acoustic and electric guitars under the name Taylor Guitars. The El Cajon-based company said he was fired for declining sales, but the Fourth District’s Div. One overturned a grant of summary judgment for company in Sandell v. Taylor-Listug, Inc., D055549.