Tuesday, September 7, 2010
C.A. Revives Claims That Lawyers Helped Client Cheat Estate
By KENNETH OFGANG, Staff Writer
A pair of actions charging a law firm with helping its client cheat the estate of the client’s former business partner were given new life by this district’s Court of Appeal Friday.
Div. Seven 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.
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 by an amendment to the complaint against the client, and that the amendment requires leave of court upon a showing that the plaintiff is likely to prevail.
The plaintiff’s subsequent motion to allow such an amendment, 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. While the trial judge found that the lawyers owed a duty to Motion Graphix, and not to the estate, Perluss said the allegation that the attorneys aided in defrauding individuals engaged in business transactions with their client was sufficient to bring the action under the Sec. 1714.10(c) exception.
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.
The case is Favila v. Katten Muchin Rosenman LLP, B215096.
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