Court Opinion

ID: 6330271
Source: CourtListenerOpinion
Date Created: 2022-04-12 23:03:04.381719+00
Date Added: 2024-06-11T09:22:59.229674
License: Public Domain

Filed 4/11/22 Dynastion Energy v. Yung CA2/4
    NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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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 IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                           SECOND APPELLATE DISTRICT

                                          DIVISION FOUR

 DYNASTION ENERGY, S.R.O.,                                                  B311960

            Plaintiff and Appellant,                                       (Los Angeles County
            v.                                                             Super. Ct. No.
                                                                          20STCV37438)
 JOHN YUNG et al.,

            Defendants and Respondents.

     APPEAL from a judgment of the Superior Court of Los
Angeles County. Michael L. Stern, Judge. Reversed.
     Law Office of Louis E. Shoch, Louis E. Shoch, for Plaintiff
and Appellant.
     Lewis Brisbois Bisgaard and Smith, John S. Poulos and
John Ternieden for Defendants and Respondents.
       Dynastion Energy, S.R.O. (Dynastion) appeals from an
order sustaining, without leave to amend, the demurrer of
defendants Lewis, Brisbois, Bisgaard & Smith (Lewis, Brisbois)
and John P. Yung (Yung), a Lewis, Brisbois partner, to
Dynastion’s complaint for aiding and abetting fraud. The
complaint alleged Dynastion invested in a joint venture with
Yung’s client. Dynastion also alleged Yung knew his client had
failed to perform its obligations in a previous joint venture
involving the same business enterprise, but Yung failed to
disclose this information to Dynastion. In sustaining the
demurrer, the trial court held the agent’s immunity rule, under
which duly acting agents cannot be held liable for conspiring with
their own principals, barred Dynastion’s claim. We reverse,
concluding that an exception to the rule applies where, as here,
the complaint alleges the attorney was aware of the client’s
previous failure to perform in a similar joint venture.

FACTUAL ALLEGATIONS AND PROCEDURAL HISTORY

      A.  Formation of the HoldCo Joint Venture and
      Misappropriation of its Assets

      The complaint contained the following allegations relating
to the formation of the HoldCo joint venture, misappropriation of
HoldCo assets, Yung’s involvement in a previous ill-fated joint
venture, and Yung’s (and his firm’s) knowledge of and/or
participation in alleged fraud and other wrongdoing.

      Dynastion is a limited liability company formed in the
Slovak Republic. In late 2016, representatives of Dynastion were
introduced to Ray Brewer (Brewer), the owner and operator of
CH4 Power, Inc. (“PowerCo”) in Tulare, California. Dynastion

                                2
discussed with Brewer a potential business relationship involving
Brewer’s “anaerobic digesters,” (digesters) which were systems to
convert dairy cow manure into electricity.

       Brewer told Dynastion that PowerCo had the necessary
relationships with dairy farmers, as well as the intellectual
property, to build the digesters in California, as well as across
North America. Brewer pitched a joint venture to Dynastion
involving a multi-million-dollar investment from Dynastion.

       Yung and Lewis, Brisbois had previously represented
Brewer. With Yung’s assistance, Brewer formed an entity, CH4
Green Energy Co. (“Green Energy”) for the purposes of forming
the joint venture with Dynastion. Pursuant to the Joint Venture,
the parties agreed to form a holding company to own and operate
the joint venture. Green Energy and Dynastion would each have
a 50 percent interest in the joint venture holding company
(“HoldCo”). Yung retained a profit participation interest in Green
Energy.

      During the formation of HoldCo, Yung participated in
various meetings during which Brewer misrepresented his intent
to transfer assets to HoldCo and overstated the value of the
assets. Yung knew that Brewer was mispresenting the facts, yet
Yung affirmed Brewer’s statements and Yung made his own
misrepresentations and failed to disclose material facts.

      Yung and Lewis, Brisbois provided HoldCo with legal
representation. HoldCo executed a conflict waiver to enable
Lewis, Brisbois to represent HoldCo in addition to the joint
venturer Green Energy.

                                 3
      The joint venture between Green Energy and Dynastion
was the subject of two agreements, the Joint Venture Agreement
(December 5, 2017) and the Amended and Restated Joint Venture
Agreement (February 23, 2018), which replaced the Joint
Venture Agreement.

      Dynastion funded HoldCo with an initial contribution in
excess of $2 million. Under the Joint Venture Agreement, Green
Energy and Brewer were to contribute PowerCo’s intellectual
property and other project resources to HoldCo at fair value, and
Green Energy would be responsible for developing, constructing
and managing the digesters. There were 14 specific digester
projects, known as California Dairy Energy projects, or “CDEs,”
that PowerCo would contribute. The CDEs included intellectual
property, engineering and site drawings, contracts, land leases
and fuel supply agreements for each CDE.

       PowerCo and HoldCo executed a Bill of Sale pursuant to
which HoldCo paid $2.1 million for various assets, including
intellectual property rights and work product for specified CDEs.
Yung and Lewis, Brisbois drafted the Bill of Sale. After
Dynastion transferred the funds, Brewer and PowerCo failed to
cause the transfer of their interest in the assets it had agreed to
transfer under the Joint Venture Agreement. Furthermore,
Brewer and PowerCo had overstated the value of the assets to be
transferred.

      Brewer misappropriated Dynastion’s contributions to
HoldCo, instead using the funds for his own interest and the
interest of other entities under his control.

                                 4
      B.    The Previous Joint Venture.

      Unbeknownst to Dynastion, at the time of the formation of
the HoldCo joint venture, Brewer and Yung had been involved in
a previous joint venture with another party. In April 2013,
Brewer had created CH4 Bioenergy Holdings (“BioEnergy”), a
limited liability company. The holders of BioEnergy were Brewer
(51.3 percent), Yung (two percent), and four other individuals
(46.7 precent).

       Like HoldCo, BioEnergy was formed to construct and
operate digesters on dairy farms in the Central Valley. Brewer
told the investors in the joint venture that he and PowerCo were
contributing intellectual property that Brewer had spent more
than $1 million developing, and that Brewer already had 43
letters of intent from California dairy farmers to provide land and
dairy waste necessary for the construction and operation of the
digesters, and that Brewer had regulatory approvals and building
permits necessary to begin construction.

      However, in August 2013 one of the investors in BioEnergy
accused Brewer of misconduct, including misrepresentations
regarding the status of BioEnergy’s business, its projects and
building permits, and alleged that Brewer misappropriated funds
and concealed his misrepresentations. The investor alleged that
Brewer had forged many of the 43 letters of intent. In September
2013, it became clear that BioEnergy would not move forward.
Yung terminated his representation of BioEnergy at this time,
and rescinded his interest in the company.

      Dynastion and HoldCo learned of BioEnergy holdings and
its business history, as well as Yung’s involvement, in October
2019, i.e., after Dynastion had invested in HoldCo.

                                5
     C.    CDE 173

       CDE 173 was one of the 14 CDE projects which were meant
to be transferred to HoldCo. and was representative of Brewer’s
misuse of funds and misrepresentations. CDE 173 was a CDE
project to be contributed to HoldCo that was located on a dairy
farm owned and operated by Simon Vander Woude.

      Before the Joint Venture, PowerCo had entered into a fuel
supply agreement with Vander Woude governing PowerCo’s right
to construct and operate CDE 173 on Vander Woude’s dairy farm.
These rights were supposed to be transferred to HoldCo.

      However, shortly before Dynastion transferred the funds to
HoldCo, Brewer learned that Vander Woude had cancelled the
fuel supply agreement with CDE 173, pursuant to written notice
dated December 20, 2017. The reason for the cancellation was
PowerCo’s failure to break ground on the project.

      At the time of the execution of the Joint Venture
Agreements and the Bill of Sale, Yung knew of Vander Woude’s
cancellation and thus that CDE 173’s value was overstated.

       In July 2018, Yung and another partner at Lewis, Brisbois
had a series of communications with Brewer concerning initiating
litigation against Vander Woude for cancelling the fuel
agreement with CDE 173. Although HoldCo had paid for the
rights to CDE 173, including the fuel supply agreement, Yung
never discussed any lawsuit with anyone other than Brewer, and
HoldCo continued to be unaware of the cancellation.

      In preparation for a lawsuit against Vander Woude, Brewer
used $10,000 from HoldCo to pay a retainer to Yung and Lewis,
Brisbois. No disinterested member of HoldCo was aware of this

                               6
payment. Yung and Brewer initiated a lawsuit on behalf of
PowerCo, although the rights to the fuel supply agreement had
been transferred to HoldCo.

       This unauthorized lawsuit jeopardized HoldCo’s
relationship with dairy farmers, which relationship was critical
to its operations.

      Yung and Lewis, Brisbois were aware that Brewer was
breaching his fiduciary obligations to HoldCo and misstating the
value of assets and the status of various projects, but did not
reveal that information to Dynastion or HoldCo.

      D.    Complaint.

      Dynastion and HoldCo’s complaint alleged four causes of
action: (1) aiding and abetting fraud; (2) aiding and abetting
breach of fiduciary duty; (3) breach of fiduciary duty; and (4) legal
malpractice. Dynastion was a party solely to the first cause of
action, while HoldCo was the sole plaintiff asserting the second,
third and fourth causes of action.

      With respect to the first cause of action, the complaint
alleged that Yung and Lewis, Brisbois aided and abetted
Brewer’s fraud. Yung and Lewis, Brisbois were aware that
Dynastion was ignorant of the previous joint venture and its
demise. Yung knew that in order to induce Dynastion to fund the
new joint venture, Brewer had intentionally failed to disclose the
existence of the prior joint venture and the reasons for its demise.

       In reliance on the material omissions regarding the prior
joint venture, Dynastion executed the joint venture agreements
and funded HoldCo’s operations with $2 million. With knowledge

                                 7
of Brewer’s fraud, Yung participated in drafting the Joint
Venture Agreement and Amended Joint Venture Agreement.

      It was not until September or October 2019 that Dynastion
became aware of the earlier joint venture, including Yung’s
participation, the demise of that joint venture, and the
allegations of fraud and misappropriation.

      E.    Demurrer To Complaint.

       Defendants Yung and Lewis, Brisbois demurred to the first
and second causes of action for aiding and abetting based upon
the agent’s immunity rule, and asserted that the complaint failed
to join Brewer, an indispensable party. Defendants did not demur
on the basis of Civil Code section 1714.10, which imposes a
prefiling requirement for actions against attorneys for conspiring
with their client. Dynastion had not sought leave to file its
complaint in advance of filing.

      Plaintiffs Dynastion and HoldCo opposed the demurrer.
They conceded, as Dynastion does on appeal, that the agent’s
immunity rule precludes claims against an attorney for
conspiracy to breach a client’s duty to a third party, unless the
attorney also breaches an independent duty to that party. But,
they contended, it does not apply to a claim the attorney aided
and abetted the client’s fraud. Further, even if the rule did apply,
the “independent duty” exception would permit plaintiffs’ claim.
Finally, plaintiffs asserted they were not required to join Brewer
because it is not necessary to join all tortfeasors to the action.

       The trial court sustained the demurrer to the first and
second causes of action, holding that plaintiffs failed to meet the
prefiling requirements of Civil Code section 1714.10, subdivision

                                 8
(a) and further the two aiding and abetting claims were based on
alleged wrongdoing done in the attorney’s representative capacity
and failed as a matter of law under the agent’s immunity rule.
The trial court did not address defendants’ indispensable party
argument.

                         DISCUSSION

       Dynastion1 argues that its claim is not subject to the
prefiling order requirement of section 1714.10, subdivision (a),
nor does the agent’s immunity rule bar its claim because the
“independent duty” exception applied.2 Yung and Lewis, Brisbois
contend that the trial court correctly ruled that Dynastion’s claim
was subject to the prefiling requirements of section 1714.10 and
defendants did not owe an independent duty to Dynastion.

1     Although the third and fourth causes of action were not the
subject of the demurrer, the judgment is final as to Dynastion
because the demurrer disposed of the first cause of action, the
only cause of action to which it was a party. (See In re Baycol
Cases I & II (2011) 51 Cal.4th 751, 759.)
2      Arguably, defendants’ failure to assert section 1714.10 at
the demurrer stage waived this procedural defense. The express
language of section 1714.10, subdivision (b) requires that the
defense be raised in the attorney’s “first appearance” in the case.
(Farmers & Merchants Trust Co. v. Vanetik (2019) 33 Cal.App.5th
638, 655.) However, the trial court nevertheless concluded the
prefiling requirement was not met and substantively applied
section 1714.10 as a bar to Dynastion’s claims by concluding they
fell within the agent’s immunity rule. In any event, as discussed
below, the allegations of the complaint fit within one of the
statutory exceptions to the prefiling requirement.

                                 9
      A.    Standard of Review.

       On appeal from an order sustaining a demurrer without
leave to amend, we apply a de novo standard of review. We
exercise our independent judgment to determine whether the
complaint states a cause of action as a matter of law. (Villafana
v. County of San Diego (2020) 57 Cal.App.5th 1012, 1016.) In
reviewing the complaint, “we must assume the truth of all facts
properly pleaded by the plaintiffs, as well as those that are
judicially noticeable.” (Howard Jarvis Taxpayers Assn. v. City of
La Habra (2001) 25 Cal.4th 809, 814.) We may affirm on any
basis stated in the demurrer, regardless of the ground on which
the trial court based its ruling. (Summers v. Colette (2019) 34
Cal.App.5th 361, 367.) When a trial court sustains a demurrer
without leave to amend, we must decide whether there is a
reasonable possibility the plaintiff could cure the defect with an
amendment. The plaintiff has the burden of proving that an
amendment would cure the defect. (Modisette v. Apple Inc. (2018)
30 Cal.App.5th 136, 155.)

       “We review the trial court’s interpretation of section
1714.10 under the de novo standard.” (Central Concrete Supply
Co. v. Bursak (2010) 182 Cal.App.4th 1092, 1098.) “Applying
section 1714.10 . . . requires the court to initially determine
whether the pleading falls . . . within the coverage of the statute.”
(Berg & Berg Enterprises, LLC v. Sherwood Partners, Inc. (2005)
131 Cal.App.4th 802, 818.) “Once it is determined that the
pleading falls within the coverage of subdivision (a) of section
1714.10, the next step is to ascertain whether the pleaded claims
fall within either of the exceptions set forth in subdivision (c) of
the statute.” (Stueve v. Berger Kahn (2013) 222 Cal.App.4th 327,
331.)

                                 10
      B.    Discussion.

      1.    Conspiracy and the Agent’s Immunity Rule.

       Civil conspiracy imposes liability on persons who, while
not actually committing the underlying tort, share with the
tortfeasors a common plan or design and its perpetration. (Berg
& Berg, supra, 131 Cal.App.4th at p. 823.) However, a civil
conspiracy does not give rise to a cause of action unless there has
been an independent civil wrong, and is thus not an independent
substantive basis for liability. (Rusheen v. Cohen (2006) 37
Cal.4th 1048, 1062.) As explained in Doctors’ Co. v. Superior
Court (1989) 49 Cal.3d 39, (Doctors’ Co.), “‘[t]he elements of an
action for civil conspiracy are the formation and operation of the
conspiracy and damage resulting to plaintiff from an act or acts
done in furtherance of the common design . . .’” (Id. at p. 44.)

      Civil liability for aiding and abetting may be imposed on
one who aids and abets the commission of an intentional tort if
the person (a) knows the other’s conduct constitutes a breach of
duty and gives substantial assistance or encouragement to the
other to so act or (b) gives substantial assistance to the other in
accomplishing a tortious result and the person’s own conduct,
separately considered, constitutes a breach of duty to the third
person. (Stueve v. Berger Kahn, supra, 222 Cal.App.4th at p. 323.)
Aiding-abetting focuses on whether a defendant knowingly gave
substantial assistance to someone who performed wrongful
conduct, while conspiracy focuses on whether the defendant
agreed to join the wrongful conduct. (Ibid.)

      Under the agent’s immunity rule, an agent cannot be liable
for conspiring with its principal based upon the agent’s conduct
undertaken in an official capacity on behalf of the principal.

                                11
(Doctors’ Co., supra, at p. 41; Berg & Berg, supra, 131
Cal.App.4th at p. 817.)

       Both civil conspiracy and aiding and abetting are subject to
the agent’s immunity rule. (Berg & Berg, supra, 131 Cal.App.4th
at p. 823, fn.10; Howard v. Superior Court (1992) 2 Cal.App.4th
745, 749.) The rule applies “without regard to the labels attached
to the cause of action or whether the word “conspiracy”—having
no talismanic significance—appears.” (Cortese v. Sherwood (2018)
26 Cal.App.5th 445, 455.)

      2.    Section 1714.10 and the Agent’s Immunity Rule.

       Civil Code section 1714.10 is co-extensive with the agent’s
immunity rule. However, as originally enacted, it also operated
as a gatekeeper to actions against an attorney for conspiracy,
requiring persons seeking to assert a claim for conspiracy against
an attorney in connection with the attorney’s actions to
compromise a claim or dispute to obtain a court order prior to
filing a complaint. (Civ. Code § 1714.10, subd. (a); Berg & Berg,
supra, 131 Cal.App.4th at p. 817–818.) A party must establish a
reasonable probability of prevailing before pursuing a “cause of
action against an attorney for a civil conspiracy with his or her
client arising from any attempt to contest or compromise a claim
or dispute.” (Civ. Code § 1714.10, subd. (a).)3

3      Civil Code section 1714.10, subdivision (a) provides at
relevant part, “No cause of action against an attorney for a civil
conspiracy with his or her client arising from any attempt to
contest or compromise a claim or dispute, and which is based
upon the attorney’s representation of the client, shall be included
in a complaint or other pleading unless the court enters an order
allowing the pleading that includes the claim for civil conspiracy

                                 12
       Originally enacted in 1988, Civil Code “‘[s]ection 1714.10
was intended to weed out the harassing claim of conspiracy that
is so lacking in reasonable foundation as to verge on the
frivolous.’” (Rickley v. Goodfriend (2013) 212 Cal.App.4th 1136,
1148.) However, later amendments to section 1714.10 set forth
exceptions: “[t]his section shall not apply to a cause of action
against an attorney for a civil conspiracy with his or her client,
where (1) the attorney has an independent legal duty to the
plaintiff, or (2) the attorney’s acts go beyond the performance of a
professional duty to serve the client and involve a conspiracy to
violate a legal duty in furtherance of the attorney’s financial
gain.” (Civ. Code § 1714.10, subd. (c), (emphasis added).) The
exceptions mirror the limits on an attorney’s liability for
conspiracy established by Doctors’ Co., supra, 49 Cal.3d 39.
(Cortese v. Sherwood, supra, 26 Cal.App.5th at p. 453.)

       Several courts have observed that the exceptions swallow
the rule because they capture all viable attorney-client
conspiracy claims; as a result, only those claims that would fail in
any event remain subject to the pleading hurdle in subdivision
(a). (Pavicich v. Santucci (2000) 85 Cal.App.4th 382, 394–395
(Pavicich).) In effect, “a plaintiff who can plead a viable claim for
conspiracy against an attorney need not follow the petition
procedure outlined in the statute as such a claim necessarily falls
within the stated exceptions to its application.” (Berg, supra, 131
Cal.App.4th at p. 818.)

to be filed after the court determines that the party seeking to file
the pleading has established that there is a reasonable
probability that the party will prevail in the action.”

                                 13
      3     The First Exception Applies

       The first exception in Civil Code section 1714.10,
subdivision (c), applies where an attorney owes an “independent
legal duty” to the plaintiff. This exception applies to “a
relationship beyond that of attorney-client.” (Evans v. Pillsbury,
Madison & Sutro (1998) 65 Cal.App.4th 599, 605.) Attorneys are
expected to stay within the bounds of the law in representing
their clients. “Counsel who circumvent established legal channels
to accomplish a desired result, participating with the client in a
scheme” to deprive another of their property are “not performing
the normal services of an attorney.” (Rickley v. Goodfriend, supra,
212 Cal.App.4th at p. 1154.)

       Thus, “an attorney has an independent legal duty to refrain
from defrauding nonclients.” (Klotz v. Milbank, Tweed, Hadley &
McCloy (2015) 238 Cal.App.4th 1339, 1351 (Klotz); accord, Rickley
v. Goodfriend, supra, 212 Cal.App.4th at p. 1151; see Shafer v.
Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003)
107 Cal.App.4th 54, 71.) “[A] lawyer communicating on behalf of
a client with a nonclient may not knowingly make a false
statement of material fact to the nonclient [citation], and may be
liable to the nonclient for fraudulent statements made during
business negotiations.” (Vega v. Jones, Day, Reavis & Pogue
(2004) 121 Cal.App.4th 282, 291.)

      In Pavicich v. Santucci, supra, 85 Cal.App.4th 382, the
plaintiff was persuaded to invest as a limited partner in a
struggling brew pub project. (Id. at p. 386.) However, a prior joint
venture had been dissolved and after a settlement agreement and
release were entered into, certain of the former joint venturers
asserted that the release had been procured by fraud. (Id. at pp.

                                14
385–386.) During negotiations leading up to his investment, the
plaintiff asked two of the people remaining in the project and the
attorney whether there were circumstances surrounding the
early days of the joint venture that the plaintiff should know
about. (Id. at p. 386.) Although the attorney told the plaintiff
there was a settlement, he did not disclose the allegations that
the release had been procured by fraud. (Ibid.)

       Pavicich concluded that the plaintiff stated a viable cause
of action against the attorney for conspiring to defraud the
plaintiff, reasoning that the case could not be decided in the
attorney’s favor under a theory that he had no duty of disclosure
to the plaintiff. (Pavicich, supra, 85 Cal.App.4th at p. 398.)
Rather, since the attorney had indicated to the plaintiff that the
releases they had signed would prevent future problems with the
project, the attorney was bound by “the principle that ‘where one
does speak he must speak the whole truth to the end that he does
not conceal any facts which materially qualify those stated.
[Citation.] One who is asked for or volunteers information must
be truthful, and the telling of a half-truth calculated to deceive is
fraud.’ [Citations.]” (Ibid.)

      Pavicich is on point here. Defendants are alleged to have
previously represented Brewer in connection with the prior joint
venture, and Yung took a percentage interest in it. After
BioEnergy did not move forward, Yung terminated his
representation and rescinded his ownership interest.

       Defendants provided the current joint venture, HoldCo,
with legal representation. Dynastion alleged that Yung
participated in meetings regarding the formation of the current
joint venture, during which Brewer made statements that Yung

                                 15
knew were false. Yung also knew of Vander Woude’s cancellation
of the fuel supply contract, and the potential litigation against
him on behalf of PowerCo, but did not disclose these facts to
Dynastion.

       Assuming the truth of plaintiff’s allegations, given Yung’s
level of involvement with Brewer, the prior joint venture and its
demise, as well as the cancellation of the Wander Woude
contract, Yung had a duty to disclose Brewer’s
misrepresentations concerning the status of his property
interests in the intellectual property and the CDEs, and Brewer’s
malfeasance with respect to funds. In sum, although Yung did
not represent Dynastion, given the facts of this case, Yung and
Lewis, Brisbois had an independent duty to Dynastion as the
second investor in Brewer’s “digester” enterprise, namely, the
duty to “refrain from defrauding nonclients.” (Klotz, supra, 238
Cal.App.4th at p. 1351.) Because Dynastion’s claims come under
the exception of Civil Code section 1714.10, subdivision (c), no
prefiling order was required to commence this action.

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                        DISPOSITION

       The judgment of the superior court is reversed. Dynastion
is to recover its costs on appeal.

    NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

                                                CURREY, J.
We concur:

WILLHITE, Acting P.J.

            *
MICON, J.

*
      Judge of the Los Angeles County Superior Court, assigned
by the Chief Justice pursuant to article VI, section 6 of the
California Constitution.

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