Court Opinion

ID: 2802486
Source: CourtListenerOpinion
Date Created: 2015-05-21 00:03:20.514748+00
Date Added: 2024-06-11T08:31:42.087233
License: Public Domain

Filed 5/20/15 Stuart v. Allen Matkins et al. CA4/3

                      NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 certified for
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or ordered published for purposes of rule 8.1115.

              IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                     FOURTH APPELLATE DISTRICT

                                                DIVISION THREE

KATHERINE STUART, Individually and
as Trustee, etc., et al.,
                                                                       G049450
     Plaintiffs and Appellants,
                                                                       (Super. Ct. No. 30-2009-00303239)
         v.
                                                                       OPINION
ALLEN MATKINS LECK GAMBLE
MALLORY & NATSIS, LLP, et al.,

     Defendants and Respondents.

                   Appeal from a judgment of the Superior Court of Orange County, Craig L.
Griffin, Judge. Affirmed.
                   Blumberg Law Corporation, Ave Buchwald and John P. Blumberg for
Plaintiffs and Appellants.
                   Hill, Farrer & Burrill and Michael K. Collins for Defendants and
Respondents.
                                              INTRODUCTION
                  Appellants, Katherine Stuart, the Stuart Family Trust, and Marshall Stuart
Properties, LLC, appeal from a judgment entered against them after the trial court found
they had failed to meet their burden of proof as to attorney malpractice and financial
elder abuse. In essence, they contend the trial court listened to all the evidence and came
to the wrong conclusions.
                   We do not reweigh evidence. If substantial evidence supports the
judgment, we must affirm it. And appellants failed to preserve some of the issues they
have now raised on appeal, by not properly drawing the trial court’s attention to them, so
we can’t consider them. We therefore affirm the judgment in favor of attorney James
McCormick and his law firm, Allen Matkins Leck Gamble Mallory & Natsis.
                                                      FACTS
                  Although the appellants are Katherine Stuart, the Stuart Family Trust (the
Trust), and Marshall Stuart Properties, LLC, the central figure in this case is Marshall
Stuart, Katherine’s husband. During the crucial time period in 2007, Stuart was making
the decisions for the Trust and for the limited liability company. He was then 84 years
old.
                  In 2007, Stuart sold property owned by the Trust and wanted to avoid
                                                                         1
paying taxes on the gain by means of a 1031 exchange. After looking at several
possibilities, he identified a commercial property in Santa Clarita as a suitable exchange.
The property included a large building leased to a single tenant: Wickes Furniture
Company. The lease term was 15 years, beginning in 2006, with 3 five-year options to
renew in favor of Wickes.

         1
                   A 1031 exchange refers to the nonrecognition of gain or loss on certain kinds of property if the
property is exchanged for other property of “like kind,” as provided in the Internal Revenue Code, title 26 of the
United States Code Service, section 1031. The exchange must conform strictly to the Internal Revenue Service
rules, including some fairly short time limits.

                                                          2
                  To purchase this property, Stuart had to put up the proceeds of the recent
sale ($6.4 million) and to borrow an additional $6.3 million. He borrowed the money
from Merrill Lynch Mortgage Lenders; a balloon payment on the loan was due in 10
years. Stuart entered into an agreement to acquire the property in April 2007.
                  Stuart engaged a broker to assist him with the transaction, James Brashier,
and Brashier in turn recommended James “Kimo” McCormick of the law firm of Allen
Matkins Leck Gamble Mallory & Natsis to take care of the legal aspects of the
                                                                                       2
transaction. Stuart engaged McCormick to perform legal services.
                  Among the many tasks associated with the purchase and sale, the one that
became the main focus of the litigation was obtaining the Wickes financial statement.
The lease did not include a “cooperation clause,” one that would have required Wickes to
furnish the landlord with information regarding its financial condition. As a privately
held company, Wickes was under no obligation to provide its financials to anyone unless
it saw some benefit to itself – for example, obtaining a loan. Despite McCormick’s and
Brashier’s strenuous efforts, the Wickes financials were not to be had, at least not for
Stuart’s perusal.
                  At first, Stuart refused to go through with the exchange unless he could see
the financials. He was understandably leery of becoming the landlord of a single tenant
whose financial condition was shrouded in mystery. But as the time to complete the 1031
exchange began to run out, he changed his mind. Based on the information he was able
to compile, he decided that going through with the exchange – even without the
financials – was preferable to the alternative: paying $1.3 million in taxes and putting the
rest of the proceeds into municipal bonds. Escrow for the property closed on June 29,
2007.

         2
                   The law firm’s engagement letter specified the scope of representation as the purchase of the Santa
Clarita property, the financing of the property, reviewing the Wickes lease, and “other prospective real estate and
business ventures.”

                                                          3
                Sadly, any tale of a real estate transaction occurring just prior to 2008 can
have only one ending. In early 2008, Wickes declared bankruptcy. Wickes ultimately
rejected the lease. The unsecured creditors, such as Stuart, received less than a penny on
the dollar. The lender foreclosed, and Stuart lost the property.
                Stuart individually and as trustee of the Trust sued both Brashier and
McCormick, as well as their firms, for negligence, breach of fiduciary duty, negligent
                                            3
misrepresentation, and elder abuse. Marshall Stuart Properties, a Delaware limited
liability company formed to hold title to the property, was also a plaintiff. Stuart became
incompetent, and his wife, Katherine Stuart, was appointed as his guardian ad litem in
                4
January 2011. She also represented the Trust as trustee.
                After a 12-day bench trial, the trial court held that neither the attorney
defendants nor the broker defendants were liable for negligence or for elder abuse.
Appellants have appealed only from the judgment in favor of the attorney defendants.
                                                DISCUSSION
                “We review the trial court’s factual findings for substantial evidence by
examining the whole record, including conflicting evidence, in the light most favorable to
the ruling below to determine whether there is reasonable, credible evidence of solid
value to support that ruling.” (Ferguson v. Yaspan (2014) 233 Cal.App.4th 676, 682.)
We assume a judgment is correct, and all presumptions and intendments are indulged to
support it, even on matters as to which the record is silent. It is the appellant’s burden to
show error. (Ayala v. Antelope Valley Newspapers, Inc. (2014) 59 Cal.4th 522, 546.)

            3
                The fate of the misrepresentation cause of action is unexplained, but apparently it was not an issue
at trial.
            4
                The court found that Stuart was not displaying signs of age-related dementia at the time of the
transaction.
                We are advised that Stuart died on November 7, 2014.

                                                        4
I.                Attorney Negligence
                  “The elements of a cause of action in tort for professional negligence are:
(1) the duty of the professional to use such skill, prudence, and diligence as other
members of his profession commonly possess and exercise; (2) a breach of that duty; (3)
a proximate causal connection between the negligent conduct and the resulting injury;
and (4) actual loss or damage resulting from the professional’s negligence. [Citations.]”
(Budd v. Nixen (1971) 6 Cal.3d 195, 200, superseded by statute on other grounds.) “In
addressing breach of duty, ‘the crucial inquiry is whether [the attorney’s] advice was so
legally deficient when it was given that he [or she] may be found to have failed to use
“such skill, prudence, and diligence as lawyers of ordinary skill and capacity commonly
possess and exercise in the performance of the tasks which they undertake.” [Citation.]’
[Citations.]” (Dawson v. Toledano (2003) 109 Cal.App.4th 387, 397.) To recover for
transactional malpractice, a plaintiff must show that “but for the alleged malpractice, it is
more likely than not that the plaintiff would have obtained a more favorable result.”
(Viner v. Sweet (2003) 30 Cal.4th 1232, 1244 (Viner).) This “more favorable result” can
take two forms: a more advantageous agreement (a “better deal”) or the collapse of the
proposed transaction, leaving the plaintiff better off (“no deal”). (Id. at p. 1239; see
                                                                     5
Wood v. Jamison (2008) 167 Cal.App.4th 156, 164.)
                  In this case, there is no question that, as Stuart’s attorney, McCormick had
a duty to him. The question is, a duty to do what? And assuming he had the duty
ascribed to him by appellants, would the result to Stuart have been more favorable if
McCormick had performed it?

         5
                   Appellants do not refer to or cite Viner in their opening brief. Their arguments on causation rely
mainly on two other cases, one based on medical malpractice (Cobbs v. Grant (1972) 8 Cal.3d 229) and the other
based on wrongful death (Haft v. Lone Palm Hotel (1970) 3 Cal.3d 756). In their reply brief, appellants
acknowledge the existence of Viner, but maintain it should not apply to this case. Viner is the controlling authority
on causation in transactional malpractice actions.

                                                          5
              Appellants’ focus on this issue in their appeal has shifted dramatically from
their focus at trial. Trial testimony largely centered on the risk of going ahead with the
1031 exchange without the Wickes financials and whether Stuart had been adequately
counseled about this risk by his attorney and his broker. On appeal, however, appellants
have abandoned this tack. Now they concede that Stuart fully understood the risk of
buying property leased to a single tenant whose financial statement he had not seen. He
fully understood that this tenant might fail, leaving him holding the bag. What he did not
understand – and what McCormick negligently failed to explain to him – was the risk that
Wickes would not fail. Stuart’s loan was due in 10 years, but Wickes had at least a 15-
year lease, even disregarding the 3 options to renew. Because Wickes did not have to
give him its financial statements, Stuart might have trouble refinancing or selling the
property when his loan came due. A bank or a buyer would want to judge for itself how
financially sound Wickes was, and Stuart could not compel Wickes to reveal this
information. Had McCormick explained this risk to Stuart, so the argument goes, he
would not have bought the property. He would have paid the taxes and put the rest of the
sale proceeds into municipal bonds.
              The trial court explained its rejection of this argument as follows:
[Appellants] assert that [McCormick] breached [his] duty of care by failing to warn . . .
Stuart of the risks of proceeding with a lease agreement that did not have a cooperation
clause, because of the potential difficulties in refinancing the property after ten years.
The evidence demonstrated, however, that . . . Stuart was well aware of a lack of a
cooperation clause in the lease, as evidenced by the parties’ unsuccessful attempts to
obtain the Wickes’ financials. True, . . . McCormick did not specifically point out that
the Wickes lease would have five years left at the time then ten year loan became due,
and that refinancing might be a problem without financials. But any failure to
specifically point this issue out to . . . Stuart was not a legal cause of any of the losses

                                               6
claimed here. Specifically, . . . Stuart’s loss of the Santa Clarita property did not occur
because the ten year loan came up, and he was unable to refinance.”
                  What appellants maintain, in effect, is that, all evidence to the contrary
notwithstanding, Stuart would not have bought the Santa Clarita property if McCormick
had explicitly told him, “You know, you might have a problem 10 years from now trying
to refinance or sell this property because Wickes doesn’t have to give you financial
statements.” Moreover, Stuart could not have figured this potential problem out for
himself, despite all the trouble caused during the 2007 transaction by Wickes’ refusal to
part with its financials. This highly sophisticated investor was somehow oblivious to the
difference between the due date of his loan and the term of Wickes’ lease – and the
possible effect of this difference between 10 and 15.
                  The evidence presented at trial did not support this theory. Stuart was an
experienced businessman who had engaged in several real estate transactions involving
the sale and leasing of commercial buildings and borrowing money to buy property. He,
or rather the Trust, also owned property leased to a single tenant. He had engaged in a
prior 1031 exchange. Before he hired McCormick, he had already identified the Santa
Clarita property he wanted to acquire. Stuart terminated the transaction in May 2007
because due diligence could not be completed in the time allotted in the agreement
between him and the seller. Stuart could then have walked away without penalty.
Instead, he continued negotiating. Stuart got his loan on the Santa Clarita property
                                                                6
without giving the lender the Wickes’ financials. Appellants presented no evidence that
things would be different in 10 years, if indeed Stuart still owned the property then. As
for being unable to sell the property, he was buying it with the Wickes’ financials unseen.
He himself believed the risk acceptable; nothing suggested at the time that a worthy

         6
                  McCormick testified in response to questions posed by appellants under Evidence Code section
776 that the lender’s attorney told him the lender had the financial statements, but was prevented by a confidentiality
agreement from giving them to Stuart.

                                                          7
buyer would make a different assessment in 10 years or whenever Stuart decided he
wanted to sell, which could have been before 10 years elapsed. In addition, the problems
Stuart might face in 10 years paled beside the present certainty that he was going to have
to give the government $1.3 million if he did not complete the 1031 exchange on time.
              Finally, although the risk arose from the contract, specifically from the
lease’s lack of a cooperation clause, the risk itself was a business one. Stuart knew he
could not require Wickes to turn over its financial information. The risk – as identified
by appellants – was that some future business deal he may have wanted to do would be
impeded or derailed because of his lack of leverage over Wickes. Stuart was in as good a
position as McCormick – if not a better one – to assess this risk, which was, in any case,
not a legal one. No law degree or legal experience was required to perceive and evaluate
this risk. “The test to distinguish malpractice from other wrongs is whether the claim
primarily concerns the quality of legal services.” (Ronald E. Mallen, Legal Malpractice
(2015 ed.) § 1:2, pp. 4-5.)
              Appellants argue that one of a lawyer’s basic duties is to advise, and
McCormick breached this duty by failing to advise Stuart. No one disputes the duty to
advise – the question is what the lawyer is to advise about. In this case, the trial court
found Stuart was an experienced businessman who was well able to appreciate the
relevant business risks involved in the transaction. He hired McCormick to do the legal
work involved in putting the 1031 exchange together, not to advise him on business
matters. Substantial evidence supports both the court’s assessment of Stuart’s business
acumen and the resulting inference that McCormick had no duty to offer business advice
to Stuart. As the trial court observed, “McCormick had no duty to point out what was
clearly obvious to . . . Stuart: That closing the transaction without Wickes’ financials
carried considerable risk.”
              Appellants did not carry their burden of proof as to McCormick’s duty to
Stuart to warn him of a business risk or as to causation from failure to warn even

                                              8
assuming there was such a duty. Substantial evidence supports the trial court’s
conclusions with respect to legal malpractice.
II.               Breach of Fiduciary Duty
                  Appellants assign error to the trial court’s “implied” finding that
McCormick did not breach his fiduciary duty to Stuart by failing to disclose a social
relationship with Brashier, the broker. Appellants have waived this issue on appeal.
                  The third amended complaint, the operative one here, did not contain an
allegation McCormick breached his fiduciary duty to Stuart by failing to disclose a social
relationship with Brashier. As to McCormick and his law firm, the complaint alleged,
“The Attorney Defendants, breached said fiduciary duties by failing to provide an
accurate analysis of the Dun & Bradstreet Report to [appellants], by failing to condition
close of escrow on the obtaining of the Wickes’ financial statements, and by failing to
properly advise [appellants] of the potential adverse consequences of closing the
transaction without all of Wickes’ financial information thereby ensuring that [appellants]
would proceed to close the transaction. They engaged in these acts and omissions to
assure payment of their own fees and to aide [sic] and abet [Brashier and his firm’s]
objectives of assuring the deal would close and brokers’ commissions and fees would be
paid.” The list of negligent acts in the malpractice cause of action did not include failing
to disclose a relationship between McCormick and Brashier.
                  At trial, appellants’ expert on attorney malpractice began to testify that
McCormick violated Rule 3-310 of the Rules of Professional Conduct by failing to
                                                                                      7
disclose to Stuart that he and Brashier had a social relationship. Defense counsel
objected immediately, telling the court, “There’s no allegation in the complaint that any

         7
                  Rule 3-310 of the Rules of Professional Conduct provides in pertinent part, “(B) A member shall
not accept or continue representation of a client without providing written disclosure to the client where: .[¶] . . . [¶]
(3) The member has or had a legal, business, financial, professional, or personal relationship with another person or
entity the member knows or reasonably should know would be affected substantially by resolution of the matter
. . . .”

                                                            9
part of this case is based on a breach of Rule 3-310 B or a failure to disclose the
relationship.” The court decided to allow the testimony and stated, “I’ll take a look at the
complaint and the scope of it and consider that and in considering the evidence.”
Appellants did not seek leave to amend the complaint to conform to proof during the trial.
               After trial was over, the court issued a proposed statement of decision. The
proposed statement did not mention a violation of Rule 3-310 or, for that matter, a breach
of fiduciary duty. Appellants filed objections to the proposed statement; they did not
mention a rule violation or breach of fiduciary duty or point out to the court that it had
failed to make findings on these issues. The final statement of decision did not mention
either of these issues.
               Code of Civil Procedure section 634 provides, “When a statement of
decision does not resolve a controverted issue, or if the statement is ambiguous and the
record shows that the omission or ambiguity was brought to the attention of the trial
court either prior to entry of judgment or in conjunction with a motion under Section 657
or 663, it shall not be inferred on appeal or upon a motion under Section 657 or 663 that
the trial court decided in favor of the prevailing party as to those facts or on that issue.”
(Italics added.)
               “A judgment or order of a lower court is presumed to be correct on appeal,
and all intendments and presumptions are indulged in favor of its correctness.
[Citations.]” (In re Marriage of Arceneaux (1990) 51 Cal.3d 1130, 1133.) A party may
avoid these intendments and presumptions by objecting, pursuant to Code of Civil
Procedure section 634, to the statement of decision. “[T]he party must state any
objection to the statement in order to avoid an implied finding on appeal in favor of the
prevailing party. . . . [I]f a party does not bring such deficiencies to the trial court’s
attention, the party waives the right to claim on appeal that the statement was deficient in
these regards, and hence the appellate court will imply findings to support the judgment.”
(Id. at pp. 1133-1134.)

                                               10
               Appellants did not bring the omission of findings on Rule 3-310 or on
fiduciary duty to the attention of the trial court when it objected to the proposed statement
of decision. We therefore imply findings to support the judgment. Most likely, the trial
court consulted the third amended complaint and concluded a rule violation had not been
pleaded. As for the breach of fiduciary duty claim pleaded in the third amended
complaint, appellants have now admitted Stuart “appreciated the risk entailed in buying a
property leased to a single tenant that might fail,” thereby undercutting any cause of
action for failure to warn Stuart of potential adverse consequences stemming from the
absence of the Wickes’ financials.
III.           Elder Abuse
               Welfare & Institutions Code section 15610.30, which defines elder
financial abuse, provides in pertinent part, “(b) A person or entity shall be deemed to
have taken, secreted, appropriated, obtained, or retained property for a wrongful use if,
among other things, the person or entity takes, secretes, appropriates, obtains, or retains
the property and the person or entity knew or should have known that this conduct is
likely to be harmful to the elder . . . . [¶] (c) For purposes of this section, a person or
entity takes, secretes, appropriates, obtains, or retains real or personal property when an
elder or dependent adult is deprived of any property right, including by means of an
agreement, donative transfer, or testamentary bequest, regardless of whether the property
is held directly or by a representative of an elder . . . .” An “elder” is a person age 65 or
older residing in California. (Welf. & Inst. Code, § 15610.27.) Appellants alleged in the
third amended complaint that McCormick and his firm assisted and aided Brashier and
his firm in pressuring and unduly influencing Stuart to close the transaction and failed to
counsel Stuart about the risky effects of the missing financial statements. The trial court
found “no evidence of bad faith or undue influence on the part of [McCormick] or
[Brashier].”

                                               11
              Appellants now argue the trial court erred in its conclusion because it was
based on the erroneous assumption that McCormick did not breach any duty to Stuart,
specifically a duty to disclose his relationship to Brashier. We review the trial court’s
findings of fact for substantial evidence. (Bickel v. City of Piedmont (1997) 16 Cal.4th
1040, 1053, superseded by statute on other grounds; Monks v. City of Rancho Palos
Verdes (2008) 167 Cal.App.4th 263, 295.)
              The trial court’s initial findings on elder abuse concentrated on Brashier. It
found he had not pressured Stuart into closing the 1031 exchange. There was a need for
some haste, but the need arose from the Internal Revenue Service rules regarding these
exchanges, not from pressure applied by Brashier. The court referred to McCormick only
in passing, stating in the proposed statement of decision, “[T]here was no evidence of bad
faith or undue influence on the part of either Mr. Brashier or Mr. McCormick. Mr. Stuart
needed timely assistance with a pending 1031 transaction that he had instituted on his
own, and the evidence at trial demonstrated that each of these professionals put their full
effort into achieving Mr. Stuart’s goal.”
              The court did not mention failing to disclose McCormick’s relationship
with Brashier in connection with elder abuse. When appellants objected to the proposed
statement of decision, they did not mention nondisclosure as a controverted issue the
court had failed to resolve. The final statement of decision again focused on Brashier’s
conduct, mentioning McCormick and his firm only in passing. We therefore imply
findings to support the judgment (see In re Marriage of Arceneaux, supra, 51 Cal.3d at
pp. 133-134), which was that neither McCormick nor his firm engaged in elder abuse.

                                             12
                                  DISPOSITION
            The judgment is affirmed. Respondents are to recover their costs on
appeal.

                                              BEDSWORTH, J.

WE CONCUR:

RYLAARSDAM, ACTING P. J.

MOORE, J.

                                         13