Filed 9/21/18 Epis v. Jolley CA1/4

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION FOUR

BARBARA EPIS, Plaintiff and Appellant, v. SCOTT C. JOLLEY, et al., Defendants and Respondents.

A143387 (Marin County Super. Ct. No. CIV1001283)

Barbara Epis, a wealthy elderly woman and sophisticated real estate investor, entered into a number of business and real estate transactions with her attorney, Vernon Bradley, and her accountant, Scott Jolley. After losing close to a million dollars on certain transactions, Epis sued Bradley and Jolley for breach of contract, negligent and intentional misrepresentation, breach of fiduciary duty, and elder abuse, as well as for violation of the unfair competition law (UCL). (Bus. & Prof. Code, § 17200 et seq.)[1] Bradley cross-complained, asserting causes of action for, among other things, breach of contract, a UCL claim, and declaratory relief. Most of the causes of action were tried to a jury, but the UCL and declaratory relief causes of action were tried to the court as equitable claims.

The gist of Epis’s appeal is that the court erroneously ruled against her on her UCL cause of action against Bradley. The court found Bradley violated Rule 3-300 of the Rules of Professional Conduct[2] by entering into certain transactions with her without securing written consent from her and without advising her of the potential risks or encouraging her to seek an independent legal opinion.

This violation, she argues, satisfied both the “unlawful” and the “unfair” theories of recovery on her various claims under the UCL. Epis also specifically claims, with respect to Bradley’s cross-complaint for declaratory relief of his title to the houseboat where he had lived for 20 years, the judge improperly applied the preponderance standard of proof when he should have applied the clear and convincing evidence standard.

We conclude the trial court erred in holding that a UCL claim could not be premised on a violation of the rules of professional conduct. We therefore remand for the court’s reconsideration of the evidence on Epis’s third cause of action. We further conclude the court applied the wrong evidentiary standard on Bradley’s request for declaratory relief (fifth cause of action in the cross-complaint), which also necessitates a remand.

1. BACKGROUND

The parties are familiar with the facts, and we shall not provide a detailed history of their dealings with one another. In brief, the parties invested together in a series of real estate transactions in Marin County. Through shrewd real estate dealings over the course of 30 years, Epis had amassed a fortune of some $22 million. Bradley and Jolley used her as a “deep pocket” investor in properties they planned to renovate and sell at a profit. Epis provided the cash required for down payments and certain other financial needs during development; Bradley managed the renovation and development of the properties they purchased; and Jolley provided credit financing and funds for debt service and remodeling. It appears Jolley and Bradley also handled accounting and legal issues that arose.[3]

At trial, Epis took the position that the funds she provided were loans, but there was substantial evidence supporting the trial court’s finding that Epis was a joint venturer with Bradley and Jolley. At some point the arrangement foundered and money was lost. Then, as the trial court put it, the “former friends . . . turned on each other.”

The jury trial resulted in findings in favor of Jolley on all causes of action. The jury found Bradley had breached his fiduciary duty to Epis, but Epis was not harmed. The jury awarded Bradley $185,385.74 on his cross-complaint based on Epis’s breach of contract on a project called 96 Mt. Tiburon. The equitable issues, including the UCL claims and request for declaratory relief, were then tried to the court. The court ruled in Bradley’s favor, holding a violation of the rules of professional conduct could not be the basis for a UCL violation. The court also found Bradley was the legal and beneficial owner of the disputed houseboat. As to Bradley’s UCL cross-claim against Epis, the court found the same evidence that supported the jury’s breach of contract verdict supported Bradley’s third cause of action on the cross-complaint.

Epis appeals.

2. DISCUSSION

1. Standard of Review

The parties do not agree on the standard of review. Epis claims it is de novo review because the issue on appeal is one of law. Bradley claims an abuse of discretion standard applies because we are, he says, reviewing a discretionary determination by the trial court sitting in equity. We shall review de novo any issues of law decided by the court, and shall review for substantial evidence any factual findings it made. (Daro v. Superior Court (2007) 151 Cal.App.4th 1079, 1092 (Daro).)

2. Epis’s UCL Cause of Action

Section 17200 defines unfair competition as “any unlawful, unfair or fraudulent business act or practice.” An action to enforce the UCL may be brought by, in addition to executive officers, “a person who has suffered injury in fact and has lost money or property as a result of the unfair competition.” (§ 17204.) There are four specific transactions here at issue: (1) a $200,000 “five-day loan” from Epis to Bradley and Jolley in connection with the purchase of 130 Geldert Drive in Tiburon, which allegedly was never repaid; (2) a contract to purchase a property located at 96 Mt. Tiburon, as to which the jury awarded Bradley $185,385.74, and Epis contends she is entitled to void the contract and thereby bar his recovery of the jury’s verdict; (3) the 96 Mt. Tiburon contract insofar as Epis claims a right to void the agreement under section 17203 and to recover $260,000 she paid toward the purchase; and (4) title to a houseboat that was the subject of Bradley’s cross-complaint, which the court awarded to Bradley. We discuss the facts of these transactions only as necessary to explain our legal analysis.

It is settled that what constitutes “unfair competition” or an “unlawful, unfair or fraudulent business act or practice” under any given set of circumstances is a question of fact, reviewable for substantial evidence. (People v. McKale (1979) 25 Cal.3d 626, 635; Countrywide Financial Corp. v. Bundy (2010) 187 Cal.App.4th 234, 257; Daro, supra, 151 Cal.App.4th at p. 1092.) Here, however, the court appears to have concluded as a matter of law that an attorney’s violation of a rule of professional conduct can never serve as the basis for a UCL claim. It wrote: “The issue is whether a violation of the Rules of Professional Conduct (‘The Rules’) gives rise to a violation of the rule of law. The Rules are intended to establish the standards for members for the purposes of discipline. [Citation.] The fact that a member has engaged in conduct that may be contrary to these rules does not automatically give rise to a civil cause of action. [Citations.] The State Bar administers discipline for violating the rules governing lawyers. The Rules, 1-110.” The court then found Bradley had violated the rules of professional conduct by failing to make a full disclosure of potential conflicts and failing to secure an adequate, signed waiver of potential conflicts, as required by Rule 3-300.[4] The judge called Bradley’s conduct “scandalous.” This was consistent with the jury’s finding that Bradley breached his fiduciary duty to Epis, but also found Epis was not harmed thereby.

After the bench trial, the court further concluded Epis could not recover for a UCL violation based on that breach. “The rules of conduct are enforced by the State Bar. While the jury determined that Bradley breached his ethical duty to Ms. Epis, this breach alone is not a violation of any law. Therefore, it is not an unfair business practice.” As we read the statement of decision, this was a blanket rejection of Epis’s theory of recovery based on the legal conclusion that a violation of the rules of professional conduct can never constitute an unlawful or unfair business practice under the UCL. The cases cited by the court in support of its conclusion that violation of the rules “does not automatically give rise to a civil cause of action” are inapposite. Those cases establish only that a violation of a rule of professional conduct does not alone give rise to a cause of action against an attorney; they do not involve cases in which a UCL violation was alleged based on a rules violation. (See Ames v. State Bar (1973) 8 Cal.3d 910, 915-917 [disciplinary proceeding at a time when the rules absolutely prohibited an attorney from acquiring an interest adverse to his or her client]; Noble v. Sears, Roebuck & Co. (1973) 33 Cal.App.3d 654, 658-659 [violation of rule of professional conduct does not render attorney liable in damages]; Wilhelm v. Pray, Price, Williams & Russell (1986) 186 Cal.App.3d 1324, 1333, fn. 5 [“violation of rule 7-103 does not subject an attorney to civil liability in damages”].)

Where a rules violation is alleged as the “unlawful” or “unfair” act or practice giving rise to a cause of action under the UCL, the law is to the contrary. (People ex rel. Herrera v. Stender (2012) 212 Cal.App.4th 614, 632 [upholding preliminary injunction entered on UCL cause of action in a case where “the complaint does not allege any independent cause of action for breach of a rule of professional conduct[, but rather] . . . unlawful business practices under section 17200, using violation of the Rules of Professional Conduct as a measure of the unlawful practice.”].) “ ‘There is a distinction for our purposes between trying to regulate professional conduct, which plaintiff is not trying to do, and trying to prevent fraud on the public, which plaintiff is trying to do.’ [Citation] This point is also dispositive of appellants’ contention that the [plaintiff] is improperly using section 17200 as a means to usurp the duties of the California State Bar in regulating the practice of law.” (Id. at p. 640, italics added.)[5] Having concluded the court misapprehended the controlling precedent in that regard, we must remand for reconsideration of its decision in light of the possibility that a violation of the rules of professional conduct may form the basis of a UCL claim. We do not hold an attorney’s violation of the rules of professional conduct invariably amounts to an unfair, unlawful or fraudulent act or practice. We only hold that a rules violation is not automatically, categorically exempted from constituting an unlawful, unfair or fraudulent act or practice under the UCL. The trial court should have determined as a matter of fact whether it amounted to an unlawful, unfair or fraudulent act or practice in this case.

We express no opinion on whether Epis suffered “injury in fact” from the alleged rules violation, or whether she “lost money or property as a result.” (§ 17204; Hall v. Time Inc. (2008) 158 Cal.App.4th 847, 849; see Prakashpalan v. Engstrom, Lipscomb & Lack (2014) 223 Cal.App.4th 1105, 1134 [affirming dismissal of UCL cause of action against attorney where attorney’s violation of Rule 3-310 was alleged as a fraudulent, unfair, and unlawful act, but plaintiff failed to allege causation of damage from that violation].) Here, Epis’s theory was that her investments failed because she was duped by her lawyer and accountant into entering into “risky and unsound ventures.” Bradley’s theory was that the real estate market tanked as part of widespread economic woes, causing Epis’s losses (and his own). The court seemed to favor Bradley’s view, referring to the parties’ investments “turn[ing] south” when the “economy collapsed,” but ultimately had no occasion to resolve the issue given its conclusion that Epis’s UCL cause of action failed as a matter of law. The issue of causation is one of fact which cannot be resolved in the first instance on appeal. Whether there was a causal connection between Bradley’s ethical violation and Epis’s losses, that is, whether the losses occurred “as a result” of the unfairness or unlawfulness (§ 17204), is a question for the trial court upon remand.[6]

3. Bradley’s Claim for Declaratory Relief re Title to the Houseboat

1. Background

Unlike the issue of causation on the UCL claim, a fact-based issue that is properly before us is the question of who holds title to the houseboat or floating home located at 54 Liberty Dock in Sausalito. Bradley had lived and maintained his law office in the houseboat for more than 20 years. The houseboat was worth approximately $675,000 in 2001. Prior to 2001, title to the floating home was held by Linda Ghilotti, who was then Bradley’s girlfriend. Bradley claims he was the beneficial owner even at that time. Sometime in 2000, for reasons the court found “not clearly explained” at trial, “Epis agreed to hold the houseboat in trust as Bradley’s fiduciary.”[7] The actual transfer of ownership was evidenced by a bill of sale showing Ghilotti, not Bradley, as the seller. The closing statement shows Epis paid $137,211.64 cash for the floating home, and financed the remainder of the purchase price with a $540,000 loan. In 2008, Epis took out a line of credit of $150,000 using the houseboat as collateral. So, loans taken out on the houseboat totaled $690,000 and were at some point consolidated.

Epis ostensibly bought the houseboat from Ghilotti on January 3, 2001, in what appears to have been something akin to a sale-and-leaseback transaction. The very next day, Epis (as lessor) signed an agreement with Bradley (as lessee) to rent him the houseboat for the exact amount of the mortgage payment on it, and he was also required to pay dock fees, taxes and insurance. Thus, Epis invested $137,211.64 in the houseboat—or gave Bradley a loan in that amount—but it cost her virtually nothing on a continuing basis (i.e., it was a “cash flow wash”). Bradley contends he was required to pay and paid all the costs associated with the houseboat, maintained it, made improvements, and was its beneficial owner.

The court granted Bradley’s claim for declaratory relief, finding he was the owner of the houseboat. Epis contests the finding and judgment on two fundamental grounds. First, the court applied a preponderance standard of proof when she claims clear and convincing evidence was required. Second, she argues that even if the court could properly vest title in Bradley, it erred in not also requiring Bradley to pay off the outstanding balance of the loans on the houseboat (approximately $588,000 at time of trial).

2. The standard of proof

Evidence Code section 662 provides: “The owner of the legal title to property is presumed to be the owner of the full beneficial title. This presumption may be rebutted only by clear and convincing proof.” “Section 662 codifies a common law presumption recognized in the California cases.” (Law Revision Com. com. foll Evid. Code § 662; see also former Code Civ. Proc., § 1826, as enacted Stats 1872.) The selection of a burden of proof reflects “ ‘the degree of confidence our society thinks [the factfinder] should have in the correctness of factual conclusions for a particular type of adjudication.’ [Citation.]” (People v. Jimenez (1978) 21 Cal.3d 595, 604, overruled on other grounds in People v. Cahill (1993) 5 Cal.4th 478, 509, fn. 17.) The reasons for the presumption are self-evident: to support a policy favoring the stability of titles to property and to conform to judicial reluctance to tamper with duly executed instruments and documents of legal title. (In re Marriage of Brooks & Robinson (2008) 169 Cal.App.4th 176, 184-185, overruled on other grounds in In re Marriage of Valli (2014) 58 Cal.4th 1396, 1405.)

Epis testified she bought the houseboat from Ghilotti and was merely renting it to Bradley. The proof of legal title in this case was the bill of sale, which showed title passing from Ghilotti to Epis. There was also evidence that Epis executed a promissory note for $540,000 contemporaneously with the houseboat transaction. Epis was billed for loan payments, berthing fees and taxes. On the “certificate of title” dated February 13, 2009, filed at the state Department of Housing and Community Development (HCD) Epis was designated as the registered owner. Bradley calls Epis’s claim to title “disputed,” but he does not argue the evidence of Epis’s title was insufficient to raise the presumption under Evidence Code section 662. Thus, we conclude Epis presented sufficient evidence she was the title owner of the houseboat to trigger the presumption under Evidence Code section 662. Bradley’s title had to be proved by clear and convincing evidence.

Bradley’s evidence showed his long residency in the houseboat, as well as showing that, at least as of 2009, Epis put Bradley’s name as the transfer on death (TOD) designee on the certificate of title at the HCD so that Bradley would become the title owner of the houseboat upon Epis’s death. Bradley also introduced evidence of an unsigned contract with Epis entitled “Addendum to Houseboat Repurchase Contract of Sale,” in which she agreed to allow him to take title at any time he wished if he paid off or assumed the loan on the houseboat. All equity in the houseboat was to be Bradley’s. He claims the document embodies their agreement, but he was unable to produce a signed copy. He did, however, produce a copy with Epis’s handwritten notes, showing she had read the contract. Aside from the addition of $150,000 debt against the houseboat in 2008, that is how the arrangement was left until after this lawsuit was filed in 2011, when Epis unilaterally, and without notice to Bradley, made her son the TOD designee.

In reaching his conclusion about the houseboat’s ownership, the trial judge relied in part on a letter written by Epis to Bradley in 2005 in which she repeatedly referred to “your” houseboat or floating home “in my name.” She told Bradley she wanted him to put the houseboat into his own name so it would be taken off her credit report, as her credit scores were suffering from its presence. Expressly finding Epis’s testimony lacked credibility, the trial judge found the houseboat belonged to Bradley and was simply held in trust by Epis. He applied the preponderance of the evidence standard, which he announced as the correct standard, citing no supporting authority.

Bradley argues it makes no difference for our purposes whether the trial court applied the usual preponderance standard or the more demanding clear and convincing evidence standard because the difference between the two “disappears” on appeal. (E.g., In Re Marriage of E. & Stephen P. (2013) 213 Cal.App.4th 983, 989-990; In re Mark L. (2001) 94 Cal.App.4th 573, 580-581; see also, e.g., Crail v. Blakely (1973) 8 Cal.3d 744, 750.) He urges us simply to determine the trial judge did not abuse his discretion[8] in making his finding and to consider our task at an end.

We think the difference in burdens of persuasion is more significant than that. A panel of this court recently discussed the role of an appellate court when a finding at trial was required to be made by clear and convincing evidence but was instead made to a preponderance standard, rejecting the notion that the difference in standards of proof “disappears” on appeal. (T.J. v. Superior Court (2018) 21 Cal.App.5th 1229, 1238-1240.) In T.J. we held an appellate court should “ ‘review the record in the light most favorable to the trial court’s order to determine whether there is substantial evidence from which a reasonable trier of fact could make the necessary findings based on the clear and convincing evidence standard.’ ” (Id. at p. 1239, quoting In re Isayah C. (2004) 118 Cal.App.4th 684, 694; see also, e.g., In re Angelia P. (1981) 28 Cal.3d 908, 924.) T.J. was decided in the context of dependency proceedings, but the context matters not. The same analysis applies here.

Besides, the problem here is more fundamental than how we review the issue on appeal. The trial court applied the wrong standard of persuasion and thus never made a factual finding to the required level of certainty. In such circumstances, a remand is necessary to allow the court to exercise its judgment in accordance with the clear and convincing burden of persuasion. It makes no difference whether we think the record contains sufficient evidence to sustain a finding that a reasonable factfinder would consider clear and convincing, for no such finding was made in this case. Epis was entitled to have the trial court determine the issue by clear and convincing evidence, and we must remand the case so that determination can be made by the judge who heard the evidence. (See Estate of Chambers (2009) 175 Cal.App.4th 891, 896-897; In re Terry D. (1978) 83 Cal.App.3d 890, 899-901; cf. People v. Hutchins (2007) 147 Cal.App.4th 992, 996-999 [clear and convincing standard erroneously applied in a manner that disadvantaged criminal defendant required limited remand].) It would be premature for us to express an opinion on whether the record would support such a finding. To be clear, we do not remand for a new trial. The court may simply apply the correct standard to the evidence it received in the trial previously conducted. (See Terry D., at pp. 899-901 [remand for reconsideration]; Hutchins, at pp. 998-999 [limited remand].) It would be up to the trial court to decide whether to permit the parties to reopen the evidence.

3. Balance of the loan payments

The second issue raised by Epis with respect to the houseboat is that the judge, in awarding Bradley title to the houseboat, made no finding that Bradley had paid off or assumed the loans on the houseboat, which she appears to claim was a condition precedent to his acquiring title under their agreement. Indeed, such a finding would have been contrary to the evidence because money remained owing on the houseboat loans in Epis’s name. The evidence was consistent that Bradley would acquire legal title to the houseboat only if he assumed or paid off the loans on it. Epis contends the court, having found Bradley to be the owner of the houseboat, also should have imposed on Bradley liability to pay off the outstanding loans on it, which amounted to some $588,000 at the time of trial. She claims Bradley should only have been awarded title subject to existing loans.

Again, we agree in principle with Epis. The houseboat served as the collateral on these loans, and Bradley ordinarily made the loan payments directly to the mortgage holder prior to trial. Occasionally, to protect her credit rating, Epis made payments for Bradley when he failed to pay. Since Bradley was awarded title to the houseboat, he also should have been burdened with repaying the outstanding balance of any loans taken out to purchase or improve the floating home, or any such loans that inured to Bradley’s benefit rather than Epis’s. Assuming the trial court adheres to its finding on the title transfer point after applying the correct standard of proof—an issue on which we again emphasize we intimate no view—the logic of the transaction Bradley argues took place appears to carry a quid for the pro quo. Unless the court concludes Epis intended the initial down payment as a gift, she should be compensated for that payment. Epis should not be required to repay loans taken on a houseboat to which she never acquired beneficial title, except to the extent she personally benefited from the loan proceeds. Upon remand, if the court again declares Bradley to be the owner of the houseboat, the court shall take evidence and argument as needed to determine the amount (if any) Bradley’s estate[9] should be required to pay to Epis, given that (1) Epis paid the down payment[10] and several monthly payments, and (2) the houseboat has since been foreclosed upon.

3. DISPOSITION

The judgment is vacated and the matter is remanded for further proceedings in accordance with this opinion. Costs on appeal are awarded to Epis, to be paid by Bradley’s estate. Epis’s request for judicial notice filed February 16, 2016 is denied.