Filed 1/5/18 Gong v. Lawton CA4/1
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COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA



DAVID R. GONG,

Plaintiff and Appellant,

v.

DANIEL A. LAWTON et al.,

Defendants and Respondents.
D070906



(Super. Ct. No. 37-2013-00065144- CU-PN-CTL)


APPEAL from a judgment of the Superior Court of San Diego County, Katherine A. Bacal, Judge. Affirmed.
David A. Kay for Plaintiff and Appellant.
Dan A. Lawton in pro. per., for Defendants and Respondents.
In this attorney malpractice case the trial court found the 51 percent majority shareholder of a closely held corporation, plaintiff and appellant David Gong, cannot recoup attorney fees the corporation paid to an attorney, defendant and respondent Dan Lawton. Lawton was disqualified from representing both Gong and the corporation in proceedings adverse to the corporation's minority 49 percent shareholder, Gong's brother Jeffrey Gong. The circumstances disclosed in the record here fully support the trial court's unwillingness to ignore the corporation's separate existence and attribute to David Gong amounts paid by the corporation. Accordingly, we affirm the trial court's judgment denying David Gong any relief on his claims against the attorney.
FACTUAL AND PROCEDURAL BACKGROUND
A. Underlying Circumstances and Prior Proceedings
In an earlier related case, Gong v. RFG Oil, Inc. (2008) 166 Cal.App.4th 209, 212 (Gong I), which in many respects informs our resolution of this appeal, we described the initial circumstances which give rise to the parties' dispute: "RFG, a California corporation and franchisee of the Valvoline Instant Oil Change Stores, is owned by Jeffrey [Gong] (holding 49 percent of the corporate stock) and David [Gong] (holding 51 percent of the corporate stock). Jeffrey and David also function as the board of directors for RFG, with David acting as the majority of the board. The brothers executed a buy-sell agreement that provided, in part, that if one party left the business, the other party could purchase his shares at 'book value.' In 2001, David suffered a major spinal cord injury that required a three-month hospital stay and a lengthy rehabilitation process. Due to David's injury, Jeffrey assumed all management duties for RFG. In 2003, David reassumed his duties based on Jeffrey's alleged mismanagement of the company.
"In late 2005, the brothers had a falling out and RFG terminated Jeffrey and forced him to resign his position as a corporate officer. Jeffrey then sued David and RFG for involuntary dissolution of RFG, declaratory relief regarding the proper interpretation of the buy-sell agreement, breach of fiduciary duty, and wrongful discharge. Jeffrey later added a cause of action for specific performance of the buy-sell agreement.
"The trial court severed Jeffrey's claim for declaratory relief, tried the matter and issued a statement of decision determining that the buy-sell agreement required that David purchase Jeffrey's shares at 'fair market value.' Until then, the law firm of Luce Forward, Hamilton and Scripps (Luce) represented both David and RFG. After the trial, Jeffrey challenged Luce's continuing ability to represent both David and RFG, claiming that RFG now had a significant role in the dispute between the two brothers because the buy-sell agreement required RFG to pay for an appraiser, selected by David. As one of RFG's two directors, Jeffrey wanted to be sure that the counsel advising RFG on this point was neutral and not acting primarily in David's interest. Jeffrey also asserted that David dissuaded a potential third party from purchasing RFG and that Luce's duties to David prevented it from providing RFG neutral guidance.
"Luce indicated that RFG would retain new counsel and Lawton later substituted in as counsel for RFG. When David also sought to retain new counsel, Jeffrey reiterated his concern that a single firm could not jointly represent David and RFG. Despite this concern, Lawton substituted in as counsel for David and RFG cross-claimed against Jeffrey for cancellation of Jeffrey's shares and other forms of relief based on Jeffrey's alleged fraud and breaches of fiduciary duty. Jeffrey immediately filed a disqualification motion. Lawton opposed the motion, arguing that there were no grounds for disqualification and the motion was untimely because Jeffrey had not objected to joint representation by Luce at the outset of the litigation." (Gong I, supra, 166 Cal.App.4th at pp. 213–214.)
The trial court denied Jeffrey Gong's motion to disqualify Lawton; Jeffrey appealed from the order and we reversed, finding that Lawton could not represent both David Gong and the corporation. We found that there was an actual conflict between David Gong's interests and the corporation's interests which prevented Lawton from representing both David Gong and the corporation, notwithstanding David's willingness to waive any conflict. (Gong I, supra, 166 Cal.App.4th at p. 216.) However, we found that Lawton could continue to represent David Gong. (Id. at p. 217.)
At the time we decided Gong I, Lawton had agreed that he would represent David Gong and RFG through trial of the dissolution action for a flat fee of $100,000. Following our ruling in Gong I, Lawton did in fact continue to represent David Gong in both the dissolution action initiated by Jeffrey Gong and a separate partition with respect to real estate the brothers held jointly.
Shortly before trial in the partition action, David Gong drafted a proposed offer to compromise under the provisions of Code of Civil Procedure section 998; Lawton reviewed the offer and served it on Jeffrey Gong's counsel by e-mail two days after he received it from David Gong. Thereafter, the trial court in the partition action resolved all issues in favor of David Gong. However, the trial court was unwilling to award David Gong his expert witness fees because he found the offer to compromise was not timely served and was not sufficiently specific. Jeffrey Gong appealed from the trial court's judgment in the partition action and Lawton represented David Gong on that appeal until October 2009.
In October 2009, while the partition judgment was on appeal, and before the corporate dissolution action had been finally resolved in the trial court, Lawton and David Gong had a very serious disagreement and Lawton believed that he could no longer represent David Gong in either proceeding. According to David Gong the disagreement was over Lawton's request for $50,000 in additional compensation. Initially, David Gong refused to execute any substitution of attorneys, but after Lawton filed motions to withdraw as counsel in the dissolution action and in the partition action, he did not oppose the motions and Lawton withdrew as counsel in both proceedings.
The dissolution action proceeded to trial, David Gong was represented by substituted counsel and the trial court resolved all issues, save one, in favor of Jeffrey Gong. Neither of the brothers appealed the trial court's judgment in the dissolution action. The partition judgment was affirmed on appeal and on remand from the judgment David Gong was ordered to pay Jeffrey Gong $796,620 for his interest in the brothers' jointly held real property.
B. Instant Proceedings
Following entry of judgment in the dissolution action, David Gong and RFG filed a complaint against Lawton in which they alleged claims for professional negligence and breach of fiduciary duty. However, by way of stipulation, the initial complaint was dismissed without prejudice and eventually David Gong filed a second complaint against Lawton again alleging claims for professional negligence and breach of fiduciary duty; RFG was not a named party in the second complaint and did not participate in the litigation against Lawton.
At trial, which was conducted without a jury, David Gong proceeded on essentially two theories: first he argued that, in the partition action, Lawton had failed to timely serve his offer to compromise and that as a result, although he prevailed in the partition action, he was not able to recover $53,646 in expert witness fee; secondly, he argued that Lawton breached his fiduciary duties to Gong and that as a result of those breaches Lawton should be compelled to pay to David Gong the attorney fees Lawton earned while representing RFG and David Gong.
At the close of David Gong's case, Lawton moved for a judgment under Code of Civil Procedure section 631.8. The trial court granted Lawton's motion and orally explained that with respect to Lawton's asserted failure to timely serve David Gong's offer to compromise, David Gong had failed to show that his offer otherwise would have entitled him to recover expert witness fees because the offer was not unconditional as required by Code of Civil Procedure section 998; the court also found that in any event, the expert witness fees were paid by RFG, not Gong, and therefore Gong would not have suffered any loss by virtue of any negligence on Lawton's part. With respect to the breach of fiduciary duty claim, the trial court agreed that, in light of Gong I, it was compelled to find that Lawton had breached his fiduciary duty during the period he represented both RFG and David Gong. However, the trial court further concluded David Gong could not recover fees paid by RFG and that all the fees Lawton had earned were paid by RFG. The court found that the evidence David Gong presented to the effect that he in fact paid the corporation's obligations to Lawton was not credible. Following the trial court's oral explanation of its determination of Lawton's motion, David Gong did not request a written statement of decision, and the trial court entered judgment in favor of Lawton. David Gong filed a timely notice of appeal.
DISCUSSION
As David Gong states in his reply brief, the only argument raised in his opening brief "had to do with the trial court's legal ruling that David Gong could not collect fees and costs which he had not personally paid." Moreover, in his reply brief David Gong expressly accepts the trial court's finding he "did not personally pay the fees and costs" which he seeks to recover. Rather, he argues he should recover the fees Lawton earned because with respect to Lawton's representation he is a real party in interest within the meaning of Code of Civil Procedure section 367. We reject this argument. David Gong's status as a real party does not satisfy the further requirement that he, as opposed to the corporation, suffer damage or that he, as opposed to the corporation, should recoup any unjust enrichment Lawton experienced.
Code of Civil Procedure section 367 provides: "Every action must be prosecuted in the name of the real party in interest, except as otherwise provided by statute." In light of the fact Lawton represented both RFG and David Gong in the dissolution and partition proceedings, we have no difficulty accepting the initial proposition that both RFG and David Gong would be real parties in interest with respect to Lawton's representation of them. Nonetheless, given the particular nature of the recovery asserted by David Gong, his status as one of two real parties in interest does not require as a matter of law that he, as opposed to the corporation, be provided with that recovery.
With respect to Lawton's failure to timely serve an offer to compromise in the partition action, the only loss which David Gong asserts is the amount of expert fees which he concedes the corporation paid. That loss, if it occurred, was the corporation's loss, not David Gong's. In particular, there is nothing in the record which shows that the corporation assigned to David Gong its right to recover the amounts it paid in expert fees.
The same is true with respect to the breach of fiduciary claims. Significantly, David Gong does not claim Lawton's representation of him or the corporation adversely effected the result of either the dissolution or partition actions, the typical predicate to recovery for legal malpractice. (See Garretson v. Miller (2002) 99 Cal.App.4th 563, 571–572.) Rather, as he did in the trial court, David Gong claims that in representing both RFG and him in the dissolution action and then later withdrawing as counsel, Lawton acted unethically and that as a matter of public policy Lawton should not be permitted to profit from his unethical behavior. (See, e.g., American Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451; Fair v. Bakhtiari (2011) 195 Cal.App.4th 1135.) The difficulty the trial court had with this theory and a difficulty we share, is the remedy he asserts: recovery by him of funds paid by the corporation. Again, it bears emphasis there is nothing in the record which shows the corporation assigned any of its claims to David Gong.
With respect to the tardy offer to compromise and the breach of fiduciary claims, we are unable to discern any equitable or public policy basis upon which we may ignore the separate identity of the corporation. In light of the fact that at all pertinent times Jeffrey Gong was a 49 percent owner of the corporation, this is plainly not a case where as a matter of equity, we are required to ignore the corporation's separate identity. With respect to public policy, the corporation's separate identity and interests were in fact the very principles we vindicated in Gong I, when, as we have noted, we found David Gong and the corporation had interests that were divergent enough that Lawton could not represent both of them. (See Gong I, supra, 166 Cal.App.4th at pp. 216–217.) Although we expressly recognized that as a practical matter David Gong controlled the manner in which the corporation functioned, that functional control did not prevent us from recognizing the separate identity of the corporation. (Ibid.)
Requiring that David Gong recover from Lawton funds which were paid by RFG is not only barred here by the separate identity of the corporation we recognized in Gong I, Lawton's conduct here is outside the principles set forth in those cases which have required an attorney to disgorge fees as a means of discouraging unethical conduct. We of course are bound by our prior determination that Lawton's representation of conflicting interests violated rule 3-310 (C) of the California Rules of Professional Conduct. (See Gong I, supra, 166 Cal.App.4th at pp. 215–216.) However, contrary to David Gong's argument, that violation does not warrant automatic forfeiture of fees. "A lawyer engaging in clear and serious violation of duty to a client may be required to forfeit some or all of the lawyer's compensation for the matter. Considerations relevant to the question of forfeiture include the gravity and timing of the violation, its willfulness, its effect on the value of the lawyers work for the client, any other threatened or actual harm to the client, and the adequacy of other remedies." (Rest.3d Law Governing Lawyers, § 37; see also Cal Pak Delivery, Inc. United Parcel Service, Inc. (1997) 52 Cal.App.4th 1, 15–16 (Cal Pak).) For instance, in Goldstein v. Lees (1975) 46 Cal.App.3d 614, 623–624, the court found that a corporation's former counsel agreement to represent minority shareholders in an action against the corporation was void and unenforceable because among other matters the attorney had access to confidential information while representing the corporation. More recently in Cal Pak an attorney was disqualified and barred from being compensated after he had offered to dismiss his clients' case in exchange for a several million-dollar payment to himself. (Cal Pak, supra, 52 Cal.App.4th at pp. 15–16.) However, in other cases, where the client was aware of the ethical violation, the attorney sought compensation for work performed before the violation occurred or provided the client with valuable services, fees have been permitted. (Ibid.)
Here, of significance to any recovery by David Gong, as opposed to RFG, is our determination in Gong I that Lawton could continue to represent David Gong. (Gong, supra, 166 Cal.App.4th at p. 217.) In requiring that only RFG obtain new counsel we stated: "This decision does not call into question Lawton's good faith; rather it recognizes a conflict presented by these unique circumstances." (Ibid.) Implicit in our willingness to permit Lawton to continue to actively participate in the litigation is recognition that his conduct did not constitute the serious sort of ethical violation which would prevent him from being compensated.
We recognize that in addition to the conflict we discussed in Gong I, David Gong contends that Lawton acted unethically in October 2009 in demanding an additional payment of $50,000. If, as David Gong contends, this was a breach of his agreement with Lawton, it was subject to a claim for breach of contract and contract damages, which David Gong did not assert. Given the adequacy of a breach of contract claim, the drastic remedy of disgorgement is not available. (See Rest.3d Law Governing Lawyers, supra, § 37.)
In sum, the trial court did not err in finding that David Gong could not recover from Lawton fees paid by RFG. RFG made no claim against Lawton in its own right, and there is no basis upon which we should ignore the corporation's separate identity. This is particularly true on a record which shows that in any event Lawton did not act in a manner in which such disgorgement would be appropriate.


DISPOSITION
The judgment is affirmed. Lawton to recover his costs on appeal.



BENKE, J.

WE CONCUR:




McCONNELL, P. J.





HUFFMAN, J.