Johnson v. Drolson

Filed 5/25/10 Johnson v. Drolson CA4/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

APPEAL from a judgment of the Superior Court of San Diego County, Jay M. Bloom, Judge. Affirmed.

I

INTRODUCTION

Lee Johnson, as trustee of the Lee Johnson Trust, filed this action against Paul Drolson and Drolson's firm, Wealth Advisors.^[1] Johnson alleged that Drolson, while acting as Johnson's investment advisor, negligently encouraged him to invest $250,000 in a hedge fund, and that Johnson lost his $250,000 investment. After a bench trial, the trial court determined that Drolson committed professional negligence and that he breached his fiduciary duty in encouraging Johnson to invest in the fund. The court also found that Johnson was 30 percent comparatively negligent. The trial court found that Johnson suffered $250,000 in damages, and reduced that amount by 30 percent, due to Johnson's comparative negligence. The court entered judgment against Drolson in the amount of $175,000.

On appeal, Drolson claims that "the trial court erred by finding [him] liable for negligence and breach of fiduciary duty." Although Drolson appears to be claiming that there is not substantial evidence in the record to support the judgment, his brief contains almost no citations to the reporter's transcript, and fails to set forth all of the material evidence that supports the judgment.

We conclude that Drolson has failed to demonstrate that the trial court erred in finding him liable on Johnson's claims for negligence and breach of fiduciary duty, and affirm the judgment.

II

FACTUAL AND PROCEDURAL BACKGROUND

In November 2006, Johnson filed a six count complaint against Drolson, and Drolson's broker/dealer, QA 3 Financial Corporation (QA 3), alleging professional negligence, breach of fiduciary duty, intentional and negligent misrepresentation, concealment, and aiding and abetting securities fraud.

In June and July 2008, the trial court held a bench trial on Johnson's claims against Drolson for negligence, breach of fiduciary duty, intentional and negligent misrepresentation, and concealment.^[2] In September 2008, the trial court filed a statement of decision in which it found Drolson liable on the negligence and breach of fiduciary duty claims, and concluded that Johnson had suffered a total of $250,000 in damages. The court reduced Johnson's damages by 30 percent based on his comparative negligence. The court found in favor of Drolson on Johnson's claims for intentional and negligent misrepresentation and concealment.

In its statement of decision, the trial court summarized the case, stating that Johnson claimed that Drolson had made various representations to him to induce Johnson to invest in a hedge fund managed by International Management Associates(IMA), and that he had invested $250,000 in the hedge fund based on Drolson's representations. According to the trial court, the fund subsequently "imploded due to fraudulent conduct by the fund manager," and Johnson "lost his entire investment."

The trial court noted that Johnson testified that Drolson had told him that the hedge fund had obtained good results in the past, that Drolson had investigated the fund, that returns were in the range of 25 to 40 percent, that there were audited returns for a three year period, that the fund's manager was a "genius," and that Drolson intended to personally invest in the fund at some point in the future. The court stated that Drolson denied having made these representations. The court found that Johnson was "more credible on this issue," noting that Johnson's testimony was corroborated by another witness, Dr. Paul Chasan, who testified that Drolson had made similar representations to him. The court also found that Johnson's testimony was supported by the fact that after authorities discovered the fraud, Johnson sent Drolson an e-mail in which Johnson accused Drolson of telling him that he had investigated the fund, and that Drolson never denied this allegation. The court found that Drolson's failure to respond was "[e]ssentially . . . an adoptive admission."

The court did state that none of Drolson's statements was "necessarily false." However, the court found that, "taken as a whole in conjunction with evidence of Drolson's conduct," the statements were sufficient to establish that Drolson had committed professional negligence and that he had breached his fiduciary duty to Johnson. The court reasoned that although Drolson's statement that he had investigated the hedge fund "might have been technically true," the evidence demonstrated that Drolson had done a "cursory investigation" into the fund, and that his investigation fell below the standard of care in the industry.

Specifically, with regard to the adequacy of Drolson's investigation, the trial court found that Drolson could have obtained more information about the hedge fund from the fund's representative, and that he could have determined whether other brokerage firms had stopped trading securities on behalf of the hedge fund. The court also found that while Drolson had obtained some information pertaining to one of IMA's hedge funds, Johnson invested in a different IMA hedge fund. In addition, the court stated that there was no evidence that the hedge fund in which Johnson invested had ever been audited. Further, the court observed that Drolson had allowed Johnson to invest in a hedge fund "that had never been approved by QA3," and that Drolson admitted that "if he had recommended [Johnson's] purchase of the fund when it was not approved, it would have been a breach of his duty."

The trial court also found that Drolson had acted as "Johnson's agent or financial advisor," and that "there certaintly was a fiduciary relationship between Drolson and Johnson." In support of these findings, the court noted that Drolson testified in detail concerning how he "had advised [Johnson] on financial and life matters," and that Drolson stated that he aspired to "control Johnson's entire portfolio."

With respect to the Drolson's involvement in Johnson's decision to invest in the hedge fund, the trial court found as follows:

"Drolson . . . argues [that] Johnson made the investment on his own initiative and Drolson cannot be faulted for that. However, the investment was made in part because of Drolson's statements about the IMA group of funds and its manager. Moreover, the court finds the testimony of [Johnson] and [the fund's representative] credible that [Drolson] was not a passive participant at the time of the purchase on August 31, 2005. Rather, he was actively involved in encouraging and facilitating the sale of the securities. In fact, he was going to get a commission for the transaction."

The trial court also found that after Johnson received his first statement from the fund and discovered that the statement did not reflect investments in particular securities, Johnson expressed his concern to Drolson that the hedge fund might be a "Ponzi scheme." Rather than investigating the reason for the discrepancy, Drolson reassured Johnson, stating, in the trial court's words, "[that] he had checked it out, it had audited returns, and it was solid." According to the trial court, this conduct was relevant because it "led to [Johnson] staying in the fund."

The trial court reasoned that "[a]ll these facts as well as the opinion of [Johnson's] expert that Drolson's conduct fell below the standard or care support a finding for [Johnson] on the claims of negligence and breach of fiduciary duty . . . ."^[3]

With respect to causation, the trial court found that "[Drolson] put [Johnson] in a fund without adequate investigation and when it became apparent upon receipt of the first statement that things were not right, [Drolson] still did nothing concrete to resolve [Johnson's] concerns." The court found that "[Drolson's] assurances of the soundness of the fund and failure to do something substantial when questions arose . . . directly left [Johnson] in harm's way and ripe for victimization by the embezzler."

With respect to damages, the trial court found that Drolson was responsible for Johnson's loss of his $250,000 investment. However, the trial court also found that Johnson was comparatively negligent, reasoning that Johnson was "a sophisticated businessman and should have been on notice there was some risk to the investment as the promised returns were in the range of 25-40%." The court found Johnson's comparative negligence to be 30 percent.

In November 2008, the trial court entered judgment in favor of Johnson in the amount of $175,000. Drolson timely appeals.

III

DISCUSSION

Drolson claims that "the trial court erred by finding [him] liable for negligence and breach of fiduciary duty."

A. Governing law

In Benach v. County of Los Angeles (2007) 149 Cal.App.4th 836, 852 (Benach), the court outlined the burden on an appellant to support its claims with reasoned argument:

"It is a fundamental rule of appellate review that the judgment appealed from is presumed correct and ' " 'all intendments and presumptions are indulged in favor of its correctness.' " [Citation .]' [Citation.] An appellant must provide an argument and legal authority to support his contentions. This burden requires more than a mere assertion that the judgment is wrong. 'Issues do not have a life of their own: If they are not raised or supported by argument or citation to authority, [they are] . . . waived.' [Citation.] It is not our place to construct theories or arguments to undermine the judgment and defeat the presumption of correctness. When an appellant fails to raise a point, or asserts it but fails to support it with reasoned argument and citations to authority, we treat the point as waived. [Citation.]"

More specifically, an appellant must "[p]rovide a summary of the significant facts limited to matters in the record." (Cal. Rules of Court, rule 8.204(2)(C).) Similarly, all parties must file briefs in which they "[s]upport any reference to a matter in the record by a citation to the volume and page number of the record where the matter appears." (Cal. Rules of Court, rule 8.204(1)(C).)

It is also well established that where an appellant claims on appeal that there is not substantial evidence in the record to support the judgment, the appellant must set forth in his brief all of the material evidence relevant to the question, including that which supports the judgment. If the appellant fails to do so, the appellate court may deem the claim to be forfeited. (E.g., Foreman & Clark Corp. v. Fallon (1971) 3 Cal.3d 875, 881 (Foreman) [substantial evidence review is forfeited if appellant fails to cite evidence favorable to the judgment].)

The Foreman court explained the rationale for this rule as follows, " 'When a finding of fact is attacked on the ground that there is not any substantial evidence to sustain it, the power of an appellate court begins and ends with the determination as to whether there is any substantial evidence contradicted or uncontradicted which will support the finding of fact.' [Citations.]" (Foreman, supra, 3 Cal.3d at p. 881.) A contention that there is not substantial evidence in the record to support the judgment, " 'requires [an appellant] to demonstrate that there is [n]o substantial evidence to support the challenged findings.' " [Citations.] A recitation of only [appellant's] evidence is not the 'demonstration' contemplated under the above rule. [Citation.] Accordingly, if, a[n] [appellant] . . . contend[s], 'some particular issue of fact is not sustained, [he is] required to set forth in [his] brief all the material evidence on the point and not merely [his] own evidence.' " (Ibid.)

Finally, an appellant "is not exempt from the foregoing rules because he is representing himself on appeal in propria persona. Under the law, a party may choose to act as his or her own attorney. [Citations.] '[S]uch a party is to be treated like any other party and is entitled to the same, but no greater consideration than other litigants and attorneys. [Citation.]' [Citation.] Thus, as is the case with attorneys, pro. per. litigants must follow correct rules of procedure. [Citations.]" (Nwosu v. Uba (2004) 122 Cal.App.4th 1229, 1246-1247 [concluding that appellant acting in propria persona forfeited substantial evidence claim by failing to provide citations to the reporter's transcript and failing to refer in his brief to evidence favorable to the judgment].)

B. Drolson has failed to demonstrate that the trial court erred in entering

judgment in favor of Johnson

Although it is not entirely clear from his brief, Drolson appears to be claiming that there is not substantial evidence in the record to support the trial court's judgment.^[4] Drolson's brief suffers from two material omissions, each of which makes it impossible for him to prevail on this claim.

First, Drolson fails to provide adequate citations to the record to support his factual assertions. Drolson's appeal comes after a trial at which witnesses testified on various contested issues. The witness' testimony was recorded in a reporter's transcript that comprises seven volumes. Notwithstanding this factual record, Drolson's opening brief contains a statement of facts nearly five pages in length that includes only a single reference to the reporter's transcript. The legal argument section of Drolson's brief also contains numerous factual assertions, with no corresponding citation to the reporter's transcript. For example, Drolson states that he informed Johnson that Johnson would be investing directly with IMA, asserts that QA 3 eventually did approve the IMA hedge fund into which Johnson had invested, and claims that "all [of the] principals of IMA didn't know [about the fraud] and lost their family's personal money." None of these assertions is supported by any citation to the reporter's transcript.

This court may not simply assume that Drolson's version of the evidence presented at trial is accurate, and we are under no duty to search the record to locate all of the relevant testimony in order to verify the correctness of the assertions in Drolson's brief. In sum, Drolson's claim of lack of substantial evidence fails because he has failed to support the factual assertions in his brief with proper citations to the record, as required by California Rules of Court, rule 8.204(1)(C).

The second material omission that dooms Drolson's substantial evidence claim is that Drolson fails to refer in his opening brief to significant evidence in the record that supports the judgment. (See Foreman, supra,3 Cal.3d at p. 881.) For example, in his opening brief Drolson asserts that "Johnson never became a client of Drolson's." However, Johnson presented expert testimony that he was a client of Drolson's. Specifically, John Cione, a securities law expert, testified that the relationship between Drolson and Johnson was that of a registered investment advisor/customer. Drolson does not address this testimony in his opening brief. Nor does Drolson address Cione's testimony that Drolson owed Johnson a fiduciary duty as a registered investment advisor, and that Drolson breached that duty by failing to perform adequate due diligence concerning IMA.

With respect to Johnson's investment in the IMA hedge fund, Drolson states, "Johnson invested directly with IMA," and claims that Drolson was "not involved in the transaction." However, Drolson fails to address evidence that tends to establish his significant participation in Johnson's investment in the IMA hedge fund, including evidence that Drolson arranged meetings between an IMA representative and Johnson. Indeed, Drolson's participation was sufficiently substantial that he acknowledged at trial that he would have been entitled to a commission on Johnson's investment after QA 3 approved the fund.^[5]

Drolson did acknowledge in his brief that Johnson testified that Drolson made various representations to Johnson regarding Drolson's investigation into the IMA hedge fund and the soundness of that investment. However, Drolson asserts that, "it was [IMA's representative], not Drolson, who made these representations." As noted above, it is not this court's role to resolve controverted issues of fact. (See Foreman, supra, 3 Cal.3d at p. 881, [appellate court's role "begins and ends with the determination as to whether there is any substantial evidence contradicted or uncontradicted which will support the finding of fact' "].)

Further, Drolson fails to address in his opening brief Dr. Chasan's testimony, which the trial court found corroborated Johnson's testimony concerning Drolson's representations regarding the IMA hedge fund. Nor does Drolson discuss the evidence that the trial court relied on in concluding that Drolson had made an adoptive admission regarding his representations to Johnson. In a similar vein, Drolson does not discuss evidence pertaining to the representations and statements that Drolson made to Johnson after Johnson expressed concerns about his investment in the hedge fund.

In sum, Drolson's brief fails to include adequate citations to the reporter's transcript and fails to set forth all of the material evidence that supports the judgment. Accordingly, we conclude that Drolson has not demonstrated that there is insufficient evidence in the record to support the judgment. (See Foreman, supra, 3 Cal.3d at p. 881; Benach, supra, 149 Cal.App.4th at p. 852.)

IV

DISPOSITION

The judgment is affirmed. Johnson is entitled to costs on appeal.

AARON, J.

WE CONCUR:

HALLER, Acting P. J.

McDONALD, J.

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^[1] Drolson is representing himself on appeal. Wealth Advisors, represented by counsel, joined in Drolson's briefs on appeal. Since the distinction between Drolson and Wealth Advisors is not material to this appeal, we refer to the two collectively as Drolson, for ease of reference.

^[2] The trial court granted QA 3's motion for summary judgment prior to trial. It is unclear from record how the trial court disposed of Johnson's securities fraud claim.

^[3] The court also specifically rejected Drolson's argument that "he did not have any duty . . . to make a reasonable investigation, to prevent Johnson from investing in the fund, limit[ing] [Johnson's] investment amount, or in curing problems that occurred after the investment." In rejecting this argument, the court reasoned in part that Drolson had acted as Johnson's agent and financial advisor, notwithstanding Drolson's contention that Johnson was never a client of Drolson's.

^[4] Drolson's brief can be read as attempting to assert an additional claim to the effect that the trial court erred in concluding that Drolson owed Johnson a duty of care. Drolson cites cases in which courts have stated that courts are reluctant to impose upon a party a duty "to manage business affairs so as to prevent purely economic loss to third parties . . . ." We are not persuaded. In its statement of decision, the trial court expressly found that Drolson was "acting as Johnson's agent or financial advisor," and that "a fiduciary relationship" existed between Johnson and Drolson. Thus, according to the trial court, Drolson's relationship with Johnson was not one of a mere "third party." Further, for the reasons discussed in text, Drolson has failed to demonstrate that the trial court erred in finding that he acted as Johnson's "financial advisor" and that he owed a fiduciary duty to Johnson.

^[5] The trial court found that Drolson was "in line to obtain a commission from the sale."