PLAINTIFFS’ GENERAL OBJECTIONS

Plaintiffs have filed a document (537 pages including exhibits) titled “Notice of Objections [sic] (1) any Appearance by Richard Peddie for any Party in This Action and (2) any Reply Brief any Defendants [sic] Files in Support of Demurrers and Motions to Strike.” (ROA 186.) Both objections are OVERRULED.

As to the first objection, if Plaintiffs believe Mr. Peddie cannot appear as counsel in this action, they should file a properly noticed motion to disqualify him. The Court will not entertain any request to disqualify Mr. Peddie as part of an “objection.” The Court notes that Plaintiffs previously moved to disqualify Mr. Peddie, then withdrew their motion. (See ROAs 50, 77.)

As to the second objection, Plaintiffs argue that any reply brief filed after March 30, 2020—the date originally set in the Court’s scheduling order for Defendants’ demurrers—is untimely. Plaintiffs recognize that the COVID-19 pandemic closed courts around the State, including this Court, for an extended period of time. They nevertheless argue that because this Court requires e-filing, and because the e-filing interface was never closed, any replies had to be filed by March 30. This argument is meritless. As set forth in a series of emergency orders posted on Court’s website, the entire period from March 17 to May 22 was a court holiday. (See https://www.occourts.org/media-relations/CoronaVirusUpdate.html.) The Court considers any reply brief filed no later than five court days before the rescheduled hearing date to be timely filed. (CCP § 1005(b).) To the extent Plaintiffs claim they are prejudiced by the Court’s consideration of such briefs, the Court finds no prejudice exists.

DEMURRER OF KRING & CHUNG PARTIES

Defendants Kring & Chung, LLP; Kenneth Chung; Allyson Thompson; Laura Hess; and Laura Booth (the “K&C Defendants”) demur to all causes of action against them in the complaint of Plaintiffs Paula Thomas; PDTW, LLC; and Thomas Wylde Holdings, LLC (“TWH”). Thomas is not a plaintiff as against the K&C Defendants, as she settled her claims against them in prior litigation. (Compl., p. 20, fn. 1.) Only PDTW and TWH bring claims against the K&C Defendants. The K&C Defendants’ demurrer is SUSTAINED WITHOUT LEAVE TO AMEND.

Request for Judicial Notice

The K&C Defendants seek judicial notice of numerous documents filed in the various cases related to the present dispute. (See ROAs 102-103, hereafter “RJN.”) Plaintiffs do not oppose this request, which is GRANTED.

Grounds for Ruling

CCP § 425.10 requires a complaint to contain a statement of facts constituting the cause of action in ordinary and concise language. The facts to be pleaded are those upon which liability depends, so each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged.  Plaintiffs have grossly violated these pleading standards. The operative complaint is a 1,289-page document consisting of 355 pages of allegations and 934 pages of exhibits. The 25 causes of action do not begin until page 115 of the complaint, and the charging allegations contain pages and pages of tables comparing years of tax returns, multi-page quotations from documents already appended to the complaint, and charging allegations against persons and entities who do not appear to be parties to this action. If Plaintiffs’ goal was to confuse/overwhelm the reader, they have succeeded.

  1. Factual Background

From a review of the complaint and the judicially noticed documents referenced above, the Court sets forth the following factual background. If a fact is taken from a judicially noticed document, the Court cites to the RJN; otherwise, the following facts are taken from the complaint, whose allegations are assumed to be true to the extent they do not conflict with judicially noticed documents.

  1. The Underlying Litigation

Thomas is a fashion designer who created a line known as Thomas Wylde. She owns 99.5% of PDTW and 100% of TWH. Thomas assigned her intellectual property to TWH, which in turn licensed it to PDTW which distributed the Thomas Wylde line. In 2014, Thomas transferred the business to a new company, Defendant Thomas Wylde, LLC (“TW”). Through a series of agreements, Thomas acquired a minority interest in TW, while non-party entities controlled by non-party Stephen Choi held the majority interest. Thomas became a salaried employee of TW. Thomas claims she was persuaded to agree to this arrangement by her management team at PDTW, consisting of Defendants Jene Park, John Hanna and David Schnider (an attorney).

Thomas’ relationship with TW soured and she was terminated by TW in April 2015. She retained the K&C Defendants to represent her interests, and in October 2015 she and PDTW filed suit against TW, Hanna, Park, and several related entities, in a case titled Thomas v. Thomas Wylde, LLC, LASC No. BC596495 (the “Original Action”). In the Original Action, Thomas brought both wrongful termination claims and claims based on her status as a shareholder in TW (both derivative and in her own right).

Thomas fired the K&C Defendants in May 2017, and her current counsel took over prosecution of the Original Action. (RJN, Exs. C-D.) In October 2017, Thomas (again represented by current counsel) individually sued the K&C Defendants for legal malpractice in connection with the Original Action, in a case titled Thomas v. Schnider, LASC No. BC679247 (the “First Malpractice Action”). (RJN, Ex. E.) Thomas settled her individual claims against the K&C Defendants, and in August 2018, she dismissed them from the First Malpractice Action with prejudice. (RJN, Ex. H.)

Shortly thereafter, in November 2018, Thomas and TWH (once again represented by current counsel) filed a second case against the K&C Defendants, titled Thomas v. Kring & Chung, LASC No. 18STCV05667 (the “Second Malpractice Action”). In this case, only TWH sued the K&C Defendants, as Thomas had settled her individual claims in the First Malpractice Action. (RJN, Ex. I, at Minute Order, p. 2.) The court in the Second Malpractice Action sustained the K&C Defendants’ demurrer against TWH without leave to amend on grounds of untimeliness, res judicata and TWH’s lack of capacity to sue (as TWH is a canceled LLC). (RJN, Ex. I.) On June 7, 2019, the K&C Defendants were dismissed from the Second Malpractice Action with prejudice. (RJN, Ex. J.) The court’s docket for the Second Malpractice Action does not reflect the filing of an appeal. (RJN, Ex. O.)

  1. PDTW’s Bankruptcy

In the meantime, in June 2016, PDTW filed for Chapter 7 bankruptcy, in case titled In re PDTW, LLC, Bankr.C.D.Cal. No. 6:16-bk-15889-SY. (RJN, Ex. A.) PDTW retained Defendants Pagter & Perry Isaacson and Misty Perry Isaacson for the bankruptcy. Plaintiffs allege that the K&C Defendants conspired with the Pagter & Perry Isaacson firm to “force” PDTW into bankruptcy based on fabricated debt claims from TW. PDTW’s bankruptcy schedules, signed by Thomas under penalty of perjury, listed only the claims advanced in the Original Action as property of the estate. (RJN, Ex. B, at p. 10.)

The bankruptcy trustee filed an adversary action against Thomas, TW and TWH. As regards Thomas, the trustee alleged that PDTW, not Thomas, owned intellectual property that Thomas had assigned to TW as part of the transactions described above. The trustee also sought repayment of loans allegedly made to Thomas by PDTW. The parties settled their dispute in May 2019 without admission of liability. As relevant here, in exchange for a payment of $30,000, Thomas was assigned PDTW’s “litigation rights” on an “AS-IS, WHERE-IS basis.” (RJN, Ex. K, at pp. 19-21 [capitalization original].) The trustee moved for court approval of the settlement, arguing the settlement was in the best interests of PDTW’s creditors. (Id., at p. 12.) The bankruptcy court approved the settlement, finding it “just and proper under the circumstances of this case.” (RJN, Ex. L.)

In December 2019, Plaintiffs filed the present case.

  1. Discussion

Again, Thomas has not sued the K&C Defendants in this action. Only TWH and PDTW are party plaintiffs against the K&C Defendants.

  1. TWH Lacks Capacity to Sue

The K&C Defendants argue that the issue of TWH’s capacity to sue has been fully litigated, that TWH has been found to lack such capacity, and that it is precluded from arguing otherwise here. The K&C Defendants are correct.

The K&C Defendants ask the Court to apply collateral estoppel, or issue preclusion, to the question of TWH’s capacity to sue. The doctrine applies when: “(1) A claim or issue raised in the present action is identical to a claim or issue litigated in a prior proceeding; (2) the prior proceeding resulted in a final judgment on the merits; and (3) the party against whom the doctrine is being asserted was a party or in privity with a party to the prior proceeding.” (Brinton v. Bankers Pension Services, Inc. (1999) 76 Cal.App.4th 550, 556.)

All three elements are met here. In the Second Malpractice Action the K&C Defendants argued TWH, as a canceled LLC, lacked capacity to sue. The court agreed with the K&C Defendants, and it entered judgment against TWH accordingly. (RJN, Exs. I [demurrer ruling], J [judgment].) TWH was party to the Second Malpractice Action and is party to this action. TWH is collaterally estopped from arguing that it has capacity to sue.

The only question TWH raises (albeit not in its opposition brief, which omits any discussion of lack of capacity) concerns the finality of the judgment in the Second Malpractice Action. On page 222, footnote 13 of the complaint, Plaintiffs state that the issue of TWH’s capacity to sue is on appeal. As the K&C Defendants point out, however, the online docket for the Second Malpractice Action does not reflect the filing of a notice of appeal. (RJN, Ex. O.) Because Plaintiffs’ allegation conflicts with the judicially noticeable docket, the Court will disregard the allegation and sustain the demurrer as to TWH without leave to amend. (See Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 604 [“a pleading valid on its face may nevertheless be subject to demurrer when matters judicially noticed by the court render the complaint meritless”].)

  1. PDTW’s Claims Are Barred by Judicial Estoppel

As to PDTW, the K&C Defendants argue that PDTW’s failure to schedule its current claims in the bankruptcy action estops PDTW from pursuing those claims here. Again, the Court agrees.

Judicial estoppel “applies when (1) the same party has taken two positions; (2) the positions were taken in judicial or quasi-judicial administrative proceedings; (3) the party was successful in asserting the first position (i.e., the tribunal adopted the position or accepted it as true); (4) the two positions are totally inconsistent; and (5) the first position was not taken as a result of ignorance, fraud, or mistake.” (Aguilar v. Lerner (2004) 32 Cal.4th 974, 986-987 [quotation omitted].)

In the bankruptcy court, PDTW—with Thomas signing under penalty of perjury—failed to schedule the claims it now brings against the K&C Defendants. (RJN, Ex. B, at p. 10.) This was tantamount to an affirmative assertion that no such claims existed. Now, in this Court, PDTW seeks $250 million in compensatory damages, plus punitive damages from the K&C Defendants. These two positions are totally inconsistent and were made in separate judicial proceedings.

 

Plaintiffs elsewhere argue that because of the discovery rule, any claims PDTW might have against the K&C Defendants did not accrue until September 2017, well after it filed for bankruptcy. (Opp. at p. 15.) Assuming this to be true, PDTW still cannot claim ignorance, fraud or mistake regarding its failure to schedule the claims. Federal law imposed on PDTW a continuing duty to update its schedules to disclose potential claims. (See Hamilton v. State Farm Fire & Cas. Co. (9th Cir. 2001) 270 F.3d 778, 785.) PDTW admits it had discovered the K&C Defendants’ alleged wrongdoing by September 2017, and it was required to update its schedules to include any related claims. In opposition, PDTW identifies no such amendment.

Finally, both the trustee and the bankruptcy court accepted PDTW’s bankruptcy schedules as true. Again, PDTW settled its adversary complaint against Thomas for a $30,000 payment from Thomas. In exchange, the trustee assigned to Thomas “[a]ny and all . . . litigation rights.” (RJN, Ex. K, at p. 21.) In order to secure the bankruptcy court’s approval, the trustee had to establish that the settlement was in the “paramount interest” of PDTW’s creditors. (See In re Woodson (9th Cir. 1988) 839 F.2d 610, 620 [cited in RJN, Ex. K, at p. 8].) The bankruptcy court approved the settlement, finding it “just and proper under the circumstances of this case.” (RJN, Ex. J, at p. 2.)

In approving a settlement that assigned litigation rights to Thomas in exchange for a payment of $30,000, the bankruptcy court necessarily relied on PDTW’s failure to schedule the present claims. Had PDTW scheduled the present claims, both the trustee and the bankruptcy court would have been on notice of a potential $250 million recovery from the K&C Defendants (plus multiples of that amount in punitive damages). The paramount interest of PDTW’s creditors would hardly be served by a settlement that signs away the right to $250 million or more in damages in exchange for a $30,000 check, particularly when the trustee cited depletion of the estate’s assets as a reason to approve the settlement. (RJN, Ex. K, at p. 12.)

In opposition, PDTW argues that no position it took in the bankruptcy court is inconsistent with any position it takes in this litigation. For the reasons set forth above, that argument is without merit. Judicial estoppel bars PDTW’s claims against the K&C Defendants.

DEMURRER OF SCHNIDER PARTIES

Defendants David Schnider, David Schnider dba Schniderlaw, and Nolan Heimann, LLP (collectively, “Schnider”) demur to all causes of action against them in the complaint of Plaintiffs Paula Thomas; PDTW, LLC; and Thomas Wylde Holdings, LLC (“TWH”). The Court rules as follows:

  1. As to TWH, the demurrer is SUSTAINED WITHOUT LEAVE TO AMEND in its entirety.
  2. As to PDTW and Thomas’s 20th cause of action, the Court is inclined to sustain without leave to amend. However, at the hearing, Plaintiffs should be prepared to address any way this cause of action might be amended to avoid the bar of Civil Code § 1714.10.
  3. As to PDTW, the demurrer to the remaining causes of action is SUSTAINED WITHOUT LEAVE TO AMEND.
  4. As to Thomas, the demurrer to the remaining causes of action is SUSTAINED, and this case is STAYED pending the resolution of Thomas’s claims against Schnider in Thomas v. Schnider, LASC No. BC679247. This scope of this stay includes Schnider’s demurrer arguments that are not addressed by this ruling (e.g., the statute of limitations as applied to Thomas). To the extent these arguments remain relevant after the stay is lifted, the Court will address them at that time.

Requests for Judicial Notice

Schnider seeks judicial notice of documents filed in various cases related to the present dispute. (See ROAs 89-90, hereafter “RJN.”) Plaintiffs do not oppose this request, which is GRANTED. Schnider has also filed a joinder (ROA 94) in the request for judicial notice filed by Defendants Jene Park and Thomas Wylde, LLC. (See ROA 124, the “Park RJN.”) The Court incorporates by reference its concurrent rulings on the Park RJN; as particularly relevant to this motion, the Court GRANTS judicial notice of Exhibit A to the Park RJN, a certificate of cancellation of TWH.

Plaintiffs have filed their own request for judicial notice. Because the documents of which Plaintiff seeks notice are either redundant of Schnider’s request for judicial notice (a federal court complaint already part of Schnider’s RJN) or immaterial to the Court’s ruling (a February 2020 notice of dismissal that appears to add nothing to a November 2019 notice of dismissal already part of Schnider’s RJN), the Court DENIES judicial notice.

Grounds for Ruling

CCP § 425.10 requires a complaint to contain a statement of facts constituting the cause of action in ordinary and concise language. The facts to be pleaded are those upon which liability depends, so each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged.  Plaintiffs have grossly violated these pleading standards. The operative complaint is a 1,289-page document comprising 355 pages of allegations and 934 pages of exhibits. The 25 causes of action do not begin until page 115 of the complaint, and the charging allegations contain pages and pages of tables comparing years of tax returns, multi-page quotations from documents already appended to the complaint, and charging allegations against persons and entities who do not appear to be parties to this action. As noted above, if Plaintiffs’ goal was to confuse/overwhelm the reader, then they have succeeded.

  1. Factual Background

From a review of the complaint and the judicially noticed documents referenced above, the Court sets forth the following factual background. If a fact is taken from a judicially noticed document, the Court cites to the RJN; otherwise, the following facts are taken from the complaint, whose allegations are assumed to be true to the extent they do not conflict with judicially noticed documents.

Thomas is a fashion designer who created a line known as Thomas Wylde. She owns 99.5% of PDTW and 100% of TWH. Thomas assigned her intellectual property to TWH, which in turn licensed it to PDTW which distributed the Thomas Wylde line. In 2014, Thomas transferred the business to a new company, Defendant Thomas Wylde, LLC (“TW”). Through a series of agreements, Thomas acquired a minority interest in TW, while non-party entities controlled by non-party Stephen Choi came to hold the majority interest. Thomas became a salaried employee of TW. Thomas claims she was persuaded to agree to this arrangement by her management team at PDTW, consisting of Defendants Jene Park, John Hanna, and David Schnider (an attorney, sued alongside what appear to be two law firms that employed him).

As relevant to this dispute, Plaintiffs allege that Schnider (who subsequently became general counsel of TW) concealed conflicts of interest during the formation of TW and the negotiation of the transfer of PDTW’s operations to TW. They also allege that Schnider intentionally defrauded them in that various agreements he advised on were never intended to be performed by PDTW’s counterparties. In essence, Plaintiffs allege that Choi’s true purpose in these transactions wasn’t to invest in PDTW, but to strip PDTW (and Plaintiffs) of its assets while using PDTW as a vehicle to park fictional losses as part of a tax evasion scheme.

As the foregoing suggests, Thomas’ relationship with TW soured, and she was terminated by TW in April 2015. In October 2015, she and PDTW filed suit against TW, Hanna, Park, and several related entities, in a case titled Thomas v. Thomas Wylde, LLC, LASC No. BC596495 (the “Original Action”). In the Original Action, Thomas brought both wrongful termination claims and claims based on her status as a shareholder in TW (both derivative and in her own right).

 

In June 2017, Thomas individually sued Schnider and other defendants for copyright and trademark infringement, fraud, civil RICO, and related claims in federal court in a case titled Thomas v. Thomas Wylde, LLC, C.D.Cal. No. 2:17-cv-04158 (the “RICO Action”). (RJN, Ex. 4.) In the RICO Action, Thomas alleged a scheme to wrest control of PDTW from her in order to steal her intellectual property and use PDTW as part of a tax evasion scheme.

In October 2017, Thomas individually sued Schnider and other defendants for legal malpractice, fraud, and related claims in a case titled Thomas v. Schnider, LASC No. BC679247 (the “First Malpractice Action,” so called because Thomas filed a second malpractice action not relevant to this demurrer). (RJN, Exs. 1 [docket], 2 [operative complaint].) Thomas filed a request to dismiss her claims against Schnider without prejudice in November 2019 (RJN, Ex. 3); however, the docket in the First Malpractice Action does not reflect an actual entry of dismissal. (RJN, Ex. 1.) For purposes of this demurrer, Thomas’ claims against Schnider in the First Malpractice Action remain pending. (As noted above, Plaintiffs sought judicial notice of a February 2020 request for dismissal, but that request is signed by neither counsel nor the clerk, nor does it bear a file stamp. The Court therefore has not considered this document.)

Plaintiffs filed the present action in December 2019.

  1. Discussion
  2. The Complaint Is Sufficiently Certain—But Barely

Schnider first argues that the complaint is fatally uncertain, for it is impossible to determine which of the Plaintiffs brings which claim. This argument is not without merit; as the Court notes above, the complaint is hardly a model of clarity. In particular, Plaintiffs’ allegation that harm to any one of them constitutes harm to all of them (Compl. ¶ 260) suggests that Plaintiffs are using their multiple-entity structure like a game of whack-a-mole: if one Plaintiff loses, the next one can simply assert the same claims.

Nevertheless, “where the complaint contains substantive factual allegations sufficiently apprising defendant of the issues it is being asked to meet, a demurrer for uncertainty should be overruled.” (Williams v. Beechnut Nutrition Corp. (1986) 185 Cal.App.3d 135, 139, fn. 2.) The complaint meets this relaxed standard—but barely.

  1. TWH Lacks Capacity to Sue

Schnider argues that TWH, a canceled LLC, lacks capacity to sue. It is correct. TWH was dissolved and canceled on January 13, 2015. (Park RJN, Ex. A.) Upon cancellation, it ceased to have the powers, rights, and privileges afforded by the Corporations Code. (See Corp. Code, § 17707.08(c).) Among those powers is the ability to sue or be sued. (See Corp. Code, § 17701.05(b).) In addition, the Court notes that while Schnider has not raised collateral estoppel, TWH is collaterally estopped from claiming capacity to sue for the reasons set forth the Court’s concurrent ruling on the K&C Defendants’ demurrer.

Because TWH’s claims fail as a matter of law, Schnider’s demurrer is sustained as to TWH without leave to amend.

  1. Civil Code § 1714.10 Is Inapplicable, With One Exception

Schnider argues that Thomas’s and PDTW’s claims are barred for failure to comply with the prefiling requirements of Civil Code § 1714.10. Section 1714.10(a) provides that “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,” may be maintained unless the plaintiff first obtains a court order allowing him to file suit.

With the exception of the 20th cause of action, which concerns alleged discovery abuses, none of the claims against Schnider arises from an “attempt to contest or compromise a claim or dispute.” While Plaintiffs make allegations about Schnider’s conduct in relation to the Original Action and the First Malpractice Action, those allegations are directed to tolling the statute of limitations. They are not the basis of substantive claims against Schindler. Rather, those claims are based on Schindler’s conduct in relation to the series of agreements that Plaintiffs claim resulted in the destruction of PDTW—that is, they are based on transactions, not litigation. Section 1714.10 does not apply to claims based on an attorney’s transactional work. (Steuve v. Berger Kahn (2013) 222 Cal.App.4th 327, 331.)

The 20th cause of action is another matter. There, Plaintiffs allege that during the Original Action, they propounded discovery to TW regarding TW’s applicable insurance policies. TW responded that no such insurance existed. Plaintiffs allege this representation was false—that TW in fact had applicable insurance—and that Thomas dismissed the Original Action in reliance on the claimed lack of an insurance policy from which she could recover. (See Compl. ¶¶ 411-414.)

These allegations against Schnider clearly fall within the ambit of Civil Code § 1714.10. The misrepresentations at issue were allegedly made by TW, not by Schnider. At most, Schnider is a co-conspirator in a scheme to serve false discovery responses about TW’s insurance coverage. Thus, unlike the other causes of action, the 20th arises directly from an alleged “civil conspiracy . . . to contest . . . a claim” and is “based upon the attorney’s representation of the client.” Accordingly, Plaintiffs were required to get a court order before filing the 20th cause of action, and they failed to do so. The Court therefore sustains Schnider’s demurrer to the 20th cause of action on the grounds that Plaintiffs failed to comply with section 1714.10.

Plaintiffs’ moving papers, which devote only a paragraph to § 1714.10, do not address the possibility of amendment. At the hearing, Plaintiffs will need to explain how the 20th cause of action can be amended such that the bar of section 1714.10 does not apply. Otherwise, the Court will sustain the demurrer without leave to amend.

  1. Thomas’s Claims Must Be Abated

Relying on CCP § 430.10(c), Schnider argues that Thomas’s remaining claims are barred because of pending actions in California state and federal courts, to wit, the First Malpractice Action and the RICO Action. A plea in abatement lies only when the concurrent actions are pending in California courts, so insofar as this ground for demurrer is based on the federal RICO Action, it is without merit. (Gregg v. Superior Court (1987) 194 Cal.App.3d 134, 136.)

Turning to the First Malpractice Action, a plea in abatement lies when “[t]here is another action pending between the same parties on the same cause of action.” (CCP § 430.10(c).) Thomas and Schnider are both parties to the First Malpractice Action, and as discussed above, the First Malpractice Action is still pending as between Thomas and Schnider. The question is whether the same cause of action is at issue in both cases. “Cause of action” in this sense refers not to a caption line in a complaint, but to the primary right or rights at issue. (See Bush v. Superior Court (1992) 10 Cal.App.4th 1374, 1384.) “The cause of action, as it appears in the complaint when properly pleaded, will therefore always be the facts from which the plaintiff’s primary right and the defendant’s corresponding primary duty have arisen, together with the facts which constitute the defendant’s delict or act of wrong.” (4 Witkin, Cal. Procedure (5th ed. 2020) Pleading § 34 [quoting Pomeroy, Code Remedies (5th ed.), p. 528].)

From the Court’s review of the operative complaint in the First Malpractice Action and the complaint in this action, it appears both cases involve the invasion of the same primary rights. (The 20th cause of action does not overlap, but the Court has addressed that cause of action above.) Both cases allege that Schnider breached professional duties of care and fiduciary duties owed to Thomas and that Schnider defrauded her. Both cases allege that this conduct was part of a scheme whereby Schnider, acting alongside Park, Hanna, and others (notably Choi), conspired to use the TW entity to seize control of PDTW from Thomas, strip it of its assets (most importantly its intellectual property), and use it as a vehicle for tax evasion and money laundering. While the present action involves a few extra allegations—mainly relating to Schnider’s alleged participation in preparing tax returns that listed false “advances” from TW to PDTW—these new allegations are simply part of the same scheme to encumber PDTW with nonexistent debt for tax purposes.

In opposition, Plaintiffs do not argue that this action and the First Malpractice Action involve different primary rights. They simply argue that the First Malpractice Action is no longer pending. For the reasons set forth above, this argument is without merit.

Except for the 20th cause of action addressed above, Schnider’s demurrer to Thomas’s claims is sustained in its entirety and Thomas’s remaining claims will be stayed until resolution of the First Malpractice Action. The scope of this stay includes the portions of Schnider’s demurrer to Thomas’s claims not addressed in this ruling; if necessary, the Court will address those arguments after the stay is lifted.

  1. PDTW’s Claims Are Time-Barred

As to Thomas’s and PDTW’s remaining claims, Schnider argues they are all barred by the statute of limitations. The Court agrees, except as to the 20th cause of action. That cause of action arguably did not accrue until Thomas dismissed the Original Action in 2018. For purposes of demurrer, it is timely.

 

  1. No Tolling in Bankruptcy

Plaintiffs argue there is no issue with the timeliness of PDTW’s claims because the statute of limitations was tolled from the time PDTW filed for bankruptcy until the time Thomas was assigned PDTW’s litigation rights. As explained in more detail in concurrently filed rulings, PDTW declared bankruptcy in 2016, and the bankruptcy trustee initiated an adversary proceeding against Thomas. As part of the settlement of the adversary proceeding, Thomas was assigned PDTW’s litigation rights, which presumably include the right to bring the present lawsuit in PDTW’s name. The settlement was approved by the bankruptcy court in May 2019. According to Plaintiffs, the applicable statute of limitations was tolled for about three years while the Bankruptcy Code’s automatic stay was in place.

Plaintiffs misunderstand how CCP § 356 interacts with the 11 U.S.C. § 362, the Bankruptcy Code’s automatic stay provision. Section 356 tolls the statute of limitations “[w]hen the commencement of an action is stayed by” a “statutory prohibition,” such as section 362’s automatic stay. But “[t]he 11 U.S.C. § 362 automatic stay only stays lawsuits against the debtor and the debtor’s bankruptcy estate. The Section 362 stay does not apply where, as here, the debtor is the plaintiff in a lawsuit.” (In re Mitchell (Bankr.C.D.Cal. 1997) 206 B.R. 204, 212.) Because the automatic stay did not apply to suits PDTW might bring as a plaintiff, the statute of limitations was not tolled by PDTW’s bankruptcy.

  1. Applicable Statute of Limitations
    1. Fraud Claims

CCP § 340.6(a) sets forth two rules for the commencement of suits against an attorney. First, in the case of “actual fraud,” the limitations period is the same as the general statute of limitations for fraud, i.e., three years from discovery. (See CCP § 338(d).) The Court assumes for purposes of this demurrer that the 5th-7th, 14th-15th, and 18th-19th causes of action (each captioned as some type of fraud) are indeed claims for “actual fraud.” Therefore, a three-year limitations period applies.

    1. Non-Fraud Claims (Except UCL)

Second, in all other cases, the limitations period is one year after the plaintiff discovered, or reasonably should have discovered, the attorney’s wrongful act, or four years from the date of the wrongful act, whichever occurs first. The four-year limitation—but only the four-year limitation—is tolled while the attorney “willfully conceals the facts constituting the wrongful act or omission.” (CCP § 340.6(a)(3).) PDTW’s non-fraud claims—the 1st, 3rd, 12th-13th, 16th-17th, 21st, and 23rd—are governed by this portion of the statute.

In their opposition, Plaintiffs suggest the four-year limitation applies here, and that it was tolled while Schnider concealed his alleged wrongdoing. They are incorrect. In paragraph 71 of the complaint, Plaintiffs allege that they received “a full explanation of how PDTW was damaged, and by whom,” by “November 2, 2018,” when Schnider finished the last of 20 hours of deposition. Once PDTW discovered, or reasonably should have discovered, its non-fraud claims, it was subject to a one-year limitations period. As the Court discusses in more detail below, PDTW’s claims accrued well before November 2, 2018, but Plaintiffs themselves allege PDTW had full knowledge of all claims against Schnider by that date. As a result, drawing every possible inference in Plaintiffs’ favor, PDTW had to file its non-fraud claims by November 2, 2019.

    1. UCL Claim

Plaintiffs’ 23rd cause of action is for UCL violations. Although a UCL claim is not one for “actual fraud,” the UCL’s own four-year statute of limitations (Bus. & Prof. Code, § 17208) controls, not the one-year limitation of section 340.6(a). (See Blanks v. Seyfarth Shaw LLP (2009) 171 Cal.App.4th 336, 364 [“The UCL has a four-year statute of limitations, which applies even if the borrowed statute has a shorter limitations statute. . . . This language ‘admits no exceptions.’”].)

  1. Analysis
    1. Non-Fraud Claims

As to the non-fraud claims, for the reasons set forth above, the latest possible date to file suit was November 2, 2019. Plaintiffs filed suit on December 2, 2019, a month too late. Because Plaintiffs’ own allegations establish the non-fraud claims are untimely, the demurrer to those claims is sustained without leave to amend.

    1. Fraud Claims (Except UCL)

The fraud claims are a more difficult question, but still one capable of resolution on demurrer. Again, the complaint alleges a scheme to wrest control of Thomas’s intellectual property from PDTW, assign it to TW, and encumber PDTW with debt so that Choi and others could launder money and evade taxes.

As regards Schnider, PDTW (through Thomas, its owner) was aware in 2014 that he simultaneously represented Thomas, TWH, PDTW, and TW when he was drafting the agreements that structured the business relationship among these entities. (Compl., ¶ 30.) (To be sure, Plaintiffs allege that Schnider failed to disclose a conflict of interest, but they were nonetheless aware of the fact of his multiple representation.) After Schnider negotiated the relevant transaction documents, Thomas signed them in December 2014. (Compl., ¶¶ 39, 429.) Then, in April 2015, Schnider “led the charge to terminate” Thomas. (Compl., ¶ 30.) These facts were all known by April 2015.

The Complaint also explains what Plaintiffs knew by January 2016. Exhibit 4 to the complaint is a letter from PDTW’s then-counsel, the K&C Defendants, dated January 21, 2016 and summarizing their knowledge of the facts of the Original Action as of that date. As set forth in that letter, by no later than that date, PDTW—whether on its own, through Thomas, or through counsel at K&C—was aware of the broad contours of the scheme discussed above. Thomas had formed TW to handle the business side of things; Thomas had assigned PDTW’s intellectual property rights to TW in exchange for shares in TW and became a salaried TW employee; Choi invested in, and took majority control of, TW; Thomas was terminated by TW; and TW issued thousands of new shares to a Choi-related entity, diluting Thomas’s portion of TW to almost nothing. (See Compl., Ex. 4, at pp. 4-8.) Thomas inquired about, and K&C rejected, a cause of action for “theft of company” based on the above facts. (Id., at p. 8.)

So, by January 2016, PDTW knew of Schnider’s multiple representations, of his drafting the agreements that transferred its intellectual property to TW, of his central role in the termination of Thomas, and of the dilution of Thomas’s shares in TW. PDTW may not have known why the relationship between PDTW, Thomas, and TW was structured in this fashion—that is, it may not have known of the alleged tax evasion and money laundering plans. But it knew that it no longer owned Thomas’s designs, that share dilution meant Thomas no longer had the slightest control over how TW used her designs, and that Schnider was a key participant in the acts leading up to that point. PDTW knew it had been injured (even if it did not know the extent of the injuries), and it knew Schnider had a role in the events that caused those injuries. It was therefore on inquiry notice as to Schnider in January 2016. At that point, it was charged with all knowledge that a reasonable investigation into Schnider would have uncovered. (See Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 808-09.)

Nevertheless, Plaintiffs claim PDTW was unaware of the injuries allegedly caused by Schnider until the fall of 2017, when its present counsel took over in the Original Action and conducted extensive discovery (recounted in exhaustive detail at 64-74 of the complaint) and found documents and testimony exposing Schnider to liability.

The problem for PDTW is that once inquiry notice attaches, the discovery rule only delays accrual if a plaintiff in fact “diligent[ly] investigat[es] the circumstances of the injury” and fails to “reasonably discover[] facts supporting the cause of action.” (Fox, supra, 35 Cal.5th at p. 809.) Current counsel conducted a diligent investigation in the fall of 2017 after Plaintiffs fired the K&C Defendants, but as set forth above, inquiry notice attached at least 18 months earlier. And for those 18 months, Plaintiffs allege the K&C Defendants “did not do a thing to investigate how Schnider was involved with PDTW’s situation.” (Compl., ¶ 200.) The K&C Defendants knew Schnider was PDTW’s attorney and had relevant documents in his possession, but they neither served a document subpoena nor noticed his deposition. (Ibid.) They “fail[ed] to conduct the most basic discovery” of Schnider. (Compl., ¶ 201.)

The K&C Defendants’ failure to conduct any investigation on Plaintiffs’ behalf—an allegation critical to Plaintiffs’ malpractice claims against the K&C Defendants—dooms PDTW’s claims against Schnider. Without a diligent investigation in January 2016, Plaintiffs cannot take advantage of the discovery rule to claim that PDTW was unaware of its claims against Schnider until the fall of 2017. Because Plaintiffs were on inquiry notice with respect to Schnider no later than January 2016, but failed to conduct any investigation of him, PDTW’s fraud claims against Schnider accrued in January 2016. As a result, they had to be filed by January 2019. Inasmuch as the present suit was not filed until December 2019, PDTW’s fraud claims are untimely and Schnider’s demurrer to the fraud claims is sustained without leave to amend.

    1. UCL Claim

The UCL claim is based on two sets of underlying allegations that differ in particulars from the general terms of the overall scheme: misappropriation of Thomas and PDTW’s intellectual property, and conversion of money and personal property (among other things, computers and furnishings), in each case aided by Schnider. (See Compl., ¶¶ 428-446.) As explained below, although a four-year limitations period applies, the claims are untimely.

  1. Intellectual Property Allegations

As to the intellectual property, Plaintiffs allege: “Since January 1, 2015 [TW] has been using the trademark as if it owns it.” (Id., ¶ 428.) Insofar as it is based on the intellectual property allegations, the UCL claim accrued on that date. Plaintiffs cannot use the discovery rule to toll accrual, for Plaintiffs allege that Thomas signed the documents purporting to give TW the right to use the intellectual property by December 31, 2014. (Id., ¶ 429.) Plaintiffs now allege those documents were some combination of void ab initio, fraudulent, and non-binding due to the failure of conditions precedent. Yet the facts remain that (1) as of December 31, 2014 Thomas knew she had apparently transferred intellectual property to TW, and (2) as of January 1, 2015, TW was using that intellectual property in its own name.

This was enough to put Thomas, and thus PDTW, on inquiry notice. (See Corp. Code § 17703.01(a) [“every member is an agent of the limited liability company for the purpose of its business or affairs”]; Civ. Code § 2332 [“As against a principal, both principal and agent are deemed to have notice of whatever either has notice of, and ought, in good faith and the exercise of ordinary care and diligence, to communicate to the other.”].)

At that point, PDTW was charged with all knowledge that a reasonable investigation would have uncovered. Once again, Plaintiffs allege the K&C Defendants failed to investigate these claims. (See Compl., ¶ 428 [K&C Defendants “were incompetent” and “failed to take legal action to protect the brand name from misuse and abuse”].) As with the fraud claims, the K&C Defendants’ failure to conduct any investigation defeats PDTW’s attempt to take advantage of the discovery rule here. Because the complaint in this action was not filed by January 1, 2019, the UCL claim is untimely insofar as it is based on intellectual property allegations.

ii. Conversion Allegations

The same is true of the conversion allegations. The complaint in the Original Action included a cause of action for conversion brought by PDTW (in its own right) and Thomas (derivatively of TW) against Park, Hanna and several related entities. (See Compl., Ex. 2, at ¶¶ 100-107.) PDTW and Thomas alleged the theft of PDTW’s money and personal property, just as they do here. (Compare Compl., ¶¶ 443-444, with Compl., Ex. 2, ¶¶ 102, 104-105.) The complaint in this action adds details—among other things, providing a comprehensive list of chattels and monetary transactions at issue—but the underlying allegations of conversion remain the same. The claim therefore accrued by no later than October 1, 2015, the date the Original Action was filed. Because the complaint in this action was not filed by October 1, 2019, the UCL claim is untimely insofar as it is based on conversion allegations.

The UCL claim is time-barred with regard to each set of allegations on which it is based. Schnider’s demurrer to the UCL claim is sustained without leave to amend.

DEMURRER OF KIM PARTIES

Defendants Kyu Hong Kim CPA, Inc. (the “Kim Firm”), Kyu Hong Kim, and Allison Kwon (collectively, the “Kim Defendants”) demur to all causes of action against them in the complaint of Plaintiffs Paula Thomas; PDTW, LLC; and Thomas Wylde Holdings, LLC (“TWH”). The Court rules as follows:

  1. At TWH’s request (see Opp. at p. 2), its claims against the Kim Defendants are DISMISSED WITHOUT PREJUDICE. The Kim Defendants’ demurrer to TWH’s claims is therefore OVERRULED AS MOOT.
  2. In all other respects, the Kim Defendants’ demurrer is SUSTAINED WITHOUT LEAVE TO AMEND.

Request for Judicial Notice

The Kim Defendants seek judicial notice of (1) documents filed in Thomas v. Kring & Chung, LASC No. 18STCV05667 and (2) federal government-issued identification documents for Kwon. (See ROA 132, hereafter “RJN.”) Plaintiffs do not oppose this request, which is GRANTED.

 

Grounds for Ruling

CCP § 425.10 requires a complaint to contain a statement of facts constituting the cause of action in ordinary and concise language. The facts to be pleaded are those upon which liability depends, so each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged.  Plaintiffs have grossly violated these pleading standards. The operative complaint is a 1,289-page document comprising 355 pages of allegations and 934 pages of exhibits. The 25 causes of action do not begin until page 115 of the complaint, and the charging allegations contain pages and pages of tables comparing years of tax returns, multi-page quotations from documents already appended to the complaint, and charging allegations against persons and entities who do not appear to be parties to this action. As noted above, if Plaintiffs’ goal was to confuse/overwhelm the reader, then they have succeeded.

  1. Factual Background

From a review of the complaint and the judicially noticed documents referenced above, the Court sets forth the following factual background. If a fact is taken from a judicially noticed document, the Court cites to the RJN; otherwise, the following facts are taken from the complaint, whose allegations are assumed to be true to the extent they do not conflict with judicially noticed documents.

Thomas is a fashion designer who created a line known as Thomas Wylde. She owns 99.5% of PDTW and 100% of TWH. Thomas assigned her intellectual property to TWH, which in turn licensed it to PDTW which distributed the Thomas Wylde line. In 2014, Thomas transferred the business to a new company, Defendant Thomas Wylde, LLC (“TW”). Through a series of agreements, Thomas acquired a minority interest in TW, while non-party entities controlled by non-party Stephen Choi came to hold the majority interest. Thomas became a salaried employee of TW. Thomas claims she was persuaded to agree to this arrangement by her management team at PDTW, consisting of Defendants Jene Park, John Hanna and David Schnider. In essence, Plaintiffs allege that Choi’s true purpose in these transactions wasn’t to invest in PDTW, but to strip PDTW (and Plaintiffs) of its assets while using PDTW as a vehicle to park fictional losses as part of a tax evasion and money laundering scheme.

As relevant to this dispute, Plaintiffs allege that the Kim Defendants knowingly included false information in PDTW’s and TW’s tax returns regarding nonexistent “advances” from TW to PDTW. These falsified tax returns, supported by fake invoices and accounting reports that the Kim Defendants helped to prepare, were crucial to the tax evasion and money laundering scheme. Furthermore, the false debts represented by the advances forced PDTW into bankruptcy in June 2016.

In November 2018, Thomas and TWH sued Kim and the Kim Firm (but not Kwon), as well as other defendants, in a case titled Thomas v. Kring & Chung, LASC No. 18STCV05667 (the “Second Malpractice Action,” so called because Thomas filed an earlier malpractice action not relevant to this demurrer). The complaint alleged negligence, fraud, malpractice and related claims against the many defendants. As relevant here, Thomas and TWH brought a negligence claim against Kim and the Kim Firm arising from the aforementioned allegations about falsified tax returns. (RJN, Ex. 3, at ¶¶ 297-300.) Kim and the Kim Firm demurred to Thomas and TWH’s claims, and the court sustained their demurrer without leave to amend. (RJN, Ex. 2.) The court entered final judgment in favor of Kim and the Kim Firm on July 9, 2019. (RJN, Ex. 1.)

Plaintiffs filed the present action in December 2019.

  1. Discussion
  2. Thomas’s Claims Against Kim and the Kim Firm Are Barred by Res Judicata

As set forth above, Thomas brought similar claims against Kim and the Kim Firm (but not Kwon) in the Second Malpractice Action. The court in that action sustained Kim and the Kim Firm’s demurrer without leave to amend and entered judgment in their favor. The Kim Defendants argue that Thomas and PDTW’s claims are barred by res judicata. As explained below, this is correct only as to Thomas’s claims against Kim and the Kim Firm. Res judicata is otherwise inapplicable.

“Res judicata, or claim preclusion, prevents relitigation of the same cause of action in a second suit between the same parties or parties in privity with them.” (Mycogen Corp. v. Monsanto Co. (2002) 28 Cal.4th 888, 896.) “Under this doctrine, all claims based on the same cause of action must be decided in a single suit; if not brought initially, they may not be raised at a later date.” (Id., at p. 897.) It applies if a second suit involves: (1) the same cause of action (2) between the same parties (3) after a final judgment on the merits in the first suit. (Id., at p. 896.)

The third element of res judicata is not at issue here. Final judgment on the merits was entered against Thomas and in favor of Kim and the Kim Firm in the Second Malpractice Action. The parties dispute the first and second elements: privity of parties and the scope of the cause of action at issue.

  1. Kwon Is Not in Privity with Kim and the Kim Firm

Res judicata only bars relitigation of a cause of action between parties to the first case and their privies. Because Kwon was not party to the Second Malpractice Action, she may assert the defense of res judicata only if she is in privity with Kim or the Kim Firm.

The Kim Defendants argue res judicata applies to Kwon because “she is an employee of” the Kim Firm, so claims against her are “derivative of the claims against the other” Kim Defendants. (Memo. at p. 11.) The law does not support this argument. “Agents and principals, including, of course, masters and servants, do not, as such, have any mutual or successive relationship to rights of property. They are not in privity with each other. Consequently the principal or master is not bound by the judgment obtained in an action by or against the agent or the servant, and vice versa, unless he was a party or privy thereto by having authorized or actually and openly prosecuted or defended the action, or by having been notified and given an opportunity to defend under circumstances requiring him to do so.” (Deorosan v. Haslett Warehouse Co. (1958) 165 Cal.App.2d 599, 619 [citation omitted].) Kwon is not in privity with Kim and the Kim Firm for purposes of res judicata.

  1. No Res Judicata Effect as to PDTW

Like Kwon, PDTW was not party to the Second Malpractice Action, so res judicata applies to TW only if it is in privity with Thomas. Here, the Restatement Second of Judgments, which has been endorsed by the California Supreme Court, is instructive. (See George Arakelian Farms, Inc. v. Agricultural Labor Relations Bd. (1989) 49 Cal.3d 1279, 1290 & fn. 7; see also Newport Beach Country Club, Inc. v. Founding Members of Newport Beach Country Club (2006) 140 Cal.App.4th 1120, 1131 [noting “[t]he Supreme Court’s acceptance of the Restatement Second of Judgments”].)

The Kim Defendants argue that because Thomas, the 99.5% owner of PDTW, litigated and finally lost the Second Malpractice Action, the judgment in the Second Malpractice Action has a claim preclusive, or res judicata, effect on PDTW. The general rule is that a judgment against a corporation or a shareholder in the first action has no binding effect on the other in a second action unless one of several exceptions applies. (Rest.2d Judgments, § 59.) One of those exceptions arises in the context of closely held corporations, a situation analogous to the closely held limited liability companies like PDTW: if an issue is actually litigated in the owner’s original action, the determination in the original action is usually binding on the corporation in the second action. (Id., § 59(3); see also id., §59, com. e.) But the Reporter’s Note clarifies that this exception applies only to issue preclusion, not to claim preclusion. (Id., § 59, Reporter’s Note [“It may be emphasized that the problem of claim preclusion is quite different.”].)

Because this exception to the general rule applies only to issue preclusion and not to claim preclusion, the judgment against Thomas in the Second Malpractice Action lacks a res judicata effect on PDTW. (The collateral estoppel/issue preclusion effect on PDTW is discussed below.)

  1. Thomas’s Claims Arise from The Same Primary Rights

“California’s res judicata doctrine is based on the primary right theory.” (Mycogen Corp., supra, 28 Cal.4th at p. 904.) “[T]he violation of a single primary right gives rise to but a single cause of action.” (Ibid. [citation omitted].) “The cause of action, as it appears in the complaint when properly pleaded, will therefore always be the facts from which the plaintiff’s primary right and the defendant’s corresponding primary duty have arisen, together with the facts which constitute the defendant’s delict or act of wrong.” (4 Witkin, Cal. Procedure (5th ed. 2020) Pleading § 34 [quoting Pomeroy, Code Remedies (5th ed.), p. 528].)

From the Court’s review of the relevant portions of the complaint in the Second Malpractice Action (RJN, Ex. 3), Thomas alleged in that case that Kim and the Kim Firm were critical, willing participants in a scheme to launder money and evade taxes through TW (id., ¶ 297 [they “agreed to commit tax evasion for TW and launder money to and through South Korea”]), and that part of this scheme was falsifying PDTW’s tax returns to include nonexistent debt owed to Hillshore, one of TW’s Choi-controlled investors. (Id., ¶ 298.) This false debt, in turn, was used to force PDTW into bankruptcy as part of the larger overall scheme to strip PDTW of its intellectual property and convert it into part of a money laundering enterprise, described elsewhere in the complaint. The factual allegations against Kim and the Kim Firm in this matter are nearly identical; any differences are insignificant. (In particular, the additional details about fabrication of QuickBooks reports and invoices to support the falsified tax returns add nothing to a preexisting allegation of falsified tax returns.) The two cases arise from the same primary rights.

Plaintiffs object that the prior claim against Kim and the Kim Firm was for negligence, while the current claims center on fraud and conspiracy. They argue that fraud and conspiracy are different injuries from negligence, and thus involve different primary rights. Plaintiffs are wrong for two reasons. First, Plaintiffs’ description of the complaint in the Second Malpractice Action is inaccurate. It expressly accuses Kim and the Kim Firm of both participating in a tax evasion conspiracy involving TW (RJN, Ex. 3, ¶ 299) and preparing tax returns with information they knew to be false (i.e., committing fraud in the preparation of tax returns). (Id., ¶ 297.) Thomas’s claim may have been captioned as negligence, but the substantive allegations included fraud and conspiracy.

Second, Plaintiffs confuse the legal theories that might entitle Thomas to relief with the injuries she suffered. Again, as regards Kim and the Kim Firm, the primary rights at issue are (1) PDTW’s and Thomas’s right to a truthfully prepared tax return (in Thomas’s case, in her capacity as an owner of both PDTW and TW), which was injured by the preparation of false tax returns, and (2) more generally, Thomas’s right to control her businesses and operate them in the manner she desired, which was injured by the alleged tax evasion and money laundering scheme (which included forcing PDTW into bankruptcy through false debt). The underlying facts, and thus the injuries and primary rights at issue, are the same in each action. All Thomas has changed is the theory of recovery—fraud and conspiracy as opposed to negligence. A change in legal theories is not the same as a change in primary rights. (Mycogen Corp., supra, 28 Cal.4th at p. 904 [nature of injury to primary right is “distinguished from the legal theory on which liability for that injury is premised”] [citation omitted, emphasis original].)

Plaintiffs also argue that Thomas now seeks far more damages than she did in the Second Malpractice Action, namely $250 million in compensatory damages and some multiple of that amount in punitive damages. As with theories of recovery, Plaintiffs confuse remedies with rights. “The primary right must also be distinguished from the remedy sought: The violation of one primary right constitutes a single cause of action, though it may entitle the injured party to many forms of relief, and the relief is not to be confounded with the cause of action, one not being determinative of the other.” (Ibid. [citation omitted].) That Thomas now seeks greater damages because she alleges intentional torts and punitive damages rather than negligence is irrelevant. “[T]he claim preclusion aspect of the res judicata doctrine generally bars a second action brought solely to recover greater or different damages.” (Hong Sang Market, Inc. v. Peng (2018) 20 Cal.App.5th 474, 490.)

For these reasons, res judicata bars Thomas’s claims against Kim and the Kim Firm. Their demurrer to her claims is sustained without leave to amend.

  1. All Remaining Claims Are Time-Barred

Thomas’s claims against Kwon, and PDTW’s claims against all the Kim Defendants, survive res judicata. But under the doctrine of collateral estoppel, or issue preclusion, all these claims are time-barred. The doctrine applies when: “(1) A claim or issue raised in the present action is identical to a claim or issue litigated in a prior proceeding; (2) the prior proceeding resulted in a final judgment on the merits; and (3) the party against whom the doctrine is being asserted was a party or in privity with a party to the prior proceeding.” (Brinton v. Bankers Pension Services, Inc. (1999) 76 Cal.App.4th 550, 556.) Unlike res judicata, the party asserting collateral estoppel need not be in privity with a party to the original proceeding. (See DKN Holdings LLC v. Faerber (2015) 61 Cal.4th 813, 824.) Kwon may therefore take advantage of collateral estoppel.

In the Second Malpractice Action, Kim and the Kim Firm demurred to Thomas’s claims on statute of limitations grounds, and Thomas argued the discovery rule tolled accrual of her claims. The court sustained the demurrer, holding that (1) the statute of limitations began to run when PDTW filed for bankruptcy on June 30, 2016, and (2) because Thomas was personally on inquiry notice of the alleged wrongdoing, she could not rely on the discovery rule to toll accrual. (RJN, Ex. 2, at p. 3.) Again, the case proceeded to final judgment in favor of Kim and the Kim Firm. (RJN, Ex. 1.)

  1. Thomas’s Claims Against Kwon

This is enough to dispose of Thomas’s claims against Kwon—which are based entirely on acts taken by Kwon in the course of the Kim Firm’s relationship with TW and PDTW—on statute of limitations grounds. With an accrual date of June 30, 2016 and no discovery-related tolling, Thomas’s present fraud-based claims had to be filed by June 30, 2019. (See CCP, § 338(d).) This matter was filed on December 2, 2019.

 

Plaintiffs seek to avoid this conclusion by arguing that Kwon’s identity was purposefully concealed from them as late as February 2019, so the discovery rule applies. (See Compl., ¶ 77; Opp., p. 15.) Plaintiffs are correct that the court in the Second Malpractice Action did not decide this question, but judicially noticeable documents show the argument is based on a false premise.

Plaintiffs allege that “[c]ounsel for [the Kim Firm] concealed the identity of Allison Kim by telling counsel for Plaintiffs [in February 2019] that she did not exist and nobody by that name worked at [the Kim Firm].” (Compl., ¶ 77 [emphasis original].) Kwon’s name is Allison Kwon, not Allison Kim, and the former name appears on both her United States passport and her IRS enrolled agent card. (RJN, Exs. 4-5.) Counsel was telling the truth when he said there was no such person as “Allison Kim” at the Kim Firm. He could not have deceived Plaintiffs about the existence of a nonexistent person, so the alleged deception is no basis to apply the discovery rule.

Under principles of collateral estoppel, Thomas’s claims against Kwon are time-barred. Her demurrer to Thomas’s claims is sustained without leave to amend.

  1. PDTW’s Claims
  2. PDTW Is Bound by the Judgment Against Thomas

PDTW, a limited liability company, is legally distinct from Thomas, its 99.5% owner. But in certain circumstances, issues decided against Thomas may be binding as to PDTW. Again, the Restatement is instructive. In the analogous

context of closely-held corporations, “interests of the corporation’s management and stockholders and the corporation itself generally fully coincide. . . . When the controlling owner is the party to the [first] litigation, his opportunity and incentive to litigate issues commonly affecting him and the corporation is ordinarily sufficient to treat his participation as being on behalf of the corporation as well.” (Rest.2d Judgments, § 59, com. e.) The Court adopts this reasoning in the context of LLCs such as PDTW.

Plaintiffs argue, however, that this is not the ordinary case: when the Second Malpractice Case was filed, PDTW (through the bankruptcy trustee) was involved in an adversary proceeding against Thomas, so their interests were not aligned. The Restatement recognizes that the owner of a closely held corporation may be adverse to the corporation such that no privity exists: “[I]t can happen that a substantial proprietor in a corporation finds himself in conflict with the corporation’s management or with other stockholders, and in an antagonistic position regarding issues litigated by the latter. The rule of issue preclusion should not be applied in such circumstances . . . .” (Ibid.)

Plaintiffs are correct that Thomas was adverse to PDTW while the adversary complaint was pending in bankruptcy. But as the Restatement explains, the application of collateral estoppel depends on the particular nature of the parties’ adversity. What matters are the “issues litigated by” Thomas and PDTW in the adversary proceeding, not the mere fact that an adversary proceeding took place. The adversary proceeding concerned ownership of intellectual property, ownership of various chattels, and prepetition loans allegedly made by PDTW to Thomas. (Compl., Ex. 2.) Whatever issues were in dispute, the statute of limitations for claims involving the Kim Defendants was not among them, so the adversary proceeding does not bar the application of collateral estoppel to PDTW.

Furthermore, the notion that PDTW and Thomas would ever have been adverse on the statute of limitations issue makes little sense. While PDTW and Thomas might have disputed the ownership of intellectual property or the repayment of prepetition loans, they would surely have been in alignment regarding the existence of a potential $250 million claim against Kim and the Kim Firm. Such a claim, if proven, would easily have paid off the estate’s debts with hundreds of millions of dollars left over in PDTW’s accounts when the company exited bankruptcy and Thomas resumed control. The judgment against Thomas in the Second Malpractice Action has a preclusive effect as to PDTW on the statute of limitations issue. Because PDTW’s claims accrued on June 30, 2016, they had to be filed by June 30, 2019. Again, this case was not filed until December 2, 2019.

  1. PDTW’s Claims Are Not Tolled by Bankruptcy

Attempting to avoid collateral estoppel, Plaintiffs argue that PDTW’s claims were tolled during the bankruptcy by operation of CCP § 356. As with the discovery allegations about Kwon, Plaintiffs are correct that this issue was not decided in the Second Malpractice Action, but incorrect that section 356 applies.

Section 356 tolls the statute of limitations “[w]hen the commencement of an action is stayed by” a “statutory prohibition.” Plaintiffs argue the automatic stay attendant to a bankruptcy filing triggered section 356, which tolled the statute of limitations until Thomas secured PDTW’s litigation rights in her settlement with the estate. But “[t]he 11 U.S.C. § 362 automatic stay only stays lawsuits against the debtor and the debtor’s bankruptcy estate. The Section 362 stay does not apply where, as here, the debtor is the plaintiff in a lawsuit.” (In re Mitchell (Bankr.C.D.Cal. 1997) 206 B.R. 204, 212.) Because the automatic stay did not apply to suits PDTW might bring as a plaintiff, the statute of limitations was not tolled by PDTW’s bankruptcy.

For the foregoing reasons, PDTW’s claims against the Kim Defendants are time-barred and the Kim Defendants’ demurrer to PDTW’s claims is sustained without leave to amend.

DEMURRERS OF THOMAS WYLDE, LLC AND PARK

Defendants Thomas Wylde, LLC (“TW”) and Jene Park demur to all causes of action against them in the complaint of Plaintiffs Paula Thomas; PDTW, LLC; and Thomas Wylde Holdings, LLC (“TWH”). The Court considers these separately filed demurrers together because TW and Park are represented by the same counsel, and Park is alleged to have a minority interest in TW. The Court rules as follows:

  1. TWH asks the Court to dismiss its claims against TW without prejudice (TW Opp., at p. 2), but it makes no such request regarding its claims against Park. The Court dismisses TWH’s claims against TW without prejudice, and TW’s demurrer to TWH’s claims is OVERRULED AS MOOT. Park’s demurrer to TWH’s claims is SUSTAINED WITHOUT LEAVE TO AMEND.
  2. Except for the 20th cause of action, TW and Park’s demurrers to PDTW’s and Thomas’s claims are SUSTAINED WITHOUT LEAVE TO AMEND. As to the 20th cause of action, TW’s demurrer is SUSTAINED WITH LEAVE TO AMEND on or before August 10, 2020. Any amended complaint must be filed with both (1) a redline against the original complaint, and (2) a declaration from counsel identifying all new allegations, and only the new allegations, with no inclusion of extraneous material.

Requests for Judicial Notice

  1. Defendants’ Requests

TW and Park have filed identical requests for judicial notice. (ROAs 119, 124.) Because they are identical, the Court considers these documents to be a single filing and refers to them as the “RJN.” Plaintiffs have filed objections to the RJN. The Court rules on Plaintiffs’ objections as follows.

Objection to Exhibit F: SUSTAINED on the grounds that this is not a proper subject of judicial notice. This document is a settlement agreement. It is neither a court record nor a fact not subject to reasonable dispute, as TW and Park claim.

Objections to Exhibits H, I, M, and Q: SUSTAINED on the grounds that these are not a proper subject of judicial notice. These documents are tax returns in various stages of preparation, none of which is signed by the filing party. (Exhibit H is explicitly a draft return.) These documents cannot be considered government records.

Objections to all other exhibits: OVERRULED. The Court GRANTS judicial notice of the remaining documents.

  1. Plaintiffs’ Request

Plaintiffs have filed a request for judicial notice. (ROA 152.) This request is unopposed. Because it appears to the Court that all documents at issue are records of previous related court proceedings, this request for judicial notice is GRANTED.

Grounds for Ruling

CCP § 425.10 requires a complaint to contain a statement of facts constituting the cause of action in ordinary and concise language. The facts to be pleaded are those upon which liability depends, so each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged.  Plaintiffs have grossly violated these pleading standards. The operative complaint is a 1,289-page document comprising 355 pages of allegations and 934 pages of exhibits. The 25 causes of action do not begin until page 115 of the complaint, and the charging allegations contain pages and pages of tables comparing years of tax returns, multi-page quotations from documents already appended to the complaint, and charging allegations against persons and entities who do not appear to be parties to this action. As noted above, if Plaintiffs’ goal was to confuse/overwhelm the reader, then they have succeeded.

  1. Factual Background

From review of the complaint and the judicially noticed documents referenced above, the Court sets forth the following factual background. If a fact is taken from a judicially noticed document, the Court cites to the RJN; otherwise, the following facts are taken from the complaint, whose allegations are assumed to be true to the extent they do not conflict with judicially noticed documents.

Thomas is a fashion designer who created a line known as Thomas Wylde. She owns 99.5% of PDTW and 100% of TWH. Thomas assigned her intellectual property to TWH, which in turn licensed it to PDTW which distributed the Thomas Wylde line. In 2014, Thomas transferred the business to a new company, Defendant Thomas Wylde, LLC (“TW”). Through a series of agreements, Thomas acquired a minority interest in TW, while non-party entities controlled by non-party Stephen Choi came to hold the majority interest. Thomas became a salaried employee of TW. Thomas claims she was persuaded to agree to this arrangement by her management team at PDTW, consisting of Defendants Jene Park, John Hanna and David Schnider. Park also held a minority interest in TW.

As relevant to this dispute, Plaintiffs allege that Park and the rest of the PDTW/TW management team, working in concert with the other Defendants and Choi, intentionally defrauded them in order to take over PDTW for their own purposes. In essence, Plaintiffs allege that Choi’s true purpose in these transactions wasn’t to invest in PDTW, but to strip PDTW (and Plaintiffs generally) of its assets while using PDTW as a vehicle to park fictional losses as part of a tax evasion scheme.

As the foregoing suggests, Thomas’ relationship with TW soured and she was terminated by TW in April 2015. In October 2015, she and PDTW filed suit against TW, Hanna, Park, and several related entities, in a case titled Thomas v. Thomas Wylde, LLC, LASC No. BC596495 (the “Original Action”). In the Original Action, Thomas brought both wrongful termination claims and claims based on her status as a shareholder in TW (both derivative and in her own right). A copy of the complaint in the Original Action is attached to the present complaint as Exhibit 2. The Original Action was dismissed with prejudice at Thomas’s request in April 2018. (RJN, Ex. E.)

In October 2017, Thomas and TWH sued Park (but not TW) and other defendants in a case titled Thomas v. Kring & Chung, LASC No. 18STCV05667 (the “Second Malpractice Action,” so called because the principal claims are for legal malpractice and because Thomas filed an earlier malpractice action not relevant to this demurrer). As relevant here, Park was alleged to have engaged in numerous acts that were part of the aforementioned tax evasion and money laundering scheme. Park demurred to Thomas and TWH’s claims, and the court sustained her demurrer without leave to amend. (RJN, Ex. U.) The court entered final judgment in favor of Park on July 9, 2019. (ROA 134, Ex. O, at line 34 [docket noting filing of notice of entry of judgment]. The Court has already taken judicial notice of this document in connection with the K&C Defendants’ demurrer.)

Plaintiffs filed the present action in December 2019.

  1. Discussion
  2. Initial Matters

In its opening papers, TW requests sanctions against Plaintiffs for filing this lawsuit. (TW Memo. at p. 10.) Because TW did not follow the procedural requirements of CCP § 128.7, the request is denied.

In their opposition papers, Plaintiffs argue TW’s demurrer should be overruled on “ethical grounds,” to wit, that counsel for TW and Park is disqualified from representing both parties at the same time. (TW Opp. at p. 7.) Plaintiffs cite no authority that such a conflict is grounds to overrule a demurrer. Even if such authority exists, the Court notes that Plaintiffs filed a motion to disqualify counsel from representing TW (ROA 50), but they withdrew the motion before an opposition was filed. (ROA 77.) Whatever merit this argument might have, Plaintiffs waived it.

  1. TWH Lacks Capacity to Sue

Park argues that the issue of TWH’s capacity to sue has been fully litigated, that TWH has been found to lack such capacity, and that it is precluded from arguing otherwise here. She is correct.

Park asks the Court to apply collateral estoppel, or issue preclusion, to the question of TWH’s capacity to sue. The doctrine applies when: “(1) A claim or issue raised in the present action is identical to a claim or issue litigated in a prior proceeding; (2) the prior proceeding resulted in a final judgment on the merits; and (3) the party against whom the doctrine is being asserted was a party or in privity with a party to the prior proceeding.” (Brinton v. Bankers Pension Services, Inc. (1999) 76 Cal.App.4th 550, 556.) Unlike res judicata, the party asserting collateral estoppel need not be in privity with a party to the original proceeding. (See DKN Holdings LLC v. Faerber (2015) 61 Cal.4th 813, 824.)

 

All three elements are met here. In the Second Malpractice Action, the K&C Defendants argued TWH, as a canceled LLC, lacked capacity to sue. The court agreed with them, and it entered judgment against TWH accordingly. (RJN, Ex. C [demurrer ruling]; ROA 103, Ex. J [judgment]. The Court has already taken judicial notice of the latter document in connection with the K&C Defendants’ demurrer.) TWH was party to the Second Malpractice Action and is party to this action. TWH is collaterally estopped from arguing that it has capacity to sue.

  1. All Causes of Action Except the 20th Are Time-Barred

As explained below, nearly all of Plaintiffs’ causes of action are time-barred. The sole exception is the 20th cause of action relating to failure to provide copies of insurance policies, which the Court addresses later in this ruling.

  1. PDTW Is Not Entitled to Tolling

Initially, Plaintiffs argue that whatever the statute of limitations might be, it was tolled as to PDTW from the time PDTW filed for bankruptcy until the time Thomas was assigned PDTW’s litigation rights. As explained in more detail in concurrently filed rulings, PDTW declared bankruptcy in 2016 and the bankruptcy trustee initiated an adversary proceeding against Thomas. As part of the settlement of the adversary proceeding, Thomas was assigned PDTW’s litigation rights, which presumably include the right to bring the present lawsuit in PDTW’s name. The settlement was approved by the bankruptcy court in 2019. According to Plaintiffs, the applicable statute of limitations was tolled for about three years while the Bankruptcy Code’s automatic stay was in place.

Plaintiffs misunderstand how CCP § 356 interacts with the 11 U.S.C. § 362, the Bankruptcy Code’s automatic stay provision. Section 356 tolls the statute of limitations “[w]hen the commencement of an action is stayed by” a “statutory prohibition,” such as section 362’s automatic stay. But “[t]he 11 U.S.C. § 362 automatic stay only stays lawsuits against the debtor and the debtor’s bankruptcy estate. The Section 362 stay does not apply where, as here, the debtor is the plaintiff in a lawsuit.” (In re Mitchell (Bankr.C.D.Cal. 1997) 206 B.R. 204, 212.) Because the automatic stay did not apply to suits PDTW might bring as a plaintiff, the statute of limitations was not tolled by PDTW’s bankruptcy.

  1. Collateral Estoppel Applies to the 1st, 17th-19th, 22nd, and 24th-25th Causes of Action

In the Second Malpractice Action, Park demurred to Thomas’s claims on statute of limitations grounds, and Thomas argued the discovery rule tolled accrual of her claims. The court sustained the demurrer, holding that (1) the statute of limitations began to run “at the latest” when PDTW filed for bankruptcy in “June/July 2016,” and (2) Thomas was personally on inquiry notice of the alleged wrongdoing, so she could not rely on the discovery rule to toll accrual. (RJN, Ex. U, at pp. 2-3.) Again, the case proceeded to final judgment in favor of Park. (ROA 103, Ex. O, at p. 3, line 34 [docket reflecting filing of notice of entry of judgment dismissing Park].)

 

  1. Thomas’s Claims

The court in the Second Malpractice Action determined that Thomas’s claims accrued in June or July of 2016, and this ruling has a collateral estoppel effect as to Thomas. It appears to the Court that the 1st, 17th-19th, 22nd, and 24th-25th causes of action are all founded on allegations of fraud, so a three-year limitations period applies. (See CCP § 338(d).) Thomas’s claims had to be filed by June or July of 2019, but the present action was not filed until December 2019. Her claims are untimely, and Park and TW’s demurrer to these claims is sustained without leave to amend.

  1. PDTW’s Claims

PDTW, a limited liability company, is legally distinct from Thomas, its 99.5% owner. But in certain circumstances, issues decided against Thomas may be binding as to PDTW. The Restatement Second of Judgments, which has been endorsed by the California Supreme Court, is instructive. (See George Arakelian Farms, Inc. v. Agricultural Labor Relations Bd. (1989) 49 Cal.3d 1279, 1290 & fn. 7; see also Newport Beach Country Club, Inc. v. Founding Members of Newport Beach Country Club (2006) 140 Cal.App.4th 1120, 1131 [noting “[t]he Supreme Court’s acceptance of the Restatement Second of Judgments”].)

As the Restatement explains, in the analogous context of closely held corporations, “interests of the corporation’s management and stockholders and the corporation itself generally fully coincide. . . . When the controlling owner is the party to the [first] litigation, his opportunity and incentive to litigate issues commonly affecting him and the corporation is ordinarily sufficient to treat his participation as being on behalf of the corporation as well.” (Rest.2d Judgments, § 59, com. e.) The Court adopts this reasoning for the context of LLCs such as PDTW.

Plaintiffs argue, however, that this is not the ordinary case: when the Second Malpractice Case was filed, PDTW (through the bankruptcy trustee) was involved in an adversary proceeding against Thomas, so their interests were not aligned. (See Park Opp., at p.15.) The Restatement recognizes that the owner of a closely held corporation may be adverse to the corporation such that no privity exists: “[I]t can happen that a substantial proprietor in a corporation finds himself in conflict with the corporation’s management or with other stockholders, and in an antagonistic position regarding issues litigated by the latter. The rule of issue preclusion should not be applied in such circumstances . . . .” (Rest.2d Judgments, § 59, com. e.)

 

Plaintiffs are correct that Thomas was adverse to PDTW while the adversary proceeding was pending in bankruptcy. But as the Restatement explains, the application of collateral estoppel depends on the particular nature of the parties’ adversity. What matters is “issues litigated by” Thomas and PDTW in the adversary proceeding, not the mere fact that an adversary proceeding took place. The adversary proceeding concerned ownership of intellectual property, ownership of various chattels, and prepetition loans allegedly made by PDTW to Thomas. (Compl., Ex. 25.) Whatever issues were in dispute, the statute of limitations for claims arising from an alleged criminal money laundering and tax evasion scheme was not among them, so the adversary proceeding does not bar the application of collateral estoppel to PDTW.

 

Furthermore, the notion that PDTW and Thomas would ever have been adverse on the statute of limitations issue makes little sense. While PDTW and Thomas might have disputed the ownership of intellectual property or the repayment of prepetition loans, they would surely have been in alignment regarding the existence of a potential $250 million claim against TW and Park. Such a claim, if proven, would easily have paid off the estate’s debts with hundreds of millions of dollars left over in PDTW’s accounts when the company exited bankruptcy and Thomas resumed control. Accordingly, because the judgment against Thomas in the Second Malpractice Action also has a preclusive effect as to PDTW on the statute of limitations issue, Park and TW’s demurrer to the foregoing claims is sustained without leave to amend.

  1. The 23rd Cause of Action Is Independently Time-Barred

TW and Park recognize that the UCL has a four-year statute of limitations. (See Bus. & Prof. Code § 17208). They urge the Court to ignore the statute and find that the statute of limitations on a UCL claim is governed by the gravamen of the claim (here, the three-year limitation for fraud-based claims), not by the UCL itself. Their argument is unsupported by governing law. “The UCL has a four-year statute of limitations, which applies even if the borrowed statute has a shorter limitations statute. . . . This language ‘admits no exceptions.’ [Citation.]” (Blanks v. Seyfarth Shaw LLP (2009) 171 Cal.App.4th 336, 364.)

The UCL claim is based on two sets of underlying allegations whose accrual was not directly addressed by the court’s ruling in the Second Malpractice Action: TW and Park’s misappropriation of Thomas and PDTW’s intellectual property, and TW and Park’s conversion of money and personal property (among other things, computers and furnishings). (See Compl., ¶¶ 428-446.) As explained below, although a longer statute of limitations applies, the claims are untimely.

  1. Intellectual Property Allegations

As to the intellectual property, Plaintiffs allege: “Since January 1, 2015 [TW] has been using the trademark as if it owns it.” (Id., ¶ 428.) Insofar as it is based on the intellectual property allegations, the UCL claim accrued on that date. Plaintiffs cannot use the discovery rule to toll accrual, for Plaintiffs allege that Thomas signed the documents purporting to give TW the right to use the intellectual property by December 31, 2014. (Id., ¶ 429.) Thomas now alleges those documents were some combination of void ab initio, fraudulent, and non-binding due to the failure of conditions precedent. Yet the facts remain that (1) as of December 31, 2014 she knew she had apparently transferred intellectual property to TW, and (2) as of January 1, 2015, TW was using that intellectual property in its own name.

This was enough to put Thomas, and thus PDTW, on inquiry notice. (See Corp. Code § 17703.01(a) [“every member is an agent of the limited liability company for the purpose of its business or affairs”]; Civ. Code, § 2332 [“As against a principal, both principal and agent are deemed to have notice of whatever either has notice of, and ought, in good faith and the exercise of ordinary care and diligence, to communicate to the other.”].)

 

At that point, Thomas and PDTW were charged with all knowledge that a reasonable investigation into TW and Park would have uncovered. (See Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 808-09.) The only way for Plaintiffs to toll accrual would be to plead that they conducted a diligent investigation yet were unable to obtain all reasonably available information. (See id., at 809.) But Plaintiffs allege no investigation took place: instead, their former counsel, the K&C Defendants, “were incompetent” and “failed to take legal action to protect the brand name from misuse and abuse.” (Compl., ¶ 428.) This allegation, critical to Plaintiffs’ malpractice claim against the K&C Defendants, defeats any attempt to take advantage of the discovery rule here. Because the complaint in this action was not filed by January 1, 2019, the UCL claim is untimely insofar as it is based on intellectual property allegations.

  1. Conversion Allegations

The same is true of the conversion allegations. The complaint in the Original Action included a cause of action for conversion brought by PDTW (in its own right) and Thomas (derivatively of TW) against Park, Hanna and several related entities. (See Compl., Ex. 2, at ¶¶ 100-107.) PDTW and Thomas alleged the theft of PDTW’s money and personal property, just as they do here. (Compare Compl., ¶¶ 443-444, with Compl., Ex. 2, ¶¶ 102, 104-105.) The complaint in this action adds details—among other things, providing a comprehensive list of chattels and monetary transactions at issue—but the underlying allegations of conversion remain the same. The claim therefore accrued by no later than October 1, 2015, the date the Original Action was filed. Because the complaint in this action was not filed by October 1, 2019, the UCL claim is untimely insofar as it is based on conversion allegations.

In short, the UCL claim is time-barred with regard to each set of allegations on which it is based. TW and Park’s demurrer to the 23rd cause of action is sustained without leave to amend.

  1. The 20th Cause of Action is Uncertain and Lacks Particularity

The sole remaining cause of action is the 20th for fraud by concealment. There, Plaintiffs allege that during the Original Action, they propounded discovery on TW regarding TW’s applicable insurance policies. TW responded that no such insurance existed. Plaintiffs allege this representation was false—that TW in fact had applicable insurance—and that TW filed and collected on a “false” claim for insurance benefits that was unjustified. TW is also accused of failing to inform the insurance carrier about Thomas’s wrongful termination claim. The insurance claim is deemed “false” inasmuch as the underlying loss—mismanagement of TW—was intentional not negligent. Almost as an afterthought, Thomas adds that had she known about the insurance policy, she would have made a claim against it, and that she dismissed the Original Action in reliance on the claimed lack of insurance from which she could recover. (See Compl. ¶¶ 411-14.) Based on this last allegation, the statute of limitations has not yet run on this claim, at least at the demurrer stage, because it is possible the claim did not accrue until Thomas dismissed the Original Action in 2018.

Like much of the rest of the lawsuit, this claim is muddled. Amid allegations that TW’s “insurance protection was unreasonably too much,” that Park, Hanna and others “were incompetent” and “drove TW into the ground,” and that defendants filed a false claim to obtain insurance money, is the assertion that Thomas settled her wrongful termination lawsuit based on a false discovery response.

The Court is not in a position at this point to say whether these jumbled allegations are sufficient to support a fraud by concealment cause of action. It also cannot say as a matter of law that they do not. Because of this uncertainty and the lack of particularity, the demurrer is sustained and Plaintiffs will be given an opportunity to amend this cause of action by August 10, 2020. To the extent that Plaintiffs elect to amend, they are advised to state their claim in a straightforward manner, eliminating allegations that are both confusing and irrelevant to the cause of action.

DEMURRER OF KF PROFESSIONALS

Defendants KF Professional Group, Norman Ko and Joseph Foster (collectively, the “KFP Defendants”) demur to all causes of action against them in the complaint of Plaintiffs Paula Thomas; PDTW, LLC; and Thomas Wylde Holdings, LLC (“TWH”). The KFP Defendants separately move to strike portions of the complaint.

While Plaintiffs’ opposition to the demurrer was untimely, in light of the confusion surrounding court closures and the COVID-19 pandemic, the Court will exercise its discretion to consider the opposition. KFP, having filed a reply addressing the merits of the opposition, will suffer no prejudice if the Court considers the opposition.

The Court rules as follows:

  1. The KFP Defendants’ demurrer is SUSTAINED WITHOUT LEAVE TO AMEND in its entirety.
  2. The KFP Defendants’ motion to strike is DENIED AS MOOT.

Request for Judicial Notice

The KFP Defendants seek judicial notice of (1) documents filed in Thomas v. Kring & Chung, LASC No. 18STCV05667 and (2) documents filed in Thomas v. Schnider, LASC No. BC679247. (ROA 182, hereafter “RJN.” This is an amended version of the original request for judicial notice, filed at ROA 111.) Plaintiffs do not oppose this request, which is GRANTED.

At the same time Plaintiffs filed their opposition to the demurrer, they filed a request for judicial notice “in support of Plaintiffs’ opposition to the demurrer filed on behalf of Kring & Chung, Kenneth Chung, Laura Hess, Laura Booth, and Laura Hess [sic].” (ROA 204.) The supporting declaration included with the request makes clear that this is not a typographical error; rather, the RJN really is directed at the K&C Defendants. Because these materials are by their own terms irrelevant to the KFP Defendants’ demurrer, the Court DENIES notice.

Grounds for Ruling: Demurrer

Before addressing the merits of the demurrer, the Court notes that Plaintiffs’ opposition discusses only Thomas and PDTW. It does not mention TWH at all, except in the caption. It therefore appears to the Court that TWH does not oppose the demurrer. Nevertheless, in abundance of caution, the Court will consider the arguments advanced on Thomas and PDTW’s behalf to be advanced on behalf of TWH as well.

CCP § 425.10 requires a complaint to contain a statement of facts constituting the cause of action in ordinary and concise language. The facts to be pleaded are those upon which liability depends, so each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged.  Plaintiffs have grossly violated these pleading standards. The operative complaint is a 1,289-page document comprising 355 pages of allegations and 934 pages of exhibits. The 25 causes of action do not begin until page 115 of the complaint, and the charging allegations contain pages and pages of tables comparing years of tax returns, multi-page quotations from documents already appended to the complaint, and charging allegations against persons and entities who do not appear to be parties to this action. As noted above, if Plaintiffs’ goal was to confuse/overwhelm the reader, then they have succeeded.

Factual Background

From review of the complaint and the judicially noticed documents referenced above, the Court sets forth the following factual background. If a fact is taken from a judicially noticed document, the Court cites to the RJN; otherwise, the following facts are taken from the complaint, whose allegations are assumed to be true to the extent they do not conflict with judicially noticed documents.

Thomas is a fashion designer. She created a line known as Thomas Wylde. She owns 99.5% of PDTW and 100% of TWH. Thomas assigned her intellectual property to TWH, which in turn licensed it to PDTW. PDTW distributed the Thomas Wylde line. In 2014, Thomas transferred the business to a new company, Defendant Thomas Wylde, LLC (“TW”). Through a series of agreements, Thomas acquired a minority interest in TW, while non-party entities controlled by non-party Stephen Choi came to hold the majority interest. Thomas became a salaried employee of TW. Thomas claims she was persuaded to agree to this arrangement by her management team at PDTW, consisting of Defendants Jene Park, John Hanna, and David Schnider. In essence, Plaintiffs allege that Choi’s true purpose in these transactions wasn’t to invest in PDTW, but to strip PDTW (and Plaintiffs) of its assets while using PDTW as a vehicle to park fictional losses as part of a tax evasion and money laundering scheme.

As relevant to this dispute, Plaintiffs allege that the KFP Defendants knowingly included false information in PDTW’s and TW’s tax returns regarding nonexistent “advances” from TW to PDTW. These falsified tax returns, supported by fake invoices and accounting reports that the KFP Defendants helped to prepare, were crucial to the tax evasion and money laundering scheme. Furthermore, the false debts represented by the advances forced PDTW into bankruptcy in June 2016.

In November 2018, Thomas and TWH sued the KFP Defendants, as well as other defendants, in a case titled Thomas v. Kring & Chung, LASC No. 18STCV05667 (the “Second Malpractice Action,” so called because Thomas filed an earlier malpractice action not relevant to this demurrer). The complaint alleged negligence, fraud, malpractice, and related claims against the many defendants. As relevant here, Thomas and TWH brought a negligence claim against the KFP Defendants arising from the aforementioned allegations about falsified tax returns. (RJN, Ex. 1, at ¶¶ 291-296.) The KFP Defendants demurred to Thomas and TWH’s claims, and the court sustained the demurrer without leave to amend. (RJN, Ex. 2.) The court dismissed the claims against the KFP Defendants with prejudice on April 10, 2019. (RJN, Ex. 5.)

Plaintiffs filed the present action in December 2019.

Discussion

  1. Thomas and TWH’s Claims Against the KFP Defendants Are Barred by Res Judicata

As set forth above, Thomas and TWH brought similar claims against the KFP Defendants in the Second Malpractice Action. The court in that action sustained the KFP Defendants’ demurrer without leave to amend and entered judgment in their favor. The KFP Defendants argue that all claims are barred by res judicata. As explained below, this is correct only as to Thomas and TWH’s claims. Res judicata is inapplicable to PDTW.

“Res judicata, or claim preclusion, prevents relitigation of the same cause of action in a second suit between the same parties or parties in privity with them.” (Mycogen Corp. v. Monsanto Co. (2002) 28 Cal.4th 888, 896.) “Under this doctrine, all claims based on the same cause of action must be decided in a single suit; if not brought initially, they may not be raised at a later date.” (Id., at p. 897.) It applies if a second suit involves: (1) the same cause of action (2) between the same parties (3) after a final judgment on the merits in the first suit. (Id., at p. 896.)

The third element of res judicata is not at issue here. Final judgment on the merits was entered against Thomas and TWH in favor of the KFP Defendants in the Second Malpractice Action. The parties dispute the first and second elements: privity of parties and the scope of the cause of action at issue.

  1. No Res Judicata Effect as to PDTW

PDTW was not party to the Second Malpractice Action, so res judicata applies to PDTW only if it is in privity with Thomas. Here, the Restatement Second of Judgments, which has been endorsed by the California Supreme Court, is instructive. (See George Arakelian Farms, Inc. v. Agricultural Labor Relations Bd. (1989) 49 Cal.3d 1279, 1290 & fn. 7; see also Newport Beach Country Club, Inc. v. Founding Members of Newport Beach Country Club (2006) 140 Cal.App.4th 1120, 1131 [noting “[t]he Supreme Court’s acceptance of the Restatement Second of Judgments”].)

The Defendants argue that because Thomas, the 99.5% owner of PDTW, litigated and finally lost the Second Malpractice Action, the judgment in the Second Malpractice Action has a claim preclusive, or res judicata, effect on PDTW. The general rule is that a judgment against a corporation or a shareholder in the first action has no binding effect on the other in a second action unless one of several exceptions applies. (Rest.2d Judgments, § 59.) One of those exceptions arises in the context of closely held corporations, a situation analogous to the closely held limited liability companies like PDTW: if an issue is actually litigated in the owner’s original action, the determination in the original action is usually binding on the corporation in the second action. (Id., § 59(3); see also id., §59, com. e.) But the Reporter’s Note clarifies that this exception applies only to issue preclusion, not to claim preclusion. (Id., § 59, Reporter’s Note [“It may be emphasized that the problem of claim preclusion is quite different.”].)

Because this exception to the general rule applies only to issue preclusion and not to claim preclusion, the judgment against Thomas in the Second Malpractice Action lacks a res judicata effect on PDTW. (The collateral estoppel/issue preclusion effect on PDTW is discussed below.)

  1. Thomas and TWH’s Claims Arise From The Same Primary Rights

“California’s res judicata doctrine is based on the primary right theory.” (Mycogen Corp., supra, 28 Cal.4th at p. 904.) “[T]he violation of a single primary right gives rise to but a single cause of action.” (Ibid. [citation omitted].) “The cause of action, as it appears in the complaint when properly pleaded, will therefore always be the facts from which the plaintiff’s primary right and the defendant’s corresponding primary duty have arisen, together with the facts which constitute the defendant’s delict or act of wrong.” (4 Witkin, Cal. Procedure (5th ed. 2020) Pleading § 34 [quoting Pomeroy, Code Remedies (5th ed.), p. 528].)

From the Court’s review of the relevant portions of the complaint in the Second Malpractice Action (RJN, Ex. 1), Thomas and TWH made two sets of allegations against the KFP Defendants. First, they alleged that the KFP Defendants breached their duty of care to Thomas. Foster was Thomas’s CPA, and in that capacity owed her a duty of care. However, his partner Ko agreed to work with Hanna, Schnider, and Park to convince Thomas that a new company—TW—was needed to fund the operations of the Thomas Wylde line. (In the Second Malpractice Action, as here, Thomas and TWH alleged at length that the true purpose of TW was to serve as a vehicle for tax evasion and money laundering.) Thomas alleged that by simultaneously serving as her CPA and advising Hanna, Schnider, and Park, the KFP Defendants had an obvious conflict of interest that injured her. (RJN, Ex. 1, ¶ 291.)

Second, Thomas and TWH alleged that the KFP Defendants were critical, willing participants in a scheme to launder money and evade taxes through TW (id., ¶ 292 [“Foster had actual knowledge of the efforts to embezzle” by creating a false advance from TW to PDTW]; ¶ 293 [“The [KFP] Defendants conspired with Jene Park to commit tax evasion, so Jene Park could then embezzle more money out of TW and reduce the revenues.”]), and that part of this scheme was falsifying PDTW’s tax returns to reflect the nonexistent advance from TW. (Id., ¶ 294.) This false debt, in turn, was used to force PDTW into bankruptcy as part of the larger overall scheme to strip PDTW of its intellectual property and convert it into part of a money laundering enterprise, described elsewhere in the complaint.

While the first set of allegations, relating to a conflict of interest, appear to be absent from the present complaint, the factual allegations against the KFP Defendants in this complaint are nearly identical to the second set of allegations. Any differences are insignificant. The two cases thus arise from the same primary rights.

Thomas and TWH suggest the two cases concern different injuries, and therefore arise from different primary rights. (Opp. at p. 13 [“KF Professionals does not even discuss the injuries to be compensated in the two actions.”].) But they provide no reasoned argument or explanation for how the injuries differ, only a suggestion. In any event, it appears to the Court from a review of the two complaints that the primary rights at issue are (1) PDTW’s and Thomas’s right to a truthfully prepared tax return (in Thomas’s case, in her capacity as an owner of both PDTW and TW), which was injured by the preparation of false tax returns and (2) more generally, Thomas’s right to control her businesses and operate them in the manner she desired, which was injured by the alleged tax evasion and money laundering scheme (which included forcing PDTW into bankruptcy through false debt). The underlying facts, and thus the injuries and primary rights at issue, are the same in each action. All Thomas has changed is the theory of recovery—fraud and conspiracy as opposed to negligence. A change in legal theories is not the same as a change in primary rights. (Mycogen Corp., supra, 28 Cal.4th at p. 904 [nature of injury to primary right is “distinguished from the legal theory on which liability for that injury is premised”] [citation omitted, emphasis original].)

For these reasons, res judicata bars Thomas and TWH’s claims against the KFP Defendants. Their demurrer to these claims is sustained without leave to amend.

  1. PDTW’s Claims Are Time-Barred

PDTW’s claims against the KFP Defendants are not barred by res judicata. But under the doctrine of collateral estoppel, or issue preclusion, all these claims are time-barred. The doctrine applies when: “(1) A claim or issue raised in the present action is identical to a claim or issue litigated in a prior proceeding; (2) the prior proceeding resulted in a final judgment on the merits; and (3) the party against whom the doctrine is being asserted was a party or in privity with a party to the prior proceeding.” (Brinton v. Bankers Pension Services, Inc. (1999) 76 Cal.App.4th 550, 556.) Unlike res judicata, the party asserting collateral estoppel need not be in privity with a party to the original proceeding. (See DKN Holdings LLC v. Faerber (2015) 61 Cal.4th 813, 824.) The KFP Defendants may therefore take advantage of collateral estoppel.

In the Second Malpractice Action, the KFP Defendants demurred to Thomas and TWH’s claims on statute of limitations grounds, and they argued the discovery rule tolled accrual of their claims. The court sustained the demurrer, holding that (1) the statute of limitations began to run no later than April 1, 2015, and (2) Thomas and TWH had failed to plead facts sufficient to delay accrual under the discovery rule. (RJN, Ex. 2, at Order, pp. 3-4.)

  1. PDTW Is Bound by the Judgment Against Thomas

PDTW, a limited liability company, is legally distinct from Thomas, its 99.5% owner. But in certain circumstances, issues decided against Thomas may be binding as to PDTW. Again, the Restatement is instructive. In the analogous context of closely held corporations, “interests of the corporation’s management and stockholders and the corporation itself generally fully coincide. . . . When the controlling owner is the party to the [first] litigation, his opportunity and incentive to litigate issues commonly affecting him and the corporation is ordinarily sufficient to treat his participation as being on behalf of the corporation as well.” (Rest.2d Judgments, § 59, com. e.) The Court adopts this reasoning in the context of LLCs such as PDTW.

Plaintiffs argue, however, that this is not the ordinary case: when the Second Malpractice Case was filed, PDTW (through the bankruptcy trustee) was involved in an adversary proceeding against Thomas, so their interests were not aligned. The Restatement recognizes that the owner of a closely held corporation may be adverse to the corporation such that no privity exists: “[I]t can happen that a substantial proprietor in a corporation finds himself in conflict with the corporation’s management or with other stockholders, and in an antagonistic position regarding issues litigated by the latter. The rule of issue preclusion should not be applied in such circumstances . . . .” (Ibid.)

Plaintiffs are correct that Thomas was adverse to PDTW while the adversary complaint was pending in bankruptcy. But as the Restatement explains, the application of collateral estoppel depends on the particular nature of the parties’ adversity. What matters is “issues litigated by” Thomas and PDTW in the adversary proceeding, not the mere fact that an adversary proceeding took place. The adversary proceeding concerned ownership of intellectual property, ownership of various chattels, and prepetition loans allegedly made by PDTW to Thomas. (Compl., Ex. 2.) Whatever issues were in dispute, the statute of limitations for claims involving the KFP Defendants was not among them, so the adversary proceeding does not bar the application of collateral estoppel to PDTW.

Furthermore, the notion that PDTW and Thomas would ever have been adverse on the statute of limitations issue makes little sense. While PDTW and Thomas might have disputed the ownership of intellectual property or the repayment of prepetition loans, they would surely have been in alignment regarding the existence of a potential $250 million claim against the KFP Defendants. Such a claim, if proven, would easily have paid off the estate’s debts with hundreds of millions of dollars left over in PDTW’s accounts when the company exited bankruptcy and Thomas resumed control.

The judgment against Thomas in the Second Malpractice Action has a preclusive effect as to PDTW on the statute of limitations issue. PDTW’s claims accrued on April 1, 2015, so they had to be filed by April 1, 2018. Again, this case was not filed until December 2, 2019.

Nor may the discovery rule be applied to toll the statute of limitations as to PDTW. This issue was also litigated and lost by Thomas in the Second Malpractice Action, and the court’s judgment is preclusive as to PDTW. Plaintiffs’ argument that there is no law supporting a “waiver” of the discovery rule in a successive action (Opp. at p. 16) misses the mark. The discovery rule is unavailable under principles of collateral estoppel because the issue was litigated and lost, not because it was waived.

  1. New Discovery Allegations Do Not Make the Claims Timely

In opposition, Plaintiffs argue that PDTW makes new allegations about its discovery of the KFP Defendants’ alleged fraud that were not passed upon in the Second Malpractice Action, and that these allegations show the discovery rule applies. Specifically, they argue the alleged fraud was not discovered until December 2017 when the KFP Defendants produced documents in response to a subpoena. (Compl., ¶ 77.) Assuming, arguendo, that the discovery rule remains a live issue despite the court’s ruling in the Second Malpractice Action, Plaintiffs are incorrect.

As the allegations of the Second Malpractice Action make clear, Thomas, the 99.5% owner of PDTW, was on inquiry notice of the alleged fraud at the time it was happening. In the Second Malpractice Action, Thomas and TWH alleged not only that Foster (Thomas’s personal accountant) “had actual knowledge of the efforts to embezzle” by using false advances from TW to PDTW, but also that “Plaintiff [i.e., Thomas] specifically instructed Joseph Foster not to put any $4 [sic] advance from TW on PDTW’s tax returns.” (RJN, Ex. 1, at ¶ 292.) Thomas was on inquiry notice of the alleged fraud, and by operation of law, that knowledge was imputed to PDTW. (See Corp. Code, § 17703.01(a) [“every member is an agent of the limited liability company for the purpose of its business or affairs”]; Civ. Code, § 2332 [“As against a principal, both principal and agent are deemed to have notice of whatever either has notice of, and ought, in good faith and the exercise of ordinary care and diligence, to communicate to the other.”].) The discovery rule does not toll the statute of limitations here.

  1. PDTW’s Claims Are Not Tolled by Bankruptcy

As a final attempt to avoid collateral estoppel, Plaintiffs argue that PDTW’s claims were tolled during the bankruptcy by operation of CCP § 356. Plaintiffs are correct that this issue was not decided in the Second Malpractice Action, but incorrect that section 356 applies.

Section 356 tolls the statute of limitations “[w]hen the commencement of an action is stayed by” a “statutory prohibition.” Plaintiffs argue the automatic stay attendant to a bankruptcy filing triggered section 356, which tolled the statute of limitations until Thomas secured PDTW’s litigation rights in her settlement with the estate. But “[t]he 11 U.S.C. § 362 automatic stay only stays lawsuits against the debtor and the debtor’s bankruptcy estate. The Section 362 stay does not apply where, as here, the debtor is the plaintiff in a lawsuit.” (In re Mitchell (Bankr.C.D.Cal. 1997) 206 B.R. 204, 212.) Because the automatic stay did not apply to suits PDTW might bring as a plaintiff, the statute of limitations was not tolled by PDTW’s bankruptcy.

For the foregoing reasons, PDTW’s claims against the KFP Defendants are time-barred, and the KFP Defendants’ demurrer is sustained without leave to amend.

Grounds for Ruling: Motion to Strike

In light of the foregoing ruling sustaining the demurrer without leave to amend, the motion to strike is denied as moot.

DEMURRER OF GREENBERG DEFENDANTS

Defendants Greenberg Glusker and Andrew Apfelberg (collectively, the “Greenberg Defendants”) demur to all causes of action against them in the complaint of Plaintiffs Paula Thomas; PDTW, LLC; and Thomas Wylde Holdings, LLC (“TWH”). The Court rules as follows:

  1. The demurrer to the 1st, 4th, 12th, and 16th-17th causes of action is SUSTAINED WITHOUT LEAVE TO AMEND.
  2. The demurrer to the 5th-7th causes of action is SUSTAINED WITH LEAVE TO AMEND. Plaintiffs shall have until August 10, 2020 to file an amended complaint. The scope of permitted amendment under this order extends only to pleading a diligent investigation of Plaintiffs’ fraud claims against the Greenberg Defendants between the summer of 2015 and the summer or fall of 2017, as discussed below. No other amendments will be permitted at this time. Any amended complaint must be filed with both (1) a redline against the original complaint, and (2) a declaration from counsel identifying all new allegations, and only the new allegations, with no inclusion of extraneous material.

Requests for Judicial Notice

The Greenberg Defendants seek judicial notice of documents filed in Thomas v. Kring & Chung, LASC No. 18STCV05667 and (2) documents filed in Thomas v. Schnider, LASC No. BC679247. (ROA 192, hereafter “RJN.”) Plaintiffs do not oppose this request, which is GRANTED.

In opposition, Plaintiffs have filed a two-part request for judicial notice (ROA 229-230) that attaches a number of documents filed in PDTW, LLC v. Thomas Wylde, LLC, C.D.Cal. No. 2:17-cv-04158-JAK-PJW. In addition to requesting judicial notice, this filing includes a declaration from Plaintiffs’ counsel, Dimitrios Biller, setting forth what appears to be an “update” on the state of the parties’ various lawsuits, including actions Plaintiffs intend to take in these cases going forward. Defendants have filed objections to the request. (ROA 239.) They object to every paragraph the Biller Declaration. In addition, they object to judicial notice of each of the six attached documents.

The Court OVERRULES the Greenberg Defendants’ objections to notice of the federal court filings, as they are proper subjects of judicial notice. (See CCP, § 452(d).) The Court therefore GRANTS notice of these documents, but it takes notice only of their existence, not of the truth of any matters asserted therein. To be clear, this means the Court will not consider the substance of any of these documents, even though Plaintiffs discuss their substance at some length in the opposition.

The Court SUSTAINS each of the Greenberg Defendants’ objections to the Biller Declaration, which is an improper attempt to introduce extrinsic material on a demurrer.

Grounds for Ruling

CCP § 425.10 requires a complaint to contain a statement of facts constituting the cause of action in ordinary and concise language. The facts to be pleaded are those upon which liability depends, so each evidentiary fact that might eventually form part of the plaintiff’s proof need not be alleged.  Plaintiffs have grossly violated these pleading standards. The operative complaint is a 1,289-page document comprising 355 pages of allegations and 934 pages of exhibits. The 25 causes of action do not begin until page 115 of the complaint, and the charging allegations contain pages and pages of tables comparing years of tax returns, multi-page quotations from documents already appended to the complaint, and charging allegations against persons and entities who do not appear to be parties to this action. As noted above, if Plaintiffs’ goal was to confuse/overwhelm the reader, then they have succeeded.

  1. Factual Background

From review of the complaint and the judicially noticed documents referenced above, the Court sets forth the following factual background. If a fact is taken from a judicially noticed document, the Court cites to the RJN; otherwise, the following facts are taken from the complaint, whose allegations are assumed to be true to the extent they do not conflict with judicially noticed documents.

Thomas is a fashion designer. She created a line known as Thomas Wylde. She owns 99.5% of PDTW and 100% of TWH. Thomas assigned her intellectual property to TWH, which in turn licensed it to PDTW. PDTW distributed the Thomas Wylde line. In 2014, Thomas transferred the business to a new company, Defendant Thomas Wylde, LLC (“TW”). Through a series of agreements, Thomas acquired a minority interest in TW, while non-party entities controlled by non-party Stephen Choi came to hold the majority interest. Thomas became a salaried employee of TW. Thomas claims she was persuaded to agree to this arrangement by her management team at PDTW, consisting of Defendants Jene Park, John Hanna, and David Schnider. In essence, Plaintiffs allege that Choi’s true purpose in these transactions wasn’t to invest in PDTW, but to strip PDTW (and Plaintiffs) of its assets while using PDTW as a vehicle to park fictional losses as part of a tax evasion and money laundering scheme.

As relevant to this dispute, Plaintiffs allege that on the recommendation of Schnider, a longtime friend of Apfelberg, the Greenberg Defendants were retained in the early spring of 2014 to provide general corporate legal advice to both PDTW and TWH. Thomas alleges that the Greenberg Defendants’ simultaneous representation of PDTW and TWH was a conflict of interest that required a waiver, and that the Greenberg Defendants concealed the conflict and failed to secure a waiver. The Greenberg Defendants continued to provide representation in connection with the transactions that resulted in the creation of TW, Choi’s investment and other actions that led to the alleged use of PDTW as part of a tax evasion scheme. Plaintiffs allege both that the Greenberg Defendants’ representation failed to meet the applicable standard of care, and that some actions taken in the course of representation were knowingly fraudulent and made in service of the tax evasion and money laundering scheme.

Plaintiffs further allege that in December 2014, after the transactions that created TW were complete, Apfelberg abandoned his representation of Thomas. He passed her off to non-party Olivia Goodkin, another attorney at the Greenberg firm. Goodkin apparently provided employment-related advice to Thomas around the time of her April 2015 termination by TW. The complaint does not appear to allege any wrongdoing by Goodkin or the Greenberg firm arising specifically from Goodkin’s representation of Thomas; the malpractice, fraud, and related causes of action all arise from Apfelberg’s representation.

Finally, as relevant to the Greenberg Defendants, Plaintiffs allege the Greenberg Defendants failed to return client files on demand in violation of the parties’ fee agreement. The first request for the files was made in 2017. The Greenberg Defendants allegedly failed to return the files at this time; instead, the files were finally turned over in response to a subpoena in PDTW’s bankruptcy case. Plaintiffs allege that even this production was incomplete, as some of Apfelberg’s and Goodkin’s files had been destroyed.

In November 2018, Thomas and TWH sued the Greenberg Defendants and Goodkin, as well as other defendants, in a case titled Thomas v. Kring & Chung, LASC No. 18STCV05667 (the “Second Malpractice Action,” so called because Thomas filed an earlier malpractice action not relevant to this demurrer). The complaint alleged negligence, fraud, malpractice, and related claims against the many defendants. Relying on the parties’ fee agreements, the Greenberg Defendants moved to compel arbitration. The court granted this motion, finding the arbitration clauses fully enforceable as to all parties, and it rejected numerous arguments Plaintiffs raise in their moving papers here, including some that go directly to the merits of Plaintiffs’ underlying claims. (See RJN, Ex. 4.) Plaintiffs refused to initiate arbitration as ordered, and on March 10, 2020, the court dismissed the claims against the Greenberg Defendants without prejudice. (RJN, Ex. 6.)

Plaintiffs filed the present action in December 2019.

  1. Discussion
  2. Res Judicata and Collateral Estoppel Are Inapplicable

As set forth above, Thomas and TWH brought similar claims against the Greenberg Defendants in the Second Malpractice Action. The Greenberg Defendants moved to compel arbitration pursuant to two engagement agreements: first, with PDTW and TWH, and second, with Thomas herself. The court found both agreements were fully enforceable and ordered Thomas and TWH’s claims to arbitration. In reaching this conclusion, the court considered and rejected a number of arguments that bear not only on the enforceability of the arbitration agreement, but also go directly to the merits of Plaintiffs’ claims here (such as the extent of conflict disclosures and the validity of conflict waivers). (See RJN, Ex. 4.) Thomas and TWH failed to initiate arbitration as ordered, so on March 10, 2020, the court dismissed the claims against the Greenberg Defendants in the Second Malpractice Action without prejudice under CCP § 583.410. (RJN, Ex. 6.) That is, the case was dismissed for want of prosecution.

Neither res judicata nor collateral estoppel applies unless the court in the first action entered a final judgment on the merits. (Mycogen Corp. v. Monsanto Co. (2002) 28 Cal.4th 888, 896 [res judicata]; Brinton v. Bankers Pension Services, Inc. (1999) 76 Cal.App.4th 550, 556 [collateral estoppel].) “It is established California law that a dismissal for want of prosecution is not on the merits and therefore does not operates as res judicata to a subsequent proceeding.” (Mattern v. Carberry (1960) 186 Cal.App.2d 570, 572; see also Ashworth v. Memorial Hospital (1988) 206 Cal.App.3d 1046, 1053 [regarding former statute, “Section 583 dismissals are ‘without prejudice’ . . . and thus have no res judicata or collateral estoppel effect.”].) Because there was no final judgment as to the Greenberg Defendants in the Second Malpractice Action, nothing that happened in that action has a res judicata or collateral estoppel effect here.

  1. Plaintiffs’ Claims Are Time-Barred

The Greenberg Defendants argue all claims are barred by the statute of limitations, and the Court agrees.

  1. Non-Fraud Claims

CCP § 340.6(a) sets forth two rules for the commencement of suits against an attorney arising from the performance of professional services. First, for all claims other than “actual fraud,” the limitations period is one year after the plaintiff discovered, or reasonably should have discovered, the attorney’s wrongful act, or four years from the date of the wrongful act, whichever occurs first. The four-year limitation—but only the four-year limitation—is tolled while the attorney “willfully conceals the facts constituting the wrongful act or omission.” (CCP § 340.6(a)(3).) Plaintiffs’ non-fraud claims—the 1st, 4th, 12th, and 16th-17th—are governed by this portion of the statute.

In their opposition, Plaintiffs suggest the four-year limitation applies here, and that it was tolled while the Greenberg Defendants concealed their alleged wrongdoing. They are incorrect. In paragraph 65 of the Complaint, Plaintiffs allege that until the Greenberg Defendants produced certain documents pursuant to subpoena in the PDTW bankruptcy, they were not aware “that Greenberg Glusker and Andrew Alpheberg [sic] caused PDTW harm and how that harm was caused.” That is, Plaintiffs allege that when this production was complete, they knew of the alleged harm and how it was caused. As the Court discusses in more detail below, Plaintiffs’ claims accrued before this document production, and Plaintiffs themselves allege the latest possible time at which their claim accrued. Once they had knowledge of the harms at issue, they were subject to a one-year limitations period.

Plaintiffs allege a rolling production of documents that concluded, at the latest, on August 31, 2018. (See Compl., ¶ 339 [first production on July 19, 2018; second production on July 31, 2018; third production “a month later”].) Therefore, drawing every possible inference in Plaintiffs’ favor, they had until August 31, 2019 to bring their non-fraud claims. (This includes the contract claim arising from the Greenberg Defendants’ alleged failure to turn over client documents as required by the fee agreement. That claim most likely accrued in June 2017, when the Greenberg Defendants allegedly refused to comply with Plaintiffs’ request for their files (Compl., ¶ 338), but it certainly accrued by the time of the subpoenaed document production in bankruptcy. Plaintiffs were able to confirm through that production that the Greenberg Defendants still had the files in their possession.) As it is, Plaintiffs filed suit on December 2, 2019, three months too late. In short, Plaintiffs’ own allegations establish the non-fraud claims are untimely, and the demurrer to those claims is sustained without leave to amend.

  1. Fraud Claims

Second, in the case of “actual fraud,” the limitations period is the same as the general statute of limitations for fraud, i.e., three years from discovery. (See CCP § 338(d).) The Court assumes for purposes of this demurrer that the 5th-7th and 15th causes of action (each captioned as some type of fraud) are indeed claims for “actual fraud.” Therefore, a three-year limitations period applies.

The fraud claims present a more difficult question, but still one capable of resolution on demurrer. Again, the complaint alleges a scheme to wrest control of Thomas’s intellectual property from PDTW, assign it to TW, and encumber PDTW with debt so that Choi and others could launder money and evade taxes. The Greenberg Defendants’ supposed involvement in this scheme began in February 2014, when PDTW and TWH both retained Apfelberg for general corporate advice. (Compl., ¶ 222, Ex. 49.) Thomas signed the fee agreements on behalf of both PDTW and TWH, so she knew of the multiple representation at the time. (Compl., ¶ 227.) Plaintiffs allege that the Greenberg Defendants’ simultaneous representation of PDTW and TWH was a conflict of interest that was not properly waived. (The exact nature of this conflict does not appear to be explained in the Complaint, but the Court assumes there was in fact a conflict for purposes of demurrer.)

Regardless, the fact remains that Thomas (and PDTW and TWH) knew of the concurrent representation in February 2014. To the extent a waiver was required, the Complaint makes clear that Thomas (and thus PDTW and TWH, on whose behalf she signed) knew it was required at the time she signed the fee agreements. This is because Plaintiffs assert that the Greenberg Defendants should have followed the same waiver procedure as Schnider did in 2013, when he simultaneously represented all parties to the transactions that assigned Thomas’s intellectual property to TWH and licensed it to PDTW. (Compl., ¶ 224.) Because Plaintiffs had already been required to sign a waiver regarding Schnider’s concurrent representation, they were on inquiry notice as to whether such a waiver was required for the Greenberg Defendants in February 2014.

However, Plaintiffs potentially suffered no damage from the mere fact of a concealed conflict—the harm only happened later, when the alleged scheme stripped them of their assets and saddled PDTW with false debts. The same is true of the other allegedly fraudulent acts involving the Greenberg Defendants, which continued throughout the process of negotiating and papering the transactions that created TW and changed the nature of the Thomas/TWH/PDTW/TW relationship. That course of fraudulent acts ended on December 31, 2014, when “Apfelberg abandoned Thomas because he knew what was going to happen with Thomas and her companies” (Compl., ¶ 142), i.e., that PDTW and TWH would be used in the tax evasion scheme and that Thomas would be forced out of TW soon thereafter. (See ibid. [Apfelberg “knew the Employment Agreement [between Thomas and TW] that he agreed to have Thomas sign was a set up to fire Thomas”].)

By the summer of 2015, Thomas had been terminated by TW, and the process of diluting her shares in TW and transferring her intellectual property (held by TWH and PDTW) to TW was complete. Plaintiffs not only knew that the Greenberg Defendants provided general advice regarding these transactions, they knew that Apfelberg was a participant in negotiating them. (See Compl., Ex. 42 [email from December 2014 seeking Apfelberg’s comments on transaction documents, with Thomas cc’d].) Thus, by the summer of 2015, Plaintiffs knew of the scheme (the claimed theft of the company), they knew they had been damaged by the scheme (with Thomas fired, her shares diluted, and the intellectual property transferred to TW), and they knew the Greenberg Defendants had been active participants in the events leading to the damages. By no later than the summer of 2015, Plaintiffs were on notice of the Greenberg Defendants’ alleged fraud, so they were charged with all knowledge that a reasonable investigation into the Greenberg Defendants would have uncovered. (See Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 808-809.)

Nevertheless, Plaintiffs claim they were unaware of their claims until present counsel took over their claims, conducted extensive discovery (recounted in exhaustive detail at paragraphs 64-79 of the Complaint) and finally secured the client files from the Greenberg Defendants in August 2018. (Compl., ¶ 76.)

The problem for Plaintiffs is that once inquiry notice attaches, the discovery rule only delays accrual if a plaintiff in fact “diligent[ly] investigat[es] the circumstances of the injury” and fails to “reasonably discover[] facts supporting the cause of action.” (Fox, supra, 35 Cal.5th at p. 809.) Plaintiffs’ allegations establish that they were on inquiry notice in the summer of 2015, so to toll the statute of limitations until August 2018, they must plead some sort of diligent investigation that failed to turn up the relevant facts. They have not done so.

However, in an abundance of caution, the Court notes that the allegations regarding the Greenberg Defendants are materially different from those regarding Schnider, another attorney defendant, in one important respect. The Court is sustaining Schnider’s demurrer to Plaintiffs’ fraud claims without leave to amend because Plaintiffs specifically allege the K&C Defendants—their former counsel—conducted no discovery of Schnider at all. This allegation, critical to Plaintiffs’ malpractice claims against the K&C Defendants, necessarily means that Plaintiffs failed to conduct a diligent investigation of Schnider. Plaintiffs therefore cannot rely on the discovery rule to toll accrual of their claims against Schnider.

As to the Greenberg Defendants, however, Plaintiffs make no specific allegations about the lack of an investigation. Plaintiffs will therefore be granted leave to amend as to the fraud claims for the sole purpose of alleging a diligent investigation of these claims between the summer of 2015 and summer or fall of 2017. No other amendments will be permitted by this order.