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March 2014 - Litigation as a Pressure Tactic: Be Sure of Your Target

by Howard J. Klein

It is not uncommon for a plaintiff to institute litigation against one party in order to pressure another party, with whom the defendant has a relationship, into a settlement with the plaintiff. There is, however, a limit to this strategy: the plaintiff must have a legitimate cause of action against the party that is sued. A recent appellate court decision, although ordered unpublished and non-precedential, is nevertheless instructive for illustrating the dangers in suing a clearly non-liable party solely to exert leverage on the party with whom the plaintiff actually has a dispute.

In Jay v. Mahaffey, 218 Cal. App. 4th 1522 (2013), the Fourth District Court of Appeal affirmed the trial court’s dismissal of an anti-SLAPP motion to dismiss a malicious prosecution suit. In the underlying suit, Mahaffey was counsel for the Lawrences in an action against JR Enterprises (JR), a limited partnership. During the course of the protracted litigation, Mahaffey sued the limited partners in an effort to pressure them to force JR into a favorable settlement. The court ruled that Mahaffey’s aggressive strategy was grounds for a malicious prosecution action against Mahaffey and his associate, Ghormley.

Mahaffey and Ghormley, representing the Lawrences, first sued JR for breach of lease, and JR cross-complained. During closing argument at trial, Mahaffey stated that in a limited partnership, “[t]he limited partners make no decisions.” Mahaffey, 218 Cal. App. 4th at 1528. The trial resulted in a net judgment in favor of JR. JR subsequently sued the Lawrences regarding certain issues relating to the lease that were not resolved by the first action. The Lawrences, still represented by Mahaffey and Ghormley, filed a cross-complaint for breach of contract and breach of covenant, naming JR and one of the limited partners as cross-defendants. The cross-complaint was subsequently amended to add another forty-five limited partners as cross-defendants. Some of the amendments were signed by Mahaffey, the rest by Ghormley. Depositions of five limited partners were then noticed, with the names of both Mahaffey and Ghormley on the notices. Counsel for the limited partners (Scheithauer) asked Ghormley why his clients were being sued. Ghormley replied, “Doug Mahaffey has plans for the limited partners.” Id. at 1531. The deposition of one of the limited partners (Jay) was then taken, in which he testified that, as a limited partner, he had no knowledge of the finances and business practices of JR, other than what was reported in the schedule K-1’s he received.

Mahaffey then told Scheithauer that he would dismiss all but one of the limited partners if they would withdraw the motion they had filed to disqualify the trial judge. Stating that the Lawrences and the limited partners should be “aligned” against JR, Mahaffey offered to represent the limited partners in a derivative action against JR on contingency. Id. Mahaffey dismissed concerns about a conflict of interest by stating that the limited partners “were not really at fault,” and that they had been sued only “to get their attention,” and to make sure that “they were aware of how JR Enterprises had ignored the Lawrences’ attempts to settle ...” Id. at 1544. Despite Scheithauer’s rejection of his offer, Mahaffey dismissed all but one of the limited partners without prejudice. Mahaffey later repeated his offer to Scheithauer to represent the limited partners in a derivative action against JR. Mahaffey told Scheithauer that he had learned, from his deposition of Jay, “that the limited partners have absolutely no involvement with the general partner as to decisions regarding the management of the subject lease.” Id. at 1532. In a later hearing, Mahaffey stated in court that, on the basis of the Jay deposition, he had become convinced that the involvement of the limited partners was so limited that the causes of action he had alleged against them “likely could never be proven.” Id.

Several months after their dismissal, twelve of the limited partners sued the Lawrences, Mahaffey, and Ghormley for malicious prosecution. The defendants countered with anti-SLAPP motions to dismiss under Cal. Code of Civil Procedure section 425.16, which the trial court denied. This decision was appealed.

The court of appeals summarized the process for resolving anti-SLAPP motions. First, the court must decide whether the defendant has made the threshold showing that the challenged cause of action arises from a protected activity as defined in section 425.16. If so, the court must then determine whether the plaintiff has demonstrated that the malicious prosecution complaint is both “legally sufficient and supported by a sufficient prima facie showing of facts to sustain a favorable judgment [for plaintiff],” citing Wilson v. Parker, Covert & Chidester, 28 Cal. 4th 811, 821 (2002).

Readily finding that the threshold showing was made, the court then discussed whether the plaintiffs had established a prima facie case of malicious prosecution. There are three elements: (1) whether, in a prior action that was commenced by or at the direction of the malicious prosecution defendants, there was a termination favorable to the plaintiffs; (2) whether the prior action was brought without probable cause; and (3) whether the prior action was initiated and/or prosecuted with malice.

The first element was easily met. The voluntary dismissal of the limited partners was presumed to be a termination on the merits that was favorable to them. Mahaffey had attempted to rebut this presumption with a declaration stating that the limited partners had only been dismissed “for business reasons.” Mahaffey, 218 Cal. App. 4th at 1531. The court held that Mahaffey’s declaration was properly excluded by the trial court, but opined that, even if it had been considered, it was contradicted by his earlier statement in court in the underlying action that the limited partners had “absolutely no involvement with the general partner.” This statement, to the court, strongly suggested that the limited partners were dismissed because they had no liability. Id. at 1540.

Next, the court addressed the element of probable cause, stating that it “exists when a lawsuit is based on facts reasonably believed to be true, and all asserted theories are legally tenable under the known facts,” citing Cole v. Patricia A. Meyer & Assoc., 206 Cal. App. 4th 1095, 1105 (2012). In other words, was the institution of the prior action legally tenable based on the facts known to the malicious prosecution defendants? This question must be answered, according to the court, under an objective standard, namely, whether any reasonable attorney would have thought the claim tenable. Probable cause would not exist either if the prior action was brought in reliance on facts that the defendant had no reason to believe to be true, or if the defendant sought recovery on a legal theory that was untenable under the known facts.

In this case, the court ruled there was no question that the limited partners were immune under the Uniform Limited Partnership Act (Corp. Code §§ 15900 et seq.) from any potential liability of the limited partnership under the causes of action alleged in the underlying case. This immunity, coupled with the lack of any dealings of the limited partners with the Lawrences, established a prima facie lack of probable cause.

The defendants attempted to rebut the prima facie showing by arguing that the limited partners were liable under a tort cause of action that would not have been barred by the ULPA. The court rejected the contention that an unpled theory of liability could establish probable cause. Furthermore, the court ruled, even if the tort theory had been validly pled, it is well-established that if any one cause of action among several pled was asserted with malice and without probable cause, an action for malicious prosecution will lie. Here, the limited partners had been sued for breach of lease, an action that no reasonable attorney would have brought against the limited partners in the face of the immunity provided by the ULPA for contractual obligations.

Turning to the element of malice, the court considered the subjective intent or purpose with which the defendant brought the prior action, holding that a malicious prosecution plaintiff “must plead and prove actual ill will or some improper ulterior motive” on the part of the defendants. Mahaffey, 218 Cal. App. 4th at 1543. While the lack of probable cause may be a factor in determining the existence of malice, it is not sufficient; other evidence is needed of an improper purpose. Malice on the part of Mahaffey was predicated on the evidence that he knew the limited partners had no liability, as well as the “very strong inference” from his statements to Scheithauer that the limited partners were sued solely to push JR to a settlement, and not to resolve any genuine legal dispute between the Lawrences and the limited partners. Id. at 1545. A reasonable trier of fact could therefore conclude that the action against the limited partners was a “poster child” for cases brought primarily for an improper purpose.

Ghormley’s attempt to escape liability by arguing she was merely Mahaffey’s associate following his instructions was rejected. Citing Cole for the holding that attorneys may not avoid malpractice liability merely by showing they took only a passive role in frivolous litigation, the court found ample evidence that Ghormley had, in fact, taken an active role in the suit against the limited partners. Cole, 206 Cal. App. 4th at 1100. Moreover, referring to Business & Professions Code section 6068, the court ruled that, as an attorney admitted to the California bar, Ghormley had “independent duties” that negated her argument as a defense to malicious prosecution liability. Mahaffey, 218 Cal. App. 4th at 1546.

Howard Klein is a partner at Klein, O’Neill & Singh, LLP, and a member of the OCBA Professionalism and Ethics Committee. He may be contacted at hjklein@koslaw.com.

 
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