Opinion
Dennis Wise and Joan Macfarlane (together the Wises) were represented by the law firm, defendant DLA Piper LLP (US), 1 that aided them in obtaining a judgment in 1994 against William Cheng. However, DLA did not advise the Wises of the necessity to renew the judgment, and after 2004 the judgment became unenforceable. The Wises brought this action alleging malpractice and obtained a judgment against DLA. On appeal, DLA contends the evidence is insufficient to support the judgment against it because there was no evidence the Wises’ judgment against Cheng would have been collectible even had it been renewed. DLA also contends on appeal (1) there was no substantial evidence the statute of limitations on the malpractice claim had been tolled by continuous representation, (2) the special verdict form was fatally flawed because it did not submit to the jury the issue of whether there had been continuous representation within four years of filing the complaint, and (3) even assuming the judgment as to liability and damages was proper, there was no legal basis for the award of attorney fees against DLA. We do not reach these contentions because of our conclusion that there was no substantial evidence the judgment against Cheng was collectible.
I
FACTUAL BACKGROUND
A. DLA’s Representation of the Wises in the Cheng Matter
In 1987, the Wises loaned $350,000 to Cheng, who signed two promissory notes. However, Cheng defaulted on the notes, and later filed for bankruptcy.
Cheng made no payments on the debt. Accordingly, DLA obtained a state court judgment against Cheng, entered on August 1, 1994, for $605,184.50. DLA Attorney Breslauer, who represented the Wises in obtaining the judgment, told them, “we have got this judgment, it’s good forever, until the cows come home.” Breslauer also told the Wises, “[w]e will keep our ears to the ground” and “we can come back and bring in Mr. Cheng for examinations from .time to time, every six months, or surely once a year, if we want, just for harassment purposes even, if you want to.” However, DLA did not inform the Wises the judgment would become invalid if not renewed within 10 years.
In 1994, DLA pursued collection efforts but determined Cheng was “dead broke,” and a report from an asset search firm reported Cheng had no assets, had numerous other creditors, had been sued in numerous other proceedings, and had state and federal tax liens filed against him. Breslauer sent the asset search report to the Wises, and stated that if they were aware of any banking relationships not reflected in the report, they should contact Breslauer and DLA would “follow up.” The Wises did not ask DLA to do anything further to collect the judgment, because there was nothing else to do unless something new came up.
Copeland left DLA in mid-1995 and took some of the Wises’ matters with him to his new firm. However, the Wises instructed that the Cheng bankruptcy issues were to remain with Breslauer at DLA. When Breslauer left DLA at the end of 1995, the Cheng bankruptcy matters apparently remained with DLA, because DLA Attorney Rubin wrote to the Wises in April 1996 explaining the status of the Cheng bankruptcy and told them they would receive a final distribution check later in the year, and that the “remainder of your judgment will survive this bankruptcy and is enforceable against Cheng’s post-bankruptcy assets.” Rubin stated she would “continue to monitor this case” but told the Wises “it is likely you will not receive any further notices except the one to allow the creditor distribution.”
In late 1996, DLA Attorney Zander sent a letter to the Wises enclosing a check from the bankruptcy trustee for $21,578.63, “representing the final
The Wises had no further contact with DLA until 2009. Although DLA closed the Cheng file administratively, DLA did not notify the Wises it had ceased representing them.
B. Subsequent Events
The Wises divorced in 1998. When dividing their marital assets, they contacted Copeland at his new firm to help accomplish the division and assignment of the Cheng judgment, with each receiving one-half. Copeland’s new firm appeared as counsel of record for the Wises in the state court lawsuit in which the judgment against Cheng had been obtained and accomplished the division and assignment later in 1998. Copeland did not advise the Wises of the need to renew the judgment within 10 years.
In 2004, the judgment expired as a matter of law. At trial, DLA stipulated its representation of the Wises fell below the standard of care because it did not inform them of the need to renew the judgment or calendar the 10-year expiration date on the judgment. In 2009, the Wises discovered the judgment had been allowed to expire, and filed the present action against DLA within one year of that discovery.
C. Evidence of Collectibility: Cheng’s Post-bankruptcy Financial Condition
At trial, Cheng testified he has not owned any bank accounts, real estate, or any other assets since his bankruptcy proceedings. He previously was licensed as a CPA, but relinquished that license in the 1990’s in part because he could not afford to pay for the continuing education requirements. He had not filed a personal tax return in 17 years.
2
Since his bankruptcy, the “only money” he has received to support his lifestyle was derived from three
Cheng has a proven ability to convince investors to invest in corporate entities he has formed. Between 2003 and 2011, he raised at least $1.3 million from investors in OSCN and its subsidiaries, although Cheng estimated it was closer to $2 million. All of these investment monies, in return for which the investors received stock in the entities, were paid into the corporations and were spent on operating expenses for the entities. The operating expenses paid for by funds invested in OSCN included the rent on the La Jolla house where Cheng lived and his multiple trips to China. None of the funds were given to Cheng personally. By the time of trial, OSCN had less than $100 in its bank account. Cheng’s biggest investor, Mr. White, had invested approximately $900,000 over the years and, although he had put other investors in contact with Cheng, he cautioned them they had to be willing to take a 100 percent risk on any funds invested. By the time of trial, White had written off most of his investments because “[t]here was no viable evidence that it was worth anything at that point,” and White had told an investigator that “nothing has happened since the beginning of the stock, so I consider it worthless.” Cheng agreed the stock was “worthless” and “could be used to wallpaper bathrooms.”
Cheng testified that “if any of these businesses . . . takes off and makes money,” he would receive millions in back salary. However, none of the companies have any contracts or agreements, and Cheng described the companies as “dead” without an infusion of new investment funds. Since the stock market crash of 2008, Cheng has had difficulty raising money from investors. Cheng was specifically asked about solicitation materials he gave to a potential investor in 2009 seeking to persuade new investments in his
D. Expert Opinions on Collectibility
Plaintiff’s Expert
Joel Selik, a collection attorney, testified for the Wises that the Cheng judgment (1) could have been collected in the past and (2) might be collectible in the future. Selik premised his opinion on “past collectibility” on several facts. First, Selik testified “it appears that Cheng had at least $2 million dollars, probably more since he gave a million to Ohio State,” because Mr. White had invested approximately $900,000 so it was “absolutely uncontroverted that [Cheng] had money” that could have been reached by “piercing the corporate veil . . . and all that money we’d be able to collect,” and piercing would have been “very easy in this particular case.”
Second, Selik testified that although he had seen neither the deed to nor lease for the La Jolla home in which Cheng lived, there was “a probability” (based on the length of time Cheng had lived there and the amount of rent paid) he had an “ownership interest” in the home on which a creditor could levy. Third, Selik relied on Cheng’s statement that he donated $1 million to his alma mater as indicative that Cheng had substantial assets after the bankruptcy, although Selik conceded he did not independently verify either the accuracy of Cheng’s claim, or whether donations were made after (rather than before) Cheng’s bankruptcy. Cheng, a 1967 graduate of Ohio State University, testified he donated over $1 million to the university “[o]ver the years,” and had also raised significant funds for Ohio State. However, there was no evidence these funds were donated after the Wises’ judgment had lapsed. Indeed, although Cheng received a “Pacesetter” award from Ohio State’s Fisher College of Business, that award was conferred in 1986, and Cheng testified he had left the board of an Ohio State alumni group after the bankruptcy.
Fourth, Selik relied on Cheng’s testimony that he (Cheng) had made multiple trips to China after the bankruptcy as indicating he was “spending a lot of money.” The only evidence for the funding of these trips was that Cheng used investor money for them, and Selik’s testimony contained no mention of any factual basis for his belief that Cheng used personal resources for them. Indeed, Selik conceded he had not conducted an asset search on Cheng, but nevertheless stated (when asked how Cheng could have paid the judgment in response to pressure from his investors) that “[w]e have a few possible sources and a few out there in the [ether] that I suspect.”
On appeal, the Wises claim (without citation to the record) Cheng “testified that if he had been aggressively pursued, he would have come up with [enough money to fully] satisfy the judgment.” We disregard this “testimony” in our analysis for several reasons. First, the Wises’ malpractice claim was not that DLA should have aggressively pursued collection efforts before the judgment expired in late 2004, and therefore Cheng’s purported ability to raise funds to pay the judgment before that date has no relevance to whether the Wises showed the judgment would have been collectible had it not expired.
Second, Cheng’s “what if’ surmises are doubly speculative, because it asks him to speculate both as to what
he
would have done, and to how
others
would have reacted to what he might have done (cf.
Sargon Enterprises, Inc. v. University of Southern California
(2012)
Finally, and most importantly, Cheng did not testify he would have come up with enough money to fully satisfy the judgment had he been pursued after 2004. Instead, the Wises apparently refer to a declaration (not included in the record on appeal) prepared by their counsel and signed by Cheng that stated, “I am certain that if I had asked, I could have and would have obtained stock equity investments from [OSCN investors] to satisfy the entire judgment . . . Cheng’s actual testimony, however, was that by the time he signed the declaration he was not getting much money anymore from investors because of the recession. Moreover, when specifically asked about the statement that he would have obtained money from investors to pay the judgment, Cheng actually testified he “wouldn’t ask my investors to take their money and . . . satisfy the judgment” (italics added), nor would he have “gotten anywhere with [such a request],” nor would he have used investments made in the corporations to pay the Wises because “[t]hat’s what Ponzi schemes do.”
Selik’s opinion on “future collectibility” was based on a single overarching theme: because Cheng had been able to convince some “very important men”
Defendant’s Expert
Miles Grant, a collection attorney, testified for DLA that the judgment could not have been collected in the past or in the future. Grant conducted an extensive investigation of Cheng’s assets, which Selik described as “excellent,” and determined that Cheng has “been broke” and has “never had any assets” since 1991. Cheng owns no bank accounts in his name, drives a car—registered in the name of one of his companies—against which debt is owed, and lives in a rental unit (in which he had no ownership interest) not in good condition and furnished with “quite old” furniture.
Grant explained that a primary theme of Selik’s opinion regarding collectibility—a creditor may use “reverse alter ego” to reach corporate assets to satisfy debts incurred by a shareholder of the corporate entity—is an incorrect theory because the theory is no longer available to creditors. Grant also testified Selik’s theory that the creditor could have subpoenaed Cheng’s investors for third party debtor examinations and thereby pressured his investors to lend money to Cheng (or pressured Cheng to pay the judgment) faced numerous factual and legal obstacles: first, the identities of the investors would be unknown to the creditor unless Cheng cooperated with the creditor; second, many judges would not permit a creditor to subpoena third party investors because of the statutory limitations on such subpoenas; finally, it is purely speculative that investors would then have given or loaned Cheng an additional $1 million with which to pay the judgment.
RELEVANT LEGAL PRINCIPLES
A. Substantive Law: The Issue of Collectibility
“The elements of a cause of action in tort for professional negligence are: (1) the duty of the professional to use such skill, prudence, and diligence as other members of his profession commonly possess and exercise; (2) a breach of that duty; (3) a proximate causal connection between the negligent conduct and the resulting injury; and (4) actual loss or damage resulting from the professional’s negligence.”
(Budd
v.
Nixen
(1971)
“The element of collectibility requires a showing of the debtor’s solvency. ‘ [“W]here a claim is alleged to have been lost by an attorney’s negligence, ... to recover more than nominal damages it must be shown that it was a valid subsisting debt,
and that the debtor was solvent.”
[Citation.]’ [Quoting
Lally v. Kuster
(1918)
The plaintiff in a malpractice action must establish that the underlying judgment lost as the result of the attorney’s error could have been collected.
(Garretson v. Harold I. Miller
(2002)
“Although such a plaintiff is not required to offer proof that establishes causation ‘with absolute certainty,’ a plaintiff is still required to ‘ “ ‘introduce evidence which affords a reasonable basis for the conclusion
“It is useful to consider the various factors bearing upon the issue of collectibility of an underlying judgment, ... to establish the proper guidelines for discovery. Collectibility is part of the plaintiff’s case, and a component of the causation and damages showing, rather than an affirmative defense which the Attorney Defendants must demonstrate. [Citations.] Collectibility is not a question only of the solvency of the defendant in an underlying case, such as in bankruptcy, but rather pertains to the defendant’s ability to pay a judgment or some part of it. [Citing 4 Mallen & Smith, Legal Malpractice (2006 ed.) § 30.17, pp. 490-491.] .... Collectibility thus ‘looks to the actual circumstances to determine whether the judgment “would have been collectable.” ’ (Id. at p. 494, fn. 40.) It is not enough for a plaintiff to present speculation or assumptions- about an underlying defendant’s ability to respond in damages, as opposed to proof of same. [Citation.] Admissible evidence on collectibility can include information about the basic solvency of the defendant in the underlying case, as shown by its assets, net worth or available proceeds from investments.” (Italics added.)
When the plaintiff does not introduce evidence from which a trier of fact could conclude, to a reasonable degree of certainty, the judgment would have been collectible, a verdict in favor of the plaintiff must be reversed.
(Filbin v. Fitzgerald
(2012)
B. Standard of Appellate Review
On appeal, a jury’s findings on collectibility are reviewed for substantial evidence.
(Garretson
v.
Harold I. Miller, supra,
III
ANALYSIS
A demonstration of collectibility here—whether Cheng was able to pay some or all of the judgment—required the Wises to introduce admissible evidence (rather than speculation or assumptions) as to “ ‘the actual circumstances to determine whether the judgment “would have been collectable” ’ ” and “can include information about the basic solvency of the defendant in the underlying case, as shown by [his or her] assets, net worth or available proceeds from investments.”
(Hecht; Solberg, Robinson, Goldberg & Bagley LLP v. Superior Court, supra,
The Wises rely principally on Selik’s testimony that the judgment against Cheng was collectible in the past and would be collectible in the future, to assert there was substantial evidence to support the finding of collectibility.
The principal thrust of Selik’s testimony regarding past and future collectibility was that the Wises could have used “reverse piercing” and obtained funds placed in the corporate entities by third party investors to satisfy the judgment against Cheng. On appeal, the Wises assert reverse piercing was not the only, or “arguably not even a significant basis,” for Selik’s opinion. However, the first example they cited on appeal for Selik’s “other” bases for his opinion on collectibility was Selik’s testimony that a creditor can file a motion to amend the judgment to include the corporate entity or file a separate lawsuit. Selik did not state those were alternatives to reverse corporate piercing, but instead testified those were the methods he would have employed to effect a reverse corporate piercing. Moreover, it is irrelevant to our analysis whether reverse piercing was the principal predicate for Selik’s opinion, or was merely one of many bases for his opinion, because our evaluation of whether substantial evidence supports the judgment requires an examination of whether he had some basis for concluding the judgment would have been collectible.
However, as DLA’s appellate brief convincingly argues, the law precludes the Wises from employing “reverse piercing” to obtain funds paid by third party investors into Cheng’s corporate entities to satisfy Cheng’s personal debts.
(Postal Instant Press, Inc. v. Kaswa Corp.
(2008)
The only remaining factor cited by Selik in support of his opinion on past collectibility was his conclusion that an aggressive collection effort could have included subpoenaing Cheng’s investors under third party judgment debtor examination procedures, and these examinations would have exerted pressure on these investors to loan Cheng the money to pay the Wises.
5
This
We decline to accord testimony any weight when it is premised on the assumption that the law will not be followed by the courts. Moreover, even assuming a judge would have disregarded the law and issued the subpoena, this aspect of the foundational facts relied on by Selik to conclude the judgment would have been collected in the past (i.e., from loans by investors to Cheng because the investors “are going to want to protect their investment”) is speculative on multiple levels: it assumes the Wises would have discovered the identities of the investors to be subpoenaed before investments dried up as a result of the 2008 stock market crash 6 ; more importantly, it required Selik to speculate as to what investors might have done (e.g., loaned money to Cheng personally) under a hypothetical set of historical facts without any evidence that Cheng’s investors would have in fact reacted as surmised by Selik. Selik apparently never spoke to any investors to ask whether they would have loaned money to Cheng personally had they learned of his indebtedness to the Wises. Although Jack White (who appears to have been Cheng’s largest investor) was a witness at trial, the Wises never asked him whether he would have loaned money to Cheng personally had he learned of Cheng’s indebtedness to them.
Because all of the predicates for Selik’s opinion on past collectibility rely on speculation, factual assumptions unsupported by the record, or fallacious legal assumptions, his opinion “cannot rise to the dignity of substantial
The Wises also rely on Selik’s testimony that the judgment would have been collectible in the future to assert there was substantial evidence to support the finding of collectibility. However, Selik’s opinion on “future collectibility,” premised on his prediction that Cheng would continue to convince investors to invest in his business schemes, explained that (1) if Cheng succeeded in getting new investors and the business became successful “we might have something ... in the millions and millions and millions to go after,” and (2) even if the businesses continued to fail “it’s probably just a few million dollars in investments that we will be going after.” The latter basis for Selik’s opinion on future collectibility merely restates his “reverse piercing” theory and we conclude, for the reasons already discussed, it is entitled to no weight and cannot constitute substantial evidence.
(Corrales, supra,
In
Sargon Enterprises, Inc.
v.
University of Southern California, supra,
Similarly, in
Greenwich S.F., LLC v. Wong
(2010)
In reversing the award, the court stated that “[t]he lost profits claim was based on the assumption that [the plaintiffs] would have constructed the residence according to the plans and specifications without changes and that the venture would have been profitable. These assumptions were inherently uncertain, contingent, unforeseeable and speculative. The proposed real estate development project here involved numerous variables that made any calculation of lost profits inherently uncertain.”
(Greenwich, supra,
190 Cal..App.4th at p. 766, fn. omitted.) Other cases are in accord. (See, e.g.,
Kids’ Universe v. In2Labs
(2002)
Selik’s opinion that the Wises could collect their judgment in the future likewise rested on the hope that, notwithstanding Cheng’s track record over the preceding two decades, one or more of Cheng’s entities would earn future
We conclude there was no substantial evidence introduced by the Wises to support a finding that the judgment against Cheng would have been collectible, either in the past or in the future, had it been renewed. Accordingly, we reverse the judgment against DLA, and direct that judgment be entered in its favor.
(Kelly v. Haag
(2006)
DISPOSITION
The judgment is reversed. DLA is entitled to costs on appeal.
Benke, Acting P. 1, and McIntyre, 1, concurred.
Respondents’ petition for review by the Supreme Court was denied February 11, 2014, S214601.
Notes
During the relevant time, the Wises were represented by the law firm known as Gray, Cary, Ames & Frye, and later known as Gray Cary Ames & Friedenrich. DLA Piper LLP (US) is the successor in interest to that firm. For ease of reference, we refer to the firm as DLA regardless of timeframe.
Although Cheng testified at his deposition he received $5,000 per month from Cheng Consulting Services for his services, he denied that at trial. Instead, he testified that Overseas Chinese Net (OSCN), a Nevada corporation Cheng formed, in return for the services provided by Cheng Consulting Services to OSCN, used OSCN funds to pay the rent on the property Cheng occupies and that houses the office of Cheng Consulting Services and OSCN. OSCN is the sole source of the monthly funds for Cheng Consulting Services. Because OSCN and its subsidiaries apparently have never generated any revenue, it appears the source of funds was limited to money from investors into OSCN. Indeed, after testifying that his companies had
Selik mentioned Cheng’s “algae for oil” scheme, the “commodities and the trading money in gold,” and Cheng’s “Marco Polo” proposal. However, although Selik mentioned these future projects, he expressly disavowed that his opinions on “collectibility” were reliant on any opinions as to “investment in China.”
To the extent Selik’s opinion on past collectibility assumed Cheng must have had some degree of financial wherewithal in reliance on the fact the rent on the property was $5,100 per month, the only evidence on the source of funds to pay this rent was that one of the corporate entities used corporate funds (obtained by capital infusions from investors) to pay the rent.
Selik also testified these examinations could have resulted in payment because Cheng would have been pressured (either by the investors or out of self-interest) to pay the judgment. In addition to the fallacious legal theory and speculative assumptions fatal to Selik’s opinion on “investor loans to pay the judgment” as discussed below, Selik’s belief Cheng would have paid the judgment fails for a third reason: it is based on the implicit predicate that Cheng had independent assets to which he would have resorted to respond to this pressure. Because there was no
evidence
Cheng had any assets to which he could have resorted, Selik’s opinion that
Cheng testified that, after the stock market crash of 2008, he had difficulty raising money ' from investors. There was no evidence, had the judgment been renewed, the Wises would have learned the identities of the investors any earlier than they actually did (i.e., in 2009), well after the crash.