DURANT SOFTWARE v. HERMAN

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Court of Appeal, Second District, Division 6, California.

DURANT SOFTWARE, etc., Plaintiff and Appellant, v. James E. HERMAN, Defendant and Respondent.

Civ. B029673.

Decided: January 31, 1989

Hollister & Brace and William A. Brace and Robert L. Brace, Santa Barbara, for plaintiff and appellant. Eskin & Jackson and George C. Eskin, Ventura, and Diane M. Matsinger, Santa Barbara, for defendant and respondent.

A judgment creditor files a civil action alleging that an attorney and other individuals conspired to fraudulently convey assets of a judgment debtor.   The judgment creditor alleges that at a debtor's examination, the debtor's attorney engaged in acts in furtherance of the conspiracy.  Civil Code section 47, subdivision 2 bars causes of action arising from conduct in a judicial proceeding.   Is the judgment creditor's cause of action for conspiracy against the attorney barred by section 47 when the wrong underlying the conspiracy occurred before the judgment debtor examination?   We hold the cause of action is not barred.

FACTS

In July 1983, Durant Software sold a computer software program to Robex/6 Corporation.   The parties had a dispute over payment for the program.   This dispute was resolved in favor of Durant who won an arbitration award of $228,585.41.   On January 22, 1985, a San Francisco Superior Court confirmed the award and entered a judgment in favor of Durant.

On November 22, 1985, Durant filed the instant action in Santa Barbara Superior Court against Robex/6, its principals, Donald C. and Lois D. Hoodes, and their attorneys of the law firm of Cappello & Foley.   Durant alleged, inter alia, that Robex/6 transferred a computer phone system to the law firm for $100,000, and that the debt was cancelled without consideration and for the purpose of hindering Durant from collecting its judgment.   Durant seeks to set aside this allegedly fraudulent conveyance to Cappello & Foley.

In a separate cause of action Durant seeks damages against the defendants, including attorney James E. Herman, an associate of Cappello & Foley, for engaging in a conspiracy to defraud a judgment creditor.   A third cause of action, not relevant to this appeal, alleged that Robex/6 wrongfully distributed corporate assets to the Hoodes as shareholders.

Durant does not allege that Herman took part in the actual transfer of assets to the law firm or to others, but that he destroyed evidence and suborned perjury prior to and during a debtor's examination of Robex/6's former controller, and thus acted in furtherance of a conspiracy to defraud.

Durant submitted the declaration of Charles J. Churchfield, the former Robex/6 controller.   Churchfield declared, inter alia, that on the morning of the debtor's examination, Herman “physically destroyed” two pages of a computerized Accounts Receivable Detailed Aging Report which was to be delivered to Durant in response to a request for production of documents.

Churchfield also averred that Herman and another attorney with Cappello & Foley “expressly told me to lie under oath at my debtor's examination” in order to “cover up the fact that Robex/6's assets had been transferred to various entities and individuals for no consideration in furtherance of a conspiracy to defraud Durant.”   Churchfield's declaration also stated that Herman accompanied him to the debtor's examination and “repeatedly took me out of the conference room and told me to falsify my answers to pending questions.”

Herman moved for summary judgment of the conspiracy cause of action as to him, or, in the alternative, summary adjudication of the issues relating to him.   He filed a declaration denying the Churchfield allegations, and argued inter alia that even if the allegations were true, his conduct in preparation for and during the debtor's examination was absolutely privileged pursuant to Civil Code section 47, subdivision 2.   Herman submitted a statement of “undisputed” facts in support of his motion, many of which Durant disputed.   Herman also submitted portions of Churchfield's deposition, taken after the declaration, where he alleges Churchfield recanted his earlier allegations.

In ruling on Herman's motion, the trial court reviewed the declaration and depositions and found eight triable issues of fact remained, including whether Herman was involved in a conspiracy to hinder Durant's collecting its judgment against Robex/6;  whether Herman destroyed evidence prior to the debtor's examination;  and whether he suborned perjury during that examination.   The court agreed with Herman, however, that even if these allegations were true, his conduct amounts to “publications” involving litigation.   The court concluded that because “the only evidence in support of plaintiff's cause of action against Mr. Herman is absolutely privileged” pursuant to Civil Code section 47, subdivision 2, it granted summary judgment in Herman's favor.

Durant appeals, arguing that the trial court misapplied the privilege.   We reverse the order for summary judgment.   Durant's damages, if any, do not flow from the judgment debtor hearings, but instead from the alleged fraudulent conveyances which arose out of the conspiracy.   The attorney's purported conduct at the debtor's hearing is merely evidence from which a fact-finder may infer he was a co-conspirator.

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DISCUSSION

I.

 Civil Code section 47, subdivision 2, reads in relevant part:  “A privileged publication or broadcast is one made— ․ [¶] 2. In any (1) legislative or (2) judicial proceeding, or (3) in any other official proceeding authorized by law․”  The privilege for a publication made in “any ․ judicial proceeding” follows the Civil Code provisions defining the torts of libel and slander, and was “at least historically, ․ primarily designed to limit an individual's potential liability for defamation.”   (Oren Royal Oaks Venture v. Greenberg, Bernhard, Weiss & Karma, Inc. (1986) 42 Cal.3d 1157, 1163, 232 Cal.Rptr. 567, 728 P.2d 1202 (hereafter Oren Royal Oaks ).)

In recent years, California courts have applied the privilege to torts other than defamation where defendant's injurious conduct would be privileged for defamation purposes.  (See, e.g., cases listed in Oren Royal Oaks, supra, 42 Cal.3d at p. 1164, fn. 5, 232 Cal.Rptr. 567, 728 P.2d 1202.)   The rationale for extending the privilege beyond the defamation arena is that “[t]he salutary purpose of the privilege should not be frustrated by putting a new label on the complaint.   If it is desirable to create an absolute privilege in defamation, not because we desire to protect the shady practitioner, but because we do not want the honest one to have to be concerned with libel or slander actions while acting for his client, we should not remove one concern and saddle him with another for doing precisely the same thing.”  (Thornton v. Rhoden (1966) 245 Cal.App.2d 80, 99, 53 Cal.Rptr. 706.)

Herman contends that the privilege applies to all “causes of action” except malicious prosecution.  (See Ribas v. Clark (1985) 38 Cal.3d 355, 364, 212 Cal.Rptr. 143, 696 P.2d 637.)   This broad statement does not tell the whole story.   The privilege applies when the damages grow out of judicial proceedings.   It is thus necessary to determine the relationship between the conduct complained of and the causes of action alleged.   We must “draw a careful distinction between a cause of action based squarely on a privileged communication, such as an action for defamation, and one based on an underlying course of conduct evidenced by the communication.”  (White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 888, 221 Cal.Rptr. 509, 710 P.2d 309.)

The Supreme Court recently considered this distinction in Oren Royal Oaks, supra, 42 Cal.3d 1157, 232 Cal.Rptr. 567, 728 P.2d 1202.   Plaintiff landowner sought damages from a neighbor and the neighbor's attorney, alleging abuse of process and conspiracy to abuse process.   The allegations were largely based on statements made by the neighbor's attorney during settlement negotiations relating to the neighbor's petition for an administrative writ of mandamus challenging the plaintiff's proposed residential development project.   The attorney sought summary judgment on the grounds that his statements were absolutely privileged pursuant to section 47, subdivision 2.

The trial court first denied the motion for summary judgment, but later, following directions of a peremptory writ issued by the Court of Appeal, granted summary judgment in favor of the attorney.   Still later, when the case was appealed, the Court of Appeal had a change of heart and reversed the summary judgment which it had directed the frustrated trial court to grant.

The appellate court concluded that “ ‘[w]hen the publication itself is alleged to be the tortious conduct ․, the privilege creates a “transactional immunity.”   Where, however, the alleged tortious conduct is something other than the publication itself, then the publication may be used as evidence bearing on the tortious nature of that conduct.   In other words, Civil Code section 47(2) does not provide an immunity from “use” of the publication.’ ”   (Id. at p. 1163, 232 Cal.Rptr. 567, 728 P.2d 1202.)

The Court of Appeal concluded that the alleged tortious conduct was the institution of the writ of mandate for an improper purpose, which constituted an abuse of process, and not the statements made during settlement negotiations.   Therefore, section 47, subdivision 2 would not bar the consideration of those statements in determining the motive behind the administrative mandamus action.

The Supreme Court affirmed the summary judgment imposed by the trial court because the complaint did not state a cause of action for abuse of process.   No doubt, the trial judge was amused by this touch of irony.   The Supreme Court, therefore, did not decide the provocative issue of whether the privilege applies in an abuse of process case, where it is the judicial misconduct itself that forms the basis for the cause of action.   But, approving some of the reasoning of the Court of Appeal, the Supreme Court noted that section 47, subdivision 2 would not prohibit a court from considering for evidentiary purposes, the statements made by the attorney in the settlement negotiations.

The Supreme Court went on to explain that section 47 is not an evidentiary privilege excluding evidence but instead operates as a limitation upon liability.  “Indeed, on brief reflection, it is quite clear that section 47(2) has never been thought to bar the evidentiary use of every ‘statement or publication’ made in the course of a judicial proceeding:  answers to interrogatories or to questions at depositions are, for example, routinely admitted into evidence and relied on in determining liability, even though they are clearly ‘statements made in the course of a judicial proceeding.’   Thus, while 47(2) bars certain tort causes of action which are predicated on a judicial statement or publication itself, the section does not create an evidentiary privilege for such statements.   Accordingly, when allegations of misconduct properly put an individual's intent at issue in a civil action, statements made during the course of a judicial proceeding may be used for evidentiary purposes in determining whether the individual acted with the requisite intent.   [Citations.]”  (Id. at p. 1168, 232 Cal.Rptr. 567, 728 P.2d 1202.)

California courts have recognized that the section 47 privilege, rooted in defamation, only applies where the cause of action arises out of the publication.   In Fellows v. National Enquirer, Inc. (1986) 42 Cal.3d 234, 228 Cal.Rptr. 215, 721 P.2d 97 our Supreme Court noted that statutory restrictions on libel and slander actions such as the section 47, subdivision 2 privilege “have been applied to nondefamation claims when such claims were based on defamatory language.”  (Id. at p. 243, 228 Cal.Rptr. 215, 721 P.2d 97;  see p. 244, fn. 11, 228 Cal.Rptr. 215, 721 P.2d 97; and cases cited.)   All of these cases arose out of a publication in a public or judicial proceeding.

The Court of Appeal in Block v. Sacramento Clinical Labs, Inc. (1982) 131 Cal.App.3d 386, 390–391, 182 Cal.Rptr. 438, observed that the privilege has been applied “to defeat tort actions which, however labeled and whatever the theory of liability, are predicated upon the publication in protected proceedings of an injurious falsehood.  [Fns. omitted.]”  Another court disagreed with Block that the privilege applies only to falsehoods, but concluded nonetheless that the publication must be “injurious.”  (Rosenthal v. Irell & Manella (1982) 135 Cal.App.3d 121, 127–128, 185 Cal.Rptr. 92.)   Other courts have suggested that actions subject to the privilege must be “based upon the defamatory nature of a communication․”  (Lerette v. Dean Witter Organization, Inc. (1976) 60 Cal.App.3d 573, 579, 131 Cal.Rptr. 592;  Brody v. Montalbano (1978) 87 Cal.App.3d 725, 739, 151 Cal.Rptr. 206.)

Herman contends that destroying evidence and suborning perjury in a judicial or official proceeding is privileged conduct.   In all the cases he cites the damages flowed directly from perjury or the creation of false evidence which formed the basis for the barred causes of action.  (See, e.g., Pettitt v. Levy (1972) 28 Cal.App.3d 484, 487–488, 104 Cal.Rptr. 650 [fraud, negligent misrepresentation, negligence, infliction of emotional distress, and conspiracy all stemming from the alleged preparation and submission of a false or forged building permit];  Steiner v. Eikerling (1986) 181 Cal.App.3d 639, 641, 226 Cal.Rptr. 694 [causes of action for malicious institution of civil proceedings and for civil conspiracy based on alleged forgery of a will presented for probate;  damages included expenses incurred in attending the judicial proceedings];  Carden v. Getzoff (1987) 190 Cal.App.3d 907, 909, 235 Cal.Rptr. 698 [abuse of process and infliction of emotional distress stemming from the alleged manufacture of false evidence].)

In Taylor v. Bidwell (1884) 65 Cal. 489, 4 P. 491, an old but enduring case, plaintiff accused the defendants of falsely charging him with arson and procuring false evidence at trial.   Plaintiff alleged his injuries were caused by statements made in a judicial proceeding.   The Supreme Court affirmed the sustaining of a demurrer, in part, because there is no civil liability for suborning perjury.  (Id. at p. 490, 4 P. 491.)   The injury flowed directly from the alleged false statements.

In more recent cases involving torts stemming from conduct other than perjury or creating false evidence, the privilege was upheld where there existed the same direct relationship between the conduct and the injury that was present in Taylor.  (See, e.g., Ribas v. Clark, supra, 38 Cal.3d at p. 364, 212 Cal.Rptr. 143, 696 P.2d 637 [invasion of privacy, infliction of emotional distress, and outrage resulting from attorney's testimony at an arbitration proceeding];  and Dong v. Board of Trustees (1987) 191 Cal.App.3d 1572, 1594, 236 Cal.Rptr. 912 [various causes of action, including infliction of emotional distress and breach of implied covenant of good faith and fair dealing, “predicated” on the privileged statements in the course of a federal investigation].)

In each of these cases the plaintiff alleged damages flowing from the conduct which was held to be privileged, and the causes of action were thus barred.   Where the conduct is not the “nucleus” of the cause of action, however, and is offered merely as evidence of an element of a tort, the privilege does not operate.  (Dong v. Board of Trustees, supra, 191 Cal.App.3d at p. 1594, 236 Cal.Rptr. 912;  Oren Royal Oaks, supra, 42 Cal.3d at p. 1167, 232 Cal.Rptr. 567, 728 P.2d 1202.)

II.

 In order to determine whether the section 47, subdivision 2 privilege bars the conspiracy action against Herman, we must make a distinction between a cause of action “based squarely” on a privileged communication, such as an action for defamation, and one based upon an underlying course of conduct evidenced by the communication.  (White v. Western Title Ins. Co., supra, 40 Cal.3d at p. 888, 221 Cal.Rptr. 509, 710 P.2d 309.)   If the cause of action is based upon conduct during the judgment debtor hearing, and in preparation for that hearing, the privilege applies.   If the cause of action is not based on conduct arising from the judgment debtor hearing, then the conduct at the judgment debtor hearing is admissible to support the cause of action for conspiracy.   Although “liability cannot be founded upon a judicial communication, it can be proved by such a communication․”  (Ibid.)

Durant contends that Herman's liability arises from his role as a conspirator in fraudulent conveyances.   His liability does not arise from his conduct relating to the judgment debtor hearing.   Durant argues that Herman's purported suborning of perjury and destruction of evidence is merely evidence from which the fact-finder may infer that he “concurred in the tortious scheme with knowledge of its unlawful purpose ․” and so is a conspirator.  (Wyatt v. Union Mortgage Company (1979) 24 Cal.3d 773, 784, 157 Cal.Rptr. 392, 598 P.2d 45.)

Herman responds that Durant is playing a “label game,” attempting to defeat the privilege by alleging conspiracy when the only ground for liability is the privileged publication.   In addition, the court found that Herman did not participate in the transfer of the assets.

 It is true there is no separate tort of civil conspiracy.   The gist or nucleus of a cause of action for conspiracy is not the conspiracy, but the underlying wrong producing damage.  (Unruh v. Truck Insurance Exchange (1972) 7 Cal.3d 616, 631, 102 Cal.Rptr. 815, 498 P.2d 1063;  Wise v. Southern Pacific Co. (1963) 223 Cal.App.2d 50, 65, 35 Cal.Rptr. 652.)   Nevertheless, Herman need not have joined the conspiracy at the time of its inception to be liable.  “ ‘․ [E]very one who enters into such a common design is in law a party to every act previously or subsequently done by any of the others in pursuance of it.’  [Citations.]”  (De Vries v. Brumback (1960) 53 Cal.2d 643, 648, 2 Cal.Rptr. 764, 349 P.2d 532.)

A conspirator's actions which further the conspiracy, therefore, may be distinct from earlier actions of other conspirators.   The significance of the conspiracy is that each member is liable as a joint tort-feasor.  (Robert H. Jacobs, Inc. v. Westoaks Realtors, Inc. (1984) 159 Cal.App.3d 637, 645, 205 Cal.Rptr. 620;  H & M Associates v. City of El Centro (1980) 109 Cal.App.3d 399, 413, 167 Cal.Rptr. 392.)   A plaintiff is entitled to damages from those defendants who engage in a conspiracy, and “the requisite concurrence and knowledge ‘ “ ‘may be inferred from the nature of the acts done, the relation of the parties, the interests of the alleged conspirators, and other circumstances.’ ” '  [Citation.]”  (Wyatt v. Union Mortgage Co., supra, 24 Cal.3d at p. 785, 157 Cal.Rptr. 392, 598 P.2d 45.)

Here, the underlying wrongs for which Durant seeks relief are the allegedly fraudulent conveyances.   Durant's pleadings, if true, establish Herman as a co-conspirator whose conduct at the judgment debtor hearing helped his law firm in its alleged plan to hide its client's assets.  (Ibid.)  The trial court found there to be a triable issue of fact concerning whether Herman was engaged in a conspiracy to hinder collection of the judgment against Robex/6.   This is the nucleus of the cause of action against Herman.  (Wise v. Southern Pacific Co., supra, 223 Cal.App.2d at p. 65, 35 Cal.Rptr. 652;  Dong v. Board of Trustees, supra, 191 Cal.App.3d at p. 1594, 236 Cal.Rptr. 912.)

Herman asserts there is no conspiracy exception to the privilege, especially when, as here, the only acts in furtherance of the conspiracy were publications made in judicial proceedings.   This is true only when the tort underlying the conspiracy is one for which the privilege applies, i.e., where the publication itself is injurious.   A civil conspiracy does not stand apart from the underlying tort that grows out of the conspiracy.

 When a cause of action for the underlying tort is not barred by the privilege, conduct relating to a judicial proceeding is admissible as evidence of the tort.  (White v. Western Title Ins. Co., supra, 40 Cal.3d at p. 888, 221 Cal.Rptr. 509, 710 P.2d 309;  Oren Royal Oaks, supra, 42 Cal.3d at p. 1168, 232 Cal.Rptr. 567, 728 P.2d 1202.)   That same conduct should also be admissible as evidence of conspiracy to commit the tort.   To apply the privilege as a bar against all conspiracy causes of action no matter what the underlying wrong, as Herman urges, would transform this bar against liability into an evidentiary privilege.

In Pettitt v. Levy, supra, 28 Cal.App.3d 484, 104 Cal.Rptr. 650, cited by Herman, the trial court properly sustained a demurrer to causes of action for fraud, misrepresentation, negligence, and emotional distress because the damages resulted only from the purported filing of a false or forged building permit, conduct which the court held privileged pursuant to section 47, subdivision 2.  (At pp. 486–487, 491, 104 Cal.Rptr. 650.)   The court further barred a cause of action for conspiracy, which was grounded on the same false or forged building permit, because the plaintiffs were not able to plead facts to “ ‘․ show something was done which, without the conspiracy would give rise to a right of action․’  [Citation.]”  (At p. 491, 104 Cal.Rptr. 650;  see also McClatchy Newspapers, Inc. v. Superior Court (1987) 189 Cal.App.3d 961, 234 Cal.Rptr. 702;  Thornton v. Rhoden, supra, 245 Cal.App.2d 80, 53 Cal.Rptr. 706 [privilege bars causes of action for defamation and for conspiracy to defame].)

In each of these cases, the defendants' only conduct in furtherance of the conspiracy was a communication in a judicial proceeding.   The communication was privileged only because it was central to the underlying wrong.   Once the privilege was invoked against the underlying torts, the conspiracy actions could not stand.

By contrast, here the alleged fraudulent conveyances occurred long before the judgment debtor hearing.   Herman's conduct relating to the debtor's examination is admissible evidence which could prove his involvement in a conspiracy to fraudulently convey the assets.   Of course this evidence is also admissible against any of the other alleged conspirators.

 Our holding does not declare open season on attorneys providing legal advice to their clients.   The section 47, subdivision 2 privilege is designed to afford litigants “ ‘․ the utmost freedom of access to the courts ․’  [Citation.]”  (Berman v. RCA Auto Corp. (1986) 177 Cal.App.3d 321, 324, 222 Cal.Rptr. 877) and protect innocent counsel from harassment (Friedman v. Knecht (1967) 248 Cal.App.2d 455, 462–463, 56 Cal.Rptr. 540).

Nevertheless, the privilege does not bar the evidentiary use of every statement made in the course of a judicial proceeding.  (Oren Royal Oaks, supra, 42 Cal.3d at p. 1168, 232 Cal.Rptr. 567, 728 P.2d 1202.)   The privilege is designed to further the policy of encouraging attorneys to zealously protect their clients interests.   It is inapplicable, however, when the attorneys are acting in their own financial interest or to cover up the wrongful conduct of their law firm.

 Attorneys are immune from “charges of conspiracy based upon advice rendered to clients accused of breach of contract․  [But] [a]ttorneys may be liable for participation in tortious acts with their clients, and such liability may rest on a conspiracy.”  (Wolfrich Corp. v. United Services Automobile Assn. (1983) 149 Cal.App.3d 1206, 1211, 197 Cal.Rptr. 446, interpreting Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 576, 108 Cal.Rptr. 480, 510 P.2d 1032, and Wise v. Southern Pacific Co., supra, 223 Cal.App.2d 50, 35 Cal.Rptr. 652.)

 Herman's alleged conduct is evidence that he and his law firm conspired with a client to defraud or injure a third party.   For this kind of conduct an attorney may be liable.  (Roberts v. Ball, Hunt, Brown & Baerwitz (1976) 57 Cal.App.3d 104, 109, 128 Cal.Rptr. 901;  Schick v. Bach (1987) 193 Cal.App.3d 1321, 1328, 238 Cal.Rptr. 902.)   An attorney who fraudulently injures a third party is not relieved from liability merely because he acted in the capacity of an attorney.  (Goodman v. Kennedy (1976) 18 Cal.3d 335, 346, 134 Cal.Rptr. 375, 556 P.2d 737.)   When the attorney goes beyond his role as advisor, and acts in a maliciously fraudulent way knowingly treading upon the legal rights of others, he is not shielded from liability.  (Worldwide Marine Trading v. Marine Transport Serv. (1981) 527 F.Supp. 581, 585.)

Our holding only establishes Durant's right to proceed with its action against Herman.   Whether the allegations are true or not is a matter to be determined in other proceedings.

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The order granting summary judgment in favor of Herman is reversed.   [[/]]  The parties are to bear their own costs on appeal.

GILBERT, Associate Justice.

STEVEN J. STONE, P.J., and ABBE, J., concur.