POLAKOFF v. WOLFE

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Court of Appeal, Fourth District, Division 1, California.

Gary L. POLAKOFF et al., Plaintiffs and Appellants, v. Deborah WOLFE, Individually, and as a Partner in Kremer & Wolfe, etc., Defendant and Respondent.

No. D010467.

Decided: June 28, 1990

Frank and Freedus, A.P.C., Stanley Frank, Robert M. Feinson and Wendy H. Bunten, San Diego, for plaintiffs and appellants. Hollins & Rice, Byron S. Hollins and Patricia A. Nevonen, Los Angeles, for defendant and respondent.

The complaint in this case stated two causes of action:  malicious prosecution and loss of consortium.   The demurrer of one of the defendants was sustained as to both causes of action without leave to amend.   Plaintiffs appeal.

PROCEDURAL BACKGROUND

Since the appeal results from the sustaining of a demurrer, we review the facts as they are set forth in the complaint.   The demurring defendant, Deborah Wolfe, is an attorney who was sued for alleged tortious conduct committed in the course of representation of clients.   Although the allegations of the complaint are sparse, we can construct the background facts leading to the malicious prosecution action from the complaint, the stipulation for dismissal of a prior action attached as an exhibit to the complaint, and the undisputed recitation of facts set forth in appellate briefs.

The prior action was to enforce a promissory note.   It was brought against the corporate maker of the note and also against appellants Polakoffs, alleged to be the owners and alter egos of the corporation.   The attorney for the plaintiff in the prior action was respondent Deborah Wolfe.   The prior action was resolved by a stipulation which resulted in a judgment against the corporation and a dismissal, with prejudice, of Gary Polakoff.1  The stipulation was silent as to the reason for the dismissal, stating only that “All claims made by plaintiffs in this action against Gary Polakoff are hereby dismissed with prejudice.”

Appellants then sued respondent Wolfe for malicious prosecution and loss of consortium.   Respondent successfully demurred to the complaint.   Neither the notice of the ruling sustaining the demurrer nor the judgment of dismissal indicates the basis of the court's determination.   At the time of the hearing the court stated its ground for ruling on the malicious prosecution cause of action was the failure of plaintiffs to show a favorable termination on the merits of the prior action.   The court stated no basis for its ruling on the second cause of action for loss of consortium.   We proceed to review all potential grounds for sustaining the demurrer, however, cognizant of the principle that if the ruling is correct on any basis it will be upheld, even though the stated reason for the ruling may be found in error.  (See 9 Witkin, Cal.Procedure (3d ed. 1985) Appeal, § 259, p. 266.)

SUFFICIENCY OF THE CAUSE OF ACTION FOR MALICIOUS PROSECUTION

 The three elements of a cause of action for malicious prosecution are:  (1) a favorable termination of the prior action;  (2) lack of probable cause for the bringing of the prior action;  and (3) establishment of malice in the maintenance of the prior action.

 (1) Favorable Termination.   The requirement of a favorable termination of the prior action is based upon the concept that it tends to show lack of culpability.  (Jaffe v. Stone (1941) 18 Cal.2d 146, 150, 114 P.2d 335.)   A finding of not guilty in a criminal proceeding or a defense verdict in a civil action satisfies the underpinnings of this inference.   At the opposite extreme, a dismissal based on procedural rather than substantive grounds, such as a dismissal based on the statute of limitations, does not reflect the merits of the underlying action.  (5 Witkin, Summary of Cal.Law (9th ed. 1988) Torts, § 441, pp. 524–525.)   Such dismissal will therefore not satisfy the requirement of “favorable termination” of the prior action.

 Termination of an action based upon the stipulation of the parties occupies a middle ground:  It may or may not reflect victory on the merits for the defendant.   Where such termination is disclosed by the pleadings, will this ambiguity defeat the plaintiff's effort to show “favorable termination,” as claimed by the respondents in this appeal;  or is it a matter subject to factual proof at trial, as contended by appellant?

The court in Minasian v. Sapse (1978) 80 Cal.App.3d 823, 145 Cal.Rptr. 829 was faced with a somewhat similar problem.   The termination of the prior action, upon which the subsequent malicious prosecution action was grounded, was based upon the failure of the plaintiff to prosecute the action under then Code of Civil Procedure section 583, subdivision (a).   The court concluded that failure to prosecute an action probably does reflect on its lack of merit and hence reversed a judgment on the pleadings in favor of the defendant.   The appellate court recognized, however, that at the pleading stage it might not be possible to determine conclusively the motivation for failure to prosecute, and that such might “occasionally be attributable to other than a complainant's implicit concession as to the merits of the action.”  (Minasian v. Sapse, supra, at p. 828, 145 Cal.Rptr. 829.)   This possibility constituted an issue of fact, the court held, to be determined at trial.

Weaver v. Superior Court (1979) 95 Cal.App.3d 166, 156 Cal.Rptr. 745 followed and expanded upon the reasoning of Minasian.   In Weaver, as here, the “favorable termination” element of a malicious prosecution action was based upon voluntary dismissal of the prior action.   The case came to the appellate court by writ brought upon the denial of a motion for summary judgment sought by the plaintiff in the malicious prosecution action.   The defendant's showing at the motion for summary judgment was that the prior action had been abandoned because of its excess cost, not lack of merit.   Plaintiff contended this was insufficient to overcome the inference of lack of favorable termination asserted to flow from voluntary dismissal.   The court stated “when a dismissal results from negotiation, settlement or consent, a favorable termination is normally not recognized․  Under these latter circumstances, the dismissal reflects ambiguously on the merits of the action.”  (Id. at pp. 184–185, 156 Cal.Rptr. 745.)   Concluding that a voluntary dismissal, like a negotiation or settlement, is ambiguous as to the merits of the action, the court ruled the matter was not subject to resolution by summary judgment.  (Id. at p. 186, 156 Cal.Rptr. 745.)

Even closer to the fact situation of our case is Haight v. Handweiler (1988) 199 Cal.App.3d 85, 244 Cal.Rptr. 488.   The issue, as in Weaver, was whether the voluntary dismissal of the prior lawsuit constituted “favorable termination” as required for the subsequent malicious prosecution action.   Here, however, the dispute was resolved not on the pleadings or by summary judgment, but by a court trial.   The court, after taking evidence, determined the dismissal had been a condition of settlement of the case with a codefendant, and as such did not reflect upon the merits of the dismissed defendant's case.   In affirming, the appellate court stated “The determination of the reasons underlying the dismissal is a question of fact,” citing Minasian v. Sapse.  (Id. at p. 89, 244 Cal.Rptr. 488.)

 From these authorities we conclude that certain species of suit resolution are so clear as to their grounds they conclusively establish, or disestablish, that the prior action was favorably determined on its merits.   Other categories of suit termination, however, are ambiguous.   Where the bare recitation of the means by which the action was terminated leaves in doubt the reasons for termination, such reasons are to be determined not on the pleadings but by development of the facts giving rise to the termination, to be accomplished either at trial or by summary judgment.2  (Accord, see Oprian v. Goldrich, Kest and Associates (1990) 220 Cal.App.3d 337, 269 Cal.Rptr. 429.)

Following this reasoning, we are obliged to conclude that the trial judge was in error in sustaining the demurrer to the first cause of action.   There was nothing before the court to indicate the basis for the stipulated dismissal of the defendant in the prior action (the plaintiff in this action).   Dismissal could have occurred because there was no merit to the complaint against Gary Polakoff, in which case Polakoff's malicious prosecution case should proceed.   On the other hand, the prior dismissal could have been a condition to the taking of the judgment against the corporation, in which case, as in Haight v. Handweiler, it would not reflect resolution on the merits.   It is a matter for fact determination, not disposal by demurrer.

(2) Lack of Probable Cause.   Assuming establishment of favorable termination of the prior action, respondent nevertheless contends the complaint is defective in that it has not adequately pled lack of probable cause.   Respondent here relies upon the specific formulation of “probable cause” which is applicable to attorneys bringing suit on behalf of their clients.   Respondent cites Sheldon Appel Co. v. Albert & Oliker (1989) 47 Cal.3d 863, 254 Cal.Rptr. 336, 765 P.2d 498 and Klein v. Oakland Raiders, Ltd. (1989) 211 Cal.App.3d 67, 259 Cal.Rptr. 149 as establishing new criteria for measuring the probable cause requirement as applied to attorney defendants.

Respondent is, of course, correct in suggesting that a new standard has been established.   It had been held in Tool Research & Engineering Corp. v. Henigson (1975) 46 Cal.App.3d 675, 120 Cal.Rptr. 291 that an attorney could be liable for malicious prosecution if he brought an action on behalf of a client without a reasonable or honest belief in its merits, or if he negligently failed to investigate the law or facts before proceeding.  Sheldon Appel rejected this test, holding:  (1) the conclusion as to the merit of the action is to be made upon an objective rather than subjective standard—i.e., not the specific opinion of tenability of the attorney bringing the action, but whether “any reasonable attorney would have thought the claim tenable” (Sheldon Appel, supra, 47 Cal.3d at p. 886, 254 Cal.Rptr. 336, 765 P.2d 498);  and (2) the attorney's diligence in investigation of the facts or law is irrelevant to the determination of probable cause (id. at pp. 882–883, 254 Cal.Rptr. 336, 765 P.2d 498).

 Respondent claims the following portion of the complaint fails to allege the probable cause elements prescribed by the Sheldon Appel standard:

“defendants ․ acted without probable cause in bringing and/or prosecuting the above-mentioned action against plaintiffs, in making the allegations stated therein which a reasonable lawyer would not regard as tenable and/or by unreasonably neglecting to investigate the facts and law in making their decision to proceed in prosecution of the above mentioned action․  [¶] [A]t the time the Complaint was filed, defendants ․ knew of no factual basis for the allegations against plaintiffs and/or should have known the allegations and causes of action concerning plaintiffs' alleged wrongful conduct had no basis in fact.”

This is at best a questionable allegation of lack of probable cause.   The portion of the charge claiming unreasonable investigation would not, under Sheldon Appel, support a conclusion of lack of probable cause.3  The allegation that “a reasonable lawyer would not regard [the action] as tenable” parallels the standard set forth in Sheldon Appel.   The paragraph then continues by stating the lawyer knew of no factual basis and/or should have known the complaint had no basis in fact.   The totality of this pleading leaves one in doubt as to the specific charge.   The language “should have known” implies negligence.   Coupled with the preceding allegation of inadequate investigation of facts, the tenor of the probable cause paragraph can be read to suggest lack of probable cause on the part of an attorney because he negligently participated in the bringing of an action when he did not have a sufficient basis for his belief in or understanding of its underpinnings.   On this analysis we conclude the demurrer was properly sustained.

 However, the paragraph if slightly tailored would have contained an allegation of lack of probable cause which we would have found adequate.   If the attorney “knew of no factual basis for the allegations against plaintiffs” and also filed the complaint when “a reasonable lawyer would not regard [the cause] as tenable,” we believe he would have framed his pleading without probable cause.   An attorney cannot claim probable cause to file a lawsuit based upon fact allegations which he knows to be untrue.   (Klein v. Oakland Raiders, Ltd., supra, 211 Cal.App.3d at pp. 74–75, 259 Cal.Rptr. 149;  Sheldon Appel Co. v. Albert & Oliker, supra, 47 Cal.3d at p. 881, 254 Cal.Rptr. 336, 765 P.2d 498.)   We conclude it also to be the rule that the composing of allegations leading to liability (such as that a defendant was the alter ego of his corporation) when an attorney has no facts (even such minimal facts as the representation of his client) upon which to base the allegations, constitutes lack of probable cause.   Since it appears the plaintiff in this case might have been able to state a viable cause of action based on this analysis, we find the sustaining of the demurrer without leave to amend to be error.

 (3) Malice.   Respondent asserts the pleading of malice is inadequate because it is conclusory, pleading simply that when the defendant lawyer prepared and filed the complaint she did so “maliciously,” and for “improper motives, including ․ harassing and causing economic harm to plaintiffs.”   The contention that these allegations are conclusory is warranted.   It does not, however, carry the day.   Malice is a state of mind, and it would seem difficult in many cases to allege more than the simple fact that it existed.   Here the plaintiff has alleged that the attorney knew the claims contained in the complaint were false;  that the attorney prosecuted these claims without an adequate investigation into their bases;  and that such prosecution was done for the purpose of harassing and causing economic harm.   We find these allegations, although assuredly general, to be adequate.  (See Sheldon Appel Co. v. Albert & Oliker, supra, 47 Cal.3d at p. 883, 254 Cal.Rptr. 336, 765 P.2d 498 [negligent investigation although irrelevant to the question of probable cause may be shown as it bears on malice of the attorney bringing the action];  Albertson v. Raboff (1956) 46 Cal.2d 375, 382, 295 P.2d 405 and Goland v. Peter Nolan & Co. (1934) 2 Cal.2d 96–97, 38 P.2d 783 [general allegations of malice held sufficient].)

INADEQUACY OF THE CAUSE OF ACTION FOR LOSS OF CONSORTIUM

 Loss of consortium is a derivative action.   Harm to a person resulting from injury to her spouse is actionable only if the precedent injury is actionable.  (Jablonski v. Royal Globe Ins. Co. (1988) 204 Cal.App.3d 379, 388, 251 Cal.Rptr. 160.)   Had we affirmed the trial court's sustaining of the demurrer to Gary Polakoff's malicious prosecution action, we would automatically reject Diane Polakoff's cause of action for loss of consortium.   Having reversed this judgment, however, we are obliged to review the action for loss of consortium upon the assumption that the action for malicious prosecution may succeed.

The nature of injury to one's spouse which has the potential of causing a claim for loss of consortium was last reviewed in Anderson v. Northrop Corp. (1988) 203 Cal.App.3d 772, 250 Cal.Rptr. 189.   In Anderson, a wife sued for loss of consortium because of the alleged impairment to her marital relationship resulting from Northrop Corp.'s firing of her husband.   In affirming the sustaining of a demurrer to the complaint, the court reviewed and summarized prior authority on the subject.   Admitting that loss of consortium can result not only from physical but from severe psychological injuries to one's spouse, the court nevertheless rejected claims based upon obviously minor vexations.   Citing Rodriguez v. Bethlehem Steel Corp. (1974) 12 Cal.3d 382, 115 Cal.Rptr. 765, 525 P.2d 669, the court restated the proposition that injury to the non-plaintiff spouse must be sufficiently serious and disabling to raise the inference that the conjugal relationship is more than superficially or temporarily impaired.  (Anderson v. Northrop Corp., supra, 203 Cal.App.3d at pp. 780–781, 250 Cal.Rptr. 189.)   The Anderson case and those it cites stand for the proposition that conclusory pleading of this particular cause of action is insufficient, and that the facts revealed by specific pleading must reasonably lend themselves to the conclusion that serious harm will likely have been caused the complaining spouse.

Our review of Diane Polakoff's cause of action for loss of consortium reveals only conclusory pleading.   The allegations of fact contained in her husband's cause of action, while potentially sustaining an action for malicious prosecution, suggest no severe physical or psychological damage supportive of anything other than “superficial or temporary” impairment of conjugal relations.   We believe the trial court was justified in sustaining the demurrer to this cause of action.

While the demurrer was properly sustained, we must reverse the trial court's order insofar as it denied Diane the opportunity to amend her claim to bring it within the strictures described in Anderson.   While we may question, under the facts of this case, whether she will be able ultimately to prove her claim, at the demurrer stage “we are not concerned with plaintiff's possible inability or difficulty in proving the allegations of the complaint.”  (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 572, 108 Cal.Rptr. 480, 510 P.2d 1032.)   Because the pleading defects might be curable, we are constrained to require that Diane be granted at least the opportunity to plead facts, if such exist, which would support a claim of loss of consortium.

DISPOSITION

The judgment of the trial court dismissing the first and second causes of action is reversed, with directions to modify the order sustaining the demurrer to provide leave to amend both the first and second causes of action.

I dissent.   I believe the court correctly determined that the underlying case giving rise to this action for malicious prosecution was not terminated in favor of Gary Polakoff.   I would therefore affirm the judgment of dismissal.

In analyzing this case to determine whether the demurrer was properly sustained without leave to amend, we cannot ignore the views expressed by the California Supreme Court on the tort of malicious prosecution.  (Auto Equity Sales v. Superior Court (1962) 57 Cal.2d 450, 455, 20 Cal.Rptr. 321, 369 P.2d 937.)   Consistent with Sheldon Appel Co. v. Albert & Oliker (1989) 47 Cal.3d 863, 254 Cal.Rptr. 336, 765 P.2d 498, we are not obligated to benignly scrutinize Polakoff's pleadings so that he can continue to burden the court system with this “disfavored” tort.  (Id. at p. 872, 254 Cal.Rptr. 336, 765 P.2d 498.)   In Sheldon Appel, the court deliberately refused to remove malicious prosecution from the “disfavored” list, announcing it “agree[d] with those decisions and commentaries which have concluded that the most promising remedy for excessive litigation does not lie in an expansion of malicious prosecution liability.”  (Id. at p. 873, 254 Cal.Rptr. 336, 765 P.2d 498.)   “[T]he better means of addressing the problem of unjustified litigation is through the adoption of measures facilitating the speedy resolution of the initial lawsuit and authorizing the imposition of sanctions for frivolous or delaying conduct within that first action itself, rather than through an expansion of the opportunities for initiating one or more additional rounds of malicious prosecution litigation after the first action has been concluded.”   (Ibid.)

Examining the first action in light of the foregoing, the inferences which must be drawn establish that the case on which Polakoff bases his malicious prosecution claim was not terminated in his favor.   The earlier lawsuit involved Gerald Forman's complaint for damages drafted by Wolfe naming Parkway Pontiac GMC Inc. and Polakoff among others as defendants.   Polakoff was Parkway's president.   The same firm of lawyers represented the corporation and Polakoff individually.   Following arbitration, a request was made for a trial de novo.   At the superior court the parties settled their case by signing a stipulation.   The single stipulation provided for a dismissal with prejudice against Polakoff individually with judgment to be entered against the corporation on specified terms including a sliding scale for the amount to be paid depending on the date of payment as well as describing security for the judgment pending its satisfaction.   Polakoff signed the stipulation individually and as president of the corporation.   His counsel also signed the stipulation approving it as to form.

The fact that the dismissal of Polakoff was part of a stipulated settlement package he agreed to, in my view, precludes him from maintaining a malicious prosecution action in the absence of an express reservation of rights in the stipulation.   The general rule is well established that the “favorable termination” element of a malicious prosecution claim is not satisfied when the prior proceeding ended by “negotiation, settlement, or consent.”  (Webb v. Youmans (1967) 248 Cal.App.2d 851, 853, 57 Cal.Rptr. 11;  see also Jaffe v. Stone (1941) 18 Cal.2d 146, 152, 114 P.2d 335;  Prosser and Keeton on Torts (5th ed. 1984) § 120, p. 892.)   Here, the clear inference from the package settlement is that Polakoff was dismissed not because the action against him had no merit but because Polakoff had agreed on behalf of the corporation to satisfy Forman's claim and to provide adequate security to assure payment.

The majority opinion suggests it is a question of fact whether Forman's voluntary dismissal of Polakoff constitutes a termination of the prior action in Polakoff's favor.   In support of this conclusion, they rely principally on Haight v. Handweiler (1988) 199 Cal.App.3d 85, 244 Cal.Rptr. 488 but the facts of that case are clearly distinguishable.   In Haight, one of two defendants in the underlying action offered to settle the case by paying $37,500 if the plaintiff agreed to dismiss the action as to both defendants.   Haight, the other defendant, was not a party to the settlement.   Following a court trial, the judge determined that the plaintiff's dismissal of Haight was an integral part of the settlement and thus did not constitute a termination of the action in Haight's favor.   The Court of Appeal affirmed, finding substantial evidence to support the trial court's determination.  (Id. at p. 89, 244 Cal.Rptr. 488.)

Although the issue of the complaint's sufficiency was not before the court in Haight, dicta in the court's opinion suggests that the “favorable termination” issue was properly treated by the trial court as a question of fact.   There, however, because Haight was not a party to the settlement, he had no opportunity to demonstrate that the dismissal was not a quid pro quo component of the settlement package.   In contrast here, if the dismissal was not tied to the settlement, Polakoff could have insisted that the settlement be structured differently or demanded language in the stipulation preserving his right to bring a malicious prosecution action.

In light of the policies enunciated in Sheldon Appel, I see no reason to allow a malicious prosecution action to be maintained—indeed, to require a trial on the merits in most cases—where a defendant obtains a dismissal as part of a settlement agreement which does not specify that such a “disfavored” action may be later prosecuted.1  In the absence of express notice, parties are entitled to assume that settlement constitutes an end to litigation rather than simply a breathing space between rounds.   Accordingly, I would affirm the judgment.

FOOTNOTES

1.   Both Gary and Diane Polakoff were named as defendants in the prior action.   The prior action, as against Diane, was dismissed (for unknown reasons) before the stipulated settlement was entered.   The stipulation therefore resulted in the dismissal only of Gary Polakoff.   The cause of action for malicious prosecution was brought only by Gary Polakoff.   Diane Polakoff joined in the complaint upon her allegation of damage resulting from loss of consortium.

2.   The requirement of “favorable conclusion” is efficient when the defendant in the original case has lost on the merits.   His loss is res judicata to any question of propriety of the initiation of the action and the establishment of probable cause of the plaintiff in bringing the action.   When the case is resolved against the plaintiff on any basis, however, it would seem that a determination of the underlying lack of merit would require a review of facts.   That the case is dismissed because of the bar of the statute of limitations does not establish that it was not brought maliciously and without probable cause.   While claiming no empirical knowledge or experience in the matter, we would nevertheless expect that cases brought in the face of a statute of limitations problem would just as often be based on malicious motives and lack probable cause as cases which do not suffer a limitations defect.   We see no reason why a party injured by being named in a meritless lawsuit should be precluded from redress because one of the defenses to the lawsuit relates to procedural rather than substantive issues.   However, this distinction appears well rooted in our jurisprudence, and certainly this case is not a suitable vehicle to challenge it.We cannot accept the dissent's contention that a termination of the lawsuit which is ambiguous as to its basis should result in what amounts to a conclusive presumption adverse to the injured defendant.   There is nothing in Sheldon Appel to indicate that its position of disfavor of malicious prosecution as a type of action goes this far.   Also, we cannot subscribe to the notion that failure to include a reservation of rights on the part of the dismissed defendant should work to his disadvantage.   The stipulated dismissal is a contractual transaction.   Rights lost or gained as a result thereby should be governed by contract principles, not by judicially imposed presumptions.   It is as much the obligation of the dismissing plaintiff as it is the burden of the dismissed defendant to anticipate the potential of a malicious prosecution action.   Absent discussion of the issue, no presumption one way or the other should follow respecting the potential cause of action for malicious prosecution which, certainly in the abstract, can constitute a very valuable right.

3.   We should note that neither Sheldon Appel nor Klein was a case decided on pleading grounds.   Each was an appeal which followed a trial, and the errors requiring reversal in each case were errors in the conduct of the trial or in jury instructions.   However, the new rules of substantive proof enunciated by Sheldon Appel are readily applicable to revised standards for pleading malicious prosecution actions against attorneys.

1.   My disagreement with the majority involves more than the phraseology of a settlement agreement.   I am concerned with the impact of the majority decision on the practice of law.   The majority seem to be unaware that lawyers routinely face potential liability as defendants in malicious prosecution actions.Here, the majority decision will have a substantial impact on how plaintiffs' counsel conduct settlement negotiations.   Under the rule the majority adopt, plaintiffs' attorneys must now be concerned about protecting their own interests as well as their clients' as soon as settlement negotiations commence since every silent settlement agreement can spawn a malicious prosecution action.   The attorney's self-interest ripens into an actual conflict with the client where the settling defendant is willing to waive malicious prosecution against the plaintiff but not the plaintiff's attorney.   Obviously, such a situation will result in the need for independent counsel resulting in additional unnecessary expense and delay.   While the result I reach would not entirely resolve the conflict issue, the number of cases in which it arises would be substantially reduced, limited only to those where a settling defendant seeks to explicitly reserve the right to bring a later malicious prosecution action.

FROEHLICH, Associate Judge.

KREMER, P.J., concurs.