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Commercial and Residential Evictions in California in the time of COVID-19 (Part 3 of 3) Updated as of: August 13, 2020

April 10, 2020/in All Blog Posts, Corporate Litigation/by Chris Evans

Part 1 and Part 2 of this three-part article, which addresses Governor Newsom’s statewide California eviction moratorium and the City of San Diego, can be found here and here.

The Judicial Council of California’s Emergency Rule 1

On April 6, 2020, the Judicial Council of California adopted 11 categories of COVID-19 emergency rules to assist California courts in a variety of respects, one of which is evictions. Pursuant to Emergency Rule 1, effective immediately, essentially all evictions and unlawful detainers are suspended. The rule prohibits any California Court from issuing a summons on any unlawful detainer complaint, as well as entering the default of any tenant in any unlawful detainer action. There is a narrow exception for actions necessary to “protect public health and safety;” however, this phrase is undefined. As originally drafted, this Rule was set to remain in place until 90 days after Governor Newsom lifts the California State of Emergency declaration.

As time ticked by and the pandemic worsened across California, it became quite clear that the California State of Emergency was not going to be lifted any time soon. As a result, the statewide ban on evictions, pursuant to Emergency Rule 1, was essentially set to be in place indefinitely. Realizing this and reiterating the intent of Emergency Rule 1 to only be temporary, the Judicial Council of California took action to amend Emergency Rule 1.

On August 13, 2020, the Judicial Council voted 19-1 to amend Emergency Rule 1 to end California’s statewide eviction freeze. Pursuant to the Judicial Council’s amendment, the statewide eviction freeze will be lifted as of September 1, 2020. In voting to amend the eviction ban, California Chief Justice Tani G. Cantil-Sakauye stated, “The duty of the judicial branch is to resolve disputes under the law and not to legislate. I urge our sister branches to act expeditiously to resolve this looming crisis.”

The Judicial Council’s eviction suspension was extraordinarily broad in that it did not limit itself to situations in which commercial or residential tenants are grappling with financial difficulties caused by COVID-19, and, instead, served as a blanket suspension on evictions. For over five months, the Emergency Rule has prevented landlords from taking any legal action against any tenant, regardless of whether the tenant has been affected by COVID-19. Now, with the passage of the Judicial Council’s Amendment to lift the statewide eviction freeze, California State Courts can now resume all unlawful detainer proceedings that came to a sudden halt in April of 2020 and begin processing all unlawful detainer complaints filed during the eviction freeze.

Similar to Governor Newsom’s eviction Order, the Judicial Council’s rule did not alleviate the root problem of tenants being unable to pay rent. As noted by the California Chief Justice, the legislature—not the judiciary—have the proper tools to attempt to solve the inevitable eviction crisis, and it will up to the California legislative bodies to craft a solution to afford relief to residential tenants. One such measure that the State Legislature is considering is AB 1436, which strikes a balance of protecting financially impacted tenants from eviction while also preserving landlords’ rights.

AB 1436 prohibits landlords from evicting tenants that cannot pay rent due to the economic effects of COVID-19. However, the proposed law permits landlords to evict a tenant that is not financially affected by COVID-19 and fails to pay rent, or a tenant that occupies the property unlawfully. In its current form, AB 1436 satisfies landlords’ interests and concerns and protects tenants that have felt the financial impacts of COVID-19. AB 1436 does not apply to commercial tenancies.

President Donald Trump’s Executive Order to Ban All Evictions

On August 8, 2020, President Donald Trump signed four separate executive orders, one of which was meant to protect all U.S. renters from eviction (the “Order”). However, the Order does little to achieve its overall purpose as it does not restrict any landlord, commercial or residential, from evicting a tenant.

The Order directs the Secretary of Health and Human Services and the Director of the CDC to evaluate whether halting evictions is “reasonably necessary to prevent the further spread of COVID-19.” The Order also instructs the Secretaries of the Treasury and Housing and Urban Development departments to identify all federal funds that can be used to provide temporary financial assistance to renters that are struggling to pay rent. The Secretaries of Treasury and Housing and Urban Development are further required to “promote the ability of renters and homeowners to avoid eviction.”

The Order does little to effectuate an instant protection to millions of Americans—and Californians—that are struggling to pay rent. Rather, the Order requires that other federal agencies investigate the problem and determine if it necessary to halt evictions and provide financial relief to renters. Looking ahead, all renters across the U.S., including California renters, must look to their state legislatures and local municipalities for assistance.

Conclusion & Recommendations

Commercial and residential landlords and tenants are facing an incredibly unique and unparalleled set of circumstances. The temporary eviction moratoriums at both the state and local levels have been enacted to try and combat not only the financial and economic stresses caused by the COVID-19 pandemic, but also the consequences of such stresses, such as losing one’s home or possession of a business. It is important to be cognizant of the fact that there are sure to be situations and instances that remain unaddressed, subject to dispute or simply fall within the inevitable grey areas. Additionally, the landscape will continue to shift and landlords and tenants should continue to look for the most recent updates.

With that in mind, landlords and tenants should try to be patient with each other and remain organized. Document as much of the interactions with your tenant or landlord as you can, and preserve all letters, notices, correspondence (e-mails and text messages included) exchanged with your landlord or tenant. Additionally, both landlords and tenants should understand that tenants will still be responsible for the rent that they are unable to pay on time. The eviction moratoriums do not forgive tenant’s missed rent payment. Finally, the requirements in the Orders and Ordinance speaking to notice and documentation are the minimum requirements. There is nothing from preventing a landlord or a tenant from engaging further with one another to try and come to mutual understandings, payment plans, lease addendums or the like and such options should almost always be considered.

Should you have questions or concerns about your rights or obligations, whether from a landlord or tenant’s perspective, an experienced real estate attorney can help you navigate these issues and the uncertainty that comes along with them.

The materials available at this web site are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to this web site or any of the e-mail links contained within the site do not create an attorney-client relationship. The opinions expressed at or through this site are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.

Squatter’s Rights, Prescriptive Easements, and Adverse Possession

April 8, 2020/in All Blog Posts, Corporate Litigation, Real Estate/by Ajay Gupta

Though a property owner may prefer not to consider it, there are rights which an individual is entitled after using a property for a particular period of time despite the fact that they do not own said property. Legally, when an individual uses a property without the permission of the owner it is known as adverse possession. California has a variety of protections for both property owners and squatters that ensure that these circumstances can be litigated fairly and effectively.

For those engaged in adverse possession the law is highly specific. Depending on the type of property and the manner of its use, the failure of a property owner to take action against a squatter can eventually lead to the latter claiming legal ownership of the property. Though the requirements vary widely, they generally include paying property taxes continuously for 5 years.

Property owners have few means of recourse other than litigation, as the courts must establish conclusively that the squatter has no authentic claim to the property before eviction can be pursued. Such claims commonly include tenant’s rights, or a situation where the claimant can prove that they provided monetary compensation, goods or services to the property owner in exchange for use of the property. Even an implied oral or written contract with the owner could be valid. If this can be established any attempt at eviction would have to proceed in accordance with local landlord-tenant law.

Prescriptive easement is a commonly encountered relative of adverse possession. Generally it entails intermittent use of a section of a property for a particular purpose without the consent of the owner, such as an unpaved driveway to one’s property that runs across another property for some distance. Like adverse possession, the key to any claim is continuous unchecked use for a period of time, otherwise it is simply trespassing. However, the major difference is that the claimant does not have to pay property taxes and other parts of the property can be used and resided upon by the owner during the claimed period of continuity.

The CBD FAQ

December 8, 2019/in All Blog Posts, Cannabis, Corporate Litigation/by Jake Ayres

CBD, short for cannabidiol, is the wildly popular compound that has found its way into food, drinks, supplements, cosmetics, and even dog treats. CBD is a non-psychoactive instance of the 113 known cannabinoids, organic compounds unique to cannabis. Celebrity athletes have gotten into the game as well, with ex-Patriots tight end and lovable goofball Rob Gronkowski partnering with CBD Medic and North Shore cult hero professional surfer Jamie O’Brien extolling the virtues of the CBDMD line of products on his Instagram page. CBD’s proponents cite its purportedly therapeutic effects, ranging from analgesic, anti-inflammation, anti-anxiety, and mild sedation. Some proponents have even used the term the “boy scout molecule” to describe its positive effects because it always “does the right thing.”

Although the FDA has only approved CBD in the context of clinical trials for the drug Epidiolex—used to treat a form of epilepsy—the market interest in CBD, derived in part from the anecdotal reports of its benign and benevolent bodily effects, has skyrocketed in the recent past. In fact, the cannabis industry market research firms BDS Analytics and Arcview Market Research estimate that the CBD industry could reach a value of $20 billion by 2024. In spite of the overwhelming public interest and market demand, one question remains: is it legal? In the article below, we answer the fundamental frequently asked questions about the current, hazy legal framework.

FAQ:

IS CBD LEGAL AT THE FEDERAL LEVEL?

IS CBD LEGAL UNDER CALIFORNIA LAW?

CAN YOU PUT CBD IN FOOD OR DRINKS?

CAN I DEPOSIT FUNDS FROM HEMP-DERIVED CBD WITH A BANK? CAN I GET A BANK LOAN FOR MY HEMP-DERIVED CBD BUSINESS?

WHAT’S NEXT?

Is CBD legal at the federal level?

Yes—if it is derived from hemp, not cannabis. The Agriculture Improvement Act of 2018 (the “Farm Bill”) passed by Congress revised Controlled Substances Act to differentiate between the plants cannabis and hemp. Without delving too deep into botany and plant genetics, generally speaking, hemp is the same species as cannabis sativa, but has little to no psychoactive properties—that is, a very low proportion of delta-9 tetrahydrocannbinol (THC).

Indeed, the Farm Bill defines hemp as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannbinol [THC] concentration of not more than 0.3 percent on a dry weight basis.” Because the plant is itself legal, that has paved the way for the nationwide legality of CBD, provided it is derived from a hemp plant.

That being said, the Farm Bill also provides that hemp-derived CBD, as well as the hemp plants themselves, are subject to relatively strict state-federal oversight, where hemp cultivators, in states like California that have opted to develop a hemp program, must apply for licenses from state departments of agriculture who have submitted an approved plan to the United States Department of Agriculture. Cultivators in states that have opted not to develop a hemp program must apply to the federal government for licenses to grow.

The penalty for cultivators that grow a crop that is out of compliance—that is, one that contains more than 0.3% THC—is the harsh remedy of mandatory destruction of the entire crop. This legal regime has brought into relief the climate sensitivity of hemp, in that seeds grown in one state can generate a crop coming in under the 0.3% threshold, while identical seeds grown in a different state can result in a non-compliant crop subject to destruction. As the science on the plant develops, hemp cultivators will continue to have to bear the risk of these variations in THC content as long as cannabis and THC remain federally illegal.

Is CBD Legal under California Law?

Yes. Nothing earth shattering here, but a foundational point that puts California at odds with federal law once again. Now that cannabis has been legalized for recreational use in California, the whole plant, including CBD derived from cannabis, is now legal at the state level (provided the parties in the supply chain have the proper licensure, of course).

However, cannabis is still federally illegal. CBD derived from cannabis, as opposed to hemp, is still federally illegal, placing CBD in the same legal netherworld as California-legal cannabis and THC. That is, businesses and individuals that grow, manufacture, process, distribute, sell, and consume cannabis, even in states where it has been legalized for adult-use/recreational purposes, are still breaking federal law, which considers cannabis a Schedule I drug under the Controlled Substances Act.

However, there is a measure of protection for medical cannabis operators. Under the Ninth Circuit’s decision in United States v. McIntosh, 833 F.3d 1163 (2016), the federal government is prohibited from prosecuting individuals or entities for medical cannabis usage or distribution, provided that those same persons are in compliance with applicable state medical cannabis laws. Id. at 1177. In that case, the Ninth Circuit ruled that then-entitled Rohrabacher-Farr Amendment (now known as the Rohrabacher-Blumenauer Amendment)—a Congressional rider on appropriations bills that prevents the federal government from using federal funds to prosecute state law-compliant individuals or entities for cannabis usage/possession/distribution in states where medical cannabis is legal—was a binding prohibition on federal drug law prosecution against legal medical cannabis operators and consumers. The Rohrabacher-Blumenauer Amendment is currently in effect until September 30, 2020, having been renewed via the 2020 Fiscal Year omnibus spending bill on December 20, 2019.

However, the Amendment provides no protection from prosecution for recreational, as opposed to medical, cannabis. Although a broader version of the Rohrabacher-Blumenauer Amendment, which would have extended protection to recreational cannabis usage as well as medical cannabis usage, passed the House in June of 2019, the Senate refused to consider that expansion. On the other hand, the Cole Memorandum (“Cole Memo”), a now-defunct relic of the Obama administration, did provide some measure of protection for recreational cannabis, wherein the then-U.S. Attorney General James Cole in August 2013 instructed the DOJ to de-prioritize prosecution of cannabis cases, provided that the would-be defendants were in compliance with locally-enforced state law requirements. Of course, the Cole Memo explicitly stated it did not create any substantive civil rights or reduce the powers of the DOJ to prosecute cannabis cases, but instead provided prosecutorial guidelines. Although ostensibly geared toward avoiding prosecution of medical cannabis, the Cole Memo itself made no such distinction, referring to “jurisdictions that have enacted laws legalizing marijuana in some form,” and came after the first wave of recreational legalization in 2012 in Colorado and Washington. Regardless of the erstwhile Cole Memo’s scope, the vehemently anti-cannabis former Trump Administration U.S. Attorney General Jeff Sessions rescinded the Cole Memo with a one-page memorandum of his own in 2018.

Ultimately, the current administration has shown relatively little intention of prosecuting recreational cannabis. Sessions’ successor, William Barr, is less dogmatic about cannabis and its enforcement, and favors a “federalist” approach where the federal government would cede enforcement power and responsibility to the states. Barr even went as far to say that he “accept[s]” the Cole Memo, but has yet to reinstate it with a memorandum of his own, preferring to delegate the discretionary authority to individual U.S. Attorneys.

Until the federal government speaks more concretely, as of now, the only thing protecting legitimate cannabis businesses, even if their only product is non-psychoactive CBD (derived from cannabis, not hemp), are the whims of the local U.S. Attorney. However, California legitimate cannabis businesses can take some comfort in the fact that two of the four California U.S. Attorneys—Robert Brewer of the Southern District of California and McGregor Scott of the Eastern District of California—have made neutral-to-positive remarks regarding their enforcement priorities and personal attitudes toward cannabis, while the other two have remained sphinxish on the matter.

Can you put CBD in food or drinks?

Not right now, per the FDA. The FDA regulates food and drink in interstate commerce, and currently prohibits infusion of CBD into human or animal food or drink, citing the dearth of research on the toxicity of the molecule. However, this status is subject to change, as researchers within and without the FDA continue to explore the effects of CBD on humans and animals.

In fact, despite the widespread availability of CBD-infused food and drink products, the FDA has recently begun to assert its authority. On November 25, 2019, the FDA issued a press release announcing that it had “issued warning letters to 15 companies for illegally selling products containing [CBD] in ways that violate the Federal Food, Drug, and Cosmetic Act (FD&C Act).” The warning letters cited the 15 companies for various violations of the FD&C Act, including “marketing CBD products to treat diseases or for other therapeutic uses for humans and/or animals” and “marketing CBD products as dietary supplements and adding CBD to human and animal foods.” In so doing, the FDA noted that “it cannot conclude that CBD is generally recognized as safe . . . among qualified experts for its use in human or animal food.” The FDA cited back to its prior consumer update, where it pointed out the results of several preliminary studies indicating potential negative effects of CBD, including but not limited to liver damage. In short, the FDA continues to rely on the absence of reliable science on the effects of CBD in justifying a conservative approach to the legal regime surrounding CBD infused food and drink. More importantly for operators in the hemp and CBD industries, the FDA has shown that is not afraid to crack down on those who would flout the prohibition on CBD-infused food and drink. Whether these warning letters lead to prosecution for the 15 businesses or their competitors, however, remains to be seen.

Can I deposit funds from hemp-derived CBD with a bank? Can I get a bank loan for my hemp-derived CBD business?

Unclear. The federal government and the banking industry are engaged in an ongoing ping-pong match wherein Congress urges banks to accept hemp money, and the banking industry responds by requesting additional guidance from the federal government.

The initial volley came in April 2019 where Senators Mitch McConnell and Ron Wyden sent letters to banking regulators urging them to issue guidance so that banks would “feel secure in engaging” with the hemp industry, but also noting that “[l]egal hemp businesses . . . should not [be] discriminated against.” The American Banking Association sent a follow-up letter to financial regulators in June 2019 similarly urging for issuance of guidance to the banking industry such that they would be empowered to accept money from legal hemp businesses.

On December 3, 2019, federal banking regulators responded by confirming that they would not require federally insured banks to file suspicious activity reports for hemp business clients. In so doing, they confirmed that hemp is no longer considered a Schedule I controlled substance, and that hemp business customers are responsible for compliance with the regulatory framework put forth by the Farm Bill. Despite this reassurance, the ABA responded positively to the announcement, but stopped short of announcing it was open season for hemp business loans, noting that they would work with regulators to “develop additional guidance.” In short, although federal regulators and the banking industry are closer to reaching consensus on providing financial services to hemp businesses than they were in early 2019, the banking industry has not indicated that they are entirely open for business. That being said, the rollback of the suspicious activity reports rule perhaps paves the way for more risk-tolerant financial institutions to jump into servicing the hemp industry while the more conservative wing of the industry waits for additional federal guidance and assurances.

What’s Next?

The legal framework for CBD, much like that of cannabis more broadly, has yet to catch up to the market demand. Because of the potential pharmaceutical, food, and drink applications of CBD, the FDA has taken the lead on its regulation, holding a public hearing from various stakeholders at the end of May 2019. The FDA has not yet issued further rules or guidance since then, presumably to digest the numerous comments made at that day-long hearing. Until then, hemp-derived CBD is safely in the stream of commerce, as long as it is not in food or drink. Cannabis-derived CBD is in the same legal purgatory as California-legal cannabis, but may benefit from the same amount of prosecutorial discretion. As far as your favorite CBD lemonade your local liquor store stocks, that product is in jeopardy of being taken off the shelves, as demonstrated by the FDA’s November warning letters.

An Offer You Can’t Refuse: Civil Extortion or Demand Letter

August 6, 2019/in All Blog Posts, Corporate Litigation/by Jake Ayres

When sending a demand letter, whether the sender is an attorney or a lay person, it can be tempting to come in guns blazing. While it is standard practice to threaten civil litigation, sometimes the sender will contemplate other threats, such as threatening criminal prosecution or calling the IRS (or FTB). However, while it may be only human to try and maximize the leverage present in the demand letter in order to effectuate a result, making threats to report someone in a demand letter can result in liability for civil extortion and place the demand letter outside of the litigation privilege. This article discusses the often fine and blurry line between a strongly worded demand letter and an extortionate threat.

The Basics

Before exploring the case law, a quick primer on the law defining civil extortion is in order. Extortion is defined as “the obtaining of property from another, with his consent . . . induced by a wrongful use of force or fear . . . .” Pen. Code § 518. Fear, for purposes of extortion, “may be induced by a threat of any of the following: 1. To do an unlawful injury to the person or property of the individual threatened or of a third person. 2. To accuse the individual threatened . . . of any crime. 3. To expose, or impute to him . . . any deformity, disgrace, or crime. 4. To expose a secret affecting him . . . . 5. To report his . . . immigration status or suspected immigration status.” Pen. Code § 519. Moreover, attempted extortion is just as punishable as successful extortion. Pen. Code § 523.

Threats that may be legal on their own can become extortionate “when coupled with a demand for money.” Philippine Export & Foreign Loan Guarantee Corp. v. Chuidian, 218 Cal. App. 3d 1058, 1079 (1990). Extortionate threats are criminal regardless of “whether or not the victim committed the crime or indiscretion upon which the threat is based and whether or not the person making the threat could have reported the victim to the authorities or arrested the victim.” Flatley v. Mauro, 39 Cal. 4th 299, 327 (2006) (citations omitted). Moreover, the victim need not be accused of a specific crime—vague intimations suffice, provided that “‘the accusations . . . put the intended victim of the extortion in fear of being accused of some crime.’” Id. (quoting People v. Sanders, 188 Cal. 744, 749-50 (1922)).

Origin of the Species: Flatley v. Mauro

The seminal case on the issue of civil extortion in California is Flatley v. Mauro, 39 Cal. 4th 299 (2006). In that case, Michael Flatley, the “Lord of the Dance” himself, received a demand letter from attorney D. Dean Mauro on behalf of a woman who claimed that Flatley had raped her in a Las Vegas hotel room. In the demand letter, Mauro threatened that “all pertinent information and documentation, if in violation of an U.S. Federal, Immigration, I.R.S., S.S. Admin., U.S. State, Local, Commonwealth U.K., or International Laws, shall immediately be turned over to any and all appropriate authorities” if Flatley did not immediately settle the case. Id. at 308-09. The letter also threatened to send press releases to a laundry list of media outlets if Flatley declined to settle. Id. at 309. In subsequent phone calls with Flatley’s attorneys, Mauro said it would take “seven figures” to settle the matter and prevent him from “going public.” Id. at 311.

After declining to pay Mauro, Flatley sued Mauro for, among other things, civil extortion. Id. at 305. Mauro filed an anti-SLAPP motion to strike Flatley’s complaint, arguing that his demand letter, upon which Flatley’s complaint was premised, was subject to the litigation privilege. Id. at 311. Flatley argued that Mauro’s letter constituted extortion and was therefore illegal conduct unprotected by the litigation privilege. Id. The trial court agreed with Flatley and denied Mauro’s anti-SLAPP motion. Id. The Court of Appeal affirmed. Id.

The California Supreme Court affirmed the Court of Appeal and held that because Mauro’s letter and subsequent phone calls constituted extortion, were illegal as a matter of law, and thus unprotected by the litigation privilege. Id. at 333. The court held that Mauro’s threats to accuse Flatley of rape squarely met the definition of extortion in that he “threatened to ‘accuse’ Flatley of, or ‘impute to him,’ ‘crimes’ and ‘disgrace.’” Id. at 330 (citing Pen. Code § 519). The court also reasoned that Mauro’s vaguer threats to report Flatley for unspecified violations of immigration and tax law established extortion because they put Flatley in fear of being accused, and were placed even more firmly within the realm of extortion because these alleged violations were unrelated to Mauro’s client’s claim against Flatley. Id. at 330-31.

Despite the foregoing, the court did attempt to cabin its holding to the facts of the case:

We emphasize that our conclusion that Mauro’s communications constituted criminal extortion as a matter of law are based on the specific and extreme circumstances of this case. . . . [O]ur opinion should not be read to imply that rude, aggressive, or even belligerent prelitigation negotiations, whether verbal or written, that may include threats to file a lawsuit, report criminal behavior to authorities or publicize allegations of wrongdoing, necessarily constitute extortion. . . . Nor is extortion committed by an employee who threatens to report the illegal conduct. In short, our discussion of what extortion as a matter of law is limited to the specific facts of this case.

Id. at 332 n.16 (emphasis added).

Flatley’s Progeny: Trying to Draw the Line

The court’s firm repudiation of Mauro’s aggressive pre-litigation tactics has cast a long shadow over demand letters in later cases, resulting in liability for attorneys.

Although not as over-the-top as Mauro’s demand letter, an attorney’s demand letter in Mendoza v. Hamzeh, 215 Cal. App. 4th 799 (2013) was threatening enough for the Court of Appeal to affirm the trial court’s holding that it was extortionate. In that letter, attorney Reed Hamzeh told plaintiff Miguel Mendoza, a former employee of Hamzeh’s client, Hamzeh demanded a payment of at least $75,000, or he would “be forced” to report Mendoza to “the California Attorney General, the Los Angeles District Attorney, the Internal Revenue Service regarding tax fraud, the Better Business Bureau, as well as to customers and vendors with whom he may be perpetrating the same fraud upon.” Id. at 802. The court held that “Hamzeh’s threat to report criminal conduct to enforcement agencies and to Mendoza’s customers and vendors, coupled with a demand for money, constitutes ‘criminal extortion as a matter of law.’” Id. at 806. Importantly, the court also noted that although Hamzeh’s threats were not as egregious as those in Flatley, they still constituted extortion as a matter of law, concluding that “[t]he rule must be a bright line rule.” Id. at 807.

The courts further refined the Flatley rule in Stenehjem v. Sareen, 226 Cal. App. 4th 1405 (2014), when the Court of Appeal reconfirmed that veiled threats still can constitute extortion as a matter of law. Jerome Stenehjem sued his former employer, AKON, and his boss, Surya Sareen, for wrongful termination after he was terminated for misconduct. Stenehjem sent an email to Sareen’s counsel demanding a settlement payment and vaguely invoking a potential qui tam case based on AKON’s allegedly fraudulent billing practices. In particular, Stenehjem wrote that he did not want to “involve the United States Attorney General, the Department of Justice or the DOD, nor did he “wish to make a Federal case out of this,” nor was it his “first choice to procede [sic] with the Qui Tam option.” Id. at 1422. Despite the more veiled and circumspect threats to report Sareen to the authorities, the court concluded that Stenehjem’s email constituted extortion as a matter of law because “[i]t threatened to expose Sareen to federal authorities for alleged violations of the False Claims Act unless he negotiated a settlement of Stenehjem’s private claims.” Id. at 1422. The could reasoned that just because Stenehjem’s threats were “less than explicit” did not render them legal—“that Stenehjem’s threats may have been ‘veiled’ . . . or ‘half-couched in legalese does not disguise their essential character as extortion.’” Id. at 1425 (citations omitted). Finally, the court also noted that the conduct threatened to be exposed by Stenehjem was unrelated to his claim for wrongful termination. Id. at 1423.

On the other end of the spectrum, the court in Malin v. Singer, 217 Cal. App. 4th 1283 (2013) determined that a pre-litigation demand letter with no “overt” threat to report the plaintiff to authorities was not extortion as a matter of law and thus survived an anti-SLAPP challenge by virtue of being subject to the litigation privilege. Plaintiff Michael Malin was accused, in a letter from defendant celebrity lawyer Marty Singer, who was representing Malin’s business partner Shereene Arazm, of misappropriating company funds, including “to arrange sexual liaisons with older men.” Id. at 1288. The demand letter, in addition to threatening a civil lawsuit, accused plaintiff of “engag[ing] in insurance scams designed to defraud . . . insurers,” “hid[ing] assets from creditors as well as from the taxing authorities.” Id. The court held that the letter did not constitute extortion as a matter of law, and contrasted it with the letters at issue in Flatley and Mendoza, reasoning that “Singer’s demand letter did not expressly threaten to disclose Malin’s alleged wrongdoings to a prosecuting agency or the public at large.” The court also noted that the “secret” threatened to be exposed was related to Singer’s client’s claims against Malin, unlike the conduct threatened to be exposed in Flatley and Mendoza, which “had no reasonable connection to the underlying dispute.” Id. at 1299.

Federal Courts Weigh In

The federal courts have also had opportunities to interpret Flatley and its progeny. The California Central District Court held that a letter from a composer plaintiff to a music production company defendant threatening to, inter alia, “file a criminal complaint with the FBI [and] seek whatever criminal punishment the justice department might see fit” was extortion as a matter of law. Baker v. FirstCom Music, No. LACV 16-8931-VAP (JPRx), 2017 U.S. Dist. LEXIS 222010, at *19 (C.D. Cal. July 27, 2017). Reaching the opposite conclusion, the California Central Bankruptcy Court held in King v. McCarthy (In re McCarthy), No. 2:12-bk-40506 ER, 2013 Bankr. LEXIS 4708 (C.D. Cal. Nov. 6, 2013) that a creditor’s threat to “picket [debtor’s] home and [debtor’s and debtor’s] spouse’s respective workplaces, and to obtain media coverage of Plaintiff’s non-payment of the amounts due Debtor” did not constitute extortion as a matter of law. Id. at *10.

Analysis and Takeaways

Although whether civil extortion exists as a matter of law is a slippery question, certain “dos and don’ts” for demand letters can be extrapolated from the leading cases:

Don’t threaten to report the recipient to the authorities. In Flatley, Mendoza, Stenehjem, and Baker, all of the senders made threats to report the recipients, and all of those communications were held to be extortionate as a matter of law. However, per Flatley’s footnote, this threat must be coupled with a demand for money to be extortionate. Flatley, 39 Cal. 4th at 332 n.16. One still may threaten to report someone to the authorities if not also demanding money. However, a demand letter is almost always aimed toward monetary recovery. Therefore, a best practice would be to avoid threats to report the recipient to any and all authorities.
Don’t get cute, either. The sender in Stenehjem did not explicitly condition his reporting the recipient to the authorities on payment of his demand, but instead tried to avoid making a direct threat by saying he did not “want . . . to involve” various federal authorities in his dispute with the recipient. Recognizing this tactic as a mafia-style “it’d be a real shame if something happened to you”-type threat, the court firmly established that even “veiled” threats can constitute extortion as a matter of law. Accordingly, when drafting a demand letter, don’t try to veil your threats—a court is likely to see right through such an attempt.
If you must bring up other wrongdoing, do draft carefully. The line between the “cute” but illegal threats of Stenehjem and the more plain, legal statements of wrongdoing in Malin is blurry at best. The main difference between the two is how delicately they are drafted. One could argue, as the plaintiff did in Malin, that Singer’s mention of violation of tax laws and insurance fraud constituted an implicit threat to report the plaintiff for those violations. While the court in Malin reasoned that Singer’s demand letter was allowable because there was no “overt” threat, Stenehjem—decided a year after Malin—confirmed that implicit—or “covert”—threats can also qualify as extortion. Although it is unclear whether a court would interpret the statements in Malin as “implicit” threats with the benefit of Stenehjem as precedent, it is advisable to err on the side of “just stating the facts” side of the scale and mention knowledge of violations of the law without mentioning the relevant authorities.
If you must bring up other wrongdoing, do make sure it is related to the underlying claims. Although it is unclear whether “unrelatedness” is a prerequisite to a finding that a threat to report or reveal is extortionate, courts are clear in that they view threats to reveal misconduct that is related to the underlying claim more favorably. In Flatley and Stenehjem, the courts both explicitly noted that the conduct threatened to be exposed was unrelated to the underlying claims against the recipients of the demand letters, thus weighing in favor of a finding of extortion. On the other hand, the threat found to be extortionate by the sender in Baker was ostensibly related to his underlying claims for, inter alia, fraud, copyright infringement, and RICO violations. One could harmonize the seemingly conflicting rulings on relatedness by requiring relatedness for the “secret” prong of Penal Code section 519, and not requiring it for the “crime” prongs of that section. See Malin, 217 Cal. App. 4th at 1299 (“[T]he ‘secret’ that would allegedly expose [Malin] and others to disgrace was inextricably tied to Arazm’s pending complaint. . . . We cannot conclude that the exposure of Malin’s alleged activities would subject him to any more disgrace than the claim that he was an embezzler.”); see also id. (holding that Singer’s letter was not extortionate because, unlike the letters in Flatley and Mendoza, it did not “contain[] . . . express threats [to report Malin to prosecuting agencies or the IRS] and others that had no reasonable connection to the underlying dispute”) (emphasis added).

The law on civil extortion is a highly fact-specific world of fine lines. Because of the nuanced law on the subject, the safest bet is to avoid making threats to report the recipient of the demand letter to any authority for a supposed criminal violation, whether explicit or implicit. However, as the foregoing cases demonstrate, there is substantial wiggle room, particularly when it comes to the “secret exposure” prong of the penal code. In any event, it behooves prospective plaintiffs and their counsel to think twice before making threats to report in a demand letter.

There’s more to learn. Read Part II here:

An Offer You Can’t Refuse, Part II: No Cash, No Claim

In the Weeds on the SAFE Banking Act

May 20, 2019/in All Blog Posts, Cannabis, Corporate Litigation/by Jake Ayres

In tax season of 2019, a legal cannabis grower walked a nerve-wracking 20 yards from the parking lot to a California government office to pay his state taxes—with a pile of $350,000 in cash. The illegality of cannabis at the federal level has largely shut cannabis businesses—legal at the state level—out of traditional banking. As a result, cannabis businesses operate on an all-cash basis, leading to cash payments to employees, vendors, professional service providers, utilities, and government entities. While this has been a boon to the armored transport and logistics industries, cannabis businesses striving to remain within the contours of the law find themselves bearing the considerable burdens of operating on an all-cash basis, racking up considerable overhead to protect large sums of cash from would-be thieves. Given the onus placed on cannabis businesses—and, arguably, neighbors wary of 24/7 armed guards—cannabis business surely cannot remain excluded from banking forever, can they? Enter the Secure And Fair Enforcement (SAFE) Banking Act of 2019

This Act would open the federal floodgates holding back a swollen river of cannabis money, allowing cannabis business to bank their money with traditional financial institutions. The SAFE Banking Act, cosponsored by a bipartisan group of 180 representatives, has already been approved for a U.S. House of Representatives floor vote after passing the House Financial Services Committee on March 28, 2019, with a 45 to 15 vote. On April 8, 2019, the House Judiciary Committee referred the bill to the House Committee on Crime, Terrorism, and Homeland Security, where it has not yet received a vote. A week later, companion legislation was reintroduced in the Senate. On May 9, the attorneys general of 33 states (along with Washington D.C. and four U.S. Territories) sent a letter to Congress to advocate for the bill’s passage, arguing that “the reality of the [cannabis industry] requires federal rules that permit a sensible banking regime for legal businesses.”

The SAFE Banking Act would provide safe harbor for financial institutions to accept money from “cannabis-related legitimate businesses” (“CRLBs”)—that is, cannabis businesses that are in compliance with the applicable state law regime—in that they would be immunized from adverse federal action, whether by federal regulators or prosecutors. The bill would also immunize funds derived from state-legal cannabis transactions from the federal money laundering statute. Finally, the bill also would immunize collateral interests held by banks in loans provided to the cannabis industry from asset forfeiture, making possible bank foreclosures on cannabis business assets, such as farms or other real estate.

The bill also goes beyond CRLBs to provide banking access to “service providers” to the cannabis industry. The bill’s definition of “service provider” is broadly worded to include any business that “sells goods or services” to a CRLB, and explicitly includes real estate professionals, lawyers, and “other licensed services”—e.g. CPAs. In particular, the bill would extend the safe harbor and money laundering exemptions to funds deposited by service providers in addition to CRLBs. In other words, the vendors and professionals providing services to the cannabis industry would also be allowed to bank money derived from their cannabis industry clients with financial institutions. This would be a financial security blanket for the notoriously risk-averse legal profession, although California lawyers have already obtained a measure of protection with the November 2018 amendment to California Rule of Professional Responsibility 1.2.1, which allows California attorneys to counsel legal California cannabis businesses, provided that they advise said business regarding federal illegality.

The House Financial Services Committee passed several amendments to the SAFE Banking Act that alter its scope. Representative Steve Stivers successfully proposed an amendment that explicitly included insurers of CRLBs as a class of businesses to which banks can provide financial services. Representative Ed Perlmutter also successfully proposed several amendments, the most significant of which broadened the definition of “financial services” in the bill to include armored car services and “money transmitting businesses,” which would presumably open the door to cannabis transactions via PayPal, Venmo, and Western Union.

Although the SAFE Banking Act’s House floor debate does not yet have a set date, the bipartisan support in the House, along with the support of a majority of the states attorneys general, suggests that it may pass the House. However, the Senate Banking Committee chair, Senator Mike Crapo, has openly stated his opposition to his committee’s considering the bill. However, legislative 180s on cannabis are not unheard of, such as former Speaker of the House and cannabis opponent John Boehner’s sudden support for cannabis legalization after joining the board of cannabis company Acreage Holdings. The SAFE Banking Act would provide relief for a cannabis industry eager to pay its employees and taxes electronically, and would also enervate financial institutions with the munchies for cash from the $16 billion legal U.S. cannabis industry. Although the legislation remains a possibility rather than a reality, the traction and bipartisan support the bill has received suggests that legalized banking for cannabis industry funds is a question of “when” rather than “if.” Regardless of its ultimate success, the SAFE Banking Act merits monitoring by the cannabis and financial sectors such that they can be prepared for the coming changes to their respective industries. In any case, the days of grocery bags full of cash as tax payments seem untenable in the long term.

Insolvency and Corporate Responsibilities To Creditors

February 15, 2019/in All Blog Posts, Corporate Litigation/by Chris Evans

The moment a corporation becomes insolvent, a lot can change, and fast. If the officers and directors of the company are unaware of how insolvency can transform the landscape of corporate responsibilities and duties, they run the risk of exposing themselves to liability for the corporation’s debts, even if there was no personal guaranty. For purposes of this blog article, we look at how insolvency changes (or doesn’t change) the scope of a director’s fiduciary duties to creditors.

The Business Judgment Rule

First, a little background information. The decisions of a company’s Board are scrutinized under what is known as the business judgment rule (the “BJR”). The BJR provides broad latitude to the decision makers of a business, and courts will not review (i.e. second guess) directors’ business decisions or hold directors liable for errors or mistakes in judgment, so long as they satisfy the following:

Disinterested and independent;
Acting in good faith; and
Reasonably diligent in informing themselves of the facts.

When a company becomes insolvent the protections of the BJR remain largely intact. However, the duties owed by the directors of the company become slightly larger.

Fiduciary Responsibilities

It is well established that corporate directors owe a fiduciary duty to the corporation and its shareholders and must serve in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders. Corporations Code § 309. Notably, this fiduciary duty is not owed to a corporations’ creditors.

In California, only upon a company becoming insolvent does any such duty become owed to creditors. Even with such duty, however, the duty is limited in scope and is not synonymous with the fiduciary duty directors owe to the corporation and its shareholders. Unlike the fiduciary duty owed to the corporation and its shareholders (above), there is no statutory authority in California establishing that, upon a corporation’s insolvency, or otherwise, directors also owe a duty to the corporation’s creditors. In fact, under current California law, there is no broad, paramount fiduciary duty of due care or loyalty that directors of an insolvent corporation owe the corporation’s creditors solely because of a state of insolvency. Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1041.

Rather, the duty owed by directors to creditors is an extension of the contractual relationship that already exists between the creditor and the company in question, and stems from what is known as the “trust fund doctrine.

The Trust Fund Doctrine

The trust fund doctrine dictates that all of the assets of a corporation, immediately upon becoming insolvent, become a trust fund for the benefit of all creditors in order to satisfy their claims. Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1040. The scope of violations of the trust fund doctrine are limited to instances where directors or officers have “diverted, dissipated, or unduly risked the insolvent corporation’s assets.” Id. As such, by relying on the trust fund doctrine, California courts hold that the scope of the duty owed by corporate directors to the insolvent corporation’s creditors is limited in California only to the avoidance of actions that divert, dissipate, or unduly risk corporate assetsthat might otherwise be used to pay creditors claims. This would include acts that involve self-dealing or the preferential treatment of creditors (i.e. directors diverting assets of the corporation for benefit of insiders or preferred creditors).

Defining Insolvency

With the existence of such a duty owed to creditors upon “insolvency,” the next question, naturally, becomes, “What is the definition of insolvency?” Unfortunately, there are multiple definitions and, ultimately, will be an issue of fact. California Corporations Code section 501 provides, for example, that a corporation is insolvent, if, as a result of a prohibited distribution, it would “likely be unable to meet its liabilities … as they mature.” In the Ninth Circuit Court of Appeals, a finding of insolvency by the standard of a debtor not paying debts when they become due requires more than merely establishing the existence of a few unpaid debts. See In re Dill, 731 F.2d 629, 632 (9th Cir.1984). There is also insolvency in the balance sheet sense in which the value of liabilities exceeds the value of assets. See In re Kallmeyer, 242 B.R. 492, 496–497 (9th Cir.BAP1999).

Fortunately, because the trust-fund doctrine only deals with entities that are actually insolvent, California courts hold that there is no fiduciary duty that is owed to creditors by directors of a corporation solely by virtue of its operating in the “zone” or “vicinity” of insolvency. Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1041. While insolvency is a grey area in and of itself (above), the existence of a zone or vicinity of insolvency is even less objectively determinable than actual insolvency, which is further reason why California courts do not prescribe a duty owed to creditors when an entity operates in the “zone of insolvency.” Accordingly, when a solvent corporation is navigating in the zone of insolvency, the focus for directors does not change: directors must discharge their duty to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of the shareholder owners.

Based on the foregoing, and in conjunction wit the BJR, it follows that in order for a creditor to hold a director liable for operational decisions of the business based on allegations of breach of fiduciary duty, the creditor would need to establish the following: (1) the company was insolvent; (2) the conduct in which the director engaged amounted to self-dealing, preferential treatment of creditors, and diversion, dissipation or undue risk of corporate assets; and (3) directors were not personally disinterested and their acts were not performed in good faith and without following reasonable investigation (i.e. a rebut of the presumption afforded by the BJR).

The challenge for a director is that the definition of insolvency is not clear under California law, as described above. As a result, when a corporation approaches a point where it cannot pay its creditors or when a dissolution is reasonably foreseeable, it is important to understand the potential obligations to the corporation’s creditors. The failure to recognize such obligations will expose you personally for liabilities that were once held exclusively by the corporation. Such personal liability can come in the form of fraud or breach of fiduciary duty, which also may become non-dischargeable in a bankruptcy under 11 USC 523(a). As such, at a minimum, you should consult with counsel to make sure your bases are covered.

Reverse Veil Piercing: A Welcome Addition to the Creditor’s Collection Arsenal

September 18, 2018/in All Blog Posts, Corporate Litigation/by Chris Evans

In 2017, the California Court of Appeals ruled that creditors can directly pursue the assets of an LLC owned by a judgment debtor to satisfy the judgment. This process, known as “Reverse Veil Piercing,” marks a significant change in California law as it relates to collections and the way that the assets of an LLC are viewed in the eyes of the Courts. The ruling may also be indicative of how the Courts plan to treat closely held entities in the future.

In late 2017, California’s Fourth Appellate District concluded that “reverse veil piercing” may be used by creditors to add an LLC to a judgment the creditor has against an individual owner of the LLC. The decision, albeit narrow, was set forth in detail in Curci Investments, LLC v. Baldwin (2017) 14 Cal.App.5^th 214 and departed from the well-settled California law against reverse veil piercing set forth in the 2008 appellate decision, Postal Instant Press, Inc. v. Kaswa Corp. (2008) 162 Cal.App.4th 1510. The Curci ruling grants creditors a significant new means of collecting a judgment that otherwise may be extraordinarily difficult, or impossible, to collect.

The Facts

The case of Curci Investments, LLC v. Baldwin involved Mr. James P. Baldwin. Mr. Baldwin was a real estate developer who over his lifetime was involved in hundreds of corporations and limited liability companies. One of the LLCs was named JPB Investments, LLC (JPB). Mr. Baldwin was the 99 percent owner of JPB, with his wife holding the remaining one percent. Mr. Baldwin was also the manager and CEO of JPB and controlled all of its decisions and actions, such as cash distributions to Mr. Baldwin and his wife. JPB’s exclusive purpose was to hold, invest and/or distribute the cash balances of Baldwin and his wife.

Mr. Baldwin defaulted under a $5.5 million promissory note. Curci, the owner of the note, filed suit and eventually obtained a judgment against Mr. Baldwin, personally, in the approximate amount of $7.2 million. When Curci obtained its judgment against Mr. Baldwin personally, Curci pursued several avenues to try and collect on the judgment. However, after exhausting most of its options, Curci was unable to receive any recovery on its judgment. With few options left, Curci filed a motion to expand the judgment to include one of Mr. Baldwin’s LLCs, JPB (above), based on the theory that JPB was the alter ego of Mr. Baldwin. In other words, Curci wanted to utilize “reverse veil piercing” to reach the assets of JPB and satisfy Curci’s judgment.

Hold That Thought…

A quick aside about alter ego and piercing the corporate veil. These concepts are not particularly new and have long been permissible in California[1]. As is well-recognized, a corporation or an LLC are considered a separate legal entity, distinct from its stockholders, officers and directors (or members and managers), with separate and distinct liabilities and obligations[2]. This affords the shareholders of a corporation, or the members of an LLC, protection from judgments against the corporation or LLC.

However, that legal separation (and protection) may be disregarded by the courts when the creditor shows the following exists:

Such a unity of interest and ownership between the corporation (or LLC) and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist (based upon a variety of factors); and
Injustice will result if the acts in question are treated as those of the corporation (or LLC) alone[3].

If these prongs are demonstrated, the actions of the corporation or LLC will be deemed to be those of the persons or organizations actually controlling the corporation. This is known as “piercing the corporate veil”—the creditor is piercing the protective veil of the corporation or LLC to reach the assets of particular shareholders or members[4].

The concept Curci sought to utilize with respect to its judgment against Mr. Baldwin was the concept of reverse piercing of the corporate veil. The concept of reverse veil piercing is similar to traditional veil piercing in that when the ends of justice so require, and the foregoing two prongs are shown to exist, a court will disregard the separation between an individual and a business entity. However, rather than seeking to hold an individual responsible for the acts of an entity, reverse veil piercing seeks to satisfy the debt of an individual through the assets of an entity of which the individual is an insider.

Reverse Veil Piercing In California Before Curci

In Postal Instant Press, Inc. v. Kaswa Corp. (2008) 162 Cal.App.4th 1510, 1513 (Postal Instant Press), the Court held that a third-party creditor may not reverse pierce the corporate veil to reach corporate assets to satisfy a shareholder’s personal liability. In deciding against allowing reverse veil piercing, the Court cited three concerns:

The effect of allowing judgment creditors to bypass standard judgment collection procedures;
The potential of harming innocent shareholders and corporate creditors (i.e. the non-debtor insiders of a corporation or LLC); and
Using an equitable remedy in situations where legal theories or legal remedies are available outweigh the wrong to the judgment creditor.

With the ruling in Postal Instant Press, reverse veil piercing in California was effectively dead, and it remained that way until Curci obtained its judgment against Mr. Baldwin.

The Curci Decision

In Curci, the Court acknowledged the above concerns, but distinguished the facts from those in Postal Instant Press. In doing so, the Court concluded that the three concerns were not present in the case before the Court. The distinction was grounded largely in the fact that Postal Instant Press was dealing with a corporation, whereas Curci was dealing with an LLC owned entirely by Mr. Baldwin and his wife.

The Court identified that a creditor does not have the same options against a member of an LLC as it has against a shareholder of a corporation. If the debtor is a shareholder of a corporation, the creditor can step straight into the shoes of the debtor, acquire the shares and then have whatever rights the shareholder had in the corporation, including the right to dividends, to vote, and to sell the shares. On the other hand, when the debtor is a member of an LLC, the creditor may only obtain a limited charging order to receive any distributions made to the member from the LLC. Here, because Mr. Baldwin had complete management and control over JPB, Mr. Baldwin could manipulate distributions such that no funds went to Mr. Baldwin, which is precisely what Mr. Baldwin had been doing to avoid the judgment.

Additionally, there was simply no “innocent” member of JPB that could be affected by reverse piercing. Mr. Baldwin held a 99 percent interest in JPB and his wife holds the remaining 1 percent interest, who, based on community property principles, was also liable for the debt owed to Curci.

Based on the above, the Court held that reverse veil piercing may be available to Curci with respect to JPB and sent the case back to the trial court to undertake the fact-driven analysis applicable to piercing a corporate veil. In parting words, the Court held that “the key is whether the ends of justice require disregarding the separate nature of JPB under the circumstances.”

What Now?

The ruling from the Court in Curci will likely be construed quite narrowly and only with respect to fact patterns largely mirroring the facts of Mr. Baldwin and his entity. Additionally, the ruling in Postal Instant Press should still be considered binding law with respect to corporations as the Curci ruling was almost entirely founded on the fact that the entity in question was an LLC. Even with the Curci ruling, when corporate entities and LLCs are structured and operated correctly, they will in all likelihood continue to exist separately from the individuals who form and manage them.

That said, the Curci ruling remains notable and opens the door to reverse veil piercing in California, which is a significant shift in California creditor law and a substantial change in the options previously available to creditors struggling to collect a judgment against an individual debtor. Those setting up corporate entities that will be largely controlled and operated by a single individual should keep the Curci case top of mind. Going forward, when a creditor is dealing with an individual judgment debtor actively misusing an LLC, one can all but guarantee that the creditor will now rely upon the Curci ruling to argue “the ends of justice” require reverse veil piercing to be permitted against the debtor’s LLC.

[1] Sonora Diamond Corp. v. Superior Court (2000) 83 Cal. App. 4th 523, 538

[2] Robbins v. Blecher (1997) 52 Cal.App.4th 886, 892

[3] Sonora Diamond Corp. v. Superior Court, supra, 83 Cal. App. 4th at 538

[4] In addition to piercing the alter ego and piercing the corporate veil, there is a concept known as the Single-Enterprise doctrine which is also recognized in California. While well outside the scope of this article, the Single-Enterprise doctrine can be used to hold multiple, distinct legal business entities liable as if they were a single entity. See Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1249-50.

To Sue or Not to Sue?

April 16, 2016/in All Blog Posts, Corporate Litigation/by Ajay Gupta

A common question faced by attorneys in regards to litigation, and one I get asked almost daily by potential clients, is should one party sue another party for a perceived wrong doing. The question often goes like this, “Ajay, So-and-So did me wrong, now I want to sue them. Can you help me?” This question is almost associated with at least some level of emotion. In most instances, the opposing party did, in fact, commit some level of wrongdoing . An emotional response by the aggrieved party in such instances is completely reasonable. The person was wronged, they want retribution, they need help.

However, when weighing the strength of a new potential lawsuit, it is vital to minimize the emotional aspect in order to analyze the merits of the case objectively. I often urge potential clients to ask themselves a series of questions to help them decide whether or not filing litigation is the best course of action.
For example:

1. DO I HAVE THE RESOURCES TO PURSUE LITIGATION?

It’s no secret that litigation can be costly. Filing fees and attorney fees are not cheap and most lawsuits involve many attorney hours before a proper resolution can be reached. However, this notion is often overlooked when someone thinks about their own dispute through an emotional lens. The reality is that the initial filing fee, not to mention the fees for preparing case documents, is typically several hundred dollars depending on the scope of the case. When the costs of preparing your documents and prosecuting the case are factored in, litigation can easily cost thousands of dollars per month. The other reality is that many cases cannot be taken on a contingency basis, meaning the costs of bringing the lawsuit cannot be deferred until after recovery is obtained. The cost of litigation is a very important factor to consider when initiating a lawsuit.

2. I’M MAD NOW; WILL I STILL BE MAD IN 18 MONTHS?

In addition to being inherently costly, litigation is also time consuming. The California Courts have been burdened by budget constraints recently and as a result, many routine hearings get pushed out months down the road. This translates to a timetable of 18 months to 2 years before a matter can typically reach trial. If your matter is more complex or if the opposing side is particularly litigious, it can take even longer to reach trial. It is not uncommon for people to discover that after several months of costly litigation, they may not feel as strongly about their dispute as they did at the onset of litigation. As a result, some people decide to enter into less-than-ideal settlement agreements which may not offset the costs of litigation, and in some instances, may even choose to dismiss the case without any compensation. These types of situations can often be avoided if the timely and costly nature of litigation are accurately assessed.

3. WHAT ARE MY (MONETARY) DAMAGES?

At its heart, civil litigation boils down to money. Person A sues Person B because Person B allegedly owes Person A money. While there are other aspects of civil litigation, such as injunctive or declaratory relief, by and large the majority civil disputes revolve around money. As such, it is crucial to accurately assess your monetary damages when analyzing the strengths of your case. As outlined above, litigation can be expensive and lengthy. You need to be able to determine whether or not it is worthwhile, from a financial standpoint, to engage in a costly legal battle. I receive many calls from people who have had a legitimate wrong committed against them; however, the measure of monetary damages is such that it is simply not financially sound to pursue litigation. The analogy I often use in this situation is, just because you got hit by a car, it doesn’t mean that you were necessarily injured. The unfortunate reality is that sometimes, it is simply too expensive to pursue legal recourse if the ends do not financially justify the means.