Scottsdale Insurance Company v. The Milton H. Greene Archives, Inc. et al

Filing 167

FINDINGS OF FACT AND CONCLUSIONS OF LAW RE THE PRIORITY OF THE SONI LAWFIRMS CLAIM TO THE DISPUTED FUNDS RELATIVE TO SCOTTSDALE INSURANCE CO.SAND VNU BUSINESS MEDIA, INC.S CLAIMS signed by Judge Dale S. Fischer. (ir)

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 UNITED STATES DISTRICT COURT CENTRAL DISTRICT FOR THE STATE OF CALIFORNIA SCOTTSDALE INSURANCE CO., ) ) Plaintiff, ) ) vs. ) ) THE MILTON H. GREENE ) ARCHIVES, INC.; THE SONI LAW ) FIRM; VNU BUSINESS MEDIA, INC. ) ) Defendants, ) ) ) ________________________________ ) CASE NO.: CV 10-1090 DSF (JEMx) FINDINGS OF FACT AND CONCLUSIONS OF LAW RE THE PRIORITY OF THE SONI LAW FIRM’S CLAIM TO THE DISPUTED FUNDS RELATIVE TO SCOTTSDALE INSURANCE CO.’S AND VNU BUSINESS MEDIA, INC.’S CLAIMS 17 18 Scottsdale Insurance Co. filed this action in the nature of interpleader on 19 February 12, 2010. The Court granted the parties’ stipulation to bifurcate the 20 action and adjudicate the priority of the Soni Law Firm’s claim to the disputed 21 funds relative to Scottsdale’s and VNU Business Media, Inc.’s claims first. The 22 parties also agreed that this matter could be decided on the papers submitted and 23 stipulated facts. 24 25 Having reviewed the stipulated facts and papers submitted, the Court makes the following findings of fact and conclusions of law. 26 27 28 FINDINGS OF FACT AND CONCLUSIONS OF LAW 1 I. 1 FINDINGS OF FACT 2 3 4 1. On April 29, 2004, the Milton H. Greene Archives, Inc. filed a copyright infringement action against BPI Communications Inc. (“BPI Action”). 5 6 2. The Soni Law Firm represented the Archives in the BPI Action. 7 8 3. VNU Business Media, Inc. is the successor to BPI. 9 10 4. On May 30, 2005, Joshua Greene signed a written retainer agreement 11 with the Soni Law Firm on behalf of the Archives, which provided that the 12 Archives would pay Soni an hourly fee for legal services rendered after that date. 13 14 15 5. On October 27, 2005, the Archives filed a copyright infringement action against Julien’s Auction House, LLC and Barclay-Butera, LLC (“Julien’s Action”). 16 17 6. Soni represented the Archives in the Julien’s Action. 18 19 20 7. The Archives sought approximately $2.9 million against the defendants in the Julien’s Action. 21 22 8. Scottsdale had issued an insurance policy that required it to pay Julien’s 23 and Barclay-Butera’s legal expenses in the Julien’s Action, and to indemnify them 24 from any damage awards. 25 26 27 9. Pursuant to this policy, Scottsdale paid for both Julien’s and BarclayButera’s legal expenses in the Julien’s Action. 28 FINDINGS OF FACT AND CONCLUSIONS OF LAW 2 10. On March 8, 2006, District Judge Alicemarie H. Stotler found that VNU 1 2 was the “prevailing party” in the BPI Action, and ordered the Archives to pay 3 VNU $765,695.37 in attorney’s fees. 4 11. In her March 8, 2006 order, Judge Stotler referred to the Archives’s 5 6 claims in the BPI Action as “frivolous,” its filing of a Rule 11 motion as “abusive,” 7 its ex parte practice as “needless,” and its summary judgment motions as 8 “meritless.”1 9 12. On January 18, 2007, VNU filed a Notice of Judgment Lien in the 10 11 Julien’s Action. 12 13. On February 26, 2007, the jury in the Julien’s Action awarded the 13 14 Archives $34,875.97 in damages against Julien’s, but did not award the Archives 15 any damages against Barclay-Butera. 16 14. On December 20, 2007, District Judge A. Howard Matz found that 17 18 Barclay-Butera was a “prevailing party” in the Julien’s Action, and ordered the 19 Archives to pay Barclay-Butera $202,287.76 in attorney’s fees. 20 15. In his December 20, 2007 order awarding Barclay-Butera attorney’s 21 22 fees, Judge Matz noted that “Plaintiff ha[d] taken a number of frivolous positions 23 and repeatedly asserted arguments previously rejected”; a lawyer with Soni 24 25 26 27 28 1 The Court overrules Soni’s objections to these findings. (See Docket Nos. 160-61.) Contrary to Soni’s contention, it is clear that Judge Stotler made these findings in her March 8, 2006 order. In addition, Soni’s objections under Rules 401 and 403 of the Federal Rules of Evidence are overruled. The Court must analyze the equities between the parties’ competing claims, and Judge Stotler’s findings are highly probative on that subject. FINDINGS OF FACT AND CONCLUSIONS OF LAW 3 1 expressed concern that there was “no evidentiary basis” for the Archives’s claims 2 against Barclay-Butera; the Archives’s willful infringement argument against 3 Barclay-Butera “was close to frivolous”; there was evidence of “improper 4 motivation” on the part of the Archives during settlement negotiations; and the 5 Archives’s estimate for damages was “based on palpably contrived, implausible 6 and unfounded speculation.” The Order makes clear that Judge Matz, in addition 7 to criticizing counsel’s strategy and trial performance, also found counsel’s record- 8 keeping and invoices were “to put it charitably, rather dubious.” Judge Matz 9 detailed charges to the wrong client file, charges for numerous days in excess of 12 10 hours, and otherwise clearly excessive billing, as well as excessive hourly rates.2 11 16. On December 20, 2007, Judge Matz also found that the Archives was 12 13 the “prevailing party” over Julien’s, and ordered Julien’s to pay the Archives 14 $338,493.97 in attorney’s fees. This was $413,714.86 less than the amount 15 requested. 16 17. In his December 20, 2007 order awarding the Archives attorney’s fees, 17 18 Judge Matz incorporated the findings from his order awarding Barclay-Butera 19 attorney’s fees. He also found that the Archives and Soni “displayed flagrant greed 20 in their trial conduct and strategy” and “engaged in conduct that caused [the 21 Julien’s Action] to be blown out of proportion.” In addition, Judge Matz noted that 22 Soni “displayed embarrassing sloppiness on several occasions” and repeatedly 23 “mis-cited the law relating to ‘reckless disregard’ . . . despite the Court’s rulings 24 and admonitions . . . .” Finally, Judge Matz found that Soni’s hourly billing rates 25 were “unreasonable” and that “[i]n certain respects, [Soni’s] record-keeping and 26 27 28 2 The court overrules Soni’s objections under Rules 401 and 403 to Judge Matz’s findings regarding Soni’s and the Archives’s litigation conduct in the Julien’s Action. The Court must balance the equities, and Judge Matz’s findings are highly probative. FINDINGS OF FACT AND CONCLUSIONS OF LAW 4 1 [its] invoices submitted to the Court were, to put it charitably, rather dubious.” 2 3 4 18. On July 9, 2009, the Ninth Circuit denied the Archives’s appeal of the judgment in the Julien’s Action. 5 6 7 19. Pursuant to Scottsdale’s insurance policy with Julien’s, Scottsdale must pay the Archives the attorney’s fee award Archives obtained in the Julien’s Action. 8 9 20. On February 12, 2010, Scottsdale filed this interpleader action; named 10 the Archives, Soni, and VNU as defendants; and deposited $400,896.45 with the 11 clerk of the court. 12 13 21. Soni is representing both itself and the Archives in this action. 14 15 22. On February 1, 2011, Soni filed a complaint against the Archives for 16 breach of contract and open book accounting in the Superior Court of California, 17 County of Los Angeles. 18 19 23. On February 17, 2011, the Archives signed a stipulation for entry of 20 judgment against it in the action filed by Soni. Soni apparently had separate 21 counsel in that action. 22 23 24 24. On February 22, 2011, a final judgment in Soni’s action against the Archives was entered in the amount of $1,413,018.63. 25 26 27 25. The Archives still has not paid Soni for any of the legal services rendered in the BPI or Julien’s Actions. 28 FINDINGS OF FACT AND CONCLUSIONS OF LAW 5 1 26. The Archives currently does not have the money to pay the amounts it 2 admits owing Soni for its legal services rendered, or the attorney’s fees awards 3 against it in the BPI and Julien’s Actions. 4 II. 5 CONCLUSIONS OF LAW 6 7 1. Because this action was brought under 28 U.S.C. § 1335, the Court 8 applies California substantive law to determine whether Soni’s claim to the 9 disputed funds has priority over Scottsdale’s and VNU’s claims. See Equitable 10 Life Assurance Soc’y of the United States v. McKay, 837 F.2d 904, 905 (9th Cir. 11 1988). 12 13 A. Scottsdale’s Right of Equitable Offset 14 15 2. “[E]quitable offset is a means by which a debtor may satisfy in whole or 16 in part a judgment or claim held against him out of a judgment or claim which he 17 has subsequently acquired against his judgment creditor. The right exists 18 independently of statute and rests upon the inherent power of the court to do justice 19 to the parties before it.” Salaman v. Bolt, 74 Cal. App. 3d 907, 918 (1977). “[I]n 20 the ordinary setoff circumstances, ‘a setoff procedure simply eliminates a 21 superfluous exchange of money between the parties,’ and ‘may operate to preclude 22 an unfair distribution of loss if one of the parties is totally insolvent or is unable to 23 pay a portion of the judgment against him.’” Birman v. Loeb, 64 Cal. App. 4th 24 502, 519 (1998) (quoting Jess v. Herrmann, 26 Cal. 3d 131, 137 (1979)). In fact, 25 “[t]he insolvency of the party against whom the relief is sought affords sufficient 26 ground for invoking this equitable principle.” Harrison v. Adams, 20 Cal. 2d 646, 27 648 (1942). Moreover, “[t]he fact that the demand of the plaintiff has not been 28 reduced to judgment is no obstacle to its allowance as set-off against a judgment.” FINDINGS OF FACT AND CONCLUSIONS OF LAW 6 1 Id. at 649. “[U]nless the judgment creditor establishes the existence of facts 2 supporting some equitable principle precluding it, offset is a matter of right, at least 3 where the judgment creditor is insolvent.” Margott v. Gem Props., Inc., 34 Cal. 4 App. 3d 849, 854 (1973) (internal citation omitted). 5 6 3. Subrogation “is defined as the substitution of another person in place of 7 the creditor or claimant to whose rights he or she succeeds in relation to the debt or 8 claim.” State Farm Gen. Ins. Co. v. Wells Fargo Bank, N.A., 143 Cal. App. 4th 9 1098, 1105 (2006) (internal quotation marks omitted). “In the insurance context, 10 subrogation takes the form of an insurer’s right to be put in the position of the 11 insured for a loss that the insurer has both insured and paid.” Id. at 1106. When an 12 insurance company pays a claim against its insured, “the insurance company is 13 subrogated to the rights of its insured against any wrongdoer who is liable to the 14 insured for the insured’s damages.” Id. “Subrogation has its source in equity and 15 arises by operation of law.” Id. (internal quotation marks omitted). 16 17 4. Applying these principles, Scottsdale has a right of equitable offset 18 because: (1) it must pay the judgment and attorney’s fee award entered against 19 Julien’s in the Julien’s Action to the Archives; (2) the Archives must pay the 20 attorney’s fee award it owes Barclay-Butera in the Julien’s Action to Scottsdale 21 under the doctrine of subrogation; (3) the Archives is insolvent as shown by its 22 inability to pay the fees it owes Soni or the attorney’s fee awards it owes Scottsdale 23 and VNU; and (4) the Archives has not asserted any facts that would support 24 precluding this right. 25 26 B. Scottsdale’s Right of Equitable Offset has Priority over Soni’s Claim 27 28 5. Courts determine the priority between a right of equitable offset and an FINDINGS OF FACT AND CONCLUSIONS OF LAW 7 1 attorney’s contractual lien by balancing the competing equities. See Brienza v. 2 Tepper, 35 Cal. App. 4th 1839, 1848 (1995). “[T]he general rule is that . . . an 3 attorney’s lien is subordinate to the rights of the adverse party to offset judgments 4 in the same action or in actions based upon the same transaction . . . .” Id. at 1849 5 (internal quotation marks omitted). Other relevant factors include whether giving 6 an attorney’s lien priority would totally defeat the equitable offset, and also 7 whether the attorney’s lien was based on a hourly or contingent fee contract. See 8 Pou Chen Corp. v. MTS Prods., 183 Cal. App. 4th 188, 193-94 (2010). Moreover, 9 in assessing priority, “courts are not powerless to deal with” the situation where 10 there is “a danger of collusion between the attorney and the client to defraud 11 creditors.” Cetenko v. United Cal. Bank, 30 Cal. 3d 528, 535 (1982). 12 6. Even if Soni has a valid attorney’s contractual lien over the attorney’s fee 13 14 award entered in the Archives’s favor in the Julien’s Action,3 Scottsdale’s 15 equitable offset would have priority over it for four reasons. First, the general rule 16 applies because the claims Scottsdale and the Archives have against one another 17 arise from the same action. Second, if Soni’s purported lien had priority over 18 Scottsdale’s right of equitable offset, it would completely defeat the offset. Third, 19 the public policy rationale for giving an attorney’s contractual lien priority is 20 weaker when the lien derives from an hourly fee arrangement. Fourth, it appears 21 likely that Soni and the Archives have colluded in an attempt to defraud the 22 Archives’s creditors. Soni has worked under its hourly fee arrangement with the 23 Archives for nearly six years, but still has never been paid by the Archives. Soni 24 represents both itself and the Archives in this action. In doing so, it has advocated 25 a position that would result in Soni receiving all of the disputed funds, and 26 27 28 3 In California, a client may grant his attorney a lien on the proceeds from a prospective judgment with either an express contract or a retainer agreement that implies the attorney will look to the judgment for payment of his fee. Cetenko, 30 Cal. 3d at 531. The lien is created and takes effect when the fee agreement is executed. Id. at 533-34. FINDINGS OF FACT AND CONCLUSIONS OF LAW 8 1 Scottsdale and VNU not being able to collect on their claims against the Archives 2 due to its insolvent status. Soni’s and the Archives’s lack of good faith in litigating 3 the BPI and Julien’s Actions, as noted by District Judges Stotler and Matz, 4 exacerbates the concern that Soni and the Archives have colluded to defraud the 5 Archives’s creditors. Moreover, it is difficult to imagine why the Archives - 6 especially if represented by truly independent counsel - would stipulate to a 7 $1,413,000 judgment in favor of Soni. The Archives had in hand a ruling from a 8 United States district judge excoriating Soni for its conduct in the action, and for 9 its billing practices. Under these circumstances, no reasonable client would 10 stipulate that it owed its attorney such a significant sum in the absence of 11 collusion.4 12 C. VNU’s Claim to the Disputed Funds has Priority over Soni’s Claim 13 14 7. “Other things being equal, different liens upon the same property have 15 16 priority according to the time of their creation, except in cases of bottomry and 17 respondentia.” Cal. Civ. Code § 2897. Thus, before according priority among 18 liens based on their time of creation, a court must first “determine whether the 19 equities of the lienholders are equal.” Bluxome St. Assocs. v. Fireman’s Fund Ins. 20 Co., 206 Cal. App. 3d 1149, 1159 (1988). In determining the equities between an 21 attorney’s contractual lien and a judgment creditor’s lien, courts may consider 22 whether giving priority to the attorney’s lien will enable the judgment debtor to 23 24 25 26 27 28 4 The Court recognizes that the Archives also incurred attorney’s fees for Soni’s unsuccessful representation with regard to the claims against Barclay-Butera. But Judge Matz awarded fees to the Archives for Soni’s work that related to both defendants. The total amount pertaining to Barclay-Butera alone could not possibly raise the Archives’s debt to more than four times the amount awarded by Judge Matz. (Barclay-Butera’s attorneys received only slightly more than $200,000 for their services.) In the absence of an explanation for the stipulation to such an extraordinary amount, the Court finds that there was very likely to have been collusion. FINDINGS OF FACT AND CONCLUSIONS OF LAW 9 1 avoid a judgment lien. See Oldham v. Cal. Capital Fund, Inc., 109 Cal. App. 4th 2 421, 435-36 (2003). In addition, courts may consider whether the hourly charge 3 was excessive or if the hours were misrepresented. See Cetenko, 30 Cal. 3d at 532. 4 Finally, as noted above, “courts are not powerless to deal with” the situation where 5 there is “a danger of collusion between the attorney and the client to defraud 6 creditors.” Id. at 535. 7 8 9 8. VNU has a judgment lien over the attorney award the Archives obtained in the Julien’s Action. See Cal. Civ. Pro. § 708.410. 10 11 9. Even if Soni has a valid attorney’s contractual lien over the attorney’s fee 12 award entered in the Archives’s favor in the Julien’s Action, VNU’s lien would 13 have priority over it because all is not equal between these competing claims for 14 three reasons. First, if Soni’s purported lien had priority, VNU would not be able 15 to collect on its judgment against the Archives due to its insolvent status. Second, 16 Soni’s hourly charge was found to be exceedingly excessive in the Julien’s action, 17 and Soni engaged in “frivolous,” “needless,” and “meritless” litigation tactics in 18 both the BPI and Julien’s Actions. Finally, the danger of collusion between Soni 19 and the Archives strongly supports the conclusion that the equities are not equal 20 between VNU and Soni’s claim on the disputed funds. 21 III. CONCLUSION 22 23 24 25 For these reasons, the Court concludes that both Scottsdale’s and VNU’s claims have priority over Soni’s claim to the disputed funds. 26 27 28 5/23/11 FINDINGS OF FACT AND CONCLUSIONS OF LAW 10 1 2 Dated: Dale S. Fischer United States District Judge 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 FINDINGS OF FACT AND CONCLUSIONS OF LAW 11

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