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)

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