Dynastion Energy v. Yung CA2/4

Filed 4/11/22 Dynastion Energy v. Yung CA2/4

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not

certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been

certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FOUR

DYNASTION ENERGY, S.R.O., B311960

Plaintiff and Appellant, (Los Angeles County

v. Super. Ct. No.

20STCV37438)

JOHN YUNG et al.,

Defendants and Respondents.

APPEAL from a judgment of the Superior Court of Los

Angeles County. Michael L. Stern, Judge. Reversed.

Law Office of Louis E. Shoch, Louis E. Shoch, for Plaintiff

and Appellant.

Lewis Brisbois Bisgaard and Smith, John S. Poulos and

John Ternieden for Defendants and Respondents.

Dynastion Energy, S.R.O. (Dynastion) appeals from an

order sustaining, without leave to amend, the demurrer of

defendants Lewis, Brisbois, Bisgaard & Smith (Lewis, Brisbois)

and John P. Yung (Yung), a Lewis, Brisbois partner, to

Dynastion’s complaint for aiding and abetting fraud. The

complaint alleged Dynastion invested in a joint venture with

Yung’s client. Dynastion also alleged Yung knew his client had

failed to perform its obligations in a previous joint venture

involving the same business enterprise, but Yung failed to

disclose this information to Dynastion. In sustaining the

demurrer, the trial court held the agent’s immunity rule, under

which duly acting agents cannot be held liable for conspiring with

their own principals, barred Dynastion’s claim. We reverse,

concluding that an exception to the rule applies where, as here,

the complaint alleges the attorney was aware of the client’s

previous failure to perform in a similar joint venture.

FACTUAL ALLEGATIONS AND PROCEDURAL HISTORY

A. Formation of the HoldCo Joint Venture and

Misappropriation of its Assets

The complaint contained the following allegations relating

to the formation of the HoldCo joint venture, misappropriation of

HoldCo assets, Yung’s involvement in a previous ill-fated joint

venture, and Yung’s (and his firm’s) knowledge of and/or

participation in alleged fraud and other wrongdoing.

Dynastion is a limited liability company formed in the

Slovak Republic. In late 2016, representatives of Dynastion were

introduced to Ray Brewer (Brewer), the owner and operator of

CH4 Power, Inc. (“PowerCo”) in Tulare, California. Dynastion

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discussed with Brewer a potential business relationship involving

Brewer’s “anaerobic digesters,” (digesters) which were systems to

convert dairy cow manure into electricity.

Brewer told Dynastion that PowerCo had the necessary

relationships with dairy farmers, as well as the intellectual

property, to build the digesters in California, as well as across

North America. Brewer pitched a joint venture to Dynastion

involving a multi-million-dollar investment from Dynastion.

Yung and Lewis, Brisbois had previously represented

Brewer. With Yung’s assistance, Brewer formed an entity, CH4

Green Energy Co. (“Green Energy”) for the purposes of forming

the joint venture with Dynastion. Pursuant to the Joint Venture,

the parties agreed to form a holding company to own and operate

the joint venture. Green Energy and Dynastion would each have

a 50 percent interest in the joint venture holding company

(“HoldCo”). Yung retained a profit participation interest in Green

Energy.

During the formation of HoldCo, Yung participated in

various meetings during which Brewer misrepresented his intent

to transfer assets to HoldCo and overstated the value of the

assets. Yung knew that Brewer was mispresenting the facts, yet

Yung affirmed Brewer’s statements and Yung made his own

misrepresentations and failed to disclose material facts.

Yung and Lewis, Brisbois provided HoldCo with legal

representation. HoldCo executed a conflict waiver to enable

Lewis, Brisbois to represent HoldCo in addition to the joint

venturer Green Energy.

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The joint venture between Green Energy and Dynastion

was the subject of two agreements, the Joint Venture Agreement

(December 5, 2017) and the Amended and Restated Joint Venture

Agreement (February 23, 2018), which replaced the Joint

Venture Agreement.

Dynastion funded HoldCo with an initial contribution in

excess of $2 million. Under the Joint Venture Agreement, Green

Energy and Brewer were to contribute PowerCo’s intellectual

property and other project resources to HoldCo at fair value, and

Green Energy would be responsible for developing, constructing

and managing the digesters. There were 14 specific digester

projects, known as California Dairy Energy projects, or “CDEs,”

that PowerCo would contribute. The CDEs included intellectual

property, engineering and site drawings, contracts, land leases

and fuel supply agreements for each CDE.

PowerCo and HoldCo executed a Bill of Sale pursuant to

which HoldCo paid $2.1 million for various assets, including

intellectual property rights and work product for specified CDEs.

Yung and Lewis, Brisbois drafted the Bill of Sale. After

Dynastion transferred the funds, Brewer and PowerCo failed to

cause the transfer of their interest in the assets it had agreed to

transfer under the Joint Venture Agreement. Furthermore,

Brewer and PowerCo had overstated the value of the assets to be

transferred.

Brewer misappropriated Dynastion’s contributions to

HoldCo, instead using the funds for his own interest and the

interest of other entities under his control.

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B. The Previous Joint Venture.

Unbeknownst to Dynastion, at the time of the formation of

the HoldCo joint venture, Brewer and Yung had been involved in

a previous joint venture with another party. In April 2013,

Brewer had created CH4 Bioenergy Holdings (“BioEnergy”), a

limited liability company. The holders of BioEnergy were Brewer

(51.3 percent), Yung (two percent), and four other individuals

(46.7 precent).

Like HoldCo, BioEnergy was formed to construct and

operate digesters on dairy farms in the Central Valley. Brewer

told the investors in the joint venture that he and PowerCo were

contributing intellectual property that Brewer had spent more

than $1 million developing, and that Brewer already had 43

letters of intent from California dairy farmers to provide land and

dairy waste necessary for the construction and operation of the

digesters, and that Brewer had regulatory approvals and building

permits necessary to begin construction.

However, in August 2013 one of the investors in BioEnergy

accused Brewer of misconduct, including misrepresentations

regarding the status of BioEnergy’s business, its projects and

building permits, and alleged that Brewer misappropriated funds

and concealed his misrepresentations. The investor alleged that

Brewer had forged many of the 43 letters of intent. In September

2013, it became clear that BioEnergy would not move forward.

Yung terminated his representation of BioEnergy at this time,

and rescinded his interest in the company.

Dynastion and HoldCo learned of BioEnergy holdings and

its business history, as well as Yung’s involvement, in October

2019, i.e., after Dynastion had invested in HoldCo.

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C. CDE 173

CDE 173 was one of the 14 CDE projects which were meant

to be transferred to HoldCo. and was representative of Brewer’s

misuse of funds and misrepresentations. CDE 173 was a CDE

project to be contributed to HoldCo that was located on a dairy

farm owned and operated by Simon Vander Woude.

Before the Joint Venture, PowerCo had entered into a fuel

supply agreement with Vander Woude governing PowerCo’s right

to construct and operate CDE 173 on Vander Woude’s dairy farm.

These rights were supposed to be transferred to HoldCo.

However, shortly before Dynastion transferred the funds to

HoldCo, Brewer learned that Vander Woude had cancelled the

fuel supply agreement with CDE 173, pursuant to written notice

dated December 20, 2017. The reason for the cancellation was

PowerCo’s failure to break ground on the project.

At the time of the execution of the Joint Venture

Agreements and the Bill of Sale, Yung knew of Vander Woude’s

cancellation and thus that CDE 173’s value was overstated.

In July 2018, Yung and another partner at Lewis, Brisbois

had a series of communications with Brewer concerning initiating

litigation against Vander Woude for cancelling the fuel

agreement with CDE 173. Although HoldCo had paid for the

rights to CDE 173, including the fuel supply agreement, Yung

never discussed any lawsuit with anyone other than Brewer, and

HoldCo continued to be unaware of the cancellation.

In preparation for a lawsuit against Vander Woude, Brewer

used $10,000 from HoldCo to pay a retainer to Yung and Lewis,

Brisbois. No disinterested member of HoldCo was aware of this

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payment. Yung and Brewer initiated a lawsuit on behalf of

PowerCo, although the rights to the fuel supply agreement had

been transferred to HoldCo.

This unauthorized lawsuit jeopardized HoldCo’s

relationship with dairy farmers, which relationship was critical

to its operations.

Yung and Lewis, Brisbois were aware that Brewer was

breaching his fiduciary obligations to HoldCo and misstating the

value of assets and the status of various projects, but did not

reveal that information to Dynastion or HoldCo.

D. Complaint.

Dynastion and HoldCo’s complaint alleged four causes of

action: (1) aiding and abetting fraud; (2) aiding and abetting

breach of fiduciary duty; (3) breach of fiduciary duty; and (4) legal

malpractice. Dynastion was a party solely to the first cause of

action, while HoldCo was the sole plaintiff asserting the second,

third and fourth causes of action.

With respect to the first cause of action, the complaint

alleged that Yung and Lewis, Brisbois aided and abetted

Brewer’s fraud. Yung and Lewis, Brisbois were aware that

Dynastion was ignorant of the previous joint venture and its

demise. Yung knew that in order to induce Dynastion to fund the

new joint venture, Brewer had intentionally failed to disclose the

existence of the prior joint venture and the reasons for its demise.

In reliance on the material omissions regarding the prior

joint venture, Dynastion executed the joint venture agreements

and funded HoldCo’s operations with $2 million. With knowledge

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of Brewer’s fraud, Yung participated in drafting the Joint

Venture Agreement and Amended Joint Venture Agreement.

It was not until September or October 2019 that Dynastion

became aware of the earlier joint venture, including Yung’s

participation, the demise of that joint venture, and the

allegations of fraud and misappropriation.

E. Demurrer To Complaint.

Defendants Yung and Lewis, Brisbois demurred to the first

and second causes of action for aiding and abetting based upon

the agent’s immunity rule, and asserted that the complaint failed

to join Brewer, an indispensable party. Defendants did not demur

on the basis of Civil Code section 1714.10, which imposes a

prefiling requirement for actions against attorneys for conspiring

with their client. Dynastion had not sought leave to file its

complaint in advance of filing.

Plaintiffs Dynastion and HoldCo opposed the demurrer.

They conceded, as Dynastion does on appeal, that the agent’s

immunity rule precludes claims against an attorney for

conspiracy to breach a client’s duty to a third party, unless the

attorney also breaches an independent duty to that party. But,

they contended, it does not apply to a claim the attorney aided

and abetted the client’s fraud. Further, even if the rule did apply,

the “independent duty” exception would permit plaintiffs’ claim.

Finally, plaintiffs asserted they were not required to join Brewer

because it is not necessary to join all tortfeasors to the action.

The trial court sustained the demurrer to the first and

second causes of action, holding that plaintiffs failed to meet the

prefiling requirements of Civil Code section 1714.10, subdivision

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(a) and further the two aiding and abetting claims were based on

alleged wrongdoing done in the attorney’s representative capacity

and failed as a matter of law under the agent’s immunity rule.

The trial court did not address defendants’ indispensable party

argument.

DISCUSSION

Dynastion1 argues that its claim is not subject to the

prefiling order requirement of section 1714.10, subdivision (a),

nor does the agent’s immunity rule bar its claim because the

“independent duty” exception applied.2 Yung and Lewis, Brisbois

contend that the trial court correctly ruled that Dynastion’s claim

was subject to the prefiling requirements of section 1714.10 and

defendants did not owe an independent duty to Dynastion.

1 Although the third and fourth causes of action were not the

subject of the demurrer, the judgment is final as to Dynastion

because the demurrer disposed of the first cause of action, the

only cause of action to which it was a party. (See In re Baycol

Cases I & II (2011) 51 Cal.4th 751, 759.)

2 Arguably, defendants’ failure to assert section 1714.10 at

the demurrer stage waived this procedural defense. The express

language of section 1714.10, subdivision (b) requires that the

defense be raised in the attorney’s “first appearance” in the case.

(Farmers & Merchants Trust Co. v. Vanetik (2019) 33 Cal.App.5th

638, 655.) However, the trial court nevertheless concluded the

prefiling requirement was not met and substantively applied

section 1714.10 as a bar to Dynastion’s claims by concluding they

fell within the agent’s immunity rule. In any event, as discussed

below, the allegations of the complaint fit within one of the

statutory exceptions to the prefiling requirement.

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A. Standard of Review.

On appeal from an order sustaining a demurrer without

leave to amend, we apply a de novo standard of review. We

exercise our independent judgment to determine whether the

complaint states a cause of action as a matter of law. (Villafana

v. County of San Diego (2020) 57 Cal.App.5th 1012, 1016.) In

reviewing the complaint, “we must assume the truth of all facts

properly pleaded by the plaintiffs, as well as those that are

judicially noticeable.” (Howard Jarvis Taxpayers Assn. v. City of

La Habra (2001) 25 Cal.4th 809, 814.) We may affirm on any

basis stated in the demurrer, regardless of the ground on which

the trial court based its ruling. (Summers v. Colette (2019) 34

Cal.App.5th 361, 367.) When a trial court sustains a demurrer

without leave to amend, we must decide whether there is a

reasonable possibility the plaintiff could cure the defect with an

amendment. The plaintiff has the burden of proving that an

amendment would cure the defect. (Modisette v. Apple Inc. (2018)

30 Cal.App.5th 136, 155.)

“We review the trial court’s interpretation of section

1714.10 under the de novo standard.” (Central Concrete Supply

Co. v. Bursak (2010) 182 Cal.App.4th 1092, 1098.) “Applying

section 1714.10 . . . requires the court to initially determine

whether the pleading falls . . . within the coverage of the statute.”

(Berg & Berg Enterprises, LLC v. Sherwood Partners, Inc. (2005)

131 Cal.App.4th 802, 818.) “Once it is determined that the

pleading falls within the coverage of subdivision (a) of section

1714.10, the next step is to ascertain whether the pleaded claims

fall within either of the exceptions set forth in subdivision (c) of

the statute.” (Stueve v. Berger Kahn (2013) 222 Cal.App.4th 327,

331.)

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B. Discussion.

1. Conspiracy and the Agent’s Immunity Rule.

Civil conspiracy imposes liability on persons who, while

not actually committing the underlying tort, share with the

tortfeasors a common plan or design and its perpetration. (Berg

& Berg, supra, 131 Cal.App.4th at p. 823.) However, a civil

conspiracy does not give rise to a cause of action unless there has

been an independent civil wrong, and is thus not an independent

substantive basis for liability. (Rusheen v. Cohen (2006) 37

Cal.4th 1048, 1062.) As explained in Doctors’ Co. v. Superior

Court (1989) 49 Cal.3d 39, (Doctors’ Co.), “‘[t]he elements of an

action for civil conspiracy are the formation and operation of the

conspiracy and damage resulting to plaintiff from an act or acts

done in furtherance of the common design . . .’” (Id. at p. 44.)

Civil liability for aiding and abetting may be imposed on

one who aids and abets the commission of an intentional tort if

the person (a) knows the other’s conduct constitutes a breach of

duty and gives substantial assistance or encouragement to the

other to so act or (b) gives substantial assistance to the other in

accomplishing a tortious result and the person’s own conduct,

separately considered, constitutes a breach of duty to the third

person. (Stueve v. Berger Kahn, supra, 222 Cal.App.4th at p. 323.)

Aiding-abetting focuses on whether a defendant knowingly gave

substantial assistance to someone who performed wrongful

conduct, while conspiracy focuses on whether the defendant

agreed to join the wrongful conduct. (Ibid.)

Under the agent’s immunity rule, an agent cannot be liable

for conspiring with its principal based upon the agent’s conduct

undertaken in an official capacity on behalf of the principal.

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(Doctors’ Co., supra, at p. 41; Berg & Berg, supra, 131

Cal.App.4th at p. 817.)

Both civil conspiracy and aiding and abetting are subject to

the agent’s immunity rule. (Berg & Berg, supra, 131 Cal.App.4th

at p. 823, fn.10; Howard v. Superior Court (1992) 2 Cal.App.4th

745, 749.) The rule applies “without regard to the labels attached

to the cause of action or whether the word “conspiracy”—having

no talismanic significance—appears.” (Cortese v. Sherwood (2018)

26 Cal.App.5th 445, 455.)

2. Section 1714.10 and the Agent’s Immunity Rule.

Civil Code section 1714.10 is co-extensive with the agent’s

immunity rule. However, as originally enacted, it also operated

as a gatekeeper to actions against an attorney for conspiracy,

requiring persons seeking to assert a claim for conspiracy against

an attorney in connection with the attorney’s actions to

compromise a claim or dispute to obtain a court order prior to

filing a complaint. (Civ. Code § 1714.10, subd. (a); Berg & Berg,

supra, 131 Cal.App.4th at p. 817–818.) A party must establish a

reasonable probability of prevailing before pursuing a “cause of

action against an attorney for a civil conspiracy with his or her

client arising from any attempt to contest or compromise a claim

or dispute.” (Civ. Code § 1714.10, subd. (a).)3

3 Civil Code section 1714.10, subdivision (a) provides at

relevant part, “No cause of action against an attorney for a civil

conspiracy with his or her client arising from any attempt to

contest or compromise a claim or dispute, and which is based

upon the attorney’s representation of the client, shall be included

in a complaint or other pleading unless the court enters an order

allowing the pleading that includes the claim for civil conspiracy

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Originally enacted in 1988, Civil Code “‘[s]ection 1714.10

was intended to weed out the harassing claim of conspiracy that

is so lacking in reasonable foundation as to verge on the

frivolous.’” (Rickley v. Goodfriend (2013) 212 Cal.App.4th 1136,

1148.) However, later amendments to section 1714.10 set forth

exceptions: “[t]his section shall not apply to a cause of action

against an attorney for a civil conspiracy with his or her client,

where (1) the attorney has an independent legal duty to the

plaintiff, or (2) the attorney’s acts go beyond the performance of a

professional duty to serve the client and involve a conspiracy to

violate a legal duty in furtherance of the attorney’s financial

gain.” (Civ. Code § 1714.10, subd. (c), (emphasis added).) The

exceptions mirror the limits on an attorney’s liability for

conspiracy established by Doctors’ Co., supra, 49 Cal.3d 39.

(Cortese v. Sherwood, supra, 26 Cal.App.5th at p. 453.)

Several courts have observed that the exceptions swallow

the rule because they capture all viable attorney-client

conspiracy claims; as a result, only those claims that would fail in

any event remain subject to the pleading hurdle in subdivision

(a). (Pavicich v. Santucci (2000) 85 Cal.App.4th 382, 394–395

(Pavicich).) In effect, “a plaintiff who can plead a viable claim for

conspiracy against an attorney need not follow the petition

procedure outlined in the statute as such a claim necessarily falls

within the stated exceptions to its application.” (Berg, supra, 131

Cal.App.4th at p. 818.)

to be filed after the court determines that the party seeking to file

the pleading has established that there is a reasonable

probability that the party will prevail in the action.”

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3 The First Exception Applies

The first exception in Civil Code section 1714.10,

subdivision (c), applies where an attorney owes an “independent

legal duty” to the plaintiff. This exception applies to “a

relationship beyond that of attorney-client.” (Evans v. Pillsbury,

Madison & Sutro (1998) 65 Cal.App.4th 599, 605.) Attorneys are

expected to stay within the bounds of the law in representing

their clients. “Counsel who circumvent established legal channels

to accomplish a desired result, participating with the client in a

scheme” to deprive another of their property are “not performing

the normal services of an attorney.” (Rickley v. Goodfriend, supra,

212 Cal.App.4th at p. 1154.)

Thus, “an attorney has an independent legal duty to refrain

from defrauding nonclients.” (Klotz v. Milbank, Tweed, Hadley &

McCloy (2015) 238 Cal.App.4th 1339, 1351 (Klotz); accord, Rickley

v. Goodfriend, supra, 212 Cal.App.4th at p. 1151; see Shafer v.

Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003)

107 Cal.App.4th 54, 71.) “[A] lawyer communicating on behalf of

a client with a nonclient may not knowingly make a false

statement of material fact to the nonclient [citation], and may be

liable to the nonclient for fraudulent statements made during

business negotiations.” (Vega v. Jones, Day, Reavis & Pogue

(2004) 121 Cal.App.4th 282, 291.)

In Pavicich v. Santucci, supra, 85 Cal.App.4th 382, the

plaintiff was persuaded to invest as a limited partner in a

struggling brew pub project. (Id. at p. 386.) However, a prior joint

venture had been dissolved and after a settlement agreement and

release were entered into, certain of the former joint venturers

asserted that the release had been procured by fraud. (Id. at pp.

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385–386.) During negotiations leading up to his investment, the

plaintiff asked two of the people remaining in the project and the

attorney whether there were circumstances surrounding the

early days of the joint venture that the plaintiff should know

about. (Id. at p. 386.) Although the attorney told the plaintiff

there was a settlement, he did not disclose the allegations that

the release had been procured by fraud. (Ibid.)

Pavicich concluded that the plaintiff stated a viable cause

of action against the attorney for conspiring to defraud the

plaintiff, reasoning that the case could not be decided in the

attorney’s favor under a theory that he had no duty of disclosure

to the plaintiff. (Pavicich, supra, 85 Cal.App.4th at p. 398.)

Rather, since the attorney had indicated to the plaintiff that the

releases they had signed would prevent future problems with the

project, the attorney was bound by “the principle that ‘where one

does speak he must speak the whole truth to the end that he does

not conceal any facts which materially qualify those stated.

[Citation.] One who is asked for or volunteers information must

be truthful, and the telling of a half-truth calculated to deceive is

fraud.’ [Citations.]” (Ibid.)

Pavicich is on point here. Defendants are alleged to have

previously represented Brewer in connection with the prior joint

venture, and Yung took a percentage interest in it. After

BioEnergy did not move forward, Yung terminated his

representation and rescinded his ownership interest.

Defendants provided the current joint venture, HoldCo,

with legal representation. Dynastion alleged that Yung

participated in meetings regarding the formation of the current

joint venture, during which Brewer made statements that Yung

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knew were false. Yung also knew of Vander Woude’s cancellation

of the fuel supply contract, and the potential litigation against

him on behalf of PowerCo, but did not disclose these facts to

Dynastion.

Assuming the truth of plaintiff’s allegations, given Yung’s

level of involvement with Brewer, the prior joint venture and its

demise, as well as the cancellation of the Wander Woude

contract, Yung had a duty to disclose Brewer’s

misrepresentations concerning the status of his property

interests in the intellectual property and the CDEs, and Brewer’s

malfeasance with respect to funds. In sum, although Yung did

not represent Dynastion, given the facts of this case, Yung and

Lewis, Brisbois had an independent duty to Dynastion as the

second investor in Brewer’s “digester” enterprise, namely, the

duty to “refrain from defrauding nonclients.” (Klotz, supra, 238

Cal.App.4th at p. 1351.) Because Dynastion’s claims come under

the exception of Civil Code section 1714.10, subdivision (c), no

prefiling order was required to commence this action.

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DISPOSITION

The judgment of the superior court is reversed. Dynastion

is to recover its costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

CURREY, J.

We concur:

WILLHITE, Acting P.J.

*

MICON, J.

*

Judge of the Los Angeles County Superior Court, assigned

by the Chief Justice pursuant to article VI, section 6 of the

California Constitution.

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