Friday, July 29, 2011

Phillips, Spallas & Angstadt LLC v. Fotouhi (Cal. Ct. App. - July 27, 2011)

Here's a classy set of attorneys.  The facts:

"In November 2000, [Shahab E.] Fotouhi entered into a partnership agreement with Phillips, Spallas & Fotouhi, LLP (the Phillips firm). In March 2004, Fotouhi announced he was leaving the firm, effective April 1, 2004, and taking two major insurance clients with him (insurance clients).

Fotouhi started a new law practice, with three of the Phillips firm‘s former associates, Darren Epps, Wendy Hillger, and Michael Gilroy. Fotouhi, Epps, Hillger & Gilroy, LLP registered as a limited liability partnership on March 25, 2004. As the general partner, managing partner, and president of the Partnership, Fotouhi held a dominant position in the firm,and controlled the firm's books and records. He generated between 75 and 90 percent of the work."

Okay so far, right?  You can leave your law partners if you want and take your clients with you.  That's generally permissible.  Tough on your former partners, but not usually legally improper.
"In May 2004, the Phillips firm's successor in interest, Phillips, Spallas, & Angstadt, LLP, and two of its named partners, Robert K. Phillips and Gregory L. Spallas (collectively, plaintiffs) asserted claims against Fotouhi for violating the partnership agreement and filed a petition in the superior court to compel arbitration. On May 17, 2005, an arbitration panel awarded plaintiffs liquidated damages of $2.4 million, finding Fotouhi had breached the partnership agreement by failing to give proper notice of his withdrawal, and continuing to perform work for and referring work from the insurance clients (arbitration award)."
Oops.  Now, you may be able to leave a firm, but you've got to do it as you promised in advance.  And if you promised to make payments or give notice, you've got to do that.  So Fotouhi's $2.4 million down.
But at least he has new firm, clients, and income to pay it.  Let's see how he responds:
"Fotouhi vowed plaintiffs would 'never get a dime out of him.' A week later, Fotouhi met with a bankruptcy attorney and, on August 29, 2005, filed a petition for chapter 7 bankruptcy. In December 2007, the bankruptcy court entered a judgment denying him discharge, finding he had made false oaths in his bankruptcy schedules and statement of financial affairs. The bankruptcy court found he 'was motivated by his expressed intention to deprive his former partners of any recovery on their massive judgment against him, and to mislead all parties as to the value of his interest in the Partnership as well as other assets' and that, by leaving virtually no paper trail, Fotouhi maximized 'his ability to obfuscate the extent and nature of his property and business dealings.'  The bankruptcy trustee filed a proceeding to recover referral fees Fotouhi did not report in his bankruptcy papers, and the bankruptcy court entered a $53,666.43 judgment against Fotouhi on November 18, 2008." 
That's far from classy by Fotouhi.  It's akin to fraud.  Hardly what we'd like to see from a member of the Bar.
But Fotouhi's not done.  Getting the $2.4 million judgment against him, the additional bankruptcy judgment, and getting his petition dismissed (and a finding that he committed perjury) apparently wasn't enough:
"Less than a month later, on December 12, 2008, 'Fotouhi, Epps, Hillger & Gilroy, Inc.' filed articles of incorporation. The Corporation issued 1000 shares of stock on December 17, 2008. The majority shareholders were Ryan Mau, who had not been a partner of the Partnership, and Hillger, with 350 shares each. Epps, Gilroy, and Fotouhi were issued 100 shares each. Mau and the partners of the Partnership became the directors and officers of the Corporation. Fotouhi was secretary of the Corporation, which registered with the California State Bar in January 2009.  The Partnership continued operating as a law practice.

The bankruptcy trustee pursued a claim for valuation of Fotouhi‘s interest in the Partnership as an asset of the bankruptcy estate. The bankruptcy court found Fotouhi had a 38.59 percent interest in the Partnership and valued this interest at more than $546,000 as of the filing of the bankruptcy petition. On May 10, 2009, the bankruptcy court entered judgment against the Partnership for $546,440.18.
Shortly after the May 2009 bankruptcy judgment was entered, the Partnership began doing business as 'Fotouhi, Epps, Hillger & Gilroy, P.C.' The Corporation took over the Partnership‘s office lease and continued to operate in the same location. The Corporation filed substitutions of counsel for the Partnership‘s clients in pending cases, and vendor accounts were changed to the Corporation‘s name. The Partnership‘s website became the Corporation‘s website, and firm‘s name was changed on the letterhead and signage to reflect that it was now a professional corporation (P.C.) rather than a limited liability partnership (LLP)."

I get it.  More of the same.  Evading the judgment, and with the active participation of your new law partners.  The trial court below understood this as well, and ordered the new firm to pay plaintiffs a portion of the proceeds from the new firm to satisfy the judgments against Fotouhi.  Which led to the latest appeal, the next installment of the attempt to evade the judgment.

Happily, however, the Court of Appeal affirms.  Not only does it do so, but equally happily, in my view, it publishes (albeit belatedly) the opinion.  Including a fairly telling indictment of both Fotouhi and his partners, saying:  "Fotouhi not only declared his intent not to pay the judgment, but that he filed for bankruptcy shortly after the arbitration award in an unsuccessful attempt to discharge the debt and maneuvered Partnership funds to conceal his assets, and that his partners assisted him in his efforts to avoid paying the judgment."

Not exactly a ringing endorsement of the law firm.  Which continues to practice, and has offices in several cities in California and elsewhere.  I'm presuming, however, that it will not exactly highlight the Court of Appeal's opinion on the "News and Events" portion of its web page.  Even though a client might well find this stuff pretty interesting.

You'd expect more from lawyers.  As well as from partners of lawyers.  Given the express findings by the various courts, I would think that the State Bar would get involved.  But as a practical matter, unless you're convicted of drunk driving or bounce a trust fund check or refuse to return your client's phone calls, there's not much stomach for discipline that involves real work and "messy" disputes.  Sadly.