Mark Wilson Prevails Against Equitable Indemnity Claim

San Francisco Partner Mark Wilson prevailed in the California 2nd District Court of Appeal earlier this month, defeating an equitable indemnity cross-complaint arising out of fraud allegations and leading the court to affirm the trial court’s judgment in favor of our client.

Our client, a professional business management firm, was retained by an investor to advise on the sale of its majority membership interest in a company to the cross-complainant, a minority owner and the company’s manager. Based on the financial information provided by the minority owner and our client’s independent valuation, as well as the minority owner’s disclosure of anticipated rental rates and the existence of leasing prospects, the investor sold its interest based on the fair market valuation of the property. Notably, the minority owner did not disclose the identities of the leasing prospects, allegedly claiming they “did not matter” when asked by our client. Following the sale, the investor discovered that the minority owner had made a tentative deal with a lucrative lessee to lease the property at a rate over 30 percent more than the prior lease. The investor sued the minority owner for fraud, breach of fiduciary duty, and breach of contract, to which he responded with a cross-complaint against our client for equitable indemnity. Our client objected, and the trial court sustained its demurrer with leave to amend.

The minority owner’s first amended counterclaim argued that our client intentionally deceived him into believing that the investor had all the information about future leasing prospects that it requested or wanted, and that this alleged intentional fraudulent conduct contributed to and/or caused all damages to the investor from selling its membership interest to the minority owner. Our client again demurred on the grounds that it only had liability to the investor and owed no duty to the minority owner, and therefore could not be sued by him. The trial court sustained our client’s demurrer without leave to amend. The minority owner then filed a motion for leave to file a second amended counterclaim, seeking to file a new pleading with seven new causes of action and a new cross-defendant. The trial court denied this motion, leading the minority owner to appeal.

In Mr. Wilson’s briefing to the Court of Appeal, he demonstrated that the minority owner could not adequately state a claim for equitable indemnity. In order to do so, the minority owner would have needed to plead sufficient facts showing that our client had breached a duty to the investor itself, the plaintiff in the underlying case. Rather, the minority owner alleged that our client had made a misrepresentation to him. Because there was no breach of a duty to the minority owner, this argument could not form the basis for equitable indemnity.

Further, under the California Code of Civil Procedure § 875 (d), the minority owner could not shift liability from himself to our client as his alleged fraudulent actions were claimed to be intentional, not merely negligent. 

As to the trial court’s denial of the minority owner’s motion for leave to file a second amended counterclaim, the appellate court also upheld this decision. The appellate and trial courts recognized that the minority owner’s prospective claims of intentional and negligent misrepresentation against our client were only “artfully pleaded indemnity claims,” claims which had already been deemed insufficiently pleaded.

Mark Wilson is a member of the Strategy, Writs, and Appeals team (SWAT) at Manning Kass. He has substantial experience in appellate litigation, including serving as a panel attorney representing indigent criminal defendants before the California 1st District Court of Appeal, and a staff attorney on the Supreme Court of California’s criminal central staff.