Key Decisions

August 2013 – An Attorney’s Mistake Was Inexcusable

(filed under: Key Decisions | August 16, 2013)

An Attorney’s Mistake Was Inexcusable

Toho-Towa Co., Ltd. v. Morgan Creek Productions, Inc.
(Cal. Ct. of App., 2d Dist.), filed July 11, 2013, published July 11, 2013

KEY FACTS

Toho-Towa negotiated with Morgan Creek Productions to acquire Japanese distribution rights to a motion picture produced by Morgan Creek. After the parties had reached an agreement as to the terms of the distribution deal, Morgan Creek’s general counsel at the time told Toho-Towa that a Morgan Creek affiliate, rather than Morgan Creek itself, would grant Toho-Towa the distribution rights under the agreement, and that a third related entity would guarantee certain contractual obligations to Toho-Towa. He told Toho-Towa that this was the structure Morgan Creek used for its international distribution deals.

When the transaction went sour, Toho-Towa initiated arbitration with the two affiliates.

The arbitrator entered a final arbitration award in favor of Toho-Towa against the two affiliates for $5,233,386. On Toho-Towa’s motion, the award was confirmed as a judgment. With interest and attorney’s fees, the judgment was for $5,741,536.

When neither of the affiliates paid the judgment, Toho-Towa conducted debtor examinations.

Toho-Towa then moved to add Morgan Creek to its judgment against the affiliates, on the theory that Morgan Creek was the alter ego of the other two entities.

Morgan Creek opposed the motion by objecting to Toho-Towa’s various offers of evidence. It did not, however, submit any evidence challenging its status as an alter ego.

Based on arguments Morgan Creek made at the hearing of Toho-Towa’s motion, the trial court continued the hearing to give Morgan Creek an opportunity to address one of Toho-Towa’s arguments.

Morgan Creek filed additional papers, but did not submit any evidence in support of its position.

Three days before the new hearing date, Morgan Creek changed counsel. Its new counsel made an ex parte application to again continue the hearing and also for leave to introduce additional evidence. In support of this, Morgan Creek provided a declaration and evidence that it was not the alter ego of the affiliate companies.

The trial court announced that it had considered all of the papers and then granted Toho-Towa’s motion.

Morgan Creek then filed a motion for relief pursuant to Code of Civil Procedure Section 473. The trial court denied this motion, rejecting requests for relief based on prior counsel’s mistake of law and Morgan Creek’s failure to introduce evidence in opposition to Toho-Towa’s motion to add Morgan Creek as a judgment debtor.

Morgan Creek appealed.

HOLDING & REASONING

The Court of Appeal affirmed.

The court first addressed the question of what evidence was properly before it for purposes of the appeal. It held that since the trial court denied Morgan Creek’s motion to present additional evidence, unless it erred, only that evidence that was submitted in support of and opposition to Toho-Towa’s motion was properly before it. However, since Morgan Creek did not appeal the trial court’s denial of its ex parte application, its additional evidence was not properly before it. The court rejected Morgan Creek’s argument that since its additional declarations had been designated as part of the record on appeal, the appellate court could consider it. Designating something does not mean it is properly considered.

Having determined what it could consider on appeal, the court noted that a “trial court’s failure to consider evidence not before it cannot be error.”

The court then turned to a consideration of alter ego liability and whether there was substantial evidence before the trial court to support its determination that Morgan Creek was the alter ego of its affiliates. It determined that there was.

Next, the court addressed Morgan Creek’s motion for relief, which was based on two separate grounds: (1) its attorney’s mistake of law, and (2) its attorney’s excusable neglect. Of the first ground, it said:

“It is well settled that relief may be granted for mistake of law by a party’s attorney. An honest mistake of law is a valid ground for relief where a problem is complex and debatable. The issue of which mistake of law constitutes excusable neglect presents a question of fact. The determining factors are the reasonableness of the misconception and the justifiability of lack of determination of the correct law.”

The court then summarized Morgan Creek’s “mistake of law” argument as being that its former counsel did not know that the trial court would decide the case based on the evidence presented to it.

The court rejected it, saying:

This was not a winning argument, given the fact that Mr. Gutman had been practicing law for 28 years, had experience representing entertainment clients, including [Morgan Creek], in litigation, had conducted over 50 jury trials, and had obtained several multi-million dollar verdicts and settlements.

The court then addressed Morgan Creek’s “excusable neglect” argument:

A party who seeks relief under section 473 on the basis of mistake or inadvertence of counsel must demonstrate that such mistake, inadvertence, or general neglect was excusable because the negligence of the attorney is imputed to his client and may not be offered by the latter as a basis for relief. In determining whether the attorney’s mistake or inadvertence was excusable, the court inquires whether “a reasonably prudent person under the same or similar circumstances” might have made the same error. In other words, the discretionary relief provision of section 473 only permits relief from attorney error “fairly imputable to the client, i.e., mistakes anyone could have made.” Conduct falling below the professional standard of care, such as failure to timely object or to properly advance an argument, is not therefore excusable. To hold otherwise would be to eliminate the express statutory requirement of excusability and effectively eviscerate the concept of attorney malpractice. The failure to introduce readily available, compelling evidence which supports the client’s position that it is not the alter ego of a sister corporation with a $5.7 million outstanding judgment is not a mistake that a reasonably prudent person in the same circumstances might have made but rather conduct falling below the professional standard of care.

Based on this, the court held that the trial court acted within its discretion in denying Morgan Creek’s Section 473.

ANALYSIS

This case is noteworthy for its discussion of what constitutes excusable versus inexcusable neglect. An attorney’s failure to introduce readily available, compelling evidence cannot be an excusable neglect.