L.A. 32267.
Supreme Court of California,
In Bank.
Jan. 12, 1989.
Shirley M. Hufstedler, Hufstedler, Miller, Kaus & Beardsley, Los Angeles, for cross-defendant and appellant.
R. Wicks Stephen, II, Los Angeles, for cross-complainant and respondent.
ARGUELLES, Justice.
Albert & Oliker (A & O), a law firm, appeals from a judgment entered against it in a malicious prosecution action. [FN1] The law firm contends that the trial court erred in permitting the case to go to the jury, asserting that the court should have concluded, on the basis of the uncontroverted facts, that Sheldon Appel Company (Sheldon Appel) had failed to establish one of the essential elements of a malicious prosecution action -- namely, that the prior action, on which the malicious prosecution claim was based, had been brought "without probable cause." The Court of Appeal rejected the law firm's claim, and we granted review to consider a number of issues relating to the proper determination of the probable cause element in a malicious prosecution action, including the question whether a plaintiff may establish an absence of probable cause by proving that its former adversary's attorney failed to perform adequate legal research before filing the prior action.
The trial court in this case did not resolve the probable cause issue in this manner, but improperly left the probable cause determination to the jury for resolution under an erroneous standard. We need not return the case to the trial court, however, for we are in as good a position as that court to make the required legal determination, and we conclude, in light of the underlying facts and relevant legal precedents, that the prior action in question here was objectively tenable and thus was not brought without probable cause. Accordingly, we shall reverse the decision of the Court of Appeal with directions to order the entry of judgment in favor of A & O.
In August 1978, three of A & O's clients -- M.J. Choppin, J.P. Kinzer, Jr., and Donald Miller (collectively, CKM) -- sold a 42-unit apartment building to Sheldon Appel. During the negotiations which preceded the signing of the escrow agreement, Sheldon Appel represented that it would do a "first class" job of converting the building into condominiums and selling the units, and CKM ultimately agreed to sell the building for $2.75 million cash plus "47% of the excess, if any, of gross sales receipts to [Sheldon Appel] of the condominium units over 3,750,000 dollars." The escrow agreement contained a clause providing that all terms of the sale agreement which were to be performed by Sheldon Appel but which were incapable of performance before the close of escrow would survive the close of escrow and would be binding on Sheldon Appel and its "successors or assigns," but neither the sale agreement nor the escrow agreement contained any provision expressly declaring that the property was to constitute security for Sheldon Appel's obligations.
Shortly after the close of escrow on February 5, 1979, CKM learned that Sheldon Appel was offering to sell the entire building in bulk for $4 million. The loan prospectus for this offer contained detailed estimates of expected resale prices for individual condominium units, totaling well over $4.9 million. The sale of the building in bulk would have produced a quick profit for Sheldon Appel, sparing it the effort and expense associated with the sale of individual units. At the same time, however, CKM feared that such a sale would deprive it of its anticipated share of the profits attributable to the sale of the apartments as individual units rather than as a single piece of property.
After learning of Sheldon Appel's bulk sale offer, CKM consulted its attorneys, defendant A & O. On February 23, 1979, A & O filed a complaint on behalf of CKM against Sheldon Appel, seeking a declaration of CKM's rights under the sales contract and the imposition of an equitable lien on the property in question; at the same time, A & O recorded a notice of lis pendens on the property on behalf of CKM.
A little more than a month thereafter, on March 30, 1979, Sheldon Appel filed a motion to expunge the notice of lis pendens, contending that CKM's action did not affect "title to or right of possession of" the real property in question and thus that the lis pendens was not valid (see Code Civ.Proc., s 409.1); in addition to expungement, the motion sought an award of attorneys' fees as a sanction for CKM's alleged misuse of the lis pendens procedure (see Code Civ.Proc., s 409.3). Three weeks later, on April 19, 1979, the trial court granted the motion and expunged the lis pendens; the court declined, however, to impose attorneys' fees on CKM. CKM sought
a writ of mandate to vacate the expungement order, but the Court of Appeal denied the writ petition and this court denied a petition for hearing. Eventually, all of the causes of action in CKM's original lawsuit were terminated in Sheldon Appel's favor. [FN2]
On January 3, 1980, Sheldon Appel filed an answer to the breach of contract action and, at the same time, filed a cross-complaint against both CKM and A & O seeking damages for malicious prosecution. In support of its malicious prosecution claim, Sheldon Appel alleged that CKM and A & O had knowingly asserted an untenable lien claim and recorded an impermissible lis
pendens to force it to sell individual units.
The trial court severed the malicious prosecution cross-complaint from the breach of contract complaint, and the contract action went to trial first. On April 24, 1984, CKM obtained a judgment of over $720,000 against Sheldon Appel in the breach of contract action.
Sheldon Appel's cross-complaint for malicious prosecution then proceeded to a separate trial. CKM moved in limine for a ruling by the trial court on the question whether the challenged lien claim and lis pendens had been filed and recorded without probable cause, asserting that the uncontradicted facts established that the prior action was instituted with probable cause. The trial court denied the motion and permitted the malicious prosecution action to go to trial.
At trial, the court, over objection, permitted an attorney called by Sheldon Appel to testify as an expert witness on the question of the legal tenability of the prior action. The court also admitted evidence with respect to the adequacy of the legal research that had been performed
by A & O prior to the filing of the initial complaint and the recording of the lis pendens. John Zemanek, an attorney employed by A & O who at that point had been a member of the bar for less than a year, had prepared and filed the complaint and had recorded the notice of lis pendens on behalf of CKM. Zemanek initially reported spending slightly over four hours performing all of these tasks, but later testified that he had spent more time than he had reported. Sheldon Appel asserted that Zemanek had spent unreasonably little time researching the legal basis for the lien claim.
In submitting the probable cause issue to the jury, the trial court instructed the jury that "[t]o constitute probable cause for the prosecution of a civil proceeding against [Sheldon Appel] ... the evidence must establish that: [A & O], after a reasonable investigation and industrious
search of legal authority, had an honest belief that their clients' claims were tenable, and that [A & O] prosecuted claims which a reasonable lawyer would regard as tenable, or did not unreasonably neglect to investigate the facts and law in making their determination to proceed with the prior action." As so instructed, the jury found in favor of Sheldon Appel on the
malicious prosecution action, and awarded it $82,000 in compensatory damages and $1 million in punitive damages. [FN3]
During the period between the recording of the lis pendens and its expungement, Sheldon Appel abandoned its plan to make a bulk sale of the apartment building and began to sell individual condominium units, incurring extra interest costs because of the cloud on the title resulting from
the lis pendens. On December 4, 1979, after Sheldon Appel had sold enough condominiums to generate receipts in excess of $3.75 million but had not paid any of the excess to CKM, A & O filed a new action on CKM's behalf seeking damages for breach of contract.
We granted review to consider, and to attempt to clarify, a number of issues that have led to disparate rulings in recent Court of Appeal decisions with respect to the application of the probable cause element in malicious prosecution actions.
The common law tort of malicious prosecution originated as a remedy for an individual who had been subjected to a maliciously instituted criminal charge, but in California, as in most common law jurisdictions, the tort was long ago extended to afford a remedy for the malicious prosecution of a civil action. (See Eastin v. Bank of Stockton (1884) 66 Cal. 123, 126-127, 4 P. 1106; Grant v. Moore (1866) 29 Cal. 644.) Under the governing authorities, in order to establish a cause of action for malicious prosecution of either a criminal or civil proceeding, a plaintiff must demonstrate "that the prior action (1) was commenced by or at the direction of the defendant and was pursued to a legal termination in his, plaintiff's, favor [citations]; (2) was brought without probable cause [citations]; and (3) was initiated with malice [citations]." (Bertero v. National General Corp. (1974) 13 Cal.3d 43, 50, 118 Cal.Rptr. 184, 529 P.2d 608; Rest.2d Torts, ss 653-681B.)
Before taking up the specific questions presented by this case -- which relate to the proper application of only the probable cause element of the tort -- we think it may be helpful to touch on several policy concerns that have recently been raised with respect to the appropriate application of the malicious prosecution tort generally.
Although the malicious prosecution tort has ancient roots, courts have long recognized that the tort has the potential to impose an undue "chilling effect" on the ordinary citizen's willingness to report criminal conduct or to bring a civil dispute to court, and, as a consequence, the tort has traditionally been regarded as a disfavored cause of action. (See, e.g., Babb v. Superior Court (1971) 3 Cal.3d 841, 847, 92 Cal.Rptr. 179, 479 P.2d 379; cf. Jaffe v. Stone (1941) 18 Cal.2d 146, 159-160, 114 P.2d 335.) [FN5] In a number of other states, the disfavored status of the tort is reflected in a requirement that a plaintiff demonstrate some "special injury" beyond that ordinarily incurred in defending a lawsuit in order to prevail in a malicious prosecution action. (See O'Toole v. Franklin (1977) 279 Or. 513, 569 P.2d 561, 564, fn. 3 [listing 17 states adhering to special-injury rule]; Friedman v. Dozorc (1981) 412 Mich. 1, 312 N.W.2d 585, 596 [applying special-injury rule].) Even in jurisdictions, like California, which do not impose a special-injury requirement, the elements of the tort have historically been carefully circumscribed so that litigants with potentially valid claims will not be deterred from bringing their claims to court by the prospect of a subsequent malicious prosecution claim.
A number of legal commentators have examined the merits of permitting more liberal use of malicious prosecution actions against litigants and their attorneys as a means of combating groundless litigation. Most of the academic commentators have concluded that expansion of the malicious prosecution tort is not a promising remedy for the problem. (See, e.g., Mallen & Levit, Legal Malpractice (2d ed. 1981) s 48, p. 101 ["[s]ound public policy considerations dictate against lessening the requirements of the tort and against creating new remedies for one whose injury is attributable to having been named as a party in a lawsuit"]; Birnbaum, Physicians Counterattack: Liability for Lawyers of Instituting Unjustified Medical Malpractice Actions (1977) 45 Fordham L.Rev. 1003, 1033 ["Any significant expansion of the tort of malicious prosecution would lead to interminable and vexatious litigation that should be avoided"]; Note, Groundless Litigation and the Malicious Prosecution Debate: A Historical Analysis (1979) 88 Yale L.J. 1218, 1234- 1237 [proposing that malicious prosecution tort be replaced with compulsory counterclaim in underlying action]. But see, e.g., Note, A Lawyer's Duty to Reject Groundless Litigation (1980) 26 Wayne L.Rev. 1561, 1566-1570 [proposing that attorney liability be expanded by imposing negligence liability to clients' adversaries].)
The courts of several other states have recently addressed this same question and, in thoughtful opinions, have rejected attempts to broaden the application of the tort, refusing to extend the scope of malicious prosecution liability. (See, e.g., Wong v. Tabor (Ct.App.Ind.1981) 422 N.E.2d 1279, 1285-1290 [declining to expand definition of lack of probable cause]; Friedman v. Dozorc, supra, 312 N.W.2d 585, 595-608 [declining to expand definition of lack of probable cause and declining to abandon special-injury rule].)
After reviewing the competing policy considerations, we agree with those decisions and commentaries which have concluded that the most promising remedy for excessive litigation does not lie in an expansion of malicious prosecution liability. As the Supreme Court of Michigan has recently noted, "In seeking a remedy for the excessive litigiousness of our society, we would do well to cast off the limitations of a perspective which ascribes curative power only to lawsuits." (Friedman v. Dozorc, supra, 312 N.W.2d at p. 600.) While the filing of frivolous lawsuits is certainly improper and cannot in any way be condoned, in our view the better means of addressing the problem of unjustified litigation is through the adoption of measures facilitating the speedy resolution of the initial lawsuit and authorizing the imposition of sanctions for frivolous or delaying conduct within that first action itself, rather than through an expansion of the opportunities for initiating one or more additional rounds of malicious prosecution litigation after the first action has been concluded. In recent years, the Legislature has taken several steps in this direction, enacting legislation to facilitate the early weeding out of patently meritless claims and to permit the imposition of sanctions in the initial lawsuit -- against both litigants and attorneys -- for frivolous or delaying conduct. (See, e.g., Code Civ.Proc., ss 437c, 1038, 128.5, 409.3.) Because these avenues appear to provide the most promising remedies for the general problem of frivolous litigation, we do not believe it advisable to abandon or relax the traditional limitations on malicious prosecution recovery. This general perspective informs our analysis of the more specific questions presented by this case, to which we now turn.