Thiel v. MKA Real Estate Qualified Fund CA1/4

Filed 10/3/16 Thiel v. MKA Real Estate Qualified Fund CA1/4
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION FOUR
PENELOPE GAE THIEL, as Successor in
Interest to NORMAN M. THIEL,
Plaintiff and Respondent, A144099, A144984
v. (Marin County
MKA REAL ESTATE QUALIFIED Super. Ct. No. 10-04972)
FUND I, LLC et al.,
Defendants and Appellants.
I.
INTRODUCTION
In 2007, Norman Thiel followed a recommendation from his financial advisor
Jeffrey Guidi to invest a substantial part of his retirement savings in a private placement
securities offering by MKA Real Estate Qualified Fund I, LLC (Qualified Fund). In
2010, Norman filed this action seeking redress for the loss of his investment, alleging
causes of action for fraud, breach of fiduciary duty, negligence and financial elder abuse
against Guidi, Qualified Fund and others. After Norman passed away in 2013, his wife
Gae was substituted as the plaintiff in this case in her capacity as Norman’s successor in
interest.1
1
We distinguish between members of the Thiel family by using their first names.
No disrespect is intended.
1
At a 2014 bench trial, the only remaining defendants were Qualified Fund and its
manager MKA Capital Group Advisors, LLC (Advisors). The trial court found in favor
of Gae on all of Norman’s causes of action, concluding that Qualified Fund and Advisors
(collectively, “MKA”)2 were jointly and severally liable for Norman’s damages, either
directly or because Guidi was their agent. The court awarded damages totaling $500,000,
and statutory attorney fees in the amount of $1,247,709.10. The court also imposed a
civil penalty under Civil Code section 3345 in the amount of $570,000, plus compounded
prejudgment interest.
In this consolidated appeal from the judgment and postjudgment attorney fee
order, MKA contends the entire judgment must be reversed because (1) MKA did not
have any independent duty of care with respect to Norman’s investment decision; and
(2) Guidi was not MKA’s agent as a matter of law. Alternatively, MKA challenges
various components of the judgment and damages award. We find that the civil penalty
the trial court imposed in order to deter and punish MKA was not authorized by Civil
Code section 3345 and must be stricken. In all other respects, we affirm the judgment.
II.
STATEMENT OF FACTS
A. The Complaint
The operative pleading is a November 2013 third amended complaint (the
complaint), which was filed by Gae after Norman passed away in June of that year. Gae
sought damages and rescission for breach of fiduciary duty, fraud, negligence, and
financial elder abuse against Guidi; Guidi’s partner and business associates; and
For several months prior to Norman’s death, pretrial proceedings were stayed
while Qualified Fund appealed an order denying its motion to compel arbitration of
Norman’s claims. This court affirmed that order in an unpublished decision filed on
November 9, 2012. (Thiel v. MKA Real Estate Qualified Fund, 2012 Cal.App.Unpub.
LEXIS 8225.)
2
When practicable, we use the singular term MKA to collectively refer to
appellants. However, we sometimes refer to appellants as Advisors and Qualified Fund
for clarity sake.
2
Qualified Fund and Advisors. Gae alleged that Guidi was also affiliated with e-Planning
Securities, Inc. (ePlanning), a broker-dealer that was not a named defendant because it
had invoked the protection of the bankruptcy court.
In a prefatory paragraph, Gae alleged that each defendant was “acting as an agent,
servant, employee, and/or co-conspirator” of the other defendants when doing or omitting
to do the acts alleged. Gae further alleged that when defendants caused the Thiels to lose
half their limited savings, they were all aware that Norman and Gae were over the age of
65, were retired and living on a fixed income, and were not sophisticated investors.
Common factual allegations in the complaint told the following story: In 2002,
Norman attended an investment seminar put on by Guidi which was marketed to retirees.
On Guidi’s recommendation, Norman withdrew “his entire retirement savings of
$400,000” from a low risk investment in order to make an investment in two high risk
projects. Guidi falsely represented the nature of the risk to Norman and failed to disclose
material facts including that the projects were part of a “Ponzi scheme.” Despite Guidi’s
alleged misconduct, by 2007 Norman “was able to recover his capital and a reasonable
return for its use.” However Guidi then persuaded Norman to invest $200,000 of that
money in MKA, a company that provided financing for construction projects. MKA held
itself out as accepting investments “only from ‘Accredited Investors,’ ” but it took no
steps to ensure that its investors were accredited, did not “properly vet the individuals and
entities through which it accepted subscriptions,” and used agents like Guidi who were
“purveyors of interests in Ponzi schemes.”
Gae alleged that Guidi arranged for Norman to invest in MKA knowing that
Norman was not an accredited investor, that the risk was inappropriate for his age, that he
“was in failing health, that he was a recent survivor of cancer, and that he was in a
particularly vulnerable mental state and lacked the strength to oppose a persistent effort
to urge him to make a high risk investment completely inappropriate for an investor in his
position.” Furthermore, Guidi “took extreme and illegal measures” to secure Norman’s
consent to make the MKA investment, which included making false statements about the
nature and quality of the MKA investment, and falsely representing that MKA would pay
3
Norman “12% per annum regularly.” For a few months, the investment performed as
Guidi had promised, but in late 2007 MKA “suddenly” stopped making monthly
distributions. Then MKA deducted the already paid distributions from Norman’s capital
investment. Only then did MKA provide Norman with documentation exposing the high
risk and unsafe nature of his investment. Thereafter, Norman’s demands for a return of
his investment were wrongfully denied by MKA.
B. Trial Evidence
In August 2014, a court trial was held before the Honorable Mark Talamantes. By
that time, the only remaining defendants in the action were the two MKA defendants. On
the first day of trial, Guidi’s former trial counsel joined the team of attorneys representing
MKA. Over the course of five court days, the court heard evidence which substantially
established the facts summarized below.
1. The 2002 Investments
In 2002, Norman was 64, his net worth was $500,000, and his investments were
primarily in mutual funds. Some time that year, Norman met Guidi at an investment
seminar where Guidi was a presenter. After Norman attended Guidi’s seminar, his
conservative investing practices changed.
At Guidi’s recommendation, Norman made a $400,000 investment which
represented 80 percent of his liquid assets (the 2002 investment) in two projects
sponsored by the Asset Real Estate Investment Company (AREI). Guidi told Norman
that one of the projects, an assisted living facility, had an expected rate of return of
9 percent, and the other, a real estate development in Utah, had an expected rate of return
of either 12 or 13 percent. Gae testified at trial that she had been uncomfortable about the
2002 investment, but Norman “trusted Jeff [Guidi] completely[,] . . . he just thought the
world of him.”3
3
It appears that Gae was unwell at the time of trial. Although she testified, both
parties also relied on excerpts from prior deposition testimony. Consequently, Gae’s
testimony about the pertinent events was incomplete, and somewhat disjointed.
4
Guidi testified at trial that he was a registered representative of ePlanning when he
introduced the two AREI projects to Norman and, as such, ePlanning was his supervisor
and the sponsor of investments he shared with clients like Norman. The two AREI
projects Guidi showed to Norman were the only “offerings” ePlanning had at that time
that “expected to return in the area of 12 percent per annum.” After Guidi helped
Norman make his 2002 investment, Norman became Guidi’s client, and the two met
regularly to discuss Norman’s “goals,” and “what was going on . . . in general.”
2. Norman’s Failing Health
In 2002, Norman suffered from cerebral vascular disease which required that he
undergo a carotid endarterectomy, a procedure during which a stent is inserted into the
carotid artery in order to remove a blockage. The first time the procedure was attempted,
Norman “flatlined” and had to be resuscitated, but on a subsequent occasion the stent was
successfully inserted. In 2004, Norman had the procedure again in his other carotid
artery.
In 2006, Norman and Gae sold their home but could not afford to buy another one
in Marin County. When the couple contemplated a move to a retirement trailer park,
their daughter Laura suggested they move into her home. Laura had been living in an in-
law unit and renting out her house to supplement her own income. In October, the Thiels
purchased an interest in Laura’s home and moved there. By that time, Norman was
suffering from Chronic Obstructive Pulmonary Disease (COPD) and had to use an
oxygen tank every day. He used a portable tank which he took with him when he left the
house.
By the spring of 2007, there were marked changes in Norman’s mood and health.
He became short-tempered and frustrated when trying to balance his checkbook so Laura
took over that task from him. He slowed down generally and stopped doing handyman
repairs around the house. He had arthritis in his neck and back, started using a cane, and
became hunched over. He became sedentary, slept a lot and had a chronic bad cough
which would almost make him stop breathing. In April of that year, Norman was
diagnosed with prostate cancer which was treated with hormone suppression therapy and
5
six weeks of radiation. He was in a lot of pain and very tired. Around that same time,
Norman received a final payment from his 2002 investment in the AREI deal.
Norman earned approximately $192,000 on his 2002 investment, and when AREI
returned his $400,000 principal, Norman called Guidi for help reinvesting it. Norman
became fixated on the idea of making another investment that would make 12 percent
again and not lose any of his principal. Norman’s family was unable to convince him
that his goal of achieving another 12 percent return was unrealistic.
3. MKA
MKA is a set of funds that lends money to builders involved in different facets of
the construction industry. The three primary funds are the “Opportunity Fund,” the
“Qualified Fund,” and an offshore fund. The Opportunity Fund was the original fund
established in 2002. The Qualified Fund was subsequently established in an effort to
overcome financial problems experienced by the Opportunity Fund. The funds do not
have their own officers, directors, or employees; all of their acts, including accounting
and investment activities, are performed by MKA’s manager, Advisors.
Brian Wagoner is Advisors’s executive vice-president of finance. Wagoner
testified at trial that the Qualified Fund is “a private fund comprised of members’ equity”
and is different from the Opportunity Fund because it cannot take on debt. When asked
how MKA secured investors for the Qualified Fund in 2006-2007, Wagoner gave this
answer: “If I understand the question correctly, we used a private placement. I think we
fell under some SEC rule like a regulation D offering. If I understand your question, it
just means that we couldn’t solicit directly. We had to use a broker dealer. All investors
had to be accredited. And there was a number limit. We had to keep it below five
hundred” investors.
ePlanning was one of the broker-dealers that MKA used to locate investors for the
Qualified Fund. In June 2006, MKA and ePlanning executed a Placement Agent
Agreement (the 2006 PAA), pursuant to which MKA engaged ePlanning to act as its
nonexclusive placement agent and broker in selling units in the Opportunity Fund.
Wagoner testified that, although the 2006 PAA was originally executed for the
6
Opportunity Fund, the parties used the same agreement for Qualified Fund. Advisors’s
president, Jason Sugarman, signed the 2006 PAA on behalf of MKA.
By executing the 2006 PAA, ePlanning expressly assumed enumerated duties with
respect to investments in the MKA funds, which included: (1) using “standard reasonable
efforts to procure qualified subscribers for the Units on the terms described in [the
fund’s] Offering Memorandum”; (2) distributing offering materials to potential investors
which had been prepared by MKA, including an offering memorandum, a financial
statement and a “Purchaser Questionnaire”; (3) assisting potential investors in
understanding offering materials and using best efforts to ensure that clients read all
pertinent material before investing; and (4) complying with all pertinent laws, rules and
regulations.
MKA’s duties under the 2006 PAA included collecting Purchaser Questionnaires
delivered by ePlanning; “review[ing] the representations set forth in each Purchaser
Questionnaire by each prospective investor,” and using its sole discretion to “decide
whether to accept the offer to invest made by each prospective investor.” MKA also
agreed that, to the extent it offered to sell units directly, it would perform all the duties
assigned to the broker under the agreement.
Advisors’s executive vice-president of finance Wagoner testified that when new or
existing members purchased units in a MKA fund, they had to complete a subscription
booklet which included a subscription agreement, information about the specific
investment, and an investor worksheet. Wagoner represented that he reviewed “every
single subscription document” that was generated in connection with the purchase of a
membership unit in an MKA fund. Wagoner also testified that “every single investor” in
the Qualified Fund was an accredited investor—that “[t]hey had to be.”
4. Norman’s 2007 Investment
In the spring of 2007, after Norman called Guidi for investment advice, Norman
was asked to complete an ePlanning “New Account Application.” On May 30, 2007,
Norman completed the form in handwriting. Norman estimated his net worth as
$800,000, attributing $200,000 to the value of his residence. He reported his “Risk
7
Tolerance” as “Conservative for Income.” He identified his employer as “Retired,” his
source of funds as “IRA Transfer,” and his source of net worth as “Lifetime Of
Accumulation.”
In the spring or summer of 2007, Guidi and Norman had a few telephone
conversations about Norman’s desire to make another investment. Guidi testified that he
told Norman about some “REITS” he thought would be appropriate, but Norman wanted
a higher return. Guidi testified he also mentioned MKA and Norman seemed interested
in that. Laura, who was living with her father at that time, testified Guidi took several
months to find an investment for Norman, and Guidi did not tell Norman about a REIT
or any other investment opportunity during their telephone conversations in 2007.
On July 2, 2007, Guidi met with Norman and Gae at his office and arranged for
Norman to purchase a one membership unit interest in MKA’s Qualified Fund. Norman
did not speak to anyone employed by MKA prior to that meeting, and Gae testified at
trial she did not think Guidi and Norman discussed the MKA investment opportunity
prior to that meeting. Guidi “ran the whole show,” he was “very, very persuasive about
what [Norman] could do,” and he convinced Norman that MKA was a good investment
for Norman to make.
Gae testified Guidi told Norman “we have to act really fast on this MKA project.”
Laura also recalled her father told her that when Guidi presented the MKA investment, he
told Norman that “there was this short period of time. He had to sign now or the window
would close . . . .” At trial, Guidi acknowledged there was no time restriction associated
with the MKA investment, and he denied suggesting there was one.
During the July 2007 meeting, Gae objected to Guidi’s proposal, calling the
investment “not . . .good . . .at all” and a “worst” choice, but Guidi was talking fast,
saying it was such a good idea, and making assurances that “it’ll be okay; it is a good
investment . . . [a]nd they have a good reputation.” Norman did not look or feel well;
Gae later recalled that Norman was not “in his right mind” at that meeting, but that “there
was no turning him back.” At trial, Guidi acknowledged Gae objected to the MKA
investment. Guidi testified that, because Gae objected, he suggested Norman take time to
8
think about it or just invest half the $400,000, and Norman decided he did not want to
wait, but that he would follow Guidi’s suggestion to limit his investment to $200,000.
Gae testified Norman did not have to sign many papers “to get the project started
in his name.” Guidi had Norman sign three documents at the July 2007 meeting. First,
Norman signed a new version of an ePlanning “New Account Application” that had been
completed in handwriting by someone other than Norman. Some of the information on
this form was the same as the information on Norman’s May 2007 New Account
Application, including, for example, that Norman’s “Risk Tolerance” was “Conservative
for Income.” However, the July 2007 version of the form did not state that Norman was
retired, but reported instead that he was employed by “Miller Pacific” as an
“Engineering/Contractor,” and that his estimated net worth was $1.067 million.
At trial, Guidi testified he told Norman that he had to be an accredited investor in
order to make an investment in MKA, which meant his net worth had to exceed
$1 million. On the first day of Guidi’s trial testimony, he could not recall whether he had
ever seen the May 2007 New Account Application in which Norman reported a net worth
of $800,000. On the second day of his testimony, however, Guidi recalled he did see that
application prior to the July meeting. Guidi also recalled the reason he previously told
Norman about the REITS was because Norman initially reported his net worth as lower
than $1 million, and the REITS did not have accredited investor requirements.4
According to Guidi, when he raised the accredited investor requirement at the July 2007
meeting, Norman told him that the numbers he put down on the May 2007 form were not
accurate, and that his net worth was higher than $800,000. So Guidi helped Norman
calculate his net worth and complete a new form.
The second document Norman signed at the July 2007 meeting stated: “I
understand that e-PLANNING Securities, Inc. recommends limiting accredited investors
to no more than 20% of net worth invested in Limited Partnership or Limited Liability
4
Laura testified that Norman told her that MKA was the only investment
opportunity that Guidi offered to Norman in 2007.
9
Corporations as an asset class. Our broker has advised us of these guidelines and I wish
to exceed this recommendation with this investment in MKA Real Estate Qualified Fund
I, LLC. My net worth is $1,067,000, and attached is the paperwork for the above-
mentioned investment.”
Finally, Norman signed a MKA Subscription Booklet, which included an
agreement to purchase a membership unit in Qualified Fund for $200,000. Norman’s
initials appear next to a statement in the booklet which indicated that he had a net worth
of more than $1 million.
When Norman made his MKA investment, members of the Qualified Fund were
receiving monthly distribution payments calculated to result in a 12 percent annual return
on their investments. However, near the end of 2007, MKA suspended monthly
distribution payments because of cash flow problems. In July 2008, Advisors notified
Norman it had re-characterized the monthly distribution payments that were made to him
in 2007 as a partial return of his capital contribution. In October 2008, Advisors notified
investors that their “right” to withdraw from Qualified Fund had been suspended and that
every prior acceptance of a request to redeem an investment in that fund was being
reversed.
5. Guidi’s Arrest
On May 21, 2009, Guidi and his business partner Gary Armitage were arrested
and charged with approximately 70 felonies. Guidi testified the charges arose out of his
relationship with AREI, which turned out to be a Ponzi scheme, and all charges against
him were dismissed after he paid approximately $300,000 to three former clients and
surrendered his securities license.
When Norman learned Guidi had been arrested and charged with fraud, he
admitted to Laura that his faith in his investment advisor was finally broken and said he
was going to hire an attorney “to fight MKA.” On June 9, 2009, an attorney named
Vernon Watters sent a letter to MKA demanding a return of Norman’s investment.
Watters outlined concerns that Norman’s investment had been secured through fraud. He
also identified Guidi as the “advisor” who arranged Norman’s investment in Qualified
10
Fund, and stated that Guidi was in jail pending trial on charges of fraud. Watters
proposed that “Guidi’s relation with the Fund and its constituent members needs to be
explored.” Watters also requested someone from MKA contact him by phone or e-mail.
One month later, Advisors’s general counsel, Daniel White, responded to Watters
on behalf of MKA. In a letter which was sent to a different address than appeared on
Watters’s letter, White stated: “Please be advised that all redemptions have been
suspended, as well as all preferred distributions. Nothing contained in your letter
explains why your clients should be redeemed from MKA before other investors.
Consequently, the Thiels will be treated exactly the same as other investors.” White did
not offer to discuss the matter further, although he did advise Watters to “direct all further
communications” to him.
At trial, White testified that he interpreted Watters’s letter as a request for both a
distribution and redemption of Norman’s 2007 investment. White recalled the letter
mentioned that Guidi had been arrested, so he talked with Advisors’s personnel to
determine whether there was any relationship between MKA and Guidi “and they said
no.” White also recalled he reviewed documents in MKA’s file pertaining to Norman’s
investment and “there didn’t seem to be anything wrong [with them] or any red flags.”
So, “a few days afterwards,” he wrote back to Norman’s lawyer that the Fund did not
have any money to distribute, and it was not accepting redemptions.
White testified some other “MKA personnel, not legal” was responsible for vetting
MKA’s broker-dealers before they were engaged by MKA. However, before denying a
redemption request, he “would have” checked the “FINRA” Web site to make sure the
broker-dealer that arranged the investment was in good standing. White, who had
participated in proceedings before FINRA, described that body as an industry
organization that regulates broker-dealers and the people who work for them. Under
cross-examination, White admitted he did not “run any FINRA check on Mr. Guidi.”
Under cross-examination, White was asked several times whether MKA had a
complete file of documentation pertinent to Norman’s 2007 investment, including a
purchaser questionnaire. White’s answers were so evasive that the court expressed
11
frustration at his “hyperbole,” and “concern[] about this witness.” Ultimately, White
essentially admitted that MKA’s file included Norman’s purchaser questionnaire even
though the document was not produced in response to plaintiff’s discovery request.
White also confirmed MKA did have a complete file when they rejected Norman’s
request for a return of his investment.
6. Expert Evidence Regarding Undue Influence and Elder Abuse
Dr. Jonathan Canick is a clinical psychologist and neuropsychologist who was
qualified as an expert in the areas of neuropsychology; undue influence as it affects
seniors; and evaluating the cognitive capacity of an individual. Canick testified that in
July 2007, Norman was “cognitively compromised and disordered,” that his “level of
disorder made him highly vulnerable to undue influence,” and that he was “a victim of
elder financial abuse.” Canick explained that Norman suffered from hypoxia, which is a
lack of proper oxygenation of the brain that causes “confusion, memory problems,
organizational problems, difficulty initiating, executing, things like that.”
At trial, the defense objected that Canick could not use Norman’s medical records
as evidence of his hypoxia because those records had not been authenticated. Therefore,
Canick used prior interviews with Norman’s family and friends to identify several
circumstances about Norman’s health and lifestyle which supported his expert opinion.
Pertinent health factors included Norman’s daily use of oxygen, his long history of severe
COPD, his heart condition, and his prostate cancer. Pertinent lifestyle factors included
that Norman was a smoker, was sedentary and suffered from significant fatigue.
Canick testified that hypoxia is a documented side effect of COPD; of undergoing
a carotid endarterectomy; and of the medication used to treat Norman’s prostate cancer.5
Furthermore, the effects of hypoxia can be compounded by smoking and inadequate
5
Canick testified that between 2002 and 2006, carotid endarterectomies were
performed on patients who had “dramatic symptoms like passing out, falling asleep,
extreme kinds of symptoms.” Furthermore, although effective to treat the heart
condition, the procedure has fallen out of favor because it often causes patients to suffer
“little mini-strokes,” which significantly diminish brain function.
12
sleep. Changes in Norman’s lifestyle that were consistent with a cognitive impairment
included the fact that after 2006 Norman was no longer able to engage in his hobby of
fixing things around the house, and he was unable to do full time work because “he was
so weak and compromised.” In 2008 his driver’s license had to be taken away, which
reflected that a “very executive kind of function, driving, . . . was really compromised.”
Canick opined that Norman’s “perseveration” was another manifestation of his
cognitive impairment. For example, after Norman had his license taken away by the
authorities he continued to drive. Similarly, in the spring of 2007 he fixed on the idea of
making another investment with a 12 percent return.
7. Expert Testimony Regarding Securities Industry Standards
Preston DuFauchard is a private consultant, attorney, and former commissioner of
the California Department of Corporations who offered expert testimony about industry
standards relating to the sale of private placements. DuFauchard testified that securities
are distributed either through public offerings or private placements and the primary
distinction between the two methods is that private placements are exempt from the
registration requirements of the securities laws and “need to be sold in a way that
maintain[s] that exemption.”
According to DuFauchard, the standard way to conduct a private placement is for
the issuer to identify a broker dealer and to “use that broker dealer to make sure that the
broker dealer’s clients are accredited investors” so that the issuer can maintain its
exemption from the registration requirements of federal securities law. Furthermore, a
“general solicitation” of a private placement will cause the issuer to lose its exemption.
Therefore, unless the issuer “knows of a population of willing investors, then the issuer
will typically use a registered broker dealer who does have preexisting relationships to
make the offering available to investors.”
DuFauchard testified that it is standard industry practice for the issuer of a private
placement offering to “assign responsibility to the broker dealer to scrub its clients to
make sure that they had the sufficient net worth to invest in the fund and [to] also put
certain constraints on the broker dealer so that the issuer would not lose its exemption
13
from registration.” One constraint typically imposed on the broker dealer is to ensure
that investors who are referred to the fund are accredited investors. In 2007, an
accredited investor was defined as someone with a net worth of $1 million.
DuFauchard opined that the 2006 PAA is a routine contract consistent with
industry practice. DuFauchard also testified that devising a relationship in which an
entity like Advisors manages a set of funds like the MKA funds is consistent with
industry standards.
C. The Trial Court’s Decision
The parties filed written closing arguments and proposed statements of decision,
and the court issued a tentative decision which was subject to objections and a hearing.
Then, on January 8, 2015, the court filed an 18-page statement of decision which set forth
findings of fact and law in favor of Gae on her causes of action for negligence, breach of
fiduciary duty, fraud and financial elder abuse.6
1. Negligence
Holding MKA directly liable for negligence, the trial court first found that a
“private placement fund owes a duty of care to an elderly investor in the absence of
privity of contract.” It reached that conclusion by applying a multi-factor test set forth by
our Supreme Court in Biakanja v. Irving (1958) 49 Cal.2d 647, 648 (Biakanja). Under
that test, the court found, among other things, that (1) the 2006 PAA between ePlanning
and MKA was intended to affect Norman; (2) MKA ignored “red flags” in Norman’s
application file; (3) the harm Norman suffered was foreseeable to MKA; (4) MKA’s
conduct was closely connected to the injury that Norman suffered; (5) MKA’s conduct
was worthy of moral blame; and (6) imposing a duty on MKA was consistent with public
policy.
As further support for its finding of a duty, the trial court applied a supplemental
test set forth in Bily v. Arthur Young & Co (1992) 3 Cal.4th 370, 398 (Bily), concluding
6
The court found that Gae failed to establish that she was entitled to the remedy
of rescission. That finding is not at issue on appeal.
14
that imposing a duty on MKA under these facts would not create a risk of
disproportionate liability. In this regard, the court emphasized that the Thiels were not
sophisticated investors, and this case involved “a senior losing his retirement due to
conduct of an overzealous agent.”
After finding a legal duty of care, the court then concluded that MKA breached its
duty by accepting Norman’s 2007 investment without appropriately monitoring the
conduct of its registered representative, and without conducting an appropriate review of
Norman’s investment file or taking reasonable steps to ensure that Norman was an
accredited investor.
2. Breach of Fiduciary Duty and Fraud
The trial court found that Guidi assumed a fiduciary duty by holding himself out to
Norman as a trustworthy and capable financial advisor. He then breached that duty by
“steering” Norman to “an unsuitable high risk investment for an ailing senior,” and by
telling him “that time was of the essence.” Guidi also committed fraud by making
knowingly false representations including that (1) MKA was an appropriate investment
for Norman; (2) Norman’s net worth was higher than it was; and (3) time was of the
essence because the investment opportunity was closing. In reaching these conclusions
about what Guidi said and did, the trial court made an express finding that Guidi was not
a credible trial witness.
In analyzing the evidence of fraud, the court found that Guidi knew he was
pressuring Norman to make an investment that represented more than 20 percent of his
net worth. Guidi “expressly made a note” of that fact on the ePlanning client form and, at
the same time, the court found, “Guidi reported on the form that his client’s income was
$1,067,000, which conveniently meets the 20% benchmark when investing $200,000.00.”
The court further concluded that MKA was vicariously liable for damages
resulting from Guidi’s breach of fiduciary duty and fraud because Guidi was MKA’s
agent when he arranged for Norman’s 2007 investment in Qualified Fund. (Civ. Code,
§ 2295.) To support its finding of an agency relationship, the court relied primarily on
the parties’ actions and statements, including evidence that MKA needed
15
ePlanning/Guidi to secure investors for Qualified Fund, and that the parties manifested
their consent to an agency relationship by executing the 2006 PAA.
3. Elder Abuse
In holding MKA liable for financial elder abuse (Welf. & Inst. Code, § 15610.30),
the court appears to have relied primarily on an agency theory of vicarious liability, but it
also made findings about MKA’s direct liability.
With regard to vicarious liability, the court found that Guidi committed elder
abuse by “taking and obtaining [Norman’s] $200,000.00 and by encouraging [Norman] to
purchase an investment in MKA with a level of risk that was not appropriate for a person
of his age, health, and financial circumstances.” In reaching this conclusion, the court
credited Gae’s testimony about what happened at the July 2007 meeting as well as expert
testimony showing that Norman was susceptible to undue influence. It also found that
Guidi knew Norman did not qualify to be an investor in MKA but “he pushed it through
anyway exposing his client to great loss, and MKA through the agency contract with
ePlanning to great liability.” Finally, the court found there was clear and convincing
evidence that Guidi acted with fraud, oppression and malice.
Addressing MKA’s direct conduct, the court reiterated that “MKA was negligent
by both not catching the irregularities contained in its investor file, and because it did not
properly monitor Mr. Guidi as its registered representative.” Beyond that, the court
found that MKA also “retained Mr. Thiel’s money” when it “knew or should have known
that keeping the money would be harmful to him.”
4. Damages
Recognizing that “even a conservative investment would most probably have lost
value after the stock market crash of 2008, and part of [Norman’s] investment was
redeemed,” the court awarded Gae compensatory damages in the amount of $100,000.
As additional damages for financial elder abuse, Gae was awarded emotional distress
damages in the amount of $400,000, and her attorney fees and costs. (Welf. & Inst.
Code, § 15657.5.)
16
The trial court did not award punitive damages, but it did impose a civil penalty to
deter and punish MKA. (Civ. Code, § 3345.) The $570,000 penalty was calculated by
using a base amount of $200,000, and applying a multiplier of 2.85. The court awarded
prejudgment compounded interest on the penalty at a rate of seven percent. Finally, the
court found that Qualified Fund and Advisors were joint and severally liable and
vicariously liable for all damages, penalties, interest, fees and costs.
D. Judgment and Attorney Fee Award
A January 15, 2015 judgment incorporated the damages award from the statement
of decision. On April 10, 2015, the court issued an “Amended Judgment, nunc pro tunc,
after motion and hearing on April 10, 2015.” The amended judgment “clarifi[ed]” that
the MKA defendants were joint and severally liable for Norman’s damages by adding the
following sentence to the judgment: “Culpability is shared on an equal basis. (The
defendants are joint and severally liable for all damages, meaning the plaintiff may
collect all or some of the damages from any one or several of the liable parties.)” The
amended judgment also added a provision that July 5, 2007, was the start date for the
accrual of prejudgment interest on the civil penalty.
On April 10, 2015, the court filed a 19-page postjudgment “Attorneys’ Fee
Order.” Pursuant to an analysis that MKA does not challenge on appeal, the trial court
awarded Gae attorneys fees in the total amount of $1,247,709.10.
III.
DISCUSSION
A. MKA’s Direct Liability for Negligence
We begin with MKA’s claim that it has no direct responsibility for any injury
suffered by Norman. MKA contends the direct negligence finding must be reversed
because MKA did not have a duty to (1) supervise Guidi, (2) “ferret out something in
ePlanning’s file,” or (3) return Norman’s investment after Guidi was arrested. This
argument conflates two distinct issues: duty and breach.
“ ‘Actionable negligence involves a legal duty to use due care, a breach of such
legal duty, and the breach as the proximate or legal cause of the resulting injury.’
17
[Citation.]” (Beacon Residential Community Assn. v. Skidmore, Owings & Merrill LLP
(2014) 59 Cal.4th 568, 573 (Beacon).) “ ‘The existence of a legal duty to use reasonable
care in a particular factual situation is a question of law for the court to decide.
[Citation.] However, the elements of breach of that duty and causation are ordinarily
questions of fact for the jury’s determination. [Citation.]’ [Citation.]” (McGarry v. Sax
(2008) 158 Cal.App.4th 983, 994.)
1. Duty
“ ‘A judicial conclusion that a duty is present or absent is merely “ ‘a shorthand
statement . . . rather than an aid to analysis . . . . “[D]uty,” is not sacrosanct in itself, but
only an expression of the sum total of those considerations of policy which lead the law
to say that the particular plaintiff is entitled to protection.’ ” [Citation.] “Courts,
however, have invoked the concept of duty to limit generally ‘the otherwise potentially
infinite liability which would follow from every negligent act . . . .’ ” ’ [Citation.]”
(Beacon, supra, 59 Cal.4th at p. 573.)
“A duty may arise through statute, contract, or the relationship of the parties.
[Citation.]” (National Union Fire Ins. Co. of Pittsburgh, PA v. Cambridge Integrated
Services Group, Inc. (2009) 171 Cal.App.4th 35, 45 (National Union Fire).) “The factors
to be considered in determining whether a duty of care exists based on the relationship
between two parties in a commercial context who are not in privity were established in
Biakanja [supra,] 49 Cal.2d [at p.] 650.]” (National Union Fire, at p. 45.) As discussed
in our factual summary, the trial court applied the Biakanja factors to reach its conclusion
that a private placement fund owes a common law duty of care to an elderly potential
investor.7
Biakanja, supra, 49 Cal.2d at page 650 established the following test: “The
determination whether in a specific case the defendant will be held liable to a third person
not in privity is a matter of policy and involves the balancing of various factors, among
7
Surprisingly, MKA does not address the trial court’s duty analysis in its lengthy
appellate briefs.
18
which are the extent to which the transaction was intended to affect the plaintiff, the
foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the
closeness of the connection between the defendant’s conduct and the injury suffered, the
moral blame attached to the defendant’s conduct, and the policy of preventing future
harm. [Citations.]”
Here, the trial court found the 2006 PAA was clearly intended to affect Norman.
It delegated responsibility to Guidi to evaluate whether potential investors were
appropriate based on criteria established by MKA; and it also delegated responsibility to
ePlanning to generate documentation about the prospective investor that Advisors would
use to decide whether to accept the investment. Furthermore, the harm Norman suffered
was foreseeable to MKA. The investment “flowed from a trusting relationship between
Guidi and Mr. Thiel, on which MKA depended and used to its benefit”; and the loss of an
elderly investor’s retirement savings was a foreseeable consequence of the risky nature of
investing in Qualified Fund. Furthermore, MKA’s conduct was closely related to
Norman’s harm because, as the trial court found, “[p]resumably,” MKA would not have
accepted Norman’s investment if it had properly monitored Guidi’s conduct and “better
reviewed the investment file” which raised red flags about whether Norman met the
requirements to participate in the private placement offering.
As the trial court also found, MKA was worthy of moral blame: “MKA turned a
blind eye to how investors qualify to invest in their ventures when seeking funding;
MKA’s aim was to accumulate sufficient funding for its real estate investment.
Therefore, speculators like MKA have a perverse incentive to ignore how their investors
qualify at the time the money comes in, but insist upon enforcement of their investor
guidelines when those investors assert their rights.” Finally, imposing a duty under these
circumstances was also consistent with public policy discouraging financial elder abuse.
In Bily, supra, 3 Cal.4th 370, our Supreme Court identified three circumstances
which weigh against finding a duty of care among commercial actors who are not in
privity of contact: (1) when recognizing a duty imposes liability out of proportion to
fault; (2) when the third party is a sophisticated actor; and (3) when expanding liability
19
could have deleterious effects on the economy. (Id. at pp. 398-408.) None of these
concerns are present here. As the trial court found, this case involves a discrete situation
in which MKA’s agent abused his position of trust to unduly and fraudulently influence
an elderly unsophisticated client. Recognizing MKA’s duty here does not expose it to
liability disproportionate to its fault. Nor does it imperil the economy.
In its reply brief, MKA argues, for the first time, that it owed Norman only a
“general duty of care” to provide accurate disclosure materials regarding the risks of
investing in Qualified Fund, citing Corporations Code section 25400 et seq. We disagree.
These provisions form a part of the Corporate Securities Law of 1968, which “created an
entirely new area of statutory liability dealing with fraudulent practices in securities
transactions. [Citations.]” (Bowden v. Robinson (1977) 67 Cal.App.3d 705, 711.) By
enacting this law, the Legislature “established a carefully drafted series of actions and
remedies that supplement common law actions, remedies and limitations.” (Id. at p. 717,
italics added.) Thus, we reject MKA’s belated and unsupportable notion that this state
securities law statute restricts the scope of its common law duty of care.
In addition to meeting the Biakanja test, recognizing a duty of care under these
circumstances is also supported by applicable federal securities law. Although MKA and
Norman were not in privity of contract until after Norman made his 2007 investment,
MKA’s transaction with Norman was regulated by a federal statute. Section 5 of the
Securities Act of 1932 prohibits “the unregistered offer or sale of securities in interstate
commerce, unless an exemption from registration applies. [Citation.]” (SEC v. Capital
Cove Bancorp LLC (C.D.Cal. Sept. 1, 2015, No. SACV 15-980-JLS) 2015 U.S. Dist.
Lexis 174962, at *24; see 15 U.S.C. § 77e(a), (c).) Exemptions from registration
requirements are construed in light of the statutory purpose of the Securities Act, which is
“to protect investors by promoting full disclosure of information thought necessary to
informed investment decisions.” (S. E. C. v. Ralston Purina Co. (1953) 346 U.S. 119,
124, fn. omitted.) The entity claiming the exemption carries the ultimate burden of
proving the exemption applies. (Id. at p. 126; S. E. C. v. Garber (S.D.N.Y. 2014) 990
F.Supp.2d 462, 466.)
20
Here, defense witnesses testified that the Qualified Fund offering was exempt
from registration requirements of the Securities Act under Regulation D. Regulation D is
comprised of three rules which establish different exemptions, and several other rules
which impose general conditions for maintaining those exemptions. (See generally
Hazen, The Law of Securities Regulation (2009 6th ed.) § 4.20, pp. 186-193; Loss,
Seligman, Paredes, Securities Regulation (2015 5th ed.) ch. 3, pp. 356-370.) Defense
expert DuFauchard testified that Qualified Fund’s private placement was a Rule 506
offering. “ ‘The SEC promulgated Rule 506 . . . in order to provide investors with a safe
harbor to be certain that they can avoid registration requirements.’ [Citation.]” (SEC v.
Credit First Fund, LP (C.D.Cal. Feb. 13, 2006, No. CV05-8741-DSF) 2006 U.S. Dist.
Lexis 96697 at *39, fn. omitted.)
In 2007, Rule 506 imposed specific conditions which limited the number of
unaccredited investors that could participate in the offering, and which also required that
even unaccredited investors had to possess a minimal level of knowledge in financial
matters to be able to evaluate the merits and risk of the prospective investment. A minor
or technical violation of these requirements could be excused if the issuer could show that
it took reasonable steps to comply with them. (17 C.F.R. § 230.506; Mark v. FSC
Securities Corp. (6th Circ. 1989) 870 F.2d 331, 334-335; Hazen, supra, The Law of
Securities Regulation, pp. 292-293.)
Our brief overview of these provisions of federal securities law reveals two
important fact-based conclusions. First, contrary to MKA’s representations, the
conditions associated with its Regulation D exemption were not mandatory; MKA
voluntarily elected to pursue an exemption in order to avoid registration requirements
otherwise imposed by federal law for the protection of its investors. Second, to the extent
that the investment relationship between MKA and Norman was dependent on the
Regulation D exemption, MKA assumed a statutory duty to take reasonable steps to
assure that Norman was an accredited investor.
These conclusions are important because they demonstrate that MKA could not
shield itself from liability arising out of the duty it owed to Norman by using an agent or
21
independent contractor to secure investors for the private placement offering. A
nondelegable duty may arise when a statute or regulation requires specific safeguards or
precautions to ensure others’ safety. (Felmlee v. Falcon Cable TV (1995) 36 Cal.App.4th
1032, 1038.) Restatement Second of Torts, section 424, states the nondelegable duty rule
as follows: “One who by statute or by administrative regulation is under a duty to provide
specified safeguards or precautions for the safety of others is subject to liability to the
others for whose protection the duty is imposed for harm caused by the failure of a
contractor employed by him to provide such safeguards or precautions.”
“A nondelegable duty is a definite affirmative duty the law imposes on one by
reason of his or her relationship with others. One cannot escape this duty by entrusting it
to an independent contractor. [Citation.]” (Felmlee, supra, 36 Cal.App.4th at p. 1038.)
Camacho v. Youde (1979) 95 Cal.App.3d 161, illustrates this doctrine. In
Camacho the court held that the holder of an agricultural pest control license was subject
to discipline because his pilot negligently dumped pesticide on a man during aerial
spraying of a field. While the court described the pilot as the licensee’s employee, it also
accurately stated that effective regulation would be impossible if a licensee could
immunize himself from disciplinary action by contracting away the daily operations of
his business to independent contractors. (Id. at p. 164.) The court viewed the licensee’s
duty to apply pesticides safely as “nondelegable to either an independent contractor or to
an employee,” and held the licensee “to the conduct prescribed by statute for operating
his licensed business.” (Id. at p. 165.)
Other courts have confirmed the principle under California law that the duty to
comply with a statutory or regulatory safeguard is a nondelegable duty. (Evard v.
Southern California Edison (2007) 153 Cal.App.4th 137, 146-147; see also 6 Witkin,
Summary of Cal. Law (10th ed. 2005) Torts, § 1247, pp. 634-635.)
2. Breach
The trial court found that MKA breached its duty to use due care by failing to take
reasonable steps to ensure that Norman was an accredited investor. Specifically, MKA
22
did not monitor the conduct of its agent or conduct a reasonable review of Norman’s
investor file. These findings are supported by substantial evidence.
The record contains two fundamentally different versions of a New Account
Application for Norman, both of which were signed by Guidi within a five-week period
in 2007. Even a cursory comparison of the two documents would have sent up red flags:
(1) Both were signed by Norman and yet they were completed by different people;
(2) Both reported that Norman’s investment goal was “conservative for income,” but they
were used to justify an investment that was far from conservative; (3) Although the
second form was signed only 33 days after the first, that second form showed Norman’s
net worth to have significantly increased from that shown on the first form—an amount
that disqualified him for MKA’s private placement—to an amount that qualified him for
that investment.
Other significant discrepancies pertained to information about Norman’s advanced
age and vulnerability: The May 30 application reported Norman was retired, his IRA
account was the source of his investment, and the source of his $800,000 net worth was a
“Lifetime of Accumulation.” By contrast, the July 2 application stated that Norman was
employed, his career was in “Engineering,” his source of funds was an “IRA maturing
note,” and his net worth was $1.067 million.
The other form Norman signed contemporaneously with his 2007 investment in
MKA was also a red flag to anyone who read it. Guidi had Norman sign the form to
acknowledge he was ignoring advice not to make an investment of more than 20 percent
of his net worth, but then filled in blanks on the form to indicate that the MKA
investment did not exceed 20 percent of Norman’s net worth. As the trial court found,
the contradictory information contained on this one form showed that Guidi knew that
Norman’s net worth was less than the reported amount.
On appeal, MKA contends a breach of duty cannot be based on evidence that it
failed to oversee “the conduct of the hundreds of registered representatives of the dozens
of . . . broker-dealers who offer the MKA fund to investors.” This argument
mischaracterizes the narrow scope of the trial court’s findings of fact. MKA did not
23
breach some broad duty to oversee broker-dealers generally, but a specific duty to
exercise reasonable care to protect this elderly investor from fraud and other intentional
misconduct by appropriately monitoring the individualized transactional actions of its
agent, taken for its financial benefit. MKA also breached its duty by failing to review
documents in its own file that were generated for the express purpose of assisting it in
determining whether to accept a proposed investment.
MKA argues that DuFauchard’s “uncontradicted expert testimony” establishes that
MKA had no duty to verify independently information about Norman gathered by Guidi.
DuFauchard testified it is industry practice for the private placement issuer to delegate
responsibility to the broker-dealer to “scrub” the potential investor to make sure he or she
is eligible to make the investment. However, he also acknowledged that if the broker-
dealer fails to comply with pertinent securities laws governing the private placement
offering, the failure creates potential liability for both the broker-dealer and the issuer.
Furthermore, DuFauchard did not testify it is standard industry practice for an
issuer to fail to review a potential investor’s file before accepting his or her investment.
To the contrary, MKA’s general counsel, Daniel White, testified that if paperwork
associated with a new investment disclosed the investor sought a “conservative for
income” investment, or if there was some other “red flag” in the file, MKA would return
the investment. In this case, however, MKA did not follow its own standard practice.
We also reject MKA’s contention there is no evidence MKA’s file for Norman
contained documents generated by ePlanning that could potentially have disclosed
Guidi’s fraud and/or the fact that Norman was not an accredited investor. The trial court
made an express finding that “MKA held a complete file on Mr. Thiel that contained all
relevant documents associated with this investment.” This finding is supported by the
trial testimony of Daniel White, which we have summarized above.
3. Statute of Limitations
MKA next contends that Norman’s claim against MKA for negligence is barred by
the two-year statute of limitations. (Code Civ. Proc., § 339, subd. 1.) MKA relies on
trial testimony from Advisors’s executive vice-president of finance, Brian Wagoner, that
24
“somewhere in January 2008 I believe we sent out a letter to all the investors explaining
that there’s a problem and we’re going to do a I think like a one or two quarter pause in
paying monthly distributions.” According to MKA, this testimony shows that Norman
was “on notice that he was not in a conservative investment when [Qualified] Fund
stopped paying distributions in January 2008.” We disagree. The explanation Advisors
gave to Qualified Fund inventors did not put them on notice of anything except that there
was an unexpected, temporary pause in paying monthly distributions.
Alternatively, MKA asserts that the two-year statute of limitations began to run in
August 2008 when “the Thiels were communicating with other investors in the MKA
Fund regarding their concerns about the fund.” To support this theory, MKA relies on
testimony by Gae and Laura which shows that, as early as August 2008, a disgruntled
MKA investor contacted Gae by e-mail and opined that MKA was a Ponzi scheme, and
that Gae expressed an interest in learning about his lawsuit. But, this evidence is not
probative on the statute of limitations defense because the causes of action that resulted in
this judgment belonged to Norman, not to Gae. Indeed, the trial testimony upon which
MKA relies shows that Norman did not participate in any of Gae’s email
communications with the disgruntled MKA investor. MKA does not identify any
evidence that Norman was even aware of that investor. To the contrary, Laura testified
that Norman did not suspect MKA of any wrongdoing until he learned that Guidi was
arrested. Thus, the trial record supports the court’s express finding that Norman did not
understand the nature of his claims until he learned that Guidi was arrested for fraud.
As best we can determine, the trial evidence does not fix the exact date Norman
learned about Guidi’s arrest, which appears to have occurred on May 21, 2009. As
discussed above, the demand letter from Norman’s attorney which referred to that fact
was dated June 9, 2009. Therefore, the statutes of limitations on Norman’s claims began
to run no earlier than May 21, 2009. Norman filed his original complaint less than two
years later, on September 10, 2010, well within the two-year limitations period. Thus,
MKA failed to establish its statute of limitations defense.
25
B. MKA’s Vicarious Liability
MKA challenges parts of the judgment holding it vicariously liable for Guidi’s
fraud, breach of fiduciary duty and elder abuse. The crux of these arguments is that
MKA and Guidi were not in an agency relationship “as a matter of law” because
“ePlanning was an independent contractor, and Guidi worked under ePlanning’s
auspices.”
1. The Agency Finding Is Supported By Substantial Evidence
“An agent is one who represents another, called the principal, in dealings with
third persons. Such representation is called agency.” (Civ. Code, § 2295.) “An agent for
a particular act or transaction is called a special agent. All others are general agents.”
(Civ. Code, § 2297.) “An agency relationship ‘may be implied based on conduct and
circumstances.’ [Citation.]” (Borders Online v. State Bd. of Equalization (2005) 129
Cal.App.4th 1179, 1189.)
“ ‘ “[T]he existence of an agency relationship is usually a question of fact, unless
the evidence is susceptible of but a single inference.’ ” ’ [Citation.]” (Harley-Davidson,
Inc. v. Franchise Tax Bd. (2015) 237 Cal.App.4th 193, 214.) Where conflicting
inferences may reasonably be drawn from the evidence, the determination of the trial
court will be accepted on review even though a contrary determination could likewise
have been upheld. (3 Witkin, Summary of Cal. Law (10th ed. 2005) Agency and
Employment, § 93, p. 140; Trane Co. v. Gilbert (1968) 267 Cal.App.2d 720, 726 [“The
question of whether one is an agent is ordinarily a question of fact, the determination of
which by the trial court on substantial evidence will be binding on the reviewing
tribunal.”]; McCollum v. Friendly Hills Travel Center (1985) 172 Cal.App.3d 83, 91
[existence of an agency relationship is a jury question “ ‘unless the evidence is
susceptible of but a single inference’ ”].)
It has been said that “ ‘ “the chief characteristic” ’ ” of an agency relationship
“ ‘ “is that of representation, the authority to act for and in the place of the principal for
the purpose of bringing him or her into legal relations with third parties. [Citations.]”
[Citation.]’ ” (Violette v. Shoup (1993) 16 Cal.App.4th 611, 620.) In this case, the record
26
contains substantial evidence that MKA retained ePlanning (and Guidi) to act for and in
the place of MKA in order to bring MKA into legal relations with third party investors in
MKA’s Qualified Fund. That evidence falls into three main categories.
First, as MKA’s trial expert testified, in order to offer securities pursuant to a
private placement, MKA had to comply with the requirements of the exemption that it
invoked. Because one such requirement precluded MKA from making a general
solicitation for investors, MKA chose to use a representative—in this case ePlanning—to
act on its behalf in order to secure offers for its private placement. Specifically, when
Guidi elicited Norman’s legally binding offer to invest in the Qualified Fund, Guidi was
acting for and in the place of MKA in order to bring about a legal relationship between
Norman and MKA, a relationship that could not have been created without Guidi’s
representation because MKA did not have its own prior relationship with Norman.
Second, MKA witnesses also testified that MKA operated under an exemption
which required it to secure only accredited investors. As discussed above, MKA had a
statutory duty to ensure that Norman was such an investor. The evidence in this case
shows that MKA attempted to comply with that duty by using a representative to ensure
in the first instance that investment offers were solicited only from accredited investors.
Finally, as the trial court found, MKA and ePlanning manifested their intent to
create an agency relationship by entering into the 2006 PAA. Through execution of that
contract, MKA engaged ePlanning to “serve as a non-exclusive broker and placement
agent for the offering and sale of Units in the Fund,” and ePlanning agreed to “perform
its obligations under [the PAA] through its registered representatives.” While these
contract provisions are not dispositive of an agency relationship, evidence that the parties
believed they were creating a relationship in which ePlanning would act as a
representative of MKA for the purpose of securing offers to invest in the Qualified Fund
was relevant to establish that an agency was in fact created. (See, e.g., ING Bank, FSB v.
Chang Seob Ahn (2010) 758 F.Supp.2d 936, 942 (ING) [under California law, evidence
that parties included a provision in their contract disclaiming an agency relationship was
relevant to question whether agency existed.])
27
On appeal, MKA does not dispute that ePlanning acted as its representative by
securing offers to invest in the Qualified Fund. Instead, MKA contends that, as a matter
of law, ePlanning performed services for MKA solely in its capacity as an independent
contractor.
MKA’s characterization of ePlanning as an independent contractor is consistent
with a provision in the 2006 PAA that states: “It is understood that the Broker’s
relationship with MKA is as an independent contractor. Nothing herein shall be
construed as creating a relationship of partners, joint venturers, or employer and
employee between or among the Broker or MKA.” However, MKA overlooks the fact
that neither this provision, nor any other evidence in this record precluded the trier of fact
from finding that ePlanning was also an agent of MKA for the offering and sale of units
in the MKA fund. Indeed, that is precisely how the parties described ePlanning in the
2006 PAA.
Under California agency law, there is no question that an independent contractor
can also be an agent. “Agency and independent contractorship are not necessarily
mutually exclusive legal categories as independent contractor and servant or employee
are. In other words, an agent may also be an independent contractor. [Citation.] One
who contracts to act on behalf of another and subject to the other’s control, except with
respect to his physical conduct, is both an agent and an independent contractor.
[Citation.]” (City of Los Angeles v. Meyers Bros. Parking System, Inc. (1975) 54
Cal.App.3d 135, 138, italics omitted; see also Doctors’ Co. v. Superior Court (1989) 49
Cal.3d 39, 46, fn. 4 [confirming that “if a person contracts to act on behalf of another (the
principal) and subject to the principal’s control except with respect to physical conduct,
that person is both an agent and an independent contractor”], italics omitted; Jackson v.
AEG Live, LLC (2015) 233 Cal.App.4th 1156, 1184 (Jackson) [same].)
These cases are based on the Restatement Second of Agency, which provides the
following definition of an independent contractor: “a person who contracts with another
to do something for him but who is not controlled by the other nor subject to the other’s
right to control with respect to his physical conduct in the performance of the
28
undertaking. He may or may not be an agent.” (Rest.2d Agency, § 2.) The Restatement
Second of Agency also expressly states that “One who contracts to act on behalf of
another and subject to the other’s control except with respect to his physical conduct is an
agent and also an independent contractor.” (Id. at § 14N.)
In the present case, the factual evidence shows that ePlanning contracted to act on
behalf of MKA and subject to its control except with respect to the physical conduct of its
employees and representatives. Through the contractual duties that ePlanning undertook,
MKA controlled to a large degree the interactions that ePlanning registered
representatives were to have with prospective investors in Qualified Fund. Those
contract terms dictated, for example, who could invest, what material would be provided
to potential investors, what records ePlanning was required to keep; how ePlanning
representatives were to interact with clients; what actions by ePlanning representatives
required MKA’s express prior approval; and what provisions of the securities law
governed the transactions.
Furthermore, in drafting the 2006 PAA, MKA reserved specific duties which
ensured its ultimate control over the investment transaction. As noted in our factual
summary, MKA retained responsibility for reviewing each Purchaser Questionnaire and
used that information to exercise its sole discretion to decide “whether to accept the an
offer to invest.” This retention of ultimate control over the investment transaction
dovetailed with ePlanning’s contractual obligation to represent MKA; ePlanning acted for
and on behalf of MKA by securing investors that were not otherwise available to MKA,
and MKA controlled that representation by retaining the authority to decide whether to
accept the offers that ePlanning secured on its behalf.
For all of these reasons, we conclude that even if we assume ePlanning was an
independent contractor, the trial record contains substantial evidence to support the
agency finding in this case. We reach this conclusion paying more than lip service to our
standard of review of this issue, and will not parse the factual record for evidence that
might lead to a contrary conclusion. We also emphasize the discrete nature of the trial
court’s finding. The court did not find that ePlanning was a general agent or employee of
29
MKA, but rather that it acted as a special agent of MKA when it solicited and secured
offers to invest in Qualified Fund.
2. Complete Control Is Not Required
MKA insists that an independent contractor cannot be an agent of the hirer unless
the hirer “exerts almost complete control” over the independent contractor, citing Stilson
v. Moulton-Niguel Water Dist. (1971) 21 Cal.App.3d 928, 936 (Stilson).
In Stilson, supra, 21 Cal.App.3d 928, the plaintiff was injured during the course of
his employment by American Bridge, a contractor that was hired by a water district to
construct water tanks. The trial court entered a directed liability verdict against the water
district finding it was vicariously liable for appellant’s injuries because American Bridge
was its employee/agent. On appeal, the Stilson court found the directed verdict could not
be sustained on the basis of agency, but affirmed the judgment on the ground that the
water district violated a nondelegable duty to take precautions to avoid the risk that
caused plaintiff’s injury.
Preliminarily, we recognize that Stilson addressed a substantively different agency
question. The issue in Stilson was whether American Bridge was an employee or an
independent contractor of the hirer. (Stilson, supra, 21 Cal.App.3d at p. 935.) As noted
above, it is not possible to be both an employee and an independent contractor. (See
generally Gonzalez v. Workers’ Comp. Appeals Bd. (1996) 46 Cal.App.4th 1584,
1589-1593.) But that is not the question we address here. The issue before us is whether
substantial evidence supports a finding that ePlanning was an agent of MKA regardless
of whether it was also an independent contractor.
As to the control issue, the actual rule quoted in Stilson is that “ ‘If the employer
has the right to exercise complete control, an employer-employee relationship exists,
whether or not that potential control is exercised with respect to all details.’ [Citation.]”
(Stilson, supra, 46 Cal.App.4th at p. 936.) This rule does not mean that an agency
finding must be supported by proof that the hirer had the right to exercise complete
control. (Wickham v. Southland (1985) 168 Cal.App.3d 49, 58.) Rather, it means that
when there is proof of “the right to exercise complete control a principal-agency
30
relationship exist[s] as a matter of law, but that otherwise the right to control [is] an
important factor to be taken into consideration” along with numerous other potentially
relevant factors. (Ibid.)
“ ‘[W]hether an agency relationship has been created or exists is determined by
the relation of the parties as they in fact exist by agreement or acts [citation], and the
primary right of control is particularly persuasive. [Citations.] Other factors may be
considered to determine if an independent contractor is acting as an agent, including:
whether the “principal” and “agent” are engaged in distinct occupations; the skill required
to perform the “agent’s” work; whether the “principal” or “agent” supplies the workplace
and tools; the length of time for completion; whether the work is part of the “principal’s”
regular business; and whether the parties intended to create an agent/principal
relationship. [Citation.]’ [Citation.]” (Jackson, supra, 233 Cal.App.4th at p. 1184.)
Here, as discussed above, there is substantial evidence of MKA’s right to control
ePlanning’s conduct with respect to the acquisition of investors for MKA’s private
placement. Other pertinent factors were also present. In this instance, ePlanning was
engaged to perform a role that belonged to MKA, i.e., to secure investors for MKA’s
private placement, and to take steps to ensure those investors were accredited. That work
was part of MKA’s regular business, and, by executing the 2006 PAA, the parties
manifested the intent to create an agent/principal relationship in which ePlanning’s
registered representatives would act on MKA’s behalf by arranging for accredited
investors to make offers to purchase units in the Qualified Fund.
Despite its different context, Stilson offers comments on several general points of
agency law that are supportive of the conclusion the trial court, and we, reach in this case.
First, echoing the passage in Jackson we quote above, Stilson confirms that in cases
involving alleged employer-employee relationships, control is but one of “numerous”
factors to be considered. (Stilson, supra, 21 Cal.App.3d at p. 936.) Second, Stilson
mentions the significance of whether the parties intended to create an agency
relationship. (Id. at p. 937.) Thus, under Stilson, the fact that MKA and ePlanning
31
expressed their intention to create an agency relationship in the 2006 PAA properly was
supportive of the trial court’s finding of agency in this case.
Finally, the most relevant aspect of Stilson is its disposition, which exemplifies
exactly why agency is ordinarily a question of fact. Even when the circumstances are
undisputed, the totality of the evidence may be susceptible to more than one reasonable
inference depending on a multitude of potentially relevant factors. The Stilson judgment
was reversed because the trier of fact was denied the opportunity to perform its function
of deciding whether to draw a reasonable inference that an agency relationship existed in
that case. (Stilson, supra, 21 Cal.App.3d at p. 937.)
That error did not occur here; in this case, the agency issue was the subject of a
trial and a finding based on evidence produced during that trial. Indeed, the Stilson court
emphasized that the existence of an agency relationship “is normally a question of fact.”
(21 Cal.3d at p. 936.) Because the agency finding in this case is supported by the trial
record, MKA’s appeal of this issue is not well-founded.
3. Control Over Day-to-Day Matters Is Not Required
MKA argues that, as a matter of law, ePlanning was not its agent because MKA
did not control “day-to-day matters” relating to ePlanning’s employees, citing Patterson
v. Domino’s Pizza, LLC (2014) 60 Cal.4th 474 (Patterson). MKA characterizes
Patterson as directly relevant precedent which bars an agency finding in this case.
In Patterson, supra, 60 Cal.4th 474, the plaintiff alleged that she was subjected to
sexual harassment by her supervisor at a pizza franchise where both were employed.
Plaintiff sued her alleged harasser, the franchisee of the pizza store, and the franchisor.
The trial court granted the franchisor summary judgment, but the court of appeal reversed
the judgment. The issue before the Supreme Court was whether “a franchisor stand[s] in
an employment or agency relationship with the franchisee and its employees for purposes
of holding it vicariously liable for workplace injuries allegedly inflicted by one employee
of a franchisee while supervising another employee of the franchisee[.]” (Patterson,
supra, 60 Cal.4th at pp. 477-478.)
32
The Patterson court’s agency analysis focused on two primary factors: (1) the
level of control the franchisor exercised over the franchisee; and (2) the need to ensure
that any extension of vicarious liability was consistent with the “contemporary realities”
of the franchise industry. (Patterson, supra, 60 Cal.4th at p. 478.) The plaintiff’s theory
was that “the degree of control exercised by franchisors like Domino’s makes each
franchisee the agent of the franchisor for all business purposes, and renders each
employee of the franchisee an employee of the franchisor in vicarious liability terms.”
(Id. at p. 496, italics added, fn. omitted.) Rejecting this theory, the Patterson court found
that, to the extent a franchisor “imposes comprehensive and meticulous standards for
marketing its trademarked brand and operating its franchises in a uniform way,” the
franchisor “controls the enterprise.” (Id. at p. 478.) But for the franchisor to incur
liability for the conduct of employees of franchisees who injure each other on the job, the
franchisor must function more like an employer itself by retaining or assuming “a general
right of control over factors such as hiring, direction, supervision, discipline, discharge,
and relevant day-to-day aspects of the workplace behavior of the franchisee’s employees.
[Citation.]” (Id. at p. 478.)
Applying the principals set forth above, the Patterson court concluded the
franchisor was entitled to summary judgment with respect to plaintiff’s sexual
harassment claims because the undisputed evidence established that while the franchisor
controlled the business operations and brand image of the pizza store, the franchisee
“made day-to-day decisions involving the hiring, supervision, and disciplining of his
employees.” (Patterson, supra, 60 Cal.4th at p. 478.)
Contrary to MKA’s contention on appeal, Patterson does not hold that “day-to-
day control” is the standard for establishing any agency relationship. Rather, the
Patterson court addressed the “novel” question of a franchisor’s vicarious liability for
workplace injuries allegedly inflicted and suffered by employees of a franchisee, and it
explicitly limited its holding to that context. (Patterson, supra, 60 Cal.4th at pp. 477,
503.) The present case does not involve a franchise agreement or a work place injury
involving employees of a franchisee.
33
Equally important, the issue here is not whether ePlanning was an agent of MKA
for all business purposes. (Compare Patterson, supra, 60 Cal.4th at p. 496.) Rather, the
pertinent issue is whether ePlanning was acting as an agent of MKA when its
representatives interacted with third parties for the purpose of securing investors for
MKA’s company. Evidence that MKA used entities like ePlanning to conduct those
interactions in order to qualify for a federal securities law exemption, and that MKA
controlled the nature of those dealings through its “Placement Agent Agreement” (italics
added) supports the trial court’s factual conclusion that an agency relationship existed for
that specific purpose.
4. ePlanning Was Not An Insurance Broker
MKA contends that this case is analogous to insurance coverage cases in which
courts have found that an insurance broker who procures a policy for the insured is not
acting as the agent of the insurance provider. (See, e.g., American Way Cellular, Inc. v.
Travelers Property Casualty Co. of America (2013) 216 Cal.App.4th 1040; Rios v.
Scottsdale Ins. Co. (2004) 119 Cal.App.4th 1020, 1026 (Rios).)
Agency relationships pertaining to the transaction of insurance are governed by
the Insurance Code. (See Krumme v. Mercury Ins. Co. (2004) 123 Cal.App.4th 924, 928
[the “evolution of the concepts of broker and agent in the insurance context” parallel an
“extensive statutory history”].) The Insurance Code defines an “Insurance agent” as “a
person authorized, by and on behalf of an insurer, to transact all classes of insurance
other than life, disability, or health insurance, on behalf of an admitted insurance
company.” (Ins. Code, § 31, italics added.) An “Insurance broker” is defined as “a
person who, for compensation and on behalf of another person, transacts insurance other
than life, disability, or health with, but not on behalf of, an insurer.” (Ins. Code, § 33,
italics added.) By their express terms, these definitions do not apply outside the
insurance industry.
Furthermore, even in the insurance context, an individual’s designation as an agent
or broker is not necessarily determinative. “Generally, an insurance agent acts only as
the agent for the insured in procuring a policy of insurance. [Citation.] An insurance
34
broker may, however, act in a dual capacity, in which he serves as the insured’s broker in
procuring insurance but also acts as the insurer’s agent by collecting the premium and
delivering the policy to the insured. [Citations.]” (Mark Tanner Construction, Inc. v.
HUB Internat. Ins. Services, Inc. (2014) 224 Cal.App.4th 574, 584, italics omitted.)
When a dual agency issue arises, courts look to the facts of the particular case, what the
parties said and did, to determine whether there was an actual agency relationship.
(Maloney v. Rhode Island Ins. Co. (1993) 115 Cal.App.2d 238, 244-245.)
For example, in Rios, supra, 119 Cal.App.4th 1020, a jewelry store owner sued
her insurer for denying her claim for losses relating to a theft at her store. The Rios court
affirmed a defense summary judgment, finding that the plaintiff’s policy did not cover
theft and that any erroneous representation about the scope of that coverage made to
plaintiff by an insurance broker could not be imputed to the insurer. (Id. at p. 1023.) In
analyzing the agency issue, the court explained that the plaintiff’s insurance policy had
been procured by an individual named Whilt who acted as both a broker and an agent of
the insurance company. With regard to the procurement of the policy, Whilt was the
plaintiff’s agent because he acted as an insurance broker with no authority to bind the
insurer. For other limited purposes, such as receiving premiums, Whilt was an agent of
the insurance company. Because Whilt was only a limited agent with no binding
authority, he was not a “general agent” of the insurer as a matter of law. (Id. at p. 1027.)
As our discussion above makes plain, the issue in this case is not whether
ePlanning was MKA’s general agent. Thus, ePlanning’s lack of authority to bind MKA
is not dispositive here, as it can be in insurance coverage cases. 8 Furthermore, the
8
To put the matter in general agency terms, lack of authority to enter into a
binding contract on behalf of the principal pertains to the scope of an agency, not to the
determination of whether an agency exists. (Rest.3d Agency, § 1.01., com c [“Agents
who lack authority to bind their principals to contracts nevertheless often have authority
to negotiate or to transmit or receive information on their behalf.”].) For example, in
Mason v. Mazel (1947) 82 Cal.App.2d 769, plaintiffs sought specific performance of a
real estate purchase agreement that was executed for the defendant by a third party. The
court denied specific performance because it found that the third party was an agent
35
function that ePlanning performed with respect to the Qualified Fund private placement
was not equivalent to an insurance broker whose role is limited to finding insurance
coverage for its client. Here, the evidence shows that MKA chose to conduct a private
placement offering, and it also chose to retain ePlanning to act on its behalf and in its
place in order to locate and solicit offers from accredited investors who were not
otherwise available to MKA. This and other evidence discussed above supports the trial
court’s factual conclusion that ePlanning was MKA’s agent in that specific context.
5. Compliance with the Securities Law Does Not Preclude
An Agency Finding
MKA argues that when an issuer of a private placement simply follows industry
practice by including “securities law-driven requirements” in a placement agent
agreement, it is not exerting the type of independent control required to justify finding an
agency relationship. For this reason, MKA contends, this court should follow the lead of
courts outside this jurisdiction which have “uniformly” held that “a private-placement
entity is not vicariously liable on an agency theory for misrepresentations made by
independent-contractor ‘placement agent’ brokers or their registered representatives.”
Characterizing the restrictions MKA imposed on ePlanning as “securities law-
driven requirements” is misleading. The provisions in the 2006 PAA that controlled the
conduct of ePlanning’s registered representatives pertained to an exemption from a
registration requirement that MKA chose to pursue and sought to maintain for its own
financial benefit. Because MKA wanted that exemption from registration, it had to meet
certain requirements, and by executing the 2006 PAA, it delegated some of that work to
an agent, ePlanning.
Furthermore, for all the reasons discussed above, we are not persuaded by MKA’s
argument that a broker-dealer of a private placement offering can never be the agent of
the issuing company, as a matter of law. The finding of an agency relationship in this
case is not only supported by substantial evidence, but is consistent with California law.
authorized to act on the defendant’s behalf in order to find a purchaser but was not an
agent for purposes of consummating an actual sale of the property. (Id. at p. 773.)
36
MKA fails to provide any California authority supporting the per se rule that it proposes.
The contention that courts outside this jurisdiction have settled the matter has inadequate
and inapposite support—MKA cite only two cases: Schweizer v. Keating (D. Md. 2001)
150 F.Supp.2d 830 (Schweizer), and Brooks v. Euclid Sys. Corp. (2003) 151 Md.App.
487, which followed Schweizer. Both cases were decided under Maryland law and
involved plaintiffs who took investment advice from Michael Keating. Resort to these
out-of-state cases is unnecessary because the issues on appeal are readily resolved by
applying California agency law to the evidence produced at trial. We note also that the
2006 PAA contains a choice of law provision under which the parties agreed that
California law would apply to the interpretation of the 2006 PAA and the rights and
duties of the parties thereunder. In any event, the two Keating cases relied on by MKA
are inapposite.
In Schweizer, supra, 150 F.Supp.2d 830, a 57-year-old businessman with an
annual income of more than $400,000 sought damages resulting from his investments in a
business trust operated by its managing shareholder Ridgewood Power Corporation. The
plaintiff had been paid distributions which represented an annual rate of return of
approximately seven percent, but when he was unable to liquidate his investments he
filed suit against Keating, Keating’s broker-dealer employer (Delta), and Ridgewood.
The Plaintiff alleged that Ridgewood was directly liable for fraud, securities law
violations and negligence, and that it was also vicariously liable for Keating’s
misconduct. The trial court granted Ridgewood summary judgment and the Schweizer
court affirmed. (Id. at p. 837.)
First, the Schweizer court rejected the plaintiff’s argument that Ridgewood was
directly liable for failing to advise him that the shares he purchased were speculative and
illiquid, finding that the summary judgment evidence established that Ridgewood
“undertook extensive measures designed to ensure that prospective investors would be
aware that the Trust shares were both speculative and illiquid.” (Schweizer, supra, 150
F.Supp.2d at pp. 838-839.) Then, the court turned to the plaintiff’s theory of vicarious
liability which was premised on the allegation that Ridgewood was Keating’s employer.
37
(Id. at p. 839.) The court affirmed the summary judgment ruling as to this theory because
the evidence established the following facts: Delta was Keating’s employer;
Ridgewood’s written contract with Delta contained an express “disavowal of a[n]
employee-employer relationship”; and there was insufficient evidence regarding the
parties’ acts and conduct to support an inference of an employer-employee relationship
under Maryland law. (Id. at pp. 839-840.)
In reaching its decision, the Schweizer court rejected the plaintiff’s contention that
an “employer-employee relationship” was created by provisions in the Ridgewood-Delta
contract which gave Ridgewood the right to control the manner in which the investment
was offered to potential investors. (Schweizer, supra, 150 F.Supp.2d at p. 840.) The
court reasoned that “[m]ost of the ‘control’ provisions identified by Plaintiff [were]
identical to those imposed under the applicable securities laws, and enable[d] the offering
to retain exemption from registration.” (Ibid.) Absent evidence that those restrictions
were atypical, or that Delta was deprived of its discretion regarding who to choose as or
how to interact with investment clients, the contract did not establish a basis for
plaintiff’s allegation of a “master-servant relationship.” Nor did plaintiff identify any
other indicia of an employer-employee relationship between Ridgewood and Delta or
Keating. Finally, because the allegation that Ridgewood controlled Delta’s conduct was
“baseless,” the court summarily concluded the plaintiff could not prove an actual agency
by inference under Maryland law. (Id. at p. 841.)
In this court, MKA contends its 2006 PAA with ePlanning is indistinguishable
from the Schweizer agreement, the Schweizer court’s reasoning is unassailable, and,
therefore, Schweizer compels the conclusion that ePlanning was not MKA’s agent as a
matter of law.
Schweizer, supra, 150 F.Supp.2d at page 839, is distinguishable on several
grounds. In that case, Ridgewood’s contract with Delta expressly stated that Delta was
an independent contractor “and that nothing herein shall be construed as creating a
relationship of partners, affiliates, joint venturers, or employer and employee . . . .”
Despite that express contract term, the plaintiff’s theory was that the broker-dealer was
38
actually an employee. Because there was no evidence to support that theory, summary
judgment was affirmed. This case presents a fundamentally different legal issue than
Schweizer addressed, i.e., whether ePlanning was an agent, not whether it was an
employee of MKA. Furthermore, although the 2006 PAA characterized ePlanning as an
independent contractor, that placement agent agreement also expressly characterized
ePlanning as an “agent” of MKA. As noted earlier, California common law specifically
provides that an agency relationship can be found even where the agent is an independent
contractor. (Doctors’ Co. v. Superior Court, supra, 49 Cal.3d at p. 46.) As also noted,
evidence the parties believed they were creating an agency relationship is a relevant
factor particularly when, as here, that belief is expressed in the contract itself. (ING,
supra, 758 F.Supp.2d at p. 941, quoting Stilson, supra, 21 Cal.App.3d at p. 937.)
Also, we disagree with MKA that the reasoning of Schweizer is unassailable. For
example, the Schweizer court disregarded the fact that the Ridgewood-Delta agreement
allowed Ridgewood to retain control over the manner in which trust shares would be
offered to potential investors solely because those “control” provisions were designed to
enable the offering to retain an exemption from registration. (Schweizer, supra, 150
F.Supp.2d at p. 840.) But the court failed to explain why compliance with the securities
laws was inconsistent with an agency finding. As discussed above, evidence that a
private placement issuer made the decision to use a broker to solicit offers on its behalf in
order to maintain its own exemption from securities law registration requirements
supports the agency finding. Indeed, without a broker to represent the issuer and act on
its behalf, a legal relationship with a third party investor would typically not otherwise
occur.
Finally, in Schweizer, supra, 150 F.Supp.2d 830, the district court found the
summary judgment evidence was insufficient to create a triable issue of fact as to whether
a employer-employee relationship existed between a private placement issuer and a
broker dealer. Here, by contrast, we sit as a court of review to determine whether an
express finding of fact is supported by substantial evidence. For all of the reasons
39
discussed above, the agency finding is supported by the trial record in this case. Thus,
MKA’s nonbinding foreign authority does not affect our conclusions outlined above.
C. MKA’s Liability for Elder Abuse
MKA next claims it is not liable for financial elder abuse because (1) there is “no
evidence supporting a finding that ePlanning or Guidi was the MKA Defendants’ agent”
and (2) the trial court did not find that MKA did anything which could support a finding
of direct liability under the elder abuse statute. We reject both assertions. As discussed
above, substantial evidence supports the agency finding. Furthermore, the trial court did
make findings regarding MKA’s direct liability for financial elder abuse.
“The Elder Abuse and Dependent Adult Civil Protection Act (Welf. & Inst. Code,
§ 15600 et seq.) was enacted to provide for the ‘private, civil enforcement of laws against
elder abuse and neglect’ [citation]. The statutory provisions are not limited to mentally
incompetent or physically impaired elders, or persons of limited financial means.
[Citations.]” (Bonfigli v. Strachan (2011) 192 Cal.App.4th 1302, 1315 (Bonfigli).)
“ ‘Financial abuse’ of an elder . . . occurs when a person or entity does any of the
following: [¶] (1) Takes, secretes, appropriates, obtains, or retains real or personal
property of an elder or dependent adult for a wrongful use or with intent to defraud, or
both. [¶] (2) Assists in taking, secreting, appropriating, obtaining, or retaining real or
personal property of an elder or dependent adult for a wrongful use or with intent to
defraud, or both. [¶] (3) Takes, secretes, appropriates, obtains, or retains, or assists in
taking, secreting, appropriating, obtaining, or retaining, real or personal property of an
elder or dependent adult by undue influence, as defined in Section 15610.70.” (Welf. &
Inst. Code, § 15610.30, subd. (a).)
“Under the statute, it is not necessary that the taker maintain an intent to defraud if
it can be shown that the person took the property for a wrongful use and ‘knew or should
have known that [his or her] conduct was likely to be harmful to the elder . . . .’
[Citations.]” (Bonfigli, supra, 192 Cal.App.4th at p. 1315.)
Here, as discussed above, the trial court found that MKA was negligent in
accepting Norman’s investment because it failed to catch “the irregularities contained in
40
its investor file, and because it did not properly monitor Mr. Guidi as its registered
representative.” The court also found that after MKA was put on notice that Norman’s
investment was procured by Guidi’s fraud, MKA “retained Mr. Thiel’s money,” when it
“knew or should have known that keeping the money would be harmful to him.” MKA
overlooks these findings, which are sufficient to hold it directly liable for financial elder
abuse.
In its reply brief, MKA argues that refusing to return Norman’s investment did not
constitute elder abuse as a matter of law. It reasons the recipient of an investment is not
required “to return funds to an elder upon demand without a showing that the recipient
itself engaged in wrongdoing,” and in this case there is no evidence that MKA did
anything wrong.
For reasons we have thoroughly discussed, accepting Norman’s investment in the
first place was wrongful; MKA negligently accepted an investment from an elderly,
cognitively impaired retiree who was unduly influence by MKA’s agent, who did not
meet the requirements of an accredited investor, and who expressly stated in writing that
he desired a conservative investment. Furthermore, there is substantial evidence MKA
retained Norman’s property for its own financial benefit when it knew or should have
known that the investment was secured by fraud, and it did so with knowledge that its
actions would be harmful to Norman. This evidence includes White’s testimony which
shows that MKA ignored or overlooked evidence in its own file that should have caused
it concern; that it did not investigate Norman’s claim that his investment was induced by
Guidi’s fraud; and that it retained a substantial portion of Norman’s life savings when it
knew that retaining that money would be harmful to Norman.
D. MKA’s Liability for Breach of Fiduciary Duty
MKA does not challenge the trial court’s finding that Guidi breached his fiduciary
duty to Norman. Thus, we affirm that finding without further discussion. MKA does
contend, however, that as “a matter of due process” it cannot be liable for breach of
fiduciary duty because Gae’s complaint did not name it in the breach of fiduciary cause
of action.
41
In her complaint, Gae did not allege that the MKA defendants owed a fiduciary
duty to Norman. The complaint did, however, contain specific and detailed agency and
co-conspirator allegations which put MKA on notice of its potential liability for damages
caused by Guidi’s breach of fiduciary duty. In addition, Guidi’s breach of fiduciary duty
was a component of the separately pled cause of action for financial elder abuse, and
MKA was expressly named in the financial elder abuse cause of action. Finally, and in
any event, this case was tried on the theory that MKA was vicariously liable for Guidi’s
breach of fiduciary duty. Thus, MKA waived its claim that the pleadings failed to raise
this issue adequately. (Hilliard v. A. H. Robins Co. (1983) 148 Cal.App.3d 374, 392.)
E. Advisors’ Liability for Norman’s Damages
Because MKA conceded that Qualified Fund is unable to act except through
Advisors, the trial court found that Gae did not have to prove Advisors was an alter ego
of Qualified Fund in order to hold Advisors liable for Norman’s damages. On appeal,
MKA disputes this finding, arguing Advisors is essentially an agent of the Fund, and it
cannot be personally liable for acts performed on behalf of its principal. We find no
evidence Advisors asserted this agency defense at trial. In any event, the record
substantially shows that Advisors’ direct liability was based on its own duty to Norman
and its agency relationship with Guidi.
Alternatively (and inconsistently), Advisors contends Norman was a “complete
stranger.” But, as the manager of Qualified Fund, Advisors had a duty to ensure the
fund’s private placement offering complied with the exemption from securities law
requirements. The securities law and its exemptions are designed to protect the investor,
in this case Norman. Thus, Advisors did owe Norman a duty of care for all of the reasons
discussed above.
Finally, MKA contends Advisors cannot be liable for any of Norman’s damages
because Advisors “wasn’t even sued until 2013.” As discussed above, Norman filed his
original complaint in September 2010, but Advisors was not named as a defendant until
November 26, 2013, when Gae filed her operative Third Amended Complaint. MKA
42
posits that “[a]ny two-year statute of limitations, as a matter of law, thus had long run by
2013.” In making this argument, MKA fails to acknowledge important procedural facts.
As discussed earlier, the statutes of limitations on Norman’s claims began to run
no earlier than May 21, 2009. Less than two years later, on April 6, 2011, this case was
stayed when Qualified Fund filed an appeal from an order denying its motion to compel
arbitration of Norman’s claims. (Code Civ. Proc., § 916, subd. (a).) While that appeal
was pending, MKA entered into a stipulation with Norman that all statutes of limitations
pertaining to any claim Norman had against Advisors were tolled until 45 days
“following the filing and service by plaintiff of a Second Amended Complaint.” 9 On
November 9, 2012, this court affirmed the order denying arbitration. Norman died the
following year, and, on October 17, 2013, the trial court granted Gae’s motion to file a
second amended complaint, substituting herself as Norman’s successor in interest. Less
than 45 days later, on November 26, 2013, Gae filed her complaint which added Advisors
as a named defendant. Since the tolling agreement was still in effect at that time, the
claims against Advisors were not barred by the two-year limitations period.
F. Damages Issues
1. Emotional Distress Damages Were Recoverable
As noted above, the trial court awarded Gae $400,000 in emotional distress
damages. MKA contends there is no legal basis for that award.10 We disagree.
Section 377.34 of the Code of Civil Procedure (section 377.34) provides that a
successor in interest on the decedent’s cause of action may not recover “damages for
pain, suffering, or disfigurement.” However, section 15657.5 of the Welfare and
Institutions Code states that “[w]here it is proven by a preponderance of the evidence that
9
MKA does not dispute its tolling agreement with Norman was valid. (See
Salmon Protection & Watershed Network v. County of Marin (2012) 205 Cal.App.4th
195, 203 [recognizing the “desirability and validity” of tolling agreements].)
10
Because MKA did not file a motion for new trial, it may not contend on appeal
that the amount of the damages award was excessive. (Code Civ. Proc., § 657, subd. (5);
see, e.g., Sholar v. Barker (1962) 211 Cal.App.2d 31, 32-33; Schroeder v. Auto Driveway
Co. (1974) 11 Cal.3d 908, 918.)
43
a defendant is liable for financial abuse, as defined in Section 15610.30, and where it is
proven by clear and convincing evidence that the defendant has been guilty of
recklessness, oppression, fraud, or malice in the commission of the abuse, in addition to
reasonable attorney’s fees and costs set forth in subdivision (a), compensatory damages,
and all other remedies otherwise provided by law, the limitations imposed by Section
377.34 of the Code of Civil Procedure on the damages recoverable shall not apply.”
(Welf. & Inst. Code, § 15657.5, subd. (b).
In this case, the trial court found that MKA was directly and vicariously liable for
financial elder abuse. (Welf. & Inst. Code, § 15610.30.) The court also found clear and
convincing evidence of fraud, oppression and malice. Taken together, the court’s
findings establish that the limitation on the recovery of emotional distress damages
imposed by section 377.34 does not apply here.
MKA argues that even if section 377.34 does not apply, there was still no basis for
awarding emotional distress damages because “economic loss, without more, cannot
support an award of emotional distress damages.” MKA’s only authority for this claim
of error is a reference to Erlich v. Menzes (1999) 21 Cal.4th 543, 554-555, which applies
the general rule that emotional distress damages are not recoverable for negligence
resulting in a purely economic injury.
If by this argument, MKA means to say the torts that were committed against
Norman did not cause him mental suffering, we disagree. Testimony from Gae and
Laura substantially supports the trial court’s implicit finding that these wrongful acts
caused Norman to suffer mental pain and suffering in addition to his economic injury.
If MKA is arguing that Norman was not entitled to emotional distress damages
because he did not incur a physical injury, he is mistaken. “ ‘Damages for emotional
distress have been permitted only where there is some means for assuring the validity of
the claim. [Citation.] The case law reveals a diversity of circumstances in which
recovery for emotional distress may be had. They are loosely linked in the sense that in
each it could be said that a particular form of mental suffering naturally ensued from the
acts constituting the invasion of another kind of protected interest. “The commonest
44
example . . . is probably where the plaintiff suffers personal injuries in addition to mental
distress as a result of negligent or intentional misconduct by the defendant.” [Citation.]
Pain and suffering is the natural concomitant of a personal injury. [Citation.]” ’ ”
(Gonzales v. Personal Storage, Inc. (1997) 56 Cal.App.4th 464, 472 (Gonzales).)
However, there are many other instances in which emotional distress damages
have been awarded for intentional torts that did not result in a physical injury. (Gonzales,
supra, 56 Cal.App.4th at pp. 472-473.) For example, the Gonzales court upheld an award
of emotional distress damages resulting from the defendant’s wrongful conversion of
plaintiff’s property. (Ibid.) Furthermore, even in negligence cases, emotional distress
damages are recoverable when (1) “the defendant has assumed a duty to plaintiff in
which the emotional condition of the plaintiff is an object,” or (2) the defendant’s breach
of some other legal duty proximately causes the emotional distress. (Potter v. Firestone
Tire & Rubber Co. (1993) 6 Cal.4th 965, 985.)
Finally, MKA’s unexplained reliance on Erlich v. Menzes, supra, 21 Cal.4th 543is unavailing. Unlike that case, MKA’s liability is not limited to negligence; it is
vicariously liable for Guidi’s intentional torts and directly and vicariously liable for elder
abuse. Therefore, contrary to MKA’s suggestion here, emotional distress damages were
not awarded because of MKA’s negligence.
For all these reasons, MKA has failed to substantiate its claim that emotional
distress damages were not recoverable in this case.
2. The Civil Penalty Must Be Stricken
As noted in our factual summary, the trial court imposed a civil penalty under
Civil Code section 3345 (section 3345). It calculated the amount of the award by starting
with a base penalty of $200,000, applying a multiplier of 2.85, and awarding prejudgment
interest from the date of Norman’s 2007 investment in MKA. MKA contends that this
penalty was not authorized under section 3345. Because we agree, we do not address
MKA’s alternative arguments that the court miscalculated the amount of the penalty or
otherwise abused its power by awarding it against MKA.
45
Section 3345 applies “ ‘in actions brought by, on behalf of, or for the benefit of
senior citizens or disabled persons, as those terms are defined in subdivisions (f) and (g)
of Section 1761, to redress unfair or deceptive acts or practices or unfair methods of
competition.’ [Citation.] Subdivision (b) of Civil Code section 3345 allows for a
recovery of up to three times the amount of a monetary award whenever ‘a trier of fact is
authorized by a statute to impose either a fine, or a civil penalty or other penalty, or any
other remedy the purpose or effect of which is to punish or deter,’ if the trier of fact finds
any of the factors identified in the statute to exist.” (Clark v. Superior Court (2010) 50
Cal.4th 605, 610, fns. omitted (Clark).)11
Section 3345 is not an independent cause of action; it authorizes a heightened
recovery when the trial court has imposed a statutory fine, civil penalty or other remedy
the purpose of which is to punish or deter. (Clark, supra, 50 Cal.4th at p. 615.) Although
11
Section 3345, subdivision (b) states: “Whenever a trier of fact is authorized by
a statute to impose either a fine, or a civil penalty or other penalty, or any other remedy
the purpose or effect of which is to punish or deter, and the amount of the fine, penalty,
or other remedy is subject to the trier of fact’s discretion, the trier of fact shall consider
all of the following factors, in addition to other appropriate factors, in determining the
amount of fine, civil penalty or other penalty, or other remedy to impose. Whenever the
trier of fact makes an affirmative finding in regard to one or more of the following
factors, it may impose a fine, civil penalty or other penalty, or other remedy in an amount
up to three times greater than authorized by the statute, or, where the statute does not
authorize a specific amount, up to three times greater than the amount the trier of fact
would impose in the absence of that affirmative finding:
“(1) Whether the defendant knew or should have known that his or her conduct
was directed to one or more senior citizens or disabled persons. [¶] (2) Whether the
defendant’s conduct caused one or more senior citizens or disabled persons to suffer: loss
or encumbrance of a primary residence, principal employment, or source of income;
substantial loss of property set aside for retirement, or for personal or family care and
maintenance; or substantial loss of payments received under a pension or retirement plan
or a government benefits program, or assets essential to the health or welfare of the senior
citizen or disabled person. [¶] (3) Whether one or more senior citizens or disabled
persons are substantially more vulnerable than other members of the public to the
defendant’s conduct because of age, poor health or infirmity, impaired understanding,
restricted mobility, or disability, and actually suffered substantial physical, emotional, or
economic damage resulting from the defendant’s conduct.”
46
the treble recovery provision can apply to a remedy that is not characterized as a penalty
per se, it must be based on a statutory remedy “in the nature of a penalty” which “has ‘the
purpose or effect’ of punishing or deterring. [Citation.]” (Id. at p. 614, italics omitted.)
Thus, for example, the Clark court found that “[b]ecause restitution in a private action
brought under the unfair competition law is measured by what was taken from the
plaintiff, that remedy is not a penalty and hence does not fall within the trebled recovery
provision of Civil Code section 3345, subdivision (b).” (Id. at pp. 614-615.) On the
other hand, courts applying Clark have found that section 3345 can be applied to treble a
punitive damages award. (See, e.g., Ross v. Pioneer Life Ins. Co. (C.D.Cal. 2008) 545
F.Supp.2d 1061, 1064; Alberts v. Liberty Life Assur. Co. (N.D.Cal. June 2, 2014, No. C-
15-01587-RS) 2014 U.S. Dist. Lexis 75350, at *17; Johnston v. Allstate Ins. Co.
(S.D.Cal. May 23, 2013, No. 13-CV-574-MMA(BLM)) 2013 U.S. Dist. Lexis 73424, at
*13.)
In this case, MKA contends that the trial court erroneously used section 3345 to
“levy a penalty in the first instance.” According to MKA, the “$200,000 amount appears
to be a number picked out of thin air.” Gae counters that the $200,000 obviously
represents the amount of Norman’s 2007 investment, and she posits that the trial court
imposed that penalty under Civil Code section 3294, which authorizes an award of
punitive damages in order to punish and deter fraud.
Although we agree with Gae that the $200,000 figure that the court used to
calculate this penalty was likely premised on the amount of Norman’s 2007 investment, it
does not appear that there was any statutory basis for awarding that amount as a penalty
in addition to the damages to which Norman was otherwise entitled. The trial court made
an express finding that it was not awarding punitive damages against MKA.
Furthermore, despite its detailed statement of decision, the court did not reference any
statute which authorizes a penalty or other remedy intended to punish or deter MKA
under the circumstances presented here. Thus, the civil penalty imposed under section
3345 must be stricken from the judgment.
47
IV.
DISPOSITION
The penalty imposed under Civil Code section 3345 in the amount of $570,000 is
hereby stricken. The amended judgment is otherwise affirmed. Costs on appeal are
awarded to Gae.
48
_________________________
RUVOLO, P. J.
I concur:
_________________________
REARDON, J.
49
50
RIVERA, J., Dissenting:
I agree with the majority that MKA is liable for its own acts and omissions in its
dealings with Norman Thiel. I part company with my colleagues only insofar as they
conclude that MKA is also liable for the acts and omissions of ePlanning and its
registered representative, Guidi. It is my view that the contract between MKA and
ePlanning did not create a principal-agency relationship, and therefore MKA is not
vicariously liable for ePlanning’s and Guidi’s fraud, breach of fiduciary duty, and elder
abuse.
A. Standard of Review
“Ordinarily, the question of agency is one of fact; however, where the evidence is
undisputed the issue becomes one of law.” (Magnecomp Corp. v. Athene Co. (1989)
209 Cal.App.3d 526, 536; see Oakland Raiders v. National Football League (2005)
131 Cal.App.4th 621, 642, fn. 19 [agency is generally a question of fact, but the issue
may be decided as a matter of law if the undisputed facts negate any such relationship];
Harley-Davidson, Inc. v. Franchise Tax Bd. (2015) 237 Cal.App.4th 193, 214 [existence
of agency is question of fact unless evidence is susceptible of only one inference].)
The facts relating to agency in this case are undisputed. The majority nevertheless
defers to the trial court’s “finding” of agency and applies the substantial evidence test
(Maj. Opn. ante, at pp. 27, 32, 34, 36, 39, 42), apparently concluding that the evidence
gives rise to “conflicting inferences” that were resolved by the trial court as a factual
question. I do not so read the trial court’s statement of decision.
The court’s analysis was brief. It recited the statutory definition of an agency and
of agency authority (Civ. Code, §§ 2295 & 2317); it cited cases stating that proof of an
agency relationship can be established by “ ‘evidence of the acts of the parties and their
oral and written communications’ ”; and it rejected MKA’s contention (that an
independent contractor cannot also be an agent) as having “no basis in law.” Turning to
1
the facts, the court recounted the expert’s testimony that MKA “needed” ePlanning in
order to operate, that is, “[MKA’s] Qualified Fund could not solicit investors directly—it
had to use agents so as not to violate SEC rule 501(a), Regulation D.” The court then
stated, “[a]n agency relationship results when there is a manifestation of consent among
[sic] the principal and agent by express agreement that enumerates how the agent shall
act on behalf of the principal and be subject to its control,” and went on to conclude that
the Placement Agent Agreement (the Agreement) created an agency relationship because
it “explained” the terms under which ePlanning would provide its services to MKA.
The trial court applied what it believed to be the correct legal principles to the
undisputed testimony and its interpretation of the contract. The trial court made no
mention of factual disputes or conflicting inferences. I therefore read the statement of
decision as determining this issue as a matter of law. Further, any conflicting inferences
arising out of the Agreement between MKA and ePlanning involve the interpretation of a
contract, which is a legal issue. (Oceanside 84, Ltd. v. Fidelity Federal Bank (1997)
56 Cal.App.4th 1441, 1448 [the interpretation of a contract is a question of law both for
the trial court and the appellate courts].) Consequently, our review should be de novo.
B. Essential Elements of an Agency
A true agency is a fiduciary relationship in which (1) the agent has the power to
act on behalf of the principal vis-à-vis third parties and (2) the principal has the power to
control the agent’s activities.
The use of the word “agent” in an agreement is not determinative of the nature of
the relationship. “Whether a relationship is characterized as agency in an agreement
between parties or in the context of industry or popular usage is not controlling.”
(Rest.3d Agency, § 1.02; see Kuchta v. Allied Builders Corp. (1971) 21 Cal.App.3d 541,
548 (Kutcha) [“the declarations of the parties in the agreement respecting the nature of
the relationship are not controlling”].)
2
“ ‘ “The chief characteristic of the agency is that of representation, the authority to
act for and in the place of the principal for the purpose of bringing him or her into legal
relations with third parties. [Citations.]” [Citation.] “The significant test of an agency
relationship is the principal’s right to control the activities of the agent. [Citations.]” ’ ”
(Violette v. Shoup (1993) 16 Cal.App.4th 611, 620 (Violette).)
The Restatement defines agency as “the fiduciary relationship that arises when one
person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent shall
act on the principal’s behalf and subject to the principal’s control, and the agent
manifests assent or otherwise consents so to act.” (Rest.3d Agency, §1.01, italics added.)
“An agency relationship arises only when the elements stated in §1.01 are present.” (Id.
§1.02.)
1. Representation (the agent’s power to act on behalf of the principal)
“The essence of an agency relationship is the delegation of authority from the
principal to the agent which permits the agent to act ‘not only for, but in the place of, his
principal’ in dealing with third parties.” (Channel Lumber Co. v. Porter Simon (2000) 78
Cal.App.4th 1222, 1227 (Channel Lumber).) This element of agency, although
applicable in any context, is most often discussed in the cases distinguishing insurance
“brokers” from insurance “agents.”
Although the terms “broker” and “agent” are defined by statute (Ins. Code, §§ 31,
33), disputes nevertheless arise concerning which characterization pertains in a particular
transaction. Applying both the Insurance Code and general principles of agency, courts
have consistently held that one who represents the insurer and has the power to bind the
insurer to an insurance contract is an agent, whereas one who serves as an intermediary
3
between the insured and the insurer, and with no authority to bind the insurer to a
contract, is not an agent, but only a broker.1
A broker acts as a middleman between the insurer and the insured; a broker places
an order with an insurance carrier selected by the broker or its customer, whereas an
insurance agent is authorized to transact insurance business on the carrier’s behalf.
(American Way Cellular, Inc. v. Travelers Property Casualty Co. of America (2013)
216 Cal.App.4th 1040, 1052.) Consequently, “[u]nlike an agent, a broker does not act for
the insurer, and the insurer is not liable for the broker’s acts or omissions.” (Ibid.)
The facts of our case are congruent with this construct. MKA did not empower
ePlanning or its representatives to act on its behalf to accept investors for MKA’s
Qualified Fund; indeed, the Agreement explicitly withheld from ePlanning any authority
to bind MKA to any obligation to the potential investors: “[MKA] shall decide whether
to accept the offer to invest made by each prospective investor, in MKA’s sole
discretion.” “MKA reserves the right to reject any offer . . . by a prospective investor
referred by Broker [ePlanning].” Thus, ePlanning’s function was to act as a middleman.
Just as an insurance broker offers its customers a variety of insurance products, assists
them in identifying which carrier would best serve their needs, and then forwards its
customers’ applications for insurance to carriers, so, here, the broker-dealer’s role was to
offer a variety of investments—including MKA’s Qualified Fund—to its clients, assist
them in understanding the risks and benefits of the investments, and (as to MKA) forward
1
See, e.g., Marsh & McLennan of Cal., Inc. v. City of Los Angeles (1976) 62
Cal.App.3d 108, 117 [“[t]he most definitive characteristic of an insurance agent is his
authority to bind his principal, the insurer; an insurance broker has no such authority”];
Douglas v. Fidelity National Ins. Co. (2014) 229 Cal.App.4th 392, 411 [hallmarks of
insurance agent include power to bind the insurer]; Rios v. Scottsdale Ins. Co. (2004) 119
Cal.App.4th 1020, 1026 (Rios) [the “general rule” is that a broker who has no binding
authority is not a general agent for the insurer; the insurance code is consistent with this
rule]. As is discussed, the same principle applies outside of the insurance arena.
4
the prospective investors’ applications to MKA. Under no circumstances could
ePlanning “alter the legal relations between [MKA] and third persons.” (Alvarez v.
Felker Mfg. Co. (1964) 230 Cal.App.2d 987, 999 (Alvarez).) Because ePlanning was
never authorized to bind or to act on behalf of MKA, “ ‘the chief characteristic’ ” of
agency is not present. (Violette, supra, 16 Cal.App.4th at p. 620.)
The majority concludes that the lack of authority to bind MKA cuts in favor of
finding a principal-agent relationship because it purportedly demonstrates that MKA was
exercising control over ePlanning’s “representation” of MKA. (Maj. Opn. ante, at p. 29.)
No authority is cited for this assertion. As the cases demonstrate, the absence of
authority to bind a principal tends to disprove rather than prove an agency. (See, e.g.,
Champlaie v. BAC Loans Servicing, LP (E.D. Cal. 2009) 706 F.Supp.2d 1029, 1056–
1057 [agency claim fails where no allegation that lender gave loan broker authority to
represent or bind lender].) 2
The majority points out that an insurance broker can actually be a dual agent—it is
the agent of the customer for whom it procures insurance, but it can also act as the
“agent” of the insurer for narrow purposes, such as collecting the premiums and
delivering the policy to the insured—citing Maloney v. Rhode Island Ins. Co. (1953)
2
The majority uses the term “representation” to describe ePlanning’s function
under the Agreement. (Maj. Opn. ante, at p. 29.) It is true that ePlanning can be
described in the vernacular as MKA’s “representative” for the purpose of marketing
MKA’s product to investors. But the term “representation” in agency law has a more
specific meaning: A true agent acts not only “ ‘for’ ” but actually “ ‘in place of’ ” the
principal “ ‘for the purpose of bringing him or her into legal relations with third
parties.’ ” (Violette, supra, 16 Cal.App.4th at p. 620; Channel Lumber, supra,
78 Cal.App.4th at p. 1227.) The Agreement nowhere identifies ePlanning as MKA’s
“representative” and nowhere authorizes ePlanning to take any legally binding action on
MKA’s behalf or in its name. ePlanning was engaged to identify qualified investors and
offer them MKA’s product; it did not act as MKA’s representative (in the agency sense)
because it could not.
5
115 Cal.App.2d 238 (Maloney), Mark Tanner Construction, Inc. v. Hub Internat. Ins.
Servs., Inc. (2014) 224 Cal.App.4th 574 (Mark Tanner), and Rios, supra,
119 Cal.App.4th 1020. But acting as an agent simply to be a pass-through conduit
between two parties is not the kind of agency that creates vicarious liability, and that is
clear from the cases. Maloney stands only for the principle that a broker who places a
policy with an insurer, and accepts the premium payment for that policy, is acting as the
insurer’s agent with respect to that payment and therefore has a fiduciary duty to turn
over the premium to the insurer (or the insurer’s conservator). (Maloney, at pp. 244–
247.) Nothing in Maloney would support the proposition that a broker acting as an
insurer’s agent to collect a premium will thereby make the insurer vicariously liable for
misrepresentations made by the broker to its customer. In fact, in Rios, the court held
that the insurer was not liable as a matter of law for a broker’s negligence or
misstatements to his customer because the broker was not the insurer’s agent, although he
served as its “agent” for the purpose of collecting the premium and delivering the policy.
(Rios, supra, 119 Cal.App.4th at p. 1025–1027.)3
In this same vein, the majority also observes that agents who lack authority to bind
their principles can still have authority to do other things on their behalf, such as
negotiating or transmitting information, citing Mason v. Mazel (1947) 82 Cal.App.2d
769. But Mason does not support the notion that this kind of authority creates a true
agency relationship, i.e., one that results in vicarious liability, and the cases tell us the
opposite. In Mason, a seller gave an agent the exclusive listing to sell his property but
did not empower the agent to enter into contract of sale; the seller was therefore not liable
3
The third cited case, Mark Tanner, is irrelevant to this discussion because
although it mentions the principle stated in Maloney— that an insurance broker can act as
an insurer’s agent “by collecting the premium and delivering the policy”—there was no
agency issue involved in that case. (Mark Tanner, supra, 224 Cal.App.4th at p. 584.)
6
to the third-party buyer for specific performance of the contract signed by his agent. (Id.
at p. 774; see Toth v. Metropolitan Life Ins. Co. (1932) 123 Cal.App. 185 [representation
to third party by soliciting agent that he would deliver policy did not create liability for
insurer because agent’s authority limited to soliciting insurance policy applications].)
Here, MKA authorized ePlanning only to solicit its clients to invest in MKA’s
fund.4 The majority characterizes this as a “special agency” (as distinguished from a
“general agency”) and suggests that this was the trial court’s finding. (Maj. Opn. ante, at
p. 29.) I do not find any such distinction in the trial court’s statement of decision, but in
any event, labeling ePlanning’s contractual obligations as a “special agency” adds
nothing to the analysis. The question is whether ePlanning and MKA have the kind of
principal-agent relationship that, like an employer-employee relationship, legally
implicates the doctrine of respondeat superior. I conclude it does not because MKA
could not empower ePlanning to act on its behalf to fulfill regulatory requirements (Maj.
Opn. ante, at pp. 23–24) and ePlanning could not act on MKA’s behalf to bind it to any
obligations to third parties. Therefore, ePlanning was not acting on behalf of MKA for
any purpose, but was merely a conduit by which MKA introduced its product into the
marketplace. The first core attribute of an agency—that of representation—is therefore
absent.
2. Control (the power of the principal to control the activities of the
agent)
“ ‘ “The significant test of an agency relationship is the principal’s right to control
the activities of the agent.” ’ ” (Violette, supra, 16 Cal.App.4th at p. 620.) In order to
create an agency relationship, however, the “control” must be appreciably greater than
the general supervisorial authority commonly found in a service or franchise contract.
4
ePlanning was expressly not authorized to make any representation about
MKA’s product that was not consistent with MKA’s own materials.
7
The case of Stilson v. Moulton-Niguel Water Dist. (1971) 21 Cal.App.3d 928 (Stilson) is
instructive.
In Stilson, the plaintiff was injured while working on a construction project. The
owner (Owner) of the project hired the plaintiff’s employer to do the construction and
another firm (Boyle) was hired to be the supervising engineer. All parties agreed that
plaintiff’s injuries were caused by the negligence of his employer. The trial court
directed a verdict in favor of plaintiff against Owner and Boyle on the theory that
plaintiff’s employer was an agent of both Owner and Boyle, who were therefore
vicariously liable for the employer’s negligence. (Stilson, supra, 21 Cal.App.3d at
pp. 932–933.)
The court of appeal affirmed the verdict, but on a different ground. The court,
however, provided a discursive analysis on the subject of agency, and specifically on the
level of control required to find an agency relationship.
“A major consideration in determining an agency relationship exists is whether an
employer retains a right of control over one whom he employs not only as to the result of
the work done but also as to the mode of accomplishing the work. [Citations.]” (Stilson,
supra, 21 Cal.App.3d at p. 935.) “[T]he control which an owner may exert in his general
supervisory power over work done at his behest may be a broad general power of
supervision without changing a relationship from employer-independent contractor to one
of agency.” (Id. at p. 936.) An owner “ ‘may retain a broad general power of supervision
and control as to the results of the work so as to insure satisfactory performance of the
independent contract—including the right to inspect [citation], the right to stop the work
[citation], the right to make suggestions or recommendations as to details of the work
[citation], the right to prescribe alterations or deviations in the work [citation]—without
changing the relationship from that of owner and independent contractor or [changing]
the duties arising from that relationship.’ [Citation.]” (Stilson, supra, 21 Cal.App.3d at
8
p. 936.) In short, the most important factor of an agency relationship is the right to
control “the manner and means of accomplishing the result desired.” (Ibid.)
I will discuss below why I conclude the Agreement does not assign to MKA any
control over the “mode of accomplishing” nor the “manner and means” of conducting the
brokerage services to be provided by ePlanning. First, however, I address preliminary
issues pertaining to the opinion in Stilson.
The majority describes Stilson as addressing whether the plaintiff’s employer “was
an employee or an independent contractor of the hirer” which is “substantively different”
from the issue before us. (Maj. Opn. ante, at p. 30.) While the plaintiff in Stilson did
argue that the Owner and Boyle were his “statutory employers” under Labor Code
§ 6304, he argued, primarily, that the contract between his employer and the Owner
created an agency relationship, and the directed verdict was granted on that basis.
(Stilson, supra, 21 Cal.App.3d at p. 933.) The discussion in Stilson indisputably sets
forth the standards for the nature of control required to find an agency relationship that
imparts vicarious liability to a hirer. (Stilson, supra, 21 Cal.App.3d at pp. 933–937.)5
The majority also cites Stilson as demonstrating that “even when the
circumstances are undisputed, the totality of the evidence may be susceptible to more
than one reasonable inference depending on a multitude of potentially relevant factors.”
(Maj. Opn. ante, at p. 32.) But the agency issue in Stilson was deemed a fact question not
5
Essentially the same factors are used to decide whether an agency relationship
exists as are used to determine whether there is an employer-employee relationship. (Cf.
Stilson, supra, 21 Cal.App.3d at p. 936.) “Generally speaking, whether a person is an
independent contractor or an agent is determined by the same rules as those applicable in
determining whether [s]he is an independent contractor or an employee. [Citation.]”
(Rogers v. Whitson (1964) 228 Cal.App.2d 662, 671; see Jackson v. AEG Live, LLC
(2015) 233 Cal.App.4th 1156, 1184.) The fact that an independent contractor cannot also
be an employee but can also be an agent does not change the analysis. (See, e.g., City of
Los Angeles v. Meyers Bros. Parking System, Inc. (1975) 54 Cal.App.3d 135, 138–139.)
A core element of agency is always control.
9
because of a “multitude of . . . relevant factors,” but only because the evidence showed
conflicting levels of control—the parties’ conduct reflected only supervisorial power but
a contract provision gave Owner the “unlimited power to discharge” suggesting a much
higher degree of control. (Stilson, supra, 21 Cal.App.3d at p. 937.) On that basis, the
court concluded the agency determination could not be made as a matter of law. (Ibid.)
The court in Stilson did identify nine potentially relevant factors. Regarding those, it
stated, the “most important factor” of an agency or employee relationship is the right to
“control the manner and means of accomplishing the result desired,” but it did not apply
any of the other factors. (Id. at p. 936, italics added.)
Of the remaining eight factors—which have been enumerated in the majority’s
opinion (Maj. Opn. ante, at pp. 30–31)—the majority relies on only two to support its
conclusion that there was an agency relationship: “ ‘ “whether the work is part of the
‘principal’s’ regular business” ’ ” and “ ‘ “whether or not the parties intended to create an
[principal and agent] relationship.” ’ ”6 (Maj. Opn. ante, at p. 31.) While I disagree that
either of those factors support an agency on this record, I will not belabor the issue. It is
sufficient to say that at least five of the remaining six factors point in the other direction,
and, in any event, without the primary element of control, the secondary factors carry
little weight. (See Jackson, supra, 233 Cal.App.4th at p. 1181.)
I turn, now, to the issue of how much control creates a true agency.
This question is discussed most frequently in franchise cases, where plaintiffs seek
to hold franchisors liable for the torts of their franchisees. A robust body of law has
developed in this arena, applying the well-established tenets of agency, all consistent with
6
For example, the majority interprets the Agreement as evincing the parties’
belief that they were creating an agency because they used the term “placement agent.”
But the phrase “placement agent” in this context is more likely to be a term of art that
describes an entity, such as a broker, that plays the role of intermediary in bringing
together investors and sellers of securities. (See, e.g., Government Code §§ 7513.8
subd. (f)(1); 82047.3.)
10
the principles enunciated in Stilson. “In determining whether a true agency relationship
exists between a franchisor and franchisee, the courts focus on the right to control.
[Citations.] If the ‘franchise agreement gives the franchisor the right of complete or
substantial control over the franchisee, an agency relationship exists. [Citation.]’ ”
(Kaplan v. Coldwell Banker Residential Affiliates, Inc. (1997) 59 Cal.App.4th 741, 745
(Kaplan); see Cislaw v. Southland Corp. (1992) 4 Cal.App.4th 1284, 1291 (Cislaw) [it is
the right to control the means and manner in which the result is achieved that determines
whether a principal-agency relationship exists].)
So, for example, in Cislaw, the parents of a minor who died of respiratory failure
after smoking clove cigarettes purchased at a 7-Eleven store unsuccessfully sued the
franchisor under an agency theory. The franchise contract provided that the franchisees
were independent contractors and gave them the right to make all inventory, employment
and operational decisions, including the right to hire, fire, supervise, discipline, and
compensate its employees. But the agreement also obligated the franchisee to keep the
store property clean, to maintain the equipment in good repair, to carry an inventory
“consistent with the 7-Eleven image,” to operate the store during specified hours 364
days per year, to deposit receipts into a designated account, to provide the franchisor with
copies of purchase and sales records, and to pay a percentage fee based on net receipts.
(Cislaw, supra, 4 Cal.App.4th at pp. 1293–1294.) The court concluded these provisions
did not create a triable issue of fact as to whether the franchisees were agents of the
franchisor; this was because the agreement did not give to the franchisor control over the
“means and manner” of carrying out the franchise contract. (Id. at p. 1295.) A
franchisor, the court concluded, “must be permitted to retain such control as is necessary
to protect and maintain its trademark, trade name and goodwill, without the risk of
creating an agency relationship with its franchisees.” (Ibid.; see Kaplan, supra,
59 Cal.App.4th at p. 746 [“[a]bsent a showing that [the franchisor] controlled or had the
11
right to control the day-to-day operations of [the franchisee’s] office, it was not liable for
[the franchisee’s] acts or omissions as a real estate broker on a true agency-respondeat
superior theory”].)7
In contrast, the courts have held that a principal-agent relationship does exist
where a franchisor exercises pervasive control over the franchisee. (See Kuchta, supra,
21 Cal.App.3d at p. 547 [franchisor controlled builder-franchisee’s performance of every
aspect of its construction, from plans and specifications through work in progress to
completion of the project]; Nichols v. Arthur Murray, Inc. (1967) 248 Cal.App.2d 610,
615–616 [franchisor retained the right to control day-to-day operational decisions, and to
direct all aspects of employment, the dealings between the franchisee and dance students
and most matters relating to operational expenses]; Porter v. Arthur Murray, Inc. (1967)
249 Cal.App.2d 410, 415–417, 421 [same].)
These “control” standards, while elucidated most often in the franchise context,
are applicable generally. (See, e.g., City of Los Angeles v. Meyers Bros. Parking System,
Inc. (1975) 54 Cal.App.3d 135, 138–139 [parking lot manager acted as agent of owner
where owner maintained control of parking lot’s budget, its “operating policy” (parking
rates, validation privileges, parking commitments) and, to a large degree, its personnel];
ING Bank v. Ahn (N.D.Cal. 2010) 758 F.Supp.2d 936, 942–943 (ING Bank) [loan broker
not agent of lender where contractual obligations were supervisory and left day-to-day
management to the broker].) These standards are also consonant with the federal
7
I agree with the majority that the case of Patterson v. Domino’s Pizza
(Patterson) (2014) 60 Cal.4th 474 is not particularly useful in analyzing the vicarious
liability issue before us (Maj. Opn. ante, at pp. 32–34), other than reiterating the general
principle that, in the absence of the “traditional right of general control an ‘employer’ or
‘principal’ has over factors such as hiring, direction, supervision, discipline, discharge,
and relevant day-to-day aspects of the workplace behavior of the franchisee’s
employees,” there is no basis for finding an employment or agency relationship between
a franchisor and a franchisee. (Patterson, at p. 503.)
12
regulation describing who is a “controlling person” for purposes of vicarious liability for
another’s violation of securities law. “[T]he SEC has defined ‘control’ generally to mean
‘the possession, direct or indirect, of the power to direct or cause the direction of the
management and policies of a person whether through the ownership of voting securities,
by contract, or otherwise.’ [Citation.]” (Poptech, L.P. v. Stewardship Credit Arbitrage
Fund, LLC (D. Conn. 2011) 792 F.Supp.2d 328, 336 (Poptech), italics added.)
In responding to MKA’s arguments, the majority correctly observes that the test of
agency is not whether the hirer exerts “almost complete control” over the independent
contractor (Maj. Opn. ante, at p. 30) nor whether the contractor was the hirer’s agent “for
all business purposes” (Maj. Opn. ante, at p. 33). But the majority does not then identify
or apply the actual test for agency, which centers on whether the hirer has a measure of
control over the contractor that is distinctly greater than the hirer’s general supervisorial
authority. (Stilson, supra, 21 Cal.App.3d at p. 936.) The point being, a hirer does not
have to risk altering the legal relationship between itself and a contractor—becoming the
contractor’s employer or principal for purposes of liability—simply because it exercises
general control over the hirer’s work to ensure satisfactory performance of the contract.
(Ibid.)
The inquiry, then, is whether the provisions governing ePlanning’s handling of
MKA’s product gave MKA the kind of control over ePlanning that would create a
principal-agent relationship, or whether those provisions were merely an exercise of
general supervisory powers.
The relevant portions of the Agreement set forth a series of contractual
obligations: The broker agreed to use reasonable efforts to procure qualified subscribers
for MKA’s Qualified Fund, to distribute MKA’s materials only to clients reasonably
determined to be qualified, to keep records as to the clients who received the materials, to
assist the clients in understanding the materials, to comply with all laws and regulations,
13
to retain information for four years, and to use no sales materials not first approved by
MKA. For its part, MKA obligated itself to collect and review the Purchaser
Questionnaires and decide whether, in its sole discretion, to accept the client’s offer to
invest; to communicate its decision to ePlanning; to deliver all requisite materials to the
investor; to be subject to all the broker’s obligations if MKA itself makes a concurrent
offer; to comply with all laws and regulations; and to compensate ePlanning for
investments referred by ePlanning and accepted by MKA.
In analyzing these provisions, the majority does not discuss the nature or extent of
control required to create an agency. Instead it merely characterizes the provisions of the
contract “as though the level of control they convey is self evident.” (ING Bank, supra,
758 F.Supp.2d at p. 942.) The majority interprets the provisions of the Agreement as
controlling “in large part” the interactions of ePlanning with its prospective investors,
such as “who could invest, what material would be provided to potential investors, what
records ePlanning was required to keep; how ePlanning representatives were to interact
with clients; what actions by ePlanning representatives required MKA’s express prior
approval; and what provisions of the securities law governed the transactions.” (Maj.
Opn. ante, at p. 29.)
This overstates the contract. It is not the Agreement that determines what
regulations govern ePlanning’s actions, what records must be kept or who can invest, it is
the regulations themselves. Indeed, even in the absence of such provisions, a broker is
independently obligated to comply with the securities regulations governing the offering
of private placements under Regulation D and to ensure that the investment is suitable for
the customer. (See FINRA Reg. Notice 10-22 [“[A]ny broker-dealer that recommends
securities offered under Regulation D must meet its suitability requirements under NASD
Rule 2310 (Suitability), and must comply with the advertising, supervisory and record-
keeping rules of FINRA and the SEC”].) But even if the majority’s characterizations
14
were accurate, they “misapprehend agency law.” (ING Bank, supra, 758 F.Supp.2d at
p. 942.) The exercise of supervisory powers is not relinquished when hiring an
independent contractor. “The law merely requires that day-to-day management of the
independent contractor’s business be left to the independent contractor.” (Ibid. )
Applying agency principles, the provisions adverted to by the majority are, at most,
general supervisory directives and do not approach the level of control that would create
a true principal-agent relationship.
ING Bank is instructive, and is factually very similar to the case at hand.8 There,
the bank entered into a contract with a loan broker authorizing it to solicit prospective
borrowers for loans to be underwritten by the bank. (ING Bank, supra, 758 F.Supp.2d at
p. 938.) The contract was thirteen pages long, and contained numerous requirements,
“rang[ing] from the general—follow all laws, communicate with borrowers, submit
accurate information—to the specific—obtain the borrower’s signature on the
application, coordinate the collection of documentation, ensure that borrowers sign an
agreement disclosing that [bank] and [broker] have a contractual relationship.” (Ibid.)
The contract also provided that the broker was not the bank’s agent, and was free to
solicit loans on behalf of other mortgage lenders. (Ibid.)
The plaintiffs (the Ahns) submitted to the broker an application for a loan; the
broker falsified the application, stating that the Ahns had substantially more income than
shown in their paystubs. (ING Bank, supra, 758 F.Supp.2d at p. 938.) Additionally, the
loan broker violated Civil Code § 1632 because it failed to provide the Ahns with a
Korean translation of the loan agreement, after negotiating with the Ahns entirely in
Korean. (Id. at p. 940.) The loan was placed with the bank; the Ahns defaulted; the bank
8
Although they are not binding precedent, we may consider relevant federal
district court opinions as persuasive. (Futrell v. Payday California, Inc. (2010) 190
Cal.App.4th 1419, 1432, fn. 6.)
15
sued for judicial foreclosure; and the Ahns counterclaimed against the broker and the
bank for fraud, unfair business practices and violation of Civil Code § 1632. (Id. at
pp. 938–939.)
The Ahns moved for summary judgment against the bank on its claim for
rescission based on the violation of Civil Code § 1632. (ING Bank, supra, 758 F.Supp.2d
at p. 940.) Under applicable precedent, a lender is not liable for a violation of the statute
unless the lender either acted as a broker or had an agency relationship with the broker.
(Ibid.) Since the bank was not a broker, the issue was whether the bank and the broker
were in an agency relationship. (Id. at p. 941.)
The Ahns’ agency argument focused on two questions. First, whether the broker
had the power to alter the bank’s relationships and second, whether the bank had the right
to exercise control over the broker. (ING Bank, supra, 758 F.Supp.2d at p. 941.) The
court readily concluded the broker had no power to alter the bank’s legal relationships. It
further concluded the Ahns had not proven that the bank had the right to “exert the kind
of control over [the broker] that gives rise to an agency relationship.” (Ibid.)
The Ahns’ primary “control” argument was premised on the terms of the contract,
which they described as “replete with directives, mandates and responsibilities with
which [the broker] was obligated to comply in exchange for [the bank’s] commission
payment.” (ING Bank, supra, 758 F.Supp.2d at p. 942.) The court concluded, however,
that the provisions—which were, in fact, numerous and detailed—were not “nearly
comprehensive enough to suggest that [the bank] was doing anything other than
supervising an independent contractor.”9 (Ibid.)
9
The contract provisions included the following requirements: The broker must
“(1) ensure that borrowers sign a disclosure agreement; (2) analyze the borrower’s
income and debt; (3) describe to the borrower the types of loan products available;
(4) complete the borrower’s application; (5) obtain the borrower’s signature on the
application; (6) coordinate the collection of documentation; (7) order appraisals and
inspections if necessary; (8) assist the borrower in understanding and resolving credit
16
The flaw in the Ahns’ argument was to treat the provisions of the contract “as
though the level of control they convey is self evident.” (ING Bank, supra, 758
F.Supp.2d at p. 942.) This, the court concluded, misapprehends agency law. One need
not relinquish supervisory powers when hiring an independent contractor. “The law
merely requires that day-to-day management of the independent contractor’s business be
left to the independent contractor. Here, it was.” (Ibid.) Additionally, the contract
disclaimed an agency relationship—which was not dispositive, but a factor to be
considered—and the broker was free to broker loans for other lenders, which also tends
to negate an agency relationship. The court concluded that the evidence presented by the
Ahns supported only one inference, “that [the broker] was acting as an independent
contractor when it brokered the Ahns’ loan.” (Id. at p. 943.)
The Agreement between ePlanning and MKA contained similar, but fewer
requirements. In it, ePlanning agreed to use “its standard reasonable efforts to procure
qualified subscribers for the Units on the terms described in the Offering Memorandum”
in exchange for compensation. The “manner and means” by which ePlanning was to
carry out its “reasonable efforts” was left entirely to ePlanning, except that it was
contractually obligated to help its clients read and understand MKA’s materials, to be
honest in describing MKA’s offering, to clear marketing materials with MKA, to comply
with applicable regulations, and to keep certain records. Nothing in the Agreement gave
to MKA control of ePlanning’s “day-to-day operations” (Kaplan, supra, 59 Cal.App.4th
at p. 746) or of ePlanning’s “ ‘management and policies’ ” (Poptech, supra, 792
F.Supp.2d at p. 336) as distinct from a general supervisorial power (Stilson, supra, 21
Cal.App.3d at p. 936).
issues; (9) communicate regularly with the borrower and gather additional
documentation, if necessary; (10) facilitate the signing of closing documents;
(11) disclose the relationship between [the bank and the broker]; and (12) certify it
provided these services.” (ING Bank, supra, 758 F.Supp.2d at p. 942.)
17
ePlanning was not only free to manage its day-to-day affairs as it saw fit, but was
also free to determine to which qualified investors it would offer MKA’s product, how
best to describe the risks and benefits of various investments, including MKA’s product,
and the manner in which the investment would be presented. (See Schweizer v. Keating
(D.Md. 2001) 150 F.Supp.2d 830, 840 (Schweizer).) The Agreement also left ePlanning
free to sell products from other issuers and to solicit applications for other investments,
(ING Bank, supra, 758 F.Supp.2d at p. 942), and either party could terminate the
Agreement for any reason. The Agreement gave MKA neither the means nor the power
to exercise any control or supervision over ePlanning or its representatives. MKA’s only
recourse in the event ePlanning or its representatives did not meet their contractual
obligations was to terminate the contract on ten days’ notice.10
Upon independent review, I would conclude that ePlanning’s contractual
obligations in connection with offering MKA’s product are, as a matter of law, well
below the threshold level of control that would manifest a true principal-agent
relationship, i.e., one that creates vicarious liability. Rather, they are merely an
enumeration of mostly regulatory-based supervisorial directions concerning a matter in
which the contracting party is beneficially interested. (Cislaw, supra, 4 Cal.App.4th at
p. 1295 [a person who has an interest in the work being performed by another is allowed
to exercise a certain measure of control pertaining to the work without acquiring the
responsibilities of a master].)
10
MKA presumably could have prepared a contract that would accord it control
over ePlanning with respect to its solicitations for MKA’s product, but it did not do so.
(Cf. Asplund v. Selected Investments in Financial Equities, Inc. (2000) 86 Cal.App.4th
26, 32 [broker contracted with registered representative to sell interests in broker’s
mutual fund; contract provided that sales representative would be independent contractor
except that he was subject to the broker’s “supervision and control” with respect to sales
of the mutual fund].)
18
C. Schweizer
The majority rejects MKA’s argument that a broker-dealer in a private placement
offering can never legally be in a principal-agent relationship with the issuer, and I agree.
(Maj. Opn. ante, at p. 39.) But MKA also urges us to consider the case of Schweizer,
supra, 150 F.Supp.2d 830, in which, on very similar facts, the court held as a matter of
law that no agency relationship was created between an offeror of a private placement
investment and the broker-dealer it hired to solicit investors. I would agree with MKA
that Schweizer, while not controlling, is nonetheless persuasive. The majority rejects it as
inapposite and unnecessary to our analysis because “the issues on appeal are readily
resolved by applying California agency law to the evidence produced at trial.” (Maj.
Opn. ante, at p. 37.)
California law does answer the agency question, but I disagree with the majority
as to what that answer is. Consequently—and because the Schweizer opinion is
consistent with California law on the subject of agency—I shall respond to the majority’s
analysis of that case.
The facts of Schweizer are set forth in the majority opinion and will not be
repeated here. (Maj. Opn. ante, at pp. 37–38.) Suffice to say, in that case, an offeror of a
private placement investment (Ridgewood) entered into a “best efforts” agreement with a
broker-dealer (Delta) (with key provisions comparable to those in the Agreement here).
(Schweizer, supra, 150 F.Supp.2d at pp. 834, 840.) Delta’s registered representative and
employee (Keating) convinced one of his clients to apply to be an investor in Ridgewood,
even though the investment was inappropriate for that client, after Keating
misrepresented to the client the nature of the investment. (Id. at pp. 834–837.) The issue
in Schweizer was whether Ridgewood was vicariously liable to the investor for the
misrepresentations made by Keating based on either a master-servant or an “actual
agency by inference” theory. (Id. at p. 839.)
19
The Schweizer court held that Ridgewood was not liable for Keating’s wrongdoing
as a master or employer because the provisions of the “best efforts” agreement were
“insufficient to establish that the Ridgewood Defendants had the right to control Delta
and its representatives.” (Schweizer, supra, 150 F.Supp.2d at p. 840.) The court
observed that most of the “control” provisions identified by Plaintiff—the same
provisions relied upon by the majority here (Maj. Opn. ante, at pp. 29, 31)—were
identical to those imposed under the applicable securities laws and were merely
provisions which “responsible issuers would be expected to include . . . in selling
agreements . . . in order to ensure compliance with the law.” (Schweizer, supra,
150 F.Supp.2d at p. 840.) The court concluded, “Delta and its representatives retained a
significant degree of discretion in selecting potential investors to whom trust shares
would be offered and the manner in which the investment would be presented to the
prospective buyer . . . . Plaintiff’s assertion that the Ridgewood Defendants controlled
Delta and its representatives in a manner that is indicative of a master-servant
relationship is without merit.” (Ibid.)
The majority dismisses Schweizer as inapposite because “this case presents a
fundamentally different legal issue . . . , i.e., whether ePlanning was an agent, not
whether it was an employee of MKA” (Maj. Opn. ante, at p. 38), and also because the
District Court was determining whether the summary judgment evidence was sufficient
to create an issue of fact whereas we are determining whether a trier of fact’s finding is
supported by substantial evidence (Maj. Opn. ante, at p. 39). As to the latter point, the
distinction is irrelevant because both we and the District Court are applying the law to the
undisputed facts to make a determination of agency. As to the former, it is true that
Schweizer analyzed whether the “best efforts” agreement created the kind of control that
characterizes an employer-employee relationship, and concluded that it did not. But, as
has been noted, there is a substantial overlap in the factors for determining whether one is
20
an employee or an agent. (See ante, fn. 5.) In any event, that was not the only theory
advanced by the plaintiff in Schweizer. He also argued, in the alternative, that there was
an “actual agency by inference.” (Schweizer, supra, 150 F.Supp.2d at p. 841.) The
majority describes the Schweizer court as rejecting this theory “summarily.” (Maj. Opn.
ante, at p. 38.) I would not characterize it in that way.
Addressing the agency theory, the Schweizer court began by setting forth the three
key elements of an “agency by inference,” which are: “1) the agent was subject to the
principal’s right of control; 2) the agent had a duty to act primarily for the benefit of the
principal; and 3) the agent held the power to alter the legal relations of the principal.”
[Citation.]” (Schweizer, supra, 150 F.Supp.2d at p. 841.) As has been described,
elements (1) and (3) are two of the key elements of agency under California law.
The Schweizer court went on to conclude that the first element—that of a
principal’s right to control an agent—could not be proven “[f]or reasons discussed at
length in the preceding subsection [of the opinion]” rejecting the master-servant theory.
(Schweizer, supra, 150 F.Supp.2d at p. 841.) This is in keeping with California law,
which applies the same general rules to determine whether there is an agency relationship
or an employment relationship. (Rogers, supra, 228 Cal.App.2d at p. 671.)
As to the third element, the court determined there was “no legitimate claim that
Delta had the power to alter the Ridgewood Defendants’ legal relations” because it was
undisputed that Ridgewood retained the ultimate authority to accept or reject potential
investors presented by Delta. (Schweizer, supra, 150 F.Supp.2d at p. 841.)
“Accordingly, there is no basis for inferring actual agency in the instant case.” (Ibid.)
Again, this is in keeping with California agency law. (Alvarez, supra, 230 Cal.App.2d at
p. 999.)
Of course, a federal case from Maryland is not controlling here. But the facts and
the law of that case are almost indistinguishable from the facts of this case and the law of
21
agency in California. I therefore disagree with the majority’s characterization of
Schweizer as addressing a “fundamentally different legal issue” than that presented in the
case before us.11 (Maj. Opn. ante, at p. 38.)
The majority also disagrees with the reasoning of Schweizer. According to the
majority, the Schweizer court “disregarded the fact that the Ridgewood-Delta agreement
allowed Ridgewood to retain control over the manner in which trust shares would be
offered to potential investors solely because those ‘control’ provisions were designed to
enable the offering to retain an exemption from the registration.” (Maj. Opn. ante, at
p. 39.) This misapprehends the reasoning of Schweizer. The court did not “disregard”
the purported “fact” that the agreement “allowed Ridgewood to retain control over the
manner in which trust shares would be offered to potential investors.” To the contrary,
the Schweizer court premised its discussion on the principle that “[t]he reservation of
some control over the manner in which work is done does not destroy the independent
contractor relationship where the contractor is not deprived of his judgment in the
execution of this duties. [Citation.]” (Id. at p. 840.) The Schweizer court then concluded
the contractual provisions at issue were “insufficient to establish that the Ridgewood
Defendants had the right to control Delta and its representatives” because Delta “retained
a significant degree of discretion” in selecting potential investors to whom the trust
11
The majority also seeks to distinguish this case from Schweizer on the ground
that the term “placement agent” was used in the Agreement between MKA and
ePlanning. (Maj. Opn. ante, at pp. 38–39.) But we cannot discern from the opinion
whether that term was or was not used in the agreement in question in Schweizer. We do
know that the contract at issue in Schweizer contained virtually identical disclaimer
language as the “Authority” provision in the Agreement here: “[Delta’s] relationship
with [Ridgewood] is as an independent contractor and… nothing herein shall be
construed as creating a relationship of partners, affiliates, joint venturers, or employer
and employee, between [Delta] and [Ridgewood].” (Schweizer, supra, 150 F.Supp.2d at
p. 839.)
22
shares would be offered as well as the manner in which the investment would be
presented. (Schweizer, supra, 150 F.Supp.2d at p. 840, italics added.) The court also
pointed out that Ridgewood had no involvement in Delta’s hiring, discipline or dismissal
of its representatives, nor Delta’s compensation structure or calculation. (Id. at p. 841.)
What the court concluded, in essence, is that the so-called “control” provisions did not
control the “manner and means” by which Delta would carry out its contractual duties,
and were mostly duplicative of the legal requirements Delta would have had to comply
with anyway in order to serve as a broker for private placements. (Id. at p. 840.)
In eschewing the rationale of Schweizer the majority expresses the view that when
“a private placement issuer ma[kes] the decision to use a broker to solicit offers on its
behalf in order to maintain its own exemption from securities law registration
requirements,” that fact “supports [an] agency finding.” (Maj. Opn. ante, at p. 39.) But
the mere decision of a private placement issuer to utilize an independent broker to solicit
investors (in order to retain its exemption) is no more relevant to the issue of agency than
an insurance company’s decision to utilize independent brokers to solicit purchasers of its
products (for whatever reason). What is relevant is whether, in carrying out that decision,
the hirer has authorized the broker to act in its place to create binding legal obligations
and whether the broker has ceded to the hirer not just a general supervisorial power, but
the right to control the manner and means by which the broker conducts its business in
carrying out the contract.
D. Conclusion
MKA has been and should be held liable to plaintiff for its own acts and
omissions. But MKA should not be held vicariously liable for the acts or omissions of
ePlanning or Guidi. MKA did not empower ePlanning to approve investors for the
Qualified Fund or to bind MKA to any obligations. ePlanning did not cede to MKA the
power to control ePlanning’s policies, personnel or business, nor to oversee or direct the
23
manner and means by which ePlanning’s representatives would carry out the Agreement.
Neither of the hallmarks of a true agency relationship are present here.
_________________________
Rivera, J.
24