Genis v. Schainbaum

Filed 7/22/21
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
DARRYL W. GENIS, B304968
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. 19STCV02892)
v.
MARTIN A. SCHAINBAUM et al.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of Los
Angeles County, Barbara A. Meiers, Judge. Affirmed.
Joseph J. M. Lange Law Corporation and Joseph J. M.
Lange for Plaintiff and Appellant.
Klinedinst, Heather L. Rosing, Robert M. Shaughnessy,
and Irean (Lu) Zhang for Defendants and Respondents.
________________________
Appellant Darryl W. Genis sued his criminal defense
attorney for legal malpractice after Genis entered a plea of guilty
to federal tax charges in United States District Court. Genis
alleged his attorney, Martin Schainbaum, negligently advised
him to sign “closing agreements” by which he agreed to pay civil
tax fraud penalties as part of the disposition of his criminal case.
Genis contended that but for Schainbaum’s negligence, he would
not have agreed to that obligation.
Genis filed his complaint for legal malpractice in Los
Angeles Superior Court against Schainbaum and Martin A.
Schainbaum, a Professional Law Corporation (hereinafter
respondent or Schainbaum). Respondent demurred on the
ground that actual innocence of the criminal charges, which
Genis did not allege, is a necessary element of a cause of action
for legal malpractice arising out of a criminal proceeding. The
trial court agreed, found that the obligation was incurred as part
of a plea agreement to resolve criminal charges, and sustained
the demurrer without leave to amend. Genis filed a timely
appeal. We affirm.
Question Presented
As framed by appellant, “In the legal malpractice context,
does the ‘actual innocence’ standard adopted in Wiley v. County of
San Diego (1998) 19 Cal.4th 534 [(Wiley)], apply to legal
malpractice claims stemming from legal representation involving
simultaneous civil and criminal cases, when a plaintiff is only
pursuing legal malpractice claims as to the underlying civil
case?”
2
The Criminal Prosecution
We take our facts from the complaint and the exhibits
attached to the demurrer, to which no objections were raised.1
On July 3, 2015, Genis, a lawyer himself, retained Schainbaum to
represent him in a tax investigation. On November 18, 2015, the
United States Attorney’s Office informed Schainbaum that his
client Genis was the target of a federal investigation into
criminal violations of the Internal Revenue Code. The
1 Schainbaum filed a request for judicial notice of the
exhibits attached to the demurrer. The record does not reflect
whether the trial court granted the request. Both parties relied
on the exhibits during their arguments before the trial court and
do so now on appeal. We have reviewed the exhibits and take
judicial notice of them on our own motion, pursuant to Evidence
Code section 452, subdivision (d). (See also Scott v. JPMorgan
Chase Bank, N.A. (2013) 214 Cal.App.4th 743, 751 [“a demurrer
may be sustained where judicially noticeable facts render the
pleading defective [citation], and allegations in the pleading may
be disregarded if they are contrary to facts judicially noticed”];
see also C.R. v. Tenet Healthcare Corp. (2009) 169 Cal.App.4th
1094, 1103 [“judicial notice may be taken of documents pertinent
to the issues raised by a demurrer”].) “As to accepting the
accuracy of the contents of judicially noticed documents, [there
are] three different approaches to judicial notice at the demurer
stage: the truth of a document’s contents will not be considered
unless it is a judgment, statement of decision, or order [citations];
the truth of statements may be accepted when made by a party
but not those of third parties or an opponent [citations]; and the
contents of a document may only be accepted ‘ “ ‘where there is
not or cannot be a factual dispute concerning that which is
sought to be judicially noticed.’ ” ’ ” (C.R. v. Tenant Healthcare
Corp., at p. 1103.)
3
government informed Schainbaum it intended to pursue criminal
felony charges against Genis for willful tax evasion in violation of
title 26 of the United States Code sections 7201 and 7206.
About one year into representing Genis pre-indictment,
Schainbaum negotiated and Genis executed a plea agreement
with the United States Attorney’s Office. Genis agreed to plead
guilty to a three-count information charging misdemeanor willful
failure to file tax returns for tax years 2009, 2010, and 2011 in
violation of title 26 of the United States Code section 7203. Genis
also agreed to make full restitution, which was tentatively set at
$679,958, and to cooperate with the IRS in determining his true
tax liability for tax years 2005 through 2012. Genis promised to
sign separate “closing agreements” prior to sentencing, which
would allow the IRS to assess and collect unpaid taxes, interest,
and “any applicable civil penalties” for each year.2 He also
agreed not to object to the IRS receiving material and
information obtained by way of criminal grand jury subpoenas
and to pay “at or before sentencing all additional taxes and all
penalties and interest assessed” by the IRS.
Finally the agreement provided that if Genis succeeded in
withdrawing his pleas of guilty in the future, the government
would be relieved of its obligations and could charge any offense
not filed or dismissed as a result of the agreement without Genis
raising a statute of limitations defense.
2 A “closing agreement” is IRS Form 886 whereby the IRS
and taxpayer agree to a final determination of tax liability and
the case is permanently and conclusively closed. (26 C.F.R.
§ 301.7121-1; 26 U.S.C.S. § 7121.)
4
In exchange for Genis’s promises, the government did not
charge him with felony tax fraud violations that would have
exposed him to a possible 15-year prison sentence and the
probable loss of his license to practice law.
On July 26, 2016, the government filed the fully executed
plea agreement and the criminal information. On October 24,
2016, Genis entered pleas of guilty. The district court recited
Genis’s obligations under the plea agreement, including his
promises to pay restitution and applicable civil penalties. Genis
testified he was satisfied with Schainbaum’s representation,
believed Schainbaum had fully advised him, and fully understood
the consequences of the pleas. Genis further swore he was
pleading guilty because he was in fact guilty of the crimes
charged in the information. Sentencing was scheduled for
February 13, 2017.
On November 17, 2016, the prosecutor sent the “closing
agreements” to Schainbaum for Genis to sign before the
sentencing hearing in February. The closing agreements
imposed 75 percent civil tax fraud penalties on the tax liabilities
Genis owed for the years 2009 through 2012.
Schainbaum forwarded the closing agreements to Genis to
sign. Genis signed the closing agreements before he was
sentenced. At sentencing, Genis admitted his willful failure to
file: “I’m here because of what I did wrong, not because of what
somebody else did or did not do. [¶] And I’m here to face those
consequences regardless of how hard they may be; and when I
walk out of here, I’m the one that’s going to be responsible and
I’m not going to change that opinion because I don’t like the
sentence. [¶] So I just wanted to be perfectly clear that I hold
myself and nobody else responsible for my shortcomings.
5
[¶] . . . [¶] I need to make money first and foremost to pay off this
obligation and the obligation is split. It’s split in terms of the
nearly $700,000 that is the restitution; and I might add that I
didn’t contest that amount because I didn’t want to delay the
early admission of guilt.” Genis also acknowledged the enormous
monetary penalties he faced pursuant to the plea agreement:
“The government, the Treasury, has suffered the loss of the use of
the money. They’re going to get it back; and no matter how long
it takes, they’re going to get it back with a penalty and interest
that is so large that it could never be charged in a commercial
transaction without violating usury laws.”
The district court sentenced Genis to eight months
imprisonment on each count to run consecutively and one year of
supervised release. It also ordered restitution of $679,958 for
unpaid or understated taxes. Genis began serving his sentence of
imprisonment on May 19, 2017.
Post-Conviction Proceedings
One year later, on February 15, 2018, Genis filed a Motion
to Vacate, Set Aside or Correct Sentence by a Person in Federal
Custody, pursuant to title 28 of the United States Code
section 2255 (2255 motion). The district court assigned case
number CV 18-1247-DSF to the motion. Genis alleged
Schainbaum provided ineffective assistance of counsel in that he
failed to investigate Genis’s gambling addiction in mitigation of
sentence; failed to object to imposition of consecutive sentences;
and failed to object to the civil fraud penalties required by the
closing agreements. The government opposed the motion.
On August 6, 2018, the district court held an evidentiary
hearing on the motion. Both Genis and Schainbaum testified.
The district court made extensive factual findings. It found that
6
after purposely negotiating a plea agreement that did not allege
fraud so as to protect Genis’s law license, neither Genis nor
Schainbaum contemplated the application of civil fraud penalties
as set out in the closing agreements. (Civil fraud penalties are up
to 75 percent of the unpaid tax liability while civil accuracy
penalties are 20 percent.) By the same token, the court also
found that the government, in good faith, did contemplate such
fraud penalties and the very large numbers it provided to Genis
and Schainbaum as tentative penalties supported the
transparency of its position, even though the plea agreement
itself never used the word “fraud.” The court found a lack of
mutual understanding between the parties about whether civil
accuracy or civil fraud penalties were going to be imposed. The
court assumed Schainbaum, who either did not review the
documents or did not notice that civil fraud penalties were being
imposed, provided ineffective assistance of counsel which
prejudiced Genis.
As a remedy, the district court offered Genis the
opportunity to withdraw his plea and go to trial. Genis declined
the offer and instead asked the court to strike the civil fraud
penalties only and validate the rest of the agreement.
Ultimately, the district court found it inappropriate, absent
fraud or intentional misrepresentation, to elevate one party’s
position over another’s. Because striking the civil fraud penalties
was the sole remedy Genis requested, the district court denied
the motion. Genis appealed. The United States Court of Appeals
for the Ninth Circuit affirmed. (United States v. Genis (9th Cir.
2020) 824 Fed.App. 539.)
7
The Complaint
On February 1, 2019, Genis filed a three-page complaint
alleging a single cause of action for “legal negligence” and seeking
$10 million in damages. He alleged Schainbaum committed legal
malpractice in that he failed to consult with a gambling addiction
expert to obtain a more lenient sentence; failed to review the
closing agreements before forwarding them to Genis for signature
and before signing them himself; and failed to advise Genis that
he would be liable for penalties at a higher “fraud” rate even
though the charges to which he pleaded guilty did not include an
element of fraud. Genis alleged he was liable for substantially
more than he otherwise would have owed “but for [Schainbaum’s]
negligence.”
The Demurrer and The Trial Court’s Ruling
On November 20, 2019, respondent filed a demurrer
asserting Genis “does not allege and cannot prove actual
innocence of the crimes charged, has not obtained post-conviction
relief or exoneration for the crimes charges, and cannot establish
that Schainbaum caused his alleged harm.”
Genis argued in opposition that he was challenging only
the “civil” portion of the plea agreement, which resolved
“separate civil and criminal cases.” Because the civil fraud
penalties were the only points at issue, he argued he did not have
to prove his actual innocence of the criminal charges.
On January 10, 2020, the trial court sustained the
demurrer without leave to amend. It reviewed the plea
agreement and found that Genis’s agreement to pay restitution
and applicable civil penalties was part and parcel of the
resolution of the criminal investigation and charges against him.
The trial court stated the inclusion of civil penalties was “like any
8
run-of-the-mill case where you might have something like
restitution.” It called the agreement to pay civil penalties a
“condition precedent” to the judge imposing an agreed-upon
sentence. The trial court did not address the second issue raising
lack of causation. It entered judgment on February 5, 2020.
Applicable Law
A demurrer tests the legal sufficiency of the complaint.
(Hernandez v. City of Pomona (1996) 49 Cal.App.4th 1492, 1497.)
The grounds for a demurrer are those listed in Code of Civil
Procedure section 430.10, including, among others, failure to
state facts sufficient to constitute a cause of action. (Code Civ.
Proc., § 430.10, subd. (e)).
An order sustaining a demurrer without leave to amend is
reviewed de novo. The court exercises its independent judgment
to determine whether or not the complaint states facts sufficient
to constitute a cause of action as a matter of law. (Lincoln
Property Co., N.C., Inc. v. Travelers Indemnity Co. (2006)
137 Cal.App.4th 905, 911.) We assume the truth of properly
pleaded factual allegations, facts that reasonably can be inferred
from those expressly pleaded, and matters that are judicially
noticeable. (Ivanoff v. Bank of America, N.A. (2017)
9 Cal.App.5th 719, 725.) We construe the pleading in a
reasonable manner and read the allegations in context. (Id. at
p. 726.) However, courts will not close their eyes in situations
where a complaint contains allegations of fact inconsistent with
attached documents/exhibits, or allegations contrary to facts
which are judicially noticed. (Ibid.) Where facts appearing in
attached exhibits or judicially noticed documents contradict, or
are inconsistent with, the complaint’s allegations, we must rely
9
on the facts in the exhibits and judicially noticed documents.
(Ibid.)
When a demurrer is sustained without leave to amend, we
decide whether there is a reasonable possibility that the plaintiff
can amend his/her complaint to cure the defect. (Blank v. Kirwan
(1985) 39 Cal.3d 311, 318.) If the defect can be cured, the trial
court has abused its discretion and we reverse; if not, there has
been no abuse of discretion and we affirm. (Ibid.) The burden of
proving such reasonable possibility is squarely on the plaintiff.
(Ibid.)
Analysis
Preliminarily, we note Genis raises only one issue on
appeal, that is, Schainbaum’s alleged negligence in failing to
exclude the IRS civil fraud penalties as part of the terms of the
written plea agreement and closing agreements. Other theories
of liability alleged in the trial court have not been pursued on
appeal and are therefore waived. (Lee v. Kim (2019)
41 Cal.App.5th 705, 721.)
In any action for legal malpractice against criminal defense
counsel, the plaintiff, as the former criminal defendant, must
necessarily allege and prove actual innocence of the criminal
charges. (Wiley, supra, 19 Cal.4th at p. 545.) The actual
innocence requirement applies to any legal malpractice “ ‘ “in the
course of defending a client accused of crime” ’ ” (id. at p. 536,
fn. 1) or, put another way, “arising out of a criminal proceeding.”
(Coscia v. McKenna & Cuneo (2001) 25 Cal.4th 1194, 1200
(Coscia).) When it is clear the plaintiff cannot in good faith plead
factual innocence or exoneration, leave to amend the complaint
should not be granted. (Wilkinson v. Zelen (2008)
167 Cal.App.4th 37, 49.)
10
Wiley extensively discusses the public policy reasons
undergirding the actual innocence rule. Notably, Wiley rejected
carving out exceptions to the rule, asserting, “Regardless of the
attorney’s negligence, a guilty defendant’s conviction and
sentence are the direct consequence of his own perfidy. The fact
that nonnegligent counsel ‘could have done better’ may warrant
postconviction relief, but it does not translate into civil damages,
which are intended to make the plaintiff whole.” (Wiley, supra,
19 Cal.4th at p. 539.) The Wiley Court flatly stated “ ‘the notion
of paying damages to a plaintiff who actually committed the
criminal offense . . . is of questionable public policy and is
contrary to the intuitive response that damages should only be
awarded to a person who is truly free from any criminal
involvement.’ ” (Ibid.)
Acknowledging the tension created where, as here, guilt is
conceded, but counsel’s negligence nevertheless caused a less
favorable outcome, Wiley announced that a defendant’s “own
criminal act remains the ultimate source of his predicament
irrespective of counsel’s subsequent negligence. Any harm
suffered is not ‘only because of’ attorney error but principally due
to the client’s antecedent criminality.” (Wiley, supra, 19 Cal.4th
at p. 540.) It consequently ruled that the paradigm of “but for”
causation in civil malpractice cases is inapplicable in the context
of malpractice by criminal defense counsel. In so holding, the
court pointed out that unlike a civil matter where the damage
done by an attorney’s negligence can only be recovered through a
legal malpractice claim, a criminal defense lost through an
attorney’s negligence can be corrected by post-conviction relief.
(Id. at pp. 542–543.) Indeed, given the availability of post-
conviction relief, “it is inimical to sound public policy to afford a
11
civil remedy, which in some cases would provide a further boon to
defendants already evading just punishment . . . .” (Id. at p. 543.)
Here, it is undisputed appellant is guilty of the offenses to
which he pleaded guilty. As set out above, Genis has never
wavered in publicly proclaiming his guilt and remorse for his
conduct.
Appellant’s argument that he was prejudiced by his
attorney’s negligence in plea negotiations and sentencing is
analogous to the arguments rejected in Coscia. There, plaintiff
sued his defense attorney for malpractice, alleging her negligence
in advising him not to cooperate with the government resulted in
a guilty plea to a felony instead of a misdemeanor. (Coscia,
supra, 25 Cal.4th at p. 1198.) Quoting Stevens v. Bispham
(Or. 1993) 851 P.2d 556, 562, our Supreme Court reaffirmed the
holding in Wiley, stating, “ ‘Although a plaintiff may wish that he
or she had gotten a better deal, we do not consider it appropriate,
outside of circumstances where . . . relief . . . is available under
the post-conviction relief law, to treat a convicted offender as
having been caused “harm” in a legally cognizable way by any
disposition of that person’s case that was legally permissible.’
The convicted criminal’s own conduct is deemed to be the sole
cause of his or her indictment and conviction—either after trial or
based on a guilty plea.” (Coscia, at pp. 1202–1203.)
We agree with the trial court that the civil penalties arose
out of the criminal prosecution, as did any alleged legal
malpractice attributable to Schainbaum. Genis was required to
allege actual innocence. Moreover, under Coscia, Genis was
required to obtain exoneration of his guilt as a prerequisite to
proving actual innocence in his malpractice action against his
former criminal defense counsel. (Coscia, supra, 25 Cal.4th at
12
p. 1205.) He has not satisfied either element; the demurrer was
properly sustained.
Genis makes two arguments as to why the actual innocence
rule does not apply to him. First, he argues there were two
simultaneous separate cases – one criminal and one civil—and he
is challenging only the penalties arising out of the civil case. He
makes the bold statement that the district court recognized it
was dealing with one civil and one criminal matter because it
included a civil case number in the caption of its order denying
the 2255 motion.
Plaintiff’s position is flatly contradicted by the record.
While it is accurate to suggest the prosecutor inserted civil
penalties as part of the punishment to which Genis agreed, it
stretches the record beyond credulity to claim there was a
separate pending civil case. At the outset, Genis was informed he
was looking at being charged criminally. He received
consideration in the form of reduced charges because he agreed to
the inclusion of civil penalties as part of the disposition of the
criminal case. That the government asked for civil penalties in
exchange for forbearance in charging felony offenses does not in
any way transform the underlying action into civil litigation. We
note Genis appeared to acquiesce to the notion that this case, at
its core, was a criminal prosecution when he declined the
opportunity to withdraw his plea and go to trial, presumably
because of the risk of being charged with more serious offenses as
was expressly reserved in the plea agreement.
13
Genis points to the civil case number (CV 18-1247-DSF) on
the caption of the order denying post-conviction relief as evidence
that there was a simultaneous civil proceeding out of which the
civil penalties arose. First, Genis filed the 2255 motion one year
after the conclusion of his criminal case. By no means can
anyone characterize the proceedings under that case number as a
“simultaneous” civil matter, as Genis has done.
Second, a 2255 motion is the statutory equivalent of a
petition for writ of habeas corpus, traditionally a civil filing.
(Sanders v. United States (1963) 373 U.S. 1, 15 [“the motion
procedure is the substantial equivalent of federal habeas
corpus”].) Hence, the civil case number. While it is a civil
proceeding in name and number, it is not a civil tax action
brought by the government to recover penalties for civil tax
violations. Because the government cannot recover civil tax
penalties by way of a 2255 motion, there is no way the motion can
be deemed the civil equivalent of the criminal information filed
by the government against Genis. Although Genis avers that he
retained Schainbaum to represent him in a “criminal tax/civil”
matter, the exhibits upon which all parties relied belie and, in
fact, contradict that there was ever a civil action contemplated or
filed with respect to civil tax liability. In sum, to state there were
two simultaneous, ongoing civil and criminal matters is simply
disingenuous. We decline to distort the record.
Next, Genis relies on Bird, Marella, Boxer & Wolpert v.
Superior Court (2003) 106 Cal.App.4th 419 (Bird) and Lynch v.
Warwick (2002) 95 Cal.App.4th 267 (Lynch) to claim he may
pursue his counsel’s legal negligence as to the civil tax fraud
penalties without a showing actual innocence, even if the
penalties arise out of a criminal matter. In Bird, plaintiff filed a
14
lawsuit accusing his criminal defense attorney of overbilling
under the retainer agreement the parties had executed. The
court found that the primary rights plaintiff asserted in the
complaint were to be billed in accordance with specific
contractual provisions and to be free from unethical or fraudulent
billing practices. (Bird, at p. 421.) Plaintiff expressly renounced
any claim that counsel’s representation adversely affected the
outcome of the criminal case. (Id. at p. 428.) This type of dispute
implicated neither the actual quality of the representation
plaintiff received nor plaintiff’s guilt or innocence of the criminal
charges. (See also Brooks v. Shemaria (2006) 144 Cal.App.4th
434, 440–442 [actual innocence rule did not apply to suit for
return of unused portion of retainer or to counsel’s negligent
failure in a separate action to obtain return of seized property
before it was destroyed].) The action was allowed to proceed to
challenge the “padded” invoices.
In Lynch, plaintiff sought to recover “out-of-pocket
expenses unrelated to guilt or innocence.” (Lynch, supra,
95 Cal.App.4th at p. 270.) He alleged his criminal defense
attorney negligently failed to investigate facts and possible
meritorious defenses to the charges. This negligence compelled
Lynch to fire counsel and bear the cost of retaining a new
attorney to represent him. (Id. at pp. 269, 270.) The Lynch court
held that regardless of the labels Lynch put on his causes of
action (breach of contract, breach of fiduciary duty), he was
fundamentally seeking recovery for the alleged substandard
representation he received from his criminal defense attorney.
He therefore had to allege and prove his actual innocence of the
charges. (Id. at pp. 273–274.)
15
These two cases do not help Genis, who alleges that paying
civil fraud penalties was not what he contemplated when he
signed the plea agreement and the closing agreements. The
primary right he seeks to assert is the right to competent
representation. He seeks compensation for what he considers a
less favorable outcome directly tied to his lawyer’s alleged
malpractice in not refining the language of the plea agreement
and not reviewing the closing agreements to ensure they correctly
reflected Genis’s expectations. He is expressly alleging, not
disclaiming, that the substandard quality of Schainbaum’s
representation resulted in a harsher sentence. This is exactly
what the Wiley Court determined cannot be countenanced absent
proof of actual innocence. (Wiley, supra, 19 Cal.4th at
pp. 542-543.)
In closing, we note that even if Schainbaum was, in fact,
negligent in not catching and then preventing the inclusion of
civil fraud penalties in the disposition, his alleged negligence is
exactly the kind of mistake correctable in post-conviction
proceedings. Indeed, Genis had such a proceeding where he was
offered the opportunity to withdraw the plea, abandon the
challenged agreement, and proceed to trial. He declined to do so.
We find the trial court properly sustained the demurrer
without leave to amend because Genis failed to plead actual
innocence, a necessary element of his cause of action for legal
malpractice arising out of a criminal proceeding.
16
DISPOSITION
The judgment is affirmed. Costs are awarded to
respondents.
CERTIFIED FOR PUBLICATION
STRATTON, J.
We concur:
GRIMES, Acting P. J.
OHTA, J.*
* Judge of the Los Angeles Superior Court, assigned by the
Chief Justice pursuant to article VI, section 6 of the California
Constitution.
17