People v. Investco Mgmt. & Dev. LLC

22 Cal.App.5th 443

231 Cal.Rptr.3d 595

The PEOPLE, Plaintiff and Appellant,

v.INVESTCO MANAGEMENT & DEVELOPMENT LLC et al., Defendants and Appellants.

A143307

A143406

Court of Appeal, First District, Division 4, California.

Filed April 18, 2018

Holman & Martin, A Russell Martin, Mary Ann Smith, Deputy Commissioner, Douglas M. Gooding, Assistant Chief Counsel, Edward Kelly Shinnick, Senior Counsel, Danielle A. Stoumbor, for Appellant

Hornstein Law, Val D. Hornstein, San Rafael, Matthew R. Harrison, Timothy F. Perry, for Respondents

REARDON, J.

I. INTRODUCTION

These consolidated appeals challenge the award of attorney fees to respondents Kim Agasaveeran and Jeffrey Bryant (respondents) under Code of Civil Procedure section 1021.5 ( section 1021.5 ). Respondents specially appeared in an already-settled securities fraud action brought by the Commissioner of the Department of Business Oversight (DBO) against real estate investment company Investco Management & Development LLC (Investco M&D) and its promoters, Christopher P. Epsha, Steven G. Thompson, Barry D. LeBendig, and Douglas R. Hanson (the promoters). Respondents—victims of the securities fraud—successfully opposed a motion that would have stayed all individual actions by them and other defrauded investors against these defendants. Respondents also raised several issues concerning the fairness of the settlement, resulting in substantive changes to the stipulated interlocutory judgment and special master order in the DBO action.

We conclude the trial court did not abuse its discretion in finding that respondents: were successful parties against the DBO, Investco M&D and the promoters; enforced an important right affecting the public and a large group of securities fraud victims; and provided necessary, non-duplicative, and significant benefits to this group of investors, while incurring litigation expenses that were out of proportion to their personal interests. Accordingly, we affirm.

II. FACTUAL AND PROCEDURAL BACKGROUND

Investco M&D and the promoters offered and sold memberships in numerous Investco AV limited liability corporations (Investco AV LLCs) to the public through trade shows and fairs throughout California. According to the DBO, these membership interests constituted "securities" within the meaning of the Corporations Code but were sold without qualification or exemption from qualification by the Department of Corporations. Investco M&D and the promoters represented to prospective investors that the investment funds would be used to purchase specific real property in rural Los Angeles County at a favorable price. However, Investco M&D and the promoters failed to disclose that for each of the Investco AV LLCs, there was a corresponding Landco LLC that had purchased the same property only weeks or months before for a substantially lower price and sold the properties to each Investco AV LLC, resulting in undisclosed profits to Investco M&D and the promoters. This scheme reached 443 investors and raised approximately $22,725,000. In February 2009, the DBO issued a desist and refrain order against Investco M&D, Epsha and Thompson, directing them to immediately refrain from offering or selling securities and from making any material misrepresentations or omissions about these securities.

A. The DBO Action

In January 2011, the DBO filed a civil action against Investco M&D, the promoters, and several Investco AV LLCs for violations of the Corporate Securities Law of 1968 (CSL) and the February 2009 desist and refrain order. The DBO sought to enjoin these defendants from any further selling of unregistered limited liability membership interests in numerous Investco AV LLCs, restitution for the individual investors who were harmed, disgorgement of profits, and civil penalties. In June 2011, the DBO obtained a preliminary injunction that prevented Investco M&D, the promoters, and named Investco AV LLCs from selling, transferring, or otherwise disposing of the real property owned by the LLCs without court approval and from using the LLC bank accounts for anything other than property management and development.

In May 2012, the DBO action settled. Under the confidential settlement agreement, Investco M&D, the promoters, and the named Investco AV LLCs agreed to a permanent injunction enjoining them from: offering to sell or selling any security of any kind, including interests in the LLCs, unless such securities are qualified or exempt; offering or selling any security by means of written or oral communications that contain untrue statements of material fact or omit to state material facts; and violating the February 2009 desist and refrain order. In exchange, the DBO released these defendants from all claims that were or could have been brought by the DBO. On May 14, 2012, the trial court (Hon. Harold Kahn) entered the stipulated interlocutory judgment.

In January 2013, the trial court (Hon. Marla J. Miller) appointed James H. Donell as special master to monitor and approve the sale of the real properties held by the LLCs. Under the appointment order, any development plan or sale of property had to be approved by the special master based on his good faith belief that the sale or development plan was in the best interests of the investors of the Investco AV LLCs. The special master's duties did not involve the day-to-day management or development of any Investco AV LLC property or day-to-day management of Investco M&D.

In March 2013, the DBO sent notices of the settlement to approximately 443 investors in the Investco AV LLCs, including respondents. In August 2013, respondents each filed civil actions against Investco M&D, the promoters, the Investco AV LLCs, and various entity and individual defendants, asserting causes of action for the unlawful offer and sale of unqualified non-exempt securities, material misrepresentations and omissions in the offer and sale of securities, fraud and deceit, and various torts including negligence, conversion, and breach of fiduciary duty.¹

In December 2013, Investco M&D, the promoters, and several Investco AV LLCs (the moving defendants) moved to amend the interlocutory judgment to stay all actions against them arising out of the subject matter of the settlement agreement pending completion of their obligations under the settlement agreement. The moving defendants argued that if respondents obtained the relief they sought in their individual actions, the Investco AV20 and AV21 LLCs would almost certainly be forced to sell their real estate holdings at reduced prices to satisfy the judgments, which would interfere with the terms of the settlement, give respondents far more than their pro rata share of the assets owned by the LLCs in which they invested, and create a shortfall for the remaining Investco AV20 and AV21 LLC investors.

The DBO filed a written joinder to the moving defendants' motion, "adopt[ing] the request and memorandum of points and authorities and supporting documents filed therewith." Additionally, the DBO argued that "[i]f the two individual investors who have recently filed their own separate civil actions ... are allowed to proceed with their own actions before the Special Master has completed his oversight and review of real property sales and distribution of proceeds, these particular investors advance their own interests at the expense of all investors." The DBO stated that "[i]n the interests of promoting the interests of each and all investors equally, and without favoring one investor over another, the Commissioner joins in the Defendants' Motion to Modify the Interlocutory Judgment to enjoin investors, ... and all other persons or entities from seeking from defendants relief of any kind, in law or in equity, creating or enforcing a lien upon any real property, or the doing of any act or thing whatsoever to interfere with the oversight, control, or management of the special master during the course of his appointment in this action and until the filing of Final Judgment."

Respondents filed a "special appearance" as "interested parties" in opposition to the motion to modify. They argued that they were involuntarily bound by the settlement agreement and were denied due process because they received no notice of the settlement nor any opportunity to be heard, object, or opt out. They further argued that the settlement agreement was unduly favorable to Investco M&D and the promoters because it permitted them to retain the fruits of their fraud and allowed them to remain in control of the underlying properties and investment vehicles, subject to limited oversight. Respondents further contended the settlement agreement was unfairly punitive against them because it limited their income, restricted their damages, modified their private contractual relations, forced them to be involuntary partners with the promoters, and replaced their right to legal recourse with a revocable, unsecured personal "guarantee" of 70 percent return on their principal investment. Respondents further argued that a forced liquidation of the underlying properties would not necessarily result because the promoters were personally liable for respondents' damages, and respondents were also seeking rescission, which would revest title in the underlying properties back to the moving defendants.

The trial court (Hon. Ernest H. Goldsmith) held three lengthy hearings on the motion, which we summarize below.

1. The March 7, 2014 Hearing

During the first hearing, the trial court immediately expressed concerns about several aspects of the settlement. The court stated that the LLCs' assets "can be dissipated" while the investor actions were stayed, leaving them with "thin air to go against." Respondents' counsel, Val Hornstein, added that his clients would be left with "an unsecured promise by crooks" to try to make a 70 percent return to his clients while they maintained control of the LLCs' properties. The trial court responded, "I'm very queazy [sic] about...