Welborne v. Sfe Inv. Counsel, Inc.

MARTHA L. WELBORNE, Plaintiff and Appellant, v. SFE INVESTMENT COUNSEL, INC., Defendant and Respondent.

B281957

COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION TWO

April 25, 2018

(Super. Ct. No. BC552464)

ORDER MODIFYING OPINION[NO CHANGE IN JUDGMENT]

THE COURT:

It is ordered that the opinion filed herein on April 25, 2018, be modified as follows:

On page 13, last paragraph after Disposition, second sentence beginning, "Plaintiff shall recover her costs on appeal" is deleted and the following sentence is inserted in its place:

Respondent shall recover their costs on appeal.

There is no change in judgment.

/s/_________

ASHMANN-GERST, Acting P.J.

/s/_________

CHAVEZ, J.

/s/_________

GOODMAN, J.*

^* Retired Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

(Los Angeles County Super. Ct. No. BC552464)

APPEAL from a judgment of the Superior Court of Los Angeles County. John P. Doyle, Judge. Affirmed.

Pick & Boydston, Brian D. Boydston for Plaintiff and Appellant.

Gartenberg Gelfand Hayton, Edward Gartenberg, Milena Dolukhanyan for Defendant and Respondent.

____________________ Plaintiff Martha L. Welborne (Welborne) appeals the February 21, 2017 judgment of dismissal entered after the trial court sustained respondent SFE Investment Counsel, Inc.'s (SFEIC) demurrer to Welborne's second amended complaint without leave to amend. Welborne contends she sufficiently pleaded that SFEIC had aided and abetted a breach of fiduciary duty by Stern Fisher Edwards, Inc. We disagree, and affirm the judgment.

FACTUAL AND PROCEDURAL HISTORY

1. Factual allegations

On review of an order sustaining a demurrer without leave to amend, we take as true the well-pleaded factual allegations of the complaint. (Construction Protective Services, Inc. v. TIG Specialty Ins. Co. (2002) 29 Cal.4th 189, 193.) In her second amended complaint (SAC), Welborne alleged the following.¹ In or about 2004, defendant Ryman-Carroll Foundation (Ryman) obtained a line of credit of approximately $550,000, collateralized by its assets. Ryman then used a portion of this money to provide loans totaling $415,000 to defendant Moira Byrne Foster Foundation (MBFF). Defendant Mark Foster (Foster) was an officer and director of Ryman and a director and president of MBFF at the time of this loan. Ryman later paid off its line of credit by drawing against a margin account in its name. That margin account was transferred to Stern Fisher Edwards, Inc. (Stern Fisher) in 2006.

Stern Fisher and SFEIC served as "investment counsel and broker/dealer" for Welborne and others. In 2012 Stern Fisher and SFEICbecame aware that Foster had misappropriated funds from certain clients, including two limited liability companies of which he was manager, and of his financial distress, including multiple judgments against him. They were also aware that the Financial Industry Regulating Authority (FINRA) was conducting an examination of Stern Fisher and of Foster. SFEIC arranged for Foster to be terminated as the manager of those limited liability companies, obtaining approval from their partners for it to become manager.

In mid-2012, Stern Fisher and Ryman terminated their business arrangements with Foster. Stern Fisher continued to maintain Welborne's accounts, and "[d]uring the entire period that [Welborne's] accounts were under such supervision . . . SFEIC was involved in investigations relating to thefts by Foster of money from Foster's clients, including [Ryman], which also maintained investment accounts" with SFEIC and Stern Fisher.

Welborne did not know Foster had stolen money from the limited liability companies as she was not a member. SFEIC did not tell her Foster had done so. Welborne remained a Stern Fisher client for another year, until mid-2013.

In June 2013, Ryman demanded that Foster pay it $490,108 to satisfy the then balance on Ryman's promissory note and to enable Ryman to pay off its margin account. Ryman and others threatened to sue Foster if he did not promptly make the payment.²

"[I]n July of 2013, Foster was flat broke, and everyone knew it." The defendants, including SFEIC, knew or could have discovered, that Foster hadno assets with which to pay the $490,108 he agreed to pay to settle the dispute with Ryman and others.

Foster "found" the $490,108 to repay Ryman in Welborne's accounts at Stern Fisher. Still "acting as [Welborne's] investment advisor,³ Foster directed Stern Fisher to transfer all the funds in both [of her] accounts to two other accounts" at another brokerage firm; from there he arranged for transfer of Welborne's funds to a law firm representing Ryman to meet Foster's obligation to settle his dispute with Ryman.⁴ Welborne had no knowledge of any of these issues and did not authorize the transfers.

Stern Fisher and SFEIC settled other claims resulting from Foster's misconduct totaling $1.6 million, but they never told Welborne about Fisher's thefts. SFEIC never instituted "adequate safety and compliance measures to ensure the integrity" of Stern Fisher's conduct.

2. Proceedings related to the SAC

Welborne filed her original complaint on July 22, 2014. SFEIC's demurrer to it was sustained with leave to amend. Shortly thereafter, the action was stayed while Welborne arbitrated her claims against Stern Fisher and one of its employees. Proceedings in the trial court resumed on May 25, 2016, upon conclusion of the arbitration.⁵ On September 6, 2016, Welbornefiled a first amended complaint (FAC). In the FAC, she asserted two causes of action against SFEIC, for "Aiding and Abetting Conversion" and "Aiding and Abetting Breach of Fiduciary Duty." The trial court sustained SFEIC's demurrers to these claims, again with leave to amend. On November 21, 2016, Welborne filed her SAC; its third and fourth causes of action set out allegations against SFEIC. The third cause of action now alleged that SFEIC (and Foster) had breached a fiduciary duty owed to her. The fourth cause of action alleged "Aiding and Abetting Breach of Fiduciary Duty" against SFEIC and Ryman.

The SAC contained allegations of knowledge by SFEIC and others of "management problems with investment entities organized and overseen by Foster," and that Foster and SFEIC had entered into an "Administrative Services Agreement" on March 21, 2012, which SFEIC terminated by letter in early May 2012, as of May 31, 2012. Welborne also alleged that by the end of May 2012, Foster was told his "registration as a broker with Stern Fisher" would terminate, and he must vacate his office at Stern Fisher. FINRA wrote to Foster, with copy to Stern Fisher on May 16, 2012 about "an examination of Stern Fisher that had been ongoing with respect to various Foster investment entities." That investigation was alleged to have continued through the date of filing of the SAC.

In July 2012, SFEIC wrote to Foster to terminate agreements which they had entered into in 2009 concerning the limited liability companies. InSeptember 2012, Stern Fisher tendered a liability claim to its insurer, stating that Foster had '"engaged in dishonest and/or fraudulent acts in the misappropriation of client funds. . . ."' In December 2012, on behalf of SFEIC, Stern Fisher wrote to Foster to confirm that the amount of his indebtedness to SFEIC was $1,689,513. (This amount was later reduced to $1,347,627.) SFEIC also filed a civil action against Foster in which it made reference to Foster's inability to satisfy multiple monetary claims against him.

The Fourth Cause of Action for "Aiding and Abetting Breach of Fiduciary Duty" now alleged that SFEIC, Stern Fisher and one of its employees had breached fiduciary duties they owed to Welborne, and, if they did not owe her such duties directly, then they may "be held liable for aiding and abetting another party's breach of its fiduciary duty."

Welborne now alleged that SFEIC and the other defendants had actual knowledge of the fiduciary duties Foster owed to her with respect to her accounts. They each knew or should have known that Foster was "violating his fiduciary duties" to Welborne by "moving her IRA [and other] accounts from Stern Fisher and SFEIC and then liquidating them to fund Foster's share of the [amount due to Ryman]. In acting and failing to act as alleged . . . , SFEIC [and the others] actively and affirmatively assisted in Foster's conversion of [Welborne's] IRA . . . and helped conceal it. . . . [I]n 2012, Stern Fisher knew that Foster had been stealing Foster and Stern Fisher['s] clients' money . . . , but failed to provide such material information to [Welborne] despite the fact that [she] remained a Stern Fisher client, that as [her] agent Stern Fisher owed [her] a fiduciary duty, and as Stern Fisher's agent, SFEIC owed [her] that same fiduciary duty."

"SFEIC substantially assisted and aided and abetted Stern Fisher's breach of its fiduciary duties to [Welborne] by failing to inform [her] thatStern Fisher was aware of Foster's thefts of other Stern Fisher clients' money . . . but was concealing that fact from [her] and failing to inform [her] of the same."

Finally, "SFEIC and [Ryman] substantially assisted and aided and abetted Foster's breaches of fiduciary duties for their own financial gain by (1) . . . pressuring Foster to make payment of funds they knew he did not legally possess, and by transferring [Welborne's [] IRA accounts out of the safekeeping of Stern Fisher and SFEIC, and (2) by omission in the form of failing to inform [Welborne] of Foster's other financial misdeeds, specifically of Foster's theft of client funds from [other investors.]"...