Is Advice of Counsel a Defense to a California UD Malicious Prosecution Action?

In the recent California appellate decision in Ceron v. Liu, Plaintiffs are former tenants of defendant Sally Liu.

Plaintiffs and Liu had been adversaries in a series of lawsuits related to plaintiffs’ tenancies, culminating in a successful malicious prosecution action by plaintiffs against Liu based on unlawful detainer actions brought against them by Liu.

Liu challenged the judgment in favor of plaintiffs on their claim for malicious prosecution on various grounds, including that she had probable cause to file the unlawful detainer actions based on the advice of counsel.

The appellate court found that Liu asserted a valid advice of counsel defense, vacated the judgment, and remanded the matter.

Liu owned various rental units in San Francisco and Emeryville.  Plaintiffs were tenants in two of her San Francisco units.

In 2014, plaintiffs filed a complaint for damages against Liu, alleging causes of action for intentional and negligent breaches of the implied warranty of habitability, intentional and negligent violations of various Civil Code and Health and Safety Code provisions, intentional violation of Business and Professions Code section 17200, negligence, nuisance, breach of contract, intentional infliction of emotional distress, and breach of the San Francisco Residential Rent Stabilization and Arbitration Ordinance (rent ordinance).

In 2015, Liu filed two unlawful detainer actions against plaintiffs premised upon nonpayment of rent.

After discussions with the court, plaintiffs filed an unopposed motion to consolidate Liu’s pending unlawful detainer actions with plaintiffs’ case.

Liu then dismissed her two unlawful detainer actions without prejudice.

In September 2015, a jury found Liu liable as to certain claims and awarded damages.

In November 2015, plaintiffs filed a new complaint against Liu, alleging causes of action for breach of the rent ordinance, violation of Business and Professions Code section 17200, negligence, intentional infliction of emotional distress, and malicious prosecution.

The parties waived their right to a jury trial, and the court subsequently limited plaintiffs’ complaint to the malicious prosecution claim arising from the two unlawful detainer lawsuits.

Following a bench trial, the court found plaintiffs proved all elements of a malicious prosecution claim.

Of note, the court explained, no reasonable person in  Liu’s circumstances would have believed that there were reasonable grounds to bring and maintain the two UD actions.

Prior to filing the two UD actions, Liu knew – or at the very least made no effort to determine if – all four plaintiffs had sent checks for the full amount of the rent to her by certified mail every month that the two UD actions claimed that plaintiffs had not paid rent.

The court emphasized that case law, the San Francisco Rent Ordinance and common sense all establish that the filing and maintenance of the two UD actions were wholly lacking in objective probable cause.

The court concluded the plaintiffs experienced inconvenience, anxiety and emotional distress as a result of the UD actions.

The court also expressly rejected all of Liu’s affirmative defenses, including that Liu failed to demonstrate she relied on legal advice in “good faith.”

The court entered judgment, and Liu appealed.

Liu raised various arguments challenging the malicious prosecution judgment.

Because the appellate court concluded Liu asserted a valid advice of counsel defense, it did not reach her remaining arguments.

Plaintiffs’ claim for malicious prosecution requires proving Liu initiated or continued the unlawful detainer actions against plaintiffs with malice and without probable cause; the prior action ended in plaintiffs’ favor; and plaintiffs suffered damages as a result.

There can be no viable claim for malicious prosecution if the prior lawsuit was “legally tenable”—that is, if the plaintiff in the prior case (who becomes the defendant sued for malicious prosecution) had “probable cause” to bring the prior lawsuit.

Probable cause is objectively assessed by asking whether any reasonable attorney would agree that the action is totally and completely without merit.

However, was relevant in this case, a defendant may establish probable cause by proving they have in good faith consulted a lawyer, have stated all the facts to him, have been advised by the lawyer that they have a good cause of action and have honestly acted upon the advice of the lawyer.

Simply put, a truthful disclosure of all relevant facts to counsel coupled with good-faith reliance on the advice of counsel is a complete bar to a malicious prosecution claim.

At the malicious prosecution trial, both Liu and attorney Paul McCarthy testified that Liu retained McCarthy to provide legal advice and assistance in drafting legal documents in connection with the unlawful detainer actions.

During that testimony, McCarthy was asked “what information did you have from Ms. Liu that was pertinent to your advice?”

McCarthy stated Liu informed him of the following facts: (1) the tenants had sent rent checks to Liu’s home address via restricted delivery, signature required; (2) at the time the checks were to be delivered, Liu was at work and unable to sign for the checks; (3) Liu received notices of attempted delivery from the post office, and understood she had to go to the postal substation to pick up the mail; (4) Liu was unable to pick up the checks from the postal substation because, based on the substation’s hours, doing so would require her to take time off from work; (5) Liu believed the post office eventually sent the checks back to her tenants as undelivered; and (6) as a result, the tenants had not paid rent for approximately a year.

McCarthy also was aware that Liu previously had been receiving checks from her tenants by regular mail.

McCarthy stated he believed Liu’s statements regarding the checks because he was aware sending checks by restricted delivery was a common ploy tenants used to annoy a landlord that they didn’t like.

McCarthy also testified he was aware of Liu and plaintiffs’ history of disputes, including (1) plaintiffs wanted Liu to make improvements and were unhappy with her response, (2) the building was old and had leaks that needed repairs, (3) the parties had prior litigation that was resolved by a settlement, and (4) there was a pending lawsuit against Liu filed by plaintiffs.

McCarthy stated he had seen the parties’ settlement agreement and reviewed documents related to the pending lawsuit prior to preparing the unlawful detainer actions.

Based on this information, McCarthy testified he advised Liu that the rent had not been properly tendered and assisted Liu in drafting three- day notices and completing the unlawful detainer forms.

Specifically, McCarthy testified he told Liu that she had met the legal prerequisites for filing an unlawful detainer action, but recommended she simply sue for back rent in civil court without the hassle of an unlawful detainer action.

However, Liu informed him she preferred to file unlawful detainer actions because the plaintiffs had not paid rent in the past, and she wanted to get new tenants.

McCarthy testified he did not believe the three-day notices or the unlawful detainer actions were filed for any improper purpose because rent had not been paid for a year.

He did not believe there was any independent reason Liu wished to evict plaintiffs apart from nonpayment of rent.

The record indicated Liu provided McCarthy with the relevant facts, and McCarthy advised Liu she had a legal basis for filing the unlawful detainer actions.

McCarthy identified numerous facts relevant to the unlawful detainer actions that formed the basis of his opinion.

While the trial court took issue with why Liu acted how she did—e.g., her reasons for

not going to the post office “did not withstand . . . scrutiny”; her efforts to collect allegedly past-due rent after service of the three-day notices were “churlish”; her actions after service of the three-day notices showed she was “determined to find a way to proceed with . . . her planned eviction lawsuits”—it did not identify any omitted or erroneous information provided by Liu to McCarthy.

The record also reflected that Liu accurately understood McCarthy’s advice—i.e., she had the legal right to file the unlawful detainer actions—and Liu testified that she filed the actions based on McCarthy’s advice.

Liu also testified she would not have filed the unlawful detainer actions if McCarthy had advised her otherwise. The trial court’s statement of decision does not cite any evidence to the contrary.

A defendant must plead advice of counsel as an affirmative defense.

However, in one decision relied upon, the court stated in passing that an insurer “may defend itself against allegations of bad faith and malice in claims handling with evidence the insurer relied on the advice of competent counsel.”

But the court did not define the meaning of competent counsel, and no cases require a client to assess their attorney’s competence.

The trial court then proceeded to identify two bases for concluding McCarthy was “incompetent” such that Liu’s reliance on his advice was not in good faith: (1) McCarthy’s lack of experience with unlawful detainer actions; and (2) McCarthy’s failure to perform sufficient legal research before advising Liu.

The court clearly erred as any deficiencies in McCarthy’s abilities or counsel cannot be attributed to Liu for purposes of defeating an advice of counsel defense.

McCarthy is an attorney in good standing with the State Bar of California, and the court failed to explain why that is insufficient. “Competent” counsel has been interpreted to simply mean an independent attorney “ ‘engaged in the general practice of law,’ ” and there is nothing in this case that merits going outside of this definition.

Further, McCarthy testified he saw nothing unusual about Liu retaining him for an unlawful detainer matter, and there is no indication in the record that McCarthy ever indicated to Liu that he could not competently advise her.

The trial court also suggested Liu could not rely on McCarthy’s counsel in good faith because McCarthy performed insufficient legal research before advising Liu.

The appellate court is unaware of any California authority requiring clients to assess the depth or quality of their attorney’s research, doubtless because the duty of competence is one imposed on lawyers, and clients may rely on their attorneys to comply with this duty and inform them if they are unable to competently perform any legal tasks.

It is the lawyer’s obligation—not the client’s—to undertake reasonable research in an effort to ascertain relevant legal principles and to make an informed decision as to a course of conduct based upon an intelligent assessment of the problem.

A court cannot shift this burden to the client—and it may not impute to a client his or her attorney’s inadequate legal analysis so as to void good-faith reliance on counsel’s advice.

Rather than shifting an attorney’s burden onto his client, the appellate court employed a commonsense interpretation of “good-faith” reliance on the advice of counsel.

Black’s Law Dictionary defines “good-faith reliance” as honest reliance that is free of pretext or disingenuousness.”

The phrase “good faith” in common usage has a well-defined and generally understood meaning, being ordinarily used to describe that state of mind denoting honesty of purpose, freedom from intention to defraud, and, generally speaking, means being faithful to one’s duty or obligation.

Here, nothing in the record indicates Liu was aware McCarthy’s advice was erroneous, or that she sought such advice for any purpose apart from determining whether she was legally entitled to file an unlawful detainer action.

Nor did the record reflect any malfeasance behind Liu’s decision to retain McCarthy.

To the contrary, McCarthy testified he believed the only motivation behind Liu’s decision to file the unlawful detainer actions was the nonpayment of rent.

The record thus indicates Liu relied on McCarthy’s advice in good faith, and the malicious prosecution claim against her should have been dismissed based on her advice of counsel defense.

LESSONS:

1.         There can be no viable claim for malicious prosecution if the prior lawsuit was “legally tenable”—that is, if the plaintiff in the prior case (who becomes the defendant sued for malicious prosecution) had “probable cause” to bring the prior lawsuit.

2.         Probable cause is objectively assessed by asking whether any reasonable attorney would agree that the action is totally and completely without merit.

3.         A defendant may establish probable cause by proving they have in good faith consulted a lawyer, have stated all the facts to him, have been advised by the lawyer that they have a good cause of action and have honestly acted upon the advice of the lawyer.

4.         Simply put, a truthful disclosure of all relevant facts to counsel coupled with good-faith reliance on the advice of counsel is a complete bar to a malicious prosecution claim.