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8 SUPERIOR COURT OF THE STATE OF CALIFORNIA
9 COUNTY OF SANTA CRUZ
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JEFFREY SCHARF, an individual, and Case No. 20CV01388
11 SHERRIL SMITH-SCHARF, an individual,
[PROPOSED] ORDER DEFENDANTS’
12 Plaintiffs, MOTION TO DETERMINE
PREVAILING PARTY AND TO FIX
13 vs. AMOUNT OF ATTORNEY’S FEES
14 SCHARF INVESTMENTS, LLC, a limited
liability company; and BRIAN KRAWEZ, an
15 individual,
16 Defendants.
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ORDER
CASE NO. 20CV01388
1 The motion to determine prevailing party and fix amount of attorney’s fees (“Motion”) of
2 defendants Scharf Investments, LLC and Brian Krawez (“Defendants”) came on for hearing before
3 this Court on March 8, 2022. Plaintiffs Jeffrey Scharf and Sherril Smith-Scharf (“Plaintiffs”)
4 appeared at the hearing through their counsel Andrew D. Lanphere of Pillsbury Winthrop Shaw
5 Pittman, LLP, and Defendants appeared at the hearing through their counsel David Y. Chun of the
6 Law Offices of David Y. Chun and Jennifer Baldocchi of Paul Hastings LLP. The Court, having
7 reviewed the papers filed in support of and in opposition to the Motion, and having heard the
8 argument of counsel, finds, adjudges, and orders as follows:
9 The motion is denied.
10 The threshold issue for the Court’s determination on this motion is whether
Defendants are the prevailing parties in this action.
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Plaintiffs’ initial complaint asserted causes of action for breach of three Promissory
12 Notes and Pledge Agreements. Plaintiffs alleged that Defendants were in default and the
Notes were immediately due, because the Notes provided that a failure by Defendants to
13 perform any agreement in the MIPA or Operating Agreement constituted a default; and
further provided for acceleration of the Notes upon a change in control of Scharf
14 Investments. Plaintiffs alleged that default events as specified in the MIPA and TOA had
occurred, and that there had been a change in control of the company. Shortly after Plaintiffs
15 filed their complaint Defendants paid Plaintiffs the sum of $18 Million. There does not
appear to be any dispute that this constituted the full amount of the debt Plaintiffs claim was
16 then due. While Plaintiffs claim that they disputed that the Notes were actually due, but
nevertheless made the payment based on current interest rates and to avoid paying $600,000
17 in interest, a payment of this magnitude in such close proximity to the filing of the complaint
can be reasonably viewed as an implicit admission of liability.
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Following Defendants’ payment Plaintiffs filed a First Amended Complaint (FAC)
19 which revised the breach of contract claims to allege that the payment did not compensate
Plaintiffs for the costs of collection and attorney’s fees, to which they were entitled under the
20 Notes [“On any Event of Default, Payee shall be entitled to recover from Payor all reasonable
costs of collection, and, should suit be brought on this Note and judgment be obtained in
21 favor of Payee, Payee shall be entitled to reasonable attorneys' fees, which, on accrual, shall
bear interest at the same rate as the principal”]. The FAC also added tort causes of action for
22 concealment of a change of control and other events of default; conversion of certain
Exchange Interests and Rights (EIRs); breach of fiduciary duty by concealing events of
23 default and the transfer of certain EIRs; and a declaratory relief cause of action to determine
the parties’ respective rights to the EIRs and for an accounting as to the EIRs.
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Defendants argue that the causes of action asserted in the FAC were “frivolous”, and
25 that Defendants must therefore be declared the prevailing parties and Plaintiffs must suffer
the consequences of unnecessarily continuing the litigation by paying Defendants’ attorney’s
26 fees on the non-contract claims. However, Defendants’ payment of the underlying debt did
not compensate Plaintiffs for any damages Plaintiffs may have incurred as a result of the
27 delay in discovering that the alleged change in control and other events of default, such as
deprivation of voting rights attached to the EIRs. The payment of the underlying debt also
28 failed to compensate Plaintiffs for the costs of collection and attorney’s fees as provided in
the Notes. While Plaintiffs eventually elected to dismiss these claims, the conclusion that
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ORDER
CASE NO. 20CV01388
1 Defendants’ payment of $18 Million was an implicit admission of liability leads to the
further conclusion that these claims, while likely far smaller than the initial claims, were not
2 necessarily frivolous, as they are based on the same core facts alleged in the initial complaint.
3 Plaintiffs obtained their litigation objectives by obtaining the bulk of the relief they
sought. The Court therefore finds that Defendants are not the prevailing parties in this action,
4 and denies Defendants’ motion on this basis.
5 IT IS SO ORDERED
6 Dated: ________, 2022
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Timothy Volkmann
8 Judge of the Superior Court
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Approved as to form:
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11 __________________________
12 Counsel for Defendants
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ORDER
CASE NO. 20CV01388
1 PROOF OF SERVICE
2 I, Maria M. Gonzalez, the undersigned, hereby declare as follows:
3 1. I am over the age of 18 years and am not a party to the within cause. I am employed
4 by Pillsbury Winthrop Shaw Pittman LLP in the County of San Francisco, State of California.
5 2. My email and business address are maria.gonzlaez@pillsburylaw.com; Four
6 Embarcadero Center, 22nd Floor, San Francisco, CA 94111-5998.
7 3. My mailing address is P. O. Box 2824, San Francisco, CA 94111-5998.
8 4. On March 23, 2022, I served a true copy of the attached document(s) titled exactly:
9 • [PROPOSED] ORDER DEFENDANTS’ MOTION TO DETERMINE PREVAILING
PARTY AND TO FIX AMOUNT OF ATTORNEY’S FEES
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☒ (EMAIL TRANSMISSION) by electronic mail to the persons at the email addresses listed
11 below.
12 ☒ (U.S. MAIL) by causing a true copy to be placed in a sealed envelope addressed as below
and deposited with postage fully prepaid for collection and mailing by the U.S. Postal Service
13 following ordinary business practices.
14 Jennifer Baldocchi, Esq. Attorneys for Defendant Scharf
Jessica E. Mendelson, Esq. Investments, LLC and Brian Krawez
15 PAUL HASTINGS LLP
515 South Flower Street
16 Twenty-Fifth Floor
Los Angeles, California 90071
17 Telephone: (213) 683-6000
Facsimile: (213) 627-0705
18 Email: jenniferbaldocchi@paulhastings.com
jessicamendelson@paulhastings.com
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David Y. Chun, Esq. Attorney for Defendants Scharf
20 LAW OFFICES OF DAVID Y. CHUN Investments, LLC and Brian Krawez
2005 De La Cruz Blvd., Ste. 245
21 Santa Clara, California 95050-3026
Telephone: (408) 995-0200
22 Facsimile: (408) 228-5033
Email: dchun@chunlaw.com
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I declare under penalty of perjury that the foregoing is true and correct. Executed on March
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23, 2022 from my residence at Pittsburg, California.
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27 Maria M. Gonzalez
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ORDER
CASE NO. 20CV01388
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1 2 3 4 5 6 7 8 SUPERIOR COURT OF THE STATE OF CALIFORNIA 9 COUNTY OF SANTA CRUZ 10 JEFFREY SCHARF, an individual, and Case No. 20CV01388 11 SHERRIL SMITH-SCHARF, an individual, [PROPOSED] ORDER DEFENDANTS’ 12 Plaintiffs, MOTION TO DETERMINE PREVAILING PARTY AND TO FIX 13 vs. AMOUNT OF ATTORNEY’S FEES 14 SCHARF INVESTMENTS, LLC, a limited liability company; and BRIAN KRAWEZ, an 15 individual, 16 Defendants. 17 18 19 20 21 22 23 24 25 26 27 28 ORDER CASE NO. 20CV01388 1 The motion to determine prevailing party and fix amount of attorney’s fees (“Motion”) of 2 defendants Scharf Investments, LLC and Brian Krawez (“Defendants”) came on for hearing before 3 this Court on March 8, 2022. Plaintiffs Jeffrey Scharf and Sherril Smith-Scharf (“Plaintiffs”) 4 appeared at the hearing through their counsel Andrew D. Lanphere of Pillsbury Winthrop Shaw 5 Pittman, LLP, and Defendants appeared at the hearing through their counsel David Y. Chun of the 6 Law Offices of David Y. Chun and Jennifer Baldocchi of Paul Hastings LLP. The Court, having 7 reviewed the papers filed in support of and in opposition to the Motion, and having heard the 8 argument of counsel, finds, adjudges, and orders as follows: 9 The motion is denied. 10 The threshold issue for the Court’s determination on this motion is whether Defendants are the prevailing parties in this action. 11 Plaintiffs’ initial complaint asserted causes of action for breach of three Promissory 12 Notes and Pledge Agreements. Plaintiffs alleged that Defendants were in default and the Notes were immediately due, because the Notes provided that a failure by Defendants to 13 perform any agreement in the MIPA or Operating Agreement constituted a default; and further provided for acceleration of the Notes upon a change in control of Scharf 14 Investments. Plaintiffs alleged that default events as specified in the MIPA and TOA had occurred, and that there had been a change in control of the company. Shortly after Plaintiffs 15 filed their complaint Defendants paid Plaintiffs the sum of $18 Million. There does not appear to be any dispute that this constituted the full amount of the debt Plaintiffs claim was 16 then due. While Plaintiffs claim that they disputed that the Notes were actually due, but nevertheless made the payment based on current interest rates and to avoid paying $600,000 17 in interest, a payment of this magnitude in such close proximity to the filing of the complaint can be reasonably viewed as an implicit admission of liability. 18 Following Defendants’ payment Plaintiffs filed a First Amended Complaint (FAC) 19 which revised the breach of contract claims to allege that the payment did not compensate Plaintiffs for the costs of collection and attorney’s fees, to which they were entitled under the 20 Notes [“On any Event of Default, Payee shall be entitled to recover from Payor all reasonable costs of collection, and, should suit be brought on this Note and judgment be obtained in 21 favor of Payee, Payee shall be entitled to reasonable attorneys' fees, which, on accrual, shall bear interest at the same rate as the principal”]. The FAC also added tort causes of action for 22 concealment of a change of control and other events of default; conversion of certain Exchange Interests and Rights (EIRs); breach of fiduciary duty by concealing events of 23 default and the transfer of certain EIRs; and a declaratory relief cause of action to determine the parties’ respective rights to the EIRs and for an accounting as to the EIRs. 24 Defendants argue that the causes of action asserted in the FAC were “frivolous”, and 25 that Defendants must therefore be declared the prevailing parties and Plaintiffs must suffer the consequences of unnecessarily continuing the litigation by paying Defendants’ attorney’s 26 fees on the non-contract claims. However, Defendants’ payment of the underlying debt did not compensate Plaintiffs for any damages Plaintiffs may have incurred as a result of the 27 delay in discovering that the alleged change in control and other events of default, such as deprivation of voting rights attached to the EIRs. The payment of the underlying debt also 28 failed to compensate Plaintiffs for the costs of collection and attorney’s fees as provided in the Notes. While Plaintiffs eventually elected to dismiss these claims, the conclusion that 1 ORDER CASE NO. 20CV01388 1 Defendants’ payment of $18 Million was an implicit admission of liability leads to the further conclusion that these claims, while likely far smaller than the initial claims, were not 2 necessarily frivolous, as they are based on the same core facts alleged in the initial complaint. 3 Plaintiffs obtained their litigation objectives by obtaining the bulk of the relief they sought. The Court therefore finds that Defendants are not the prevailing parties in this action, 4 and denies Defendants’ motion on this basis. 5 IT IS SO ORDERED 6 Dated: ________, 2022 7 Timothy Volkmann 8 Judge of the Superior Court 9 Approved as to form: 10 11 __________________________ 12 Counsel for Defendants 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2 ORDER CASE NO. 20CV01388 1 PROOF OF SERVICE 2 I, Maria M. Gonzalez, the undersigned, hereby declare as follows: 3 1. I am over the age of 18 years and am not a party to the within cause. I am employed 4 by Pillsbury Winthrop Shaw Pittman LLP in the County of San Francisco, State of California. 5 2. My email and business address are maria.gonzlaez@pillsburylaw.com; Four 6 Embarcadero Center, 22nd Floor, San Francisco, CA 94111-5998. 7 3. My mailing address is P. O. Box 2824, San Francisco, CA 94111-5998. 8 4. On March 23, 2022, I served a true copy of the attached document(s) titled exactly: 9 • [PROPOSED] ORDER DEFENDANTS’ MOTION TO DETERMINE PREVAILING PARTY AND TO FIX AMOUNT OF ATTORNEY’S FEES 10 ☒ (EMAIL TRANSMISSION) by electronic mail to the persons at the email addresses listed 11 below. 12 ☒ (U.S. MAIL) by causing a true copy to be placed in a sealed envelope addressed as below and deposited with postage fully prepaid for collection and mailing by the U.S. Postal Service 13 following ordinary business practices. 14 Jennifer Baldocchi, Esq. Attorneys for Defendant Scharf Jessica E. Mendelson, Esq. Investments, LLC and Brian Krawez 15 PAUL HASTINGS LLP 515 South Flower Street 16 Twenty-Fifth Floor Los Angeles, California 90071 17 Telephone: (213) 683-6000 Facsimile: (213) 627-0705 18 Email: jenniferbaldocchi@paulhastings.com jessicamendelson@paulhastings.com 19 David Y. Chun, Esq. Attorney for Defendants Scharf 20 LAW OFFICES OF DAVID Y. CHUN Investments, LLC and Brian Krawez 2005 De La Cruz Blvd., Ste. 245 21 Santa Clara, California 95050-3026 Telephone: (408) 995-0200 22 Facsimile: (408) 228-5033 Email: dchun@chunlaw.com 23 I declare under penalty of perjury that the foregoing is true and correct. Executed on March 24 23, 2022 from my residence at Pittsburg, California. 25 26 27 Maria M. Gonzalez 28 3 ORDER CASE NO. 20CV01388