Connelly v. Hayashi CA4/3

Filed 7/24/13 Connelly v. Hayashi CA4/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication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.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION THREE

SCOTT CONNELLY,

Cross-complainant and Appellant, G046247

(Super. Ct. No. 30-2010-00371616)
v.
OPINION
JOE HAYASHI et al.,

Cross-defendants and Respondents.

Appeal from a judgment of the Superior Court of Orange County, Nancy
Wieben Stock, Judge. Reversed.
Krane & Smith, Samuel Krane and Ralph C. Loeb; Law Offices of Becky
Walker James, Becky Walker James and Kathryn Lohmeyer for Cross-complainant and
Appellant.
Klinedinst, Heather L. Rosing and David M. Majchrzak for Cross-
defendants and Respondents.
* * *
 Cross-complainant Scott Connelly alleges cross-defendant Joe Hayashi,
Connelly’s alleged attorney, committed fraud and breached fiduciary duties. Hayashi
was hired to draw up the paperwork creating a new business venture between Connelly
and various individuals. Hayashi allegedly deceived Connelly as to the identity of one of
the individuals involved in the business who was recently convicted of criminal fraud in
connection with other business dealings. Hayashi also allegedly misrepresented the
nature of one the agreements Connelly signed, resulting in the contribution of assets to
the new venture Connelly had not intended. Connelly did not read the agreement before
signing it, relying instead on Hayashi’s representations of what it contained. Hayashi
also allegedly fraudulently induced Connelly to refrain from timely serving a “reversion
notice” that would have unwound the whole transaction.
The court sustained demurrers to various causes of action sounding in fraud
and professional negligence. The allegedly fraudulently-induced agreement, which was
attached to the cross-complaint, stated that Hayashi did not represent Connelly, only the
newly formed entity. The court ruled Connelly was bound by that admission, and, as a
result, Connelly could not assert professional negligence claims. Nor could Connelly
establish justifiable reliance for the fraud claims due to his failure to read the agreement.
The court also found the fraud claims lacked specificity.
We reverse. Connelly’s allegations establish an implied attorney-client
relationship with Hayashi. Connelly is not bound by contrary “admissions” in the
agreement he signed. Normally facts in an attached exhibit trump contrary facts alleged
in a complaint. But that rule does not apply here because Connelly did not merely attach
the agreement, but did so claiming it was fraudulent. Further, Connelly’s failure to read
the agreement does not preclude justifiable reliance on a misrepresentation by a fiduciary.
Finally, we conclude Connelly adequately pleaded fraud, with one exception. For one of
his causes of action, he has not adequately pleaded damages, but as to that cause of action
we reverse the order denying leave to amend.

2
 1
FACTS

Connelly is a physician and leading expert in the field of human nutrition
and metabolism. He is the inventor of the MET-Rx high protein, low-fat vitamin and
mineral enriched drink. For more than a decade, Connelly has researched the
development of medical products from specific dairy bioactive whey protein fractions to
exploit their regenerative properties. In 2001, Connelly identified a specific dairy
bioactive fraction, “lactoferrin,” and contracted with a research group to produce it. After
receiving a suitable sample of the protein fraction, Connelly contracted with Brigham and
Women’s Hospital in Boston to perform standard rodent testing using lactoferrin. The
positive results from that study led Connelly to find a manufacturing partner to
commercialize lactoferrin.
That partner turned out to be cross-defendant Murray Gouldburn Co-
2
operative Co. (“Murray Gouldburn”), the largest processor of milk in Australia. Murray
Gouldburn perfected industrial methodologies to produce a dairy protein fraction
containing lactoferrin, called Whey Growth Factor Extract (“WGFE”). Connelly and
Murray Gouldburn formed a joint venture and sold WGFE on a small scale under the
brand “Progenex.”
A few years later, Connelly and Murray Gouldburn decided to seek
additional financing to expand the operation. During the search, Connelly met cross-
3
defendants Adam Stuart Zuckerman and Ryan Page. Zuckerman referred to himself as

1
The following facts taken from Connelly’s various cross-complaints are
assumed to be true for purposes of this appeal.
2
Murray Gouldburn is not a party to this appeal.
3
Zuckerman and Page are not parties to this appeal.

3
“Adam Stuart” to conceal his identity because Zuckerman had recently been convicted of
felony fraud in connection with a business operation.
Zuckerman and Page claimed they could raise the funding Connelly sought
through various entities they were affiliated with. After further discussions, Connelly,
Zuckerman, and Page agreed to set up a new company to further develop and
commercialize products being sold under the Progenex brand name. Zuckerman and
Page agreed to raise $5 million, and Connelly agreed to invest $1million to be used
exclusively for medical research and to transfer intellectual property rights associated
with Progenex to the joint venture.
Subsequently, Connelly, Zuckerman, and Page discussed the importance of
speaking to an attorney to form the proposed joint venture and prepare all agreements
related to the venture. To that end, Zuckerman and Page introduced Connelly to Joe
Hayashi, a partner at the law firm Fortis General Counsel, LLP (“Fortis”) as an attorney
who could handle the various legal matters they discussed. Over the next few months, on
several occasions Page, Zuckerman, and Connelly met with Hayashi to discuss
implementation of the deal. Connelly deemed these conversations to be confidential.
During these conversations, Hayashi expressly stated he was looking out for Connelly’s
interests. The parties discussed the assets Connelly would bring to the table together with
Connelly’s goals and purposes for participating in the deal. Zuckerman and Page were
present during these conversations.
Hayashi provided legal advice to Connelly. The legal advice Hayashi
provided to Connelly concerned such topics as Connelly’s rights in connection with the
deal; the formation, ownership, and governance of the new entity; the use and protection
of intellectual property and funds invested or to be invested by Connelly; and the rights
and obligations between and among Connelly, VenturePharma (a participating company
controlled by Zuckerman and Page), and Murray Gouldburn.

4
 Hayashi also agreed to perform legal services on Connelly’s behalf. For
example, Hayashi, at Connelly’s request, prepared an agreement (“Contribution
Agreement”), which documented, among other things, Connelly’s contribution of assets
and intellectual property to the new company. Connelly specifically directed Hayashi to
clarify in the Contribution Agreement that Connelly was not contributing his “BodyRx”
branded products and that Connelly was not responsible for raising money for the new
venture. Hayashi agreed to prepare the agreement consistent with Connelly’s wishes.
Also, Hayashi agreed, at Connelly’s request, to prepare the appropriate documentation
reflecting that Connelly’s $1 million investment would be used principally to fund certain
medical studies concerning Progenex (the parties refer to this as the “Investment
Agreement”).
As a result of these interactions, Connelly believed Hayashi was his
attorney.
When Hayashi completed a draft of the Contribution Agreement, he called
Connelly to inform him a draft was complete and that it was consistent with Connelly’s
direction and their various communications. Relying on these representations, Connelly
signed the Contribution Agreement and related agreement without reading them.
Hayashi did not inform Connelly additional terms had been added they had
not discussed. In particular, Hayashi did not inform Connelly he had added paragraph
3.9, which stated Connelly was “relying solely on [his] legal counsel and not on any
statements or representations of the Company’s legal counsel, [Fortis], for legal advice
with respect to this investment . . . .” Nor did Hayashi inform Connelly about paragraph
8.12, which stated, “Each party to this Agreement acknowledges that [Fortis], outside
general counsel to the Company, has in the past performed and is or may now or in the
future represent one or more Founders or their affiliates in matters unrelated to the
Contribution, including representation of such Founders or their affiliates in matters of a

5
 [4]
similar nature to the Contribution. The applicable rules of professional conduct require
that [Fortis] inform the parties hereunder of this representation and obtain their consent.
[Fortis] has served as outside general counsel to the Company and has negotiated the
terms of the Contribution solely on behalf of the Company. The Company and each
Founder hereby (a) acknowledge that they have had an opportunity to ask for and have
obtained information relevant to such representation, including disclosure of the
reasonably foreseeable adverse consequences of such representation; (b) acknowledge
that with respect to the Contribution, [Fortis] has represented solely the Company, and
not any Founder or any director, officer, member, manager or employee of the Company
or any Founder; and (c) gives its informed consent to [Fortis’s] representation of the
Company in the Contribution.” (Footnote added.)
Hayashi had not discussed conflicts with Connelly as set forth in paragraph
8.12. Hayashi never asked Connelly if he had independent counsel and knew he did not.
Further, contrary to Hayashi’s representations, Hayashi had not incorporated language
ensuring Connelly’s investment would be used principally for medical research. Finally,
Hayashi did not draft the Contribution Agreement to exclude Connelly’s “BodyRx”
products from the scope of Connelly’s contribution.
The Contribution Agreement set forth the various contributions of
VenturePharma LLC (a participating entity controlled by Zuckerman and Page),
Connelly, and Murray Gouldburn, and documented the equity each investor acquired in
Progenex Dairy Bioactive, Inc. (the new entity) as a result of their contributions.
Connelly and Murray Gouldburn agreed to transfer or irrevocably license certain
intellectual property rights associated with the Progenex product. VenturePharma
provided unspecified “past services.”

4
The “Founders” are defined as VenturePharma, Connelly, and Murray
Gouldburn.

6
 Throughout the time the Contribution Agreement was being discussed and
prepared, which was July through November of 2009, during various meetings and
conference calls Hayashi referred to Zuckerman as “Adam Stuart” in furtherance of
Zuckerman’s effort to conceal his identity. And despite knowing Zuckerman’s criminal
history, Hayashi never disclosed such facts to Connelly.
Pursuant to the Contribution Agreement, Progenex Dairy Bioactives was
obligated to raise $5 million within 90 days. In the event it did not, Connelly and Murray
Gouldburn had the right to opt out of the Contribution Agreement (the “reversion right”).
The reversion right had to be exercised in writing within 14 days after the 90-day funding
period had elapsed.
Progenex Dairy Bioactives did not raise the $5 million. Consequently,
Murray Gouldburn exercised its reversion right. Due to the reversion of various
intellectual property rights to Murray Gouldburn, this effectively put Progenex Dairy
Bioactives out of business.
Progenex Dairy Bioactives began negotiating with Murray Gouldburn in an
attempt to bring Murray Gouldburn back into the operation. In the meantime, Progenex
Dairy Bioactives, together with Zuckerman, Page, and Hayashi, assured Connelly he did
not have to tender his reversion notice while they were still negotiating with Murray
Gouldburn. While the negotiations were ongoing, Murray Gouldburn discovered “Adam
Stuart” was in fact Adam Stuart Zuckerman, a convicted felon. As a result, Murray
Gouldburn broke off the negotiations. At that point, which was well after the contractual
time period had expired, Connelly tendered his reversion notice. Despite previously
telling Connelly he need not tender his notice while negotiations with Murray Gouldburn
were ongoing, Hayashi and the other cross-defendants deemed Connelly’s reversion
notice late and ineffective.
Thereafter, Progenex Dairy Bioactives, VenturePharma, and a related entity
sued Connelly for breaches of various contractual and fiduciary duties. Connelly then

7
filed a cross-complaint naming, among others, Progenex Dairy Bioactives, Murray
Gouldburn, VenturePharma, Page, Zuckerman, Hayashi, and Fortis. This appeal
concerns only Connelly’s cross-complaint against Hayashi and Fortis.
Connelly’s initial cross-complaint alleged six causes of action against
Hayashi and Fortis: Fraud in the inducement regarding the Contribution Agreement,
Fraud in the inducement regarding the Investment Agreement, violation of Corporations
5
Code section 25504.1 (joint and several liability for fraud in the sale of securities)
violation of California Code of Regulations, title 10, section 260.504.2.2 (alleging fraud
in the preparation of documents in connection with the sale of securities), professional
negligence, and fraud regarding Connelly’s reversion notice. Connelly did not allege he
had an attorney-client relationship with Hayashi or Fortis in the original cross-complaint.
Connelly attached the Contribution Agreement as an exhibit to the cross-complaint, but
claimed it did not accurately reflect the scope of Hayashi and Fortis’s representation.
Hayashi and Fortis demurred, contending, among other things, Connelly
had not established the requisite duty to support the causes of action against Hayashi and
Fortis because Connelly did not allege an attorney-client relationship.
Rather than respond to the demurrer, Connelly filed a first amended cross-
complaint (FACC). This time Connelly did claim an attorney-client relationship, and he
detailed various communications he had with Hayashi and services Hayashi provided to
6
Connelly, as described above. Connelly alleged the same causes of action as in the
original cross-complaint.

5
All further statutory references are to the Corporations Code unless
otherwise indicated.
6
The second and third amended cross-complaints provide increasingly more
detail regarding Connelly’s interactions with Hayashi. The differences between the
cross-complaints, however, do not play a significant role in the outcome of this appeal.

8
 Connelly alleged, essentially, three theories of fraud. We quote extensively
from his allegations in the discussion section below. By way of summary, the first theory
is that Hayashi falsely represented he was looking out for Connelly’s best interests and
that the Contribution Agreement was consistent with Connelly’s directions. The second
theory was that Hayashi fraudulent misrepresented Zuckerman’s identity as “Adam
Stuart” and concealed Zuckerman’s identity and criminal history. The third theory was
that Hayashi falsely represented that Connelly did not need to tender his reversion notice
while Progenex Dairy Bioactives was negotiating with Murray Gouldburn. Connelly
claimed he suffered damages as a result, but did not specify the nature or amount of
damages. In connection with his professional negligence claim, which specified some of
the same acts, Connelly claimed as damages “the cost of defending the claims alleged
against him in this lawsuit and potentially other lawsuits, [and] the costs of prosecuting
some or all of the claims alleged by Connelly in this action . . . .”
Hayashi and Fortis demurred, and the court sustained the demurrer as to all
causes of action against Hayashi and Fortis with leave to amend. The court ruled the
Contribution Agreement, which was attached to the cross-complaint, prevented Connelly
from establishing an implied attorney-client relationship: “Inasmuch as the Causes of
Action are based on an implied attorney client relationship, the Causes of Action fail as
the facts pled do not support the finding of such an implied relationship. The alleged
confidential communications cannot support the finding of an implied relationship
(Zenith [Ins. Co. v. O’Connor (2007) 148 Cal.App.4th 998 (Zenith)]). The potential for
conflict of interest seems to preclude the finding of an implied relationship [(ibid.)]. The
prior admissions by Cross-Complainant preclude a finding of such a relationship. The
fact that these admissions were contained in an agreement which Cross-Complainant
seeks to rescind does not preclude them as admissions. Cross-Complainant himself refers
to the terms of the Agreement as assertions of fact; there is no reason that Cross-
Defendants cannot do the same especially when the Agreement is still valid until

9
rescinded.” The court was apparently referring to paragraphs 3.9 and 8.12 of the
Contribution Agreement, quoted above, which indicate Fortis solely represented the new
company, not Connelly. The court also found the fraud causes of action were pleaded
with insufficient particularity, Connelly had not alleged material assistance with a fraud
in connection with the sale of securities as required under section 25504.1, and Connelly
had no standing under California Code of Regulations, title 10, section 260.504.2.2.
Connelly filed a second amended cross-complaint (SACC). The SACC
continued to rely on an attorney-client relationship between Connelly and Hayashi.
Connelly dropped his cause of action based on California Code of Regulations, title 10,
section 260.504.2.2, and added a cause of action for breach of fiduciary duty against
Hayashi and Fortis. Connelly also filled out his allegation of damages stemming from
the fraud to include “all damages resulting from Connelly’s execution of purported
agreements and documents that do not accurately reflect the terms and conditions of the
Progenex Transaction as discussed by Connelly and the Cross-Defendants, including
Connelly’s investment of $1 million in [Progenex Dairy Bioactives], Connelly’s
attorneys fees and costs incurred by Connelly as a result of torts committed by others, and
Connelly’s share of the profits that would have been earned had the Cross-Defendants
documented the Progenex Transaction discussed by the parties and not destroyed the
parties’ relationship be [sic] engaging in the conduct alleged above . . . .”
The court sustained another demurrer and this time granted a motion to
strike portions of the SACC. As to the causes of action for professional negligence and
breach of fiduciary duty, the court sustained without leave to amend on the ground there
was no attorney-client relationship, as the court had previously ruled. The court
sustained the demurrer without leave to amend as to the violation of section 25504.1
because Connelly had still not alleged facts demonstrating Hayashi and Fortis materially
assisted in any fraud in connection with the sale of securities. The court sustained the
demurrer with leave to amend as to the fraud causes of action, giving Connelly an

10
opportunity to plead fraud outside the context of an attorney-client relationship. The
court noted the fraud causes of action “still fail to allege sufficient facts as to duty,
justifiable reliance, causation, and damages. . . . It is unclear how Cross Complainant
could rely on the Cross Defendants when he has admitted that he was represented by his
own legal counsel other than Cross Defendants. Cross Complainant’s failure to read the
Agreements is to his detriment and not a ground to impose liability on others.” Finally,
the court struck various allegations concerning the alleged attorney-client relationship.
The third amended cross-complaint (TACC) omitted the professional
negligence, breach of fiduciary duty, and section 25504.1 causes of action. It added a
negligent misrepresentation claim against Hayashi and Fortis, and accused Hayshi and
Fortis of aiding and abetting and conspiring with the other cross-defendants in their fraud.
This time the court sustained a demurrer without leave to amend as to all
causes of action against Hayashi and Fortis. “Absent an attorney-client relationship,
Connelly has no legal basis for asserting any affirmative duty owed on the part of
Hayashi [and] Fortis, so as to support his claims for Fraud in the Second, Third, and
Eighteenth Causes of Action and Negligent Misrepresentation in the New Seventh Cause
of Action. Further, after having been afforded numerous opportunities to amend,
Connelly has not met the heightened pleading standards for Fraud. Further, other than
alleging that if he didn’t invest, he wouldn’t have lost money, Connelly has failed to
plead that the actions of Hayashi [and] Fortis caused his damages. And, as stated in
earlier rulings, Connelly is unable to plead justifiable reliance on the alleged statements
or non-actions of Hayashi [and] Fortis, due to the fact that as the transactional documents
clearly spell out, he had access to his own counsel and was never represented by Hayashi
[and] Fortis.” With respect to the use of “Adam Stuart” to conceal Zuckerman’s true
name, the court stated, “The Court concurs with Hayashi [and] Fortis that a
misrepresentation must involve a positive assertion, in this case, that would be far more
than merely referring to a person by the name they are currently using.”

11
 7
Connelly timely appealed.

DISCUSSION

Standard of Review
“In reviewing the sufficiency of a complaint against a general demurrer, we
are guided by long-settled rules. ‘We treat the demurrer as admitting all material facts
properly pleaded, but not contentions, deductions or conclusions of fact or law.
[Citation.] We also consider matters which may be judicially noticed.’ (Serrano v.
Priest (1971) 5 Cal.3d 584, 591.) Further, we give the complaint a reasonable
interpretation, reading it as a whole and its parts in their context. (Speegle v. Board of
Fire Underwriters (1946) 29 Cal.2d 34, 42.) When a demurrer is sustained, we
determine whether the complaint states facts sufficient to constitute a cause of action.”
(Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) Generally, “[i]n reviewing an order
sustaining a demurrer without leave to amend, ‘the allegations of the complaint must be
liberally construed with a view to attaining substantial justice among the parties.’”
(Heckendorn v. City of San Marino (1986) 42 Cal.3d 481, 486.)
“Generally it is an abuse of discretion to sustain a demurrer without leave
to amend if there is any reasonable possibility that the defect can be cured by
amendment.” (Cooper v. Leslie Salt Co. (1969) 70 Cal.2d 627, 636.) In reviewing a
7
Connelly’s notice of appeal purports to be from various orders on the
demurrers and motions to strike. The same day Connelly filed his notice of appeal, the
trial court filed a judgment of dismissal. We issued an order deeming Connelly’s appeal
to have been filed immediately after the judgment. We now also deem the appeal to be
from the judgment of dismissal, not the nonappealable orders. (Vitkievicz v. Valverde
(2012) 202 Cal.App.4th 1306, 1310, fn. 2 (“an order sustaining a demurrer without leave
to amend is not appealable. [Citation.] In the interests of justice and absent any
prejudice to . . . the respondent, we construe the appeal from the order sustaining the
demurrer as taken from the order of dismissal later filed”).)

12
demurrer “sustained without leave to amend, we decide whether there is a reasonable
possibility that the defect can be cured by amendment: if it can be, the trial court has
abused its discretion and we reverse; if not, there has been no abuse of discretion and we
affirm.” (Blank v. Kirwan, supra, 39 Cal.3d at p. 318.) “The burden of proving such
reasonable possibility is squarely on the plaintiff.” (Ibid.)

Connelly Adequately Pleaded an Implied Attorney-client Relationship
We turn first to whether Connelly adequately pleaded an attorney-client
relationship. The court held, “The alleged confidential communications cannot support
the finding of an implied relationship (Zenith [,supra, 148 Cal.App.4th 998]). The
potential for conflict of interest seems to preclude the finding of an implied relationship
[(ibid.)].” We disagree with the court’s interpretation that Zenith and conclude Connelly
adequately pleaded an implied attorney-client relationship.
“With the exception of a court appointment, the relationship of lawyer and
client is created by contract.” (Houston Gen. Ins. Co. v. Superior Court (1980) 108
Cal.App.3d 958, 964.) “Although the [attorney-client] relationship usually arises from an
express contract between the attorney and the client, it may also arise by implication.”
(Streit v. Covington & Crowe (2000) 82 Cal.App.4th 441, 444.) “No formal
arrangements are necessary to establish an attorney-client relationship [citation],
especially where . . . the existence of the relationship is demonstrated and reinforced by
the attorney’s own conduct.” (Davis v. State Bar (1983) 33 Cal.3d 231, 237.)
“Whether or not an implied contract has been created is determined by the
act and conduct of the parties and all the surrounding circumstances involved . . . .” (Del
E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 611.) “Mutual
assent is determined under an objective standard applied to the outward manifestations or
expressions of the parties, i.e., the reasonable meaning of their words and acts . . . .”

13
(Alexander v. Codemasters Group Limited (2002) 104 Cal.App.4th 129, 141, disapproved
on another ground in Reid v. Google (2010) 50 Cal.4th 512, 524, 527.)
The following factors are relevant in determining whether an attorney-client
relationship has been created by implied agreement: whether the attorney volunteered his
or her services to the prospective client; whether confidential information has been
disclosed by the prospective client; whether the prospective client reasonably believed he
or she was consulting the attorney in the attorney’s professional capacity; whether the
attorney acted or indicated by statements that he or she was representing the prospective
client; the amount of contact between attorney and the prospective client; whether the
prospective client sought legal advice from the attorney and whether the attorney
provided advice; whether the attorney previously represented the prospective client,
particularly where the representation occurred over a period of time or in several matters
or without an express agreement; whether the prospective client paid fees or other
consideration in the matter in question; and whether the prospective client consulted the
attorney in confidence. (Vapnek et al., California Practice Guide: Professional
Responsibility (The Rutter Group 2012) ¶ 3:4, p. 3-1; see also State Bar Standing Com.
on Prof. Responsibility & Conduct, Formal Opn. No. 2003–161.) Our Supreme Court
has emphasized “the factual nature underlying the formation of the professional relation.”
(Flatt v. Superior Court (1994) 9 Cal.4th 275, 281.)
Here, Connelly alleged sufficient facts to establish an implied attorney-
client relationship. Connelly alleged Hayashi expressly said he was looking out for
Connelly’s interests. (See Miller v. Metzinger (1979) 91 Cal.App.3d 31, 39 [where
attorney obtained putative client’s medical records for evaluation of wrongful death claim
and said he “‘would take care of it or have somebody take care of it that knew about
trying malpractice suits,’” triable issue of fact as to existence of attorney-client
relationship precluded summary judgment]; see also Tormo v. Yormark (D.N.J. 1975)
398 F.Supp. 1159 , 1166 [cited by Miller, attorney’s promise “‘to see what could be done

14
with regard to settlement’” sufficed to imply an attorney-client relationship].) Connelly
alleges Hayashi rendered legal advice to Connelly on various topics concerning the
transaction, which prima facie establishes an attorney-client relationship. (People ex rel.
Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1148
[“‘“When a party seeking legal advice consults an attorney at law and secures that advice,
the relation of attorney and client is established prima facie.” [Citation.]’”].) Connelly
alleged Hayashi performed legal services for Connelly — i.e., drafted various agreements
at Connelly’s request — and that Connelly had several confidential conversations with
Hayashi. Both of these are factors listed above as tending to show an attorney-client
relationship. Based on these interactions, Connelly alleged he believed Hayashi was
acting as his attorney. Taken at face value, these allegations touch on several of the
factors listed above and thus suffice to plead an implied attorney-client relationship.
In concluding Connelly had not sufficiently alleged an implied attorney-
client relationship, the court relied exclusively on Zenith, supra, 148 Cal.App.4th 998.
But as noted, we disagree with the court’s interpretation of Zenith.
In Zenith, Zenith Insurance Company agreed to reinsure Royal Insurance
Company for all of Royal’s exposure under certain insurance policies between Royal and
its insured. The reinsurance agreement provided Royal the right to defend and settle, in
its sole discretion, claims on the underlying policies, and denied Zenith any right to
associate in the defense or settlement of the claims. (Zenith, supra, 148 Cal.App.4th at
pp. 1002-1003.) After claims were asserted against Royal’s insured, Royal retained the
respondent law firm to defend the claims. Royal settled the claims and demanded
payment from Zenith. (Id. at p. 1003.) Zenith sued the law firm for professional
negligence, claiming it had mishandled the settlement by failing to pursue certain
contribution and indemnification claims. (Ibid.) Zenith admitted there was no express
attorney-client relationship, but claimed one was implied based on the circumstances, or,
alternatively, that Zenith was an intended beneficiary of the contract between Royal and

15
the attorney. (Id. at pp. 1004-1005.) In support of its claims, Zenith alleged the attorney
occasionally spoke with Zenith concerning the pending litigation and settlement strategy.
(Id. at p. 1004.) On another occasion one of Royal’s representatives assured Zenith the
law firm was “‘protecting all of our interests,’” though neither the attorney nor the law
firm was party to that statement. (Ibid.) Further, the attorney knew Zenith was liable for
both the settlement costs and attorney fees. (Id. at p. 1005.) Finally, the attorney never
told Zenith he was not representing them. (Ibid.)
The trial court sustained a demurrer, finding the law firm had no duty to
Zenith, and the Court of Appeal affirmed. It held the contractual relationship between
Zenith and Royal precluded an implied attorney-client relationship between Zenith and
the attorney: “[T]he context of this case is a commercial arrangement between a ceding
insurer and a reinsurer. The reinsurer had no contractual or legal obligations to Royal’s
insured. It had no involvement in Royal’s selection of [the attorney] or its direction of
[the attorney], nor any right to participate in the settlement, adjustment or defense of any
claims, even though it would ultimately be responsible for paying them. Zenith, as
reinsurer, had the right to claims files, legal opinions and access to Royal’s agents. Thus,
allegations describing the contacts and communications necessary to ensure that Zenith
received that information could not establish an undertaking by [the attorney] to represent
Zenith.” (Zenith, supra, 148 Cal.App.4th at p. 1011.) The court further noted that at one
point Zenith directed the attorney to file claims against potential indemnitors, but the
attorney refused, which militated against any implied attorney-client relationship. (Ibid.)
The Zenith court also held Zenith was not a third-party beneficiary of the
contract between Royal and the attorney. The court noted, importantly, that in this
portion of the argument, “Zenith does not rely on any claim of a direct express or implied
contractual relationship.” (Zenith, supra, 148 Cal.App.4th at p. 1008.) Rather, “[a]n
essential predicate for establishing an attorney’s duty of care under an ‘intended
beneficiary’ theory is that both the attorney . . . and the client, Royal, must have intended

16
Zenith to be a beneficiary of legal services [the attorney] was to render. [Citation.] Even
if the lawyer’s representation could incidentally benefit the claimant, that does not
sufficiently satisfy this predicate.” (Ibid.) The court noted that the potentially adverse
interests of Royal and Zenith precluded any inference that Royal intended the attorney-
client relationship to benefit Zenith: “Royal, but not Zenith, would be exposed to
potential bad faith liability for the unjustified failure to fully discharge all of the
obligations owed under the policy. Thus, [the attorney] could not ethically represent both
Royal and Zenith in these matters. In such circumstance, it would be impossible to
conclude that either Royal or [the attorney] ever intended to confer upon Zenith
beneficiary status of [the attorney’s] legal services performed for Royal.” (Id. at p.
1008.) “The existence of such a conflict of interest precludes implication of third-party
beneficiary status.” (Id. at p. 1009.)
Here, the court drew two conclusions from its reading of Zenith, neither of
which withstands analysis. First, citing Zenith, the court held, “The alleged confidential
communications cannot support the finding of an implied relationship.” Second, “The
potential for conflict of interest seems to preclude the finding of an implied relationship.”
Zenith does not stand for either of those propositions.
With respect to confidential communications, Zenith held the fact of those
communications did not establish an implied attorney-client relationship in the unique
circumstances of that case because the reinsurer was statutorily entitled, under Insurance
Code section 622, to receive such communications, even absent an attorney-client
relationship. (Zenith, supra, 148 Cal.App.4th at p. 1011.) The attorney “was doing no
more than discharging on Royal’s behalf that statutory obligation. The fact of such
communication can neither destroy an applicable privilege . . . nor create an attorney-
client relationship.” (Id. at p. 1010.) There is no similar circumstance here. Rather, as
noted above, the presence of confidential communications is one factor tending to
establish an implied attorney-client relationship.

17
 Nor does a conflict of interest preclude an implied attorney-client
relationship. Zenith simply held the conflicting interests of Royal and Zenith were
evidence that neither the attorney nor Royal intended Zenith to be the beneficiary of the
attorney’s legal services. Moreover, that point was raised in connection Zenith’s
argument that it was an intended third-party beneficiary of the lawyer’s services rendered
under his contract with Royal, not that the presence of a conflict precluded an implied
attorney-client relationship. The presence of a conflict may be relevant in determining
whether an implied attorney-client relationship arose in the totality of the circumstances,
but Zenith does not stand for the proposition that such a conflict is dispositive.
Such a rule, moreover, would only pervert the law. The reality is attorneys
do occasionally improperly represent conflicted clients. It would be unjust to permit such
an attorney to automatically escape liability for professional negligence or breach of
fiduciary duty because of the conflict. But, assuming Connelly’s allegations are true, that
is essentially what happened here: Hayashi represented conflicted clients and, under the
court’s ruling, escaped liability because the conflict precluded any allegation that Hayashi
represented Connelly. The court erred.
Hayashi and Fortis offer an additional argument for why no attorney-client
relationship could form: because Zuckerman and Page were present at the various
conversations Connelly had with Hayashi, and thus the communications were not
confidential. We reject this argument for two reasons.
First, the existence of confidential communications is only one factor in
determining whether an attorney-client relationship formed. Even if Hayashi and Fortis
were right, therefore, Connelly pleaded other facts tending to show an attorney-client
relationship, which are sufficient for purposes of pleading.
Second, Hayashi and Fortis’s position is incorrect because the presence of
Zuckerman and Page is consistent with an implied joint representation. Hecht v. Superior
Court (1987) 192 Cal.App.3d 560, is instructive. In Hecht two individuals contacted an

18
attorney to help form a new corporation. (Id. at pp. 563-564.) During the formation
stages of the corporation, the two individuals and the attorney had one meeting and
several phone conferences to discuss various corporate matters, such as selecting officers,
directors, and shareholders. (Ibid.) Once the corporation was formed, both individuals
were listed as officers and shareholders. (Ibid.) The individuals later had a falling out
and one of them, the defendant, excluded the other, the plaintiff, from the corporation.
(Ibid.) The plaintiff sued for her share of the profits and sought to depose the attorney.
(Ibid.) Defendant objected on the basis of the attorney-client privilege and the trial court
agreed in part. (Ibid.) The Court of Appeal reversed, holding the above facts sufficed to
invoke the “‘joint client’” exception to the attorney-client privilege. (Id. at p. 567.)
Here, Connelly alleged significantly more interaction between himself and
Hayashi than was the case in Hecht. Just as in Hecht, we conclude Connelly’s
communications, despite the presence of Zuckerman and Page, are consistent with an
8
implied joint representation.

The Contribution Agreement Did Not Preclude Connelly from Pleading an Implied
Attorney-Client Relationship
The court further found certain “admissions” in the Contribution
Agreement, which was attached to Connelly’s cross-complaint, precluded Connelly from
pleading an attorney-client relationship with Hayashi. Specifically, paragraph 3.9 states
Connelly was “relying solely on [his] legal counsel and not on any statements or
representations of the Company’s legal counsel, [Fortis], for legal advice with respect to

8
Hayshi and Fortis cite out-of-state authority for the proposition that an
attorney retained to form a legal entity represents the entity even before it actually exists.
They conclude they represented the as-yet-unformed entity, not Connelly. We need not
decide whether California would indulge nonexistent clients, however, because here the
allegations establish an attorney-client relationship with Connelly regardless of who else
Hayashi and Fortis represented.

19
this investment . . . .” And paragraph 8.12 states, “[Fortis] has served as outside general
counsel to the Company and has negotiated the terms of the Contribution solely on behalf
of the Company. The Company and each Founder hereby . . . acknowledge that with
respect to the Contribution, [Fortis] has represented solely the Company, and not any
Founder or any director, officer, member, manager or employee of the Company or any
Founder . . . .”
We hold these contractual provisions did not preclude Connelly from
pleading an implied attorney-client relationship.
Generally, “[w]e . . . ‘accept as true both facts alleged in the text of the
complaint and facts appearing in exhibits attached to it. If the facts appearing in the
attached exhibit contradict those expressly pleaded, those in the exhibit are given
precedence.’” (Sarale v. Pacific Gas & Electric Co. (2010) 189 Cal.App.4th 225, 245
(Sarale).) The basis for this rule is the “truthful pleading” requirement. Under the
truthful pleading requirement, “‘“The pleadings must be true. That is to say, the pleader
must set forth his case as he believes it . . . the rule is universal and inexorable, that
nothing whatever should be alleged which is not believed to be true; and the lawyer who
inserts any statement, no matter how trivial, which he does not believe, violates that rule,
and with it, his duty as an officer of the law.’” [O]ne of the several applications of the
principle of truthful pleading is that ‘[f]alse allegations of fact, inconsistent with annexed
documentary exhibits [citation] or contrary to facts judicially noticed [citation], may be
disregarded, and factual contradictions within a verified complaint may result in
admissions [citation].’” (Williams v. Southern California Gas Co. (2009) 176
Cal.App.4th 591, 598.)
Consistent with the purpose of ensuring truthfulness, the rule prioritizing
facts in attached exhibits is applied where the allegations in the complaint are
inconsistent with facts apparent in attached exhibits. (See, e.g., Sarale, supra, 189
Cal.App.4th at p. 245 [plaintiffs claimed gas company had no easement over their land

20
but attached to their complaint a grant of right-of-way conclusively demonstrating such
an easement; plaintiffs did not challenge the validity or accuracy of the exhibit]; Holland
v. Morse Diesel Intern., Inc. (2001) 86 Cal.App.4th 1443, 1448-1449 [contract attached
to complaint demonstrated plaintiff was an unlicensed subcontractor, not merely a
provider of labor and supplies; plaintiff did not dispute the validity of the contract, only
its characterization]; Dodd v. Citizens Bank of Costa Mesa (1990) 222 Cal.App.3d 1624,
1627 [plaintiff claimed he was a customer of a bank but attached bank documents
demonstrating the account in fact belonged to a separate company; plaintiff did not
dispute the validity of the bank documents].)
Here, however, there is an obvious point of distinction: Connelly claims
the attached agreement was procured by fraud. Where a party claims fraud in the
execution and attaches the fraudulent agreement as an exhibit to a complaint, it makes
little sense to bind the plaintiff to the fraudulent agreement simply because it was
attached. And that is essentially what Connelly alleges. Connelly alleges he never read
the agreement, the agreement was materially different than what he thought, the
disclaimer of an attorney-client relationship was false, and his signature was procured by
fraud. There is no indication on the face of the complaint Connelly is being untruthful. It
is entirely possible the author of the Contribution Agreement was being untruthful, as
Connelly alleges. Because we cannot conclude Connelly was being untruthful, there is
no basis for holding Connelly to recitals in the Contribution Agreement. In holding
9
otherwise, the court erred.

9 The parties extensively briefed whether the “sham pleading doctrine”
precluded Connelly from alleging an attorney-client relationship based on allegedly
inconsistent allegations in the original cross-complaint. It does not appear to us,
however, that the trial court ruled on the basis of the “sham pleading doctrine.” The trial
court’s ruling on the demurrer to the FACC states, “The prior admissions by Cross-
Complainant preclude a finding of [an attorney-client] relationship. The fact that these
admissions were contained in an agreement which Cross-Complainant seeks to rescind
does not preclude them as admissions.” (Italics added.) As the italicized portion makes

21
 The court dismissed Connelly’s causes of action for professional
negligence and breach of fiduciary duty solely based on the absence of an attorney-client
relationship. The court’s ruling as to those causes of action is reversed.

Connelly Adequately Pleaded Fraud
The court sustained a demurrer to Connelly’s fraud claims. We review the
court’s ruling de novo. (Stearn v. County of San Bernardino (2009) 170 Cal.App.4th
434, 439-440.)
“‘The elements of fraud, which give rise to the tort action for deceit, are (a)
misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of
falsity (or “scienter”); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance;
and (e) resulting damage.’” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638
(Lazar).) “‘Fraud actions . . . are subject to strict requirements of particularity in
pleading. [A]llegations of fraud involve a serious attack on character, and fairness to the
defendant demands that he should receive the fullest possible details of the charge in
order to prepare his defense. Accordingly the rule is everywhere followed that fraud
must be specifically pleaded. [T]he policy of liberal construction of the pleadings . . .
will not ordinarily be invoked to sustain a pleading defective in any material respect.’”
(Committee On Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197,
216 (CCTV, Inc.), superseded by statute on other grounds as stated in Californians for
Disability Rights v. Mervyn’s, LLC (2006) 39 Cal.4th 223, 228.) “‘This particularity

clear, the trial court was relying on admissions contained in the Contribution Agreement,
not separate admissions in the text of the cross-complaint. Also, the court nowhere
mentioned the “sham pleading doctrine” or anything like it. Application of the “sham
pleading doctrine” is reviewed for abuse of discretion. (Sanai v. Saltz (2009) 170
Cal.App.4th 746, 768.) Since the trial court never exercised its discretion on this issue,
the issue is not properly before us.

22
requirement necessitates pleading facts which “show how, when, where, to whom, and by
what means the representations were tendered.”’” (Lazar, supra, 12 Cal.4th at p. 645.)
The court found Connelly’s fraud causes of action to be deficient in several
respects: (1) Connelly had not adequately pleaded when, where, to whom, and by what
means the alleged misrepresentations were made; (2) Connelly had not pleaded a duty to
disclose facts that were allegedly concealed; (3) Connelly could not establish justifiable
reliance; and (4) Connelly did not plead causation and damages. Below we analyze each
finding and conclude Connelly adequately pleaded fraud, with one exception, and as to
that exception Connelly must be given an opportunity to amend.
We begin with the alleged misrepresentations. Connelly’s first fraud cause
of action is entitled, “Fraud in the Execution Re: Contribution Agreement.” Connelly
alleged, “[B]eginning in July 2009 and continuing through November 2009 Connelly and
cross-defendant Hayashi participated in meetings and conference calls regarding various
aspects of the Progenex Transaction.” “Hayashi represented to Connelly that Hayashi
was looking out for Connelly’s interests and that the Contribution Agreement would be
consistent with the various issues Hayashi and Connelly discussed throughout their
confidential communications.” In particular, “Connelly directed Hayashi to include
provisions making clear that (a) Connelly’s contribution to [Progenex Dairy Bioactive]
did not include BodyRx; and (b) Connelly was not responsible for raising money for
[Progenex Dairy Bioactive].” “Just before November 8, 2009, Hayashi told Connelly by
telephone that consistent with Connelly’s direction and their communications, Hayashi
had prepared and finalized a Contribution Agreement and all related agreements.”
“These representations made by said Hayashi were, in fact, false.” “In addition, during
these meetings, conference calls and in e-mail communications involving Hayashi and
Connelly, Hayashi referred to Zuckerman as ‘Adam Stuart.’ The purpose of this was in
furtherance of the efforts of Defendants to conceal Zuckerman’s criminal history from
Connelly to induce Connelly to enter into the Contribution Agreement . . . .”

23
 In determining whether these allegations sufficiently set forth the alleged
misrepresentation, we bear in mind the purpose of the specificity requirement. “The
specificity requirement serves two purposes. The first is notice to the defendant, to
‘furnish the defendant with certain definite charges which can be intelligently met.’”
(CCTV, Inc., supra, 35 Cal.3d at pp. 216-217.) The second is “‘“to enable the court to
determine whether, on the facts pleaded, there is any foundation, prima facie at least, for
the charge of fraud.”’” (Ibid., italics added.)
With these purposes in mind, Connelly’s fraud allegations pass muster
because he alleges the when, where, to whom, and by what means requirements. When:
between July 2009 and November 2009. Where: in meetings and conference calls. To
whom: Connelly. By what means: orally. These allegations are sufficient to satisfy the
purposes of the specificity requirement—putting defendants on notice and permitting a
court to prima facie analyze their sufficiency. (See CCTV, Inc., supra, 35 Cal.3d at pp.
217-218 [holding fraud allegations concerning “all ads for sugared cereals within a given
four-year period” was “sufficient to define the subject of the complaint and provide
notice to defendants”]); Wald v. Truspeed Motorcars, LLC (2010) 184 Cal.App.4th 378,
394 [holding allegations of “[o]ral statements made at a meeting” in “June 2008” at
company offices alleged fraud with sufficient particularity]; see also Murphy v. BDO
Seidman (2003) 113 Cal.App.4th 687, 693 [“The complaint thus provides enough
information for respondents to know what purported falsehoods they must defend
against”].) We might prefer to have greater detail regarding precisely when each meeting
and conference call occurred, and where the meetings took place, but we are mindful
there has been no discovery on that topic, and the plaintiff is an individual who may only
have memory to rely on. The facts alleged here are sufficiently particular to permit
Hayashi and Fortis to focus their own inquiry and discovery efforts moving forward.
We reach a similar result with respect to Connelly’s remaining two fraud
causes of action. In the cause of action entitled, “Fraud in the Inducement Re:

24
Investment Agreement,” Connelly alleges, “During several phone calls and/or meetings
in or about August and September 2009 and in late October 2009, Hayashi represented to
Connelly that he would prepare the appropriate paperwork documenting the fact that
funds contributed by Connelly would be used solely for the purposes of paying for the
cost of medical studies coordinated by Connelly . . . . [¶] The true facts were that
Hayashi had no intention of preparing the appropriate paperwork documenting the fact
that funds contributed by Connelly would be used solely for the purposes of paying for
the cost of medical studies . . . .” When: August and September 2009 and late October
2009. Where: phone calls and meetings. To whom: Connelly. By what means: oral
statements.
Similarly, in the cause of action entitled, “Fraud Re: Connelly Reversion
Notice, Connelly alleges, “[B]eginning in or about late January 2010 to the first week of
February 2010, . . . Hayashi and Fortis orally represented to Connelly during phone
conferences that he was not required to send a ‘reversion notice’ opting out of the
Contribution Agreement . . . while negotiations to review the terms of the Contribution
Agreement were pending between [Progenex Dairy Bioactive] and [Murray Gouldburn].
[¶] [T]hese representations . . . were, in fact, false.” When: late January to early
February 2010. Where: phone conferences. To whom: Connelly. By what means: oral
statements. These allegations are sufficient.
Next we turn to whether Connelly adequately pleaded a duty to disclose
various facts he claims were concealed.
“‘“[T]he elements of an action for fraud and deceit based on concealment
are: (1) the defendant must have concealed or suppressed a material fact, (2) the
defendant must have been under a duty to disclose the fact to the plaintiff, (3) the
defendant must have intentionally concealed or suppressed the fact with the intent to
defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and would not
have acted as he did if he had known of the concealed or suppressed fact, and (5) as a

25
result of the concealment or suppression of the fact, the plaintiff must have sustained
damage.”’” (Boschma v. Home Loan Center, Inc. (2011) 198 Cal.App.4th 230, 248.)
Connelly claims, essentially, Hayashi had a duty to disclose the unfavorable
terms of the Contribution Agreement that were inconsistent with Connelly’s prior
direction, and Hayashi had a duty to disclose Zuckerman’s criminal history. The court
sustained the demurrers, finding Connelly had not pleaded facts demonstrating Hayashi
had a duty to disclose these facts.
In reaching that conclusion, the court relied on its erroneous conclusion that
Connelly had not adequately pleaded an attorney-client relationship between Connelly
and Hayashi. We have concluded otherwise, and consequently must reject the court’s
finding regarding duty as well.
“[T]he dealings between practitioner and client frame a fiduciary
relationship. The duty of a fiduciary embraces the obligation to render a full and fair
disclosure to the beneficiary of all facts which materially affect his rights and interests.
‘Where there is a duty to disclose, the disclosure must be full and complete, and any
material concealment or misrepresentation will amount to fraud. . . .’” (Neel v. Magana,
Olney, Levy, Cathcart & Gelfand (1971) 6 Cal.3d 176, 188-89, fn. omitted.) Assuming
Hayashi was Connelly’s attorney, the fact that the Contribution Agreement did not
contain provisions Connelly had discussed with Hayashi was unquestionably a material
fact Hayashi had a duty to disclose. Similarly, that the Contribution Agreement
disclaimed an attorney-client relationship was a material term Hayashi had to disclose.
Likewise, the fact that Hayashi was arranging a business relationship between Connelly
and a convicted felon was a fact Hayashi had a duty to disclose. (See AREI II Cases
(2013) 216 Cal.App.4th 1004, 1022-1023 [plaintiff adequately alleged fraud against
investment bankers that aided in concealment of the criminal background of the owner of
one party to a business transaction].) And assuming Hayashi concealed these facts with
fraudulent intent, as Connelly alleges, Hayashi committed fraud.

26
 We turn next to the court’s holding that Connelly could not have justifiably
relied on Hayashi’s misrepresentations and concealments regarding the content of the
Contribution Agreement because Connelly admits he did not read it. In so holding, the
court erred.
“[U]pon a clear showing that a written instrument was executed by one
party to it without reading it in the belief, induced by the fraudulent representations of the
other party, that its provisions were different from those set out, the courts should set the
agreement aside. Certainly it would be a reproach to our law if an attorney . . . could thus
deliberately misrepresent the terms of a writing and hold the client to a bargain which he
never intended to make. [W]e cannot close our eyes to the fact that as a practical matter
many people would sign such a contract without reading it, when prepared by an
attorney, because of the fact that the drawing of contracts is a matter which the average
person, and very rightly, feels is peculiarly a lawyer’s business. [¶] [I]t is the
unquestioned rule that where the parties occupy a relation to one another which the law
regards as confidential a written contract which one of the parties induces the other to
sign by knowingly misrepresenting its contents may be set aside.” (Mazuran v. Stefanich
(1928) 95 Cal.App. 327, 331-332; see also Simmons v. Ratterree Land Co. (1932) 217
Cal. 201, 205 [“Although a purchaser may not offer as a defense against the provisions of
a contract that he failed to read it, if his failure to read is due to fraud or trickery of the
seller or his agent, the rule is otherwise”]; Brown v. Wells Fargo Bank, N.A. (2008) 168
Cal.App.4th 938, 959 [“If the defendant is in a fiduciary relationship with the plaintiff
which requires the defendant to explain the terms of a contract between them, the
plaintiff’s failure to read the contract would be reasonable. [Citations.] In such a
situation, the defendant fiduciary’s failure to perform its duty would constitute
constructive fraud [citation], the plaintiff’s failure to read the contract would be
justifiable [citation], and constructive fraud in the execution would be established”].)
As Professor Williston eloquently stated, “[I]f a party has fraudulently misrepresented a

27
document’s contents or induced the other party to refrain from reading the document,
courts will allow a remedy, choosing not to permit a positively fraudulent party to
prosper because of the stupidity or credulity of the defrauded party, subject only to the
rights of innocent third parties. In short, the law should not give any assistance to a
knave, a scoundrel or a con artist who preys upon the less alert or more naive members of
society.” (27 Williston on Contracts (4th ed. 2012) § 69:35, pp. 37-39, fns. omitted.)
Here, as we concluded above, Connelly adequately pleaded an attorney-
client relationship with Hayashi. Accordingly, Connelly’s failure to read the
Contribution Agreement does not preclude justifiable reliance on Hayashi’s
representations concerning the nature of the agreement.
Finally, we turn to the court’s conclusion that Connelly did not plead
causation and damages. Connelly alleged, in essence, three theories of fraud, though the
three theories are mixed throughout the counts in Connelly’s complaint. First, Hayashi
defrauded Connelly by not informing, or misinforming, Connelly about Zuckerman’s
prior criminal history, including a recent criminal conviction for fraud. Second, Hayashi
defrauded Connelly by misrepresenting or concealing the true nature of the Contribution
Agreement. Third, Hayashi defrauded Connelly by falsely stating Connelly did not have
to serve a timely reversion notice. The court held, “There are no facts alleged as to how
any representation by Cross Defendants were the actual and proximate cause of Cross
Complainant losing his $1 million investment.” “[O]ther than alleging that if he didn’t
invest, he wouldn’t have lost money, Connelly has failed to plead that the actions of
Hayashi Fortis caused his damages.”
With respect to the first theory of fraud, we agree with the court. The gist
of Connelly’s theory is that Hayashi defrauded Connelly into doing business with a
fraudster, Zuckerman, and the fraudster, predictably, defrauded Connelly. As a general
matter, this theory is viable in terms of causation. The problem is, Connelly did not
allege he lost money. He claims he made an investment of $1 million and contributed

28
valuable intellectual property rights. But he received equity in Progenex Dairy Bioactive
in exchange, and he did not allege his equity has lost value. For all we know, his $1
million investment could have turned into $100 million (certain allegations hint
10
otherwise, but in the context of a fraud cause of action, more than hints is required).
Nonetheless, Connelly should be given an opportunity to amend. We
acknowledge the court already gave Connelly two opportunities to amend. But the
court’s comments on the issue of causation and damages were cursory, offering Connelly
little guidance on what the defect was, much less how to cure it. And, of course,
Connelly is hearing from us for the first time. (See CCTV, Inc., supra, 35 Cal.3d at p.
221 [“We recognize that plaintiffs have already had opportunities to amend, but without
the guidance of this opinion, their failure to make the specific amendments we now
require is excusable”].) Under the circumstances, Connelly’s failure to properly cure the
causation and damages issue is excusable, and the court’s refusal to grant leave to amend
an abuse of discretion. On remand, Connelly should be given an opportunity to allege
facts — if he can do so truthfully — demonstrating not just that he made an investment
he otherwise would not have made, but that his investment resulted in a loss.
With respect to Connelly’s other two theories of fraud, he has adequately
alleged causation and damages. Critically, both the court and Hayashi and Fortis ignored
certain of Connelly’s damages allegations. Connelly claimed as damages from Hayashi’s
fraud, “Connelly’s attorneys fees and costs incurred by Connelly as a result of torts
committed by others . . . .” And Connelly claimed as damages from Hayashi’s
professional negligence, which encompassed many of the same acts as the fraud cause of
action, “the cost of defending the claims alleged against him in this lawsuit and . . . the
costs of prosecuting some or all of the claims alleged by Connelly in this action . . . .”

10
Notably, Connelly does not seek rescission or restitution against Hayashi
and Fortis, presumably because they were not parties to the Contribution Agreement. He
seeks damages.

29
 Connelly has properly alleged damages under the tort-of-another doctrine.
“A person who through the tort of another has been required to act in the protection of his
interests by bringing or defending an action against a third person is entitled to recover
compensation for the reasonably necessary loss of time, attorney’s fees, and other
expenditures thereby suffered or incurred.” (Prentice v. North Amer. Title Guar. Corp.
(1963) 59 Cal.2d 618, 620 [defendant escrow company negligently closed escrow in sale
of real estate, and as a result plaintiff had to sue third parties to quiet title. Court held
plaintiff could recover attorney fees and costs incurred in the quiet title action from the
escrow company in a negligence suit].) “In the usual case, the attorney’s fees will have
been incurred in connection with a prior action; but there is no reason why recovery of
such fees should be denied simply because the two causes (the one against the third
person and the one against the party whose breach of duty made it necessary for the
plaintiff to sue the third person) are tried in the same court at the same time.” (Id. at p.
621.) Here, Connelly has had to defend against the complaint in this action and has
cross-complained against various other individuals and entities. He claims these suits
would have been unnecessary had the Contribution Agreement accurately reflected his
conversations with Hayashi, and he also claims none of these suits would have been
necessary had he not been fraudulently induced to delay service of his reversion notice.
Thus both theories of fraud have a causal link to his tort-of-another damages.
With the exception noted above, Connelly adequately pleaded each of the
elements of fraud. Thus the court erred in sustaining demurrers to the fraud causes of
action.

The Court Erred in Sustaining the Demurrer to the Corporations Code section 25504.1
Cause of Action
We also conclude the court erred in sustaining a demurrer to Connelly’s
cause of action under section 25504.1. Section 25504.1 states, “Any person who

30
materially assists in any violation of Section . . . 25401 . . . , with intent to deceive or
defraud, is jointly and severally liable with any other person liable under this chapter for
such violation.” Section 25401 states, “It is unlawful for any person to offer or sell a
security in this state or buy or offer to buy a security in this state by means of any written
or oral communication which includes an untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading.” “In order to have a valid
cause of action under California Corporations Code § 25401 [a plaintiff] must allege that
there was a sale or purchase of stock in California by fraudulent untrue statements or by
omitting material facts that would by omission make the statements misleading.” (MTC
Electronic Technologies Co., Ltd. v. Leung (C.D. Cal. 1995) 876 F.Supp. 1143, 1147.)
“To support liability under section 25504.1 for such a violation, the complaint must
include allegations demonstrating how the defendant assisted in the act of selling or
offering to sell securities by means of false and misleading statements. Such assistance
may take the form of aiding in the preparation of offering documents relied upon by
investors, communicating misrepresentations directly to investors . . . .” (AREI II Cases,
supra, 216 Cal.App.4th at p. 1015.) Further, the defendant must not merely have assisted
in the sale of the securities, but must have assisted in the violation itself. (Id. at pp. 1015-
1016.)
Connelly pleaded a violation of section 25401 against cross-defendants
Progenex Dairy Bioactives, Page, and Zuckerman, which forms the predicate for his
section 25504.1 claim against Hayashi and Fortis. The gist of those claims is that cross-
defendants falsely represented their ability to raise funds for the operation and falsely
represented the scope of Connelly’s obligations under the relevant agreements. Hayashi
and Fortis do not contend in their brief that Connelly inadequately pleaded a violation of
section 25401. And the court, for its part, held only that Connelly had not pleaded
material assistance by Hayashi and Fortis under section 25504.1. Thus we assume,

31
without deciding, that Connelly adequately pleaded a violation of section 25401 against
the other cross-defendants.
We have no trouble concluding Connelly pleaded material assistance by
Hayashi and Fortis. Hayashi allegedly formed the corporation and drafted the relevant
documents leading to the sale of the Progenex Dairy Bioactive stock. He then allegedly
obtained Connelly’s signature by fraud. He also allegedly concealed the fraudulent
character and criminal history of Zuckerman, who Connelly claims committed the
predicate violation of section 25401. These alleged acts were plainly material
contributions to the alleged violations of section 25401. In holding otherwise, the court
erred.

The Court Erred in Striking Connelly’s Negligent Misrepresentation, Conspiracy to
Defraud, and Aiding and Abetting Counts
In sustaining the demurrer to the SACC, the court granted Connelly leave
to amend his fraud counts to omit any reliance on an attorney-client relationship. In
doing so, Connelly added counts — based on exactly the same facts — of negligent
misrepresentation, conspiracy to defraud, and aiding and abetting in fraud. The court
apparently struck these counts, stating, “To the extent that the Motion to Strike is not
Moot, as it addresses Causes of Action included in the TAC[C], for which leave to amend
11
was not granted, the Court Grants the Motion without leave to amend.” The court erred.
“Following an order sustaining a demurrer or a motion for judgment on the
pleadings with leave to amend, the plaintiff may amend his or her complaint only as
authorized by the court’s order.” (Harris v. Wachovia Mortgage, FSB (2010) 185
Cal.App.4th 1018, 1023.) “This rule is inapplicable,” however, where “the new cause of

11
We say “apparently” because the trial court did not specify precisely what it
was striking.

32
action directly responds to the court’s reason for sustaining the earlier demurrer.”
(Patrick v. Alacer Corp. (2008) 167 Cal.App.4th 995, 1015.)
Connelly’s new legal theories directly responded to the court’s reasoning
for sustaining the demurrer to the SACC. The court gave Connelly leave to amend
precisely so he could change his theory of fraud against Hayashi to omit any reference to
an attorney-client relationship. It comes as no surprise that this would entail pleading
different legal theories on the same facts. Thus, the court erred in striking the counts of
negligent misrepresentation, conspiracy, and aiding and abetting.

33
 DISPOSITION

The judgment of the trial court is reversed. Upon remand, and within 30
days following issuance the remittitur, Connelly may file a fourth amended cross-
complaint, making allegations held sufficient by this opinion. Connelly shall recover his
costs incurred on appeal. 12

IKOLA, J.

WE CONCUR:

RYLAARSDAM, ACTING P. J.

BEDSWORTH, J.

12 Connelly claims the trial court erred in limiting certain discovery that was
permitted prior to his filing of the TACC. The purpose of the discovery was to better
enable Connelly to plead his causes of action. Our disposition renders the pre-complaint
discovery issue moot.

34