In the Matter of: ESTATE FINANCIAL MORTGAGE FUND, LLC v. Bryan Cave Llp, a professional limited liability partnership

NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In the Matter of: ESTATE FINANCIAL
MORTGAGE FUND, LLC,
Debtor,
BRADLEY D. SHARP, Liquidating
Trustee of the Liquidating Trust of Estate
Financial Mortgage Fund, LLC,
Appellant,
v.
BRYAN CAVE LLP, a professional
limited liability partnership, and
KATHERINE M. WINDLER, an
individual,
Appellees.
No. 12-56009
D.C. No. 2:12-cv-02495-SJO
MEMORANDUM*
In the Matter of: ESTATE FINANCIAL,
INC.,
Debtor,
No. 12-56011
D.C. No. 2:12-cv-02511-SJO
FILED
MAR 24 2014
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
* This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.

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THOMAS P. JEREMIASSEN,
Appellant,
v.
BRYAN CAVE LLP and KATHERINE
M. WINDLER,
Appellees.
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Appeals from the United States District Court
for the Central District of California
S. James Otero, District Judge, Presiding
Argued and Submitted February 14, 2014
Pasadena, California
Before: FARRIS, N.R. SMITH, and WATFORD, Circuit Judges.
The trustees’ complaints in these cases admit that Estate Financial, Inc.
(EFI) and Estate Financial Mortgage Fund (EFMF) violated the law before and
after they retained Bryan Cave. But the complaints allege that EFI and EFMF
retained Bryan Cave to prevent and correct these violations. The complaints also
allege that to the extent the entities continued to violate the law after retaining
Bryan Cave, they did so in reliance on Bryan Cave’s negligent legal advice.
Under California law, a client who engages in wrongdoing in reliance on a
lawyer’s negligent legal advice may be barred by the unclean hands defense or the
in pari delicto doctrine from pursuing a claim for legal malpractice. See Chapman

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v. Superior Court, 29 Cal. Rptr. 3d 852, 862–64 (Ct. App. 2005); Blain v. The
Doctor’s Co., 272 Cal. Rptr. 250, 256–58 (Ct. App. 1990). For either of those
affirmative defenses to apply, however, the plaintiff’s conduct must be so
obviously wrongful that, notwithstanding the lawyer’s erroneous legal advice, no
lay person could be confused about its illegality or impropriety. See Blain, 272
Cal. Rptr. at 258.
Construing the complaints’ factual allegations in the light most favorable to
the trustees, as we must, we do not believe the complaints admit to that type of
wrongdoing. The complaints state that EFI and EFMF violated various provisions
of California real estate and securities law by, for example, failing to comply with
disclosure and licensing requirements, issuing unauthorized promotional notes,
engaging in unauthorized loan transactions, exceeding the maximum number of
investors, and improperly commingling funds. Unlike lying under oath, id., self-
dealing, Chapman, 29 Cal. Rptr. 3d at 855–58, 865, or running a Ponzi scheme,
Peregrine Funding, Inc. v. Sheppard Mullin Richter & Hampton LLP, 35 Cal. Rptr.
3d 31, 48 (Ct. App. 2005), the misconduct admitted in the complaints is not so
obviously wrongful that the principals of EFI and EFMF must have known it to be
unlawful notwithstanding Bryan Cave’s allegedly erroneous legal advice.
Although Bryan Cave advised EFI and EFMF that some of their conduct was

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unlawful, Bryan Cave encouraged the principals to continue operating while Bryan
Cave helped them correct the problems. Given the nature of the violations
involved, the principals could have accepted that advice without “violat[ing]
conscience, or good faith, or other equitable standards of conduct.”
Kendall-Jackson Winery, Ltd. v. Superior Court, 90 Cal. Rptr. 2d 743, 749 (Ct.
App. 1999).
It’s true, as Bryan Cave points out, that the complaints contain isolated
allegations suggesting that the principals may have engaged in misconduct that
they knew to be wrongful, regardless of any negligent legal advice Bryan Cave
provided. For example, the EFI complaint alleges that EFI “used investor money
to pay interest payments to other investors,” and improperly diverted “investor
money intended for development and construction purposes” to pay interest,
expenses, and forbearance fees. These allegations, construed in the light most
favorable to Bryan Cave, support the conclusion that the principals operated EFI
and EFMF as a Ponzi scheme, which would be misconduct so obviously wrongful
that a lay person could not be confused about its impropriety. See Blain, 272 Cal.
Rptr. at 258. But at this stage of the case, we must construe the allegations in the
light most favorable to the trustees. Viewed in that light, the alleged misuse of
investor funds could reflect negligent accounting practices in the course of an

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otherwise legitimate business enterprise, rather than outright fraud. Considered in
context, the isolated allegations Bryan Cave has identified do not support dismissal
of these actions at the pleading stage.
In sum, without expressing any view as to the ultimate merits of the trustees’
claims, we conclude that the district court erred by dismissing the complaints.
Given our disposition, we need not resolve the trustees’ arguments that the in pari
delicto and unclean hands defenses may never apply to bankruptcy trustees or to
claims brought by trustees that arise post-petition.
REVERSED and REMANDED.

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