Facts

Southwestern Research, Inc. (SRI), a company engaged in conducting pharmaceutical clinical trials in Beverly Hills, CA, was founded by Dr. Dennis Munjack, a psychiatrist and professor of medicine at the USC Medical School. John Murphy, who was a resident in psychiatry at the medical school studying under Dr. Munjack, later became a 50 percent owner of SRI. In May 2008, Dr. Munjack died. Pursuant to the terms of his written trust agreement, Dr. Munjack left his stock in SRI in trust for his two children, Jeff and Julie Munjack. Dr. Murphy claimed that he owned 100 percent of SRI stock pursuant to a 1994 oral agreement with Dr. Munjack that the surviving doctor would inherit the other's shares upon the death of the other doctor. From July 2008 through February 2013, Lois Friedman, the trustee of the Dennis Munjack inter vivos trust (Trust), and Dr. Murphy engaged in litigation to determine the ownership of the shares formerly held by Dr. Munjack. The probate court determined that the stock at issue was owned by the trust. The court of appeal affirmed the decision and the Supreme Court denied review.

On August 6, 2013, the Trust filed a shareholder derivative lawsuit against Dr. Murphy, SRI's general manager Darrell Maag, Southern California Research LLC (SCR), a new clinical trials company formed by Maag, and the accountants and attorneys who represented and advised Murphy, Maag and SRI. The complaint alleged 13 causes of action including conversion and breach of fiduciary duty and damages in excess of $4 million. In early 2014, the trust discovered that SCR was operating out of SRI's headquarters office utilizing SRI's physicians and staff. Maag was listed as SCR's owner. In response, the trust sought a temporary restraining order and preliminary injunction. A temporary restraining order was granted, but the preliminary injunction was denied.

In March 2015, Maag resigned from his employment with SRI. On April 27, 2016, Dr. Murphy informed the other members of the SRI board of directors that he was unilaterally shutting down SRI's business the following day.

In December of 2019 the Discovery Referee, the Hon. Patricia Collins, recommended imposition of terminating sanctions against defendant Murphy because he repeatedly refused to comply with three different discovery orders, deleted multiple SRI email accounts (including Maag's), refused to produce SRI documents spanning from 2005 through 2011 and, together with his attorney, committed intentional fraud upon the court by selectively sanitizing his February 2018 document production to eliminate all mails with the attorney and emails injurious to Dr. Murphy's position in the litigation. On August 6, Judge Huey Cotton affirmed and adopted the Referee's recommendation to impose terminating sanctions on Dr. Murphy.

In October of 2019, the Discovery Referee recommended imposing terminating sanctions against defendants Maag and SCR based upon wholesale deletion of multiple SCR email accounts (including Dr. Murphy's), the deletion of virtually all emails with the accountant defendants, sanitizing document productions to eliminate incriminating emails, willful refusals to produce documents and willfully false interrogatory responses. On November 14, 2019, Judge Elaine Mandel elected to instead impose issue sanctions and monetary sanctions against Maag and SCR and ordered the production of the missing documents and further discovery responses, including a complete explanation of the admitted document deletions. Maag and SCR failed to comply with the court's Order. On February 23, 2021, Judge Huey Cotton entered terminating sanctions against Maag and SCR, finding that they had intentionally refused to comply with the court's November 14, 2019 order and had engaged in further spoliation of evidence and provided additional willfully false discovery responses.

The trial officially began in January 2020 with the brief testimony of one witness, and was scheduled to resume in May of 2020 after the resolution of outstanding motions. Covid forced postponement. Following settlements with the attorney and accountant defendants, and entry of terminating sanctions against Defendants Murphy, Maag and SCR, plaintiffs submitted extensive proof of the damages. In October 2021, the court heard two days of testimony in connection with the plaintiffs' requests for punitive damages and equitable relief.

PLAINTIFFS' CONTENTIONS: Plaintiffs contended that, while the parties were engaged in litigation about ownership of the stock, defendants Murphy and Maag diverted 100 percent of the net revenues of SRI to themselves in the form of unauthorized salaries and improper cash payments and personal expense payments, totaling $5,688,235.76. Plaintiffs asserted that, during that same period, no distributions were made to the trust. Plaintiffs alleged that defendants Murphy and Maag each used substantial amounts of converted funds to purchase new residences. Plaintiffs claimed that, while the appeal was pending, defendants Murphy and Maag sought and obtained advice from attorneys and accountants representing SRI about dissolving SRI but having defendant Maag set up a new company with a different name. Plaintiffs alleged that, based on the advice of the attorneys and accountants performing services for SRI, defendants secretly established a new clinical trials company known as SCR. Plaintiffs contended that, after the court of appeal announced its tentative decision to affirm the probate court's judgment, defendants Murphy and Maag agreed upon a new game plan to operate SCR secretly from within the same business premises as SRI, utilize the SRI's personnel, facilities, and assets, and have SCR hold itself out to SRI's customers as both the successor to SRI and the same company operating under two different names. Plaintiffs argued that defendants engaged in the aforementioned conduct for the express purpose of diverting the business, goodwill and other assets of SRI to the benefit of defendants and SCR and to cause the business of SRI to become worthless over time and, after all of the new business was successfully diverted to the new company, to cause SRI to be shut down and dissolved. Plaintiffs claimed that defendants Murphy and Maag and the accountant defendants agreed in writing to conceal the existence of SCR and its operations from plaintiffs and anyone affiliated with the trust. Plaintiffs alleged that defendants' new game plan included representing to pharmaceutical companies, contract research organizations and institutional review boards monitoring clinical trials that SRI was changing its name to SCR and therefore the name of the contracting party for all pending clinical trials would need to be changed from SRI to SCR. Thereafter, defendants Murphy, Maag and SCR both negligently and intentionally solicited clinical trials business from the pharmaceutical companies and contract research organizations by portraying SRI, and its physicians Drs. John Murphy and Brock Summers in a false light. More specifically, plaintiffs contended that defendants Murphy and Maag represented to pharmaceutical companies and contract research organizations that SRI had been renamed as SCR and that they offered the services of Drs. Murphy and Summers as principal investigators for clinical trials to be conducted by SCR and falsely represented in writing that Drs. Murphy and Summers were staff physicians of SCR or, in Dr. Murphy's case, on some occasions, as the medical director of SCR--when in fact both doctors were full time employees of SRI and were prohibited by their fiduciary duties and the statutory and common law duties of loyalty from performing services on behalf of SCR. Plaintiffs alleged that, from June 2012 through April 2014, SCR was operated in complete stealth mode from within SRI's offices. There was no notification or signage of any kind on the building directory or on the door of the business premises occupied by SRI which indicated that SCR was located and operating within the same office space; defendants Murphy, Maag and SCR made no disclosure to SRI's landlord that another business was operating within the same office suite occupied by SRI; and SCR had no business license from the City of Beverly Hills. Plaintiffs claimed that each person employed by SRI from June 2012 through May 2016 was required by defendants to perform services on behalf of SCR. Plaintiffs further asserted that each SRI employee had a corresponding job title with SCR and a scrstudies.com email address. Plaintiffs also contended that SRI paid out at least $4,594,951.23 in additional salary, employee benefits and insurance payments, and employer social security payments to SRI employees who were unlawfully performing services on behalf of SCR. Plaintiffs argued that the SCR website, which was nearly identical to the SRI website, furthered the illusion of being presented to pharmaceutical companies and to SRI's former patients that SRI and SCR were the same company. Plaintiffs claimed that, for the ten-year period from 2002 through 2012, SRI earned net profits averaging $1.1 million per year. Plaintiffs alleged that, as defendants Maag and Murphy diverted new business to SCR, SRI's revenues from clinical trials plummeted from $3.7 million in 2012 to $1.27 million in 2014. Plaintiffs also claimed that, from June of 2012 through mid-2017, SCR conducted at least 43 clinical trials, and defendants Murphy, Maag and SCR diverted such business opportunities and more than $5.6 million in revenues from SRI to SCR.

DEFENDANTS' CONTENTIONS: Defendants denied all contentions.

Insurer

Travelers Insurance (defendants Maag and SCR)

Settlement Discussions

$2,031,780.00 in settlements were received from attorney and accountant defendants before trial. Following entry of judgment, Dr. Murphy settled for $3.5 million and the cancellation of his shares in his SRI after filing bankruptcy proceedings.

Result

Default judgment of $21,546,624 (following terminating sanctions) with additional findings regarding constructive trusts/equitable liens against defendants Maag and Murphy for real property purchased with converted corporate funds.

Other Information

On October 21, 2021 defendants Maag and SCR filed an appeal contesting the imposition of the terminating sanctions against them. On January 12, 2022 Maag and SCR filed Chapter 11 Bankruptcy Petitions. On March 10, 2022, following relief from the automatic stay, the Court of Appeal dismissed the appeal pursuant to the appellate disentitlement doctrine based upon failure to pay $32,620 in referee fees and monetary sanctions pursuant to a March 29, 2021 court order imposed to remedy fraud upon the court by Maag and SCR in 2016 and 2017. Rehearing was denied.

Length

Two days