The decision is Guild Mortgage Company v. CrossCountry Mortgage, filed on May 27, 2026, by the Fourth District Court of Appeal. The trial court had thrown out the entire case at the pleading stage, largely on the theory that California’s trade-secret statute swallowed up most of the claims. The Court of Appeal reversed across the board and sent the case back to be litigated. The opinion deserves attention because the trial court’s reasoning tracks the defenses competitors raise all the time, and the appellate court rejected each of them.

An Eighteen-Month Raid Run From Inside the Company

Guild and CrossCountry are rival nationwide residential mortgage lenders. According to Guild’s allegations, over roughly eighteen months beginning in January 2020, CrossCountry recruited and conspired with several employees at Guild’s Kirkland, Washington branch to dismantle it from within. While still employed and paid by Guild, those employees allegedly recruited their own colleagues to jump to CrossCountry, diverted Guild’s customers, and converted Guild’s pipeline of active loan applications to the competitor. They are also alleged to have accessed Guild’s computer systems without authorization and copied confidential information, including borrower data, customer financial information, and employee compensation details, to help CrossCountry gain an edge.

At the center was the branch manager, whom Guild had trusted to run the office, hire and supervise loan officers, and safeguard customers’ sensitive financial information. Two other managers were also involved, and all three had signed agreements promising not to solicit or divert Guild’s clients or employees. The alleged result was a mass resignation that cost Guild essentially the entire branch. In a separate arbitration against the three employees, an arbitrator later awarded Guild more than $10.6 million against the branch manager alone. This lawsuit targets the competitor that allegedly orchestrated the scheme.

Employees Can Plan to Leave, but They Cannot Switch Sides on Your Payroll

The first question was whether the departing employees owed Guild any duty that CrossCountry could be liable for helping them breach. California law has long recognized that an employee owes undivided loyalty to the employer while still employed. An employee is free to look for another job and to make ordinary preparations to compete before resigning, but the employee cannot transfer that loyalty to a competitor while still drawing a paycheck. Acting against the employer’s interests during employment breaches the duty.

The trial court had relied on a 2018 decision that some read to mean a disloyal-employee claim sounds only in contract, not in tort. The Court of Appeal declined to follow that reading. It explained that the earlier case had overlooked settled authority and a Labor Code provision requiring employees to prefer the employer’s business, and it confirmed that conduct of the kind alleged here violates a social policy that supports tort liability. The court also held that the branch manager could be a fiduciary as a matter of law. Fiduciary status does not turn on a person’s title or on whether he had unilateral authority. What matters is the level of trust, confidence, and discretion the employer placed in him. A manager entrusted with running a branch can owe fiduciary duties even without the title of officer.

Trade-Secret Law Does Not Swallow Every Claim

The trial court’s central rationale was that California’s Uniform Trade Secrets Act displaced Guild’s interference and computer-fraud claims. This is a familiar defense move. When a competitor is sued for poaching employees, customers, and data, it often argues that the dispute is really just a trade-secret case, so that every related claim must rise or fall with trade-secret law.

The Court of Appeal rejected that framing here. Courts look to the gravamen, or gist, of the complaint to decide whether the trade-secret statute displaces a claim. Guild did not even plead trade-secret misappropriation, and the heart of its case was not the theft of confidential files. It was a coordinated scheme to sabotage an entire branch from the inside, which caused damage far beyond the loss of any particular document. On those allegations, the interference claims were not displaced.

The court went further on Guild’s computer-fraud claim under the Comprehensive Computer Data Access and Fraud Act. No published California decision had resolved whether the trade-secret statute displaces a civil claim under that computer-fraud law, and federal courts had split on the question. The Court of Appeal held that it does not. The two statutes address different harms, and the Legislature expanded the computer-fraud remedy over time in a way that would make little sense if trade-secret law quietly absorbed it. The practical upshot is that unauthorized access to your systems can support its own claim, whether or not the data taken qualifies as a trade secret.

What This Means If a Competitor Targets Your Team

For employers, the decision is a useful counter to the playbook competitors use when they recruit a team away. Your employees owe you loyalty while they work for you, and that loyalty is enforceable in tort, not only under whatever contract they signed. Managers you entrust with real responsibility may owe fiduciary duties even if they are not officers. And a competitor who knowingly assists or induces that disloyalty can be on the hook for aiding and abetting, and for interfering with your contracts and customer relationships.

Just as important, you are not confined to a trade-secret theory, and you should resist being forced into one. If the real injury is the loss of a team, a customer base, or a book of business, build the case around that conduct rather than around a handful of copied files. And if someone reached into your systems without permission, the computer-fraud statute is a separate tool that does not depend on proving a trade secret. On the prevention side, this is a reminder to keep loyalty and non-solicitation terms current in employment agreements, to cut off system access for departing employees promptly, and to act quickly when a pattern of coordinated departures starts to emerge.

Bottom Line

The Court of Appeal did not decide that Guild wins. It decided that Guild is entitled to prove its case, and it cleared away the defenses the trial court had used to end the lawsuit before it started. For any California business that depends on its people, its clients, and its data, the decision confirms that a competitor cannot orchestrate a raid from inside your company and then hide behind trade-secret law to escape the consequences. Horst Legal Counsel helps businesses protect their teams and client relationships, and pursue the parties who try to take them.

The post A Competitor Gutted a Rival’s Branch From the Inside. A California Court Just Revived the Lawsuit. appeared first on Horst Legal Counsel.

The California Supreme Court answered both questions in J.M. v. Illuminate Education, Inc., a unanimous opinion authored by Justice Liu and issued on May 14, 2026, with a separate concurrence by Justice Groban. The headline holdings reshape how data breach claims are pleaded in California under the Confidentiality of Medical Information Act, and they redraw the boundary of who counts as a “customer” with standing under the Customer Records Act. For technology vendors, school districts, healthcare-adjacent platforms, and any business that processes personal information through a third-party service, the practical implications are immediate.

The Setup

Illuminate Education provides software services to school districts across the country. Among other things, its platform stores data on individual students, including medical information that districts use for educational planning and intervention. The Ventura County Office of Education contracts with Illuminate to support the district where the plaintiff, identified only as J.M., was a student.

In early 2022, Illuminate experienced a data breach. Its investigation eventually confirmed that databases containing protected student information had been subject to unauthorized access over a roughly twelve-day window in late December 2021 and early January 2022. Illuminate notified the Ventura County Office of Education about twelve days after confirming the breach. Notice to affected families, including J.M.’s guardians, didn’t go out until June 10, 2022, roughly five months after Illuminate first detected the suspicious activity. J.M., through his guardian, sued on behalf of a putative class for violations of the Confidentiality of Medical Information Act and the Customer Records Act.

The trial court dismissed the case at the demurrer stage. The Court of Appeal reversed. The Supreme Court granted review and, on May 14, issued an opinion that splits the difference, but in ways that significantly change the landscape for both sides of these disputes.

The Big Move: “Actually Viewed” Is Dead

For more than a decade, California’s Court of Appeal had held that a plaintiff suing under the Confidentiality of Medical Information Act couldn’t state a claim unless the plaintiff alleged that the breached information was actually viewed by an unauthorized party. The rule originated in Regents of the University of California v. Superior Court in 2013 and was reinforced by Sutter Health v. Superior Court in 2014 and Vigil v. Muir Medical Group IPA, Inc. in 2022. Defendants relied on this rule routinely. If the laptop was stolen but never accessed, no claim. If the hard drive was lost but the data was encrypted and the thief was probably after the hardware, no claim. The “actually viewed” requirement was, for years, one of the most defendant-friendly features of California data breach law.

The Supreme Court has now disapproved all three of those opinions to the extent they’re inconsistent with the new standard. In place of “actually viewed,” the Court adopted what it described as the primary inquiry going forward: whether the information was exposed to a significant risk of unauthorized access or use.

The Court’s reasoning is grounded in the statutory text. Civil Code section 56.101 requires covered entities to preserve the confidentiality of medical information. Civil Code section 56.36, in turn, authorizes a civil action and even provides for nominal damages of $1,000 without any requirement that the plaintiff suffered or was threatened with actual damages. The Court concluded that a regime that conditions liability on proof of actual viewing is hard to square with a statute that authorizes recovery without proof of actual harm.

The Court also flagged a practical concern that resonates with anyone who handles modern privacy litigation. Victims of data breaches rarely know what happened to their data unless they suffer downstream harm. And as the Court explicitly noted, breaches may now be facilitated by artificial intelligence or automated cybercrime in ways that never involve a human actually viewing the information. An “actually viewed” rule fits an earlier era of data theft. It doesn’t fit how breaches happen in 2026.

Importantly, the Court was careful to clarify that mere loss of possession isn’t always enough. The “significant risk” standard is meant to do real work. Smash-and-grab thefts of hardware where the thief was after the device, not the data, may fall short. Encrypted data with no realistic path to access may fall short. The analysis is fact-intensive and considers the form, duration, and extent of the breach, as well as any mitigation by the covered entity. Justice Groban’s concurrence pushed this point further, emphasizing that the new standard demands a realistic and appreciable risk, not mere theoretical exposure, and that any “significant risk” must be grounded in facts showing unauthorized access or use is reasonably likely under the circumstances.

The Other Move: Who Is a “Provider of Health Care”

The plaintiff still lost the case. The Court held that J.M. hadn’t adequately alleged that Illuminate is a “provider of health care” within the meaning of Civil Code section 56.06, which is a threshold requirement for any claim under the relevant sections of the Confidentiality of Medical Information Act.

The reasoning is worth understanding because it draws a line that many software vendors will want to study. Section 56.06 reaches businesses that maintain medical information in order to make that information available to individuals or to health care providers, for the purpose of allowing the individual to manage their own information or for diagnosis and treatment. The Court found that J.M.’s complaint alleged that Illuminate makes its data available to educators, students, and parents to support educational evaluation and planning, not for individual medical management or for diagnosis and treatment by a health care provider. The Legislature, the Court explained, had specific business models in mind when it extended the statute beyond traditional medical providers, including personal health record services and consumer-facing health applications. A business-to-business educational software platform, even one that stores medical information, doesn’t automatically fall within those categories.

Justice Groban’s concurrence went further on this point. He argued that J.M. had also failed to allege that maintaining medical information is integral to Illuminate’s business purpose in the first place, and that he would have affirmed the trial court’s denial of leave to amend, on the view that the defects in the complaint can’t be cured. The majority left that determination to the lower courts on remand.

For technology companies, the holding cuts two ways. The expanded liability standard means that covered entities now face data breach exposure on substantially easier pleading terms than before. But the statutory definition of who counts as a covered entity remains limited, and businesses that process medical information purely as part of a downstream service to a business customer, rather than as a service to individual end users, may not be covered at all.

The Customer Records Act Holding

The Court also held that J.M. couldn’t sue under the Customer Records Act because he wasn’t Illuminate’s “customer” within the meaning of that statute. The Customer Records Act authorizes a civil action by an injured “customer,” which it defines as an individual who provides personal information to a business for the purpose of purchasing or leasing a product or obtaining a service from that business.

The Ventura County Office of Education purchased Illuminate’s services. J.M. didn’t. The Court of Appeal had reasoned that J.M. and other students were the ultimate beneficiaries of Illuminate’s services and should be treated as customers for purposes of the statute. The Supreme Court rejected that reasoning. The Customer Records Act defines “customer” narrowly and uses that term, rather than the broader “consumer” or “individual,” when authorizing a private right of action. The Legislature’s choice is treated as deliberate.

This is a meaningful clarification for any business that operates on a business-to-business model where the end users of the service never directly transact with the vendor. The Customer Records Act may not give those end users a path to sue the vendor directly, even when the vendor experiences the breach.

What This Means in Practice

A handful of takeaways worth flagging for in-house counsel, technology executives, and anyone with vendor risk on their balance sheet.

The “actually viewed” defense is gone for any covered entity. Vendor and service agreements that allocated risk on the assumption that this defense was available need to be re-papered. Incident response playbooks that assumed a breach without confirmed access would be defensible need to be revisited.

The statutory definition of “provider of health care” still does work. Tech vendors processing medical information in a purely business-to-business context, without making the information available to individuals for personal management or to providers for diagnosis and treatment, may have a strong argument that they aren’t covered. That argument has to be made carefully and is fact-dependent.

End users may have fewer direct paths to sue a business-to-business vendor under the Customer Records Act than the Court of Appeal had suggested. But other statutory regimes, including the California Consumer Privacy Act, remain available and contain their own enforcement mechanisms.

The Court’s specific reference to artificial intelligence as a mechanism by which breaches can occur without human viewing isn’t a holding, but it signals that California courts are thinking about how privacy statutes apply to modern data exposure scenarios. Businesses building AI products, or businesses whose data may be ingested by AI systems, should treat this as one more reason to take a fresh look at their data governance.

Bottom Line

J.M. v. Illuminate Education, Inc. is the kind of decision that will be litigated around for years. Plaintiffs’ counsel will lean on the new “significant risk” standard. Defense counsel will lean on the narrow statutory definitions that still limit who is covered in the first place. The shape of California data breach litigation just changed, and the right time to think about what that means for your business is now, not after the next incident.

If your business processes personal or medical data through third-party vendors, or if you’re the vendor sitting on that data, this decision changes the calculus on incident response, contract allocation, and litigation exposure. Reach out to Horst Legal Counsel to talk through how this affects your operation.

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If you own, operate, or invest in a hotel or extended-stay property in California, you have probably heard of the “28-day shuffle.” The playbook is familiar: require all guests to check out before they hit 30 consecutive days of occupancy, make them stay away for a few days, and then let them re-register. The goal is to keep guests in “transient occupancy” status indefinitely, which means no tenant protections, no eviction proceedings, and no obligations that come with a landlord-tenant relationship. Some operators have been running this policy for years under the assumption that as long as every guest gets the same treatment, the legal exposure is manageable.

A California Court of Appeal decision issued this month suggests that assumption deserves a second look.

The Hotel and the Policy

The defendants in Aerni v. RR San Dimas, L.P. (Cal. Ct. App., 2nd Dist., Apr. 16, 2026) own the Red Roof Inn in San Dimas, a 134-room economy hotel that has enforced a maximum 28-day stay policy for at least the past several years. The policy applies to every guest without exception. At check-in, guests are told verbally and in writing that their stay cannot exceed 28 consecutive days, and they are required to initial an acknowledgment of that limit. Anyone who reaches day 28 must vacate the property completely for at least three days before reregistering.

The hotel advertised itself on Craigslist as an “extended stay” property in the “apartments, housing for rent” section, with weekly rates of $427. Some guests had lived there for more than five years. Some listed the hotel address as their primary residence on their registration cards, a practice the hotel did not prohibit. A hotel principal testified, candidly, that the 28-day policy was designed in part to avoid lengthy eviction proceedings.

The two named plaintiffs stayed at the hotel in overlapping 28-day increments from June through November 2022. Each time they hit day 28, they left for the required three days, typically to their vehicle or another motel, then returned and reregistered. In November 2022, they filed a putative class action under Civil Code section 1940.1, the statute that prohibits the 28-day shuffle.

What the Statute Actually Says, and What It Does Not

Civil Code section 1940.1 was enacted to give residential hotel occupants a path to tenant protections once they have been in continuous occupancy for 30 days. The statute creates a private right of action for guests who can show three things: that they occupied a “residential hotel,” that the hotel required them to move out or re-register before 30 days, and that the purpose of that requirement was to keep them in transient occupancy status.

The definition of “residential hotel” comes from the Health and Safety Code, and it is where the litigation turned. A residential hotel is, roughly speaking, a multi-unit building used as guests’ primary residence, unless the building is primarily used by transient guests who have other primary residences.

The defendants moved to defeat class certification on the ground that each class member would need to prove individually that the hotel was their personal primary residence. The trial court agreed. Because the statute uses the phrase “primary residence” in defining what a residential hotel is, the court reasoned that liability required an individualized showing from each plaintiff about their own residential situation. That kind of individualized inquiry, the court held, prevents common issues from predominating, which kills class certification.

Where the Trial Court Got It Wrong

The Court of Appeal reversed. The error, the court explained, was treating a hotel-wide question as though it were a plaintiff-by-plaintiff one.

“Residential hotel” is a characteristic of the building, not of any individual guest. The statute asks whether the hotel as a whole is used as guests’ primary residence and whether it is primarily used by transient guests who have other homes. Those are questions about the property, answerable through occupancy data, duration-of-stay statistics, advertising practices, and the hotel’s own policies. They do not require the court to interrogate each of the potentially 1,700 class members about their personal living arrangements.

The court was careful to distinguish the only individualized element the statute actually contains: whether that specific plaintiff was required to check out before 30 days for the purpose of keeping them in transient status. That inquiry is individual. But the threshold question of whether this is a residential hotel to begin with is not. And because the trial court denied class certification on the basis of that threshold question alone, the denial was grounded in an erroneous legal assumption. That kind of legal error, regardless of whether there might otherwise be evidence to support the outcome, is grounds for reversal.

The court also acknowledged that the statute has real ambiguities, including what percentage of non-transient guests makes a building “residential,” and how to assess a hotel’s status if its occupancy patterns change over time. It was candid enough to tell the Legislature to fix those gaps. For now, those questions go to the merits of the claims, not to whether a class should be certified. They will be litigated another day.

What This Means for Property Owners and Investors

The practical implications extend beyond the Red Roof Inn in San Dimas.

Any California hotel or extended-stay property that systematically enforces sub-30-day checkout policies should treat this decision as a signal to audit its exposure. The fact that a policy applies uniformly to all guests is not a shield against class treatment. If anything, a written, uniform policy applied to hundreds of guests over multiple years is precisely the kind of common evidence that makes class certification possible. The hotel’s own testimony that the policy was designed to avoid tenant relationships, combined with advertising that targeted long-term occupants, will not look favorable when the case goes back to the trial court.

For buyers and lenders evaluating hospitality or extended-stay assets, this decision adds a diligence item that has not always appeared on the checklist. If a property has a history of 28-day checkout cycles, if it markets itself to long-term guests, and if its occupancy data shows a meaningful proportion of stays that cluster just below 30 days, the exposure under section 1940.1 is real and, after Aerni, potentially certifiable as a class action. That is the kind of contingent liability that belongs in a purchase agreement representation, not a post-closing surprise.

For operators who are currently running variations of the 28-day policy, the decision counsels caution. The statute’s ambiguities remain unresolved, and the trial court has yet to decide the merits of the underlying claims. But the class certification hurdle, which defendants in these cases have historically used as an effective early exit, just became harder to clear.

The Bottom Line

The 28-day shuffle has always been legally questionable. What Aerni adds is a practical reality: the legal theory behind it is now more easily litigated as a class action. Hotel operators who rely on uniform checkout policies to avoid tenant relationships may find that the uniformity of the policy is exactly what allows a class to be certified against them. The case goes back to the trial court, the merits are still live, and the statute’s ambiguities are genuinely unresolved. But the path to a certified class of displaced guests, potentially numbering in the thousands, is now open, and property owners should be thinking carefully about what their records, their testimony, and their advertising will look like when that litigation arrives.

Real estate litigation involving landlord-tenant disputes, habitability claims, and property owner liability is a core part of Horst Legal Counsel’s practice. If you have questions about how Aerni affects your property or portfolio, we are glad to talk through it. Contact us here.

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Check fraud targeting businesses and professionals has become a routine hazard of commercial life. The scheme is almost always the same: someone poses as a client or counterpart, sends a check that looks legitimate, asks you to wire money once it “clears,” and disappears the moment you do. Banks know this pattern well enough to warn customers about it in their own account agreements. What they have not always made clear is what happens when a bank employee tells you, expressly, more than once, and in person, that the check has cleared and you are safe to proceed.

A California Court of Appeal decision issued earlier this month provides the most precise answer California courts have given to that question, and the answer has real consequences for businesses, law firms, and anyone who has ever acted on a verbal assurance from a banker.

The Facts That Made This Case Different

The plaintiff in Y.P. v. Wells Fargo Co. (Cal. Ct. App., 1st Dist., Apr. 9, 2026) was an attorney who received what appeared to be a cashier’s check for $99,700 from a purported client. Before wiring nearly $90,000 of those funds as directed, he did something most victims of this scam do not do: he called the bank specifically to ask whether the check was legitimate, was told it had cleared, went to the branch in person, raised his concerns again face-to-face with the same employee, and asked directly whether it was safe to proceed. The employee’s response was unambiguous: “Yes, it is all good; it is cleared and good to go.”

The next day, Wells Fargo notified him that the check had been returned as altered or fictitious and charged back $99,700 from his IOLTA account. He was left holding an $89,730 loss on a wire that had already gone out.

He sued.

Most of the Case Was Always Going to Lose

The trial court dismissed the case entirely, and the Court of Appeal largely agreed. The plaintiff’s contract claims failed because the deposit account agreement expressly authorized Wells Fargo to charge back unpaid deposits, warned customers not to deposit checks from people they did not know, and assigned responsibility for losses to customers who ignored those warnings. The court noted, with some directness, that the plaintiff fell victim to “the exact scheme” that Wells Fargo’s own agreement had described and cautioned against. The implied covenant claims failed for the same reason: the implied covenant of good faith cannot be used to contradict express contract terms. The negligent hiring and supervision claim failed for lack of any specific allegations about the employee’s prior conduct or known propensities.

Where the trial court went wrong was in dismissing the negligent misrepresentation claim along with everything else. The Court of Appeal reversed on that issue alone.

The Distinction That Saved One Claim

The line the court drew is worth understanding precisely. California law already recognized, following Holcomb v. Wells Fargo Bank, N.A. (2007) 155 Cal.App.4th 490, that a bank employee who tells a depositor their funds are “available” has a reasonable basis for doing so. Provisional credit is standard banking practice, and the vast majority of deposited checks do ultimately clear. Telling a customer their funds are available is not the same as guaranteeing the underlying instrument is genuine. That principle, standing alone, would have ended the plaintiff’s case.

But the plaintiff had not asked whether his funds were available. He had asked, twice and with explicit concern about potential fraud, whether the check itself was legitimate. The employee answered that specific question directly and affirmatively, without following the bank’s own internal procedure for verifying check validity. After the loss, the branch manager told the plaintiff that the correct procedure was to call the issuing bank before representing that a check was good. The employee had skipped that step entirely before telling the plaintiff he was clear to wire. A statement of present fact, made without reasonable grounds for believing it to be true, on which a customer justifiably relied, is negligent misrepresentation. The complaint stated that claim adequately.

The court also corrected an error in the trial court’s reasoning. Surviving a demurrer on negligent misrepresentation does not require alleging that the employee knew the check was fraudulent. That is intentional misrepresentation, a different and higher bar. Negligent misrepresentation requires only that the speaker lacked a reasonable basis for what they said, which the plaintiff established by alleging the employee skipped the bank’s own verification steps.

What This Means for Your Business

The practical takeaway is not that banks are now broadly liable for check fraud losses. They are not, and this decision changes very little of that baseline. What it identifies is the narrow set of circumstances in which a misrepresentation claim can survive.

Two things need to be true. The bank employee must have responded to a question about the instrument’s validity, not merely about whether funds were available. And the employee must have lacked a reasonable basis for that answer, typically because the bank had a procedure for verifying that question and did not follow it. If either element is missing, the case falls squarely within the established line of authority holding that reliance on statements about check status is unreasonable as a matter of law.

For businesses that handle third-party funds, process wire transfers, or operate in any context where check verification matters, the decision reinforces a few practical habits worth keeping. Document your conversations when you express concerns about a transaction. Understand that “funds available” and “check verified” are not synonymous, regardless of how casually a banker uses the words. And if you receive a specific assurance about an instrument’s legitimacy, get it in writing before acting on it. The California Uniform Commercial Code’s allocation of check fraud risk to depositors remains intact. The exception carved out by an employee’s direct, unqualified, and procedurally unsupported representation about an instrument’s legitimacy is real, but it is narrow, and most victims of this scheme will still bear the loss.

The decision also carries something worth noting for financial institutions. The same deposit account agreement that shielded Wells Fargo from contract liability contained language warning about the exact fraud pattern at issue, which ultimately helped establish that the employee’s assurances went well beyond what the contract authorized or any reasonable banking procedure would support. The existence of internal verification steps, once they come to light, defines the standard against which employee conduct will be measured.

The Bottom Line

Banks win most of these cases, and they should. The statutory framework allocates check fraud risk to depositors for good reasons, and no court is going to rewrite that allocation because a transaction turned out badly. What this decision confirms is that the protection is not absolute. When a bank employee steps outside the role of processing transactions and into the role of affirmatively vouching for an instrument’s legitimacy, a negligent misrepresentation claim becomes available if that assurance turns out to be groundless. The gap between “your funds are available” and “your check is good” is narrow in ordinary language but legally significant, and knowing where that line falls matters whether you are on the receiving end of a fraudulent check or on the other side advising a financial institution about what its employees say at the branch window.

Disputes arising from wire fraud, financial misrepresentations, and bank transactions are areas where Horst Legal Counsel regularly advises clients. If your business has encountered a situation like this one, we are happy to talk through where you stand.  Contact Us Here!

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If your company does construction work for a California city or county, you need to know about a case the Second District Court of Appeal just published. The short version: any private individual with knowledge of fraud against public funds can sue you under the California False Claims Act, and the procedural technicalities you might have counted on to make the case go away no longer work the way defendants thought they did.

In Albarghouti v. LA Gateway Partners, LLC (2d Dist., April 2, 2026), the Court of Appeal reversed the dismissal of a qui tam lawsuit against two companies involved in construction projects at Los Angeles International Airport. The court’s reasoning reshapes how the CFCA’s procedural requirements work in practice, and it tilts the playing field toward private whistleblowers in a meaningful way.

What Happened

Jamal Albarghouti filed a qui tam complaint in May 2022 alleging that LA Gateway Partners and PCL Construction Services submitted false claims to the Los Angeles Department of Water and Power and Los Angeles World Airports in connection with LAX construction projects. Under the CFCA, a private individual (called a “relator”) can bring suit on the government’s behalf when they discover fraud against public funds. The incentive is significant: if the government doesn’t intervene, the relator can collect between 25 and 50 percent of the proceeds recovered in the action.

Albarghouti followed the statutory playbook. He filed his complaint under seal, mailed a copy to the Attorney General by certified mail with return receipt requested, and noted on the required Judicial Council form that the seal would expire 60 days later, on July 26, 2022. Then he waited.

Here’s where things went sideways. Because the case involved political subdivision funds (not state funds), the Attorney General’s office was supposed to forward the complaint to LADWP and LAWA within 15 days. It didn’t. An internal error at the AG’s office meant the complaint never reached the local prosecuting authorities. Nobody sought to extend the seal. Nobody notified the court of a decision to intervene or decline.

After the 60 days passed, Albarghouti served the defendants and began litigating. The defendants demurred, arguing he had “prematurely” broken the seal by serving them before the Attorney General notified the court of its decision. The trial court agreed and sustained the demurrer without leave to amend, effectively killing the case.

What the Court of Appeal Decided

The Second District reversed on two independent grounds, both of which matter for businesses facing qui tam exposure.

The seal lifts automatically after 60 days. The court held that the CFCA creates a default 60-day sealing period. When that period expires and the government has neither requested an extension nor notified the court of its intervention decision, the seal lifts on its own. The statute says the complaint “may remain under seal for up to 60 days.” The court read that language to mean exactly what it says: 60 days is a ceiling, not a floor. The defendants argued the seal stays in place indefinitely until the government acts. The court rejected that reading, noting it would render the 60-day language meaningless and would perversely reward governmental inaction. Under the defendants’ theory, the government could extend the seal forever simply by doing nothing, without ever having to show the “good cause” the statute requires for formal extensions. The court found that result inconsistent with both the statutory text and the Legislature’s intent to encourage private enforcement of the CFCA.

Procedural noncompliance doesn’t automatically kill the case. Following the U.S. Supreme Court’s reasoning in State Farm Fire and Casualty Co. v. U.S. ex rel. Rigsby (2016), the court held that a relator’s failure to comply with the CFCA’s sealing and service requirements does not mandate automatic dismissal. The CFCA specifies dismissal as the remedy for other kinds of violations (like cases based on publicly disclosed information), but it says nothing about dismissal for seal violations. That silence, the court reasoned, was intentional. Compliance with sealing procedures isn’t even something a qui tam plaintiff can allege at the time of filing, because most of the requirements involve post-filing actions. A demurrer was the wrong vehicle to challenge compliance.

The court also dispatched the defendants’ standing argument. They claimed Albarghouti lacked standing to pursue the case because the government never “assigned” him the right to proceed. The court pointed to the plain language of section 12652, which authorizes a qui tam plaintiff to bring the action without any prior governmental approval, and which allows the plaintiff to remain a “full party” even if the government does intervene.

Why This Matters for Your Business

This decision changes the practical calculus for any company that does business with California’s state or local governments. Here’s what you should take from it.

First, procedural defenses are weaker than they used to be. Before Albarghouti, defendants in qui tam cases could reasonably hope that a relator’s missteps in the sealing process would provide grounds for dismissal. That argument just lost significant ground. The court made clear that compliance with sealing requirements isn’t even a pleading element of a CFCA cause of action, and that noncompliance doesn’t trigger automatic dismissal. If you’re a defendant in a qui tam action, your defense needs to be built on the substance of the claims, not on procedural foot faults.

Second, the 60-day clock is real. The government can no longer sit on a qui tam complaint indefinitely while the seal stays in place. If the AG’s office doesn’t act within 60 days, the relator can move forward. For businesses, this means you could be served with a qui tam lawsuit as soon as 60 days after filing, with no ambiguity about whether the relator jumped the gun. The timeline is now clear and predictable.

Third, internal compliance matters more than ever. When procedural defenses shrink, substantive defenses become the whole ballgame. If your company holds government contracts, the best protection against a qui tam suit is making sure your billing practices, reporting, and contract performance can withstand scrutiny. An employee who sees irregularities now has a clearer, faster path to the courthouse.

Bottom Line

The Albarghouti decision makes it easier for private whistleblowers to bring False Claims Act suits against government contractors in California, and harder for defendants to escape those suits on procedural grounds. If your business works with public agencies, the time to audit your compliance practices is before a relator files, not after.

Horst Legal Counsel advises businesses on litigation risk, government contract exposure, and dispute resolution strategy. If you have questions about how this decision might affect your operations, we’re here to help.

The post California’s False Claims Act Just Got Harder to Dismiss appeared first on Horst Legal Counsel.

Horst Legal Counsel | April 2026

Someone torpedoes your deal. You spend north of a million dollars in court forcing the sale through. You win. Then you sue the people who caused the mess in the first place, and you win again. But the second lawsuit cost you another $841,000 in legal fees. Can you recover those fees too?

The First District Court of Appeal just said no. In Guinnane Construction Co., Inc. v. Chess, the court confirmed that California’s “tort of another” doctrine covers the attorney fees a business is forced to spend litigating against an innocent third party because of someone else’s wrongful conduct. It does not cover the fees spent going after the wrongdoer directly. That distinction sounds technical, but for any business that has been dragged into layered litigation by a bad actor, it is the difference between full recovery and absorbing six figures in legal costs.

What Happened in Guinnane

The dispute started with an 80-acre parcel of land in Livermore. Guinnane Construction held the right to purchase a 50 percent interest in the property through an assigned right of first refusal. Edmund Jin, a prospective buyer, and his real estate agent Stephen Chess knew about that right. They pursued the deal anyway, ultimately convincing the sellers to breach their agreement and sell to Jin for $1.5 million.

Guinnane sued the sellers for specific performance. That case was fully litigated for over a year, culminating in a bench trial. Guinnane prevailed, obtaining a court order directing conveyance of the property interest in exchange for $1.2 million.

Guinnane then turned to the people who had caused the problem. It filed a separate action against Jin and Chess for inducing breach of contract and intentional interference with contractual relations. After years of litigation, including a meritless anti-SLAPP motion by the defendants that this same appellate court had already rejected, the trial court entered judgment in Guinnane’s favor. The compensatory damages totaled $1,798,994, consisting of the attorney fees Guinnane had incurred prosecuting the specific performance action plus prejudgment interest.

So far, the tort of another doctrine was working exactly as designed. The fees Guinnane spent suing the sellers were recoverable as damages against the people whose interference made that lawsuit necessary. The question was what came next.

The Fee Request the Court Denied

After judgment, Guinnane moved for an additional $841,133 in attorney fees: the cost of prosecuting the tort of another action against Jin and Chess. Guinnane argued that without recovering those fees, its judgment would be significantly diluted. It had spent over $800,000 just to collect the damages the defendants’ own conduct caused. If the doctrine existed to make Guinnane whole, shouldn’t it cover the full cost of getting there?

The trial court denied the motion, and the Court of Appeal affirmed. Presiding Justice Stewart, writing for a unanimous panel, traced the doctrine from its 19th-century English common law origins through the California Supreme Court’s foundational decisions in Prentice v. North American Title Guaranty Corp. and Gray v. Don Miller & Associates. The through line was consistent: the tort of another doctrine allows a plaintiff to recover fees spent in litigation with a third party that the defendant’s tortious conduct made necessary. It does not extend to the fees incurred in the action against the tortfeasor.

Why the Court Drew the Line

The court’s reasoning rested on the structural relationship between the tort of another doctrine and the American Rule, codified in Code of Civil Procedure section 1021, which requires each party to bear its own attorney fees absent a statute or contract providing otherwise. The tort of another doctrine is not a general fee-shifting rule. It is a narrow equitable exception that treats certain attorney fees as consequential damages, specifically, the fees a plaintiff was forced to spend because of the defendant’s wrong. Those fees are recoverable as damages “like any other damages,” but the key phrase is “in the action against the third party.”

Gray itself made this distinction. The Supreme Court there remanded for an apportionment of attorney fees, directing the trial court to award only the portion “attributable to [the plaintiff’s] action against the sellers,” not the fees incurred in the fraud action against the broker. Subsequent decisions reinforced the boundary. In Lewis v. Edmonds, this same court rejected a tort of another claim for fees incurred suing the tortfeasor, noting the doctrine “arguably would support a recovery from [the defendant] for the attorney fees incurred in [plaintiffs’] defense of the foreclosure proceeding” but not fees from “the ordinary two-party action” against the wrongdoer. Third Eye Blind, Inc. v. Near North Entertainment drew the same line, distinguishing fees recoverable under the doctrine from “attorney’s fees qua attorney’s fees” incurred in suing the tortfeasor defendant.

Guinnane tried an alternative argument: that “fees on fees” are recoverable under the private attorney general doctrine (Code of Civil Procedure section 1021.5), and the same logic should apply here. The court rejected the analogy. The private attorney general doctrine exists to incentivize enforcement of important public policies. Without fee recovery, such litigation would often be impracticable, and statutory rights would go unenforced. The tort of another doctrine serves a different function. It compensates a plaintiff for a specific economic injury. It does not aim to encourage litigation or deter bad conduct. Those are fundamentally different engines, and extending “fees on fees” from one to the other would require the kind of policy decision that belongs to the Legislature.

The court acknowledged the practical unfairness. Guinnane spent over $841,000 to collect damages that the defendants’ own tortious interference had caused, and the defendants’ aggressive litigation tactics, including a meritless anti-SLAPP motion, made the case more expensive than it needed to be. The opinion closes by noting that sanctions for frivolous litigation tactics exist as a potential remedy, but the bar is high. As for changing the underlying rule, the court said plainly: “this court is not at liberty to depart from current law.”

What This Means for California Businesses

For companies involved in real estate transactions, commercial contracts, or any business relationship where a third party’s interference might trigger cascading litigation, Guinnane offers three practical lessons.

First, budget for the full cost of enforcement. If you are the victim of tortious interference and need to sue both the breaching party and the interfering party, the tort of another doctrine will help you recover the fees from the first lawsuit. It will not help you recover the fees from the second. That reality should inform how you structure your litigation strategy, how you allocate resources, and how you evaluate settlement offers.

Second, look for contractual and statutory fee provisions early. The American Rule applies by default, but contracts can change the calculus. If your agreements include attorney fee provisions that cover disputes arising from interference or breach, you may have an independent basis for fee recovery that the tort of another doctrine does not provide. Review your contracts with this gap in mind.

Third, consider injunctive relief and other early intervention strategies. The cheapest way to deal with cascading litigation is to prevent it. When a third party is actively interfering with a deal, tools like lis pendens, temporary restraining orders, and preliminary injunctions can stop the interference before it metastasizes into years of multi-front litigation. The earlier you involve litigation counsel, the more options you have.

Guinnane Construction v. Chess is a well-reasoned opinion that confirms what practitioners have long suspected about the boundaries of the tort of another doctrine. It is also a reminder that winning on the merits does not always mean recovering every dollar you spent getting there.

The post The Tort of Another Has Limits: appeared first on Horst Legal Counsel.

Horst Legal Counsel | March 2026

When a contract ends, parties often assume the old deal is no longer part of the story. This case is a reminder that assumption is not always right.

In Pomona Valley Hospital Medical Center v. Kaiser Foundation Health Plan, Inc., the California Court of Appeal addressed what happens after a long running reimbursement agreement is terminated and the parties move into a dispute over the reasonable value of services. Kaiser argued that once the contract ended, the prior agreement had no role in determining what the hospital should be paid. The Court of Appeal disagreed.

Pomona Valley Hospital and Kaiser had operated under a reimbursement contract dating back to 2004. After Kaiser terminated the agreement, the hospital continued providing emergency services to Kaiser members, and Kaiser began paying what it unilaterally considered the reasonable value of those services. The hospital sued in quantum meruit, alleging Kaiser had underpaid by tens of millions of dollars for services provided between late 2017 and early 2020.

At trial, the hospital introduced evidence of the parties’ prior contract rates as part of its proof of value. The jury found in the hospital’s favor. After the verdict, however, the trial court concluded that the prior contract should not have been admitted into evidence and granted Kaiser’s motion for a new trial, while also offering remittitur as an alternative. That ruling set up the appeal.

The core issue before the Court of Appeal was whether the prior contract rates could still be considered as evidence of reasonable value, even though the contract itself had already been terminated. The court held that they could.

The appellate court explained that the jury was not being asked to enforce the old agreement. It was being asked to determine the reasonable value of the services the hospital had provided. In that context, the parties’ historical contract rates were relevant evidence the jury could consider along with the rest of the valuation record. The court therefore rejected the idea that the prior agreement was categorically off limits simply because the legal theory had shifted from contract enforcement to quantum meruit.

That distinction matters. In many business disputes, the real fight begins after the contract ends. The legal framework changes, but the economic history between the parties does not disappear. A prior pricing arrangement may still become important evidence of what both sides previously accepted as fair, and that history can shape how a court or jury evaluates a later claim for reasonable value.

The Court of Appeal did agree with Kaiser on one point. It held that the prejudgment interest rate applied below should be reduced from 10 percent to 7 percent. But on the central evidentiary issue, the court concluded the trial court had erred in treating the prior contract as inadmissible and in granting a new trial on that basis.

Why This Case Matters

Although this opinion arose in the healthcare reimbursement context, its logic extends well beyond that setting. Service providers, vendors, contractors, and businesses in long term commercial relationships often end up in disputes after an agreement is terminated. When payment claims shift into quantum meruit or other reasonable value theories, the parties’ prior course of dealing may still carry real evidentiary weight.

That makes this case a useful reminder that a terminated contract is not always a dead document. Even if it no longer governs the parties’ rights, it may still shape the valuation battle that follows.

Bottom Line

Pomona Valley Hospital Medical Center v. Kaiser Foundation Health Plan, Inc. shows that when a contract ends, the dispute does not necessarily start from zero.

The legal claim may change, but the prior deal may still matter. For businesses involved in posttermination payment disputes, that pricing history may become one of the most important parts of the case.

The post Lessons from Pomona Valley Hospital Medical Center v. Kaiser Foundation Health Plan, Inc. appeared first on Horst Legal Counsel.

When operations get disrupted, customers look for refunds. Students are no different. During COVID-era campus closures, many sued universities for tuition back based on an “implied promise” of in-person education.

This California Court of Appeal just rejected this effort in a case involving Chapman University, finding that Chapman had not made a specific promise to provide in-person education to its students. The opinion makes clear that broad messaging about the campus and facilities descriptions, even with “face-to-face” language, can still be too general to become an enforceable contract term.

What happened

Two Chapman University students challenged summary judgment after Chapman moved instruction online during the COVID-19 pandemic in March 2020, following local lockdown orders.

Looking ahead to Fall 2020, Chapman told students its “goal” was to reopen, described a mix of in-person, online, and hybrid classes, and said it was “optimistic,” but conditioned any return on governmental “support and approval.” In August, Chapman told students approval was unlikely and the semester would be remote. The plaintiffs stayed enrolled and later graduated.

They sued for breach of contract, unjust enrichment, and unfair business practices, seeking a partial tuition refund. They pointed to the course portal listing locations, a credit-hour policy referencing weekly “face-to-face contact” for traditional classes, a faculty handbook, catalogs describing campus facilities (with a contract disclaimer), and Chapman’s historical practice of mostly in-person instruction.

The legal frame

This case sits in a familiar but narrow lane of higher-education contract law: courts will enforce only specific promises a university undertakes. General expectations about the student experience are not enough.

When there is no formal agreement spelling out terms, courts look to implied terms based on the parties’ reasonable expectations in context, including representations in publications. But the key test is definiteness and specificity: the more explicit the representation, the more reasonable it is to treat it as a contractual promise.

Procedurally, this was summary judgment. On appeal, the court reviewed the ruling de novo and viewed the evidence in the light most favorable to the students.

What the court held (and why)

The court affirmed summary judgment because in-person education was not part of the parties’ bargain.

It’s not enough that students expected an on-campus experience. The point is whether the university bound itself to deliver it. California law requires a specific promise, not a general expectation, and the court held that even extensive campus materials here did not cross that line.

The court walked through the students’ evidence and treated it as nonbinding context, not contract terms. The registration portal listed expected locations. The credit-hour policy used “face-to-face contact” language for traditional classes. The catalogs touted facilities but included an express disclaimer that they should not be considered the basis of a contract. The faculty handbook was not directed to students and there was no evidence students even had access to it. And past practice of primarily in-person instruction did not amount to a promise forever.

Chapman’s reopening communications did not help the students because they were aspirational and contingent. Calling reopening a “goal,” expressing optimism, and conditioning in-person instruction on governmental approval is the opposite of an unequivocal assurance. It’s not “We will.” It’s “We hope, if we can.”

The court also rejected the idea that tuition pricing implied an in-person promise, noting there was no evidence Chapman offered a cheaper online program that would make “in-person” look like a priced contractual feature.

On remedies, the court emphasized the benefit-of-the-bargain reality in the record: the plaintiffs took classes, graduated, and received degrees. On that record, the contract claim could not succeed, and unjust enrichment failed for the same reason.

The unfair business practices claims also failed. The “unfairness” theory rose and fell with the contract theory, and the “unlawfulness” theory relied on Education Code section 94897, which the court treated as inapplicable because Chapman was accredited by the Western Association of Schools and Colleges and thus exempt under Education Code section 94874(i).

What the court did not decide

The students expressly did not fault Chapman for closing during the emergency. The opinion instead focused on a narrower question: whether the cited materials created a specific, enforceable promise of in-person instruction that survived the move online.

Why this matters for universities and higher-ed counsel

If you defend universities, this decision is a practical playbook for evaluating refund exposure when delivery modes change. Courts are drawing a bright line between experience marketing and contract terms. It’s not “Did we promote the campus?” It’s “Did we promise, specifically, to deliver that modality?”

This also sharpens drafting and communications strategy. Disclaimers in catalogs mattered. So did careful, conditional language when discussing reopening. When institutions speak in goals and contingencies, they reduce the risk that a court will treat communications as binding commitments.

Practical takeaways

• Audit catalogs, portals, and policy statements for language that could be read as a firm commitment on modality or access, then tighten it to measurable, conditional terms where appropriate.
• Use clear disclaimers in student-facing materials, especially catalogs and program descriptions, and make sure they are not buried.
• Document the “bargain” in plain terms: what students receive (instruction and credits leading to a degree), and what remains operationally flexible (how and where instruction is delivered).
• Coordinate compliance and advertising review for unfair competition risk: if a claim is framed as “unlawful,” exemptions and applicability can be dispositive.

Bottom line

The California Court of Appeal affirmed summary judgment for Chapman University: statements about campus life, facilities, class locations, and “face-to-face” language did not amount to a specific implied contractual promise of in-person instruction.

For universities, the message is operational but simple: keep promises specific, keep expectations realistic, and keep public-facing language disciplined, especially when circumstances can force rapid delivery changes.

The post Grant v. Chapman University: appeared first on Horst Legal Counsel.

A Brief Filled With Quotes That Never Existed

The case itself is a straightforward business dispute. But the Court of Appeal never reached the merits because something far simpler stopped the entire process: the appellant’s opening brief contained several quotations attributed to California cases that simply aren’t real.

Respondent moved to strike the brief and dismiss the appeal. Their argument was that the lawyer relied on AI tools that hallucinated these quotes and even pulled a transcript excerpt from the wrong case.

When confronted, the attorney didn’t deny the errors. Instead, he said these were “clerical citation mistakes”—the result of his staff forgetting to replace a few paraphrased placeholders with actual case language. He denied the involvement of AI.

The court didn’t seem to buy it for a second. More importantly, though, it made clear that it couldn’t matter less how the errors happened.

The Court’s Point: You Chose the Workflow, You Own the Consequences

The justices started with a basic rule every litigator learns early in their career:
You don’t misquote the law. Period.

Whether the bad quotes came from AI, a rushed associate, or a sloppy editing process didn’t matter. California courts have made their position very clear in recent decisions like People v. Alvarez and Noland v. Land of the Free, L.P.: if you file a brief containing fabricated authority, you are responsible for the misrepresentation.

In Shayan, the court walked through the types of inaccuracies it found—stitched-together quotes that never appeared in the cited case, paraphrases disguised as direct quotations, and even language about issues the underlying opinions never discussed.

Some of these errors didn’t even help the attorney’s argument. But that’s not the point. The court emphasized the systemic harm: if fake quotes make it into the briefing ecosystem, they get repeated, cited, and eventually accepted as “law” by someone who doesn’t double-check.

Sanctions: Not Fatal, But Serious

The court didn’t dismiss the appeal outright, but the sanctions were still significant:

• $7,500 payable to the court,
• The opening brief stricken, with a corrected version required, and
• A State Bar referral.

The message here is plain and consistent with the Court of Appeal’s previous decisions on AI-generated inaccuracies: California courts are no longer giving the benefit of the doubt—or a slap on the wrist—when legal arguments are backed by unreliable authority.

Why Clients and In-House Teams Should Pay Attention

At first glance, this looks like a lawyer problem. It isn’t.

This is now a business-risk issue tied directly to the quality of your litigation strategy and your selection of litigators. The Court did not dismiss the appeal this time, but make no mistake: client outcomes are being placed directly at risk every time this phenomenon recurs.

Key Takeaways

• AI can assist, but cannot replace verification.
  Courts won’t tolerate briefs containing AI hallucinations, and no amount of finger-pointing at software will fix it.
• Your company’s reputation gets dragged in too.
  A sanctions order like this affects credibility—not just for the lawyer, but for the client behind the filing.

What Companies Should Do Right Now

AI is already part of litigation, whether anyone says it out loud. The question is whether your company has guardrails in place to control the risks.

Two Immediate Steps

• Update outside counsel guidelines to require disclosure of AI use in research and drafting, and insist on human review before anything goes to court.
• Set internal protocols so your in-house team doesn’t accidentally send AI-generated text into a filing or regulatory submission without a second set of eyes.

Shayan v. Shakib won’t be the last case where a California court confronts AI hallucinations, but it’s already one of the clearest. The takeaway is simple: AI can speed up drafting, but it cannot replace judgment, accuracy, or professional responsibility. Companies should expect their attorneys—and their internal teams—to build workflows that reflect that reality.

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