You shouldn't have to have a law degree to understand that, if you are going to file a lawsuit, you need to sue the right person – especially if you are seeking $300 million and punitive damages.

Remarkably, that’s the lesson that the California Court of Appeal had to deliver in a case it recently decided. (Medley Capital Corporation v. Security National Guaranty, Inc.)

The dispute arose over a $22.5 million loan to Security National Guaranty (SNG) by a company named Fourth Third LLC. SNG, run by Edmond Ghandour, borrowed the money to finance a real estate development in Northern California.

The appellate court’s decision doesn’t go into much detail about the underlying business issues, but in 2014 SNG demanded that Fourth Third accept $15 million as payment in full on the loan, effectively giving SNG a discount of over $7 million. Fourth Third refused to discount the loan.

On July 2, 2014, SNG’s attorney sent a letter to Fourth Third saying that, unless the discounted payoff offer was accepted within seven days, SNG would “immediately commence suit” against the lender and the firms that serviced the loan. The letter identified the servicers as Medley Capital LLC, Medley Capital Corporation, Medley Opportunity Fund L.P., and Medley Opportunity Fund Ltd.

Fourth Third’s attorney responded the very next day, saying, “Your letter improperly attempts to draw in” the four Medley firms, when “the only entity who has any relationship with SNG is Fourth Third LLC.” Counsel also pointed out that Medley Capital Corporation (MCC) is a publicly held company (it is listed on the New York Stock Exchange), and that asserting unsubstantiated claims against it “could cause significant damage.”

Three weeks later, Fourth Third filed a lawsuit against SNG demanding immediate repayment of the loan, which by then totaled nearly $44 million including interest, fees and penalties.

SNG, undeterred, filed a cross complaint against Fourth Third and MCC on Sept. 2, alleging that Fourth Third and MCC had fraudulently reneged on a commitment to accept the $15 million discounted payoff. SNG asked for $300 million in actual damages, plus unspecified punitive damages.

On Sept. 15, Medley Management Inc., an affiliate of MCC, made a $108 million initial public offering.

Exactly one week later, SNG issued a press release announcing that it had sued MCC, a “NYSE business,” with the headline: “Medley Capital Corporation and Fourth Third Sued by Security National Guaranty for in Excess of $300 Million.”

Internet message boards lit up as investors wondered whether the lawsuit meant that MCC had committed fraud.

But, as Fourth Third’s attorney pointed out in an Oct. 9 letter to SNG’s lawyer, Medley Capital Corporation was not an agent or loan servicer for Fourth Third. Medley Capital Corporation is one of several investment companies and funds managed by subsidiaries of Medley Management Inc., the lawyer’s letter noted.

In a brief email, SNG’s attorney responded that he had spoken with his client and “SNG has re-confirmed that Medley Capital Corporation is a proper defendant.” SNG said it would only remove MCC from the lawsuit if it agreed to waive all claims against SNG, including claims for malicious prosecution. MCC refused.

SNG and Fourth Third reached a settlement in February of 2015, under which SNG paid the lender $17 million. The settlement did not include MCC, but in June SNG filed a dismissal of its cross complaint against MCC.

In September, MCC sued SNG and Ghandour for malicious prosecution.

As the appellate court explained, malicious prosecution refers to a civil lawsuit “brought without probable cause” and “initiated with malice” – that is, it was brought for an improper purpose, misusing the judicial system in an attempt to gain a benefit to which the plaintiff is not entitled.

“There is no evidence that [SNG’s and Ghandour’s] attorney…did anything to research the applicable facts, or applicable law, before filing the cross-complaint seeking $300 million in damages,” the appellate ruling noted. That could certainly imply malice.

In addition, the appellate judges said, SNG and Ghandour “were notified no fewer than four different times that MCC was the wrong entity to sue,” and emails written at the time show that they knew this. Yet they filed their lawsuit anyway. That, according to the ruling, is further evidence of malicious prosecution.

Strike three was “the misleading press release, with its misleading headline, naming MCC first, highlighting the fraud claim seeking punitive damages, not to mention $300 million in actual damages.” The appellate judges said “this too is evidence of malice.”

The appellate ruling affirmed the lower court’s decision to allow MCC to pursue its malicious prosecution claim against SNG and Ghandour, and ordered them to pay MCC’s costs.

Though malicious prosecution lawsuits are disfavored, this case is a reminder that under the right circumstances courts will still let them proceed.  The moral of the story is that in court, as elsewhere, it’s best to know what – and who – you are talking about.

By Laurie Murphy