March 3, 2010

Haight Brown & Bonesteel

Professional Liability News

Haight Brown & Bonesteel has been dedicated to defending professionals throughout the State of California for over 40 years. We are pleased to provide you with our first issue of Professional Liability News, a new regular publication of Haight Brown & Bonesteel. This edition contains the 2009 California published decisions with full case descriptions, broken down by profession – Lawyers, Accountants, Directors & Officers and Insurance Agents & Brokers – to assist you in your day-to-day professional activities. The published cases involving lawyers begins directly below. To view cases involving Directors & Officers, click here. To go directly to Accountants, click here, and for Insurance Agents & Brokers, click here.

LAWYERS

Communication of Settlement Offer to Opposing Counsel is a Protected Activity Subject to the Absolute Litigation Privilege:

Respondent Troy & Gould (TG) filed an action on behalf of MAG against GeneThera, Inc. and Laura Bryan (represented by Attorney Shoemaker). During the course of the action, TG sent a settlement letter to Attorney Shoemaker offering settlement with defendant Bryan only, if she also agreed to provide certain information to plaintiff. GeneThera and Bryan thereafter filed an action against TG alleging that the settlement offer constituted an interference with contractual relations and negligence. The trial court granted TG’s motion to strike the complaint under the anti-SLAPP statute. The appellate court agreed. The court found that an attorney's communication with opposing counsel regarding pending litigation is directly related to the right to petition and, therefore, subject to a SLAPP motion.

GeneThera Inc. v. Troy & Gould Professional Corporation (2/27/09) 171 Cal.App.4th 901

Testator’s Attorney Owed No Duty to Intended Beneficiary Based on a Claim that the Testator Intended the Bequest to be Increased:

Approximately six months before Schumert married Chang, he retained attorney Lederman to prepare a revocable trust. Schumert had been diagnosed with terminal cancer. The trust provided for distribution of his estate upon his death and included a payment to Chang which amount was reduced by a later amendment. A few months after Schumert and Chang married, Schumert instructed attorney Lederman to amend the trust and leave the entire estate to Chang, except for the sum of $250,000 which was to go to his son. Attorney Lederman refused and advised Schumert to get a psychiatric evaluation before making changes to his estate plan. Schumert died before this was accomplished. Chang then filed suit against Attorney Lederman alleging that he breached his duty of care to her as an intended third-party beneficiary of Schumert’s trust and estate. The trial court sustained Attorney Lederman’s demurrer to the complaint without leave to amend. Upholding the trial court’s decision, the Court of Appeal reaffirmed a long history of decisions holding that the testator’s attorney owes no duty to a non-client potential beneficiary when a will or trust has been executed, is free of legal defects and the question raised is the decedent’s intent. Finding such duty or liability on the part of a testator’s attorney would impose impossible duties because the interests of potential beneficiaries are always in conflict.

Chang v. Lederman (3/16/09) 172 Cal.App.4th 67

Legal Malpractice Could Not be Determined as a Matter of Law on a Motion in Limine and Exceeded the Trial Court’s Jurisdiction:

Blanks retained Seyfarth Shaw to represent him in an action against his former accountant for acting as a business agent without holding a license. When Blanks was not successful in his action, he sued Seyfarth Shaw, alleging that they failed to timely file a claim before the Labor Commissioner resulting in his inability to recover the $10.6 million which had been paid to the accountant. The trial court, on granting a motion in limine, precluded Seyfarth Shaw from presenting any testimony with regard to the attorney’s trial strategy and found that they were negligent as a matter of law. This, the Court of Appeal held, exceeded the authority of the trial court and decided an issue without full development of the facts.

Blanks v. Shaw (5/20/09) 171 Cal.App.4th 336

No Claim of Legal Malpractice Could be Found, as a Matter of Law, Where Class Counsel Complied With the Terms of the Notice Procedure:

Class member Martorana filed a legal malpractice claim against the class counsel alleging that counsel owed a duty to the class to establish a settlement notice procedure and owed a duty to each member of the class to take reasonable steps to notify them of their failure to file a claim and confirm each claim was timely submitted. Class counsel’s demurrer to the complaint was sustained. Martorana filed an amended complaint which further alleged that class counsel failed to negotiate a procedural mechanism in the settlement agreement requiring class counsel be notified before the claim filing deadline as to which class members had not yet responded. Martorana alleged that had he been contacted by counsel he would have filed a claim and received a portion of the settlement. Class counsel again demurred and again it was sustained without leave to amend. Martorana appealed. The Court of Appeal concluded that, in this instance, an action for malpractice could not be based solely on class counsel’s failure to provide more notice than was required by the court-approved settlement procedure.

Martorana v. Marlin & Saltzman, et al. (7/1/09) 175 Cal.App.4th 685

No Conflict of Interest in Attorneys Representation of Decedent, and Executor/ Beneficiary of Decedent’s Will:

Law firm Baker Manock & Jensen drafted a will for Lillian Salwasser which provided that certain property would be left to her husband and the remainder of the estate would go into a trust which identified two of her four sons as its only beneficiaries. Walter was one of the omitted heirs in Salwasser’s will. Salwasser’s husband died a short time later and Walter was appointed administrator of his estate. Walter filed a motion to disqualify the Baker firm based on allegations of conflict of interest in that the firm’s interests in representing Salwasser in drafting the estate plan was adverse to their representation of the beneficiary and executor of her estate. The trial court agreed finding a conflict of interest existed and disqualified the firm. The Court of Appeal reversed the decision. It was found that since no issue was raised that the will failed to make valid bequests contemplated by the testator, there could be no conflict. The court also could not find any divergence of interest between the son who was both a beneficiary and the executor, and therefore no conflict existed.

Baker Manock & Jensen vs. Superior Court (7/22/09) 175 Cal.App.4th 1414

Anti-SLAPP Statute Bars Action Against Attorneys Engaged In a Protected Activity:

An action was brought by a former wife against her ex-husband’s attorney and attorneys who represented ex-husband’s siblings and mother, alleging that they were part of a plan by ex-husband to evade his support obligations by changing his mother’s estate plan. Ex-husband owed a significant amount in unpaid support. Upon the death of ex-husband’s mother, it was alleged that the attorneys, ex-husband and siblings participated in probate proceedings and revised the mother’s estate plan in a manner that appeared to disinherit the ex-husband so as to prevent the former wife from collecting the support obligation. The Court of Appeal upheld the trial court's decision granting the attorneys' motion to strike under the anti-SLAPP statue, finding their activities to be protected as within the confines of the probate action.

Cabral v. Martins (8/21/09) 177 Cal.App.4th 471

Attorney's Knowledge of Lien Does Not, by Itself, Create a Fiduciary Relationship or Duty Between the Attorney and the Lienholder:

DePrato retained attorneys to represent him in an action to recover damages for injuries sustained in an automobile accident. DePrato received medical services from Sacramento MRI Center which sold and assigned its interest in DePrato's account to Kevin Gilman. DePrato and his attorneys signed a lien to Gilman against any recovery that he might receive in the litigation. The lien provided: "With respect to any and all monies received as a result of this INCIDENT, you are not to disburse any such monies prior to paying LIEN MEDICAL in full for the lien that LIEN MEDICAL holds as a result of this INCIDENT. YOU must pay LIEN MEDICAL in full within 30 days of receipt of any monies received as a result of this INCIDENT." DePrato later substituted in new counsel, Dalby, who did not sign the lien but acknowledged he was aware of it. The lawsuit settled for less than the litigation costs and DePrato received no monies, nor did the attorneys or Gilman. Gilman sued attorney Dalby claiming breach of fiduciary duty and conversion. The Court held that, in this case, the lien created nothing more than a contractual duty between DePrato, his attorneys and Gilman to withhold money for Gilman in the event the litigation was successful. It did not create a contractual or fiduciary relationship with attorney DePrato. The Court recognized that attorney Dalby was not a signator to the lien and his knowledge of its existence alone did not create a contractual duty.

Gilman v. Dalby (8/10/09) 176 Cal.App.4th 606

Denial of Attorney/Defendant’s Motion to Set Aside a Default Judgment Upheld:

Plaintiff Hearn filed a complaint alleging legal malpractice against attorney Anjilvel, Howard and Richlin. Anjilvel and Richlin settled with plaintiff before any appearance in the action was necessary. Howard failed to respond to the complaint but appeared at a default prove-up hearing. At the hearing, plaintiff presented testimony concerning the facts of the underlying case, evidence that Howard failed to comply with the standard of care and that plaintiff would have prevailed had the standard of care been met. Documentary evidence was admitted supporting plaintiff’s damage request of $245,000 and $15,000 in attorneys fees. After judgment was entered in favor of plaintiff, Howard made a motion to vacate the judgment based on a claim she had not been served. The trial court's judgment in favor of plaintiff and against Howard, was upheld on appeal. The appellate court found that the attorney's unsupported and subjective belief that she had not been served did not constitute the "mistake, inadvertence, surprise, or excusable neglect" that would otherwise entitled her to a set aside of the default judgment.

Hearn v. Howard (9/1/09) 2009 WL 2752756 (Cal.App.2 Dist.)

There Was No Violation of Due Process Rights Based on Liability of Defendant to Disclose Client’s Confidences:

Attorney Dietz brought an action for fraud, breach of contract and other causes of action against Meisenheimer & Herron, based on Dietz’s referral of a bad faith case to Meisenheimer and an agreement that Dietz would receive 25% of any contingency fee that Meisenheimer might receive in the action. Meisenheimer filed a motion for protective order claiming that the action should be dismissed in its entirety because the attorney-client privilege prevented them being able to defend the case. The trial court dismissed the fraud cause of action, but permitted the case to proceed as to the other causes of action. Meisenheimer appealed, contending that it was deprived of its due process rights. The Court of Appeal upheld the trial court’s rulings, finding the four factors established in General Dynamics (1994) 7 Cal.4th 1164 could not be established so as to support a finding that Meisenheimer’s due process rights were being violated by the inability to disclose his client’s confidential information.

Dietz v. Meisenheimer & Herron (9/17/09) 177 Cal.App.4th 771

The Statutory Prohibition Against Requiring Disclosure of Attorney-Client Privileged Information was Violated by an Order Requiring Disclosure for an In-Camera Inspection:

Costco Wholesale Corporation retained a law firm to provide advice as to whether certain managers were exempt from wage and overtime laws in California. The firm’s attorney spoke to certain managers and thereafter issued an opinion letter to Costco. Years later, a class action was filed against Costco by several employees who claimed they had been classified as “exempt” and failed to receive overtime wages. The employees sought production of the opinion letter, to which Costco objected on the grounds of attorney-client privilege and work-product doctrine. At the hearing, the court ordered an in-camera review of the letter as to determine the merits of the privilege and/or work product claim and further ordered production of the letter in substantially redacted form. Costco’s writ of mandate from this order was denied. The California Supreme Court reversed, finding that when a communication is a confidential one between attorney and client, the entire communication is privileged, including any factual material contained within the communication. Further, the court could not order the production of a written communication which was claimed to be privileged in order to allow a ruling on the claim of privilege.

Costco Wholesale Corp. v. Superior Court (11/30/09) 47 Cal.4th 72

Adverse Rulings Requiring Disclosure of Attorney Client Protected Information Are Not Immediately Appealable Under the Collateral Order Doctrine:

In an unlawful termination suit, Mohawk Industries appealed from an order granting the plaintiff’s motions to compel disclosure of documents that it contended were protected by the attorney-client privilege. Plaintiff had met with Mohawk’s counsel in connection with another action against Mohawk during which the attorneys allegedly pressured plaintiff to recant certain earlier statements that were against Mohawk’s interests. Documents relating to this meeting were the subject of this motion, to which the attorney-client privilege was asserted. The appellate court dismissed Mohawk’s appeal on the grounds that it did not qualify for immediate appeal under the collateral order doctrine. This dismissal was upheld by the U.S. Supreme Court. New Supreme Court Justice Sotomayor authored her first opinion, finding that the avenues available for a litigant faced with protecting and assuring the vitality of the attorney-client privilege are sufficient and that this situation was no different than other "erroneous evidentiary rulings” where remedies through certification of the order or writ of mandamus were available.

Mohawk Industries, Inc. vs. Norman Carpenter (12/8/09) 2009 U.S. LEXIS 894

ACCOUNTANTS

Accountants Not Liable for Securities Fraud Absent Specific Contacts With and Reliance By Investor Plaintiffs:

Investor class action commenced against company's outside accountants based on "fraud-on-the-market" doctrine to establish presumption of reliance on accounting firm based on press releases issued by company which referenced a "partnership" between the company and the accounting firm. Plaintiffs had not actually relied on the press releases in making their investments. Ninth Circuit upheld dismissal of action because the statement in the press release was not, itself, misleading in any event. Thus, because the statements did not purport to communicate to the public at large anything to the effect that the accounting firm had engaged in deceptive conduct, the presumption of reliance was not available and plaintiffs' claims failed.

In re Peregrine Systems, Inc. Securities Litigation, 301 Fed. Appx. 149, 151 (9th Cir. 2009), based upon and explaining Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 128 S. Ct. 761 (2008) [claim for fraud not permitted against third parties who did not directly mislead plaintiffs but were simply 'business partners' with those who did].

DIRECTORS & OFFICERS

Dismissal of Derivative Suit Upheld Where No Prior Demand on Board:

The trial court dismissed a shareholder's derivative action against a corporation and its directors and officers based on alleged misrepresentations in a proxy statement when the shareholder did not make a demand on the Board before filing suit as required by the Corporations Code and instead, made a conclusory allegation that such a demand would have been futile. The Court of Appeal affirmed the judgment of dismissal and held conclusory allegations of possible liability of the Board of Directors were insufficient to establish demand futility. The court went on to find the complaint failed to identify egregious misstatements or omissions in the proxy statement such that its approval would constitute gross misconduct or malfeasance and create a reasonable doubt regarding the directors' exercise of business judgment.

Bader v. Anderson (11/23/09) 179 Cal.App.4th 775

Dismissal of Creditor’s Complaint Upheld—Directors Owed No Duty to Creditors to Investigate Bankruptcy Options:

The trial court dismissed a creditor's complaint alleging breach of fiduciary duty against the directors of an insolvent company. The corporation entered into an assignment for the benefit of creditors before entering into a "zone of insolvency" before the assignment occurred. The creditors sued the directors, claiming they had failed to investigate the possibility of a bankruptcy reorganization through which the corporation's accumulated net operating losses might have been carried forward before making the assignment. The Court of Appeal held the directors owed no duty to the creditors to investigate potential bankruptcy options except to avoid actions that would divert, dissipate, or unduly risk corporate assets that might otherwise be used to pay creditors' claims, including self-dealing or preferential treatment of creditors. The Court ruled the trust fund doctrine generally pertains to cases where the directors or officers of an insolvent corporation have diverted assets of the corporation for the benefit of insiders or preferred creditors.

Berg & Berg Enterprises, LLC, v. Boyle et al., (11/24/09) 178 Cal.App.4th 1020

Approval Requirement is a Condition Precedent to the Right to File a Derivative Suit:

The trial court dismissed a shareholder's derivative action alleging breaches of fiduciary duty by corporate officers and directors because the company was incorporated in the British Virgin Islands and prior to filing suit, the plaintiff shareholder did not obtain approval from the high court of the British Virgin Islands. The Court of Appeal held that the approval requirement was a substantive provision that governed the shareholder's standing to sue. The internal affairs doctrine in the Corporations Code applied and, therefore, the approval requirement established a condition precedent to the right of a shareholder to derivatively sue corporate directors on behalf of the company.

Vaughn, v. LJ International, Inc. (8/19/09) 174 Cal.App.4th 213

Summary Judgment Upheld--No Triable Issue of Material Fact as to Knowledge of Fraud:

The trial court granted summary judgment dismissing shareholders' claims for fraud and related causes of action against former directors after shareholders alleged that they had been induced to hold stock by fraudulent financial reports involving improper recognition of revenue. The summary judgment motions asserted that there was no evidence of knowledge of fraudulent accounting practices. The Court of Appeal concluded the former directors' sales of stock did not raise a genuine issue of material fact as to the directors’ knowledge of fraud because the sales were not shown to have taken place under suspicious circumstances and the group published information doctrine was not shown to have applied to summary judgments to permit the plaintiff to defeat such motions. The court held there were insufficient facts plead on a control person liability claim and an amendment could not have cured the defect because of lack of privity between the shareholder and former directors.

Bains v. Moores, et al., (7/8/09) 172 Cal.App.4th 445

INSURANCE AGENTS & BROKERS

Duty of An Insurance Broker:

In an insurance broker negligence case where the broker was involved in developing a package of coverage for a franchisor and held herself out as an expert to franchisees who utilized her services in setting their franchises, the broker was found to have a special duty of care to the franchisees. The appellate court found that the trier of fact could believe that the broker never mentioned workers’ compensation coverage and where the GL policy had an employee exclusion, it was negligent for the broker not to discuss workers' compensation coverage, particularly since the coverage is mandated under California law. Moreover, the insured's failure to read the policy did not render the insured's reliance on the broker unjustifiable as a matter of law. The statute of limitations against the broker did not begin to run when the employee suffered injury, but when the franchisee/employer/insured suffered an uncovered verdict. Although the insured could be assigned comparative negligence for (1) failing to read the policy and (2) failing to procure the workers' compensation insurance required for employers, comparative negligence is a question of fact and the appeals court has no power to reweigh the evidence.

Williams v. Hilb, Rogal & Hobbs Insurance Services, Inc. (2009) 177 Cal.App.4th 624

This document in intended to provide you with general information about recent professional liability related cases and issues. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this alert, please contact:

Dave Evans

San Francisco

415-281-7624

devans@hbblaw.com

Michael Long

Orange County

714-754-1100

mlong@hbblaw.com

Valerie Moore

Los Angeles

310-215-7709

vmoore@hbblaw.com