APPEAL from a judgment of the Superior Court of Sacramento County, Michael G. Virga, Judge. Reversed. (Super. Ct. No. 07AS00215).
The opinion of the court was delivered by: Blease, Acting P. J.
CERTIFIED FOR PUBLICATION
This legal malpractice case tenders the doctrine of judicial estoppel, which precludes a party from taking inconsistent positions in separate proceedings where the position in the first proceeding was adopted by the court or accepted by it as true. (Jackson v. County of Los Angeles (1997) 60 Cal.App.4th 171, 181 (Jackson).) Judicial estoppel differs from collateral estoppel or equitable estoppel in that it is focused on the relationship between the litigant and the judicial system and not on the relationship of the parties. (Id. at p. 183.)
The issue arises in a malpractice action initiated by plaintiffs, The Swahn Group, Roger Swahn and Pamela Swahn (collectively, the Swahns)in which the trial court sustained the demurrer of defendants Malcolm Segal, James Kirby, and Segal & Kirby (collectively, S&K). S&K had represented the plaintiffs as their attorneys in an action against Gary Tharaldson and his various business enterprises for breach of a contract to develop 20 hotels. On the advice of S&K the breach of contract action was settled. The plaintiffs changed attorneys and brought an action to rescind the settlement agreement. The rescission action resulted in a second settlement agreement which was not incorporated in a judgment. This action was then filed claiming that S&K committed malpractice in the initial breach of contract action. The defendants filed a demurrer, which the trial court sustained and dismissed the malpractice action.
The primary basis for the trial court's ruling was that plaintiffs were judicially estopped to pursue this action because positions critical to their malpractice claims were totally inconsistent with positions taken by them in the rescission action. The trial court found that the Swahns could not claim that their attorneys were negligent in advising a settlement of the initial action and also claim to have been fraudulently induced to settle by Tharaldson.
The rescission action resulted in a settlement agreement between plaintiffs and Tharaldson and his business enterprises. The only evidence of the terms of the settlement is the Swahns' allegation in the malpractice complaint against S&K that S&K ultimately resolved all disputes with Tharaldson by way of a settlement which involved payments to members of the plaintiffs' family and the granting of a petition to approve the compromise of the claim of Trevor Swahn, a minor. The order granting the petition is not in the record and the summary of the case submitted to the trial court for a minor's compromise does not mention the Swahns' allegations of fraud and concealment against Tharaldson, et al., but states only that Tharaldson "refused to perform under the terms of the purported settlement and refused to execute formal settlement documentation...."
We shall conclude that the requirements for judicial estoppel were not met since the trial court did not adopt the claims advanced by the plaintiffs in the settlement of the rescission action that conflict with claims advanced in this action.
We shall reverse the judgment of dismissal.
FACTUAL AND PROCEDURAL BACKGROUND
This appeal arises after the trial court sustained S&K's demurrer to the legal malpractice complaint. Accordingly, the facts we review are those alleged in the malpractice complaint together with the materials it incorporates, the materials noticed by the trial court, and the actions taken by the trial court.*fn1
Underlying both this action and the rescission action was a development contract dispute between the Swahns and one of Tharaldson's companies. S&K acted as the Swahns' attorney in the dispute, which resulted in an arbitration proceeding. One of the grounds for the rescission action was that Tharaldson fraudulently induced the Swahns to sign the settlement agreement by misrepresenting the terms of the agreement. The Swahns also alleged that Tharaldson, or certain of his corporations, made material misrepresentations that led the Swahns to pursue an unnecessary arbitration.
A. The Development Contract
The legal malpractice complaint alleges that in 1996, the Swahns entered into a contract with C&G Development, Inc. ("C&G"), a corporation owned and operated by Tharaldson. Under the terms of the contract, the Swahns agreed to assist in the construction of 20 hotels over a five-year period, in exchange for a payment of $50,000 per hotel plus a nine and one-half percent ownership interest in each hotel. The Swahns' percentage interest in each hotel was to be 50 percent vested on the date the hotel opened for business, and 100 percent vested on the date all 20 hotels were completed. The contract contained a binding arbitration provision.
After the Swahns and C&G entered into the development contract, 19 separate corporations were created to own and operate each hotel. These corporations were not signatories to the development contract. We shall refer to them as the hotel corporations.
Without the Swahns' knowledge, C&G filed articles of dissolution in 2000. In 2001, Tharaldson attempted to terminate the development contract on the ground the five-year time period set forth in the contract for the construction of 20 hotels had expired.
B. Development Contract Litigation
The Swahns hired S&K to advise them regarding the contract dispute with Tharaldson. S&K, on the Swahns' behalf, filed a complaint for breach of the development contract against C&G and other Tharaldson- owned entities, including the hotel corporations. S&K objected to Tharaldson's demand for arbitration, but the trial court ordered C&G and the Swahns, but not the hotel corporations, to arbitration.
The arbitration was divided into two phases--liability and damages. In phase one of the arbitration the arbitration panel ruled in the Swahns' favor against C&G. The arbitration panel deferred the issue of the culpability of any defendants other than C&G to the second phase of the arbitration.
C. Settlement of Development Contract Litigation
Phase two of the arbitration proceeding was never held because the parties entered into mediation, which resulted in a settlement agreement. A handwritten settlement agreement gave the Swahns a 6 to 10 percent interest in 16 of the hotel corporations, $150,000 in cash, and a loan in an amount totaling nearly two million dollars. The agreement was signed by Tharaldson in his individual capacity, as well as his capacity as president of C&G, president of Tharaldson Development Company, and president of the 16 hotel corporations in which the Swahns were to have an ownership interest. The settlement agreement contained a provision that any dispute concerning the documentation of the agreement would be resolved by the mediator.
D. Action to Rescind Settlement Agreement
The Swahns then changed attorneys. Approximately six months after substitution of counsel, the Swahns sent Tharaldson a notice of rescission of the settlement agreement. The notice asserted that the dispute concerned the Swahns' understanding that loan repayments would be made from dividends, as opposed to Tharaldson's view that both distributions and dividends would be security for the loans. The grounds stated for rescission were mutual mistake of fact and fraud in the inducement. The Swahns claimed that Tharaldson's interpretation of the settlement agreement was "concealed from Swahn's counsel [S&K] and the mediator by Tharaldson and their counsel." The Swahns contended that "these representations and concealments by Tharaldson to [the mediator] and to their counsel were fraudulent."
Thereafter, the Swahns, represented by current counsel, filed a complaint for rescission and damages against Tharaldson, various Tharaldson-related corporations, and the hotel corporations. The action sought to rescind the handwritten settlement agreement.
The rescission complaint alleged that the defendants who were not parties to the development contract "stated in writing to the arbitrators during the arbitration and before the Phase I interim award that they were... voluntarily appearing in the arbitration." It also alleged that as a part of a continuing plan and scheme on the part of Tharaldson and the other defendants to defraud the Swahns, "DEFENDANTS who were not signatories to the Hotel Development Contract [the hotel corporations] intended to walk a legal tight rope by leading PLAINTIFFS to believe that they were appearing in the arbitration but, if the arbitration award was against them, planned to recant and renege on their voluntary appearance claiming that they were not bound by the arbitration decision. And in fact, after the PLAINTIFFS' resounding victory in the Phase I liability decision, some of the DEFENDANTS suddenly claimed that they had not appeared and were not bound by the decision against them."
The rescission complaint also alleged there was a "lack of the meeting of the minds regarding the source of the repayment of the settlement `loans.' PLAINTIFFS insisted that the settlement `loans' would be repaid from corporate dividends only; THARALDSON contends that the Handwritten Purported Agreement provides that the settlement `loans' may be repaid from hotel sales proceeds as well as dividends." The rescission complaint alleged there was an inconsistency in the repayment terms of the loan because one paragraph stated that the Swahns would assign all dividends/distributions to Tharaldson Financial as security for the loans and another paragraph stated that the "`loan will be repaid only out of any dividends declared'" by the hotels.*fn2
The trial court ordered the dispute over the settlement agreement back to the mediator, pursuant to the terms of the settlement agreement. The case was subsequently settled for a payment to the Swahns of approximately six million dollars. Prior to the settlement, the initial breach of contract action on the development agreement was dismissed by the court for failure to prosecute.
E. Malpractice Litigation
The legal malpractice complaint states causes of action in professional negligence, breach of contract, breach of ...