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White Mountains Reinsurance Co. of America v. Borton Petrini, LLP

California Court of Appeals, Third District, Sacramento

November 26, 2013

WHITE MOUNTAINS REINSURANCE COMPANY OF AMERICA, Plaintiff and Appellant,
v.
BORTON PETRINI, LLP, Defendant and Respondent

APPEAL from a judgment of the Superior Court of Sacramento County, Super. Ct. No. 34201000069376CUPNGDS Gerrit W. Wood, Judge.

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[Copyrighted Material Omitted]

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COUNSEL

Selvin Wraith Halman, Gary R. Selvin and Nancy J. Strout for Plaintiff and Appellant.

Roeca Haas Hager, Russell S. Roeca, Shannon L. Ernster, and Kyle Montes De Oca for Defendant and Respondent.

ROBIE, J.

There is a general rule in California barring the assignment of a cause of action for legal malpractice. In this case, we recognize a narrow exception to that rule. Specifically, a cause of action for legal malpractice is transferable when (as here): (1) the assignment of the legal malpractice claim is only a small, incidental part of a larger commercial transfer between insurance companies; (2) the larger transfer is of assets, rights, obligations, and liabilities and does not treat the legal malpractice claim as a distinct commodity; (3) the transfer is not to a former adversary; (4) the legal malpractice claim arose under circumstances where the original client insurance company retained the attorney to represent and defend an insured; and (5) the communications between the attorney and the original client insurance company were conducted via a third party claims administrator. Under the circumstances set forth above, the public policy concerns that have been determined in other cases to weigh against the assignment of legal malpractice claims do not arise. Thus, the trial court erred in deciding that plaintiff White Mountains Reinsurance Company of America (White Mountains) lacked standing to prosecute this legal malpractice action against defendant Borton Petrini LLP (Borton) because White Mountains acquired the cause of action through assignment from the original insurer. We will, therefore, reverse the judgment in favor of Borton.

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FACTUAL AND PROCEDURAL BACKGROUND

The underlying facts are taken from a “Joint Stipulation of Facts” the parties entered into for purposes of resolving a joint “Motion on Agreed Dispositive Issue.”

Modern Service Insurance Company (Modern Service) issued a car insurance policy to Flora Cuison covering the period from January 2003 to January 2004, with a $100, 000 limit on bodily injury liability per person. In July 2003, Cuison caused an automobile accident that seriously injured Karen Johnson. In June 2005, Johnson filed suit against Cuison. Cuison was purportedly served with the complaint in the action, along with an undated 30-day offer to compromise for the $100, 000 policy limits, around June 29.

On or about July 11, Country Insurance & Fidelity Services (Country), the claims administrator acting on behalf of Modern Service, faxed a letter to Borton Petrini asking the firm to accept the defense of Cuison in the action. Borton took the case, representing Modern Service and Cuison, and allowed the offer to compromise to expire without a response.

In 2005 and 2006, Borton reported on the progress of the case, submitted invoices to, and received payments from Modern Service for services rendered.

In October 2006, Mutual Service Casualty Insurance Company (Mutual Service) and FolksAmerica Reinsurance Company (FolksAmerica) entered into a stock repurchase agreement under which Mutual Service would be demutualized and FolksAmerica would acquire Mutual Service’s stock.

In December 2006, while the stock repurchase agreement had not yet been completed, Modern Service entered into an assumption reinsurance and administration agreement with Mutual Service under which Mutual Service assumed the California liabilities of Modern Service. Specifically, under that agreement Modern Service ceded to Mutual Service all of its “ ‘gross direct obligations and liabilities and rights under and relating to’ ” “ ‘all insurance business written by [Modern Service] since its incorporation in respect of risks located in California.’ ” (Modern Service was ceasing to conduct business in California.) The Cuison policy was one of the polices Mutual Service assumed in the deal.

A few days after the Modern Service/Mutual Service deal, the stock transaction between Mutual Service and FolksAmerica closed, and Mutual Service changed its name to Stockbridge Insurance Company (Stockbridge).

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In 2007, Borton continued to report on the progress of the case and continued to submit invoices to Modern Service in care of Country, but the payments Borton received in January and February were from Mutual Service. Between June and September, the payments were from Stockbridge.

In September 2007, Stockbridge transferred its liabilities to FolksAmerica. Thereafter, although Borton continued to report on the case and submit invoices to Modern Service care of Country (which it did throughout its participation in the case), the payments came from FolksAmerica.

In July 2008, FolksAmerica changed its name to White Mountains. Nonetheless, Borton continued to receive payments on the case in the name of FolksAmerica. It was not until May 2009 that the name of White Mountains began appearing on the payments. Two months earlier, however, a different law firm had been substituted in place of Borton. (Thus, White Mountains paid Borton’s final invoices following the substitution of counsel.)

In November 2009, White Mountains paid $1.86 million to settle the case.

In January 2010, White Mountains, denominating itself the successor-in-interest to Modern Service, commenced this action against Borton by filing a complaint for negligence alleging that Borton had committed malpractice by letting the offer to compromise expire, thereby exposing the insurer to liability in excess of the $100, 000 policy limits and causing the insurer to incur substantial expenses for attorneys and experts to defend Cuison against Johnson’s lawsuit.

In 2011, Borton moved for summary judgment on the ground that a legal malpractice cause of action may not be assigned and therefore White Mountains lacked standing to pursue the action. In January 2012, the trial court denied the motion on the ground that Borton had failed to show when the cause of action accrued and therefore failed to show that White Mountains had acquired the cause of action by assignment.

Thereafter, the parties agreed to have the trial judge resolve the question of White Mountains’ standing based on the stipulated set of facts set out above. The trial court decided that the legal malpractice cause of action accrued when Modern Service incurred legal expenses it would not have incurred if the case had been settled for the policy limits in July 2005. Thus, White Mountains could have acquired the cause of action only by assignment. The court further concluded, however, that a legal malpractice cause of action may not lawfully be assigned in California, even under the facts presented in this case. Accordingly, the court determined that White Mountains lacked standing to prosecute the action, and the court entered judgment against White Mountains in April 2012. Thereafter, White Mountains filed a timely notice of appeal.

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DISCUSSION

White Mountains contends the trial court erred in “mechanically appl[ying] the rule prohibiting the sale and assignment of a single legal malpractice claim to conclude [Modern Service] improperly assigned the malpractice claim, in the context of sale of corporate assets, to White Mountains in contravention of California law.” As we will explain, we agree the trial court erred. Under the facts of this case, the recognized public policy reasons for barring the assignment of a cause of action for legal malpractice do not apply.

I

Goodley

In California, the rule that a legal malpractice cause of action is not assignable can be traced to Goodley v. Wank & Wank, Inc. (1976) 62 Cal.App.3d 389 [133 Cal.Rptr.83] (Goodley), which has been referred to as “the seminal decision” on the assignability of legal malpractice claims. (Mallen & Smith, Legal Malpractice (2013) § 7:12, p. 835.) In Goodley, it was alleged that the defendant attorneys had negligently represented one Eleanor Katz in the proceeding to dissolve her marriage because they had returned to her certain original insurance policies of which she was the beneficiary and had failed to secure a court order to restrain her husband from changing the status of those policies. (Goodley, at p. 391.) It was further alleged that “during the pendency of the dissolution proceeding, her husband found the policies and, without her knowledge, cancelled the[m] and shortly thereafter died” and that as a result Katz was damaged in the sum of $147, 000. (Id. at pp. 391-392.) The plaintiff, Goodley, further asserted that he was the owner of Katz’s legal malpractice claim against the attorneys by virtue of a written assignment from her. (Ibid.)

On summary judgment, the trial court concluded the action was without merit because “ ‘the cause of action is predicated on a tort (i.e., malpractice) and plaintiff is the assignee of the person who allegedly was the victim of malpractice, and causes of action for tort cannot be assigned.’ ” (Goodley, supra, 62 Cal.App.3d at p. 392, fn. 1.) The appellate court affirmed, albeit for a different reason. (Id. at pp. 395-398.)

The appellate court began by explaining as follows: “In 1872 our Legislature effected a change in the common law rule of nonassignability of choses in action by enacting sections 953 and 954, Civil Code. Thus a thing in action arising out of either the violation of a right of property or an obligation or contract may be transferred [citations]. The construction and application of the broad rule of assignability have developed a complex

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pattern of case law underlying which is the basic public policy that ‘ “[a]ssignability of things in action is now the rule; nonassignability the exception” ’ [citations]. ‘ “[A]nd this exception is confined to wrongs done to the person, the reputation, of the feelings of the injured party, and to contracts of a purely personal nature, like promises of marriage.” ’ [Citation.] Thus, causes of action for personal injuries arising out of a tort are not assignable nor are those founded upon wrongs of a purely personal nature such as to the reputation or the feelings of the one injured. Assignable are choses in action arising out of an obligation or breach of contract as are those arising out of the violation of a right of property [citation] or a wrong involving injury to personal or real property.” (Goodley, supra, 62 Cal.App.3d at pp. 393-394, fns. omitted.)

Recognizing that “the personal nature of the duty owed to the client does not perforce convert the breach thereof to a ‘tort of a purely personal nature’ on a par with those wrongs done to the person of the injured party or his reputation or feelings which fall within the exception to the general rule of assignability” (Goodley, supra, 62 Cal.App.3d at p. 397), the appellate court nonetheless concluded that “a chose in action for legal malpractice is not assignable [because of] the uniquely personal nature of legal services and the contract out of which a highly personal and confidential attorney-client relationship arises, and public policy considerations based thereon.” (Id. at p. 395.) The court explained that “[i]t is the unique quality of legal services, the personal nature of the attorney’s duty to the client and the confidentiality of the attorney-client relationship that invoke public policy considerations in our conclusion that malpractice claims should not be subject to assignment. The assignment of such claims could relegate the legal malpractice action to the market place and convert it to a commodity to be exploited and transferred to economic bidders who have never had a professional relationship with the attorney and to whom the attorney has never owed a legal duty, and who have never had any prior connection with the assignor or his rights. The commercial aspect of assignability of choses in action arising out of legal malpractice is rife with probabilities that could only debase the legal profession. The almost certain end result of merchandizing such causes of action is the lucrative business of factoring malpractice claims which would encourage unjustified lawsuits against members of the legal profession, generate an increase in legal malpractice litigation, promote champerty and force attorneys to defend themselves against strangers. The endless complications and litigious intricacies arising out of such commercial activities would place an undue burden on not only the legal profession but the already overburdened judicial system, restrict the availability of competent legal services, embarrass the attorney-client relationship and imperil the sanctity of the highly confidential and fiduciary relationship existing between attorney and client.” (Id. at p. 397.)

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The appellate court continued as follows: “Public policy encourages those who believe they have claims to solve their problems in a court of law and secure a judicial adjustment of their differences. The California Supreme Court has emphatically rejected the concept of self help [citation]. However, the ever present threat of assignment and the possibility that ultimately the attorney may be confronted with the necessity of defending himself against the assignee of an irresponsible client who, because of dissatisfaction with legal services rendered and out of resentment and/or for monetary gain, has discounted a purported claim for malpractice by assigning the same, would most surely result in a selective process for carefully choosing clients thereby rendering a disservice to the public and the profession.” (Goodley, supra, 62 Cal.App.3d at pp. 397-398.)

The Goodley court also drew an analogy to the California Supreme Court’s “early refusal to recognize a naked right of action for fraud and deceit as a marketable commodity, holding that assignment of a bare right to complain of fraud is contrary to public policy.” (Goodley, supra, 62 Cal.App.3d at p. 398, fn. omitted.) In doing so, however, the court noted in a footnote that “[w]here the form of assignment to [the] plaintiff is sufficient to cover the property rights and claims of his assignors in and to the moneys or property so obtained by fraud and deceit, it constitutes a transfer of more than a mere naked right of action for fraud and deceit, since it includes also the right to recover the moneys or property so obtained.” (Id. at p. 398, fn. 12.) Thus, as will become important hereafter, the Goodley court recognized that a ...


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