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By Samson Habte
Dec. 2 --A malpractice claim is assignable where it is part of a larger commercial transaction between insurers and is not transferred to a litigation adversary, the California Court of Appeal, Third District, held Nov. 26 (White Mountains Reins. Co. of Am. v. Borton Petrini, LLP, 2013 BL 332333, Cal. Ct. App. 3d Dist., No. C071365, 11/26/13).
The ruling carves out what the court described as a “narrow exception” to California's long-standing rule barring such assignments--a policy that, although eroded by courts in other jurisdictions, had until now remained ironclad in California.
According to the opinion, decisions from other states have recognized exceptions permitting the transfer of a malpractice claim as part of a larger transaction between a party who owned the claim and a successor entity who acquired all of the party's assets and liabilities.
But although the court said those cases were “persuasive,” the exception it announced here was narrower, and was predicated on five conditions:
• the assignment is “a small, incidental part of a larger commercial transfer between insurance companies”;
• the larger transfer is of “assets, rights, obligations, and liabilities and does not treat the legal malpractice claim as a distinct commodity”;
• the transfer is not to a former adversary;
• the claim arose “under circumstances where the original client insurance company retained the attorney to represent and defend an insured”; and
• 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,” Justice Ronald B. Robie wrote.
Modern Service Insurance Co. issued Flora Cuison an automobile insurance policy with a $100,000 limit on bodily injury liability. In 2003, Cuison was involved in a car accident that seriously injured Karen Johnson, who subsequently filed suit against Cuison in June 2005.
That personal injury complaint was served with a 30-day offer to compromise for the $100,000 policy limit. Shortly thereafter, a claims administrator acting on behalf of Modern retained the Borton Petrini law firm to defend Cuison against the suit. According to the court, the firm allowed the compromise offer to expire without a response.
Over the next two years, Borton reported to and received payments from Modern. In December 2006, that company was acquired by Mutual Service Casualty Insurance Co., which assumed all of Modern's California liabilities, including the Cuison policy.
A few days later, Mutual completed a stock transaction with FolksAmerica Reinsurance Co. and was renamed as Stockbridge Insurance Co. Accordingly, while Borton's payments for the first few months of 2007 were from Mutual, payments received later that year were from Stockbridge.
Another ownership change took place in September 2007, when Stockbridge transferred its liabilities to FolksAmerica, which then began making payments to Borton. In July 2008, FolksAmerica changed its name to White Mountains Reinsurance Co. of America, and Borton's final invoices were paid by that entity.
In March 2009, a different law firm was substituted in place of Borton. Eight months later, White Mountains paid $1.86 million to settle Cuison's case.
White Mountains then commenced the present action alleging that Borton committed malpractice by allowing the $100,000 compromise offer to expire, thereby exposing the insurer to liability far in excess of that amount.
Borton moved to dismiss the suit, saying White Mountains lacked standing because malpractice claims cannot be assigned. A trial court agreed.
On appeal, White Mountains argued that the trial court erred in “mechanically appl[ying] the rule prohibiting the sale and assignment of a single legal malpractice claim to conclude [Modern] improperly assigned the malpractice claim, in the context of sale of corporate assets.” The appellate panel agreed.
The court acknowledged that several California cases have applied the long-standing common law rule against the assignment of malpractice claims, including Baum v. Duckor, Spradling & Metzger, 84 Cal. Rptr.2d 703, 15 Law. Man. Prof. Conduct 211 (Cal. Ct. App. 1999), and Curtis v. Kellogg & Andelson, 86 Cal. Rptr.2d 536, 15 Law. Man. Prof. Conduct 365 (Cal. Ct. App. 1999).
Among these [we]re the need to preserve the element of trust between attorney and client, which could be impaired if the attorney perceives a future threat of the client's assignment to a stranger or adversary of a legal malpractice claim. Similarly, counsel might be discouraged from pursuing vigorous advocacy on behalf of his or her client if that advocacy might alienate the adversary, who might someday be motivated to sue the attorney for legal malpractice under an assignment of rights. An attorney might also seek to please an employer-insurer at the expense of the insured's best interest, if the attorney fears the employer might someday turn over its malpractice cause of action to a third party. Finally, if malpractice claims could be bought and sold, the inevitable result would be raised malpractice insurance premiums.
Robie pointed out that “in California the rule against the assignment of legal malpractice claims has never been applied (at least in a published appellate opinion) to a factual scenario like that present here.”
In other states, he added, courts “have determined that the rule should not apply where the assignment of a cause of action for legal malpractice is incidental to a larger commercial transaction involving the transfer of other business assets and liabilities, because the public policy concerns that weigh against the assignment of legal malpractice claims do not arise in that context.”
The out-of-jurisdiction cases cited by the court include Cerberus Partners L.P. v. Gadsby & Hannah, 728 A.2d 1057, 15 Law. Man. Prof. Conduct 185 (R.I. 1999), Learning Curve Int'l Inc. v. Seyfarth Shaw LLP, 911 N.E.2d 1073, 25 Law. Man. Prof. Conduct 348 (Ill. 2009), and St. Luke's Magic Valley Reg'l Med. Ctr. v. Luciani, 293 P.3d 661, 29 Law. Man. Prof. Conduct 675 (Idaho 2013).
“We find the out-of-state cases set forth above to be persuasive authority,” the appellate panel declared in reversing the trial court's ruling that the malpractice claim was invalidly assigned.
However, the exception the court announced was not as broad as that carved out in some of the out-of-state opinions. Explaining the facts that justified an exception, the court noted: “In this case, the assignment of the legal malpractice claim was only a small, incidental part of a larger commercial transfer between insurance companies involving the transfer of assets, rights, obligations, and liabilities. The transfer did not treat the legal malpractice claim as a distinct commodity and did not create a market for such claims.”
It is also relevant that “White Mountains was not a former adversary of Modern Service,” the court added. “Another significant fact is that in this case, the legal malpractice claim arose after Modern Service retained Borton to represent and defend Cuison, and the communications between Borton and Modern Service were conducted via a third party claims administrator,” it continued.
“For the foregoing reasons, we conclude that on the stipulated facts presented here, Modern Service's cause of action for legal malpractice against Borton was assignable,” the court declared.
White Mountains was represented by Gary R. Selvin of Selvin Wraith Halman, Oakland, Cal. Borton Petrini was represented by Russell S. Roeca of Roeca Haas Hager LLP, San Francisco.
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