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MCLE Article and Self-Assessment Test

1999 Ethics Roundup

Court decisions in 1999 make it clear that a risk management strategy is a lawyer's best method of preventing ethical liabilities 

By Ellen R. Peck and H. Jay Ford III 

Ellen R. Peck, a former State Bar Court judge and former ethics counsel to the State Bar of California and the American Bar Association, is a sole practitioner in Malibu. She is the immediate past chair of the Los Angeles County Bar Association Committee on Professional Responsibility and Ethics. H. Jay Ford III is a shareholder in the firm of Tyre, Kamins, Katz & Granof. He is the current chair of the Association's Committee on Professional Responsibility and Ethics. 

The nineties brought a marked increase in the number of California decisions addressing the obligations, liabilities, and rights of attorneys. This rise in the sheer volume of published appellate decisions has been matched by a steady expansion in the breadth of the decisions. The last year of the decade was no exception. In 1999, the case law in the area of legal ethics continued to grow in both quantity and scope.

The trends that emerged in 1999 are not only fairly clear but commendable as well. Appellate courts are granting relief to lawyers by limiting the scope of their duties to either statutory or clearly foreseeable risks and by requiring legal malpractice plaintiffs to prove by a preponderance of the evidence that lawyers breached their duty. At the same time, courts are less tolerant of lawyer conduct that fails to protect client confidentiality or promotes abuse of the system through dishonesty and gamesmanship. These trends promote high standards of professionalism and support lawyers who continue to study and incorporate risk management procedures into their practices.

Many of last year's opinions highlighted the procedural and substantive issues that arise in legal malpractice claims. (For a discussion of new developments regarding attorney misconduct, sanctions, discipline, attorneys' fees, and liens, see "Rights and Responsibilities," page 38. The voluminous cases addressing conflicts of interest and disqualification of counsel will be discussed in a forthcoming article.) However, a single decision creating a new ethical standard that will govern the inadvertent disclosure of privileged documents ultimately may have the broadest impact upon the future practice of law of all the cases decided in 1999.

Level of Proof
Several cases addressed the level of proof that a legal malpractice plaintiff must adduce to establish the essential elements of a legal malpractice action. The most notable is Marshak v. Ballesteros,1 in which the court of appeal held that in order to prevail in a legal malpractice action, it is not enough for the plaintiff to prove that the underlying action would have resulted in a better outcome had the lawyer recommended that the plaintiff reject the settlement offer. The plaintiff also must prove what that better outcome might have been.2

Like many legal malpractice cases, Marshak arose from an action for dissolution of marriage. In 1993, a doctor hired the defendant attorney to represent him in the dissolution of his 24-year marriage. At a mandatory settlement conference in 1994, the doctor and his soon-to-be ex-wife stipulated in open court to a settlement of the dissolution action-a settlement that resolved issues of attorneys' fees, restraining orders, and the distribution of property as well as relieving the doctor of any continuing support obligation. After a bout of settlement remorse, the doctor denied that he had agreed to the settlement and proceeded to file, in propria persona, a motion to set aside the judgment. He was not successful, and the order denying the motion was affirmed on appeal.3

The doctor then sued his attorney for legal malpractice, claiming that she advised him to settle for less than the case was worth. The doctor stated that his attorney failed to object to the overvaluation of the accounts receivable from his medical practice and to the undervaluation of the marital residence (which was awarded to the doctor's ex-wife) and that he suffered a $337,000 loss as a result.4

After the attorney moved for summary judgment, the doctor presented no competent evidence on the undervaluation of the family residence and the overvaluation of the accounts receivable. Instead he submitted his declaration, in which he stated, "Defendant Ballesteros was negligent because she urged Dr. Marshak to settle his case knowing that his house was worth at least $895,000 based on a comparative sale one month earlier, while accepting Mrs. Marshak's figures that the house was worth only $600,000," and "Defendant Ballesteros never told Dr. Marshak that his motion for modification would not be successful if the records of the Marshak Medical Clinic were not produced." The doctor also submitted the declaration of his current attorney, who opined that the defendant was negligent in October 1993 when, in seeking a modification of a pendente lite support order, she "should have prepared a declaration of Mr. Snyder (plaintiff's longtime friend and an accountant) setting forth his expertise, experience, knowledge of Dr. Marshak's records and his opinion of Dr. Marshak's income."5

In affirming summary judgment in favor of the attorney, the appellate court concluded that the doctor failed to establish the undervaluation of the family residence and the overvaluation of the accounts receivable. But the court observed that even if he had done so, the doctor would still not have prevailed, since he needed to prove that his ex-wife would have settled for less than she did or that, following trial, a judge would have entered judgment more favorable than the settlement to which he stipulated.6

The court in Galanek v. Wismar7 created an exception to the requirement that the legal malpractice plaintiff must prove that the underlying case would have been resolved in favor of the plaintiff. When the attorney is responsible for the destruction of crucial evidence, and this act thwarted the plaintiff's ability to prove the case within a case, the plaintiff is relieved from proving the probable success of the underlying case. In a products liability action against Honda, Galanek alleged that her injuries from a rear-end collision, which occurred while she was stopped at a stop sign, were the result of a defect in her vehicle that caused the driver's seat to collapse upon impact. Galanek replaced Wismar with other counsel. Summary judgment was granted in favor of Honda on the ground that Galanek could not prove her vehicle was defective because it was sold to a third party and destroyed without having been adequately inspected. The trial court rejected the declaration of Galanek's designated expert, an accident reconstructionist, concluding that a comparison of an exemplar vehicle with photographs taken of Galanek's car after the accident would be sufficient to prove the alleged defect.8

Instead of appealing the summary judgment in the underlying action, Galanek filed a legal malpractice action against Wismar based on Wismar's failure to take reasonable steps to prevent the destruction of her vehicle. The trial court granted nonsuit after her opening statement at trial on the grounds that Galanek not only lacked expert evidence that a failure of the car seat was a cause of her head injury but she also lacked scientific evidence that producing her car as evidence was essential to proving the alleged defect in the car seat.9

The court of appeal reversed the trial court's order of nonsuit in favor of the attorney. In the appellate court's view, Galanek stated sufficient facts in her opening statement to avoid nonsuit. The court observed that to sustain her burden of proof in a legal malpractice action, Galanek had to establish that Wismar's negligence in failing to protect her car from loss or destruction caused her to lose a meritorious case against Honda and that her injuries were caused in part by a defect in her car. The court held that her opening statement alleged facts that, if proven, would establish that her car was destroyed as a result of Wismar's negligence and also included sufficient facts to prove Galanek's case within the case against Honda.10

The more interesting part of the opinion was the court's conclusion that if the facts asserted in Galanek's opening statement were proved, the burden of proof would shift "to Wismar to establish that his negligence did not cause Galanek to lose a meritorious products liability claim against Honda."11 The court described the reasoning on which the burden-shifting analysis was based:

    If Galanek cannot prove her underlying case against Honda, it follows that she cannot conclusively prove "proximate causation" in the instant malpractice action against Wismar. Because Wismar's negligence in failing to preserve the car is what made it impossible for Galanek to prove causation, as a matter of public policy it is more appropriate to hold Wismar liable than to deny Galanek recovery, unless Wismar can prove his negligence did not damage Galanek.12

Scope of Duty
The courts explored the scope of an attorney's duty in two legal malpractice cases that both arose from nonsuits in favor of the defendant attorneys. In Bolton v. Trope,13 the underlying case was a personal injury action filed by Bolton after an automobile accident. Bolton claimed that he hit his head against his car's windshield and side window.

Bolton's lawyers sent him to three board-certified doctors who found no residual physical symptoms of injuries and did not refer him to a neuropsychologist. After Bolton rejected two settlement offers recommended by the two law firms that represented him, the lawyers withdrew. Unable to find successor counsel, Bolton later settled with the automobile manufacturer shortly before trial for $40,000-about $5,000 more than the last offer Bolton received during the time he was represented by counsel. Nine months after the settlement, armed with a neuropsychologist whose testimony would establish that he suffered a brain injury as a result of the automobile accident, Bolton sued his former lawyers, alleging that they committed legal malpractice "by failing to secure and/or designate appropriate forensic mental health experts, including a neuropsychologist to present his brain injury/cognitive impairment claim."14 The trial court granted nonsuit for the defendant attorneys after the testimony of the neuropsychologist was excluded and Bolton elected not to proceed with trial.15

In affirming the nonsuit, the Second District Court of Appeal concluded that the defendant attorneys had no duty to retain a neuropsychologist to establish Bolton's brain injury when the board-certified neurologists who had examined Bolton did not recommend that Bolton see such a specialist.16 Indeed, the court concluded that the defendant attorneys were required to rely on the opinions of the medical experts.17

The court in Novak v. Low, Ball & Lynch18 held that insurer's counsel owes a duty of due care to the insured, even when the insured is represented by independent counsel. Novak was sued for defamation, trespass, and two other causes of action. Acceptance Insurance Company, Novak's commercial insurer, accepted the defense under a reservation of rights with the belief that Novak was potentially covered on the first two causes of action. Acceptance agreed to pay attorney Kuns to act as independent counsel for Novak pursuant to Civil Code Section 2860. Acceptance retained Low, Ball & Lynch (LBL) to monitor Kun's billings and to represent Acceptance's interests in the lawsuit against Novak.19

On behalf of Acceptance, and without notification to or inclusion of Novak or Kuns, LBL negotiated a dismissal and release from liability for $7,500 on the first two causes of action. LBL's purpose in settling was to allow Acceptance to withdraw from the case. Novak defended the remainder of the action at his own expense, without much success: an arbitration award of $63,702 was entered against him. Unable to pay the award or fund an appeal, Novak settled. He then sued Acceptance, LBL, and the individual LBL attorney who was monitoring Kuns with a claim against the attorney for negligent or fraudulent negotiation of a partial settlement to Novak's detriment. The trial court granted summary judgment in favor of LBL and against Novak, who appealed.

In reversing the judgment, the court of appeal held that LBL had a duty pursuant to Civil Code Section 2860(f)20 to notify Novak and Kuns of the pendency of the settlement negotiations and to permit them to participate. The court rejected LBL's claims that it represented only the interests of the insurer-at least with respect to the duties of sharing information and affording independent counsel the opportunity to participate in all aspects of the litigation, including settlement negotiations (which the court deemed to be a critical stage of any proceeding). The court cautioned that the duties of counsel under Section 2860(f) do not extend to preventing the insurer from exercising its contractual right to settle claims.21

In Harris v. Rudin, Richman & Appel,22 the court of appeal held that an agreement to settle a legal malpractice action could not be enforced because the agreement was not signed by all parties. The appellate court declared that the trial court erred in sustaining a demurrer to the plaintiff's addition of a cause of action for breach of contract of the settlement agreement. Harris sued Rudin, Richman & Appel (RR&A) claiming that the law firm was negligent in supervising and drafting an irrevocable trust for Harris that exposed the trustees to personal liability for gift and estate taxes. Harris and RR&A entered into a settlement in which RR&A agreed to pay $205,000 to Harris. Although two of the law firm principals signed the settlement agreement, neither Harris nor the other law firm principals did. RR&A disavowed the settlement after discovering a new addition to the Probate Code that, in the firm's opinion, nullified the firm's potential malpractice liability. The court of appeal sustained the lower court's refusal to enforce the settlement agreement on the grounds that all parties (including the plaintiff) had not signed the agreement pursuant to Code of Civil Procedure Section 664.6. However, the court also held that a cause of action for breach of a settlement agreement could be alleged because the complaint sufficiently pled a cause of action for breach of an oral contract.

Equitable Indemnity
Crouse v. Brobeck, Phleger & Harrison23 created an exception to the general rule that a successor attorney cannot obtain equitable indemnity from a prior firm in a legal malpractice action.24 During 1987 and 1988, the Brobeck firm and attorney Boatwright successfully negotiated the sale of a limited partnership interest on behalf of Crouse. At closing, a promissory note for $7.25 million was tendered, payable in September 1990.

Boatwright did not deliver the note to Crouse or ensure that it was held in a secure location. In August 1989, Boatwright left Brobeck and in March 1990 became a partner in Page, Polin, Busch & Boatwright. Crouse continued to be represented by Brobeck until March 1990, when she hired Boatwright and Page, Boatwright's new firm. When Crouse's file was transferred from Brobeck to Page, the file did not contain the original promissory note. During the spring and summer of 1990, Boatwright negotiated a restructuring of the terms of the note, in which Crouse was to receive $6.25 million in cash and a new $1 million note payable in 18 months upon closing. During the negotiation, Boatwright took no steps to locate the original note, did not assess the legal significance of the failure to have the note at closing, and did not evaluate the alternatives that would be available to Crouse if the note was not delivered at closing. The obligors believed that the misplaced note was negotiable on demand, however, and so the closing fell through when Crouse could not produce the note. Within a few days Boatwright negotiated a different restructuring of the note in which Crouse would receive $5 million in cash, to be held in escrow for one year, and a new $2.5 million note, even without delivery of the first note.25

In the fall of 1990, Crouse was advised by independent counsel that the foregoing facts constituted legal malpractice by Boatwright and the Page firm. Until July 1993, Boatwright and Page continued to represent Crouse in collecting the proceeds due under the restructured note and in negotiating a discounted payoff of the new note. Although Crouse filed a legal malpractice action against Boatwright, Brobeck, and Page in August 1994, the parties agreed that the filing technically took place in December 1993 pursuant to a tolling agreement between the parties.26

After Boatwright and Page brought cross-complaints against Brobeck for equitable indemnity, Brobeck obtained a summary judgment against them.27 On appeal, the court held that the statute of limitations for a legal malpractice action28 does not bar a claim for equitable indemnity29 and reversed the judgment as to contractual and statutory indemnity.30 The court affirmed the judgment denying Boatwright's claims for breach of fiduciary duty against Brobeck since a law firm's fiduciary responsibility to departing partners can only be breached if 1) the firm had attempted to divert a partnership opportunity for personal benefit to the detriment of former partners or 2) the remaining partners excluded the ex-partner from the benefits of an existing partnership opportunity.31

The court also reversed the trial court judgment in favor of Boatwright and Page, holding that the statute of limitations for Crouse's claims against Boatwright and Page were tolled during the period of continued representation that ended in July 1993. The court rejected Boatwright's argument that the statute was not tolled because his continued representation did not involve the specific subject matter of the original negligence involving the lost note and because the note was extinguished by novation in the October 1990 restructuring transaction. The court observed that the "subject matter of continued representation" is an objective test, and when advice or action on a business transaction is negligent, the continued representation of the client in the course of defending or furthering the client's positions based on the original advice or action constitutes the same specific subject matter. The court held that Boatwright's continued advice to Crouse on the original business transaction as well as his help in collecting on the new note constituted continued representation on the same specific subject matter as the original negligence.32 The court also affirmed the summary judgment in favor of Brobeck, holding that the statute of limitations on Crouse's claims against the firm ran one year after October 1990.33

Two other legal malpractice cases from last year involved claims brought by bankruptcy estates. In Baum v. Duckor, Spradling & Metzer,34 the court of appeal held that a legal malpractice claim belonging to the bankruptcy estate of a corporation may not be assigned by the debtor's trustee to a creditor of a corporation or any other third party. In Curtis v. Kellogg & Andelson,35 the court of appeal held that a legal malpractice claim belonging to the bankruptcy estate of a professional corporation may not be assigned to the sole doctor shareholder. The Curtis court also found that the bankruptcy trustee lacked the authority to grant the sole shareholder the right to assert legal malpractice claims belonging to the corporation.

Inadvertent Delivery of Documents
State Compensation Insurance Fund v. WPS, Inc.36 establishes the procedure that counsel on both sides must follow when documents that are obviously privileged or confidential are delivered to the opposing party and it is reasonably apparent that the materials were delivered inadvertently. WPS's lawyer received boxes of documents from outside counsel for the State Compensation Insurance Fund (SCIF) that were going to be used as trial exhibits. The boxes contained civil litigation summary forms prepared for the exclusive use of SCIF's lawyers and were marked at the top with the words "ATTORNEY-CLIENT COMMUNICATION/ATTORNEY WORK PRODUCT" and "DO NOT CIRCULATE OR DUPLICATE." The word "CONFIDENTIAL" was printed around the perimeter of each page. The materials were neither accompanied by a privilege log nor listed on any other privilege log. The WPS lawyer shared the documents with his expert witness, who then provided the documents to another lawyer who was adverse to SCIF in a different matter.37 When counsel for SCIF asked the lawyer for WPS to return the documents, the latter refused. SCIF then filed an application for an order holding WPS and its counsel in contempt for violating a previous protective order regarding all documents. The application also sought the destruction or return of the confidential documents as well as sanctions against WPS and its counsel.38

The trial court ruled that while neither WPS nor its counsel had violated the protective order, WPS and its counsel should be sanctioned $6,070 for failing to return the documents in violation of ABA Formal Opinion 92-368.39 The court of appeal affirmed the trial court's ruling that the documents were patently privileged on the grounds that the claims forms were prepared in the course of the attorney-client relationship between SCIF and its counsel and were marked accordingly.40 Without any substantive discussion or rationale, the court rejected WPS's claim that the facts contained in the communications might be subject to disclosure.41 Based upon the language of Evidence Code Section 912, the court held that a waiver does not include accidental, inadvertent disclosure of privileged information by the party's attorney and upheld the trial court's finding that the disclosure of SCIF's counsel of the claims forms had been inadvertent.42

The court of appeal reversed the sanctions order, noting that neither ABA Formal Opinion 92-368 nor the ABA Model Rules of Professional Conduct have been adopted in California and have no legal force of their own. The ABA Model Rules may only be considered as a collateral source where there is no direct authority in California and there is no conflict with the public policy of California. The court further held that counsel for WPS cannot be sanctioned for engaging in conduct condemned by an ABA formal opinion that has not been promulgated by any decision, statute, or the California Rules of Professional Conduct.43

Although it reversed the sanctions that were based upon ABA Formal Opinion 92-368, the court of appeal adopted some of its procedures as a protocol for future conduct between lawyers. If a lawyer receives materials that obviously appear to be subject to an attorney-client privilege or otherwise clearly appear to be confidential and privileged, and if it is reasonably apparent that the materials were provided or made available through inadvertence, the receiving lawyer should:

  • Examine the materials only to ascertain if the materials are privileged and refrain from any further examination.        
  • Immediately notify the sender that the receiving lawyer possesses material that appears to be privileged.        
  • Resolve the matter by mutual agreement or request assistance from the court in the form of protective orders and other appropriate methods of judicial intervention.44

The court observed that disqualification might be justified if the attorney's conduct is not consistent with these guidelines (assuming other factors compel disqualification).45 The court emphasized that its conclusions were based upon:

    [T]he importance which the attorney-client privilege holds in the jurisprudence of this state. Without it, full disclosure by clients to their counsel would not occur, with the result that the ends of justice would not be properly served. We believe a client should not enter the attorney-client relationship fearful that an inadvertent error by its counsel could result in the waiver of privileged information or the retention of the privileged information by an adversary who might abuse and disseminate the information with impunity. In addition, it has long been recognized that "[a]n attorney has an obligation not only to protect his client's interests but also to respect the legitimate interests of fellow members of the bar, the judiciary, and the administration of justice…."46

The court anticipated the possibility that a lawyer might abuse this process by deliberately planting confidential information in discovery productions and claiming thereafter that the material was inadvertently delivered in order to move to disqualify the opponent. Thus mere exposure to an adversary's confidential information, standing alone, does not warrant disqualification, according to the court. If a lawyer seeks to hold another lawyer accountable for the misuse of inadvertently received confidential materials, the burden shifts to the complaining lawyer to persuasively demonstrate inadvertence.47 

1 Marshak v. Ballesteros, 72 Cal. App. 4th 1514 (1999).

2 Id. at 1518.

3 Id. at 1516.

4 Id.

5 Id. at 1516-17.

6 Id. at 1519.

7 Galanek v. Wismar, 68 Cal. App. 4th 1417 (1999), rev. den. (Mar. 24, 1999).

8 Id. at 1421.

9 Id. at 1423.

10 Id. at 1425.

11 Id. at 1426-28.

12 Id. at 1426.

13 Bolton v. Trope, 75 Cal. App. 4th 1021 (1999), rev. filed (Nov. 30, 1999).

14 Id. at 1022-23.

15 Id. at 1024.

16 Id. at 1026 (the care provided by the neurologists included an examination, multiple tests, diagnosis, and treatment).

17 Id. at 1024.

18 Novak v. Low, Ball & Lynch, 77 Cal. App. 4th 278 (1999).

19 Id. at 280-81.

20 Civ. Code §2860(f) states:

    Where the insured selects independent counsel pursuant to the provisions of this section, both the counsel provided by the insurer and independent counsel selected by the insured shall be allowed to participate in all aspects of the litigation. Counsel shall cooperate fully in the exchange of information that is consistent with each counsel's ethical and legal obligation to the insured. Nothing in this section shall relieve the insured of his or her duty to cooperate with the insurer under the terms of the insurance contract.

21 Novak, 77 Cal. App. 4th at 280-81.

22 Harris v. Rudin, Richman & Appel, 74 Cal. App. 4th 299 (1999).

23 Crouse v. Brobeck, Phleger & Harrison, et al., 67 Cal. App. 4th 1509 (1998).

24 Austin v. Superior Court (Chambers, Noronha & Lowry), 72 Cal. App. 4th 1126 (1999), reaffirmed the general rule that no contribution and indemnity in a legal malpractice action brought against predecessor counsel will lie against the plaintiff's current firm.

25 Crouse, 67 Cal. App. 4th at 1520-22.

26 Id. at 1522.

27 Id. at 1523-24.

28 Civ. Code §340.6.

29 Crouse, 67 Cal. App. 4th at 1541-48.

30 Id. at 1549-50, 1552.

31 Id. at 1550-51.

32 Id. at 1528-31.

33 Id. at 1535-40.

34 Baum v. Duckor, Spradling & Metzer, 72 Cal. App. 4th 54 (1999).

35 Curtis v. Kellogg & Andelson, 73 Cal. App. 4th 492 (1999).

36 State Compensation Ins. Fund (SCIF) v. WPS, Inc., 70 Cal. App. 4th 644 (1999).

37 Id. at 647-50.

38 Id. at 649.

39 Id. at 650-51.

40 The SCIF court distinguished the facts of the case, including the clearly marked litigation forms, from Aerojet-General Corp. v. Transport Indem., 18 Cal. App. 4th 996 (1993), in which the alleged confidential materials were not marked and the information was primarily nonprivileged and subject to discovery. SCIF, 70 Cal. App. 4th at 654-55.

41 SCIF, 70 Cal. App. 4th at 652.

42 Id. at 653-54.

43 Id. at 655-56.

44 Id. at 656-57.

45 Id. at 657.

46 Id. (quoting Kirsch v. Duryea, 21 Cal. 3d 303, 309 (1978), and In re Marriage of Flaherty, 31 Cal. 3d 637, 647 (1982).

47 Id. at 657.

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