In Village Northridge Homeowners Association v. State Farm Fire and Casualty Company

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ANDREA LYNN RICE
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LIABILITY UPDATE
May 2, 2008

In Village Northridge Homeowners Association v. State Farm Fire and Casualty Company 2007 Daily Journal D.A.R 18547, the Second Appellate District of the California Court of Appeal held that California Supreme Court precedents holding that a plaintiff cannot avoid a fraudulently induced contract of release without rescinding the contract and restoring the money paid as a consideration for the release (Garcia v. California Truck Co. (1920) 183 Cal. 767, 773 (Garcia )) apply only to the release of personal injury claims, and not to the settlement and release of claims arising from a contract of insurance.

The lawsuit arose from the Northridge earthquake in January 1994. Village Northridge Homeowners Association (the Association or the insured) sued State Farm Fire and Casualty Company (State Farm or the insurer), alleging breach of contract and breach of the implied covenant of good faith and fair dealing. The complaint alleged State Farm improperly undervalued the Association’s loss, inducing it to forego proper repairs and to forego payment of amounts properly owed under the policy. The Association further alleged it “was required to sign a release and did so under compulsion and with no other option afforded to secure partial benefits owed,” and that it did not agree “that the partial payments provided fully compensated [the Association] for the actual damages and loss sustained. . . .”

The Association’s second amended complaint alleged a cause of action for fraud as well as claims for breach of contract and breach of the implied covenant of good faith and fair dealing. The Association alleged it had spent the $1.5 million on partial earthquake repairs and was not offering to return the $1.5 million; acknowledged a credit in that amount in State Farm’s favor against the damages sought in the lawsuit; did not seek to rescind the release; and contended the release was unenforceable as the product of fraud.

State Farm demurred. The trial court sustained the demurrer without leave to amend, observing the Association chose to affirm the settlement agreement and keep the money paid by State Farm, but not to release the claims, and “[t]hey can't have it both ways.” Judgment was entered and the Association filed this timely appeal. The Court of Appeal reversed.

State Farm contended that the Association’s only option under California law for avoiding its release was to rescind the settlement agreement and return the $1.5 million to State Farm, and it could not “keep the money and sue.” “While the question is not without difficulty, we conclude that, in the circumstances of this case, State Farm is mistaken.”

The court acknowledged that in Garcia, supra, 183 Cal. 767, the Supreme Court “made it clear that rescission is essential to the extinguishment of a contract of release in a personal injury case, and that there can be no rescission without restoration of the consideration. This is not, however, a personal injury case, in which the only purpose of the releasee’s payment is to obtain a release from an inchoate tort claim. This is an insurance contract case, in which the releasee-insurer had an underlying contractual obligation to pay for damage to the insured’s dwellings caused by earthquake, and in addition a statutory obligation not to misrepresent the terms of its policy. (See Ins. Code, § 790.03.) Under these circumstances—and particularly where the consideration received by the releasor was long ago expended to repair the very damage the releasee-insurer contracted to cover—we conclude Garcia does not prevent the insured from avoiding the release without returning the consideration for which it was given.”

The court found that two general principles were relevant to the analysis. “The first is the Garcia principle: that a plaintiff in a personal injury case cannot avoid a fraudulently induced contract of release without rescinding the contract and restoring the money paid as a consideration for the release. . . . The second is the more general principle that, if a defrauded party is induced by false representations to execute a contract, the party has the option of (1) rescinding the contract and restoring any consideration received under it, or (2) affirming the contract and recovering damages for the fraud. (Bagdasarian v. Gragnon, supra, 31 Cal.2d at p. 750; Hines v. Brode (1914) 168 Cal. 507, 511-512.) We conclude the second, more general, principle applies here, permitting the Association to affirm the settlement agreement and recover damages for the fraud.”

The court acknowledged the apparent incongruity, noted by the trial court, in “affirming” a contract and yet avoiding one of its principal terms: the release. “The incongruity, however, is not as severe as may first appear. Indeed, because of the underlying insurance obligation, the circumstance is not unlike both (1) cases in which a settlement agreement and the mutual releases in it are considered separable, thus permitting the plaintiff to affirm the settlement and sue for fraud despite the release, . . . or (2) cases, as described in Garcia, applying the ‘well-recognized rule’ that one who rescinds a contract for fraud ‘is not required to restore that which in any event he would be entitled to retain.’ . . . While neither principle fits perfectly, either is more appropriately applied to a case in which an insurer has misrepresented policy limits to obtain a settlement than is a principle that requires the return of the insurance settlement monies as the price of a challenge to the insurer’s fraud.”

State Farm argued that Garcia and a similar case, Taylor v. Hopper (1929) 207 Cal. 102, 276 (Taylor), controlled. In Taylor, the Supreme Court held that the remedy of affirming a compromise agreement, retaining the money received under it, and suing for fraud “does not exist in a case such as we are considering.” “But Taylor, like Garcia, was considering a personal injury case, in which plaintiff was run over by defendants’ automobile and released her claim in a compromise agreement. Taylor concluded the ‘affirm and sue’ remedy did not exist because ‘[[t]he difficulty in determining the amount of damages is insurmountable.’ (Ibid.)”

State Farm insisted that Garcia and Taylor are not “archaic decisions,” and that their holdings “comport with common sense and the strong policy in favor of settlement.” “While we do not disagree with these sentiments, we cannot agree that the Garcia/Taylor principle applies to the settlement of a claim grounded upon an insurance contract. Indeed, Taylor itself demonstrates that a personal injury settlement is very different from an insurance settlement. The principal difference, of course, is the existence of an underlying liability. In Taylor or any other personal injury claim, there may or may not be a valid negligence claim and underlying liability on the part of the defendant. . . . In an insurance settlement, by contrast, there is necessarily an underlying liability on the part of the insurer. While the scope of the insurer’s liability may be subject to dispute, the existence of its contractual obligation to pay for earthquake repairs is not.”

To summarize: The principles established in Garcia and Taylor, holding that a plaintiff cannot avoid a fraudulently induced contract of release without rescinding the contract and restoring the money paid as a consideration for the release, do not apply to a contract for the settlement and release of insurance claims, where the insurer is alleged to have induced the settlement by misrepresenting policy limits. Instead, the principle applicable to ordinary contracts – that a party induced by fraud to execute a contract has the option of rescinding it or affirming it and recovering damages for the fraud – applies. Any other conclusion would leave a defrauded insured with no practical remedy and would do nothing to discourage fraud in the settlement of insurance claims. Accordingly, the trial court erred in sustaining State Farm’s demurrer to the Association’s second amended complaint.

----Andrea Lynn Rice

Pagarigan v. Aetna U.S. Healthcare of California, Inc

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LIABILITY UPDATE
April 25, 2008

In Pagarigan v. Aetna U.S. Healthcare of California, Inc. 2007 Daily Journal D.A.R 18666, the Second Appellate District of the California Court of Appeal held that failure to timely file an amended complaint warrants dismissal under California Code of Civil Procedure Section 472(b).

Teri, Mary, and John Pagarigan (“The Pagarigans”) sued the Aetna group of defendants for elder abuse and the wrongful death of their mother, Johnnie Pagarigan, while a resident at the Magnolia Gardens nursing home. “These Aetna entities (‘Aetna’) were to blame for their mother’s death, the Pagarigan children say, because Aetna operated the health maintenance organization responsible for Magnolia Gardens.”

The Pagarigans filed their complaint on February 26, 2001. Aetna and the other defendants filed separate demurrers, which the trial court sustained in separate orders. On the Aetna appeal, this court issued its unpublished decision on October 25, 2005. That decision reversed the judgment and remanded the case with instructions. The instructions were to sustain the Aetna demurrer with leave to amend as to the first and eleventh causes of action, to sustain the Aetna demurrer without leave to amend on the remaining counts, and for further proceedings consistent with that opinion. As to the Aetna defendants, the clerk of this court certified that the October 25, 2005 decision was final and mailed notice of the issuance of the remittitur to the parties. This notice of remittitur was on February 17, 2006. For about six weeks, nothing happened. Then on April 6, 2006, Aetna brought an ex parte motion in the trial court, asking the trial court to dismiss the Pagarigans’ case against Aetna. Aetna’s rationale was that the law gave the Pagarigans 30 days to file an amended complaint against Aetna, and the Pagarigans had not done so. The trial court heard further oral argument and then granted Aetna’s motion to dismiss the Pagarigans’ action against it.

The Pagarigans then moved to set aside this order of dismissal on the basis of mistake, inadvertence, surprise, or excusable neglect. The trial court denied the motion. The Pagarigans filed a timely appeal, and the Court of Appeal affirmed.

There are two issues. First, was the trial court right to grant Aetna’s motion to dismiss? Second, was the trial court right to deny the Pagarigans’ motion to set aside this order of dismissal on the basis of mistake, inadvertence, surprise, or excusable neglect? We answer yes to both questions.

The court observed that “The first issue concerns dismissal. A particular statute governs this issue. That statute is section 472b of our Code of Civil Procedure. We emphasize some key words of the last sentence of section 472b, which states that ‘[w]hen an order sustaining a demurrer without leave to amend is reversed or otherwise remanded by any order issued by a reviewing court, any amended complaint shall be filed within 30 days after the clerk of the reviewing court mails notice of the issuance of the remittitur.’ (Italics added.)”

The plain language of section 472b set a deadline. The plaintiffs did not meet it. The trial court correctly granted Aetna’s motion to dismiss the Pagarigans’ case against Aetna.

The Pagarigans argued that section 472b’s 30 day deadline did not apply in this case because that deadline conflicted with this court’s more specific opinion of October 25, 2005. The Pagarigans pointed to that opinion’s final section, which gave instructions for remand. “These instructions were ‘to sustain the demurrer with leave to amend as to the first and eleventh causes of action in the Pagarigans’ complaint and to sustain the demurrer without leave to amend as to the remaining counts against Aetna, and for further proceedings consistent with this opinion.’ . . .”

This supposed conflict, however, does not exist. Section 472b sets out a procedural timeline. The appellate opinion set out substantive requirements. The substantive requirements could have been met within the procedural timeline. This is especially true here because events moved in slow motion. This court filed its appellate opinion on October 25, 2005. This court’s clerk did not mail notice of the issuance of the remittitur—and hence section 472b’s 30 day clock did not start ticking—until February 17, 2006. So the Pagarigans had nearly four months to prepare for the beginning of their 30 day period for action. Once this 30 day clock began to tick, it would have been straightforward for the Pagarigans to file an appropriate pleading. This pleading could have been, for instance, a motion (1) to enter an order sustaining Aetna’s demurrer as the court of appeal had directed, and (2) for leave to file an appropriately amended complaint. Such a pleading would have complied fully with all authorities. Indeed, it would have effectuated these rules. It would have kept this case moving forward, which is the aim of section 472b. The Pagarigans’ claim of conflict has no basis.

The second question before the appellate court was whether the trial court erred when it denied the Pagarigans’ motion to set aside the dismissal of their case. The statutory authority here was section 473, subdivision b, of the Code of Civil Procedure. Section 473, subdivision b, contains two sentences that are independently pertinent. “Sentence [1] is the discretionary relief provision of section 473. Sentence [2] is that section’s mandatory relief provision. The Pagarigans’ motion relied on both provisions. Each provision raises a separate issue.”

The first issue concerned the discretionary relief provision of section 473. “Two reasons show the trial court did not abuse its discretion by declining to set aside the dismissal. [¶] First, the Pagarigans’ mistake of law was unreasonable. As the trial court remarked during argument, section 472b of the Code of Civil Procedure is ‘absolutely completely clear.’ . . . [¶] A second reason supports the trial court’s refusal to grant discretionary relief. This reason is that the Pagarigans’ inaction after remand appeared to the trial court to be ‘intentional conduct’ rather than mistake, inadvertence, surprise, or neglect. The trial court noted that the Pagarigans never asserted ignorance of section 472b. To the contrary, the Pagarigans had demonstrated their awareness of this statute by citing it. The trial court reasonably suggested that the Pagarigans had chosen to ignore this plain statute for ‘strategic advantage.’ . . . Deliberate inaction after remand is a unilateral way to attempt to help oneself to a stay. As the trial court put it, ‘[the Pagarigans] were aware of section 472b and ignored it, perhaps because they hoped to defer or postpone any further trial court proceedings until other matters were concluded at the Court of Appeal.’ ”

The court then considered the mandatory relief provision. “The mandatory relief provision of section 473 has a rather narrow application. This provision operates only where there has been a ‘resulting default judgment or dismissal entered against [the] client. . . .’ . . . Courts have considered carefully this particular use of the word ‘dismissal.’ ‘[T]he Legislature intended the word “dismissal” to have a limited meaning in the context of the mandatory provision of section 473(b).’ (English v. IKON Business Solutions, Inc. (2001) 94 Cal.App.4th 130, 148.)”

As we have just recited, however, the trial court did not believe that the failure to timely file an amended complaint was due to mistake, inadvertence, surprise, or neglect, but was instead knowing and intentional conduct. . . . Designing conduct that leads to a dismissal is not akin to a default.

----Andrea Lynn Rice

Boeing Co. v. Continental Casualty

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ANDREA LYNN RICE
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LIABILITY UPDATE
April 18, 2008

In Boeing Co. v. Continental Casualty 2007 Daily Journal D.A.R 18419, the Second Appellate District of the California Court of Appeal held that a party to an indemnity contract is incapable of alleging status as an additional insured under a commercial general liability policy where the policy requires that the insured has requested in writing that it be added.

Christmas in April USA (CIA) is a nonprofit corporation based in Washington, D.C. CIA enlists volunteers to repair and rehabilitate the homes of low-income, elderly and disadvantaged persons. CIA solicits companies such as Boeing Co. (Boeing) to encourage its employees to volunteer for reconstruction projects.

On April 28, 2001, Todd Black (Black), an employee of California State University at Long Beach (CSULB), allegedly was injured while working as a volunteer on a CIA project at the home of Sam and Annie Nichols (Nichols) in Long Beach. On April 24, 2002, Black filed suit against Boeing, CSULB and Nichols (Black v. Boeing et al.). As against Boeing, Black pled causes of action for negligence, product liability and breach of implied warranty. Black asserted that Boeing was a joint venturer with CSULB and CIA on the Nichols project, his work at the Nichols home was under the direction and supervision of Boeing and Boeing supplied him with a defective step-stool.

Boeing tendered its defense in Black to Continental Casualty Company (Continental). On April 24, 2003, Continental declined the tender in a letter which stated in relevant part: “[Continental] insured [CIA] under the above-referenced policy, however, this policy does not identify [Boeing] as an additional insured. We have confirmed with our insured that they did not have a legal requirement to name [Boeing] as an additional insured nor did [Boeing] request to be added as an additional insured on [CIA’s] policy. . . . [¶] We have also confirmed that no contract exists as between your client and our insured. At this time, [Continental] respectfully rejects your request to defend and indemnify [Boeing].” Boeing defended the Black action and obtained summary judgment on August 4, 2003 on various grounds.

On January 19, 2006, Boeing sued Continental to recover its defense costs in the Black action. Boeing’s theory that it was an additional insured under CIA’s Continental policy was based on the language of the following endorsement: “The following are additional insureds: [¶] . . . [¶] 3. Any person, (other than the named insured, or any employee of the named insured) or an organization while acting as any agent for, or on behalf of the named insured, including but not limited to real estate agents, however, such coverage will be granted only on written request of the insured and for such limits as are afforded by this policy.”

Continental demurred to Boeing’s complaint. Citing the language of the additional insured endorsement, Continental contended that Boeing can qualify as an additional insured only if Boeing could establish that the insured, i.e., CIA, made a written request that additional insured coverage be extended to Boeing, and in the absence of any “allegation anywhere that any insured requested Continental provide additional insured coverage for Boeing, Boeing did not allege sufficient facts to establish that it was an additional insured.”

The trial court sustained Continental’s demurrer without leave to amend, explaining “whether only the named insured can seek coverage or someone else is entitled to seek coverage under the terms of the policy, coverage has to be requested, and a person or entity has to become an insured before they assert a right to indemnity. [¶] The company has to undertake to insure someone, and then anything which is insured under the policy gives rise to a right to demand indemnity under the policy. [¶] But someone who’s never been accepted as an insured, someone who’s never asked to become an insured, who becomes injured, can't then write a letter asking to be covered for the injury. That just isn't the way the law contemplates insurance will work, nor do insurance companies contemplate having to be liable for coverage to the world of volunteers, all of whom are unknown until after they've suffered injury.”

Boeing filed a timely notice of appeal from the judgment of dismissal. The Court of Appeal affirmed.

The appellate court noted as a preliminary matter that Boeing admittedly was not the named insured. CIA, a corporation, was the only person or entity identified in the policy as the “named insured.” “Further, section II of the policy, setting forth the policy’s ‘WHO IS AN INSURED’ provisions, is unavailing to Boeing. Under those provisions, CIA, as a corporation, was an insured, as were its executive officers and directors (with respect to their duties as officers and directors) and its stockholders (only with respect to their liability as stockholders). In addition, pursuant to Section II, the following were also insureds under the policy: CIA’s employees for acts within the scope of their employment; any person acting as CIA’s real estate manager; any person or organization having custody of CIA’s property upon death; and CIA’s legal representative upon death-none of which provisions is relevant here.”

Boeing’s case against Continental stands or falls with the application of the policy’s special endorsement for additional insureds. To reiterate, said endorsement provides in relevant part: “The following are additional insureds: [¶] . . . [¶] 3. Any person, (other than the named insured, or any employee of the named insured) or an organization while acting as any agent for, or on behalf of the named insured, including but not limited to real estate agents, however, such coverage will be granted only on written request of the insured and for such limits as are afforded by this policy.” (Italics added.)

Boeing asserted that, to trigger coverage for an additional insured, the special endorsement stated that “the insured,” not the “named insured,” must make a written request to the insurer, and here, it made such a written request to Continental. “We reject Boeing’s attempt to create an ambiguity in this regard. As discussed, ambiguity is not necessarily to be found in the fact that a word or phrase isolated from its context is susceptible of more than one meaning; the critical principle is that an insurance policy must be interpreted as a whole and in context.”

The court pointed out that paragraph B of the policy’s Common Policy Conditions stated in relevant part: “CHANGES [¶] This policy contains all the agreements between you and us concerning the insurance afforded. The first Named Insured shown in the Declarations is authorized to make changes in the terms of this policy with our consent.” (Italics added.) “Thus, solely CIA, as the named insured, had the authority to request changes to the policy, and with the consent of Continental.”

Reading Paragraph B in conjunction with the special endorsement for additional insureds, it is clear that Boeing had no standing to make written request to Continental to be named as an additional insured under the policy. [¶] Because Boeing did not qualify as an additional insured under CIA’s policy, Continental did not owe Boeing a defense in the Black personal injury action. Therefore, the trial court properly sustained Continental’s demurrer to Boeing’s first amended complaint without leave to amend.

----Andrea Lynn Rice

Johnson v. American Standard

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ANDREA LYNN RICE
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LIABILITY UPDATE
April 11, 2008

In Johnson v. American Standard, Inc. 2008 Daily Journal D.A.R 4701, the California Supreme Court adopted the “sophisticated user” doctrine and defense which operates to negate a manufacturer’s duty to warn of a product’s potential danger when the plaintiff has (or should have) advance knowledge of the product’s inherent hazards. The court held further that the relevant time for determining user sophistication is when the sophistication user is injured and knew or should have known of the risk.

Plaintiff was a trained and certified heating, ventilation, and air conditioning (HVAC) technician. Plaintiff sued various chemical manufacturers, chemical suppliers, and manufacturers of air conditioning equipment, including defendant American Standard, Inc. Plaintiff specifically alleged that he brazed refrigerant lines on an evaporator that defendant had manufactured in 1965 that contained R-22 refrigerant, creating and exposing him to phosgene gas and causing him to develop pulmonary fibrosis. The causes of action against defendant included negligence, strict liability failure to warn, strict liability design defect, and breach of implied warranties. In each cause of action, plaintiff’s theory was that defendant knew that servicing the evaporator would create harmful phosgene gas, but defendant failed to provide plaintiff with an adequate warning. (See Anderson v. Owens-Corning Fiberglas Corp. (1991) 53 Cal.3d 987, 1002 (Anderson ).)

Defendant moved for summary judgment on the ground, inter alia, that it had no duty to warn about the risks of R-22 exposure because it could assume that the group of trained professionals to which plaintiff belonged, and plaintiff himself, were aware of those risks. The trial court granted summary judgment. The Court of Appeal affirmed and held that because plaintiff’s theory was the same in all causes of action, i.e., product liability through the failure to warn, the sophisticated user defense should apply to plaintiff’s complaint in its entirety. The California Supreme Court granted review and affirmed as well.

The Court pointed out that, generally speaking, manufacturers have a duty to warn consumers about the hazards inherent in their products. “. . . Anderson made it clear that ‘[w]hatever may be reasonable from the point of view of the manufacturer, the user of the product must be given the option either to refrain from using the product at all or to use it in such a way as to minimize the degree of danger.’ . . . Conversely, when a sufficient warning is given, ‘the seller may reasonably assume that it will be read and heeded; and a product bearing such a warning, which is safe for use if it is followed, is not in defective condition, nor is it unreasonably dangerous.’ (Rest.2d Torts, § 402A, com. j, p. 353.)”

The Court observed that the sophisticated user defense exempts manufacturers from “their typical obligation to provide product users with warnings about the products’ potential hazards.” The defense, if successfully argued, acts as an affirmative defense to negate the manufacturer’s duty to warn. “Under the sophisticated user defense, sophisticated users need not be warned about dangers of which they are already aware or should be aware. . . . Because these sophisticated users are charged with knowing the particular product’s dangers, the failure to warn about those dangers is not the legal cause of any harm that product may cause. . . . The rationale supporting the defense is that ‘the failure to provide warnings about risks already known to a sophisticated purchaser usually is not a proximate cause of harm resulting from those risks suffered by the buyer’s employees or downstream purchasers.’ (Ibid.) This is because the user’s knowledge of the dangers is the equivalent of prior notice. . . .”

The Court explained that the sophisticated user defense evolved out of the Restatement Second of Torts, section 388 (section 388) and the obvious danger rule, an accepted principle and defense in California. The defense has been held to apply equally to strict liability and negligent failure to warn cases. The duty to warn is measured by what is generally known or should have been known to the class of sophisticated users, rather than by the individual plaintiff’s subjective knowledge.

The Court observed that section 388 provides that a supplier of goods is liable for physical harm the goods cause if the supplier knows, or should know, the items are likely to be dangerous, fails to reasonably warn of the danger, and “has no reason to believe that those for whose use the chattel is supplied will realize its dangerous condition.” Courts have interpreted section 388, subdivision (b), to mean that if the manufacturer reasonably believes the user will know or should know about a given product’s risk, the manufacturer need not warn that user of that risk. This is “especially [true] when the user is a professional who should be aware of the characteristics of the product.” (Strong v. E.I. Du Pont de Nemours Co., Inc. (8th Cir.1981) 667 F.2d 682, 687.) “Other jurisdictions that have adopted the sophisticated user defense have cited section 388 and the obvious danger rule as a basis for doing so. . . . While this court has not expressly adopted a sophisticated user defense, it has adopted section 388 as law in California. (See Stevens v. Parke, Davis & Co. [(1973)] 9 Cal.3d [51] at p. 64.)” The Court further pointed out that California law also recognizes the obvious danger rule, which provides that there is no need to warn of known risks under either a negligence or strict liability theory.

. . . As the Court of Appeal reasoned, the sophisticated user defense simply recognizes the exception to the principle that consumers generally lack knowledge about certain products, for example, heavy industrial equipment, and hence the dangers associated with them are not obvious. For those individuals or members of professions who do know or should know about the product’s potential dangers, that is, sophisticated users, the dangers should be obvious, and the defense should apply. Just as a manufacturer need not warn ordinary consumers about generally known dangers, a manufacturer need not warn members of a trade or profession (sophisticated users) about dangers generally known to that trade or profession.

The Court acknowledged that, under the “should have known” standard, there will be some users who were actually unaware of the dangers. “However, the same could be said of the currently accepted obvious danger rule; obvious dangers are obvious to most, but are not obvious to absolutely everyone. The obvious danger rule is an objective test, and the courts do not inquire into the user’s subjective knowledge in such a case. . . . Thus, under the sophisticated user defense, the inquiry focuses on whether the plaintiff knew, or should have known, of the particular risk of harm from the product giving rise to the injury.”

The Court also held that the relevant time for determining user sophistication for purposes of this exception to a manufacturer’s duty to warn is when the sophisticated user is injured and knew or should have known of the risk. (Crook v. Kaneb Pipe Line Operating Partnership (8th Cir.2000) 231 F.3d 1098, 1102.) “As the Court of Appeal pointed out, ‘[t]he sophisticated user defense will always be employed when a sophisticated user should have, but did not, know of the risk. Otherwise, the issue would be actual knowledge and causation.’ Therefore, the sophisticated user’s knowledge of the risk is measured from the time of the plaintiff’s injury, rather than from the date the product was manufactured. The timeline focuses on the general population of sophisticated users and conforms to the defense’s purpose to eliminate any duty to warn when the expected user population is generally aware of the risk at issue.”

----Andrea Lynn Rice

Nielsen v. Beck

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OF
ANDREA LYNN RICE
A Professional Corporation
12100 Wilshire Boulevard
Suite 780
Los Angeles, California 90025
Telephone (310) 207-3717
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LIABILITY UPDATE
April 4, 2008

In Nielsen v. Beck 2007 Daily Journal D.A.R 18193, the Second Appellate District of the California Court of Appeal held that subdivision (a)(2) of Code of Civil Procedure section 340.6, that tolls the statute of limitations if an attorney “continues to represent the plaintiff regarding the specific subject matter in which the alleged wrongful act or omission occurred,” may apply where an attorney continues to perform services for a client even after a substitution of attorney is filed and where the attorney continued to represent the client in an unlawful detainer action which arose from advice given in a prior bankruptcy proceeding.

Robert Nielsen and William Nielsen (“the Nielsens”) owned PrimePapers, Inc. (PrimePapers), a company that cuts rolls of paper used by other commercial interests. Attorney Paul A. Beck was hired by PrimePapers and its affiliate entity, PrimePapers Louisiana (PPL) to represent PrimePapers and PPL “in connection with a number of pending legal issues, including but not limited to the defense of claims brought against the Company by various creditors and the resolution of the Company’s outstanding obligations to its creditors through a workout or Chapter 11 or Chapter 7 bankruptcy filing.” Bankruptcy proceedings were filed and on March 23, 2004, the bankruptcy court entered an order closing the case.

PrimePapers leased a building from ProLogis California I, LLC (ProLogis). The lease for that premises contained a provision whereby ProLogis would waive a large amount of rent. However, in the event of default, this “free rent” had to be paid. The Nielsens personally guaranteed the lease. Beck advised the Nielsens to stop making rent payments to ProLogis. ProLogis then filed an unlawful detainer action against plaintiffs. Beck represented plaintiffs in connection with the unlawful detainer action. On September 2, 2003, the San Bernardino trial court found against PPL on the issue of possession and against the Nielsens in the amount of $394,840.42. Beck continued to provide professional services to PrimePapers, PPL, and the Nielsens in attempts to settle the unlawful detainer case and to avoid enforcement proceedings by ProLogis, the judgment creditor.

On August 26, 2004, the Nielsens and Beck executed a substitution of attorney form to replace Beck with attorney Slates. The substitution of attorney form was returned to attorney Slates and then filed with the Superior Court on September 3, 2004. According to Robert Nielsen, at the time the substitution of attorney form was signed, he “felt very uncomfortable for [Beck] to do any more work for [him]. Everything that [Beck] touched, it continued to get worse and worse and worse.” However, after August 26, 2004, Beck continued to work for the Nielsens. In September 2004, Robert Nielsen contacted Beck by telephone concerning appropriate tactics and procedures in resolving the ProLogis claims. On October 14, 2004, Beck mailed a bill to Robert Nielsen for professional services, requesting payment of $350 for one hour of “professional services rendered.”

On September 2, 2005, the Nielsens filed this legal malpractice action against Beck. The complaint sought damages for representation with regard to the bankruptcy and ProLogis cases. Beck filed a motion for summary judgment contending that the lawsuit was barred by the one-year statute of limitations contained in Code of Civil Procedure section 340.6. In opposing the motion, the Nielsens argued that the statute of limitations was tolled under the “continuous representation” rule codified in subdivision (a)(2) of section 340.6. The trial court granted the motion for summary judgment. The Nielsens appealed from the subsequently entered judgment, and the Court of Appeal reversed.

The court observed that “Code of Civil Procedure section 340.6 does not expressly state a standard to determine when an attorney’s representation of a client regarding a specific subject matter continues or when the representation ends, and the legislative history does not explicitly address this question. (Gonzalez v. Kalu (2006) 140 Cal.App.4th 21, 28 (Gonzalez ).) However, a number of recent cases have addressed this standard.”

The court pointed out that in its recent case of Gonzalez, supra, 140 Cal.App.4th 21, an attorney abandoned a client. “[T]he crucial inquiry in abandonment cases is “when the client actually has or reasonably should have no expectation that the attorney will provide further legal services. [Citation.]” “In Gonzalez, we did not mean to suggest that the standard, which is to be viewed by the client’s perspective, is to be applied universally, in all cases. Rather, we compared abandonment cases to other types of malpractice lawsuits.”

The court found that there were triable issues of fact with regard to tolling the statute of limitations. “To satisfy the one year provision of Code of Civil Procedure section 340.6, the Nielsens’ legal malpractice case had to be filed within one year after the Nielsens discovered, or through reasonable diligence should have discovered, the negligence of Beck, unless the statute was tolled pursuant to subdivision (a)(2) because Beck continued to represent the Nielsens.”

The court acknowledged that a strong argument could be made that the statute of limitations could not extend any later than August 26, 2004, when the substitution of attorney form was executed because it demonstrated that the ongoing relationship between Beck and the Nielsens had ended and Beck would no longer be rendering legal advice. “However, there is contrary evidence from which a trier of fact could conclude that the relationship between Beck and the Nielsens had not been severed at the time the substitution of attorney form was signed, but rather, the statute was tolled through September 18, 2004. . . . On September 9, 14, and 18, 2004, Robert Nielsen placed telephone calls to Beck asking for advice. There is evidence that during these three telephone calls, Beck rendered professional services. Beck’s October 2004 billing statement requested payment for ‘professional services rendered’ and described the services Beck rendered as ‘negotiations, options and strategy. . . .’ Thus, there is evidence from which a trier of fact could conclude that there was an ongoing mutual relationship and activities in furtherance of that relationship through September 18, 2004. If the trier of fact so concludes, then the statute of limitations would not have expired because the lawsuit was filed on September 2, 2005.”

The court also rejected Beck’s contention that even if the statute was tolled with respect to the ProLogis litigation, it was not tolled with respect to the earlier representation involving the bankruptcy and reorganization of PrimePapers.

Beck’s representation in the bankruptcy case and Beck’s representation in the unlawful detainer proceedings can be seen to be intertwined and related, having overlapping purposes. The advice given by Beck in the bankruptcy case resulted in the unlawful detainer proceeding. Beck advised the Nielsens and PrimePapers to stop paying ProLogis. (Gold v. Weissman (2004) 114 Cal.App.4th 1195 [representation to file medical malpractice case continued with attorney’s agreement to file complaint with Board of Medical Quality Assurance as both had a shared, common purpose]; Baright v. Willis (1984) 151 Cal.App.3d 303 [retaining attorney to sue for damages as a result of workplace injury would include third party lawsuit as well as workers’ compensation case]; contra, Panattoni v. Superior Court (1988) 203 Cal.App.3d 1092.) Thus, even though the bankruptcy case was in a different forum than the unlawful detainer proceedings and involved different parties, from the above stated facts, a trier of fact could conclude that the representation of the Nielsens with regard to the unlawful detainer action involved the same specific subject matter as the bankruptcy action.

----Andrea Lynn Rice