Harkness v. Platten

• Decision Date: 16 June 2016
• Docket Number: CC C092970CV,CA A147439,SC S063222
• Citation: 375 P.3d 521,359 Or. 715
• Parties: John Harkness and Sherri Harkness, Petitioners on Review, v. Jack R. Platten, Respondent on Review.
• Court: Oregon Supreme Court

359 Or. 715

375 P.3d 521

John Harkness and Sherri Harkness, Petitioners on Review

v.Jack R. Platten, Respondent on Review.

CC C092970CV

CA A147439

SC S063222

Supreme Court of Oregon.

Argued and submitted March 4, 2016.

June 16, 2016

Emil R. Berg, Boise, Idaho, argued the cause and filed the brief for petitioners on review. With him on the brief was Leonard D. DuBoff, The Duboff Law Group, Portland.

James M. Callahan, Callahan & Shears, P.C., Portland, argued the cause and filed the brief for respondent on review.

Scott A. Shorr, Stoll Stoll Berne Lokting & Shlachter PC, Portland, filed the brief for amicus curiae Oregon Trial Lawyers Association.

Before Balmer, Chief Justice, Kistler, Walters, Landau, Baldwin, Brewer, Justices, and DeVore, Justice pro tempore.^**

BALDWIN

, J.

This is a legal malpractice and negligent misrepresentation case where we review a trial court judgment directing a verdict in favor of Platten (defendant). In an earlier lawsuit, defendant had represented the Harknesses (plaintiffs) against Kantor, a loan officer, and her successive employers, Sunset Mortgage (Sunset) and Directors Mortgage, Inc. (Directors), as the result of a fraudulent investment and loan scheme directed at plaintiffs by Kantor. That case did not settle to plaintiffs' satisfaction, and plaintiffs sought to recover their remaining loss from defendant.

In this case, the trial court granted defendant's motion for a directed verdict based on the conclusion that plaintiffs' liability theories of apparent authority and respondeat superior asserted against Sunset and Directors were not supported by sufficient evidence in the record and could not have led to a result more favorable than the settlement. Plaintiffs appealed the trial court ruling, and the Court of Appeals affirmed. Harkness v. Platten , 270 Or.App. 260, 348 P.3d 1145 (2015)

. For the reasons explained below, we reverse the decisions of the trial court and the Court of Appeals.

The facts as stated by the Court of Appeals, which we adopt, are as follows:¹

“Plaintiffs * * * were interested in using the equity in their home to invest when [Mr. Harkness] saw a homemade flyer for various businesses at work. The flyer included a photocopy of Kantor's business card that indicated Kantor was a loan officer with Sunset. After [Mr. Harkness] spoke with a coworker who had worked with Kantor to purchase an apartment complex, plaintiffs set up and attended a meeting with Kantor at her Sunset office. Kantor proposed that plaintiffs borrow money from Sunset, using the equity in their house as collateral, and then she would invest those proceeds in short-term, high-interest loans to developers and building contractors (hard-money loans). She told plaintiffs that those hard-money loans would be secured by first or second liens on real property with ‘lots' of equity. Kantor explained that she and Sunset would get paid from the commission on plaintiffs' conventional loan on their house and from the conventional construction loans that Sunset would do for the builders.

“After meeting with Kantor at Sunset again, plaintiffs agreed to the proposal, took out a conventional loan from Sunset, and turned over the loan proceeds to Kantor. Kantor did use those proceeds to make hard-money loans to several people and prepared certain documentation on Sunset letterhead. For the first of those loans, which was not funded from the Sunset loan proceeds turned over to Kantor, [Mrs. Harkness] gave Kantor a cashier's check made out to Sunset. [Mrs. Harkness] always met with Kantor at her Sunset office to learn about additional hard-money loan opportunities and to receive copies of notes for the loans Kantor made, which were always closed outside of plaintiffs' presence.

“Kantor later went to work as a loan officer at Directors. Plaintiffs continued their same investment relationship with Kantor at Directors and met with her at her Directors' office in the same manner as when Kantor was at Sunset. Plaintiffs also took out an additional loan from Directors, using their rental house as collateral, the proceeds of which were paid directly to Kantor to make hard-money loans to people Kantor found. Kantor's assistant at Directors was knowledgeable about all of plaintiffs' hard-money loans and would assist plaintiffs with information on those matters.

“Plaintiffs did not get loan payments directly from borrowers and did not know how borrowers made payments, but Kantor arranged deposits into plaintiffs' bank account to service plaintiffs' personal loans. [Mrs. Harkness] testified that certain notes directed payments to be made at addresses that corresponded to Sunset's or Directors' office address. Plaintiffs did not receive the proceeds from some of the note payoffs; instead, when a note was paid off or came due but not paid off, Kantor would recommend that plaintiffs immediately invest payoffs into new loans or roll over unpaid loans into a new loan to the same borrower, which plaintiffs would then do.

“[Mrs. Harkness] testified that she would not have dealt with Kantor if she were not working through Sunset. She also testified that she would not have continued working with Kantor if Kantor had not been at Directors. [Mrs. Harkness] believed that Kantor was a representative of Sunset, and then Directors, and was acting within the scope of her employment in all her dealings with plaintiffs. However, it was undisputed that Kantor, in fact, was not performing duties for which she was hired as a loan officer with regard to the investment scheme and hard-money loan arrangements—that type of transaction was not part of the business of either Sunset or Directors—and neither Sunset nor Directors received any fees or commissions from the hard-money loans. There also was no evidence that the control persons at Sunset or Directors were aware of Kantor's arrangement with plaintiffs.

“After about two years of investing with Kantor, plaintiffs were contacted by an attorney for one of the borrowers on a hard-money loan financed by plaintiffs. Kantor told [Mrs. Harkness] that she just had forgotten to record a lien, so [Mrs. Harkness] accompanied Kantor to record the lien. The borrower then sued plaintiffs. At the end of that lawsuit, plaintiffs learned that Kantor had forged the documents for at least that loan, and, for other loans, Kantor had not recorded any liens, or had recorded a lien in third position behind a lien Kantor had placed in favor of Directors on the property. Kantor also had been running all the money through her personal accounts. At the conclusion of that lawsuit, plaintiffs held notes to five outstanding loans, including the one deemed a forgery by the court, that totaled approximately $980,000, and at least one of the borrowers had already filed bankruptcy.

“Plaintiffs then retained attorney Flaherty to represent them in a suit against Kantor, Sunset, and Directors (the underlying action). Sometime after filing the underlying action, Flaherty contacted defendant to be a securities law expert in the case, but, instead, defendant fully associated with Flaherty as co-counsel in the case to assist with securities law issues. * * *

“ * * * * *

“At the end of [a] two-day mediation, the parties settled the underlying action for $600,000. Plaintiffs testified that that amount could not make them whole because it would leave them with significant amounts owing on their residential mortgage. Plaintiffs' expert in the malpractice case testified that, on the date of the settlement, the total amount owing to plaintiffs on the five outstanding loans was $998,149. Plaintiffs believed at the time of the settlement that their total damages were approximately $1.15 million. Plaintiffs initially were prepared to reject a $600,000 settlement and go to trial because they were led to believe by their attorneys that they had a strong case. After learning about their exposure to attorney fees and that Flaherty and defendant were not prepared for trial, and relying on defendant's assurance that they could get money from borrowers, plaintiffs decided to settle for $600,000.

“After the settlement, plaintiffs contacted defendant to pursue the big borrower. Defendant declined to take the case and told plaintiffs that ‘you'd be better off to take your money and take it to Vegas and put it in a slot machine.’ Plaintiffs would not have accepted the settlement if defendant had not told them that there were ways to collect from the borrowers. Plaintiffs hired another attorney to sue that borrower, but the borrower filed bankruptcy.

“Plaintiffs then brought a legal malpractice case against Flaherty, which was dismissed for reasons not disclosed in the record. Following that dismissal, plaintiffs brought this legal malpractice and negligent misrepresentation case against defendant.”

Harkness, 270 Or.App. at 262–67, 348 P.3d 1145

(footnotes omitted).

To prevail on their legal malpractice and negligent misrepresentation claims against defendant, plaintiffs needed to prove a “case within a case”—that is, they were required to show, among other things, that, but for defendant's legal malpractice or negligent misrepresentation, they would have gone to trial in the underlying action, prevailed, and been awarded more than the amount that they had received in the settlement. See Chocktoot v. Smith , 280 Or. 567, 570–71, 571 P.2d 1255 (1977)

(explaining case-within-a-case methodology). Plaintiffs' underlying action involved both contract and noncontract claims. For their case within a case on their contract claims, plaintiffs proceeded on a theory that Kantor had apparent authority from Sunset and Directors to bind those companies to the oral contract that was the basis for Kantor's investment scheme with plaintiffs—loaning funds to plaintiffs based on the equity in their different properties and then facilitating the lending of those funds to other borrowers for plaintiffs' investment purposes. For their case within a case on their noncontract claims, pl...