KL Group v. Case, Kay & Lynch

• Decision Date: 09 October 1987
• Docket Number: No. 86-2021,86-2021
• Citation: 829 F.2d 909
• Parties: , 23 Fed. R. Evid. Serv. 1257 KL GROUP, a California general partnership formerly known as Keoni Loa, Plaintiff-Appellant, v. CASE, KAY & LYNCH, a Hawaii general partnership, Paul A. Lynch, a Hawaii law corporation, Paul A. Lynch, an individual and Steven D. Whittaker, an individual, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 909

829 F.2d 909

9 Fed.R.Serv.3d 645, 23 Fed. R. Evid. Serv. 1257

KL GROUP, a California general partnership formerly known as Keoni Loa, Plaintiff-Appellant, v. CASE, KAY & LYNCH, a Hawaii general partnership, Paul A Lynch, a Hawaii law corporation, Paul A. Lynch, an individual and Steven D. Whittaker, an individual, Defendants-Appellees.

No. 86-2021.

United States Court of Appeals Ninth Circuit.

Argued and Submitted June 8, 1987.

Decided Oct. 9, 1987.

Robert B. Ericson, Los Angeles, Cal., for plaintiff-appellant.

Ronald E. Mallen and Michael L. Boli, San Francisco, Cal., for defendants-appellees.

Appeal from the United States District Court for the District of Hawaii.

Before GOODWIN, BEEZER and THOMPSON, Circuit Judges.

DAVID R. THOMPSON, Circuit Judge:

I

OVERVIEW

KL Group ("KL"), a California partnership, appeals the district court's grant of summary judgment in favor of the defendants-appellees, and the district court's protective order barring KL's use of a letter, for which the attorney-client privilege was claimed and which was inadvertently turned over to KL during discovery. We have jurisdiction under 28 U.S.C. Sec. 1291. We affirm the grant of the protective order, but because genuine issues of material fact exist, we reverse the summary judgment and remand the case to the district court.

II

FACTS

KL was formed for the purpose of acquiring and developing twenty-two acres on Poipu Beach, Kauai, Hawaii. Legal title to the property was held by a trust. The trust agreement required a complex bidding procedure and acceptance by beneficiaries holding sixty percent of the trust interests before a purchase offer could be accepted. KL offered $5.9 million for the property in April 1979. Beneficiary voting to accept or reject the offer was set for May 15, 1979. A second bidder, Diamond West, made a competing offer of $6.9 million. KL countered with its own $6.9 million offer conditioned on acceptance before April 23, 1979. Beneficiaries holding eighty percent of the trust interests voted to accept KL's offer on April 23, 1979. On the advice of defendants Case, Kay & Lynch ("Case Kay"), a Hawaii law partnership, the trustee refused to sell the property to KL because KL's offer had been accepted prior to the May 15 designated balloting date.

Believing it had an enforceable contract, KL retained Hawaii attorney Robert A. Smith ("Smith") to assist it in compelling the trustee to complete the sale. KL (then known as "the Hunt Knight partnership") filed suit in the United States District Court for the District of Hawaii and in Hawaii state court against the trustee, the beneficiaries of the trust, and Diamond West and its broker.

In June of 1979, KL resubmitted its $6.9 million offer. Again, the offer was accepted, this time by beneficiaries holding seventy percent of the trust interests. Thereafter the transaction was closed with Lawyers Title Insurance Corporation of Virginia ("Lawyers Title") providing title insurance. The litigation which spawned the present lawsuit ensued. Diamond West, the unsuccessful bidder, and its real estate broker sued KL by filing counterclaims in KL's original lawsuit which KL had filed in the district court in Hawaii. The counterclaims included claims against KL for interference with business relationships, unfair competition, and fraud. The counterclaimants also sought rescission of the sale (which would have defeated KL's title) and imposition of a constructive trust. ¹

When the counterclaims were filed, KL's attorney, Smith, tendered defense of the counterclaims to Lawyers Title and demanded indemnification under the policy of title insurance Lawyers Title had furnished when KL bought the property. In response to this demand, Case Kay, who represented Lawyers Title, wrote to Smith by letter dated October 29, 1979 ("the October 29 letter"). In this letter, Case Kay, on behalf of Lawyers Title, took the position that the policy of title insurance did not provide coverage for the counterclaims because the counterclaims were founded upon "affirmative tortious conduct" not covered by the policy. Case Kay stated, however, that Lawyers Title would pay the cost of the defense of "the counterclaim," reserving the right to deny coverage and reserving October 29, 1979

the right to raise any other defense to liability under the policy. The October 29 letter, written on Case Kay stationery, provided in its entirety:

Mr. Robert A. Smith

Davies Pacific Center

Suite 2208

841 Bishop Street

Honolulu, Hawaii 96813

Re: Policy No. J486839,

Lawyers Title Insurance Company

Insured: Keoni Loa

Dear Mr. Smith:

This letter will respond to yours of September 14, 1979 concerning the lawsuit commenced by your client, Hunt Knight partnership, ² in the United States District Court, Civil No. 79-0178 on April 30, 1979. In an amended answer to that complaint filed August 2, 1979, Mr. Patrick Jaress, attorney for defendants Michael J. Ryan and Hawaii Real Estate Exchange, Ltd. set forth certain counterclaims against plaintiff including a claim for rescission and cancellation of the sale of the Poipu property. In addition to the right to rescind the contract between Long & Melone, Ltd. and Hunt Knight partnership, counterclaimants assert the right to imposition of a constructive trust on the subject property.

Among other things, these counterclaims are based on allegedly false and misleading statements of your clients and affirmative tortious interference with the business relationships of Hawaii Real Estate Exchange and Michael J. Ryan. While we have not yet received the further statement of facts in support of your tender of defense as promised in your letter, we feel it is appropriate to respond at this time.

It is the position of Lawyers Title Insurance Company that the insurance policy issued by it to Keoni Loa does not provide coverage against the claims asserted in the defendants' counterclaims. Among other matters, and without waiving reliance on other exculpatory provisions of the policy, we have reference to the clear language of Exclusions from Coverage, paragraph 3. There is an Exclusion for:

Defects, liens, encumbrances, adverse claims, or other matters (a) created, suffered, assumed, or agreed to by the insured claimant; (b) not known to the Company and not shown by the public records but known to the insured claimant either at Date of Policy or at the date such claimant acquired an estate or interest insured by this policy and not disclosed in writing by the insured claimant to the Company prior to the date such insured claimant became an insured hereunder....

Since any successful counterclaim by the defendants would appear to arise from the affirmative tortious conduct of your clients, the lack of coverage seems plain.

However, even though there is no coverage under the policy, Lawyers Title Insurance Company is willing to defend against this counterclaim. The cost of this defense will be born [sic] by Lawyers Title Insurance Company; however, Lawyers Title Insurance Company will undertake to defend you only with the express understanding that any such action shall not be construed as a waiver of the rights of Lawyers Title Insurance Company under the policy and shall not be considered as an acceptance of liability or an admission of an obligation to defend under the policy. Lawyers Title Insurance Company will undertake the defense only upon the express condition that it reserves any rights which it may have to deny coverage or raise any other defense to liability under the policy; conversely you will retain any rights you may have under the policy.

By providing the defense, Lawyers Title Insurance Company does not, in any way, obligate itself to pay any judgments which may be rendered against you or In the circumstances of this case, since the claims against the title to your property arise by way of counterclaim, we must make it clear that we are assuming the defense of this counterclaim only. We will not assume any responsibility for prosecution of the principal action and, indeed, fully expect you to move forward with that prosecution in the mutual interest of the insured and insurer.

any settlement made on your behalf and the insurance company will not be obligated to furnish any appeal bond. Moreover, it is understood that you will cooperate with Lawyers Title Insurance Company in the defense of the case and will render all assistance in your power toward procuring a favorable decision.

Please acknowledge your understanding and agreement to the foregoing by signing in the appropriate space below. Retain the enclosed copy for your records, and return the acknowledged letter to us in the stamped, addressed envelope provided. We understand your motions are pending before the Honorable Samuel P. King on November 13, 1979, so your prompt cooperation in this matter will be appreciated.

If you have any questions, please feel free to contact me.

Very truly yours,

CASE, KAY & LYNCH for LAWYERS TITLE INSURANCE COMPANY

/s/ Stephen D. Whittaker

STEPHEN D. WHITTAKER

ACKNOWLEDGED AND SO AGREED:

/s/ Robert A. Smith

ROBERT A. SMITH

DATED: 10-31-79

The foregoing letter was signed by attorney Stephen D. Whittaker on behalf of Case Kay. It was also signed by Smith under the typewritten statement: "ACKNOWLEDGED AND SO AGREED". ³

As the Poipu litigation proceeded, both Smith and Case Kay performed legal services in connection with it. Smith's legal services were performed exclusively for KL, although KL contends that some of his services benefited Lawyers Title and should have been paid for by Lawyers Title. Case Kay's legal services were performed both for KL and for Lawyers Title. Smith and Case Kay agreed that Smith would prosecute KL's original complaint, and Case Kay would provide the "basic defense" of the counterclaim. In practice, however, this division of effort quickly blurred.

Smith wrote to Case Kay seeking its help in persuading Lawyers Title to pay Smith...