Channel Lumber Co., Inc. v. Porter Simon

• Decision Date: 09 March 2000
• Docket Number: No. C029576.,C029576.
• Citation: 93 Cal.Rptr.2d 482,78 Cal.App.4th 1222
• Court: California Court of Appeals Court of Appeals
• Parties: CHANNEL LUMBER COMPANY, INC., Plaintiff and Appellant, v. PORTER SIMON et al., Defendants and Respondents.

93 Cal.Rptr.2d 482

78 Cal.App.4th 1222

CHANNEL LUMBER COMPANY, INC., Plaintiff and Appellant, v. PORTER SIMON et al., Defendants and Respondents.

No. C029576.

Court of Appeal, Third District.

March 9, 2000.

Weintraub, Genshlea & Sproul, Charles L. Post, Sacramento, and William S. Jue, Sacramento; Stephen H. Cornet, Oakland, for Plaintiff and Appellant.

Hansen, Boyd, Culhane & Watson, Kevin R. Culhane, Betsy S. Kimball, Roger R. Billings and Daniel V. Kohls, Sacramento, for Defendants and Respondents.

SCOTLAND, P.J.

After retained counsel unsuccessfully defended a corporate landlord in a legal action brought against it by tenants, the corporation sued counsel for malpractice. Judgment was entered in counsel's favor.

Relying on Corporations Code section 317, the trial court ordered the corporation to indemnify counsel for the expenses and attorney fees incurred in defending against the malpractice claim. (Further section references are to the Corporations Code unless specified otherwise.)

Section 317 gives a corporation the authority, and in some instances imposes an obligation upon the corporation, to indemnify a person "who was or is a party or is threatened to be made a party" to any legal proceeding "by reason of the fact that the person is or was an agent of the corporation...."

For reasons which follow, we agree with appellant corporation that section 317 does not apply to this case. As we will explain, when outside counsel (as opposed to in-house counsel) is retained by a corporation to represent it at trial and then is sued by the corporation for allegedly committing legal malpractice while representing the corporation, outside counsel is a party to the malpractice suit by reason of his or her actions in the capacity of an independent contractor, not "by reason of the fact that [outside counsel] is or was an agent of the corporation," within the meaning and purposes of section 317.

Because we conclude section 317 does not apply, we shall reverse the trial court's order requiring, pursuant to that section, the corporation to indemnify its former outside counsel for attorney fees and expenses incurred in defending against the corporation's action for legal malpractice.

FACTUAL AND PROCEDURAL BACKGROUND

Channel Lumber Company, Inc. (Channel) was the owner of the Boatworks Mall in Tahoe City. (See Pate v. Channel Lumber Co. (1997) 51 Cal.App.4th 1447, 1449-1450, 59 Cal.Rptr.2d 919.) In accordance with lease agreements, the expenses of maintaining the common areas of the mall were passed on to tenants in proportion to the square footage of each individual tenant's leased premises. (Id. at p. 1450, 59 Cal.Rptr.2d 919.) A number of tenants brought an action against Channel (the Pate litigation), alleging it had inflated each plaintiffs percentage share of the common expenses and had charged the tenants for alleged common expenses that were redundant, unnecessary, or fraudulent. (Id. at p. 1450, 59 Cal.Rptr.2d 919.)

Channel retained Porter Simon, a law corporation, and attorney Michael Garnett (collectively Porter Simon) to defend Channel in the Pate litigation. During trial, Channel attempted to introduce documentation to establish the validity of the common expenses it had collected from tenants. The tenants objected on the ground that some of the documentation had not been provided during discovery. (Pate v. Channel Lumber Co., supra, 51 Cal.App.4th at p. 1452, 59 Cal.Rptr.2d 919.) The trial court excluded the documentation from evidence as a discovery sanction, and the jury returned a verdict in favor of the tenants. (Id. at p. 1453, 59 Cal.Rptr.2d 919.) This court upheld imposition of the discovery sanction and affirmed the judgment against Channel. (Id. at p. 1456, 59 Cal.Rptr.2d 919.)

Channel then commenced the present action against Porter Simon, alleging professional negligence. Channel asserted that, among other shortcomings, Porter Simon had failed to assure a record of compliance with discovery requests, failed to undertake proper discovery, and failed to assert the res judicata effect of prior litigation. The trial court granted summary judgment in favor of Porter Simon.

Relying on section 317, subdivision (d), the trial court then awarded to Porter Simon attorney fees and expenses in the amount of $83,860. Channel appeals, asserting that section 317 does not apply to Porter Simon.

DISCUSSION

Section 317 gives a corporation the authority, and in some instances imposes an obligation upon the corporation, to indemnify a person "who was or is a party or is threatened to be made a party" to any legal proceeding "by reason of the fact that the person is or was an agent of the corporation]" The issues in this appeal are focused upon subdivisions (c) and (d) of this section.

Subdivision (c) of section 317 states in pertinent part: "A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was an agent of the corporation, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of the action if the person acted in good faith, in a manner the person believed to be in the best interests of the corporation and its shareholders."

Subdivision (d) of section 317 provides: "To the extent that an agent of a corporation has been successful on the merits in defense of any proceeding referred to in subdivision (b) or (c) or in defense of any claim, issue, or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith."

Thus, subdivision (c) of section 317 establishes corporate authority to indemnify an agent who is made or threatened to be made a party to an action by or in the right of the corporation, while subdivision (d) makes indemnification obligatory when the agent successfully defends such a proceeding on the merits.

Read together, these subdivisions limit the right to seek reimbursement to a person who (1) is an agent of the corporation, and (2) is made or threatened to be made a party to an action or proceeding "by reason of the fact that the person is or was an agent of the corporation...."

Porter Simon is an outside law firm that was retained by Channel to defend it in litigation brought by its tenants. Channel's action against Porter Simon was based solely upon alleged negligence in the performance of those legal services. Porter Simon asserted and the trial court agreed that, in this respect, Porter Simon was an agent of Channel entitled to indemnification in accordance with section 317, subdivision (d).

On appeal, Channel contends the trial court erred in concluding that Porter Simon was an agent of Channel within the meaning and purposes of section 317. We agree.

"For the purposes of [section 317], `agent' means any person who is or was a director, officer, employee or other agent of the corporation ...."(§ 317, subd. (a).) Because Porter Simon was not a director, officer, or employee of Channel, the question posed is whether Porter Simon may be considered an "other agent of the corporation" for purposes of the statute.

In this respect, section 317 provides no express definitional help; however, the reasonable conclusion is that general principles of agency law may be used in resolving questions under section 317. (APSB Bancorp v. Thornton Grant (1994) 26 Cal. App.4th 926, 931, 31 Cal.Rptr.2d 736.)

As we shall explain, relevant law suggests that outside counsel retained by a corporation to represent it at trial has attributes of both an independent contractor and agent of the corporate client.

"An agent is one who represents another, called the principal, in dealings with third persons. Such representation is called agency." (Civ.Code, § 2295.) The essence of an agency relationship is the delegation of authority from the principal to the agent which permits the agent to act "not only for, but in the place of, his principal" in dealings with third parties. (People v. Treadwell (1886) 69 Cal. 226, 236, 10 P. 502, italics in original.) "The heart of agency is expressed in the ancient maxim: `Qui facit per alium facit per se.' [He who acts through another acts by or for himself.]" (Wallace v. Sinclair (1952) 114 Cal.App.2d 220, 229, 250 P.2d 154; see 3 Am.Jur.2d, Agency (1986) § 2, p. 510.)

Thus, it has been said "that the distinguishing features of an agency are representative character and derivative authority." (Lovetro v. Steers (1965) 234 Cal. App.2d 461, 474, 44 Cal.Rptr. 604; Gipson v. Davis Realty Co. (1963) 215 Cal. App.2d 190, 206, 30 Cal.Rptr. 253; Store of Happiness v. Carmona & Allen (1957) 152 Cal.App.2d 266, 269, 312 P.2d 1104.)

In general, "[a]ny person having capacity to contract may appoint an agent, and any person may be an agent." (Civ. Code, § 2296.) However, there are limitations upon the establishment of an agency relationship. "An agent may be authorized to do any acts which his principal might do, except those to which the latter is bound to give his personal attention." (Civ.Code, § 2304.) In other words, a principal may not assign nondelegable duties to an agent and may not employ an agent to do that which the principal cannot do personally. Accordingly, if a principal wishes to accomplish an end that it cannot personally accomplish, it must do so, if at all, through a mechanism other than an agency relationship.

It is well established that a corporation cannot represent itself in court. (Merco Constr. Engineers, Inc. v. Municipal Court (1978) 21 Cal.3d 724, 729-730, 147 Cal.Rptr. 631, 581 P.2d 636.) A trial attorney performs services in a court of justice (id. at p. 730, 147 Cal.Rptr. 631, 581 P.2d 636), "and the court is entitled to expect to be aided in resolution of the issues by presentation of the...