Chicago Title Ins. Co. v. Superior Court

• Decision Date: 26 November 1985
• Citation: 220 Cal.Rptr. 507,174 Cal.App.3d 1142
• Court: California Court of Appeals Court of Appeals
• Parties: CHICAGO TITLE INSURANCE COMPANY, Petitioner, v. SUPERIOR COURT of the State of California, In and For the County of San Mateo, Respondent; CALIFORNIA CANADIAN BANK, Real Party in Interest. AO30944, AO32033.

Page 507

220 Cal.Rptr. 507

174 Cal.App.3d 1142

CHICAGO TITLE INSURANCE COMPANY, Petitioner, v. SUPERIOR COURT of the State of California, In and For the County of San Mateo, Respondent CALIFORNIA CANADIAN BANK, Real Party in Interest.

AO30944, AO32033.

Court of Appeal, First District, Division 2, California.

Nov. 26, 1985.

Review Denied Feb. 27, 1986.

Pillsbury, Madison & Sutro, Walter R. Allan, Frank E. Sieglitz, Stephen Stublarec, John M. Grenfell, San Francisco, for petitioner.

No appearance for respondent.

Thelen, Marrin, Johnson & Bridges, Ted W. Harris, Jon T. Anderson, Thomas W. Lathram, Kennedy P. Richardson, San Francisco, for real party in interest.

SMITH, Associate Justice.

Chicago Title Insurance Company petitions for two writs of mandate. The first (AO30944) seeks review of respondent court's order compelling discovery of petitioner's in-house counsel. The second (AO32033) requests vacation of respondent court's order granting summary adjudication of petitioner's first, third and fifth causes of action. We have ordered the two writs consolidated.

These consolidated petitions for writs of mandate arise from a law suit filed by Chicago Title Insurance Company (CTI) against California Canadian Bank (Bank). In its complaint CTI generally alleged that at all relevant times Robert Dean Financial (RDF) ¹ was a corporation which had checking, escrow and trust accounts at the San Mateo branch of Bank. George I. Benny (Benny) ² was purportedly engaged in the business of purchasing, selling and borrowing against real property. CTI acted as an escrow agent in the transfer of funds from RDF to Benny in transactions whereby RDF delivered to CTI checks drawn on RDF's trust and escrow accounts at the Bank.

With respect to RDF and Benny, the complaint alleged that both RDF and Benny represented to CTI that said checks were for the financing and refinancing of loans by RDF to Benny, which loans were to be secured by deeds of trust against properties owned by Benny. In connection with these transactions, RDF represented that it was delivering good and sufficient funds to CTI and, in reliance on these representations, CTI issued and delivered to Benny checks made payable to Benny equal to the amount of the RDF checks less escrow charges. The complaint then claims that the purported loan transactions were fraudulent shams designed to induce CTI to pay money to Benny in exchange for RDF checks drawn on non-existent funds at the Bank. As part of the fraud and in order to conceal it from CTI, Benny, in most cases, endorsed the CTI checks to RDF, which deposited them in its accounts at Bank to cover the checks drawn on non-existent funds. ³

During the five month period during which the fraud operated, approximately $300 million in checks passed in and out of the RDF accounts at Bank. In the process RDF and Benny siphoned off nearly $17 million for their private use. ⁴

With respect to defendant, the complaint alleged that the Bank had knowledge of unusual activity in RDF accounts commencing on or about October 19, 1981. From that time forward RFD accounts appeared regularly on the Bank's daily "kite suspect" and overdraft lists. After the Bank conducted an investigation of the activity in the RDF accounts, it concluded that a "kite" ⁵ was occurring, and on or around December 1, 1981, a recommendation was made that the RDF accounts should be closed.

The complaint further alleged that despite recognition of the improper use of the account, the recommendation of the auditors was not followed. Instead, the Bank assisted, collaborated and conspired with RDF and Benny in perpetrating the fraud on CTI through January 1982 by improperly providing "special treatment of RDF checks drawn on non-existent funds and by informing RDF on a daily basis of the amount needed to cover said checks. As a result of this assistance, the Bank received in excess of $150,000 from RDF in overdraft charges. ⁶

Finally, the complaint alleged that the Bank at no point informed CTI of the kiting activity in the RDF accounts. Moreover, during the operation of the fraudulent scheme, CTI was unaware of the fraud being perpetrated upon it and was unaware that the representations upon which it relied were false. Based on the above allegations, the complaint contained five causes of action, for fraud, conspiracy to defraud, breach of duty of good faith, wrongful dishonor of checks and for money had and received.

The Bank filed an answer setting forth 18 affirmative defenses. The most pertinent of these defenses were that 1) the Bank had made no representations to CTI; 2) there was no duty of disclosure running from the Bank to CTI; 3) to the extent that the complaint was based upon the fraud of Benny and RDF, CTI had no right of recovery by virtue of its own knowledge of and active involvement in the matters complained of; and 4) any damages incurred by CTI were proximately caused by and attributable to the acts of CTI, its agents and employees, and not the Bank.

In addition, the Bank filed a cross-complaint containing seven causes of action for fraudulent concealment, breach of fiduciary duty, conspiracy, negligence, breach of contract, breach of covenant of good faith and fair dealing and conversion. The gravamen of the Bank's claims against CTI was that a separate fraudulent scheme by Benny, in which CTI participated as escrow agent and title insurer, resulted in there being grossly inflated market values on the Diamond Heights condomiums from January 1979 through 1981. According to the cross-complaint a large number of purported buyers (strawmen), in conspiracy with Benny, CTI and others, received compensation from Benny for fronting as bona fide buyers through the close of escrow. They then reconveyed title to the condominium units to Benny, usually by quitclaim deed. The process of sale and reconveyance was often repeated, sometime more than once, for each unit. The purpose and object of the scheme was to obtain increasing amounts of purchase money financing on the units, to generate artificially high and false sales values on the units, and to lead lenders to believe that their loans on the units, which were in amounts in excess of the true market values, would be fully secured. The Bank made purchase money loans to seven purported buyers or strawmen ⁷ on the condominiums and these loans were secured by first deeds of trust. However, when the empire of Benny collapsed in January or February of 1982, the purported buyers defaulted on the obligations owing to the Bank. Even though the units were released from bankruptcy, it became clear that resale of the units would not realize a sufficient amount of money to discharge the purchase money mortgages.

Discovery Question

During the course of discovery, the Bank deposed several of CTI's present and former employees, including James Straw, an attorney employed in CTI's San Francisco office as assistant regional counsel. The primary focus of the discovery proceedings was the participation of CTI's employee, James Fagerhaugh, in the alleged check kiting scheme and in other frauds perpetrated by Benny. At several depositions, and particularly that of attorney Straw, the Bank's attorney posed various questions concerning communications that Straw had with other CTI employees. All CTI employee deponents were instructed not to answer such questions on the grounds that they violated the attorney-client privilege.

The Bank moved to compel answers, contending that 1) CTI had waived the privilege by suing the Bank on grounds to which the communications were relevant; 2) the dominant purpose of some of the communications was not to obtain legal advice; and 3) the communications were in aid of a crime or fraud (Evid.Code, § 956). The motion was referred to a discovery referee, who recommended that answers be compelled to 39 of the 52 disputed items.

Although the referee rejected the argument that attorney Straw was consulted in order to facilitate a fraud, he found an implied waiver of the attorney-client privilege on the theory that "if probative information is held by a witness, such as Straw, which bears directly on the issue of whether or not the plaintiff herein had knowledge sufficient to avoid its losses, the cloak of the attorney-client privilege should be removed." The superior court adopted the recommendations of the referee "in toto insofar as they refer to the question of attorney-client privilege and the questions, et cetera, propounded to Mr. Straw." An order to this effect was then entered.

The general rule applicable to the attorney privilege has been set forth by our Supreme Court. "The privilege authorizes a client to refuse to disclose, and to prevent others from disclosing, confidential communications between attorney and client. (Evid.Code, § 950 et seq.) Clearly, the fundamental purpose behind the privilege is to safeguard the confidential relationship between clients and their attorneys so as to promote full open discussion of the facts and tactics surrounding individual legal matters. [Citation.] In other words, the public policy fostered by the privilege seeks to insure 'the right of every person to freely and fully confer and confide in one having knowledge of the law, and skilled in its practice, in order that the former may have adequate advice and a proper defense.' [Citation.] [p] Although exercise of the privilege may occasionally result in the suppression of relevant evidence, the Legislature of this state has determined that these concerns are outweighed by the importance of preserving confidentiality in the attorney-client relationship." (Mitchell v. Superior Court (1984) 37 Cal.3d 591, 599, as mod. 38 Cal.3d 63a, 208 Cal.Rptr. 886, 691 P.2d 642 [as mod.] fn. omitted.)

However, the right to assert the attorney-client privilege is not absolute. Evidence Code section 912, subdivision (a) specifically provides that waiver of the privilege occurs when any...