Collins v. Fitzwater

• Decision Date: 03 March 1977
• Docket Number: No. 77951,77951
• Citation: 560 P.2d 1074,277 Or. 401
• Parties: , Blue Sky L. Rep. P 71,343 Raymond S. COLLINS and Helen L. Collins, Respondents, v. W. Dean FITZWATER, Appellant.
• Court: Oregon Supreme Court

Page 1074

560 P.2d 1074

277 Or. 401, Blue Sky L. Rep. P 71,343

Raymond S. COLLINS and Helen L. Collins, Respondents, v. W. Dean FITZWATER, Appellant.

No. 77951.

Supreme Court of Oregon.

Argued and Submitted Oct. 6, 1976.

Decided March 3, 1977.

G. Kenneth Shiroishi, Portland, argued the cause for appellant. With him on the briefs were Thomas E. Cooney and Morrison, Dunn, Cohen, Miller & Carney, Portland.

James W. Korth, Eugene, argued the cause for respondents. On the brief were Arthur C. Johnson and John B. Arnold, of Johnson, Harrang & Mercer, Eugene.

Before DENECKE, C.J., and McALLISTER, ^* HOLMAN, HOWELL and BRYSON, JJ.

HOWELL, Justice.

This is a legal malpractice action brought to recover damages suffered by Dr. Richard B. Parker when he was held liable under ORS Chapter 59, the Blue Sky Law, to purchasers of unregistered securities issued by a corporation of which he was a director. Plaintiffs represent the purchasers of the securities and seek recovery as assignees of Dr. Parker. The defendant, W. Dean Fitzwater, was attorney for the issuing corporation. The action was tried before the court without a jury, and a judgment entered for plaintiffs.

The facts are not in dispute.

Dr. Parker attended a meeting of the board of directors of Enz-a-Bac, Inc., on September 5, 1968, as a scientific consultant. At the meeting he was elected to the board of directors, on which defendant also served. Later in the same meeting the board approved a financing plan that involved the issuance of interest-bearing promissory notes which also contained an option for conversion into capital stock. After the proposal was adopted, the defendant, as corporate attorney, drafted a promissory note form with the provisions outlined above and most, but not all, of the notes were thereafter issued over defendant's signature.

When the corporation later became insolvent, the purchasers of the notes brought individual actions under ORS Chapter 59 against the corporation and its directors, including Parker and the defendant. It was determined that the notes were securities which had been sold without registration and that, under the provisions of ORS 59.115(3), the directors were jointly and severally liable for damages to the purchasers. Thereafter, individual judgments totaling $60,759.08 were entered against Parker, the defendant, and other directors.

In an effort to avoid bankruptcy proceedings, Parker's attorney negotiated covenants not to execute with each of the judgment creditors. In exchange for these covenants, Parker assigned all causes of action he had against the defendant to plaintiffs as representatives of those judgment creditors, ¹ and he also agreed to execute a note for $3,500.

Thereafter, plaintiffs filed this action for legal malpractice against defendant for Parker's damages. ² The trial court found that defendant, as corporate attorney, was negligent in failing to determine whether the securities issued were required to be registered and in failing to advise the members of the board of directors that they could incur liability if unregistered securities were sold. The court then concluded that plaintiffs' assignment from Parker was valid and entitled them to a judgment against the defendant for $64,959.08. ³

On appeal, defendant makes three assignments of error. First, he contends that plaintiff's complaint failed to state a cause of action for indemnity because plaintiffs did not allege facts sufficient to establish that Parker's own conduct was not a bar to his recovery and that the complaint failed to state a cause of action for legal malpractice in that plaintiffs did not allege facts sufficient to establish the element of causation. Second, he argues that the trial court erred in concluding that plaintiffs' assignment from Parker was not void as against public policy. Finally, defendant contends that, in any event, the court erred in awarding damages in excess of $3,500, the amount of the note issued in exchange for the covenants not to execute.

We believe that plaintiffs' complaint adequately sets forth a cause of action for legal malpractice. Defendant's brief admits that plaintiffs 'have pled a cause of action in tort, and that their right of indemnity does not bar them from seeking other damages from defendant's tortious acts.' However, defendant contends that the essence of plaintiffs' theory of recovery is one of indemnity and that the mere fact that plaintiffs chose to seek their recovery in tort 'does not change the substance or character of their remedy.'

We fail to see the relevance of this argument. Whether plaintiffs' theory is characterized as one for negligent malpractice or one for indemnity, we believe that the complaint clearly sets forth sufficient facts to constitute a cause of action. The complaint alleges, in part, that:

'At all times material herein Defendant W. Dean Fitzwater was employed by Enz-a-Bac, Inc. as its attorney and advised the corporation, its management, and the members of its Board of Directors as their legal counsel in corporate matters.

'* * * 'Defendant W. Dean Fitzwater was negligent in representing the corporation and advising it and the members of its Board of Directors, including Richard B. Parker, in one or more of the following:

'(1) In approving the proposal to raise money by issuing promissory notes which were securities within the terms of the Oregon Bule Sky Law, Chapter 59 ORS, which securities were not registered and were not exempt from the provisions of Chapter 59 ORS.

'(2) In failing to advise the corporation and the members of the Board of Directors that they would incur legal liability if such securities without being registered were sold or exchanged for money.

'(3) In failing to see that the securities were properly registered before they were issued or sold by the corporation or by its agents or employees.

'As a direct, proximate result of the negligence of Defendant in one or more of the particulars alleged, Richard B. Parker sustained the damage alleged hereinabove.'

When considering challenges to the sufficiency of the allegations of a complaint which are raised for the first time on appeal, the complaint must be liberally construed in favor of the plaintiff. The allegations of the complaint are admitted as true, and plaintiffs are entitled to all reasonable inferences which could be drawn from those allegations. See, e.g., Lincoln Loan v. State Hwy. Comm., 274 Or. 49, 52, 545 P.2d 105 (1976); Fulton Ins. v. White Motor Corp., 261 Or. 206, 214, 493 P.2d 138 (1972).

As a member of the bar and attorney for the corporation, defendant had a legal duty to the corporation and to the other members of the board to determine whether the notes he drafted were subject to the provisions of ORS Chapter 59 and were required to be registered before sale. As a lay member of the board of directors, Parker was certainly entitled to rely upon defendant to see that the issuance of these notes complied with the applicable laws and would not expose him to individual liability. Although Parker, as a member of the board of directors, was chargeable under ORS 59.115(3) with knowledge that the notes were sold without registration, there is no evidence that Parker actually knew that registration was legally necessary. Liability under the statute

'is established by proof that the person knew the security was unregistered and It is not necessary, in addition, to prove that the person knew that the law required the security to be registered. * * *.' (Emphasis supplied.) Spears v. Lawrence Sec. Inc., 239 Or. 583, 587, 399 P.2d 348, 350 (1965) (construing the predecessor to ORS 59.115(3)). Accord, Gonia v. E. I. Hagen Co., 251 Or. 1, 7, 443 P.2d 634 (1968).

In contrast to Parker, the defendant, as corporate attorney and the drafter of the notes in question, is chargeable not only with knowledge that the notes were sold without registration but also with knowledge that the law required those notes to be registered as securities. The complaint alleges defendant's negligence and further alleges that this negligence resulted in Parker's liability to the purchasers of the notes. This is an adequate allegation of causation, for it can reasonably be inferred that Parker would not have approved the issuance of the notes without registration if he had been informed that registration was required and that a failure to register the notes could involve individual as well as corporate liability. So construed, we believe plaintiffs' complaint adequately sets forth a cause of action either for indemnity or for negligent malpractice. See Black and Co. v. Nova-Tech, Inc., 333 F.Supp. 468, 471--72 (D.Or.1971); Fulton v. White Motor Corp., supra, 261 Or. at 210, 493 P.2d 138; Ward v. Arnold, 52 Wash.2d 581, 328 P.2d 164, 166 (1958); Modica v. Crist, 129 Cal.App.2d 144, 276 P.2d 614, 615 (1954). Cf. U.S. Nat'l Bank v. Davies, 274 Or. 663, 548 P.2d 966 (1976).

Defendant's next contention is that Parker's cause of action was not assignable for reasons of public policy. Defendant admits that actions for legal malpractice are normally fully assignable, but he argues that the particular assignment in this case violates public policy and is, therefore, unenforceable. Apparently it is defendant's contention that, because Parker was found liable under ORS 59.115(3) in connection with the issuance of unregistered securities, he should not, as a matter of public policy, be permitted to shift his responsibility to the defendant, and plaintiffs should not be allowed to recover in his name.

Although ORS 59.115(3) specifically provides for contribution among those found jointly and severally liable under that statute, the statute is silent on the question of indemnity. Defendant argues that as a matter of public policy, indemnity should not be allowed under ORS 59.115 because the statute's deterrence function would be impaired if those found liable could shift the entire burden to...