Davis & Cox v. Summa Corp., s. 82-5559

• Citation: 751 F.2d 1507
• Decision Date: 18 January 1985
• Docket Number: Nos. 82-5559,s. 82-5559
• Parties: , 17 Fed. R. Evid. Serv. 774 DAVIS & COX, a partnership, Plaintiff-Appellee/Cross-Appellant, v. SUMMA CORPORATION, Defendant-Appellant/Cross-Appellee. Chester C. DAVIS, Plaintiff-Appellee/Cross-Appellant, v. SUMMA CORPORATION, Defendant-Appellant/Cross-Appellee. SUMMA CORPORATION, Defendant-Counterclaimant/Appellant, v. DAVIS & COX, a partnership, Chester C. Davis, Maxwell E. Cox, Howard M. Jaffe and Martin Cook, Plaintiffs-Counterdefendants/Appellees. SUMMA CORPORATION, Hughes Aircraft Corporation, Defendants- Counterclaimants/Appellants, v. Chester C. DAVIS, Davis & Cox, Maxwell E. Cox, Howard M. Jaffe and D. Martin Cook, Counterdefendants/Appellees. to 82-5562.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1507

751 F.2d 1507

1 Fed.R.Serv.3d 695, 17 Fed. R. Evid. Serv. 774

DAVIS & COX, a partnership, Plaintiff-Appellee/Cross-Appellant, v. SUMMA CORPORATION, Defendant-Appellant/Cross-Appellee.

Chester C. DAVIS, Plaintiff-Appellee/Cross-Appellant, v. SUMMA CORPORATION, Defendant-Appellant/Cross-Appellee.

SUMMA CORPORATION, Defendant-Counterclaimant/Appellant, v. DAVIS & COX, a partnership, Chester C. Davis, Maxwell E.

Cox, Howard M. Jaffe and Martin Cook,

Plaintiffs-Counterdefendants/Appellees.

SUMMA CORPORATION, Hughes Aircraft Corporation, Defendants- Counterclaimants/Appellants, v. Chester C. DAVIS, Davis & Cox, Maxwell E. Cox, Howard M.

Jaffe and D. Martin Cook, Counterdefendants/Appellees.

Nos. 82-5559 to 82-5562.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 7, 1984.

Resubmitted November 1, 1984.

Jan. 18, 1985.

R. Gaylord Smith, Lewis, D'Amato, Brisbois & Bisgaard, Los Angeles, Cal., for plaintiff-appellee/cross-appellant.

Robert L. Winslow, Irell & Manella, Los Angeles, Cal., for defendant-appellant/cross-appellee.

Appeal from the United States District Court for the Central District of California.

Before CHOY and SKOPIL, Circuit Judges, and PRICE ^*, District Judge.

CHOY, Circuit Judge:

In January 1979, Summa Corporation ("Summa"), a Delaware corporation wholly-owned by Howard R. Hughes, and the Hughes Estate ("the Estate") filed a complaint in Nevada state court against the "palace guard" of nurse-aides, physicians, attorneys and executives who surrounded Hughes during his lifetime and insulated him from contact with the outside world. The complaint alleged that the "palace guard" breached fiduciary duties to Summa and Hughes, misappropriated and wasted Summa's assets, mismanaged Summa and other Hughes companies, and committed legal malpractice. The defendants removed the action to the United States District Court for the District of Nevada.

In June 1979, the "palace guard" filed suits against Summa in California, New York, and Utah federal courts. The four actions brought in California were consolidated in the United States District Court for the Central District of California. The New York and Nevada actions were stayed pending the outcome of the California cases. The Utah actions have been dismissed. Summa later entered into a settlement agreement with all the "palace guard" plaintiffs and counterdefendants except Chester C. Davis and his law firm, Davis & Cox.

Davis had served as Summa's general counsel for more than sixteen years, from May 1961 until his formal termination in August 1977. He was also a director of Summa from December 1970 until May 26, 1977. In his California action, he alleged (1) a contract claim for services rendered to Summa, Hughes and Hughes' companies from May 1961 to September 30, 1977 under a 1961 agreement whereby he became general counsel to Summa and established offices on its behalf, and (2) a claim for indemnification for litigation expenses incurred in his successful defense of three lawsuits, to which he had been named a defendant because of his connection with Summa.

Davis organized the law firm of Davis & Cox, which represented Summa and Hughes in a variety of matters. In a separate complaint, Davis & Cox brought a collection action against Summa for (1) disbursements and fees for services rendered to Summa at Summa's request following Davis' termination as general counsel, and (2) services rendered to Davis for which Summa had a duty to indemnify Davis. These amounts were sought on theories of express contract, quantum meruit, and account stated.

Summa filed counterclaims against Davis and Davis & Cox ("the Davis Parties") for conspiracy, professional negligence, corporate mismanagement, and breach of fiduciary duties.

The Davis Parties filed third-party complaints for indemnification and contribution against William R. Lummis, administrator of the Estate in Nevada, Texas, Delaware, and Louisiana, and First Interstate Bank of Nevada, co-administrator of the Estate in Nevada and formerly First National Bank of Nevada ("FNB"). Lummis became a director of Summa in June 1976, and subsequently was elected Chairman of the Board. The complaints alleged that the third-party defendants approved, ratified, or participated in the wrongful transactions about which Summa was complaining in its counterclaim against the Davis Parties.

The district court awarded Davis $30,000 in deferred compensation for professional services rendered to Summa, $435,224.68 for expenses incurred by him in 1977 on Summa's behalf, and $331,076.59 for indemnification for legal expenses incurred in the successful defense of three lawsuits. The court allowed Summa offsets of $253,203.31, leaving Davis a net award of $543,097.96.

The court awarded Davis & Cox $699,027.30 for legal services and disbursements. From this amount, it subtracted $331,076.59, the amount attributable to Davis & Cox's defense of Davis in the three lawsuits, and an offset of $216,235.62, resulting in a net award of $151,715.09.

The defendants appeal and the plaintiffs cross appeal from the district court's orders.

We affirm in part, reverse in part, and remand to the district court.

I. SUMMA'S APPEAL ISSUES

A. Suppression of Evidence.

1. Accounting Evidence.

At trial, Summa attempted to defend against the Davis Parties' fee claims by introducing testimony that Davis caused certain improper personal and farm-related expenses to be paid by Summa. The Davis Parties filed a motion to exclude this and other accounting evidence on the ground that their bills constituted "accounts stated" as a matter of law. ¹ The district court granted this motion.

An account stated is an agreement, evidenced by prior transactions between the contracting parties, that a statement is the true reflection of the balance due to one of the parties. Trafton v. Youngblood, 69 Cal.2d 17, 25, 69 Cal.Rptr. 568, 573-74, 442 P.2d 648, 653-54 (1968); Gleason v. Klamer, 103 Cal.App.3d 782, 786, 163 Cal.Rptr. 483, 485 (1980). The existence of an account stated need not be express and frequently is implied from the circumstances. Zinn v. Fred R. Bright Co., 271 Cal.App.2d 597, 600, 76 Cal.Rptr. 663, 666 (1969). For example, where a creditor renders a statement and the debtor fails to object within a reasonable time, the open account may be superseded by an account stated. Luse v. Peters, 219 Cal. 625, 629, 28 P.2d 357, 359 (1933); Zinn, 271 Cal.App.2d at 600, 76 Cal.Rptr. at 666; California Bean Growers Ass'n v. Williams, 82 Cal.App. 434, 442-43, 255 P. 751, 754-55 (1927).

Summa correctly argues that the district court erred in excluding all evidence on the existence of an account stated, and in accepting the accuracy of the bills as a matter of law. Summa could have challenged the bills on a number of grounds. First, an account stated is unenforceable if there was fraud or mistake in the stating of the account. See 1 B. Witkin, Summary of California Law, Sec. 722 at 605 (8th ed. 1973). Summa might have shown that the Davis Parties fraudulently listed improper charges in their statements. The district court excluded the testimony of Davis' former office manager and administrative assistant that on Davis' instructions, he caused improper expenses to be paid from a trust account funded by Summa, and that Davis did not disclose the nature of these payments to Summa. This suppression of pertinent and material facts by a fiduciary might have been a fraud sufficient to impeach reliance on an account stated defense. See Store of Happiness v. Carmona & Allen, Inc., 152 Cal.App.2d 266, 273, 312 P.2d 1104, 1109 (1957); Kinkle v. Fruit Growers Supply Co., 63 Cal.App.2d 102, 114-15, 146 P.2d 8, 14 (1944).

Second, the attorney-client relationship between the Davis Parties and Summa provides Summa a further defense. An account stated is subject to a presumption of undue influence when entered between an attorney and client during their fiduciary relationship. Even if the client fails to object to the attorney's billing statements within a reasonable time, the attorney bears the burden of showing that the transaction was fair, regular and entered into voluntarily by the client with full knowledge of the facts. See Trafton, 69 Cal.2d at 28, 69 Cal.Rptr. at 576, 442 P.2d at 656; Gleason, 103 Cal.App.3d at 787, 163 Cal.Rptr. at 485-86. In this case, Summa might have challenged the statements by demonstrating its attorney-client relationship with the Davis Parties, its lack of knowledge of the improper charges, and the Davis Parties' failure to meet their burden of proof.

Finally, Summa could have defended against the Davis Parties' billing statements by showing that the statements included amounts for which Summa was not The district court's error in excluding all the evidence on the existence of an account stated was not harmless. A trial court's error in excluding evidence in civil actions is harmless if its decision is "more probably than not untainted by the error." Haddad v. Lockheed California Corp., 720 F.2d 1454, 1459 (9th Cir.1983). The district court committed "serious and prejudicial" error in refusing to admit and consider evidence challenging the Davis Parties' billing statements. See Hemenover v. Lynip, 107 Cal.App. at 363, 290 P. at 1091.

                liable.  Because accounts stated are "intended to preserve and protect legitimate demands but not to create obligations independent of prior indebtedness," the rendering of an account does not create a liability where no liability existed before the rendering.   Trafton v. Youngblood, 69 Cal.2d at 26, 69 Cal.Rptr. at 574, 442 P.2d at 654 (quoting Hemenover v. Lynip, 107 Cal.App. 356, 363, 290 P. 1089, 1092 (1930));  see H. Russell Taylor's Fire Prevention Service, Inc. v. Coca Cola Bottling Corp., 99 Cal.App.3d 711, 727, 160 Cal.Rptr. 411, 422 (1979)
                

2. Summaries of Attorneys' Time Sheets.

Summa contends that the district court erred in excluding a series of summaries...