Fireman's Fund Ins. Co. v. McDonald, Hecht & Solberg

• Decision Date: 15 December 1994
• Docket Number: No. D017319,D017319
• Citation: 30 Cal.App.4th 1373,36 Cal.Rptr.2d 424
• Court: California Court of Appeals Court of Appeals
• Parties: FIREMAN'S FUND INSURANCE COMPANY et al., Plaintiffs and Appellants, v. McDONALD, HECHT & SOLBERG et al., Defendants and Respondents.

Page 424

36 Cal.Rptr.2d 424

30 Cal.App.4th 1373

FIREMAN'S FUND INSURANCE COMPANY et al., Plaintiffs and Appellants, v. McDONALD, HECHT & SOLBERG et al., Defendants and Respondents.

No. D017319.

Court of Appeal, Fourth District, Division 1, California.

Dec. 15, 1994.

Review Denied March 16, 1995.

McNitt, Edwards & Schraner, Robert K. Schraner, Kristen L. White, San Diego, Quisenberry & Barbanel, Alan H. Barbanel, Stephen D. Treuer and John R. Lisenbery, Los Angeles, for plaintiffs and appellants.

Chandler, Wood, Harrington & Maffly and Donald H. Maffly, San Francisco, for defendants and respondents.

KREMER, Presiding Justice.

Plaintiffs Fireman's Fund Insurance Company, General Star Indemnity Company, and

North Star Reinsurance Corporation (together Insurers) appeal a judgment of dismissal entered after the superior court sustained without leave to amend the demurrer of defendants McDonald, Hecht & Solberg et al. (together Law Firm) ¹ to Insurers' cause of action in subrogation for legal malpractice. Seeking reversal of their dismissal as plaintiffs in this lawsuit, Insurers contend the court erred in concluding California law prohibited prosecution of a legal malpractice cause of action by a subrogee. We affirm the judgment.

I INTRODUCTION

Insurers paid more than $10 million to settle a lawsuit against their developer insureds by homeowners alleging misrepresentations in the sales of residential units. The insureds then filed a legal malpractice case against their attorneys (Law Firm) for causing those misrepresentations to be made. Later, Insurers joined the malpractice lawsuit as plaintiffs under a theory of subrogation. Law Firm successfully demurred on the ground California law prohibiting assignment of legal malpractice actions also precluded Insurers from proceeding as subrogees to their insureds' claim against Law Firm. The court entered judgment dismissing Insurers as plaintiffs.

Insurers contend the superior court improperly extended the doctrine of the nonassignability of legal malpractice claims to a subrogation situation where public policy considerations ordinarily warranting application of the doctrine were assertedly not present. We conclude the superior court properly determined settled law barred Insurers from proceeding against Law Firm on a theory of subrogation.

II FACTS

For purposes of determining the propriety of the order sustaining Law Firm's demurrer, we accept as true the facts alleged by Insurers in the second amended complaint. (Buckaloo v. Johnson (1975) 14 Cal.3d 815, 828, 122 Cal.Rptr. 745, 537 P.2d 865.)

Insurers issued comprehensive general liability policies to Pacific Scene, Inc., its successor Sundance Financial, Inc., and joint venture Treetops Unlimited (together Insureds).

In 1980 Pacific Scene retained Law Firm to provide legal services in connection with the development and sale of the Hillsborough planned development. Law Firm advised Pacific Scene about disclosures to be made to prospective buyers of Hillsborough units. Law Firm also prepared for filing with state regulators or distribution to prospective buyers legal documents containing disclosures, warranties and representations about Hillsborough units.

In September 1988 various Hillsborough homeowners associations filed a lawsuit (Homeowners action) against Insureds alleging misrepresentation of numerous facts to Hillsborough owners. Law Firm was not a party to the Homeowners action.

In November 1990 Law Firm ceased representing Insureds.

Eventually, the Homeowners action was settled. Law Firm declined an invitation to participate in the settlement negotiations.

In June 1991--because the claims made against Insureds in the Homeowners action implicated the potential for coverage arising under the liability policies Insurers had issued to Insureds--settlement payments were made by Fireman's Fund ($4,762,616.56), North Star ($4,031,772.75), and General Star

                ($1,343,927.25). 2  Insurers' payment of settlement and defense costs in the Homeowners action depleted Insureds' insurance coverage, depriving Insureds of insurance coverage for other claims asserted against them.  Under the settlement, Insureds were to replenish the limits of their insurance policies with items recovered in their contemplated lawsuit against Law Firm
                

III SUPERIOR COURT PROCEEDINGS

A PLAINTIFFS' PLEADINGS

In October 1991 Insureds sued Law Firm for legal malpractice.

In April 1992 a second amended complaint was filed adding Insurers as plaintiffs on a subrogation cause of action against Law Firm. The second amended complaint alleged Law Firm's negligence in performing legal services for Insureds involving the Hillsborough development caused the misrepresentations alleged in the Homeowners action. Under the second amended complaint, Insureds sought recovery from Law Firm for all sums Insureds became legally obligated to pay under the settlement of the Homeowners action, whether paid directly by Insureds or on their behalf by Insurers. Alleging in making the settlement payments Insurers acted in compliance with the terms of the insurance policies and California insurance law, Insurers sought to recover those settlement sums from Law Firm. Insurers alleged entitlement to such recovery to the extent the court found Insureds' cause of action for legal malpractice against Law Firm transferred to Insurers by subrogation as a matter of law by virtue of Insurers making settlement payments on Insureds' behalf.

B LAW FIRM'S DEMURRER TO SECOND AMENDED COMPLAINT

Law Firm demurred to Insurers' subrogation cause of action on the ground it failed to allege facts sufficient to state a cause of action "in that as a matter of public policy a legal malpractice claim is nonassignable and plaintiff insurers may not be subrogated to that nonassignable claim." After hearing, the superior court sustained without leave to amend Law Firm's demurrer to Insurers' subrogation cause of action. In sustaining Law Firm's demurrer, the court stated: "The law is well settled that a cause of action personal to the assignor, cannot be assigned. Legal malpractice actions have traditionally been held to be such causes of action. [Citations.] A subrogation clause in an insurance contract is an implied assignment and subject to this restriction. [Citations.] Therefore the insurers cannot directly complain of the defendants for legal malpractice." ³

The court entered judgment dismissing Insurers as plaintiffs.

Insurers appeal.

IV DISCUSSION

A

In noting the law was "well settled" that a legal malpractice action is personal to the plaintiff and cannot be assigned, the superior court relied on Jackson v. Rogers & Wells (1989) 210 Cal.App.3d 336, 258 Cal.Rptr. 454 and Goodley v. Wank & Wank, Inc. (1976) 62 Cal.App.3d 389, 133 Cal.Rptr. 83. In concluding subrogation was an implied assignment and thus subject to the prohibition against assigning legal malpractice actions, the court cited Fifield Manor v. Finston (1960) 54 Cal.2d 632, 7 Cal.Rptr. 377, 354 P.2d 1073 and Peller v. Liberty Mut. Fire Ins. Co. (1963) 220 Cal.App.2d 610, 34 Cal.Rptr. 41.

In Goodley v. Wank & Wank, Inc., supra, 62 Cal.App.3d 389, 133 Cal.Rptr. 83, the appellate court stated: "It is the unique quality of legal services, the personal nature of the attorney's duty to the client and the confidentiality of the attorney-client relationship that invoke the public policy considerations in our conclusion that malpractice claims should not be subject to assignment." (Id. at p. 397, 133 Cal.Rptr. 83; accord Jackson v. Rogers & Wells, supra, 210 Cal.App.3d at pp. 342-343, 258 Cal.Rptr. 454.)

In Kracht v. Perrin, Gartland & Doyle (1990) 219 Cal.App.3d 1019, 268 Cal.Rptr. 637, we stated: "Goodley and Jackson noted that because of the uniquely personal nature of the relationship, numerous public policy considerations were involved in determining whether claims for legal malpractice should be assignable. Goodley noted the attorney owes a duty of undivided loyalty and diligence in representing the client. Such duty is personally owed by the attorney and may not be delegated to others, and is owed solely to the client, his one intended beneficiary. Assignability would encourage commercialization of claims, and would force attorneys to defend themselves against persons to whom no duty was ever owed. Moreover, the legal profession is debased by such commercialization, because it could (1) encourage unjustified lawsuits; (2) generate increased malpractice lawsuits, burdening the profession, the court system and (to the extent malpractice premiums would inevitably rise and be passed to the consumers) the public; and (3) promote champerty. [Citation.] Assignability could conceivably reduce the public's access to legal services, since the ever present threat of assignment by irresponsible clients (seeking quick financial gain) could cause lawyers to evaluate more selectively the desirability of representing a particular client. [Citation.]" (Kracht v. Perrin, Gartland & Doyle, supra, at pp. 1023-1024, 268 Cal.Rptr. 637.)

In Fifield Manor v. Finston, supra, 54 Cal.2d 632, 7 Cal.Rptr. 377, 354 P.2d 1073, the Supreme Court concluded although "subrogation and assignment have certain technical differences, each operates to transfer from one person to another a cause of action against a third, and the reasons of policy which make certain causes of action nonassignable would seem to operate as forcefully against the transfer of such causes of action by subrogation." (Id. at p. 640, 7 Cal.Rptr. 377, 354 P.2d 1073.)

Based upon those cases, the superior court concluded Insureds were prohibited from asserting as subrogees a legal malpractice claim against Law Firm to recover the settlement payments Insurers made on Insureds' behalf in the Homeowners action.

B

Although acknowledging the existence of case law holding that legal malpractice claims are generally not assignable and nonassignable claims are not subject...