First Interstate v. Murphy
| Decision Date | 20 April 2000 |
| Docket Number | Nos. 98-17420,99-15410,s. 98-17420 |
| Citation | 210 F.3d 983 |
| Parties | (9th Cir. 2000) FIRST INTERSTATE BANK OF ARIZONA, N.A., a national banking association; TALLEY REALTY FINANCE AND INVESTMENT COMPANY, INC., an Arizona corporation, Plaintiffs-Appellants, v. MURPHY, WEIR & BUTLER, a professional corporation,Defendant-Appellee. FIRST INTERSTATE BANK OF ARIZONA, N.A., a national banking association; TALLEY REALTY FINANCE AND INVESTMENT COMPANY,INC., an Arizona corporation, Plaintiffs-Appellees, v. MURPHY, WEIR & BUTLER, a professional corporation,Defendant-Appellant |
| Court | U.S. Court of Appeals — Ninth Circuit |
COUNSEL: Edward Freidberg, Sacramento, California, for the plaintiffappellant-cross-appellee.
Robert A. Lewis and Randy Michelson, McCutchen, Doyle, Brown & Enersen, San Francisco, California, for the defendant-appellee-cross-appellant.
Appeals from the United States District Court for the Northern District of California; Fern M. Smith, District Judge, Presiding. D.C. No.CV-97-02535-FMS
Before: Diarmuid F. O'Scannlain and Pamela Ann Rymer, Circuit Judges, and Jeffrey T. Miller, District Judge. *
The issue before us is whether a law firm owes a duty to its client to disclose that it hired the law clerk of a judge before whom it was appearing in a pending matter.
Murphy, Weir & Butler (Murphy) represented First Interstate Bank of Arizona and Talley Realty Finance Company (FIB/Talley) who were secured creditors in the Chapter 11 bankruptcy proceeding of Scottsdale Pinnacle Associates (SPA). The Honorable Leslie Tchaikovsky was the presiding bankruptcy judge. Although unknown to the Murphy partner assigned to this matter, the firm hired Judge Tchaikovsky's law clerk for employment at the end of the clerkship. As it turned out, the "Chinese wall" was not impermeable as it should have been, for the law clerk continued to have some contact with the case. Judge Tchaikovsky ruled in favor of FIB/Talley, but later recused herself upon SPA's motion after SPA found out about the clerk's relationship with Murphy.1 A new trial before a different judge resulted in a decision with which FIB/Talley was not as happy. As a result, it sued Murphy for malpractice.
The district court held it was not foreseeable that hiring the law clerk without disclosure would ultimately result in Judge Tchaikovsky's recusal, because judges and law clerks are required to preserve the court's impartiality and the appearance of impartiality. For this reason, Murphy had no duty to disclose that the firm had hired the Judge's clerk. We agree. Given the presumption of judicial impartiality, it was not reasonably foreseeable that the law clerk would continue to work on Murphy's matters contrary to the Code of Conduct for Law Clerks; that the Judge would fail to screen off the law clerk completely in violation of the Code of Judicial Conduct; and that the conduct of both the Judge and the law clerk would amount to an appearance of impropriety such as to require recusal. As judges and law clerks are in the best position to prevent impropriety, we decline to impose a duty of disclosure on law firms.
Accordingly, we affirm on FIB/Talley's appeal. Murphy also sought indemnification of expenses incurred in defending this lawsuit, but the district court denied its request. We affirm this decision as well.
In early 1993, FIB/Talley engaged Murphy as local counsel in the Chapter 11 bankruptcy of SPA. FIB/Talley, as holder of the first deed of trust on SPA's only asset, opposed confirmation of SPA's reorganization plan and sought relief from the automatic stay in order to foreclose on the property. On August 12, 1994, Judge Tchaikovsky entered final orders denying SPA's reorganization plan; granting the motion of FIB/Talley for relief from the automatic stay and to determine the value of their net secured claim, which she did at $4.75 million; and denying SPA's motion to amend the findings and for a new trial.
Meanwhile, on November 19, 1993, Murphy offered employment to the Judge's only law clerk, to begin at the end of the clerkship in September 1994. The clerk accepted shortly thereafter. A Murphy partner told Judge Tchaikovsky of the firm's interest in hiring the clerk, and the clerk was reminded during the interview with the Murphy hiring committee that she could not work on any Murphy matters if she were to accept employment with the firm. Judge Tchaikovsky instructed the clerk to do no more substantive work on any case in which Murphy represented a party in interest, but the clerk handled a few telephone calls pertaining to procedural matters, observed some courtroom proceedings, marked up a memorandum relating to an earlier plan of reorganization, and was told by the Judge of her intended decision on the final plan.
SPA found out about the clerk's employment in late August and moved on September 20, 1994 to recuse Judge Tchaikovsky and to vacate her orders. Judge Tchaikovsky certified the relevant facts on October 31, 1994, and acknowledged that she had violated 28 U.S.C. S 455(a)2 by failing to insulate the clerk completely from the SPA proceeding. She recused herself and the matter was reassigned to Bankruptcy Judge Randall Newsome. After holding an evidentiary hearing, Judge Newsome determined that the conduct of Judge Tchaikovsky and the law clerk amounted to an appearance of impropriety, and ordered a new trial. Subsequently, Judge Newsome valued the SPA property at $6 million, resulting in a net secured claim for FIB/Talley of $5.4 million.3 He confirmed SPA's plan of reorganization on September 11, 1995.4
FIB/Talley brought this action for negligence, breach of fiduciary duty, and breach of contract on February 2, 1996. The district court declined to dismiss on statute of limitations grounds as it believed there was a factual dispute about when Murphy actually stopped representing FIB/Talley, but granted summary judgment on the merits. Murphy then moved for indemnification of attorney's fees and costs in the amount of $441,372, but the district court denied the motion.
Both parties have timely appealed.
FIB/Talley argues that Murphy owed a duty to it to ensure that the firm's hiring of the Judge's law clerk did not jeopardize its own litigation of the bankruptcy case. In FIB/Talley's view, the risk of harm was clearly foreseeable because failing to notify the client, the client's lead attorneys, opposing counsel, or the Judge would open the door to a later recusal motion and a possible vacatur of Judge Tchaikovsky's final orders. It notes that because recusal must be brought up as soon as there is a basis to challenge a judge's impartiality, SPA would have been precluded from raising the issue after Judge Tchaikovsky issued her final orders if Murphy had disclosed the hiring when it happened. Alternately, it points out, FIB/Talley's lead counsel could have replaced Murphy as local counsel.
The general principles that apply are well settled. Attorneys have a duty to "keep a client reasonably informed about significant developments relating . . . to the representation . . . ." California Rules of Professional Conduct 3-500. Although the attorney owes a basic obligation to provide sound advice in furtherance of a client's best interests, "such obligation does not include a duty to advise on all possible alternatives no matter how remote or tenuous." Davis v. Damrell, 119 Cal. App. 3d 883, 889 (1981). A "legal malpractice [claim] is compounded of the same basic elements as other kinds of actionable negligence: duty, breach of duty, causation, and damage." Nichols v. Keller, 15 Cal. App.4th 1672, 1682 (1993). FIB/Talley's negligence and breach of fiduciary duty claims likewise turn on whether Murphy owed them a duty and, if so, whether the breach of that duty caused the harm suffered. Id. at 1682 (citing Nymark v. Heart Fed. Savings & Loan Ass'n, 231 Cal.App.3d 1089, 1095 (1991)). Whether there is a duty, in turn, depends largely on the foreseeability of the harm alleged: "Foreseeability of harm, though not determinative has become the chief factor in duty analysis." Id. at 1686. And the foreseeability component of duty analysis is a legal issue:
Foreseeability is a question of fact in many contexts. However, in defining the boundaries of duty, fore seeability is a question of law for the court. The question of foreseeability in a "duty" context is a limited one for the court and is readily contrasted with the fact-specific foreseeability questions bear ing on negligence (breach of duty) and causation posed to the jury or trier of fact.
Id.5
Applying these principles, it is clear that the harm FIB/ Talley posits -a new trial necessitated by the Judge's recusal -was neither foreseeable to Murphy nor preventable by it. Judicial impartiality is presumed. See United States v. Herrera-Figueroa, 918 F.2d 1430, 1436 n.8 (9th Cir. 1990); In the Matter of Demjanjuk, 584 F. Supp. 1321, 1324-25 (N.D. Ohio 1984); United States v. Zagari, 419 F. Supp. 494, 501 (N.D. Cal. 1976). Section 455(a), the Code of Judicial Conduct, and the Code of Conduct for Law Clerks all place the burden of maintaining impartiality and the appearance of impartiality on the judge and the law clerk.
Section 455(a) requires a judge to disqualify herself in any proceeding in which her impartiality might reasonably be questioned. 28 U.S.C. S 455(a). This mandate is identical to the duty set out in the Code of Judicial Conduct Canon 3(E)(1).6 And pursuant to Canon 3(C)(2), a judge "shall require staff, court officials and others subject to the judge's...
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