Gibson, Dunn & Crutcher v. Superior Court

• Decision Date: 21 June 1979
• Court: California Court of Appeals Court of Appeals
• Parties: GIBSON, DUNN & CRUTCHER, a partnership and Shutan & Trost Professional Corporation, a law corporation, Petitioners, v. The SUPERIOR COURT OF LOS ANGELES COUNTY, Respondent, UNION BANK, a California Corporation, et al., Real Parties in Interest. Civ. 54792.

Page 326

156 Cal.Rptr. 326

94 Cal.App.3d 347

GIBSON, DUNN & CRUTCHER, a partnership and Shutan & Trost Professional Corporation, a law corporation, Petitioners, v. The SUPERIOR COURT OF LOS ANGELES COUNTY, Respondent UNION BANK, a California Corporation, et al., Real Parties in Interest.

Civ. 54792.

Court of Appeal, Second District, Division 4, California.

June 21, 1979.

Gibson, Dunn & Crutcher, Los Angeles, pro se.

Samuel O. Pruitt, Jr., Theodore B. Olson, Fred F. Gregory and Rex. S. Heinke, Overton, Lyman & Prince, Robert F. Lewis and David B. Parker, Los Angeles, for petitioners.

Loeb & Loeb, Jerome L. Goldberg, Robin Meadow and Lesley A. Andrus, Beardsley, Hufstedler & Kemble, Seth M. Hufstedler, Dennis M. Perluss and Evelyn S. Balderman, Los Angeles, for real parties in interest.

FILES, Presiding Justice.

The issue presented is whether lawyer I who is sued by a former client for professional negligence may cross-complain for equitable indemnity against lawyer II who was retained to extricate the client from the situation created by the alleged negligence of lawyer I. We have concluded that under the circumstances presented here the answer is negative.

This is an original proceeding for a writ of mandate or prohibition to compel the superior court to dismiss a cross-complaint. The decision here must be based upon the allegations of the pleadings, and for the purpose of discussion we must assume the truth of all of those allegations, which, of course, have not been and may never be proven.

In December 1972 Schlumberger Limited entered into a transaction with Union Bank (hereinafter Bank) whereby Schlumberger guaranteed repayment of Bank's loan to Virtue Bros. Mfg. Co., Ltd., (VBM) which was then a wholly-owned subsidiary of Schlumberger. VBM purportedly conveyed to Bank security interests in personal property. VBM subsequently defaulted and in 1975 Schlumberger paid off Bank pursuant to the guaranty and Bank assigned to Schlumberger the security interests which it had received from VBM.

When Schlumberger attempted to enforce the security interests, VBM filed a petition for reorganization under chapter XI of the Bankruptcy Act. In the bankruptcy proceedings other creditors of VBM challenged the validity of these security interests. Schlumberger retained the law firms of Gibson, Dunn & Crutcher and Shutan & Trost (hereinafter collectively as "Gibson") to assist it in enforcing its rights, and with the assistance of these lawyers Schlumberger settled its differences with the other creditors. This settlement, Schlumberger now alleges, netted about $1,000,000 less than Schlumberger would have been entitled to receive if its security interests had been valid and enforced.

Schlumberger, through its attorneys Gibson, Dunn & Crutcher filed an action for damages against Union Bank and the law firm of Kindel & Anderson (Kindel), who had acted as legal counsel for Schlumberger in the 1972 loan transaction. The complaint alleges that Bank and Kindel, acting on behalf of Schlumberger in the loan transaction, were negligent in failing to provide complete, valid, perfected and enforceable security interests and failing to advise Schlumberger of the risk that the security interests would not be enforceable.

Bank's answer to the complaint alleges as an affirmative defense that Schlumberger was contributively negligent in settling with the other creditors of VBM.

Bank and Kindel separately filed cross-complaints against Gibson, alleging that those law firms were negligent in their representation of Schlumberger in the bankruptcy proceedings, and that this negligence contributed to the loss which Schlumberger seeks to recover from the cross-complainants. Bank's cross-complaint alleges that the terms of the settlement "were unreasonable and disproportionate to the risk involved," and that the cross-defendants "were further negligent in failing to promptly petition the Bankruptcy Court to lift its stay on the foreclosure proceeding and to seek reformation of the trust deed, to which reformation Schlumberger was entitled. . . ."

Gibson demurred to Bank's cross-complaint upon the ground that it failed to state a cause of action against them. The superior court's order overruling that demurrer is the subject of the petition here.

Pursuant to an agreement among the parties Gibson has not yet responded to the cross-complaint of Kindel. Nevertheless, since that cross-complaint raises legal issues identical with those raised by the Bank, Kindel has been recognized as an additional real party in interest in this mandate proceeding.

The theory of the cross-complaint is based upon principles of comparative negligence as applied to joint tort-feasors in American Motorcycle Assn. v. Superior Court (1978) 20 Cal.3d 578, 146 Cal.Rptr. 182, 578 P.2d 899. ¹ That case arose out of the bodily injury sustained by a minor boy while participating in a motorcycle race. The minor sued the organizations who sponsored the race, charging that they had negligently designed and managed the race. One of the defendants sought leave of court to file a cross-complaint against the minor's parents seeking indemnification upon the ground that the parents had negligently failed to supervise their son, but the trial court denied leave to file it. The Supreme Court disagreed, stating that the principle of comparative negligence which had been established in Li v. Yellow Cab Co. (1975) 13 Cal.3d 804, 119 Cal.Rptr. 858, 532 P.2d 1226 "applies equally to the allocation of responsibility between two or more negligent defendants"; and the court therefore held "that under the common law equitable indemnity doctrine a concurrent tortfeasor may obtain partial indemnity from cotortfeasors on a comparative fault basis." (20 Cal.3d at pp. 607, 608, 146 Cal.Rptr. at 201, 578 P.2d at 918.)

As Bank and Kindel point out, their cross-complaints fit neatly into the rationale of American Motorcycle. They allege the negligence of Gibson was a cause of the loss which Schlumberger complains of in its action against Bank and Kindel; hence the latter, if legally responsible to Schlumberger for that loss, are entitled to at least partial indemnity from Gibson on a comparative fault basis.

We observe, however, that American Motorcycle differs factually from the present case in two respects, one of which appears to be material.

One difference is that American Motorcycle dealt with liability for a single indivisible injury that is the bodily harm sustained by the minor plaintiff in a single occurrence. The present case involves successive acts, each of which had a discernible effect contributing to the ultimate loss. It is conceivable that in this situation the evidence might show that the harm resulting from the acts of one party could be identified and measured apart from the harm caused by other parties. We do not think this factual difference should militate against comparative indemnification. In medical malpractice cases, prior to American Motorcycle, partial indemnification has been awarded in favor of the party who caused the first injury and against the physician whose subsequent negligence aggravated it. (Herrero v. Atkinson (1964) 227 Cal.App.2d 69, 38 Cal.Rptr. 490; Niles v. City of San Rafael (1974) 42 Cal.App.3d 230, 116 Cal.Rptr. 733.) These cases support the availability of equitable indemnification, comparative or otherwise, as between parties who made separate contributions to the loss.

The other distinction, which we think important, is the effect the cross-complaint for indemnification may have upon the relationship between the injured party and the law firm (lawyer II) chosen by that party to extricate him from the condition created by the cross-complainant (who need not have been a lawyer, but who, for convenience, we call lawyer I).

The most conspicuous consequence of a cross-complaint against the plaintiff's lawyer is to preclude that lawyer from trying the case on behalf of the plaintiff. Depriving a party of the lawyer of his choice, who is also the lawyer most familiar with the background of the case, is a serious matter, but we do not view it as controlling here. In Comden v. Superior Court (1978) 20 Cal.3d 906, 145 Cal.Rptr. 9, 576 P.2d 971, the Supreme Court imposed a standard which severely impairs the availability of attorneys to litigate cases arising out of business matters in which they or their firms participated. The impact of Comden is to give secondary importance to the need of a party to be represented by the law firm he deems best qualified for that task.

The critical element is the effect upon the relationship between the injured party and lawyer II while they are trying to resolve the situation created by lawyer I.

One relevant statement of the problem appears in Goodman v. Kennedy (1976) 18 Cal.3d 335, 134 Cal.Rptr. 375, 556 P.2d 737.

That action arose out of the purchase of shares of stock. The purchasers sued the seller's attorney, alleging that he had negligently advised his clients that, under Securities Exchange Commission regulations, this stock could be sold by them without adverse consequence to the holders. The Supreme Court upheld a dismissal of the action upon the ground that the complaint failed to show that the defendant lawyer owed any duty to the plaintiffs, in that the advice given was not intended to be communicated to them, nor was it intended to benefit them. Of interest here is this language:

"To make an attorney liable for negligent confidential advise not only to the client who enters into a transaction in reliance upon the advice but also to the other parties to the transaction with whom the client deals at arm's length would inject undesirable self-protective reservations into the attorney's counselling role. The attorney's preoccupation or concern with the possibility of claims based on mere negligence (as distinct from fraud or malice) by any with whom his client might deal 'would...