Home Indem. Co. v. Lane Powell Moss and Miller

• Decision Date: 05 January 1995
• Docket Number: Nos. 93-35847,93-35874,s. 93-35847
• Citation: 43 F.3d 1322
• Parties: The HOME INDEMNITY COMPANY, Plaintiff-Appellee-Cross-Appellant, v. LANE POWELL MOSS AND MILLER, et al., Defendants-Appellants-Cross-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1322

43 F.3d 1322

30 Fed.R.Serv.3d 449

The HOME INDEMNITY COMPANY, Plaintiff-Appellee-Cross-Appellant, v. LANE POWELL MOSS AND MILLER, et al Defendants-Appellants-Cross-Appellees.

Nos. 93-35847, 93-35874.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Aug. 2, 1994.

Decided Jan. 5, 1995.

Evan L. Schwab, Bogle & Gates, Seattle, WA, for appellants/cross-appellees.

James J. Corbelli, Lillick & Charles, San Francisco, CA, for appellee/cross-appellant.

Appeal from the United States District Court for the District of Alaska.

Before: PREGERSON, CANBY and BOOCHEVER, Circuit Judges.

BOOCHEVER, Circuit Judge:

FACTUAL BACKGROUND

In 1981, the fishing vessel, F/V St. Patrick, foundered near Kodiak Island. The two survivors and the estates of the ten deceased crewmembers ("plaintiffs") sued the owners of the vessel ("defendants"). The defendants were insured by a $500,000 protection and indemnity policy issued by the Home Indemnity Company ("Home"). Home hired Lane Powell Moss and Miller ("Lane Powell") to defend its insureds against the plaintiffs' injury and death claims. Recognizing that the insureds' liability exceeded the $500,000 policy limits, Home gave Lane Powell authority to negotiate for settlement of the case for the policy limits.

In October, 1982, an attorney from Lane Powell telephoned the plaintiffs' attorneys. Lane Powell claimed that during this conversation, its attorney made a policy limits offer which was rejected. The plaintiffs' attorneys maintained, however, that no such offer was made. Lane Powell did not make any written confirmation of the alleged oral offer.

In October, 1983, the trial court attempted to facilitate settlement by ordering Home and Lane Powell to make a written settlement offer. Home offered $387,221, the amount it considered to remain in the policy after subtracting payments already made to the plaintiffs for medical expenses, maintenance, and legal fees. The plaintiffs counter-demanded $460,000, the amount they considered remaining in the policy after medical expenses and maintenance, plus interest. Although the trial judge encouraged Home to accept the plaintiffs' offer because otherwise Home would probably face a bad faith action for refusal to settle, Home rejected the plaintiffs' counter-demand. Home contends that its refusal was based on its belief that it, through Lane Powell, had already made a policy limits offer to the plaintiffs in October, 1982, and that it therefore was protected from a bad faith claim for failure to tender the policy limits.

At trial and after appeal, the plaintiffs ultimately secured an $8.5 million judgment against the defendants and then purchased the right of action of one of the defendants against Home and Lane Powell for their alleged bad faith failure to settle the injury and death claims. Home and the plaintiffs settled the bad faith action for $7 million.

Home then brought a diversity action against Lane Powell for legal malpractice, breach of agent's duty, and contribution. The jury found for Home only on its malpractice and agency claims and awarded Home $2.45 million. Lane Powell moved for judgment notwithstanding the verdict and/or for a new trial. Home moved to amend the judgment to award contribution and enhanced prejudgment interest. The district court denied the motions, and both Lane Powell and Home now appeal. We affirm.

LANE POWELL'S APPEAL

I. Implied Waiver of Attorney-Client Privilege

Lane Powell's primary argument is that the district court erred by not finding that Home and the plaintiffs had waived their attorney-client privileges with respect to information Lane Powell sought to discover.

Whether a party has waived the attorney-client privilege is a mixed question of law and fact which we review de novo. United States v. de la Jara, 973 F.2d 746, 749 (9th Cir.1992). We will not find error in a district court's orders denying discovery, however, unless they reflect an abuse of discretion. United States v. Bourgeois, 964 F.2d 935, 937 (9th Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 290, 121 L.Ed.2d 215 (1992). Because this is a diversity action, we apply the substantive law of the forum state, Alaska. Where the state supreme court has not ruled on a question in issue, "we look to other state-court decisions, well-reasoned decisions from other jurisdictions, and any other available authority to determine the applicable state law." Burns v. International Ins. Co., 929 F.2d 1422, 1424 (9th Cir.1991).

A. Implied Waiver by Plaintiffs

Lane Powell sought access to information about the plaintiffs' and their attorneys' states of mind, motivations, and intent with respect to their settlement negotiations with Home. Although this information normally would be protected by the attorney-client privilege, Lane Powell argued that the plaintiffs put these matters "into issue" by bringing their bad faith claim and by asserting that the settlement negotiations in the underlying action failed because Lane Powell did not convey a timely policy limits offer. According to Lane Powell, these allegations thrust into issue the cause of the failure of the settlement negotiations, and therefore the plaintiffs impliedly waived their attorney-client privilege over communications concerning their intent to settle. The district court found, however, that there was no implied waiver of the privilege and denied discovery into these matters.

The standard for determining when an implied waiver of the attorney-client privilege occurs is set out in Hearn v. Rhay, 68 F.R.D. 574, 581 (E.D.Wash.1975). The Hearn test was used by the district court in this case, and neither party on appeal objects to its application. Under Hearn, an implied waiver of the attorney-client privilege occurs when (1) the party asserts the privilege as a result of some affirmative act, such as filing suit; (2) through this affirmative act, the asserting party puts the privileged information at issue; and (3) allowing the privilege would deny the opposing party access to information vital to its defense. Id. at 581. In Hearn, an overarching consideration is whether allowing the privilege to protect against disclosure of the information would be "manifestly unfair" to the opposing party. Id.

Even if the plaintiffs affirmatively put into issue privileged information concerning their state of mind and motivations during the settlement negotiations, thus satisfying the first and second prongs of the Hearn test, we are not convinced that the information was sufficiently vital to Lane Powell's defense to fulfill the third prong of the test. The district court's rulings denying discovery into the plaintiffs' privileged communications were not "manifestly unfair" to Lane Powell because Lane Powell was not prejudiced in its defense.

Lane Powell's main defense was that its conduct did not cause the failure to settle because the plaintiffs never intended to settle for the policy limits and in fact only wanted to "set up" a bad faith action. Therefore, Lane Powell argues that it should have been allowed to discover information concerning the plaintiffs' intent to settle, or lack thereof. The fact remains, however, that the plaintiffs did make a written offer to settle the underlying litigation for $460,000. Thus, Lane Powell's claim that the plaintiffs were unwilling to settle is without merit.

Lane Powell asserts that the motivation pleaded by the plaintiffs for making the $460,000 offer was to set up a bad faith claim. Lane Powell fails to mention, however, that what the plaintiffs actually pleaded was that their intent in making the $460,000 offer was "(1), to settle for the amount demanded; or (2), if rejected, to provide an unimpeachable basis for [establishing a] bad faith [claim]." Clearly, if the plaintiffs made a serious offer to settle their claims, they were not unwilling to settle as Lane Powell maintains. It follows then that even if there were attorney-client communications that would indicate that the plaintiffs were attempting to set up a bad faith action, they would not be relevant in light of the plaintiffs' apparent willingness to settle at the time of the $460,000 offer.

We therefore find that there was no implied waiver of the plaintiffs' attorney-client privilege and that the district court's denial of discovery into the plaintiffs' privileged communications was neither "manifestly unfair" nor prejudicial to Lane Powell.

Even if the district court's discovery rulings had been erroneous, they would not be subject to reversal absent some showing that the error harmed the complaining party. See California Pub. Utils. Comm'n v. Westinghouse Elec. Corp., 892 F.2d 778, 783 (9th Cir.1989); Alaska Civ.Proc.Rule 61; Alyeska Pipeline Serv. Co. v. Beadles, 731 P.2d 572, 576 n. 12 (Alaska 1987). Because we have determined that Lane Powell was not prejudiced here, even if we were to hold that the district court erred in not allowing discovery, the error would not be sufficiently prejudicial to warrant reversal.

B. Implied Waiver by Home

Lane Powell contends that Home waived its attorney-client privilege with respect to information concerning Home's settlement with the plaintiffs of the bad faith action for $7 million. Lane Powell argues that by seeking recovery of a portion of that settlement payment from Lane Powell, Home thrust into issue the reasonableness of that payment and thereby gave Lane Powell the right to discover all Home's privileged communications regarding its reasons for settling.

As part of its contribution claim against Lane Powell, Home was required to prove that the $7 million amount it paid in settlement with the plaintiffs was "reasonable." See Ogle v. Craig Taylor Equip. Co., 761 P.2d 722, 726 (Alaska 1988). Lane Powell argues that Home attempted to prove the reasonableness of the settlement amount solely by stating that Home relied on the advice of its counsel in accepting the settlement offer. Home...