Kaiser Foundation Health Plan, Inc. v. Aguiluz

• Decision Date: 10 July 1996
• Docket Number: No. A070477,A070477
• Citation: 54 Cal.Rptr.2d 665,47 Cal.App.4th 302
• Court: California Court of Appeals Court of Appeals
• Parties: , 96 Cal. Daily Op. Serv. 5167, 96 Daily Journal D.A.R. 8311 KAISER FOUNDATION HEALTH PLAN, INC., Plaintiff and Respondent, v. Heroico M. AGUILUZ, Defendant and Appellant.

Page 665

54 Cal.Rptr.2d 665

47 Cal.App.4th 302, 96 Cal. Daily Op. Serv. 5167,

96 Daily Journal D.A.R. 8311

KAISER FOUNDATION HEALTH PLAN, INC., Plaintiff and Respondent, v. Heroico M. AGUILUZ, Defendant and Appellant.

No. A070477.

Court of Appeal, First District, Division 3, California.

July 10, 1996.

As Modified July 18, 1996.

Rehearing Denied Aug. 19, 1996.

Review Denied Oct. 30, 1996.

Heroico M. Aguiluz, in pro. per.

Kennedy P. Richardson, Mark Palley, Marion's Inn, Robert J. Lyman, Stephen Q. Rowell, Larson & Burnham, Oakland, for plaintiff and respondent.

CORRIGAN, Associate Justice.

Introduction

Is an attorney, with notice of a client's contractual obligation to indemnify his health care provider from the proceeds of settlement or judgment, liable to the provider if he disburses such funds to the client? We accepted transfer of this case from the appellate department of the superior court to resolve an apparent conflict between two cases bearing on this issue, Miller v. Rau (1963) 216 Cal.App.2d 68, 30 Cal.Rptr. 612 and Brian v. Christensen (1973) 35 Cal.App.3d 377, 110 Cal.Rptr. 688. We hold that, under the rule of Miller v. Rau, the attorney in this case is liable for settlement proceeds disbursed to his client in knowing disregard of the health care provider's lien.

Background

The key facts are not disputed. Paulito Frez, a member of Kaiser Foundation Health Plan, Inc. (Kaiser), was injured in a motorcycle accident. Frez incurred $23,070.26 in medical expenses, which Kaiser paid. Frez hired appellant Heroico M. Aguiluz (counsel) to sue the other driver involved in the accident.

At Kaiser's request, Frez acknowledged in writing that his contract with Kaiser required him to reimburse Kaiser for any amount it paid for treatment of injuries caused by a third person, up to the amount recovered from the third party. Frez specifically agreed he would reimburse Kaiser for the cost of treating the injuries sustained in his motorcycle accident, up to the amount of any judgment or settlement he obtained. The agreement further provided: "I hereby authorize and direct my attorney, if any, to reimburse Kaiser Foundation Health Plan, Inc. by disbursing the money I receive from such a settlement or judgment directly to Kaiser Foundation Health Plan, Inc...."

Four years later, Kaiser wrote to Frez, inquiring about his personal injury action and reminding him of his reimbursement obligation. By way of a note typed on the bottom of Kaiser's letter, counsel responded that the case had not settled and was set for trial in late November 1990.

Frez and counsel settled the personal injury action for $85,000 in May 1991. Settlement negotiations between counsel and Kaiser regarding Kaiser's claim came to nothing. Neither Frez nor counsel paid Kaiser any of the $23,070.26 owed under the agreement. Counsel took no action to protect Kaiser's claim to the settlement proceeds.

Kaiser sued Frez and counsel for breach of contract and constructive trust. After settling with Frez, Kaiser went to trial against counsel in municipal court and obtained a judgment for $23,070.26. The judgment was affirmed and the case certified for transfer to this court to resolve an arguable conflict in the law.

Discussion

I. Kaiser's Recovery Was Proper Under Miller v. Rau

Miller v. Rau, supra, 216 Cal.App.2d 68, 30 Cal.Rptr. 612 (Miller ) established that an attorney on notice of a third party's contractual right to funds received on behalf of his client disburses those funds to his client at his own risk. ¹ The narrow question here is whether Brian v. Christensen, supra, 35 Cal.App.3d 377, 110 Cal.Rptr. 688 abrogated that rule. We hold it did not.

The Miller rule arose from these facts. Rau was an attorney who controlled funds to which he knew Miller was entitled under a joint venture agreement. Miller had notified Rau of a pending declaratory relief action and cautioned him that no proceeds were to be disbursed without Miller's written approval. Rau nonetheless disbursed the funds to Aivex, his clients' general partner. (216 Cal.App.2d at pp. 73-74, 30 Cal.Rptr. 612.)

The court held Rau liable for conversion. "Although the express question of Rau's duty upon receipt of notice of Miller's claim has apparently not arisen in California on facts similar to those in the instant case, courts in other jurisdictions have generally recognized the principle that where one receives money as an agent, to which his principal has no right, and where he receives notice not to pay to his principal prior to disbursement of the funds, an action for money had and received lies against such party. [Citation.] Although [counsel] argues that he had a duty to pay the funds to [Aivex], the correct principle in the factual context of the instant case is expressed in General Exchange Ins. Corp. v. Driscoll [ (1944) 315 Mass. 360, 52 N.E.2d 970] where the court states ( [id. 52 N.E.2d ] at p. 973): 'There was nothing in the defendant's status as attorney for [his client] ... which made it his duty to pay to his client money which he knew ... belonged to plaintiff. [Citations.] The defendant had complete control over the money. It was his duty to hold for the plaintiff so much of the proceeds ... as represented the plaintiff's known interest in it.' " (Miller, supra, 216 Cal.App.2d at p. 76, 30 Cal.Rptr. 612, substituted text in first five brackets, italics and ellipses added in Miller.)

The Miller court concluded that Rau had an affirmative duty to hold the amount Miller claimed. By failing either to hold the funds or file an action in interpleader, Rau "took the risk of having to pay the person rightfully entitled to the funds if it turned out that the person to whom thedistribution was made was not rightfully entitled thereto. [Citation.]" (216 Cal.App.2d at p. 76, 30 Cal.Rptr. 612; see also Rest.2d Agency § 349 & coms. b, c; Rest.2d Torts § 233 [agent who turns over property to principal with notice of third person's claim is liable for conversion if claim is valid].)

The Miller rule has been followed in a number of California cases. In McCafferty v. Gilbank (1967) 249 Cal.App.2d 569, 57 Cal.Rptr. 695 (McCafferty), McCafferty had obtained a judgment against her ex-husband, Swiger. Swiger hired an attorney, Gilbank, to prosecute an unrelated personal injury action. In a settlement negotiated in part by Gilbank, Swiger agreed to pay McCafferty one-half of the proceeds of his action in satisfaction of her judgment against him. When the action settled, however, Gilbank endorsed settlement drafts, kept his attorney fees, and delivered the remainder to Swiger and other claimants. Swiger disappeared, and McCafferty sued Gilbank for conversion. (Id. at pp. 572-574, 57 Cal.Rptr. 695.)

The Court of Appeal reversed a grant of nonsuit. Although McCafferty had failed to file a judicial lien in Swiger's personal injury action, there was a question of fact as to whether Swiger's promise to pay one-half of the settlement proceeds had created an equitable lien. (McCafferty, supra, 249 Cal.App.2d at pp. 575-576, 57 Cal.Rptr. 695.) By endorsing the checks over to Swiger without protecting McCafferty's interest, Gilbank exposed himself to liability for conversion under Miller. (McCafferty, supra, at pp. 576-577, 57 Cal.Rptr. 695; see 5 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 624, p. 718, citing McCafferty ["[A]n agent who turns over money to his principal, with knowledge of a paramount title, may be guilty of conversion."].)

The Miller rule was applied, without citation, to an attorney fee lien against a successor attorney in Weiss v. Marcus (1975) 51 Cal.App.3d 590, 124 Cal.Rptr. 297. There, Oran hired attorney Weiss to prosecute his personal injury action. Weiss's fee agreement conferred an express lien on the proceeds of that action. The case settled after Oran had discharged Weiss and replaced him with Attorney Marcus. Although Marcus was served with a " 'Notice of Motion to Establish Priority of Lien,' " he and Oran disbursed the settlement proceeds to themselves without any payment to Weiss. (Id. at pp. 594-595, 124 Cal.Rptr. 297.) The court held these allegations stated claims against Marcus for money had and received, conversion, constructive trust, and interference with contract. (Id. at pp. 599-601, 124 Cal.Rptr. 297.)

Miller was expressly extended to an attorney fee lien against a liability insurer in Siciliano v. Fireman's Fund Ins. Co. (1976) 62 Cal.App.3d 745, 133 Cal.Rptr. 376. Lyons retained attorney Siciliano to prosecute his personal injury action. The fee agreement contained an express lien on any judgment or settlement. Lyons discharged Siciliano and, proceeding in pro. per., settled the case. Despite having received notice of Siciliano's lien, Fireman's Fund, the tort defendant's liability insurer, paid the full settlement directly to Lyons. (Id. at p. 750, 133 Cal.Rptr. 376.)

Siciliano sued Fireman's Fund on various counts. (Siciliano v. Fireman's Fund Ins. Co, supra, 62 Cal.App.3d at pp. 750-751, 133 Cal.Rptr. 376.) Reversing an order sustaining Fireman's Fund's demurrer, the Court of Appeal held the insurer's knowing failure to protect Siciliano's lien could support a claim under Miller and McCafferty, supra. (Siciliano, supra, at pp. 756-757, 133 Cal.Rptr. 376.) "Even though the law favors voluntary settlements or compromises, it does not favor the making thereof in derogation of the rights of those having a lien on the moneys or to whom other obligations are owing in connection therewith." (Id. at p. 758, 133 Cal.Rptr. 376; see also Pearlmutter v. Alexander (1979) 158 Cal.Rptr. 762, 97 Cal.App.3d Supp. 16, 19-20 [following Siciliano ].)

In this case, counsel knew about the reimbursement agreement his client had signed, and he negotiated with Kaiser in an attempt to settle its claim for a lesser amount. He nonetheless disbursed the entire amount of the settlement without any attempt to protect Kaiser's interest. On these...