Loyd v. Aguilar
| Decision Date | 29 March 2000 |
| Docket Number | No. 98-55113,98-55113 |
| Citation | 208 F.3d 755 |
| Parties | (9th Cir. 2000) JANICE D. LOYD, as Trustee and Liquidator of First Assurance and Casualty Company, Ltd.,Plaintiff-Appellant, v. PAINE WEBBER, INCORPORATED, WELSHAND ASSOCIATES; BONE, ROBERTSON & MCBRIDE; CATANESE INSURANCE SERVICE, aka/CATANESE INSURANCE AGENCY; ATIF K. KAMEL; A.K. INSURANCE SERVICE; KAPLANAND LAM INSURANCE; DUMAINE INSURANCE SERVICES DRAPER INSURANCE,aka/E.G. DRAPER INSURANCE, aka/DRAPER INSURANCE; SOUTHERN INSURANCE; SANFORD & GILBERT INSURANCE AGENCY; OMEGA INSURANCE SERVICES; AYLESWORTH INSURANCE; JACK E. GILBERT INSURANCE AGENCY; et al., OPINION Defendants, and AGUILAR & SEBASTINELLI, a Professional Law Corporation, Defendant-Appellee |
| Court | U.S. Court of Appeals — Ninth Circuit |
COUNSEL: Marcus S. Bird, Hollister & Brace, Santa Barbara, California, for the plaintiff-appellant.
Thomas N. Charchut, Haight, Brown & Bonesteel, Santa Monica, California, for the defendant-appellee.
Appeal from the United States District Court for the Southern District of California; Barry T. Moskowitz, District Judge, Presiding. D.C. No. CV-95-01194-BTM
Before: James R. Browning, Alex Kozinski, and Kim McLane Wardlaw, Circuit Judges.
Janice D. Loyd, trustee and liquidator of First Assurance Casualty Co., Ltd., appeals the district court's dismissal of her complaint against the company's former law firm, Aguilar & Sebastinelli. The complaint charged the firm with malpractice for failing to prevent the company's shareholders from conducting a fraudulent insurance scheme. The district court dismissed the action on the alternative grounds that: (1) the trustee lacked standing to sue; and (2) the complaint failed to state a claim for legal malpractice. We conclude the trustee had standing, but the complaint failed to state a claim for malpractice under California law.
This appeal arises out of an alleged conspiracy to defraud purchasers of First Assurance Casualty's insurance policies.1 Approximately one year after First Assurance was incorporated in the Turks & Caicos islands, it was acquired by seven individuals (hereinafter "insiders"), who caused the company to sell insurance policies in the United States, mostly in Texas and California.
Offshore insurance companies are regulated by the California Department of Insurance. They must prove they have sufficient capital to pay potential claims, and must maintain a trust account in the United States. See Cal. Ins. Code 1765.1(b)(1). If the Department is not satisfied with an offshore company's financial status, it may prohibit in-state insurance brokers from selling or promoting the company's policies.
The insiders retained Craig Aalseth, an account manager at Paine Webber, to manage the required trust account. Although the company was virtually insolvent, Aalseth prepared reports attesting to its financial viability and compliance with California law. Meanwhile, the insiders were diverting policy premiums into their personal accounts. They permitted the company to pay claims of policyholders only when those claims were small or the claimants threatened to complain to the Department of Insurance.
The company retained Aguilar & Sebastinelli to represent it in state regulatory matters. In March 1991, the Department issued a Cease and Desist Order against the company. The law firm successfully challenged the Order in San Francisco Superior Court, enabling the company to continue to sell policies and collect premiums. Two years later, however, the Department issued a second Cease and Desist Order; shortly thereafter the company declared bankruptcy.
In early 1994, the U.S. Bankruptcy Court for the Western District of Oklahoma appointed Janice Loyd trustee for the company. She filed suit on behalf of the company against the insiders, the insurance brokers who had carried the company's policies, Paine Webber and its employee Craig Aalseth, the company's accountants, and the law firm. The district court dismissed the claim against the law firm on the grounds that the trustee lacked standing to bring a legal malpractice action against the law firm on the corporation's behalf, and, in any event, that the complaint failed to state a claim for legal malpractice.
The district court recognized that, as trustee, Loyd was empowered to bring any claim the company could have brought on its own behalf. However, the court held that the company itself would have lacked standing to sue the law firm because it was a sham corporation with no identity separate from its shareholders. We disagree.
Standing to sue is a question of law reviewed de novo. See Byrd v. Guess, 137 F.3d 1126, 1131 (9th Cir. 1998). Three elements must be satisfied to meet the minimum constitutional requirements for standing under Article III: injury in fact, causation, and redressability. See, e.g., Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992); Warth v. Seldin, 422 U.S. 490, 508 (1975). Redressability is not disputed; the questions are whether the company was injured, and whether the injury was caused by the conduct of the law firm.
The company's status as a "sham" corporation did not preclude it from suffering an injury cognizable under Article III. A corporation is a distinct legal entity that can sue and be sued separately from its officers, directors, and shareholders. See Merco Constr. Eng'rs, Inc. v. Municipal Court, 21 Cal.3d 724, 729-30 (1978). It can be injured even if its sole purpose is to serve as an engine of fraud for its shareholders. Injury is evidenced in this case by the fact that the company remains, to this day, a legally distinct entity that is responsible for the liability it incurred as a result of the allegedly fraudulent actions of its insiders.
The causation element is also satisfied. The complaint alleges that the law firm failed to discover the fraudulent scheme and take action to prevent the insolvent company from continuing to sell insurance in California.2 This harmed the company by allowing it to incur further liability which it would not otherwise have had. Although this liability exists largely because of the fraudulent conduct of the insiders, the complaint alleges that the period of insolvency was extended, and the company's liability thereby increased, because the law firm helped the company continue to operate. The injury was thus caused, in part, by the allegedly negligent conduct of the law firm.3
As a legal entity distinct from its shareholders, the company had a cognizable claim under Article III against the law firm prior to the bankruptcy proceeding. Because a trustee may assert claims possessed by the debtor immediately prior to bankruptcy, see 11 U.S.C. SS 541, 542, Loyd has standing to sue the law firm.
The district court further held that even if the trustee had standing to sue the law firm, the complaint failed to state a claim for legal malpractice. We agree, and affirm the dismissal on this ground.
Dismissal for failure to state a claim is reviewed de novo. See Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1295 (9th Cir. 1998). Review is limited to the contents of the complaint, and all allegations of material fact are taken as true and construed in favor of the nonmoving party. See Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998). "A complaint should not be dismissed unless it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim that would entitle [her] to relief." Tyler v. Cisneros, 136 F.3d 603, 607 (9th Cir. 1998).
The trustee made the following allegations:
* The law firm ...
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