Oregon Auto. Ins. Co. v. Fitzwater

• Decision Date: 13 February 1975
• Citation: 271 Or. 249,531 P.2d 894
• Parties: OREGON AUTOMOBILE INSURANCE COMPANY, Appellant, v. Clarence L. FITZWATER et al., Respondents.
• Court: Oregon Supreme Court

Page 894

531 P.2d 894

271 Or. 249

OREGON AUTOMOBILE INSURANCE COMPANY, Appellant, v. Clarence L. FITZWATER et al., Respondents.

Supreme Court of Oregon, In Banc.

Argued and Submitted Jan. 7, 1975.

Decided Feb. 13, 1975.

John R. Faust, Jr., of Hardy, Buttler, McEwen, Weiss & Newman, Portland, argued the cause and filed the briefs for appellant.

Arthur C. Johnson, Eugene, argued the cause for respondents Collins. With him on the brief were John E. Frohnmayer and Johnson, Johnson & Harrang, Eugene.

TONGUE, Justice.

This is an action for declaratory judgment by an insurance company against an attorney to whom it had issued a policy of malpractice insurance. By its complaint the insurance company alleges that defendant attorney failed to notify it upon becoming aware of facts which might reasonably be expected to be the basis of a claim against him for legal malpractice, as required by provisions of the insurance policy.

Based upon that contention, plaintiff's complaint seeks the entry of a declaratory judgment that its policy did not cover a subsequent claim made against defendant W. Dean Fitzwater for legal malpractice. The case was tried before the court, sitting without a jury. After hearing the testimony the court entered a judgment finding in favor of the defendant, thus holding, in effect, that the claim was covered by the insurance policy. Plaintiff appeals. We affirm.

Plaintiff contends on appeal that the trial court erred, as a matter of law, because 'all that is required under the policy is that the insured have notice of facts indicating that it is reasonable to expect that a malpractice claim may be asserted' and that the evidence in this case is conclusive that defendant Fitzwater had notice of such facts and nevertheless did not notify the insurance company.

Because such an action for a declaratory judgment is an action at law, in reviewing the evidence we must apply the same rules as in a case tried before a jury and in which the jury returned a verdict in favor of the defendant. Cf. Falk v. Sul America Terrestres, 255 Or. 246, 248, 465 P.2d 714 (1970). Thus, for the purposes of this appeal, defendant is entitled to the benefit of all of the facts favorable to him, as well as all reasonable inferences from such facts. Cf. Bernard v. National Guaranty Ins. Co., 99 Adv.Sh. 3275, Or., 530 P.2d 74 (1974).

The facts.

The insurance policy issued by plaintiff to defendant includes 'Special Exclusion' 7, which provides in part as follows:

'Upon the insured becoming aware of any act or omission which might reasonably be expected to be the basis of a claim or suit covered hereby, written notice shall be given * * * as soon as practicable * * *.'

Paragraph I of the 'Insuring Agreement' provides that the company agrees:

'To pay on behalf of the insured all sums which the insured shall become obligated to pay * * * for damages resulting from any claim made against the insured arising out of the performance of special services for others in the insured's capacity as a lawyer * * *.'

The defendant, an attorney in Portland, was approached by two men to organize a corporation for them named Enz-A-Bac, Inc. At that time defendant had done corporate work, but his experience in securities work was limited to the drafting of some notes and bonds or debentures for a nonprofit church corporation which made a 'periodic filing' with the Corporation Commissioner.

In August 1968 defendant prepared articles of incorporation and by-laws for the corporation, for which he was paid a fee. He also invested $10,000 in capital and became a stockholder, director and secretary of the corporation. Later, in March 1970, he become its president and remained in that capacity until December 1970, when the corporation ceased doing active business.

Although not specifically engaged and retained by the corporation as its attorney, defendant did some other legal work for the corporation and admitted that it was a 'fair statement' that he was both a member of its board of directors and 'also their attorney.'

'Almost immediately' after the corporation was organized, and for the purpose of providing it with capital, a promissory note for $10,000 was prepared by defendant and by the president of the corporation, a former banker, who then 'contacted' persons known to him. That first note, and two other notes, were dated September 1, 1968. Two more notes were issued in November 1968, seven during the year 1969, and one in 1970. It appears that some, if not all, of these notes were issued 'with option to convert a portion to stock,' but that the last three notes had some different terms. These notes were not registered as securities with the Oregon Corporation Commissioner.

Defendant did not participate in the solicitation of these notes. He did, however, sign 'most,' but not all of them. It does not appear, however, exactly how many or which notes were prepared or signed by him.

These notes were not paid when due and demands were then made for payment. On September 29, 1970, an action on the first promissory note was filed on behalf of Mr. Collins. The original complaint named the corporation as the sole defendant and was simply an action on the note. In December 1970 the corporation ceased doing active business.

Meanwhile, on March 19, 1970, an attorney representing Jackson Wade and Lucian Whealy, the holders of two other notes, wrote a demand letter addressed individually to all of the directors of the corporation, including defendant, based upon the contention that the notes were unregistered securities, imposing liability under ORS 59.115 'against the persons responsible for improper issuance of the securities' and stating the understanding 'that each of you were directors * * * at the time the notes were issued.' At some undisclosed date later in 1970 two complaints were also filed, based upon two notes which were dated April 15, 1969, and signed by defendant as secretary of the corporation, as well as by its president. Copies of these complaints are not in evidence. Other similar actions were also apparently filed on behalf of the holders of other notes.

On February 26, 1971, an amended complaint was filed in the Collins case, naming as additional defendants all of the directors of the corporation, including defendant Fitzwater, and alleging liability based upon the ground that the note to Collins was an unregistered security.

According to the defendant, at some unidentified time he 'contacted' the Oregon Corporation Commissioner, who asked that no more notes be issued because they were not registered.

In April 1971 the deposition of defendant Fitzwater was taken in the Collins case. In the course of that deposition Fitzwater was questioned at some length concerning his various assets and, among other things, was asked whether he carried malpractice insurance. The amended complaint in that case also demanded punitive damages. As previously stated, however, the plaintiff in that case was not a client of Fitzwater and the amended complaint did not allege any malpractice by him as an attorney.

In May 1971 the Wade and Whealy cases came on for trial and were settled on the day of trial. In those cases no demands were made upon Fitzwater based upon claims of malpractice or negligence as an attorney, but those claims against him were made on the same basis as the claims made against the other directors.

The Collins case then apparently went to trial. In that trial defendant Fitzwater testified that he knew that the claims by Wade and Whealy were against him and the other defendants for participating as directors and officers in issuing 'these securities' in violation of the Blue Sky Law; that the notes were securities and had not been registered, and that he had a 'potential liability' to the holders of other notes in that 'the same contention' would be made by them.

It also appears that on December 24, 1971, a judgment was taken against defendant Fitzwater and the other directors, in the Collins case; that default judgments were also entered in the other similar cases, and that such judgments, totaling $63,000, were not paid.

On October 2, 1972, a further complaint was filed against defendant Fitzwater by Collins based upon assignment to Collins by Richard Parker, one of the other directors of the corporation, of a claim by him against Fitzwater for negligence and legal malpractice, as attorney for the corporation, in failing to register the notes and alleging that by reason of such negligence a judgment totaling $63,000 had been taken against Parker. On the next day defendant Fitzwater sent a copy of that complaint to plaintiff insurance company. This was the first communication by him to it about this matter.

Prior to that time, according to Fitzwater, Parker had never at any time 'asserted' that he was 'guilty of malpractice in relation to himself' and until then neither 'Mr. Parker or anyone else (gave) him any information that a

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