State Farm Fire and Cas. Co. v. Weiss

Decision Date04 September 2008
Docket NumberNo. 06CA2634.,06CA2634.
PartiesSTATE FARM FIRE AND CASUALTY COMPANY, as subrogee of Running Bear Homeowners Association, Plaintiff-Appellant, v. Robert G. WEISS, Esq. and Weiss and Van Scoyk, LLP, Defendants-Appellees.
CourtColorado Court of Appeals

Law Office of Roger Moore, Dwight L. Pringle, Roger Moore, Brandon M. Selinsky, Denver, Colorado, for Plaintiff-Appellant.

McConnell Siderius Fleischner Houghtaling & Craigmile, LLC, Traci L. Van Pelt, Troy Rackham, Jared C. Lockwood, Denver, Colorado, for Defendants-Appellees.

Opinion by Judge ROY.

State Farm Fire and Casualty Company (the insurer) appeals the order dismissing its legal malpractice claim against Robert G. Weiss and Weiss and Van Scoyk, LLP (collectively, the attorney). We affirm and remand for further proceedings.

The attorney drafted the original association covenants governing Running Bear Homeowners Association (HOA). Under those covenants, unit owners were permitted to rent their units for periods as short as one night, and some did. The HOA desired to amend the covenants to limit rental periods to not less than thirty days and contacted the attorney for that purpose. The attorney advised the HOA that it could amend its covenants without the consent of persons or entities holding liens on the individual units. This advice was apparently based on the misapprehension that provisions of the Colorado Common Interest Ownership Act, sections 38-33.3-101, to -319, C.R.S.2007, applied when, in fact, by means of the covenants the HOA had opted out of the Act.

A unit owner sued the HOA for lost rental income. The HOA's litigation counsel concluded that the original covenants did not permit amendment without the consent of the lien holders, or a super majority of them. Based on that conclusion, the HOA then settled with the homeowner for $52,000, which the insurer reimbursed under the HOA's insurance policy.

The insurer initiated an equitable subrogation action against the attorney on the theory of professional malpractice. The attorney filed a motion to dismiss under C.R.C.P. 12(b)(5), asserting that the insurer could not bring a professional negligence action when it was never his client. The insurer opposed the motion and submitted the HOA's waiver of its attorney-client privilege. The trial court granted the motion.

The attorney then moved for an award of attorney fees and costs pursuant to sections 13-17-201 and 13-16-113, C.R.S.2007, and C.R.C.P. 54(d) and 121. The insurer objected on the ground that the dismissal was based only on a public policy concern and requested a hearing. The trial court concluded that the award of attorney fees and costs was mandatory and ordered the insurer to request a hearing no later than February 16, 2007, if one was desired. The insurer filed a notice to set a hearing by telephone on February 27, 2007, which the trial court rejected as untimely and concluded that a hearing would not materially aid in the reasonableness determination. The trial court then awarded the attorney $4,708 in attorney fees and $199.41 in costs. This appeal followed.

I.

The pivotal issue is whether an equitable subrogation action premised on a professional negligence claim against an attorney will lie. This is an issue of first impression in Colorado state courts, and we conclude that it will not lie.

We review de novo a trial court's dismissal of a claim under C.R.C.P. 12(b)(5). Wagner v. Grange Ins. Ass'n, 166 P.3d 304, 307 (Colo. App.2007). We accept all assertions of material fact in the complaint as true and view the allegations in the light most favorable to the plaintiff. BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66, 71 (Colo.2004). "A motion to dismiss is properly granted when the plaintiff's factual allegations cannot support a claim as a matter of law." Id.

A. Colorado Law

Colorado law prohibits the assignment of legal malpractice claims. Roberts v. Holland & Hart, 857 P.2d 492, 495 (Colo. App.1993). In Colorado, unless it involves fraud or malice, a legal malpractice claim must be based on the existence of an attorney-client relationship between the plaintiff and the defendant. Mehaffy, Rider, Windholz & Wilson v. Cent. Bank. Denver, 892 P.2d 230, 239 (Colo.1995). The prohibition on the assignment of legal malpractice claims rests on three public policy bases: protection of the attorney's duties of loyalty and effective advocacy to the client, the potential for conflicts of interest with third-party plaintiffs, and the potential for an attorney's unlimited liability to unknown third parties. Glover v. Southard, 894 P.2d 21, 23 (Colo.App.1994).

Subrogation is somewhat different from assignment, however. "Subrogation is a `creature of equity having for its purpose the working out of an equitable adjustment between the parties by securing the ultimate discharge of a debt by the person who in equity and good conscience ought to pay it.'" Am. Family Mut. Ins. Co. v. DeWitt, ___ P.3d ___, ___, 2008 WL 451742 (Colo.App. 2008) (quoting United Sec. Ins. Co. v. Sciarrota, 885 P.2d 273, 277 (Colo.App.1994)). "Subrogation occurs when one person is substituted in the place of another with reference to a lawful claim...." Bainbridge, Inc. v. Travelers Cas. Co., 159 P.3d 748, 751 (Colo. App.2006) (quoting Browder v. U.S. Fid. & Guar. Co., 893 P.2d 132, 136 n. 4 (Colo.1995)); see also Black's Law Dictionary 1467-68 (8th ed.2004). "Under the doctrine of equitable subrogation, when an insurer has paid its insured for a loss caused by a third party, it may seek recovery from the third party." Cont'l Divide Ins. Co. v. W. Skies Mgmt., Inc., 107 P.3d 1145, 1148 (Colo.App.2004). The insurer then stands in the shoes of its insured. Id. This prevents the insured from being unjustly enriched by recovering from both the insurer and the third party, and prevents the third party from escaping liability. Cotter Corp. v. Am. Empire Surplus Lines Ins. Co., 90 P.3d 814, 833 (Colo.2004).

B. Essex Ins. Co. v. Tyler

Although Colorado state courts have not addressed this subrogation question, in Essex Insurance Co. v. Tyler, 309 F.Supp.2d 1270 (D.Colo.2004), the United States District Court for the District of Colorado concluded that the Colorado Supreme Court would not permit an equitable subrogation claim based on an attorney's professional negligence for the same policy reasons that prohibit the assignment of such claims. There, the insurance company sued the attorneys retained to defend the insured for legal malpractice, alleging that they failed to file vital pleadings and to adequately protect against surprise testimony at trial. Id. at 1271. The insurance company argued that it was equitably subrogated to the rights of the insured by having had to pay a $237,000 judgment. Id.

The Essex court noted that Colorado case law is clear that most legal malpractice claims require an attorney-client relationship. Id. at 1272; see Brown v. Silvern, 45 P.3d 749, 752 (Colo.App.2001). It noted the policy concerns stated in Glover, 894 P.2d at 23, regarding duty, conflict of interest, and liability limitations that support a prohibition on the assignment of legal malpractice claims. Essex, 309 F.Supp.2d at 1272. The Essex court also analyzed Roberts v. Holland & Hart, 857 P.2d at 495-96, in which a division of this court held that the assignment of a legal malpractice claim would undermine the vital relationship between an attorney and client, unduly burden the justice system, and restrict the availability of competent legal services. Essex, 309 F.Supp.2d at 1273. The Essex court also noted that even when an insurance company hires an attorney to represent its insured, the attorney owes a duty only to the insured. Id. at 1272; see Colorado Bar Ass'n Ethics Comm., Formal Op. 91 (1993) (premised on Rules 1.7(b), 1.8(f), and 5.4(c) of the 1993 version of the Colorado Rules of Professional Conduct, which were superseded without apparent substantive change by the version of the Rules effective January 1, 2008).

The Essex court also analyzed case law from other jurisdictions that allow equitable subrogation of professional negligence claims against attorneys when assignment of those claims is prohibited. Essex, 309 F.Supp.2d at 1274; see Ohio Cas. Ins. Co. v. Southland Corp., 1999 WL 236733 (E.D.Pa. No. 98-CV-6187, Apr. 22, 1999) (unpublished memorandum and order); Nat'l Union Ins. Co. v. Dowd & Dowd, P.C., 2 F.Supp.2d 1013 (N.D.Ill.1998); Am. Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480 (Tex.1992). The court concluded that those courts permitting equitable subrogation value the shifting of the economic burden to the responsible party over the protection of the attorney-client relationship. Essex, 309 F.Supp.2d at 1274. The Essex court concluded that if forced to elect between the preservation of the attorney-client relationship and the shifting of the economic burden to the responsible person, the Colorado Supreme Court would choose the former. Id.

C. Other Jurisdictions

The majority of jurisdictions that have addressed this issue, ten of sixteen excluding Essex, prohibit the equitable subrogation of professional negligence claims against attorneys. The seven of these ten that prohibit assignment conclude that equitable subrogation is similar enough to assignment that the policies supporting a prohibition on assignments are equally applicable to equitable subrogation. See Capitol Indem. Corp. v. Fleming, 203 Ariz. 589, 58 P.3d 965, 969 (Ct.App.2002); Great Am. Ins. Co. v. Dover, Dixon Horne, P.L.L.C., 456 F.3d 909, 912 (8th Cir.2006) (Arkansas law); Fireman's Fund Ins. Co. v. McDonald, Hecht & Solberg, 30 Cal.App.4th 1373, 36 Cal.Rptr.2d 424, 426-30 (1994); Cont'l Cas. Co. v. Pullman, Comley, Bradley & Reeves, 929 F.2d 103, 106-07 (2d Cir.1991) (Connecticut law); Nat'l Union Fire Ins. Co. v. Salter, 717 So.2d 141, 142 (Fla.Dist.Ct.App.1998); Querrey & Harrow, Ltd. v. Transcont'l Ins. Co., 861 N.E.2d 719, 723-24 (Ind.Ct.App.2...

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