Waggoner v. Snow, Becker, Kroll, Klaris & Krauss

• Decision Date: 22 April 1993
• Docket Number: No. 91-56288,91-56288
• Citation: 991 F.2d 1501
• Parties: Thomas R. WAGGONER, Patricia Waggoner, Plaintiffs-Third-Party Defendants-Appellants, v. SNOW, BECKER, KROLL, KLARIS & KRAUSS, a New York Corporation; Snow, Becker, Krauss, a New York Corporation; Elliot H. Lutzker, Defendants-Third-Party Plaintiffs-Appellees, and Staar Surgical Company, a Delaware corporation, Third-Party-Defendant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1501

991 F.2d 1501

Thomas R. WAGGONER, Patricia Waggoner Plaintiffs-Third-Party Defendants-Appellants, v. SNOW, BECKER, KROLL, KLARIS & KRAUSS, a New York Corporation; Snow, Becker, Krauss, a New York Corporation; Elliot H. Lutzker Defendants-Third-Party Plaintiffs-Appellees and Staar Surgical Company, a Delaware corporation, Third-Party-Defendant.

No. 91-56288.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 3, 1993.

Decided April 22, 1993.

Marc J. Poster, Greines, Martin, Stein & Richland, Beverly Hills, CA, Richard A. Love, Los Angeles, CA, for plaintiffs-third-party defendants-appellants.

Allyn O. Kreps, Kim Thurman Spirito, Lewis, D'Amato, Brisbois & Bisgaard, Los Angeles, CA, for defendants-third-party plaintiffs-appellees.

Appeal from the United States District Court for the Central District of California.

Before: WALLACE, Chief Judge, SNEED and HALL, Circuit Judges.

SNEED, Circuit Judge:

Thomas Waggoner and his wife Patricia appeal the district court's grant of summary judgment for defendants Elliot Lutzker and the law firm of Snow, Becker, Kroll, Klaris & Krauss, P.C. We affirm.

I. FACTS AND PRIOR PROCEEDINGS

Thomas Waggoner is a cofounder of STAAR Surgical Company (Staar), a publicly held company incorporated in California in 1982. ¹ Until 1989, he was also its Chief Executive Officer and a member of its Board of Directors (Board). Waggoner hired defendant Elliot Lutzker as counsel for Staar in 1984. ² In April of 1986, Lutzker supervised Staar's reincorporation to Delaware.

From 1982 to 1986, Staar was principally engaged in the manufacture and sale of a patented soft intraocular lens (IOL) used in treating cataracts. In 1986 Staar expanded into other markets. In July 1987, however, finding the company short of capital, Staar negotiated a line of credit from the Bank of New York (BONY), secured primarily by accounts receivable and inventory. By September of 1987, BONY determined that Staar was under-collateralized and over-advanced on its credit line by almost $2 million. BONY threatened to discontinue the credit line and initiate foreclosure proceedings unless Staar's officers would personally guarantee the outstanding loans.

On December 13, 1987, the Staar Board convened to discuss the company's options. During the course of that meeting, Waggoner declared that he was willing to guarantee $3.5 million of BONY debt and $2.8 million of other debt in exchange for voting control of Staar for as long as his personal guarantees were outstanding. Lutzker was at the meeting and reminded everyone there that he was present only in his capacity as counsel for Staar.

On December 16, 1987, BONY informed Waggoner that he had only three days in which to provide the Bank with a written personal guarantee of the overdrawn line of credit. Staar's directors convened an emergency telephone meeting on December 17, 1987. At that meeting, Waggoner explained Staar's financial straits to the directors and advised them that he was the only person who could afford to guarantee personally Staar's debt. The Board then adopted a resolution transferring 100 shares of Class A Preferred Stock to Waggoner in exchange for his guarantee. One of those shares was to be convertible into 2 million shares of common stock after January 16, 1988, if Waggoner's guarantees were still outstanding.

Following that meeting, at the Board's direction, Lutzker drew up the Shareholders Agreement and the Certificate of Designation, the papers necessary to transfer voting control of the company to Waggoner. Waggoner had the documents reviewed by Staar's California patent counsel, Frank Frisenda, and on December 24, 1987, Waggoner personally guaranteed Staar's debt and pledged his Staar stock to BONY. Although Staar's directors tried to obtain financing in order to replace Waggoner's guarantees in the month that followed, they were not successful. Consequently, on January 19, 1988, after consulting with Lutzker, Waggoner converted one of his Preferred shares in exchange for 2 million shares of common stock.

Staar's financial trouble continued throughout 1988 and early 1989. Finally, in the summer of 1989, Staar considered the possibility of a merger with Vision Technologies, Inc. (VTI). VTI submitted a written proposal to Staar regarding a potential merger on June 29, 1989. On July 22, 1989, another company, by the name of Chiron, submitted a bid to acquire Staar's IOL business. On August 8, 1989, the Board, including Waggoner, adopted a resolution that Staar would attempt in good faith to complete a merger with VTI. The Board sent Chiron written notice terminating negotiations on August 9, 1989. In spite of the Board's resolution, however, Waggoner continued negotiations with Chiron. On August 10, 1989, one of Staar's directors unexpectedly discovered Waggoner in a secret meeting with Chiron agents at Staar's offices.

The Board convened an emergency meeting without Waggoner the next day. The Board found that Waggoner had violated his fiduciary duties to Staar and voted to remove Waggoner from his positions as president, CEO, and director of Staar. In response, Waggoner called Lutzker to ascertain if his preferred stock empowered him to remove the other directors from the Board and create a new Board. Lutzker informed Waggoner that he knew of nothing to hinder Waggoner from using his voting power in that manner. Thus, after voting to remove the other directors from the Board, Waggoner named a new Board consisting of himself, his wife and one vacancy. Waggoner sent his written consent regarding the removal of the other directors to Lutzker, who informed the other Board members what had transpired.

The Board members sought relief in court, filing two suits in Delaware. As a result of the ensuing litigation, Waggoner lost his position in and control over Staar. He also lost ownership of the common stock which he had allegedly derived from the convertible preferred stock. ³

On August 23, 1990, Waggoner filed this diversity action for legal malpractice against Lutzker and Snow Becker. Waggoner alleged that the defendants breached their duty of care because Lutzker: negligently failed to include the power to fix voting rights among the Board of Directors' powers when Staar was reincorporated in Delaware; failed to advise Waggoner that the Board did not have the power to fix voting rights; and knew or should have known that the Board lacked that power. Waggoner further alleged that Lutzker was aware that Waggoner would rely on his advice, that Waggoner did in fact rely on that advice, and that Waggoner suffered damage as a result. On September 12, 1991, the district court granted summary judgment for the defendants.

This diversity action requires exploration of the limits of liability for alleged malpractice under the laws of either New York or California by an attorney whose advice was relied on by both a corporation and one of its officers. Because the relevant transactions had contacts in both New York and California, it is necessary to determine the proper law to fix the limits of the attorney's liability.

The district court resolved these issues by finding that the defendants showed as a matter of law that: (1) there was no direct attorney-client relationship between Lutzker and Waggoner during the instances when Waggoner asserts he detrimentally relied on Lutzker's advice; (2) California's choice of law test required the district court to apply New York law to the action before it; and (3) New York law required the court to dismiss Waggoner's case because there was no privity between Lutzker and Waggoner. Waggoner timely appealed.

II. JURISDICTION AND STANDARDS OF REVIEW

The district court had jurisdiction pursuant to 28 U.S.C. § 1332. This Court has jurisdiction under 28 U.S.C. § 1291. We review the district court's order granting summary judgment de novo. Kruso v. International Tel. & Tel. Corp., 872 F.2d 1416, 1421 (9th Cir.1989), cert. denied, 496 U.S. 937, 110 S.Ct. 3217, 110 L.Ed.2d 664 (1990). Summary judgment is appropriate if the evidence, construed in the light most favorable to the nonmoving party, shows that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fu-Kong Tzung v. State Farm Fire & Casualty Co., 873 F.2d 1338, 1339-40 (9th Cir.1989). This Court also reviews de novo the district court's ruling on choice of law, see Sparling v. Hoffman Constr. Co., 864 F.2d 635, 641 (9th Cir.1988), and its interpretation of state law, see In re McLinn, 739 F.2d 1395, 1397 (9th Cir.1984) (en banc).

III. DISCUSSION

A. Attorney-Client Relationship

Waggoner first contends that Lutzker and Snow Becker are liable to him for Lutzker's negligence because Lutzker was acting as Waggoner's attorney during the preferred stock transaction. ⁴ New York and California treat the formation of an attorney-client relationship similarly. An attorney-client relationship is formed when an attorney renders advice directly to a client who has consulted him seeking legal counsel. Beery v. State Bar, 43 Cal.3d 802, 239 Cal.Rptr. 121, 739 P.2d 1289, 1293 (1987); Brandman v. Cross & Brown Co., 125 Misc.2d 185, 479 N.Y.S.2d 435, 437 (Sup.Ct.1984). A formal contract is not necessary to show that an attorney-client relationship has been formed. Bernstein v. State Bar, 50 Cal.3d 221, 266 Cal.Rptr. 625, 786 P.2d 352, 356 (1990). The court may look to the intent and conduct of the parties to determine whether the relationship was actually formed. Hecht v. Superior Court, 192 Cal.App.3d 560, 565, 237 Cal.Rptr. 528, 531 (Ct.App.1987).

To support his allegation that Lutzker acted as his counsel during the preferred stock transaction, Waggoner emphasizes that: (1) Lutzker informed him by telephone between the December 13th and December 17th meetings in 1987 that Delaware law did not prevent Staar from transferring preferred stock with a conversion feature to...