HECHT, SOLBERG, ROBINSON, GOLDBERG & BAGLEY v. THE SUPERIOR COURT OF SAN DIEGO COUNTY,

Filed 3/9/06

CERTIFIED FOR PUBLICATION

COURT OF APPEAL - FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

Continue……..from part I ……………

In the case before us, Petitioner Firm relies on the court's statement in Garretson, supra, 99 Cal.App.4th 563, that "a malpractice plaintiff need only have proven he could have collected something from the defendant in the case-within-a-case, and it is that amount that is the proper measure of his damages in the malpractice action." (Id. at p. 572.) Petitioner Firm claims that there is enough evidence already available (regarding its prior insurance coverage of $4 million at the relevant times, together with Plaintiff's own allegations about the firm's presumed solvency up to $50 million) to show something could have been collected from it, if the underlying settlement now being objected to had not been reached. About $8 million is now being sought from the Attorney Defendants. Petitioner Firm therefore argues no further discovery should be necessary regarding its financial condition, and that Plaintiff can presumably prove the "full extent of his damages" against the Attorney Defendants without the requested specific financial information, because it can be deduced from the existing record that any underlying larger judgment against Petitioner Firm, over the settlement, would have been collectible "in some amount."

Plaintiff's arguments read the "some" and "something" language of Garretson, supra, 99 Cal.App.4th 563, 571-572, out of context. In Garretson, the court was analyzing these causation issues only for the purpose of reviewing a judgment notwithstanding the verdict, under a substantial evidence standard. The court upheld the JNOV in favor of the defendant attorney, because there, the plaintiff had failed to provide any evidence that if the defendant attorney had not been negligent, she (plaintiff) would actually have been able to collect any judgment against the potential third party defendants. The collectibility issue was never tried and therefore, the plaintiff had failed to supply any proof establishing that she lost an underlying judgment of any value that was really collectible; the speculation and assumptions that she offered were not enough to satisfy the substantial evidence standard. (Id. at pp. 572-573.)

Accordingly, the statement in Garretson on which the Petitioner Firm is relying regarding collecting "something" was made in the context of analyzing whether that plaintiff's case could withstand a motion for JNOV, on a substantial evidence basis, and the court's statement was not intended to define the element of collectibility by restricting or expanding the amount of proof that a malpractice plaintiff must present regarding whether he or she incurred damages from the alleged legal malpractice. Rather, the malpractice plaintiff must try the issue and present evidence to show that but for the defendant attorney's negligence, the plaintiff could otherwise have collected a valuable judgment from the defendant in the underlying case. (Garretson, supra, 99 Cal.App.4th at p. 572.) Accordingly, Garretson is not authority for the idea that any minimal showing, speculation or not, hearsay or not, allegations or not, is enough for a malpractice plaintiff to prove collectibility of "some" of an underlying lost claim. (Id. at p. 575 ["the positive authority of a decision is coextensive with its facts].")

Specifically, Petitioner Firm is now attempting to rely on its interrogatory responses in the underlying case, which are effectively hearsay at the present time, with respect to the amount of available liability insurance coverage. Those responses do not address any coverage issues or exclusions. (See part C, post; Evid. Code, §§ 1200 et seq.; 1520 et seq. [secondary evidence rule].) It is not enough for the Petitioner Firm in this case to suggest that the record already adequately shows it had some available liability insurance at the relevant times, or that it was in generally good financial standing as a partnership. Rather, pretrial discovery on these matters is appropriate, because collectibility is a fact-intensive inquiry, and the record does not currently demonstrate that the malpractice plaintiff already has access to all necessary evidence, or to material that will lead to such evidence, on the issues of his alleged damage by loss of a valid underlying claim or judgment, and in what amount, and whether it could actually have been collected. The issue must be tried, based on evidence, and a showing of hypothetical injury is not enough to carry the plaintiff's burden on such a cause of action. (Garretson, supra, 99 Cal.App.4th at pp. 572-573.)

To provide the required proof, going beyond the allegations of its own complaint or the record in the underlying case (previous discovery responses), this malpractice plaintiff is pursuing discovery from a nonparty witness, who, not coincidentally, is also its former and allegedly negligent counsel. We next address the privacy and related issues raised by this situation.

B. Standards Governing Discovery; Privacy Issues

Code of Civil Procedure section 2017.010 et seq. provide the framework allowing a party to "obtain discovery regarding any matter, not privileged, that is relevant to the subject matter involved in the pending action . . . if the matter either is itself admissible in evidence or appears reasonably calculated to lead to the discovery of admissible evidence." (See Johnson, supra, 80 Cal.App.4th 1050, 1062.) In Ameri-Medical Corp. v. Workers' Compensation Appeals Board (1996) 42 Cal.App.4th 1260 (Ameri-Medical Corp.), the court discussed the scope of allowable financial discovery when privacy issues are raised concerning an artificial entity defendant: " ' "[T]he relevance of the subject matter standard must be reasonably applied; in accordance with the liberal policies underlying the discovery procedures, doubts as to relevance should generally be resolved in favor of permitting discovery [citation]." [Citation.]' The right to privacy in disclosure of financial information affects the scope of discovery. 'Our right to privacy is guaranteed and protected by state and federal Constitutions.' [Citation.] . . . However, '[t]he constitutional provision simply does not apply to corporations. The provision protects the privacy rights of people.' (Roberts v. Gulf Oil Corp. (1983) 147 Cal.App.3d 770, 791.)" (Ameri-Medical Corp, supra, 42 Cal.App.4th at pp. 1287-1288.)

Although it is arguable whether a corporation or other artificial entity may have the necessary standing to assert a constitutional right to privacy, some privacy rights even for such an artificial entity are recognized by the law:

" 'Although corporations have a lesser right to privacy than human beings and are not entitled to claim a right to privacy in terms of a fundamental right, some right to privacy exists. Privacy rights accorded artificial entities are not stagnant, but depend on the circumstances. [Citation.] "However, we think one cannot draw a bright line at the corporate structure. The public attributes of corporations may indeed reduce pro tanto the reasonability of their expectation of privacy, but the nature and purposes of the corporate entity and the nature of the interest sought to be protected will determine the question whether under given facts the corporation per se has a protectible privacy interest. . . ." [Citation.] [¶] It is clear to us that the law is developing in the direction that the strength of the privacy right being asserted by a nonhuman entity depends on the circumstances. Two critical factors are the strength of the nexus between the artificial entity and human beings and the context in which the controversy arises.' (Roberts v. Gulf Oil Corp., supra, 147 Cal.App.3d at pp. 796-797.)" (Ameri-Medical Corp., supra, at pp. 1288.)

In Connecticut Indemnity Co. v. Superior Court (2000) 23 Cal.4th 807, 817-818 (Conn. Indemnity), our Supreme Court was presented with claims of constitutional and statutory privacy rights of certain corporate entities, but held that these were properly to be submitted to the trial court in the first instance, so that the Supreme Court declined to rule upon them. However, the Court was willing to assume without deciding that such corporate entities have such privacy rights, even in light of Roberts v. Gulf Oil Corp. (1983) 147 Cal.App.3d 770, 791-793 "[corporate entities have no privacy rights under art. I, § 1 of the Cal. Const.]." (Conn. Indemnity, supra, at p. 818; also see H & M Associates v. City of El Centro (1980) 109 Cal.App.3d 399, 409 [a partnership may state a cause of action for invasion of privacy].)

In the case before us, Petitioner Firm is a registered limited liability partnership, formed for the practice of law, and it has complied with the requirements of section 16956 to provide security for potential judgments against it. As a partnership, it is considered a separate entity from its individual partners, but of course, the individuals who make up the partnership are human beings who have privacy rights. The Petitioner Firm raises several concerns in this regard: Does it make any difference here that it "bought its peace" in the underlying litigation, when it settled Plaintiff's malpractice action against it, such that it should not be further required to disclose financial information for that reason? Also, does it make any difference that the focus on financial condition in the underlying litigation would have been on the real estate matter defendants, not on Petitioner Firm? Petitioner Firm argues its financial condition would only have become discoverable if judgment on the merits was entered against it in the underlying action, and collection of that judgment became necessary. (Compare Code Civ. Proc., § 680.010 et seq. [enforcement of judgments].)

Like the Supreme Court in Conn. Indemnity, supra, 23 Cal.4th 807, we need not decide in this case any broad issues of the scope of privacy rights to which an artificial entity or partnership is entitled, as compared to those of the individual partners. Rather, we may assume without deciding that such an entity has such privacy rights. The issue specifically before us is an ordinary discovery problem that falls within the recognized framework for discovery in civil cases: What should be the proper balancing of the requested discovery and its relevance to the subject matter involved in the pending action, and whether it "appears reasonably calculated to lead to the discovery of admissible evidence," as opposed to any countervailing considerations, such as privacy and privilege? In general, the discovery procedures are liberally applied and "doubts as to relevance should generally be resolved in favor of permitting discovery [citations]. " (Ameri-Medical Corp., supra, 42 Cal.App.4th at p. 1287.)

Based on the nature of the collectibility aspect of the malpractice plaintiff's cause of action as outlined above, as an important component of the overall causation and damages showing required for recovery, we cannot say that the Petitioner Firm is protected from the requested discovery on a wholesale basis, on any of the grounds urged. Rather, the normal balancing process is adequate to deal with the concerns raised. The effect of the underlying settlement to buy its peace at that stage of the proceedings does not serve to protect Petitioner Firm's financial information from a limited degree of disclosure in the current action, in which it is technically a third party witness, who is, like any other witness, properly subject to the deposition subpoena served. Even assuming the Petitioner Firm has protectible financial privacy rights, those rights do not preclude discovery that is relevant to the essential issues in the case, such as collectibility, since the malpractice plaintiff can show the requested information is relevant and material to prove that a better result should have been obtained for him by the current Attorney Defendants (or the information will lead to such admissible evidence), within the usual discovery rules. Causation and damages are inextricably intertwined here. Nor do the rules of law or statutes involved create any requirement of a bifurcated proceeding, in which a complete showing of liability must be made before any damages inquiry or financial discovery can be conducted. (Compare Civ. Code, § 3295, subd. (c) [regarding proof of financial condition for punitive damages].) We need not and cannot create such a scheme by judicial decision.

In light of the above considerations, we next address each category of discovery sought, and with respect to what time periods. We do this in the context of the protective order issued, which has not been discussed in depth by either party in these proceedings. We note, however, that it appears to be a standard protective order which appropriately imposes confidentiality and restricts the availability of the documents produced to the use of the court, the named parties and their attorneys, and expert consultants or litigation personnel. (See fn. 3, ante.)

C. Application; Alternative Means

In the instant action, Plaintiff is seeking approximately $8 million in damages from the Attorney Defendants, based on the alleged lost opportunity stemming from the underlying action against the Petitioner Firm, based in turn on the real estate matter. The record thus far consists of Plaintiff's own allegations and Petitioner Firm's previous disclosures about liability coverage. We seek to determine whether the trial court abused its discretion in ordering further disclosures as follows.

We first take note that Petitioner Firm is not justified in relying on Allen v. Superior Court (1984) 151 Cal.App.3d 447, 453 (Allen) to argue that alternative means of inquiry must first be followed before conducting a deposition subpoena for business records. In that case, the court was dealing with the privacy rights of former patients and examinees of a physician, who was a defense medical expert witness in the case, and it held that the trial court abused its discretion when it failed to require a less intrusive method of discovery. The court of appeal reasoned that the party seeking this discovery, for the purpose of impeachment, had "made no showing that the information sought or substantially equivalent information could not be obtained through other means, such as by conducting a deposition without production of the records." (Ibid.) At such a deposition of the doctor, questions could be asked to obtain the essential information (what percentage of the witness's practice involved examining patients for the defense and how much compensation he was paid for defense work), so the requests for the number of cases and amounts of compensation paid (e.g., details of billing and accounting) were not necessary for the purpose of showing any bias on his part. (Ibid.)

As part of its reasoning, the court in Allen, supra, 151 Cal.App.3d 447, 453 cited authority to the effect that "a court must not generously order disclosure of the private financial affairs of nonparties without a careful scrutiny of the real needs of the litigant who seeks discovery. [Citation.]" There, the court declined to allow the requested discovery, because it was unnecessary for the declared purpose of showing the witness's purported bias. (Id. at p. 453.) However, the court in Allen did not establish any blanket rule that other means must be explored first before discoverable information may be sought through a deposition subpoena for production of business records. Instead, the holding was specific on the impeachment issue presented, which was the real need being addressed. Here, as already noted, the focus of the requested discovery is on proving the Plaintiff's case as to causation and damages, and therefore he can show the Petitioner Firm has relevant information that is not in any way peripheral to the actual dispute. As a threshold matter, the order here does not violate the principle established by Allen that disclosure of the private financial affairs of nonparties will not be ordered without justification based on "the real needs of the litigant who seeks discovery." (Id. at p. 453.) We now turn to the specifics of the order.

1. Liability Insurance Policies

Production was ordered as to: "Any and all insurance policies providing any coverage for professional liability arising from errors, acts, or omissions of said firm or any predecessor occurring from and including January 1, 1995 to [Mar. 2004], including but not limited to primary coverage, supplemental or excess liability coverage, and/or coverage policies." The court noted that the liability insurance policies are discoverable "to avoid a situation where any party argues language in the policy precludes coverage in this matter."

We first set out the statutory guidelines for such proposed discovery. Under Code of Civil Procedure section 2017.210 : "A party may obtain discovery of the existence and contents of any agreement under which any insurance carrier may be liable to satisfy in whole or in part a judgment that may be entered in the action or to indemnify or reimburse for payments made to satisfy the judgment. This discovery may include the identity of the carrier and the nature and limits of the coverage. A party may also obtain discovery as to whether that insurance carrier is disputing the agreement's coverage of the claim involved in the action, but not as to the nature and substance of that dispute. Information concerning the insurance agreement is not by reason of disclosure admissible in evidence at trial." (Italics added.)

Consistent with these guidelines, information may be discoverable even if not admissible at trial, if it will lead to admissible evidence. Here, Plaintiff's theory is that the insurance policies will be relevant to show how much money could have been collected from the Petitioner Firm, if a substantial judgment had been entered against it, as opposed to the settlement amount. Plaintiff is seeking approximately double the amount of coverage already revealed in the underlying action, so he seeks to know all additional sources that could have been made available if the underlying case had been timely pursued. Possibly, the policies will also contain financial information about the applications for coverage, which will be subject to the protective order. (See fn. 3, ante.)

We agree with the trial court that the liability insurance policies are discoverable "to avoid a situation where any party argues language in the policy precludes coverage in this matter." It is not an answer for the Petitioner Firm to suggest that a deposition of its managing partner be taken to disclose the insurance policy amounts, or the extent of coverage, because the insurance policies themselves may lead to admissible evidence about the extent of coverage provided and whether coverage would have been contested. Production would also avoid hearsay problems and secondary evidence problems. (Evid. Code, §§ 1200 et seq.; 1520 et seq.; Pajaro Valley Water Management Agency v. McGrath (2005) 128 Cal.App.4th 1093, 1107-1108.)

The parties argue back and forth whether the insurer in the underlying action rejected a reasonable settlement demand and may therefore be subject to potential bad faith liability. Those issues are beyond the scope of this discovery writ. The discovery we authorize today does not mean that a full-fledged bad faith insurance coverage dispute stemming from the underlying action will occur at any trial of the instant action, nor should it. The only issue before us is whether the trial court acted within its discretion in ordering production of the policies for the subject time period. The order was proper because they are not shown to be privileged and may lead to admissible evidence on the collectibility question, and no abuse of discretion has been shown.

2. Secretary of State Filings

Production was ordered as to: "Any and all documents or statements filed by said firm or any predecessor with the Secretary of State pursuant to Corporations Code section 16956 from and including January 1, 1995 to [Mar. 2004]." As the trial court noted in its ruling, Petitioner Firm's filings with the Secretary of State "are not beyond the reach of discovery, even if they are ultimately inadmissible at trial. Corporations Code section 16956, subdivision (d) does not preclude discovery in this case."

Under section 16956, subdivision (a), a registered limited liability partnership must, at the time of registration pursuant to section 16953, provide security for claims against it. The statute further provides, in section 16956, subdivision (d), "Neither the existence of the requirements of subdivision (a) nor the extent of the registered limited liability partnership's or foreign limited liability partnership's compliance with the alternative requirements in this section shall be admissible in court or in any way be made known to a jury or other trier of fact in determining an issue of liability for, or to the extent of, the damages in question."

These statutes do not provide any specific guidance for purposes of controlling discovery in this factual context. However, they are consistent with the general civil discovery framework as outlined above, and the trial court could properly order these filings regarding security to be disclosed because they are relevant to the issues presented on collectibility as part of causation and damages (by potentially leading to admissible evidence about the extent of assets available to satisfy any underlying judgment). Nor was the trial court required, under the analysis of Allen, supra, 151 Cal.App.3d 447, to order independent assets investigation by Plaintiff or independent inquiries to the Secretary of State before he sought this information from the Petitioner Firm, which is a nonparty witness that has relevant information on a material issue in the instant action.

3. Financial Information

Production was ordered as to: "Any and all balance sheets, profit and loss statements, credit applications, or other documents itemizing or recording the income, assets, liabilities and/or net worth of [Petitioner Firm] or any predecessor of said firm, from and including January 1, 1999 to [Mar. 2004]." As noted (see fn. 2, ante) such discovery should instead be allowed from February 2000, because the underlying malpractice action was filed against Petitioner Firm in February of 2000. This represents a very broad request, which Petitioner Firm is understandably resisting. However, admissible evidence on collectibility can include information about the assets or net worth of the defendant in the underlying case. (DiPalma, supra, 27 Cal.App.4th 1499, 1509.) The trial court heard argument on Petitioner Firm's legitimate privacy concerns and issued a protective order to address them, and limited the time frame of the order to the period up until the global settlement was reached, which was theoretically the end of Plaintiff's hypothetical opportunity to accomplish a greater recovery in the underlying action or the real estate matter. An appropriate degree of balancing was conducted and no abuse of discretion has been shown.

DISPOSITION

The petition for writ of mandate is denied. Each party is to bear its own costs.

CERTIFIED FOR PUBLICATION

HUFFMAN, Acting P. J.

WE CONCUR:

O'ROURKE, J.

AARON, J.

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