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

Petition for writ of mandate from an order of San Diego County Superior Court, Patricia A. Y. Cowett, Judge. Petition denied.

Kennerson & Grant, John K. Grant and Paul R. Kennerson for Petitioners.

David Blair-Loy for Real Party in Interest.

No appearance for Respondent.

This writ proceeding presents an opportunity to outline the standards governing an important aspect of third party financial discovery in legal malpractice cases. It is well accepted that "one who establishes malpractice on the part of his attorney in prosecuting . . . a lawsuit must also prove that careful management of it would have resulted in recovery of a favorable judgment and collection of same . . . ." (Campbell v. Magana (1960) 184 Cal.App.2d 751, 754 (italics added); Garretson v. Harold I. Miller (2002) 99 Cal.App.4th 563, 568-569 (Garretson).) We seek to determine to what extent financial discovery may be conducted, over privacy objections, about the ability to respond in damages ("collectibility") of a nonparty to the particular legal malpractice action in which discovery is sought. In this case, the legal malpractice claims against the current attorney defendants are based in part on the actions or inactions of another set of plaintiff's former attorneys in another underlying suit, and plaintiff is contending a greater recovery should have been obtained in both actions. Plaintiff is now pursuing the current attorney defendants for damages to be measured by the lost recovery allegedly caused by plaintiff's former counsel, who is the nonparty witness (petitioner). What privacy and policy concerns about discovery rights may validly be raised by such a nonparty witness in this factual context?

Our analysis of the collectibility doctrine, in light of applicable principles of discovery, leads us to conclude that the subject financial and insurance information is properly discoverable in the instant action, and it is not determinative that plaintiff's former counsel (petitioner) is not a party but is rather a witness in this proceeding, because the information sought is relevant and material to the causation and damages elements of the plaintiff's current legal malpractice cause of action. On this record, the trial court adequately balanced the relevant privacy concerns and issued a protective order to appropriately address them. We deny the petition, but issue this opinion in an effort to clarify the admittedly confusing California case law on the notion of collectibility in this factual context. (Garretson, supra, 99 Cal.App.4th at p. 570.)

I

BACKGROUND

A

IDENTIFICATION OF PARTIES AND PROCEEDINGS

In the case before us (the instant action), the third party from which discovery is sought is Petitioner Hecht, Solberg, Robinson, Goldberg & Bagley, LLP (Petitioner Firm), a law firm which formerly represented this plaintiff, real party in interest James Panther (Plaintiff), in a real estate transaction (the real estate matter). After Plaintiff lost his investment in the real estate matter, he sued the Petitioner Firm for legal malpractice. (Panther v. Hecht Solberg (Super. Ct. San Diego County, 2000, No. GIC 743628) (underlying action).) Petitioner Firm then settled Plaintiff's underlying action against it. Now, Plaintiff is suing the Chapin firm and Steven A. Micheli, and the Mazzarella firm and Mark C. Mazzarella (the Attorney Defendants), who were the lawyers who participated in obtaining that settlement for him in the legal malpractice action arising from the real estate matter.^[1] Plaintiff is contending these Attorney Defendants were negligent and obtained too small a settlement with the Petitioner Firm in the underlying action, thereby giving rise to this "trial within a trial within a trial" format.

When the Petitioner Firm, on privacy grounds, opposed a deposition subpoena for production of business records, including information about its financial condition (as well as liability insurance policies and the security it has made available as required by the law governing limited liability partnerships), Plaintiff brought a motion to compel discovery, which was granted. The trial court ordered Petitioner Firm to supply Plaintiff with the requested information within specified time frames, subject to a protective order.

In this petition for writ of mandate, Petitioner Firm seeks to overturn those orders, on the grounds that (1) no such detailed information should be required to satisfy the "collectibility" requirement in Plaintiff's instant action, (2) the trial court failed to give adequate weight to Petitioner Firm's privacy rights, particularly since financial information is involved and it is a nonparty to these current proceedings, and (3) the information could have been adequately obtained through other means, such as through deposition of its managing partner or independent inquiry to the Secretary of State, with whom this limited liability partnership is registered. (Corp Code, § 16951 et seq.; all

further statutory references are to this code unless otherwise specified.) To analyze these contentions, we set forth further factual background.

B

"TRIAL WITHIN A TRIAL WITHIN A TRIAL"

In conducting the "trial-within-a-trial" of a legal malpractice case, "the goal is to decide what the result of the underlying proceeding or matter should have been, an objective standard." (4 Mallen & Smith, Legal Malpractice (2006 ed.) § 33.1, pp. 926-927, fns. omitted (Mallen & Smith).) "The trial-within-a-trial concept may become a trial-within-a-trial-within-a-trial. This alliteration occurs when the attorney hired to bring a legal malpractice action also allegedly committed legal malpractice. The plaintiff must then show that the defendant attorney was negligent, that the prior attorney also was negligent, and finally that a better result should have been obtained in both underlying actions." (Id. at pp. 927-928, fns. omitted.)

Beginning in 1995, Petitioner Firm represented Plaintiff and other participants in a Carlsbad real estate development (referred to in the complaint as the Project; referred to here as the real estate matter). Plaintiff alleges that he lost his multimillion-dollar interest in the project when some of the other participants foreclosed upon him, based on the manner in which the Petitioner Firm had structured the project. He sued those participants, and other cross-actions were filed.

In February 2000, Plaintiff sued the Petitioner Firm for legal malpractice (underlying action), alleging that the legal representation provided to him in the real estate matter was negligent because the Petitioner Firm had failed to obtain any waivers of potential conflicts of interest among the various participants, and had engaged in numerous other forms of legal malpractice and breaches of fiduciary duty. Specific allegations were made about the professional activities of several individual partners, who were also named defendants in the underlying action. Some discovery took place and the Petitioner Firm disclosed that it carried $4 million in liability insurance coverage.

In addition to the $3.5 million pled as damages in the underlying complaint, Plaintiff asserted that he was damaged in the amount of approximately $4.5 million through the loss of the property, which had increased in value over the years. Thus, a total of approximately $8 million in damages was sought from the Petitioner Firm, although Plaintiff now contends that the San Diego real estate market could have again increased the value of the real property in the real estate matter, such that his lost opportunities would have been of greater financial magnitude.

Petitioner Firm filed a motion for summary judgment in the underlying action, raising the bar of the statute of limitations. In approximately May 2001, Plaintiff settled that underlying lawsuit with the Petitioner Firm for an undisclosed amount. The defendant individual partners were apparently not pursued further. (See fn. 3, post.)

Next, in April 2002, Plaintiff sued the Attorney Defendants in the instant action, on the basis that the Attorney Defendants' representation of him from 1999-on was negligent, including with respect to the underlying action filed against the Petitioner Firm. He claims that the settlement he had reached with the Petitioner Firm, on defendants' advice, was "premature, insufficient and ill-advised" and "was for amounts smaller than the actual value of the case would have been but for the deficiencies caused by the available statute of limitations defense [sic]." Plaintiff further alleges that the Petitioner Firm was insured, "solvent and any judgment less than $50,000,000 was in fact collectible." Accordingly, Plaintiff claims that he has been "substantially damaged as the result of the premature settlement of [the underlying action]," and that the Attorney Defendants caused this damage (the same $8 million previously alleged).

As amended, Plaintiff's complaint against the Attorney Defendants is pled in terms of negligence, breach of fiduciary duty, breach of written and oral contract against the Chapin firm and/or Micheli, breach of written, oral and contingency contracts against the Mazzarella firm, and declaratory relief. According to the complaint, the Attorney Defendants knew or should have known that the Petitioner Firm was a "potential if not essential defendant in any claim for damages" arising out of its representation of Plaintiff, and the Attorney Defendants knew this while pursuing other defendants; however, as to the Petitioner Firm, they negligently failed to obtain a tolling agreement or file an action to obtain a stay.

Eventually, in February 2004, all pending actions arising out of the real estate matter were resolved in a global settlement. Trial in the instant action was scheduled for February 2006.

In March 2005, Plaintiff sought production of documents from the Petitioner Firm through a deposition subpoena for production of business records, regarding (a) documents showing the income, assets, liabilities and/or net worth of the firm; (b) insurance policies providing any coverage for professional liability arising from errors, acts, or omissions of the firm or its predecessors; and (c) documents or statements filed by the firm with the Secretary of State pursuant to section 16956.

Petitioner Firm resisted, on the basis that it was not a party to this action and it, as well as its individual partners, were all entitled to privacy on financial matters, absent a sufficient showing to the contrary. Plaintiff's response was this motion to compel production of documents in compliance with the deposition subpoena.

II

CHALLENGED RULING; REVIEW

After oral argument held in August 2005, the trial court issued its tentative and final rulings to grant Plaintiff's motion to compel the Petitioner Firm to produce documents. Originally, the court intended to require production of the subject documents as created up until the time of hearing, but it then modified the order to allow production only of documents created up until the time the global settlement was implemented in the related litigation involving the real estate matter, or until March 31, 2004. Production was therefore ordered, subject to a protective order in a form submitted by counsel and approved by the court, responsive to the following requests:

"1. 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 [Firm] or any predecessor of said firm, from and including January 1, 1999 to [Mar. 2004].^[2]

"2. 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.

"3. 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]."^[3]

In explaining its reasoning, the court relied on Garretson, supra, 99 Cal.App.4th 563, 571, but acknowledged that it does not specifically address a discovery dispute. The court nevertheless found its discussion of collectibility instructive, as follows:

" 'The attorney's negligence causes the plaintiff to lose only that portion of the underlying judgment that could have been collected.' (Garretson[,supra], 99 Cal.App.4th 563, 571.) Here, there are allegations that the current defendants' negligence resulted in plaintiff recovering less from [Petitioner Firm] than plaintiff believes he was entitled to recover. To the extent that plaintiff prevails against these current defendants for their errors in relationship to the action against [Petitioner Firm], the measure of damages will be that which these current defendants could have collected against [Petitioner Firm]. Thus, plaintiff must know how much it could have collected against [Petitioner Firm] in order to prove the extent of his damages in this case."

Further, the trial court relied on general discovery principles to conclude that there is no reason to put off discovery of this information: " '[As] a general rule discovery with respect to all triable issues of fact should be completed before the case goes to trial. This rule applies even though one issue may not be reached because of the determination of another issue adversely to the party seeking discovery.' [Citation.]" The trial court continued, "Plaintiff may or may not prevail in its action against defendants, and may or may not ever reach the issue of collectibility against [Petitioner Firm]. However, discovery is still appropriate to allow the parties to prepare for trial."

With respect to the general categories of items sought, the court's order 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." Further, the 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. [Former] Code of Civil Procedure section 2017, subdivision (a) only requires that the matter subject to discovery be either admissible, or reasonably calculated to lead to the discovery of admissible evidence. Here, this information appears reasonably calculated to lead to the discovery of admissible evidence regarding plaintiff's damages." (Now see Code Civ. Proc., § 2017.010.)

After Petitioner Firm filed its mandamus petition, this court issued an order to show cause why the relief requested should not be granted. No stay was issued because the parties stipulated that the discovery would not be pursued until this court resolved the petition.

In general, appellate courts will conduct writ review of discovery rulings only in limited situations, such as cases in which "(1) the issues presented are of first impression and of general importance to the trial courts and to the profession [citation], (2) the order denying discovery prevents a party from having a fair opportunity to litigate his or her case [citation], or (3) the ruling compelling discovery would violate a privilege [citation]." (Johnson v. Superior Court (2000) 80 Cal.App.4th 1050, 1061 (Johnson).) Such appellate review of discovery rulings is conducted under an abuse of discretion standard. (Ibid.) "Where there is a basis for the trial court's ruling and the evidence supports it, a reviewing court will not substitute its opinion for that of the trial court." (Ibid.)

Under this approach, it is appropriate for this court to evaluate the claims presented in light of these ongoing issues of public importance and the difficulty of obtaining appellate review of such interim orders. (Johnson, supra, 80 Cal.App.4th 1050, 1061; see Venture Law Group v. Superior Court (2004) 118 Cal.App.4th 96, 101 [writ review of discovery orders appropriate where privileges are asserted].)

III

CAUSATION AND DAMAGES IN A LEGAL MALPRACTICE CASE:

COLLECTIBILITY OF AN UNDERLYING JUDGMENT

AS A COMPONENT THEREOF

A. Principles

To recover against the Attorney Defendants, Plaintiff must prove each of these elements of his cause of action for professional negligence: "(1) the duty of the professional to use such skill, prudence, and diligence as other members of [the] profession commonly possess and exercise; (2) a breach of that duty; (3) a proximate causal connection between the negligent conduct and the resulting injury; and (4) actual loss or damage resulting from the professional's negligence. [Citation.]" (Garretson, supra, 99 Cal.App.4th 563, 568.)

In DiPalma v. Seldman (1994) 27 Cal.App.4th 1499, 1507 (DiPalma), the court analyzed the causation and damages requirements of proving a legal malpractice claim. The court noted that the "element of collectibility does not apply to every legal malpractice action. An attorney's liability, ' "as in other negligence cases, is for all damages directly and proximately caused by his negligence." ' [Citation.] It is only where the alleged malpractice consists of mishandling a client's claim that the plaintiff must show proper prosecution of the matter would have resulted in a favorable judgment and collection thereof." Such facts, alleged mishandling of a client's claim (as opposed to provision of a defense or other advice), are directly before us here.

Although such a plaintiff is not required to offer proof that establishes causation "with absolute certainty," a plaintiff is still required to " ' "introduce evidence which affords a reasonable basis for the conclusion that it is more likely than not that the conduct of the defendant was a cause in fact of the result." ' [Citation.]" (Viner v. Sweet (2003) 30 Cal.4th 1232, 1243.) In the legal malpractice context, the elements of causation and damage are particularly closely linked. It is difficult to consider a plaintiff's claim that the defendant attorney's proper handling of an underlying matter would have resulted in a favorable judgment that could be collected, without evaluating the amount of such a favorable judgment. The plaintiff has to show both that the loss of a valid claim was proximately caused by defendant attorney's negligence, and that such a loss was measurable in damages. (Ibid.) In this sense, collectibility of the hypothetical underlying judgment against the named defendant is a component of the plaintiff's current case relating to damages, as caused by the current negligent attorney defendant, and is a fact-intensive inquiry.

It is useful to consider the various factors bearing upon the issue of collectibility of an underlying judgment, in order to establish the proper guidelines for discovery. Collectibility is part of the plaintiff's case, and a component of the causation and damages showing, rather than an affirmative defense which the attorney defendants must demonstrate. (Garretson, supra, 99 Cal.App.4th at pp. 569-572 [reviewing case law, Lally v. Kuster (1918) 177 Cal. 783, 788; Campbell v. Magana, supra, 184 Cal.App.2d at p. 754; Walker v. Porter (1974) 44 Cal.App.3d 174, 178].) Collectibility is not a question only of the solvency of the defendant in an underlying case, such as in bankruptcy, but rather pertains to the defendant's ability to pay a judgment or some part of it. (Mallen & Smith, supra, § 30.17, pp. 490-491.) Collectibility is not an all or nothing question, but rather concerns the measure of damages, which should not exceed the sum that could have been collected. (Id. at p. 492.) Collectibility thus "looks to the actual circumstances to determine whether the judgment 'would have been collectable.' " (Id. at p. 494, fn. 40.) It is not enough for a plaintiff to present speculation or assumptions about an underlying defendant's ability to respond in damages, as opposed to proof of same. (Garretson, supra, at pp. 573-574.) Admissible evidence on collectibility can include information about the basic solvency of the defendant in the underlying case, as shown by its assets, net worth or available proceeds from investments. (DiPalma, supra, 27 Cal.App.4th 1499, 1509.)

( Continue………as part II…….)

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^[1] The full names of the Attorney Defendants in the subject complaint are Chapin, Fleming, McNitt, Shea & Carter and Steven A. Micheli; and Mazzarella, Dunwoody & Caldarelli and Mark C. Mazzarella. Various cross-actions have been filed but they are not within the scope of these writ proceedings.

^[2] Although the court order refers to discovery of the Petitioner Firm's assets and net worth from January 1, 1999, the Plaintiff in his opposition to the petition in this court states that such discovery should be allowed from 2000 forward, apparently because his underlying malpractice action was filed against the Petitioner Firm in February of 2000. The moving papers and reporter's transcript of the hearing are consistent with this version. We accordingly deem the order as issued to include the 2000 date, not 1999, based on this concession by the plaintiff, and the trial court should correct its order accordingly.

^[3] Plaintiff acknowledges here that the Petitioner Firm's tax returns are not discoverable and only nontax documents are being requested. (Schnabel v. Superior Court (1993) 5 Cal.4th 704, 719-720.) Plaintiff also acknowledges that discovery is sought only from the Petitioner Firm (partnership) and not from its individual partners, and states that any issues about private financial information of individual natural persons will be addressed separately in the trial court, if necessary.