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The most important court decisions of the month
Welcome to Berger Kahn's monthly e-publication summarizing the most important California state and federal court decisions.

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Possible Conversion May Extend Legal Malpractice Statute Of Limitations
Lee v. Hanley
(Cal. Sup. Ct.), filed August 20, 2015

Nancy Lee advanced her attorney William Hanley $110,000 for attorney’s fees and expert witness fees. After the case settled, attorney Hanley sent Lee a letter and invoice, showing a $46,000 credit. Two months later, Lee asked Hanley to refund her final credit balance. Hanley then said Lee did not have a credit balance and she would not be receiving a refund. Lee hired attorney Walter Wilson to collect her credit balance. Wilson sent Hanley a demand letter. A few weeks later, Hanley returned $9,725 in unused expert fee advances, but declined to return the attorney’s fee advance. A little over a year after Wilson’s demand letter, Lee sued Hanley for legal malpractice. Hanley filed a series of demurrers, arguing the complaint was time-barred. The trial court sustained Hanley’s demurrer with leave for Lee to add a fraud cause of action. When Lee failed to amend her complaint, the trial court dismissed the case with prejudice. On appeal, Lee argued that the one-year statute of limitations in Code of Civil Procedure section 340.6 did not apply to her and that the limitations period was tolled because Hanley represented her until (at least) her unused expert fees were returned. The Court of Appeal reversed, holding that the complaint was not necessarily barred because it could be construed to include a conversion claim (which carried a three-year statute of limitations). The California Supreme Court affirmed, since the possible conversion claim would not depend on whether Hanley violated any professional obligation.”

Insurer May Pursue Recoupment Of Allegedly Excessive Fees
Hartford Cas. Ins. Co. v. J.R. Marketing, L.L.C.
(Cal. Sup. Ct.), filed August 10, 2015

Hartford Casualty Insurance Company issued a commercial general liability policy to Noble Locks Enterprises and to J.R. Marketing, L.L.C. Noble Locks and J.R. Marketing were sued for business-related defamation and disparagement claims. Hartford initially declined J.R. Marketing and Noble Locks’ request for defense. After Noble Locks and J.R. Marketing filed a coverage action, Hartford agreed to defend (subject to a reservation of rights). But Hartford only agreed to pay defense costs going forward, and it declined Noble Locks and J.R. Marketing’s request for independent counsel. In the coverage suit, the trial court found that Hartford had a duty to defend effective on the original tender date. The trial court ordered Hartford to pay for the defense Squire Sanders had been providing. After the underlying case resolved, Hartford sued Noble Locks, J.R. Marketing, and Squire Sanders to recoup some of the $15 million in defense fees and expenses it had paid. Squire Sanders demurred, arguing that Hartford’s right to recover attorney’s fees could only be asserted against its policyholders, and not directly against independent counsel. The trial court sustained the demurrer without leave to amend, holding that Hartford’s right to reimbursement was against its insureds, and not directly from Cumis counsel. On appeal, Hartford argued that it was “entitled to recover directly from Cumis counsel for ‘unreasonable’ and ‘excessive’ fees and costs.” The Court of Appeal affirmed, holding that allowing Hartford to sue Squire Sanders directly would frustrate the Cumis scheme. The California Supreme Court granted Hartford’s petition for review, finding that Hartford had a right of reimbursement directly against Cumis counsel. Squire Sanders argued that Hartford’s claim interfered with the “insureds’ attorney-client privilege and with their absolute right to dictate and control the defense presented by independent counsel.” But the Court disagreed, emphasizing that the Cumis doctrine already required counsel to justify their fees. The Court emphasized that Squire Sanders had itself drafted the “enforcement order” -- the court order that required Hartford to defend. That “enforcement order” had required Hartford to pay all the bills without deduction as the case progressed, but it specifically preserved Hartford’s right to seek reimbursement for any excessive fees after the case against its insureds was resolved.

Overturning Henkel, The California Supreme Court Finds Insurance Code Section 520 Trumps Anti-Assignment Clauses
Fluor Corp. v. Superior Court
(Cal. Sup. Ct.), filed August 20, 2015

Hartford insured Fluor Corporation under liability polices that included a “consent-to-assignment clause” which required the insurer’s written consent before the policy could be assigned. Hartford defended Fluor for asbestos related claims. Fluor later became two companies -- Massey Energy Company and Fluor-2. Hartford then refused to defend Fluor-2, arguing that under Henkel Corp. v. Hartford, it did not consent to Fluor assigning its insurance policies to Fluor-2. Fluor-2 moved for summary judgment, arguing that Insurance Code section 520 barred enforcing consent-to-assignment clauses “after a loss has happened.” Hartford argued that the California Supreme Court’s decision in Henkel required Hartford’s consent on the policy assignments to Fluor-2. The trial court agreed and denied Fluor-2’s motion. The Court of Appeal affirmed, claiming that Section 520 did not apply to liability insurance. The California Supreme Court reversed. While it had not considered Section 520 in Henkel, the Supreme Court recognized that Section 520 restricted an insurer’s right to “limit an insured’s right to transfer or assign a claim for insurance coverage.” The Court held that Section 520 permitted assignment of liability insurance after a “loss,” and that “loss” referenced the injury that led to litigation, not the imposition of liability as a result of litigation.


Unconscionable Arbitration Agreement Is Unenforceable
Carlson v. Home Team Pest Defense
(Ct. App., 1st Dist., Div. 4), filed August 17, 2015

Office manager Julie Carlson filed a wrongful termination lawsuit against her former employer, Home Team Pest Defense. Home Team moved to compel arbitration, alleging that on her first day of work, Carlson had been provided electronic access to all the company’s policies (including the arbitration agreement). Carlson had initially objected to the agreement, but later decided to accept the agreement after she was told that the terms were not available for her to review. The agreement was heavily weighted in Home Team’s favor. Among other things, the agreement required all claims the employee could bring to be arbitrated, while not requiring Home Team’s potential claims against the employee to be arbitrated. The agreement also limited any attorney’s fee recovery to only Home Team. And the agreement was presented without allowing the employee a choice of whether to sign it. The trial court denied the motion, finding that the agreement was procedurally and substantively unconscionable. The trial court found that rescuing the arbitration agreement by severing its unconscionable terms would require the court to “rewrite the arbitration agreement.” The Court of Appeal agreed, and denied Home Team’s motion to compel arbitration. It found that the agreement was “oppressive” and had a “high degree of procedural unconscionability” since Carlson was not given any time to review the agreement before being required to sign it. The Court’s principal concern “rests on [the agreement’s] failure to hold Home to the same obligation to arbitrate that it holds Carlson.”


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