Rus, Miliband & Smith v. Conkle & Olesten

6 Cal. Rptr. 3d 612, 113 Cal. App. 4th 656
CourtCalifornia Court of Appeal
DecidedDecember 19, 2003
DocketG030325
StatusPublished
Cited by7 cases

This text of 6 Cal. Rptr. 3d 612 (Rus, Miliband & Smith v. Conkle & Olesten) is published on Counsel Stack Legal Research, covering California Court of Appeal primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Rus, Miliband & Smith v. Conkle & Olesten, 6 Cal. Rptr. 3d 612, 113 Cal. App. 4th 656 (Cal. Ct. App. 2003).

Opinion

Opinion

SILLS, P. J.

I. INTRODUCTION

A real estate empire collapses. The estate’s bankruptcy trustee, through its attorney of record, sues the empire’s accountants for their role in the collapse. The parties settle. As part of the settlement, the trustee’s attorneys now represent the accountants in a suit against their malpractice insurer on a contingency fee basis (while still representing the trustee in enforcing the settlement). The accountants waive the obvious conflict.

The accountants then write a letter asking some questions as to the basis for the suit against their malpractice insurer, which they have every right to do. After all, it is just as likely that they will be sued for malicious prosecution as the attorneys if the lawsuit is unsuccessful. The attorneys, however, are offended. Perhaps they sense they are being set up to take the fall if the litigation fails and they and their clients find themselves sued for malicious prosecution. But they never say that. In their motion to withdraw as counsel, they merely cite, without elaboration, a “break down in. communications.”

The accountants, however, don’t think the differences are irreconcilable and oppose the withdrawal. Now chastened and humbled for being so uppity as to question their lawyers, they practically beg the attorneys to return.

*660 The accountants lose the withdrawal motion. The trial court will not force unwilling lawyers to work for willing clients. So the accountants thrash around for a new law firm, and eventually find one, but not one willing to take the case on contingency.

Then comes the surprise. With their new attorneys, the accountants settle with the malpractice insurer on favorable terms, obtaining a large sum of money. The original attorneys return to assert a quantum meruit claim on the settlement. Can they?

Of course not. Taking umbrage at being asked facially legitimate questions by one’s client about the basis for a lawsuit is not justifiable cause warranting recovery in quantum merit. (See Estate of Falco (1987) 188 Cal.App.3d 1004, 1014-1018 [233 Cal.Rptr. 807].) Clients have every right to ask questions of their lawyers as to the basis of a lawsuit, and the asking of such questions is not a reasonable basis to claim a “break down in communications.” If there was any “break down,” it was the lawyers who did not want to answer legitimate questions posed by their clients as to the validity of their clients’ claims against their malpractice carrier.

n. FACTS

A. The Bankruptcy Trustee Sues the Accountants

The Hill Williams real estate empire collapsed in the early 1990’s. By 1998 Hill Williams had been sentenced to federal prison. Charles W. Daff was appointed Chapter 7 Trustee. Rus, Miliband & Smith (the Rus firm) served as the Trustee’s counsel.

The Rus firm sued numerous potentially liable parties, including their future client, Goodrich, Goodyear & Hinds (the accountants), which had served as the prebankruptcy accountants for the Hill Williams entities. The accountants allegedly had neglected to abide by standard accounting practices in handling matters for Hill Williams. The accountants faced, in addition to the Trustee’s action, three other similar actions for professional negligence based on the same facts.

The accountants informed their malpractice insurer of the four actions against them. The malpractice insurer took the position that the claims made against the accountants arose out of a single occurrence, such that only the *661 accountants’ 1993 malpractice insurance policy year applied. That was a self-liquidating policy with $1 million in maximum coverage. 1

Despite the limit in the face of so much potential liability, the accountants were able to settle all related malpractice actions against them except for the action by Trustee Daff, with $300,000 still left on the policy.

While the $300,000 was not enough to settle with Trustee Daff outright, a settlement was put together. A typical approach when a party is facing a judgment in excess of insurance limits is to assign to the third-party claimant all rights against the insurer in exchange for a personal release from liability combined with a covenant not to execute on the judgment which the party allows to be taken against it. (See, e.g., Samson v. Transamerica Ins. Co. (1981) 30 Cal.3d 220 [178 Cal.Rptr. 343, 636 P.2d 32].) That is a fairly straightforward arrangement which allows the third-party claimant to prosecute a bad faith case in his or her own right.

In the settlement with Trustee Daff, however, there was no assignment. The accountants retained all their rights against their malpractice insurer. They did, of course, obtain a covenant not to execute, while allowing a stipulated $40 million judgment to be taken against them. But the accountants also agreed that they would pay to the Trustee the (by then reduced to) $250,000 remaining from the policy and they themselves undertake the task of filing a verified complaint against the malpractice insurer.

The sweetener in the deal was that the attorneys for Trustee Daff would represent the accountants in the contemplated bad faith action against the malpractice insurer. Accordingly, the Trustee’s attorneys would receive 43 percent of any recovery made within 10 days of trial or afterward, which would come off the top of the settlement. Of the remainder, 90 percent would go to Trustee Daff. The accountants would be left with 10 percent.

In practical effect, the settlement meant that the thousands of hours the Rus firm had spent suing a group of accountants with maybe $300,000 remaining in insurance money could now be put to potentially more profitable use representing the accountants against their malpractice insurer. Of course both Trustee Daff and the accountants signed waivers of the obvious conflict of interest.

*662 B. The Accountants (Represented by the Trustee’s Attorneys) Sue the Malpractice Insurer

The Rus firm prepared a bad faith complaint based on the theory that the malpractice insurer had acted in bad faith in denying coverage under the 1992, 1994 and 1995 policies. The malpractice insurer demurred. Instead of opposing the demurrer, the Rus firm simply redrafted the first amended complaint, making several minor technical changes to address the legal arguments in the demurrer and then submitted a copy of the draft to the accountants for review.

At this point the accountants and the Rus firm exchanged several letters leading to the Rus firm’s withdrawal. So the reader may know the flavor of each letter, we reproduce it in full in the margin after each summary.

1. Letter One: The Accountants to the Rus Firm.

The first letter, sent January 20, 1999, was from the accountants to the Rus firm. Its most prickly points were these:

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Cite This Page — Counsel Stack

Bluebook (online)
6 Cal. Rptr. 3d 612, 113 Cal. App. 4th 656, Counsel Stack Legal Research, https://law.counselstack.com/opinion/rus-miliband-smith-v-conkle-olesten-calctapp-2003.