Opinion
G030065.
10-31-2003
SHMUEL ERDE, Plaintiff and Appellant, v. EARL WALLACE et al., Defendants and Respondents.
Shmuel Erde, in pro. per., for Plaintiff and Appellant. Ruzicka, Snyder & Wallace and Earl R. Wallace for Defendants and Respondents.
* * *
Shmuel Erde argues the trial court erred in sustaining a demurrer without leave to amend on his claims against Attorney Earl Wallace and the Law Offices of Ruzicka, Snyder, Macsporran & Deveraux (collectively, Wallace) for fraud, negligent misrepresentation, and breach of an attorneys duty to an intended beneficiary. Erde contends Wallaces failure to disclose his clients intent to settle an underlying lawsuit constitutes an adequate basis for his claims. The trial court ruled the claims were barred by the applicable statutes of limitations. As an additional ground for demurrer, the court concluded Erde could not be an intended beneficiary of Wallaces clients putative desire to settle and, hence, Erde could not state claims for negligence, breach, or fraud. We do not pass on the courts statute of limitations rationale, but rather affirm on substantive grounds. As we discuss below, Wallace owed no duty to Erde, who was his clients adversary, and Erde cannot salvage his claims by casting them in terms of fraud instead of negligence.
I
FACTS AND PROCEDURAL BACKGROUND
"Because this matter comes to us on demurrer, we take the facts from plaintiffs [first amended] complaint, the allegations of which are deemed true for the limited purpose of determining whether the plaintiff has stated a viable cause of action. [Citation.]" (Stevenson v. Superior Court (1997) 16 Cal.4th 880, 885.)
In June 1995, Erde purchased a home in Los Angeles. It was only after he purchased the home that Erde attempted to assume the loan encumbering it. For nearly a year, he negotiated with the mortgagee, Residential Funding Corporation (RFC or Residential). But in April 1996, RFC foreclosed and took title to the property.
Erde and his family continued to live on the property. The real estate agent retained by RFC, Joyce Essex, encouraged Erde to submit an offer to purchase RFCs interest. Erde did so, but RFC had hired Wallace to initiate unlawful detainer proceedings. Wallace filed the unlawful detainer action, and Erde countersued. At the hearing, Erdes attorney and Wallace reached an oral agreement in the judges chambers that would allow Erde to purchase the property. But attempts to document the agreement were not successful. The parties, according to the first amended complaint on which this appeal is premised, "kept faxing each other incomplete offers, counteroffers, cancellations and revivals without producing a satisfactory final document which would accurately reflect the [oral] Agreement while incorporating additional clauses the parties wished to insert therein."
As alleged by Erdes amended complaint, "In frustration, on or about mid[-]August, 1996, RFC decided to generate a final global settlement agreement [the release] whereby RFC would manifest its intent to settle and dismiss all the outstanding disputes between the parties and sell the Property to [Erde]."
RFC directed Wallace to draft the release. Wallace, however, did not send it to Erde. According to Erdes amended complaint, Wallace "did not inform Plaintiff of RFCs agreement to settle the dispute with, and sell the Property to, Plaintiff." Erde vainly attempted to communicate with RFC through Wallace, but Wallace did not respond to numerous faxes from Erdes attorney. Erdes amended complaint alleges: "After RFC did not hear from Plaintiff, RFC concluded that Plaintiff was no longer interested in purchasing the Property and sold it to a third party, not a party to this action." Erde and his family were evicted.
Erde sued the real estate agent, Essex, claiming she breached duties owed to him as a "dual agent" for both RFC and him. He lost on summary judgment, which was affirmed on appeal to Division Seven of the Second Appellate District. The California Supreme Court denied Erdes petition for review.
Based on a declaration filed by Wallace in the suit against Essex, Erde concluded Wallace had intentionally concealed the release from him. Wallaces declaration stated: "Neither at the time I forwarded the Proposed Settlement Agreement to Essex, [n]or at any other time, did I expect Essex to forward the Proposed Settlement Agreement to Erde and/or [his counsel]. [& para;] Had Residential ultimately elected to have the Proposed Settlement Agreement forwarded to Erde or to [his counsel], this would have been accomplished by me, and not by Essex." Erde interpreted the declaration as an admission Wallace concealed the release and RFCs intent to allow Erde to purchase the property. Erde commenced this action against Wallace in Los Angeles, but the matter was later transferred to Orange County. The trial court sustained an initial demurrer by Wallace, with leave to amend. Erde filed a first amended complaint, Wallace again successfully demurred, the court entered a judgment dismissing the suit, and Erde now appeals.
II
DISCUSSION
A. Standard of Review
"An appeal from a judgment entered after the sustaining of a demurrer without leave to amend presents anew the question whether `"`it appears that the plaintiff is entitled to any relief at the hands of the court against the defendants," which is `a pure question of law. [Citations.]" (Schnall v. Hertz Corp. (2000) 78 Cal.App.4th 1144, 1152.) Put another way, we review the complaint "de novo to determine whether it contains sufficient facts to state a cause of action. [Citation.] In doing so, we accept as true the properly pleaded material factual allegations of the complaint, together with facts that may be properly judicially noticed." (G.L. Mezzetta, Inc. v. City of American Canyon (2000) 78 Cal.App.4th 1087, 1091.) The demurrer must be overruled if the plaintiff states a cause of action under any legal theory. (Barquis v. Merchants Collection Assn. (1972) 7 Cal.3d 94, 103.)
B. Erde Was an Adversary, Not an Intended Beneficiary
Erde recognizes the rule stated in Skarbrevik v. Cohen, England & Whitfield (1991) 231 Cal.App.3d 692: "`An attorney generally will not be held liable to a third person not in privity of contract with him since he owes no duty to anyone other than his client. . . ." (Id. at p. 701.) Erde contends he falls under a well-established exception to this rule for the intended beneficiaries of an attorneys work product. (See, e.g., Lucas v. Hamm (1961) 56 Cal.2d 583 [will beneficiaries entitled to sue testators attorney, notwithstanding lack of privity]; see Meighan v. Shore (1995) 34 Cal.App.4th 1025, 1035-1041 (Meighan) [collecting cases].) Under this exception, "liability is not dependent upon privity of contract, but the presence or absence of a clients intent that the plaintiff benefit from or rely upon the attorneys services . . . . Intended reliance may be express or implicit, obvious or subtle. In the final analysis, application of duty depends on the particular factual setting of the case." (Meighan, supra, 34 Cal.App.4th at p. 1041.)
A party qualifies as an intended beneficiary only when the client retained the attorney for "the principal purpose" of providing a benefit to that party. (Goldberg v. Frye (1990) 217 Cal.App.3d 1258, 1268 (Goldberg); see also 1 Mallen & Smith, Legal Malpractice (3d ed. 1989) § 7.11, p. 382 [inquiry is whether predominant purpose of attorney-client relationship was to provide legal services benefiting the plaintiff].) In Goldberg, the court observed that "[i]nnumerable instances in modern practice are encountered in which services performed by an attorney will benefit others besides his client." (Goldberg, supra, 217 Cal.App.3d at p. 1268.) The court nevertheless held: "The fact that third parties are thus benefited, or damaged, by the attorneys performance does not give rise to a duty by the attorney to such third parties, and hence cannot be the basis for a cause of action by the third parties for the attorneys negligence. In these cases the third parties are incidental beneficiaries, and `[a]n incidental benefit does not suffice to impose a duty upon the attorney. [Citations.]" (Id. at pp. 1268-1269.)
Here, the principal purpose for which RFC retained Wallace was not to benefit Erde. To the contrary, Erde was RFCs adversary. RFC sought to evict Erde in an unlawful detainer action and subsequent arms-length settlement negotiations between the parties did nothing to change their adversarial posture. Erde does not and could not maintain that settlement overtures transform adversaries into fiduciaries. To be sure, Wallace owed RFC a duty to communicate to it any settlement offers. (Rules of Prof. Conduct, rule 3-500 [duty to keep client "reasonably informed about significant developments"].) Rule 3-510 of the Rules of Professional Conduct, in fact, expressly provides that a member of the bar "shall promptly communicate to the members client: [¶] (1) All terms and conditions of any offer made to the client in a criminal matter; and [¶] (2) All amounts, terms, and conditions of any written offer of settlement made to the client in all other matters." (Italics added.) But Erde cites no authority that such a duty to communicate settlement terms runs from the attorney to the clients adversary.
The absence of such authority is no accident. Public policy militates against lightly extending any attorney duty to third parties, let alone a clients adversaries. Chief among the policy concerns is a clients right to his lawyers undivided loyalty. A lawyers client should be protected "from even the possibility of less than total devotion to his interests by the attorney of his choice." (Pollack v. Lytle (1981) 120 Cal.App.3d 931, 947 (dis. opn. of Johnson, J.), maj. opn. disapproved in Beck v. Wecht (2002) 28 Cal.4th 289, 298.) Interposing a duty to the clients adversary cannot help but inject "undesirable self-protective reservations into the . . . attorneys counseling role, thereby diminishing the quality of legal services received by the client [citation] and . . . jeopardiz[ing] the policy of encouraging confidence and preserving inviolate the attorney-client relationship." (Kroll & Tract v. Paris & Paris (1999) 72 Cal.App.4th 1537, 1542.)
Here, imposing a duty to communicate settlement intentions to an adversary would destroy any semblance of exclusive client loyalty and would seriously risk disclosure of client confidences, given the eminently variable and changeable nature of a clients desire to settle. An acute problem with Erdes position is that it provides no rational guidance on when the clients state of mind regarding settlement requires disclosure. Requiring the attorney to do so at the slightest inkling of an intent to settle would interfere with the attorneys ability to counsel the client on the legal merits and implications of that choice. Yet affixing the duty "only" when the clients intent becomes "firmly entrenched" or some other inevitably nebulous point would leave the attorney in doubt as to his exposure.
The Supreme Courts observation in Goodman v. Kennedy (1976) 18 Cal.3d 335, 344, is applicable here: "The attorneys preoccupation or concern with the possibility of claims based on mere negligence (as distinct from fraud or malice) by any with whom his client might deal `would prevent him from devoting his entire energies to his clients interests [citation]. The result would be both `an undue burden on the profession [citation] and a diminution in the quality of the legal services received by the client. [Fn. omitted. Citation.]" We decline to find the duty Erde requests. "Absent duty there can be no breach and no negligence." (Goldberg, supra, 217 Cal.App.3d at p. 1267.) Erdes claims founded in negligence for breach of a failure to communicate settlement terms to an adversary have no merit.
C. Erde May Not Salvage His Claims By Casting Them in Terms of Fraud
Relying on the recent case, Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003) 107 Cal.App.4th 54 (Shafer ), Erde argues Wallace had a duty to disclose his clients intention to settle in order to avoid perpetrating a fraud. The Shafer court reaffirmed the longstanding principle that "`[a] lawyer communicating on behalf of a client with a nonclient may not . . . [¶] . . . knowingly make a false statement of material fact . . . to the nonclient . . . ." (Id. at p. 69, ellipses in original, quoting Rest.3d, Law Governing Lawyers, § 98, p. 58.) ButShafer is readily distinguishable.
There, the plaintiff homeowners prevailed in arbitration against a remodeling contractor and looked to the contractors insurance carrier for payment. In a series of letters to the plaintiffs, the carriers attorney allegedly misrepresented the scope of insurance coverage. The court appellate court held plaintiffs had stated a cause of action against the carriers lawyer, explaining the attorney "had a duty not to make fraudulent statements." (Shafer, supra, 107 Cal.App.4th at p. 75.) Here, in contrast, Erdes complaint alleges no misstatement by Wallace, but rather seeks recovery for the failure to communicate RFCs alleged desire to settle. But Erde may not salvage his claims by casting them in terms of affirmative fraud rather than negligence.
"Fraud is an intentional tort, the elements of which are (1) misrepresentation; (2) knowledge of falsity; (3) intent to defraud, i.e., to induce reliance; (4) justifiable reliance; and (5) resulting damage." (Cicone v. Urs Corp. (1986) 183 Cal.App.3d 194, 200.) Here, even broadly construing Erdes complaint, the first element is missing. True, the failure to disclose facts may in some circumstances subject one to liability "as though he had represented the nonexistence of the matter that he has failed to disclose . . . ." (Restat.2d Torts, § 551(1).) But stated in full, this rule provides: "One who fails to disclose to another a fact that he knows may justifiably induce the other to act or refrain from acting in a business transaction is subject to the same liability to the other as though he had represented the nonexistence of the matter that he has failed to disclose, if, but only if, he is under a duty to the other to exercise reasonable care to disclose the matter in question." (Ibid., italics added.) Civil Code section 1710 embraces this concept by defining deceit as, among other things, "the suppression of a fact . . . by one who is bound to disclose it . . . ." (Italics added.) As we have discussed, however, no duty exists for a lawyer to disclose to an adversary his clients intention to settle.
Similarly, viewing settlement negotiations as a business transaction, a rule requiring full disclosure is of no aid to Erde. The Restatement Second of Torts, supra, section 551(2)(e), provides: "(2) One party to a business transaction is under a duty to exercise reasonable care to disclose to the other before the transaction is consummated . . . [¶] . . . [¶] facts basic to the transaction, if he knows that the other is about to enter into it under a mistake as to them, and that the other, because of the relationship between them, the customs of the trade or other objective circumstances, would reasonably expect a disclosure of those facts." Here, again, the relationship between Erde and RFC was that of adversaries. Nothing about the customary interactions between adversaries and their lawyers or the objective circumstances of opponents would lead one to reasonably expect the attorney for one side to disclose his clients confidences to the other side. While the client might at its discretion direct the attorney to settle, the duty to fulfill the clients wishes flows to the client and not to his adversary. The trial court did not err in holding Wallace owed no duty to Erde.
III
DISPOSITION
The judgment is affirmed. Respondents are entitled to their costs for this appeal. (Cal. Rules of Court, rule 27.)
WE CONCUR, OLEARY, ACTING P. J. and IKOLA, J.