NEW CASES
On this page we list cases to be discussed in the second edition. The brief case notes
presented here are not intended to be complete: their only purpose is to alert readers
to the existence of these cases.
This page was last updated on 4/9/10
1921: Smith
v. Blodget
(1921) 187 Cal. 235
Relevant to:
1:13 Agents and
Principals
1:31 Vicarious
Liability
3:30 Duty to
Account
Appeal from Judgment of Superior Court
Frank H. Smith, Jr. sued defendants Blodget (a
real estate agent), Commins, Fickeissen,
and Potter to recover profits on a real estate deal. On July 15, 1918, Plaintiff entered into a
short written agreement with the owners of a parcel of land in Kern County,
which gave him "an option on our land [described] to handle & sell for
us at a net price to us of $100 per acre." The parcel in question was part of a larger
tract, and any prospective buyer would naturally want to purchase all the
parcels in that tract or none of them.
On August 9, 1918, the defendant Blodget
persuaded plaintiff to execute an assignment of his option and deliver it to Blodget, who paid nothing for it. Blodget told
plaintiff at the time that the only purpose of the assignment was to give Blodget written evidence of his authority to act for Smith
and the sellers in negotiations with a particular prospective purchaser named
Gross. It turned out that there was no
prospective purchaser named Gross and in fact, Blodget
quickly "flipped" the option to a Mr. Graham who "flipped"
it quickly to defendant Potter, who then arranged the sale of this parcel -
along with several other parcels - to the Chanslor
Canfield Midway Oil Company at $125/acre.
There was no evidence that Potter knew of Smith or the circumstances of
the assignment to Blodget, but he was a business
associate of the defendant Fickeissen. After paying the owners the $16,000 which
represented their release price ($100/acre), the defendants kept about $3945
for themselves: they did not tell Smith
about the sale and they did not give him any of the money.
Smith sued
on two theories: money had and received, and accounting. The case was tried solely on the second
theory yet the court rendered judgment against all four defendants - even
though it was only Blodget who colorably
had a direct fiduciary relationship with Smith.
The
opinion begins with a long consideration of whether the written agreement
between Smith, Jr. and the owners of the land was an "option" or an
"agency agreement." This
general topic is discussed at length in Sec. 1:33 of the text. The trial court found it was an option - and
this conclusion, which was a mixed conclusion of law and fact, would not be set
aside on appeal. If it were merely an agency agreement, then Smith would be entitled
to nothing more a reasonable commission on the sale, and all the remaining
proceeds would be due to the owners. On
that interpretation, the reference to $100/acre would be understood merely as a
limitation on the agency: "You can sell if you get at least $100/acre, and
not otherwise." But if it were an
option, then if Smith could sell for more than $100/acre, he would be entitled
to keep the excess. This was Smith's
contention and the trial court found for him and that the defendants owed him
the full $3945 which represented the excess.
-- There was no doubt that the assignment of the option to Blodget, effected in August, was a
mere agency and that Blodget owed fiduciary duty
towards Smith under that assignment.
The
defendants argued that a judgment on a cause of action for accounting lies only
against the fiduciary (here, Blodget) and not against
the other defendants who may have worked with him (Commins,
Fickeissen, and Potter). But the Supreme Court held that an action for
an accounting lies against a breaching fiduciary, and
that the remedy is fundamentally equitable so that once a court has taken
jurisdiction it can grant further relief as "necessary to complete
justice." Third parties who
assisted the defendant Blodget to violate his obligation
to his principal "are equally liable for the consequences of the
conspiracy, regardless of the extent of their participation or the share of profits obtained by
them." The Court recognized that
Potter, who appears to have come into the picture after Blodget's
initial fraud was perpetrated on Smith (the fraud consisting in the false
statement that he could sell the property to Mr. Gross - who did not really
exist), hovered at the outer limits of the conspiratorial circle. Nevertheless, the evidence was held
sufficient to include him in the joint and several liability group.
See
discussion in the text, at the end of Sec. 1:31, of Gaver v. Early (1923) 191 Cal. 123, in connection with the general
proposition that A may be vicariously liable for B’s breach of fiduciary duty,
even if A received no pecuniary benefit from it.
1938: McMurray v. Sivertsen (1938) 28 Cal.App.2d 541
Relevant to Sec. 1:19a, kinship as a source of fiduciary duty: the mere relationship of parent and child, standing alone, does not give rise to fiduciary duty. See the many cases cited in the book standing for the proposition that other family relationships, standing alone, do not give rise to fiduciary duty.
1992: Merenda v. Superior Court (1992) 3 Cal.App.4th 1
Relevant to Secs. 5:9-5:13, damages and particularly, the availability of punitive damages: Assume that the defendant lawyer committed malpractice and negligently failed to pursue plaintiff's case against a third party (the underlying defendant). Assume also that had the case been properly pursued, plaintiff would have recovered both compensatory and punitive damages from the underlying defendant. Question: may the plaintiff recover these "lost" punitive damages from the lawyer defendant? This court held that the plaintiff may recover their value as an element of compensation, even though the lawyer himself did nothing for which punitive damages might be assessed. The discussion is an interesting one, worth reading just for the light it sheds on the theory of damages in general: it is not specifically related to fiduciary duties. See Piscitelli v Friedenberg below (2001), for a contrary holding.
In this case, the plaintiff also sued the lawyer for emotional distress occasioned by the fumbling of her case against the underlying defendant. Held: emotional distress damages against the lawyer were not available, because they were not "proximately caused" by the attorney's negligence. Here there is a very interesting discussion of the interrelationship of the notions of duty and proximate cause (as distinct from causation in fact).
The reasoning of this case on the key question was disapproved in Ferguson v. Lieff, Cabraser & al., (2003), infra.
1995:Parsons v. Tickner (1995) 31 Cal.App.4th 1315
Relevant to 7:13, delayed discovery of cause of action as tolling the statute of limitations. Daughter of a composer has been receiving royalties from publishers of her father's music for many years. The composer died in 1972. Pursuant to agreements entered into by the executrix of his estate with the publisher of a catalog of his songs (the "Wait & See catalog") the estate received a portion of the royalties from sales of the catalog. In 1985, as part of a general settlement of disputes over her father's estate, Polly Parsons, plaintiff here, agreed to take 50% of the royalties payable to her father's estate, the executrix (who was her stepmother) receiving the balance. But in 1991, plaintiff learned that the composer had never executed any documents transferring rights in the Wait & See catalog to the defendants. She initiated suit in 1991 for an accounting. -- Defendants demurred on the ground that the action was time-barred, and the trial court agreed. But the court of appeal reversed, holding that this type of cause of action does not accrue until the facts constituting the claim are known to plaintiff. Neither plaintiff nor the executrix of the estate were required to disbelieve the defendants' assertion that they owned the rights to the Wait & See catalog; and so their claim was not time-barred.
This case is very similar to the story, "The Three Who Were Betrayed", found at pg. 1520 of the book, and should have been included in the case appendix. It will definitely be included in the 2d Edition.
1998: Field v. Century 21 Klowden-Forness Realty (1998) 63 Cal.App.4th 18
Relevant to Sec. 7:10 and following, regarding statutes of limitation. Appeal from judgment after jury verdict based on the idea that the court should have held the claims barred by the 2-year statute of limitatons in Civil. Code Sec. 2079.4. Affirmed: the court held that 2079.4 applies to actions by purchasers against brokers who represent them but not exclusively and when the broker represents the buyer exclusively, that 2-year bar does not apply and instead, the other applicable statutes apply, and in this case, the plaintiff's cause of action was kept alive longer than the 2-year period on which the defendants relied.
1996: Cross v. Bonded Adjustment Bureau (1996) 48 Cal.App.4th 266
Relevant to Sec. 1:18, other relationships in which fiduciary duty arises, because it discusses the issue of whether a collection agency owes fiduciary duty to the judgment creditor (and holds that it does) and 5:29, Estoppel to plead statute of limitations (a "defensive" use of fiduciary duty), analyzing the "delayed discovery" rule in this setting. The opinion is a good illustration of how a determination of the existence of a fiduciary duty can affect the court's handling of the other issues in a case. Appeal from judgment after demurrer sustained without leave to amend.
1999:Nelson v. Anderson (1999) 72 Cal.App.4th 111.
Relevant to individual vs. derivative actions [see book, Sec. 7:5].
Also includes a discussion of available costs and attorney's fees.
2000:Dickson, Carlson & Campillo vs. Pole (2000) --- Cal.App.4th ---
Relevant to Sec. 4:1, termination of partnership.
Fine opinion pointing out the distinction between the defense of "unclean hands" and the principle that "one who comes into equity must do equity" - which are often confused. The failure to "have done equity" before you get to court is not a complete defense to your action, but having "unclean hands" may be. This case involved the breakup of a law firm and the taking by some of the departing partners of some of the clients. Issues reminiscent of those discussed in Jewel v. Boxer (1984) 156 CalApp.3d 171 [see Sec. 4:1 of book] arose here: who was supposed to do the work to finish out the cases-in-process at the time of dissolution? Who was supposed to get the fees for them? The trial judge found that plaintiffs had breached their fiduciary obligations towards Pole as to some of the unfinished business of the firm. However instead of requiring the plaintiffs to "do equity" as a condition of making a recovery, the trial court found that they had "unclean hands" and denied them all recovery. Under the facts of this case, this was error.
2000:GAB Business Services, Inc. v. Lindsey & Newsom Claim Service (2000) 83 Cal.App.4th 409
Relevant to Sec. 7:6, the Demurrer.
Discussion of "two kinds" of fiduciary duties: those imposed by law and those undertaken by contract. [A distinction which is slightly clumsy: if one undertakes a joint venture by agreement, and the law imposes a duty of preference as a result, which duties are which?] Discusses the notion that a corporate officer has fiduciary duty because he has "control" of the corporation and rejects it: something less than control is required to impose a fiduciary duty, but mere status as an officer is not enough. Points out that the mere fact that one is nominally an officer of a corporation does not mean that he has fiduciary duties: one might call the head of the mail room "VP - Mail" but that would not impose fiduciary duties on him. [Why not? Why give him the officer title if the purpose is not to impose such duties on him?] But where the officer has discretion to exercise (and who does not have some discretion - a peppercorn's worth?) and participates in management, he has fiduciary duty as a matter of law.
The facts in this case are reminiscent of those in Bancroft-Whitney vs. Glen (1966) 64 Cal.2d 327, discussed in the book and discussed also in this opinion. An officer of GAB Services left and took 17 employees with him to a competitor, Lindsey & Newsom. The trial court told the jury that the question of whether the departing officer had fiduciary duty towards GAB was one of fact. See discussion in book at Secs. 1:21a [confidential relationships], 2:13 [whether attorney-client relationship exists a question of fact]; 7:6 [discussing the demurrer].
2001:Piscitelli v. Friedenberg (2001) 87 Cal.App.4th 953
Related to Sec. 5:13, punitive damages, dealing with the question whether a plaintiff may sue his lawyer for "lost punitive damages" (a sum equivalent to what the plaintiff might have recovered against the underlying defendant, but for the lawyer's negligence) this Court disagreed with the reasoning of Merenda, supra, and held No, reasoning that punitive damages are not compensation for loss but are rather in the nature of a fine assessed. Their purpose is not to compensate the plaintiff but to punish the wrongdoer. Principally for this reason, the court disagreed with the reasoning of Merenda. The case also includes an interesting discussion of proximate cause as distinct from cause-in-fact, and duty.
Merenda was in fact disapproved by our Supreme Court in Ferguson v. Lieff, Cabraser, &c, see below in (2003)
2001: American Equity Insurance Co. v. Beck (2001) 90 Cal.App.4th 162
Related to Sec.2:9a, actual v. potential conflicts, this case deals with the tension between a lawyer's fiduciary and professional duty towards his client, and his fiduciary duty towards his co-counsel. As the text points out, the holding of Pollack v. Lyttle (1981) 120 Cal.App.3d 931, to the effect that co-counsel do owe each other fiduciary duty with respect to the litigation in which they are co-counsel, is contrary to the holding in Saunders v. Weissburg & Aronson (1999) 74 Cal.App.4th 869, which held that co-counsel cannot owe each other fiduciary duty. This case wrestles with the issues and ends up pinned on the mat: its analysis is, like that in Saunders, clumsy and unpersuasive. See the Comment to the Saunders opinion in the Case Appendix.
Note: See Musser v. Provencher (2001) 90 Cal.App.4th 545 disagreeing, in fn 5, with the main case and holding that an attorney might be entitled to indemnity from co-counsel when she is sued by their common client for malpractice to which both counsel contributed. See also Gursey, Schneider & Co. v. Wasser, Rosenson & Carter, et al., discussed below.
NOTE: REVIEW WAS GRANTED in both of these cases, by Orders filed Sept. 19, 2001. On June 27, 2002, the Supreme Court handed down its opinions in both cases. In Musser v. Provencher, supra, it held: [a] that there is no policy barring co-counsel (or concurrent counsel) from suing one another for indemnification of legal malpractice damages and [b] that there is no policy against allowing insurers of attorneys sued for legal malpractice to be subrogated to the insured attorney's indemnity claims against concurrent counsel or cocounsel. And in Beck v. Wecht, et al., the Court held that it would be contrary to public policy to allow co-counsel to sue each other on the theory that they have a fiduciary duty to protect each other's prospective interests in a contingency fee. The Court recognized that in this particular case, the policy factors might not apply; but it preferred to establish a "bright line" rule rather than to resolve the question on a case-by-case basis.
2001: Jones v. Wagner (2001) 90 Cal.App.4th 466.
Relevant to discussion in Secs. 3:5 and 3:8, regarding the extent to which the fiduciary must "bend over backwards" to respect the interests of the cestui. This case involves a partnership dispute between the Joneses and the Wagners over their purchase of a beachfront townhouse in Oxnard. The Joneses were not able to "keep up" with the Wagners, and failed to make the financial contribution called for in their original agreements. Ultimately the Wagners purchased the partnership property at a foreclosure sale attended by the bank, the Joneses and the Wagners. Now the Joneses sued the Wagners for "constructive fraud" - which action was really a claim for breach of fiduciary duty. The court decided that the Wagners had done nothing wrong: they had agreed to contribute just 50% of the partnership capital and when the Joneses failed to contribute their 50%, the Wagners had no obligation to help them maintain their partnership interest without paying for it.
2001:California Ironworkers Field Pension Trust, etc., et al. v. Loomis Sayles Company, etc. et al. (2001 DJAR 8221, filed Aug. 6, 2001, U.S.C.A., 9th Circ.)
Relevant to Sec. 5:B, computation of damages for negligent breach of fiduciary duty. The case was brought by three employee benefit trust funds against their investment managers for breach of fiduciary duty by mismanagement. The trial court found that the investment managers had breached their duties towards one of the plaintiff trusts by investing too much of its assets in risky "inverse floaters" which are a kind of collateralized mortgage obligations (CMO's). It would have been all right to invest some of the trust's money in inverse floaters, but not as much as the money managers actually did invest. The district court calculated the damages as the difference between what the portfolio would have earned if all the money invested into the inverse floaters had been invested in fixed income assets over the time period in question. The Circuit Court reversed on the measure of damages holding that the damages should be limited to what would have been earned if an appropriate. or permissible, amount had been invested into the inverse floaters and the rest had been invested in fixed income assets. In other words, the damages should be based on the amount erroneously invested, not on the whole amount invested into the inverse floaters.
The law of fiduciary duties is developed mainly in state courts, but this case is interesting because of its discussion of the fiduciary duties in general, and because of its clear and concise holding.
2001: Gursey, Schneider & Co., et al. v. Wasser, Rosenson & Carter et al. (2001) 92 Cal.App.4th 15
In a complicated marital dissolution action, wife was represented by Wasser, Rosenson &c, and Gursey, Schneider were retained as forensic accountants. A marital settlement was negotiated and implemented, but then wife discovered that her husband, a wealthy and successful producer of TV shows, had failed to disclose substantial assets which should have been subject to division. She tried to reopen the settlement, but the trial court denied her motion and observed that her remedy was a malpractice action against her former lawyers and accountants.
The wife sued the Wasser firm, the matter went to arbitration, and wife lost. She then sued the forensic accounting firm, Gursey, Schneider, and had better luck: she got an award of nearly $2.5 million. The accounting firm now sued the law firm for indemnity.
The law firm demurred to the complaint on the grounds that public policy bars indemnity actions against lawyers by non-clients. The trial court sustained the demurrer but the court of appeal reversed, holding that the action could go forward. A long opinion, with a strongly voiced dissent, dealing with the issues traversed in American Equity Insurance Co. v. Beck.
The Supreme Court granted review pending its decision in Musser v. Provencher (2002) 28 Cal.4th 274, in which it held definitively that there is no legal bar to a suit for indemnity by co-counsel or concurrent counsel. Once that opinion issued, the opinion in this case became final.
2001:Marriage of Duffy (2001) 91 Cal.App.4th 923
New case dealing with the fiduciary duty of spouses with respect to the community property. Relevant to Secs. 1:14 and 3:7. Husband managed the community's investments. Some of the investments went very bad. Wife now claimed that husband breached his fiduciary duty towards her by failing to disclose how he was handling the failed investments. The trial court held that husband had breached his fiduciary duty of disclosure and awarded wife her share of the value the community assets would have had if the husband had not made the soured investments. The court of appeal reversed, holding that the evidence did not support the finding that husband had breached his fiduciary duty of disclosure. The court of appeal then went on to say that the fiduciary duties of spouses with respect to the community property do not include a duty to manage the property prudently and are different from the fiduciary duties owed by non-spouse partners towards each other.
COMMENT: One question springs to mind as we read the opinion: Even if husband had breached his fiduciary duty of disclosure towards wife, how did that lead to her damage? If he had told her all about how he was going to invest the money, was wife ready to allege, and then prove, that she would have prevented him from dealing with the funds that way? It appears not, and this may have been a much simpler way to dispose of the case than the way actually taken by the court. However, the opinion suggests how the scope of the fiduciary duties may vary in accordance with the nature of the underlying relationship and with legislative decisions about what kinds of actions ought to be allowed to come to court.
Nahman v. Jacks (In re Jacks) (Aug. 21, 2001, BAP No. CC-00-1032-BMoP, 2001 DJAR 10063)
New case dealing with the dischargeability of debts for breach of fiduciary duty: see Sec. 4:25 of the book.
Nahman obtained a judgment against Zeus Medical Corporation and its alter ego, the debtor, Jacks. He then brought an action to have a determination that the debt was nondischargeable, since it arose from the debtor's fraud, defalcation while acting in a fiduciary capacity (i.e. as person in control of an insolvent corporation), and for willful and malicious injury (consisting of the debtor's having transferred corporate assets to himself freely and thereby rendered the corporation insolvent). Reviews and affirms the basic principle that the exception to discharge spelled out in 11 USC Sec. 523(a)(4) of the Bankruptcy Act referring to "acting in a fiduciary capacity" refers only to actual trusts - not to constructive trusts. However there is a line of cases holding that when a corporation is insolvent, all of its assets become a trust fund for the benefit of all its creditors, and this sort of trust does come within the purview of Sec. 523(a)(4). The issue in this case was, When did the corporation become insolvent? For at that instant, the debtor was "acting in a fiduciary capacity" for dischargeability purposes. The case was sent back for further proceedings.
2002: Marriage of Friedman (2002) 100 Cal.App.4th 65.
Relevant to Sec. 3:15, fiduciary scrutiny and undue influence. Wife tried to invalidate a postnuptial agreement that she and her husband signed. Arguing that such agreements are presumed to have been obtained through the exercise of undue influence, she contended that the agreement should have been invalidated. She relied for this proposition on Marriage of Haines (1995) 33 C al.App.4th 277, discussed in the Appendix and mentioned in the book; which discusses that presumption. But the Court here held that the presumption, though it arose, was disspelled by the evidence in this case.
The case is relevant also to Sec. 2:9a, discussing situations in which one lawyer represents dual interests. In this case, wife was a lawyer and represented herself when the postnuptial agreement was signed. She now argued under the doctrine of Flatt v. Superior Court (1994) 9 Cal.4th 275, that the husband's lawyer was involved in dual representation, and this voided the agreement. The Court disagreed, citing Klemm. v. Superior Court (1979) 75 Cal.App.3d 893, for the proposition that any conflict was merely potential and not actual, and was in any event waived. It mentions also Marriage of Egedi (2001) 88 Cal.App.4th 17, in which husband was unable to avoid the effects of his signed waiver, and the marital settlement agreement he had signed was held to be enforceable.
2002: Saline v. Superior Court (2002) 100 Cal.App.4th 909
This case is not relevant to any particular section of the book, but deals with the right of a corporate director to inspect corporate documents. Corp. Code Sec. 1602 says that, "Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind ....", is not quite absolute - but almost. Since Havilek v. Coast-to-Coast Analytical Services, Inc. (1995) 39 Cal.App.4th 1844, a limitation has been read into this right: the director may not abuse the right of inspection, by using it to damage the corporation. An example would be a director who seeks access to valuable corporate trade secret documents, for the purpose of delivering the information to a competitor: the court would be justified in placing limitations on such a director's right of inspection.
In this case, Saline was trying to gain access to corporate documents and the other directors refused this access to him. He brought an action to enforce his inspection rights and after a hearing, the trial court ordered that he should have access to the 14 categories of documents he was trying to see, but that neither he nor his counsel should discuss the documents with anyone but themselves and the other directors of the corporation. Saline sought a writ to vacate this order, claiming it was an invalid prior restraint.
The Court of Appeal held that the showing necessary to impose restrictions under Havilek is a strong showing which was not made in this case. "While we agree withy the principle set forth in Havilek, it should only be applied in extreme circumstances where a preponderance of the evidence establishes the director's clear intent to use the documents to commit an egregious tort - one that cannot be easily remedied by subsequent monetary damage - against the corporation." The mere fact that the director is "hostile" to the majority of the Board, is not enough: So Saline was clearly entitled to the records. It was also held that the court could not impose a prior restraint on Saline. Such restraints should not be analyzed as "gag orders" which are sometimes imposed on litigants during a trial: in a transactional setting like this, there is no justification for such orders. The corporation's only remedy would be to sue Saline and his counsel for violation of their fiduciary duty to maintain the information in confidence - if such a violation ever occurred.
2002: Everest Investors 8 et al. v. Whitehall Real Estate Limited Partnership XI (2002) 100 Cal.App.4th 1102
Relevant to Sec. 1:31. Plaintiffs were limited partners in various partnerships managed by McNeil. They had sued the general partner for various breaches of fiduciary duty in 1995. In 1998, partly to settle the pending litigation, McNeil sold the partnership assets to Whitehall and distributed pro rata shares to plaintiffs. Plaintiffs sued again here, alleging that the selling price was deliberately deflated in order to reduce the value of their partnership interests. They sued the general partner for breach of fiduciary duty and sued Whitehall, the buyer, for conspiring with the general partner to breach the duty.
The Court of Appeal holds here that Whitehall, being neither an agent nor agent of McNeil,"lacked capacity" to breach the fiduciary duty since it was not itself a fiduciary and therefore, could not be liable to plaintiff on a conspiracy theory.
The case is not yet final, and the Court itself (per Miriam Vogel, J.), invited Supreme Court review.
COMMENT. Review appears to have been denied. The opinion seems to blur the distinction between "conspiracy" and "vicarious liability". To say that Whitehall could not "conspire" to breach McNeil's fiduciary duty does not resolve the critical issue: could it still be vicariously liable? If in fact the plaintiff proves that McNeil deliberately sold the partnership assets to Whitehall at prices below their actual value, and that Whitehall knew the prices were deliberately and artificially low (so that it was not an "arm's length purchaser" or a "BFP") why in the world would it need "capacity" in order to be held liable to the limited partners on a vicarious liability theory?
2003: Richelle L. v Roman Catholic Archbishop of San Francisco (2003) 107 Cal.App.4th 257
Relevant to Sec. 1:21, Trust and Confidence. Parishioner sued the Archdiocese for injuries sustained as a result of a sexual relationship claimed to have been initiated by a priest in the employ of the archdiocese. The trial court sustained the demurrer of the Archdiocese on free exercise grounds: it felt that in order for the Superior Court to supervise the way priests carried out their religious duties it would have to become mpermissibly entangled in religious issues and this would be a violation of the free exercise clause. The parishioner appealed, and the Court of Appeal held that although there are some cases in which the courts can impose liability on a pastor for violation of his fiduciary duty towards his parishioners, the circumstances here did not justify such intervention; and it upheld the trial court's order.
The case includes a lengthy and learned discussion of whether a priest does in fact owe fiduciary duty towards his parishioners, and of the distinction between "confidential relationships" and "fiduciary relationships". In this connection, it quotes the text at length, in its fn. 6.
2003: Wolf v. Superior Court (Disney, RPI) (2003) 106 Cal.App.4th 625) (CA2d, Divn. 7, Feb. 25, 2003, as Modified March 20, 2003)
Relevant to Chapters One and Three, When Fiduciary Duty Arises; What the Duty entails.
Gary Wolf wrote a book and sold Disney the right to make a movie based on the characters in the book. Disney did not promise to make a movie, but it did promise that if it decided to make a movie based on those characters, it would pay Wolf 5% of the gross receipts. Later, Disney decided to make a movie after all, and it made Who Framed Roger Rabbit - a highly successful film. Then it failed to make a proper accounting to Wolf, and in the accounting it did give, it gave false and misleading information. Wolf sued for accounting, and for breach of fiduciary duty. The trial court sustained Disney's demurrer to the fiduciary duty cause of action, holding that the written contract between Disney and Wolf did not create a fiduciary duty, as a matter of law. Amazingly, the Court of Appeal affirmed on this point.
The majority opinion (over a strong dissent) held that in an otherwise arms-length relationship, the mere fact that one party undertakes to account to the other for a share of a contingent future revenue stream, does not create a partnership, joint venture, or other fiduciary relationship and therefore it does not give rise to any fiduciary duty. According to the majority, the plaintiff's remedy is in the accounting - which it views as a contractual remedy. But it does hold that in the accounting, Disney has the "burden of proof".
Comment: The opinion seems to be clearly in error, and demonstrates the extent to which our courts have failed to develop a coherent approach to the law of fiduciary duties. The duty to account does not CREATE a fiduciary duty: as is pointed out in Chapter Three of the book, it is a NECESSARY CONSEQUENCE (in this case) of Disney's having undertaken to deliver 5% of the gross revenues to Wolf if it decided to exploit his intellectual property. Nor is it necessary to have a fiduciary relationship in order to have fiduciary duties: as is pointed out in Chapter One, fiduciary duty may be undertaken by contract express or implied, and although fiduciary relationships do give rise to fiduciary duties, they are not the only source of such duty.
2003: Ferguson, et al. v. Lieff, Cabraser, Heimann & Bernstein, LLP et al. (2003) 30 Cal.4th 1037
Relevant to Secs. 5:9- 5:13, and the availability of punitive damages. This was a mass tort action in which the defendant law firm, representing a mandatory, non-opt-out class with respect to punitive damages, settled the action on terms which involved the dismissal of the punitive damage claim. Plaintiff members of the class now sue for "lost punitive damages". Plaintiffs relied on Merenda v. Superior Court (1992), supra, whose reasoning on the issue had not been followed in Piscitellli v. Friedenberg (2001), supra, The Supreme Court settled this split among the lower courts by agreeing with the reasoning of the Piscitelli court: punitive damages allegedly lost through an attorney's negligence are not recoverable as an element of damage in the malpractice action.
Comment: The Court launched into a very long discussion about the purposes of punitive damages, and how it would be contrary to public policy to allow plaintiffs to recover from their lawyers damages which are intended to be deterrents to the wrongdoers whom the lawyers were suing. The Court also discussed the inherently speculative nature of such damages in a malpractice context: who can say what the jury in the underlying action would have awarded as punitive damages? -- It seems that the general discussion is confusing because we can imagine a case in which a lawyer, through negligence, might lose his client's punitive damage award but where none of the policy issues discussed by the Court would be implicated. Suppose for instance that the jury in the underlying action did render a punitive damage award, but the lawyer failed to reduce the jury's award to judgment - or simply stipulated with opposing counsel to waive the punitive damages. In such a case, the client should be able to recover the lost punitive damages in a malpractice action, should he not? -- This case could have been decided on the "speculative damages" basis alone, and the holding might then have been clearer.
2003: BGJ Assoc., LLC v. Wilson (2003) (--- Cal.App.4th ---, Dec. 3d, 2003, CA2d, Divn. 4, Opinion by Epstein, acting P.J.)
.Relevant to Secs. 3:13-3:14, re conflict of interest - setting the interests of the cestui ahead of the fiduciary's own interests; to Sec. 2:10 regarding the voidability of transactions obtained through the exercise of undue influence, and Secs. 6:5-6:6, regarding the application of these principles to attorneys and clients. In this case, an attorney entered into a business transaction with his client and the client later decided to withdraw from the transaction. The attorney sought to enforce the deal, but the court rebuffed his efforts, relying on Rule of Prof. Conduct 3-300, and Probate Code 16004, and Gold v. Greewald (1966) 247 Cal.App.2d 296, discussed in Sec. 5:28, the defensive use of the fiduciary duty.
2005: Thomas Persson v. Smart Inventions, Inc. (2005) 125 Cal.App.4th 1141.
Relevant to Secs. 1:23 [alternative covering legal relationship]; 4:1 [termination of the relationship versus termination of the duty]; 1:21 [confidential relationship, as discussed in Rochelle, supra].
Two men, Nokes and Persson, start a business to market household consumer products, operate it as equal partners for several years and then incorporate it, each becoming a 50% shareholder. The business falls on hard times - revenues decrease, losses rise - and the relationship between the former partners deteriorates. Finally Persson agreed to be bought out of all his share holdings by Nokes: they agree on a price, and they have their lawyers draw up the papers which include general releases. Nokes pays Persson the price; the shares are conveyed - and this would have been the end of the story but for the fact that in the course of negotiating the price, Nokes failed to disclose the existence of a new product in the pipeline, the "TapLight", which was destined to generate huge profits. Persson sued both Nokes and the corporation for fraud, breach of fiduciary duty, declaratory relief, and accounting. (There was a cross-complaint which does not concern us.)
The trial court found that Nokes had a fiduciary duty towards Persson arising out of his role as a "de facto partner", and arising also out of his voluntarily assuming to give Persson full and accurate information about the condition of the business in order to aid him in arriving at a price for the buyout. The court of appeal reversed these findings: (1) shareholders do not owe fiduciary duty towards each other, as a general rule, and when the parties decided to transmute their partnership into the corporate form, their duties as partners terminated. (2) The fact that Nokes undertook to inform Persson about the condition of the business did not give rise to a fiduciary relationship, nor to a "confidential" relationship, but rather gave rise only to a duty to make full disclosures. Having told Persson about certain aspects of the business, Nokes was under a duty to disclose the existence of the TapLight project - otherwise his disclosures were misleading.
In analyzing whether Nokes was in a "confidential" relationship with Persson, the court found that there was no element of "vulnerability" - such as was discussed in Richelle, supra: When two equal parties negotiate for a buyout, no fiduciary relationship arises. "The evidence,at most, is that Nokes undertook to tell Persson everything about the current state of the business, and Persson trusted him to do so. If that were sufficient to create a fiduciary obligation "to act with the utmost good faith for the benefit of the other party" (Bacon v Soule, supra, 19 Cal.App. at p. 434), virtually every purchase and sale transaction would give rise to fiduciary duties. That clearly is not the case. (See Wolf v. Superior Court (2003) 107 Cal.App.4th 25, 31.)" 125 Cal.App. at 1161.
COMMENT: A very instructive case which illustrates the difference between fiduciary duty and the duty not to commit fraud and deceit. While the fiduciary has the duty to be truthful in his dealings with the cestui, the mere obligation to be truthful does not give rise to fiduciary duty.
2005: Oakland Raiders vs. National Football League (2005) 131 Cal.App.4th 621
Relevant to Secs. 1:23 [alternative inconsistent legal relationship] and 1:29 [miscellaneous settings in which fiduciary duty may arise].
The Raiders, a football team and member of the National Football League, complained that the NFL was not treating them well, and put them at a competitive disadvantage relative to the other member clubs. One of the legal theories that they advanced was breach of fiduciary duty. The trial court held that the NFL did not owe any fiduciary duty towards the Raiders - and the Court of Appeal agreed.
Citing the text at a couple of passages, the Court of Appeal rejected the Raiders' attempt to analogize the case to Jones v. Ahmanson, and to Cohen v. Kite Hill Homeowners Assn. (both discussed in the text) - and held that no fiduciary duty arises between a voluntary unincorporated association and its members - at least, not as a matter of law. It then went on to inquire whether, even if no duty arose as a matter of law, it might still have been undertaken by the NFL - and it held that no such duty was undertaken. To the contrary: the NFL rules contemplated that the Commissioner (Tagliabue, also named as a defendant) might have to take action on many occasions which would be adverse to the interests of one or another member club - and this network of rules was inconsistent with the existence of a fiduciary duty. In the third section of the Opinion, the Court held that the Abstention Doctrine applied, to require the court not to intervene in what was basically an intra-association dispute.
2008: City of Hope vs. Genentech (Opinion Filed April 24, 2008) California Supreme Court Case No. S129463
Relevant
to Chapter 1, Sec. C, Elements Affecting Existence of Fiduciary Duty [pp. 42-62
of the text]
In the mid-1970s, City of Hope had worked on a research project which showed some practical promise, but it was far from a finished thing. It owned some patents in the technology but it was not sure it wanted to spend the effort and funds needed to develop the technology further. So it took an alternative route: it conveyed the patents to Genentech, in exchange for the right to receive royalties on all revenues Genentech might receive from exploitation of the patents. After the deal was inked, Genentech owned the patents outright, but had a contractual duty to pay royalties to City of Hope.
The lawsuit arose after City of Hope learned that Genentech had sued a third party, Eli Lilly & Co. claiming that Lilly's manufacture and sale of Human growth Hormone (HGH) infringed the subject patents. Lilly denied infringement but ended up settling the case for $145 million plus a royalty stream. City of Hope demanded its 2% royalty on the settlement and the royalty stream. At first Genentech refused to pay but ultimately ended up paying City of Hope a fixed sum of $3 million and a 1.75% royalty on future payments from Lilly.
Later Genentech settled a case for patent infringement against Novo Nordisk (a group of related companies) for $20 million, and when City of Hope demanded 2% of that sum, Genentech refused to pay. This triggered the instant action. In the course of discovery, City of Hope learned that there had been several revenue streams related to the subject patents which Genentech had received but which it had not disclosed to City of Hope. The matter went to a jury trial on City of Hope's claims for breach of fiduciary duty, and breach of contract. The jury found in favor of City of Hope on both claims, and returned a judgment for $300 million in compensatory damages and $200 million in punitive damages. The punitive damages were based on the jury's finding that Genentech had breached a fiduciary duty towards City of Hope, and had acted with fraud and malice.
The Court of Appeal affirmed the judgment, but the Supreme Court, in a long-awaited and (frankly) expected opinion, reversed the punitive damage component of the judgment, while affirming the compensatory damage award, holding that the case sounded in contract and Genentech did not owe any fiduciary duty towards City of Hope. Citing the text at several points, the Supreme Court reasoned that a mere contract does not give rise to a fiduciary duty: to say that parties to a contract have to trust each other is not the same as saying that they owe fiduciary duties towards each other. Even though the parties contractual relationship included four factors which have from time to time been associated with fiduciary duty ((1) one party entrusts its affairs, interests or property to another; (2) there is a grant of broad discretion to another, generally because of a disparity in expertise or knowledge; (3) the two parties have an "asymmetrical access to information," meaning one party has little ability to monitor the other and must rely on the truth of the other party’s representations; and (4) one party is vulnerable and dependent upon the other) the Court found that these four factors, standing alone, do NOT give rise to fiduciary duty. The relationship between City of Hope and Genentech did not require Genentech to put the interests of City of Hope ahead of its own, which the Court said is the real hallmark of the fiduciary duty, and nowhere in the contractual documents was it stated that the relationship would be fiduciary.
The case cites Wolf v. Superior Court (Disney) (2003)107 Cal.App.4th 25 with approval, and can be understood as "nailing down" the principle that fiduciary duties will not arise in "fuzzy" circumstances. The many cases discussed in the text that seem to suggest otherwise, have to be re-read and reconsidered. And as a practical point: parties who want to be able to impose fiduciary duties on their contract partners will be best advised to have the contract language say so explicitly unless the relationship being formed is one of the "canonical" fiduciary relationships listed in the text (partnership, joint venture, etc.).
Comment: This long-awaited and much-anticipated case reflects the current judicial aversion to punitive damages and the holding came as no surprise. The jury's finding that punitive damages were appropriate under the standards of C.C. Sec. 3294 was not even disputed: the holding in this case was based on the Court's refusing to find a fiduciary duty present. So the message here is that even if your contract partner breaches his word with fraud and malice, the best you can do is obtain your contract remedies. This is the "apotheosis" of the view - introduced in Victorian times - that contract and tort are fundamentally distinct. It was not always so.