Judge Michael Small, Case 20STCV42709 2023-05-16 Tentative Ruling

Judge: Michael Small, Case: 20STCV42709, Date: 2023-05-16 Tentative Ruling

Inform the clerk if you submit on the tentative ruling. If moving and opposing parties submit, no appearance is necessary.

Case Number: 20STCV42709 Hearing Date: May 16, 2023 Dept: 57

The law firm of Donaldson & Califf, LLP (“D & C”) was sued for legal malpractice by One Lucky Elephant, LLC (“OLE”) arising out of D&C’s representation of OLE in an arbitration proceeding. Although OLE prevailed in the arbitration, it obtained only a nominal amount in damages. OLE’s malpractice suit blames D&C for that result. D&C tendered OLE’s action to its malpractice insurer, Certain Underwriters at Lloyds, London Subscribing to Certificate No. IML-0417NO-190040 (“Lloyds”), which had issued a Lawyers Professional Liability Insurance Policy (“the Policy”) to D & C. Lloyd’s defended D &C in the OLE action, subject to a reservation of its rights to rescind the Policy. In 2020, Lloyds sued D&C seeking to rescind the Policy. Lloyds’ claim for rescission is based on allegations that, in its application to Lloyd to obtain the Policy (“the Application”), D&C mispresented and concealed material underwriting risks. Pending before the Court is D&C’s motion for summary judgment or in the alternative summary adjudication (“the Motion”). The Court is denying the Motion because there are disputed issues of material fact regarding whether D&C misrepresented and concealed material underwriting risks in the Application.

The following facts are not in dispute. First, the arbitration in which D&C represented OLE and from which OLE’s malpractice suit against D&C arises concluded about a month before D&C submitted the Application to Lloyd’s to obtain the Policy. Second, D&C did not mention the OLE arbitration at all in the Application. Third, Question 12 in the Application is captioned “Risk Management and Controls.” D&C responded “DOES NOT APPLY, NON-LITIGATION FIRM” to Question 12.P, which asked D&C about its procedures when “declining a case in which a critical deadline of statute date may apply.” Similarly, D&C responded, “DOES NOT APPLY, NON-LITIGATION FIRM” to Question 12.Q, which asks whether D&C “maintain[s] a central system for control of statute dates and other critical deadlines.” Fourth, Question 14 of the Application, which is captioned “Claims,” asked D&C if it was “aware of any circumstances, allegations, tolling agreements, or contentions to any incident which may result in a claim being made against [D&C].” D&C denied knowledge of any possible claim being made against it.

Lloyd’s complaint explicitly references D&C’s responses to Questions 12.P and 12.Q, i.e. the responses that D&C is a “non-litigation firm,” on the Application as bases to rescind the Policy. The complaint does not explicitly reference D&C’s response to Question 14. Paragraph 21 of the complaint does, however, allege that the material information that D&C misrepresented and concealed in the Application “include[es] but [is] not limited to the representation that D&C was a non-litigation firm.”    Lloyd’s places D&C’s response to Question 14 at the front and center of its opposition to the Motion. It contends that the response to Question 14 is encompassed within Paragraph 21’s reference to D&C’s representations that include but that are not limited to the representations in the Application that D&C was a non-litigation firm. According to Lloyd’s, the evidence adduced in discovery shows that at the time of the Application, D&C was well aware that OLE had a potential claim against D&C arising out of the arbitration but D&C failed to mention it and thus Lloyds was misled as to the nature of the risk that it was underwriting in the Policy.

D&C argues that Lloyd’s is foreclosed from relying on D&C’s response to Question 14 on the Application to fend off summary judgment or summary adjudication. That is because, D&C says, Lloyd’s did not explicitly reference the response to Question 14 in the complaint and Lloyd’s was required to do so under pleading rules. Paragraph 21 of the complaint does not satisfy these pleading rules, D&C further says, because it is not sufficiently specific to encompass D&C’s response to Question 14 on the application.

The pleading rules on which D&C relies are not applicable here. Those rules govern claims for fraudulent misrepresentation or concealment. While rescission can be based on fraud, Lloyd’s claim for rescission of the Policy is not.  Rather, Lloyd’s claim is based on negligent or innocent misrepresentation, which are permissible bases for a rescission claim. The pleading rules that D&C invokes do not apply to claims of negligent or innocent misrepresentation. Thus, D&C’s response to Question 14 on the Application is subsumed within the broad sweep of Paragraph 21 in Lloyd’s complaint.   In turn, this creates a disputed issue of material fact as to whether the response to Question 14 in which D&C said it was unaware of potential claims against it was misleading in light of what Lloyds asserts is the looming threat of a claim by OLE arising from the results of the arbitration that saw OLE receive only nominal damages.

Lloyd’s has moved for leave to amend the complaint so that D&C’s response to Question 14 can be specifically pled.   In a separate ruling, the Court is granting Lloyd’s motion for leave. For purposes of D&C’s motion for summary judgment or summary adjudication, however, leave to amend to add a specific reference to the response to Question 14 is unnecessary.   As indicated above, Paragraph 21 in the existing complaint is sufficient to sweep up the response to Question 14.

Leaving aside the response to Question 14 and whether it is subsumed within Paragraph 21 of the complaint, the Court concludes that there also are disputed issues of material fact flowing from D&C’s responses to Questions 12P and 12Q on the Application that it was a “non-litigation firm.” For one, the evidence shows that D&C lawyer Michael Donaldson referred to the arbitration in which it represented OLE and which (to reiterate) concluded just a month before the Application was submitted as “litigation.” Second, the Application asks both about arbitration and litigation. At minimum, even if D&C actually was not a litigation firm, it should have mentioned that it had just represented a client in an arbitration – or at least there is a disputed issue of material fact as to whether that should have been mentioned.

In determining that the Motion should be denied, the Court has considered the declarations of Michael Donaldson and Lisa Califf that D&C submitted in support of the Motion. The Court is overruling D&C’s objections to those declarations.