Daily Blast November 26, 2013

Yesterday, the California Court of Appeal, Third Appellate District (Sacramento), issued an opinion in White Mountains Reinsurance Company of America v. Borton Petrini, LLP (November 26, 2013, C071365) __ Cal.App.4th __, analyzing the Goodley rule barring the assignment of a cause of action for legal malpractice. The Court of Appeal held exceptions to the Goodley rule applied to the facts of the case making the cause of action for legal malpractice assignable.

This case arose out of Borton Petrini’s representation of Modern Service Insurance Company (“Modern”) and its insured Flora Cuison (“Cuison”) in the underlying action involving a car accident caused by Cuison. (Slip opn., p. 2.) The car accident resulted in Karen Johnson (“Johnson”) sustaining injuries. Cuison was served with the complaint and a 30-day offer to compromise for the $100,000 policy limits. Borton allowed the offer to compromise to expire without a response. (Id. at p. 3.) During the course of the underlying litigation, Modern entered into an assumption reinsurance and administration agreement with Mutual Service Casualty Insurance Company (“Mutual”). The Cuison policy was included as part of this agreement. (Ibid.) Shortly after the agreement between Modern and Mutual, Mutual changed its name to Stockbridge Insurance Company and transferred its liabilities to FolksAmerica Reinsurance Company. (Id. at pp. 4-5.) FolksAmerica then changed its name to White Mountains Reinsurance Company of America (“White Mountains”). (Id. at p. 4.) White Mountains paid $1.86 million to settle the underlying case and paid Borton’s final invoices. White Mountains then filed suit for legal malpractice against Borton for allowing the $100,000 offer to compromise to expire. Borton moved for summary judgment on the ground that a legal malpractice cause of action may not be assigned and therefore White Mountains lacked standing to pursue the action. The trial court denied the motion on the ground that Borton had failed to show when the cause of action accrued. Thereafter, the parties agreed to have the trial judge resolve the question of White Mountains’ standing to file suit. (Ibid.) The trial court found White Mountains lacked standing because legal malpractice cause of action may not be lawfully assigned in California. (Id. at p. 5.) White Mountains appealed. (Ibid.)

In California, the rule that a cause of action for legal malpractice is not assignable is governed by Goodley v. Wank & Wank, Inc. (1976) 62 Cal.App.3d 389 (Goodley). Although California courts have consistently adhered to the Goodley rule, courts have also recognized exceptions to the rule. (Slip opn., p. 8.) Specifically, a cause of action for legal malpractice is assignable when (1) the assignment claim is only a small, incidental part of a larger commercial transfer between companies, (2) the larger transfer is of assets, rights, obligations and liabilities and does not treat the legal malpractice claim as a distinct commodity, (3) the transfer is not to a former adversary, (4) the legal malpractice claim arose under circumstances where the original client insurance company retained the attorney to represent and defend and insured, and (5) the communications between the attorney and the original client insurance company were conducted via a third party claims administrator. (Id. at p. 2.) The Court of Appeal held the narrow exception applies to the facts presented here. (Id. at p. 24.) The Cuison policy was not a distinct commodity because White Mountains acquired Modern’s entire book if insurance business in California and the Cuison policy was only a small part of the acquisition. (Ibid.) The acquisition of the Cuison policy included any right Modern had to sue Borton for legal malpractice. (Ibid.) The Court of Appeal also held White Mountains was not a former adversary and was liable to the same extent that Modern would have been had the series of transactions never occurred. (Id. at p. 25.) Therefore, the Court of Appeal held the trial court erred because the cause of action for legal malpractice was assignable in this particular case. (Id. at p. 26.)

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