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Must a managed care plan pay for Medi-Cal beneficiary hospital services in accordance with the providing hospital's full billed charges concerning post-stabilization services not under contract?

beneficiary.jpgIn Children's Hospital Central California v. Blue Cross of California (filed 6/10/14) F065603, Blue Cross, in providing a managed care plan, paid $4.2 million to Children's Hospital for a 10-month period of coverage without written contract rates for post-stabilization care. Payment was based on the Medi-Cal rates paid by the government. Children's Hospital sued for $6.6 million, claiming it was entitled to payment for its full billed charges totaling $10.8 million, based on California Code of Regulations title 28, section 1300.71 (a)(3)(B), which defines "Reimbursement of a Claim" as the payment of the reasonable and customary value for the health care services rendered." Children's Hospital prevailed at trial. The trial court had precluded Blue Cross from presenting evidence of: the rates accepted by or paid to Children's Hospital, Medi-Cal fee for service rates paid by the government, and expert testimony that the Medi-Cal rate was the reasonable and customary rate that Blue Cross should be paying for the services in question.

The Court of Appeal, Fifth Appellate District reversed. The court found that the Department of Managed Health Care (DMHC) adoption of 13300.71 (a) (3) (B) was not an exclusive criteria; that neither billed charges nor government rates are determinative of reasonable value; and reasonable value for the purposes here is based on quantum meruit. Accordingly, the trial court committed reversible error in not allowing discovery of these other measures of value, and further erred in excluding any documentary and expert evidence as to fees actually accepted by this and other hospitals for post-stabilization care to determine reasonable value that should be paid by Blue Cross. The billing that the hospital considered as the reasonable and customary charge was not dispositive standing alone.

This ruling does not mean that Blue Cross automatically prevails. The appellate court remanded the matter for a new trial on damages, including additional discovery. At the retrial, the jury will hear the various items of evidence going to the issue of what the reasonable value is here in the broader context of the realities in the managed care marketplace, including evidence of Medi-Cal rates.

The information contained in this blog is provided for informational purposes only, and should not be construed as legal advice on any subject matter. No recipients, clients or otherwise, should act or refrain from acting on the basis of any content included in this blog without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the recipient's state. The content of this blog contains general information and may not reflect current legal developments, verdicts or settlements. The Firm expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this blog.


Where settlement agreement provides for a discounted principal amount to be paid in installments and the entire original liability becomes due because of a late payment, is default judgment for amount in excess an unenforceable penalty?

In promissory note cases, it is not uncommon in my role as a mediator to assist parties in framing terms of a settlement that provides for installment payments. The creditor normally wants some "teeth" in the agreement in exchange for its promise to accept gradual payments rather than the full sum immediately upon settlement. On the other side, the debtor wants the benefit of a discounted principal as a reward for timely payment. This appears to be the scenario that was played out in Purcell v. Schweitzer (ordered published 3/17/2014) 2014 DJDAR 2387.

Plaintiff had received from defendant a promissory note for $85,000. Plaintiff sued defendant for default on the full sum. The parties reached a settlement agreement: plaintiff agreed to reduce the principal amount to $38,000, conditioned upon defendant's payment of 24 timely monthly installment payments to include 8.5% interest; the full, discounted amount would be paid within these 24 months. The payments were due the first of each month; should a payment not be received by the fifth day of any month, the entire original liability of $85,000 would then become immediately due. The settlement agreement further provided that the late-payment provision was not a penalty, and that defendant waived any right to appeal and any right to contest or otherwise set aside a judgment.

Defendant paid the settlement note down to a balance of $1,776.58, then made a late payment of that balance, which was accepted by defendant. Asserting the late-payment clause of the settlement agreement, plaintiff filed this lawsuit and received a default judgment for $58,829.35, reflecting reinstatement of the original liability. Defendant's motion to set aside this default judgment was granted, and plaintiff appealed. The Court of Appeal, Fourth Appellate District, Division One, affirmed, finding the default judgment was the result of an unlawful penalty or forfeiture.

The Court of Appeal recited the rule of enforceability of a liquidated damage clause: it must bear a reasonable relationship to the range of actual damages that the parties could have anticipated from the breach (Civil Code sections 1670 and 1671). Plaintiff argued that the settlement agreement here recited that the $85,000 was an agreed upon amount actually owed and was expressly stated as not being a penalty. However, the appellate court cited Greentree Financial Group Inc. v. Execute Sports, Inc. (2008) 163 Cal.App.4th 495, 499, for the proposition that the relevant breach here is the breach of the stipulation contained in the settlement agreement (in that case the stipulation for entry of judgment of installment payments of a lesser total sum than sought, which would be increased to the greater sum if not timely paid), not the breach of the underlying contract for which recovery was sought.

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Can commercial tenant sue landlord based on inaccurate pre-lease estimates of shopping center pro-rata costs portion of its rent?

landlord.jpgIn Thrifty-Payless, Inc. v. The Americana at Brand, LLC (certified for publication 8/14/13) 2013 DJDAR 10838, plaintiff, doing business as Rite-Aid, leased commercial space at defendant's shopping center in Glendale. Prior to execution of the lease, the parties negotiated through a letter of intent (LOI). In their final LOI, defendants stated that, as a part of the rent, plaintiff would be responsible for its pro-rata share of common area expenses including property tax, insurance and common area maintenance, giving per square foot estimates of what that would be. Plaintiff questioned the amount and it amended the LOI by crossing out the estimate figure and interlineating that the budget would be provided to tenant prior to lease execution. Defendant did produce budget figures and rendered a per square foot amount; it labeled the figures as "purely estimated values." The final lease of the parties provided that plaintiff would pay its pro rata share of such expenses; no details were stated.

After its first full year of occupancy, plaintiff received the bill for its share of these common area expenses. Instead of plaintiff's share being 2.2% of the total as indicated in defendant's estimates, plaintiff ended up being charged about 5.7%, resulting in about $342,700 more than estimated.

Plaintiff then sued defendant on claims of fraud and negligent misrepresentation. It claimed these expenses were material, and that it had relied upon the estimates to evaluate the suitability of the project; that defendant had reason to believe the estimates were false, and plaintiff relied upon defendant's superior knowledge. It alternatively claimed innocent misrepresentation and mutual mistake. Defendant demurred to the complaint alleging plaintiff did its own investigation and was relying on representations not contained in the integrated final lease agreement of the parties; that its estimates were non-actionable opinions and predictions. The trial court sustained the demurrer without leave to amend, finding the figures in question were only estimates.

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SNAKES IN THE PENDERGRASS - CALIFORNIA SUPREME COURT FORTIFIES FRAUD EXCEPTION TO PAROL EVIDENCE RULE IN RIVERISLAND COLD STORAGE V. FRESNO-MADERA PRODUCTION CREDIT ASSOCIATION

January 28, 2013

Contract Law.jpgFor more than 75 years, the California fraud exception to the parol evidence rule in written contract cases has been limited to evidence which tends "to establish some independent fact or representation, some fraud in the procurement of the instrument or some breach of confidence concerning its use, and not a promise directly at variance with the promise of the writing." (Bank of America v. Pendergrass (1935) 4 Cal.2d 258, 263.) Although often criticized and occasionally limited in application, the Courts of Appeal have applied the Pendergrass rule to exclude extrinsic evidence of promises that are not consistent with the terms of an integrated written contract. Pendergrass has been relied on heavily by financial institutions as a defense against claims by borrowers that bank representatives made promises that were contrary to the terms set forth in the loan documents to forbear exercise of remedies, and have been able to avoid liability on fraud claims through demurrer or summary judgment.

However, on January 14, 2013, the California Supreme Court filed its opinion in Riverisland Cold Storage, Inc. v. Fresno Madera Production Credit Association, case S190581, reversing Pendergrass' limitations on the fraud exception to the parol evidence rule. The Court found that Pendergrass was a "poorly reasoned opinion" which "departed from an established general rule" without discussing the "contrary authority." Reviewing the California law on the scope of the fraud exception when Pendergrass was decided, the Court found that Pendergrass itself was inconsistent with the state of the law at the time it was decided and was, in fact, "an aberration." On that basis, the Riverisland court overruled Pendergrass and its progeny and their limitations on introduction of intrinsic evidence under the fraud exception to the parol evidence rule.

By expanding the types of extrinsic evidence admissible in actions arising out of written contracts, the Supreme Court has given borrowers and other plaintiffs substantial leverage, in that they no longer have to show that oral promises be "consistent" with the written agreement terms in order to be admissible in evidence. However, such evidence still will have to overcome the presumption that an integrated written agreement sets forth the true intent of the parties at the time the agreement was signed. Nevertheless, Riverisland has altered the playing field and is likely to result in increased lender liability and other contract litigation.

By Christopher E. Seymour

The information contained in this blog is provided for informational purposes only, and should not be construed as legal advice on any subject matter. No recipients, clients or otherwise, should act or refrain from acting on the basis of any content included in this blog without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the recipient's state. The content of this blog contains general information and may not reflect current legal developments, verdicts or settlements. The Firm expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this blog.

Former human resource director's deceiving employer she had executed arbitration agreement neither implies agreement nor estops her from denying.

dec.jpgIn Gorlach v. The Sports Club Company. B233672 (filed October 16, 2012), the Court of Appeal, Second Appellate District, Division Four, affirmed the trial court's denying defendant's motion to compel arbitration. While the defendant conceded that plaintiff never signed a written contract to arbitrate, defendant claimed equitable estoppel or implied-in-fact agreement.

Plaintiff Susan Gorlach resigned as defendant's human resource director in August 2010. Prior to 2010, defendant had no arbitration agreement with its employees. It then revised its employee handbook to contain such an agreement and tasked plaintiff to get all employees to sign. Through July 2010, not all employees had signed, prompting plaintiff to write company executives to consider what to do about employees who failed to sign. She led executives to believe she had signed, when in fact she had not. She resigned August 6, 2010, and later sued defendant for constructive termination including a cause of action claiming paramour sexual harassment.

Defendant Sports Club moved to compel arbitration contending plaintiff assented to it by her continued employment, yet acknowledging that she had not executed the arbitration agreement. The trial court found that, while plaintiff "intentionally misled" defendant to believe she was "on board" with the new agreement, she never planned on signing it, thus there was no basis to find that an agreement to arbitrate existed between the parties.

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Doctrine of boundary by agreement: good fences don't make good neighbors absent an agreement.

September 17, 2012

fences.jpgWith apologies to Robert Frost and his poem "Mending Wall," there might be a circumstance when a good fence does make a good neighbor: that is where the fence marks an agreed-upon boundary between two neighbors. In Martin v. Van Bergen (filed September 6, 2012) 2012 DJDAR 12577, the Van Bergens contended the fence that had been built between the Van Bergens' property and that of the Martins defined the boundary between the two properties because their predecessors who owned the two properties when the fence was built created a "boundary by agreement." The Court of Appeal, Second Appellate District, Division Six, recognized this doctrine, but found one all too obvious element missing in the Van Bergen's proof: an agreement. It affirmed the quiet title judgment in accordance with the Martins' survey of the true boundary.

The Martins own a 240-acre parcel in Paso Robles that include their residence and a vineyard. The Van Bergens own a contiguous property consisting of their residence and an almond orchard. A fence runs over Martin's parcel for a portion of the 1300 feet parallel to the boundary. The area between the boundary and the fence has almond trees farmed by the Van Bergens, encroaching on the Martin parcel. The almond orchard was planted in 1947; the Van Bergens' predecessor-in-interest was assisted by Martin's predecessor, who possessed some survey equipment, in the planting. No one recalls any survey equipment actually being used; the "deer" fence constructed at that time marked the extent of almond trees simply replacing and matching the location of an old fence used to contain cattle.

In 2005, upon acquiring their property, the Martins had professional surveyors perform a survey for them. The survey established the boundary as showing the Van Bergen orchard and fence encroached on the Martins' property. The boundary indicated that 8 to 10% of the Van Bergens' almond crop was being grown on the Martins, property. The Van Bergens sold only about 25% of their crop commercially. The Van Bergens also had a professional survey performed which showed the boundary line to be different than both the fence line and the Martins' survey.

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Insufficient showing of third-party beneficiary status to compel arbitration of claim of nonsignatory to arbitration agreement

Court Gavel.jpgIn Epitech, Inc., v. Kann (filed April 16, 2012) 2012 DJDAR 4768), defendant Kann filed a petition to compel arbitration after a corporation's short term creditors brought suit against defendant, a financial advisor the corporation had retained to assist it in getting long-term financing to pay its short-term debts. Suit followed the corporation going bankrupt. Kann claimed the creditors were third-party beneficiaries of his financial advice contract with the corporation, which contained an arbitration clause. The Los Angeles Superior Court denied the petition; that order was affirmed by the Court of Appeal, Second Appellate District, Division Three.

Kann and the corporation signed an engagement letter that included an arbitration clause for any dispute arising out of the letter agreement or any issue concerning breach, termination, enforcement, interpretation or validity of it. The creditors allege that when the financing that Kann was to assist the corporation with failed to materialize, Kann induced the creditors to forbear on foreclosing upon their interests by assuring that financing was forthcoming. Their lawsuit does not allege breach of contract, rather that Kann committed fraud, negligent misrepresentation and concealment.

In his petition, Kann claimed he was being sued because of the way he performed his contract with the corporation and that plaintiffs were third-party creditor beneficiaries to the services Kann was to perform under the contract. The appellate court held the creditors were not, as a matter of law, third-party beneficiaries of Kann's agreement with the corporation, thus the denial of the petition was affirmed.

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Arbitration clause in employment contract superseded that in earlier agreement and made wrongful termination claim not subject to arbitration

contract.jpgIn the morass of paperwork accompanying the start of employment, an employer may ask the employee to sign multiple documents discussing arbitration: an employee handbook, an employer alternative resolution policy statement, and/or the contract of employment may be among the many documents. Which executed document concerning arbitration controls if their content differs?

This question is presented in Grey v. American Management Services (filed March 28, 2012) 2012 DJDAR 4075. When plaintiff applied for employment, defendant provided him with an application packet that contained an Issue Resolution Agreement (IRA) which he signed. The IRA required arbitration of any claim "arising out of or [in] relation to [the] application or candidacy of employment." After he accepted employment, plaintiff signed an employment contract that required arbitration of "a dispute arising out of the alleged breach of any provision of this Agreement." Plaintiff was terminated from his employment and filed a lawsuit primarily alleging employment discrimination and wrongful termination (no claim of "breach of contract"). Defendant successfully moved to compel arbitration, and the arbitrator found in its favor.

On appeal, the Court of Appeal, Second Appellate District, Division Four, reversed, finding that Grey was not required to submit his claims to arbitration under the terms of the employment contract.

The appellate court delineated the critical issue as whether the parties intended their writing (the employment agreement) to serve as the exclusive embodiment of their agreement. The employment agreement included an integration clause providing it was "the entire agreement of the parties and supersedes all prior and contemporaneous discussions and understandings."

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Contractor Licensing Law revisited: triable issue whether contracting entity and licensed entity are one and the same

Contractor.jpg
Since the California Legislature amended Business & Professions Code section 7031, subdivision (e), to narrow the doctrine of substantial compliance with contractor licensing requirements, a contractor attempting to recover for construction work performed may no longer avoid the harshness of the bar against recovery by claiming lack of licensure was merely a matter of form. On this subject, I authored the case of Opp v. St Paul Fire & Marine Ins. Co. (2007) 154 Cal.App.4th 71. Opp involved an individual who was barred from utilizing his personal license because he was a different entity than the corporate entity that contracted to perform the work in question.

In this blog's June 27, 2011 edition, I discussed the contrasting facts of Ball v. Steadfast-BLK (2011) 196 Cal.App.4th 694. There, the trial court's judgment barring recovery was reversed because the business name listed in the contract was deemed one and the same as the individual sole proprietor operating the business, although the owners name appeared nowhere in the business name; the business was not a legal entity licensable separate from its owner who was licensed.

Montgomery Sansome LP v. Rezai (filed March 28, 2012) 2012 DJDAR 4042 presents yet another variant on this issue. Defendants hired "Montgomery Sansome Ltd. Lp, 305 Adrian Road, Millbrae" to perform repairs at an apartment building they owned; the work orders had the quoted information printed on the work orders along with contractor's license # 741713. Defendants paid $65,000 on the contract prior to terminating it. Plaintiff claims a balance of about $203,000 is owed it.

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Full price offer does not invoke offering real estate broker's contractual right to commission

Real Estate.jpgThere are times when real estate brokers will claim entitlement to a commission, even though the sale of the real property in question has not been completed. One such case is presented in RealPro, Inc. v. Smith Residual Company LLC (filed February 28, 201) 2012 DJDAR 2655.

Defendant listed its vacant land for sale with its listing broker on the following terms: $17 million cash or such other price and terms acceptable to defendant and additional standard terms; a cooperative broker may enforce the listing agreement as a third party beneficiary (4% total commission). Within the listing period, plaintiff broker submitted to the listing broker a written offer to purchase the property for the full price of $17 million, all cash. About one month later, defendant responded with a counteroffer of an increased listing price of $19.5 million. The counteroffer was not accepted. Plaintiff eventually demanded its 2 percent brokerage fee and sued defendant for refusing to pay.

In Riverside Superior Court proceedings, defendant demurred on numerous grounds including condition precedent: that the listing price was alternatively such other price and terms acceptable to owner and escrow must close prior to payment of any commission. The trial court sustained the demurrer without leave to amend. The Court of Appeal, 4th Appellate District, Division Two, affirmed, concluding that the allegations of plaintiff's action established as a matter of law that there was no enforceable written contract entitling plaintiff to a commission.

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Homeowners' payment alone under HAMP loan work-out plan does not save home from foreclosure

bank-foreclosed-homes-for-sale.jpgDuring these times of "underwater" home mortgages, many homeowners have enlisted in the federal Home Affordable Mortgage Program (HAMP). In Nungaray v. Litton Loan Servicing, LP (filed November 22, 2011) 2011 DJDAR 16868, plaintiffs executed a "loan work-out plan" for the lender's review. Under HAMP, the lender accepts reduced mortgage payments as provided for in the plan during the time the lender reviews the plan to determine long-term acceptability. Here, plaintiffs had been delinquent in their normal mortgage payments to lender Bank of America for approximately 6 months and the notice of trustee's sale had been set prior to the execution by plaintiffs of the loan workout plan. The lender suspended foreclosure proceedings as it reviewed the plan. Two of the four reduced mortgage payments made by plaintiffs were accepted. The lender eventually decided to reject the plan and its agent notified the plaintiffs it would move forward with the foreclosure, which it did.

Plaintiffs sued for breach of contract and quiet title, and defendants (Litton and Bank) moved for summary judgment. The Ventura County Superior Court granted summary judgment, determining the plan was not an enforceable agreement requiring defendants to enter into a loan modification because such modification was expressly contingent upon factors which never came to fruition. On plaintiffs' appeal, the California Court of Appeal, Second Appellate District, Division Six, affirmed.

The appellate court rejected plaintiffs' argument that they were lulled into believing their loan had been modified: that based either on contractual principles or on estoppel created by defendant's acceptance of trial payments, they have stated facts that should go to trial. The court found that, as a matter of law, the plan expressly does not require defendants to provide plaintiffs with a permanent loan modification. Here the plan was only executed by plaintiffs and the defendants never tendered plaintiffs a permanent modification agreement because plaintiffs failed to submit complete financial information establishing that they qualified under HAMP. While, the defendants did accept two of the reduced mortgage payments, that was essentially consideration for defendant's suspending foreclosure temporarily.

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JLo wins right to arbitrate claim ex-husband and agent plan video disparaging her

Long before there was Marc Anthony, there was Ojani Noa. Now that Jennifer Lopez is apparently amicably ending her 7-year marriage to Marc Anthony, the battle with her first husband, Noa continues. Lopez requested arbitration of the complaint she filed against Noa and his agent Ed Meyer regarding their collaborative attempts to produce and sell "The JLo and Ojani Noa Story," as well as unseen home video footage. She alleges a previous settlement agreement provided that Noa would not disparage certain parties including Lopez; that agreement included an arbitration clause.

The Los Angeles Superior Court denied the motion to compel arbitration, finding there was an insufficient showing by Lopez that (1) Noa agreed to arbitrate any future disputes with Lopez and (2) Meyer either benefitted from the settlement agreement or had a relationship with Noa that pre-existed that agreement. In the unpublished opinion of Lopez v Noa, B222183, filed July 29, 2011, the California Court of Appeal, Second Appellate District, Division 4, reversed the trial court and directed the court to grant the motion to compel arbitration.

The appellate court found sufficient proof established Noa's agreement to arbitrate the present subject of litigation because, even though the settlement agreement was primarily between Noa and Mojo Restaurant, Lopez was specifically named in the agreement as a releasee: that "[a]ny future dispute between Noa and Mojo or others released herein . . . will be submitted to confidential arbitration," and that Noa would not " in any way or mode, criticize, denigrate, cast in a negative light, or otherwise disparage or cause disparagement to Mojo, Lopez or any of the Releasees." The agreement was specific that Noa would not disclose for financial gain any intimate details about his relationship with Lopez. So regardless of whether Lopez was a signatory to the settlement agreement, she was entitiled to enforce the arbitration provision in the present case as a third party beneficiary, even if she is not considered as a direct party to it.

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Employee handbook not a good place for an arbitration clause: ruled unenforceable as "take it or leave it"

dave_writing.jpgWe have here yet another opinion where an arbitration clause strikes out. Not surprising, in the light of the California Supreme Court "crack-down" more than a decade ago in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114.

Zullo v. Superior Court (filed June 21, 2011, certified for publication July 12, 2011) 2011 DJDAR 10519 came before the Court of Appeal, 6th Appellate District on petition for writ of mandate after the Santa Clara Superior Court granted the petition to compel arbitration filed by real party in interest, Inland Valley Publishing, Inc, petitoner Zullo's former employer, who had been sued for wrongful termination under California's Fair Employment and Housing Act (Government Code section 12920 et seq. (FEHA). After staying the arbitration and issuing an order to show cause, the appellate court granted the petition and issued a writ vacating the trial order with directions to deny the motion, allowing plaintiff's court action to proceed.

The Court of Appeal found that the purported agreement was actually an employer policy, implemented like the rest of the policies in the employer handbook, on a take it or leave it basis. The arbitration clause was on page 54 of a 58-page handbook and made arbitration the exclusive means to resolve any dispute an employee might raise arising out of termination of employment. Petitioner had signed an "acknowledgement of receipt" of the handbook. Petitioner claimed the clause was unconscionable as an adhesion contract and relied upon the Armendariz case which set forth a procedural element (oppression and surprise) and a substantive element (overly harsh or unjustifiable result).

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Condominium construction work excluded in liability insurance policy: looks can be deceiving

During my time on the trial court bench, I would often hear the following analogy argued concerning the concept of circumstantial evidence: "When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck." I doubt that poet James Whitcomb Riley, when he first coined this phrase in about 1884, could have imagined he was providing attorneys with trial argument material.

In California Traditions, Inc. v. Claremont Insurance Co. (filed June 21, 2011, certified for publication on July 11, 2011) 2011 DJDAR 10405, the project developed by plaintiff consisted of 146 separate residences with no shared walls, halls, roofs or plumbing or electrical lines. But to avoid minimum set-back requirements for non-condominium single family homes and to allow higher density, the project was developed, marketed and sold as condominiums. Plaintiff hired Ja-Con Systems to do the rough framing work. Ja-Con was insured under a comprehensive general liability policy issued by defendant. That policy provided an exclusion for work on condominium and townhouse projects. In a separate action homeowners sued for defective construction; plaintiff developer obtained a $2 million judgment on its indemnity cross complaint against Ja-Con and now seeks to satisfy that from the policy.

The San Diego Superior Court granted defendant's motion for summary judgment based on the undisputed fact that the condominium exclusion precluded recovery. Plaintiff had argued that Ja-Con had a reasonable expectation of coverage because the units gave the outward appearance of non-condominium detached homes.

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Sophisticated legal client who fails to read unexplained fee arbitration clause loses challenge to motion compelling arbitration

Client is represented by attorney under fee agreement containing no arbitration provision. Attorney changes firms and requests client to sign new fee agreement which includes arbitration clause. Client fails to read this clause. Under these circumstances, does the attorney have a fiduciary duty to explain the arbitration clause?

In Desert Outdoor Advertising v. Superior Court (filed June 17, 2011) 2011 DJDAR 8939, plaintiffs opposed defendant attorney's motion to compel arbitration of plaintiffs' action alleging malpractice and breach of fiduciary duty. The San Francisco Superior Court granted the motion. Plaintiffs petitioned for writ of mandate to set aside that order. Initially, the California Court of Appeal, First Appellate District, Division One, summarily denied. The California Supreme Court granted review and transferred the matter back to the Court of Appeal with directions to vacate the denial and issue an order to show cause. On reconsideration, the appellate court reasoned that the attorney had no duty to explain the arbitration clause under these circumstances and again denied the writ petition.

The appellate court refused to buy plaintiffs' argument that they were essentially misled to believe that the "new" agreement was just a formality due their attorney's change of firms. Because the original fee agreement did not have an arbitration clause, absent counsel advising them differently, plaintiffs claimed they assumed the new agreement likewise did not include an arbitration clause. On this basis, they saw no reason to carefully read the new agreement. In deferring to the factually findings of the trial court under a substantial evidence standard of review, the appellate court noted the facts belied plaintiffs' argument: the new agreement was about twice the length of the first, and one of the plaintiff's principals read the agreement carefully enough to make a minor change on the page following the page where the arbitration clause appeared.

In any event, for the plaintiffs to say they failed to carefully read the agreement is unreasonable, and the only way the court could see plaintiffs succeeding in showing they were improperly induced into signing the agreement was to prove their reliance on claimed misrepresentations was reasonable. Nonetheless, plaintiffs argued they were victims of constructive fraud arising from their attorney having a fiduciary duty to advise of the existence and meaning of the arbitration clause in the new agreement. Not so, said the court; the scope of the fiduciary obligation depends on the circumstances including the sophistication of the client. The court found the plaintiffs were sophisticated in business matters and were told by the attorney to read the new agreement--there was no duty to explain further.

I have two thoughts. One, it was pretty gutsy for the appellate court to "stick to its guns" and reinstate its denial of the writ petition after being told by the Supreme Court to perform a reasoned reconsideration. Second, one has to wonder at what point the line is drawn in determining the sophistication of a client such that the fiduciary duty of an attorney is lessened.