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March 9, 2006

Hecht, Solberg, Robinson, Goldberg & Bagley v. Superior Court (Panther) (2006) 137 C.A. 4th579

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The Fourth District holds that a legal malpractice plaintiff’s burden to show collectibility of a judgment against the underlying defendant mandates discovery of the underlying defendant’s financial information.

Hecht, Solberg, Robinson, Goldberg & Bagley, LLP represented James Panther in a real estate transaction.  After Panther settled a legal malpractice action against Hecht he sued his legal malpractice counsel, The Chapin firm and Steven A.  Micheli, and the Mazzarella firm and Mark C.  Mazzarella, “Micheli” claiming that they were negligent and obtained too small a settlement.  When Hecht opposed a deposition subpoena for production of its financial condition Panther brought a motion to compel discovery, which was granted with a protective order.

The Court of Appeal noted that since this was a legal malpractice case about a legal malpractice case the framework was a “trial within a trial within a trial.” Both the real estate matter and the first legal malpractice action needed to be recreated.  The plaintiff had to prove that the defendant attorney was negligent, that the prior attorney also was negligent, and that a better result should have been obtained in both underlying actions.

In the underlying real estate matter Panther claimed that he lost his interest in real property when some of the other owners foreclosed upon him due to the manner in which the Hecht Firm had structured the project.  Panther alleged damages in excess of Hecht’s coverage.  The case was settled when a motion for summary judgment on the statute of limitations was pending.

Panther claimed that the Hecht settlement was premature, insufficient and ill-advised and was for an amount far less than the value of the case due the statute of limitations defense which arose because Micheli failed to file the case in a timely manner.  Panther asserted that a judgment against the Hecht firm would have been collectible up to fifty million dollars.

Panther sought discovery of Hecht’s financial condition and insurance policies.  Hecht resisted on privacy grounds.  Based on Panther’s burden to prove collectiblity of the judgment, the trial court ordered production of information for a time period limited by the scope of the allegations.  The court allowed discovery of information that would not be admissible at trial given the policy of allowing a broad scope of discovery.

Collectibility is an issue in a legal malpractice action where there is an allegation that proper prosecution of a matter would have resulted in a favorable, collectible judgment.  Collectibility of the hypothetical underlying judgment is a fact-intensive inquiry.  It is not a question only of the solvency of the underlying defendant but also relates to the defendant’s ability to pay all or some part of a judgment.  Collectibility thus looks to the actual circumstances to determine whether the judgment would have been collectable.  Admissible evidence on collectibility can include information about the basic solvency of the underlying defendant as shown by its assets, net worth, or investment proceeds.

Using the normal balancing process the Court rejected Hecht’s argument that its own settlement protected the firm’s financial information from disclosure.  Hecht was a third party witness properly subject to the deposition subpoena.  It could not preclude discovery relevant to an essential issue such as collectibility.  No rule or law required a bifurcated proceeding where Panther had to make a showing of liability prior to conducting financial discovery against Hecht.

Hecht argued that its insurance policy of four million along with Panther’s allegation that the firm was solvent up to fifty million was sufficient evidence to show that something could have been collected against it.  The Court of Appeal held that Panther was required to prove the extent to which a judgment would have been collectible to establish damages.

The Court recognized that Hecht’s privacy interests were at stake.  Even though Hecht is an artificial entity,individuals with privacy rights make up the partnership.  The Court did not define the parameters of the privacy rights of a law partnership, but assumed that they exist.  The question was the proper balancing of the need for the requested discovery against the countervailing privacy rights.  Because Panther must prove collectibility to show causation and damages, Hecht could not refuse all discovery.

Comment: The burden of demonstrating collectibility is firmly on the plaintiff’s side of the equation.

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