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June 15, 2007

Expansion Pointe Properties LP, v. Procopio, Cory, Hargreaves & Savitch, LLP (2007)

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The Fourth District holds that the Supreme Court’s decision precluding underlying punitive damages as compensatory damages in a legal malpractice action can be applied to attorney-client relationships that were initiated prior to that decision.  In addition, the court found no reason not to honor a choice of law provision between an attorney and client in a retainer agreement.

Expansion Pointe Properties LP (“Pointe”) was a property developer who joined with the Mutual Life Insurance Company of New York (MONY) for financial reasons.  Pointe retained Procopio, Cory, Hargreaves & Savitch, LLP, a San Diego law firm, to represent it in litigation against MONY in Arizona.  The retainer agreement provided that California law applied and that venue would be in San Diego.  In the Arizona action, MONY obtained summary judgment against Pointe on punitive damages claims.  Pointe nonetheless recovered a substantial compensatory verdict at trial.

Pointe then brought an action against Procopio for malpractice and breach of fiduciary duties, claiming that Procopio failed to fully understand Arizona law on punitive damages, and intentionally failed to present certain evidence in support of Pointe’s punitive damages claim that would have defeated MONY’s summary judgment motion and resulted in an award of punitive damages in its favor.

Procopio moved for summary judgment, arguing that under Ferguson v.  Lieff, Cabraser, Heimann & Bernstein (2003) 30 Cal.4th 1037, [PL Update 154] underlying punitive damages cannot be recovered in a legal malpractice action.  The court granted the motion finding that although Pointe had presented sufficient evidence to raise a triable issue of fact concerning Procopio’s presentation of evidence in opposition to MONY’s motion for summary judgment, underlying punitive damages are not recoverable in California in a legal malpractice action as a matter of law.

This preclusion is due to public policy reasons.  Attorney liability for lost punitive damages in an underlying case would not serve a societal interest, because the attorney did not commit and had no control over the intentional misconduct.  It would not punish the culpable tortfeasor or deter that tortfeasor and others from committing similar wrongful acts in the future.  It would also violate the public policy against speculative damages due to the complex standard of proof applicable to such claims in the context of a malpractice case.

Pointe argued that retrospective application of that decision was improper.  The Court of Appeal noted that it is the general rule that a decision of a court of supreme jurisdiction overruling a former decision is retrospective in its operation and that the effect is not that the former decision was bad law but that it never was the law.

Although Ferguson was decided before Pointe filed its complaint; Pointe urged that the court should consider the date of its retainer agreement with Procopio.  At that time, Pointe urged, the law of California and Arizona were similar, and only later did California law change to Pointe’s detriment.  Pointe waived any argument concerning retrospective application of Ferguson.  Even absent waiver, the court stated it would have found against Pointe on the issue.

Procopio had no duty to advise Pointe on the changing law concerning attorney liability for underlying punitive damages.  An attorney’s duty to keep the client apprised of significant developments relates to the matter the attorney is handling for the client.

Attorneys do not commit malpractice based on the state of the law pertaining to malpractice damages, and there is no suggestion that Procopio believed Pointe had a potential malpractice claim against it.  The duty to alert the client to reasonably apparent legal problems outside the scope of the retention pertains to claims against third parties arising from the same course of conduct for which the attorney was retained.

The retroactive application of Ferguson did not impair Pointe’s vested contract rights.  Procopio’s retention was to represent Pointe in the MONY litigation, the retention did not pertain to a potential malpractice action.  If Pointe were correct, any pre-Ferguson agreement would not be subject to its limitation in a later malpractice action.  Given the public policy basis of Ferguson, such a holding would be against public policy.

The court rejected Pointe’s assertion that Arizona law should have applied to his claim for underlying punitive damages.  Not only was there a choice of law provision in the retainer agreement, but Pointe acquiesced to it by filing its action in California.

Typically the law of the state chosen by the parties will govern.  An exception is where the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice.  Another is where application of the law of the chosen state would be contrary to a fundamental policy of a state that has a materially greater interest than the chosen state and would be the logical jurisdiction in the absence of a choice of law by the parties.  Both the substantial relationship and reasonable basis tests were met because Procipico is domiciled in California.

Pointe failed to show Arizona law should apply absent a choice-of-law provision in the retainer agreement.  Under the Restatement courts will consider relevant contacts that include the place of contracting; the place of negotiation of the contract; the place of performance; the location of the subject matter of the contract, and the domicile, residence, nationality, place of incorporation and place of business of the parties.  The factors should be evaluated according to their relative importance with respect to the particular issue to select law which will be most fair and equitable, which will be in accord with the relevant policies of the forum state, and which will accord with the parties’ expectations.

The retainer agreement states it was entered into in California and Procopio’s place of business is California.  Pointe presented no evidence that the contract was formed in Arizona; it asked the court to assume this.  Although the retainer agreement’s subject matter and Procopio’s performance were in Arizona, the relevant issue is the California malpractice action, not the underlying Arizona action.  The parties entered into the retainer agreement knowing the subject matter and place of performance, yet selected California as both the forum state and the choice of law state.  There was no surprise or unfair advantage and application of California law met the parties’ expectations.

Because the forum was California, courts would normally apply California’s “governmental interests” test, which begins with applying the law of the forum state California, unless there is some reason not to.  Arizona’s interest in the matter is not materially greater than California’s.  Procopio is a California law firm and California’s Supreme Court has precluded recovery of underlying punitive damages in legal malpractice actions for sound public policy reasons.

Comment: Courts are reluctant to deny attorneys the protection of Ferguson, given the strong public policy reasons behind that decision.  The inclusion of a choice of law and forum provision in Procopio’s retainer agreement helped the court resolve difficult choice of law questions.  Given the many opportunities for inter-state practice, the use of such a provision is a good risk management tool.

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