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September 29, 2010

Chan v. Lund (2010) 188 Cal.App.4th 1159

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The Sixth District holds that a party cannot rescind a settlement agreement due to the allegedly coercive tactics of the party’s attorney.

Chan filed a complaint against his neighbors the Lunds and Norma Tree for trespass, negligence, and wrongful injuries to trees.  After the case settled in mediation Chan substituted counsel and the defendants filed motions to enforce the settlement.

Chan asserted that the settlement was voidable because his consent was coerced by his prior counsel through tactics that amounted to duress, undue influence, fraud, and prohibited financial dealings with a client.  Chan’s attorney threatened to withdraw on the eve of trial if Chan refused to participate in mediation or to make concessions to settle the matter.  Chan alleged that his attorney did not advise he would need court approval to withdraw and that ethical rules precluded withdrawal if it would prejudice the Chan’s rights.  In addition, the attorney induced the settlement by agreeing to discount his fees.

The trial court enforced the monetary terms of the settlement but found there was no complete agreement regarding injunctive relief.
The Court of Appeal considered Chan’s claim that his attorney “extorted” the settlement by threatening to withdraw and discounting his fee.  Chan argued that the conduct of his attorney violated criminal statutes as did enforcement of the settlement.

Extortion is to obtain the property of another with his consent induced by a wrongful use of force or fear, or under color of official right, and may be accomplished by a threat of unlawful injury.  Attorneys are not exempt from principles of extortion in their professional conduct.  The Court found that the circumstances surrounding the settlement did not support a prima facie case of extortion because Chan failed to show that his agreement was induced by his attorney’s alleged threat to withdraw.  Chan had declared that the threat to withdraw induced him to attend the mediation to persuade his attorney to retract this threat.  Although Chan declared that the threat of withdrawal was repeated at the mediation Chan’s declaration was inconsistent because it stated that the attorney threatened to withdraw and offered to discount his fees if Chan would agree to both the monetary terms and injunctive relief.  However, the settlement agreement did not condition the monetary compensation on the injunctive relief.  Even if the threats were made Chan did not establish extortion because he did not surrender anything to his attorney; Chan’s claims were surrendered to the Lunds and Norma Tree in exchange for a payment.

The Court disagreed that enforcement of the settlement was a further criminal act even if Chan could establish extortion.  There was no evidence that the Lunds or Norma Tree was aware of the allegedly criminal acts of Chan’s attorney.

The Court of Appeal held that Chan could not rescind the settlement agreement on theories of economic duress; undue influence; or fraud.

Modern economic duress doctrine requires a wrongful act which is sufficiently coercive to cause a reasonably prudent person faced with no reasonable alternative to succumb to the perpetrator’s pressure.  Where economic duress is present a party to a contract may rescind the contract under certain circumstances.  The other party to the contract must know that the duress has occurred and take advantage of it by enforcing the contract, particularly a contract made with inadequate consideration.  Chan’s attorney was not a party to the settlement agreement, and there was no evidence that he connived with the Lunds and Norma Tree to exert pressure on Chan, or that they were even aware of it.

Chan’s attorney’s offer to discount his fee was not undue influence as a violation of Rule of Professional Conduct 3-300 which prohibits an attorney from entering into a business transaction with a client absent informed written consent.  The comments to the rule make clear that the Rule does not apply to retainer agreements between attorney and client.  The rule does apply where the attorney seeks a security interest in client property to secure fees.  Chan’s attorney’s offer to discount his fees was not a “business transaction” that Chan’s attorney sought to enter into, nor did the attorney acquire an interest in Chan’s property.

Nor were the threat to withdraw or the fee discount “undue influence” under Civil Code § 1575 which precludes “taking a grossly oppressive and unfair advantage of another’s necessities or distress.” Furthermore, rescission under this section requires connivance with the other party to the contract, in this case the Lunds and Norma Tree.

Finally, the Court concluded that the threat to withdraw without the advice that withdrawal would require court approval was not fraud that warranted rescission.  There was no precedent for such a conclusion.  As with the other rescission theories presented by Chan, the lack of any evidence of the attorney’s collusion with the Lunds or Norma Tree was fatal to Chan’s claim.

Comment: The Court of Appeal was likely mindful that no settlement would be safe if parties were free to rescind based on claims of their counsel’s coercive conduct.


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