Colony Insurance Company v. Fladseth et al

Filing 59

ORDER GRANTING PLAINTIFFS MOTION FOR SUMMARY JUDGMENT. Signed by Judge Claudia Wilken on 4/3/2013. (ndr, COURT STAFF) (Filed on 4/3/2013)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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COLONY INSURANCE COMPANY,

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Plaintiff,

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v.
DOUGLAS FLADSETH; and LAW OFFICES
OF DOUGLAS C. FLADSETH,

ORDER GRANTING
PLAINTIFF’S MOTION
FOR SUMMARY
JUDGMENT (Docket
No. 42)

Defendants.

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No. C 12-1157 CW

________________________________/

United States District Court
For the Northern District of California

Plaintiff Colony Insurance Company moves for summary judgment
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finding that two state court actions do not fall within the
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coverage terms of its policy insuring Defendants Douglas Fladseth
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and the Law Offices of Douglas C. Fladseth and that it has no duty
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to defend or indemnify Defendants in those actions.

Defendants

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oppose Plaintiffs’ motion.

Having considered the papers filed by

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the parties and their arguments at the hearing on this motion, the
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Court GRANTS Plaintiff’s motion.
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BACKGROUND
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I.

Plaintiff insured the Law Offices of Douglas C. Fladseth

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The insurance policy

under Lawyers Professional Liability Policy number EO404193, valid
from August 20, 2010 to August 20, 2011.
7.

Fine Decl. ¶ 5, Ex. A,

The policy provides in relevant part,

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SECTION I - COVERAGES

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1. Insuring Agreement

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a. We will pay, in excess of the Deductible shown
in the Declarations, those sums any insured becomes
legally obligated to pay as “damages” because of an
act, error or omission arising out of your “legal

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services” rendered or that should have been
rendered. We will have the right and duty to
defend any insured against a “claim” seeking those
“damages.” However, we will have no duty to defend
any insured against any “claim” seeking “damages”
for “legal services” to which this insurance does
not apply. . . .

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2. Exclusions

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This Policy does not apply to any “claim”:

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. . .

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d. Based on or directly or indirectly arising out
of the rights or duties under any agreement
including disputes over fees for services;

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United States District Court
For the Northern District of California

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. . .

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j. Based on or directly or indirectly arising out
of or resulting from:

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. . .

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(2) The gaining by any insured of any personal
profit, gain or advantage to which an insured
is not legally entitled;

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. . .

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However, we shall defend such allegations
against any insured if it involves a “claim”
otherwise covered under the Policy until final
adjudication.

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. . .

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Id. at 9-11.
The policy defines “claim” to mean “a demand for monetary
‘damages’ arising out of a ‘legal service’ made against any
insured by service of suit, the institution of arbitration or
administrative proceedings or otherwise, but does not include a
demand for equitable or non-pecuniary relief.”

Id. at 17.

“‘Damages’ means judgments, awards and settlements an insured is
legally obligated to pay as a result of a ‘claim’ to which this
policy applies.”

Id.

“Legal services” means in relevant part the
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usual and customary services of a licensed lawyer in
good standing acting by or on behalf of the “Named
Insured” described in the Declarations of this Policy
. . .

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Id.

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SECTION I--COVERAGES, 2. Exclusions is amended and the
following added:

1

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The policy also contains an addendum that provides,

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This insurance does not apply to any “claim” for or
awards of:

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1. Punitive, exemplary or multiple damages; or

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2. Equitable or non-pecuniary relief;

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including any fines, penalties, court imposed
sanctions, return or restitution of legal fees,
costs or other expenses associated with such
awards.

United States District Court
For the Northern District of California

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Id. at 21.
II.

The state court actions
The instant case seeks to resolve whether Plaintiff has a

duty to defend and indemnify Defendants in two ongoing state court
cases, Scholz v. Fladseth, Sonoma County Case No. SCV249442 (the
Scholz action), and Christiansen v. Fladseth, Sonoma County Case
No. SCV250126 (the Christiansen action).
A. The Scholz action
On April 4, 2011, Mary Scholz, as trustee for the Amanda

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Greene Trust, filed the Scholz action in state court against
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Fladseth.

Coelho Decl. ¶ 3, Ex. B.1

On April 27, 2011, Scholz

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filed a first amended complaint (1AC) in the action.

Coelho Decl.

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¶ 3, Ex. C (Scholz 1AC).
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26
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In their opposition brief, Defendants state that the Scholz
action was filed on January 11, 2012. Opp. at 4. However, the
document that they cite shows a filing date of April 4, 2011.
Coelho Decl. ¶ 3, Ex. B.
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In the Scholz 1AC, Scholz alleges that Fladseth successfully

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represented her daughter, Amanda Greene, in arbitration

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proceedings with Kaiser arising from the failure to diagnose and

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treat her colon cancer, in which the arbitrator awarded her

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$475,000.

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wrongfully represented to Amanda that he was “entitled to a fee

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based on the total or gross recovery instead of the net sum

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recovered after deducting costs,” as required by California

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Business and Professions Code section 6146 for attorneys’ fees in

Id. at ¶¶ 1, 3, 15.

She contends that Fladseth

United States District Court
For the Northern District of California

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medical malpractice and health care professional negligence

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actions.2

Id. at ¶¶ 10-11, 16.

She alleges that, when he

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2

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(a) An attorney shall not contract for or collect a
contingency fee for representing any person seeking
damages in connection with an action for injury or
damage against a health care provider based upon such
person’s alleged professional negligence in excess of
the following limits:

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This statute provides in relevant part,

(1) Forty percent of the first fifty thousand
dollars ($50,000) recovered.

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(2) Thirty-three and one-third percent of the next
fifty thousand dollars ($50,000) recovered.

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(3) Twenty-five percent of the next five hundred
thousand dollars ($500,000) recovered.

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(4) Fifteen percent of any amount on which the
recovery exceeds six hundred thousand dollars
($600,000).

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The limitations shall apply regardless of whether the
recovery is by settlement, arbitration, or judgment, or
whether the person for whom the recovery is made is a
responsible adult, an infant, or a person of unsound
mind.

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. . .

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(c) For purposes of this section:

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disbursed the award to her, Fladseth wrongfully withheld amounts

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exceeding the statutorily allowable fee.

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29-30.

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fiduciary duty to disclose to clients the legal limitations on

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attorneys’ fees in such actions.

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Scholz also alleges that Fladseth improperly charged office-

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overhead expenses as costs in order to subvert the statutory

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limitations on attorneys’ fees, for example, by charging for

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secretarial and paralegal services under the guise of expert

Id. at ¶¶ 10-11, 16-17,

She accuses Defendants of violating their statutory and

Id. at ¶¶ 12, 17.

In her 1AC,

United States District Court
For the Northern District of California

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consultant services.

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difference between the Scholz 1AC and the original complaint filed

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in that action.

Id. at ¶ 22.

This appears to be the only

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Scholz asserts six claims against Fladseth: (1) professional

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negligence, based on the failure to advise Amanda properly of the

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maximum attorneys’ fees and costs, misrepresenting this to her,

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taking a greater portion of her recovery than permitted by law,

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and breaching the ethical duties of good faith and fidelity

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through these actions, id. at ¶¶ 25-26; (2) money had and

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received, seeking to void the contingency fee agreement and

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disgorge the wrongfully taken fees and costs, id. at ¶¶-29-32;

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(3) fraud, based on Fladseth’s intentional misrepresentation of

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the amount of attorneys’ fees and costs to which he was legally

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(1) “Recovered” means the net sum recovered after
deducting any disbursements or costs incurred in
connection with prosecution or settlement of the
claim. Costs of medical care incurred by the
plaintiff and the attorney’s office-overhead costs
or charges are not deductible disbursements or
costs for such purpose.
Cal. Bus. & Prof. Code § 6146.
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entitled, id. at ¶¶ 34-37; (4) conversion, for taking the

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additional amount and refusing to turn it over to Amanda and

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Scholz, id. at ¶¶ 39-43; (5) accounting of the legal fees and

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costs, id. at ¶¶ 45-47; and (6) violation of California’s Unfair

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Competition Law (UCL) by the acts alleged in the complaint,

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including charging fees in excess of those allowed under state law

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and falsely representing that this was permissible, id. at

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¶¶ 49-53.

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requests for general and special damages, an accounting and a

Her prayer for relief includes, among other things,

United States District Court
For the Northern District of California

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return of the amount that was improperly charged and interest on

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that amount.

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Trial in the Scholz action was set to take place on November

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30, 2012.

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represented that discovery in the Christiansen action is

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incomplete, see id. ¶ 6, they have made no such claim about

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discovery in the Scholz action.

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Kingsbury Decl. ¶ 7.

Although Defendants have

In response to Fladseth’s motion for summary adjudication in

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the Scholtz action, Scholz’s retained expert, Linda Fermoyle Rice,

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submitted a declaration dated September 25, 2012.

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¶ 9, Ex. 1 (Rice Decl.).

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medical negligence claims involve the use of expert witnesses,” to

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“testify on issues of standard of care, causation and/or damages,”

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which are “legitimate case costs that are routinely billed to the

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client and deducted from any gross settlement, judgment or

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arbitration award before attorneys’ fees are calculated.”

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Decl. ¶ 9.

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expert under those circumstances typically will include that

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expert’s overhead costs, for example typing reports or notes which

Kingsbury Decl.

In it, she opined, “Virtually all

Rice

She also stated that the “hourly fee paid to the

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may be done by the expert’s secretarial staff.”

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further stated that it “is not appropriate or within the standard

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of care for a medical malpractice lawyer to assign routine

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clerical jobs, which can and are done in-house, to a third party,

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then bill them to the client as case costs,” and that this was

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what Defendants had done.

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United States District Court
For the Northern District of California

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Id. at ¶ 10.

Id.

However, she

She summarized,

Mr. Fladseth was using an outside vendor to shift
overhead costs to his clients, which is not acceptable,
appropriate, or the standard of care for lawyers
handling medical malpractice cases. By doing so, Mr.
Fladseth deprived his clients of money to which they
were entitled. He compounded the injury to his clients
by calculating his attorneys’ fees based on the gross
recovery obtained for them, in violation of the law.
Id. at ¶ 13.

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B. The Christiansen action
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On August 3, 2011, Tammy Christiansen, Lori Wilson, Ronald
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Wanamaker, and Kristina Fontaine filed a putative class action
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complaint against Fladseth and another attorney, Richard Sax.
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Coelho Decl. ¶ 5, Ex. D.

On September 26, 2012, the state court

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granted the plaintiffs’ motion to amend their complaint to add two
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new claims.
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Kingsbury Decl. ¶ 3; see Charlston Reply Decl. ¶ 5,

Ex. A (Christiansen 1AC).3

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In the Christiansen 1AC, the plaintiffs’ substantive
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allegations against Fladseth are nearly identical to those in the
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The Kingsbury declaration represents that the state court
granted the motion on September 26, 2011. Kingsbury Decl. ¶ 3.
This date appears to be erroneous. The declaration, which was
dated October 3, 2012, also states that the motion to amend was
filed “recently” and that, as of October 3, 2012, Defendants had
not yet been served with a copy of the order granting the motion
or the 1AC. Id. In addition, the copy of the Christiansen 1AC
that Defendants provided to Plaintiff by email on October 4, 2012
is dated July 27, 2012. Charlston Decl. ¶ 5, Ex. A.
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Scholz action.

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for money had and received, fraud, conversion, accounting, and

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violation of the UCL as those in the Scholz action, and two

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additional claims for breach of fiduciary duty and constructive

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fraud.

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for professional negligence as Scholz did.

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breach of fiduciary duty, the Christiansen plaintiffs allege that

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Fladseth breached his duties towards them and the class by

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misrepresenting to them the amounts of attorneys’ fees and costs

The plaintiffs assert the same causes of action

See Christiansen 1AC ¶¶ 29-78.

They do not bring a claim
In their claim for

United States District Court
For the Northern District of California

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that he was allowed to charge.

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constructive fraud, the plaintiffs allege that each fee agreement

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“specifically recited that defendant Fladseth was entitled to the

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attorneys’ fees set forth in the contingency fee agreement by

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virtue of Business and Professions Code § 6146,” that Fladseth

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failed to disclose the fact that the fee agreements in fact

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violated that section, and that they would not have entered into

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the fee agreements if they had known such facts.

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As relief for the claims for breach of fiduciary duty and

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constructive fraud, the plaintiffs seek awards of general and

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special damages, exemplary and punitive damages, and disgorgement

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of fees.

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Id. at ¶¶ 58-71.

In the claim for

Id. at ¶¶ 73-78.

Id. at ¶¶ 69-71, 76-78.4

The plaintiffs and putative class members in the Christiansen
action testified in depositions as to their feelings about

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4

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The parties have represented that, after the instant motion
was fully briefed and heard, the trial court granted a motion by
the plaintiffs to file a second amended complaint (2AC). Docket
Nos. 56 and 57. The only apparent difference between the
Christiansen 1AC and 2AC appears to be the addition of two new
plaintiffs. See Docket No. 56, Ex. A (Christiansen 2AC) ¶¶ 5-6.
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Fladseth’s handling of their cases.

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Darling Wolfe testified that she was “a little disappointed” that

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Fladseth “wasn’t a little bit more aggressive” and that he seemed

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to change his mind about taking her case “midstream” after the

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case had progressed too far along for her to be able to find a new

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attorney.

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Christiansen also testified that she felt that Fladseth “gave up”

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and “lost interest” in her case.

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Putative class member Lila Ann Schoonmaker Bollmann testified that

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United States District Court
For the Northern District of California

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she was “angry” and “very disappointed” in the representation that

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Fladseth had provided her.

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plaintiff Lori Ann Wilson testified that, in the middle of

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arbitration with Walgreens, Fladseth said to Sax that he was not

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being aggressive enough, “that the arbitration should stop” and

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that Sax should “shut up.”

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“the emotions had gotten so high” at the arbitration made her

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“upset.”

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III. Tender of defense and history of the instant action

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Putative class member Lynn

Kingsbury Decl. ¶ 10, Ex. 2.

Named plaintiff Tammy

Kingsbury Decl. ¶ 13, Ex. 5.

Kingsbury Decl. ¶ 11, Ex. 3.5

Kingsbury Decl. ¶ 12, Ex. 4.

Named

That

Id.

On April 19, 2011, Plaintiff received a claim sent by the

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Egloff Insurance Agency on behalf of Defendants for defense and

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indemnity regarding the Scholz action.

Fine Decl. ¶ 6, Ex. B.

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Defendants also assert that Bollman testified that Fladseth
claimed he would be able to reverse a cause of death finding on
her husband’s death certificate so that she could recover on his
life insurance policy, but that he was unable to do so. Opp. at
6. In the transcript offered into evidence, Bollman in fact
testified that Fladseth said he “felt” that he could get the cause
of death changed, not that he would be certainly be able to do it.
Kingsbury Decl. ¶ 11, Ex. 3, 55:1-4. The testimony offered into
evidence also does not reveal whether Fladseth was or was not able
to have the cause of death finding reversed.
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On May 10, 2011, Plaintiff sent Defendants a letter, stating

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that it would defend them in the Scholz action, but that it would

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do so under a reservation of rights.

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the letter, Plaintiff stated that it reserved the rights “to file

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a declaratory relief action to determine its rights and duties

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under the policy” and “to withdraw from the defense and seek

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recoupment of defense fees and costs if it is determined during

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the course of the lawsuit that Colony has no coverage.”

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further notified Defendants that “because Colony has reserved

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United States District Court
For the Northern District of California

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rights on this matter you are entitled to associate counsel of

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your choice with this case.”

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Fine Decl. ¶ 7, Ex. C.

Id.

In

It

Id.

On May 31, 2011, the Egloff Insurance Agency forwarded

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Plaintiff a letter dated May 16, 2011 it received from Defendants.

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Fine Decl. ¶ 8, Ex. D.

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copy of the 1AC in the Scholz action and asserted that the “basis

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for the claim is for a miscalculation of the esoteric medical

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malpractice attorney fees which have now been paid in full.”

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Defendants also state, “In fact, we did not know the medical

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malpractice fee was to be calculated only after deducting all of

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our costs,” and that “this amounted to about a $20,000 difference

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in the fee calculation,” which they had since paid into Scholz’s

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new attorney’s State Bar trust account.

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represent that “Colony Insurance offered Cumis Counsel and Mike

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Watters is so acting.”

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With the letter, Defendants provided a

Id.

Id.

They further

Id.

On August 8, 2011, Plaintiff received a claim sent by the

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Egloff Insurance Agency on behalf of Defendants for defense and

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indemnity regarding the Christiansen action.

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E.
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Fine Decl. ¶ 9, Ex.

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On August 10, 2011, Plaintiff sent Defendants a letter

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stating that it would defend them in the Christiansen action, but

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that it would do so under a reservation of rights.

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¶ 10, Ex. F.

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Fine Decl.

Plaintiff initiated this action on March 8, 2012 and filed

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its 1AC on April 10, 2012.

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Plaintiff seeks a declaration that it does not owe a defense or

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indemnity to Defendants for the claims asserted in the Scholz and

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Christiansen actions.

United States District Court
For the Northern District of California

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Docket Nos. 1, 9.

In the 1AC,

On April 24, 2012, Defendants moved to dismiss or stay these

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proceedings pending resolution of the Scholz and Christiansen

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actions.

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will be duplicative of the state court actions, because the legal

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and factual questions here are the same as in those actions.

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Docket No. 12.

Defendants argued that the instant case

On June 11, 2012, the Court denied Defendants’ motion to

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dismiss or stay, finding that the coverage question is unrelated

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to the issues that will be determined in the underlying actions,

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that this litigation is not duplicative of the state court action,

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that it was not filed as a means of forum shopping and that it

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would serve a useful purpose to clarify Plaintiff’s legal

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obligations in the underlying state actions.

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Docket No. 39.

On June 20, 2012, the Court held a case management

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conference.

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2013 as the deadline to hear all case-dispositive motions and set

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a schedule for the filing of such motions.

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Docket No. 41.

At that time, the Court set March 7,

Id.

On September 12, 2012, Plaintiff filed an early motion for

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summary judgment on its claims against Defendants and noticed it

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for hearing on October 25, 2012.

Docket No. 42.
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In its

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supporting documents, Plaintiff provided evidence that, as of

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September 11, 2012, it had paid $110,518.63 to O’Brien, Watters &

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Davis LLP, Defendants’ chosen law firm, for the defense of the

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Scholz and Christiansen actions.

Fine Decl. ¶ 12, Ex. G.

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On September 12, 2012, the Court issued an order, noting that

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Plaintiff had filed an early summary judgment motion, and stating,

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The Court prefers to hear all case-dispositive motions
at one time, absent a good reason to do otherwise.
Plaintiff’s motion may be heard on the date noticed as
long as Defendants are prepared to oppose it and neither
party intends to file another case-dispositive motion to
be heard at a later date. The parties shall meet and
confer about the schedule and file an appropriate motion
under L.R. 7-11 if they are unable to agree.

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United States District Court
For the Northern District of California

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Docket No. 44.
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On September 21, 2012, the parties filed a stipulation to
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extend the time for Defendants to respond to the motion for
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summary judgment from September 26, 2012 to October 3, 2012,
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because Defendants’ counsel had to travel in September for work on
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other cases.

Docket No. 45.

The Court granted the stipulation on

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September 25, 2012.

Docket No. 46.

Defendants did not represent

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in the stipulation that they were unprepared to oppose the motion
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for summary judgment and did not file an administrative motion
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seeking to delay the hearing or briefing on the motion for summary
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judgment.
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On October 3, 2012, Defendants filed their opposition.
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Docket No. 47.

In their opposition, Defendants argued, among

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other things, that they have not conducted sufficient discovery in
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the underlying actions and this case and thus summary judgment is
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premature at this time.

Opp. at 16-17.

They did not file an

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affidavit or declaration pursuant to Federal Rule of Procedure
28
12

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56(d).

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to stay “in light of the discovery developed in the underlying

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action[s].”

Defendants also requested permission to renew their motion

Id. at 18.

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In the declaration of Deirdre Taber Kingsbury, which

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Defendants submitted in support of their opposition, she stated

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that a motion to amend the complaint in the Christiansen action

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had recently been granted.

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Plaintiff requested a copy of the Christiansen 1AC to review it

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for coverage, which Defendants then provided.

Kingsbury Decl. ¶ 3.

In response,

Charlston Decl.

United States District Court
For the Northern District of California

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¶¶ 4-5.

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determined that the amendments still did not create the

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possibility for coverage.

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After reviewing the Christiansen 1AC, Plaintiff

Id. at ¶ 5.

On February 28, 2013 and March 1, 2013, the parties filed

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case management statements representing that the trial court in

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the Christiansen action granted a motion to file a 2AC in that

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action.

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not change anything relevant to the present action.

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56.

Docket Nos. 56 and 57.

Plaintiff stated that the 2AC did
Docket No.

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LEGAL STANDARD

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Summary judgment is properly granted when no genuine and

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disputed issues of material fact remain, and when, viewing the

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evidence most favorably to the non-moving party, the movant is

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clearly entitled to prevail as a matter of law.

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56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986);

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Eisenberg v. Ins. Co. of N. Am., 815 F.2d 1285, 1288-89 (9th Cir.

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1987).

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28

Fed. R. Civ. P.

The moving party bears the burden of showing that there is no
material factual dispute.

Therefore, the court must regard as
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true the opposing party’s evidence, if supported by affidavits or

2

other evidentiary material.

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815 F.2d at 1289.

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in favor of the party against whom summary judgment is sought.

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Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,

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587 (1986); Intel Corp. v. Hartford Accident & Indem. Co., 952

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F.2d 1551, 1558 (9th Cir. 1991).

8
9

Celotex, 477 U.S. at 324; Eisenberg,

The court must draw all reasonable inferences

Material facts which would preclude entry of summary judgment
are those which, under applicable substantive law, may affect the

United States District Court
For the Northern District of California

10

outcome of the case.

The substantive law will identify which

11

facts are material.

Anderson v. Liberty Lobby, Inc., 477 U.S.

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242, 248 (1986).

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14

DISCUSSION
Plaintiff seeks judgment that it is not required either to

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defend or to indemnify Defendants in the state court actions.

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Plaintiff argues the state court actions fall outside of, or are

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excluded from, the coverage provisions of the policy for four

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reasons: the relief sought in the underlying actions consists of

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restitution, not damages; the claims asserted are not based on

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Defendants’ provision of “legal services,” as defined in the

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policy; the claims are based on and arise out of a dispute over

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fees; and the claims are based on and arise out of Defendants

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gaining a personal profit or advantage to which they were not

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entitled.

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A “liability insurer owes a broad duty to defend its insured

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against claims that create a potential for indemnity.”

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Mann Ins. Co. v. Barbara B., 4 Cal. 4th 1076, 1081 (1993) (citing

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Gray v. Zurich Ins. Co., 65 Cal. 2d 263 (1966)).
14

Horace

An “insured is

1

entitled to a defense if the underlying complaint alleges the

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insured’s liability for damages potentially covered under the

3

policy, or if the complaint might be amended to give rise to a

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liability that would be covered under the policy.”

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Corp. v. Superior Court, 6 Cal. 4th 287, 299 (1993) (emphasis in

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original and citation omitted).

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only a showing of a potential for liability is “one reason why it

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is often said that the duty to defend is broader than the duty to

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indemnify.”

United States District Court
For the Northern District of California

10

Montrose Chem.

That the duty to defend requires

Id. at 299.

To show that a duty to defend has attached, an insured “must

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prove the existence of a potential for coverage.”

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Cal. 4th at 300 (emphasis in original).

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no duty exists, “the insurer must establish the absence of any

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such potential.”

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the insured need only show that the underlying claim may fall

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within policy coverage; the insurer must prove it cannot.”

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(emphasis in original).

18

Montrose, 6

In contrast, to show that

Id. (emphasis in original).

“In other words,

Id.

A duty to defend may exist “even where coverage is in doubt

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and ultimately does not develop.”

20

internal quotation marks omitted).

21

inferable in the complaint, or otherwise known or discovered by

22

the insurer, suggest a claim potentially covered by the policy,

23

the insurer’s duty to defend arises and is not extinguished until

24

the insurer negates all facts suggesting potential coverage.”

25

Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 655 (2005).

26

However, the “duty to defend cannot be adjudged on the basis of

27

hindsight.”

28

176 Cal. App. 3d 598, 610 (1986).

Id. at 295 (citation and
“If any facts stated or fairly

CNA Casualty of California v. Seaboard Surety Co.,

15

Instead, “it must be determined

1

from the facts and inferences known to an insurer from the

2

pleadings, available information and its own investigations at the

3

time of the tender of defense.”

4

I.

5

Id.

Coverage provisions
“Insurance policies are written in two parts: an insuring

6

agreement which defines the type of risks being covered, and

7

exclusions, which remove coverage for certain risks which are

8

initially within the insuring clause.”

9

Ins. Co., 56 Cal. App. 4th 1489, 1497 (1997).

Rosen v. Nations Title
“Before even

United States District Court
For the Northern District of California

10

considering exclusions, a court must examine the coverage

11

provisions to determine whether a claim falls within [the policy

12

terms].”

13

(2004) (brackets in original; internal quotation marks and

14

citation omitted).

15

claims fall within the scope of coverage, and the insurer bears

16

the burden of proving that otherwise covered claims fall within an

17

exclusion.

18

(1995).

19

whereas clauses identifying coverage are interpreted broadly.”

20

Garvey v. State Farm Fire & Casualty Co., 48 Cal. 3d 395, 406

21

(1989).

22

Atl. Mut. Ins. Co. v. Ruiz, 123 Cal. App. 4th 1197, 1208

The insured bears the burden of showing that

Waller v. Truck Ins. Exchange, Inc., 11 Cal. 4th 1, 16

Further, “exclusionary clauses are interpreted narrowly,

Under the policy, to be covered, the state court actions must

23

be “claims” seeking “damages” on “an act, error or omission

24

arising out of [Defendants’] legal services rendered or that

25

should have been rendered.”

26

contends that the state court complaints do not state claims based

27

on providing “legal services” and they seek equitable or non-

Fine Decl. ¶ 5, Ex. A, 9.

28
16

Plaintiff

1

pecuniary relief instead of monetary damages.

2

both arguments.

Defendants dispute

3

A. Providing “legal services”

4

The parties dispute whether any claims in the state law cases

5

are based on providing legal services.

6

billing and administrative practices do not fall within the

7

meaning of legal services.

8

that, even if they do not, claims based on providing legal

9

services have been alleged.

United States District Court
For the Northern District of California

10

Plaintiff argues that

Defendants contend that they do, and

The policy’s definition of “legal services” is set forth in

11

relevant part above.

12

“usual and customary services of a licensed lawyer in good

13

standing.”

In summary, this phrase encompasses the

Id. at 17.

14

Plaintiff contends that this definition limits coverage to

15

claims that arise out of the provision of law-related services,

16

not all acts or omissions that occur in the general running of a

17

business that provides legal services, such as administration or

18

billing.

19

phrase “legal services” and the more general phrase “professional

20

services” have recognized a distinction between skills or

21

knowledge specific to the profession, and administrative tasks,

22

such as billing, inherent to all businesses, and have found that

23

the latter is not encompassed with these terms.

24

Co. v. Donald T. Bertucci, Ltd., 399 Ill. App. 3d 775, 782-788

25

(2010) (holding the accusation that an attorney withheld more than

26

the permissible amount of fees under Illinois law in a medical

27

malpractice case was not an action arising from an act or omission

28

in the rendering of legal services and thus was not covered by his

Plaintiff points out that courts interpreting both the

17

See Cont’l Cas.

1

professional liability insurance coverage); see also Gregg &

2

Valby, LLP v. Great Am. Ins. Co., 316 F. Supp. 2d 505, 513 (S.D.

3

Tex. 2003) (finding that billing and fee-setting are not

4

“professional services” because they do not “require specialized

5

legal skill and knowledge, nor are they acts particular to the

6

legal profession”); Tana v. Professionals Prototype I Ins. Co., 47

7

Cal. App. 4th 1612, 1619 (1996) (distinguishing between “acts or

8

omissions in the course of representing his clients” and “business

9

practices, such as attorney-client fee arrangements and disputes

United States District Court
For the Northern District of California

10

arising thereunder” in discussing the insured’s reasonable

11

expectation of coverage under a lawyers’ professional liability

12

policy).

13

The Ninth Circuit has explained, “A professional obviously

14

performs many tasks that do not constitute professional services,”

15

but that, “to be considered a professional service, the conduct

16

must arise out of the insured’s performance of his specialized

17

vocation or profession.”

18

977, 981 (9th Cir. 1981); see also Harad v. Aetna Casualty &

19

Surety Co., 839 F.2d 979, 985 (3d Cir. 1988) (“the practice of law

20

. . . has two very different and often overlooked components--the

21

professional and the commercial.

22

practice obviously involves the rendering of legal advice to and

23

advocacy on behalf of clients for which the attorney is held to a

24

certain minimum professional and ethical standards.

25

commercial aspect involves the setting up and running of a

26

business, i.e., securing office space, hiring staff, paying bills

27

and collecting on accounts receivable, etc., in which capacity the

28

attorney acting as businessperson is held to the same reasonable

Bank of California v. Opie, 663 F.2d

The professional aspect of a law

18

The

1

person standard as any other.”).

2

lawyers are not considered ‘professional services’ if they are

3

ordinary activities that can be completed by those lacking legal

4

knowledge and skill.”

5

“Thus, even tasks performed by

Gregg & Valby, 316 F. Supp. 2d at 513.

Defendants seek to distinguish the cases offered by Plaintiff

6

because some of them interpret the meaning of “professional

7

services” rather than “legal services.”

8

have considered the interpretation of professional services to be

9

informative where the definition of legal services, “apart from

However, other courts

United States District Court
For the Northern District of California

10

its focus on a lawyer’s activities, is not substantively different

11

from the definitions for ‘professional services’ set out in the

12

case law.”

13

(D. Mass. 2011); see also Cont’l Cas. Co., 399 Ill. App. 3d at

14

785-87 (interpreting the term “legal services” and discussing

15

cases that applied the term “professional services”).

16

substantive difference between the definition at issue here and

17

the definitions for “professional services” other than the fact

18

the definition here is focused on the services of a lawyer instead

19

of a generic professional.

20

Clermont v. Cont’l Cas. Co., 778 F. Supp. 2d 133, 139

There is no

Defendants argue that the definition here includes the usual

21

and customary services of a lawyer but does not limit those

22

services to only those performed in their capacity as a lawyer.

23

Opp. at 15.

24

encompass all acts that a lawyer performs in the course of

25

rendering services, including both administrative and professional

26

acts.

27
28

They contend that the term should be interpreted to

Opp. at 15-16.
However, the definition at issue here, which encompasses “the

services of a licensed lawyer,” is not written more broadly than
19

1

the definitions at issue in the cases discussed above and

2

unambiguously refers to those acts that a lawyer performs that use

3

his or her specialized training and knowledge.

4

Tana, the policy defined “professional services” in relevant part

5

as “[t]hose services rendered or that should have been rendered

6

for others as a lawyer.”

7

offer no principled difference between the definition in Tana,

8

which encompasses the services “of a lawyer,” and the definition

9

at issue here, which addresses those rendered “as a lawyer.”

For example, in

47 Cal. App. 4th at 1617.

Defendants

United States District Court
For the Northern District of California

10

Further, because there is no ambiguity in the term, Defendants’

11

reliance on the principle that ambiguities should be construed in

12

favor of coverage is unavailing.

13

Defendants also argue that the complaints at issue here do

14

allege “claims for acts, errors or omissions in connection with

15

the legal services rendered by defendants.”

16

Defendants apparently refer to the professional negligence claim

17

asserted in the Scholz 1AC, in which the plaintiff asserted that

18

Fladseth committed legal malpractice because he failed to advise

19

Amanda properly of the maximum attorneys’ fees and costs allowed

20

under state law.

21

negligence or malpractice claim does not alter that the billing

22

and fee-setting acts at issue are administrative tasks and not the

23

usual and customary services of a lawyer.

24

Opp. at 16.

However, that this was phrased as a professional

Accordingly, there is no dispute of material fact that the

25

underlying complaints do not create the potential for coverage

26

because they are not based on providing legal services.

27
28
20

1

B. Damages

2

Plaintiff also argues that there is no coverage under the

3

policy because the state court actions seek only restitution or

4

disgorgement of funds improperly gained, which cannot constitute

5

covered “damages” under insurance policies in California.

6

Unified W. Grocers, Inc. v. Twin City Fire Ins. Co., 457 F.3d

7

1106, 1115 (9th Cir. 2006) (“California case law precludes

8

indemnification and reimbursement of claims that seek the

9

restitution of an ill-gotten gain.”); Bank of the West v. Superior

See

United States District Court
For the Northern District of California

10

Ct., 2 Cal. 4th 1254, 1268 (1992) (holding that public policy

11

requires that “insurable damages do not include costs incurred in

12

disgorging money that has been wrongfully acquired”).

13

Defendants have not disputed this doctrine.

Instead, they

14

argue that the plaintiffs in the state court actions have not

15

limited their claims to equitable relief.

16

fact that the state court plaintiffs have demanded special damages

17

and general damages according to proof to show that they are not

18

just asking for restitution or disgorgement.

19

label of ‘restitution’ or ‘damages’ does not dictate whether a

20

loss is insurable.”

21

Instead, what matters is “whether the claim seeks to recover only

22

the money or property that the insured wrong- fully [sic]

23

acquired.”

24

Defendants point to the

However, “[t]he

Unified W. Grocers, 457 F.3d at 1115.

Id.

In the Scholz case, the plaintiff brings a claim for

25

professional negligence, alleging that, by breaching his duty of

26

fidelity, fairness and good faith toward his client, Fladseth

27

committed legal malpractice.

28

seeks an award of “special and general damages in an amount

Scholz 1AC ¶ 26.

21

The plaintiff

1

according to proof” for this claim.

2

claim, the plaintiff also seeks recovery of “general and special

3

damages in an amount according to proof by reason of said wrongful

4

taking.”

5

submitted in the Scholz case to argue that the damages sought go

6

beyond restitution of the amount based on the miscalculation of

7

attorneys’ fees based on the gross recovery under Cal. Bus. &

8

Prof. Code § 6146(a) and request compensation because Fladseth

9

breached the standard of care for lawyers handling medical

Id. at ¶ 36.

Id. at ¶ 27.

In the fraud

Defendants cite Rice’s expert declaration

United States District Court
For the Northern District of California

10

malpractice claims.

11

clear that these claims seek return of the money wrongfully taken

12

as fees.

13

to shift overhead costs to his clients, which is not acceptable,

14

appropriate, or the standard of care for lawyers handling medical

15

malpractice cases,” and, “By doing so, Mr. Fladseth deprived his

16

clients of money to which they were entitled.”

17

& Prof. Code § 6146(c)(1) (“the attorney’s office-overhead costs

18

or charges are not deductible disbursements or costs” under the

19

statute).

20

costs, they would be able to charge customers for these expenses

21

in addition to the fees charged for their services that are

22

subject to a statutory cap in section 6146(a).

23

to nothing in the pleading or the Rice declaration that would

24

support an award of damages beyond the compensation of the money

25

that Fladseth is alleged to have acquired wrongfully, apart from

26

the request for exemplary and punitive damages.

27

Court finds, for this additional reason, that there is no dispute

Opp. at 2.

However, Rice’s declaration makes

Rice opines, “Mr. Fladseth was using an outside vendor

See also Cal. Bus.

If attorneys were to label office-overhead expenses as

28
22

Defendants point

Accordingly, the

1

of material fact that the Scholz action did not create a potential

2

for coverage.

3

In the Christiansen action, the plaintiffs allege that

4

Fladseth breached his fiduciary duties towards them by failing to

5

advise them that the fee agreements that he entered into with them

6

violated state law, that they would not have entered into these

7

agreements had he disclosed this fact, and that this breach

8

created a conflict of interest between them and Fladseth that

9

infected their entire relationship.

Christiansen 1AC ¶¶ 63-66,

United States District Court
For the Northern District of California

10

74.

11

Fladseth on the basis “that he is not entitled to be paid when he

12

has not provided the fidelity that he bargained for and promised”

13

and that he should pay “a penalty” for his breach.

14

78.

15

money that Fladseth wrongfully charged in excess of the statutory

16

limit.

17

of any potential for coverage on this alternative basis in the

18

Christiansen action.

19

basis for coverage for that case because the claims made were not

20

based on Defendants’ providing of legal services.

21

II.

22

They request disgorgement of some or all of the fees paid to

Id. at ¶¶ 71,

Thus, their complaint may go beyond seeking recovery of the

Plaintiff has not met its burden to establish the absence

However, as discussed above, there is no

Exclusions from coverage
Even if there were coverage for either case, there is no

23

material dispute of fact that the claims in both state court

24

actions fall into two different exclusions contained in the

25

policy, for disputes over fees for services and the gaining of

26

personal profit or advantage to which the insured was not

27

entitled.

28
23

1

A. Dispute over fees

2

Plaintiff contends that the claims asserted in the state

3

court actions are excluded from coverage as “[b]ased on or

4

directly or indirectly arising out of the rights or duties under

5

any agreement including disputes over fees for services.”

6

Defendants respond that the Scholz plaintiff made claims for

7

negligence in providing legal services and that the Christiansen

8

plaintiffs assert that the defendants represented and gave advice

9

concerning the propriety of their fees, which goes beyond

United States District Court
For the Northern District of California

10

allegations simply based on the miscalculation of fees.

11

9-10.

12

the claims in the underlying cases may have been disputes over

13

fees, they were not based on “any agreement.”

14

contend that the pleadings in both cases may be amended to add

15

other claims that are not within this exclusion.

16

Opp. at

At the hearing, Defendants further argued that, although

Defendants also

Both the Scholz and Christiansen actions “directly or

17

indirectly” arise out of disputes over agreements, including over

18

fees.

19

based on Fladseth’s improper withholding of fees and costs in

20

violation of state law.

21

allegation that Fladseth wrongfully represented to Amanda the

22

amount of fees and costs that he could charge her and that, as a

23

result, she signed a disbursement statement permitting him to

24

withhold the excessive amounts.

25

negligence claim brought in the Scholz case and argue that it was

26

not subject to this exclusion, even narrowly construed, the

27

allegations made in that claim clearly arise directly or

28

indirectly out of disputes over fees.

All six of the claims made in the Scholz pleadings are

Each claim is based on the plaintiff’s

Although Defendants point to the

24

In the professional

1

negligence claim the plaintiff alleges that Defendants “were

2

negligent in the representation of AMANDA, failing to properly

3

advise her regarding the maximum attorney’s fees and costs allowed

4

by law and of the appropriate manner of calculating costs and

5

fees, attempting to improperly take a greater portion of AMANDA’S

6

recovery as attorney’s fees and costs than is permitted by law,

7

and misrepresenting and fraudulently representing that defendants

8

were entitled to greater attorney’s fees and reimbursement of

9

costs than allowed by law.”

Scholz 1AC ¶ 25.

The claim also

United States District Court
For the Northern District of California

10

alleges that, “by charging excessive and unlawful fees and costs,”

11

Defendants committed legal malpractice by breaching the “ethical

12

duties of good faith and fidelity.”

13

expert declaration, which Defendants also cite in this context,

14

Rice attests that Defendants improperly classified items as

15

deductible costs that should have been included in the attorneys’

16

fees amounts, which are subject to the statutory cap.

17

all indisputably claims regarding disputes over fees.

18

Id.

Similarly, in the Rice

These are

To the extent that Defendants contend that the exclusion does

19

not apply because the dispute was about fees but not about an

20

agreement, this argument is unavailing.

21

excludes “disputes over fees for services.”

22

Scholz complaint alleges that the fee agreement, in the form of

23

the signed disbursement statement, violated state law.

24

disputes in the complaint, including the negligence claim, each

25

arose directly or indirectly out of the rights or duties under the

26

fee agreement, namely Fladseth’s right to withhold the amount that

27

was excessive under state law.

28
25

The exclusion clearly
In addition, the

The

1

Similarly, the claims in the Christiansen action arise
directly or indirectly out of the rights or duties under

3

agreements, including disputes over fees.

4

specifically pointing to allegations or claims included in the

5

operative complaint in this action that are not subject to this

6

exclusion, Defendants primarily argue that claims might be added

7

to the complaint in the future which may not be based on fee

8

disputes.

9

named plaintiffs and the putative class members who stated that

10
United States District Court
For the Northern District of California

2

they were unhappy with the legal services provided by Fladseth,

11

not just the fees and costs charged.

12

shows that the plaintiffs may later add claims, based on

13

Fladseth’s failure to provide proper legal services, that are

14

separate and apart from the failure to advise clients properly

15

about the limits on attorneys’ fees and misclassification of

16

costs.

17

Rather than

Defendants point to the deposition testimony of the

Defendants contend that this

In support of their argument, Defendants improperly conflate

18

“two similar, but critically distinct ideas” within California

19

law.

20

F. Supp. 2d 803, 810 (N.D. Cal. 2007).

21

that California law allows, indeed requires, insurers to consider

22

evidence ‘extrinsic’ to the allegations set forth on the face of a

23

third-party complaint.”

24

Mann, 4 Cal. 4th at 1081; Gray, 65 Cal. 2d at 276).

25

insurance company “cannot construct a formal fortress of the third

26

party’s pleadings and retreat behind its walls” and the third

27

party is not “the arbiter of the policy’s coverage.”

28

Cal. 2d at 276.

See Storek v. Fidelity & Guar. Ins. Underwriters, Inc., 504
First, “it is beyond cavil

Id. at 810 (citing, among others, Horace
Thus, the

Gray, 65

Second, “it is also clear that, under California
26

1

law, an insurer’s duty to defend extends to all suits that raise

2

the ‘possibility’ or ‘potential’ for coverage.”

3

Supp. 2d at 810 (citing Gray, 65 Cal. 2d at 275; CNA Casualty, 176

4

Cal. App. 3d at 606).

5

unplead facts that may give rise to new claims not yet asserted in

6

the lawsuit, Plaintiff is required to provide a defense.

7

Storek, 504 F.

Thus, Defendants reason, because there are

However, under the first principle, “the cases make it clear

8

that extrinsic evidence is sufficient to compel an insurer to

9

defend only when the evidence pertains to claims actually asserted

United States District Court
For the Northern District of California

10

by the third party.”

11

among others, Horace Mann, 4 Cal. 4th at 1081 (extrinsic facts

12

“give rise to a duty to defend when they reveal a possibility that

13

the claim may be covered by the policy” (emphasis added in

14

Storek)); El-Com Hardware, Inc. v. Fireman’s Fund Ins. Co., 92

15

Cal. App. 4th 205, 217 (2001) (“extrinsic facts known to the

16

insurer can generate a duty to defend” when “they reveal a

17

possibility the policy may cover the claim”).

18

provided here do not reveal that any claim actually asserted in

19

the Christiansen action might fall under the coverage of the

20

policy.

21

Storek, 504 F. Supp. 2d. at 811 (citing,

The extrinsic facts

Under the second principle, for a potential amendment “to

22

give rise to a liability that would be covered under the policy,”

23

it “must be supported by the facts already pled in the complaint.”

24

Upper Deck Co. v. Fed. Ins. Co., 358 F.3d 608, 615 (9th Cir. 2004)

25

(citing Olympic Club v. Those Interested Underwriters at Lloyd’s

26

London, 991 F.2d 497, 503 (9th Cir. 1993) (“Only amendments that

27

would include new causes of action clearly supported by the facts

28

already pled in the complaint may support a finding of potential
27

liability.”) (emphasis in original)); Low v. Golden Eagle Ins.

2

Co., 99 Cal. App. 4th 109, 113-14 (2002) (holding that there is no

3

duty to defend a claim for uncovered economic losses even if it

4

might later be amended to allege bodily injury);

5

Fire Ins. Exch., 37 Cal. App. 4th 1106, 1114 (1995) (“An insured

6

may not trigger the duty to defend by speculating about extraneous

7

‘facts’ regarding potential liability or ways in which the third

8

party claimant might amend its complaint at some future date.”);

9

Hurley Constr. Co. v. State Farm Fire & Cas. Co., 10 Cal. App. 4th

10
United States District Court
For the Northern District of California

1

533, 538 (1992) (“The insured may not speculate about unpled third

11

party claims to manufacture coverage.”)); see also Hudson Ins. Co.

12

v. Colony Ins. Co., 624 F.3d 1264, 1267-68 (9th Cir. 2010) (“These

13

cases concluded that there was no potential for coverage, not

14

because the complaint did not list a particular legal cause of

15

action, but because the complaint did not allege any facts

16

supporting a covered cause of action.”).

17

alleged in the complaint that could support an unplead but covered

18

cause of action.

19

that arise out of the fee dispute.

Gunderson v.

Here, no facts have been

Instead, the allegations all relate to claims

20

Thus, although the Court must consider extrinsic facts that

21

relate to plead claims, and must consider facts plead that could

22

support unplead claims, it need not consider unplead facts

23

supporting only unplead claims.

24

812 (“there is no evidence to impose a duty to defend when the

25

underlying lawsuit sets forth neither the facts nor the legal

26

claims necessary to bring the lawsuit within the terms of the

27

policy”).

28

undertake a defense as to claims that are factually and legally

See Storek, 504 F. Supp. 2d at

“The duty to defend does not require an insurer to

28

1

untethered from the third party’s complaint.”

2

Am. Zurich Ins. Co., 830 F. Supp. 2d 953, 961 (E.D. Cal. 2011);

3

see also Microtec Research, Inc. v. Nationwide Mut. Ins. Co., 40

4

F.3d 968, 971 (9th Cir. 1994) (explaining there was no potential

5

for coverage where the third party knew about facts that could

6

have given rise to a potentially covered claim but elected to omit

7

such allegations and claims from the underlying suit).

8

Defendants are “not entitled to justify an argument for coverage

9

based on speculation about claims that have not been alleged or

Burgett, Inc. v.

United States District Court
For the Northern District of California

10

asserted,”

11

Because

4th 976, 988 (2007), their arguments are unavailing.

12

Golden Eagle Ins. Corp. v. Cen-Fed Ltd., 148 Cal. App.

Further, to the extent that Defendants argue that they may

13

uncover facts in discovery that may reveal that a claim is

14

covered, this argument is also not persuasive.

15

of potential coverage is made at the time the lawsuit is tendered

16

to the insurance company.”

17

omitted).

18

a potential for coverage, Defendants may submit a new tender of

19

defense to Plaintiff.

20

“The determination

Upper Deck, 358 F.3d at 612 (citations

If new extrinsic evidence were developed that revealed

Id. at 613.

If the Christiansen plaintiffs amend their complaint to add

21

claims not subject to this exclusion, Defendants may re-tender the

22

actions to Plaintiff for a defense.

23

taking into account the extrinsic facts offered, there is no

24

material dispute that the actions fall into this exclusion.

25
26

However, as currently plead,

B. Gaining of personal profit or advantage to which insured
was not entitled
In its motion, Plaintiff also seeks a determination that it

27
has no duty to defend or indemnify Defendants under a provision
28
29

1

that excludes from the policy claims that are “[b]ased on or

2

directly or indirectly arising out of or resulting from . . .

3

[t]he gaining by any insured of any personal profit, gain or

4

advantage to which an insured is not legally entitled.”

5

In their opposition, Defendants correctly point out that this

6

exclusion further states, “However, we shall defend such

7

allegations against any insured if it involves a ‘claim’ otherwise

8

covered under the Policy until final adjudication.”

9

exclusion cannot be the only basis for disclaiming coverage for

Thus, this

United States District Court
For the Northern District of California

10

the duty to defend.

11

this exclusion may serve an additional basis to deny coverage as

12

to both the duty to defend and the duty to indemnify.

13

Because the claims are not otherwise covered,

The allegations in the underlying complaint arise out of

14

Defendants’ unlawful gaining of a profit or advantage to which

15

they were not entitled, by categorizing overhead expenses as

16

costs, by charging clients rates higher than the statutory limit

17

and by telling their clients that this was proper.

18

underlying actions also fall into this exclusion.

19

III. Defendants’ request to renew motion to stay and to delay
adjudication of the instant motion for summary judgment

20

Thus, the

Defendants request that they be allowed to renew their motion
21
for a stay and that this motion be denied as premature until they
22
have had an opportunity to conduct discovery in this case and
23
further discovery in the underlying cases.
24
Plaintiff’s motion for summary judgment was filed prior to
25
the deadline previously set by the Court for dispositive motions.
26
Shortly after the motion was filed, the Court issued an order
27
stating that the motion could be heard as noticed “as long as
28
30

1

Defendants are prepared to oppose it and neither party intends to

2

file another case-dispositive motion to be heard at a later date.”

3

Docket No. 44.

4

about the schedule and file an administrative motion if they were

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unable to agree.

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stipulation to change the briefing dates based on Defendants’

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counsel’s travel schedule.

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did not represent that they were not prepared to oppose the

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motion.

United States District Court
For the Northern District of California

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The Court directed the parties to meet and confer

Id.

The parties subsequently filed a

Docket No. 45.

Defendants, however,

In addition, Defendants have not submitted a declaration as

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required under Federal Rule of Civil Procedure 56(d) to show that

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they cannot present facts essential to justify their opposition or

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that facts they would seek in discovery would entitle them to

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relief.

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diligent in seeking discovery; although Defendants state that they

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have “not had the opportunity to conduct discovery” in this case,

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their opposition was filed more than three months after the

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initial case management conference was held.

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previously noted, if the complaints in the state court actions are

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amended, they may re-tender the defense to Plaintiff.

They have also not made any showing that they were

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Further, as

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CONCLUSION
For the reasons set forth above, the Court GRANTS Plaintiff’s
motion for summary judgment (Docket No. 42).
The Clerk shall enter judgment and close the file.

Plaintiff

shall recover its costs from Defendants.
IT IS SO ORDERED.

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Dated: 4/3/2013

CLAUDIA WILKEN
United States District Judge

United States District Court
For the Northern District of California

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