Sunday, January 27, 2013

FYI: Cal App Ct Holds Atty-Client Privilege Applies to Title-Appointed Counsel, Provides Other Rulings Regarding Privilege

The California Court of Appeal, Fourth District, recently confirmed that a tripartite attorney-client relationship exists between a title insurer, its insured, and counsel retained by the title insurer to defend or prosecute claims in order to protect the interests of the insured, regardless of whether the insurer has a formal retainer agreement with the retained counsel.
The Court also ruled that:  (1) an insurer's reservation of rights did not destroy the tripartite attorney-client relationship;  (2) there is no meaningful distinction between retaining counsel to defend or to prosecute a claim on behalf of the insured;  (3) the title insurer did not waive the attorney-client privilege by failing to file on its own behalf an objection or a motion to quash; and  (4) documents covered by the attorney-client privilege are not subject to in camera review, unlike documents covered by the attorney work-product doctrine which are so subject to determine the level of protection to be conferred.
A copy of the opinion is available at:
A borrower obtained a home mortgage refinancing loan, securing the loan with a first deed of trust in favor of the lending bank ("Bank").  Bank was the insured under a title insurance policy insuring the priority of Bank's deed of trust over any other lien or encumbrance.  Unbeknownst to Bank, however, the borrower had at about the same time obtained a business line of credit from another bank ("Defendant") that was partially secured by the same property that secured Bank's refinancing loan.  The deed of trust for the line of credit was recorded five days before the recordation of Bank's deed of trust.
Defendant eventually initiated foreclosure proceedings under the deed of trust securing the business line of credit and notified Bank of the default.  The property was later sold at a trustee's sale with Defendant being the successful bidder. 
Two days before the trustee's sale, Bank's temporary counsel, whose request to Defendant to postpone the sale was refused, tendered to the title insurer ("Title Insurer") a claim under the title insurance policy and filed a complaint for equitable subrogation and declaratory relief.  Title Insurer accepted the claim, but with a reservation of rights supposedly due to the fact that Bank had submitted its claim to Title Insurer so close to the date of the trustee's sale.
Several months later, Title Insurer retained counsel ("Counsel") to represent Bank in an  action against Defendant, which Counsel, seeking injunctive and declaratory relief, filed an amended complaint to include an additional cause of action for fraud.
Defendant served deposition subpoenas duces tecum on Title Insurer's parent company and others, seeking documents that included communications between Counsel and Title Insurer.  Bank moved to quash or modify the subpoenas duces tecum (the "Motions to Quash") to exclude communications between Counsel and Title Insurer on the ground that they were protected by the attorney-client privilege and/or were protected attorney work product.   Arguing that Counsel had been hired by Title Insurer and that a tripartite attorney-client relationship existed among Bank, Counsel, and Title Insurer, Bank included with its moving papers a declaration from Counsel that it had been retained by Title Insurer to represent Bank.  In opposition to the Motions to Quash, Defendant argued that the tripartite attorney-client relationship had been destroyed because Title Insurer was providing coverage to Bank under a reservation of rights. 
The lower court ("Respondent Court") denied the Motions to Quash, ruling that none of the documents listed on Bank's privilege log was privileged and ordering the documents to be produced to Defendant.  In addition, at the hearing on the Motions to Quash, the Respondent Court found no attorney-client relationship between Counsel and Title Insurer existed because Counsel was retained to prosecute the underlying action rather than to defend an existing one.
Bank and Title Insurer petitioned the Court of Appeal for writ of mandate or prohibition to challenge Respondent Court's order.   The Court of Appeal issued an order to show cause, in response to which Defendant filed an unverified "Return Brief" that did not respond to the allegations of the writ petition and which included neither an answer nor a demurrer to the writ petition in accordance with court rules.
The Court of Appeal granted the writ for mandate or prohibition, directing Respondent Court to vacate its order denying the Motions to Quash and to issue a new order granting them.
Turning first to Defendant's unverified return in response to the order to show cause, the Court of Appeal accepted as true the "well-pleaded and verified allegations of the writ petition," because Defendant failed to file a true return with a verified answer or demurrer to the allegations of the writ petition.  See Cal. Code Civ. Proc. § 1094.  Viewing Defendant's failure to submit a true return as an "integral and critical step in the procedure for determining the merit of a petition for extraordinary relief," the Court held that it had "no option but to accept the well-pleaded allegations of the writ petition as true."
Next, with respect to whether a tripartite attorney-client relationship existed among Title Insurer, Bank, and Counsel, the Court concluded that Title Insurer's retention of Counsel to represent Bank was sufficient to establish such a tripartite attorney-client relationship.  Viewing the relationship among the three entities as a "loose partnership, coalition or alliance directed toward a common goal, sharing a common purpose which lasts during the pendency of the claim or litigation against the insured," the Appellate Court concluded that there was no  need for a formal retainer agreement between  Title Insurer and Counsel to create the tripartite attorney-client relationship. "Retaining [Counsel] to represent [Bank] was enough in itself to establish the tripartite attorney-client relationship," the Court explained. 
Rejecting Defendant's assertion that the tripartite attorney-client relationship was destroyed when Title Insurer provided counsel for Bank under a reservation of rights, the court explained that a reservation of rights in itself does not create a disqualifying conflict requiring the appointment of independent counsel, so-called "Cumis" counsel.  Noting that the reason for the reservation of rights was Bank's submission of its claim to Title Insurer just two days prior to the trustee's sale, and that nothing in the record indicated Counsel was acting as Cumis counsel, the Appellate Court also pointed out that even if the reservation of rights did create a disqualifying conflict, the right to invoke the conflict belonged solely to Bank.  Moreover, the Court observed that even if Counsel were serving as Cumis counsel, any information disclosed by Bank or by Counsel to Title Insurer would not waive the privilege as to any other party.
Taking Respondent Court to task for making the "artificial distinction" between defending a title insurance action and prosecuting a title claim, the Appellate Court specifically noted that the standard title insurance policy granted Title Insurer the right to either defend an action or to initiate and prosecute a claim in order to protect the rights of an insured.   See Jarchow v. Transamerica Title Ins. Co., 48 Cal. App.3d 917, 924, 927, 941-42 (1975)(concluding that a "title insurer's duties to defend and to initiate a lawsuit are 'kindred duties' addressing 'the same fundamental concern'" to protect the integrity of the insured's title).   In so doing, the Court pointed out that in this case where the foreclosure sale had extinguished Bank's lien, the only means available to Title Insurer to protect Bank's interest was to prosecute an underlying action for equitable subrogation and declaratory relief.
The Appellate Court also rejected Defendant's argument that Title Insurer waived any right to object to production of privileged documents and information because Title Insurer failed to bring its own motion to quash the subpoenas.  Noting that only the holder of the attorney-client privilege and attorney work-product may assert the privilege, the Court reasoned that the "holder of the privilege" is defined by the client and that, as a result of the tripartite attorney-client privilege among Bank, Title Insurer, and Counsel, they were a "unitary whole" entitled as joint clients holding the privilege to assert the privilege on behalf of the others.  The Court thus ruled that it was unnecessary for Title Insurer to move to quash the subpoenas to prevent disclosure of privileged communications and attorney work product. 
Finally, with respect to Bank's assertion of both the attorney-client privilege and the attorney work product doctrine, the Appellate Court concluded that Bank had met its burden of establishing facts sufficient to support a prima facie claim of privilege.  In so doing, the Court distinguished between material protected by the attorney work product doctrine  -- and thus subject to in camera inspection for a determination as to whether absolute or qualified protection applies -- and communications covered by the attorney-client privilege.  The latter, the Court explained, was not subject to disclosure for in camera inspection.  See Costco Wholesale Corp. v. Superior Court, 47 Cal.4th 715 (2009); Coito v. Superior Court, 54 Cal.4th 480, 502 (2012).  The Court thus ruled that certain documents listed in Bank's privilege log, being protected by the attorney-client privilege, were not subject to in camera inspection and that others might be subject to the attorney work product doctrine and potentially subject to in camera inspection for an analysis as to whether absolute or qualified work product protection applied.
Accordingly, concluding that under the circumstances in this case a review of Respondent Court's discovery ruling was warranted, the Court of Appeal vacated the lower court's order denying the Motions to Quash  The Appellate Court also ordered the lower court to grant Bank's Motions to Quash.

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
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