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JANICE D. LOYD, as Trustee and Liquidator of First Assurance and Casualty Company, Ltd., Plaintiff-Appellant, v. PAINE WEBBER, INCORPORATED, WELSHAND ASSOCIATES; BONE, ROBERTSON & MCBRIDE; CATANESE INSURANCE SERVICE, aka/CATANESE INSURANCE AGENCY; ATIF K. KAMEL; A.K. INSURANCE SERVICE; No. 98-55113 KAPLANAND LAM INSURANCE; DUMAINE INSURANCE SERVICES; D.C. No. DRAPER INSURANCE, aka/E.G. CV-95-01194-BTM DRAPER INSURANCE, aka/DRAPER OPINION INSURANCE; SOUTHERN INSURANCE; SANFORD & GILBERT INSURANCE AGENCY; OMEGA INSURANCE SERVICES; AYLESWORTH INSURANCE; JACK E. GILBERT INSURANCE AGENCY; et al., Defendants, and AGUILAR & SEBASTINELLI, a Professional Law Corporation, Defendant-Appellee.
Appeal from the United States District Court
for the Southern District of California
Barry T. Moskowitz, District Judge, Presiding
Argued and Submitted
September 14, 1999--Pasadena, California
Filed March 29, 2000
Before: James R. Browning, Alex Kozinski, and
Kim McLane Wardlaw, Circuit Judges.
Per Curiam Opinion
_________________________________________________________________
COUNSEL
Marcus S. Bird, Hollister & Brace, Santa Barbara, California,
for the plaintiff-appellant.
Thomas N. Charchut, Haight, Brown & Bonesteel, Santa
Monica, California, for the defendant-appellee.
_________________________________________________________________
OPINION
PER CURIAM:
Janice D. Loyd, trustee and liquidator of First Assurance
Casualty Co., Ltd., appeals the district court's dismissal of her
complaint against the company's former law firm, Aguilar &
Sebastinelli. The complaint charged the firm with malpractice
for failing to prevent the company's shareholders from con-
ducting a fraudulent insurance scheme. The district court dis-
missed the action on the alternative grounds that: (1) the
trustee lacked standing to sue; and (2) the complaint failed to
state a claim for legal malpractice. We conclude the trustee
had standing, but the complaint failed to state a claim for mal-
practice under California law.
I.
This appeal arises out of an alleged conspiracy to defraud
purchasers of First Assurance Casualty's insurance policies.1
Approximately one year after First Assurance was incorpo-
rated in the Turks & Caicos islands, it was acquired by seven
individuals (hereinafter "insiders"), who caused the company
to sell insurance policies in the United States, mostly in Texas
and California.
Offshore insurance companies are regulated by the Califor-
nia Department of Insurance. They must prove they have suf-
ficient capital to pay potential claims, and must maintain a
trust account in the United States. See Cal. Ins. Code
1765.1(b)(1). If the Department is not satisfied with an off-
shore company's financial status, it may prohibit in-state
insurance brokers from selling or promoting the company's
policies.
The insiders retained Craig Aalseth, an account manager at
Paine Webber, to manage the required trust account. Although
the company was virtually insolvent, Aalseth prepared reports
attesting to its financial viability and compliance with Califor-
nia law. Meanwhile, the insiders were diverting policy premi-
ums into their personal accounts. They permitted the company
to pay claims of policyholders only when those claims were
small or the claimants threatened to complain to the Depart-
ment of Insurance.
The company retained Aguilar & Sebastinelli to represent
it in state regulatory matters. In March 1991, the Department
issued a Cease and Desist Order against the company. The
law firm successfully challenged the Order in San Francisco
Superior Court, enabling the company to continue to sell poli-
cies and collect premiums. Two years later, however, the
Department issued a second Cease and Desist Order; shortly
thereafter the company declared bankruptcy.
In early 1994, the U.S. Bankruptcy Court for the Western
District of Oklahoma appointed Janice Loyd trustee for the
company. She filed suit on behalf of the company against the
insiders, the insurance brokers who had carried the company's
policies, Paine Webber and its employee Craig Aalseth, the
company's accountants, and the law firm. The district court
dismissed the claim against the law firm on the grounds that
the trustee lacked standing to bring a legal malpractice action
against the law firm on the corporation's behalf, and, in any
event, that the complaint failed to state a claim for legal mal-
practice.
II.
The district court recognized that, as trustee, Loyd was
empowered to bring any claim the company could have
brought on its own behalf. However, the court held that the
company itself would have lacked standing to sue the law
firm because it was a sham corporation with no identity sepa-
rate from its shareholders. We disagree.
[1] Standing to sue is a question of law reviewed de novo.
See Byrd v. Guess, 137 F.3d 1126, 1131 (9th Cir. 1998).
Three elements must be satisfied to meet the minimum consti-
tutional requirements for standing under Article III: injury in
fact, causation, and redressability. See, e.g., Lujan v. Defend-
ers of Wildlife,
504 U.S. 555, 560
-61 (1992); Warth v. Seldin,
422 U.S. 490, 508
(1975). Redressability is not disputed; the
questions are whether the company was injured, and whether
the injury was caused by the conduct of the law firm.
[2] The company's status as a "sham" corporation did not
preclude it from suffering an injury cognizable under Article
III. A corporation is a distinct legal entity that can sue and be
sued separately from its officers, directors, and shareholders.
See Merco Constr. Eng'rs, Inc. v. Municipal Court, 21 Cal.3d
724, 729-30 (1978). It can be injured even if its sole purpose
is to serve as an engine of fraud for its shareholders. Injury
is evidenced in this case by the fact that the company remains,
to this day, a legally distinct entity that is responsible for the
liability it incurred as a result of the allegedly fraudulent
actions of its insiders.
[3] The causation element is also satisfied. The complaint
alleges that the law firm failed to discover the fraudulent
scheme and take action to prevent the insolvent company
from continuing to sell insurance in California. 2 This harmed
the company by allowing it to incur further liability which it
would not otherwise have had. Although this liability exists
largely because of the fraudulent conduct of the insiders, the
complaint alleges that the period of insolvency was extended,
and the company's liability thereby increased, because the
law firm helped the company continue to operate. The injury
was thus caused, in part, by the allegedly negligent conduct
of the law firm.3
[4] As a legal entity distinct from its shareholders, the com-
pany had a cognizable claim under Article III against the law
firm prior to the bankruptcy proceeding. Because a trustee
may assert claims possessed by the debtor immediately prior
to bankruptcy, see 11 U.S.C. SS 541, 542, Loyd has standing
to sue the law firm.
III.
The district court further held that even if the trustee had
standing to sue the law firm, the complaint failed to state a
claim for legal malpractice. We agree, and affirm the dis-
missal on this ground.
Dismissal for failure to state a claim is reviewed de novo.
See Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1295 (9th
Cir. 1998). Review is limited to the contents of the complaint,
and all allegations of material fact are taken as true and con-
strued in favor of the nonmoving party. See Pareto v. FDIC,
139 F.3d 696, 699 (9th Cir. 1998). "A complaint should not
be dismissed unless it appears beyond doubt that the plaintiff
can prove no set of facts in support of the claim that would
entitle [her] to relief." Tyler v. Cisneros, 136 F.3d 603, 607
(9th Cir. 1998).
The trustee made the following allegations:
<!BUL> The law firm "provided legal services to[the
company] with respect to regulatory and corpo-
rate matters, securities and litigation from no
later than April of 1991 to March of 1994. At all
times material to this case, Aguilar & Sebastinelli
held itself out as an expert in the field of offshore
insurance. While representing [the company] the
law firm also represented other alien insurance
companies, most of which were in financial diffi-
culty or were operated by con men for the pur-
pose of looting premiums."
<!BUL> "At all times, Aguilar & Sebastinelli knew that
[the company] was relying upon Aguilar &
Sebastinelli to represent its interests in California
as an insurance company, and not the adverse
interests of the Insider Rico Defendants who
were looting the company of its assets during the
time period of Aguilar & Sebastinelli's represen-
tation."
<!BUL> Aalseth's fraudulent misrepresentation regarding
the worth of the company's securities "was com-
municated directly to Sebastinelli, the attorney
for [the company] who, in reliance on the accu-
racy, transferred the information to CDI in
response to request for further information . . ."
<!BUL> "In performing professional services for[First
Assurance Casualty Co.], the attorney firm
breached its duty to use the care and skill ordinar-
ily used by reputable attorneys, all to the detri-
ment of FACC in the form of looted premiums
and increased insolvency. Said attorney firm
breached its duties of loyalty and prudence owed
to FACC by allowing the Insider RICO Defen-
dants to act adverse to the interests of FACC and
by advising FACC to continue to operate as an
insurer in violation of state insurance regulations
and at a time when FACC was insolvent and
therefore incapable of responding to its contrac-
tual obligations."
[5] The elements of a cause of action for attorney malprac-
tice under California law are: (1) the duty to use such skill,
prudence and diligence as members of the profession com-
monly possess; (2) breach of that duty; (3) a proximate con-
nection between the breach and the injury; and (4) actual loss
or damage. See Wiley v. County of San Diego, 19 Cal. 4th
532, 536 (1998). "The question of the existence of a legal
duty of care in a given factual situation presents a question of
law which is to be determined by the courts alone. " Nichols
v. Keller, 15 Cal. App. 4th 1672, 1682 (1993).
[6] The complaint fails to satisfy the duty element. It
alleges only that: 1) the law firm relied upon faulty reports
provided by Paine Webber and transmitted those documents
to the California Department of Insurance; and 2) the firm has
represented crooked clients in the past. The trustee contends
that these allegations support an inference that the law firm
"turned a blind eye to insider misconduct," and "should have
known that the company was being looted." However, absent
accompanying allegations that the firm knew or should have
known the reports were fraudulent, or was aware of other
facts suggesting that the company was acting illegally, such
an inference cannot be supported.4
Alternatively, Loyd argues that these allegations are suffi-
cient to state a claim for malpractice under FDIC v.
O'Melveny & Meyers, 969 F.2d 744 (9th Cir. 1992), rev'd on
other grounds, O'Melveny & Myers v. FDIC,
512 U.S. 79
(1994), reaff'd on remand, FDIC v. O'Melveny & Myers, 61
F.3d 17 (9th Cir. 1995). There, we held that in the "high spe-
cialty field" of securities offerings, counsel has an automatic
duty to "make a `reasonable, independent investigation to
detect and correct false or misleading materials.' "
O'Melveny, 969 F.2d at 749 (quoting Felts v. National
Account Sys. Assoc., Inc., 469 F. Supp. 54, 67 (N.D. Miss.
1978)). We decline to impose a similar duty here. The
O'Melveny decision was dependent on the fact that the firm
was assisting in a public offering and helped produce docu-
ments which suggested to the investing public that the client
was financially sound. See id. at 746. Nowhere did the court
indicate that, as a general matter, an attorney who represents
corporate clients has an automatic duty to independently
investigate whether its clients are engaging in fraudulent con-
duct.
IV.
Although Loyd, as trustee of a corporation whose assets
were looted by its shareholders, had standing to sue the law
firm, her complaint failed to state a claim for legal malprac-
tice under California law. Accordingly, the district court prop-
erly dismissed the complaint.
AFFIRMED
_______________________________________________________________
FOOTNOTES
1 Because Loyd is appealing a dismissal pursuant to Fed.R.Civ.P.
12(b)(6), the Court takes the allegations in the complaint as true. See
Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998).
2 "At the pleading stage, general factual allegations of injury resulting
from the defendant's conduct may suffice" to establish causation for the
purpose of standing. Lujan,
504 U.S. at 561
.
3 Our holding that the trustee failed to state a claim for legal malpractice
under California law does not undermine this conclusion. The complaint
sufficiently alleges that the law firm's conduct was a cause of the injury.
Whether this conduct rises to the level of legal malpractice goes to the
merits of the lawsuit, not to the preliminary question of standing.
4 At oral argument, counsel for the trustee asserted that the firm must
have been aware of the fraud because it was apparent on the face of the
documents submitted to the Department of Insurance. However, this asser-
tion that the documents should have alerted the firm to fraud was absent
from the complaint, which the trustee had two opportunities to amend.
To read the FINDLAW full text of this opinion, go to:
http://laws.findlaw.com/9th/9855113.html
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