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FIRST INTERSTATE BANK OF ARIZONA, N.A., a national banking association; TALLEY REALTY FINANCE AND INVESTMENT COMPANY, No. 98-17420 INC., an Arizona corporation, Plaintiffs-Appellants, D.C. No. CV-97-02535-FMS v. MURPHY, WEIR & BUTLER, a professional corporation, Defendant-Appellee. FIRST INTERSTATE BANK OF ARIZONA, N.A., a national banking association; TALLEY REALTY FINANCE AND INVESTMENT COMPANY, No. 99-15410 INC., an Arizona corporation, D.C. No. Plaintiffs-Appellees, CV-97-02535-FMS v. OPINION MURPHY, WEIR & BUTLER, a professional corporation, Defendant-Appellant.
Appeals from the United States District Court
for the Northern District of California
Fern M. Smith, District Judge, Presiding
Argued and Submitted
March 14, 2000--San Francisco, California
Filed April 20, 2000
Before: Diarmuid F. O'Scannlain and Pamela Ann Rymer,
Circuit Judges, and Jeffrey T. Miller, District Judge.*
Opinion by Judge Rymer
After SPA discovered the clerk's relationship with Murphy,
and Judge Tchaikovsky granted SPA's recusal motion, a new
trial before a different judge resulted in a decision less favor-
able to FIB/Talley. FIB/Tally sued Murphy for malpractice.
The district court ruled that it was not foreseeable that hir-
ing the law clerk without disclosure would ultimately result in
Judge Tchaikovsky's recusal, because judges and law clerks
are required to preserve the court's impartiality and appear-
ance of impartiality. On that basis, the court concluded that
Murphy had no duty to disclose that it had hired the law clerk,
and granted summary judgment for the law firm. FIB/Tally
appealed.
[1] Attorneys have a duty to keep a client reasonably
informed about significant developments relating to the repre-
sentation. The obligation does not include a duty to advise on
all possible alternatives, no matter how remote or tenuous.
FIB/Talley's claims turned on whether Murphy owed them a
duty, and if so, whether breach of that duty caused the harm
suffered. Whether there is a duty turns on the foreseeability
of the harm. Foreseeability is a legal issue for the court.
[2] Judges and their law clerks are presumed to be impartial
and to discharge their ethical duties to avoid the appearance
of impropriety. Lawyers are entitled to assume that judges and
law clerks will perform their duty. Further, there are proce-
dures for ensuring both the reality and appearance of impar-
tiality. For this reason, it is not foreseeable that hiring a law
clerk will result in recusal.
[3] FIB/Tally submitted no authority indicating that a law
firm should refrain from recruiting judicial clerks, or tell
opposing counsel, its clients, or the court if it offers employ-
ment to a law clerk, or if its offer is accepted. Murphy had no
basis for believing that the Judge's impartiality was reason-
ably subject to question. The Judge told the clerk not to do
substantive work on the SPA litigation. That the wall was per-
meable in this case did not make it foreseeable that judges and
law clerks will not honor their ethical duties in all cases. It is
reasonable for law firms to rely on the presumption that
judges and law clerks will maintain their impartiality when
the clerk has obtained an offer of employment.
[4] Murphy owed no duty to inform FIB/Talley, lead coun-
sel, SPA, Judge Tchaikovsky, that the law clerk had accepted
an offer of employment with the firm. In the absence of duty
none of the claims survived.
_________________________________________________________________
COUNSEL
Edward Freidberg, Sacramento, California, for the plaintiff-
appellant-cross-appellee.
Robert A. Lewis and Randy Michelson, McCutchen, Doyle,
Brown & Enersen, San Francisco, California, for the
defendant-appellee-cross-appellant.
_________________________________________________________________
OPINION
RYMER, Circuit Judge:
The issue before us is whether a law firm owes a duty to
its client to disclose that it hired the law clerk of a judge
before whom it was appearing in a pending matter.
Murphy, Weir & Butler (Murphy) represented First Inter-
state Bank of Arizona and Talley Realty Finance Company
(FIB/Talley) who were secured creditors in the Chapter 11
bankruptcy proceeding of Scottsdale Pinnacle Associates
(SPA). The Honorable Leslie Tchaikovsky was the presiding
bankruptcy judge. Although unknown to the Murphy partner
assigned to this matter, the firm hired Judge Tchaikovsky's
law clerk for employment at the end of the clerkship. As it
turned out, the "Chinese wall" was not impermeable as it
should have been, for the law clerk continued to have some
contact with the case. Judge Tchaikovsky ruled in favor of
FIB/Talley, but later recused herself upon SPA's motion after
SPA found out about the clerk's relationship with Murphy.1
A new trial before a different judge resulted in a decision with
which FIB/Talley was not as happy. As a result, it sued Mur-
phy for malpractice.
The district court held it was not foreseeable that hiring the
law clerk without disclosure would ultimately result in Judge
Tchaikovsky's recusal, because judges and law clerks are
required to preserve the court's impartiality and the appear-
ance of impartiality. For this reason, Murphy had no duty to
disclose that the firm had hired the Judge's clerk. We agree.
Given the presumption of judicial impartiality, it was not rea-
sonably foreseeable that the law clerk would continue to work
on Murphy's matters contrary to the Code of Conduct for Law
Clerks; that the Judge would fail to screen off the law clerk
completely in violation of the Code of Judicial Conduct; and
that the conduct of both the Judge and the law clerk would
amount to an appearance of impropriety such as to require
recusal. As judges and law clerks are in the best position to
prevent impropriety, we decline to impose a duty of disclo-
sure on law firms.
Accordingly, we affirm on FIB/Talley's appeal. Murphy
also sought indemnification of expenses incurred in defending
this lawsuit, but the district court denied its request. We
affirm this decision as well.
I
In early 1993, FIB/Talley engaged Murphy as local counsel
in the Chapter 11 bankruptcy of SPA. FIB/Talley, as holder
of the first deed of trust on SPA's only asset, opposed confir-
mation of SPA's reorganization plan and sought relief from
the automatic stay in order to foreclose on the property. On
August 12, 1994, Judge Tchaikovsky entered final orders
denying SPA's reorganization plan; granting the motion of
FIB/Talley for relief from the automatic stay and to determine
the value of their net secured claim, which she did at $4.75
million; and denying SPA's motion to amend the findings and
for a new trial.
Meanwhile, on November 19, 1993, Murphy offered
employment to the Judge's only law clerk, to begin at the end
of the clerkship in September 1994. The clerk accepted
shortly thereafter. A Murphy partner told Judge Tchaikovsky
of the firm's interest in hiring the clerk, and the clerk was
reminded during the interview with the Murphy hiring com-
mittee that she could not work on any Murphy matters if she
were to accept employment with the firm. Judge Tchaikovsky
instructed the clerk to do no more substantive work on any
case in which Murphy represented a party in interest, but the
clerk handled a few telephone calls pertaining to procedural
matters, observed some courtroom proceedings, marked up a
memorandum relating to an earlier plan of reorganization, and
was told by the Judge of her intended decision on the final
plan.
SPA found out about the clerk's employment in late August
and moved on September 20, 1994 to recuse Judge Tchaikov-
sky and to vacate her orders. Judge Tchaikovsky certified the
relevant facts on October 31, 1994, and acknowledged that
she had violated 28 U.S.C. S 455(a)2 by failing to insulate the
clerk completely from the SPA proceeding. She recused her-
self and the matter was reassigned to Bankruptcy Judge Ran-
dall Newsome. After holding an evidentiary hearing, Judge
Newsome determined that the conduct of Judge Tchaikovsky
and the law clerk amounted to an appearance of impropriety,
and ordered a new trial. Subsequently, Judge Newsome val-
ued the SPA property at $6 million, resulting in a net secured
claim for FIB/Talley of $5.4 million.3 He confirmed SPA's
plan of reorganization on September 11, 1995.4
FIB/Talley brought this action for negligence, breach of
fiduciary duty, and breach of contract on February 2, 1996.
The district court declined to dismiss on statute of limitations
grounds as it believed there was a factual dispute about when
Murphy actually stopped representing FIB/Talley, but granted
summary judgment on the merits. Murphy then moved for
indemnification of attorney's fees and costs in the amount of
$441,372, but the district court denied the motion.
Both parties have timely appealed.
II
FIB/Talley argues that Murphy owed a duty to it to ensure
that the firm's hiring of the Judge's law clerk did not jeopar-
dize its own litigation of the bankruptcy case. In FIB/Talley's
view, the risk of harm was clearly foreseeable because failing
to notify the client, the client's lead attorneys, opposing coun-
sel, or the Judge would open the door to a later recusal motion
and a possible vacatur of Judge Tchaikovsky's final orders. It
notes that because recusal must be brought up as soon as there
is a basis to challenge a judge's impartiality, SPA would have
been precluded from raising the issue after Judge Tchaikov-
sky issued her final orders if Murphy had disclosed the hiring
when it happened. Alternately, it points out, FIB/Talley's lead
counsel could have replaced Murphy as local counsel.
[1] The general principles that apply are well settled. Attor-
neys have a duty to "keep a client reasonably informed about
significant developments relating . . . to the representation
. . . ." California Rules of Professional Conduct 3-500.
Although the attorney owes a basic obligation to provide
sound advice in furtherance of a client's best interests, "such
obligation does not include a duty to advise on all possible
alternatives no matter how remote or tenuous." Davis v. Dam-
rell, 119 Cal. App. 3d 883, 889 (1981). A "legal malpractice
[claim] is compounded of the same basic elements as other
kinds of actionable negligence: duty, breach of duty, causa-
tion, and damage." Nichols v. Keller, 15 Cal. App.4th 1672,
1682 (1993). FIB/Talley's negligence and breach of fiduciary
duty claims likewise turn on whether Murphy owed them a
duty and, if so, whether the breach of that duty caused the
harm suffered. "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. Entry of sum-
mary judgment in favor of the defendant in a professional
negligence action is proper where the plaintiff is unable to
show the defendant owed such a duty of care." Id. at 1682
(citing Nymark v. Heart Fed. Savings & Loan Ass'n, 231
Cal.App.3d 1089, 1095 (1991)). Whether there is a duty, in
turn, depends largely on the foreseeability of the harm
alleged: "Foreseeability of harm, though not determinative,
has become the chief factor in duty analysis." Id. at 1686. And
the foreseeability component of duty analysis is a legal issue:
Foreseeability is a question of fact in many contexts.
However, in defining the boundaries of duty, fore-
seeability is a question of law for the court. The
question of foreseeability in a "duty" context is a
limited one for the court and is readily contrasted
with the fact-specific foreseeability questions bear-
ing on negligence (breach of duty) and causation
posed to the jury or trier of fact.
Id.5
Applying these principles, it is clear that the harm FIB/
Talley posits -- a new trial necessitated by the Judge's
recusal -- was neither foreseeable to Murphy nor preventable
by it. Judicial impartiality is presumed. See United States v.
Herrera-Figueroa, 918 F.2d 1430, 1436 n.8 (9th Cir. 1990);
In the Matter of Demjanjuk, 584 F. Supp. 1321, 1324-25
(N.D. Ohio 1984); United States v. Zagari, 419 F. Supp. 494,
501 (N.D. Cal. 1976). Section 455(a), the Code of Judicial
Conduct, and the Code of Conduct for Law Clerks all place
the burden of maintaining impartiality and the appearance of
impartiality on the judge and the law clerk.
Section 455(a) requires a judge to disqualify herself in any
proceeding in which her impartiality might reasonably be
questioned. 28 U.S.C. S 455(a). This mandate is identical to
the duty set out in the Code of Judicial Conduct Canon 3(E)(1).6
And pursuant to Canon 3(C)(2), a judge "shall require staff,
court officials and others subject to the judge's direction and
control to observe the standards of fidelity and diligence that
apply to the judge and to refrain from manifesting bias or
prejudice in the performance of their official duties."
Canon 2 of the Code of Conduct for Law Clerks requires
a law clerk to avoid impropriety and the appearance of impro-
priety; it states:
A law clerk should not engage in any activities that
would put into question the propriety of the law
clerk's conduct in carrying out the duties of the
office. A law clerk should not allow family, social,
or other relationships to influence official conduct or
judgment. A law clerk should not lend the prestige
of the office to advance the private interests of oth-
ers; nor should the law clerk convey or permit others
to convey the impression that they are in a special
position to influence the law clerk.
Id. Canon 5(C)(1) directly speaks to the issue of prospective
employment and instructs:
A law clerk should refrain from financial and busi-
ness dealings that tend to detract from the dignity of
the office, interfere with the proper performance of
official duties, exploit the law clerk's position, or
involve the law clerk in frequent transactions with
individuals likely to come in contact with the law
clerk or the court in which the law clerk serves. Dur-
ing the clerkship, a law clerk may seek and obtain
employment to commence after the completion of
the clerkship; if any law firm, lawyer, or entity with
whom a law clerk has been employed or is seeking
or has obtained future employment appears in any
matter pending before the appointing judge, the law
clerk should promptly bring this fact to the attention
of the appointing judge, and the extent of the law
clerk's performance of duties in connection with
such matter should be determined by the appointing
judge.
Id. It is expected that when a "clerk has accepted a position
with an attorney or with a firm, that clerk should cease further
involvement in those cases in which the future employer has
an interest." Alvin B. Rubin & Laura B. Bartell, Law Clerk
Handbook 23 (1989). It is up to the judge to make sure this
happens. "Judges themselves are in the best position to fore-
stall future difficulties with a few simple instructions and
quick action where necessary." Kevin D. Swan, Comment,
Protecting the Appearance of Judicial Impartiality in the
Face of Law Clerk Employment Negotiations, 62 Wash. L.
Rev. 813, 840 (1987).
[2] Of course judges are not infallible. See, e.g., Liljeberg
v. Health Services Acquisition Corp., 486 U.S. 847, 862
(1988) (judge failed to inform the parties of association with
institution that could be affected by outcome of litigation);
Hall v. Small Business Administration, 695 F.2d 175 (5th Cir.
1983) (magistrate judge allowed law clerk who was a former
member of the plaintiff class and had accepted employment
with the class's counsel to work on the case); Miller Indus-
tries, Inc. v. Caterpillar Tractor Co., 516 F. Supp. 84 (S.D.
Ala. 1980) (district judge allowed law clerk who had accepted
employment with defendant's counsel to continue to work on
case). But despite this, judges (and their law clerks) are pre-
sumed to be impartial and to discharge their ethical duties
faithfully so as to avoid the appearance of impropriety. Law-
yers are entitled to assume that judges (and law clerks) will
perform their duty. Further, there are well established and
well known procedures for ensuring both the reality and
appearance of impartiality.7 For this reason, it is not foresee-
able that hiring a law clerk will result in recusal.
Relying on Miller and Hall, FIB/Talley points out that if
Murphy had told SPA about hiring Judge Tchaikovsky's
clerk, SPA might have agreed to waive any objection to Mur-
phy continuing to represent FIB/Talley as local counsel, or set
up a waiver in the absence of timely objection to the court, in
either case averting the Judge's recusal and vacatur of her
orders.8 Neither Miller nor Hall was concerned with the issue
of foreseeability. Both involved the timeliness of a party's
motion to disqualify a judge whose law clerk continued to
work on a case in which his future employer was counsel. In
each, the losing side did not learn of the basis for disqualifica-
tion until after judgment had been entered. Their belated
motion to disqualify was opposed on the ground of untimeli-
ness and waiver, but the argument was rejected, the judge was
disqualified, and the judgment was vacated. In Miller and
Hall, as here, it is obvious in retrospect that the problems
could have been averted if the law firm had refrained from
offering employment so long as the clerk was working for the
judge, or if the firm had told the other side. But hindsight is
not the test for foreseeability.
[3] More importantly, FIB/Talley submits no authority indi-
cating that a law firm should refrain from recruiting judicial
clerks -- indeed, the Canons indicate otherwise -- or must
tell opposing counsel, its own clients or the court if it offers
employment to a law clerk or its offer is accepted. 9 Murphy
had no basis for believing that the Judge's impartiality was
reasonably subject to question. Both Judge Tchaikovsky and
her law clerk knew about the clerk's prospective employment
with Murphy. Typically (and consistent with the duty to avoid
the appearance of impartiality), in these circumstances a judge
would either tell the clerk not to do any work on the matter,
or disclose the clerk's disqualification on the record and pro-
ceed only if the disqualification were waived. Here, the Judge
did not seek waivers, but rather told the clerk not to do sub-
stantive work on the SPA litigation. Regrettably, this did not
go far enough to forestall recusal. But the fact that the wall
was permeable in this case does not make it foreseeable that
judges and law clerks will not fully honor their ethical duties
in all cases. In sum, it is entirely reasonable for law firms to
rely on the presumption that judges and law clerks will main-
tain their impartiality by adequately following appropriate
procedures when the law clerk has obtained an offer or a posi-
tion of future employment.
This leaves the burden where it should be as a matter of
policy and practicality. The law clerk is the one person who
is always sure to know of a conflict. Even in the computer age
there is no reason to assume that counsel of record is aware
of everyone whom his firm has hired and where each prospec-
tive employee is presently working. We therefore cannot
agree with FIB/Talley that Murphy should bear the blame for
Judge Tchaikovsky's recusal.
[4] Nor does FIB/Talley articulate any compelling need for
a new duty of the sort it proposes. On the one hand it would
overcompensate for the occasional judicial lapse; but on the
other hand, it would underachieve the objective for no amount
of disclosure can guarantee the appearance of impartiality if
the judge and clerk fall short of what duty turns out to
demand. At the end of the day neither counsel nor clients can
control what happens inside a judge's chambers. Accordingly,
we agree with the district court that Murphy owed no duty to
inform FIB/Talley, lead counsel, SPA, or Judge Tchaikovsky
that Judge Tchaikovsky's law clerk had accepted an offer of
future employment with the firm. In the absence of duty, none
of the claims survives.
III
On its cross-appeal, Murphy argues that it is entitled to
indemnification for expenses because it prevailed on a claim
that arose from its role as an agent for its corporate clients.
However, Arizona and Delaware only provide for indemnifi-
cation of directors, not agents, see Ariz. Rev. Stat. S 10-852;
8 Del. Code S 145(c); and California, which recognizes
indemnity for agents, Cal. Corp. Code S 317(d), treats a cor-
poration's outside counsel as an independent contractor which
cannot seek indemnity under S 317(d) for costs incurred in
defending a legal malpractice claim brought by the client. See
Channel Lumber Co., Inc. v. Simon, 93 Cal.Rptr.2d 482, 487
(Ct. App. 2000).
AFFIRMED.
_______________________________________________________________
FOOTNOTES
*Honorable Jeffrey T. Miller, United States District Judge for the
Southern District of California, sitting by designation.
1 The basis for recusal was the appearance of impropriety; there is no
suggestion of actual impropriety or lack of impartiality by the Judge or the
law clerk.
2 28 U.S.C. S 455(a) provides that "[a]ny justice, judge, or magistrate of
the United States shall disqualify himself in any proceeding in which his
impartiality might reasonably be questioned."3 When coupled with the interest accumulated on the secured claim from
August 1994 and the value of an unsecured claim, FIB/Talley recovered
over $7.4 million. Judge Newsome's ruling, however, did not give FIB/
Talley relief from the automatic stay, which would have permitted it to
foreclose on SPA's property.
4 FIB/Talley did not appeal.
5 Both parties submitted expert declarations opining on foreseeability,
but FIB/Talley's contention that the opinion of its expert was improperly
ignored is incorrect. The district court properly treated foreseeability in the
context of determining whether Murphy owed a duty of disclosure as an
issue of law.
6 Canon 3(E)(1) provides: "A judge shall disqualify himself or herself in
a proceeding in which the judge's impartiality might reasonably be ques-
tioned . . . ." The Commentary further indicates that
[u]nder this rule, a judge is disqualified whenever the judge's
impartiality might reasonably be questioned, regardless whether
any of the specific rules in Section 3E(1) apply. For example, if
a judge were in the process of negotiating for employment with
a law firm, the judge would be disqualified from any matters in
which that law firm appeared, unless the disqualification was
waived by the parties after disclosure by the judge.
7 FIB/Talley suggests that the problem of isolating a clerk who has an
offer or has accepted future employment is exacerbated when (as here) thejudge only has a single clerk. This may be so, but has no bearing on the
judge's duty or the law clerk's. If the possibility of being without a law
clerk poses a practical problem for the judge, the judge can always cure
it by either taking on a judicial extern, or prohibiting his or her clerks from
interviewing or accepting future employment during the clerkship year.
8 Section 455(a) disqualification is one that might be waived under
S 455(e) if preceded by full disclosure on the record of the basis for dis-
qualification. However, recusal issues must be raised at the earliest possi-
ble time after the facts are discovered. See, e.g., United States v. Conforte,
457 F.Supp. 641, 653 (D. Nev. 1978), aff'd, 624 F.2d 869, 880 (9th Cir.
1980).
9 The California State Bar Formal Opinion, 1987-93 to which FIB/Talley
refers, is inapposite. It has to do with an attorney's obligation to disclosea close personal relationship with a court reporter or bailiff to his client.
This is animated by concerns that do not pertain to a law clerk -- that the
relationship might inhibit the attorney from challenging a transcript or the
bailiff's conduct with the jury.
FIB/Talley also relies upon the order entered by Judge Kozinski in In
re Bernard, 31 F.3d 842 (9th Cir. 1994), in which he declined to recuse
himself in a bankruptcy appeal on account of a possible appearance of
impropriety arising out of his wife's position as the U.S. Trustee. In doing
so, he expressed the view that
[c]ounsel for a party who believes a judge's impartiality is rea-
sonably subject to question has not only a professional duty to his
client to raise the matter, but an independent responsibility as an
officer of the court. Judges are not omniscient and, despite all
safeguards, may overlook a conflict of interest. A lawyer who
reasonably believes that the judge before whom he is appearing
should not sit must raise the issue so it may be confronted and put
to rest. Any other course would risk undermining public confi-
dence in our judicial system.
Id. at 847. However, as we explain, here the relevant facts were not
unknown to the judge, nor was the conflict overlooked.
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