Monday, November 24, 2008
Court of Appeal Clarifies Rule on Reimbursing Client Security Fund
Holds Settlement With Clients Does Not Limit Amount Recoverable by State Bar
By KENNETH OFGANG, Staff Writer
The State Bar’s subrogation rights against an attorney whose clients were reimbursed by the Client Security Fund are not limited to the amount of a litigation settlement between the lawyer and the clients, the First District Court of Appeal has ruled.
Div. Four Thursday overturned a San Francisco Superior Court judge’s ruling limiting the State Bar’s recovery in an action against former Escondido lawyer William J. Statile, who resigned from the State Bar in 2003 with discipline charges pending.
Statile represented several related trusts whose trustees sued him in San Diego Superior Court, alleging that he had converted trust assets to his own benefit. To settle the actions, he agreed to resign from the State Bar, to pay $100,000 to the trustees over a specified period of time, and to cooperate with the trustees’ efforts to obtain reimbursement of additional amounts from the State Bar.
He further agreed that in the event of a subsequent default—which the parties stipulated did not occur—the trusts could have judgment in the amount of $300,000, less any amounts paid.
In 2004, the CSF paid a total of more than $220,000 to the five trusts. Statile did not bring a mandate proceeding challenging the trusts in superior court, as permitted by CSF rules.
The State Bar subsequently brought suits seeking reimbursement for all of the payments. Statile testified that the funds in the trusts had been embezzled by an employee, and that while he was “somewhat’ aware of the CSF and agreed to cooperate with the trusts’ efforts to obtain reimbursement from it, he did not suggest to the trustees that they seek such reimbursement and was “not at all” aware that the fund was designed to reimburse clients for losses sustained at the hands of attorneys.
Judge Thomas Mellon concluded that under principles of subrogation, the State Bar’s rights “were defined by and limited to the terms of the” settlement agreement.
But Justice Patricia Sepulveda, writing for the Court of Appeal, explained that the State Bar’s subrogation rights are defined by the State Bar Act, whose relevant provisions state that the State Bar is subrogated to the rights of the CSF applicant “[u]pon making a payment.”
The settlement agreement between Statile and the trusts, the justice noted, specifically contemplated that the trusts would seek reimbursement for all of their losses, subject only to the provision limiting the amount the fund can pay to any one client to $50,000.
“Moreover, we construe Statile’s agreement not to object to the settling plaintiffs seeking payment from the CSF as a waiver of his present claim that the bar is precluded from enforcing its subrogation rights above what is owed under the settlement agreement,” Sepulveda wrote. “The statutory scheme contemplates that the CSF may seek reimbursement from a former attorney who caused a client monetary loss through its right of subrogation....By permitting the settling plaintiffs to seek reimbursement from the CSF, Statile implicitly acknowledged that the CSF would be permitted to seek reimbursement from him.”
Limiting the State Bar’s rights to the amount of the settlement, the justice went on to say, “would work a great injustice to the bar and to the CSF, and ultimately would result in all members of the State Bar in essence paying for the harm that Statile alone caused—a harm that he alone should ultimately be responsible for.”
Sepulveda went on to say that, under principles of collateral estoppel, the amount owed by Statile to the State Bar is the full amount that was paid by the CSF to his clients—the determination of which Statile could have challenged by writ petition but did not—and cannot be relitigated in the trial court.
The case is State Bar of California v. Statile, 08 S.O.S. 6355.
Copyright 2008, Metropolitan News Company