Thursday, February 7, 2002
Rudin Firm Wins New Trial in Bid to Scuttle Malpractice Settlement
By ROBERT GREENE, Staff Writer
A Los Angeles law firm and its partners, facing a malpractice suit over an allegedly botched trust document, are entitled to a trial over just when its lawyers discovered a Probate Code amendment in their favor, this district’s Court of Appeal ruled yesterday.
The ruling kept alive an argument by the firm of Rudin, Richman & Appel that a settlement reached with its unhappy client could be rescinded, based on both parties’ belief at the time that the irrevocable intervivos trust the firm drafted personally exposed the trustees to estate and gift taxes at the time of distribution.
In fact, the firm had been let off the hook by an amendment to the Probate Code which had been passed, signed into law, and was awaiting implementation—and which was to take effect retroactively in 1997. But the firm did not know about the amendment to Sec. 16081 on Aug. 30, 1996, when it agreed to pay $205,000 in exchange for a release of the liability claims against it. It allegedly learned of the pending law in October 1996.
The client-turned-plaintiff, Dennis A. Harris, sued the firm and its partners for breach of contract when the lawyers discovered the new law and tried to abrogate the settlement. Los Angeles Superior Court Judge David D. Perez granted Harris’ summary judgment motion and rejected the firm’s, but Justice Earl Johnson Jr. of Div. Seven said there remained triable issues of fact as to whether the firm properly rescinded the settlement agreement.
Johnson agreed with the firm that the settlement may have been based on a mutual mistake of fact or law going to the essence of the agreement—the firm’s potential liability for malpractice.
“If the amendment to the statute has the effect the defendants claim it has then, under the trust as drafted by defendants, the trustees will suffer no adverse tax consequences from making distributions to the beneficiaries, and the settlement value of Harris’s malpractice suit is obviously diminished,” Johnson said, adding that the settlement actually could constitute a “windfall” to Harris.
It does not matter that the courts or the Internal Revenue Service might ultimately reject the firm’s interpretation of the Probate Code amendment and that the document drafted for Harris could end up making the trustees personally liable for taxes after all, the justice said. What matters is that the firm may put on a case that shows it would not have entered into the settlement if it had known about the amendment.
Johnson likewise rejected Harris’ argument that the firm and its partners should not escape liability for faulty work on a trust document because of their further negligence in failing to keep up with changes in their very field of law. Defendant Martin Appel was a certified tax specialist and defendant Jeffrey Berkowitz was a certified public accountant as well as a tax lawyer, Harris noted.
“Freedom from negligence, however, is not a requirement for rescission based on a mistake of law,” Johnson said. “Freedom from negligence is only required for a rescission based on a mistake of fact. Arguably the mistake at issue here was one of law—all parties supposing they knew the provisions of section 16081.”
Besides, Johnson said, Harris cited no authority for the proposition that a party to a lawsuit must monitor all bills before the Legislature in the event one could impact the case.
But it was not a total win for the firm. The court upheld sanctions totaling $4,750, imposed by Perez after the defendants lost a motion for reconsideration, then moved to vacate and asked for a new trial based on the same arguments that had failed in the reconsideration motion.
The case is Harris v. Rudin, Richman & Appell, B142179.
Copyright 2002, Metropolitan News Company