Burum v. State Compensation Insurance Fund

This is an appeal from a judgment for defendant which was entered in consequence of the sustaining of special and general demurrers to plaintiffs’ second amended complaint without leave to amend.

Plaintiffs, a firm of attorneys, seek to recover from defendant, State Compensation Insurance Fund, certain attorneys’ fees in pursuance of a written contract alleged to have been made between the parties. The trial court ruled adversely to plaintiffs’ claim for compensation “on the ground that the Fund has no authority to make the contract sued on in this case.” Plaintiffs properly challenge the propriety of that ruling in view of the facts alleged and the law applicable thereto.

From the second amended complaint, it appears that plaintiffs, as attorneys for the widow and three minor children of one E. E. Davis, who was killed in an industrial accident, brought an action for damages against the alleged negligent third parties. The State Compensation Insurance Fund, which was the insurance carrier for Davis ’ employer, paid the widow for herself and as guardian ad litem of the three minor children, the sum of $6,300 in pursuance of an award of the Industrial Accident Commission. The Fund claimed the right to recover said amount of death benefits “as special damages against [the responsible] third parties, either in a separate suit brought in its own name, or by lien imposed on the judgment in any action brought by the widow on behalf of herself and the minor children.” Electing to follow the latter course, the Fund entered into a written contract with plaintiffs for them to represent it in the death action and “to recover the amount of its lien against any judgment obtained or amount paid in settlement of said case” for a contingent fee of 25 per cent. As reason for their employment by the Fund, plaintiffs allege that “an action instituted in the Fund's name, as an insurer claiming subrogation, would be likely to

It is then alleged that plaintiffs “fully performed their part of [the] agreement and obtained judgment for, and actually collected . . . and caused to be paid to the Fund . . . Fifty-eight Hundred Dollars ($5800.00),” of which amount “plaintiffs [are] entitled to receive from the Fund the sum of Fourteen Hundred Fifty Dollars ($1450.00)” under the terms of the contract; that “the services contracted for and performed by plaintiffs . . . were of such a nature that they could not be performed adequately or competently or satisfactorily by an attorney or attorneys selected under the provisions of the Civil Service Act of the State of California”; that “by reason of the selection and employment of plaintiffs by the Fund, it was possible for the Fund to obtain greater, speedier, more satisfactory and more adequate service than it could have obtained by use of any attorneys other than plaintiffs acting as attorneys for the widow and minor children in [the death] action”; that at all times “plaintiffs were actively in charge of the litigation” and “by reason of the investigation they had made, the preparation of pleadings by them, and their familiarity with the facts and the law pertaining to said litigation, and their concurrent representation

The pivotal question presented by this appeal from a judgment on demurrer is the sufficiency of plaintiffs’ allegations to sustain their claim for compensation against the Fund. In support of the judgment, defendant Fund first argues that approval of its contract with plaintiffs would involve violation of article XXIV of the state Constitution, being the so-called Civil Service Amendment adopted in 1934. This argument accords with the view of the trial court that the Fund was without “authority” to negotiate such independent,arrangements for legal services as were performed by plaintiffs. In this connection defendant relies upon the case of State Compensation Insurance Fund v. Riley, 9 Cal.2d 126 [ 69 P.2d 985 , 111 A.L.R. 1503 ], wherein the Fund entered into an agreement with a special attorney calling for him “to act as attorney for [its secretary] Gallagher” in the prosecution of certain federal tax litigation and “to protect the fund” in its correlative interest therein. After the agreement was made the State Controller refused to draw a warrant for the stipulated retainer fee. An action in mandamus ensued. In denying the writ, this court discussed at length the purport of the state civil service system as reflected by the history of the constitutional amendment above mentioned and the statutes enacted relating thereto. Without repeating that discussion, suffice it to say that the civil service provisions were expressly declared to be “comprehensive in their scope” and “to embrace within their terms professional as well as nonprofessional service” performed for the state. Thus, while recognizing that the legal services there in question were “urgent, temporary and require [d] expert knowledge, experience and

Plaintiffs’ second amended complaint, as above reviewed, demonstrates their awareness of the exception noted in the Riley case as ground for removing the contract here in question “from the operation of civil service.” Thus, it is alleged that “the services contracted for and performed by plaintiffs . . . were of such a nature that they could not be performed adequately or competently or satisfactorily by an attorney or attorneys selected under the provisions of the Civil Service Act.” The force of such allegation stems from the fact that in the conduct of its insurance business the Fund operates on a “fairly competitive” basis with private insurance carriers and has the power to “enter into any contracts or obligations relating to the State Compensation Insurance Fund which are authorized or permitted by law.” (Ins. Code, §§ 11775, 11783.) So pertinent are these statutory provisions in measure of the Fund’s rights here. If the employer is insured against workmen’s compensation liability, the insurer has the same right of action as the employer, or is subrogated to the employer’s right. (Lab. Code, § 3850, subd. (b); Ins. Code, § 11662.) In enforcing its cause of action the

In the present case, according to the facts pleaded, the Fund elected the third course of procedure, the lien method of recovery in the death action, as best calculated to assure its recoupment of “expenditures for compensation.” By that election, so it is alleged, the Fund avoided any prejudice which might accrue were it to appear before a jury as a party litigant seeking from “third parties” a recovery to reimburse itself against an insurance loss. Moreover, in line with the allegation that the reimbursement claim of the Fund exceeded the amount of known assets from which a judgment against the responsible “third parties” could be satisfied and the consequent priority right of the Fund in the damage recovery, the widow manifestly would have had no incentive to employ attorneys to prosecute the action for the sole benefit of the Fund and at the same time the Fund was without legal right to substitute in such litigation its attorneys or any other attorney selected by civil service examination in the place of the attorneys selected by the widow. But the Fund had a recognized interest in the death action by virtue of its claim of a lien upon any judgment that might be obtained therein and, a fortiori, it was to the Fund’s advantage to have that action continued in pursuance of an approved means of effecting its reimbursement for “expenditures for compensation.” (Lab. Code, § 3856.) Such claim of lien undoubtedly constituted an interest in the death action as would warrant the Fund’s employment of special counsel for its protection, consistent with its broad powers to conduct its insurance business on a “fairly competitive” basis and to take such steps as it should deem proper to keep its losses at a minimum. (Cf. State Compensation Insurance Fund v. Riley, supra, 9 Cal.2d 126 , 131-132.) In so attempting to bring about a recovery in the pending litigation, the Fund was proceeding not on any theory of subrogation to the heirs’ right to maintain their damage action (Jacobsen v. Industrial Acc. Com., 212 Cal. 440 , 446 [ 299 P. 66 ]) but on the premise of safeguarding its legitimate lien interest as created by statute. (Merino v. Pacific Coast Borax

Defendant next challenges “the ethics of employing the widow’s attorneys to do the work of recovering the amount of the Fund’s lien against her judgment.” Such arrangement, it is argued, placed plaintiffs “in the position of representing adverse interests” and, as supporting authority, Anderson v. Eaton, 211 Cal. 113 [ 293 P. 788 ], is cited. But that case is wholly distinguishable upon its facts. There the plaintiff, suing for attorney’s fees, had undertaken to represent defendant, the mother of a deceased employee, in an action

While in its consideration of the Anderson v. Eaton case, this court did refer to a possible conflict of interests in the event of an offer of settlement of the claims of defendant and the insurance carrier against the third party tort feasor, the decision was grounded upon the actual conflict of interests between defendant and the insurance carrier in the pending litigation before the Industrial Accident Commission. Thus, it was said at pages 116 and 117: “While the defendant had knowledge that plaintiff was the legal representative of the insurance carrier of the Gas Company and received an annual retainer therefor, plaintiff failed to explain to her wherein the two employments were adverse. As attorney for the defen

In the present case, the litigation of the compensation claim had been entirely completed, the award had been paid, and plaintiffs had already brought the action on behalf of the widow before they entered into their contract with the Fund looking toward the recovery of its lien against any judgment obtained or settlement made. Plaintiffs’ pleading shows that “it was to the best advantage of all parties that one firm of attorneys should represent both the widow and minor children and the Fund, ’ ’ and that the widow and minor children entered into a written contingent fee contract with plaintiffs, with the approval of the court, after a full disclosure of the factors motivating plaintiffs ’ employment by the Fund. Plaintiffs’ pleading does not show any actual or undisclosed adverse interests, or that any advantage was taken of any of the parties, or that plaintiffs were “required to choose between conflicting duties” or “to reconcile conflicting interests” rather than “enforce to their full extent” the rights of all parties. (Anderson v. Eaton, supra, 211 Cal. 113 , 116.) Apparently the only possible conflict of interests between the widow and the Fund which could have arisen might have developed in the event of an offer of settlement, but such mere possibility does not necessarily invalidate plaintiffs’ contract of employment. (Thornton on Attorneys at Law, vol. I, §§ 174 et seq., pp. 307 et seq., and cases cited.) As was said

Defendant finally raises the matter of plaintiffs’ failure to allege that they had filed a claim with the State Board of Control pursuant to sections 667 and 688 of the Political Code; and contends, in reliance upon Bekins Van & Storage Co. v. State of California, 135 Cal.App. 738 [ 28 P.2d 61 ], that the filing of such claim by plaintiffs was a condition precedent before a court could acquire jurisdiction to entertain the cause for trial. But the cited case is not in point, for there the claim was “against the state” while here the claim is “against the Fund,” a “self-supporting” and independent “agency of the state” as declared by statute. (Cf. Gilmore v. State Compensation Insurance Fund, 23 Cal. App.2d 325 , 329-330 [ 73 P.2d 640 ].)

At the time this action was commenced, section 11783 of the Insurance Code provided that “ [T]he [Industrial Accident] commission may, on behalf of the fund and in the [fund’s] name . . . sue and be sued in all actions arising out of any act or omission in connection with the fund, or in connection with its business or affairs.” (Stats. 1935, ch. 145, p. 725: amended in 1945, Stats. 1945, ch. 1431, p. 2711, in a manner immaterial to this decision.) Section 11771 expressly precludes any liability against the state “beyond the assets of the [fund]” for the payment of any such claim as is here involved. Section 11782 declares that “ [A]ll business and affairs of the fund shall be conducted in [its] name,” and section 11774 provides that “[its] assets . . . shall be applicable to the payment of losses sustained on account of insurance and to the payment of the salaries and other expenses charged against it.” Section 11778 gives general authority to “ [T]he fund [to] transact workmen’s compensation” business “to the same extent as any other insurer.”

Sections 667 and 688 of the Political Code are general in their application to the presentation of claims against the state. The Workmen’s Compensation law, the Insurance Code

From what has been said, it follows that the trial court erred in sustaining the demurrers to plaintiffs’ second amended complaint without leave to amend.

The judgment is reversed.

Gibson, C. J., Shenk, J., Carter, J., Schauer, J., and Tray-nor, J., concurred.

In my opinion, assuming that plaintiff has pleaded sufficient facts to avoid, as against a demurrer, the bar of the Civil Service Act, the complaint does not state a cause of action because its allegations show that the contract sued upon is contrary to public policy and void.

The attorneys plead, as the basis for the recovery of fees, that, at the time the contract was made, neither the widow of Davis, nor the Fund, knew of any assets of the tort feasor from which a judgment in excess of the lien for compensation could be satisfied. As further justification' for their employment, it is charged “. . . that an action instituted in the Fund’s name, as an insurer claiming subrogation, would' be likely to encounter prejudice and hostility on the part of a jury, while an action prosecuted in the name of the widow on behalf of said minor children would be likely to excite a sympathetic consideration of all the evidence on the part of the jury. ...” In other words, the allegations of the complaint, in effect, are that the Fund is suing in the name of the widow.

At one time, the Workmen’s Compensation Act allowed subrogation, but since the amendment of 1927, “in lieu thereof the employer is granted the right to sue or to acquire a lien for his expenditures in the event the employee sues

There is broad opportunity for taking advantage of an employee under the circumstances shown by the present record. Where an attorney is hired to represent both the insurance carrier and employee in the suit against the tort feasor, he may be required to choose between the conflicting interests of his two clients. If the suit goes to trial, the injured workman' may obtain a judgment for much more than the amount of compensation paid to him under the provisions of the Labor Code. There is also the possibility of an adverse judgment, in which event the insurance carrier would obtain no recovery for compensation by it. Counsel “though in good faith intending to discharge his obligation as . . . [the injured party’s] attorney, would be in such a position as might have unconsciously caused him to accept an offer of compromise or settlement of her claim . . . rather than run the risk of bringing an action and jeopardizing” the carrier’s rights. (Anderson v. Eaton, 211 Cal. 113 , 117 [ 293 P. 788 ]. Cf. Lessing v. Gibbons, 6 Cal.App.2d 598 at 604 [ 45 P.2d 258 ].)

In Anderson v. Eaton, supra, as in the present case, the widow of the deceased employee was represented by counsel also employed by the carrier. She had full knowledge of his dual employment. After she discharged him and settled with the tort feasor, the attorney sued her for his fee. The court held that the contract was void as against public policy because of the conflict of interest between the two clients. Although in that case there was evidence as to fraudulent representations by the attorney and here the plaintiffs’ good faith is not questioned, the ruling does not rest upon the ground of the representations of the attorney.

The facts pleaded in the present case show a cause of action based upon a contract which public policy forbids. A fundamental rule of the legal profession is that “a lawyer can, under no conceivable circumstances, recover for services rendered in the same suit to parties having opposing interests.” (Strong v. International Bldg., Loan & Investment Union, 183 Ill. 97 ,102 [ 55 N.E. 675 , 47 L.R.A. 792 ].)

For these reasons, I would affirm the judgment.