Capitol Indemnity v. Fleming

IN THE COURT OF APPEALS
STATE OF ARIZONA
DIVISION TWO

CAPITOL INDEMNITY CORPORATION, )
an Arizona corpor ation, )
) 2 CA-CV 2001-0114
Plaintiff/Appellant, ) DEPARTMENT A
)
v. ) OPINION
)
ROBERT B. FLEMING and RHONDA )
FLEMING, husband and wife; FLEMING )
& CURTI, P.L. C., )
)
Defendants/Appellees. )
)

APPEAL FROM THE SUPERIOR COURT OF PIMA COUNTY

Cause No. C-20004182

Honorable Ted B. Borek, Judge

AFFIRMED

Jennings, Haug & Cunningham, LLP
By William F. Haug and William F. Begley Phoenix
Attorneys for Plaintiff/ Appellant

Chandler, Tullar, Udall & Redhair, LLP
By Charles A. Davis Tucson
Attorneys for Defendants/Appellees

F L Ó R E Z, Judge.
¶1 Capitol Indemnity Corporation, the surety for Anita Heller, a client of attorney

Robert B. Fleming and conservator of an estate, filed an action against Fleming, his spouse, and

Fleming’s law firm (collectively, Fleming) for damages arising out of Fleming’s alleged

negligence in failing to act when Heller illegally used estate funds to make gifts and loans to her

own children. Fleming filed a motion to dismiss the complaint for failure to state a claim upon

which relief could be granted, pursuant to Rule 12(b)(6), Ariz. R. Civ. P., 16 A.R. S., Pt. 1.

After a hearing, the trial court granted Fleming’s motion and this appeal followed. We affirm.

BACKGROUND

¶2 In reviewing the grant of a motion to dismiss a complaint, we assume the facts

alleged in the complaint to be true and give plaintiffs the benefit of all inferences arising from

those facts. Botma v. Huser, 202 Ariz. 14, 39 P.3d 538 (App. 2002). We will uphold a trial

court’s dismissal of a complaint “only if the plaintiff is not entitled to relief ‘under any facts

susceptible of proof under the claims stated.’” Linder v. Brown & Herrick, 189 Ar iz. 398, 402,

943 P.2d 758, 762 (App. 1997), quoting Donnelly Constr. Co. v. Oberg/ Hunt/Gilleland, 139

Ariz. 184, 186, 677 P.2d 1292, 1294 (1984).

¶3 In 1996, the Pima County Superior Court appointed Heller to serve as conservator

of the estate of Pearl E. Bennett, an incapacitated person. The court required Heller to post a

bond in the amount of $345,000. Capitol issued the bond under a suretyship agreement with

Heller. In 1997, Heller retained F leming to advise her on the duties of a conservator and to help

her prepare and file annual accountings. Between her appointment in 1996 and her removal and

criminal indictment in 1998, Heller used $235,561. 03 of estate funds to make unauthorized gifts

and loans to her children. Although Fleming documented these transactions in two annual

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accountings he filed with the court, he allegedly did not alert Heller or the court about their

impropriety. When Heller’s financial misconduct was discovered, the court r emoved her as

conservator and ordered her to reimburse the estate the full amount she had misappropriated.

Heller was only able to repay $45,561.03 of the usurped funds. As surety, Capitol was then

required to pay the r emaining $190,000 owed.

¶4 Capitol alleged in its complaint that Fleming had owed a duty to it, as Heller’s

surety, as well as to Bennett, the estate’s protected person. Capitol further alleged that Fleming

had breached that duty when he failed to properly inform Heller that her actions were illegal and

to notify the court of Heller’s ongoing criminal misconduct. In its r esponse to the motion to

dismiss, Capitol advanced two theories in support of its claim. First, Capitol contended that it was

entitled to sue Fleming directly under the principles outlined in Fickett v. Superior Court, 27 Ariz.

App. 793, 558 P.2d 988 (1976). Second, and alternatively, Capitol claimed that it was entitled

to be equitably subrogated to Bennett’s right to sue Fleming for malpractice pursuant to A. R.S.

§ 12-1643(A). The trial court found that Capitol had no claim under either theory and gr anted

Fleming’s motion to dismiss.

DISCUSSION

1. Direct Cause of Action

¶5 Capitol first contends it “has a direct cause of action against Fleming for legal

malpractice under the principles announced by this Court in Fickett.” In Fickett, the conser vator

of an incompetent person’s estate sued the attorney for the former guardian, alleging that the

attorney had negligently failed to discover the guardian’s scheme to misappropriate and convert

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estate assets for his personal benefit. The conservator claimed that the attorney had owed a duty

to the ward despite a lack of privity between the ward and the attor ney.

¶6 In analyzing the conservator’s claim, this court restated the general rule that an

attorney is not liable for legal malpractice to parties other than the attorney’s client absent

collusion or fraud. Fickett; see also Restatement (Third) of the Law Governing Lawyers § 51

cmt. a (2000) (lawyer owes duty of care to nonclient only in “ limited circumstances”). But, in

Fickett, we created an exception to the general r ule, concluding that the attorney had owed a duty

to the ward and was liable for breach of that duty. We reached that conclusion after applying the

following balancing test:

[T]he determination of whether, in a specific case, the attorney will
be held liable to a third person not in privity is a matter of policy
and involves the balancing of various factors, among which are [1]
the extent to which the transaction was intended to affect the
plaintiff, [2] the foreseeability of harm to him, [3] the degree of
certainty that the plaintiff suffered injury, [4] the closeness of the
connection between the defendant’s conduct and the injuries
suffered, [5] the moral blame attached to the defendant’s conduct,
and [6] the policy of preventing future harm.

27 Ariz. App. at 795, 558 P.2d at 990. We concluded that, “ when an attorney undertakes to

represent the guardian of an incompetent [person], he assumes a relationship not only with the

guardian but also with the ward.” Id. In an analogous case, we determined that the attorney

representing the special administrator of a decedent’s estate owed a fiduciary duty to the estate’s

beneficiary. In re Estate of Shano, 177 Ar iz. 550, 869 P.2d 1203 (App. 1993). As a result, we

concluded the beneficiary was entitled to object to the attorney’s repr esentation of the special

administrator based on a conflict of interest. Neither Fickett nor Shano, however, suggests that

Fleming owed a duty to a person other than his client and the protected person, the intended

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beneficiary of his representation. Indeed, we r ecently clarified that “neither Shano nor Fickett

established or recognized any duty an attorney owes to nonclients who are not, at least

derivatively, intended beneficiaries of the attorney-client relationship. ” Wetherill v. Basham, 197

Ariz. 198, ¶ 36, 3 P.3d 1118, ¶36 (App. 2000).

¶7 In Wetherill, the par ties’ relationship was analogous to that of Fleming and Capitol.

There, this court declined to impose on the attorney who had repr esented the cosettlor of a trust

a duty to the disinherited former beneficiar y. The attorney had no attorney-client relationship with

the former beneficiary but had an attorney-client relationship with and owed a duty to the

cosettlor, whose interests were adverse to the disinherited beneficiary. As noted above, we

distinguished both Fickett and Shano because the disinherited heir in Wetherill was not the

intended beneficiary of the attorney’s services. Similarly, Capitol is not the intended beneficiary

of Fleming’s services; thus, F leming did not owe a duty to Capitol.

¶8 Capitol also relies on Paradigm Insurance Co. v. Langerman Law Offices, P. A.,

200 Ariz. 146, 24 P.3d 593 (2001), as suppor ting its right to directly sue Fleming. Capitol argues

that this case “falls squarely within the long line of precedent discussed in Paradigm and,

consequently, Fleming owe[d] a duty to Capitol” that establishes its “r ight, as a ‘nonclient,’ to

bring a direct action against Fleming for professional negligence.” However, neither Paradigm

nor any of the precedents on which it relied concerned the types of relationships that existed

among the parties here.

¶9 Paradigm Insurance Company had issued a medical malpractice insurance policy

to a physician who was later sued for medical malpractice. Paradigm assigned Langerman Law

Offices to represent the physician in the malpractice action. Langerman allegedly failed to timely

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discover the existence of a primary policy covering the physician, which compelled Paradigm, the

excess carrier , to act as the physician’s primary carrier and to settle the physician’s claim within

its own policy limits. After Par adigm terminated Langerman’s representation of the physician,

it refused to pay Langerman the attorney’s fees incurred in representing the physician. Langerman

sued Paradigm for its fees, and Paradigm counterclaimed for negligence. The trial court granted

summary judgment in favor of Langerman, holding that the attorneys had owed no duty of care

to the insurer and could not be held liable for negligence that had injured Paradigm but not the

physician.

¶10 Our supreme court held that, “ when an insurer assigns an attorney to repr esent an

insured, the lawyer has a duty to the insurer arising from the understanding that the lawyer’s

services are ordinar ily intended to benefit both insurer and insured. ” Id. at ¶29. In analyzing the

relationships among the parties and determining an attorney’s duty to a nonclient, the supr eme

court relied on the following language from the Restatement of the Law Governing Lawyers

§ 51(3):

“[A] lawyer owes a duty of care . . . to a nonclient when and to the
extent that:

(a) the lawyer knows that a client intends as one of the
primary objectives of the representation that the lawyer’s
services benefit the nonclient;

(b) such a duty would not significantly impair the lawyer’s
performance of obligations to the client; and

(c) the absence of such a duty would make enforcement of
those obligations to the client unlikely.”

Paradigm, 200 Ar iz. 146, ¶23, 24 P.3d 593, ¶ 23.

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¶11 Here, subsections (a) and (c) do not apply to the relationships among Capitol,

Heller, and Fleming. Applying subsection (a), there is no assertion in the complaint that the

primary objective of Fleming’s representing Heller was to create any benefit to the nonclient,

Capitol. Instead, Heller retained Fleming’s services after contracting with Capitol and did so for

her own benefit—to have him advise her and oversee the annual accountings. Nothing in the

complaint suggests that Heller was motivated by any intent that Fleming’s representation should

extend to or benefit the surety. And even if Heller retained F leming with that motive, there is no

evidence Fleming knew she intended that result. Thus, the first criterion is not satisfied. See

Restatement § 51(3)(a).

¶12 As to subsection (c), it is doubtful that the absence of a duty on Fleming’s part to

protect Capitol would have made enforcement of Fleming’s obligations to Heller any less likely.

See Restatement § 51(3)(c). Subsection (b) is more difficult to assess because it is unclear, based

on this limited record, how imposing a duty of care on Fleming to protect Capitol’s interests could

have impaired Fleming’s ability to fulfill his obligations to Heller. Even if it did not, however,

the existence of this element alone is insufficient. See Restatement § 51(3)(b). Thus, Capitol

failed to satisfy the test on which the supreme court relied in Paradigm.

¶13 Paradigm, then, does not support imposing a duty on Fleming in favor of Capitol.

The relationships among the parties in Paradigm differed fundamentally from the relationships

among the parties here. Capitol did not assign Fleming to represent Heller, as did the insurer in

Paradigm. In fact, there is no statement in the complaint that any relationship existed between

Capitol and Fleming. Nor is there any evidence of an understanding that Fleming’s legal services

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had been intended to benefit both Heller and Capitol, an intent from which a duty could have

arisen. See Paradigm.

¶14 We have not found, and neither party has cited, any Arizona case holding that the

attorney for a conservator owes a fiduciary duty to the conservator’s surety. The cases on which

Capitol relies do not support its contention that it has a direct cause of action against Fleming

under the circumstances here. Additionally, we agr ee with Fleming that Restatement § 51(4),

which addresses the duty an attorney for a fiduciary may owe in certain circumstances to third

parties, did not impose a duty on Fleming for the benefit of Capitol. Therefore, the tr ial court did

not err in dismissing Capitol’s complaint pursuant to Rule 12(b)(6). Ariz. R. Civ. P.

2. Equitable Subrogation

¶15 Capitol argues in the alternative that the doctrine of equitable subrogation, codified

in § 12-1643(A), entitles it to be subrogated to the rights Bennett held to sue Fleming for

malpractice. Capitol asserts that, as surety for Heller , it “ has the right to exercise all rights of the

creditor once a judgment rendered against the principal has been paid.” Section 12-1643(A)

provides:

When a person who is surety on an undertaking is compelled
to pay a judgment or part thereof . . . such judgment shall not be
discharged by such payment but . . . shall be considered as assigned
to the surety together with all rights of the creditor thereunder to the
extent of the payment made by the surety, and interest thereon.

Here, the principal is Heller, the creditor is Bennett, and the surety is Capitol. Accordingly,

under § 12-1643(A), Capitol may be entitled to assignment of the order requiring Heller to

reimburse the estate to the extent of the payment it made to the estate on Heller’s behalf.

However, that Capitol is entitled to be assigned Bennett’s right to collect from Heller does not

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mean that Capitol is also entitled to be subrogated to Bennett’s right to sue Fleming directly for

legal malpractice.

¶16 Moreover, Capitol’s contention that it is entitled to equitable subrogation of

Bennett’s claim against Fleming has another impediment. Although we recognize that assignment

and subrogation are not identical legal principles, 1 they are sufficiently similar for us to conclude

that, in Arizona, legal malpractice claims are not subject to subrogation, just as they are not

subject to assignment. Botma (affirming dismissal of legal malpractice claim packaged with bad

faith claim against insurance carrier because Arizona pr ohibits assignment of legal malpractice

claims); Kiley v. Jennings, Strouss & Salmon, 187 Ar iz. 136, 140, 927 P.2d 796, 800 (App. 1996)

(“[A] cause of action for legal malpractice cannot be assigned.”).

¶17 In reaching that conclusion, we have found instructive, as did the tr ial court,

Fireman’s Fund Insurance Co. v. McDonald, Hecht & Solberg, 36 Cal. Rptr . 2d 424 (Ct. App.

1994). There, insurers settled a lawsuit brought by a group of homeowners against their insureds,

developers of the plaintiffs’ residences, for allegedly misrepresenting numerous facts in selling the

residences. The developers sued their attorneys, alleging they had caused the misrepresentations

to be made. When the insur ers joined the lawsuit as plaintiffs under a theory of subrogation, the

attorneys successfully demurred on the ground that California law prohibits assignment of legal

malpractice actions and, thus, precluded subrogation of the legal malpractice action. The

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Although statute section headings are not law, A.R. S. § 1-212, they can help to resolve
ambiguities. Florez v. Sargeant, 185 Ar iz. 521, 917 P.2d 250 (1996). The heading of A.R. S.
§ 12-1643(A) denotes that the section deals with subrogation while the text itself speaks of
assignment. We find no significant distinction between subrogation and assignment here.

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California Court of Appeal affirmed, citing the following public policy reasons for prohibiting the

assignment of legal malpractice claims:

“Assignability would encourage commercialization of claims, and
would force attorneys to defend themselves against persons to whom
no duty was ever owed. Moreover, the legal profession is debased
by such commercialization, because it could (1) encourage
unjustified lawsuits; (2) generate increased malpractice lawsuits,
burdening the profession, the court system and (to the extent
malpractice premiums would inevitably rise and be passed to the
consumers) the public; and (3) promote champerty. Assignability
could conceivably reduce the public’s access to legal services, since
the ever present threat of assignment by irresponsible clients
(seeking quick financial gain) could cause lawyers to evaluate more
selectively the desirability of representing a par ticular client. ”

36 Cal. Rptr. 2d at 427, quoting Kracht v. Perrin, Gartland & Doyle, 268 Cal. Rptr . 637, 640

(Ct. App. 1990). Similar public policy considerations underlie Arizona’s rule prohibiting

assignment of a legal malpractice claim. See Botma; cf. State Farm Fire & Cas. Co. v. Knapp,

107 Ariz. 184, 185, 484 P. 2d 180, 181 (1971) (declining to lift the lid “‘on a [P]andora’s box

crammed with both practical and legal problems’” by allowing assignment of personal injury and

medical payments claims), quoting Travelers Indem. Co. v. Chumbley, 394 S. W.2d 418, 425 (Mo.

Ct. App. 1965); Lingel v. Olbin, 198 Ar iz. 249, 8 P.3d 1163 (App. 2000) (claim for wrongful

death not assignable); Lo Piano v. Hunter, 173 Ar iz. 172, 840 P.2d 1037 (App. 1992) (explor ing

public policy rationale for barring assignment of personal injury claims).

¶18 In Fireman’s Fund, the California Court of Appeal fur ther explained that, even

though subrogation and assignment have some differences, “‘each oper ates to transfer from one

person to another a cause of action against a third, and the reasons of policy which make certain

causes of action nonassignable would seem to operate as forcefully against the transfer of such

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causes of action by subrogation. ’” 36 Cal. Rptr. 2d at 427, quoting Fifield Manor v. Finston, 354

P.2d 1073, 1077 (Cal. 1960); see also Knapp, 107 Ar iz. at 185, 484 P.2d at 181 (“[S]ubrogation

amounts to an assignment.” ). We agree that the public policies that prohibit assignment of a legal

malpractice claim in Arizona also prohibit equitable subrogation of a legal malpractice claim. For

the same reasons as did the court in Fireman’s Fund, we decline to gr ant Capitol a right to be

subrogated to Bennett’s legal malpractice claim against Fleming. See Kiley. Thus, the trial court

correctly refused to permit Capitol to proceed against Fleming under the doctrine of equitable

subrogation.

CONCLUSION

¶19 Having failed to establish the existence of a legal relationship and a concomitant

duty owed it by Fleming, Capitol has no claim against Fleming and his firm. See Linder. Thus,

we affirm the trial court’s granting of Fleming’s motion to dismiss the complaint.

______________________________________
M. JAN FLÓREZ, Judge

CONCURRING:

________________________________________
J. WILLIAM BRAMMER, JR., Presiding Judge

________________________________________
JOSEPH W. HOWARD, Judge

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