No. 46991 -0 -II Court of Appeals, Div. II, of the State of Washington Roff Arden and Bobbi Arden, Appellants, v. Forsberg Umlauf, P.S., et al., Respondents. Brief of Appellants Kevin Hochhalter Attorney for Respondent Cushman Law Offices, P.S. 924 Capitol Way South Olympia, WA 98501 360 -5 34 -9183 WSBA # 43124 Table of Contents 1. Introduction 1 2. Assignments of Error 2 3. Statement of the Case 3 3.1 Forsberg was appointed by Hartford to defend Ardens in Duffy a Arden. 3 3.2 Forsberg followed Hartford's settlement instructions despite opposition from Ardens 6 3.3 The trial court dismissed Ardens' claims on summary judgment. 9 4. Summary of Argument 12 5. Argument 13 5.1 Summary judgment rulings are reviewed de novo. 13 5.2 Forsberg owed fiduciary duties of undeviating loyalty to Ardens. 13 5.2.1 Forsberg owed Ardens the fiduciary duties ordinarily owed by an attorney to a client 14 5.2.2 Forsberg owed enhanced duties under Tank because the defense was under a reservation of rights 17 5.2.3 Forsberg owed the fiduciary duties of a trustee over Ardens' asset of insurance defense 20 5.3 Forsberg breached its duty of loyalty to Ardens 23 5.3.1 Forsberg failed to advise Ardens and seekArdens' informed consent for actual and potential conflicts of interest in the representation 24 5.3.1. 1 Potential conflicts relating to coverage and to Forsberg's long- standing relationship with Hartford. 24 5.3.1. 2 Potential conflicts arising from Ardens' secondary interests in swift resolution of the litigation. 27 5.3.1. 3 Actual conflict between Ardens' settlement instructions and settlement instructions from Hartford. 28 5.3.2 Forsberg placed the interests of Hartford above the interests of Ardens. 32 5.3.3 Forsberg's breach of duties also constitutes breach of trust. 34 5.4 Ardens are entitled to broad equitable remedies for Forsberg's breach. 34 5.4.1 Ardens are entitled to disgorgement of all fees paid to Forsberg for the representation. 35 5.4.2 Ardens are entitled to emotional distress damages 37 5.4.3 Ardens are entitled to attorney fees incurred as a result of Forsberg's breach of trust, including fees incurred in this malpractice litigation. 39 5.5 The trial court erred in dismissing Ardens' legal malpractice claim where there were material issues of fact precluding summary judgment 41 5.5.1 There were material issues of fact regarding the availability of emotional distress damages under Schmidt v. Coogan 41 5.5.2 There were material issues of fact as to whether Forsberg's malpractice was a proximate cause of Roff Arden being charged with a felony 43 5.6 Ardens request an award of attorney fees on appeal. 44 6. Conclusion 44 Table of Authorities Table of Cases Allarda Pac. Nat'lBank„ 99 Wn.2d 394, 663 P.2d 104 ( 1983) 40, 44 Allarda FirstInterstate Bank, N.A., 112 Wn.2d. 145, 768 P.2d 998 (1989) 40, 44 Am. BestFoods, Inc. v. Alea London, Ltd., 168 Wn.2d 398, 229 P.3d 693 (2010) 14 Behnks v. Ahrens., 172 Wn.App. 281, 294 P.3d 729 (2012) 37 Cotton v. Kronenberg., 111 Wn.App. 258, 44 P.3d 878 (2002) 14 Eriks v. Denver., 118 Wn.2d 451, 824 P.2d 1207 (1992) 24, 33, 34, 35, 36, 37 Gillespie v. Seattle -FirstNat'lBank, 70 Wn.App. 150, 855 P2d 680 (1993) 35 Huey v. Carpenter., 119 Wn.2d 251, 830 P.2d 646 (1992) 24 In Re Disciplinary ProceedingAgainstMarshall., 160 Wn.2d 317, 157 P.3d 859 (2007) 16 Labriola v. Pullard Group, Inc., 152 Wn.2d 828, 100 P.3d 791 (2004) 13 Michaela Masquera -Lacy, 165 Wn.2d 595, 200 P.3d 695 (2009) 13 Nat'lSur. Corp. v. Immunex Corp., 176 Wn.2d 872, 297 P.3d 688 (2013) 17 Price v. State., 114 Wn.App. 65, 57 P.3d 639 (2002) 39 Schmidt v. Coogan, 181 Wn.2d 661, 335 P.3d 424 (2014) 3, 37, 38, 40, 41 Schmitt a Langenour, 162 Wn.App. 397, 256 P.3d 1235 (2011) 13 Smith v. Safeco Ins. Co., 150 Wn.2d 478, 78 P.3d 1274 (2003) 13 Tank v. State Farm Fire & Cas. Co., 105 Wn.2d 381, 715 P.2d 1133 (1986) 1, 12, 14, 16, 18, 23, 40 Van Dyke v. White, 55 Wn.2d 601, 340 P.2d 430 (1960) 14, 18 VersuslawInc. v. SteolRives, LLP, 127 Wn.App. 309, 111 P.3d 866 (2005) 14 Woo v. Fireman'sFundIns. Co., 161 Wn.2d 43, 164 P.3d 454 (2007) 20 Woods v. City Nat'lBank & Trust Co., 312 U.S. 262, 85 L.Ed 820, 61 S.Ct. 493 (1941) 36 Statutes /Rules CR 56 13 RPC 1.2 17, 29, 30 RPC 1.4 17, 29, 30 RPC 1. 7 15, 16, 17, 26, 27 RPC 1. 8 14 RPC 5.4 14, 15, 18 Secondary Sources Barker, William T., InsurerLitigation Guidelines: EthicalIssuesforInsurer - SelectedAndIndependentDefense Counsel, ABA Section of Litigation 2012 Insurance Coverage Litigation Committee CLE Seminar March 1 -3, 2012) 15, 16, 17, 18, 20, 26, 30 Barker, William T. and Silver, Charles, ProfessionalResponsibilities of Insurance Defense Counsel (2014) 16, 18, 33 Bogert, George G., et al., The Law of TrustsandTrustees 3d ed. 2007) 21, 22, 34 Harris, Thomas V., Washington InsuranceLaw (3d ed 2010) 15, 17, 18, 26 Restatement 2d of Trusts 21, 35 1. Introduction Forsberg & Umlauf attorneysJohn Hayes and William "Chris" Gibson were appointed by Hartford, Ardens' insurer, to defend Ardens under a reservation of rights. Forsberg had a long- standing attorney -client and business relationship with Hartford, but did not advise Ardens of that relationship. Forsberg's conflict of interest, which should have disqualified it from representing Ardens, caused Forsberg to breach its fiduciary duties of undeviating loyalty to Ardens. Forsberg failed to advise Ardens of potential and actual conflicts of interest, failed to confer with Ardens regarding settlement decisions, and ultimately placed the interests of Hartford above the interests of Ardens. Ardens sued Forsberg for legal malpractice and breach of fiduciary duties. The trial court erroneously dismissed both claims on summary judgment. Ardens' evidence set forth specific facts supporting the elements of their claims. The undisputed facts show that Forsberg breached its fiduciary duties under the RPCs and under Tank v. State Farm Fire & Cas. Co., 105 Wn.2d 381, 715 P.2d 1133 (1986), entitlingArdens to disgorgement of all fees and costs received by Forsberg in connection with the representation. This Court should reverse the trial court's erroneous orders. Ardens ask this Court to also recognize that insurance- assigned defense counsel stands in the position of a trustee over the insurance defense asset, which it must manage for the sole benefit of the insured client. Breach of trust entitles the client to additional equitable remedies. Brief ofAppellants - 1 2. Assignments of Error 1 The trial court erred in granting Defendants' motion for summary judgment on Ardens' legal malpractice claims where there were material issues of fact as to proximate cause and the availability of emotional distress damages. 2. The trial court erred in denying Ardens' motion for reconsideration of the first summary judgment order. 3. The trial court erred in granting Defendants' motion for summary judgment on Ardens' breach of fiduciary duty claims where Ardens' evidence set forth specific facts supporting each of the elements of their claims. 4. The trial court erred in denying Arden's motion for partial summary judgment of liability for breach of fiduciarydutywhere the undisputed evidence established Forsberg's breach of fiduciary duties. Issues related to assignments of error Whether insurance -a ppointed defense counsel stands in the position of a trustee over the insured's asset of insurance defense (assignments of error 3 and 4). Whether Forsberg breached its fiduciary duties as attorneys and trustees by failing to advise Ardens of potential or actual conflicts of interest and failing to resolve those conflicts in favor of Ardens (assignments of error 3 and 4). Brief ofAppellants - 2 Whether Defendants breached their fiduciary duties as attorneys and trustees byplacing the interests of Hartford above the interests of Ardens assignments of error 3 and 4). Whether there were material issues of fact on the element of proximate cause in Ardens' legal malpractice claim, precluding summary judgment dismissal (assignments of error 1 and 2). Whether there were material issues of fact regarding the availability of emotional distress damages under Schmidt v. Coogan, 181 Wn.2d 661, 335 P.3d 424 (2014) (assignments of error 1 and 2). 3. Statement of the Case 3. 1 Forsberg was appointed by Hartford to defend Ardens in Duffy v. Arden. Roff and Bobbi Arden were sued by Anne and Wade Duffy for negligent orintentional property damage and emotional distress. CP 855, 904. Ardens tendered defense of the case to their insurer, Property and Casualty Insurance Company of Hartford. CP 856, 904. Hartford initially refused to defend. CP 904. Ardens hired attorneyJon E. Cushman, who pressured Hartford to accept the tender of defense. CP 855 -56. Hartford eventually accepted, appointing attorneysJohn P. Hayes and William C. " Chris" Gibson of the firm Forsberg & Umlauf, P.S. to defend Ardens. CP 130; 445 -46. Hartford informed Forsberg & Umlauf that the defense would be under a reservation of rights. See CP 208, 318, 320. Although the reservation of rights letter was not issued untilmonths later, Brief ofAppellants - 3 Hayes and Gibson recognized from the outset that a coverage dispute was likely to arise between Ardens and Hartford. CP 169, 208. Hartford was a long -s tanding client of Forsberg & Umlauf in coverage disputes. Four partners, including Hayes, regularly represented Hartford as coverage counsel. CP 203 -04. Neither Hayes nor Gibson ever informed Ardens of this pre -e xisting attorney -client relationship with Ardens' insurer. CP 227, 229, 430. Neither Hayes nor Gibson everinformed Ardens of any potential conflict of interest that may have arisen from Forsberg & Umlauf's relationship with and duties to Hartford. CP 430. Had Ardens known of the relationship, they would nothave accepted Forsberg & Umlauf as defense counsel. CP 227, 229. Gibson metwith Ardens and Cushman within a few weeks of being appointed. CP 483 -84; 546. During that meeting, Gibson explained to Ardens that his duties were solely to Ardens as clients. CP 173. Gibson told Ardens that he would attempt to get Hartford to pay the full amount of any liability, despite the reservation of rights. CP 173. Cushman would remain involved in the case as personal counsel and to prosecute Ardens' counterclaims. CP 166. Ardens explained to Gibson the circumstances surrounding Duffys' claims. Duffys alleged that Roff Arden negligently or maliciously shot and killed two of Duffys' dogs. CP 445. Duffys lived over 200 yards away from Ardens in a rural area in Mason County. CP 536. Duffys habitually allowed their dogs to roam free. CP 536. On multiple occasions, Duffys' dogs came onto the Arden property and threatened and chased Ardens. CP 536 -37. Brief ofAppellants - 4 Roff Arden suffers from post -t raumatic stress disorder (PTSD) as a result of physical and mental abuse as a child. CP 573. He was re- traumatized in 2010 by a painful, unexpected eye procedure. CP 572 -73. His PTSD manifests as acute anxiety attacks or bouts of depression, difficulty trusting others, and an intense fight -or -flight response. CP 574, 586. Arden also suffers from a fear of dogs as the result of a previous dog attack. CP 589 -90. Arden had explained his mental condition to Anne Duffy in 2009. CP 538, 540. Two of Duffys' dogs startled Arden while he was workingwith caustic chemicals outside his studio. CP 540, 599. Arden warned Anne Duffy that the dogs could not be around the studio. CP 540, 599. Nevertheless, Duffys continued to allow their dogs to wander free and to menace Ardens on Ardens' property. See CP 538 -39, 599. Arden admitted to Gibson that he shot Duffys' yellow lab in the midst of a PTSD- induced fight -or -flight response when two of Duffys' dogs chased Ardens halfway down their driveway. CP 585 -86. A police report claimed thatArden admitted to having shot another dog 15 months earlier, but Arden maintained he did not. CP 585. The report, which Gibson reviewed, recommended felony criminal charges against Roff Arden. CP 484, 491. Coming out of the meeting with Gibson, Ardens understood that Gibson would evaluate Hartford's exposure in the case and then get back in touch with Ardens. CP 546. Gibson had informed Ardens that it was his practice," generally, to try to get the insurer to pay the full amount even in a reservation -of-r ights case. CP 173. Neither Gibson nor Hayes ever contacted Ardens to discuss a specific litigation or settlement strategy. CP 574, 582. Brief ofAppellants - 5