How Does Agency Issues Affect Arbitration Agreements in California?

 The recent California appellate decision in Enmark v. KC Community Care, LLC, reviewed the issues related to agency and arbitration agreements and provides information for the scope and extent of agency concepts regarding a conservator.

 

The Lanterman-Petris-Short Act (LPS) (Welf. & Inst. Code, § 5000 et seq.) “authorizes the appointment of a conservator for up to one year for a person determined to be gravely disabled as a result of a mental disorder and unable or unwilling to accept voluntary treatment.” 

 

Lisa Enmark (Lisa) was under an LPS conservatorship when she moved into Community Care Center, a skilled nursing facility (Facility). 

 

Her father Scott Enmark (Scott) signed two optional arbitration agreements with the Facility as Lisa’s representative. 

 

After Lisa died, her parents (plaintiffs) sued the Facility’s owners and operators (defendants), asserting both successor and individual claims. 

 

Defendants petitioned to compel arbitration. 

 

The trial court denied the petition, finding no evidence of Scott’s authority to bind Lisa to arbitration on the successor claims. 

 

As for the wrongful death claim, the court found neither Scott nor Lisa’s mother Marilyn Warhol (Marilyn) signed the agreements in their individual capacities.

 

On appeal, defendants contended the successor claims are subject to arbitration because the LPS conservatorship order authorized Scott to sign the agreement on Lisa’s behalf. Defendants also contended plaintiffs’ wrongful death claim is subject to arbitration.

 

In 2018, the superior court found Lisa was “gravely disabled” and “lack[ed] capacity to consent to psychotic medication.” Scott was appointed as the LPS conservator of Lisa’s person. The appointment was to expire in one year. 

 

The LPS conservatorship order empowered Scott to place Lisa in “the least restrictive setting” for her “care and needs,” including a medical or psychiatric nursing facility; to require Lisa to “have treatment related specifically to remedying or preventing the recurrence of” her “being gravely disabled”; and to require Lisa “to accept psychotropic medications.” 

 

The order also imposed “disabilities” on Lisa. She was prohibited from possessing a driver’s license and a firearm or other deadly weapon, refusing or consenting to treatment for her mental health disorders and other medical conditions, and “enter[ing] into any contract in which the consideration for performance is money or property.” 

 

In 2019, Lisa was admitted to the Facility. Upon her admission, Scott signed two separate arbitration agreements, identifying himself as Lisa’s “Resident Representative.” 

 

The first agreement subjected to binding arbitration “any dispute as to medical malpractice.” The second agreement subjected to binding arbitration “any claim other than a claim for medical malpractice, arising out of the provision of services by the Facility.”

 

Signing the arbitration agreements was not “a precondition [of the resident’s] admission,” and the agreements could be “rescinded” in writing. Scott did not rescind the agreements. 

 

The agreements added they would bind not only the parties, but also the heirs, representatives, executors, administrators, successors and assigns of the parties, whose claims stem from a resident’s admission to the Facility. 

 

 In 2021, Lisa was sexually assaulted in her room by a male resident at the Facility. She died days later.  Lisa was 37 years old. 

 

Plaintiffs Scott and Marilyn filed a complaint against defendants KF Community Care, LLC, doing business as Community Care Center; Kirkside Facilities Operations, LLC; KSNF, LLC; Cambridge Healthcare Services, LLC; Jacob Wintner; and Ira Smedra.

 

As Lisa’s successor in interest, Scott asserted causes of action for dependent abuse, negligence, premises liability, negligent hiring, supervision, or retention, violation of the Patient’s Bill of Rights (Health & Saf. Code, § 1430), and willful misconduct.

 

Scott and Marilyn asserted a cause of action for wrongful death in their individual capacities. 

Defendants petitioned to compel arbitration. 

 

After a hearing on the petition, the trial court issued a minute order, denying the petition, finding defendants failed to establish Scott had authority to sign the agreements on Lisa’s behalf to arbitrate the successor claims. The court found Scott and Marilyn did not sign the agreements in their individual capacities to arbitrate the wrongful death claim. 

 

The LPS Act governs the involuntary detention, evaluation, and treatment of persons who, as a result of mental disorder, are dangerous or gravely disabled. 

 

 The Act authorizes the superior court to appoint a conservator of the person for one who is determined to be gravely disabled so that he or she may receive individualized treatment, supervision, and placement.

 

The right to compel arbitration depends upon the existence of a valid agreement to arbitrate between the parties. Basic principles of contract law govern that question. 

 

The party seeking to compel arbitration bears the burden of proving the existence of an arbitration agreement between the parties, and the party opposing the motion bears the burden of establishing a defense to the agreement’s enforcement. 

 

Because arbitration is a matter of contract, the general rule is that one must be a party to an arbitration agreement to invoke or be bound by its terms. 

 

Notwithstanding this general rule, a person (and, more specifically, a resident in a skilled nursing care facility) who did not sign an arbitration agreement can be compelled to arbitrate if there is an agency relationship between the resident and the person who signed the agreement. 

 

Defendants first contend the trial court erred in finding they failed to prove Scott had authority to sign the agreements on Lisa’s behalf to arbitrate the successor claims. 

 

An agent is someone who represents another—the principal—in dealings with third parties. (Civ. Code, § 2295.) 

 

An agent has such authority as a principal actually or ostensibly confers upon him. 

 

Actual authority is such as a principal intentionally confers upon an agent, or intentionally or by want of ordinary care allows the agent to believe himself to possess. 

 

Ostensible authority is such as a principal, intentionally or by want of ordinary care, causes or allows a third person to believe the agent to possess. 

 

An agent will normally have the authority to do everything necessary or proper and usual in the ordinary course of business for effecting the purpose of his agency. 

 

Authority may be granted to an agent either by a precedent authorization or a subsequent ratification. 

 

The crux of this case involves the construction of the LPS conservatorship order, and  whether, as a matter of law, the order confers actual and/or ostensible authority on Scott to sign the arbitration agreements for Lisa. 

 

If so, defendants have met their burden of proving valid arbitration agreements exist binding plaintiffs to arbitration of their successor claims. 

 

The LPS conservatorship order cannot be construed as establishing Scott’s actual agency. 

 

The hallmarks of actual agency are consent and control: Agency is the relationship which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.

 

The principal must in some manner indicate that the agent is to act for him, and the agent must act or agree to act on his behalf and subject to his control.

 

By its nature, the conservator-conservatee relationship is not derived from actual agency. It does not depend on whether the conservatee consents to the conservator’s court-ordered authority. 

Nor is the conservator subject to the conservatee’s control. Thus, with respect to actual agency, the LPS conservator agreement is not the basis for Scott’s authority to act for Lisa in any capacity as a matter of law. 

 

Ostensible agency is a different matter. The LPS conservatorship agreement gave Scott ostensible or apparent authority to place Lisa in the Facility and to ensure she accepted and received all necessary medical care.

 

The question is whether Scott’s authority as Lisa’s conservator extended to signing the arbitration agreements on her behalf. In other words, to what extent can such authority be implied from the conservatorship order? 

 

The appellate court concluded Scott’s execution of the arbitration agreements was not a health care decision binding Lisa—and Scott’s successor claims—to arbitration. Further, it concluded the court’s reasoning concerning the scope of a power of attorney applies equally to Scott’s ostensible authority under the conservatorship order. It did not authorize Scott to have Lisa’s claims against the Facility arbitrated. 

 

Nothing in the LPS conservatorship order clearly authorizes Scott to agree to arbitration on Lisa’s behalf, thereby empowering him to waive her right to a jury trial on any claims against the Facility. There is no express language to that effect. 

 

Nor is there a general or catchall provision from which that authority can be reasonably inferred. In asserting Scott derives such authority from his power to decide Lisa’s placement, defendants overlook the fact that committing a conservatee to a facility for treatment is itself a health care decision. 

 

In sum, the trial court properly ruled Scott is not compelled to arbitrate his successor claims. 

 

LESSONS:

 

1.         An agent is someone who represents another—the principal—in dealings with third parties. (Civ. Code, § 2295.) 

 

2.         An agent has such authority as a principal actually or ostensibly confers upon him. 

 

3.         Actual authority is such as a principal intentionally confers upon an agent, or intentionally or by want of ordinary care allows the agent to believe himself to possess. 

 

4.         Ostensible authority is such as a principal, intentionally or by want of ordinary care, causes or allows a third person to believe the agent to possess. 

 

5.         An agent will normally have the authority to do everything necessary or proper and usual in the ordinary course of business for effecting the purpose of his agency. 

 

6.         Authority may be granted to an agent either by a precedent authorization or a subsequent ratification. 

 

7.         The hallmarks of actual agency are consent and control: Agency is the relationship which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act. 

 

8.         With respect to actual agency, the LPS conservator agreement is not the basis for Scott’s authority to act for Lisa in any capacity as a matter of law. 

Is a Contractor With Employees Required to Have Workers Compensation Insurance?

This question was answered in the recent California appellate decision in American Building Innovation LP v. Balfour Beatty Construction, LLC. 

As a condition precedent to the issuance, continued maintenance, or reinstatement of a contractor’s license, California law requires applicants and licensees to have on file “at all times” a current and valid certificate of workers’ compensation insurance. 

 

If the applicant or licensee has no employees or is not otherwise subject to workers’ compensation laws, this requirement is inapplicable.  

 

Failure to obtain or maintain the required coverage results in the automatic and immediate suspension of the contractor’s license by operation of law.  

 

Such a suspension impacts the contractor’s ability to litigate claims for compensation: a party who was not duly licensed at all times during the performance of its contracting work generally cannot bring or maintain an action to collect compensation for that work.  

 

A suspended contractor’s license can be retroactively reinstated if the licensee obtains and submits to the registrar a valid certificate of workers’ compensation insurance within 90 days of the certificate’s effective date. 

 

If the certificate is submitted to the registrar more than 90 days after its effective date, however, retroactive reinstatement is available only if the licensee shows that the failure to have a certificate on file was due to circumstances beyond the control of the licensee.

 

This appeal involved the interplay of these statutes and what circumstances are “beyond the control of the licensee” for purposes of retroactive license reinstatement. 

 

In this case, plaintiff American Building Innovation LP (ABI) had a workers’ compensation policy when it started work on a project. 

 

Its insurer canceled the policy, however, because ABI refused to pay outstanding insurance premiums charged on a prior policy, since ABI believed (correctly as it turns out) it was being overcharged. 

 

As a result of the policy cancellation, ABI’s contractor’s license was suspended mid-project. Fully aware it was unlicensed and uninsured, ABI nevertheless continued its work. 

 

ABI later sued to recover amounts allegedly owed for its work on the project. 

 

Several years into that litigation, ABI settled its old premium dispute with its workers’ compensation insurer and had the canceled policy retroactively reinstated as part of the settlement. 

 

ABI then applied to the Contractors’ State License Board (the Board) for retroactive reinstatement of its contractor’s license, asserting that ABI’s failure to file a certificate of workers’ compensation coverage had been due to circumstances beyond its control, in that the policy had been canceled unbeknownst to ABI. 

 

The Board accepted ABI’s representation and retroactively reinstated its contractor’s license. 

The appellate court decided whether ABI was duly licensed at all times during the performance of its work; if not, Bus. & Prof. Code, section 7031 bars ABI from bringing or maintaining the present action to collect the amount owed under the contract. 

 

The appellate court concluded section 7031 bars ABI’s current claims. 

 

A suspended contractor’s license can be retroactively reinstated only if the failure to have a certificate on file was due to circumstances beyond the control of the licensee.

 

In this case, the lapse in coverage was not beyond ABI’s control. The record demonstrates the policy cancellation occurred because ABI chose not to pay billed insurance premiums. 

 

ABI learned of the policy cancellation days after it took effect, yet ABI did not procure replacement coverage until years later when it settled the premium dispute with its insurer. 

 

The insurer’s retroactive reinstatement of the policy following that settlement was essentially meaningless because it occurred long after the statute of limitations ran on any workers’ compensation claims, rendering the coverage illusory. 

 

In this case, ABI was not entitled to retroactive reinstatement of its license. Because ABI applied for retroactive reinstatement of its license more than 90 days (in this case, nearly three years) after the effective date of the certificate of insurance, the Board could only reinstate the suspended license if the failure to have a certificate on file was due to circumstances beyond the control of ABI.

Here, neither the policy cancellation nor the continued failure to have insurance on file were outside ABI’s control. 

 

In ABI’s request for reinstatement, Vo represented to the Board, under penalty of perjury, that ABI’s lack of workers’ compensation insurance "was beyond my control because unbeknownst to me and [ABI], [State Fund] improperly submitted a cancellation notice to the [Board] for ABI’s February 21, 2017 to February 21, 2018 policy.” 

 

That representation was false. State Fund canceled the 2017-2018 policy effective January 25, 2018, because ABI made a considered decision not to pay the premiums due on the previous policy. 

 

Once the policy was canceled, ABI had a duty to obtain coverage elsewhere if it intended to continue to work on Balfour Beatty’s project. 

 

It failed to do so. Instead, it falsely represented to the Board, under penalty of perjury, that ABI was exempt from workers’ compensation insurance requirements because it had no employees. 

 

When it elected not to pay the premium due or procure workers’ compensation insurance elsewhere, ABI compromised the safety and security of its workers. It was not until over two years later, when faced with Defendants’ motion for summary judgment, that ABI agreed to pay the 2015-2016 policy premium so that its 2017-2018 policy would be retroactively reinstated. 

 

ABI has not shown its lapse in workers’ compensation coverage “was due to circumstances beyond [its] control.” 

 

The Board, therefore, lacked the power to reinstate ABI’s suspended license retroactively.

 

That in turn means ABI was not “duly licensed . . . at all times during the performance of” its work. 

 

Accordingly, section 7031 bared ABI from bringing or maintaining the present action against Balfour Beatty to collect compensation for its work on the project, “regardless of the merits of [ABI’s] cause of action” against Balfour Beatty.  

 

Citing the Eighth Amendment to the United States Constitution, ABI maintained the application of section 7031 is unconstitutional in that it arbitrarily and excessively punished ABI by precluding any recovery for its work. 

 

The legitimacy of the public policies underlying California’s licensing laws and the validity of section 7031 are well established. 

 

As the California Supreme Court has observed, California’s licensing laws are intended “to protect the public from incompetence and dishonesty in those who provide building and construction services,” and the “licensing requirements provide minimal assurance that all persons offering such services in California have the requisite skill and character, understand applicable local laws and codes, and know the rudiments of administering a contracting business.” 

 

Section 7031 advances this purpose by withholding judicial aid from those who seek compensation for unlicensed contract work. The obvious statutory intent is to discourage persons who have failed to comply with the licensing law from offering or providing their unlicensed services for pay.

 

Because of the strength and clarity of this policy, it is well settled that section 7031 applies despite injustice to the unlicensed contractor. Section 7031 represents a legislative determination that the importance of deterring unlicensed persons from engaging in the contracting business outweighs any harshness between the parties.

 

The result is “a stiff all-or-nothing penalty for unlicensed work.” 

The statute itself specifies that it applies regardless of the merits of the cause of action brought by the plaintiff, and its harsh results are justified by the importance of deterring violations of the licensing requirements. 

 

LESSONS:

 

1.         As a condition precedent to the issuance, continued maintenance, or reinstatement of a contractor’s license, California law requires applicants and licensees to have on file “at all times” a current and valid certificate of workers’ compensation insurance. 

 

2.         If the applicant or licensee has no employees or is not otherwise subject to workers’ compensation laws, this requirement is inapplicable.  

 

3.         Failure to obtain or maintain the required coverage results in the automatic and immediate suspension of the contractor’s license by operation of law. 

 

4.         A suspended contractor’s license can be retroactively reinstated only if the failure to have a certificate on file was due to circumstances beyond the control of the licensee.

Does a Subcontractor Owe a Duty to Owner in California When No Contractual Privity?

This issue was answered in the recent California appellate decision in Lynch v. Peter & Associates, Engineers, Geologists, Surveyors, Inc., where the appellant subcontractor became liable for an extensive amount of damages even though it only charged the general contractor $360 for its services.

This case demonstrates the veracity of the California Supreme Court’s observation that the declining significance of privity has found its way into construction law. 

 

Appellant sued, amongst others, a soils engineering firm that had performed what is alleged to be a very cursory geotechnical inspection of an excavated footing trench on her property for a home remodeling project. 

 

She brought claims against the firm for professional negligence and nuisance when her home sustained significant damage from subsidence resulting from the construction. 

 

The firm filed for summary judgment, arguing it had no contract with appellant, and thus owed her no duty of care. 

 

The trial court agreed and granted the firm’s motion. 

 

The appellate court found the respondent firm failed to meet its moving burden, and also held that it did in fact owe appellant a duty of care. 

Appellant Cheryl Lynch is the owner of residential real property located in San Clemente (the subject property).

 

In the summer of 2015, the Lynches engaged a general contractor, Hutton Construction (Hutton), to perform two phases of home improvement construction and repairs on the subject property, as per plans prepared by architect Benjamin Stevens. 

 

The construction proposed was: a remodel of the existing residence, building additions along the south and north sides of the existing residence, a site retaining wall along the northern property boundary, underpinning of the existing foundation along the general west side of the existing residence, a new raised wood deck west of the residence, and surrounding hardscape improvements. 

 

The first phase of work was governed by a contract dated July 27, 2015. 

 

Pursuant to Stevens’ plans, the first phase involved site improvements, was to commence August 3, 2015, and finish by September 14, 2015. The total to be paid to Hutton on the first phase was $154,677.60.  

 

The second phase was governed by a contract dated July 8, 2016. This phase was to consist of the residence remodel and addition. The second phase was to commence June 14, 2016, and finish by October 14, 2016. The total to be paid to Hutton on the second phase was $250,679.59. 

 

In September 2014, Stevens requested a geotechnical services proposal from Coastal Geotechnical (Coastal), a local geotechnical engineering firm. 

 

Coastal provided its proposal, which was addressed to the Lynches stating Coastal would evaluate the geotechnical conditions beneath the accessible portions of the property, and provide grading and foundation recommendations for the proposed construction for an estimated cost of $5,800. 

 

Included in Coastal’s scope of work was review of available reports, maps, and photographs; subsurface exploration by way of manually excavated test pits for geologic observation and soil and rock sampling; laboratory testing of samples; engineering and geologic analysis; and preparation of a final report with test results, analyses, conclusions, and recommendations. 

 

Coastal noted that published geologic maps of the area showed the subject property was situated on a “queried landslide,” and it emphasized its scope of work was not intended to remedy that issue specifically or the slope stability issues that might accompany it. 

 

By the spring of 2018, the Lynches replaced the general contractor, Hutton, with an outfit called Grover Construction (Grover). 

 

Grover engaged the respondent, Peter & Associates, Engineers, Geologists, Surveyors, Inc. (the Peter firm), to do a geotechnical inspection of a footing trench it had excavated for the proposed addition on the property. 

 

The contract for this work, written up on the Peter firm’s letterhead, provided the Peter firm would be paid $360. 

 

The contract also contained the following provision: “This contract does not include: [¶] 1. Subsurface exploration, laboratory testing, settlement analysis and/or slope stability calculations. Peter & Associates, Inc. is not responsible for potential settlement and/or slope failure, if any. [¶] 2. Geotechnical review of grading plan, foundation plan, and/or structural design calculations, if any. Peter & Associates, Inc. is not responsible for adequacy of the plans/calculations.”

 

The Peter firm’s contract did not mention the Lynches and contained no clause pertaining to third party beneficiaries. It also contained a clause limiting their liability to twice their fee. 

Grover paid the Peter firm $360 and the Peter firm sent a licensed civil and geotechnical engineer named Lan Pham to inspect the footing on the subject property. 

 

Pham’s inspection consisted of visual observation of the trench, and use of a steel probe three feet in length to “punch it down” into the trench to feel the soil. Afterward, he prepared a single-page handwritten memo summarizing his findings. 

 

The memo was addressed to both Mike Grover, principal of Grover, and “Gregory & Cheryl Lynch.” 

 

Grover went ahead and poured the footing, but the soil proved inadequate to the task of holding it up. The footing for the addition collapsed, and the house subsided in that area, moving laterally toward the slope underneath. 

 

Appellant was required to install a grade beam and caissons to support the collapsed addition. As of May 2023, the house included over 4.9 inches of deflection, and had cracks in the floor and foundation, and other signs of distress. 

The Lynches filed suit in 2021 against Hutton, Coastal, Stevens, the Peter firm, and other subcontractors for breach of contract, nuisance, and negligence. 

 

 The Peter firm was named as a defendant on the fifth cause of action for professional negligence and the sixth cause of action for nuisance. 

 

The Peter firm filed a motion for summary judgment against the third amended complaint, on the ground that it had no legal liability to appellant under any negligence or nuisance theory. 

The motion did not seek summary adjudication in the alternative. 

 

The Peter firm argued it had no legal liability to appellant because it was a small engineering firm hired to inspect a single footing for a fee of $360. 

 

It also cited the exclusions in the contract, as well as the fact it had no other role in 

After hearing argument and taking the matter under submission, the trial court, granted summary judgment. 

Appellant takes issue with this ruling on three grounds. 

 

First, despite a lack of privity of contract, she contends the Peter firm did indeed owe her a duty of care in large part because she and her late husband were the intended direct beneficiaries of the work being performed. 

 

Second, she says there are triable issues of fact regarding her nuisance cause of action and the trial court erroneously concluded her nuisance claim was identical to her negligence claim. 

 

Finally, she argued the trial court erred by sustaining in blanket fashion the Peter firm’s objections to two declarations she filed in opposition to summary judgment—her own declaration and that of her expert, Gregory Axten. 

 

The appellate court agreed with her on all three points. 

 

In this case, the Peter firm failed to meet its moving burden on summary judgment. 

 

Even if it negated the element of duty in appellant’s negligence claim—which, to be clear, it did not—it failed to make any showing whatsoever to invalidate appellant’s nuisance claim. 

 

It is axiomatic that liability for negligence in any scenario must be premised on a duty of care, and the existence and scope of a defendant’s duty is an issue of law to be decided by the court. 

 

When professional negligence is alleged, the plaintiff must show the defendant had a duty to use such skill, prudence and diligence as other members of the profession commonly possess and exercise. 

 

In times past, it was generally accepted that there was no liability for negligence committed in the performance of a contract in the absence of privity. 

 

However, as the California Supreme Court recognized as far back as 1958, the rule has since been greatly liberalized, and the courts have permitted a plaintiff not in privity to recover damages in many situations for the negligent performance of a contract. 

 

Thirty-four years later, the state high court substantially restricted the scope of the professional duty owed by auditors to the investing public. 

 

To that point, California cases dealing with negligence by construction professionals often take a harder line in general than those in the accounting and audit space. 

 

However, the project here was not commercial, but residential. 

 

Contractors working on a residential project surely know their work directly impacts a person’s home, which changes the analysis substantially. And the defendant’s written report was addressed directly to the Lynches as well as Grover. 

 

The Peter firm knew its contract with Grover was for appellant’s benefit. 

 

Also, appellant argues the same footing trench inspected by the Peter firm was inadequate to hold up the foundation as represented by Pham in his report. This same foundation failed and required further repairs. 

 

The Peter firm does not show that the soil in the excavated trench was adequate for the intended use. Additionally, the Peter firm’s contract contained exclusions, essentially allowing it to abdicate some of the basic steps necessary to make the geotechnical inspection it was required to make. 

 

Six factors support finding a duty of care in this case. 

 

First, as we have already noted, the transaction was most definitely intended to affect the Lynches as homeowners, and the harm to them if the job was not correctly done was certainly foreseeable. 

 

Coastal had noted as early as 2014 the property’s being situated on a possible landslide area, which was information easily accessible to the Peter firm if they had tried to obtain it. 

 

Because of the nature of the property, the Peter firm had to have known a proper soils inspection was crucial to successfully building the foundation for the addition. 

 

The injury here is reasonably certain: appellant claims the house has subsided laterally into the slope, which suggests the ground underneath the house is moving. 

 

It is less clear who is more or less responsible for the subsidence, but certainly given what has occurred, a trier of fact could reasonably conclude that the Peter firm’s inspection should have raised the soil issues. 

 

The Peter firm did not submit any evidence to show its inspection was adequate. 

 

Moral blame attaches due to the contract between Grover and the Peter firm. And finding a duty in this case would further the policy of preventing harm. 

 

Therefore, the appellate court held the Peter firm owed appellant a duty of care to perform its geotechnical inspection with the skill expected of a professional in its position. 

 

The motion for summary judgment failed to undermine or negate any element in appellant’s nuisance claim either. 

 

Under Civil Code section 3479, a nuisance includes an obstruction to the free use of property, so as to interfere with the comfortable enjoyment of life or property.

 

Appellant alleged the damage to her house is ongoing as the slope underneath it continues to essentially give way. 

 

In its motion, the Peter firm argued it was only on the property once to conduct a single inspection of one footing, and thus could not be held liable for nuisance. 

 

Nothing could be further from the truth. Not only is the party who maintains the nuisance liable but also the party or parties who create or assist in its creation.

 

The Peter firm did not adduce any evidence showing it was not responsible for the damage and subsidence at the Lynches’ home, whether it was the result of one trip to the property or multiple trips. 

 

LESSONS:

 

1.         The California Supreme Court recognized as far back as 1958, the rule has since been greatly liberalized, and the courts have permitted a plaintiff not in privity to recover damages in many situations for the negligent performance of a contract. 

 

 

2.         It is axiomatic that liability for negligence in any scenario must be premised on a duty of care, and the existence and scope of a defendant’s duty is an issue of law to be decided by the court. 

 

3.         When professional negligence is alleged, the plaintiff must show the defendant had a duty to use such skill, prudence and diligence as other members of the profession commonly possess and exercise. 

 

4.         Not only is the party who maintains the nuisance liable but also the party or parties who create or assist in its creation.

Who are Intended Beneficiaries of a California Trust?

This issue was the subject of the recent California appellate decision in Grossman v. Wakeman.

 Attorney John Peter Wakeman, Jr. (Wakeman), and Wakeman Law Group, Inc., appealed the legal malpractice judgments entered against them following a jury trial. 

 

The judgments were in favor of respondents Jeffrey G. Grossman (Jeffrey), Alexis Grossman (Alexis), and Nicholas Grossman (Nicholas). 

 

The appellate court reversed the judgments. 

 

Respondents were not appellants’ clients. Appellants’ client was Dr. A. Richard Grossman (Richard), the father of Jeffrey and Peter Grossman (Peter). 

 

Peter is the father of Alexis and Nicholas, hereafter “the grandchildren.” During the trial, Richard was described as “a huge name in the . . . burn surgery community” who “had started the Grossman Burn Centers.” 

 

Peter is the husband of recently convicted Rebecca Grossman for the death of two children in a traffic collision who was sentenced to 25 years to life.

 

Richard died in March 2014 at the age of 81. His estate was valued at $18 million. 

 

Richard’s 2012 estate planning documents, prepared by appellants, disinherited respondents and Peter. 

 

Richard’s entire estate was left to his fourth wife, Elizabeth Grossman (Elizabeth), even though she was independently wealthy. Richard married Elizabeth in 2000, and they remained married until his death. 

 

Although Richard’s 2012 estate planning documents disinherited respondents, in a special verdict the jury expressly found that respondents were “the intended beneficiaries of” the documents. 

 

The jury further found that appellants had “breach[ed] the standard of care in the preparation” of the documents and that respondents had been damaged by appellants’ negligence. The jury awarded damages totaling $9.5 million: $4.75 million to Jeffrey and $4.75 million to the grandchildren. 

 

Appellants alleged that they “owed no duty to [respondents].” They “owed a duty only to the decedent, Richard Grossman.” Appellants contended, “[T]he absence of . . . a duty to [respondents] establishes that [they] cannot be liable to [respondents], since duty is an essential element of a malpractice claim.” 

 

The appellate court concluded the evidence was insufficient to show that appellants owed a duty of care to respondents because there is no “clear, certain and undisputed evidence of [Richard’s] intent” to benefit respondents by leaving his estate to them.

 

A 2003 restatement of Richard’s revocable trust (the ARG Trust) equally divided the residue of his estate into two shares: one share for each of his two sons, Jeffrey and Peter. Elizabeth would receive only Richard’s personal property. 

 

In September 2011 Richard met with Wakeman. 

 

Richard told Wakeman that he wanted half of his estate to go to Jeffrey and the other half to go to the grandchildren, i.e., Peter’s children. Richard said he did not want Peter to inherit a portion of his estate because “Peter had already been well provided for and he didn't really trust Peter to take care of his own kids.” 

 

On December 1, 2011, Wakeman met with Richard and Elizabeth. Wakeman testified that at the meeting Richard had said “he wanted to leave everything to Elizabeth and let her decide what to do with it.” 

 

“‘All [Richard] said is, “I want it all to go to Elizabeth, and she can decide who gets what” . . . [in her] [c]omplete discretion.’” Wakeman advised Richard “‘that he was essentially disinheriting his grandchildren and his . . . son.’” 

 

Richard told Wakeman “that Peter was likely to sue when he found out what Richard had done, so [Wakeman] advised Richard that it would be best for him to have a neurological exam to have contemporaneous documentation in his file as to his mental capacity.” Richard did so. 

 

In a letter dated March 20, 2012, Dr. Peter Miao wrote: “[Richard] has been under my care for the past many years. He has had neurological exam recently and has had a complete neurological work up. I find him in sound mind & body and is capable of making competent financial and estate planning decisions.” 

 

On December 21, 2011, Wakeman sent Richard estate planning documents that, according to Wakeman, carried out Richard’s instructions at the December 1, 2011 meeting. The documents included an irrevocable trust for Jeffrey and an irrevocable trust for the grandchildren. An inventory of Richard’s property shows that, at the time of his death, Brookfield Farms constituted the bulk of his estate’s value. 

 

Wakeman also sent Richard an amendment and restatement of his revocable trust, the ARG Trust. Richard was named as the trustee of the trust, and Elizabeth was named as the successor trustee. 

 

The restatement provided that, upon Richard’s death, the trustee shall make a gift of $25,000 to each of three named beneficiaries. Neither respondents nor Peter would receive a gift. 

 

The restatement continued, “[T]he Trustee shall distribute the rest, residue and remainder of the Trust Estate outright and free of trust to the Settlor's spouse, Elizabeth Rice Grossman.” Wakeman testified, “[I]f Elizabeth predeceased Richard, then [the residue] was going to go 50-50, half to Jeff’s trust and half to the grandkids’ trust.” 

 

On appeal, Respondents argued: “It is undisputed that there is not one iota of evidence suggesting that Richard ever had a falling out with his three intended beneficiaries [Jeffrey and the grandhildren]. Indeed, . . . there is a virtually unbroken solid wall of testimony from multiple friends, colleagues, family members, and percipient witnesses that Richard truly loved these close family members and fully wanted to provide for them.”

“The massive weight of the evidence is that Richard always intended to bequeath his estate to his sole Grandchildren and his special needs son Jeffrey.” 

 

Respondents claimed that Elizabeth “had legally forsworn” any right to Richard’s estate because “Elizabeth and Richard had signed a prenuptial agreement which provided that neither would inherit anything from the other and that all their money and assets would go to their respective heirs. Nothing in the trial record suggested that that prenuptial contract had ever been formally abrogated.” 

 

But the 2000 prenuptial agreement permitted either party to bequeath property to the other party: “Nothing contained in this Agreement shall affect the right of either party hereto to transfer, convey, devise or bequeath any property to the other or to receive any legacy or devise or any other benefit expressly given by any will, codicil, trust or other instrument of the other executed after the date of this Agreement.” 

 

A nonclient third party can maintain a malpractice action only if there is clear, certain and undisputed evidence of the client’s intent to benefit the third party, or to benefit the third party in the way the third party claims. 

 

The third party must show that the client’s attorney knew or reasonably should have known of this evidence when the alleged malpractice occurred. Attorneys are not clairvoyants capable of ascertaining the unexpressed intent of their clients. 

 

Because the evidence of Richard’s alleged intent to leave his estate to respondents instead of Elizabeth is not clear, certain, and undisputed, as a matter of law the evidence is insufficient to show that appellants owed a duty of care to respondents in preparing the 2012 restatement of the ARG Trust. 

 

Wakeman’s testimony, together with the supporting testimony of Elizabeth, Laurel Luby, and Meredith Rattay, shows that the evidence of Richard’s alleged intent was disputed.

 

If Richard had intended to leave his estate to respondents, there would have been no need for him to have obtained the letter from Dr. Miao attesting to his capability of “making competent financial and estate planning decisions.” 

 

Wakeman advised Richard to obtain the letter because Richard said he wanted to disinherit his children and grandchildren and leave his entire estate to his independently wealthy fourth wife. 

 

The imposition of malpractice liability in these circumstances would not only be unjust, it would also place an intolerable burden on the legal profession.

 

LESSONS:

 

1.         A living trust is an essential part of any estate plan.

 

2.         Although not required like probating a will, a trust can be challenged in probate court.

 

3.         If applicable, obtain a neurological exam to have contemporaneous documentation as to the mental capacity of the Settlor/Trustor.

 

4.         A nonclient third party can maintain a malpractice action only if there is clear, certain and undisputed evidence of the client’s intent to benefit the third party, or to benefit the third party in the way the third party claims. 

 

5.         The third party must show that the client’s attorney knew or reasonably should have known of this evidence when the alleged malpractice occurred. Attorneys are not clairvoyants capable of ascertaining the unexpressed intent of their clients. 

 

6.         Filing a legal malpractice case waives the attorney-client privilege.