San Francisco Legal Malpractice Attorney

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					Filed 4/10/97
                   CERTIFIED FOR PARTIAL PUBLICATION *
                IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
                            FIRST APPELLATE DISTRICT
                                  DIVISION FIVE


PATRICK BARKHORDARIAN et al.,

         Plaintiffs and Appellants,                       A073726

v.                                                        San Francisco County
                                                          Superior Court
COOLEY, GODWARD, CASTRO,                                  No. 962637
HUDDLESON & TATUM et al.,

         Defendants and Respondents.



                            PROCEDURAL HISTORY AND FACTS
         Patrick Barkhordarian, Keesup Choe and Bruce Felt appeal from a summary
judgment in their legal malpractice action against Alan Mendelson and his law firm, Cooley,
Godward, Castro, Huddleson & Tatum (collectively, Cooley).
         In January 1989, Cooley was retained as counsel by the recently incorporated
Renaissance Software, Inc. Renaissance Chief Executive Officer Alex Vieux and his then-
wife, Chief Financial Officer Joelle Préaux, recruited Barkhordarian, Choe, Felt
(appellants) and Kannan Ayyar, to the start-up project. Initial financing was obtained from a
French venture capital firm, Compagnie Financière du Scribe (CFS). Appellants allege that
sometime early in 1989, Vieux introduced Cooley‟s Alan Mendelson to appellants as “our
attorney” and that during a lunch meeting, Mendelson encouraged Choe and other founding
members to “consult with him about their concerns.”



*      Pursuant to rules 976 and 976.1, California Rules of Court, this opinion is certified
for publication, with the exception of parts II and III.



                                              1
       On May 25, 1989, Renaissance and CFS signed a memorandum of understanding
(MOU) covering, among other things, the funding of the corporation, the issuance of shares
to the founders, the composition of the Board of Directors, 1 and the designation of
Mendelson as “the lawyer of the deal (not the representative of the Founders or of CFS).”
As such, Mendelson drafted certain corporate documents including a shareholders‟
agreement and bylaws, ostensibly based on the MOU. Felt alleges that Mendelson “took
direction from [him] in drafting the corporate documents at a time when [Felt] was neither
an officer, director, shareholder or employee” of Renaissance.
       In December 1989, soon after Mendelson negotiated an agreement severing Vieux
and Préaux from Renaissance, Cooley resigned from its representation of the corporation.
A dispute arising out of the severance negotiations resulted in a settlement agreement and
mutual release of claims executed by Renaissance and Cooley in February 1992.
       At the annual shareholders‟ meeting on July 10, 1992, André Harari was elected as a
Renaissance director over appellants‟ objection that the provision of the shareholders‟
agreement which allowed his election violated the spirit and intent of the MOU. CFS filed
in the Santa Clara Superior Court an action to determine the validity of the election (Corp.
Code, § 709), which was referred for hearing to a panel of three retired judges (Code Civ.
Proc.,2 § 638). In accordance with a provision in the order of reference,3 the panel issued a
preliminary statement of decision on July 27, 1992, in favor of CFS. On July 29, the
reconvened shareholders confirmed Harari‟s election, and the newly-elected Board of


1     The initial Board consisted of André and Daniel Harari of CFS, Vieux and Ayyar of
Renaissance, and from one to three outside directors to be chosen unanimously by
Renaissance and CFS.

2      All further statutory references are to the Code of Civil Procedure unless otherwise
indicated.

3       The order of reference provided for a decision on or before July 27, 1992. The
parties stipulated they would “welcome immediate announcement,” since the annual
shareholders meeting was scheduled to reconvene to take final action based on the decision.



                                              2
Directors terminated appellants as officers of Renaissance. On July 30, the reference panel
issued its final statement of decision. The Santa Clara Superior Court filed its judgment
based on the referees‟ July decision (§ 644) on December 1, 1992. In the interim,
appellants filed a wrongful termination action on July 31, 1992, against Renaissance, which
was settled sometime after July 1, 1993.
       On July 30, 1993, appellants filed the instant action against Cooley, alleging “legal
negligence” (attorney malpractice), breach of contract, and breach of fiduciary duty. The
gravaman of their complaint was that Mendelson prepared the corporate documents in such
a way that, contrary to the intent expressed in the MOU that founders and investors maintain
mutual control of Renaissance, CFS was able to wrest control of the Board of Directors
through the election of André Harari, as a result of which appellants lost their company and
their jobs. On November 13, 1995, Cooley filed a motion for summary judgment on three
grounds: Cooley owed appellants no duty, any claim had been released, and the action was
barred by the applicable statutes of limitations. After a hearing, the trial court granted
Cooley‟s motion solely on statute-of-limitations grounds, stating “the Court does not rule
on the issue of duty.” Judgment was accordingly entered on February 20, 1996, and
appellants filed a timely notice of appeal.
                                         DISCUSSION
       “After examining the facts before the trial judge on a summary judgment motion, an
appellate court independently determines their effect as a matter of law.” (Szadolci v.
Hollywood Park Operating Co. (1993) 14 Cal.App.4th 16, 19, citation omitted.) “Despite
this independent review, the appellate court applies the same legal standard as did the trial
court.” (Id. at p. 19, see § 437c, subd. (c).) “The trial court‟s stated reasons supporting its
ruling, however, do not bind this court. We review the ruling, not its rationale.” (14
Cal.App.4th at p. 19, citation omitted.) “Thus, we must affirm so long as any of the grounds
urged by [Cooley], either here or in the trial court, entitles it to summary judgment.”
(Western Mutual Ins. Co. v. Yamamoto (1994) 29 Cal.App.4th 1474, 1481, citation
omitted.)
       I. Did the Trial Court Correctly Rule the Action was Time-Barred?


                                               3
       A. Introduction
       Section 340.6 provides that a legal malpractice action shall be commenced within
one year of when the client discovers or should have discovered the facts constituting the
malpractice, but that the statue is tolled under section 340.6, subdivision (a)(1), during the
time, inter alia, that the client “has not sustained actual injury.” (ITT Small Business
Finance Corp. v. Niles (1994) 9 Cal.4th 245, 248.)
       The trial court in this case found appellants sustained actual injury no later than July
29, 1992, when pursuant to the reference panel‟s preliminary statement of decision, “the
vote [they] sought to stop went forward; the person [they] sought to keep off the Board went
on; and [they] were terminated as officers of Renaissance.” Appellants contend the statute
was tolled until judgment was entered on December 1, 1992.
       Appellants allege attorney malpractice in the preparation of the shareholders‟
agreement and incorporation documents, and that Cooley failed to carry out the intent of
the MOU in the preparation of these documents. In short, this claim is one of
“transactional” legal malpractice. (ITT, supra, 9 Cal.4th at p. 250.) Therefore in analyzing
when “actual injury” occurs, i.e., when tolling ends and the statute of limitations begins to
run, appellants urge that the holding of the Supreme Court in ITT--also a transactional
malpractice case--is instructive.
       Relying on ITT, appellants urge us to apply what they describe as a bright-line rule
articulated in ITT, “that in transactional legal malpractice cases, when the adequacy of the
documentation is the subject of dispute, an action for attorney malpractice accrues on entry
of adverse judgment, settlement, or dismissal of the underlying action. It is at this point
that the former client has discovered the fact of damage and suffered „actual injury‟ due to
the malpractice under section 340.6.” (ITT, supra, 9 Cal.4th at p. 258, italics in original.)
       Appellants contend that here, as in ITT, “the statute of limitations of section 340.6
was tolled until the action contesting the documentation was concluded” (9 Cal.4th at p.
258) by entry of judgment. They maintain that “according to the ITT court,” no preliminary
ruling or event is sufficient to trigger the running of the statute. Here as in ITT, appellants



                                               4
seek to toll the statute of limitations while the adequacy of the documents that formed the
basis of the transaction is initially litigated.
       We conclude that appellants‟ complaints were timely filed, and they did not suffer
“actual injury” within the meaning of section 340.6, at the earliest, until the underlying
reference panel issued its final statement of decision on July 30, 1992.
       B. “Actual injury” within the meaning of section 340.6.
       “Under section 340.6, a malpractice action accrues once a former client „discovers‟
the malpractice, and is tolled until the client suffers „actual injury‟ from the malpractice.
There must be a nexus between the discovery and the harm, and without both elements the
filing of the malpractice action is premature. Thus, discovery of the facts essential to the
malpractice claim and the suffering of actual harm from the malpractice establish a cause
of action and begin the running of the statute of limitations.” (ITT, supra, 9 Cal.4th at p.
250; italics in original, see also § 340.6, subd. (a)(1).)
       In accordance with the reasoning of the Supreme Court in ITT, the fact that
appellants incurred attorney fees in litigating the adequacy of the incorporation documents,
or the fact that plaintiffs were voted off the Board does not alone establish “actual injury.”
       In ITT , as in Sirott v. Latts (1992) 6 Cal.App.4th 923 on which ITT relies, “[t]he
statute of limitations remained tolled until ITT suffered an actual loss attributable to its
attorney‟s alleged malpractice, that is when it was forced to accept an unfavorable
settlement of the adversary proceeding.” (ITT, supra, 9 Cal.4th at p. 253.) The Supreme
Court found the adversary proceeding in ITT analogous to the arbitration proceeding in
Sirott. In Sirott, a physician was negligently advised he did not need a special medical
malpractice insurance policy. When he was later sued for medical negligence, he attempted
to reinstate his professional liability coverage. In a separate proceeding on the coverage
issue an arbitrator determined the liability carrier had no duty to defend or indemnify. Only
after it was thus judicially determined that the physician had no coverage, did the
physician‟s cause of action for legal malpractice accrue. The court in ITT observed that
“[a]s in Sirott, these initial legal fees incurred by ITT were not sufficient „actual injury‟
within the meaning of Section 340.6(a)(1) because at the time the proceeding was filed and


                                                   5
ITT hired counsel to defend the loan documentation, there was no actual harm attributable
to malpractice.” (ITT, supra, 9 Cal.4th at pp. 252-253, italics added.)
       The holding of the Supreme Court in ITT is further clarified by its own reliance on
its ITT decision soon thereafter in International Engine Parts, Inc. v. Feddersen & Co.
(1995) 9 Cal.4th 606 (Feddersen). The court in Feddersen addressed when “actual injury”
occurs in an accounting malpractice case, interpreting section 339, which contains language
virtually identical to section 340.6. The Supreme Court traced the origin of the language of
section 339 to attorney malpractice cases, Neel v. Magana, Olney, Levy, Cathcart &
Gelfand (1971) 6 Cal.3d 176, and Budd v. Nixen (1971) 6 Cal.3d 195, which were decided
under the old section 339.
       The court then cites and summarizes its ITT holding: “[T]he question whether the
plaintiff suffered actual injury as a result of the attorney‟s preparation of the loan
documents is contingent on the outcome of the adversary proceeding.” (Feddersen, supra,
9 Cal.4th at p. 619, quoting ITT, supra, 9 Cal.4th at p. 258.) Feddersen concludes that “the
assessment of the tax deficiency is the equivalent of the settlement in ITT, because the
question whether the taxpayer suffered actual injury as a result of the accountant‟s allegedly
negligent preparation of the tax returns is contingent on the outcome of the audit.”
(Feddersen, supra, 9 Cal.4th at p. 619.)
       In this case there are two prior “actions”--(1) the claim against Cooley concerning
the severance of Vieux and Préaux, and (2) the Corporations Code section 709 action to
determine the validity of the July 10, 1992 election of Harari as a director. The section
709 action is similar to, although not precisely the same as the “underlying action” that
formed the basis of the tolling analysis of ITT. As in ITT the parties here participated in an
underlying dispute resolution proceeding. In the Corporations Code section 709 action the
appellants and the competing directors litigated the validity of the vote to elect Harari as a
director over appellants‟ objection. Had appellants successfully argued that this vote was
invalid, there would be no “harm” since appellants still would have had a controlling
interest. Until this was decided, there could be no accrual of the cause of action charging



                                                6
negligent failure to carry out the intent of the MOU in the preparation of the shareholder‟s
agreement or bylaws.
       In this Corporations Code section 709 action, there was an adverse ruling by the
referees, tentatively, on July 27. However, it was only a preliminary statement of decision.
The referees did not issue their final decision until July 30. Therefore, actual injury, i.e.,
harm as a result of Cooley‟s alleged negligent preparation of the subject documents was
suffered at the earliest on the date of the final decision of the reference panel in this
“underlying action” (and arguably was not until the judgment was entered.) Appellants note
that they could still have moved to set aside the referees‟ decision after it was rendered. In
accordance with the analysis of ITT the fact of “harm” --whether it is in the form of
expenditure of attorney fees or in the form of being voted off the Board on July 29 --is not
alone determinative. (ITT, supra, 9 Cal.4th at p. 251.)
       Our decision is in accord with the analysis of the Second District, in Tchorbadjian
v. Western Home Ins. Co. (1995) 39 Cal.App.4th 1211. In that case, the plaintiffs‟ legal
malpractice and breach of fiduciary duty claim arose out of an unsuccessful defense of a
personal injury claim. Plaintiffs contended they were not told of a reasonable settlement
offer made by their adversary after an adverse arbitration award and that their homeowner‟s
carrier tortiously contested liability coverage, requiring a personal contribution to a larger
settlement payment than was proposed by the adversary following the arbitration. The court
in Tchorbadjian notes that the case contained elements of both litigation malpractice and
transactional malpractice.4 Applying the reasoning of ITT, Tchorbadjian held that the
discovery by the plaintiffs that they had been “betrayed” by their former counsel was not
enough to start the statute running. “The adverse result of [their attorney‟s] malpractice was
not realized until the Tchorbadjians entered an „adverse settlement‟ in the underlying action
on [a date], less than one year before the action against [their attorney] was commenced.


4       “The appellate courts have construed the statutory tolling requirement of „actual
injury‟ in various ways in various contexts. As addressed by the courts, the cases fall into
two general categories: litigation malpractice and transactional malpractice.”
(Tchorbadjian, supra, 39 Cal.App.4th at pp. 1218-1219.)

                                               7
Indeed, the Tchorbadjians have not as yet sustained „actual injury‟ in regard to the insurance
coverage issue, as it remains unresolved.” (39 Cal.App.4th at p. 1224, fn. omitted.)
        Cooley urges that the rule of ITT was clearly not intended to be a “rule for all
seasons,” and that in this case actual injury occurred at the latest on July 29, 1992, when
they lost their board seats, lost their right to vote, lost control of Renaissance, and lost their
jobs. Citing the prescience of the Court of Appeal in Radovich v. Locke-Paddon (1995)
35 Cal.App.4th 946 (Radovich), Cooley argues that Radovich anticipated the subsequent
decision of the Supreme Court in Adams v. Paul (1995) 11 Cal.4th 583 (Adams) in which
the court stated, “depending upon the particulars, actionable harm may occur at any one of
several points in time subsequent to an attorney‟s negligence. Hence, as with other causes
of action, the determination is generally a question of fact.” (Id. at p. 588.) In Cooley‟s
view, the so-called bright line rule of ITT should not be applied here to avoid a statute-of-
limitations bar. Instead where “the material facts are undisputed, the court may, however,
resolve the issue of when the plaintiff suffered manifest and palpable injury as a matter of
law.” (Adams, supra, 11 Cal.4th at p. 586.) Cooley contends the trial court properly did
just that.
        We disagree with Cooley‟s application of Radovich and Adams to this case. First,
as we have stated, ITT stands for more than the solitary proposition that in a transactional
malpractice case involving the alleged negligent preparation of documents, actual injury
occurs upon adverse judgment or settlement or dismissal of the underlying action. ITT calls
for an analysis of when a client suffers harm which is attributable to the alleged
malpractice.
        Further, the holding of ITT will have a different result when applied in different
contexts. As pointed out by the court in Tchorbadjian, “[w]ithin the transactional category
[of cases], there are two different types of scenarios: (1) those in which there is an adverse
disposition in a dispute-resolution proceeding separate from the malpractice action, similar
to the situation in litigation malpractice . . . and (2) those in which there is no such dispute -
resolving determination in a separate proceeding. In transactional malpractice without a
separate dispute resolution process, actual injury may result when a client enters into a


                                                8
binding contract which is detrimental to his interests.” (Tchorbadjian, supra, 39
Cal.App.4th at p. 1219, citations omitted.)
       In considering when “actual injury” occurs, Radovich found “some patterns have
emerged from the recent cases. The broad principle of general applicability which may be
derived is that the effect of asserted legal malpractice should not be identified as actual
injury until it has reached a point (on a continuum between the asserted malpractice and the
point at which its injurious effects become „irremediable‟) at which injury has been made to
appear with an empirical certainty sufficient to allay the law‟s distaste for speculation.”
(Radovich, supra, 35 Cal.App.4th at p. 971.) Faced with the difficulty of applying a bright-
line test in the situation where no underlying dispute resolution proceeding had occurred,
Radovich articulated a vague standard which itself lacks empirical footing, is of little
guidance to attorneys or litigants seeking to comply with section 340.6 and avoid legal
malpractice, and is difficult, if not impossible, to apply. We decline to apply it to the case
before us for these reasons and because our case is factually distinguishable.
       Regarding Cooley‟s reliance on Adams and the meaning which Justice Kennard adds
to the Adams‟ holding in her concurring opinion, we do not believe it assists us in our
analysis. Cooley urges that Adams emphasizes that the trial court must make a factual
inquiry in considering a statute of limitations defense presented in a motion for summary
judgment. In Cooley‟s view, the fact of actual injury may be determined as a matter of law
to have occurred more than one year prior to the filing of appellants‟ complaint.
       First Adams is distinguishable because it involves a missed statute claim in a
litigation malpractice case, and is not a transactional case. Additionally, we do not believe
Adams undermines the Supreme Court‟s clear holding in ITT that in transactional
malpractice cases the fact of injury alone is not determinative. Rather, one must look at
when a malpractice plaintiff suffered actual harm as a result of the defendant attorney‟s
professional negligence. Moreover, Justice Kennard‟s vigorous argument that the question
of when the cause of action has accrued is a “question of fact for the trier of fact” and the
majority opinion to the same effect both fail to instruct the trier of fact as to how it should
make the factual determination. The majority suggests little more than that the injury must


                                               9
be “palpable”: “If the parties agree on the sequence of events and any other material
matters, the court may then determine on summary judgment the point at which the fact of
damage became palpable and definite even if the amount remained uncertain, taking into
consideration all relevant circumstances.” (Adams v. Paul, supra, 11 Cal.4th at p. 593.)
       We recognize that a client who has indisputably suffered palpable damage in the
course of, and allegedly as a result of, his or her attorney‟s conduct in the underlying
proceeding in the transactional malpractice context may pursue an appeal from the adverse
judgment in that proceeding in the hope of accomplishing a favorable result in the
underlying proceeding and avoiding the expense of a second lawsuit for attorney‟s
negligence. If the client‟s cause of action for attorney malpractice accrues with the entry
of the adverse judgment under the holding of ITT, is such a client compelled to institute the
action for attorney negligence to satisfy the statute of limitations, regardless of the success
on appeal? We have little trouble imagining an unfortunate escalation of litigation costs in
pursuit of a legal malpractice action which may ultimately prove to be fruitless or of
minimal value.
       However, our Supreme Court has clearly answered this question in the affirmative in
the litigation malpractice context. (Laird v. Blacker (1992) 2 Cal.4th 606.)
Notwithstanding the prospects of success on appeal from an underlying adverse judgment,
the cause of action of the client claiming attorney malpractice is not tolled during the time
the client pursues an appeal. The client, under Laird, is compelled to file a malpractice
action against his attorney despite the pendency of the appeal in the case where attorney
malpractice occurred, in order to preserve that malpractice claim against a time bar. The
judgment against the plaintiff, rather than the finality of the appeal therefrom, establishes
“actual injury” within the meaning of section 340.6. “Thus, even if the former client loses
the underlying action because of the attorney‟s malpractice, success on appeal does not
negate an action for legal malpractice.” (2 Cal.4th at p. 615.) In so holding, the Supreme
Court has given clear guidance to the practitioner and litigant in the litigation malpractice
context. Nothing in ITT suggests a different result in the transactional malpractice context.
(See ITT, supra, 9 Cal.4th at p. 257.)


                                              10
       We are mindful that statutes of limitation represent “practical and pragmatic devices
to spare the courts from litigation of stale claims, and the citizen from being put to his
defense after memories have faded, witnesses have died or disappeared, and evidence has
been lost.” (Chase Securities Corp. v. Donaldson (1945) 325 U.S. 304, 314.) Statutes of
limitation are also obstacles to just claims, however; and they should therefore be strictly
construed to avoid the forfeiture of a plaintiff‟s rights. (Sevilla v. Stearns-Roger, Inc.
(1980) 101 Cal.App.3d 608, 611.) Litigants and their counsel may well decry the
confusion that abounds in appellate decisions attempting to define when a statute-of-
limitations bar arises in the transactional malpractice case. Appellate courts would do well
to consider practitioners‟ ability to understand and comply with a statute-of-limitations
rule, as part of the reviewing court‟s analysis of whether “reasonable application [of a rule]
becomes too problematic.” (See Adams v. Paul, supra, 11 Cal.4th at p. 589.) We
respectfully suggest that the question-of-fact rule articulated in Adams is too problematic
to permit reasonable application by the practitioner or trial judge. We strongly agree that
precision is needed in defining the statute-of-limitations bar in both the transactional and
litigation malpractice context to avoid inconsistent and haphazard results and the protracted
litigation the disparate decisions have engendered.
       In summary, we conclude that the undisputed factual showing of harm to appellants
on July 29 does not establish “actual injury” as a matter of law within the meaning of
section 340.6, as that statute has been interpreted by our Supreme Court. Not until
appellants suffered an adverse determination in the underlying dispute resolution
proceeding can it be said as a matter of law that appellants‟ cause of action accrued. This
did not occur earlier than July 30, 1992, the date of filing of plaintiffs‟ complaint.
       Accordingly, the order granting summary judgment on the ground that the action is
time-barred should be reversed. Since we review the summary judgment de novo, we must
address (1) Cooley‟s no-duty argument, and (2) its release argument.
       II. Is Cooley Entitled to Summary Judgment on the Issue of Duty?
       A. Introduction



                                              11
       Cooley contends that the trial court‟s grant of summary judgment is proper for the
alternative reason that Cooley did not owe appellants a duty of care. Appellants dispute
Cooley‟s contention; appellants argue that Cooley did indeed owe them a duty and offer two
theories in support of their assertion.
       Appellants first argue that Cooley‟s duty to them arose because they were clients of
Cooley. Appellants alternatively argue that they were the intended beneficiaries of
Cooley‟s work and therefore, even if they were not Cooley‟s clients, Cooley nonetheless
owed them a duty.
       Duty is a key element of any action for professional malpractice. (See Goldberg v.
Frye (1990) 217 Cal.App.3d 1258, 1267.) We may therefore affirm the trial court‟s grant
of summary judgment if appellants failed to establish a question of fact regarding a duty of
care. (See Schultz v. County of Contra Costa (1984) 157 Cal.App.3d 242, 248 [court may
affirm on any basis supported by record].)
       B. Implied-in-fact attorney-client relationship
       Under one of its theories, appellants premise Cooley‟s duty of care on the duty that
arises in the attorney-client relationship. “To state the obvious,” however, such a duty
“depends on the existence of an attorney-client relationship.” (Fox v. Pollack (1986) 181
Cal.App.3d 954, 959 (Fox).) Whether an attorney-client relationship exists is a question of
law. (Responsible Citizens v. Superior Court (1993) 16 Cal.App.4th 1717, 1733.)
Nonetheless, that question cannot be reached until conflicts in the facts necessary for that
decision are resolved. (Ibid.)
       “Except for those situations where an attorney is appointed by the court, the
attorney-client relationship is created by some form of contract, express or implied, formal
or informal.” (Fox v. Pollack, supra, 181 Cal.App.3d at p. 959.) Appellants do not contend
that they entered into an express contract with Cooley. They instead contend that the
attorney-client relationship with Cooley was created by an implied contract.
       Whether express or implied, a contract must be based upon the intention and assent
of the parties. (Responsible Citizens v. Superior Court, supra, 16 Cal.App.4th at p. 1733.)
“The distinction between [the two forms of] contracts relates only to the manifestation of


                                             12
[that] assent. (Id. at pp. 1732-1733.) “An implied contract is one, the existence and terms
of which are manifested by conduct,” (Civ. Code, § 1621, italics added), as opposed to
“words” (see Civ. Code, § 1620). (See also Hecht v. Superior Court (1987) 192
Cal.App.3d 560, 565 [intent and conduct of parties is critical to formation of the attorney-
client relationship].)
       The issue, therefore, is whether appellants have demonstrated a question of fact
regarding Mendelson‟s assent to an implied contract. We conclude that on this record a
question of fact does exist. The evidence which creates that question of fact includes
appellants‟ declarations stating that 1) Vieux introduced Mendelson to appellants as “our
attorney,” 2) Mendelson encouraged founding members to consult with him about their
concerns or interests, and 3) Mendelson took directions from Felt regarding the drafting of
the corporate documents at a time when Felt was neither an officer, director, shareholder
nor employee of Renaissance.
       Appellants also rely on the language of the MOU, which, at least arguably, supports
their contentions as well. That document describes Mendelson as “the lawyer of the deal
(and not the representative of the Founders or of CFS).” Cooley interprets this language as
expressly disavowing Mendelson‟s representation of any “Founder” or of CFS. While that
may be one interpretation of the language, we cannot say that it is the sole interpretation of
that document. As appellants argue, this language may also indicate that Mendelson did not
represent “the Founders or . . . CFS,” because, as lawyer of “the deal,” he represented the
Founders and CFS and all other signatories to the MOU. Conflicts in the evidence prevent
resolution of this question by summary judgment.
       Cooley contends that in any event the MOU is irrelevant because neither Mendelson
nor anyone at Cooley, drafted or signed that document. Cooley misperceives appellants‟
argument. Appellants argue in part that Mendelson knew the contents of the fully executed
MOU and nonetheless remained silent in the face of its provision designating him the
“lawyer of the deal.” Cooley also suggests that rules governing the conduct of attorneys
would not permit Mendelson to represent both the Founders and CFS, but resolution of this
contention requires a factual record which simply is not present here.


                                              13
       The cases that Cooley has cited are factually distinguishable. In Fox, “[t]he affidavits
supporting and opposing the motion for summary judgment contain[ed] no allegations of
evidentiary facts, nor any facts permitting any reasonable inferences from which the
existence of an attorney-client relationship between appellants and respondent could be
found.” (Fox v. Pollack, supra, 181 Cal.App.3d at p. 959.) There, appellants knew that the
attorney was counsel for the opposing party in a real estate exchange. (Ibid.) This record
contains no evidence that appellants knew that Cooley had been retained by Renaissance.
Moreover, Renaissance is not an “opposing party” and hence even if appellants were aware
of Mendelson‟s retention by Renaissance, this case would still be factually distinguishable
from Fox. Furthermore, the appellants in Fox had no contact with the attorney other than
the single occasion when they visited his office for the sole purpose of executing the
exchange agreement. (Ibid.) Here, in contrast, Mendelson was allegedly introduced to
appellants as “our attorney” and one of the appellants alleges that “Mendelson took
direction from [him] in drafting the corporate documents at a time when [he] was neither an
officer, director, shareholder or employee of RSI.”5
       Cooley also relies in large part on Torres v. Divis (1986) 144 Ill.App.3d 958.
There, the plaintiff had nothing but his own belief that the attorney was representing him to
support his allegation of an attorney-client relationship. As we have explained, appellants
here have more than their mere belief.
       C. Intended beneficiary
       Appellants contend that Cooley owed them a duty of care even if they were not
clients of Cooley. “Determination of whether in a specific case an 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 the extent to which the transaction was intended to affect
the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff


5       Cooley also cites Skarbrevik v. Cohen, England & Whitfield (1991) 231
Cal.App.3d 692. That case is particularly irrelevant to this portion of our analysis because
that plaintiff had “not asserted at any point in [the] litigation that he had an attorney-client
relationship with defendants.” (Id. at p. 701.)

                                               14
suffered injury, the closeness of the connection between the [attorney‟s] conduct and the
injury, and the policy of preventing future harm. . . . Limited exceptions to the privity rule
have evolved in situations where the third party is the intended beneficiary of the attorney‟s
services or the foreseeability of harm to the third party resulting from professional
negligence is not outweighed by other policy considerations.” (Skarbrevik v. Cohen,
England & Whitfield, supra, 231 Cal.App.3d at p. 701, citations omitted.)
       We find that there exists a question of fact as to the issue of duty under this theory
as well. The MOU identifies appellants as some of the “founders” and contains numerous
indications that the founders may be intended beneficiaries of “the deal” described in the
MOU. For example, the MOU provides that “[t]he Vesting [of stock] to each Founder . . .
will be subject to the fact that the Founder is still employed by [Renaissance] at the date of
vesting” and that “[o]utside directors will be unanimously chosen by Founders and CFS.”
The MOU directs Mendelson to “do his best efforts to . . . keep the spirit and rationale of
this memorandum of understanding.” Mendelson testified at his deposition that he
understood that his job was to “try to the best of [his] ability to implement the business deal
that the parties have agreed to.” Mendelson also acknowledged that he “consider[ed] from
this Memorandum of Understanding that [the form of the corporate structure and who can
or cannot obtain control of the company under that structure] was one of the legitimate
issues . . . in the minds of the people drafting th[e] agreement.” Those “people” at least
arguably include appellants, signatories to the MOU. In these circumstances, appellants
have successfully demonstrated a question of fact regarding Cooley‟s duty to them even if
they were not Cooley‟s clients.
       Cooley‟s reliance on Skarbrevik, supra, 231 Cal.App.3d at pages 701-703, is
misplaced. The court there held that an attorney for a closely-held corporation owed a
“direct duty” to the client corporation, not to the shareholders individually. (Id. at p. 704.)
“An attorney representing a corporation does not become the representative of its
stockholders merely because the attorney‟s actions on behalf of the corporation also
benefit the stockholders; as attorney for the corporation, counsel‟s first duty is to the
corporation.” (Id. at p. 703.) Here, however, appellants do not contend that Cooley owed


                                               15
them a duty merely because of appellants‟ status in the corporation as shareholders or
officers. Unlike the facts in Skarbrevik, these appellants were parties to an agreement
which required the drafting of certain documents, a drafting task which Mendelson agreed
to perform.
       Because we conclude that appellants have created a question of fact as to the issue of
duty, we need not address their contention that a continuance was required to permit
appellants additional time for discovery before the court ruled on the motion for summary
judgment. (See § 437c, subd. (h).)
       III. Does the Release Entered into Between Renaissance and Cooley Compel
            Summary Judgment in Favor of Cooley?

       Cooley argues that it was also entitled to summary judgment on the basis of a
“Settlement Agreement And Mutual Release Of All Claims” (release) effective February 3,
1992. Cooley acknowledges that the release was between Renaissance on the one hand, and
Mendelson and Cooley Godward on the other. Despite this concession, Cooley
nonetheless attempts to impose the terms of the release upon appellants. Cooley‟s attempt
relies upon a provision in the release which provides that the release “shall bind . . . the
agents, directors, officers, [and] shareholders” of Renaissance. Because at thetime of the
release appellants were “agents, directors, officers [and] shareholders” of Renaissance,
Cooley contends the release bars appellants‟ personal claims.
       “„[I]t is also a general rule that the assent of a party to a contract is necessary in
order that it be binding upon him.” (Edwards v. Comstock Insurance Co. (1988) 205
Cal.App.3d 1164, 1167, quoting Smith v. Occidental etc. Steamship Co. (1893) 99 Cal.
462, 470-471.) It is axiomatic that nonparties have not assented to a contract. Therefore,
regardless of the broad language it uses, a contract cannot bind nonparties. Cooley does not
cite any case holding to the contrary. (Cf. General Motors Corp. v. Superior Court
(1993) 12 Cal.App.4th 435, 437 [release of “any and all persons, firms, and corporations”
releases claims against corporation not specifically named]; Winet v. Price (1992) 4
Cal.App.4th 1159, 1167 [party‟s later-discovered claim barred where party released
“unknown or unanticipated claims”]; Edwards v. Comstock Insurance Co., supra, 205


                                               16
Cal.App.3d at p. 1166 [party‟s assent to general release of all claims precludes action by
party against insurer for unfair claims settlement practices].)
       Appellants were not parties to the release and therefore the release could not waive
appellants‟ personal claims. While appellant Felt signed the release, he did so, not in his
individual capacity, but as the Chief Financial Officer of Renaissance. Felt did not purport
to bind himself individually (see United States Liab. Ins. Co. v. Haidinger-Hayes, Inc.
(1970) 1 Cal.3d 586, 595 [Directors and officers are not personally liable on contracts
signed by them for and on behalf of the corporation unless they purport to bind themselves
individually]), and Cooley, conceding that Renaissance was the party to the agreement, does
not suggest otherwise. Cooley was not entitled to summary judgment on this ground either.
                                        DISPOSITION
       We reverse the trial court‟s grant of summary judgment. Costs are awarded to
appellants.
                                                          Jones, J.
We concur:
              Peterson, P.J.

              Haning, J.




                                              17
Trial court:                      San Francisco Superior Court

Trial judge:                      Hon. William J. Cahill


Counsel for plaintiffs and
appellants:                       James S. Bostwick
                                  Keith A. Shandalow
                                  Attorneys at Law
                                  James Bostwick & Associates

Counsel for defendants and
respondents:                      James A. Richman
                                  Paul A. Renne
                                  Attorneys at Law
                                  Cooley, Godward, Castro,
                                   Huddleson & Tatum




A073726




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