Professional Malpractice Claim
The Court identified the elements of a professional malpractice claim as (a) duty, (b) breach, (c) causation and (d) damages.
Duty
After a brief discussion of California law and explanations made by the expert witnesses, the Court held that Defendants owed Plaintiff a general duty of care in providing the opinion letters as well as a duty to disclose facts that materially qualify the representations made by Defendants. Thus, the first element of the professional malpractice claim was established.
Breach
Plaintiff identified a number of alleged breaches that were made by Defendants in connection with the opinion letters.
Plaintiff’s Ability to Collect Gross Commissions
Plaintiff alleged that Borrower had provided its standard sub-agent agreement which required that all gross commission payments from an insurance company be payed directly to Borrower (through the lockbox). Under the standard agreement Borrower would, in turn, pay its sub-agents. However, Defendants apparently knew, but did not disclose that the standard agreement had been modified so that the gross commissions were to be paid by the insurance company directly to the sub-agents rather than to Borrower through the lockbox. Plaintiff claimed that that statements made by the individual Defendant at a meeting sometime after the second opinion letter was issued, indicated that he believed that the insurance company might pay gross commissions to the sub-agents rather than to the lockbox. Plaintiff claimed that Defendants concealed their doubts that the insurance company might pay the sub-agents rather than Borrower in the event of a default while including “Knowledge Qualifier” paragraphs to the effect that Defendants knew of no facts which lead them to believe that the representations of Borrower in the Loan Documents are untrue or inaccurate. For the “Knowledge Qualifier,” the first opinion letter used the following language while the second referred to “any Amended Loan Documents”:
Wherever we indicate that our opinion with respect to the existence or absence of facts is based on our knowledge, our opinion is based solely on (i) the current actual knowledge of the attorneys currently with our firm who have represented [Borrower] and (ii) the representations and warranties of said parties contained in the Loan Documents; we have made no independent investigation as to such factual matters. However, we know of no facts which lead us to believe such factual matters are untrue or inaccurate.
The Court noted that the terms of the “Knowledge Qualifier” applied only to statements in the opinion letters where Defendants indicate their own knowledge as to a particular subject matter. Because Plaintiff did not point to any reference to “knowledge” regarding Plaintiff’s ability to collect gross commissions from the insurance company, and because statements made months after the opinion letters were issued, those statements do not represent Defendants’ subjective knowledge at the time the letters were issued. The Court found that Defendants did not conceal doubts and did not make any misrepresentation under the “Knowledge Qualifier.”
Borrower’s Rights and Title to Gross Commissions
In both opinion letters, Defendants opined that “[t]he provisions of the Loan Agreement create a valid security interest in favor of [Plaintiff] in the respective rights, title and interests of [Borrower] in and to all Collateral ….” Plaintiff argued that such opinion meant a valid security interest in the gross commissions and that such statement was a misrepresentation because the individual Defendant did not believe the insurance company would honor Borrower’s pledge of the gross commissions. The Loan documents and opinion letters did not mention “gross commissions.” Defendants argued that Borrower pledged “Collateral” which was defined as “[a]ll of the assets of [Borrower].” The Court held that Plaintiff failed to produce any evidence showing that Defendants were aware that the gross commissions were not payable to the lockbox or that they made any misrepresentations on the matter.
Borrower’s Disclosure Schedule
Plaintiff identified various alleged misrepresentations made in Borrower’s Disclosure Schedule. The Court rejected the Plaintiff’s claims that such misrepresentations breached the “Knowledge Qualifier” because Defendants did not represent their knowledge as to any portion of the Disclosure Schedule. Plaintiff objected to Defendants’ assumptions that the Collateral exists and Borrower had rights or title to it and that all statement sin the Loan Documents are true. The Court addressed the objection:
“Under customary opinion letter practice, ‘stated assumptions ... shift to the opinion recipient the responsibility for confirming the assumed facts for itself or taking the risk that what is assumed might turn out to be untrue.’ According to Defendants’ expert, [Arthur N.] Field, use of assumptions informs the recipient that no diligence has been done; the recipient only takes solace in the fact that the assumption will not be used if the opinion giver knows it is or likely is false.”
The Court noted that Plaintiff failed to show that Defendants owed Plaintiff a duty for the Disclosure Schedule other than the duty not to defraud others. The Court held that there was no breach because Defendants made no representations in or as to the disclosures, which were made by Borrower, not Defendants
No Litigation Paragraph
Both opinion letters contained the following (the second opinion letter referred to “Amended Loan Documents”):
“[T]o our knowledge, there [is] no [lawsuit] pending or threatened against [Borrower Parties] that (a) asserts the invalidity of any Loan Document, (b) seeks to prevent the consummation of any of the transactions [therein], [or] (c) ... might (i) adversely affect the validity or enforceability of any Loan Document ....”
Because the paragraph refers to Defendants’ knowledge, the “Knowledge Qualifier” applies and the Defendants would be liable if they knew of facts to the contrary. The Court noted that Plaintiff construed the quoted language to mean that “no litigation was pending that might adversely ‘impair the collateral.’” The Court went on to explain that Defendant’s did not breach their duty by misrepresenting or concealing any litigation. The opinion letters expressly referred to the “validity or enforceability” of the specified documents, not Borrower Parties’ financial resources or the collateral Borrower Parties’ pledged to Plaintiff.
Causation
In order to prevail on the causation element, the Court stated that Plaintiff needs to prove that had Defendants not made the alleged misrepresentations and concealment, Plaintiff would not have proceeded with the loan. Essentially Plaintiff needs to show it reasonably relied on the Defendants’ actions. However, in this case Plaintiff could not have reasonably relied. Not only did Plaintiff know about pending litigation, it had received a memorandum that expressed that Borrower Parties might owe “significant monetary damages.” The Court noted it was unreasonable for Plaintiff to rely on its interpretation of the opinion letters due to the notice it had to the contrary.
The Court thus found that Defendants satisfied their burden that no reasonable juror could find for Plaintiff on either the breach or causation elements and concluded the Court need not rule on the damages element because it was not discussed by the parties. The Court found that as a matter of law, based on the actual opinion letters and related documents, no reasonable juror could find in Plaintiff’s favor. The Court also noted that Plaintiff misconstrued the applicable law.
Other Claims
The Court dealt swiftly with the remaining causes of action asserted by Plaintiff. As discussed in its analysis of the professional malpractice claim, the Court found that Plaintiff failed to establish any misrepresentation made by Defendants and thus granted Defendants’ motion as to the intentional and negligent misrepresentation claims.
Finally, the Court repeated its findings that Defendants did not conceal or suppress any material fact in breach of a duty. Plaintiff did not show the element of fraudulent intent and, moreover, Defendants proved that Plaintiff was aware of all allegedly concealed facts.
Conclusion
We anticipate reporting on further developments in the various pending opinion letter cases.
The Order is GemCap Lending, LLC v. Quarles & Brady, LLP, Case No. CV14-07937-RSWL, 2017 WL 4081884 (C.D. Cal. Sept. 13, 2017).