HERRON v. State Farm Mutual Insurance Company, a Corporation, and Anthony Caruso, Respondent.*

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District Court of Appeal, Third District, California.

John Wynne HERRON, Fred R. Winn, and Mansfield Davis, Plaintiffs and Appellants, v. STATE FARM MUTUAL INSURANCE COMPANY, a Corporation, Anthony Caruso, Donald Halverson, and Donna Halverson, Defendants, State Farm Mutual Insurance Company, a Corporation, and Anthony Caruso, Respondent.*

Civ. 9870.

Decided: December 22, 1960

Herron & Winn and Mansfield Davis, San Francisco, for appellants. Bledsoe, Smith, Cathcart, Johnson & Phelps, San Francisco, for respondents.

Plaintiffs, John Wynne Herron, Fred R. Winn and Mansfield Davis, appeal from a judgment dismissing their complaint as to the respondents State Farm Mutual Insurance Company and Anthony Caruso after their demurrer to the second amended complaint was sustained without leave to amend.

The action is one based on alleged unjustifiable interference with the contractual rights between attorney and client. We shall first summarize the allegations of the complaint.

Appellants are attorneys at law. A Mr. and Mrs. Donald Halverson were injured in an automobile accident on May 11, 1958. Appellants entered into a contingent fee contract with the Halversons which provided in part that the Halversons could not settle their claim without the consent of the appellants. On May 22, 1958, appellants notified Anthony Caruso, State Farm Mutual Insurance Company's agent in Vallejo, and the insurance company that they were representing the Halversons. On June 6, 1958, both Mr. and Mrs. Halverson informed appellants that they did not wish to be represented by them. The letter from Mr. Halverson read in part: ‘Evidently there has been some misunderstanding. I recollect you visiting my hospital room at a time when I was not quite clear in my mind due to having had some drugs. I do not delieve that I retained you to represent me either verbally or otherwise.’ Mrs. Halverson stated in her letter that she signed the contract as the result of a misunderstanding and that therefore she did not desire to be represented by them. The Halversons then settled with the insurance company. This action was thereafter filed against the Halversons, State Farm Mutual and Caruso. It was alleged in the complaint that on or about June 1, 1958, Anthony Caruso and the insurance company induced the Halversons to discharge appellants as their attorneys by advising the Halversons that they did not need to continue to retain attorneys to represent them; that each had one year to file suit; that a settlement satisfactory to the Halversons would be made; that State Farm Mutual Insurance Company, by and through its agent, Anthony Caruso, agreed with the Halversons to deprive appellants of the benefit of the contract with the Halversons; that they assisted in the preparation of the letters notifying appellants of their discharge and advised that the letters be mailed; and that in doing these things Caruso and State Farm Mutual Insurance Company acted maliciously and caused appellants to lose the benefit of their contingent fee contract.

The principal question presented by this appeal is whether or not an attorney has a cause of action against third persons who maliciously interfere with the attorney's contingent fee agreement with his client. It is the contention of respondents that the trial court did not err in sustaining respondents' demurrer without leave to amend because appellants could not state a cause of action against respondents.

Appellant relies strongly on the case of Freed v. Manchester Service, Inc., 165 Cal.App.2d 186, at page 188, 331 P.2d 689, at page 690, in which the court said:

‘It is well settled in California that an action will lie for inducing a breach of contract although the means employed were in themselves lawful, unless there is sufficient justification for such conduct. Imperial Ice Co. v. Rossier, 18 Cal.,2d 33, 35, 112 P.2d 631; Dominguez Estate Co. v. Los Angeles Turf Club, 119 Cal.App.2d 530, 541, 259 P.2d 962; Rest., Torts, sec. 766. Liability also exists for unjustifiable justifiable interference with contractual rights despite the fact that the contract is terminable at will. Speegle v. Board of Fire Underwriters, 29 Cal.2d 34, 39, 172 P.2d 867; Romano v. Wilbur Ellis & Co., 82 Cal.App.2d 670, 673, 186 P.2d 1012. Therefore, whether plaintiff's interest in the Gordon lease or his contract with Gordon was coupled with an interest or vested is immaterial and need not be considered. As stated at page 39 of 29 Cal.2d at page 870 of 172 P.2d in the Speegle case, supra, ‘[r]ecognizing that the fact that a contract is ‘at the will of the parties, respectively does not make it one at the will of others' (citations).’

‘The cases establish no precise formula or standard by which a defendant's conduct is to be evaluated in order to determine whether it was justified. The courts and legal writers often speak in terms of a ‘balancing of interests,’ (see, e. g., Masoni v. Board of Trade of San Francisco, 119 Cal.App.2d 738, 742, 260 P.2d 205; 41 Harv.L.Rev. 728, 745). The Restatement of Torts, § 767, cited in many California cases (e. g., Imperial Ice Co. v. Rossier, supra, 18 Cal.2d at page 36, 112 P.2d at page 633; Hancock v. Burns, supra, 158 Cal.App.2d [785] 794 [890], 323 P.2d [456] 461; Masoni v. Board of Trade of San Francisco, supra, 119 Cal.App.2d at page 742, 260 P.2d at page 207), suggests that the following factors are pertinent when the question of justification is in issue:

“(a) the nature of the actor's conduct,

“(b) the nature of the expectancy with which his conduct interferes,

“(c) the relations between the parties,

“(d) the interest sought to be advanced by the actor, and

“(e) the social interests in protecting the expectancy on the one hand and the actor's freedom of action on the other hand.' The rationale behind the defense of justification is stated as follows in 41 Harvard Law Review 728, 745: ‘Whether a privilege of invasion exists depends upon whether it is of greater moment to society to protect the defendant in the invading activities than it is to protect and guard the plaintiff's interest from such invasion.”

Respondent in reply contends that the Freed case is distinguishable on its facts from the instant case because the Freed case involved a different kind of contract. Respondents state that the subject matter of the contract there in question was real property and a business conducted thereon, in particular a certain automobile wash rack facilities and the business of washing automobiles for profit; and the plaintiffattorney in that case could therefore acquire an interest in the subject matter of the contract prior to judgment. Respondents argue that the cause of action sought to be established in the instant case cannot apply to an attorney's contingent fee contract wherein the subject matter of the contract is the client's personal injuries. There are no decisions in California dealing with the precise question here involved, but respondent relies upon a number of decisions of outside jurisdictions.

The first of these is Tauro v. General Acc. Fire & Life Assur. Corp., 297 Mass. 234, 8 N.E.2d 773. The facts in that case were that an attorney brought action against the defendant insurance company and its local manager, alleging that he was employed by one Johnson to prosecute to trial or settlement a tort action arising out of personal injuries sustained in an automobile accident. Plaintiff had filed an action on behalf of Johnson and guaranteed payment of Johnson's doctor's bills and other bills. Plaintiff alleged that defendant insurance company, with knowledge of plaintiff's contract and action, ‘wilfully and maliciously and with intent to deprive the plaintiff of the benefits, advantages and profits that the plaintiff would otherwise have made and received from his said employment, did with either actual ill will or purpose to harm or without legal justification, influence, persuade and induce the said * * * Johnson to settle his tort actions for an inadequate amount, although the defendant's assured was at the time represented by counsel employed by the defendant, and by reason of the said wilful and malicious acts of the defendant, the plaintiff wholly lost the benefits, advantages and profits of said contract with said * * * Johnson and lost the value of the services rendered under said employment, together with other damages.’ Defendant's demurrer to the complaint was sustained and upon appeal it was held that the demurrer was properly sustained, the court stated at page 773 of 8 N.E.2D: ‘The asserted basis of the plaintiff's action is the malicious procurement by the defendant of a breach of a contract between the plaintiff and his client. But the facts alleged in the declaration do not warrant the conclusion that the client broke his contract with the plaintiff. The employment of the plaintiff as an attorney to prosecute to a trial or settlement a claim for personal injury did not prohibit the client from making a settlement with the opposing party. In this Commonwealth a claim for damages for personal injuries is not assignable, and an attorney rendering services in connection therewith has no lien, until after a final judgment has been obtained. The settlement made by the plaintiff's client with the defendant insurance company was within the client's right and was not a breach of his contract with the plaintiff.’

Also cited by respondents is Herbits v. Constitution Indemnity Co., 279 Mass. 539, 181 N.E. 723. In that case plaintiff's attorneys had entered into a contingent fee contract with a personal injury claimant and had rendered services in connection with the contract. Defendant insurance company settled the cause of action directly with plaintiff's client despite the fact that it knew of the existence of the contract and the services rendered by plaintiffs. Upon appeal the court held that no cause of action existed for willful interference with plaintiffs' contract in this factual situation. The court stated at page 725 of 181 N.E.: ‘* * * In this Commonwealth an attorney who prosecutes a suit has no lien for his fees or disbursements until after a final judgment has been entered. G.L. c. 221, section 50. He may not upon the bringing of a suit for personal injuries to his client protect himself for the amount of his fee by an assignment, since such a right of action is not assignable before judgment. * * * His client may without his consent or knowledge settle a pending suit brought and prosecuted by him. * * * The settlement made by the plaintiffs' client was within her contract rights. She committed no breach of her contract with the plaintiffs by making the settlement. It follows that the defendant who induced her to make it committed no legal wrong against the plaintiffs.’

Respondents also cite Krause v. Hartford Accident & Indemnity Co., 331 March. 19, 49 N.W.2D 41. In that case plaintiff sued defendant company to recover for damages alleged to have been suffered as a result of defendant's adjusters having willfully and maliciously induced plaintiff's client to break their contingent fee contract with plaintiff. The Circuit Court entered an order dismissing the action and plaintiff appealed. The Supreme Court held that defendant's alleged willful and malicious inducement of plaintiff's clients to break their contract with plaintiff had not constituted an actionable tort on the part of the defendant. The court stated at pages 44, 45 of 49 N.W.2d:

‘* * * Hence in this case the question is presented: Did defendant's alleged wilful and malicious inducement of the Paquins to break their contract with plaintiff constitute an actionable tort on the part of defendant?

‘From the early case of Lumley v. Gye, 2 Ellis & Blackburn 216, most of the common law courts have adopted and enlarged upon the idea that unlawful interference with another's contract rights constitutes an actionable tort. In general that proposition has been adopted in this jurisdiction. * * *

‘The question of the right of an attorney to sue a third party for inducing his client in the absence of the attorney's consent to settle a case is somewhat novel in this State. * * *

‘Under their contract with plaintiff, the Paquins in the instant case, * * *, had the right to settle their claims. And it was the privilege of the defendant herein to negotiate with the Paquins for the purpose of reaching a settlement. * * *

‘In the light of the foregoing authorities it must be held that in granting defendant's motion to dismiss and denying plaintiff's subsequent motion to vacate the order of dismissial, the trial court ruled properly. The dismissal of plaintiff's suit is affirmed, with costs.’

In the case of Employers Casualty Co. v. Moore, 60 Ariz. 544, 142 P.2d 414, George and Edith Damron retained the law firm of Moore & Romley to bring an action against one Thomas E. Hudson on account of personal injuries suffered by reason of the negligent operation of an automobile by Hudson. The contingent fee contract provided that the attorneys should have one-third of the recovery and should have an assignment pro tanto of any collection or judgment. An action was filed by the attorneys. Thereafter the Damrons settled their claim with defendant insurance company without consulting their attorneys. Plaintiff-attorneys brought an action against the insurance company alleging that defendant, with full knowledge of plaintiffs' contract with the Damrons, induced the Damrons to settle their claim; that said settlement was fraudulent; and that the settlement was a wrongful interference with their contractual relationship with their clients. The case was tried and judgment entered for plaintiffs. Defendant appealed and the court reversed the judgment with directions to dismiss the action. The court stated at page 416 of 142 P.2d: ‘What the appellant and Hudson did was lawful and, even though it might have interfered with appellees' contract with the Damrons, it certainly gave the appellees no right of action to recover attorney fees from the appellant. Even though we may be in sympathy with the appellees, we think a proper and legitimate construction of the rules of law, as we find them in the cases and in the texts, will not permit the recovery.’

While the decisions relied upon by respondents support their position, there is another line of cases which are opposed to the ones cited by respondents, and which, in our opinion, present a sounder and more enlightened view. We shall refer to and quote from a number of these cases.

In Lurie v. New Amsterdam Casualty Co., 270 N.Y. 379, 1 N.E.2d 472 an attorney sued an insurance company on the ground that the insurer, through its agents, wrongfully induced and procured the client to repudiate the contract with the attorney. Upon appeal the New York Court of Appeals said at page 473 of 1 N.E.2d: ‘Plaintiff concedes, of course, that the cause of action growing out of the automobile accident belonged to his client and not to him, nor does he assert any authority to obstruct such a settlement as his client may have elected to make. In re Levy, 249 N.Y. 168, 170, 163 N.E. 244. The rule of law is certain that a contract of retainer may be canceled at any time and in such a case the attorney is entitled only to the reasonable value of his services to the date of cancellation. Martin v. Camp, 219 N.Y. 170, 114 N.E. 46, L.R.A.1917F, 402; Application of Krooks, 257 N.Y. 329, 178 N.E. 548; In re Tillman, 259 N.Y. 133, 181 N.E. 75. This attorney complains, not because his client canceled his retainer, a right inherent in the contract and not constituting a breach, but because the client, falsely denying the existence of the contract, repudiated it and assumed that position by reason of the wrongful instigation of these defendants. That a cause of action exists against those who unlawfully induced the breach of this contract is settled in this state. [Citing cases.]’

In Employers Liability Assurance Corp. v. Freeman, 10 Cir., 229 F.2d 547, an attorney brought an action to recover for the wrongful interference with the contractual relations between the attorney and his client. The client had been injured and consulted with the attorney who, after being retained, notified the insurer that he had been retained. An adjuster spoke to the client and told him that he did not need an attorney and induced the client to settle. The insurer sought a directed verdict on the ground that it was acting to protect a legal right and that it was privileged. Recovery was allowed, and in affirming the judgment the United States Circuit Court of Appeal said at page 549: ‘* * * It is the well settled general rule of law in Oklahoma that if one employs fair means and acts in good faith and with justification for the protection of his legal rights, he is not liable in damages even though his acts and conduct constitute interference with the contractual rights of another; that on the other hand, if one maliciously interferes with a contract between two parties and induces one of them to break that contract to the injury of the other party, the injured party may maintain an action in tort against the wrongdoer; and that if the procurement of the breach is intentional and without excuse, it is malicious. [Citing cases.] And these general principles have application to the interference of the contractual relation between an attorney and his client. [Citing cases.]’

The case of Klauder v. Cregar, 327 Pa. 1, 192 A. 667, involved an action brought by an attorney against an insurance company and its agent, the plaintiff alleging in his complaint that defendants had maliciously interfered with performance of the contract between him and his client and induced her to break the contract to his injury and damage. On the trial of the case, at the close of plaintiff's evidence, the trial court granted a nonsuit. Upon appeal the Supreme Court reversed the judgment, stating at page 668 of 192 A: ‘At the outset of a review of the pleadings, the testimony, and the governing legal principles entering into the case, it is opportune to remark that ‘a ‘contract confers certain rights on the person with whom it is made, and not only binds the parties to it by the obligation entered into, but also imposes on all the world the duty of respecting that contractual obligation.’ * * * If one maliciously interferes in a contract between two parties, and induces one of them to break that contract to the injury of the other, the party injured can maintain an action against the wrongdoer.' Caskie v. Philadelphia Rapid Transit Co., 321 Pa. 157, 184 A. 17, 18, 106 A.L.R. 318. An agreement between an attorney and a client on a contingent fee basis is a legal and valid contract and as such is entitled to the protection of the law. Williams v. Philadelphia, 208 Pa. 282, 57 A. 578.'

In Bennett v. Sinclair Nav. Co., D.C., 33 F.Supp. 14, at page 15, the court said: ‘In addition to and independent of the remedy which an attorney may have against his client for breach of a contingent fee contract, where the attorney's interest in the contract is maliciously interfered with by the wrongful act of a third party with knowledge of the existence of a valid contract and the rights of the attorney thereunder, the latter has a cause of action against the wrongdoer: Klauder v. Cregar, 327 Pa. 1, 192 A. 667. * * *’

Keels v. Powell, 207 S.C. 97, 34 S.E.2d 482, was an action in which an attorney sought to recover damages for interference with the contractual relationship between the attorney and his client with whom he had a contingent fee contract in a personal injury matter. The defendants appealed from an order overruling their demurrer to the complaint. In affirming the order overruling the demurrer the Supreme Court of South Carolina said at page 484 of 34 S.E.2d:

‘The stated principle has been sanctioned also by our own Court in the recent case of Parker v. Brown, 195 S.C. 35, 10 S.E.2d 625, 631, wherein it was declared that: ‘A party to a contract would have a cause of action against a third person for interference with the contractual relationship, but before liability could arise certain factors and elements must appear, the first of which is the existence of a valid contract.’

‘The general tenor of the authorities on the point is to the effect that to give rise to a cause of action of this character the interference must have been willful and unjustified. A fair construction of the allegations of the complaint, in the light of this generally accepted doctrine, constrains me to say that the complaint states such a cause of action.

‘In reviewing the authorities I find but one reference, insofar as this particular point is concerned, to the relationship of attorney and client. In 7 C.J.S., Attorney and Client, sec. 53, p. 836, this statement appears: ‘Third persons unlawfully interfering with the relationship of an attorney and his client, or using an attorney's name without authority are liable to the attorney for the damages caused thereby.’

‘The general principle here invoked is supported by both reason and authority, and there would appear to be no sound reason why it should not be held applicable to the relation of attorney and client, as well as to other contractual relationships.’

In State Farm Fire Ins. Co. v. Gregory, 4 Cir., 184 F.2d 447, at page 448, the court said: ‘This is an appeal from a judgment for plaintiff in an action for damages for malicious interference with contract. Plaintiff is an attorney at law who had been employed by an insured to bring an action for recovery on a contingent fee basis on a valued fire insurance policy. The only question presented by the appeal is the sufficiency of the evidence to support the verdict in plaintiff's favor. There was evidence tending to show that an adjuster of the company, after learning of plaintiff's employment by the insured, induced the latter to settle for less than the face of the policy by representing that this would be more advantageous to him than proceeding with the suit and dividing the recovery with plaintiff. While there is evidence to the contrary, there is abundant evidence, when taken in the light most favorable to plaintiff, to support the conclusion that the adjuster obtained the settlement by inducing the insured to abandon his lawyer and save the fee which he had contracted to pay. This clearly made out a case for plaintiff. Keels v. Powell, 207 S.C. 97, 34 S.E.2d 482.’

While there appears to be a conflict of authority, we believe that the decisions which hold that an attorney has a good cause of action against third persons who maliciously and without justification interfere with the attorney's contingent fee agreement with the client are based upon sounder reasoning and are more in accordance with good public policy. It is not contended that a contract between an attorney and a person who has been injured in an accident, which contract provides that the attorney will represent the injured person on a contingent fee basis, is not a legal and valid contract. While it is true that such a contract may be terminated by the client, this does not give to a third person the right to maliciously interfere with that contract. As stated in Speegle v. Board of Fire Underwriters, 29 Cal.2d 34, at page 39, 172 P.2d 867, at page 870: ‘Intentional and unjustifiable interference with contractual relations is actionable in California as in most other jurisdictions. * * * Recognizing that the fact that a contract is ‘at the will of the parties, respectively does not make it one at the will of others,’ * * *.' Respondents argue that while the general rule is that a cause of action exists for inducing the breach of other types of contracts, such a cause of action cannot apply to an attorney's contingent fee contract wherein the subject matter of the contract is the client's personal injuries. However, as we view the matter, there is no sound reason why the general rule should not be held applicable to the relation of attorney and client as well as to other contractual relationships.

Having concluded that a cause of action may be stated for maliciously interfering with an attorney's contingent fee contract in a personal injury matter, we shall next consider whether the complaint in the instant case did state a cause of action. The complaint alleged that the agent of respondent insurance company induced the Halversons to discharge appellants as their attorneys by advising the Halversons that they did not need to continue to retain attorneys to represent them; that each had one year to file suit; that a settlement satisfactory to the Halversons would be made; that State Farm Mutual Insurance Company by and through its agent, Anthony Caruso, agreed with the Halversons to deprive appellants of the benefit of their contract with the Halversons; that they assisted in the preparation of the letters notifying appellants of their discharge and advised that the letters be mailed; and that in doing these things Caruso and State Farm Mutual Insurance Company acted maliciously and caused appellants to lose the benefit of their contingent fee contract. Upon this appeal we must of course accept the allegations of the complaint as true, and it requires little argument to prove that the quoted allegations set forth that respondent company's agent made improper statements to the Halversons in order to induce them to break their contract with appellants and that respondents acted maliciously. We are of the opinion that the second amended complaint did state a cause of action and that the court erred in sustaining respondents' demurrer.

The judgment is reversed with directions to the trial court to overrule the demurrer.

SCHOTTKY, Justice.

VAN DYKE, P. J., and PEEK, J., concur.