Opinion
No. 74958-COA
02-19-2020
OCEANIA INSURANCE CORPORATION, Appellant, v. Jeffrey A. COGAN; and Jeffrey A. Cogan, Esq., Ltd., a Nevada Professional Entity, Respondents.
ORDER OF AFFIRMANCE
Oceania Insurance Corporation appeals from a district court order granting a motion to dismiss in a tort action. Eighth Judicial District Court, Clark County; Douglas Smith, Judge.
Oceania sued Jeffrey A. Cogan, Esq., and his law firm for legal malpractice and breach of fiduciary duty in connection with his prior representation of the company in a federal case. Oceania alleged that Cogan committed malpractice when he failed to get a default that had been entered against the company set aside, leading to the entry of a default judgment in excess of $5 million in favor of the plaintiff in that case, Alutiiq International Solutions, LLC (Alutiiq). The district court dismissed Oceania’s complaint for failure to state a claim, concluding that the company could present no set of facts that would show that Cogan’s professional negligence caused its damages. The court also concluded that Oceania’s breach of fiduciary duty claim was duplicative of the malpractice claim and therefore suffered the same defect. Finally, the court concluded that any attempt on the part of Oceania to amend its complaint would be futile. This appeal followed.
We do not recount the facts except as necessary to our disposition.
Originally, we reversed the district court’s order and remanded the case on grounds that Oceania’s complaint, brought by Oceania in its own name, properly stated claims for legal malpractice and breach of fiduciary duty. However, Cogan filed a petition for rehearing arguing that we misapprehended the public policy concerns at the heart of the Supreme Court of Nevada’s holding in Tower Homes, LLC v. Heaton , 132 Nev. 628, 377 P.3d 118 (2016), which reaffirmed Nevada precedent prohibiting the assignment of legal malpractice claims. Cogan argues that Oceania lacks standing to maintain this action because, in the original action giving rise to the underlying claims, the federal district court impermissibly assigned Oceania’s legal malpractice claim by transferring the majority of Oceania’s shares to Alutiiq (the adverse party in the underlying litigation) and ordering that "all causes of action belonging to Oceania are executed and applied toward satisfaction of [Alutiiq’s] default judgment against [Oceania’s original majority shareholder] under NRS § 21.230." We previously rejected that argument on grounds that Oceania, not Alutiiq, brought this action on its own behalf, and it therefore did not implicate Nevada’s policy prohibiting the assignment of legal malpractice claims. However, in light of the public policy concerns presented in Cogan’s rehearing petition, we granted the petition and set the matter for oral argument. After considering the parties’ arguments on rehearing, we vacate our prior decision and affirm the district court’s order dismissing the case.
We note that the district court did not address whether there was an effective assignment of Oceania’s legal malpractice claim to Alutiiq against public policy considerations as articulated in Tower Homes. Rather, the court dismissed Oceania’s legal malpractice action for other reasons. We reached this issue in our prior order of reversal and remand because it implicates Oceania’s standing to maintain the action, which is an issue that "can be raised at any time in the litigation, even for the first time on appeal." See Applera Corp. v. MP Biomedicals, LLC , 93 Cal. Rptr. 3d 178, 192 (Ct. App. 2009).
We note that the federal court granted such relief on grounds that Alutiiq’s motion seeking the same was unopposed, although the record does not reveal why it was unopposed. Moreover, the parties do not dispute that Alutiiq gained control of Oceania as a result of the order.
As an initial matter, we note that the facts of this case are distinguishable from Tower Homes in that—in spite of the federal district court’s order assigning all of Oceania’s causes of action to Alutiiq—Oceania, not Alutiiq, brought this action and is entitled to receive any proceeds from it. See Tate v. Goins, Underkofler, Crawford & Langdon, 24 S.W.3d 627, 634 (Tex. App. 2000) ("[T]he plaintiff’s right to bring his own cause of action for malpractice is not vitiated by [an] invalid assignment [of that claim]."). Nevertheless, we are persuaded that the public policy considerations underlying the prohibition of assigning legal malpractice claims act to bar this legal malpractice action under the specific facts and circumstances presented here.
By virtue of the federal court’s order assigning a majority of Oceania’s shares to Alutiiq, that company—as majority shareholder (and represented by the same counsel that litigated the federal case on its behalf)—is essentially controlling the litigation in this case. This is problematic because Alutiiq was Oceania’s adversary in the prior case, and part of proving a legal malpractice claim is showing that the claimant would have prevailed or at least obtained a better result in the prior case if not for the attorney’s malpractice. See Semenza v. Nev. Med. Liab. Ins. Co., 104 Nev. 666, 667-68, 765 P.2d 184, 185 (1988) (noting that the plaintiff in a legal-malpractice case must show that the breach of the attorney’s duty proximately caused the client’s damages). This means that Oceania’s current counsel and Alutiiq (as Oceania’s majority and controlling shareholder) are in the curious position of having to prove in this legal malpractice action that Oceania would have prevailed in the federal district court case but for Cogan’s malpractice. Of course, this position is diametrically opposed to the position they took in that case, which resulted in a judgment in favor of Alutiiq. Stated another way, in this legal malpractice action, Alutiiq will have to take the position that it should not have prevailed in the underlying action in federal court, even though its victory in federal court is why it is in the position of being the majority shareholder of Oceania and being involved in this action in the first place.
This kind of position shifting is what at least one court has explicitly identified as a reason for prohibiting the assignment of legal malpractice claims to an adversary in the underlying action. See Kommavongsa v. Haskell , 67 P.3d 1068, 1078 (Wash. 2003) (en banc) (prohibiting the assignment of legal malpractice claims to adversaries in the litigation giving rise to the claim in part "because the ‘trial within a trial’ that necessarily characterizes most legal malpractice claims arising from the same litigation that gave rise to the malpractice claim would lead to abrupt and shameless shift of positions that would give prominence (and substance) to the perception that lawyers will take any position, depending upon where the money lies, and that litigation is a mere game and not a search for truth, thereby demeaning the legal profession"); cf. Tower Homes , 132 Nev. at 634, 377 P.3d at 122 (identifying Goodley v. Wank & Wank, Inc., 133 Cal. Rptr. 83 (Ct. App. 1976), as "detailing policy considerations that underlie the nonassignability of legal malpractice claims"); Goodley, 133 Cal. Rptr. at 87 (noting that allowing the assignment of a legal malpractice claim "convert[s] it to a commodity to be exploited" and "is rife with probabilities that could only debase the legal profession").
We recognize that Alutiiq’s control over this litigation stems from its ownership interest in Oceania rather than from a direct assignment of the legal malpractice claim. But in light of the foregoing, we conclude (as have other courts in similar circumstances) that the transfer of ownership to Alutiiq nevertheless constituted a de facto assignment of the claim—which Oceania concedes is its only asset—in violation of Nevada’s public policy. See Kenco Enters. Nw., LLC v. Wiese, 291 P.3d 261, 264 (Wash. Ct. App. 2013) (citing Kommavongsa and holding that the acquisition of Kenco by its adversary in the underlying action "amounted to an assignment of [Kenco’s legal malpractice] claim," which was Kenco’s only asset); see also Paonia Res., LLC v. Bingham Greenebaum Doll, LLP, No. 3:14-cv-95-DJH, 2015 WL 7431041, at *3-4 (W.D. Ky. Nov. 20, 2015) (dismissing the case and concluding on similar facts that "a de facto assignment" of a legal malpractice claim occurred); Trinity Mortg. Cos. v. Dreyer , No. 09-CV-551-TCK-FHM, 2011 WL 61680, at *3 (N.D. Okla. Jan. 7, 2011) (addressing similar facts and concluding that even though "there was no actual transfer" of the relevant claims, there was nevertheless "a de facto transfer" sufficient to trigger the rule). Although the cases we have cited addressed situations where parties had expressly agreed to the transfers of ownership preceding the legal malpractice action—whereas the transfer here may or may not have been involuntary—it is the mere "opportunity for collusion and the transformation of legal malpractice to a commodity that is problematic." Kenco, 291 P.3d at 263 ("This reasoning applies whether or not the collusion is real.").
We take the opportunity to address a concern raised in the dissent that at least two of the four public policy considerations cited by courts prohibiting the assignment of legal malpractice claims are not applicable here. Specifically, the dissent contends that there can be no risk of collusion between Oceania and Alutiiq because they never contractually transferred a claim or even shares of stock between each other; rather, this was accomplished by court order. Thus, the dissent reasons, there is no risk of commoditizing the claim by turning it into a salable product. However, the mechanism of transfer—court order verses contract—does not make the risk of collusion between the parties more or less likely. Lack of evidence in the record demonstrating that the parties explicitly agreed to such an arrangement does not necessarily mean that it did not occur or, even more importantly, that it was not possible. To wit, because the federal court ordered the transfer of shares to Alutiiq on grounds that its request went unopposed, we cannot rule out the possibility that Oceania’s original majority shareholder willfully and collusively acquiesced to the transfer by failing to oppose it. Further, there is no question that the legal malpractice claim is Oceania’s only asset, meaning that Oceania must prevail on the claim for Alutiiq to have gained any benefit by acquiring a stake in the company. Plainly speaking, the malpractice claim appears to have been commoditized. Finally, even if some of the policy concerns set forth in the dissent did not apply to this case, we know of no authority requiring that all four concerns be present or that any given concern (e.g., collusion) predominate over the others (e.g., debasing the legal profession). Simply, there is no authority cited in the dissent barring application of the public policy considerations of Tower Homes and similar cases to the facts and circumstances presented here.
Accordingly, although corporate entities generally retain their causes of action following a change in ownership, see Curtis v. Kellogg & Andelson, 86 Cal. Rptr. 2d 536, 545 (Ct. App. 1999) (noting that, "for legal purposes, [a] [c]orporation has separate rights and a separate identity," and its causes of action are distinct from those of its owners), allowing Oceania in its current form to maintain this action would violate public policy in the same ways that a direct assignment would. We cannot allow Alutiiq to perform an end run around Nevada’s public policy and achieve indirectly what it could not achieve directly. See Schwende v. Sheriff, ‘ Washoe Cty., 86 Nev. 143, 144, 466 P.2d 658, 659 (1970) (rejecting a litigant’s attempt to indirectly obtain relief that he could not obtain directly); Kenco , 291 P.3d at 265 ("We cannot allow th[e] rule to be obfuscated by clever lawyers and legal subtleties."). We therefore vacate our prior decision and affirm the district court’s order dismissing the action. See Saavedra-Sandoval v. Wal-Mart Stores , Inc. , 126 Nev. 592, 599, 245 P.3d 1198, 1202 (2010) ("This court will affirm a district court’s order if the district court reached the correct result, even if for the wrong reason.").
It is so ORDERED.
TAO, J., dissenting:
In the Hollywood blockbuster Avengers: Endgame (Marvel 2019), the villain Thanos collects the six primeval Infinity Stones and uses them to eradicate half of all life on Earth. Though the stones are supposedly indestructible, Thanos finds a way around this in order to prevent the eponymous heroes from reversing the havoc he wreaked: he uses the power of the stones to destroy the stones themselves.
A circularity like that—using something to destroy itself—may make for great drama. But it’s bad law. Here’s the result that the majority reaches: In the prior federal lawsuit, the federal court assigned all of Oceania’s "causes of action" (including its potential malpractice claim against Cogan) to litigation opponent Alutiiq. Everyone agrees that this violates the rule set forth in Tower Homes that legal malpractice claims cannot be assigned from one plaintiff to another. So everyone agrees that Tower Homes makes the claim revert back to Oceania. Fair enough. With this much I have no quibble, as even the parties stipulated to its correctness (indeed, that’s why only Oceania and not Alutiiq is a party to this appeal).
But then the majority uses the same rule to cancel itself out: after Tower Homes made the malpractice claim revert back to Oceania, the majority then invokes Tower Homes to conclude that Oceania can’t assert the claim either. Much like the Infinity Stones (or, for those more classically inclined, the mythical Greek King Erysichthon whom the gods forced to eat his own body), the majority loops Tower Homes back on itself to make the malpractice claim simply disappear into thin air. It uses Tower Homes to prevent Oceania from asserting a claim that was previously given back to it via Tower Homes. This isn’t just circular, it’s a misapplication of Tower Homes. Tower Homes is a rule prohibiting the assignment of malpractice claims from one party to another, but the circularity turns it into a rule requiring them to be dismissed at the pleading stage so that no party can assert them, whether assignor, assignee, or anyone else. Respectfully, I dissent.
The facts of this case are odd, and I agree with the majority that there are things about them that make me squeamish. If a corporation is taken over by its litigation adversary, it seems odd that the adversary can then induce the corporation to pursue a legal malpractice claim against an attorney who once represented its own adversary. That feels not only unseemly, but possibly rife with ethical quandaries. But is that enough to warrant immediate dismissal of the malpractice claim? The majority says yes and implements a rule that seems to come down to this: when a party acquires a majority of a litigation adversary’s stock, it loses the right to assert any legal malpractice claim arising from that litigation when the malpractice claim is the sole asset of the acquired company. Thus, once Alutiiq acquired a majority of Oceania’s stock, Oceania could no longer sue Cogan for any malpractice that he might have committed before the acquisition. The majority softens its ruling by limiting it only to cases in which a legal malpractice claim is the only asset of the corporation whose stock was acquired. That seems to make it a narrow rule unlikely to have broad application, perhaps unlikely to ever come up again in the annals of Nevada jurisprudence. After all, how often would anyone wish to acquire stock in a company whose only asset is a legal malpractice claim against its own attorney? As a general rule legal malpractice claims are difficult to win so the investment value of such a claim isn’t likely to be high, and if serious malpractice actually occurred, that’s a sign that the corporation may have management problems unlikely to attract many investors.
But a rule of dismissal has problems of its own. I may not like everything that will follow if we let the claim proceed, but "[a] judge who likes every result he reaches is very likely a bad judge, reaching for results he prefers rather than those the law compels." AM. v. Holmes , 830 F.3d 1123, 1170 (10th Cir. 2016) (Gorsuch, J., dissenting). There are four basic flaws here. First, it’s premature. Second, the rule conflicts with foundational principles of corporate governance by making a corporation’s right to sue for legal malpractice depend upon who owns its stock and how much of it they own. Third, the rule doesn’t correctly interpret or apply the cases that it supposedly arises from, including Tower Homes. Fourth, as a practical matter, the rule might not be quite as narrow as my colleagues strive to make it.
I.
This appeal arises from the district court’s dismissal of Oceania’s malpractice lawsuit against attorney Cogan. Because this is an appeal from a motion to dismiss under NRCP 12(b)(5), we accept the facts alleged in the complaint as true and view all factual inferences in the light most favorable to the plaintiff. See Buzz Stew, LLC v. City of N. Las Vegas , 124 Nev. 224, 227-28, 181 P.3d 670, 672 (2008).
A corporation named Alutiiq sued Oceania in one federal lawsuit and sued both Oceania and Oceania’s 51% majority shareholder (Lyon) in another. Both Oceania and Lyon retained attorney Cogan to defend them in their respective suits. In both suits, Alutiiq obtained default judgments (allegedly due to Cogan’s malpractice). To enforce the judgment against Lyon, the court awarded the shares Lyon owned in Oceania (which were 51% of all shares) to Alutiiq. To enforce the judgment against Oceania, the federal court assigned all of its causes of action (which were by then only the malpractice claim) to Alutiiq, an assignment everyone now agrees was invalid under Tower Homes because legal malpractice claims cannot be assigned between parties. In any event, Alutiiq thus became the majority owner of Oceania’s shares and the owner of all of its potential claims except the potential malpractice claim against Cogan that stayed with Oceania. Oceania, now 51% owned by Alutiiq, then sued Cogan for malpractice. The district court dismissed the suit. We originally resolved the appeal in an order, but then granted rehearing and oral argument, leading to the instant order.
The question before us (as framed in Cogan’s petition for rehearing) is whether the fact that Alutiiq previously was Oceania’s litigation adversary, but now effectively controls Oceania, creates such a potential for conflicting duties that the malpractice suit against Cogan must be dismissed at the outset of litigation before discovery has even begun. From these facts, I concede a few points of agreement with my colleagues. The first is that this all looks very bad and puts a number of people in positions that appear highly compromising. Start with attorney Cogan. In the federal lawsuit, Cogan represented Oceania in its fight against Alutiiq, but now Alutiiq effectively controls Oceania. This puts Cogan in a place where his loyalty appears divided: he once was adversarial to Alutiiq, but now Alutiiq wants to drive a lawsuit asserting that Cogan’s duties ran to it all along.
Loyalty aside, there’s the question of privilege, confidentiality, and attorney work-product. During the federal litigation, Cogan presumably engaged in privileged and confidential communications with his client Oceania over how to best fight Alutiiq and presumably generated attorney work-product along those lines as well. But now that Alutiiq controls Oceania, it may now be privy to all of those communications and work-product. During oral argument, Oceania noted that privilege is frequently waived anyway during a malpractice suit; but it seems to me there’s at least an arguable difference between waiving the privilege (potentially under seal or under the protection of a discovery protective order) in order to help mount a defense in court and turning over those communications and work product directly to your former litigation adversary without restriction or condition.
Then there’s the question of loyalty to Cogan’s other client, Lyon. During the federal litigation, Cogan represented both Lyon and Oceania, and at the time their interests were mutually aligned against Alutiiq. But now that Lyon no longer owns most of Oceania’s shares, Lyon’s interests are no longer aligned with Oceania’s. Indeed, their interests may now be opposing, which may place Cogan in the difficult position of juggling conflicting duties to two different clients. Alongside any questions of loyalty between those two clients stand questions of confidentiality and privilege: is Alutiiq now privy to privileged and confidential communications and work-product that took place between Cogan and Lyon at a time when Lyon’s interests aligned with Oceania’s against Alutiiq?
Finally, there are questions about the incentives of the various parties to defend Cogan’s actions. Proving a legal malpractice claim requires a showing that the attorney’s conduct fell below the standard of care and that the client would have done better in the federal litigation but for the malpractice. E.g., Mainor v. Nault, 120 Nev. 750, 774, 101 P.3d 308, 324 (2004). When Oceania was mostly owned by Lyon, Alutiiq’s interests more or less aligned with Cogan in that both would have preferred to show that the result of the federal suit would not have differed (after all, Alutiiq would not want to undermine its victory). But now that Oceania is mostly owned by former litigation adversary Alutiiq, Alutiiq will benefit by trying to prove that Oceania would have prevailed in the prior federal litigation, which is the exact opposite of the position Alutiiq would have taken previously. Indeed, during oral argument, appellate counsel for Oceania openly stipulated that this was the current situation, and the majority makes it a major focus of its order dismissing this claim.
The real issue that Cogan is trying to get at isn’t just that there was a change in stock. It’s that there was a change in management. It just so happens in the case of a closely-held corporation like Oceania that the shareholders, officers, managers, directors, and employees are all one and the same. Thus, the potential problem here isn't that stock changed hands from one group of shareholders to their litigation adversary. It's that, even though the malpractice claim belongs to the corporation, the managers and directors who would control the litigation and reap its potential proceeds suddenly morphed into the litigation adversaries. But Cogan’s duties always run to the corporation regardless of who the corporation employs as managers and employees. See Upjohn v. United States, 449 U.S. 383 (1981) (overruling a previous principle that corporate attorney’s duties run to the corporation’s "control group"). As long as the corporation remains the same entity (and so long as there’s no allegation that the corporate veil should be pierced), the corporation remains Cogan’s client regardless of who controls it or owns its stock.
II.
The first problem with a dismissal is that it’s premature. Whether considered as a change in stock or a change in management, should this lawsuit proceed I agree that Cogan may be placed in difficult positions that could potentially conflict with various rules of professional responsibility. But unlike my colleagues, I don’t believe that’s enough to warrant outright dismissal of the claim at the pleading stage. The unstated but integral premise of an early dismissal is that those conflicts are not only hypothetical but real, and, beyond that, not only real but irreconcilable. But all we have is the complaint. Before an answer has been filed we don’t even know which facts alleged in the complaint are disputed, much less what facts any future evidence will ultimately prove to be true or false. Under NRCP 12(b)(5) we must assume certain facts to be true that might not be true at all, so we have no idea how real any potential conflicts actually might turn out to be. And even if some problems would eventually arise, after dismissal nobody will ever have an opportunity to try to find any better way around them. Dismissal is simply too drastic a remedy for a claim about which we actually know so little.
III.
The second problem with this approach is that it conflicts with settled law regarding corporate governance. A major engine fueling Nevada’s economy is the stability and clarity of our laws relating to corporate governance, laws second in effectiveness only to those of the state of Delaware. Businesses feel comfortable investing in Nevada because they know their assets will be treated by the courts in a predictable and consistent manner. One settled principled of corporate governance—indeed, the foundational idea behind all of corporate law—is that corporations exist independently of whoever happens to own its shares. See Curtis v. Kellogg & Andelson, 86 Cal. Rptr. 2d 536, 545 (Ct. App. 1999) (noting that, "for legal purposes, [a] [c]orporation has separate rights and a separate identity," and its causes of action are distinct from those of its owners). The only exception to this is in those very rare scenarios in which the corporation is the effective "alter ago" of its shareholders and its corporate veil is a fiction that ought to be pierced.
But the majority’s holding makes Oceania’s (a corporation) right to sue its attorney for legal malpractice depend entirely on who its shareholders are and when they acquired its shares, without any finding that the corporation was any kind of "alter ego." The outcome is this: If Alutiiq had never acquired or owned any of Oceania’s shares, then Oceania would be free to sue its lawyer for any malpractice it believes occurred. But because Alutiiq acquired a majority of Oceania’s shares after the alleged malpractice occurred, Oceania cannot sue its lawyer. Yet if Alutiiq owned less than a majority of the shares, then Oceania can apparently sue. And if Alutiiq owns a majority of Oceania’s shares, but acquired them well before the alleged malpractice occurred, maybe Oceania could sue. By inference, although Alutiiq owns a majority of Oceania’s shares right now, if Alutiiq sells those shares to someone else in the future, then maybe Oceania might again be able to sue its lawyer. This violates fundamental principles of corporate law by intertwining the corporation’s rights with those of its shareholders, in something very much akin to an "alter ego" or "piercing the corporate veil" analysis, without such a claim having been made.
Indeed, in his petition for rehearing, Cogan expressly avoids any alter ego claim yet nonetheless argues that once a majority of the corporate stock changed hands, the corporation itself thereby became a different entity, creating what he calls a "standing" problem. But while a majority of Oceania’s stock changed hands, that only means the owners of the corporation changed. The corporation itself did not. Merely because a corporation undergoes a change in shareholders has no effect on the ongoing legal status of the corporation itself. Indeed, corporate stock is traded all the time without creating any change to the corporate entity itself; that’s the reason the New York Stock Exchange and NASDAQ even exist as open markets for the free and public sale of corporate stock. The fact that shares of corporate stock changed hands has no bearing on who Cogan’s client was, and is.
Corporations might possess all kinds of claims against a variety of potential defendants, including competitors, vendors, or suppliers. There’s no principle of law under which those claims just die (at the pleading stage, no less) whenever a litigation adversary acquires some or even most of the company’s stock. Admittedly, claims for legal malpractice against the company’s attorney may feel a little different because they might implicate ethical issues that other types of claims might not. But I know of no rule of law under which a corporation’s right to sue anyone for anything, whatever the legal theory behind the claim, depends on who happens to own its stock at any given moment in time.
IV.
The third problem here is that existing precedent doesn’t support this outcome. The basic holding of Tower Homes is that a claim for legal malpractice cannot be assigned from one entity to another because such a claim derives from an attorney-client relationship whose fundamental attributes—the duties of loyalty and confidentiality—always stay with the original client. This is the law in a number of other states as well. Cf. Davis v. Scotty 320 S.W.2d 87 (Ky. 2010); Edens Tech. LLC v. Kile Goekjian Reed & McManus PLLC, 675 F. Supp. 2d 75, 79-82 (D. D.C. 2009) ; Gurski v. Rosenblum & Filan LLC , 885 A.2d 163 (Conn. 2005) ; Gen. Sec. Ins. Co. v. Jordan, Coyne & Savits, LLP, 357 F. Supp. 2d 951 (E.D.Va. 2005) ; Kommavongsa v. Haskell, 67 P.3d 1068 (Wash. 2003) ; Aleman Servs. Corp. v. Samuel H. Bullock, P.C. , 925 F. Supp. 252 (D. N.J. 1996) ; Picadilly Inc. v. Raikos, 582 N.E.2d 338, 343 (Ind. 1991) ; Okla. Stat. tit. 12, § 2017 (D) (1984).
Everyone agrees that, under this rule, the federal court’s attempt to transfer Oceania’s malpractice claim to Alutiiq was invalid, and the claim actually reverts back to and belongs to Oceania. But once Oceania took back the malpractice claim and asserted it in its own name, Tower Homes no longer applies to what happens next. Yet after recognizing that the claim reverted back to Oceania under Tower Homes, the majority then relies upon Tower Homes again to invalidate the claim—even though it’s Oceania that now asserts it. This is, as I’ve noted, fundamentally circular: it’s using Tower Homes to prevent Oceania from asserting a claim that was previously given back to it via Tower Homes.
The three cases the majority principally relies upon for its public policy analysis don’t support this result. See Paonia Resources, LLC v. Bingham Greenbaum Doll LLP , 2015 WL 7431041 at *1 (W.D. Ky. 2015) (unpublished); Kenco Enters. Nw., LLC, v. Wiese, 291 P.3d 261 (Wash. 2013) ; Trinity Mortg. Co., v. Dreyer, 2011 WL 61680 (N.D. Ok. 2011) (unpublished). The rule of those three cases is simple and straightforward: they extend the prohibition against assignments to situations where there was no express assignment of the claim, but where the facts demonstrated a "de facto" assignment from one party to another that constituted an assignment in everything but name. In Kenco , the majority shareholders (the Kangs) assigned their malpractice claim to the corporation (Kenco), and then the ownership of Kenco was transferred to the litigation adversary (Sleeping Tiger). The court specifically noted that "Kenco/Kang and Sleeping Tiger entered into an assignment agreement that provided the Kangs would assign their legal-malpractice claims to Kenco." Kenco , 291 P.3d at 262. So, the adversary obtained not only the corporation’s legal malpractice claim, but the malpractice claim of the previous shareholders as well. Similarly, in Trinity, the parties executed what the court called a "de facto" assignment cloaked as an assignment of shares coupled with exclusive contractual power over the course of the litigation. 2011 WL 61680 at *3. Likewise, in Paonia, the parties executed a contract in which the parties "agreed to a judgment ... transferred ownership and control ... and accepted a release of any [other] claims." 2015 WL 7431041 at *1.
In all three cases, the parties entered into a contract to transfer something. In all three, the court looked past the form of the transfer and concluded that the parties executed an effective assignment of the claim that they just endeavored to call something else. The difference here is there was no contractual agreement between Oceania and Alutiiq giving Oceania the claim; Oceania always had it (indeed, Oceania got it back precisely because the federal court’s assignment of it to Alutiiq failed under Tower Homes ). By dismissing the claim anyway, were not unraveling an assignment, whether formal or "de facto." Were doing something else.
The rule of Tower Homes , Paonia, Kenco, and Trinity is that SOMEONE may assert the malpractice claim, and the question is whether it ought to be the assignor or assignee. But here, if we dismiss the claim, NOBODY can assert it. This isn’t a rule invalidating an assignment. It’s a rule dismissing a malpractice claim with prejudice even if nobody ever attempted to assign it. Whatever this is, it isn’t the rule of Tower Homes, Paonia , Kenco , and Trinity , but an entirely new rule having nothing to do with assignments. And it’s potentially dangerous to future cases. Corporations might not be able to pursue genuine malpractice cases, and attorneys who committed real malpractice might get away scot-free, all just because the corporation’s stock happened to change hands at some point in time after the malpractice.
To sidestep this pitfall, Cogan seems to suggest that there is something that can be invalidated that resurrects the malpractice claim, namely, the transfer of shares to Alutiiq. He implies that if Alutiiq sells off its interests in Oceania, Oceania then becomes its old self and can then freely sue him if it wants. The problem with this argument is obvious: it runs afoul of the basic principle that a corporation is a separate entity from its shareholders and the corporation’s rights do not depend upon who holds its stock. Cogan effectively suggests that Oceania is only his client if someone other than Alutiiq (indeed, anyone in the world except Alutiiq) owns its shares (or perhaps if Alutiiq owns some shares but not a majority of them?), which self-evidently violates corporation law.
V.
There’s another problem with trying to force this appeal into the boundaries of Tower Homes , Paonia , Kenco, or Trinity. It’s the presence of minority shareholders.
In Kenco and Paonia, the litigation adversary acquired 100% of the stock of the adversary corporation. In Trinity, the adversary acquired 50% of the shares, but also acquired exclusive control over the litigation and the exclusive right to collect any recovery, making it the "sole decision maker" over the litigation. 2011 WL 61680 at *4. Thus, in all three cases, the adversary acquired complete control over the company and the complete right to collect all proceeds from the malpractice claim. Consequently, there were no minority shareholders whose interests could be adversely affected. The only interests that mattered belonged to the parties before the court.
But here, Alutiiq acquired only a 51% interest in Oceania’s shares. It possesses a 51% right to control the company, which might be enough to control decision-making, but we don’t know from the existing record how any proceeds from a malpractice claim (if successful) might be distributed among the majority and minority shareholders. Unlike Paonia, Kenco, and Trinity, we do know that there exists at least one minority shareholder who might hold some stake in those proceeds. For purposes of a motion to dismiss, we can’t conclude with certainty that Alutiiq’s 51% interest is all that matters. If we dismiss the malpractice claim, we’re dismissing something that might have brought value to minority shareholders who are not parties to this litigation, without an opportunity for them to weigh in on how this lawsuit might affect their shares. Indeed, everyone agrees that the malpractice claim is Oceania’s only remaining corporate asset. Dismissing it likely means the value of the minority shares will go to zero even though they have no say in any of this.
VI.
Even though the cases themselves don’t apply directly, does the public policy behind them nonetheless support this outcome? Several discrete "public policy" concerns underlie why legal malpractice claims cannot be contractually assigned. "The worry is that allowing assignments would incentive collusion and convert legal malpractice into a commodity." Paonia, 2015 WL 7431041 at *3 (internal quotations marks omitted). "[T]he commercialization of malpractice claims ... in turn would span an increase in unwarranted malpractice actions." Picadilly v. Raikos, 582 N.E.2d 338, 342 (Ind. 1991). Additionally, such assignments "undermine the sanctity of the attorney-client relationship; result in decreasing the availability of legal services to insolvent clients; [and] impact negatively on the duty of confidentiality ...." Id. They also create a "disreputable public role reversal" that would reflect negatively on the legal profession and potentially "result in decreasing the availability of legal services to insolvent clients." Trinity , 2011 WL 61680 at *4.
Thus, courts cite these four concerns: the risk of collusion between the contracting parties; the commoditization or commercialization of malpractice claims which in turn might increase the number of frivolous claims; undermining confidential and privileged communications; and the potential adverse impact on the reputation of the legal profession. Kenco recognizes that that there need be no actual collusion for a de facto assignment to be found, so long as the possibility exists. Kenco, 291 P.3d at 263 ("The reasoning applies whether or not the collusion is real.").
The problem is that, of the four, two clearly do not apply here. There can be no risk of collusion between Oceania and Alutiiq when they never contractually transferred any claim between each other; all Alutiiq did was acquire stock, and that is not the same thing as acquiring a claim. And it acquired the stock by court order, not by contract. Additionally, without any such contractual transfer of a claim, there is no risk of commoditizing the claim by turning the claim itself into a saleable product (and again, the commercial sale of stock is not the same thing as the commercial sale of a claim).
Thus, of the four cited "public policy" concerns, the only two that can arise are the concerns over the potential exposure of privileged and confidential communications and how such claims might reflect poorly on the reputation of the legal profession. I agree that those are certainly valid concerns, at least in theory, and perhaps one can plausibly argue that they ought to be enough on their own to justify invalidating the claim here. On the other hand, those concerns aren’t unique to this case. Legal malpractice cases are always ugly whether there was ever an attempted assignment or not. They arise when a relationship of trust and confidence has devolved into conflict and antagonism. They always bring disrepute to the legal profession, because they always result in the public airing of things that are supposed to remain private and confidential between an attorney and his client. The profession looks bad whenever an attorney is sued for malpractice, especially whenever one is found to have committed malpractice. But that’s true of every malpractice case whether or not they spring from facts that have anything to do with this appeal. So to me, these two public policy concerns seem the least important of the four that courts usually consider because they are the least unique to this kind of appeal.
All things considered, my concern is this: when the rule itself expressly doesn’t apply because there was no contractual assignment or sale of any claim, and further two of the four public policy concerns underlying the rule also do not apply, are we really allowed to force a square peg into a round hole and make it apply anyway? If we do, then were not really following the same rule of law that those courts applied. Instead, were making a new and different rule of our own. Maybe it’s a good rule, and maybe it’s not. But good or bad, it’s not the same rule of Tower Homes , Paonia, Kenco, or Trinity.
VII.
The fourth problem with trying to create a rule even as purportedly narrow as this one is that it’s never as narrow as you might think. Robert Jackson once warned of the dangerous "tendency of a principle to expand itself to the limit of its logic" and be extended in the future to factual scenarios it was never designed for, with the court ending up "now saying that ... we did decide the very things we [in the prior case] said we were not deciding." Korematsu v. United States, 323 U.S. 214, 246-47 (1944) (Jackson, J., dissenting). Ultimately, "the fairness of a process must be adjudged on the basis of what it permits to happen, not what it produced in a particular case." Morrison v. Olson , 487 U.S. 654, 731 (1988) (Scalia, J., dissenting).
Cogan suggests that the holding can be limited only to situations where the legal malpractice claim is the corporation’s only remaining asset after the adversary acquires the stock. At first blush this seems pretty narrow. But think it through, and suppose the adversary acquires stock in a corporation whose only assets are a legal malpractice claim along with a bank account containing a mere $10. Would the rule apply to bar the claim? Allowing the claim to proceed in that instance seems to implicate the exact same public policy concerns as if the $10 did not exist. But the presence of the $10 seems to mean that the rule would not apply, and the outcome becomes entirely different: if the corporation has a malpractice claim plus $10 then it can sue, but if it has a malpractice claim and no cash, then it can’t. Why would $10 matter that much?
Logically, it shouldn’t. At the very least, I can think of no principle of law or public policy that ought to make so much depend on so little. So let’s take the next step and assume that it doesn’t make a difference. That leads us here: the next court handling this issue is allowed to conclude that the $10 represents a de minimis amount that it can ignore and still apply our rule to dismiss the malpractice claim. Seems reasonable. But then suppose in the next case that the next corporation’s assets are a malpractice claim, plus $100. Probably still de minimis. What if the next corporation’s assets are a malpractice claim, plus $1,000? Still de minimis? Take the next case with a malpractice claim, plus $2,000. Or the next case with a malpractice claim plus some old merchandise inventory worth $5,000. And so on, and so on. With each increment, the idea that the court’s holding applies exclusively when the malpractice claim is the "only" corporate asset becomes less and less clear. At some point the limitation shrinks away to just become a universal rule that malpractice claims disappear whenever a litigation opponent buys stock in an adversary, no matter what other assets exist. It applies when Alutiiq acquires stock in a minor adversary, and it applies when General Electric or Disney acquire stock in a Fortune 500 adversary.
Think about the holding from another perspective. Cogan argues that a corporation’s legal "adversary" in a prior lawsuit cannot pursue the corporation’s legal malpractice claim after acquiring a majority of shares. Is that limited only to a direct adversary (plaintiff against defendant), or does it also encompass third-party plaintiffs, third-party defendants, or other interveners to the original lawsuit? What about an assignor/assignee to the original claim, or a subrogor/subrogee or indemnitor/indemnitee to the original adversary? What about third-party beneficiaries or third-party obligors? In each of these instances, similar "public policy" concerns might or might not apply. The balance of those interests might resemble the instant appeal in many ways, but it also might be very different in many ways. So does the same rule apply to those entities and situations, or not?
It all comes down to this: The problem with relying on two of four cherry-picked "public policy" concerns rather than a clearly articulated rule of law is that the holding doesn’t contain clear parameters one way or the other. Which means the answer as to all of these hypothetical scenarios is: your guess is as good as mine. And that lack of clarity captures my underlying concern with relying on vague "public policy" concerns to resolve a complex appeal like this one.
VIII.
Ultimately, there is no clear rule of law that requires the claim here to be dismissed while remaining consistent with fundamental principles of corporate law. It seems to me that this simple observation is enough to resolve this appeal.
In science, the absence of evidence is not always evidence of absence. Just because proof doesn’t yet exist that something is true does not necessarily mean that it must be false. Carl Sagan, The Demon-Haunted World: Science as a Candle in the Dark 213 (Ballantine, 1st. ed. 1997). For thousands of years nobody could come up with proof that the earth was round, but that obviously did not mean that it was always flat until the evidence finally emerged.
But sometimes the absence of evidence can establish the absence of an underlying fact. If scientists have run enough tests, all valid and well-designed to cover every possible iteration of every potential outcome under the scientific method, that all consistently show no evidence that the Loch Ness Monster exists, then perhaps there should come some point at which we can accept as true that it does not, in fact, exist.
Here, if there is no principle of law squarely on point that dictates that this legal malpractice claim must be dismissed, then perhaps the absence of a legal principle means there’s nothing wrong with this claim. So maybe the answer to this appeal is just this: if there is no clear and neutral principle of law that says this claim must be dismissed, then it should not have been dismissed. The lack of a legal principle is itself the legal principle that we should apply.
From this, the conclusion must be Oceania remains Cogan’s client, and it can still sue him no matter who owns its stock. Cogan might have to navigate a thicket of potential ethical issues during such a suit, but that has nothing to do with whether the claim itself is viable. I don’t envy the position Cogan now finds himself in, and cannot offer any advice to him on how to conduct himself in this malpractice suit. I also don’t envy the district court that will be tasked with resolving these questions. But just because a lawsuit may be difficult to handle and may force difficult choices does not mean that it must be dismissed at the pleading stage under NRCP 12(b)(5) before any of the potential ethical issues theoretically on the horizon manifest themselves as concrete and real problems actually at hand. Moreover, although no attorney wants to be sued for malpractice at all, there’s no guarantee that Cogan will lose this suit if it goes to trial. As the majority notes, Oceania/Alutiiq may shift its position on whether it would have prevailed in the federal litigation. But that says nothing about whether Cogan’s conduct fell below the applicable standard of care. Even better for Cogan, a jury may well recognize everything behind the shift in Oceania’s/Alutiiq’s ownership and management and weigh it all accordingly in determining whether Cogan breached any duty that Alutiiq claims he owed.
As much sympathy as I have for Cogan, my concern is less with him than it is for the next case. The problem with relying upon a balance of free-floating policy concerns (even when applied to facts that raise my eyebrows, as the facts of this appeal do) is that doing so creates ambiguous guidance for other cases whose facts might be similar, but slightly different. The law cares about achieving a just and fair outcome for any individual litigant. But it cares equally, and perhaps even more, about ensuring predictability, consistency, stability, and clarity across the full spectrum of cases that could conceivably ever come before a court. "Law, ... unlike science, is concerned not only with getting the result right but also with stability, to which it will frequently sacrifice substantive justice." Richard A. Posner, The Problems of Jurisprudence 51 (1990). Appellate courts must therefore consider not only the case at hand, but also how any rule they apply in this case will fit other cases that might come up in the future, possibly involving considerably more complex or less palatable facts. Under the doctrine of stare decisis , appellate courts should not make rulings whose reasoning applies only to a single case and gives no guidance to any other. The purpose of the rule is to " ‘promote[ ] the evenhanded, predictable, and consistent development of legal principles, foster[ ] reliance on judicial decisions, and contribute[ ] to the actual and perceived integrity of the judicial process." Citizens United v . Fed. Election Comm’n, 558 U.S. 310, 377 (2010) (Roberts, C.J., concurring) (quoting Payne v. Tennessee , 501 U.S. 808, 827 (1991) ). Following rules of law that apply generally to all similar cases is "the means by which we ensure that the law will not merely change erratically, but will develop in a principled and intelligible fashion." Vasquez v. Hillery, 474 U.S. 254, 265 (1986).
Because in the end there is no clear and neutrally applicable rule of law that prohibits this malpractice claim from being litigated, I would conclude that the district court should not have dismissed it, and would reverse.