USA Gymnastics has been in the news recently for inauspicious reasons, and USA Swimming is featured in a recent fraud and intentional breach of fiduciary duty case against a lawyer. Unfortunately, the Court of Appeal engaged in some linguistic gymnastics as to causation when issuing its recent opinion in Knutson v. Foster, 2018 DJDAR 7891 (Aug. 8, 2018). Knutson involved claims by a former client against her attorney for fraudulent concealment and intentional breach of fiduciary duty.
"But-for" causation and the "case-within-the-case" analysis are concepts used in virtually every lawsuit by a former client against his or her attorney. It is axiomatic that a plaintiff, to establish a claim against his or her former attorney, must show that but for the conduct of the attorney, plaintiff would have achieved a better result. The same holds true if the "substantial factor" test is used, as but-for causation is subsumed under the substantial factor test. Yanez v. Plummer, 221 Cal. App. 4th 180 (2013).
However, the Court of Appeal in Knutson not only held that the but-for standard should not be used when an attorney is sued by his or her former client for fraud and/or intentional breach of fiduciary duty, but premised its reversal of the trial court on a supposed distinction between the substantial factor test. In addition, the Knutson court appears to have abandoned the well-established case-within-the-case analysis.
In Knutson, the plaintiff, Dagny Knutson, brought suit against her former attorney Richard Foster for fraudulent concealment and intentional breach of fiduciary duty in connection with Foster's negotiations with USA Swimming on her behalf.
Knutson alleged that she turned down an athletic scholarship offered by Auburn University based on an oral agreement with USA Swimming's head coach, under which she would receive tuition, room, board and a stipend from USA Swimming if she turned professional instead of attending Auburn. Shortly after entering into the oral agreement, the head coach for USA Swimming was fired and USA Swimming allegedly refused to honor the oral agreement.
Knutson retained Foster to represent her in dealing with USA Swimming's alleged breach of the oral agreement. Foster allegedly failed to disclose numerous material facts to Knutson, including the fact that Foster had close ties with USA Swimming and that Foster would not file a lawsuit against USA Swimming. Foster also allegedly did not disclose that he had previously represented the head coach, but had refused to represent him in a wrongful termination suit after he was terminated by USA Swimming.
Foster negotiated a settlement with USA Swimming on behalf of Knutson. The terms of the settlement, unlike the alleged terms of the oral agreement, included performance markers (payments being contingent upon Knutson being in the top 25 in the world or top three in the United States, which actually may not have been onerous given her past performances). Ultimately, Knutson was unable to meet the performance markers and USA Swimming stopped making payments to her.
Knutson sued Foster for fraudulent concealment and intentional breach of fiduciary duty. (Foster never even met Knutson until her deposition was taken in the case against him, and did not have a telephone conference with her to discuss the settlement agreement.) After a trial, the jury found in favor of Knutson on both of her claims. However, the trial court granted Foster's motion for a new trial on the grounds that Knutson had failed to establish that Foster's conduct caused her damages.
In reversing, the Knutson court held that the trial court erroneously applied the but-for test for causation rather than the supposedly applicable substantial factor test. The court specifically cited the following in the trial court ruling: "As to [Knutson's] fraud theory, substantial factor causation is still an element of proof and it only seems reasonable to this Court that [she] needs to prove that if the misrepresentations had not been made, or that full disclosure of these relationships had been made and [she] had employed another attorney to deal with USA Swimming, she would have had a different result." The Court of Appeal disagreed with this statement.
Knutson is a significant case because it not only contains a confusing analysis of the distinction between but-for causation and substantial factor causation, but it could also be read to dispose of the case-within-the-case analysis for claims against an attorney for fraud and/or intentional breach of fiduciary duty. The court's analysis veers out of its lane in two ways.
First, the court incorrectly reversed the trial court's decision based on the use of the but-for standard of causation. This analysis fails to recognize that the substantial factor test of causation subsumes the but-for test. See Viner v. Sweet, 30 Cal. 4th, 1232, 1239-41(2003); Yanez, 221 Cal. App. 4th at 187. In other words, if a plaintiff satisfies the substantial factor standard of causation, plaintiff also necessarily satisfies the but-for standard of causation. As the court in Yanez held in applying the but-for analysis in a claim for legal malpractice, breach of fiduciary duty and fraud against an in-house counsel, "conduct is not a substantial factor if the same harm would have occurred without that conduct." Id. at 190.
To be sure, the facts of the Knutson case may have warranted a reversal of the trial court's decision based on the specific facts of the case. However, it should not have been reversed based on the trial court drawing an erroneous distinction of the "applicable" causation standard.
In addition, Knutson could be read to hold that the case-within-a-case methodology is never applicable to claims for fraud and intentional breach of fiduciary duty. The Knutson court's problem with the trial court's application of the but-for causation test apparently is that the trial court required Knutson to establish that if she "had employed another attorney to deal with USA Swimming, that she would have received a better result." Although this analysis may not be necessary to establish emotional distress damages in this particular case -- the court's analysis of the lack of need for Knutson to adduce evidence of her emotional distress other than the her own testimony, may warrant an entirely separate article -- other cases may require a different result.
For instance, what if attorney Foster, notwithstanding his allegedly undisclosed conflicts, had performed flawlessly and obtained the exact deal Knutson wanted in the first place? Similarly, what if she already had an eating disorder and depression by the time she came to Foster? Would Knutson still have a meritorious claim for emotional distress against Foster? The answer should be no. See, e.g., Blecher & Collins P.C. v. Northwest Airlines, Inc., 858 F.Supp. 1442 (C.D. Cal. 1994); Lazy Acres Market, Inc. v. Tseng, 152 Cal. App. 4th 1431, 1436 (2007) ("it is pure speculation to say the outcome would have been any different, had Tseng declared a conflict at the beginning of the case ... The complaint alleges no facts that show any different result would have been obtained, no matter what Tseng did or failed to do.")
The categorical distinction between fraud/concealment/breach of fiduciary duty and negligence appears to be inaccurate. The real question is what damages does the plaintiff seek. Some fraud and concealment claims will require an examination of a hypothetical scenario that the plaintiff claims would have occurred. Per Viner: "Determining causation always requires evaluation of hypothetical situations concerning what might have happened, but did not. [T]he crucial causation inquiry is what would have happened if the defendant attorney had not been negligent. This is so because the very idea of causation necessarily involves comparing historical events to a hypothetical alternative." 30 Cal. 4th at p. 1242. In Viner, the Supreme Court applied this principle to conclude that even in a transactional malpractice case, the plaintiff must show that but for the alleged malpractice, he or she would have obtained a better result. Id.
What would the test be if the plaintiff alleged the attorney fraudulently concealed something that would have altered the result of the trial, or concealed facts that would have caused the plaintiff to enter into a different transactional deal? The analysis should not depend on whether the plaintiff sues for negligence or fraud or breach of fiduciary duty. Some fraud cases require "comparing historical events to a hypothetical alternative."
For these reasons, the court's categorical rule that "causation for legal malpractice is analyzed differently than causation for the intentional torts of fraudulent concealment and intentional breach of fiduciary duty" may be incorrect.
This decision may be a classic example of "bad facts make bad law." The court, clearly offended by the alleged conduct of Foster, pointed out 15 separate instances of concealment by Foster. It seems that the court may have taken its analysis, although possibly yielding the correct result in this matter, too far.
Review by the California Supreme Court is warranted to address the confusion Knutson creates. Alternatively, and at the minimum, although there is a paucity of case law involving a fraud claim brought by a prior client against former counsel, it would probably be best if the Knutson decision, which is based on a specific, rare set of facts, is depublished. Indeed, the fraud cases relied on by the court were not filed against attorneys.
In sum, rather than clarify the applicable causation standard when a lawyer is sued for fraud or intentional breach of fiduciary duty, Knutson has added confusion to the proper causation inquiry, including the use of the case-within-the-case analysis.