L.A.'s Rutter, Hobbs & Davidoff Hit with $10 Million Malpractice Verdict

By Amanda Bronstad

The National Law Journal (June 20, 2011)

A jury has issued a $10 million malpractice verdict against Rutter, Hobbs & Davidoff Inc. and two of its senior attorneys over a 1997 business contract.

The June 15 verdict, which followed a month-long trial in Los Angeles County, Calif., Superior Court, was returned against the Los Angeles firm; name partner Frank Hobbs, who has since retired; and shareholder Geoffrey Gold, former head of the firm’s litigation department.

An additional arbitration proceeding over related claims, including potential punitive damages associated with a failed lawsuit the firm filed to enforce the 1997 contract, will take place in the near future against Hobbs; Gold; Brian Davidoff, managing director of the firm; transactional attorney Fred Fenster; Olivia Goodkin, chairwoman of the labor & employment practice; and Rosslyn Hummer, a former attorney at the firm.

Don Howarth, co-founder of Howarth & Smith in Los Angeles, who represented the plaintiff in the malpractice case, said he expects to ask for punitive damages of up to three times the $10 million verdict during the arbitration hearing.

“We will be seeking punitive damages of two to three times the actual damages of $10 million because they went forward...with an action that had no basis without telling their client,” Howarth said. “That’s a common problem today, where lawyers think they’re in business for themselves instead of being in business for their client.”

Davidoff said the firm planned to file post-trial motions to review the jury’s decision and, if that fails, would appeal the verdict.

“We strongly disagree with the jury’s conclusion. We believe the verdict was in error and failed to follow clear California law as annunciated by the California Supreme Court,’’ Davidoff said. “Our view is clearly that the verdict will either be corrected by the trial court or the court of appeal.”

The suit was filed Jan. 19, 2010, by J.P. Hyan, a former sheriffs deputy in Los Angeles County, Calif., who became a stockbroker during the late 1980s. In 1990, he created a business plan for the Los Angeles County Employees’ Retirement Association to invest pension money in local residential building projects. He pitched the idea to Lowe Enterprises Inc., a national real estate company, where he began working as an investment adviser for a subsidiary in 1993. The Lowe subsidiary agreed to pay Hyan 10% of the gross fees received from the pension investment project, which was launched in 1995 and generated tens of millions of dollars over 12 years.

“He designed a program for LACERA, which has to invest pension fund money, and he brought in a manager called Lowe to manage pension fund money in this new program he started,” Howarth said. “Lowe earned a fee for managing this pension fund money and investing it. Mr. Hyan was entitled to 10% of that fee.”

But their partnership fell apart. In 1997, Hyan hired Rutter Hobbs & Davidoff to negotiate a separation agreement from Lowe. The primary attorney was Hobbs, but Gold also worked with Hyan on the deal. According to Howarth, the separation agreement should have allowed Hyan to continue to receive 10% from gross fees in the pension investment program indefinitely.

“The problem was they left a hole in it that a truck could drive through,” he said of the 1997 contract.

Hyan continued to receive the 10% for the next 10 years, with his annual income reaching $2.5 million by 2006. But by 2006, Lowe had sold the subsidiary that managed the program to a third party, TriPacific Capital Advisors LLC. Hyan’s payments stopped after December 2006. When he contacted Rutter Hobbs & Davidoff, the firm’s lawyers – specifically, Hobbs, Fenster, Gold, Goodkin, Davidoff and Hummer – pursued a lawsuit on his behalf against TriPacific for declaratory relief, asserting that a clause in the contract made it binding on “successors and assigns” to the Lowe subsidiary, according to court documents.

That lawsuit went to arbitration, and an arbitrator ruled against Hyan in 2008, awarding TriPacific $419,510 in attorneys’ fees, expenses and costs. Hyan, who claims he faced foreclosure of his home in Park City, Utah, and was hospitalized for a cardiac incident related to stress, sued the firm for more than $30.5 million, including $24.6 million in lost income.

The jury’s verdict pertained only to his malpractice claims against the firm, Hobbs and Gold. Hyan’s claims against the lawyers at Rutter, Hobbs & Davidoff who handled his unsuccessful lawsuit against TriPacific seeking to enforce the contract will be the subject of the pending arbitration proceeding, which has not yet been scheduled.

“That’s what the second portion is about – the decision to go forward when they knew or should have known they didn’t do this right,” Howarth said.

Rutter Hobbs & Davidoff argued that Hyan failed to prove he would have obtained a better deal but for the firm’s alleged legal malpractice –the standard set by the California Supreme Court’s 2003 decision in Viner v. Sweet.

“To prove causation, a plaintiff must present evidence that without defendant’s negligence, it would have obtained a more advantageous agreement – a better deal,” Davidoff said. “We don’t think the evidence was that he had a better deal.”

In fact, he said, the evidence at trial showed that the firm’s lawyers attempted to insert a clause that would have maintained Hyan’s 10% deal indefinitely, but Lowe balked at the idea.

Davidoff also disputed Hyan’s claims for punitive damages.

“His theory in that case is that knowing that allegedly the clause was wrong, we instituted an action to attempt to cover it up,” he said. “We think that’s just plainly absurd. That is just not the case.”