The recent Court of Appeal decision in Roche v. Hyde, Nos. A150459, A1500462 (filed 6/30/20), though unpublished, presents a cautionary tale for lawyers and clients. The case arises out of sale of a winery in Sonoma County by Roche (“Seller”) to Ram’s Gate, LLC (“Buyer”). The focus of the fraud and misrepresentation claims by the Buyer was Seller’s failure to disclose a seismic report that showed an active fault line under a building pad. Seller maintained the report had been delivered to the attorney for a predecessor entity of Buyer (these entities had common ownership and the same attorney, Hyde), in a previous attempt to buy the winery.

After discovering the seismic issues impacting Buyer’s construction plans, Buyer sued for breach of contract, fraud and negligence, alleging the non-disclosure of the seismic fault. After protracted discovery to obtain Buyer’s files and those of its attorney Hyde to prove prior knowledge of the seismic facts, resulting in multiple court orders to produce requested documents, Buyer dismissed its case without prejudice to avoid court ordered discovery sanctions and also agreed to pay Seller’s attorney’s fees and costs.  End of story? 

No. Seller brought an action for malicious prosecution against Buyer and Hyde. Seller asserted that Buyer’s fraud claim was brought without probable cause because Buyer had actual or constructive knowledge of the seismic fault because, unbeknownst to Buyer, its lawyer Hyde, had the seismic report from the prior, failed transaction with Buyer’s predecessor.

Buyer responded with an anti-SLAPP motion against the malicious prosecution action, claiming the voluntary dismissal of its earlier case meant there could be no support that the fraud claim lacked merit, an essential element to proving malice. The anti-SLAPP motion was denied, which order Buyer appealed.

Two issues were raised in Buyer’s appeal. First, whether Buyer’s dismissal of its fraud claims with prejudice to avoid discovery sanctions and with payment of seller’s attorney’s fees and costs, could negate Seller’s favorable termination of the prior litigation argument because it was a “negotiated” settlement. The appellate court said no because the modest reduction in attorney’s fees could not support a negotiated settlement, especially where the client did not sign a settlement agreement releasing any claims. Rather, the lawsuit was dismissed without prejudice to avoid certain discovery sanctions against Buyer. Second, and a more universal issue (even though in an unpublished opinion), was whether Buyer could be charged with constructive knowledge of what was known to its attorney Hyde, even though never conveyed to the client. Recall that Hyde had the seismic report, having obtained it during escrow while representing Buyer’s predecessor LLC in the sale that was never consummated. If Buyer was constructively aware of the seismic report in attorney Hyde’s possession, then Buyer’s allegation of Seller’s failure to disclose was utterly without merit, and Buyer’s lawsuit was brought without probable cause, an showing essential to proving malice.

Reaching all the way back to 1894, the Court of Appeal relied on Wittenbrock v. Parker, 102 Cal. 93, holding that where specific to the facts of a current representation, factual knowledge in the possession of an attorney [or others in the same law firm], even though obtained in unrelated representations or transactions, can be imputed to the clueless client. Hyde could not represent Buyer and make allegations of fraud that—based on information already in Hyde’s possession—were unfounded. It is an axiomatic rule of agency, that the attorney is the agent of the client and the information known to the attorney can be imputed to the client.

Here, the attorney had actual or constructive knowledge of facts contrary to the very  allegations his client was making, facts directly calling into question the merit of the lawsuit the client brought. Hyde’s apparent failure to recognize the doctrine of imputed knowledge led his client into years of protracted and senseless but expensive litigation. Moreover, there were other facts known to the attorney and client that should have put one or both under a duty of inquiry and constructive knowledge of the facts that were knowable, before engaging in litigation based upon inaccurate facts and representations. Thus, Seller’s malicious prosecution action lives on. One also has the feeling that another action is just beginning.

As a litigator, Neil has been lead counsel in a substantial number of court and jury trials, appeals and arbitrations in state and federal courts in the areas of legal malpractice defense, technology, securities, fiduciary fraud, corporate and business disputes, real estate and natural resources involving environmental, water and oil and gas.