Kurt Schmalz and Victoria Tsylina Win Summary Judgment for Attorney Client in $5 Million Legal Malpractice Lawsuit

February 5, 2021

Kurt Schmalz and Victoria Tsylina recently won summary judgment for a Los Angeles attorney who had been sued by a former client for legal malpractice in connection with Bankruptcy Court litigation over insurance coverage of asbestos claims.  The lawsuit was filed in November 2018 by Plaintiff Continental Casualty Company, an insurance company, against its former attorney Raymond Tittmann and the firm of Wargo French LLP, where Tittman had been a partner.

In the underlying action, lawyer Tittmann was engaged by Resolute Management, Inc. (“Resolute”) on behalf of National Indemnity Company, Inc. (“NICO”) to defend an insurance company –  Continental Casualty Company (“Continental”) – in connection with a bankruptcy adversary proceeding entitled Barry A. Chatz, as Trustee for the CFB/WFB Liquidating Trust v. Continental Casualty Company, Adversary case no. 15-04136 in the United States Bankruptcy Court for the Northern District of California (the “Adversary Action”).  Barry A. Chatz, as Trustee for the CFB/WFB Liquidating Trust (the “Trust”), alleged that the insurer Continental failed to adhere to the claims-handling process Continental and the Trust negotiated in the bankruptcy proceeding of one of Continental’s insured, the now defunct manufacturer, Chicago Fire Brick, which filed bankruptcy in 2000 in part because of mounting asbestos claims.  The Adversary Action sought a declaration that Continental must pay on the claims, up to its remaining policy limits of $2.5 million and that Continental engaged in “bad faith” claims handling, obliging Continental to pay the Trust’s attorneys’ fees and costs, and related penalties.

Although Continental was the named defendant in the Adversary Action, as the issuer of the relevant insurance policies, the action was handled by Resolute on behalf of NICO because in 2010, Continental transferred all of its legacy asbestos and environmental liabilities, including those asbestos liabilities pursuant to the policies involved in the subject bankruptcy and the Adversary Action, to Berkshire Hathaway’s NICO, with NICO acquiring all of Continental’s liabilities in exchange for Continental’s payment of $2 billion to NICO, and NICO assuming up to $4 billion of Continental’s asbestos and environmental liabilities.  After this transfer, Continental was completely taken out of the picture with regard to the asbestos and environmental liabilities, with NICO assuming all claims handling and claims payments up to the $4 billion limit.  NICO hired its affiliate company, Resolute, as NICO’s subcontractor for claims handling.

In defending the Adversary Action, Tittmann asserted coverage defenses in Continental’s answer, and filed a motion for partial summary judgment on the grounds that Continental did not have to pay 100% of each of the submitted claims because other insurers had to be allocated some percentage of each claim.  After the motion for partial summary judgment was denied (with the finding that the Trust’s allocation of 100% liability to Continental was correct), Continental did not settle the case, but attempted to pursue other coverage defenses, hiring additional defense counsel to press those defenses.  The Trustee opposed Continental’s attempts to raise those defenses and filed a motion, in lieu of setting the case for trial, to recover on the Continental policies and for substantial attorneys’ fees, costs and penalties, based on Illinois law.

On November 16, 2017, the bankruptcy court granted the Trustee’s Motion for Attorneys’ Fees and Costs, held that Continental was estopped from asserting its other coverage defenses, and awarded the Trustee the remaining balance of $2.5 million on the policies issued by Continental, over $200,000 in prejudgment interest, a statutory penalty of $60,000, and the Trustee’s attorneys’ fees and costs of approximately $800,000, totaling nearly $4 million (the “adverse judgment”).  Continental appealed the adverse judgment to the U. S. District Court, but the judgment was affirmed.  In October 2018, Continental settled the judgment with a payment to the Trustee of $4,006,980.08.  The settlement of the adverse judgment, all of Continental’s attorneys’ fees and expenses, and all other associated costs in the Adversary Action were paid by Resolute, out of NICO’s bank account.  Continental did not pay anything toward the settlement of the adverse judgment or any other fees and costs, nor did it have to reimburse NICO and/or Resolute for any part of the payments they made.

On November 14, 2018, Continental filed its legal malpractice action against Tittmann and the law firm Wargo French, where Tittmann practiced during some of the time the Adversary Action was pending.  In the lawsuit, Continental contended that Defendants failed to raise certain coverage defenses and told the bankruptcy court that Continental’s only defense to the Adversary Action was on the allocation issue.  Continental alleged that Tittmann told the court that a trial was not necessary on the remaining coverage defenses and that the court could enter judgment against Continental following the court’s adverse ruling on the allocation issue in the partial summary judgment motion.  Continental further alleged that its coverage defenses to the asbestos claims were meritorious and Continental would have had a better result in the case had it been allowed to pursue those defenses in further proceedings.  Continental claimed damages in the legal malpractice action of over $5 million, including the costs of settling the adverse judgment, and attorneys’ fees and related costs Continental allegedly spent to remedy Defendants’ conduct.

Defendants denied Continental’s contentions in the lawsuit, including the allegations that Tittmann had committed any malpractice in the Adversary Action or that Continental’s coverage defenses were meritorious.  After several months of discovery, including depositions of Continental’s persons most knowledgeable and other key witnesses, and production of documents, Tittmann filed a Motion for Summary Judgment on Continental’s Complaint.  Tittmann based his summary judgment motion on the evidence of the 2010 transaction in which Continental transferred $4 billion of its legacy pollution and asbestos liabilities to NICO in exchange for a $2 billion payment to NICO.  Based on the 2010 transaction, Tittmann argued in the Motion that Continental, as plaintiff, did not suffer any damages as a result of the alleged legal malpractice because the undisputed evidence showed that the adverse judgment and all other expenses and associated costs in the Adversary Action were paid by NICO and not by Continental.  Defendant Wargo French, represented by Nemecek & Cole, joined in Tittmann’s Motion.

In opposition to Tittmann’s Motion, Continental argued that the payments by NICO/Resolute of the adverse judgment and the related and associated costs in the Adversary Action were part of its reinsurance coverage with NICO and that the collateral source rule applied such that NICO’s payments were irrelevant.  Continental also argued it suffered actual damages because the sums paid by NICO diminished Continental’s benefits under the $4 billion coverage in liabilities it received in exchange for a $2 billion payment as a result of the 2010 transfer of Continental’s asbestos and environmental liabilities to NICO. Thus, Continental argued that NICO’s payments diminished the $4 billion limit, creating the potential for that limit to be exceeded in the future.  However, Continental did not produce evidence that NICO’s payments actually exhausted the $4 billion limit.

Judge John P. Doyle, of the Los Angeles Superior Court, granted Tittmann’s Motion, holding that Continental did not suffer any actual damages in the underlying Adversary Action as a result of Defendants’ alleged legal malpractice.  Among other things, the Court stated that the collateral source rule did not apply and that the diminution in Continental’s $4 billion coverage was a hypothetical injury and did not constitute actual damages. After parties’ arguments at the hearing on Tittmann’s Motion, the Court granted summary judgment in favor of Defendants and ordered counsel for Tittmann to submit a judgment of dismissal.

Shortly after the Court granted Tittmann’s Motion, the parties reached a confidential settlement.  Continental Casualty Co. v. Tittmann, et al, LASC Case No. 18STCV04963.

This case is included in the Daily Journal’s Verdicts and Settlements Section, published on February 5, 2021.

Full text of the Daily Journal Article may be found here: Daily Journal Article (Official) (00621065)

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