In-House Counsel's Negligence is not Imputed to Company

Companies and their in-house attorneys were given an amazing gift by the California Court of Appeal this week.

The case in question arose from an innocent little wage claim. Maria Gutierrez was a cashier at a gas station owned by G&M Oil Company. She sued G&M, claiming that the company had failed to provide workers with meal breaks or to compensate them for the time they would spend counting out their registers at the end of a shift.

G&M was represented by Michael Gray, who was both the family-owned company's Vice President and General Counsel, as well as the son of the company's CFO. According to the court's opinion, the trial court entered a $4 million default judgment against G&M after Gray failed to defend the action. Not surprisingly, G&M removed Gray and brought in outside counsel to challenge the huge judgment with a motion to vacate.

The motion to vacate presented some interesting issues. Under Code of Civil Procedure § 473, a court "shall" grant a motion to vacate if the attorney screws up, and is willing to sign what is referred to as a "mea culpa" declaration, admitting his or her mistake, and begging that it not be imputed to the client. But here, since Gray was the Vice President of the company, he in essence was the client, so the mea culpa declaration was basically saying, "don't hold me responsible for what I chose to do." Unlike an innocent client who did not know that his attorney was dropping the ball, shouldn't a company be held to the decisions of its attorney when that attorney is part of the company? The trial court did not think so, and ruled that an attorney is an attorney, whether in-house or not. The trial court granted the motion to vacate, threw out the default judgment and put the matter back on the trial calendar.

Labor claims are typically handled on a contingency basis, often for one-third of any amount recovered, and the Labor Codes provide for recovery of all attorney fees, so you can imagine how crestfallen plaintiff's counsel was when the court threw out what may have been a more than $1.4 million pay day. The ruling on the motion to vacate was appealed.

The Court of Appeal sided with G&M, and upheld the trial court's decision to vacate the judgment. The court was willing to view Gray as wearing two hats. Yes, he was an officer of the company, but for purposes of the litigation he was acting as the company's general counsel, and not as an officer.

Was the ruling by the Court of Appeal correct? Often bad facts make bad law. The specter of a four million dollar default judgment, combined with the fact that, according to the decision, Gray had kept the action a secret from the rest of the company officers, meant that the trial court and then the court of appeal were both going to look for a way to provide relief. Further, there is a very strong public policy that matters should be decided on the merits, and not on technicalities. Therefore, the case was probably decided correctly, but there was a wrinkle that may have eluded the Court of Appeal.

I have defeated motions to vacate in the past by showing the court that the attorney in question is not providing a true mea culpa declaration. The attorney must ask for relief based on a mistake, not on a failed litigation strategy. In one case, I sued a company but the attorney for the company decided the matter was subject to an arbitration provision and simply refused to participate in the litigation. Just as in this case, after I obtained the substantial default judgment, the company brought in new counsel and filed a motion to vacate using the former attorney's mea culpa declaration. However, I defeated the motion by persuading the court that the attorney was not admitting to any mistake, but rather was continuing to argue that the matter had to be submitted to arbitration. The court agreed that an attorney cannot try one strategy, and if it fails, file a mea culpa declaration and go to plan B.

With this week's ruling by the Court of Appeal, companies with in-house counsel could try that approach. An individual defendant who knows about an action and simply decides to ignore it will not be granted relief on a motion to vacate, because there has been no mistake or inadvertence – the party just chose to ignore the action. Gray, the Vice President of G&M, attended two status conferences in the matter, and for whatever reason elected not to pursue a defense. Why is G&M getting a pass from that decision, when an individual defendant would not?

The mea culpa declaration approach of section 473 is self-policing in the sense that an attorney will not file a mea culpa declaration unless there has been a real mistake, because he or she is basically admitting to malpractice. With in-house counsel, especially where the counsel is an officer, the corporation could simply instruct the attorney to file the mea culpa declaration, whether or not the attorney agrees there was a mistake, since the attorney will know he is not exposing himself to a malpractice claim.

The Court of Appeal's ruling can be found here.

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