2009-00054569-CU-BC

Twin Rivers USD vs. C Financial Investment Inc

Nature of Proceeding: Motion for Judgment on the Pleadings

Filed By: Larsen, Cynthia J.

Cross-Defendant Orrick, Herrington, & Sutcliffe LLP’s (“Orrick”) motion for judgment on
the pleadings on Defendant/Cross-Complainant, C. Financial Investments, Inc.’s
(“CFI”) Second Amended Cross-Complaint (“SACC”) is ruled upon as follows.

Orricks’ request for judicial notice is DENIED.

Based upon allegedly defective financial advice from CFI, Plaintiff Twin Rivers Unified
School District (“Twin Rivers”) has pleaded causes of action for claim and delivery,
conversion, breach of agreements/breach of implied covenant of good faith and fair
dealing, fraud and deceit, negligent misrepresentation, constructive fraud, professional
negligence, breach of fiduciary duty, declaratory relief and injunctive relief.

In the SACC, CFI has cross-complained against Orrick for declaratory relief and
comparative indemnity. CFI alleges that Orrick acted as bond and disclosure counsel
in connection with Twin Rivers’ financing. CFI alleges that Orrick prepared the Official Statement relating to the financial condition and operations of the District and
performed due diligence activities to allow it to make such statements. (SACC ¶ 14
(a).) CFI further alleges that, as part of the Twin Rivers financing team, Orrick owed
duties to both Twin Rivers and CFI to report any “errors, irregularities, improper
activities, procedural or other weaknesses, statutory violations, mismanagement or
excessive fees being collected in connection with the school financing efforts of [Twin
Rivers].” (SACC, ¶ 11.) CFI also alleges that Orrick “advised Grant regarding the
structuring and issuance of facilities bonds for use in school facilities construction and
improvements, and had a duty to disclose and report to the
Financing Team any deficiencies regarding the financing structures used by
Grant.” (SACC, ¶ 14(c).)

Orrick moves for judgment on the pleadings on the grounds that attorneys are exempt
from claims of equitable indemnity.

“[T]he ordinary rules of implied equitable indemnity in tort do not apply when the claim
for indemnity is made against an attorney, is based on a breach of the attorney’s duty
to his or her client, and is brought by an adverse party in litigation which is the same as
or related to that in which the alleged negligence took place.” (Major Clients Agency v.
Diemer (1998) 67 Cal. App. 4th 1116, 1130.) “Perceiving that attorneys would be
reluctant to accept cases that might result in indemnity claims, and, more significantly,
that if faced with a potential indemnity claim, the attorney’s sense of self-preservation
might impinge on his or her duty of undivided loyalty to the client, these cases have
established an exception to the ordinary rule of equitable indemnity. (Id.)

In opposition, CFI argues that this rule does not apply to Orrick, as bond counsel,
because it was “employed to provide an objective legal opinion designed to induce
reliance by third parties as to the legality of the bond offering.” (Opposition, 3:20-22
[emphasis in original].) CFI further argues that as bond and disclosure counsel, Orrick
intended to induce reliance of third parties, including CFI. (Roberts v. Ball, Hunt, Hart,
Brown & Baerwitz (1976) 57 Cal. App. 3d 104, 110 [“an attorney may owe a duty to a
third person, and may be liable if the third person who was intended to be benefited by
his performance is injured by his negligent execution of that duty.”]; Bily v. Arthur
Young & Co. (1992) 3 Cal.4th 370, 407-408 [non-client of an auditor who receives and
relies on the audit report are intended beneficiaries of the audit report and may recover
on a theory of negligent misrepresentation.].) According to CFI, “Orrick gave advice
and prepared the official written statement regarding the financial operations of the
district with the intention that it be transmitted to and relied upon by CFS and others in
securing district financing” and that it knew that others would rely upon the statement.
(Opposition, 8:17-24.)

In reply, Orrick argues that CFI’s argument is misplaced because Twin River’s
complaint against CFI is not based on Orrick’s bond opinion. Orrick argues that Twin
Rivers does not seek any damages based on any alleged misrepresentations in the
bond opinion or raise any claims that any of the statements in the bond opinion were
inaccurate.

The Court is not convinced by Orrick’s argument. Twin Rivers’ complaint alleges that
between 2001 and 2008, Twin Rivers issued a number of general obligation bonds for
facilities construction and improvements “in direct reliance on the representations and
recommendations” by CFI. (FAC, ¶24.)
CFI contends that it relied upon the bond opinion in making its representations and recommendations to Twin Rivers. Thus, the bond opinion may form, in part, the basis
of CFI’s representations and recommendations to Twin Rivers and may be a source of
equitable indemnity.

At this stage of the proceedings, the Court finds that the SACC states facts sufficient to
constitute an equitable indemnity cause of action against Orrick.

Accordingly, the motion is DENIED.

The minute order is effective immediately. No formal order pursuant to CRC Rule
3.1312 or further notice is required.