Summary
The Ninth Circuit certified to the Nevada Supreme Court a question concerning when the transfer of majority ownership of a corporate entity may constitute a de facto assignment of the entity’s legal malpractice claims in violation of Nevada public policy. The order addresses Nevada’s prohibition on assigning legal malpractice claims, corporate separateness, the effect of an intervening bankruptcy trustee, and the settlement that transferred ownership of Fresh Mix, LLC to its former minority owners.
Topics
Practice areas
Questions Presented
- Under what circumstances, if any, does a transfer of majority ownership of a corporate entity effectuate a de facto assignment of the entity's legal-malpractice claims in violation of Nevada public policy?
- How should Nevada's public policy against assignment of legal-malpractice claims be reconciled with corporate separateness and the principle that an entity's legal rights ordinarily do not depend on the identity of its owners?
- What role, if any, should alleged attorney conflicts, an intervening bankruptcy trustee's control of the claims, and the circumstances of the ownership transfer play in determining whether a de facto assignment occurred?
Holdings
- Certification was appropriate because the appeal presented an important and open question of Nevada law for which no controlling decision of the Nevada Supreme Court or Nevada Court of Appeals existed.
- Under Nevada law, legal-malpractice claims are unassignable as a matter of public policy, but an invalid assignment does not extinguish the claim; the assignment is set aside and the injured client retains the right to pursue it.
Key quotations
“QUESTION CERTIFIED; PROCEEDINGS STAYED.” (at 21)
“A legal malpractice claim is one such unassignable cause of action.” (at 11)
“An invalid assignment thus generally “does not warrant dismissal of the legal malpractice claim.”” (at 12)
Factual background
Fresh Mix, a Delaware limited liability company, was majority-owned and controlled by Get Fresh Sales, Inc. while its former lawyers allegedly represented both entities despite conflicting interests. Fresh Mix alleged that the lawyers helped the majority owner divert company assets, manipulate the company's finances, and place Fresh Mix into an involuntary Chapter 7 bankruptcy to disadvantage minority owners. After the bankruptcy court raised concerns about abuse of process, the parties settled; the majority owner transferred its interest in Fresh Mix to the former minority owners, who then controlled the company, and Fresh Mix retained its legal-malpractice claims against its former lawyers.
Procedural history
The district court concluded that Fresh Mix's legal-malpractice claims were barred because the transfer of control of Fresh Mix from its former majority owner to former minority owners constituted a de facto assignment of the claims under Nevada public policy. Fresh Mix appealed. The Ninth Circuit determined that the appeal presented an important and unresolved question concerning the interaction between Nevada's prohibition on assignment of legal-malpractice claims and principles of corporate separateness, certified the question to the Nevada Supreme Court, withdrew submission, stayed the appeal, and administratively closed the docket pending a response.
Remand instructions
The Ninth Circuit did not remand to the district court for merits proceedings. It certified the question to the Nevada Supreme Court, stayed further proceedings, withdrew submission, administratively closed the docket, and directed the parties to notify the clerk of the Nevada Supreme Court's decision regarding certification.