Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-89-04033/USCOURTS-ca10-89-04033-0/pdf.json

Nature of Suit Code: 360
Nature of Suit: Other Personal Injury
Cause of Action: 

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. FILED 

UNITED STATES COURT OF APPEALS United s,r::h~Y{ Appeals 

TENTH CIRCUIT 

JUDITH M. KELLY, 

v. 

Plaintiff-Appellee and 

Cross-Appellant, 

) 

) 

) 

) 

) 

) 

) 

KRUSE, LANDA, ZIMMERMAN & MAYCOCK, ) 

a partnership, JAMES R. KRUSE, ) 

P.C., JAMES R. KRUSE and DELBERT ) 

M. DRAPER, ) 

Defendants-Appellants and 

Cross-Appellees. 

) 

) 

) 

AUG 2 0 1991 

ROBERT L. HOECKER 

Clerk 

Nos. 89-4033 & 89-4039 

(D.C. No. C-85-1057W) 

(D. Utah) 

ORDER AND JUDGMENT* 

Before MOORE, TACHA, and EBEL, Circuit Judges. 

BACKGROUND 

Appellee was an officer and director of Earth Energy 

Resources ("EER"), an oil exploration and investment company. EER 

hired appellants to advise it in several securities transactions. 

Nevertheless, EER sold several limited partnerships in violation 

of Nebraska Blue Sky Laws. The purchasers of these limited 

partnerships ("Nebraska investors") eventually sued appellant and 

several others under Nebraska's securities laws. The Nebraska 

investors prevailed, recovering a large judgment against appellee 

* This order and judgment has no precedential value and shall not 

be cited, or used by any court within the Tenth Circuit, except 

for purposes of establishing the doctrines of the law of the case, 

res judicata, or collateral estoppel. 10th Cir. R. 36.3. 

Appellate Case: 89-4033 Document: 010110132106 Date Filed: 08/20/1991 Page: 1 
-- far in excess of her ability to pay. Thereafter, appellee 

threatened to file bankruptcy. 

The Nebraska investors, fearing that they would recover very 

little in the event that appellee did become bankrupt, or in the 

event that she successfully appealed the judgment, negotiated a 

contract with her. In exchange for the Nebraska investors' 

agreement to drop their claims against her, appellee agreed to: 

(1) drop her appeal of the Nebraska judgment; (2) not file for 

bankruptcy for 90 days after the execution of the agreement; (3) 

diligently prosecute a legal malpractice law suit against 

appellants for failing to inform her of her potential securities 

laws liability; (4) assign to the investors 99 percent of any 

damages she might recover in her suit against appellants, less her 

expenses so long as her expenses did not exceed 25 percent of the 

recovery; (5) immediately pay the investors $75,000; (6) provide 

the investors with copies of the pleadings, correspondence, and 

other relevant documents stemming from her legal malpractice 

lawsuit against appellants; (7) allow the Nebraska investors to 

intervene in and participate in the suit against appellants; (8) 

not settle the suit against appellants without first obtaining 

approval from the Nebraska investors. 

Appellee prevailed in a bench trial, where she was awarded 

$2,316,090, in addition to a prejudgment interest rate of 7.87 

percent. On direct appeal, in this court, appellants raise six 

issues. The first issue is whether the assignment of 99 percent 

of the proceeds represented an impermissible assignment of a legal 

malpractice claim. The second issue is whether appellants, 

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retained by EER to advise it with respect to securities laws, owed 

a duty of care to the individual directors of that corporation. 

The third issue is whether the district court correctly ruled that 

appellants' failure to provide legal advice to the appellee was 

the proximate cause of her liability to the investors. The fourth 

issue is whether the district court properly allowed a particular 

expert to testify as to securities law matters. The fifth issue 

is whether the district court erred in holding an associate of the 

appellant-law firm to the standard of care of a specialist. The 

final issue is whether the district court awarded the appellee 

damages in excess of actual injury. 

Appellee cross-appeals on two issues. The first cross-appeal 

asks whether the district court erred in denying one of appellee's 

claims for damages allegedly received as a result of a particular 

illegal security offering made by EER. The second cross-appeal 

issue is whether the court erred when it set the prejudgment 

interest rate on appellee's award at 7.87 percent. 

We affirm the district court on each issue. 

ANALYSIS 

A. Assiqnability Of Malpractice Claim Was Not Raised Below 

The appellants' brief claims that "[t]he [a]ssignment of Mrs. 

Kelly's [c]ause of [a]ction [w]as [r]aised [b]efore the [t]rial 

[c]ourt [A]ppellants argued that the Kelly Agreement was 

an illegal attempt to assign a legal malpractice action. (Doc. 75 

at 18-27)." Appellants' Br. at 12. We have carefully read 

Document 75 at pages 18 through 27, which is a "Memorandum in 

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Support of Defendant's Motion to Limit Damages," and find no 

reference to the issue of the assignability of the legal 

malpractice cause of action under Utah law that would cause us to 

conclude that the issue was fairly raised in the district court. 

After this concern was mentioned by this court during oral 

argument, appellants filed a supplemental authority that attempted 

to give "additional record citations establishing that the issue 

of the assignability of a legal malpractice cause of action was 

raised before the district court." Supp. Authority, January 24, 

1991, at 1. That supplemental authority consisted of transcript 

excerpts of a motion for partial summary judgment. We have 

carefully examined this authority and conclude that it also did 

not raise the illegality of assigning the legal malpractice claim. 

To the contrary, it argued only that appellee had suffered a set 

amount of damages, and that this should limit her recovery. The 

oral arguments to which appellants cite, do briefly allude to the 

assignability of the action, but the reference was oblique and 

went only to the issue of the proper measure of damages suffered 

by appellee. In no way was the issue fairly raised below; 

therefore, we will not consider it. 

B. Whether Appellant Had A Duty Or Obligation To Appellee 

Appellants contend that they had no legal duty to warn or 

advise appellee of possible securities violations. The Utah 

Supreme Court has clearly stated that 

[f]or a third party to have enforceable rights under a 

contract, then, that party must be an "intended 

beneficiary" of the contract, and the intention of the 

parties is to be determined from the terms of the 

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contract as well as the surrounding facts and 

circumstances. 

Ron Case Roofing & Asphalt v. Blomquist, 773 P.2d 1382, 1386 (Utah 

1989). Thus, under Utah law, the intent of the parties is fairly 

dispositive on the issue of whether there was an intended thirdparty beneficiary in an attorney-client relationship. See Atkinson 

v. IHC Hospitals Inc., 798 P.2d 733, 735 (Utah 1990) (quoting 

Flaherty v. Weinberg, 492 A.2d 618, 625 (Md. 1985) ("'[T]he test 

for third party recovery is whether the intent to benefit actually 

existed, not whether there could have been an intent to benefit 

the third party."'), cert. denied 111 S.Ct. 970 (1991). 

We have carefully examined the evidence and find nothing that 

would lead us to conclude that the district court was clearly 

erroneous in stating that the "retention agreement ••• gave rise 

to a binding contractual obligation on the part of [appellants] to 

perform the enumerated services including an obligation to 

[appellee], as a third-party beneficiary of that agreement." Dist. 

Ct.'s Findings of Fact and Conclusions of Law at 13. We note that 

although courts have held that "the fact that an attorney 

represents a corporation does not make that attorney counsel to 

officers and directors of the corporation," Kline Hotel Partners 

v . Aircoa Equity Interests, 708 F. Supp. 1193, 1195 (D. Colo. 

1989); Stratton Group, Ltd. v. Sprayregen, 466 F. Supp. 1180, 1184 

n.3 (S.D.N.Y. 1979), there is little doubt that a contract can 

specifically define legal duties. In this case, the retention 

agreement, entered into by the law firm, stated that appellants 

agreed to provide "[a]dvice with respect to liabilities 

officers, directors and others in connection with ... the 

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. [of] 

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offering." Appellants' Br. at 6 (quoting 'II 9 of the Retention 

Agreement). Given this language, we cannot find error in the 

district court's conclusion that the agreement created an intended 

third-party beneficiary relationship with appellee and that 

appellants breached that obligation. 

Appellants have also argued that Draper, who was an associate 

at the law firm, had no obligation or duty to appellee because he 

was not a signatory to the retention agreement. The district 

court, however, specifically found that the appellants "failed to 

meet the standard of care which prevailed among the general 

community of securities lawyers and were therefore negligent 

relating to each of the Earth Energy offerings •••• [i]n 

failing to warn Earth Energy or its officers and 

directors .•. II Dist. Ct.'s Findings of Fact and Conclusions 

of Law, at 25, 26. The conclusion that Draper, even as a nonsignatory to the retention agreement, could be liable to appellee 

is consistent with Utah law which states that "'any duty owed by 

an attorney to a third party is derivative of the duty owed by 

that attorney to his client,'" Atkinson, 798 P.2d at 736 (quoting 

Franko v. Mitchell, 762 P.2d 1345, 1354 (Ariz. App. 1988), and 

that appellee in this case need only "allege and prove that the 

intent of the client to benefit the nonclient was a direct purpose 

of the transaction or relationship.'" Id. at 735 (quoting 

Flaherty, 492 A.2d at 625) 

We believe that there was ample evidence in this case to 

support the holding that Draper and appellee formed an attorneyclient relationship; whether Draper actually signed the retention 

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agreement is not dispositive to this finding. Indeed, in Utah the 

entire question of whether an attorney-client relationship exists 

is subjective. Thus, 

[t]he contract may be express or implied from the 

conduct of the parties .... The relationship is 

proved by showing that the party seeks and receives the 

advice of the lawyer in matters pertinent to the 

lawyer's profession .••• Such a showing is subjective 

in that a factor in evaluating the relationship is 

whether the client thought an attorney-client 

relationship existed •••. In sum, "[i]t is the 

intent and conduct of parties which is critical to the 

formation of the attorney-client relationship" •. 

• . • [It is a] factual issue of whether an attorneyclient relationship existed .•.• 

Breuer-Harrison, Inc. v. Combe, 799 P.2d 716, 727-29 (Utah App. 

1990). Given these rather clear statements by the Utah courts, we 

cannot say that it was clearly erroneous for the district court to 

find that such a relationship existed between appellee and Draper, 

and that the resultant duty of care was subsequently breached by 

him. 

Therefore, we affirm the district court's conclusion that 

appellants' had a duty, which they breached, to advise appellee of 

potential securities violations. 

C. Whether Failure To Advise Constituted Proximate Cause 

Appellants allege that there was not sufficient proof on the 

issue of whether the appellants' breach of duty was the proximate 

cause of the losses suffered by appellee. We believe that in this 

case causation can be inferred, and that it was not clearly 

erroneous of the lower court to have so found. 

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We find more than plausible the conclusion that, had appellee 

been informed of the potential for securities violations and the 

resultant personal liability stemming from EER offerings, she 

would have taken steps -- either before or after the actual sales 

-- to limit or prevent her liability. It would not have been 

error for the district court to have relied upon this common sense 

conclusion, as well as any evidence and testimony presented, in 

making this finding of fact. Because it was not clearly 

erroneous, we affirm the district court's ruling on causation. 

D. Whether The Expert Testimony Was Permissible And Credible 

Appellants contend that the district court, in finding that 

they breached their duty to appellee, based its finding on 

impermissible testimony of an incompetent witness. We find ample 

evidence to support the competency of that witness, Dr. Long. The 

fact that he has testified in other securities cases, and that he 

is a professor of securities law of 20 years standing, suggests 

that the district court did not abuse its broad discretion in 

qualifying and accepting Dr. Long as an expert. See Firestone 

Tire & Rubber Co. v. Pearson, 769 F.2d 1471, 1482 (10th Cir. 

1985); Scholz Homes, Inc. v. Wallace, 590 F.2d 860, 863 (10th Cir. 

1979); United Telecommunications, Inc. v. American Television & 

Communications Corp., 536 F.2d 1310, 1317 (10th Cir. 1976). 

Therefore, we affirm the district court on the issue of whether 

Dr. Long was a competent expert witness. 

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E. The Correct Standard Of Care For An Associate 

The appellants argue that the court applied the wrong 

standard of care in finding that Draper, a four-month associate 

with the law firm, breached his duty to appellee. The court 

applied the same standard of care to Draper as it applied to the 

partners of the firm. 

We find no error in the district court's decision to hold 

Draper to a specialized standard of care. Draper knowingly acted 

on behalf of the law firm, an entity that held itself out as 

capable of performing securities law work. Thus, Draper, as an 

associate of the firm, undertook to perform duties commensurate 

with his association with the law firm and his licensed membership 

in the Utah bar. We cannot take exception with the district 

court's holding that Draper "failed to meet the standard of care 

which prevailed among the general community of securities lawyers 

••. relating to each of the Earth Energy offerings .... " 

Dist. Ct.'s Findings of Fact and Conclusions of Law, at 25. 

Indeed, "[p]rofessional persons in general, and those who 

undertake any work calling for special skill, are required not 

only to exercise reasonable care in what they do, but also to 

possess a standard minimum of special knowledge and ability." W. 

Prosser & P. Keaton, The Law of Torts, (1984 5th ed.)§ 32, at 185 

(emphasis added and citation omitted). We therefore affirm this 

holding by the district court. 

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F. Whether The District Court Erred On The Damage Award 

The district court carefully considered appellants' argument 

that the most that could be recovered from appellant was either 

the $75,000 paid by appellee under the Kelly agreement or 

$650,000, the total of appellee's personal assets. The district 

court found that the "$75,000 that [appellee) paid as part of her 

Settlement Agreement was but a portion of her consideration in the 

contract; the remainder includes her obligation to diligently 

prosecute this lawsuit and then turn over any proceeds therefrom." 

Memorandum Decision and Order Denying Defendants' Motions, at 6. 

Instead, the court awarded appellee $2,316,090, which reflected 

her damages in relation to the Nebraska judgment. 

We agree with the district court that the judgment the 

investors obtained was stayed in exchange for the appellee's 

prosecution of the lawsuit, and that appellee still remained 

liable on the whole judgment -- far more than either the $75,000 

or $650,000. Thus, rather than forcing appellee into bankruptcy, 

the Nebraska investors allowed her to garnish all her assets --

the largest being the prosecution of this malpractice lawsuit. 

Ascertaining the correct standard for measuring damages is a 

question of determining state law. We review de novo the district 

court's conclusion that the correct measure of damages incurred by 

appellee is measured by the "judgment rule," which sets the 

recoverable amount in relation to the liability for the party's 

adverse judgment, as opposed to the "prepayment rule," which sets 

damages in relation to the party's current out-of-pocket damages. 

See Salve Regina College v. Russel, 111 S.Ct. 1217, 1221 (1991) 

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("court of appeals should review de nova a district court's 

determination of state law"). 

We find no error in the district court's decision to award 

damages to appellee by reference to the judgment rule because Utah 

has apparently adopted that standard. In Ammerman v. Farmers Ins. 

Exch., 450 P.2d 460, 461-62 (Utah 1969), the court found that in 

an indemnity case there was no accord and satisfaction, and hence 

no limitations on damages, when the loser of a lawsuit "who was 

unable to pay the judgment, (agreed to] cooperate •.. and do 

everything reasonably necessary ... to collect the (j]udgment 

•••• This agreement is executory in nature and does not, as of 

now, amount to an accord and satisfaction." 

Therefore, we find no error in the district court's 

determination of damages suffered by appellee. 

G. Appellee's Claim For Damages Under Offering 1981-B 

On cross-appeal, appellee claims error in the district 

court's factual finding that the retention agreement did not 

involve offering 1981-B. See Dist. Ct.'s Findings of Fact and 

Conclusion of Law at 15. Appellee asserts that appellants were 

responsible for informing her as to potential liability for 

offering 1981-B. The district court cited ample evidence to 

support it factual finding that the agreement was not meant to 

cover the 1981-B offering, id. at 11, 15, and therefore we will 

not disturb this conclusion absent a clearly erroneous weighing of 

the evidence. We affirm the holding that there was no liability 

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for the 1981-B offering because there was never an engagement of 

legal services for that security. 

H. Proper Measurement Of Prejudgment Interest Rate 

The parties disagree as to whether Nebraska's or Utah's 

prejudgment interest rate applies to appellee's damage recovery. 

Nebraska's rate is 7.87 percent, while Utah's is 10 percent. The 

district court ultimately adopted Nebraska's rate of 7.87 percent. 

Appellants argue that because the damages incurred by 

appellee are based upon the Nebraska rate of 7.87 percent, it 

would be unfair to calculate appellants' liability at the Utah 

rate of 10 percent. They contend that the use of Utah's 

prejudgment interest rate would result in a 2.13 percent windfall, 

thus overcompensating appellee. Appellee, in turn, avers that 

because Utah is the forum state for this federal action and 

because Utah Code Annot. 15-1-1 (1991 Supp.) states that a chose 

of action will be awarded prejudgment interest, she should receive 

the Utah rate of 10 percent. 

We believe that to the extent appellee has not yet paid the 

investors because they have stayed execution on their judgment, 

she should only recover the Nebraska rate of interest. Indeed, 

the Nebraska judgment is, presumably, accruing interest at the 

Nebraska rate of 7.87 percent. To this end, appellee's chose of 

action has, within itself, an irnbedded prejudgment interest rate 

of 7.87 percent. Thus, the Nebraska rate of interest is akin to a 

moratory rate of interest in that it will compensate appellee for 

the interest she would owe the Nebraska investors, who are, in a 

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sense, acting as appellee's creditors. Cf. United 

Telecommunications, 536 F.2d at 1314. Additionally, appellants 

are correct that appellee "makes no pretense of argument that the 

extra interest damages are required to make her whole." Answer Br. 

of Cross-Appellees at 39. 

We find support for this conclusion in the Utah Supreme 

Court's statement that "[t)he purpose of a prejudgment interest 

award is to compensate a plaintiff for actual loss or to prevent a 

defendant's unjust enrichment." Canyon Country Store v. Bracey, 

781 P.2d 414, 422 (Utah 1989). The district court's choice of the 

Nebraska prejudgment interest rate best accomplishes this 

objective as it will compensate appellee on the judgment that the 

Nebraska investors have heretofore stayed. 1 

1 We note that appellee has dedicated some effort to a 

discussion of what prejudgment interest rate should be applied to 

the $75,000 appellee paid under her side-contract with the 

Nebraska investors. For instance, appellee claims that "[t)here 

is no theory under Utah law that would justify the application of 

the Nebraska judgment interest rate to this $75,000 •... Under 

Utah law, interest accrues ... [on) this $75,0000 at the 

prejudgment rate of ten percent per annum -- not 7.87 percent." 

Appellee's Br. at 49. See also Appellee's Reply Br. to the Answer 

Br. of Cross-Appellees at 18. 

The question of what the appropriate interest rate on the 

$75,000 would be, and whether appellee could even recover that 

amount in addition to her full recovery on her chose of action, is 

a conundrum whose solution must wait until another day. Simply 

put, we do not believe that the district court understood the 

appellee to have requested recovery of that $75,000, nor is there 

any indication that the district court awarded appellee damages 

based on the $75,000. For instance, appellee's complaint prays 

for "indemnification against any and all judgments that may become 

final against [appellee) ... as the result of a sale of 

unregistered non-exempt securities .••• " Appellee's Complaint 

for Damages for Malpractice at 5 (emphasis added). Likewise, we 

have examined appellee's first and third amended complaints, and 

find similar requests for relief in relation to the successful 

lawsuit filed by the Nebraska Investors. It is clear that the 

district court awarded appellee damages based on the exact size of 

[Footnote Continued ••• 

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Therefore, we find no error in the district court's adoption 

of the Nebraska rate of prejudgment interest, and AFFIRM. 

[ ... Footnote Continued] 

Entered for the Court: 

David M. Ebel 

Circuit Judge 

her chose of action, i.e., the amount that she had been found 

liable to the Nebraska Investors. Thus, the district court, after 

reciting and summing appellee's separate liability for Offerings 

1981-C, 1981-E, and 1981-F, then found that appellee was 

entitled to recover a judgment against [appellants] for 

$2,316,090.00 .... The figure of $2,316,090.00 is 

arrived at as the total of the judgments entered against 

[appellee] in the United States District Court for the 

District of Nebraska and which concern the Earth Energy 

offerings 1981-C, 1981-E, and 1981-F •••• 

Dist. Ct.'s Findings of Fact and Conclusions of Law at 31 

(emphasis added). 

Therefore, we do not believe the appellee's recovery embodied 

the $75,000 she contracted to pay the Nebraska Investors, and so 

we do not speculate on what the proper prejudgment interest would 

be on that amount. 

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