Page 1
Ninth Circuit:
Presumption Against Validity of Oral Contracts Between Lawyer, Client Was Overcome
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals on Friday reinstated counterclaims filed by a Texas attorney against a Napa Valley winery previously owned by a former client and friend, in which the lawyer sought a declaration of ownership interest in the company based on a “handshake agreement,” holding that triable issues exist as to whether the Texan had rebutted a presumption against oral contracts between lawyers and those they serve.
Also finding that California’s litigation privilege bars the winery’s breach of fiduciary duty claim against the lawyer, the court said that a carve-out applicable to malpractice suits does not apply because the gravamen of the complaint was based on the attorney’s assertion of ownership interests in the company—by way of a Texas lawsuit challenging the sale of the winery to a third-party—rather than his failure to live up to his duties to his client.
At issue is the purported oral agreement between Fred Schrader (referred to in the opinion as “Fred”), the former owner of Schrader Cellars, LLC, and Texas attorney Robert M. Roach. In the early 2000s, the two friends began discussing the creation of a new wine company with winemaker Thomas Brown that would be called Roach Brown Schrader (“RBS”); Brown eventually dropped out of the deal.
Legal Work
Roach had provided legal work as needed to Schrader and his California wine companies and, according to Cellars, had agreed to loan Schrader up to $150,000 for wine production over the course of three years, commencing in 2002. In exchange, and in addition to repayment, the winery would ship him 15 cases of Cellars wine per year and include Roach’s name on the label of one of the wines produced.
According to Roach, he agreed to invest as a partner in RBS because Schrader was struggling financially. He claims that he invested $135,000 in RBS to help procure specialty grapes in exchange for an equal equity interest in the company, but says Schrader instead used the money to fund the then-faltering Cellars.
Roach contends his investment helped Cellars survive as the company “went from obscurity to prominence (earning 19 perfect 100-point ratings from wine critic Robert Parker).”
Roach Brown Schrader LLC was formed in 2002 but the corporate charter was cancelled in December 2013, purportedly without Roach’s knowledge. The agreement concerning RBS was never memorialized in writing.
In 2017, Franciscan Vineyards, then a subsidiary of Constellation Brands, acquired Cellars for approximately $60 million. Following the sale, Roach filed suit against Constellation in Texas state court.
Ownership Interest Contested
Cellars filed the present action in 2021, seeking, among other things, a declaration that Roach did not have any ownership interest in the company and asserting a claim for breach of fiduciary duty. The operative complaint asserts:
“Despite having voluntarily accepted the trust and confidence of Plaintiff with regard to its legal and business matters,…Roach abused the trust and confidence of Plaintiff by attempting to acquire an ownership…interest in Schrader Cellars, LLC…without notifying Plaintiff of his intent to do so, giving Plaintiff the opportunity to seek the advice of independent counsel, or obtaining Plaintiff’s written consent.”
Roach asserted counterclaims seeking a declaration that he possesses ownership interests in RBS and Cellars as well as demanding an equitable accounting. Other counterclaims were dismissed and are not a part of the appeal.
After Cellars filed a motion for summary judgment, Magistrate Judge Sallie Kim of the Northern District of California granted Cellars’ request for declaratory relief and dismissed Roach’s counterclaims. She found that even if Roach’s version of the RBS contract existed, it would be unenforceable because the defendant failed to rebut a presumption that an oral agreement between a lawyer and client is the product of undue influence by the attorney.
The case went to trial solely on Cellars’ remaining claim of breach of fiduciary duty. Kim instructed the jury that, as a matter of law, Roach had breached his duties to Cellars and the jury was to decide only the issue of harm.
The jury declined to award damages based on Roach’s assertion of the litigation-privilege defense. Roach appealed the summary judgment order and Cellars separately appealed Kim’s denial of a post-trial renewed motion for judgment as a matter of law.
In an opinion authored by Circuit Judge Mark J. Bennett, and joined in by Circuit Judges Anthony D. Johnstone and Milan D. Smith Jr., the court reversed the partial summary judgment order in favor of Cellars and affirmed the denial of Cellars’ renewed motion for judgment as a matter of law.
Rebuttable Presumption
The presumption at issue stems from California Rule of Professional Conduct, rule 3-300, which requires that lawyers not enter into business transactions with clients unless “[t]he transaction…and its terms are fair and reasonable…and are fully disclosed and transmitted in writing,” “[t]he client is advised in writing that [he] may seek the advice of an independent lawyer,” and “[t]he client thereafter consents in writing to the terms.”
Bennett explained:
“While Rule 3-300 does not itself provide a basis for civil liability or voiding an agreement, California courts have relied on Section 16004 of the California Probate Code to find that if a transaction involving an attorney violates Rule 3-300, there is a rebuttable presumption that the transaction is the product of undue influence by the attorney….An attorney’s failure to rebut the presumption ‘renders the transaction voidable at the client’s option.’…This presumption can be rebutted if the attorney ‘show[s] that the dealing was fair and just, and that the client was fully advised.’ ”
Turning to the circumstances surrounding the oral agreement, the jurist said:
“We find that the district court erred because there are triable issues of fact concerning whether Roach rebutted the presumption regarding his alleged breach of his duties under Rule 3-300—that is, there are triable issues of fact concerning whether the transaction ‘was fair and just’ and whether [Schrader] ‘was fully advised.’ ”
Schrader’s Idea
The jurist reasoned:
“First, Roach…averred that RBS was Fred’s idea and that Fred solicited a cash investment from Roach….A former Cellars partner, Carole Boehk, confirmed that at the time of RBS’s formation, Fred was short of cash and that Roach was the sole supplier of cash for RBS.
“Second, …Roach further averred that he had requested a written partnership agreement…but Fred ‘refused and said he preferred doing business by…handshake agreements’….
“Third, Fred dictated the terms of the oral RBS agreement….According to Roach, Fred sought out Texas investors (including Roach) because Fred believed that they ‘were willing to…permit him more freedom in the day-to-day management of his projects.’ ”
Bennett added:
“Roach also averred that [Schrader] made false representations to induce Roach to enter into the RBS agreement. Fred allegedly promised Roach that Roach ‘was making an equity investment and obtaining an equity ownership…interest in the RBS wine business.’ According to Roach, ‘Fred said frequently that RBS was a separately owned business, distinct from Schrader Cellars.’ But rather than using Roach’s money exclusively for RBS, as promised, Fred used Roach’s money for his Cellars wines. While Fred now asserts that Roach’s cash investment was a loan, …Cellars’s own accounting records referred to Roach as an ‘investor,’ Roach’s contribution as an ‘investment,’ and the RBS project as a ‘joint venture.’ ”
Under these circumstances, he concluded, “at the very least, there is a triable issue of fact on whether the alleged agreement was void” and Kim’s grant of summary judgment in Cellars’ favor on its declaratory judgment claim and on Roach’s counterclaims must be reversed.
Fiduciary Duties
He also declared that Kim “erred in concluding (and instructing the jury) that Roach had breached his fiduciary duties to Cellars” based on the same analysis. However, Bennett said:
“[The] jury instruction ultimately had no effect on the outcome of the trial, because the jury answered ‘yes’ to the special verdict question: ‘Do you find that the gravamen—or heart—of the claim that Cellars brings for breach of fiduciary duty against Roach is based on his filing of the Texas lawsuit?’ The district court thus concluded that Cellars’s claim was barred by the California litigation privilege, so the jury did not reach the remaining issue of damages.”
Bennett said there is no need to determine whether Roach’s privilege defense is an issue of law that the jury could not decide. He explained that “[e]ven if it were the case that the court must decide the privilege question—and we make no determination on that issue—we would still conclude, as the jury did, that privilege bars Cellars’s claim.”
He noted that the privilege, codified in Civil Code §47(b), does not apply to cases involving claims for attorney malpractice but wrote:
“[W]e agree with the district court that ‘the crux of this dispute was not [malpractice, i.e.,] Roach’s action in representing Cellars.’ Rather, ‘the crux of this claim for breach of fiduciary duty was Roach’s attempt to gain ownership of Cellars.’…
“We find…that ‘the gravamen…of the claim that Cellars brings for breach of fiduciary duty against Roach is based on his filing of the Texas [Litigation].’ Cellars’s claim for breach of fiduciary duty is thus barred by the litigation privilege.”
The case is Schrader Cellars LLC v. Roach, 23-15862.
Copyright 2025, Metropolitan News Company