In This Issue
By Peter L. Garchie

In this issue of California Case Comments, we are pleased to present a variety of timely and interesting issues. New California Supreme Court developments, substantive case developments and our Y2K column fill the pages of this newsletter.

In addition to the California Supreme Court's latest pronouncement of the rules relating to spoilation of evidence, we take this opportunity to mention that The Court accepted for review Safeco Insurance Company of America v. Robert S., 1999 Daily Journal D.A.R. 5153. As you might recall, the appellate decision was handed down on March 9, 1999 and appeared in 99 Daily Journal D.A.R. 2277, March 11, 1999. For those interested in insurance coverage issues, the Safeco decision will decide whether the "illegal acts" exclusion in homeowners policies is unambiguous. The appellate court decided that the exclusion was clear and did not require an insurer to indemnify a wrongful death action. Analyzing a situation where the insured committed involuntary manslaughter, the appellate court found that Safeco was free to limit the scope of coverage under its insurance policy, even under circumstances in which a reasonable insured person would otherwise expect coverage, as long as it is done in conspicuous, plain and clear language. We will soon see whether The Court accepts or rejects the lower appellate decision.

For people handling cases involving allegedly defective products and asbestos, you may want to look at Howard v. Owens Corning, 1999 Daily Journal D.A.R. 5042. Although not briefed in this issue of California Case Comments, the Howard case is important for product liability trials because of its holding on expert evidence. In essence, the Howard case, decided by the First Appellate District, held that a jury does not have to accept uncontroverted expert testimony as conclusive unless it involves the standard of care for professional negligence or medical malpractice.

At the end of this issue of California Case Comments, right after our Y2K Litigation Update by J. Albert Garcia, we provide the profile of one of our partners, Mr. Randall L. Mason. As some of you may know, Mr. Mason leads our firm's financial institution practice. As of May 20, 1999, Mr. Mason was chosen to lead the United States Army Reserve for the 70th U.S. Army Regional Support Command, comprising all of Washington, Oregon and Idaho. We feature Mr. Mason to congratulate him on this recent promotion.

We hope you are enjoying the spring. Please let us know if you have any questions about any of the articles discussed in our newsletter.

Tort Claim For Spoliation Of Evidence Cannot Be Stated Against Third Parties

Temple Community Hospital v. The Superior Court of Los Angeles County

99 Daily Journal D.A.R. 5137 (June 1, 1999)

In Temple Community Hospital v. The Superior Court of Los Angeles County, 1999 Daily Journal D.A.R. 5137 (June 1, 1999), the court considered whether a tort cause of action will lie against a third-party who intentionally destroys or suppresses evidence that would be relevant to the lawsuit. A similar issue was addressed by the court in Cedars-Sinai Medical Center v. Superior Court (1998) 18 Cal.4th 1 ("Cedars-Sinai").

In Cedars-Sinai, the court determined that a tort cause of action could not lie against a party to a lawsuit for intentionally destroying or suppressing evidence that would be relevant to the lawsuit where the spoilation has or should have been discovered before the conclusion of the litigation. Although the court recognized that "the intentional spoilation of evidence is a "'grave affront to the cause of justice and deserves our unqualified condemnation,'" the court ultimately determined that the burdens of such a cause of action far outweighed any potential benefit. The Temple court discussed these considerations in detail and ultimately determined that these same factors weighed against allowing a tort cause of action against third parties.

The Cedars-Sinai court recognized that allowing a tort cause of action for spoilation would contravene the court's long-standing policy of limiting collateral or ancillary tort claims arising out of litigation-related misconduct. Such misconduct could be addressed by way of sanctions within the original proceeding, disciplinary and penal sanctions and resort to the legislative process. The court further determined that a tort remedy would be of limited utility in light of the remedies provided by the Evidence Code and the Code of Civil Procedure. Even if sanctions were not available in the original proceeding, the court determined that a tort remedy could be rejected solely on the basis that such a remedy would produce endless derivative litigation. The court also recognized that spoilation cases would be incurably uncertain and based on speculation. Furthermore, the potential imposition of liability might cause individuals and entities to engage in unnecessary and expensive record-retention policies. Lastly, the court explained that a spoilation cause of action tried with the underlying litigation would create jury confusion and inconsistency. If, on the other hand, a spoilation claim were brought after the conclusion of the underlying litigation, there would be duplicative proceedings involving a "re-trial within a trial." All of these factors led the Cedars-Sinai court to conclude that a tort cause of action for spoilation should not be allowed against a party.

The Temple court followed the Cedars-Sinai court's lead and determined that a tort cause of action for spoilation would not be allowed against third parties. The Temple court, like the Cedar-Sinai court, recognized that courts have "cautioned against expanding tort liability to include litigation-related misconduct other than malicious prosecution." The court further explained that:

to allow a litigant to attack the integrity of evidence after the proceedings have concluded, except in the most narrowly circumscribed situations, such as extrinsic fraud, would impermissibly burden, if not inundate our justice system.

The Temple court agreed that a tort cause of action was of little utility in light of other remedies such as regulatory, criminal, and disciplinary sanctions available within the scope of the original litigation. As the court explained:

[t]he goal of having disputes resolved in a single proceeding whose outcome is final as to both of the parties would be undermined if a party who was disappointed in a verdict were permitted to bring a new lawsuit against a new party, claiming that the first lawsuit would have been won but for the new party's destruction or suppression of evidence.

The court further explained that:

[w]e are reluctant to provide disappointed litigants a second opportunity to seek the compensation they sought in the original lawsuit, even if they seek it against a party not involved in the original lawsuit. We also are reluctant to require courts to provide a forum for parties who seek to avoid the effect of a prior judgment by asserting that a collateral wrong improperly affected the verdict.

The court similarly found that where a spoilation claim was brought concurrently with the underlying action, such claims would be premature and potentially meritless and could create jury confusion and inconsistency.

The Temple court went on to explain that in most cases spoilation will be exposed prior to the trial of the underlying action and that there would, therefore, be other more effective remedies available to the aggrieved party. Among other remedies, the aggrieved party would be entitled to the inference that the missing evidence was harmful to the party who disposed of it; the discovery sanction available under the Code of Civil Procedure; and the remedies available by way of the Evidence Code.

Another factor which both the Cedars-Sinai and Temple courts recognized was the uncertainty of proving a cause of action for spoilation. As the Temple court explained:

even if the jury infers from the act of spoilation that the spoliated evidence was somehow unfavorable [to a party], there will typically be no way of telling what precisely the evidence would have shown and how much it would have weighed in the spoilation victim's favor.... The jury could only speculate as to what the nature of the spoliated evidence was and what effect it might have had on the outcome of the underlying litigation.

Lastly, the Temple court recognized that a spoilation cause of action would require a "re-trial within a trial" which would inevitably lead to jury confusion and inconsistent results. For all of these reasons, the court concluded, as did the Cedar-Sinai court, that a tort cause of action would not lie against a third-party for spoilation of evidence.

- Debra B. Branse

Independent Insurance Claim Adjuster Does Not Owe A Duty To The Insured

Sanchez v. Lindsey Morden Claims Services, Inc.

99 Daily Journal D.A.R. 4761 (May 21, 1999)

The Second Appellate District has held that an independent insurance claims adjuster has no duty to an insured with whom it has no contract.

In Sanchez v. Lindsey Morden Claims Services, Inc., 99 Daily Journal D.A.R. 4761 (May 21, 1999), Sanchez was in the business of transporting commercial machinery. Sanchez purchased cargo insurance issued by an underwriter at Lloyd's of London. A commercial dryer was damaged while Sanchez was transporting it to Los Angeles, and Sanchez made a claim under the cargo policy for repairs. Sanchez claimed that repairs needed to be completed immediately because the dryer's purchaser was suffering business loss. The damage was capable of repair in one week's time, at a cost of $12,000.

Lloyd's engaged Lindsey Morden to investigate and adjust the loss. Three months elapsed before the claim was paid, and the dryer's purchaser sued Sanchez. The judgment against Sanchez was $1.325 million. Sanchez then sued Lloyd's and Lindsey Morden. The trial court sustained Lindsey Morden's demurrer without leave to amend, and the appellate court affirmed.

The appellate court pointed out that insurer-retained adjusters are controlled by their clients. It is the insurer, not the adjuster, who has the ultimate power to grant or deny coverage and to pay or deny the claim. Further, "the adjuster has no contract with the insured and would face liability without the chance to limit its exposure by contract." Sanchez at 4762. Imposing this duty on the adjuster would also subject the adjuster to conflicting loyalties: "An adjuster cannot argue both sides of such disputes, any more than a lawyer can represent opposites sides in a lawsuit. An adjuster owes a duty to the insurer who engaged him. A new duty to the insured would conflict with that duty, and interfere with its faithful performance. This is poor policy." Id.

The court observed that adjusters are already deterred from neglect by exposure to liability to the insurer who engaged them, for breach of contract or indemnity. Furthermore, as insurance is a "highly uncertain and risky endeavor," it requires "accurate predictions about the occurrence and cost of future events. Insurers are able to define and limit the risks...." Id at 4762-4763. Adjusters, on the other hand, have no contract and no ability to define or circumscribe their potential risks or liabilities to insureds.

The court also noted that imposing a duty on adjusters would significantly depart from existing law. See, Egan v. Mutual of Omaha (1979) 24 Cal.3d 809; Gruenberg v. Aetna (1973) 9 Cal.3d 566. The general law of agency provides that an adjuster is an agent hired by a principal, and agents are not liable to third parties for economic loss.

- Susan E. Leonard

Real Estate Brokers Might Be Bound By Attorneys Fees Provision In Sales Contract

Pacific Preferred Properties, Inc. V. Moss

99 Daily Journal D.A.R. 4409 (May 13, 1999)

In 1993 the Moss family sold a house to the Morgan family. As part of the payment for the house the Morgans assigned to the Mosses a secured deed of trust on a car wash, which was owned by a third party. The Morgans personally guaranteed the deed of trust.

The deed of trust contained an acceleration clause which provided, upon sale of the car wash, the total amount of the note would immediately become due and payable at the option of the holder. When the Mosses learned that the owner of the car wash intended to sell, they sent a letter to the car wash owner and the Morgans informing them of their intent to enforce the acceleration clause. Upon sale of the car wash, demand was made by the Mosses for full payment of the deed of trust. No payment was made, so the Mosses foreclosed on the car wash and demanded payment from the Morgans pursuant to their personal guarantee. Litigation ensued, which involved the two real estate brokerages which handled the transactions, Pacific Preferred Properties (PPP) and NorCal Reality Partners (NorCal).

PPP and NorCal contended that both the Mosses and the Morgans knew that the acceleration clause had been included mistakenly. The Mosses won the suit against PPP and NorCal on a Motion for Summary Judgment on the ground that there was no evidence to support the theory that they knew the acceleration clause was included mistakenly. The Mosses then moved for an award of attorneys fees based on a clause in the real estate purchase agreement entered into for the sale of their house to the Morgans. The clause stated,

"In any legal action, proceeding or arbitration arising out of this agreement, whether instituted by or against the BUYER or SELLER, or the Brokers named herein, the prevailing party(s) shall be entitled to reasonable attorney's fees and costs."

The trial court denied the motion for attorney's fees, but the appellate court reversed for the following reasons.

The court used principles of contract formation to analyze the obligations created by the contract. The court reasoned that when a contract containing a clause of this kind is supplied by the broker, the broker manifests an intention to pay attorney's fees in ensuing litigation if the broker does not prevail. When the buyer and seller execute the document, they manifest assent to the reciprocal attorney's fees right and obligation. There is mutual assent by the parties to be bound.

The court differentiated the contract in the instant case from that in Super 7 Motel Associates v. Wang (1993) 16 Cal.App.4th 541, wherein the court ruled that the attorney's fees clause related only to litigation regarding the broker's fee agreement. The Super 7 clause stated, "In any action between broker and seller arising out of this agreement the prevailing party shall be entitled to reasonable attorney's fees and costs."

The difference between the two contracts was, that the Super 7 contract could be divided into two parts, one addressing the buyer/seller obligations and the other addressing the commission agreement. In contrast, the PPP/NorCal contract, although similarly divided, contained several references to the broker and the relationship of the broker to the buyer and seller in the buy/sell portion of the contract. The key difference in the two contracts was the wording of the clause. In the PPP/NorCal contract the attorney's fees provision clearly applied to the broker in regard to the entire agreement, not just disputes regarding the broker's fees.

The court ruled that the brokers were a party to the agreement including the attorneys fees clause and thus were obligated to pay the reasonable attorney's fees and costs incurred by the Mosses.

- Rebekah S. Tyrell

Employer's Common Law Claims Against Insurance Company Are Not Pre-empted By The Employee Retirement Income Security Act

Stanton v. Paul Revere Life Insurance Company

99 Daily Journal D.A.R. 4299 (May 10, 1999)

Mark P. Stanton, an ophthalmologist, is employed by Mark P. Stanton, M.D., Inc., thought an employment agreement. Dr. Stanton purchased a business income overhead expense ("BOE") policy from Paul Revere Life Insurance Company through Randall G. Ames, an authorized agent of Paul Revere.

Neither the validity of the policy nor its terms are disputed. The dispute concerns whether Dr. Stanton is entitled to the full benefits available under the policy. Dr. Stanton maintains that he has suffered a disabling injury which prevents him from performing surgery. According to Dr. Stanton, when he purchased the policy he understood from Mr. Ames that such a disability made him "totally disabled" and entitled him to full policy benefits. Paul Revere, on the other hand, maintained that Dr. Stanton was not totally disabled and it made a partial denial of benefits.

Dr. Stanton then filed suit alleging claims, among others, for breach of contract, bad faith, invasion of privacy and fraud. Later, Paul Revere filed a motion for summary judgment on the grounds that its BOE policy is part of an employee welfare benefit plan established by Dr. Stanton. Paul Revere argued that Dr. Stanton's common law claims are preempted by the Employee Retirement Income Security Act ("ERISA") 29 U.S.C. §§ 1001 et seq.

In addressing the motion for summary judgment, the United States District Court for the Southern District of the State of California stated that ERISA would only preempt if there is a "plan" for purposes of ERISA. In order to resolve the preemption issue, the critical question was whether or not the BOE policy purchased by Dr. Stanton was part of an ERISA plan. In order to prevail on its motion for summary judgment, Paul Revere had the burden of establishing the existence of an ERISA plan.

In support of its motion for summary judgment, Paul Revere advanced two primary propositions. First, it claimed that the BOE policy constituted an employee welfare benefit plan in and of itself. Second, Paul Revere argued that the various benefits provided by Stanton's corporation constitute a plan.

Dr. Stanton asserted that the BOE policy was not an employee welfare benefit plan. He contended that he purchased the BOE policy because his ability to conduct a profitable business depended on his ability to perform surgery. Should he suffer a disability grave enough to prevent him from performing surgery, he knew that certain expenses -- leases, insurance, salaries and the like -- would continue. The BOE policy was designed the cover expenses of the business when revenue generated by Dr. Stanton decreased. It was not intended to replace Dr. Stanton's lost wages.

The District Court concluded that the BOE policy was not specifically designed to benefit the employee, Dr. Stanton, but instead to cover the owner should its only revenue-producing employee be injured. For these and other reasons the District Court found that standing by itself the BOE policy was not an employee welfare benefit plan.

Also, Paul Revere argued that the various benefits provided by Stanton's corporation, including health, life and disability insurance, and a pension/profit-sharing plan, all constitute an ERISA plan maintained by the corporation for the benefit of its employees. The District Court found that the facts and circumstances of this case demonstrate that no ERISA plan existed.

Judicial decisions interpreting the ERISA statutes have established certain factors which guide the courts in determining whether or not an ERISA plan exists. Paul Revere failed to show what benefits, if any, were intended under the supposed "plan." It made no showing that there was a "class" of beneficiaries or that any class was intended. Paul Revere also failed to establish, as is required, the existence of a regular source of financing and a procedure for applying for or receiving benefits.

The District Court ruled that Paul Revere failed to meet its burden of establishing the existence of an ERISA plan. As a result, the District Court denied Paul Revere's motion for summary judgment.

- R. Anthony Moya

Absent A Special Duty, A Shareholder's Remedy For Breach Of Fiduciary Duty Is Derivative Action

Nelson v. Anderson

99 Daily Journal D.A.R. 4605 (May 19, 1999)

In Nelson v. Anderson 99 D.A.R. 4605 (May 19,1999), the Second Appellate District ruled that absent a special duty, a shareholder's remedy for breach of fiduciary duty is a derivative, rather than an individual action. In 1993, Nancy Nelson formed a corporation called "Lonan" with Loni Anderson, for the purpose of manufacturing and distributing cosmetics via infomercial and direct mail. Nelson and Anderson were the sole shareholders, with twenty-five and seventy-five percent ownership of the outstanding shares respectively. Nelson was named to various corporate offices, including chief operating officer. Anderson was named as corporate president and chief executive officer. In a separate agreement, Anderson's attorneys at Musick, Peeler & Garrett agreed to provide legal services to Lonan.

Despite Nelson's many years of experience in the infomercial business, Anderson chose to cast another spokesperson in the Lonan infomercial. Nelson spent a great deal of her time and her own funds traveling to different cities marketing Lonan. Nelson repeatedly proposed to Anderson that she trade personal information to the National Enquirer magazine in exchange for free advertising for Lonan. Anderson refused the free advertising until December of 1994, but a deal was never reached. Nelson arranged for Anderson to appear via telephone on the Home Shopping Network, but Anderson refused to honor the commitment. Nelson felt that Anderson's attorney, with whom Anderson was personally involved, took too great a part in the management decisions of the corporation. The Lonan infomercial was aired repeatedly in different markets, but failed to produce enough revenue for Lonan to meet costs. The corporation failed in 1995.

Nelson sued Anderson in 1995 for breach of fiduciary duty and sued the Lonan attorneys at Musick, Peeler & Garrett for legal malpractice. A jury awarded Nelson $565,000 against Anderson, but found for Musick, Peeler & Garrett in the malpractice action. Anderson appealed on the grounds that Nelson did not have standing to bring the action as an individual, rather the proper action should have been a derivative suit on behalf of the corporation. The appellate court agreed.

It is a general rule that a corporation, which suffers damages through wrongdoing of its officers and directors, must bring the action to recover losses itself. If the corporation fails to bring the action, then suit may be filed by a stockholder acting derivatively on behalf of the corporation. The court stated, an individual action exists only if the damages were not incidental to an injury to the corporation. The suit must be founded on a claim that the injury resulted from the violation of some special duty owed to the stockholder by the wrongdoer and having its origin in circumstances independent of the plaintiff's status as a stockholder.

All of the acts alleged to have caused Nelson's injury related to either misfeasance or negligence in the management of Lonan corporation. As such, all of the duties claimed to have been breached were owed to the corporation, not to Nelson individually. Because the gravamen of the action was injury to the corporation, the appropriate course should have been a derivative action.

Nelson claimed to have been deprived of $1,101,754.00 in lost profits, as a result of the inferior infomercial and the improper management of Lonan. However, a stockholder has no ownership interest in the profits of the corporation, thus a stockholder cannot claim to have been deprived of those profits. The injury in the instant case was to the corporation, not the stockholders individually. The court found that Nelson alleged no breach of duty owing to her personally, any loss of capitol investment and emotional distress were incidental to the injury to the corporation.

Because the corporation's lost earnings, profits, and opportunities rendered the whole body of Lonan shares valueless, the action must be in the form of a derivative suit by the shareholders on behalf of the corporation. On these grounds, the judgment in favor of Nelson was reversed.

- Rebekah S. Tyrell

Y2K FEATURE ARTICLE

Y2K LITIGATION UPDATE

By J. Albert Garcia, Esq.

Almost one hundred cases relating to the Y2K problem, including two insurance declaratory relief matters, are now pending in the United States. Slowly, many of these cases are being settled or are moving towards amicable resolution. Many more, however, continue to be zealously litigated, and this month we update our readers on the status of several of the most active cases venued in federal and state courts nationwide.

Filed in late 1998, Cincinnati Insurance Co. v. Source Data Systems, et al., Case No. C-98-144 (N.D. Iowa) was the first declaratory relief matter filed in connection with the Y2K problem. Defendant Source Data Systems ("SDS") provided computer equipment, software and support services to Pineville Community Hospital ("Pineville"). It was alleged that the system and software, warranted to be "operable beyond 1999," in fact were not Y2K compliant. Pineville sued SDS, claiming damages for the replacement of the system and software sold by SDS. SDS tendered the defense of the Pineville suit to Cincinnati Insurance Company ("Cincinnati"), which accepted the defense, subject to a full reservation of rights. Cincinnati then filed suit seeking a judicial declaration that it owed no coverage.

Cincinnati thereafter sought discovery from SDS regarding the nature and extent of the damages sought in the underlying litigation and the time that SDS became aware of potential Y2K claims by Pineville. SDS took the position that it was inappropriate to conduct discovery until the underlying action was resolved. Cincinnati filed a motion to compel discovery, and SDS countered with a motion to stay the action.

On April 24, 1999, the Cedar Rapids Division of the Northern District Court of Iowa issued its decision addressing the parties' motions. Regarding SDS's argument that waiting for resolution of the underlying matter was the proper approach, the Court observed, "such a scenario is possible but relatively uncommon. Usually, the duty to defend can be determined by examining the nature of the claims made in the underlying litigation together with any particular policy exclusions such as those for untimely notice of the claim." The Court further noted that the discovery requests "appear to be targeted at a determination of whether Cincinnati owes a duty to defend the underlying litigation." On these bases, the Court concluded that SDS failed to show that it was entitled to a stay of the litigation and ordered it to respond to Cincinnati's discovery requests.

In the second declaratory relief matter, American Alliance Insurance Co. v. Sunbeam Corp., Case No. 98 Civ. 4703 (S.D.N.Y.), American Alliance Insurance Company ("American") seeks a declaration that it is not obligated to issue to Sunbeam Corporation ("Sunbeam") a $10 million excess D&O liability policy pursuant to an offer to bind such coverage that it issued in April 1998. American alleges that Sunbeam failed to submit a letter explaining why it was Y2K compliant or copies of its existing policies or binders as required under the terms of the offer. Although Sunbeam did submit a warranty letter advising that the insured had no knowledge of any error or omission that might give rise to a claim, American claims that it was both inadequate and false based on a press release issued on April 3, 1998 advising of accounting irregularities. Seventeen securities fraud actions were subsequently filed in Florida. Earlier this year, Sunbeam moved for an order transferring the matter to the U.S. District Court for the Southern District of Florida. The New York District Court denied Sunbeam's motion, and the case continues to be litigated. Whether any Y2K claims against Sunbeam will become the subject of coverage remains to be seen.

In Sunquest Information Systems, Inc. v. Dean Witter Reynolds, Inc. (W.D.Pa.), plaintiff Sunquest Information Systems ("Sunquest") sued defendants Compucare Company and Dean Witter Reynolds Inc., alleging that both defendants are liable in connection with alleged misconduct arising from Sunquest's acquisition of Antrim Corporation ("Antrim"), a former subsidiary of Compucare that markets medical software. Sunquest develops, markets and supports integrated computer information systems for hospitals and other health care providers and allegedly holds a major share of the laboratory information processing market. Dean Witter acted as Compucare's investment banker.

Sunquest alleges, among other things, that defendant failed to disclose hidden problem areas within Antrim, including certain Y2K deficiencies in its software products. According to the complaint, in September 1996, Compucare and Sunquest began negotiations for the Antrim acquisition. During the course of the negotiations, the defendant represented that Antrim's most recent laboratory and financial information system release was fully functional and Y2K compliant. Compucare also allegedly represented that it was aware of no development which is likely to occur in the future that would adversely affect Antrim's business. Despite such representations, after the Antrim acquisition, Sunquest learned that Antrim's information systems were not compliant and required a tremendous amount of work to correct malfunctions and defects. The complaint alleges 9 causes of action including, indemnity, breach of implied warranties of merchantability and fitness for a particular purpose, fraud, negligence, misrepresentation and omissions, violation of federal securities laws, Pennsylvania securities fraud, and rescission.

On March 24, 1999, the federal court for the Western District of Pennsylvania granted in part defendants' motion to dismiss. The court held that Sunquest may pursue claims against Compucare and Dean Witter for indemnity, breach of contract and breach of express warranty, and that it may amend its securities claim against Dean Witter, but not against Compucare. The Court also held that Sunquest's allegations do not give rise to claims for breach of implied warranty, negligence or fraudulent misrepresentation.

In In Re Intuit, Inc. (formerly captioned Issokson v. Intuit, Inc.), Case No. CV773646 (Cal. Superior Ct., Santa Clara), the plaintiff claimed that the on-line banking functions of Quicken would not operate after December 31, 1999, and that as such, all users were entitled to damages. Before any of the lawsuits had been filed, Intuit had posted on its Web site a listing of all products that could handle dates after December 31, 1999, and those that could not. Intuit's WebSite,

according to Intuit, makes clear that the on-line banking users will have available a fix by the end of June '99. Apparently, Issokson admitted that he had not been damaged, that his Quicken software had not malfunctioned, and that he did not anticipate any such malfunctions in the immediate future

or at least until Year 2000.

On August 28, 1998, Judge John Herlihy of the Santa Clara County Superior Court issued the ruling dismissing the class action complaint after Intuit agreed to provide Year 2000 fixes for free. Judge Herlihy ruled that, because no form of damage from Intuit's software products had been experienced, and there was no proof that any such damage would take place before Intuit had the opportunity to provide a remedy to any user of its software, the complaint should be dismissed, with leave to amend. The Order dismissing the case gave Issokson the opportunity to amend his complaint, but made it clear that the absence of existing damages was fatal to any damage claim against Intuit.

On October 9, 1998, an amended complaint was filed by Milberg Weiss in Issokson and the consolidated Rubin and Colbourn matters, which are nearly identical to Issokson. The amended complaint attempts to avoid a motion to dismiss by asserting that Intuit's promise to provide free fixes does not entirely correct the problem because:

1. Intuit could rescind the offer at any time;

2. the offer is not widely publicized with its technical support divisions still telling callers to purchase the the Quicken 98 upgrade (or later version);

3. the fix is only available on the Internet, thereby leaving some without access;

4. some have already paid for a fix;

5. somehow, the class is still deprived of the benefit of the bargain;

6. that by fixing the bug after the date that the Comptroller of the of the Currency recommends and after the date that problems will begin to arise violates the state business protection act; and

7. that they have failed to inform customers of the fix availability.

The causes of action are otherwise fairly consistent with the other class actions. The complaint asserts breach of implied warranty; Magnuson Moss Warranty Act; Fraud; Unfair Business Practices (based on refusal to fix until they were sued); Injunctive Relief from selling defective versions of the product and to provide refunds to those who already bought.

On February 2, 1999 the consolidated cases were dismissed with prejudice, but the Court allowed Issokson to amend (within 30 days) his claim under Section 17200 of the California Unfair Practices Act, which permits only injunctive relief. This will allow the case to go forward to determine whether, even if no one has been damaged, Issokson can state a claim that Intuit engaged in unfair trade practices by allegedly misinforming Issokson about the availability of the fix that Intuit announced will be released in June. A motion to amend has now been filed.

Qual-Craft Industries, Inc. v. Realworld Corporation, Case No. 98-01186 (Mass. Superior Ct., Norfolk.) is another class action case in which the plaintiffs allege that defendant's accounting and business software should be getting free upgrades instead of paying between $3000 and $5000 to eliminate Y2K problems. Plaintiff claims that it purchased version 6.6 of defendant's software in April 1995 and that the software will not recognize dates beyond 1999. Defendant has stated that it will only provide upgrades for version 7.2, which was issued in June 1997.

Under the terms of a settlement approved on April 16, 1999, RealWorld will provide free Y2K compliant modules and discounts to licensees of versions 6.0 to 7.2 of the Classic Accounting Software. In addition to the free modules, the settlement provides discounts on software upgrades to the some 275,000 customers who own versions 6.0 through 7.2 of its RealWorld Classic Accounting software. The upgrade allows users to be fully Y2K compliant. Customers who already purchased a Year 2000 compliant version prior to the class-action suit will have the ability to receive a fifty (50%) percent discount off of the list price of all of RealWorld's Windows-compatible software modules. Finally, registered owners of the software will be eligible for free software subscription services.

The upgrades and other discounts are valued at an estimated $915 for each of the 40,000 business customers using older versions of the software which used a two digit date code. It is estimated that the terms of the settlement may cost RealWorld as much as $55 million.

Rhodes v. Omega Research, Inc., Case No. 98-0174 (S.D. Fla.) is a shareholder class action against Omega and its securities underwriters due to their alleged failure to disclose in the company's initial public offering prospectus, among other things, that some of Omega's software products were Y2K noncompliant.

On March 1, 1999, the Florida Southern District Court dismissed the Y2K noncompliance fraud claim with prejudice under the "bespeaks caution" defense, because the prospectus discussed risk factors regarding "defects in current or future products". The Court permitted the plaintiffs to amend the complaint regarding alleged overstatements of Omega's sales, and undisclosed non-Y2K technical glitches and bugs.

ATTORNEY PROFILE

COLONEL RANDALL L. MASON

(Deputy Commander, 70th U.S. Army Regional Support Command)

Colonel Randall Lamar Mason was born on September 5, 1948 in Salina, Utah. He enrolled in the Utah Army National Guard as a Medical Corpsman in 1966. In June 1971, he was commissioned as a Military Intelligence Second Lieutenant following completion of Officer Candidate School. He then served as an Assistant Polish Section Leader in the 142d Military Intelligence Linquist Company, in Salt Lake City, Utah.

Following relocation to California in 1975, then First Lieutenant Mason left the Utah Army National Guard in favor of the U.S. Army Reserve. His reserve assignments include: Deputy Chief of Staff Operations, Chief of Operational Readiness Division, and Deputy Chief of Plans and Operations Division, on the 63d ARCOM staff; many positions in the 309th Army Security Agency Battalion, including Commander, 309th HHC; Commander, 337th MI Detachment (Counter Intelligence/Interrogation); Commander, 307th MI Detachment (Counter Intelligence/Interrogation); Commander, 734th MI Company (Interrogation & Exploitation); and both Commander, and Interim Commander, 140th MI Battalion (CEWI) on two separate assignments. Following his second battalion command, then Col. Mason transitioned to the Transportation Corps and served three years as Commander, 1394th Deployment Support Brigade stationed at Camp Pendleton, California before being selected as the Chief of Staff, 63rd US Army Regional Support Command (comprising all of California, Arizona and Nevada).

Colonel Mason was selected by the United States Army and assigned on May 20, 1999 to be the Deputy Commanding General, 70th US Army Regional Support Command (comprising all of Washington, Oregon and Idaho).

His military education includes the Medical Corpsman Course, Officer Candidate School, Combat Intelligence Staff Officer Course,

Counterintelligence Officer Course, Military Intelligence Officer Advance Course, Crypto Tactical Operations Officer Course, Army Command & General Staff College, Brigade Pre-Command Course, Senior Officer Transportation Transition Course and the United States Army War College.

Colonel Mason's awards and decorations include the Meritorious Service Medal w/3 OLC, Army Commendation Medal, Army Achievement Medal, National Defense Service Medal, Army Reserve Components Achievement Medal w/5 OLC, Armed Forces Reserve Medal w/Hour Glass Device, Army Service Ribbon, and the Army Reserve Component Overseas Training Ribbon.

Colonel Mason, his wife Brenda, and children Russell, Scott, Marshelle, Bryan, Shannon and Brandon live in La Mesa, California. His sons, Russell and Scott are also members of the Army National Guard and Army Reserve, respectively. He is a partner in the law firm of Lewis, D'Amato, Brisbois & Bisgaard