Recent developments in the law of legal malpractice
Maryland bad faith/legal malpractice action against individual defense attorneys dismissed
In Cook v. Nationwide Insurance Company, Case No. PWG-13-882 (D. Md. Aug. 23, 2013), the Court considered a "dizzying array" of motions in an insurance bad faith case arising out of an excess judgment in a motor vehicle accident case tried in Maryland state court. The federal district court denied the plaintiff's motion to remand, dismissed the case as against the non-diverse insurance defense attorneys who tried the underlying case, and set a schedule for limited discovery relating to the issue of whether there had been a settlement demand arguably within policy limits prior to the trial verdict.
In the underlying auto accident case, the insured had been driving while intoxicated and on a suspended license when he struck and injured the plaintiff's car, causing severe injuries to the plaintiff. The insured's policy only had limits of $50,000. The plaintiff brought suit in the Circuit Court for Prince George's County, Maryland, which ultimately resulted in a judgment of $892,050.52. On the first day of trial, the Plaintiff had offered to settle for $71,000, an amount consisting of the policy limits of $50,000 and $21,000 in "trial costs." The insurer had countered with an offer of $50,000 plus $4,000 in trial costs. After the judgment was returned, the insured driver executed an assignment to Plaintiff of any and all rights he had against the insurer and the defense counsel in any claims he had as a result of the handling of the claim and the trial.
The plaintiff subsequently filed suit against the insurer, against the individual defense attorneys, and against their law office in the Circuit Court for Prince George's County, asserting one count of bad faith/negligence. The defendants then removed the case to federal court, asserting that the individual defense attorneys who were residents of Maryland were fraudulently joined. Immediately after removal, the defendants moved to dismiss. Plaintiff then filed a motion to remand, and moved for leave to file an amended complaint.
Judge Grimm denied the plaintiff's motion to remand, on the grounds that he had failed to state any colorable claims against any non-diverse defendants, specifically, the defense attorneys. The Court noted that nowhere did the complaint even allege that the attorney defendants had control over any decisions as to whether to settle the Plaintiff's claims, or that the defendant attorneys were even aware of the $71,000 settlement demand until after the insurer had rejected it. The Court also rejected plaintiff's argument that he had stated a viable claim for legal malpractice, ruling that under Maryland law, claims for legal malpractice are not assignable, citing Claggett v. Dacy, 420 A.2d 1285, 1288 (Md. App. 1980). Accordingly, the Court held that the assignment of the insured's claims for legal malpractice was invalid as a matter of law and cannot support a claim against the defendant attorneys.
The Court granted the plaintiff's motion to amend with regard to the count of bad faith only, to allow the plaintiff to allege that the insurer had the authority to pay the $21,000 in trial costs either as an expense or as a cost under the policy, and thus had an obligation to do so under the terms of the policy. Arguably, if the $21,000 represented trial costs, then together with the $50,000 in policy limits, the $71,000 settlement demand may have been within policy limits.
With regard to the defendants' motion to dismiss, the Court noted that the defendants argued that the plaintiff's lowest settlement demand was $71,000, and that the insurer had offered to settle for $54,000, consisting of the policy limits of $50,000 and $4000 in costs. The Court noted that neither party has pointed out any case in which an insurance company was held liable for bad faith after offering to settle at, much less above, its policy limits.
The plaintiff argued that the $71,000 offer was within policy limits because the additional $21,000 constituted "trial costs." The Court held that plaintiff therefore alleged, "by the narrowest of margins", a plausible ground for relief. Noting that under Maryland law, "costs" do not include the prevailing party's counsel fees, the Court set a schedule for expedited and limited discovery on the issue of what expenses are included in the $21,000 of alleged costs, and any good faith basis Plaintiff may have for believing that attorney's fees or or any other expenses are "costs" under the policy.
Interestingly, while on a motion to dismiss such evidence could not be considered by the Court, the defendants' motion to dismiss noted that there were numerous settlement offers made of the policy limits, the first being made about 70 days after the accident at issue. However, the insurance company defendants evidently opted to withhold policy limits information until the plaintiff provided his medical records, and that appears not to have occurred until after suit was already filed. Reading between the lines, it appears that plaintiff's counsel may have been angered at having had to incur significant trial preparation expenses before being informed that the policy limits were only $50,000.
Posted by David B. Stratton on 08/27/2013 at 07:56 PM
Lawyers Professional Liability - Unreported administrative error results in disclaimer of coverage
In Minnesota Lawyers Mut. Ins. Co. v. Baylor & Jackson, PLLC, No. 10-2701 (D. Md. Apr. 3, 2012), the District Court granted summary judgment to the insurer, holding that the insurer is not liable to defend or indemnify the defendant law firm under an LPL policy. The Court awarded summary judgment based on the finding that any reasonable lawyer would have been worried about a malpractice claim after summary judgment had been awarded in the underlying action based on the insured law firm's administrative error in submitting an unexecuted affidavit in opposition to a motion for summary judgment.
This matter arose out of the insured law firm's representation of a client who was involved in a dispute concerning various agreements as to the funding of litigation against the United States and the allocation of any proceeds from that litigation. That dispute resulted in a lawsuit in the Circuit Court for Baltimore City, before Judge Kaplan, in which the insured law firm represented the defendant. Judge Kaplan awarded summary judgment to the plaintiff in that action, in part because the defendants never contested the validity of the underlying agreement. One of the defendants tried to contest the validity in his opposition to the plaintiff's motion for summary judgment, but he failed to submit either an affidavit or a sworn statement to support his contention, and Judge Kaplan disregarded his argument. In the subsequent coverage action, the District Court noted that the record indicated that an unexecuted affidavit had been attached to the opposition memorandum in error, and at the ensuing hearing in August, 2006, Judge Kaplan refused either to allow the defendant to execute the affidavit or to testify to the contents of the affidavit despite his presence at the hearing. The total damages awarded to the plaintiff in that action was about $2.6 million, and the judgment was affirmed on appeal in 2009. The appellate court also observed that the defendants opposition to summary judgment was not supported by any sworn evidence as required by Md. Rule 2-501. The appellate court noted that the failure to properly place facts in dispute affected the arguments on all the counts.
The insured law firm had placed Minnesota Mutual on notice as soon as it they had received the appellate court's opinion on July 9, 2009. The former client filed a malpractice suit in August, 2009. Although Minnesota Mutual initially defended, presumably under a reservation of rights, it eventually withdrew from the defense and disclaimed coverage. This was because the insurer had concluded that the insured law firm should have reported the potential claim during the policy period of August 1, 2006 to August 1, 2007, because it was during that time that the firm "first became aware of facts which could have reasonably supported the claim asserted against it . . . ." Minnesota Mutual filed a declaratory judgment action to establish its lack of liability for the defense and indemnification of the insured law firm in the legal malpractice action.
The Minnesota Mutual policy was a claims made and reported policy. It stated, among other things, that a claim is deemed made when "an act, error or omission by any INSURED occurs which has not resulted in a demand for DAMAGES but which an INSURED knows or reasonably should know, would support such a demand." The Policy definition of "CLAIM(S)" also provided, in part, that it means "An act, error or omission by any INSURED which has not resulted in a demand for DAMAGES but which an INSURED knows or reasonably should know, would support such a demand."
The District Court, in awarding summary judgment to Minnesota Mutual, found that "the act, error, or omission giving rise to the Underlying Defendants' malpractice claim occurred on August 11, 2006, when [the insured law firm] . . . filed the opposition to summary judgment without supporting evidence." Maryland employs an objective standard for evaluating the reasonableness of an insured's actions in relation to the obligation to notify an insurance company of a potential claim. An insured's notice obligation accrues when the circumstances known to the insured at that time would have suggested to a reasonable person the possibility of a claim. The District Court found that:
Thus, any reasonable lawyer faced with a motion for summary judgment could simply have read Maryland Rule 2-501 and known that an unexecuted affidavit does not satisfy the Maryland standard for summary-judgment practice. [The insured law firm] . . . reasonably could have become aware, probably acutely aware, of that during the motions hearing when Judge Kaplan refused to let [the client] . . . either execute the affidavit or provide testimony at the hearing. . . . It certainly should have become aware of its shortcoming when Judge Kaplan rendered his opinion on August 22, 2006, specifically pointing out the absence of admissible evidence from the opposition that could possibly establish a genuine dispute of material fact. Any reasonable lawyer would have read Judge Kaplan's opinion with alarm as to what it meant to him or her personally. Any reasonable lawyer would have been worried it could lead to a malpractice claim. At that point, a claim was deemed made under the 2006 Policy. And at that point, [the insured law firm] . . . had to report the claim during the 2006 Policy term in order for it to be a covered claim. Consequently, [the insured law firm's] . . . failure to report it during the 2006 Policy term precluded coverage.
The Court rejected the insured law firm's argument that it had no reason to give notice to Minnesota Mutual in 2006 because Judge Kaplan's grant of summary judgment was based upon multiple alternative grounds, only one of which was the lack of an affidavit. The Court reasoned that any reasonable lawyer would have been aware that Maryland appellate courts may affirm a summary judgment on any one of several alternative grounds, and thus, the insured law firm risked appellate affirmance solely on the basis of the firm's malpractice.
The District Court also found that an alternative ground for finding no coverage was that the insured law firm in 2007 failed to report on its application for renewal of its Minnesota Mutual policy, "any INCIDENT which could reasonably result in a claim being made against the firm or a member of the firm". The Court found that the failure to report this incident until July 9, 2009 could have been reasonably regarded by Minnesota Mutual as a material misrepresentation, and the insurer was entitled to decline coverage under the 2009 policy on the ground of material misrepresentation.
Finally, the District Court rejected the insured law firm's argument that Minnesota Mutual could not show actual prejudice due to late notice, under Md. Ins. Code sec. 19-110. The District Court concluded that under the language of the Minnesota Mutual policy, the time for reporting was no mere "notice provision", but was incorporated into the definition of coverage and therefore became a condition precedent to coverage. Consequently, the insured law firm's failure to report the claim within the policy term or extended reporting period amounted to a failure to perform a condition precedent to coverage. The 2006 policy expired by the time the claim was reported to the insurer, and so coverage was never triggered for this incident. Thus no breach of the 2006 policy occurred and the insurer is not required to show actual prejudice in order to disclaim coverage under Section 19-110. Even if the insurer were required to show prejudice, the Court found that it could have easily done so by showing it had been excluded from the post-summary judgment and appellate proceedings which were the only opportunities in which the insurer could have had to fashion a request for relief.
Posted by David B. Stratton on 04/16/2012 at 01:34 PM
4th Circuit affirms summary judgment based on business enterprise exclusion in LPL policy
In Minnesota Lawyers Mut. Ins. Co. v. Antonelli, Terry, Stout & Kraus, LLP, No. 10-2404 (4th Cir. March 29, 2012)(unpublished), the Court affirmed the District Court's award of summary judgment to the insurer, holding that the insurer does not have a duty to defend the insured law firm because the complaint falls entirely within the insurance policy's Business Enterprise Exclusion.
In the underlying suit, the defendant attorneys were alleged to have advised their clients to transfer the ownership of certain patents for wireless email technology to a shell company, NTP, in which the clients held no interest, in order to protect the patents from creditors. Later, NTP filed a patent infringement action against RIM, alleging that RIM's Blackberry system infringed on the wireless email technology patents.
RIM settled the suit for $612.5 million and received a perpetual license. When the defendant attorneys refused to share the settlement with the plaintiffs, the plaintiffs sued for breach of fiduciary duty, breach of contract, unjust enrichment, and promissory estoppel.
The Business Enterprise Exclusion stated that the policy did not provide coverage to:
any CLAIM arising out of PROFESSIONAL SERVICES rendered by any
INSURED in connection with any business enterprise:
(a) owned in whole or part;
(b) controlled directly or indirectly; or
(c) managed, by any INSURED, and where the claimed DAMAGES resulted from
conflicts of interest with the interest of any client or former client or with the
interest of any person claiming an interest in the same or related business
The Fourth Circuit found that each element of this exclusion was met within the four corners of the Complaint. There was no dispute that the case arose out of professional services that the insureds provided to the plaintiffs. Those services included counseling as to changing the ownership of certain patents in order to avoid their creditors. The Court also found that the professional services were rendered "in connection with" a business enterprise, and that the insureds owned, controlled or managed the business enterprises that were involved. Finally, the Court found that the asserted damages surely resulted from conflicts of interest, because the defendant attorneys allegedly obtained complete ownership and control of their clients' assets and exploited those assets for personal benefit, violating professional ethics rules governing conflicts of interest. See Va. R. Prof. Conduct 1.8(a), (b), and (j).
Business Entreprise Exclusions are discussed in more detail here.
Posted by David B. Stratton on 04/08/2012 at 02:41 PM
Attorney malpractice claims in $100 million D.C. patent malpractice suit survive preliminary motions
In Lans v. Adduci Mastriani & Schaumberg L.L.P., No. 02-2165 (D.D.C. May 23, 2011), the District Court, in a 120-page opinion, denied the defendants' motion to dismiss an attorney malpractice suit arising out of patent litigation. In this suit, the plaintiffs claim that the defendants' alleged misdeeds resulted in the loss of the plaintiffs' proprietary interests in a patent worth more than $100 million.
Judge Walton's opinion is predominantly a discussion of challenges raised by defendants concerning personal jurisdiction under the D.C. long-arm jurisdiction statute, concerning the fiduciary shield doctrine, and concerning the application of issue and claim preclusion based on decisions in the underlying litigation. Judge Walton dismissed the plaintiffs' civil RICO claims.
Concerning the malpractice claims, Judge Walton ruled that although no federal claims remained in the case, the state law malpractice claims require resolution of substantial questions of federal patent law under 28 U.S. C. sec. 1338(a). Judge Walton decided that the Court would maintain subject matter jurisdiction over the malpractice claim, due to the need to litigate the issue of patent infringement and resulting damages in the malpractice claim. Further, the court maintained supplemental jurisdiction over all the remaining state-law claims in the case.
The defendants had argued that the plaintiffs' claims for breach of contract, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing should be dismissed because they were all duplicative of the malpractice claim, arose out of the same facts as the negligence claim, and required essentially the same standard of care. The Court rejected this argument, on the grounds that the various causes of action each rested on different proof. The malpractice claim was based on the alleged failure to investigate and clarify ownership of the patent. The breach of contract claim was based on alleged failure to carry out the terms of the contingency fee agreement, and on alleged conversion of funds owed under the terms of the fee agreement. The breach of the implied covenant of good faith was based on the same facts as the breach of contract claim. The breach of fiduciary duty claim centered on alleged violations of the D.C. Code of Professional Conduct and the Swedish Bar's Canon of Ethics, including among other things failure to disclose conflicts of interest. Thus, the Court found that the fiduciary duty claims did not arise out of the same facts as the malpractice claim, and that a failed malpractice claim would not neessarily preclude recovery on a claim for breach of fiduciary duty. Thus, the Court found that none of the other state-law claims were duplicative of the malpractice claims.
Interestingly, the Court also rejected an argument by the defendant law firm that an independent cause of action for breach of the covenant of good faith and fair dealing does not exist in the District of Columbia for claims based on an attorney's representation of a client. See slip op. at 118. The Court distinguished Jacobsen v. Oliver, 201 F.Supp. 2d 93, 98 n. 2 (D.D.C. 2002), on the grounds that Jacobsen dismissed the implied covenant count because it was identical to a malpractice claim in that case. But in this case, the plaintiffs' implied covenant claims were founded upon their contingent fee agreement with the defendant law firm, not on the legal representation or alleged malpractice. Therefore, Judge Walton reasoned, the general rule applies that in every contract there is an implied covenant of good faith and fair dealing. "No cases addressing legal malpractice have carved out an exception for such cases, and therefore, just like other contracts, contracts with attorneys are subject to an implied covenant of good faith and fair dealing."
Lawyer Professional Liability: D.C. Circuit discusses remedy following breach of fiduciary duty
In So v. Suchanek, Nos. 10-7071, 10-7087 and 10-7113 (D.C. Cir. Jan. 20, 2012), a professional liability action against an attorney, the Court considered the defendant attorney's appeal of a judgment that the attorney had to disgorge fees, with interest, totaling $455,933.52 as a result of the attorney's breach of fiduciary duty by failing to disclose a direct conflict of interest. The Court also considered the former client's cross-appeal, in which the former client argued that the amount of disgorgement should have been higher. The Court ruled against the attorney and in favor of the former client, affirming the judgment against the attorney as to liability, but remanding the matter to the trial court for recalculation of the amount of disgorgement of fees, in a higher amount, covering the entire course of representation.
The facts of the case are perhaps best summed up by the trial court's one-sentence introduction to its Memorandum Decision:
This case presents the sad story of a blind and
partially deaf retired administrative law judge who robed himself
with the made-up title "Chief Judge Emeritus"; held himself out
as a knowledgeable, indeed powerful, lawyer with experience in
complex international financial matters; undertook to provide
legal representation from Washington, D.C., to a British
corporate entity, an American investor, a wealthy but naive, non-
English speaking Hong Kong investor, and a Chinese woman resident
in Canada, in connection with a financial fraud perpetrated in
London; ignored or failed to recognize conflicts of interest
between and among these clients; accomplished roughly nothing
except administrative duties for any of them; accepted
substantial payments from his client but neither prepared nor
submitted bills; and, when his representation came to an end and
his Hong Kong client demanded the return of $400,000 of the funds
that had been entrusted to him, refused to do it.
So v. Suchanek, No. 08-2091 (D.D.C. May 6, 2010)(U.S. District Judge James Robertson).
Finding several conflicts of interest in violation of D.C. Rule of Professional Conduct 1.7, the district court stated that:
The controlling Circuit precedent found in Hendry v.
Pelland, supra, amply supports a finding that a lawyer who
represents his client although he has conflicts of interests has
violated his fiduciary duty, and that such a violation, without
more, will support an order for the disgorgement of legal fees.
Hendry does not, however, require disgorgement, nor does it
prescribe the amount or proportion of fees that must be disgorged
if disgorgement is to be the remedy. For those matters, the
trial court is left to its sound, equitable discretion.
On appeal, the D.C. Circuit observed, in pertinent part, that although not every ethics violation rises to the level of a breach of fiduciary duty, a breach occurs when an attorney represents clients with conflicting interests.
The Circuit Court agreed that disgorgement is an equitable remedy entrusted to the sound discretion of the district court. Here, however, the Circuit Court held that the district court's award of damages was founded on an erroneous view of the law, namely, a misapplication of rule 1.7, because the district court erroneously considered the conflict of interest limited to two discrete time periods. The Court directed that on remand, the district court consider the following factors:
The remedy . . . [the district court] fashions should account for the full extent of the conflicts found; the need to deter attorney misconduct; the "fundamental principle of equity . . . that fiduciaries should not profit from their disloyalty"; and the decreased value of the services provided to So resulting from Suchanek's rampant misconduct. Hendry, 73 F.3d at 402; see also Restatement (Third) of the Law Governing Lawyers [sec.] 37 cmt. e (2000)("Ordinarily, forfeiture extends to all fees for the matter for which the lawyer was retained . . . . ")
This case illustrates the importance of early identification of conflicts of interest and an effective response to such conflicts.
Posted by David B. Stratton on 01/23/2012 at 10:28 PM
District of Columbia
Legal malpractice in D.C.: the common knowledge exception to the requirement of expert opinion
In Carranza v. Fraas, No. 05-0117 (D.D.C. Oct. 31, 2011), Judge Urbina granted summary judgment on legal malpractice and breach of fiduciary duty claims, due to the plaintiffs' lack of expert testimony supporting some of their claims, and the plaintiffs' lack of admissible evidence to support their last remaining claim. The plaintiffs, who were two female farmers from Montana, brought suit against the defendant attorney for legal malpractice and breach of fiduciary duty arising out of their underlying civil rights action against the USDA.
The plaintiffs had three claims. First, they alleged that the attorney failed to meet USDA-imposed deadlines in pursuing a settlement in the civil rights action. Second, they alleged that the attorney failed to disclose a conflict of interest arising from his work as a registered lobbyist before the USDA. Third, they alleged that the attorney failed to inform them of a settlement offer by the USDA.
Judge Urbina granted summary judgment on the first two claims in an earlier opinion, Carranza v. Fraas, 763 F.Supp.2d 113 (D.D.C. Feb. 7, 2011). The Court noted that to establish legal malpractice under D.C. law, the plaintiffs must demonstrate the applicable standard of care, that the attorney violated that standard and that the violation caused a legally cognizable injury. They must establish the standard of care by presenting expert testimony, unless the attorney's lack of care and skill is so obvious that the trier of fact can find negligence as a matter of common knowledge.
Here, the plaintiffs had failed to designate an expert witness, and argued that their allegations fell within the common knowledge exception. Concerning the allegation that the attorney failed to meet USDA deadlines, Judge Urbina acknowledged that failing to adhere to court filing deadlines is a type of negligence that may fall within the common knowledge exception. However, not every failure to meet a deadline falls within the common knowledge exception. The alleged deadline here was an unspecified time during which the USDA expected the defendant to file paperwork in accordance with the purported settlement offer. The Court found that "it is far from clear that a lay jury could determine the significance of the defendant's alleged failure to comply with such deadlines without the aid of expert testimony", and that the common knowledge exception did not apply to these deadlines.
The plaintiffs' second claim was based on an alleged conflict of interest. While other jurisdictions have held that no expert testimony is necessary in cases involving obvious conflicts of interest, in D.C. the Court observed that it has been held that "assessing an alleged conflict of interest is a task that falls beyond the ken of a lay juror relying on common knowledge and requires expert testimony." Thus, the Court found that the common knowledge exception did not apply to the conflict of interest claim.
The plaintiffs' third claim was that the attorney failed to inform them of the USDA's January 2001 settlement offer. The Court did find that the common knowledge exception applied to this claim:
Without question, an attorney has a duty to inform his client of meaningful settlement offers made in the course of civil litigation. See, e.g., D.C. RULES OF PROF'L CONDUCT R. 1.4(a) cmt. 1 (providing that "[a] lawyer who receives from opposing counsel an offer of settlement in a civil controversy . . . is required to inform the client promptly of its substance") . . . .
The Court reasoned that a lay juror could recognize that an attorney's failure to report a settlement offer is a breach of duty, and is a withholding of information necessary to make decisions that are at the core of the attorney-client relationship. However, the Court denied summary judgment on this claim without prejudice, to allow for further discovery as to whether the USDA had in fact ever made the alleged settlement offer.
The Court also refused plaintiffs' motion to appoint an expert under Fed. Rule of Evidence 706(A), which was a ruling that drew some scholarly attention.
In the subsequent opinion, the Court granted the renewed summary judgment motion by the defense. After discovery, it simply turned out that there was no evidence that the USDA had actually made the alleged settlement offer in January, 2001. The plaintiffs' opposition to the renewed motion for summary judgment rested only upon their own unsupported affidavit, which itself merely presented hearsay. The contemporaneous documentation of the settlement negotiations indicated that the USDA had never made the alleged settlement offer after all.
This case illustrates the need for a practitioner to document settlement negotiations carefully, in order to avoid any misunderstandings and resolve any claims expeditiously.
Legal malpractice decision explores roles of judge, jury, and expert in District of Columbia
In a legal malpractice case, Hickey v. Scott, No. 07-1866 (D.D.C. July 11, 2011), the District Court explored the respective roles of the judge, jury, and expert under D.C. law. (An earlier decision in this case was previously discussed here.)
The claim discussed in this ruling was the plaintiff's allegation that the lawyer violated the applicable standard of care by failing to request Laffey Matrix hourly rates in his petition for attorney's fees in the underlying action before the EEOC. Before the District Court was the issue of the permissible scope of expert testimony with regard to that claim. Should the parties' experts be permitted to testify on whether it is a breach of the appropriate standard of care for an eligible attorney not to request Laffey rates in his fee petition before the EEOC, and instead request only his lower, contractual rates? Second, should the experts be permitted to testify whether the attorney met the legal criteria for an award of Laffey rates? Third, should the experts be permitted to testify whether the attorney's failure to petition for Laffey rates was the proximate cause of any injury to the former client?
Each of these questions implicated the respective roles of the Court, the jury, and the experts at trial.
The Court ruled that whether it is a breach of the applicable standard of care for an eligible attorney not to file a fee petition for Laffey rates before the EEOC is a question that the jury must decide.
However, expert testimony as to the applicable standard of care is appropriate and necessary, unless the attorney's lack of care and skill is so obvious that the trier of fact can find negligence as a matter of common knowledge.
The Court also ruled that the experts would be allowed to opine on whether it is a breach of the standard of care for an attorney in the same circumstances not to petition for Laffey rates.
On the other hand, the legal criteria for an award of Laffey rates was ruled to be a matter of law, within the sole province of the Court, and upon which the experts were not permitted to testify. Surprisingly, the District Court cited an Illinois decision on this point.
The Court also ruled that once it had instructed the jury as to the law on an attorney's eligibility for Laffey rates, the question of whether the attorney satisfied these legal criteria was one for the jury to decide.
Finally, the Court considered the issue of who would decide whether the attorney's failure to petition for Laffey rates was the proximate cause of injury? In other words, whether such a petition for Laffey rates, if made, would have been successful? The District Court characterized this as a variety of the "case-within-a-case" issues typical of legal malpractice cases. Here, the issue was whether a reasonable Administrative Law Judge would have awarded fees at the higher Laffey rates if the attorney had sought them.
Adopting the approach of a number of non-District of Columbia precedents, the District Court ruled that the jury should perform its traditional function of applying law to facts, even when the earlier factfinder was a judge -- as long as it only involves an application of law to facts, not a decision on a disputed issue of law. Under this approach, the Court simply instructs the jury on the legal aspects of the case, and then leaves it to the jury to decide what a reasonable fact-finder would have concluded if the attorney had not been negligent.
Finally, the Court considered whether the jury may be assisted by expert testimony in making that assessment. Citing precedent from the Second Circuit, Virginia, and California, the District Court ruled that no, the parties experts would not be permitted to testify on this, and invade the jury's function by reaching the ultimate question of whether a petition for Laffey rates before a reasonable ALJ would have been successful.
The District Court acknowledged that there is a fine line between an expert's testimony on why an attorney's failure to petition for Laffey rates constituted a breach of the standard of care, and expert testimony on whether a reasonable ALJ would have awarded Laffey rates, however "[a]lthough the distinction may be subtle, it is one that must be drawn."
This decision provides a framework for future legal malpractice cases to help properly delimit the respective roles of the parties' experts, the jury, and the Court.
Legal malpractice insurer breached duty to defend, affirms 4th Circuit
In Minnesota Lawyers Mutual Insurance Co. v. Batzli, Nos. 10-1684, 10-1839, 10-1910 (4th Cir. Aug. 4, 2011)(unpublished), the 4th Circuit affirmed the trial court's denial of a post-trial motion for judgment as a matter of law, made by the insurer, that challenged the jury's verdict that the insurer breached its duty to defend under a legal malpractice policy. Although the decision was unpublished, the opinion is lengthy and also has a dissent by Circuit Judge Shedd.
The 4th Circuit found that there was sufficient evidence in the record for a reasonable jury to conclude that the insurer breached its policy.
The underlying legal malpractice claim arose from a drafting error in a property settlement agreement prepared in the client's divorce proceeding. Essentially, the client instructed the insured lawyer to seek the wife's interest in a family business during the settlement negotiations. After some negotiations, the insured believed he had negotiated a deal under which the wife would transfer her interest in the family business to the husband, however, the property settlement agreement he prepared had indicated that the husband would retain "his" interest in the family business, rather than "their" interest. This mistake came to light when the insured sent a follow-up document to the wife's lawyer to effect the transfer of the family business, to which the wife's lawyer responded that his client had not agreed to such a transfer. The wife's interest in the family business was worth over $400,000.
The insured disclosed his drafting omission to the husband, and the husband decided to go through with the property settlement and to move for correction of the agreement on the grounds of a scrivener's error.
In August, 2006, the insured filed a motion in the Circuit Court seeking correction of the scrivener's error, which was denied by the Court. The Virginia Court of Appeals affirmed this denial in May, 2008.
Around October, 2008, the insured's law firm renewed its legal malpractice policy with MLMIC. The policy included prior acts coverage but only if the insured had no knowledge of facts which could reasonably support a claim at the effective date of the policy. Also, coverage under the policy is conditioned on compliance with a notice requirement that requires the insured to give immediate written notice to the insurer in the event a claim; and that a claim is made whenever an act, error, or omission by any insured occurs which has not resulted in a demand for damages but which an insured knows or reasonably should know, would support such a demand.
In January, 2009, the husband filed a malpractice suit against the insured lawyer and his firm. The insured gave prompt notice of the suit to MLMIC, which denied coverage because the insured failed to comply with the notice requirement. The scrivener's error had been the subject of litigation since 2006.
In the district court, cross motions for summary judgment were denied because the there were genuine factual disputes between the parties as to whether it was reasonable for the insured to anticipate a claim by the husband.
At trial, the jury found for the insured and awarded damages of $8400, representing attorney's fees to date to defend the legal malpractice claim.
In response to MLMIC's post-trial motion, the district court reduced the damages award to nominal damages ($1), because the insured lawyer failed to provide evidence of the reasonableness of the fees, such as the nature of the services performed, the length of such services, and the applicable rates for such representation, and thus there was insufficient evidence to support the jury's award of damages.
However, the district court denied MLMIC's argument that the insured's notice of a claim by the husband was untimely as a matter of law, in large part because it was uncontested that the former wife would not have agreed to transfer her interest in the family business to the husband.
The parties thereafter filed cross appeals.
On appeal, the 4th Circuit acknowledged, as did the district court, that the test for whether the circumstances would give rise to a claim, for purposes of the notice requirement, was an objective one:
Failure to give timely notice will not be excused when the insured only subjectively concludes that coverage under the policy will not be implicated. Such a policy provision requires the insurer to be notified whenever, from an objective standpoint, it should reasonably appear to the insured that the policy may be involved.
The appellate court stated that the district court's decision was not that the insured did not need to notify MLMIC because any foreseeable claim would lack merit; instead, the district court determined that there was no reasonably foreseeable potential claim. The appellate explained that:
The distinction is perhaps confusing because both conclusions could potentially result from the determination that [the insured's] error caused no damage to his client. See Campbell v. Bettius, 244 Va. 347, 352, 421 S.E.2d 433, 436 (1992) ("In a legal malpractice action, the fact of negligence alone is insufficient to support a recovery of damages. The client must prove that the attorney's negligence proximately caused the damages claimed.").
Here, the wife had testified at trial that she would not have signed an agreement to transfer her interest in the family business to her husband. Thus, a reasonable jury could have determined that the insured lawyer could not have anticipated a demand for damages for "failing to procure that which was unprocurable." A reasonable belief that an insured's error caused no harm to the insured's client is relevant to whether an objectively reasonable person in the insured's position would expect his error to give rise to a claim for damages.
Accordingly, the 4th Circuit affirmed the ruling of the district court, finding that the jury had sufficient evidentiary basis to conclude that the insured reasonable thought his drafting error would not result in a claim until he learned from the husband that a legal malpractice suit would be filed.
Circuit Court Judge Shedd dissented, on the grounds that the insured admitted his error to his client in a letter, offered to bear the costs of the action in state court to try to correct the error, and in addition, the insured said that upon realizing the error, he felt sick about it and lost sleep over it. The insured knew that the wife's 20% interest in the family business was worth $440,000. Because the wife's interest in the family business was a non-marital asset, the divorce court did not have jurisdiction over it and the only way the husband could have received the wife's 20% interest was through the property settlement agreement, which the insured failed to properly draft. Thus, Judge Shedd would have reversed and entered judgment in favor of MLMIC.
[For practitioners, this opinion teaches the importance of providing timely notice of a potential claim to one's professional liability insurer. In addition, it teaches that a fee claim must be supported by an affidavit of fees and costs.]
Posted by David B. Stratton on 09/01/2011 at 01:54 PM
Legal and tax malpractice summary judgment reversed by D.C. Court of Appeals
In Pair v. Queen, No. 08-CV-1646 (D.C. Aug. 26, 2010), the Court reversed the trial court's award of summary judgment to the attorney who allegedly was responsible for a million dollar tax bill from the IRS.
The relationship between the Pairs and Mr. Queen broke down after Mr. Queen informed appellants that the District of Columbia and the IRS had assessed penalties and interest charges against the estate totaling more than a million dollars. The Pairs allege that they learned the estate's tax returns had been improperly prepared and had been filed almost a year and a half late.
The former clients were both the personal representatives of the estate, and beneficiaries of the estate.
The trial court awarded summary judgment on the attorney malpractice claim. Relying on United States v. Boyle, 469 U.S. 241 (1985), the trial court reasoned that because the plaintiffs were personal representatives of the estate, and as such had a non-delegable duty to the IRS to timely file the tax returns, they were also negligent and did not have standing to bring a lawsuit against someone who joined them in the negligence. The trial court found that the contributory negligence of the personal representatives was a complete bar to the attorney malpractice action.
The trial court dismissed the accountant malpractice count on the same grounds, and also on the grounds that there was no privity between the personal representatives and the accountant.
The D.C. Court of Appeals brusquely reversed these rulings. The Court held that:
Appellants argue, and we agree, that the trial court erred, as a matter of law, in applying United States v. Boyle to bar the Pairs' claims for malpractice and breach of fiduciary duty. The question at issue in Boyle was "whether a taxpayer's reliance on an attorney to prepare and file a tax return constitutes `reasonable cause' under ? 6651 (a)(1) of the Internal Revenue Code, so as to defeat a statutory penalty incurred because of a late filing." Boyle, 469 U.S. at 242. Boyle concerned the duties an estate and its representative owed to the IRS. By contrast, the Pairs' claims of malpractice concern the duties a professional owes to a client.
Mr. Queen's dual status as a personal representative and as attorney for the estate has, understandably, led to some confusion in analyzing the complaint. The Pairs are not seeking to excuse "[t]he failure to make a timely filing of a tax return . . . by [their] reliance on an agent." Boyle, 469 U.S. at 252 (holding that the executor's reliance on the estate attorney to file the return did not constitute "reasonable cause" for the failure to file a timely return). Instead, they are seeking "compensatory and consequential damages" through a malpractice claim. Importantly, nothing in Boyle suggests that a taxpayer's non-delegable duty to the IRS relieves a professional from liability for negligent failure to perform the duties for which an estate has employed him.
The Court of Appeals also held that the trial court had erred in its finding that contributory negligence barred the claims. The Court pointed out that in a 1993 decision, it had recognized that there was a difference between the non-delegable duty of a personal representative to file tax returns with the IRS, and the delegation that occurs when the personal representative reasonably relies on expert advice concerning substantive questions of tax law, such as whether liability exists in the first instance.
Moreover, the Court stated that it is not clear that the personal representatives would be without recourse even if the penalties derived solely from the late filing of the tax returns.
No one contests that the estate suffered substantial penalties as a result of both improper preparation and late filing of the estate tax returns. However, the trial court did not determine whether "the failure to file timely returns was  due to a lack of diligence or dereliction of duty on the part of [the Pairs] with regard to ascertaining and meeting filing deadlines, [or] rather due to [their reasonable] reliance on [professionals'] erroneous advice and assistance regarding substantive issues."
The Court held that on the record before it, a finding of contributory negligence per se could not be sustained.
With regard to the accountant malpractice claim, the Court held as follows:
We have already concluded that the court erred, as a matter of law, by relying on Boyle to bar the malpractice claims. Moreover, further factual inquiry is required to clarify the roles of Mr. Smith and Mr. Tolliver. The exact nature of their relationship to Mr. Queen is not clear from the present record, and it is important to remember that Mr. Queen was wearing two hats. A key question (perhaps not susceptible of a clear answer) is whether he engaged Mr. Smith and Mr. Tolliver while acting as a personal representative of the estate or solely in his capacity as the estate's attorney.
Posted by David B. Stratton on 01/15/2011 at 02:41 PM
District of Columbia
Legal Malpractice Claim Arising From Criminal Representation Barred By Collateral Estoppel
In Johnson v. Sullivan, the Court dismissed a legal malpractice claim arising out of prior criminal representation, based in part on the doctrine of defensive collateral estoppel.
The plaintiff brought a legal malpractice action against his former criminal attorneys, who had represented him at trial and in post-trial proceedings. Among other things, the defendants moved to dismiss on the ground that the plaintiff could not demonstrate that, but for the alleged negligence, the outcome of the plaintiff's post-conviction application for relief would have concluded in his favor. The defense argued that the plaintiff was collaterally estopped from litigating one element of his negligence claim -- that the alleged negligence in the post-trial proceedings resulted in or was the proximate cause of the plaintiff's loss.
The district court agreed:
Because the doctrine of collateral estoppel bars relitigation of the adequacy of Blitzer's representation, the plaintiff cannot show that Blitzer breached a duty owed to him or that the outcome of his post-conviction proceedings would have been favorable. And where, as here, the plaintiff's breach of fiduciary duty, fraud and breach of contract claims are indistinguishable from his legal malpractice claim, his inability to prove the malpractice claim renders these other claims unsustainable. See Hinton, 2010 WL 2710603, at *1 ("[A]ppellant cannot recast his malpractice claim as a breach of fiduciary duty claim . . . and he has not shown that his claims of negligence, breach of care, breach of trust, and bad faith are distinguishable from his malpractice claim."); Macktal v. Garde, 111 F. Supp. 2d 18, 23 (D.D.C. 2000) ("f plaintiff is unable to prove his professional negligence claim, contract and tort claims which are essentially restatements of the failed malpractice claim must also fail."); Biomet, 967 A.2d at 670 n.4 (rejecting appellant's "attempt to recast its malpractice argument as also breach of contract and breach of fiduciary duty"). The Court will therefore grant Blitzer's motion to dismiss.
John Tremain May, Esq., of Jordan Coyne & Savits, LLP, represented one of the defendants in this matter.
Posted by David B. Stratton on 01/06/2011 at 02:59 PM
District of Columbia
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