Recent developments in the law of legal malpractice
Virginia Legal Malpractice: The burden of proving non-collectibility is on negligent attorney
In Shevlin Smith v. McLaughlin, the Virginia Supreme Court considered the issues of: (1) whether an attorney breaches the duty to a client by failing to correctly anticipate a judicial ruling on an unsettled legal issue; (2) whether collectibility is relevant to a legal malpractice claim when the alleged injury is the loss of an otherwise viable claim; and (3) whether non-pecuniary damages are recoverable in a legal malpractice claim.
Among other things, the Court held that the burden of proving that a judgment in the underlying case would have been uncollectible is on the negligent attorney.
This case involve an allegation of legal malpractice in an underlying legal malpractice claim, which in turn arose from alleged malpractice in a criminal case.
The alleged malpractice in the original criminal matter was that the criminal defense attorneys negligently failed to obtain the taped interview of the alleged victims and compare those tapes with the inaccurate written transcripts used during the first criminal trial. In that trial, the accused had been represented by two separate law firms.
The first criminal trial resulted in a conviction, and the accused served four years in prison before the conviction was overturned in a habeas proceeding. After that, the accused was found not guilty in a second prosecution.
The accused hired the firm of Shevlin Smith to represent him in a criminal malpractice case. Shevlin Smith negotiated a settlement and release with law firm #1 in order to settle the criminal malpractice claim against it. The release did not discharge the criminal malpractice claim against law firm # 2.
Four months later, a Virginia Supreme Court opinion was issued in an unrelated matter, Cox v. Geary. Based on that decision, law firm # 2 filed a plea in bar, arguing that the criminal malpractice claim against it must be dismissed because under the new decision, the settlement and release of some co-defendants to the legal malpractice claim was a release of all co-defendants. The trial court agreed, and sustained law firm # 2's plea in bar.
The plaintiff then filed a second legal malpractice claim against Shevlin Smith, based on two theories of liability. First that Shevlin Smith breached its duty be failing to foresee how the Court's holding in Cox v. Geary would impact the Release Agreement. Second, that Shevlin Smith breached its duty to the plaintiff by failing to take various actions with respect to law firm # 1, and failing to fully advise the plaintiff about the alternative of refusing the settlement and continuing to proceed against law firm # 1.
Here, the court noted that since the alleged negligence occurred in a criminal proceeding, the legal malpractice plaintiff "must prove post-conviction relief and innocence entitling him to release."
Concerning the issue of judgmental immunity, the Virginia Supreme Court declined to adopt a per se judgmental immunity doctrine. Instead, the Court held that, if an attorney exercises a reasonable degree of care, skill, and dispatch while acting in an unsettled area of the law, which is to be evaluated in the context of the state of the law at the time of the alleged negligence, then the attorney does not breach the duty owed to the client. While this determination is ordinarily a question of fact for a jury, it becomes an issue of law when reasonable minds could not differ on the issue.
Further concerning the issue of whether collectability is relevant to a legal malpractice claim, the court held that collectibility is implicated when the injury claimed by the legal malpractice plaintiff is the loss of an otherwise viable claim. That is, collectibility limits the measure of the legal malpractice plaintiff's damages as to how much the legal malpractice plaintiff could have actually recovered from the defendant in the underlying litigation, absent the attorney's negligence.
The client must prove that the attorney's negligence proximately caused the damages claimed. As to who must prove that a judgment in the underlying case was collectible, the Court said the following:
"Consequently, collectibility is relevant because a legal malpractice plaintiff's damages for a lost claim can only be measured by the amount that could have actually been collected from the defendant in the underlying action in the absence of the attorney's negligence. Entry of judgment against the defendant in the underlying claim does not guarantee collection of the entire award. Instead, successfully prosecuting a claim to judgment is only half of the marathon that is redressing an injury in our judicial system. Once armed with a judgment, a plaintiff then has 20 years to collect that award . . ."
However, while collectibility is relevant, it is not an element of a legal malpractice plaintiff's prima facie case. The Virginia Supreme Court held that "we do not place the burden on a legal malpractice plaintiff to also prove the value of the underlying judgment that he would have been able to collect absent the attorney's negligence."
Instead, Virginia joined the growing trend of jurisdictions that place the burden of pleading and disproving collectibility on the negligent attorney as an affirmative defense.
Finally, the court held that a plaintiff cannot recover non-pecuniary damages in a legal malpractice action. The question of what damages are recoverable in a legal malpractice claim is governed by Virginia law pertaining to what damages are recoverable in a breach of contract claim. Regardless of the foreseeability of non-pecuniary injury incident to a breach of contract, however, "[a]s a general rule, damages for breach of contracts are limited to the pecuniary loss sustained."
The "rule," then, is clear: "tort damages" — including non-pecuniary damages such as mental anguish, emotional distress, and humiliation — "are not recoverable for breach of contract." As this principle holds true for all non-pecuniary, non-economic injury caused by the attorney's malpractice, such loss is not recoverable as damages in a legal malpractice claim.
To discuss these holdings or the defense of a Virginia legal malpractice claim, contact Carol T. Stone of Jordan Coyne LLP at 703-246-0900.
Posted by David B. Stratton on 08/01/2015 at 08:44 PM
Requirements to plead a legal malpractice action arising from a criminal matter in Virginia
In Desetti v. Chester, the Virginia Supreme Court considered the issue of whether a plaintiff sufficiently pled a claim for legal malpractice that occurred during the course of an attorney's misrepresentation of the plaintiff in a criminal matter.
The plaintiff, her husband, and her son were all involved in a criminal incident with a law enforcement officer at their home. Based on that incident, she was charged with felony assault and battery of a law enforcement officer and a misdemeanor obstruction of justice count. Her husband and son were charged with misdemeanor obstruction of justice counts. They all retained the same defense counsel.
The charges against the husband and son went to trial first. The defense attorney called the plaintiff as a witness, and during the course of her direct examination, she admitted that she struck the law enforcement officer who had entered her home. The husband and son were found guilty.
Next, the prosecution gave the defense attorney a plea offer, which would allow her to plead guilt to a misdemeanor assault and battery. The defense attorney never conveyed this offer to the plaintiff. Instead, he advised her to plead not guilty and go to a jury trial because "she had a 'slam dunk' case." He also allegedly failed to inform her that a guilty verdict on her felony charge would entail a mandatory minimum sentence of six months of incarceration.
The Plaintiff's trial then took place. The Plaintiff alleged that the defense attorney made the unilateral decision, without consulting with her, to reject the prosecution's jury instruction that incorporated the lesser-included offense of misdemeanor assault and battery because the defense attorney was employing a "felony or freedom" strategy. At trial, the jury returned a verdict on the felony assault and battery charge, and the Plaintiff was sentenced to the mandatory minimum of six months of incarceration.
While serving her sentence the Plaintiff filed a petition for writ of habeas corpus, alleging ineffective assistance of counsel. A year later, the habeas court granted her petition on the basis that the defense counsel's ineffective assistance of counsel prejudiced the plaintiff in a criminal matter, because of (1) the defense counsel's concurrent representation of the three defendants; (2) the defense counsel's failure to convey and explain the plea offer; (3) the defense counsel's failure to advise and consult with the plaintiff about the inclusion of a lesser-included misdemeanor offense in the jury instructions. The habeas court vacated her felony assault and battery conviction.
The Commonwealth elected to retry her for her actions giving rise to the original charges. The Plaintiff this time pled guilty to misdemeanor assault and battery. She was convicted of misdemeanor assault and battery and was sentenced to ten days of incarceration, with all ten days suspended.
The Plaintiff then brought a legal malpractice suit against her former criminal defense counsel.
In the malpractice action, the defendant filed a demurrer on the grounds that the plaintiff failed to state a claim upon which relief could be granted because she was not actually innocent of the criminal act of assault that was the basis of her prosecution. The argument was that although the felony assault and battery had been vacated, the plaintiff subsequently admitted guilt to misdemeanor assault and battery, and it was that guilt of a criminal act which was the proximate cause of her injuries. The trial court sustained the demurrer.
On appeal, the Virginia Supreme Court affirmed the trial court.
The Court began by pointing out that in the normal legal malpractice action, the essential elements are the existence of an attorney-client relationship which gave rise to a duty, breach of that duty, and that the damages claimed by the plaintiff must have been proximately caused by the defendant attorney's breach.
However, in a legal malpractice action arising out of a criminal matter, there are additional burdens of pleading, to ensure that courts do not assist the participant in an illegal act who seeks to profit from the act's commission. A criminal defendant may not profit from a crime in a subsequent legal malpractice action.
For that reason, a legal malpractice plaintiff, who alleges that malpractice occurred during the course of a criminal matter, must also plead (1) that the damages to be recovered were proximately caused by the attorney's malpractice and (2) were not proximately caused by the plaintiff's own criminal actions.
The Court reasoned that to adequately plead proximate causation in this case, the plaintiff was required to plead that the damages she seeks to recover were proximately caused by the legal malpractice and not by her own criminal conduct. However, the only pecuniary damage pled in the compliant was that her nursing license was suspended as a direct result of her felony conviction. There was no allegation that she would not have lost her nursing license based upon her conviction of misdemeanor assault and battery. Thus, the Court found that the plaintiff failed to plead damages flowing from her felony conviction that would not have been proximately caused by her misdemeanor sentence.
Secondly, with regard to the length of her jail time, the Court found that the plaintiff had adequately pled that but for the legal malpractice, she would have been sentenced to less than six months. However, the complaint failed to plead that her damages were proximately caused by legal malpractice, rather than by her own criminal conduct. The Court pointed out that "there is no basis to determine what sentence a circuit court would have imposed in the original criminal proceeding had [the defense attorney] not been negligent." This is because a defendant convicted of misdemeanor assault and battery is subject to a sentence of not more than twelve months and a find of $2,500, either or both. In the plaintiff's second criminal trial, her suspended sentence was after she had already served her original six month sentence. The original misdemeanor plea offer was not accompanied by a sentence recommended by the Commonwealth. Thus, there were no facts pled from which to draw the inference that, absent the legal malpractice, the circuit court would have imposed any shorter sentence than the six months that was imposed.
Accordingly, the Virginia Supreme Court affirmed the circuit court's judgment sustaining the demurrer.
Impact: This opinion explains in detail what elements a plaintiff must plead in the complaint to allege a cause of action for legal malpractice where the plaintiff was found guilty in the underlying criminal matter. It would be an over-simplification to say that under Virginia law, a person convicted of a crime cannot bring a legal malpractice claim against his or her criminal defense lawyer unless the conviction is overturned and there is a finding of not guilty. For example, in this case, the opinion suggests that the plaintiff might have stated a cause of action if she had pled that her nursing license would not have been suspended based upon a conviction of misdemeanor assault and battery. That would have been an allegation that she sustained pecuniary harm not proximately caused by her ultimate misdemeanor conviction.
To discuss the defense of a pending legal malpractice matter in Virginia, contact Carol T. Stone of Jordan Coyne LLP at 703-246-0900.
Posted by David. B. Stratton on 07/27/2015 at 01:00 PM
DC: Legal malpractice verdict in favor of plaintiff reversed on appeal due to lack of privity
In Scott v. Burgin, No. 12-V-1474 (D.C. Aug. 14, 2014), the Court reversed a $255,000 jury award in a legal malpractice case against a divorce attorney. The plaintiff was not a client of the defendant law firm, and consequently the Court held that the defendant's duty of care did not extend to the Plaintiff, and reversed the judgment. In so doing, the Court refused to expand the third party beneficiary exception to the requirement of privity in a legal malpractice action.
The plaintiff's fiancé was a retired government employee, who was long separated from his first wife, but they had never gotten a divorce.
The plaintiff and her fiancé had a long-standing relationship of over 25 years. After the fiancé was diagnosed with terminal bone cancer, the plaintiff met with the defendant attorney to seek his help in getting the fiancé a divorce from his separated wife. The attorney said he would help the fiancé, if the fiancé chose to retain him. The fiancé wished to obtain a divorce so that he could marry the plaintiff. Although he had previously designated the plaintiff as the beneficiary of his federal benefits, he was aware that the plaintiff might not receive them unless their were married.
A year passed before the fiancé met with the attorney. Shortly thereafter, the fiancé signed a retainer agreement for the lawyer's representation in his divorce proceedings.
Unfortunately, the attorney did not serve the separated wife with the divorce complaint until November, 2007, about 11 months later. The fiancé died in April, 2008, and a divorce was never secured prior to his death.
Afterwards, the federal government denied the plaintiff's claim for survival benefits under the Civil Service Retirement System, based on evidence showing that the earlier marriage was never terminated.
The plaintiff brought suit against the lawyer for legal malpractice and the related breach of contract as a third-party beneficiary, and the jury returned a verdict in favor of the plaintiff.
On appeal, the sole issue was whether the plaintiff lacked standing to sue for legal malpractice or breach of contract.
The Court held that the plaintiff did not have standing. It was undisputed that the fiancé and the fiancé alone, was the lawyer's client. In the District of Columbia, both contracting parties must intend a direct benefit which the third party can enforce against the promisor, for classic third-party beneficiary liability to exist. Here, there was no real evidence that the attorney himself intended to incur any liability beyond that imposed by law as part of his duty of care.
The Court reaffirmed the general rule that the obligation of an attorney is to his client, and not to a third party. The Court distinguished the recognized exception to that rule, where the impact upon the third party is not an indirect or collateral consequence, but the end and aim of the transaction. The classic situation that meets that exception is the failure of an attorney to properly draft a will.
Here, the anticipated divorce decree did not provide the same direct benefits to the plaintiff. The Court stated that the fiancé of either party to a divorce is a complete stranger to the transaction, and the divorce does nothing to change that status. The newly divorced person would have had to take at least one further action, that is, marry the plaintiff. The Court noted that in the divorce proceedings, the pension rights at issue might have been the subject of controversy, since the separated wife had had four children in the marriage.
To permit the plaintiff's suit here would frustrate one of the primary goals of the privity rule, that is, avoiding exposure to the attorney to indeterminate liability to an indeterminate class of people. It would also undermine the ability of the attorney and the client to exercise control over their contractual agreement.
Posted by Jordan Coyne LLP on 08/16/2014 at 07:36 PM
District of Columbia
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.
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