Settled for Less? Sue for Malpractice
Hernandez v. Baugh, 401 N.J. Super. 539; 951 A.2d 1095 (App. Div. 2008)
NJ Underlying commercial transaction, real estate.
Student Contributor: John Anzalone
Facts: Plaintiff consulted with attorney to represent him in the purchase of a business with Plaintiff's uncle. In representing both the Plaintiff and uncle, the attorney created two corporations, one to own the business, the other to own the real estate on which it sat. Plaintiff was only given stock in the corporation that owned the real estate. Plaintiff had an unwritten understanding with the uncle regarding his role in the business, and asked the attorney if his interests in the business were protected with such an arrangement. The attorney did not change the agreement to give Plaintiff partial ownership of the business. Plaintiff sued the uncle for breach of their understanding and settled for less than he alleged he would be entitled to had the attorney not failed to protect his interests in the business.
Issue: Since the settlement agreement stated that the settlement was "fair and reasonable” was plaintiff barred from bringing a legal malpractice action against the attorney?
Ruling: In reversing the lower court, the Appellate Division held that the settlement agreement’s wording did not entitle the attorney to dismissal of suit against her, based on the following factors:
- The wording of the settlement, "in light of all relevant factors" included the attorney's alleged negligence in weakening plaintiff’s case against the uncle.
The plaintiff was forced to settle for less because his claim seeking an ownership interest in the business had been weakened by the attorney's alleged negligence.
Among the factors that plaintiff had to take into consideration in negotiating the settlement [with his uncle] were the legal hurdles he faced in proving that he held an ownership interest in [the business]; those hurdles, he contended, were the result of defedant [attorney's] negligence.
The Lesson: If the attorney's negligence caused a reduced value of the former client's settlement because it made the client's case weaker, the attorney can be held liable even if the settlement is called “fair and reasonable” in light of the circumstances. At the outset of the relationship, the attorney should have counseled the plaintiff to get his own lawyer or, if permitted by law, to get a full waiver of the conflict in representing the plaintiff and uncle. The lawyer should also have made clear, in writing and at the beginning who he represented and who he did not represent.
I agree with the holding in this case. I don't think there should ever be an instance where an attorney's liability can be mitigated or defeated by previous arrangements/agreements.If so, attorneys will be sure to include in all agreements they make/oversee a clause or statement which they can use to attempt to dismiss any malpractice claims against them. Attorney's should always be liable to their clients for malpractice, regardless of previous agreements.
There seem to be a number of different ethical issues here. Since the attorney represented both the plaintiff and the uncle, he had to determine at the outset that there were no conflicting interests and make clear to each party what his role was. Also, the rules of ethics do not allow an attorney to limit his liability to his client via an agreement (without the client consulting independent counsel). As Ms. Deaner stated, an attorney should always be subject to liability to his client regardless of any agreements he makes.
I also agree with the holding in this case and especially with the lesson given by Mr. Anzalone. This was obviously a large business deal and the attorney should have been hesitant from the outset regarding his representation of both clients. I think it would be difficult to serve as legal counsel for both parties in this kind of transaction because the two clients are not only family but they are in business together. I also think that the attorney should have obtained a waiver before accepting representation. This way he could have possibly shielded himself from a potential malpractice claim by making it clear who he represented and what his duties were.