Legal Malpractice Law Review : Professional Responsibility Case Summaries & Commentary : Bennett J. Wasserman : LegalMalpractice.com : Lawyer Malpractice & Legal Ethics

Robert A. Borissoff v. Taylor & Faust et al., 33 Cal. 4th 523 (Cal. 2004)

CA Underlying probate matters

Student Contributor: Evan Michael Hess

Facts: A special administrator in probate court retained the Defendants Taylor and Faust to provide assistance in tax matters relating to the execution of a will. Without authorization, the administrator borrowed approximately $115,000 from the estate for personal reasons. After some time, the administrator sought assistance from Defendant Faust. Faust later informed the administrator that he could no longer provide representation. Representation was then assumed by attorney McGovern. An IRS form was not filed by McGovern, which would have extended for three years the estate’s rights to claim a tax refund for administrative expenses related to the will contest. A malpractice action was initiated against Faust and McGovern, to which both Defendants asserted affirmative defenses that that they owed no duty as attorneys to plaintiff, with whom they did not stand in privity of contract, and that the statute of limitations barred plaintiff's claims. The Court of Appeals agreed, as did the trial court, that the Plaintiffs lacked standing to sue the defendants.

Issue: May the successor fiduciary of an estate in probate assert a professional negligence claim against attorneys retained by a predecessor fiduciary to provide tax assistance for the benefit of the estate?

Ruling: Yes. The Supreme Court held that:

1) “[the probate] code's relevant provisions strongly support the inference that a successor fiduciary does have standing to sue an attorney retained by a predecessor fiduciary to give tax advice for the benefit of the estate”;
2) “While privity of contract may not exist, the successor has the same powers and duties as the predecessor, including the power to sue”; and
3) the successor’s fiduciary must have standing to sue the predecessor’s attorney for malpractice if the successor is to have standing to sue for the same.

Lesson: Even if  privity of contract does not exist, if an attorney breaches a duty to a predecessor, a successor fiduciary may sue the attorney for malpractice.

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Michael Viner et al. v. Charles A. Sweet et al. 30 Cal. 4th 1232 (Cal. 2003)

CA Underlying corporate transaction

Student Contributor: Evan Michael Hess

Facts: Plaintiffs retained Defendant and his law firm for a corporate transaction. After negotiating an employment termination agreement, the Plaintiffs brought a legal malpractice suit alleging seven claims, encompassing and array of agreements stemming from negligent representation / misrepresentations by the Defendants to the Plaintiffs. A jury awarded the Plaintiffs damages on all seven claims, with the Court of Appeals reducing the damages award. On appeal, the Defendants contend that in a transactional
malpractice action, the plaintiff must show that but for the alleged malpractice, a more favorable result would have been obtained, and that the Plaintiffs would not have entered into the transaction (a “no deal” scenario).

Issue: Must the plaintiff in a transactional legal malpractice action prove that a more favorable result would have been obtained but for the alleged negligence?

Ruling: Yes. The Supreme Court of California held that:

1) there is “nothing distinctive about transactional malpractice that would justify a relaxation of, or departure from, the well-established requirement in negligence cases that the plaintiff establish causation by showing either (1) but for the negligence, the harm would not have occurred, or (2) the negligence was a concurrent independent cause of the harm”;
2) “Determining causation always requires evaluation of hypothetical situations concerning what might have happened, but did not. In both litigation and transactional malpractice cases, the crucial causation inquiry is what would have happened if the defendant attorney had not been negligent”;
3) There must be investigation into what would have happened but for the lawyer’s alleged negligence.

Lesson: Plaintiffs seeking damages in an action for legal malpractice stemming from an underlying transaction must show both but for causation, just as in litigation malpractice actions. A malpractice case will not be successful if the Plaintiff does not prove that the underlying case had merit.

 

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Beal Bank, SSB v. Arter & Hadden, LLP, 42 Cal. 4th 503 (Cal. 2007)

CA.  Underlying collection practice

Student Contributor: Evan Michael Hess

Facts: Plaintiff, Beal Bank, retained Defendant law firm to collect payments on loans by debtors. The Defendant assigned associate Steven Gubner to represent Beal Bank in bankruptcy proceedings. Gubner filed a motion for summary judgment to recover the default interest, and received an unfavorable ruling. Beal Bank appealed the ruling to the District Court. Just over seven months later, Gubner left Defendant firm and began his own practice, taking with him Beal Bank. Under the representation of Gubner’s firm, the District Court affirmed the ruling of the bankruptcy court. Following appeal to the Ninth Circuit affirming the same.

Beal Bank then filed an action for legal malpractice against Gubner’s firms, and Arter & Hadden, LLP. Gubner then withdrew as counsel for the Plaintiff in bankruptcy court, and all parties entered into a tolling agreement for 15-month period. Beal Bank then dismissed the action. One day short of the end of the tolling period, Beal Bank filed an action for legal malpractice. The Respondents to the action demurred on the basis that the one-year statute of limitations had tolled upon the bankruptcy court’s entering of an adverse ruling.

Issue: When an attorney leaves a firm and takes a client with him or her, does the tolling in ongoing matters continue for claims against the former firm?

Ruling: The California Supreme Court, in reversing the judgment of the Court of Appeal and sustaining the demurrer held that:

1) there existed a conflict of authority under Beane v. Paulsen, 21 Cal.App.4th 89 (1993) and Crouse v. Brobeck, Phleger & Harrison, 67 Cal.App.4th 1509 (1998);
2) Crouse is more persuasive authority because it takes into account controlling California Code and legislative intent; and
3) “When a lawyer leaves a firm and takes a client with him, the firm's representation of the client ceases. There is no risk the firm will attempt to run out the clock on the statute of limitations by offering reassurances and blandishments about the state of the case. Conversely, the firm loses all ability to mitigate any damage to the client.”

Lesson: “If [case law] is ambiguous, [the Supreme Court] may consider a variety of extrinsic sources in order to identify the interpretation that best effectuates the legislative intent.” The Supreme Court held that risks envisioned by the legislature in stopping the tolling period were not applicable when a firm’s representation of a client ceases.

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Martos v. Concilio, 642 A.2d 1096 (Pa. Super. Ct., 1993)

Underlying PA Divorce Action.

Student Contributor: Colleen Gaedcke

Facts: Plaintiff retained the defendant to represent him in renegotiating a property settlement agreement with his former wife. The new agreement was made part of a stipulation that settled personal property and child custody issues. The stipulation became a court order and a court appointed master decided the remaining issues. Both the plaintiff and his ex wife filed exceptions to modify the master’s recommendations, resulting in the plaintiff owing $250,000.00 to his ex-wife. The plaintiff then filed a legal malpractice and breach of contract action against the defendant claiming that the defendant was not competent in advising him that the plaintiff’s initial settlement agreement with his ex-wife should be opened by stipulation that allowed for the renegotiation of items that were already settled.

Issue: Whether an action for legal malpractice covers claims made by the client against their attorney for fraud in the inducement?

Ruling: No.

Citing the Pennsylvania Supreme Court in Muhammad v. Strassburger, McKenna, Messer, Shilobod and Gutnick, 587 A.2d 1346 (Pa., 1991), the court stated, “…in light of our longstanding public policy which encourages settlements…we will not permit a suit to be filed by a dissatisfied plaintiff against his attorney following a settlement to which that plaintiff agreed, unless that plaintiff can show he was fraudulently induced to settle the original action. An action should not lie against an attorney for malpractice cased on negligence and/or contract principles when that client has agreed to a settlement. Rather, only cases of fraud should be actionable.”

Lesson: Where a client is unhappy with the outcome of a settlement agreement their only redress against their attorney is fraud by inducement, not legal malpractice. An attorney should make sure that his or her client explicitly agrees to any modifications to a stipulation in order to protect him or herself from a legal malpractice claim where their client was dissatisfied with the outcome

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Wright v. Meyers & Spencer, LLP, 849 N.Y.S.2d 274 (N.Y. App. Div. 2d Dep't 2007)

NY Underlying Bankruptcy Action

Student Contributor: Melissa Goldberg

Facts: This is an action for legal malpractice arising out of Defendants' representation of Plaintiff in a bankruptcy proceeding. Plaintiff alleges in the verified complaint that he made a transfer to his “daughter” Plaintiff and this disclosed in the bankruptcy petition. The bankruptcy trustee brought an adversarial proceeding alleging that the transfer was fraudulent because it was made within one year of the filing of the bankruptcy proceeding. Plaintiff claimed that the Defendants should have advised Plaintiff to delay filing for bankruptcy until one year after the transfer was made to avoid the adversarial proceeding.

Issue: Does the Plaintiff have standing to file this suit against the Defendants?

Result: No, the Plaintiff did not have standing because
• Any legal malpractice cause of action necessarily accrued prior to the filing of the Plaintiff's bankruptcy petition so,
• Upon commencement of the Plaintiff's bankruptcy proceeding, the malpractice cause of action became "property of the estate" pursuant to the Bankruptcy Code.

Lesson: In a Bankruptcy action, any cause of action that arises prior to a bankruptcy proceeding beginning is property of the estate and not the individual. Only a person with standing can sue.

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Matter of Haft, 98 N.J. 1, 483 A.2d 393 (1984)

NJ Underlying Due Diligence and Disciplinary Action

Student Contributor: Maninder (Meena) Saini

Facts: Attorney-respondent was assigned a case on August 24, 1976 by the Office of the Public Defender and had to prepare an appellate brief on behalf of a client who was convicted of murder. With extensions and notices given by the Appellate Division on four separate occasions, the attorney failed to file the appellate brief for the client’s appeal. The Court issued an Order for attorney to appear personally before it on March 20, 1978, but the attorney failed to appear. After several attempts made by the Court to reach the attorney, the Court forwarded this matter to the Supreme Court Ethics Committee to take action. A complaint was filed against the attorney by the Division of Ethics and Professional Services. The attorney, in his answer, admitted that he had not prepared the appellate brief and that he was not aware of the other hearings because he was on vacation. The attorney further explained that he was going through a very emotional period in his life and placed other matters before completing the brief.

Issue: Did the attorney’s conduct amount to unethical behavior that warranted the use of sanctions?

Ruling: The Supreme Court held the failure, refusal, or neglect to file the required materials, on behalf of a client, justifies public reprimand and reimbursement to the Ethics Financial Committee for appropriate administrative costs.

Rule: An attorney who accepts a case must act diligently in pursing the client’s interests. Furthermore, an attorney who cannot perform diligently is under an ethical obligation to petition to withdraw as assigned counsel so the appeal can still be submitted in a timely manner by another lawyer.

Lesson: When an attorney decides to accept a case from Legal Aid, they accept the person who they are representing as a client, therefore, all ethical obligations will apply. The attorney must diligently pursue the client’s case. An attorney cannot excuse his failure to follow court procedures on personal distress or the lack of familiarity with such court procedures. An attorney is responsible to file the appropriate briefs or they must file a motion for extension of time or timely seek to be relieved of the assignment if they encounter any difficulties that will impair their ability to furnish competent and diligent representation. 

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Meara v. Hewitt, 455 Pa. 132; 314 A.2d 263 (1974)

PA Underlying Mortgage Transaction

Student Contributor: Natalie Resto

Facts: The client had executed a mortgage on a real estate he owned to a corporation, which was wholly owned by his attorney. The mortgage was given in exchange for stock representing 25 percent interest in the corporation. The client then died and the attorney was appointed executor of his estate pursuant to the client’s will. That year the corporation through the attorney assigned the mortgage to the Hewitts for a consideration of $100. A couple of years later the mortgagee corporation became insolvent. The estate brought an action against the attorney arguing that the attorney took advantage of the attorney-client relationship when he allowed him to enter into a mortgage in favor of a corporation of which the attorney was the sole owner. The lower court found that the attorney and the client did have a confidential relationship but that there was no abuse of that relationship. The estate appealed.

Issue: Who has the burden of showing whether the attorney-client relationship has been abused?

Ruling: The attorney has the burden to prove that he did not abuse the relationship, that he fully disclosed the facts of the transaction to his client, and that the transaction is fair and conscionable. The court remanded to see whether the attorney met his burden.

Lesson: The standard of conduct that must prevail between an attorney and client when it involves business transactions is that:

“[N]o shadow of anything like deception or unfair dealing upon the  part of any attorney can be countenanced…Owing to confidence bestowed upon him, the attorney is presumed to be able to strongly influence his client; hence the law often declares transactions between them void which between other persons would be objectionable.”

Id. at 135 (quoted Kribbs v. Jackson, 387 Pa. 611, 129 A.2d 490 (1957)).

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Phoenix Founders, Inc. v. Marshall, 887 S.W.2d 831 (1994)

TX: Conflict of interest; disqualification

Student Contributor: Amber R. Gilchrest*

Facts: A paralegal working at the law firm of Thompson & Knight quit her job to work for David & Goodman,  where she spends 6/10th of an hour on a collection suit by Phoenix Founders against Ronald and Jane Beneke. The Benekes were represented by David & Goodman while Phoenix Founders was represented by Thompson & Knight. The paralegal later quit David & Goodman and returned to Thompson & Knight while the litigation against the Benekes continued.  The paralegal was not questioned by Thompson & Knight about any potential conflicts of interest and was not screened from the case. Counsel for the Benekes sent a letter demanding that Thompson & Knight withdraw from representing Phoenix Founders; Thompson & Knight refused,  at which point counsel for the Benekes filed a motion to disqualify. After initially overruling the motion, the trial court granted the motion because the confidential information known by an employee is imputed to the employer; in this case the paralegal imputed the confidential information to Thompson & Knight.

Issue: Whether a law firm must be disqualified from representation after employing a non-lawyer formerly employed by opposing counsel even though the law firm takes sufficient precautions to reduce the risk of the disclosure of confidential information?

Ruling: No, a law firm is not required to be disqualified from representation by employing a non-lawyer former employer of opposing counsel if the law firm takes sufficient precautions to reduce the risk of disclosure of confidential information to an acceptable level. In a case of first impression, the court looked to the Coker rule which states that lawyers are disqualified when they represent a client in pending suit that is “substantially related” and adverse to the interests of a former client. NCNB Texas Nat’l Bank v. Coker, 765 S.W.2d 398 (Tex. 1989). Furthermore, the court discussed the Petroleum Wholesale rule which states that any confidential information known by a lawyer is presumed to be shared with other members of the firm because of the nature of the relationship among firm members. Petroleum Wholesale, Inc. v. Marshall, 751 S.W.2d 295 (Tex. App. –Dallas 1988). The court agreed that the Coker rule applies to non-lawyers as well as lawyers,  but refused to extend Petroleum Wholesale  to non-lawyers provided that law firm can prove it took formal screening measures sufficient to protect confidential information. The nature of the involvement, time spent on the case, and the substantiality or the relation between the current and former case are all factors. The case was remanded for determination of whether the law firm took sufficient precautions to screen the paralegal.

Lesson: Lawyers and law firms should always ask every new employee or rehired employee about previous employment or other experience that may create conflicts of interest. Furthermore, law firms should have screening procedures and policies in place to ensure that confidential information is protected and not disclosed.

* Amber R. Gilchrest is in her final year at Texas Tech University School of Law.   She earned her B.A. with a double major in Government and Psychology from the University of Texas at Austin and wants to pursue a career in public service.  

  

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Aduddell v. Parkhill, 821 S.W.2d 158 (Tex. 1991)

TX: Underlying asbestosis personal injury clam; statute of limitations

Student Contributor: Jean Moss Sullivan*

Facts: Plaintiff was diagnosed on April 24, 1983 with asbetosis and retained the defendant lawyers to sue asbestos manufacturers for plaintiff’s injuries. The plaintiff’s statute of limitations for the asbestos injuries expired on April 24, 1985. Lawyers did not file the suit until May 20, 1985. The federal district court entered judgment for the asbestos manufacturers because the plaintiff’s claim was filed after the 2-year statute of limitations.
Plaintiff sued Lawyers for breaches of express and implied warranties under the Deceptive Trade Practices Act and for negligence. Lawyers moved for summary judgment because the plaintiff’s suit was filed after the two-year statute of limitations for his legal malpractice claim. The plaintiff then pled the discovery rule but the trial court granted Lawyers’ motion to strike the amended petition as untimely. The trial court granted summary judgment in favor of Lawyers. The court of appeals affirmed the summary judgment, holding that when the plaintiff fails to timely plead the discovery rule, the legal injury rule applies in determining when a negligence cause of action accrues and when the statute of limitations begins to run. The plaintiff’s legal injury by the defendants occurred on April 24, 1985, the date the statute of limitations ran in the underlying case.

Issue: Whether the plaintiff’s claims against the defendants begin to toll before all of the appeals for the underlying claim are exhausted.

Ruling: When an attorney allegedly commits litigation malpractice, the court held that the statute of limitations does not begin tolling until all appeals of the underlying claim are exhausted.

Lesson: A plaintiff may wait to file suit for a legal malpractice claim until all appeals for the underlying claim have been exhausted. A plaintiff is able to consider the final outcome of the underlying claim before filing suit for legal practice. If the discovery rule applies, it is necessary to plead it in a timely fashion. Malpractice litigators should be aware of the burdens in asserting limitations defenses and relying on discovery and other tolling rules.

 
Jean Moss Sullivan is a third year student at Texas Tech University Law School and is a J.D. Candidate for May 2010. She received her B.A. in Religion from Southwestern University in 2007.

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O'Donnell v. Smith,  52 Tex. Sup. Ct. J. 52 (Tex. 2009).

TX: Underlying decedent's estate claims

Student Contributor: Aaron Moncibiaz*

FACTS:  Executor Thomas O’Donnell sued Decedent’s former attorneys, Cox & Smith, for legal malpractice, breach of fiduciary duty, and gross negligence/malice. The claims are based on Cox & Smith’s advice to Decedent when Decedent served as executor of his wife’s estate. The Decedent retained Cox & Smith to advise him in the independent administration of his wife’s estate, and consulted the law firm regarding the separate vs. community classification of the couple’s shares of stock. Cox & Smith prepared an estate tax return that omitted certain shares of stock from a list of the wife’s assets.

The Decedent died twenty-nine years later, leaving the bulk of his estate to charity and not his children. Approximately one month after the Decedent’s death, his children sued the Decedent’s estate alleging that the Decedent has misclassified certain shares of stock as separate property, and as a result underfunded their mother’s trust. O’Donnell settled the children’s claims for just under $13 million, less than half of their estimated value. O’Donnell then sued Cox & Smith, alleging that the attorneys failed to properly advise the Decedent about the serious consequences of mischaracterizing assets, and that the firm’s negligence caused damage to the Decedent’s estate.

PROCEDURAL HISTORY:  At trial, Cox & Smith won summary judgment on all claims, but the court gave no basis for its decision. The court of appeals ruled in favor of Cox & Smith, basing its judgment on the fact that O’Donnell, as executor of the estate, lacked privity of contract with the attorneys. The Supreme Court of Texas vacated the lower court’s judgment and remanded for reconsideration in light of its decision in Belt v. Oppenheimer, Blend, Harrison & Tate, Inc., 192 S.W.3d 780 (Tex. 2006). In Belt, the Supreme Court of Texas held that an estate’s personal representative may bring the decedent’s survivable claims on behalf of the estate. The court further held that legal malpractice claims for pure economic loss survive, and an estate’s personal representative may bring survivable claims on behalf of the estate.

On remand, the court of appeals held that Belt was not limited to estate planning malpractice suits. The court explained that O’Donnell, as executor, stepped into Decedent’s shoes and could bring whatever malpractice action Decedent could have brought while still alive. The court then reviewed the record and found that although no evidence supported O’Donnell’s malice or breach of fiduciary duty claims, a triable issue of fact existed as to what damages were attributable to Cox & Smith’s actions. The court remanded the case to the trial court to determine if Cox & Smith’s actions constituted legal malpractice. Cox & Smith appeal this decision.

 ISSUE:  The court considered whether an executor may bring suit against a decedent’s attorney for malpractice committed outside the estate-planning process.

RULING: The Supreme Court of Texas agreed with the court of appeals’ interpretation of Belt and held that an executor should not be prevented from bringing the decedent’s survivable claims on behalf of the estate. The court does not, however, address whether Cox & Smith’s actions constituted legal malpractice.

A dissent supported by two justices of the court argued that the majority applied the wrong case in forming its opinion. The justices contend that Barcelo v. Elliott, 923 S.W.2d 575 (Tex. 1996) should control. Under the Barcelo privity barrier, a non-client is precluded from bringing a malpractice suit against the decedent’s attorneys because of lack of privity.

LESSON:  A decedent’s legal malpractice claim does not terminate with the death of the decedent. Regardless of whether the claim involves an estate planning matter or some other legal caveat, the claim survives and may be brought by the decedent’s personal representative.

*Aaron Moncibaiz, a third year law student at Texas Tech University School of Law, will be receiving his J.D. degree in May 2010.  A member of the Board of Barristers and a competitor in the American Association of Justice National Trial Advocacy Competition, Aaron has focused his studies to trial and appellate practice.  Aaron served as a legal intern for the American Legislative Exchange Council in Washington, D.C. and is currently employed as a law clerk with the Lubbock County District Attorney’s Office.  Aaron received his B.S. in Architecture from Texas Tech University in 2007.

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Berry & Murphy, P.C. v. Carolina Casualty Ins. Co., 586 F.3d 803 (10th Cir. 2009).

Underlying Legal Malpractice Action

Facts:  The Burkhardts retained Plaintiff to represent them in a personal injury lawsuit in or about January, 2005.  More than a year later, in March, 2006, Murphy, the attorney responsible for the Burkhardt matter left the Plaintiff law firm to join a new firm.  Murphy initially took the Burkhardt matter with him, but shortly thereafter, filed a motion to withdraw as counsel for lack of cooperation by the Burkhardts.  

The Burkhardts’ claim was eventually dismissed without prejudice for failure to prosecute in June, 2006. The Burkhardts hired new counsel, moved for reconsideration, and successfully reinstated their complaint.  In December, 2007, however, the Burkhardts’ claim was again dismissed for failure to provide discovery.

In the meantime, the Burkhardts’ new counsel had sent Murphy a letter in January, 2007 advising him that she intended to file a legal malpractice claim against him due to his failure to submit witness disclosures.  Murphy did not provide a copy of this notice to his former firm.  

In January, 2008, the Burkhardts did in fact file a legal malpractice claim against Murphy and his former firm.  Murphy's former firm was was insured by Carolina Casualty Insurance Company under a claims made policy in effect from February 6, 2008, to February 6, 2009.  The firm was served with the lawsuit on July 23, 2008 and promptly reported it to Carolina Casualty. Carolina Casualty denied coverage on the grounds that the alleged malpractice claim was first made against an insured, Murphy, prior to the effective date of the policy.  

Issue:  Does a carrier have a duty to provide a defense or indemnity under a claims made policy on a claim initially reported to an insured prior to the commencement of the coverage period and over a year prior to service of the complaint?  

Ruling:  No. The District Court ruled in favor of Carolina Casualty and the Plaintiff law firm appealed.  On appeal, the Tenth Circuit held that a claims made policy confers coverage for claims presented during the policy period. The policy stated that a claim will be deemed to have been first made at the time notice of the claim is first received by any insured. The policy further stated that "all claims based upon or arising out of the same wrongful acts or any related wrongful acts, or one or more series of any similar, repeated, or continuous wrongful act or related wrongful acts, shall be considered a single claim". The court, determining that the wrongful acts alleged in the Burkhardts' January, 2007 letter were related to the acts alleged in the malpractice claim, and that Murphy was an insured under the terms of the policy, held that Carolina Casualty was entitled to disclaim coverage.
 

Lesson:  Law firms and individual insureds must advise their professional liability carriers immediately upon receiving notice of a potential claim to avoid a disclaimer of coverage based on the "late notice defense".  A claims made policy will not cover claims that were reported prior to the inception of the policy period.

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O’Brien v. Cleveland, 2010 Bankr. LEXIS 171 (Bankr. D.N.J. Jan. 22, 2010).

Underlying commercial action

Facts: Debtors filed a chapter 13 bankruptcy after falling behind on their mortgage payments. Even after the Chapter 13 filing, however, the debtors were unable to keep up with their payments under the the court ordered plan. Eventually, the first mortgage holder commenced a mortgage foreclosure on the debtors’ home. To avoid a sheriff’s sale of their property, the debtors entered into a mortgage rescue arrangement with Cleveland.

The rescue plan was a scam by Cleveland to defraud the debtors. It required the debtors to transfer title in their property, worth over $800,000, to Cleveland, with an option to buy it back at $650,000. Cleveland was to take out a new mortgage on the property, pay off the debtors’ old mortgage and some other outstanding debts in bankruptcy, and permit the debtors to continue to occupy the house in exchange for a payment of $5,000 per month to be used to service the new mortgage.

Cleveland’s attorney, William E. Gahwyler, Jr., prepared all of the closing documents for this transaction, including the HUD-1 statement. The statement contained a number of misrepresentations, including an incorrect sale price, a misrepresentation of Cleveland’s investment in purchasing the property, and a misrepresentation of the debtors’ proceeds from the sale. Moreover, the transaction was never reported by Gahwyler to the bankruptcy court for approval.

The debtors subsequently learned that Cleveland had mortgaged their property for over $100,000 in excess of the outstanding mortgages for its personal benefit. Likewise, the debtors’ $5,000 monthly payments were not being used to satisfy the debt on the property. Eventually, the lender moved to foreclose on the property, and the debtors filed an adversary complaint against Cleveland and its attorney, Gahwyler, alleging fraud, legal malpractice, conspiracy, and violation of a number of statutes.

Issue: Did Gahwyler owe a duty to the debtors in his capacity as attorney for Cleveland?

Holding: The court held that the debtors were entitled to a judgment against Cleveland based on causes of action arising in fraud, violation of the New Jersey Consumer Fraud Act, Truth in Lending Act, Home Ownership and Equity Protection Act, and New Jersey Home Ownership Security Act of 2002.

The court further held that the lack of an attorney-client relationship between the debtors and Gahwyler was no bar to obtaining relief against him:

Mr. Gahwyler should have withdrawn from representing Mr. Cleveland as soon as the nature of the transaction became known to him…[a]s an attorney, Mr. Gahwyler had an ethical obligation to prepare an accurate closing statement and should have withdrawn from representing Cleveland rather than create an inaccurate closing statement . . . had Gahwyler fulfilled his ethical responsibilities, Cleveland could not have carried out his plot. Gahwyler’s failure to perform his ethical obligations proximately caused damages to the debtors in the amount of the increased debt encumbering this house.

Lesson: An attorney who knowingly participates in the fraudulent scheme of his client will be held responsible for damages proximately sustained by a third-party as a result of the deceptive conduct.

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Olds v. Donnelly, 291 N.J.Super. 222 (App. Div. 1996).

Underlying Personal Injury Claim

Student Contributor:  Jason Klien

Facts: On June 27, 1985 Robert Olds underwent hernia surgery and sustained significant injuries. Two months later Plaintiff consulted with an attorney, Donnelly, about bringing a medical malpractice claim against his surgeon, Dr. Donahue. Plaintiff signed a retainer agreement with Donnelly on or about August 27, 1985. On June 25, 1987, two days before the statute of limitations was to expire, Donnelly advised Olds that he could no longer represent him. Plaintiff’s case against Dr. Donahue was, therefore, barred by the applicable statute of limitations.

Plaintiff subsequently brought this action against Donnelly for legal malpractice, alleging that the Defendant deprived him of the opportunity to seek compensation for his post-surgical injuries. The jury returned a verdict of $500,000 in Plaintiff’s favor, and Donnelly moved for a judgment notwithstanding the verdict. The court granted the motion on the grounds that there was nothing within the record to support a finding of legal malpractice against Dr. Donahue. Plaintiff appealed.

Issue: Can the trial court grant a judgment notwithstanding the verdict on the basis of a lack of “credible” evidence?

Ruling: No. In deciding whether such a motion should be granted, the court must accept as true all the evidence which supports the position of the party defending against the motion, and must afford that party all legitimate inferences which could be deduced therefrom. If at that point the court could sustain a judgment in Plaintiff’s favor, the motion must be denied.

Lesson: The Court may not weigh the credibility of the evidence presented by the defendant attorney against the evidence presented by the Plaintiff in support of his claims and allegations. This is within the sole province of the jury, and therefore, cannot be the basis of a judgment notwithstanding the verdict:

[T]he trial court presented with such a motion is not concerned with the worth, nature or extent (beyond a scintilla) of the evidence, but only with its existence, viewed most favorably to the party opposing the motion.

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Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA et al., 2010 WL 1558977 (U.S. April 21, 2010).

Facts:  Jerman sued Carlisle, McNellie, Rini, Kramer & Ulrich (the “Defendant law firm”) for, allegedly, violating the Federal Debt Collection Practices Act (“FDCPA”) by representing to Jerman that her debt would be assumed valid unless she disputed the debt “in writing” even though the FDCPA does not require a written dispute.
 

The Defendant law firm argued that their mistake was excused under the FDCPA’s bona fide error defense:

A debt collector may not be held liable in any action brought under this subchapter if the debt collector shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.

Issue:  Can attorneys avoid liability for a mistake of law under the FDCPA's bona error defense? 

Ruling:  The Supreme Court reversed the Appellate Division and held that the bona fide error defense does not apply to a violation resulting from a debt collector’s mistaken interpretation of the legal requirements of the FDCPA. The Court declined to adopt an expansive reading of the defense and relied upon the “common maxim” that “ignorance of the law will not excuse any person, either civilly or criminally”.

The Court reasoned that the bona fide error defense’s requirement of maintaining “procedures reasonably adapted to avoid any such error…naturally evokes procedures to avoid mistakes like clerical or factual errors”:

The dictionary defines procedure as a series of steps followed in a regular orderly definite way…In that light, the statutory phrase is more naturally read to apply to processes that have mechanical or other such regular orderly steps to avoid mistakes…But legal reasoning is not a mechanical or strictly linear process.

The Court next considered the Defendant law firm’s argument that Congress’ decision to amend only the bona fide error defense in the Truth in Lending Act to specifically exclude “errors of legal judgment” evidenced its intent to include mistakes of law in the FDCPA’s bona fide error defense. The Court disagreed:

[I]t is not obvious that the amendment changed the scope of TILA’s bona fide error defense in a way material to our analysis, given the uniform interpretations of three Courts of Appeal holding that the TILA defense does not extend to mistakes of law.

Furthermore, the Court stated that Congress likely did not intend the defense to apply to mistakes of law, since Congress did not expressly include mistakes of law in any of the parallel bona fide error defenses elsewhere in the U.S. Code.

In response to the argument that the threat of liability under the FDCPA might create an irreconcilable conflict between an attorney’s personal financial interest and her ethical obligation of zealous advocacy on behalf of a client, the Court noted that “an attorney’s ethical duty to advance the interests of his client is limited by an equally solemn duty to comply with the law and standards of professional conduct”.

Finally, the Court noted that the FDCPA contains a safe harbor defense for “any act done or omitted in good faith in conformity with any [Federal Trade Commission] advisory opinion” that is more tailored to address the mistake at issue than the bona fide error defense. Although the Court recognized that the Federal Trade Commission has issued only four opinions in the past decade, and has an average processing time in excess of three months, the Court concluded that the existence of this separate, more apposite provision weighs against “stretching” the bona fide error defense to provide protection for mistakes of law.

Lesson:  An attorney cannot rely upon the FDCPA's bona fide error defense for misinterpretations of the statute's legal requirements.

Editor's Note:  Jerman involves only a mistake of law under the FDCPA. Accordingly, it is not clear whether Jerman is applicable to mistakes of state law or federal law on issues other than the FDCPA.  The Courts of Appeal have expressed different views on this issue.

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Sanchez v. Hastings, 898 S.W.2d 287 (Tex. 1995).

TX: Underlying personal injury and wrongful death action; conflicts of interest; statute of limitations

Student Contributor: Rudolfo Santos, Jr.*

FACTS:   On June 8, 1984, Carlos Sanchez, husband of Graciela Sanchez, was killed on the job, when a portable crane mounted on his employer’s, Cedar Creek Fabrications, Inc., truck came into contact with electrical wires.
Soon thereafter, Steve Hastings, on behalf of the law firm Allison & Huerta, P.C., (the Firm), contacted Mrs. Sanchez and offered to represent her as well as the Estate of Carlos Sanchez, and their minor child Gina Sanchez, in a wrongful death and survival action stemming from the job accident. Mrs. Sanchez agreed to allow the firm to handle the matter, but unbeknownst to her the firm also represented Reliance Insurance Company, Cedar Creek Fabrications, Inc.’s workers compensation insurance carrier, in its subrogation action against the defendants for reimbursement of the death benefits paid to Carlos Sanchez’s family.
The Firm filed a wrongful death and survival suit naming various parties as defendants, but the suit did not include any action against Cedar Creek Fabrications, Inc. When the case proceeded to trial the court appointed an ad litem to represent Gina Sanchez. The ad litem had filed a claim against Cedar Creek Fabricators, Inc., alleging gross negligence, but by that time Graciela Sanchez was barred from bringing a similar claim due to expiration of the limitations period. The trial court rendered a final judgment against the defendants on August 29, 1990.
Approximately two months after final judgment was entered, Graciela Sanchez contacted the ad litem; it was at that time the ad litem informed Mrs. Sanchez about prospective malpractice claims against the Firm. On August 29, 1990, Graciela Sanchez filed a malpractice claim against the Firm and three of its attorneys individually. The defendants moved for summary judgment on the ground that Sanchez’s claim was barred by statute of limitations. The trial court granted defendants’ summary judgment on the ground that the two-year statute of limitations precluded the suit. The court of appeals affirmed.

ISSUE:  Whether the running of the statute limitations is tolled in a legal malpractice case where the underlying litigation has not concluded?

RULING:  The court held that the limitations period was tolled until the conclusion of the underlying litigation. The court considered its previous decision in Hughes v. Mahaney & Higgins, 821 S.W.2d 154 (Tex. 1991),  where it held :

“when an attorney commits malpractice in prosecution or defense of a claim that results in litigation, the statute of limitations on the malpractice claim against the attorney is tolled until all appeals on the underlying claims are exhausted.” Id. at 157.

The Court determined that Hughes necessarily extended to trial court proceedings. Therefore, limitations, on malpractice claims, are tolled until a final judgment is entered on all underlying claims.

LESSON:  1) Attorneys should avoid fundamental conflicts of interest, or at the very least be candid to clients by disclosing all potential conflicts of interest.    2) In Texas, the statute of limitations does not begin to run until a final judgment has been entered on all claims stemming from the underlying litigation.

*Rodolfo “Rudy” Santos, Jr. is a third year law student at the Texas Tech School of Law, and will be receiving his J.D. in May 2010.  His main area of study has been devoted to trial and appellate practice.  He will be joining the litigation department of Person, Whitworth, Borchers & Morales, LLP in August 2010.

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Westport Ins. Corp. v. Bayer, 284 F.3d 489 (2002)

PA :Underlying Negligent Misrepresentation Action

Student Contributor: Natalie Resto

Facts: Lakens filed suit against Bayer, an attorney, to recover money in a Ponzi-type scheme. Bayer filed for bankruptcy before the Lakens’ action against him reached trial. The Lakens eventually obtained an order lifting the stay when they agreed to limit any damages they might receive to those available under Bayer’s professional liability insurance policy with Westport. The insurance company then brought this declaratory judgment action against the attorney. They argued that the attorney’s professional liability policy provided no coverage for the investors’ claims against the insured, the attorney. The lower court found that even though the Lakens never retained Bayer to act as their attorney, he created the impression that he was “looking out for” their interests, and he had also claimed to have performed a due diligence investigation, which provided a basis for Bayer’s liability.

Issue: Does a professional liability insurance cover only those claims that arise out from acts or omissions unique to the practice of law?

Ruling: No, not when the policy does not define what it means for an injury to “arise out of the conduct of the insured’s profession as a lawyer.”
The insuring agreement stated that the policy covers claims “arising out of services rendered or which should have been rendered by any insured…and arising out of the conduct of the insured’s profession as a Lawyer.” Id. at 496.
Here the court broadly construed the coverage afforded by the insuring agreement of Bayer’s policy, and held that the policy’s insuring agreement provides coverage to Bayer for the Lakens’ negligent misrepresentation claims against him.

Lesson: When a policy provision is ambiguous, the court construes the provision in favor of the insured in a manner consistent with the reasonable expectations the insured had when obtaining coverage. Id. at 497; Standard Venetian Blind Co. v. American Empire Ins. Co., 503 Pa. 300, 469 A.2d 563 (Pa. 1983).

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Birnbaum v. Misiano, 52 A.D.3d 632, 861 N.Y.S.2d 711

NY: Underlying loan; uncollectiblility

Student Contributor: Michael H. Park

Facts: Attorney represented plaintiff in a series of loans made to a third party whom the attorney knew socially. The third party provided watches as collateral on the loans. At no time over the course of the 21 months in which the loans were issued did the attorney recommend that plaintiff get an appraisal as to the value of the watches. Eventually, it was discovered that the watches were worthless, and the plaintiff brought a legal malpractice action against the attorney for failing to ensure that the loans were adequately collateralized. The attorney moved to dismiss on the grounds that the plaintiff failed to prove that the attorney's actions were the proximate cause of his damages because the plaintiff could not show that a judgment was obtained against the third party that could not be collected. The trial court dismissed the complaint and the plaintiff appealed.

Issue: Does the lack of an uncollectable judgment against a party in an underlying action preclude a plaintiff from going after their attorney for legal malpractice?

Ruling: No. In reversing the Supreme Court, Nassau County, the Appellate Division, Second Department held that the complaint was improperly dismissed for the following reasons:
1) The burden of the plaintiff is to show that the attorney did not “exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession, and that the attorney's breach of that duty proximately caused the plaintiff to sustain actual and ascertainable damages”.
2) There is nothing to suggest that because the plaintiff has not pursued an action against the third party to whom money was loaned and that a judgment obtained against the third party would be uncollectable, Plaintiff will be unable to prove that the attorney's conduct was the proximate cause of their damages.

Lesson: Even if a plaintiff does not pursue a cause of action against the party in the underlying action, they can still bring a legal malpractice claim against the attorney who represented them. Just because there exists the possibility of recovering money against another party does not eliminate the attorney as a proximate cause of the plaintiff's damages.

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Rechberger v. Scolaro, Shulman, Cohen, Fetter & Burstein, P.C., 45 A.D.3d 1453, 848 N.Y.S.2d 459 (2007)

NY: Business losses allegedly attributed to malpractice.

Student Contributor: Michael Park

Facts: Plaintiff was a shareholder in a corporation represented by an attorney. Through the course of business, the plaintiff lost money in his investment in the corporation. The plaintiff then brought a legal malpractice suit against attorney alleging that the attorney's conduct was the cause of the investment loss. The attorney moved to dismiss the complaint on the grounds of no attorney-client relationship and the trial court denied the motion. The attorney then appealed.

Issue: Did the trial court err in denying the motion to dismiss for lack of attorney-client relationship?

Ruling: Yes. In reversing the ruling by the Supreme Court, Wyoming County, the Appellate Division, Fourth Department held for the attorney for the following reasons:
1) An individual’s belief that he had an attorney-client relationship with a lawyer does not necessarily “confer upon him the status of a client”. In a legal malpractice action, an attorney-client relationship must be established.
2) Furthermore, while the plaintiff was a shareholder in the corporation represented by attorney this does not necessarily mean they had an attorney-client relationship. The plaintiff failed to produce documentary evidence that the relationship with the attorney rose to the level of an attorney-client relationship.

Lesson: A shareholder in a corporation does not necessarily enjoy an attorney-client relationship with a lawyer who represents that corporation because that person is a shareholder. Furthermore, more than a mere belief by the client that they have an attorney-client relationship with a lawyer is needed to prove the existence of that relationship.

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Nelson v. Kalathara, 48 A.D.3d 528, 853 N.Y.S.2d 89 (2008)

NY: Underlying litigation, privity. 

Student Contributor: Michael Park

Facts: An incapacitated person had a guardian assigned to them and their property. The plaintiff, who happened to be the previous guardian’s brother, eventually replaced the guardian. However, the previous guardian entered into a contract to sell property belonging to the incapacitated person and retained an attorney to represent him. The purchaser also retained an attorney and the sale went through successfully. However, the plaintiff discovered the sale and brought an action against the purchaser's attorney alleging that he committed legal malpractice in handling the real estate sale. The purchaser's attorney then made a motion to dismiss for lack of privity, which was denied by the trial court. The attorney then appealed.

Issue: Did the trial court properly rule that privity was not required between the purchaser's attorney and the plaintiff in the legal malpractice action?

Ruling: No. In reversing the ruling of the Supreme Court, Westchester County, the Appellate Division, Second Department held that the purchaser's attorney's motion was improperly denied for the following reason:

There is an exception to the privity rule required in legal malpractice actions. This exception states that if an attorney's behavior could be categorized as fraud, collusion, malicious acts, or other special circumstances, then no privity is required or simply a showing of near-privity is all that is required to link the attorney to the damaged party.

Lesson: A third party to an attorney's alleged legal malpractice does not need to establish privity if it can be established that the attorney's conduct constituted fraud, collusion, malicious acts, or other special circumstances. In the absence of those conditions, the third party must establish privity with the attorney to be able to bring a legal malpractice claim.

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Harry J. Joe, et ano. v. Two Thirty Nine Joint Venture, 145 S.W.3d 150 (TX. 2003)

Student Contributor: Max J. Starkie* 

Facts:  A client brought an action for malpractice and breach of fiduciary duty against his attorney and law firm after the attorney, a member of a local city council, voted in favor of a construction moratorium that was adverse to the client. The 14th Judicial District Court, Dallas County granted summary judgment for the attorney and law firm. The client appealed. The Dallas Court of Appeals reversed and remanded. Review by the Texas Supreme Court was granted. The Texas Supreme Court reversed and rendered judgment ruling that the client-appellant take nothing.

In 1992, an attorney and shareholder with the law firm of Jenkins & Gilchrist, P.C., who also served as a legislator on a city council, began his representation of Two Thirty Nine Joint Venture. He provided legal service for 239 JV’s formation, its acquisition, development, and sale of 239 acres of land in Irving, Texas.

The attorney-legislator voted in favor of an ordinance that adversely affected 239 JV. Specifically, he voted in favor an ordinance that would place a 120-day moratorium on apartment construction in Irving, Texas. The ordinance imposing the moratorium passed unanimously. As a result, the potential buyer of 239 JV’s acreage cancelled the contract with 239 JV. 239 JV claimed that the attorney-legislator’s vote as a council member quashed a land sale the group had in the works.  The attorney-legislator did not disclose information about the meeting to anyone at the law firm or 239 JV about the meeting, its agenda, or his position on the moratorium. The attorney-legislator later voted in favor of an extension of the moratorium on two more occasions.

In April, 1997, 239 JV filed a lawsuit against the attorney-legislator and his law firm of Jenkins & Gilchrist, P.C. The pleadings alleged that the attorney-legislator and his law firm owed 239 JV “a duty of ordinary care and a fiduciary duty and one of loyalty” and that the actions of the law firm and the attorney-legislator constituted a breach of those duties. 239 JV also alleged that the attorney and the law firm failed to disclose the conflict of interest created by the attorney’s involvement with the moratorium while the firm represented 239 JV in ongoing efforts to sell a tract of land for an apartment building and failure to disclose matters that were material to the firm’s representation of 239 JV.

Issue:  Whether the applicability of legislative and official immunity to legislators, who are also practicing attorneys and who encounter a conflict between their public and private professional responsibilities, shields lawyer-legislators from civil liability for activities within their legislative capacities?

Ruling:  When these obligations conflict, the Court held that legislative immunity shields lawyer-legislators from civil liability for activities within their legislative capacities. In other words, clients cannot sue lawyer-legislators for voting as legislators against clients’ interests.

Lesson: The decision allows numerous Texas attorneys to continue serving on public boards and in elected office without worrying about numerous possible conflicts posed by representing specific private clients as attorneys.

This decision is important because it spells out that lawyer-legislators are now free from having clients control how they vote, a proposal that would have made it nearly impossible for lawyers to serve in public office. Had the decision not been reversed, it could have been a disastrous outcome for lawyers who serve on public bodies.

A lawyer-legislator's clients also have reasons to be troubled by the decision. If a client is going to hire an attorney-legislator, the client should be careful about what issues are coming up before his attorney because that attorney now has no obligation to inform the client of anything he's learned in the course of his legislative duty. In other words, legislative immunity trumps the fiduciary duty a lawyer owes a client.

Max J. Starkie is a second year law student at Texas Tech University School of Law, and a candidate for his J.D. in May 2011. He was an advocate on the AAJ National Mock Trial Team for the Texas Tech University School of Law. He has served as a law clerk for the Honorable Judge Royal Hansen of the Third District Court in Salt Lake City, Utah. He served as a Police Officer in the State of Utah for approximately seven years prior to attending law school. Max received his B.S. in Criminal Justice from Utah Valley University.
  

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