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

Rodgers v. Weatherspoon, 141 SW 3d 342 (Tex. App. 2004)

TX: Underlying criminal defense

Student Contributor: Megan Diodato

Facts:  The client was charged with aggravated assault and the attorney was appointed to represent him. The client filed motions to act on his own behalf and to dismiss attorney as his counsel. The attorney filed a motion to withdraw. The motion was granted that day. The client personally contacted the court multiple times and on one of his visits the client was arrested because the judge determined his bail was not sufficient. The client claims the clerk told him that if his attorney had been present in court he would have been released to his attorney and would not have to go to jail. The client filed a suit, claiming the attorney committed legal malpractice because he did not communicate with him and did not appear in court in time to allow client to avoid arrest. The client claims damages resulting from spending six days in jail and having to pay additional money for the increased bond. The attorney contends that he had no duty to the client and was not the cause of his arrest and damages. The client appeals attorney’s summary judgment that dismissed his legal malpractice claim.

Issue: Whether attorney’s breach of duty was the proximate cause of the client’s injuries.

Ruling: No.   Attorneys have a fiduciary relationship with their clients as a matter of law and summary judgment may be proper if it is shown that the attorney’s act or omission was not the cause of any damages to the client. The two components of proximate cause are cause-in-fact and foreseeability. Cause-in fact is where the defendant’s acts or omissions were a substantial factor in bringing about the injury that would not otherwise have occurred. Foreseeability does not require that the actor anticipate the particular injury that eventually occurs. In a legal malpractice case, where a lay person would ordinarily be competent to make a determination on causation, expert testimony is unnecessary. The attorney offered evidence through the trial judge’s testimony that the attorney had nothing to do with the client’s bond being held insufficient, as it was insufficient on his own. After the attorney presented this evidence, the client then had the burden of introducing his own evidence to raise an issue of material fact about causation. The client failed to meet this burden and offered no evidence that the attorney ever received word that he needed to appear at the court before the client was taken to jail. Only the county clerk said she had called the attorney’s office and left a message, but had not spoken to the attorney. There is no evidence that the client’s claimed harm would have been diminished or would not have occurred if the attorney had acted the way client contends. The attorney disproved the causation element of client’s malpractice claim as a matter of law.

Lesson: In order to win on a malpractice claim the plaintiff must prove that their harm would have been less or would not have occurred at all  if defendant acted in accordance with the standards of care. 

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Rodgers v. Weatherspoon, 141 SW 3d 342 (Tex. App. 2004)

TX: Underlying criminal defense

Student Contributor: Megan Diodato

Facts:  The client was charged with aggravated assault and the attorney was appointed to represent him. The client filed motions to act on his own behalf and to dismiss attorney as his counsel. The attorney filed a motion to withdraw. The motion was granted that day. The client personally contacted the court multiple times and on one of his visits the client was arrested because the judge determined his bail was not sufficient. The client claims the clerk told him that if his attorney had been present in court he would have been released to his attorney and would not have to go to jail. The client filed a suit, claiming the attorney committed legal malpractice because he did not communicate with him and did not appear in court in time to allow client to avoid arrest. The client claims damages resulting from spending six days in jail and having to pay additional money for the increased bond. The attorney contends that he had no duty to the client and was not the cause of his arrest and damages. The client appeals attorney’s summary judgment that dismissed his legal malpractice claim.

Issue: Whether attorney’s breach of duty was the proximate cause of the client’s injuries.

Ruling: No.   Attorneys have a fiduciary relationship with their clients as a matter of law and summary judgment may be proper if it is shown that the attorney’s act or omission was not the cause of any damages to the client. The two components of proximate cause are cause-in-fact and foreseeability. Cause-in fact is where the defendant’s acts or omissions were a substantial factor in bringing about the injury that would not otherwise have occurred. Foreseeability does not require that the actor anticipate the particular injury that eventually occurs. In a legal malpractice case, where a lay person would ordinarily be competent to make a determination on causation, expert testimony is unnecessary. The attorney offered evidence through the trial judge’s testimony that the attorney had nothing to do with the client’s bond being held insufficient, as it was insufficient on his own. After the attorney presented this evidence, the client then had the burden of introducing his own evidence to raise an issue of material fact about causation. The client failed to meet this burden and offered no evidence that the attorney ever received word that he needed to appear at the court before the client was taken to jail. Only the county clerk said she had called the attorney’s office and left a message, but had not spoken to the attorney. There is no evidence that the client’s claimed harm would have been diminished or would not have occurred if the attorney had acted the way client contends. The attorney disproved the causation element of client’s malpractice claim as a matter of law.

Lesson: In order to win on a malpractice claim the plaintiff must prove that their harm would have been less or would not have occurred at all  if defendant acted in accordance with the standards of care. 

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Oasis West Realty, LLC v. Kenneth A. Goldman, Supreme Court of California, May 16, 2011

Facts: Goldman, and his law firm Reed Smith, represented Plaintiff Oasis in a redevelopment plan involving a nine-acre parcel in Beverly Hills on which Oasis was to build a hotel and luxury condominiums. After two and one-half years, Defendants ended their attorney-client relationship with Oasis, and thereafter, Goldman participated in a referendum that would allow voters to overturn the city council's approval of the project. Oasis asked Goldman to withdraw from this activity, and ultimately sued Goldman and Reed Smith for, allegedly, violating their duties of loyalty and confidentiality. 

Issue: Did Goldman violate any duties to his former client by participating in a civic organization to promote his personal beliefs and interests? 

Ruling: According to the Supreme Court of California-- Yes. 

The Court first explained that an "attorney may not do anything which will injuriously affect the former client in any matter in which the attorney formerly represented the client nor may the attorney at any time use against the former client knowledge or information acquired by virtue of the previous relationship." 

The Court held that "a lawyer's right to freedom of expression is modified by the lawyer's duties to clients...The requirement that a lawyer not misuse a client's confidential information [] applies to discussion of public issues." 

This, in spite of the California Anti-SLAPP statute which protects attorneys (and others) from "lawsuits against public participation...freedom of speech and petition for the redress of grievances."

In support of its holding, the Court reasoned that Oasis had presented a prima facie case that Goldman did use confidential information. The Court didn't answer how, but presented this analysis: 

For example, an attorney may discover, in the course of the representation of a real
estate developer, that city officials are particularly concerned about the parking
and traffic impacts of a proposed development, or that an identifiable population
demographic is especially disposed to oppose the proposed development. Under
the interpretation proposed by defendants and adopted by the Court of Appeal, the
attorney would be free to terminate the representation of the developer and use this
information to campaign (quite effectively, one would imagine) against the precise
project the attorney had previously been paid to promote.

Lesson: Until and unless the United State Supreme Court hears and overturns this case, a California lawyer may be at risk for a malpractice/breach of fiduciary duty suit for exercising his right to freedom of speech in support of his personal civic interests if it is in conflict with the interests of his former client. 

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Hoagland v. Sandberg, Phoenix & Von Gontard, 385 F. 3d 737 (2004)

7th Cir.: Underlying legal malpractice claim

Student Contributor: Clem Durham

Facts: The district court determined after a bench trial that Hoagland's suit failed as a suit for legal malpractice. Hoagland doesn't disagree. His grievance is that he should have been allowed either to amend his complaint to make clear that his claim, which he believes the district judge misunderstood, is not malpractice but is rather breach of contract or alternatively breach of fiduciary duty, or allowed to dismiss his suit without prejudice and start over. The claim, in substance and without regard to how it might be characterized, is that the Sandberg law firm represented the adversaries — a corporation (Midwest) and its swindling president — in a derivative action and used its dual representation to prevent the corporation from recovering assets of which the president had wrongfully deprived the corporation; that the law firm had wrongfully accepted payment of its fees from the corporation (the client whose interests the firm had sacrificed); and that it should therefore be required to rebate ("disgorge") the fees to Hoagland for the benefit of the corporation.

Issue: Is it proper to dismiss a claim as duplicative, when a breach of fiduciary duty claim is based on the same operative facts as a legal malpractice claim, and results in the same injury?

Ruling: Yes. Hoagland cannot be permitted, by recharacterizing the claim — whether by calling the conflict of interest a breach of fiduciary obligation or by contending that his contract with the law firm contained an implied promise not to commit such conflicts — to get around the requirement of presenting expert testimony. That is the kind of formalist move that courts rightly reject. Illinois courts hold that "when a breach of fiduciary duty claim is based on the same operative facts as a legal malpractice claim, and results in the same injury, the later claim should be dismissed as duplicative." The fact that restitution was sought instead of conventional damages also does not alter the nature of the suit. Restitution is a remedy, at least when sought as here as reparations for a tort. Asking for restitution doesn't change the cause of action.

Lesson: Make sure all claims are included in the initial complaint, because if a new theory of recovery is brought too late, it may be deemed duplicative. 

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Roni LLC, et al. v. Afra et al., 2010 WL 3703047, September 16, 2010

NY: Underlying real estate investments

Facts: This action arose from a series of business transactions in which investors acquired membership interests in limited liability companies that purchased and managed multi-family residential buildings in NY. The Defendants, either directly or through their wholly owned companies, located the properties, arranged financing, organized the limited liability companies, and managed the properties. Plaintiffs alleged, amongst other things, that Defendants made a secret profit at the expense of Plaintiffs’ and their LLCs. While Defendants allegedly disclosed some of the profits made from the business venture, they allegedly concealed that property sellers and mortgage brokers directly or indirectly paid them commissions of up to 15% of the purchase price of the property.

Plaintiffs asserted claims of breach of fiduciary duty, fraud (both actual and constructive) and waste. Defendants filed a motion to dismiss for, among other things, failure to state a cause of action and failure to plead actual fraud and breach of fiduciary duty with specificity.

Issue: Whether a fiduciary duty claim had been sufficiently pled based on both the parties’ relationship and on the defendants’ status as the organizers of the business venture?

Ruling: The parties business or personal relationship is not sufficient to establish a fiduciary relationship. A conventional business relationship between parties dealing at arms length does not give rise to fiduciary duties, unless the plaintiff shows the defendant “had superior expertise or knowledge about some subject and misled the plaintiff by false representations concerning that subject”. While Defendants held themselves out to be experts, Plaintiffs did not allege that Defendants misled them in any way that would affect the transactions.

It is well settled that before and after a corporation comes into existence, a promoter, much like Defendants’ role in this case, acts as the fiduciary to the corporation and its present and anticipated shareholder. By extension, the organizer of an LLC is a fiduciary of the investors it solicits to become members. Therefore, Plaintiffs’ allegations that the Defendants planned the business venture, solicited plaintiffs to invest and organized the LLC are sufficient to establish a fiduciary relationship.

The fiduciary duty includes the obligation to fully disclose any interests of the promoter that might affect the company and its members, including profits. Therefore, Plaintiffs’ allegations that the Defendants: failed to reveal that they would receive commissions from sellers and mortgage brokers in addition to their other, disclosed profit from the venture was sufficient to establish a cause of action for breach of fiduciary.

Lesson: In order to establish a breach of fiduciary duty claim between promoters and investors, there must be sufficient facts alleged to establish the fiduciary relationship as well as the duties owed within that relationship.
 

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Keller v. Loews Corp., 895 NYS 2d 376 (2nd Dept. 2010)

Facts:  In house counsel sued for religious discrimination after the termination of his employment.  The defendant counterclaimed for breach of fiduciary duty.  More specifically, the defendant alleged that counsel disclosed confidential information in his discrimination complaint.  The trial court dismissed the counterclaim on the ground that there is no fiduciary relationship between an employer and an at-will employee.

Issue:  Does in house counsel owe any fiduciary upon the termination of his at-will employment? 

Ruling:  Yes.

[A] lawyer, as one in a confidential relationship and as any fiduciary, is charged with a high degree of undivided loyalty to his client.  Indeed, the duty to preserve client confidences and secrets continues even after representation ends.  Thus, we conclude that an in-house attorney, his status as an at-will employee notwithstanding, owes his employer client a fiduciary duty.

Lesson:  In house counsel owes his client a fiduciary duty irrespective of his status as an "at-will employee".  The fiduciary duty continues even after termination of counsel's employment.

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 Oster v. Kirschner, et al 2010 NY Slip Op. 05981 (App Div, 1st Dept. 7-6-2010)

NY: Underlying Private  investment

FACTS: A NJ law firm, Lum, Danzis, Drasco & Positan,LLC lost its bid to stay out of a NY law suit brought by investors in a private investment  plan named Cobalt,  which turned out to be a Ponzi scheme  operated by a convicted felon with the help of an admitted criminal with numerous convictions for securities violations and  who was banned from the securities industry.  Investors lost over $22 million. As Cobalt's attorneys,  the law firm is accused of preparing the private placement memorandum  (PPM) which failed to disclose the criminal histories  of the investment's managers, although the Firm's attorneys were aware of it.  Also, the PPM allegedly contained other affirmative misrepresentations to which plaintiffs pointed in their "aiding and abetting" , fraud and breach of fiduciary duty Complaint. The Law Firm also served as the  escrow agent for the investment transactions. The Law Firm "did not seriously dispute that they had knowledge of [their clients'] criminal backgrounds." It just claimed that knowledge and the knowledge of misrepresentations in the PPMs--"the admitted vehicle by which investment in the Ponzi scheme was carried out--does not sufficiently allege actual knowledge..."

ISSUE: Does the Complaint adequately plead fraud, or should the trial court's dismissal of the Complaint be reversed?

HELD: Order dismissing Complaint reversed. Complaint re-instsated.

1. A plaintiff alleging an aiding and abetting fraud claim must allege the existence of he underlying fraud, actual knowledge and substantial assistance.  Actual knowledge of fraud can be "discerned from surrounding circumstances."

2. The Law Firm's preparation of the PPM, including, significantly, a backdated amendment to it that showed the investment managers criminal past which it had not previously disclosed, constitutes "substantial assistance."

The PPMs authored by defendant attorneys were the means by which the Cobalt...entities were able to solicit funds for ...[the] Ponzi scheme. The PPM is the very mechanism by which investments such as Cobalt are placed in the marketplace, and the admitted "but for" cause of plaintiff's investment losses. Yet defendants assert that "loss causation" is lacking because it has not been adequately pleaded that defendant attorneys had actual knowledge that their clients--whom they admittedly knew to be criminals, banned from the securities industry for engaging in fraudulent investment schemes--would operate...Cobalt...as a Ponzi scheme. If the facts and circumstances herein do not support an inference of actual knowledge, then it is doubtful that any action for aiding-and-abetting fraud could be sustained against any attorney, who, like defendant attorneys, consciously chose to look the other way when their clients asked them to prepare the PPM...To say that defendant attorneys merely furnished legal services to help solicit investments in...Cobalt..., and did not have knowledge of the fraud they helped perpetrate...[is] simply not tenable. The Court cannot and will not endorse what is essentially a "see no evil, hear no evil" approach. 

LESSON:  Is the NY Court expanding the duty of vigilance of the lawyer regarding disclosure of information that non-clients should be entitled to know?  Will there be an appeal from this ruling? Let's wait and see. 

For an interesting NJ case involving a different NJ law firm also involved in composing a "defective" PPM, see Profit Sharing Trust v. Lampf Lipkind, 630 A.2d 1191 (1993).

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 Hofstra Law School Class #5

Read: Fortney & Johnson, Legal Malpractice Law, Ch. 4, pp. 101-116; 421-424. 

Restatement of Law Governing Lawyers

§49. Breach of Fiduciary Duty--Generally

In addition to the other possible bases of civil liability described in §§48 [professional negligence] 55[breach of contract and equitable relief] and 56 [liability to a non-client], a lawyer is civilly liable to a client if the lawyer breaches a fiduciary duty to the client set forth in §16(3) and if that failure is a legal cause of injury with the meaning of §53, unless the lawyer has a defense within the meaning of §54. 

 

§16  Lawyer's Duties to a Client--Generally

To the extent consistent with the lawyer's other legal duties and subject to other provisions of this Restatement, a lawyer must, in matters within the scope of the representation:

(1) proceed in a manner reasonably calculated to advance a client's lawful objectives, as defined by the client after consultation;

(2) act with reasonable competence and diligence;

(3) comply with obligations concerning the client's confidences and property, avoid impermissible conflicting interests, deal honestly with the client, and not employ advantages arising from the client-lawyer relationship in a manner adverse to the client; 

(4) fulfill valid contractual obligations to the client. 

The Lawyer's Fiduciary Duties: "The 4 C's":

 1. Communicate

RLGL  §20 A Lawyer's Duty to Inform and Consult with a Client

(1) A lawyer must keep a client reasonably informed about the matter and must consult with a client to a reasonable extent concerning decisions to be made by the lawyer... 

(2) A lawyer must promptly comply with a client's reasonable requests for information. 

(3) A lawyer must notify a client of decisions to be made by the client...and must explain a matter to the extent reasonably necessary to permit the client to make informed decision regarding the representation. 

 * * *

RPC 1.4 Communication

(b) A lawyer shall keep a client reasonably informed about the status of a matter and promptly comply with reasonable requests for information.

(c) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decision regarding the representattion. 

 

Rizzo v. Haines, 555 A.2d 58 (Pa. 1989). (duty to disclose settlement offers to client)

FDIC v. Clark, 978 F.2d 1541 (10th Cir.1992) (duty to inform board of directors of a corporate officer's fraud).

2. Conflict Avoidance (duty of loyalty)

Maritrans v. Pepper Hamilton & Scheetz, 529 Pa. 241, 602 A.2d 1277 (1992)

Matter of Silverman, 113 NJ 198 (1988) (doing business with clients)

3. Confidentiality

Profit Sharing Trust v. Lampf Lipkind, 267 NJ Super 174 (Law Div. 1993)

4. Competence

Starron v. Weinstein, 305 N.J.Super. 263, 701 A.2d 1325 

Various courts have used other terms synonymous or encompassed by the "4 C's" to describe the fiduciary duty, or at least, the context within which various allegations of the breach of fiduciary duty has arisen. You should be familiar with these terms and recognize them as examples of breaches of the fiduciary duty:  "self-dealing"; "failure to exercise independent professional judgment"; "duty of loyalty"; "duty of candor"; "abuse of a position of trust"; "putting the interests of the lawyer ahead of the clients"; "misuse or abuse of client's confidential information". 

Here's a question to consider: If a lawyer overcharges a client, are there any circumstances where could be considered a breach of fiduciary duty?  I'd like to hear your thoughts on this. 

Share your comments, questions and input.  Just click the "Comment" button.

Prof. W. 

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 Aiken v. Hancock, 115 S.W.3d 26 (Tex. App.—San Antonio 2003, pet. denied).

TX: Underlying civil litigation "catastrophe".

Student Contributor: Courtney E. Hamilton*

Facts:   Douglas Aiken brought action against his former attorneys Patrick Hancock and Mark Ferguson, and their firm, Deadman and Ferguson, alleging violations of the Deceptive Trade Practices Act (DTPA), breach of fiduciary duty, negligence, gross negligence and breach of contract. The trial court partially granted Ferguson’s motion for summary judgment and dismissed Aiken’s breach of contract claims. The trial court also granted Ferguson’s first amended motion for summary judgment. Aiken appealed the decision of the trial court and neither the law firm of Deadman and Ferguson or Deadman were parties to the appeal. Aiken’s arguments to support his claim of breach of fiduciary duty were that Ferguson (1) falsely represented to Aiken his readiness to go forward and try Aiken’s case, and (2) failed to disclose that he was not ready to try Aiken’s case. Aiken also alleged that Ferguson falsely represented to him that the expert witness was ready to testify about a full audit and failed to disclose that the expert witness was not ready to testify about a full audit.
On appeal, Ferguson argued that Aiken’s claims are actually a single legal malpractice claim, and violating the Texas law that prohibits a plaintiff from fracturing legal malpractice claims.

Issue:  Whether Aiken improperly "fractured" his legal malpractice claims against Ferguson.

Ruling:  The San Antonio Court of Appeals held that Aiken improperly fractured his legal malpractice claim against Ferguson. The court found that Aiken’s classification of his claim as breach of fiduciary duty was improper because allegations did not consist of “self dealing, deception, or express misrepresentations in Ferguson’s legal misrepresentations in Ferguson’s legal representation.” The proper classification of these allegations would be a legal malpractice claim.
The court also held that Aiken’s assertion that Ferguson’s DTPA allegations based on alleged express misrepresentations did not state a cause of action independent from the malpractice claim.
After the court found that there was only one cause of action for legal malpractice the court applied the summary judgment standard of review. In doing so, the court held that summary judgment was proper because Aiken failed to prove causation and damages, two necessary elements for a legal malpractice claim.

Lesson:  A breach of fiduciary duty involves issues of loyalty, confidentiality, and candor while a legal malpractice claim involves negligence and the lawyer’s alleged failure to exercise ordinary care. A plaintiff cannot fracture their malpractice claim when they cannot meet the elements of the additional malpractice claims. The court will view this as one malpractice claim and the plaintiff must establish by a preponderance of the evidence all the elements of a malpractice claim (duty, breach, causation, and damages).
 

*Courtney E. Hamilton is a third year law student at Texas Tech School of Law, and a candidate for her J.D. in May 2010. She currently serves as Articles Editor for the Texas Tech Administrative Law Journal. She has served as a law clerk for the U.S. Attorneys’ Office for the Northern District of Texas, the Texas State Board of Pharmacy, and the Texas Commission on Environmental Quality. Courtney received her B.S. in Chemistry from Sam Houston State University.

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Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193 (Tex. 2002)

TX: Underlying referral of a personal injury case to another law firm

Student Contributor: Anna Ford (J.D. ( 2011) Texas Tech University School of Law; B.B.A. (2008) Emory University)

FACTS:  After a helicopter crash, James Chang, an associate with the firm of Brewer & Pritchard, recommended that the firm take the personal injury cases for the victims of the crash. Chang personally knew one of the victims, Herbert King, because he was Chang’s close friend’s father. After a partner at the firm recommended that the case be referred to another firm, Chang scheduled a meeting for King with Nick Johnson, a personal injury lawyer and close friend of Chang’s. Johnson referred the case to the firm of Jamail & Kolius, who made an agreement to pay Johnson a referral fee. A year after the case settled, Chang and Johnson formed a partnership together. Chang never told his employer about the referral but defendants’ facts support their contention that Chang did not receive any compensation as a result of the King suit or Johnson’s referral to Jamail & Kolius.  Thereafter, the firm sued its former associate, Chang, and Johnson, alleging breach of fiduciary duty, actual and constructive fraud, conversion, and negligence.
The district court entered summary judgment for defendants on all causes of action. The appellate court reversed and remanded the breach of fiduciary duty and constructive fraud causes of action against both defendants and affirmed the remaining causes of action. The Supreme Court affirmed the appellate court’s holding, disagreeing with its reasoning.
On appeal, the firm asserts that Chang had breached a fiduciary duty that he owed to the firm and that Johnson had knowingly assisted Chang in committing that breach. The firm contends that Chang violated the policies in place forbidding associates to refer cases without securing a referral fee for Brewer & Pritchard.
Defendants argue that as a matter of law Chang owed no fiduciary duty to plaintiff, mainly because there was no employment agreement to that effect.

ISSUE:  Does an associate of a law firm breach a fiduciary duty to his employer when gainfully referring a matter to another firm or lawyer without the employer’s permission?

RULING:  Yes. The associate owes a fiduciary duty to his employer not to personally profit or realize any gain or advantage from referring a matter to another law firm or lawyer, absent the employer’s agreement otherwise. However,

“an associate may participate in referring a client or potential client to a lawyer or firm other than his … employer without violating a fiduciary duty to that employer as long as the associate receives no benefit, compensation, or other gain as a result of the referral.”

LESSON:  The employee of a law firm should not profit from a referral to another firm or lawyer without the consent of his employer. The employee should disclose to his employer when he has referred a case to another lawyer or firm.   A lawyer should not share a fee with a lawyer who is not in the same firm without permission of his client.
 

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Maritrans GP, Inc. v. Pepper, Hamilton & Scheetz, 529 Pa. 241 (Pa. 1992)

Student Contributor: Melissa Goldberg

Underlying: Motion to disqualify for  Conflict of Interest 

Facts: Defendant represented Plaintiff in broad range of labor matters for well over a decade. During the course of their labor representation of Plaintiff, Defendant became familiar with Plaintiff’s operations and "gained detailed financial and business information. The Court of Common Pleas of Philadelphia County entered an order preliminarily enjoining Pepper and Messina from continuing to act as labor counsel for seven of Plaintiff’s New York-based competitors. The trial court ruled that preliminary injunctive relief was necessary given the existence of a substantial relationship between Defendant’s current representation of the New York companies, whose interests were adverse to the interests of Plaintiff, and their former longstanding representation of Plaintiff.

Issue: Is the conduct of Defendant Attorney’s is actionable independent of any violation of the Code of Professional Responsibility?

Result: Violations of the Code do not per se give rise to legal actions that may be brought by clients or other private parties; however, the record supports a finding that Defendant’s conduct here constituted a breach of common law fiduciary duty owed to Plaintiffs.
1) there is a well-entrenched body of substantive law prohibiting fiduciaries from engaging in conflicts of interest, and that there is no law excepting attorneys from that prohibition.
2) the trial court improperly relied upon the Rules of Professional Conduct without any independent finding that Pepper and Messina's conduct was "actionable." Just as there would be an independent cause of action available to a client whose attorney has misappropriated his funds, so too there is an independent cause of action available to a client whose attorney engaged in impermissible conflicts of interest vis a vis that client.

Lesson: The public's trust in the legal profession undoubtedly would be undermined if the Court did not recognize the common law foundation for the principle that an attorney's representation of a subsequent client whose interests are materially adverse to a former client in a matter substantially related to matters in which he represented the former client constitutes an impermissible conflict of interest actionable at law.

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In re Estate of Westin, 874 A.2d 139, 2005 PA Super 158 (Pa. Super. Ct. 2005)

PA Underlying Will Probate

Student Contributor: John Anzalone

Facts: Creditors of an estate bring suit to remove  Attorney as the executor of the estate because of the embezzlement of the estate's funds by an employee of the law firm. The lower court held that the request to remove Executor Attorney was moot since he voluntarily agreed to withdraw.

Issue: Did the Orphan's Court err in refusing the creditor's request to remove the Executor Attorney as executor of the estate?

Ruling: In reversing the lower court, the Superior Court held that the lower court should have dismissed the Executor Attorney and appointed a new executor, based on the following considerations:
1) The court  can remove an executor of an estate when that executor's personal interests conflict with the estates and "cannot be served simultaneously."
2) Here, the estate has an action against the executor for the embezzlement from the account maintained by the executor for the estate. There is a conflict of interest here because the Executor Attorney would have to sue himself and his law firm on behalf of the estate to protect the estate's interests.

Lesson: Even where an attorney-executor recognizes his conflict of interest and resigns, the court can still officially remove him and appoint another in his place.  Here is another example of the sometimes troubling issues raised when an attorney who prepares a will, names himself as Executor and serves in that role. 

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Estate of Albanese v. Lolio, 393 N.J. Super. 355 (App. Div. 2007).

NJ Underlying Probate Matter

Student Contributor: Natalie Resto

Facts: The decedent was survived by three daughters, all beneficiaries under the decedent’s will. One of the beneficiaries, the executrix, retained the defendant attorney for the probate of the decedent’s estate. The executrix, allegedly upon the advice of the attorney and a financial planner, withdrew funds from the IRA and made equal distributions to the beneficiaries, resulting in a personal income tax burden on the beneficiaries of approximately $298,000 each. All the beneficiaries, including the testatrix, sued the attorney for malpractice claiming that the attorney never outlined options by which the testatrix could pay the estate taxes. The attorney, however, claimed that he advised the testatrix of other options for paying the taxes aside from using funds from the IRA. These conversation, however, were never documented in writing.

Issue: Does an attorney owe a duty to the individual beneficiaries to inform them of the personal tax implications of his advice?

Ruling: The court held that under the retainer agreement, the attorney represented the estate and its executrix, and was obligated to advise her with regard to post-mortem planning, including calculating tax needs. This requirement, however, did not apply to the remainder of the beneficiaries who likely had different, and possibly adverse, interests. As a result, the Court declined to extend the duty an attorney owes to third parties who are beneficiaries of an estate the lawyer represents, or to hold that the attorney has an obligation to consider and advise third-party beneficiaries of the tax consequences of a bequest or legacy.

Lesson: Attorneys have an obligation to define the scope of their representation clearly and unambiguously. Restatement of the Law Governing Lawyers §14 comment f states that “[i]n trusts and estates practice a lawyer may have to clarify with those involved whether a trust, a trustee, its beneficiaries or groupings of some or all of them are clients and similarly whether the client is an executor, an estate, or its beneficiaries.” The attorney will bear liability for the beneficiaries that fall under the scope of his representation as it is set forth in his retainer agreement.

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Milbank, Tweed, Hadley & McCloy v. Boon, 13 F.3d 537 (2nd Cir. 1994)

NY Underlying Representation: Prospective Purchase of Bankrupt Company's Assets

Student Contributor: John Anzalone

Facts: Defendant Law firm represented Plaintiff through an agent in her attempt to purchase the assets of a bankrupt company. Problems occurred with the deal and the Agent was dismissed by the Plaintiff. Agent then told Firm that he wanted to buy the assets of the bankrupt company. Despite knowing that Plaintiff still sought to purchase the assets, Firm told Plaintiff that it would represent Agent in his attempt to purchase the assets. Plaintiff objected to this subsequent representation of Agent. Agent outbid Plaintiff with Firm's assistance. The jury found that Firm's representation of Plaintiff's Agent breached its fiduciary duties to her and was a "substantial factor in preventing her from obtaining assets she sought in the transaction."

Issue: Was the determination that Firm breached its duty to its former client by representing Plaintiff's agent in the same transaction incorrect?

Ruling: In affirming the lower court, the Second Circuit held that the Firm breached its fiduciary duty to Plaintiff, based on the following considerations:
1) Firm committed a serious breach of its fiduciary duties to Plaintiff as a former client by representing a party with interests adverse to the Plaintiff in the same transaction.
2) The nature of this breach triggers the prophylactic rule so plaintiff has to prove that Firms' actions were a substantial factor in its damages instead of the normal requirement of proximate cause.
3) The jury could have found that Firm's action were a substantial factor in Agent purchasing the assets rather than Plaintiff because their presence could have given Agent more credibility. The jury could have found that the deal moved forward because Agent and Firm agreed to use Plaintiff's money in an escrow account for Agent's purchase too. This potential usage also could have been held as interfering with Plaintiff's negotiations because she had to take action to protect her funds from usage by her former agent.
4) There was factual evidence supporting that Firm used confidential information gained from Plaintiff in its representation of Agent because it knew that Plaintiff was not willing to bid higher than she had previously stated to them. 

Lesson: If an attorney or a law firm is alleged to have breached their fiduciary duty to the client they are subject to the prophylactic rule that will make it easier for a plaintiff to prove the proximate cause element of the legal malpractice cause of action. The burden will be reduced from “but for” to “substantial factor”.

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Petrillo v. Bachenberg, 139 N.J. 472 (1995)

Student Contributor: Evan Kusnitz

NJ Underlying Real Estate Transaction

Facts: A purchaser of real estate sued the seller and the seller’s attorney. The seller’s attorney had forwarded to the seller an incomplete copy of the results of percolation tests conducted by a previous owner to determine the subject property’s ability to hold a septic tank. During negotiations, the seller gave the incomplete copy of the test results to the purchaser. When the purchaser performed her own tests after the contract had been signed, she became aware of the actual quality of the land and told the seller that the contract was null and void. The seller refused to return the purchaser’s deposit. The purchaser subsequently brought suit against the seller’s attorney for, among other claims, breach of fiduciary duty.

Issue: Does an attorney who represents a seller in a real estate transaction owe any duty to the purchaser of the subject property?

Ruling: The court applied a “relaxed” privity rule, holding that an attorney for a real estate seller who makes affirmative misrepresentations by providing misleading information concerning the subject of the transaction, violates a fiduciary duty to a purchaser who will rely on the material misrepresentations to his detriment.

Lesson: A seller’s attorney has a fiduciary duty of care to the buyer and this duty exists when the attorney knows, or should know, that non-client will rely on the attorney’s affirmative misrepresentations.

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Lawrence v. Miller 48 A.D.3d 1, 853 N.Y.S.2d 1 (1st Dept., 2007)

Student Contributor: Maninder (Meena) Saini

NY Underlying Estate Litigation-Attorney fees

Facts: A husband passed away and left the estate to respondent-wife and their three children. The will was admitted to probate in January 1982. The respondent (Lawrence) retained the Graubard law firm on an hourly basis to represent her in connection with the estate. Respondent was billed over $18 million in legal fees over a 22-year lengthy dispute over the estate. Throughout the years, more than $350 million in distributions were made to the beneficiaries. To conclude the litigation, a $60 million settlement was offered but the respondent declined. The respondent then renegotiated the existing agreement with the law firm. The law firm would continue to get an hourly rate, but there was an annual cap of 1.2 million. In addition, the agreement contained a 40% contingency fee provision for any additional monies that were distributed to the beneficiaries. Months later, the law firm reached a settlement agreement for approximately $104.8 million. The respondent refused to pay the law firm the 40% of the additional $40 million it obtained. The law firm filed a petition to compel payment. The respondent then brought a lawsuit for, inter alia, breach of fiduciary duty.

Issue: Whether the revised contract that contained a contingency fee of 40% of any future monies distributed to the beneficiaries is unconscionable on its face.

Ruling: The court found that a 40% contingent legal fee of $40 million for five months work was not unconscionable on its face, especially following years of litigation. Thus, the law firm did not breach any fiduciary duties.

 “Any determination of unconscionability generally requires a showing of both procedural and substantive unconscionability, requiring an examination of the contract formation process and the alleged lack of meaningful choice.”

Lesson: Should it be unconscionable for an attorney to place high contingency fees in the retainer agreement when the attorney is investing his time and risking collecting nothing in the event of a loss? The attorney must demonstrate that he did not exploit the situation and that the client understood the terms of the agreement. Even though it may seem excessive at first blush, the circumstances underlying the agreement must be fully evaluated. Agreements are to be enforced when no deception is involved in making the contract between competent adults. 

Editor's Note: The "bottom line" is given all the circumstances, the fee must be reasonable. RPC 1.5 (a). 

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Milbank, Tweed, Hadley & McCloy v. Boon, 13 F.3d 537 (2nd Cir. 1994)

NY Underlying Commercial Action/Conflict of Interest

Student Contributor: John Anzalone

Facts: Defendant law firm represented Plaintiff, through an agent, in her attempt to purchase the assets of a bankrupt company. Eventually, however, Plaintiff dismissed the agent. The agent, thereafter, advised Defendant law firm of his interest in purchasing the assets of the same bankrupt company.

Despite being fully aware that Plaintiff still sought to purchase the assets, Defendant law firm informed the Plaintiff that it would represent the agent in his attempt to purchase the assets, and despite Plaintiff’s objections, proceeded with the representation. Ultimately, the agent outbid Plaintiff with the firm's assistance.

The jury found that the firm's representation of Plaintiff's agent breached its fiduciary duties to her and was a "substantial factor in preventing her from obtaining assets she sought in the transaction."

Issue: Did the firm breach its duty to Plaintiff by representing her former agent in the same transaction?

Ruling: In affirming the lower court, the Second Circuit held that the firm had breached its fiduciary duty to Plaintiff, and reasoned as follows:

1. The firm committed a serious breach of its fiduciary duties to Plaintiff by representing a party with interests adverse to the Plaintiff in the same transaction.
2. The nature of this breach triggers the prophylactic rule so that, instead of establishing proximate cause, plaintiff has to prove only that the firm’s actions were a substantial factor in the resulting damages.
3. Here, the substantial factor test was satisfied given the likelihood that (a) the agent and the firm conspired to use Plaintiff’s escrow funds for the agent’s purchase of the bankrupt entity’s assets; (b) this conspiracy interfered with Plaintiff’s negotiations to purchase the same assets; and (c) the firm and the agent conspired to use confidential information regarding Plaintiff’s bid.

Lesson: If an attorney or a law firm terminates its relationship with one client and commences an engagement with another party with directly adverse interests in the same transaction, they will be subject to the “prophylactic rule” which makes it easier for a plaintiff to prove malpractice by substituting the usual "but for" causation in fact  requirement with the “substantial factor” test.

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Insight and Commentary from Ben Wasserman and Krishna Shah

In order to drive a car in New Jersey, you need a license and insurance. If your negligent driving injures someone, you have insurance not only to protect yourself, but to protect the person you injure.

In order to practice law in New Jersey, you also need a license, but not insurance. If your negligence dmages a client and you have no insurance, then it's too bad for the client.

Is there something wrong with this picture? We think so. We lawyers are fiduciaries to our clients. That means that first and foremost we have to put our clients' interests ahead of our own. Even at our own cost.

Is New Jersey destined for universal mandatory legal malpractice insurance?

Read more from this week's New Jersey Law Journal's Professional Malpractice Supplement.

The article linked to this post may express the opinions of its authors. It is not intended as a statement or position of the editorial board of The Legal Malpractice Law Review.

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Dynasty Building Corp. v. Ackerman, 376 N.J. Super. 280 (App. Div. 2005)

NJ: Attorney Trust Account Funds

Student Contributor: Michael Park

Facts: Attorney received funds from Plaintiff through an accidental wire transfer directly into his trust account. Plaintiff learned of the accidental transfer a couple weeks later and demanded that the monies be returned. Attorney insisted that the monies belonged to his client. After consulting with his client, the attorney turned the monies over to his client instead of Plaintiff. Plaintiff filed a complaint to recover the monies four years later, and was awarded a default judgment after the complaint went unanswered almost a year later. Attorney was then granted his motion to vacate the default judgment because the motion judge ruled that Plaintiff failed to give notice of the default judgment to attorney, and the complaint was barred by a six-year statute of limitations, which had run by one day.

Issue: Was the motion to vacate properly granted?

Ruling: In reversing the motion judge, the Appellate Division held that the motion to vacate the default judgment was not properly granted for the following reasons:
1) The court found there was little prejudice to the attorney as he had obviously been aware of the default judgment because he filed his motion to vacate twenty-four days later.
2) Instead of counting from the date that the monies were turned over to attorney’s client, the time started to run when the attorney breached his duty to the Plaintiff. The motion judge had started counting from the day that the funds went into the attorney’s trust fund, incorrectly concluding that was when the conversion occurred, when in fact the funds were just sitting there and no damages had been suffered.

If in fact the plaintiffs can establish that it was their funds, a fiduciary relationship developed between them and [attorney] even though he did not represent them in any matter.

Lesson: Although the plaintiff was not a client of the attorney, and it was unclear how the money had been transferred into his clients’ trust account; the attorney still owed a fiduciary duty to the Plaintiff to not touch the money.

The attorney argued that he had consulted with his client and was instructed to give the client the monies, which he did, having no reason not to believe him. However, the court reasoned that the attorney should have left the monies untouched in the trust fund account until it was discovered who the monies belonged to, instead of deciding himself who was telling the truth.

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Costco Warehouse v. Greg Randall (2009 CAL LEXIS 12375) (pdf)

Decided Nov. 30, 2009.

CA: Attorney Client Privilege

FACTS: In June of 2000, Costco retained Sheppard, Mullin, Richter & Hampton to provide legal advice regarding whether certain warehouse managers in California were exempt from California wage and overtime laws. One of Sheppard’s wage and hour law attorneys interviewed warehouse managers and produced a 22-page opinion letter on the issue. Costco, the interviewed managers and the lawyer all testified that they understood the communications between the managers and Hensley were, and would remain, confidential.
Several years later, a group of Costco employees filed a class-action suit against Costco alleging that between 1999 and 2001, Costco had misclassified some of its managers as ‘exempt’ and had therefore failed to pay overtime wages. In the course of the litigation, Costco employees sought to compel discovery of the lawyer’s opinion letter. Costco objected on grounds that the letter was subject to the attorney-client privilege and the attorney work product doctrine. Plaintiffs argued that the letter contained unprivileged information and that Costco had waived the privilege by placing the contents of the letter in issue.

RULING: Overruling the intermediate appellate court, the California Supreme Court reiterated California’s strong policy in favor of maintaining client confidences and secrets.

1. In Costco, after finding that an attorney-client privilege existed by virtue of an opinion letter written by independent counsel who had interviewed and taken witness statements from company employees, the Supreme Court found the entire letter, including the witness statement summaries, to be privileged.

2. Additionally, the majority ruled that, while the court can require an in camera hearing to determine whether the relationship constituted an attorney-client relationship, there is no authority for allowing the court to require in camera disclosure of the communications themselves. Those communications are privileged from disclosure, even in camera. If “ the dominant purpose” of the relationship was to provide legal advice from lawyer to client, no disclosure of communications is permitted.

3. Additionally, the Supreme Court held that it was not necessary to demonstrate any harm resulting from the disclosure; the intrusion into the attorney-client relationship was deemed to be harm in itself.

'[T]he privilege is absolute and disclosure may not be ordered, without regard to relevance, necessity or pany particular circumstance peculiar to the case.'

LESSON: From a legal malpractice point of view, it is crucially important to maintain client confidences, even in the face of a judicial order to reveal confidential material in camera. At least in California, it has long been held that a lawyer has a duty to preserve client secrets and confidences, even in the face of a contempt citation. See, In Re Navarro, 93 Cal. App. 3d 325,330 (pdf). 

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Fiorentino v. Rapoport,   693 A.2d 208 (Pa. Super. 1997).

PA underlying sale of business interest : conflict of interest

Student contributor: Cheryl Neuman

Facts: Plaintiff and his business partner had established a restaurant servicing business. Ten years later, plaintiff and his partner decided to end their business relationship. They hired defendant lawyer to draft the terms of their mutual agreement. The defendant, however, failed to discuss the possibility of a default by one of the partners, conflict of interest, or the possibility of hiring independent counsel by each of the business partners. Subsequent to signing the termination agreement, one business partner could not pay plaintiff the money that he owed the other under the agreement. Furthermore, the business partner transferred the business’s assets to other companies—owned by his family, that competed in the restaurant servicing business. The defaulting partner filed for bankruptcy. Plaintiff then sued defendant for 1) breach of contract, 2) legal malpractice, and 3) breach of fiduciary duty.

Issue: Was it the inadequate quality of defendant’s legal services that allowed the defaulting partner to strip the business of all assets, rendering it judgment proof, so that he could not pay what was owed to plaintiff?

Ruling: Yes, it was the negligence of defendant’s legal services that allowed the defaulting partner to liquidate his business so that he could declare bankruptcy and subsequently fail to pay the money owed to plaintiff. Plaintiff’s expert (the Editor here) testified that it is a universal practice for lawyers to consult form books when drafting agreements for the sale of a business. Common protection used in these agreements include clauses that require corporate stock to be transferred through third-party escrow accounts, prohibit the transfer of corporate assets to other entities for less than the full market value, and prevent the buyer from setting up businesses that compete with the business providing the payment source for the seller, which is what happened in this case. None of those common safety clauses were used in the termination agreement and that benefitted one partner over the other. The conflict of interest should have been obvious to the defendant lawyer.

Lesson: The crux of the matter is that the default could have been avoided if the agreement had been properly drafted to prevent the transfer of assets away from the servicing business into other businesses that actively competed with the original business. That happened becuase, the defendant lawyer had a conflict of interest, since he could not concurrently represent both the separating partners whose interests were adverse to one another. It was therefore inevitable that one side of the transaction was going to benefit at the cost of the other. The Court relied heavily on the plaintiff's expert and permitted the suit to proceed under both tort and contract theories. 

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During one of our recent class meetings at Hofstra Law School, we discussed the different causes of action that are typically brought in legal malpractice lawsuits. We saw in Fiorentino v. Rapoport, 693 A.2d 208 (PA. 1997), at least three separate and distinct causes of action: breach of contract, negligence and breach of fiduciary duty. Many jurisdictions apply different statutes of limitations to each of these causes of action, which frequently determine which one of them will survive a motion to dismiss. Sometimes the facts of a particular case can establish theories of liability in more than one cause of action. For example, the same facts can establish both negligence and breach of fiduciary duty.

One renowned scholar, Professor Charles Wolfram, is critical of the way courts have permitted breach of fiduciary duty claims in legal malpractice cases. He wants them to be scaled back. In “A Cautionary Tale: Fiduciary Breach as Legal Malpractice”, 34 Hofstra L. Rev. 689,692 (2006), he argues that

“courts have allowed fiduciary breach claims to proliferate needlessly on the same ground already adequately occupied by negligence….[M]ost fiduciary breach claims are problematic precisely because of their almost complete and useless overlap with available claims of negligence.”

On the other hand, we studied Judge (now Justice) Sotomayor’s decision in Estate of Re v. Kornstein, et al., 958 F. Supp. 907 (SDNY 1997). She points out that a breach of fiduciary duty claim alleviates plaintiff's burden of proof particularly in regard to the proximate cause element of the cause of action. (True, the Court dismissed the negligence claim and permitted the fiduciary breach to proceed.) Also, there is generally a longer statute of limitations applicable to breach of fiduciary duty claims than negligence claims. These distinctions can easily make the difference between recovery for or dismissal of a bona fide claim. The notion that meritorious claims deserve appropriate remedies may thus help to explain why the vitality of the fiduciary breach claim is so important to fundamental fairness and justice.

We also read the Restatement of Law Governing Lawyers § 49 which provides that the breach of fiduciary duty claim is “[i]n addition to the other possible bases of civil liability…”

Should fiduciary breach claims in legal malpractice lawsuits be permitted to continue to flourish or should they be scaled back and limited to being, in effect, a cause of action of last resort reserved only for the most reprehensible forms of lawyer misconduct that harms clients? And what if it harms forseeable non-clients?

Do you see any merit to the argument that the proliferation of fiduciary breach claims should be encouraged because of its prophylactic benefit, i.e., it serves as a constant reminder to us of our over-arching, primary duty of undivided loyalty to our client and thus encourages adherence to that duty?

As lawyers, these are concepts we must take to heart in our everyday dealings with clients and non-clients alike. What do you think about this debate? Do you see a lawyer’s fiduciary duty as a standard of care or perhaps even an enforceable “Code of Conduct”? Or do you think in years to come we will see a move toward taking the teeth out of its bite?

Please, share your thoughts and comments with us. Just click the comments link below.

Prof. W.

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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:

1. 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.

2. 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.

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