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

Guarantee Insurance Co. v. Saltman, 217 N.J. Super. 604, (App. Div. 1987)

NJ Underlying Legal Malpractice Action

Student Contributor: Colleen Gaedcke

Facts: A few months after obtaining professional malpractice coverage from the plaintiff, one of the partners at the defendant law firm was served with a legal malpractice complaint. The defendant submitted the complaint to the plaintiff who provided a defense under a reservation of rights to disclaim pending an investigation of any misrepresentation by the law firm on its application for coverage. This investigation ultimately revealed that the defendant law firm did not have knowledge of the malpractice claim at the time it submitted its application.

Despite the results of its own investigation, however, plaintiff moved to disclaim its duty to defend and indemnify the firm for alleged fraudulent misrepresentations and intentionally withholding information concerning the malpractice action. Additionally, plaintiff sought reimbursement for all defense costs.

The law firm, in turn, filed a counterclaim against the plaintiff arguing that it owed a defense and indemnity for the pending malpractice claim, and furthermore, sought indemnification for all legal fees incurred in defending the plaintiff’s declaratory judgment action. The court found that the plaintiff’s policy with the defendant was valid and required plaintiff to provide a defense and indemnity in the malpractice action. Moreover, under Court Rule 4:42-9(a)(6), the law firm was awarded a significant portion of the legal fees it incurred in defending the declaratory judgment action.

Issue: Can an insured recover counsel fees from an insurer for costs and expenditures incurred in defending an insurer’s disclaimer of coverage?

Ruling: Under the American Rule, a prevailing party cannot collect attorney’s fees from the losing party. The New Jersey Supreme Court has, however, carved out an exception to this Rule in R. 4:42-9(a)(6) for an insured who is forced to litigate for its policy benefits against an insurer who erroneously disclaims coverage under a liability or indemnity policy of insurance.

Lesson: New Jersey Courts recognize that counsel fees must be awarded to insureds in order to make certain that they are receiving the full value of the coverage afforded by liability and indemnity policies in instances where an insurer’s disclaimer is not supported by the policy’s exclusions, conditions, or limitations on coverage.

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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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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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Coregis Insurance Co. v. Law Offices of Carole F. Kafrissen, 186 F. Supp.2d 567 (3d Cir. 2002)

Underlying Legal Malpractice Action

Student Contributor:  Justin Lieberman

Facts: An attorney was sued for professional malpractice and his carrier agreed to settle the claim with his consent. The attorney then filed a compliant against his carrier for bad faith in settling with his former client, as well as denial of benefits under the policy. The attorney, while in the discovery stage of the bad faith litigation, requested amongst other things, six documents from the carrier's claims file that the carrier alleged were attorney-client privileged.

The District Court found that four of the documents were not protected by the privilege, and while the remaining two could have appeared to be protected, Pennsylvania law offered limited protection for communications from lawyers to their clients. The insurer had to submit redacted versions of the four documents to the attorney, and provide the remaining two documents to the Court for in camera review.

The carrier appealed to the Third Circuit. The attorney moved the Court to declare the appeal frivolous, require immediate production and proceed to trial, or in the alternative, stay the proceeding until the Third Circuit made a ruling on the appeal. The insurer opposed the motion, arguing that the Court’s decision was incorrect, and no in camera review of the documents was necessary since all of the communications contained in them were privileged.

Issue: Whether, under Pennsylvania law, the attorney-client privilege protects communications from the client to the lawyer only, or whether it extends also to communications from the lawyer to the client, even though this disclosure will not reveal the client's communications to the lawyer?

Ruling: Pennsylvania law cloaks with privilege communications from the client to the attorney, but does not extend an equal and full protection to those communications flowing from the lawyer to the client. Rather, it enjoins the attorney only from subsequent unauthorized disclosures of communications made to him in confidence by the client, and does not shield other information imparted by the attorney to the client, i.e. counsel’s advice to the client. Accordingly, in camera production of the carrier’s claims file was required in order to ascertain which certain documents would be protected from production.

Lesson: Under Pennsylvania law, all communications from an attorney are not automatically afforded attorney-client privilege. Rather, the communication flowing from an attorney to his client is only protected to the extent the disclosure would infringe upon client confidences.

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Utica Mutual. Ins. Co. v. Maran & Maran, 142 N.J. 609 (1995)

NJ Underlying workers comp proceeding

Student Contributor:  Lisa Larato

Facts: Defendant Ingala sustained work related injuries and had been receiving workers compensation benefits from the Plaintiff, Utica Mutual Insurance Co. (Utica). Ingala retained a separate attorney to handle a products liability claim against the third party liable for his injuries. That attorney failed to file suit within the statute of limitations. Plaintiff then retained  Maran & Maran, to sue that attorney for malpractice. The malpractice suit settled for $585,000.

Utica contended that it had a workers compensation lien on the legal malpractice settlement proceeds, but Maran & Maran disagreed. Utica filed the instant lawsuit and the parties cross-filed for summary judgment. Maran & Maran argued that even if such a lien could attach to a legal malpractice recovery, it should not attach if the malpractice and workers compensation recoveries do not fully compensate the injured worker. They also argued that the workers compensation carrier had no claim because it failed to institute its own action against the tortfeasor.

The Superior Court, Law Division, granted Ingala and Maran & Maran’s motion and held that the lien did not attach to a malpractice recovery. Utica appealed, and the Supreme Court, Appellate Division, affirmed. Utica then moved for reconsideration and the Supreme Court granted that motion.

Issue: Whether, pursuant to N.J.S.A. 34:15-40, a workers compensation lien attaches to the proceeds of a malpractice suit brought to recover damages from an attorney who failed to institute an action against the third-party tortfeasor?

Ruling: The Supreme Court held that the statute establishing workers compensation liens prevents Maran & Maran from retaining any workers compensation benefits that have been supplemented by recovery against a liable third party, even if recovery and benefits when combined would leave Ingala less than fully compensated. Under N.J.S.A. 34:15-40, Utica is entitled to reimbursement, irrespective of whether or not Ingala is fully compensated.

Lesson: The Purpose of N.J.S.A. 34:15-40 is to prevent recovery from different sources for the same injury; no justification exists for allowing an injured employee who receives a legal malpractice recovery to be in a better position than an injured employee who recovers directly from the tortfeasor. The court reasoned that the “no double recovery” rule should not be different when the third-party recovery is against a party other than the tortfeasor.

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

PA Underlying Legal Ethics Matter

Student Contributor: Lisa Larato

Facts: This legal malpractice action was commenced by the Plaintiff, Maritrans GP, Inc., former clients of the Defendant law firm, due to the law firm’s representation of the Plaintiffs’ competitors, entities whose interests were found to be adverse to the interests of Plaintiffs, in matters substantially related to matters in which they had represented Plaintiffs. The Court of Common Pleas granted the Plaintiffs injunctive relief and enjoined the Defendants from representing the Plaintiffs’ competitors. The Superior Court reversed the injunction order, given that it was based on nothing more than the Defendants’ alleged violation of Pennsylvania’s Rules of Professional Conduct (1.7, 1.9) which, in and of itself, cannot be the basis for a cause of action in legal malpractice. Plaintiffs’ appealed the Superior Court’s reversal.

Issue: Did the Defendants’ conduct give rise to a claim for legal malpractice?

Ruling:

1) [Defendant] attorneys’ representation of subsequent clients whose interests were materially adverse to former client in matter substantially related to matters in which [they] represented the former client was an impermissible conflict of interest actionable at law, independent of any violation of the code of professional responsibility; (2) injunctive relief would lie to prevent [the] attorneys from breaching fiduciary duties toward [their] former client by representing its competitors; and (3) grant of preliminary injunction was not an abuse of discretion, given law firm's extensive involvement in its former client's affairs and its extensive knowledge of sensitive client information.

Lesson: The Court will intervene to prevent imminent harm to a former client by an attorney’s breach of his or her fiduciary duty, irrespective of the fact that the breach may constitute a violation of nothing more than state professional ethics guidelines. 

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First American Title Ins. Co. v. Lawson, 351 N.J. Super. 407 (App. Div. 2002)(PDF)

Student Contributor: Evan Kusnitz

NJ Underlying Legal Ethics Action

Facts: Three attorneys formed a law firm in New Jersey. In addition to engaging in the unauthorized practice of law in New Jersey, one of the attorneys, Wheeler, also misappropriated client funds. When another of the attorneys, Lawson, discovered the misappropriation and confronted the attorney engaged in this violation, Wheeler tried to explain his actions in light of the financial difficulties facing the firm and convinced Lawson to join in his scheme in order to pay off the firm’s liabilities.

In the meantime, the firm had been notified by the Office of Attorney Ethics that it would be conducting an audit of the firm’s books in response to several grievances. Shortly thereafter, Wheeler completed an application for malpractice insurance, along with two warranty statements, denying that he was aware of any actual or potential malpractice claims against the law firm.

Eventually, two title insurance companies were forced to make payment to several of the firm’s defrauded clients. These title insurers subsequently filed claims against the firm for reimbursement of monies paid as a result of the firm’s wrongful conduct. When the firm attempted to seek a defense and coverage from its malpractice carrier, the carrier filed a declaratory judgment action seeking to rescind its policy, given Wheeler’s misrepresentation to the carrier that he was unaware of potential malpractice claims.

Issue: May a malpractice carrier rescind a policy due to deliberate misrepresentations on its application?

Ruling:

1. Equitable fraud provides that a party may rescind a contract where there is proof of (a) a material misrepresentation of a presently existing or past fact; (b) the maker’s intent that the other party rely on it; and (c) detrimental reliance by the other party. In the context of an application for insurance, an additional inquiry must be made into whether the insured knew that the information was false when completing the application.
2. This rule applies even if the insurer might not have been diligent in investigating the background of the insured.

Lesson: A malpractice insurer may rescind a policy when the insured deliberately conceals information concerning known ethical and professional violations that may serve as the basis of legal malpractice actions.

EDITOR'S NOTE: The New Jersey Supreme Court affirmed the Appellate Division’s decision to allow the malpractice carrier to rescind its policy with regard to the liability of the partners who engaged in unlawful conduct, however, based on partnership law, it reversed the rescission of the policy with regard to the innocent partner. First American Title Ins. Co. v. Lawson, 177 N.J. 125 (2003)(PDF).

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