PA: Lawyer's Fraud as Basis for Malpractice

Posted on June 23, 2010 by Ben Wasserman

O’Callaghan v. Weitzman, 436 A.2d 212 (Pa. Super. Ct., 1981)

PA Underlying Tort Action.

Student Contributor: Colleen Gaedcke

Facts: The plaintiffs, husband, wife and daughter, brought a fraud and legal malpractice action against the defendant resulting from the defendant’s representation of in a vehicular negligence accident. The defendant hired a colleague to handle the plaintiff’s case who in turn hired another attorney to institute the suit on the plaintiff’s behalf. By the time the attorney attempted to commence the action, the statute of limitations had run as for the two adult plaintiffs. The attorney alerted the defendant and his malpractice insurer as to his error. Without any authority to do so, the defendant negotiated with the attorney’s insurer and obtained a $9,000 settlement offer for the plaintiffs. The plaintiffs accepted the offer under the impression that the settlement was for the original automobile accident. The defendant deducted 40% contingent fee from the $9,000 and gave the plaintiffs a personal check for the remainder of the balance. When the plaintiffs learned the truth behind the settlement they brought this action against the defendant for fraud and legal malpractice.

Issue: Whether the lower court erred in granting the plaintiffs motion for a new trial on the issue of fraud?

Ruling: No. The plaintiff’s evidence was sufficient to warrant submission of the issues of fraud and damages to the jury.
1. “Fraud is composed of a misrepresentation fraudulently uttered with the intent to induce the action undertaken in reliance upon it to the damage of its victim..[and] the evidence must be sufficient to ‘enable the jury to come to a clear conviction, without hesitating, of the truth of the precise facts in issue’.”
2. The jury could come to a clear conclusion that the defendant defrauded the plaintiffs because the defendant failed to truthfully inform the plaintiff about the nature of the settlement in an effort to avoid being sued for malpractice.
3. Furthermore, as a result of the defendant’s actions the plaintiff was denied the opportunity to have a disinterested advocate pursue a malpractice claim against the attorney for missing the statute of limitations.

Lesson: A deliberate nondisclosure by a lawyer of a material will amount to fraud and legal malpractice for which the client can sue the lawyer.

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NJ Saving the Innocent Partner from Misrepresentations to the Carrier

Posted on November 4, 2009 by Krishna Shah

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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