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

Iram P. Valentin and Edward Patrick Abbott

NJ: Settlement Agreements; Attorneys Fees

The New Jersey Appellate Division reiterated the need for care in addressing the issue of attorney’s fees in settlement agreements in a recent opinion approved for publication. It is customarily assumed by attorneys that unless specifically provided by statute, rule or case law, litigants bear their own attorney’s fees under the “American Rule.” Nonetheless, attorneys routinely provide for a release of claims for attorney’s fees in settlement agreements that resolve litigation. However, Porreca v. City of Millville suggests that this should be standard practice, and a failure to clearly and unambiguously waive such fees may lead to exposure for the client.

The plaintiff In Porreca, a resident and taxpayer of the defendant's municipality, brought two separate actions "in lieu of prerogative writs,” alleging violations of the municipality’s tax abatement program and a failure to collect “review and inspection fees” from developers in violation of the municipal code. The parties subsequently executed a settlement agreement addressing the claims in both matters. The settlement agreement was silent on the issue of attorney’s fees, although it stated that the parties released “all claims for damages.” Further, the settlement agreement indicated that the municipality had taken action on the plaintiff’s complaints both prior and subsequent to the litigation.

In overruling the trial court, the Appellate Division determined that R. 4:42-9(a)(2), the so-called "fund in court" exception, could apply in this instance. The "fund in court" exception can apply when a litigant does more than merely advance his or her own interests, which results in a benefit to a class of persons of which the litigant is a member. If this is the case, then the court has discretion to award the amount of attorney’s fees, if any, which are reasonable in light of the facts of the case. There does not need to be an actual fund or amount of money in the court’s possession for this to apply and the litigant does not need to obtain all the relief sought as a result of the lawsuit. In applying these principles to Porreca, the Appellate Division found that the plaintiff could be entitled to attorney’s fees under R. 4:42-9(a)(2), as he obtained relief for taxpayers in the defendant municipality by increasing revenue for the municipality as a result of cell towers being placed on the tax rolls and the return of fees to the municipality.

The Appellate Division then looked to the settlement agreement to determine if the plaintiff had waived the claim for attorney’s fees. Again, the settlement agreement did not reference attorney’s fees. The Appellate Division specifically rejected a bright-line rule that the claim for attorney’s fees would survive the settlement agreement unless it was expressly and specifically waived. The Court then looked to basic contract principals and found that the terms of the settlement agreement were ambiguous as only “all claims for damages” were released and the claims asserted by the plaintiff did not involve claims in which attorney’s fees were a traditional element of damages. The Appellate Division therefore remanded the matter to the trial court to address the issue of whether the plaintiff had waived his claim for attorney’s fees in the settlement agreement.

A Costly Lesson Learned

This case demonstrates the need for specificity in the drafting of all settlement agreements. In negotiating a settlement, the issue of attorney’s fees must be addressed and resolved with clear and unambiguous language in the settlement agreement. Failure to do so may result in the imposition of attorney’s fees against a client. 

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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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McMahon v. Shea, 547 Pa. 124 (1997)

Student Contributor: Justin Lieberman

Underlying Divorce Matter

Facts: The husband in an underlying divorce action brought a professional malpractice suit against his attorneys, claiming that they had failed to properly advise him in his divorce settlement. More specifically, the husband claimed that his attorneys had failed to advise him as to the length of his duty to pay alimony and to generally read and review the alimony agreement in its entirety.

The wife remarried two months after the divorce was finalized, and husband moved to terminate his alimony payments. The court denied the termination of alimony payments, holding that the alimony agreement survived the divorce since it was not merged with the divorce decree. The court ordered continued payment of alimony until the parties’ youngest child turned twenty-one. Consequently, husband further alleged that his attorneys had been negligent in advising him to stipulate that the alimony agreement be incorporated but not merged with the divorce decree.

The attorneys argued that husband’s action had to be dismissed, since a dissatisfied plaintiff may not file a malpractice suit following a settlement to which he agreed, unless he could show he was fraudulently induced into settling the action.

Issue: Can an attorney be held liable for advice rendered to a client in a settlement to which the client subsequently agreed?

Holding: The Court rejected the attorneys’ argument and held that an attorney’s use of ordinary skill and knowledge extends to the conduct of settlement negotiations:

The fact that the legal document at issue had the effect of settling a case should not exempt his attorneys from liability…An attorney may not shield himself from liability in failing to exercise the requisite degree of professional skill in settling the case by asserting that he was merely following a certain strategy or exercising professional judgment.

Lesson: Negligence in failing to advise a client as to the controlling law applicable to a contract is actionable as malpractice, even if the contract serves to settle the underlying dispute.

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Ziegelheim v. Apollo, 607 A.2d 1298, 128 N.J. 250 (N.J. 1992)

NJ Underlying Divorce Action Settlement

Student Contributor: John Anzalone

Facts: Plaintiff discussed her concern with Defendant Attorney that her husband was concealing substantial assets and asked Attorney to make a thorough inquiry into her husband's assets that attorney failed to undertake before negotiating the property settlement agreement. This resulted in the marital estate being undervalued. Plaintiff received 14 percent of the estate's value in the settlement. Plaintiff signed the agreement after Attorney advised that she would receive no more than 10-20 percent of the estate's value at trial. Plaintiff later filed a malpractice suit against Attorney and a suit to get the settlement set-aside that was rejected.

Issue: Did the lower court err in holding that there was only one factual dispute that Attorney had committed malpractice and that Plaintiff's claims were estopped because the settlement was deemed fair?

Ruling: In partially reversing the lower court, the New Jersey Supreme Court held Plaintiff's  malpractice case could go forward, based on the following considerations:

1) A dissatisfied litigant does not have to prove that their attorney committed fraud in the settlement before they can sue the attorney for malpractice in settlement negotiations.

2) Litigants rely on attorney's advice on whether to accept settlements and the law insists that their recommendation be made with the skill, diligence, and knowledge of a reasonably competent attorney. Attorneys are expected to know the reasonable probability of their case's success and the range of potential outcomes. A lawyer must exercise reasonable care in negotiating a settlement for a client, just as he must exercise such care in all other aspects of the representation. 

3) The doctrine of estoppel should not be applied here because the fact the court hearing  on setting aside the settlement  called the award "fair and equitable" does not mean that Plaintiff could not have secured a better award had Attorney not been negligent.

4) The prior ruling also did not touch on whether or not Plaintiff's husband hid assets. Consequently, the ruling does not bar a claim that Attorney negligently failed to discover hidden marital assets.

5) Given the evidence, Plaintiff's further claims that Attorney negligently failed to put agreed upon terms into writing and delayed in making the final settlement resulting in financial losses,  should not have been disposed of with summary judgment.

Lesson: Rulings regarding the fairness of a settlement do not preclude suits against attorneys for malpractice in reaching that settlement. To avoid malpractice claims in settlement situations attorneys should explain the settlements as written to the consenting parties and their legitimate basis for believing that the client should accept the proposed agreement. 

Editor's Note:  This case highlights the "settle and sue" syndrome  in legal malpractice actions. At this posting, the NJ Supreme Court has heard oral argument in Guido v. Duane Morris, LLP  and is taking a fresh look at the issue. Stand by for a decision in the near future. 

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Katz v. Herzfeld & Rubin, P.C., 853 N.Y.S.2d 104 (2 Dept. 2008)

NY Underlying Personal Injury Action

Student Contributor:  Jason Klein

Facts: Plaintiffs retained Defendant attorneys as counsel for a personal injury action which was eventually settled. Subsequently, Plaintiffs commenced an action for legal malpractice alleging that Defendants refused to pursue a claim for loss of income, and as a result, Plaintiffs were forced to settle their personal injury action for an amount far below what they could have recovered. Defendants filed a motion to dismiss arguing that because Plaintiffs dismissed Defendants and hired new counsel five months prior to settling, the Defendants’ actions did not proximately cause the alleged damages. The trial court granted the Defendants’ motion to dismiss and Plaintiffs appealed

Issue: Did the trial court properly grant Defendants’ Motion to Dismiss in light of Plaintiff’s decision to terminate their representation five months in advance of the settlement of which they now complained?

Ruling: Yes. Successor counsel had been retained in a timely fashion and had every opportunity to protect the Plaintiff’s rights in advance of the time of their decision to enter into a settlement.

Lesson: Plaintiffs had sufficient time in which to pursue its claims with successor counsel, and therefore, could not establish that any alleged damages resulting from their decision to settle were proximately caused by the acts or omissions of their former counsel.

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Muhammed v. Strassburger, McKenna, Messer, Shilobod and Gutnik
526 Pa. 541, 587 A.2d 1346 (Pa. 1991)

PA Underlying Medical Malpractice Litigation

Student Contributor: Justin B. Lieberman

Facts: Former client sued attorney for legal malpractice after the client was unhappy with the settlement received in the underlying medial malpractice action. In the underlying action clients accepted a settlement offer at a pre-trial conference, and then recanted the acceptance after their lawyer informed the opposing side of acceptance. The opposing side sought enforcement of the settlement and the trial court, at an evidentiary hearing, upheld the settlement, as did the Superior Court on appeal. The clients filed suit against the attorneys. The law firm defended on the following grounds: that the action should be dismissed as the claims were too speculative and settling clients were seeking to relitigate the settlement. The case was brought to the Supreme Court of Pennsylvania.

Issue: Can a settling defendant sue his/her lawyer for malpractice although they agreed to settle the underlying claim?

Ruling: A client cannot bring a malpractice claim against a former attorney because of their later dissatisfaction of a settlement to which they agreed,  unless they can show some fraudulent conduct by the attorney  in advising the client on accepting the settlement. Here, the clients, were dissatisfied not able to renegotiate their settlement after they had already voluntrarily accepted an offer. They were thus, not fraudulently induced to settle by their attorney.

We foreclose the ability of dissatisfied litigants to agree to settlement and then file suit against their attorneys in the hope that they will recover additional monies.

Lesson: An attorney may not be held liable when a client later decides they are unsatisfied with a settlement they willingly agreed to at a prior time, unless the attorney fraudulently induced or intentionally misadvised the client to accept the settlement.

Editor's note: This was the law in PA for many years. The stringent rule in this case, of barring a malpractice suit against the lawyer who represented the settling party-- has  since  been substantially limited  and liberalized.

See, e.g., McMahon v. Shea, 441 Pa. Super. 304, 657 A.2d 938 (1995).

The holding in Muhammad has been rejected in New Jersey (Ziegelheim v. Apollo, 128 N.J.250, 607 A.2d 1298 (1992) and Connecticut (Grayson v. Wofsey, Rose, Kweskin & Kuriansky, 231 Conn. 168, 646 A.2d 1994).

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Prospect Rehabilitation Services, Inc. v. Squitieri, 392 N.J. Super. 157 (App. Div. 2007)
NJ Underlying Commercial Action

Student Contributor: Melissa Goldberg

Facts: Plaintiff sued a nursing home for overpayment of rent and construction advances in an underlying action in which Plaintiff’s lawyer had failed to include a Medicare claim. Plaintiff fired its attorney and tried to, unsuccessfully, amend its complaint in the underlying action to include the Medicare claim. Eventually, Plaintiff settled with the nursing home voluntarily in the underlying action and sued its attorney for malpractice. The trial court dismissed Plaintiff’s legal malpractice complaint because it found Plaintiff settled voluntarily with the nursing home, and thus, was precluded from recouping any additional monies from its attorney. The Plaintiff appealed arguing that it only settled as an attempt to mitigate damages, and that it was not necessary to exhaust all appeals before bringing the malpractice action.

Issue: Whether the Plaintiff could successfully assert a cause of action for malpractice after settling in the underlying action without exhausting all appellate remedies?

Ruling: Yes, Plaintiff could assert a cause of action for legal malpractice against the defendant attorney to recoup damages under the Medicare claim, since:

1. Plaintiff never represented that the settlement with the nursing home was an acceptable settlement of all of its underlying claims;
2. Plaintiff entered into the settlement in an effort to mitigate its damages; and,
3. There is no requirement that all appellate remedies available in an underlying action be exhausted prior to asserting a claim for legal malpractice.

Lesson: As long as a litigant enters into a settlement in the underlying action in an effort to mitigate damages, it does not have to exhaust all appellate remedies prior to asserting a cause of action for legal malpractice.

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Kaplan v. Skoloff & Wolfe, P.C. 770 A.2d 1258 (N.J.Super.A.D., 2001)
NJ Underlying Divorce Action Settlement

Student Contributor: John Anzalone

Facts: Attorney represented Plaintiff in a divorce proceeding. Plaintiff alleged that because of the attorney negligence in negotiating a property settlement agreement, she received less than she was entitled to when she accepted it. Plaintiff's expert concluded that the settlement was not adequate by comparing what she received to anecdotal evidence as to what he got for one former client recently. As a professional negligence action, an expert opinion on liability was required, But the court found Plaintiff's expert testimony inadmissible because it was based on anecdotal experience of the expert that were unsupported by facts.

Issue: What constitutes an inadmissible expert net opinion?

Ruling: In affirming the dismissal, the Appellate Division held that the expert's opinion on liability was properly excluded, based on the following factors:

1. In New Jersey, expert opinions that are solely conclusions and that fail to provide the basis for the conclusions are considered "net opinions" and are inadmissible as evidence.
2. To get an expert's opinion admitted into evidence, the expert must provide evidence of the accepted practice by lawyers that the defendant failed to adhere to.
3. The expert here failed to provide evidence other than anecdotal evidence regarding a case he handled in the recent past and otherwise only established that he would have done something different in the case, and not what reasonable attorneys' would have done in this case.

...the net opinion rule requires the expert witness 'to give the why and wherefore of his expert opinion, not just a mere conclusion...'

... Plaintiff's expert offered no evidential support establishing the existence of a standard of care, other than standards that were apparently personal to himself.

The Lesson: For the expert's opinion to be admissible in a legal malpractice case, he must define the standard of care and must support its definition by reference to evidence that other experts rely on and which are applicable to lawyers in similar circumstances. The expert's opinion must not be solely based on the expert's own personal view and experience. Once the expert esablishes the applicable standard of care or practice, he must then, through reference to the factual evidence, express the opinon how the defendant lawyer deviated from that standard and how that deviation was the cause of the alleged damage.

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