Dec 28 2016

Legal Malpractice Law Update 12/28/16

Supreme Court of Ohio

Scope of Representation: Attorney and law firm did not commit malpractice by not asserting a claim which was not in their scope of representation, after they clearly communicated to client that they were not undertaking the claim, which they believed was not viable.

Supreme Court of Rhode Island

Proximate Cause: Summary judgment in favor of attorney reversed due to question of fact on whether attorney’s alleged acts and omissions were proximate cause of client’s damages arising from client’s buyout of the majority shareholder of a closely held corporation, even where client disregarded attorney’s unambiguous, written advice not to proceed with the purchase.

Court of Appeals of Oregon

Attorney-Client Privilege: Defendant attorneys were not entitled to dismissal of derivative complaint by claiming they could not defend without divulging privileged attorney-client communications, as it was not apparent on the face of the complaint that attorney-client communications existed, they were necessary to the defense of the complaint, and the client had not waived the privilege, such that the attorney-client privilege prevented defendants from defending against all of the claims against them.

Court of Appeal of California, 2nd District

Statute of Limitations: The statute of limitations applicable to legal malpractice claims also applied to and barred claims of unfair business practices, conversion, fraud, and for accounting against an attorney arising from alleged malpractice.

Court of Appeals of Texas

Legal Malpractice Claim Following Criminal Conviction: A plaintiff challenging the sufficiency of his former criminal defense attorney’s representation is barred from raising claims of legal malpractice where the plaintiff has not been exonerated for the underlying criminal offense.

New York Supreme Court, Appellate Division, Second Department

Lack of Causation: Client failed to state a cause of action for legal malpractice because 180-day notice rule required to assert claim against corporate shareholder for unpaid wages expired prior to law firm’s retention by client.


Supreme Court of Ohio

Scope of Representation: Attorney and law firm did not commit malpractice by not asserting a claim which was not in their scope of representation, after they clearly communicated to client that they were not undertaking the claim, which they believed was not viable.

Ratonel v. Roetzel & Andress, L.P.A.
2016 WL 7115873 (Ohio 12/7/2016)

The plaintiff was represented by a law firm in the purchase of an apartment building in Ohio. The plaintiff hired the defendant attorneys to represent her in a legal malpractice suit against plaintiff’s former law firm for failure to ensure the apartment building was inspected prior to her purchase. The plaintiff claimed she also wanted the defendant attorneys to pursue a legal malpractice action against the former law firm relating to a different property in Nebraska. The defendant attorneys argued that they never agreed to pursue a legal malpractice action concerning the Nebraska property. The original engagement letter between the plaintiff and the defendant attorneys did not mention the Nebraska property at all. One paragraph in the engagement letter indicated that if the plaintiff wished to retain the defendant attorneys for additional services not specified, then the parties could enlarge the scope of the engagement. No additional agreed upon services were ever discussed. The trial court granted summary judgment in favor of the defendant attorneys relating to the Nebraska property. In a split decision, the Second District Court of Appeals reversed the trial court’s granting of summary judgment. The defendant attorneys appealed to the Supreme Court of Ohio. The Court noted that the scope of an attorney’s representation can be formed based on the conduct of the attorney and the expectations of the client; it does not have to be expressly communicated. On the other hand, Prof.Conduct R. 1.2(c) states that a lawyer may limit the scope of a new or existing representation if the limitation is reasonable under the circumstances and was communicated to the client, preferably in writing. The Court examined the parameters of the parties’ relationship to determine whether the scope of the attorney-client relationship included a claim related to the Nebraska property. The complaint filed by the attorneys related entirely to the Ohio apartment building, except for a single paragraph which stated that the former law firm should have known that the Nebraska property was a limited dividend property. The plaintiff claimed that this paragraph showed that the Nebraska property was included in the scope of the defendant attorneys’ representation. The Court disagreed, noting that the Complaint made no other mention of and sought no damages relating to the Nebraska property. Additionally, the defendant attorneys sent the plaintiff a letter for her review, which included a section regarding the former firm’s liability for the Nebraska property, making it clear that any claim against the Nebraska property flowed from a separate act of negligence. The defendant attorneys also asserted that the reference to the Nebraska property was only a negotiating tool, and never had been sent to opposing counsel in any event. The defendants later sent the plaintiff an e-mail stating that, while the case regarding the Ohio apartment building was strong, bringing up the Nebraska property claim weakened the plaintiff’s claim regarding the Ohio apartment building. The defendants concluded that there was no viable claim for the Nebraska property. The defendants sent a demand letter to the plaintiff’s former law firm which included a reference to the Nebraska property, but the demand itself was limited to the Ohio apartment building transaction. An Amended Complaint was filed that was based solely on the former firm’s representation of the plaintiff for her purchase of the Ohio apartment building. Additionally, the plaintiff admitted during her deposition that she knew the complaint that was filed did not include a claim about the Nebraska property, that the defendant attorney told her several times that she had no claim regarding that property and that the defendants refused to file such a claim. The Supreme Court of Ohio took all of those factors into account in holding that the plaintiff failed to prove that the scope of the attorney-client relationship included a claim involving the Nebraska property. The record demonstrated that the plaintiff wanted the defendant attorneys to represent her in a malpractice action regarding the Nebraska property and that the defendant attorneys researched the claim, but ultimately decided that the claim was not viable and clearly communicated that to the plaintiff. Therefore, the Supreme Court of Ohio held that summary judgment in favor of the defendant attorneys on this issue was correct. The Court of Appeals decision was reversed and the trial court’s award of summary judgment was reinstated.

Supreme Court of Rhode Island

Proximate Cause: Summary judgment in favor of attorney reversed due to question of fact on whether attorney’s alleged acts and omissions were proximate cause of client’s damages arising from client’s buyout of the majority shareholder of a closely held corporation, even where client disregarded attorney’s unambiguous, written advice not to proceed with the purchase.

Rose v. Brusini 2016
WL 6962335 (R.I. 11/29/2016)

A client sued his former attorney for professional negligence and breach of contract arising out of the attorney’s representation of the client in connection with the client’s buyout of the majority shareholder of a closely held corporation of which the client was the minority shareholder. During the negotiation of a purchase and sale agreement, the attorney repeatedly advised the client in writing not to sign the agreement because the majority shareholder was refusing to provide crucial financial information about the company. Nonetheless, the attorney continued providing comments on and proposed edits to the purchase and sale agreement, including the addition of a “True-up clause” aimed at capturing post-closing any amount improperly or incorrectly paid to the majority shareholder. The client opted to proceed with the purchase notwithstanding his attorney’s cautionary advice. After closing, the client discovered that the majority shareholder had overstated the company’s accounts receivable and understated the accounts payable, thereby resulting in an overpayment to the majority shareholder in the purchase. The majority shareholder filed suit against the client after the client declined to satisfy the remaining balance from the buyout. The client filed a counterclaim seeking reimbursement of the overpayment under the “True-up clause.” The majority shareholder obtained partial summary judgment after the Superior Court found ambiguity in the language of the agreement. Thereafter, the client and the majority shareholder entered into a settlement. The client incurred over $300,000 in attorney’s fees litigating the dispute with the majority shareholder. The client then sued his former attorney for professional negligence and breach of contract alleging that the attorney had failed to advise him of his statutory right as a shareholder to obtain access to the corporation’s books and records and for negligently drafting the “True-up clause.” The attorney moved for summary judgment arguing that the client had failed to follow the attorney’s unambiguous, written advice not to sign the agreement, and thus the true proximate cause of the client’s damages was the client’s own decision to proceed with the purchase, not the attorney’s alleged acts or omissions. The Superior Court granted summary judgment for the attorney, finding that while a question of fact existed concerning whether the attorney breached the duty of care, there was no evidence of proximate cause, as it would be pure conjecture as to what the client might have done had he been advised by his attorney of his statutory right as a shareholder to obtain access to the corporation’s books and records, and any ambiguity that may have existed concerning the “True-up clause” did not equate to legal malpractice as the underlying litigation had settled before the efficacy of the clause was fully litigated. The client appealed. Reviewing the summary judgment decision de novo, the Supreme Court of Rhode Island held that a question of fact existed concerning whether the client’s damages were proximately caused by the attorney’s alleged acts and omissions. In so holding, the Court credited as sufficient the client’s summary judgment affidavit that he would have obtained the corporation’s books and records prior to closing had he been advised by his attorney of his statutory right to do so. As a result, the Court reversed the summary judgment decision and remanded the case for further proceedings.

Court of Appeals of Oregon

Attorney-Client Privilege: Defendant attorneys were not entitled to dismissal of derivative complaint by claiming they could not defend without divulging privileged attorney-client communications, as it was not apparent on the face of the complaint that attorney-client communications existed, they were necessary to the defense of the complaint, and the client had not waived the privilege, such that the attorney-client privilege prevented defendants from defending against all of the claims against them.

Deep Photonics Corp. v. LaChapelle
2016 WL 6998893, 282 Or.App. 533 (Or. Ct. App. 11/30/2016)

This appeal arose out of a derivative action filed by plaintiffs against defendant attorney and his law firm. Defendant attorney acted as general counsel and secretary for a corporation. An entity controlled by defendant attorney’s law firm was a majority shareholder of the corporation along with four other individuals. Plaintiffs were two minority shareholders of the corporation and also employees of the corporation, including the CEO. After certain events, plaintiffs were terminated from the corporation along with other employees, the corporation’s Oregon operations were shut down, and assets and operations were transferred to Korea and placed under a majority shareholder’s, or his company’s, control. After being named as parties to a lawsuit initiated by the corporation, plaintiffs brought a third-party derivative action against the directors of the corporation, as well as defendant attorney and his law firm. Plaintiffs alleged that defendant attorney breach his fiduciary duty by taking actions that included terminating plaintiffs and moving corporate operations to Korea, as well as approving the corporation’s lawsuit against plaintiffs. Defendants filed both a special motion to strike the third-party complaint (anti-SLAPP motion) and a motion to dismiss the third-party complaint for failure to state a claim. The trial court denied defendants’ motion to strike, concluding that the claims against defendants did not arise from protected litigation activity, but granted the motion to dismiss with prejudice after concluding that the defendants could not defend the action without divulging attorney-client privileged communications between defendants and the corporation. Plaintiffs appealed the granting of defendants’ motion to dismiss, and defendants appealed the denial of their anti-SLAPP motion. On appeal, the Court of Appeals of Oregon affirmed the trial court’s denial of defendants’ motion to strike, holding that defendants’ conduct did not arise out of protected activity set forth in ORS 31.150. Specifically, the lawsuit did not implicate a public interest, as the corporation was a private, closely-held corporation, and none of the conduct upon which the lawsuit was based was made in anticipation of litigation. The Court of Appeals recognized that plaintiffs’ claims arose out of defendants’ failure to provide competent legal advice to the corporation, which is not an act in furtherance of the right to petition, therefore distinguishing claims arising out of protected activity as opposed to claims simply associated with it. The Court of Appeals next turned its attention to defendants’ motion to dismiss and reversed the trial court’s grant of that motion. In granting defendants’ motion to dismiss, the trial court relied on a California decision that held a derivative legal malpractice action brought by a majority shareholder could not proceed because the defendant was foreclosed from disclosing privileged communications that were necessary for mounting a defense. Since the defendant attorney was only licensed to practice law in California and he was subject to California professional ethics rules, the trial court applied the rule from the California case. The Court of Appeals disagreed with the trial court’s application of California law, holding that Oregon applies its own rules concerning litigation and ethics, and ethics rules have no bearing on the interpretation of statutory rules of evidence, including the attorney client privilege. The Court of Appeals further held it was not apparent on the face of plaintiffs’ complaint that the attorney-client communications existed, they were necessary to the defense of the complaint, and the client had not waived the privilege, such that the attorney-client privilege prevented defendants from defending against all of the claims against them. Thus, the trial court’s dismissal of the plaintiffs’ complaint was in error. The Court further opined that to the extent any claims appeared on the face of the complaint to implicate the attorney-client privilege as to a defense, the court could have stayed the proceedings as to the attorney defendant to determine, as litigation progressed, whether there was a waiver of privilege for any attorney-client communications or whether an exception applied. Therefore, the Court of Appeals reversed the trial court’s granting of defendants’ motion to dismiss and remanded for further proceedings.

Court of Appeal of California, 2nd District

Statute of Limitations: The statute of limitations applicable to legal malpractice claims also applied to and barred claims of unfair business practices, conversion, fraud, and for accounting against an attorney arising from alleged malpractice.

Foxen v. Carpenter
2016 WL 7017964 (Cal. Ct. App. 11/3/2016)

Plaintiff suffered severe injuries in an auto accident in 2009 and hired defendant attorneys to bring a personal injury action. Plaintiff signed defendants’ retainer agreement. Plaintiff recovered a sum total of $3 million at trial for direct and consortium claims, after defendant attorneys recommended that plaintiff reject a $5 million settlement offer believing they could recover more. Defendant attorneys did not submit an accounting to plaintiff regarding the proposed disbursement of settlement funds and deducted attorney’s fees of 40%, litigation costs of nearly $575,000, and “outstanding medical bills” of $360,000 such that plaintiff’s net recovery from the settlement was approximately $846,000. Plaintiff alleged that the proposed disbursement contained fraudulent and improper charges in excess of amounts actually invoiced by vendors, and charges not authorized by plaintiff. The plaintiff brought a ten-count legal malpractice action against defendant attorneys, including counts for declaratory relief, breach of contract, unfair business practices, conversion, breach of the implied covenant, money had and received, and an accounting. The trial court dismissed the plaintiff’s claims based on the one-year statute of limitations set forth at Code of Civil Procedure section 340.6(a), which provides that an action against an attorney for a wrongful act or omission, other than for actual fraud, arising in the performance of professional services, shall be commenced within one year after the plaintiff discovers, or through the use of reasonable diligence should have discovered, the facts constituting the wrongful act or omission. On appeal, plaintiff argued that her breach of contract, declaratory relief, money had and received, and breach of the implied covenant of good faith and fair dealing claims were governed by the four-year statute applicable to claims on a written instrument, not section 340.6(a), because she alleged that the defendant attorneys’ breach related not to the quality of their legal services, but to nonprofessional obligations generally owed by all persons who enter into contracts. The Court of Appeal disagreed, holding that plaintiff’s claims were properly barred, reasoning that plaintiff’s contract claims were based on defendants’ alleged misconduct in allocating the settlement funds in the personal injury action and that plaintiff could not establish her contract claims against defendants without demonstrating they breached professional duties owed to her, or nonlegal services closely associated with the performance of their professional duties as lawyers. The Court of Appeal drew further support from a recent decision, Lee v. Hanley, 41 Cal. 4th 1225 (2015), which indicated that the term ‘professional services’ is best understood to include nonlegal services governed by an attorney’s professional obligations in light of the California Legislature’s intent that section 340.6(a) apply to more than claims for legal malpractice. As for the plaintiff’s conversion and fraud claims, the plaintiff argued that her claims were not time barred because they accrued in 2013. The plaintiff likened her case to Lee, where conversion claims against an attorney were permitted to proceed subject to a longer statute of limitations because the complaint stated a claim against attorneys for simple conversion, like ordinary theft. The Court of Appeal disagreed, noting that the instant plaintiff’s operative complaint could not be read to infer that defendants wrongfully converted an identifiable sum of money which was undisputedly owed to plaintiff. Moreover, plaintiff’s allegations that the statute of limitations should be tolled were contradicted by other allegations in the complaint that she knew of the fraud in December 2011. The Court of Appeal held that the plaintiff’s claim for unfair business practices was not properly before the Court because it was not raised until plaintiff’s appellate reply brief, and moreover, California law holds that where more than one statute might apply to a particular claim, a specific limitation, here the one-year provision applicable to attorney malpractice, prevails over a more general provision. Finally, plaintiff’s claim for accounting was properly barred because she failed to identify the proper statute of limitations that applied to it, if not the one-year statute of section 340.6(a), and the claim was also not timely raised in the principal appellate brief.

Court of Appeals of Texas

Legal Malpractice Claim Following Criminal Conviction: A plaintiff challenging the sufficiency of his former criminal defense attorney’s representation is barred from raising claims of legal malpractice where the plaintiff has not been exonerated for the underlying criminal offense.

Stallworth v. Ayers
2016 WL 7104017 (Tex. App. – Houston 12/6/2016)

The client was charged and convicted of one count of assault on a family member, second offense. Following his conviction and incarceration, the client filed suit against his criminal attorney alleging negligence in his representation of the client. The client’s first complaint did not allege that he had been exonerated of the underlying conviction and therefore his claims were barred under the prevailing Texas Law. Accordingly, the attorney successfully moved to dismiss. Prior to the court ruling on the attorney’s motion, the client amended his complaint to assert claims for breach of contract, breach of fiduciary duty, gross negligence and violation of the deceptive trade practices act in an apparent attempt to avoid dismissal. The essence of his allegations arose out of the attorney’s failure to provide the prosecution with an affidavit produced by the underlying victim allegedly recanting her allegations, that the attorney failed to challenge the legal sufficiency of the charging document and failed to request medical records or photographs of the victim’s injuries. The trial court granted the attorney’s motion and dismissed the client’s complaint, with prejudice. The client appealed. The client’s central argument on appeal was that the claims alleging breach of contract and breach of fiduciary duty were not barred by the prevailing Texas law requiring a legal malpractice plaintiff be exonerated of the underlying criminal offense prior to filing suit. The Court of Appeals examined the essence of the client’s claims and determined that each arose from the attorney’s alleged failure to provide adequate legal representation. Texas law does not permit a plaintiff to simultaneously raise claims for legal malpractice, breach of fiduciary duty, or equivalent claims where they all arise from the same underlying factual allegations. Therefore, the Court found that the client’s allegations gave rise to claims of legal malpractice and properly required that he be exonerated prior to filing suit. This rule arose from the Texas Supreme Court’s holding in Peller v. Hughes & Luce, 909 S.W.2d 494, 496 (Tex. 2009), wherein the Court held, as a matter of law, that a malpractice plaintiff’s criminal conduct is the cause in fact of injuries arising from his or her conviction and not the alleged conduct or misconduct of his or her former attorney. Therefore, a claim for legal malpractice brought by a criminal defendant requires that the defendant be exonerated. As the client failed to allege and demonstrate that he had been exonerated, the Court of Appeals affirmed the trial court’s dismissal of the client’s Amended Complaint.

New York Supreme Court, Appellate Division, Second Department

Lack of Causation: Client failed to state a cause of action for legal malpractice because 180-day notice rule required to assert claim against corporate shareholder for unpaid wages expired prior to law firm’s retention by client.

Ingvarsdottir v. Gaines, Gruner, Ponzini & Novick, LLP
2016 WL 6991731 (N.Y.A.D. 2 Dept. 11/30/16)

The New York Supreme Court, Appellate Division, reversed a trial court order denying defendant attorneys’ motion to dismiss plaintiff’s complaint. Plaintiff-former client was named as a defendant in a lawsuit, which included as defendants her former employer, and the president/sole shareholder of the company where she worked (“the shareholder”). Plaintiff worked for the company while on two H-1B nonimmigrant visas issued for the period of May 20, 2005 until May 15, 2011. In connection with the underlying case, plaintiff informed the law firm parties (defendants in this attorney malpractice action) that the company did not pay her any wages or salary for her work. The law firm then asserted a cross-claim on her behalf in the underlying action to recover unpaid wages from the company and the shareholder. On May 3, 2014, the plaintiff filed this malpractice action against the law firm parties, alleging, inter alia, that: (1) the attorneys had mistakenly asserted in the cross-claim that her employment for the company had ended in 2009, when it actually had ended later; and, (2) the law firm parties had failed to provide the statutorily required notice to the shareholder that she intended to recover unpaid wages from him individually. As a result of the malpractice suit, the law firm parties asserted a third-party action against the attorney who had represented the plaintiff regarding immigration issues. The immigration attorney had been involved in drafting plaintiff’s original cross-claim in the underlying case for unpaid wages. The law firm parties alleged that the immigration attorney also owed a duty to plaintiff to provide notice to the shareholder, pursuant to applicable law. In September 2014, the law firm parties moved to dismiss the plaintiff’s complaint, arguing that they could not be liable for attorney malpractice regarding the second theory (no notice to the shareholder), because the period in which plaintiff would have been required to provide notice to him had actually expired before plaintiff had retained the law firm parties to represent her. The New York Supreme Court denied the motion. The immigration attorney moved to dismiss the third-party complaint, arguing that retainer agreements he entered into with the plaintiff expressly limited the scope of his representation of the plaintiff to issues related to immigration and a claim before the U.S. Department of Labor. The Court allowed the immigration attorney’s motion, and dismissed the third-party complaint against him. The Court denied the motion of the law firm parties to dismiss the complaint. On appeal, the law firm parties argued that the lower court erred in denying their motion to dismiss because they had not been retained until May 19, 2011 and the plaintiff had failed to assert her claim within the statutorily mandated 180 days after the termination of her employment, which they argued was no later than May 4, 2011. Plaintiff asserted two primary arguments: (1) the 180-day notice period had not run before she hired the law firm parties; and, (2) even if the period had run, the complaint stated a cause of action based upon the “insanity toll” of applicable New York law, and the doctrine of equitable tolling. First, plaintiff claimed that the 180-day notice period actually did not commence until May 15, 2011, the date on which the U.S. Department of Labor found, in a separate proceeding, that plaintiff’s termination from employment was co-extensive with the expiration of her H-1B visa. The complaint thus alleged that plaintiff was employed with the company (and the shareholder) until May 15, 2011. Second, plaintiff argued that she endured mental abuse by the named shareholder of such a magnitude that she was under a psychiatric disability at the relevant time. Further, regarding equitable tolling, plaintiff claimed that the law firm parties were aware of the abuse she suffered and they should have been alerted that the 180-day notice period may be subject to equitable tolling, and they should have ensured that notice had been provided, even if it technically would have been late. The Appellate Division held that the lower court erred in its decisions by not concluding that the facts alleged in the complaint failed to establish a cause of action to recover damages for legal malpractice. The plaintiff argued that, because federal immigration law permits an employee on an H-1B visa to receive wages through the expiration of the visa, it was the expiration of her visa that constituted the end of her employment, which commenced the 180-day period. The Court disagreed, stating that state law, not federal immigration law, determines when an employee ceases working, and resigns from employment. The Court noted that plaintiff was actually arrested, along with the named shareholder, on November 4, 2010 and charged with grand larceny in the first degree arising from thefts from a company client. Thus, the Court held that, under state law, November 4, 2010 – the arrest date – was the date when plaintiff ceased providing employee services to the company, and the 180-day notice period to the shareholder began to run on that date. Accordingly, on May 4, 2010, prior to defendant law firm’s retention, the 180-day notice period had already ended, and therefore the complaint should have been dismissed. As for the plaintiff’s claim that the 180-day notice requirement should have been tolled due to her insanity and equitable tolling arguments, the Court held that the complaint failed to allege sufficient facts to support a finding that plaintiff was unable to function in society, as required for the insanity toll under applicable law. Further, the Court ruled that although equitable tolling had sometimes prevailed in cases involving issues with statutes of limitations, the 180-day notice period is not a statute of limitations, and instead is considered a condition precedent to the ability to file suit. As such, the underlying claim was not subject to equitable tolling.

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