May 1 2017

Legal Malpractice Law Update 4/30/17

Supreme Court of Virginia

Statute of Limitations: Continuous-representation rule extended three-year statute of limitations to only one of two members of client’s litigation team.

Moonlight Enterprises, LLC v. Mroz 797 S.E.2d 536, 2017 WL 1237947 (Va. 3/30/2017)

The Supreme Court of Virginia affirmed in part and reversed in part a trial court’s decision dismissing the client’s suits against two of its former attorneys on statute of limitations grounds. In 2008, the client retained Attorney 1 as counsel for the purchase of three retail condo units. The client alleged that Attorney 1 negligently misrepresented that the units included parking, which would have been refuted by the resale disclosure package (“RDP”) which Attorney 1 failed to obtain, and that the RDP included information of which the client was unaware, including fees and assessments by the condo association for parking and other services. In 2010, Attorney 1 filed suit against the condo association on the client’s behalf. Another member of Attorney 1’s firm, Attorney 2, took over primary responsibility for the litigation. On January 12, 2012, the condo association prevailed in the litigation and was awarded attorney’s fees and costs. That same day, the parties submitted a proposed final order to the court. A week later, January 19, Attorney 2 e-mailed the client and confirmed the client’s prior statement that it had hired new counsel to handle the appeal. After Attorney 2 discovered that the court misplaced the proposed final order, he sent another order to the court on January 26, 2012. The court entered the final order on February 10, 2012 after the court’s law clerk spoke with Attorney 2 that same day. Also on that date, Attorney 2 copied the newly retained appellate lawyer on his e-mail to the client concerning the final order. In 2013, the client filed a malpractice suit against Attorneys 1 and 2. The complaint charged Attorney 1 with legal malpractice in his handling of the 2008 purchase transaction by causing the client to buy the condo units without being informed about the provisions in the RDP. The complaint charged Attorney 2 with legal malpractice in the handling of the 2010 litigation. The court ultimately dismissed the malpractice claim against Attorney 1 on statute of limitations grounds. On February 10, 2015, three years to the day after the entry of the final order in the unsuccessful condo litigation, the client filed a second malpractice suit, the present suit now on appeal, against both attorneys. The complaint asserted counts of legal malpractice associated with the handling of the 2010 condo litigation. Both attorneys asserted that the three-year status of limitations barred the new malpractice suit. Attorney 1 also argued that res judicata barred the malpractice claims against him. The circuit court agreed and dismissed the case against both defendants, holding that the statute of limitations began to run on January 26, 2012 at the latest, when Attorney 2 sent the second order to the court. On appeal, the Supreme Court of Virginia examined the continuous representation doctrine and held the circuit court had been correct in dismissing the claim against Attorney 1, but incorrect as to Attorney 2. The continuous-representation rule applies only when a continuous or recurring course of professional services relating to a particular undertaking is shown to have taken place over a period of time. The proper inquiry is not whether a general attorney-client relationship has ended, but instead, when the attorney’s work on the particular undertaking at issue has ceased. With respect to Attorney 1, the client did not contend that he performed any legal services after January 26, 2012. Thus the action filed on February 10, 2015 was untimely as to him. The Court offered no opinion on the res judicata issue because of its ruling on the statute of limitations issue. As for Attorney 2, the Court held that the circuit court erred in holding that the three-year limitation period began to run before February 10, 2012. On February 10, 2012, the date of entry of the final order, Attorney 2 consulted with the circuit court’s law clerk, informed the client’s appellate counsel to be on the lookout for the date of entry of the final order for the purposes of filing an appeal and reported all of these facts to the client. Under such circumstances, and despite the fact that the client had retained other counsel to handle the appeal, the Court did not believe that Attorney 2’s involvement in the particular undertaking at issue had ceased. As a result, dismissal as to Attorney 2 was reversed.

Court of Appeals of Kentucky

Issue Preclusion: Issues addressed in attorney-disciplinary proceeding presided over by a judge that lasted for twelve days, included the testimony of 43 witnesses and consideration of over 100 exhibits, and allowed the respondent an opportunity to question witnesses and submit a brief after the conclusion of the hearing, with the decision ultimately being reviewed by the Kentucky Supreme Court, precluded the relitigation of those issues in civil legal malpractice action.

Chesley v. Abbott, 2017 WL 943973 (Ky. App. 3/10/2017)

This appeal stems from a legal malpractice action that arose out of the settlement of a lawsuit against the manufacturers of a diet pill. Plaintiffs brought suit against their four former attorneys claiming breach of fiduciary duty after receiving less than 40% of the proceeds from the $200,450,000 settlement. Despite the attorneys’ engagement agreement limiting the attorneys’ contingency fee to approximately $61,000,000, approximately $20,500,000 of the settlement was diverted by the attorneys to fund a sham non-profit organization while another $106,000,000 was divided between the attorneys. Plaintiffs sought summary judgment against the attorneys on their breach of fiduciary duty claims. The trial court granted summary judgment in plaintiffs’ favor as to three out of the four attorneys, but denied the motion as to appellant-attorney, holding that there were genuine issues of material fact as to his liability. While the plaintiffs’ action was pending, the Kentucky Bar Association (KBA) investigated claims of professional conduct against the attorneys. After an extensive hearing, a finding was made that appellant-attorney violated nine Rules of Professional Conduct and it was recommended that he be permanently disbarred. The Kentucky Supreme Court found appellant-attorney had violated eight Rules of Professional Conduct and permanently disbarred him from the practice of law in Kentucky. Following appellant-attorney’s disbarment, plaintiffs filed a motion for summary judgment as to their claims for breach of fiduciary duty against appellant-attorney arguing that he was bound by the findings and conclusions of the disciplinary proceedings in relation to their case. The trial court agreed and granted plaintiffs’ motion. Appellant-attorney argued on appeal, amongst other things, that issue preclusion did not apply because the issues presented in the KBA disciplinary proceeding differed from those in the civil action and that he did not have a full and fair opportunity to litigate the issues before the KBA trial commissioner. In other words, two out of the four elements for issue preclusion, identity of issues and the estopped party having a full and fair opportunity to litigation the issues, were not met. The Court of Appeals recognized that Kentucky’s Rules of Professional Conduct were not designed to be a basis for civil liability, nor does the violation of a Rule by itself give rise to a civil cause of action or create a presumption in a case where a legal duty has been breached. The Court went on to discuss that the violation of a Rule may be evidence of the breach of the standard of care and, in this instance, the Rules establish the standard of conduct required of an attorney acting as his clients’ fiduciary. The Court of Appeals held that the facts and issues addressed in the summary judgment motion were identical to the issues ultimately decided by the Kentucky Supreme Court in the disciplinary proceedings. Thus, the element of identity of issues was satisfied. The Court then turned its attention to the appellant-attorney’s argument that he did not have a full and fair opportunity to litigate the issues before the KBA trial commissioner. The Court of Appeals found this argument unpersuasive, holding that there was a full and fair opportunity to litigate given that the proceedings lasted twelve days with testimony from 43 witnesses and consideration of more than 124 exhibits, the proceedings were held before a judge, appellant-attorney had an opportunity to question the witnesses, and the parties had an opportunity to submit briefs after the conclusion of the hearings. Appellant-attorney argued that he was denied a full and fair opportunity to litigate the issues based upon a limited ability to engage in discovery in the civil action. This argument was found to be equally unpersuasive, as any alleged inability to engage in discovery did not hinder appellant-attorney’s ability to present his defense in the KBA disciplinary matter. Lastly the Court of Appeals commented that general considerations of fairness led to the conclusion that issue preclusion was appropriate in this matter. Therefore, the Court of Appeals affirmed the trial court’s granting of summary judgment in favor of plaintiffs on their claim for breach of fiduciary duty against appellant-attorney.

Supreme Court of Iowa

Settlement Agreement: Law firm and plaintiffs did not agree to same version of confidentiality provision in proposed settlement agreement in attorney malpractice case, rendering settlement agreement unenforceable.

Estate of Cox v. Dunakey & Klatt, P.C., 2017 WL 1291796 (Iowa 4/7/2017)

The Iowa Supreme Court reversed a lower court’s ruling enforcing a settlement agreement in an attorney malpractice case between a law firm and the parents of a deceased client. The malpractice case stemmed from the law firm’s drafting of a prenuptial agreement that was intended to waive the future spouse’s rights to her husband’s 401(k) plan, which the husband wanted to go to his parents. While dissolution proceedings were pending, the husband died, whereupon the validity of the prenuptial agreement was litigated. It was determined that the waiver was ineffective and, as a result, the 401(k) account passed to the husband’s widow, rather than to his parents. The husband’s parents then filed an action for legal malpractice against the law firm that drafted the prenuptial agreement. After the law firm filed a motion for summary judgment, the parties agreed to mediate the case. Although a resolution was not reached during the mediation, the parties ultimately closed in on a settlement; the only remaining issue was the settlement agreement’s confidentiality provision. The parents’ attorneys initially proposed confidentiality of the amount only. The law firm’s insurance adjuster responded with alternative language, cautioning that the law firm would need to accept it as well. The parents accepted the adjuster’s alternative language, which applied to the parties only. The law firm’s attorney then sent to the parents’ attorney a settlement agreement containing a confidentiality provision that applied to the parties and their attorneys. The parents’ attorney wrote back, objected to the proposed language, and requested the adjuster’s confidentiality provision, or they would take action to seek trial of the case. When the law firm’s attorney did not respond by the deadline imposed by the parents, the parents filed a motion to set a new trial date, arguing there had been “no meeting of the minds” on the settlement agreement. The law firm then filed a motion to enforce its version of the settlement agreement. The lower court ruled that a binding agreement had been reached by the parties, including the confidentiality provision espoused by the law firm, explaining that “it is the norm that confidentiality agreements would be binding on the parties and counsel.” The court would not allow the parents’ attorney to “change the rules” and claim that the agreement should not be binding on him. The parents appealed the court’s ruling and the Iowa Supreme Court held that because the parties had never agreed to the same confidentiality provision, they had not agreed on a settlement. The versions that went back and forth between the parties, according to the Court, were different versions, and counter proposals were made. Essentially, the version of the confidentiality provision that the parents agreed to would have bound only the parties to confidentiality. The law firm sought to have both the parties and the attorneys bound to confidentiality. The Supreme Court concluded that mutual assent was lacking, i.e., offer and acceptance of the same version of the confidentiality provision. As a result, no settlement was reached.

Court of Appeals of Texas – Houston (14th District)

Personal jurisdiction over pro hac vice counsel: Texas court had specific personal jurisdiction over nonresident attorney to hear legal malpractice actions against him arising from his appearance in Texas courts to represent a nonresident client.

Nawracaj v. Genesys Software Systems, Inc., 2017 WL 924495 (Tex. App. - Houston [14th Dist.] 3/7/2017)

The appellant Illinois attorney represented a client in litigation in Texas. He sought assistance of local counsel, whom his client engaged, since he was not licensed to practice in Texas. Illinois counsel later obtained admission pro hac vice. Illinois counsel prosecuted the case as "attorney in charge," though he represented local counsel would work closely with him. Illinois counsel estimated he did 90% of the work related to the case. In February 2013, the client forwarded Illinois counsel an invoice from local counsel which Illinois counsel believed was unreasonably high. At Illinois counsel's recommendation, the client did not pay the invoice and promptly was sued by local counsel for nonpayment of fees. The client responded by asserting claims against local and Illinois counsel alleging negligence, breach of fiduciary duty, negligent misrepresentation and fraud. Illinois counsel filed a special appearance objecting to the court's exercise of personal jurisdiction over him. The court denied the special appearance, for which Illinois counsel sought interlocutory review. The Court of Appeals of Texas affirmed the denial of special appearance on de novo review. The Court held that the client's allegations were sufficient to bring Illinois counsel within the Texas long-arm statute, reasoning that the long arm statute permits jurisdiction over those who, in whole or in part, commit a tort in Texas, and that the complaint sufficiently alleged the commission of a tort. The complaint asserted that Illinois counsel fell below the standard of care for Texas attorneys by negligently supervising local counsel, failing to monitor local counsel's billings, and making misrepresentations to the client regarding local counsel's invoices. The Court further held that exercising personal jurisdiction over the Illinois attorney was consistent with due process because Illinois counsel purposely availed himself of the privilege and financial benefit of practicing law in Texas on behalf of his client, thereby establishing minimum contacts necessary to establish jurisdiction. The Court further reasoned that because Illinois counsel's activities in Texas subjected him to disciplinary proceedings brought by the State Bar authority in state court, that same court should likewise have jurisdiction over a malpractice suit by his client alleging lack of competence and diligence. The Court also noted that Illinois counsel admitted that he conducted 90% of the litigation, issued substantial bills on behalf of his work in Texas, and recruited a local law firm to assist in the litigation. The Court found that exercising jurisdiction "comported with traditional notions of fair play and substantial justice" because of Illinois counsel's significant contacts, through this litigation, with Texas. The Court further reasoned that a forum selection clause in counsel's retention agreement claiming that the parties agreed to litigate any dispute in Illinois was not persuasive and did not nullify the existence of the minimum contacts necessary to establish jurisdiction. Finally, the Court believed that Texas had a substantial interest in ensuring attorneys who represent parties in Texas properly discharge their duties, and, where the client and co-defendant were located in Texas, that jurisdiction was most convenient and furthered the goal of obtaining an efficient resolution of the controversy.

Court of Appeals of Minnesota

Allegation in Complaint was Binding: Allegation in complaint against attorney deemed to establish a fact that refuted damages necessary for claim, and when motion to amend was correctly denied, dismissal was appropriate.

Leach v. Turman & Lang, Ltd., 2017 WL 1376382 (Minn. App. 3/27/2017)

The Court of Appeals of Minnesota affirmed a judgment of the district court, dismissing the clients’ legal malpractice claim in favor of the attorney and his law firm. In this case, the attorney prepared a stock purchase agreement for the sale of the clients’ corporation to a holding company. At the time of the sale, the clients were defending a wrongful-termination lawsuit brought by a former employee. The purchase agreement provided that the holding company was aware of the litigation, and, subject to the indemnity provision in the purchase agreement, agreed to indemnify and pay the expenses and judgment associated with the lawsuit. The indemnification provision in the purchase agreement stated: “[Holding company] shall hold and indemnify [the clients] harmless from the claims of the [former employee] up to the sum of $100,000.00. In the event the amount necessary to resolve the issues with [the former employee] exceed[s] $100,000.00 [the clients] shall be responsible for that portion.” The former employee’s lawsuit resulted in an $823,717.59 judgment in against the clients. The clients’ corporation subsequently transferred its assets pursuant to the purchase agreement. The holding company then reached a settlement with the former employee and in December of 2014 brought an action in North Dakota seeking indemnification from the clients in the amount of $318,946.02. The clients moved to dismiss, arguing that the provision did not require them to indemnify the holding company because, according to the indemnification provision, they were “responsible” only to the former employee, not to the holding company. The North Dakota district court denied the motion to dismiss, concluding that the indemnification provision in the purchase agreement was not ambiguous and provided the clients would be responsible for any amount in excess of $100,000 owed to the former employee. The clients then filed a lawsuit against their attorney and his law firm, claiming, among other things, that the indemnification provision made no sense because against their expectation it exposed them to unlimited liability and appeared to be a “scrivener’s mistake” that the respondent attorney should have noticed. The respondent attorney moved to dismiss, noting that in the clients’ amended complaint they alleged that they understood they would be responsible for any damages to the former employer in excess of $100,000. Following the hearing on the motion to dismiss, the clients filed a supplemental memorandum, asserting that they should be allowed to amend the first amended complaint due to “obvious typographical error” in the relevant allegation. The district court granted the attorney’s motion to dismiss, stating that the amended complaint established that the clients understood they were responsible to the former employer for any amount in excess of $100,000. The district court concluded that the admission in the amended complaint clearly established that the clients had not been damaged. The district court also denied the clients’ motion to amend and granted the attorney’s motion to dismiss. The clients appealed, arguing both that the district court should have permitted them to amend the first amended complaint, and the district court erred by dismissing their complaint after concluding that they failed to show damages. The Minnesota Court of Appeals affirmed the dismissal. With respect to the motion to amend, the Court of Appeals reasoned that the amendment proposed by the clients reflected a significant substantive change. The clients had suggested in their supplemental memorandum that, because of “obvious typographical errors,” it would be best if the relevant paragraph were “simply shortened.” However, in comparing the first amended complaint with the suggested amendment, it was determined that the clients sought to alter the meaning and language by stating that they believed they would not be responsible for any substantial liability. Under such a circumstance, denying the motion to amend was within the lower court’s discretion. In agreeing that the clients had failed to show damages, the Court of Appeals reasoned that regardless of how the respondent attorney explained the indemnification provision, the clients understood their potential liability and understood they would be responsible for any amount in excess of $100,000 owed to the former employee. As a result, their legal malpractice claim failed.

Second Circuit Court of Appeals

Res Judicata in Bankruptcy: Plaintiff’s claims against formal counsel in bankruptcy proceeding were not barred where the relief sought against former counsel would not disturb the integrity of the bankruptcy judgment.

Brown Media Corporation v. K&L Gates, LLP, 2017 WL 1360770 (2d Cir. 4/14/2017) The plaintiffs’ claims in this malpractice lawsuit arose from the defendants’ representation of multiple adverse parties who were involved in bankruptcy proceedings. Four managers from the original corporation consulted with the defendant attorneys regarding ways to prevent a creditor from taking control of the company. The defendants ultimately advised the managers to have the original corporation enter into Chapter 11 bankruptcy, have the managers form a new corporation and have that new corporation purchase the original corporation’s assets in the bankruptcy proceeding. The defendants later told two of the four managers that it wanted to represent the original corporation in the bankruptcy. Thereafter, the defendants provided advice to the managers regarding the creation of the new corporation and the structuring of an asset purchase agreement intended to permit the new corporation to purchase the original corporation’s assets at the bankruptcy sale. Only after creating the new corporation and drafting the majority of the asset purchase agreement did the defendants advise plaintiffs to retain separate counsel. Even then, the defendants did not obtain waivers from the other two managers. Nor did the defendants advise the new corporation that it had represented a rival bidder. Following a series of complicated maneuvers involving other related entities (one of whom also had been represented by the defendants), the rival bidder’s bid was accepted. The new corporation then sued, arguing that the defendants deliberately failed to take action that would have thwarted the rival bidder’s bid. The defendants moved to dismiss, alleging that the new corporation’s claims were barred by res judicata. The district court granted the defendants’ motion, reasoning that because the new corporation failed to raise its claims before the bankruptcy court, its present claims constituted a collateral attack on the bankruptcy judgment. The district court further explained that the new corporation’s claims were “so inextricably linked” to the underlying bankruptcy that granting them relief would effectively overrule the bankruptcy court’s orders. The new corporation appealed. In addition to the traditional res judicata analysis, the Second Circuit Court of Appeals addressed the question of whether an independent judgment in the separate proceeding would “impair, destroy, challenge, or invalidate the enforcability or effectiveness of the bankruptcy plan.” Examining the purpose of the bankruptcy plan, the Second Circuit observed that the “foremost concern” of the bankruptcy could is “maximizing the value of the debtor’s estate.” In examining the complaint, the Court of Appeals concluded that the complaint alleged misconduct on the part of the defendants and not the actual parties to the bankruptcy. Accordingly, entering judgment against the defendants in subsequent civil action would not disturb the bankruptcy court’s judgment. The Court of Appeals further concluded that although the bankruptcy court could have had jurisdiction over the new corporation’s claims, its failure to raise such claims did not implicate the doctrine of res judicata. The confirmation of the bankruptcy plan did not concern, nor address the new corporation’s allegations against the defendants as counsel to the original corporation. Accordingly, the Court of Appeals reversed the judgment of the district court.

Back to Newsletters