Sep 1 2017

Legal Malpractice Law Update 8/31/17

Massachusetts Appeals Court

Fiduciary Duty to Minority Shareholders: Outside counsel hired by majority shareholders of a closely held company may owe minority shareholders a fiduciary duty where corporate operating agreement contained significant protections for minority shareholders.

Baker v. Wilmer Cutler Pickering Hale and Dorr LLP et al.
2017 WL 3091262 (Mass. App. Ct. 7/21/2017)

The Massachusetts Appeals Court reversed the portions of a trial court judgment dismissing under Rule 12(b)(6) claims for breach of fiduciary duty and violation of Massachusetts’ consumer protection statute brought by shareholders of a closely-held Massachusetts corporation against that corporation's counsel, on the basis that the counsel owed a fiduciary duty to the minority shareholders, notwithstanding the lack of attorney-client relationship between the groups. The closely-held corporation was governed by an operating agreement providing extensive minority protections, including that all members were entitled to participate in the corporation's management; further capital contributions could not be mandated, and those proffered were treated as loans; and the agreement could not be amended to alter the percentage interest of any member without the consent of each member adversely affected. Notwithstanding these protections, and motivated by a disagreement among shareholders about how to resolve a financial shortfall, the majority shareholders worked secretly in concert with the corporation's counsel to devise and execute a plan by which the corporation would merge itself into a new company controlled exclusively by the majority shareholders. This plan was viable because the operating agreement was silent on mergers and Massachusetts law permitted such a merger based only on majority vote. After being frozen out, the minority shareholders sued the corporation’s counsel for breach of fiduciary duty, alleging that such a duty arose from counsel's representation of the closely-held corporation in which, by law, shareholders owed each other a fiduciary duty. The Massachusetts Appeals Court agreed, noting that the Supreme Judicial Court had previously noted in dicta that, logically, counsel to a closely held corporation owes each shareholder a fiduciary duty, just as an attorney for a partnership owes a fiduciary duty to each individual partner. The Appeals Court reasoned that the significant minority protections contained within the operating agreement and described in the complaint resolved the factual question as to whether a fiduciary duty existed. The Appeals Court also rejected two counterarguments advanced by the majority shareholders for why no fiduciary duty should exist. First, the court concluded that it did not matter that the complaint failed to allege that minority shareholders reposed trust in, or even interacted with, corporation counsel, because of the covert nature of counsel's actions, juxtaposed with the strong minority protections afforded by the operating agreement. Next, the court concluded that the mere potential for, or presence of actual conflict between the counsel's client, the corporation, and its minority members, due to disagreements about how to address a financial shortfall, did not prevent imposing a fiduciary duty in this case because the operating agreement imposed consensual decision making despite the obvious potential for conflicts. As for the minority shareholders’ claims under the consumer protection statute, the Appeals Court held that the novel issue as to whether a fiduciary relationship between the parties could constitute “trade or commerce” was also sufficiently pleaded so as to survive dismissal.

Court of Appeals of Texas – Eastland, 11th District

Anti-Fracturing Rule: The anti-fracturing rule barred client’s claims for breach of contract, breach of fiduciary duty, fraud, DTPA and negligent misrepresentation where the gravamen of the client’s complaint related to the quality or adequacy of the attorney’s representation.

Cotton v. Jones
2017 WL 3572818 (Tex. App. – Eastland 8/17/2017)

Defendant attorney prepared a gift deed for a client wherein the client conveyed a parcel of real estate to her children, the plaintiffs, subject to a life estate for the remainder of her life. At the time of the client’s death, she was married and living with her husband on the property. After her death, her husband asserted a surviving spouse’s homestead right to the property. In a separate lawsuit, the husband’s rights to the property were affirmed. Subsequently, the plaintiffs sued the defendant attorney for legal malpractice, breach of contract, breach of fiduciary duty, fraud, violation of the DTPA (Deceptive Trade Practices Consumer Protection Act), and negligent misrepresentation based on the preparation of the gift deed. The plaintiffs alleged that the purpose of the gift deed was to vest clear title in the property to them, along with immediate possession and control of the property upon the death of their mother, without the necessity of probate. Defendant attorney filed a motion for summary judgment on five grounds, one of which alleged that claims for breach of contract, breach of fiduciary duty, fraud, DTPA, and negligent misrepresentation were improper attempts to fracture a legal malpractice claim. He further alleged that plaintiff’s claims for legal malpractice, negligent misrepresentation, and DTPA violations were barred by the statute of limitations. The trial court granted the summary judgment motion based on the statute of limitations defense, but denied the motion on the anti-fracturing ground, thereby allowing plaintiffs to pursue their breach of contract and breach of fiduciary duty claims. Defendant attorney obtained permission from the trial court to pursue a permissive appeal from the partial denial of his motion for summary judgment contending that, as a matter of law, the claims against him for breach of contract, breach of fiduciary duty, fraud, DTPA, and negligent misrepresentation were subsumed under the plaintiff’s claims against him for professional negligence under the anti-fracturing rule. The rule against fracturing claims prevents plaintiffs from converting what are actually professional negligence claims against an attorney into other claims. The rule prevents legal malpractice plaintiffs from “opportunistically transforming a claim that sounds only in negligence into other claims” to avail themselves of longer limitations periods, less onerous proof requirements, or other tactical advantages. For the anti-fracturing rule to apply, the spirit of the complaint must focus on the quality or adequacy of the attorney’s representation. The plaintiffs argued that they had done more than merely reassert the same claim for legal malpractice under an alternative label and there was no showing that the claims were improper or opportunistic. The plaintiffs also argued that some non-malpractice claims have been permitted when there is a claim that the attorney obtained an improper benefit. In this instance, the plaintiffs argued on appeal that the defendant attorney obtained an improper benefit in the form of preserving his business and license to practice law. The Court disagreed that the preservation of an attorney’s ability to continue the practice of law is the type of improper benefit contemplated by a breach of fiduciary duty claim and the only financial benefit that the defendant attorney received for preparing the gift deed was his fee of $75. The Court of Appeals concluded that the gravamen of the plaintiff’s claims for breach of contract, breach of fiduciary duty, fraud, DTPA, and negligent misrepresentation were impermissibly fractured, professional negligence claims. The Court reasoned that the plaintiff’s claims were all based on the allegations that the attorney failed to obtain the husband of the client’s effective consent to the gift deed or a renunciation of his homestead rights. Therefore, the Court of Appeals reversed the trial court’s order denying the defendant attorney’s motion for summary judgment on his anti-fracturing defense ground, effecting a dismissal of all of plaintiffs’ claims.

District Court of Appeal of Florida, First District

Equitable Estoppel: Attorney was not equitably estopped from asserting a defense based on the statute of limitations where the client’s mistaken belief that the limitations period had been tolled was not based on the attorney’s communications or actions.

Riverwood Nursing Center, LLC v. Gilroy
219 So.3d 996 (Fla. 1st DCA 6/6/2017)

The defendant attorney, who represented the plaintiff nursing center, failed to respond to a request for a hearing on an administrative complaint issued by the state’s health care administration, causing the health care administration to enter a final order by default against the nursing center, revoking its license. The nursing center was forced to terminate operations and alleged that it suffered substantial damages. After the nursing center brought suit against the attorney alleging legal malpractice, the lower court granted the attorney’s motion for summary judgment upon the finding that the doctrine of equitable estoppel did not bar the attorney’s statute of limitations defense. More specifically, in October of 2013, the nursing home filed its complaint against the attorney arising from the default. The attorney’s motion for summary judgment argued that the two-year statute of limitations imposed by the state barred the claims after April 14, 2013, which was two years after the health care administration’s order became final. The attorney also argued that the doctrine of equitable estoppel raised by the nursing home did not bar the attorney’s statute of limitations defense. The trial court granted the attorney’s motion. On appeal, the Court of Appeal noted that during pre-suit discussions between the attorney’s insurance carrier and the president and counsel for the nursing center, the nursing center advised the attorney and its carrier that it intended to submit a claim against him. The insurance carrier and attorney made an offer to the nursing center to settle for one hundred thousand dollars, expressly stating that they would not settle for any amount above that figure. Additionally, the president of the nursing center indicated multiple times that he did not want to sue the attorney, that he thought the statute of limitations stopped running when a claim was initiated rather than at the time suit is filed, and that the attorney did not inform him regarding the two-year statute of limitations period, which would have meant that the nursing center would have had to file suit on or before April 14, 2013 and not in October of 2013. The Court of Appeal agreed with the trial court that it was undisputed that the nursing center filed suit after the statute of limitations had expired, and that the settlement negotiations between the attorney and his insurance carrier and the nursing center’s president and counsel did not toll the statute of limitations based on an equitable estoppel theory because the attorney and the insurance carrier did not act fraudulently or make any misrepresentation of material fact. The Court of Appeal noted that the doctrine of equitable estoppel is based on the public policy notions and principles of fair play and essential justice that would arise from lulling another party into a disadvantageous legal position. The doctrine can appropriately be invoked if a party shows that the opposing party represented a fact that is contrary to its position that it takes at a later time, that the party asserting the doctrine relied on the opposing party’s earlier representation, and that the party asserting the doctrine changed its position to its detriment due to the opposing party’s representation and reliance thereon. Applying those principles to the case at bar, the Court of Appeal reasoned that even though the nursing center president repeatedly testified that he always believed the statute of limitations stopped running when a claim is filed rather than when a law suit is commenced, that belief was not founded on any sort of misrepresentation by the attorney, who in fact had no duty to advise him about said statute of limitations, especially since the nursing center was represented and advised by its own counsel in this matter. Further, the attorney and his insurance carrier made clear in February or March of 2013 that they would not settle for any more than $100,000 to settle the claim, while there was still time remaining on the statute of limitations in which a law suit could have been properly filed by the nursing center. Thus, the Court of Appeal agreed that the attorney should not be equitably estopped from relying on a statute of limitations defense.

Court of Appeals of Indiana

Liability for Another Attorney’s Theft: Defendant attorney did not breach his duty to exercise ordinary skill and knowledge or to provide plaintiff with accurate and non-misleading information regarding the status of the settlement proceeds that had been stolen by a different attorney in the firm.

DiBenedetto v. Devereux
2017 WL 2705759 (Ind. App. Ct. 6/23/2017)

Plaintiff was severely injured in a head-on collision in April of 2010 and entered into a contingent fee contract with a partner of the defendant’s law firm to pursue her claims. At the time, the defendant attorney was an associate in the firm but not assigned to assist with the plaintiff’s case, nor did he perform any work related thereto. Ultimately, the plaintiff’s personal injury claims were settled without filing a lawsuit. The first settlement for $50,000 was paid by the insurance company for the tortfeasor. In January of 2011, the plaintiff signed a Release in Full of All Claims and Rights, but reserved the right to maintain a claim for underinsured motorist (UIM) coverage against her own insurance company. In the summer of 2011, the plaintiff and her father stopped by the firm unannounced to inquire about the disbursement of the first settlement. The attorney handling the plaintiff's case was not in the office on the day of her visit. The defendant attorney, the only attorney present in the office that day, agreed to speak with the plaintiff regarding the status of her settlement disbursement after consulting with the firm’s paralegal and reviewing the firm’s case-management software. In discussing the status of her disbursement, the defendant attorney acknowledged the January settlement and noted there were medical liens and a pending UIM claim. He explained that typically with cases like this, the pending UIM claim had to be settled before the medical liens could be negotiated and, thereafter, if any settlement funds remained, they would be distributed to her. He further advised her to follow up with her handling attorney concerning actual distribution of the settlement funds already received. In September of 2011, the plaintiff's UIM claim was settled, and the settlement check was dated October 11, 2011. The check was endorsed by someone other than the defendant attorney, and deposited into the firm's account on October 12, 2011. Six weeks later, on November 29, 2011, the plaintiff was presented with and signed a release of all claims to finalize the settlement of the UIM claim. The plaintiff never received any of the funds from the settlement of either of her claims. It was later determined that the plaintiff's attorney had misappropriated the settlement funds received from both settlements. In early December 2011, concerned with the plaintiff's attorney's business practices, the defendant attorney resigned from the firm. Shortly thereafter, he contacted the Indiana Supreme Court Disciplinary Commission to express his concerns about the attorney handling the plaintiff’s case and the business practices of the firm. In January 2012, the FBI contacted the defendant attorney concerning an investigation into the plaintiff's attorney's failure to fund trusts that he described to clients as structured annuities. The defendant attorney was not made aware of any potential wrongdoing on behalf of the plaintiff's attorney. The plaintiff's attorney was criminally charged in federal court in April of 2012 and later plead guilty to one count of wire fraud. In October of 2013, the plaintiff brought a claim for legal malpractice against the defendant attorney alleging that he was negligent, breached his fiduciary duties, and breached his contractual obligations by not providing her with accurate information when she inquired about the disbursement of her settlement funds in the summer of 2011. The defendant attorney moved for summary judgment, which was granted by the trial court. On appeal, the plaintiff argued that the defendant attorney breached his duty to provide her with accurate and truthful information in the summer of 2011, asserting that he failed to correct or supplement the advice he gave her, he was aware the plaintiff's attorney had not promptly distributed any of the money from the first settlement, and had not promptly notified any health care provider or subrogee of the settlement. She further argued that he knew or should have known that there was no legal obligation for her to wait for the completion of her UIM claim before the money could be distributed, and when he left the firm in December of 2011, he failed to inform her about the problems with the handling of her settlement proceeds. The plaintiff designated an affidavit of another attorney, who opined that the defendant attorney should have taken action to protect the plaintiff by investigating further and advising her that she should not have had to wait for distribution of the settlement that had already been received. The defendant attorney argued that he provided the plaintiff with accurate information and further advised her to consult directly with the attorney handling her case regarding the disbursement of her settlement. The Court of Appeals focused on the meeting between the plaintiff and the defendant attorney in the summer of 2011. Assessing the statements made to the plaintiff, the Court determined that the advice given by the defendant attorney was not inaccurate or necessarily misleading at the time, and the defendant attorney had no reason to suspect any wrongdoing by the plaintiff's attorney with regard to the plaintiff's settlement funds. Affirming the trial court's grant of summary judgment in favor of the defendant attorney, the Court concluded, as a matter of law, that the defendant attorney did not breach his duty to exercise ordinary skill and knowledge or to provide the plaintiff with accurate and non-misleading information.

Massachusetts Appeals Court

Standing of Bankruptcy Debtor to Pursue Malpractice Claim: Plaintiff, a bankruptcy debtor who failed to disclose a personal injury claim to the bankruptcy trustee, was not barred from pursuing legal malpractice claim against defendant law firm that did not file personal injury complaint prior to expiration of statute of limitations.

Holland v. Kantrovitz & Kantrovitz LLP
92 Mass. App. Ct. 66, 2017 WL 3482880 (8/15/2017)

The Massachusetts Appeals Court reversed the trial court’s order dismissing the plaintiff’s legal malpractice claim on summary judgment on the ground that the bankruptcy action foreclosed the claim. The plaintiff retained the defendant attorneys in 2009 to pursue a claim with respect to injuries sustained when she slipped and fell on ice. One month after retaining the defendants, the plaintiff, acting pro se and without informing the defendants, filed for bankruptcy and received a discharge in 2010. The plaintiff did not disclose the personal injury claim in her bankruptcy filings. She did however respond to the bankruptcy trustee’s questioning that she believed she was owed money as a result of her slip and fall. In 2011, the defendants realized that the statute of limitations on the personal injury claim had expired and informed plaintiff of this by letter. The legal malpractice suit followed. The plaintiff contended that the defendants failed to engage in meaningful communications prior to her bankruptcy filing and did not discover that the plaintiff was in such financial distress that she was considering bankruptcy. The plaintiff contended that the defendants had a duty to advise her how bankruptcy would affect her personal injury suit. She also contended that the defendants breached their duty to coordinate with the bankruptcy trustee to preserve the plaintiff’s right to be compensated for her personal injury claims. Finally, she contended that the defendants failed to timely file the underlying personal injury suit. The defendants moved for summary judgment, arguing that the plaintiff’s malpractice claim should be confined to the failure to timely file suit because that was the only negligent act alleged in the amended complaint, that no harm resulted from that failure because the plaintiff gave up the right to pursue the underlying personal injury action when she failed to disclose it in the bankruptcy proceedings and that the plaintiff was judicially estopped from asserting her personal injury claim by virtue of her failure to disclose it in bankruptcy filings. The Appeals Court held that the malpractice claim was never part of the bankruptcy estate. Under Massachusetts law, a legal malpractice claim accrues “when a client ‘knows or reasonably should know that he or she has sustained appreciable harm as a result of the lawyer’s conduct.’” Under this test, the plaintiff’s legal malpractice claim based on the failure to timely file suit had not accrued by the date the bankruptcy petition was filed. The plaintiff did not know that the defendants had allowed the statute of limitations to lapse until she received the 2011 letter from the defendants – more than a year after the bankruptcy petition was filed. Because the plaintiff’s malpractice claim was never part of the bankruptcy estate, the trustee never had standing to pursue it. The Appeals Court then turned to the question of whether the plaintiff would be able to show causation or harm, given her failure to disclose the personal injury claim in her bankruptcy filings. The defendants argued that the plaintiff was foreclosed from pursing the underlying personal injury claim once she was discharged in bankruptcy without having disclosed the claim; therefore, the plaintiff would not be able to prove that their later failure to file suit caused any harm. The Appeals Court held that the personal injury claim (whether disclosed or not) was not extinguished by the bankruptcy discharge. The personal injury claim continued to exist until the statute of limitations lapsed, and its value was not diminished by the bankruptcy. As soon as the plaintiff filed her bankruptcy petition, her personal injury claim became an asset of the bankruptcy estate, and the trustee was responsible for pursuing it for the benefit of the estate and its creditors. Had the defendants filed suit on the plaintiff’s behalf after the bankruptcy discharge, before the statute of limitations elapsed, the remedy would be to substitute as the real party in interest, the trustee of the bankruptcy estate, in the place of the former debtor. Therefore, it was the running of the statute of limitations, not the bankruptcy discharge that extinguished the personal injury claim. The Appeals Court held that the malpractice claim should not have been dismissed on the ground that the defendants’ negligence in allowing the statute of limitations to run could have caused no harm. Finally, the defendants argued that the plaintiff’s failure to disclose the personal injury suit judicially estopped her from pursing the malpractice claim. The Appeals Court disagreed and held that the trial court erred when the court concluded that the plaintiff’s good faith in the bankruptcy proceedings was not material and that she therefore need not consider it. The trial court was required to accept the plaintiff’s assertions that she did not intend to hide the personal injury claim from the bankruptcy trustee, that she thought she had disclosed it when she told the trustee she had fallen and believed she had a right to sue someone for her injuries. The Appeals Court reversed the judgment allowing the defendants’ motion for summary judgment and dismissing the plaintiff’s amended complaint.

Washington Supreme Court

Collateral Estoppel: Collateral estoppel barred plaintiffs’ malpractice claim arising out of defendant attorney’s withdrawal on eve of trial where the trial court granted the defendant attorney’s motion to withdraw over plaintiffs’ objection.

Schibel v. Eymann
2017 WL 3382278 (Wash. 8/3/2017)

Plaintiffs retained the defendant attorneys (“defendants”) in connection with a pending lawsuit against the plaintiffs former landlord that was initiated by plaintiff’s predecessor counsel. The underlying case was continued several times prior to the defendants’ retention. Following their retention, the defendants continued the trial date twice, with an ultimate trial date of November 1, 2010. The trial judge informed the parties that no further continuances would be granted. On October 10, 2010, the defendants informed the plaintiffs, in writing, that they would need to withdraw due to a breakdown in their relationship. In accordance with Washington Court Rule 71, the defendants filed a motion to withdraw and continue the trial, which was opposed by the plaintiffs. The trial court held a hearing on the motion and opposition, during which the plaintiffs indicated that they would not be able to find replacement counsel as they still owed fees to the defendants. The trial court granted the defendants’ motion to withdraw and entered an order finding that a breakdown in their relationship with the plaintiffs had occurred and that proper notice had been provided in accordance with Rule 71. The motion to continue the trial was denied due to the plaintiffs’ perceived inability to locate successor counsel. Following the defendants’ withdrawal, the plaintiffs unsuccessfully pursued settlement negotiations with their former landlord. Following the breakdown of settlement negotiations, the plaintiffs’ claims against the landlord were dismissed with prejudice. The plaintiffs subsequently retained new counsel and appealed the trial court’s grant of the defendants’ motion to withdraw. The Court of Appeals affirmed the trial court’s order, specifically finding that allowing the motion to withdraw was a proper exercise of the court’s discretion. The plaintiffs’ further appeals to the Supreme Court of Washington and the United States Supreme Court were unsuccessful. The plaintiffs then filed their malpractice action against the defendants. The malpractice complaint alleged negligence in preparing for trial, handling settlement negotiations, and the defendants’ withdrawal from the underlying litigation. The defendants moved for summary judgment, arguing that the plaintiffs’ claim related to the defendants’ withdrawal was barred by collateral estoppel given the trial court’s allowance of the defendants’ motion to withdraw. The motion for summary judgment was denied, and, as reported in the May 31, 2016 edition of the Legal Malpractice Law Update, the Court of Appeals affirmed. This appeal followed. The preclusive effect of an order granting a motion to withdraw was a novel issue in the State of Washington and was subject to a split of authority in jurisdictions that had considered the issue. In defending the appeal, the plaintiffs contested the satisfaction of the first and fourth elements of collateral estoppel, specifically: (1) whether there was an identity of the issues in both proceedings and (4) whether the application of estoppel would result in injustice. Contrary to the findings of the Court of Appeals, the Supreme Court found that due to the trial court’s exclusive authority to permit the defendants to withdraw, there was an identity of the issues. The Trial Court’s order conclusively established the propriety of the defendants’ withdrawal. With respect to the fourth element, the Supreme Court found that the plaintiffs were provided a full and fair opportunity to be heard on their objection to the defendants’ withdrawal and pursued every avenue of appeal. Accordingly, no such injustice would result from the preclusion of the plaintiffs’ malpractice claims which arose from the defendants’ withdrawal. Finally, the Supreme Court believed that sound logic supported applying collateral estoppel to the wrongful withdrawal claim, stating that when attorneys comply with the court rule for withdrawal, they should have confidence in that rule. If there was no collateral estoppel effect, withdrawing by court order would expose attorneys to the same consequences as simply abandoning their clients, which could dissuade attorneys from following the court rule for withdrawal. Accordingly, the Supreme Court reversed the denial of the motion for summary judgment only as to the claims for negligence arising from the defendants’ withdrawal.

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