Oct 1 2018

Legal Malpractice Law Update 9/25/18

 

Supreme Court of Utah

Non-Economic Damages:  Emotional distress arising from the attorney’s actions is not compensable measure of damages for legal malpractice, breach of contract or breach of fiduciary duty causes of action absent “unusual circumstances”.

Court of Appeals of Ohio, Tenth District

Statute of Limitations:  Legal malpractice action barred by the statute of limitations because the action of the parties, not a later court order permitting withdrawal, controlled the termination of attorney-client relationship.

California Court of Appeal, Fourth District, Division 3

Causation Standard of Proof:  Claims of fraudulent concealment and intentional breach of fiduciary duty by a client against his or her attorney are subject to the substantial factor causation standard, not the “but for” or “trial within a trial” causation standard employed in cases of legal malpractice based on negligence.

Supreme Court of New Hampshire

Settlement of Underlying Claim Does Not Bar Legal Malpractice Suit:  Summary judgment for defendant attorney reversed where settlement agreement in underlying claim did not bar subsequent legal malpractice claim.

Court of Appeals of Ohio, Fifth District

Settlement Does Not Waive Legal Malpractice Claim:  An estate with a right to a legal malpractice claim can pursue the claim even if it enters into a settlement agreement concerning the subject for which the attorney was retained.

Court of Appeals of Georgia

Evidence of Attorney-Client Relationship:  JNOV in favor of attorney in legal malpractice action involving sale of business transaction reversed because there was sufficient evidence for the jury to find an attorney-client relationship, notwithstanding the absence of an engagement letter or any compensation paid to the attorney.

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Supreme Court of Utah - Gregory & Swapp, PLLC v. Kranendonk 2018 WL 3598842 (Utah 7/26/2018)

Non-Economic Damages:  Authored by Jillian McGrath 

Defendant attorney failed to bring a claim against two truck drivers who severely injured the client before the statute of limitations ran.  Defendant attorney failed to disclose to the client for ten months that he missed the statute of limitations.  Client sued the attorney and his firm for legal malpractice, breach of contract, breach of fiduciary duty, and negligent hiring, training and supervision.  The jury found for the client on each claim, awarding her $750,000, the amount the jurors believed she would have received if the defendant attorney timely filed her claim.  The jury also awarded her $2.75 million for non-economic damages, emotional distress.  The client moved for attorney’s fees and litigation expenses on the ground that the defendant firm breached its fiduciary duties.  The jury awarded her $1,666,666.67 in attorney fees, the amount she owed under the contingency fee agreement, but did not award her litigation expenses.  After trial, the defendant firm moved for judgment notwithstanding the verdict on the jury’s second award of $2.75 million, arguing that non-economic damages unrelated to the original personal injury claim should not be awarded in this instance.  The district court denied the motion.  The defendant firm appealed, arguing that the client’s case did not qualify as one of the “rare” instances where non-economic damages is compensable for breach of contract, because emotional distress was not a foreseeable result of a breach in this case and was not explicitly contemplated by the parties when they formed their agreement.  They also argued that the non-economic damage award could not be supported under a breach of fiduciary claim, because there was insufficient evidence to establish an actionable breach of fiduciary duty.  The Supreme Court of Utah agreed with both arguments and vacated the jury’s $2.75 million award for non-economic damages.  When bringing a legal malpractice suit, “[c]lients ... may sue for damages based on breach of contract, breach of fiduciary duty, or negligence.”  Usually, the elements required to prove negligence and breach of fiduciary duty in the legal malpractice context are “substantially the same,” so a plaintiff’s choice to classify its malpractice claim under one of the two theories does not cause “any difference in result.”  This is so because “[m]ost rules applicable to negligence actions also apply to actions for breach of fiduciary duty.”  But an action for breach of contract is “very different” from these other two legal malpractice theories.  The “[r]ules of contract, not rules of legal malpractice, govern an action” brought under a breach of contract theory.  In that vein, damages that may be awarded under these theories may also differ.  Because the client did not point to specific language or obligations in her contract with the defendant attorney that show that emotional damages were contemplated at the time they formed the contract, the Supreme Court held that the district court erred in affirming the $2.75 million jury award under that theory.  Normally “there is no recovery of damages for mental anguish stemming from a breach of contract.”  This is so because “an award of damages in a breach of contract case attempts to ‘place the aggrieved party in the same economic position the party would have been in if the contract was not breached.’”  In the legal malpractice context, this means that typically the only emotional distress damages recoverable under a breach of contract theory are those stemming from the injury in the underlying case.  An exception to this rule may exist in “unusual circumstances.”  Something in the contract, therefore, must show that the parties contemplated granting relief for more than the typical mental anguish and discouragement that results from a breach of contract.  When the primary nature of the contractual obligations involves peculiarly personal interests, as opposed to pecuniary interests, emotional distress damages stemming from a breach of that contract may be warranted.  Here the nature of the contract formed by the defendant firm did not involve peculiarly personal interests.  In order to recover on a breach of fiduciary duty claim in the legal malpractice context, a plaintiff must show (1) the existence of “an attorney-client relationship; (2) breach of the attorney’s fiduciary duty to the client; (3) causation, both actual and proximate; and (4) damages suffered by the client.”  The Supreme Court held that the client failed to provide any evidence that the defendant attorney’s breach of fiduciary duty (i.e. his intentional concealment of the fact that the statute of limitations had expired) caused the mental anguish she experienced.  Rather, the evidence provided at trial shows that the client suffered emotional distress due to the defendant attorney’s legal malpractice – conduct that both parties conceded could not support non-economic damages in this case.  “If the client’s injury would have occurred regardless of the attorney’s action, then there is no causation.”  Here, nothing at trial suggested that the client’s mental distress would not have occurred if defendant attorney had not concealed his malpractice from her.  Instead, the evidence suggested that the client’s mental distress would still have occurred because the defendant attorney lost her personal injury claim.  The Supreme Court of Utah also vacated the district court’s award of attorney fees because the breach of fiduciary duty claim failed and that was the only claim that could support an award of attorney’s fees.  For the same reason, the Supreme Court held that the district court correctly denied the client’s claim for litigation expenses.

Court of Appeals of Ohio, Tenth District - Felix v. Gerth Law Offices, LLC 2018 WL 3752173 (Ohio App. 10th Dist. 8/7/2018)

Statute of Limitations:  Authored by  Michael Beers 

Defendant attorneys previously represented plaintiffs in a Chapter 7 Bankruptcy proceeding.  After plaintiffs failed to pay defendant attorneys their fees pursuant to a retainer agreement, defendant attorneys notified plaintiff through electronic and U.S. Mail the attorney client-agreement had “reached its termination” on June 3, 2015.  On the same date, defendant attorneys filed a motion to withdraw from the bankruptcy case.  On July 16, 2015, the Bankruptcy Court entered an order granting the motion for withdrawal.  On July 13, 2016, plaintiffs initiated a legal malpractice action against defendant attorneys based on the Bankruptcy Court sustaining the trustee’s objection to plaintiffs’ homestead exemption.  Defendant attorneys successfully moved for summary judgment on the ground that the action was barred by the one-year statute of limitations.  On appeal, plaintiffs argued the lower court erred in finding the statute of limitations began running on June 3, 2015, as opposed to July 16, 2015.  In order to identify the date the statute of limitations began running, the Court of Appeals was required to determine: (1) when plaintiffs should have known they had an injury caused by defendant attorneys; and (2) when the attorney-client relationship terminated.  The latter of these two dates is when the statute of limitations began to run.  As for the first date, the parties did not dispute plaintiffs became aware of a potential injury prior to June 3, 2015.  With regard to the second date, plaintiffs contended the attorney-client relationship did not terminate until the motion to withdraw was allowed on July 16, 2015.  In applying Ohio precedent, the Court of Appeals affirmed the lower court’s ruling by holding that the Bankruptcy Court’s order did not set the termination date; rather it was the action of the parties.  The Court of Appeals based its ruling on the fact that on June 3, 2015, defendant attorneys explicitly stated in a letter they were withdrawing and considered the representation terminated.  Furthermore, defendant attorneys filed their motion to withdraw the same date they sent the letter to plaintiffs.  Finally, plaintiffs retained a successor bankruptcy attorney who filed an appearance on July 1, 2015, which itself was more than one year prior to the date plaintiffs commenced their legal malpractice action.  The Court of Appeals held that these factual determinations were sufficient to affirm the trial court’s judgment.

California Court of Appeal, Fourth District, Division 3 - Knutson v. Foster 2018 WL 3751724 (Cal. Ct. App. 08/08/2018)

Causation Standard of Proof:  Authored by Christopher C. Storm

The California Court of Appeal reversed a trial court order granting defendant attorney's motion for a new trial after a jury returned a verdict finding defendant attorney fraudulently concealed multiple conflicts of interest impacting his representation of the plaintiff client, and had intentionally breached his fiduciary duty to the client.  Plaintiff client was an internationally-ranked high school athlete with multiple college athletic scholarship offers.  Plaintiff committed to a college but then de-committed when her preferred coach left that school.  Plaintiff alleged that her sport’s national governing body appealed to her to turn professional and train for the Olympics rather than go to college, orally promising to provide her financial support to train at a national training center.  The offer was not contingent upon athletic achievement.  Plaintiff accepted the offer, declined college scholarship offers, moved to and began to train at the national training center.  After a personnel shakeup within the governing body, the governing body informed plaintiff that it would not honor her deal.  Plaintiff retained defendant attorney to negotiate a settlement agreement with the governing body that contained new financial support terms.  Defendant attorney negotiated a settlement agreement between the plaintiff and the governing body, but the settlement deal was shorter in duration than plaintiff desired and contained onerous performance requirements which were practically impossible to achieve.  Critically, during defendant’s representation of the plaintiff, she did not appreciate that defendant attorney was well-connected with the governing body, having multiple high-level personal relationships with executives, and that those relationships created a conflict of interest where defendant attorney had divided loyalties between the governing body and the plaintiff.  Plaintiff proved at trial that defendant attorney fraudulently concealed many ways in which he had a close relationship with the governing body.  For example, defendant attorney concealed from plaintiff client that he would not litigate against the governing body, and had told the governing body so.  Also, in exchanging emails with the director of the governing body, defendant wrote that he did not want his client’s dispute “to escalate.”  Also, defendant attorney failed to advise his client that threatening to take her story public might be an impactful bargaining chip for her.  Defendant attorney omitted to advise his client that she might have independent claims against individuals employed by the governing body as well.  Defendant attorney did not inform his client that he forwarded attorney-client communication to the governing body, or that he told the governing body that plaintiff was out of money and needed to settle.  Finally, defendant attorney did not tell his client that she could have obtained money through other sources without entering into the onerous settlement agreement.  The Court of Appeal held that in allowing defendant’s motion for new trial, the trial court erroneously applied the legal malpractice (or “but for”) standard of causation to the fraudulent concealment claim, instead of the proper “substantial factor” test.  The Court of Appeal held that under the proper substantial factor causation test, the clear evidence summarized above supported the plaintiff’s verdict on plaintiff's fraud claim.  Specifically, the Court found that defendant attorney’s concealment of the foregoing facts was a substantial factor in the plaintiff’s decision to enter into the unfavorable settlement agreement with unattainable performance markers that led to her losing financial support and feelings of despair.  Likewise, the Court found that the trial court inappropriately applied the legal malpractice standard of causation to the plaintiff’s intentional breach of fiduciary duty claim, instead of the substantial factor causation test, which is the appropriate standard for intentional conduct.  The Court of Appeal found that the jury had sufficient evidence to support a plaintiff’s verdict on a breach of duty of loyalty theory, as the evidence established that defendant attorney failed to provide to plaintiff written disclosures of his relationships with the governing body; failed to employ all negotiation strategies beneficial to the client, such as threatening to go public; failed to disclose all communications he received from the governing body personnel; and more.  The Court found that these breaches of the defendant attorney’s fiduciary duty caused plaintiff harm initially by failing to provide her with all the information she needed to make an informed decision about entering into the settlement agreement with the governing body, and also by failing to ensure that plaintiff's best interests were being protected during the negotiations.  The California Court of Appeal reversed the post judgment order granting defendant’s motion for a new trial and remanded the matter with directions to reinstate the judgment, including plaintiff’s costs on appeal.

Supreme Court of New Hampshire - Moore v. Grau 2018 WL 3748554 (N.H. 8/8/2018)

Settlement of Underlying Claim Does Not Bar Legal Malpractice Suit:  Authored by Rebecca Robertson

Plaintiff sued her former attorney after an underlying lawsuit settled.  The defendant attorney moved for summary judgment on the ground that the settlement agreement in the underlying lawsuit provided that “no future lawsuits will be filed against any third parties arising from the former relationship between” the settling parties.  The trial court granted summary judgment, holding that the defendant attorney was the type of third party contemplated in the underlying settlement agreement.  The Supreme Court of New Hampshire reversed on the ground that the legal malpractice claim did not originate, grow out of, or flow from the plaintiff’s relationship with the defendants in the underlying suit, and therefore did not fall within the prohibition of the settlement agreement that no future lawsuits would be filed against any third parties arising from the former relationship of the underlying plaintiff and defendants.  Interpreting a contract, such as a settlement agreement, is a question of law for the court to decide and is therefore reviewed de novo.  The Supreme Court held that the defendant attorneys had the burden of showing that the settlement release was intended to discharge them or that the plaintiff had received full compensation for the release of claims against them.  “Arising from” was interpreted synonymously with the term “arising out of” which has been interpreted as a very broad, general and comprehensive term, defined as “originating from or growing out of or flowing from.”  The defendant attorneys contended the phrases above should include “originating from, growing out of, flowing from, incident to or having connection with.”  The Supreme Court of New Hampshire declined to interpret the terms above more broadly as the defendant attorneys argued, because “arising from” requires some causal connection between X and Y, the causal connection must be more than tenuous and must consist of more than “but for” causation.  The Y in the Settlement Agreement language in this case was the former relationship between the underlying plaintiff and defendant.  The legal malpractice claim arose not from that relationship but, rather, the relationship between the underlying defendant (the legal malpractice plaintiff) and their attorneys (the legal malpractice defendant).   The legal malpractice defendants were not joint-tortfeasors with their clients who settled the underlying case, but were instead successive or independent wrongdoers, therefore this action was subject to the rule that settlement of the underlying action did not, as a matter of law, bar suit against an attorney for legal malpractice committed during that underlying action.  The New Hampshire Supreme Court held that legal malpractice was a separate and distinct claim against an independent and successive tortfeasor which arose out of the attorney-client relationship and the malpractice alleged here could not be said to bear any causal connection to the former relationship between the underlying plaintiffs and the legal malpractice defendants other than the “but for” relationship.

Court of Appeals of Ohio, Fifth District - Moore v. Michalski 2018 WL 3641736 (Ohio App. 5th Dist. 7/30/18)

Settlement Does Not Waive Legal Malpractice Claim:  Authored by Avana A. Anderson

Defendant attorneys were engaged to re-write the client’s father’s Will, but improperly left the father’s home and land to his estranged wife, instead of his two children.  Following the client’s father's death, and as a result of the attorney’s mistake, the estate filed a declaratory judgment action asking the probate court to interpret the Will.  After the probate court directed the estate and the decedent’s estranged wife to come to an agreement concerning the Will, the parties entered into a settlement agreement.  The estate subsequently filed suit against the attorneys alleging legal malpractice in the drafting of the Will.  The attorneys never properly filed an answer to malpractice complaint.  The attorneys subsequently moved for summary judgment arguing that the estate’s legal malpractice claims were waived because the estate entered into a settlement agreement concerning the Will and the attorneys' fees incurred in presenting the malpractice case were not recoverable.  The trial court denied the attorneys’ motion for summary judgment.  Prior to the start of trial, the estate waived its motion for default judgment due to the attorneys’ failure to answer and requested that the matter proceed to trial.  The case proceeded to jury trial and the jury awarded the estate economic and non-economic damages, as well as attorney’s fees incurred in prosecuting the legal malpractice action.  On appeal, the attorneys argued that the trial court made six errors including instructing the jury to consider attorney’s fees in the prosecution of the legal malpractice case as damages and failing to instruct the jury on the estate’s waiver of its malpractice claim due to entering into a settlement agreement in the probate proceeding.  The Court of Appeals of Ohio, Fifth District found that the trial court erred in instructing the jury to consider attorney’s fees in the prosecution of the legal malpractice case as damages.  Absent any statutory authority or showing of bad faith, malicious conduct, or vexatious conduct, attorney’s fees may not be awarded in legal malpractice law suits.  The Court of Appeals also held that the trial court did not err in failing to instruct the jury that the estate waived its legal malpractice claim because it entered into a settlement agreement, noting that the client should not be forced to give up a settlement offer in order to pursue a malpractice claim.

Court of Appeals of Georgia - Stewart v. McDonald 815 S.E.2d 665 (Ga. App. 7/17/2018)

Evidence of Attorney-Client Relationship:  Authored by Jacqueline A. Welch

Plaintiff owned 49% of a business, and his business partner owned a 51% share, based on the 2001 formation of the company.  Due to financial issues, the partners agreed to sell to a holding company to infuse needed capital into the business.  A business consultant agreed to form the holding company.  Under a 2008 agreement, the holding company promised to assume the debts of the business and pay the two partners $100,000 each for their membership interests in the business, to be paid in installments.  The holding company agreed to retain the two partners as independent contractors and to pay each a salary and other compensation, including 20% of all profits.  The agreement was silent on the issue of ownership of intellectual property of the former company.  The business consultant had determined that plaintiff’s partner who formerly owned 51% of the company, not the former company, owned all of the intellectual property.  The holding company separately entered into a licensing agreement with plaintiff’s former partner for the use of intellectual property.  Plaintiff was not involved in negotiating or drafting any of these separate agreements.  In 2009, the business consultant negotiated with new investors to purchase the holding company for $3 million.  A separate agreement between plaintiff’s former partner and the new entity granted him equity in the new company, and $500,000 more than plaintiff.  Plaintiff was not granted equity in the new entity and did not know his former partner had received an equity interest.  In early April 2010, the defendant attorney agreed to help facilitate the transaction at the request of plaintiff’s former partner and the new entity.  The attorney later testified at trial that the deal to sell the company was already struck, and the new entity needed help moving “the transaction forward” and “to get [documents] signed.”  The attorney said he helped reduce the deal to writing, and viewed his role as “assistant scrivener and messenger” who was “doing a favor for friends.”  The attorney had no engagement letter with the former partners or the new entity, and he was not compensated.  Plaintiff however testified that he believed the attorney represented him and was negotiating on his behalf.  Plaintiff said he thought the attorney would be paid as he had for past assistance, in the form of free access to the business.  In April 2010, the attorney received several draft documents from the new entity’s attorney and began reviewing them. The documents showed that the former 51% partner would receive an equity interest, and that plaintiff had no equity position.  Ultimately, the attorney was involved in an agreement between the former 51% partner and the new entity, including a five-year employment contract with a salary increase.  Plaintiff signed the closing document and voiced no objection to the terms of the transaction for three years.  He claimed he did not realize that he and his former partner were treated differently in the transaction until 2013.  Plaintiff claimed that the attorney’s negligence cost him $735,000, and he was entitled to 49% of the total proceeds of the sale of the company, and not just the cash amount he was owed under the 2008 agreement.  At trial, plaintiff argued and elicited expert testimony to the effect that an attorney-client relationship had formed, between him and the attorney, and that the attorney failed to exercise due care.  The attorney admitted he did not perform the duties of counsel on plaintiff’s behalf because he did not believe he was plaintiff’s counsel.  The attorney testified he drafted the definitive agreements as the new entity had instructed him to do, and he was not trying to negotiate for plaintiff.  On appeal, plaintiff contended the trial court erred in granting the attorney’s motion for judgment notwithstanding the jury’s verdict (“JNOV”) on the malpractice claim because an attorney-client relationship formed, the attorney breached the standard of care, and caused damages.  The Court of Appeals of Georgia explained that in a legal malpractice case, plaintiff must prove three elements:  “1) employment of the defendant attorney … 2) failure of the attorney to exercise ordinary care, skill, and diligence; and, 3) that the attorney’s negligence was the proximate cause of the plaintiff’s damages.”  Regarding whether an attorney-client relationship formed, the Court explained that it may be implied from the conduct of the parties, and may be found where no fee is paid.  The Court agreed with the jury’s view that an attorney-client relationship had formed concerning the sale of plaintiff’s interest in the former company, including the attorney’s communication on plaintiff’s behalf concerning his compensation.   The Court ruled that by failing to act as plaintiff’s attorney, he ignored core obligations, and the jury was authorized to find that the attorney breached the duty of care he owed to plaintiff.  The Court said the jury could conclude that the unfavorable outcome for plaintiff not receiving a 49% share of the proceeds realized from the sale to the new entity was the result of the attorney’s failure to fulfil duties owed to plaintiff.  The Court also ruled that the lower court’s allowance of a JNOV on plaintiff’s alternative but duplicative claims for fraud and breach of fiduciary duty was harmless.  The Court agreed with plaintiff that the trial court erred in allowing the attorney’s motion for a JNOV on the claims for attorney’s fees, and for punitive damages, because evidence could have supported a jury finding that the attorney’s persistent failure to represent plaintiff adequately went beyond mere negligence and rose to the level of bad faith.  A dissenting opinion contended that the Court of Appeals should have affirmed the lower court’s JNOV decision because plaintiff did not show that the attorney’s action proximately caused the alleged damages, given the status of plaintiff’s ownership interest and plaintiff did not demonstrate that but for the attorney’s error, the outcome would have been different.

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