Malpractice Liability/Fee ForfeituresHome/Table of ContentsCivil Liability
Conflicts of interest have become one of the most serious causes of malpractice liability for lawyers and law firms with sophisticated business practices. Notice the reference to the business practice. For many years, lawyers believed that conflicts were something that litigators worried about: the fear of disqualification and the accompanying embarrassment and potential loss of fees. That still happens, but the real monetary exposure is in the business practice.
Following will be a list of jury verdicts, appellate decisions and press articles about significant payments by law firms and their insurance carriers in just the past few years. These are the tip of the iceberg. Dozens of cases, which are not public, are being settled every year for millions of dollars resulting from good lawyers' insensitivity to real or perceived conflicts of interest. Examples. Baldasarre v. Butler,
604 A.2d 112 (N.J. App. 1992) (upholding a $1.9 million judgment against a lawyer and his law firm for attempting to represent both the seller and buyer of real estate); [Law Firm] v. Boon
, 13 F.3d 537 (2d Cir. 1994) (upholding a $2 million verdict for a firm's allegedly dropping one client and then representing another in purchasing property that the first client had tried to purchase); Schlesinger v. Herzog
, 672 So. 2d 701 (La. App. 1996) (upholding a $5.5 million verdict against lawyer who represented both sides of a business acquisition); Automated Marine Propulsion Systems, Inc. v. Sverdlin
, No. 97-02103, Harris County, Texas (according to the January 31, 1999 Texas Lawyer, a prominent Dallas law firm paid $20 million to settle a case in which it was alleged that the firm abandoned one client in order to assist other clients in taking away his business) ; Swank v. Cunningham
, 2008 Tex. App. LEXIS 2207 (Tex. App. March 27, 2008) (fighting over the $20 million described just above); Wall St. J., Nov. 17, 1992 (Pepper, Hamilton & Scheetz paid a $3 million settlement for allegedly betraying one client in representing other clients); Interclaim Holdings Ltd. v. Ness, Motley, Loadholt, Richardson & Poole,
298 F. Supp. 2d 746 (N.D. Ill. 2004) (denial of post trial motions where jury verdict was $8.3 million in compensatory damages and $27.7 million in punitive damages; law firm had allegedly turned on its client); and Wall St. J., Oct. 29, 1992 (Oklahoma lawyer hit with $120 million jury verdict for allegedly changing sides in an oil field development dispute); Lawrence Savings Bank v. Levenson
, 797 N.E.2d 485 (Mass. App. 2003) (upholding $1.5 million jury verdict against bank's former lawyers) In In Re Kujawa
, 256 B.R. 598 (8th Cir. 2000), the court imposed a $100,000 sanction against a lawyer for representing creditors in a proceeding in which the lawyer's client was the debtor. In Gunster, Yoakley & Stewart, P.A. v. McAdam
, 965 So. 2d 182 (Fla. App. 2007), a law firm allegedly caused an estate to hire a bank, with which the law firm had an allegedly undisclosed relationship, resulting in a $1 million malpractice judgment.
New York. In In re TCW/Camil Holding L.L.C
., 2004 U.S. Dist. LEXIS 9659 (D. Del. May 12, 2004), the court held that under New York law a plaintiff cannot base a cause of action against a lawyer on a conflict of interest. Then, weeks later a New York appellate division held just the opposite in Tabner v. Drake
, 780 N.Y.S.2d 85 (N.Y. App. 2004).
Here is a case of no liability: First Interstate Bank of Arizona, N.A. v. Murphy, Weir & Butler
, 210 F.3d 983 (9th Cir. 2000). A law firm hired a former judicial clerk. As a result, the judge for whom the clerk worked recused himself from one of the firm's cases. The client sued the law firm. The Ninth Circuit affirmed the trial court's summary judgment for the law firm. Mis-directed Fax, but no Liability. Poway Land, Inc. v. Hillyer & Irwin
, 2002 Cal. App. Unpub. LEXIS 10786 (Cal. App. November 21, 2002). The law firm faxed a letter meant for its client to a lawyer for the other side. The client sued the law firm. The court upheld a summary judgment for the law firm, because there was no showing that the mistake contributed to the client's loss. [Note: this is the first case of which we are aware in which a serious claim was made against a law firm for accidentally sending a client communication to the other side.] Possible Liability of Board Member to other Client of Firm. Joe v. Two Thirty Nine Joint Venture
, 145 S.W.3d 150 (Tex. 2004) A lawyer (Joe) was the member of the city council. His partner represented a local real estate developer. Joe sponsored an ordinance that imposed a moratorium on apartment development. Because of the moratorium the developer was unable to develop some of his property as he wished. He sued Joe and his law firm. The trial court granted summary judgment. The appellate court reversed, essentially calling this a conflict of interest. Among other things the court said more should have been disclosed to the developer so that he could have adopted a strategy to avoid the effects of the moratorium. In this opinion the Texas Supreme Court reversed the appellate court, holding, in part, that telling the developer about the council proceedings was not within the firm's scope of representation. The court also made rulings about legislative immunity under Texas law.
Julia D. Gray, Pillsbury Winthrop Accused of Malpractice in Atlanta Trust Fund Case
, Fulton County Daily Report, December 19, 2001. Following is a summary of the article. Timothy Cobb is the divorced father of two sons, each of whom is beneficiary of a trust. Crichlow is a partner at Pillsbury, and until November 2000, was trustee of the trusts. Pillsbury represented the trusts. The new trustee is Madelyn Adams, former wife of Cobb and mother of the beneficiaries. She has sued Cobb, Crichlow and Pillsbury Winthrop. It seems that the trust had made loans to Cobb's company, edaflow, totaling $2.4 million. Crichlow is an investor in edaflow. The trusts made additional loans totaling some $400,000 to other companies in which Cobb and Crichlow had interests. Much of the money has been lost. Among other claims, Adams claims Crichlow had violated the prudent investor rule (the trusts had a total value of $6.5 million). She also claims Crichlow and the firm had a conflict of interest and were guilty of malpractice. Nederlander v. Papiano
, 2012 Cal. App.
Unpub. LEXIS 1717 (Cal. App. March 6, 2012). Beneficiaries of a trust
brought this case against a lawyer/trustee for breach of fiduciary
duty. Beneficiaries claim that the defendant allowed the trust settlor
to withdraw money for his own use contrary to the terms of the trust.
The case is mostly about trust construction. However, one of the issues
is whether Beneficiaries are entitled to double damages under a
California statute because the defendant was guilty of bad faith. The
court's finding of bad faith was based upon the defendant's various
conflicts of interest, including: (1) he represented various family
members; (2) he was trustee of related trusts; (3) he represented the
settlor in the settlor's divorce; and (4) a condition of the defendant's
approval of the withdrawals was that some of the withdrawn amounts be
applied to the defendant's fee invoices. Firm Enjoined from Representing Competitors; Later Paid Large Settlement. Maritrans GP Inc. v. Pepper, Hamilton & Scheetz,
602 A.2d 1277 (Pa. 1992) (injunction granted). Later the law firm paid a settlement of $3 million to aggrieved former client. Canadian Supreme Court; Side-Switching. Strother v. 3464920 Canada Inc
., 2007 SCC 24 (Can). A lawyer represented Client A on a series of matters. The lawyer told Client A that the law no longer permitted the types of transactions they were doing. While still representing A the lawyer began representing a former employee of A in doing the same type of transaction. A sued the lawyer and his firm for breach of fiduciary relationship. The trial court found for the lawyer. The Court of Appeal of British Columbia reversed, and the Supreme Court affirmed, as to the individual lawyer's liability. No Fiduciary Duty Among Co-Counsel, but Indemnification for Malpractice Damages Is Allowed. Beck v. Wecht
, 48 P.3d 417 (Cal. June 27, 2002). Michael and Ronald Stephens hired Daniel Beck to represent them in a product liability suit against General Motors. Beck brought in Ronald Wecht as local counsel. They both were on a contingent fee agreement. During trial GM offered $6 million to settle the case. Nevertheless, the case went to the jury, which found for GM. Beck sued Wecht for not conveying the settlement offer, thereby depriving Beck of his contingent fee. Reconciling a conflict between two California appellate courts, the California Supreme Court disallowed the claim, holding that co-counsel do not have fiduciary duties to one another. However, on the same day, in Musser v. Provencher
, 48 P.3d 408 (Cal. June 27, 2002), the court held that the policies that prohibit co-counsel from suing each other for breach of fiduciary duty do not apply where one seeks indemnification from the other in a malpractice damages context. In Mazon v. Krafchick
, 144 P.3d 1168 (Wash. 2006), the court reached the same result as Beck
. In Scheffler v. Adams and Reese, LLP
, 950 So. 2d 641 (La. 2007) , the court followed Mazon
. In Forensis Group, Inc. v. Frantz, Townsend & Foldenauer
, 29 Cal. Rptr. 3d 622 (Cal. App. 2005), the court allowed an engineering expert witness being sued by an unsuccessful client for malpractice to sue the lawyers who had represented the client. Aiding and Abetting Breach of Fiduciary Duty. Anstine v. Alexander
, 128 P.3d 249 (Col. App. 2005). This is not a conflicts case. But, because a breach of fiduciary duty could be asserted against a lawyer with a conflict of interest, the decision is of interest. It confirms that in Colorado a lawyer can be sued for aiding and abetting a breach of fiduciary duty of a non-client to other non-clients. Same in Pennsylvania, Reis v. Barley, Snyder, Senft & Cohen LLC
, 484 F. Supp. 2d 337 (E.D. Pa. 2007) . Suits against lawyers alleging aiding and abetting breaches of fiduciary duty are increasing; however, the court rejected the theory in LeRoy v. Allen, Yurasek & Merklin
, 872 N.E.2d 254 (Ohio 2007). The court in LeRoy
did recognize a cause of action by non-client, minority shareholders where "fraud, collusion or malice" is present. No Damages Shown. Sentinel Products Corp. v. Platt
, 2002 U.S. Dist. LEXIS 13217 (D. Mass. July 22, 2002). Sentinel sued Dickinson Wright for malpractice, arising out of patent prosecution work Dickinson did for Sentinel. The Patent and Trademark office denied two Sentinel applications, citing a patent of a former employee of Sentinel, Dennis Knaus. Dickinson had represented Knaus in obtaining that patent. The work for Knaus and Sentinel were more or less during the same time period. Sentinel reworked and resubmitted its applications, and patents ultimately issued. In the malpractice case Sentinel claimed that Dickinson had a conflict of interest and that Sentinel was damaged by the delays caused by the Knaus patent. The court granted Dickinson a summary judgment because Sentinel could not show how the alleged conflict caused Sentinel damage. More No Damages Shown Cases. Nordwind v. Rowland
, 2009 U.S. App. LEXIS 23544 (2d Cir. Oct. 16, 2009) (law firm represented competing heirs to German confiscated assets); Swilley v. Tipton
, 2008 U.S. App. LEXIS 14109 (6th Cir. July 1, 2008); Elmo v. Callahan,
2012 U.S. Dist. LEXIS 120142 (D.N.H. Aug. 24, 2012); DeMeo v. Provident Bank
, 2008 Ohio App. LEXIS 2475 (Ohio App. June 16, 2008); Kuhlman Electric Corp. v. Chappell
, 2005 Ky. App. LEXIS 252 (Ky. App. Dec. 2, 2005); Baker Botts, L.L.P. v. Cailloux
, 224 S.W.3d 723 (Tex. App. 2007) (reversing $65.5 million verdict involving representation of wealthy family and bank as fiduciary). No Duty to Warn Prospective Client of Statute of Limitations. In Flatt v. Superior Court
, 885 P.2d 950 (Cal. 1994), the court held that a lawyer did not have a duty to advise a declined client about the statute of limitations if doing so would disadvantage an existing client. Release of Lawyer Effective. Peebles v. Sheridan Healthcare, Inc.
, 853 So. 2d 559 (Fla. App. 2003). A group of doctors sold their practices. Their lawyer had a relationship with the purchasers. In connection with the sale the parties signed very broad releases, including a release of any liability to their lawyer, although their lawyer was not a party to the agreements. When some of the doctors later sued the purchasers, including the lawyer for having a conflict of interest, the defendants relied upon the releases. In this opinion the court found that the releases were so clear, that the plaintiffs were bound by them, even as to their claim against their lawyer. Florida has the ABA Model Rule version of Rule 1.8(h). The court did not discuss the rule. Plaintiff Must Prove Case within a Case in Both Legal Malpractice Case and Breach of Fiduciary Case. Weil, Gotshal & Manges v. Fashion Boutique of Short Hills, Inc
., 780 N.Y.S.2d 593 (N.Y. App. 2004). Inadvertent Breach of Screen Can Be Cause of Action for Damages. Spur Products Corp. v. Stoel Rives LLP
, 122 P.3d 300 (Ida. 2005). Can't Sue other Side's Lawyer. Gibo v. U.S. Nat'l Ass'n, 2013 U.S. Dist. LEXIS 25749 (D. Haw. Jan. 29, 2013); Lima v. Deutsche Bank Nat'l Trust Co.,
2013 U.S. Dist. LEXIS 25756 (D. Haw. Jan. 29, 2013). These are two
cases involving alleged wrongful foreclosure proceedings by banks. The
plaintiffs joined the banks' lawyers, Hawaii citizens. The banks removed
the cases, alleging fraudulent joinder of the lawyers. In these
opinions the magistrate judge denied motions to remand. The court held
that allowing actions against the other side's lawyers would create an
unacceptable conflict of interest and that, because of the conflict, the
complaints failed to state a cause of action against the lawyers.
For a similar holding, see Clark v. Druckman
, 624 S.E.2d 864 (W. Va. 2005). Estate Planning Lawyer Should Inquire into the Relationship between Husband and Wife Clients. Smith v. Hastie
, 626 S.E.2d 13 (S.C. App. 2005). Lawyer represented H and W in the creation of a family limited partnership. Later W discovered that her interest in the partnership could be impaired. She sued Lawyer for malpractice. H and W had a history of marital problems. Lawyer claims he did not know that when he did their estate plan. For that reason the trial court granted Lawyer’s motion for summary judgment. The appellate court, in this opinion, reversed. It relied principally on an expert witness affidavit of an experienced estate-planning lawyer. The expert opined that Lawyer should have inquired about H and W’s relationship before recommending a specific estate plan. This might have, among other things, caused Lawyer to recommend that W seek other counsel. Standing Required to Sue Lawyer with Conflict. Sadler v. Creekmur
, 821 N.E.2d 340 (Ill. App. 2004). "Simple" Breach of Fiduciary Duty Does Not Qualify for Award of Punitive Damages. Fortnow v. Hughes Hubbard & Reed, LLP
, 814 N.Y.S.2d 561 (N.Y. Misc. 2005). Excessive Reliance on Ethics Rules in Complaint Results in Dismissal. Lear Corp. v. Butzel Long, PC
, 2006 Mich. App. LEXIS 1697 (Mich. App. May 18, 2006). But, in Recker v. Malson
, 2006 Mich. App. LEXIS 2543 (Mich. App. Aug. 17, 2006), the court held that ethics rules could be admissible in a malpractice action. That was also the gist of Teague v. St. Paul Fire and Marine Ins. Co
., 2009 La. App. LEXIS 470 (La. App. Apr. 7, 2009). Smith v. Morrison,
2012 Pa. Super. LEXIS 545 (Pa. Super. May 23, 2012). In this legal
malpractice case the trial court refused to instruct the jury on the
Pennsylvania ethics rules regarding the lawyers' alleged breach of
fiduciary duty, but gave the plaintiff an opportunity to support the
instructions through the common law, which she failed to do. In this
opinion the appellate court affirmed, relying primarily on the strict
Preamble in the Pennsylvania rules. Interesting Malpractice Insurance Coverage Case. Milgrub v. Continental Cas. Co
., 2007 U.S. Dist. LEXIS 80 (W.D. Pa. Jan. 3, 2007). Lawyer and Lawyer's wife sold their residential real estate to Purchasers, husband and wife. Lawyer represented Purchasers in the transaction, which, in the court's words was a "scenario that tests the boundaries of professional ethics and common sense." Later, Purchasers sued Lawyer and Lawyer's wife for fraud, etc. One of the counts was against Lawyer for breach of fiduciary duty, largely due to Lawyer's conflict of interest. Lawyer's malpractice carrier denied coverage, asserting the contractual liability exclusion (in this case, the real estate sales contract). That exclusion carried an exception for situations in which the lawyer would have been liable absent the contract. Lawyer filed this case, seeking coverage. The court granted Lawyer a judgment on the pleadings, finding that Lawyer could be found liable for breach of fiduciary duty even had there been no contract. Client "Waives" Civil Cause of Action against Lawyer for Conflict of Interest by not Moving to Disqualify Lawyer in Earlier Matter. Swilley v. Tipton
, 2007 U.S. Dist. LEXIS 7481 (E.D. Ky. Jan. 30, 2007).
Class representative barred from suing class counsel where court had earlier found settlement to be reasonable. Koehler v. Brody
, 483 F.3d 590 (8th Cir. 2007) . In re The Brown Schools
, 368 B.R. 394 (D. Del. 2007). This opinion dealt with a motion to dismiss, so we should not make too much of it at this stage. Nevertheless, it is illustrative of what a bankruptcy trustee can allege against the former law firm for the debtor. The claims here included breach of fiduciary duty (motion denied), aiding and abetting a breach of fiduciary duty (motion granted with leave to replead), aiding and abetting a fraudulent transfer (motion granted with leave to replead), deepening insolvency (motion denied pending further developments in the Delaware courts), civil conspiracy (motion granted with leave to replead), and a declaratory finding that the law firm’s claim for fees should be subordinated (motion granted - no mention of repleading). As to deepening insolvency the bankruptcy judge said that the opinion in Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P
., 906 A.2d 168 (Del. Ch. 2006), was “well reasoned,” but she denied the motion pending a decision by the Delaware Supreme Court. Need for Expert Witness. Hoagland v. Sandberg, Phoenix & Von Gontard, P.C
., 385 F.3d 737 (7th Cir. 2004). This is a suit against a law firm arising out of the firm’s conflict of interest. The plaintiff did not call an expert witness. For that reason the trial court “entered judgment” for the law firm (procedural history all but nonexistent). The Eighth Circuit affirmed. A similar case is Strong v. Baker
, 2008 Tenn. App. LEXIS 200 ( Tenn. App. March 31, 2008). No Need for Expert Witness. Wilson v. Vanden Berg
, 687 N.W.2d 575 (Iowa 2004). Discuss Need for Expert Witness. Carranza v. Fraas
, 2011 U.S. Dist. LEXIS 11460 (D.D.C. Feb. 7, 2011) (discusses “common knowledge” exception to need for expert); Floyd v. Hefner
, 2008 U.S. Dist. LEXIS 25642 (S.D. Tex. March 31, 2008). Presumption of Shared Confidences in Disqualification Context Does not Apply in Malpractice Action. Capital City Church of Christ v. Novak
, 2007 Tex. App. LEXIS 4148 (Tex. App. May 23, 2007). Lawyer for Executor not Lawyer for the Heirs. Campbell v. Johnson
, 2007 Wash. App. LEXIS 2930 (Wash. App. Oct. 29, 2007). Common Law Breach of Fiduciary Duty and "Standard-Commercial-Transaction" Exception. Liggett v. Young
, 877 N.E.2d 178 (Ind. 2007). Liggett, a building contractor, brought a claim against his lawyer (“Lawyer“), for whom Liggett built a house. Lawyer had drafted the construction contract using a standard form, which among other things, said that only lawyers should complete the form. Lawyer also added a paragraph to the form. Liggett’s claim was based on Lawyer’s violation of Indiana’s version of Model Rule 1.8(a), and Lawyer’s breach of his common law fiduciary duty to Liggett. Lawyer based his defense, in part, on the “standard-commercial-transaction” exception to Rule 1.8(a), and the same exception to Lawyer’s common law fiduciary duty to Liggett. The trial court granted Lawyer summary judgment on Ligget’s claim. In this opinion the Indiana Supreme Court reversed, holding there were questions of fact to be resolved by a trier of fact. The supreme court made two important findings: (1) regardless of the Preamble to Indiana’s ethics rules, Liggett could still maintain an action for breach of the common law fiduciary duties owed by lawyers to clients; and (2) the transaction in question was not a “standard commercial transaction.” The court based the finding upon the fact that only lawyers should complete the standard form, and the fact that Lawyer had added a custom clause to the contract. Cannot Avoid Statute of Limitations Problem by Calling a Negligence Claim a Breach of Fiduciary Duty or Fraud. Murphy v. Gruber
, 2007 Tex. App. LEXIS 9707 (Tex. App. Dec. 13, 2007). Legal malpractice action. The complaint purported to plead negligence, fraud, and breach of fiduciary duty. In this opinion the court affirmed the trial court’s dismissal of the action based upon the statute of limitations. The court held that all three counts were merely negligence claims, for which the statute was two years. Denial of Motion to Disqualify in One Suit Constitutes Collateral Estoppel in Subsequent Suit for Damages. Weinberger v. Tucker
, 510 F.3d 486 (4th Cir. 2007), but not if appellate court affirmed trial court on laches grounds only, Zevnik v. Superior Court
, 2008 Cal. App. LEXIS 84 (Cal. App. Jan. 18, 2008). Duty of Confidentiality Versus Duty to Keep Client Informed. Sitar v. Sitar
, 2008 N.Y. App. Div. LEXIS 2964 (N.Y. App. April 1, 2008). In this opinion the Appellate Division reversed the trial court’s order granting a motion to dismiss in favor of Lawyer. Lawyer had represented both sides in the sale of business assets. This is a classic illustration of the tension created in a multiple representation between the duty of confidentiality and the duty to keep clients informed. In the words of the court:
Here, the plaintiffs alleged that McGraw represented both sides of the transaction, and was thereby burdened by a conflict of interest, and that he was aware of information critical to the purchase price of Business Computing but withheld that information from the plaintiff John Sitar, who was his client. These allegations were sufficient to state a cause of action to recover damages for legal malpractice . . . .
Failure to Report Theft of Colleague Can Be Cause of Action. In re Estate of Spencer
, 2008 N.J. Super. LEXIS 90 (N.J. Super. April 23, 2008). This is a suit against a lawyer for failing to report the theft of funds from several estates by a fellow lawyer. It is very state specific and the interrelationships are complex. At bottom, here is the court’s holding:
. . . [A]n attorney such as Averna who has a close and interdependent business relationship with another lawyer, and who is performing legal work for a common client at that lawyer's request, has a duty to report that lawyer if he or she develops actual knowledge that the lawyer has been stealing funds from their common client.
Vaxiion Therapeutics, Inc. v. Foley & Lardner LLP,
2008 U.S. Dist. LEXIS 98612 (S.D. Cal. Dec. 4, 2008). Law Firm's San Diego office prosecuted patents for Co. A. Law Firm's D.C. office prosecuted patents for Co. B. Both representations involved related technologies. Co. A wound up suing Law Firm because of this conflict (this case). This opinion deals with the court's disposition of Law Firm's motion for summary judgment. The opinion is very fact-intensive, but two of the issues should be of interest to this audience. First, as to what Co. A had to show establish damages, the court said:
In order to prevail on its claim of breach of fiduciary duty under California law, [Co. A] need not demonstrate that [Law Firm] actually disclosed its confidences or degraded the qualify of its work. [Law Firm] is not entitled to summary judgment on [Co. A's] breach of fiduciary duty claim.
The second issue, which the court did not resolve, was whether passage of time constitutes a waiver of a conflict of interest in a malpractice suit (as opposed to a disqualification) context.
In New York claims for malpractice and breach of fiduciary duty are almost always duplicative. Nordwind v. Rowland
, 2009 U.S. App. LEXIS 23544 (2d Cir. Oct. 16, 2009). Leonard v. Dorsey & Whitney LLP
, 2009 U.S. App. LEXIS 870 (8th Cir. Jan. 15, 2009). This is one of several cases involving the financing of an Indian casino. The situation is complex both procedurally and substantively. The main lesson of this opinion is that the lawyer for a loan originator, or "agent," is not, without more, the lawyer for the banks that participate in the financing. Nor, absent extraordinary circumstances, do the participating lenders have a cause of action against the lawyer on a third-party beneficiary theory. Because of recent declarations of the Minnesota Supreme Court on this point, the Eighth Circuit, in this opinion, reversed findings of liability for a lender/participant against the law firm for the agent. Award of Fees from Conflicted Lawyer. THOIP v. The Walt Disney Co
., 2009 U.S. Dist. LEXIS 3507 (S.D.N.Y. Jan. 20, 2009). Lawyer had a pretty clear conflict in a corporate family context. He ultimately withdrew voluntarily, but not before dragging his feet in the face of very explicit correspondence from the other side and oral urging from the court. Lawyer also notified the other side of his withdrawal several days after the court said he should, causing the other side to file papers that they otherwise would not have filed. As a result, in this opinion, the court ordered Lawyer and his firm to pay the other side's fees and expenses related to the conflict. The court relied upon 28 U.S.C. Sec. 1927 and, alternatively, the court's inherent power. $35 Million Verdict Against Law Firm Reversed. Blanks v. Seyfarth Shaw, LLP,
2009 Cal. App. LEXIS 187 (Cal. App. Feb. 20, 2009). Adams v. Small
, 2009 Cal. App. Unpub. LEXIS 9029 (Cal. App. Nov. 16, 2009). This is a suit by investors for fraud against the promoter of the investments. The investors also sued an estate planning lawyer who would accompany the promoter to meetings with investors. The trial court granted the lawyer a summary judgment on all counts. In this unpublished opinion the appellate court affirmed as to all counts but one. The last count was for the lawyer's failure to disclose to those investors for whom he had done estate planning that he was also doing corporate work for the promoter. The complaint also included counts for aiding and abetting and conspiracy. The opinion illustrates just how difficult it is to sue a lawyer in these types of cases. SLAPP not Applicable to this Malpractice Case. PrediWave Corp. v. Simpson Thacher & Bartlett LLP,
2009 Cal. App. LEXIS 1925 (Cal. App. Dec. 2, 2009). This is a legal malpractice action arising out of defendant/law firm's ("Law Firm") alleged earlier representation of the plaintiff, PrediWave ("PW") and PW's CEO, Qu. PW claims that Law Firm had a conflict of interest, because Qu was a crook, and Law Firm did not tell PW that Qu was a crook. Law Firm moved to dismiss the suit under California's SLAPP law. The trial court granted the motion, and in this opinion, the appellate court reversed. We will not get into the nuances of SLAPP; however, the court held that because PW was suing its own counsel for legal work done on behalf of PW, while having a conflict of interest, SLAPP did not apply.
Cal. Op. 2009-178 (undated). Outlines what a lawyer must do when settling a malpractice claim with a client. This includes dealing with California Civil Code section 1542 and California Rule 3-400. Boston Prop. Exchange Transfer Co. v. Iantosca
, 2010 U.S. Dist. LEXIS 16242 (D. Mass. Feb. 18, 2010). A lawyer cannot be liable to a non-client where there had been a conflict between the interests of the client and the non-client. Representing Lender and Substitute Trustee. Laws v. Priority Trustees Services of N.C
., LLC, 2010 U.S. App. LEXIS 8815 (4th Cir. April 28, 2010). Law Firm represented the lender in this foreclosure action. Law Firm also created and represented the substitute trustee, the appointment of which was authorized by the deed in trust. At the foreclosure sale, the property was sold leaving $19,000 owing on the note. The owners filed this action against Law Firm and the substitute trustee. The trial court granted a motion to dismiss. In this opinion the appellate court affirmed, holding that the relationship among Law Firm, the lender, and the substitute trustee, did not, without more, give rise to a cause of action. Gorshek v. Trewin
, 2010 Wisc. LEXIS 46 (Wis. June 24, 2010). Lawyer purchased his clients' farm. The clients sued for breach of fiduciary duty. The trial court found for the clients and ordered the purchase rescinded. The appellate court affirmed, and in this opinion the supreme court affirmed. The trial court had also ordered punitive damages. The supreme court held (with one dissent) that because there were no compensatory damages, an award of punitive damages would be inappropriate. The overall outcome of this case was heavily dependent on the factual findings of the trial court. This opinion contained no mention of Rule 1.8(a).
In Vinewood Capital v. Sheppard Mullin Richter & Hampton, LLP
, 2010 U.S. Dist. LEXIS 85575 (N.D. Tex. Aug. 19, 2010), a three-year delay in raising a conflict resulted in dismissal of a breach of fiduciary claim by an alleged former client against its law firm. Abusive Tax Shelters
. We have collected cases involving tax opinions from law firms with conflicts of interest at the page entitled, “Investing . . . “ Purchasing Client’s Property; Breach of Fiduciary Duty. Houston v. Ludwick
, 2010 Tex. App. LEXIS 8415 (Tex. App. Oct. 21, 2010). In this opinion the court upheld a $142,000 breach-of-fiduciary-duty jury verdict against a lawyer who had received four condominium units from the plaintiff/client in payment of fees. Among other things, the jury held that the client received considerably less than what the units were worth. The court did not mention Texas' version of Model Rule 1.8(a). Inducing Clients to Invest. Minnesota Lawyers Mut. Ins. Co. v. Ahrens
, 2010 U.S. Dist. LEXIS 107873 (M.D. Pa. Oct. 8, 2010). Law Firm allegedly caused Clients to invest several million dollars in an investment scheme. Clients lost their money and sued Law Firm. Law Firm's malpractice carrier ("InsCo") filed this action seeking a declaration that an exclusion in its policy, relating to investment activities, precludes coverage for the investment losses. In this opinion, construing the exclusion, the court granted InsCo a judgment on the pleadings. [Editorial Comment: we had thought that lawyers stopped inducing their clients to enter into investments years ago, particularly because of jaw-boning by malpractice carriers. Evidently, some lawyers will never learn.] Freedom Financial Group, Inc. v. Woolley
, 2010 Neb. LEXIS 134 (Neb. Nov. 12, 2010). Corporate affiliates do not normally have a cause of action against a lawyer who allegedly committed malpractice for another affiliate. Court applied “undue burden upon the legal profession” without explanation. Leff v. Fulbright & Jaworski, L.L.P
., 2010 N.Y. App. Div. LEXIS 8531 (N.Y. App. Div. Nov. 18, 2010). Law Firm did estate planning for W and H, but evidently separately and at different times. After H's demise, in this action, W sued Law Firm for malpractice relating to its handling of H's estate plan. In this opinion the court affirmed the trial court's order dismissing the complaint. First, the court held that W did not have a cause of action as a beneficiary. Second, the court held that under the circumstances W was not "in privity" with Law Firm with respect to its planning H's estate. Last, the court held that damages would be "grossly speculative." Country Club Partners, LLC v. Goldman
, No. 508950 (N.Y. App. Div. Dec. 16, 2010). Law Firm represented client who tried to buy real estate. After negotiations fell through, a partner in Law Firm successfully purchased the same real estate. There was another bidder, as well. In this opinion the court affirmed the trial court's grant of summary judgment. There was no showing that the partner's conduct in any way harmed the client. Allen v. Steele
, 2011 Colo. LEXIS 365 (Col. May 9, 2011). Husband and Wife visited Lawyer about possibly representing them in a personal injury case. They claim the Lawyer gave them bad statute-of-limitations information causing them to miss a deadline. They sued Lawyer for negligent misrepresentation, among other things. In this opinion the court held that non-clients cannot sue a lawyer for giving bad advice about a tort case. It must relate to a business transaction. The court rejected the claim that Section 15(1)(c) of the Restatement applied. The court also noted that Colorado's version of MR 1.18 only protected non-clients as to confidentiality and conflicts of interest. Morgan v. Sun Trust Mortgage
, 2011 U.S. Dist. LEXIS 71730 (W.D. Mich. July 5, 2011). Law Firm represented mortgagee in a foreclosure and, after receiving a title report, published a notice of foreclosure. In fact, the mortgage had been released. The mortgagors sued Law Firm for defamation, among other things. In this opinion the court granted Law Firm summary judgment. The court said that allowing non-clients to sue a law firm would, among other things, create a conflict of interest for the law firm. Flycell, Inc. v. Schlossberg LLC,
2011 U.S. Dist. LEXIS 126024 (S.D.N.Y. Oct. 28, 2011). This is the
district judge's ruling denying the lawyers' FRCP 12(b)(6) motion to
dismiss this legal malpractice case. Without getting into details the
opinion is a pretty clear what it takes to plead a cause of action
based, largely, in part, on a conflict of interest. The court did,
consistent with New York jurisprudence, dismiss a breach of fiduciary
count because it was based upon the same facts and same damages
calculation as the malpractice count. The court also sustained an
aiding and abetting breach of fiduciary duty count, and refused to
dismiss the plaintiff's prayer for punitive damages.
Frankel v. McDonough,
2011 U.S. Dist. LEXIS 123992 (S.D.N.Y.). Rule 12(b)(6) motion to
dismiss a malpractice suit against a law firm and one of its members
("Lawyers"). Plaintiff is a securities broker who, along with her
employer, was a respondent in a FINRA arbitration. Lawyers represented
Plaintiff and the employer in the arbitration. The arbitration panel
found for the claimants and awarded them several million dollars. The
award was upheld by the New York Supreme Court and the Appellate
Division. In this opinion the district judge granted the Rule 12(b)(6)
motion. The court seemed impressed that Plaintiff's alleged wrongdoing
was the subject of an arbitration, a trial court review, and an
appellate court review. As to Plaintiff's claim that Lawyers had a
conflict of interest in representing both Plaintiff and her employer,
the court reasoned that, because the employer's liability would be
derivative of Plaintiff's, Lawyers would have had every motivation to
succeed for Plaintiff. Instructing the Jury. Abreu v. Mackiewicz,
2012 N.J. Super. Unpub. LEXIS 2646 (N.J. App. Div. Dec. 5, 2012). This
opinion is from an appeal by a legal malpractice plaintiff from a jury
verdict for the lawyers. Malpractice cases rarely edify conflicts
issues, and this is no exception. However, it is an interesting
exploration on how to instruct a jury on issues dealing with whether a
person is a current client or former client and what a lawyer's duties
are to former clients. The opinion combines considerations raised by
various sections of the Restatement and applicable ethics rules,
particularly Rules 1.7 and 1.9.Fee Forfeitures
The black letter of Restatement § 37 provides as follows:
A lawyer engaging in clear and serious violation of duty to a client may be required to forfeit some or all of the lawyer's compensation for the matter. Considerations relevant to the question of forfeiture include the gravity and timing of the violation, its willfulness, its effect on the value of the lawyer's work for the client, any other threatened or actual harm to the client, and the adequacy of other remedies.
The Reporter's Note to § 37 cites a number of state and federal court opinions upholding the principles contained in the black letter. Those cases dealing with conflicts of interest appear below, along with more recent cases. We are not aware of any cases standing for the proposition that a lawyer's fees may never be the subject of forfeiture as the result of a conflict. The cases
. Following are cases in which fee forfeitures were upheld because of the punished lawyer's, or law firm's, conflict of interest. In some cases this occurred even where no harm resulted from the conflict. In other cases the court ignored the good faith or lack of knowledge of the conflict by the lawyer. Rodriguez v. Disner, 2012 U.S. App. LEXIS 16698 (9th Cir. August 10, 2012)
(class counsel denied $7 million fee); Hendry v. Pelland
, 73 F.3d 397 (D.C. Cir. 1996) (no harm); In re Eastern Sugar Antitrust Litigation
, 697 F.2d 524 (3d Cir. 1982) (failure of opposing law firms to disclose law firm merger negotiations); Silbiger v. Prudence Bonds Corp
., 180 F.2d 917 (2d Cir. 1950); Allapattah Services, Inc. v. Exxon Corp
., 454 F. Supp. 2d 1185 (S.D. Fla. 2006) (class counsel's fee was reduced from $21 million to $15 million); Warnell v. Ford Motor Co
., 205 F. Supp. 2d 956 (N.D. Ill. June 11, 2002); In re Estate of Brandon
, 902 P.2d 1299 (Alaska 1995); Moses v. McGarvey
, 614 P.2d 1363 (Alaska 1980) (lawyer's motive irrelevant); Holmes v. McClendon
, 76 S.W.3d 836 (Ark. 2002); Crawford & Lewis v. Boatmen's Trust Co. of Arkansas, Inc
., 1 S.W.3d 417 (Ark. 1999); Little Rock v. Cash
, 644 S.W.2d 229 (Ark. 1982); A.I. Credit Corp., Inc. v. Aguilar
, 2003 6 Cal. Rptr. 3d 813 (Cal. App. 2003); Jeffry v. Pounds
, 136 Cal. Rptr. 373 (Cal. App. 1977) (lawyer's knowledge irrelevant); Newton v. Newton
, 2011 Ill. App. LEXIS 715 (Ill. App. June 30, 2011) (conflict in divorce case; forfeited $250,000) Rice v. Perl
, 320 N.W.2d 407 (Minn. 1982) (no harm); Ulico Cas. Co. v. Wilson, Elser, Moskowitz, Edelman & Dicker LLP
, 843 N.Y.S.2d 749 (N.Y. Sup. Ct. 2007), modified, Ulico Cas. Co. v. Wilson, Elser, Moskowitz, Edelman & Dicker
, 2008 N.Y. App. Div. LEXIS 6737 (N.Y. App. Sept. 16, 2008); Keyes v. Johnson, 2012 N.C. App. LEXIS 1020 (N.C. App. Aug. 21, 2012)
(suit for fees; lawyer lost because of an earlier finding of conflict); Ivancic v. Enos, 2012 Ohio App. LEXIS 3218 (Ohio App. Aug. 13, 2012) ($50,000; lawyer for decedent's estate); Burrow v. Arce
, 997 S.W.2d 229 (Tex. 1999) (no harm); Cotton v. Kronenberg
, 44 P.3d 878 (Wash. 2002); Eriks v. Denver
, 824 P.2d 1207 (Wash. 1992) (no harm); and Behnke v. Ahrens, 2012 Wash. App. LEXIS 2838 (Wash. App. Dec. 10, 2012).
. No Forfeiture. Bertelsen v. Harris
, 2008 U.S. App. LEXIS 17078 (9th Cir. Aug. 11, 2008). The court affirmed (2-1) the trial court, which found that the ethical violations did not warrant forfeiture. Things had turned out well for the clients. Vigorous dissent. Dewey v. R. J. Reynolds Tobacco Co
., 536 A.2d 243 (N.J. 1988), is unique. It is a tobacco product liability case. The plaintiffs' law firm hired a lawyer from the defendant's firm and failed to obtain the consent of the defendant. New Jersey is not a screening state. The defendant moved to disqualify the plaintiffs' firm. The court denied the motion because disqualification would have badly prejudiced the plaintiffs. Instead, the court ordered the plaintiffs' firm to continue but for no fee.
In Alaska Native Tribal Health Consortium v. Settlement Fund
, 84 P.3d 418 (Alas. 2004) the court held that a lawyer may be entitled to fees even though he had a conflict of interest. Miess v. Port City Trucking, Inc
., 2012 U.S. Dist. LEXIS 15358
(E.D. Mo. Feb. 8, 2012). Lawyers filed suit on behalf of the driver and
passenger of a car that had been rear-ended by a truck. The passenger
dismissed Lawyers and hired new counsel, ultimately settling the case.
In this proceeding Lawyers seek to recover their 1/3 contingent fee. In
this opinion the court found a number of violations of the Missouri
Rules. One violation was the conflict between the driver, who had no
license, and the passenger. Lawyers obtained no waiver of that
conflict. In any event, the court ordered that because Lawyers had
benefited plaintiffs, Lawyers should receive 8% of the settlement. The
court refused to award expenses to Lawyers because Lawyers, in their fee
agreement, failed to specify whether their fee would be computed after
deducting expenses or before.
Behnke v. Ahrens
, 2012 Wash. App. LEXIS 1555 (Wash. App. July 2, 2012). Lawyer advised trusts on using a "Son of BOSS" tax shelter. The IRS disallowed all the tax savings, and the trustees sued lawyer for, among other things, having a conflict of interest. A jury awarded minimal damages. The court then ordered that Lawyer disgorge fees of a few thousand dollars because of his conflict. On appeal the appellate court affirmed. The court noted that in Washington the violation of an ethics rule cannot be the basis for a cause of action for malpractice or evidence of malpractice. The bankruptcy cases
. The "Bankruptcy" page of this site discusses the Bankruptcy Code's unique conflict-of-interest rules under 11 U.S.C. § 327(a). 11 U.S.C. § 328(c) authorizes the court to deny compensation to lawyers acting contrary to § 327(a). That is, if the counsel for the debtor or creditor's committee is not "disinterested" or has an "interest adverse to the estate." Following are bankruptcy cases in which fees and expenses were denied, reduced, or ordered forfeited, for these types of conflicts: In re Network Cancer Care, L.P., Debtor
, 2006 U.S. App. LEXIS 18103 (5th Cir. July 19, 2006) (entire fee of $60,000 forfeited); In re West Delta Oil Co., Inc., Debtor
, 432 F.3d 347 (5th Cir. 2005) (failed to disclose intent to invest in debtor); In re Gary Mercury, Debtor
, 2004 U.S. App. LEXIS 25481 (2d Cir. Dec. 10, 2004) (not a lot of money, but very ugly conflict); In re Milwaukee Engraving Co., Inc
., 219 F.3d 635 (7th Cir. 2000); United States v. Gellene
, 182 F.3d 578 (7th Cir. 1999) (this was the lawyer's criminal appeal; however, the court noted that the firm had forfeited $1.8 million in fees); In re Crivello
, 134 F.3d 831 (7th Cir. 1998); In re Jore Corp.
, 298 B.R. 703 (D. Mont. 2003) ($1.6 million); In re Hot Tin Roof
, 205 B.R. 1000 (1st Cir. 1997); Rome v. Braunstein
, 19 F.3d 54 (1st Cir. 1994) ($140,000); Electro-Wire Products, Inc. v. Sirote & Permutt, P.C. (In re Prince)
, 40 F.3d 356 (11th Cir. 1994) ($200,000); In re Futuronics Corp
., 655 F.2d 463 (2d Cir. 1981) ($250,000); In re Arlan's Dep't Stores, Inc
., 615 F.2d 925 (2d Cir. 1979); In re Matco Electronics Group, Inc
., 2008 WL 141908 (N.D.N.Y. Jan. 11, 2008) (partial forfeiture for failing to disclose relationships); In re Congoleum Corp
., 03-51524 (D.N.J. Feb. 7, 2006) ($13 million); In re EToys, Inc
., 331 B.R. 176 (D. Del. 2005); In re Big Rivers Electric Corp
., 2002 U.S. Dist LEXIS 16174 (W.D. Ken. August 13, 2002) (examiner tried to negotiate special fee with three major creditors); In re Ponce Marine Farm, Inc
., 259 B.R. 484 (D.P.R. March 9, 2001); In re Granite Partners, L.P
., 219 B.R. 22 (S.D.N.Y. 1998) ($2.7 million); In re Angelika Films 57th
, 227 B.R. 29 (S.D.N.Y. 1998); In re Leslie Fay Companies Inc
., 175 B.R. 525 (S.D.N.Y. 1994) ($1 million); In re Granite Sheet Metal Works
, 159 B.R. 840 (S.D. Ill. 1993). So v. Suchanek
, 2012 U.S. App. LEXIS 1165 (D.C. Cir. Jan. 20,
2012). This is a suit by Client against Lawyer for breach of fiduciary
duty, arising from Lawyer's conflict of interest. The trial judge
ordered Lawyer to disgorge some $450,000 in fees. In this opinion the
D.C. Circuit held that Lawyer should disgorge more and remanded to the
district court to determine how much. The court held that Lawyer's
conflict was more wide-ranging than recognized by the trial court.
In In re Bruno
, 327 B.R. 104 (E.D.N.Y. 2005), the court denied fees to a law firm that had attempted to represent the driver and passengers in an auto accident case. Niemann v. Niemann
, 2010 Mich. App. LEXIS 1643 (Mich. App. Sept. 2, 2010). Lawyer had been disqualified on former-client/substantial-relationship grounds. In this opinion the court affirmed the trial court finding that Lawyer's charging lien should not be enforced because of the conflict.
Treatises dealing with fee forfeitures for conflicts generally. Hazard, Hodes, & Jarvis §§ 8.21, 10.11 & 13.12; Rotunda & Dzienkowski § 1.10-7(c).Role of Conflicts Rules in
The "Scope" statement that appears at the beginning of the ABA Model Rules of Professional Conduct provides that the Rules were not designed to create civil causes of action against lawyers. Yet, experience has been that the Rules, including the rules relating to conflicts of interest, are frequently brought into such actions, typically through the testimony of expert witnesses. Moreover, the Scope statement was amended in 2002 to provide that the violation of an ethics rule can be evidence in a civil liability case against a lawyer.
Section 52(2) of the Restatement reflects this reality and provides as follows:
(2) Proof of a violation of a rule or statute regulating the conduct of lawyers:?
(a) does not give rise to an implied cause of action for lack of care;?
(b) does not preclude other proof concerning the duty of care in Subsection (1); and?
(c) may be considered by a trier of fact as an aid in understanding and applying the standard of Subsection to the extent that;
(i) the rule or statute was designed for the protection of persons in the position of the claimant and?
(ii) proof of the content and construction of such a rule or statute is relevant to the claimant's claim.?
The Reporters’ Note appearing after the Comment to Restatement § 52 reflects that a majority of jurisdictions treat admissibility of the ethics rules in malpractice actions. Court May Instruct Jury on Ethics Violation. Mainor v. Nault
, 101 P.3d 308 (Nev. 2004). The above Reporters' Note cites several cases to the same effect.
In Azzar v. Tolley
, 2004 Mich. App. LEXIS 2979 (Mich. App. Nov. 2, 2004), the court said:
[T]his Court has found a rebuttable presumption that violations of the Code of Professional Conduct constitute actionable malpractice, Beattie v. Firnschild, 394 N.W.2d (Mich. App. 1986).
Another case to the same effect is Hart v. Comerica Bank
, 957 F. Supp. 958 (E.D. Mich. 1997). Maritrans GP, Inc. v. Pepper, Hamilton and Scheetz
, 602 A.2d 1277 (Pa. 1992), is one of the few opinions nationwide that hold that ethics rules are not admissible in malpractice actions. Meyers v. Sudfeld
, 2007 U.S. Dist. LEXIS 7634 (E.D. Pa. Feb. 2, 2007), cites Maritrans
for the proposition that mere violation of an ethics rule does not establish a cause of action. Pollen v. Comer
, 2007 U.S. Dist. LEXIS 46906 (D.N.J. June 28, 2007). In this legal malpractice case the judge granted the lawyer/defendant summary judgment. One of the counts dealt with an alleged conflict of interest. The court said that the plaintiff incorrectly pleaded the count by alleging a violation of ethics rules. The court acknowledged New Jersey authority that a violation of ethics rules can be evidence of malpractice. The court said that regardless of the pleading deficiency the plaintiff could show no proximate cause for his alleged losses.
Relating to the above discussion, see Berkeley Ltd. Partnership v. Arnold, White & Durkee
, 118 F. Supp. 2d 668 (D. Md. 2000). Arnold, White & Durkee represented Berkeley Limited Partnership, plaintiff in patent litigation against IBM. Berkeley is now suing AWD for malpractice, alleging AWD did not disclose to Berkeley that it represented Intel while it was representing Berkeley against IBM. Intel made chips for the IBM computers that were the subject of the patent litigation. Berkeley is claiming that it also had causes of action against Intel that would have enhanced its overall claim, but AWD talked it out of suing Intel. The cited opinion accompanies several summary judgment rulings. The key conflict-of-interest ruling gives Berkeley a summary judgment as follows:
Therefore as to the issue of liability only, Defendant's representation of both BLP and Intel constitutes a conflict of interest pursuant to D.C. Bar rule 1.7.
Legal Malpractice Claim not Assignable. Taylor v. Saltz Babin
, 2009 La. App. LEXIS 724 (La. App. May 8, 2009). In this opinion the appellate court held that legal malpractice claims are not assignable in Louisiana. The opinion contains a good survey of state and federal courts around the country. Claim not assignable under some circumstances, Kenco Enters. N.W., LLC v. Wiese, 2013 Wash. App. LEXIS 6 (Jan. 7, 2013). Assignment of Malpractice Proceeds not Effective. Dank v. Sears Holding Mgm't Corp
., 2009 N.Y. App. Div. LEXIS 1248 (N.Y. App. Div. Feb. 17, 2009). The court denied a motion to certify a class, in part because the class representative wanted also to be class counsel ("inherent conflict of interest"). (The court also said he failed to establish numerosity or establish that he had the financial resources and professional qualifications to to undertake a class action.) Davis v. Scott
, 2009 Ky. App. LEXIS 26 (Ky. App. Feb. 13, 2009). The court held that the assignment of the proceeds of a legal malpractice claim, like the assignment of the claim itself, is invalid, where the client also relinquishes control of the claim.Home/Table of Contents