By Sue C. Jacobs
New York Law Journal
June 14, 2017
As we have previously discussed, when the attorney client relationship does not end well litigation frequently ensues. The retainer agreement will generally provide that the client remains responsible for all reasonable legal fees and expenses incurred to the date the relationship is terminated.
The client may commence an action against her former law firm alleging legal malpractice, or in response to an action for outstanding legal fees she may assert counterclaims alleging among other causes of action: (1) legal malpractice; (2) breach of fiduciary duty; (3) aiding and abetting breach of fiduciary duty; and (4) breach of contract. The validity of the causes of action is generally tested in motions to dismiss and/or for summary judgment. In order to survive the motions, distinct damages arising from separate facts must be alleged and exist between the various causes of action based on negligence and those based on intentional acts. If the allegations in the different causes of action stem from the same or similar facts and do not specify distinct sets of damages, courts will hold the causes of action are duplicative and dismiss all but one, usually the malpractice claim. The breach of contract cause of action is rarely determined to be independent of the malpractice claim.
The Different Causes of Action
In order to successfully claim both legal malpractice and breach of fiduciary duty claims there must be allegations of different facts and different damages. Another significant difference is the timing of the offending actions. The alleged malpractice arises or occurs during the time the lawyer or law firm represented the client. The fiduciary causes of action may arise from activities after the retention was completed or terminated.
In a malpractice action the client must establish that the attorney failed to exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession and that the breach of the duty proximately caused the client to sustain actual ascertainable damages. The client must also establish that “but for” the attorney’s negligence she would have prevailed in the underlying action.
To establish a breach of fiduciary claim or a claim of aiding and abetting a breach of fiduciary claim the client must establish the attorney intended to deceive or knowingly participated in and encouraged the breach of fiduciary duty. The court assumes the attorney and law firm have a fiduciary duty to their clients during the representation, but a sustainable claim for breach of fiduciary duty will not arise unless deceit based on intentional acts is properly alleged.
If the causes of action are based on essentially the same set of facts the courts will find the allegations are duplicative. Recently several courts have permitted the claims of breach of fiduciary duty and attorney malpractice to proceed. In one decision, the court permitted the client’s counterclaim for breach of fiduciary duty to proceed since the legal malpractice and the breach of fiduciary duty claims were based on different allegations: The malpractice claim stemmed from the firm’s negligent conduct and the fiduciary duty was based on different, separate allegedly intentional conduct. See Burke, Albright, Harter & Redding v. Robert Sills , 83 A.D.3d 1413, 919 N.Y.S.2d 731 (4th Dept. 2011). It found allegations of negligent conduct supported the malpractice claim, and allegations that the attorneys intended to deceive the client supported the breach of fiduciary duty claim.
In Burke, id., plaintiff commenced an action against its former client for legal fees. The defendant answered the pleading and asserted a counterclaim for legal malpractice. The law firm moved for summary judgment and defendant cross-moved for leave to issue a second amended answer adding counterclaims for fraud and breach of fiduciary duty. The court permitted the amendment holding the allegations involved both negligent conduct and intentional deceit.
In Neogenix Oncology v. Peter Gordon , 133 F. Supp. 3d 539 (E.D.N.Y. 2015), the court addressed an action involving a company’s efforts to attract investors through a program which included paying finders’ fees to unlicensed stock brokers. The offending parties knew the program was illegal and the company eventually sought bankruptcy protection after the fraudulent scheme was discovered. The company sued two former law firms and individual attorneys alleging they knowingly permitted the company to pay the illicit finder’s fees to unlicensed brokers, ultimately forcing the company into bankruptcy.
The former CFO of the company which created the fraudulent scheme was named as a defendant. The initial law firm advised the CFO, but not the company, the proposed plan was unlawful. That law firm actively participated in the illegal activities for months.
The attorney primarily advising Neogenix changed law firms and the second firm also participated in the fraudulent scheme and failed to advise the company of the illegal funding arrangement. In the interim, the company hired a chief legal officer. The firm never advised the new in-house counsel of the scheme’s illegality.
After the company changed to a third law firm because of a fee dispute with the second firm, the new firm immediately notified the company the funding approach was illegal. Shortly thereafter, the SEC commenced an investigation that revealed over $25 million had been processed through the unlicensed funds. The company faced potential rescission claims from investors and giving rise to “significant exposure.” It opted to file for bankruptcy, claiming its financial and legal exposures deterred investors and forced it to file for bankruptcy.
The Holdings in ‘Neogenix’
Each of the several defendants, including the law firm, the named individual members of the firm and company’s original general counsel, moved to dismiss the causes of action inter alia for legal malpractice, breach of fiduciary duty and aiding and abetting a breach of fiduciary duty.
The court denied the motions stating the allegations were assumed to be true and read in the light most favorable to the party making the allegations. The court held the allegations passed the “but for” test, and that the two law firms’ intentional acts, in their failure “to advise the company of the illegal scheme, was a breach of a fiduciary duty.” It also denied the individual defendants’ motions based on their intentional acts.
To determine whether a fiduciary relationship exists, the court stated it would examine “whether one person has reposed trust or confidence in the integrity and fidelity of another who thereby gains a resulting superiority or influence over the first.” Id. at p. 554. “A fiduciary relationship exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation.” Id. The court stated New York law requires a fiduciary relationship “exhibit the characteristics of de facto control and dominance” finding both factors present in the instant case.
The court also held that the allegations that the company’s in-house counsel was a knowing participant in the scheme based on his placing side investments using confidential and proprietary information supported a plausible claim for breach of fiduciary duty. Id. at pp. 558-59.
The Role of Damages
In Ulico v. Wilson Elser, Ulico Cas. Co. v. Wilson, Elser, Moskowitz, Edelman & Dicker , 56 A.D.3d 1, 865 N.Y.S.2d 14 (1st Dept. 2008), the court ruled the malpractice claim arose from the law firm’s representation of two related businesses vying for the same clients. Plaintiff, an insurance company, was the firm’s original client. The law firm subsequently represented a business established to compete for the same business. The firm lured its own client’s customers from the initial to the second client. Although the appellate division held the firm committed malpractice and breached its fiduciary duty to its client, it held only one set of damages could be proven. Id. Therefore it dismissed the breach of fiduciary duty claims.
Courts recently have been more liberal in holding that causes of action for both legal malpractice and breach of fiduciary duties may exist in the same action. The courts assume a fiduciary duty between attorney and client but look at the timing of the alleged offending actions and the sources of damages to determine if they are distinct from the damages allegedly sustained for the legal malpractice.