Category Archives: Publications

“Allegations Involving Legal Malpractice and Breach of Fiduciary Duty”

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.

Recent Decisions

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.

Conclusion

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.

“The Possible Consequences of Pursuing Outstanding Legal Fees”

By Sue C. Jacobs
New York Law Journal
January 17, 2017

The attorney client relationship is not one that always ends well. The client is able to discharge the attorney at any time, but outstanding legal fees must be addressed. The retainer letter should address the issue of outstanding legal fees and expenses or the contingency fee arrangement. Normally the retainer letter provides the client is responsible for all reasonable fees and expenses incurred to the termination date. If the fee arrangement is changed during the representation, the court will closely scrutinize it. The former client may not promptly pay the agreed-upon outstanding legal fees or may claim the revised fee or contingency schedule was made improperly or under duress.

After several requests for the fees and notice to the client pursuant to Rule 137 of Rules of the Chief Administrator of the Court, the client may agree to mediate or arbitrate the dispute. If the client either ignores the correspondence or refuses to pay the fees, the attorney may determine to commence an action seeking the legal fees. What follows is a long, unhappy, expensive experience for each party.

The attorney, generally acting pro se, commences an action, the client retains counsel and alleges a counterclaim for legal malpractice with a demand for money damages and/or causes of action for breach of contract, breach of fiduciary duty and other possible causes of action a creative lawyer conceives.

The Account Stated

In a typical case the plaintiff law firm sues for unpaid fees. Defendant, the former client, answers and denies the fees are due and asserts at least one counterclaim based on legal malpractice.

The relationship may have extended over several months or years. The complaint will allege the fees sought are reasonable and the work done was necessary. The complaint will probably allege either the fees were explicitly or implicitly approved. If so, the law firm alleges the fees sought are for an “account stated,” or counsel is entitled to fees on a theory of quantum meruit. For an “account stated” to be established there must be an agreement, either express or implied from the retention of the account or invoice rendered that remains without objection for an unreasonable amount of time or generally prior invoices were paid.

The client may contest there is an account stated by claiming he never approved the invoices or the work was unnecessary. The law firm may allege the client either approved of the invoices or failed to timely object after receiving them. In two matrimonial actions in which the attorneys sought and were denied summary judgment the clients each claimed they signed the invoices to signify approval only under duress. The courts held that the former client’s affidavit, alleging counsel told them work would not continue until the invoices were signed, raised an issue of fact as to whether the defendant “acquiesced in the correctness of the invoices.”¹

Counterclaim for Malpractice

The defendant’s answer will frequently contain at least one counterclaim for malpractice. In order for the malpractice claim to be effective the client will have to establish that “but for” the attorney’s negligence he would have prevailed in the underlying action; the negligence was the proximate cause of the loss and the client suffered actual and ascertainable financial damages. Base legal assertions of malpractice will not suffice and are not presumed to be true.

In one action, the law firm was not liable for legal malpractice in a matrimonial action after the client established the law firm negligently failed to timely respond to discovery demands. The law firm proved that plaintiff was not precluded from introducing certain evidence at trial after the discovery responses were provided during a deposition.²

Fiduciary Duty, Contract Claims

Courts look at claims of breach of contract and fiduciary duty to determine if they are duplicative of the cause of action for malpractice. One court recently permitted a cause of action for breach of fiduciary duty based on allegations that the attorney disclosed confidential information in the complaint to recover legal fees.³

Unconscionable Conduct

In an occasional case, the parties may agree to a new fee schedule or contingency fee arrangement during the representation. Courts will look at these revisions with special scrutiny.

In In Re Lawrence,4 the Graubard Miller firm (Graubard) represented the defendant’s wife, Alice Lawrence (Lawrence), and her children in estate litigation for more than 20 years after Sylvan Lawrence, a well-known real estate developer, had died. Lawrence maintained she was very sophisticated, “tough,” intelligent and knowledgeable about real estate and litigation. She claimed she managed her own investment portfolio and “‘never’ consulted with her attorneys or children about business matters but rather kept her own counsel and ‘trusted nobody.'”5

After she unsuccessfully tried to negotiate a settlement directly with the executor’s children, Lawrence complained to Graubard about the law firm’s hourly legal fees to date, totaling more than $18 million. She requested that the fee arrangement be altered. The law firm suggested a contingency fee arrangement, a draft which the firm provided to Lawrence. After Lawrence and her accountant reviewed it, she suggested an additional paragraph that the law firm accepted.

The parties signed the agreement with a contingency fee of 40 percent of any proceeds collected. Soon after the contingency agreement was signed evidence described as a “smoking gun” emerged indicating malfeasance by the executor, and the estate settled for $100 million.

Graubard sued Lawrence in Surrogate’s Court after Lawrence refused to pay her share of funds based on the revised retainer agreement. Lawrence then sued Graubard in Supreme Court, claiming that the revised retainer was unconscionable and sought its rescission.

After many appeals, the Court of Appeals held the agreement was not unconscionable but stated the courts

“give particular scrutiny to fee arrangements between attorneys and clients,” placing the burden on attorneys to show the retainer agreement is “fair, reasonable, and fully known and understood by their clients[.]”6

The court acknowledged that fee arrangements revised during the representation are to be reviewed “with even heightened scrutiny, because a confidential relationship has been established and the opportunity for exploitation of the client is enhanced.” It is the attorney’s burden to establish the validity of the changed fee agreement.7

The court based its decision on a number of findings. It held that the new agreement was not procedurally unconscionable since the evidence showed Lawrence “fully understood” its terms. The court noted Lawrence was involved in “every detail” of her case; had submitted a draft of the new agreement to her accountant to review; and that the estate’s expert witness testified that Graubard had provided Lawrence with “‘a tremendous amount of detail'” concerning her claims, “including their likelihood of success and potential recoveries.” That expert confirmed that Graubard had given Lawrence “a lot” of the information she needed at the time the new agreement was being negotiated.8

To determine whether the revised retainer was “unreasonably excessive” and substantially unconscionable, the court looked “primarily” at the risk borne by the attorneys and the value of those services in proportion to the overall fee. The court determined that Graubard had considerable risk, since Lawrence frequently fired and threatened to fire her attorneys and a client may terminate the representation at any time leaving the attorneys only to recover in quantum meruit.

The court also noted that the value of Graubard’s service was to be judged not merely by the time devoted to the representation but also by the result. Lawrence ultimately recovered $111 million. The court emphasized Graubard’s diligent work in uncovering the “smoking gun” evidence. Although the Court of Appeals held the 40 percent contingency fee agreement was not unconscionable, it was not complimentary about the parties’ conduct.

Conclusion

The action for attorney fees is one in which all the parties’ dirty laundry is aired. An attorney who sues for fees can expect to litigate a malpractice claim. If the fee arrangement is revised during the representation, the agreement is subject to heavy scrutiny to determine if the client fully understood the changes and whether the attorney’s fees were out of proportion to the attorney’s degree of risk and the result obtained.

Endnotes

  1. Wand, Powers & Goody v. Yuliano, 144 A.D.3d 1017,__N.Y.S.3d__(2d Dept. 2016) and Landa v. Blocker, 87 A.D.3d 719, 928 N.Y.S.2d 779 (2d Dept. 2011).
  2. Id.
  3. Quinn Emmanuel Urquhart & Sullivan v. Avra Surgical Robotics, 158148/14 NYLJ 120277655 7840 (Sup., NY, decided Dec. 20, 2016).
  4. 24 N.Y.3d 320, 998 N.Y.S.2d 698 (2014).
  5. Id. at 327-27.
  6. Id. at 336.
  7. Id.
  8. Id. at 337-38.

Sue C. Jacobs is a member of Goodman & Jacobs. Howard M. Wagner, an associate at the firm, assisted in the preparation of this article.