The Kentucky Divorce Law Journal reports this legal malpractice case. Baker v. Coombs Here is the DLJ’s analysis:
"Baker filed for divorce from her husband, Collins, in 1989. A divorce decree, which referenced their Property Settlement Agreement, was entered in 1990. As part of the Agreement, Collins agreed to pay Baker $500,000. A balloon payment of $300,000 was due by January 1, 2002 and the remaining $200,000 due in ten annual installments of $20,000 continuing through January 1, 2001. The Agreement also provided that if the balloon payment was paid prior to the due date, the other payments would be forgiven. As security for the payments, Baker was given liens on all of Collin’s stock holdings of closely held corporations. Collin was to “execute all necessary documents to effectuate these liens” and “the Certificates shall be held by Ronald Coombs, Attorney.” Coombs represented Collins in the divorce proceedings and in other matters.
Despite the Agreement, Collins never gave Coombs any stock certificates before Collins died in September 1999. Coombs asked Collins for the certificates, but Collins never delivered them. Shortly before Collin’s death, Baker discovered that he had sold his interest in his largest corporation in 1992 without perfecting a lien in his stock holdings and making the agreed upon transfer to Baker. Baker did not know what happened to the other corporations, but none of them were listed as assets of his estate. Baker did not know whether any liens were ever prepared and she could not recall inquiring as to the liens or certificates prior to Collin’s death.
In November 1999, Baker filed a proof of claim against Collin’s estate for monies owed to her under the Agreement. The estate objected. Therefore in December 1999, she filed a complaint against the estate, Collin’s widow, and Coombs. Baker alleged that properties were transferred out of Collin’s name, prior to his death, in a deliberate attempt to prevent the payment of monies he owed to her and to reduce the inheritance of his child. She also alleged that Coombs failed to follow the terms of the Agreement in not holding the stock certificates and allowing Collin’s to sell his businesses without taking action to assure that Baker be paid what she was owed.
Baker was awarded a judgment against the estate. Baker and Coombs then filed cross motions for summary judgment. The trial court concluded that Coombs did not commit professional negligence and that he was not personally liable for the monies Collins owed Baker. The court held that Coombs signed the Agreement only in his capacity as Collin’s counsel, and not as a party to the Agreement. Therefore, only Collins and his estate could be held liable. Baker appealed.
On appeal Baker argued: 1) Coombs placed himself in the position of becoming a fiduciary to her by agreeing to hold the stock certificates, and 2) she should be deemed a third party beneficiary of Coomb’s legal services because he agreed to hold the stock certificates as security for the payments owed to her. Baker argued that, under both theories, Coombs had an affirmative obligation to obtain the stock certificates from Collins, to compel Collins to provide them, or to advise Baker that he had not obtained them.
Regarding Baker’s argument that Coombs owed her a fiduciary duty as a result of being mentioned in the Agreement, the Court first noted that no such duty arose solely from the fact that Coombs signed the Agreement. CR 11 requires that attorneys sign pleadings. Next, the Court noted that in the Agreement Coombs, in effect, designated himself as a de facto escrow agent on behalf of Baker as to the certificates, despite his representation of Collins. Coombs created the appearance that a fiduciary duty might have arisen. However, after examining the literal language of the Agreement, the Court found that Coombs was obligated to hold and secure the certificates only after they were placed in his possession. Coombs had no affirmative duty to obtain the certificates or notify anyone that he was not in possession of them. Since Coombs never took possession of the certificates, his arguable duty to Baker never arose. It remained inchoate and unenforceable. If he had received the certificates, he would have been obligated to Baker for having voluntarily agreed to assume the fiduciary duties attached to holding the certificates.
Regarding Baker’s second argument, the Court noted that a legal malpractice claim may arise only to the attorney’s client. However, an attorney may still be liable to a third party because of events arising out of his representation of a client if the attorney’s acts are fraudulent or tortuous and result in injury to that third person. Liability may be found where the attorney is responsible for damage caused by his negligence to someone intended to be benefited by his actions regardless of any lack of privity. The Court found that absent willful and wanton conduct, fraud, or malice, Coombs owed no duty of care to Baker as a third party beneficiary since Coombs had a contractual obligation to represent Collins against Baker as the adverse party in the divorce proceedings.
The Court observed that Coombs became involved in a situation which had the potential to create a conflict of interest between him and his client. The Court warned that attorneys should review SCR 3.130, Rule 1.7 before taking similar steps and obtain prior clear consent from the parties if they choose to embark on an analogous course to preclude similar litigation.