One may lose the right to bring a legal malpractice case based on earlier attorney fee dispute resolution. In this case , Margrabe v. Sexter & Warmflash, PC, 07-CV-2798, District Judge Kenneth M. Karas, SDNY, we see just how the process operates. Plaintiff retains attorneys to represent her in a shareholder derivative matter. Attorneys were successful in obtaining a significant amount of money for her, but from then on things went badly. Attorneys were terminated, fees were disputed, escrow accounts started, and a defamation action commenced over the termination letter. Eventually the attorneys smartly started an attorney fee dispute action under Judiciary Law 475, and were awarded fees. This was the end of the issue, although plaintiff did not yet know it.

From the Court: "Plaintiff claims that Defendants failed to exercise the degree of skill and knowledge commonly possessed by members of the legal profession in their representation of her in the Rusciano Lawsuit. (Compl. ¶27.)

In the R&R, Magistrate Judge Yanthis recommended that the Court grant Defendants’ Motion to Dismiss Plaintiff’s legal malpractice claim on res judicata and collateral estoppel grounds. (R&R 4-5.)

Although Plaintiff initially objected to Magistrate Judge Yanthis’s recommendation (Pl.’s Objections to R&R ("Pl.’s Obj.") 4), Plaintiff has since acknowledged to the Court that, based on the Court of Appeals’ denial of Plaintiff’s appeal, her legal malpractice claim "is barred under New York State law by the doctrine of res judicata." (Letter from William Greenberg, Esq. to the Court (Jan. 30, 2009).)

The Court agrees that, in New York, a judgment "fixing the value of a professional’s service necessarily decides that there was no malpractice." Lipani v. Collins, Collins & Dinardo, P.C., No. 90-CV-5278, 1992 WL 168267, at *3 (S.D.N.Y. June 25, 1992) (quoting Nat Kagan Meat & Poultry, Inc. v. Kolter, 416 N.Y.S.2d 646, 647 (App. Div. 1979)); accord Best v. Law Firm of Queller & Fischer, 718 N.Y.S.2d 397, 397 (App. Div. 2000) (holding that plaintiffs were "precluded from asserting a cause of action alleging malpractice" against the defendant law firm inasmuch as the New York Supreme Court had found that law firm was entitled to its agreed-upon legal fee).5 Here, it is undisputed that the Plaintiff’s legal malpractice claim is precluded by the state supreme court decision that Sexter & Warmflash was entitled to its reasonable legal fees. Accordingly, Plaintiff’s malpractice claim is dismissed as barred by the doctrines of res judicata and collateral estoppel."
 

As yet another example of why legal malpractice is a difficult discipline, here is a case in which there was a failure to file a counterclaim, The legal malpractice case ends in dismissal, because the Appellate Division determines that the counterclaim, even if made would have failed. Ginther v Rosenhoch ;2008 NY Slip Op 10292 ;;Appellate Division, Fourth Department
 

"One necessary element of such a cause of action is that, " but for the [defendants’] negligence, the plaintiff[] would have been successful in the underlying action’ " (Oot v Arno, 275 AD2d 1023, 1023). Here, plaintiff alleges that defendants committed legal malpractice by, among other things, failing to assert a counterclaim in the underlying action, for recovery of premiums paid by plaintiff under a disability insurance policy. We note, however, that the Second Circuit affirmed the judgment of the District Court in favor of the plaintiff insurer in the underlying action on the sole ground that the claim for benefits made by defendant, the plaintiff herein, was untimely under the policy (Provident Life & Cas. Ins. Co. v Ginther, 51 Fed Appx 72). Thus, it cannot be said that, but for defendants’ negligence, plaintiff would have been successful on a counterclaim for recovery of premiums in the underlying action (see Oot, 275 AD2d 1023).

Gina Passarella of the Legal Intelligenser reports on a case from Philadelphia that illustrates the difference between Breach of Fiduciary Duty and Legal Malpractice involving  Cravath, Swaine & Moore.  and Airgas, inc.

From the article:  ‘U.S. District Court Judge Eduardo C. Robreno ruled that under Pennsylvania law, Airgas sufficiently showed that Cravath had a fiduciary duty to Airgas and sufficiently supported its four damages claims for attorney fees, cost of obtaining new financing counsel, inability to obtain new financing and disgorgement of fees paid to Cravath. Robreno also upheld, at this juncture, Airgas’ claims for punitive damages.

Airgas sued Cravath after the firm decided to represent other longtime client Air Products & Chemicals in Air Products’ takeover bid for Airgas. Robreno had said the Delaware Chancery Court, which was overseeing litigation between the two companies regarding the takeover bid, should be the one to decide whether Cravath can represent Air Products or if it is barred by a conflict of interest.

The Delaware court in March ruled Cravath could continue in its representation, finding Airgas didn’t show how it would be harmed by Cravath’s involvement. But Airgas’ claims for damages based on an alleged breach of fiduciary duty have continued in the Eastern District of Pennsylvania before Robreno.

In his opinion Tuesday denying Cravath’s motion for judgment on the pleadings, Robreno said the parties "hotly dispute" the nature and scope of Cravath’s representation of Airgas and Air Products, when Cravath officially stopped representing Airgas and what Cravath learned while representing the company. He said he would treat the motion for judgment on the pleadings as a motion to dismiss.

"Airgas has pleaded its claim in detail and alleged facts that Cravath disregarded its duty of undivided loyalty to its client Airgas by accepting, without a prior disclosure, a representation of Air Products designed explicitly to help Air Products take over Airgas," Robreno wrote in a 23-page opinion in Airgas Inc. v. Cravath Swaine & Moore. "Airgas alleges that at the same time (August-October 2009) that Airgas had engaged Cravath and assumed its undivided loyalty, Cravath was covertly advising Air Products on how to end Airgas’s independent corporate existence. This pleading sufficiently sets forth a claim for breach of fiduciary duty."

Legal Malpractice rules are either legislated or court created.  There is no general underpinning such as an amendment to the Constitution, nor is there a basic common law history (with the very notable exception of the area of attorney deceit, which is as old as the Magna Carta.)  But as we have commented before, legal malpractice is the law of lawyers, written by lawyers, prosecuted by lawyers, and ruled on by lawyers.

Criminal defendants have no real ability to sue their attorneys for the mistakes which may have ended in the conviction.  In New York, a criminal defendant must demonstrate "actual innocence" before suing the attorney.  The thinking goes that a criminal was convicted on the evidence and not simply on blunders or shoddy work.  This must be true, no?

Yesterday’s New York Times tells of a simple calendaring mistake by Sullivan & Cromwell which could lead to an execution.  Cory R. Maples was convicted in Alabama of murder, and in the sentence phase, was sentenced to death.  Sullivan & Cromwell offered pro bono work on his case.  When an order, which required a responsive filing was mailed to the attorneys listed at Sullivan & Cromwell, they had moved on, and the envelopes were returned.

This was a most common law office failure/calendaring error.  This time, the consequences were not a loss of money, but, rather a potential execution.  The matter is now before the Supreme Court on a cert application. 

Is this the case that might change the rule in criminal legal malpractice? 

BAKER,  -v.- CHARLES SIMPSON, WINDELS MARX LANE & MITTENDORF, LLP  is the story of a Chapter 7 petitioner whose case was converted into a Chapter 11 proceeding.  He had counsel appointed, who then represented him until the end of the proceedings. The proceedings ended badly, with plaintiff Baker alleging "that: (1) On the advice of counsel, he refinanced through appellee Galster Capital LLC, which he contends misrepresented itself as a lender and failed to fund his mortgage loans as agreed. 1 (2) Galster Capital caused him to incur legal fees, forgo offers from other prospective lenders, and [*4] accrue interest on his debt. (3) During a status conference before the bankruptcy court, attorney Simpson made a misrepresentation concerning the bankruptcy estate. (4) Simpson arranged an improperly "fixed" auction sale of two of his commercial properties without notice to Baker, and after a prospective buyer moved to reopen the sale, the bankruptcy court issued an order vacating the original sale and scheduling a new sale on notice. (5) Allstate Insurance Company acted negligently when, at Simpson’s direction, it deposited insurance proceeds into a JPMorgan Chase bank account in Baker’s name. (6) And, Simpson improperly converted the funds deposited into the JPMorgan account for his personal use."

How did the Second Circuit handle this matter?  In the end, it ruled that there it had no jurisdiction to determine whether Bankruptcy Court had the right to take the state court legal malpractice action over, and then dismiss. The rules of permissive abstention and mandatory abstention are implicated here.

"Having determined that the bankruptcy court had jurisdiction over this matter, we look to the abstention doctrine to [*10] provide guidance as to the proper exercise of that jurisdiction. See In re Southmark Corp., 163 F.3d at 929-30. As we have previously explained, "the abstention provisions implicate the question whether the bankruptcy court should exercise jurisdiction, not whether the court has jurisdiction in the first instance." In re S.G. Phillips Constructors, Inc., 45 F.3d 702, 708 (2d Cir. 1995).

Mandatory abstention applies when "a proceeding based upon a [s]tate law claim or [s]tate law cause of action" is "related to a case under [T]itle 11" but does not arise under or arise in a case under Title 11. 28 U.S.C. § 1334(c)(2). In the proceeding before the district court, Baker conceded that the mandatory abstention provision set out in section 1334(c)(2) is inapplicable to this case. Baker, 413 B.R. at 42 n.4. Therefore, this Court may properly find any argument that the mandatory abstention provision governs this appeal waived. See United States v. Brown, 352 F.3d 654, 663 (2d Cir. 2003); Billing v. Ravin, Greenberg & Zackin, P.A., 22 F.3d 1242, 1245 n.1 (3d Cir. 1994).

In any event, any argument that — in the absence of a waiver — mandatory abstention would apply, is without merit. A bankruptcy [*11] court has "plenary jurisdiction over ‘all cases under [T]itle 11 and all core proceedings arising under [T]itle 11, or arising in a case under Title 11’" Mt. McKinley Ins. Co. v. Corning Inc., 399 F.3d 436, 447-48 (2d Cir. 2005) (quoting 28 U.S.C. § 157(b)(1)). As the Fifth Circuit has explained, although the definition of a proceeding "arising in" Title 11 is not entirely clear, it covers claims that "are not based on any right expressly created by [T]itle 11, but nevertheless, would have no existence outside of the bankruptcy." In re Wood, 825 F.2d 90, 97 (5th Cir. 1987)."
 

Result?  State Court action removed to Bankruptcy Court, Bankruptcy Court dismisses, no effective appeal.

Cases in which attorneys steal money rather than lose money [or commit blunders which lose otherwise meritorious cases] are in the jurisdiction of the New York Lawyers’ Fund for Client Protection.  This fund fills an important role, and covers areas which will not be susceptible to a legal malpractice case.  Malpractice Insurance carriers will not likely cover thefts, nor fraud by the attorneys; hence the added importance of this Fund.

The fund is paid for by attorney fees levied by New York.  Attorneys now pay $ 350. per two year period merely to register.  A significant portion of these monies goes to the fund.  Claims have picked up recently, probably consistent with the economy, as  Joel Stashenko of the NYLJ reports:

"In the first six months of this year, 349 new claims were filed with the fund, a 44.2 percent increase from the 249 received in the same period last year.

As of July 1 of this year, 762 claims were pending. If all were paid out at the maximum eligible reimbursement rate of $300,000, the fund would be liable for $35 million.

By comparison, the fund faced 612 claims on the same date last year with a potential exposure of $24 million. Halfway through 2008 the fund had 536 pending claims.

Awards also are running ahead of last year’s rates. In the first six months of the year, the fund paid out $4.3 million, up $2.9 million in the same period of 2009."

Attorneys for insurance carriers are rarely the subject of a legal malpractice case…it is much more often plaintiff’s attorney. The Poppe law firm blog reports this case of a car insurance defense attorney who goes to trial on the underlying auto accident without ever meeting with the client, and to make matters worse, admits liability without the client’s consent. While the Poppe blog does not set forth the full facts, it’s my guess that there was a verdict in excess of the policy, and that the resulting case against the attorney is for the amount above the policy along with disbursements and interest.

Here is the report:"Lawyer Osborne never contacted client Turner about the trial. In fact, he never even spoke to his client before the trial. One more thing. Lawyer Osborne stipulated (admitted) that client Tuner was negligent—even though he never spoke with his client. The jury awarded $1.7 million against the absent Turner. By the time Turner knew about the trial it was over, and he was facing a huge judgment.

In the legal negligence trial, Taylor W. Jones of Jones Jensen & Harris sued the former law firm alleging they bungled the car wreck defense and would have won the case if they had not commited legal malpractice. A jury agreed.

Georgia insurance defense law firm, Swift, Currie McGehee and Hiers defended lawyer Osborne. James T. McDonald, of the Swift law firm defended Osborne.

The jury awarded Turner $991,000 against his "lawyer."

The rules for attorney billing are different from those of any other profession.  While the general principals are the same, attorneys are required to utilize retainer agreements, or a similar document, while this is not true for accountants, dentists, etc.  There are consequences for the failure to use a retainer agreement, but Courts, especially the Second Department have permitted vast exceptions.  How does one understand the various factors?

One way is to read Constantine Cannon LLP v. Parnes,  2010 Slip Op  31956  a recent decision by Justice Edmead.  In this decision, she carefully dissects the various strands of claims and defenses.

"Plaintiff alleges that its invoices to defendants were carefully itemized, with each entry containing the date, amount of time, and a detailed description of the work performed, as well as the attorney’s name and billing rate. Mr. Matz, as the billing partner on defendants’ matters, reviewed each invoice before it was sent out, and his administrative assistant addressed and mailed each invoice to Ms. Parnes via first class mail (see the "invoices"). From September 2008 through February 2009, plaintiff provided defendants with approximately $630,000 worth of legal services, and defendants paid the invoices for those services without protest. "

"defendants’ "first affirmative defense and counterclaim" allege that plaintiff failed to issue defendants a written letter of engagement, pursuant to 22 NYCRR §1215.1. Therefore, plaintiff is barred from collecting a fee, and defendants are entitled to judgment against plaintiff for the full amount of all fees paid: $627,845.31. Defendants’ "second affirmative defense and counterclaim," allege that plaintiff "vastly overcharged" for its services, for example, charging for the time of persons apparently not admitted to the New York bar at the same hourly rate as admitted lawyers. "

The Court: "The rule covering engagement letters provides in relevant part: "[A]n attorney who undertakes to represent a client and enters into an arrangement for, charges or collects any fee from a client shall provide to the client a written letter of engagement before commencing the representation, or within a reasonable time thereafter" (22 NYCRR §1215.1). ""However, a law firm’s "failure to comply with the rules on retainer agreements (22 NYCRR 1215.1) does not preclude it from suing to recover legal fees for the services it provided" (Miller v Nadler, 60 AD3d 499, 500 [Sup Ct New York County 2009], citing Egnotovich v Katten Muchin Zavis & Roseman LLP, 55 AD3d 462, 464 [1st Dept 2008]; Nicoll & Davis LLP v Ainetchi, 52 AD3d 412 [1st Dept 2008]; Seth Rubenstein, P.C. v Ganea, 41 AD3d 54, 63-64 [2d Dept 2007]). The First Department explains in Nabi v Sells (70 AD3d 252, 253-254 [1st Dept 2009]): "Against the client’s unqualified right to terminate the attorney-client relationship is balanced the notion that a client should not be unjustly enriched at the attorney’s expense or take undue advantage of the attorney, and therefore the attorney is entitled to recover the reasonable value of services rendered." Further, the caselaw does not distinguish between the recovery of fees under a theory of quantum meruit or an account stated. Instead, this Court has held that [22 NYCRR §1215.1] "contains no provision stating that failure to comply with its requirements bars a fee collection action. Indeed, the regulation is silent as to what penalty, if any, should be assessed against an attorney who fails to abide by the rule" (Morgan, Lewis & Bockius LLP v IBuyDigital.com, Inc., 2007 WL 258305, 1 [Sup Ct New York County 2007] [emphasis added]). Therefore, defendants’ first affirmative defense fails to defeat plaintiff’s account stated and quantum meruit claims."

"[Courts] have held that the client may [not] use the attorney’s noncompliance [with 22 NYCRR §1215.1]…as a sword to compel disgorgement of fees already paid. This is particularly relevant with respect to plaintiff’s claim against [the defendants] since it appears that she has paid only a portion of the fees billed… . The issue has yet to be addressed by the First Department… . The Second Department [in Seth Rubenstein, P.C. v Ganea, supra]…ruled that the attorney discharged without cause was not precluded from recovering in quantum meruit the fair and reasonable value of the legal services provided, but did not address the issue of whether fees already paid were disgorgeable. That issue was determined by the Appellate Term, 9th & 10th Judicial Districts, in [Jones] v. Wright… where the court held that "while an attorney’s failure to comply with the provision does not entitle a client to a return of legal fees where the services have already been rendered…a client may seek to recover a fee already paid if it appears that the attorney did not properly earn said fee." This appears to be consistent with the well established principles that an attorney who is discharged for cause does not have the right to recover legal fees, provided "the misconduct relates to the representation for which the fees are sought."

(Most citations omitted) (Emphasis added).

The Court in Jones v Wright (2007 WL 2247199, 1 [App Term 9th & 10th Jud Dists 2007]), which is cited by the Matos Court, stated:

Indeed, while an attorney’s failure to comply with the provision does not entitle a client to a return of legal fees where the services have already been rendered, a client may seek to recover a fee already paid if it appears that the attorney did not properly earn said fee [citing Beech v Gerald B. Lefcourt, P.C., 2006 NY Slip Op 51092U, 4 (Civ Ct New York County 2006) ("While a client cannot maintain a cause of action for return of a legal fee based on noncompliance with Rule 1215.1, a client may seek recovery of the already paid fee grounded in a breach of contract theory, if an attorney did not properly earn any part of such fee")]."