The short answer is when there is spoliation.  Spoliation is the intentional or negligent destruction of evidence.  It may take place prior to, or during litigation, and it always deprives one side of the use of otherwise admissible evidence. 

In the helicopter case, it seems to have been intentional. IN RE HELICOPTER CRASH NEAR WENDLE CREEK, BRITISH COLUMBIA, ON AUGUST 8, 2002; Docket No. 3:04md1649 (SRU)
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF CONNECTICUT; 2009 U.S. Dist. LEXIS 41477; May 18, 2009,

Spoliation comes into the legal malpractice picture when, for example, defendant attorney fails to take discovery of important evidence in the underlying case, and the ability later to obtain that evidence no longer exists.  In a matrimonial legal malpractice case, it may no longer be possible to discovery the other spouse’s financial records, and so plaintiff cannot show exactly how much she lost by target attorney’s negligent failure to take discovery.

In the helicopter case: "…defendants’ alleged failure to maintain or produce the allegedly "missing" records materially impaired her prosecution of her medical negligence and informed consent claims.

Plaintiff’s "negligent spoliation" claim is akin to a legal malpractice claim [*6] in that "damages arise from the loss" — or diminution of value — of an underlying claim. . . . [P]plaintiff’s primary medical negligence and informed consent claims ultimately failed for lack of proof of scientific/medical causation. Plaintiff argues that, if the allegedly absent records had been created or maintained and produced, Williamson might have been provided with the "missing link" that would have enabled him to identify and persuasively explain the causal relationship between gadolinium extravasation and Raynaud’s syndrome. Specifically, plaintiff points to the fact that no records reflect the amount of gadolinium used during the procedure. . . .
 

We have commented about the Collateral Estoppel trap in legal malpractice with regard to fee arbitrations and hearings.  in short, when a court grants an attorney fee application, it implicitly determines that there can have been no malpractice, as the court may not award fees in the face of malpractice.  Fee arbitrations and hearings in state court happen, but not that often.  Bankruptcy fee hearings happen in every case, and in every case where fees are awarded to counsel, the question of res judicata comes up.

In re D.A. ELIA CONSTRUCTION CORP., Plaintiff, v. DAMON & MOREY, LLP, Defendant.;07-CV-143A  ;  UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NEW YORK;   389 B.R. 314; 2008 U.S. Dist. LEXIS 25496 has been the leading case on this issue.  There, attorneys who had been granted fees were able to fend off legal malpractice claims based upon res judicata.

Now, in PENTHOUSE MEDIA GROUP, INC., , – against – PACHULSKI STANG ZIEHL & JONES LLP, ;UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK;  2009 U.S. Dist. LEXIS 46617 we see a slightly different result.  Judge Scheindlin sitting in appeal of a US Bankruptcy decision by Judge Bernstein, finds that the legal malpractice plaintiffs did not have a full and fair opportunity to be heard, and that res judicata does not control the issue of legal malpractice.

"Although Pachulski’s fee application was approved by the bankruptcy court in the prior proceeding, I cannot conclude as a matter of law that PMG had a full and fair opportunity to litigate allegations of Pachulski’s malpractice during that hearing. Many of the factors used to consider whether a party had a full and fair opportunity to litigate an issue favor PMG, particularly given PMG’s continued retention of Pachulski as its counsel. For instance, one of the factors courts have considered is "the importance of the claim in the prior litigation." 45 PMG had just undergone a reorganization with the help of Pachulski as its counsel. The possibility that Pachulski may have committed malpractice while representing PMG during that reorganization may not have been at the forefront of PMG’s concerns. In addition, PMG [*16] had no "incentive [or] initiative to litigate" the malpractice issue, 46 considering that it expected Pachulski to continue to advise PMG in the winding down of its bankruptcy proceeding.

Of particular importance to this Court is the bankruptcy court’s reliance on D.A. Elia Construction Corp. 50 Judge Bernstein concluded that D.A. Elia was directly on point, 51 but D.A. Elia is perhaps even more clearly distinguishable from the instant case than other cases cited by Pachulski, as in that case the malpractice claim was actually litigated during the fee application proceeding. D.A. Elia emphasized that
many of the same allegations made by Elia in its [malpractice] complaint were previously made by Elia in its objections to Damon & Morey’s final fee application. Specifically, Elia argued to the bankruptcy court that the firm had labored under a conflict of interest, had committed legal malpractice and had failed to turn over money owed to the estate. The bankruptcy court provided Elia with ample opportunity [to] raise those claims, but ultimately rejected them as meritless. 52
The district court concluded that "it cannot be said that Elia was denied the opportunity to raise these [malpractice] claims in the prior action." 53 In the instant case, PMG raised no such objections [*19] at the fee hearing."

Clients often ask whether it matters that their legal malpractice case comes as a defense to an attorney fee case.  It should not, but judges are swayed by the procedural setting of cases before them.  Does it make a difference whether the legal malpractice case is a main action or a counterclaim?  Taking a look at this case gives possible insight.

Kluczka v Lecci  2009 NY Slip Op 04867  Decided on June 9, 2009  Appellate Division, Second Department  holds that:
 

"The plaintiff retained the defendant attorney to represent him in a divorce action commenced by his former wife. The divorce action was settled by a stipulation pursuant to which the plaintiff agreed, inter alia, to waive his interest in the marital residence and give his former wife a share of his pension benefits, while she agreed to waive her interest in another property, and forgive certain child support arrears. The plaintiff thereafter commenced this action, contending that the defendant had committed legal malpractice by recommending that the plaintiff enter into the stipulation without obtaining appraisals of the subject real property or his pension.

Here, the defendant made a prima facie showing that he was entitled to summary judgment by demonstrating that the stipulation in the underlying divorce action was a provident agreement which provided both parties with benefits, and that his allegedly negligent failure to obtain appraisals did not cause the plaintiff to incur any damages. In opposition, the plaintiff failed to raise an issue of fact as to whether he incurred damages by submitting evidentiary proof that, but for the defendant’s alleged negligence, he would have been able to negotiate a more favorable settlement (see Rapp v Lauer, 229 AD2d 383, 384; Rogers v Ettinger, 163 AD2d 257, 258). Accordingly, the Supreme Court should have granted that branch of the defendant’s motion which was for summary judgment dismissing the complaint.

However, the court properly denied that branch of the plaintiff’s cross motion which was for summary judgment dismissing the defendant’s counterclaim to recover unpaid legal fees. An attorney may not recover fees for legal services performed in a negligent manner even where that negligence is not a proximate cause of the client’s injury (see Martin, Van de Walle, Guarino & Donohue v Yohay, 149 AD2d 477, 480; Campagnola v Mulholland, Minion & Roe, 148 AD2d 155, 158, affd 76 NY2d 38). Here, the submissions of both parties demonstrate that there is a sharply disputed issue of fact as to whether the defendant’s performance of legal services, as measured against that of an attorney of reasonable skill and knowledge, was negligent (see Kutner v Catterson, 56 AD3d 437). Thus, the issue of whether the defendant is entitled to recover legal fees on his counterclaim must await resolution at trial. "

CPLR 3211 (a)(1) is the "documentary evidence" portion of a general pre-answer motion to dismiss.  The standard applied to dismissal motions under this particular sub-section is:

"On a motion to dismiss based upon documentary evidence, dismissal is only warranted if the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law" (Klein v Gutman, 12 AD3d 417, 418; see CPLR 3211[a][1]; Saxony Ice Co., Div. of Springfield Ice Co., Inc. v Ultimate Energy Rest. Corp., 27 AD3d 445). Moreover, where "evidentiary material is submitted and considered on a motion to dismiss a complaint pursuant to CPLR 3211(a)(7), the court must determine whether the plaintiff has a cause of action, not whether the plaintiff has stated one" (Steve Elliot, LLC v Teplitsky, 59 AD3d 523, 524, citing Guggenheimer v Ginzburg, 43 NY2d 268, 275). "[U]nless it has been shown that a material fact as claimed by the [plaintiff] to be one is not a fact at all and unless it can be said that no significant dispute exists regarding it . . . dismissal should not eventuate" (Guggenheimer v Ginzburg, 43 NY2d at 275).
 

Here, in the quote taken from Walker v Kramer ; 2009 NY Slip Op 04414 ;  Decided on June 2, 2009 ;  Appellate Division, Second Department we see a situation in which neither defendant demonstrated their right to dismissal.  Plaintiff has adequately stated a cause of action, or indeed, has a cause of action which the court discerned, in this matrimonial legal malpractice case.
 

A "client’s unilateral belief" in the attorney-client relationship is insufficient to prove privity between the attorney and client, sufficient for a legal malpractice lawsuit, but subsequent behavior or acts by the attorneys might provide the necessary proof.  Here, in Terio v Spodek ;  2009 NY Slip Op 04412
Decided on June 2, 2009 ; Appellate Division, Second Department  we see how that might happen:
 

"To recover damages for legal malpractice, a plaintiff must prove, inter alia, the existence of an attorney-client relationship (see Velasquez v Katz, 42 AD3d 566, 567; Moran v Hurst, 32 AD3d 909; Wei Cheng Chang v Pi, 288 AD2d 378, 380; Volpe v Canfield, 237 AD2d 282, 283). While a plaintiff’s unilateral belief does not confer upon him or her the status of client (see Volpe v Canfield, 237 AD2d at 283), an attorney-client relationship may exist in the absence of a formal retainer agreement (see e.g. Swalg Dev. Corp. v Gaines, 274 AD2d 385, 386). To establish an attorney-client relationship there must be an explicit undertaking to perform a specific task (see Wei Cheng Chang v Pi, 288 AD2d 378; Volpe v Canfield, 237 AD2d at 283).

Here, Reich failed to establish, as a matter of law, that an attorney-client relationship was not formed and did not exist during the time that the alleged acts of negligence occurred. Reich’s submissions demonstrated that it consulted with the plaintiff, advised her of her chances of success, and negotiated a settlement with a bankruptcy trustee. Contrary to Reich’s arguments, the fact that it was purportedly not the attorney of record at the time of a hearing before the United States Bankruptcy Court to determine whether the particular asset at issue qualified as an exemption, is not dispositive of the existence of an attorney-client relationship during the period of the alleged negligence. "

In the past six months, new life has been breathed into Judiciary law 487.  It may well be the oldest statute in Anglo-American jurisprudence.  Dating from1275  the statute provides that an attorney who is guilty of any deceit or collusion, may be guilty of a misdemeanor and held for treble damages.

Since the Court of Appeals decided Amalfitano v Rosenberg   12 NY3d 8 a rise in the acceptance of, and application of the statute has been seen.  Here, in a Fourth Department case, Scarborough v Napoli, Kaiser & Bern, Llp ;2009 NY Slip Op 04475 ;Decided on June 5, 2009 ;Appellate Division, Fourth Department  we see summary judgment being denied to the target attorney defendants,

"The medical malpractice action was dismissed against the underlying medical defendants after defendants failed to file a timely note of issue. Following the dismissal of that action, defendants asked plaintiff to sign a stipulation of discontinuance with respect to the underlying action, which in fact had already been dismissed. According to plaintiff, he was informed that he could not prevail in his underlying action but was never informed that the action already had been dismissed as a result of defendants’ failure to file [*2]a timely note of issue. Subsequently, a member of defendants’ firm telephoned plaintiff and told him the actual basis for the dismissal of the underlying action.

Plaintiff thereafter commenced this action asserting causes of action for legal malpractice and for treble damages pursuant to Judiciary Law § 487. Defendants moved for summary judgment dismissing the amended complaint in its entirety on the ground that no acts or omissions by the underlying medical defendants were the proximate cause of the death of plaintiff’s father, an essential element of a cause of action for legal malpractice.

Contrary to the further contention of defendants, the court properly determined that none of the defendants is entitled to summary judgment dismissing the Judiciary Law § 487 cause of action. That statute provides in relevant part that an attorney who is "guilty of deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party . . . [i]s guilty of a misdemeanor, and . . . he [or she] forfeits to the party injured treble damages, to be recovered in a civil action." "A violation of Judiciary Law § 487 may be established either by the defendant’s alleged deceit or by an alleged chronic, extreme pattern of legal delinquency by the defendant’ " (Izko Sportswear Co., Inc. v Flaum, 25 AD3d 534, 537; see Amalfitano v Rosenberg, 12 NY3d 8; Schindler v Issler & Schrage, 262 AD2d 226, lv dismissed 94 NY2d 791, rearg denied 94 NY2d 859). Here, the documents submitted by defendants in support of their motion establish that some of the attorneys at defendant law firm engaged in intentional deceit, and thus by their own submissions defendants defeated their entitlement to summary judgment dismissing that cause of action. "

In both Federal District Court and in State Court in New York attorneys have a "retaining lien" under Judiciary Law 475.  In Federal District Court the rule is set forth in Katz v. Image Innovations Holdings Inc., 06 Civ. 3707;Decided: May 27, 2009; District Judge John G. Koeltl

U.S. DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

"It is well settled in this Circuit that an attorney may claim a retaining lien for outstanding unpaid fees and disbursements on a client’s papers and property that came into the attorney’s possession as the result of his professional representation of that client. See Pomerantz v. Schandler, 704 F.2d 681, 683 (2d Cir. 1983) (per curiam) (citing In re San Juan Gold, Inc., 96 F.2d 60 (2d Cir. 1938)). This right to a retaining lien is grounded in common law, and is enforced in federal courts unless a specific federal law alters the parties’ rights. See Allstate Ins. Co. v. Nandi, 258 F.Supp.2d 309, 311 (S.D.N.Y. 2003) (citing Rivkin v. A.J. Hollander & Co., Inc., No. 95 Civ. 9314, 1996 WL 633217, at *2 (S.D.N.Y. Nov. 1, 1996)). In this case, no federal law prevents the Court from fixing a retaining lien.

The decision to fix a retaining lien lies within the discretion of the district court. See Allstate, 258 F.Supp.2d at 311 (citing Pay Television of Greater New York, Inc. v. Sheridan, 766 F.2d 92, 94 (2d Cir. 1985) (per curiam)). A retaining lien attaches "when the action is commenced and remains in force when an attorney is discharged without cause." See Allstate, 258 F.Supp.2d at 312 (quoting Casper v. Lew Lieberbaum & Co., Inc., No. 97 Civ. 3016, 1999 WL 335334, at *8 (S.D.N.Y. May 26, 1999)). While an attorney who has been discharged for cause has no right to compensation or to a retaining lien, an attorney who has been discharged without cause is entitled to be paid a fee on a quantum meruit basis for the reasonable value of the legal services that were provided. See Viada v. Osaka Health Spa, Inc., No. 04 Civ. 2744, 2005 WL 3481196, at *2 (S.D.N.Y. Dec. 19, 2005) (citing Gurry v. Glaxo Wellcome, Inc., No. 98 Civ. 6243, 2000 WL 1702028, at *1 (S.D.N.Y. Nov. 14, 2000)). When counsel is granted leave to withdraw by the court, the discharge is not for cause. See Viada, 2005 WL 3481196, at *2. Absent a defendant’s urgent need for the papers subject to the retaining lien, such as for a criminal trial, the Court of Appeals for the Second Circuit has held it an abuse of discretion to require withdrawing counsel to turn over papers subject to a retaining lien without conditioning it on payment or posting bond for payment of outstanding legal fees. See Pomerantz, 704 F.2d at 683-684."
 

How are "inefficiencies" such as intra-office conferences and duplication of effort handled?

"There is some duplication caused by McCarter’s employment of 14 attorneys in this matter, and its billing for internal conferences. (See generally Ex. A, Moran Decl., Jan. 21, 2009.) A deduction of 5 percent from the attorney’s fees adequately compensates for this inefficiency. See New York State Ass’n for Retarded Children, Inc. v. Carey, 711 F.2d 1136, 1146 (2d Cir. 1983) (endorsing percentage reductions as a practical means of reducing a fee application to avoid an excessive fee, and noting percentage reductions of 5 percent to 22 percent ); Mr. X v. New York State Educ. Dept., 20 F.Supp.2d 561, 564 (S.D.N.Y. 1998) (reducing requested attorney’s fees award by twenty percent for, among other considerations, duplicative work)."

The collapse of a hedge fund gives rise to a legal malpractice claim by various of the investors.  The hedge fund impresario is convicted of securities fraud, and then turns around to help the investors sue the funds’ attorney. 

In Eurycleia Partners, LP v Seward & Kissel, LLP ; 2009 NY Slip Op 04299 ; Decided on June 4, 2009 ; Court of Appeals ; Graffeo, J. we see that there is not enough connection between the attorneys and plaintiffs, and that plaintiffs cannot show the requisite relationship between the attorneys and the funds.
 

"The July 2007 amended complaint presents three main allegations against S & K. First, plaintiffs assert S & K learned at some point in 2005 that Wood River invested more than 10% of its assets in Endwave stock in violation of the 10% restriction contained in the offering memoranda. According to plaintiffs, S & K nonetheless persisted in drafting offering memoranda falsely representing that Wood River was adhering to the 10% cap as part of its investment policy. Second, plaintiffs claim that S & K falsely stated in the offering memoranda that TBS was Wood River’s auditor even though S & K knew from the inception that TBS had not been retained to perform any auditing work. Third, plaintiffs allege S & K learned in January 2005 that Wood River had violated securities laws by failing to file required notices when Wood River obtained 5% and, later, 10% of Endwave’s stock [FN5]. Plaintiffs maintain that S & K breached fiduciary duties owed to them, as limited partners, by failing to disclose the SEC violations to them.

Here, whether the claim is labeled fraud or aiding and abetting fraud, we conclude that neither the allegations in the complaint nor the surrounding circumstances give rise to a reasonable inference that S & K participated in a scheme to defraud or knew about the falsity of the two contested statements in the offering memoranda. The amended complaint conclusorily alleges that at some unspecified point in 2005 S & K became aware that more than 10% of Wood River’s holdings were invested with Endwave but, nonetheless, S & K continued to issue offering memoranda falsely representing that Wood River would not invest more than 10% of its assets in any given security.

We likewise find the amended complaint’s alternative allegation of fraud or aiding and abetting fraud — that S & K knew TBS was not Wood River’s auditor yet continued to list TBS in the offering memoranda — to be similarly conclusory. As the Appellate Division recognized, the complaint elsewhere alleges that in the summer of 2005 TBS falsely represented that it was the fund’s auditor and would conduct an audit. In short, although we are mindful that a plaintiff need not produce absolute proof of fraud and that there may be cases in which particular facts are within a defendant’s possession, it is also true that the strength of the requisite inference of fraud will vary based on the facts and context of each case.

A fiduciary relationship arises "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" (EBC I, Inc. v Goldman, Sachs & Co., 5 NY3d 11, 19 [2005] [internal quotation marks and citation omitted]). Put differently, "[a] fiduciary relation exists when confidence is reposed on one side and there is resulting superiority and influence on the other" (AG Capital Funding Partners, L.P. v State St. Bank & Trust Co., 11 NY3d 146, 158 [2008] [internal quotation marks and citation omitted]). Ascertaining the existence of such a relationship inevitably requires a fact-specific inquiry. [*6]

Here, plaintiffs do not allege that they had direct contact or any relationship — contractual or otherwise — with S & K. Indeed, plaintiffs acknowledge that the offering memoranda advised prospective limited partners to consult their own legal counsel prior to investing in Wood River. Plaintiffs nevertheless contend that S & K’s attorney-client relationship with Wood River in and of itself created a fiduciary relationship between S & K and the limited partners themselves. We disagree. "