The question of when a legal malpractice claim belongs to the debtor and when it belongs to the debtor’s estate is of strong significance.  If the former, plaintiff may hire his own attorney and proceed; if the latter, then the trustee in bankruptcy or debtor’s estate holds the reins.  Here, from Bankruptcy Law Network is a case in which the legal malpractice included a claim of negligently advising a Chapter 11 filing rather than a Chapter 13 filing.

"A recent New Jersey case, In re Hussain, 2008 WL 5102458 (Bky.D.N.J. Dec. 5, 2008), held that a bankruptcy debtor’s legal malpractice claim against his former bankruptcy attorney was property of the estate, to be administered by the bankruptcy trustee for the benefit of creditors.

The bankruptcy court observed that the legal malpractice claim involved the alleged failure to advise the debtor that he could have filed a Chapter 11 case rather than a Chapter 13 case, and the failure to propose a Chapter 13 plan which could be confirmed by the court. These were actions involving pre-bankruptcy conduct. Accordingly, the legal malpractice claim accrued on the date the bankruptcy petition was filed, and it was therefore property of the estate under bankruptcy code section 541(a)(1). Although the filing of the legally inadequate chapter 13 plan was a post-petition event, it served only to magnify the malpractice claim, and not to create a new malpractice claim belonging to the debtor."

Thank you for reading our commentary this year.  We wish a wonderful holiday season to all.  We’ll be returning on January 2, 2009.

A sole shareholder of a closely held corporation hires an attorney.  The retainer agreement does not always reflect that the attorney is representing both the individual and the corporation, and at the begining it probably means little.  After a progression into a legal malpractice case it may well take on epic porportions.  Here, in this caseLeach v. Bailey we see the confusion and trouble it can cause:

"Leo Wells sought specific performance of an agreement to convey real property or, in the alternative, money damages (Wells v Ronning, 269 AD2d 690 [2003]). Defendants represented plaintiff at the trial level in the underlying action. In brief, Wells obtained summary judgment on liability against both plaintiff and a corporation of which plaintiff was the sole shareholder and, after the corporation was dissolved, the successor in interest. Upon plaintiff’s appeal, this Court reversed the judgment against plaintiff but concluded that judgment could be entered against the corporation because it neither opposed the summary judgment motion at the trial level nor appealed (id. at 691-693). The judgment was later satisfied after the sale of real property that remained titled in the corporation. Plaintiff then commenced this action.

Supreme Court (Spargo, J.) granted defendants’ motion for partial summary judgment dismissing that part of the complaint that sought damages arising out of the sale of the [*2]corporation’s property. The court concluded that defendants had demonstrated that they did not represent the corporation and, thus, could not be liable to plaintiff for losses suffered by the corporation. This Court reversed, finding that plaintiff had raised questions of fact regarding whether defendants represented the corporation (37 AD3d at 898-899).

The parties subsequently stipulated that defendants did not represent the corporation, but did commit malpractice in their representation of plaintiff individually. They further elected to proceed to a nonjury trial on certain stipulated issues of proximate causation and damages. At trial, plaintiff presented expert testimony and an appraisal report from real estate appraiser James Edward Beatty to rebut the testimony given on Wells’ behalf by real estate appraiser Bruce Bauer in the underlying action. Supreme Court (Lynch, J.) determined that defendants’ malpractice did not cause the unfavorable result against the corporation in the underlying action, and dismissed the complaint. Although one of the stipulated issues was whether plaintiff may recover counsel fees both paid to defendants and incurred on his appeal in the underlying action, the court made no findings regarding whether plaintiff could recover such fees from defendants. Plaintiff now appeals.

Plaintiff asserts that the focus in this action is the issue of defendants’ failure to call an expert to value the real property at issue in the underlying action. Specifically, plaintiff asserts that Beatty’s appraisal testimony offered herein establishes that the value of the real property at issue in the underlying action was $30,000 and, thus, "but for" defendants’ failure to challenge the $90,000 appraised value offered by Wells, judgment in the amount of $30,000 plus interest, rather than $90,000 plus interest, would have been entered against him and the corporation. Plaintiff’s argument misses the mark.

As noted above, the judgment in the underlying action was reversed insofar as it imposed personal liability on plaintiff (Wells v Ronning, 269 AD2d at 692-693) and, ultimately, the judgment as against the corporation was satisfied from the sale of the corporation’s assets. Thus, any damages arising out of the entry of the judgment in the prior action were suffered by the corporation, not plaintiff. Generally, a shareholder has no cause of action "[f]or a wrong against a corporation . . . [even] though he [or she] loses the value of his [or her] investment" (Abrams v Donati, 66 NY2d 951, 953 [1985]). While exceptions to the general rule exist, they are inapplicable inasmuch as the parties have stipulated that defendants did not represent the corporation and there are no allegations of fraud, collusion or malicious acts herein. Accordingly, defendants cannot be liable for any losses suffered by the corporation (see Griffin v Anslow, 17 AD3d 889, 892 [2005]; C.K. Indus. Corp. v C.M. Indus. Corp., 213 AD2d 846, 847 [1995]; see also Abrams v Donati, 66 NY2d at 953-954; cf. Lawrence Ins. Group v KPMG Peat Marwick, 5 AD3d 918, 919 [2004]; Benedict v Whitman Breed Abbott & Morgan, 282 AD2d 416, 418 [2001]; Weiss v Salamone, 116 AD2d 1009, 1010 [1986]). In any event, even assuming that plaintiff could recover based upon the $90,000 judgment entered against the corporation, he failed to demonstrate that the corporation would have prevailed or that the amount of the judgment would have been lower "but for" the failure to submit an appraisal report in the underlying action (see Rudolf v Shayne, Dachs, Stanisci, Corker & Sauer, 8 NY3d 438, 442 [2007]; AmBase Corp. v Davis Polk & Wardwell, 8 NY3d 428, 434-436 [2007]; Antokol & Coffin v Myers, 30 AD3d 843, 845 [2006]). "

The answer to this question is a qualified yes.  Attorney fees, which are unearned by virtue of the malpractice, or other fees which are spent to rectify the situation may be collected.  Here is a case from the Third Deparment on the issue. LEACH  Appellant, v.BAILLY et al., Respondents.

"Finally, turning to plaintiff’s arguments regarding the malpractice committed against him individually, we reject plaintiff’s assertion that he is entitled to fees incurred in subsequent litigation unattributable to that malpractice. We conclude, however, that he is entitled both to [*3]counsel fees paid to defendants and to counsel fees incurred upon the appeal of the adverse determination in the underlying action, which resulted from the admitted malpractice committed against plaintiff individually (see Rudolf v Shayne, Dachs, Stanisci, Corker & Sauer, 8 NY3d at 443-444; Harris v Bonacci, 65 NY2d 876 [1985], affg on op below 109 AD2d 1072, 1073-1074 [1985]). Unearned fees may be recovered in a malpractice action, and "plaintiff’s damages may include ‘litigation expenses incurred in an attempt to avoid, minimize, or reduce the damage caused by the attorney’s wrongful conduct’" (Rudolf v Shayne, Dachs, Stanisci, Corker & Sauer, 8 NY3d at 443, quoting DePinto v Rosenthal & Curry, 237 AD2d 482, 482 [1997]; see 3 Mallen and Smith, Legal Malpractice § 21:6 [2008]). The record establishes in particular, the parties’ stipulation that defendants committed malpractice in representing plaintiff that such fees and expenses total $15,342.43, and plaintiff is entitled to interest from the date that his damages were incurred, i.e., the date that the fees were paid (see Rudolf v Shayne, Dachs, Stanisci, Corker & Sauer, 8 NY3d at 442; Harris v Bonacci, 109 AD2d at 1074; CPLR 5001 [b]). "

We want to take this occasion to wish everyone a Merry Christmas and  a Happy New Year.

This holiday season has been one long story about bad economic news, swindles, bad investments, and hedge funds.  One meme of this blog has been that legal malpractice litigation is ubiquitous, and intertwined with all aspects of our world.  This is simply a reflection of the integration of law and lawyers in all aspects of our social and economic lives.

Here is another example.  An attorney is accused of pocketing $ 18 million.  The Kansas City Star reports:

"The trustee of bankrupt Ethanex Energy Inc. has sued a major multinational law firm over an alleged multimillion-dollar fraud scheme by a former partner that contributed to Ethanex’s demise.

The trustee, Eric Rajala, is seeking unspecified damages from 900-lawyer McGuireWoods, which is based in Richmond, Va., and has 17 offices worldwide. Rajala’s complaint says that McGuireWoods “was aware of, supported and profited” from the activities of the former partner, Louis W. Zehil.

"[Louis] Zehil, of Ponte Vedra Beach, Fla., was forced out of McGuireWoods in February 2007 after his alleged scheme was uncovered. Shortly afterward, federal prosecutors in New York brought criminal fraud charges against him, and the Securities and Exchange Commission brought parallel civil charges."

The criminal case is pending, with Zehil scheduled to make his next appearance in court in late April. The SEC case is also pending, awaiting resolution of the criminal case.

The SEC charged that Zehil made more than $17 million in illegal profits by selling the unregistered shares of seven energy companies, including those of Ethanex and Kansas City-based Alternative Energy Sources Inc.

“We believe that McGuireWoods is responsible for Zehil’s conduct,” said Kansas City attorney John M. Edgar, who filed the complaint on Rajala’s behalf.

William Allcott, a partner with McGuireWoods, said the firm did not believe the suit had merit."

Arbitration and legal malpractice form an uneasy fit.  One reason is that discovery is limited; another is that the case is decided by a panel of attorneys.  While in many ways a panel of "wise men" may be preferable, in legal malpractice plaintiff will generally prefer a jury.

Juries trend towards a less highly technical view of departures and damages than do a panel of attorneys.  As an example, the case of Kaminsky v Herrick, Feinstein LLP , 2008 NY Slip Op 09934 ,Decided on December 18, 2008 ,Appellate Division, First Department  provides an example.
 

Plaintiff offered evidence of $ 3.25 million damages, and eventually won about $ 300,000.  Plaintiff’s claim was that his attorneys failed to offer testimony about the share value of the case and failed to offer an expert on the direct arbitration case, relying on a rebuttal witness, which the arbitrators did not heed.

In the Appellate Division, plaintiff lost. "In this action for legal malpractice, plaintiff claims that his attorneys’ failure to offer [*2]sufficient expert testimony concerning the valuation of his damages resulted in an inadequate arbitration award. However, plaintiff fails to offer any viable legal basis upon which the arbitration panel could have reached a substantially different result. Thus, plaintiff cannot establish that the outcome of the proceedings would have been more favorable but for defendants’ asserted failure to present evidence, and the complaint must be dismissed. "

It was always a first year economy class aphorism that hemlines were positively correlated with the state of the economy.  Better finances led to brighter prospects, led to more sprightly dresses, with higher hemlines.  A downturn in the economy leads to a similar sartorial downturn.

This article from NY Lawyer  "As Economy Worsens, More Lawyers Being Targeted in Malpractice Suits" seems to say the same thing is true of legal malpractice suits.  "With financial losses piling up in the downturn, real estate lawyers have increasingly become a target of legal malpractice claims, said Bill Loucks, president of Orlando-based Florida Lawyers Mutual Insurance. He said the firm has had a 13 percent increase in real estate-related claims since January. But he said that isn’t entirely related to the real estate market collapse.

“The economy has had an indirect impact on claims, primarily on the real estate practice area,” he said. “Attorneys whose primary practice is centered around real estate went through a real estate boom. … When the real estate market fell apart, then there was a lot of very close inspection of lawyer-prepared documents.”

Clients of the insurer, which writes legal malpractice insurance, tend to be firms with small numbers of lawyers and solo practitioners.

An American Bar Association study of legal malpractice claims supports Loucks’ observations. Claims in real estate work grew 4 percent from 2004 to 2007 compared with the previous four-year period, according to the report released in September, "

Many claims against lawyers include allegations of errors in transactions ranging from conflicts of interest and closing mistakes to poorly drafted contracts and zoning and escrow issues, the study said.

“Certainly real estate problems are coming out of the woodwork in all kinds of areas. That will continue,” Trazenfeld said. “The rising market covered up a lot of legal malpractice. Now that there’s a downturn in the market all of the malpractice,” claims are sprouting.

One group of clients that are suing real estate attorneys are title insurance firms that have been accused of making legal errors in transactions. Title insurers often turn around and sue their title insurance agents, who typically are lawyers.