LEGAL MALPRACTICE LAW PROBLEMS AND PREVENTION By Susan Saab Fortney George Mahon Professor of Law Texas Tech University Vincent R. Johnson Professor of Law St. Mary's University AMERICAN CASEBOOK SERIES® THOMSON * VVEST Mat #40506218 Table of Contents PREFACE ................ . . ... . .... ... . . ........... . ..... ... v ACKNOWLEDGMENTS ... . ... . .. ... .. ...................... . .. vii SUMMARY OF CONTENTS . . ...... . . . ... .... ... .. . ...... . ..... . xi TABLE OF CONTENTS . .. ........ ....... .. . .. . .... ........... xiii TABLE OF CASES ... . ... ... . .. ... . . .. ....................... xxi TABLE OF BOOKS AND ARTICLES . ... ... .. ... .. . . . .. .... .. . .. . xxix Chapter 1. Introduction to Legal Malpractice . . . . . . . . . . . . . . . . 1 A. The Increase in Legal Malpractice Exposure and Litigation ..... 2 1. Changes in Client Attitudes and Expectations ... . .... .. .. . 2 Legal Malpractice: When the Legal System Turns on the Lawyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Notes on Expectations and Malpractice Exposure . .... .. 8 2. Changes in the Legal Profession That Mfect Malpractice Liability . .. ... . . ................................. 8 3. Expansion in the Theories of Liability ... .... . . . . ... .... . . 9 4. Statistics on Legal Malpractice Claims .................. 10 B. The Role of Malpractice Education and Risk Management in Avoiding Costly Claims .. . . : . . . . ...... ... . . . . ....... 12 Problem 1-1: What is Your Malpractice Intelligence Quotient (I.Q.)? .... ...... ..................... 13 Chapter 2. Overview of Theories of Liability . .. ...... . ... . .. A. Legal Malpractice Defined .. . .... .. .. .... . ...... .. ... . ... . B. Principal Theories of Liability ... . . ... . ... ...... . ... ....... 1. Theories Covered in the Restatement .. ........ . .. ... ... 2. Consequences of Classification . . . . . . . . . . . . . . . . . . . . . . . . . a. Pleadings and Proof ... .. ......................... b. Defenses. .. ... .. . .. . .. ... .. . . . . . . .... ....... . . . . c. Insurance ........ .. .. . . . . . .... .. .... .. . . . .. . . ... d. Respondeat Superior .... . .. .. .. . . ...... . ... .. ..... e. Remedies . ... ... .... .. . ........ . .. .... . ... ... . .. f. Discharge in Bankruptcy . . .. . ...... . .. . ..... . .. . .. 3. Differentiating Claims ..... ..... .. ........ . ... . . .. .. . . Fiduciary Duty, Tort and Contract: A Primer on the Legal Malpractice Puzzle . . .... .. . C. Differentiating Clients, Prospective Clients, and Nonclients .... D. Differentiating Legal Malpractice from Discipline .. .. . .... . . . Xlll 15 15 16 16 17 17 18 19 19 19 20 21 21 29 30 LEGAL MALPRACTICE LAW xiv 1. 2. 3. Purpose and Prosecutor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Procedures and Decision-makers ... .. .. .... . .... . . ..... Effect of Ethics Rule Violations . . .. ... . ... . . . .. . .... . . . Problem 2-1 : Investigating and Asserting Claims . . . .. . 30 31 31 33 Chapter 3. Negligence . . . .. . . .... ... . . .. ... ... . .... . ...... A. Duty to Exercise Care .. . . .. .. .. .. ........ . . .. ...... . . . .. 1. To Whom is a Duty Owed? ... ... . . . . .. . . ............ .. a. Clients .. ... . . ........ . . .... .. .. ... .. ... . .. ..... b. Prospective Clients . . . . .... .... .... . .. . . .. .. . ..... Problem 3-1: Potential Clinic Clients . ... . .. . . . . .. c. Class Members ....... . . .. . . ... ... . .... . . ... . .... 2. Scope of Representation . . . ... ..... ... .. . . ...... .. ... . Lerner v. Laufer .... . . ... .. . ..... ..... . .... ... . . . Notes on Termination of Representation ...... . . . ... . . Problem 3-2: The Public Housing Litigation ...... ... .. B. Breach of Duty . . .. . .. .. ..... . .. .. . .. . .. . . ... ... . ... .. . . 1. The Standard of Care ... . . .... .. .. . .. . . . .. . . .... .. ... 2. Exercise of Judgment .. . .. .. . .. .. . . ...... . ..... . . .. .. Darby & Darby, P.C. v. VSI International, Inc. . .. . ... . Problem 3-3: Standardized Testing Errors . . . ... .. .... 3. Expert Testimony ...... . .... . .. .. . . ..... ... . .. . . . . .. Problem 3-4: The Expert Witness's Dilemma . .... . . ... 4. Specialists and Novices . . ....... . .. . . . .... . .... . .. ... . 5. Negligence Per Se in Legal Malpractice . .. . ... . .. . ... .. .. 6. Informed Consent in Legal Malpractice . ............ . .. . . Problem 3-5: The Veteran's Appeal ........... .... .. . Misrepresentation by Lawyers about Credentials or Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Causation . . ......... .. .. .. . ....... . .. .. .. ... ... .. . . . . . 1. Factual Causation: The But-For Test .. . ...... . . . . ... . . . . a. "Trial-within-a-Trial" Analysis ... . . .. . .... . .. .. ..... b. The Test for Factual Causation .. .. . . . ...... . ... . . . . Notes on Factual Causation .. .. .... . .. . . .. .. ... . c. Loss of a Chance .. . . ... .. . ... . . .. . . ....... . ...... Vahila v. Hall ... . . . ... .... . . .... . . . ....... ... Problem 3-6: The Summer Associate's Memo . .. .. . . 2. Proximate Causation .. ... ... .... ... .. .. . ........... .. a . In General ... . .. . . .. ... ........ . .. . .... ........ . b. Super seding Causation and Shifting Responsibility . .. . Problem 3-7: The Withdrawal Misstep . .. . . . .. . . .. 35 36 37 37 38 39 39 40 42 49 50 51 51 52 55 57 59 70 71 72 73 74 Chapter 4. Breach of Fiduciary Duty .. .... . . ... . ... .... .. . A. Changing the Language of Duty . .. . . . .. . . . . . . ... . . ... .... 1. The Measured Language of Negligence . ...... . . . .. . . . . . 2. The Demanding Language of Fiduciary Duty . .. . . . . .. . .. 3. The Interplay of Negligence and Fiduciary Duty .. . .. . . .. 75 79 79 79 82 84 89 90 93 94 94 97 99 101 101 101 101 102 TABLE OF CONTENTS xv 4. Lawyers and Strict Liability ...................... .. .. 5. Expert Testimony on Fiduciary Duties . ..... . ...... . ... 6. Fiduciary Duties and Causation of Damages ........... . 7. The Statute of Limitations for Fiduciary Breach . .. ...... Disclosure Obligations ....... ... ..... . . .... . .. . . . .. . .... ''Absolute and Perfect Candor" to Clients ..... . . . .. . ..... Fee Forfeiture . .... .. .. ...... ..... .... .. ... . ..... .. . ... Burrow v. Arce .......... .. .... . ........... ..... . ... Problem 4-1: "We are Just Friends" . . . ......... . . .... . . Aiding and Abetting a Breach of Fiduciary Duty ......... .. . . l. A Dangerous Theory of Lawyer Liability . . . . . . . . . . . . . . . . 2. Duties to Clients Versus Duties to Nonclients ... ..... ... 3. Tort Principles on Aiding and Abetting . ... ......... . ... 4. Implications for Corporate Policy Making ....... .. . ..... 5. Circumstantial Evidence of Knowledge . .. .. ....... . . .. . 6. Substantial Assistance ........ . .. .... ... .. . .... .. . .. 7. Privileges and Defenses . ..... . ..... . . ... . ............ Problem 4-2: The New Golf Course .... .......... .. . Intra-Firm Fiduciary Duties .. . . ......................... 103 104 104 105 105 105 112 112 116 117 117 119 119 120 122 124 125 127 128 Chapter 5. Duties to Nonclients ....... . .... ... . .. . . .. .. ... A. Historical Development . . . . .... .. . ..... . . . .. . . ... . .. . .. . l. The Privity Obstacle . . . ... . .. ...... . .... .... ... ... .. 2. Exceptions to Privity ........ .... .... . ... .. .......... 3. Modern Nonclient Litigation .... . . . .... . ... . ....... . .. 4. Statutory Limits on Nonclient Liability ... . ....... .. .... 5. Successors in Interest .... . . .. . . . .. . ....... . ........ . B. Fraud on Nonclients ... .. .. .. ... . ....... . .. . .. ..... ... . . l. A Primer on the Law of Fraud ... ..... .... .... . ..... . . a. Tort Law and Other Common Law Remedies ... .. ... . b. The Elements of Deceit ......... .. ....... . .. . ..... c. Scienter . . . . ... .... . ........ . . . .. . . .. . . .... . ... d. Types of Misrepresentation ............. .. . . . ..... e. Actions Based on Nondisclosure (Silence) .... ...... . . f. Opinion v. Fact ......... . .... .. ... .. ........ . ... 1. "Puffing"...... . ..... . . .. .... .. .......... ii. Words of Qualification . ... . . ... .... . ... . .. . iii. Implicit Statements of Fact ... . . . .. ......... iv. Intentions .......... . ............. . ...... g. Actionable Statements of Opinion ... ... ........ .... h . Statements of Law ......... ...... .. . . ... . .. ..... . 1. Justifiable Reliance .... . .. . .. . . ... .. . . .... .. . .. .. J. Intent to Induce Reliance or Expectation of Reliance ... k. Resulting Damages . . ..... . . .. .. . .. .. .... .... .... Problem 5-1: The Scaffolding Rental Business . .... C. Deceptive Trade Practices Acts .......... . ... . ..... . .. . .. . l. Culpability Requirement ... ....... ..... . .. ... ..... . . . 133 133 133 134 136 137 138 139 140 140 141 141 141 143 144 145 146 146 147 147 148 149 150 150 151 152 152 B. C. D. E. xvi LEGAL MALPRACTICE LAW 2. Applicability to Lawyers . ... ... . . . . .... . . . . .. . .. . . .. . 3. Advantages Over Common Law ......... .. ...... ... .. . 4. Multiple Damages .. ... . .. .... . . ... . .... . .... . .... .. 5. Suits by Nonclients . . .. .. . . ..... . . ... . ... . . . .... . ... Negligent Misrepresentation . ..... . .. . . . . . ..... ... . .. .... Problem 5-2: The Tax Shelter Opinion Lett er ... . ..... . . . Claims Based on Representation of Fiduciaries .. . .. . .. . .. . . . Funds and Property of Nonclients .... .. .. .. . .. .. .. . . .. . . . Problem 5-3: Disputed Settlement Proceeds . .. . .. . ...... Intended Beneficiaries . . . .... .. . .... . .. ... .. .. .... . ... . . 1. Invalid Wills .. . .. . . . .. .... ... ... .. . ... . .. ... . . . . . . . 2. Other Intended Beneficiaries . . .. ... ..... . .. . .. ... . . . . Problem 5-4: The Mis-Drawn Easement . ........ . . . . Duties to Other Lawyers .. .. .. . . .. . . .. . . ....... .. . .... . . 1. Duties to Outside Co-Counsel . . . . . . . . . . . . . . . . . . . . . . . . . Beck v. Wecht .... . . .... .. .. . . .. .. .... .. .. ... ... 2. Retaliatory Claims for Malicious Prosecution . . . . . . . . . . . . Duties to Litigation Adversaries .. . ......... . ... .. .. . . . ... 1. The Litigation Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Problem 5-5: The Enlarged Legal Team . . . ... . .. . . . . 152 153 155 155 156 160 161 162 163 164 164 168 169 170 170 170 174 177 177 179 Chapter 6. Remedies for Legal Malpractice ....... . .. . ..... A. Compensatory Damages .......... ... . . .. .. . . . . ...... . . . 1. Basic Rules .. . . .... .. ...... . . ... . . . . . . .. . ..... . .. .. a. No Speculation and Reasonable Certainty ... .. . ... . . b. Proximately Caused Losses . ... . . . . .... . . .. .. ..... c. Emotional Distr ess Damages .. ....... . .... . .... . .. d. Harm to Reputation ..... .... . . . .. . . ... . . . ... ... . e. Attorney's Fees as Compensatory Damages . . . . ..... . f. Adjustments to the Calculation of Damages . .... . .... Problem 6-1: The Structured Settlement . . . . ... . . B. Punitive Damages .. ..... . ........ .. .. . . . . . .......... . . 1. State Law Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Constitutional Limitations . .. .. . . .. . ...... ......... .. a. Due Process and the Amount of Punitive Damages . . . . b . Vicarious Liability for Punitive Dama ges .. . . . . .. . ... Problem 6-2: Overbilling Clients .. ....... .. . .. .. 3. Liability for "Lost Punitive Damages" . ... .. ... . .... . ... Tri-G, Inc. v. Burke, Bosselman & Weaver ... . . . ... .. Problem 6-3: The Nursing Home Litigation . . ...... .. C. Restitution .. .. ... . ... . . .. . . .. . .... . ... .. . . ... . . .... .. 181 181 181 181 182 183 185 186 187 187 188 188 191 191 198 198 199 199 202 203 Chapter 7. Defenses and Obstacles to Recovery ... ... . . .... A. Contributory Negligence, Comparative Negligence, and Comparative Fault ..... ... . . . ... . . . .. . .. . .. . ... .. ... 1. Conduct Contributing to the Plaintiffs Harm .. .. ... ..... Problem 7-1: The Lawyer as Client .. . .... ..... ... .. 205 D. E. F. G. H. 1. 205 208 209 TABLE OF CONTENTS xvii Avoidable Consequences and Failure to Mitigate ......... Borley Storage and Transfer Co., Inc. v. Whitted ..... . Notes on Mitigation .. . .... .. ... .......... ..... ... Problem 7-2: The Flawed Trust .. ... . .. . . . ........ . Unlawful Conduct .. .. ... .. .. . .. .. . .............. ..... . 1. In General ... ... .. .. . ............... ..... ......... 2. The Exoneration or Innocence Requirement in Criminal-Defense Malpractice ....... .. ............ Caanan v. Barte .... . ...... . .. . .. .. ... .. .... ... . . Notes on Unlawful Conduct ... .. ... .. .. ... ... . ... . Problem 7-3: Client Fraud on Investors ....... . ..... Malpractice Statutes of Limitations .. ... .. . . . ........ . .... 1. In General .............. ... .... . . .. .. ..... . .... .. . 2. Commencement of the Running of the Statute .. .. ....... Problem 7-4: The Failure to Notify the Insurer ..... . . 3. Tolling .. ... .. ... .. .... ........... . . ....... . .... . . . a. The Discovery Rule .............................. Humphreys v. Argabrite . . .... . ............. . .. Note on Discovery of Malpractice .... .. . . ..... .. b. The Continuous Representation Rule ........ .... ... DeLeo v. Nusbaum ......... .. ......... .. .. . . . Notes on the Continuous Representation Rule ... .. Problem 7-5: The Missed Maritime Defense .. ..... c. Fraudulent Concealment ..... . .. . . . .... . . ...... . . Non-Assignability of Legal Malpractice Claims ..... .. .. . .... Problem 7-6: A Deal With One of the Defendants . ... ..... Joint Liability and Reimbursement ...................... . Releases and Covenants Not to Sue . ... .. . . ... .. .......... Problem 7-7: The Wrongful Incarceration Release ... .. ... Notes on Settlement and Contribution .. .. ... . .. . . '.... . Immunities and Privileges . .... ............. . ........ . . .. Arbitration Agreements . ... ...... ..... .. .. . ............. Problem 7-8: Pleading Malpractice Defenses . . . .. . . . .. ... 209 210 212 214 215 215 2. B. C. D. E. F. G. H. Chapter 8. Vicarious Liability .......... .. ................ A. Firms, Employers, and Partners ....... .. .... ............. 1. Development and Structure of Law Firms .... .. . ..... ... Notes on the Development and Structure of Law Firms 2. Agency Principles .. .. ......... .. ........ ..... ....... 3. Joint and Several Liability .................. . ........ Notes on Vicarious Liability ........ .. .... . .... . .. . Problem 8-1: The Wanted Partner .... .. ... ... .. ... . 4. Supervisory Responsibility and Liability ..... . .......... B. Limited Liability Law Firms .... ... . .... ... ... . . .. . ...... 1. Advent and Characteristics of Organizational Structures .. Organizational Choices of Professional Service Firms: An Empirical Study . .............. ... ..... . .. 216 216 219 221 221 221 223 224 225 225 225 228 229 229 232 234 235 236 239 239 244 245 246 247 249 252 255 255 255 257 257 261 262 263 264 266 266 266 xviii LEGAL MALPRACTICE LAW Problem 8-2: The Hot Potato Client . . . ....... ....... Evaluating Liability of Lawyers Practicing in Limited Liability Firms . .......... ... . ..... . ... ... .. ... .. Problem 8-3: Looking for Shelter . ... . . . . .. .... .. .. . 3. Unresolved Liability Issues Related to Practice in LLPs . . . Professional Responsibility and Liability Issues Related to Professional Limited Liability Partnerships ..... Problem 8-4: Am I My Partner's Keeper? ............ C. Other Associations that Expose Lawyers to Liability for the Conduct of Other Lawyers .. . .. . ... .. .. .. .... .. . . .. . . 1. Referral Fee Arrangements ... . ... .. ........... . .. ... 2. Negligent Referral .................................. 3. Co-Counsel Arrangements .. .. .. .. ......... . ... ... ... 4. "Of Counsel" Arrangements .. .. .. . .... .... .. .. ... . . . . 5. Office-Sharing Arrangements ... . ... . .... .. ... .. ...... Problem 8-5: Pals or Partners . . . ........ . . . . ... . .. 270 2. Chapter 9. Important Malpractice Traps .. . . .... ........ . . A. Client Relations Errors ................................. 1. Client Screening . . ........ .... . ... ..... . ....... . ... . 2. Client Communication and the Failure to Keep Clients Reasonably Informed ... .. ... . . . ... . ... . .... .. ... B. Conflicts of Interest ..... .. ..... ... .... . ... . ... . ..... . . . 1. The Nature and Consequences of Conflicts of Interest ... . . 2. Analyzing Conflicts and Obtaining Informed Consent .... . Conflicts of Interest .. . .. ...... ... .. ...... .. ... . .. Problem 9-1: Know Your Conflicts and Clients .. . ..... 3. Practical Issues Related to Written Disclosure and Informed Consent ... . .. .... . ... ...... . . . ..... . .. 4. Advanced Waivers .. ...... . ......... ... . . ........ ... Professional Responsibility News on "Thrust-Upon" Conflicts, Advance Waivers of Future Conflicts . . .. C. Litigation Errors . . . .. . . . . . ... .. . . ......... . ... . ..... . . . 1. Missed Deadlines .. .. .. ... . .... . ........... . ........ Top 10 Ways Not to Blow a Statute of Limitations ..... 2. Appellate Malpractice .. . . .... ...... ... .. . .. ... ...... Appellate Malpractice ..... . ...................... Notes on Appellate Malpractice ... ... . ... ... ... . . .. 3. The Exercise of Judgment in Litigation .... . .. . ........ . Problem 9-2: Lawyer's Exercise of Professional Judgment in Litigation ........................ 4. Settlement Errors . ..... ..... . . ............... . . ... . Thomas v. Bethea . .......... . . . ....... .. ... . ... . Notes on Post-Settlement Malpractice Claims ........ Problem 9-3: Inadequate Settlements ............... D. Business Transactions with Clients .................... . . . 1. General Concerns .......... . ...... .. .... . ... ...... . 271 272 272 272 279 280 281 284 285 286 287 288 289 289 290 291 293 293 295 297 302 303 304 305 306 307 308 311 311 313 314 314 315 316 325 326 326 326 TABLE OF CONTENTS 2. Fee Arrangements .................................. a. Taking Stock in Lieu of Fees . . ..... . .... ... . . . . ... The Decline in Lawyer Independence: Lawyer Equity Investments in Clients ............... b. Modifying Fee Agreements ............ . .. .. ....... Changing Fee Agreements During Representations: lVhat Are the Rules? ....................... 3. Entrepreneurial Activities with Clients .. . ....... . . . .... Risky Business Transactions with Clients .. ... . . ..... E. Breach of Confidentiality ............ . ... . ............... Problem 9-4: Liability for Breaches of Confidentiality ..... F . Representing Entities . ................... .... .......... 1. General Traps Associated with Representing Entities ..... Ethical Considerations lVhen Representing Organizations .................. . ............ 2. Lawyers Serving As Corporate Officers and Directors 3. Risks Associated with Sarbanes-Oxley (Sarbanes) .... . ... Problem 9-5: Dealing with Constituents ............. Chapter 10. Preventing Legal Malpractice .. . ....... . ...... A. What is Law Practice Risk Management? ..... ..... ........ B. Client Management Procedures . ............... .. ........ 1. Screen Prospective Clients ............ . .......... .... 2. Conduct a Thorough Conflicts Checks .................. Fortifying A Law Firm's Ethical Infrastructure: Avoiding Legal Malpractice Claims Based on Conflicts of Interest .. .. . . .. .. .... . ............ Problem 10-1: Conducting Conflicts Checks and Analyses .. ............... .. ............ .... 3. Use Non-Engagement Letters ............ . ............ 4. Obtain Signed Engagement Agreements ................ 5. Cement Client Relations .......... . .. ... . . ........... 6. Use Care in Terminating Representation . . ... .. . ...... . C. Administrative and Work Control Systems .......... .... .. . D. Human Resources Management ...................... ... . Managing Lawyers' Risks at the Millennium ............ Notes on Human Resources Management ............... Problem 10-2: All for One, One for All? ................. Chapter 11. Legal Malpractice Insurance .................. A. Why Study Legal Malpractice Insurance ....... .. ...... . ... B. What Type of Coverage is Available ....... ..... ........... C. The Anatomy of a Policy ..... . . .. ........... . ........... 1. What Are the Specific Policy Terms for the Named Insured: The Declarations Page ............... .. ... 2. What Do Policies Cover: Insuring Agreements ........... 3. What Policies Don't Cover: Exclusions .................. xix 327 328 328 332 332 341 342 346 348 349 349 350 364 365 366 369 371 372 373 375 376 389 389 390 392 393 394 396 397 400 401 403 403 405 405 406 406 409 xx D. E. F. G. LEGAL MALPRACTICE LAW a . Exclusions Eliminating Coverage Not Intended to be Provided under a Legal Malpractice Policy . ..... . b. Exclusions Relating to Extraordinary Risk . .... . ... .. c. Exclusions Relating to Moral or Illegal Risks . . . .. . ... 4. What Typical Conditions Mfect Coverage . .. ... .. . .... .. Problem 11-1: What Insurance is Available for the Lawyer Wearing Different Hats? . . . .. . .. .. ... .. . Recognizing How Firm Changes Mfect Coverage .. . . . . . . . . . . Problem 11-2: What is Your Insurance Intelligence Quotient (I.Q.)? . . ... ....... .... .... . . . .... . .. . .. Obtaining Insurance . . .. . .... . ..... . ..... ..... . . . .. .. . . 1. What to Consider in Purcha sing Insurance . ..... .... .. . . 2. How to Apply for Insurance . .. .. . .. . . . . . . . . . .. .... ... Handling Claims . . .. . ....... . ... . ... . . . .. . . .. .. . .. .... . 1. Give the Insurer Prompt Notice . .. ..... .. .. . . . .. .... . . 2. Understand Coverage Issues . . .. . . .. .. ... . .. . .. .. . ... 3. Do Not Write Internal Memoranda ....... ... .... .. . .. . 4. Monitor Defense Counsel and Settlement Offers . ... . .. . . Informing Clients When Lawyers Discover Their Own Malpractice .. . ... . . . .... .. . . ...... . .. . . ..... .... . .. Problem 11-3: Why Give the Client and the Insurer Bad News? .. ... ..... . . . .. . .... . . ... . . ... .. .. 409 410 411 412 412 413 414 415 415 417 418 418 419 420 420 421 424 Index . . . . ... . . . . .. .. ..... . . . ....... . .. . . . .. .. . . ........ . 425