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  ETHICS & PROFESSIONAL RESPONSIBILITY FLASHPOINTS MAY 2012

Terrence P. McAvoy, Steven M. Puiszis, & Thomas P. Sukowicz
Lawyers for the Profession, Hinshaw & Culbertson LLP, Chicago
(312) 704-3000 | Email Thomas Sukowicz | Email Steven Puiszis

 

Minnesota District Court Finds Jurisdiction Over Ohio Lawyer.

In Western Thrift & Loan Corp. v. Rucci, No. 11-3644 (JNE/TNL), 2012 WL 1021681 (D.Minn. Mar. 27, 2012), the U.S. District Court for the District of Minnesota concluded that its exercise of personal jurisdiction over an Ohio attorney was appropriate in light of his activities within the state.

The plaintiff, a former client, sued the defendant attorney, alleging claims of negligence/malpractice and breach of contract relating to the lawyer’s representation of the former client in a previous legal proceeding (the “R&D Litigation”), which was pending in Minnesota. The former client was a defendant in the R&D Litigation and was initially defended by another law firm. That firm was discharged, however, and the former client then retained the defendant attorney, who was a citizen of Ohio and practiced law in Ohio and California.

The defendant lawyer was not admitted to practice law in Minnesota and so applied for admission pro hac vice in the R&D Litigation. “In his application, he ‘request[ed] permission to appear and participate as an attorney at law . . .’ and ‘agree[d] to participate in the preparation and the presentation of the case . . . and accept service of all papers served.’ ” 2012 WL 1021681 at *1. Because the defendant lawyer was not associated with local counsel, his application was denied. On April 2, 2009, the court granted the prior firm’s motion to withdraw and ordered that the former client obtain new counsel before May 1, 2009. On April 3, 2009, the prior firm notified the former client that it was withdrawing as counsel, and that it had been informed that the defendant attorney would be taking over the case. On May 5, 2009, the defendant attorney e-mailed an informal request to the magistrate judge, seeking an extension of time to associate with local counsel. The lawyer “explained that he had ‘contacted four local attorneys, but ha[d] not been able to find one willing to act as local counsel.’ ” Id. The magistrate judge denied the motion on May 12, 2009.

On May 26, 2009, plaintiffs in the R&D Litigation moved for entry of default. On June 9, 2009, the defendant attorney filed a notice of filing bankruptcy on behalf of a codefendant of the former client in that underlying litigation, which stayed the R&D Litigation. In October 2009, the stay was lifted. A pretrial conference was held on November 30, 2009, but no attorney appeared on behalf of the former client. Although the attorney had been receiving copies of all the notices and submissions in the R&D Litigation, he did not participate in any manner after filing the bankruptcy notice. On January 21, 2010, plaintiffs in the R&D Litigation again filed a motion for entry of default judgment. The court granted the motion on May 10, 2010, stating that “[the attorney] did not take the steps necessary to be admitted to practice before this court, nor did he secure substitute counsel as required by the magistrate judge’s April 1, 2009, order. The court imputes [the lawyer’s] failure to defend this case to [the former client], and default judgment is warranted on this basis.” Id. The former client subsequently entered into a settlement agreement in the R&D Litigation.

The former client then sued the attorney based on his unsuccessful attempts to associate with local counsel, failure to obtain proper admittance to the court, and failure to respond to or file any documents in the R&D Litigation, resulting in the entry of default judgment. The former client alleged that it did not know that the defendant lawyer had failed to be admitted to represent the former client, and so it did not know that it was unrepresented until it was too late.

The defendant attorney moved to dismiss based on lack of personal jurisdiction. The court initially noted that to survive a motion to dismiss for lack of personal jurisdiction, a plaintiff must establish a prima facie case that the forum state has personal jurisdiction over the defendant.

A court must view the evidence in the light most favorable to the plaintiff when deciding whether the plaintiff has made the requisite showing. . . . The court must determine whether the exercise of personal jurisdiction over a non-resident defendant complies with the state long-arm statute, and if so, whether it comports with due process. . . . Minnesota’s long-arm statute, Minn.Stat. §543.19, confers jurisdiction to the fullest extent permitted by due process. 2012 WL 1021681 at *2.

Due process allows a court to exercise personal jurisdiction over a non-resident defendant if the defendant has “certain minimum contacts with [the forum state] such that the maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice.’ ” Int’l Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 90 L.Ed. 95 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463, 61 S.Ct. 339, 85 L.Ed. 278 (1940)). The [lawyer]’s contacts with the state must be such that the defendant “should reasonably anticipate being haled into court there.” World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980).

The former client argued that the defendant attorney was subject to specific personal jurisdiction in Minnesota because the lawsuit arose out of or related to the lawyer’s contacts with Minnesota during the R&D Litigation. The defendant attorney argued that he did not have the requisite minimum contacts to be subject to personal jurisdiction in Minnesota, and that litigation there would be inconvenient for the parties. He further argued that he had never been to Minnesota, had no offices or property in the state, and was not licensed to practice law there. The defendant attorney also argued that his only communications with the former client occurred in California or Ohio, not Minnesota. The court noted, however, that the defendant lawyer’s contacts with Minnesota were his: (1) unsuccessful application for admission pro hac vice in the R&D Litigation; (2) communications with the court with respect to that application; (3) contacts with four different local attorneys in his attempt to associate with local counsel; and (4) filing of the notice of bankruptcy with the court in the R&D Litigation. These contacts were all directly related to his representation, or attempted representation, of the former client, which was the same conduct on which this suit was based.

The court found that the defendant attorney had purposefully availed himself of the privilege of conducting activities within Minnesota, and that the former client’s cause of action arose out of and related to the lawyer’s contacts with Minnesota during the R&D Litigation. The court thus concluded that its exercise of personal jurisdiction over the defendant attorney was appropriate.

This decision shows that courts are very willing to exercise personal jurisdiction over nonresident attorneys even when the lawyer’s contacts with the forum state are fairly minimal.

 

Expert Testimony Not Required To Establish Reasonableness of Attorneys’ Fees Incurred.

In Schwartz v. Bloch, No. 4D10-742, 2012 WL 1108408 (Fla.Dist.App. Apr. 4, 2012), the District Court of Appeal of the State of Florida of the Fourth District concluded that because the plaintiff, a former client, was seeking attorneys’ fees and costs as an element of wrongful-act damages, he was not required to present independent expert testimony as to the reasonableness of the attorneys’ fees.

In 2004, the former client consulted the defendant lawyers for asset-protection advice in light of his forthcoming marriage. The defendant lawyers discussed with the former client the possibility of obtaining a prenuptial agreement, but the former client informed the defendant attorneys that such an agreement was not a viable option. The defendant lawyers then advised the former client that the most effective alternative would be for him to assign his interests in family businesses to other members of his family so as not to own those assets during the marriage.

The former client followed this advice and on September 23, 2004, assigned his interests in six business entities to his father. The former client married in December 2004. On January 4, 2006, the former client’s father wrote a letter to the former client, purporting to remove the former client’s authority to run one of the businesses. The letter further stated that the former client had been “ ‘removed from the bank accounts’ and was ‘not authorized to sign checks on behalf of the company.’ ” 2012 WL 1108408 at *1. Shortly thereafter, one of the former client’s brothers told the former client that he would no longer have access to the bank accounts of the family businesses.

After a business-related feud with his father, the former client hired a second attorney and sued several members of his family, his former accountant, several of the family business entities, and the defendant attorneys. The former client’s claims against his family and his accountant settled in July 2007, but his legal malpractice action against the defendant attorneys remained pending. At trial, the former client presented expert testimony that the defendant attorneys breached duties owed to the former client by advising him to assign his assets to his father for no consideration, without advising him of other family members’ adverse interests. The former client sought wrongful-act damages for the attorneys’ fees and costs he incurred in prosecuting the claims against his family and his former accountant. The second lawyer testified to the fees and costs he charged in prosecuting the former client’s claims. However, the former client presented no independent expert testimony as to the reasonableness of the attorneys’ fees.

The former client also sought damages for harm to his interests in various business entities. Although the former client sought damages relative to 12 entities, there were only 6 assignments executed in September 2004. The jury returned a verdict for the former client with respect to some of the entities, but for the defendant attorneys as to all other entities. The jury awarded $125,000 in damages for each of 4 entities, for a total of $500,000. In addition, “the jury awarded $250,000 as reasonable and necessary attorney’s fees, costs or expenses recoverable under the wrongful act doctrine.” 2012 WL 1108408 at *2.

The defendant lawyers filed a posttrial motion for judgment in accordance with their earlier motions for directed verdict and for judgment notwithstanding the verdict. They argued, among other things, that the former client had failed to: (1) present expert testimony as to the reasonableness of his attorneys’ fees; and (2) properly prove his damages with respect to the loss of his business interests. The trial court granted the motion, vacated the damages awards, and entered final judgment in favor of the defendant attorneys.

The appellate court reversed only that portion of the trial court’s posttrial order that set aside the jury’s award of $250,000 in attorneys’ fees or costs because of the former client’s failure to present independent expert testimony to establish the reasonableness of the attorneys’ fees expended in representing the former client. The court held that such independent expert testimony was not required for fees that the former client incurred in the litigation with his family and sought as an element of his compensatory damages under the wrongful-act doctrine.

The wrongful-act doctrine provides that when

the wrongful act of the defendant has involved the claimant in litigation with others, and has placed the claimant in such relation with others as makes it necessary to incur expenses to protect its interests, such costs and expenses, including reasonable attorney’s fees upon appropriate proof, may be recovered as an element of damages. Martha A. Gottfried, Inc. v. Amster, 511 So.2d 595, 598 (Fla. 4th DCA 1987) (internal quotation omitted). This is an exception to the rule that attorney’s fees are not recoverable in the absence of a statute, contract, or rule authorizing such an award. Id.

The court held that because the former client was seeking fees and costs incurred in the litigation with his family as an element of his compensatory damages under the wrongful-act doctrine, he was not required to present corroborating testimony from an independent expert.

This case is significant because if a plaintiff is seeking attorneys’ fees incurred as a result of malpractice, he or she must generally present expert testimony as to the reasonableness and necessity of the attorneys’ fees incurred as a proximate result of the attorney’s alleged negligence. Here, although the court held that an independent expert was not necessary, the attorney who represented the former client testified at trial regarding the fees and costs charged to the former client.

 

California Federal Court Holds Buyer and Seller Protected by Common-Interest Privilege.

In Morvil Technology, LLC v. Ablation Frontiers, Inc., No. 10-CV-2088-BEN (BGS), 2012 WL 760603 (S.D.Cal. Mar. 8, 2012), the U.S. District Court for the Southern District of California held that two companies that shared attorney-client privileged documents during negotiations between them for an acquisition did not waive either company’s privilege because they shared common interests in avoiding litigation as well as in assessing the validity and enforceability of the acquiree’s patents.

During the course of negotiations in which one company (acquirer) sought to acquire another company (acquiree), the two companies shared attorney-client privileged information that had been prepared by their respective lawyers. There was no written common-interest agreement. The privileged documents pertained to, inter alia, the enforceability and scope of the acquiree’s patents. The plaintiff in the instant action against both the acquirer and the acquiree (defendants) sought production of the documents, arguing that each party had waived privilege by sharing the documents with the other party. The defendants, however, asserted that the documents were protected by the common-interest privilege.

The U.S. District Court for the Southern District of California held that the documents were protected by the common-interest privilege because the defendants shared the documents to further the companies’ common interest in avoiding or reducing litigation. The court cited authority from the Northern District of California for the proposition that a buyer and seller are protected by the common-interest privilege when they jointly anticipate litigation. Because it was unclear whether the defendants here had actually anticipated litigation, the Southern District also cited authority from the federal circuit indicating that the common-interest privilege applies to joint efforts to avoid or reduce litigation, which was ultimately the rule the Southern District relied on.

The court alternatively held that the documents were protected by the common-interest privilege because the defendants had a common legal interest in determining whether the acquiree’s patents were valid and enforceable.

This opinion highlights a circumstance in which documents shared outside of litigation — even by companies on opposite sides of a transaction — can remain protected by the attorney-client privilege. The common-interest doctrine is technically an exception to a waiver of the attorney-client privilege and is most commonly present in a litigation setting when parties with aligned interests seek to share information without waiving privilege. Here, it appears that the court was willing to recognize a very broad scope of protection as long as the privileged communications were shared in an effort to anticipate, avoid, or reduce litigation or to ensure the efficacy of the intellectual property at the core of the transaction.

 

Bankruptcy Court Authorizes Destruction of Client Files.

In In re Howrey LLP, No. 11-31376 (Bankr. N.D.Cal. Mar. 2, 2012) (see also Chapter 11 Trustee’s Motion for Order Authorizing Procedures for Disposition of Client Files, Feb. 29, 2012), the Bankruptcy Court of the Northern District of California granted a motion by the trustee of a bankrupt law firm allowing the trustee to destroy client files that remained in the firm’s possession after giving notice to affected clients and an opportunity to claim such files.

Following the dissolution of a national law firm, the Chapter 11 trustee handling the firm’s bankruptcy moved the bankruptcy court to adopt a process for dealing with the disposition of client files. The court granted the trustee’s motion and adopted the proposed procedures. Those procedures set out detailed requirements for notifying affected clients, but generally allowed for the destruction of unclaimed files following a waiting period triggered by such notification.

The files at issue generally related to closed matters. Most of the firm’s active files had been transferred to different firms. Nonetheless, the remaining files were substantial, amounting to roughly 220,000 boxes and costing roughly $55,000 per month to store. At least one third-party storage facility had threatened to auction off such files in the event its storage fees were not paid.

The trustee claimed to have authority to abandon the files under §§541 and 544 of the Bankruptcy Code. Section 541 defines “property of the estate” broadly and §544 authorizes the abandonment of property that is burdensome to the estate or of inconsequential value. Despite such authority, the trustee found it prudent to adopt procedures that were guided by the ethical rules applicable to attorneys.

The trustee looked to guidelines for dealing with client files contained in rules related to termination of representation and the sale of a law practice. Those rules provided guidance for the procedures related to client notification and the appropriate waiting period following notification.

Moreover, concerns regarding client confidentiality, combined with concerns about the cost of storage, led the trustee to propose destruction of unclaimed files as the best course of action. And while many jurisdictions’ ethical rules require the preservation of client files for a certain number of years, the trustee’s motion noted that such rules do not expressly contemplate bankruptcy. The procedures did, however, provide for the preservation of certain documents with intrinsic value, such as wills and trusts, or documents related to criminal defense.

This disposition provides one reasoned and principled approach to the handling of client files by bankrupt law firms. Ethical rules can, and in this case do, provide some guidance. It should be noted, however, that jurisdictions vary regarding lawyer responsibility for closed files. Moreover, a bankruptcy trustee may be concerned principally with the bankrupt law firm’s obligations, whereas the court ultimately also must be mindful of the individual lawyers and the clients whose interests may be impacted as well.

 

Ninth Circuit Reverses Sanctions for Failure To Consider Willfulness, Fault, or Bad Faith.

In R & R Sails, Inc. v. Insurance Company of State of Pennsylvania, 673 F.3d 1240 (9th Cir. 2012), the U.S. Court of Appeals for the Ninth Circuit held that the imposition of terminating sanctions under Fed.R.Civ.P. 37(c)(1) requires the court to consider willfulness, fault, or bad faith, as well as the availability of lesser sanctions.

This matter involved a dispute between an insured and an insurer over the extent to which the insured’s loss was covered. The insured brought, inter alia, a bad-faith tort claim against the insurer based on the insurer’s denial of coverage. The insured also sought recovery of its attorneys’ fees reasonably incurred to compel payment of the policy benefits. In California, such fees are known as Brandt fees. See Brandt v. Superior Court of San Diego County, 37 Cal.3d 813, 210 Cal.Rptr. 211 (1985).

In its pretrial memorandum, the insured indicated that it would support its Brandt fees claim with certain invoices. Over the following months, the insurer sought such invoices to no avail. For not producing the invoices, the U.S. District Court for the Southern District of California ultimately sanctioned the insured under Fed.R.Civ.P. 37(c)(1) by excluding the insured’s Brandt fees evidence. Fed.R.Civ.P. 37(c)(1) forbids use of information at trial that was not properly disclosed under Fed.R.Civ.P. 26(a), but it also provides for alternative or additional types of sanctions. In this case, the lack of evidence resulting from the sanction led the district court to grant the insurer’s motion for judgment as a matter of law.

The Ninth Circuit reversed and remanded, holding that the district court had not made adequate findings to support its sanction. The Ninth Circuit held that the evidence preclusion sanction was particularly harsh because it fully undermined the insured’s Brandt fee claim as well as the insured’s request for punitive damages. In the court’s words, the sanction amounted to dismissal of a claim (i.e., a terminating sanction).

The Ninth Circuit held that a sanction that amounts to dismissal requires consideration of willfulness, fault, or bad faith, as well as the availability of lesser sanctions. Because the district court failed to undertake such considerations, the Ninth Circuit reversed and remanded.

This opinion provides that imposition of a terminating sanction, or a sanction amounting to such under Fed.R.Civ.P. 37(c)(1), requires consideration of willfulness, fault, or bad faith, as well as the availability of lesser sanctions. The Ninth Circuit previously has made clear that such considerations must accompany terminating sanctions under other sanctions rules. This opinion, for the first time, expressly and directly recognizes the applicability of such considerations under Fed.R.Civ.P. 37(c)(1).

 
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