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Ethics & Professional Responsibility FLASHPOINTS February 2019

February 15, 2019Print This Post Print This Post

Terrence P. McAvoy & Katherine G. Schnake
Lawyers for the Profession, Hinshaw & Culbertson LLP, Chicago
312-704-3000 | E-mail Terrence P. McAvoy | E-mail Katherine G. Schnake

Fifth Circuit Reverses District Court’s Denial of Law Firm’s Motion To Dismiss Based on Application of Attorney Immunity

In Ironshore Europe DAC v. Schiff Hardin, L.L.P., 912 F.3d 759 (5th Cir. 2019), the plaintiff, an excess insurer, filed suit against a law firm for negligent representation arising out of the firm’s misstatements and omissions in the course of reporting on the litigation against the plaintiff’s insured. The district court denied the defendant’s motion to dismiss based on attorney immunity defense. The Fifth Circuit reversed, however, and found that the law firm’s conduct fit squarely within the scope of the firm’s representation of its client.

The plaintiff issued a policy of excess insurance to Dorel Juvenile Group, Inc., which contained an “assistance and cooperation” provision giving the plaintiff the right to associate with Dorel in the defense of any claim, requiring Dorel to cooperate in the event the plaintiff exercised that right, and requiring Dorel to provide promptly any litigation-related information requested by the plaintiff. 912 F.3d at 762. Dorel later was sued in the Eastern District of Texas for its design, marketing, and sale of a forward-facing car seat after a one-year-old child suffered a paralyzing spinal cord injury and a brain injury in a car accident. The defendant was retained by Dorel to defend the lawsuit.

The defendant provided the plaintiff with information about the litigation, including developments in the litigation and the defendant’s opinions of the settlement value and potential judgment value of the case. The case went to trial, and the jury rendered a verdict against Dorel and “awarded total compensatory damages of $24,438,000 and an additional $10 million in exemplary damages.” 912 F.3d at 762. The plaintiff then retained its own counsel, and the parties participated in posttrial mediation, during which a confidential settlement was agreed on in an amount that reached the plaintiff’s policy.

The plaintiff then sued the defendant for negligent misrepresentation. The plaintiff alleged that the firm made various misrepresentations and omissions in the course of reporting on the case to the plaintiff, including making false statements in verbal and written reports and failing to disclose certain information about the underlying suit’s facts and settlement and judgment value. The plaintiff also argued that it relied to its detriment on the negligent misrepresentations and that had it known the true facts about the developments in the lawsuit, settlement offers, and the danger of triggering its policy, it would have settled the underlying case for a much lower amount than the ultimate verdict or post-verdict settlement.

The defendant moved to dismiss the complaint asserting that it was entitled to attorney immunity because any communications with the plaintiff were part of the discharge of the firm’s duties to its client, Dorel. The district court denied the motion and the defendant appealed.

The Fifth Circuit reversed the district court’s denial of the motion and rendered judgment dismissing the complaint. The court’s analysis began with the question of whether the attorney immunity doctrine under Texas law shields an attorney against claims by a nonclient based on negligent misrepresentation made in the course of counsel’s representation of his clients. Having found no decisions from the Supreme Court of Texas that directly addressed this issue, the court made an Erie prediction that the Supreme Court of Texas would apply the attorney immunity doctrine to shield attorneys from such negligent misrepresentation claims.

The next question the court addressed was whether the requirements of attorney immunity were satisfied. The court noted that whether an attorney’s conduct was in the scope of his representation of a client is a legal question. The conduct at issue included reporting on the status of the litigation, providing opinions on litigation strategies, providing estimates of potential liability, reporting on the progress of the trial and reporting on pre-trial rulings and settlement offers. The Fifth Circuit found that the conduct at issue fell within the routine conduct attorneys engage in when handling this type of litigation, and the defendant’s conduct fell within the scope of the firm’s representation of Dorel.

This is a significant case because the court extended the applicability of the attorney immunity doctrine to negligent misrepresentation claims filed by non-clients and linked the firm’s alleged misrepresentations to the firm’s representation of a client, and the case underscores the broad scope of the attorney immunity defense.

Illinois Appellate Court Reaffirms Necessity of Proving “But For” Causation in Transactional Malpractice Claim

In Northern League of Professional Baseball Teams v. Gozdecki, Del Guidice, Americus & Farkas, LLP, 2018 IL App (1st) 172407, the plaintiff sued his former lawyers for legal malpractice due to their alleged failure to include an exit fee provision in a baseball league agreement after the plaintiff entered a nonmonetary settlement with four teams who left the league. The Illinois Appellate Court affirmed the trial court’s entry of judgment in favor of the defendants after a jury trial.

The plaintiff operated as an independent baseball league unaffiliated with major league baseball. In 2005, the plaintiff’s teams began to discuss the concept of exit fees. Later that year, two teams left the league, and the plaintiff filed suit against them based on the league agreement exit fee provision. Ultimately, the case settled, but the two teams did not pay any money and did not return their stock.

In 2009, the plaintiff retained the defendant to draft a new league agreement. The defendants were told to keep the exit fee provision. To keep attorneys’ fees low, the league’s commissioner provided the defendants with a first draft of the agreement, which did not contain a liquidated damages/exit fee provision. Multiple drafts of the league agreement were circulated, including one with a $2 million liquidated damages provision. The defendants subsequently spoke with one of the owners who indicated that he did not want to sign with that provision. The final draft was substantially the same as the first draft circulated in March, except that the liquidated damages provision for expulsion was reduced from $2 million to $1 million, and the draft did not contain an exit fee provision. The league commissioner reviewed the agreement, approved the draft and representatives from the remaining six teams executed the league agreement.

Four of the teams gave notice that they would depart the league after the 2011 season to join a rival association. Ultimately, the plaintiff and the departing teams entered into a mutual release and settlement in which no money was paid. The plaintiff claimed that if they had an exit fee, they would have filed a lawsuit against the departing teams and made a legal attempt to collect the exit fee. The departure ultimately caused the league to cease operations.

The plaintiff subsequently filed a legal malpractice claim against the defendants alleging they failed to include a damages provision in the league agreement that would impose $1 million in liquidated damages on teams that voluntarily withdrew from the league. The plaintiff sought as compensatory damages the $4 million that it should have been able to collect from the departing teams, but for the defendants’ alleged malpractice. The case proceeded to trial, and the jury rendered a verdict in favor of the defendants. The plaintiffs subsequently appealed.

On appeal, the plaintiff argued, among other things, that it was error for the trial court to allow testimony from two owners of the league, who stated they would not have signed an agreement containing an exit fee provision. Relying on King Koil Licensing Co. v. Harris, 2017 IL App (1st) 161019, ¶64, 84 N.E.3d 457, 416 Ill.Dec. 475, the First District of the Illinois Appellate Court held that in order to establish its case within a case, the plaintiff was required to show that it would have prevailed against the departing teams on an agreement containing an automatic exit fee provision. Accordingly, the plaintiff was required to establish that the owners in the league would have agreed to such a provision in the league agreement. The court found that it was proper to include the owners’ testimony because the jury had to consider the parties’ intent regarding exit fees.

This case reaffirms the principle that in a transactional malpractice claim a plaintiff must prove that “but for” the attorney’s negligence, the outcome of the underlying transaction would have been different and more favorable for the plaintiff. Also, it shows that testimony from a witness — who was a party to the contract at issue and concerning their intent as regards the terms of the contract — is an excellent source of evidence to prove or refute the causation element of a legal malpractice claim in a transactional setting.

For more information about ethics and professional responsibility, see ATTORNEYS’ LEGAL LIABILITY — 2018 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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