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LEGAL MALPRACTICE WITH PROPERTY SETTLEMENTS
© 1995 National Legal Research Group, Inc.
While equitable distribution has brought economic justice to the marital partnership, it has brought economic liability to family law practitioners. Counsel in family law cases must deal with complex classification and valuation issues, often complicated further by the other spouse's effort to hide assets and asset values. Most equitable distribution cases are resolved by settlement. But once a settlement is achieved, there is no guarantee that the client will remain satisfied with the result. In many cases, the client may seek modification of the decree; if that tactic does not succeed, the client may find fault with his divorce lawyer. Will the client's agreement to a negotiated property settlement bar the client from later suing his or her lawyer for malpractice?
Courts in several recent cases have allowed malpractice suits to go forward even though the property settlement was reviewed and approved by the court in the divorce proceeding. In a few cases outside the divorce context, however, courts have taken the opposite view and held that a settlement precludes a subsequent malpractice suit. In some jurisdictions, the issue remains unsettled.
Part I of this article discusses the minority view - that settlement bars a subsequent malpractice suit. Part II discusses the majority view, as applied in recent equitable distribution cases. Part III briefly raises some other issues concerning malpractice and settlements.
For additional discussion, see Annot., "Legal Malpractice in Settling or Failing to Settle Client's Case," 87 A.L.R .3d 168 (1978 & Supp 1994); Annot., "Attorney's Liability for Negligence in Cases Involving Domestic Relations," 78 A.L.R. 3d 255 (1977 & Supp. 1994); and 2 R. Mallen & J. Smith, Legal Malpractice SS 17.15, 24.36 (3d ed. 1989 & Supp. 1993).
I. Settlement as Bar to Subsequent Malpractice Suit
Leading Case. The leading case for the minority view is Muhammad v. Strassburger, McKenna, Messer, Shilobod & Gutnick , 526 Pa. 541, 587 A.2d 1346 (1991), a malpractice case stemming from the plaintiffs' dissatisfaction with the settlement of their medical malpractice action. Citing the strong public policy which encourages settlements, the Pennsylvania Supreme Court declared that a dissatisfied plaintiff may not file a malpractice suit against his attorney following a settlement to which that plaintiff agreed, unless he or she can show that he was fraudulently induced to settle the original action. The court said that to allow negligence or breach-of-contract suits against lawyers after a settlement has been negotiated by the attorneys and accepted by the clients would "create chaos in our civil litigation system." 587 A.2d at 1349. Lawyers would be reluctant to settle a case for fear some enterprising attorney representing a disgruntled client would find a way to sue them for something that could have been done but was not, the court said. On the public policy issue, the court noted that settlement of civil litigation is critical to the courts' management of their caseloads. "Second bite" cases - litigation concerning litigation - should be viewed with a jaundiced eye because they require twice the resources of a single case, yet they resolve only a single litigant's claims, the court said. More importantly, the court noted, settlements reduce the stress and negativity associated with protracted litigation and benefit society as a whole by allowing litigants to return to the productive and positive aspects of their lives. The court said, however, that there must be redress for the plaintiff who has been fraudulently induced into agreeing to settle. If the lawyer knowingly commits malpractice, but does not disclose the error and convinces the client to settle so as to avoid the discovery of such error, then the client's agreement was fraudulently obtained, the court explained.
Other Cases. In some cases in other states, courts have held that the settlement of the underlying suit barred a plaintiff's malpractice action against the attorney who handled the underlying claim. For example, in Mitchell v. Transamerica Insurance Co. , 551 S.W.2d 586 (Ky. Ct. App. 1977), the plaintiffs brought a malpractice action against their attorney, alleging that the attorney allowed the statute of limitations to run on the plaintiffs' personal injury suit. The appellate court found that because the plaintiffs were able to bring the same cause of action in another jurisdiction that had a longer statute of limitations, and ultimately received a substantial settlement there, they failed to prove that they suffered any damages as a result of the attorney's malpractice. Their argument that they could have received more damages if the cases had been tried in Kentucky was a matter of "conjecture and speculation," the court said. Id. at 588; see also Douglas v. Parks , 68 N.C. App. 496, 315 S.E.2d 84, review denied , 311 N.C. 754, 321 S.E.2d 131 (1984) (because plaintiff affirmed the settlement agreement, he was precluded from bringing a malpractice suit against the attorney who represented him in the original action); Glenna v. Sullivan , 310 Minn. 162, 245 N.W.2d 869, 873 (1976) ("To allow a client who becomes dissatisfied with a settlement to recover against an attorney solely on the ground that a jury might have awarded them more than the settlement is unprecedented"); Davenport v. Stone , 548 So. 2d 945 (Fla. DCA 1988) (plaintiff could not maintain a lawsuit for attorney malpractice since plaintiff voluntarily entered into a settlement agreement in the underlying suit, was fully advised by competent counsel, and suffered no damages).
II. Settlement Does Not Bar Subsequent Suit
The dissent in Muhammad v. Strassburger, McKenna, Messer, Shilobod & Gutnick, supra , derided the majority decision as declaring a "LAWYER'S HOLIDAY." 587 A.2d at 1352 (Larsen, J., dissenting).
Courts in other states have not rushed to adopt the Pennsylvania Supreme Court's view that a dissatisfied litigant can recover for legal malpractice in negotiating a settlement only in cases involving fraud. On the contrary, courts in recent divorce cases have expressly declined to accept that position. Grayson v. Wofsey, Rosen, Kweskin & Kuriansky , 231 Conn. 168, 646 A.2d 195 (1994); Ziegelheim v. Apollo , 128 N.J. 250, 607 A.2d 1298 (1992); Baldridge v. Lacks , 883 S.W.2d 947 (Mo. Ct. App. 1994).
In Ziegelheim v. Apollo, supra , the New Jersey Supreme Court said that "litigants rely heavily on the professional advice of counsel when they decide whether to accept or reject offers of settlement, and we insist that the lawyers of our state advise clients with respect to settlements with the same skill, knowledge, and diligence with which they pursue all other legal tasks." 607 A.2d at 1304. Attorneys are supposed to know the likelihood of success for the types of cases they handle, and they are supposed to know the range of possible awards in those cases, the court added. It pointed out that deviation from standards of professional care results in liability for doctors, dentists, and other professionals. "Like most courts, we see no reason to apply a more lenient rule to lawyers who negotiate settlements," the court said. Id. Negotiation of settlements is one of the most basic and most frequently undertaken tasks that lawyers perform, the court observed.
The wife, who had received about $324,000, or 14% of the marital estate, contended that the attorney was negligent because he convinced her to accept an agreement that a reasonably prudent attorney would have advised against accepting, that the attorney failed to make a proper investigation into assets, and that he negligently delayed in finalizing the settlement, among other things. Reversing the trial court's grant of summary judgment for the lawyer, the court decided that the wife should be allowed to litigate her claims. The family court's determination that the settlement was fair and equitable did not bar the wife's claims, the court held. "The fact that a party received a settlement that was `fair and equitable' does not mean necessarily that the party's attorney was competent or that the party would not have received a more favorable settlement had the party's incompetent attorney been competent," the court declared. Id. at 1305.
Addressing the possible impact of its decision, the court stressed that it did not mean to open the door to malpractice suits by each and every dissatisfied party to a settlement. "Many such claims could be averted if settlements were explained as a matter of record in open court in proceedings reflecting the understanding and assent of the parties," the court said. Id. at 1306. Attorneys cannot be held liable simply because they are not successful in persuading an opposing party to accept certain terms, and "attorneys who pursue reasonable strategies in handling their cases and who render reasonable advice to their clients cannot be held liable for the failure of their strategies or for any unprofitable outcomes that result because their clients took their advice. The law demands that attorneys handle their cases with knowledge, skill, and diligence, but it does not demand that they be perfect or infallible, and it does not demand that they always secure optimum outcomes for their clients," the court said. Id.
In Grayson v. Wofsey, Rosen, Kweskin & Kuriansky, supra , the Connecticut Supreme Court held that a client who has agreed to the settlement of a marital dissolution action on the advice of counsel may recover against the lawyer for the negligent handling of her case. The court affirmed judgment on a $1.5 million jury verdict for the wife in her malpractice action against the lawyers who had advised her to accept lump-sum alimony of $150,000 and periodic alimony of $12,000 per year.
A lawyer specializing in family law testified that the defendants had failed properly to investigate and evaluate the husband's business interests and assets, and, as a result, the wife had agreed to a distribution and alimony award that were not fair and equitable. She would have received a greater distribution and alimony award had she been competently represented, the expert said. The fact that a judge had approved the settlement did not bar the malpractice action, the court decided. A judge's inquiry does not serve as a substitute for diligent investigation and preparation by counsel, it said.
The court agreed with the lawyers that settlements should be encouraged, but declined "to adopt a rule that promotes the finality of settlements and judgments at the expense of a client who, in reasonable reliance on the advice of his or her attorney, agrees to a settlement only to discover that the attorney had failed to exercise the degree of skill and learning required of attorneys in the circumstances." 646 A.2d at 199. The majority of courts have decided not to adopt a rule insulating attorneys from exposure to malpractice claims arising from their negligence in settled cases if the attorney's conduct has damaged the client, the court observed. Allowing malpractice suits for negligence in settled cases would not discourage settlements, the court said, because settlements are often in clients' best interests, and "we harbor no doubt that attorneys will continue to give advice concerning the resolution of cases in a manner consistent with their professional and ethical responsibilities." Id. at 200. The court also rejected the lawyers' prediction of a dramatic increase in legal malpractice claims by parties who have become disenchanted with their settlement agreements. Quoting Ziegelheim v. Apollo, supra , the court said that attorneys cannot be held liable simply because they do not always secure optimum outcomes, as long as they pursue reasonable strategies and render reasonable advice.
In Baldridge v. Lacks, supra , the wife accepted a $1 million settlement, even though she acknowledged that she knew the husband might have had as much as $15 million in property. Later, she sued her attorney and his partners for failing to conduct adequate discovery to determine the extent of the husband's marital and nonmarital property. The Missouri Court of Appeals refused to adopt the Pennsylvania view that a settlement precludes a subsequent malpractice action except in cases involving fraud. Although agreeing that settled cases should not readily be revisited, the court found that the language in Muhammad went "well beyond" that proposition. 883 S.W.2d at 952. It would not serve the interest of justice to immunize attorneys from civil liability in cases where their clients have settled, the court declared. "Accordingly, we refuse to adopt a "bright line" rule that protects attorneys from liability where a plaintiff has made a submissible case of negligence." Id.
The lawyers argued that by entering into a court-approved settlement and by giving sworn testimony agreeing to be bound by the settlement, the wife was barred from a collateral attack on the reasonableness of the settlement by means of a malpractice action. That contention, the court said, mischaracterized the wife's malpractice claim. She did not attack the reasonableness of the settlement but instead claimed that the lawyers negligently advised her to enter into the separation agreement without first having fully and adequately assessed the nature and extent of the marital estate. Those issues were not adjudicated at the settlement hearing in the dissolution proceeding, so collateral estoppel did not apply, the court decided.
The lawyers also contended that the traditional standard for legal malpractice, arising out of fully litigated matters, does not fit cases where the plaintiff challenges advice given in connection with settlement. Because litigants settle for reasons apart from the probability of success of their claims, the conventional elements of legal malpractice, which require proof that but for the lawyer's negligence the plaintiff would have been successful, are unsuited to settled cases, the lawyers argued. In a case where the underlying action was settled, they said, the focus should be on the conduct of the attorney and the reasonableness of the settlement under all of the prevailing circumstances. In particular, they asserted that a submissible case of legal malpractice challenging an attorney's advice given in connection with a settlement should require the plaintiff to demonstrate that the lawyer made a fraudulent or negligent misrepresentation which induced the plaintiff to agree to a settlement that was unreasonable under all of the circumstances. The court rejected that argument, finding no reason to differentiate between underlying actions which were settled and those which went to trial. To prove damages, it was sufficient for the plaintiff to present expert testimony as to what she would have received had the underlying action been tried, the court said. However, after determining that an instruction was prejudicially erroneous, the court reversed the $2.4 million judgment for the wife and remanded for a new trial.
A leading example of a successful malpractice lawsuit following a settled divorce case is Helmbrecht v. St. Paul Insurance Co. , 122 Wis. 2d 94, 362 N.W.2d 118 (1985). The attorney had advised the wife to accept a property settlement of $25,000 and a maintenance award of $1,000 per month for 42 months. In a subsequent malpractice action, the wife claimed that the lawyer had failed to conduct adequate discovery of the marital estate and was therefore not prepared to prove the value of marital assets or the amount which she needed for maintenance. Even though the trial judge in the divorce action testified in the malpractice action that the settlement was fair, the Wisconsin Supreme Court reversed a directed verdict for the lawyer and approved a jury verdict awarding damages of $250,000 to the wife.
Three lawyers testified for the wife that the lawyer negligently failed to discover the extent and value of the marital assets, that the lawyer did not adequately prepare for trial, and that he failed to secure an adequate property settlement and maintenance award for the wife. Generally, the court observed, an attorney is not required to exercise perfect judgment and will not be held accountable for an error in judgment if he acts in good faith and his acts are well-founded and in the best interests of the client. Here, however, the lawyer did "little or nothing to accumulate all the pertinent facts necessary to make an intelligent and professional evaluation" of the wife's claim. 362 N.W.2d at 131. In such a case, the court said, the damage to the client must be calculated by comparing what he or she actually received from the stipulation with what a reasonable judge at the time would have awarded her had she been properly represented. The trial court erred in allowing the judge in the divorce case to testify as to what he would have awarded, the court added.
Other cases in which lawyers have been held liable for negligence in settled cases include Rhine v. Haley , 238 Ark. 72, 378 S.W.2d 655 (1964), and Ishmael v. Millington , 241 Cal. App. 2d 250, 50 Cal. Rptr. 592 (1966). But see Bowen v. Arnold , 380 N.W.2d 531 (Minn. Ct. App. 1986) (evidence supported jury verdict that attorney was not negligent even though he had failed to obtain current financial and bank records regarding husband's corporation and independent appraisal of corporation, where evidence showed that wife made informed decision to forgo such procedures). Cases Outside Divorce Context. In malpractice actions challenging the adequacy of representation in cases not involving divorce or equitable distribution, most courts have held that a settlement does not preclude a subsequent malpractice claim. See Edmondson v. Dressman , 469 So. 2d 571 (Ala. 1985); Bill Branch Chevrolet, Inc. v. Burnett , 555 So. 2d 455 (Fla. DCA 1990); McCarthy v. Pedersen & Houpt , 250 Ill. App. 3d 166, 621 N.E.2d 97, cert. denied , 153 Ill. 2d 557, 624 N.E.2d 809 (1993); Fishman v. Brooks , 396 Mass. 643, 487 N.E.2d 1377 (1986); Lowman v. Karp , 190 Mich. App. 448, 476 N.W.2d 428 (1991); Cohen v. Lipsig , 92 A.D.2d 536, 459 N.Y.S.2d 98 (1983).
III. Other Issues
Delay Before Settlement. Suppose that a lawyer does not take steps to move a case forward, and the client subsequently hires another lawyer who negotiates a settlement. In a Wisconsin case that presented this scenario, the plaintiff sued his original lawyer for malpractice and won a jury verdict for damages in the amount of the larger settlement that he claimed he would have received if the claim had been settled in a timely manner, as well as damages for the loss of use of the settlement proceeds. An appellate court reversed, holding that public policy considerations weighed against allowing such a claim. Recovery for failing to settle a claim at an earlier date for more money would open the door too wide to malpractice claims, the court said. Schlomer v. Perina , 163 Wis. 2d 708, 473 N.W.2d 6 (Ct. App. 1991). The Wisconsin Supreme Court affirmed, but for different reasons. It rejected the broad public policy analysis of the lower court and held instead that proximate cause was lacking. Delay by an attorney alone cannot cause damages unless it is probable that it caused the loss of a witness, passing of a statute of limitations, or similar results, the court said. Schlomer v. Perina , 169 Wis. 2d 247, 485 N.W.2d 399 (1992). But see Ziegelheim v. Apollo, supra (wife permitted to pursue her claim that divorce lawyer negligently delayed in finalizing the settlement).
Failure to Accept Settlement. As a general rule, an attorney can be held liable for failing to inform the client of an existing settlement offer or for negligence in failing to recommend that an adequate settlement offer be accepted. E.g., Moore v. Greenberg , 834 F.2d 1105 (1st Cir. 1987) ($90,000 offer not transmitted); Scognamillo v. Olsen , 795 P.2d 1357 (Colo. Ct. App. 1990) (for their failure to recommend accepting a $54,000 settlement offer, lawyers were held liable for over $800,000 in damages which had been imposed against two of their clients, but damages were reduced by the amount the clients would have had to pay if the settlement had been accepted).
Missed Settlement Opportunity. Suppose that an equitable distribution case goes to trial, and the client is dissatisfied with the court's property division. May the client sue his or her lawyer for failing to negotiate a settlement, even though the other party did not make an acceptable offer? In general, courts have rejected claims based on failure to negotiate a settlement as too speculative to support a malpractice recovery. E.g., McCartney v. Dunn & Conner, Inc. , 386 Pa. Super. 563, 563 A.2d 525 (1989); Campbell v. Magana , 184 Cal. App. 2d 751, 8 Cal. Rptr. 32 (1960); see also Fuschetti v. Bierman , 128 N.J. Super. 290, 319 A.2d 781 (Law Div. 1974).
Impact of Unsuccessful Motion for Relief from Judgment. Usually, the client will have pursued a motion for relief from judgment before suing his or her divorce lawyer for malpractice. May principles of collateral estoppel be invoked? West Virginia's high court held that collateral estoppel precluded a wife from suing her divorce lawyers for malpractice, since that lawsuit involved issues which had been fully litigated in the wife's earlier motion for relief from judgment. In denying the wife's motion for postjudgment relief, the trial court determined that she knew of the existence of a workers' compensation claim and knowingly waived her rights to it in the property settlement agreement. Thus, in her subsequent legal malpractice action, she was collaterally estopped from claiming that she did not know about the award and that she was under duress. Walden v. Hoke ,189 W. Va. 222, 429 S.E.2d 504 (1993).
In other cases, however, courts have permitted malpractice challenges after an unsuccessful motion for relief for judgment. E.g., Grayson v. Wofsey, Rosen, Kweskin & Kuriansky, supra . Usually, the issues in the two proceedings - that is, the motion for relief from judgment and the legal malpractice action - are not the same, so collateral estoppel does not apply.
IV. Conclusion
In a majority of states, clients may challenge the competence of a lawyer's representation even though they agreed to a settlement and a trial judge approved it. Hence, lawyers are vulnerable to malpractice claims by former clients who have become dissatisfied with their settlements. To minimize the risk of a successful malpractice claim, lawyers must build a record that they fully investigated all marital and separate property and its value. Settlement before completion of discovery entails substantial risk in terms of a subsequent malpractice suit.
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