Recent case developments underscore the importance of proving up damages with reliable and specific evidence and the continued vitality of the familiar principle that malpractice plaintiffs may recover what is needed to make them whole, but nothing more. Courts applied these principles to cases involving alleged uncollectible judgments, collateral-source funds, interest on settlement agreements, and collateral attorney fees. Other cases restricted recovery of emotional-distress damages in legal-malpractice cases. In breach-of-fiduciary-duty cases, the courts remained willing to allow claims for all damages that could reasonably be attributed to the breach. Overall, appellate courts looked carefully at damage theories and awards, confirming that careful testing of causation and damage theories remains a fertile area of damage control in legal-malpractice cases, particularly on appeal.
Damages Awarded in Accordance with Purpose of Compensatory Damages
In legal-malpractice cases, courts award compensatory damages with the purpose of putting the plaintiff in the position he or she would have occupied absent the attorney’s malpractice. Berndt v. Levy, No. 08-1067, 2010 WL 3913240, at *25–29 (D. Kan. Sept. 30, 2010); Shoemake v. Ferrer, 225 P.3d 990, 992–94 (Wash. 2010). Compensatory damages ensure the adequate, but not excessive, compensation of plaintiffs. For example, in Berndt, the federal court, applying Kansas law, held that damages in a legal-malpractice action should be limited to collectible judgments, to make the plaintiff whole. Berndt, 2010 WL 3913240, at *27. There, a former client filed a legal-malpractice action against the attorney, alleging that the attorney negligently failed to file a medical-malpractice action on his behalf within the two-year statute of limitations. Id. at *1.
In a motion for partial summary judgment, the attorney argued that the client’s damages should be limited to $800,000 (the amount of the doctor’s insurance coverage) because the client could not produce evidence that the doctor could satisfy any judgment over that amount. Id. at *25. In assessing an issue not previously decided by Kansas jurisprudence, the court found that a Kansas court would likely prevent a legal-malpractice plaintiff from recovering as damages any uncollectible amount of the underlying judgment. Id. at *27. The court reasoned that the inclusion of “actual damages” as an element of a plaintiff’s legal-malpractice action warranted this limitation. Id. Moreover, limiting damages to collectible judgments furthered the purpose of compensatory damages—that is, putting the plaintiff in the position he or she would have occupied absent the attorney’s malpractice. Id. Nonetheless, the court denied the attorney’s summary-judgment motion on this issue because it found that the client raised evidence regarding the doctor’s income, which could have affected the collectibility of the judgment. Id.
Also in Berndt,the court held that legal-malpractice damages could not include amounts already paid to the plaintiff by third parties that would have been deducted from the underlying judgment. Id. at 28. The defendant attorney also argued in his motion for summary judgment that amounts already paid to the client by his employer and its insurer should be excluded from the client’s damages. Id.at *25. Once again, the court faced an issue not previously decided by Kansas jurisprudence, and it recognized the split in national jurisprudence regarding the application of the collateral-source rule to legal-malpractice cases. Id. at *28. The court found that a Kansas court would not allow a legal-malpractice plaintiff to recover as damages payments by third parties that would have been deducted from the underlying judgment. Id. The court again reasoned that this limitation was consistent with the purpose of compensatory damages and put the plaintiff in the position he would have occupied absent the attorney’s malpractice. Id. Thus, if the client’s employer and its insurer would have held a valid lien against the underlying judgment, this amount should not be available as damages to the plaintiff in the legal-malpractice action. Id.
Similarly, in Shoemake, the court awarded as compensatory damages interest on the entire amount of a settlement agreement instead of only on the amount of the agreement less the hypothetical fees owed to the offending attorney. Shoemake, 225 P.3d at 994–95. There, a former client brought a legal-malpractice action seeking interest on a settlement that the client would have received 10 years earlier if not for the attorney’s negligence. Id. at 991. The client sought to recover interest on the entire amount of the settlement, whereas the former attorney argued that he only owed interest on the amount of the settlement minus any fees he would have collected as a contingency fee. Id. The court held that the client was entitled to recover interest on the entire amount of the settlement, including the portion that the attorney would have earned. Id. at 994. It reasoned that “disregarding a negligent attorney’s fees in calculating a plaintiff’s damages is simply part and parcel of a compensatory damage award because the plaintiff is burdened with the obligation to pay twice for the same services.” Id. at 994. Thus, the increased award of interest on the entire settlement amount did not necessarily create a windfall for the plaintiff because she had the additional expense of hiring two lawyers to resolve the same issue. Id. Moreover, despite the compensatory nature of this increase in damages, the court noted that the damages would serve a deterrence function (not to be confused with a punitive award) by discouraging other attorneys from breaching their ethical duties. Id. at 994.
Collateral Attorney Fees
Although the court in Collier v. Manring, 309 S.W.3d 848, 849–54 (Mo. Ct. App. 2010), did not expressly discuss the purpose of compensatory damages, it found that attorney fees in a collateral action could be awarded as damages in a legal-malpractice case when the plaintiff filed the two claims in the same petition. Id. at 853–54. There, beneficiaries of a trust filed an action against a co-trustee and the attorney who drafted trust documents. Id. at 850. The petition’s first seven counts alleged wrongdoing by the co-trustee, and the eighth count alleged a legal-malpractice claim against the attorney for negligently drafting the trust documents. Id. In the legal-malpractice action, the beneficiaries primarily sought to recover as damages the legal expenses incurred in prosecuting their claims against the co-trustee. Id.
In reversing the trial court’s grant of summary judgment, the court found that the attorney fees could in fact be recovered as damages. Id. at 854. Although attorney fees are generally borne by each party, the collateral-litigation exception provides that reasonable attorney fees are proper items of damages when the plaintiff incurred the fees in a different action involving a different party as the proximate result of the defendant’s breach of duty. Id. at 852–53. The court explained that the collateral-litigation exception is simply an application of the theory of proximate damages, thus making funds awarded under the exception compensatory damages designed to make the plaintiff whole. Id. at 853. Here, the court determined that the collateral-litigation exception applied to the beneficiaries’ claims against the attorney even though they were alleged in the same petition as the claims against the co-trustee. Id. at 853–54. The court reasoned that the two sets of claims differed in nature and were brought against two separate defendants. Id. Thus, the malpractice claim was collateral to the claims against the co-trustee, the collateral exception applied, and the beneficiaries could seek attorney fees as damages in their malpractice action. Id. at 854.
Usually No Legal Malpractice Damages for Emotional Distress
In Taylor v. Paskoff & Tambler, LLP, 908 N.Y.S.2d 861, 861–63 (N.Y. Sup. Ct. 2010), the court applied the general prohibition against recovery of emotional damages in legal-malpractice cases to legal-malpractice actions concerning adoption and custody. In Crone v. Nestor, No. 09-0231, 2010 WL 3324923 (Iowa App. Aug. 25, 2010), the court likewise barred recovery of emotional-distress damages for the loss of a house, but left open the possibility of recovery of emotional damages in other appropriate cases. Id. at *4–5. There, a former client alleged that an attorney committed malpractice when he failed to establish a trust provided for in a divorce settlement. Id. at *1. The trust was to provide mortgage payments on the client’s home after the death of her ex-husband, and because the trust was never established, she could not make her mortgage payments, and lost her home. Id. The client alleged that the loss of her home caused her emotional distress. Id. Although the court recognized that most jurisdictions do not allow recovery of emotional damages in legal-malpractice cases, it proceeded to analyze whether the client could state a claim for emotional damages under Iowa tort law. Id. at *4–5. Ultimately, the court concluded the client could not recover emotional-distress damages because she did not present evidence of physical injury and the attorney-client contract did not concern a subject that would carry with it a “deeply emotional response in the event of a breach.” Id.
Damages Resulting from Breach of Fiduciary Duty
While liability, causation, and damage are (and should) remain conceptually distinct, it would be naive to pretend that the seriousness of a breach of duty has no impact upon the length of the chain of causation and resulting damage. Courts remain more than willing to permit recovery of all damages that reasonably can be attributed to conflicts of interest and other serious breaches of fiduciary duty. In Airgas, Inc. v. Cravath, Swaine & Moore LLP, No. 10-612, 2010 WL 3046586, at *1–8 (E.D. Pa. Aug. 3, 2010), a former client filed an action against a law firm, alleging breach of fiduciary duty by simultaneously representing another client with conflicting interests. Id. at *1. The client, Airgas, Inc., alleged that while the firm acted as the client’s financing counsel, the firm also represented the client’s competitor, Air Products and Chemical, Inc., and advised Air Products about a corporate takeover of Airgas. Id. In assessing the firm’s Rule 12(c) motion for judgment on the pleadings, the court found that Airgas properly alleged four distinct types of damages suffered as a result of the law firm’s breach of fiduciary duty. Id. at *5–*8.
First, Airgas properly alleged as damages attorney fees paid to other counsel to disqualify the law firm from representing Air Products in an action against Airgas. Id. at *5–*6. The court reasoned that under Pennsylvania law, attorney fees incurred as the result of a former attorney’s breach of fiduciary duty are legally cognizable damages in a breach-of-fiduciary duty suit. Id.
Second, the client properly alleged as damages the cost of having to hire new counsel to replace the law firm, which had represented the client for about 10 years. Id. at *6–*7. The court determined that questions of fact existed as to the client’s reasonable expectation that the law firm would have continued to represent it. Id. at *6. Moreover, the fact that the client had the ability to replace the firm was not relevant. Id. at *7.
Third, Airgas properly alleged damages resulting from its inability to obtain financing due to the law firm’s representation of Air Products in its attempted takeover of Airgas. Id. at *7. The court determined that the financial impact of the attempted takeover implicated various issues of fact, and therefore, could not be adjudicated under a 12(c) motion. Id.
Finally, the client properly alleged as damages the fees paid to the law firm. Id.at *8. Pennsylvania law recognizes that “a client is entitled to return of fees paid to an attorney who had breached his or her fiduciary duties.” Id. Thus, because Airgas alleged that it paid fees to the firm for service rendered while the firm also represented Air Products, it properly alleged payment of fees as damages. Id.
No Offset Against Malpractice Judgment Based on Contingency-Fee Agreement
Cintra v. Law Office of Diane M. Shulman, 2011 WL 1886505 (Mass. Super. April 28, 2011) involved a legal-malpractice case against an attorney who failed to properly serve the plaintiff's complaint and who allowed the statute of limitations to expire without simple corrective action. After a jury verdict in the plaintiff’s favor, the plaintiff moved for entry of final judgment. The defendant attorney opposed the motion, claiming that the jury’s award should be reduced by the amount the defendant would have earned pursuant to the contingency-fee agreement.
The court noted that the majority of other jurisdictions do not permit an offset based on the contingency-fee agreement. However, the First Circuit Court of Appeal in Moores v. Greenberg, 834 F.2d 1105 (1st. Cir. 1987) permitted such an offset and concluded that a Massachusetts state court would likely reach the same conclusion.
Rejecting the defendant’s argument, the court in Cintra explained why an offset would be inappropriate and inequitable:
Three major arguments against an offset emerge from these cases. First, that the full measure of the plaintiff's damages in the malpractice action is determined by the size of the judgment lost in the underlying action. Second, that the lawyer found liable for malpractice should be prohibited from benefiting from the contract he violated. Third, that the fee which the plaintiff would have paid to the negligent lawyer is “cancelled out” by attorneys fees he pays upon winning his malpractice action. In addition to these three arguments, there are also policy considerations against applying an offset, such as providing lawyers with additional deterrence to breaching ethical duties to clients and holding the unique attorney-client relationship to a different standard than traditional contract principles.
Id. at *1 (internal citations omitted). The Cintra court distinguished the Mooresdecision, which involved the certainty of a settlement offer, the certainty that the client would have accepted the offer, and the involvement of the lawyer in procuring the offer. The Mooresdecision noted that it would be inequitable to permit offset of a contingency agreement “[w]here a lawyer accepts an engagement and thereafter fails to show up at the starting gate, e.g., . . . failure to file suit within statute of limitations . . . failure to serve mandatory notice of claim within prescribed period”— the exact type of conduct involved in Cintra. Cintra, 2011 WL1886505 at *2; Moores, 834 F.2d at 1112. Further, the defendant failed to present evidence that any substantial amount of work had been performed on the plaintiff's behalf for which the defendant should have been compensated, and the defendant failed to argue for fees in quantum meruit. Under these circumstances, the court concluded that a deduction of one-third of the jury award to account for the contingency fee would be inappropriate.
Observations from 2010–2011
Courts in 2010 and 2011 upheld claims for recovery of the reasonable value of lost judgments (less uncollectable amounts), interest on settlement agreements, collateral attorney fees, damages resulting from lost financing opportunities, and other specifically proven items of damage. Claims for emotional damages and collateral-source funds were denied. Legal malpractice plaintiffs in 2010 and 2011 didn’t always get what they wanted, but for the most part, they got what they needed.
Keywords: litigation, professional liability, compensatory damages, collateral attorney fees, emotional distress, breach of fiduciary duty, contingency fee
James A. Brown is a shareholder and Erin L. Delatte is an associate with Liskow & Lewis, PLC in New Orleans, Louisiana. Mr. Brown currently serves as a cochair of the Professional Services Liability Litigation Committee of the ABA Section of Litigation.