August 31, 2015 Practice Points

Party in Privity Barred by Collateral Estoppel from Establishing Causation Element of Legal Malpractice Claim

The <i>Scherer</i> decision, and others like it, confirms that collateral estoppel may be a viable defense to a legal malpractice claim when the underlying issues have been fully and fairly litigated.

By Carey L. Menasco

Confirming the principle that a plaintiff should not get a second bite at the proverbial apple, an Ohio district court recently dismissed a plaintiff’s legal-malpractice action on grounds that it was barred by the prior decision in the underlying litigation under the doctrine of collateral estoppel. See Scherer v. Wiles, No. 2:12-cv-1101, 2015 U.S. Dist. LEXIS 96892 (S.D. Ohio July 24, 2015).

In Scherer, the plaintiff was one of several beneficiaries to a family trust. However, when the beneficiaries failed to provide the documents and information necessary to prepare a final trust accounting, the trustee filed suit against them. The beneficiaries counterclaimed against the trustee for breach of fiduciary duty, and the trustee responded with a claim against Scherer for conversion of trust assets.

During discovery, Scherer and the beneficiaries refused to produce documents and were held to be “in blatant violation of the discovery process.” In addition, Scherer’s attorney made improper objections during a deposition, and the court imposed discovery sanctions, including the exclusion of certain testimony pertaining to the trustee’s conversion claim against Scherer.

After trial in 2007, the court found that Scherer had in fact misappropriated $6.2 million of trust assets over seven years. The unauthorized transactions were the same transactions for which Scherer was barred from providing rebuttal evidence due to the discovery sanctions. The court therefore entered judgment against Scherer for $6.2 million. The court also dismissed Scherer and the beneficiaries’ counterclaims against the trustee challenging the trustee’s accounting.

On appeal, the appellate court upheld dismissal of Scherer’s counterclaim but remanded for trial of the other beneficiaries’ counterclaims. After trial in 2011, the court found the counterclaims meritless and confirmed the $6.2 million judgment against Scherer.

Thereafter, Scherer brought a legal-malpractice claim against his attorney in the trust case, alleging that the attorney’s negligence during the discovery process led to the discovery sanctions that precluded the testimony necessary to rebut the trustee’s conversion claim. The attorney argued that collateral estoppel barred Scherer from proving the causation element of his claims—i.e., that but for the attorney’s conduct, Scherer would have prevailed in the trust litigation.

In Ohio, collateral estoppel applies when: (1) the fact or issue was actually and directly litigated in the prior action; (2) the fact or issue was passed upon and determined by a court of competent jurisdiction; and (3) the party against whom collateral estoppel is asserted was a party in privity with a party to the prior action. Daubenmire v. City of Columbus, 507 F.3d 383, 389 (6th Cir. 2007).

The district court found that the mere fact that Scherer lost the underlying trial did not preclude him from relitigating the adverse judgment as part of the case-within-a-case component of his legal-malpractice claim. Rather, there was a question of fact concerning whether the attorney’s negligence contributed to the adverse judgment at trial.

Nevertheless, because the beneficiaries’ counterclaims (which were identical to Scherer’s) were tried and dismissed in 2011, and there was no argument that the malpractice of Scherer’s attorney could have negatively affected the factual or legal findings in that later proceeding, the facts and issues fully litigated in the 2011 trial had preclusive effect as to the causation element of Scherer’s malpractice claim. Thus, the court held that collateral estoppel barred the plaintiff “from arguing that but for [his attorney’s] negligence, he would have prevailed on his counterclaims or defeated the $6.2 million judgment.”

Even though Scherer was not a party to the 2011 action, the court expressly found that he was in privity with the other beneficiaries because he actively participated in that action and had a common interest in the outcome of that proceeding. The court noted that, under Ohio law, which applies a modern rule of privity, exact identity of the parties is not required. Instead, “[a]s a general matter, privity ‘is merely a word used to say that the relationship between the one who is a party on the record and another is close enough to include that other within the res judicata.’” Id. at *56 (citing Brown v. City of Dayton, 730 N.E.2d 958, 962 (Ohio 2000)). “[A] mutuality of interest, including identity of desired result,” can be sufficient for privity purposes. Id.

The Scherer decision, and others like it, confirms that collateral estoppel may be a viable defense to a legal malpractice claim when the underlying issues have been fully and fairly litigated. Further, in jurisdictions applying the modern rule of privity, collateral estoppel may extend to non-parties, provided that their interests are sufficiently aligned to parties in the underlying litigation.

— Carey L. Menasco, Liskow & Lewis, APLC, New Orleans, LA


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