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Posts Tagged ‘legal malpractice’

Is “But-For” Causation In California Legal Malpractice Cases In Jeopardy?

Posted on: September 18th, 2018

By: Gretchen Carner & Brett Safford

California attorneys sued for fraud and intentional torts, as opposed to negligent legal malpractice, may be subjected to a different causation standard after the California Court of Appeal’s recent opinion in Knutson v. Foster (2018) 25 Cal.App.5th 1075.  The opinion has caused somewhat of a stir.  “But-for” causation and the “case-within-the-case” analysis are concepts used in virtually every lawsuit by a former client against his or her attorney.  It is axiomatic that a plaintiff, to establish a claim against his or her former attorney, must show that but for the conduct of the attorney, plaintiff would have achieved a better result.

Knutson modifies the causation analysis for certain claims against attorneys. Knutson held that the “but-for” standard should not be used when an attorney is sued by his or her former client for fraud and/or intentional breach of fiduciary duty. The Knutson court premised its reversal of the trial court on a supposed distinction between the “but-for” and substantial factor causation tests. In addition, the Knutson court appears to have abandoned the well-established “case-within-the-case analysis.”

In Knutson, Plaintiff Dagny Knutson filed a lawsuit against her former attorney Richard Foster for fraudulent concealment and intentional breach of fiduciary duty.  Knutson’s claims against Foster arose from his handling of her claim for breach of oral contract against USA Swimming.

Knutson, an internationally ranked swimmer in high school, committed to Auburn University on a full athletic scholarship.  She selected Auburn because Paul Yetter, one of its swimming coaches, was considered an expert in the individual medley, Knutson’s specialty event.  However, in March 2010, the head coach of USA Swimming Mark Schubert told Knutson that Yetter was leaving Auburn and advised her to swim professionally instead of attending Auburn or another university.  Schubert then orally promised her that she would receive training at USA Swimming’s “Center for Excellence” in Fullerton, California as well as room, board, tuition, and a stipend.  The agreement was to last through 2016—after the Summer Olympics in Rio de Janeiro.  Notably, the oral agreement did not include “performance markers,” which Knutson would have to meet to retain her benefits.  Knutson accepted the offer and hired a sports agent.  However, only a few months after moving to Fullerton, USA Swimming terminated Schubert’s employment.

At the suggestion of her agent, Knutson hired attorney Foster after she stopped receiving money from USA Swimming.  Yet, Foster did not disclose to Knutson his close personal ties with high-level persons in the aquatics industry or that he had well-established relationships USA Swimming and other swimming organizations.  Foster also did not disclose that he represented Schubert in 2006, or that following Schubert’s termination from USA Swimming in 2010, he refused to represent Schubert in a wrongful termination action because “he did not want to have a negative relationship with USA Swimming in the future.”

Foster, on behalf of his client, Knutson, ultimately reached a settlement with USA Swimming.  The settlement agreement provided tuition from January to December 2012, but between 2013 and 2016, all payments were contingent upon “perform markers,” i.e., Knutson maintaining a top 25 ranking in the world or a top three ranking in the United States.

After learning of Foster’s conflicts of interest, Knutson sued Foster for fraudulent concealment and intentional breach of fiduciary duty.  The jury found in favor of Knutson on both causes of action, but the trial court granted Foster’s motion for new trial on the grounds that Knudson “failed to adduce evidence of causation and that the jury’s award of damages was excessive.” The trial court also denied Foster’s motion on two other grounds.  Both Knutson and Foster filed notices of appeal.

The Court of Appeal reversed, holding that the trial court erroneously applied the “but-for” test for causation instead of the “substantial factor” test.  The Court explained, “Here, the trial court recognized the different standards of causation between legal malpractice claims and fraud claims, but nevertheless erroneously applied the malpractice standard of causation to the fraudulent concealment claim.  Although the court referred to the substantial factor for causation, it used and applied the but for test.”  After identifying Foster’s alleged concealments and breaches of loyalty, the court then concluded that “[a] substantial factor in Knutson’s decision to enter into the settlement agreement was Foster’s fraudulent concealment of the foregoing facts” and breaches of his fiduciary “caused Knutson harm initially by failing to provide her with all the information needed to make an informed decision about entering into the settlement agreement with USA Swimming and failing to ensure that Knutson’s best interests were being protected by Foster during the negotiations.”

The Court’s analysis in Knutson is problematic because it blurs the relationship between the “but-for” test of causation applied in legal malpractice claims and the “substantial factor” test of causation applied in intentional tort claims.  The “but-for” test has long been the appropriate causation standard for legal malpractice claims.  As explained by the California Supreme Court in Viner v. Sweet (2003) 30 Cal.4th 1232, “In a litigation malpractice action, the plaintiff must establish that but for the alleged negligence of the defendant attorney, the plaintiff would have obtained a more favorable judgment or settlement in the action in which the malpractice allegedly occurred. The purpose of this requirement, which has been in use for more than 120 years, is to safeguard against speculative and conjectural claims.”  (Id. at p. 1241, emphasis added.)  “This method of presenting a legal malpractice lawsuit is commonly called a trial within a trial.” (Blanks v. Seyfarth Shaw LLP (2009) 171 Cal.App.4th 336, 357.)  The “substantial factor” test requires that the “the plaintiff to establish ‘a reasonable basis for the conclusion that it was more likely than not that the conduct of the defendant was a substantial factor in the result.’ ” (Lysick v. Walcom (1968) 258 Cal.App.2d 136, 153, emphasis added.)

Knutson is a significant case because it not only contains a confusing analysis of the distinction between “but-for” causation and “substantial factor” causation, but it could also be read to dispose of the “case-within-the-case” analysis for claims against an attorney for fraud and/or intentional breach of fiduciary duty.  Review by the California Supreme Court is warranted to address the confusion Knutson creates.  Until then, it should be argued that Knutson is an outlier case which can be distinguished on its specific facts.  We will be keeping a close eye on this one.

If you have any questions or would like more information, please contact Gretchen Carner at [email protected] or Brett Safford at [email protected].

Continuing Fiduciary Relationship Does Not Always Toll the Statute of Limitations in California

Posted on: March 5th, 2018

By: Brett C. Safford

In Choi v. Sagemark Consulting, 18 Cal. App. 5th 308 (2017) (“Choi”), plaintiffs, husband and wife, filed a lawsuit in November 2010 alleging that defendants, their former financial advisors, offered negligent and fraudulent financial planning advice with respect a complex investment program involving life insurance and annuities under former section 412(i) of the Internal Revenue Code (“IRC section 412(i) Plan”).  Audited by the IRS in 2006, Plaintiffs alleged that defendants misrepresented the IRC section 412(i) Plan’s promised benefits as well as its risk of adverse IRS action and tax consequences.  The audit concluded in 2009, and plaintiffs were subject to significant penalties and tax liabilities caused by the IRC section 412(i) Plan.

Defendants moved for summary judgment, arguing that plaintiffs’ causes of action were barred by the applicable statutes of limitation.  Defendants introduced two communications to show that plaintiffs were aware the IRS had identified defects in the IRC section 412(i) Plan as of November 2006, and IRS penalties and damages would be accruing as of September 2007. Trial court granted summary judgment, finding that plaintiffs were on notice of the IRS penalties as of September 2007, and therefore, the two-year and three-year statutes of limitations applicable to plaintiffs’ causes of action expired prior to filing of the complaint in November 2010.

The Court of Appeal affirmed, rejecting plaintiffs’ arguments that (1) the September 2007 e-mail only put plaintiffs on notice that damages might occur in the future, and (2) the fiduciary or confidential relationship between plaintiffs and defendants, as their financial advisors, tolled the statute of limitations.  Applying the general “discovery rule,” the court concluded that the plaintiffs discovered or should have discovered defendants’ negligent advice as of the September 2007 e-mail because that e-mail indicated “‘legally cognizable damage’ in the form of IRS penalties.” Choi, 18 Cal. App. 5th at 330.  Despite uncertainty as to the monetary amount of the penalties, “‘the existence of appreciable actual injury does not depend on the plaintiff’s ability to attribute a qualifiable sum of money to consequential damages.’” Id. at 331.  The court further held that tolling did not apply, even though the fiduciary relationship between plaintiffs and defendants continued while they collectively challenged the IRS assessment, because “[d]elayed accrual due to the fiduciary relationship does not extend beyond the bounds of the discovery rule.” Id. at 334.  Therefore, the court “decline[d] to apply the tolling principles to a scenario in which the defendants had disclosed the facts necessary to support’ the plaintiff’s cause of action.” Id.

The Court of Appeal’s analysis in Choi is significant in the professional liability context for two reasons.  First, the court reaffirmed that the general “discovery rule,” i.e., the statute of limitations period begins to run when a plaintiff discovers or should have discovered the cause of action, is the default rule for when causes of action accrue in professional liability cases.  The Court rejected plaintiffs’ attempt to apply a differing accrual rule applicable only to accounting malpractice actions arising from negligent preparation of tax returns.  The court explained, “It may be that actual injury results from an accountant’s allegedly negligent preparation of tax returns only as determined by an IRS audit, but the same cannot be said for more wide-ranging categories of negligent tax-related or investment advice.” Choi, 18 Cal. App. 5th at 328.

Second, and more importantly, the appellate court declined to toll the statute of limitations even though plaintiffs and defendants maintained a fiduciary relationship while challenging the audit.  California recognizes that certain cases involving a fiduciary obligation will toll the statute of limitations.  For example, the statute of limitations in a legal malpractice action is tolled while “[t]he attorney continues to represent the plaintiff regarding the specific subject matter in which the alleged wrongful act or omission occurred.” Cal. Civ. Proc. Code, § 340.6, subd. (a)(2).  However, in Choi, the court held that the discovery rule is not displaced by delayed accrual due to a fiduciary relationship—at least in the financial advisor-client context.  The court reasoned that Plaintiffs were on inquiry notice of the facts constituting their injury as of September 2007, and their continuing relationship with defendants “did not prevent or delay [them] from discovering the wrongdoing beyond September 2007.” Choi, 18 Cal. App. 5th at 335.

The Court of Appeal’s decision in Choi undermines the commonly asserted proposition that a continuing fiduciary relationship will toll the statute of limitations and reaffirms the importance of the “discovery rule.”  At least in professional liability cases involving financial advisors, plaintiffs cannot hide behind their fiduciary relationship with defendants to avoid a statute of limitations defense.  Rather, the central inquiry is when did plaintiffs discover their causes of action—regardless of whether the discovery occurred before or after the termination of the fiduciary relationship.  As such, the Choi decision provides valuable authority for professional liability defense attorneys, especially those representing financial advisors, in cases where the statute of limitations may offer a defense.

If you have any questions or would like more information, please contact Brett Safford at [email protected].

In Defending Legal Malpractice Suits in Georgia, When Subsequent Legal Counsel Was Retained Could Be Crucial

Posted on: November 30th, 2017

By: Jessica C. Samford

When dealing with a lawsuit alleging legal malpractice, one of the first lines of defense in Georgia is O.C.G.A. § 9-11-9.1, which requires that an expert affidavit be filed at the same time as the complaint. Not only does this statute require the affidavit to set forth specifically “at least one negligent act or omission claimed to exist and the factual basis for such claim” by a “competent” expert; it also comes with teeth, mandating dismissal for failure to state a claim under certain circumstances.  While much attention is given toward subsection (e) of the statute, which addresses attacking defects in the expert affidavit, this statute contains additional provisions that provide strong consequences if the situation calls for the application of subsections (b) and (f) as explained below.

First, subsection (b) allows a complaint to be filed without the expert affidavit but only if (i) the complaint alleges that the required affidavit could not be prepared “because of time constraints,” (ii) the complaint is instead accompanied by the filing of an affidavit by the filing attorney, attesting that they were hired less than 90 days before the expiration of the limitation period, and (iii) an expert affidavit is filed within 45 days. The statute then provides that the court is forbidden from extending the 45-day deadline for any reason without consent of all parties and that “the complaint shall be dismissed for failure to state a claim” for failure to timely file either affidavit.

Importantly, dismissal is also mandated under this subsection if it turns out the law firm of the attorney who filed the affidavit “or any attorney who appears on the pleadings” was actually retained more than 90 days before the end of the limitation period. Therefore, in addition to the typical statute of limitation defense considerations as to when the applicable limitation period (2, 4, or 6 years depending on the particular allegations) was triggered and would run out for each claim asserted in the complaint, a key consideration should also be when subsequent counsel was retained in order to evaluate the possibility of a mandatory dismissal under subsection (b).

Next, subsection (f) provides that as long as a motion to dismiss raising the failure to file any affidavit required by the statute is filed with the answer, the complaint cannot be refiled after the limitation period’s expiry, even if voluntarily dismissed as is often done in an attempt to cure a prior failure to timely file any of the above affidavits.  (It should be noted there is a narrow exception if the requisite affidavit actually existed at the time it was required to be filed but was not filed by mistake.)  So if the circumstances fall within the realm of subsection (b), moving to dismiss at the same time as the answer could add finality to this statutory defense.  For example, subsequent counsel may try to fall back on a voluntary dismissal to circumvent a defense meriting mandatory dismissal, perhaps because there is evidence they were hired before the 90-day period.  By operation of subsection (f), the action would be dismissed as time-barred even if refiled with the requisite affidavit(s) after the applicable statute of limitation period passed.

While this statute is not limited to legal malpractice and applies to other enumerated professions, the affirmative defenses provided therein could be critical to obtaining an early dismissal with prejudice of a legal malpractice suit filed in Georgia.

If you have any questions or would like more information, please contact Jessica C. Samford at [email protected].

State Legislature Enters the Unfamiliar Realm of Regulating Legal Practice and Passes Laws Prohibiting Assignability of Legal Malpractice Claims

Posted on: April 18th, 2013

By: Dana Maine and William Ezzell

Following last month’s unanimous opinion from the Georgia Supreme Court that legal malpractice claims were not per se unassignable, the State Bar of Georgia successfully implemented a counterstrike aimed at barring the assignment of all legal malpractice claims. The case, Villanueva v. First American Title Insurance Company, involved a legal practice claim against a closing attorney in a mortgage refinance transaction. [E-Alert: Stranger Danger: Georgia Joins Minority View and Allows Assignability of Legal Malpractice Claims]. The Georgia Supreme Court held, but for actions in personal injury, all claims, including those for legal malpractice, were assignable.

The aggressive, albeit quiet, lobbying efforts of the State Bar resulted in the passage of House Bills 160 and 359, relating to foreclosed property registries and the disposition of unclaimed property, respectively. In Georgia, lawmakers are permitted to add unrelated provisions to legislation so long as the provision applies to the same code section the legislation addresses. Thus, in an apparent attempt to maximize the chances of the provision’s passage, each Act included identical provisions amending O.C.G.A. § 44-12-24, governing the assignability of legal claims involving property.

House Bills 160 and 359 provide:

Except for those situations governed by Code Sections 11-20-210 and 11-9-406, a right of action is assignable if it involves, directly or indirectly, a right of property. A right of action for personal torts, for legal malpractice, or for injuries from fraud to the assignor may not be assigned.

The Georgia Legislature passed both measures almost unanimously, and the bills are currently awaiting Governor Deal’s signature. Georgia requires the Governor sign any legislation into law within 40 days from March 28, 2013, and while the Governor has yet to publicly comment on the bills, it is widely expected that the Governor – an attorney – will sign the legislation into law. Once signed, the legal malpractice provisions will become effective immediately. Copies of each bill are available here and here

Final passage of the laws should curb the concerns of insurers and Georgia lawyers alike. Most pressing are the malpractice policies currently necessitating implementation or renewal. Assignable legal malpractice claims would have required insurers to raise premiums significantly, perhaps as high as 25 percent. From a more strategic vantage point, insurance carriers’ fears of the creation of a secondary market for LPL claims should be assuaged. The Georgia Legislature recognized the danger for all interested parties from the holding in Villanueva – an increase in the pool of risk for insurers – and acted decisively without any ambiguity, due in no small part to the State Bar.

While this legislation solves the problem for Georgia lawyers, LPL carriers must recognize that there may be unwelcome impacts from Villanueva. The decision of the Georgia Supreme Court fell within a clearly defined minority of jurisdictions that concluded legal malpractice claims are assignable. In reaching the decision, the court provided a comprehensive survey and analysis of courts nationwide regarding the policy implications of majority and minority stances on assignability. Although the court explicitly refrained from incorporating any public policy in the holding, the case has already garnered national attention and will undoubtedly be used by claimants arguing for assignable LPL claims in future appellate litigation in other jurisdictions.

Stranger Danger: Georgia Joins Minority View and Allows Assignability of Legal Malpractice Claims

Posted on: April 2nd, 2013

By: Dana Maine

Legal malpractice carriers be aware that you will now be on the hook for defending your insureds in actions brought by strangers to any attorney-client relationship. The Georgia Supreme Court just answered the question on the minds of Georgia attorneys and legal malpractice practitioners across the country – legal malpractice claims are assignable in Georgia, as long as they are not presented in the nature of a personal injury. Villanueva v. First American Title Insurance Company, 2013 WL 1092589 (March 18, 2013). A unanimous Georgia Supreme Court, with seemingly little difficulty, determined that Georgia’s assignability statute (O.C.G.A. § 44-12-24) unequivocally directed the outcome of this case.

The facts of the case are not unusual. The defendant-attorney, Derick Villanueva, began working with the Moss Firm in January 2007. Three months later, he opened a new firm, Moss & Villanueva, with his boss George Moss. Shortly thereafter, in May 2007, Villanueva acted as the closing attorney and settlement agent for a mortgage refinance. As part of that transaction, Villanueva signed closing instructions issued by Homecomings Financial, LLC, which was replacing two prior mortgages on the property, totaling almost $1.2 million. As part of the closing instructions, Villanueva acknowledged that he was to pay off the earlier mortgages.

As part of the closing activities, Homecomings wired the refinance funds to an escrow account used by Villanueva’s old firm, because the account for the new firm had not been established at the time of the closing. Unfortunately, a non-lawyer who had access to the escrow account withdrew funds from the account and the previous mortgages were not paid in full.

Homecomings’ title insurer, First American Title Insurance Company, paid off the balances on the previous mortgages. Thereafter, First American filed suit against Villaneuva accusing him of committing malpractice by failing to pay off the mortgages. First American based its malpractice claim on its right as assignee from Homecomings, which was included in the closing protection letter First American issued to Homecomings.

In reaching its decision, the Georgia Supreme Court cited to the general rule that permits assignment of a right of action “if it involves, directly or indirectly, a right of property,” while “[a] right of action for personal torts or for injuries arising from fraud to the assignor may not be assigned.” O.C.G.A. § 44-12-24. The Court held that the damage involved in the case involved financial loss which is akin to injury to property; therefore, the malpractice claims are assignable. Discounting the public policy concerns relied upon by the majority of state courts to bar the assignment of legal malpractice claims, the Georgia Court said the legislature has not seen fit to amend the Georgia statute to prohibit the assignment of these claims. Therefore, the Court saw no reason to read the prohibition into the statute.

The vast majority of legal malpractice claims involve financial loss and will now be assignable in Georgia. The pool of potential plaintiffs for legal malpractice claims has just expanded exponentially. Insurers can be expected to cover the increased risk with a corresponding increase in premiums. As a practical matter, in these difficult economic times, malpractice insurance now represents an additional source of funds from which a disgruntled litigant can seek recompense.