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Archive for the ‘Professional Liability and MPL’ Category

California Lawyers Now Have Duties To Clients “Who Got Away”

Posted on: September 24th, 2019

By: Greg Fayard

Under Rule 1.18 of California’s Rules of Professional Conduct, lawyers must now protect the confidences of prospective clients–even if a formal lawyer-client relationship never materializes.

That is, confidential information conveyed by a would-be client to a California lawyer, but where the potential client does not retain the lawyer, must be protected and can impact other matters handled by another lawyer in the firm.

For example, in a law firm that does family law, if Wife consults lawyer A in a divorce case and says she has a secret bank account, but Wife does not retain lawyer A, and Husband then consults lawyer A, lawyer A would need the informed written consent from both Husband and Wife to represent Husband.

Lawyer B in the law firm could represent Husband, but only if lawyer A is screened from Husband’s case and written notice is provided to both Husband and Wife. Consent from Wife is not needed.

This is an example of duties to the prospective client, the Wife—the client “who got away.” Just know that in situations where prospective clients meet with a lawyer, but no official attorney-client relationship results from that meeting, for future matters, sometimes informed written consent is needed, and sometimes notice and screening is needed.

If you have any questions or would like more information, please contact Greg Fayard at [email protected], or any other member of our Lawyers Professional Liability Practice Group, a list of which can be found at

Investors’ Life Insurance ‘Gamble’ Busts out in NJ Courts

Posted on: September 19th, 2019

By: Justin Boron

To take out insurance, you almost always need an “an insurable interest” in the risk being insured, such as a financial interest in a home or a car.  It’s what prevents strangers to the risk from betting on the occurrence of a casualty, like your neighbor taking out a policy on your house or car in the hopes that either is destroyed in an accident.  The requirement takes on heightened importance in the area of life insurance where it prevents strangers to the insured life from betting on someone’s death and discourages worse things, like foul play.

But because life insurance is treated as a transferrable asset—much like a home or car—investors developed a workaround for the “insurable interest” requirement.  In arrangements referred to as stranger-oriented life insurance policies—STOLIs, for short—investors fund the premiums for a life insurance policy purchased by the insured who has the insurable interest when the policy is purchased but who intends to re-sell it at a discount to investors without an insurable interest.  The insured’s frequent practical purpose is to pay for immediate health care needs or other expenses.  The investors’ purpose is to make a profit off the benefit when it is paid.  Usually, that means that their profit increases the sooner the insured dies.  STOLIs, of course, are controversial.  But despite efforts to regulate them, they continue to evolve in one form or another.

Considering New Jersey law, the Third Circuit Court of Appeals recently confronted whether a STOLI involving a $5 million benefit could be upheld under the states’ public policy.  Based on certified questions answered by the New Jersey Supreme Court, it concluded that the life insurance policy was void ab initioSun Life Assurance Co. v. Wells Fargo Bank NA, Nos. 16-4337, 16-4387, 2019 U.S. App. LEXIS 24916, at *5-6 (3d Cir. Aug. 21, 2019).  It reasoned that the STOLI arrangement was intended to benefit the investors whose interest was in the early death of the insured rather than anyone whose interest was in the continued life of the insured.  As a result, it was not an insurance policy; it was a gamble on a person’s life.

In so holding, the Third Circuit and the New Jersey Supreme Court joined at least 30 other states prohibiting or regulating STOLIs, so its decision is not particularly remarkable on its own.  But it illustrates how determined investors are to bet on the duration of a person’s life when there is a financial incentive and how common the STOLI arrangements might be.  Absent a large benefit, they probably go unchallenged.

In fact, there have been multiple recent cases that either voided such policies or precipitated legislative change to the “insurable interest” requirement.   See, e.g., Wells Fargo Bank, N.A. v. Pruco Life Ins. Co., 200 So. 3d 1202 (Fla. 2016); Lincoln Nat’l Life Ins. Co. v. Gordon R.A. Fishman Irrevocable Life Tr., 638 F. Supp. 2d 1170 (C.D. Cal. 2009); Sun Life Assurance Co. v. Conestoga Tr. Servs., LLC, 263 F. Supp. 3d 695, 702 (E.D. Tenn. 2017).

Although the New Jersey ruling places it in line with other states’ position on the issue, the Third Circuit decided to refund the policyholder the premiums paid to the insurer.  As a result, the ruling might not discourage the practice completely, and it certainly will persist in other states where there is no anti-STOLI legislation.

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

California Lawyers Now Have A Duty of Diligence

Posted on: September 13th, 2019

By: Greg Fayard

The prior rules of professional conduct for California lawyers required them to be competent but were silent on also being “diligent.” Under the latest version of the rules, California lawyers now have an express duty of diligence. (Rule 1.3) That is, California lawyers can now be disciplined by the State Bar for neglecting or disregarding a matter.

The State Bar, after all, is a consumer protection organization, and its focus is on protecting the public from unscrupulous or incompetent lawyers. It is not a trade association that promotes lawyer interests.

Hence, California lawyers now have a duty “to get the job done”—the new duty of diligence. Lawyers should therefore stay on top of their matters and not let them languish. Doing so could expose the lawyer to a State Bar complaint.

If you have any questions or would like more information, please contact Greg Fayard at [email protected], or any other member of our Lawyers Professional Liability Practice Group, a list of which can be found at

NJ Appellate Division Finds Trial Court Had No Jurisdiction in Fee Dispute Between Firm and Client In Successful Legal Malpractice Action Against Client’s Previous Attorney

Posted on: September 11th, 2019

By: Erin Lamb

A three-judge panel of the New Jersey appellate division has ruled that a trial judge, having presided over a successful legal malpractice trial, had no jurisdiction to award fees in a dispute between a law firm and its client that was unrelated to the shifting of Plaintiff’s fees from her to the negligent counsel, as required under the Saffer decision.

Plaintiff hired a firm to represent her in a malpractice suit against an attorney who had advised her on the purchase of a home in Mantoloking, Ocean County, New Jersey. She claimed the attorney failed to inform her that the property contained a storm water easement. She also brought suit against the New Jersey Department of Transportation for negligence over its installation of a storm water pipe under the foundation of her home. The suit named other Defendants who were not involved in the trial.

In 2016, a jury found her previous attorney liable and ordered her previous attorney to pay $980,000 in compensatory damages.  The jury also found the NJDOT, the only other remaining defendant, was not liable.

In New Jersey, negligent attorneys are responsible for the reasonable legal expenses and attorney fees incurred by a former client in prosecuting the legal malpractice action. Saffer v. Willoughby, 143 N.J. 256, 272 (1996). The Saffer court determined such costs were “consequential damages that are proximately related to the malpractice.”  Plaintiff was therefore eligible for an award of counsel fees and costs. The trial judge held a bench trial and awarded Plaintiff $99,506.10 in consequential damages.

There were, however, two outstanding issues pertaining to the costs and fees – 1) her previous attorney likely was not liable for all of Plaintiff’s consequential damages, because the Action had included other parties and causes of action, and 2) the firm representing her in the malpractice action had remaining, unpaid, legal bills, which exceeded the awards of the compensatory and consequential damages. The trial court ordered limited discovery into these issues of apportionment, focusing on the apportionment of the costs and fees to be paid by the negligent previous counsel.

Plaintiff reached a settlement with her previous counsel on the costs and fees claim and informed the court of that development. The only remaining issue was the unpaid bills of the firm that represented her in the malpractice action. Plaintiff had already paid the firm $400,000.  The firm claimed $1.7 million remained unpaid.

The trial judge informed both parties that he would issue a resolution if they could not resolve the dispute. Both the firm and Plaintiff objected to the trial court’s desire to determine the reasonableness of the costs and fees. The firm asserted the retainer agreement listed Cook County, Illinois, as the forum for any disputes arising from the attorney-client relationship. The firm duly informed the trial court that they objected to any further determinations from the judge as New Jersey had no jurisdiction to determine the reasonableness of the costs and fees. Plaintiff informed the court she intended to dispute the reasonableness of Freeborn’s fees separately. However, she never pursued any action.

Despite the objections, the trial judge proceeded with a plenary hearing on the reasonableness of the firm’s fees.  It entered an order reducing the $1.7 million bill to $359,000. The trial court claimed jurisdiction was proper under a 2005 Appellate Division case, Levine v. Levine, 381 N.J. Super. 1 (App. Div. 2005).

The appellate division disagreed with the trial court’s reasoning and found it should not have relied on Levine, which involved the right of an attorney in a matrimonial action to petition for a lien on a client’s assts, and protecting substantive and procedural due process rights regarding attorney-client fee disputes under the New Jersey Attorney’s Lien Act.

The appellate court noted that the firm had not taken any steps to involve the trial court in their fee dispute with their client; no petition had been filed seeking a lien and determination under the Attorney’s Lien Act; and the court proceeded under the objection of the firm. Plaintiff also had not taken any steps to involve the trial court. There was no subject matter jurisdiction. The firm was never named as a party in any action related to the claim.

The trial court had no legal authority to assert jurisdiction, rendering any relief granted a legal nullity. The Appellate Division ruled that the firm must file a separate cause of action to adjudicate its claim for fees against its client and expressly rendered no opinion as to the enforceability of the forum selection clause in the retainer agreement.

The case is Lucas v. 1 on 1 Title Agency, et al. No. A-2217-16T2 (App. Div. 2019).

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


Don’t Shoot the Messenger: Tips for Avoiding Claims of Negligent Contract Negotiation

Posted on: September 4th, 2019

By: Catherine Bednar

When negotiating on behalf of a client, an attorney focuses on obtaining the best possible deal, balancing the client’s needs and objectives against the other side’s demands as well as the limitations of the law. An attorney must also be mindful, however, of the possibility the client might someday bring a malpractice claim in if the deal goes sour later.

In Jenkins v. Bakst, 95 Mass. App. Ct. 654 (July 23, 2019), the Massachusetts Court of Appeals recently affirmed an award of summary judgment in favor of an attorney, Bakst, who had negotiated an employment contract on behalf of the Plaintiff, Jenkins. In 2003, Jenkins entered into negotiations with a security services company, Apollo, to join the company as its president and chief operating officer.  Ten years later, when Jenkins left Apollo he was disappointed by the valuation of his stock buyout under the employment agreement.  After challenging the stock valuation, Jenkins settled his claims with Apollo. He then pursued a malpractice claim against his attorney, who had proposed the methodology used in the contract.

Before Bakst entered into any negotiations with Apollo, Jenkins informed Bakst of his wishes regarding the stock buy-back clause. The draft employment agreement prepared by Apollo’s counsel provided for buy-back of Jenkins’s stock at book value. Jenkins told Bakst he wished to receive fair market value for his shares, which he believed should be measured at between twenty-five to thirty-five percent of annual revenue, equivalent to 3 to 4 months of the company’s average revenue. Notably, an existing agreement between Apollo and two other shareholders provided for buy-back of two months of the average annual revenues. Bakst told Apollo’s counsel that Jenkins would not accept book value and believed Apollo’s fair market value should be equal to four months of revenues, not two months. Bakst also suggested an alternative method for establishing Apollo’s fair market value, which Bakst had used in agreements for other clients. Apollo’s counsel accepted Bakst’s proposed alternative methodology.

Jenkins argued Bakst was negligent by failing to follow his instructions for a buy-back provision based on three or four months of revenues. The superior court ruled a fact finder could not find either that Bakst had breached the standard of care or caused Jenkins any injury.

In reaching its decision, the court noted Bakst’s testimony that he had described the alternative valuation method to Jenkins before proposing it to Apollo’s counsel. Jenkins, on the other hand, testified he could not remember his conversations with Bakst prior to signing the employment agreement. The court found there was no evidence Apollo would have accepted Jenkins’ formula based on three to four months of revenues.  The court further noted Jenkins was an

experienced businessperson. It was undisputed he read the employment agreement, initialed the relevant pages, and then signed it.  Because Jenkins could not contradict Bakst’s testimony that he had explained the valuation before Jenkins signed, there was no material fact dispute to survive summary judgment.

The Jenkins case highlights potential pitfalls for attorneys when negotiating contracts. While an attorney may not be able to entirely avoid a lawsuit by an unhappy former client, there are some measures one can take to minimize the risk.

  1. Know the Client: Be sure to ask which terms are most important to the client. What concessions is the client willing to make? What terms are considered deal-breakers?
  2. Communicate Often and In Writing: In Jenkins, the client did not rebut the attorney’s testimony he had counseled his client about the buy-back provision. But what if the client had testified differently? In order to minimize risk, an attorney should take care to communicate with the client during the course of a contract negotiation, ideally in writing. Correspondence to the client detailing what terms have been accepted, rejected or modified, discussing the pros and cons, and advising the client of their options may avoid any misunderstandings down the road as to how the final agreement was reached. Tracking changes in a document is another useful too for showing the client exactly how the contract has changed.
  3. Confirm Understanding of Terms: Make sure the client understands the terms of the contract/agreement. Ask the client in writing if the final version is agreeable and obtain their written confirmation before proceeding.
  4. Read, Initial and Sign: In Jenkins, the court cited the fact that the Plaintiff had initialed the relevant pages and signed the contract. While one might think it goes without saying, say it anyway: have the client read and sign the entire agreement, initialing each page of the contract.

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