Better Deal or No Deal: Causation in Transactional Malpractice Cases
| Publication year | 2013 |
| Pages | 51 |
Articles
The Civil Litigator
Better Deal or No Deal: Causation in Transactional Malpractice Cases
By John M. Palmeri, Franz Hardy, Nicole Salamander Irby
The Civil Litigator articles address issues of importance and interest to litigators and trial lawyers practicing in Colorado courts. The Civil Litigator is published six times a year.
Coordinating Editor
Timothy Reynolds, Boulder, of Bryan Cave HRO—(303) 417-8510, timothy. reynolds@bryancave. com
The Colorado Supreme Court provided instruction on the applicable standard for proving damages in transaction-based professional negligence cases in Gibbons v. Ludlow. Causation requires proof of a "better deal" or "no deal," which implicates unique evidentiary considerations.
Professional negligence claims arising from business transactions present a unique set of circumstances. These claims often involve sophisticated, complex, and high-risk agreements. Damages may be substantial, because the transacting parties have high expectations of returns. Even though traditional liability and damage theories apply in transactional settings, the elements and defenses—such as the proximate cause requirement of "case within a case"—have special application in transactional settings.
This article provides an overview of the basic legal concepts that surround transactional negligence claims. It also discusses the Colorado Supreme Court's recent pronouncement on this issue and raises practical considerations in bringing or defending such claims.
Overview of the Elements
The elements of a professional negligence cause of action are:
1) the duty of the professional owed to the plaintiff to use such skill, prudence, and diligence as other members of the profession commonly possess and exercise;
2) a breach of that duty;
3) a proximate causal connection between the negligent conduct and the resulting injury; and
4) actual loss or damage resulting from the professional's negligence.[1]
To establish the proximate cause element in a traditional legal malpractice case, the plaintiff must prove the case within a case, which requires proof that the case underlying the malpractice action would have been successful if the attorney had acted in accordance with his or her duty.[2] The Colorado Supreme Court recently extended the case within a case standard to a professional negligence action against a transactional real estate broker in Gibbons v. Ludlow?[3]
Overview of Case Within a Case in Transactional Claims
Courts have been asked whether case within a case applies to claims involving transactional negligence—that is, whether a plaintiff must prove that an excluded or unfavorable term in the underlying agreement would have been accepted by the other negotiating party if the professional had acted in accordance with his or her duty. The majority of courts addressing this issue have determined that the case within a case standard does apply to transactional malpractice claims.[4]
The Viner v. Sweet decision by the California Supreme Court is instructive.[5] The plaintiffs in Viner filed a lawsuit against the attorney who represented them in the sale of their business. The plaintiffs claimed that the defendant attorney had led them to believe several favorable terms were included in the sale agreement, which in fact were not included. A jury awarded the plaintiffs lost profits of more than $13 million. The defendant moved for judgment notwithstanding the verdict and for a new trial, arguing that the trial court erred in failing to instruct the jury that the plaintiffs had to prove they would have obtained those favorable terms in the sales agreement but for the defendant's negligence. The trial court denied the motions.
The California Court of Appeals affirmed and distinguished the standard for establishing causation in transactional malpractice claims as opposed to traditional litigation malpractice claims. The California Supreme Court addressed the court of appeals' rationale, which it summarized as follows:
First, the court [of appeals] asserted that in litigation a gain for one side is always a loss for the other, whereas in transactional work a gain for one side could also be a gain for the other side. Second, the court [of appeals] observed that litigation malpractice involves past historical facts while transactional malpractice involves what parties would have been willing to accept for the future. Third, the court [of appeals] stated that "business transactions generally involve a much larger universe of variables than litigation matters." According to the Court of Appeals, in "contract negotiations the number of possible terms and outcomes is virtually unlimited," and therefore the "jury would have to evaluate a nearly infinite array of 'what-ifs,' to say nothing of 'if that, then whats,' in order to determine whether the plaintiff would have ended up with a better outcome 'but for' the malpractice."[6]
The California Supreme Court reversed and rejected the court of appeals' rationale in failing to apply the case within a case standard. The California Supreme Court disagreed that "in litigation a gain for one side necessarily entails a corresponding loss for the other."[7] The Court explained:
Litigation may involve multiple claims and issues arising from complaints and cross-complaints, and parties in such litigation may prevail on some issues and not others, so that in the end there is no clear winner or loser and no exact correlation between one side's gains and the other side's losses. In addition, an attorney's representation of a client often combines litigation and transactional work, as when the attorney effects a settlement of pending litigation. The "but for" test of causation applies to a claim of legal malpractice in the settlement of litigation, even though the settlement is itself a form of business transaction.[8]
The California Supreme Court concluded:
just as in litigation malpractice actions, a plaintiff in a transactional malpractice action must show that but for the alleged malpractice, it is more likely than not that the plaintiff would have obtained a more favorable result[9]
Most commentators agree with the holding and rationale of the Viner decision. In a treatise on legal malpractice, the authors explain:
Proof of causation requires analysis of the consequences of proper advice. Thus, the client needs to prove what should have been achieved had the "proper" advice been given. If the alleged error is the failure to obtain or advise of a provision, concession or benefit, the client must prove that the other party would have agreed. It is not sufficient to show that the other party "might have" agreed.[10]
A plaintiff must demonstrate that his or her position in the underlying transaction "was compromised or negatively impacted due to the purported negligence of the defendant-attorney."[11] Further:
This means that the plaintiff must show that he or she would have been ultimately better off in the underlying transaction in a world where the defendant-attorney's purported negligence had never occurred.[12]
Case Within a Case is not Universally Applied
Application of the case within a case standard, although well recognized nationally, is far from uniform. In Nicolet Instrument Corp. v. Lindquist & Vennum, Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit held that proving case within a case is unnecessary in transactional claims.[13]
The plaintiff in Nicolet was represented by the defendant law firm in the sale of a wholly owned subsidiary. After the sale was complete, the plaintiff remained liable under the sales agreement for a building lease between the sold subsidiary and the lessor. Years after the sale, the former subsidiary defaulted on the lease and the plaintiff was required to pay $2.6 million to the lessor. The plaintiff alleged that the defendant law firm was negligent in failing to eliminate the plaintiffs contingent liability under the lease.
The district court granted the defendant's motion for summary j udgment, concluding that the plaintiff had failed to prove that the purchaser would have agreed to accept the liability but for the defendant's failure to include it in the sales agreement. The Court of Appeals reversed based on its rationale that the traditional but for causation analysis did not apply in transactional legal malpractice settings:
Proof of causation is even more difficult in a negotiating situation, because while there is (at least we judges like to think there is) a correct outcome to most lawsuits, there is no "correct" outcome to a...
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