Breach of fiduciary duty and punitive damages.

AuthorPope, Daniel J.

AFTER years of defending professionals of all occupations, nothing much surprises us anymore. But for the uninitiated, particularly lawyers, the first time you are sued for malpractice can be a real shock. As legal malpractice claims have increased in number,(1) plaintiffs' lawyers who traditionally practiced in ordinary tort or products liability cases have taken an interest in suing lawyers and have brought along with them theories not traditionally found in professional liability litigation.

For example, it is now common to have garden variety malpractice complaints against lawyers include causes of action for breach of fiduciary duty, violations of professional responsibility rules, negligence, misrepresentation, and fraud. Damages now range from what the client may actually have lost or failed to win in the underlying deal or litigation, to emotional distress, disgorgement fees, and punitive damages.

A frightening scenario

These cases can go something like this:

Smitty was sitting in his office looking at the lake on a beautiful spring day when his tranquillity was altered by remembering the disaster that occurred last week in court. He had agreed to take over the prosecution of a case on behalf of his wife's cousin against a party insured by one of his clients. Although his wife's cousin told him repeatedly this conflict was no problem, Smitty did not think he had ever gotten a written waiver from her.

Smitty judged the case's merits as fair at best, but his client's previous lawyer was not as confident. If nothing else, Smitty thought he could salvage a win, although not as high as his client wanted, and he said as much several times. Then the case went badly in front of an increasingly hostile jury, and he lost big time.

Smitty was thinking of sending his wife's cousin flowers along with an invitation for dinner when his secretary told him someone needed to see him at reception as soon as possible. With one last look at the lakefront, Smitty thought it would be a nice day to play golf. A few minutes later, Smitty instead found himself served at the reception desk with a summons for the complaint his wife's cousin had just filed against him.

Returning to his office, Smitty began to read the complaint with increasing alarm. There were counts for malpractice and breach of fiduciary duty, breach of his ethical and professional responsibilities for failure to disclose his conflict of interest, and fraud. Damages ranged from the judgment he should have obtained to emotional distress and disgorgement of his fees and punitive damages. Smitty thought wryly that at least the complaint did not ask for his first-born.

At first, Smitty was stunned, then he got mad. "Can this be possible?" he thought. Can a client sue a lawyer for both malpractice and breach of fiduciary duty, add claims of ethical violations, seek damages for mental distress, and disgorgement of fees, and punitive damages?

The answer is yes and no, and this article will describe the differences between these varied causes of action, and the damages you are exposed to in each kind of case.

Legal malpractice

Legal malpractice is an unusual creature of law, having managed to evade categorization either as strictly a tort or contract action. Most courts seem to prefer the hybrid definition that legal malpractice is a claim for legal services, sounding in tort and arising from an express or implied contract.(2)

We lawyers have done a better job of raising the bar to pleading malpractice actions against ourselves than we have for our other professional clients, such as officers and directors. To plead a cause of action for legal malpractice, the disgruntled client must plead the existence of the attorney-client relationship, a duty arising from that relationship, a breach, proximate cause, and damages.(3)

The beauty in this seemingly simplistic mosaic is that the former client must plead and prove that counsel's negligence caused the loss of the underlying case if the client was the plaintiff in the underlying litigation, or the loss of a meritorious defense if the client was the defendant. As one author put it, legal malpractice is a "land of second chances."(5)

Put another way, the disgruntled client--a loser below--must prove that "but for" the attorney's negligence, the client would have won.(5) In order to put the client in the position he or she would have been in if the attorney had not committed malpractice, damages are usually limited to the value of the client's lost claim or the amount of the adverse judgment entered against the client.(6)

The beauty of this burden is readily apparent. A lawyer can make numerous blunders in handling a case, even failing to file it, but if the client would not have won anyway, no cause of action exists, and the case is dismissed on motion.(7) This result is consistent throughout the United States.(8)

Breach of fiduciary duty

In an attempt to bolster what may be a weak legal malpractice claim, unhappy clients often add a breach of fiduciary duty claim to their complaints. After all, a fiduciary relationship exists between a lawyer and client as a matter of law, requiring the lawyer to hold sacred the duties of loyalty and confidentiality to the client.

In the business world, should a client's bank, financial advisor or trustee mishandle the client's money and then lose the rest, the client could file a claim for negligence, breach of contract and breach of fiduciary duty. The same is not always true for breach of fiduciary duty claims in traditional legal malpractice actions.

Some courts have determined that a client's fiduciary duty claim against an attorney is contained within the "rubric of legal malpractice,"(9) or is, "at root," the same as a legal malpractice claim.(10) For example, the Missouri Supreme Court held that if the alleged breach of fiduciary duty was "dependent on" the existence of attorney negligence, then the breach of fiduciary duty claim was considered to be the same as an action for attorney malpractice.(11)

Likewise, a California appellate court permitted a defendant-attorney to raise a legal malpractice statute of limitations defense to a breach of fiduciary duty claim, finding that "most claims for breach of fiduciary obligations can be restated as a claim for attorney malpractice" and that most fiduciary obligations arise out of the attorney-client relationship.(12)

Still, other courts and commentators consider a breach of fiduciary duty to comprise legal malpractice, even though they consider the breach to constitute a wrong that is "distinct and independent from professional negligence."(13)

Other courts have found that an action for legal malpractice is "conceptually distinct" from an action for breach of fiduciary duty, because "not all legal malpractice rises to the level of a breach of fiduciary duty."(14) A federal court in Kansas held that clients can bring breach of fiduciary duty claims, as distinguished from professional negligence claims, when the client sues the attorney in other roles than as counsel, e.g., as a trustee.(15)

While an attorney's breach of fiduciary duty may be considered to be a tort,(16) the law in many states recognizes that a professional's fiduciary duties arise from a contractual relationship and thus are governed or at least limited by the substantive law of agency, contracts and equity.

There are differences

Depending on the jurisdiction in which the action is filed, malpractice claims and breach of fiduciary duty claims can be different animals, and the disgruntled client may have to allege and prove different facts to support each. In some states, clients cannot replead the allegations supporting malpractice, but must seek monetary damages and entitle the count one for a breach of fiduciary duty.(17) Clients must allege something more and seek something else. And if you think that you are protected if you win, think again.

Beyond legal malpractice

Consider the case of a very large nationally known law firm that sued its client, CMI Corp., for unpaid fees.(18) CMI predictably counterclaimed for malpractice but also added claims for breach of fiduciary duty, breach of professional...

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