The "Sophisticated" Client in Legal Malpractice

There is no lack of irony in legal malpractice litigation.  Because of the structure of the "case within a case" defendant attorney often takes on the defenses available in the underlying case.  So, plaintiff's attorney sees defendant attorney loudly and heatedly making the very same arguments that were made in the underlying action with absolutely no cognitive dissonance.

Here is an example in SF Holdings Group, Inc. v Kramer Levin Naftalis & Frankel LLP ;2008 NY Slip Op 08520 ; Decided on November 13, 2008 ; Appellate Division, First Department .
 
This was a fairly complicated transaction in which a plant in St. Thomas was left off the table.  Legal malpractice litigation ensued, and one defense was that plaintiff, a sophisticated business, knew that the plant was not part of the transaction.

Here is the interesting part.  The court held that being sophisticated, yet relying on the attorney is proper, and will not amount to a full defense to legal malpractice.  The attorney would argue that there can be no legal malpractice when the client understands the risks and the nature of the transaction.

The court held that such argument amounts to potential mitigation only. "Given the procedural context, the motion court correctly rejected Kramer Levin's argument that plaintiffs, as a matter of law, were aware that St. Thomas was not working capital based on the merger agreement itself. Kramer Levin did not conclusively establish, for the purposes of plaintiffs' alleged awareness, that the merger agreement on its face discloses that the St. Thomas facility was not included under the definition of working capital (see Held v Kaufman, 91 NY2d 425, 431-432 [1998]). Further, to the extent that Mehiel, a sophisticated businessman, executed the merger agreement on behalf of plaintiffs with full knowledge of its terms, "[a]ny negligence on the part of [the client] in reviewing the agreement is merely a factor to be assessed in mitigation of damages" (Mandel, Resnik & Kaiser, P.C. v E.I. Electronics, Inc., 41 AD3d 386, 388 [2007]
 
Prior Knowledge and Legal Malpractice Insurance

Whether attorney for Plaintiff or for defendant, each practitioner in the Legal Malpractice field has either a professional or personal interest in legal malpractice insurance.  No one, whether prosecuting or defending legal malpractice cases wants to lose or have coverage excluded, and attorneys do not want to have coverage lost for the defendants in a legal malpractice case.

Here is a blurb from McGuire Woods on prior knowledge exclusions in legal malpractice insurance:

"Professional liability and D&O insurers regularly rely on "prior knowledge exclusions" to restrict coverage. These exclusions apply if the insured knew, prior to commencement of the policy period, that the activity in which it was involved would result in a claim against it. Typically, cases involving prior knowledge exclusions turn on the extent of the insured's knowledge of the risk of a claim and whether that knowledge is sufficient to bar coverage.

Recently, in Executive Risk Indemnity Inc. v. Pepper Hamilton LLP, 865 N.Y.S.2d 25, 2008 N.Y. App. Div. Lexis 6885 (N.Y. App. Div. Sep. 23, 2008), the New York Supreme Court, Appellate Division construed a "prior knowledge" exclusion very narrowly in a declaratory judgment action involving a dispute over coverage for alleged legal malpractice. The court held that in order to apply the exclusion to claims against a law firm based on the wrongful conduct of the firm's client, the insurer must prove not only that the law firm had knowledge of its client's misconduct, but also that the firm participated in the client's wrongful conduct in such a way that it believed that it might be subject to liability for that conduct.

The coverage dispute arose from Pepper Hamilton's representation of Student Finance Corporation, which financed student loans and then securitized and resold them to investors. In March 2002, Student Finance's principal told a partner in the law firm that the company had been using its own reserve accounts to make forbearance payments for overdue loans. By covering up defaults, Student Finance allegedly made its securities more attractive to investors.
 
Recovering Workers' Compensation Liens in Legal Malpractice

Worker is injured on the job by a paving machine.  Worker collects WC benefits from his employment.  Worker sues paving machine manufacturer in products liability, and his attorney blows the statute.  Worker succeeds in legal malpractice.  May WC carrier recoup benefits?

Had the case been tried as a products liability case [not legal malpractice] in NY, the answer would be yes, recoupment.  Here, in this Florida case, the answer is no. Here is the blurb from Risk & Insurance.com.

"Case name:Columbia v. Brewer, No. 1D07-5658 (Fla. Dist. Ct. App. 10/22/08).

What it means: An injury suffered as a result of legal malpractice does not occur in the course of a claimant's employment, and the defendants in a legal malpractice case are not third-party tortfeasors under Florida law. As a result, the claimant's employer is not entitled to recoup the workers' compensation benefits it has paid from the proceeds of the legal malpractice settlement. Instead, it may sue the third party that caused the claimant's injuries if the claimant fails to do so within one year after the cause of action accrues. "