Monthly Column: Are Attorney's Fees Consequential Damages In Legal Malpractice Actions?

In reading The Legal's reporting in First Judicial District of Pennsylvania v. Rotwitt, et al., Phila. C.P. October term; 2011, No. 4286, it appears plaintiff-FJD additionally seeks attorney's fees secondary to its legal malpractice claim arising from the Philadelphia family court construction project litigation. Said differently, as reported, this, in part, legal malpractice action seeks its related attorney's fees: both regarding incurred by FJD in the underlying action as well as to be incurred in prosecuting this action.

To the best of this author's knowledge, there is no Pennsylvania precedential authority to allow the recovery of attorney's fees related exclusively to the prosecution of the legal malpractice action absent a contractual provision in the underlying fee agreement otherwise. With this action, it appears there was no contractual provision.

However, as reported cited by FJD, New Jersey holds otherwise: legal malpractice actions are "fee shifting." Saffer, et al. v. Willoughby, 670 A.2d 527 (N.J. 1996).

Willoughby, a former professional basketball player, retained the services of All-Pro Reps, Inc., and its principals, as agent and business manager, respectively. For most of his career, Willoughby arranged for All-Pro to receive a portion of his earnings for All-Pro to invest on Willoughby's behalf. However, All-Pro's principals diverted most of the money without Willoughby's authorization into tax shelters, resulting in Willoughby losing approximately $1,000,000.00.

All-Pro principal, Jerry Davis, brought an action against Willoughby alleging Davis owed $129,000.00 in fees. Willoughby retained Michael Saffer, Esquire, to defend him in the fee dispute litigation.

Willoughby asserted counterclaims against Davis alleging breach of fiduciary duty and misappropriation of funds. When Willoughby requested Saffer to implead All-Pro's other principal, Lewis Sheffel, Saffer refused claiming there was no evidence to support Sheffel's involvement in the mishandling of Willoughby's money.

A jury awarded Willoughby $768,047.84 in compensatory damages and $100,000 in punitive damages on the counterclaim. The Appellate Division (New Jersey's intermediate court) reduced the award to $750,957.78.

Thereafter, Davis filed a Chapter 11 bankruptcy petition. As a result, Willoughby was only able to collect $150,000.00 of the total judgment.

Saffer then accused Willoughby of Willoughby's failure to pay Saffer's legal fees. Willoughby alleged Saffer breached their fee agreement by billing at excessive rates and for duplicate work. This new fee dispute between Saffer and Willoughby resulted in arbitration with the fee committee for Passaic County (in New Jersey, an opportunity for fee dispute arbitration is mandatory and that opportunity must be advised of the client-defendant prior to the initiation of the fee dispute complaint with the trial court; in Pennsylvania, fee arbitration is permissive with no pre-suit requirement of notice).

During the arbitration litigation, Willoughby reviewed Saffer's file regarding the Davis-Willoughby matter - discovering a promissory note signed by Sheffel that tied Sheffel to the misappropriation of Willoughby's earnings. This caused Willoughby to allege that Saffer withheld this evidence when he advised Willoughby that there was no legal basis for impleading Sheffel. Willoughby alleged that had Sheffel been held jointly liable for the judgment, Willoughby would have been able to collect the full amount of his damages from Sheffel.

During the arbitration, Saffer filed a malpractice complaint in the trial court. Notwithstanding, the fee dispute committee found Saffer entitled to his total fee as compliant with RPC 1.5. Saffer sought to vacate the arbitration award or stay it pending disposition of the legal malpractice complaint, but the trial court denied both requests.

While much of the New Jersey Supreme Court's opinion regards the procedural interplay between the fee dispute arbitration and separate legal malpractice proceeding, the remainder of the opinion directly bears the directly upon FJD's request for legal malpractice attorney's fees.

In reaching its decision that a cause of action in legal malpractice presents a fee shifting remedy, the Saffer court surveyed other jurisdictions. The court held that there is a general rule that "permits a lawyer who rendered negligent services to collect his or her reasonable fee less damages sustained by the client." Conversely, "a client may recover the actual damages sustained by an attorney's malpractice ... ." In adopting a prior Appellate Division's opinion, the Supreme Court held an attorney precluded from fees for services negligently performed.

To the surprise of perhaps the entire New Jersey legal community, the court went further: "a negligent attorney is responsible for the reasonable legal expenses and attorney's fees incurred by a former client in prosecuting the legal malpractice action." The Supreme Court reasoned that those damages are consequential.

In reviewing New York law, the New Jersey Supreme Court rejected New York precedent holding that an arbitration panel's attorney's fee award bars a subsequent malpractice case as "necessarily includ[ing] the finding of no malpractice."

Thus, in New Jersey, as to attorney malpractice actions, the "American Rule" has been rejected (with the exception of executor or trustee undue influence). Time and time again, New Jersey courts have rejected the application of Saffer fee shifting to other similar but not attorney-malpractice (or attorney breach of fiduciary) claims. Except as discussed,Saffer has never been since expanded (but has often been criticized).

What makes legal malpractice actions different than other professional negligence matters (or, in fact, other matters altogether)? Why are claims against attorneys so different as to warrant the expansion of fee-shifting almost solely with regard to attorneys - whereas the American rule is the prevailing standard in every other category?

Unfortunately, the New Jersey courts (seem to this author) as to have not well-explained this difference. In looking at the Saffer commentary, it seems that Saffer does not make much sense - but that New Jersey attorneys are struck with it.

Certainly, in New Jersey, attorneys have traditionally been treated differently than other professionals. No other professional requires a pre-suit notice towards the opportunity of binding arbitration prior to collection of a delinquent debt (except in foreclosure). The New Jersey legal malpractice statute of limitations is six (6) years (in contrast to Pennsylvania's two years - with the Gorski perhaps breach of contract exception discussed in prior columns). The New Jersey disciplinary system seems to be much more draconian (with many more rules and more severe punishments for the violation of those rules).

Thus, in New Jersey, Saffer perhaps is a recognition that the state simply treats attorneys differently at large.

While this author can presume that difference arises out of our self-patrolling system of governance, special relationship to our clients, and the overriding duty of candor and honesty in all things as a reflection of the necessary implication that attorneys through judges do, in fact, make the law. As to the law, legislators are held to like standards (except are, in their individual capacities and, in large part, in their official capacities, immune from civil actions).

However, why are medical malpractice actions not fee-shifting? Certainly, there is no more vulnerable or unsophicate as a patient undergoing surgery. There is no less an obligation of candor and honesty with regards to a psychiatrist. Medical professionals have their own governing body and licensure requirements (including the obligation for ongoing continuing education).

Thus, it would appear on the surface that we treat ourselves differently than compared to doctors (or even other like professionals) treat each other - i.e., we treat ourselves worse (as is no more evident than in law school versus medical school: shark tank v. fraternity).

In reviewing Saffer, it would seem that the one distinct difference is, frankly, our fees.

With the exception of contractual provisions or statutes, the American Rule necessitates that a client must pay their own attorney; thus, the client cannot be truly fully compensated - made whole. In a legal malpractice action, where the client seeks that underlying compensation through a second more difficult and expensive action, the New Jersey Supreme Court seems to have understood the practicality that a client suing his attorney, at least in part, must be, as much as possible, placed in a position he would have obtained had the underlying attorney not acted negligently.

By this economic analysis, Saffer makes sense. However, the economics have never been addressed by the New Jersey courts.

In adjudicating FJD v. Rotwitt, perhaps our courts will have the opportunity to better reason regarding the practicalities (i.e., economics) of a legal malpractice action than the New Jersey courts - in adopting

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