How to Get Paid in a Tough Market
Speaker: William Voorhees, Jr., Esq.
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Blum is Glum – Bankruptcy Lawyer Has No Duty to Protect Matrimonial
Lawyers Fee Without Lien
Malcolm Blum v. Poonam Agarwal
Superior Court of New Jersey
Appellate Division
Docket No. A-4145-09T3
Decided September 12, 2011 Unpublished
OPERATIVE FACTS:
Malcolm Blum is a wonderful fellow and a very fine lawyer who has been
practicing since 1967. He represented Ms. Agarwal, taking over a very
contentious divorce from her previous lawyers at Budd Larner. The Budd Larner
lawyers had a fee claim of some $125,000.
Mr. Blum did an outstanding job, apparently, for Ms. Agarwal. In the
matrimonial case the husband was ordered to pay not only Malcolm’s fee but the
Budd Larner fee.
Naturally, the husband went bankrupt, and confusion reigned. Malcolm’s
client Ms. Agarwal retained the Gillman firm to represent her in the bankruptcy
proceedings. Not all of the husband’s property was subject to the claims of the
creditors in bankruptcy, and eventually monies were paid to the Gillman firm.
Malcolm elected not to proceed to obtain a lien for the amount due on his
fees in the matrimonial matter.
Eventually monies paid to the Gillman firm were disbursed to their client
Ms. Agarwal. Gillman knew about Malcolm’s fee claim, but paid monies to the
client anyway.
Malcolm sued not only the client but the Gillman firm, alleging that the
Gillman firm owed him a duty to protect the legal fee.
The Trial Court granted Gillman & Gillman’s Motion for Summary
Judgment finding that there was no such obligation as alleged by Malcolm, and
pointed out that Malcolm had not perfected his attorney’s lien.
CASE HOLDING:
The Appellate Division agreed with the Trial Court and rejected Mr.
Blum’s contention that the judge erred by dismissing the Complaint because
Blum did not perfect the lien prior to the disbursement of the funds.
The Appellate Court went through in great detail the procedure
encompassed by N.J.S.A. 2A:13-5, the Attorney Lien Statute, and the specific
procedures set out for enforcing such a lien under H&H Ranch Homes Inc. v.
Smith, 54 NJ Super 347.
The Appellate Court reasoned:
“Thus, Blum had sufficient time to perfect his lien against funds
due Agarwal and was aware there was a competing interest in any
funds recovered from Agarwal’s husband. This does not leave
Blum without a remedy. He has a judgment against the husband
on which there is a principle balance due and that he may collect
from the bankruptcy estate and he also has a judgment against
Agarwal for $58,215.68.”
COMMENT:
This case has a harsh lesson for all matrimonial attorneys. It is not, for
example, sufficient to have the client acknowledge the existence the amount due
to the attorney and then “file” an agreement (typically a PSA) with the county
clerk in order to later claim it is a “lien” upon the property or upon the distribution
of the proceeds. It is not a lien.
This Court has sent a clear message to lawyers to this effect:
“The legislature has provided you with a remedy. In H&H Ranch
we have told you how to obtain the remedy. If you are going to be
lazy and not do what the legislature and the courts tell you, you are
not going to be protected.”
For malpractice lawyers, this is an important limitation on the duty of
attorneys to non-clients.
We all wish Mr. Blum good luck in recovering his fee.
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Attorney Fees: Withholding of Trust Account Funds May be Defalcation Preventing
Bankruptcy Dischargeability
In Re Vincenza Leonelli-Spina (Albro v. Spina)
Leonelli-Spina v. Albro
2010 U.S. Dist. LEXIS 32105, 6-7 (D.N.J. Apr. 1, 2010)
PREFACE:
I provided Ms. Leonelli-Spina with representation during the long course of the
matters involved here. I confess I have a prejudice in favor of Ms. Spina. The
information in this blog article and my commentary are not based in any way upon my
representation of Ms. Spina nor upon the information I obtained during the course of that
representation. My comments are strictly confined to this particular United States
District Court Opinion.
OPERATIVE FACTS:
Albro, a former client, sued Spina in Bergen Superior Court for various causes of
action arising out of an employment claim handled by Spina very successfully. The Trial
Judge found Spina withdrew money from Mr. Albro's trust account, which violated the
Rules of Professional Conduct R. 1.15(a), 1.15(b) and 1.4. More specifically, Spina failed
to keep Albro's trust funds separate from her business account, she failed to return Albro's
funds when he asked for them, she deposited two of Albro's pension checks directly into
her business account, and she failed to keep Albro reasonably informed of the status of
his trust funds. The Assignment Judge also found that Spina violated New Jersey Court
Rules because she failed to maintain an up to date balance of the trust account.
Spina filed for bankruptcy and sought to discharge the Albro judgment.
The Bankruptcy Court declined to discharge the award of $260,000 in
compensatory damages, $211,000 for unauthorized withdrawals from an escrow account,
$14,000 in interest and penalties because of Spina’s failure to pay taxes on behalf of
Albro, $350,000 punitive damages, $145,000 in attorney’s fees, and $16,000 in costs,
finding these debts were the results of “defalcation” within the meaning of the
Bankruptcy Code.
CASE HOLDING:
Judge Sheridan affirmed the findings of the Bankruptcy Court. He opined:
“When an attorney is the debtor the term defalcation while acting in a fiduciary
capacity has a broader scope than fraud. 11 U.S.C. § 523(a)(4). In order for a
debt to be excepted from discharge under this statutory phrase, a creditor must
prove the existence of a fiduciary relationship, and that a fraud or defalcation
occurred while the debtor acted in a fiduciary capacity. In re Tamis, 398 B.R. 124,
130 (Bankr. D.N.J. 2008). "Defalcation refers to a fiduciary's withholding of
funds, and applies to conduct that does not rise to the level of fraud,
embezzlement, or misappropriation." Casini v. Graustein (In re Casini), 307 B.R.
800, 819 (Bankr. D.N.J. 2004). "A defalcation occurs when a fiduciary fails to
account for funds received in his fiduciary capacity." Id. (citation omitted). An
individual must act recklessly when committing a defalcation while acting in a
fiduciary capacity in order for the debt to be discharged under this provision. In re
Tamis, 398 B.R. at 132. A debtor's belief that he or she was acting in good faith
will not prevent their debt from being excepted from discharge if their behavior
demonstrates an extreme departure from the ordinary standards of care. See id. at
133. In this case, the facts found by the Assignment Judge in the Spina Litigation
clearly show Spina acted recklessly in the administration of Albro's trust account.
Defalcation correctly includes her actions. See Goldberg v. New Jersey Lawyers'
Fund for Client Protection, 932 F.2d 273, 278 (3d Cir. 1991).
In addition to defalcation, Spina was found culpable of fraud in the Spina
Litigation. The Assignment Judge considered the standards and applied the facts.
(see pages 4-7 of this Opinion) "[F]raud has the same meaning under the
bankruptcy code as in the common law of torts." Araps v. DeBaggis (In re
DeBaggis), 247 B.R. 383, 388-89 (Bankr. D.N.J. 1999) (relying on Field v. Mans,
516 U.S. 59, 69-70, 116 S. Ct. 437, 133 L. Ed. 2d 351 (1995)). The Assignment
Judge concluded the facts show actual fraud, and the Bankruptcy Court found that
all the factual findings in the Spina Litigation arose from Spina's fraud or
defalcation.”
COMMENT:
This case highlights the enhanced duties of an attorney (as compared to the
ordinary fiduciary) when standing in a fiduciary capacity to the client on the question of
money handling. The Court held that the attorney has a “broader scope” than fraud. The
fact than an attorney may have a sincere belief that he or she was acting in good faith will
not preclude non-dischargeability when the behavior of the attorney demonstrates an
“extreme departure” from the ordinary standards of care.
Thus, when it comes to the handling of fees, it seems that for purposes of nondischargeability “extreme negligence” (my phrase) is tantamount to legal fraud.
I doubt that the readers of this blog are engaged in any conduct which might give
rise to claims of this type against them. This case is interesting for Plaintiffs attorneys
who are successful in obtaining a judgment for the return of legal fees under Saffer v.
Willoughby and its progeny. In extreme cases, the debtor attorney might seek the
protection of bankruptcy. The legal malpractice Plaintiffs lawyer need only prove that
the debtor attorney was “extremely negligent” (if you will indulge my turn of phrase) in
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order to prevent the attorney from skulking away into the night under the cloak of
bankruptcy.
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Plaintiff’s Legal Malpractice Expert Owes No Duty to Defendant Lawyer
Reilly, Supple & Wischusen, LLC. V. Malcolm Blum v. Michael P. Ambrosio
Appellate Division Docket No. A-2618-09T3
Unpublished, Decided March 9, 2011
OPERATIVE FACTS:
The well-known, excellent and distinguished defense firm of Reilly, Supple, and
Wischusen defended Malcolm Blum, Esq. in a legal malpractice action brought by
Rabbani. Rabbani engaged the expert services of Michael Ambrosio as his expert
witness, and Ambrosio issued a report.
The Wischusen firm won Summary Judgment on behalf of Blum dismissing
Rabbani’s malpractice Complaint despite the existence of the report. Good job!!!
If Blum was grateful for these services, he did not show it. He stiffed the Reilly
firm for $102,000. The Reilly firm, which for some unknown reason is unwilling to work
for free, filed this collection action against Blum for unpaid legal fees.
Blum then filed a Third Party Complaint against Ambrosio, alleging that
Ambrosio’s opinions in the underlying action were “negligently prepared and constituted
malpractice”. Ambrosio moved to dismiss the Third Party Complaint before the Trial
Judge, Judge Wertheimer.
Judge Wertheimer concluded that the litigation privilege barred Blum’s cause of
action against Ambrosio, and therefore Judge Wertheimer dismissed Blum’s Third Party
Complaint with prejudice “for failure to state a cause of action”.
Ambrosio also claimed that Blum’s daughter, an attorney, could not have
provided a valid Affidavit of Merit. This interesting issue was never reached.
As an aside, Ambrosio filed a Motion for fees and costs under Rule 1:4-8 which
Judge Wertheimer denied. Blum appealed the dismissal of his case, and Ambrosio
appealed the denial of his Rule 1:4-8 Motion.
CASE HOLDING:
The Appellate Division went beyond the ruling of the Trial Court. The Appellate
Division affirmed the dismissal of Blum’s case against Ambrosio because of the litigation
privilege, but then went on to say:
“Ambrosio did not owe a duty to Blum in the underlying litigation.
Attorneys may be held to owe a duty to non-clients when the attorneys
know, or should know, that non-clients will rely upon the attorney’s
representations and the non-clients are not to remote from the attorneys to
be entitled to protection.”
The Court found there was no reliance upon Ambrosio, and therefore no duty.
The Court also upheld the denial of the Rule 1:4-8 Motion.
COMMENT:
This is the first New Jersey case with which I am familiar which deals with the
question of whether or not a legal malpractice expert owes a duty to the adverse party.
The Appellate Division’s emphasis on existing case law which limits duty to a non-client
to those cases in which there was reliance by the non-client upon the attorney is
completely consistent with existing New Jersey case law.
I thought that Ambrosio’s raising of the “litigation privilege” argument was very
well done. That was the basis of the Trial Court’s decision. The Appellate decision
agreed with the Trial Court in the most summary fashion.
There are other lessons here. I gather that Mr. Blum was uninsured because the
Reilly firm obviously did not get paid by an insurance carrier. The fact that Blum got out
on Summary Judgment shows that the Plaintiff’s case was extremely thin to begin with.
The amount of the bill for fees and costs incurred by the Reilly firm ($102,000 unpaid)
shows how expensive it is to litigate legal malpractice claims. The Reilly firm will no
doubt get at least part of its fee, but the Plaintiff’s attorney whose client’s claim was
defeated by Summary Judgment probably spent just as much time and came up empty
handed.
Listen up Plaintiffs’ lawyers – legal malpractice cases are not rear end hits. Even
the simplest of cases means that you will be gambling $100,000 of your time. You
should think twice about not only whether or not an attorney is guilt of malpractice, but
whether or not, in light of the tremendous amount of work you are going to put into a
case, the malpractice is causally linked to substantial damages.
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Another Legal Malpractice Counterclaim to Fee Claim by Lawyers
Dismissed
Schepisi & McLaughlin v. Anna Manos
Superior Court of New Jersey
Appellate Division
Docket No. A-2638-09t1
Decided September 19, 2011 Unpublished
OPERATIVE FACTS:
I need only be brief with these operative facts.
The Plaintiff law firm sued their former client for some $31,000 in legal
fees. The former client counterclaimed for malpractice. She obtained an
Affidavit of Merit, but nothing further. In her legal malpractice Counterclaim,
she recited a laundry list of alleged problems with her lawyers, including the fact
that her lawyers did not do what she told them to do.
The Trial Court, without a legal malpractice expert, denied the client’s
Motion for Summary Judgment, granted Schepisi & McLaughlin’s Motion for
Judgment dismissing the Counterclaim.
The Trial Court also entered judgment in the full amount of the fee claim
without Affidavits, etc., etc..
The client appealed.
CASE HOLDING:
The Appellate Division agreed with the Trial Court. The legal malpractice
Counterclaim was out.
The Appellate Division appointed to something which is a common
feature of legal malpractice Counterclaims as follows:
“Here, Manos appears to set herself up as the expert on legal
malpractice because many of her allegations center around
Schepisi not doing what she ordered with respect to the conduct of
the litigation. Such attorney-client disagreements are not legal
malpractice as defined by our case law. Schepisi may have
deviated from Manos’ instructions of legal strategy. But he was
not bound to follow a non-lawyer’s strategy plan.”
That is pretty strong language, and appears to contradict certain case law.
“In fact, it could be an act of malpractice if a lawyer follows a
client’s strategy if doing so will cause the lawyer to deviate from
the standard of care required by the lawyer.”
This is also difficult to understand. If a client chooses to commit legal
hari-kari against a lawyer’s advice, the lawyer is duty bound to follow those
instructions as long as it does not violate any Ethical Rules. At least, that is what
I think.
COMMENT:
This is another example of a law firm which files a Complaint to get paid
a legal fee and instead purchases a peck of trouble. For $31,000, is it worth it to
do battle in the Trial Court with a determined pro se, head to the Appellate
Division, prevail in the Appellate Division, and then get a remand for a proper
adjudication on the amount of your fee.
Here Schepisi & McLaughlin represented itself, so once again I presume
that the malpractice carrier was not involved. However, you cannot hide
malpractice claims. Each application asks if you have received any malpractice
claims, whether or not you have elected to report or self-defend.
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Philip B. Vinick, Esq. v. Paul A. Friedman, Esq. et als.
Superior Court of New Jersey
Appellate Division
Docket No. A-2590-09T3
Decided July 28, 2011 (Unpublished)
OPERATIVE FACTS:
Attorney Philip B. Vinick, Esq. sued Attorney Paul A. Friedman and three firms
with which Mr. Friedman was associated.
Vinick was seeking to collect a portion of a legal fee that the Friedman
Defendants had received for services rendered in defending Alan Funk, a client of
Vinick.
Friedman was an expert in labor and employment law, specializing in ERISA
litigation. Although an experienced litigator, Friedman is not a certified trial attorney
pursuant to R. 1:39 and thus may not divide or share a legal fee with a referring attorney
pursuant to the provisions of that Rule.
When Vinick’s client Funk was named as a Defendant as an employer trustee and
fiduciary of a union health fund, Vinick undertook his representation. Apparently
recognizing that this representation called for specialized expertise, Vinick recommended
that Friedman be engaged to “also” represent Funk in the lawsuit. Funk retained
Friedman, with Plaintiff remaining as “co-counsel” of record. Plaintiff Vinick was paid
for his services as co-counsel.
After Friedman commenced representing Funk it was discovered that Travelers
wrote an insurance policy insuring the fund’s trustees (like Funk) against acts of
negligence. Travelers agreed to defend Funk commencing after a certain date.
According to Vinick, he realized that Travelers would only pay one law firm,
Friedman. According to Vinick (and this was denied by Friedman) the two entered into a
verbal agreement to divide the legal fees Friedman received in violation of R. 1:39, with
Plaintiff getting one-third of the fees.
Friedman continued to represent Funk and get paid. The action settled, and
Vinick demanded that Friedman pay him a portion of the legal fees that they had
received. Friedman refused.
Vinick’s First Count claimed breach of contract. The Second Count was quantum
meruit, and the Third Count was unjust enrichment.
The Trial Court dismissed all three counts and quashed a Subpoena served upon
Travelers to obtain billing records as being moot.
Vinick appealed.
CASE HOLDING:
Regarding the quantum meruit claim, Vinick claimed that he was a “rainmaker”,
thereby entitling him to a one-third referral fee despite the existence of R. 1:39.
The Appellate Court dismissed this argument out of hand, pointing out that to
allow such a recovery as a “rainmaker” would “require a wholesale ignoring of the Rules
that have been propagated to protect the client’s interests.”
The Appellate Division also affirmed the dismissal of Vinick’s breach of contract
claim. The oral alleged contract to share fees was not in writing as required by R.P.C. 1.5
nor does it “bare some proportionality to the services rendered by counsel…”. The Court
observed “one cannot back into proportionality at the end of the representation…”.
Finally, the Appellate Court upheld the dismissal of Vinick’s claim for “unjust
enrichment” because any “unjust enrichment” would violate the provisions of R. 1:39.
The Appellate Court thereby affirmed the dismissal of Vinick’s claim in all
respects.
COMMENT:
If attorneys want to know how NOT to handle referral fee issues this is the case to
examine.
One might infer from reading the case that Vinick, correctly perceiving that he did
not have the specialization required to handle an ERISA claim in Federal Court, sought to
jump on the fee bandwagon once the mother load of Travelers’ deep pockets were found.
Apparently, Mr. Vinick did not make any of these claims until the end of the case. One
might also infer from the holding that neither the Trial Court nor the Appellate Court
believed Vinick’s claim that there was some kind of an oral argument. Rather politely,
both the Trial Court and the Appellate Court assumed arguendo that Mr. Vinick was
telling the truth.
While Mr. Vinick viewed himself as a “rainmaker”, Wikipedia’s comment on the
word schnorrer: “The English usage of the word denotes a sly chiseler who will get
money out of another any way he can, often through an air of entitlement. A schnorrer is
distinguished from an ordinary beggar by dint of his boundless chutzpah.”
You read this case and decide whether or not it is boundless chutzpah for a lawyer
to proclaim to a Court that he is unfettered by Ethical Rules such as R.P.C. 1.5 and Court
Rules such as 1:39. Certainly, the Appellate Division did not think that this claimant
lawyer was entitled.
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