recent developments in texas legal malpractice law · alistair dawson is experienced in practicing...

RECENT DEVELOPMENTS IN TEXAS LEGAL MALPRACTICE LAW

ALISTAIR B. DAWSON, Austin MO TAHERZADEH, Austin

Beck, Redden & Secrest

BROADUS A. SPIVEY, Austin Spivey & Ainsworth

State Bar Of Texas 27TH ANNUAL ADVANCED CIVIL TRIAL COURSE

August 25-27, 2004 – Dallas September 22-24, 2004 – Corpus Christi

November 10-12, 2004 - Houston

CHAPTER 12

ALISTAIR B. DAWSON

Alistair Dawson is experienced in practicing almost every aspect of commercial litigation, ranging from antitrust claims and class action suits to oil and gas disputes. A partner with Beck, Redden & Secrest, L.L.P. since 1998, he has demonstrated a high degree of competency in preparing and trying complex, high-stakes cases. He has teamed effectively with lawyers of prominent national firms including Gibson, Dunn & Crutcher, Skadden, Arps, O'Melveny & Myers, Paul, Weiss and others to prepare complex multi-party cases for trial.

Mr. Dawson has represented a variety of clients in many circumstances, working with medium-sized cases to large complex cases involving multiple parties and hundreds of millions of dollars. He has additional experience in labor, trade secret, attorney malpractice and insurance disputes. He currently serves as Partner in charge of Attorney Employment.

Highlights of his experience include: • Currently defending a Fortune 100 company in an antitrust case involving allegations of attempted monopolization and exclusive dealing where the plaintiff claims more than $1 billion in damages. Case is set for trial in February 2004 in Federal Court in Texarkana. • Defending Compaq Computer in four nationwide consumer class actions all brought in Beaumont, Texas. One of the cases is currently pending before the Texas Supreme Court where it was dubbed "the case to watch" in 2003 by the Texas Bar Journal. The other three cases remain pending before the trial court. • Defending ExxonMobil in a suit brought by the State of Texas for unpaid royalties. The trial court granted ExxonMobil's motion for summary judgment and the matter is now on appeal to the Court of Appeals. • Successfully tried a case in New York involving an oil and gas prospect in East Texas on behalf of famed New York developer Sheldon Solow. The case was tried for approximately three weeks in the Supreme Court of New York in Manhattan. The case settled during the cross-examination of the plaintiff for less than 1/10th of the damages sought. • Successfully defended Marathon Oil in a multi-million dollar royalty dispute brought in Henderson, Texas (in which more than 200 of the plaintiffs were Henderson residents). After a four-week trial, the jury returned a verdict in Marathon's favor. • Tried a case on behalf of four businesses whose shops were damaged as a result of a fire that occurred at the Highland Village Shopping Center. Trial lasted two weeks. • Successfully defended IBM in products liability cases involving repetitive stress injury filed in Texas. Five cases were brought in various courts throughout the state and summary judgments were granted in all five cases. In connection with those cases, Mr. Dawson served on the National Defense Steering Committee, which was comprised of representatives from all major companies throughout the United States who had been sued for alleged product defects resulting from repetitive stress injury. • Led a team of 10 lawyers and more than 20 experts in suits on behalf of AT&T to gain entry into the local phone markets in Texas, Oklahoma and Kansas. As a result of these proceedings, interconnection agreements were executed with Southwestern Bell in all three states permitting AT&T to enter the market and offer service. • Represented Mobil Oil in oil royalty/antitrust litigation brought by the General Land Office alleging that Mobil and others had underpaid royalties because the "posted price" did not translate to market price. In connection with this case, Mr. Dawson represented Mobil on the joint defense steering committee. • Defended Morgan Stanley in a fraud case brought by a former customer/investor. The case was tried before the NADA, which ruled in Morgan's favor and awarded it attorneys' fees. • Involvement (along with patent counsel) in several patent infringement cases on behalf of Hyundai and Compaq. Education and Qualifications Mr. Dawson graduated magna cum laude from Vanderbilt University in 1986 with a degree in International Economics and International Business. He graduated with honors from the University of Texas School of Law in 1989, where he served as an editor of the Texas Law Review and was a member of the prestigious Chancellor's Society. He was admitted to practice law in Texas in 1989, is admitted to practice in all state and federal courts in Texas, the United States Supreme Court and the Court of Appeals for the Fifth Circuit.

Legal and Professional Activities

Mr. Dawson is active in several national and regional bar associations as well as other law-related educational and professional organizations.

Texas Supreme Court Advisory Committee

Member, International Association of Defense Counsel

Business Litigation and Corporate Counsel Committee of the American Bar Association

Member, State Bar Litigation Council (Chair Nominating Committee)

Member, State Bar Litigation Section Committee on Jury Selection (1998 - 2002)

State Bar of Texas CLE Committee

Chair, Antitrust Section of the Houston Bar Association

Member, HBA Administration of Justice Committee (1998 - 2000)

Member, HBA Planning Committee (1998 - 2000)

Fellow, Texas Bar Foundation

Fellow, Houston Bar Foundation

Member, Texas Association of Defense Counsel

Member, Garland Walker Inns of Court

Keeton Fellow, University of Texas School of Law

Dean's Roundtable, University of Texas School of Law

College of the State Bar of Texas

Editorial Board, THE ADVOCATE

Adjunct Professor, University of Houston Law Center

Speeches and Publications

Mr. Dawson routinely speaks and writes articles on various aspects of litigation and the legal profession. Some of his work includes:

"Recent Developments in Texas Legal Malpractice Law" given at the Litigation Update in January 2003



"Discovery Building Blocks" given at the Advanced Personal Injury Update, 2003

"Privileges Update" given at the Advanced Personal Injury Update, 2003

"Recent Developments in Texas Legal Malpractice" given at the 2003 Advanced Personal Injury Seminar

"Legal Malpractice/3rd Party Liability" given at the 2002 Advanced Civil Trial Course

"Legal Liability" given at the 17th Annual IP Conference in November 2001

"Business Litigation Survey" given at the 2001 Advanced Civil Trial Course

House Bill 4 and the Future of Class Action Litigation, 24 THE ADVOCATE (2003)

Regulating Referral Fees: An Evolutionary Process, December 2003, TEXAS BAR JOURNAL

Narrowing the Broad Form Submission, published January 2004, TEXAS BAR JOURNAL

Innovative Thinking in Jury Innovations, Vol. 18, No. 2 THE ADVOCATE (1999)

“Recent Developments in Summary Judgment” given at the Litigation Update in January 2004

“Update on Referral Fee Issues” given at Houston Bar Association Litigation Section luncheon in February 2004

“Texas Rules of Civil Procedure: An Update” given at the Advanced Litigation Update, Houston Paralegal Association in April 2004

“House Bill 4 and the Future of Class Action Litigation” given at the State Bar of Texas Antitrust and Business Litigation Section seminar in April 2004

Professional Memberships and Community Service

Board of Directors, Literacy Advance of Houston (1995 - 1999)

Committee Member, Houston Livestock Show and Rodeo

Chair, Capital Campaign for The Parish School (non-profit school for children with special needs)

Chair, Underwriting Committee for The Parish School (1998 - 2002)

Board of Directors, The Parish School (1999 - Present)

Member of the Board of Directors, Theatre Under The Stars

Distinguished Service Award, The Parish School

Interests and Hobbies

Mr. Dawson is originally from the United Kingdom. His family came to the United States in the late 1960s. He enjoys golf, traveling, theatre and coaching his kids' soccer and basketball teams. Mr. Dawson is an active family man. He is married to Wendy King Dawson and has three children. Kaitlyn Dawson, 13, is active in sports (basketball and softball) and a would-be actress/singer. Cameron Dawson, 8, loves art and school and (hopefully) will take up an interest in golf. Collin is an infant who keeps his mother fully occupied (and is the apple of her eye).

BECK, REDDEN & SECREST, L.L.P.

Background Information Broadus A. Spivey practices law in the Law Offices of Broadus a Spivey, in Austin

Texas, and he is:

a graduate of the University of Texas (BA, 1960) and U.T. Law School (J.D., 1962);

a member of the State Bar of Texas (President 2001-2002);

a member of the Texas Trial Lawyers Association (President 1981-1982);

an Advocate of the American Board of Trial Advocates;

a Fellow of the International Society of Barristers;

a Fellow of the International Academy of Trial Lawyers (President 2002-2003);

a Fellow of the American College of Trial Lawyers;

a Fellow of the College of the State Bar of Texas;

a Fellow of the Texas Bar Foundation;

a member of the National Board of Advocacy, ATLA;

a member of Trial Lawyers for Public Justice;

a member of the Philosophical Society of Texas;and

is board certified in Personal Injury Trial Law by the Texas Board of Legal Specialization.

Texas Legal Malpractice Law Chapter 12

i

TABLE OF CONTENTS

I. INTRODUCTION....................................................................................................................................... 1

II. THE LAW OF LEGAL MALPRACTICE..................................................................................................... 1

III. THE ATTORNEY-CLIENT RELATIONSHIP.............................................................................................. 1 A. Creation of the Relationship .................................................................................................................... 1 B. “Beauty Pageant” ................................................................................................................................. 1 C. Who is the Client—Corporate Entities ................................................................................................... 1

IV. ATTORNEY’S LIABILITY......................................................................................................................... 2 A. The Texas Disciplinary Rules of Professional Conduct—Prima Facie Evidence of the Standard of Care..... 2 B. Negligence........................................................................................................................................... 2

1. Attorney’s Negligence and Resulting Damages is a Question of Fact................................................ 3 2. An Attorney is Required to Know the Clearly Defined Rules of Law ................................................ 3 3. No Liability for “Failing to Assert Every Conceivable Defense Tactic Under the Sun”....................... 3 4. Attorney Not Liable For Unilateral Acts of Legal Secretary.............................................................. 3 5. Being Inexperienced and Having Differences of Opinion With Client Does Not Automatically Make a

Lawyer Guilty of Malpractice......................................................................................................... 4 6. Damages....................................................................................................................................... 4 7. Acts or Omissions by the Attorney that Resulted in Damages to the Client ........................................ 5 8. The Court Relies On Plaintiff’s Own Pleadings and Expert’s Testimony To Characterize Claims as

Malpractice Claims........................................................................................................................ 6 9. When Attorney Negates An Element of The Legal Malpractice Claim, Summary Judgment For The

Attorney Is Proper On The Additional Causes Of Action When They Arise From The Same Set of Facts............................................................................................................................................. 6

C. Breach of Fiduciary Duty ...................................................................................................................... 6 1. Fee Forfeiture As Damages for Breach for Fiduciary Duty ............................................................... 7 2. Potential Conflicts ......................................................................................................................... 7 3. Multiple Party Representation ........................................................................................................ 8 4. Example of Attorney Breach of Fiduciary Duty ............................................................................... 8 5. Client May Recover Mental Anguish and Exemplary Damages ........................................................ 9 6. Expert Testimony is Required Regarding the Standard of Skill and Care........................................... 9

D. Breach of Contract as Cause of Action ................................................................................................... 9 1. Attorney’s Fees are a Common Source of Disputes between Clients and Attorneys.......................... 10 2. Sending the Client a Bill and Ending a Relationship With Her At The Same Time is Not Extreme and

Outrageous Behavior ................................................................................................................... 11 E. Statutory Causes of Action .................................................................................................................. 11 F. A Legal Malpractice Plaintiff May Not Split His/Her Claims ................................................................. 12

V. ARBITRATION OF MALPRACTICE CLAIMS......................................................................................... 14

VI. DEFENSES TO LEGAL MALPRACTICE CLAIMS.................................................................................. 14 A. Defenses—Generally .......................................................................................................................... 14 B. Third Party Liability and the Privity Defense........................................................................................ 14

1. The “Bright Line” Requirement Relaxed....................................................................................... 15 2. Fraudulent Conduct Creates an Exception to the Privity Requirement ............................................. 15

a. Aiding and Abetting—Securities and other Fraud................................................................... 15 b. Negligent Misrepresentation.................................................................................................. 15

C. Statue of Limitations ............................................................................................................................. 16 1. When is a Claim Not a Legal Malpractice Claim, Such That A Four-year Statute of Limitations

Applies?...................................................................................................................................... 16 2. When Does the Action Accrue For the Purpose of the Statute of Limitations?.................................. 17

a. The Discovery Rule Is an Exception to the Statute of Limitations ............................................ 17 b. The Distinction Between The Discovery Rule and Fraudulent Concealment Often May Be

Blurred in Legal Malpractice Actions Where Failure to Disclose is Tantamount to Concealment17


ii

c. Discovery of Injury Occurs When Plaintiff is Exposed to the Risk of Harm.............................. 17 d. Discovery of Injury Applies to the Knowledge of Facts As Opposed to A Knowledge of the Law

........................................................................................................................................... 18 e. Client Is Entitled To Rely On His Own Lawyer’s Statements For Purposes Of The Discovery

Rule .................................................................................................................................... 18 f. An Attorney’s Breach of His Fiduciary Duties May Be “Inherently Undiscoverable”................ 19

3. The Hughes/Murphy Rule is Again Just the Hughes Rule ............................................................... 20 4. The Hughes Tolling Rule Does Not Apply to DTPA Claims ........................................................... 20 5. The Hughes Rule Does Not Apply to Attorney’s Transactional Work ............................................. 21

VII. SARBANES-OXLEY AND THE POTENTIAL IMPLICATIONS OF THE “UP-THE-LADDER” AND “NOISY WITHDRAWAL” REQUIREMENTS........................................................................................... 21

VIII. PRACTICAL TIPS FOR AVOIDING MALPRACTICE CLAIMS ............................................................. 22


1

TEXAS LEGAL MALPRACTICE LAW I. INTRODUCTION

Lawyers conduct their day to day activities in large part insulated from the critique and judgment of non-lawyers. That fact changes when, according to the (former) client, something serious has gone wrong, and the client, or a third party, files a legal malpractice claim. Recent studies and statistics support the general assumption among lawyers that legal malpractice claims are on the rise.1 To that end, the scope of this article is broad. First, this article will focus on the term legal malpractice. Legal malpractice is a catch-all phrase that encompasses a group of causes of action by which clients and third parties attempt to recover damages from lawyers. Second, this article will discuss some of the recent changes that have taken place in Texas legal malpractice law. This article then will conclude with what this author believes are practical tips for avoiding malpractice claims. II. THE LAW OF LEGAL MALPRACTICE

Legal malpractice based on professional negligence compensates clients and other plaintiffs for injury caused by a lawyer’s action or inaction. Legal actions against lawyers are rooted in two common law causes of action. Like a tort action for negligence, the plaintiff in a legal malpractice claim must establish that the defendant owed a duty to the plaintiff and that there has been a breach of that duty. Generally, that translates into showing that the lawyer acted without reasonable care. Other elements of a negligence cause of action, such as proximate cause and damages, must also be proven.

A legal malpractice action can also be based on an action for a breach of contract. That contract can be created in a written instrument, or it can be implied from the conduct of the parties. From the creation of that relationship—i.e., the creation of an agency relationship—it follows that the attorney client relationship imposes the duties of a fiduciary upon the attorney. Regardless of the theory alleged, the ultimate issue in a legal malpractice case is whether there has been a breach of duty. This issue—also known as “fracturing”—is discussed in section IV. See also Burrow v. Arce, infra. III. THE ATTORNEY-CLIENT RELATIONSHIP A. Creation of the Relationship

In Texas, an attorney-client relationship is created when the parties manifest, whether explicitly or

1 See A.B.A. STANDING COMM. ON LAWYER’S PROF’L LIAB., Profile of Legal Malpractice Claims 1996-1999 Study 5 (April 2001) (hereinafter, “ABA Study”).

implicitly by their conduct, an intention to create the attorney-client relationship. See National Med. Enters., Inc. v. Godbey, 924 S.W.2d 123, 147 (Tex. 1996). The formation of the relationship does not depend on the payment of a fee. Prigmore v. Harware Mut. Ins. Co., 225 S.W.2d 897, 899 (Tex. Civ. App.—Amarillo 1949, no writ). From these general principles it follows that a fiduciary relationship can be established even when an attorney merely enters into a discussion with a potential client. See Nolan v. Freeman, 665 F.2d 738, 739 n.3 (5th Cir. 1982). The test of whether the attorney-client relationship was formed is the reasonable expectation of the client in light of all the surrounding circumstances. See Perez v. Kirk & Carrigan, 822 S.W.2d 261, 265 (Tex. App.—Corpus Christi 1992, writ denied). B. “Beauty Pageant”

In B.F. Goodrich Co. v. Formosa Plastics Corp., 638 F. Supp. 1050 (S.D. Tex. 1986), plaintiff Goodrich attempted to disqualify the opposing side’s law firm because its attorney was one of five attorneys interviewed and considered for representation—hence the “beauty pageant.” The court concluded no relationship had been formed, mainly because “Goodrich basically designed and controlled the structure of each interview…. Only Goodrich attorneys met with the candidates and those attorneys regulated what information was furnished to each candidate.” Id. at 1052. Most important, however, was the court’s holding that the “fact that the attorney-client relationship had not yet been established does not mean that the [defendant’s] firm owed no duty whatever to Goodrich.” Id. In such instances, then, the lawyer must treat the information obtained from even a potential client as confidential, even if no attorney client relationship is ever formed. C. Who is the Client—Corporate Entities

In terms of delineating who the client is, representing legal entities poses distinct problems for lawyers. When an attorney represents legal entities such as corporations or limited partnerships, the directors or limited partners of those entities cannot legitimately claim that they personally have an attorney-client relationship with the attorney. TEX. DISCIPLINARY R. PROF’L CONDUCT 1.12, reprinted in TEX. GOV’T CODE ANN., tit. 2, subtit. G app. A (Vernon Supp. 2002) (Tex. State Bar R. art. X, § 9) (“A lawyer employed or retained by an organization represents the entity.”) The following are general principles regarding the client in corporations and limited partnerships. • Corporations : Rendering legal services to a

corporation generally does not, by itself, create a

http://www.TexasBarCLE.com/CLE/PMCasemaker.asp?table=TX_caselaw&volume=924&edition=S.W.2d&page=123&id=26895_01


http://www.TexasBarCLE.com/CLE/PMCasemaker.asp?table=US_5thcircuit&volume=665&edition=F.2d&page=738&id=26895_01


http://www.TexasBarCLE.com/CLE/PMCasemaker.asp?table=US_distctopinions&volume=638&edition=F.Supp.&page=1050&id=26895_01


2

duty for the attorney to the corporation’s investors, its officers and directors, and its shareholders. See Wingate v. Hajdik , 795 S.W.2d 717, 719 (Tex. 1990); Hamlin v. Gutermuth, 909 S.W.2d 114, 116 (Tex. App.—Houston [14th Dist.] 1995, writ denied).

• Corporations : In Scherrer v. Haynes and Boone, L.L.P., 2002 Tex. App. LEXIS 999 (Tex. App.—Houston [1st Dist.] Feb. 7, 2002, no pet.) (not designated for publication), the court found that the plaintiff, a shareholder of the corporation represented by the defendants, could not maintain a legal malpractice claim against the law firm—even if its advice had caused him harm—because he did not have privity with the allegedly offending attorneys. In other words, a shareholder in a corporation cannot, under Texas law, maintain a legal malpractice case against the lawyers of the corporation

• Limited Partnerships : Malpractice actions by limited partners against attorneys representing limited partnerships have been unsuccessful, usually because of the lack of any duty to the limited partners personally. Hopper v. Frank , 16 F.3d 92 (5th Cir. 1994).

As discussed, infra, in this article , to help avoid confusion and malpractice actions, the attorney should clearly set out in a written agreement which persons or entities are or are not the lawyer’s client. IV. ATTORNEY’S LIABILITY

The two most common bases for a lawyer’s liability are negligence and actual or constructive breaches of one’s fiduciary duties to a client. Of course, every lawyer is always liable for such intentional torts as fraud, malicious prosecution, wrongful attachment or levy, and civil conspiracy. Statutes, both state and federal, also provide bases for legal malpractice claims. And, finally, there are the ethical rules and standards which have long governed the professional responsibilities of lawyers, and which will be discussed first because they establish many of standards that govern lawyers. A. The Texas Disciplinary Rules of Professional

Conduct—Prima Facie Evidence of the Standard of Care The Texas Disciplinary Rules of Professional

Conduct govern the professional responsibilities of attorneys. The Rules are extensive in scope and, thus, will not be discussed in detail here. Rather, a few general observations regarding their impact on malpractice claims will be noted.

First, a “[v]iolation of a rule does not give rise to a private cause of action nor does it create any

presumption that a legal duty to a client has been breached.” TEX. DISCIPLINARY R. PROF’L CONDUCT preamble § 15. Second, Texas courts have repeatedly held that a violation of the state bar rules does not create a private cause of action. See Dyer v. Shafer, Gilliland, Davis, McCollum & Ashley, Inc., 779 S.W.2d 474, 479 (Tex. App.—El Paso 1989, writ denied). Finally, and despite the previous statement, Texas courts have continued to use those same ethical rules as standards of conduct for attorneys in legal malpractice cases. Avila v. Havana Painting Co., 761 S.W.2d 398, 400 (Tex. App.—Houston [14th Dist.] 1988, writ denied) (noting that the code of attorney conduct required attorney to deliver client funds promptly, and failure to do so gave rise to cause of action in tort).

Practice in federal court is similar. Thus, though each federal court has its own rules of admission and practice, those rules often follow those of the state in which the federal courts sits. See Bruce A. Green, Whose Rules of Professional Conduct Should Govern Lawyers in Federal Court and How Should the Rules be Created?, 64 GEO. WASH. L. REV. 460 (1996); see also In re Dresser Indus., 972 F.3d 540, 542-45 (5th Cir. 1992).

The ABA’s Model Rules of Professional Conduct, adopted in 1983 (the “Model Rules”), are also influential in setting standards of conduct. The Model Rules are based on the ABA’s Model Code of Professional Responsibility, adopted in 1969. Though the Model Rules will not be discussed here, it should be noted that most state and federal courts base their rules of professional conduct on the Model Rules. See id.

In addition to the above rules, bar associations, whether national or local, regularly issue ethics advisory opinions that are not binding on courts. However, good faith reliance on an opinion could be used in defense of a disciplinary or malpractice claim. See generally NATHAN M. CRYSTAL, Professional Responsibility 14 (2nd ed. 2000). B. Negligence

Negligence is the failure to do that which a reasonable attorney practicing in the same locality would do, or not do, under the same circumstances. Cosgrove v. Grimes, 774 S.W.2d 662, 665 (Tex. 1989). Said differently, negligence is when a client claims that a lawyer mishandled a legal matter. Lawyers who practice in a specialized field, such as securities or tax, are held to the standard of care normally exercised by those specialists. Rhodes v. Batilla, 848 S.W.2d 833, 843 (Tex. App.—Houston [14th Dist.] 1993, writ denied). As can be expected, the standard of care allows for some latitude in strategy. Thus, “[I]f an attorney makes a decision which a reasonably prudent attorney could make in the same or similar















3

circumstances, it is not an act of negligence even if the result is undesirable.” Cosgrove, 774 S.W.2d at 665. 1. Attorney’s Negligence and Resulting Damages is

a Question of Fact The determination of an attorney’s negligence and

the amount of damages proximately caused by that negligence are usually questions of fact. Millhouse v. Wiesenthal, 775 S.W.2d 626, 627 (Tex. 1989). However, after the jury makes its factual determinations, the court then determines the legal question of “whether such facts found by the jury constitute professional misconduct. If the trial court determines the facts constitute professional misconduct, it then enters judgment in favor of the plaintiff.” Rhodes, 848 S.W.2d at 840 (internal quotations omitted). Moreover, “[a]lthough proximate cause in a legal malpractice action is usually a question of fact, it may be determined as a matter of law if the circumstances are such that reasonable minds could not arrive at a different conclusion.” Schlager v. Clements, 939 S.W.2d 183, 187 (Tex. App.—Houston [14th Dist.] 1996, writ denied). 2. An Attorney is Required to Know the Clearly

Defined Rules of Law Not much discussion is required here. Suffice to

say, ignorance of the law, even a good faith one, is no defense.2 The following two cases best illustrate the point:

a. An attorney’s good faith belief that his clients’ claims were barred by the statute of limitations would not be a defense to a legal malpractice claim. Haussecker v. Childs, 935 S.W.2d 930, 934 (Tex. App.—El Paso 1996), aff’d, 974 S.W.2d 31 (Tex. 1998).

b. An attorney may be liable for damages to a client resulting from the attorney’s incorrect interpretation of a statute. For example, an attorney was held liable for preparing an agreement in violation of statute where the statute was unambiguous. Mosaga, S.A. v. Baker & Botts, 780 S.W.2d 3, 5 (Tex. App.—Eastland 1989, no writ).

3. No Liability for “Failing to Assert Every

Conceivable Defense Tactic Under the Sun” In Zenith Star Ins. Co. v. Wilkerson, 2004 Tex.

App. LEXIS 2621, (Tex. App.—Austin March 25, 2004, no pet.), a worker’s compensation carrier brought suit against its attorney in the underlying suit,

2 The ABA Study lists “Failure to Know/Properly Apply Law” as the reason cited for the highest number of alleged attorney errors. See ABA Study at 12.

alleging that the carrier would have prevailed in that suit had the attorney asserted lack of jurisdiction based on improper venue and misidentification. The trial court granted summary judgment for the attorney, and the court of appeal affirmed. The court held that the attorney was not negligent in failing to raise the jurisdictional defenses because they were not valid at the time. (The validity of the defenses is a question of law for the court.) Given the unsettled state of the law, the court reviewed opinions issued during and after the pendency of the suit to determine whether the attorney erred in not raising the defense. The court concluded that the attorney’s failure to assert the defense could not have been the promixate cause of any damage to the carrier because even if the defense had been successful, the claimant would have ultimately prevailed on appeal.

4. Attorney Not Liable For Unilateral Acts of Legal Secretary Employers are liable for the negligent acts of their

employees if the employees’ actions fall within the course and scope of their employment. Baptist Memorial Hosp. Sys. v. Sampson, 969 S.W.2d 945, 947 (Tex. 1998). Attorneys are not immune from the vicarious liability that is associated with being an employer. However, a recent case has limited some attorney liability for the unilateral acts of an employee. In Moser v. Davis, 79 S.W.3d 162 (Tex. App.—Amarillo 2002, no pet.), the plaintiff attempted to prove his attorney’s negligence by introducing evidence concerning the conduct of the lawyer’s secretary. The attorney had been retained to draft reciprocal wills for the plaintiff and her husband. However, the attorney had not completed the wills because the plaintiff could not decide on who the beneficiaries of a trust would be.

While the attorney was out of town, the plaintiff called the attorney’s office and told the legal secretary that she had decided on the beneficiary designation. The legal secretary informed the plaintiff that the attorney was out of town. Despite this information, the plaintiff insisted that the wills be completed immediately. The secretary decided to insert the beneficiaries’ names in the wills drafted by the attorney. The attorney was never contacted about the secretary’s actions and before he returned, the wills were signed and executed.

Upon the death of the plaintiff’s husband, several drafting errors were discovered and the trust assets did not pass to the intended beneficiaries. The plaintiff filed suit against the attorney claiming legal malpractice. The jury found for the defendant attorney, and the appellate court affirmed the decision. The court of appeals found that the plaintiff failed to prove that the attorney had granted his secretary the authority to draft legal documents. Further the court












4

held that the secretary’s duties were limited to typing wills under the supervision of the attorney, receiving information from the clients to provide to the attorney, executing documents at the discretion of the attorney, and occasionally explaining wills to clients. The court also suggested that malpractice claims based on actions taken by a lawyer’s support staff without the knowledge of the lawyer would rarely be successful.

5. Being Inexperienced and Having Differences of

Opinion With Client Does Not Automatically Make a Lawyer Guilty of Malpractice Lehrer v. Supkis, 2002 Tex. App. LEXIS 3696

(Tex. App.—Houston [1st Dist.] Feb. 28, 2002, no pet.) (not designated for publication), is an unusual legal malpractice case that involved an overly litigious plaintiff-appellant (the appeals court also found the appeal objectively frivolous and assessed a sanction of $10,000). Plaintiff Lehrer hired two lawyers to represent him in a divorce proceeding. Unhappy with the divorce decree, Lehrer hired Supkis to represent him in a legal malpractice suit against his former divorce lawyers. Supkis negotiated a settlement agreement, pursuant to which the parties filed a joint motion to dismiss. Predictably, Lehrer became displeased with the settlement arrangement, so he ordered Supkis to move for a new trial. After the motion was denied, Lehrer filed suit against Supkis, alleging legal malpractice under negligence, breach of fiduciary duty, and DTPA theories. The jury found for the defendant, Supkis, on all counts. On appeal, the court observed that there was sufficient evidence in the record to justify the jury verdict. Specifically, the court explained that the mere fact that Supkis had never tried a case involving divorce or legal malpractice before Lehrer’s case, as well the fact that Supkis was not board certified in family law, did not prove that Supkis was somehow de facto negligent. In fact, Supkis had produced evidence showing that Lehrer had been pleased with Supkis’ representation and had even asked Supkis to represent him in yet another legal malpractice suit.

Lehrer also claimed that Supkis had committed malpractice by refusing to follow Lehrer’s request that he pursue discovery of the personal financial records of one of Lehrer’s divorce lawyers. Supkis had refused, believing that inquiries into the divorce lawyer’s personal financial affairs would prompt the trial judge to sanction Lehrer and Supkis for discovery abuse. The court noted that Supkis’ decision was reasonably prudent under the circumstances, even if the client wanted to take a different course of action. Consequently, a mere difference of opinion between Supkis and his client could not justify a finding of legal malpractice.

6. Damages To obtain damages in a legal malpractice suit, the

client must prove not only that the underlying suit would have been successful but for the malpractice of the attorney, but he must also establish the amount of damages he would have recovered had he been successful—this is also referred to as the “suit within a suit.” Fireman’s Fund Am. Ins. Co. v. Pa tterson & Lamberty, Inc., 528 S.W.2d 67, 69-70 (Tex. Civ. App.—Tyler 1975, writ ref’d n.r.e). He must also show that the judgment would have been collectible. Cosgrove, 774 S.W.2d at 665-66. In a case in which the client was a defendant and the client alleges he would have been successful but for the attorney’s malpractice, the client must prove he had a meritorious defense. Heath v. Herron, 732 S.W.2d 748, 753 (Tex. App.—Houston [14th Dist.] 1987, writ denied). The Heath court, however, affirmed a judgment against an attorney for malpractice based on expert “settlement value.” This suggests that Texas courts my allow recovery without the need to show success in the underlying suit.

The “suit within a suit” scenario leads to a few peculiar situations:

[I]n pursuing such an inquiry in a suit between an attorney and client the court is, in a sense, compelled to try a “moot case,”—a suit without a plaintiff and without a defendant. It is impossible to say what defenses would have been urged by the defendants in the compromised cause. It also presents the anomaly of trying two suits in one, in which the liability of persons not parties to the suit on trial in question.

Lynch v. Munson, 61 S.W. 140, 142 (Tex. Civ. App.—1901, no writ). No less strange is the fact that the attorney must then take the position that the earlier suit would have been unsuccessful even if it had been handled properly, assuming it was not. See Mathew v. McCoy, 847 S.W.2d 397, 401 (Tex. App.—Houston [14th Dist.] 1993, no writ) (noting that defending against legal malpractice claim by arguing doctors in the underlying suit did not commit medical malpractice after pursuing medical malpractice claim is permissible).

In Joachim v. Chambers, 815 S.W.2d 234, 240-41 (Tex. 1991), the attorney-defendants went so far as to have the judge who presided over the underlying suit testify in the malpractice suit. The trial judge refused to strike the judge’s testimony, and the court of appeals declined to reverse the trial judge. In granting the writ of mandamus, the supreme court noted, among others, that the judge’s “testimony for defendants confers his very considerable prestige as a judicial officer in support of defendants’ position.” Id. at 239.







5

Nelson v. Dykeman, 2002 Tex. App. LEXIS 2625 (Tex. App.—Beaumont Apr. 11, 2002, no pet.), offers a perfect illustration of the “suit within a suit” element of attorney negligence claims. Yankee Enterprises (“Yankee”) filed breach of contract and DTPA claims against Dunkin’ Donuts (“Dunkin”) relating to an alleged franchise agreement between the parties. The jury found for Yankee and awarded damages on both counts. Dunkin then moved for judgment as a matter of law, which the district court granted with respect to the DTPA claims only. Both parties appealed to the court of appeals, which partially reversed the district court’s judgment and ordered that Yankee take nothing on its breach of contract claims as well. Id. at *1.

Alleging legal malpractice, Yankee then filed suit against Dykeman, the attorney who had represented Yankee during the litigation with Dunkin. The trial court granted summary judgment in favor of Dykeman on the negligence claim, prompting Yankee’s appeal. Id. at *4.

The Beaumont Court of Appeals affirmed, with one justice dissenting. The majority noted that for a legal malpractice claim premised on negligence, the plaintiff must show that it would have prevailed in the underlying litigation but for the negligence of its attorney. Id. at *5. The court held that Yankee could not satisfy this “suit within a suit” requirement because it could not identify any damages it had incurred due to the alleged breach of contract. Id. Thus, the court never addressed the merits of Yankee’s attorney negligence claim, for it was the absence of Yankee’s damages—not Dykeman’s conduct—that caused Yankee’s difficulties in the underlying litigation. The dissent argued that appellant had raised a fact issue with regards to damages.

The El Paso Court of Appeals rendered a similar decision in Doucakis v. Speiser, Krause, Madole, P.C., No. 08-00-00296-CV (Tex. App.—El Paso June 27, 2002, no pet.) (not designated for publication), 2002 WL 1397155.

Doucakis, as the sole shareholder of two foreign corporations, had entered into a distribution contract with an American company. When a contract dispute arose, the parties submitted to binding arbitration. Doucakis retained Speiser, Krause, Madole P.C. (“Law Firm”) to represent his companies in the arbitration. However, an arbitration order was eventually entered against Doucakis’ companies. Id. at *2.

Doucakis then brought a legal malpractice suit against the Law Firm, both as an individual and in his representative capacity as sole shareholder of his corporations. The Law Firm filed a motion for summary judgment claiming, inter alia, that Doucakis could not prove the elements of a malpractice claim. The trial court granted the Law Firm’s motion. Id.

On appeal, the El Paso Court of Appeals affirmed in part and reversed in part. With respect to Doucakis’

individual claims, the court noted that he could not prevail on his malpractice claims without proving that he would have recovered in the underlying arbitration but for the Law Firm’s alleged negligence. Id. at *5. The court then stated that because Doucakis was not a party to the contract giving rise to the dispute, he could not have recovered individually in the arbitration. Id. Therefore, the court affirmed dismissal of Doucakis’ claims for failure to satisfy the “suit within a suit” requirement. However, the court held that the corporations’ malpractice claims could proceed, for two reasons: (1) they were parties to the underlying agreement and (2) there was colorable evidence that the corporations would have recovered in the arbitration but for the Law Firm’s conduct. Id. at *8.

Together, Nelson and Doucakis demonstrate the significant hurdles plaintiffs must overcome to prove attorney negligence claims. In effect, plaintiffs must try two cases: one involving the alleged legal malpractice, and one concerning the merits of the plaintiff’s position in the underlying litigation. Considering this burden, it is not surprising that many plaintiffs try to cast their malpractice claims under the DTPA, which does not require proof of the “suit within a suit” element.

These cases also illustrate how the strategic choices made by an attorney may come back to haunt him or her during the “suit within a suit” phase of a subsequent malpractice lawsuit. One way to prevent plaintiffs from proving the “suit within a suit” requirement is to show how the client authorized a certain tactic after being fully advised about all risks and other alternatives. Therefore, lawyers would be wise to document and store all communications to and from their clients, even after the representation has ended. These files may be a lawyer’s best defense in a malpractice action 7. Acts or Omissions by the Attorney that Resulted

in Damages to the Client These act or omissions can include inaction or

delay, such as allowing the client’s cause of action to become barred by the statute of limitations, erroneous advice or opinion, the failure to advise the client of relevant information, the improper preparation of legal documents, or other omissions. The following cases are but a small sample of the many cases recognizing a cause of action for an attorney’s acts or omissions:

a. Attorney liable for failure to answer a lawsuit filed against client and his subsequent failure to overturn the resulting default judgment entered against client. Holland v. Hayden, 901 S.W.2d 763 (Tex. App.—Houston [14th Dist.] 1995, writ denied).

b. Attorney liable for filing suit against passenger rather than driver, alleging wrong



6

location of accident, and failed to correct error before expiration of statute of limitations. Cosgrove v. Grimes, 774 S.W.2d 662, 665 (Tex. 1989).3

c. Attorney liable for advising client to get a “paper divorce” to prevent IRS collection attempts. Rhodes, 848 S.W.2d at 840.

d. Attorneys owed a duty to clients to make full and fair disclosure of every facet of proposed settlement, especially in class action. Bloyed v. General Motors Corp., 881 S.W.2d 422, 436 (Tex. App.—Texarkana 1994), aff’d, 916 S.W.2d 949 (Tex. 1996).

8. The Court Relies On Plaintiff’s Own Pleadings

and Expert’s Testimony To Characterize Claims as Malpractice Claims In Mecom v. Vinson & Elkins, 2001 Tex. App.

LEXIS 3088 (Tex. App.—Houston [1st Dist.] May 10, 2001, pet. dism’d) (not designated for publication), the plaintiffs alleged numerous causes of actions involving estate planning legal services. In affirming the trial court’s characterization of the client’s claims as legal malpractice, the court relied upon the testimony of the client’s own expert. The expert, an attorney, testified that the lawyers “failed to discharge [their] duty of care.” Id. at *10. The court further noted that its “conclusion that this is a legal malpractice action is further supported by [the plaintiff’s] own description of her claims and her expert’s testimony that V & E breached their duties and the standard of care as attorneys ….” Id. at *11. 9. When Attorney Negates An Element of The Legal

Malpractice Claim, Summary Judgment For The Attorney Is Proper On The Additional Causes Of Action When They Arise From The Same Set of Facts In McDermott v. Nelsen, Tex. App. LEXIS 2740

(Tex. App.—Houston [1st Dist.] April 26, 2001, no pet.) (not designated for publication), the trial court instructed a verdict against Nelsen, the client, on his legal malpractice claims because of the lack of expert testimony at trial. But the court permitted the case to go to the jury on Nelsen’s negligence, gross negligence, and DTPA claims. In reversing and rendering judgment for McDermott, the court of appeals stated, “Texas courts do not permit the

3 Compare Medrano v. Reyes, 902 S.W.2d 176, 178 (Tex. App.—Eastland 1995, no writ) (holding that law firm was not liable for failing to file a wrongful death action prior to running of limitations period when the firm set a letter to the clients, the clients retained new counsel, and the letter was received twenty-one months before end of limitations period).

fracturing of the malpractice claim into other causes of actions.” Id. at *3. C. Breach of Fiduciary Duty

The relationship of attorney and client is one of the highest trust and confidence. See Smith v. Dean, 240 S.W.2d 789, 791 (Tex. Civ. App.—Waco 1951, no writ). In furtherance of that relationship, the attorney has a duty to represent his client with undivided loyalty, to preserve the client’s confidences, and to disclose to the client any information that might prevent the fulfillment of these obligations. See NCNB Texas Nat’l Bank v. Coker, 765 S.W.2d 398, 399 (Tex. 1989); Employers Cas. Co. v. Tilley, 496 S.W.2d 552, 559 (Tex. 1973). This duty applies equally to prospective clients—i.e., preliminary consultations between the potential client and the attorney. Nolan v. Foreman, 665 F.2d 738 (5th Cir. 1982).

Failure to disclose important information is the most common form of the attorney’s breach of fiduciary duty. There must be complete disclosure of all information which may impact the quality of the attorney’s representation, including an explanation of its legal significance. See Employers Cas. Co. v. Tilley, 496 S.W.2d 552, 558 (Tex. 1973) (“If a conflict arises between the interests of the insurer and the insured, the attorney owes a duty to the insured to immediately advise him of the conflict.”); Bloyed v. General Motors Corp., 881 S.W.2d 422, 436 (Tex. App.—Texarkana 1994), aff’d, 916 S.W.2d 949 (Tex. 1996) (holding that attorneys owed a duty to clients to make full disclosure of every facet of proposed settlement, especially in class action).

In Gibson v. Ellis, 126 S.W.3d 324 (Tex. App.—Dallas 2004, no pet.), a couple had a one-third contingency fee contract with an attorney to a handle their personal injury suit. A second attorney took over the case when the first attorney died. The wife’s claims settled first. The husband’s case settled for an equal amount not long afterward. The attorney deducted amounts for the wife’s medical bills and for attorney’s fees from the husband’s settlement. The husband sued the attorney based on the deduction from his settlement proceeds. The court of appeals held, among others, that the husband did not establish a breach of fiduciary duty. Doing so requires the plaintiff to show that the attorney obtained an improper benefit from representing the client. The husband had claimed the attorney breached his fiduciary duty by telling the husband that the wife’s medical bills were subject to letters of protection and were community debts. The court noted that even if the attorney made those statements and they were false, there was no evidence he knew they were false when he made them or that they were made to subordinate the husband’s interests to the attorney’s interests.

















7

1. Fee Forfeiture As Damages for Breach for Fiduciary Duty A lawyer who is found to have acted in violation

of his duty to a client may be required to forfeit some or all of the his compensation for the matter. Fee forfeiture is not required in every case where an attorney breaches a fiduciary duty. Burrow v. Arce, 997 S.W.2d 229, 241 (Tex. 1999). The remedy of fee forfeiture is an equitable one and is highly dependent on the facts of the underlying breach of fiduciary duty. Id. The ultimate decision on the amount of any fee forfeiture must be made by the court. Id. at 245. The court must determine whether forfeiture is equitable and just. Id. Also, unlike other causes of action, the supreme court has held that proof that the attorney’s breach of duty harmed the client is not a prerequisite to recovering fees paid. Id. This is because it “is the agent’s disloyalty, not any resulting harm that violates the fiduciary relationship and thus impairs the basis for compensation.” Id. Burrow v. Arce is discussed fully infra.

In Malone v. Abraham , Watkins, Nichols & Friend, P.C., 2004 Tex. App. LEXIS 4619 (Tex. App.—Houston [1st Dist.] May 20, 2004, no pet. h.) (opin’n on reh’g) former clients sued the defendant law firm in separate lawsuits claiming negligent misrepresentation, unjust enrichment, invasion of privacy and conversion. The defendant attorneys represented the plaintiffs in asbestos litigation. The firm secured a settlement for some of the plaintiffs. After receiving an installment of their fee, the firm withdrew from further representation from the non-settling and pending-cases clients. The defendant firm moved for summary judgment claiming that the plaintiffs had no proof of damages, among other elements. The trial court agreed and granted the motion. While no liability was imposed on the defendant firm, the court noted that fee forfeiture can be an appropriate remedy for breach of fiduciary duty even when the plaintiff has only suffered a legal injury and no actual damages have been suffered. Further, the court noted that fee forfeiture is limited to “clear and serious” violations of the duty. Id. 2. Potential Conflicts

The prohibition against conflicts of interests seeks to insure clients that their lawyers will represent them with undivided loyalty. A client is entitled to be represented by a lawyer whom the client can trust. Because these principles form an important part of a fiduciary relationship, conflicts are often the source of a breach of attorney’s duty to his client. Conflicts of interest come in many forms. See generally TEX. DISCIPLINARY R. PROF’L CONDUCT 1.06, 1.08 & 1.09. They include adverse representation against a current client, multiple representation of clients in a single matter, representation against a former client,

advocate-witness conflicts, and conflicts involving the lawyer’s own personal or financial interest. The Texas Disciplinary Rules require counsel to refuse to accept or continue employment if such representation would involve a “substantially related” matter that would materially and directly adverse to the interests of another client, or if such representation would become limited by the attorney’s responsibilities to another client. Id. 1.06(b), 1.15(a)(1). In Goffney v. Rabson, 56 S.W.3d 186, 193-94 (Tex. App.—Houston [14th Dist.] 2001, pet. denied) the court stated: “Breach of fiduciary duty bay an attorney most often involves the attorney’s failure to disclose conflicts of interest, failure to deliver funds belonging to the client, placing personal interests over the client’s interests, improper use of client confidences, taking advantages of the client’s trust, engaging in self-dealing, and making misrepresentations.” Id. at 193-94.

The test for determining conflict is whether competent representation of one client will or is likely to affect adversely the exercise of the attorney’s competent representation of another client is For example, in J.W. Hill & Sons, Inc. v. Wilson, 399 S.W.2d 152, 154 (Tex. Civ. App.—San Antonio 1966, writ ref’d n.r.e.), the court of appeals held that it was reversible error for tria l judge to deny an attorney’s motion to withdraw from representing the owner’s of a truck when one of the passengers, who was also an employee of the truck’s owner, contended that he was in the course of his employment during events that led up to the collision and which led to the passenger/employee’s sustaining damages. Vickery v. Vickery, 1997 Tex. App. LEXIS 6275 (Tex. App.—Houston [1st Dist.] 1997, pet. denied) (opin’n on reh’g) (not designated for publication), presents a more obvious conflict situation. There, the husband, himself an attorney, hired an attorney, who also happened to be his friend, to represent his wife in their divorce. In a jury trial, the jury found that the attorney who handled the divorce breached her fiduciary duty to the wife. The jury also found that the husband had also breached his fiduciary duty to his wife. The court of appeals noted, “To the extent that [the husband] was advising [the wife] of the legal aspects of a transaction by which he would benefit, [he] assumed the ‘high duty of an attorney to his client.’” Id. at *34-35. In Lopez v. Munoz, Hockema & Reed, L.L.P., 980 S.W.2d 738, 743 (Tex. App.—San Antonio 1998), rev’d on other grounds, 22 S.W.3d 857 (Tex. 2000), the court held that an attorney’s attempt to grossly overcharge the client, or to imply to the client that the attorney is entitled to overpayment, can constitute breach of fiduciary duty.

The following case illustrates, and contrasts, a different standard for determining conflict. In In re Clarke T. Blizzard and Rudolph Abel, Investment Advisers Act of 1940 Release No. 2032 (April 24,










8

2002), the SEC instituted proceedings against seven individuals for various alleged securities violations. While the other respondents settled with the SEC or defaulted, the Division of Enforcement (the “Division”) proceeded against Abel. Prior to the hearing, the Division filed an emergency motion to disqualify Abel’s attorney from representing both Abel and five witnesses that the Division had placed on its witness list. The Division argued that an actual or potential conflict of interest existed in the multiple representation, even though Abel and each of the five witnesses had waived any potential conflict. The ALJ denied the Division’s motion.

On an interlocutory appeal, the SEC found that the facts of the case warranted disqualification. It explained that it had an “obligation to ensure that administrative proceedings are conducted fairly in furtherance of the search for the truth and a just determination of the outcome.” Moreover, “the attorney’s representation of Abel with respect to subject matters that are substantially related to his representation of the witness clients could result in divided loyalties that will prevent him from fulfilling his duty to act in good faith.” Finally, the SEC concluded that “the appearance of lack of integrity ‘cannot be addressed by the consent of the attorney’s clients to his representation of them.”

The SEC’s “appearance” standard is much narrower than the Texas standard. In Texas, an attorney may represent multiple clients if he “reasonably believes the representation of each client will not be materially affected,” and “each affected or potentially affected client consents to such representation after full disclosure of the existence, nature, implications, and possible adverse consequences of the common representation and the advantages involved, if any.” TEX. DISCIPLINARY R. PROF’L CONDUCT 1.06; see also Mandell & Wright v. Thomas, 441 S.W.2d 841, 846 (Tex. 1969) (holding that before interest of different clients can be said to conflict precluding representation by single law firm or attorney, their respective interests must be adverse and hostile). 3. Multiple Party Representation

An attorney may represent multiple clients if he “reasonably believes the representation of each client will not be materially affected,” and “each affected or potentially affected client consents to such representation after full disclosure of the existence, nature, implications, and possible adverse consequences of the common representation and the advantage involved, if any.” Rule 1.06 (c)(2). If any affected client refuses to consent, then the attorney may not proceed with the multiple representation. Also, the lawyer has the primary responsibility for advising the prospective client of possible conflicts of

interests in their positions. See Burnap v. Linnartz, 914 S.W.2d 142, 150 (Tex. App.—San Antonio 1995, writ denied). Determining whether “full disclosure” has occurred is case specific. The sophistication of the client, whether the lawyer is dealing with in-house counsel, the length of the relationship between client and attorney, the legal issues involved and the experience of the lawyer are considered. ABA Comm. On Ethics and Prof’l Responsibility, Formal Op. 93-372 (1993). 4. Example of Attorney Breach of Fiduciary Duty

In Burrow v. Arce, 997 S.W.2d 229 (Tex. 1999), the Texas Supreme Court discussed the liability of an attorney for breaches of fiduciary duty occurring in connection with the settlement of his clients’ cases. Twenty-three individuals were killed and hundreds were injured in a series of explosions at a chemical plant. Five attorneys represented 126 plaintiffs. The case was settled for $190 million, of which the attorneys received a contingent fee of more than $60 million. Later, forty-nine of the plaintiffs sued the attorneys for, among others, breach of fiduciary duty, alleging that the attorneys solicited business through a lay intermediary, failed to fully investigate and assess individual claims, failed to communicate offers received and demands made, entered into an aggregate settlement of all plaintiffs’ claims without their authority or approval, agreed to limit their law practice by not representing others involved in the same incident, and intimidated and coerced their clients into accepting the settlement.

The trial court granted summary judgment for the defendants on the ground that the plaintiffs failed to show that they suffered any actual damages. The court of appeals affirmed on all but the fiduciary duty claim, on the basis that forfeiture is an appropriate remedy for an attorney’s breach of a fiduciary duty owed to a client and that actual damages are not a prerequisite for fee forfeiture. See Arce v. Burrow, 958 S.W.2d 239 (Tex. App.—Houston [14th Dist.] 1997, writ granted). The supreme court held:

• An attorney can be held liable in damages for

alleged breach of fiduciary duty in connection with a settlement entered into by his client even if the client: (1) accepted and approved of the settlement; (2) did not show that the settlement was unfair or inadequate in any way; and (3) did not establish what award he or she would have received absent the breach of duty. Id. at 937-943.

• A client could measure her damages in terms of the fee paid to the breaching attorney and recover all or some portion of that fee as damages, with the amount of forfeiture








9

determined by the severity of the breach involved. Id.

• Finally, the court concluded that while the issue of whether an attorney breached his or her fiduciary duty to a client generally would involve issues of fact to be resolved by a jury, the issue of amount of fees to be forfeited in the event of a breach would be one of law for the court. Id. at 943-44.

5. Client May Recover Mental Anguish and

Exemplary Damages A legal malpractice plaintiff may recover mental

anguish damages. The courts that have considered the issue of mental anguish damages, however, have held that such damages are not recoverable in a claim based on negligence. See Delp v. Douglas, 948 S.W.2d 483, 495 (Tex. App.—Fort Worth 1997), rev’d on other grounds, 987 S.W.2d 879 (1999); Rhodes v. Batilla, 848 S.W.2d 833, 844-45 (Tex. App.—Houston [14th Dist.] 1993, writ denied). Punitive damages are also allowed in a legal malpractice case. They are appropriate when an attorney intentionally and knowingly breaches his fiduciary duties and obligations to his client. Id.; see also Avila v. Havana Painting Co., 761 S.W.2d 398, 400 (Tex. App.—Houston [14th Dist.] 1988, writ denied) (holding that punitive damages were appropriate where attorney wrongfully withheld client’s funds). 6. Expert Testimony is Required Regarding the

Standard of Skill and Care Ramsey v. Reagan Burrus, Dierksen, Lamon & Bluntzer, P.L.L.C., 2003 Tex. App. LEXIS 276 (Tex. App.—Austin 2003, no pet.), establishes that TEX. R. EVID. 701-702 apply equally to the kind of expert testimony required in legal malpractice claims. In Ramsey, the plaintiff sued the attorney who drafted real estate documents. The defendant filed a motion for summary judgment and moved to exclude the plaintiff’s expert testimony, which the trial court granted, because, among other reasons, he was not licensed to practice law in Texas and was unfamiliar with Texas. The court of appeals affirmed, citing the expert’s lack of qualifications, namely, the absence of a license to practice the law in Texas.

In Ersek v. Davis & Davis, P.C., 69 S.W.3d 268 (Tex. App.—Austin 2002, pet. denied), Ersek sued the law firm, alleging negligence and violations of the DTPA. Five months after the suit was filed, and in response to discovery requests, the client indicated that he had not retained an expert witness. He supplemented his answers in September, but still did not identify an expert. In November 2000, the firm filed a motion for summary judgment. The client filed a response which included a supporting affidavit from

an attorney, a motion for continuance, and a supplemental response to disclosure identifying the attorney who provided the affidavit as an expert witness. The trial court granted the firm’s motion to strike the affidavit and for summary judgment.

The court of appeals affirmed. The court first noted that the client was required to designate his expert witness by October 19, 2000. Id. at 270. Having failed to do so, he was not entitled to designate an expert later in a supplementary discovery response. Id. at 271. Moreover, because he waited over a year to do so, he was not entitled to designate an expert witness late on the ground of good faith. Id. at 271-72. The court then concluded that without an expert witness, the client had no evidence to support his cause of action.

In Hoover v. Larkin , 2001 Tex. App. LEXIS 6313 (Tex. App.—Houston [14th Dist.] Sep. 13, 2001, pet. denied) (not designated for publication), the trial court granted the defendant attorney’s motion for summary judgment. In concluding that the attorney’s affidavit did not conclusively establish that he did not breach a duty owed to the client, the court noted that “at no point does he describe what that standard of care is; or what duty he owes to his client when involved in settlement negotiations.” Id. at *3. The dissent noted that the attorney “does more than say, “Take my word for it, I know ….” Id. at *12 (emphasis and ellipses in original). D. Breach of Contract as Cause of Action

The client-lawyer relationship derives from mutual consent, and in that respect, it is shaped by agreement. The lawyer’s duty to the client, more often than not, arises as an implied term of the client-lawyer agreement. Of course the contract may be explicit and in writing. Such contracts may specify the services the lawyer is being retained to provide. They may be very specific, including such terms as, for example, which lawyers in a firm will work on the client’s behalf, the rates that will be charged, billing arrangements, and fee collection.

Despite the contractual nature of the attorney-client relationship, courts are hesitant to allow a plaintiff to divide or fracture legal malpractice claims into breach of contract claims (or other claims, for that matter). See Goffney v. Rabson, 56 S.W.3d 186, 190-94 (Tex. App.—Houston [14th Dist.] 2001, pet. denied) (holding that because legal malpractice claim was dropped before trial, plaintiff was not entitled to recover on her breach of contract, DTPA, and breach of fiduciary duty claims). Indeed, the First Court of Appeals has concluded that breach of contract actions against attorneys are limited to claims for excessive fees. Greathouse v. McConnel, 982 S.W.2d 165, 172 n.2 (Tex. App.—Houston [1st Dist.] 1998, no pet.).









10

The following subsections discuss some of the problems associated with attorney fees.

1. Attorney’s Fees are a Common Source of

Disputes between Clients and Attorneys.

“When a Lawyer Has Contracted For a Contingent Fee, The Lawyer is Entitled To Receive The Specified Fee Only When And To The Extent The Client Receives Payment”

In 2001, a Texas Supreme Court case addressed contingency fee agreements. Though the case does not involve legal malpractice, the impact of its holding can lead to unnecessary litigation. In Levine v. Bayne, Snell & Krause, 40 S.W.3d 92 (Tex. 2001), it was the attorneys who sued the clients, to recover additional attorney fees under a contingency fee contract, which stated that the clients would pay the lawyers one-third of “any amount received by settlement or recovery” from their lawsuit against Donald and Pat Smith. Originally, the Levines hired Bayne, Snell, & Krause to sue the Smiths for their failure to disclose foundation defects in the home they sold to the Levines. Because of the alleged defects, the Levines stopped making mortgage payments to the Smiths. The Smiths counterclaimed for breach of the mortgage agreement.

After a jury verdict, the trial judge awarded the Levines $243,644 in damages for the foundation defects, along with interest and attorney’s fees. However, the court also found that the Smiths were entitled to the balance due on the mortgage, accrued interest and attorney’s fees, all of which totaled $161,851.38. In the end, the trial court offset the awards, and awarded the Levines $81,792.38 and clear title to their home.

After the award was affirmed on appeal, the Levines ended up with $104,110.31 and the clear title. Bayne Snell then sent the Levines a statement claiming $155,866.13 in fees: one-third of the Levines’ award before the offset, prejudgment interest, and costs; plus court-awarded attorney’s fees, and post-judgment interest and expenses. The Levines disagreed with the calculation, claiming that amount did not reflect the offset. The Levines nonetheless gave Bayne Snell $104,110.31. Bayne Snell sued to collect the remainder.

The court’s analysis focused on the fact that the phrase “any amount received” in the contingency fee agreement was not defined. It then noted that Section 35 of the Restatement (Third) of the Law Governing Lawyers and its comment provides the answer to the issue in the case. Id. at 94. “That section states that ‘when a lawyer has contracted for a contingent fee, the lawyer is entitled to receive the specified fee only

when and to the extent the client receives payment.’” Id. (quoting RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS § 35 (2000)). The remainder of the court’s analysis stressed that lawyers are invariably more sophisticated then their clients at least as far as fee agreements are concerned. Id. at 95. From this it follows that lawyers’ should bear the burden of clarifying attorney-client contracts. Id.

There were two other opinions issued in this case. Justice Owen concurred, noting that “the Court’s opinion is overly broad.” Id. at 96. She observed that, for example, “if a client takes action after a fee agreement is consummated that would not be anticipated by counsel, and that action gives rise to a counterclaim, the attorney’s contingent fee should not be diminished.” Id.

Justice Hecht dissented. Justice Hecht saw two serious flaws in the court’s holding. First, “the Court does not say that the contract is this case is ambiguous or contrary to any public policy. Yet the court refuses to give effect to its plain language ….” Id. at 100–101. Second, the “Levines received a financial benefit from the cancellation of their mortgage debt to the Smiths.” Id. at 101.

Contingency fees were also at issue in The Law Offices of Windle Turley, P.C. v. French, 2003 Tex. App. LEXIS 1258 (Tex. App.—Fort Forth Feb. 6, 2003, pet. dism’d by agr.). In that case, Sawicki, a Turley attorney, filed a medical malpractice action on the plaintiffs’ behalf. When Sawicki left to start his own firm, the plaintiffs asked for the case files and informed Turley that they were going to hire Sawicki. Turley filed a petition in intervention in the plaintiffs’ suit, seeking the full fee under the contingent fee agreement. Before trial, plaintiffs asked Turley to take the case back, but Turley refused. Eventually, the plaintiffs obtained a favorable jury verdict. Turley then filed a motion for summary judgment on its motion for intervention.

The court of appeals affirmed in part and reversed in part, holding:

• The court first addressed the argument that

Turley’s attempt to collects its fees was unconscionable. “Because the amount of an attorney’s fee is a contractual matter between attorney and client, a court ordinarily has no authority to determine whether the fee is reasonable—if the fee agreement was valid when made and was between mentally competent persons.” Id. at *15.

• The court also explained that although a client’s breach of a fee agreement may excuse the attorney from performing, it does not entitle the attorney to the full contractual fee. Rather, the attorney is only entitled to



11

recover his full fee under a contingency fee agreement that has been repudiated if the attorney is damaged by being prevented from performing. In the case of Turley, it had the opportunity to perform but chose otherwise—that is, Turley was given the means of fully mitigating its alleged losses, but refused to take advantage of that opportunity. Id. at *16.

• The court then held that Turley’s attempt to recover its contingency fee was unconscionable as a matter of law. The court reasoned that Turley’s refusal to take the case back placed the plaintiffs in a no-win situation of having to give up the lawsuit, represent themselves pro se, or find an attorney who would represent them for nothing.

• Despite the foregoing, the court concluded that summary judgment was improper to the extent it precluded Turley from recovering its out-of-pocket expenses. In doing so, the court rejected the plaintiffs’ argument that Turley had abandoned the contract. Turley never engaged in any conduct that evidenced an intent to relinquish its rights under the fee agreement.

• Justice Dauphinot dissented. She believed that a fact issue was raised regarding whether Turley had the opportunity to perform and mitigate its damages.

2. Sending the Client a Bill and Ending a

Relationship With Her At The Same Time is Not Extreme and Outrageous Behavior In Gaspard v. Beadle , 36 S.W.3d 229 (Tex.

App.—Houston [1st Dist.] 2001, pet. denied), a couple hired Gaspard to represent them in a real estate matter. Several months later, the wife filed for divorce. Sometime after the divorce and the real estate matter were both pending, the wife and Gaspard began dating. They dated for about three years. During that time, Gaspard drafted pleadings and did some research for the wife on a usury counterclaim in the divorce case. Gaspard, however, eventually told her to get another attorney because he could “no longer work for free.” Several months after they stopped dating, the attorney sent her a bill for his work on the usury counterclaim almost two years earlier. At trial, the judge dismissed Gaspard’s claims and sanctioned him for filing a frivolous cla im against the woman’s attorney for filing a counterclaim against him. The jury ruled in favor of the woman, awarding her actual and exemplary damages.

On appeal, the First Court of Appeals reversed all but the sanctions ruling. In essence, the court’s ruling

can be pared down to the statement that “rude behavior does not equate to outrageousness [or fraud].” Id. at 238.

E. Statutory Causes of Action

The Texas Deceptive Trade Practices Act (DTPA), see TEX. BUS. & COM . CODE ANN. §§17.41 et seq. (Vernon 2002), was enacted to regulate deceptive business practices. Latham v. Castillo, 972 S.W.2d 66 (Tex. 1998). However, the DTPA no longer applies to any claim for damages “based on the rendering of a professional service, the essence of which is the providing of advice, judgment, opinion, or similar professional skill.” DTPA §17.49. Nevertheless, the DTPA may still apply to certain conduct. Misrepresentation of material facts, a failure to disclose information, and certain unconscionable acts or breach of an express warranty may still provide the basis of a DTPA claim for legal malpractice. Id. “Attorneys can be found to have engaged in unconscionable conduct by the way they represent their clients.” Latham, 972 S.W.2d at 68. To succeed in a claim for misrepresentations, general statements will not suffice.

In Francisco v. Foret, 2002 Tex. App. LEXIS 2610 (Tex. App.—Dallas April 11, 2002, pet. denied), the court held that statements by attorney claiming “he had ‘a lot’ of experience in the area of medical malpractice and [the client] had a ‘90% chance of winning,’” were not specific enough to support liability under the DTPA. See also Mazuca & Assoc. v. Schumann, 82 S.W.3d 90 (Tex. App.—San Antonio May 17, 2002, pet. denied) (en banc) (after discussing DTPA, court noted that attorney “made no misrepresentations, only bad judgments).

Bellows v. San Miguel, 2002 Tex. App. LEXIS 3164 (Tex. App.—Houston [14th Dist.] May 2, 2002, pet. denied.) (not designated for publication), also discussed the interplay between legal malpractice claims and the DTPA. This lawsuit arose out of a one-automobile accident that killed four teenagers. The accident led to a lawsuit against the manufacturer, the car dealership, and the mother of the car’s driver. San Miguel, the mother of one of the deceased passengers, intervened in the lawsuit just prior to a mediation between the plaintiffs and the manufacturer.

During the mediation, the manufacturer offered $3 million to settle the claims of San Miguel and her ex-husband (“Carbajal”). The parties ultimately agreed to this settlement, with the further provisions that (a) Carbajal would receive $2,575,000, out of which attorney fees and expenses would be paid, and (b) San Miguel would receive $475,000 free of any attorney fees and expenses. San Miguel later claimed, however, that the plaintiffs’ attorneys coerced her into accepting the settlement. Consequently, she sued the plaintiffs’ lawyers for violations of the DTPA, asserting that: (1)







12

they lied to her about the size of the manufacturer’s settlement offer, saying it was for $2 million rather than $3 million; (2) they became angry with San Miguel when she requested one-half of the amount being offered to her and Carbajal; and (3) they falsely told her that her children had signed an affidavit stating San Miguel was a bad mother, which the manufacturer planned to use if the case went to trial. The jury ruled in favor of San Miguel, and the court entered a final judgment of over $500,000, not including attorney’s fees.

On appeal, Bellows claimed that San Miguel had failed to prove facts sufficient for a DTPA claim as a matter of law. Specifically, he asserted that her allegations, even if believed by the jury, were legally and factually insufficient to prove that he had engaged in “unconscionable” conduct as required by the DTPA. The court rejected this argument, noting that the record contained evidence from which a reasonable jury could find that the appellant (a) had lied to San Miguel concerning the size of the settlement offer and the existence of an affidavit calling her a bad mother, and (b) had a motive to deceive San Miguel (i.e. his fee arrangement with Carbajal). The court held that this evidence was sufficient to justify the jury’s verdict.

The court stated that misrepresentations about the size of a settlement offer and a non-existent affidavit “cannot be characterized as merely providing advice, judgment, or opinion….” Therefore, San Miguel’s claims were actionable under the DTPA.

The only victory for the defendant in Bellows was that the court struck the jury’s award of $12,500 in mental anguish damages. The court noted that mental anguish damages under the DTPA must be premised on mental pain so great that it disrupts a plaintiff’s everyday activities. The only evidence of mental anguish provided by San Miguel was that she felt “threatened,” “coerced” and “frightened” by her attorneys’ conduct in the mediation. Evidence of mere emotions—without any proof of a disruption to daily activities—could not justify mental anguish damages for attorney malpractice under the DTPA.

Francisco and Bellows demonstrate that when attorney malpractice claims are based on intentional misrepresentations, plaintiffs are not limited to just common law negligence and breach of contract claims. Instead, the DTPA offers a host of additional statutory remedies. See generally Haas v. George, 71 S.W.3d 904, 910 (Tex. App.—Texarkana 2002, no pet.) (claims against attorney based on DTPA violations are distinct from claims based on common law legal malpractice theories).

Other state and federal statutes may also serve as the basis of legal malpractice claims. Such statutes include civil conspiracy and various securities actions.

F. A Legal Malpractice Plaintiff May Not Split His/Her Claims Although there are several theories under which a

claimant might seek recovery, the ultimate issue is whether the attorney has breached his duty of care, resulting in damages. 4 As discussed below, claimants often have an incentive to couch their cla ims in terms other than legal malpractice. In Sledge v. Alsup, the court of appeals stated:

Nothing is to be gained by fracturing a cause of action arising out of bad legal advice or improper representation into claims for negligence, breach of contract, fraud or some other name. If a lawyer’s error or mistake is actionable, it should give rise to a cause of action for legal malpractice …. Nothing is to be gained in fracturing that cause of action into three or four different claims and sets of special issues. … The real issue remains one of whether the attorney exercised that degree of care, skill and diligence as lawyers of ordinary skill and knowledge commonly possess and exercise.

759 S.W.2d 1, 2 (Tex. App.—El Paso 1988, no writ).

In Deutsch v. Hoover, Bax & Slovack , L.L.P., 97 S.W.3d 179 (Tex. App.—Houston [14th Dist.] 2002, no pet.), the law firm sued Deutsch for unpaid legal bills. Deutsch counterclaimed, alleging negligence, breach of contract, breach of fiduciary duty, negligent misrepresentation, DTPA violations, and fraud. At the close of evidence, the trial court concluded that the statute of limitations barred all but Deutsch’s negligence claim. The jury found Deutsch’s own negligence caused his injuries, and awarded the law its claimed legal fees as well as fees incurred in bringing the collection suit.

The court of appeals reversed the trial court and held that the rule against dividing or fracturing a negligence claim prevents legal malpractice plaintiffs from opportunistically transforming a claim that sounds only in negligence into other claims. If the gist of client’s complaint is that the attorney did not exercise that degree of care, skill, or diligence as attorneys of ordinarily skill and knowledge commonly

4 Fracturing of claims often implicates the statute of limitations. Compare McGuire v. Kelley, 41 S.W.3d 679 (Tex. App.—Texarkana 2001, no pet.) (negligence malpractice claims governed by two-year statute of limitations, but intentional fraud malpractice claims governed by four-year limitations period) with Burnap v. Linnartz, 38 S.W.3d 612 (Tex. App.—San Antonio 2000, no pet.) (all legal malpractice claims governed by two-year statute of limitations).









13

possess, then the complaint should be pursued as a negligence claim, rather than some other claim. However, the court concluded that the gist of Deutsch’s remaining claims were appropriately classified as breach of fiduciary duty claims independent of his negligence claims. Id. at 189-90.

In Nelson v. Gioffredi & Associates, 2002 Tex. App. LEXIS 847 (Tex. App.—Amarillo Jan. 29, 2002, pet. denied) (not designated for publication), the court reaffirmed the general principle expressed in Sledge. An attorney employed by Gioffredi and Associates (“Gioffredi”) represented Nelson during a criminal prosecution. Upon Nelson’s conviction, he filed suit against Gioffredi. Nelson alleged, among other things, that the Gioffredi lawyer who had represented him had committed professional negligence, fraud and forgery during the course of the representation. The trial judge dismissed Nelson’s claim as “frivolous and malicious.” Id. at *1.

In affirming the trial court’s decision, the court noted that all of the various causes of action asserted by Nelson pertained to the quality of representation provided by Gioffredi. Id. at *2. Therefore, no matter how the plaintiff chose to classify his claims, they all boiled down to allegations of legal malpractice. Id. Upon categorizing them as legal malpractice claims, the court promptly dismissed the plaintiff’s contentions.5

In May v. Atkins, No. 0:01-CV-067-C 2001 U.S. Dist. LEXIS 21343 (N.D. Tex. Dec. 21, 2001), Plaintiff sued her former law firm for failing to properly handle her case, namely failing to respond to summary judgment. Plaintiff alleged negligence, legal malpractice, breach of fiduciary duty, breach of contract, breach of warranty, violations of the Texas Deceptive Trade Practices Act, negligent hiring, negligent retention, negligent supervision, and intentional infliction of emotional distress. Plaintiff hired the law firm to represent her in an employment discrimination case. A lawyer employed by the 5 Among the many reasons why the court dismissed Nelson’s case was the fact that Nelson had not been exonerated of guilt for the underlying crime. Nelson, 2002 Tex. App. LEXIS 847 at *2. The appellate court noted that dismissal was proper under the established Texas rule that one convicted of a crime cannot maintain legal malpractice claims involving that conviction unless he has been exonerated on direct appeal, through post-conviction relief, or otherwise. Id. This rule was the focus of several other 2002 cases as well. See Larson v. Hunt, No. 01-00-01196-CV (Tex. App.—Houston [1st Dist.] May 16, 2002, no pet.) (not designated for publication), 2002 WL 992410; Guevara v. Perez, No. 08-01-00279-CV (Tex. App.—El Paso Feb. 28, 2002, no pet.) (not designated for publication), 2002 WL 313193; Geiger v. Landes, No. 12-01-00152-CV (Tex. App.—Tyler Jan. 31, 2002, no pet.) (not designated for publication), 2002 WL 169284.

defendants was initially assigned to the case. However, before the plaintiff’s action was resolved, the attorney handling the case quit the defendant’s law firm. After months of inactivity, the defendants filed a Motion to Withdraw as Plaintiff's Counsel, which was denied by the court. Moreover, the court ordered defendants to file a Response to a Motion for Summary Judgment that had been filed. The defendants failed to file the Response. Consequently, the court granted summary judgment and dismissed the plaintiff's lawsuit. Based on the attorneys’ failure to file the Response to the Motion for Summary Judgment, the plaintiff sued her former law firm. The defendants moved for summary judgment, arguing that the plaintiff was impermissibly fracturing one malpractice action into several claims. In denying the defendants’ Motion for Summary Judgment, the court noted that plaintiffs may not fracture their legal malpractice claims.

In Goffney v. Rabson, 56 S.W.3d 186 (Tex. App.—Houston [14th Dist.] 2001, pet. denied), Rabson hired a lawyer to handle an estate suit. That lawyer brought in another lawyer, Goffney, to work on the suit. Several days before trial was to begin, the first lawyer told Rabson he could not continue due to a heart condition. Goffney, now given the responsibility of going to trial, got another lawyer to help with getting a continuance. The trial judge refused to grant a continuance. Rabson claimed that that when the court recessed for lunch, Goffney left the courtroom. Rabson eventually managed to hire another attorney to handle the case. The trial ended in a $750,000 judgment against the Rabson, and the she ultimately settled with the other parties to that suit.

Rabson sued Goffney for legal malpractice, breach of contract, deceptive trade practices, and breach of fiduciary duty. Before trial, however, Rabson dropped her malpractice claim. The jury found for her on the other causes of action.

In reversing, the court of appeals held that the client could not recover on her breach of contract, DTPA, and breach of fiduciary duty claims because they are all in the nature of a tort action for legal malpractice, and the client abandoned her malpractice claim prior to trial. Id. at 192.

The court noted that the breach of contract claim was based on the allegation that Goffney abandoned Rabson on the day of trial, which the court characterized as a breach of Goffney’s duty to represent the client, a malpractice claim. Id. The court also noted that Rabson’s claim that she was seeking as damages the fees she paid Goffney, as opposed to malpractice damages, did not recast her claim. As to her DTPA claim, the court noted that Rabson’s allegations do not involve the type of deceptive conduct, as opposed to negligent conduct, required to support a cause of action under the DTPA against an



14

attorney. Id. at 192-93. Finally, the court held that in support of her breach of fiduciary duty claim, Rabson raised the same allegations as in her breach of contract and DTPA claims (that Goffney abandoned her at trial, did not properly prepare the case for trial, and misled Rabson into believing the case had been properly prepared for trial). Id. at 192.

The holding of this case is sure to surprise some. Even assuming that the court’s analysis of Rabson’s breach of contract and DTPA claims is correct, it is difficult to justify the court’s conclusion that the lawyer’s abandonment of the client at trial does not rise to the level of a breach of fiduciary duty. V. ARBITRATION OF MALPRACTICE

CLAIMS Arbitration clauses are routinely included in

contracts. In Miller v. Brewer, 118 S.W.3d 896 (Tex. App.—Amarillo 2003, no pet.), the attorney-client contract contained a mandatory arbitration clause purportedly applicable to all disputes arising out of the attorney-client relationship. When a dispute arose over the attorney’s settlement of the client’s employment discrimination suit, the client sued the attorney. The trial court ordered arbitration. The client filed a demand for arbitration, but then moved to set aside the order compelling arbitration. When the client did not go forward with arbitration, the trial court dismissed the case, and the court of appeals affirmed.

The client argued that the Texas Arbitration Act does not apply to a personal injury claim, unless each party to the claim, on the advice of counsel, agrees to arbitrate and the agreement is signed by each party’s attorney. CIV. P. REM. CODE § 17.002(a), (c). The court distinguished In re Godt, 28 S.W.3d 732, 739 (Tex. App.—Corpus Christi 2000, no pet.), in which the Corpus Christi court of appeals held that the personal in jury exception applied to a legal malpractice case. Rather, the court held that the case at hand was more akin to In re Hartigan, 107 S.W.3d 684, 690-91 (Tex. App.—San Antonio 2003, orig. proceeding, pet. denied), in which the court held that a claim aris ing from representation in a divorce case was not a claim for personal injury and, therefore, was not excluded from the scope of the act. VI. DEFENSES TO LEGAL MALPRACTICE

CLAIMS A. Defenses—Generally

This section considers defenses to a negligence or breach of fiduciary duty action, assuming the client establishes a duty and resulting damages. Not every defense available will be discussed. As a general rule, the attorney may assert any defenses in the malpractice suit that the defendant in the original suit could have asserted. Mathew v. McCoy, 847 S.W.2d 397, 401 (Tex. App.—Houston [14th Dist.] 1993, no writ). In

Mathews, the court stated that defending against legal malpractice claim by arguing doctors in the underlying suit did not commit medical malpractice after pursuing medical malpractice claim is permissible. The following is a partial list of defenses available in a legal malpractice action:

(a) estoppel; (b) contributory negligence; (c) collateral estoppel; (d) settlement; and (e)-(f) limitations and privity, both of which get

their own sections in this article.

Sutton v. Estate of McCormick , 47 S.W.3d 179 (Tex. App.—Corpus Christi 2001, no pet.), illustrates the point that many defenses are available in a legal malpractice action. A lawyer drafted loan documents that allegedly contained a usurious rate of interest. The lender was sued on the note. He then sued the lawyer for malpractice. The jury found that the plaintiff was not a client of the lawyer with respect to the loan transaction, and the trial court rendered a take-nothing judgment for the lawyer’s estate. In affirming the trial court, the court of appeals held that the plaintiff’s testimony left unclear the exact parameters of the relationship between himself and the lawyer. B. Third Party Liability and the Privity Defense

Texas law holds that an attorney owes no duty to third party non-clients and is not ordinarily liable to third parties for damages resulting form the performance of professional services. Barcelo v. Elliott, 923 S.W.2d 575, 578-79 (Tex. 1996). One court has summarized the rule as follows:

Under Texas law, an attorney owes a duty only to those parties in privity of contact with him. Because an attorney has no duty of care to non-clients, a non-client can have no claim for negligence against an attorney. Third parties in Texas have no standing to sue attorneys on causes of action arising out of their representation of others.

Bossin v. Towber, 894 S.W.2d 25, 33 (Tex. App.—Houston [14th Dist.] 1994, writ denied). While other jurisdictions have relaxed the privity rule, Texas courts have refused to deviate from the strict privity rule for attorneys. See First Mun. Leasing Corp. v. Blankenship, Potts, Aikman, Hagin & Stewart, 648 S.W.2d 410, 413 (Tex. App.—Dallas 1983, writ ref’d n.r.e.).

The privity rule applies equally to a third party beneficiary of the attorney’s services. In Barcelo , an attorney prepared a will and an inter vivos trust agreement for his client. Upon her death, the trust was











15

to terminate, and certain assets would be distributed to he children, with the remainder to her grandchildren. After her death, two of the children contested the validity of the trust, and the probate court found it invalid and unenforceable. The grandchildren then sued the lawyer because, they alleged, his negligence resulted in a much smaller share for them. Barcelo, 23 S.W.2d at 576. The supreme court noted that most other states have relaxed the privity barrier in the context of estate planning, but went to hold, after noting the benefits of a bright-line rule, that “an attorney retained by a testator or settlor to draft a will or trust owes no professional duty of care to persons named as beneficiaries under the will or trust.” Id. at 578-79.

1. The “Bright Line” Requirement Relaxed

In American Centennial Insurance Co. v. Canal Insurance Co., 843 S.W.2d 480, 485 (Tex. 1992), the Texas Supreme Court held that an excess insurance carrier has the right to bring an equitable subrogation action against the insured’s defense counsel. The holding was a departure from the rule that attorney malpractice claims are not assignable. See State Farm Fire & Casualty Co. v. Gandy, 925 S.W.2d 696, 707-08 (Tex. 1992). Courts distinguish subrogation from assignment because the subrogee “stands in the shoes of the insured,” and the insurer is the party who actually bears the cost of the attorney negligence.” Stonewell Surplus Lines Ins. Co. v. Drabek , 835 S.W.2d 708, 711 (Tex. App.—Corpus Christi 1992, writ denied).

2. Fraudulent Conduct Creates an Exception to the

Privity Requirement The privity rule, however, does not protect

attorneys from liability to third parties for fraudulent conduct. “[A]n attorney is liable if he knowingly commits a fraudulent act that injures a third person, or if he knowingly enters into a conspiracy to defraud a third person.” Likover v. Sunflower Terrace II, Ltd., 696 S.W.2d 468, 472 (Tex. App.—Houston [1st Dist.] 1985, no writ). Cases involving securities transactions are a frequent source of allegations against attorneys. See Manning Gilbert Warren III, The Primary Liability of Securities Lawyers, 50 S.M.U. L. REV. 383, 390-91 (1996). Attorneys also may be liable to non-clients for assisting other attorneys in unethical transactions. TEX. DISCIPLINARY R. PROF’L CONDUCT 4.01 cmt. 2.

a. Aiding and Abetting—Securities and other Fraud

In recent years, plaintiffs have attempted to circumvent the privity requirement by asserting “aiding and abetting” causes against the lawyer or law firm. In asserting claims against attorneys, third parties must do more than merely assert that a lawyer or a law firm aided or abetted a client’s fraud merely because the

lawyer(s) knew of the fraud and did not reveal it. Bernstein v. Portland Sav. & Loan Assoc., 850 S.W.2d 694, 701-02 (Tex. App.—Corpus Christi 1993, writ denied) (holding that a lawyer who had only limited arms-length contacts with a savings and loan owed no duty to disclose any fraudulent activities committed by his client).

In Bernstein v. Portland Sav. & Loan Assoc., the court made two critical pronouncements. 850 S.W.2d 694, 701-02 (Tex. App.—Corpus Christi 1993, writ denied). First, it differentiated between fraud claims based on material misrepresentations and those based on failure to disclose. Id. The failure to disclose a fraud claim is inconsistent with the attorney’s duty not to disclose the client’s confidences. Id. This troubling inconsistency was addressed in the court’s second pronouncement: “If we found a duty in lawyers to disclose confidential information in this situation, we would place lawyers in the difficult position of choosing either to remain silent and risk fraud liability or to betray client confidences and risk jeopardizing that and other attorney-client relationships.” Id. at 702 n.7. In the end, this difference may not matter much, as recent cases and trends indicate, mainly because plaintiffs typically allege material misrepresentations as a basis for their claims. See generally , Steve McConnico and Robyn Bigelow, Legal Malpractice and Professional Responsibility: Summary of Recent Developments in Texas Legal Malpractice Law, 33 ST. MARY’S L. J. 607 (2002) (discussing recent trends).

The recent controversy surrounding Enron and other high profile corporate meltdowns have only continued the trend of plaintiffs in securities related cases looking to lawyers for compensation. In December 2001, Miami’s Greenberg Traurig, in a lawsuit involving allegations that the firm aided a client who engaged in securities fraud, was a co-defendant in a $75 million verdict. The judgment placed $22.4 million of the $40.7 million punitive damages against the law firm. Mary Alice Robbins, Deals and Suits, Tex. Law., Dec. 1, 2001, at 6.

Given the public anger over the recent financial failures of nationally recognized corporations, the pressure to demand greater responsibility from professionals who oversee companies’ operations will intensify. Lawyers often play a major role in handling a corporation’s transactions. This reality may result in increased pressure on lawmakers to enact statutes and ethical codes that will reshape the protection currently afforded lawyers. The Sarbanes-Oxley is one such example.

b. Negligent Misrepresentation

The tort of negligent misrepresentation requires a plaintiff to establish: (1) a duty to act with care; (2) a negligent representation upon which third parties are expected to, and do, rely to their detriment; and (3)











16

knowledge by or notice to the professional that the representation will be relied upon. RESTATEMENT OF TORTS (SECOND) § 552 (1997). Until recently, Texas courts had refused to apply this tort to attorneys. Thompson v. Vinson & Elkins, 859 S.W.2d 617, 623 (Tex. App.—Houston [1st Dist.] 1993, writ denied) (holding that section 552 does not apply to attorneys). Moreover, that approach changed with McCamish, Martin, Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787 (Tex. 1999). In McCamish, the Texas Supreme Court specifically adopted Section 552 of the Restatement of Torts (Second), and held that allowing a non-client to bring a negligent misrepresentation action does not undermine the privity requirement. Id. at 794. Moreover, in addressing the argument that Section 552 would threaten lawyers with almost unlimited liability, the court noted that Section 552 limits liability to situations in which the attorney providing the information is aware of the non-client and intends for the non-client to rely on the information. Id. C. Statue of Limitations

The general rule is that a two-year statute of limitations governs legal malpractice claims. Apex, 41 S.W.3d at 120. This limitations period applies regardless of whether the claim is based in tort, contract, or any other theory. Id. Section 16.003 of the Civil Practice and Remedies Code, while not explicitly stating that it applies to legal malpractice claims, sets out the two-year limitations period. TEX. CIV. PRAC. & REM. CODE ANN. § 16.003 (Vernon Supp. 2002).6 Application of this general rule is tempered by three related issues: (1) when is a claim against an attorney deriving from services rendered not a legal malpractice claim; (2) for the purpose of determining the time of limitations, when does the “action accrue”; and (3) the effect of the Hughes tolling rule.

1. When is a Claim Not a Legal Malpractice Claim,

Such That A Four-year Statute of Limitations Applies? In McGuire v. Kelley, 41 S.W.3d 679 (Tex.

App.—Texarkana 2001, no. pet.), the client brought claims against an attorney for breach of fiduciary duty, breach of contract, and fraud, alleging the attorney failed to account to client for her rightful share of the settlement in client’s underlying personal injury action. The jury found for the client on her breach of contract, 6 Section 16.003(a) states: “Except as provided by Sections 16.010 and 16.0045, a person must bring suit for trespass for injury to the estate or to the property of another, conversion of personal property, taking or detaining the personal property of another, personal injury, forcible entry and detainer, and forcible detainer not later than two years after the day the cause of action accrues.”

breach of fiduciary duty, and fraud claims. Id. at 681. The attorney appealed, and argued that the trial court erred in not ruling as a matter of law that the client’s breach of fiduciary duty claim was barred by limitations. Id. Specifically, he “contended that the limitations period on breach of fiduciary duty is two years.” Id.

In upholding the application of the four-year statute of limitations to the breach of fiduciary duty claim, the court first observed that other courts have held similarly. Id. at 682 (citing Rowe v. Rowe, 887 S.W.2d 191 (Tex. App.—Fort Worth 1994, writ denied)). More important, however, was the court’s reference to the amended version of section 16.004 of the Texas Practices and Remedies Code. In 1999, the legislature added breach of fiduciary duty to the list of claims having a four-year limitations period. Id. at 682 n.2; see also TEX. CIV. PRAC. & REM . CODE ANN. § 16.004 (Vernon Supp. 2002).7

On appellant’s motion for rehearing, the court addressed his contention that prior cases have held that the breach of fiduciary duty is subject to a two-year statute of limitations. McGuire, 41 S.W.3d at 684. The court noted that “legal malpractice claims based on intentional fraud are governed by a four-year statute.” Id. (citing Estate of Degley v. Vega, 797 S.W.2d 299, 303 (Tex. App.—Corpus Christi 1990, no writ)). In Degley, the Corpus Court of Appeals applied a two-year limitations period to a fraud claim. Id. at 302–03. In doing so, however, the court observed “an important distinction between an action for negligent legal malpractice, which is clearly governed by the two-year limitations period applicable to personal injuries, and for intentional fraud committed by an attorney.” Id. (citations omitted). Finally, the McGuire court noted that the cases relied upon by appellant—Willis v. Maverick , 760 S.W.2d 642, 644 (Tex. 1988), and Jampole v. Matthews, 857 S.W.2d 57, 64 (Tex. App.—Houston [1st Dist.] 1993, writ denied)—did not involve a breach of fiduciary duty claim based on fraudulent misrepresentation. McGuire 41 S.W.3d at 684.

Despite the holding in McGuire, the issue regarding how a plaintiff labels a particular cause of action and the applicable statute of limitations remains unsettled. Recently, the San Antonio Court of Appeals held that “Legal malpractice claims are governed by the two-year statute of limitations.” Burnap v. Linnartz, 38 S.W.3d 612, 623 (Tex. App.—San Antonio 2000, no pet.); see also Apex, 41 S.W.3d at 7 In amending section 16.004, the legislature stated, “The intent of this Act is to clarify existing law by resolving a conflict in case law concerning the applicable statute of limitations for actions for fraud and breach of fiduciary duty.” Act of May 26, 1999, 76th Leg., R.S., ch. 950, § 2, 1999 Tex. Gen. Laws 3687.















17

120; Davenport v. Verner & Brumley, 2001 WL 969249 (Tex. App.—Dallas Aug. 28, 2001, no pet.) (“The statute of limitations on appellant’s claims for negligence, breach of fiduciary duty, breach of implied warranty, fraud, and DTPA violations is two years. The fraud claim is two years, rather than four, since it is the basis of a legal malpractice claim.”). 2. When Does the Action Accrue For the Purpose of

the Statute of Limitations? The accrual of a cause of action is a question of

law. Willis v. Maverick , 760 S.W.2d 642, 644 (Tex. 1988). A legal malpractice cause of action accrues when the client sustains a “legal injury.” Legal injury in tort occurs when the tort is committed and damage suffered, even if the fact of the injury is not discovered until later or some of the damages have not occurred. S.V. v. R.V., 933 S.W.2d 1, 4 (Tex. 1993). Two exceptions limit application of the two-year statute of limitations. The discovery rule and the fraudulent concealment rule.

a. The Discovery Rule Is an Exception to the Statute

of Limitations 8 The discovery rule can apply in legal malpractice

claims. Willis 760 S.W.2d at 645. In a malpractice case, the statute of limitations does not begin to run until the claimant discovers or should have discovered through the exercise of reasonable care and diligence the facts establishing the elements of his cause of action. Id. at 645–46. In Willis, the supreme court concluded that the relationship between an attorney and the client justifies the imposition of the discovery rule. In so holding, the court stated:

A fiduciary relationship exists between attorney and client. As a fiduciary, an attorney is obligated to render a full and fair disclosure of facts material to the client’s representation. The client must feel free to rely on his attorney’s advice. Facts which might ordinarily require investigation likely may not excite suspicion where a fiduciary relationship is involved. Further, breach of the duty to disclose is tantamount to concealment

8 In Wagner & Brown v. Horwood , the supreme court addressed the discovery rule in a non-legal malpractice case. The court noted that “we determine whether an injury is inherently undiscoverable on a categorical basis because such an approach ‘brings predictability and consistency to the jurisprudence.” 58 S.W.3d 732, 735 (Tex. 2001) (quoting Apex Towing , 41 S.W.3d at 122). In other words, the question is whether “the type of injury that [is at issue] generally is discoverable by the exercise of reasonable diligence.” Id. (internal quotations omitted).

Id. at 645 (citations omitted). Not unlike prior years, the plaintiffs in this year’s cases pleaded the discovery rule to get around the affirmative defense of limitations. b. The Distinction Between The Discovery Rule and

Fraudulent Concealment Often May Be Blurred in Legal Malpractice Actions Where Failure to Disclose is Tantamount to Concealment Fraudulent concealment “tolls the statute of

limitations until the fraud is discovered or could have been discovered with reasonable diligence. Velsicol Chem. Corp. v. Winograd, 956 S.W.2d 529, 531 (Tex. 1997). The doctrine of fraudulent concealment concerns whether, and for how long, the statute of limitations is tolled. In contrast, the discovery rule determines when a cause of action accrues. Arabian Shield Dev. Co. v. Hunt, 808 S.W.2d 577, 585 (Tex. App.—Dallas 1991, writ denied). Also, unlike the discovery rule, the party asserting fraudulent concealment has the burden of raising it in response to the summary judgment motion and must come forward with evidence raising a fact issue on each element of fraudulent concealment. In Gibson v. Ellis, 58 S.W.3d 818 (Tex. App.—Dallas 2001, no pet.), the client’s pleading stated, “Due to Defendant’s fraudulent concealment, the Plaintiff could not have discovered his claim until September of 1995.” Id. at 824. The court interpreted that statement as an “implicit pleading of the discovery rule.” Id. at 824-25. Because the defendant had not offered any evidence to negate the discovery rule, the court reversed and remanded.9

c. Discovery of Injury Occurs When Plaintiff is

Exposed to the Risk of Harm In Brents v. Haynes & Boone, 53 S.W.3d 911

(Tex. App.—Dallas 2001, pet. denied), Haynes & Boone filed a lawsuit on behalf of the Brentses and others against Edward Pine and other defendants, seeking to prevent them from selling residential property to the Tarrant County Mental Health Mental Retardation Association (MHMR). The plaintiffs applied for a temporary restraining order. On July 8, 1991, the TRO was dismissed, and the following day Pine was nonsuited from the case. On September 14, 191, the Brentses received a notice of a discrimination complaint from the United States Department of Housing and Urban Development (HUD). On October 18, 1991, the Brentses told Haynes & Boone that they no longer wanted to be involved in the MHMR lawsuit. On November 9, 1992, the remaining allegations in the MHMR lawsuit were voluntarily dismissed. On 9 On remand, the trial court granted a take-nothing judgment against the plaintiff’s claims and awarded the attorney $41,000 in attorney’s fees. The court of appeals affirmed. The case is discussed supra .












18

October 19 1994, HUD charged the Brentses with discrimination. In 1996, a United State district court concluded that Thomas Brents had acted in a discriminatory manner. On October 18, 1996, the Brentses filed their legal malpractice action against Haynes & Boone. Eventually, the case was dismissed based on the affirmative defense of limitations. On appeal, the Brentses argued that their cause of action did not accrue until October 19, 1994, when HUD issued a charge of discrimination against the Brentses and they discovered that the MHMR lawsuit was groundless. Id. 913–14.

In rejecting the Brentses’ argument, the court noted that the test for discovery of injury “is not when they knew the suit was groundless but when they knew they were at risk of harm.” Id. at 915. “As a matter of law, the Brentses discovered they were at risk of economic harm when they received the HUD letter [on September 14, 1991].” Id.

Another case illustrating this point is Manning v. Jenkins & Gilchrist, P.C., No. 08-00-00153-CV (Tex. App.—El Paso Aug. 16, 2001, no pet.) (not designated for publication), 2001 WL 925738. In that case, Manning, the plaintiff, was originally a co-defendant in a sexual discrimination case. The sexual discrimination case was settled with the defendants in 1994. The employer co-defendant, however, failed to make payment on the settlement. The plaintiff in the discrimination case then attempted to collect from Manning in 1997. Manning’s attorneys, Jenkins & Gilchrist (J&G), refused to provide him with a defense. Following the granting of partial summary judgment against him on the issue of liability, Manning entered into an agreed judgment. Afterward, Manning filed a malpractice suit against J&G. J&G filed a motion for summary judgment on several grounds, including statute of limitations. Id. at *1–*2.

On appeal, Manning argued that he did not discover J&G’s failure to disclose facts relevant to the settlement agreement until after he hired new counsel in 1997. The court noted that because Manning allegedly obtained erroneous advice from J&G and entered into the settlement agreement on or about December 1993, his malpractice cause of action accrued on that date. Id. at *4.

d. Discovery of Injury Applies to the Knowledge of

Facts As Opposed to A Knowledge of the Law In Johnson v. Walker, 2001 Tex. App. LEXIS

6149 (Tex. App.—Amarillo Sept. 5, 2001, no pet.) (not designated for publication), Johnson hired Walker, in May 1993, to represent him after an arrest for the offense of possession of a firearm. While Johnson was out on bond, Walker sought and obtained a preliminary hearing on the charge. During the hearing, the judge hinted that she would find there was no probable cause and dismiss the charge. Walker suggested that Johnson

be continued on bond until the case was heard by the grand jury. The judge agreed and Johnson remained on bond until he was indicted for that offense on June 24, 1993. Sometime later, Johnson was arrested for a parole violation. Walker represented Johnson during two parole hearings. After those hearings Johnson relieved Walker from the case and obtained another attorney. Eventually, Johnson pleaded guilty and was sentenced to six years confinement. On November 16, 1999, Johnson filed suit against Walker, alleging malpractice, breach of contract, breach of fiduciary duty, breach of warranty, and DTPA violations. Id. at *1.

Walker’s answer contained a general denial and asserted the affirmative defense of limitations. Id. In December 1999, Johnson moved for summary judgment on his claims and also asserted the discovery rule and fraudulent concealment. Id. Walker also moved for summary judgment, which was granted. In affirming the grant of summary judgment, the appeals court noted that “Johnson argues that he ‘discovered the wrong and unjust legal injury in the month of June 1999 while doing legal research.’” Id. at *3. The court responded by noting that “the discovery rule applies to the knowledge of the facts on the part of the appellant as opposed to a knowledge of the law.” Id. (citing Willis v. Maverick , 760 S.W.2d 642 (Tex. 1988)) (internal quotations omitted).

e. Client Is Entitled To Rely On His Own Lawyer’s

Statements For Purposes Of The Discovery Rule Smith v. Cutrer & Jefferson, No. 14-00-00100-CV

(Tex. App.—Houston [14th Dist.] January 24, 2002, no pet.), (not designated for publication) 2002 WL 87485, is illustrative. In 1991, the plaintiffs, represented by Cutrer & Jefferson (“Law Firm”), filed suit against Borden, Inc. (“Borden”). In 1992, the court entered judgment against the plaintiffs, and the plaintiffs did not file an appeal. Four months later, the Law Firm filed a second lawsuit on behalf of the plaintiffs against Borden. This time the plaintiffs tried their claims to a jury, which awarded them $2.3 million in damages. Borden appealed, and in 1996, the Fifth Circuit reversed and rendered judgment that the plaintiffs take nothing on their claims. Specifically, the Fifth Circuit held that the plaintiffs’ claims were barred by res judicata because they had made essentially the same claims in the first lawsuit. Id.

In 1998, the former Borden plaintiffs filed a legal malpractice suit against the Law Firm. The Law Firm moved for summary judgment, and the trial court granted the Law Firm’s motion without stating the grounds on which its judgment was based. Id.

The central issue on appeal was whether the plaintiffs’ claims were barred by the two-year statute of limitations. Id. The Law Firm argued that because the plaintiffs knew that the first lawsuit had been



19

dismissed with prejudice, they were put on notice about a possible malpractice claim as soon as the first case was dismissed in 1992. The plaintiffs responded that the Law Firm had negligently misrepresented the legal effect of the dismissal of the first case, so they did not “discover” the malpractice until the Fifth Circuit barred their second lawsuit due to res judicata. Id.

The appellate court ruled for the plaintiffs and reversed. The court noted that ordinarily a reasonable person is put on notice of possible legal malpractice once he learns that his case has been dismissed with prejudice. However, the court explained that if the Law Firm had in fact misrepresented the legal effect of the first case’s dismissal, then the plaintiffs would not have known about the malpractice until the second suit was dismissed. Therefore, the court held that summary judgment was inappropriate since there was a factual dispute over whether the alleged misrepresentations had taken place. “To hold otherwise would be to say that [the plaintiffs] could not rely on their own lawyer’s statements, which would… require a diligent client to hire a second lawyer to review the first lawyer’s actions at every difficulty.” Id.

f. An Attorney’s Breach of His Fiduciary Duties

May Be “Inherently Undiscoverable” In Haas v. George, the plaintiff brought

malpractice claims against the attorney who had represented her in a divorce proceeding eight years earlier. 71 S.W.3d 904, 910 (Tex. App.—Texarkana 2002, no pet.) Haas alleged that during negotiations over the divorce settlement between 1989 and 1991, George had represented to Haas that the settlement provided her over $4,000 a month in child support. In 1997, George notified Haas by letter that in fact the settlement only guaranteed a little over $2,000 in child support; the extra payments had been made to Haas as part of her one-half share of the community estate. When her husband stopped sending the “community estate” portion of the payments, Haas brought suit against George. Haas alleged that George had committed malpractice by misrepresenting the nature of the property settlement and failing to secure a more advantageous property division. Id. at 908-09. The trial court granted George’s motion for summary judgment, although it did not specify the reason for its decision. Id. at 911.

On appeal, George argued that Haas’ claims were barred by the two-year statute of limitations. Haas responded that she did not discover her injury until she received George’s 1997 letter, meaning that the limitations period did not begin to run until 1997 pursuant to Willis. Id. at 909.

The court agreed with Haas. As an initial matter, it noted that the discovery rule could delay the statute of limitations only when (1) the nature of the injury is

inherently undiscoverable and (2) the evidence of the injury is objectively verifiable. Id. at 912. “These two elements of inherent undiscoverability and objective verifiability balance these conflicting policies in statutes of limitations: the benefits of precluding stale claims versus the risks of precluding meritorious claims that happen to fall outside an arbitrarily set period.” Id.

The court then explained that for a legal malpractice-related injury to be inherently undiscoverable, it must be the kind of injury that by its nature is unlikely to be discovered within the two-year limitations period. Id. By definition, a fiduciary’s misconduct is such an injury, because the person to whom a fiduciary duty is owed is usually unable to monitor the fiduciary’s actions or unaware of the need to do so. Id. Since George owed fiduciary duties to his client when he represented her in the divorce case, and since Haas had no reason to question her attorney’s judgment until she received the 1997 letter, the court found that Haas’ injury was inherently undiscoverable. Id. at 913.

As for objective verifiability, the court observed that Haas had put forth sufficient evidence to show that George had not secured a reasonable settlement in the underlying divorce action. Moreover, Haas had presented evidence that George had failed to communicate better settlement offers to her. Thus, the court held that Haas had presented objectively verifiable proof of her injury. Id. Consequently, the court remanded the legal malpractice claims for trial. Id.

The Haas case serves as a good reminder that the two-year statute of limitations for legal malpractice cases is not as strict as it may seem. Lawyers who breach their fiduciary duties may never be completely immune from the consequences of their actions, although legal malpractice plaintiffs would be well-advised to bring their claims as soon as possible.

In Lewis v. Nolan, 105 S.W.3d 185 (Tex. App.—Houston [14th Dist.] 2003, pet. denied), the plaintiff filed suit against his former attorney, alleging the attorney failed to respond to a motion for summary judgment, which resulted in a judgment being entered against the plaintiff. The attorney filed a motion for summary judgment, which was granted, based on the statute of limitations. First, the court rejected the attorney’s argument that the discovery rule was inapplicable. The court noted that because of the fiduciary relationship between attorney and client, an attorney’s misconduct is considered inherently undiscoverable. The attorney then argued that the former client had constructive notice of the judgment against him. In support, the attorney relied upon the rule that a party to a lawsuit is charged by law with notice of all orders and judgment rendered in that suit. In rejecting that argument, the court of appeals noted




20

that it is counterintuitive to suggest that an attorney can tell a client he will take care of issues that arise and still be protected from potential malpractice claims by a legal presumption that he client had notice of the final judgment against him. 3. The Hughes/Murphy Rule is Again Just the

Hughes Rule Ordinarily, the limitations period for a legal

malpractice claim runs from the time that the legal injury is discovered. However, in Hughes v. Mahaney & Higgins, 821 S.W.2d 154 (Tex. 1991), the supreme court held that “when an attorney commits malpractice in the prosecution or defense of a claim that results in litigation, the statute of limitations on the malpractice claim against the attorney is tolled until all appeals on the underlying claim are exhausted.” Id. at 157. In essence, the Hughes rule seeks to avoid the harsh results that the legal injury and discovery rules can create. These rules may force a client to bring suit against the attorney when the client discovers the injury regardless of whether the attorney is still prosecuting or defending the client’s claim. Id. at 156–57. Were a client placed in the circumstance of having to prosecute a case against her own attorney, the practical result would be that the client would be forced into asserting “inherently inconsistent litigation postures,” arguing the propriety of counsel’s actions in the underlying suit and impropriety in the malpractice suit. Id. Thus, the Hughes court concluded that the limitations period should be tolled for the second cause of action “because the viability of the second cause of action depends on the outcome of the first.” Id. at 157.

In a subsequent case, the supreme court seemingly modified the Hughes rule. In Murphy v. Campbell, 964 S.W.2d 265 (Tex. 1997), the court held the mere fact that a client must take inconsistent litigation positions is not dispositive of when the tolling rule applies. The decisive element is whether the client is forced to obtain new counsel. Following Murphy, the application of the Hughes/Murphy rule resulted in confusing and inconsistent application of the rule. For a discussion of the struggle faced by intermediate courts in applying the rule, see Eiland v. Turpin, Smith, Dyer, Saxe & McDonald , 64 S.W.3d 155 (Tex. App.—El Paso 2001, no pet.), and the cases cited therein.

The ensuing confusion eventually forced the supreme court to grant petition in a case and resolve the confusion. See Apex Towing Co. v. Tolin , 41 S.W.3d 118 (Tex. 2001).

In Apex, the plaintiffs sued their attorneys for mishandling the defense of a maritime personal injury lawsuit. Specifically, Apex alleged, in part, that the attorneys failed to file a timely maritime limitations-of-liability pleading, leaving Apex exposed to a judgment in excess of the value of the vessel and its freight. On August 31, 1994, the trial court in the underlying suit

rendered judgment on a jury verdict for an amount in excess of any limit that could have been imposed had Apex’s attorneys filed a timely maritime-limitations pleading. Apex hired additional counsel to file post-judgment motions and an appeal. The case was ultimately settled, and the court of appeal dismissed the appeal on May 19, 1995.

In the legal malpractice law suit, filed on February 19, 1997, the attorneys moved for summary judgment on the grounds that the two-year statute of limitations began to run no later than January 27, 1995, when the parties purportedly agreed to settle the underlying law suit. The trial court granted summary judgment for the attorneys. The Beaumont Court of Appeals affirmed. Apex Towing Co. v. Tolin , 997 S.W.2d 903 (Tex. App.—Beaumont 1999, pet. granted), rev’d, 41 S.W.3d. 113 (Tex. 2001).

The supreme court emphatically stated: We conclude that Murphy did not modify the rule we announced in Hughes, and today we reaffirm that rule: When an attorney commits malpractice in the prosecution or defense of a claim that results in litigation, the statute of limitations on a malpractice claim against that attorney is tolled until all appeals on the underlying claim are exhausted or the litigation is otherwise finally concluded.

Apex, 41 S.W.3d at 119. In the case, therefore, the underlying case was not finally concluded until May 19, 1995, when the court of appeals issued its order dismissing Apex’s appeal. 4. The Hughes Tolling Rule Does Not Apply to

DTPA Claims In Underkofler v. Vanasek , the supreme court held

that the Hughes rule does not toll the statute of limitations incorporated into the DTPA. Underkofler v. Vanasek , 53 S.W.3d 343, 345 (Tex. 2001). There, Vanasek hired Underkofler and his law firm to pursue recovery on a note against the maker, a limited partnership, and against the its partner as guarantors. A non-jury trial began on June 6, 1991. During trial, the judge ordered the parties to mediation, which was ultimately unsuccessful. In the meantime, two of the defendants filed for bankruptcy in late 1991. In April 1992, Vanasek wrote a letter to one of Underkofler’s partners expressing concerns about Underkofle r’s work. In May 1992, the trial court granted Underkofler’s motion to withdraw. Afterward, Vanasek hired another attorney. Trial resumed on April 29, 1994. Trial was again recessed and reset several times. Eventually, Vanasek settled with one of the defendants and obtained default judgments against others, on September 24, 1994.










21

Before the settlement agreement, Vanasek sued Underkofler for malpractice, alleging negligence, gross negligence, breach of contract, breach of implied and express warranties, and DTPA violations. Id. at 345. Underkofler filed a motion for summary judgment, which was granted. Id. The court of appeals reversed in part, and affirmed in part. Id. Specifically, the court of appeals held that limitations on DTPA claims should be tolled because the policy reasons behind Hughes likewise applied to those claims. Id.

In disagreeing with the court of appeals on that issue, the court stated, “The Legislature has adopted a specific statute of limitations for DTPA claims, and has included only two exceptions to the general rule that limitations begins to run on the date the wrongful act occurred, a discovery rule and a fraudulent concealment rule[.]” Id. at 346.

In 1995, the Legislature amended the DTPA to exclude from it scope claims for damages based on “the rendering of a professional service, the essence of which is the providing of advice, judgment, opinion, or similar professional skill.” TEX. BUS. & COM . CODE ANN. § 17.49(c) (Vernon Supp. 2001). The practical effect of this amendment has been to eliminate the DTPA as a basis for most legal malpractice claims because those claims are usually predicated on the attorney’s allegedly erroneous advice, judgment, opinion, or professional skill. Therefore, to the extent a malpractice claim is based in negligence, the DTPA does not provide a cause of action, restricting the holding in Underkofler to its facts. 5. The Hughes Rule Does Not Apply to Attorney’s

Transactional Work In Vacek Group, Inc. v. Clark , 95 S.W.3d 439

(Tex. App.—Houston [1st Dist.] 2002, no pet.), the court found that the Hughes rule did not toll the statute of limitations where the malpractice claim is based on an attorney’s transactional work. Clark, the defendant, was hired to carry out a “corporate divorce” where a shareholder of a closely held corporation, Vacek Group, was to leave the company by selling his shares to the remaining shareholders. Clark drafted the agreement setting out the terms of the divorce. The agreement failed to include any language that would release the parties from potential claims as a result of the divorce. Inevitably, a dispute arose between the parties. Realizing the absence of the release was a mistake on the part of Clark, the remaining Vacek shareholder sent Clark a letter on July 25, 1997 expressing his disproval and relieving the attorney of his responsibilities to the corporation. After receiving the letter Clark concluded a few outstanding matters and as of August 22, 1997 Clark still was referring to himself as “the corporate attorney” for Vacek. Eventually the corporate divorce dispute between the

shareholders was resolved when Vacek settled for $24,000.

On July 27, 1999 Vacek sued Clark and his law firm for negligence, breach of fiduciary duty, breach of contract and violation of the Deceptive Trade Practices Act. Clark defended the action by claiming that the statute of limitations had run as of July 25, 1999—two years after Vacek sent Clark the letter expressing their dissatisfaction with Clark’s representation. Cla rk argued that the discovery rule applied and the letter was evidence that Vacek knew of the alleged malpractice. Vacek countered the argument by claiming that the Hughes rule tolled the statute of limitations while Clark was still acting as Vacek’s “corporate attorney”. However, the court disagreed and held:

We hold that the tolling rule foes not apply to malpractice claims based on errors committed by attorneys in the course of conducting transactional work. Here, Clark’s alleged malpractice was in drafting the [a]greement, which is transactional work. Clark did not draft the [a]greement in the prosecution or defense of a claim that results in litigation. Following Apex Towing Co. and Murphy, we hold that the Hughes tolling rule does not apply to Vacek;s situation

VII. SARBANES-OXLEY AND THE POTENTIAL

IMPLICATIONS OF THE “UP-THE-LADDER” AND “NOISY WITHDRAWAL” REQUIREMENTS On January 23, 2003, the SEC adopted rules

implementing section 307 of Sarbanes-Oxley and establishing standards of professional conduct for attorneys representing corporations who appear before the SEC. 17 C.F.R. pt. 205 (2002). Among other things, Rule 205.3 requires an attorney to report evidence of a material violation to his corporate client’s chief legal officer or the equivalent. Id. § 205.3(b)(1). Specifically, the new standards must require an attorney “to report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by [an employee or agent of] the company . . ., to the chief legal counsel or the chief executive officer [(CEO)] of the company.” Id. If an attorney reasonably believes that the chief legal officer has not provided the attorney with an “appropriate response within a reasonable time,” the attorney must continue to report the evidence of the material violation “up-the-ladder”—that is, to the corporation’s board of directors. Id. § 205.3(b)(3)(i), (iii). In addition to the “up-the-ladder” reporting required by the SEC, the regulations allow (but do not require) a lawyer to report its corporate clients wrongdoing to the SEC. The new provision provides protection for



22

attorneys that choose to reveal wrongdoing by corporations that could cause substantial injury to the financial interest or property of another. Additionally, the new regulations would allow attorneys to report corporate misdeeds in order to remedy consequences of such misdeeds, if the attorney’s legal services were used in connection with the wrongdoing. Thomas E. Spahn, “Sarbanes-Oxley, the ABA Model Rules and State ‘Whistleblowing’ Duties: The Untold Story,” http://www.mcguirewoods.com/news-resources/publications/commerical_litigation/article663.asp September 16, 2003.

While the SEC provisions seem shocking at first glance, the duty of the attorney to dissuade the client from committing fraud is not new. In fact, only weeks before the enactment of Sarbanes-Oxley, the ABA Task Force on Corporate Responsibility noted that forty-one states, including Texas, already “permit or require disclosure [of client confidences] to prevent a client from perpetrating a fraud that constitutes a crime, and eighteen states permit or require disclosure [when necessary] to rectify substantial loss resulting from client crime or fraud” where the attorney’s services were involved or used. ABA TASK FORCE ON CORP. RESPONSIBILITY, PRELIMINARY REPORT 32 (July 16, 2002), available at http://www.abanet.org/buslaw/corporateresponsibility/preliminary_report.pdf (stating that “[w]hen a lawyer has confidential information clearly establishing that a client is likely to commit a criminal or fraudulent act that is likely to result in substantial injury to the financial interests or property of another, the lawyer shall promptly make reasonable efforts under the circumstances to dissuade the client from committing the crime or fraud”).

While the ramifications of Sarbanes-Oxley have yet to be felt in terms of attorney legal malpractice litigation, the impact may not be as earth-shattering as expected. The SEC has mercifully stalled on adopting the “noisy withdrawal” requirement which would require attorneys appearing or practicing before the SEC to report their corporate clients’ misdeeds to the Commission. Instead, the SEC seeks to provide protection for attorneys who do report the corporate wrongdoing. The remaining regulations mirror some state ethics rules. Therefore, the Sarbanes-Oxley bill may not drastically infringe on the attorney-client relationship and duty to maintain client confidences as initially anticipated.

VIII. PRACTICAL TIPS FOR AVOIDING MALPRACTICE CLAIMS

• Keep Fee Disputes to a Minimum

As one recent ABA Journal article noted, “keeping fee disputes to a minimum can be key to reducing risks of malpractice claims and disciplinary complaints.” Jill Schachner Chanen, It’s Not Just About Money, ABA Journal May 2003, at 45. In fact, “studies suggest that as many as two-thirds of all malpractice claims against lawyers originated as counterclaims in lawsuits brought by the lawyers seeking payment of fees.” Id. The ABA article recommends the following steps for avoiding fee-related malpractice claims:

Ø Give the client an accurate assessment of the

cost of handling legal matters. Ø Give the client a clear statement of the scope

of the work to be performed. Ø As much as possible, avoid general language

in the fee agreement. Not limiting the scope of the engagement with detailed language increases your exposure.

Ø Follow established billing and collection practices. Sending clients regular fee statements help emphasize the importance of paying their legal bills.

Ø Be more descriptive in explaining billing tasks. “Services rendered” is vague and leaves the client wondering they are paying for. Explain the task in plain English and, when possible, frame the wording in a positive light.

• Saying “No” to A Prospective Client

There are a myriad of reasons for not taking on new clients. Here are a few of them: for whatever reason, it’s the type of cases you may neglect; the subject matter of the suit is not one with which you are familiar; or you simply do not have the time. • Establish Who Your Clients Are

Use of an engagement letter clears any misunderstanding about who the client is and what is expected of you. Client-lawyer agreements are contracts, subject to the rules of contract law, as well as other rules which govern the fiduciary relationship between them. Thus, a lawyer must define clearly the matters for which they are agreeing to represent their clients. Subjects that should be addressed in such an agreement include: who the client is, especially in a corporation or other legal entity; the lawyer or lawyers


23

within the firm who will handle the client’s case; and fee agreements. The use of engagement letters on a regular basis furthers the important goal of never agreeing to undertake a matter in an informal setting. • Check for Conflicts Before Accepting

Representation

The key here is to do the conflicts check before obtaining any confidential information from the prospective client. Often it is necessary for a prospective client to reveal and for the lawyer to learn confidential information prior to the formation of a client-lawyer relationship. In such instances, the lawyer must treat that information as confidential in the interest of the prospective client, even if no attorney client relationship is ever formed. See, e.g., B.F. Goodrich Co. v. Formosa Plastics Corp., 638 F. Supp. 1050 (S.D. Tex. 1986). • Client Communication

This is the easiest, but most overlooked, step

attorneys could take to avoid problems later. Return calls; forward documents; report your activities to the client; explain discovery procedures; solicit your clients’ opinions; clarify dates and facts during the initial meeting with the client; keep precise time logs of work completed for each client; keep all client files. In sum, lawyers’ failure to communicate regularly with their clients is often a source of alleged errors. The ABA Study shows that errors categorized under “Client Relations” accounts for 12% of the errors alleged. • Calendar System

The best protection against malpractice is to calendar all important dates in the case. Loss of substantive rights due to missing a date is likely to be negligence per se. The ABA Study indicates that failure to calendar properly or to know deadlines accounts for 22% of the alleged errors committed by lawyers.

• Know and Monitor the Client’s Objectives and

Perspective

The attorney-client relationship is a lengthy one when litigation is involved. It is important for an attorney to regularly ask questions of the client to determine what the client’s objectives in the litigation are. Frequently, these objectives can change throughout the course of the litigation. Therefore, it is imperative for an attorney to keep up-to-date with the client’s goals and perspectives of the litigation. By

regularly monitoring and tailoring the course of action to the current objectives of the client, an attorney can attain a better result for the client.



recent developments in texas legal malpractice law · alistair dawson is experienced in practicing...

Documents