Ruling increases risks for lawyers

November 17, 2011
The Daily Report

On Oct. 27, the risks for Georgia attorneys went way up. In Villanueva v. First American Title Insurance Company, No. A11A1344, 2011 WL 5084599 (Ga. Ct. App. Oct. 27, 2011), the Georgia Court of Appeals decided in a case of first impression that legal malpractice claims are now assignable.

The facts of the case are straightforward. A mortgage refinancing lender contracted with a law firm to conduct closings for refinanced mortgages. One of the law firm's attorneys, Derick Villanueva, closed a real estate transaction involving a refinancing.

The law firm, through no fault of Villanueva, failed to pay off prior lenders in accordance with the closing instructions. The title company, First American Title, reimbursed the refinancing lender for its loss.

The title company then sued the closing attorney (Villanueva) for legal malpractice and sought to recover the amounts the title company paid to make the refinancing mortgage company whole.

The closing attorney denied that the title company had a claim against him because he was not a party to the contract between the title company and the law firm. The Court of Appeals agreed.

In reaching this decision, the Court of Appeals held that, although there was a contract with the law firm, there was no contract between First American Title and Villanueva. The question then became how could the title company sue the closing attorney if the title company had no contract with him?

To answer this question, the Court of Appeals focused on a "closing protection letter" between the title company and the refinancing lender that provided that the title company would be "subrogated to all rights and remedies [the refinancing lender] would have had against any person or property …"

The Court of Appeals held as follows:

"Although the language in the closing protection letter from First American to [the refinancing lender] purported to create a right of subrogation, we concluded that, in fact, it created an assignment."

Hence, under the Court of Appeals' analysis, the title company was an assignee of the refinancing lender's legal malpractice claim against the closing attorney.

The Court of Appeals recognized that "[w]hether legal malpractice claims are assignable is an issue of first impression."

Without acknowledging (or addressing) the rather voluminous Georgia Supreme Court authority establishing the uniqueness of the attorney-client relationship (and the claims arising out of it) under Georgia law, the Court of Appeals concluded as follows:

"… the loss is solely a financial loss, it involves a right of property, and it is assignable." (Emphasis added.)

In analysis and application, the Court of Appeals treated actions for legal malpractice like any other property claim—fully assignable. Yet, prior to this decision, claims arising out of an "engagement for personal services, requiring skill, science, or peculiar qualifications" have not been assignable in Georgia, and for good reason.

More particularly, engagements for legal services involve a multitude of issues not implicated in ordinary tort or contract actions. Indeed, the Georgia Supreme Court has repeatedly emphasized the hybrid nature of a legal malpractice claim as sounding in both tort and contract with an assortment of rules and requirements unique to such cases.

For example, the rules for legal malpractice claims—ranging from case within a case, to the triggering event for the statute of limitations for legal malpractice claims, to the presumption of damages for some purposes but not others—have established rather definitively that legal malpractice claims are different under Georgia law. They are unlike other contracts or causes of action arising from them.

There are good reasons why the Georgia Supreme Court has treated legal malpractice claims so differently. A legal malpractice action implicates an array of issues that arise out of the rules, regulations, obligations, and duties applicable only to attorneys.

Indeed, the Georgia Supreme Court has for more than a century developed and applied special rules—arising out of the unique nature of the attorney-client relationship—to enforce and assure important protections for clients as opposed to other third parties.

Consistent with this view, the Georgia Supreme Court has held that the normal enforceability of contracts between parties to ordinary contracts do NOT apply to attorney-client fee agreements.

Instead, clients have the power to terminate attorney-client relationships without regard to what the parties agreed or the specific provisions of the attorney-client fee agreement.

A duty to act in accordance with the skill, diligence, prudence and care is read into every attorney-client contract, regardless of whether this duty actually appears on the face of the contract. Basically, unlike other contracts with merger clauses, the terms of the fee agreement are a start but not the end for evaluating a claim against an attorney. As a result, malpractice claims are necessarily fact intensive involving understandings and specialized duties outside the normal confines of a typical contract or tort action.

Similarly, unlike other contracts that permit prospective waivers, clients retain the right to preserve or waive the attorney-client privilege, regardless of the position of their creditors, or even their insurers.

Also, clients retain the ability to assert conflicts of interests, regardless of the position of third parties.

All of these issues, as well as many others, are grounded in the special relationship that exists between an attorney and a client under Georgia law as established by the Georgia Supreme Court.

Yet, any suggestion of a special or unique relationship is casually cast aside by the ruling of the Court of Appeals. More significantly, it shifts decisions regarding whether to assert and insist on these protections from clients to third parties who may not share the same interests.

Unfortunately, this decision has far-reaching implications well beyond these weighty issues for the attorney-client relationship under Georgia law. Legal malpractice insurers are certain to take note and when renewals come next year, Georgia attorneys will undoubtedly feel the pain. But, the risks from this decision extend even further.

The potential for abuse is notable. Now, every lender, creditor, partner, limited partner, insurer, or other interested party can usurp the protections of the attorney-client relationship and actually strip the clients of their attorney-client protections as provided and guaranteed in the State Bar of Georgia rules with nothing more than a letter purporting to exercise subrogation rights.

As currently framed, it is indeed difficult to see how the Villanueva decision can be reconciled with the important attorney-client protections that Georgia courts have afforded Georgians for centuries.

Simply treating the attorney-client relationship like any other action (whether in contract or in tort) appears in derogation of the existing Georgia Supreme Court law holding such attorney-client contracts must be viewed, reviewed, and enforced differently than other contracts.

The risks from the Villanueva decision for both Georgia attorneys and Georgia clients are high. At a minimum, the assignability of a legal malpractice claim would appear to clearly be an issue for the Georgia Supreme Court to decide so that both the duties and liabilities of Georgia attorneys can be reconciled.

If unchanged, the Villanueva case sets the stage for greater liability for claims arising out of failed transactions of less merit. Legal malpractice claims may become little more than throw-in settlement items to pursue against attorneys without regard to the protections of clients or the duties of Georgia attorneys.

Reprinted with permission from the November 17, 2011 issue of the Daily Report© 2011 ALM Media Properties, LLC.  Further duplication without permission is prohibited.  All rights reserved.

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