The assignment of claims for negligent performance of professional services is common in many industries, but courts treat these claims differently for certain sectors. Attorneys tend to benefit from these “differences,” which are likely to receive further attention— and challenges—as a result of the coronavirus-caused slowdown.
The fallout from the pandemic may result in increased sales of distressed assets and corporate streamlining. Likewise, crisis profiteering by a handful of cash-rich companies may further increase economic restructuring.
If this recession mirrors the last one, legal malpractice claims are likely to surge as well. If these factors are combined, many legal malpractice claims may be brought by successor entities or assignees pursuing claims in the wake of a commercial transaction where the malpractice claim itself was initially an afterthought.
While the existence of a potential malpractice action may not be the primary consideration for a strategic acquisition, if you are considering the acquisition of a distressed asset, it is important to consider the precise language of the purchase agreement and determine whether it might include future legal malpractice claims.
For litigants prosecuting or defending an assigned malpractice claim, it is important to understand whether applicable law permits assignments generally, allow exceptions for certain kinds of commercial transactions, or bars the assignment of legal malpractice claims altogether.
Watching the States
Courts routinely permit the assignment of professional malpractice claims against architects, engineers, and accountants, but Illinois, and many other states, do not permit the assignment of malpractice claims against lawyers, aside from a few narrow exceptions.
In Kroll v. Cozen O’Connor, a district court applying Illinois law recently dismissed a legal malpractice claim asserted by an employee against his employer’s attorney. The employee was assigned the claim as part of a settlement with his employer. In dismissing the claim, the court refused to create a new exception to the rule prohibiting the assignment of legal malpractice claims. The proffered exception would have allowed employees to pursue assigned claims against their employer’s attorney.
The court relied on longstanding Illinois case law, tracing back to Goodley v. Wank & Wank Inc., a California appellate court opinion. Goodley has been referred to as “the seminal decision” on the assignability of legal malpractice claims.
The Goodley court refused to permit voluntary assignments of legal malpractice claims because of the “unique quality of legal services” and concerns over the commodification of malpractice claims. The court predicted that permitting such assignments would “encourage unjustified lawsuits against members of the legal profession, generate an increase in legal malpractice litigation, promote champerty and force attorneys to defend themselves against strangers.”
No Illinois court has questioned Goodley; however, courts in several other states have done so.
One of the first states to allow the assignment of malpractice claims was Pennsylvania where the court wrote that it would “not allow the concept of the attorney-client relationship to be used as a shield by an attorney to protect him or her from the consequences of legal malpractice.” The Supreme Court of Utah likewise has rejected Goodley and its underlying policy argument. The court believed the concerns expressed in Goodley were speculative and saw little reason to single out lawyers for protection against malpractice claims while forcing other professionals to face their clients’ assigned claims. Even California’s own appellate courts have questioned the continuing validity of Goodley in passing.
Many states, including Illinois, Idaho, and California, have sought to chart a middle ground. They do not permit aggrieved clients to assign claims in isolated transactions because of many of the policy concerns outlined in Goodley. However, they do permit assignments of malpractice claims under certain circumstances.
Illinois, Idaho, California, and other states permit the assignment of legal malpractice claims if the assignment is transferred to an assignee in a commercial transaction, along with other business assets and liabilities. Courts adopting this exception to non-assignability distinguish between purely economic transactions and “freestanding” malpractice claim assignments.
The Supreme Court of Idaho believed that “in an era of ever-increasing corporate restructuring, it is hard to imagine that this Court, bestowing such a lucky break to attorneys, while leaving clients without recourse, would lead to any public perception except favoritism.” Allowing lawyers to escape liability because of their client’s restructuring or sale “will reinforce the perception, shared by many in our society, that courts will go out of their way in order to protect members of the bar.”
In states that have not adopted the commercial transaction exception to non-assignability, plaintiffs will likely push for its adoption. Other states may follow Utah’s Supreme Court and abandon limitations specific to the assignability of legal malpractice claims altogether.
As the pandemic reshapes many aspects of the legal industry, it will be interesting to see if it modifies a longstanding defense unique to legal malpractice claims.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Timothy Parilla is an attorney at Palmersheim & Mathew LLP, a Chicago-based litigation boutique that handles a range of commercial and antitrust/competition litigation.