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Weird fiduciary breach claim goes client’s way

By Diane Karpman

Diane Karpman
Karpman

You don’t have to be a rocket surgeon (yes, a combo phrase) to know that if the statute of limitations has run, a client lacks a viable claim. In Slovensky v. Freidman (2006) 142 Cal. App. 4th 1518, the plaintiff’s tort claim for toxic mold exposure was time barred. Yet her remarkable super-hero lawyers were able to recover a whopping $340,000 by slipping her stale claim into a global settlement with other plaintiffs. Then, what does the ungrateful client do? She sued her lawyers for legal malpractice and breach of fiduciary duty, because as we all know, “no good deed goes unpunished.”

There are two types of professional errors and omissions. Traditional tort-based legal malpractice requires a plaintiff to establish duty, breach, causation and damages. If the statute has run on a claim, then a plaintiff cannot prove that but for her lawyers’ conduct, she would not have been harmed, since she was harmed by her own failure to act. Also, if the statute has run, a plaintiff cannot prove that her lawyers settled her claim for too little since she was entitled to zip. This is garden-variety negligence.

A “breach of fiduciary duty” is a subtly different type of claim and has deep Anglo-American jurisprudential roots. Lawyers, like trustees, are agents, and unfaithful agents are not entitled to compensation, which can trigger fee forfeiture or disgorgement.

In this tale, this is where Slovensky becomes artistically pleaded, because in some other fiduciary breach cases, you do not need to establish damages to prevail. Fiduciary breach is a remedial claim, which can be characterized as restorative. Because the goal is deterrence, at common law, damages are irrelevant.

Fiduciary breach is established by the standard of conduct, as opposed to the standard of care employed in legal malpractice. With its 19th century roots, the claim encourages rhetorical hyperbole (akin to Cardozo’s sometimes over-the-top language): punctilios of honesty, forthrightness, fidelity. Plaintiffs’ lawyers are given a green light on lofty emotive phrases on a moral plane of righteousness, which has a charged emotional impact on juries when compared to the pedestrian negligence analysis.

Several states (including Texas) apply the concept in a rigid manner. California seems to be developing a more limited approach and will not mandate knee-jerk disgorgement absent some detriment to the client, as opposed to the amazing windfall in Slovensky. At first glance, it may appear that the Slovensky court went a bit too far with “where an attorney’s misrepresentation or concealment has caused the client no damage,” but you have to remember that those were uncontroverted facts in a summary judgment motion.

The concept of “disgorgement” or fee forfeiture is often shocking to lawyers and yet it is a routine remedy for breach of fiduciary duty. Fee forfeiture or disgorgement is ordinarily not a risk that is amortized in a law firm’s long-range business plan. In California, it is now beginning to look like a client must demonstrate some loss, as opposed to winning the lottery in Slovensky.

• Legal ethics expert Diane Karpman can be reached at 310-887-3900 or at karpethics@aol.com.

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