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PA: One Giant Step for Legal Mal Plaintiffs in Pennsylvania

Coleman v. Duane Morris, LLP (Superior Court of PA–Nov. 13, 2012)

Underlying Matter: PA stock sale agreement to avoid personal tax liability; alleged breach of retainer contract claim for legal malpractice.

Facts: Plaintiffs held ownership interests in two companies, BCA Management Inc. and BCA Professional Services, Inc. By 2006, the companies owed over $2 million in unpaid payroll and employee withholding taxes, for which the Plaintiffs were personally liable. In order to relieve themselves of this liability, Plaintiffs sought to sell their interests in BCA. Plaintiffs began negotiating with Buyer and sought legal advice in May of 2006 from their attorney and her law firm (who had represented them in various matters since 2000) regarding a non-binding letter of intent. The letter of intent provided that Plaintiffs would sell their shares in BCA for at least $2.5 million. Plaintiffs alleged that the attorney agreed to represent them in the transaction. Plaintiffs also alleged that the attorney agreed, as she and her firm had always done in the past, to bill BCA for the legal work, and that the Buyer would pay the attorney fees after its acquisition of BCA. Plaintiffs then put together a Draft Agreement outlining the sale and submitted it to the attorney. The Draft Agreement provided for the sale of 100% of Plaintiffs’ BCA stock in exchange for $300,000. Further,, Plaintiffs would resign their positions with BCA and would get new positions with Buyer. Finally, the Draft Agreement contained a guaranty that Buyer would pay up to $2.2 million in unpaid taxes. The defendant attorney then made revisions to the Draft Agreement and gave it to Plaintiffs and to Buyer’s counsel. Plaintiffs alleged that following this, they were assured by the attorney that the sale would relieve them of their personal tax liability. The defendant attorney’s changes were incorporated into the final stock purchase agreement. Plaintiff later learned that despite the transfer, they would remain personally liable for the taxes until they were paid.

At the closing on July 14, 2006, Plaintiffs and their attorney were advised that the Buyer had assigned its rights under the Agreement to an alleged subsidiary formed the day before. Plaintiffs asked the attorney about the significance of this assignment and the attorney allegedly replied that it would not affect the tax liability issue and that Plaintiffs had “gotten everything they wanted, and more” from the deal. After the closing, one of the Plaintiffs, Eric Coleman, continued to manage BCA, but he was fired at the start of 2007, and he then sued to re-obtain control of BCA after he was made aware of problem at the company by current and former clients. The Court awarded him limited power of attorney and ordered him to perform an accounting. Plaintiff then discovered that BCA’s assets had been plundered by the Buyer and that the unpaid taxes were still owing. Eventually, the IRS seized a BCA bank account to pay a small part of the total tax debt.

Plaintiffs brought this action for legal malpractice against Duane Morris. The suit was based on a breach of contract theory, seeking to recover the lost value of the BCA stock and the interest and fees that accrued on the tax debt.. They did not sue in negligence because that two-year statute of limitations had already run.. The Defendants asserted that Plaintiffs had concealed the true extent of their tax liability and in fact never discussed their tax liability with them. They also claimed that Plainittfs did not pay them Attorneys fees and that Plaintiffs’ damages were inconsistent with proof of “actual loss”. Defendants argued that Bailey v. Tucker, 621 A.2d 108 (Pa.1993), which arose from an underlying criminal defense, was controlling and limited Plaintiffs damages to a reimbursement of attorneys fees paid. Since Plaintiff paid no fees to Defendant attorney or firm in connection with the sale of the BCA stock, the action should be dismissed on the pleadings since no damages were sustained.

The trial court agreed and dismissed the claim on the pleadings. Plaintiffs appealed.

Issue: Is a client who sues a lawyer for legal malpractice based on breach of contract allowed to recover consequential damages or are damages limited to attorney fees paid to the defendant attorneys?

Ruling: Yes. In a civil case, damages for legal malpractice based on breach of contract are no longer limited to the amount of fees paid to defendant attorney, plus interest. The rule in Bailey v. Tucker, applies only to legal malpractice actions arising from underlying criminal cases.

The Court ruled in pertinent part:

“We conclude that the limitation on damages imposed by the Bailey court applies to an action in assumpsit [breach of contract] based on a claim of attorney malpractice in a criminal case, but that limitation does not extend to an action for legal malpractice in assumpsit where the underlying action was, as here, a civil action”.

Moreover, the Judge held that Plaintiffs had entered into the transaction represented by the Defendant attorney with the expectation that they would be relieved of their tax liability, which constituted “actual loss”:

“Thus, the plaintiffs’ claim for the value of their stock, which they bargained away based on their reliance on defendants’ legal advice, and the interest and penalties that had accrued on the unpaid taxes… would constitute the actual losses sustained by plaintiffs.”

Lesson: Publication of this unpublished decision has been approved, according to our information,  and would then have precedential value. It will, to be sure, have a profound effect on how much a plaintiff in a legal malpractice case can recover as damages under Pennsylvania law. Based on Bailey v. Tucker, available damages in legal malpractice actions based solely on breach of contract were limited to a return of attorneys fees, plus interest. This will no longer be the case going forward. The decision opens the door for plaintiffs who miss the two year tort statute of limitations permitting them to recover consequential damages, including the value of their underlying cases which are botched by attorney negligence and who never paid a fee in the underlying case because of a contingency fee agreement. In effect, the holding that a plaintiff can recover essentially the same damages in a breach of contract claim (assumpsit) against the attorney as could be recovered in a negligence case (trespass) effectively nullifies the two year tort cause of action in legal malpractice cases. 

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Posted in: Attorneys Fees, Commercial, Damages, Defenses, Pennsylvania