Fed’l: 2d Circuit Ct. of Appeals
Underlying Class Action settlement: Issue preclusion; Injunction against malpractice action
FACTS: Clients brought a state court action in the Supreme Court of New York alleging legal malpractice and breach of fiduciary duty against their former attorneys who, after litigating two related class actions in the federal court, settled them, with court approval. The clients alleged that the attorneys breached their duty by settling the second of the two class actions without conducting any discovery, which would presumably have led to a better settlement for them. The class actions alleged that officers and directors of Computer Associates (CA) participated in a scheme to artificially inflate the price of CA’s stock, artificially inflate its represented revenues, and conceal the deterioration of the business. The District Court certified a new single class encompassing the two separate class actions and approved a global settlement. The court issued a Final Judgment which held (1) that the settlement was “fair, reasonable and adequate,” (2) awarded class counsel fees, which the court held to be “fair and reasonable” and (3) retained exclusive jurisdiction “over the parties and the Settlement Class Members for all matters relating to these actions”.
The Attorneys sought an injunction under the federal Anti-Injunction Act, 28 U.S.C. §2283, barring the clients from pursuing their state court action. The Act provides:
A court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.
ISSUE: Can the federal court enjoin the clients’ prosecution of their legal malpractice and breach of fiduciary duty claims in state court where the federal court had approved a settlement and attorneys fees in the class action which is the underlying matter from which the malpractice action arises?
(1) The so-called “relitigation” exception to the federal Anti-Injunction Act permits a federal court to enjoin a state court proceeding “to protect or effectuate its judgments”, per 28 U.S.C.§2283. The exception, which was “designed to implement ‘well-recognized concepts of claim and issue preclusion,” authorizes a federal court to enjoin “state litigation of a claim or issue ‘that previously was presented to and decided by the federal court.’
“ It is unusual for the federal court “to dictate to other courts the preclusion consequences of its own judgment. Deciding whether and how prior litigation has a preclusive effect is usually the bailiwick of the second court—in this case, the New York state court. “
(2) The class action court held that the global settlement was “fair, reasonable and adequate” and that class counsel was entitled to an award of fees that were “fair and reasonable”. “Whether an award of “fair and reasonable” attorneys’ fees necessarily decided the deficient-performance [i.e., breach of duty] prong of a legal malpractice claim is an issue of first impression in this Circuit. We conclude that the deficient-performance prong of New York’s legal malpractice rule is identical to the reasonable-performance issue that the District Court decided as a necessary component of the [class action] Settlement Order.” The District Court’s findings could only have been made if counsl’s performance met or exceeded the minimal standards of professional competence—otherwise an award of fees would not have been fair and reasonable in the circumstances. Thus, “the state court action seeks to relitigate the same issue that the District Court already resolved”
LESSON: This is a case of first impression in the 2nd Circuit, but it can have wide and far reaching effects on “botched settlements” in federal court actions, which later give rise to state court malpractice actions. Of particular interest is the Court’s reasoning, perhaps, circular, that because the court awarded a “fair and reasonable” fee to the attorneys that by definition, their representation complied with the accepted standards of care. Typically in both federal and state cases the definition of the applicable standard to which lawyers must adhere in the settlement of cases and whether they adhered or transgressed that standard requires expert testimony. The decision gives no hint as to whether the District Court elicited such testimony before it concluded that because the fee it awarded was fair and reasonable, the legal services must have complied to the standard of care.
Posted in: Federal