NJ: Underlying Matter: Bankruptcy. Designated defense counsel sued for malpractice for reporting to carrier that client committed bankruptcy fraud, which leads carrier to deny coverage.
Facts: Attorney Buchanan was sued by his former clients for filing a legally deficient Chapter 13 bankruptcy proceeding on their behalf, causing the loss of their residence and business properties. Buchanan’s insurance carrier designated defendant attorneys and firm to represent the insured attorney. Eventually, Designated defense counsel, sought permission from the carrier to settle the case and in doing so, informed the carrier of a letter that the insured attorney wrote to his bankruptcy clients which was an effective admission by the insured attorney that he had participated in committing bankruptcy fraud by his deficient filing. In receiving and reviewing this information from designated defense counsel’s settlement memo– a week before the malpractice trial, the carrier informed the insured that it now was going to disclaim coverage because it arose out of “dishonest, fraudulent, criminal or malicious acts or omissions” and that it would proceed to seek a declaratory judgment that it was not obligated to provide coverage.
The Law Division ruled that Plaintiff was entitled to coverage. Plaintiff then filed this action against designated defense counsel, alleging legal malpractice and other claims arising from the disclosure and accusation of his wrongful conduct that triggered the disclaimer and the declaratory judgment action. Plaintiff filed a motion for summary judgment. Defendants opposed and filed a cross motion, arguing the claims were barred because they were protected by the litigation privilege in connection with the insured’s statements made in their settlement memo to the carrier. The Motion Court ruled in favor of Defendants and Plaintiff appealed.
Issue: Does the litigation privilege–here, statements made by the designated defense counsel to the professional liability carrier, which triggers a disclaimer of coverage, shield that defense attorney from malpractice claims brought by his own client, the insured ?
The litigation privilege generally protects an attorney from civil liability arising from words he has uttered in the course of judicial proceedings. However, the privilege is intended to protect attorneys from defamation actions and also from a host of other tort-related claims, but not where a claim is made that the disclosure by the attorney is a breach of duty to his client.
“Our Supreme Court has noted…that the privilege does not protect attorneys from discipline for violating the Rules of Professional Conduct…[T]he Court…is committed to assuring that attorneys comply with accepted professional standards’…[I]t therefore follows that the litigation privilege does not protect an attorney from a claim by his or her client based upon statements the attorney made in the course of a judicial proceeding where, as in this case, it is alleged that the attorney breached his duty to the client by failing to adhere to accepted standards of legal practice.”
“[T]he litigation privilege should not be extended to protect an attorney from civil liability where his or her client claims that the attorney’s representation did not meet the applicable standards for legal practice.”
Lesson: This is a case of first impression in New Jersey. While the litigation privilege “generally protects an attorney from civil liability arising from words he has uttered in the course of judicial proceedings”, in this case, the Appellate Division extended the logic that the privilege does not apply to bar discipline for violations of the RPC, to cases of legal malpractice. This latest erosion of the litigation privilege doctrine essentially removes legal malpractice actions from the various tort related claims the privilege protects against. Still, it is unclear how this ruling will affect legal malpractice defense in particular. However, what is abundantly clear is that lawyers retained by insurance carriers in defense cases should tread lightly when balancing their competing obligations to both their client–the insured and the insurance companies. This is yet another presentation of the classic dilemma called the “triadic relationship” that often causes conflict for designated defense counsel between the insured client on the one hand and the insurer on the other.