RIVERA-SOTO, J., writing for a unanimous Court.
(Adapted From the Syllabus accompanying the Court’s decision)
In this appeal the Court revisits the effect the settlement of an underlying lawsuit may have on a subsequent legal malpractice action arising out of that settled lawsuit.
FACTS: Plaintiff Joseph Guido was the majority shareholder and chairman of the board of directors of Allstates Worldcargo, Inc. (Allstates). In October 2004, plaintiff sued Allstates and several of its officers and directors, alleging certain corporate governance concerns. On October 27, 2004, the day before the return date on plaintiff’s order to show cause, James J. Ferreli, Esq., a lawyer with and a partner in defendant Duane Morris, LLP (the Law Firm), wrote to plaintiff advising, in part, “against any agreement…that includes as a term any limitation on [his] rights as majority shareholder of Allstates [.]” Ferrelli’s letter concluded by advising that should plaintiff settle, he
should “do so without undermining [his] ability and right as majority shareholder to change the board of directors, amend the By-Laws, or take other appropriate action, and that [he] take all steps to protect, to the greatest extent possible, the value of [his] stock.”
The next day, the trial court denied plaintiff’s request for temporary restraints and referred the matter to mediation; the parties entered into a voluntary dismissal without prejudice, as provided in Rule 4:37-1(a); and entered into a settlement that was placed on the record. The parties, however, were unable to reduce the settlement terms to writing and, ultimately, Allstates “withdr[e]w [its] settlement proposal and elect[ed] to proceed with the litigation of this matter.” As a result, in February 2005, plaintiff filed a second suit against Allstates, again seeking injunctive relief. The trial court also referred that action to mediation, which ultimately resulted in the settlement plaintiff now claims was inadequate due to defendant’s failure to represent plaintiff in a competent manner. That settlement incorporates all of the items that caused concern to, and were counseled against by, Ferrelli in his letter to plaintiff. At a hearing held on April 5, 2005 where plaintiff was represented by Frank A. Luchak and Patricia Kane Williams, both of whom were lawyers from the Law Firm, the terms of the settlement were placed on the record. Moreover, the trial court questioned the parties and was satisfied that there was “nothing that would impact [their] ability to understand the terms and accept responsibility for the terms.” Almost two years later, on February 15, 2007, plaintiffs (Joseph Guido and his wife Teresa) filed their legal malpractice complaint against the Law Firm, Luchak and Williams, claiming that defendants “failed to exercise the knowledge, skill and ability ordinarily possessed and exercised by members of the legal profession similarly situated, and failed to employ reasonable care and prudence in connection with their representation of” plaintiffs. Defendants moved for summary judgment, pursuant to Rules 4:46-1 and -2. By a letter opinion and order dated June 11, 2008, the trial court entered summary judgment in favor of defendants and dismissed plaintiffs’ complaint with prejudice. Acknowledging that “there is a genuine issue of material fact as to whether or not the defendants adequately advised plaintiffs of the impact the voting agreement would have on the value of their shares, and whether or not the failure to do so constitutes legal malpractice[,]” the trial court, relying in part on Puder v. Buechel, 183 N.J. 428 (2005), nevertheless concluded that “a [p]laintiff must take reasonable steps to avoid the consequences of a former attorney’s tortious conduct before suing the attorney for malpractice.”
The trial court noted that plaintiffs “never sought to vacate or set aside the underlying settlement, nor did they take any reasonable steps to remedy the purported negligence of their attorneys.” Believing that efforts to vacate a prior settlement are an indispensable condition precedent to an action which alleges that the prior settlement was the result of legal malpractice, the trial court granted defendants’ motion for summary judgment and dismissed plaintiffs’ complaint “in its entirety with prejudice[.]”
Plaintiffs moved for reconsideration. Based on Hernandez v. Baugh, 401 N.J. Super. 539 (App. Div. 2008), the trial court granted reconsideration, and vacated its earlier order. The trial court noted that it “had previously determined that because [p]laintiffs failed to vacate the settlement in the Chancery Division, this would prohibit the malpractice action against [d]efendants.” It defined the “issue [a]s whether or not the actions taken by [p]laintiff to avoid the malpractice action w[ere] reasonable and [p]laintiff rightly argues to the Court that an application to the Chancery Division to vacate the Order because the attorney was negligent would be without merit.” The trial court agreed, declaring that,“[i]n fact, it would be an exercise in futility to do so.”
THE APPELLATE DIVISION
Defendants sought leave to appeal that interlocutory order, which was granted. In an unpublished opinion, the Appellate Division affirmed the trial court’s denial of summary judgment. As a threshold matter, the panel concluded that it was proper for the trial court to have considered and granted plaintiffs’ motion for reconsideration, in part because Hernandez v. Baugh was decided after the motion was filed. Addressing the substance of defendants’ summary judgment motion, the Appellate Division agreed with the trial court that there existed “a genuine issue of material fact as to whether or not the defendants adequately explained the long-term implications of the settlement to” plaintiffs. The Appellate Division distinguished Puder and determined that this case was more like Ziegelheim v. Apollo, 128 N.J. 250 (1992), “at least with respect to the matters not clear from the terms of the settlement agreement.” On the issue of whether plaintiffs’ failure to seek to vacate the settlement barred them from pursuing a malpractice action, the appellate panel concluded “plaintiffs had no reasonable expectation of success on a motion to set aside the General Equity settlement, and consequently had no obligation to make such an application.”
THE SUPREME COURT
The Supreme Court granted defendants’ motion for leave to appeal. In addition, the Court granted amicus curiae status to the Trial Attorneys of New Jersey (TANJ) and to the New Jersey State Bar Association (NJSBA).
HELD: When a client alleges that he entered into a settlement based on negligent advice from his lawyers, he need not first seek to vacate the settlement, but may proceed directly against those lawyers the plaintiff asserts provided the negligent advice that culminated in the settlement.
1. The standards for determining whether a client can maintain a legal malpractice action against a lawyer who counseled a settlement are set forth clearly in Ziegelheim v. Apollo, 128 N.J. 250 (1992). The court in Ziegelheim concluded that
“[t]he fact that a party received a settlement that was ‘fair and equitable’ does not mean necessarily that the party’s attorney was competent or that the party would not have received a more favorable settlement had the party’s incompetent attorney been competent.” Id. at 265.
When viewed in its proper context – that Puder, supra, represents not a new rule, but an equity-based exception to Ziegelheim’s general rule – the rule of decision applicable here is clear: unless the malpractice plaintiff is to be equitably estopped from prosecuting his or her malpractice claim, the existence of a prior settlement is not a bar to the prosecution of a legal malpractice claim arising from such settlement. Here, unlike in Puder, plaintiffs did not represent to the court that they were satisfied with the settlement, or that the settlement was fair and adequate. In addition, and provided that they are supported by sufficient credible evidence in the record, the Court is bound by the trial court’s finding of a genuine issue of material fact, a finding concurred in by the Appellate Division. In light of that finding, the Court perceives no principled basis to bar plaintiffs’ malpractice claim. In addition, although whether a malpractice plaintiff in fact has sought to vacate a prior settlement may be a relevant factor, the failure to do so cannot be, in and of itself, dispositive. No doubt, there may be circumstances in which a malpractice plaintiff’s failure to mitigate his or her damages by seeking to vacate the settlement that gives rise to the malpractice claim may be relevant. However, because that action logically cannot be a prerequisite for all malpractice claims based on a settlement, it also cannot rise to the level of a condition precedent to a malpractice suit. Because the equitable considerations that animated the Court’s decision in Puder are absent here, the Court applies Ziegelheim’s rule without exception and concludes – without intimating any view as to the merits of plaintiffs’ substantive claim – that the trial court and the Appellate Division correctly held that plaintiffs’ malpractice claim is not barred as a matter of law.
The judgment of the Appellate Division is AFFIRMED, and the case is REMANDED to the trial court for further proceedings consistent with the principles to which the Court has adverted.
CHIEF JUSTICE RABNER and JUSTICES LONG, ALBIN, WALLACE, and HOENS join in
JUSTICE RIVERA-SOTO’s opinion. JUSTICE LaVECCHIA did not participate.