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Settled for Less? Sue for Malpractice

Hernandez v. Baugh, 401 N.J. Super. 539; 951 A.2d 1095 (App. Div. 2008)
NJ Underlying commercial transaction, real estate.

Student Contributor: John Anzalone

Facts: Plaintiff consulted with attorney to represent him in the purchase of a business with Plaintiff’s uncle. In representing both the Plaintiff and uncle, the attorney created two corporations, one to own the business, the other to own the real estate on which it sat. Plaintiff was only given stock in the corporation that owned the real estate. Plaintiff had an unwritten understanding with the uncle regarding his role in the business, and asked the attorney if his interests in the business were protected with such an arrangement. The attorney did not change the agreement to give Plaintiff partial ownership of the business. Plaintiff sued the uncle for breach of their understanding and settled for less than he alleged he would be entitled to had the attorney not failed to protect his interests in the business.

Issue: Since the settlement agreement stated that the settlement was "fair and reasonable” was plaintiff barred from bringing a legal malpractice action against the attorney?

Ruling: In reversing the lower court, the Appellate Division held that the settlement agreement’s wording did not entitle the attorney to dismissal of suit against her, based on the following factors:

  1. The wording of the settlement, "in light of all relevant factors" included the attorney’s alleged negligence in weakening plaintiff’s case against the uncle.
  2. The plaintiff was forced to settle for less because his claim seeking an ownership interest in the business had been weakened by the attorney’s alleged negligence.

Among the factors that plaintiff had to take into consideration in negotiating the settlement [with his uncle] were the legal hurdles he faced in proving that he held an ownership interest in [the business]; those hurdles, he contended, were the result of defedant [attorney’s] negligence.

The Lesson: If the attorney’s negligence caused a reduced value of the former client’s settlement because it made the client’s case weaker, the attorney can be held liable even if the settlement is called “fair and reasonable” in light of the circumstances. At the outset of the relationship, the attorney should have counseled the plaintiff to get his own lawyer or, if permitted by law, to get a full waiver of the conflict in representing the plaintiff and uncle. The lawyer should also have made clear, in writing and at the beginning who he represented and who he did not represent.

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Posted in: Advance Waivers of Conflicts, Commercial, Conflicts of Interest, Fiduciary Duty, New Jersey, Real Estate