Litigation Privilege Pierced in Legal Malpractice Action (NJ)

The litigation privilege generally shields individuals involved in a litigation from liability for any communication made in connection with that litigation, as long as the statements are made in connection or logical relation to the litigation.  But the New Jersey courts recently handed down a decision that changes the liability shield of the litigation privilege in legal malpractice actions where counsel violated rules of professional conduct.

In Buchanan v. Leonard, the Appellate Division examined a interesting “legal-malpractice-within-legal-malpractice” suit. Buchanan, an attorney, had been sued for allegedly mishandling a bankruptcy petition on behalf of his clients, the Kerrs.  The Kerrs alleged that as a result of the mishandling of their bankruptcy, they subsequently lost their home as well as their business property.

Leonard was then hired by Buchanan’s professional liability insurance carrier to defend Buchanan in the underlying malpractice lawsuit, and Leonard discovered a letter where Buchanan agreed to file a bankruptcy petition on behalf of the Kerrs that contained misrepresentations of fact, and the Kerrs agreed to indemnify Buchanan for any resulting sanctions.  Leonard later wrote a settlement memorandum to Buchanan’s insurer recommending settlement before trial because if the memorandum was revealed at trial, Buchanan could face professional disciplinary charges.

Shortly after receiving the settlement memorandum, and a week before the trial, the insurer notified Buchanan that it was withdrawing its coverage and would not defend the lawsuit on Buchanan’s behalf, citing an exclusion in the policy for “dishonest, fraudulent, criminal or malicious acts or omissions.”  The insurer also filed a declaratory judgment action against Buchanan seeking a determination that it was not required to provide coverage to Buchanan in the legal malpractice suit.  The declaratory judgment action was decided in favor of Buchanan.

Buchanan then filed a complaint against Leonard and his law firm, alleging legal malpractice, negligent supervision of Leonard, breach of contract, breach of fiduciary duty, tortuous interference with contract, defamation, and unjust enrichment.  After filing an answer, but before the close of discovery, cross-motions for summary judgment were filed by the parties.  Buchanan sought partial summary judgment on his legal malpractice claim.  Leonard and his law firm sought summary judgment on all claims in the complaint, citing the litigation privilege and lack of expert testimony as to the legal malpractice claims, and a statute of limitations defense as to the defamation count.

Ultimately, the trial court granted Leonard’s motion for summary judgment, and denied Buchanan’s motion.  The judge agreed that the defamation claim was time-barred because it had not been filed within one year of the alleged defamatory statements (the settlement memorandum), and that the legal malpractice claims failed because Buchanan had not submitted an expert report in support of that claim.  The judge also determined that all of Buchanan’s claims failed as a matter of law because they were based on the settlement memorandum, which the trial court held was subject to the litigation privilege.

On review, the Appellate Division affirmed the grant of summary judgment as to the defamation claim, but reversed as to the legal malpractice claims.  Because the litigation privilege issue was one of first impression, the Appellate Division decided to follow the example set by the California courts, and deny litigation privilege as a shield from liability as between an attorney and a client in a malpractice matter.  The court stated that because the litigation privilege does not protect attorneys from discipline for violating the New Jersey Rules of Professional Conduct, “[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.”

Additionally, because discovery had not yet closed in this matter prior to the filing of the cross-motions for summary judgment, and because Buchanan had already retained a legal malpractice expert, the Appellate Division remanded the matter to the trial court with instructions to allow Buchanan the opportunity to submit his expert report.

This case underscores the care that must be taken by defense counsel in the tripartite relationship.  Although an attorney must keep his insurance client apprised of the facts of the case, revealing confidential facts that place his legal client’s coverage in jeopardy can lead to a host of troubles.

Thanks to Christina Emerson for her contribution to this post.  If you would like more information please write to mbono@wcmlaw.com.