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A Victory for the Malpractice Plaintiff

Legal malpractice plaintiffs gained a powerful bit of case law when the New Jersey Supreme Court handed down its ruling in 2010's Guido v. Duane Morris. There, the plaintiffs sought to sue their former lawyers for malpractice over a settlement ...

Legal malpractice plaintiffs gained a powerful bit of case law when the New Jersey Supreme Court handed down its ruling in 2010's Guido v. Duane Morris. There, the plaintiffs sought to sue their former lawyers for malpractice over a settlement the plaintiffs themselves accepted after mediation two years before. In its decision, the Court held that former clients can overcome a motion for summary judgment and proceed to trial in hopes to proving that a settlement they agreed to would have been better had their lawyers not acted negligently.

Such was great news for Joseph Guido, who alleged that his lawyers did not properly explain the settlement's long-term value and marketability implications. He owned 56.1 percent of the stock of Allstates WorldCargo Inc., a shipping company. From 1961 onward, he served as President and CEO, and later, board chairman. In 2004 he attempted to amend the Allstates' bylaws to increase the size of the board of directors from four to seven members. He also wanted to appoint three non-employees to fill the newly created seats. The three other directors resisted, at which time Guido attained legal counsel and sued, seeking injunctive relief and other remedies.

The case went to mediation and a settlement was forged between the parties. The board would be increased to seven members, with the new members being judicially appointed. A voting agreement would also be adopted that would require unanimous consent of all directors for any future modification of the board of directors or bylaws, as well as any decision to sell or transfer capital stock. Such restrictions would continue to bind all future stock owners.

In 2005, Guido and his wife, Teresa, stated in court that they understood and agreed to the settlement. But just two short years later, they had a change of heart. Guido attained a new lawyer and sued Duane Morris. He argued that he had been "stripped of his power" as majority shareholder and that his current holdings were worthless because of restrictions placed upon them via the Voting Agreement. Naturally, this was all the fault of the Duane Morris lawyers.

Duane Morris moved for summary judgment based on Puder v. Beuchel, 183 N.J. 428 (2005), which barred malpractice suits by litigants who accepted a settlement after stating on the record they were satisfied, as the Guidos had done with regard to Allstates. The case seemed foolproof for the law firm until the New Jersey Appellate Division decided Hernandez v. Baugh in August 2008. Contrary to the holding in Puder, it permitted malpractice suits alleging that the plaintiff had been made to settle a case on unfavorable terms because of his lawyer's negligence. The Appellate Division distinguished Puder on the basis that, unlike Puder-where the client testified that a settlement of her claim on essentially the same terms as an earlier settlement the client later claimed was the product of malpractice was fair and reasonable-the plaintiff in Hernandez "was compelled to settle his [earlier] action because the negligence of defendant deprived him of the proofs he needed to prevail." The court thus framed Guido's issue as whether or not the actions taken by the plaintiff to avoid the malpractice action were reasonable.

When it addressed the substance of the defendants' summary judgment motion, the Appellate Division "note[d], as did the motion judge, that there is a genuine issue of material fact as to whether or not the defendants adequately explained the long-term implications of the settlement" to the plaintiffs. Specifically, the court wondered whether the plaintiffs were given adequate explanation that the settlement's new restrictions on the sale of stock would have a significant adverse impact on the value and marketability of the plaintiff's majority ownership interest, as well as his wife's minority interest. The judges also noted that some of the long-term implications, particularly those related to the value of the stock, would not have necessarily been obvious from the terms of the settlement itself. Thus, no matter how clear the settlement's terms appeared to be, the plaintiffs' full understanding could not be ensured but for thorough explanation from their lawyers.

In determining whether or not a client can maintain a legal malpractice action against a lawyer who counseled a settlement, the Supreme Court turns to Ziegelheim, where a party dissatisfied with a settlement sought to sue her former lawyer for alleged malpractice that culminated with a settlement. Prior to continuing with her malpractice suit, she moved to set aside the settlement. The motion was denied, as the settlement was found "to have been entered into . . . after extensive negotiations" where the client herself had stated she "accepted the settlement without coercion." The Ziegelheim Court rejected this rule and concluded that the "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."

The New Jersey Supreme Court looked at both Puder and Ziegelheim to ultimately hold that: "unless the malpractice plaintiff is to be equitably stopped 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 a settlement. Thus, the Guidos' malpractice claim should not be barred. Unlike in Puder, they did not represent to the court that they were satisfied with the settlement, or that the settlement was fair and adequate. They merely stated on the record at the hearing that they understood and agreed to abide by the settlement terms, and that they suffered no impediments in understanding those terms.

Similarly situated plaintiffs thus gained a significant victory that day. While the Supreme Court reminded its constituents that such standards would apply in only limited circumstances, those standards may be easily stretched to include more and more plaintiffs. Lawyers everywhere may find themselves acting more cautiously than ever.

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