Commercial Litigation and Arbitration

Settlement of Underlying Case Does Not Bar Legal Malpractice Claim, New Jersey Court Rules

On Monday, a New Jersey appellate court ruled that a former client was not estopped from pursuing legal malpractice claims against an attorney for his alleged mishandling of the former client's action against two nursing homes, even though the client had voluntarily settled with the nursing homes before the underlying issues were litigated to a conclusion. See Prospect Rehabilitation Services, Inc. v. Squitieri, A-2991-05, — A.D.2d —, 2007 WL 1108870 (N.J. Super. Ct. App. Div. Apr. 16, 2007).

In the underlying suit, Prospect Rehabilitation Services claimed that two nursing homes had overcharged it rent and construction advances by $70,000. Following an adverse decision in non-binding arbitration, Prospect discovered that its attorney had been aware of but failed to allege $400,000 in denied Medicare claims that were actionable against the nursing homes. Prospect fired its attorney and, through new counsel, sought leave to amend the complaint to add the Medicare denial claim. Leave was denied, and at trial, the jury awarded Prospect $74,500. Prospect appealed from denial of the motion for leave to amend, but decided to settle with the nursing homes for $115,000 and abandoned the appeal.

Prospect then sued the former attorney for the difference between the verdict and what could have been recovered, had the medicare denial claim been included in the original complaint. The trial court dismissed the malpractice complaint on summary judgment, citing the New Jersey Supreme Court's decision in Puder v. Buechel, 183 N.J. 428 (2005), which barred a client in a matrimonial case from suing her former counsel where the client had accepted a favorable divorce settlement negotiated by her new counsel. The appellate court in Prospect v. Squitieri reversed, holding that the settlement with the nursing homes was not an automatic bar to Prospect's malpractice claim. The court distinguished Puder on the basis that there, the client had stated on the record that the divorce settlement was "acceptable" and a "fair compromise of the issues."

The appellate court remanded the malpractice case for trial "by way of the suit-within-a-suit or other appropriate format." In that trial, the attorney will have "the right to assert, among its other defenses, that it was unreasonable for plaintiff to settle the underlying case and dismiss the appeal, including that the amount the settlement was unreasonable."

The decision follows the general rule in most U.S. jurisdictions, under which a voluntary settlement before exhaustion of appeals from an adverse ruling does not, per se, bar a malpractice action against the former attorney. E.g., Kerson Co. v. Shayne, Dachs, Weiss, Kolbrenner, Levy, 45 N.Y.2d 730, 380 N.E.2d 142 (N.Y. 1977). Nevertheless, settlement of the underlying claim generally presents a substantial hurdle to legal malpractice recovery by the former client. See, e.g., Tortura v. Sullivan, 21 A.D.3d 1082, 1083 (N.Y. App. Div. 2d Dep't 2005) (legal malpractice claim viable despite settlement of the underlying action, but only if that settlement was "effectively compelled by the mistakes of counsel").

Peter Jerdee

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