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A malpractice action against Wolff & Samson and Nixon Peabody can go forward in New Jersey despite a state court precedent that bars unhappy settling parties from suing their lawyers. The Appellate Division on Monday allowed the plaintiffs in Schulman v. Wolff & Samson, A-4674-06, to proceed with shareholder derivative claims against the two firms for malpractice and breach of fiduciary duty. The judges held that Puder v. Buechel, 183 N.J. 425 (2005) — which prohibits clients who settle claims for less than they are worth from later suing their lawyers for the difference — applies only to cases in which the malpractice claim arises from problems with the underlying settlement. The litigation stemmed from the breakup of Van Mar Inc., an East Brunswick, N.J., lingerie company. In 2005, after minority shareholders Allan Schulman and his son Darren were forced off the board of directors, they sued Allan’s ex-wife Marilyn and two other children, Vanessa and Scott, who held 52-2/3 percent of Van Mar, for the alleged improper transfer of the company’s assets and employees to a successor entity. A new complaint filed in 2006 added claims against the law firms for malpractice, fraud, breach of fiduciary duty and breach of contract. The plaintiffs asserted derivative claims on behalf of the company as well as individual claims on their own behalf as minority owners. They alleged that Nixon Peabody and partner Frank Ryan helped Marilyn, Vanessa and Scott “develop and implement their scheme to defraud plaintiffs out of their interests in Van Mar.” They also charged that the West Orange, N.J., firm of Wolff & Samson and partner Paul Colwell, retained by Van Mar to defend the initial lawsuit, aided the interests of the other family members rather than acting in the company’s best interest. The family members settled among themselves in 2007. The lawyers did not participate and were not present when the settlement was placed on the record and Allan and Darren called it fair and reasonable while specifically preserving their claims against the lawyers. Middlesex County Chancery Court Judge Amy Piro Chambers granted the lawyers’ motion to dismiss, finding Puder applied because the alleged malpractice arose from the same events alleged in the complaint and the plaintiffs had stated on the record the settlement was fair and reasonable. But the appeals court distinguished Puder as a case where “the damages caused by the alleged inequities of the actual settlement were the crux” of the complaint against the former attorney. In contrast, the damages sought in Schulman were not the result of an inadequate settlement but were instead caused by alleged malpractice and breach of duty independent of the settlement. Judges Carmen Messano, Edith Payne and Paulette Sapp-Peterson held the fraud and contract claims should have survived because Puder “only foreclosed the subsequent prosecution of a legal malpractice claim by a settling party against her attorney and did not address whether the same public policy considerations would foreclose a plaintiff from pursuing a different cause of action.” In addition, Puder could not apply to any of the individual claims because the lawyers never represented the plaintiffs, only the company. Allan and Darren contended that the firms, as Van Mar’s counsel, owed a duty to them as minority shareholders. Messano said the issue was one of first impression but the court did not have to decide it because the plaintiffs abandoned their individual claims on appeal. It also left unresolved the novel question of whether a derivative malpractice claim can be maintained under New Jersey law. R. James Kravitz, who represents Allan and Darren, calls Schulman the most significant case interpreting Puder. It limits Puder to a very narrow set of facts, he says, restricting it to malpractice claims and making clear that it “simply isn’t going to be applicable when the attorney is functioning as a joint tortfeasor,” says Kravitz, of Fox Rothschild in Princeton. His clients are seeking about $8 million in compensatory damages. Brian Molloy, lawyer for the Nixon Peabody defendants, says he had hoped the appeals court would address the issue of counsel’s duty to minority shareholders. The majority trend is that there is no duty, says Molloy, of Wilentz Goldman & Spitzer in Woodbridge, N.J. Gage Andretta, of Wolff & Samson, who represents his firm and Colwell, did not return a call. Two other courts have recognized limits to Puder. Last year, an appeals court in Project Rehabilitation Services Inc. v. Squitieri declined to apply the precedent on the basis that the plaintiff never acknowledged the settlement was fair and satisfactory and settled only after the trial court denied its motion to amend the complaint to add claims allegedly comprising malpractice. Kravitz represented the plaintiffs in that case. A federal court applying New Jersey law likewise refused to dismiss a malpractice claim in Keltic Financial Partners v. Krovatin, 2007 WL 1038496 (D.N.J. 2007). Puder did not apply because there was no contention that malpractice caused the plaintiff to settle too low, and the alleged malpractice did not even arise out of legal services, reasoned U.S. District Judge Joel Pisano.

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