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A legal malpractice insurer that voluntarily paid $800,000 to settle a claim cannot later demand that the insured lawyer reimburse it — even if the lawyer had threatened to give her former client a $3 million consent judgment — a federal judge in Philadelphia has ruled. In Coregis Insurance Co. v. Law Offices of Carole F. Kafrissen, U.S. District Judge Eduardo C. Robreno found that the insurer knew that the lawyer’s threat was “illusory” and that any consent judgment she entered on her own could never be enforced against the insurer. As a result, Robreno found that the settlement Coregis struck with Kafrissen’s former client, Cynthia Clark, was a voluntary payment that it cannot now seek to recover from Kafrissen. In 1998, Clark had filed a legal malpractice suit against Kafrissen in the Philadelphia Court of Common Pleas. Kafrissen had previously represented Clark in a medical malpractice suit. Kafrissen requested that Coregis defend and indemnify her against Clark’s claim. Coregis undertook Kafrissen’s defense, but also filed suit in federal court, seeking a declaratory judgment that it was not required to defend or indemnify Kafrissen under the terms of Kafrissen’s malpractice policy and requesting rescission of the policy contract. In its federal suit, Coregis claimed that Kafrissen’s application for malpractice insurance had failed to disclose the existence of Clark’s potential claim against her. Even though Clark’s malpractice suit against Kafrissen was stayed pending resolution of the coverage question, settlement discussions continued in Clark’s case. In January 2000, Kafrissen’s lawyer, Ronald Kidd, informed Coregis that if it did not drop its federal suit, Kafrissen would offer Clark a settlement in which Kafrissen would consent to a $3 million judgment and Clark would execute a covenant not to execute the judgment against any of Kafrissen’s assets. As Judge Robreno described it, “the clear implication underlying the settlement proposal was that following the execution of such a settlement, Clark would be able to proceed against Coregis directly to satisfy the $3 million judgment.” Coregis responded by telling Kidd that Kafrissen’s policy expressly prohibited Kafrissen from settling any claims made against her under the policy without Coregis’s consent. In a letter from its lawyer to Kidd, Coregis also put Kafrissen on notice that if she agreed to the entry of the consent judgment seeking to bind Coregis, the insurer reserved the right to “pursue affirmative relief against Ms. Kafrissen for breach of contract, collusion, breach of the covenant of good faith and fair dealing, and any other remedies Coregis may have.” Following the exchange of letters, no consent judgment between Clark and Kafrissen was ever entered, and no settlement was ever reached between Clark and Kafrissen. Instead, two months later in March 2000, Coregis and Clark reached a settlement agreement for $1 million that was contingent upon Kafrissen consenting to the settlement. Kafrissen agreed to consent to an $800,000 settlement, but insisted on two conditions — that the settlement was a “full and final settlement” of both Clark’s claims against Carole Kafrissen and her practice, as well as Coregis’s claims against her in the federal suit. Despite Kafrissen’s refusal to consent to the settlement without Coregis’s agreement to drop its claim for rescission of its policy with Kafrissen, the insurer later entered into a settlement with Clark in which Coregis agreed to pay Clark $800,000 for her release of all claims against Kafrissen. Coregis then amended its federal suit to seek recoupment of the $800,000 from Kafrissen. But Kafrissen moved for summary judgment, arguing that Coregis is not entitled to recover from her since its payment to Clark was voluntary. Judge Robreno agreed, saying “it is elementary that one who voluntarily pays money with full knowledge of the facts, without any fraud having been practiced upon him, cannot recover it back.” Coregis’ lawyers — Victor M. Verbeke, Arthur W. Lefco, Andrew B. Clauss and Kristine M. Maciolek of Cozen & O’Connor, along with John J. Freeman and Brian G. Schumann of Bollinger Rubbery & Garvey in Chicago — argued that Kafrissen’s threat to enter into a consent judgment with Clark effectively forced Coregis to enter into the settlement with Clark in order to protect itself from the jeopardy of the possible $3 million consent judgment. Robreno disagreed, saying “this argument is entirely without merit.” The threatened consent judgment, he said, would not have required Coregis to pay $3 million to Clark because, as Coregis’s own attorney said in his letter to Kidd, the terms of the policy prohibited Kafrissen from entering into such an agreement, and Coregis would have had legal recourse against Kafrissen if she had done so. And under Pennsylvania law, Robreno said, “absent an insurer’s consent to the entry of judgment against the insured, any judgment secured by the insured cannot be enforced against the insurer.” As a result, Robreno said, it was clear that a consent judgment agreed upon by Clark and Kafrissen would have had no legal effect upon Coregis. “To the extent that Coregis subjectively believed that the threat of the consent judgment was not illusory but in fact real, a contention the court finds difficult to countenance in light of Coregis’s own persuasive letter, … Coregis would have been mistaken as to the law concerning Kafrissen’s ability to bind Coregis under the insurance contract that Coregis had issued to Kafrissen,” Robreno wrote. Under Pennsylvania law, Robreno said, “money paid voluntarily, although under a mistake of law as to the interpretation of a contract, cannot be recovered.” Coregis argued that there is an exception to the rule regarding voluntary payments where the payor acts in its own self interest. Robreno rejected the argument, saying “although it argues forcefully that the `self interest’ rule should be applied in this case, Coregis fails to explain the rule’s genesis or contours, or even to provide a public policy rationale for applying the rule in this case. Whatever the breadth or pedigree of the `self interest’ exception, the parties agree that it has not been applied by any court in Pennsylvania.” All of the cases cited by Coregis on that point were distinguishable, Robreno found, because “Coregis was under no immediate time pressure to settle, because Clark’s action had been stayed pending resolution of Coregis’s declaratory judgment action, and the threat of the entry of a consent judgment by Kafrissen was illusory.” Instead, Robreno adopted the reasoning of the Alabama Supreme Court in Mount Airy Insurance Co. v. Doe Law Firm, a 1995 case with “nearly identical facts” to Coregis’ claims against Kafrissen. In Mount Airy, an insurance company sought to recover the amount that it had paid a third party to settle a legal malpractice suit brought by the third party against a law firm that had a malpractice insurance policy with the insurance company. The law firm had refused to consent to the settlement negotiated by the insurance company because the insurance company would not agree, as a condition of the law firm’s consent to the settlement, that it would waive any right to seek reimbursement from the law firm. The Alabama Supreme Court held that the insurance company was not entitled to recover from the law firm the amount that it paid in the settlement because the insurance company “voluntarily” made the payment, and a voluntary payment in satisfaction of a colorable legal demand on another is not recoverable absent fraud, duress, or extortion. Coregis argued that Mount Airy was distinguishable since the law firm in that case did not threaten to cut off the insurer’s right to offer a defense against the underlying claim by entering into a consent judgment with the plaintiff in the underlying malpractice claim. But Robreno found that the distinction made no difference. “Even if Kafrissen had entered into the consent judgment with Clark, the judgment would have no legal effect on Coregis because any judgment secured by the insured without the insurer’s consent cannot be enforced against the insurer,” he wrote. “Therefore, the apparent threat by Kafrissen to enter a consent judgment with Clark would not have cut off Coregis’s right to offer a defense that it was not required to make payment to Clark based on the underlying claim.”

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