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Courts across the country have long been divided as to whether legal malpractice claims can be assigned by a client to a third party. This issue has important ramifications for the practice of law and the public perception of lawyers. Too loose a rule invites harm to the attorney-client relationship, while too restrictive an approach may create the impression that a self-regulating legal profession is using its perceived control of the system to its selfish, protectionist advantage. Thus far, advancing a number of practical and policy considerations, the majority of courts that have addressed the question (including California, Indiana, Florida, Texas, New Jersey, Virginia, and Illinois) [FOOTNOTE 1]have issued what appears to be a blanket prohibition against the assignment of legal malpractice claims. [FOOTNOTE 2]This bright-line rule ignores the fact that in particular circumstances, none of the concerns articulated by these courts about such assignments may exist, or are only weakly implicated. On the other hand, courts in at least four jurisdictions (New York, Pennsylvania, Oregon and Maine) [FOOTNOTE 3]have permitted assignment in language that seems to suggest it always should be allowed. These courts may have given too short shrift to valid policy concerns articulated by the majority. The competing “all or nothing” approaches adopted by these courts are easy to apply, but fail to address or even acknowledge the wide variety of situations in which assignment may arise. Yet an alternative approach exists. As in many other complex areas, the courts could take a case-by-case approach when faced with the question of whether to permit or prohibit the assignment of legal malpractice claims. By examining the economic and ethical reasons commonly offered by the courts for across-the-board rejection of assignments, a balancing test can be fashioned. When applied to the individual circumstances of each case, this balancing test would achieve equity and promote policy considerations. THE ECONOMIC RATIONALES FOR REJECTING ASSIGNMENT Courts that bar the assignment of attorney malpractice claims often focus on the economic realities that would follow a permissive rule. For example, they fear that permitting assignment of legal malpractice claims “could relegate the legal malpractice action to the marketplace and convert it to a commodity to be exploited and transferred to economic bidders who have never had a professional relationship with the attorney, and to whom the attorney has never owed a legal duty.” [FOOTNOTE 4]Others note that creating a market for legal malpractice claims could encourage unjustified legal malpractice claims against lawyers. [FOOTNOTE 5] As valid as these observations may be, they do not justify an absolute bar on the assignment of malpractice claims, any more than they would justify immunity from malpractice claims filed directly by a client. The usual remedy for the filing of a meritless claim is a vigorous defense, possibly accompanied by a motion for sanctions. Lawyers have no more automatic right to an extra level of protection beyond what every other citizen is provided. Some courts also worry that if assignment is permitted, the bar will be less inclined to represent clients who are perceived to be more likely to assign their rights, such as the uninsured or the nearly insolvent. [FOOTNOTE 6]This seems to be a very speculative concern, with at most only marginal impact; if such clients are having trouble getting representation, it is probably out of concern for their ability to pay their bills, rather than because the bar generally fears an assignment of future, unaccrued malpractice claims. If anything, marketplace realities are precisely the reason why assignment should be permitted in some circumstances. Legal malpractice is a contractual claim, as well as a tort claim, [FOOTNOTE 7]and lawyers should have no special protection from the economic harms their breaches cause. An unbending rule prohibiting the assignment of legal malpractice claims could unjustly insulate incompetent attorneys from suit. There can be a myriad of reasons, including the attorney’s own mishandling of the client’s affairs, why a client might be unable to finance even a meritorious suit against its attorney. The client should, in the most efficient way possible, be able to assign its claim to someone who has the time, energy, and resources to bring such an action. [FOOTNOTE 8]The public perception of attorneys is harmed, not helped, if trade-protectionist rules protect us from economically rational assignments of claims at the same time the law permits the assignable of claims against other professionals. [FOOTNOTE 9] ANOTHER CENTRAL CONCERN: THE UNIQUE ATTORNEY-CLIENT RELATIONSHIP The courts opposing assignment appear to be on much more solid ground when they express concern over the effect of an assignment on the intensely personal bond of trust and confidentiality that should be the cornerstone of the attorney-client relationship. There can be little doubt that an assignment of malpractice claims would be destructive of that relationship. An analogy is sometimes drawn to the common law prohibition against the assignment of personal injury claims, which were viewed as too intensely personal to be transferable. [FOOTNOTE 10] It is paternalistic in the extreme for the profession to tell clients that they cannot choose to assign even valid malpractice claims simply because lawyers want to preserve client relationships. In most cases where a client believes he or she has an assignable malpractice claim, the quality of the relationship will have deteriorated to the point where the assignment itself has little, if any, cumulative impact. As one court noted, we should “not allow the concept of the attorney-client relationship to be used as a shield by an attorney to protect him or her from the consequences of legal malpractice. Where the attorney has caused harm to his or her client, there is no relationship that remains to be protected.” [FOOTNOTE 11] It goes too far to say that there is never any relationship to be preserved just because there is an allegation that the attorney may have harmed his or her client. Just as a per seprohibition on assignments makes little policy sense in most cases, it would be wrong to assume that an assignment should always be permitted. One hypothetical example illustrates why a balancing of interests is preferable to a per serule. Suppose a client with a continuing and long-standing relationship with its attorneys is forced into a bankruptcy in which the client’s creditors seek the assignment of a potential malpractice claim as part of reaching agreement on an approved plan. The court should have discretion to balance the client’s competing needs, with an eye toward the broader public policy in favor of preserving an existing attorney-client relationship, when deciding whether to approve an economically coerced assignment. PRESERVING CLIENT CONFIDENCES When a client sues for malpractice, this results in a partial waiver of the lawyer’s duty to keep the client’s matters confidential. [FOOTNOTE 12]When the client remains in control of the lawsuit, it can terminate the lawsuit if it later determines that the risks associated with a public airing of its confidences outweighs the potential benefits of a malpractice lawsuit. However, the client loses that fail-safe protection upon the normal assignment of its legal malpractice claim, putting a third party, who otherwise would not be entitled to know the client’s confidences and secrets, effectively in control of disclosures. [FOOTNOTE 13] The client may not fully appreciate the dangers at the time of the assignment. Indeed, the danger from disclosure may not even be knowable at the time because it is hard to predict in advance the exact scope of the partial waiver and circumstances may change, making the disclosure of what was initially thought to be innocuous information much more problematic later. Courts should be mindful of such concerns. However, they do not justify an absolute prohibition on assignments because the confidences belong to the client, and the client has the right to waive them. What these concerns do require is that courts should insist on detailed warnings to clients about the dangers of an assignment. It may even be true in certain circumstances that court approval of an assignment should be made conditioned upon the assignee’s agreement to rescind the assignment at the client’s request (with appropriate restitution to the assignee of his costs to that date, and the like). THE ‘CalPERS’ CASE IN NEW YORK All of these concerns were implicated by a recent decision by the New York Court of Appeals, New York’s highest court. In State of California Public Employees’ Retirement System(“CalPERS”) v. Shearman & Sterling(“Shearman”), [FOOTNOTE 14]Shearman ably argued that legal malpractice claims are not assignable. Opposing counsel eloquently argued to the contrary, that New York has and should permit an assignment, for the very reasons discussed here. The Court of Appeals avoided reaching that broad issue, holding that the purported assignment was not specific enough to include assignment of a legal malpractice claim. The court’s careful scrutiny of the assignment of legal malpractice claims in CalPERSwell illustrates the alternative, individualized approach that courts may use to assess the propriety of assignment. There are reasons, outlined above, why an assignment should not be permitted lightly, and it is possible that the concerns raised by the various courts that have opposed assignments contributed to the Court of Appeals’ seemingly searching review of the assignment language. It is interesting to speculate what the Court of Appeals would have done if the assignment had been sufficiently explicit. As noted, New York’s lower courts have permitted the assignment of malpractice claims. What result would a balancing, policy-oriented approach yield on the facts of that case? In CalPERS, Equitable Real Estate Investment Management Inc. (“Equitable”) originated and closed certain real estate loans. [FOOTNOTE 15]Shearman represented Equitable and drafted the relevant loan documents and agreements. Equitable then assigned the loans to CalPERS pursuant to an omnibus assignment agreement between them. One of the borrowers defaulted and CalPERS sought acceleration of the loan. [FOOTNOTE 16] When it received less money than it had expected from the acceleration provisions, CalPERS sued Shearman for legal malpractice, alleging that the documentation Shearman prepared had been negligently drafted. CalPERS, which had no formal attorney-client relationship with Shearman, alleged among other things that Equitable’s assignment of the loans to CalPERS included an assignment of a legal malpractice claim against Shearman. [FOOTNOTE 17]The Court of Appeals held, however, that based upon the language of Equitable and CalPERS’ agreement, Equitable’s assignment to CalPERS did not include an assignment of its legal malpractice claims. Therefore the court did not reach the issue of whether the legal malpractice claims could have been assigned at all. The facts of CalPERSillustrate nicely why courts should take a case-by-case approach when faced with the question of whether to permit or prohibit the assignment of legal malpractice claims. Equitable is a very sophisticated party, well able to assess the pros and cons of assignment, including the risks that such an assignment would harm its continuing relationship (if any) with well-respected counsel or would result in the partial waiver of confidential information. Also, because the assignment of the legal malpractice claims was part of the assignment of the loans themselves, the decision whether to waive confidentiality with regard to communications relating to the making of those loans could be made as intelligently by CalPERS as by Equitable. Thus, there would be little justification for a blanket prohibition on an assignment. On the other hand, it made sense for the Court of Appeals to insist that any assignment be clear and unambiguous. Only in that way could the Court have confidence that Equitable had, in fact, made a careful and knowing cost-benefit analysis of an assignment. Instead, on these facts, it is at least possible that Equitable intended to make an assignment only of its rights within the four-corners of the loan documents, without intending to destabilize its relationship with Shearman. CONCLUSION The assignment of legal malpractice claims raises important questions concerning the relationship between an attorney and client. It also impacts the public perception of the legal profession and may be viewed as simply another attempt by the self-regulating profession to insulate itself from liability. While many of the courts that have thoroughly analyzed the issue have recognized some important concerns related to the assignment of these types of claims, these concerns may not be present or controlling in every case. Those seeking the latitude to assign legal malpractice claims should advocate the adoption of a flexible rule that permits a case-by-case assessment of whether an assignment was made knowingly and intentionally by a fully informed client, without undue economic pressure or other coercion. Thomas C. Moore is a partner and Jeremy R. Feinberg and Jason A. Zweig are associates in the Litigation and Dispute Resolution department of the New York office of Proskauer Rose LLP. They can be reached at [email protected], [email protected]and [email protected]. For further information about the authors and/or Proskauer Rose LLP, please visit the firm’s Web site at www.proskauer.com. ::::FOOTNOTES:::: FN1 California: Goodley v. Wank and Wank, Inc., 133 Cal. Rptr. 83 (Cal. Ct. App. 1976); Indiana: Picadilly, Inc. v. Raikos, 582 N.E.2d 338, 343 (Sup. Ct. Ind. 1991); Florida: Forgione v. Dennis Pirtle Agency, Inc., 701 So. 2d 557, 559 (Sup. Ct. Fla. 1997); Texas: Zuniga v. Groce, Locke & Hebdon, 878 S.W.2d 313 (Tex. Ct. App. 1994); New Jersey: Alcman Serv. Corp. v. Bullock, 925 F. Supp. 252, 256-258 (D.N.J. 1996); Virginia: MNC Credit Corp. v. Sickels, 497 S.E.2d 331 (Sup. Ct. Va. 1998); Illinois: Clement v. Prestwich, 448 N.E.2d 1039, 1042 (Ill. App. Ct. 1983). FN2This list represents a random sampling of the states and is not intended to be comprehensive. For a more comprehensive review, see, e.g.,ASSIGNABILITY OF CLAIMS FOR LEGAL MALPRACTICE, 40 A.L.R. 4th 684 (1985). FN3 New York: Tawil v. Finkelstein, Bruckman Wohl Most & Rothman, 646 N.Y.S.2d 691, 692-693 (1st Dep’t 1996). Pennsylvania: Hedlund Mfg. Co. v. Weiser, Stapler & Spivak, 539 A.2d 357, 359 (Sup. Ct. Pa. 1988). Oregon: Collins v. Fitzwater, 560 P.2d 1074, 1078 (Sup. Ct. Or. 1977). Maine: Thurston v. Continental Cas. Co., 567 A.2d 922 (Sup. Ct. Me. 1989). FN4 Goodley v. Wank and Wank, Inc., 133 Cal. Rptr. 83, 87 (Cal. Ct. App. 1976). FN5 Id. FN6 Zuniga v. Groce, Locke & Hebdon, 878 S.W.2d 313, 317-318 (Tex. Ct. App. 1994). FN7 Thurston v. Continental Casualty Co., 567 A.2d 922, 923 (Sup. Ct. Me. 1989); MNC Credit Corp. v. Sickels, 497 S.E.2d 331 (Sup. Ct. Va. 1998). FN8 Id. FN9Some courts also argue that the doctrine of “judicial estoppel” should bar an assignment. See, e.g., Zuniga v. Groce, Locke & Hebdon, 878 S.W.2d 313 (Tex. Ct. App. 1994). Assume that Client loses to Assignee, who accepts as partial satisfaction of his judgment against Client an assignment of Client’s legal malpractice claim against Lawyer who handled (and lost) the case between Client and Assignee. The doctrine presumably would prevent Assignee from asserting in the assigned malpractice case that Assignee only won the underlying action because of Lawyer’s malpractice; Assignee is estopped from claiming that his own claims were without merit. However, while this doctrine might make it foolhardy for Assignee to accept an assignment of malpractice claims — because the assignment may be judicially unenforceable — that would be Assignee’s problem, not Client’s, and so this doctrine does not support the across-the-board elimination of all assignments. FN10 MNC Credit Corp. v. Sickels, 497 S.E.2d 331, 333 (Sup. Ct. Va. 1998). FN11 Hedlund Mfg. Co. v. Weiser, Stapler & Spivak, 539 A.2d 357, 359 (Sup. Ct. Pa. 1988). FN12 Bowne, Inc. v. AmBase Corp., 150 F.R.D. 465, 488 (S.D.N.Y. 1993) ( quoting Hearn v. Rhay, 68 F.R.D. 574, 581 (E.D. Wash. 1975)); Paramount Communications, Inc. v. Donaghy, 858 F. Supp. 391, 395 (S.D.N.Y. 1994) ( citing Bowne). FN13 Picadilly, Inc. v. Raikos, 582 N.E.2d 338, 343 (Sup. Ct. Ind. 1991). FN1495 N.Y.2d 427, 741 N.E.2d 101 (2000). FN15 Id. FN16 Id. FN17 Id. CalPERScould not sue Equitable directly, as those two parties entered into a settlement agreement related to the assignment of the loans which also included a declaration that Equitable had intended to assign all possible claims relating to the promissory note including “all causes of action relating to professional malpractice, including without limitation all causes of action against, and right to sue, Shearman for negligence and breach of contract.” Id.

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