The difficulty of showing damages from a lawyer’s alleged malpractice when the underlying case has settled continues to vex malpractice plaintiffs. In Jacobs v. Tapscott, Civil Action No. 3:04-CV-1968-D, 2006 U.S. Dist. Lexis 68619 (N.D. Tex. 2006), asbestos plaintiffs sued their lawyers over a series of settlements with solvent and insolvent defendants.

The lawyers argued, successfully, that the clients had no evidence that they could have collected more through trial or settlement from the solvent defendants; no evidence that any solvent defendant would have agreed to settle for more than it did; no evidence that any solvent defendant had the financial ability to fund a greater settlement, no evidence that a judgment could be collected from any solvent defendant who would not agree to greater settlement; no evidence of how much of the settlement balances owed by the insolvent defendants – Johns-Manville, Pittsburgh Corning, and Fibreboard – would not be collected from their bankruptcies; and no evidence of how much of a settlement to be paid over time they will not receive.

But the clients’ Arce claims – claims for fee forfeiture based on breach of fiduciary duty which require no proof of damages – survived, in part, following a lengthy parsing of the various asserted breaches of fiduciary duty.

Facts

Plaintiffs Karin Jacobs (“Karin”), Patria Jacobs (“Patria”), and JoeAnn Frost (“JoeAnn”) sue defendants William K. Tapscott, Jr., Esquire (“Tapscott”),  and Baron & Budd, P.C. (“Baron & Budd”) based on their representation of plaintiffs in asbestos-related litigation arising from the death of Carl Bernard Jacobs (“Carl”). Karin is Carl’s widow, and Patria and JoeAnn are his daughters. Carl was employed in shipyards that exposed him to asbestos products for most of his adulthood, and he was ultimately diagnosed with mesothelioma. Before he died, Carl consulted an attorney in New Orleans, Scott Bickford, Esquire (“Bickford”). Bickford’s law firm, Martzell & Bickford, accepted his case on a one-third contingency fee employment agreement if the case settled before trial. Bickford later referred the case to Baron & Budd, a firm that is nationally recognized for handling asbestos litigation. Baron & Budd accepted the case based on 40% contingency fee arrangements, evidenced by three employment agreements and powers of attorney signed by Karin, Patria, and JoeAnn.

Defendants filed suit on behalf of plaintiffs and Carl’s estate in state courts in Galveston (the “Jacobs Litigation”) and Dallas counties against numerous asbestos defendants (“Asbestos Defendants”). Before the June 1999 trial setting of the Jacobs Litigation, defendants negotiated settlements with several Asbestos Defendants and advised Karin, Patria, and JoeAnn that they had reached cash settlements with all Asbestos Defendants for total payments of $2.4 to $2.5 million and perhaps more.

Plaintiffs became dissatisfied with defendants’ representation of them. In sum, they complain that the settlement was not for an amount that they had agreed to accept when they retained Baron & Budd, and their case was worth substantially more than what they received in settlement; they were not informed of important details of the settlement, including that it would not be paid entirely in cash, that a settlement had not been reached with Pittsburgh Corning Corporation (“Pittsburgh Corning”), that certain defendants, such as Fibreboard Corporation (“Fibreboard”), were in poor financial condition or bankrupt, that of the $200,000 that Johns-Manville Trust (“Johns-Manville”) had agreed to pay to settle, only $20,000 was payable immediately in cash, with virtually no possibility of recovering the $180,000 balance; that defendants did not obtain from the Asbestos Defendants written confirmation or evidence of the settlements and did not protect plaintiffs from the consequences of post-settlement bankruptcy; and that defendants had renegotiated the settlement with Rapid American Corporation (“Rapid American”), reducing the payment from $125,000 to $52,015.00.

Karin, Patria, and JoeAnn sued Tapscott and Baron & Budd on theories of negligence, misrepresentation, breach of fiduciary duty, breach of contract, fee forfeiture, and gross negligence. They sought to recover actual damages, punitive or exemplary damages, attorney’s fees, an accounting, fee forfeiture, and pre-and post-judgment interest.

The legal malpractice claim

Under Texas law, “[t]o recover on a claim for legal malpractice, a plaintiff must prove that the attorney (1) owed the plaintiff a duty; (2) the attorney breached that duty; (3) the breach proximately caused plaintiff’s injuries; and (4) the plaintiff was damaged.” Williams v. Briscoe, 137 S.W.3d 120, 124 (Tex. App. 2004, no writ) (citing Greathouse v. McConnell, 982 S.W.2d 165, 172 (Tex. App. 1998, pet. denied).

[w]hen a legal malpractice claim arises from earlier litigation, the plaintiff also bears the burden to prove he would have prevailed on the underlying cause of action. In addition, a plaintiff must prove the amount of damages he would have recovered and collected in the underlying case if it had been properly prosecuted. Evidence that damages could have been collected is required because, even if an attorney’s negligence prevented the entry of a judgment in the client’s favor, the client suffered no damage unless he could have collected some part of that judgment. This aspect of plaintiff’s burden is commonly referred to as the “suit within a suit” requirement. Thus, to prove that [defendant] committed legal malpractice, appellants had to prove that she failed to bring a medical negligence claim against the dialysis clinic, that the medical negligence claim would have been successful, that it would have resulted in damages, and that those damages would have been collectible.

Id. (citations omitted).

The court applied these principles in granting summary judgment on the legal malpractice claim:

Because plaintiffs have failed to adduce evidence that would permit a reasonable trier of fact to find that defendants’ alleged negligence damaged them, and because this failure renders all other fact issues immaterial, the court grants summary judgment dismissing plaintiffs’ negligence claim

Anti-fracturing rule stops breach of contract claim

The plaintiffs also brought a breach of contract claim, which the court rejected as an impermissible attempt to fracture their legal malpractice claim.

“[U]nder Texas law, a plaintiff cannot fracture a legal malpractice claim into multiple causes of action.” Archer v. Med. Protective Co., 197 S.W.3d 422, 427 (Tex. App. 2006, no writ h.) (citing Aiken v. Hancock, 115 S.W.3d 26, 28 (Tex. App. 2003, pet. denied)). Generally, Texas courts “frown on attempts to fracture one cause of action into three or four.” Ross v. Arkwright Mut. Ins. Co., 892 S.W.2d 119, 133-34 (Tex. App. 1994, no writ) (citing Sledge v. Alsup, 759 S.W.2d 1, 2 (Tex. App. 1988, no writ)). “If a lawyer’s error or mistake is actionable, it should give rise to a cause of action for legal malpractice with one set of issues which inquire if the conduct or omission occurred, if that conduct or omission was malpractice and if so, subsequent issues on causation and damages.” Sledge, 759 S.W.2d at 2. “If the gist of a client’s complaint is that the attorney did not exercise that degree of care, skill, or diligence as attorneys of ordinary skill and knowledge commonly possess, then that complaint should be pursued as a negligence claim, rather than some other claim.” Deutsch v. Hoover, Bax & Slovacek, 97 S.W.3d 179, 189 (Tex. App. 2002, no pet.) (citing Goffney v. Rabson, 56 S.W.3d 186, 190-94 (Tex. App. 2001, pet. denied)). “The rule against dividing or fracturing a negligence claim prevents legal-malpractice plaintiffs from opportunistically transforming a claim that sounds only in negligence into other claims.” Id.

Applying these principles, the court said:

Plaintiffs’ breach of contract action is based on the following alleged acts or omissions: defendants failed to inform or to keep plaintiffs reasonably informed about the Jacobs Litigation, and they made false and untrue statements concerning the settlement to which they had agreed, thus preventing plaintiffs from making an informed decision about whether to settle the case on the terms and for the amounts negotiated; defendants failed to inform plaintiffs that, once they executed separate contingent fee agreements, defendants would not communicate with them about settlements or settlement negotiations until after they legally committed them to settle, despite plaintiffs’ written requests that they be informed before executing any such documents on their behalf; defendants failed to evaluate the Jacobs Litigation properly and intentionally undervalued it; before settlement negotiations were conducted and completed, defendants failed to secure written confirmation from and executed by each plaintiff clearly setting forth the amount of authority granted by each; defendants misrepresented or omitted material facts that prevented plaintiffs from making an informed decision whether to settle on the terms defendants negotiated, to go to trial, or to release non-settling defendants; defendants failed to obtain a writing that would legally bind each settling Asbestos Defendant in the Jacobs Litigation and that could be judicially enforced against any settling Asbestos Defendant who failed to settle; and defendants failed to enforce written settlement agreements that were not funded. An attorney’s alleged failure to keep his client informed about the lawsuit in which he is representing the client, false statements concerning settlement that prevent a client from making an informed decision about settlement, failure to inform a client that the attorney will not communicate about settlement until after the client is legally committed to settle, failure to properly evaluate a lawsuit, failure before settlement negotiations are conducted and completed to secure written confirmation from the client that clearly sets forth the amount of authority granted the attorney, misrepresentation or omission of material facts that prevent a client from making an informed decision whether to settle, try the case, or release non-settling defendants, failure to obtain a writing that would legally bind and be enforceable against a settling defendant, and failure to enforce an unfunded settlement agreement all relate to his failure to exercise the degree of care, skill, or diligence that attorneys of ordinary skill and knowledge commonly possess rather than to his failure to perform his contract with the client.

Accordingly, the court holds that defendants are entitled to summary judgment dismissing plaintiffs’ breach of contract action because it is a fractured claim.

A complicated parsing of Arce claims

As is now well known, “in the context of the attorney-client relationship, proof of damages is not required with a request for fee forfeiture in a breach of fiduciary duty claim.” Spera v. Fleming, Hovencamp & Grayson, P.C., 25 S.W.3d 863, 873 (Tex. App. 2000, no pet.) (citing Arce, 958 S.W.2d at 251); Arce, 958 S.W.2d at 244-45 (“To be entitled to the remedy of fee forfeiture, [plaintiffs] do not have to prove [defendants] caused actual damage – proof of a breach is enough.”). Thus, the failure to establish causation and damages, which doomed the legal malpractice claim, was not an absolute defense to the Arce claims.

The court did, however, apply the anti-fracturing principles to determine which aspects of the alleged conduct could properly be brought as Arce breach of fiduciary duty claims – an analysis made necessary by the common plaintiffs’ tactic of recasting all the allegedly negligent conduct as breaches of fiduciary duty (think of it as an over-arching “fiduciary duty not to be negligent” theory):

[p]laintiffs identify 13 grounds for their breach of fiduciary duty claim: (1) improperly using and exercising the powers of attorney in the employment agreements with plaintiffs; (2) failing to recognize that a conflict of interest existed or may have existed between JoeAnn, on the one hand, and Karin and Patria on the other, continuing their representation, and not recommending separate counsel; (3) not confirming and making certain that all parties agreed to the amount of authority to settle; (4) failing to contact plaintiffs and obtain their prior approval and consent to dismiss any parties in the Jacobs Litigation; (5) submitting a claim on behalf of Karin only with Johns-Manville, without informing plaintiffs and securing Karin’s signature on the claim, resulting in a $20,000 payment to Baron & Budd that was not disclosed to plaintiffs; (6) failing to inform plaintiffs before settling with Johns-Manville that $180,000 of the $200,000 settlement was a worthless note that would never be collected; (7) deliberately lying to plaintiffs and informing them that the entire Jacobs Litigation had settled and failing to inform them that Pittsburgh Corning had not settled; (8) failing to inform plaintiffs that extended terms of payment had been granted to Pittsburgh Corning; (9) failing to inform them that the Rapid American settlement was contingent upon other events and unilaterally negotiating a Rule 11 agreement; (10) failing to inform them they had entered into a fee splitting agreement with Bickford and Martzell & Bickford; (11) failing to prepare the case for trial and having a trial lawyer present for the June 1, 1999 trial setting of the Jacobs Litigation; (12) not timely securing Rule 11 agreement with Pittsburg Corning; and (13) entering into aggregate settlements without informing or obtaining the informed consent of plaintiffs.

The court concludes that grounds 2, 3, 4, 5, 6, 8, 9, 11, and 12 are claims for legal malpractice, not for breach of fiduciary duty. In ground 2, plaintiffs allege that defendants failed to recognize a possible conflict of interest among the plaintiffs and continued their representation without recommending separate counsel. This is an assertion that defendants did not exercise the degree of care, skill, or diligence that attorneys of ordinary skill and knowledge commonly possess. [fn5] The gist of grounds 3, 4, 5, 6, 8, and 9 is defendants’ purported failure to keep plaintiffs adequately informed and to communicate with them regarding matters relevant to the Jacobs Litigation and settlement, and thus they are negligence claims. See Archer, 197 S.W.3d at 427 (holding claims that attorney neglected matters, mis-evaluated case, and failed to communicate with client “can be viewed as claims involving legal malpractice”). Allegation 11 relates to defendants’ purported lack of preparation for and attendance at trial. Ground 12 refers to defendants’ purported failure to timely secure a Rule 11 agreement with a settling defendant. Both are patently claims of attorney conduct below the standard of care.

[fn5] The court recognizes that a claim for breach of fiduciary can be based on the attorney’s failure to disclose his own conflict of interest without impermissibly fracturing a negligence claim. See Deutsch, 97 S.W.3d at 190-91. Here, however, plaintiffs are asserting a conflict among themselves, not with their lawyers.

This left the following potential bases for the Arce breach of fiduciary duty claim: (1) improperly using and exercising the powers of attorney in the employment agreements with plaintiffs; (7) deliberately lying to plaintiffs and informing them that the entire Jacobs Litigation had settled and failing to inform them that Pittsburgh Corning had not settled; (10) failing to inform them they had entered into a fee splitting agreement with Bickford and Martzell & Bickford; and (13) entering into aggregate settlements without informing or obtaining the informed consent of plaintiffs. The court found that these parts of the Arce claims survived the anti-fracturing rule:

Ground 1 refers to defendants’ purported improper use and exercise of the powers of attorney contained in the employment agreements. Plaintiffs contend that the powers of attorney did not grant defendants the right to settle the Jacobs litigation without consulting them. According to plaintiffs, by doing so, defendants “gained the benefit of attorney’s fees improperly thereby and avoided the necessity and expense of a jury trial.” Ps. Br. 17. An attorney’s “pursuit of his own pecuniary interests over the interests of his client . . . can be viewed as claims involving breached fiduciary duties.” Archer, 197 S.W.3d at 427-28 (citing Aiken, 115 S.W.3d at 28). Thus the claim is not improperly fractured.

. . .

In ground 7, plaintiffs allege that defendants deliberately lied to them and told them the entire Jacobs Litigation had settled, without telling them that Pittsburgh Corning had not settled. “The attorney-client relationship is highly fiduciary in nature.” Judwin Props., Inc. v. Griggs & Harrison, 911 S.W.2d 498, 506 (Tex. App. 1995, no writ) (citing O’Dowd v. Johnson, 666 S.W.2d 619, 621 (Tex. App. 1984, writ ref’d n.r.e.)). “This relationship carries the utmost good faith.” Id. (citing State v. Baker, 539 S.W.2d 367, 374 (Tex. Civ. App. 1976, writ ref’d n.r.e.)). “Attorneys owe their clients a fiduciary duty of ‘most abundant good faith,’ requiring absolute perfect candor, openness, and honesty, and the absence of any concealment or deception.” Combs v. Gent, 181 S.W.3d 378, 384 (Tex. App. 2005, no writ h.) (citing Deutsch, 97 S.W.3d at 196). This predicate for breach of fiduciary duty – an alleged deliberate lie rather than a mere failure to communicate or inform – is not improperly fractured.

In ground 13, plaintiffs contend that defendants breached their fiduciary duty by entering into aggregate settlements without informing plaintiffs or obtaining their informed consent. This can be the basis of a claim for breach of fiduciary duty. See Arce v. Burrow, 958 S.W.2d 239, 245 (Tex. App. 1997), aff’d as modified, 997 S.W.2d 229 (Tex. 1999). Consequently, it is not an improperly fractured negligence action.