Monday, April 14, 2003
Court of Appeal Limits Damages in Legal Malpractice Cases
By KENNETH OFGANG, Staff Writer/Appellate Courts
Legal fees incurred in an unsuccessful effort to overturn a settlement agreement cannot be recovered in a malpractice suit against the attorneys who advised the plaintiff to settle, the First District Court of Appeal ruled Friday.
Div. Four granted a writ sought by the law firm of Orrick Herrington & Sutcliffe, directing that the malpractice claim be stricken from a suit by high-tech entrepreneur Michael A. Malcolm. The founder of hardware manufacturer CacheFlow—now Blue Coat Systems—is trying to recover hundreds of thousands of dollars he spent in trying to overturn a settlement agreement he signed three years ago.
He still can try to recover those funds, the Court of Appeal said, but only on a contract theory.
Malcolm and his ex-wife signed the settlement agreement in March 2000. Having retained several law firms in the course of the divorce, he was represented in the negotiation of the agreement by Christopher Ottenweller, a partner at Orrick.
Within three weeks of signing the agreement, Malcolm moved to set aside it aside. The motion was denied, the settlement was confirmed, and eventually Malcolm was ordered to pay $100,000 in sanctions for persisting in his efforts to set aside the settlement.
Two Firms Sued
Malcolm sued Orrick, along with another firm that had represented him, Kaufman & Young. He claimed that the agreement was “horribly defective” and that Ottenweller told him the document was a “term sheet” and not a binding settlement. He claimed that the settlement left him exposed to adverse tax consequences, to securities law violation proceedings, and to possible claims by both his former wife and his current wife.
Orrick cross-complained for more than $400,000 in legal fees, and moved for summary judgment on the ground that Malcolm had experienced none of the potential consequences he identified and thus suffered no damages.
Malcolm responded that his damages included the fees he paid to Orrick, the fees he paid to attempt to remedy Orrick’s errors, and his payment of over $500 million to his ex-wife to settle claims he said were worth about $30 million at time of separation. He also filed a declaration from Ottenweller in which the attorney said he understood that there were additional terms that were not in the settlement agreement but that would be included in the final judgment
In denying Orrick’s motion, a San Francisco Superior Court Judge found there were damages created by evidence of attorneys’ fees expended in connection with attempts to correct errors committed in the negotiation, preparation and execution of a settlement agreement enforceable under CCP section 664.6, entered on or about March 14, 2000, including, without limitation, motions to vacate the judgment and subsequent appeals.”
But Presiding Justice Laurence Kay, writing for the appellate panel, said the malpractice claim must be dismissed because there are no recoverable tort damages. Malcolm, the jurist said, “produced no evidence showing his ex-wife would have settled for less than she did, or that following a trial, he would have obtained a judgment more favorable than the settlement.”
Nor did he show his ex-wife would have agreed to a settlement that included the terms he claims were omitted, Kay said, so any damages were speculative.
Kay rejected the plaintiff’s contention that he need not show that he would have obtained a better result, in other words, that the “case-within-a-case” analysis should not be applied to an allegation of negligence in the drafting of an instrument. The plaintiff said the case was one of transactional, rather than business malpractice.
But Kay, who noted that the applicability of the case-within-a-case approach to transactional malpractice is before the state Supreme Court—in a case argued earlier this month, Viner v. Sweet—said it would be absurd to allow a party to recover attorney fees from his former lawyers for pursuing litigation he would have lost regardless of their alleged malpractice.
“[A]s Orrick points out, a litigant dissatisfied with a settlement (or a judgment for that matter) need only hire new attorneys and incur additional fees challenging the settlement to generate damages,” Kay wrote.
The case is Orrick Herrington & Sutcliffe v. Superior Court (Malcolm), A101737.
Copyright 2003, Metropolitan News Company