New Jersey's Litigation Privilege Does Not Bar a Claim By a Client for Legal Malpractice Against Defense Attorneys

By John L. Slimm, Esq.*

Key Points:

• Litigation privilege limited by New Jersey court.
• Litigation privilege does not apply to a client's malpractice claims against his/her attorney where it is claimed that the attorney's representation did not meet applicable standards of practice.

In Buchanan v. Leonard, A-2243-11T4 (App. Div. October 9, 2012) (approved for publication), Mr. Leonard and his firm, Morgan, were assigned by Legion Insurance Company to defend a legal malpractice action on behalf of an attorney, William Buchanan. In the case, discovery revealed that Earl and Sherry Kerr owned a home and business property in New Jersey. Nations Credit had a $129,000 first mortgage, and William Wooden had an $85,000 second mortgage on the business property. In April 1992, Buchanan filed a Chapter 13 Petition on behalf of the Kerrs. The Petition was dismissed because the Kerr's debts exceeded the limits established for individuals filing Chapter 13 Petitions. On August 21, 1993, Buchanan wrote to the Kerrs and stated that he had advised them they should be filing a Chapter 11 Bankruptcy Petition rather than a Chapter 13 Petition. He stated that the Kerrs would not be eligible to file a Chapter 13 if they treated Wooden's claim as almost entirely unsecured. Buchanan stated that he had no experience with Chapter 11 Petitions and believed the Kerrs would be much better served by an attorney with such experience. In the August 21, 1993 letter, Buchanan additionally wrote that the Kerrs had declined his advice, in part, because they would have to pay a large retainer to a new attorney. The Kerrs, instead, directed him to file a Chapter 13 Petition.

In March 2000, the Kerrs filed suit against Buchanan, in which they alleged that Buchanan had prepared and filed a legally deficient Chapter 13 Bankruptcy pleading on their behalf and, as a result, they lost their residence, as well as their business and its property. Legion assigned defense counsel to defend the case. Legion did not raise any coverage issues at that time. In July 2003, Legion was declared insolvent, and New Jersey Property Liability Insurance Guaranty Association assumed Legion's obligations. NJPLIGA never asserted that Buchanan was not entitled to coverage.

During the course of the litigation, the Kerrs produced an expert report. The Kerr's expert opined that a competent bankruptcy attorney should have first filed a Chapter 7 Petition and, after discharge, commenced a Chapter 13 proceeding. The expert opined that this would have allowed Wooden's second mortgage on the business property to be treated as wholly unsecured. According to the expert, in the Chapter 13 proceeding, the Kerrs would have been discharged of all unsecured debt, including Wooden's secured mortgage. The expert wrote that the Kerrs could have retained the equity in their residence, which could have been used to pay a substantial portion of the IRS debt. The Kerrs also would have been able to avail themselves of a Bankruptcy Code exemption and retain $30,000 from the sale of the proceeds of that property, as well as their business property. The plaintiff's expert opined that, as a result of the course pursued by Buchanan, the clients had to abandon their residence, walking away from equity. He stated they had to manipulate the value of their business property on their Bankruptcy Petition just to appear eligible for the filing of the Chapter 13 Petition. He stated that the manipulation was directed by Buchanan and resulted in a Chapter 13 plan whereby the Kerrs had to pay the second mortgage on the business property to Wooden in the amount of $85,000 over a 60-month period. Ultimately, the Kerrs lost their residence, business property, and their business and did not receive a discharge for any unsecured debt. They were left with substantial debt to the IRS and had no remaining assets with which to attempt to pay off the debt to the IRS.

On May 28, 2004, Dean Sutton issued an expert report for Buchanan. He wrote that the Kerrs agreed to the Chapter 13 proceeding and were aware that they had to classify Wooden's second mortgage as almost entirely secured and pay him accordingly. The defense expert wrote that the Kerrs intended to abandon their residential property and, therefore, were aware that the loss of the property would not affect the taxes they were required to pay. He opined that the Chapter 13 plan provided for the satisfaction of the IRS's and Wooden's claims. He stated that the Chapter 13 case was subsequently dismissed because the Kerrs failed to make payments required by the plan. He wrote that the loss of the Kerr's properties and businesses was not the result of Buchanan's conduct but was, instead, the result of their failure to make the required plan payments.

In April of 2005, Buchanan's attorney, Leonard, submitted a report to NJPLIGA for authorization seeking to settle. He noted in his report that, before Buchanan filed the second Chapter 13 position, he wrote the letter of August 21, 1993, to the Kerrs. In his report to PLIGA, Leonard stated that the letter was an admission of bankruptcy fraud by Buchanan and the Kerrs. He wrote that, if the statute of limitations on the crime had not run, Buchanan would possibly be subject to five years in prison and/or a fine of $5,000. He also advised that, if the letter was disclosed at trial, the insured would still be subject to discipline, which would include a period of suspension.

On May 16, 2005, one week prior to trial, PLIGA advised Buchanan that it was withdrawing coverage and that it would not defend him. On May 17, 2005, PLIGA wrote Buchanan and stated that the withdrawal of the coverage was prompted by the letter of August 21, 1993, under which the attorney knowingly filed a Chapter 13 Petition containing material misrepresentations of fact. PLIGA declined coverage under its exclusion for dishonest, fraudulent, and criminal or malicious acts. PLIGA then filed a declaratory judgment action. Following a bench trial, the Law Division held that Buchanan was entitled to coverage.

Buchanan then filed suit against Leonard's firm, alleging that the attorneys who represented him were negligent and careless, and deliberately expressed an opinion contrary to his best interests. He alleged negligent supervision, breach of contract, breach of fiduciary duty, tortious interference, defamation and unjust enrichment. On motions for summary judgment, the attorney defendants argued: that the claims were barred under the litigation privilege; that the defamation claim was barred under the statute of limitations (one year); and that the legal malpractice claim should be dismissed because Buchanan did not serve an expert report. The trial court entered summary judgment on behalf of the defendant attorneys because Leonard's statements were covered by the litigation privilege. The trial court also ruled that the defamation claim was barred under the one-year statute of limitations.

The Appellate Division found that the defamation claims were barred by New Jersey's one-year statute of limitations, N.J.S.A. 2A:14-3. However, the Appellate Division reversed the decision of the trial court on the litigation privilege. The Appellate Division noted that New Jersey had never specifically addressed the question of whether the privilege protects an attorney from claims by his client. The Appellate Division held that the privilege did not protect an attorney from a claim by his own client based upon statements the attorney makes in the course of a judicial proceeding where it is alleged that the attorney breached his duty to the client by failing to adhere to accepted standards of legal practice. The Appellate Division followed California law on the issue and concluded that the litigation privilege does not apply to a client's malpractice claim against his/her attorney. Therefore, the Appellate Division held that the trial court erred when it determined that the litigation privilege barred Buchanan's legal malpractice claim, and the decision of the trial court was reversed.

The key aspect of the decision is with respect to the litigation privilege. I previously examined this privilege in an article published in the New Jersey Law Journal on March 14, 2011--"The Litigation Privilege in Claims Against Attorneys." My article dealt with claims by third parties against attorneys. However, in Buchanan, the Appellate Division has now ruled that attorneys cannot avail themselves of the litigation privilege in connection with claims made by their own clients. It should be noted, however, that, in their decision, the Appellate Division declined to consider whether the litigation privilege barred causes of action other than malpractice. The Appellate Division advised the trial court to address that issue on remand. Accordingly, because the Appellate Division has not ruled with respect to whether or not the privilege would bar other claims, it is recommended that, in cases brought against attorneys in similar circumstances, summary judgment motions be filed asserting the litigation privilege as a defense to claims apart from malpractice claims. A record should promptly be made in connection with such claims in order to protect the matter for appeal, since that issue has not yet been decided by the Appellate Division or the New Jersey Supreme Court.

Defense Digest, Vol. 19, No. 1, March 2013