Lawyers make mistakes. Usually when that happens, the mistake can be fixed. Sometimes, however, it can’t. If your lawyer made a mistake AND you lost money, you probably have a claim for legal malpractice.
When you make a claim against the lawyer, he then files a claim with his malpractice insurance carrier. If the carrier refuses to pay or if you can’t agree on a settlement, a lawsuit inevitably follows. Ultimately a judge or jury decides if your claim is valid and how much you receive.
But what happens if your lawyer disappears or is no longer practicing law? Or what happens if the entire law firm is gone?
Even if the law firm goes under, the insurance should still cover any claims. Things get tricky, however, if the insurance isn’t enough or if the law firm had no insurance.
Most lawyers are set up as professional corporations, limited partnerships or limited liability companies. They do that to protect themselves from large claims and other creditors. Depending on the state, that form of ownership may make it more difficult to collect. Especially if there is insufficient insurance or no insurance at all.
Let’s examine a recent case to see how individual lawyers might be held responsible if the law firm disbands.
Banks Sues Its Own Lawyers for Malpractice, Law Firm Disbands
First Citizens Bank & Trust recently sued it legal counsel for malpractice. In a 2018 case filed in Fresno, California, the bank says that its former law firm, Perkins Mann & Everett, gave them bad legal advice. The bank says one of the firm’s lawyers told the bank it could foreclose on a hotel even though the hotel had filed for bankruptcy protection.
After the motel was seized and sold, a federal judge ruled the bank acted illegally. Now the bank is on the hook for potentially millions of dollars.
First Citizens Bank is a state chartered bank headquartered in Raleigh, North Carolina. In 2008, the bank loaned money to a company called Oakhurst Lodge Inc. The hotel borrowed a total of $2 million from First Citizens and a local California bank. Their loan was secured by a lien on the hotel property.
In just two years, Oakhurst was struggling to pay its bills. In August of 2010 the company filed for bankruptcy protection. When a company or person files for bankruptcy protection, all collection actions are subject to an automatic stay. That means creditors can’t foreclose or seize loan collateral without permission of the court. (This is often called “relief from the stay.”)
Oakhurst was able to get the court and creditors to agree to a reorganization plan. If they couldn’t reorganize, they would be placed into a chapter 7 bankruptcy. In that type proceeding, a trustee oversees the liquidation of all of the debtor’s non-exempt property. The assets are sold, creditors paid and any remaining debt is discharged.
As noted above, Oakhurst was able to get the court to approve a reorganization plan. As long as they made the payments required under the plan, they could continue to operate and ultimately receive a discharge.
By June 2012, Oakhurst was in default again. They didn’t make the required monthly payments.
When the motel defaulted, the bank spoke with Reid Everett, one of the partners at the Perkins Mann Everett law firm.
Everett allegedly told the bank that they could send foreclose on the motel and sell it. According to an email from Everett to the bank, he said,
“I have reviewed the debtor's chapter 11 plan, the order confirming the plan, and the applicable bankruptcy code and rules. There is no stay in effect that would require the Bank to go back to the bankruptcy court to get an order permitting it to take action to enforce the terms of the confirmed plan as it pertains to the Bank. I confirmed this with the debtor's attorney who agrees that there are no impediments to the Bank filing a new NOD. This means that the Bank can commence nonjudicial foreclosure proceedings anew. I recommend that the nonjudicial foreclosure proceedings be commenced to get the clock running.”
He was wrong.
In August of 2014, the bank sold the motel to a new buyer.
Under bankruptcy law, any act taken in violation of the automatic stay is void. A creditor that violates the automatic stay may also be liable for serious penalties including punitive damages.
If you think you know what is coming next, you are probably correct. Oakhurst sued to get the property back. A bankruptcy judge ruled that the bank did violate the automatic stay. The hotel had a fire in the interim, however, further complicating the case.
The parties tried to mediate a settlement and in 2016, it looked like the bank and hotel reached an agreement with the bank paying $850,000. The bankruptcy court disagreed putting the bank back at square one.
The bank is appealing but as of the spring of 2018, it looks like the bankruptcy court is holding fast to its ruling that the bank violated the stay. The bank says that through the present, it has suffered millions of dollars of damages and may be on the hook for even more.
First Citizens Bank sued Perkins Mann and Everett but the firm is now defunct. The law firm apparently disbanded in March of 2018, the same month that the bankruptcy court ruled against the bank. [We would not be surprised if the long and protracted litigation caused the firm to split up. It is hard to retain lawyers when no one knows if the firm will be in existence in a month.]
Knowing that the firm is probably gone for good, the bank sued not only the law firm but also the individual partners of the firm.
Are those partners liable? That is the topic of this post.
Assuming Reid Everett was the partner giving bad advice, he certainly would be liable. The firm that employed him would also be liable.
But the firm is gone and the bank says the firm did not have enough insurance. Can the bank collect against the other partners in the firm?
Unfortunately for the bank, they likely face an uphill battle. Collecting against the other lawyers will be more difficult. Especially if the other lawyers did not commit any malpractice themselves.
California law requires lawyers to personally guaranty the firm for malpractice claims but there are financial limits on those guaranties. If the law firm had some insurance, it can be difficult to go beyond the insurance and beyond the assets of the firm.
The bank claims that the law firm “was a mere shell, instrumentality and conduit through which Defendant Shareholders carried on their business.”
They also say that the law firm was “a mere shell and sham with inadequate capital and assets, and was conceived, intended, and used by [the other lawyers] as a device to avoid individual liability, inequitably, so as substitute a financially insolvent corporation in the place of [the individual lawyers], without any reasonable regard for the true extent of PME’s actual exposure to liability for professional negligence in the community where the Shareholder Defendants practiced law.”
Proving that the firm was a mere shell designed and calling the other lawyers at the firm “coconspirators” will be difficult to prove. We think very difficult.
As much as we want to see justice prevail, it doesn’t appear that the malpractice in this case was deliberate. Assuming the attorney Everett did give bad advice, it wasn’t intentional or part of a conspiracy. And it doesn’t appear that others in the firm were involved in providing the bad advice. It was simply bad advice.
So what does that mean? It means that the bank probably has a valid claim against the former firm’s malpractice insurance and Reid Everett. Whether or not they collect a full measure of damages remains to be seen.
Were You the Victim of Bad Lawyering?
Assuming the facts in the First Citizens Bank case are true as presented, the advice they received from their lawyer was wrong.
Nothing in the legal world is truly black and white and this case is no exception. Although a federal bankruptcy judge found that the bank violated the automatic stay, a state court judge found no violation.
And simply because a lawyer’s advice is wrong doesn’t mean he or she committed malpractice. In every lawsuit there is a winner and a loser but that doesn’t mean the lawyer on the losing side is guilty of malpractice.
To prove malpractice, one must show that the lawyer did not “exercise the knowledge, skill and ability ordinarily exercised by other similarly situated lawyers in the community.” A jury will likely decide that in the First Citizens Bank case.
Had the law firm been able to fix the bad advice, there might not have been any damages. And the bank could still win on the bankruptcy appeal suggesting that the lawyer’s advice wasn’t wrong.
At this point, even if the bank “wins”, it may still be out millions of dollars. And win or lose, it may not collect everything it lost.
If you are the victim of legal malpractice, find an attorney well versed in these cases. A malpractice lawyer must not only understand malpractice law, he must also learn the subject matter of the underlying action. In this case, that means learning commercial bankruptcy law too.
To learn more about legal malpractice, visit our legal malpractice claims page. Want to see if you have a case? Contact us online or by phone at 877-858-8018.