Principles of Judicial Estoppel May Constrain the Assignability of Legal Malpractice Claims to Former Litigation Adversaries

March 15, 2017 | Professional Liability | Complex Torts & Product Liability | Insurance Coverage

In a recent decision, the United States District Court for the Southern District of New York considered whether principles of judicial estoppel may prevent an assignee of a legal malpractice claim from prevailing on a claim against his former adversary’s attorneys. Molina v. Faust Goetz Schenker & Blee, LLP, 2017 U.S. Dist. LEXIS 13568 (S.D.N.Y. Jan. 31, 2017) involved a plaintiff, Benny Molina (“Molina”), who had performed various construction and renovation work at a premises owned by a Gregory and Julie Oyen (the “Oyens”). It was alleged that, as a result of Molina’s negligence in performing work, the Oyens suffered water damage to their apartment, and the Oyens and their insurer, Allstate Insurance Company, brought claims against Molina and various companies under his control to recover the damages.

Molina retained defendant Faust Goetz Schenker & Blee, LLP (“Faust Goetz”) to defend him and his companies against the Oyens’ and Allstate’s claims. After Faust Goetz prevailed on a motion for summary judgment as to one of the corporate defendants, it failed to take any further action to defend the claims against Molina, ultimately resulting in the entry of significant default judgments against Molina in favor of the Oyens and Allstate.

Thereafter, Molina executed an agreement (the “First Assignment”) assigning his legal malpractice claims against Faust Goetz to the Oyens. The First Assignment gave the Oyens the exclusive right to prosecute the claims, without the need for any further agreement or action by Molina. The Oyens’ attorney in the underlying property damage action then commenced a legal malpractice action on behalf of Molina, notwithstanding the fact that Molina has assigned that claim to the Oyens. That action was then voluntarily discontinued and Molina and the Oyens entered into a second agreement (the “Second Assignment”), which purported to assign back to Molina the interest covered by the First Assignment in exchange for Molina’s agreement to commence and prosecute the malpractice case against Faust Goetz, to transfer any amounts received from the suit to Oyens’ attorney’s escrow account, and to distribute 94% of the proceeds of any claim to the Oyens, with all amounts applied to the satisfaction to the judgments.

A second legal malpractice claim was then commenced against Faust Goetz, purportedly on Molina’s behalf. Faust Goetz moved for summary judgment on the grounds that Molina, as the Oyens’ assignee, was judicially estopped from asserting that the Oyens never should have obtained a default judgment against him in the first place—an argument that Molina would need to make in order to prevail on his legal malpractice claims.

The Southern District agreed with Faust Goetz’s contention. The Court held that Molina was acting as the Oyens’ assignee and thus stood in their shoes for equitable purposes. Accordingly, under principles of judicial estoppel, Molina could not advance any arguments which the Oyens would be precluded from advancing on their own behalf. Moreover, the Court held that the Oyens, by virtue of their entitlement to any damages awarded and their continued control over the litigation, were real parties of interest to the litigation and accordingly could not advance positions at odds with their contentions in the underlying property damage action.

There was, the Court acknowledged, a tension between the fact that New York permits (or at least does not categorically prohibit) the assignment of legal malpractice claims and the fact that the assignment of a legal malpractice claim to a former adversary in litigation may frequently be ineffective in that such assigned claims may often be dismissed on judicial estoppel grounds. Nonetheless, the Court held, such an outcome was warranted under the factual circumstances at hand.

Practice Note: While New York law does not expressly prohibit the assignment of legal malpractice claims to former litigation adversaries, the granting of such assignments may

In a recent decision, the United States District Court for the Southern District of New York considered whether principles of judicial estoppel may prevent an assignee of a legal malpractice claim from prevailing on a claim against his former adversary’s attorneys. Molina v. Faust Goetz Schenker & Blee, LLP, 2017 U.S. Dist. LEXIS 13568 (S.D.N.Y. Jan. 31, 2017) involved a plaintiff, Benny Molina (“Molina”), who had performed various construction and renovation work at a premises owned by a Gregory and Julie Oyen (the “Oyens”). It was alleged that, as a result of Molina’s negligence in performing work, the Oyens suffered water damage to their apartment, and the Oyens and their insurer, Allstate Insurance Company, brought claims against Molina and various companies under his control to recover the damages.

Molina retained defendant Faust Goetz Schenker & Blee, LLP (“Faust Goetz”) to defend him and his companies against the Oyens’ and Allstate’s claims. After Faust Goetz prevailed on a motion for summary judgment as to one of the corporate defendants, it failed to take any further action to defend the claims against Molina, ultimately resulting in the entry of significant default judgments against Molina in favor of the Oyens and Allstate.

Thereafter, Molina executed an agreement (the “First Assignment”) assigning his legal malpractice claims against Faust Goetz to the Oyens. The First Assignment gave the Oyens the exclusive right to prosecute the claims, without the need for any further agreement or action by Molina. The Oyens’ attorney in the underlying property damage action then commenced a legal malpractice action on behalf of Molina, notwithstanding the fact that Molina has assigned that claim to the Oyens. That action was then voluntarily discontinued and Molina and the Oyens entered into a second agreement (the “Second Assignment”), which purported to assign back to Molina the interest covered by the First Assignment in exchange for Molina’s agreement to commence and prosecute the malpractice case against Faust Goetz, to transfer any amounts received from the suit to Oyens’ attorney’s escrow account, and to distribute 94% of the proceeds of any claim to the Oyens, with all amounts applied to the satisfaction to the judgments.

A second legal malpractice claim was then commenced against Faust Goetz, purportedly on Molina’s behalf. Faust Goetz moved for summary judgment on the grounds that Molina, as the Oyens’ assignee, was judicially estopped from asserting that the Oyens never should have obtained a default judgment against him in the first place—an argument that Molina would need to make in order to prevail on his legal malpractice claims.

The Southern District agreed with Faust Goetz’s contention. The Court held that Molina was acting as the Oyens’ assignee and thus stood in their shoes for equitable purposes. Accordingly, under principles of judicial estoppel, Molina could not advance any arguments which the Oyens would be precluded from advancing on their own behalf. Moreover, the Court held that the Oyens, by virtue of their entitlement to any damages awarded and their continued control over the litigation, were real parties of interest to the litigation and accordingly could not advance positions at odds with their contentions in the underlying property damage action.

There was, the Court acknowledged, a tension between the fact that New York permits (or at least does not categorically prohibit) the assignment of legal malpractice claims and the fact that the assignment of a legal malpractice claim to a former adversary in litigation may frequently be ineffective in that such assigned claims may often be dismissed on judicial estoppel grounds. Nonetheless, the Court held, such an outcome was warranted under the factual circumstances at hand.

Practice Note: While New York law does not expressly prohibit the assignment of legal malpractice claims to former litigation adversaries, the granting of such assignments may be ineffective as a means of recovering against otherwise judgment-proof defendants.

Reprinted with permission from the April 2014 lpl eAdvisory – ABA Standing Committee on Lawyer’s Professional Liability.  All rights reserved.

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