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Negligent Settlement Recommendations

| Apr 7, 2004 | Legal Brief

Did you hear the story about the jury that rendered a defense verdict after the attorney told his client she would be “crazy” to take a million dollars in settlement?  When the court entered a judgment against the client for attorneys’ fees and costs, the attorney was sued for malpractice!  This and other real cases cited in this article illustrate the perils encountered by attorneys when recommending or advising a client on settlement.

This article will review the legal obligations of client and attorney with respect to settlements, the standards for attorney liability to a client, the measures of damages awardable against the attorney, and some tips on how to avoid problems.

I. The Responsibilities Of Client and Attorney

The authority to decide whether and on what terms to settle a civil claim is reserved to the client, except when the client has validly authorized the lawyer to make that decision.  Restat 3d of the Law Governing Lawyers, Section 22.  The client retains the non-delegable right to revoke that authority.

The attorney must advise the client to the extent reasonably necessary to permit the client to make informed decisions on settlement.  Restat 3d of the Law Governing Lawyers , Section 20.  The attorney’s advice must cover the legal considerations and may include economic, social, political, and moral implications of the courses of action available to the client.  Id., Section 20, comment e.  The attorney has a duty to the client to act with reasonable competence and diligence, which includes doing appropriate factual investigation, legal research, and analysis.  Restat 3d of the Law Governing Lawyers , Section 16 and comment.  In short, the lawyer advises and the client decides.

A client’s decision to accept or reject a settlement offer is binding.  See, e.g., Penbroke State Bank v. Warnell , 461 S.E. 2d 231 (Ga. App. 1995).  On the other hand, an attorney with proper authorization may settle on behalf of a client prior to any revocation, and that settlement is binding on the client absent fraud or mistake.  See, e.g., Crowley v. Harvey & Battey, 488 S.E. 2d 334 (S.C. 1997).

These principles appear clear and straightforward.  Nevertheless, problems arise for various reasons:  the client becomes dissatisfied with the settlement and/or the attorney; the attorney did not adequately investigate and gather important facts and/or did not find and apply the relevant law; the attorney did not inform the client of determinative factual and legal matters; the attorney without authorization moved beyond the realm of advice into the realm of decision; and most importantly, the attorney cannot show with documentation that there was compliance with the duties and principles governing settlement matters.

II. How The Court Are Dealings With Allegations of Neglect Settlement Recommendations

There is a wide variety of cases involving negligent recommendations to settle, including divorce, personal injury, commercial litigation, breach of contract, and worker’s compensation claims. Most reported decisions involve situations where the settlement recommended by the attorney occurred, followed by client dissatisfaction.  Less common are situations where the attorney recommended against a settlement, which therefore did not occur, followed by client dissatisfaction.

The first issue in cases where the recommended settlement occurred is the effect of the settlement of the underlying suit on the subsequent malpractice action against the attorney.  Most courts have held that the settlement of the underlying action and the acceptance of benefits from that settlement do not preclude a subsequent action by the client against the attorney for legal malpractice.  See, e.g., Thomas v. Bethea, 718 A. 2d, 1187, 1190-95 (Md. 1998) (lead paint poisoning); Crowley v. Harvey & Battey , 488 S.E. 2d 334 (S.C. 1997) (divorce); Bruning v. Law Offices of Ronald Palagi, 551 N.W. 2d 266 (Neb. 1996) (worker’s compensation); McCarthy v. Pederson & Houpt, 621 N.E. 2d 97 (Ill. App. 1993) (commercial litigation); Lowman v. Karp, et al., 476 N.W. 2d 428 (Mich. App. 1991) (personal injury).  There can be exceptions, however.  For example, in Vogel v. Touhey , 828 A.2d 268 (Md. App. 2003), the court used the doctrine of “judicial estoppel,” to bar a client’s malpractice suit.  The client discovered the attorney’s alleged negligence prior to entering into a divorce settlement. The client, who was an attorney, appeared unrepresented at a hearing before a domestic relations master and stated on the record that she was fully aware of the issues.  She declined the master’s suggestions that she not go through with the settlement, pursue further discovery, or obtain a postponement.  Instead, the client accepted the settlement before the master, stating that it was “fair and equitable.”  On these facts, the court barred the subsequent malpractice claim.

Another issue addressed by the courts is the standard for determining liability.  Most courts hold an attorney to the exercise of ordinary care and diligence in the execution of the matters entrusted to her and to an average degree of professional skill and knowledge.  See Sauer v. Flanagan & Maniotis, 748 So. 2d 1079 (Fla. App. 2000) (“reasonable care” standard in slip and fall case); Thomas v. Bethea , supra, at 1195; Ziegelheim v. Apollo, 607 A.2d 1298 (N.J. 1992) (“reasonable care” standard in divorce case); Helmbrecht v. St. Paul Ins. Co., 362 N.W. 2d 118 (Wis. 1985) (“reasonable attorney” standard in divorce case).

There are exceptions to the liability standard as well.  The most prominent is the decision of the Supreme Court of Pennsylvania in Muhammad v. Strassburger, et. al., 587 A.2d 1346 (Pa. 1991).  In that case, the court permitted the subsequent legal malpractice suit despite settlement of the underlying claim, but held that the suit by the dissatisfied client is actionable only when the client can show he was fraudulently induced to settle the underlying claim.  587 A.2d at 1348.  This holding has not been followed in cases not governed by Pennsylvania law.  See, e.g., McWhirt v. Heavey, 550 N.W. 2d 327 (Neb. 1996); Grayson v. Wofsey, et. al., 646 A.2d 195 (Conn. 1994).  Another exception is “judgmental immunity” which provides that an attorney is not liable to a client for tactical decisions made in good faith or for decisions made on a “fairly debatable point of law.”  Crosby v. State, 705 So. 2d 1356, 1358 (Fla. 1998), see also Macktal v. Garde, 111 F. Supp. 2d 18, 22 (D.C. 2000) (“recommended settlement is . . . a protected judgment”).  Judgmental immunity has not been applied, however, to a situation where an attorney failed to inform a client that there were unsettled legal issues related to the settlement.  Wood v. McGrath, et al., 589 N.W. 2d 103 (Neb. 1999).

III. Measures of Damages

Damages recoverable against an attorney for a negligent recommendation regarding settlement depend on how the case is presented to the trier of fact.  In situations where the client acknowledges that it was appropriate to settle the underlying suit but claims that the attorney recommended an unreasonable amount, the measure is the difference between the actual settlement and a reasonable settlement. In situations where the attorney recommended acceptance of an inadequate settlement offer instead of trying the case, the measure of damages is the difference between what the client received and what the client would have received (the so-called “trial within a trial”).  For a fuller discussion of measure and proof of damages issues, see Mallen and Smith, Legal Malpractice, 29-32, 4th ed. (1996); Thomas v. Bethea, supra; Dauget v. Pappas, 704 P.2d 600 (Wash. 1985).

IV. Tips To Avoid

1.    Be diligent.  Investigate and seek to verify the key facts.  Know the applicable law and check for new statutes, court decisions, and regulations.

2.    Remember that you do not have to advise a client to accept or reject any particular settlement.  Likewise, you do not have to make a recommendation to a client for or against any particular settlement.  (Advising a client to settle or not is stronger than recommending.)  Your obligation is to provide the client with all of the available relevant information and advice so that the client can make an informed settlement decision.  Advising or recommending with respect to accepting or rejecting particular settlement blurs the line between the advice role of the attorney and the decision role of the client.

3.    Put it in writing.  Before the client makes a final settlement decision, summarize in writing the relevant information and the advice you have given with respect to settlement.  Record any non-legal factors influencing the client to accept or reject a settlement (such as a client who states he wants to settle now because he is moving across country and wants to get on with his life) because these factors cannot be established later if you have not documented them.

4.    Make clear that you are prepared to take the case all the way to the end if that is the client’s decision.  At the same time, avoid bravado such as “I am 99% sure that we are going to win and get a substantial verdict in this case.”

5.    Put the settlement on the record and obtain a transcript.

6.    In difficult or close situations, obtain an independent opinion of the pros and cons of the proposed settlement.

Reprinted with permission from the Risk Management Memo newsletter, a publication of Great American Insurance Group, Professional Liability Division (greatamericanlawyer.com).