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 Ethics and
Professionalism
Breach of Fiduciary Duty and Punitive Damages
By Daniel J. Pope and Suzanne Lee
AFTER years of defending professionals
of all occupations, nothing much surprises
us anymore. But for the uninitiated, par-
ticularly lawyers, the first time you are
sued for malpractice can be a real shock.
As legal malpractice claims have increased
in number,' plaintiffs' lawyers who tradi-
tionally practiced in ordinary tort or prod-
ucts liability cases have taken an interest in
suing lawyers and have brought along with
them theories not traditionally found in
professional liability litigation.
For example, it is now common to have
garden variety malpractice complaints
against lawyers include causes of action for
breach of fiduciary duty, violations of pro-
fessional responsibility rules, negligence,
misrepresentation, and fraud. Damages
now range from what the client may actu-
ally have lost or failed to win in the under-
lying deal or litigation, to emotional dis-
tress, disgorgement fees, and punitive dam-
ages.
A frightening scenario
These cases can go something like this:
Smitty was sitting in his office looking at
the lake on a beautiful spring day when his
tranquillity was altered by remembering
the disaster that occurred last week in
court. He had agreed to take over the pros-
ecution of a case on behalf of his wife's
cousin against a party insured by one of his
This department is conducted by
IADC member Daniel J. Pope and Helen
Whatley Pope. Readers are urged to send
their comments, experiences or articles
to Mr. Pope at Bell, Boyd & Lloyd, 70
West Madison Street, Chicago, IL
60602-4207, fax: 312/372-2098, e-mail:
dpope@bellboyd.com.
This articlefirst appearedin Lawyer to
Lawyer, Edition X, and is reused with the
permission of the publisher, Executive
Risk Inc., Simsbury, Connecticut.
clients. Although his wife's cousin told
him repeatedly this conflict was no prob-
lem, Smitty did not think he had ever got-
ten a written waiver from her.
Smitty judged the case's merits as fair at
best, but his client's previous lawyer was
not as confident. If nothing else, Smitty
thought he could salvage a win, although
not as high as his client wanted, and he
said as much several times. Then the case
went badly in front of an increasingly hos-
tile jury, and he lost big time.
Smitty was thinking of sending his
wife's cousin flowers along with an invita-
tion for dinner when his secretary told him
someone needed to see him at reception as
soon as possible. With one last look at the
lakefront, Smitty thought it would be a nice
day to play golf. A few minutes later,
Smitty instead found himself served at the
reception desk with a summons for the
Page 258 DEFENSE COUNSEL JOURNAL-April 1999
complaint his wife's cousin had just filed
against him.
Returning to his office, Smitty began to
read the complaint with increasing alarm.
There were counts for malpractice and
breach of fiduciary duty, breach of his ethi-
cal and professional responsibilities for
failure to disclose his conflict of interest,
and fraud. Damages ranged from the judg-
ment he should have obtained to emotional
distress and disgorgement of his fees and
punitive damages. Smitty thought wryly
that at least the complaint did not ask for
his first-born.
At first, Smitty was stunned, then he got
mad. "Can this be possible?" he thought.
Can a client sue a lawyer for both malprac-
tice and breach of fiduciary duty, add
claims of ethical violations, seek damages
for mental distress, and disgorgement of
fees, and punitive damages?
The answer is yes and no, and this article
will describe the differences between these
varied causes of action, and the damages
you are exposed to in each kind of case.
Legal malpractice
Legal malpractice is an unusual creature
of law, having managed to evade categori-
zation either as strictly a tort or contract
action. Most courts seem to prefer the hy-
brid definition that legal malpractice is a
claim for legal services, sounding in tort
and arising from an express or implied
contract. 2
1. RONALD E. MALLEN & JEFFREY M. SMITH,
Legal Malpractice § 1.1 (4th ed. 1996).
2. See, e.g., Land v. Greenwood, 478 N.E.2d
1203 (Ill.App. 1985).
3. Claire Associates by Livaditis v. Pontikes, 502
N.E.2d 1186 (Ill.App. 1986), appeal denied, 508
N.E.2d 726 (II1. 1987).
4. MALLEN & SMITH, supra note 1,at § 32.1.
5. Bartholomew v. Crockett, 475 N.E.2d 1035
(Ill.App. 1985).
6. See, e.g., Smith v. Childs, 437 S.E.2d 500
(N.C.App. 1993).
7. Sharpenter v. Lynch, 599 N.E.2d 464 (Il1.App.
1992) (claim not filed barred by statute of limita-
tions); Kirkland & Ellis v. CMI Corp., No. 95 C
7457, 1996 WL 55995 (N.D. I1l. Sept. 30, 1996) (not
reported in F.Supp.) (despite egregious conduct, no
valid underlying claim).
8. See MALLEN & SMITH, supra note 1, at § 32.6.
We lawyers have done a better job of
raising the bar to pleading malpractice ac-
tions against ourselves than we have for
our other professional clients, such as of-
ficers and directors. To plead a cause of
action for legal malpractice, the disgruntled
client must plead the existence of the attor-
ney-client relationship, a duty arising from
that relationship, a breach, proximate
cause, and damages.'
The beauty in this seemingly simplistic
mosaic is that the former client must plead
and prove that counsel's negligence caused
the loss of the underlying case if the client
was the plaintiff in the underlying litiga-
tion, or the loss of a meritorious defense if
the client was the defendant. As one author
put it, legal malpractice is a "land of sec-
ond chances."5
Put another way, the disgruntled client-
a loser below-must prove that "but for"
the attorney's negligence, the client would
have won.5 In order to put the client in the
position he or she would have been in if
the attorney had not committed malprac-
tice, damages are usually limited to the
value of the client's lost claim or the
amount of the adverse judgment entered
against the client.6
The beauty of this burden is readily ap-
parent. A lawyer can make numerous blun-
ders in handling a case, even failing to file
it, but if the client would not have won
anyway, no cause of action exists, and the
case is dismissed on motion. 7 This result is
consistent throughout the United States.8
Breach of fiduciary duty
In an attempt to bolster what may be a
weak legal malpractice claim, unhappy cli-
ents often add a breach of fiduciary duty
claim to their complaints. After all, a fidu-
ciary relationship exists between a lawyer
and client as a matter of law, requiring the
lawyer to hold sacred the duties of loyalty
and confidentiality to the client.
In the business world, should a client's
bank, financial advisor or trustee mis-
handle the client's money and then lose the
rest, the client could file a claim for negli-
Ethics andProfessionalism
gence, breach of contract and breach of fi-
duciary duty. The same is not always true
for breach of fiduciary duty claims in tradi-
tional legal malpractice actions.
Some courts have determined that a
client's fiduciary duty claim against an at-
torney is contained within the "rubric of
legal malpractice," 9 or is, "at root," the
same as a legal malpractice claim." For ex-
ample, the Missouri Supreme Court held
that if the alleged breach of fiduciary duty
was "dependent on" the existence of attor-
ney negligence, then the breach of fidu-
ciary duty claim was considered to be the
same as an action for attorney malprac-
tice. "
Likewise, a California appellate court
permitted a defendant-attorney to raise a
legal malpractice statute of limitations de-
fense to a breach of fiduciary duty claim,
finding that "most claims for breach of fi-
duciary obligations can be restated as a
claim for attorney malpractice" and that
most fiduciary obligations arise out of the
attorney-client relationship.' 2
Still, other courts and commentators
consider a breach of fiduciary duty to com-
prise legal malpractice, even though they
consider the breach to constitute a wrong
that is "distinct and independent from pro-
fessional negligence."' 3
Other courts have found that an action
for legal malpractice is "conceptually dis-
tinct" from an action for breach of fidu-
ciary duty, because "not all legal malprac-
tice rises to the level of a breach of fidu-
ciary duty."'' 4 A federal court in Kansas
9. Doe v. Roe, 681 N.E.2d 640 (Ill.App. 1997),
appeal denied, 686 N.E.2d 1160 (Ill. 1997); Metrick
v. Chatz, 639 N.E.2d 198 (Ill.App. 1994).
10. See, e.g., Resolution Trust Corp. v. Holland
& Knight, 832 F.Supp. 1528 (S.D. Fla. 1993); In re
Ackerman, 330 N.E.2d 322 (Ind. 1975).
11. Klemme v. Best, 941 S.W.2d 493 (Mo.
1997).
12. Quintilliani v. Mannerino, 72 Cal.Rptr.2d 359
(Cal.App. 1998).
13. Mosier v. Southern California Physicians Ins.
Exch., 74 Cal.Rptr.2d 550 (Cal.App. 1998); MALLEN
& SMITH, supra note 1, at § 1.1.
14. Id. at § 1.1 fn. 20. See also Majumdar v.
Lurie, 653 N.E.2d 915 (Ill.App. 1995), appeal
Page 259
held that clients can bring breach of fidu-
ciary duty claims, as distinguished from
professional negligence claims, when the
client sues the attorney in other roles than
as counsel, e.g., as a trustee. 5
While an attorney's breach of fiduciary
duty may be considered to be a tort, 16 the
law in many states recognizes that a
professional's fiduciary duties arise from a
contractual relationship and thus are gov-
erned or at least limited by the substantive
law of agency, contracts and equity.
There are differences
Depending on the jurisdiction in which
the action is filed, malpractice claims and
breach of fiduciary duty claims can be dif-
ferent animals, and the disgruntled client
may have to allege and prove different
facts to support each. In some states, cli-
ents cannot replead the allegations support-
ing malpractice, but must seek monetary
damages and entitle the count one for a
breach of fiduciary duty. 7 Clients must al-
lege something more and seek something
else. And if you think that you are pro-
tected if you win, think again.
Beyond legal malpractice
Consider the case of a very large nation-
ally known law firm that sued its client,
CMI Corp., for unpaid fees. 8 CMI predict-
ably counterclaimed for malpractice but
also added claims for breach of fiduciary
duty, breach of professional responsibility,
strict liability for misrepresentation, and
negligent misrepresentation.
denied, 660 N.E.2d 1271 (Ill. 1995).
15. McNeilus Fin. Servs. v. Farm Bureau Mut.
Ins. Co., No. 97-2260-JTM, 1998 U.S. Dist. Lexis
1176 (D. Kan. Jan. 7, 1998).
16. Beverly Hills Concepts Inc. v. Schatz &
Schatz, No. CV89-0369864-S, 1997 Conn. Super.
Lexis 178 (Conn.Super. Jan. 27, 1997) (not reported
in A.2d); Askanase v. Fatjo, 130 F.3d 657 (5th Cir.
1997).
17. See, e.g., Thompson v. Karr, 4 F.Supp.2d 731
(N.D. Ohio 1998); Moguls of Aspen Inc. v. Faegre
& Benson, 956 P.2d 618 (Colo.App. 1997); Metrick,
639 N.E.2d 198.
18. Kirkland & Ellis, supra note 7.
Page 260 DEFENSE COUNSEL JOURNAL-April 1999
Some facts were not in dispute. CMI
thought it was the exclusive licensee of
two patents controlling the process and ma-
chinery for recycling used asphalt. CMI
sued many competitors for infringement of
these two patents, and the law firm repre-
sented CMI in two of those lawsuits, win-
ning each.
A third case involving these two patents
was handled and lost by another law firm.
The trial court in this third case ruled the
two patents invalid, and the Court of Ap-
peals for the Federal Circuit affirmed. Un-
fortunately for CMI, the Federal Circuit
then decided the two cases the law firm
had won and reversed them as well, based
on the judgment entered in the third case.
CMI then refused to pay the law firm for
its fees, and litigation ensued.
The law firm moved to dismiss CMI's
counterclaim in its entirety, and the trial
court agreed. Turning to the legal malprac-
tice count, the court reasoned that the law
firm had won, not lost, the two cases under
its care. CMI argued that the law firm
would have obtained liens to the infringing
defendant's assets if it had acted diligently,
and that the senior liens would have caused
a settlement of the third case before that
case went to trial. The law firm also was
accused of failing to present evidence of
greater damages that would have left the
infringing defendant no choice but to settle.
CMI argued the law firm had not done ei-
ther because of a conflict of interest.
19. Id. at *9, citing Nagy v. Beckley, 578 N.E.2d
1134 (Ill.App. 1991)).
20. The court also struck CMI's counts for breach
of professional liability, strict liability for misrepre-
sentation, and negligent misrepresentation either for
failure to state a claim or lack of proximate cause.
For further proceedings, see 1999 WL 92257 (N.D.
Ill. Feb. 11, 1999) (denying Kirkland & Ellis motion
for summary judgment on CMI's "conflicts" affir-
mative defenses and "malpractice" affirmative de-
fense).
21. Kling v. Landry, 686 N.E.2d 33 (Ill.App.
1997), appeal denied, 690 N.E.2d 1381 (I11.1998).
22. Metrick, 639 N.E.2d 198.
23. Estate of Re v. Kornstein Veisz & Wexler,
958 F.Supp. 907 (S.D. N.Y. 1997), appeal dis-
missed, No. 97-9124 (L), 1998 WL 477166 (2d Cir.
Aug. 6, 1998); Arce v. Burrow, 958 S.W.2d 239
(Tex.App. 1997).
The trial court disagreed, reasoning: "No
matter how egregious [the law firm's] al-
leged conduct may have been, the favor-
able ... judgments ([the law firm] ob-
tained) were reversed through no fault of
[the law firm]." Also finding no precedent
for CMI's "lost settlement" argument, the
court dismissed the legal malpractice
count.
Turning to the alleged breach of fidu-
ciary duty for failing to disclose a conflict
of interest, the court noted that CMI had
alleged this conflict of interest in the mal-
practice count as well, and that the harm
CMI alleged it suffered in each count was
identical: alleged lost liens and lost settle-
ments. The court concluded the counts
were duplicative of one another, a situation
that can lead to dismissal of the breach of
fiduciary duty count in Illinois.19
CMI argued that the core allegations of
malpractice in Count I (failure to obtain
higher damage, superior liens, etc.) were
different from the core allegation of breach
of fiduciary in Count II (failure to disclose
its alleged conflict of interest), but the
court was not convinced. The court rea-
soned that the "relevant question is
whether the breach of fiduciary duty
claim ... alleges anything that is not in the
malpractice claim." Finding CMI had not
alleged something more, did not seek dif-
ferent damages, and that there was no
proximate cause in any event, the court dis-
missed the breach of fiduciary count as
well.2 0
What's that something more?
Some courts define that something more
CMI failed to allege as "fidelity, honesty
and good faith."'" Others are more specific:
the defendant must have been "unfaithful,"
"dishonest," "acted in bad faith," had a
"conflict of interest," or engaged in "self-
dealing. '2 The CMI court held that a con-
flict of interest was not enough to plead
breach of fiduciary duty where the dam-
ages suffered were not proximately caused
by the breach. Courts in New York and
Texas would strongly disagree.23
Ethics and Professionalism
But what if CMI had pleaded some other
damage, such as the fees it paid the law
firm, and sought disgorgement or punitive
damages? Would the court's analysis hold
up? One recent case that received a good
deal of publicity discusses the intellectual
problems with a breach of fiduciary duty
claim that seeks other types of damages-
to wit, a claim for emotional distress.
Damages for emotional distress
The majority of courts have held that
emotional distress and other non-economic
damages resulting from pecuniary loss are
not recoverable in a legal malpractice ac-
tion based on negligence. 24 However, there
appears to be a contrary trend.
In Doe v. Roe, 25 the plaintiff changed her
divorce lawyer when her new lawyer
promised her a rapid settlement of her case
and the continued custody of her daughter.
No written agreement was signed, but in
exchange for a $7,500 retainer, which the
plaintiff told her new lawyer she could ill
afford, the lawyer promised he would col-
lect any additional attorneys fees from the
plaintiff s husband.
Shortly thereafter, the lawyer forced
himself on the plaintiff, and she submitted
to his sexual demands from fear that he
would either compromise her case or with-
draw and leave her without the financial
ability to hire a third lawyer.
Later, the client's husband walked into
the bedroom of their former house and
found his wife and her lawyer in bed. He
promised he would never pay the lawyer's
fees. The lawyer did not seek his additional
fees from the husband, as agreed, for fear
of retaliation by the husband. Instead, he
had the plaintiff sign a "routine" settlement
agreement in which the plaintiff agreed to
pay $2,500 for the lawyer's outstanding
fees and granted him a lien on her home
for security. Soon, the lawyer obtained a
judgment against the plaintiff for his fees
based on the "routine" settlement agree-
ment she had signed.
The lawyer began to dun the plaintiff for
his fees, which he said had grown to
Page 261
$40,000, but he agreed to work out "other
ways" for payment. He eventually gave her
a release after additional sexual favors.
When the plaintiff had difficulty enforcing
the terms of the divorce decree with her
former husband, she consulted the lawyer,
who agreed to represent her on "the same
terms" as before. The client fired him and
filed suit against him for breach of fidu-
ciary duty, seeking damages for emotional
distress. The trial court dismissed her com-
plaint, and the plaintiff appealed.
The Illinois Appellate Court had no
trouble reversing the trial court and rein-
stating the breach of fiduciary duty com-
plaint. But the court struggled with the
emotional distress damage claim, question-
ing whether it was a "proper element of
damages." In Illinois, breach of fiduciary
duty claims are grounded in contract law,
not tort law, where recovery of emotional
distress damages is traditionally available.
The court acknowledged that problem but
noted that although the Illinois Supreme
Court had eliminated economic losses in
legal malpractice actions,26 the court had
not changed the circumstances under
which a lawyer may be sued nor the dam-
ages sought based on the circumstances in-
volved.
The Appellate Court then relied on a
150-year-old English case, Hadley v.
Baxendale,27 and concluded that in contract
actions in Illinois, damages are proper if
they naturally follow from the breach.
Here, the court held, the plaintiff's emo-
tional distress could naturally follow from
the defendant's breach of his fiduciary duty
(just as in a tort action), and it allowed the
plaintiff the opportunity to pursue damages
for mental distress.
Is it unusual?
Perhaps the Doe case could be cataloged
as one of those unusual decisions where
24. Gavend v. Malman, 946 P.2d 558 (Colo.App.
1997), citing various state cases.
25. 681 N.E.2d 640 (IlI.App. 1997).
26. Collins v. Reynard, 607 N.E.2d 1185 (I11.
1992).
27. 9 Ex. 341, 156 Eng.Rep. 145 (1854).
Page 262 DEFENSE COUNSEL JOURNAL-April 1999
the defendant gets what he deserves, even
if the court had to stretch to get there. After
all, the defendant in Doe was alleged to
have made continued legal representation
contingent on sexual favors, compromised
his client not once but three times because
of their sexual relationship, and used confi-
dential information she had given him to
further his own personal interests. If those
facts do not support a breach of fiduciary
duty claim, perhaps nothing does.28
But consider the Rhode Island Supreme
Court's majority decision and Justice
Flanders's stinging 15-page dissent in
Vallinoto v. DiSandro,29 a case that went to
trial resulting in a verdict of $25,000 com-
pensatory damages and $200,000 in puni-
tive damages for Ms. Vallinoto.
At trial, Vallinoto proved that DiSandro,
her third divorce lawyer, had deceived her
into a sex-for-legal services relationship,
agreeing to work for sexual favors and en-
gaging in dilatory tactics when she refused.
He also threatened to withdraw, told her no
one else would take her case, and in that
event, she would lose custody of her
daughter and be deported back to Spain. In
a coup di grace, he also prepared false an-
swers to interrogatories for her in which
she denied any extramarital affairs.
Using strict construction, the majority
was able to assign error to the trial court's
denial of DiSandro's motion for directed
verdict as to each count. With respect to
legal malpractice, DiSandro had obtained
an excellent result. The plaintiff's breach
of fiduciary duty count likewise fell for
lack of damages, because her evidence of
emotional distress was not admissible.
Ditto her intentional infliction of emotional
distress. The majority did describe Di-
Sandro's conduct as "reprehensible," but it
felt powerless to do anything but order a
new trial.
28. But see Kirkland, supra note 7.
29. 688 A.2d 830 (R.I. 1997).
30. See, e.g., In re Kern, 491 N.E.2d 1275
(Ill.App. 1986).
31. 73 F.3d 397 (D.C. Cir. 1996).
Justice Flanders obviously disagreed
with the majority. He found DiSandro's
"sexual depredation" constituted a "fla-
grant breach of the fiduciary duties" owed
to the plaintiff, and that this breach also
"constituted legal malpractice." Citing
cases in support from all over the country,
and distinguishing those cases relied on by
the majority, the dissent made a compel-
ling case for affirming the jury's verdict.
In fact, this case, perhaps like no other in
the United States, presents both sides of the
debate on whether lawyers can be sued for
a breach of fiduciary duty.
Disgorgement/forfeiture of fees
Disgorgement (or forfeiture) of attor-
ney's fees is yet another remedy that plain-
tiffs in some jurisdictions and under certain
circumstances have been able to recover
based on breach of fiduciary duty claims
against their former attorneys. An equitable
form of relief, disgorgement of fees (or for-
feiture of unpaid legal fees) may be
awarded as part of a constructive trust
theory of recovery. Generally, disgorge-
ment of fees is allowed only when fraud is
present or when there is a breach of a fidu-
ciary relationship by the dominant party. 0
A fairly recent federal appellate court
case in Washington, D.C., Hendry v.
Pelland,31 addressed the purposes behind
utilizing forfeiture of legal fees as a rem-
edy to redress breach of fiduciary duty and
legal malpractice claims.
Three members of the Hendry family
sued their attorney in connection with legal
services rendered in connection with the
litigation and settlement of a dispute con-
cerning an agreement between five mem-
bers of the family (as owners) and a devel-
oper (as buyer) for the sale of the family's
large parcel of land. The defendant coun-
tersued for unpaid legal fees. The plain-
tiffs' complaint alleged claims for legal
malpractice and a breach of fiduciary duty
based on the attorney's conflict of interest
in representing all five members of the
Hendry family.
The trial court granted the defendant's
Ethics and Professionalism Page 263

motion for judgment as a matter of law on on the punitive and deterrent goals of the
the breach of fiduciary duty claim and re- remedy and the counterbalance of the attor-
jected the plaintiffs' request for disgorge- neys' right to reasonable compensation for
ment of legal fees and punitive damages. services rendered, the client who attempts
Thus, only the negligence claim went to to obtain this equitable form of relief from
the jury. The plaintiffs lost, and the defen- the court will likely face a tough burden of
dant was awarded its unpaid legal fees. persuasion.
The Court of Appeals for the District of
Columbia vacated the judgment in part and Breach of fiduciary duty cases
remanded. It first found that the plaintiffs Breach of fiduciary claims arise and suc-
had presented sufficient evidence for a jury ceed in diverse cases in many jurisdictions
to find that the defendant breached his fi- in both state and federal courts.34 A few
duciary duty of loyalty by maintaining an examples will suffice:
unethical conflict of interest in represent- e (Kansas) Insurance Management As-
ing all members of the Hendry family in sociates Inc. v. Miller 35 involved two law-
the dispute with the developer. yers who drafted a stock purchase agree-
Next, the court held that for an award of ment for the plaintiff and then represented
forfeiture of legal fees, the plaintiffs an estate that sued the plaintiff. The trial
needed to prove only that defendant court upheld the count for "negligence and
breached his fiduciary duty, not that the legal malpractice," the count for "breach of
breach also caused their injuries. fiduciary duty and breach of ethical duty,"
Finally, the court addressed the prophy- and damages that included disgorgement of
lactic purposes behind the remedy of for- fees. It denied the lawyers' motion for
feiture of legal fees: summary judgment.
o (Washington State) Eriks v. Denver36
Forfeiture of legal fees serves several differ- involved a lawyer who represented both in-
ent purposes. It deters attorney misconduct, a
goal worth furthering regardless of whether a vestors
in and promoters of a tax shelter.
particular client has been harmed .... It also The Washington Supreme Court upheld the
fulfills a longstanding and fundamental prin- trial court's finding that the lawyer's repre-
ciple of equity-that fiduciaries should not sentation of both investors and promoters
profit from their disloyalty. ... And, like was a breach of his fiduciary duties to the
compensatory damages, it compensates cli- investors and affirmed the lower court's or-
ents for a harm they have suffered. ... Un-
like other forms of compensatory damages,
however, forfeiture reflects not the harms cli- 32. Id. at 402.
ents suffer from the tainted representation, 33. See, e.g., Johnson v. Gudmundsson, 35 F.3d
1104 (7th Cir. 1994); Avianca Inc. v. Corriea, 705
but the decreased value of the representation
F.Supp. 666 (D. D.C. 1989), aftd, 70 F.3d 637 (D.C.
itself. Because a breach of the duty of loyalty
Cir. 1995); Cal Pak Delivery Inc. v. United Parcel
diminishes the value of the attorney's repre-
Service Inc., 60 Cal.Rptr.2d 207 (Cal.App. 1997).
sentation as a matter of law, some degree of 34. Hendry, 73 F.3d 397; Sweeney v. Athens
Reg'l Med. Ctr., 917 F.2d 1560 (lth Cir. 1990);
forfeiture is thus appropriate without further
proof of injury.32 Resolution Trust Corp. v. Gardner, 788 F.Supp. 26
(D. D.C. 1992); Condren v. Grace, 783 F.Supp. 178
Disgorgement (or forfeiture) of legal (S.D. N.Y. 1992); Littell v. Morton, 369 F.Supp. 11,
(D. Md. 1974), aff'd, 519 F.2d 1399 (4th Cir. 1975);
fees is apparently becoming a more com- Arce, 958 S.W.2d 239; Ins. Management Assocs.
monly used remedy in breach of fiduciary33 Inc. v. Miller, No. 91-C-931, 1994 WL 362206
duty actions by clients against attorneys. (Kan.Dist.Ct. March 15, 1994); Eriks v. Denver, 824
P.2d 1207 (Wash. 1992); Stanley v. Richmond, 41
While usually reserved for the more egre- Cal.Rptr.2d 768 (Cal.App. 1995); Gilchrist v. Perl,
gious forms of fiduciary breaches, lawyers 387 N.W.2d 412 (Minn. 1986); Crawford v. Logan,
360 (Tenn. 1983).
should not be surprised if a client suing for 65635.S.W.2d
No. 91-C-931, 1994 WL 362206 (Kan.
breach of fiduciary duty also seeks dis- Dist.Ct. March 15, 1994).
gorgement or forfeiture. However, based 36. 824 P.2d 1207 (Wash. 1992).
Page 264
der that the lawyer disgorge all fees, plus
paying prejudgment interest. The court re-
jected the lawyer's argument that there
were no damages or proximate cause, rea-
soning that a fiduciary's breach of ethical
responsibilities should result in disgorge-
ment regardless of proximate cause in or-
der to discipline professional misconduct
and deter future similar misconduct.
* (Texas) Arce v. Burrow37 arose from
a class action settlement by which the cli-
ents, certain class plaintiffs, charged that
their attorneys breached fiduciary duties by
soliciting business through a lay intermedi-
ary, failing to fully investigate and assess
individual claims, failing to communicate
offers received and demands made, enter-
ing into an unfair, aggregate settlement
without authority, and intimidating clients
into settlement through threats, coercion
and false promises. The Texas Court of
Appeals held that forfeiture of legal fees
was an appropriate remedy for a lawyer's
breach of fiduciary duties under Texas law.
The court further noted that other appropri-
ate equitable remedies included rescission
and the imposition of a constructive trust.
Punitive damages
While it is certainly bad news that the
types of cases brought against lawyers are
increasing in complexity, and the type of
damages lawyers face are different, except
in rare cases, all claims are at least covered
by insurance. The truly frightening trend is
the increase in legal malpractice cases that
include claims for punitive damages, dam-
ages usually not covered by insurance and
possibly against public policy.
Punitive damages are recognized in al-
most every state for tort claims. The rea-
sons given for assessing them are invari-
37. 958 S.W.2d 239 (Tex.App. 1997).
38. State Farm Gen. Ins. Co. v. Clifton, 527 P.2d
798 (N.M. 1974); Riverside v. Pedigo, 430 N.E.2d
796 (Ind. 1982).
39. 735 ILCS 5/2-1115.
40. Wernick v. Macks, 535 N.E.2d 876 (111.
1989).
41. 599 N.E. 2d 1318 (III.App. 1992).
DEFENSE COUNSEL JOURNAL-April 1999
ably to punish conduct that is malicious,
fraudulent or reckless, and to deter others
from engaging in similar misconduct.
Many states do not allow punitive damages
in breach of contract actions, although
there are exceptions. For instance, New
Mexico and Indiana do, and some types of
contracts lend themselves to punitive dam-
age claims, such as an insurance com-
pany's bad faith refusal to pay.38
Lawyers, both plaintiffs' and defense,
can find common ground on the punitive
damage issue. After all, plaintiffs' lawyers
are not immune from punitive damage
claims. In several states, the bar has joined
forces and pushed through legislation at-
tempting to bar punitive damage claims in
professional liability cases. Illinois is a
good example of this trend.
In 1985, the Illinois legislature enacted a
statute to abolish punitive damages in
medical and legal malpractice cases.3 9 It
provides:
In all cases, whether in tort, contract or oth-
erwise, in which the plaintiff seeks damages
by reason of legal, medical, hospital or other
healing art malpractice, no punitive, exem-
plary, vindictive or aggravated damages shall
be allowed.
Prior to 1985, lawyers practicing in Illi-
nois were unquestionably subject to puni-
tive damages for breaches of their fiduciary
duties to clients, even though Illinois fol-
lowed the rule that fiduciary duties are
governed by the substantive law of con-
tracts, not tort.4 1 Surprisingly, since the
statute was passed, the cases that followed
make it clear that the statute, as applied by
the courts, does not completely preclude
awards of punitive damages against attor-
neys for actionable conduct in rendering le-
gal services to clients. The loophole seems
to center around uncertainty about what
causes of action the phrase "legal malprac-
tice" encompasses, e.g., are claims for
fraud and breach of fiduciary duty in-
cluded?
In 1992, the Illinois Appellate Court sit-
ting in Chicago applied the statute to a
unique case, Calhoun v. Rane.41
Ethics and Professionalism
Calhoun had retained Rane to represent
him before the Illinois Industrial Commis-
sion. Rane neglected Calhoun's case,
which resulted in its dismissal for want of
prosecution. Several years later, Rane at-
tempted to cover up his negligence by tell-
ing Calhoun an offer to settle for $500 was
on the table.
Calhoun charged Rane with willful and
wanton misconduct for covering up
his negligence and then offering "hush
money." Calhoun argued that in doing so,
Rane was clearly performing legal services
for himself, not Calhoun, and that the stat-
ute therefore did not apply. The court
found Calhoun's allegations "very serious"
and went out of its way to criticize Rane's
misconduct. Nevertheless, it held that the
statute applied and suggested that Calhoun
take his case to the Illinois legislature.
If Calhoun had lived in Peoria, Illinois,
however, he clearly would have had a more
receptive audience. In 1997, the Illinois
Appellate Court sitting in Peoria visited the
issue of whether common law fraud was
outside the statute in Cripe v. Leiter.42
Cripe hired Leiter to handle the transfer of
two trusts owned by her mother. Leiter al-
legedly submitted false and fraudulent bills
in excess of $40,000 for his work. Cripe
sued him for common law fraud and
sought punitive damages.
The court started its opinion by noting
the statute in question was applicable only
if the behavior in the complaint amounted
to legal malpractice. Since legal malprac-
tice and common law fraud are distinct and
different causes of action, the court held
that the statute did not apply. Leiter argued
that the legislative history implied common
law fraud was included, and pointed out
that several other appellate courts, includ-
ing that in Calhoun, already had decided
that intentional misconduct fell within the
statute. The court rejected each argument,
however, reasoning that the plain language
of the statute clearly limited it to legal mal-
practice cases, and the other appellate
Page 265
cases never considered whether intentional
misconduct was 43
"malpractice" within the
statute's terms.
Other states do not engage in the same
intellectual debate as Illinois. For example,
in the District of Columbia, New Jersey,
New York, Texas, Georgia, Maryland, and
Minnesota, lawyers face punitive damages
in breach of fiduciary duty cases where
there is fraud, malice, oppression, willful
and wanton misconduct, intentional mis-
representation, or even gross negligence. 44
Think about that the next time you con-
sider suing your client for fees in those
states.
Smitty plays golf after all
We hate to be the bearer of bad news,
but it is an increasingly hostile environ-
ment out there for lawyers. We must all
strive for better communication with our
clients, more thought and care in the han-
dling of their cases, and more candor about
their chances of success, both before and
during the case. This is no guarantee, but
clients who are kept informed generally re-
spect and like their attorneys, and usually
do not sue them.
As for Smitty, he found a letter from his
wife's cousin that looked for all the world
like a waiver of his conflict, and he played
golf after all.
42. 683 N.E.2d 516 (Ill App. 1997), appeal al-
lowed, 689 N.E.2d 1138 (Ill. 1997).
43. See also In re Marriage of Pagano, 607
N.E.2d 1242 (Ill. 1993) (punitive damages available
for breach of fiduciary duty where fraud is gross or
malice shown).
44. Smith v. Lightning Bolt Productions, 861
F.2d 363 (2d Cir. 1988) (New York law); Bank
Saderat Iran v. Telegen Corp., No. C-94-2330-VRW,
1997 WL 685247 (N.D. Cal. Oct. 16, 1997) (not
reported in F.Supp.); In re Legal Econometrics Inc.,
191 B.R. 331 (N.D. Tex. 1995); Home Ins. Co. v.
Wynn, 493 S.E.2d 627 (Ga.App. 1997); Fairfax Sav-
ings, F.S.B. v. Weinberg & Green, 685 A.2d 1189
(Md.Spec.App. 1996); Fiedler v. Adams, 466
N.W.2d 39 (Minn.App. 1991); Rizzo v. Haines, 555
A.2d 58 (Pa. 1989).