Cause and Effect

Facing a $12.8 million judgment, a plaintiff sought recourse in a legalmalpractice claim against his trial counsel for its alleged role in that unhappy result. But his undoing was the Business Court’s focus on whether he would have prevailed had his trial counsel done better.

In Fleming v. Horner, 2022 NCBC 26, plaintiff Peter Fleming lodged a malpractice claim following massive judgments against him and entities he controlled arising from salary, cash transfers, and loans he caused the entities to make for his benefit at a time he knew the transferor companies were in a wind-down mode or owed substantial sums to creditors.

The legal malpractice claim against Hamilton, Stephens, Steele + Martin and one of its former lawyers – Adam Horner – centered on summary judgment hearings at which HSSM appeared on behalf of Fleming and other corporate defendants. HSSM had previously withdrawn from the representation before summary judgment due to non-payment of fees, but “agreed to resume representation of [Fleming] and the corporate defendants in the Underlying Action for the limited purpose of opposing the summary judgment motion.” Id. ¶ 22.

Fleming’s contention was that HSSM’s work in that limited purpose (re-)engagement was, well, too limited. HSSM appeared at the first hearing after filing “no affidavits, briefs or documents in opposition” to summary judgment – a docket condition that showed, the court noted, “comparatively little case/litigation activity in the weeks leading into the [sumamry judgment] motion and hearing.” Noting that it was “not like Mr. Horner’s firm to be unprepared for a hearing,” the trial court indicated HSSM should have moved to continue the hearing. Id. ¶¶ 23-24.

On its own initiative, the trial court scheduled a second summary judgment hearing.  HSSM appeared for Fleming through a new attorney – defendant Horner and the associate who appeared at the first hearing were exiting the firm – but still with no advance submissions on behalf of Fleming or the corporate defendants. Id. ¶ 26. Partial summary judgment of $3.1 million was entered on the breach of fiduciary duty, constructive fraud, and constructive fraudulent transfer counts. A subsequent trial on the remaining Chapter 75 unfair trade practice claims resulted in a trebled award. Id. ¶¶ 27, 33.

A legal malpractice claim requires proof of three elements: (i) breach of a duty owed; (ii) proximate cause to the client’s damages; and (iii) the amount of those damages. Id. ¶ 49 (citing Rorrer v. Cooke, 313 N.C. 338, 355 (1985)). The claim against HSSM did not turn on whether its representation at summary judgment was insufficient, but on causation – whether there was evidence that Fleming “would have prevailed in the underlying action” had HSSM represented him in a different manner. A plaintiff in a legal malpractice claim must meet this high standard “even if the attorney’s actions during the underlying case resulted in the merits never being adjudicated.” Id. ¶¶ 51, 52 (quoting Kearns v. Horsley, 144 N.C. App. 200, 203, 211-212 (2001)).

Judge Robinson examined the claims against Fleming in the underlying action and determined that they were so strong and compelling that he would not have prevailed even aided by more thorough-going representation at summary judgment. The Business Court noted that (¶ 88):

“[N]othing [Horner and HSMM] could have done would have changed this result.”

The Business Court also rejected Fleming’s argument that he should avoid personal liability because he relied on the advice of lawyers and accountants pursuant to N.C.G.S. § 55-8-30(b) in making the relevant financial decisions. Judge Robinson found that Fleming didn’t qualify for that safe harbor because neither his lawyers nor accountants had been told about the wind-down status of one entity or the creditor status of another. “The protections of N.C.G.S. § 55-8-30(b) do not apply when a director does not apprise his advisors of essential, relevant information,” the court held. Id. ¶ 64.

Takeaways

  • The proximate cause component of a legal malpractice claim can involve a rigorous analysis of whether a lawyer’s client would have prevailed in the underlying action even assuming modified conduct by that counsel.
  • A director’s ability to rely on the advice of lawyers and accountants is disallowed “if the director has actual knowledge concerning the matter in question that makes reliance otherwise permitted . . . unwarranted.” N.C.G.S. § 55-8-30(b)(11).

Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.