The Problem With Collectability In Legal Malpractice Cases

By Timothy Parilla
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Law360 (September 1, 2020, 3:47 PM EDT) --
Timothy Parilla
Timothy Parilla
In many states, a client's role as a plaintiff or defendant in an underlying lawsuit has a significant effect on legal malpractice claims in an unexpected way.

If the client was a plaintiff in the underlying suit, it must prove all the standard elements of legal malpractice and prove that the underlying judgment would have been collectable. In other words, the client needs to prove that the underlying party sued was solvent or had insurance that would have covered the judgment. If the client cannot do so, it will have no recourse against its negligent attorney.  

Unlike plaintiffs, defendants who pursue legal malpractice claims against their counsel do not have to prove that they were actually harmed by their counsel's legal malpractice. Rather, courts will presume damage regardless of whether the defendants actually had the ability to pay the judgment in question.

The U.S. District Court for the Northern District of Illinois recently upheld this rule despite the fact that the allegedly negligent attorney tried to show that the judgment was not collectable and was just another liability on a mountain of debt. That case puts the inconsistency of these rules into focus.

Newman

In Newman as Trustee of the World Marketing Trust v. Crane Heyman Simon Welch & Clar,[1] the collapse of a direct-mail marketing company spawned several lawsuits, including a legal malpractice claim against Crane Heyman, the law firm retained to represent the marketing company prior to and during the bankruptcy proceedings.

Shortly after the marketing company declared bankruptcy and ceased operations, its former employees filed a class action for failure to timely serve notice of closures and layoffs in compliance with the Worker Adjustment and Retraining Notification, or WARN, Act.

The class prevailed on its WARN Act claim before the bankruptcy court. The bankruptcy trustee settled the dispute while on appeal and then filed a malpractice suit against Crane Heyman alleging the law firm failed to advise the marketing company of the need to issue a timely WARN notice, which significantly increased the marketing company's liabilities by more than $4 million.

Crane Heyman moved for summary judgment, arguing that a law firm cannot be liable for malpractice committed against insolvent parties. The law firm argued its misstep merely added another unpayable liability onto the marketing company's mountain of unpayable debts.

The appellate court rejected the argument noting, "Illinois courts have long distinguished between legal malpractice claims involving attorneys who were hired to prosecute a claim and those involving attorneys who were hired to defend a claim." Citing Gruse v. Belline,[2] the court noted that Illinois adopted the judgment rule.  

Illinois, like many states, adopted a rule where an unpaid judgment against a client constitutes proof of actual damages for purposes of a legal malpractice claim. That rule is referred to as the judgment rule and has been adopted by many states.[3]

In Newman, the district court refused to create an exception to the judgment rule in instances where defendant law firms can show that the judgment entered against the client would remain unpaid. The court refused to immunize negligent defense counsel, stating: 
 
In short, there is no question that World Marketing would have suffered damages if it were still solvent. The Court does not believe that the calculus changes simply because World Marketing is now insolvent. As Crane Heyman seems to acknowledge, accepting its argument would mean that law firms representing insolvent defendants are immune from malpractice actions. The Court thinks this result unsound as both a matter of law and policy.

While the court expressed concern over immunizing attorneys representing insolvent defendants, it did so without directly addressing the fact that attorneys are routinely immunized from malpractice actions when they represent plaintiffs pursuing claims against insolvent defendants. Nor did the court in Newman explain what warranted this distinction, which is based on long-standing Illinois case law.  

Collectability

Most courts addressing the collectability of a potential judgment in the context of legal malpractice claims are faced with the issue of who must prove the collectability of the judgment: the client as part of its prima facie case or the attorney as part of its affirmative defense.[4]

The Colorado Supreme Court recently addressed this issue, determining that the client should be responsible for doing so.[5] It argued that requiring the plaintiff to prove collectability (1) aligned with the tort theory requirements that the plaintiff prove causation and damages; (2) is not unfair or especially difficult; and (3) would prevent a windfall if defendants could not prove collectability.[6]

In LeHouillier v. Gallegos, the Supreme Court reversed the ruling of an appellate court, which gave "seven compelling rationales" for requiring the defendant-attorney to prove collectability as an affirmative defense:

  1. It is unfair to require the client to prove collectability because he or she must already prove the attorney's malpractice.

  2. The negligent attorney is in a better position to prove collectability because the attorney should have investigated solvency in the underlying case.

  3. Requiring collectability would be at odds with the evidence rule, which generally excludes evidence of insurance coverage.

  4. The delay between the original injury and a legal malpractice claim is common, which could hinder the client's ability to gather evidence about collectability.

  5. Insolvency of the underlying defendant permits the attorney to avoid the consequences of one's negligent act, and the beneficiary of insolvency should bear the burden of proving it.

  6. Placing the burden on the attorney does not eliminate the effect of insolvency if the attorney proves that the judgment is not collectable.

  7. In most civil suits, plaintiffs are not obligated to prove collectability — enforcement of the judgment remains for another day.

Other courts addressing similar legal malpractice issues have expressed concern that bestowing a lucky break to attorneys, while leaving clients without recourse, will reinforce the perception, shared by many in our society, that courts will go out of their way in order to protect members of the bar.

Moving Away From Collectability

The debate about proving collectability misses the point that judgments have inherent value. Courts — like the court in Newman — recognized this reality when it comes to judgments entered against insolvent defendants. Further, we see the value in a judgment, regardless of collectability, in a host of other settings.

On some occasions, parties bring lawsuits against judgment-proof defendants because they want to raise awareness of their cause or third-party recognition that they were harmed. Likewise, prosecutors often seek multiple life sentences or sentences well in excess of a person's natural life to signal to the community that the defendant should be penalized more severely than a defendant's life span would allow.

Whether plaintiffs should be entitled to pursue their full injury or merely nominal damages against a counsel who committed malpractice is a difficult question that need not be addressed here. However, courts should consider extending the same concern over immunizing plaintiffs' counsel for malpractice as they do for defendants' counsels, especially as we see accelerating insolvency due to the fallout from the pandemic.

Takeaways for Practitioners

During the 2008 recession, legal malpractice cases increased dramatically, as did bankruptcies. If the fallout from the pandemic generates similar effects, issues related to collectability are likely to arise more frequently in legal malpractice cases. While collectability may not be the first thing parties think of when litigating a legal malpractice claim, it is important to consider throughout the course of the dispute.

For attorneys litigating legal malpractice cases, it is critical to understand whether collectability is part of the plaintiff's prima facie case requirement or an affirmative defense. For the party with the burden of proof regarding collectability, previously sued and potentially insolvent parties may be less cooperative in responding to third-party discovery requests. Such requests should be prepared at the outset of the litigation in the event court intervention is necessary to obtain compliance.

Finally, as this issue various from state to state, practitioners need to be aware of the law of the forum, the existence of any choice of law provisions, and other potentially applicable state laws. As the burden of proof may vary depending on the outcome of a choice of law analysis, parties should consider whether it makes sense to stipulate to a choice of law at the outset of the case.  



Timothy G. Parilla is an associate at Palmersheim & Mathew LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] Newman as Tr. of World Mktg. Tr. v. Crane, Heyman, Simon, Welch, & Clar No. 17 C 6978, 2020 WL 3250742 (N.D. Ill. June 16, 2020).

[2] Gruse v. Belline , 138 Ill. App. 3d 689 (2d Dist. 1985).

[3] See e.g., Montfort v. Jeter , 567 S.W.2d 498, 499–500 (Tex. 1978); Shipman v. Kruck , 593 S. E.2d 319 (Va.2004); Pickens, Barnes & Abernathy v. Heasley , 328 N.W.2d 524 (Iowa 1983); Roebuck v. Steuart , 544 A.2d 808 (Md.App.1988).

[4] See Gallegos v. LeHouillier , 2017 COA 35, ¶¶ 54-55, 434 P.3d 698, 705–06, rev'd and remanded, 2019 CO 8, ¶¶ 54-55, 434 P.3d 156 (collecting cases and discussing majority and minority rules).

[5] LeHouillier v. Gallegos , 2019 CO 8, ¶ 30, 434 P.3d 156, 162, reh'g denied (Feb. 19, 2019) ("For the reasons below, we now expressly hold that the client-plaintiff must prove collectability of the underlying judgment as part of her prima facie case.").

[6] Id. at 31-44.

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