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Legal Malpractice and Conflict Of Interest, Concern Insurers

Real estate is the practice area continuing to see the largest number of legal malpractice claims, and the most frequently alleged malpractice error is conflict of interest.

August 18, 2014

A recent survey of legal malpractice insurers by a major brokerage finds that real estate practices and conflict-of-interest disputes continue to be trouble spots for law firms.

Boies Schiller sanction. Last week, a federal judge in Manhattan ordered Boies Schiller & Flexner to pay Host Hotels & Resorts Inc. more than $271,000 in sanctions for representing a plaintiff in an antitrust lawsuit against the hotel company when the firm previously had advised the company itself.

Boies Schiller has said it intends to appeal the sanctions to the U.S. Court of Appeals for the Second Circuit even though the judge threw out the underlying lawsuit last month. Sean O’Shea, the current lawyer for the plaintiff, Madison 92nd Street Associates, said they intend to appeal the judge’s dismissal as well to the Second Circuit.

U. S. District Judge Colleen McMahon of the Southern District of New York entered the judgment against Boies Schiller on Aug. 8. She awarded Host Hotels legal fees and expenses—mostly attorney fees and database research costs—that it incurred gathering evidence that Boies Schiller had ignored what Judge McMahon called “a blatant conflict of interest” by agreeing to represent Madison 92nd Street Associates LLC in a $350 million lawsuit against Host and other defendants alleging an anticompetitive conspiracy.

Judge McMahon used the phrase in her November 2013 order denying Boies Schiller’s request for reconsideration of a motion for sanctions, in which she also noted that Boies represented Host in a long-running dispute with Marriott from 2001 to 2004. Sean O’Shea of O’Shea Partners replaced Boies Schiller on the lawsuit in March 2013. Boies Schiller notified Proskauer they would be withdrawing on Feb. 23, 2013, according to Boies Schiller.

Nicholas Gravante, general counsel of Boies Schiller, said in an email statement, “We expected the excessive fees that Host requested would be cut substantially and they were.  However, now that we can finally appeal to the Second Circuit, we also expect the remaining sanctions to be summarily reversed.”

Marriott International Inc., Diamondrock Hospitality Co. and the New York Hotel & Motel Trades Council were the other defendants named in the lawsuit, which initially was filed in January 2013.  The operator of an Upper East Side hotel under the Courtyard by Marriott brand, Madison Associates sued the other hospitality companies and union under New York and federal antitrust and racketeering laws, accusing them of conspiring to force their hotel to employ union labor, which they say put it at a competitive disadvantage against other nonunion hotels the chains owned and operated. The organization blamed the labor situation for the hotel’s financial failure and eventual bankruptcy after several years in operation.

Judge McMahon dismissed the antitrust and racketeering claims against Marriott, Host, Diamondrock and the union on July 28 with prejudice. She ruled that conspiracy was not to blame for the hotel’s condition but rather an agreement that was signed between Madison and Marriott that gave the Marriott control over personnel employed at the 92nd Street hotel. O’Shea did not respond to an emailed request for comment. A source said Madison Partners also may be planning to appeal their lawsuit’s dismissal.

Host had sought nearly $400,000 in sanctions on the conflict-of-interest charge but the judge reduced the award because she said she found the estimate excessive” although she “recognized that part of the excess was occasioned by Boies Schiller’s intransigence.” Proskauer Rose represented Host with respect to the malpractice allegation.

Malpractice claims survey. Meanwhile, a survey of eight major insurers released last month by Ames & Gough, an insurance brokerage serving 80 percent of Am Law 100 firms, said that while the frequency of legal malpractice claims against law firms had leveled off last year after rising during and after the recession, the severity of claims continues to increase. Real estate is the practice area continuing to see the largest number of legal malpractice claims, and the most frequently alleged malpractice error is conflict of interest, as in the Boies case.

The survey found that the number of claims filed was similar in 2013 to 2012, but that six of eight insurers also said they had more claims with reserves of $500,000 or more. Three of them indicated that the number of claims in excess of that amount had increased 11 percent or more.

Half of the responding insurers said they had participated in paying a claim of $100 million or more, though some may have been involved in paying the same claim, the survey said.

The annual survey also found that cost of defending against legal malpractice claims and the rates insurers paid defense counsel also rose last year. Half the insurers polled said they increased average hourly rates they paid defense counsel by 2-5 percent. (Seven of eight insurers said rates fell between $251 and $400 per hour.)

“When business deals go bad, clients often look to their lawyers for compensation,” said Eileen Garczynski, partner and senior vice president of Ames & Gough, in a news release. “To minimize their risk of related malpractice actions, law firms need to maintain a strong conflicts database and clearly identify who they’re representing in a transaction. They also should avoid serving on their clients’ corporate boards,” she said.

More Boies Schiller: In a more positive development for Boies Schiller, a judge threw out a fashion model’s lawsuit against the law firm and former partner Andrew Hayes. As reported in the New York Law Journal, model Mary Anne Fletcher hired Boies Schiller in 2003 to represent her in claims against two modeling agencies and Macy’s department store at the same time that Boies Schiller was representing models in two class action suits.  She also joined the class actions shortly after hiring Boies Schiller to represent her. She settled with the agencies and the department stores after hiring other counsel, but then filed a lawsuit against Boies Schiller in New York State Supreme Court in 2007, alleging that the firm committed legal malpractice by representing her individually and also representing the class plaintiffs. Justice Eileen Bransten ruled in early August that Fletcher failed to prove her claims.

Wachtell: A federal district court judge in Kansas ordered a malpractice lawsuit filed by CVR Energy Inc. against the law firm of Wachtell, Lipton, Rosen & Katz be transferred to the Southern District of New York. U.S. District Judge Julie Robinson on Aug. 14 denied Wachtell’s request to dismiss the suit, which was filed in October 2013. The oil refining company accuses Wachtell and partners Andrew Brownstein and Benjamin Roth of malpractice in their representation of CVR Energy in its unsuccessful attempt to defend against a hostile takeover by investor Carl Icahn for $2.6 billion in 2012. The company wants to clawback the $6 million in fees it says it paid Wachtell. Judge Robinson wrote that Kansas was the improper venue but “CVR’s case does not appear to be legally frivolous and the court finds that the interests of justice compel transfer rather than dismissal.” Wachtell countersued Icahn in December 2013 in New York.

Duane Morris: In other lawsuit news, a New Jersey appeals court upheld the dismissal of a legal malpractice suit against Duane Morris, agreeing with a lower court judge’s ruling two years ago that the law firm showed no proof of negligence in its handling of a matter for Joseph Guido, cofounder of Allstates WorldCargo Inc. in Bayville, N.J., as reported in New Jersey Law Journal. Guido had filed the lawsuit against the firm alleging that two partners at the firm failed to fully explain the implications of a 2005 shareholder settlement they had negotiated for him.

Greenberg Traurig: A legal malpractice case against Greenberg Traurig and a former GT shareholder, Leslie Corwin, who is now a partner at Blank Rome, was settled at the end of July, according to court records, as reported in New York Law Journal. The terms were not made public. Allen Roberts, who is now a member of Epstein Becker & Green, filed the malpractice lawsuit against Greenberg Traurig and Corwin in 2009. They had represented him in an arbitration to recover a share of his partnership interest in a firm he had founded, Roberts & Finger. John Houston Pope, an Epstein Becker member in the lawsuit, represented Roberts. "Although we continue to believe the case lacked merit, we are pleased to have closure on this matter," a spokeswoman was quoted as saying.

Originally posted by MP McQueen via Am Law Daily website.

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