Limitations of the Litigation Privilege Defense

/ 16.Oct, 2012

The New Jersey Superior Court, Appellate Division, has recently decided the case of Buchanan v.  Leonard.  The Appellate Division reversed in part the decision of the Law Division, which had granted summary judgment in this legal malpractice case on the basis of the litigation privilege defense.  The legal malpractice action arose out of the underlying legal malpractice action, which in turn arose out of a bankruptcy filing.

Mr. Buchanan had represented Earl and Sherri Kerr in the filing of a Chapter 13 bankruptcy petition, despite his advice to them that they would be better served by a Chapter 11 petition.  The bankruptcy was not successful, and the Kerrs lost their residence and a commercial property.

After the Kerrs lost the residence, they filed a legal malpractice action against Mr. Buchanan.  Mr. Buchanan was represented by Mr. Leonard, of the firm Morgan Melhuish, in the defense of legal malpractice action.  Mr. Leonard was retained by Mr. Buchanan’s insurance company Legion Insurance Company for the defense.   However in July 2003, Legion was declared insolvent, and the New Jersey Property Liability Insurance Guarantee Association ( NJPLIGA) assumed the defense obligations.   In April 2005, Mr. Leonard submitted to NJPLIGA a form seeking authorization to settle the litigation.  In his request Mr. Leonard referred to an August 21, 1993 letter Mr. Buchanan had written to the Kerrs stating that Mr. Buchanan agreed to inflate the value of a garage on the bankruptcy petition, as long as the Kerrs agreed they would indemnify him for any sanctions imposed for utilizing misleading figures.  Mr. Leonard wrote that this letter was “an admission of bankruptcy fraud.”  On May 16, 2005, a week before trial, NJPLIGA advised Mr. Buchanan that it was withdrawing coverage as a result of the August 21, 1993 letter.   There followed a declaratory judgment action, and in February, 2007, after a bench trial the law division held that Mr. Buchanan was entitled to coverage.

Mr. Buchanan then sued Mr. Leonard based upon the report to NJPLIGA stating that Mr. Buchanan’s conduct amounted to fraud, alleging that Mr. Leonard had been negligent in his representation of him by failing to protect his interest, and deliberately expressing an opinion contrary to his best interest.  In November 2011, Mr. McKinnon filed a motion for partial summary judgment.  Defendants opposed the motion and filed the cross-motion for summary judgment.  Defendants argued the claims were barred by the litigation privilege.  The Law Division granted summary judgment on all claims, stating that because they were based on Mr. Leonard statements in the settlement memorandum, they were covered by the litigation privilege.

In its decision reversing the Law Division, the Appellate Division noted the litigation privilege had been held not to protect attorneys from discipline for violating the Rules of Professional Conduct.  The Appellate Division held that by analogy the litigation privilege would not protect an attorney from a claim by his clients.  The Appellate Division relied on several California cases with similar holdings.

The takeaways from this litigation are to be aware of the likely limits of the litigation privilege, and for defense counsel to always keep in mind who their actual client is.

-Josh J.T. Byrne, Esquire