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Hearsay through the grapevine

Rumors no basis for malpractice claim

The rumors started to swirl just as jury selection got underway, rumors that the defendant company had spurned an offer to just “walk away” from the whole messy lawsuit. The purported offer, coming three years before trial, would have let both sides walk away from the suit with no exchange of money.

Maybe the rumors were just idle courtroom chat. An off-hand comment that went from lawyer to lawyer until it just made sense as a way of explaining how things went so terribly wrong.

They went wrong when the defendant company lost after a six-week trial and now faces a $10.6 million judgment. The company decided the law firm it fired before trial was at fault, for not telling it about the “walkaway offer.” The client sued the law firm, Virginia-based Williams Mullen, for legal malpractice.

On May 10, the law firm won summary judgment on the malpractice claim in an Alexandria U.S. District Court, but the matter is far from resolved. The court has denied a motion for reconsideration, but the law firm’s counterclaim for an unpaid $1.2 million fee is set for trial July 31.

Water wars

The underlying case was complicated from the start.

A North Carolina company, GE Betz Inc., sued Zee Company, a Tennessee-based competitor, who hired GE Betz’s ex-employees and allegedly violated a noncompete that protected GE Betz’s water processing business. GE Betz also sued for tortious interference with business expectancy and contract, and for violation of North Carolina’s unfair trade practices statute.

The suit filed in North Carolina state court involved in-house counsel, lead lawyers hired from New York City and Richmond, local trial counsel and a courtroom observer who is a specialist in aviation law.

Here’s how the case unfolded, according to the summary judgment record cited by Senior U.S. District Judge T.S. Ellis III in his May 10 opinion.

When GE Betz sued, it turned to lead counsel Victoria Cundiff, a litigation partner at the New York office of Paul Hastings and a member of that firm’s GE client service team, and to North Carolina lawyers John Martin and Jenna Butler as local trial counsel. GE Betz’s general counsel, Glynn Key, also worked on the matter.

Zee hired as lead counsel, Williams Mullen shareholder William Barrett, who previously had represented Zee in an Illinois immigration investigation and in an NLRB proceeding in North Carolina. Zee also hired North Carolina lawyer Stephanie Adams as local counsel.

After filing suit in April 2007, GE Betz won a temporary restraining order against Zee. Between entry of the TRO and the court’s later preliminary injunction against Zee, Cundiff recalled she had a specific conversation with Barrett, in Butler’s presence, in which Cundiff  outlined four conditions necessary to settle the case: Zee would need to “cease switching of accounts,” withdraw a proposal related to an important company client, agree on customers subject to the restrictions at issue and agree to restart the time period for the restrictive covenants.

Barrett disputed that the conversation had occurred and said billing documentation and phone records backed him up.

In its legal malpractice suit, Zee returned to the Cundiff conversation after it struck out with its claim of a “walkaway offer.”

Discovery continued in the state court case, and beginning in February 2008, GE Betz made several settlement offers to Zee, all of which involved Zee paying money – from $800,000 to $1.4 million – to GE Betz, Ellis wrote. After Zee turned down each offer, jury selection began in February 2010.

Enter Daniel Barks. Zee had hired Barks to “observe certain proceedings in the North Carolina action,” Ellis said. Barks was the first to report the rumors about “a walkaway offer.” Barks said he heard from GE Betz local counsel Martin that GE Betz had made a settlement offer that would “stop the whole thing for no money.” He also testified he heard something similar from in-house counsel Key.

Later in 2010, Zee’s local lawyer Stephanie Adams, said she too had heard about the “walkaway offer,” according to her affidavit.

Rumors of the walkaway offer reached Zee president Robert Bullard, through Barks. In mid-April 2010, Zee told Williams Mullen it no longer wished to be represented by the Richmond firm, and it asked for the case files for transfer to new counsel. Zee did not mention the rumors to Williams Mullen until after that firm withdrew from the case in June 2010, when the law firm said Zee had an outstanding bill of $1.2 million.
The two companies’ lawsuits were tried in New Hanover County Superior Court in North Carolina from Sept. 27 to Nov. 12, 2010, when Judge Phyllis Gorham took the matter under advisement. On April 28, 2011, Zee filed its legal malpractice suit against Williams Mullen.

On July 24, 2011, Gorham entered judgment for GE Betz and against Zee for $288,297, plus interest, costs, punitive damages and reasonable attorney’s fees. In pleadings filed May 22, Zee says the state court’s final award to GE Betz is $10,640,586.54.

Offers and rumors of offers

Ellis traced the rumors through the various lawyers’ depositions and affidavits, and concluded none of the lawyers had personal knowledge of any walkaway offer. Each lawyer for GE Betz denied having made such an offer. Ellis credited the lawyers’ “honestly held beliefs,” but said their hearsay declarations could not come into evidence.

The proffered testimony “is exactly the sort of rumor-mill evidence that the hearsay rule is intended to exclude,” Ellis wrote.

Excluding the hearsay evidence about the alleged walkaway offer, Ellis said Zee’s case rose or fell on Cundiff’s account of her conversation with Williams Mullen, which the firm conceded had not been communicated to Zee because it denied the statement was ever made.

Even assuming there had been a breach of a professional duty, Zee could not produce evidence of proximate cause or damages that would require resolution at trial, Ellis concluded.

No reasonable jury “could conclude that Cundiff manifested intent to be bound to her statement in an offer of settlement,” Ellis wrote. There was simply no evidence the North Carolina lawsuit would have been decided more favorably for Zee had Cundiff’s statement been timely communicated to Zee, especially in light of additional offers later rejected by Zee. The most Zee ever offered to settle the North Carolina suit was a $170,000 payment to GE Betz.

Ellis entered summary judgment for Williams Mullen on Zee’s legal malpractice and constructive fraud claims.
The case offers an example of “abuse in our legal system,” said Richmond lawyer William D. Bayliss, who defended the malpractice suit for his own firm. In the underlying case, GE Betz initially estimated its compensatory damages at around $200,000, although it also pursued some claims that allowed for treble and punitive damages. The case went on to generate millions in legal fees, Bayliss said.

The Zee case is not a “garden-variety” legal malpractice claim, according to Alexandria lawyer Bernard J. DiMuro, who has defended law firms accused of malpractice. Most legal malpractice claims have more clear-cut claims, involving issues like missing deadlines, or failing to find a necessary expert.

A duty to keep a client informed about discussions with the other side has a very low threshold, DiMuro said. Anything that could significantly affect settlement needs to be shared with the client, even “what appears to be an innocuous settlement offer.” A lawyer may get a phone call from opposing counsel, who’s feeling him out on terms. Even if the receiving lawyer “sort of puffs back” and says that will never do, he still may need to call or email the client about the conversation.

Claims about failure to convey information that could lead to settlement are bound to be more speculative, when it comes to proving a breach of duty and damages, according to DiMuro. The law firm won summary judgment in Zee because the court said, assuming the information had been communicated to Zee, the client still could not show the exchange would have ripened into final settlement.

This case came down to a “spitting match between the lawyers,” DiMuro said.

Ellis had a “Herculean task” to separate all the parties and all the lawyers’ statements, said Arlington lawyer Joseph Cunningham, who also defends lawyer malpractice cases. Although Zee was decided under North Carolina law, the lawyer’s duty to communicate important information is the same in Virginia.

Cunningham said there’s not a lot of law in Virginia on what it takes to get a malpractice claim in front of a jury. The Zee decision is important because “it establishes the principle that a plaintiff suing a lawyer has to do more than say, ‘Well, there was a possibility the underlying case would have settled.’”

The McLean law firm of Dombroff & Gilmore PC tried the North Carolina state court case for Zee. Donald C. Weinberg of that firm, who represented Zee in the malpractice claim, did not return calls for comment.

Editor’s Note: On Aug. 21, 2012, Zee Company filed a notice of appeal in the 4th U.S. Circuit Court of Appeals, No. 12-2010.

VLW 012-3-214

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