A year ago, I reported on a New York County Supreme Court decision denying a defendant law firm’s motion to dismiss fraud and misrepresentation claims that were based upon the law firm’s alleged misrepresentation to the client that it had no conflict of interest in defending the client in litigation. See “Attorney’s Failure to Disclose Conflict of Interest Before Accepting Representation Can Constitute Fraud and Negligent Misrepresentation.” The lower Court in that case allowed the fraud and negligent misrepresentation claims against the attorneys to go forward based upon the alleged statement to the client that the law firm had no conflict of interest when it in fact did have a conflict. The Appellate Division, First Department, has now reversed that decision and dismissed the fraud and misrepresentation claims, in Federal Ins. Co. v Lester Schwab Katz & Dwyer, LLP, 2022 NY Slip Op 07149 (1st Dep’t Decided Dec. 15, 2022).
Legal Malpractice and Fraud Claims
As I have commented, attempted fraud claims by clients against their attorneys face a number of obstacles. For example, courts often find that alleged fraud claims are “duplicative” of the legal malpractice claim, where they are based upon the same facts and the same damages are sought. This is a viable defense to the fraud claims, which are subject to dismissal where the underlying facts amount to alleged legal malpractice. See ,e.g., Commercial Division Finds Attempted Fraud Claims Against Attorneys Duplicative of Malpractice Claims and Subject to Three-Year Statute of Limitations; Are Claims of Fraud and Professional Malpractice Duplicative?
Federal Ins. Case
In the Federal Ins. case, the basic underlying facts involved the law firm’s indication to the prospective client that a conflict search revealed no conflict of interest in appearing on behalf of the insured party defendant in a pending litigation. The law firm did in fact have what even it admitted was a conflict, which prevented it from asserting cross-claims against another defendant in the underlying litigation. Such a conflict of interest can in fact form the basis of a legal malpractice claim provided that the client can show damages proximately caused by the existence of the attorney’s conflict. See, e.g., Esposito v. Noto, 132 A.D.3d 944 (2d Dep’t 2015).
The lower Court did not address why it determined the fraud and negligent misrepresentation claims were “distinct” from the asserted legal malpractice claims. The Court below simply applied the basic elements of the causes of action for fraud and negligent misrepresentation and ruled that the complaint adequately stated such claims.
On appeal, the Appellate Division reversed that ruling, finding that while the legal malpractice claims could go forward, the fraud and negligent misrepresentation claims were flawed. Like the Court below, the First Department did not address whether those claims were duplicative of the legal malpractice claims, but it dismissed those claims on the merits, finding that they did not adequately state a claim.
Fraud Reliance, Causation and Intent
In addressing the fraud and negligent misrepresentation claims, the First Department ruled that the client was in fact aware of the conflict and the corresponding consequence that a cross-claim could not be asserted, finding that fatal to those claims:
The causes of action for fraud and negligent misrepresentation, however, should have been dismissed pursuant to CPLR 3211(a)(1). Both of these claims are based on the contention that LSKD obtained its assignment to defend the insureds in the underlying action by misrepresenting or omitting to disclose the fact that it had a conflict of interest as to the City of New York, a codefendant in the underlying action. This conflict prevented LSKD from pursuing a cross claim against the City, to the detriment of the insureds and their insurers. The theory that LKSD misrepresented or failed to disclose the existence of the conflict is conclusively refuted by documentary evidence, specifically, an April 16, 2013 email from LSKD to, inter alia, the claims adjuster who retained it, plainly stating:
“As discussed, we will accept this new assignment with the understanding that we will not assert cross claims against the City of New York. Our firm represents the City of New York in other matters and we are conflicted from asserting claims against them.”
In the context of the foregoing express disclosure of the conflict and consequent inability of LKSD to pursue a cross claim against the City, the communication of the same date that a search for possible conflicts had yielded negative results was not misleading.
Although it did not explain the legal significance in terms of the elements of fraud, in essence, the First Department found that the client could not have reasonably relied on the representation of no conflict where it was explicitly advised that there was in fact a conflict and the effect of not being able to assert the cross-claim. Or, applying the necessary element of causation, the misrepresentation of no conflict could not have been the proximate cause of the client’s decision to hire the firm because the accurate information was actually conveyed to the client. Either way, the fraud claims were defective.
Then, the First Department addressed the client’s argument that while the law firm did disclose the conflict and that it could not assert the cross-claim, the law firm allegedly improperly downplayed the importance of asserting any cross-claim. The First Department rejected that argument by relying upon the element of “intent” to defraud, ruling that the allegations did not support such intent when the law firm conveyed that information:
To the extent plaintiff contends that LKSD inaccurately minimized the viability of a potential cross claim against the City, the complaint fails to allege particularized facts that this advice was given with deceptive intent so as to support a fraud claim.
Of course, that analysis would not apply to the claim of negligent misrepresentation because “intent” to defraud is not required for such a claim, and the fiduciary relationship that the attorney had to the client could form the basis for such a claim. See my post: SDNY Sustains (Barely) Negligent Misrepresentation Claim by Sophisticated Party. The First Department did not address that rather glaring point.
Attempting to assert legal malpractice and fraud claims simultaneously presents a variety of intricate issues. While the defense of “duplicative” pleadings certainly plays a prominent role in such situations, the merits and necessary elements for pleading and proving independent claims of fraud have their own formidable challenges for clients seeking to assert such claims. Even where the respective claims are not deemed duplicative, the underlying elements of each cause of action obviously must be established.