As reported by Forbes, a U.S. District Court sanctioned a prominent U.S. law firmfor manufacturing a frivolous lawsuit.  The case is Lavesky et al. v. ITT Educational Services, Inc., filed under the False Claims Act (“FCA”).  The Lavesky court did not mince words in sanctioning plaintiff’s counsel: “From what the Court can gather, [plaintiff’s attorneys’] view is that virtually any ex-employee will do for purposes of manufacturing an FCA lawsuit.”  

Many people will not be shocked by the title of this post.  However, a new report issued by an advocacy group for the U.S. Chamber of Commerce was recently released that was entitled, “The Plaintiffs’ Bar Goes Digital, an Analysis of the Digital Marketing Efforts of Plaintiffs’ Attorneys and Litigation Firms.”  The report found that marketing efforts were being camouflaged as forums or support group sites.   The report estimated that law firms had spent more than $50,000,000 on Google advertising in 2011.  The overwhelming majority of that was spent by Plaintiff’s firms.  However, despite the fact that the amount of spending does not rank with large corporations, it is disproportionate for the size of the industry.  The report is critical of the Plaintiffs’ Bar because of a lack of transparency that many of their sites were actually marketing for law firms.  

Although unexpectedly large jury verdicts have prompted disputes between excess and primary insurers for years, the phenomenon of excess carriers suing defense counsel hired by the primary insurer relatively new.  The issue presented in such cases is whether, in the absence of a direct attorney/client relationship, the excess carrier has any right to sue counsel or, in the alternative, pursue a claim for equitable subrogation based upon counsel's client relationship with the insured.

For the most part, courts have declined to acknowledge a direct client relationship between the excess insurer and defense counsel.  As a result, some states have ruled that excess counsel has no right of action at all.  Indeed, in many states, courts have refused to acknowledge a client relationship between defense counsel and the primary insurer that hires counsel to defend its insured.  Whether a lawyer has an attorney-client relationship with an insurer that has hired it to represent a policyholder has been considered in several cases where insurers have sought to sue defense counsel for malpractice.  In several of these cases, courts have ruled that  the insurer is not a client of defense counsel. See First American Carriers v. Kroger Co., 787 S.W.2d 669, 671 (Ark. 1990)("when a liability insurer retains a lawyer to defend an insured, the insured is the lawyer's client");  Atlanta Int. Ins. Co. v. Bell, 475 N.W.2d 294, 297 (Mich. 1991)(declaring that "the relationship between the insurer and the retained defense counsel [is] less than a client-attorney relationship");  Continental Cas. v. Pullman, Comley, 929 F.2d 103, 108 (2d Cir. 1991)("[i]t is clear beyond cavil that in the insurance context the attorney owes his allegiance, not to the insurance company that retained him but to the insured defendant"); Point Pleasant Canoe Rental v. Tinicum Tp., 110 F.R.D. 166, 170 (E.D. Pa. 1986) ("[w]hen a liability insurer retains a lawyer to defend an insured, the insured is considered the lawyer's client") and In Re Petition of Youngblood, 895 S.W.2d 322, 328 (Tenn. 1995)(counsel's sole client is insured).

A few jurisdictions have also acknowledged that, even if the excess insurer is not a client, it is at least a third-party beneficiary of these legal services and thus entitled to bring suit.  Thus, in Paradigm Insurance Company v. The Langerman Law Offices, 24 P.2d 593 (Ariz.  2001), the Arizona Supreme Court found that although an insurer's retention of defense counsel does not necessarily give rise to an inherent conflict of interest in every case, neither does an insurer always enjoy "client" status. The Supreme Court agreed with defense counsel that "the potential for conflict between insurer and insured exists in every case; but we note the interests of insurer and insured frequently coincide."  Accordingly, the court found that it was possible, absent a conflict of interest, for defense counsel to represent both insurer and insured "but in the unique situation in which the lawyer actually represents two clients, he must give primary allegiance to one (the insured) to whom the other (the insurer) owes a duty of providing not only protection, but of doing so fairly and in good faith."  In any event, even if the insurer is not the lawyer's client but merely an agent of the insured, it is entitled to the same protection as the insured enjoys with respect to the confidentiality of client communications.  The court concluded that, "when an insurer assigns an attorney to represent an insured, the lawyer has a duty to the insurer arising from the understanding that the lawyer's services are ordinarily intended to benefit both insurer and insured when their interests coincide.  This duty exists even if the insurer is a non-client."

Others have likewise found that no client relationship exists but have permitted such claims to go forward on a theory of equitable subrogation.  However, a right to pursue claims for equitable subrogation may be of little value to an insurer in cases where the insured itself is already pursuing a malpractice action of its own, however.  In Pine Island Farmers Cooperative v. Erstad & Riemer, P.A., 649 N.W.2d 444 (Minn. 2002), for instance, the Minnesota Supreme Court refused to find that defense counsel had a client relationship with the insurer and, furthermore, refused to permit the insurer to pursue an action for equitable subrogation to pursue rights accrued from the insured as, in this case, the insured itself had already sued defense counsel for malpractice.  

In a recent Mississippi case, however, the state Court of Appeals has suggested the possibility that an actual attorney/client relationship may be established as the result of contacts between defense counsel and the excess carrier.  In Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, No. 2009-CA-01063, a nursing home in Mississippi was sued for failing to provide proper care to a resident.  The primary insurer (Royal) engaged local counsel to defend the case.  A year later, Royal hired the law firm of Quintairos, Prieto, Wood & Boyer to take over the defense.  The Quintairos firm is a large national law firm with offices throughout the South and Southwest but is not itself a Mississippi law firm.  This fact was pointed out to Royal by the nursing home in expressing concern that none of Quintairos' partners or trial attorneys were licensed to practice law in Mississippi.  Although Royal insisted on continuing to use the Quintairos law firm despite its insured's concerns, these concerns were magnified when, a few weeks later, the trial court struck down counsel's belated designation of a physician as an expert witness.  Thereafter, the law firm issued an updated evaluation of the case.  Whereas prior reports had given a settlement value of $500,000 or less, the March 19, 2004 report concluded that the case had a value of $3 million to $4 million, the first indication that Great American's excess policy might be implicated.  Thereafter, Royal tendered its limits and Great American ultimately settled the lawsuit for an undisclosed amount.

In the ensuing malpractice action against Quintairos, Great American sought recovery on theories of equitable subrogation and negligence, including claims for negligent misrepresentation based upon the trial report submitted to Great American by the law firm.  In 2009, the trial court granted the defendants' motion to dismiss, holding that Great American lacked standing to file suit because it had no attorney/client relationship with the law firm. 

In 2011, the Court of Appeal affirmed the trial court's dismissal of Great American's negligence claims but declared that it should be permitted to go forward on a theory of equitable subrogation.  In Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, 2009-CA-01603 (Miss. App. January 18, 2011), the Mississippi Court of Appeals has ruled that an excess insurer may sue defense counsel hired by the primary insurer for any alleged negligence that resulted in the underlying nursing home suits settling for sums greater than the primary limits of coverage.  The court held that Great American could not sue for malpractice, since it lacked an attorney-client relationship with the firm.  The court declined to allow a direct claim based upon the excess insurer's reliance on alleged misrepresentations with respect to case valuation.  Nevertheless, as have other courts, the Court of Appeals held that even in the absence of an attorney-client relationship, an insurer may bring a claim for equitable subrogation. 

It is logical that an excess-insurance carrier should be allowed to pursue a claim in the insured's place. Shady Lawn had no incentive to pursue a legal-malpractice claim against Quintairos even if it believed Quintairos to be negligent because it had insurance in place to pay the settlement. Also, Royal had no incentive to pursue a claim if it believed the settlement value to be at or near the policy limits of the primary coverage regardless of the alleged malpractice. "The only winner produced by an analysis precluding liability would be the malpracticing attorney." Atlanta Intern. Ins. Co. v. Bell, 475 N.W.2d 294, 298 (Mich. 1991). ¶18. We recognize that a possibility exists that this may result in frivolous claims by excess-insurance carriers; but, for this Court to prohibit legitimate claims would leave the attorney who allegedly committed malpractice free from consequences if the primary insurer declined to pursue a claim. Also, we find that a conflict is not created by allowing Great American to seek equitable subrogation against Quintairos for legal malpractice. Great American and Shady Lawn have the same interest in this litigation -- Shady Lawn's competent representation. Further, Quintairos has already shared attorney-client communications and work product with Great American in the underlying cases. 

Last month, however, the full Court of Appeals withdrew the 2011 panel opinion and substituted a new decision declaring that Great American could pursue claims for negligence and equitable subrogation against the Quintairos firm.  Although the court "denied" Great American's motion for rehearing, its new decision effectively grants the relief that the excess insurer was seeking.  Whereas the Court's earlier opinion had only allowed the case to go forward on a theory of equitable subrogation, the court has now ruled 7-2 in Great American Excess & Surplus Ins. Co. v. Quintairos, Prieto, Wood & Boyer, 212 WL 266858 (Miss. App. January 31, 2012) that Great American had direct rights of action against the firm based upon misrepresentations that it made in reports from Quintairos to Great American.  Even though Great American had not hired the Quintairos firm, the court ruled that Great American was not a "stranger" to the attorney/client relationship.  The court found a relationship was implicit in the communications that defense counsel had been providing to the excess carrier, belying counsel's claims that permitting such a cause of action would interfere with the privilege attached to communications between defense counsel and its client.  

Under the circumstances, the Mississippi court ruled that any misrepresentations in the report that Quintairos had provided to Great American  would support a claim for malpractice and that the trial court had therefore erred in granting counsel's motion to dismiss.  Further, as before, the court recognized a right on the part of an umbrella carrier to bring a claim for equitable subrogation,

Writing in dissent, Justices Carleton and Russell argued that Great American lacked standing to raise these claims and that, "Creating a cause of action for legal malpractice wherein no privity of contract, nor attorney-client relationship exists, jeopardizes the sanctity of the attorney-client relationship."

It remains to be seen whether this Mississippi opinion will provide a template for other courts to imply a client relationship between excess insurers and defense counsel in cases where there were privileged communications between the parties and other trappings of an attorney-client relationship.  What does seem apparent is that courts are becoming less concerned about the formal relationships and are increasingly looking to the actual inter-relationships among defense counsel, primary insurers and excess carriers in determining whether the purposes and indiciae underlying the attorney-client relationship should extend to excess insurers.  It is less clear, however, that Quintairos would support the finding of a client relationship between an excess insurer and defense counsel where, as is more commonly the case, the excess carrier merely receives information from the primary insurer and has little or no direct dealings with defense counsel.

Last week, the Wall Street Journal Law Blog wrote about a recent New York ethics opinion approving legal advertising on Groupon and other group coupon sites.  These services allow consumers to pay one price up front for a service that is more valuable. A restaurant, for example, may offer a $50 meal for $25 that is paid immediately. An attorney, like this one, for example, may offer to provide a will for $99.  New York wasn’t the first state to weigh in on the issue--South Carolina has, too--and it probably won’t be the last. 

Two undeniable and interconnected facts: the U.S. housing market remains virtually stagnant and the number of lawsuits against real estate professionals is on the rise.  Existing home sales have dropped steadily since 2005.  There is a glut of product on the market, yet relatively few ready, willing and able buyers.  During the same period, delinquency and foreclosure rates have grown at an alarming rate.  Real estate professionals have been under considerable pressure to adapt to the conditions of this weak and sputtering market.  Many have not fared so well, as there has been a noticeable increase in lawsuits filed against agents, brokers, inspectors and other real estate professionals.

Insurance fraud has been estimated to take between $80 billion and $300 billion a year from the insurance industry in the United States. Every state has a statute making insurance fraud a crime including the federal crimes of mail and wire fraud and the Racketeer Influenced and Corrupt Organization Act (RICO). RICO can also be a civil action which allows for treble damages or punitive damages.

Some insurer victims of insurance fraud have become proactive. In State Farm Mutual Automobile Insurance Company; State Farm Fire and v. Arnold Lincow, D.O.; Richard Mintz, D.O.; Steven Hirsh; 7622 Medical, No. 10-3087 (3d Cir. 09/16/2011) the Third Circuit dealt with an appeal from State Farm’s successful trial against some doctors and clinics who defrauded it and those it insured.

Facts

After a four-week jury trial plaintiff State Farm successfully convinced the jury that defendants, a number of health care providers (“Defendants”), engaged in various schemes to defraud State Farm by billing it for medical services that were either not provided or provided unnecessarily, and were illegal under RICO, fraud statutes, and common law fraud. Following trial, Defendants filed motions for judgment as a matter of law or, in the alternative, for a new trial or, in the alternative, to alter or amend the judgment. The District Court denied Defendants’ motions in their entirety.

Plaintiff alleged that Defendants were members of a conspiracy that sharply inflated the costs of medical care for car accident victims by prescribing tests and treatments, as well as prescriptions and medical equipment – whether medically necessary or not – and then routinely billed State Farm for additional treatments that were never provided. At trial, State Farm’s proof of Defendants’ fraud consisted of State Farm’s claim files and testimony of patients, physicians at Defendants’ medical facilities, Defendant physicians, and experts.
After a four-week trial, the jury awarded Plaintiff over $4 million against all Defendants jointly and severally, and individual Defendants were found liable for punitive damages totaling $11.4 million

Analysis

The Third Circuit’s reviews a district court’s order granting or denying a motion for a new trial for abuse of discretion unless the court’s denial of the motion is based on the application of a legal precept, in which case the review is plenary. A new trial may be granted on the basis that a verdict was against the weight of the evidence only if a miscarriage of justice would occur if the verdict were to stand.

State Farm noted that RICO is distinct because the members of the association-in-fact enterprise include all the defendants, there is a complete identity between the enterprise and the defendants and, therefore, no distinctiveness among the defendants.  As the District Court noted and State Farm urged, the intracorporate conspiracy doctrine is not universally accepted, and it is questionable whether the Defendant’s version is completely accurate.

The defendants argued that State Farm failed to prove: (1) the elements of an association-in-fact enterprise; (2) that defendant Mintz conspired with the other Defendants to defraud, as § 1962(d) requires; (3) that Mintz’s actions proximately caused State Farm’s injuries; (4) that Mintz’s conduct fulfilled the elements of common law fraud; and (5) that Mintz’s conduct fulfilled the elements of statutory fraud under Pennsylvania law. The Third Circuit rejected all of Mintz’s claims to the contrary and held that the weight of the evidence supports the jury’s finding against Mintz and the other defendants. Therefore, the Third Circuit concluded that to let the verdict stand would not result in a miscarriage of justice.

The Third Circuit agreed with State Farm’s assertion that a violation of the Insurance Fraud statute is a civil tort and that, as the jury found and the District Court upheld, the Defendants together contributed to State Farm’s injuries and are thus jointly and severally liable. Moreover, as the District Court correctly noted, there is no requirement for district courts to instruct juries to award damages against each defendant separately and individually. Because State Farm elected to receive treble damages the Third Circuit had no reason to address the contention that the punitive damages award should be reduced.

Lesson

Insurers who are the victims of fraud cannot rely on police agencies to investigate and prosecute perpetrators of insurance fraud. Prosecutions are few and far between. As readers of Zalma’s Insurance Fraud Letter, available FREE at http://www.zalma.com/ZIFL-CURRENT.htm, know prosecutions are increasing but are still anemic and those who are prosecuted and convicted usually receive minor punishments. By being proactive insurers can recover from the fraud perpetrators, like the doctors involved in this case, the insurer can recover what it lost, a bonus of three times the compensatory damages, and actually deter insurance fraud by hitting the perpetrators where it hurts them most, in their wallet.

It is time that insurers emulate the actions of State Farm and the few other insurers who are using civil suits to defeat insurance fraud by taking the profit out of the crime.

California Insurance Commissioner Dave Jones announced August 19, 2011 that Susana Ragos Chung, 60, a Los Angeles area based attorney has been sentenced in Alameda Superior Court for Insurance Fraud. Chung entered pleas of no contest on two felony counts for violations of Section 549 of the Penal Code, recklessly submitting fraudulent insurance claims. She was sentenced to five years formal probation and to also pay $117,561 in restitution to insurance companies for 15 separate fraudulent claims. In addition, she was ordered to pay $235,123 to the state restitution fund. Chung agreed to place herself on inactive status with the California State Bar pending its mandatory investigation into her criminal conduct, which may result in her disbarment.

In August 2003, the California Department of Insurance (CDI), Benicia Regional Office, Fraud Division, Urban Auto Fraud Task Force initiated an investigation known as "Phantom Menace" into organized automobile insurance fraud in the Bay Area. The Task Force included Investigators from the California Highway Patrol, and Alameda and San Francisco County District Attorney's Offices. As a result of the information and evidence gathered by the Task Force CDI began an undercover investigation in July 2004, which included contacting numerous auto body shops, medical offices and law offices.

Task force members were able to infiltrate a sophisticated auto fraud organized crime ring operating in the Bay Area. This ring was working with law offices in the Los Angeles area. One of these law offices was owned and operated by Chung. In November 2004, task force members acting in undercover capacities were solicited to participate in staged collisions. Numerous collisions were staged and undercover officers were referred to auto body repair shops, medical offices and law offices in an effort to file false automobile insurance claims and secure substantial bodily injury claim settlements.

Between 2003 and 2007, Chung participated in this fraud ring by submitting insurance claims for suspects who staged these collisions for profit. Chung represented the claimants who were allegedly "injured" in these fake collisions. The majority of the people she represented never met her, and many did not even know they had an attorney. Nearly 100 people have been convicted in Alameda County over the last several years as part of this conspiracy, including more than 90 staged collision participants, and three chiropractors. The majority of the participants in these staged collisions readily admitted to law enforcement that no accident had ever occurred.

I understand that California jails are crowded and criminals are being let loose to ease the crowding but running a major fraud ring, in the opinion of ZIFL, requires some real jail time and seizure of the guilty lawyer’s assets. Mr. Jones should not be bragging about this result he should be complaining that the court is being too kind.

From Zalma's Insurance Fraud Letter, September 1, 2011 available free at – http://www.zalma.com/ZIFL-CURRENT.htm.

According to Wikipedia, "It's the economy, stupid" was a phrase made popular by campaign strategist James Carville during Bill Clinton’s bid to become president in 1992.  According to Carville, Bill Clinton was the proper presidential choice because the economy was going in the tank.  In 2011, the economy is still, stupid.  What are lawyers doing to avoid claims created by the failing real estate market and the stupid economy?

On July 5, 2011, The AmLaw Daily reported on a survey by Ames & Gough that legal malpractice claims are rising because of the sputtering economy and sagging real estate market.  So, for the lawyer in the private practice, “it’s the economy, stupid”.  According to the pundits, the lawyer’s chances of getting sued are increasing.

There is a distinct increase in claims against very good attorneys for work that is fair or good but not great.  The rise in claims appears to emanate from legal work that eventually resulted in the client losing money in a failed real estate deal or commercial transaction. In each of several recent matters involving claims by clients against lawyers, the deal would have had a good result in a decent commercial real estate market but the market is sour and there are LPL claims. A recurring theme in several cases is (a) assuming too much about the client's expertise, in the case of a new client, and (b) not spelling out, in writing, possible negative outcomes to a deal or a certain strategy.  From the complaints of recently filed lawsuits allegations and expert opinions accuse the good attorney of:

1. The lawyer did not advise his clients of the real likelihood that a good faith dispute could arise over the enforceability of the contract language;
2. The attorney, as a reasonably prudent attorney, should have foreseen that the option, as drafted, was likely to result in litigation and a reasonably prudent attorney, in similar circumstances, would have taken steps to prevent such a result;
3. The attorney is liable because they cannot adequately demonstrate that they told their clients they were signing an agreement that may subject them to litigation the future;
4. The attorney failed to advise the client to postpone certain actions required by statute until “better evidence” could be collected.  Had the attorney counseled the clients about the importance of obtaining the “better evidence” the clients made critical decisions without informed consent;
5. The lawyer failed to ensure that the client would not be subjected to further liability after the partnership was dissolved; and
6. In reliance upon the counsel of the managing member, the clients made payments for capital contributions which were not accounted for in the LLC and the lawyer’s failure to draft an “air tight” operating agreementjustifies the lawsuit.

These are just bits of lawsuits recently filed.  Some of the accusations sound stupid but, it is the fault of the economy, not sub-standard lawyering.
The practical lawyer should be careful to challenge his client and the client’s understanding about the transaction.  Do not assume the client is sophisticated but take the time to advise on the potential issues that could be encountered. If the client is responsible for adhering to future responsibilities provide her with a checklist or a calendaring system.  Avoid conflicts, and be careful out there.

The continuing evolution of electronic-filing in federal and state courts has revolutionized case management in clerks’ offices throughout the country.  In order to account for that continuing evolution in Alabama specifically, the Alabama Supreme Court recently adopted amendments to several of the Alabama Rules of Civil Procedure, including Rule 58 governing the rendition and entry of orders and judgments in Alabama state courts. See Ala. R. Civ. P. 58 cmt. (2008).  Although the amendments to Rule 58, which went into effect less than a year ago, are seemingly inconsequential, lawyers practicing in Alabama who are unaware of the changes to the Rule could be susceptible to malpractice if they fail to timely appeal based on those changes.  Further, while lawyers practicing in Alabama should be particularly cognizant of the changes, lawyers practicing in other states should monitor their own state’s rules to ensure they become aware of any changes similar to those discussed below that might affect the time to take an appeal.

In general, and subject to certain exceptions, a party has six weeks from the day a judgment is entered to file its notice of appeal pursuant to Alabama Rule of Appellate Procedure 4.  Under old Alabama Rule of Civil Procedure 58, a judgment was not “entered” for purposes of taking an appeal unless and until it was entered into the State Judicial Information System (SJIS), which entry sometimes occurred days or even weeks after the judgment was rendered.  Now, however, a judge can render a judgment electronically “by executing and transmitting an electronic document to the electronic-filing system[,]” and a judgment rendered by doing so is “deemed ‘entered’ within the meaning of . . . the Rules of Appellate Procedure as of the date the order or judgment is electronically transmitted by the judge to the electronic-filing system.” Ala. R. Civ. P. 58(c) (emphasis added). 

Some Alabama judges may still choose to render judgments the “traditional” way by manually signing the judgment and then having their clerks enter the judgment into the SJIS.  Indeed, Rule 58 still provides for that method of rendering and entering judgments.  But, in light of the amendments to Rule 58, lawyers practicing before Alabama judges who frequently render orders or judgments electronically should be sure to appropriately calendar the deadline for filing a notice of appeal from the time they receive the electronic dismissal, rather than waiting to do so for the clerk’s entry of the judgment in the SJIS as they might have done in the past.  Failure to do so could be fatal to an appeal.