Monthly Archives: April 2015

Who Should be Protected the Attorney or the Client?

By Michael Zoller, Esq.
mzoller@pashmanstein.com

The New Jersey Supreme Court recently granted certification in the case of Mortgage Grader Inc. v. Ward & Olivo LLP, John Olivo and John Ward to address the question of who should bear responsibility for a legal malpractice claim when a law firm allows its insurance coverage to lapse during dissolution.  The Trial Court held that when the law firm fails to maintain the malpractice insurance required by Court Rule 1:21-1 it reverts to being a general partnership and individual partners of the law firm can all be personally liable for the malpractice committed by one partner.  On appeal, the Appellate Court reversed the Trial Court by holding that the law firm organized as a limited liability partnership does not revert to a general partnership when it fails to maintain its legal malpractice insurance.  Now the Supreme Court will settle the issue.

The question presented by Mortgage Grader is one of importance to both clients and attorneys.  Court Rules allow attorneys to practice in corporations, companies and partnerships that all provide limit personal liability protection.  If an attorney commits malpractice only the individual attorney and the firm itself may be held financially responsible.  The aggrieved client cannot personally pursue other attorneys in the firm.  The tradeoff for this limited liability protection is that the firm must maintain at least a specified amount of malpractice insurance so that there is a pool of money for the client to potentially collect against.  The circumstances of Mortgage Grader appear to have highlighted a loophole in the insurance coverage in return for limited liability protection paradigm.

In Mortgage Grader, the plaintiff retained the law firm of Ward & Olivo, LLP to represent it in several patent infringement suits.  John Olivo was responsible for handling the cases on behalf of Mortgage Grader.  When Mortgage Grader realized that it had entered into unfavorable settlements due to advice from Olivo it sued the firm and its two named partners for malpractice.  Normally, the firm’s malpractice insurance would provide a pool for Mortgage Grader to potentially recover from, but in this case no insurance was available because prior to the claim being made, Ward & Olivo had dissolved and instead of purchasing a tail policy to provide coverage for claims filed after dissolution, the firm had allowed its insurance policy to lapse.

It is Mortgage Grader and the Trial Court’s opinion that since Ward & Olivo chose to not purchase a tail policy while it was still winding up its affairs, Mortgage Grader should be able to recover against whatever assets of the firm still exist and both Olivo and Ward individually.  This approach provides more protection to Mortgage Grader because it creates a bigger pool of money for it to potentially recover from.  It is Ward and the Appellate Court’s opinion that even though Ward & Olivo did not purchase a tail policy to maintain insurance coverage, Ward should still be afforded liability protection and Mortgage Grader should only be allowed to potentially recover against whatever assets of the firm still exist and Olivo individually.  This approach provides protection to Ward because Mortgage Grader will not be able to potentially recover from his personal assets.

The question before the Supreme Court boils down to who should be protected: the client who engages a law firm under the assumption that malpractice insurance is in place to protect it should something go wrong or the attorney who chose to not purchase tail insurance when he dissolved his firm?  The answer the Supreme Court provides has the potential to affect all attorney-client relations going forward so it bears watching from both sides of the aisle.

You Can’t Take It With You, But Can Your Spouse?

Yearing, T.By Tadd Yearing, Esq.
tyearing@pashmanstein.com

 

When a party in a divorce action dies during litigation, the right to equitable distribution disappears. This is because equitable distribution is specifically awarded upon final dissolution of a marriage. The courts, however, have allowed exceptions to this principle; crafting equitable relief to prevent clearly unfair results, such as to prevent one party (or estate) from being unjustly enriched or to prevent fraud by one party upon the other.

In the 1990 case of Carr v. Carr, 120 N.J. 336, our Supreme Court reviewed the equitable distribution claim of a wife following the death of her husband. Despite the couple having been married for seventeen years, the husband’s will left the entirety of his estate to his children from a prior marriage. Because there was also divorce pending, the wife’s rights to at least a spousal share of the estate were in question. Reviewing the probate and equitable distribution statutes, the court concluded, “the principle that animates both statutes is that a spouse may acquire an interest in marital property by virtue of the mutuality of efforts during the marriage.” It thus held that, “if warranted by the evidence,” a court can act to prevent unjust enrichment where equitable distribution becomes unavailable because of the death of one party prior to the entry of a Judgment of Divorce.

Twenty years later, the Supreme Court revisited these principles in the case of Kay v. Kay, 200 N.J. 551 (2010). In that case, the roles were reversed somewhat, as the deceased spouse’s estate was seeking relief from the surviving spouse, who was accused of having improperly diverted assets. Once again, the court authorized equitable relief to promote fair dealing and to ensure that, “marital property justly belonging to the decedent will be retained by the estate for the benefit of the deceased spouse’s rightful heirs.”

This brings us to the Appellate Division’s recent unreported decision in Beltra v. Beltra, 2014 WL 8096146, decided just last month. In this case, plaintiff-wife filed for divorce after a thirty-four year marriage. She was subsequently diagnosed with a terminal illness and tragically died six months into litigation, and prior to a final hearing. The estate was permitted to substitute in and the parties had a five-day trial to determine equitable distribution. The trial court’s written opinion was scathing in its assessment of defendant’s behaviors. It noted that defendant’s, “non-verbal actions were extraordinary in demonstrating his lack of candor with the court.” It noted he was “evasive” and that his testimony was “inconsistent.” More still, the trial court found he had made substantial deposits of cash generated from his business into foreign banks, purchased foreign assets with cash payments, and had interests in a number of spin-off businesses – much of which remained undisclosed to the wife/estate even after multiple contempt orders for his failure to disclose.

The trial court entered an award of assets and husband appealed. The appellate division vacated the order and remanded the matter for further findings. Following additional argument from the parties, the trial court specifically noted that exceptional circumstances warranting equitable relief existed and reinstated the original order for distribution. The judge further imposed a constructive trust on defendant’s assets.

Defendant again appealed, this time challenging the trial court’s imposition of a constructive trust, and arguing that because the estate failed to demonstrate “the nature or value of the subject assets,” it was error for the trial court to order distribution.

Unmoved by defendant’s arguments, the Appellate Division noted that, “[t]he facts were so flagrant and defendant’s offered explanation so unbelievable, the [trial] judge reported the apparent unreported income to regulatory and law enforcement agencies.” Moreover, the appellate court called out defendant’s extreme bad faith in arguing wife’s inability to ascertain the value of the assets. It highlighted the fact that because of defendant’s efforts to hide assets, plaintiff provided what information she could obtain. Thus, it was unreasonable to place a burden of proof on the party not having access to evidence to support that burden. Finally, the Appellate Division affirmed the use of a constructive trust to remedy the inequity caused by defendant’s clandestine efforts, and to “protect the right to claim marital assets in a matrimonial action.”

This case is an extreme reminder of the complexities that can arise in matrimonial litigation. The conflicting intersection of estate and divorce law clearly shows the potential for clients to be left in a legal “black hole” of sorts. To the extent that case law has developed to limit the possibility of parties being left without recourse, it is instructive that the Appellate Division first remanded the matter back to the trial court for specific findings in support of its imposition of equitable relief. That is, the ability to avoid this possible black hole is not guaranteed. As a practical matter, then, it is important that the right to relief is not simply assumed because of one party’s untimely death.

While death itself may seem to beg the question of inequity, this is clearly not the case. It is, therefore, critical that the court be presented with an explicit basis on which to find that equitable remedies are necessary to avoid injustice. There are a myriad of scenarios where the interests of justice might suggest leaving the parties “as is,” such as insolvency, or where a surviving spouse must continue to care for an unemancipated child, or where the parties each have substantial independent wealth, to name but a few. On the other hand, where one party acts to obstruct discovery, the Beltra court’s understanding with regard to burdens of proof counsels that the other party should not be penalized for being unable to present proofs beyond that to which they had reasonable access.

As is so often the circumstance in matrimonial matters, the specific facts of any given case matter. While Beltra reinforces important guiding principles for a serious, yet infrequently occurring, situation, more than anything it highlights that ensuring fairness between the parties is what matters most.