The Georgia Court of Appeals holds Apportionment of Fault to Non-Parties Does Not Permit Apportionment of Damages

            On May 21, 2020, the Georgia Court of Appeals issued an opinion in the closely watched legal malpractice case of Alston & Bird, LLP v. Hatcher Management Holdings, LLC (“Hatcher II”).  The Court of Appeals’ construction of Georgia’s apportionment statute, O.C.G.A. § 51-12-33, may have important implications in tort litigation when defendants analyze joinder of non-parties and consider the utility of filing a notice of non-party fault.      

The Underlying Dispute

            In 2000 Maury Hatcher hired Jack Sawyer, then an Alston & Bird, LLP (“Alston”) partner, to form and represent a holding company that was intended to manage the Hatcher family real estate fortune, Hatcher Management Holdings, LLC (“HMH”).  Beginning in 2005, Maury embezzled money from HMH, taking more than $876,000 in compensation and $218,000 in distributions.  In 2008, suspecting that something was wrong, Maury’s family members asked for access to HMH’s books and records. Sawyer advised them that they had no right to any of HMH’s books and records despite clear provisions in the operating agreement stating otherwise, and he never advised them that Maury was required to make annual reports of all distributions.  On October 31, 2008, Maury redeemed his and his immediate family’s interests, paying himself $397,000 more than they were worth. In January 2009, Maury resigned as HMH’s manager, and he moved to Florida telling his family that he was effectively judgment proof.[1]

HMH’s Case Against Maury

            HMH and its members sued Maury in a separate action in 2009 alleging he breached his fiduciary duties.  In 2011, the trial court granted partial summary judgment in favor HMH finding Maury liable for breaches of his fiduciary and contractual duties under the operating agreement.  The trial court’s order was upheld on appeal.  Following a damages trial, in which Maury failed to participate, the trial court awarded over $4 million in damages.  HMH was unable to collect on that judgment. 

HMH’S Legal Malpractice Case Against Alston

            In 2012, after HMH prevailed on summary judgment against Maury, but before the Court of Appeals affirmed the trial court, HMH sued Alston for: (1) legal malpractice; (2) breach of fiduciary duty; (3) pre-judgment interest under O.C.G.A. § 13-6-13; and (4) attorney’s fees and litigation expenses under O.C.G.A. § 13-6-11.[2]  Alston filed a notice of non-party fault under O.C.G.A. § 51-12-33 (“apportionment notice”), and in an earlier interlocutory appeal, Hatcher I, the Court of Appeals reversed the trial court’s order striking Alston’s apportionment notice.

            At trial, the jury awarded HMH $697,614 in compensatory damages, $341,831 in prejudgment interest under O.C.G.A. § 13-6-13, and $1,096,561.48 in attorney’s fees and costs under O.C.G.A. § 13-6-11, for a total award of $2,136,006.48.  The jury apportioned 60% of the fault to Maury, a non-party, 32% to Alston, and 8% to HMH.  The trial court then reduced HMH’s award to $683,522.07, 32% of the total.

Alston’s Appeal

            In Hatcher II, Alston contended that the trial court erred by denying its motion for directed verdict and motion for judgment notwithstanding the verdict on the issue of proximate cause.  Notably, Sawyer admitted at trial that if he had he advised the members of their rights in 2008, before Maury redeemed his interests under the operating agreement, the non-managing members could have detected the fraud and mitigated their damages by stopping or claiming set-offs against Maury’s October 31, 2008 redemption.  The Court of Appeals affirmed the trial court’s denial of Alston’s motions, finding that there was sufficient evidence that Sawyer’s actions were the proximate cause of HMH’s loss.

            Alston also argued that the trial court erred by allowing the jury to consider pre-judgment interest under O.C.G.A. § 13-6-13.  The Court of Appeals agreed, finding that O.C.G.A. § 13-6-13 only applies in breach of contract actions. Because HMH only asserted tort claims, breach of fiduciary duty and legal malpractice, the panel reversed the trial court’s award of pre-judgment interest.

HMH’s Cross Appeal as to Apportionment of Damages

            In its cross-appeal, HMH argued that the trial court erred by reducing all of its damages by 68%.  The Court of Appeals agreed with HMH, finding that O.C.G.A. § 51-12-33 only permitted the trial court to reduce HMH’s compensatory damages by 8% and that it did not allow any reduction in HMH’s damages for attorney’s fees and costs under O.C.G.A. § 13-6-11.

            The Court of Appeals concluded that apportionment under O.C.G.A. § 51-12-33 did not apply to a fee and cost award under O.C.G.A. § 13-6-11 because those damages were wholly attributable to Alston, and claims under O.C.G.A. § 13-6-11 stand apart from the claims on which they are dependent.  By eliminating any apportionment against the fee recovery, the Court of Appeals reinstated the entire award of litigation fees and expenses totaling $1,096,561.48. 

            Further, when considering HMH’s compensatory damages, the Court of Appeals reasoned that:

  1.  O.C.G.A. § 51-12-33(a) only allows the trial court to apportion damages in a single defendant case against a plaintiff when a plaintiff is partially at fault;
  2. O.C.G.A. § 51-12-33(b) only permits the apportionment of damages among co-defendants; and
  3.  although O.C.G.A. § 51-12-33(f) permits the apportionment of fault against non-parties (as supported by Hatcher I), it does not permit the apportionment of damages to non-parties.

As a result, the Court of Appeals remanded with instructions to re-calculate the reduction of HMH’s $697,614 compensatory damages award by 8% rather than 68%.

Strategic Implications

            Given the potential impact of this ruling, further review or challenge is expected.  The Court’s analysis nullifies what many assumed was the legislature’s intent: allow apportionment of fault to non-parties, thus reducing potential damages awarded against party defendants.  While the opinion fully recognizes fault can be apportioned to non-parties, there is no discussion or analysis of how apportionment of fault will serve to defer the liability alleged against the defendant if such apportionment cannot reduce damages.  Will trials now be bifurcated with liability only phases where fault of all is considered before any damages are presented?  And even then, what calculus is used if not against damages awarded? 

         Should the holding stand, defendants now must rethink their assumptions about apportionment of damages.  In a case with only one defendant, filing a notice of apportionment will not result in any damages being apportioned, except in cases where the plaintiff is found partially at fault. Decisions not to add parties, instead hoping to rely on apportionment, may now need revisited. 

          This closely watched and long-awaited opinion is sure to cause much more discussion and analysis in the weeks to come.  Stay tuned for further updates. To read the Court of Appeals decision, please click here.


[1] The Court of Appeals did not address these statements or give a detailed procedural history of the separate suit between HMH and Maury, but additional facts are set out in the Final Order and Judgment in that case, Hatcher Management Holdings LLC et al. v. Hatcher et al. 2009CV179145, Fulton County Superior Court (March 5, 2013), and Hatcher I.  

[2] HMH also sought punitive damages, but those were not awarded and they were not germane to the Court of Appeals’ decision in Hatcher II.

South Carolina Court of Appeals Affirms Dismissal of Legal Malpractice Case for Failure to Comply with the Statute of Limitations

The South Carolina Court of Appeals recently issued an Opinion in Personal Care, Inc. v. Jerry N. Theos, et al., affirming the Circuit Court’s dismissal of a legal malpractice case for failing to comply with the statute of limitations. The Court of Appeals considered two arguments by Appellants: (1) whether the Circuit Court erred in denying the Motion to Restore and (2) whether the Circuit Court erred in concluding the discovery rule, and not the date the underlying case was resolved, applied to determine the applicable statute of limitations.

Personal Care retained attorney Jerry Theos to investigate claims against a former employee. Personal Care directed Theos to send a letter to the former employee demanding she refrain from certain wrongful activity, including soliciting its clients. Theos also sent the letter, dated September 14, 2009, to a third-party medical services provider frequently employed for Personal Care’s business. Theos ultimately filed suit on behalf of Personal Care against the former employee. The former employee asserted a counterclaim for defamation stemming from the September 2009 letter.

On March 8, 2013, prior to resolution of Personal Care’s case against the former employee, Personal Care commenced a legal malpractice lawsuit against Theos (and others) for the handling of the underlying lawsuit. In the legal malpractice Complaint, Personal Care claimed Theos’ September 2009 letter exposed the company to liability and forced it to incur additional legal costs in defending the counterclaim, among other allegations of negligence. Theos filed an Answer generally denying the allegations and moved to dismiss the claims based on the expiration of the statute of limitations. Shortly thereafter, the parties executed a Consent Order pursuant to Rule 40(j) SCRCP, striking the case from the docket pending resolution of the underlying case between Personal Care and its former employee.

Rule 40(j), SCRCP provides for tolling of the statute of limitations if the claim is restored upon motion made within one year of the date stricken. Here, Personal Care did not move to restore the legal malpractice case until more than one year after the Order dismissing it pursuant to Rule 40(j). Respondents opposed the Motion to Restore, asserting the statute of limitations had run on the legal malpractice claims. The Court agreed, essentially holding that the case was dismissed, and therefore, Respondents could only raise this statute of limitations defense at this motion (as opposed to a motion for summary judgment).

In response, Appellants cited Stokes-Craven Holding Corp. v. Robinson, 416 SC 517, 787 S.E. 2d 485 (2016) to argue the statute of limitations did not begin to run until an “adverse verdict, judgment or a ruling” was entered against the client in the underlying lawsuit. In this case, the Court of Appeals disagreed and held Stokes-Craven did not eliminate the discovery rule in favor of a bright-line rule that all legal malpractice claims accrue on the date an adverse judgment is entered against the client. Rather, it found that Stokes-Craven dealt with the “particular scenario” in which a client’s injuries are predicated on an adverse judgment that is then appealed. Here, Personal Care’s cause of action for legal malpractice was predicated on the September 2009 letter, and therefore, Personal Care first suffered a financial injury when it was forced to spend additional funds and commit time and other resources to mitigate the damages caused as a direct and proximate result of Respondent’s errors.

While Stokes-Craven dealt a blow to the statutes of limitations defense available in legal malpractice cases in South Carolina, Personal Care has narrowed Stokes-Craven and reinforced the applicability of the discovery rule.

The entire Opinion can be found here.

 

Claims Against CPA’s for Failure to Detect Fraud

The July issue of Accounting Today makes important points about accounting risk for failure to detect and report fraud.  Sarah Ference, Risk Control Director for CNA, notes that while CPA engagements are not typically designed to detect or report fraud, most clients, and perhaps most jurors, think CPAs should always be on the lookout for fraud.  25% of claims arising from audit and attest engagements allege that the CPA failed to detect and report fraud.   6% of tax service claims also allege a failure to detect and report fraud.   Ms. Ference notes the importance of engagement letters to manage expectations and, where appropriate, disclaim reliance.  Mission creep, of course, can render the best engagement letter ineffective.   Finally, the article suggests that anything sinister or unusual observed during the engagement should be reported in writing to the client.    The disconnect between client/juror expectations and an accountant’s scope of engagement will apparently always be with us.  Paying attention to potential fraud and reporting it may help your accounting firm avoid becoming a data point in the claims statistics.

5 Takeaways from CLM 2018 Annual Conference, March 14-16, 2018 in Houston, TX

I was fortunate to attend and speak on a panel at the CLM Annual Conference in Houston last week. I thought I would pass along a few takeaways from the professional liability sessions I attended.

  1. The increase in autonomy for “Physician Extenders” (CRNA, NP, PA, midwives) likely comes with increased liability risk to them. Analyzing contracts with the supervising physician, actual supervision of the physician extender, whether the extender’s liability insurance coverage matches the realities of their practice, and whether the extender will be held to the physician standard of care are all important considerations in advising and defending a physician extender.
  2. Lawyers must embrace Artificial Intelligence in analyzing cases and use it to their advantage. They must be prepared to discuss why the data is or is not accurate and how it can be applied to a specific case.
  3. Don’t forget about paper and unsaved emails in the “high-stakes” insurance broker case. The tendency may be to focus on ESI due to the vast amount of documentation in a multi-million dollar claim. But a hand-written note documenting a meeting or phone call, or an email that was not saved to the client file could be the key piece of evidence to support the broker’s position that a coverage was refused or a particular risk was discussed.
  4. High exposure does not necessarily translate to the existence of a special relationship with an insurance broker. Key factors to address in opposing a special relationship finding are:
    • Other brokers involved/seeking competing bids
    • Criticism or questioning of the broker by the client
    • The sophistication of the client and autonomy in decision-making
  5. Cyber-attacks and data breaches pose an increasing risk to professionals such as lawyers, accountants, insurance agents, and medical professionals, who possess a significant amount of potentially valuable data.
    • As the sophistication of the attacks has increased, so has the variety in available insurance coverages.
    • Make sure that your firm and your clients have adequate coverages to address the wide range of cyber risk to you and your clients.
    • The sooner you respond to a cyber-attack, the better, starting with reporting it to your insurance carrier who likely has the resources to assist with addressing the issue.

Accountants – Guard your Clients’ Tax Returns or Face Death by 1000 Cuts

Today the CPA Dailey Letter (citing CBS News and the IRS) warned against phishing attacks on accounting firm computer networks resulting in stolen data and fraudulent tax returns. We helped an unfortunate client facing this problem last year. They merged in a smaller firm in the middle of busy season and didn’t get the small firm converted to the large firm’s computer system quickly enough. Imagine a hacker getting copies of all your clients’ 2016 returns and then using your clients’ data to file fraudulent 2017 returns seeking big refunds. You and your clients learn about the problem when notices start drifting in from the IRS rejecting returns that seek 7 figure refunds. Eventually you get such a notice for every one of your tax return clients. You have to call each and every one of them to tell them that fraudsters have all their personal information from the return. Fraudulent tax returns may just be the beginning of their identity theft problems. This problem could really ruin your quarter and your year. Keep your software updates current and do some simulated attacks to protect your clients and your firm.

Tough News Week for Auditors

Earlier this week the Wall Street Journal and others reported that KPMG had hired former PCAOB staffers to reveal the secret list of KPMG audits that the PCAOB would examine.  The article reported that the SEC had indicted 5 former KPMG employees including 3 former partners for fraud.  KPMG apparently discovered the scheme in March of 2017 and self-reported.  Allegedly almost half the 2013 KPMG audits reviewed by the PCAOB in 2014 had been found deficient and the firm felt pressure to improve its audit quality.  The partners charged included those formerly in charge of national audit quality and another responsible for inspections.

A few days later GE announced an SEC probe of its accounting practices along with a restatement of its 2016 and 2017 financial results.  At least part of the problem arises from revenue recognition issues in its jet engine and power turbine business.  Other problems stem from charges in its long term care insurance business.  Together the adjustments may total over 21 Billion dollars.  KPMG has served as GE’s auditor since 1909.

These articles highlight the challenges even the largest audit firms face in detecting material misstatements in a client’s financials.  We face increasing complexity in public company financials and auditors are struggling to keep up with the standards in a difficult environment.

Accounting Firm Prevails Against Disgruntled Seller

Matt Gass and Joe Kingma won a motion to dismiss against a seller after a deal fell through. The seller alleged malpractice, misrepresentation and intentional interference; essentially that the purchaser wanted to get out of their agreement and used the accountant to achieve that result. Joe and Matt filed an early motion to dismiss and prevailed on all the claims.

Claims arising from the accountant’s role in mergers and acquisitions are definitely on the rise, and we are handling several more of those now, so check back for updates.

 

Transitioning from Offense to Defense: Challenging the Viability of Underlying Claims is a Strong Defense in Legal Malpractice Lawsuits

Causation continues to be one of the toughest hurdles for clients suing their former lawyers. In legal malpractice cases arising from litigation, one element of a plaintiff’s case will be the merits of that underlying litigation. If the underlying case was unwinnable, then losing is not malpractice. Relying on this rationale, Georgia courts have been frequently dismissing malpractice cases. Sometimes an attorney’s best defense is to attack the merits of the underlying claims he or she had previously argued in favor of.

In Benson et al. v. Ward, the Georgia Court of Appeals held that a defendant attorney was entitled to summary judgment in a legal malpractice lawsuit because his former client could not show that the trial court abused its discretion dividing marital property. The plaintiff’s lawyer failed to timely file an appeal of the divorce decree. Because the trial court has broad discretion in how it divides marital property, the plaintiff couldn’t meet the high burden of showing that the division would have been reversed if the appeal had been properly filed.

In McDonough v. Taylor English Duma, LLP, the Georgia Supreme Court affirmed the dismissal of a legal malpractice lawsuit based on Georgia’s non-assignment statute (O.C.G.A. § 44-12-24). The plaintiff was a successor in interest to a bank on a note and guaranties that sued the guarantor for fraudulently transferring property to his wife. The plaintiff’s attorney did not add the wife to the lawsuit before she transferred the property to a bona fide purchaser. As a result, the plaintiff couldn’t execute the judgment against the transferred property. The Court held that the plaintiff could not have prevailed on the fraudulent transfer claim because a right of action for fraud is not assignable. Because the fraudulent transfer claim was not viable, the legal malpractice claim also failed.

It is important, however, to note that the Georgia legislature has passed the Uniform Voidable Transfer Act, which expressly allows assignees to pursue fraudulent transfer claims. Even so, the McDonough decision is a good reminder that a valid defense to the underlying claims can sever proximate cause in the legal malpractice lawsuit.

These cases emphasize that the viability of underlying claims are often the lynchpin in legal malpractice lawsuits. Once a legal malpractice lawsuit is filed, however, an attorney needs to be comfortable switching from offense to defense. This can put attorneys in the awkward spot of challenging their own positions they had taken representing their former client. As the Georgia courts continue to show us, attacking proximate cause due to failures of the claims underlying the legal malpractice lawsuit can often be the best defense.

Waiving the Unwaivable: Non-Waivable Conflicts and Statutes of Repose Can’t Be Waived, Right?

October 2017 has been an interesting month for cases involving waiver in the courts of Georgia. These cases are important reminders that legal rights may matter, but a party’s conduct matters more. They underscore the fact that almost anything is waivable in the right circumstance. Waiver is a fancy word for giving parties what they said (or acted like) they wanted or at least accepted, despite changing their minds at some later point.

In Department of Labor v. Preston, No. 17–10833 (11th Cir. Oct. 12, 2017), new Circuit Judge Kevin Newsom writes an interesting opinion on ERISA’s statute of repose (That’s not a thought you would expect to have about an ERISA case, but Judge Newsom is already making a name for himself rendering interesting usually mundane statutory issues.) In concluding that ERISA’s statute of repose is subject to waiver, the Court collected a list of many waivable “rights,” including the Fourth Amendment right to be free from unreasonable searches, the Fifth Amendment right against self-incrimination, and the Sixth Amendment right to assistance of counsel. The opinion concludes: “It would be passing strange—bizarre, in fact—to conclude that while a litigant can renounce his most basic freedoms under the United States Constitution, he is powerless to waive the protection of . . . ERISA’s statute of repose. No way.” No way, indeed.

This Eleventh Circuit case pairs well with an opinion out of the Georgia Court of Appeals to underscore the concept of waiver, even of the unwaivable. In Zelda Enters., LLLP v. Guarino, 2017 Ga. App. LEXIS 447 (Oct. 4, 2017), the Georgia Court of Appeals reminded us that even non-waivable conflicts of interest are waivable in the course of litigation. The Court noted that the Rules of Professional Conduct—which prohibit waiver of certain conflicts of interest among lawyers and their clients—does not control the decision of whether a client subsequently waives the ability to have a lawyer disqualified in a legal proceeding by delaying in seeking disqualification. In sum, the Court seems to have caught on to the fact that litigants are trying to use tenuous connections with counsel to achieve litigation advantage by seeking disqualification of a party’s lawyer of choice, often after months or years of litigating without raising the issue.

To conclude, legal rights are great. But almost all of them can be waived either expressly in writing or by virtue of a party’s conduct in litigation, and courts are increasingly attuned to hyper-technical lawyering seeking to avoid the consequences of a party’s earlier actions. For the moment, substance prevails over form.

5 Takeaways From the Carlock Copeland 2017 Accounting Risk Program in Nashville, TN

1. Cyber Insurance is cheap and important to protect against risks not covered by E&O. Work with a knowledgeable broker and insurer and buy the coverage because the risk is real and growing.

2. Make sure your engagement letter includes:
• a specific description of the work you will do;
• limitation of damages provision where not precluded by standards;
• indemnification where not prohibited by standards;
• disclaimers where appropriate ( i.e. AUP’s);
• jurisdiction, venue and choice of law provisions; and
• a provision for the client to pay for time and expense you incur for subpoena compliance.

Watch out for client changes including cyber representations and indemnifications of any kind.

3. Evaluate the risk to your firm before responding to subpoenas or document requests.  Consultation with your insurer or outside counsel may be time well spent.  The risk runs from minimal to existential and different risks require different responses.

4. You save money by not engaging with bad clients.  Red flags include:

• financially stressed or unprofitable  clients;
• clients whose work you are not really equipped to handle;
• clients whose interests conflict with other clients; and
• clients who lack management integrity.

These all should be evaluated for disengagement. Consider firing  your bottom 5 or 10% and investing those resources into developing better opportunities.

5. All of us have clients who present some special risk.  Do what you can to mitigate that risk with:
• thorough client acceptance procedures;
• engagement letters;
• robust conflict analysis; and
• continuous reevaluation.

Employ detailed financial management including precise billing entries, timely billing and early AR follow-up in order to spot problems quickly.