Articles

I.
Peeler Applies Only to Suits By Convicted Clients

Macias v. Moreno, 30 S.W.3d 25 (Tex. App.-El Paso 2000, pet. denied) involved a claim of legal malpractice against a client's former criminal defense attorney. In Macias, the appellate court addressed the issue whether a sole proximate cause instruction should be made available to a legal malpractice defendant in a suit brought by a former criminal client who was never convicted. The appellate court determined a conviction is a condition precedent to applicability of the sole proximate cause instruction under the Peeler¹ doctrine.

In Macias, Officer Freddy Moreno ("Moreno") was indicted for violating the rights of a prisoner and was released on bond. He hired Francisco Macias ("Macias") to defend him. Macias neglected to inform Moreno of a hearing and Moreno did not appear. A warrant was issued, Moreno was arrested, and he spent three weeks in jail. Moreno then fired Macias and hired another attorney who succeeded in having the charges dismissed. Macias, 30 S.W.3d at 26.

Moreno brought a legal malpractice claim against Macias. Relying on Peeler, Macias requested that a sole proximate cause instruction be submitted in the jury charge arguing that Moreno is barred from recovery unless Moreno could show that he was exonerated of the underlying criminal charge. The trial court refused the submission, the jury found Macias negligent, and a judgment was entered against Macias.

Macias appealed arguing that, under Peeler, Moreno's recovery was barred unless he could show that he was exonerated of the underlying criminal charge and, therefore, he was entitled to the sole proximate cause instruction. Moreno argued that, under Peeler, the sole proximate cause defense existed only when a conviction existed. Since Moreno was never convicted of the crime, the submission of the sole proximate cause defense would be improper.

The appellate court agreed with Moreno. The appellate court distinguished Peeler as a case applying only to convicted plaintiffs. Since Moreno was never convicted of the crime, the sole proximate cause defense could not be properly submitted. Therefore, the trial court's judgment was affirmed.

II.
The Hughes Rule Is Clarified: The Tolling Period Extends To Final Judgment

Apex Towing Co. v. Tolin, 2000 WL 33191372 (Tex. 2001) (not released for publication) is a case involving the application of the statute of limitations to legal malpractice actions. The court addressed the question whether the Hughes doctrine² had been modified by its later decision in Murphy v. Campbell, 964 S.W.2d 265 (Tex. 1997). The Texas Supreme Court determined that the Hughes rule had not been modified and disapproved of all authority to the contrary.

In Apex, Apex Towing Company ("ATC") sued William Tolin ("Tolin"), its former attorney, for legal malpractice in the handling of the defense of a maritime personal injury lawsuit. Judgment was rendered in the underlying litigation on August 31, 1994. The amount of the judgment was in excess of that which would have been awarded had Tolin filed certain pleadings. ATC then hired additional counsel to file post-judgment motions and an appeal. The case was finally settled on or about January 27, 1995 and the appeal was dismissed on May 19, 1995.

On August 31, 1995, ATC filed a legal malpractice suit against Tolin but subsequently dismissed it without prejudice. On February 19, 1997, ATC re-filed that suit. Tolin moved for summary judgment on the statute of limitations arguing that limitations began to run no later than January 27, 1995 -- the date that parties purportedly agreed to settle the underlying personal injury suit.

The trial court granted Tolin's summary judgment on limitations grounds. The court of appeals affirmed basing its decision on Murphy. The court of appeals held that ATC discovered or should have discovered the legal malpractice claim no later than August 31, 1994 -- the date of the underlying judgment in excess of any maritime limit of liability. The court of appeals further held that in Murphy, the Texas Supreme Court narrowed the tolling provision to situations where "the client is continuing to use the same lawyer in the pending litigation." Tolin, 2000 WL 33191372 **2. Since ATC hired a new attorney no later than January 27, 1995, the Hughes doctrine did not apply.

The Texas Supreme Court, however, reversed the court of appeals. To support its ruling, the court initially looked at the policy reasons behind the Hughes doctrine. First, the legal injury rule and the discovery rule can force a client into an untenable position of having to adopt inherently inconsistent litigation postures in the underlying case and the malpractice case. Second, the action should be tolled because the viability of the legal malpractice action depends upon the outcome of the underlying litigation. The court claimed that this rule had been uniformly applied since its rendition.

The Texas Supreme Court declared that the "continued-representation" requirement applied by the court of appeals violated the Hughes doctrine. The court of appeals decision was flawed because it did not eliminate the problem of a client having to adopt inconsistent positions in the underlying case and the malpractice case.

Also, a close reading of the Murphy decision does not support the court of appeals' decision. First, Murphy declared that the Hughes doctrine did not apply to actions against accountants. Therefore, it could not have modified the Hughes doctrine's application to legal malpractice actions. Second, a clear and strict application of the Hughes rule is required to bring predictability and consistency to this area. Applying the Hughes rule to this appeal, since the underlying case was concluded on May 19, 1995 and the malpractice case was filed on February 19, 1997, the Texas Supreme Court determined that ATC's action was timely filed.

III.
The Hughes Rule Does Not Apply To DTPA Causes Of Action

Underkofler v. Vanasek, 2000 WL 33191375 (Tex. 2001) (not released for publication) is a case involving the application of the statute to limitations to a Texas Deceptive Trade Practices Act ("DTPA") cause of action. The appellate court addressed the question whether, in a legal malpractice case, the statute of limitations is tolled until final judgment on DTPA claims. The court found that the Hughes rule applied only to common law causes of action. Therefore, a DTPA claim is not tolled and a two-year statute of limitations applies.

In Underkofler, Paul Underkofler ("Underkofler") represented Hugh Vanasek ("Vanasek") in an action to collect upon a note in 1991. Vanasek first had concerns about Underkofler's representation during the spring and fall of 1991 and continuing into 1992. Underkofler filed a motion to withdraw, which was granted in May 1992.

After the withdrawal, Vanasek hired another attorney. In April 1994, Vanasek settled with several defendants. In April 1994, he also filed suit against Underkofler for legal malpractice, violations of the pre-1995 DTPA, and other causes of action. A final judgment against the remaining defendants was rendered in September 1994.

Underkofler moved for summary judgment on many grounds, including that the DTPA claim was barred by limitations. The trial court granted his summary judgment on this ground. The appellate court reversed finding that the Hughes rule tolled limitations until there was a final judgment or other resolution in the underlying litigation.

The Texas Supreme Court reversed the court of appeals' determination expressly holding that the Hughes doctrine does not apply to DTPA claims. The Underkofler court held that the Texas legislature adopted a specific two-year statute of limitations for DTPA claims. The only two exceptions to that general rule are the discovery rule and fraudulent concealment. Underkofler, 2000 WL at **2; TEX. BUS. & COM. CODE § 17.565. Due to the Texas legislature's explicit language creating only two exceptions to the DTPA's two-year statute of limitations, the Texas Supreme Court refused to create an additional one.³ Applying this rule, the Texas Supreme Court held that Vanasek's DTPA causes of action were barred by the two-year statute of limitations.

IV.
The Case-Within-A-Case Requirement

In Schaeffer v. O'Brien, WL 253937 (Tex. App. - Eastland 2001, n.p.h.), William Schaeffer ("Schaefer"), was originally hired by three clients on a contingency basis, in a suit against Vittorio di Guevara Suardo Fabbri ("Fabbri"). The clients discharged Schaeffer and hired another attorney, but Schaefer maintained his contingency fee interest.

The underlying case settled and Schaeffer entered into a Rule 11 Agreement with Fabbri's attorneys, Susman Godfrey, which stated that Fabbri would not pay the settlement funds to Schaeffer's former clients and Fabbri would interplead the settlement amounts. While Fabbri deposited the funds into the court registry, he did not file an interpleader. Those funds were eventually paid to the former clients.

Schaeffer then retained Mike O'Brien ("O'Brien") for the purpose of filing a breach of contract suit against Susman Godfrey for breach of the Rule 11 Agreement. O'Brien did not do so.

Schaeffer then filed a legal malpractice suit against O'Brien arguing that O'Brien committed malpractice by failing to file the suit and Schaeffer was damaged in the amount of the lost fee. O'Brien then moved for summary judgment arguing that Schaeffer could not meet the "case-within-a-case" requirement as a matter of law because Susman Godfrey was not a party to the Rule 11 Agreement.

The trial court granted O'Brien's motion for summary judgment and the court of appeals affirmed. The basis of the court of appeals' decision was the "case-within-a-case" requirement. A plaintiff in a legal malpractice case must show that, but for the attorney's conduct, the plaintiff would have prevailed in the underlying transaction. Here, this was impossible because Susman Godfrey was acting only as Fabbri's agent.

In Texas, an agent can avoid liability on a contract only by disclosing his intent to sign as a representative of another contracting party. This requirement, however, does not require every contract signed by a lawyer for a disclosed client to contain explicit language negating his personal liability provided that the contract does not implicitly impose any liability on the lawyer.

In this case, neither Susman Godfrey nor the lawyer who signed the Rule 11 Agreement were parties to it. Therefore, Schaeffer could not establish the "case-within-a-case" requirement and summary judgment was proper.

V.
Arbitration Clauses: Not Always Applicable to Legal Malpractice Actions

In Re Pamela Godt, 28 S.W.3d 732 (Tex. App. - Corpus Christi, 2000, no pet.) involves a former client who filed a petition for writ of mandamus from an order compelling arbitration in a malpractice suit against her former attorney. The relevant issue was whether an arbitration clause in a contingency fee contract was enforceable. In examining the specific facts, the court of appeals held in relevant part that the attorney-client contract was unenforceable because the attorney failed to sign it and that the Texas Arbitration Act did not apply to personal injury claims such a legal malpractice actions.

Pamela Godt ("Godt") retained Thomas Henry ("Henry") to represent her in a medical malpractice case. Godt executed a contingency fee agreement which contained a mandatory arbitration clause pursuant to the Texas Arbitration Act ("TAA").⁴ Henry took no action on Godt's claim.

Just before the expiration of the statute of limitations, Henry withdrew from the case. Later he did provide Godt with a petition to file pro se.

Godt filed a legal malpractice suit against Henry. Henry answered and filed a motion to compel arbitration based on a mandatory arbitration clause contained in the agreement. The trial court granted Henry's motion and stayed the lawsuit pending resolution by binding arbitration. See Godt, 28 S.W.3d at 735.

Godt requested findings of fact and conclusions of law. Henry submitted proposed findings of fact and conclusions of law to which Godt objected. However, the trial court signed the findings and conclusions without modification. The fact findings included (1) the arbitration agreement conformed with the TAA and "applicable legal authority"; (2) there was no evidence the arbitration agreement was procured by fraud, duress, or in an unconscionable manner; (3) the claim arose out of Godt's attorney/client relationship with Henry; (4) Chapter 171.002(a)(3) of the Civil Practice and Remedies Code, which states that the TAA does not generally apply to claims for personal injury, was inapplicable to the agreement. See Godt, 28 S.W.2d at 735. Conclusions of law made by the court included: (1) the arbitration agreement is valid and enforceable under the TAA; (2) the claims are within the scope of the agreement; (3) no applicable defense existed which would defeat enforceability; and (4) 171.002(a)(3) was inapplicable. See Godt, 28 S.W.3d at 735.

Godt filed a writ of mandamus. She argued the arbitration agreement was unenforceable because the malpractice claim "is a claim for personal injury," and therefore, falls within the scope of the TAA's exceptions . See TEX. CIV. PRAC. & REM. CODE ANN. §171.002. Henry maintained that he was entitled to arbitrate under the TAA because a written arbitration agreement existed and that a legal malpractice claim is not one for a personal injury.

The court of appeals determined that the arbitration agreement was unenforceable because it failed to comply with TEX. GOV'T. CODE § 82.065(a). Henry never signed the contingency fee contract. Since the Texas Government Code requires that both parties execute the agreement, the arbitration clause is unenforceable on that ground alone. See Godt, 28 S.W.3d at 738.

The court of appeals further determined that even had the agreement complied with § 82.065(a), it would still be unenforceable. The court reasoned that under Texas law, a legal malpractice claim is classified as a personal injury action. The TAA expressly does not apply to claims for personal injury unless (1) each party to the claim, on the advice of counsel, agrees in writing to arbitrate; and (2) the agreement is signed by each party and each party's attorney. See TEX. CIV. PRAC. & REM. CODE ANN. § 171.002(a)(3), (c) (Vernon Supp. 2000). Since it is undisputed that Henry did not execute the contingency fee contract, the court held the arbitration agreement is unenforceable under the TAA. See Godt, 28 S.W.3d at 738-39. Therefore, the writ of mandamus was conditionally granted because the court concluded that the trial court's grant of Henry's motion to compel arbitration was clearly an abuse of discretion. See id. at 739.

VI.
Contingent Fee Contracts: "Any Amount Received" Applies To Net Recovery

Levine v. Bayne, Snell & Krause, Ltd., 2001 WL 33146425 (Tex. Sup. Ct. February 1, 2001), involves a dispute over attorneys' fees owed under a contingency fee contract. The primary issue was whether the phrase "any amount received" mandated that the one-third attorney fee provision should be calculated based upon the full amount awarded or the amount awarded after any offsets are subtracted. The Texas Supreme Court found that "any amount received" referred only to the client's net recovery and, therefore, all offsets must be subtracted prior to calculation of attorneys' fees.

The underlying claim centered around a suit by Ron and Serena Levine (collectively the "Levines") against Donald and Pat Smith (collectively the "Smiths") for failure to disclose foundation defects in a home the Smiths sold to the Levines. The Smiths, who financed the house for the Levines, counterclaimed for breach of the mortgage agreement since the Levines stopped making payments due to the alleged defects.

The jury awarded the Levines $243,644.00 in damages for the defects along with the interest and attorney's fees. The Smiths were awarded $161,851.38 for the balance due on the mortgage, accrued interest, and attorney's fees. The trial judge offset the award to the Levines by the amount due the Smiths resulting in a $81,792.62 net judgment for the Levines. The offset worked to extinguish the Levine's mortgage obligation, thus providing them with the additional benefit of clear title to the home. The Smiths paid the Levines $104,110.31 after the appeals court affirmed the judgment. See Levine, 2001 WL 33146425 at *1.

Prior to commencing the suit, the Levines executed a contingency fee contract with their attorneys, Bayne, Snell & Krause, Ltd. ("BSK"). That contingency fee contract stated as follows:

The contingency fee contract does not define the phrase "any amount received."

After the Smiths paid the judgment, BSK sent the Levines's a statement claiming entitlement to $155,866.13 in fees. This amount represented one-third of the judgment, including court-awarded attorney's fees and post-judgment interest and expenses, but prior to offset, pre-judgment interest, and costs.

The Levines, while contesting the fees because the calculation did not reflect the trial court's offset for the Smiths' successful counterclaim, endorsed the Smiths' settlement check for $104,110.31 over to BSK to pay the attorney fees. When the Levines refused to pay the remainder of the bill, BSK sued its former client for the remaining balance.

The Texas Supreme Court determined that the phrase "any amount received" applied to the net recovery. While the court recognized that other courts have opted to apply the fee to the client's full award in cases such as this, it determined that net recovery was the proper measure. The Court based this decision on the premise that "lawyers are more able than most clients to detect and clarify omissions in client-lawyer contracts because lawyers almost always write such contracts and are more familiar with the intricacies of legal representation and with the law of drafting fee agreements and other contracts." The Court further reasoned that its holding was not "novel" but "simply emphasizes one facet of a lawyer's duty to the client, i.e., to inform a client of the basis or rate of the fee at the outset of the matter." The Court did imply that had the contract expressly stated that the attorney's fees should be based upon the total recovery, that its conclusion would differ.

VII.
Fee Forfeiture Limited To Matter On Which Fiduciary Duty Is Breached

While not rendering a new legal rule, Universal Fleet Leasing, Inc. v. Pope, 2000 WL 1708515 (Tex. App.-Houston [1st Dist.] November 16, 2000) does discuss what may be necessary to demonstrate fee forfeiture in a summary judgment context under Burrow v. Arce, 997 S.W.2d 229, 240 (Tex. 1999). In that case, the attorney defendants moved for summary judgment on plaintiffs' fee forfeiture claim. The evidence presented was that the attorneys represented the plaintiffs since 1984 and incurred fees during that time period. The court, in granting the defendants motion for summary judgment on this issue, however, stated that the plaintiffs failed to present any evidence regarding what services were formed or not performed related directly to the services provided which supported the alleged breach of fiduciary duty claim. Certainly, this is not direct authority for the proposition, but it is some evidence that the appellate courts are open to a limited interpretation of the Arce rule.

¹ Peeler v. Huges & Luce, 909 S.W.2d 494 (Tex. 1994) (a criminal defendant does not have a cause of action for legal malpractice unless he has been exonerated of the crime of which he is accused).
² Hughes v. Mahaney & Higgins, 821 S.W.2d 154 (Tex. 1991) (holding that limitations were tolled until there was a final judgment or other resolution in the underlying litigation).
³ In doing so, the court overruled Aduddell v. Parkhill, 821 S.W.2d 158 (Tex. 1991).
⁴ A significant discussion exists regarding whether the contingency fee contract was also governed by the Federal Arbitration Act and the alleged affect of conflicting Federal Arbitration Act and Texas Arbitration Act provisions. Since these issues are not specifically legal malpractice issues, they are not addressed in this summary.

A. This article was written by Robert M. Browning, formerly associated with the Firm.