The short answer as it is often in law is: it depends. There are two recent cases that can help you draw your conclusions.

In Skipper v. Ace Property and Casualty Insurance Co., the South Carolina Supreme answered the following question: “Can a legal malpractice claim be assigned between adversaries in litigation in which the alleged malpractice arose”?   The Court’s answer was “No” for reasons of policy, but assignments of legal malpractice claims can occur in many contexts, not all of which violate the public policy concerns expressed in Skipper, which deals with an assignment between adversaries.

Skipper arose from an accident between Skipper’s vehicle and a logging truck driven by Moors and owned by Specialty Logging. Specialty had a $1 million policy issued by Ace Insurance. After negotiations for a settlement failed, unknown to Ace and its attorneys, Moors, Specialty, and Specialty’s owner (collectively the “Specialty Parties”) agreed to admit liability and to execute a confession of judgment for $4.5 million. The Specialty Parties also agreed to bring a malpractice suit against the attorneys hired by Ace to handle the case (joining Ace as co-defendant), with the Skippers receiving 85-90% of the proceeds of the action. In exchange the Skippers agreed not to execute the judgment so long as the Specialty Parties cooperated in the malpractice action.

The Skippers and the Specialty Parties then brought a legal malpractice suit against the attorneys hired by Ace; the case was removed to federal court. The defendants claimed that the assignment of the malpractice claim to the Skippers was invalid. The District Court certified the question to the South Carolina Supreme Court.

The Court accepted the certification and agreed with the majority of courts that the assignment of the malpractice claim was void as a matter of public policy. The Court gave several policy reasons for its decision:

          First, assignments of legal malpractice claims between adversarial parties pose a risk of collusion: “When an original defendant is essentially relieved of liability, there is little incentive for the consent judgment to reflect the actual loss.” Because the consenting defendant will not have to pay, the parties can agree to artificially inflated damages.

Second, assignment of malpractice claims undermines the relationship between defense attorney and client by creating a conflict between their interests. Defendants can obtain freedom from liability by agreeing to a consent judgment and pursuit of a malpractice claim against their lawyers.

Third, if such assignments were allowed it would result in the parties taking the opposite positions in the malpractice case from the ones they took in the underlying tort action. This divergence arises because a legal malpractice case is a “case within a case.” To win a legal malpractice action the plaintiff must show that the lawyer breached the standard of care and that this breach proximately caused damage. When the malpractice occurs in litigation, the plaintiff must provide that “but for” the lawyer’s negligence the plaintiff would have prevailed in the litigation.

Another decision worth considering is the California Court of Appeals’s White Mountains Reinsurance Company of America v. Borton Petrini, LLP, 164 Cal. Rprt. 3d 912 (Ct. App. 2013), rev. denied Feb.11, 2014.

California has traditionally followed a strict prohibition on assignment of malpractice claims on the ground that a malpractice claim was a “uniquely personal” right. See Goodley v. Wank & Wank, Inc. 133 Cal Rptr. 83 (Cal. Ct. App. 1976). However, in White Mountains the court recognized a narrow exception. In that case Modern Service Insurance Co. had issued an automobile policy with a $100,000 limit. The insured was involved in a serious accident; the victim brought suit and her attorneys served a demand for Modern’s policy limits. Modern informed its claims administrator to direct the Borton firm to accept the offer, but Borton failed to accept the offer by the deadline. A few years later (accident case still pending) Modern was acquired by another insurer, and its name was changed to White Mountains.   White Mountains ultimately settled the accident case for $1.86 million.   White Mountains then brought suit against the Borton firm for malpractice.

The appellate court, reversing the decision of the trial court, found that the malpractice claim could be assigned because on these facts the policy reasons for prohibiting assignment of malpractice claims did not apply:

Specifically, a cause of action for legal malpractice is transferable when (as here) (1) the assignment of the legal malpractice claim is only a small, incidental part of a larger commercial transfer between insurance companies; (2) the larger transfer is of assets, rights, obligations, and liabilities and does not treat the legal malpractice claim as a distinct commodity; (3) the transfer is not to a former adversary; (4) the legal malpractice claim arose under circumstances where the original client insurance company retained the attorney to represent and defend an insured; and (5) the communications between the attorney and the original client insurance company were conducted via a third party claims administrator. Under the circumstances set forth above, the public policy concerns that have been determined in other cases to weigh against the assignment of legal malpractice claims do not arise.

Courts in other jurisdictions have allowed assignment of malpractice claims when the assignment is part of a larger commercial transaction, as in White Mountains. See, e.g., Richter v. Analex Corp., 940 F. Supp. 353 (D.D.C. 1996); St. Luke’s Magic Valley Reg’l Med. Ctr. v. Luciani (In re Order Certifying Question to Idaho Supreme Court), 293 P.3d 661 (Idaho 2013).

Unlike in Skippper, in White Mountains there is no possibility of collusion, no conflict of interest because the assignment is a separate transaction from the litigation, and no change of positions in litigation. White Mountains and Skipper are consistent because Skipper was limited to assignments “between adversaries in litigation” and the commercial assignment in White Mountains is not between adversaries.

However, a number of other fact patterns (which the White Mountains court highlighted) involving assignments of legal malpractice claims may arise:

• The assignment of a claim against the attorney is not a legal malpractice claim but some other type of claim such as fraud or breach of fiduciary duty;
• The assignment is a transfer on the death of the client to a beneficiary of the estate, or perhaps a sale by estate to a third party;
• The claim is being brought by a trustee in bankruptcy, or the trustee seeks a court-ordered sale of the claim;
• The claim is being assigned to the owners of an entity as part of a dissolution or other restructuring of an entity;
• An insurance company as subrogee of its insured is bringing a malpractice claim against the lawyer who represented the insured.

In some or perhaps all of these other fact patterns, an analysis of policy considerations may lead to a different result than in Skipper and White Mountains.

For more information, Nathan M. Crystal.