Legal Malpractice Claims - Is the Underlying Litigation Really Final as to Each Client?

Florida’s Fourth District Court of Appeal recently decided a legal malpractice case involving underlying litigation between the FDIC and a corporate mortgagor, R.S.B. Ventures, Inc. (“R.S.B.”), and the owners of R.S.B. who personally guaranteed the mortgage loan.

After the FDIC called R.S.B.’s loan, R.S.B. through counsel filed suit in state court against the FDIC for various claims including fraud and breach of fiduciary duty. The FDIC removed the case to federal court and counterclaimed against R.S.B. for mortgage foreclosure and recovery on the promissory note, and filed a claim against the personal guarantors for recovery on the personal guaranties. R.S.B. and the personal guarantors responded to the FDIC’s pleadings, and later R.S.B. filed an amended complaint against the FDIC.

Successor legal counsel for R.S.B. failed to respond to the FDIC’s motion to dismiss the amended complaint, and ultimately the court dismissed R.S.B.’s amended complaint, struck R.S.B.’s answer and affirmative defenses to the FDIC’s counterclaim for mortgage foreclosure, entered a default against R.S.B., and a default final judgment of foreclosure with an award of attorney’s fees against R.S.B. Successor counsel filed an appeal on behalf of R.S.B. in the Eleventh Circuit Court of Appeals, which was later dismissed for lack of prosecution.

The underlying property was subsequently sold to FDIC’s successor in interest at a foreclosure sale, and the entire case was administratively closed by the district court. No deficiency judgment was entered against R.S.B. or the personal guarantors, and no judgment was entered against the personal guarantors on FDIC’s claim on the personal guaranties.

During the pendency of the underlying case, R.S.B. and the personal guarantors filed a legal malpractice against their successor counsel for damages due to the entry of the default final judgment of foreclosure and the attorneys’ fees award against R.S.B., and due to the potential for a deficiency judgment against the personal guarantors.

Successor counsel moved to dismiss the legal malpractice action or, in the alternative, moved to stay or abate the case, asserting that the action was premature since the underlying case was still pending. The trial court granted the motion to dismiss the legal malpractice action, finding that the administrative closing of the underlying case did not affect the substantial rights of the parties and the legal malpractice claims were premature.

On appeal to the Fourth District Court of Appeal, the appellate court recognized the general bright line test that a cause of action for legal malpractice in the litigation context does not accrue until the litigation is concluded by final judgment and the final judgment becomes final. The court further recognized, however, that finality in the underlying litigation does not require that every matter before the court be fully resolved before a legal malpractice action is ripe for adjudication. The bright line test does not require that there be a determination of the full extent of all losses suffered by a client before a legal malpractice claim accrues. Rather, if a client has suffered some loss as a consequence of the attorney’s negligence, a legal malpractice action has accrued.

Upon review of the dismissal of the legal malpractice action, the appellate court held that under the bright line test, R.S.B.’s legal malpractice action against successor counsel accrued when the Eleventh Circuit Court of Appeals dismissed R.S.B.’s appeal of the default final judgment of foreclosure. Although collateral issues such as a possible deficiency judgment against R.S.B. were not yet resolved, R.S.B. sustained a loss when it lost all rights to the mortgaged property. Thus, the appellate court reversed the trial court’s dismissal of R.S.B.’s legal malpractice action.

However, because no adverse final judgment was entered against the personal guarantors, their legal malpractice action was premature, and the appellate court affirmed dismissal of their claims. The potential for a deficiency action against them was not sufficient to give rise to a legal malpractice action.

For more information on this topic, contact Lori A. Heim at lheim@bushross.com or (813) 204-6444.