Ulico Cas. Co. v. Wilson, Elser, Moskowitz, Edelman & Dicker, ____N.Y.S.2d____, 2008 WL 4206216 (N.Y.A.D. 1 Dept. 2008)

Brief Summary
A New York appellate court reversed a trial court’s grant of partial summary judgment and order of disgorgement of fees, thus rejecting a breach of fiduciary duty claim against a law firm that represented a client’s competitor in setting up a competing business.

Complete Summary
Law firm Wilson, Elser, Moskowitz, Edelman & Dicker (the “Firm”) was retained as claims counsel by casualty insurance provider Ulico Casualty Company (“Ulico”) from April 1986 through June 1999 under a written retainer agreement with a nonexclusive clause, which stated that the Firm would “devote all the time necessary to the business of the Company, but shall not by this retainer be prevented or barred from taking other employment of a similar or other legal character.” Id. at *1. Pursuant to this clause, the Firm, without objection from Ulico, served as claims counsel for other insurers offering similar insurance. The Firm served as counsel to Ulico’s managing general agent and underwriter, Professional Intermediaries Associates, Inc., and Professional Indemnity Agency Inc. (collectively, “PIA”).

The Underlying Dispute
In 1995, PIA established a business relationship with Legion Insurance Company (“Legion”), a competitor of Ulico. PIA retained the Firm to draft the managing general agency agreement between PIA and Legion, which included, inter alia, a continuity endorsement that facilitated the policyholder’s transition between insurers by treating the Legion policy as a renewal of the one issued by Ulico and an endorsement designed to enhance Legion’s coverage over the insurance being offered by Ulico. The Firm agreed to act as claims counsel for Legion and, at the request of PIA, refrained from disclosing this information to Ulico. At the time when the Firm acted as claims counsel for Legion, three claims were made under Ulico policies by union benefit funds, which subsequently replaced their policies with Legion.

After learning of the Firm’s representation of Legion, Ulico terminated its relationship with PIA and the Firm. Ulico brought suit against the Firm, alleging breach of fiduciary duty, aiding and abetting PIA’s breach of fiduciary duty, legal malpractice, tortious interference with contract, and tortious interference with prospective economic advantage.

The Trial Court Decision
In Ulico Casualty Co. v. Wilson, Elser, Moskowitz, Edelman & Dicker, 16 Misc.3d 1051, 843 N.Y.S.2d 749 (Sup. Ct., N.Y. Co., 2007), the trial court awarded Ulico partial summary judgment as to liability on its first cause of action, finding that the Firm had breached its fiduciary duty by assisting Legion in the transfer of Ulico’s clients to Legion. The court declined to dismiss Ulico’s claims for legal malpractice, aiding and abetting, and tortious interference with contractual relations. Further, the court directed the Firm to disgorge the fees it received for the duration of the Firm’s breach and directed an assessment.

The Appellate Division Decision
In a unanimous decision, the appellate court modified the trial court’s order granting Ulico’s partial summary judgment so as to deny Ulico’s motion for partial summary judgment, thus concluding that the Firm’s liability was limited to the claim for legal malpractice. The court vacated the order that directed disgorgement of the attorneys’ fees.

In its analysis, the court first agreed with the lower court’s determination that the Firm acted under a conflict of interest when it engaged in the simultaneous representation of Ulico and Legion. The court likewise agreed that Ulico’s breach of fiduciary claim was based on facts different from those underlying the legal malpractice claim.

The court did not, however, agree that Ulico could recover damages for the Firm’s breach of fiduciary duty on legal grounds less rigorous than those required for recovery under a theory of legal malpractice. Specifically, the court stated:

It is clear that [the Firm’s] surreptitious advancement of the conflicting interests of PIA and Legion in setting up Legion as a competitor to [Ulico] might be construed as a violation of the [F]irm’s fiduciary duty to its client. However, violation of the ethical constraint against dual representation does not, without more, support a claim for recovery of damages . . . .

Id. at *5 (citations omitted).

Addressing the legal standard, the court stated that within the context of an action asserting attorney liability, the claims of malpractice and breach of fiduciary duty are governed by the same standard of recovery, which requires the establishment of the “but for” element of malpractice, irrespective of how the claim is denominated in the complaint. With this precept in mind, the court reasoned that Ulico’s breach of fiduciary duty claim should have been dismissed because Ulico failed to establish that it would have not sustained a loss of business but for the Firm’s assistance to Legion. Simply put, Ulico did not establish its entitlement to recover damages against the Firm for its cause of action for breach of fiduciary duty.

The court likewise held that Ulico’s cause of action for tortious interference with contractual relations should have been dismissed; noting that Ulico’s inability to establish that PIA did not independently reach its decision to breach its managing general agent agreement was fatal to its cause of action. Further, the court reasoned that Ulico failed to make a prima facie showing that the Firm provided substantial assistance to Legion’s endeavors so as to subject the Firm to liability and dismissed the cause of action for aiding and abetting. With respect to the forfeiture of the Firm’s legal fees, the court declined to summarily decide the question on the preliminary record.

Notably, the court discussed at length the Firm’s breach of its fiduciary duty within the context of professional responsibility, noting that it was “no defense to [the Firm’s] alleged violation of its professional duty that it reserved the right to accept ‘other employment of a similar or other legal character during its representation of plaintiff.” Id. at *4. Accordingly, the Firm could not circumscribe its professional obligation by transforming the attorney-client relationship into an arm’s length commercial transaction, as “[t]he attorney’s obligations  . . . transcend those prevailing in the commercial market place.” Id. (citation omitted).

Significance of Opinion
The appellate court’s ruling delineates the legal standard to be applied in circumstances involving attorneys defending legal malpractice actions, who may also be liable for a claim of breach of fiduciary duty.  

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