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Using NJ’s plaintiff-friendly case law, an aggressive litigant stands to win up to $2.5M from a NY firm
March 8, 1999
 A Wall Street firm facing a judgment of up to $2.5 million has discovered why New Jersey is such a harsh environment for legal malpractice defendants.
On Jan. 23, a jury in Bergen County Superior Court found that 70-lawyer Herzfeld & Rubin’s negligence in 1985 caused a loss to Integrity Insurance Co., of Paramus, which later went into liquidation and has still not emerged.
The firm argued that it did nothing wrong, but by the jury’s reckoning, plaintiffs’ lawyer David Mazie, a partner in
A Livingston, New Jersey law firm, had the facts on his side.
Just as important, it looks like Mazie had emerging case law on his side too.
Three state Supreme Court decisions in the past 22 months have put New Jersey on an anti-malpractice rampage, and Herzfeld & Rubin is the first firm to be felled by all three rulings at once.
One case strengthens the notion that a lawyer can have a duty to a nonclient. The second says, in effect, that there is no comparative negligence in malpractice cases; lawyers who provide less than adequate information, even to a savvy client, can’t cut their losses by blaming the client.
The third decision, like a 400-pound wrestler giving an already stunned opponent a full body slam, hold the losing firm liable for the winning plaintiff’s legal fees.
Mazie says he will ask the court to order Herzfeld & Rubin to pay his firm’s fees and costs of $700,000 or so, on top of $971,000 in damages, $460,000 in prejudgment interest and $400,000 in a complex additional set of damages.
"New Jersey has become very favorable for plaintiffs in malpractice cases," Mazie says. And that’s one of the few points over which he and Herzfeld & Rubin aren’t arguing.
I’m confident, in New York, the law as determined by the highest court, would not support a claim such as this," says managing partner Herbert Rubin.
"I don’t think New Jersey’s will support it either," he adds, but that’s a statement to be tested on appeal.
Investor Partnership at Root of Case
The case, Integrity Ins. v. Herzfeld & Rubin, L-40313-89, germinated in the mid-1980s when a group of investors, mostly from New York and New Jersey, formed a partnership to buy and operate an office building in New Castle, N.Y. It as a typical pre-1986 tax shelter deal.
Twenty-nine of the investors got their stakes by borrowing from Ingersoll-Rand Financial Corporation. Ingersoll-Rand protected itself from default by obtaining a surety bond from Integrity Insurance Co. If any of the partners failed to make their promised payments, Integrity would be obligated to pay Ingersoll-Rand.
On April 18, 1985, as counsel to New Castle Associates, Herzfeld & Rubin sent Integrity a 10-paragraph opinion letter that said the partnership’s private placement memorandum complied with New York securities rules and that Herzfeld & Rubin knew of no misstatements or omissions in the memorandum.
Later that year, New Castle collapsed, the bank lost its money and Integrity was required to make good on the loss. In 1986, Integrity collapsed too. The alleged $1.8 million loss guaranteed by Integrity in the New Castle deal was just one pea in a patch. Since then, Integrity has been in liquidation under the control of the state Banking and Insurance Department.
Plaintiff’s lawyer Mazie, who represents the liquidator, has been trying to recoup sums lost by the surety branch of Integrity, and the effort led him to file professional liability cases against lawyers and accountants.
Some cases have settled, but Herzfeld & Rubin went to trial, relying on its own partners as trial counsel. They lost.
The jurors found that the firm was negligent when it issued the opinion letter, that the negligence was the proximate cause of Integrity’s loss and that the firm was negligent when it failed to file New York’s RI-1 form, which gives the civil litigation and criminal history of principals in real estate and securities transactions.
What an RI-1 would have shown, according to Mazie’s evidence, was that the deal’s promoter, Gerald Cahill of New York, was a disbarred lawyer who had been implicated in previous fraud cases in New York. Cahill subsequently pleaded guilty to fraud in another case and was sentenced to probation in New York.
As for the opinion letter, it failed to disclose that in addition to borrowing money from Ingersoll-Rand, the investment partners had borrowed money from other banks for the same investment, which meant that more than one repayment would be required.
In its defense, the firm said Integrity had the means, through credit reports, to know about the additional loans.
The firm said it didn’t know about Cahill’s background. Martin Licht, a former Herzfeld & Rubin lawyer who dealt with Cahill and other promoters of the deal, had described them as Damon Runyonesque characters, but he testified at the trial, "I did not believe them to be crooks, thieves or fraudulent."
As for the double loans, Licht testified that he informed an Integrity officer about them, the implication being that Integrity knew what it was doing when it funded the surety bond. The conversation was not recorded in Licht’s records, however, and he made the assertion after the loan officer died, so there is no one to back his story.
Mazie’s point was relatively simple: When Herzfeld & Rubin sent the opinion letter, it had a duty to make sure Integrity had all the facts. If the firm had suspicions, it should have followed them up, and in this case it should have had suspicions. The firm certainly knew about the double loans, the undisputed evidence showed.
The jury, after hearing evidence for 22 days, deliberated for three hours and returned a verdict against the law firm. What Herzfeld & Rubin, besides the evidence, were rulings by Superior Court Judges William Meehan, the judge supervising Integrity’s liquidation, and Arthur Troast, the trial judge.
Precedent Bears Fruit
Meehan and Troast relied on three recent New Jersey rulings that have altered the terrain for legal malpractice cases.
In Petrillo v. Bachenberg, 139 N.J. 472 (1995) -- the case about lawyers’ duties to non-clients -- the Court held that an attorney representing a potential purchaser of property failed to provide a complete report of environmental tests to another purchaser. The Court found that the lawyer had "a duty not to misrepresent negligently the contents of a material document on which he knew others would rely to their financial detriment."
In this case, Integrity was not a client, but Herzfeld & Rubin sent Integrity the opinion letter and had a duty under
Petrillo not to act negligently.
Perhaps more important, Troast applied
Conklin v. Hannoch Weisman, 145 N.J. 395 (1996), to prevent Herzfeld & Rubin from mitigating any damages by arguing that Integrity contributed to the damages.
In Conklin, a case about a firm’s advice to an allegedly sophisticated real estate client, the Court ruled that the concept of comparative negligence did not belong in a legal malpractice action; the key question was whether a lack of adequate advice caused the loss.
Because of the application of Conklin, though, "we were bound, tied, and gagged" from hammering away at what Integrity did to cause the loss, says Peter Kurshan, the Herzfeld & Rubin partner who tried the case.
Every time evidence against Integrity was produced, "the court would remind the jury that Integrity’s integrity was not an issue," Kurshan says.
Kurshan says there’s a huge distinction between the requirements of
Conklin and his case. In Conklin, the plaintiff was a client; Integrity wasn’t a client. Yes, lawyers owe a duty to non-clients in some cases. But the standard set by
Conklin for what is required of firms when they deal with clients should not be applied in cases involving non-clients, he says.
In other words, Kurshan suggests, a court can’t piggybank the procedure in Conklin onto a case that hinges on
Petrillo.
Mazie points out, though, that in previous discussions, particularly
Albright v. Burns, 206 N.J. Super. 625 (App. Div. 1986), the courts have said the lack of privity does not bar a malpractice claim.
And even if the court agrees with Kurshan, it does not change the jury’s finding that Herzfeld & Rubin’s negligence was the proximate cause of Integrity’s loss. On a retrial to find comparative negligence, Herzfeld & Rubin would only have a chance to reduce its liability by a percentage.
The third recent decision affecting Herzfeld & Rubin is
Saffer v. Willoughby, 143 N.J. 256 (1996), which says fees and costs incurred by a plaintiff in prosecuting legal malpractice cases are consequential damages that can be included in the judgment.
Mazie has said in a brief that Integrity will seek fees and costs incurred in filing collection suits against the New Castle investors as well as the fees and costs of the Herzfeld & Rubin litigation.
His fee application has not been filed, but he estimates it will approach $700,000. He also wants the judgment to include about $400,000 that Integrity liquidators have paid to satisfy Ingersoll-Rand’s claim for payment under the surety bond provided by Integrity in 1985.
Chilling Effect
Herzfeld & Rubin takes the position that the verdict was not a finding of legal malpractice but of negligence. Again, Integrity was not a client. Therefore, the firm argues, fee-switching under
Willoughby does not apply.
The firm plans to file a motion to set aside the verdict, or at least for a new trial. If that fails the wrangling over the damages will begin in earnest.
Rubin and Kurshan say the verdict is dangerous because it makes lawyers do things for non-clients that they shouldn’t be required to do.
In this case, they say, the evidence showed that the opinion letter to Integrity answered all the questions Integrity had asked. Just as important, they say, none of the negative information that later turned up was known to the firm when it wrote the letter.
If the rules say that a non-client who asks a specific set of questions and gets an honest answer can win damages. If it turns out to be wrong, "no lawyer will ever write an opinion letter again." Kurshan says.
Mazie sees it differently. If a lawyer signs an opinion letter and someone relies on it, the lawyer should make sure it’s a good opinion.
The proposed judgment and related documents in Integrity Ins. v. Herzfeld & Rubin, P.C., are available on Counsel Connect in LIBRARY under "N.J. Law Journal Full-Text Documents." See page 22 for details. Senior writer Henry Gottlieb can be reached by e-mail at
hgottlieb@counsel.com.
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