One of the longest-running controversies in the legal malpractice cases is whether the owner of a legal malpractice claim may assign it to another party. Once it was black letter law that a legal malpractice claim could not be assigned. In recent years courts have relaxed the rule on the ground that all sorts of other legal claims can be assigned so a legal malpractice claim should be no different.
However, in this case, Nevada held that the assignment was improper and barred the legal malpractice claim.
In this case, an entity, Tower Homes, LLC filed a bankruptcy petition. Among the creditors were prospective condominium purchasers who had paid earnest money to Tower. The bankruptcy court, acting on the recommendation of the Trustee, allowed the creditors to bring the legal malpractice claim against the former attorneys for Tower Homes. The bankruptcy trustee was motivated by the lack of available funds for the trustee to hire a lawyer and prosecute the claim
The court reasoned that the claim was not being pursued by the Trustee for the benefit of the entire estate, but that the claim had essentially been assigned to the creditors of Tower Homes. The court viewed the bankruptcy court order as an assignment. The court did not discuss whether or not there were other creditors.
The creditors argued that they were only assigned the proceeds of the claim, not the entire claim, but the court disagreed. It found that they had control over the prosecution of the claim. The court reasoned that allowing an assignment was improper because it would imperil the attorney-client privilege.
As the court in Goodley stated, “[i]t is the unique quality of legal services, the personal nature of the attorney’s duty to the client and the confidentiality of the attorney-client relationship that invoke public policy considerations in our conclusion that malpractice claims should not be subject to assignment.” 133 Cal. Rptr. at 87. Allowing such assignments would “embarrass the attorney-client relationship and imperil the sanctity of the highly confidential and fiduciary relationship existing between attorney and client.” Id. Here, issues regarding the personal nature of the attorney-client privilege are implicated. Also, a number of confidentiality problems arise if the purchasers are allowed to bring this claim. For example, the record reflects that plaintiff’s counsel attempted to discover confidential files regarding Heaton’s representation of Tower Homes. Because the bankruptcy court’s order demonstrates that the purchasers are actually pursuing the claim, any disclosure potentially breaches Heaton’s duty of confidentiality to Tower Homes. Additionally, Tower Homes can no longer control what confidential information is released, because it cannot decide whether to dismiss the claim in order to avoid disclosure of confidential information. In Nevada, the duty of confidentiality does not extend “to a communication relevant to an issue of breach of duty by the lawyer to his or her client.” NRS 49.115(3).
In my opinion, the reasoning in support of this decision is rather weak because the Trustee had the right to waive the attorney-client privilege on behalf of the corporation. In sum, this opinion strikes me as unduly formalistic. In the world of legal malpractice, lawyers often win cases they should lose based on formalistic arguments like these.