August 7, 1991
DAVID O. DALO AND D-DEVELOPERS, INC., APPELLANTS
MURRAY A. KIVITZ, ET AL., APPELLEES
Appeal from the Superior Court of the District of Columbia; Hon. Harriett R. Taylor, Trial Judge
Ferren, Terry and Farrell, Associate Judges.
The opinion of the court was delivered by: Farrell
This appeal arises from a judgment for legal malpractice in favor of appellant David D. Dalo against his attorneys, appellees Kivitz and Liptz. Dalo challenges the refusal of the trial court, as trier of fact, to award him attorney's fees as damages, punitive damages, and certain compensatory damages. *fn1 Only the third claim has merit, necessitating a partial remand for further proceedings.
During the summer of 1988 Dalo, a real estate developer, negotiated a real estate contract to purchase property in the District of Columbia known as "Greystone" for $3,765,000. Pursuant to an assignment agreement, Dalo assigned his right to buy Greystone to J. Eugene Wills, also a real estate developer. Under the terms of the assignment agreement, if Wills purchased Greystone, he owed Dalo $435,000; if Wills through no fault of Dalo's failed to purchase Greystone, he owed Dalo $87,000, that sum to be held in escrow. The closing on the transaction was scheduled for October 4, 1988.
Meanwhile Dalo's attorneys, law partners Kivitz and Liptz, *fn2 arranged a joint venture among themselves, Dalo, and another client, banker Charles J. D'Arco. The purpose of the venture was to split the $435,000 Dalo expected to earn from the Greystone transaction. When entering this business venture with the clients, Kivitz and Liptz failed to advise either client about the potential conflicts of interest that existed among the parties to the joint venture agreement.
On October 3, 1988, Kivitz, Liptz and D'Arco learned that Dalo intended to renege on his promise to split the money. On October 4, therefore, Kivitz, Liptz and D'Arco sued Dalo, the title company for the Greystone deal, and the stakeholders of the money held in escrow. They requested a declaratory judgment of the validity of the joint venture agreement and claimed their shares of Dalo's proceeds from the Greystone transaction, scheduled to close that day. Upon filing the lawsuit, Kivitz and Liptz terminated their attorney-client relationship with Dalo, withdrew from representing him in all pending litigation, and retained possession of Dalo's files as a lien for over $17,000 in outstanding attorney's fees. For reasons unrelated to the lawsuit brought by the attorneys, Wills never purchased Greystone. The stakeholders for the transaction froze the escrow account pending the outcome of the lawsuit. Ultimately, Dalo lost the opportunity to collect the $87,000 due under the assignment agreement with Wills.
Dalo responded to the lawsuit by filing a nine-count counterclaim against Kivitz, Liptz and D'Arco for injuries he sustained from the conduct of his attorneys regarding the Greystone deal, including the filing of the lawsuit against him. *fn3 Dalo requested compensatory damages, punitive damages against Kivitz and Liptz, the return of his legal files, and attorney's fees.
The trial Judge entered summary judgment against Kivitz, Liptz and D'Arco on the merits of their contract claims against Dalo, concluding that the joint venture agreement was void because Kivitz and Liptz, as Dalo's attorneys, had engaged in a business deal with Dalo while failing to discharge their fiduciary duties owed him in the attorney-client relationship. That ruling was indisputably correct. *fn4 See Rule 1.8, Rules of Professional Conduct; Fielding v. Brebbia, 130 U.S. App. D.C. 270, 272, 399 F.2d 1003, 1005 (1968); United States v. Orsinger, 138 U.S. App. D.C. 403, 412, 428 F.2d 1105, 1114, cert. denied, 400 U.S. 831, 91 S. Ct. 62, 27 L.Ed.2d 61 (1970).
After a bench trial on Dalo's counterclaims, Judge Taylor determined that Kivitz and Liptz had committed legal malpractice in the form of numerous violations of ethical standards. *fn5 On appeal, this malpractice liability is undisputed. However, the Judge awarded Dalo damages only in the amount of $737.50 for "costs associated with reconstructing [Dalo's] files that Kivitz and Liptz failed and refused to turn over to Dalo." On appeal, Dalo challenges the denial of additional damages in three respects.
Dalo first seeks attorney's fees as an element of his damages, contending he should be compensated for successfully defending against the contract claims by Kivitz and Liptz and also for prosecuting his own successful malpractice claims against the attorneys.
Dalo takes no issue with the American Rule under which, as interpreted in this jurisdiction, "every party to a case shoulders its own attorneys' fees, and recovers from other litigants only in the presence of statutory authority, a contractual arrangement, or certain narrowly-defined common law exceptions." Synanon Found., Inc. v. Bernstein, 517 A.2d 28, 35 (D.C. 1986). See also In re Antioch Univ., 482 A.2d 133, 136 (D.C. 1984); Biddle v. Chatel, 421 A.2d 3, 7 (D.C. 1980). To justify his claim for attorney's fees, Dalo invokes principles similar to those underlying the exception to the American Rule for wrongful involvement in litigation. See Auxier v. Kraisel, 466 A.2d 416, 420-21 (D.C. 1983). Under this exception, attorney's fees may be awarded to clients who have been forced into litigation by their attorney's malpractice. See, e.g., Knight v. Furlow, 553 A.2d 1232, 1235 (D.C. 1989); Olson v. Fraase, 421 N.W.2d 820, 828-29 (N.D. 1988); Sorenson v. Fio Rito, 90 Ill. App. 3d 368, , 413 N.E.2d 47, 51-52 (1980); McClain v. Faraone, 369 A.2d 1090, 1093-94 (Del. Super. Ct. 1977).
The exception has specific requirements:
Where a plaintiff seeks in a separate action to recover attorney's fees incurred by him in earlier litigation with a third person arising out of the tortious act of the defendant, . . . if the natural and proximate consequences of the defendant's tortious act were to involve the plaintiff in litigation with a third person, reasonable compensation for attorney's fees may be recovered as damages against the author of the tortious act.
Auxier, 466 A.2d at 420 (quoting Brem v. United States Fidelity & Guar. Co., 206 A.2d 404, 407 (D.C. 1965)). Hence there are three requirements for an award under this exception: "(1) the plaintiff must have incurred the fees in the course of prior litigation; (2) ordinarily that litigation must have occurred between the plaintiff and a third party who is not the defendant in the present action; and (3) the plaintiff must have become involved in the underlying litigation as a consequence of the defendant's tortious act." Id. See Safeway Stores, Inc. v. Chamberlain Protective Servs., Inc., 451 A.2d 66, 69 (D.C. 1982); Biddle v. Chatel, 421 A.2d at 7. This exception to the American Rule has "no application where the litigation is between the same parties." Murphy v. O'Donnell, 63 A.2d 340, 342 (D.C. 1948). *fn6
Dalo seeks attorney's fees from Kivitz and Liptz for all of his litigation with them. Because this claim is based on expenses incurred in the lawsuit between the same parties and not litigation that "occurred between and a third party who is not the defendant in the present action [for fees]," the wrongful-involvement-in-litigation exception is inapplicable here. *fn7 Dalo points out that the litigation also involved the banker D'Arco, who is not involved in the fee claim. Dalo, however, has not claimed attorney's fees for collateral litigation with D'Arco or for any litigation involving independent allegations by D'Arco. His claim for fees against Kivitz and Liptz lacks sufficient involvement with a third party litigant to meet the demands of the exception.
Dalo argues, however, that this appeal is not really about the American Rule (and its prohibition on fee-shifting, save in narrow circumstances) at all but instead about whether a client wronged by his attorney's breach of fiduciary duty in suing him can recover as damages attorney's fees directly caused by the wrong. "In cases where the American rule applies," Dalo asserts, "the successful plaintiff has incurred fees to remedy a wrong, but -- unlike here -- the fees were not directly caused by the wrong itself." The argument is creatively presented, but we conclude that Dalo in effect urges us to create a new exception to the American Rule when an attorney sues a current client in breach of the attorney's fiduciary duty. Since we are unpersuaded that it is possible to fashion this new exception in a principled way, we reject it.
Dalo points out by analogy that, as an item of compensatory damages, plaintiffs in cases sounding in malicious prosecution are entitled to attorney's fees incurred in defending the unmeritorious suit. See Weisman v. Middleton, 390 A.2d 996 (D.C. 1978). "Reasonable and necessary legal fees incurred in defending the prior suit" are, to be sure, traditional elements of a damage award in malicious prosecution cases. Id. at 999. *fn8 But to succeed in such an action, the plaintiff must show that a prior action instituted against him maliciously and without probable cause was terminated in his favor and that he sustained special injury. Ammerman v. Newman, 384 A.2d 637 (D.C. 1978). "It is generally held that the requisite malice is that dependent on the existence of an improper motive (as distinguished from malice in the technical legal sense), and has also been described as the existence of an evil purpose or motive, a wicked or mischievous intent, or a wilful, wanton, reckless or oppressive disregard [of the rights of the plaintiff." Id. at 640-41. *fn9 The trial Judge, however, found that Kivitz and Liptz lacked malice and had probable cause to file the lawsuit. Although as lawyers they improperly sued a current client, the filing "may have been for reasons which they believed to be legitimate." The Judge thus concluded that Kivitz and Liptz "did not file a suit which they knew to be lacking in merit" and "did not file the suit for the purpose of intentionally interfering with the [real estate] contracts." In view of these findings, which Dalo does not attack, he would not be entitled to damages under a malicious prosecution theory.
Dalo argues, nevertheless, that the breach of duty in this case -- a "uniquely improper" lawsuit filed by attorneys against a current client -- is a sufficient equivalent to the malice required for malicious prosecution. To accept this analysis, however, would permit clients sued by their attorneys in breach of fiduciary duty to recover damage awards enhanced by awards of attorney's fees, while other clients victimized by malpractice equally severe but not including an attorney-initiated suit would be barred from such enhanced recovery. Moreover, we can discern no principled basis for distinguishing in this regard any other fiduciary who brings suit against a party in what is determined to be a breach of the trust relationship. We thus reject this novel and ill-defined exception to the American Rule. *fn10
Dalo's remaining argument is that the conduct of Kivitz and Liptz satisfied the conventional "bad faith" exception to the American Rule. *fn11 Under that exception, the court may award attorney's fees to a prevailing litigant "when the other party 'has acted in bad faith, vexatiously, wantonly, or for oppressive reasons.'" Launay v. Launay, Inc., 497 A.2d 443, 450 (D.C. 1985) (quoting Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 258-59, 95 S. Ct. 1612, 44 L. Ed. 2d 141 (1973) (internal quotation marks omitted)); see Goffe v. Pickard, 588 A.2d 265, 271-72 (D.C. 1991). In rejecting application of the bad faith exception, the trial Judge observed that "this is essentially an equitable claim," the party "seeking equity must do equity," and Dalo's "hands are far from clean." *fn12 Appellant argues that this is too narrow a ground on which to reject a fee shift, citing the Supreme Court's recent statement in Chambers v. NASCO, Inc., 111 S. Ct. 2123, 2133, 115 L. Ed. 2d 27 (1991), that "the imposition of sanctions [under the bad-faith exception] transcends a court's equitable power concerning relations between the parties and reaches a court's inherent power to police itself" (emphasis added). We do not read this statement, however, as implying that a trial Judge may not take into account "clean hands" considerations in deciding whether to shift fees on grounds of bad faith conduct, when the result "incidentally [is to] compensate the prevailing party for costs which should not have been incurred." Synanon Found., Inc. v. Bernstein, 517 A.2d at 37. *fn13 In any event, the trial Judge recognized that the bad faith exception "is intended to punish those who abuse the judicial process." It thus serves a purpose similar to punitive damages. See Chambers, 111 S. Ct. at 2137 (quoting Hall v. Cole, 412 U.S. 1, 4-5, 93 S. Ct. 1943, 36 L. Ed. 2d 702 (1973)) ("the underlying rationale of 'fee shifting' is, of course, punitive"). The Judge's rejection of Dalo's claim for punitive damages, part III, (infra), fully demonstrates her conviction that the attorneys had not acted in bad faith in filing or maintaining the lawsuit. There was no abuse of discretion in her refusal to invoke the bad faith exception. Goffe, 588 A.2d at 271.
Dalo next challenges the court's refusal to award him punitive damages. In rejecting the claim for punitive damages, the Judge conceded that Dalo had "proven by well beyond a preponderance of the evidence that Kivitz and Liptz committed legal malpractice in numerous respects." She concluded, however, that the conduct did not "rise to the level of willful or reckless or malicious disregard" of Dalo's rights. We find no error in the Judge's ruling.
Punitive damages are justified
only when the defendant commits a tortious act accompanied with fraud, ill will, recklessness, wantonness, oppressiveness, willful disregard of the plaintiff's rights, or other circumstances tending to aggravate the injury. . . . Whether punitive damages will lie depends on the intent with which the wrong was done, and not on the extent of the actual damages.
Washington Medical Center v. Holle, 573 A.2d 1269, 1284 (D.C. 1990) (citations and quotation marks omitted). Indeed, we have said that "punitive damages are appropriately reserved only for tortious acts which are replete with malice." Zanville v. Garza, 561 A.2d 1000, 1002 (D.C. 1989). Understandably, therefore, Dalo does not cite a single case in which this court has reversed a refusal by the trier of fact to award punitive damages. See Holle, 573 A.2d at 1284 (in case tried without jury, whether punitive damages are warranted rests within discretion of court).
Dalo attempts to surmount this obstacle by arguing that the Judge misapprehended the law: that although she twice found no "malicious or reckless or willful" misconduct by Kivitz and Liptz, she must have meant that Dalo failed to prove "actual malice" or evil motivation, when the law is that a lesser showing of reckless indifference will suffice. It would not be surprising if trial Judges labored under some confusion about the meaning of malice in this area given the varying formulations in our decisions. Compare, e.g., Parker v. Stein, 557 A.2d 1319, 1322 (D.C. 1989) ("recklessness, . . . willful disregard of the plaintiff's rights") with Zanville, supra (quoting with approval the court's holding in Queen v. Postell, 513 A.2d 812, 816 (D.C. 1986), that "the punitive damages award . . . was incorrect because the tortious act was not 'aggravated by evil motive, actual malice, deliberate violence or oppression'"). On this record, however, we find no basis for concluding that the Judge required Dalo to prove a state of mind exceeding recklessness or conscious indifference to his rights on the part of his attorneys; the Judge's express words are to the contrary. In actuality, we think Dalo's complaint is with the evidentiary sufficiency supporting the Judge's finding of no reckless or willful misconduct, a matter we review only under the clearly erroneous standard. *fn14 D.C. Code § 17-305(a) (1989). See Cooter & Gell v. Hartmarx Corp., 110 S. Ct. 2447, 2461, 110 L. Ed. 2d 359 (1990) (abuse of discretion would include "clearly erroneous assessment of the evidence"). Applying that standard, we find no abuse of discretion in the denial of punitive damages. *fn15
We turn finally to the part of Dalo's argument we find to have merit: that the Judge erred in dismissing his claim for compensatory damages in the amount of $87,000 for the loss he suffered as a result of the unwillingness of the Greystone stakeholders to release the escrow funds while the Kivitz and Liptz lawsuit was pending. Dalo was to receive that money if Wills through his own fault failed to purchase Greystone.
The Judge dismissed Dalo's claim for the $87,000 because of Dalo's failure to make "any request at all" for the escrowed funds. Thus, the Judge held that Dalo's conduct, not the lawsuit tortiously filed by Kivitz and Liptz, was the proximate cause of his loss. The record is unmistakable, however, that the Kivitz and Liptz lawsuit -- naming Dalo, the title company, and the escrow agent as defendants -- foreseeably caused the funds to be frozen in the escrow account. Hence the filing of the lawsuit was a substantial and direct causal link in the events leading to Dalo's injury, his inability to obtain the funds. *fn16 As a matter of law, therefore, the filing of the lawsuit was the proximate cause of the injury.
As with any tort action, legal malpractice liability is predicated on a finding that the injury was proximately caused by the breach of duty. District of Columbia v. Freeman, 477 A.2d 713, 715-16 (D.C. 1984) (tortious act must "play a central role" in the injury or be a "substantial factor" leading to the harm). Proximate cause exists when there is a "substantial and direct causal link" between the attorney's breach and the injury sustained by the client. Id. at 716. *fn17 A defendant "will be held responsible for the damages which result despite the entry of another act in the chain of causation" if that subsequent act reasonably could have "been anticipated and protected against." St. Paul Fire & Marine Ins. Co. v. James G. Davis Constr. Co., 350 A.2d 751, 752 (D.C. 1976); see McKethean v. WMATA, 588 A.2d 708, 716 (D.C. 1991). *fn18 By contrast, an intervening act not reasonably foreseeable (sometimes referred to as a "superseding cause") breaks the chain of causation and relieves the wrongdoer of liability. St. Paul Fire & Marine Ins. Co., 350 A.2d at 752; McKethean, 588 A.2d at 716. *fn19
In this case, the evidence established that in early October 1988, after the Kivitz and Liptz lawsuit was filed but before Wills failed to purchase Greystone, the stakeholder refused in writing to release any funds held in escrow "pending the outcome of the suit." At trial the stakeholder testified that after the failure of the Greystone transaction, he was unwilling to release the $87,000 unless certain conditions were satisfied -- either all the parties consented to release or a court ordered Disposition of the funds. Thus, so long as Kivitz and Liptz maintained their lawsuit (and hence themselves plainly would not agree to the release), the funds were effectively frozen. Certainly it was foreseeable to the attorneys that Dalo would not undertake the futile act of demanding the escrow funds from a stakeholder that had announced it would not release them while the suit was pending. *fn20 It was also foreseeable that Dalo would not expend (he effort to obtain authorizations from other parties whose consent was a necessary but insufficient condition of winning release of the funds. In short, Dalo's failure to request the money or do other acts necessary to obtain it were not intervening causes sufficient to overcome the "central role," Freeman, supra, played by the lawsuit in causing Dalo's loss. We therefore must reverse the determination of the trial Judge to the contrary.
There remains, nevertheless, the question whether Dalo is entitled to the $87,000 representing the facial amount of the money in escrow. In the summer of 1988, developer Wills deposited at least one check for $25,000 and a promissory note for $62,000 in the escrow account. Wills apparently had received a bank commitment to finance the Greystone deal, and there was evidence that during this period he possessed considerable wealth. On the other hand, the stakeholder was informed in December 1988 that there were insufficient funds in the bank to cover the $25,000 check. Kivitz and Liptz argued below that "it is speculative to suggest that there were even funds available to satisfy the liquidated damages provision of the assignment contract as of October 18th, 1988," but the trial Judge did not reach this issue in view of her finding on causation. We therefore must remand the case to the trial Judge with directions to ascertain, as best she can, the actual value of the instruments in the escrow account as of October 1988, which will be the measure of the loss Dalo sustained from the tortious filing of the lawsuit.
The judgment is affirmed in part, reversed in part, and remanded for further proceedings consistent with this opinion.