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In Cowan Liebowitz & Latman, P.C., v. Kaplan,1 the Florida Supreme Court decided whether a potential plaintiff may assign a legal malpractice claim involving the preparation of private placement memoranda (documents explaining the details of an investment to potential investors). The Florida Supreme Court concluded that attorneys preparing private placement memoranda owe a duty to those who rely on statements made in their memoranda. Therefore, parties may assign legal malpractice claims to a non-client for an attorney’s misrepresentation and failure to disclose accurate information in preparing private placement memoranda.

I. Assignment of Legal Malpractice Claims and Related Cases

The traditional rule in Florida and in most states is that attorney malpractice claims are nontransferable. This longstanding practice and policy applies a blanket prohibition against assignment of legal malpractice claims, allowing only clients to sue for malpractice. Malpractice is a personal tort arising from the attorney/client relationship. Kaplan creates an exception to the customary rule and practice.

In Forgione v. Dennis Pirtle Agency, Inc.,2 the Florida Supreme Court determined that an insured’s negligence claim against an insurance agent for failure to obtain proper coverage is assignable to a third party. Although the Florida Supreme Court permitted the assignment of claims against an insurance agent, the Court reiterated its agreement with the policy of foreclosing assignment of legal malpractice claims. The Forgione opinion addresses the grounds precluding assignment of a claim for attorney malpractice, stating that such a cause of action is not assignable because “Florida law views legal malpractice as a personal tort [. . . ] involv[ing] a confidential, fiduciary relationship of the very highest character, with an undivided duty of loyalty owed to the client.”3

In KPMG Peat Marwick v. National Union Fire Ins. Co. of Pittsburgh, Pa.,4 the Florida Supreme Court considered whether an insurer/assignee and/or insurer/subrogee may assert a malpractice claim against an independent auditor for negligently performed audits and failure to detect losses, which led an insurance company to pay amounts to its insured to cover the losses. Although the Florida Supreme Court contrasted the corporate client/ independent auditor relationship to the attorney/client relationship, the Florida Supreme Court declined to shield independent auditors in the same way attorneys are shielded from assignment of legal malpractice claims. In reaching its decision, the KPMG Court distinguished an attorney from an independent auditor, stating: “[r]ather than acting as an advocate with an undivided duty of loyalty owed to a client, an independent auditor performs a different function.”5 Because the attorney/client relationship requires “zealous” representation of a client’s position in an adversarial setting, as opposed to an independent auditor who is hired to give an opinion on a client’s financial statements with impartiality, the prohibition of assigning a legal malpractice claim does not apply equally to the assignment of malpractice claims against an independent auditor.6

II. Factual Background of Kaplan

Medical Research Industries, Inc. (MRI), a Florida corporation, developed homeopathic medical products. In order to secure money for company improvements, MRI’s attorneys prepared private placement memoranda, offering shares in the company to potential investors. Four private placements were issued from 1996-1998, raising over fifty million dollars from about two-thousand shareholders for MRI. Later, MRI’s majority shareholder, William Tishman, borrowed eighteen million dollars in unsecured loans from MRI. In the “Use of Proceeds” section of the private placement memoranda, the attorneys claimed that the capital raised in connection with the placement would be used to operate and expand MRI’s business. However, the attorneys knew that a substantial amount of the money was being funneled into unsecured loans to Tishman. The Tishman loan led MRI to eventual insolvency. MRI sued Tishman to recover the loan. Unable to satisfy the judgment against Tishman, MRI executed an “Assignment for the Benefit of Creditors” to Donald Kaplan. Kaplan then sued the attorneys who prepared the private placement memoranda for legal malpractice. On appeal, the Third District Court of Appeal held that the “legal services at issue [were] not personal in nature but involved the publication of corporate information to third parties, i.e., the investors [and therefore] the policies underlying the prohibition of bare assignment of legal malpractice claims are inapplicable.”7

III. Kaplan v. Cowan Liebowitz & Latman, P.C., and the Third District Court of Appeal Opinion

In Kaplan v. Cowan Liebowitz & Latman, P.C.,8 the Third District Court of Appeal permitted the assignment of MRI’s legal malpractice claim by holding the following: first, in preparing the private placement memoranda for potential investors, the MRI attorneys are similar to the accountant conducting an independent audit described in KPMG, therefore “the policies underlying the prohibition of bare assignment of legal malpractice claims are inapplicable,”9 and, second, under Chapter 727 of the Florida Statutes, an assignee for the benefit of creditors is analogous to a bankruptcy trustee, to whom legal malpractice claims may be transferred.10 Therefore, because Kaplan, as an assignee for the benefit of creditors, was charged with gathering and liquidating MRI’s assets, “[he] is no different from a trustee in bankruptcy who has full standing to bring a debtor’s legal malpractice claim.”11

The Florida Supreme Court acknowledged that by analogizing the MRI attorneys to an accountant conducting an audit, the Third District Court of Appeal “expressly and directly conflict[ed] with [the Supreme Court’s] statements in KPMG and Forgione (albeit in dictum) implying a blanket prohibition against assignment of legal malpractice claims.”12 Based on this conflict in law, the Florida Supreme Court accepted jurisdiction. Although the Third District Court of Appeal decision also rested on an analysis of Chapter 727, the Florida Supreme Court declined to resolve the statutory issue of Chapter 727, limiting the scope of its opinion to examining the MRI attorney’s duty to third parties who rely on statements made in private placement memoranda.

IV. The Florida Supreme Court Opinion in Kaplan

In Kaplan, the Florida Supreme Court adopted the reasoning set forth by the Third District Court of Appeal and receded “from the broad dicta in KPMG and Forgione purporting to prohibit the assignment of all legal malpractice claims.”13 Nevertheless, the Florida Supreme Court stressed that “the vast majority of legal malpractice claims remain unassignable because in most cases the lawyer’s duty is to the client.”14 When attorneys prepare private (or public) placement memoranda, “[they] act much as accountants do in performing independent audits. That is, they act not just for the corporation’s benefit, but for the benefit of all those who rely on the representation in their documents.”15

In order to support the assignment of MRI’s legal malpractice claim, the court compared the role of the attorneys in Kaplan with the role of the independent auditor in KPMG. “Like the independent auditors in KPMG, the attorneys intended that third parties would rely on the representations in the memoranda. The legal services at issue, therefore, were not personal but involved publication of corporate information.”16 In addition, the court explained that the assignment of a legal malpractice claim, such as the claim MRI assigned to Kaplan, would not endanger the attorney-client relationship because the “attorney’s services for MRI involved publication of information to third parties, [therefore] the attorneys owed a duty to the public when advising MRI and preparing the private placement memoranda.”17

The Florida Supreme Court also examined the role of securities lawyers and the communication of investment information. The court stated that “securities lawyers have been held to owe a duty to the public.”18 Because compliance with the securities laws present complicated questions to investors, an attorney has a unique role in communicating accurate information to investors. In order to secure the proper functioning of market transactions, the public must be able to rely on information or an opinion offered by an attorney regarding the securities laws and statutes. In this regard, “lawyers often have public duties beyond those owed to the clients.”19 Since the attorneys in Kaplan drafted the private placement memoranda knowing that such information would be disseminated to potential investors relying on the content of the memoranda, the services were not personal and may be assigned to a non-client plaintiff.

V. Conclusion

Kaplan creates an exception to the longstanding rule of non-assignment of a legal malpractice claim. The Kaplan rationale rests on the public nature of the attorney’s communication which was intended for release to third parties— i.e. shareholders and the investing public. As the Court stated: “the documents the attorneys prepared not only were intended for release; they were released to third parties.”20 Thus, the confidentiality concerns arising from the attorney/client privilege do not apply. Additionally, because the MRI attorneys did not disclose accurate information in private placement memoranda when soliciting investors, the Florida Supreme Court permitted the assignment of the legal malpractice claim to a third party plaintiff. While the Florida Supreme Court expressed reluctance about creating a market for legal malpractice claims, most claims would be prevented so long as information is not intended for release to third parties.

 

Endnotes

1 902 So.2d 755 (Fla. 2005). 

2 701 So.2d 557 (Fla. 1997). 

3 Forgione, 701 So.2d at 559. 

4 765 So.2d 36 (Fla. 2000). 

5 Id. at 37. 

6 Id. at 38. 

7 Kaplan v. Cowan Liebowitz & Latman, P.C., 832 So.2d 138, 140 (Fla.3d DCA 2002). 

8 832 So.2d 138 (Fla.3d DCA 2002). 

9 Id. at 140. 

10 Id. at 140. 

11 Id. at 140. 

12 Kaplan, 902 So.2d 755, at 756. 

13 Id at 756. 

14 Id. at 756. 

15 Id. at 758. 

16 Id. at 759. 

17 Id at 759. 

18 Id. at 759. 

19 Id. at 759. 

20 Id at 759.

Note from the Editor: The Federalist Society takes no positions on particular legal and public policy matters. Any expressions of opinion are those of the author. We welcome responses to the views presented here. To join the debate, please email us at [email protected].