Bank Prevails in Legal Malpractice Action
Quad City Bank & Trust v. Elderkin & Pirnie, P.L.C., No. 13-2025 (Iowa Ct. App. Feb. 25, 2015)
The Iowa Court of Appeals recently affirmed a legal malpractice judgment against a law firm that represented an Iowa bank in an unsuccessful accounting malpractice action. The court determined that, in addition to damages stemming from the unsuccessful lawsuit, the bank was entitled to collect the attorney fees paid to the law firm to prosecute the accounting malpractice action.
A bank retained the law firm to file a malpractice action against an accounting firm that provided work for the bank. The bank alleged that it lost large sums of money because it detrimentally relied upon the accounting firm’s negligent audits of a customer’s financial statements. At trial, the bank’s sole expert witness was excluded from testifying because the court found that he was not qualified to offer an opinion as to the standard of care applicable to the accounting firm. The bank lost the case, and then filed a malpractice action against the law firm. The jury returned a verdict for the bank in the malpractice action, and the law firm appealed. The bank also challenged the district court’s ruling that the bank could not offer into evidence the amount of attorney fees the bank paid the law firm to prosecute the action against the accounting firm.
Iowa Court of Appeals Decision
The Iowa Court of Appeals affirmed the judgment against the law firm, but reversed the district court’s ruling that the amount of attorney fees should be kept from the jury. The court remanded for a new trial on the issue of the amount of attorney fees the bank should recover from the law firm.
On the malpractice issue, the appellate court first held that the evidence was sufficient to uphold the verdict. The law firm’s defense to the malpractice was that (1) there was insufficient evidence to show that a judgment against the accounting firm would have been collectable; (2) the bank failed to offer sufficient evidence of the damages the bank would have recovered if its lawsuit against the accounting firm had been successful; (3) the bank did not show that the accounting firm’s negligence was the cause of its injuries, and; (4) there was not sufficient evidence to show that if an accounting expert had testified the result would have been any different.
The court rejected the law firm’s arguments, primarily using the law firm’s own assertions against it. The court pointed out that in letters to the bank while preparing for trial, the law firm had encouraged the bank that this “action was the ‘holy grail’ of lawsuits because it could result in recovering the entire loss sustained by the bank, and there was a ‘very high potential for substantial recoveries’ against the accounting firms.” Testimony also established that the law firm had informed the bank prior to trial that expert testimony was essential to the success of the action. The law firm justified the expense of the expert to the bank by stating that the case would come down to a “battle of the experts” and that without one, the case would be dismissed. The court also found that the evidence of proximate cause in the underlying accounting malpractice lawsuit was sufficient based on the testimony of the law firm’s own attorneys, who stated that the financial statements prepared by the accounting firm were inaccurate.
The court also reversed the district court’s order excluding evidence of the amount of attorney fees the bank paid to the law firm to prosecute the accounting malpractice action. The bank argued that the goal of a legal malpractice action—to put clients in the position they would have occupied had the attorney not been negligent—would be defeated if the bank was not permitted to recover the attorney fees it paid to the negligent law firm. The court agreed, finding that while Iowa courts had not affirmatively held that attorney fees from the underlying case are recoverable in a malpractice action, a decision of the Iowa Supreme Court in 2013 indicated that the Iowa Supreme Court would be open to the idea. Hook v. Trevino, 839 N.W.2d 434 (Iowa 2013). Specifically, the court quoted from the Iowa Supreme Court, stating that it would “not turn a blind eye to the reality that the victim of legal malpractice must retain a second lawyer to recover from the first.” The court reasoned that paying two attorneys, the negligent attorney and the malpractice attorney, to recover one claim, was not putting the injured party back in the same position. The court applied the logic of Hook to find that the bank was entitled to collect the fee from the underlying accounting malpractice action from the law firm. The bank had paid the law firm a total of approximately $1,007,000 for all the work the law firm did in connection with the bank’s defaulting customer. The court ordered a new trial to determine that portion of the fee attributed to prosecuting the accounting firm malpractice action.
This malpractice action within a malpractice action demonstrates the dilemma facing lawyers accused of malpractice. To defend against the claims, the attorneys must argue that their client had little chance to win the lawsuit the lawyers agreed to prosecute in the first place. This is a tough sell where, as here, internal memos and communications with the client reveal that the lawsuit was pitched as the “holy grail” of lawsuits.
The Center for Agricultural Law and Taxation does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. The Center's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.