NEW JERSEY LAW JOURNAL FEBRUARY 16, 2004
N.J. APPEAL TESTS LIABILITY OF FIRMS WHEN CONTRACT PARTNERS ARE SUED
By Henry Gottlieb
A state appeals court has been asked to decide, in a case against ex-judge Andrew Napolitano, whether partnerships are automatically liable for malpractice by contract lawyers - even when the rest of the firm and the client have no relationship.
Napolitano and his former firm, Newark 's Sills Cummis Epstein & Gross, are defendants in a suit by a company that says it lost millions of dollars because of bad legal advice. The dispute focuses on whether Napolitano and the firm, or just Napolitano, owed the client a duty.
When he was with the firm in 1997 and 1998, Napolitano's contract allowed him to receive payment directly from lecture and media companies, but his law clients were to be billed by the firm.
In this case, client Licette Music Corp. retained Napolitano for legal services but paid the $39,000 in fees with checks made out to him, not the firm.
Licette, eager to keep Sills Cummis on the hook in the malpractice case, wants the Appellate Division to rule as a matter of law that the particular facts of the relationship among the client, the lawyer and the firm are irrelevant.
The fact that Napolitano was an employee of the firm and performed legal services for a client is enough to make Sills Cummis liable for any negligent work, Licette argued in a Jan. 12 brief in support of a motion for leave to appeal.
"Sills Cummis could not have Napolitano as a member of the law firm but disavow his work for liability purposes, even if he took all of the money for himself and never disclosed his relationship with Licette," the former client's new lawyer, Princeton solo practitioner Glenn Bergenfield, says in his appellate brief.
He's in the Appellate Division because a trial judge did not buy his argument.
Last Dec. 19, Essex county Superior Court Judge Francine Schott declined to grant Bergenfield summary judgment on the issue, saying the facts of the relationships among Napolitano, the firm and the client were relevant.
If the appeals court denies him leave to appeal, Bergenfield would have to slow that Licette believed that Sills Cummis, not just Napolitano working independently, was its champion.
Millions of dollars are at stake in the case, Licette Music Corp. v. Sills Cummis, Esx-L-1469-99, which grew out of an effort by Licette - owner of the recording rights to many popular Disney songs of the 1940s and 1950s - to collect an $8.1 million judgment against a record producer who allegedly had not paid royalties.
Napolitano is a former Bergen County Superior Court judge who lectures on legal developments for the Law Journal, is a regular commentator on the Fox Network and is a partner at Fischbein Badillo Wagner Harding in New York .
He was a partner in Newark 's Reed Smith in 1996 when Licette hired him, and the representation continued when he moved to Sills Cummis the next year.
The looming issue for Licette then was whether the statute of limitations had expired on the company's effort to gain control of two properties worth more than $1 million each that the defendant with the $8.1 million judgment had allegedly conveyed fraudulently.
A special master ruled that the claim for one property was time-barred and that Napolitano allegedly advised Licette to cut its losses, settle for just one property and abandon the claim for the other.
According to the negligence suit, the special master made a mistake - the claim was not time-barred - and Napolitano failed to recognize the error and pursue the case rather than settle.
Napolitano and Sills Cummis counter that even if the special master made a mistake and even if Napolitano did not spot the error, the settlement was not necessarily a bad move. The client might have lost even more if the issues had gone to trial.
Napolitano's lawyer, Laurence Orloff of Roseland's Orloff, Lowenbach, Stifelman & Siegel, says of Bergenfield 's case: "When the discovery evolves and the story comes out, it will be a different story than the one he is trying to tell."
Right now, with discovery in the malpractice case on hold, the story is only a subplot about the narrow but intriguing issue of firms' duties to clients of contract partners.
Appeals courts already have ruled that although firms are generally liable for their lawyers' errors, the duty of a firm is questionable when the case is against a lawyer with the title "counsel or "of counsel."
In those cases, proper resolution of the claim requires a detailed evaluation of the facts about such issues as what the client expected and the relationship between the "of counsel" lawyer, the Appellate Division ruled in Staron v. Weinstein, 305 N.J.Super. 236 (1997).
But that principal does not apply to lawyers who hold themselves out to be partners, Bergenfield argues.
"Napolitano was not listed on the Sills Cummis letterhead as an 'of-counsel' attorney as others were listed," Bergenfield says in his appellate brief. "The questions of agency and authority are relevant to one who is 'of counsel' but not to one who is a partner or member of the firm."
He suggested in his oral argument to Schott that the defendants would be right if Napolitano was engaged in nonlegal business. "If he were to go out and try to sell Web site design or something, then he doesn't bind the firm, there's at least a fact question," Bergenfield argued.
But Staron's principles do apply, even if the title of the lawyer on the hot seat is different, says Stephen Long, a partner at Florham Park 's Drinker, Biddle & Reath who represents Sills Cummis.
"Law firms are not liable for acts of their attorneys if the attorney and client agree that the law firm is not representing the client," Long says in his brief.
He and Orloff cite a section of the Uniform Partnership Law in effect before 2000, N.J.S.A. 42:1-9, which says one partner's acts bind the others "unless the partner so acting has in fact no authority to act for the partnership in the particular manner, and the person with whom he is dealing has knowledge of the fact that he has no authority."
Long adds that facts to be disclosed in discovery made possible to Schott's ruling will show that Napolitano was acting on his own, not for the firm.
Not only did the fee checks go directly to Napolitano, there was no retainer letter formalizing a relationship between the client and the firm. No Sills Cummis billing account was established, no conflict checks were performed and none of Napolitano's time spent on the case was recorded in the case in the firm's time-recording system, Long says in his brief.
Bergenfield suggests in pleadings that these facts do not demonstrate a lack of responsibility by Sills Cummis. Instead, they constitute possible evidence that Napolitano was not upfront with his firm about income that was coming in.
That suggestion, coupled with the latest appeal of Scott's ruling, does not sit well with Orloff, to whom Napolitano referred all questions last week.
He says the plaintiff's pleadings against Napolitano are an "effort to gain the court's attention by labeling him a rogue, a thief and a contract breaker when the facts - discovery has only just begun - will demonstrate otherwise."