John R. Douglas and Terry J. Grennan, of Cassem, Tierney, Adams, Gotch
& Douglas, for appellee.
1. Judgments: Appeal and Error.
When reviewing a question of law, an appellate
court reaches a conclusion independent of the lower court's ruling.
2.
Attorneys at Law.
An attorney's judgment or recommendation on an unsettled
point of law is immune from suit, and the attorney has no duty to accurately
predict the future course of unsettled law.
3.
Attorney and Client: Compromise and Settlement.
The Nebraska Supreme Court
insists that lawyers advise clients with respect to settlements with the
same skill, knowledge, and diligence with which they pursue all other legal
tasks.
4. ____: ____. The decision to settle a controversy is the client's.
5. ____: ____. An attorney should exert his or her best efforts to ensure
that a client has been provided the information necessary to assess the
risks and benefits of either settling or proceeding to trial.
6.
Attorney and Client.
Where there are reasonable alternatives, the attorney
should inform the client that the issue is uncertain, unsettled, or debatable
and allow the client to make the decision.
7.
Attorney and Client: Compromise and Settlement.
Because the client bears
the risk when settling or refusing to settle a dispute, it is the client
who should assess whether the risk is acceptable, not the attorney.
8.
Attorney and Client: Compromise and Settlement: Negligence: Immunity.
The doctrine of judgmental immunity does not apply to an attorney's failure
to inform a client of unsettled legal issues relevant to a settlement. Rather
, whether an attorney is negligent for such a failure is determined by whether
the attorney exercised the same skill, knowledge, and diligence as attorneys
of ordinary skill and capacity commonly possess and exercise in the performance
of all other legal tasks.
HENDRY, C.J., WRIGHT, CONNOLLY
, GERRARD, and MCCORMACK
, JJ.
CONNOLLY, J.
We granted the appellant, Beverly J. Wood's petition for further review
of the Nebraska Court of Appeals' decision. The Court of Appeals concluded
that as a matter of law, Timothy J. Pugh, an attorney with the appellee,
the law firm of McGrath, North, Mullin & Kratz, P.C. (McGrath), did not
breach the standard of care or commit legal malpractice by failing to inform
Wood that the law relating to two issues relevant to a divorce settlement
was unsettled and that the settlement resolved those issues against her.
We reverse the Court of Appeals' decision and conclude that the doctrine
of judgmental immunity does not apply to an attorney's failure to inform
a client of unsettled legal issues relevant to a settlement agreement.
BACKGROUND
We set out the facts focusing on the issues raised in Wood's petition
for further review. For a more detailed recitation of the facts, see
Wood
v. McGrath, North
, 7 Neb. App. 262, 581 N.W.2d 107 (1998).
Wood brought a legal malpractice action against McGrath, alleging that
Pugh had negligently represented her in a dissolution action. The underlying
dissolution action was concluded by settlement and decree. In her petition
against McGrath, Wood alleged that Pugh allowed her to accept less than
her share of the marital estate and was negligent by, inter alia, failing
to inform her that (1) the settlement reflected a distribution which excluded
all rights to then unvested stock options which her husband held through
his employment at Werner Enterprises, Inc.; (2) the state of the law indicated
that a trial court could likely include all such stock options within the
marital estate; (3) the settlement reflected a distribution which excluded
approximately $210,489 from the marital estate to account for potential
capital gains tax on the stock that the couple owned; and (4) the state of
the law indicated that a trial court could likely value the Werner stock
without deducting any potential capital gains tax.
At trial, Wood testified that Pugh told her the settlement awarded her
40 percent of the marital estate and that when she asked if that was appropriate
, she said Pugh told her a judge would award her anywhere from 35 to 50 percent
—that she could do better or worse than the settlement by going to trial.
However, Wood testified that Pugh never discussed the different terms of
the settlement, never mentioned any alternatives to settling, never provided
any reasons to reject the settlement, and never discussed the potential
outcome of a trial. She stated that she would not have signed the agreement
if Pugh had told her that a trial court might include the unvested stock
options as part of the marital estate and that a trial court might prohibit
the deduction of potential capital gains tax when valuing the stock, contrary
to what the settlement proposed.
Two attorneys testified as expert witnesses for Wood. David Domina stated
that when a property settlement raises the issue of unvested stock options
, the decision is the client's whether to pursue the issue to trial or to
nonetheless settle the issue and that a lawyer breaches the applicable standard
of care by failing to inform the client of the existence of the issue and
the related law. Domina testified that when a settlement agreement deducts
potential capital gains taxes from the value of a marital estate, a lawyer
breaches the applicable standard of care by failing to inform a client of
the effect of the deduction and the related law. Paul Galter testified that
given the terms of the settlement agreement presented to Wood, Pugh breached
the standard of care because Pugh did not give Wood sufficient information
on the unvested stock options and capital gains tax issues. Galter stated
that Pugh had a duty to tell Wood that the agreement raised the issues;
to explain their effects to Wood; and to explain what the relevant law on
the issues was, including what courts in other jurisdictions had held, before
permitting her to sign the agreement.
At the close of Wood's evidence, McGrath moved for a directed verdict
, which the court sustained on the issues of the stock valuation and the
exclusion of unvested stock options.
On appeal, Wood asserted, inter alia, that the trial court erred in granting
McGrath's directed verdict, arguing that Pugh breached the standard of care
by failing to properly advise her in regard to the settlement agreement.
The Court of Appeals noted that the law on both the inclusion of unvested
stock options in the marital estate and the consideration of potential capital
gains taxes in valuing the estate were unsettled in Nebraska at the time
the parties entered into the agreement.
Wood v. McGrath, North
, 7 Neb. App
. 262, 581 N.W.2d 107 (1998). Accordingly, the court held that the judgmental
immunity rule applied and concluded that Pugh's acts and omissions relating
to the issues were not negligent as a matter of law. The court then stated
that “Pugh, upon exercise of informed judgment, was not obligated to give
additional advice regarding the unsettled nature of relevant legal principles
.”
Id
. at 282, 581 N.W.2d at 121.
ASSIGNMENT OF ERROR
In her petition for further review, Wood asserts that the Court of Appeals
erred in affirming the trial court's judgment.
SCOPE OF REVIEW
When reviewing a question of law, an appellate court reaches a conclusion
independent of the lower court's ruling.
Hoiengs v. County of Adams
, 254
Neb. 64, 574 N.W.2d 498 (1998).
ANALYSIS
Wood argues that the doctrine of judgmental immunity does not apply to
Pugh's failure to inform her of the law relating to the unvested stock options
and capital gains tax deduction issues; that the settlement resolved those
issues against her; and that given the body of law on the issues at the
time, a trial judge might have resolved those issues in her favor. McGrath
notes that the law regarding those issues was unsettled in Nebraska when
Pugh represented Wood and argues that the doctrine of judgmental immunity
applies to an attorney's decision regarding unsettled law, citing
Baker
v. Fabian, Thielen & Thielen
, 254 Neb. 697, 578 N.W.2d 446 (1998). McGrath
thus contends that when presenting a client with a settlement, an attorney
has no duty to inform a client of possible options when the law relating
to a relevant issue is unsettled.
In
Baker, supra
, this court held that an attorney is not liable for an
error in judgment on a point of law which has not been settled by this court
and on which reasonable doubt may be entertained by well-informed lawyers
. Thus, an attorney's judgment or recommendation on an unsettled point of
law is immune from suit, and the attorney has no duty to accurately predict
the future course of unsettled law. This immunity rule encourages practicing
attorneys in this state to predict, in a professional manner, the outcome
of legal issues relevant to their clients' cases. See Canon 7, EC 7-3 and
7-5, of the Code of Professional Responsibility. However, Pugh's recommendations
(or lack thereof) on the unvested stock options and capital gains tax issues
are not before us. Rather, the issue is whether the doctrine of judgmental
immunity applies to Pugh's failure to inform Wood that the law relating
to unvested stock options and potential capital gains tax issues, while unsettled
in Nebraska, were settled in other jurisdictions in a manner which would
have been favorable to Wood. The question of whether an attorney owes a
duty to inform a client of the unsettled nature of relevant law was not addressed
in
Baker
. Thus, we must determine whether to extend the
Baker
judgmental
immunity rule to an attorney's failure to inform a client of unsettled legal
issues relevant to a settlement agreement.
“[W]e insist that lawyers . . . advise clients with respect to settlements
with the same skill, knowledge, and diligence with which they pursue all
other legal tasks.”
Bruning v. Law Offices of Ronald J. Palagi
, 250 Neb.
677, 689, 551 N.W.2d 266, 272 (1996) (citing
Grayson v. Wofsey, Rosen, Kweskin
& Kuriansky
, 231 Conn. 168, 646 A.2d 195 (1994)). See, also,
McWhirt v.
Heavey
, 250 Neb. 536, 550 N.W.2d 327 (1996). We declined in
McWhirt v. Heavey
, 250 Neb. at 547, 550 N.W.2d at 335, “‘to adopt a rule that insulates attorneys
from exposure to malpractice claims arising from their negligence in settled
cases if the attorney's conduct has damaged the client.'” We decline to
adopt such a rule now.
The decision to settle a controversy is the client's. See Canon 7, EC
7-7. If a client is to meaningfully make that decision, he or she needs
to have the information necessary to assess the risks and benefits of either
settling or proceeding to trial. “A lawyer should exert his or her best
efforts to ensure that decisions of a client are made only after the client
has been informed of relevant considerations.” Canon 7, EC 7-8. The desire
is that a client's decision to settle is an informed one.
- The attorney's research efforts may not resolve doubts or may lead to
the conclusion that only hindsight or future judicial decisions will provide
accurate answers. The attorney's responsibilities to the client may not
be satisfied concerning a material issue simply by determining that a proposition
is doubtful or by unilaterally deciding the issue. Where there are reasonable
alternatives, the attorney should inform the client that the issue is uncertain
, unsettled or debatable and allow the client to make the decision.
2 Ronald E. Mallen & Jeffrey M. Smith, Legal Malpractice §17.15 at 531
-32 (4th ed. 1996).
Additionally, an allegation that an attorney is negligent by failing
to inform a client of an unsettled legal issue relevant to a settlement does
not demand that an attorney accurately predict the future course of unsettled
law. Thus, an allegation that an attorney did not properly inform a client
of relevant unsettled legal issues does not provide the same need for immunity
from suit as does an attorney's judgment or recommendation in an area of
unsettled law.
In
Williams v. Ely
, 423 Mass. 467, 668 N.E.2d 799 (1996), lawyers affiliated
with a law firm prepared disclaimers for clients in which the clients renounced
their remainder and contingent interests in a family trust. In affirming
the lower court's ruling that a competent estate planning attorney would
have advised that the law was unsettled regarding the appropriate time to
file the disclaimers, the
Williams
court recognized the difference between
alleging negligence for a recommendation based upon an area of unsettled
law and alleging negligence for failing to inform a client of relevant unsettled
law.
- It does not matter that the opinion that the disclaimers would generate
no adverse gift tax consequences was a reasonable view of the law in 1975.
The problem is not that Gaston Snow gave reasonable advice that in time
proved to be wrong. The problem is that the apparent certainty of the opinion
given, at a time when the issue was not conclusively resolved, denied the
plaintiffs the opportunity to assess the risk and to elect to follow alternative
estate planning options.
Id
. at 476, 668 N.E.2d at 806. See
First Nat. Bank of Clovis v. Diane
, Inc.
, 102 N.M. 548, 698 P.2d 5 (N.M. App. 1985) (holding that while lawyer
was not liable for his error in judgment on unsettled legal issue, jury
properly considered whether lawyer was negligent for failing to inform client
of risk created by unsettled law that recommendation was based upon).
In
Crosby v. Jones
, 705 So. 2d 1356 (Fla. 1998), which the Court of Appeals
relied upon, the
Crosby
court addressed whether an attorney must inform
a client of the unsettled law relevant to the client's case. In the underlying
case, Crosby advised Jones to settle with one of two tort-feasors, but in
doing so, Crosby did not advise Jones that a decision from a Florida appellate
district court had determined that settling in such a situation would be
adverse to her interests. On appeal in her suit against the second tort-
feasor, Jones' appellate district court ruled adversely to her. See
Jones
v. Gulf Coast Newspapers, Inc.
, 595 So. 2d 90 (Fla. App. 1992). Jones sued
Crosby for malpractice, and on appeal, the
Crosby
court held that the attorney
had no duty to inform the client of the unsettled nature of the law. However
, the court's decision was based upon the fact that at the time of Crosby
's recommendation, (1) a statute and a Florida Supreme Court decision appea
red to be on point and supported Crosby's recommendation, see Fla. Stat.
ch. 768.041(1) (1973), and
Sun First National Bank of Melbourne v. Batchelor
, 321 So. 2d 73 (Fla. 1975), and (2) two prior decisions issued by Jones'
own appellate district court, the same court that ruled adversely in the
underlying case, also supported Crosby's recommendation to settle. See
Crosby
at 1358-59, 1359 n.2.
In
Crosby
, 705 So. 2d at 1359, the court noted that its decision “does
not mean that an attorney should never be required to inform a client regarding
a conflict in the law; however, when an interpretation has been made as
to the state of the law in a given district and that interpretation has a
proper basis of support,” an attorney need not advise his or her client
of case law from other jurisdictions. Indeed, the facts and the holding in
Crosby
indicate that that case involved the failure to advise a client in
an area of
apparently settled
law, rather than
unsettled
law. Thus, regarding
apparently settled law, our decision in
Baker v. Fabian, Thielen & Thielen
, 254 Neb. 697, 578 N.W.2d 446 (1998), would be dispositive and in accordance
with
Crosby
. In the instant case, however, Pugh had no case law from this
jurisdiction which supported the settlement agreement's determinations on
the unvested employee stock options or capital gains tax issues.
In
Davis v. Damrell
, 119 Cal. App. 3d 883, 174 Cal. Rptr. 257 (1981),
which the Court of Appeals also cited for support, the
Davis
court held
that under the circumstances, the doctrine of judgmental immunity applied
to the attorney's failure to inform the client of the unsettled nature of
the law relating to a settlement agreement. “As a matter of policy,” the
court stated that an attorney should not be required to compromise his or
her good faith and informed judgment by advising the client of the unsettled
nature of relevant legal principles.
Id
. at 889, 174 Cal. Rptr. at 260.
The fallacy in the
Davis
court's reasoning is that when determining whether
to settle a dispute, it is the client, not the attorney, who bears the risk
. Because the client bears the risk, it is the client who should assess whether
the risk is acceptable, not the attorney. See Canon 7, EC 7-7 and 7-8;
Williams
v. Ely
, 423 Mass. 467, 668 N.E.2d 799 (1996); 2 Ronald E. Mallen & Jeffrey
M. Smith, Legal Malpractice § 17.15 (4th ed. 1996).
Ultimately, we cannot support what would be the clear result of extending
the judgmental immunity rule in the instant case. If we conclude that the
judgmental immunity rule applies to an attorney's failure to inform a client
of unsettled legal issues relevant to a settlement, an attorney could forgo
conducting research or providing a client with information on a relevant
legal issue once he or she determined that the legal issue at hand was unsettled
in this state. We fail to see how this result promotes the settlement of
disputes in a client's best interests.
We conclude that the doctrine of judgmental immunity does not apply to
an attorney's failure to inform a client of unsettled legal issues relevant
to a settlement. Our conclusion makes no judgment as to whether Pugh was
negligent. It imposes no additional duty as a matter of law to research
or inform a client on unsettled legal matters. Rather, it simply directs
that consistent with
Bruning v. Law Offices of Ronald J. Palagi
, 250 Neb.
677, 551 N.W.2d 266 (1996);
McWhirt v. Heavey
, 250 Neb. 536, 550 N.W.2d
327 (1996); and
McVaney v. Baird, Holm, McEachen
, 237 Neb. 451, 466 N.W.2
d 499 (1991), whether an attorney is negligent for such a failure is determined
by whether the attorney exercised the same skill, knowledge, and diligence
as attorneys of ordinary skill and capacity commonly possess and exercise
in the performance of all other legal tasks. At the same time, an attorney
's ultimate recommendation in an area of unsettled law is immune from suit
.
Baker v. Fabian, Thielen & Thielen, supra
. Such a result gives the client
the benefit of both professional advice and the information necessary to
make an informed decision whether to settle a dispute.
CONCLUSION
The Court of Appeals erred in concluding that Pugh was not negligent
as a matter of law in failing to inform Wood of the unsettled nature of the
law regarding whether unvested stock options were part of the marital estate
and whether the marital estate's unvested stock options should have been
valued without deducting potential capital gains tax. Accordingly, we reverse
the Court of Appeals' decision and remand the cause to the Court of Appeals
with directions to remand the cause to the district court for a new trial
.
REVERSED AND REMANDED FOR A NEW TRIAL.
STEPHAN and MILLER-LERMAN
, JJ., not participating.