Does Legal Malpractice Insurance Cover an Attorney’s Obligation to Repay a Personal Loan From a Client?

by Mike Mintz on September 3, 2012 · 0 comments

in Contract Law,legal malpractice,Legal News and Trends,Litigation

Plaintiff Jane Kelley, a California resident, sued a law firm (“Dahle”) and the lawyer’s malpractice insurer, Wisconsin Lawyers Mutual Insurance Company (WILMIC) alleging, inter alia, breach of contract, negligence and breach of a fiduciary duty.  The claims arose from the alleged failure of the law firm to repay a $300,000 loan which it solicited from the plaintiff three years ago.  Kelley also sued  WILMIC, for recovery of the loan proceeds.  WILMIC had issued a “claims made” malpractice policy to the Dahle law firm. The case is entitled Kelley v. Wisconsin Lawyers Mutual Ins. Co. et al., Case No. 11-C-600 (U.S. Dist. Ct. E.D. Wis. 2012).

WILMIC moved for summary judgment, claiming that its policy does not cover Kelley’s claims. The district court agreed with WILMIC and granted its summary judgment motion.

FACTS

After Dahle represented Kelley for some time, Kelley offered to lend Dahle $300,000. Dahle contends that in return for the personal loan, Kelley would not be paying her any legal fees in cash. Dahle proposed documenting the loan in a promissory note and securing it with a mortgage from an entity called TNT Commercial Acquisitions. The proposed note was to have a five-year repayment term with interest at 5% which would have translated into monthly payments of $5661.37.  Dahle also proposed, alternatively, paying the loan on a four-year amortization schedule by making weekly payments instead.  Also, any legal fees that Kelley incurred would be credited against the balance due on the loan. In other words, Kelley would no longer be paying legal fees out of pocket.  Dahle never advised Kelley to consult with an outside attorney in connection with the terms of the loan.

The parties had a hard time reaching an agreement on the terms of the loan. Kelley was reluctant to part with the cash for business reasons, but Dahle kept pressing her for the loan.  Eventually, Kelley forked over the $300,000 loan to Dahle in the form of two separate checks.  Kelley wrote the word “loan” on the checks and later wrote the words “TNT Commercial” on one of the checks.  The parties never did issue the promissory note and the loan was never secured by TNT Commercial.  Also, Dahle never made the weekly or monthly payments she had originally discussed with Kelley.  Furthermore, the legal fees that Kelley incurred were never credited against the amount of the loan.

Months after Kelley wrote the two checks for the loan, the parties tried to work out the terms of the loan.  They haggled over the interest rate on the loan, eventually agreeing to a 6.5% rate.  Instead of Dahle making monthly payments on the loan, Kelley received monthly credits against the attorney’s fees she had incurred retroactively.  Furthermore, Dahle agreed to make monthly cash payments to Kelley starting in November 2010.

Kelley never received any cash payments from Dahle. She only received credits against her legal fees.  Subsequently, Kelley demanded a full accounting from Dahle for the amount of the loan and the legal fees she had incurred which were used as a credit against the loan.  She also demanded an immediate repayment of the balance due on the loan.  Dahle did not respond to the demand and Kelley filed this lawsuit for breach of contract-Dahle’s failure to repay the loan; professional malpractice-Dahle breached a duty of care by engaging in business transactions with a current client in a manner prohibited by Wisconsin state court rules; and breach of fiduciary duty-Dahle negotiated this business arrangement in a way that was adverse to Kelley’s best interests.

WILMIC contends in its summary judgment motion that Kelley’s claims are not covered under their policy or, alternatively, that coverage for such claims is excluded.

LAW

The policy that WILMIC issue to Dahle states in pertinent part that it will provide coverage to Dahle for damages Dahle is legally obligated to pay for wrongful acts for which Dahle is legally liable. WILMIC contended that the damages Kelley seeks are not “damages” under the terms of its policy. The policy’s damages clause clearly states that it does not cover expenditures, unpaid bills or refunds that an attorney gives a client to resolve a dispute.  The court recognized that in essence, Kelley is seeking repayment of her loan, no matter how she dresses up her legal claims.

The court agreed with WILMIC’s characterization of the transaction between Kelley and Dahle, noting that the loan was essentially an expenditure for which Kelley is now seeking recovery.  The court found it of no moment that the expenditure in question was not a “legal” expenditure but rather a personal one, since the policy does not specify that covered damages exclude only legal expenditures.  Hence Kelley’s quest for repayment falls outside the scope of the WILMIC policy.

The court also pointed out that legal malpractice policies generally do not offer coverage against default on the payment of an attorney’s contractual debt. It is simply not designed to cover these exigencies.  Instead, legal malpractice is designed to protect attorneys from liability to clients caused by their errors in providing the clients with legal services that result in the loss of an otherwise meritorious claim or defense.

Add a Comment






Asterisks (*) indicate required fields.

Use of and participation in this website are subject to Terms & Conditions