A Release From a Client Doesn’t Always Work
Client Compatability, Legal MalpracticeA recent Illinois case is instructive about the effectiveness of releases of malpractice claims from departing clients.
In Construction Systems, Inc. v. FagelHaber, a law firm represented a construction company seeking payment for work on a commercial building project. The law firm filed a lien and litigation against the owner and general contractor on the project, but not against a lender as was arguably required under Illinois law, because of an inadequate title search. The firm eventually figured out that the lender had filed appropriate mortgage documents and had to be included in litigation, and did not discuss with the client whether a lien should have been filed earlier.
The client eventually grew dissatisfied with how long the litigation process was taking and with the fees being charged by the law firm, and obtained new counsel. The client asked for the client file, but refused to do provide it fully until payment of outstanding amounts were received. The law firm also required a release of all claims against the firm as part of the settlement of the fee dispute. New counsel reviewed the release and the client construction company executed it. After new counsel reviewed the entire file, it became clear that the original law firm knew that the lender had filed its mortgage, and that the original law firm had failed to file a lien for the construction company. The parties litigated whether a filed lien was required under Illinois law, but settled for a fraction of the outstanding invoices of the construction company before a court ruling on the issue. The construction company then filed suit against the original law firm.
In the appellate opinion, the court ruled that the release signed at the time the file was returned only contemplated the release of the fee obligations, not of unknown legal malpractice claims. The court noted the fiduciary nature of the attorney-client relationship, which requires complete candor with the client. The failure to turn over the complete file before the signing of the release as well as failing to otherwise disclose the potential malpractice operated to invalidate the release. The court distinguished other cases in which a general release operated to release additional malpractice claims, as the client in those cases knew they had malpractice claims at the time they signed releases.
For lawyers generally, this case suggests that in fee disputes a general release intended to release unknown malpractice claims could be ineffective. However, under Texas law, legal malpractice claims are mandatory counterclaims, so the result may differ in Texas. The failure to turn over the complete client file when a client has failed to pay a bill can cause problems other than the apparent effect in this particular case. Rule 1.15 (d) of the Texas Disciplinary Rules of Professional Conduct limit the ability to hold client files because of failure to pay fees:
The lawyer may retain papers relating to the client to the extent permitted by other law only if such retention will not prejudice the client in the subject matter of the representation.
