Sign, Sign, Everywhere Assign

Professionals owe a duty to their clients to satisfy the standard of care commonly exhibited by others within their profession.  Consequently, privity is often required to maintain a malpractice claim; i.e. it is often the client with the exclusive right to sue her professional. This narrow application of standing assumes, however, that clients have retained their exclusive right to sue.  In fact, as with many torts, clients may freely assign their right to file malpractice actions to third parties, even those that are adverse to the client in the underlying litigation.

In a recent decision from the Southern District of New York, the court considered the circumstances in which a party could sue an attorney after having been assigned malpractice claims by the attorney’s client.  Contractor performed construction work on a building in Manhattan that later resulted in extensive water damage to residents of the building.  Residents filed a state court action against Contractor for negligence in the repair work.  Contractor hired counsel to represent him in the state court action, but the attorneys failed to get the claims against him dismissed and stopped appearing on his behalf, resulting in a judgment against him.

Contractor then assigned all rights to any malpractice action he may have against his attorneys to the Residents and their attorney.  In a subsequent agreement, the Residents assigned the malpractice rights back to Contractor, in part, with the understanding that Contractor would transfer any amounts received from the litigation to the Residents and hire the Residents’ attorney to prosecute the malpractice claim, even though the attorney continued to represent the residents from the underlying lawsuit.

The attorneys who were sued for malpractice filed a motion for summary judgment, asserting that Contractor was judicially estopped from asserting any claim in the malpractice action that was contrary to positions taken by the residents in the underlying negligence action.  In analyzing this defense, the court noted that causes of action are freely assignable, but that an assignee is precluded from making an argument that his assignor would be judicially estopped from making.

The court continued that because the underlying residents retained an interest in the assignment, the doctrine of judicial estoppel applied to preclude any claim made that was contrary to positions taken by the residents in the underlying state court action. Because the residents had successfully argued the elements of the underlying cause of action against the Contractor, they were estopped arguing that Contractor’s counsel in the underlying action was negligent.

Professionals should remain cognizant of their clients’ right to assign claims to others.  Even if clients do not personally file suit, they may be convinced to assign their rights to third parties who intend to pursue litigation in exchange for a portion of the proceeds.  In those instances, counsel should consider whether the litigants’ claims contradict positions taken in the underlying action, which could support dismissal on estoppel grounds.