By Samson Habte
March 7 — An attorney doesn't breach a duty of care to a client by failing to raise claims in litigation “that are merely colorable, but not necessarily viable,” the Oregon Supreme Court said March 3.
“This court has never suggested that a lawyer's duty to a client requires taking ‘colorable,' but ultimately incorrect, legal positions,” Justice Martha Lee Walters wrote.
Rather, Oregon cases make it clear that “A lawyer cannot be held liable for failing to assert a claim that is colorable but not viable,” Walters said.
The decision reverses an appellate opinion that said attorneys at the law firm Schwabe, Williamson & Wyatt (Schwabe) could be held liable for malpractice for failing to assert “a colorable claim” that would have given a client they represented in a business dispute “increased leverage” during settlement negotiations.
The supreme court's rejection of the “colorable claim” standard—and reaffirmation of the “viable claim” standard—was a victory not only for the lawyer-defendants but also the Professional Liability Fund, which serves as the mandatory provider of primary malpractice insurance coverage for members of the Oregon bar.“A lawyer cannot be held liable for failing to assert a claim that is colorable but not viable.”Oregon Supreme Court
The PLF in an amicus brief urged the justices to reject the “colorability” standard, saying a contrary holding would encourage “scorched earth litigation.”
“Whatever ‘colorable' means, its use as a standard to define an attorney’s duty to a client has no support in the law of this Court, and it is unfair to litigation attorneys whose work is particularly susceptible to hindsight bias,” the PLF stated.
Plaintiff Gerald L. Rowlett contacted Schwabe for advice after his partners in a real estate company, Sunrise Partners LLC, took actions that Rowlett viewed as detrimental to his interests.
A Schwabe lawyer filed an arbitration demand that accused the partners of breach of fiduciary duty. The case was dormant for two years and was later taken over by another Schwabe lawyer.
Meanwhile, the court said, Rowlett's partners distributed $5.8 million to all Sunrise members except Rowlett, and they removed Rowlett as a member.
Schwabe then filed an amended arbitration demand that alleged breach of fiduciary duty and, for the first time, asserted a claim for shareholder “oppression” against Sunrise. When a court dismissed the arbitration for lack of prosecution, Schwabe filed a lawsuit for Rowlett alleging the same claims.
One year later, after a precipitous drop in the real estate market, Sunrise offered to settle Rowlett's case for $200,000; his complaint had demanded $900,000.
Rowlett accepted the settlement and then sued his lawyers for malpractice. Among other things, he claimed the lawyers negligently failed to “recognize that the factual circumstances gave rise to [an oppression] claim” and failed to assert that claim earlier, before the real estate market declined.
A trial judge dismissed those claims, saying Rowlett provided no authority showing that Oregon law recognized oppression claims in the LLC context.
The Oregon Court of Appeals reversed. It said even if a “claim for oppression in the LLC context is not cognizable in Oregon, defendants still could have breached their duty of care by failing to assert a colorable claim of oppression earlier in the Sunrise litigation.”
That is so, the panel said, because “an assertion of a colorable claim could have altered the outcome for Rowlett considerably by giving him increased leverage to secure a settlement” on much more favorable terms.
The supreme court reversed the appellate panel on that point.
“[We] disagree that lawyers can be held to have breached a duty of care in a malpractice action by failing to raise claims that are merely colorable, but not necessarily viable,” Walters said. “Rather, as the court has stated, a client who alleges malpractice in litigation must prove the existence of ‘a valid cause of action or defense, which, had it not been for the attorney's alleged negligence, would have brought about a judgment favorable to the client in the original action.'”
“Using ‘colorable' as the standard to define a lawyer's duty to a client would place lawyers in an untenable position, given that, any time an area of law is unsettled, both sides arguably are ‘colorable,' and, in every case that goes to trial, one side loses,” Walters said.
“For that reason, [one] commentator states, it is ‘universally recognized' that ‘an attorney is not liable for an error in judgment on an unsettled proposition of law,'” Walters wrote, citing 2 Ronald E. Mallen, Legal Malpractice §19:1 at 1226 (2016 ed).
“[E]ven if the trial court erred in concluding that an oppression claim by a minority member of an LLC against the LLC or its other members is not viable in Oregon, an issue we do not reach, any such error was harmless,” Walters added.
Striking the “negligence allegations concerning defendants' failure to raise the oppression claim earlier in the Sunrise litigation did not affect the outcome of the malpractice case,” Walters said, because Rowlett was “able to make virtually identical arguments” by litigating his claims against the law firm for breach of fiduciary duty.
Christopher T. Carson of Kilmer, Voorhees & Laurick P.C., Portland, Ore., represented the defendants. David W. Melville, Portland, represented Rowlett and his companies.
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Copyright 2016, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.
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