The D.C. Court of Appeals recently affirmed the trial court’s dismissal of negligence and conversion claims brought by a litigation financier’s (“Litigation Financier”) against two attorneys (“Attorneys”) who releasedsettlement proceeds directly to the Client, instead of honoring the client’s prior separate assignment of such proceeds.
The Court rejected Litigation Financier’s negligence claim against Attorney, holding that they did not owe the financier a duty of care, and further held that the professional rules governing the conduct of attorneys did not create an independent duty of care. The Court also determined that the conversion claim failed because the financier had no property right in the settlement proceeds itself, only a contractual right to receive such proceeds from the Client, and Attorneys had no legal duty to honor their Client’s agreement.
A copy of the opinion is available here.
After successfully challenging the foreclosure of his home, Client sought to bring a wrongful eviction claim (“Eviction Claim”) against the lender (“Lender”). Client had previously borrowed funds from Litigation Financier to challenge the foreclosure. Pursuant to a written agreement, Client agreed to reimburse Litigation Financier for funding his prior litigation by assigning the lion’s share of any recovery he obtained from the Eviction Claim. Op. at 2. Client then hired the Attorneys to pursue the Eviction Claim. Op. at 3.
Before suit was filed, Client and Lender settled the Eviction Claim for $100,000. Upon learning of the settlement, Litigation Financier contacted Attorneys, presented a copy of the written agreement, and demanded his portion of the settlement proceeds. Attorneys refused to pay Litigation Financier, and instead remitted the proceeds directly to Client. Litigation Financier sued Client for breach of contract, which suit ultimately settled for $20,000.
Addressing the negligence theory, the Court of Appeals determined that Attorneys did not owe Litigation Financier a duty of care. Op. at 5. The Court rejected Litigation Financier’s argument that Rule 1.15 of the District of Columbia Rules of Professional Conduct created a duty of care for Attorneys to protect against wrongful interference with his share of the proceeds. Op. at 5. That Rule provides that a lawyer must “promptly deliver to the client or third person any funds or other property that the client or third party is entitled to receive.” However, the comments to the Rule clarify that: “[t]hird parties, such as client’s creditor, may have just claims against funds or other property in a lawyer’s custody. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client . . . .” (emphasis added). See Rule 1.15, comment 8. Seizing on the reference to “applicable law,” the Court determined that the Rule itself did not impose a duty upon the Attorneys. Op. at 6.
The Court distinguished cases where an attorney contracted with a third party for payment of expenses, such as payments to an expert health care provider, because such duty in that case would arise under the applicable law of contractual obligations between the attorney and the expert. Consequently, the Court affirmed the dismissal of the negligence claim. Op. at 6.
The Court also rejected Litigation Financier’s conversion claim. “[T]he tort of conversion consists of an ‘unlawful exercise of ownership, dominion, and control over the personalty of another in detail or repudiation of his right to such property.” Op. at 7. Although the Court noted that specific identifiable fund of money may be converted, the Court rejected Litigation Financier’s attempt to impose a conversion claim against Attorneys, or to assert a lien against such funds.
Notably, the Court observed that Attorneys were not parties to their Client’s agreement with Litigation Financier and had no legal duty to ratify it. Op. at 7-8 (citing, generally, Travelers Ins. Co. v. Haden, 418 A.2d 1078, 1084 (D.C. 1980) (“In general, an attorney may be liable for failure to protect a lien imposed on his client‘s settlement proceeds, where he expressly agrees with the client and the creditor to do so.”).
Moreover, the Court determined that while the Client may have contractually agreed to remit the settlement proceeds, Litigation Financier did not have an in rem property right in the proceeds. “While contractual rights are in personam rights that bind only the parties to the contract, property rights are in rem rights that are ―good and enforceable against all the world.” Op. at 9.
“Here, [Litigation Financier] signed a contract with [Client] . . . that gave him a right to the proceeds from the tenants‘ wrongful eviction claims, but this right was a contractual right enforceable against [Client] . . ., not a property right enforceable against whomever might be in possession of those proceeds.” Id.
Accordingly, the Court affirmed the dismissal of the negligence and conversion claims.