Malpractice Suit Against Duane Morris Can Go Forward

A litigant in a dispute over control of a closely held corporation can proceed with suing Duane Morris lawyers who allegedly settled the case without explaining the full economic ramifications, a state appeals court says.

Wednesday's ruling in Guido v. Duane Morris, A-1162-08, continues a trend of trimming back a 2005 New Jersey Supreme Court precedent that blocks clients from suing their lawyers over settlements originally found to be acceptable.

The appeals court read Puder v. Buechel, 183 N.J. 428 (2005), together with an earlier ruling, Ziegelheim v. Apollo, 128 N.J. 250 (1992), to permit malpractice claims following a settlement when "particular facts" support the claim of attorney incompetence and "negate the element of prior acceptance of the underlying settlement."

In this case, Joseph Guido's allegation that his lawyers did not explain to him the long-term value and marketability implications of the settlement were sufficient, the judges said.

Guido owned 56.1 percent of the stock of Allstates WorldCargo Inc., a Bayville, N.J., shipping company. He was its president and CEO from 1961 to 1999, when he became board chairman. In 2004, he sought to amend the bylaws to increase the size of the board of directors from four to seven members and to appoint three non-employees to fill the new seats. When the three other directors resisted, Guido retained Duane Morris.

His suit, seeking injunctive relief and other remedies, went to mediation before retired Appellate Division Judge James Havey. A settlement was forged that provided for increasing the board to seven members -- the new members to be judicially appointed -- and for adopting a voting agreement requiring that any future modification of the board of directors, or of the bylaws, and any decision to sell or transfer capital stock would require unanimous consent of all the directors. The restrictions were to be binding on all subsequent stock owners.

At a hearing in 2005, Guido and his wife, Teresa, stated on the record that they understood and agreed to the settlement, which was then approved by Ocean County, N.J.'s general equity judge at the time, James Clyne.

Almost two years later, Guido had a change of heart. With a new lawyer, Donald Fedderly, he filed suit against Duane Morris and two partners in its Princeton, N.J., office who had worked on the original case, Frank Luchak and Patricia Kane Williams.

The malpractice complaint alleged that due to ineffective representation, Guido had been "stripped of his power" as majority shareholder and that his holdings "were rendered worthless because of the restrictions placed thereon pursuant to the Voting Agreement."

Duane Morris moved for summary judgment and Law Division Judge Edward Oles granted it based on Puder, which barred a malpractice suit by a litigant who accepted a settlement after stating on the record she was satisfied.

On his motion for reconsideration, Guido had a stroke of luck. Two days before it was argued on Aug. 1, 2008, the Appellate Division decided Hernandez v. Baugh, 401 N.J. Super. 539, allowing a malpractice suit that alleged the plaintiff was compelled to settle a case on unfavorable terms because his lawyer's negligence deprived him of needed proofs. Oles vacated the summary judgment and Duane Morris appealed.

In Wednesday's per curiam, unpublished opinion, Appellate Division Judges Ariel Rodriguez and Alexander Waugh Jr. found Oles did not abuse his discretion, in light of the just-decided Hernandez case.

The appeals court parsed the differences between Puder and Ziegelheim, the latter of which said the "fact that a party received a settlement [in an underlying action] that was 'fair and equitable' [did] not mean necessarily that the party's attorney was competent or that the party would not have received a more favorable settlement had the party's incompetent attorney been competent."

Puder and Ziegelheim were brought by divorce clients unhappy with their property settlements but the client in Puder was aware of the alleged deficiencies in her attorney's representation when she agreed to the property settlement, while Ziegelheim only discovered them after the fact.

Guido's situation was closer to Ziegelheim's, the panel said, because although Guido was "aware he was giving up certain rights inherent in majority ownership, he specifically contends that he was not aware of the effect the restrictions on the sale of stock and other provisions of the voting agreement would have on the value of his investment."

In both Puder and Ziegelheim, the aggrieved clients tried to repudiate the settlement in the underlying action but Guido did not. The appeals court found he was not required to do so in order to bring the malpractice claim, since the underlying case ended two years before he filed the malpractice action, and, at that point, he had no reasonable expectation of success before the equity judge.

Nevertheless, the fact that Duane Morris failed to raise that issue in its initial summary judgment brief meant Guido might not have had sufficient opportunity to brief it in opposing the motion, which was another justification for granting the motion to reconsider.

Neither Luchak nor Williams nor their lawyer, Joseph LaSala of Morristown, N.J.'s McElroy Deutsch Mulvaney and Carpenter, returned calls. But Duane Morris's general counsel Michael Silverman says, "we represented our client properly in the underlying case and are confident that we will prevail in this case."

Fedderly, a Flanders, N.J.-based solo, could not be reached for comment.

The lawyer who first represented him in the case, James Ferrelli, also of Duane Morris, was not a defendant in the malpractice