Tuesday, November 25, 2014

New Jersey Court Considers Effect of Law Firm Not Maintaining Required Malpractice Insurance

New Jersey Court Considers Effect of Law Firm Not Maintaining
Required Malpractice Insurance

In a recent case from New Jersey, that was considered the effect of a dissolving law firm not maintaining tail malpractice insurance coverage and the impact of that failure on the part nurse personal responsibility for claims against the partnership.  In this instance, based particular on the wording of the New Jersey statute, it was determined that the partners did not lose the limited liability afforded by LLP status.  Mortgage Grader, Inc. v. Ward & Olivo, LLP, Docket No. A-3777-13T3 (NJ App. Div. Nov. 14, 2014).
Ward and Olivo organized Ward & Olivo, LLP with themselves as the only partners.  In July, 2009, plaintiff Mortgage Grader, Inc. retained W & O and specifically Olivo to represent it in some patent infringement litigation. The litigation was ultimately settled in return for certain one-time payments to Mortgage Grader for which the defendants received licenses of the intellectual property.
On June 30, 2011, Ward and Olivo ceased actively practicing through W & O; thereafter it had no activities except collecting outstanding fees.  The firm’s professional malpractice policy expired on August 8, 2011, and no tail coverage was acquired.
In October, 2012, Mortgage Grader filed a lawsuit against the W & O partnership, Oliva and Ward, it being alleged that Oliva’s representation of it in the litigation was deficient.  Ward had never been involved in the representation of Mortgage Grader.
While Ward sought to be dismissed from the lawsuit on the basis that he has no liability for the activities of the partnership, it being an LLP, Mortgage Grader asserted that LLP status had been lost where the partnership ceased to maintain malpractice insurance coverage, that being a condition precedent under the New Jersey statute for law firms organized as LLPs.
The trial court held that, inter alia, as W&O no longer maintained liability insurance it lost its LLP status and would be treated as a traditional general partnership in which Ward would be responsible for Olivo’s malpractice.  The appellate court disagreed.  Referring to the language of the controlling Supreme Court rule, there were defined consequences for a firm not maintaining the required insurance including termination or suspension of the firm’s ability to practice law or to otherwise discipline it.  N.J. S. Ct. Rule 1:21-1C.    As treatment of an LLP as a general partnership was not a defined consequence of the failure to maintain required insurance, the trial court’s effort to do so was reversed.  As such Ward was practicing with Olivo as partners in an LLP, and Ward was properly dismissed from the suit against W&O and Olivo alleging Olivo’s malpractice.
The Court alluded to, but did not base its decision upon, the question of whether a firm is required to maintain tail coverage. 
The Kentucky LLP statute was amended in 2012 in response to Evanston Ins. Co. v. Dillard Department Stores, Inc., 602 F.3d 610 (5th Cir. 2010), to provide, inter alia, that the question of LLP status will be determined as of the time of the operative facts giving rise to the claim versus when the claim is filed.  See also Rutledge, The 2012 Amendments to Kentucky’s Business Entity Statutes, 101 Kentucky Law Journal Online 1, 2-3 (2012).  For that reason the question presented in Mortgage Grader, Inc. v. Ward & Olivo, LLP has in Kentucky already been resolved.

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