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A Law Firm's Disbursement Of Funds From A Client Trust Account Was a "Professional Service."
A Law Firm's Disbursement Of Funds From A Client Trust Account Was a "Professional Service."
By Dana Sheridan, Esq.
In Nardella Chong, P.A. v. Medmarc Casualty Ins. Co., 2011 U.S. App. LEXIS 10685; 22 Fla. L. Weekly Fed. C 2109, the Plaintiff law firm filed a declaratory relief action against its insurer, Medmarc Casualty Insurance Co. (“Medmarc”), seeking to determine whether the professional liability policy at issue provided coverage for attorney Chong’s erroneous disbursement of client funds from its trust account. The District Court granted Medmarc’s motion for summary judgment denying coverage and appeal to the 11th Circuit followed. The 11th Circuit reversed the summary judgment ruling and applying Florida law, held in favor of the law firm, holding that the firm’s disbursement of funds was a “professional service” under the Medmarc policy.
The claim at issue arose when a “client,” Northlink Industrial, Ltd. (“Northlink”), hired Chong to purportedly establish a subsidiary in the United States. As part of the retention, Northlink gave the firm a cashier’s check in payment, which Chong deposited into the firm’s trust account. Northlink then instructed Chong to wire-transfer most of the proceeds of the cashier’s check to overseas business partners, which Chong did. The cashier’s check was a forgery, and the funds that were transferred out of the trust account thus belonged to other clients. The law firm insured ultimately tendered the claim to Medmarc, but Medmarc denied coverage for the wrongfully disbursed funds on the basis that the claim did not involve either “professional services” or covered damages.
The District Court held that the claim was not covered because “there [were] no negligent acts or negligent omissions resulting from the performance of, or failure to perform, professional services.” The policy defined “professional services” to include services performed by the law firm as a “trustee . . . or . . . in any similar fiduciary capacity” as long as “those services [are] typically and customarily performed by an attorney.” The District Court also found that the firm’s other clients’ potential claims against it could result only in restitution, rather than covered damages under the policy.
But, the 11th Circuit disagreed, finding that the deposit of clients’ funds into a trust account “creates a fiduciary relationship between those clients and the law firm” and as such, constitutes a “professional service” as defined under Medmarc’s policy. The Court also held: “That the management of trust accounts is a professional service customarily performed by attorneys is indicated by the Florida Bar’s devotion of an entire chapter of its rules of attorney conduct to the topic. Furthermore, Medmarc’s corporate representative testified in her deposition that Chong’s management of its trust account constituted the performance of legal services to those clients with funds in the account.”
The Court also noted, and found compelling, that Medmarc had taken the position in previous litigation filed in Georgia that the performance of trust account duties constituted “professional services.” Thus, the 11th Circuit held that Medmarc’s arguments on summary judgment, that the transfer of trust funds is a “ministerial” or administrative rather than “professional service,” to be without merit. The 11th Circuit also reversed the District Court’s ruling on the damages issue as well, holding that when an attorney distributes trust funds to a third party without his client’s authorization he may be sued for malpractice damages, resulting in a loss to the attorney. Thus, the damages to the firm would be in the form of malpractice damages, not merely restitution.
Tressler Comments
There are many decisions out there where courts hold that a task or duty that is purely administrative in nature cannot be a “professional service.” After all, just because an act by an insured is a “service” does not necessarily and always mean that that service rendered was “professional” in nature. In the Chong case, the 11th Circuit holds that the transfer of client funds is not merely administrative (even when it was performed by someone other than an attorney, as was the case here) because management of funds and all necessary tasks incidental to management, such as the transfer of funds, creates a fiduciary relationship between the law firm and the client. I wonder if the result would have been different if the Medmarc policy had not included the phrase “in a similar fiduciary capacity” in its definition of “professional services.”
In any event, it appears that in the Court’s view, this fiduciary relationship was key and instrumental to its ruling that a single transfer of funds was indeed a professional act of the law firm insured. But, I confess, I’m just not seeing it -- After all, long term management of the client trust really was not the problem here. The problem was a single transfer of funds out – a transfer made by someone other than an attorney (albeit, likely at the direction of an attorney). And, no matter who made the transfer, this certainly feels more like an administrative service than a “professional” service. The lesson here is perhaps that carriers should be very specific in how they define “professional services” and not only include specific descriptions of services they cover, but also be careful to define what is not a “professional” service. So, if a carrier wishes to preclude coverage for administrative tasks, it should be careful to carve them off of its policy’s definition of “professional services.” Finally, as a cautionary tale, positions taken in one case -- even those taken under a different set of facts under the law of different jurisdiction -- can come back to bite (with teeth). Carrier best practice is to be consistent in taking external coverage positions.
