Achtman v. Kirby, McInerney & Squire, LLP
2006 U.S. App. LEXIS 24233, 2006 WL 2720643, 464 F.3d 328 (2006)
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Rule of Law:
A federal court may exercise supplemental jurisdiction over a state-law legal malpractice claim that arises from representation in a prior federal action if the claims share a "common nucleus of operative fact." An attorney's strategic litigation decision not to sue a potential defendant does not constitute malpractice if it represents a reasonable choice among several available courses of action, rather than conduct falling below the professional standard of care.
Facts:
- Bennett Funding Group ('BFG'), an equipment finance company, allegedly committed securities fraud through an elaborate 'Ponzi' scheme that victimized over 20,000 investors.
- The accounting firm of Arthur Andersen & Co. ('Andersen') had audited BFG's allegedly misleading financial statements for 1989 and 1990.
- The law firms of Kirby, McInerney & Squire, LLP ('Kirby') and Bernstein, Litowitz, Berger & Grossman, LLP ('Bernstein') were appointed as co-lead counsel to represent the class of investors in a consolidated securities action against BFG.
- Kirby and Bernstein chose not to name Andersen as a defendant in the class action lawsuit against BFG.
- The Notice of Pendency sent to the investor class listed the parties being sued but did not mention Andersen as a potential defendant who was not being sued.
- Kirby and Bernstein secured settlements totaling over $139 million with BFG's insurers and another accounting firm, Mahoney Cohen & Co.
- During this period, other law firms representing individual BFG investors had brought separate, and sometimes successful, actions against Andersen.
- Some of the BFG class members later sought to sue Kirby and Bernstein for legal malpractice, specifically for the failure to sue Andersen.
Procedural Posture:
- Plaintiffs, former members of a securities class action, filed a putative class action for legal malpractice against their former attorneys, Kirby and Bernstein, in the U.S. District Court for the Southern District of New York.
- The district court granted the defendants' motion to dismiss the complaint for failure to state a claim under Rule 12(b)(6), ruling that the attorneys' actions were reasonable as a matter of law.
- The plaintiffs appealed the dismissal to the U.S. Court of Appeals for the Second Circuit.
- Finding the basis for jurisdiction unclear, the Second Circuit remanded the case to the district court for the limited purpose of explaining its basis for exercising subject matter jurisdiction.
- On remand, the district court identified three potential grounds for jurisdiction: its authority under the All Writs Act, diversity jurisdiction, and supplemental jurisdiction.
- The case then returned to the Second Circuit for review of both the jurisdictional question and the merits of the dismissal.
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Issue:
Does a law firm's strategic decision not to sue a potential defendant in a complex class action, based on doctrinal uncertainty and a risk assessment, constitute legal malpractice under New York law?
Opinions:
Majority - McLaughlin, J.
No. A law firm’s strategic decision not to sue a potential defendant, when based on a reasonable assessment of risks and legal uncertainties, does not constitute legal malpractice. The court first established that it had supplemental jurisdiction over the state-law malpractice claim under 28 U.S.C. § 1367(a). It reasoned that the malpractice action and the underlying securities litigation arose from a 'common nucleus of operative fact,' making them part of the same constitutional 'case or controversy.' The district court's deep familiarity with the original litigation, similar to its role in fee disputes, supported the exercise of jurisdiction. On the merits, the court found that to state a claim for malpractice under New York law, a plaintiff must allege more than an 'error of judgment' or the 'selection of one among several reasonable courses of action.' Here, the decision not to sue Andersen was a reasonable strategic choice because: (1) auditor liability for securities fraud was uncertain following the Supreme Court's decision in Central Bank of Denver; (2) potential damages from Andersen were questionable as most relevant securities had been paid down; and (3) no other of the twenty-five class action firms in the BFG litigation had named Andersen as a defendant. Therefore, the attorneys' conduct did not fall below the ordinary skill and knowledge required of the legal profession.
Analysis:
This decision reinforces the high bar for pleading legal malpractice based on an attorney's strategic choices, granting attorneys significant discretion in complex litigation. By affirming that a reasonable, albeit debatable, tactical decision is not negligence, the ruling protects attorneys from being judged with the benefit of hindsight. Furthermore, the court's jurisdictional analysis solidifies the application of supplemental jurisdiction to malpractice claims arising from federal class actions, analogizing them to attorney fee disputes. This promotes judicial efficiency by allowing the court most familiar with the underlying litigation to adjudicate related malpractice claims, rather than forcing them into state court.
