Thumbs up and downA lawyer’s duty of care to a client does not include raising claims on the client’s behalf that are merely “colorable,” and not actually “viable,” the Oregon Supreme Court held last month.  The court said that a “colorability” standard would only promote “scorched earth litigation,” and expose lawyers to malpractice liability based on “hindsight bias.”

Plummeting real estate market — and shareholder oppression

In Rowlett v. Fagan, the plaintiff was a real estate developer who had organized an LLC to develop some valuable properties.  When the two other members of the business took actions the plaintiff viewed as unfair to his interests, he sought legal advice from a large Pacific Northwest regional firm.

The firm filed a demand for arbitration based on breach of fiduciary duty.  The case went into hiatus at that point.  Two years later, the firm amended the arbitration demand and added a claim based on “shareholder oppression.”  But in the meantime, the plaintiff’s two partners had ousted him from the LLC and cut him out of a $5.8 million distribution.

The court dismissed the arbitration claim for lack of prosecution; the firm then filed a complaint on the plaintiff’s behalf, with the same claims and a $900,000 prayer for relief.

Fast forward one year.  The real estate market had dropped like a rock, and the defendant offered to settle for $200,000, which the plaintiff accepted.  Then he turned around and sued his lawyers, alleging, among several other things, that they were negligent in failing to recognize that the factual circumstances gave rise to a claim for shareholder oppression, and in not asserting that claim before the real estate market tanked, at a time when it might have provided some negotiating leverage.

“Colorable” vs. “viable”

The intermediate court of appeals had reversed the trial court’s dismissal of the plaintiff’s claim for negligent failure to timely press the oppression claim, holding that while Oregon law was not clear on whether an oppression claim against an LLC was actually cognizable, the claim was at least colorable, and therefore that the law firm had a duty to raise it.  Wrong, said the state supreme court.

The supreme court held that lawyers cannot be held to have breached a duty of care by failing to raise claims that are merely colorable.  Rather, a malpractice plaintiff must “prove the existence of ‘a valid cause of action or defense, which, had it not been for the attorney’s alleged negligence, would have brought about a judgment favorable to the client in the original action.'”  Thus, a lawyer has no duty to a client to take “‘colorable,’ but ultimately incorrect, legal positions.”

A “colorable” standard of duty “would place lawyers in an untenable position, given that, any time an area of law is unsettled, both sides arguably are ‘colorable,'” said the court.  In sum (and perhaps inadvertently in a catchy rhyme), “a lawyer cannot be held liable for failing to assert a claim that is colorable but not viable.”

Vulnerable to second-guessing

The court’s ruling in Rowlett is in line with what the court called the “universally recognized” idea that where the law is unsettled, as it was on the underlying issue of the oppression claim, a lawyer’s judgment call does not subject the lawyer to liability — even if the judgment, as seen in the rear-view mirror, turns out to have been mistaken.