If you’re like me, some mornings you’re greeted by an email that purports to be from a potential client (usually located in China, Hong Kong, or Japan) that reads something like this:
Dear Counsel [or Sir or some other generic greeting],
On behalf of XYZ Company, we request your legal services and possible representation on a Debt Recovery matter involving XYZ Company and a client in your jurisdiction.
Do let us know if you are currently accepting new clients. We look forward to a prompt response from you. Thank you very much.
I’ll admit that the first time I received such an email years ago, I entertained the idea, for a brief moment at least, that maybe, just maybe, it was legitimate inquiry. But then my inner skeptic took over, and I went right to snopes.com or some similar site to see if scams of this type were going around. They were, of course. I deleted the email and went back to the grind.
Now I just delete them as soon as they come in. As I’m sure you do. And as I thought every lawyer did.
But it seems that some lawyer or employee at a now-defunct central Florida law firm didn’t listen to his or her inner skeptic when he/she received one of those emails back in 2007. Giving that person the benefit of the doubt, let’s assume these scams weren’t so well publicized back then.
In any event, an inquiry came from Hong Kong asking the law firm to set up a U.S. subsidiary of a supposed Hong Kong parent company. The “client” subsequently sent a cashier’s check to the law firm for a bit more than $197,000. The lawyer deposited it in the firm’s lawyer’s trust (IOTA) account. Before the check cleared, the client told the law firm to wire $180,000+ to other foreign entities.
The law firm proceeded to follow the client’s directions. And because the law firm had enough funds from other clients in its IOTA account, the bank covered the wire transfers even though the original check hadn’t cleared. The “client’s” check, of course, never did clear.
The Insurance Coverage Dispute
Realizing it was short $180,000+ to its other clients, the law firm sought coverage from its malpractice insurer for their lost funds. [I imagine the adjuster’s reaction went something like this: “You did what? You fell for one of those scams? And you want us to indemnify you for it?!”]
The insurer denied coverage. The law firm filed a declaratory judgment action in the Middle District of Florida. Judge Virginia M. Hernandez Covington granted summary judgment to the insurer.
In Nardella Chong, P.A. v. Medmarc Casualty Insurance Co., No. 10-12237, decided May 27, 2011, the Eleventh Circuit reversed.
The Coverage Issues
The law firm’s professional liability policy indemnified it for “Damages” – defined as “any compensatory monetary judgment or award, or any settlement consented to by the” insurer, resulting from alleged “negligent acts or negligent omissions,” in “the performance of or failure to perform ‘Professional Services.’”
“Professional Services” was defined as including, among other things:
“Services performed . . . for others as an attorney;” and “services as an administrator, conservator, receiver, executor, guardian, trustee, committee of an incompetent person, or services performed in any similar fiduciary capacity, but only for those services typically and customarily performed by and attorney.”
In both the district court and the court of appeals, the case came down to two issues:
1. Did the law firm’s acts and omissions occur in the course of performing “Professional Services”?
2. Did the money the law firm owed its other clients (i.e., the funds lost in the scam that it had to repay into its trust account) amount to “damages” as defined by the policy?
The district court answered “no” to both questions, but the 11th Circuit answered “yes.”
The Court’s reasoning, and my analysis, is below.