Beaty v. Hertzberg & Golden, P.C.

• Decision Date: 23 December 1997
• Docket Number: Docket Nos. 105428,105429,No. 7,7
• Citation: 456 Mich. 247,571 N.W.2d 716
• Parties: Lavora BEATY, individually and as personal representative of the estate of Thomas Beaty, Jr., deceased, Plaintiff-Appellee, v. HERTZBERG & GOLDEN, P.C., Robert S. Hertzberg, and Judith Greenstone-Miller, jointly and severally, Defendants-Appellants. Calendar
• Court: Michigan Supreme Court

Page 716

571 N.W.2d 716

456 Mich. 247

Lavora BEATY, individually and as personal representative of

the estate of Thomas Beaty, Jr., deceased, Plaintiff-Appellee, v. HERTZBERG & GOLDEN, P.C., Robert S. Hertzberg, and Judith

Greenstone-Miller, jointly and severally,

Defendants-Appellants.

Docket Nos. 105428, 105429.

Calendar No. 7.

Supreme Court of Michigan.

Argued Oct. 8, 1997.

Decided Dec. 23, 1997.

Powers, Hallowell & Nickolai by Karl A. Nickolai and Dennis N. Powers, Highland, for plaintiff-appellee.

Miller, Canfield, Paddock & Stone, P.L.C. by Gilbert E. Gove, Steven A. Roach, and Terence A. Thomas, Detroit, for defendants-appellants.

TAYLOR, Judge.

Plaintiff, individually and as the personal representative of her late husband's estate, filed what was essentially a malpractice suit against the attorneys for the bankruptcy trustee who supervised the liquidation of her husband's corporation. The trial court granted defendants' motion for summary disposition with regard to all counts of the complaint. The Court of Appeals affirmed with regard to counts I-V of the complaint, but reversed with regard to count VI on the basis of its finding that, under this Court's decision in Atlanta Int'l Ins. Co. v. Bell, 438 Mich. 512, 475 N.W.2d 294 (1991), plaintiff could employ the doctrine of equitable subrogation to avoid the defense of lack of privity and step into the shoes of the trustee to maintain the suit. ¹ After defendant filed a claim of appeal from this portion of the decision, plaintiff filed a cross appeal, challenging the dismissal of the other counts. We affirm in part and reverse in part because the Court of Appeals erred in invoking the doctrine of equitable subrogation under the circumstances presented in this case.

I

Plaintiff's late husband, Thomas Beaty, Jr., was the majority shareholder of B & K Hydraulic Company. In June 1986, creditors forced B & K into involuntary bankruptcy. The Beatys owned real estate in Livonia that is referred to in the record as the Mayfield property. Their title to the property was by the entirety, i.e., as husband and wife. The property was not a corporate asset that would have been reachable by B & K's creditors. However, Thomas Beaty and plaintiff agreed to transfer the property to the corporation in July 1986 in order to increase the pool of corporate assets to enable a conversion of the petition to one for chapter 11 reorganization.

Initially, the bankruptcy court appointed B & K as the debtor in possession during the reorganization; however, in November 1987, it was agreed that defendant Robert Hertzberg would be appointed trustee. With the bankruptcy court's approval, Hertzberg employed his own law firm, Hertzberg & Golden, P.C., to represent him in the sale of the Mayfield property under the reorganization plan.

In 1985, Thomas Beaty had purchased two $1 million life insurance policies. One policy listed plaintiff as the beneficiary, and the second "key man" policy listed B & K. After Thomas Beaty's death, plaintiff and Hertzberg, as the trustee in bankruptcy for B & K, each submitted claims to Loyal American Life Insurance for payment on the respective policies. Loyal American denied both claims because the policies had lapsed as a result of failure to pay monthly premium installments in November 1987.

Plaintiff filed suit in circuit court to recover the proceeds on the life insurance policy in which she was the named beneficiary, and Loyal American removed the case to federal court. In this litigation, plaintiff argued that the insurance company was estopped from canceling the policy because it had previously accepted late payments in connection with those policies. After its motion for summary judgment was denied, the insurer eventually agreed to a settlement of $600,000.

Plaintiff asked trustee Hertzberg to bring an action on the other policy so that the proceeds could be added to the bankruptcy estate to avoid the sale of the Mayfield property. This Hertzberg agreed to do on a contingent-fee basis. The lawyer from Hertzberg's firm who undertook this effort was Judith Greenstone-Miller. This suit was also brought in federal court. However, the estoppel argument was not raised. Plaintiff contends that this proved fatal to the trustee's claim because, upon mutual motions for summary judgment, Loyal American's motion was granted while the trustee's motion was denied. The trustee was unsuccessful in appealing this decision.

In August 1991, plaintiff filed an amended five-count complaint in the Oakland Circuit Court against defendants ² for their failure to recover the insurance policy proceeds, alleging claims for breach of contract and malpractice (count I), breach of fiduciary duty (count II), and negligence (counts III-V). ³ In August 1991, plaintiff filed a motion in the bankruptcy court to compel trustee Hertzberg to assign to plaintiff the malpractice claim against Hertzberg's firm and to accept funds offered by plaintiff to pay the remaining creditors, thus avoiding the sale of the Mayfield property and leaving plaintiff as the sole remaining creditor of the estate.

Before the court could rule on the motion, Hertzberg resigned as trustee because of a conflict of interest created by the suit. Stuart Gold was selected as a replacement trustee in October 1991. Plaintiff did not object to the appointment of Gold, provided he would agree to the assignment of the malpractice claim and the payoff of the other creditors. Plaintiff's motion was granted in November 1991, and the malpractice claim was assigned, expressly subject to defendants' right to assert the defense of nonassignability of this type of claim. Plaintiff subsequently amended her complaint to add a cause of action based on the doctrine of equitable subrogation (count VI).

In the circuit court, defendants moved for summary disposition pursuant to MCR 2.116(C)(8) and (C)(10). The court ultimately granted summary disposition for defendants with regard to all plaintiff's claims. ⁴ A divided Court of Appeals panel reversed in part. The majority affirmed the trial court's order granting summary disposition with regard to all plaintiff's claims, except her claim for equitable subrogation. It held that plaintiff could state a cause of action under the doctrine of equitable subrogation because the trustee would be unlikely to sue his own firm for malpractice, and that the inherent conflict of interest could form a basis for allowing the plaintiff to maintain a malpractice action against the trustee's attorneys for the benefit of the estate. The dissent asserted that summary disposition was properly granted with regard to all plaintiff's claims.

II

We review a grant or denial of a motion for summary disposition pursuant to MCR 2.116(C)(8) de novo. Auto-Owners Ins. Co. v. Harrington, 455 Mich. 377, 381, n. 3, 565 N.W.2d 839 (1997). Defendant argues that the Court of Appeals erred in finding that plaintiff could invoke the doctrine of equitable subrogation to step into the shoes of the trustee and maintain a malpractice action against the attorneys for the trustee. We agree.

Generally, a legal malpractice action may be brought only by a client who feels that he has been damaged by retained counsel's negligence. 7 Am. Jur. 2d, Attorneys at Law, § 249, p. 268; Friedman v. Dozorc, 412 Mich. 1, 23-25, 312 N.W.2d 585 (1981). In this case, however, we are presented with the less frequently seen situation in which a third party claims that her relationship with counsel is of a nature sufficient to justify the imposition of liability even in the absence of an attorney-client relationship. There has been a reluctance to permit an attorney's actions affecting a nonclient to be a predicate to liability because of the potential for conflicts of interest that could seriously undermine counsel's duty of loyalty to the client. Friedman, supra; Atlanta Int'l, supra at 518, 475 N.W.2d 294; anno: Attorney's liability, to one other than immediate client, for negligence in connection with legal duties, 61 A.L.R.4th 615, § 8, pp. 634-645.

Yet, this Court has recognized that an attorney's negligence may expose him to liability to third parties under certain circumstances. One vehicle for affording relief has been the doctrine of equitable subrogation. Atlanta Int'l, supra at 522, 475 N.W.2d 294. This doctrine is best understood as allowing a wronged party to stand in the place of the client, assuming specific conditions are met. ⁵ Atlanta Int'l, supra at 521-522, 475 N.W.2d 294. Those conditions are: (1) a special relationship must exist between the client and the third party in which the potential for conflicts of interest is eliminated because the interests of the two are merged with regard to the particular issue where negligence of counsel is alleged, (2) the third party must lack any other available legal remedy, and (3) the third party must not be a "mere volunteer," i.e., the damage must have been incurred as a consequence of the third party's fulfillment of a legal or equitable duty the third party owed to the client. Id. at 519-520, 521-523, 475 N.W.2d 294; see also Senters v. Ottawa Savings Bank, FSB, 443 Mich. 45, 56, 503 N.W.2d 639 (1993), and Ramirez v. Bureau of State Lottery, 186 Mich.App. 275, 285, 463 N.W.2d 245 (1990) (holding that equity will not interfere where a legal remedy is available); Auto Club Ins. Ass'n v. New York Life Ins. Co., 440 Mich. 126, 132, 485 N.W.2d 695 (1992), Commercial Union Ins. Co. v. Medical Protective Co., 426 Mich. 109, 117, 393 N.W.2d 479 (1986), and Smith v. Sprague, 244 Mich. 577, 579-580, 222 N.W. 207 (1928) (holding that equitable subrogation is not available to a "mere volunteer"). In this case, plaintiff argues that she does not run afoul of the disqualifying conditions and thus can succeed to the rights of the client, trustee Hertzberg.

As to the first condition, plaintiff contends that her interests and those of the trustee were merged with regard to...