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Complex estate litigation usually doesn’t get resolved in a single winner-take-all trial. These cases usually get played out in multiple “mini” trials (sometimes before the same judge, sometimes not) turning on an evolving set of contingencies that no one could have predicted in advance.

If you’re smart, it’s these “unknown unknowns” that keep you up at night. Case in point: who knew that winning a “defalcation” ruling in a bankruptcy proceeding against your client’s former probate lawyer could end up immunizing his insurance carrier from liability?

Case Study

In re West, Slip Copy, 2015 WL 2445315 (Bkrtcy. M.D.Fla., May 20, 2015)

I first wrote about this case here, when a bankruptcy judge ruled that a probate attorney (“West”) had been dishonest and breached his fiduciary duty to his former client (“Aleta”) when he billed her in accordance with Florida’s statutory fee schedule. Applying the fee schedule contained in F.S. 733.6171, West estimated his firm’s fees would be a little over three hundred thousand dollars based on a percentage value of the $23 million estate. Aleta testified that she was “shocked” by that amount, but that West told her that the bill was “set by Florida statute and law,” and that, prior to his passing, her father had known about it. Anyway, Aleta made two payments before falling out with West, ultimately suing him for a return of the fees already paid. The case was moved to the bankruptcy court when West and his wife jointly filed for chapter 7 bankruptcy.

The bankruptcy judge hammered West, ordering him to pay back $212,478 in fees. The judge also concluded that West’s billing-related statements to Aleta were dishonest, intentional and fraudulent. These findings resulted in a “defalcation” ruling, which meant West’s $212,478 debt to Aleta was not dischargeable in bankruptcy. If West actually had the money to pay this debt, this was good news for Aleta. If he didn’t, then the defalcation ruling wasn’t much of a win . . . unless West’s insurance carrier, Florida Lawyers Mutual (“FLM”), was also on the hook. That’s the issue the court grappled with this time around.

Is the insurance carrier “off the hook”? YES

Aleta apparently hoped to collect her $212,478 judgment from FLM, West’s malpractice insurance carrier. FLM had other ideas, arguing that the prior defalcation ruling meant West’s actions fell under his policy’s coverage exclusion for any claim “arising out of a . . . dishonest, intentional . . . or fraudulent act, error or omission.” Aleta argued the policy exclusion was limited to criminal acts, which West’s conduct falls short of. The bankruptcy court wasn’t convinced, concluding that because its prior defalcation ruling was based on a finding that West’s actions had been dishonest, intentional and fraudulent, the coverage exclusion also applied. Bottom line, FLM was “off the hook for West’s liability.” Here’s why:

Florida law requires courts to liberally construe policy exclusions in favor of insureds. This is not to say that courts must always side against insurers. When policy “language is plain and unambiguous, there is no occasion for the Court to construe it.” Instead, courts must simply apply the policy’s plain meaning. The policy exclusion in this case is unmistakably clear: it does not cover dishonest or fraudulent conduct.

A fair look at the facts of this case definitively shows that Aleta’s claim falls within that exclusion. To review, West lied to Aleta by telling her that the he was bound by Florida law to charge a percentage fee. He furthered this fraud when he told Aleta that her father had approved this arrangement. And in a time where he knew she was dependent upon his professional judgment and care, West took advantage of the trust and confidence that Aleta placed within him. This was intentional and dishonest—to say the least. Even the narrowest reading of the policy’s terms would not cut in favor of Aleta’s position. Florida Lawyers Mutual is off the hook for West’s liability. West is not. He remains liable to Aleta for $212,478.

Lesson learned?

In estate litigation it’s the “unknown unknowns” that can convert today’s big win into tomorrow’s bitter set back. The bankruptcy judge’s defalcation ruling against West was clearly a “win” for Aleta, but it also immunized West’s insurance carrier from liability. This may have all been part of a grand strategy, or it could have been an unintended consequence. Either way, we now have one more contingency we can transfer from the “unknown unknown” column to the much easier to handle “things we know we don’t know” column. Will a defalcation ruling always immunize a lawyer’s insurance carrier from liability? We don’t know. But that’s OK, we now know this is a possible risk (it’s a known unknown), and can plan accordingly. And for those of us making a living in the crazy world of civil litigation, that counts as a win.