For starters, would you mind providing everyone with a brief overview of the underlying case which gave rise to the matter you'll be discussing today?
The underlying case was an action brought by Adriana Mraz and her three children for the wrongful death of her husband, Richard Mraz, from an accident caused by an allegedly defective Dodge pickup (referred to as “the Chrysler case”). Richard tried to reenter and stop a Dodge pickup that had self-shifted from park to reverse and was moving backwards in a circle. Richard was struck by the truck and died the next month as a result of his injuries.
The attorneys representing the plaintiffs on that case achieved a phenomenally successful verdict for their clients, right?
That is correct, Dan. A California jury awarded a verdict of more than $54 million against Chrysler in 2007, including $50 million of punitive damages – which was noteworthy for multiple reasons. First, before this case, no plaintiff had won a park-to-reverse defect judgment against Chrysler. Second, the amount of punitive damages awarded was exactly what plaintiff counsel (Lieff Cabraser Heimann &Bernstein LLP) had recommended despite a recent U.S. Supreme Court decision (
Phillip Morris USA v. Williams) that questioned the constitutionality of such awards. Third, the trial court entered a single judgment for the Mraz family without any division among the plaintiffs. Both parties appealed the judgment which Chrysler secured with a bond from Safeco Insurance Company backed by $81 million of Chrysler assets. With the appeal pending, Chrysler filed for bankruptcy which automatically stayed the Chrysler appeal.
But during the final stages of resolving their dispute, they made a serious misstep which ultimately cost their client a significant amount of money. Tell us about that.
Yes. Arguably, from a structured settlement perspective, Lieff Cabraser made multiple missteps. Despite subsequently being completely exonerated by the California Court of Appeal and despite obtaining a $24 million lump sum settlement for the Mraz family following the Chrysler bankruptcy, Lieff Cabraser was the defendant in a professional malpractice lawsuit initiated by Adriana Mraz on behalf of her daughter Allison against Lieff Cabraser for failure to obtain a structured settlement on behalf of her daughter Allison Mraz, a minor. A trial jury subsequently returned a $400,000 verdict.
But that wasn’t the end of it, was it?
No. The California Court of Appeal reversed this verdict and found “there was substantial evidence that the real impediment to a structured settlement for [Allison] was Safeco, not Lieff Cabraser” and concluded: “without Safeco’s cooperation, it was impossible for any lawyer to have obtained a structured settlement for [Allison].” Allison’s attorney in the professional malpractice case, however, argued that receiving punitive damages as a lump sum, as opposed to a non-qualified structured settlement, cost Allison at least $600,000 in unnecessary income taxes and could have been avoided if Lieff Cabraser had done any of the following:
- Retained the advice of a knowledgeable structured settlement expert in a timely manner.
- Asserted appropriate language to preserve the option for structured settlements in the bankruptcy petition and/or settlement term sheet.
- Utilized an IRC 468B Qualified Settlement Fund to: 1) provide Safeco with a full and final release allowing time for the plaintiffs to 2) allocate settlement funds; and, 3) determine whether or not to structure. Note: this would not have been a “single claimant” QSF because Allison’s two brothers were stepsons and therefore had adverse interests.
That punitive damage component really jumps out at me because of our firm's commitment to stressing the importance of structuring taxable damages. Arguably, that was an even costlier mistake than failing to structure the physical injury damages. Thoughts?
Many attorneys often overlook the important tax-savings opportunity of structuring punitive damages or other taxable damage awards – including their own legal fees. As previously stated, the plaintiff attorney in the Mraz professional malpractice case estimated the failure to structure Allison’s $2.4 million of punitive damages resulted in $600,000 of income taxes that might otherwise have been avoided. “Non-qualified” structured settlements, meaning periodic payments of taxable damages that do not “qualify” for IRC section 130 funding, represent an expanding market.
Since there was no directive or agreement in the term sheet specifically referencing structured settlements, Safeco doesn't appear to have done anything wrong.
The facts are somewhat complex and confusing. In brief: the parties signed the settlement term sheet on August 27, 2009 with no mention of structured settlements. On October 1, Lieff Cabraser e-mailed Safeco’s counsel and asked Safeco to send that portion of the funds designated for Allison directly to the insurance companies overseeing any structure and promised to provide Safeco with the names of those companies in the next day or two. Despite those instructions, Safeco wired the entire $24 million to Lieff Cabraser’s trust account on October 2, 2009. Although Safeco originally agreed to reverse its October 2, 2009 wire transfer, it later refused - subsequently objected to participating in any aspect of a structured settlement, apparently concerned it might create a legal obligation in the future upon the failure of a primary obligor to make a structured payment. So, Dan, mistakes were made by both Lieff Cabraser and Safeco, but no legal liability was established. However, it was Lieff Cabraser, not Safeco, who had responsibilities to protect the interest of their client, Allison Mraz.
Clearly the structured settlement conversation should have taken place earlier and been more clearly delineated. A pretty costly oversight. The term "constructive receipt” is one our clients often hear but don’t always fully appreciate. Tell us how that factored into this case.
IRC 451(a)and the Regulations thereunder explain that income, “although not actually reduced to the taxpayer’s possession,” is “constructively received” by the taxpayer in the taxable year during which it is “credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time.” The terms of the Settlement Agreement Lieff Cabraser negotiated on behalf of Adriana Mraz and her family required Safeco to wire transfer $24 million to Lieff Cabraser’s trust account by October 5, 2009 – which they did on October 2, ignoring (or somehow not noticing) the email sent by Lieff Cabraser to Safeco on October 1 belatedly attempting to preserve a structured settlement for Allison. The receipt of settlement funds in an attorney’s trust account generally is considered to constitute “constructive receipt” for a client. Subsequent attempts by Lieff Cabraser to convince Safeco to reverse the transaction proved unsuccessful and resulted in the professional malpractice lawsuit.
Some attorneys might argue their duty to help clients doesn’t extend to discussing structured settlements with them. What’s your view on that issue?
In the context of personal injury cases, including the Mraz case, I would argue that addressing structured settlement issues is inexorably part of the plaintiff’s attorney’s role. The ABA Model Rules of Professional Conduct address this responsibility, as least indirectly, in several ways. Attorneys are to “abide by the client’s decisions concerning the objectives of the representation” and to “consult with the client as to the means by which they are to be pursued.” (Rule 1.2) Attorneys must communicate with clients reasonably to explain matters so that the clients can make informed decisions. (Rule 1.4) Attorneys must be diligent regarding matters that can be adversely affected by the passage of time, a subject inevitably present in any structured settlement. (Rule 1.3) It is a critical point for plaintiff’s attorneys, therefore, to specify clearly with their clients the attorney’s agreed role, including when the engagement ends. “Ordinarily, a representation in a matter is completed when the agreed-upon assistance has been concluded.” (Rules 1.2(c), 6.5, 1.3).
Is it common for attorneys to be sued for failure to preserve their client’s ability to structure their settlement?
Common? No. However, the risk and legal precedent do exist as evidenced by the 2001
Grillo v. Pettiette case in Texas. The Grillos’ allegations included acts and omissions by their attorneys in a prior medical malpractice case that resulted in a 1991 court approved settlement of $2,500,000. Their allegations included a claim that the 1991 settlement “contained no language which required at least one defendant or its liability insurer to promise a fixed and determinable periodic payment which would be tax free to the plaintiff.” Instead, according to the Grillos, their attorneys “instructed Josephine Grillo to request court approval of a Section 142 Trust and the purchase of annuities which were not tax free and did not maximize the future value of Christina Grillo’s recovery.” Although the Grillos’ previous attorneys denied liability, the final judgment against them was $1,600,000.
What are the lessons here?
Lieff Cabraser is one of the most successful personal injury litigation firms in the United States. As the Mraz case demonstrates, however, the expertise and desire of many personal injury attorneys is to obtain the largest possible amount of compensation. The format of a lump sum settlement or judgment is generally uncomplicated. Personal injury attorneys generally know how to draft a release or other form of settlement document that conforms to state law and obtains for their clients a one-time amount agreed to be due to their clients. Structured settlements, and personal injury settlement planning in complex cases, however, require the timely application of different professional knowledge, resources and skill sets.
Any practice pointers that might have helped the attorneys stave off such an undesirable turn of events?
If Lieff Cabraser had retained, and listened to, a qualified settlement planning expert prior to and during their negotiation with Safeco, they could have avoided a professional malpractice lawsuit and better served their clients. Best practices in this case would have included the use of IRC 468B Qualified Settlement Fund to allow unlimited time for allocating settlement funds and determining whether or not to structure. Plaintiff attorneys should always consider settlement term sheet language to preserve structured settlement options.
468B Qualified Settlement Funds might be a good topic for a future newsletter. Any final thoughts or advice?
The result of the jury trial and the appeal was to exonerate Lieff Cabraser who, from a purely lump sum perspective, accomplished their objectives. Nevertheless, the Mraz case presents some important structured settlement and personal injury settlement planning lessons for plaintiff attorneys.
A good note to end on. Thanks so much for your time, Pat.
Thank you for the opportunity to discuss the Mraz case, Dan.