New Michigan Case on Attorney Fees as Element of Damages

By David M. Saperstein

In October 2024, our blog described the various approaches taken by different jurisdictions regarding whether attorney fees can be recovered as an element of damages in legal malpractice cases.  In Hark Orchids, LP v [name withheld], __ Mich __; __ NW3d __; 2024 WL 5249913 (2024), the Michigan Supreme Court recently joined the jurisdictions that allow such claims.  In doing so, the Court specifically rejected the necessity of a tender of the claim as a precondition to suit.  The unanimous decision ruled that, “[p]ermitting aggrieved clients to recover attorney fees that are caused by legal malpractice and are reasonably and necessarily incurred to mitigate the harm of the malpractice is consistent with the nature of malpractice relief – to make the clients whole.” 

Underlying Facts

In Hark Orchids, the Plaintiff company had been the defendant in an underlying workers’ compensation case.  The legal malpractice Complaint alleged that although the company’s attorneys in the workers’ compensation case settled that claim, the attorneys failed to inform the company that the underlying plaintiff had made a global demand that would resolve all potential claims against the company, not only the workers’ compensation claim.  Later, the underlying plaintiff brought and lost a separate employment discrimination suit against the company.  When the employment case concluded, the Plaintiff company sued its former workers’ compensation attorneys for legal malpractice, alleging that but for the negligence of its attorneys, and specifically the failure to notify them of the global demand, the company would not have been required to defend the employment discrimination suit.

As we reported in our prior article, Michigan had been a jurisdiction that held that the prior litigation exception to the American Rule required fraud or malicious conduct in order to recover attorney fees as an element of damages.  The defendant attorneys in Hark Orchids successfully moved to dismiss the legal malpractice case on this basis, arguing that the Complaint did not allege fraud or malice. The Michigan Court of Appeals affirmed the trial court’s dismissal on this basis in a 2-1 decision.

Michigan Supreme Court Decision

On appeal, the Michigan Supreme Court reversed.  The Court cited and followed a Tennessee Supreme Court case, John Kohl and Co, PC v Dearborn & Ewing, 977 SW2d 528, 534 (Tenn, 1998), which provided that three distinct categories of fees are implicated in malpractice actions: 1) the “initial fees” paid to the attorney for legal services that were allegedly negligent; 2) the “corrective fees” incurred by successor counsel to correct the problem allegedly created by the negligent attorney, and 3) the “litigation fees” in the malpractice action.  The Court held that the first two categories of fees can be proper compensatory damages, and that only the last category of potential damages, the fees from the malpractice suit, is barred by the American Rule.

Purpose of Damages

The Michigan Supreme Court’s decision provides guidance on the proofs that will be required when a legal malpractice plaintiff alleges attorney fees, and possible defenses.  The opinion references on multiple occasions that the purpose of damages is “to make the clients whole.”  For example, the Court held that it would allow “recoupment of payments for added legal services the client would not have incurred if the attorney had provided adequate legal services.”  Similarly, the Court stated that “malpractice plaintiffs must be placed in the same position they would have been if the reasonable legal services they were promised were effectively provided.”  At other points in the opinion, the Court makes similar statements.  Accordingly, the focus on damages in future legal malpractice litigation in Michigan will be whether the alleged damages are consistent with the purpose of making the client whole.

Clawback of Fees

There are internal safeguards that the Hark Orchids opinion provides that will hopefully limit the unreasonable expansion of its holdings.  For example, although the opinion allows for the possibility of a clawback of fees paid to the allegedly negligent attorney, the opinion also holds that “usually, the fees paid to the defendant-attorney bear no relation to the loss of the client.”  The plaintiff in the legal malpractice action must prove that it incurred “additional costs” that would not have been paid absent the allegedly negligent conduct. 

The Court warned that the same principle will limit recovery of payments to third-party attorneys.  If such third-party fees would have been the same or more absent the alleged negligence, the fees are not recoverable.  The client should not be put in a better position than if the negligence had not occurred.

Reasonable and Necessary Requirement

The Court emphasized that any compensatory attorney fees must be reasonable and necessary.  The Court warned that the new standard should not become “a vehicle by which attorneys and their clients pass on unreasonable fees and rates to third parties.”

Contractual Underpinning to Malpractice Claims

Finally, the Hark Orchids opinion analyzed the structural nature of legal malpractice claims, and particularly the overlapping relationship between the tort of legal malpractice and contractual claims.  The Court noted:

We will monitor future cases to see if this language will be used by creative attorneys to impact other aspects of legal malpractice litigation, such as the sufficiency of the allegations of a complaint, which statute of limitation applies, and relatedly, the gravamen of a complaint for determining the choice of limitation period.

Conclusion

The Michigan Supreme Court’s opinion in Hark Orchids eliminated a defense that limited the damages available to legal malpractice claims in Michigan.  As a result of this decision, “initial fees” paid to the attorney for legal services that were allegedly negligent, as well as “corrective fees” incurred by successor counsel to correct the problem allegedly created by the negligent attorney, are now potentially available.  It remains to be seen whether this decision will impact other settled areas of legal malpractice jurisprudence.