Mortgage Grader, Inc. v. Ward & Olivo, LLP (075310) , 225 N.J. 423 ( 2016 )

SYLLABUS
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the
convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the
interest of brevity, portions of any opinion may not have been summarized).
Mortgage Grader, Inc. v. Ward & Olivo, L.L.P. (A-53-14) (075310)
Argued February 1, 2016 -- Decided June 23, 2016
FERNANDEZ-VINA, J., writing for a majority of the Court.
In this appeal, the Court considers whether a law firm practicing as a limited liability partnership (“LLP”)
failed to maintain professional malpractice insurance to cover claims against it, and, if so, whether that failure may
cause the revocation of the firm’s LLP status, rendering innocent partners personally liable. To inform that
determination, the Court also considers when a law-firm LLP incurs its obligation to a client under the Uniform
Partnership Act.
In July 2009, Mortgage Grader hired Olivo of Ward & Olivo (“W&O”) to pursue claims of patent
infringement. Mortgage Grader entered into settlement agreements, which eventually would give rise to allegations
of legal malpractice.
On June 30, 2011, W&O dissolved and entered into its windup period. W&O continued to exist as a
partnership for the sole purpose of collecting outstanding legal fees and paying taxes. W&O’s claims-made
malpractice insurance policy ran through August 8, 2011. W&O did not purchase a “tail policy.” In October 2012,
Mortgage Grader filed a complaint against W&O, Olivo, and Ward alleging legal malpractice by Olivo in
connection with the settlement agreements. Mortgage Grader filed an affidavit of merit (“AOM”) pursuant to
N.J.S.A. 2A:53A-27 to support its malpractice claims, and served the AOM on Olivo and W&O, but failed to serve
Ward. Ward filed an answer and subsequently moved to dismiss. Ward maintained that W&O’s liability shield
remained intact, and therefore he could not be held vicariously liable for Olivo’s alleged negligence. Ward also
claimed that Mortgage Grader had not served him with an AOM as required by statute.
The motion court denied Ward’s motion to dismiss. The court first determined that Mortgage Grader had
failed to comply with the statutory requirement to serve an AOM on each defendant named in the complaint, and
rejected its substantial compliance argument. However, the court also determined that W&O failed to maintain the
requisite insurance pursuant to Rule 1:21-1C, which provides that a law firm organized as an LLP must purchase
malpractice insurance. As a result, W&O’s liability shield lapsed, relegating W&O to a general partnership (GP).
Thus, the motion court concluded that Ward could be held vicariously liable for Olivo’s alleged legal malpractice.
The Appellate Division reversed. 438 N.J. Super. 202 (App. Div. 2014). The panel held that the trial court
erred in converting W&O from an LLP to a GP when it failed to purchase a tail insurance policy, and concluded that
Ward was shielded from personal liability as a result. Furthermore, the Appellate Division determined that
Mortgage Grader failed to substantially comply with the AOM Statute because Mortgage Grader took no deliberate
steps to comply, thus providing no reasonable notice of the claim to Ward, whose personal assets would be at risk.
The Court granted Mortgage Grader’s motion for leave to appeal. 221 N.J. 216 (2015).
HELD: The requirement in Rule 1:21-1C(a)(3) that law firms organized as LLPs maintain malpractice insurance does
not extend to the firm’s windup period when the law firm has ceased performing legal services, and does not require
purchase of tail insurance. In addition, the violation of Rule 1:21-1C(a)(3) does not result in automatic conversion of a
law firm organized as an LLP into a GP. As a result, Mortgage Grader had no vicarious liability claim against Ward.
1. Rule 1:21-1C permits attorneys to organize as LLPs, which establishes a shield from personal liability for LLP
partners. Rule 1:21-1C conditions practice by law-firm LLPs on compliance with partnership law, adherence to the
rules of professional responsibility, and maintenance of malpractice insurance. Specifically, section (a) provides
that “[a]ttorneys may engage in the practice of law as limited liability partnerships” provided that “[t]he limited
liability partnership shall obtain and maintain in good standing one or more policies of lawyers’ professional
liability insurance which shall insure the limited liability partnership against liability imposed upon it by law for
damages resulting from any claim made against the limited liability partnership by its clients arising out of the
performance of professional services by attorneys employed by the limited liability partnership in their capacity as
attorneys.” R. 1:21-1C(a)(3) (emphasis added). The plain language of the Rule ties the mandate to carry
malpractice insurance to damages from the performance of “professional services.” There is no indication that the
administrative activities characterizing a windup are included within that term. (pp. 10-12)
2. In addition to the plain language of the insurance mandate, subsection (a)(1) of Rule 1:21-1C instructs that “[a]ll
provisions of the Uniform Partnership Act (“UPA”), N.J.S.A. 42:1A-1 through 56, shall be complied with, except
where inconsistent with these rules.” Because Rule 1:21-1C incorporates the UPA by reference, the Court examines
the UPA and related legal authority. During the windup period, the LLP continues to exist, but only to wind up the
partnership’s affairs. The administrative activities conducted during the windup period are not the transacting of
business for which a law-firm LLP was established. Accordingly, under the circumstances here, where a law-firm
LLP has entered the windup period and has ceased to provide any legal services, the windup period does not
constitute practicing law and no acts of malpractice could be committed during this period. Such a law firm is not
required to maintain professional liability insurance under Rule 1:21-1C(a)(3). Here, W&O fully complied with the
Rule’s insurance mandate by maintaining malpractice insurance the entire time it was engaged in the practice of law.
In addition, a law-firm LLP incurs its obligation to a client on the date the alleged malpractice occurred. Here,
W&O was a valid LLP with professional liability insurance at the time of Olivo’s alleged malpractice. (pp. 12-16)
3. In addition to erroneously determining that W&O was practicing law during its windup period, the trial court
improperly relied on Rule 1:21-1C to convert W&O from an LLP to a GP. The Rule provides that “any violation of
this rule by the limited liability partnership shall be grounds for the Supreme Court to terminate or suspend the
limited liability partnership’s right to practice law or otherwise to discipline it.” R. 1:21-1C(a)(2) (emphasis added).
Therefore, only the Supreme Court has the authority to discipline a law firm organized as an LLP. Moreover, the
phrase “or otherwise discipline it” is circumscribed by a variety of sanctions imposed through the Court Rules.
Because only the Court may use Rule 1:21-1C to discipline a law firm organized as an LLP, and because the Court
Rules do not list conversion of business organizational form as a type of sanction, conversion of W&O from an LLP
to a GP was improper. Moreover, the UPA’s provisions that govern revocation of LLP status reflect a tendency to
preserve the liability shield. Those provisions, combined with the lack of any language in the statutory scheme
giving authority to the judiciary to convert a properly recognized LLP into a GP, lead to the conclusion that the UPA
provides no support for the trial court’s conversion of W&O from an LLP to a GP. (pp. 16-19)
4. The Court next addresses whether the mandate in Rule 1:21-1C(a)(3) to obtain malpractice insurance should
carry into the future by requiring law-firm LLPs to maintain insurance after dissolution. Practical considerations
and public policy concerns lead the Court to hold that tail coverage is not required. (pp. 19-21)
5. The effect of the Court’s holding is that Mortgage Grader has no claim against Ward for vicarious liability; as a
result, the AOM issue does not control the outcome. By way of guidance, the Court notes that even if Ward were
not shielded from personal liability, Mortgage Grader was not obligated to serve an AOM on Ward. Mortgage
Grader’s claim against Ward was solely based on vicarious liability. Consequently, the allegations against Ward did
not require a finding of whether Ward breached the professional standard of care in the legal profession. Therefore,
Mortgage Grader’s service of the AOM on Olivo and W&O was all that was required. (pp. 21-22)
The judgment of the Appellate Division is AFFIRMED.
JUSTICE ALBIN, CONCURRING IN PART AND DISSENTING IN PART, concurs in the judgment
of the majority, but dissents from the majority’s conclusion that an LLP does not have to maintain liability insurance
during the LLP’s windup period. He would amend Rule 1:21-1C to make explicit that lawyers operating as an LLP
will be treated as a general partnership if they fail to maintain malpractice insurance and to require that an LLP carry
malpractice insurance for a six-year period after its dissolution, if such insurance is reasonably available.
CHIEF JUSTICE RABNER; JUSTICES LaVECCHIA, PATTERSON, and SOLOMON; and
JUDGE CUFF (temporarily assigned) join in JUSTICE FERNANDEZ-VINA’s opinion. JUSTICE ALBIN
filed a separate opinion, concurring in part and dissenting in part.
2
SUPREME COURT OF NEW JERSEY
A-53 September Term 2014
075310
MORTGAGE GRADER, INC.,
Plaintiff-Appellant,
v.
WARD & OLIVO, L.L.P., and
JOHN OLIVO, ESQ.,
Defendants,
and
JOHN WARD, ESQ.,
Defendant-Respondent.
Argued February 1, 2016 – Decided June 23, 2016
On appeal from the Superior Court, Appellate
Division, whose opinion is reported at 438
N.J. Super. 202 (App. Div. 2014).
Dennis T. Smith argued the cause for
appellant (Pashman Stein, attorneys; Mr.
Smith and Michael J. Zoller, on the briefs).
Daniel R. Bevere argued the cause for
respondent (Piro, Zinna, Cifelli, Paris &
Genitempo, attorneys; Mr. Bevere and Shane
A. Sullivan, on the brief).
Peter J. Gallagher argued the cause for
amicus curiae New Jersey State Bar
Association (Miles S. Winder III, President,
attorney; Mr. Winder, of counsel; Mr.
Gallagher and Mr. Winder, on the brief).
JUSTICE FERNANDEZ-VINA delivered the opinion of the Court.
1
In this case, the Court must determine whether a law firm
practicing as a limited liability partnership (“LLP”) failed to
maintain professional malpractice insurance to cover claims
against it, and, if so, whether that failure may cause the
revocation of the firm’s LLP status, rendering innocent partners
personally liable. To inform that determination, we also
consider when a law-firm LLP incurs its obligation to a client
under the Uniform Partnership Act (“UPA”). N.J.S.A. 42:1A-18.
For the reasons that follow, we conclude that the
requirement in Rule 1:21-1C(a)(3) that law firms organized as
LLPs maintain malpractice insurance does not extend to the
firm’s windup period and does not require purchase of tail
insurance coverage. Moreover, Rule 1:21-1C(a)(3) is a
disciplinary rule and this Court is solely responsible for
attorney discipline. Consequently, violation of that Rule does
not result in automatic conversion of a law firm organized as an
LLP into a general partnership (“GP”) and Mortgage Grader had no
vicarious liability claim against Ward.
Therefore, we affirm the judgment of the Appellate
Division.
I.
In July 2009, Mortgage Grader hired Olivo of Ward & Olivo
(“W&O”) to pursue claims of patent infringement against other
entities. Mortgage Grader entered into settlement agreements in
2
those matters. In exchange for one-time settlement payments,
Mortgage Grader granted those defendant-entities licenses under
the patents, including perpetual rights to any patents Mortgage
Grader received or obtained through assignment, regardless of
their relationship to the patents at issue in the litigation.
It is those provisions of the settlement agreement that
allegedly gave rise to legal malpractice.
On June 30, 2011, W&O dissolved and entered into its windup
period. It is undisputed that W&O continued to exist as a
partnership for the sole purpose of collecting outstanding legal
fees and paying taxes. The next day, Ward formed a new LLP and
began to practice with a new partner. W&O’s claims-made
malpractice insurance policy ran through August 8, 2011.1 W&O
did not purchase a “tail policy.”2 Olivo sent Mortgage Grader a
letter on May 10, 2012 on behalf of both Olivo Law Group, LLC
1 In a “claims-made” policy, the coverage is effective “if the
negligent or omitted act is discovered and brought to the
attention of the insurance company during the period of the
policy.” Zuckerman v. Nat’l Union Fire Ins. Co., 100 N.J. 304,
310 (1985) (emphasis added) (quoting Samuel N. Zarpas, Inc. v.
Morrow, 215 F. Supp. 887, 888 (D.N.J. 1963). A “claims-made”
policy provides no prospective coverage. Ibid. (quoting Brander
v. Nabors, 443 F. Supp. 764, 767 (N.D. Miss.), aff’d, 579 F.2d
888 (5th Cir. 1978)). “Claims-made” policies may also offer
limited or no retroactive protection for acts occurring prior to
the policy’s effective date. Id. at 318-19.
2 “Tail” coverage is insurance beyond the effective dates of a
“claims-made” policy. Zuckerman, supra, 100 N.J. at 311.
3
and W&O, informing Mortgage Grader of the termination of legal
services.
Mortgage Grader filed a complaint against W&O, Olivo, and
Ward in October 2012. The complaint alleged legal malpractice
by Olivo, claiming that the settlement agreements resulting from
Olivo’s representation harmed Mortgage Grader’s patent rights.
Specifically, the complaint alleged that the settlement
agreements limited damages to past damages, failed to provide
for royalty rates or licensing fees for future use of the
patents, and failed to limit the licensing fee provision in the
settlements to only the patents in the suit. Mortgage Grader
thereafter filed an affidavit of merit (“AOM”) pursuant to
N.J.S.A. 2A:53A-27 to support its malpractice claims and served
the AOM on Olivo and W&O, but failed to serve it on Ward.
Ward filed an answer and subsequently moved to dismiss for
failure to state a claim. Ward argued that the requirement in
Rule 1:21-1C, which provides that a law firm organized as an LLP
must purchase malpractice insurance, is silent as to tail
coverage following its dissolution. Ward also argued that, in
any event, W&O had satisfied the Rule’s requirement because W&O
had insurance while it practiced law. Ward maintained that, as
a result, W&O’s liability shield remained intact and therefore
he could not be held vicariously liable for Olivo’s alleged
4
negligence. Ward also claimed that Mortgage Grader never served
him with an AOM as required by N.J.S.A. 2A:53A-27.
Mortgage Grader countered that W&O was still in operation
and practicing law during its windup period, and that it was
therefore required to maintain malpractice insurance pursuant to
Rule 1:21-1C(a)(3) during that time. Mortgage Grader contended
that W&O’s failure to maintain insurance stripped the LLP of its
liability shield and converted it to a GP. Mortgage Grader also
claimed that it had substantially complied with the Affidavit of
Merit Statute.
The motion court denied Ward’s motion to dismiss. The
court first determined that Mortgage Grader had failed to comply
with the statutory requirement to serve an AOM on each defendant
named in the complaint, and rejected its substantial compliance
argument. However, the court also determined that W&O failed to
maintain the requisite insurance, which caused its liability
shield to lapse and relegated W&O to a GP. Thus, the motion
court concluded that Ward could be held vicariously liable for
Olivo’s alleged legal malpractice.
The Appellate Division reversed. Mortgage Grader, Inc. v.
Ward & Olivo, L.L.P., 438 N.J. Super. 202, 215 (App. Div. 2014).
The Appellate Division concluded that the UPA did not provide
that a law firm organized as an LLP converts to a GP if it fails
to maintain malpractice liability insurance. Id. at 209-10
5
(citing N.J.S.A. 42:1A-18(c)). The panel also noted that Rule
1:21-1C(a)(3) states that the only remedies for an LLP’s failure
to maintain malpractice insurance are for this Court to
terminate or suspend the LLP’s right to practice law or
otherwise discipline it. Because of this, and the fact that the
Legislature has never amended the UPA to require conversion of
an LLP to a GP as a sanction for failing to purchase a tail
insurance policy, the panel found that a trial court has no
authority to convert an otherwise properly organized LLP into a
GP in order to sanction a partner for practicing without
malpractice insurance. Id. at 211.
However, the panel declined to decide the issue of whether
winding up a law practice constitutes “practicing law,” and left
that for the consideration of the Office of Attorney Ethics, the
Disciplinary Review Board, or a district ethics committee. Id.
at 212 n.6 (citing R. 1:20-1). Accordingly, the Appellate
Division held that the trial court erred in converting W&O from
an LLP to a GP when it failed to purchase a tail insurance
policy, and concluded that Ward was shielded from personal
liability as a result. Id. at 213.
Furthermore, the Appellate Division determined that
Mortgage Grader failed to substantially comply with the
Affidavit of Merit Statute because Mortgage Grader took no
deliberate steps to comply with the statute, thus providing no
6
reasonable notice of the claim to Ward, whose personal assets
would be at risk. Id. at 215.
We granted Mortgage Grader’s motion for leave to appeal.
221 N.J. 216 (2015).
II.
A.
Mortgage Grader argues that law firms organized as LLPs in
the windup period continue to exist as viable entities, and must
therefore maintain professional liability insurance as required
by Rule 1:21-1C(a)(3). Because malpractice insurance is a
prerequisite to the formation of a law-firm LLP, Mortgage Grader
contends that the natural consequence for non-compliance is the
conversion of the LLP into a GP. Mortgage Grader maintains that
is made possible by the open-ended provision in Rule 1:21-
1C(a)(2) stating that the Court may “otherwise discipline” LLPs
that fail to comply with the Rule that authorizes attorneys to
operate as an LLP. Further, Mortgage Grader points to Olivo’s
termination of the attorney-client relationship in May 2012,
nine months after W&O’s malpractice insurance lapsed. Based on
that, Mortgage Grader claims that no distinction exists between
the windup period and pre-dissolution practice that would
support an interpretation that the Rule does not require the
purchase of tail coverage. Consequently, Mortgage Grader
maintains that service of an AOM on Ward was not required
7
because the basis of the claim against him was vicarious
liability as a member of a GP.
B.
Ward counters that W&O complied with the Rule’s insurance
mandate because W&O maintained professional liability insurance
during the entire time it was actively engaged in the practice
of law, and after its policy lapsed, W&O existed solely to
collect outstanding fees and pay taxes in an effort to wind up
the partnership. According to Ward, neither Rule 1:21-1C(a)(3)
nor the UPA mandates the purchase of tail coverage, and any
determination to the contrary would constitute a dramatic change
that should result only from this Court’s rule-making function
or from the State Legislature rather than as a result of motion
practice in a trial court. Ward asserts that a mandate to
purchase tail coverage would essentially require coverage
perpetually into the future because the six-year statute of
limitations for a professional malpractice claim would not apply
to claims arising from representation on behalf of a minor or
the drafting of a will.
Ward also argues that even if this Court determines that
failure to obtain tail coverage violates Rule 1:21-1C(a)(3),
neither the rule nor the UPA authorize a remedy of converting a
law-firm LLP into a GP for failure to maintain malpractice
insurance. In Ward’s view, the failure of the Legislature and
8
the Supreme Court to provide for such a remedy demonstrates that
such a remedy was never contemplated. Finally, Ward contends
that Mortgage Grader failed to serve him with an AOM, and failed
to substantially comply with the Affidavit of Merit Statute.
C.
Amicus curiae the New Jersey State Bar Association
(“NJSBA”), also urges this Court to affirm the Appellate
Division’s determination that neither the UPA nor Rule 1:21-
1C(a)(3) permits a court to convert a law-firm LLP to a GP for
failure to maintain malpractice insurance. According to the
NJSBA, the Legislature has been aware of the Rule since its
enactment in 1996, yet has never sought to amend the UPA to
allow for the conversion of an LLP to a GP.
In addition, the NJSBA points out that Rule 1:21-1C(a)(2)
permits only this Court, not a trial court, to impose sanctions
on an LLP that fails to comply with the mandate to maintain
malpractice insurance. Even if this Court were to find policy
reasons in favor of removal of LLP status as a sanction for non-
compliance with the insurance mandate during the windup period,
the NJSBA maintains that this Court should consider the
imposition of such a sanction through its rule-making process
rather than the present appeal. Finally, the NJSBA points out
that mandating tail coverage would affect law-firm LLPs of all
9
sizes, and could disproportionately affect small LLPs and those
that practice in particular areas of the law.
III.
An appellate court interprets both statutes and court rules
de novo. State v. Tate, 220 N.J. 393, 405 (2015) (citing
Willingboro Mall, Ltd. v. 240/242 Franklin Ave., L.L.C., 215
N.J. 242, 253 (2013)). No deference is owed to
“interpretation[s] of the law and the legal consequences that
flow from established facts.” Manalapan Realty, L.P. v.
Manalapan Twp. Comm., 140 N.J. 366, 378 (1995); see also State
v. Drury, 190 N.J. 197, 209 (2007) (defining the de novo
standard of review). Rather, this Court looks directly to the
relevant statutes and rules. Merin v. Maglaki, 126 N.J. 430,
434 (1992) (“Construction of any statute necessarily begins with
consideration of its plain language.”); see also First
Resolution Inv. Corp. v. Seker, 171 N.J. 502, 511 (2002) (noting
that interpretation of court rules is guided by tenets of
statutory construction).
IV.
We first determine whether the malpractice insurance
mandate of Rule 1:21-1C(a)(3) applies to the windup period. The
New Jersey Constitution grants this Court “jurisdiction over the
admission to the practice of law and the discipline of persons
admitted.” N.J. Const. art. VI, § 2, ¶ 3. Effective January 1,
10
1997, we added Rule 1:21-1C to permit attorneys to organize as
LLPs. The LLP structure establishes a shield from personal
liability for LLP partners. See R. 1:21-1C(a)(1) (incorporating
UPA by reference); N.J.S.A. 42:1A-18(a) & (c).3
Rule 1:21-1C conditions practice by law-firm LLPs on
compliance with partnership law, adherence to the rules of
professional responsibility, and maintenance of malpractice
insurance. Specifically, section (a) provides that “[a]ttorneys
may engage in the practice of law as limited liability
partnerships” provided that
[t]he limited liability partnership shall
obtain and maintain in good standing one or
more policies of lawyers’ professional
liability insurance which shall insure the
limited liability partnership against
liability imposed upon it by law for damages
resulting from any claim made against the
limited liability partnership by its clients
arising out of the performance of professional
services by attorneys employed by the limited
liability partnership in their capacity as
attorneys.
[R. 1:21-1C(a)(3) (emphasis added).]
The plain language of Rule 1:21-1C ties the mandate to carry
malpractice insurance to damages from the performance of
3 However, for foreign LLPs, the rule provides that an attorney
“shall not be shielded from personal liability for his or her
own negligence, omissions, malpractice, wrongful acts, or
misconduct, and that of any person under his or her direct
supervision and control while rendering professional services on
behalf of the limited liability partnership.” R. 1:21-1C(a)(1).
11
“professional services.” We find no indication that the
administrative activities characterizing a windup are included
within that term. Cf. Cal. Corp. Code § 16956(a)(2)(A) (stating
that “[u]pon the dissolution and winding up of the partnership,
the partnership shall, with respect to any insurance policy or
policies then maintained pursuant to this subparagraph, maintain
or obtain an extended reporting period endorsement or equivalent
provision in the maximum total aggregate limit of liability
required to comply with this subparagraph for a minimum of three
years if reasonably available from the insurer”).
In addition to the plain language of the insurance mandate,
subsection (a)(1) of Rule 1:21-1C instructs that “[a]ll
provisions of the Uniform Partnership Act, N.J.S.A. 42:1A-1
through 56, shall be complied with, except where inconsistent
with these rules.” R. 1:21-1C(a)(1). Because Rule 1:21-1C
incorporates the UPA by reference, we next examine the language
of the UPA and related legal authority.
A partnership’s existence continues during the windup
period and “is terminated when the winding up of its business is
completed.” N.J.S.A. 42:1A-40(a). Under the UPA, “the express
will of all of the partners to wind up the partnership business”
causes dissolution and commences the winding up of a
partnership. N.J.S.A. 42:1A-39(b)(2). At any time prior to the
completion of the winding up of a partnership, all of the
12
partners “may waive the right to have the partnership’s business
wound up and the partnership terminated.” N.J.S.A. 42:1A-40(b).
In that event, “the partnership resumes carrying on its business
as if dissolution had never occurred, and any liability incurred
by the partnership or a partner after the dissolution and before
the waiver is determined as if dissolution had never occurred.”
N.J.S.A. 42:1A-40(b)(1) (emphasis added). The windup period is
temporally indeterminate under the UPA due to the partners’
ability to waive dissolution and because winding up is limited
in terms of activity.
During the windup period, the LLP continues to exist, but
only to wind up the partnership’s affairs. “On dissolution the
partnership is not terminated, but continues until the winding
up of partnership affairs is completed, and for that purpose
alone.” Scaglione v. St. Paul-Mercury Indemn. Co., 28 N.J. 88,
102 (1958). “A dissolved corporation exists solely to prosecute
and defend suits, and not for the purpose of continuing the
business for which it was established.” Lancellotti v. Maryland
Casualty Co., 260 N.J. Super. 579, 583 (App. Div. 1992) (citing
Leventhal v. Atl. Rainbow Painting Co., Ltd., 68 N.J. Super.
406, 412 (App. Div. 1961)). Our Appellate Division in
addressing this issue has previously held that “dissolution is
distinguished from termination of the partnership business;
despite dissolution, the partnership continues for the purpose
13
of winding up partnership affairs.” Wilzig v. Sisselman, 182
N.J. Super. 519, 525 (App. Div. 1982) (citing N.J.S.A. 42:1-30;
Scaglione v. St. Paul-Mercury Indem. Co., 28 N.J. 88, 102
(1958)) (emphasis added). “[D]issolution designates the point
in time when the partners cease to carry on the business
together; termination is the point in time when all the
partnership affairs are wound up; winding up, the process of
settling partnership affairs after dissolution.” Insulation
Corp. of Am. v. Berkowitz, 274 N.J. Super. 337, 344 (App. Div.
1994) (citing Official Comment, Uniform Partnership Act § 29, 6
U.L.A. at 365 (1969)) (emphasis added). Similarly, N.J.S.A.
14:12-9 would bar professional corporations from practicing law
during the windup period. See N.J.S.A. 14A:12-9 (stating that a
dissolved corporation “shall carry on no business except for the
purpose of winding up its affairs”). The UPA sets forth
activities that do not constitute “transacting business”:
“collecting debts or foreclosing mortgages or other security
interests in property securing the debts, and holding,
protecting, and maintaining property so acquired.” N.J.S.A.
42:1A-53(a)(8). In sum, the important distinction pertaining to
LLP liability is the point in time at which an LLP enters
dissolution, commences winding up its affairs, and thus ceases
to engage in the business for which it was created.
14
We consider the UPA and the case law interpreting it to be
dispositive on this issue. The administrative activities
conducted during the windup period are not the transacting of
business for which a law-firm LLP was established. Accordingly,
we conclude that under the circumstances here, where a law-firm
LLP has entered the windup period and has ceased to provide any
legal services, the windup period does not constitute practicing
law and therefore no acts of malpractice could be committed
during this period. Such a law firm is not required to maintain
professional liability insurance under Rule 1:21-1C(a)(3).
Therefore, W&O fully complied with the Rule’s insurance mandate
by maintaining malpractice insurance the entire time it was
engaged in the practice of law.
Similarly, the date on which W&O incurred its alleged
obligation to Mortgage Grader is also dispositive. The National
Conference of Commissioners on Uniform State Laws (the “National
Conference”), in its comment to the Revised Uniform Partnership
Act (“RUPA”), the proposed legislation New Jersey adopted and
codified as the UPA, provides in part that “partnership
obligations under or relating to a note, contract, or other
agreement generally are incurred when the note, contract, or
other agreement is made.” RUPA (1997), Comment 3 to Section
306, at 51. “Partnership obligations under or relating to a
tort generally are incurred when the tort conduct occurs rather
15
than at the time of the actual injury or harm.” Ibid.
Therefore, we hold that a law-firm LLP incurs its obligation to
a client on the date the alleged malpractice occurred. Here,
W&O was a valid LLP with professional liability insurance
coverage at the time of Olivo’s alleged malpractice.
Our holding precludes Mortgage Grader from maintaining a
vicarious liability claim against Ward. Our analysis does not
end there, however, because we next address the trial court’s
conversion of W&O from an LLP into a GP.
V.
A.
In addition to erroneously determining that W&O was still
practicing law during its windup period, the trial court
improperly relied on Rule 1:21-1C to convert W&O from an LLP to
a GP. The Rule provides that “any violation of this rule by the
limited liability partnership shall be grounds for the Supreme
Court to terminate or suspend the limited liability
partnership’s right to practice law or otherwise to discipline
it.” R. 1:21-1C(a)(2) (emphasis added). Therefore, only this
Court has the authority to discipline a law firm organized as an
LLP. Here, the trial court erred by relying on a disciplinary
rule that only this Court may use.
Moreover, the phrase “or otherwise discipline it” is
circumscribed by a variety of sanctions imposed through the
16
court rules. See, e.g., R. 1:20-15A (listing disbarment,
indeterminate suspension, term of suspension, censure,
reprimand, and admonition as categories of discipline); see also
In re Aponte, 215 N.J. 298, 298-99 (2013) (censuring attorney
who failed to maintain liability insurance while practicing as
professional corporation in violation of Rule 1:21-1A(a)(3),
among other violations, and requiring reimbursement of expenses
associated with his prosecution). Because only this Court may
use Rule 1:21-1C to discipline a law firm organized as an LLP,
and the Court Rules do not list conversion of business
organizational form as a type of sanction, we conclude that
conversion of W&O from an LLP to a GP was improper under the
Rule.
B.
Our analysis does not end with Rule 1:21-1C because we must
also determine if the UPA provides authority to convert an LLP
to a GP. The UPA defines a partnership as “an association of
two or more persons to carry on as co-owners of a business for
profit formed under [N.J.S.A. 42:1A-10], predecessor law, or
comparable law of another jurisdiction.” N.J.S.A. 42:1A-2.
With certain exceptions, “all partners are liable jointly and
severally for all obligations of the partnership.” N.J.S.A.
42:1A-18(a). By contrast,
17
[a]n obligation of a partnership incurred
while the partnership is a limited liability
partnership, whether arising in contract,
tort, or otherwise, is solely the obligation
of the partnership. A partner is not
personally liable, directly or indirectly, by
way of contribution or otherwise, for such an
obligation solely by reason of being or so
acting as a partner.
[N.J.S.A. 42:1A-18(c) (emphasis added).]
The UPA further provides that the status of an LLP “remains
effective, regardless of changes in the partnership” until the
LLP cancels its status under N.J.S.A. 42:1A-6(d) or the State
Treasurer revokes its status under N.J.S.A. 42:1A-49(c) for
failure to file an annual report when due or pay the required
filing fee under N.J.S.A. 42:1A-49. N.J.S.A. 42:1A-47(e).
The UPA’s provisions that govern revocation of LLP status
reflect a tendency to preserve the liability shield. In the
event that the State Treasurer seeks to revoke an LLP’s status
for failure to file an annual report or pay the filing fee, the
UPA requires that the LLP receive sixty days’ notice of the
impending revocation. N.J.S.A. 42:1A-49(c). During this time
period, the LLP has an opportunity to cure the deficiency before
the effective date of the revocation. Ibid. If the LLP cures,
the revocation does not take effect. Ibid. The UPA also
permits an LLP to apply for reinstatement within two years after
the effective date of revocation. N.J.S.A. 42:1A-49(e). If the
LLP applies and reinstatement is granted, the reinstatement
18
relates back to and takes effect as of the effective date of the
revocation, and the LLP’s status continues as if the revocation
never occurred. N.J.S.A. 42:1A-49(f). The National Conference
explains that “[t]he relation back doctrine protects gaps in the
reinstated partnership’s liability shield.” RUPA (1997),
comment to Section 1003, at 147.
In sum, the UPA offers many mechanisms to preserve LLP
status once obtained, and those mechanisms apply retroactively
to sustain the partnership’s liability shield even during gaps
in LLP status. Those provisions, combined with the lack of any
language in this statutory scheme giving authority to the
judiciary to convert a properly recognized LLP into a GP, lead
us to conclude that the UPA provides no support for the trial
court’s conversion of W&O from an LLP to a GP.
VI.
We now address whether the mandate in Rule 1:21-1C(a)(3) to
obtain malpractice insurance should carry into the future by
requiring law-firm LLPs to maintain insurance after dissolution.
Practical considerations and public policy concerns lead us to
hold that tail coverage is not required.
Because a claims-made policy provides coverage only for
claims made while the policy is in effect, we cannot impose a
requirement for an LLP to purchase tail coverage without
deciding how long the tail coverage must last. Even if such a
19
requirement were tailored to meet the six-year statute of
limitations for malpractice actions, it would fail to ensure
coverage for all possible claims. For example, a malpractice
claim involving an attorney who handled a claim on behalf of a
minor could result in the tolling of the statute of limitations
until the minor reached adulthood, meaning the minor could file
a timely claim more than six years after the malpractice.
Similarly, a dispute regarding a will an attorney drafted in all
likelihood would not arise until after the client’s death, which
may occur much longer than six years after the drafting of the
will.
In addition, competing public policy concerns play a role
in our analysis. “On the one hand, Rule 1:21-1C provides
attorneys the opportunity to practice in a chosen entity that
includes limited liability for its members. On the other, it
seeks to protect consumers of legal services from attorney
malpractice by requiring such entities to maintain adequate
insurance.” First Am. Title Ins. Co. v. Lawson, 177 N.J. 125,
139 (2003). Ultimately, we determined, “the rule helps to limit
the public’s exposure to uninsured risks arising from the
receipt of legal services in this State.” Ibid.
This insurance requirement for law-firm LLPs marks a
departure from the general rule that malpractice insurance is
not required for attorneys in New Jersey. Our rules do not
20
require tail coverage for professional corporations or GPs, nor
do they require single practitioners to carry any insurance,
including tail coverage.
We decline to impose a tail requirement on attorneys who
choose to practice as LLPs, particularly because a mandate to
purchase tail coverage still would not fully protect the public
from uninsured risks due to the types of scenarios outlined
above.4 We hold that the mandate in Rule 1:21-1C for LLPs to
purchase professional liability insurance does not include any
requirement to purchase tail coverage.
The effect of our holding in the present case is that
Mortgage Grader has no claim against Ward for vicarious
liability. Nevertheless, Mortgage Grader may still pursue its
malpractice claims against Olivo and W&O.
VII.
Finally, because our holding results in Mortgage Grader
having no claim against Ward, the affidavit of merit issue does
not control the outcome of this matter. However, for guidance
we provide the following comments.
4
The dissent posits that law-firm LLPs could avoid the problem
of tail coverage altogether by purchasing occurrence policies.
However, there is no evidence in this record or otherwise made
available to us that occurrence policies are available to insure
against professional malpractice claims. Indeed, neither the
parties nor amicus raised such a suggestion in their positions
to this Court.
21
“[W]hen asserting a claim against a professional covered
by the affidavit of merit statute . . . a claimant should
determine if the underlying factual allegations of the claim
require proof of a deviation from the professional standard of
care for that specific profession.” Couri v. Gardner, 173 N.J.
328, 341 (2002). “If such proof is required, an affidavit of
merit shall be mandatory for that claim, unless [an exception
applies].” Ibid.; see also Hubbard v. Reed, 168 N.J. 387, 390
(2001) (holding that affidavit of merit is not required in
common knowledge cases). A claim of vicarious liability
requires proof of a particular legal relationship to the person
that allegedly acted negligently or deviated from a professional
standard of care, not proof of negligence or deviation from a
professional standard of care.
Here, even if Ward were not shielded from personal
liability as a partner of W&O, Mortgage Grader was not obligated
to serve an AOM on Ward. Mortgage Grader’s claim against Ward
was solely based on vicarious liability. Consequently, the
allegations against Ward did not require a finding of whether
Ward breached the professional standard of care in the legal
profession. Therefore, Mortgage Grader’s service of the
affidavit of merit on Olivo and W&O was all that was required.
VIII.
22
For the reasons set forth above, we hold that the mandate
in Rule 1:21-1C that a law-firm LLP purchase professional
liability insurance does not extend to the windup period when
the law firm has ceased performing legal services. In addition,
we hold that Rule 1:21-1C does not require law-firm LLPs to
purchase tail coverage to maintain malpractice insurance beyond
dissolution. Further, we affirm the Appellate Division’s
conclusion that a trial court does not have the authority to
convert a law-firm LLP into a GP.
IX.
The judgment of the Appellate Division is affirmed.
CHIEF JUSTICE RABNER; JUSTICES LaVECCHIA, PATTERSON, and
SOLOMON; and JUDGE CUFF (temporarily assigned) join in JUSTICE
FERNANDEZ-VINA’s opinion. JUSTICE ALBIN filed a separate
opinion, concurring in part and dissenting in part.
23
SUPREME COURT OF NEW JERSEY
A-53 September Term 2014
075310
MORTGAGE GRADER, INC.,
Plaintiff-Appellant,
v.
WARD & OLIVO, L.L.P., and
JOHN OLIVO, ESQ.,
Defendants,
and
JOHN WARD, ESQ.,
Defendant-Respondent.
JUSTICE ALBIN, concurring in part and dissenting in part.
Lawyers operating as a limited liability partnership (LLP),
pursuant to Rule 1:21-1C, are shielded from vicarious liability
for the malpractice of their partners. The rule’s quid pro quo
is that the LLP must carry adequate malpractice insurance “to
protect consumers of legal services.” First Am. Title Ins. Co.
v. Lawson, 177 N.J. 125, 139 (2003) (explaining relationship
between liability shield and insurance requirement under Rule
1:21-1C).
I cannot agree with the majority’s holding that the law
firm of Ward & Olivo, before its dissolution as an LLP, did not
1
have an obligation to carry malpractice insurance pursuant to
Rule 1:21-1C during the wind-up period, while it was still
collecting client fees.1 The majority’s conclusion means that an
LLP, while winding up business, can collect fees from a client,
but has no responsibility to maintain insurance to compensate
that client for an earlier act of malpractice. In my view, even
the most rigid interpretation of Rule 1:21-1C does not compel
such an inequitable result.
I concur with the majority that Rule 1:21-1C, as currently
written, does not provide the remedy of stripping the partners
of the liability shield for their failure to maintain
malpractice liability insurance. Although that remedy does not
accord with the letter of the rule, it is in keeping with the
spirit of the rule. Lawyers operating as an LLP should not
expect that they can hide behind the liability shield while
failing to maintain the required amount of malpractice
insurance. Therefore, I would amend Rule 1:21-1C to make
explicit that lawyers operating as an LLP will be treated as a
general partnership if they fail to maintain malpractice
insurance. Additionally, I would amend the rule to require that
an LLP carry malpractice insurance for a six-year period after
1 “Winding up” is “[t]he process of settling accounts and
liquidating assets in anticipation of a partnership’s or a
corporation’s dissolution.” Black’s Law Dictionary 1835 (10th
ed. 2014).
2
its dissolution, if such insurance is reasonably available.
Tail coverage will ensure that the law firm’s last client has as
much financial protection as the firm’s first client.2
I.
In a general partnership, each partner in a law firm is
vicariously liable for the malpractice of every other partner.
See N.J.S.A. 42:1A-18(a). Thus, a client wronged by the
malpractice of one partner can seek full satisfaction of a
judgment from other partners. See ibid.
This Court adopted Rule 1:21-1C in 1996 to allow attorneys
to practice law in a limited liability partnership, provided the
partnership secured malpractice liability insurance in an amount
of not less than $100,000 for each attorney employed by the LLP.
R. 1:21-1C. The legal structure of an LLP shields one partner
from vicarious liability for the malpractice of another partner.
See N.J.S.A. 42:1A-18(c).
Rule 1:21-1C(a)(3) provides that “[a]ttorneys may engage in
the practice of law as limited liability partnerships . . .
provided that” the LLP “shall obtain and maintain in good
standing one or more policies of lawyers’ professional liability
2 “Tail coverage, also referred to as an extended reporting
period, extends the time within which a claim may be made after
the cancellation or expiration of a particular claims-made
policy.” Home Ins. Co. v. Law Offices of Jonathan DeYoung,
P.C., 32 F. Supp. 2d 219, 224 (E.D. Pa. 1998).
3
insurance.” The trade-off for the liability shield of Rule
1:21-1C is that the attorneys operating as an LLP must maintain
malpractice liability insurance. See First Am. Title, supra,
117 N.J. at 139. Thus, in exchange for protection from lawsuits
premised on vicarious liability, partners must provide adequate
financial security in the form of insurance for their clients.
Common sense and public policy suggest that partners not be
permitted to seek shelter behind the liability shield of an LLP
when they have not maintained malpractice insurance. Rule 1:21-
1C should provide a remedy equal to the violation of the
mandatory malpractice insurance requirement.
The current rule has a limited set of sanctions for an
LLP’s failure to maintain malpractice insurance: “Any violation
of this rule by the limited liability partnership shall be
grounds for the Supreme Court to terminate or suspend the
limited liability partnership’s right to practice law or
otherwise to discipline it.” R. 1:21-1C(a)(2). It does not
provide the remedy of rendering the partners jointly and
severally liable for the LLP’s failure to maintain insurance.
In this case, under the current rule, Ward is not jointly and
severally liable for the malpractice of his partner, despite the
fact that he and his partner continued to operate as an LLP,
collecting fees from clients during the wind-up period, while
4
not carrying claims-made legal malpractice insurance.3
In the scenario sanctioned by the majority, partners in an
LLP can collect fees from a client during the wind-up period and
not maintain malpractice insurance without ever violating Rule
1:21-1C. Yet, if the same attorneys were operating as a general
partnership -- and not in the form of an LLP -- they would be
vicariously liable. See N.J.S.A. 42:1A-18(a). The attorneys in
this case should be in no better position than attorneys
operating as a general partnership when they are sued for
malpractice.
Other jurisdictions that permit attorneys to operate as an
LLP conditioned on maintaining malpractice insurance provide a
remedy commensurate with a breach of the insurance requirement.
Colorado, Delaware, Illinois, Indiana, Massachusetts, Nebraska,
Ohio, Oklahoma, and Washington explicitly state in their
statutes or court rules that LLPs lose their liability shield
when they fail to maintain adequate malpractice insurance. See
Colo. R. Civ. P. 265(a)(2) (imposing joint and several liability
on partners of LLP unless LLP has minimum amount of malpractice
insurance); Del. Sup. Ct. R. 67(h)(ii)(1) (imposing joint and
3 Under a claims-made policy, the policyholder is protected “if
the negligent or omitted act is discovered and brought to the
attention of the insurance company during the period of the
policy.” Zuckerman v. Nat’l Union Fire Ins. Co., 100 N.J. 304,
310 (1985) (quoting Samuel N. Zarpas, Inc. v. Morrow, 215 F.
Supp. 887, 888 (D.N.J. 1963)).
5
several liability for partners of LLPs if LLP does not maintain
malpractice insurance); Ill. Sup. Ct. R. 722(b)(1) (stating that
failure of LLP to maintain minimum insurance subjects partners
to joint and several liability for rule’s minimum per claim
amount, and to higher per claim amount if failure to maintain
insurance is fraudulent or willful); Ind. Admission & Discipline
R. 27(h) (imposing joint and several liability on partners if
LLP “fails to have the professional liability insurance or other
form of adequate financial responsibility required by” rule);
Mass. Sup. Jud. Ct. R. 3:06(3)(c) (imposing joint and several
liability on partners if LLP “fails to maintain insurance or a
fund in the Designated Amount in compliance with this rule”);
Neb. Sup. Ct. R. 3-201(C)(7)(b)(iv), (C)(7)(c) (stating that if
LLP does not maintain professional liability insurance, partners
“shall be jointly and severally liable to the extent that the
assets of the organization are insufficient to satisfy any
liability incurred by the corporation for” malpractice of its
partners); Ohio Gov.Bar.R. III(4) (imposing joint and several
liability for partners of LLPs “to the extent that the firm
fails to have the professional liability insurance or other form
of adequate financial responsibility required by this rule”);
Okla. Stat. tit. 54, § 1-309 (stating that failure to comply
with liability insurance requirement for LLP renders partners
jointly liable); Wash. Rev. Code § 25.05.125 (stating that
6
partners are personally liable if LLP fails to maintain “a
policy of professional liability insurance . . . or other
evidence of financial responsibility . . . to the extent that,
had such insurance . . . or other evidence of responsibility
been maintained, it would have covered the liability in
question”).
We should adopt the approach taken by those jurisdictions.
We should amend Rule 1:21-1C to provide that lawyers who operate
as an LLP and fail to maintain malpractice insurance lose their
liability shield if their partners are sued for malpractice.
II.
As indicated earlier, attorneys operating as an LLP should
maintain malpractice insurance during the windup of business.
In addition, the rule should require that an LLP secure tail
coverage for a reasonable period after the LLP’s dissolution, to
give adequate financial protection to all the law firm’s
clients, not just the first ones through the door.
Inevitably, there will be a time lag between an act of
legal malpractice, its discovery by a client, and the filing of
a lawsuit. Under a claims-made policy, as in the case before
us, insurance coverage is available only if the law firm has
insurance in the year that the claim is filed. So, for example,
if lawyers operating as an LLP represent clients from January 1
through June 30 and dissolve the LLP on July 1 without securing
7
tail coverage, the liability shield will be in place and those
clients with valid claims after July 1 will not have the
financial security of insurance coverage.
In California, attorneys operating as an LLP must maintain
insurance coverage during the wind-up period and for a minimum
of three years after the LLP’s dissolution. Cal. Corp. Code §
16956(a)(1)(A) (“Upon the dissolution and winding up of the
partnership, the partnership shall” maintain a policy of
liability insurance “for a minimum of three years if reasonably
available from the insurer.”). The California approach is
sensible because it protects clients whose claims come to light
after the LLP is no longer a going concern. A new rule can
mirror the California statute to include an exception for cases
in which liability insurance is not reasonably available.
The statute of limitations for the filing of legal
malpractice claims in New Jersey is six years. N.J.S.A. 2A:14-
1; McGrogan v. Till, 167 N.J. 414, 420 (2001). The purpose of
Rule 1:21-1C is to ensure that attorneys practicing as an LLP
have insurance coverage to provide clients wronged by
malpractice a remedy. Thus, this Court should require lawyers
engaging in the practice of law as an LLP to secure tail
coverage for six years after the LLP’s dissolution, if such
coverage is reasonably available. This tail-coverage period
will provide equality of coverage for the firm’s first and last
8
clients. To that end, mandating six years of tail coverage will
protect clients whose malpractice claims have not come to light
before attorneys dissolve their LLPs.
Because we cannot protect those clients whose malpractice
claims may arise six years after an LLP’s dissolution is no
reason not to protect those clients who file claims within a
reasonable period after the dissolution. I do not accept the
majority’s position that because we cannot protect everyone, we
should protect no one.
If a law firm can secure an occurrence policy, then tail
coverage is unnecessary because clients will have insurance
coverage for any act of malpractice committed during the life of
the LLP.4 Those lawyers unwilling to make the financial
commitment to provide adequate insurance coverage for clients
during the existence of the LLP, or during a wind-up period, or
for a reasonable period after the LLP’s dissolution can always
practice in a general partnership. They should not, however,
have the benefit of the LLP’s liability shield if the quid pro
quo of insurance coverage is not honored.
III.
4 Under an occurrence policy, attorney malpractice would be the
occurrence that is insured. See Templo Fuente De Vida Corp. v.
Nat’l Union Fire Ins. Co., 224 N.J. 189, 201 (2016). Under such
a policy, so long as the act of malpractice occurred during the
life of the policy, coverage attaches. Ibid.
9
The New Jersey Constitution vests this Court with
rulemaking authority over practice and procedure in our courts
and the manner in which lawyers may practice law in this State.
See N.J. Const. art. VI, § 2, ¶ 3. Pursuant to that authority,
this Court adopted the current version of Rule 1:21-1C. This
case has illuminated deficiencies in the rule that place clients
and the public at risk. This Court therefore should exercise
its constitutional authority and amend the current rule.
Lawyers practicing in LLPs should no longer be able to invoke
the liability shield of an LLP if they have not maintained
adequate malpractice liability insurance during the life of the
LLP and for a six-year period after its dissolution. In the
event of non-compliance, the lawyers should be treated as though
they were practicing in a general partnership and be subject to
vicarious liability in cases of legal malpractice.
I concur in the judgment of the majority. However, I
dissent from the majority’s conclusion that an LLP does not have
to maintain liability insurance during the LLP’s wind-up period.
I also would amend Rule 1:21-1C to require lawyers engaging in
the practice of law as an LLP to secure tail coverage for a six-
year period after the LLP’s dissolution, if such coverage is
reasonably available.
10