In Khalil v. Williams, et al., the Supreme Court of Pennsylvania held that attorneys who may have engaged in fraud in connection with the execution of a release may not shield themselves from potential liability based on the Court’s holding in Muhammad v. Strassbruger, McKenna, Shilobad & Gutnick, 587 A.2d 1346 (Pa. 1991) which stands for the proposition that attorneys cannot be liable on legal malpractice claims when clients change their minds about the sufficiency of a negotiated settlement.

Issues Addressed by the Court:

  1. Were Plaintiff’s claims for fraud in connection with a settlement barred by Muhammad, which bars legal malpractice suits following the settlement of a lawsuit absent an allegation of fraud?

Important Facts

Plaintiff, Dr. Ahlam Khalil, owned a condominium in a multi-unit building in Philadelphia. Khalil’s condominium sustained water damage when her upstairs neighbor’s unit suffered a water leak. Khalil moved out of the building and stopped paying her condominium fees. Khalil then brought a claim against her insurance companies and her upstairs neighbor.

About a year later, Khalil was sued by her condominium association for unpaid fees which resulted in her assertion of counterclaims and a Joinder Complaint against her former neighbor as well as the property management company. The cases were designated the “Water Damage Case” (brought by Khalil) and the “Fees Case” (brought by the Condo Association).

Prior to the trial of the Water Damage Case, Khalil reached a settlement in principle with her insurer, Travelers, for $17,500. The crux of the case before the Supreme Court arose from the Release from this settlement. Before signing the Release, Khalil clearly communicated to her attorneys that she did not want to waive any of her counterclaims in the “Fees Case.” Khalil advised that she would not agree to the settlement of the “Water Damage Case” unless express language was added that protected her rights to her counterclaim in the “Fees Case.” There were multiple versions of the Release. Release language was slightly modified, and Khalil was assured by her counsel that her counterclaims in the “Fees Case” remained intact and that the release language would not impact those claims. Although Khalil admitted that the release she signed contained the language she requested, she alleged that her counsel switched the Release that was actually tendered to Travelers and that the Release proffered to Travelers was an earlier draft of the Release that did not have the “carve out” language that she had specifically requested.

Based upon the Release in the “Water Damage Case” the counterclaim defendants in the “Fees Case” successfully secured a dismissal of Khalil’s counterclaims. Khalil then sued her attorneys for legal malpractice, breach of contract and negligent and fraudulent misrepresentation. Khalil’s prior attorneys moved for summary judgment alleging that Khalil’s sole purpose in bringing the legal action was to revisit the settlement amount, which was clearly prohibited by Muhammad. Summary judgment on all claims was granted in the “Fees Case” and was affirmed by the Pennsylvania Superior Court.

The Court’s Analysis

Appellant Kahlil asserted that the Superior Court erred in the dismissal of all of her claims because it failed to adequately consider her contention that with regard to her negligence claims as she was claiming that her attorneys provided substandard representation by failing to ensure that the Release that she signed was the version that contained the carve out language relative to the “Fees Case” that she had specifically requested.

Appellees responded claiming that Kahlil's true objective was to dispute the settlement amount and pursue a multiplicity of lawsuits, which is exactly the type of "socially unproductive, burdensome and needless litigation" the Supreme Court condemned and expressly foreclosed in Muhammad.

Public policy has long favored settlements between parties. It is clear that courts will not permit litigants to agree to a settlement arrangement and then file claims against their legal counsel in an attempt to collect a higher settlement amount. Allowing such a practice would encourage frivolous suits against attorneys as well as exacerbating the problem of the already over-taxed court system. Courts do not generally allow plaintiffs who are unhappy with their final settlements to attempt to relitigate the case, unless they can show some that they were fraudulently induced to sign the settlement agreement. "An action should not lie against an attorney for malpractice based in negligence and/or contract principles when the client has agreed to a settlement. Rather, only cases of fraud should be actionable." Muhammad, 587 A.2d at 1348.

Although Plaintiff’s arguments with regard to her negligence/breach of contract claims appeared to the Supreme Court to fit into the well-recognized exception to Muhammad, i.e., the claim did not attack the value of the settlement amount but questioned her attorneys’ faulty advice about the possible consequence of entering into such a legal agreement. That exception, set forth in, McMahon v. Shea, 657 A.2d 938, 942 (Pa. Super.1995), provides that where the plaintiff's claim rested on counsel's alleged failure to advise the client about well-established principles of law and the impact of the agreement upon the client's future obligations (and these claims do not challenge the amount of the settlement) said claims are permissible. As Khalil's claims challenged her prior attorney's legal advice, those claims should not precluded by Muhammad. Unfortunately, the Supreme Court found that Plaintiff’s Complaint against her former attorneys failed to plead facts that would allow her to fit within said exception because the Complaint averred that Plaintiff was a victim of fraud, not of faulty legal advice or negligence. Thus, she had no basis upon which to avail herself of this potential avenue for recovery.

While dismissing the negligence claims, the Supreme Court found that Khalil may have been fraudulently induced or potentially not fully apprised of her rights and obligations in signing the settlement agreement. As Khalil has demonstrated that she possessed a valid claim for fraud regarding the scope and effect of the settlement agreement and release, the court's ruling in Muhammad barring lawsuits based on adequacy of settlement would not preclude her fraud claim. The Supreme Court concluded that Plaintiff’s fraud claims, relating to the settlement of the Water Damage Case could proceed because said claims had never been properly adjudicated in the Water Damage Case as had been asserted by the Defendants in the Fees Case.

Therefore, the Superior Court's decision to affirm the trial court's grant of summary judgment on this singular issue was reversed and remanded.

Key Takeaways

  • An attorney's ethical duties of competence, honesty and diligence are important to maintain at every stage of litigation; including the settlement phase.
  • Attorneys must ensure that when making representations about the effect of a settlement agreement/release upon other pending litigation, one must be certain that any representations about the effects of the release are fully and completely evaluated.
  • Attorneys should provide full disclosure and explanation to the client of a settlement agreement and release. When complex issues are involved with a release, and there are multiple versions of the settlement documentation, counsel must ensure that the release which has been approved by the client is the release which is presented for signature.

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