Can a Law Firm’s Legal Misconduct Be Considered Client Service With Regard to Violation of Law Prohibiting Fee-Splitting ?

In Gregg & Valby, L.L.P. v. Great American Insurance Co., 316 F. Supp. 2d 505, 512-13 (S.D. Tex. 2004), a Texas court rejected the contention that a law firm's misconduct with respect to its fees were client services. Gregg & Valby, 316 F. Supp. 2d 505.

The legal malpractice policy at issue covered "Professional services," which were defined as " 'services you perform for a client in your capacity as: (a) a lawyer; (b) a mediator or arbitrator; (c) a notary public; or (d) as an administrator, conservator, executor, guardian trustee, receiver, or in any similar capacity. ' " Gregg & Valby, 316 F. Supp. 2d at 510-11.

Practically speaking, this definition is identical to the definition operating here.

The Houston firm was hired to draft forms for two mortgage lenders to use at real estate closings. Gregg & Valby, 316 F. Supp. 2d at 511.

The prepared forms indicated the firm would receive a $ 175 document preparation fee, but the firm had allegedly agreed to share the collected fees with the mortgage lenders, in violation of federal laws prohibiting fee-splitting and kickbacks in real estate settlements involving federal funds and requiring truth in lending. Gregg & Valby, 316 F. Supp. 2d at 511.

The firm was named in two class-action lawsuits and sought defense and coverage from its legal malpractice insurer, arguing that the alleged wrongdoing occurred early on when the lawyers drafted the forms and advised the mortgage lenders on the legality of the fee-sharing arrangement. Gregg & Valby, 316 F. Supp. 2d at 512.

The court rejected the contention that the suits concerned legal work or advice, pointing out that "the home buyers did not complain about the amount of the 'Document Preparation Fee,' nor its existence, but only what happened to that fee after it was paid at closing." Gregg & Valby, 316 F. Supp. 2d at 513.