Portable X-Ray: A Legal Malpractice Claim Case Study

Case Study by Narver Insurance
Narver Insurance is a Member of the Los Angeles and Orange County Chapters of CAPROS

Loss prevention involves identifying and anticipating risks in the practice of law. Studying claims that have actually happened can help you more readily spot risks and identify opportunities to use loss prevention and decrease exposure to claims in your own firm. The case you are about to study is taken directly from a real claim situation. It is not a composite case nor has it been embellished; it is simply a real-life situation that involves a law firm. Fictitious names and locations have been used to maintain confidentiality.

Cast of Characters:

Marshall & Marshall, defendant ,William Marshall, Esq., Brian Marshall, Esq., Mark Belier, Esq., Paralegal, Portable X-Ray, Inc., plaintiff F Former client of Marshall & Marshall

Background:

In 1968, with one x-ray machine and a beat up old Volkswagen, Bob Floffman started his portable x-ray business. By 1997, Bob had more than 200 sophisticated field-service vehicles, over 400 employees and five separate facilities, located from San Diego to Seattle, providing highly sophisticated medical diagnostic services, with the ability to electronically transmit test results from the field to qualified physicians located far away who could instantaneously read and evaluate the data for immediate evaluation of the patients’ condition.

Bob had known attorney William Marshall, Esq. since college in the early 1960s, and William had been Bob’s lawyer from the day he started his business. William advised Bob personally on all legal matters including his business organization, estate planning, trust creation, and tax planning. William helped Bob form his corporation, Bob’s Portable X-Ray, Inc. and, over the years, provided legal counsel to the corporation and all of its business transactions. Because of their close relationship, there never had been any form of written contract between Bob and William, nor between Bob’s Portable X-Ray, Inc. and Marshall & Marshall. William, and his firm, Marshall & Marshall, would send monthly invoices to Bob, and Bob would regularly pay them.

Sale of business:

In 1997, Bob was approached by Dr. C. S. Brown about acquiring Bob’s business. Seeing an opportunity to cash out on years of hard work, Bob turned to William and his law firm, Marshall & Marshall, to help him negotiate and effectuate the sale. The sale culminated in May 1998. Payment for the business was to be made in three separate installments: $2,000,000 at the time of sale; $1,000,000 a year later; and another $1,000,000 two years after the date of sale. Payment of the second and third payments, however, were not required if Medicare were to disallow ‘‘facility billing.’’

The portable medical care industry utilized two forms of billing through Medicare. The first was “direct billing,” whereby Medicare would be billed directly for services provided to each person tested. The second was “facility billing,” whereby the facility in which the tested person was a patient or resident was billed. The facility, in turn, would bill Medicare for services invoiced to it. Although facility billing was not illegal, the industry realized much higher revenue through the use of “facility billing,” as providers generally would be paid the full amount of their invoice. When Medicare was billed directly, however, Medicare unilaterally would discount the amount invoiced by a substantial amount. Accordingly, the entire portable medical testing industry, including Dr. Brown, was concerned that Medicare someday might disallow “facility billing” entirely. Accordingly, Bob agreed to sell his business with the understanding that, if Medicare were to disallow ‘facility billing” at any time during the two years after the sale, then he would not be paid the second and third $1,000,000 payments.

As it turned out, Medicare did not prohibit or otherwise disallow or restrict “facility billing” during the two years after the sale. Consequently, Bob fully expected to be paid. However, the buyer refused to make the second and third payments relying upon vague and ambiguous language in the sale agreement. Prior to the time set for the second and third payments, Dr. Brown unilaterally changed the acquired company’s billing practices by completely abandoning “facility billing” and doing direct billing exclusively. Although less revenue resulted, the lost revenue was significantly less than the amount of the second and third payments to Bob, Dr. Brown thereupon refused to make the second and third payments.

Litigation regarding the second and third payment:

Not receiving the second and third payment, Bob turned to his trusted attorney William for advice and legal counsel. Based upon William’s personal knowledge that the sale agreement did not reflect the intention of the parties, he hereupon recommended that Bob sue Dr. Brown. Because the parties to the acquisition agreement included Rob in his individual capacity (employment agreement) and his trust (holder of the shares in Bob’s Portable X-Ray. Inc.), and finally Bob’s Portable X-Ray, Inc., all three were named Plaintiffs in the subsequent suit.

Although William remained intimately involved with the progress of this litigation, it soon became apparent to Bob that William’s son, Brian Marshall, Esq., was acting as the lead counsel on the case. Bob subsequently voiced concern about Brian’s lack of experience. In response, William assured him that his son, Brian, was a capable, though inexperienced, litigator; but William also directed Bob to the firm’s letterhead which reflected the firm’s “of counsel” relationship with well known attorney Mark Belier, Esq. “After all,” William assured Bob, “it’s the firm you’re hiring — not any one particular lawyer in the firm.” Believing that Mr. Belier would be there to oversee Brian’s work, Bob said no more on the subject.

During discovery, William’s deposition testimony was that the parties knowingly agreed to keep the language regarding “facility billing” vague and ambiguous, so not to red flag the difference between direct and facilities billing to Medicare. Furthermore, William’s notes and correspondence leading to the execution of the acquisition agreement provided overwhelming evidence supporting Plaintiffs’ contention that, at Dr. Brown’s request, the language was deliberately vague and ambiguous.

Only weeks before the trial date, and while he was pursuing ex parte motions to extend the trial and discovery cut-off dates in light of uncompleted discovery. Brian stipulated to binding arbitration before an independent arbitrator. Within this stipulation, Brian agreed to evidentiary limitations designed “to expedite the arbitration process”. Included in this stipulation was Brian’s agreement to waive direct testimony of witnesses and to admit only the declarations of Dr. Brown and Dr. Brown’s counsel.

During discovery, Brian delegated the preparation of responses to Form Interrogatories to a paralegal. Because the response deadline was approaching, and before responses were prepared, the paralegal sent a Verification form for Bob to sign. Bob regularly signed any and all documents given to turn by his attorneys, explaining that he had no idea what all “that legal mumbo jumbo” meant. Ultimately, the response to Form Interrogatory 50.6. which was sent to the opposition, along with Bob’s signed Verification, was that the acquisition agreement was not ambiguous.

At arbitration, Brian did not call William as a witness nor did he attempt to introduce his declaration. Although Brian orally argued that the language at issue was “obtuse” and “vague,” the arbitrator completely ignored any parol evidence being introduced by Brian on the sole ground that “pursuant to his response to Form Interrogatory 50.6, Plaintiff does not contend it is ambiguous.” Furthermore, Brian was unable to impeach the testimony of Dr. Brown and the counsel who had represented Dr. Brown during the negotiation for sale of Bob’s business, as Brian had stipulated that they need not appear at the arbitration. Pursuant to stipulation, the arbitrator accepted the declarations of Dr. Brown and his counsel. Consequently, Plaintiff was left with no basis to proffer testimony or evidence of any intent that existed outside the four-corners of the written contract. In summary, the arbitrator ruled against Bob and in favor of Dr. Brown.

Bob is an unhappy client:

Bob received only $2,000,000, when he believed he was entitled to $4,000,000. Bob paid Marshall & Marshall more than $230,000 for negotiation and preparation of sale agreements, as well as for subsequent litigation. Additionally, Bob was surprised to learn after the arbitrator had ruled against him, that a judgment was being entered against him for Dr. Brown’s costs and attorney’s fees in the amount of $252,000. While at a subsequent golf outing, after bad-mouthing attorneys in general with his new tale of woe, a friend urged Bob to seek out a legal malpractice attorney.