Fine Housing, Inc. v. Sloan

THE STATE OF SOUTH CAROLINA
In The Court of Appeals

Fine Housing, Inc., Appellant,

v.

William H. Sloan, Jr., Respondent.

Appellate Case No. 2017-002517

Appeal From Dorchester County
Carmen T. Mullen, Circuit Court Judge

Opinion No. 5761
Heard June 16, 2020 – Filed August 19, 2020

AFFIRMED AS MODIFIED

Charles S. Altman, of The Law Offices of Charles S.
Altman, and Meredith L. Coker, both of Charleston; and
Patrick John Norton, of Chicago, Illinois, for Appellant.

Stephanie Holmes Burton, of Gibbes Burton, LLC, of
Spartanburg, for Respondent.

LOCKEMY, C.J.: In this legal malpractice action, Fine Housing, Inc. (Fine
Housing) appeals the circuit court's order granting William Sloan, Jr.'s motion to
disqualify Fine Housing's counsel, Charles Altman, as a necessary witness. We
affirm as modified.

FACTS/PROCEDURAL HISTORY
This action arose from Fine Housing's purchase of two parcels of land, the Sol
Legare Avenue and Pittsburg Avenue properties (collectively, the Properties), from
Robin Robinson and RRJR, LLC (collectively, Robinson). In November 2013,
Robinson sought to sell the Properties to satisfy its debts. William Swope
represented Robinson during the sale of the Properties and contacted Sloan to
conduct the closings. Prior to the closings, the Sol Legare property was scheduled
for a foreclosure sale. In order to avoid the sale, the closings were expedited. Fine
Housing requested the mortgagee postpone the foreclosure sale so that it could
have more time for the closing; however, Altman, who represented the mortgagee,
denied that request.

On December 2, 2013, Fine Housing closed on both properties in a single
transaction for a total purchase price of $850,000. As part of the agreement, Fine
Housing granted Robinson a lease on the Properties with the option to repurchase
within two years. After the closing, Sloan discovered state and federal tax liens on
the Properties in the name of John Robinson, Robinson's deceased husband.
Additionally, Sloan was informed that Barry Clarke claimed he had a lease on the
Pittsburgh property and a right of first refusal. Further, Chandler Crabtree and
William Foster brought suit against Fine Housing based on the Statute of
Elizabeth. It is alleged that Sloan relied on Swope's title search and failed to
identify these existing tax liens, lawsuits, or leases on the Properties before the
expedited closing. Thereafter, Robinson defaulted on the lease and sued Fine
Housing. Robinson alleged it had not sold the property to Fine Housing but Fine
Housing had instead loaned it $850,000 with the Properties as collateral.

Altman represented Fine Housing in the Clarke, Crabtree, and Foster litigations
and during their tax lien actions. Altman settled Robinson's actions against Fine
Housing, and that settlement established Fine Housing owned both properties.
Altman then negotiated settlements with Crabtree and Foster for $100,000.
Subsequently, Clarke offered to purchase the Pittsburgh property for $650,000,
which Fine Housing rejected. The Clarke action went to trial, and the trial court
found in favor of Clarke.

As to the tax liens, Sloan explained he was uncertain whether the tax liens applied
to the Properties. Sloan and Altman disagreed as to what actions to take regarding
the payment of the tax liens. Altman eventually negotiated a settled payoff of the
tax liens on the Properties, which Fine Housing paid on behalf of Robinson.

Altman, on behalf of Fine Housing, brought a legal malpractice suit against Sloan.
In its complaint, Fine Housing alleged Sloan failed to identify the tax liens on the
Properties, which required Altman to negotiate and obtain payoffs for the tax liens.
Fine Housing also alleged Sloan failed to discover that the Properties were subject
to the Clarke lease and the Crabtree and Foster lawsuits and failed to issue the title
policies correctly.

In his answer, Sloan denied Altman was required to negotiate tax lien payoffs for
the Properties. Sloan alleged Fine Housing failed to mitigate damages, suffered
damages due to its own negligence, and its damages were caused by the
intervening and superseding acts of others. On June 9, 2016, Sloan submitted his
first set of answers to interrogatories, naming Altman as a witness.

Vince Destaso, Fine Housing's representative pursuant to Rule 30(b)(6), SCRCP,
was deposed in connection to this suit. Destaso displayed a lack of knowledge
related to the tax liens on the Properties. Specifically, Destaso stated he was
unaware of the amount of the tax liens, unsure about the power of attorney to
handle these liens, and unclear about whether the tax liens were settled.
Additionally, Destaso was unsure about the exact amount of the Crabtree and
Foster settlements, the date of the settlements, or why Fine Housing took a $50,000
insurance loss.

During Sloan's deposition, Altman asked Sloan about the actions Altman took and
the conversations he had with Sloan regarding the tax liens. The following
exchanges occurred:

[Altman]: And didn't I also obtain a compromised
settlement with the South Carolina Department of
Revenue?

[Sloan]: Yes.

[Altman]: Didn't we have some discussion about whether
or not the—if the tax liens expired by their terms after the
closing, whether or not the money . . . should have been
paid over to Ms. Robinson . . . ?

The questioning continued:

[Altman]: And I believe I told you on behalf of Fine
Housing you could not release the money to Ms.
Robinson; is that correct?
[Sloan]: I don't remember that specifically, but that
sounds correct.

[Altman]: And I did it based on this opinion, correct?

Sloan moved to disqualify Altman as counsel, arguing Altman was a necessary
witness in Fine Housing's suit against Sloan. Specifically, Sloan asserted Altman
was a necessary fact witness as to the following:

[(1)] The urgency of the payoff of the . . . mortgage and
[the] refusal to postpone the foreclosure sale, leading to a
rushed closing; [(2)] Obtaining payoffs for tax liens
associated with both parcels of property, including
attempts to deal with the seller's counsel regarding
payoffs; [(3)] Assertions by Mr. Altman concerning
which liens had to be paid and a subsequent negotiation
of a payoff of a state tax lien; [(4)] Discussion and
negotiations relating to the title insurance commitments
and title policy; [(5)] The settlement of the action brought
by [Robinson], since Mr. Destaso . . . testified . . . he did
not read the settlement agreement and was not familiar
with its terms, but claim[ed] amounts paid in settlement
as damages in this case; . . . [(6)] The settlements
. . . entered into with the current tenant of the Pittsburg
Avenue property; [(7)] The settlement of the prior Foster
and Crabtree actions; and [(8)] The nature of legal
services provided . . . for which Fine Housing . . . [wa]s
seeking damages.

Fine Housing argued the matters were uncontested and disqualification would
cause substantial hardship to Fine Housing.

At the hearing on the motion to disqualify Altman, Sloan also asserted Altman was
the only one who could explain the tax liens and whether the Crabtree and Foster
settlements were fair and reasonable. Lastly, he asserted Altman was a necessary
witness as to the mitigation of damages based on Clarke's offers to buy the
Properties.
The circuit court granted Sloan's motion to disqualify Altman. The court held
Altman was a necessary witness because he was the only witness who could testify
as to the reason Fine Housing settled the Foster and Crabtree actions, the
conversations with Sloan about title insurance, and the discharge of the tax liens.
In addition, the circuit court held Altman's testimony was necessary to explain (1)
which tax liens applied to the Properties, (2) why he advised Fine Housing to pay
the tax lien that was in John Robinson's name, (3) the settlement with Robinson,
and (4) his negotiations with the South Carolina Department of Revenue about the
tax lien. The circuit court found Destaso's deposition demonstrated he was unable
to provide accurate testimony regarding these issues. The circuit court also found
Altman was a necessary witness regarding Fine Housing's damages from title
insurance, settlements, and mitigation.

The circuit court found Altman's dual role would confuse and mislead the jury.
The court concluded disqualification would not work substantial hardship or
surprise on Fine Housing because Sloan identified Altman as a witness in his
answers to interrogatories. The circuit court granted "Sloan's motion to
disqualify . . . Altman as counsel for [Fine Housing]," but did not "preclude
another attorney from . . . Altman's firm [from] representing Plaintiff at the trial of
this case." Fine Housing filed a motion to reconsider, which the circuit court
denied. This appeal followed.

ISSUES ON APPEAL

1. Did the circuit court err by finding Altman was a "necessary witness"?

2. Did the circuit court err by failing to apply the exceptions explicit in Rule 3.7,
RPC, Rule 407, SCACR, in its analysis?

3. Did the circuit court err by disqualifying Altman from all representation of Fine
Housing?

STANDARD OF REVIEW

"A circuit court's ruling on a motion to disqualify a party's attorney is reviewed for
an abuse of discretion." Brooks v. S.C. Comm'n on Indigent Def., 419 S.C. 319,
324, 797 S.E.2d 402, 404 (Ct. App. 2017). "An abuse of discretion occurs when
the ruling is based on an error of law or a factual conclusion without evidentiary
support." Historic Charleston Holdings, LLC v. Mallon, 381 S.C. 417, 434, 673
S.E.2d 448, 457 (2009).
LAW/ANALYSIS

I. Necessary Witness

Fine Housing argues the circuit court erred in finding Altman was a necessary
witness. Fine Housing argues several of the issues in dispute were matters of
public record and could be found in the documents related to this case or through
other witnesses. We disagree.

Rule 3.7 of the South Carolina Rules of Professional Conduct, Rule 407, SCACR
states,

A lawyer shall not act as advocate at a trial in which the
lawyer is likely to be a necessary witness unless: (1) the
testimony relates to an uncontested issue; (2) the
testimony relates to the nature and value of legal services
rendered in the case; or (3) disqualification of the lawyer
would work substantial hardship on the client.

Comment 2 of Rule 3.7 states, "The tribunal has proper objection when the trier of
fact may be confused or misled by a lawyer serving as both advocate and witness."

"[A]n attorney is 'likely to be a necessary witness' when the 'attorney's testimony is
relevant to disputed, material questions of fact' and 'there is no other evidence
available to prove those facts.'" Brooks, 419 S.C. at 326, 797 S.E.2d at 405
(quoting Clough v. Richelo, 616 S.E.2d 888, 891-92 (Ga. Ct. App. 2005)). The
attorney need not be "the only witness to these events"; instead, an attorney can be
disqualified under Rule 3.7 if "no other witness would be able to provide evidence
regarding the full [circumstances]" and other "material information." Id. at 327,
797 S.E.2d at 406.

"A claimant in a legal malpractice action must establish four elements: (1) the
existence of an attorney-client relationship, (2) a breach of duty by the attorney, (3)
damage to the client, and (4) proximate causation of the client's damages by the
breach." Stokes-Craven Holding Corp. v. Robinson, 416 S.C. 517, 525, 787 S.E.2d
485, 489 (2016).

We find the circuit court did not abuse its discretion by disqualifying Altman
because the record supports the circuit court's conclusion he was a necessary
witness. See Brooks, 419 S.C. at 324, 797 S.E.2d at 404 ("A circuit court's ruling
on a motion to disqualify a party's attorney is reviewed for an abuse of
discretion."). On appeal, Fine Housing does not dispute that Altman's testimony
was material to the litigated issues; instead, Fine Housing argues other evidence or
witnesses were available to prove the facts Altman could provide. See id. at 326,
797 S.E.2d at 405 ("[A]n attorney is 'likely to be a necessary witness' when the
'attorney's testimony is relevant to disputed, material questions of fact' and 'there is
no other evidence available to prove those facts.'" (quoting Clough, 616 S.E.2d at
891-92)).

Fine Housing alleges Sloan caused it to incur damages relating to the settlement of
the Crabtree and Foster actions. However, Destaso's deposition indicates he was
unable to testify about the details of the settlements or the exact amount of
damages incurred by Fine Housing. Specifically, he stated he was unsure of the
date or the total amount of the settlement and was unable to explain why there was
a loss of insurance coverage. Although Destaso was never specifically asked about
the reasonableness or necessity of the settlements, he showed he lacked the
knowledge necessary to testify regarding the settlements. Destaso's failure to
explain the details of the Crabtree and Foster settlements was evidence that Altman
was a necessary witness. Altman knew the details of these actions, why Fine
Housing settled them, what damages stemmed from the settlements, and whether
those damages were proximately caused by Sloan's negligence. Without Altman's
testimony, Sloan's ability to contest whether the damages were the result of a
superseding cause or whether the settlements were reasonable would prove
difficult.

The record shows Altman also had significant knowledge relating to Robinson's
tax liens. Sloan disputes whether Fine Housing was required to pay the tax liens
against the property. Fine Housing asserts that representatives of the South
Carolina Department of Revenue and Internal Revenue Service can be called as
witnesses to explain the tax liens; however, Altman has additional knowledge to
explain why the parties believed Robinson's tax liens should have been settled and
is privy to conversations with Sloan regarding the settlement of the tax liens.
Thus, evidence supports the circuit court's conclusion that Altman's testimony
would provide the trier of fact with the full circumstances regarding the tax liens at
issue.

Moreover, Altman's deposition showed his questioning has the propensity to
confuse the jury. When Altman questioned Sloan, he frequently crossed the lines
between advocate and witness by stating his actions regarding the facts of this
case. Questioning that draws attention to the attorney's actions would confuse the
jury and blur the line between advocate and witness. See Rule 3.7, cmt. 2, RPC,
Rule 407, SCACR ("The tribunal has proper objection when the trier of fact may
be confused or misled by a lawyer serving as both advocate and witness."). Based
on the foregoing, we find the record supports the circuit court's conclusion Altman
was a necessary witness.

II. Rule 3.7 Exceptions

Fine Housing argues the circuit court erred in failing to apply the exceptions to
Rule 3.7. Fine Housing asserts the testimony Sloan seeks from Altman relates to
the nature and value of legal services rendered and the disqualification of Altman
would cause substantial hardship to Fine Housing. We disagree.

Comment 3 of Rule 3.7 explains, "Paragraph (a)(2) recognizes that whe[n] the
testimony concerns the extent and value of legal services rendered in the action in
which the testimony is offered, permitting the lawyers to testify avoids the need for
a second trial with new counsel to resolve that issue." Comment 4 of Rule 3.7
states, "It is relevant that one or both parties could reasonably foresee that the
lawyer would probably be a witness."

"The substantial hardship exception to Rule 3.7 is construed narrowly.
Accordingly, the 'expense and possible delay inherent in any disqualification of
counsel,' without more, do not qualify as substantial hardship." Brown v. Daniel,
180 F.R.D. 298, 302 (D.S.C. 1998) (quoting Estate of Andrews v. United
States, 804 F.Supp. 820, 829 (E.D. Va. 1992)). "To find 'substantial hardship,'
courts have required something beyond the normal incidents of changing counsel,
such as the loss of extensive knowledge of a case based upon a long-term
relationship between the client and counsel and substantial discovery conducted in
the actual litigation." Id.

Fine Housing asserts the circuit court erred by considering Altman's potential
testimony as to the nature and value of legal services in "prior matters" because
this violated the exception in Rule 3.7(a)(2). However, Rule 3.7(a)(2) provides an
exception only for legal services rendered in the case at the bar, not in prior
matters. See Rule 3.7(a)(2) ("A lawyer shall not act as advocate at a trial in which
the lawyer is likely to be a necessary witness unless . . . the testimony relates to the
nature and value of legal services rendered in the case . . . ." (emphasis added));
Rule 3.7, cmt. 3 ("Paragraph (a)(2) recognizes that whe[n] the testimony concerns
the extent and value of legal services rendered in the action in which the testimony
is offered, permitting the lawyers to testify avoids the need for a second trial with
new counsel to resolve that issue." (emphasis added)). Thus, the circuit court did
not err by considering Altman's potential testimony as to prior matters because
Rule 3.7(a)(2) applies to legal fees in the case at the bar, not to legal fees asserted
as damages from a previous case.

Further, the circuit court did not abuse its discretion by finding Altman's
disqualification would not cause substantial hardship to Fine Housing. Here, the
record contains no evidence Fine Housing would suffer any additional hardship
beyond the normal expense and delay a litigant would experience with a change of
counsel. The record does not show that Altman maintained a long-standing
attorney-client relationship with Fine Housing because Altman only began
representing Fine Housing after the closing that prompted this litigation.
Moreover, Fine Housing's ability to continue to be represented by Altman's firm
mitigates its hardship. Based on the foregoing, we find the circuit court did not err
in its application of the exceptions found in Rule 3.7.

III. Scope of Disqualification

Fine Housing argues the circuit court abused its discretion by disqualifying Altman
from all representation because Rule 3.7 applies only to trial advocacy. We agree.

As an initial matter, the circuit court order did not expressly prohibit Altman from
representing Fine Housing on other matters. However, it did not expressly outline
any limits on the disqualification, and both parties assert the disqualification was
complete. Therefore, we address whether Rule 3.7 disqualifies Altman from all
representation. We hold it does not.

"A lawyer shall not act as advocate at a trial in which the lawyer is likely to be a
necessary witness . . . ." Rule 3.7, RPC, Rule 407, SCACR (emphasis added). The
comments to Rule 3.7 describe the rationale behind the advocate-witness rule.
Comment 1 explains, "Combining the roles of advocate and witness can prejudice
the tribunal and the opposing party and can also involve a conflict of interest
between the lawyer and client." The prevailing justification for disqualifying
counsel as a necessary witness is to prevent jury confusion. See Rule 3.7, cmt. 2
("The tribunal has proper objection when the trier of fact may be confused or
misled by a lawyer serving as both advocate and witness.").

If Altman is no longer an advocate at trial, the propensity for jury confusion is
greatly diminished. As other jurisdictions that have identical rules to our Rule 3.7
have held, we hold that Rule 3.7 does not prohibit an attorney from representing
the client in other roles outside of trial advocacy. See Culebras Enters. Corp. v.
Rivera-Rios, 846 F.2d 94, 101 (1st Cir. 1988) (providing attorneys who were
disqualified and conducted pretrial activities did not violate Rule 3.7 because the
rule prohibits "a lawyer-witness only from acting as [an] 'advocate at a trial'");
Smaland Beach Ass'n, Inc. v. Genova, 959 N.E.2d 955, 967 (Mass. 2012)
(providing disqualification from Rule 3.7 only disqualifies an attorney as to the
trial of the case and a disqualification on pretrial matters must derive from a source
other than Rule 3.7); see also ABA Comm'n on Ethics & Prof'l Responsibility,
Informal Op. 1529 (1989) ("The Committee construes the prohibition in Model
Rule 3.7(b) against a lawyer-witness acting as 'advocate at a trial' as forbidding
active participation as a trial lawyer, including presenting evidence and argument,
and not as prohibiting assistance to the lawyer who serves as the active trial
advocate . . . ."); id. ("A lawyer who anticipates testifying as a witness on a
contested issue at a trial may represent a party in discovery and other pre-trial
proceedings . . . ."). Because Rule 3.7 does not require Altman to be disqualified
from all representation and to do so would exacerbate the hardship to Fine
Housing, to the extent the order did so, we modify the order to clarify Altman is
only disqualified from representing Fine Housing at the trial of this case.

CONCLUSION

Based on the foregoing, the circuit court's order is

AFFIRMED AS MODIFIED.

GEATHERS and HEWITT, JJ., concur.