I N S I D E T H I S I S S U E :

S P E C I A L P O I N T S O F I N T E R E S T :

sional liability claims brought by a bankruptcy trustee or receiver because often the professional in some way was either 1) di-rectly involved in whatever ac-tivities that caused the entity to fail or 2) should have discovered and advised the entity of the problems that led to the entity’s demise. As brutal as this retro-spectoscope can be in these cases where the business has obviously failed, all standard of care defenses related to what was known at the time, what the standards were in place at the time and what the owners and decision makers of the busi-ness entity did with that same information should be fully ex-plored, if necessary with experts in that field who can opine as to what other professionals were doing in same or similar circum-stances.

In the wake of the 2008 financial crises there was a proliferation of bankruptcies of corporate entities. Whether because of the number of filings, the depth of the crisis, or a bolt of collective creativity, the trustees and receivers of these bankrupt entities sought out any potential source of recovery. Because they are insured, this search often involved suits being filed professionals for malpractice, particularly attorneys. Though the crisis has passed the number of bankruptcies has fallen, the fre-quency with which such claims are being brought, relative to the number of bankruptcies, has not necessarily seen a corresponding decrease. A combination of factors has helped produce a longer tail on these type of cases, such as stat-ute of limitations discovery rules, procedural leniencies provided within the bankruptcy proceeding

(if that is the venue of the case), and claims made insurance poli-cies that often grant full prior acts coverage for professional such as lawyers, accountants, and brokers such that the insur-ance carriers are extending col-lectible coverage in these case. Furthermore, any stigma or disin-centive in filing these claims against professionals, if it ever existed, appears to have worn off, as these kinds of cases have become more the norm and are considered (by the experienced Trustees who have pursued them before) as acceptable (or even honorable) deployment of the their fiduciary responsibilities. This article will discuss the peculi-ar challenges of defending these cases and strategies to be em-ployed.

Standard of Care Standard of care can be a more difficult battle ground in profes-

D E F E N D I N G P R O F E S S I O N A L S W H E N S U E D B Y B A N K R U P T E N T I T I E S , B Y : J E N N I F E R B E R A R D , C P C U , A N D D O N A L D P A T R I C K E C K L E R , E S Q .

L E T T E R F R O M T H E P R E S I D E N T , B Y : T I M O T H Y J . G E P H A R T , C P C U

Planning for the 2017 Annual Meeting and Seminar began in earnest immediately following the Denver meeting. This year’s meeting will be held at the Wes-tin River North in Chicago, Sep-tember 27th through the 29th. The call for program proposals drew a tremendous response, and this year’s programing will provide a wide range of informa-tive sessions related to handling the professional liability risks we all deal with.

Topics specific to the areas of medical, legal, architects and engineers, and chiropractic pro-fessional liability will be covered, along with more general topics of interest to us all, such as the use/misuse of social media, pro-fessional liability risks arising from immigration issues, effec-tive use of ADR and an innova-tive interactive program on pro-fessional liability claim trends. The presenters include industry

experts and attorneys well versed in these practice areas. In addition to a tremendous amount of substance, we’ll also have some fun. The Member Dinner (included in the registra-tion fee) will be at the Kinzie Chophouse, one of the best, in my opinion, in the city. The planning committee is working on a field trip for Thursday after the sessions end. More on that to come. And we’ll get together

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Standing The trustee or receiver generally stands in the shoes of the debtor, as his successor in interest. As such, standing is generally not going to be a viable defense but should be closely examined if the Trustee attempts to boost or confuse the damage picture by asserting losses from other adjacent businesses (which may not be his purview, or may be too attenuated). In all cases, the bankruptcy order that conveys upon the trustee or receiver his power should be requested and carefully reviewed for any restrictions related to time, or scope.

Unclean Hands and In Pari Delicto Bankruptcy courts have repeatedly concluded that a trustee in bankruptcy takes the debtor’s rights subject to all defenses and other burdens to which such rights were subject immediately prior to the commencement of the bankruptcy case. This “standing in the shoes of the debtor” principle becomes very important when considering important defenses such as in pari delicto/unclean hands. Depending on the jurisdiction, these doctrines, which apply when both the plaintiff and defendant participate in a fraudulent, illegal, or inequitable conduct, may be interchangeable. They are often affirmative defenses that must be pled. In some jurisdictions in pari delicto applies to complaints at law, while unclean hands ap-plies to allegations seeking equitable relief. In such jurisdictions unclean hands will likely not be available in a professional malpractice claim. In Ohio, which adheres to this majority position, the unclean hands defense is defined as a defense against claims in equity. Rivers v. Otis Elevator, 996 N.E.2d 1039, 1047 (Ohio, 8th Dist.). The unclean hands de-fense requires a showing that the party seeking relief engaged in reprehensible conduct with respect to the subject matter of the action. State ex rel. Coughlin v. Summit County Bd. of Elections, 995 N.E.2d 1194, 1197 (2013). The doctrine of unclean hands considers whether the party seeking relief has engaged in inequi-table conduct that has harmed the party against whom he seeks relief. Downie-Gombach v. Laurie, 41 N.E. 2d 858, 865 (2015). The doctrine of unclean hands “precludes one who has defrauded his adversary in the subject matter of the action from equitable relief.” In re Dow, 132 B.R. 853, 860 (Bankr.S.D.Ohio 1991) (the doctrine of unclean hands does not apply where there is no allegation that the plaintiffs defrauded the de-fendant). With respect to in pari delicto the doctrine “refers to the plaintiff's participation in the same wrongdoing as the defendant.” Downie-Gombach, 41 N.E. 2d at 865. The doctrine refers to equal fault, or equal culpability. Id. It is premised on the policy that “no Court will lend its aid to a man who founds his cause of action upon an immoral or illegal act.” Id. The “doctrine is only appli-

cable when the plaintiff bears equal fault to, or more fault than, the defendant for the alleged wrong.” Antioch Litigation Trust v. McDermott Will & Emery LLP, 738 F.Supp.2d 758, 772 (S.D.Ohio 2010). In this way the doctrine can be part of a comparative fault analysis. In pari delicto is founded upon public policy, and does not depend upon the guilt or innocence of a party. Commercial Nat'l Bank v. Wheelock, 40 N.E. 636 (1895). Under Illinois law no distinction between the applica-tion of these doctrines in the context of a professional malpractice action. Lurie v. Wolin, 2014 IL App (1st) 130661-U, ¶¶ 11-17. In Illinois, a claim for professional malpractice cannot be pursued when the plaintiff has placed himself in a questionable situation. Illinois courts have consistently found that the court is re-quired to leave the parties where it found them and provide no remedy when such parties are before them. In Makela v. Roach, 142 Ill. App. 3d 827, 832 (2nd Dist. 1986) the court held:

[w]here a party voluntarily elects to follow advice intended to extricate herself from a questionable situation, she comes to his court with unclean hands and may not seek relief from her wrongful conduct through a legal malpractice action. ... We pass no judgment on the advice given by the defendant, as a refusal to aid [plaintiff] is a decision based on her attempt to evade the law.

Likewise in Mettes v. Quinn, 89 Ill. App. 3d 77, 80 (3rd Dist. 1980) the court held that “[i]t has been the policy of the courts to refuse their aid to anyone who seeks to found his cause of action upon an illegal or immoral act or transaction.” Illinois courts will not aid plaintiffs who by their own acts create a situation and then seek unethical or illegal behavior on behalf of a licensed professional to extricate them. More recently, in Peterson v. McGladrey LLP, 792 F.3d 785, 788-789 (7th Cir. 2015), in which the trustees in bankruptcy for mismanaged a investment fund brought accounting malpractice claims against the outside audi-tor, and the Court found that even though the auditor committed a separate error, the fund manager’s own misconduct barred the claims under in pari delicto. The Court found no support for the argument of the trustee that the error of the professional must be the same as that of the client in order for in pari delicto to apply. Peterson, 792 F.3d at 787. Irrespective of the manner in which these doctrines are conceived in a given state, counsel for the defend-ant professional should ascertain if there is a basis to claim that the plaintiff is at least in part culpable in causing the injury claimed.

Causation As pointed out above, these entities are bankrupt or

P R O F E S S I O N A L D E F E N S E I N B A N K R U P T C Y , C O N T ’ D

“[T]rustee in

bankruptcy takes

the debtor’s rights

subject to all

defenses and other

burdens to which

such rights were

subject … .”

Page 2 P R O F E S S I O N A L L I A B I L I T Y D E F E N S E Q U A R T E R L Y

PLDF Eighth Annual

Meeting

Westin River North

Chicago, Illinois

September 27-29, 2017

otherwise insolvent; getting a handle on the various (and often complex) causes for that situational and the full time line of decision making that contributed to them, can be critical to asserting important defenses related to statute of limitations or scope of involve-ment. Every demarcation in the professional’s involve-ment, e.g. the timing of his various engagements and the scope of those engagements, should be examined closely alongside a broken down version of the damag-es model to explore fully all causation angles. At its simplest, if it can be shown that the entity would have been bankrupt or insolvent irrespective of the conduct of the professional, the plaintiff’s complaint, or key parts of the damages, may be able to be defeated. This is particularly true when the professional is an outsider to the business and may not have directly participated in whatever dismal decision making or market condi-tions that contributed to the business’s demise. Miti-gation of damages defenses are often closely linked with causation, Consider one illustrative example of the kind of case in which causation and unclean hands kinds of defens-es can be found in a case stemming from a bankrupt business. Plaintiff was a business whose franchise model to sell start up software and policies that would allow small banks and other financial institutions to sell insurance on the side. The business underwent an ini-tial honeymoon phase in the early 2000s, consistent with the rising market then, but suffered serious de-cline closely linked with the real estate market crash and the disappearance of smaller lending institutions. Ultimately, the franchise company was subjected to involuntary bankruptcy and its Trustee/Receiver, in an effort to increase the bankruptcy Estate, pursued claims against all of the professionals involved in any aspect of the business. Various defendant professionals were accused of failing to see and report the inevitable flaws in the business model itself and further accused of helping to sustain the unsustainable in a way that deepened the later insolvency. Despite the large dam-ages that stemmed from the demise of the company, many different causation issues, comparative fault angles and scope of representation defenses became apparent when a deep exploration of timeline of com-partmentalized legal work took place.

Damages Closely related to the causation issues are some im-portant damages defenses that should be considered in every complex or soft damages scenario. Insolvencies do not happen all at once, they invariably happen over time which allow for defenses (including statute of limitations) based on that break down. Trustees in bankruptcy should not be able to escape the empirical proof requirements for damages that exist in many jurisdictions, because they, again, stand only in the

shoes of the debtor at the time of the bankruptcy. Damages in professional negligence cases usually must be proved with “legal certainty” or “reasonable certainty” which is defined differently in different juris-dictions but most often means some reasonable space of time (e.g. 5 years for the “new business rule”) in which empirical business data and facts support the financial conclusions. Mere conclusions without sup-porting data, or rank speculation (e.g. about things such as future profits) should not satisfy this proof requirement. As an example in Meriturn Partners, LLC v. Banner & Witcoff, Ltd., 31 N.E.3d 451, 459-460 (1st Dist. 2015) the court upheld a $6 million judgment (the amount of the investment by the plaintiffs) but declined to award lost profits as too speculative because of the new na-ture of the business at issue. The Court applied the “new business” bar applied to “unestablished ventures, unestablished products and unestablished processes” of an existing business, not just to a new “business” itself. Meriturn Partners, 31 N.E.3d at 459. For a full exposition of Meriturn Partners, see “Just When You Thought You Knew Who You Represented: A New Deci-sion May Upset the Law Regarding Attorney Liability to Third Parties,” IDC Quarterly, Vol. 26, No. 2, Donald Patrick Eckler, Matt Tibble, and Adam Carter, http://www.pretzel-stouffer.com/profiles/pdf/26.2.M1.pdf

Negotiation, Resolution, and the Fiduciary Dilemma Trustees and receivers have a fiduciary responsibility to recover as much money for the bankruptcy estate as reasonably possible; it is their obligation to the debtor and to the creditors. Depending on the trustee and the situation, this responsibility can produce inflexible or even unfair dynamics when it comes time to try to resolve the matter. Trustees often will not be shy about asserting their fiduciary duty and pragmatism as rea-sons why negotiations should take place early in the case (before full discovery has taken place). A trustee may then later utilize this same responsibility as an excuse for why she cannot possibly negotiate below a certain amount. Counsel for the defendant should raise issues related to the costs and risk in the case, includ-ing serious dilemmas (for both sides) caused by dimin-ishing limits policies. Reminding the trustee that she must not only take into account whatever risk of losing that exists in that particular case, but she must act more responsibly than perhaps the business entity would have done before the insolvency -- her duty extends to achieving a reasonable result net of expens-es, from her efforts. For example, spending $1 million in fees and experts to prove a questionable liability case that has a best day of $2 million in a situation involved a diminishing limits $2 million policy is a pre-carious scenario for a Trustee. The Trustee should be reminded that she is most certainly not fulfilling her

P R O F E S S I O N A L D E F E N S E I N B A N K R U P T C Y , C O N T ’ D

“Trustees and

receivers have a

fiduciary

responsibility to

recover as much

money for the

bankruptcy estate

as reasonably

possible … .”

Page 3 V O L U M E 9 , I S S U E 2

PLDQ’s Summer 2017 Issue

We encourage member submission of

articles pertinent to professional liability claims

administration, defense trial advocacy, or

professional liability sub-stantive law. The manu-

script deadline for the next issue is:

August 1, 2017.

fiduciary duty if her inflexible negotiating produces a lengthy expensive litigation process, or an unfavorable or nonexistent net recovery.

Conclusion The challenges of defending a case involving a bank-rupt entity are unique and require a different approach

than the defense of other professional malpractice actions. Conceding breach of the standard of care may be an awkward position to take, but it is often the nec-essary tact in such cases so that the defense of the case can focus on the other elements of the case where successful defense is much more likely to be found.

P R O F E S S I O N A L D E F E N S E I N B A N K R U P T C Y , C O N T ’ D

“In recent months,

PLDF has also

reached another

milestone. The

organization now

boasts over 500

members.”

Page 4 P R O F E S S I O N A L L I A B I L I T Y D E F E N S E Q U A R T E R L Y

PLDF AND DIVERSITY The Professional Liability

Defense Federation

supports diversity in our member recruitment

efforts, in our committee and association

leadership positions, and in the choices of counsel,

expert witnesses and medi-ators involved in profes-

sional liability claims.

Jennifer Berard is a Director of Profes-sional Services Claims at CNA who manag-es litigation against lawyers, physicians, accountants and others. She is also an attorney licensed in Kansas and Missouri, and has achieved the CPCU designation.

She may be reached at jennifer.berard@cna.com.

L E T T E R F R O M T H E P R E S I D E N T , C O N T ’ D

for the Welcome Party Wednesday evening on the Westin’s newly renovated outdoor bar. The Board has worked extremely hard to put together a program with substance, entertainment, and a significant amount of time for networking. Please thank them when you see them. In recent months, PLDF has also reached another milestone. The organization now boasts over 500 members. Thanks to all for promoting PLDF to your clients, colleagues, and defense lawyers. I also encourage everyone to become familiar with and use the PLDF website (pldf.org). The website con-tains a wealth of information and provides tools for communicating with members. Remember, too, that PLDF can offer Amicus assistance for cases related to the defense of professionals. PLDF has lent a hand in several successful appeals.

Strong, active committees are at the heart of suc-cessful organizations, and the PLDF is an excellent example of that premise. The programming for the 2017 Annual Meeting and Seminar was driven by committee proposals. Join a committee! It’s an ex-cellent way to expand your universe of clients and defense lawyers. I’m looking forward to seeing everyone in Septem-ber in Chicago. Registration materials will be out soon. Please feel free to contact me or any of your Board members with questions about PLDF.

Timothy J. Gephart, CPCU is President of PLDF and Vice President—Claims at Minne-sota Lawyers Mutual Insurance Company. Tim may be reached at tjg@mlmins.com.

R A N S O M W A R E , B Y : A N T H O N Y S . C O T T O N E , E S Q . A N D C A R R I E C A M P I , E S Q .

Perhaps the most prevalent and perplexing topics in the rapidly growing field of cybersecurity is what is known as “ransomware”. This article will address what ransomware is, illustrate its prevalence and pervasiveness in today’s society, address some prop-er pre-breach preparations, and evaluate the typical and sometimes conflicting responses and their im-pacts. We will not claim to be offering iron-clad defenses to ransomware attacks, as such things do not exist, and as all the research and estimations on the growth of attacks makes clear. What we can do in this article is provide the general consensus of the best practices for consumers and businesses prior to any breach or ransomware attack. In presenting this information, we will provide you with some examples

of ransomware attacks which have resulted in the recovery of the businesses information without pay-ing ransom, and a relatively minimal impact on the business’ daily functioning. We will also be providing some tips for appropriate actions following a ransomware attack. As you will see, acting swiftly and decisively in this confusing time is vitally important to both an effective and safe reso-lution.

What is Ransomware? Ransomware is malware (malicious software) that is installed in a victim’s device or devices, such as com-puters, smartphones, tablets, and the like. The mal-ware can be downloaded through email attachments, an infected software download, visiting a malicious website or clicking on a malicious link. The malware

Donald Patrick Eckler is a partner at Pretzel & Stouffer, Chartered, in Chicago. Pat defends doctors, lawyers, architects, engi- neers, appraisers, accountants, mortgage brokers, insurance brokers, surveyors and other professionals. He may be reached a deck-ler@pretzel-stouffer.com.

will infect, lock, and/or take control of a system by encrypting the user’s files until a ransom is paid for them to be decrypted. The intent is to extort money from the owner of the information. Ransomware can prevent you from using or accessing certain files, en-crypt files, or stop certain files or applications from running. Cybercriminals have developed and utilized (and continue to develop and utilize) a number of types of ransomware. It could be encrypting or non-encrypting ransomware, where files are converted or take possession of and/or access is restricted to these files. There is also “leakware” which does not deny access to a victim’s files, but will threaten to leak the contents of the files publicly. Some ransomware will even put a time limit on when payment will be due to gain access back to a user’s files, and if such a deadline is not met, the amount demanded will exponentially increase. Despite the type of ransomware used, all have the same general goal, which is to illegally convert or take control of information and hold it for ransom. Needless to say, ransomware is a terrifying concept for anyone who has been infected and had to respond and fight for the access to their files back. It is these victims that will tell you that no matter how prepared you may be for a breach, if you are infected with ran-somware, the appropriate response is not always clear, and at times, can be conflicting. As we will discuss in more detail below, the immediate need to regain ac-cess to your files may persuade the victim to make whatever payment is asked of them. However, pay-ment of the ransom does not guarantee that you will gain access to your files, as cybercriminals may simply demand more, or not give you the entirety of the en-crypted files back until further ransom is paid. If the ransom is paid, and the key to decryption is given, some cybercriminals have even put further viruses within that key. It is easy to see that these crimes are far-reaching and ever adapting. Ransomware does not discriminate. It has and contin-ues to infect users at the very basic level of personal home computers and systems, to the largest corpora-tions in our country and even our own government. The volume and sensitivity of the files that has been converted could have major consequences to a victim, not solely related to the payment of ransom. The con-version of files through ransomware could cause em-barrassment at the very least, major disruptions in business and business practices, and/or subject a cor-porate victim to civil and/or government action or in-vestigation. Businesses such as hospitals, school dis-tricts, retail establishments, and law firms (to name a few) contain exorbitant amounts of personal infor-mation and possible personal health information that, if converted and ultimately exposed or disclosed, illus-trates a nightmare scenario for the business which

could have no end in site. Federal, state, and local governments, as well as law enforcement agencies, contain highly sensitive and classified information that if converted, could have devastating effects. Further-more, the identity of these cybercriminals and their motivations behind using ransomware range from ran-dom hackers with goals of political protest or embar-rassment, to high-tech professional actors who could be linked to major criminal organizations and even terrorism. The anonymity of these cybercriminals fur-ther complicates an appropriate and effective re-sponse.

How Prevalent is Ransomware Today? The United States Department of Justice has recently released statistics showing that there are more than 4,000 ransomware attacks each day against businesses and consumers. The FBI estimated that in 2016, $1 billion was paid to restore access to users’ files in ran-somware attacks. Verizon’s recently released breach report, which it conducts every year, stated that the amount of ransomware attacks have doubled in the last year. However, these studies can be underestima-tions, as they are based on cybersecurity incidents that require reporting, disclosure, or the need for outside forensic investigators. These studies do not account for smaller ransomware attacks that do not get report-ed. It was recently found that 34% of ransomware victims worldwide pay the ransom demanded of them. A study from security firm, Symantec, has found that victims in the United States are almost twice as likely to pay ransomware demands (64%) as other victims around the world. Symantec’s study also showed that the average ransom demanded for attacks has boomed from $294 per attack in 2015 to $1,077 per attack in 2016. Yet another report from SonicWall, a cybersecurity software firm, stated that in 2015, there were 3.8 mil-lion ransomware attacks. SonicWall estimated that number soured to 638 million ransomware attacks in 2016. Lending support to those numbers is a study by IBM, which estimated a 6,000 percent increase in ran-somware attacks from the year 2015 to 2016. The IBM study found that 70% of business victims paid the cy-bercriminals to get their data back, and of those who paid, 50% percent paid more than $10,000 and 20% paid more than $40,000. As recently as April of 2017, Newark City Hall has been the victim of a ransomware attack. The attack is being said to have been caused by a staff member opening an email attachment containing malware. The cybercrimi-nals have disrupted computers in City Hall, and have demanded 1.7 bitcoin for every computer subject to the hack. In total, the cybercriminals are demanding 24 bitcoin (roughly $32,000).

R A N S O M W A R E , C O N T ’ D

“The [U.S.]

Department of

Justice has recently

released statistics

showing that there

are more than

4,000 ransomware

attacks each day

against businesses

and consumers.”

Page 5 V O L U M E 9 , I S S U E 2

As illustrated in this Newark City Hall attack, phishing emails were the number one vehicle for ransomware attacks in 2016 and the trend is expected to continue in 2017. The success of cybercriminals in the recent years have proved it to be a profitable business, and as such, new ransomware software is being developed at a rapid rate, with no sign of slowing down. So with these staggering numbers being presented to us, it would appear that consumers and businesses will be more and more likely to be victims of ransomware attacks as time goes on and this illegal activity grows. At this point, there is no indication that it will slow down. So how can we protect ourselves and our busi-nesses, or how should we counsel our clients, on pro-tecting themselves and being prepared for ransomware attacks?

Pre-Breach Preparation Given that phishing emails were the top vehicle for ransomware attacks in 2016, and that trend does not appear to be any different in 2017, proper education can play an enormous (and inexpensive) role in the defense of ransomware attacks. Training yourself, or your employees, how to spot suspicious emails, web-links, and the like, could go a long way toward stopping a potential attack or breach. This training should not just include training on a company’s own systems, but should also include policies with regard to personal devices connecting to the company’s system. These policies should be very clear and compliance should be reviewed often. Despite a consumer or a business’ diligence with re-gard to training to spot phishing emails or suspicious links, it seems inevitable that even savvy individuals at one point may let their guard down. To prepare for such eventualities, sufficient cybersecurity software is key. A consumer or a business must have antivirus software which monitors systems for malware. Cyber-security software can be specifically designed to identi-fy and stop ransomware attacks. The general consensus in the cybersecurity communi-ty is that comprehensive information backup systems could be the most important way to both dictate a swift and effective response, and mitigate any damages of a ransomware attack. These backup systems must be implemented, and information must be backed up on a regular basis for them to truly be effective. There are a number of examples of appropriately implement-ed and utilized backup systems that have saved a con-sumer and/or business from potentially devastating consequences. In March of 2016, Ottawa Hospital was the victim of a ransomware attack, when four computers in their net-work were rendered inaccessible to hospital adminis-trators. Files were locked down by the malware. The hospital wiped the drives of these computers and were able to utilize their backup systems to get back up and

running without paying the ransom demanded from the cybercriminals. The Hospital claimed their security practices protected all personally identifiable health information, and as such, due to this quick response and the Hospital’s preparedness, were able to avoid the inevitable collateral damage associated with poten-tial disclosure of protected health information. The longer this issue persisted, the more that the risks to patient safety also increased. In November of 2016, the San Francisco Municipal Transportation Agency (SFMTA), which runs the San Francisco’s bus, light rail, and trolley car systems, was hacked. It was said that the ransomware attack ac-cessed data, and the cybercriminals held an encryption key that they demanded payment for. Cybercriminals demanded 100 bitcoin (approximately $70,000) to release data converted, and release control over their systems. The SFMTA decided to shut down their sys-tems while they handled the issue, allowing passengers to ride for free. The move was said to be made to pro-tect passengers. The SFMTA then restored its systems from its backup systems, which they regularly updated. Given SFMTA’s successful backing up of their system and rapid response, there was no more than a two day interruption in the fare machine services, and the dan-gers of further infiltration were extinguished. SFMTA paid no ransom, and given their preparedness level, appeared to never have intended to. SFMTA is praised for their prevention systems with regard to this attack, but despite their success in getting back on line, this attack still posed the danger of compromising a great deal of personally identifiable information, and possibly cost the Agency approximately $50,000 in unpaid pas-senger fares. Again, while suggestions and examples can be seen, there is no full proof process for protecting against the overall onslaught of ransomware attacks. So what is a suggested response in the event an attack does occur to you, your business, or your client’s business? An effective response plan in the event of an attack is cru-cial.

Post-Breach Response In the event that either a consumer or a business has become a victim of a ransomware attack, proper imme-diate action is extremely important. The most instantaneous decision to be made is whether to pay the ransom. The immediate reaction to being a victim of a ransomware attack is very reasona-bly, to pay the ransom so that you can gain access to your files as soon as possible. Statistics certainly sup-port that this is exactly what victims do. This does not just go for consumers and small businesses. In Febru-ary of 2016, the Hollywood Presbyterian Medical Cen-ter was a victim of a ransomware attack and paid the $17,000 ransom in bitcoin. The hospital stated this was the best course of action to return to normal opera-

R A N S O M W A R E , C O N T ’ D

“Training …

employees how to

spot suspicious

emails, weblinks,

and the like, can go

a long way toward

stopping a

potential attack or

breach.”

Page 6 P R O F E S S I O N A L L I A B I L I T Y D E F E N S E Q U A R T E R L Y

PLDF COMMITTEES PLDF’s 11 substantive com-

mittees include: Medical Legal Accounting Investment Corporate Governance Insurance Real Estate Construction Design Cyber Security Employment Practices Miscellaneous PL

tions. The hack was reported to authorities, as was required, and was investigated thereafter. The decision by the Hospital was not an easy one, as is the same for any victim of ransomware attacks. Does the institution pay the money, which may open them-selves up to future attacks and/or possibly fund illegal enterprises; or do they refuse to pay, and risk the loss of access to, in this case, vital patient information which could pose severe risks to patient care? It is hard to argue with a hospital’s decision to pay a ran-som for access to files when patient’s lives are at risk. However, the decision is less clear when the infor-mation is proprietary in nature, or is information that could cause embarrassment. The decision to pay a ransom truly can change depending on the identity of the victim and their business. But keep in mind, paying a ransom does not always guarantee a solution and an end to the problem. The SonicWall study, referenced above, indicated that less than half of the victims in ransomware attacks in 2016 fully recovered their data. In counseling your clients, it is best to advise them to develop processes and procedures for this decision ahead of time so that all necessary consequences are considered. There are also free resources online that can help you or your client to determine if files en-crypted are able to be recovered without paying the ransom. Consult with IT professionals before using such sites, and advise your clients to research these resources as part of pre-breach planning. In response to a ransomware event, there should be an immediate forensic examination of the situation. Not only does such an investigation help to identify whether information was actually exfiltrated, it also allows for an initial assessment on just how broad the breach could be. Ransomware attacks sometimes go far beyond what is immediately apparent. In addition to getting your systems back online, there are many other consideration to be contemplated, including identification of what information was compromised or exposed. Was there personally identifiable information exposed? Personal health information? Valuable trade secrets or proprietary information? Such identification is crucial to a rapid and effective response, as the na-ture of the information could subject the consumer or business entity to even further issues. For instance, most all states have laws for security breach notification in the event that personally identifi-able information is compromised. Delay in these notifi-cations could subject the victim to penalties and fines. Furthermore, exposure of personally identifiable health information could subject the victim to violations of HIPAA and state privacy laws. If sensitive attorney-client privileged communications are compromised, the victim may have ethical exposure as well. Without knowing what information was taken control of by cybercriminals, the victim will not be able to fully un-derstand their legal duties with regard to that breach.

Responses to ransomware attacks can also present divergent approaches in responders. One of the issues that has arisen in this landscape is the different re-sponses between traditional IT responses versus re-sponses from information security focused individuals or groups. The traditional IT professionals’ primary focus in the wake of a ransomware attack is to get a system back up and running as soon as possible. An information security professional will be far more fo-cused on how the breach occurred, and seeking to identify what information was compromised and whether that information was exfiltrated from the system. These two backgrounds could sometimes cause conflict. For instance, a traditional IT profession-al, without an information security focus, may make the situation worse, as their desire to get the system back up and running immediately may compromise important data that would allow for a proper investiga-tion of the incident. An approach focused solely on information security may delay a response longer that could end up costing the victim far more money in ransom, lost business, increase potential exposure to future attacks and other collateral damage. Recogniz-ing such potential pitfalls and planning ahead will help in the event you, your business, or you clients become victims.

Conclusion It is clear that ransomware attacks are trending up-ward. Individuals and businesses at all levels must be prepared for this eventuality. It is the responsibility of everyone to be prepared in the event of a ransomware attack. Developing strong pre-breach practices and training are essential to the groundwork of attack re-sponses. Development of a response plan with a re-sponse team will also be vital in assessing damage after a breach, making the most important decisions in the fastest and most effective ways, and navigating through and mitigating potential collateral damage. These response plans should be reviewed regularly and tested often. While no one can be fully prepared in the event of an attack, the measures taken prior to and immediately after an attack could drastically change the outcome and impact.

R A N S O M W A R E , C O N T ’ D

“It is clear that

ransomware

attacks are

trending upward.

Individuals and

businesses at all

levels must be

prepared for this

eventuality.”

Page 7 V O L U M E 9 , I S S U E 2

Contact PLDF:

Christine S. Jensen

Managing Director

Professional Liability

Defense Federation

1350 AT&T Tower

901 Marquette Avenue South

Minneapolis, MN

55402

(612) 481-4169

cjensen@pldf.org

Carrie L. Campi manages the team han-dling claims for Allied World’s, cyber liabil-ity, lawyers errors and omissions (E&O), insurance agents and brokers E&O, archi-tects and engineers E&O, and miscellane-

ous professional lines. Carrie may be reached at car-rie.campi@awac.com.

Anthony S. Cottone is with Burns White, LLC in their Philadelphia office. He repre-sents clients in medical malpractice, com-mercial litigation, employment,, and cyber liability/security matters. Reach Tony at

ascottone@burnswhite.com.

“[T]ransmission

through unsecure

means can lead to

a waiver of the

attorney-client

privilege or work

product

protection.”

Page 8 P R O F E S S I O N A L L I A B I L I T Y D E F E N S E Q U A R T E R L Y

PLDF Amicus Program Please let us know of

appeals in your

jurisdictions implicating important professional

liability issues that might have national significance.

decided in the context of the California Public Records Act (PRA), which is modeled after the federal Freedom of Information Act (FOIA). Its holding may be distin-guishable in cases that do not implicate either Act, but is certainly illustrative of how courts may view infor-mation contained in billing records. It appears that billing records (or at least portions of those records) may enjoy attorney-client privilege protection from disclosure in ongoing cases, but that billing records in concluded cases could be subject to compelled disclo-sure.

Oops – Did We Just Waive the Privilege?

A client wants to share surveillance video with its lawyer to determine strategy in ongoing litigation. Does it matter how that video is

shared?

One of the hallmarks of the attorney-client privilege is protection by the client of the secret nature of the communication. In Harleysville Insurance Company v. Holding Funeral Home, Inc., 2017 U.S. Dist. LEXIS 18714, 15 CV 57 (W.D. Va, February 9, 2017), the court held that materials which were transmitted in an unse-cured fashion were not protected from disclosure even though the materials would have otherwise en-joyed such protection. The use of technology makes the transmission of information much easier and more efficient, especially for large volumes of data. However, transmission through unsecure means can lead to a waiver of the attorney-client privilege or work product protec-tion. In Harleysville, an insurer wished to share video surveillance footage of a fire loss scene with its coun-sel, and chose to utilize an internet-based electronic file sharing service. The client sent a hyperlink to its lawyers – which could be accessed by anyone who clicked the link or typed in the url – and did not pass-word protect the information shared. The hyperlink was transmitted via an email which contained a stand-ard confidentiality notice. Later, additional infor-mation, including the insurer’s entire claim file, was added to the site. In discovery, the other side was provided electronic copies of all documents, including the email which contained the hyperlink. Despite the confidentiality notice, counsel used the hyperlink to gain access to the video and the entire claims file without ever noti-fying the insurer or its counsel that they had accessed and reviewed potentially privileged information. The Harleysville court determined that the attorney-client privilege had been waived because the client insurer had failed to transmit the information in a secure way, and had failed to redact privileged infor-mation. The court stated “[t]he information uploaded

P R I V I L E G E U P D A T E : A T T O R N E Y B I L L S / I N T E R N E T T R A N S M I S S I O N B Y : D O N A L D P A T R I C K E C K L E R , E S Q . A N D A L I C E M . S H E R R E N E S Q .

As described in our previous article, Tribe’s Trump Tweet: A-C Client Privilege and Confidentiality,” PLDF Quarterly, Vol. 8, Issue 3, not all confidential infor-mation is protected by the attorney-client privilege. Two recent decisions analyze how the protections of the attorney-client privilege may inadvertently be compromised or lost, even when the information itself is confidential. This article explores how attorneys can safeguard their clients’ confidential information as the law of privilege and technology rapidly evolves.

Attorneys’ Bills Not Categorically Protected

Opposing counsel wants to obtain billing records in an ongoing case. Can a lawyer be

compelled to disclose these records and potentially reveal strategies to the other side?

In Los Angeles County Board of Supervisors v. The Superior Court of Los Angeles County, 2 Cal. 5th 282 (2016), the Supreme Court of California addressed whether lawyers may be compelled to produce billing invoices. In that case, the ACLU submitted a public records request to the county seeking “invoices” speci-fying the amounts the county had been billed by any law firm in connection with nine lawsuits alleging ex-cessive force against jail inmates. The court noted that since the billing records in question had been trans-mitted in a secure fashion, those records remained confidential. However, in coming to its determination that billing invoices are not “categorically” protected by the attorney-client privilege, the court pointed to the business nature of attorney bills and the well settled principle that business advice is not protected by the attorney-client privilege. Despite this ruling, the court noted that information contained within certain invoices may still be within the scope of the privilege. The court stated: “To the extent that billing information is conveyed ‘for purpose of legal representation’ – perhaps to inform the client of the nature or amount of work occurring in connec-tion with a pending legal issue – such information lies in the heartland of the attorney-client privilege.” The court went on to hold that when a legal matter remains pending and active, the privilege encompasses everything in an invoice, including the amount of ag-gregate fees, because an uptick in spending might reveal investigative efforts and trial strategy, or con-cern about a particular event. The court did note, how-ever, that the privilege may not protect invoices in concluded matters: “But there may come a point when this very same information no longer communicates anything privileged, because it no longer provides any insight into litigation strategy or legal consultation.” So what does this mean in the context of professional liability defense? The Board of Supervisors case was

to this site was available for viewing by everyone, any-where who was connected to the internet and hap-pened upon the site by use of the hyperlink or other-wise. In essence, Harleysville has conceded that its actions were the cyber world equivalent of leaving its claims file on a bench in the public square and telling its counsel where it could find it.” The attorney-client privilege is possessed by the cli-ent, not the attorney. The Harleysville court observed that the technology involved in information sharing is rapidly evolving, and whether a client chooses to use a new technology is a decision within that client’s con-trol. The court placed the burden of understanding whether the technology chosen by a client allows un-wanted access by others to confidential information squarely on the client. So what can attorneys do to aid their clients in avoid-ing inadvertent waiver of the privilege? To the extent it is within an attorney’s knowledge, an attorney can counsel clients on the appropriate manner to secure their electronic data. Even if a client missteps and pro-vides information in an unsecure matter, there are

ways to minimize the damage done, including remov-ing the information from the unsecured source. It should be acknowledged that while the Harleysville court found that the insurer client had waived the priv-ilege by using unsecured transmissions, the court was not pleased with the counsel who accessed the poten-tially protected information either. The court issued sanctions, finding that counsel should have asked the court to decide the issue before making any use of the potentially protected information: “The court should demand better, and the ruling here is not intended to merely tolerate the bare minimum ethically compliant behavior, but, instead, to encourage the highest pro-fessional standards from those attorneys who practice before the court.”

Conclusion As these cases illustrate, potential threats to the attor-ney-client privilege may come from within the attorney-client relationship. As defenders of a client’s confi-dences, attorneys should be vigilant in maintaining the secure transmission of client information, whether it is their bills, the client’s claims files, or other information.

“[The insurer’s]

actions were the

cyber equivalent of

leaving its claims

file on a bench in

the public square

and telling its

counsel where it

could find it.”

Page 9 V O L U M E 9 , I S S U E 2

P R I V I L E G E : A T T O R N E Y B I L L S / I N T E R N E T T R A N S M I S S I O N , C O N T ’ D

Alice M. Sherren is a Claim Attorney with Minnesota Lawyers Mutual Insurance Company. Since joining MLM in 2009 Alice directs the defense of LPL claims and speaks on risk management and ethics matters. She may be reached at asher-ren@mlmins.com.

Donald Patrick Eckler is a partner at Pre- tzel & Stouffer, Chartered, in Chicago. Pat defends doctors, lawyers, architects, engi- neers, appraisers, accountants, mortgage brokers, insurance brokers, surveyors and other professionals. He may be reached at deck-ler@pretzel-stouffer.com.

C A S E R E P O R T : D U A L A G E N C Y / F I D U C I A R Y D U T I E S , B Y : G L E N R . O L S O N , E S Q . A N D A R I A . B A R U T H , E S Q .

In late 2016 the California Supreme Court ruled in Horiike v. Coldwell Banker Residential Brokerage Co., 1 Cal.5th 1024 (2016) that a real estate brokerage firm representing the buyer and seller in the same transac-tion has fiduciary responsibilities to both parties, and in doing so created important precedent concerning the handling and sharing of information in a “dual-agency” transaction. The case involves a dispute over the square footage of a mansion in Malibu, California purchased by Hong Kong millionaire Hiroshi Horiike. Chris Cortazzo, the listing agent from Coldwell Banker, gave Horiike a flier indicating the home had 15,000 square feet of living space. A building permit indicated the house had 11,050 square feet of living space while tax records stated the property had less than 9,500 square feet. Horiike, who was represented by another Coldwell Banker agent named Chizuko Namba, signed a disclo-sure acknowledging the broker had no responsibility for verifying square footage and did no further investi-gation to determine the accurate square footage.

In 2009, when preparing to do work on the property, Horiike reviewed the building permit history and dis-covered the property had less than 12,000 square feet of living area. Horiike sued and lost after a jury trial in 2012. However, the Court of Appeal reversed, reasoning that Cortazzo owed a duty to Horiike equiv-alent to the duty owed by Coldwell Banker. Civ. Code section 2079.13(b). Cortazzo breached that duty be-cause he “did not add a handwritten note of advice to hire a qualified specialist to verify the square footage of the home” as he had done with a previous pro-spective buyer. Coldwell Banker appealed to the Cali-fornia Supreme Court. The Supreme Court affirmed, holding that in when a real estate brokerage represents the buyer and seller it owes fiduciary duties to both. In this case Cortazzo should have provided the buyer with all known infor-mation – the handwritten note provided to a prior prospective buyer - even though Cortazzo represent-ed the seller. The Supreme Court also observed that the disclosure

statute (Civil Code § 2079.13(b)) provides that the duties of the broker would be imputed to the broker-age firm. When the disclosure statute was enacted the law provided that a sales person is licensed only to act as an agent for, on behalf of, and in place of, the real estate broker under whom he or she is licensed. Peo-ple v. Asuncion, 152 Cal.App.3d 422, 425, 199 Cal.Rptr. 514 (1984). Brokers, in turn, were required to super-vise the activities of their sales persons and could be disciplined and held liable based upon conduct within the scope of their employment. Civ. Code section 2338; Business & Professions Code section 10177(h). It was undisputed that Coldwell Banker owed a fiduci-ary duty to Horiike including a duty to learn and dis-close all information materially affecting the value or desirability of the residence. That duty extended to information known only to Cortazzo, since brokers are presumed to be aware of the facts known to its sales persons. Although Coldwell Banker argued Horiike should instead be suing Namba for breach of fiduciary duty, the Court disagreed, stating the Civil Code says Coldwell Banker bears responsibility for the associate licensees – both of them – who perform as agents of the agents.

D U A L A G E N C Y / F I D U C I A R Y D U T I E S , C O N T ’ D

“[T]he Supreme

Court noted

’significant

concerns inherent

in dual agency.’”

Page 10 P R O F E S S I O N A L L I A B I L I T Y D E F E N S E Q U A R T E R L Y

PROFESSIONAL LIABILITY DEFENSE QUARTERLY

is published by: Professional Liability Defense Federation 1350 AT&T Tower

901 Marquette Avenue South

Minneapolis, MN 55402 (612) 481-4169

Comment: Horiike serves to emphasize the extensive fiduciary duties owed by brokers to both buyers and sellers in the dual agency situation. As the Supreme Court noted, there are some limitations on what must be disclosed. For instance, the dual agent may not dis-close to the seller that the buyer is willing to pay a price greater than the offering price without the express written consent of the buyer or disclose to the buyer that the seller is willing to sell the property at a price less than the listing price, without the express written consent to the seller. Civ. Code section 2079.21. Facts concerning the physical characteristics of the property, like those at play in Horiike, are not confidential as be-tween buyer and seller and real estate brokers need to be on alert for discrepancies in the MLS listing and mar-keting materials that may provide fodder to breach of fiduciary duty claims by unhappy buyers. Although this case does not change the law permitting dual-agent transactions, the Supreme Court noted “significant con-cerns inherent in dual agency.” The case creates a sig-nificant and substantial responsibility for brokerages that must be taken into account by brokerages provid-ing dual-agency representation.

Glen R. Olson is a partner with Long & Levit LLP in San Francisco. He defends attorneys, accountants, insurance agents, escrow agents, real estate bro-kers, and directors and officers. He may be reached at golson@longlevit.com.

Ari A. Baruth is a senior counsel at Long & Levit LLP in San Francisco. He defends architects, engineers, construction man-agers, owners and other professionals in the construction industry. He may be reached at abaruth@longlevit.com.

Beth Whitney is the Head of Small and Mid-Sized Lawyers Underwriting at Swiss Re Corporate Solutions in Chicago, Illi-nois. During her 15 years at Swiss Re Corporate Solutions she has also held positions as the Head of North America

Lawyers & Agents Products, Lawyers Risk Manager and Client Operations Leader, and other positions in the Lawyers Claims group. Beth is a frequent speaker on the topic of Lawyer's Professional Liability at industry events sponsored by the ABA, Hinshaw, ALFA, ACI and various bar associa-tions. She has also spoken at insurance agents events discussing the important features of an LPL policy. Beth earned her Juris Doctorate at DePaul Universi-ty. Before joining Swiss Re Corporate Solutions, she practiced insurance defense at a large Chicago law firm where she successfully tried numerous jury trials to verdict. Beth also holds a Bachelor's degree in Civil Engineering from Virginia Tech. Prior to attending law

school, she worked for Raytheon Engineers and Con-structors in Philadelphia, Pennsylvania in their nuclear and environmental groups.

F E A T U R E D I N D U S T R Y M E M B E R : E L I Z A B E T H W H I T N E Y , S V P S W I S S R E C O R P O R A T E S O L U T I O N S

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Have you uploaded your bio data and photo yet?

Joseph F. Nicholas, Jr. is President and Managing Partner of Mazanec Raskin & Ryder Co., L.P.A. He offices in its Cleve-land, Ohio location. Joe focuses his prac-tice on the defense of professional liability matters. He has defended professionals

including lawyers, accountants, doctors, dentists, ar-chitects, and insurance agents and brokers throughout his career. In addition to his professional liability practice, Joe has significant experience handling commercial truck-ing (long haul and short haul) and commercial coach carrier matters. His practice also includes litigation of first and third party claims with regard to personal lines, various general liability matters and construction defects. Before joining the firm, he served as a claims representative at Progressive Casualty Insurance Com-pany for two years adjusting private passenger auto-mobile claims. Joe also worked for Transport Insur-ance Company in Dallas, Texas, as a Claims Branch Manager and then as a Claims Attorney where he managed commercial trucking claims. Joe has received the AV Preeminent rating, and is licensed to practice in the state and federal courts of Ohio. He received his B.A. degree from the University of Dayton and law degree from Cleveland State Uni-versity, Cleveland-Marshall College of Law. Joe is also a member of the Trucking Industry Defense Associa-tion.

I N S U R A N C E A & B C O M M I T T E E C H A I R

J O S E P H F . N I C H O L A S , J R .

“Please note the

accompanying

biographies of four

of PLDF’s

committee leaders.

This will be a

regular feature in

the PLDQ.”

Page 11 V O L U M E 9 , I S S U E 2

Gary S. Kessler is a shareholder with Kessler Collins P.C., in Dallas, Texas. He is Board Certified in Civil Trial Practice and has been named Texas "Super Lawyer" and included in the Best Lawyers in America for over twenty years. He has tried cases involving

insurance, securities, intellectual property and corpo-rate matters and has argued before the Texas Supreme Court and multiple Federal Circuit courts. His broad experiences through commercial litigation helped set the standard for excellent client service at Kessler Col-lins. Gary has national and international experience. He has represented the People's Republic of China in claims arising under the Foreign Sovereign Immunities Act, as well major financial institutions, insurers (both domestic and foreign) and international corporations. He is a frequent lecturer for industry groups and is an instructor for the National Institute of Trial Advocacy. Gary is a member of the Inns of Court, an organization whose principal mission is to teach young attorneys the value of ethical advocacy in a litigation practice. He is also a member of the Securities Industry and Financial Markets Association (Compliance and Legal Society). Gary is a graduate of the University of Notre Dame (B.B.A.) and Southern Methodist University Dedman School of Law (J.D.). Among other specialties Gary defends financial professionals in securities litigation and regulatory matters.

I N S U R A N C E A & B C O M M I T T E E C O - V I C E C H A I R

B E N A . A N D R E W S

F I N A N C I A L P R O F E S S I O N A L C O M M I T T E E C H A I R

G A R Y S . K E S S L E R

I N S U R A N C E A & B C O M M I T T E E C O - V I C E C H A I R

P E T E R J . B I G I N G

Ben A. Andrews is a shareholder with Pen-nington P.A. in its Tallahassee, Florida office. Licensed in both Florida and Geor-gia, Ben defends healthcare providers, insurance agents and brokers, and other

professionals facing E&O claims. He also litigates con-struction defect, insurance coverage and products liability cases. Ben has received the AV Preeminent rating, and is board certified as a specialist in civil trial law by the Florida Bar. Ben’s undergraduate degree was in Finance from the University of Florida, and from there he received his Juris Doctorate degree from Florida State University College of Law. After law school Ben clerked for a United States District Judge in the Northern District of Florida, before entering the private practice. In addi-tion to his membership in Professional Liability De-fense Federation, Ben is a member of the Florida De-fense Lawyers Association, Tallahassee Bar Association and the Defense Research Institute.

Peter J. Biging is a partner with Goldberg Segalla’s New York City office, and is Vice Chair of the firm’s Professional Liability Practice Group. His practice focuses on the defense of a variety of professionals

against errors and omissions claims, labor and em-ployment practices litigation, commercial litigation, municipal liability litigation, and professional liability coverage work. His E&O work includes defending in-surance agents and brokers, securities brokers, law-yers, and miscellaneous professionals. Peter is a graduate of Queens College of the City University of New York (B.A. cum laude) and Fordham University School of Law (J.D.). He is AV-Preeminent rated, and has received New York Metro Super Law-yers™ honors most recently from 2012 to 2016. Peter is a prolific author and presenter on professional lia-bility, E&O, EPL, and professional liability insurance coverage matters. He is a 30-year litigator in the state and federal courts of New York.

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