Broad Language in Retainer Agreement Allows Legal Malpractice Claim to Proceed Against Law Firm

The United States District Court, Southern District of New York recently held that a legal malpractice action could withstand a law firm’s motion to dismiss when the law firm’s retainer agreement was broadly written and did not clearly define the scope of the firm’s representation.

In Mitchell Barack v. Seward & Kissel, LLP, (Civil Action No. 16-cv-9664), the plaintiff sued the defendant law firm related to its representation of the plaintiff and his energy company, ESCO, in the sale of ESCO to another company, ForceField.  Once a letter of intent was prepared, which included a provision that each party’s attorneys could conduct due diligence of the other party, the plaintiff retained the defendant.  The defendant’s engagement letter described the scope of its representation broadly, stating that the firm, as “lead transaction counsel,” would represent the plaintiff and ESCO in connection with the proposed sale of ESCO’s common stock to ForceField and related documents, transactions and agreements.

The defendant did not conduct any due diligence of ForceField.  Shortly before the closing, the defendant advised the plaintiff to proceed with the sale, despite ForceField’s lack of sufficient cash to comply with the pricing terms set forth in the letter of intent.  Approximately six months after the closing, one of ForceField’s Board Members was charged with securities fraud and conspiracy, a securities fraud class-action lawsuit was filed against the company and the SEC suspended the public trading of ForceField’s stock shares.  These events ultimately resulted in ForceField delisting itself from public trading, which rendered the restricted stock and deferred payment note that plaintiff received at the closing worthless.  Plaintiff repurchased ESCO at a “fire sale” price of $900,000 and re-sold it to another buyer for $1 million, which was significantly less than the $7.5 million compensation that was negotiated with ForceField.

The plaintiff sued the defendant for legal malpractice in negligently advising him on the sale of ESCO, alleging that the defendant would have discovered publicly available “red flags” regarding ForceField’s fraud, financial misconduct and manipulation of its stock price if it had conducted due diligence.  The defendant moved to dismiss the complaint, which was denied.  The District Court rejected the defendant’s argument that the scope of its representation did not include conducting due diligence on ForceField.  The court referred to the “facially broad” language in the retainer agreement, which failed to define “lead transaction counsel” or provide additional insight as to the scope of the defendant’s responsibilities.  Importantly, the retainer agreement did not explicitly exclude due diligence responsibilities from the scope of the defendant’s retention.  The court therefore concluded that the defendant may have had a duty to conduct due diligence, or, at the least, to discuss the issue with plaintiff.  The court also rejected the defendant’s causation arguments and the defendant’s assertion that the plaintiff’s alleged damages were speculative.

The Barack decision highlights the importance of carefully defining the scope of a lawyer’s representation in a retainer agreement.  The language in retainer agreements should specifically delineate the services that the lawyer will be providing to the client and expressly identify any services that are not contemplated by the representation.  Otherwise, broad language in a retainer agreement could be interpreted to encompass legal services that may not have been contemplated by the lawyer, creating exposure to legal malpractice claims.

For more information about the court’s decision, please contact Jonathan Bruno or Deborah Isaacson.