May 2nd, 2014

FKB’s Andrew R. Jones and Bain R. Loucks win motion for summary judgment dismissing a $5 million legal malpractice claim.

FKB’s Andrew R. Jones and Bain R. Loucks won motion for summary judgment to dismiss a $5 million legal malpractice claim on 5/2/14.

The plaintiff, a sophisticated real estate speculator, retained FKB’s client, the defendant law firm (“Firm”), in connection with plaintiff’s investment in a resort hotel located in upstate New York.  Unfortunately, plaintiff invested at the height of the real estate market, and when the market crashed, the real estate venture failed, and plaintiff lost its investment.  Plaintiff sued the law firm for allegedly failing to properly protect its investment.

Plaintiff alleged two claims for malpractice.  First, plaintiff alleged that the Firm failed to procure a personal guaranty of plaintiff’s investment from a wealthy co-investor in the venture.  Second, plaintiff alleged that the Firm failed to advise that a Lease and Management Agreement executed by the plaintiff served to subordinate plaintiff’s investment to the senior lenders in the transaction – lenders that had first and second mortgage positions.  In other words, plaintiff could not cash-out its investment until the lenders were repaid.

As to the first malpractice claim, FKB argued that the alleged failure to obtain the personal guaranty is of no consequence, because under the transactional documentation, plaintiff had no right to recover under that guaranty (even assuming, arguendo, that the Firm had failed to obtain it).  As is typical in commercial real estate finance transactions, the senior mortgage lenders were entitled to be paid in full before plaintiff could be repaid its investment in the property.  Because the real estate venture failed, the senior lenders were never paid; therefore, plaintiff was not entitled to be paid.  Thus, even if the Firm had obtained a personal guaranty from the wealthy co-investor, it would have been of no value to plaintiff.  Moreover, FKB argued that the documentary evidence established that plaintiff was informed, prior to the closing, that the wealthy co-investor had not provided the guaranty.

As to the second malpractice claim, FKB argued that the Lease and Management Agreement was consistent with the other transactional documents plaintiff executed, all of which served to subordinate plaintiff’s investment to the senior lenders’ loans.  Plaintiff did not allege any error by the Firm in drafting or reviewing the other documents.  Instead, plaintiff claimed that the Firm failed to advise that the senior lenders would have priority of recovery over the plaintiff.

FKB argued that contemporaneous documentary evidence conclusively established that plaintiff was, in fact, informed that its investment was subordinate to the senior lenders.  Additionally, FKB pointed out that plaintiff executed three separate transactional documents in which plaintiff expressly acknowledged the senior lenders’ priority rights.  The documentary evidence established that the transactional documents were, in fact, sent to plaintiff prior to the transaction for his review and approval.  FKB argued that plaintiff lost its investment because the senior lenders lost their investments.  In other words, the real estate venture failed and the senior lenders were not paid; therefore, plaintiff was never entitled to be repaid.

Justice O. Peter Sherwood agreed with FKB’s arguments and granted summary judgment dismissing plaintiff’s Complaint.  In a well reasoned opinion, Justice Sherwood held that the record established that plaintiff was advised that its investment was subordinate and of the unsigned guaranty prior to the closing.  While plaintiff claimed that he failed to review the documents that were provided to him, Justice Sherwood noted that it is “inconceivable that plaintiff’s principal was unaware of” that of which defendant allegedly failed to advise him.”  Delphi Easter Partners Ltd. Partnership v. Prickett, Jones, Elliott, Kristo & Schnee, 224 A.D.2d 349 (1st Dept. 1996).  Justice Sherwood further noted that plaintiff “proceeded to the closing armed with knowledge that the guaranty had not been signed.”

While plaintiff attempted to manufacture a question of fact by claiming that the Firm advised him that it had the executed personal guaranty from the wealthy co-investor, FKB was able to rely upon the Firm’s contemporaneous documentary evidence to establish that plaintiff was fully advised of the circumstances surrounding the transaction.  In particular, FKB was able to use the Firm’s documentation to provide Justice Sherwood with a detailed timeline demonstrating that the Firm did, in fact, advise plaintiff that his investment was subordinate.  Indeed, the documentary evidence established that plaintiff had attempted to modify the subordination language prior to the closing.

This was a great decision for the Firm and for the legal practitioner in general.  The decision establishes that where the practitioner properly documents the advice to her client, the practitioner should be able to rely upon the contemporaneous evidence to defend any claim that may arise from the alleged advice, even where the plaintiff attempts to create a question of fact as to verbal communications that contradict the documentary evidence.

If you have any questions or would like to discuss the decision in general, feel free to contact Andrew R. Jones or Bain R. Loucks.