Dec 1st, 2015

FKB’s A. Michael Furman, Andrew R. Jones and Bain R. Loucks win an appeal in the Appellate Division, First Department and obtain dismissal of a Legal Malpractice case arising out of an underlying Commercial Real Estate Transaction

The action arose from allegations that FKB’s client (the “Law Firm”) negligently represented the Plaintiff in connection with a $1,050,000 investment in a failed real estate investment in a hotel resort in upstate New York.  Hon. O. Peter Sherwood, J.S.C. of New York County’s Commercial Division, granted FKB’s motion for summary judgment, and Plaintiff appealed to the Appellate Division, First Department.
Plaintiff alleged that the Law Firm failed to advise the Plaintiff that a Lease it signed in connection with the transaction contained a “Subordination Clause,” which barred the Plaintiff from being repaid its investment until senior mortgage lenders in the transaction had been paid in full.  The Plaintiff also alleged that the Law Firm failed to obtain a personal guaranty from a wealthy co-investor in the transaction.

Justice Sherwood rejected Plaintiff’s claims, finding that the Law Firm forwarded the Subordination Clause to the Plaintiff, discussed it with Plaintiff, and the Plaintiff never objected to it.  Moreover, documentary evidence established that the Plaintiff tried to negotiate the terms of the Subordination Clause, but the senior lenders would not close the transaction without the Subordination Clause in place.

FKB argued that even if the Law Firm had not advised the Plaintiff about the Subordination Clause, the Plaintiff was not harmed by that alleged failure because the Subordination Clause was consistent with the other mortgage documents that the Plaintiff executed in connection with the transaction.  FKB demonstrated that the mortgage documents unequivocally subordinated any rights that the Plaintiff had to receive a return of its investment to the senior mortgage lenders’ right to be repaid — just as the Subordination Clause did. Thus, FKB argued that any alleged failure of the Law Firm to advise Plaintiff of the Subordination Clause was not the proximate cause of any alleged damages, as the Plaintiff’s investment was subordinate even without including the Subordination Clause.

FKB also successfully argued that the Plaintiff was aware that the firm had not obtained the subject personal guaranty at the time Plaintiff authorized the closing.  FKB argued that even if the Plaintiff was not aware, the personal guaranty was of no value, because the Plaintiff’s right to recovery under any such guaranty was unconditionally assigned to the senior mortgage lenders.

The Appellate Division, First Department unanimously affirmed Justice Sherwood’s decision, holding that Plaintiff failed to establish that the Law Firm “failed to exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession [or] meet the exacting standard that but for the attorney’s negligence the outcome of the matter would have been substantially different.”  The Court held that the documentary evidence refuted Plaintiff’s claim that the Law Firm failed to advise him of the existence and consequence of a subordination provision added to the lease at issue.  The Court noted that the Law Firm’s alleged failure to obtain a personal guaranty did not cause Plaintiff any damages, as the documentary evidence conclusively established that Plaintiff assigned its rights to any guaranty to the lenders on the subject transaction.  The decision is reported at 2015 N.Y. App. Div. LEXIS 8196, 2015 NY Slip Op 08090.

If you have any questions about this decision, or the defense of attorneys in general, please contact A. Michael Furman, Andrew R. Jones or Bain R. Loucks.