March 30, 2016

Claims Specialist Peggy Kleinschmit Discusses a Recent Claim

Most attorneys, at least occasionally, are approached by friends and acquaintances for “free” and/or “quick” legal advice. Often, however, giving such advice is anything but free or quick for the actual attorney. In our claim of interest, one such attorney was approached by a long-time friend and client with a request to form a corporation. The attorney helped form this corporation (ABC), the purpose of which was to purchase certain interests in default notes in foreclosure. Further, upon learning of the purpose of ABC Corporation, the attorney introduced his friend and client to the owner of XYZ Corporation, believing that the two parties could mutually benefit from one another.
Thereafter, both parties approached the attorney with a pre-drafted proposed Asset Purchase Agreement (APA) for his review. For a small fee, the attorney reviewed the APA and the transaction went forward. As part of the APA, a third-party became a lender to XYZ Corporation and that lender reviewed the APA prior to providing the loan. When the owner of XYZ Corporation stopped communicating with parties and never made any payments to the lender, the lender sued the attorney. What the attorney did not know at the time of the introduction, was that the owner of XYZ Corporation had a fraudulent history when it came to these types of transactions.

Both the lender and ABC brought claims against the attorney. ABC asserted conflict of interest allegations as the attorney represented both ABC and XYZ. The lender also asserted allegations of breach of fiduciary duty and asserted that the attorney “recommended” XYZ and “approved” the APA which turned out to be inartfully drafted and detrimental to both the lender and ABC. The attorney was forced to defend this lawsuit, all stemming from gratuitously introducing two parties to one other and reviewing an APA as a favor to a friend for a negligible sum.

LESSON: Attorneys must always proceed with caution when giving any legal advice, regardless of whether the advice is to a friend and regardless of whether it involves an “agreed upon plan.” The adage “in for a penny, in for a pound” is never more appropriately fitting than in these “limited” engagements. Here, a better practice would have been for this lawyer to draft a specific engagement letter for one party, use appropriate conflict waivers, leave the matchmaking to the experts, and/or adequately and substantively actually review the APA before signing off on the document.

This article has been provided and reprinted with the permission of Swiss Re. The material is for general information purposes only and is not to be relied upon or used for any particular purpose. Capital Professional Insurance Managers, Inc. and Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice.