Attorney-Client Relationship

A general release: the end of a litigation or relinquishment of a right? Every attorney and litigant often breathes a sigh of relief when a litigation comes to a conclusion. But is that always the case? Not when the release covers more than may have been intended.

In a recent decision by Commercial Division Justice Andrea Masley, the Court held that a general form release, which settled a dispute involving one piece of artwork within an allegedly stolen collection of several other pieces of artwork, barred Plaintiff from bringing a subsequent action to recover any other pieces within the collection.

In Frenk v. Solomon, Paul Westheim (“Westheim”), a famous Jewish art critic who specialized in German expressionist art, fled Nazi Germany in 1933 and entrusted his art collection with an art dealer in Berlin, Ms. Weidler (“Weidler”). Westheim later married Ms. Westheim-Frenk. After World War II, Weidler claimed that the art collection was destroyed in the war, but Plaintiff (Westheim-Frenk’s daughter) alleged that Weidler stole Westheim’s art collection and sold it in separate pieces.

In 1973, late Westheim’s wife (“Westheim-Frenk”) commenced an action against Weidler, because Weidler sold a paining from Westheim’s art collection (the “First Action”). That matter settled before discovery and was “discontinued ‘with prejudice.’” Westheim-Frenk, represented by New York counsel, executed a blanket release (the “Release”), discharging Weidler, her “heirs, executors, administrators, successors and assigns” from all claims that Westheim-Frenk “ever had, now have, or which [Ms. Wetheim-Frenk] or [her] heirs, executors, or administrators, hereafter can, shall or may have.” In consideration for the Release, Plaintiff’s mother received $7,500.00, which is equivalent to about $40,000.00 today.

In or about January of 2013, Plaintiff initiated the instant action against the executors of Weidler’s estate and her heirs, seeking to recover the valuable artwork from Westheim’s art collection, as well as damages and a judgment declaring that she was entitled to the artwork.

Following discovery, the defendants moved for summary judgment alleging that the Release and stipulation discontinuing the First Action barred Plaintiff’s claim under the doctrine of res judicata; and nothing in the broad Release was “intended to be narrowly applied to any one painting, but rather, to the entire collection.” The terms of the broad Release bar Plaintiff from bringing an action against Weidler, or her “heirs, executors, administrators, successors and assigns.” Because the defendants demonstrated the prima facie defense of release, the burden shifted to Plaintiff to evidence material issues of fact to defeat summary judgement. See Aoki v. Aoki.

In seeking to limit the broad Release, Plaintiff argues that the subject of the First Action was the artwork, entitled Portrait of Dr. Robert Freund, and, thus, that the Release applied only to that piece. Alternatively, Plaintiff argues that Westheim-Frenk was fraudulently induced by Weidler to execute the Release and, thus, the defendants should be estopped from using the Release. However, the defendants objected to Plaintiff’s use of parol evidence. Justice Masley held that because the Release contained a standardized form, the court “must be flexible in the application of the parol evidence rule.”

Plaintiff also attempted to identify a transaction between Ms. Weidler and Westheim-Frenk in support of her claim that the Release only pertained to the single painting. Plaintiff argued that in 1976, when Weidler attempted to sell another piece from Westheim’s collection, Weidler entered into an agreement to split the sale amount of the artwork—a deal which would clearly not make sense if the Release pertained to all the artwork in Westheim’s collection. On the other hand, the defendants identify a letter from Westheim-Frenk stating that she understood that nothing could be done regarding all future artwork that may turn up. Next, Plaintiff argued that it is inconceivable that the low settlement amount from the First Action ($7,500.00) would have covered all the other valuable artwork. Justice Masley, however, rejected these conclusory arguments, holding that Plaintiff’s “evidence of conduct and intent is inconclusive” in light of the clear and unambiguous language of the Release.

In that regard, the First Department has held that “to hold a release forever hostage to legal afterthoughts basically vitiates the nature of the release.” See Aoki v. Aoki. Although Plaintiff argued that the Release should be set aside because Weidler used fraud to obtain same, Justice Masley held that in order to set aside the Release on the ground of fraud, Plaintiff had to establish that the fraud was separate from the subject of the Release, in addition to all the basic elements of fraud. Plaintiff, however, failed to identify any of Weidler’s misrepresentations at the time the Release was executed. In fact, there was no support for a claim that Westheim-Frenk was defrauded when she signed the release. Interestingly, Justice Masley held that plaintiff’s mother “failed to condition the Release on the truth of the information . . . i.e. that there were no other artworks from Westheim’s collection.” The Court finally also determined that Weidler did not waive the Release and Plaintiff did not present any evidence demonstrating that Weidler “intentionally relinquish[ed] a known right.”

Accordingly, because the Release was clear and unambiguous, the Court granted the defendants’ motion for summary judgment and dismissed the action.

Takeaway: Be especially precautious when drafting a release for a client, making sure not to waive any of their rights. Here, Justice Masley recognized that Plaintiff’s mother was represented by counsel when entering into the general release. This could potentially open you to a malpractice lawsuit.

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In a legal malpractice claim brought by Plaintiff, an Australian investment bank against Morrison & Foester, claiming that the law firm did not conduct due diligence in uncovering material misrepresentations pertaining to Plaintiff’s underwriting of a public stock offering of Puda Coal, Inc., Justice Scarpulla, in the New York County Supreme Court (Index No.: 650988/15) dismissed the suit. Notably, the Supreme Court held that the Plaintiff in Macquarie Capital (USA) Inc. v. Morrison & Foerster LLP was in possession of the information at issue as it had an investigative report, prepared by a private international investigation firm that gave Plaintiff notice of the material misrepresentations. The report produced by the private firm disclosed information regarding the public offering, which contradicted public representations and reports. Upon receipt of the report, Plaintiff forwarded the report to Defendant, neither of which picked up on the misrepresentations in the report that Puda did not own a 90% interest in Shanxi Coal. Instead, the law firm issued an opinion confirming its due diligence and advising Plaintiff that nothing came to its attention that would lead to the conclusion that the offering documents contain false or misleading information. However, the Supreme Court, nevertheless, held that Plaintiff could not claim that the law firm’s representations caused damage to Plaintiff.

However, the Appellate Division, First Department unanimously reversed Justice Scarpulla’s decision and determined that Plaintiff sufficiently demonstrated the “but for” causation element necessary for its legal malpractice claim in defeating Defendant’s pre-answer motion to dismiss. Specifically, the Court held that Plaintiff demonstrated that but for the law firm’s negligence, Plaintiff would have abstained from its involvement in the public offering, thus preventing Plaintiff from acquiring fees, expenses, and other damages.

Further, the Court concluded that the law firm’s argument that Plaintiff possessed the information in an investigative report is unavailing because the information contained in the report cannot be described as explicitly putting Plaintiff on notice and not requiring counsel’s interpretation of the information. Contrarily, in Ableco Fin. LLC v. Hilson, 109 A.D.3d 438 (1st Dep’t 2013), lv denied 22 N.Y.3d 864 (2014) this Court granted defendant’s motion for summary judgment dismissing the legal malpractice claim on the basis that plaintiff indisputably possessed certain information prior to the closing and was aware that it would not receive first priority lien on the inventory and, as such, counsel’s legal interpretation was not required.

 Takeaway: In Macquarie Capital (USA) Inc, the law firm was specifically hired to conduct due diligence and investigate the company’s offering. Ultimately, the Court held that the law firm should not be able to shift legal responsibility it was hired to perform to the client. A law firm cannot release itself from liability by arguing that because its client possessed certain information, that the law firm need not conduct the due diligence it was retained to do in the first instance.

Notwithstanding general public opinion of attorney ethics, most people (including attorneys) believe that an attorney cannot dump a client in the middle of litigation to represent the other side. However, attorneys in the First Department may be surprised to learn that, in certain circumstances, a representation adverse to their former clients, even in litigation arising from substantially similar facts and issues, is sometimes allowed. Justice Shirley W. Kornreich of the New York County Supreme Court recently discussed these circumstances in two related decisions (found here and here) over the past year (Omnivere, LLC v. Friedman, No. 154544/2016).

First, some brief factual background. In 2013, Marcie Balint sold her legal staffing company, B3, to various individuals and companies referred to in subsequent litigation as “the Friedman Parties,” who then sold B3 to Omnivere, LLC. In 2014, Balint, represented by attorney Robert Bernstein of Eaton & Van Winkle, sued Omnivere, LLC and the Friedman Parties to enforce a consulting agreement. In response, the Friedman Parties asserted a third-party claim against the former CEO of B3, Gadi Rosenfeld, for allegedly approving a version of Balint’s consulting agreement that was different from the version that had been authorized.

On October 20, 2014, Rosenfeld met with Bernstein and provided documents and information to assist Balint in her actions against Omnivere, LLC and the Friedman Parties. In exchange, Bernstein agreed to represent Rosenfeld at a reduced hourly rate in the Friedman Parties action only (in May 2015, Rosenfeld, represented by separate counsel, commenced an action against Omnivere, represented at the time by Perkins Coie, alleging nonpayment of consulting fees).

At some point during the following year (when, exactly, was the subject of debate between the parties), Bernstein claimed to have become aware that Rosenfeld assisted the Friedman Parties in lying to Omnivere about the financial condition of B3 and other companies that Omnivere purchased from the Friedman Parties. In September of 2015, Balint settled with Omnivere, and together they joined forces with Bernstein as counsel in the remaining litigations with the Friedman Parties and Rosenfeld. Consequently, in November of 2015 Bernstein withdrew as counsel to Rosenfeld and replaced Perkins Coie as counsel of record to Omnivere.

On May 27, 2016, Omnivere commenced a new action against the Friedman Parties asserting causes of action for fraud, breaches of the asset purchase agreement governing the sale of B3, and conversion. Although Rosenfeld was not a named defendant, Omnivere’s complaint alleged Rosenfeld’s participation in the fraudulent scheme. If Omnivere prevails, Rosenfeld will lose shares of Omnivere equity.

Based on Bernstein’s prior representation of Rosenfeld, the Friedman Parties and Rosenfeld moved to disqualify Bernstein. Justice Kornreich denied the motion.

The Friedman Parties’ motion was denied because they had never been former clients of Bernstein and therefore lacked standing. The court held that it lacked authority to grant disqualification motions to non-clients, especially where such motions were intended as a litigation tactic, because the power to sanction attorneys for ethical violations is “principally vested in the Appellate Divisions.”

As for Rosenfeld’s motion, the court found that there was insufficient proof that Rosenfeld had actually provided information to Bernstein during the prior representation that would be prejudicial to Rosenfeld. Citing the First Department’s decision in Mayers v Stone Castle Partners, LLC, 126 AD3d 1, 6 (1st Dept 2015), the court held that rather than simply resolving all doubts in favor of disqualification to avoid the appearance of impropriety, as was required under the old rules, disqualification should be denied if “the conveyed information did not have the potential to be significantly harmful to the former client in the matter from which he seeks to disqualify counsel.” This standard required an evidentiary hearing to determine what information was actually conveyed from Rosenfeld to Bernstein and whether it had the potential to be significantly harmful to Rosenfeld. The Special Referree conducted a two-day hearing and issued a report finding that no “confidences that were harmful to Rosenfeld” had been disclosed to Bernstein.

Justice Kornreich appeared to have had misgivings about the proper application of the First Department’s decision in Mayers, noting that other Appellate Division Departments (as well as the First Department, occasionally) still apply the rule that doubts must be resolved in favor of disqualification. Justice Kornreich therefore explicitly appealed to the First Department for additional “guidance” on the continued applicability of this rule, as well as whether the requirement that the conveyed information have the potential to be “significantly harmful” is consistent with the Court of Appeal’s apparent holding to the contrary in Tekni-Plex, Inc. v Meyner & Landis, 89 NY2d 123, 131 (1996) (“By mandating disqualification irrespective of any actual detriment—that is, ‘even when there may not, in fact, be any conflict of interest’—the rule also avoids any suggestion of impropriety on the part of the attorney.”). Indeed, other recent decisions by the First Department involving legal professionals “switching sides” indicates continued adherence to the rule that “whether there is a conflict of interest must be resolved in favor of disqualification.” See USA Recycling, Inc. v Baldwin Endico Realty Assocs., Inc., 147 AD3d 697 (1st Dept 2017).

Until further clarification is received from the First Department, attorneys for now may evaluate representations adverse to former clients based on whether there would be actual prejudice to the former client, without regard to the appearance of impropriety or unfairness to other (non-client) parties.

So you were just retained on what could become a high-profile case.  The stakes are high, and it’s unclear how this will play in the media.  The issue may arise based on the parties to the case, the nature of the claims, or both.  Either way, as part of your litigation strategy, you decide that the assistance and guidance of a public relations or media crisis management firm is wise and necessary to render effective counsel.  You prepare your standard Kovel letter, and retain the PR consultant to assist.  As part of that engagement, you advise both consultant and client that it is essential that  you — as counsel — be copied on all communications so as to ensure the protection of privileged communications.  Is this enough protection to guard against the PR consultant from being compelled to disclose communications?  Maybe not.

In Gottwald v. Sebert, a case involving singer-songwriter and recording artist Kesha, Justice Shirley Kornreich ordered non-party Sunshine Sachs (the PR consultant) to produce certain documents identified on its privilege log.  The court held that the communications with the PR agency were not necessary for the rendering of legal advice.  Simply copying an attorney on the communication is not enough to invoke the attorney client privilege.  In footnote 7, the court raised an issue with respect to draft complaints logged and whether they were protected by the work product doctrine, which the court noted “is less likely to result in a waiver than with the attorney-client privilege.”  Following the court’s decision, counsel for defendant submitted a letter addressing the work product issue and why it prevented disclosure of certain materials.  The parties have been ordered to address this issue at an upcoming court conference in December.

Hiring a PR consultant to assist counsel navigate the media minefield, although wise, can be risky.  The court in Gottwald  analyzed the growing body of case law in this area, particularly in the federal courts within the Second Circuit, which seem to lean toward not finding “necessity” for the PR consultant’s involvement, but they are more apt consider application of the attorney work product doctrine.  Of course, unlike privilege, work product may, under certain circumstances be invaded, see Fed. R. Civ. P. 26(b)(3)(A).

There are several key decisions from the federal courts on this issue, namely, In re Chevron (SDNY; Kaplan, J.), Calvin Klein Trademark Trust v. Wachner (SDNY; Rakoff, J.), and Bloomingburg Jewish Educ. Ctr. v. Vill. of Bloomingburg (SDNY; Forrest, J.), that are a “must read” before engaging a PR consultant.  In New York, there is a scarcity of decisions, but the First Department in 2014 ruled in Pecile v. Titan Cap. Group, LLC that communications with a PR consultant do not per se waive the privilege.   The common thread in all of these authorities is to determine whether the particular communications with the PR consultant are necessary in order for counsel to render informed legal advice to the client.

 

In an action brought against a title company for losses in connection with a property sale, Justice Elizabeth H. Emerson, in JBGR LLC v. Chicago Title Ins. Co., denied the title insurer’s motion to amend its answer to add defenses, but also denied plaintiffs’ motion for a protective order concerning a withheld memorandum prepared by plaintiffs’ “expediter”.

This is the latest suit involving a 286-acre parcel of property for the development of homes surrounding a golf course on Long Island.  In an earlier suit, the court awarded $2.97 million in damages against the plaintiffs in the current action based upon a promissory note default.  In turn, plaintiffs sued Chicago Title, title insurer of the sale.  In short, plaintiffs allege they were unaware of a 1997 declaration that restricted development to 140 homes, of which the title insurer failed to advise.  Plaintiffs intended to build another 55 homes on the property, but couldn’t.

After years of discovery and motion practice, the case was certified trial ready, and note of issue filed in December 2016.  Post note of issue motions were then filed.  Defendant filed a motion to amend its answer to withdraw certain defenses, modify others and add six more.  Plaintiffs cross-moved for a protective order, seeking to prevent disclosure of a memorandum produced to defendant, based upon attorney client privilege and work product doctrines.

As to the proposed amendments, the court concluded that the delay, coupled with prejudice, warranted denial.  In considering the prejudice, the court applied the same elements used in the laches context, and noted that once certified as “trial ready”, the court’s discretion “should be discrete, circumspect, prudent, and cautious”.  In this case, the court focused particularly on how long defendant was aware of the facts, which had been since June 2015.

An even more significant ruling, however, was the denial of the motion for a protective order.  The memorandum in question was a memo generated by Joseph Dempsey, an attorney, summarizing a meeting held in 2010, at which the municipal applications for the development were discussed.  Defendant obtained the document through a third-party subpoena served upon one of the participants to the meeting, Victor Prusinowski.  Mr. Prusinowski described in his deposition that he was an expediter or “land-use consultant”.  The court held that the memo was not protected from disclosure on three grounds.  First, Prusinowski’s advice, as a non-lawyer service provider, while “important” to the legal advice given to the clients, was not “given to facilitate such legal advice”, and therefore the agency principle did not apply here and his presence waived any privilege.  Second, even if it were privileged, the court concluded that there was a waiver, since “plaintiffs’ took no concrete steps to obtain a ruling” or seek a claw-back for nearly two years.   Finally, the court concluded that the memo prepared by Dempsey was not considered “work product”, since he wasn’t acting as counsel when prepared.  The memo did not contain “language uniquely reflecting a lawyer’s learning an [sic] professional skills, including legal research, analysis, conclusions, legal theory or strategy”.

And all this means what?  As to amendments, consider amending or seeking leave soon after the new facts arise.  Although there may be strategy in waiting to amend, the courts will focus on how long you knew, and whether you had a reasonable excuse for the delay.  As to privilege, when working with non-lawyer service providers, courts will carefully scrutinize their retention, scope of services and their “necessity” for the rendering or facilitation of legal advice.  Consider whether counsel — and not the client — should retain the provider, and whether a Kovel agreement is needed.

 

CPLR 3211(a)(1) provides for the dismissal of a claim so long as the defense is based upon “documentary evidence”.  We’ve seen this used successfully in mortgage note cases, (e.g., Bronxville Knolls, Inc. v. Webster Town Center Partnership, [1st Dep’t 1995]), as well as lease litigation (e.g., 150 Broadway N.Y. Assocs., L.P. v. Bodner, [1st Dep’t 2004]), but how about in a legal malpractice case?  Does a termination letter from lawyer to client operate to successfully cut off malpractice claims as a matter of law?

shutterstock_420696979This defense was argued in Prott v. Lewin & Baglio, LLP, where the Second Department upheld the denial of a motion to dismiss based upon documentary evidence.  There, the plaintiff claimed that the defendant law firm was retained, but failed to timely commence an action later held barred by the statute of limitations.  The defendant law firm raised as a defense, that it had terminated the relationship earlier.  The documentary evidence proffered was the law firm’s termination letter in September 2012 — prior to the expiration of the applicable statute of limitations set to expire December 2012.  The trial court and Appellate Division held, however, that the letter failed to “utterly refute” plaintiff’s claim, which is a necessary finding to mount a successful 3211(a)(1) defense.

When terminating or declining a client relationship, be mindful that some courts have held that where the expiration of the limitations period is clear, the date should have been specified to the client in the letter, see, e.g., Burke v. Landau, Miller & Moran, where the First Department held that a question of fact existed when the non-engagement letter did not specify the date in the letter.