Here is a case, reported by Hinshaw in which a firm was required not only to disgorge fees based upon its malpractice, but had to pay the client’s legal fees generated in the dispute.
"In re SRC Holding Corp., f/k/a Miller & Schroeder, Inc., Debtor – Bremer Business Finance Corporation v. Dorsey & Whitney, LLP, Memorandum Opinion and Order, 2007 WL 1464385 (D. Minn.)
Risk Management Issue: What should a law fi rm do when it realizes it has developed a confl ict of interest with its client, or arguably has made an error that could harm the client?
The Case: Dorsey & Whitney was engaged by Miller & Schroeder, an investment banking fi rm, to close a loan transaction to President, a management company, which had contracted with the St. Regis Mohawk Tribe to build and operate casinos. Miller & Schroeder placed the loan with several different investors, including Bremer Business Finance Corporation. The loan package required approval of the National Indian Gaming Commission (“NIGC”) in order to be enforceable against the tribe. Dorsey submitted the loan to the NIGC for approval, but the approval was not obtained before the fi nancing package closed, and the NIGC never gave its consent. When the casino project failed, President became insolvent and the tribe refused to repay the loans.
Bremer fi led suit against Dorsey & Whitney and, as reported in our December 2006 issue, a bankruptcy judge denied the law fi rm’s motion to dismiss the malpractice claim. The law fi rm claimed it only represented Miller & Schroeder, which brokered the loan, and not the individual banks who participated in it; Bremer contended it was a client with standing to sue for malpractice and the bankruptcy judge agreed. Recent Developments: Dorsey’s appeal from the bankruptcy judge’s Recommendations and Order was decided on April 7, 2007, by U.S. District Court Judge Donovan Frank. Judge Frank affirmed the bankruptcy court’s determination that Bremer had standing to sue the law firm, finding that a direct attorney-client relationship existed as of June 2000. Judge Frank agreed that the law firm violated its ethical duties by failing to disclose a potential malpractice claim involving allegedly erroneous advice, and he ultimately upheld the prior order that the law firm must disgorge nearly $900,000 in fees received from Miller & Schroeder and pay Bremer’s legal costs of around $409,000 as well. "