People entering into a commercial transaction, buying into a business, for example, face a large number of potential investment problems. These range from misunderstanding complex UCC documents, not obtaining proper shareholder rights, running afoul of the bulk transfer tax problem. They reasonably retain attorneys to navigate these waters. What happens when a law firm takes on the work with a severely limited retainer and problems thereafter arise?
Ferenets v Kenworthy 2019 NY Slip Op 33751(U) November 22, 2019
Supreme Court, Queens County Docket Number: 712299/2019
Judge: Cheree A. Buggs is an example of how the client loses in these situations.
“This action arises out of an attorney-client relationship that existed between Plaintiffs and Defendants. Plaintifflryna Ferenets (individually referred to as “lryna”) alleges that as a licensed real estate broker she visited Roosevelt Island on numerous occasions because her brokerage office is located at 552 Main Street. She observed an already existing bubble tea business located at 559 Main Street and visited the shop on September 14, 2018. During Iryna’s visit she met with Guanghao Zhang (“Zhang”), who represented that he was the owner and operator of the business Sparkling Bubble Tea Inc. (hereinafter referred to as Business”), and “briefly observed the operation of the business”. lryna alleges that the co-plaintiff her husband Alexander Ferenets expressed interest in becoming a manager of a bubble tea business. Subsequently, Plaintiffs met with Zhang and informed him of their interest. Zhang informed the Plaintiffs that he was looking for a partner and the Business was worth approximately $100,000. Plaintiffs and Zhang agreed that Plaintiffs would purchase 45 out of the 100 shares of the business for $45,000. On September 18, 2018, Plaintiffs visited the Business and Zhang showed them a Shareholders Agreement signed the prior day illustrating that
Zhang held a 100% shareholder interest in the company and an individual named Shiwei Pan (“Shiwei”) held a 0 % interest.
Iryna represents that due to a referral and subsequent search of Defendants’ website the Plaintiffs decided to contact the Defendants seeking legal representation related to the purchase of the stock. On September 20, 2018, Plaintiffs contacted Defendants via phone and email. Iryna alleges on September 20, 2018 she forwarded the store lease including the rider, the Shareholders Agreement, the filing receipt of the business and the employer identification number for Defendants’ review. Plaintiffs entered into a retainer agreement with the Defendants on October 2, 2018 (hereinafter referred to as “Retainer Agreement”).”
“The relevant portions of the Retainer Agreement signed between the parties reads as follows:
1. Scope of Representation
This Jaw firm (“The Law Firm”) has been retained by both of you
(collectively “You”) to prepare the Shareholders Agreement for Sparkling Bubble Tea Inc. (the “Company”) that has already been formed with the New York State Department of State Division of Corporations. The Law Firm will be representing Your interests, not the interests of the Company or the other shareholder(s).
All of our services in this matter will end upon the preparation an execution of the Shareholders Agreement. Not included within the scope of our representation is tax or financial advice, any other transactional document, or the commencement of any litigation, which would be subject to a separate Retainer Agreement.”
“Plaintiffs allege Defendants failed to conduct and order a corporate lien search of the Business to ascertain corporate liens, judgments, obligations and liabilities and failed to determine whether the Business had any rent arrears and whether the lease was in full force and affect. Based upon the language in the Retainer Agreement there is no indication that Defendants had a duty to perform the above conduct. Nevertheless, Plaintiffs failed to establish causation. Iryna within her affidavit confirms that the Defendants agreed to purchase 45 shares of
the Business prior to retaining the Defendants. The Defendants paid $25,000 out of the agreed upon $45,000 purchase price for the shares prior to retaining the Defendants. Therefore, in light of the already existing agreement to purchase, Plaintiffs have failed to plead facts that indicate that Defendants’ lack of conduct caused the damages they allegedly sustained.
Finally, Plaintiffs allege Defendants failed to indicate who the Defendants represent in the Shareholders Agreement and failed to obtain information regarding Zhang’s citizenship. Plaintiffs have failed to establish a correlation between the above conduct and the damages they sustained. Nonetheless, within the Retainer Agreement Defendants state “[t]he Law Firm will be representing Your interests, not the interests of the Company or the other shareholder(s).” Plaintiffs
have not plead facts indicating that the either themselves or the other shareholders were unsure or unclear about who the Defendants represented. Furthermore, Plaintiffs have not plead facts that indicate how, if in anyway Zhang’s immigration status in this country affected the damages they allegedly sustained. Therefore it is,
ORDERED, that the Defendants’ motion is granted in its entirety. The Verified Complaint is dismissed.”