A constant in legal malpractice litigation is the fact that it always arises from a former representation of the client by the attorney.  How does the underlying record influence or limit the scope of legal malpractice.  Take the example of a company getting information from its attorney and acting on that information.  Assume that the company makes certain decisions which it later claims were influenced by attorney malpractice.  Are they bound by those decisions, or can they argue that they are not bound, because they acted on negligent advice.

The answer, as in all important legal questions is, “sometimes.”   Wachtell, Lipton, Rosen & Katz v CVR Energy, Inc.  2015 NY Slip Op 30270(U)  February 24, 2015  Supreme Court, New York County  Docket Number: 654343/2013 Judge: O. Peter Sherwood is a good example.  The board of this company agreed to a first set and a second set of retainer agreements with banks. The board later claimed that they would not have ratified the second retainer agreement if their attorney had not misled them.

“Ratification

When a party has the option to void an agreement, it ratifies, or affirms, the agreement by affirmatively validating the contract, or by failing to speak or act after discovering its rights (In re Marketxt Holdings Corp., 361 BR 369, 402 [Bankr SDNY 2007] [applying New York law]; Schenck v State Line Tel. Co., 238 NY 308, 313 [1924]). IfCVR’s Board had full knowledge of the fee terms 5 [* 5] of the Second Engagement Letters and failed to object or take immediate action to void the agreements, it ratified those agreements, and is responsible for fulfilling its obligations. Further, CVR’s ratification of the Second Engagement Letters would mean its obligation to pay the Banks pursuant to those agreements could not be caused by any negligence by Wach tell. Therefore, if CVR ratified the Second Engagement Letters, the chain of causation is broken between the alleged negligence and the alleged damages, and the counterclaim must be dismissed. In the Bank Actions, this court determined that CVR ratified the Second Engagement Letters. CVR is collaterally estopped from arguing that there was no ratification.

Collateral Estoppel

“Collateral estoppel, or issue preclusion, ‘precludes a party from relitigating in a subsequent action or proceeding an issue clearly raised in a prior action or proceeding and decided against that party … , whether or not the tribunals or causes of action are the same’ ” (Parker v Blauvelt Volunteer Fire Co., Inc., 93 NY2d 343, 349 [1999], quoting Ryan v New York Tel. Co., 62 NY2d 494, 500 [ 1984 ]). “The doctrine applies if the issue in the second action is identical to an issue which was raised, necessarily decided and material in the first action, and the plaintiff had a full and fair opportunity to litigate the issue in the earlier action” (Parker v Blauvelt Volunteer Fire Co., 93 NY2d at 349). Collateral estoppel will only be applied “to matters actually litigated and determined in a prior action” (Kaufman v Eli Lilly and Co., 65 NY2d 449, 456 [ 1985] [internal quotation marks omitted] citing Restatement [Second] of Judgements §27). In the Bank Actions, this court determined, on motions for summary judgment, that the Board, with knowledge of the fee terms, ratified the Second Engagement Letters. The undisputed facts there were that the Board “passed a resolution authorizing CVR to pay all fees incurred” pursuant to the Second Engagement Letters on April 18, 2012, that the amounts to be paid under those agreements were made explicitly clear to the Board later that same day, and that the Board made no objection to the Second Engagement Letters, either on that day or at the May 4, 2012, meeting when the board approved the minutes of the April 18, 2012 meeting (Bank Action Decisions at 7). At that point, regardless of Wachtell’s alleged prior misrepresentations, failures to provide information, or CVR’s original intentions regarding engaging the Banks, it was undisputed that the Board had all of the relevant information and ratified the Second Engagement Letters. That issue 6 [* 6] was necessary and material in the Bank Actions, it was thoroughly litigated,2 and the parties here are estopped from rearguing that point. CVR suggests the ratification be disregarded for this action because Wachtell ‘s malpractice caused the ratification by “the creation of inaccurate minutes and vague resolutions that failed to specify the amounts to be owed thereunder,” or failing to suggest CVR revoke the ratification and (CVR Opp. at 15). The cases relied upon by CVR in support of its arguments are distinguishable, and do not apply to these facts. In Avon Dev. Enterprises Corp. v Samnick, the First Department declined to apply collateral estoppel to preclude a malpractice claim because the issue in dispute was a pure question of law, unlike the question of ratification, here (see 286 AD2d 581, 582 [I st Dept 200 I]). In Houraney v Burton & Assoc., P. C., the plaintiff had alleged the defendant, acting as counsel in a prior lawsuit, failed to plead certain claims and made various errors at trial (08 CV 2688 CBA LB, 2010 WL 3926907, at *7 [EDNY Sept. 7, 2010] report and recommendation adopted, 08-CV-2688 CBA LB, 2011 WL 710269 [EDNY Feb. 22, 2011]). That court held collateral estoppel did not apply to the question of whether the defendant had been negligent, as that question had not been at issue in the previous litigation (id.). Here, collateral estoppel applies to the question of CVR’s ratification, which was fully litigated in the Bank Actions, not to the question of Wachtell’s negligence. Additionally, the malpractice alleged in each of the cases cited by CVR occurred in an underlying litigation. Here, no malpractice is alleged to have occurred in the litigation of the Bank Actions. CVR does not argue that the Bank Action Decisions were the result of Wachtell’s negligence. Therefore, CVR is not being “precluded from rearguing issues decided adversely to [it] because of [Wachtell’s] negligence” (id.). Schwarz v Shapiro is closer to the facts in this case (202 AD2d 187 [I st Dept 1994 ]). Schwartz sued his former attorney, Shapiro. Shapiro had drafted a letter agreement for Schwartz. In an earlier decision, the Appellate Division First Department had determined that Schwartz could not rescind the agreement because he had ratified it and accepted its benefits. As that court noted subsequently, “the doctrine of collateral estoppel prevents the plaintiff from now claiming that the agreement which he ratified and accepted did not express his understanding. Accordingly, the 2 The issue is currently under appeal. 7 [* 7] agreement cannot now serve as the basis for a claim of ma! practice or other misdeeds on the part of the attorney who drafted the agreement” (id. citing Schwartz v Public Administrator o.f County of Bronx, 24 NY2d 65 [ 1969]). Here, CVR, while in possession of all of the relevant information about the fee terms, ratified the Second Engagement Letters. CVR also accepted the benefits of the Banks’ work performed pursuant to those agreements. Accordingly, New York State law precludes CVR claiming its attorney’s malpractice caused it to enter into those agreements (see id.). As CVR alleges those agreements are the sole source of its damages, it has failed to allege the causation element of a malpractice claim. “