Businesses grow huge, make multi-million dollar loans (read: $ 125 million+) and buy/sell huge ongoing and decrepit stores.  How do they go astray?  We see one example in Ableco Fin. LLC v Hilson  2013 NY Slip Op 05665   Decided on August 20, 2013   Appellate Division, First Department .  Was it attorney error, or merely a delusional business deal?
 

"Plaintiff is in the business of making commercial loans. This action for legal malpractice stem from a $125 million loan that plaintiff made to BH S & B Holdings LLC (Bay Harbor) in August 2008. The loan was made to finance Bay Harbor’s purchase of certain assets from the bankruptcy estate of S & B Industries, Inc. (Steve & Barry’s), a retail clothing chain. According to the controlling asset purchase agreement, Bay Harbor’s desire was "to purchase substantially all the assets and to assume certain lease and other obligations of [Steve & Barry’s] with the present intention of operating the Business as a going concern." Plaintiff retained defendants on August 14, 2008 and the loan closed on August 26, 2008. Without repaying the loan, Bay Harbor filed its own bankruptcy petition in November 2008.

Plaintiff alleges, with respect to the credit card receivables claim, that defendants committed legal malpractice by failing to advise it that, after the closing, the cash proceeds of credit card sales of Bay Harbor’s inventory would be deposited in a Steve & Barry’s bank account on which plaintiff had no lien. Under the inventory claim, plaintiff alleges that defendants failed to adequately advise it that its first priority security interest on Bay Harbor’s assets was collateralized by only a portion of the Steve & Barry’s inventory as opposed to the entire inventory. Plaintiff alleges that it would not have made the loan had defendants provided it with proper legal advice that it was not acquiring a first priority lien on the entire Steve & Barry’s inventory.

The credit card receivables claim was properly dismissed because the record establishes that before making the loan plaintiff knew that agreements creating its liens on the bank accounts would not be negotiated and executed until after the closing. The inventory claim should have [*2]also be dismissed on the basis of information plaintiff indisputably possessed prior to the August 26, 2008 closing.

Defendants deposed Kevin Genda, plaintiff’s vice chair who was in charge of all of its lending activities. After negotiating the loan’s basic terms, Genda, on behalf of plaintiff, retained defendants on or about August 14, 2008. Ten days earlier, Bay Harbor and Steve & Barry’s had entered into an asset purchase agreement (APA). Under the terms of the APA, the Steve & Barry’s inventory purchased by Bay Harbor excluded inventory that constituted GOB (going out of business) inventory. The APA defined "GOB Assets" as "all owned Merchandise and Furniture and Equipment located at Store Closing Locations" as opposed to locations at which Bay Harbor intended to assume the Steve & Barry’s lease obligations and operate the business as a going concern. According to a term sheet that was transmitted on August 15, 2008 by Paul Lusardi, plaintiff’s senior vice president, the collateral for the loan was to consist of "a perfected first priority security interest in all existing and future assets of Borrower." The term sheet lists Newco (Bay Harbor) as the only "Borrower."

The record also contains an August 14, 2008 email to Lusardi from Nate Land, a member of plaintiff’s deal making team. Attached to the email is a press release about the bankruptcy court’s approval of the APA. The press release reads, in part: "The assets to be acquired include but are not limited to . . . all Steve & Barry’s merchandise, with the exclusion of any product located at stores not purchased by [Bay Harbor] [emphasis added] . . ." The foregoing documentary evidence refutes plaintiff’s pivotal claim that it made the loan on August 26, 2008 without knowing that it was not getting a first priority lien on the entire Steve & Barry’s inventory. "

Time limitations and continuing representation are a constant issue in legal malpractice cases.  When the statute begins to run and how long it may be tolled are sub-issues.  Cordero v Koval Rejtig & Dean PLLC;  2013 NY Slip Op 31893(U) ;  August 8, 2013;  Supreme Court, New York County ;  Docket Number: 113450/11; Judge: Debra A. James gives us a nice discussion of both.

"The statute of limitations for attorney malpractice is three years (CPLR 214 [ 6 ] ) . A claim for legal malpractice accrues when the attorney commits the malpractice, not when the client discovers it (Shumsky v Eisenstein, 96 NY2d 164, 166 [lst Dept 20011). A client’s ignorance of his or her attorney’s misconduct has no effect on when a claim for malpractice accrues (Lincoln Place, LLC v RVP Consulting, 70 AD3d 594, 594-595 [lst Dept, 2010). The accrual of the limitations period may be tolled according to the continuous representation doctrine."
 

"Plaintiff contends that the action accrued on December 5,2008, when his personal injury case  was dismissed, and that he had until December 5, 2011 to sue defendants. Plaintiff relies on case law stating that a legal malpractice claim accrues "when all the facts necessary to the cause of action have occurred and an injured party can obtain relief in court’" (McCoy v Feinman, 99 NY2d 295, 301 [2002] , quoting Ackerman v Price Waterhouse, 84 NY2d 535, 541 [1994]). He argues that, until his case was dismissed, he did not have an action against defendants. Plaintiff misstates the applicable law. Plaintiff had a claim against defendants before his case was dismissed, even if he was ignorant of that fact. Where it is alleged that an attorney negligently let pass the statute of limitations for the client’s action, the claim for legal malpractice accrues upon the
expiration of that statute of limitations (Cohen v Wallace & Minchenberg, 39 AD3d 691, 692 [2d Dept 20071; Baker v Levitin, 211 AD2d 507, 507 [1st Dept.1951)."

"As defendants implicitly point out, Koval’s continuous representation of plaintiff can be imputed to defendants. In Antoniu v Ahearn (134 AD2d 151 [lst Dept 1987]), the plaintiff hired the first attorney and her law firm in 1978. 1981 or 1982, the first attorney left that firm and joined In another firm, where she continued to represent plaintiff. Upon hiring a new attorney, plaintiff fired the first attorney in July 1983. On October 10, 1985, plaintiff began an action against the firm retained in 1978. The court determined that the action against the firm that plaintiff retained in 1978 was within the statute of limitations. The limitations period against that firm was tolled until the first attorney stopped representing the plaintiff. The first attorney’s continuing representation, which
stopped in 1983, was imputed to the firm."

In this case, the court permits client to plead fraud even though legall malpractice is time barred. Why? Unsophisticated client retains attorney for a first time purchase of a business. Attorney undertakes complicated transaction for $ 3000. As soon as the contract is ready, attorney tells client to sign a wavier, and then seems to have a conflict of interest and starts to represent the landlord and undertakes to evict the client.’

Hernandez v Marquez 2012 NY Slip Op 31112(U) Supreme Court, New York County Docket Number: 103531/11 Judge: Joan A. Madden:

"In October 2007, Hernandez retained Marquez, an attorney, who represented to her that he was competent to handle all aspects of the purchase of a restaurant and the acquisition of a liquor license. (Amended Complaint, 7 3). Hernandez “made it very clear to [Marquez] that she had never purchased a business before this particular purchase transaction, that she had no experience purchasing a business and that she had to rely on him completely for all aspects of the purchase of the restaurant with a liquor license.” (u 7 4). Marquez “promised that he would perform in the manner required by [Hernandez] and that she had nothing to worry about [if] she contracted with him” (a 7 5). In consideration for these promises to properly handle the purchase of the restaurant and the acquisition of the liquor license, Hernandez paid Marquez $3,000.

In reliance of Marquez’s advice, including representations that the liquor license could be transferred from the seller, so long as Hernandez was not convicted of any crimes, Hernandez contracted with the seller to purchase the business. (Ig 7 8). The purchase was accomplished through a Stock Transfer Agreement entered into on October 2,2007, a copy of which is annexed to the proposed amended complaint. The Agreement made the obtaining of a liquor license for the Restaurant a condition of the purchase. As soon as she told Marquez that she was not convicted of any crimes, Marquez had her sign a waiver, which states in pertinent part: Parties represent and state that notwithstanding anything to the contrary in documents for the above purchase, that [Hernandez Is irrevocably purchasing said store and waives condition of approval by the State of New York Liquor Authority and Beverage Control Board, and further states that he/she is qualified
for an off-premises beer license,After signing the waiver, Hernandez paid the seller $30,000 as a down payment for the business, at which time Marquez advised Hernandez to pay for the seller’s landlord $10,000 rent arrears due and owing from the seller, and instructed Hernandez to execute a new lease with the landlord, which required $5,250 as a security deposit and as monthly rent ( 7 19). There may have been a conflict of interest that caused Marquez to have Hernandez sign the waiver, since Marquez now represents the landlord in an action to evict Hernandez from her apartment 18). If Marquez had told Hernandez the truth about the waiver, Hernandez would not have gone through with the purchase of the restaurant until she had secured a liquor license. 7 20).
However, “[s]olely due to assurances, representations, advice and direction of the Marquez,
Hernandez was caused … to close the transaction with no approval from the State Liquor
Authority.”

Due to Marquez’s misrepresentations and omissions, “includ[ing] his directing Hernandez to execute a lease and pay rent of $5,250 a month, which she paid for over a year, for a premises which she believed that she would have a restaurant and liquor license,” Hernandez suffered damages (Id, 7 27). As a result of her reliance on Marquez’s representations, Hernandez alleges that she had become indebted to the seller for $91,350,000.In addition, contrary to Marquez’s representations, the liquor license for the restaurant could not be secured.
 

Accounting malpractice, like any other variant of professional malpractice (attorneys, brokers, financial professionals) are all subject to a three year statute of limitations, which may be tolled for continuous representation.  In Ghiz v Schreck & Co.  2013 NY Slip Op 31869(U)  August 9, 2013
Sup Ct, New York County Docket Number: 158805/2012  Judge: Eileen A. Rakower we see a description of the application of continuous representation.

"A cause of action charging that a professional failed to perform services with due care and in accordance with the recognized and accepted practices of the profession is governed by the three-year statute of limitations applicable to negligence actions. (See, CPLR §214[6).
 

As set forth in ATC Healthcare Inc. v. Goldstein, Golub & Kessler LLP, 28 Misc. 3d 1237(A), *3 (N.Y. Sup. July 26, 2010):

The continuous representation doctrine is an exception to the Statute of Limitations and applies only where there is a mutual understanding of the need for further representation on the specific subject matter underlying the malpractice claim. Symbol Technologies, Inc. v. Deloitte & Touche, LLP, supra, at p. 195 (citation omitted). That is, "the continuous representation must be in connection with the particular transaction which is the subject of the action and not merely during the continuation of a general professional relationship." Zaref v. Berk & Michaels, P. c., 192 A.D.2d 346, 347-48 (1 st Dept. 1993) (citations omitted). "[T]he facts are required to demonstrate
continued representation in the specific matter directly under dispute." Zaref v. Berk & Michaels, P. c., supra, at p. 348.

ATC Healthcare Inc., 28 Misc. 3d 1237(A) at *3.

Schreck contends that Plaintiffs’ accounting malpractice claim is time barred because Plaintiffs filed the Complaint in the present action on December 12, 2012, more than three years after the embezzlement was allegedly discovered on August 27, 2009 and argues that it did not continue to represent Plaintiffs specifically with respect to the embezzlement because it "could not have done anything in any ongoing capacity to ‘correct’ or ‘mitigate’ the embezzlement." However, the Complaint alleges that "Defendant Schreck continuously represented plaintiffs regarding claims
by various government bodies as to said tax penalties and liabilities up and until September 2012 as well as rendered its usual and customary services to plaintiffs and attempted to restate and correct the mistakes made during the period of defendant Schreck’s malfeasance."

Legal malpractice, and its cousin deceit might be found anywhere attorneys tend problems.  One fairly startling setting is the Poly Prep sex abuse litigation.  Like the similar Horace Mann sexual abuse litigation, there are numerous claims of concealment and lying. Andrew Keshner writes in today’s New York Law Journal that former students have filed a Judiciary Law 487 claim against Poly Prep’s outside counsel O’Melveny & Myers.

‘Former students who settled a lawsuit alleging a prestigious private school in Brooklyn covered up a football coach’s years of sexual abuse are now suing the school’s outside counsel at O’Melveny & Myers for allegedly trying to "deceive" the court with "fraudulent evidence" and "materially false and fraudulent statements."

Naming O’Melveny and Jeffrey Kohn, managing partner of the firm’s New York office, as defendants, the action argues they "should not be allowed to escape sanction for their grievous and oft-repeated falsehoods."

The lawsuit, Zimmerman v. Kohn, 652826/2013, was filed Aug. 11 in Manhattan Supreme Court (See Complaint). It demands that, in addition to other things, O’Melveny reimburse the plaintiffs for $2 million in legal fees expended to achieve a confidential settlement. In addition, the plaintiffs are seeking that all fees paid to O’Melveny by Poly Prep Country Day School be turned over to the plaintiffs.

O’Melveny scoffed at the claims.

"The underlying case was concluded nine months ago with a settlement voluntarily entered into by the plaintiffs. These claims are completely baseless and without merit," the firm said in a statement.

The current suit arises from a lawsuit 10 alumni and two former summer camp participants filed against the school and its officials in 2009 for allegedly concealing abuse that occurred from 1966 to 1991 by coach Philip Foglietta. The coach died in 1998 after working 25 years at the school.

After Eastern District Judge Frederic Block (See Profile) ruled last August that some claims could proceed in Zimmerman v. Poly Prep Country Day School, 09-cv-4586, the parties reached a confidential settlement in December. Philip Culhane, a partner at Simpson Thacher & Bartlett, was among the plaintiffs (NYLJ, Aug. 30, 2012 & Dec. 28, 2012).

The current suit’s claims include a violation of the state’s Judiciary Law §487, which prohibits attorney misconduct toward a court that includes "deceit or collusion, with intent to deceive the court or any party."

It was brought by 11 of the 12 plaintiffs, except for Culhane, and especially targets the firm’s defense of the school with a focus on Kohn and the firm’s description of an internal probe the school conducted in 2002."
 

We’re pleased to announce an article in the New York Law Journal, entitled When the "Attorney-Client Relationship Ends" appears today in the Outside Counsel column. Here is an excerpt from the article:

"As do all things in life, an attorney-client relationship, once commenced must someday end. It may end at the settlement or verdict of a litigation, it may end at the completion of a transaction, or it may end in the middle. How the attorney-client representation ends has significant effect on fees, compensation and potential legal malpractice liability. Litigations comprise a large portion of attorney-client interactions, and present a sharper beginning and end than do transactions. Transactions might include real estate leases and sales, business negotiations, employment negotiations or contract. Nevertheless, at some time all of these events will be over.

For the most part, it’s not the end of a relationship that results in tension, negotiation or litigation, it’s attorney fees. Depending on the format of those fees, whether hourly, contingent, flat or a hybrid, the end of the attorney-client relationship often indicates or triggers a dispute over fees. Disputes over fees consistently occupy a large amount of attorney time and are governed by some well-understood principles.

We will examine discharge of the attorney by the client first. Later we’ll look at attorneys who wish to end the relationship and must do so with permission of the court. Discharge of an attorney by a client is binary. It is either for cause or not for cause.

Read more: http://www.newyorklawjournal.com/PubArticleNY.jsp?id=1202615356079&When_the_AttorneyClient_Relationship_Ends#ixzz2bw7UY46Z

When does the statute of limitations begin to run?  It might be on the day of the mistake, and it might be later.  The "later cases" are rare, and  few in number.  Anderson v Beranbaum 2013 NY Slip Op 31821(U) August 5, 2013 Sup Ct, New York County Docket Number: 151918/2013
Judge: Anil C. Singh is not one of them, yet it quotes an elusive and interesting case in which the statute did not begin to run from the date of the mistake. 

"Under CPLR 214(6), all claims for legal malpractice, no matter whether they sound in tort or contract, have a three year statute of limitations. Case law further provides that the statute of limitations begins to toll upon the date that all elements of a legal malpractice have been fulfilled such that the injured party could have brought suit, regardless of whether the injured party was aware of the injury at the time (IDT Corp. v. Morgan Stanley Dean Witter & Co., 12 N.Y.3d
132, 140 (2009))."

As for plaintiff’s claims that confidentiality was breached and she was "devastated?"  These are non-economic claims and cannot be compensated in legal malpractice.  "The second incident of legal malpractice is based on Beranbaum’s alleged breach of confidentiality, which the plaintiff claims "devastated" her. Here, the plaintiff has failed to state a claim upon which relief may be granted. The only injuries that Anderson alleges from the legal malpractice are emotional, which are not considered compensable for legal malpractice claims (see Dombrowski v. Bulson, 19 N.Y.3d 347, 351 (2012); Wolkstein v. Morgenstern 275 AD.2d 635, 637 (1st Dept 2000); Dirito v. Stanley, 203 A.I>.2d 903 (4th Dept 1994))."

Its not always easy to say when the last date upon which an attorney renders service to a client, nor when the statute of limitations commences. . is it on the day that a defective security agreement is prepared? is it on the day that the security agreement is given to debtor? In this case, its no earlier than the day when the last signature is executed.

Americana Capital Corp. v Nardella 2012 NY Slip Op 04927, Appellate Division, First Department determines the date upon which a malpractice claim arose.
 

"Plaintiff’s legal malpractice claim was not barred by the statute of limitations (see CPLR 214[6]). Plaintiff alleges that the deceased negligently drafted a security agreement preventing plaintiff, as the creditor, from being able to enforce the agreement as against the debtor once the debtor defaulted.

Plaintiff’s legal malpractice claim accrued no earlier than when the agreement was executed, which occurred on November 29,
2002, the date of the last signature on the agreement (see McCoy v Feinman, 99 NY2d 295 [2002]), and this action was commenced less than three years later. "