Does this article’s title make you nervous?  It should.  With the unfortunate failures of many businesses due to the pandemic, we suspect claims of this nature will increase.  It seems many clients believe that when they hire a transactional attorney, the attorney will prevent all possible adverse consequences.  These same clients also seem to believe that if anything goes wrong in the transaction or the business, the attorney necessarily has committed malpractice.

When we say “transactional attorneys”, we mean attorneys who handle business transactions including corporate or business formations, sales or joining of businesses, businesses in bankruptcy, and businesses involved in litigation.  Are you a transactional attorney?  Do you think you are insulated from a claim?  The following examples are fictitious claims that are based upon facts found in a variety of ALPS claims.

Arnold represented BCD Corporation in its formation and capitalization.  The BCD investors eventually bought the stock from the original founder, and Arnold continued in his capacity as corporate counsel.  The BCD founder sued Arnold, alleging that he was the founder’s personal attorney, and had helped the BCD investors “steal” the corporation from its founder.

Baker represented successful business owners in selling their business.  The clients received a very large cash payment up front and agreed to accept the rest of the money over time, with payments based upon the business’s profits from year to year.  Under the new owners, the business went bankrupt.  Baker’s clients repurchased the business and continued to operate it at a profit.  They then sued Baker, alleging that he failed to properly advise them of the risk inherent in accepting a payment plan depending on the business success.

Carter advised Gamma Corporation on many items, and Gamma did not always follow Carter’s advice.  On one particular real-estate transaction Gamma did not follow Carter’s advice.  When it was forced to pay a judgment arising from that transaction, Gamma still sued Carter — even though it had disregarded Carter’s advice.

What can we learn from the above fact-based hypotheticals?  We have offered guidance on these issues before, but they are worth repeating.

  1. Identify your actual client, and screen for conflicts accordingly. Clarify your role in the transaction, both verbally and then in writing. Why is this critical?  Consider this: if the matter goes into litigation and survives motion practice, a jury may not understand the difference between representing a corporation and representing its founder.  Beware those circumstances that lead your corporation founder client to infer that you left him behind for the corporation client merely to get additional work and legal fees.
  2. Document, document, document. We have said it before and we say it again, however, in the busines transaction situation, many attorneys think that their business client is more sophisticated than other clients, and therefore they need not fully explain to the client the risks and benefits of the particular course of action.  Also, they may fail to document that advice to their client.  Even when the attorney writes a meticulous letter confirming the advice, the client might claim that she did not receive the letter.  Depending on the importance of the conversation, it may be worthwhile to review that letter with your client, and then have the client sign the letter.  This serves two purposes: (a) it ensures that your client really does understand your advice, which provides a better service to your client; and (b) it documents the conversation and advice in case your client forgets the conversation.  Although it is impractical to use this approach with each and every client conversation, certainly it is useful for pivotal conversations and advice.
  3. Beware of clients who set extreme time pressures on their business transactions. In some practices, this time pressure may well be a fact of life.  However, many transactional claims involve a situation where the attorney was pressured to hurriedly provide the documents to seal the deal.  Consider this fact when you are time-pressured, and carefully evaluate both your role and the procedures you need to undertake before committing to the representation.
  4. Review your liability insurance carefully – does it cover the business transaction advice you are providing? Ask yourself — if I make an honest mistake in this legal representation, will my liability coverage adequately protect my personal assets?  When an ALPS Insured receives notice of a claim for which he may have insufficient coverage, it is extraordinarily stressful for both the Insured and ALPS.  It’s also important to remember that most professional liability policies do not provide indemnity payments for (a) intentional acts; (b) claims stemming from investment (as opposed to legal) advice; (c) a return of fees or (d) sanctions.  Obviously, we address coverage issues in the claim in which they arise, but you will benefit from reviewing your policy and ensuring that the work you do as a transactional attorney falls within the policy provisions.

Hopefully, this article gives notice that transactional attorneys are at greater risk than ever before.  We also hope that you will take the time to review your policy and your practices and better insulate yourself against possible malpractice claims.

 

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