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Banking & Finance Law Report

Be Conscientious About Standard of Care and Ethics Because, as with all Nightmares, This Could Happen to You

Posted in Attorneys and Clients

Editor’s Note:  From time to time, it is good for financial institution and other business executives to look at the world through from the point of view of their attorneys. In this context, we offer a recent experience of a Porter Wright attorney who is writing to reach other attorneys.

What could be a worse nightmare for an attorney and his client than the following scenario?

Because of a breakdown in communications between the attorney and the client during the sale of the client’s business, the client takes matters into his own hands, negotiates a few provisions in several agreements and closes the deal without seeking further advice from or telling the attorney. Shortly after the sale closes — and the client becomes an employee of the buyer — the seller is found to have breached the asset purchase agreement and, because of a cross-default provision in his employment agreement, is terminated for cause by the buyer. The seller turns around and sues the attorney for malpractice, claiming the attorney breached his standard of conduct. By the time the matter goes to trial, the claim for damages exceeds the attorney’s malpractice insurance coverage limits.

This nightmare was a four-year reality series for an attorney in the Cleveland area. I was a bit player in the attorney’s reality show as I served as his expert witness in his legal malpractice trial. However, my experience caused me to reconsider my own client relationships and the way in which I handle certain kinds of representations. I have also taken my Ohio Code of Professional Responsibility off the bookshelf and keep it open, front and center on my desk.

Terminating attorney-client relationship was a focal point of the case

The plaintiff was clear in his claims: The attorney failed to protect the client’s interests in identifying and revising material and adverse provisions in transactional documents, including communicating them in full to the client. By failing to explicitly terminate the attorney-client relationship, the client was permitted to assume the attorney continued to negotiate the deal on behalf of the client even though they did not communicate with one another. That’s why the client only read the purchase price for the company’s assets and his salary in the employment agreement. And, according to the client, all closings are ceremonial so there is no need to have his attorney present. The client simply owed no duty to the attorney, whether to advise on agreed-upon key business points or to respond to inquiries for more information. Two expert witnesses supported these claims.

The three issues for which I was giving an expert opinion on were:

  1. The standard of care for an M&A attorney,
  2. The ethical considerations involved in the termination of the attorney-client relationship, and
  3. The contributory fault/comparative fault of the client.

The plaintiff filed a motion in limine to limit my testimony to only the standard-of-care issue because I was neither an author nor presenter on the other matters. In other words, I was not a professional expert witness. I was subjected to voir dire and qualified by the judge to testify as an expert on all three issues. Ultimately, I gave direct testimony and was subject to cross examination for more than two hours.

Make an effort to consider ethical obligations in real-time

What lesson should each of us take from this? All attorneys face these issues every day, but how many really consider their ethical obligations in real-time? Sure, we do what is necessary to obtain continuing legal education credits every couple of years, but do we think we would ever be accused of breaching our ethical obligations? The attorney on trial certainly never expected to face these claims for four years.

I suspect most attorneys believe they provide competent representation to a client by demonstrating the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation. This client felt otherwise even though the client did not respond to the attorney’s numerous requests to discuss the terms of the deal so the attorney could do more than a preliminary review of the draft documents. Most clients and attorneys probably believe they understand the roles of each in the attorney-client relationship — the attorney abides by a client’s decisions concerning the objectives of representation. But what if the client does not make those objectives clear? I doubt most of us believe we have a problem with acting with reasonable diligence and promptness in representing a client. Seems easy enough, but what if the client does not communicate?

Finally, I suspect every attorney has a process by which to terminate the attorney-client relationship. However, are you familiar with your duties when circumstances are getting cloudy, and the client may argue that an explicit statement was never made that the relationship had terminated? In that fog of misperception and transition, are you prepared to take the required steps, to the extent reasonably practicable, to protect the interests of the client. Have you ever read the court decisions that hold in determining whether the attorney-client relationship is terminated, the conduct of the parties is more critical than an explicit statement from the attorney that the attorney/client relationship was terminated?

The moral of this story: Know — and live — the Rules of Professionals Responsibility

One of the primary challenges I faced as an expert witness was whether the client owed a duty to the attorney. I told the jury that the attorney-client relationship was similar to a doctor-patient relationship in that if the client/patient withheld information it was very difficult for the attorney/doctor to make a proper diagnosis. Fortunately, a majority of jurisdictions permit a claim of comparative fault or contributory negligence by the client in the defense of legal malpractice claims.

My involvement in this malpractice trial was a stark reminder to me that all attorneys need to be very careful in dealing with difficult clients. If an attorney decides to terminate the relationship, make sure you do it in writing, return all papers/documents to the client and give the client a reasonable period of time to engage new counsel. And, at the beginning of any relationship or new matter, it is prudent to explain the expectations of the client’s duty to be fully engaged in the matter, to communicate and to promptly respond to inquiries from the attorney.

The attorney in this case can now get a good night’s sleep. The jury returned a verdict in his favor. Now the client can add hundreds of thousands of dollars of legal fees on top of his damages from breaching his asset purchase agreement and the loss of his employment by virtue of his termination.

So, pull out your Rules of Professional Responsibility and read them. You don’t want to be crossed examined on your familiarity with them without doing so. Based upon my recent experience, these rules should not be an afterthought in representing a client because if they are, it may be too late. If you are a client, make sure you step up and communicate with your attorney. If you don’t, you may be the one who is the biggest loser.