Use Retainer Agreements to Establish the Limits of Representation

The Appellate Division, First Department recently reversed the trial court’s decision granting summary judgment on liability in favor of the legal malpractice plaintiff and dismissing the defendant law firm’s counterclaims for legal fees.

In Genesis Merchant Partners, L.P. v. Gilbride, Tusa, Last & Spellane, LLC, the plaintiffs, who are related venture capital firms, sued the defendant law firm and individual attorneys regarding their representation of the plaintiffs related to four secured loans, totaling $4.425 million, that plaintiffs agreed to make to non-party Progressive Capital Solutions LLC (Progressive) to finance Progressive’s purchase of several portfolios of life insurance policies.

Portions of the loans’ proceeds were to be used to buy life insurance policies as collateral for the loans. There was no engagement letter between the parties defining the scope of the defendants’ representation. The defendants drafted the loan documents, including the Collateral Assignment of Contracts and the UCC-1 financing statements for each loan, the latter of which listed Progressive as the debtor and the plaintiffs as the secured party, and broadly declared a security interest in all of Progressive’s assets.

Progressive repaid the first loan but defaulted on the other three, resulting in a lawsuit that ultimately settled, but Progressive defaulted on the settlement. The plaintiffs then sought to collect on the life insurance policies, but the underwriters refused because they did not have any record of the collateral assignments to the plaintiffs.

The plaintiffs sued the defendants for legal malpractice for failing to perfect their security interest in the life insurance policies serving as collateral on the latter three loans. The plaintiffs claimed that they retained the defendants to advise them on the loans, which included ensuring that their security interests in the collateral were secured and perfected.

The defendants maintained that their representation was limited to the drafting of the loan documents, at the instruction of the plaintiffs. The trial court granted summary judgment in favor of the plaintiffs, finding that even if the defendants could ultimately demonstrate that the scope of their representation was limited to the drafting of the loan documents, the defendants, by filing the financing statements and billing the plaintiffs for that work, voluntarily assumed the responsibility of perfecting the security interests and negligently discharged that duty.

On appeal, the Appellate Division, First Department unanimously reversed the trial court’s decision. The First Department noted that in order for the defendants to limit the scope of their representation, they had a duty to ensure that plaintiffs understood those limits. The court found that the Collateral Assignment of Contracts, which contained a provision requiring Progressive to deliver to the plaintiffs the documents evidencing the perfection of the plaintiffs’ security interests in, and the acceptance of, the collateral assignment agreements from the insurance carriers, suggested that the defendants were not responsible for perfecting the security interest.

The court also held that emails between the parties created issues of fact as to the scope of representation and, if it was limited, whether the defendants made sure that the plaintiffs were aware that the defendants were not responsible for perfecting the security interests. The First Department also determined that the case law governing the voluntary assumption of duty relied upon by the trial court in granting summary judgment were distinguishable because they did not relate to a legal malpractice claim arising from a dispute over the scope of the retention. However, the court held that even if such a voluntary assumption of duty could be applied to a legal malpractice claim, the defendants’ filing of the UCC-1 statements and billing for that work did not establish that summary judgment in favor of the plaintiff was warranted.

The Genesis Merchant Partners decision highlights the importance of not only having a retainer agreement in place, but also having one that carefully defines the scope of the lawyer’s representation. This becomes even more critical as it is the lawyer’s responsibility to ensure that the client understands any limits to the representation. While the Appellate Division did reverse summary judgment to the plaintiff, significant exposure to the defendant attorneys remain, which could have been avoided if a well-drafted retainer agreement limiting the scope of representation was in place.

For more information about the court’s decision, please contact Jonathan Bruno or Deborah Isaacson.