Malpractice Risks for Corporate and Business Lawyers

By David R. Sinn

A review of tricky conflicts issues and other malpractice landmines for corporate lawyers, featuring a discussion of cases from around the country with an emphasis on Illinois law.

Compared to divorce and p.i. practice, corporate and business law generates few malpractice claims. That's small comfort, however, if you're one of the few, especially considering that damages in transactional claims are usually greater than average.

Typically, transactional lawyers end up favoring one client in a transaction involving multiple clients, which is the source of most litigation against them. This article discusses these conflicts issues and other malpractice pitfalls for transactional lawyers and offers pointers for avoiding problems.

Who is My Client?

Transactional attorneys involved in corporate acquisitions, mergers, and buyouts find themselves in a multi-dimensional environment where it is sometimes difficult to reconcile the law to logical affinities.

As human beings we all relate more strongly to other human beings than to a conceptual entity such as a corporation. You tend to think of yourself as the attorney for the person who asks you to form a corporation. If more than one person asks you to form a corporation, however, you face the risk of conflicts among incorporators, which can expand privity to imply a duty to non- clients.

That is precisely why the Illinois Appellate Court ruled in Torres v Divis¹ that an attorney hired by one incorporator cannot be deemed the attorney of another, reasoning that such an implication would create the potential for conflicts of interest.

In a legal malpractice action, the facts must show that the plaintiff was a client of the defendant, or that the primary purpose of the attorney/client relationship between the defendant and a third party was to benefit the plaintiff.²

In Torres, the second district stated that "[t]he client must manifest his authorization that the attorney act on his behalf, and the attorney must indicate his acceptance of the power to act on the client's account."³

Corporate Clients and Conflicts of Interest

The attorney-client relationship cannot be created by a third party who has no authority to act.⁴ In Torres, the second district stated that "[i]t would be unwise to impose on an attorney, retained by only one of several incorporators for the purpose of organizing a corporation, a duty to act on behalf of all the incorporators in the absence of an agreement that he do so. Recognition of such a duty would create an unacceptably wide range of potential conflicts of interest."⁵ However, where the primary purpose of a client's relationship with an attorney is to benefit a third party, that party becomes a third-party beneficiary of the contract between the attorney and the client who asked the attorney to act on behalf of the third party.⁶

In Majumdar v Lurie,⁷ the appellate court held that the attorney for a corporation owes a duty to the corporate entity but not its individual shareholders, officers, or directors.⁸ In Majumdar, an Illinois lawyer was sued for failing to advise his physician client of the conflict of interest he faced by being an officer in two professional corporations. The first district appellate court determined that there was no duty to do that, since the retention agreement did not include that task, nor was it a foreseeable risk.

Jointly representing corporation and principals. Even though that is the general rule in Illinois, every rule has exceptions. A practical problem for the attorney representing the small, closely held corporation or partnership is that transactions involving its principals may not be financially large enough to justify the expense of separate counsel.

In such cases, courts in other jurisdictions have allowed joint representation if there is no actual adversity and there is full disclosure of and informed consent to possible conflicts.⁹ But in In re Folding Carton Antitrust Litigation,¹⁰ the Illinois-based federal district court noted that an attorney undertaking to defend both the business entity and its officers, employees, or investors may well find that their interests are adverse.

The best approach is to obtain the client's consent in the form of a well-documented waiver of conflict of interest that follows the outline of Rule of Professional Conduct 1.7(c). Rule 1.7(c) requires lawyers to apprise clients of the implications of the common representation and fully disclose the advantages and risks. Anything less exposes the lawyer representing multiple parties to a conflict charge that can become the basis for a legal malpractice action. Like the Rules of the Road, the Rules of Professional Conduct are not prima facie proof of negligence in Illinois, but they are admissible as evidence of whether the attorney met the standard of care.

Derivative lawsuits. In derivative lawsuits, the plaintiff shareholders seek to assert the corporation's best interests, even though they are also promoting their own personal financial interest. Sometimes those two interests don't coincide. Therefore, the potential conflict of interest between derivative plaintiffs and the corporation and their potential adversity with its officers and directors usually precludes a joint defense by one law firm.¹¹

As a practical matter, new counsel should be appointed for the corporate entity rather than appointing new counsel for officers and directors. If any confidences have been revealed to the original defense counsel, the probability is that the officers and directors made the disclosure.¹²

In derivative lawsuits, it is often difficult to determine who shall select independent counsel for the corporation. Most courts hold that that responsibility remains with the directors of the corporation.¹³

In the typical shareholder derivative action lawsuit, the shareholders are suing to preserve corporate assets or to recover corporate assets belonging to the corporate entity. The corporate entity is made a nominal defendant.

Most courts "treat the corporation as a party plaintiff on the merits of the action because it will be the ultimate beneficiary if the suit is successful. The shareholders are considered guardians or trustees for the corporation."¹⁴ Therefore, an attorney who represented a corporation prior to a shareholder derivative action may also represent its shareholders because he is not acting contrary to the interests of the corporate entity.¹⁵

Even though the officers and directors have probably provided that attorney with confidential information, management should not assume that their communications with corporate counsel will remain confidential if shareholders allege significant improprieties on behalf of the directors and officers.¹⁶ On the other hand, where the officer was the sole shareholder an opposite result was reached.¹⁷

As a rule, do not defend corporate directors and officers in a derivative action if you think the case has merit.¹⁸ "Corporate counsel must refrain from participating in any controversies that exist among shareholders for its control. The board of directors and its officers are entitled to legal advice that is free of bias or ulterior motive."¹⁹

Corporate subsidiaries. In a 1995 ABA Formal Ethics Opinion, Formal Op. 95-390, the ABA Committee was asked whether "a lawyer who represents a corporate client may undertake a representation that is adverse to a corporate affiliate of the client in an unrelated matter, without obtaining the client's consent." The ABA committee found no per se prohibition. However, this opinion points out that if the affiliate or subsidiary could be considered a client of the lawyer or if the lawyer's obligations to either the corporate client or the new, adverse client will materially limit the lawyer's representation of the parent corporation, then a conflict would exist.

A 1989 California Ethics Opinion concluded that an attorney could undertake representation adverse to a wholly owned subsidiary of his corporate client where (1) the parent corporation is not the alter ego of the subsidiary and (2) confidential information was not provided by the subsidiary to the attorney.²⁰

Leading commentators identify the following recurrent patterns of adverse representation:

(1) shareholder derivative actions against officers or directors; (2) litigation between corporate officers and directors for control of management; (3) representation by former corporate counsel of former officers, directors or employees in litigation with the corporation over such issues as the breach of employment contracts and indemnification for misdeeds; (4) representation by present corporate counsel of the corporation in a suit against a former corporate officer, director, or employee for whom the corporate attorney also has served as personal counsel; and (5) representation by former corporate counsel of third parties adverse to the corporation.²¹

Protecting confidences. The main focus in corporate conflicts cases is protecting the former client's confidences.²² A conflict exists only if the attorney possesses confidences that may be abused (and that is presumed), and the present matter and past retention concern a substantially related subject matter. Even if the matters are not related, you must determine whether there were communications relevant to the present matter. The law presumes an expectation of confidentiality on the part of the client.

Dissenting shareholders. Where a fight breaks out between shareholders and corporate management for control of the corporate entity, corporate counsel cannot ethically represent dissident groups against management.²³ Some courts, however, have made an exception for closely held corporations or partnerships, reasoning that there was no confidentially when an attorney jointly represented all parties in a common venture.²⁴ On the other hand, it has been held by a New York court that because an acquired corporation essentially continued its existence after a merger the acquired corporation's attorneys could not defend its shareholders.²⁵

Corporate counsel usually may defend the corporation and its officers and directors in an action brought by a minority of dissenting shareholders, but if the action is brought by dissenting shareholders who represent the majority, corporate counsel may not defend the corporation and its officers and directors.²⁶

Other issues. Former corporate counsel cannot represent a former officer, director, or employee in a suit against the corporation for breach of an employment contract or wrongful discharge.²⁷ The lawyer for the corporate entity cannot subsequently represent a former officer who is in competition with the corporation.²⁸ "Corporate counsel can, however, represent the corporation against a former officer or director."²⁹

The bottom line with corporate conflicts of interest is that if there is no subject matter relationship between the current and the prior representations and no passing of confidential information, disqualification is not appropriate.³⁰

In-House Counsel

In-house attorneys who leave their corporate employer for private practice may not represent an entity adverse to the former corporate employer if the former in-house counsel possesses confidential information, whether learned from performing legal services or from close contact in day-to-day operations of the corporation. Former in-house counsel have been disqualified from representing a corporate employee in a retaliatory discharge action where the lawyer had been the chief legal officer of the corporation responsible for all its legal matters and had provided counsel to the corporation and subsidiaries in hundreds of employment related matters.³¹

Partnerships

The same considerations apply to partnerships. A partnership is a legal entity, and that entity is the lawyer's client. The lawyer for a partnership does not thereby become lawyer for, or owe a duty to, the individual partners.³²

Because a partnership attorney is representing the partnership entity, limited partners cannot sue the lawyer for malpractice. Only the general partner has standing to sue.³³ On the other hand, an Illinois lawyer who prepared a partnership's tax return was treated as the preparer of the limited partner's returns for the sole purpose of negligent preparation penalties by the Internal Revenue Service.³⁴

Auditors

One obscure rule of professional liability worth bearing in mind is that an attorney has no duty to reveal a client's financial problems to the client's auditor.³⁵

Liability to Successor Organizations

Can an attorney be liable for legal malpractice to the successor of a corporate client? The Nebraska Supreme Court has held that the attorney for a corporate debtor could not be sued by the debtor's corporate successor, which had purchased its assets and acquired an assignment of all rights.³⁶ A Delaware decision, on the other hand, held that an attorney could not avoid liability because the plaintiff corporation was the successor to his corporate client.³⁷

The District of Columbia has developed a third position on the issue. That court held that a successor corporation did not automatically acquire a preexisting legal malpractice claim but that the claim could be assigned to it by the original entity.³⁸ This result could not obtain in Illinois, which strictly prohibits assignment of a legal malpractice action with one exception: if a corporate client goes bankrupt, the bankruptcy trustee will acquire the legal malpractice cause of action pursuant to bankruptcy rule 543. More recently in Delaware CWC Liquidation Corp v Martin,³⁹ the court noted that courts allowing assignment of legal malpractice claims are in the minority because "[r]ules which discourage an attorney from acting loyally and confidentially should not be erected without very good cause."⁴⁰

Where two sole shareholders of a banking corporation over-valued assets, engineered sham sales, and basically falsified records to disguise the bank's dwindling net worth, the question arose whether those two principals and sole shareholders could bring an action for legal malpractice against their attorneys who prepared a private placement memorandum without consulting with the corporation's accountants or the bank's regulators. Because securities law is a highly specialized field, the federal ninth circuit court felt that the attorneys owed a duty of care not only to the investors, but also to their client – the banking corporation.⁴¹

However, where a trustee in bankruptcy sued the bankrupt corporation's attorney as successor in interest to the bankrupt corporation for failure to discover that insiders of the corporation and off-shore insurer were raiding the company till, the same court ruled that an attorney representing a corporate client had no duty to independently investigate whether the client was engaged in fraud.⁴²

Undisclosed Corporate Principals

When the agent for a disclosed principal retains an attorney, an attorney/client relationship exists between the attorney and the agent. However, when an agent for an undisclosed principal attempted to sue the retained attorney for legal malpractice, the court held that the agent suffered no damage so he could not possibly have a cause of action against the attorney. The agent was also denied leave to substitute the principal as the plaintiff.⁴³

Minority Shareholders

An attorney can be liable to minority shareholders for any personal, secret profit.⁴⁴

An attorney must inform his or her corporate client in a clear and direct manner when the corporate client's conduct violates the law. Under Illinois Rule of Professional Conduct 1.16, if the client continues the objectionable activity, the lawyer must withdraw if the representation will result in violation of the Rules of Professional Conduct or other law.

In Crookham v Riley,⁴⁵ the Iowa Supreme Court affirmed a verdict against corporate counsel in favor of a minority shareholder who alleged that corporate counsel had a conflict of interest because it favored another minority shareholder.

The Tennessee Supreme Court, on the other hand, has not been particularly kind to minority shareholder plaintiffs. In Lazy Seven Coal Sales, Inc v Stone & Hinds, PC,⁴⁶ the Tennessee Supreme Court reversed a judgment against lawyers who were held liable to one of two minority shareholders of a closely held corporation for the sum of $2,600,000. The court felt that it was not a conflict of interest for the corporate attorneys to prepare a family voting trust agreement and a shareholding agreement for the minority principal. Even though the parties to those contracts had potentially differing interests, the corporation had an interest in seeing that all of the instruments were prepared and executed properly.

Investors

Bondholders or shareholders of a corporation may bring an action sounding in legal malpractice against the corporation's attorney where the claim is based on a breach of securities law, common law fraud, or negligence.⁴⁷

Because of the privity requirement, an attorney acting as counsel for a corporation does not automatically become attorney for present or prospective investors including shareholders or bondholders.⁴⁸

When working with a closely held corporation there is always the chance that a lawyer might do something that creates an attorney/client relationship with a shareholder. It is certainly not uncommon for shareholders to make that claim. In Hager-Freeman v Spircoff,⁴⁹ a corporate shareholder claimed that the attorney for the corporation told her that she need not consult another attorney regarding her purchase of another shareholder's one-third share of the corporate stock. The selling shareholder then elected to sell those shares to someone else.

The Illinois Appellate Court found no attorney/client relationship or specific fiduciary duty, but did find that liability could lie for the attorney's assumption of a duty to the shareholder as her agent for that specific transaction. The moral of the story: you are always better advised to have shareholders seek their own counsel when purchasing or selling stock in a corporation you represent.

Although Illinois has upheld the rule of privity, the same is not true in other jurisdictions when fraud is involved in a merger or sale.⁵⁰ That is not to say that attorneys in Illinois are immune from fraud allegations. Indeed, any client in Illinois may allege fraud against any attorney. What is unsettled in Illinois law is whether punitive damages will be allowed in that situation.

In Calhoun v Rane,⁵¹ the first district held that 735 ILCS 5/2-1115 prevents a plaintiff from seeking punitive damages on a fraud count against a lawyer. The third district held just the opposite in Brush v Gilsdorf.⁵² However, when the Illinois Supreme Court resolves this split of authority among the districts, it will likely rely on its ruling in Cripe v Leiter,⁵³ where it held that since the rules of professional conduct govern an attorney's billing practices, the Consumer Fraud and Deceptive Business Practices Act would not apply to an attorney's billing of a client for legal services. Since section 2-1105 covers both physicians and attorneys it is not likely to be successfully challenged as special legislation.

In Geaslen v Berkson, Gorov & Levin, Ltd,⁵⁴ Illinois attorneys representing their client in the purchase of a corporation's stock wrote an opinion letter for the sellers concerning the transaction. The letter did not comment about the financial solvency of their clients, who were the buyers.

The appellate court found that the attorneys assumed a duty to the sellers. However, since the letter was intended for the benefit of the buyers, that duty did not extend beyond the four corners of the letter. The opinion letter therefore did not establish a fiduciary relationship between the buyers' attorney and the sellers. Since the attorneys owed an obligation of confidentiality to the buyers with respect to their financial condition, an opinion about that financial condition could not be implied by the buyers' attorneys, nor could it be inferred from the letter if it were not directly stated.

In Conroy v Andeck Resources '81 Year-End, Ltd,⁵⁵ the Illinois Appellate Court rejected a contention that lawyers who prepared a prospectus were hired to primarily benefit those who invested. And in Torres v Divis,⁵⁶ the court found that an attorney retained by one of several incorporators to form a corporation and then represent the entity did not thereby become the attorney for other incorporators or assume a duty to them. The court stated that the rule of privity was supported by a strong policy that lawyers avoid representing conflicting interests.

Acting as a Director or Officer for a Corporate Client

An attorney who occupies a corporate position such as director or officer can be held to multiple standards of care and more demanding fiduciary obligations than if he or she served in only one capacity. In that situation, charges of self-dealing are common.⁵⁷

Where an attorney is retained to represent an individual interested in acquiring a corporation's assets or shares, the attorney is under no duty to check the accuracy of financial statements of the prospective seller unless there is a specific written agreement between the attorney and the buyer client stating that the attorney would do just that.⁵⁸

Conclusion

While tort lawyers might be subject to more claims than transactional lawyers as a group, it is rare for a tort lawyer to ever have exposure to a third party. Many business transactions, however, involve substantial exposure to non-clients. Transactional practice is also fraught with potential conflicts situations. Unpleasant though it may be, transactional lawyers must always be mindful of the special malpractice risks posed by transactional practice and proceed with appropriate care and caution.

1.   144 Ill App 3d 958, 494 NE2d 1227 (2d D 1986).

2.   Pelham v Griesheimer, 92 Ill 2d 13, 440 NE2d 96 (1982); York v Stiefel, 99 Ill 2d 312, 458 NE2d 488 (1983).

3.   Torres at 963, 494 NE2d at 1231, citing York v Stiefel, 109 Ill App 3d 342, 440 NE2d 440 (3d D 1982), reversed in part on other grounds, 99 Ill 2d 312, 458 NE2d 488 (1983).

4.   Zych v Jones, 84 Ill App 3d 647, 406 NE2d 70 (1st D 1980).

5.   Torres at 964, 494 NE2d at 1231.

6.   Pelham at 21, 440 NE2d at 99.

7.   274 Ill App 3d 267, 653 NE2d 915 (1st D 1995).

8.   Id at 270, 653 NE2d at 918, citing ABC Trans Natl Transport, Inc v Aeronautics Forwarders, Inc, 90 Ill App 3d 817, 413 NE2d 1299 (1st D 1980); Bobbitt v Victorian House, Inc, 545 F Supp 1124 (ND Ill 1982).

9.   In re Brownstein, 288 Or 83, 602 P2d 655 (1979).

10.   76 FRD 417 (ND Ill 1977).

11.   Lower v Lanark Mut Fire Ins Co, 114 Ill App 3d 462, 448 NE2d 940 (2d D 1983), appeal after remand, 151 Ill App 3d 471, 502 NE2d 838 (2d D 1986).

12.   Forrest v Baeza, 58 Cal App 4th 65, 67 Cal Rptr 2d 857 (1st D 1997).

13.   Lower at 470, 448 NE2d at 946.

14.   Ronald E. Mallen and Jeffrey M. Smith, 3 Legal Malpractice § 25.6 at 735 (West 5th ed 2000) (Mallen and Smith).

15.   Jacuzzi v Jacuzzi Bros, Inc, 218 Cal App 2d 24, 32 Cal Rptr 188 (1st D 1963); Guzewicz v Eberle, 953 F Supp 108 (ED Pa 1997).

16.   Meehan v Hopps, 144 Cal App 2d 284, 301 P2d 10 (1st D 1956).

17.   Cord v Smith, 338 F2d 516 (9th Cir 1964).

18.   Yablonski v United Mine Workers of America, 448 F2d 1175 (DC Cir 1971), appeal after remand, 454 F2d 1036 (DC Cir 1971).

19.   Mallen and Smith at 745 (cited in note 14). Doe v A Corp, 330 F Supp 1352 (SD NY 1971), order affirmed by Hall v A Corp, 453 F2d 1375 (2d Cir NY 1972).

20.   Cal Ethics Opinion 1989-113.

21.   Mallen and Smith at 739 (cited in note 14).

22.   Cannon v US Acoustics Corp, 398 F Supp 209 (ND Ill 1975), affirmed in part, reversed in part, 532 F2d 1118 (7th Cir 1976) (Per Curiam).

23.   Goldstein v Lees, 46 Cal App 3d 614, 120 Cal Rptr 253 (2d D 1975).

24.   Burney v Butler, 243 Ga 620, 255 SE2d 686 (1979); Croce v Superior Court of San Francisco, 21 Cal App 2d 18, 68 P2d 369 (1937). See also American Psych Systems, Inc v Options Independent Practice Assn, 168 Misc 2d 582, 643 NYS2d 901 (NY Sup Ct 1996).

25.   Tekni-Plex, Inc v Meyner & Landis, 89 NY2d 123, 133, 651 NYS2d 954, 959 (1996), affirming and modifying 220 AD2d 326, 632 NYS2d 565 (NY App Div 1995). Mallen and Smith at 742 (cited in note 14).

26.   Field v Freedman, 527 F Supp 935 (D Kan 1981).

27.   MPL, Inc v Cook, 498 F Supp 148 (ND Ill 1980).

28.   Matter of Greenberg, 206 AD2d 963, 614 NYS2d 825 (NY App Div 1994).

29.   Mallen and Smith at 746 (cited in note 14). Nelson v Green Builders, Inc, 823 F Supp 1439 (ED Wis 1993).

30.   Flower Cart, Inc v Fackovec, 163 AD2d 184, 559 NYS2d 292 (NY App Div 1990).

31.   Franzoni v Hart, Shaffner & Marx, 312 Ill App 3d 394, 726 NE2d 719 (1st D 2000). Mallen and Smith, §25.7 at 760 (cited in note 14).

32.   Scholes v Stone, McGuire & Benjamin, 821 F Supp 533 (ND Ill 1993); Pucci v Santi, 711 F Supp 916 (ND Ill 1989). Mallen and Smith, §25.8 at 761 (cited in note 14).

33.   Thompson v Karr, 4 F Supp 2d 731 (ND Ohio 1998), affirmed, 182 F3d 918 (6th Cir 1999). See also Scholes v Stone, McGuire & Benjamin, 821 F Supp 533 (ND Ill 1993). Also see related decision at 143 FRD 181 (ND Ill 1992).

34.   Goulding v US, 957 F2d 1420 (7th Cir 1992). Mallen and Smith, §25.8 at 769 (cited in note 14).

35.   Tew v Arky, Freed, Stearns, Watson, Greer, Weaver & Harris, PA, 655 F Supp 1573 (SD Fla 1987), judgment affirmed at 846 F2d 753 (11th Cir 1988).

36.   Earth Science Laboratories, Inc v Adkins & Wondra, PC, 246 Neb 798, 523 NW2d 254 (1994).

37.   Child, Inc v Rodgers, 377 A2d 374 (Del Super Ct 1977), affirmed on that issue, Pioneer Natl Title Ins Co v Child, Inc, 401 A2d 68 (Del 1979).

38.   Richter v Analex Corp, 940 F Supp 353 (D DC 1996).

39.   213 W Va 617, 584 SE2d 473 (2003).

40.   Id, quoting Picadilly Inc v Raikos, 582 NE2d 338, 343 (Ind 1991).

41.   FDIC v O'Melveny & Myers, 969 F2d 744 (9th Cir 1992), reversed by O'Melveny & Myers v FDIC, 510 US 989 (1993) (holding that state law controlled whether a corporate officer's actions would be imputed to the FDIC as receiver. On remand, the ninth circuit, this time applying California law, concluded that corporate wrongdoing would not be imputed to a trustee, receiver or other innocent entity that steps into a corporation position pursuant to a court order), reversed on other grounds, O'Melveny & Meyers v FDIC, 512 US 79 (1994).

42.   208 F3d 755, 760 (9th Cir 2000).

43.   CPJ Enterprises, Inc v Gernander, 521 NW2d 622 (Minn 1994).

44.   Delano v Kitch, 542 F2d 550 (10th Cir 1976).

45.   584 NW2d 258 (Iowa 1998).

46.   813 SW2d 400 (Tenn 1991). See also Triple Rock LLC v Rainey, 2003 WL 21338702 (June 10, 2003).

47.   Banc One Capital Partners Corp v Kneipper, 67 F3d 1187 (5th Cir 1995); Renovitch v Kaufman, 905 F2d 1040 (7th Cir 1990), followed by Rezin v Brust, 2003 WL 22494942 (Oct 31, 2003).

48.   Felty v Hartweg, 169 Ill App 3d 406, 523 NE2d 555 (4th D 1988); Hager-Freeman v Spircoff, 229 Ill App 3d 262, 593 NE2d 821 (1st D 1992); Michel v Gard, 181 Ill App 3d 630, 536 NE2d 1375 (3d D 1989).

49.   229 Ill App 3d 262, 593 NE2d 821 (1st D 1992).

50.   Pace v Jordan, 999 SW2d 615 (Tex Ct App 1999); Schaeffer v Cohen, Rosenthal, Price, Mirkin, Jennings & Berg, PC, 405 Mass 506, 541 NE2d 997 (1989).

51.   234 Ill App 3d 90, 599 NE2d 1318 (1st D 1992).

52.   335 Ill App 3d 356, 783 NE2d 77 (3d D 2002).

53.   184 Ill 2d 185, 703 NE2d 100 (1998).

54.   220 Ill App 3d 600, 581 NE2d 138 (1st D 1991).

55.   137 Ill App 3d 375, 484 NE2d 525 (1st D 1985).

56.   144 Ill App 3d 958, 494 NE2d 1227 (2d D 1986).

57.   See Avianca, Inc v Corriea, 705 F Supp 666 (D DC 1989), affirmed at 315 US 76, 70 F3d 637 (1995).

58.   Fisk v Newsum, 9 Wash App 650, 513 P2d 1035 (1973).

The devil is in the details

Three Illinois-based malpractice cases whose unifying theme is "be careful out there."

In Ferguson v Lurie, 139 FRD 362 (ND Ill 1991), limited partners of a real estate limited partnership alleged that the attorneys representing the partnership aided and abetted their general partners in committing securities fraud. The defendant attorneys refused to produce certain documents or answer certain deposition questions, invoking the attorney-client and attorney-work-product privileges. The court ruled that the documents allegedly falling within the crime fraud exception to the attorney-client privilege were not discoverable where the plaintiffs could not demonstrate a reasonable belief that the objective of the attorney-cleint communications was crime or fraud. The court also ruled that documents prepared in anticipation of different litigation were not protected under the attorney work-product doctrine.

In Brown v Gitlin, 19 Ill App 3d 1018, 313 NE2d 180 (1st D 1974), an investor sued a seller of corporate securities that had not been registered. The corporate seller filed a cross-claim for legal malpractice against its own attorney, alleging that the attorney failed to file the required report of transfer of shares pursuant to section 4G of the Illinois Securities Act. The court held that until the lawsuit between the investor and the client had gone to judgment and was appealed, the law was unsettled concerning whether this type of transaction required a section 4G filing.

In Serafin v Seith, 284 Ill App 3d 577, 672 NE2d 302 (1st D 1996), an attorney failed to inform a 30 percent shareholder of a newly formed corporation that the preemptive rights provided to shareholders could be eliminated by a two-thirds vote of the shareholders. Fortunately for that attorney, the claim was barred by the statute of limitations.

David R. Sinn <dsinn@hrva.com>, a partner in the Peoria office of Heyl, Royster, Voelker & Allen, concentrates his practice in the defense of professional liability cases involving claims against lawyers, physicians and nursing homes.