NY Underlying Commercial Transaction: Conflicts of Interest
Facts: Client (plaintiff) brought an action against attorney and attorney’s law firm (defendants), alleging legal malpractice. This action arose out of attorneys’ representation of plaintiff in the sale of the plaintiff’s business to his son and daughter-in law. The attorney was a member of the plaintiff’s board of directors and acted as an attorney for both the plaintiff and his son in the transaction. The purchase price of the business was to be determined according to the profits made while under the control of the plaintiff’s son and daughter-in-law. The complaint alleged that the attorney was aware and did not disclose to the plaintiff that the new owners had engaged in unauthorized behavior that lowered the value of the business. The court granted the defendant’s motion to dismiss complaint for failure to state cause of action insofar as asserted against him and his law firm. The plaintiff then appealed.
Issue: Were the plaintiff’s allegations sufficient to state a cause of action to recover damages for legal malpractice?
Ruling: The appellate court held that the complaint asserted valid causes of actions for legal malpractice and breach of fiduciary duty because there was a conflict of interest since the attorney represented both sides of the underlying transaction and he was aware of important information that should have been disclosed to his client-plaintiff. A legal malpractice action requires proof that the attorney “failed to exercise the ordinary and reasonable skill and knowledge commonly possessed by a member of the legal profession.”
Lesson: It is commonly known within the legal profession that a lawyer is considered to be a fiduciary to each client. A lawyer must consider carefully whether it is appropriate to represent parties on both sides of a single transaction since potential conflict of interests may materialize. Unless the conflict is knowingly an voluntarily waived by all sides, it may be impossible for the attorney to proceed with representation. In this case, the attorney had a duty to communicate to the plaintiff the information that adversely affected the plaintiff’s business.