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Duty to Communicate and Explain Significance of Contract Terms

Conklin v. Hannoch Weisman,  281 N.J.Super. 448 (App. Div. 1995)

Student Contributor: Maninder (Meena) Saini

NJ Underlying failure to explain contract terms leading to loss of equity in realty.

Facts: A New Jersey partnership, Conklin Farms (plaintiff), was represented by Kemph and his law firm, Hannoch Weisman, P.C. (defendants) in the sale of undeveloped land. Initially, plaintiff used that land for mining, but due to rezoning laws, the plaintiff sold the land to a developer because the value of their land increased significantly. Through advice from the defendants, the plaintiff agreed to subordinate the mortgage to institutional construction-money mortgages. The sale closed and the development project failed. The property was foreclosed by the mortgage lenders and left no equity for the plaintiff. In addition, the plaintiff’s buyers and guarantors all filed for bankruptcy, leaving the plaintiff with a substantial loss. The plaintiff then filed a lawyer malpractice lawsuit claiming that the defendants’ explanations to plaintiff of the meaning and risks of the subordination agreement were inadequate and inaccurate.

Issue: Did the defendants adequately inform the plaintiff of the meaning and risks of the subordination agreement?

Ruling: The appellate court held that the defendant was negligent in representing the plaintiffs in connection with explaining subordination and the risks associated with it.

An attorney has a legal duty to explain to their clients the meaning of an agreement and to further warn them of its risks, even if the risks are not reasonably foreseeable. The duty to advise the client fully and truthfully is inherent in the attorney-client relationship.

Lesson: An attorney must always fully and truthfully explain any agreements into which its client is entering. Further, the attorney must alert its clients of all risks so they can make an informed decision. This rule is even more important whenever the client raises any doubt as to the agreement because the court may instruct the jury to apply a “subjective standard” in deciding the negligence claim; that is, would the plaintiff, not the objective  "prudent person", have declined to enter into the agreement knowing all the risks? This subjective standard is easier to overcome and may be damaging to the attorney’s case.

Note: Make sure to see the NJ Supreme Court decision in this case which held that to prove proximate cause in a legal malpractice case, the negligence of the attorney need be a "substantial factor" in causing the damages. 145 N.J.395 (1996)

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Posted in: Duties: Communicate, New Jersey, Real Estate