No Privity? No Problem

In New York, privity is required in order to maintain a legal malpractice claim. In other words, the claim must be client v. former attorney “absent special circumstances.” But under what special circumstances would a court be inclined to find legal malpractice in a non-privity situation?  A case this past week shed some light on what one of those situations may look like.

In Deep Woods Holdings LLC v Pryor Cashman LLP, Defendant Law Firm represented a non-party individual (Buyer) in a transaction in which Buyer was to purchase $10 million worth of stock in a non-party bank. Due to complications in the transaction, Buyer reached an agreement that he had the right to exercise a call option to buy shares of stock in the bank for a specified sum, provided the right was exercised within 45 days after delivery of the shares.  However, Law Firm failed to timely exercise the call option in question on behalf of Buyer.

Thereafter, Law Firm recommended that Buyer form a holding company, so that he could assign the call option and allow the new holding company to sue to exercise the call option. Law Firm helped to organize the new holding company (which was the Plaintiff instant action) and drafted the assignment, proceeding to act as counsel for the Plaintiff holding company in the subsequent litigation.  The holding company won $25.3 million in damages in their lawsuit against the fund but the Second Circuit reversed, finding that the call option had not been not exercised in a timely manner.

The holding company then brought an instant action against Law Firm, alleging malpractice based on the firm’s failure to exercise the call option in a timely manner.  But, the initial motion court granted Law Firm’s motion to dismiss the malpractice claim, because the assignment the Law Firm drafted did not specifically assign Buyer’s tort claims to the holding company, and because the malpractice allegedly occurred while Buyer owned the call option, the holding company, as assignee, did not have standing to sue Law Firm. The holding company appealed.

The appellate division unanimously reversed and reinstated the Complaint, finding that, while the motion court correctly found that the assignment did not explicitly assign Buyer’s tort claims, the Plaintiff had sufficiently pled equitable estoppel as against Law Firm.  Indeed, the court held that where an attorney drafts an assignment at a time when it represents both the individual and the holding company, “interpreting [such an] assignment to exclude tort claims would mean that neither the assignor nor plaintiff, the assignee, would be able to sue [the law firm] defendants for malpractice for failing to exercise the call option in a timely manner.”  Therefore, the court found, a “special circumstances” exception to the privity requirement existed, because “[t]o do otherwise might insulate defendants from liability for their alleged wrongdoing.”

Privity remains a key issue in malpractice claims. All professionals must be cognizant of who has standing to sue and to be aware of who may be relying on the professional’s work-product, even non-clients. This decision should be instructive to all professionals.