- New York Court Upholds Retainer Agreement That Provides Defunct Law Firm with Technology Company Stock as Legal Fees
- November 7, 2008
- Law Firm: Hinshaw & Culbertson LLP - Chicago Office
Goldston v. Bandwidth Tech. Corp., 52 A.D.3d 360, 859 N.Y.S.2d 651 (N.Y. App. 1 Dept. 2008)
Based on a retainer agreement signed at the height of the dot-com boom, a non defunct law firm was awarded two percent of a technology company’s stock.
Law firm Goldston & Schwab (“Goldston”) entered into a retainer agreement to represent Bandwidth Holdings Corporation and its wholly owned subsidiary Bandwidth Technology Corporation (collectively, “Bandwidth”). Executed by Bandwidth president Jonathan Star in September 1998, the agreement was for a fixed term of one year retroactive to June 1, 1998. Pursuant to its terms, Goldston and Bandwidth agreed that Goldston would be compensated by four shares of the closely held company’s outstanding stock - approximately two percent.
In November 1998, Goldston broke up. Bandwidth then refused to honor the retainer agreement on the grounds that president Star had no authority to issue stock without the approval of Bandwidth’s board of directors. Goldston brought the instant action for specific performance of the retainer agreement.
The state Supreme Court of New York County dismissed Goldston’s claim, finding that the retainer agreement was void and unenforceable. On appeal, the First Department unanimously reversed, reasoning that Star’s “apparent authority” to enter into the deal with Goldston rendered irrelevant any discussion of his actual authority.
On the principal issue of authority to enter into the agreement, the court noted that the president of a corporation was generally presumed to have the authority to retain counsel and negotiate the terms of that retention. Bandwidth did not contend that the retainer agreement was “so extraordinary or provid[ed] for such unusual compensation as to require board approval.” Id. at 655. Indeed, the company clearly accepted the benefits of the legal work - whether authorized or not - and effectively ratified the agreement by adopting a resolution terminating Goldston of any duties as “corporate attorney” for the company. Id. at 657.
The court also found it unimportant under the terms of the retainer agreement that Goldston performed little or no work after November 1998 since it had performed work before then. In sum, Bandwidth failed to set forth grounds upon which it should be relieved from performance.
Significance of Opinion
The court’s holding supports freedom of contract. Interestingly, the court did not discuss the ethical implications, if any, of NY DR 5-104(A) (similar to ABA Model Rule 1.8(a)), which governs business transactions between a lawyer and the lawyer’s client, including instances in which the lawyer accepts securities in lieu of fees.