- Law Firm Not Liable for Malpractice Because Mistake Did Not Cause Lower Damages Award
- April 3, 2009
- Law Firm: Hinshaw & Culbertson LLP - Chicago Office
Kaminsky v. Herrick, Feinstein LLP, 870 N.Y.S.2d 1 (App. Div. 2008)
A law firm that argued on behalf of a client for damages based on a post-IPO valuation of a company was not liable for malpractice, even though the proper damages calculation involved a pre-IPO valuation, because the firm’s mistake did not cause a lower damages award.
Edward Kaminsky sued his former law firm, Herrick, Feinstein LLP (“Herrick”), for malpractice based on Herrick’s representation in an underlying contract dispute. The underlying dispute arose after Kaminsky reached a verbal agreement to buy into a private company, NextLevel Communications, via a special purpose entity. Kaminsky was to buy a partial interest in the special purpose entity from Spencer Segura. Segura entered an identical agreement with a third party, James Agate.
Segura reneged on Kaminsky’s deal. Kaminsky quickly retained Herrick to sue Segura. A month later, NextLevel had an initial public offering (IPO). When it subsequently became clear that Segura also would not honor Agate’s deal, Agate joined Kaminsky’s lawsuit and was also represented by Herrick. The consolidated matter was sent to arbitration.
The main issue in arbitration was the amount of damages. Segura argued damages should be assessed at the time of breach. Herrick argued damages should be assessed on a post-IPO basis, and plaintiffs’ expert testimony relied on prices from two specific post-IPO dates. Segura’s expert pointed out that sale on those dates would have been impossible due to post-IPO sales restrictions. Herrick also sought to present a witness for rebuttal, but the arbitration panel refused because plaintiffs had an opportunity during the case-in-chief and during cross-examination to present such evidence. The panel awarded plaintiffs less than they desired, and Kaminsky and Agate sought to vacate the arbitral award in court. The court held the arbitration panel had afforded the plaintiffs a fair opportunity to present their case.
Kaminsky and Agate then brought separate malpractice suits against Herrick for failure to present sufficient evidence to establish the full damages resulting from Segura’s breach. Agate’s complaint was dismissed on summary judgment.
Kaminsky advanced multiple allegations of wrongdoing by Herrick but failed to address the issue of how damages should have been calculated. Most notably, Kaminsky argued that because Segura breached Kaminsky’s agreement before the IPO and Agate’s agreement after the IPO, Herrick had a conflict of interest and had favored Agate by arguing for a post-IPO damages calculation. The Supreme Court, New York County, granted summary judgment for Herrick based on stare decisis in light of the Agate case and based on collateral estoppel in light of the court’s refusal to vacate the arbitral award.
The New York Appellate Division, First Department, affirmed on different grounds. The court held that regardless of any wrongdoing by Herrick, Kaminsky had failed to establish a causal connection between the alleged wrongdoing and the size of the arbitral award. The court noted that New York law requires that damages be calculated at the time of breach, which in this case meant that the post-IPO value of the shares was irrelevant. Further, once the arbitration panel had decided on a pre-IPO valuation, Herrick made every effort to ensure that this valuation was as large as possible. Kaminsky also offered no evidence of what Herrick could have done to increase the award.
The court also noted that the latest date on which Agate’s agreement could have been breached was the date of the IPO because permitting performance to occur after the IPO would have converted Agate’s contractual right into an impermissible call option or warrant.
Finally, the court rejected Kaminsky’s argument that he had signed the retainer agreement with Herrick under duress. The court held that Kaminski’s three-year delay in pursuing the duress issue amounted to implicit ratification.
Significance of Opinion
The case serves as a reminder of the basic elements of a malpractice claim. The case shows the need for a plaintiff to prove each element of its “case within the case.”