Duty of Care in Legal Malpractice Issues

Cottone v. Fox Rothschild, LLP, 2014 WL 4287002 (September 2, 2014), cert denied 220 NJ 207.

 

business-transactionEric Michaels, Esquire (Michaels) was the attorney for Robert Cottone (Cottone) in connection with several complex business transactions.  Cottone had sold his business “Brokerage and Insurance Consulting, Inc.” (BIC) and received an equity interest in the continuing company called NIA Group, LLC (NIA).  Subsequently, NIA was restructured into a new entity called NIA-II.  In the restructuring of NIA into NIA-II, the units which Cottone was to receive were to be “identical in all respects” but Cottone received a “second warrant” (which was later called into question), his equity and an extended employment contract.  2014 WL 4287002 at *1.

In June of 2009, Cottone filed a suit against NIA-II and its President alleging that the President had misrepresented NIA’s value during the negotiations to purchase BIC.  During the summer of 2009 and leading into the fall of 2009, negotiations were carried out between Cottone and Steven Grossberg of NIA-II resulting in several drafts of a Redemption Agreement.  On September 24, 2009, while Cottone was in the hospital and Michaels was in Europe, an agreement was signed to conclude the settlement of the suit and allow NIA-II to proceed with a larger sale to Marsh and McClennan Agency, LLC (Marsh).  Id. at *2.  When the latter sale to Marsh transpired, Cottone questioned the amount of his equity and in turn sued Michaels and his law firm, Fox Rothschild. Id. at *6.

During the negotiations for the Redemption Agreement, Michaels and Cottone had reviewed several drafts.  At issue was a “kicker provision” in the Agreement which would have granted Cottone about $1,200,000 value for his warrant interest; however, in the later and final version of the agreement, the attorneys for NIA-II had inserted language to say that Cottone was to be paid a per unit sale price calculated as if his units were sold for his issued and outstanding equity at the time of sale and “for the avoidance of doubt, not any units underlying the Warrant”. Id. at *5.

In the malpractice suit against Michaels, Cottone submitted an expert report stating that Michaels was aware of Cottone’s desire to “monetize” his equity interest and that Michaels could not recall discussing with Cottone the “for the avoidance of doubt” clause which was inserted in the agreement and, per Cottone, Michaels admitted that he “missed it.” Id. at *6.   The trial court granted Michaels’ motion for summary judgment.  The trial court found that Cottone had not established a breach of duty by counsel even on the facts as alleged.  The court found that the quoted language “avoidance of doubt” was unambiguous and Cottone had also failed to establish a prima facia case on damages because there was little or no evidence supporting the possibility that NIA-II would have ever agreed to pay more for the “kicker” than as noted in the final Settlement/Redemption Agreement. Id. at *7.

The Appellate Division reversed the dismissal and remanded for further proceedings. Id. at *16. The Appellate Division found that there was a duty owed by Michaels to Cottone, however, there remained a factual question of whether the conduct of Michaels fulfilled his duty.  The court found four factual issues that need to be addressed.  When considering a best case scenario for Cottone, a trier of fact should determine whether Cottone was, in fact, entitled to a “kicker” for his original warrant interests.  Second, there were factual questions as to whether Michaels knew of Cottone’s desire to retain this “kicker.”  Third, did Michaels admit fault when first being advised that the language was inserted into the final version of the agreement?  While Cottone indicates that Michaels confessed to having “missed it,” Michaels denies that contention.  Finally, there were fact issues surrounding the expert report reliance on knowledge of Cottone’s objective in “monetizing” his equity interest and whether he, in fact, “missed it” in the final version. Id. at *13-14.

The issue is whether “Michaels committed malpractice by not inquiring into or explaining the terms of the redemption agreement, that is, whether a competent and diligent attorney acting in similar circumstances would have done so”.  Id. at *14.  At issue in the case was whether the attorney had a duty to explain each and every word in a complicated and confusing settlement agreement where the client involved is a sophisticated businessman and where revisions are being made.  According to Michaels, Cottone was a sophisticated businessperson and that he (Michaels) only served as a “scrivener” of the agreement.  Insofar as this language was added late in the negotiations, should the fault lie with Cottone, the businessperson negotiating the deal, or Michaels, the lawyer who may or may not have pointed out to the client that this was contrary to his otherwise (allegedly) stated objective.  Id. at 14.

Finally, the court reversed the dismissal on the damages claimed.  While the trial court found that the assertion was speculative, taking the facts from Cottone’s perspective exclusively, the trier of fact could determine whether or not the NIA-II would have held up the potential sale to Marsh because of the rights under Cottone’s prior law suit.  Id. at *16.


Glenn A. HenkelGlenn A. Henkel is a shareholder in the firm and earned his J.D. degree at Rutgers University School of Law, where he graduated with honors and was awarded the Prentice Hall Award for outstanding performance in the area of taxation. He earned his LL.M. in Taxation at New York University. Mr. Henkel’s particular areas of expertise include complex estate planning, tax-exempt organizations and Probate, Trust and Estate Law.