District Court Reverses: BK Erred in Dismissing Malpractice Claim
Download the full pdf of the opinion by clicking: here
July 29, 2022, US District Court for Southern New York – The US District Court for Southern New York reversed a Bankruptcy Court decision granting summary judgment to Defendants in the Basic Foods bankruptcy case. The plaintiffs Jae Ho Lee (“Lee”), his wife Soyoun Park (“Park”), and Basic Food Groups, LLC (the “Debtor”) had filed a complaint alleging breach of fiduciary duty and breach of the covenant of good faith and fair dealing against their former counsel, Samuel Ahne (“Ahne”).
The facts go as follows. Lee acquired sole membership interest in Basic Food Groups, LLC from Cheol Min Kim (“Kim”). The consideration paid for the acquisition was equal to $1.8 million which was partially financed by a $1.3 million loan to Basic Food from Noah Bank, guaranteed by Lee and Park, and secured by a lien on the Debtor’s assets. Basic Food defaulted under the loan and, in April 2015, filed a voluntary petition under chapter 11 of the Bankruptcy Code.
Lee and Park and Basic Foods Groups, LLC brought an adversary proceeding alleging that, as a result of an alleged “scheme” by Kim and Noah Bank, Lee was allegedly “fraudulently” induced to purchase Basic Food. Lee further alleged that Lee was allegedly encouraged by Noah Bank to hire Defendant Ahne as his attorney in connection with the transaction.
Lee alleged that Ahne failed to proffer admissible expert testimony to show that Ahne had not committed legal malpractice. However, the District Court found that unless the plaintiff in an attorney malpractice case provides evidence from which a reasonable jury could find that the attorney committed malpractice, there is no duty on the attorney to go to the burden and expense of retaining an expert to defend his conduct.
Lee also alleged that Ahne’s failure to perform due diligence in connection with the acquisition was allegedly a “breach of fiduciary duty”. However, the District Court held that an attorney is not liable in malpractice for failing to perform an act he was not asked to perform and that was not within the scope of the representation.
According to the complaint, Ahne allegedly owed “loyalty” to Noah Bank “for their steady stream of referrals and other benefits” and to Kim as a former client. Lee claimed that Ahne’s failure to receive a written waiver from Lee related to Ahne’s alleged conflict of interest precluded any summary judgment in favor of Ahne. However, the District Court agreed with the Bankruptcy Court that the allegation of ‘conflict of interest’ does not by itself support a legal malpractice cause of action.
Lee argued that the Bankruptcy Court ignored evidence in the record that supports that Ahne was negligent in his conduct with respect to the buyback agreement which was allegedly drafted in favor of Kim instead of Lee. According to the complaint, the buyback agreement was intended to give Lee the option to require Kim to buy back all of the units of Basic Food. However, the complaint alleges, the buyback agreement, which Ahne drafted, instead vested the option to buy back Basic Food wholly in Kim’s discretion. Lee alleges that this mistake in drafting left all the plaintiffs saddled with a debt to Noah Bank that they were unable to pay. However, the Bankruptcy Court held that there was no evidence in the record that the “Buy-Back Agreement” was intended to be drafted “to vest Lee with a put option.”
The District Court disagreed with the trial court’s ruling and pointed to the deposition testimony of Noah Bank employee who had asked Ahne to draft the “Buy-Back Agreement”. The employee testified that the agreement was intended to give Lee the option to require Kim to buy back the business. The Court observed that, in light of the clear potential negative consequences of the “Buy-Back Agreement” for his client (Lee), Ahne should have enquired Noah Bank about the purpose or motivation behind the provision or at least should have advised Lee of its potential negative consequences.
The District Court concluded that Ahne failed to exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession. The District Court reversed the Bankruptcy Court’s order on summary judgment and remanded for further proceedings consistent with District Court’s opinion.
Appellants v. Samuel Ahne (In re Basic Food Grp., LLC), 2022 U.S. Dist. LEXIS 135722