Bankruptcy lawyer owed no duty to individual because he only represented plaintiff’s company; legal malpractice claim against litigator failed because no breach of standard of care and no causation

by Chris Graham and Joseph Kelly

Abdulla v. Klosinski, Klosinski Overstreet, LLP, et al, Case No. 12-15448 (11th Cir. July 10, 2013)

Client appealed grant of summary judgment to law firm defendants in legal malpractice case.

Client alleged the firms committed malpractice and breached fiduciary duties by advising him to sign a personal guaranty for his business and for allowing a default judgment to be entered against him.

Client’s company bought $460,650 in merchandise from its vendor and never paid. Vendor sued. Client and his company retained Johnston, Wilkin & Williams (“Litigation Counsel”) to represent them in that case. Williams advised client he should consider Chapter 11 bankruptcy for his company and referred client to Klosinski & Overstreet (“Bankruptcy Counsel”) to represent client’s company in the bankruptcy. Client’s company filed for Chapter 11 and Vendor’s suit was stayed.

Client wanted to avoid the appointment of a bankruptcy trustee because he didn’t want to give up control of his business or a liquidation of the company’s assets. Vendor agreed not to seek a trustee if client executed a personal guaranty. Litigation Counsel advised client to sign the guaranty. The guaranty provided that Vendor could go after client personally in the event of a default which was defined to include a conversion of the Chapter 11 to a Chapter 7. The guaranty also included a waiver-of-defenses clause.

The bankruptcy ultimately was converted into a Chapter 7 over client’s objections and client became personally liable for his company’s debt. Vendor filed suit and served Litigation Counsel and Bankruptcy Counsel as per the guaranty, but not client because he was out of the country. Bankruptcy Counsel forwarded the complaint to client advising him that they wouldn’t be representing him in the case. Client didn’t appear timely and default judgment was entered. A couple months later, Litigation Counsel agreed to represent client for Vendor’s suit and unsuccessfully tried to reverse the default judgment.

The District Court granted the law firm defendants summary judgment. Regarding the execution of the guaranty, the court found Bankruptcy Counsel didn’t represent client personally and the record didn’t show a violation of the duty of case by Litigation Counsel. Regarding the default judgment, the court found that even if there was no default, client couldn’t have recovered in the litigation because of the waiver-of-defenses clause.

On appeal, client claimed the District Court was wrong in concluding Bankruptcy Counsel didn’t represent him. The Eleventh Circuit disagreed finding that Bankruptcy Counsel’s engagement letter explicitly said it was representing client’s company and Bankruptcy Counsel’s actions were consistent with such an engagement. The Eleventh Circuit also didn’t buy client’s argument that Bankruptcy Counsel represented him for Vendor’s suit when it represented client and his company in an unrelated matter.

Client also argued that Litigation Counsel breached the standard of care. The Eleventh Circuit disagreed noting that the record showed Litigation Counsel advised client of the risk and reward of the personal guaranty and that it was reasonable to advise client to sign the guaranty.

Client further claimed that the waiver-of-defenses clause was unenforceable because there was no consideration. The Eleventh Circuit disagreed noting that the “compromise of a doubtful claim” can be consideration.

Client lastly argued that he signed the guaranty under duress. The Eleventh Circuit again disagreed noting that “when the signer of an agreement is sophisticated in business matters and has access to and in fact obtains advice of counsel, the defense of duress is not available to void the contract.”

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