Real Estate Deals and Conflicts of Interest

Legal malpractice can certainly arise in the context of real estate transactions. A lawyer may fail to draft the proper security for the transaction, or fail to properly record important documents, or negligently draft the deal documents so that they are vague and unenforceable. Legal malpractice can also arise when one lawyer represents multiple parties to the deal, but fails to obtain the proper conflict of interest waivers. And, in virtually every case, the legal malpractice or conflict of interest usually doesn’t surface until the deal goes bad and people start to sue each other.

Joint ventures often start out with an idealistic version of “Let’s all do this together”. A and B decide that they can put together a business, and recruit monied friends C and D, and they put together, say, a nursing home. Then B, C and D decide they don’t really need A, and the trouble begins. The attorney who was hired represented them all, didn’t she? A recent case discussed that very fact pattern and it’s an example of how attorneys can get themselves into trouble.

The lawsuit involved the purchase of Ruby Weston Manor and Marcus Gavey Residential Rehab Pavilion, Inc., which were both financially troubled nursing home facilities. The plaintiff, Jonathan Mawere alleged that the defendants Joe Landau and Jack Basch agreed to jointly purchase and operate the facilities together with him, via operating companies, Alliance Health Associates, Inc., and Alliance Health Property, LLC, but that Landau and Basch, along with the defendants Leibel Rubin, Marvin Rubin and Soloman Rubin (hereinafter collectively called the purchasing defendants) ultimately excluded him from the transaction. He further alleged that defendant lawyers Garfunkel Wild, P.C., and Judith Eisen, a partner in that firm breached fiduciary obligations they owed to him by helping the purchasing defendants complete the transaction. The purchasing and nominal defendants moved, and the law firm defendants separately moved, inter alia, to dismiss the complaint against each of them. The lower court granted those motions, and the plaintiff appealed.

However, the appellate court reversed, finding the trial court should not have granted those portions of the law firm defendants’ motion to dismiss the eleventh and fourteenth causes of action, alleging legal malpractice and breach of fiduciary duty. The documentary evidence the lawyers submitted did not conclusively establish that no attorney-client relationship existed between them and the plaintiff. Furthermore, granting all favorable inferences to the client, the allegations in the complaint were sufficient to plead the existence of an attorney-client relationship between the law firm defendants and the plaintiff and to establish the law firm defendants committed legal malpractice and breached their fiduciary duties to the client. So, even though the lawyers claimed they never represented the individual plaintiff, the suit for malpractice was allowed to proceed.

In another real estate case, a building owner let a valuable building on West 46th Street in NYC slip out of her hands after 40 years. Is the attorney to blame?

The following facts were not disputed. For forty years, up until 2013, the client was the owner of the Building. In 2008, client entered into a cash-out mortgage on the Building in the amount of $2,353,000.00. Client failed to make the required payments on the loan secured by the mortgage and the default provisions of the mortgage, including a 24% penalty rate, were invoked in 2012. In January 2013, the holder of the mortgage on the Building commenced a foreclosure action against client and a receiver was appointed for the Building with the authority to manage the property and collect rents.

The client did not refinance the Building and the lender moved for summary judgment in the foreclosure action. After the lender brought the motion for summary judgment in the foreclosure action, Client entered into a contract to sell the Building to the purchaser (the “Purchaser”). The Purchaser purchased the Building from the client for $3,500,000.00 by deed dated May 22, 2013. Of that amount, approximately $2,800,000.00 was used to pay off the mortgage which was in the process of being foreclosed. The balance of the proceeds, after the payment of certain expenses, was placed in escrow for client and potentially for the Purchaser pursuant to two escrow agreements which were executed at the closing.

At the closing, the client executed an escrow agreement whereby she agreed to deposit $100,000.00 in escrow, which she would receive when she was vacated from the building, which was supposed to be no later than two weeks after closing. The escrow agreement provided that the $100,000.00 would be held in escrow to secure client’s removal from the Building which was to occur no later than May 15, 2013. The agreement further provided that in the event client failed to vacate the Building, the $100,000.00 would be applied to all costs incurred by the purchaser in connection with removing Client from the Building, including fair use and occupancy at the rate of $5,000 per month. Client continued to reside in the Building and did not pay any use and occupancy other than $5,000 ordered by the Housing Court. The court held in its previous decision that the Purchaser was entitled to the $100,000.00 held in escrow pursuant to the Client’s continued occupancy of the Building for more than 20 months after the closing. The second escrow agreement client executed at the closing set aside $62,152.00, representing the security deposit paid to Client by the first floor commercial tenant. Client would be given six months to provide the Purchaser an estoppels letter from the tenant setting forth the correct amount. If Client did not obtain the estoppel letter, the escrow amount was to be paid over to the Purchaser. The court held in its previous decision that the Purchaser was entitled to the $62,152.00 being held in escrow because more than six months had passed since the closing and client had not provided the Purchaser with an estoppel letter.

In the subsequent legal malpractice case, the moving defendant lawyers made a prima facie showing that even if they were negligent in their representation of the client, she could make out a claim for legal malpractice because she could not sufficiently establish that she has suffered actual damages as a result of any alleged negligence in allowing the sale of the Building to go forward for an amount below market value. It was undisputed that the Building was the subject of a foreclosure action at the time of the sale based on Client’s failure to make the mortgage payments on her $2,325,000.00 first mortgage note secured by the Building and that a summary judgment motion for a judgment of sale and foreclosure was then pending. Client did not allege that she had any valid defense to the foreclosure action or that she had any basis for stopping the impending foreclosure. It was also undisputed that the client was granted a thirty day stay of the foreclosure action to allow her the opportunity to refinance the Building and that she failed to do so. Based on the foregoing, the defendant lawyers sufficiently established that the only reason Client sold the Building was to avoid imminent foreclosure which was about to occur and not because of any deficient representation on the part of the defendants- she sold the Building because she did not have any other options to avoid the foreclosure. Moreover, the client failed to raise a disputed issue of fact with respect to her claim that she could have achieved a more favorable outcome to the foreclosure action but for the alleged negligence of the defendant lawyers. Her bare conclusory allegation that there were other options available to her other than the sale of the Building to avoid foreclosure was insufficient to raise an issue of fact. Her allegation that it would have taken months to achieve a judgment of foreclosure, which would have given her an opportunity to sell the Building with a real estate broker or refinance the building rather than sell the building to the Purchaser was insufficient as she failed to identify any evidence, other than mere speculation, that she would have been able to sell or refinance the Building in the time frame between the pending summary judgment motion and the foreclosure of the Building. She did not identify a single prospective purchaser who was willing to pay market value for the Building or a lender or investor who was willing to refinance the delinquent mortgage. So, the court ruled in favor of the lawyers.

Our lawyers have successfully handled numerous real estate and conflict of interest legal malpractice cases after real estate deals have gone bad. We would be happy to discuss the facts of your real estate malpractice problem with you.