Motion to Dismiss Denied in New York Federal Legal Malpractice Case

The U.S. District Court for the Southern District of New York has recently refused to dismiss a legal malpractice action against a law firm.  A client sued his former counsel, Seward & Kissel LLP, for failing to conduct due diligence in the sale of an energy company.

Prior to the sale, the firm had furnished the client with an engagement letter, which broadly described the scope of its representation as “lead transaction counsel.”  Further, the parties to the transaction had signed a letter of intent, which recited that each party could have their counsel conduct due diligence prior to the sale.

The suit claimed that the firm failed to perform a due diligence review of the potential buyer.  When the sale closed approximately six months later, one of the buyer’s board members was charged with securities fraud and conspiracy, resulting in a class-action lawsuit seeking to delist the company from public trading.

The SEC did suspend all public trading of the buyer’s shares, rendering the sale worthless.  The seller re-purchased the company for $900,000, less than the $7.5 million price negotiated with the original buyer.

The suit claims that Seward & Kissel negligently advised the client in the sale and failed to perform due diligence about the buyer, which would have revealed the securities fraud and conspiracy issues.  The court denied Seward & Kissel’s motion to dismiss, noting that the firm’s letter of engagement was “facially broad” and lacked language to indicate that the firm would not perform a due diligence inquiry.  The Court further stated that the firm had a duty at least to discuss whether a due diligence inquiry would be performed.

http://Mitchell Barack v. Seward & Kissel, LLP

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