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Practice Area Newsletter

American Bar Association - Defending Liberty, Pursuing Justice

SUMMER 2011

Vol. 7, No. 4

 

PRACTICE MANAGEMENT

 

Foul Shot: Malpractice Claim Involving NBA Great Has Lawyers Asking, “What’s Good Client Communication?”

By Todd C. Scott

When former Chicago Bulls basketball great and NBA Hall-of-Famer Scottie Pippen participated in a transaction with a business partner and their joint purchase of a Gulfstream jet, Pippen thought he was involved in a deal where his contribution toward the purchase would total $1 million. What Pippen didn’t know about was another $5 million in loans arranged by his attorneys, the Chicago firm of Pedersen & Houpt, and included in the transactional documents Pippen had signed as part of the deal. Eventually, when the jet was grounded for nearly two years due to maintenance and repair issues, the subsequent loss of lease revenue caused the loans to go into default, and Pippen was stuck paying loans he says his lawyers never told him about.

After paying nearly $7 million in principal, interest, and legal fees on the unpaid loans, Pippen brought a suit against his attorneys alleging they did not properly explain the terms of the 2002 deal to him. Pippen testified that he didn’t know he had gotten himself into a $7 million deal, and his attorneys should have informed him of the changing terms of the transaction. A Cook County, Illinois, jury somewhat agreed with Pippen and awarded him $2 million.

“They had an obligation to explain and supervise the documents,” Pippen’s attorney who handled the malpractice action, George Spellmire Jr., was quoted as saying after the verdict became public. “What he thought he was getting into was not what was actually happening.”

Pippen’s malpractice claim for failing to get his consent on a matter is not very different than the hundreds of claims that are brought against attorneys every year involving an attorney-client communication breakdown. The ABA Standing Committee on Lawyers’ Professional Liability tracks errors alleged against attorneys in legal malpractice actions, including those involving a communication breakdown between lawyers and clients. In their most recent study, professional liability insurers reported that 11.2 percent of all claims alleged against attorneys in the period from 2004–2007 involved a breakdown in client communications. Specifically, five percent of the claims involved a lawyer’s failure to obtain the client’s consent.

On the whole, the number of malpractice claims involving a breakdown in client relations is getting better. The ABA Standing Committee’s study has been conducted every four years, and it shows a significant decline from the 1999 high, when 19 percent of all claims reported against attorneys involved an allegation that the lawyer failed to obtain the client’s consent, properly provide informed consent, or follow the client’s instructions. (See graph in figure 1.) The decline in claim activity involving attorney-client communications is one of the few hopeful trends that came out of the most recent ABA Standing Committee study on professional liability.

Client Errors Graphic

But for lawyers involved in transactional matters that sometimes became very complicated, the outcome of the Pippen case leaves them wondering: are lawyers doing all they can to ensure that the client has been fully informed about the risks of the transaction?

“Transactions such as Pippen’s jet deal are often very speculative investments,” says attorney Howard S. Golden of the Chicago firm Robbins, Salomon, Patt Ltd. “If the client gets mailed lengthy documents that are single-spaced, small print, with lots of clauses and a note that says, ‘sign here,’ the lawyer is not really doing their job of explaining what the client is getting into,” says Golden. “Half of lawyers not involved in this kind of work wouldn’t fully understand what a document like that says.”

Golden, whose practice involves a broad variety of transactional work including the purchase and sale of businesses, advises that even in an investment where there is much less at stake, he believes it is important to educate the clients fully about the risks, and to break them down in simple terms.

“You have to make sure the client is fully informed of the risks involved in the investment,” says Golden. “You start by sending them a letter saying, ‘Are you aware . . . ’ and then you list your concerns about your client’s potential exposure.”

Bryon G. Ascheman, of the St. Paul, Minnesota, firm of Burke & Thomas PLLP that defends lawyers in legal malpractice actions, agrees with that advice.

“Typically, the law says that an individual should have knowledge of what he is signing,” says Ascheman. “But a lawyer has to remember that a client goes to them for an explanation of what is in the document.”

Ascheman recommends that attorneys sit down with their clients and fully identify the terms of the transaction and the potential hazards associated with it.

“Not enough lawyers actually sit down with their clients, go through the transaction, and fully document for their file that the discussion took place.” says Ascheman. Such documentation is necessary to successfully defend a malpractice action if there is a subsequent dispute as to whether the lawyer fully informed the client regarding the risks of the transaction.

Another concern is whether the lawyers fully understood what Pippen was hiring them to do. Pippen testified that he expected his attorneys to “monitor” the transaction, saying that as a professional basketball player he was busy playing his sport and that his lawyers should have “policed the deal better.” If Pippen was looking for something more than someone who would simply handle the paperwork, did his lawyers have that same understanding?

“A firm should always send out a letter spelling out exactly what their obligation is,” says Golden. He recommends a letter to the client specifically identifying the scope of the attorney’s engagement in the matter.

Also, an attorney who has not been hired to provide an opinion on the merits of a transaction should state in the letter, “You are not expecting me to opine on whether this is a good deal.” Stating those facts in simple terms is necessary to make it perfectly clear to the client that the lawyer is not giving business advice.

For Ascheman, laying out the attorney’s scope of engagement in the matter is something that every attorney should do in every matter in order to prevent misunderstandings between the lawyer and the client.

“Sometimes the scope of the matter changes,” says Ascheman, “And that’s okay. You just want to be continually monitoring the agreed-upon relationship between the lawyer and the client and document any changes to avoid misunderstanding.”

Malpractice claims involving client relations are among the most preventable of all legal malpractice actions. For nontransactional matters, the claims usually involve a misunderstanding in the expected outcome of a matter, or the client’s lack of understanding regarding the legal process they are involved in.

The key to preventing most such claims is to continually communicate with the client regarding the status of a matter—even if there are no file activities going on. Nothing frustrates a client more than not hearing from their attorney for some time regarding the status of their file. Clients often need to be made aware that the lawyer is still working on their matter, and although there may be a break in activities, a communication to the client that the break is an expected step in the legal process reassures the client that the lawyer has not neglected their matter.

Essential steps for ensuring that a client is completely aware of the important elements of a transaction include:

  • Fully document the key terms of the transaction or agreement that the client is entering into, explaining the risks in simple terms that the client can understand;
  • If possible, sit down with the client and review the writing that identifies the terms of the agreement and the risks associated with the matter;
  • Ask the client what is his or her understanding of the agreement. They may tell you something that is contrary to what is your understanding of the deal, giving you an opportunity to head off any misunderstandings after the transaction is complete;
  • Memorialize for your legal file any discussions you have had with the client about the key provisions of the transaction and the risks associated with entering into the agreement. Such a memo to the file can be crucial if there is ever a dispute between the attorney and the client about the advice that was given;
  • Identify in writing the scope of the lawyer’s involvement in the legal matter to avoid any confusion as to what the lawyer was hired to do. If the lawyer has not been hired to provide an assessment of the merits of a transaction, such a statement should be included in the engagement agreement in clearly identifiable terms;
  • Always stay in communication with a client regarding the status of their matter. Every means for communicating, whether it is a phone call, an email, or a description on an invoice is essential for the client to understand the ongoing status for their matter.

Todd C. Scott is VP of Risk Management at Minnesota Lawyers Mutual Insurance Company. He blogs at www.attorneysatrisk.com and can be reached at tscott@mlmins.com or on Twitter at RUatRISK.

© Copyright 2011, American Bar Association.