This article provides an overview of a third-party closing opinion claim from the time the claim surfaces to the completion of the summary judgment phase of the litigation. Attorneys who give opinions or advise their clients who receive opinions are generally aware of court decisions concerning opinion liability. They also are aware of their ethical responsibilities as they give and advise on opinions their clients receive. Court decisions reflect the court’s assessment of the arguments of both sides, typically in the context of a summary judgment motion made by one or both parties. In many respects, an opinion liability claim is much like any other legal malpractice claim.
However, both the significance of customary practice in the opinion area and the possibility of liability to a non-client (as well as the client in some situations) makes the opinion claim different from most legal malpractice claims. Court decisions reveal very little about how the litigating parties prepare their case, how they deal with the clients involved, who oversees the effort made by each side, the role of the insurer, the role of the opinion preparer, and the time, costs and emotional impact on the lawyers involved in the opinion, in getting through the summary judgment phase of the litigation.
In this article, we provide general guidance regarding the issues and events that a law firm typically encounters when an opinion recipient threatens or files a claim seeking damages from a law firm arising from a third- party closing opinion. These issues and events are presented as they might appear to a law firm’s general counsel (the “GC”), who ordinarily has responsibility to deal with such a situation.
This article provides only an overview. It uses a typical factual setting to identify commonly encountered issues and events. The issues and events relating to actual claims will of course.
B. The Setting
We assume for this article that:
- The claim is asserted by a lender, which is the third-party opinion recipient (the “claimant”);
- Only one attorney in the law firm is the opinion preparer and the law firm is the opinion giver as counsel to the borrower (the “client”);
- The claimant does not assert a claim against the client because the client is essentially insolvent, although it remains in ;
- The law firm does not anticipate that:
- the client will later be named as a defendant;
- the client will make a cross- claim against the law firm arising out of the closing opinion or the surrounding circumstances, even if the client is named later as a defendant; or
- the filing of a complaint will involve significant reputational risk for the law firm or its client;
- The law firm has sufficient malpractice insurance so that the claim will not cause it financial difficulty; and
- In connection with the underlying transaction, neither the transaction nor the client is directly subject to a regulatory system, such as one administered by the SEC or banking authorities.
The nature of the claim is important in determining how the opinion giver firm should. The claimant may assert more than one theory of liability. However, we assume that the claimant asserts only that it was misled because the opinion giver did not disclose material information relevant to one or more of the opinions given. Unlike a malpractice claim by a client, a claim by a non-client recipient typically is based on negligent misrepresentation.
Frequently, the alleged omission is not directly related to one of the opinions but is important to properly evaluate the opinion. We assume that the lender claims it would not have approved the loan to the borrower if it had been given the omitted information. In this connection, we assume that the lender’s possible interest in the information was understood by the opinion preparer, but not by the lender or its counsel for the transaction. Thus, the claim is similar to the claim inand in . Typically, the ultimate question in cases involving claims primarily based on omissions will be whether, under the circumstances, the recipient had a reasonable expectation that it would receive disclosure of the type of information not disclosed.
There are other familiar fact patterns for opinion claims.involves a situation in which an opinion giver made an error that might have been discovered before the closing by the attorney for the recipient. However, it was discovered only after the closing. In cases involving a clear error, whether the error gave rise to the damages claimed and resulted from the opinion giver’s negligence may remain subject to dispute.
Theand involve claims that diligence for an opinion given was not adequate. That type of case implicates the concept of customary diligence.
Claims made by a client, such as those in theand in , raise more difficult problems than third-party claims. That is because the duty to a client is typically more extensive than the duty to a third party.
C. The Checklist
1. The First Contact with the Opinion Preparer
The attorney who represented the recipient in the transaction for various reasons typically is not the one to raise the claim. In our assumed fact pattern, a litigator representing the recipient/claimant becomes involved after the facts underlying the claim are discovered and asserts that the recipient believes that the opinion preparer had specific information that should have precluded delivering the closing opinion or required disclosure of the information when the closing opinion was delivered.
We assume that the initial notice of the claim, as is often the case, is given by telephone and directed to the opinion preparer, as the lead transactional attorney. The opinion preparer is surprised by the call and later remembers the conversation as largely one-sided. The opinion preparer makes notes of the telephone conversation during and after the call but does not respond to any of the statements made by the litigator representing the claimant. It is important to note that any conversation between the opinion preparer and the litigator for the claimant can result in admissions against interest.
Sometimes, the claim will first come to the attention of the opinion giver firm in some other way, perhaps when a demand letter is received or a complaint is served. Service of a complaint eliminates some informal options for resolving the claim quickly, but also averts the possible complications of a cold contact discussed above.
The opinion preparer’s recollection of the call is that the claimant’s litigator stated that the claimant intends to file a complaint but would provide a reasonable period of time for the opinion giver law firm to respond before filing. The opinion preparer had previously become aware that the client was in serious financial difficulty but had not been contacted by the client post-closing about that and had not reviewed the file.
The opinion preparer does not at the time of the call completely remember the closing opinion that was delivered about three years earlier. The opinion preparer recalls that the closing opinion seemed routine. The opinion preparer believes the information now stated to have been omitted and alleged to be the basis of the claim would have been well outside the scope of the opinions given.
Takeaway: A transactional lawyer needs to be prepared for a cold call raising a claim and to field it without comment other than that the firm will respond promptly .
The opinion preparer is aware of the law firm’s policy that the GC should be informed immediately of any claims or threats of any claims against the law firm. However, before contacting the GC about the call the opinion preparer discusses the matter with another partner who does transactional work and has experience with third-party closing. That is done in part to gain sympathy and support for the opinion preparer’s view that the opinions were properly given. That partner, after briefly reviewing the closing opinion, offers his view that it was not necessary to disclose the information in question under customary .
The opinion preparer then informs the GC of the call.
Takeaway: Lawyers in a law firm need to be aware that conversations with other lawyers in the firm may not be privileged. Therefore discussions regarding a claim ordinarily should be limited to the firm’s GC or someone the GC designates.
2. The GC’s Background and Role
The GC has a commercial litigation background and has dealt with other legal malpractice and ethics claims asserted against the law firm. However, the GC in our situation, as a litigator, does not have the experience to evaluate whether the closing opinion was prepared properly or to evaluate the potential liability.
The GC obtains the transaction file and a description from the opinion preparer of what is known about the possible claim, as well as the contact information for the claimant’s attorney. The GC reminds the opinion preparer of the firm’s policy that no discussions about any claim or threat of any claim should occur, internally or externally, except with the GC or someone the GC designates. The opinion preparer then discloses to the GC the prior discussion had with the other partner and that partner’s conclusion.
Often the law firm’s management does not disclose claims against the firm to partners generally or only notes the presence of the claim but not the partner involved or the type of claim. As a management matter, disclosure and related discussion of the claim is typically viewed by the law firm’s management as a distraction and potentially divisive. Unfortunately, when there is no opportunity for discussion, the opinion preparer may feel isolated by the rumors within the law firm that inevitably take place.
Because the GC in our situation does not have the experience to evaluate the claim, another transactional attorney in the firm is appointed to assist the GC to evaluate the claim.
However, unless the appointment is made in a formal way, there is a risk that an evaluation by that attorney will be subject to discovery if the claim moves to litigation. Instead, the GC may choose to retain a consultative expert from another law firm to make the evaluation. Any evaluation at this stage is preliminary since the claimant’s allegations are not fully known.
Takeaway: Typically, the law firm’s GC will not have a transactional background. Therefore, the GC will want assistance in evaluating a claim involving a closing opinion.
3. Preserving Documents and Other Information
A claimant’s case can sometimes be based on using information of the opinion giver law firm. Accidentally destroying or reducing the usefulness of evidence or information that could be used to develop evidence (“spoliation”) may result in punitive action against the law firm. Intentionally doing so may be a crime. Spoliation of evidence can result in sanctions that could preclude an effective defense.
Accordingly, the GC could consider the following:
- evaluating which attorneys and non- attorneys in the law firm are likely to have evidence or information that might lead to evidence regarding the claim;
- determining the best method of communicating with those attorneys and non-attorneys regarding a “legal hold notice”;
- deciding whether to preserve telephone records in addition to preserving texts, emails, hard copies and other formats containing information, taking into account the significant cost typically associated with preserving telephone records; and
- considering whether the client should be sent a “legal hold notice,” including whether the client needs a detailed explanation.
Takeaway: A first step following notice of a potential claim often is a preservation notice to relevant law firm personnel.
4. The Need to Establish Communication Lines Quickly
The GC should move promptly to establish and maintain the following communications:
- inform firm management;
- inform the insurer;
- inform the client;
- assure that a public relations contact is available if required; and
- maintain contact with the opinion preparer.
The GC does not know how much time is available before the claimant will file a complaint if there has been no meaningful communication with the claimant’s attorney. The GC needs to know more before determining an initial strategy. A filed complaint may limit the firm’s options.
However, the GC should consider evaluating the likely claims and determining whether the applicable statute of limitations might be an effective defense. This could be relatively simple if the jurisdiction has a specific legal malpractice statute that includes claims by non-clients.
More frequently, there will be more than one claim and both the date the statute of limitations started running and whether there is any tolling will require analysis. Typically, a definitive answer will not be available at an early stage.
We assume for our setting that the statute of limitations will not become a defense for now. Therefore, it will not be a factor in assessing whether the GC should call the claimant’s attorney. Such a call could result in a better understanding of the claim. It provides a way to show that the law firm is giving attention to the matter. It may provide additional information and permit establishing a schedule for preliminary discussions.
There may be good reason for the GC not to call the claimant’s attorney at an early stage, including running of the statute of limitations. However, the decision to wait, or not respond at all, should be carefully considered based on the circumstances.
Takeaway: Careful consideration should be given to when and how to contact a claimant’s attorney, including statute of limitations considerations.
The claim, if pursued, may require disclosures that could affect the client. That raises potential client confidentiality questions under ABA Model Rule of Professional Conduct 1.6 (“Confidentiality of Information”). The GC would likely establish communications with the client’s internal legal staff or other counsel representing the client to manage any such questions and obtain client consent if required. Also, early communication with the client may be helpful in dealing with possible client concerns about the claimant’s allegations in any filed complaint regarding the professional conduct of the opinion preparer and the opinion giver firm.
Takeaway: Professional obligations to the client and possible conflicts of interest need to be carefully considered.
5. Insurance Questions and Notice of Claim
The GC is responsible to ensure that a prompt written notice required by the policy will be filed with the insurer. A contact with a claims representative of the insurer will quickly be established since the insurer typically has the major monetary risk regarding the outcome of the claim.
Takeaway: Required notices to the firm’s insurer need to be given in a timely fashion and a relationship with a claims representative of the insurer established.
6. Place of Filing and Hiring the Defense Attorney and the Consultative Expert
An initial question for the law firm is: Where is the claimant likely to pursue its claim, if it does so? Often the claim is filed in the “home” jurisdiction of the claimant.
However, if the client is also a potential defendant, the claim may be filed in the jurisdiction required by the underlying transaction agreements. In addition, the transaction may involve contacts with other jurisdictions that could support a filing elsewhere.
When very large potential claims are involved, it may be appropriate to bring in a defense team with relevant experience and a national reputation. Doing so, though, is likely to raise the costs of defense significantly. Also, if the case is brought in a jurisdiction in which the defense team is not admitted to practice, there may be additional costs involved in retaining local co-counsel.
The terms of the insurance policy will determine whether the insurer or the law firm has the right to designate the counsel to be engaged to defend the case. Often, the insurer has that right.
The insurer typically prefers to use a law firm and an attorney who has handled malpractice defense cases for it before. The typical insurer’s concern is to engage attorneys with experience in avoiding high settlements and verdicts while controlling fees. There may be negotiations between the opinion giver firm and the insurer about the attorneys to be engaged and the costs involved. When a financial institution (or other major employer of law firms) is a claimant, many large transactional law firms will decline to be engaged as the defense attorney because of conflicts of interest or business relationship concerns.
An attorney experienced in legal malpractice or similar cases against attorneys may be able to evaluate the opinion-based claims, including the question of whether the alleged non-disclosure caused the damage. However, in cases where the allegation is that diligence in preparing the opinion letter was not adequate, a detailed knowledge of customary third-party closing opinion diligence would be required to evaluate whether the closing opinion was properly given.
Unless the proposed defense attorney has had experience with third-party opinion cases sufficient to evaluate the conduct of the opinion preparer, it may be appropriate to engage a consultative expert. Either the proposed defense attorney or a consultative expert should be capable of evaluating the opinion preparer’s conduct under the circumstances of the transaction. A consultative expert may also be prepared to act as or assist in hiring the testimonial expert (see Section 15 below).
There also may be negotiations with the insurer about retaining the consultative expert and related costs. The consultative expert is for practical purposes part of (and an additional cost of) the defense team.
There is some time pressure involved in finding the defense attorney and, if needed, the consultative expert. Substantive discussions with the claimant’s attorney typically proceed only after a careful preliminary evaluation of the opinion preparer’s conduct. That will include an inquiry into the nature, extent and source of the information that was not disclosed. Typically, that involves informal and formal discovery, including depositions.
Takeaway: Assembling the appropriate defense team, including counsel and experts, is an important part of the early efforts.
7. Initial Interviews and Evaluation of the Claim
We have assumed that the claim involves non-disclosure of information relevant to an opinion given. There are a number of opinion cases and a large number of non-opinion misrepresentation cases involving non- disclosure claims. Neither customary opinion practice nor misrepresentation law requires disclosing all relevant information.
The initial evaluation must, of necessity, be made without full knowledge of what the claimant will allege in its complaint. Any evaluation at this stage will primarily rely on:
- the closing opinion itself;
- an interview with the opinion preparer;
- a review of relevant cases and bar reports;
- whatever there is in the law firm’s transaction files relating to the opinion given; and
- available information about the claimed non-disclosure.
If the opinion preparer consulted with another partner before reporting the claim to the GC, as we have assumed above, that attorney would, of course, also be interviewed.
8. Strategy for Responding to Initial Contact
Each side in the case typically lacks significant information before discovery takes place. Each side, though, will attempt to develop an overall understanding of the relevant facts. When that is done, each side will evaluate whether and the extent to which the early and informal exchange of information that will become known in discovery is then in its interest. Each side will continue to review its strategy as it comes to better understand the facts and the strategy of the other side.
9. Exploring Repair, Mediation and Settlement with Claimant’s Attorney
In some claim situations, the alleged damage may be limited or may only be the imposition of an unanticipated risk. The parties may explore repairing the damage or preventing potential future damage even if the responsibility for it is unclear. In the situation assumed, however, the claimant’s concern arises out of a loss already sustained.
There may be arguments that the claimant bears some responsibility for any damage. For many years, in most states, if a plaintiff was partially responsible for any damages based on negligence or more culpable acts or omissions, the defendant would prevail.
The new Restatement (Third) of Torts, Liability For Economic Harm (ALI 2020) recognizes that most states now apply comparative negligence principles in malpractice and negligent misrepresentation cases. As a result, proving that the opinion recipient was negligent in connection with the content of the closing opinion or the non- disclosure is no longer a complete defense in most jurisdictions.
An early settlement may sometimes appear to have significant financial advantages for both parties. The claimant will recognize that it has no insurance to cover legal fees for the litigation, that proof for its claims is frequently difficult to establish and that the outcome of the litigation is difficult to predict. Litigation funding and contingent fee arrangements may be available, but typically will significantly reduce any recovery.
Opinion giver firms often handle transactions having a value far in excess of their malpractice insurance coverage. The opinion giver firm and the insurer usually will want to avoid litigating any large claim that appears to involve a realistic chance of a material loss.
The typical claimant and its attorney will pursue some type of discovery, which might be informal, before settling a claim involving a substantial loss. Both sides will find it difficult to settle a very substantial claim before they believe that they know enough about the facts to assess whether the claim has a realistic chance of success.
Nevertheless, there may be an early mediation effort. Even if that effort does not succeed, it may establish some common ground that will be useful in achieving a settlement at a later stage in the dispute.
Takeaway: Mitigation efforts and potential settlement opportunities should be part of the early evaluation of the claim.