Imagine working the better part of your adult life to build a business that will support you and family comfortably. Then imagine selling that business to a competitor so that you can fund your retirement dreams and your children’s education. All good, right? Maybe. But what if it isn’t? What if the lawyers you hired to negotiate the sale dropped the ball? So, you’re not getting all the money you thought you were getting. And you can’t enjoy the retirement you thought you could enjoy. And your children might have to rely on student loans to attend the schools they’d prefer to attend.
Regrettably, this experience is not uncommon. As the hourly rates of big-firm lawyers have climbed through the roof, entrepreneurs and businessowners with modest legal budgets have turned to small law firms and sole practitioners to handle their transactional work. While these firms are often capable of top-flight legal representation, this is not universally true. Some of them simply are not qualified to negotiate or memorialize complex transactions. And even those that are—even the Ivy league-educated lawyers who roam the halls of shiny downtown office towers and charge $1,000+ per hour for their services—sometimes miss things. Sometimes big things. And when things are missed in a business transaction, the client usually pays the price.
Legal malpractice arises both in the litigation context and in connection with business transactions. In the litigation context, a claim for legal malpractice generally has four elements: (1) an attorney-client relationship; (2) negligence by the defendant; (3) that the defendant’s negligence was the proximate cause of the plaintiff’s damages; and (4) that but for the defendant’s conduct, the plaintiff would have been successful in the prosecution or defense of the underlying claim. Nail v. Husch Blackwell Sanders, LLP, 436 S.W.3d 556 (Mo. 2014). The latter two elements require the plaintiff to prove a “case within a case,” i.e., that he or she would have prevailed in the underlying action in the absence of the defendant’s negligence. Williams v. Preman, 911 S.W.2d 288, 294 (Mo. App. 1995). Where the underlying action was settled instead of tried, the plaintiff must prove the settlement was necessary to mitigate damages or that he or she was driven to the necessity of settling because had the case not been settled, he or she would have been worse off. Collins v. Mo. Bar Plan, 157 S.E.3d 726, 736 (Mo. App. 2005).
Where legal malpractice arises in connection with a business transaction, the elements of the claim are slightly different. The plaintiff must show: (1) an attorney-client relationship; (2) negligence by the attorney; (3) but for the attorney’s negligence, the transaction would have been consummated more favorably for the plaintiff; and (4) damages. SKMDV Holdings, Inc. v. Green Jacobsen, PC, 494 S.W.3d 537 (Mo. App. 2016). Note the difference in the third element. Unlike in litigation—where there are winners and losers—business transactions often are beneficial for both sides. Everyone typically “wins.” As a result, the plaintiff in a transactional malpractice case need not prove he or she would have prevailed in the absence of the defendant’s negligence. Instead, it is enough for the plaintiff to prove he or she would have done better in the deal.
But what does it mean to do better? How does a plaintiff prove that a transaction would have been consummated more favorably?
Sometimes, the proof is straightforward. In SKMDV Holdings, for example, the defendant law firm neglected to include a revenue multiplier in a purchase agreement that would have dramatically increased a contingent payment due the seller. After the buyer refused to make payment based on the multiplier, the seller sued the law firm. Following a jury trial, the seller obtained a verdict for the difference between what the buyer paid and what the buyer would have paid if the multiplier had been included in the purchase agreement.
SKMDV was a unique case. Oftentimes, proving damages in a transactional malpractice case is far more difficult. Courts have held a plaintiff must present evidence of the essential terms of the “better deal” the plaintiff would have reached in the absence of the defendant’s negligence. See Bryant v. Bryan Cave LLP, 400 S.W.3d 325 (Mo. App. 2013). Typically, this will require that the plaintiff possess a writing or combination of writings that spell out these terms. Beyond that, the plaintiff must prove these terms, if proposed, would have been accepted by the other party to the transaction. This last part is critical. In general, a claim for transactional malpractice cannot be based on the failure to propose contract terms the other party would have refused to accept.
How can you protect yourself from legal malpractice in a business transaction? First, choose the right lawyer. If you’re selling a family business, choose a lawyer who specializes in that type of transaction. Second, to the extent possible, be your lawyer’s co-pilot in the transaction. Endeavor to understand the terms he or she is proposing or rejecting and how they impact the deal. Don’t just tune out and let your lawyer handle things. Third, communicate all deal terms in writing. This is true whether you are speaking to your own lawyer or someone on the opposite side of the transaction. Create a record that you can refer to later if a dispute arises as to what terms were proposed.
