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Best v. Cooper Perskie April Niedelman Wagenheim & Levenson, P.A.

2006 WL 3077724 (N.J. Super. App. Div. 2006) (Unpublished)

PARTNERSHIPS; ATTORNEYS; CONFLICT OF INTEREST—Limited partners may have no claim against attorneys who, for a period of time, represented both their partnership and their partnership’s general partner where the limited partners had their own attorney at the time and were fully aware that the challenged attorneys were representing both the partnership and the general partner.

A number of individuals entered into a limited partnership agreement with another entity, which became the limited partnership’s general partner. In 1993, the partners sued their limited partnership and its general partner over the distribution of proceeds. They claimed that the attorneys for the partnership had a conflict of interest which led to a breach of duty to the partners, and resulted in a distribution that favored the general partner over the other partners. In 1996, the parties resolved the 1993 case and executed an amended limited partnership agreement. It provided for the partners to receive certain preferential distributions, but gave the general partner exclusive rights to manage the business, subject to the limited partners’ consent when required under the partnership agreement.

In 1998, the partners again sued the general partner, claiming that it had overpaid consulting fees in a condemnation action. The 1998 case was dismissed pursuant to a consent order which provided for the distribution of the proceeds of the condemnation. The consent order also adjusted the distribution method so that only excess cash flow would be distributed.

In 1999, when another dispute arose over the distribution of proceeds, the partners filed a motion to interpret and enforce the consent order, or in the alternative to vacate it. The partners claimed that the general partner had forwarded a pro forma profits distribution statement prepared by the partnership’s accountant to one of the partners. Several months later, it sent the partner a revised pro forma statement showing a sizable reduction in the distribution to the partners and an increased distribution to the general partner. The partners claimed that they were entitled to preferential distributions according to the 1996 partnership agreement, and that the first pro forma statement represented the proper distribution to the partners. The lower court entered an order denying the partners’ motion, and ordered a plenary hearing to address the factual disputes between the parties. The partners filed a motion to disqualify the partnership’s attorneys from representing both the partnership and the general partner. The court disqualified the attorneys from representing the limited partnership, but allowed them to continue representing the general partner.

The trial to resolve the dispute regarding partnership distribution proceeded, and finally the lower court entered a judgment in favor of the partners for a certain amount of money. It denied the partners’ oral application for attorneys’ fees. The partners did not appeal the order denying counsel fees. Instead, they filed a legal malpractice action against the general partner’s attorneys, alleging negligence, breach of contract, breach of fiduciary duty, and conflict of interest. The partners sought damages to the extent of the counsel fees and costs they incurred in the previous litigation. The lower court granted summary judgment in favor of the attorneys.

On appeal, the Appellate Division affirmed the lower court’s decision. The Court noted that in determining if summary judgment was appropriate, it had to determine if any issues of fact existed. Instead of arguing that there were genuine questions of fact in dispute, the Court noted that the partners merely repeated the undisputed facts that they believed supported an argument for summary judgment in their favor. It found that the attorneys’ duty to the partners under the partnership agreement and 1998 consent order was not clear at the time the dispute arose.

The Court explained that a legal malpractice claim requires the demonstration of the existence of an attorney-client relationship which creates a duty upon the attorney, the breach of that duty, and causation. The partners in the present case claimed that the attorneys had a duty to them and breached that duty by giving preferential partnership distributions to the general partner, causing the partners to go to court and spend large amounts for counsel fees. In discussing whether the attorneys owed the partners a duty of care, the Court stated that “attorneys may owe a duty of care to non-clients when they know, or should know, that non-clients will rely on the attorneys’ representations and the non-clients are not too remote from the attorneys to be entitled to protection.” It explained that an attorney may have a duty to a non-client when the attorney has a fiduciary duty regarding the property of a third party, when the attorney provides information that third parties will rely upon, when the attorney misrepresents information, and when the attorney assumes a duty to act. The Court agreed with the lower court that the facts of this case did not fall into any of those categories.

The partners claimed that the conflict at the root of this case arose when the attorneys represented the partnership and the general partner in changing the pro forma distribution analysis to benefit the general partner at the partners’ detriment. The Court noted, however, that the partners were represented by their own counsel. Therefore, it found, the partners could not claim reliance on the attorneys’ involvement in revising the statement. The Court pointed out that reliance had always been an element to be proved where an attorney’s duty of care extended to a third party. It found that the partners could not claim that they relied on the revised pro forma statement, since they relied on their own independent counsel and challenged the revised pro forma immediately.

Finally, the partners argued that the attorneys were required to obtain consent to the representation after disclosing the conflict to the interested parties. However, the Court found that the partners were fully aware that the attorneys were representing both the partnership and the general partner. Additionally, the Court stated that even if the attorneys had violated the rules of professional conduct, such violation would not constitute legal malpractice. For those reasons, the Court affirmed the lower court’s grant of summary judgment to the attorneys.

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