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Moorehead v. Luhn

A-3829-04T2 (N.J. Super. App. Div. 2007) (Unpublished)

ATTORNEYS; MALPRACTICE —Where an attorney encourages one client to invest in another client’s business despite not revealing the poor business tract record of the business for which the investment was encouraged, that attorney breaches a professional duty of care and that attorney’s law firm can be vicariously liable because of its master-servant attorney with the malpracticing attorney and when the attorney plainly had been acting within the scope of his employment when the law firm.

A businessman retained a partner of a law firm to handle his business transactions over a period of years. At a specific point within this term, the attorney approached his client and requested loans to finance a new home. An initial amount was lent. The attorney wrote a check for the loan from his firm’s trust account payable to the businessman, but, without authorization, negotiated the check by signing the businessman’s name. An entry in the law firm’s trust ledger recorded the check payable to the businessman as a “loan.” Further loans to the attorney followed in which the businessman did not expect any return on the lent funds, but just for anticipated interest charges for securing the money. The attorney did not advise the businessman to seek independent legal advice, nor did he suggest that the businessman needed collateral from him to secure any of the loans. Over time, the total amount lent to the attorney was $364,000, of which the attorney repaid $165,000.

At another specific point in their professional relationship, the attorney introduced the businessman to two restaurant investors, also clients of the attorney. The attorney, without authorization, gave the businessman’s financial information to the investors, and encouraged the businessman with repeated daily calls to invest in the investor’s restaurant, despite not revealing that the investors had experienced restaurant venture failures in the past. The businessman invested $198,340 which was lost entirely because the restaurant project became a “gross failure.”

The businessman filed suit, alleging that the attorney committed legal malpractice while participating in certain loan transactions with the businessman. The businessman also alleged that the law firm was vicariously liable for the attorney’s conduct, and was independently liable with regard to the loan transactions. The businessman alleged that had he known of the investor’s previous failures, he would have not invested.

The lower court found the attorney liable to the businessman for $199,000 for his professional negligence with respect to the loan transactions and $198,340 for the failed business venture. The court found the law firm vicariously liable only for the attorney’s actions with regard to the failed business venture, and thus jointly and severally liable for $198,340. No independent basis for law firm negligence was found with regard to either of the occurrences. The Court held that the businessman was entitled to a reasonable award of reasonable counsel fees and costs, and ultimately ordered that interest on the unpaid personal loans be assessed at the prejudgment interest rate prescribed by court rule.

The Appellate Division affirmed the lower court’s ruling. It concluded that the attorney’s conduct in the restaurant venture presented a conflict of interest as he was, in effect, representing both parties in his procurement of an investment amount from the businessman, and as such he breached a professional duty of care to the businessman which proximately caused his damages. The Court agreed with the lower court that the law firm was vicariously liable in this particular instance because of its master-servant relationship with the attorney, and because the attorney was plainly acting within the scope of his employment with the law firm. The Court agreed with the lower court’s conclusion that the law firm was not vicariously or independently liable with regard to the loan transactions. First, it noted that liability attached to the attorney as the loans were unsecured, and the businessman was not told that he should seek independent legal advice. Because the attorney entered into a business transaction with a client in which he acquired a pecuniary interest adverse to the client, he was bound to satisfy the aforementioned conditions. The absence of collateral was held to be caused by the attorney’s breach of professional duty to the businessman, constituting a proximate cause of his loss. The Court affirmed the lower court’s conclusion that the attorney was not acting within the scope of his employment with the law firm when he obtained the loans from the businessman because the acts were not actuated to any degree by a purpose to serve the law firm, and so the law firm could not be vicariously liable as to the loans transactions. Furthermore, the Court affirmed the lower court’s conclusion that the law firm could not be independently liable for the loan transactions as its bookkeeping notations on the trust account were reasonably guided by the attorney’s representations to the firm’s bookkeeper.

The Court saw no reason to disturb the lower court’s conclusion that the case was neither extraordinarily difficult nor complex to warrant an enhanced legal fee for the businessman’s attorney. Similarly, it affirmed the lower court’s conclusion that the matter was a tort action for professional malpractice, was not an action for a collection of a book account, and that the businessman failed to prove how much interest he actually paid on monies borrowed against his stock portfolio and then lent to the attorney. Therefore, the part of the lower court ruling that prejudgment interest be calculated on the loan transaction damages at the rate provided under court rule was upheld.

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