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Shu v. Butensky

A-2396-07T1 (N.J. Super. App. Div. 2009) (Unpublished)

ATTORNEYS; CONFLICTS OF INTEREST — An attorney may breach his or her duty to a client by failing to draft and record an appropriate instrument that would give constructive notice of the client’s right of first refusal with respect to property adjacent to that purchased by the attorney’s client.

A buyer entered into a purchase contract and retained an attorney to represent him in the transaction. The contract gave the buyer a right of first refusal in connection with the future sale of an adjacent lot that had been subdivided from the purchased lot. Approximately twenty years later, the owners of the adjacent lot entered into a contract to sell the property and retained the same attorney that had originally represented the buyer. Before the closing date, the attorney reached out to his former client, asking him to remove an encroachment that straddled the common line of the adjacent properties. His former client refused to remove the encroachment. The owner of the adjacent lot filed suit, seeking removal of the encroachment and damages. The former client asserted a claim of trespass, but did not raise the right of first refusal as an issue or implicate his former attorney in any way. One month later, the former client exercised his right of first refusal. After settling the encroachment action with his neighbor, the former client filed a legal malpractice action against his former attorney, alleging that the attorney knew the adjacent lot was to be sold. The former client alleged that his former attorney failed in his duty of professional care by originally failing to record the contractual provision establishing his right of first refusal, and by representing the seller of the adjacent property. The former client further alleged that the attorney should have been aware of the right of first refusal so as to avoid placing himself in a position of conflict. The attorney moved to dismiss, arguing the former client should have raised his right of first refusal in the encroachment action and should have named him as a third party defendant in that action. The attorney argued the entire controversy doctrine barred the former client from pursuing the current lawsuit.

The lower court rejected application of the entire controversy doctrine, but still dismissed the former client’s case. It concluded that the attorney did not owe his former client a duty. The former client, appealed, arguing the lower court erred when it dismissed the legal malpractice claim.

The Appellate Division reversed and remanded the matter to the lower court. The Court inferred the “duty” referred to by the lower court concerned whether the attorney should have taken steps necessary to record, or otherwise preserve, the former client’s right of first refusal. It held that the limited record supported a finding that the attorney owed a duty to his former client. The Court noted that the owner of the adjacent lot burdened by the right of first refusal intended the right to “survive the passage of time.” The Court concluded that the former client had the right to argue: (i) the attorney’s professional responsibility toward him included protecting this right of first refusal; and (ii) that the attorney breached such duty by failing to draft and record an appropriate instrument that would give constructive notice of this right to any prospective purchaser of the adjacent lot. The Court held that the facts demonstrated that a rational jury could find a causal link between the breach of the attorney’s professional duty and the damages sustained by the former client in the form of: (a) settlement of the encroachment action, and (b) lost opportunities to acquire the lot.

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