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On Tuesday, the Appellate Division, First Department, New York reversed a jury verdict against law firm Bryan Cave that was to the tune of $10.6 million. The malpractice judgment was the result of protracted litigation between two former business partners in an apparel company.
The 3-2 panel clarified that two parties to a “fully litigated” arbitration could not sign a later agreement limiting the estoppel impact of the arbitration regarding claims against third parties. The majority held that such later agreement of estoppel could be allowed only where the arbitration was not fully litigated.
The malpractice claim against Bryan Cave had been filed by businessman Herbert Feinberg in a dispute with his former partner Norman Katz. The dispute arose out of a buyout proposal made by Feinberg to Katz over Katz’s portion of the business, and the later findings by the accounting firm Mahoney Cohen Rashbart & Pockart which audited the 1995 accounts of the company, that the company’s 1996 financial statements overstated the value of the company by $10 million.
Feinberg took the matter to arbitration in 1997 alleging fraud and seeking to rescind the agreement. But in 2000, an arbitrator found Feinberg did not rely on the 1995 financials audited by Mahoney Cohen, while making his purchase decision. Disgruntled, Feinberg sued Mahoney Cohen, but the lawsuit was dismissed due to estoppel. So, Feinberg sued Bryan Cave, the law firm representing Feinberg in the arbitration in 2003, for malpractice.
Feinberg claimed that Jerome Boros, who represented Feinberg at the time and worked for Bryan Cave, and the law firm, had failed to advise Feinberg that he had an option to enter into a post-arbitration agreement with Katz limiting the effects of estoppel in suits against third parties.
A jury awarded Feinberg $10.6 million in damages; however, the appeals court ruled the verdict was erroneous. Writing on behalf of the majority, Justice James Catterson observed, “The ability of parties to formulate their own contractual restrictions as to the estoppel effect of arbitration awards is not, in reality, a carved-out exception to normal collateral estoppel principles.”
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However, while admitting Feinberg’s case for appeal in 2005, a different panel of the First Department had held otherwise and had noted that such post-arbitration agreements were valid. The present majority differentiated from the earlier ruling by holding that such post-arbitration agreements limiting the effects of estoppels against third parties were not valid in cases where the issues had been fully litigated.
