Arnav Industries Retirement Trust v. Brown, Raysman, Millstein, Felder & Steiner, 96 N.Y.2d 300 (2001)
An attorney’s misrepresentation about the limited nature of changes in a legal document can excuse a client’s failure to read the document, allowing a legal malpractice claim to proceed if the client reasonably relied on the attorney’s representation to their detriment.
Summary
Arnav Industries sued their attorneys, Brown, Raysman, Millstein, Felder & Steiner, for legal malpractice. The attorneys had revised a settlement stipulation and allegedly misrepresented to the client that the only change was to correct a typographical error. In fact, the revised stipulation significantly reduced the judgment amount in case of default. The client, relying on the attorney’s representation, signed the revised stipulation without reading it. The New York Court of Appeals held that the client’s reliance on the attorney’s misrepresentation could excuse their failure to read the document, and thus the legal malpractice claim could proceed. This decision clarifies the extent to which clients can rely on their attorney’s representations about legal documents.
Facts
Arnav Industries and Rochel Properties (plaintiffs) settled a claim against David Schick for unpaid loans, requiring Schick to make payments of $2,500,000, with a provision for an immediate judgment of $6,023,702.95 in case of default.
Plaintiffs retained the defendant law firm to prepare the settlement stipulation.
The law firm sent plaintiffs a stipulation that Joseph Wassner, trustee of Arnav and officer of Rochel, read, executed, and returned.
The law firm then forwarded a revision, stating it corrected a typographical error, changing the settlement amount from $2,800,000 to $2,080,000.
The law firm allegedly advised Wassner that the revised terms were identical to the first version, except for the typographical error.
Relying on this advice, Wassner signed the revised stipulation without reading it.
The revised stipulation erroneously stated the judgment amount upon Schick’s default as $2,080,000 instead of $6,023,702.95.
Schick defaulted after one further payment.
The defendant law firm entered a judgment against Schick for $1,980,000, based on the incorrect amount in the revised stipulation.
Schick later faced involuntary bankruptcy, and plaintiffs were required to return a $100,000 payment as a preferential transfer.
Procedural History
Plaintiffs sued the law firm for legal malpractice, alleging negligent preparation of the revised stipulation.
The Supreme Court dismissed the complaint, reasoning that a party is bound by an agreement even if they failed to read it and that the factual differences between the two stipulations invalidated any excuse for not reading the second.
The Appellate Division affirmed.
Two dissenting Appellate Division Justices argued that the alteration materially reducing the default judgment amount, combined with the misstatement about the limited changes, constituted a cognizable claim for legal malpractice.
Plaintiffs appealed to the New York Court of Appeals based on the dissenting opinion.
Issue(s)
Whether a client has a cause of action for legal malpractice when the client signs a revised settlement stipulation without reading it, relying on the attorney’s misstatement that the stipulation was changed only to correct a typographical error.
Holding
Yes, because the client’s reliance on the attorney’s misrepresentation about the scope of the changes in the document could excuse the failure to read the document and allow a legal malpractice claim to proceed.
Court’s Reasoning
The Court of Appeals reversed the lower courts, holding that the plaintiffs stated a cause of action for legal malpractice sufficient to survive a motion to dismiss.
The court emphasized that on a motion to dismiss, the pleading should be liberally construed, and the facts alleged in the complaint should be accepted as true.
To sustain a legal malpractice action, a party must show that the attorney failed to exercise the reasonable skill and knowledge commonly possessed by a member of the legal profession.
Assuming the pleaded facts to be true, the court found that the plaintiffs adequately stated a cause of action, alleging negligent preparation of the stipulation and resulting damages.
While acknowledging the general rule that a party who signs a document is bound by its terms, the court found that the plaintiffs’ alleged reliance on the attorney’s misrepresentation constituted a valid excuse for not reading the revised stipulation. The court stated that the “binding nature of that agreement between plaintiffs and a third party is not a complete defense to the professional malpractice of the law firm that generated the agreement to its client’s detriment.”
The court noted that culpable conduct by the client may be considered as a mitigating factor in the attorney’s negligence but does not automatically negate the malpractice claim. As a result, the court reinstated the first cause of action.