December 8, 2011
MAHESH UBEROI, MADHU UBEROI, AND UBEROI INTERNATIONAL, INC., PLAINTIFFS-APPELLANTS,
STARK & STARK, P.C., DEFENDANT-RESPONDENT.
On appeal from the Superior Court of New Jersey, Law Division, Mercer County, Docket No. L-1926-07.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted October 25, 2011
Before Judges Messano and Yannotti.
Plaintiffs appeal from an order entered by the Law Division on November 12, 2010, granting summary judgment in favor of defendant Stark & Stark, P.C. (S&S). We reverse.
Plaintiff Mahesh Uberoi (Mahesh) and Madhu Uberoi were the owners of Uberoi International, Inc. (UII). In 2001, Cognicase, Inc. (Cognicase) approached the Uberois and expressed an interest in acquiring UII. On May 1, 2001, Cognicase submitted an offer in the form of an Expression of Interest and Term Sheet to the Uberois. The May 1, 2001 Term Sheet stated that Cognicase offered to purchase all of UII's issued and outstanding shares for $1 million in cash, and the equivalent of $3.25 million in Cognicase shares.
The May 1, 2001 Term Sheet also stated that the Uberois would guarantee that the ratio of UII's working capital to liabilities (WCR) would not be less than 1 to 1, and UII shall not have any long-term indebtedness, except for a $32,000 loan payable to Sovereign Bank (Soverign). The Term Sheet stated that in the event that the WCR was not met as of the time of closing, an adjustment to the purchase price would be made for each $1 in working capital shortfall.
On June 28, 2001, Cognicase provided the Uberois with another Expression of Interest and Term Sheet. The June 28, 2001 Term Sheet stated that Cognicase offered to purchase the UII stock for $750,000 in cash and the equivalent of $2,850,000 in Cognicase shares.
The June 28, 2001 Term Sheet also stated that the Uberois would guarantee that UII's WCR at the time of closing would be not less than 1 to 1, and UII did not have any long-term indebtedness except for the $32,000 Sovereign loan. The Term Sheet additionally stated that in the event UII's WCR was not 1 to 1, an adjustment to the purchase price would be made for each $1 of working capital shortfall.
Mahesh negotiated the stock sale with John Valentini (Valentini), the Executive Vice President and Chief Executive Officer of Cognicase. Mahesh signed the June 28, 2001 Expression of Interest, thereby indicating that the Uberois wanted to move forward with the sale of their stock. On July 18, 2001, Congicase's attorney distributed the initial draft of the Stock Purchase Agreement (SPA). The second draft of the SPA was distributed on July 22, 2001.
Among other things, the first and second drafts of the SPA stated that if as of the closing date, UII had a WCR of 1.4 to 1, or outstanding indebtedness other than the balance due on the $32,000 Sovereign loan, the Uberois would have an obligation to pay Cognicase cash equal to the amount necessary to pay UII's outstanding indebtedness as of the closing date, plus an amount required to reduce the company's WCR to 1.4 to 1, multiplied by 1.5. This draft of the SPA stated that WCR "shall mean the ratio of current assets to current liabilities of [UII], in each case, as reflected on the Final Closing Balance Sheet [FCBS], and determined in accordance with generally accepted accounting principles [GAAP]."
The Uberois retained S&S to provide them with legal advice regarding the SPA. Allen M. Silk of S&S wrote to Mahesh on July 24, 2001, and stated that the firm had been asked to review the SPA and provide written comments on the agreement for a fixed fee. Mahesh signed the letter on July 27, 2001, indicating his agreement and acceptance of the terms and conditions stated therein. S&S assigned attorney Lawrence Cohen (Cohen) to the matter. S&S was provided with the second draft of the SPA.
On August 1, 2001, a third draft of the SPA was provided to S&S. Section 1.03(a) in this draft, which dealt with UII's WCR, was the same as that set forth in the two earlier drafts of the agreement. In August 2001, the fourth, fifth, sixth and seventh drafts of the SPA were prepared. The language of Section 1.03(a) remained unchanged.
The eighth and final draft of the SPA was prepared on the evening of August 15, 2001 and forwarded to S&S. The final version of the SPA included a change to Section 1.03(a), which was modified to state that WCR "shall mean the ratio of current assets to current liabilities (current liabilities include the Deutsche Financial Services revolving line of credit) of [UII], in each case, as reflected in the Final Closing Balance Sheet, and determined in accordance with" GAAP.
The parties executed this last version of the agreement, and the closing took place on August 17, 2001. In accordance with the SPA, Cognicase placed $500,000 in escrow to address potential post-closing adjustments to the purchase price. Thereafter, Cognicase provided the Uberois with the Final Closing Balance Sheet, which calculated UII's WCR as of the date of closing by including the amounts due on the Deutsche Financial Services line of credit (the Deutsche LOC).
Based on that calculation and other claimed discrepancies in UII's reported financial condition, Cognicase said that additional monies were due from the Uberois. The Uberois disputed the claim. Mahesh asserted, among other things, that the inclusion of the Deutsche LOC as a current liability for purposes of determining UII's WCR at the time of closing was inconsistent with the agreement he reached with Cognicase.
Mahesh raised the issue with S&S, which wrote to him on August 13, 2003. In that letter, S&S conceded that it did not notice that the definition of WCR in the final agreement had been modified to state that the Deutsche LOC was to be considered a current liability for purposes of calculating UII's WCR. S&S stated that the change had not been "redlined or otherwise highlighted" in the document it received, and S&S had only been made aware of the change when Mahesh brought it to the firm's attention.
In September 2004, Cognicase made a demand for arbitration pursuant to the SPA, and argued that the plain language of the SPA required that the Deutsche LOC be considered a "current liability" of UII for purposes of determining the company's WCR as of closing. The Uberois maintained, however, that the definition of WCR in the SPA was ambiguous and inconsistent with their agreement with Congicase.
The arbitrator issued an award dated May 31, 2005, finding that the Uberois failed to meet their burden of proving by clear and convincing evidence that the SPA's definition of WCR was ambiguous or that the explicit inclusion of the Deutsche LOC in the WCR calculation was the result of a mutual mistake. The arbitrator ordered the Uberois to pay Cognicase $454,733 plus interest from the date of the closing.
On August 1, 2007, plaintiffs filed this action against S&S. Plaintiffs alleged that S&S deviated from accepted standards of legal practice "by not clarifying" the Uberois' "position" regarding the calculation of UII's WCR in the SPA, and by failing to notify the Uberois that the definition of WCR in the SPA "had been drastically changed to" plaintiffs' "financial detriment[.]"
In support of their claim, plaintiffs produced an expert report prepared by Barry E. Levine, Esq. (Levine), dated February 16, 2010. In his report, Levine stated that he was relying upon the "declarations" filed by Mahesh in the arbitration proceeding. Levine noted that it was Mahesh's understanding that the Deutsche LOC would not be included in determining UII's WCR.
Levine noted that Mahesh had asserted that he advised Cohen that the Deutsche LOC was not to be included as a "current liability" of UII for purposes of calculating the WCR. According to Levine, Mahesh also had asserted the final draft of the SPA had been changed to include the Deutsche LOC as a "current liability" for the WCR calculation and this change did not reflect the agreement of the parties to the SPA.
Levine opined that, as counsel for the Uberois, Cohen had an obligation to discuss all relevant terms of the SPA with the Uberois to ensure that the agreement conformed to the clients' understanding. Levine opined that S&S "deviated from accepted standards of care by not advising [Mahesh] that according to the documentation he was signing that the Deutsche Bank [LOC] would be factored into the [WCR] calculation."
In his report, Levine also addressed the issue of proximate cause and damages. Levine stated that, assuming the SPA did not reflect the agreement of the parties as Mahesh maintained, it was his opinion, within a reasonable degree of certainty, that the Uberois suffered monetary damages and S&S's deviation from accepted standards of legal practice was a proximate cause of those damages.
S&S produced an expert report from Gary L. Falkin, Esq. (Falkin). Falkin opined that Cohen and S&S did not deviate from accepted standards of legal practice. He noted that the arbitrator had determined that the definition of WCR in the final SPA reflected the understanding of the transaction by the parties to that agreement, as well as by Cohen and S&S.
Falkin stated that, even if S&S deviated from accepted standards of practice by failing to notice the specific inclusion of the Deutsche LOC as a "current liability" for purposes of determining UII's WCR, the error was harmless. Falkin said that the added language did not alter the meaning of the relevant provision of the SPA and "was of no consequence."
Falkin also stated that the Uberois failed to show that S&S's alleged deviation was a proximate cause of any damages they had sustained. Falkin observed that S&S had been retained to provide advice concerning the SPA after Mahesh and Cognicase had negotiated the terms of the stock sale. He noted that the Term Sheets indicated that all of UII's liabilities other than the Soverign loan would be part of the calculation of WCR.
Falkin wrote that there was no evidence that Cognicase would have agreed to the transaction if UII's WCR was to be determined without recognition of the Deutsche LOC. He noted that Valentini had asserted that Cognicase would not have agreed to exclude the Deutsche LOC from the calculation of UII's WCR.
After the completion of discovery, S&S filed a motion for summary judgment, which plaintiffs opposed. The court considered the motion on November 12, 2010 and placed an oral decision on the record on that date.
The court stated that Levine's opinion that S&S deviated from accepted standards of practice was "without any basis." The court said that Levine had not cited any "basic accounting principles" to contradict S&S's position or the arbitrator's findings. The court added:
So, even if we went with, and we left that parenthetical out, and if we said, well, okay, [S&S] didn't specifically tell [Mahesh] about that parenthetical, it would have had the same effect. It would have been included. And just for [Mahesh] now to say, well, that wasn't my understanding, and they should have explained it to me better, there's no indication . . . that that was the case. And I can't say that the Attorney Levine's expert opinion here is anything more  than [a] net opinion, and for that reasons, . . . there's no way that a reasonable jury could find any evidence of malpractice, especially in light of no expert opinion on the subject[.]
The court accordingly determined that S&S was entitled to summary judgment, and entered an order dated November 12, 2010 memorializing that decision. This appeal followed.
Plaintiffs argue that the trial court erred by granting summary judgment in favor of S&S. Plaintiffs contend that they presented sufficient evidence to establish a genuine issue of material fact as to whether S&S deviated from accepted standards of legal practice when it failed to notice the change in the final draft of the SPA regarding the Deutsche LOC and failed to advise the Uberois of that change.
An attorney is required to exercise the degree of reasonable knowledge and skill that attorneys of ordinary ability and skill possess and exercise. St. Pius X House of Retreats v. The Diocese of Camden, New Jersey, 88 N.J. 571, 588 (1982). The attorney must exercise "'reasonable and ordinary care and diligence in the use of his skill and in the application of his knowledge to his client's cause.'" Ibid. (quoting from Hodges v. Carter, 239 N.C. 517, 519 (1954)). "What constitutes a reasonable degree of care is not to be considered in a vacuum but with reference to the type of service the attorney undertakes to perform." Ibid.
In this case, plaintiffs assert that S&S breached the duty of care owed to them as clients by failing to ensure that the SPA conformed to the agreement reached by Mahesh and Cognicase. Plaintiffs maintain that S&S negligently failed to notice and advise them concerning the change to the definition of WCR in the final draft of the agreement.
As indicated previously, in its letter of August 13, 2003, S&S conceded that it did not notice the change in the final draft of the SPA but maintains that it did not breach any duty of care to plaintiffs because the SPA executed by plaintiffs and Cognicase reflected the agreement reached by Mahesh and Cognicase. S&S argues that the parties never agreed to exclude the Deutsche LOC from the computation of LOC and, therefore, the change to the final draft of the agreement was of no significance.
In this case, the trial court determined that plaintiffs failed to present sufficient evidence to establish that the SPA did not reflect Mahesh's agreement with Cognicase. We do not agree.
Summary judgment may only be granted when there are no genuine issues of material fact, and the moving party is entitled to judgment as a matter of law. R. 4:46-2(c); Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995). "An issue of fact is genuine only if, considering the burden of persuasion at trial, the evidence submitted by the parties on the motion, together with all legitimate inferences therefrom favoring the non-moving party, would require submission of the issue to the trier of fact." R. 4:46-2(c). Summary judgment should not be granted unless there is "a single, unavoidable resolution" of a disputed issue of material fact. Brill, supra, 142 N.J. at 540.
In this case, Mahesh provided a declaration in the arbitration proceeding and testified at his deposition in this case that Cognicase had agreed to exclude the Deutsche LOC from the computation of UII's WCR. To be sure, Congnicase presented evidence disputing Mahesh's assertions. Nevertheless, the trial court was required to view the evidence before it in a light favorable to the Uberois. Brill, supra, 142 N.J. at 540.
In our view, the evidence presented by plaintiffs raised a disputed issue of fact, specifically whether the expressed inclusion of the Deutsche LOC in the WCR calculation was consistent with the agreement that Mahesh and Cognicase made. That issue was material to whether S&S breached a duty of care owed to plaintiffs, as opined by Levine.
S&S argues, however, that plaintiffs are collaterally estopped from disputing the arbitrator's findings that the definition of WCR in the SPA reflected the intentions of the parties to that agreement. "'Collateral estoppel bars a party from relitigating any issue which was actually determined in a prior action, generally between the same parties, involving a different claim or cause of action, where the burden of proof is the same.'" N.J. Div. of Youth & Family Servs. v. R.D., 207 N.J. 88, 105 (2011) (quoting Div. of Youth & Family Servs. v. R.D., 412 N.J. Super. 389, 400, (App. Div.) rev'd., 207 N.J. 88 (2011)).
The arbitrator found that the Uberois failed to meet their burden of showing by clear and convincing evidence that the WCR definition in the SPA was ambiguous or that the inclusion of the Deutsche LOC as a liability for purposes of determining WCR was a product of mutual mistake. However, in a legal malpractice action, plaintiffs are required to prove their claims by a preponderance of evidence. 2175 Lemoine Ave. Corp. v. Finco, Inc., 272 N.J. Super. 478, 488 (App. Div. 1994). Collateral estoppel does not apply here. See Gannon v. American Home Products, Inc., 414 N.J. Super. 507, 520-24 (App. Div. 2010) (noting that collateral estoppel will not be applied when party sought to be estopped had a heavier burden of persuasion on an issue in a prior action).
Accordingly, the arbitrator's findings do not preclude the finder of fact in this case from determining that plaintiffs had established by a preponderance of evidence that Mahesh and Cognicase had agreed to exclude the Deutsche LOC from the WCR computation and that the final SPA did not reflect that agreement.
In its decision, the trial court also determined that plaintiffs' claims failed as a matter of law because Levine's expert report was a net opinion. The net opinion rule precludes an expert from offering a "mere conclusion" that is not supported by factual evidence or other data. Polzo v. Cnty. of Essex, 196 N.J. 569, 583 (2008); Buckelew v. Grossbard, 87 N.J. 512, 524 (1981).
The trial court stated that Levine's opinion was flawed because it was without a factual basis. However, in arriving at his opinion that S&S deviated from accepted standards of legal practice, Levine assumed that Mahesh and Cognicase had agreed that the Deutsche LOC would not be taken into consideration in determining UII's WCR as of the time of closing. Although the factual basis for Levine's opinion was disputed, Levine's opinion had a factual basis.
The trial court additionally determined that Levine's report was deficient because Levine failed to discuss basic accounting principles in his report. The court apparently believed that Levine, a licensed attorney, was qualified to render opinions as to accounting principles. As we stated previously, the various drafts of the SPA provided that UII's WCR would be determined by considering the ratio of current assets to current liabilities in accordance with GAAP. S&S maintains that the change in the last draft of agreement to expressly include the Deutsche LOC as a liability for WCR purposes was not significant. S&S notes that the prior drafts of the agreement required that, with the exception of the Sovereign loan, all of UII's liabilities be factored in the WCR calculation in accordance with GAAP. S&S argues that the Deutsche LOC was such a liability.
Although the Deutsche LOC would apparently be considered a liability under GAAP, that would not foreclose the parties to the SPA from agreeing to exclude that liability from the calculation of UII's WCR. As we stated previously, Levine's opinion was based on the assumption that such an agreement had been made. Therefore, even assuming he was qualified to do so, Levine was not required to support his opinion with a discussion of basic accounting principles.
We therefore conclude that plaintiffs presented sufficient evidence to raise a genuine issue as to whether Mahesh and Cognicase agreed to exclude the Deutsche LOC from the computation of WCR under the SPA. Because that disputed fact is material to determining whether S&S deviated from accepted standards of legal practice in its review of the SPA, the trial court erred by granting summary judgment to S&S.
S&S argues that even assuming it was negligent in failing to notice and inform the Uberois that the final draft of the SPA had been amended to include the Deutsche LOC as a liability for purposes of calculating UII's WCR, plaintiffs have not shown that such negligence was a proximate cause of the damages allegedly sustained by the Uberois. We do not agree.
An attorney who commits legal malpractice is only liable for the losses proximately caused by such malpractice. Lemoine Ave., supra, 272 N.J. Super. at 487 (citing Gautam v. De Luca, 215 N.J. Super. 388, 397 (App. Div. 1987)). To establish proximate cause, the plaintiff must show that negligent conduct was "a substantial contributing factor" of the loss. Ibid. (citing State v. Jersey Cent. Power & Light Co., 69 N.J. 102, 110 (1976)).
In this case, plaintiffs contend that, because S&S failed to notice and advise them of the specific inclusion of the Deutsche LOC in the WCR calculation, they suffered monetary losses. Plaintiffs contend that, at the time of closing, UII owed $799,096 on the Deutsche LOC. They allege that if the Deutsche LOC was excluded from the calculation of UII's WCR, they would have been entitled to receive as much as $1,132,280 in post-closing adjustments.
We are satisfied that plaintiffs submitted sufficient evidence to support their claim that S&S's alleged malpractice was a substantial factor in causing their monetary losses. While the testimony from a fact witness would be required to explain the manner in which plaintiffs calculate their damages, those calculations are not beyond the ken of jurors of ordinary intelligence.
S&S argues, however, that plaintiffs were required to present evidence showing that Cognicase would have agreed to exclude the Deutsche LOC from the calculation of WCR under the SPA if that issue had been raised. In support of this argument, S&S relies upon our decisions in Lemoine Ave. and Froom v. Perel, 377 N.J. Super. 298, 315 (App. Div.), certif. denied, 185 N.J. 267 (2005).
In Lemoine Ave., we concluded that an attorney committed legal malpractice by structuring a transaction in violation of state law. Lemoine Ave., supra, 272 N.J. Super. at 482-83. We nevertheless held that the plaintiff failed to show that the malpractice was a proximate cause of its losses. Id. at 487. We noted that the plaintiff did not present evidence from a legal expert showing that the transaction could have been legally structured. Id. at 490. Moreover, there was no evidence that the other parties would have been willing or able to agree to such a transaction. Ibid.
In Froom, the plaintiff alleged that he had a fifty-percent interest in a development project, and the defendant law firm failed to protect that interest. Froom, supra, 377 N.J. Super. at 302, 308. We held that, even if we assumed that the firm was negligent in failing to protect the plaintiff's alleged interest in the project, the evidence did not support a finding that the negligence was a proximate cause of the loss of the plaintiff's interest. Id. at 315. We noted that there was no evidence indicating that the transaction would have gone forward with the other parties agreeing to allow the plaintiff to retain a fifty-percent interest. Id. at 317.
We are convinced that S&S's reliance upon Lemoine Ave. and Froom is misplaced. In this case, plaintiffs' claim turns on whether Cognicase had agreed to exclude the Deutsche LOC from the WCR calculation. As we have explained, plaintiffs presented sufficient evidence to raise a genuine issue of fact as to whether such an agreement had been made. Therefore, plaintiffs were not required to present evidence that Cognicase would have proceeded with the transaction if the Deutsche LOC was not included in the calculation of UII's WCR.
Reversed and remanded for further proceedings in conformity with this opinion. We do not retain jurisdiction.
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