Differences Of Opinion

In most complex commercial transactions ' mergers, acquisitions, loans and other financings ' the seller's or borrower's counsel is called upon to provide an opinion letter. The letter typically addresses various matters of interest to the buyer or lender, including any exposure to litigation, government inquiry or other proceedings that might have an impact on the value or viability of the client's business.

Increasingly, when something goes wrong with the transaction, aggrieved buyers and lenders are seeking recourse, not just against the seller or borrower, but also against the law firm that wrote the opinion letter.

What happens when a law firm provides an opinion letter that is later found to have errors or omissions?

Two recent Massachusetts cases illustrate the problems that can arise and provide some helpful guidance for firms that are asked to provide opinion letters.

Undisclosed Patent Infringement Action

In National Bank of Canada v. Hale and Dorr, LLP, the bank agreed to provide a borrower with a credit facility in the amount of $55 million. In the credit agreement the borrower represented that there were “no actions, suits, proceedings or investigations of any kind pending or, to the knowledge of [the borrower], threatened” that might have a material, adverse effect on the company.

Counsel for the borrower provided an opinion letter that stated:

To our knowledge there is no action, suit, proceeding or investigation pending or threatened against [the borrower] … which could prevent the consummation of the transactions contemplated by the credit documents … or which, if adversely determined, could have a material adverse effect on the business ….

The opinion letter listed 27 items that the law firm examined for the purposes expressed in the letter, including “such documents … as [the law firm] considered necessary for the purposes of this opinion.”

At the time the borrower and its law firm made these representations, there was a patent infringement action pending against the borrower that was not disclosed. The borrower was represented by litigation attorneys at the same law firm that gave the opinion. When the borrower defaulted on the loan and eventually filed for bankruptcy, the bank brought suit against the borrower's counsel on the following theories: negligent misrepresentation, negligence, misrepresentation, breach of contract and third-party beneficiary.

At the close of discovery, cross-motions for summary judgment were filed. The Superior Court denied the bank's motion for summary judgment in its entirety, citing a number of disputed material facts, including whether the outcome of the patent infringement action was likely to have a “material adverse effect” on the borrower.

The court granted the defendant law firm's motion with respect to the claims for negligent misrepresentation and negligence, holding that no duty of care should be imposed on the defendant law firm in favor of the bank because to do so would potentially conflict with the firm's duty to its client ' the borrower. The court also dismissed the breach of contract claim, finding that no contract existed between the defendant law firm and the bank.

The court, however, denied the law firm's motion for summary judgment on the bank's claims of misrepresentation and third-party beneficiary status. With respect to the first claim the court ruled that, by including the phrase “to our knowledge” and a list of 27 items it had reviewed, the firm implied that it had superior knowledge with respect to the matter, thereby rendering the opinion an actionable misrepresentation.

On the second claim, the court held that the firm intended that the opinion letter influence the bank's behavior in the transaction and, as a result, the bank was a third party beneficiary of the firm's contract for legal services with the borrower.

Undisclosed Criminal Investigation

In Dean Foods Company v. Pappathanasi, et al., the plaintiff purchased all of the outstanding stock of the West Lynn Creamery. The Stock Purchase Agreement contained a representation that there was no pending or threatened litigation, nor any pending or threatened government investigations, against West Lynn, except as set forth on a schedule attached to the agreement.

West Lynn's law firm provided the purchaser with an opinion letter that stated that “to our knowledge” there was no pending or threatened litigation or government investigations except as disclosed in the stock purchase agreement. The letter also stated that the attorneys rendering the opinion “have relied upon the representations of factual matters contained in the Purchase Agreement and have made no independent investigation of such factual matters; however, nothing has come to our attention which causes us to doubt the accuracy thereof.”

Approximately 9 months before the opinion letter was issued and the transaction closed, the law firm had undertaken to represent West Lynn in connection with a criminal grand jury investigation. Neither the Stock Purchase Agreement nor the opinion letter disclosed the existence of the investigation. Several months after the closing, criminal charges were filed, initially against third parties and, later, against West Lynn. West Lynn ultimately pled guilty to the charges and paid a fine of $7,200,000.

The buyer filed suit against a number of defendants including West Lynn's law firm. The case against the law firm was tried on three theories: negligent misrepresentation; negligence; and violations of the Massachusetts Consumer Protection Act, G.L. c. 93A.

Following a jury-waived trial, the Superior Court found in favor of the plaintiff on negligent misrepresentation and in favor of the law firm on the Chapter 93A claim.

Contrary to the holding in the National Bank of Canada case, the court first ruled that, in rendering the opinion, the law firm owed the buyer ' a non-client ' a duty of care. Next, the court found that the statements in the opinion letter about no litigation or pending government investigations were not so much opinions as they were statements of fact. In making such statements, the court held, lawyers must perform such due diligence as is required by customary practice. The court ruled that West Lynn's law firm failed to meet this standard.

The court nonetheless went on to find that the law firm was not liable to the plaintiffs under Chapter 93A, ruling that its actions “were not immoral, unethical, oppressive or unscrupulous …” and that the connection between the law firm the plaintiffs “is not clearly a 'commercial relationship between consumers and business persons' …”

What lessons can law firms take away from these opinion letter cases?

The National Bank of Canada and Dean Foods decisions are inconsistent in several important respects, primarily on the question whether a borrower or seller's attorney owes a duty of care to the lender or buyer in issuing an opinion letter. Nevertheless, there are some lessons law firms can learn from these cases.

The Good News

1. At root, these cases do not break any significant new legal ground. They simply reaffirm the well-established proposition that, when an attorney is asked by his client to make a representation to another party in a transaction, he has an obligation to speak truthfully.

2. Nothing in these cases suggests that attorneys who write opinion letters will be exposed to unlimited liability to a large class of unidentified persons who may read and rely on the opinion. In both cases the courts took pains to point out that the opinion letters were prepared for specific, named parties who were expected to rely on them.

3. Neither case suggests that, by providing an opinion, the attorney becomes a guarantor of his client's performance. Liability will only be imposed where the precise opinion or factual representation proved to be both the cause-in fact and a proximate cause of the other party's loss.

4. The court in Dean Foods properly concluded that a law firm's negligence in drafting an opinion letter should not and will not give rise to liability under applicable consumer protection statutes, thereby exposing the law firm to liability for multiple damages and attorneys fees.

Lessons Learned

On the other hand, there are aspects of both decisions that are cause for concern.

1. It seems clear that the use of limiting and qualifying phrases in opinion letters such as “to our knowledge” will not relieve a law firm from its obligation to conduct reasonable due diligence prior to issuing the opinion. While the precise extent of that diligence will differ depending upon the circumstances, it would seem prudent, at a minimum, for transaction lawyers to consult with their own litigation partners who do work for the client before giving a “no litigation” opinion.

2. Lawyers need to be careful to describe accurately and with specificity the due diligence they undertook in rendering the litigation opinion – what records or files were checked and who was consulted. Avoid catchall phrases like: “we have consulted all documents necessary for the purposes of this opinion.”

3. The burden of proving that an attorney's error proximately caused a loss may be somewhat more relaxed in the context of an opinion letter than in a conventional legal malpractice case. In both National Bank of Canada and Dean Foods for example, the courts accepted testimony from the plaintiffs that they would not have closed the transaction had the particular matter been disclosed.

4. The court in Dean Foods took the law firm to task for violating its own internal policies and procedures regarding the preparation and issuance of its opinion letter.

Law firms need to adopt clear procedures for opinion letters, publicize those procedures firm wide and, most especially, take steps to ensure the procedures are being followed.

Richard Zielinski is a Director in the Litigation and Professional Liability groups at Goulston & Storrs. He frequently represents law firms in legal malpractice and disciplinary matters, firm breakups and partner departures and ethics matters. He is a Fellow in the American College of Trial Lawyers and a past member of the Massachusetts Board of Bar Overseers, which oversees the attorney discipline process.

In most complex commercial transactions ' mergers, acquisitions, loans and other financings ' the seller's or borrower's counsel is called upon to provide an opinion letter. The letter typically addresses various matters of interest to the buyer or lender, including any exposure to litigation, government inquiry or other proceedings that might have an impact on the value or viability of the client's business.

Increasingly, when something goes wrong with the transaction, aggrieved buyers and lenders are seeking recourse, not just against the seller or borrower, but also against the law firm that wrote the opinion letter.

What happens when a law firm provides an opinion letter that is later found to have errors or omissions?

Two recent Massachusetts cases illustrate the problems that can arise and provide some helpful guidance for firms that are asked to provide opinion letters.

Undisclosed Patent Infringement Action

In National Bank of Canada v. Hale and Dorr, LLP, the bank agreed to provide a borrower with a credit facility in the amount of $55 million. In the credit agreement the borrower represented that there were “no actions, suits, proceedings or investigations of any kind pending or, to the knowledge of [the borrower], threatened” that might have a material, adverse effect on the company.

Counsel for the borrower provided an opinion letter that stated:

To our knowledge there is no action, suit, proceeding or investigation pending or threatened against [the borrower] … which could prevent the consummation of the transactions contemplated by the credit documents … or which, if adversely determined, could have a material adverse effect on the business ….

The opinion letter listed 27 items that the law firm examined for the purposes expressed in the letter, including “such documents … as [the law firm] considered necessary for the purposes of this opinion.”

At the time the borrower and its law firm made these representations, there was a patent infringement action pending against the borrower that was not disclosed. The borrower was represented by litigation attorneys at the same law firm that gave the opinion. When the borrower defaulted on the loan and eventually filed for bankruptcy, the bank brought suit against the borrower's counsel on the following theories: negligent misrepresentation, negligence, misrepresentation, breach of contract and third-party beneficiary.

At the close of discovery, cross-motions for summary judgment were filed. The Superior Court denied the bank's motion for summary judgment in its entirety, citing a number of disputed material facts, including whether the outcome of the patent infringement action was likely to have a “material adverse effect” on the borrower.

The court granted the defendant law firm's motion with respect to the claims for negligent misrepresentation and negligence, holding that no duty of care should be imposed on the defendant law firm in favor of the bank because to do so would potentially conflict with the firm's duty to its client ' the borrower. The court also dismissed the breach of contract claim, finding that no contract existed between the defendant law firm and the bank.

The court, however, denied the law firm's motion for summary judgment on the bank's claims of misrepresentation and third-party beneficiary status. With respect to the first claim the court ruled that, by including the phrase “to our knowledge” and a list of 27 items it had reviewed, the firm implied that it had superior knowledge with respect to the matter, thereby rendering the opinion an actionable misrepresentation.

On the second claim, the court held that the firm intended that the opinion letter influence the bank's behavior in the transaction and, as a result, the bank was a third party beneficiary of the firm's contract for legal services with the borrower.

Undisclosed Criminal Investigation

In Dean Foods Company v. Pappathanasi, et al., the plaintiff purchased all of the outstanding stock of the West Lynn Creamery. The Stock Purchase Agreement contained a representation that there was no pending or threatened litigation, nor any pending or threatened government investigations, against West Lynn, except as set forth on a schedule attached to the agreement.

West Lynn's law firm provided the purchaser with an opinion letter that stated that “to our knowledge” there was no pending or threatened litigation or government investigations except as disclosed in the stock purchase agreement. The letter also stated that the attorneys rendering the opinion “have relied upon the representations of factual matters contained in the Purchase Agreement and have made no independent investigation of such factual matters; however, nothing has come to our attention which causes us to doubt the accuracy thereof.”

Approximately 9 months before the opinion letter was issued and the transaction closed, the law firm had undertaken to represent West Lynn in connection with a criminal grand jury investigation. Neither the Stock Purchase Agreement nor the opinion letter disclosed the existence of the investigation. Several months after the closing, criminal charges were filed, initially against third parties and, later, against West Lynn. West Lynn ultimately pled guilty to the charges and paid a fine of $7,200,000.

The buyer filed suit against a number of defendants including West Lynn's law firm. The case against the law firm was tried on three theories: negligent misrepresentation; negligence; and violations of the Massachusetts Consumer Protection Act, G.L. c. 93A.

Following a jury-waived trial, the Superior Court found in favor of the plaintiff on negligent misrepresentation and in favor of the law firm on the Chapter 93A claim.

Contrary to the holding in the National Bank of Canada case, the court first ruled that, in rendering the opinion, the law firm owed the buyer ' a non-client ' a duty of care. Next, the court found that the statements in the opinion letter about no litigation or pending government investigations were not so much opinions as they were statements of fact. In making such statements, the court held, lawyers must perform such due diligence as is required by customary practice. The court ruled that West Lynn's law firm failed to meet this standard.

The court nonetheless went on to find that the law firm was not liable to the plaintiffs under Chapter 93A, ruling that its actions “were not immoral, unethical, oppressive or unscrupulous …” and that the connection between the law firm the plaintiffs “is not clearly a 'commercial relationship between consumers and business persons' …”

What lessons can law firms take away from these opinion letter cases?

The National Bank of Canada and Dean Foods decisions are inconsistent in several important respects, primarily on the question whether a borrower or seller's attorney owes a duty of care to the lender or buyer in issuing an opinion letter. Nevertheless, there are some lessons law firms can learn from these cases.

The Good News

1. At root, these cases do not break any significant new legal ground. They simply reaffirm the well-established proposition that, when an attorney is asked by his client to make a representation to another party in a transaction, he has an obligation to speak truthfully.

2. Nothing in these cases suggests that attorneys who write opinion letters will be exposed to unlimited liability to a large class of unidentified persons who may read and rely on the opinion. In both cases the courts took pains to point out that the opinion letters were prepared for specific, named parties who were expected to rely on them.

3. Neither case suggests that, by providing an opinion, the attorney becomes a guarantor of his client's performance. Liability will only be imposed where the precise opinion or factual representation proved to be both the cause-in fact and a proximate cause of the other party's loss.

4. The court in Dean Foods properly concluded that a law firm's negligence in drafting an opinion letter should not and will not give rise to liability under applicable consumer protection statutes, thereby exposing the law firm to liability for multiple damages and attorneys fees.

Lessons Learned

On the other hand, there are aspects of both decisions that are cause for concern.

1. It seems clear that the use of limiting and qualifying phrases in opinion letters such as “to our knowledge” will not relieve a law firm from its obligation to conduct reasonable due diligence prior to issuing the opinion. While the precise extent of that diligence will differ depending upon the circumstances, it would seem prudent, at a minimum, for transaction lawyers to consult with their own litigation partners who do work for the client before giving a “no litigation” opinion.

2. Lawyers need to be careful to describe accurately and with specificity the due diligence they undertook in rendering the litigation opinion – what records or files were checked and who was consulted. Avoid catchall phrases like: “we have consulted all documents necessary for the purposes of this opinion.”

3. The burden of proving that an attorney's error proximately caused a loss may be somewhat more relaxed in the context of an opinion letter than in a conventional legal malpractice case. In both National Bank of Canada and Dean Foods for example, the courts accepted testimony from the plaintiffs that they would not have closed the transaction had the particular matter been disclosed.

4. The court in Dean Foods took the law firm to task for violating its own internal policies and procedures regarding the preparation and issuance of its opinion letter.

Law firms need to adopt clear procedures for opinion letters, publicize those procedures firm wide and, most especially, take steps to ensure the procedures are being followed.

Richard Zielinski is a Director in the Litigation and Professional Liability groups at Goulston & Storrs. He frequently represents law firms in legal malpractice and disciplinary matters, firm breakups and partner departures and ethics matters. He is a Fellow in the American College of Trial Lawyers and a past member of the Massachusetts Board of Bar Overseers, which oversees the attorney discipline process.