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The Perils of Contract-Writing

In 1975, Rocco J. Fiorentino and John Converse founded a company that specialized in servicing restaurant equipment, installing serviced equipment for manufacturers, selling equipment, leasing equipment, and designing and drafting equipment. Previously, Converse had been Fiorentino's supervisor at another company ... 

In 1975, Rocco J. Fiorentino and John Converse founded a company that specialized in servicing restaurant equipment, installing serviced equipment for manufacturers, selling equipment, leasing equipment, and designing and drafting equipment. Previously, Converse had been Fiorentino's supervisor at another company and was ten years his senior. Each partner contributed approximately $300 in startup capital. Three years later, J&R was incorporated and Fiorentino and Converse were each issued 2,500 shares of stock in the company. J&R became successful, soon boasting several national accounts and serving restaurants like Pizza Hut and McDonalds. Over its ten years of operation, J&R yielded approximately $3.5 million in gross revenues.

In 1985, Fiorentino and Converse decided to terminate their business relationship. In an agreement they negotiated themselves:

(1) Fiorentino would receive the stock in Leasomatic, a smaller company started by J&R;

(2) Converse would keep all of J&R; and

(3) Fiorentino would receive $1.1 million in payments over a ten year period, payable in monthly installments of $9,166.67 as J&R received 20-5/6 of the company's shares belonging to Fiorentino on a monthly basis.

The parties hired Frank Rapoport and Allen Gordon, both partners at Saul, Ewing, to put the terms of their agreement in writing. All of the parties met on at least two occasions during the course of finalizing the agreement.

The details and the effect of the agreement were described as follows by Gordon at trial:

(1) The money owed to Fiorentino was to be paid by J&R if it had the surplus to pay it; otherwise, it was to be paid by Converse;

(2) Every month J&R would receive 20-5/6 shares of stock from Mr. Fiorentino;

(3) At the end of the transaction, Converse would own the 2500 outstanding shares of J&R, with Fiorentino's stock becoming treasury stock;

(4) The stock to be returned monthly was to be held in escrow by Converse, thus giving him the power to vote all shares of stock;

(5) Upon default, Converse would deliver to Fiorentino all shares held in escrow not redeemed by J&R, and Fiorentino would become a 50-50 shareholder;

(6) Converse was able to vote the shares of J&R and vote the company out of business and into bankruptcy; and

(7) Payments to Fiorentino depended on the net worth of J&R, and if this was deficient, Converse became responsible for payments.

The agreement, which was finalized and signed on 2 January 1986, was lacking in several respects. There was apparently no discussion during the meetings relating to what would happen in the event that a default payment occurred. There was also no discussion relating to potential conflicts of interest or the pursuit of independent counsel for each party to the agreement. The lawyers never advised the parties about the possibilities and virtues of establishing an independent escrow arrangement, nor did they discuss a provision to preclude Converse from establishing a corporation with transferred J&R assets that would be owned by his family members.

Because Converse was unable to continue making the full payments in February 1987, the parties agreed to temporarily amend the agreement to reflect a reduction in the amount due and payable to Fiorentino. Fiorentino was unable to contact Gordon at Saul, Ewing and so hired Bert Bartin, a New Jersey lawyer, to draft the addendum. Thereafter, Fiorentino received $5,500 per month in payments from J&R.

At the same time as these negotiations, Rapoport, pursuant to Converse's request, established and incorporated two companies. They were not owned by Converse, but rather by his wife, his son, his daughter, and the companies' employees. Nonetheless, Converse, served as president of both corporations. He continued the $5,500 per month payments for the next twelve months, until 8 February 1988, when he notified Fiorentino by letter that he would no longer make further payments under the agreement. Consequently, Converse voted the J&R stock and signed the authorization for the company to go into bankruptcy.

After Fiorentino initiated suit, the District Court dismissed the action on the grounds that the conduct alleged in the plaintiff's complaint did not constitute a pattern of racketeering activity under the RICO statute. Subsequently, Fiorentino filed a complaint in the Court of Common Pleas of Philadelphia County, alleging that the defendants were liable to Fiorentino under three separate theories: (1) breach of contract; (2) legal malpractice stemming from negligence; and (3) breach of fiduciary duty.

In its appeal, the Superior Court considered two claims:

(1) Should a legal malpractice plaintiff be required to demonstrate with absolute certainty what would have happened in circumstances that the defendant lawyers did not permit to come to pass by their actions and omissions?

(2) Is the granting of compulsory nonsuit proper where plaintiff's expert provided an opinion as to all relevant elements of the cause of action based upon testimony and documents of record?

The Superior Court granted the compulsory nonsuit on the ground that there had been a failure of proof as to harm, meaning that the plaintiff did not carry his burden by any evidence to establish all of the elements necessary to his case. It held that evidence which demonstrates that a plaintiff has suffered the loss of property rights under a contract will suffice to establish "actual injury" or "harm" in a legal malpractice action. Everyone involved in the case agreed that Fiorentino suffered the loss of property rights he was entitled to receive pursuant to the terms of the written contract. $914,833.29 remained to be paid under the Stock Purchase Agreement. The remaining question to be addressed was whether the cross-appellants, Gordon and Ewing, were legally responsible for this economic harm because the Stock Purchase Agreement they prepared failed to protect their client's legitimate interests and that this failure was the proximate cause of Fiorentino's actual loss.

"Proximate causation" in a legal malpractice action has been defined as "that which, in a natural and continuous sequence ,unbroken by any sufficient intervening cause, produced injury, and without which the result would not have occurred." McPeake, 381 Pa.Super. at 232, 553 A.2d at 441. A defendant will not be found to have had a duty to prevent a harm that was not a reasonably foreseeable result of the prior negligent conduct. Whether a defendant's conduct is the cause of the plaintiff's injury or loss is generally for the jury to decide, unless the evidence is so overwhelming that reasonable people would not disagree.

The experts at trial indicated that common practice among attorneys throughout the United States was to consult form books when drafting an agreement for a sale of a business. The cross-appellants did not include common seller protection arrangements in the Stock Purchase Agreement between Fiorentino and Converse. As a result, nothing prevented Converse from legally transferring assets from J&R as he saw fit, whether or not J&R received fair market value for those assets. Second, the written contract did not prohibit Converse from lawfully conveying J&R's assets directly to his family or to corporate entities controlled by his wife and children. Third, no protective clause restrained Converse from setting up enterprises which actively competed with J&R for business. Viewed in the light most favorable to Fiorentino, the Court found that the expert's testimony would support the inference that Converse was able to easily and lawfully force J&R into bankruptcy because the cross-appellants failed to draft the agreement of sale for J&R in such a way as to adequately protect Fiorentino's interests.

Thus, the Superior Court held that the failure to advise a client of the consequences arising from a contract, as well as the failure to insert protective provisions therein, forms a claim for legal malpractice. This "transformation of a reasonably funded liability into an uncollectible debt" is a deviation from the standard. As a result, Fiorentino was allowed to take his case to the jury and have his day in court to address his grievous financial injury.

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