FL: Underlying private placement securities offering
Facts: Medical Research Industries, Inc. (MRI) was a Florida corporation in the business of marketing medical products. William Tishman, was the majority shareholder, CEO, Chairman, secretary, treasurer, and director of MRI. MRI wanted to raise money to expand their business by selling shares through private placement memoranda (PPM) which is a non-public offering. The Attorneys counseled MRI on securities issues and prepared the PPM. As a result, MRI raised $50,000,000 over two and a half years. MRI became insolvent after Tishman borrowed $18,000,000 from the money raised through the private placements. MRI appointed Donald Kaplan as assignee for the benefit of MRI’s creditors. Kaplan brought a legal malpractice suit against Attorneys alleging that they knew or should have known that the PPM were false and misleading because they did not disclose that the money raised was not used to expand business but for loans to Tishman.
Issue: Whether an assignee for the benefit of creditors, acting as a fiduciary for a corporation has standing to bring a legal malpractice against the corporation’s attorneys in an action on behalf of the now-insolvent corporation?
Ruling: Yes. Under Florida law, legal malpractice claims are not assignable because of the “highly personal nature of legal representation and confidentiality.” However, an exception to this rule applies to claims that, “involve reliance on the allegedly confidential information by interests other than the entity for whom the information was prepared.” KPMG Peat Marwich v. National Union Fire Ins. Co., 765 So.2d 36, 38-39 (Fla.2000). Kaplan has standing to bring the malpractice claims against the Attorneys because their legal services involved the publication of incomplete information to the investors.
Lesson: When attorneys provide legal services that involve the publication of corporate information to third parties (investors), they, “owe ultimate allegiance to the corporation’s creditors and stockholders, as well as to the investing public.” KPMG at 38. Therefore, an assignee has standing to bring legal malpractice claims against the corporation’s securities attorney who made the incomplete disclosures.