One of the first legal malpractice cases I ever handled involved a client who wanted to file chapter 11 for her struggling business. She hired a fairly well known downtown Denver law firm to structure a chapter 11 for her business. The major creditor who wanted to shut her down was a bank that had a lien or security interest against all the company property. So, she decided to file chapter 11 and selected this particular law firm. She paid the firm a sizeable retainer and felt comfortable working with the lawyer assigned to her case. However, for reasons she could not understand, her chapter 11 was not progressing as she expected. She was not sure if the law firm was unfamiliar with chapter 11 cases or what the problem was. In time, the law firm recommended to her that she convert the chapter 11 for the company to chapter 7, basically, that she abandon her business. She could not understand why she could not reorganize. Trusting her lawyers, she converted her company’s chapter 11 to a chapter 7. After she lost the business, she had a sinking feeling that something was wrong. That is when she hired our firm.
As it turned out, the law firm she hired had a serious conflict of interest – the law firm actually represented the bank she was being sued by! That is, she was seeking protection from Bank A, and the law firm she hired, actually represented Bank A, but never told her! That is, the law firm had two masters, the chapter 11 client and the bank that was trying to seize the company assets.
Our law firm took the case and sued the law firm for professional negligence, legal malpractice. The business, properly reorganized in chapter 11, could have re invented itself and moved forward, successfully and profitably. Unfortunately, because the law firm did not give the business client its undivided loyalty, due to the conflict of interest, the law firm recommended a conversion from chapter 11 to chapter 7, solely to benefit its bank client, Bank A.
A settlement was reached that fully compensated the business that could have successfully emerged from a chapter 11 except for the law firm’s professional malpractice and negligence. Because the settlement was confidential, the parties and the dollar amount of the settlement cannot be disclosed.