A $10.6 million legal malpractice judgment against Bryan Cave and one of its former attorneys was thrown out yesterday by a state appeals court. The long-running dispute involves a failed deal between two partners in a women’s apparel company.

The decision in Feinberg v. Boros, 108498/03, also held that two parties to an arbitration that has been “fully and vigorously litigated” cannot enter an agreement limiting the estoppel effect of the arbitration on third-party claims—the central issue underlying the malpractice case.

The decision by the Appellate Division, First Department, reversed a June 2011 decision by Manhattan Acing Supreme Court Justice Barbara Jaffe. Justice James Catterson (See Profile) wrote the majority opinion, joined by Justices David Saxe (See Profile) and Rolando Acosta (See Profile). Justice Karla Moskowitz (See Profile) wrote a separate concurring opinion, joined by Justice Dianne Renwick (See Profile).

The malpractice suit stems from an older dispute between Herbert Feinberg, the plaintiff, and Norman Katz, his partner in a now-defunct women’s apparel business called I. Appel Corp. that the two men ran in the 1990s. In 1996, Feinberg bought out Katz’s share of the partnership. Feinberg maintains that, in agreeing to the buyout, he relied on a 1995 statement of the company’s finances prepared by its accounting firm, Mahoney Cohen & Co.

I. Appel turned out to be worth much less than Mahoney Cohen had said. Feinberg initiated an arbitration proceeding against Katz in an effort to recover his losses. However, the arbitration panel found that Feinberg had not relied on Mahoney Cohen’s statement in agreeing to the buyout, and awarded him no money.

In 2000, after the arbitration was complete, Feinberg sued Mahoney Cohen for accounting malpractice. In 2001, Manhattan Supreme Court Justice Marilyn Shafer dismissed the complaint insofar as it was related to the 1995 statement, ruling that the claims were estopped by the arbitration panel’s decision. The First Department affirmed in 2002.

In 2003, Feinberg filed a malpractice suit in Supreme Court against Jerome Boros, the now-retired attorney who represented him in the arbitration. At the time of the arbitration, Boros was at Robinson Silverman Pearce Arenson & Berman, which later merged into Bryan Cave. Feinberg claimed Boros failed to advise him that he could preserve his right to sue Mahoney Cohen by signing an agreement with Katz limiting the estoppel effect of the arbitration decision.

After an October 2010 trial, a jury found in favor of Feinberg and awarded him $5.1 million.

Boros sought a judgment notwithstanding verdict, but Jaffe denied that motion. The total judgment, including interest going back to 2003, ended up being $10.6 million. Boros appealed.

Yesterday, Catterson wrote that Boros should have been granted judgment notwithstanding the verdict because Feinberg and Katz could not, in fact, have agreed to prevent Mahoney Cohen from asserting collateral estoppel.

“The ability of parties to formulate their own contractual restrictions as to the estoppel effect of arbitration awards is not, in reality, a carved-out exception to normal collateral estoppel principles,” Catterson said.

Such agreements, he said, are only valid if they are consistent with normal collateral estoppel principles, which hold that collateral estoppel applies when an issue has been litigated “fully and vigorously.”

An agreement between parties that the outcome of an arbitration will not have estoppel effect amounts to an agreement not to litigate fully and vigorously, Catterson wrote.

“Essentially, therefore, the sparse case law pertaining to limitation agreements indicates that limitation of the preclusive effect of certain arbitration awards is not a purely contractual restriction which may be invoked even where there has been a full and fair opportunity to contest a determination,” he said. “Rather, it is a contractual creation that in cart-before-the-horse fashion reflects the parties’ intentions not to litigate fully or vigorously in the arbitration.”

Catterson continued, “Nothing in the relevant case law supports Feinberg’s argument as to the validity of a limitation agreement made after arbitration, after litigating the issues fully, vigorously and exhaustively, and where the agreement is directed at one third party after other third parties have asserted collateral estoppel defenses based on the arbitration award. Such a limitation agreement would be nothing more than an egregious and unenforceable attempt to impermissibly thwart fundamental collateral estoppel principles.”

In her concurrence, Moskowitz said that while she agreed with the majority’s conclusion, she rejected its holding about when agreements limiting estoppel are enforceable.

“The majority appears to say that so long as parties have the opportunity to litigate an issue fully in the arbitration, then no limiting agreement would ever be enforceable, no matter when the parties enter into it (i.e., prior to or post award),” she said. “But, if parties do not have a chance to litigate an issue completely, then collateral estoppel is not available anyway. The majority has thus collapsed the rule for limiting agreements into the rule for collateral estoppel.”

Instead, she said, the agreement at issue is not enforceable because it was a clear instance of collusion between Feinberg and Katz to deprive Mahoney Cohen of its rights.

“We have reviewed the decision. We respectfully disagree,” said Steven Storch, a partner at Storch Amini & Munves who represents Feinberg. “We strongly believe that the trial court properly upheld the verdict, and we are exploring all appropriate legal avenues.”

Edward Friedman, a partner at Friedman Kaplan Seiler & Adelman who represents Boros, declined to comment.