In the ongoing battle over whether a legal malpractice suit brought by a husband and wife against Bracewell & Giuliani must be moved to arbitration, the firm has argued that the wife was never its client.

The plaintiffs, however, have countered that she was an “implied client.”

In Sanfordv. Bracewell & Giuliani, Bracewell was sued in the Bucks County Court of Common Pleas on February 15 by Craig and Mary Jo Sanford, who allege the firm didn’t do enough to recover $12.5 million in lost proceeds of the sale of their business. Bracewell removed the matter to federal court the following month and its next filing was a motion to stay the matter pending arbitration.

Since then, the parties have fought over whether the case should remain in court, with the plaintiffs arguing that arbitration clauses in engagement letters between clients and attorneys violate public policy.

During the course of arguing for arbitration, Bracewell contended that Mary Jo Sanford was never a client and therefore could not bring legal malpractice or breach of contract claims against the firm in court.

Instead, Bracewell said in an October 3 filing, Sanford’s claims must be referred to arbitration, along with those of Craig Sanford, who signed the engagement letter containing the arbitration clause.

“Mary Jo Sanford’s name is never mentioned in the engagement letter,” Bracewell said in the filing in support of its motion to compel arbitration. “Moreover, the terms of engagement attached to the letter recite that the engagement is to represent ‘the client only,’ and not ‘partners, spouses, siblings, or other family members.’ And Mary Jo Sanford cannot have become a client of the firm in any other way, since she never sought the firm’s legal representation, and it was never offered to her.”

But the plaintiffs said in a filing Monday in opposition to Bracewell’s motion to compel arbitration that the firm’s position that it did not represent Mary Jo Sanford “borders on absurdity in that the firm was retained to recover money that belonged to both Mr. and Mrs. Sanford.”

However, while Craig Sanford was an express client of Bracewell’s pursuant to the engagement letter, Mary Jo Sanford was an “implied client” because she had an equal interest in the money Bracewell was hired to recover from the sale of the business, the plaintiffs said.

“There is no testimony that a recommendation was made for Mrs. Sanford to seek other counsel to represent her interest in the recovery of this money that was just as much hers as it was Mr. Sanford’s,” the plaintiffs said in the filing, adding that whether the firm believed it was representing Mary Jo Sanford is irrelevant if she reasonably believed the firm was representing her.

According to the complaint in Sanford, the Sanfords owned and operated a medical waste disposal business. In 2005, the Sanfords sold the company for more than $14 million, ultimately leaving the couple with more than $12.5 million in U.S. bank accounts. A prior attorney for the couple told them to move the money to offshore accounts.

In 2007, the Sanfords met Jamie Smith, an apparent well-known international security expert, former Navy Seal and CIA operative, and owner and CEO of SCG International LLC. According to the complaint, SCG and Smith were represented to the Sanfords as having government contracts to provide security services to American forces in Iraq and Afghanistan as well as to provide training for air marshals. The Sanfords said in their complaint that Smith represented he had the knowledge and experience to move the Sanfords’ money offshore.

Under the terms of the deal, according to the complaint, Smith would hold the Sanfords’ money in a secured account and the Sanfords would earn interest on it. The money was to be returned May 27, 2009, according to the complaint.

During the term of the note, Craig Sanford repeatedly tried to check on the status of his money but was often told Smith would get back to him. In the spring of 2009, Sanford began receiving letters from an attorney for Smith who said the $12.5 million had not performed well in the market and that Smith wanted to reach a new payback agreement, according to the complaint.

Sanford insisted he didn’t “invest” his money and demanded a return of the full $12.5 million. When the note came due in May 2009, the Sanfords did not receive their money or a payback proposal from Smith, according to the complaint.

Craig Sanford spoke to his neighbor in the Pocono Mountains about his situation. That neighbor was Bracewell attorney David Stockwell, then a partner in the New York and Dubai offices of Bracewell and a resident of Wayne County, Pa., according to the complaint.

Bracewell agreed to represent the Sanfords, who paid the firm $50,000, they said in the complaint. New York white-collar defense partner Jonathan N. Halpern entered the engagement agreement with the Sanfords in September 2009. According to the engagement letter, attached to the complaint, Halpern would charge $700 an hour and another attorney no longer with the firm would charge $340 an hour. By March 2010, the parties agreed to terminate the representation and the file was returned to the Sanfords a month later, according to the complaint.

The Sanfords said in their complaint that Bracewell purportedly investigated the return of the couple’s $12.5 million. But the Sanfords said the work was “incomplete, inconclusive and inadequate to accomplish the goals” of the Sanfords. According to the complaint, Bracewell took “no steps” to locate or recover the Sanfords’ money. The Sanfords said in the complaint that Bracewell failed to contact Smith or seek an injunction prohibiting him from using or distributing the money.

In their filing Monday, the plaintiffs, arguing that Mary Jo Sanford believed she had been a client of Bracewell’s during that time, said she and her husband had a conversation with Stockwell in their home about the case in July or August 2009, before the engagement letter was signed.

“Mrs. Sanford’s presence during the conversation between Mr. Sanford and Mr. Stockwell would have destroyed attorney-client privilege — unless, of course, she too was considered to be a client of the firm,” the plaintiffs said. “It is reasonable to infer that at least Mr. Stockwell must have thought that Mrs. Sanford was a client, at least at the time the conversation took place.”

The plaintiffs said in the filing that Mrs. Sanford had reasonably believed she was a client and Bracewell did nothing to dispel that belief.

“The firm had no trouble accepting Mrs. Sanford’s check for their services,” the plaintiffs said in the filing. “It is only now that they’ve been sued that they raise this disingenuous argument that Mrs. Sanford was not their client.”

But the plaintiffs further argued that although Sanford believed she was a client, she also believed she was being represented on terms other than those in the engagement letter and is therefore not bound by the arbitration clause.

According to the plaintiffs, Stockwell told the Sanfords the firm would begin work once they paid the $50,000.

Mary Jo Sanford testified that she made out a check in that amount and personally delivered it to Stockwell before the engagement letter was signed, according to the plaintiffs.

Thus, the plaintiffs said, Sanford believed the firm had orally agreed to represent her.

“That the firm later changed the terms and failed to inform her of them, or even to take her into account when drafting the fee agreement should not inure to her detriment,” the plaintiffs said, adding that Bracewell “should not be able to use its fee agreement as both a sword and a shield.”

The plaintiffs further argued that there is no evidence that anyone at the firm ever discussed the arbitration clause in the engagement letter with Sanford.

Counsel for the plaintiffs, Clifford E. Haines of Haines & Associates in Philadelphia, could not be reached for comment.

Counsel for Bracewell, Steven M. Schneebaum of Fox Rothschild in Washington, D.C., also could not be reached.

Zack Needles can be contacted at 215-557-2493 or zneedles@alm.com. Follow him on Twitter @ZNeedlesTLI.