Cadwalader Wickersham & Taft failed to defeat a malpractice suit brought by Red Zone, an investment vehicle run by the owner of the Washington Redskins, after a state judge found the firm did not prove it gave adequate warning that a side letter it reviewed may not have limited Red Zone’s liability in a proxy fight.
Red Zone, run by Redskins owner Daniel Snyder, sued Cadwalader in 2011 for $13 million claiming the firm botched a letter tied to a fee owed to UBS Securities for its work during a proxy contest for Six Flags Inc. Red Zone filed suit after the Appellate Division, First Department ruled in 2010 that Red Zone owed UBS $8 million.
“According to Cadwalader, it should not be liable because the UBS litigation did not hinge on the (letter). This argument is not compelling,” said Manhattan Supreme Court Justice Melvin Schweitzer (See Profile), granting summary judgment to Red Zone in Red Zone v. Cadwalader, 650318/2011.
Schweitzer said he would address the issue of damages in a later order. Solo practitioner Jeffrey Jannuzzo, who represents Red Zone, said in a statement: “Justice Schweitzer’s well-reasoned decision speaks for itself, and Red Zone has no further comment.”
David Marriott, a partner with Cravath, Swaine & Moore who represented Cadwalader, said: “We are aware of and disappointed by the court’s decision in the Red Zone matter. We respectfully disagree with the decision and we plan promptly to appeal.”
In July 2005, Red Zone and UBS Securities signed an engagement agreement detailing the role UBS would play in Red Zone’s potential acquisition of Six Flags. Red Zone was represented by Dennis Block, then a partner at Cadwalader and now with Greenberg Traurig.
In August 2005, Red Zone launched a proxy contest, successfully placing three of seven director positions at Six Flags, including Snyder. Just before the launch of proxy contest, UBS informed Red Zone it would demand a full $10 million fee if the proxy contest was successful.
Red Zone objected and Block was present when representatives of Red Zone and UBS reached an oral agreement, according to the ruling.
Snyder and UBS signed a letter drafted by UBS, according to Red Zone, that was supposed to memorialize the agreement to limit UBS’ fee to $2 million for anything that did not involve Red Zone acquiring the majority of voting stock of Six Flags.
By early 2006, Red Zone nominees held nine out of 10 Six Flags’ board positions. More than 50 percent of its directors were Red Zone insiders and Snyder was Six Flags’ chairman.
The next year, UBS demanded Red Zone pay the remainder of the $10 million fee. Red Zone contacted Cadwalader but later hired other counsel, including Quinn Emanuel Urquhart & Sullivan.
In subsequent litigation between UBS and Red Zone, the First Department granted summary judgment to UBS, determining Red Zone controlled Six Flags through its presence and management. Ultimately, Red Zone paid $11.7 million to UBS, Jannuzzo said.
Snyder left Six Flags’ board in 2010, nearly a year after the amusement park filed for bankruptcy.
The judge characterized Red Zone’s position as: “any fool could have drafted a letter correctly memorializing the oral agreement.”
But Cadwalader countered it warned Red Zone that the letter might not have limited its payment obligation to $2 million. Schweitzer noted that Cadwalader’s only evidence to support this claim is an affidavit by Block, which “starkly contradicts Mr. Block’s deposition testimony” given during the UBS litigation.
“Absent this affidavit, Cadwalader has not submitted evidence to create a material issue of fact that it warned Red Zone that the side letter might not have limited Red Zone’s payment obligations,” Schweitzer said.
Cadwalader, he said, is essentially “claiming that even if there were gaps in the (letter), these gaps were reasonable because they only later came into play as a result of the unexpected circumstances.”
“Here the gap was unreasonable as a matter of law,” the judge said. He said the general purpose of the agreement between UBS and Six Flags was to increase Red Zone’s influence over Six Flags. “Cadwalader was well aware of these ambitions when it reviewed” the letter, Schweitzer said.
Cadwalader relied on the affidavits of the UBS representatives who signed the letter and their testimony stated they believed the oral agreement limited Red Zone’s payment obligations.
But Schweitzer said “no reasonable attorneys would rely upon an opposing party’s interpretation of a contract.”
Cadwalader argued it was not the cause of the Red Zone’s injury because Red Zone had an opportunity to avoid damages by prevailing in the lawsuit against UBS. But Schweitzer said Red Zone’s subsequent counsel, Quinn Emanuel, had little opportunity to limit Red Zone’s liability
“Although Red Zone’s subsequent counsel is experienced and well regarded, the UBS litigation can best be summed up by reference to Harry Hopkins aside to President Roosevelt at the bleak moment of the economy’s crash in 1938: ‘There are no more rabbits,’” Schweitzer said.
On the issue of statute of limitations, the judge said that Block, now senior chairman of Greenberg Traurig’s corporate merger and acquisition practice, said Cadwalader did not understand there to be an ongoing continuous representation between the firm and Red Zone after December 2005 and he viewed his later communications with Red Zone as merely “being helpful.”
Schweitzer said legal malpractice claims generally must be filed within three years of the alleged malpractice, but he pointed out multiple occasions where Block consulted with Red Zone during the UBS dispute. Schweitzer said he found that a gap period of representation did not undermine the timeliness of Red Zone’s claim.
@|Christine Simmons can be contacted at firstname.lastname@example.org.