Sue C. Jacobs
Sue C. Jacobs ()

The Appellate Division, First Department, recently unanimously affirmed a judgment of $17.2 million against Cadwalader, Wickersham & Taft in a legal malpractice action alleging that the law firm failed to properly draft an agreement and side letter and as a result, its client had to pay its investment advisor $10 million instead of $2 million in a dispute over fees earned in an acquisition. Red Zone v. Cadwalader, Wickersham & Taft1

Cadwalader had drafted an agreement and side letter on behalf of Red Zone LLC, a private equity firm, with Red Zone’s investment advisor UBS Securities LLC concerning UBS’s fees in Red Zone’s successful takeover of Six Flags, Inc., owner and operator of multiple amusement parks. The side agreement was intended to modify the agreement’s terms concerning UBS’s fees. UBS commenced an action against Red Zone after Red Zone maintained UBS had earned only a $2 million consulting fee, and not the full $10 million addressed in the engagement agreement.

The crux of the underlying suit was whether Red Zone had gained ‘control’ of Six Flags, a term not defined in either the agreement or side letter drafted by Cadwalader. If Red Zone did not gain control the fee to UBS would be only $2 million. If it did the fee would be $10 million.

The Supreme and Appellate Division courts held that the agreements were unambiguous and Red Zone owed UBS its entire consultation fee of $10 million. After Red Zone lost the underlying action it commenced the malpractice action against Cadwalader. Red Zone claimed Cadwalader’s poor drafting of the documents amounted to malpractice.

The case is significant because Cadwalader compounded its negligent drafting in continuing to advise Red Zone throughout the underlying litigation that the agreement and side letter would limit payment of the fee. The courts held the statute of limitations against the firm was tolled since it was irrelevant that Cadwalader did not charge for its advice during the underlying litigation.

Facts in Underlying Action

In 2004 Red Zone purchased 8.76 percent of Six Flags’ voting stock in an unsuccessful bid to take over control of Six Flags.2 The value of Red Zone’s investment greatly declined. In April 2005, Red Zone met with UBS to discuss Red Zone’s options and strategy. In May 2005, Red Zone informed UBS it sought to “control the board.”

In June 2005, Red Zone and UBS signed an engagement agreement which designated UBS as Red Zone’s exclusive financial and capital advisor for Red Zone’s transactions with Six Flags. UBS’s fees included a $10 million transaction fee, net of the fees paid if the “acquisition transaction occurred by December 7, 2006.” The term acquisition transaction was defined to mean, inter alia, “the acquisition by [Red Zone] of control of [Six Flags], through a proxy contest or otherwise.” (Emphasis added.)3

In August 2005, Red Zone and UBS initiated a proxy contest for control of Six Flags. UBS informed Red Zone it would demand a $10 million fee if the contest were successful. In the underlying action, Red Zone maintained it was obligated to pay the entire fee only if it acquired 51 percent or more of Six Flags’ voting stock.

Red Zone objected to the expected payment. But the parties, facilitated by Cadwalader’s involvement, negotiated an oral agreement addressing the fees. Cadwalader subsequently drafted a side agreement that both parties signed.

The side agreement stated only that “the term ‘acquisition transaction’ does not include the Company’s proposed consent solicitation to replace three of the acquisition candidate’s seven directors announced on or about the date hereof.”

By November 2005, Red Zone had not only replaced three of the Six Flags directors, but Red Zone’s CEO had become CEO of Six Flags. Red Zone expanded the Six Flags board to 10, named three additional directors and hired 11 Red Zone people in executive positions for Six Flags. In January 2006, Red Zone replaced all of the Six Flags directors and Six Flags reimbursed Red Zone’s proxy expenses, including the president’s compensation. Red Zone paid $2 million to UBS.

In May 2007, UBS demanded the additional $8 million of its fee, claiming the acquisition transaction was complete by January 2006, within the time frame set forth in the engagement agreement. Cadwalader advised Red Zone not to pay the additional fee claiming that Red Zone did not obtain ownership of the majority of voting shares and it did not have “control” of Six Flags. Cadwalader maintained it could not be counsel of record since it had drafted the side agreement, but it continued to advise Red Zone on legal strategy prior to and in the litigation.

UBS v. Red Zone Action

UBS commenced an action to recover the outstanding $8 million. The Appellate Division, First Department, reversed the lower court’s decision and awarded UBS summary judgment. The court held Red Zone acquired “control,” triggering Red Zone’s obligation to pay the full $10 million fee. The court quoted the definition of an acquisition transaction cited above and held the agreement was unambiguous. Since the term “control” was not defined in the engagement agreement, the court cited Black’s Law Dictionary’s definition of “control” as “direct or indirect power to govern the management and policies of a person or entity whether through ownership or voting securities by contract or otherwise.”4

The court held Red Zone had acquired “control” when Red Zone’s nominees held nine of 10 seats on Six Flags’ board, over 50 percent of Six Flags’ directors were Red Zone insiders and Red Zone’s CEO also became Six Flags’ CEO. It held that both the engagement agreement and the side agreement unambiguously supported an award of the $10 million fee to UBS and remanded the case to Supreme Court.

The Supreme Court awarded judgment to UBS of $8 million, the fees in dispute, plus, UBS’s legal fees in the underlying action and pre- and post-judgment interest at the statutory amount of 9 percent. By the time the judgment was paid, UBS was owed and Red Zone paid $17.2 million.

The Malpractice Action

Red Zone then sued Cadwalader and alleged several causes of action including malpractice. In Red Zone v. Cadwalader5 the Appellate Division affirmed the award of $17.2 million to Red Zone. The court held Red Zone had obtained control of Six Flags and was obligated to pay the entire fee. It also held the statute of limitations concerning Cadwalader’s representation had been tolled even though Cadwalader did not charge for its services after 2007. The court also held Cadwalader’s affirmative defenses, including that its drafting was reasonable, were properly dismissed.

In the malpractice action the Cadwalader firm submitted an affidavit from Dennis Block, the partner who drafted the agreements. The affidavit directly contradicted Block’s deposition testimony in the UBS action. Block’s affidavit stated he had warned Red Zone that the side agreement was ambiguous. He also claimed the statute of limitations had run since the representation ended in 2005.

The Supreme and Appellate Division courts disagreed with each of Cadwalader’s arguments. They held several arguments in the affidavit were not raised until submission of opposition papers on Red Zone’s motion for summary judgment, and were contrary to Block’s deposition testimony making the papers late and devoid of merit. The courts acknowledged the gap in representation, from 2005 when the initial and side agreements were drafted, to 2007, when UBS demanded the remainder of the $10 million fee, but held Cadwalader’s representation continued from 2007 through 2010. After the lower court denied Cadwalader’s motion for leave to amend its answer and the motion to renew on the same issue the Appellate Division affirmed. It held the motions were not based on new facts, and were against the interest of justice and substantial fairness.

The courts noted that Cadwalader and Red Zone did not have either a retainer letter spelling out the representation or a termination letter advising of the cessation of the representation. Block continued to advise Red Zone throughout the litigation with UBS, recommended specific new counsel, consulted with both Red Zone and Red Zone’s new lawyers, received copies of the correspondence, gave his legal opinion as to the merits of the case, provided advice for a mediation, reviewed confidential documents sent directly to Cadwalader for editing, suggested theories for motion practice and commented on other legal papers and oral argument.

The Appellate Division demonstrated that every aspect of a claim for legal malpractice was established and “but for” Cadwalader’s negligence Red Zone would not have been obligated to pay UBS the additional $8 million fee plus interest. The Appellate Division agreed that the continuous representation doctrine tolled the statute of limitations in the absence of any evidence demonstrating that Cadwalader’s representation had been terminated.

Conclusion

Agreements must be carefully drafted with critical terms defined. Courts will not permit oral evidence to establish a meaning to a document they find unambiguous.

Although never specifically stated, Cadwalader might have limited its liability if it had properly drafted retainer or termination letters or any communication that the representation was concluded. The court held it did not matter that Cadwalader did not charge a fee for the later work. What was relevant was its continued advice to Red Zone and its continued collaboration with Red Zone’s counsel of record.

Sue C. Jacobs is a member of Goodman & Jacobs. Howard M. Wagner, an associate at the firm, contributed to this article.

ENDNOTES:

1 2014 WL 2765973,___N.Y.S.2d___,2014 N.Y. Slip Op. 04570 (1st Dept. 2014).

2 The facts are derived from UBS Securities v. Red Zone, 77 A.D.3d 575, 910 N.Y.S.2d 55 (1st Dept. 2010) lv. to appeal denied, 17 N.Y.3d 706 (2011), and Red Zone v. Cadwalader, 2013 WL 8695917 (Sup.Ct., N.Y.Cty., 2013), aff’d 2014 WL 2765973 (1st Dept. 2014), remanded, 2011 WL 7143458 (Sup.Ct., N.Y. County, 2011).

3 UBS Securities v. Red Zone, 77 A.D.2d at 578.

4. Id.

5. 2014 WL 2765973.