|Paul Peter Nicolai practices at Nicolai Law Group, PC, in Springfield. He is a member of and serves the MBA as a member of the House of Delegates, the Law Practice Management Section Council, the Fee Arbitration Committee and the Fee Arbitration Board.
|Caroline E. Nicolai practices at Nicolai Law Group, PC, in Springfield, and is a member of the MBA.
The Georgia Supreme Court recently held that attorneys have a duty to safeguard their client’s security interests in connection with collateralized payment over time arrangements in the sale of a business involving payment periods that exceed the five-year life span afforded to initial UCC financing statements. Barnes v. Turner,
2004 WL 2824213, *1 (Ga. 2004). Notifying the client of the need to renew the expiring statement may satisfy this duty. Id.
An attorney who fails to inform his or her client of the need to renew undertakes the duty to renew on the client’s behalf before the statement lapses, regardless of whether the attorney-client relationship continued to exist. Id.
In this case, the court examined the issue of what duty attorney Turner owed his client Barnes with respect to maintaining Barnes’ security interest that lapsed. Barnes sold his company in 1996 and took a secured promissory note for $180,000 to be paid over 10 years. Turner perfected the security interest by filing UCC financing statements. Turner did not inform Barnes that although the promissory note had a 10-year term, the UCC financing statement was effective for only five years. Turner further did not inform Barnes that a renewal might be obtained by filing continuation statements no earlier than six months prior to the end of the initial period.
In 1998 and 2001, the buyers of Barnes’ business pledged the same collateral securing Barnes’ interest to two other creditors. These creditors also perfected their interests by filing UCC financing statements. When Barnes’ financing statement lapsed in October 2001, he lost his senior position as a creditor to the two other creditors. The buyer filed for bankruptcy. Barnes was still owed more than $140,000 on the promissory note, which was then junior to the 1998 and 2001 creditors.
Looking outside its own jurisdiction, the court found numerous decisions by other courts indicating that an attorney in a sale of business transaction has a duty to file the original financing statement, even absent specific direction of the client. The court extended this duty to hold that if the financing statements require renewal before full payment is made to the seller, the attorney has a duty to safeguard the security interest and “take reasonable legal steps to fulfill the client’s main, known objective — to be paid for the business he sold.” Having found such a duty to exist, the court went on to discuss at which point the statute of limitations began to run.
In assessing when the four-year statute of limitations period began, the court discussed the continuous representation rule. It held that the failure to inform Barnes in 1996 was not a continuing wrong that tolled the statute of limitations. Instead, the court found that Turner’s failure to renew the financing statements triggered the four-year statute of limitations. The action, filed in 2002, was therefore timely. The majority held that Turner violated his duty to Barnes by not informing him of the expiration of the financing statement and further failing to file the renewal on his client’s behalf.
The dissent argued the majority failed to properly categorize the duty Turner assumed in representing Barnes, which was simply the sale of the business. The dissent argued Turner fulfilled the duty of closing the sale of the business and filing the original UCC financing statements. The dissent also criticized the majority for creating a duty that could outlast not only the attorney-client relationship, but also the attorney’s life. “No attorney can safely close a file and, apparently, no passage of time can insulate a mistake since the very happening of a mistake creates, under the majority’s view, another duty.” In sum, the dissent warns that the majority decision in this case adds “such uncertainty and lack of finality to every transaction that malpractice insurance carriers will be unable to make accurate assessments of their exposure…(resulting) in higher premiums.”
If adopted by other jurisdictions, the implications of this decision are immeasurable. Attorneys filing original financing statements on behalf of clients may be liable for malpractice if they fail to give clients notice of impending expiration, regardless of whether an attorney-client relationship continues to exist. In the absence of providing such notice, the lawyer undertakes the duty to renew on the clients’ behalf or faces potential malpractice liability.
A survey of existing case law reveals that attorney liability post-termination of the attorney-client relationship is generally limited to failure to take action to preserve the client’s rights at the time of the relationship’s termination. This ruling significantly furthers the attorney’s duty. It could temporally outlast the attorney-client relationship and the attorney’s life. Although this case represents a specific duty arising from a certain situation, it further highlights the pitfalls of the “full service” model most disciplinary, ethical and malpractice rules are based upon by indefinitely extending the duty an attorney owes a client.