A failed guarantee on a failed Costa Rican real estate venture was the key document for a Fulton County State Court jury’s consideration in a recent legal malpractice case; Eli Peretz and Dr. Nick Gabbay v. S. Alan Cohn et al. (12EV015232). In 2008, plaintiffs Peretz and Dr. Gabbay loaned $1.5 million to a company that planned to use the money to develop a resort in Costa Rica. However, following the economic downturn later that year, the development failed and the loan was never repaid.
The principals in the Costa Rican development were four California businessmen (referred to during the trial as the “California Group”) with whom Peretz, a long time Atlanta contractor, had previously partnered in a couple of successful real estate ventures. Peretz retained the services of his long time real estate attorney Cohn to review and advise him on the various legal documents involved in the transaction. Peretz and Dr. Gabbay testified at the trial that they informed Cohn they would require a guarantee before making the loan.
Cohn and the California Group worked out the details of a guarantee issued by an LLC the group set up. The guarantee included a statement that the LLC had a net worth of $2.1 million. In reality, although the LLC’s assets consisted of several residential properties, those properties were subject to substantial liens. Further, according to testimony at the trial, one of the members of the California Group told Cohn about the liens prior to the transaction being finalized. Nevertheless, Cohn never reported this conversation to Peretz or Dr. Gabbay or made any attempt to verify the actual worth of the LLC. Instead, he advised the two investors that the documents were in order.
As often occurs in malpractice cases, both sides called expert witnesses to testify at the trial. Plaintiff’s expert, Atlanta real estate attorney Kurt Hilbert stated that if Cohn knew there were liens on the property and failed to inform his clients, then his actions would fall below the required standard of care. Further, in his experience, he had never seen a guarantee containing a net worth statement similar to the one in this case.
The defense called William Dodson, an Atlanta real estate attorney with over 40 years of experience. On direct examination, he testified that the language regarding the net worth of the LLC had no bearing on the validity or practical value of the guarantee and that it was up to the investors, not Cohn, to investigate the LLC’s actual net worth prior to making the investment.
Plaintiff’s attorney Stephen Katz’s strategy during his cross examination of Dodson was to focus on the contrast between what Dodson had done and witnessed in his own extensive real estate practice and the facts in the present case. Katz began by asking Dodson, “My understanding from this case is that you’re not a big fan of lawyers putting [statements regarding net worth] into guarantees, correct?” Dodson’s answer set the stage for the remainder of the cross examination, “I’ve looked at many, many, many, many guarantees, and I cannot recall any that had anything in them concerning estimated net worth.”
Katz then posed a series of hypothetical scenarios to Dodson and had Dodson explain how an attorney’s actions in such cases would not violate the standard of care. After Dodson’s replies, Katz brought the questioning back to Dodson’s own experience. He asked, “But a lawyer would avoid that problem if he followed your advice and [the net worth language] would never be in there to begin with because you’ve never seen one in all the years you’ve been practicing, right.”
Katz finished the line of questioning by getting Katz to confirm that the standard of care is what a reasonable lawyer in the State of Georgia would do under the same or similar circumstances. Katz then asked, “And you’ve never seen a lawyer in the … 43 years you’ve been practicing real estate law, you’ve never seen a lawyer do this in a guarantee, right?”
Katz made sure the jury remembered this exchange during his closing statement, when he reminded the jury that the defense attorney in her closing statement, “didn’t say one single word about Mr. Dodson. They paid him … to give you an expert opinion ... and for an hour she spoke and she didn’t mention one thing. … She did not talk to you about Mr. Dodson who said you don’t put the figure in. … Because lawyers shouldn’t be on the phone talking to the opposition about what the net worth of a company is. That’s why he’s never done it in 43 years and he’s never seen it in 43 years.”
Katz’s cross examination and final statement apparently had the desired effect. The jury returned a verdict for plaintiffs of slightly more than $1.5 million dollars.
CVN’s earlier articles about the case can be found here. Steve Silver can be contacted at ssilver@cvn.com.
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