Malpractice Claim Against Cadwalader: Defining What You Mean, Not What You Don’t Mean

A New York appellate court recently unanimously affirmed a judgment of $17.2 million against the law firm Cadwalader, Wickersham & Taft in a legal malpractice action alleging that due to a drafting mistake by the law firm, its client had had to pay its investment advisor $10 million instead of $2 million in a dispute over fees earned in an acquisition. Red Zone LLC v. Cadwalader, Wickersham & Taft LLP, 12818, 2014 WL 2765973 (N.Y. App. Div. June 19, 2014) (here).

Besides its general in terrorem effect, this dispute perhaps offers a general lesson in handling definitions.

A New York Law Journal article by Sue C. Jacobs, a member of Goodman & Jacobs, provides all the gory details (here, but behind a paywall). Here are the key facts, as stated in the article (footnotes and emphasis omitted):

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.”

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 the interest of completeness, here’s the full definition of “Acquisition Transaction”:

As used in this Agreement, the term “Acquisition Transaction” means, whether effected directly or indirectly or in one transaction or a series of transactions: (a) any merger, consolidation, reorganization or other business combination pursuant to which [Red Zone] and [Six Flags] and/or all or a significant portion of their respective businesses, divisions or product lines are combined, or (b) the acquisition by [Red Zone] of 50% or more of the capital stock or assets of [Six Flags] by way of tender or exchange offer, option, negotiated purchase, leveraged buyout, minority investment or partnership, joint or collaborative venture or otherwise, or (c) the acquisition by [Red Zone] of control of [Six Flags], through a proxy contest or otherwise.

UBS demanded that Red Zone pay it an additional $8 million. It ultimately sued Red Zone and won. Red Zone turned around and sued Cadwalader for malpractice. The trial court held that Cadwalader had failed to memorialize an oral agreement between Red Zone and UBS to cap at UBS’s fees at $2 million unless Red Zone acquired more than 51% of the voting shares of Six Flags.

A simple lesson to draw from this saga is that mistakes happen: be careful out there. But one can perhaps derive a more specific lesson.

Cadwalader’s task was evidently to neutralize the third component (acquisition of control) of the definition of “Acquisition Agreement.” It elected to do so by saying what control wasn’t, but stated the exception too narrowly.

So here’s my general recommendation: Instead of revising a general proposition by carving out an exception, you might want to consider instead restating the general proposition. In this case, it seems as if it would have been more prudent for Cadwalader to restate the definition of “Acquisition Agreement” so as to eliminate the “control” element.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.