Daily Development for Friday, May 6, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

ATTORNEY/CLIENT; MALPRACTICE; SECURITY INTERESTS; UCC FILINGS: Attorney who closes deal involving personal property security interests has duty to see to it that interests are renewed if still outstanding.  If attorney fails to tell client of the renewal requirement, attorney has duty to renew the interests.

Barnes v. Turner, 606 S.E. 2d 849 (Ga. 2004) reconsideration denied, 12/9/04

Barnes sold his auto parts company to Lipps for $220,000, taking back a note for $180,000 secured by a blanket lien on Lipp’s assets.  Turner, Barne’s lawyer, perfected Barnes’ security interest by filling UCC financing statements.  Turner kept the originals of these statements.  Turner never told Barnes that, although the note had a term longer than five years, Georgia law provided that UCC financing statements are valid for only five years, and then must be renewed.

No one renewed the financing statements after five years, and at that time there were two other financing statements on file that thereupon took priority over Barnes’ interest.  Soon thereafter, Lipp filed for bankruptcy and Barnes is still owed $142,000.

The court of appeals had found that Turner may have been guilty of malpractice for not warning Barnes that the statement had to be renewed but  the statute of limitations had run on any malpractice of Turner in failing to warn Barnes of the filing requirement. It found that Turner had been retained only to create the security interest, not to maintain it.  Therefore, Turner had no independent duty to renew the interest.

The Georgia Supreme Court reversed, holding that Turner’s failure to appraise Barnes of the requirement to renew the financing statement gave rise to a duty on the part Turner to renew the statement himself.  As to Barnes’ failure to retain Turner for this purpose, the court noted that Barnes had no reason to know that this was necessary, as Turner had not given him sufficient information to be aware of the need to maintain the security interest after it was first filed.

Three judges strongly dissented, reiterating the argument that the scope of Turner’s retention included only creating a security interest at closing.  Consequently, there could be no breach of a duty to later renew the statement, as this was outside the scope of Turner’s duties.

Comment 1: The majority opinion is correct as to the original duty.  In fact, even the dissent agrees that the lawyer should have warned the client at the outset.  A lawyer undertaking to carry out the technicalities of a financing arrangement cannot assume that the client is fully aware of everything necessary afterwards to protect the security interest.  Security interests are not like a jar of pickles.  The proper use is not intuitively clear.

But what are the consequences of the duty?  The editor thinks that the conclusion drawn by the majority that the lawyer had a duty to do what it reasonably could have done - renew the UCC statements himself, is appropriate.  The court stresses that this does not mean that the original breach was a continuing one.  It saying only that it imposed on the lawyer a continuing duty to do what it did not tell the client to do

Comment 2:    The real problem would appear to be that the statute of limitations otherwise would have barred any action for malpractice prior to a time when any actual injury was known or suffered.  This, of course, is not unusual in other contexts.  Construction defects often are subject to statutes of limitations that bar recovery before the plaintiff ever obtains knowledge of the problem.  There is a mixture of policy considerations surrounding these issues that are the provinces of the tort lawyers and the judges and legislators who supervise their claims.  To the editor, however, there is nothing too troublesome about imposing on a lawyer the duty to protect a client from the consequences of his own negligence - particularly when the client likely assumed that the lawyer was doing what was necessary to insure that the client would be secured for the life of the security interest.

Comment 3: Are there other consequences?  What about failure to warn a client about the renewal requirements of judgment liens?  This is more problematic, of course, because the lawyer obtaining the judgment may not be  retained initially to collect it.  But shouldn’t a lawyer retained to collect a judgment have a duty to appraise the client of the dangers of non-renewal?  If so, then what are the consequences for failure to do so?

What about the attorney/client relationship?  Presumably the lawyer with the duty to renew necessarily has a continuing client relationship with the creditor.  Does this impose certain conflict of interest constraints on the lawyer’s other relationships?  For instance, the two junior creditors in this case were institutional lenders.  What if the lawyer or his firm represented one of these creditors?  Would you have seen the conflict?  Hmmmmm?

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