Grassi v. Hyden

Citations: 374 S.W.3d 183; 2010 Ark. App. 203; 2010 Ark. App. LEXIS 186Docket: No. CA 08-1405

Court: Court of Appeals of Arkansas; March 3, 2010; Arkansas; State Appellate Court

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In a legal malpractice case, Charles Grassi, Sr. appeals a directed verdict favoring James Hyden and his firm, Hyden, Miron, Foster, PLLC, regarding advice given on selling his majority interest in Pierce-Grassi Lumber Company, Inc. The case centers on Grassi's decision, influenced by Hyden, to establish an Employee Stock Ownership Plan (ESOP) for the sale of his shares in 1999. The ESOP was financed through a loan from First National Bank of Crossett, with Grassi selling 380 shares for $725,900, while retaining a promissory note for $439,100 for his remaining shares. Despite initial payments, the lumber company closed in 2004, leading Grassi to liquidate his investment account to settle the bank loan, resulting in a loss exceeding $260,000 and an inability to collect on the promissory note.

Grassi alleged negligence on Hyden's part for advising the ESOP formation, supported by testimonies, including Hyden’s detailed account of ESOP structures and a feasibility study conducted by attorney Glenn Borkowski. However, Hyden admitted he did not fully utilize the study and later dismissed its applicability to Grassi’s situation, asserting that he did not consider whether the company could service its resulting debt. Wyck Nisbet emphasized the importance of feasibility studies in establishing an ESOP. Ultimately, the court affirmed the directed verdict in favor of the appellees.

Fourteen strict statutory and regulatory rules govern Employee Stock Ownership Plans (ESOPs), which are costly to establish and maintain due to the extensive legal time required. The risks associated with poorly executed ESOPs can lead to significant problems, prompting legal professionals to be cautious about recommending them. Nisbet indicated that while he would not set up an ESOP if he believed it would fail, he did not find that Hyden fell below the standard of care in his recommendation, suggesting that if Hyden believed in the ESOP's success based on available information, he acted appropriately. Nisbet was uncertain whether the ESOP negatively impacted the lumber company's profitability.

At the conclusion of Grassi’s case, the appellees moved for a directed verdict, arguing that Grassi failed to provide expert testimony to establish the standard of care, demonstrate Hyden's negligence, or prove any resulting harm. Grassi’s attorney asserted that expert testimony was unnecessary under the "common-knowledge" exception, claiming that the obligation of a lawyer to disclose information is generally understood. In response, the appellees' counsel highlighted the lack of expert testimony linking the feasibility study to this specific ESOP or addressing whether Hyden relied on it, arguing that the feasibility of the ESOP was complex and beyond common jury understanding. The court granted the directed verdict, concluding that expert testimony was necessary. Following this verdict, Grassi appealed. The standard for reviewing the directed verdict is to assess evidence favorably towards the opposing party, requiring substantial evidence to support a jury verdict. A directed verdict is only appropriate if the evidence is insubstantial enough that a jury's verdict must be overturned; if reasonable individuals could draw different conclusions, the matter should go to a jury. Substantial evidence must have sufficient force to persuade the factfinder beyond mere speculation.

Grassi appeals the trial court's directed verdict favoring the appellees, arguing that the feasibility study indicated insufficient cash flow for the ESOP to service its debt, and that his attorney, Hyden, failed to disclose the study's negative implications. Grassi asserts that expert testimony was unnecessary, claiming the issue fell under the common-knowledge exception for legal malpractice cases. Legal malpractice requires proving that an attorney's conduct fell below the accepted standard of care and caused damages, with the plaintiff needing to demonstrate how the underlying case would have differed without the attorney's negligence.

The court upheld that expert testimony was necessary, as the standard of care is typically established through such testimony unless the negligence is clearly recognizable to non-professionals. Testimony from experts Nisbet and Borkowski highlighted the complexities of ESOPs, while Grassi and Burchfield indicated their lack of understanding about ESOPs prior to Hyden's explanations. Grassi failed to provide evidence that the feasibility study predicted issues for the ESOP created later. As a result, the court affirmed the directed verdict for the appellees, concluding that the circuit court did not err. The motion to transfer the case to the Arkansas Supreme Court was denied.