Lawrence J. Bernard, Jr. v. Las Americas Communications, Inc.

Citations: 84 F.3d 103; 1996 U.S. App. LEXIS 11343; 1996 WL 272862Docket: 282

Court: Court of Appeals for the Second Circuit; May 16, 1996; Federal Appellate Court

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Defendant-appellant Las Americas Communications, Inc. (LAC) appeals a March 9, 1995 judgment from the U.S. District Court for the Southern District of New York, which awarded plaintiff-appellee Lawrence J. Bernard, Jr. a contingent legal fee related to LAC's application for an FCC radio station license and dismissed LAC's counterclaim for legal malpractice. LAC contends that errors occurred in the jury instructions regarding proximate causation, damages, and materiality, as well as the exclusion of evidence concerning the license's value.

The background reveals that in 1982, LAC sought to obtain an FCC license for an FM radio station in Newark, New Jersey, hiring attorney Bruce Eisen for assistance. To finance the project, LAC developed a relationship with New York National Bank (NYNB), which extended a $400,000 line of credit contingent on the license approval and provided a $75,000 loan due by February 1986. When NYNB withdrew its funding support in June 1986 and demanded immediate repayment, LAC required additional funds to proceed with the FCC application.

President L. Raul Bernard contacted Lawrence J. Bernard, Jr. for assistance. They arranged a meeting with NYNB's president, where they discussed the loan and established a "Loan Agreement" that included continued legal representation by Bernard, a $150,000 funding commitment from investors Flores and Acevedo to cover LAC's obligations, and a promise to pay them twelve percent of the radio station's value upon the FCC's approval. Subsequently, Bernard and LAC formalized their relationship with a retainer agreement on July 8, 1986, stipulating an initial fee of $20,000 for Bernard's services. 

The court affirmed part of the lower court's judgment while vacating and remanding other aspects of it.

The agreement stipulates that if Las Americas chooses to withdraw its application from the Court or FCC for a payment from another applicant, it must pay Bernard a fee of 8% on amounts exceeding $200,000, to be paid when funds are received. Las Americas retains the right to terminate Bernard’s services at any time while ensuring that prior obligations remain enforceable, including payments owed under a specified paragraph if a contingency occurs. The Loan Agreement, finalized on September 16, 1986, mandates that LAC pay Acevedo/Flores either 12% of received funds or $360,000, whichever is greater, if it dismisses its FCC application for payments from other applicants. The agreement includes a "call" provision allowing Flores and Acevedo to demand $360,000 after two years if LAC's application remains pending. At trial, LAC alleged that Bernard did not inform them of the adverse effects of this provision on their FCC application. After resolving a funding crisis, LAC proceeded with its License application, securing approximately $700,000 from Rafael Diaz between 1986 to 1989. By 1987, LAC faced five competitors for the License and negotiated settlement agreements with them, leading to a lawsuit in 1989 to enforce one such agreement, which was settled later that year. Diaz facilitated a $3,200,000 loan commitment from Midlantic Bank on January 30, 1989, intended for settling with competitors. A trial issue arose regarding whether Midlantic was informed about the Loan Agreement, with Bernard asserting disclosure occurred when LAC first engaged with Midlantic. In January 1990, a meeting occurred between LAC and Flores/Acevedo, resulting in a dispute over LAC's obligations, which led to a lawsuit against LAC in April 1990 seeking arbitration of claims under the Loan Agreement. Midlantic subsequently demanded resolution of this lawsuit by May 25, 1990, failing which it would withdraw its financing commitment, prompting competitors to request reconsideration of the FCC's approval of settlement agreements.

LAC did not resolve the Flores/Acevedo lawsuit by the deadline of May 25, 1990, leading to Midlantic withdrawing its loan commitment of $3,200,000 on June 5, 1990. Subsequently, the New York Supreme Court ruled in favor of Flores and Acevedo in July 1990, mandating LAC to arbitrate the payment amount under the Loan Agreement. On March 13, 1991, the FCC ordered further hearings to assess LAC's qualifications for a license, prompting LAC to replace its legal representation in April 1991. On July 31, 1991, LAC withdrew its license application during ongoing hearings, opting instead for a competitor's offer of $2,100,000 plus interest, which LAC received in the summer of 1993.

Bernard, LAC's attorney, requested payment under his contingency retainer agreement, which LAC denied, leading Bernard to file a lawsuit on September 27, 1993. LAC responded on December 1, 1993, denying payment obligations and counterclaiming for malpractice, alleging Bernard's negligence in representation. A jury trial in February 1995 concluded that while Bernard was negligent, this negligence did not directly cause LAC's failure to secure the license, and Bernard did not materially breach the retainer agreement. Consequently, the court ordered LAC to pay Bernard the contingent fee and dismissed LAC's malpractice counterclaim with prejudice.

On appeal, LAC argued that the district court erred in its jury instructions regarding proximate causation, damages, and the exclusion of evidence concerning the radio station license's value. The court noted that LAC’s counterclaim for malpractice required proof that Bernard's negligence was a proximate cause of LAC's failure to obtain the license. LAC contended that it should have been allowed to recover if it could have performed better in the application process due to Bernard's negligence, regardless of whether this negligence was the proximate cause of losing the license. However, it was established that, under District of Columbia law, LAC needed to demonstrate that Bernard's actions directly led to its disqualification for the license.

LAC's counterclaim alleges that Bernard's negligence in representing LAC resulted in their unsuccessful bid for a radio license from the FCC. The district court indicated that LAC's arguments centered on the loss of the license, and LAC approved the verdict sheet for jury deliberation. On appeal, LAC claims they incurred extra expenses due to Bernard's negligence and that the district court wrongly excluded evidence related to the license's economic value. However, the appellate court noted that the case was not tried on the grounds of extra expenses and would not revisit those issues. The jury found that Bernard's negligent representation did not cause LAC's failure to obtain the license, which nullifies the need to consider the license's value. Consequently, the appellate court upheld the district court’s dismissal of LAC's malpractice counterclaim.

Regarding the Contingent Payment, the district court instructed the jury that if Bernard was found negligent, they must determine if this negligence constituted a material and substantial breach of the retainer contract, which could exempt LAC from paying the contingency fee. A material breach justifies suspending performance, while a substantial breach undermines the transaction's purpose. The jury needed to find that Bernard's negligence was significant enough to excuse LAC from payment. Despite Bernard's negligence, the contingency that triggered LAC's payment obligation was met, as LAC did not pay Bernard after the application was dismissed in favor of another applicant. Bernard's obligation to represent LAC was a condition precedent to LAC’s payment, indicating that LAC's duty to pay was contingent upon Bernard's substantial performance. Thus, substantial performance is necessary for Bernard to claim the contingent fee.

The doctrine of substantial performance allows a party to recover for a breach of contract even if their performance does not precisely match the contractual terms, as long as it meets the essential purpose of the contract. A material breach, however, signifies that substantial performance has not been achieved. In this case, Bernard's negligent legal representation of LAC constituted a material breach of his employment contract, as determined by the jury's finding of negligence. Under District of Columbia law, an attorney breaches a contract if they fail to perform with reasonable skill, which aligns with the standard for tort liability. The district court incorrectly instructed the jury that a breach must defeat the entire transaction's purpose to be considered material; instead, a breach is material if the promisee receives something substantially less than bargained for. LAC objected to this instruction, leading to the decision to vacate the judgment in favor of Bernard regarding the Contingent Payment and remand for a new trial on that claim. The district court’s dismissal of LAC's counterclaim was upheld, and both parties were ordered to bear their own costs. Additional notes indicate that President Bernard is unrelated to Bernard and that FCC rules regarding payoff transactions have changed since the events described.