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Bonds and Environmental Blunders in Engagement Letters

By Kent A. Lambert, Litigation News Associate Editor – March 30, 2012

 

While your retainer agreement may never diffuse a bomb, a recent decision from the Eastern District of Louisiana shows a properly crafted one may permit you to dodge a metaphorical bullet. This case, which is literally replete with abandoned bombing ranges, million-dollar bond issuances, and a pesky government report, demonstrates just how important a carefully constructed engagement letter can be.


Of course most practitioners have standardized correspondence they use to memorialize new engagements. Whether the lawyer takes care, as occurred here, to think through and tailor the scope of its engagement is another question entirely—and one with potentially significant implications for the in attentive firm.


Lawyers and Bonds and Developers, Oh My!
SCB Diversified Mun. Portfolio v. Crews & Assocs. involved Louisiana real estate developer (MGD Partners) purchasing 324 acres of undeveloped timberland in south Louisiana. It planned to develop a large residential community. To that end, MGD Partners created a special municipal district (SMD) to help fund site infrastructure through the issuance of millions in tax exempt bonds.


The SMD retained the McGlinchey Stafford law firm as bond counsel to the SMD in connection with the contemplated bond issuance. The firm provided a detailed retainer letter to the SMD. This document specifically outlined the scope of the firm’s engagement and responsibilities. The SMD signed and returned the letter.


Ultimately, the SMD issued roughly $7.7 million in bonds in November 2006, with McGlinchey Stafford providing various opinions in its capacity as bond counsel. The firm’s opinions addressed, among other things, the validity and effect of the bonds, the security for the bonds, and certain related topics.


For the next several years, the project moved forward, and by the spring of 2009, work on the infrastructure for the initial phase of the development project was nearing completion. The work, which included laying out 264 home lots with sewer and water lines, street lights, and a one-acre sewerage treatment plant, among other improvements, represented a $10 million outlay.


The Bomb Drops
On March 9, 2009, the U.S. Army Corps of Engineers published a public notice in a local newspaper revealing a danger of unexploded ordinance and munitions at the project site traceable to an adjoining (and partly overlapping) World War II era bombing range. The report received attention of local media outlets.


The Corps' findings prompted Tangipahoa Parish (about 70 miles north of New Orleans) authorities to suspend all further building permits at the site until safety risks in the area were fully investigated and remediated. As a result, development at the site ceased and no lots could be sold. This triggered a default on the bonds and subsequent litigation.


Among the ensuing lawsuits was one by the SMD against the McGlinchey Stafford firm. Specifically, the SMD alleged the firm breached various duties it owed to the SMD to ensure appropriate environmental work had been conducted relative to the project site.


In a motion for summary judgment, the McGlinchey Stafford firm invoked its engagement letter with the SMD, arguing that the letter limited its responsibilities to exclude the very sort of investigations the SMD contended the firm should have conducted. In response, the SMD argued, in part, that the limitations included in the engagement agreement were unenforceable because the firm had failed to obtain the SMD's properly informed consent.


After careful review of the engagement letter, the court sided with the McGlinchey Stafford firm. The court found that the engagement letter included a clear and specific delineation of the narrow scope of services the firm would be providing as bond counsel. This delineation was sufficient to overcome the the SMD’s argument that the limitation lacked its informed consent.


Avoiding Potential Land Mines
The court's conclusions appear sound according to Mark S. Davidson, Seattle, cochair of the ABA Section of Litigation's Business Torts Litigation Committee. "Every engagement should be memorialized in some fashion, identifying who the client is (and in many cases, who it is not); the scope of services (again, in many cases identifying those matters that are outside the engagement, such as tax issues, insurance coverage, or the like); and of course the lawyer's compensation," he continues.


While "not all lawyers require the client to sign the engagement, asking for a signature is the better practice to avoid problems down the road," adds Davidson. "It is both appropriate and fair to clients for an engagement agreement to identify matters excluded from the representation, which affords them the opportunity to take whatever steps may be appropriate to protect their interests as to [any] excluded matters," he says.


"Every engagement letter should be tailored to the client and the matter at issue," explains Nancy Scott Degan, New Orleans, revenue officer for the Section of Litigation. She notes that, so long as the agreement is executed at the inception of the lawyer-client relationship and explains the scope and terms of the engagement in clear and explicit terms, it should be enforced as written.


"The engagement letter sets the ground rules for the relationship between and his or her client," she continues. Degan cautions, however, that lawyers should keep a few other points in mind when considering acceptance of a narrow engagement.


"Sometimes the scope of the engagement changes over time,” Degan says. “Make sure that you do not represent the client in matters outside the scope of the engagement without revisiting and possibly revising the engagement letter. Likewise, if the matter concerns issues arguably covered by insurance, it is a good practice to make it clear in the engagement letter whether you have been engaged to examine whether [insurance] coverage [either defense or indemnity] for the matter does or does not exist as part of the engagement. And of course,” Degan concludes, “make sure the client signs the letter and that you retain it for reference." You never know what might get turned up just down the row.


Keywords: engagement letter, bond, SCB Diversified Mun. Portfolio, special municipal district, SMD



 
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