The Importance of Earnest Money Provisions

In this legal malpractice action, Jean Pierre – a Dallas commercial real estate investor – brought suit against the lawyer who represented him in a failed real estate transaction.  Pierre claimed that the lawyer had failed to advise him of the consequences of his counterparty’s changes to the earnest money provision in the real estate contract at issue.  As a result of the revised earnest money provision, Pierre lost $400,000 because the contract did not permit him to retain the earnest money when the purchaser pulled out of the transaction at the last minute.

Though the jury found in Pierre’s favor, the Court of Appeals overturned the trial court’s judgment because it found that Pierre failed to offer legally sufficient evidence of proximate causation.  In so doing, the Court of Appeals rejected Pierre’s contention that all that he needed to prove to establish causation was that he would not have signed the contract if he had understood the earnest money provision.  The Court, in rejecting Pierre’s claim, concluded that Pierre was required to prove that the counterparty would have agreed to the alternative earnest money provision (that would have refunded the money to Pierre), and that Pierre could not establish such a conclusion.

Pierre v. Steinbach

No Harm, No Foul

In Green v. McKay, the Court of Appeals addressed the causation requirement in a legal malpractice action.  Appellants were charged by the City of Dallas with certain code violations on a property they had sold to a debtor, who had executed a deed of trust in their favor, but who was later forced to file in Chapter 13 bankruptcy.  In response to the suit, appellants sought legal advice from appellee, McKay, who told appellants that they did not have to do anything and that “it would go away.”  The City ultimately obtained a default judgment of $562,275 against appellants, who then turned around and sued McKay for legal malpractice.  The Court of Appeals upheld the trial court’s decision, finding that the appellants had not presented any evidence of “causation.”  According to the Court, in a legal malpractice action, “[c]ausation requires that a plantiff prove a meritorious defense to the underlying case.”  Based on principles of bankruptcy law—which established that under the vendor’s lien held by appellants, they held legal title to the property in question—the Court found the appellants would not have been able to establish a meritorious defense in the code violations lawsuit even if McKay had filed an answer.  Accordingly, the Court concluded that the appellants could not establish the causation element of their malpractice claim and upheld the trial court’s dismissal.