Mother-Son Litigation with Unexpected Results is not Legal Malpractice

This intra-family dispute pitted brother against brother and mother against son for control of a very close corporation.  When the case was settled, one party had not successfully analyzed the potential tax liabilities and sue the attorney.

Benishai v Epstein  2014 NY Slip Op 02404 [116 AD3d 726]  April 9, 2014  Appellate Division, Second Department examines what happens when you win the case, but the results are more difficult than you expected.

"In 2004, the plaintiff, as attorney-in-fact for his mother, Bella Benishai (hereinafter Bella), commenced an action in the Supreme Court, New York County (hereinafter the New York County action), against his brother, David Benishai (hereinafter David). The plaintiff, inter alia, alleged that David had mismanaged the corporate funds of Ilan Properties, Inc. (hereinafter Ilan), a corporation in which, at that time, Bella and David were each 50% shareholders. Ilan's primary assets were two residential properties located on West 76th Street in Manhattan. After commencing the New York County action against David, the plaintiff retained the defendant attorney to represent Bella, but Bella died during the pendency of that action. Nonetheless, the plaintiff apparently directed the defendant to continue the prosecution of the New York County action against David. On March 31, 2009, the plaintiff, David, Ilan, and Bella's estate entered into a written settlement agreement, pursuant to which the plaintiff became a 50% shareholder in Ilan and agreed to release David from any claims for costs, taxes, and penalties.

In October 2011, the plaintiff commenced this legal malpractice action against the defendant, alleging, among other things, that the defendant failed to undertake an analysis of Ilan's financial status in order to determine the plaintiff's exposure to tax liabilities, fines, penalties, and other charges.

 

To recover damages in a legal malpractice action, a plaintiff must establish "that the attorney 'failed to exercise the ordinary reasonable skill and knowledge commonly possessed by a [*2]member of the legal profession' and that the attorney's breach of this duty proximately caused plaintiff to sustain actual and ascertainable damages" (Rudolf v Shayne, Dachs, Stanisci, Corker & Sauer, 8 NY3d 438, 442 [2007], quoting McCoy v Feinman, 99 NY2d 295, 301, 302 [2002] see Held v Seidenberg, 87 AD3d 616, 617 [2011] Kennedy v H. Bruce Fischer, Esq., P.C., 78 AD3d 1016, 1018 [2010]). "To establish causation, a plaintiff must show that he or she would have prevailed in the underlying action or would not have incurred any damages, but for the lawyer's negligence" (Rudolf v Shayne, Dachs, Stanisci, Corker & Sauer, 8 NY3d at 442). " 'A claim for legal malpractice is viable, despite settlement of the underlying action, if it is alleged that settlement of the action was effectively compelled by the mistakes of counsel' " (Tortura v Sullivan Papain Block McGrath & Cannavo, P.C., 21 AD3d 1082, 1083 [2005], quoting Bernstein v Oppenheim & Co., 160 AD2d 428, 430 [1990]). Nonetheless, a plaintiff's conclusory allegations that merely reflect a subsequent dissatisfaction with the settlement, or that the plaintiff would be in a better position but for the settlement, without more, do not make out a claim of legal malpractice (see Boone v Bender, 74 AD3d 1111, 1113 [2010] Holschauer v Fisher, 5 AD3d 553, 554 [2004])."

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A Remarkable Defense in Legal Malpractice

Death of attorneys and clients is inevitable, and planning for death is one thing that is expected of attorneys.  in Cabrera v Collazo  2014 NY Slip Op 00622 [115 AD3d 147]  February 4, 2014 Tom, J. itself arising from a wrongful death case, the attorney died just weeks before plaintiff's time to file the wrongful death complaint ended.  Can his estate be held responsible.

"The remarkable defense proffered in this professional malpractice action is that an attorney who neglects a matter so that the statute of limitations runs against his client cannot be held legally accountable if the attorney happens to expire before the applicable limitations period. A cause of action for attorney malpractice requires: " '(1) the negligence of the attorney; (2) that the negligence was the proximate cause of the loss sustained; and (3) proof of actual damages' " (Kaminsky v Herrick, Feinstein LLP, 59 AD3d 1, 9 [1st Dept 2008], lv denied 12 NY3d 715 [2009], quoting Mendoza v Schlossman, 87 AD2d 606, 606-607 [2d Dept 1982]). The pleadings, as "[a]mplified by affidavits and exhibits in the record" (Crosland v New York City Tr. Auth., 68 NY2d 165, 167 [1986]), contain allegations from which these elements can be made out and, thus, state a viable cause of action so as to survive a pre-answer motion to dismiss the complaint.

The extent of the duty imposed on the attorney to commence a timely action depends on the immediacy of the running of the statutory period, and no duty will be imposed where sufficient time remains for successor counsel to act to protect the client's interests in pursuing a claim (see Golden v Cascione, Chechanover & Purcigliotti, 286 AD2d 281 [1st Dept 2001] [defendant law firm relieved 2½ years before claim expired]). Where, as here, the expiration of the statute of limitations is imminent and the possibility that another attorney might be engaged to commence a timely action is foreclosed, there is a duty to take action to protect the client's rights.

Plaintiff is entitled to the inference that Tanzman died as a result of a chronic, terminal illness that he knew, or should have known, presented the immediate risk that his ability to represent his clients' interests might be impaired (see Yuko Ito v Suzuki, 57 AD3d 205, 207 [1st Dept 2008]). Here, defendants offered no evidence to elaborate on the cause or circumstances surrounding Tanzman's death. The submitted certificate of death for Tanzman merely states that Tanzman passed away on October 24, 2010 at Memorial Sloan-Kettering Cancer Center. The record suggests that plaintiff had cancer, and that his death may have been foreseeable, but the nature and duration of his illness cannot be determined from the death certificate and defendants' other submissions. Further, the record reflects that Tanzman was well aware that Collazo could not be relied upon to assist with plaintiff's representation. According to Tanzman's own statement, Collazo had done nothing on the matter in over a year, and Tanzman's retainer agreement assigned Collazo only a limited role in the case. In any event, as of September 2010, when Tanzman expressed his concern over the running of the statute of limitations in a letter to Surrogate's Court, Collazo had been convicted on a federal criminal offense and was facing sentencing and disbarment. Plaintiff is entitled to the factual inference that, at this late juncture and mindful of his ill{**115 AD3d at 152} health, Tanzman was aware of the need to prepare and file a complaint or to arrange for one to be filed as soon as the necessary letters of administration were received. The letters of administration were issued on October 6, 2010. Tanzman neither filed a complaint nor engaged another attorney to file one in his stead despite the availability of three attorneys associated with the firm as of counsel.

No discovery has been conducted and, in the absence of any evidence that the onset of Tanzman's final episode of illness was sudden, unanticipated and completely debilitating, the failure to seek assistance with the filing of a timely complaint represents a failure to protect plaintiff's interests. Further, plaintiff was not informed that the statute of limitations was about to expire so that she could protect her claim."

 

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Champerty and Judiciary Law 487

Champerty is not a subject that generates wide discussion.  You won't see a blog about it on Gawker.  When the word comes up, we see a figure from a Daumier etching or a Puck cartoon.  Nevertheless, the transfer of causes of action from individual to individual or to a corporate entity is higly regulated.

In Melcher v Greenberg Traurig LLP  2014 NY Slip Op 51296(U)  Decided on August 19, 2014  Supreme Court, New York County  Sherwood, J. we see the denial of a request to transfer or assign interests to an entity.  It should be remembered that Mr. Melcher made history in his Court of Appeals decision.  There the Court said: 'Thus, even if a claim for attorney deceit originated in the first Statute of Westminster rather than preexisting English common law (a question unresolved by Amalfitano and disputed by the parties in this case), liability for attorney deceit existed at New York common law prior to 1787. As a result, claims for attorney deceit are subject to the six-year statute of limitations in CPLR 213 (1). Because of our disposition of this appeal, we do not reach and need not resolve Melcher's other arguments.

Accordingly, the order of the Appellate Division should be reversed, with costs, and defendants' motion to dismiss the complaint denied."

Here, back in Supreme Court, we see a denial of his assignment request.  "Plaintiff Melcher initiated this action for attorney misconduct pursuant to the New York Judiciary Law §487 in 2007. Now, Melcher, 74, moves to substitute a limited liability company, LJBD Recovery LLC (LJBD) for himself as plaintiff in this action pursuant to CPLR 1018. Plaintiff has assigned his interests in this litigation to LJBD, which he created, and of which he is sole owner and manager. Plaintiff who states that "I am currently in good health", claims the substitution will avoid delay in prosecuting the case in the event of his death, and argues that as such an assignment is not prohibited pursuant to General Obligations Law § 13-101, it is permissible.Defendants argue that the proposed assignment is unnecessary and prejudicial, as Melcher, as a non-party, would be less accessible for discovery, and because the assignment could act to insulate Melcher from decisions of the court. Defendants also argue that the substitution "contravenes clear and long-settled public policy against champerty" (Opp., NYSECF Doc. No. 155 at 4).

When an assignment was made after litigation had already begun, courts have allowed a transfer of claims (see Rosenkrantz v Berlin, 65 Misc 2d 320 [Sup Ct, Nassau County 1971]), but prohibited the addition of new claims (see Erlich v Rebco Ins. Exchange, Ltd., 225 AD2d 75, 77 [1st Dept 1996]).The proposed substitution, if allowed, would prejudice the defendants by shifting the risks of litigation to a shell entity, making plaintiff less accessible to discovery, and allowing Melcher, a non-party, to continue to direct the litigation through his alter ego and to collect and retain all of the relevant information and documents. The plaintiff's rationale for the substitution, to allow the litigation to continue seamlessly in the event of his death, ignores that he is the sole owner and manager of the proposed substitute plaintiff. Plaintiff provides no rationale for how litigation would continue more smoothly with the sole owner and manager of LJBD deceased, than it would with an administrator appointed for a deceased plaintiff (see Moore v Washington, 34 AD2d 903, 904 [1st Dept 1970]). Accordingly, the court declines the invitation to allow the substitution. Plaintiff's Motion to Substitute LJBD Recovery LLC is DENIED."

 

 

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Limited Retainers in a Legal Malpractice Setting

Client is the widow of a worker who died, either at work or at a company Christmas party.  She retains the law firm to "investigate and advise her with respect to all potential claims relating to the accident of December 23, 2010 and Mr. Pena's death."  When she is no longer able to apply for Workers Compensation, she sues.  Was the law firm responsible to her on this issue?

Lirano v Grimble & Logudice, LLC  2014 NY Slip Op 32346(U)  September 3, 2014  Supreme Court, New York County  Docket Number: 154676/2013  Judge: Eileen A. Rakower is just a discovery decision, but this question will come up, and we expect to see a summary judgment motion in the future.

"As alleged in the Verified Complaint, Decedent suffered injuries in an accident while working on December 21, 2010, at 175 East 96th Street, New York, New York 10128, and died on December 23, 2010 as a result of his injuries. Plaintiff retained Defendants to "investigate and advise her with respect to all potential claims relating to the accident of December 23, 2010 and Mr. Pena's
death." The Complaint alleges, by letter dated December 28, 2012, G&L "rejected the case without commencing a lawsuit or filing a Workers' Compensation claim on behalf of the decedent, Eduardo Pena, or his estate." It further alleges, "Pursuant to the applicable statute, a Workers Compensation claim must be filed within two (2) years. Therefore, the decedent and/or his estate are precluded from filing a Workers' Compensation claim as a result of the accident of December 21, 201 O." Plaintiff claims that Defendants were negligent "in not advising the administratrix that the estate had a viable Workers' Compensation claim; in not informing her that a Workers' Compensation claim had to be commenced within two (2) years of the date of the accident and in failing to refer her to a lawyer and/or firm that focused on Workers' Compensation claims and in failing to advise her to consult with a lawyer and/or firm that focused on Workers' Compensation
claims," and resulting damages. In its Answer, G&L denies that the injuries sustained by Pena on the date of the incident was the sole factor causing Pena's death because Pena had preexisting
medical conditions. Furthermore, G&L contends Decedent was intoxicated at an after-hours Christmas party when the injury occurred, which would not be covered by Workers' Compensation. G&L further contends that (1) Plain ti ff failed to state a cause of action; and (2) Plaintiff was aware that G&L was retained solely with regard to an action based upon negligence of others, and not with respect to a Workers' Compensation claim. "

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Sister is Cruelly Used, But Is It Legal Malpractice?

Brother and friend have a Canon brand office automation equipment business.  Problem is that they have criminal records and Canon won't work with them.  They turn to Sister, who is an employee of the company.  She gets all the stock, and with it, all the debts.  Brother and friend have the right to buy back the stock for $ 10,000.  It all ends badly for the sister.  When the law firm represents Brother, Sister and Friend, is it legal malpractice?

Mattiucci v Brach Eichler, LLC  2014 NY Slip Op 32324(U)  August 21, 2014  Supreme Court, New York County  Docket Number: 152238/14  Judge: Nancy M. Bannon says no, it is not legal malpractice.

"In this action seeking damages for legal malpractice, the plaintiff, who agreed to be named sole shareholder, director, and officer of a corporation, complains that the defendant  attorneys were negligent in allowing her to do so and, notwithstanding a signed waiver, complains that the defendants had a conflict of interest in simultaneously representing her  business partners. The defendants move to dismiss the complaint on the grounds of failure to state a cause of action (CPLR 3211 [a][?)) and upon documentary evidence (CPLR 3211 [a][1])   The motion is granted.

On December 4, 2008, the plaintiff, Catherine Mattiucci, along with her brother Anthony  Grimaldi, and a third individual, Steve Hernandez, retained defendant Jay Freireich, an attorney, to represent them regarding the acquisition of a company called EZ Docs, Inc. ("EZ Docs") from Empire Technology Inc., a separate company owned by Grimaldi and Hernandez. EZ Docs is in the business of selling Canon brand office automation equipment. the parties acknowledge that Canon was unwilling to permit Grimaldi or Hernandez to have any ownership interest in a Canon licensed dealership due to their criminal records. Therefore, defendant Freireich prepared an Option to Purchase Stock Agreement which provided that plaintiff owned 100% of the common stock of EZ Docs., and granted the exclusive option to Grimaldi and Hernandez to purchase all of EZ Docs' stock for $10,000. On March 19, 2009, the plaintiff, Grimaldi, and Hernandez executed a retainer agreement which read in pertinent part: [* 1]"You do hereby acknowledge that you have requested this office to represent you with respect to your interests and you understand that I represent all three of you in this matter. You understand and are fully aware that, based upon the
circumstances of such representation your separate interests may be adverse to  the other's interests and that you each have the opportunity to be represented by separate counsel.
Notwithstanding such possible adversity of interest and conflict, you do desire  this office to represent you in connection with your interests. You understand that at any time, you may terminate this office's representation of you and retain separate counsel to represent your interests. Further this office may likewise terminate our representation of you in the event we believe it is impossible to represent you due to your adverse interests." Due to the plaintiff's concerns over her exposure to claims from creditors and taxing authorities as sole shareholder, director, and officer of EZ Docs, Freireich prepared an indemnification agreement. The agreement provided that Grimaldi and Hernandez would indemnify the plaintiff for "any and all liability to make payments under any obligation arising by and through her retention of shares, directorship or acting as officer" of EZ Docs. Defendant Freireich then prepared a Nominee Declaration which provided that the plaintiff acted as nominee for Grimaldi and Hernandez because Canon was not willing to grant any ownership interest in a Canon licensed dealership to Grimaldi or Hernandez.

According to the plaintiff, she was actually a mere employee of the company while Grimaldi and Hernandez were the shareholders, officers, and directors. However, beginning in 2011, she was sued as an officer, director, and shareholder of EZ Docs, Inc. in a number of suits alleging fraud and other causes of action. In addition to incurring legal fees in defending these actions, plaintiff received K-1s from EZ Docs Inc. attributing distributions to her as income which she did not actually receive. In November 2011, Grimaldi and Hernandez terminated the plaintiff's employment and she was unable to collect unemployment insurance benefits due to her documented position as sole shareholder, director, and officer of the company.

Finally, an "applicable principle in this case is that a [party] cannot benefit from [her] own wrongdoing." Zumpano v Quinn, 6 NY3d 666, 685 (2006). The plaintiff knowingly participated in a scheme to acquire a business with her brother and friend and then, when the arrangement she agreed to resulted, not unexpectedly, in her being named as a defendant in legal actions against the company and being ousted by her partners, turned to her attorneys for relief by claiming they committed malpractice by allowing her to participate in that arrangement, notwithstanding her signed waivers. To allow the action to proceed would be to countenance this scheme, and the court declines to do so. In any event, as discussed above, the plaintiff fails to sufficiently allege the essential elements of a claim of malpractice. "

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Defendants go 0-2 in the Motion Sequence

This case arises from representation of the client in a buy-out provision of a stock agreement.  Defendants failed to serve a notice required by the stock agreement on individual shareholders, which led to dismissal of claims against them. 

In Rehberger v Garguilo & Orzechowski, LLP   2014 NY Slip Op 04182 [118 AD3d 767]  June 11, 2014  Appellate Division, Second Department  not only is summary judgment against Plaintiff denied, but summary judgment against third-party defendants is likewise denied.

"Here, the Garguilo defendants each failed to establish their prima facie entitlement to judgment as a matter of law dismissing the complaint insofar as asserted against each of them. The stock redemption agreement in the underlying action required that notice of redemption be mailed to each of the individual shareholders at the address listed in the agreement. As a result of the Garguilo defendants' failure to send this notice to the individual shareholders, the individual shareholder defendants were dismissed from the underlying action. The Garguilo defendants' submissions in support of their respective motions did not establish, prima facie, that the plaintiff will be unable to prove at least one element of his legal malpractice claim and, thus, they failed to demonstrate their entitlement to judgment as a matter of law (see Rudolf v Shayne, Dachs, Stanisci, Corker & Sauer, 8 NY3d 438 [2007]; Barnave v Davis, 108 AD3d at 583; Affordable Community, Inc. v Simon, 95 AD3d at 1048; cf. Board of Mgrs. of Bay Club v Borah, Goldstein, Schwartz, Altschuler & Nahins, P.C., 97 AD3d 612, 613-614 [2012]; Frederick v Meighan, 75 AD3d at 531-532; Leach v Bailly, 57 AD3d 1286, 1289 [2008]). Moreover, contrary to the Garguilo defendants' contention, they failed to demonstrate, prima facie, that the plaintiff's subsequent counsel, Dollinger, Gonski & Grossman, Esqs., and Matthew Dollinger (hereinafter together the Dollinger third-party defendants), had a sufficient opportunity to fully protect the plaintiff's rights when it took over the case, as to establish that any alleged negligence on the part of the Garguilo defendants was not a proximate cause of the plaintiff's damages (cf. Perks v Lauto & Garabedian, 306 AD2d 261 [2003]; Albin v Pearson, 289 AD2d 272 [2001]).

The Garguilo defendants' respective remaining contentions are without merit.

In light of the Garguilo defendants' failure to establish their prima facie entitlement to judgment as a matter of law, the Supreme Court properly denied their respective motions for summary judgment dismissing the complaint insofar as asserted against each of them, regardless of the sufficiency of the plaintiff's opposing papers (see Affordable Community, Inc. v Simon, 95 AD3d at 1048; see generally Winegrad v New York Univ. Med. Ctr., 64 NY2d 851, 853 [1985]).

Furthermore, the Supreme Court properly denied that branch of the motion of Garguilo & Orzechowski, LLP, which was for summary judgment on the third third-party complaint, which alleged causes of action against the Dollinger third-party defendants for contribution and [*3]common-law indemnification. In the third third-party complaint, Garguilo & Orzechowski, LLP, alleged, inter alia, that if the plaintiff is able to establish that Garguilo & Orzechowski, LLP, committed malpractice, then the Dollinger third-party defendants are culpable for essentially the same conduct because they too failed to serve notice on the individual shareholders and to take action against those shareholders to enforce the buy-out provision of the stock agreement. Contrary to the contentions of Garguilo & Orzechowski, LLP, the Supreme Court properly denied that branch of its motion which was for summary judgment on the cause of action for common-law indemnification. Garguilo & Orzechowski, LLP, failed to establish, prima facie, that it was free from negligence or that its negligence was not a proximate cause of the plaintiff's alleged damages (see Waggoner v Caruso, 14 NY3d 874 [2010];

"

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Big Case, Good Results, Unhappy with Contingent Fee

The Court of Appeals will be reviewing contingent fees in Matter of Lawrence, deceased.   McCallion & Assoc., LLP v Dyche  2014 NY Slip Op 32254(U)  August 20, 2014  Supreme Court, New York County  Docket Number: 157793/13  Judge: Joan A. Madden is Supreme Court's look at the same issue.  When a client retains an attorney on a contingent basis, and the recovery is big, really big, what happens?

"In this action, M&A seeks to recover attorneys' fees arising out of its representation of Ms. Dyche in the matters of Olsen v. Dyche and An v. Dyche. Defendant SD Assets, LLC (SD Assets) is a limited liability company owned by Ms. Dyche. Defendant Empire Gateway LLC ("Empire") is a an entity from which SD Assets was designated to received quarterly distributions pursuant to a settlement agreement in the matter of Olsen v. Dyche (hereafter "the Settlement Agreement"). The complaint asserts causes of action for breach of contract, quantum meruit, an accounting, declaratory relief and injunctive relief. In connection with Olsen v. Dyche, M&A and Ms. Dyche entered into a retainer agreement providing that M&A would receive a [* 1]contingency fee of20% "of any amounts received by (Ms. Dyche) by way of settlement, judgment or award" on the counterclaim and third-party complaint, plus $250/hour for legal work related to the defense of the case. Subsequently, the contingency amount was increased to 30% as evidenced by an email exchange between M&A and Ms. Dyche. The complaint alleges that the increase in fee was "in recognition not only of the increased work load by M&A in the Olsen v. Dyche matter, but also in recognition of the tremendous amount of legal work that M&A was performing in An v. Dyche matter without compensation under the An v. Dyche fee agreement1" (Complaint, if 36). Ms. Dyche admits in the defendants' answer that she agreed to the increase the contingency fee from 20% to 30%, but maintains she only agreed to the increase because she was afraid M&A would withdraw as counsel if she did not consent. The dispute in Olsen v. Dyche centered on whether Ms. Dyche had an ownership interest
in Empire, and the extent of such interest. Empire owns 55% of the New York City Regional
Center (NYCRC) which collects investment funds from overseas investors pursuant to a program
administered by the U.S. Office of Homeland Security and invests the fund in various construction projects. It is alleged that NYCRC had contracts involving four projects that would "be producing $50,187, 500 income to NYCRC, and since Empire ... owned 55% ofNYCRC, this would yield interest income of fees to Empire of $27 ,604,225 in five years" (Complaint, ,; 21 ).
according to the complaint, the Settlement Agreement, which was entered into in June 2012, amends the Empire Operating Agreement to confirm Ms. Dyche's ownership interest in Empire, provides for cash payments to Ms. Dyche for income received by Empire in 2011 and the first two quarters of 2012, and provides for payments to Ms. Dyche (through SD Assets) of future quarterly distributions based on Ms. Dyche's percentage interest in Empire.

The complaint seeks attorneys' fees based, in part, on the 30% of these quarterly distributions alleging that "the primary component of the consideration that Ms. Dyche received via the Settlement Agreement was a specific percentage equity interest in Empire, which entitled her to receive quarterly distributions during the five year term of the three or four identified contracts [and that] the overwhelming majority of M&A's contingency fee was linked to future quarterly payments to Ms. Dyche contemplated by the Settlement Agreement, since M&A was
entitled to receive its contingency percentage of the entire amount 'of any judgment, settlement
or award,' not just the initial lump payments due Ms. Dyche on a retrospective basis."  (Complaint,~ 28).

The proposed counterclaim seeking rescission of the retainer agreement alleges that the retainer agreement in Olsen v. Dyche "initially included a 20% interest (which M&A partner Kenneth McCallion alleges was later increase to 30%) in Ms. Dyche's Empire Gateway stock dividends ... [and therefore] is "excessive within the meaning of l.5(a) of the New York Rules of Professional Responsibility" (Proposed Amended Answer, rs 23, 80(a). It further alleges that when M&A entered into the retainer agreement it entered into a "business transaction" with a client, within the meaning of Rule 1.8, but failed, as required by that rule to, inter alia, inform Ms. Dyche that under the retainer agreement he was entitled to 20% of the Empire stock dividends and later 30% of the dividends, to advise her to seek advice of counsel, or to receive Ms. Dyche's consent in writing (Id.,~ 80(b)-(d). The other proposed counterclaim seeks a declaration that retainer agreement is null and void and should be set aside modified and/or vacated based on M&A's violation of Rules 1.5(a) and 1.8 of the New York Rules of Professional Responsibility (Id., il' s 129-13 3 ).

Although there is no assertion of prejudice or surprise related to the proposed amendment, the Dyche defendants have not adequately demonstrated the merit of the proposed counterclaims. First, contrary to the allegations relating to proposed counterclaim for rescission, neither the complaint nor the relevant retainer agreement seek to recovery a percentage of Ms. Dyche's ownership in Empire stock dividends. Instead, the contingency portion of retainer agreement bases M&A' s fee on "any amounts received by (Ms. Dyche) by way of settlement, judgment or award." Moreover, the complaint seeks to recover attorneys' fees equivalent to 30% of future quarterly distributions based on Ms. Dyche' s percentage interest in Empire, rather than 30% of "Empire stock dividends," as alleged in the proposed counterclaim. Furthermore, while there may be legal issues relating to M&A's basing its fee on the distributions from Empire, absent allegations with respect to such distributions, leave to amend to add a counterclaim for rescission must be denied. Such denial, however, is without prejudice to renewal upon proper pleadings.
As for the proposed counterclaim related to M&A's alleged violation of 1.5(a) and 1.8 of the New York Rules of Professional Conduct, such counterclaim is without merit as such violation "does not, in itself, give rise to a private cause of action" Weintraub v. Phillips, Nizer, Benjamin, Krim & Ballon, 172 AD2d 254, 254 (1st Dept 1991 ). However, the alleged violations may be properly asserted with respect to other causes of action. "

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Some Head Scratching by the Court in a Legal Malpractice

Medicare costs and reimbursements in the Nursing Home field is "arcane" and probably unknown to readers of  legal malpractice blog.  In Berkowitz v Abrams, Fensterman, Fensterman,
Eisman, Formato, Ferrara & Einiger, LLP
 
2014 NY Slip Op 32299(U)  August 15, 2014
Sup Ct, New York County  Docket Number: 152368/13  Judge: Arthur F. Engoron himself admits to being a little confused.

Bottom line is that the legal malpractice case is continuing on the theory that defendant law firm should have commenced an Article 78 action, failed to do so, was conflicted, and lost about $ 450,000 for the client.

"The instant motion to dismiss is one of the most difficult this Court has had to decide in 11 +
years on the bench. This is due to the fact that the Court has been called upon to interpret
documents full of the arcane language of"Medicaid Reimbursement," an area of human activity
hitherto unknown to the Court. However, after countless readings and re-readings, several drafts
and re-drafts, and much head-scratching, the Court believes that it has finally "cracked the code,"
at least sufficiently to decide this motion correctly. In retrospect, the matter was not that
c.i complicated; but hindsight is always 20-20.

In this action, plaintiffs Morris Berkowitz d/b/a Morris Park Nursing Home and Rehab Center
and Morris Park Nursing Home and Rehab Center claim that defendants Abrams, Fensterman,
Fensterman, Eisman, Formato, Ferrara & Einiger, LLP ("Abrams") and Richard T. Yarmel
("Yarmel") committed malpractice in their representation of plaintiffs in a dispute with non-party
Office of the Medicaid Inspector General ("OMIG"). Defendants now move, pursuant to CPLR
321 l(a)(l) and (a)(7), to dismiss the complaint based on documentary evidence and for failure to
state a cause of action. These two grounds will be discussed in reverse order.

Thus, plaintiffs' first two causes of action, both for legal malpractice, are not subject to
dismissal. The third cause of action, also for legal malpractice, but based on the alleged conflict
of interest, is also not subject to dismissal (although on its alleged facts it appears, to this Court,
tenuous). However, plaintiffs' fourth cause of action, for attorney's fees, is dismissed without
prejudice pursuant to CPLR 3211 (a)(7). Plaintiffs have failed to provide a basis (such as statute,
court rule, contract, or egregious conduct) for the recovery of attorney's fees. "

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More on the Proskauer Rose LLP Case

Continuing from yesterday, we discuss one of the largest  fraud - legal malpractice cases we have seen.Chambers v Weinstein 2014 NY Slip Op 51331(U)  Decided on August 22, 2014 Supreme Court, New York County Sherwood, J. 

Proskauer Rose LLP is involved in the case, and walks away with dismissal.The facts are set forth in yesterday's blog post, and here is how  the case was decided for Proskauer.

"The Complaint alleges that 148 (through Weinstein) lent the Kahal Defendants $3.88 million. Complaint, ¶¶ 247-250. Weinstein then directed Kahal to pay $1 million of those funds to Proskauer as a retainer. Id. Proskauer knew or should have known that the funds were probably proceeds of his fraudulent activities. Id. The Complaint avers that Proskauer improperly retained and expended the funds for its benefit, and demands the return of funds. Id., ¶¶ 252-253. As noted, these allegations are largely based on the statements made by FBI Agent Ubellacker in the 2013 Action. Plaintiffs' opposition, ¶¶ 79-81. In their opposition papers, Plaintiffs also attached a document, which purports to show the $1 million payment made by Kahal to Proskauer, in a credit/debit schedule. Id., exhibit O. In such regard, Plaintiffs contend that they are "entitled to the inference that all of the funds sent to [Kahal] by 148 were Plaintiffs' funds." Id., ¶ 84.

A claim for conversion of money can be established "where there is a specific, identifiable fund and an obligation to return or otherwise treat in a particular manner the specific fund in question." Thys v Fortis Sec., LLC, 74 AD3d 546, 547 [1st Dept 2010] (internal quotation marks and citation omitted). "Although the action must be for recovery of a particular and definite sum of money, the specific bills need not be identified." Id. (citation omitted).The conversion claim fails. Despite the allegation that Proskauer "knew or should have known" that the money it received from Kahal were proceeds of Weinstein's fraud, the Complaint does not establish that Proskauer knew or should have known that the money it received from Kahal were "specific, identifiable funds" belonging to Plaintiffs and, thus, had "an obligation to return [same to Plaintiffs] or otherwise treat in a particular manner the specific fund in question."

 

3.Accounting (25th Cause of Action)[FN3] The Complaint alleges that Proskauer accepted $1 million from Weinstein or "other persons for the benefit of" Weinstein, and seeks to have Proskauer "provide an accounting of all sums received directly or indirectly from or for the benefit of Defendant Weinstein," because such funds "belonged to and originated from Plaintiffs." Complaint, ¶¶ 257-259.
To establish an accounting claim, a plaintiff must show "a fiduciary relationship between plaintiff and defendants." AMP Servs. Ltd. v Walanpatrias Found., 34 AD3d 231, 233 [1st Dept 2006]. Here, the Complaint does not allege a fiduciary relationship between Plaintiffs and Proskauer. Yet, Plaintiffs argue that "Proskauer, as a law firm, is held to a higher obligation with respect to the monies of third parties in its possession than ordinary defendants Plaintiffs' opposition, ¶ 90." They rely on Rule 1.15(a) of the Rules of Professional Conduct ("A lawyer in possession of any funds or other property belonging to another person . . . is a fiduciary . . .").

This argument has no foundation in law. The Court of Appeals has held that "an ethical violation will not, in and of itself, create a duty that gives rise to a cause of action that would otherwise not exist at law." Shapiro v McNeill, 92 NY2d 91, 97 [1998]. A fiduciary relationship arises "between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation" or "when confidence is reposed on one side and there is resulting superiority and influence on the other." Eurycleia, 12 NY3d at 561 (citations omitted). Plaintiffs have not met either test in Eurycleia. Plaintiffs' other argument that Proskauer's withdrawal from its representation of Weinstein without completing same vitiates its entitlement to the retainer (Plaintiffs' opposition, ¶¶ 88, 91) is baseless because Proskauer does not [*6]represent Plaintiffs in any action or proceeding. Thus, the accounting claim is dismissed.

5.Unjust Enrichment (30th Cause of Action)
"The essential inquiry in any action for unjust enrichment . . . is whether it is against equity and good conscience to permit the defendant to retain what is sought to be recovered." Mandarin Trading Ltd. v Wildenstein, 16 NY3d 173, 182 [2011] (citation omitted). To establish this claim, a plaintiff must show: "(1) the other party was enriched, (2) at that party's expense, and (3) that it is against equity and good conscience to permit [the other party] to retain what is sought to be recovered'." Id. at 182 (citations omitted). While privity is not required, the complaint must still

 

show there is a connection between the parties that is not "too attenuated." Id.
Similar to the fraudulent conveyance claim, the unjust enrichment claim is asserted against multiple defendants. The Complaint alleges that the defendants, including Proskauer, "accepted monies directly or indirectly from the transactions described herein" and the "retention of said monies would unjustly enrich said defendants." Complaint, ¶¶ 297-298. As to Proskauer, the Complaint seek a $1 million judgment. Moreover, Plaintiffs argue that because Proskauer kept the $1 million retainer to which they have made a claim, not requiring Proskauer, as a fiduciary, to return the funds would unjustly enrich Proskauer, particularly when it voluntarily withdrew as Weinstein's [*7]counsel while keeping the unearned fee. Plaintiffs' Opposition, ¶¶ 101-104.

Plaintiffs' arguments are unavailing. As discussed above, Proskauer is not Plaintiffs' fiduciary. The retainer was paid by Kahal, on behalf of Weinstein, Proskauer's client. The fact that Plaintiffs have made a claim against the retainer does not establish that a benefit has been bestowed upon Proskauer. Also, the cases cited by Plaintiffs (Plaintiffs' Opposition, ¶ 102) do not support their assertion because the plaintiffs in those cases bestowed a benefit directly upon the defendants. Here, the facts show that any benefit bestowed upon Proskauer came from the Kahal Defendants, not Plaintiffs. Thus, the unjust enrichment claim against Proskauer must be dismissed.

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Fraud and legal Representation

This case is one of the larger fraud - legal malpractice cases we have seen.  In fact, the scope of the fraud is breathtaking.  Proskauer Rose LLP is involved in the case, and walks away with dismissal.  Here are some of the facts in Chambers v Weinstein  2014 NY Slip Op 51331(U)
Decided on August 22, 2014  Supreme Court, New York County  Sherwood, J.

"The Complaint avers, among other things, that based on Schleider's false representations that [*2]he would invest in certain investment transactions and take steps to protect those investments, Plaintiffs lent up to $6.7 million to defendant 148 Investment LLC (148), a company owned by Todd. Id., ¶¶ 30-31. Schleider engaged the KS Defendants to represent Plaintiffs in transactions with 148. Id., ¶ 32. In February and March of 2012, based on Schleider's representation that Weinstein had access to large blocks of Facebook shares that they intended to purchase through 148 prior to an initial public offering (IPO) and then sell them at a substantially higher price, Plaintiffs lent a total of $3.025 million to 148 to purchase pre-IPO shares in three separate transactions. However, 148 purchased no Facebook shares and did not otherwise invest the money. Id., ¶¶ 35-50. Instead, Todd, Schlieder, Weinstein, Muschel and 148 engaged in self-dealings and used Plaintiffs' money for their own personal expenses. Id., ¶ 51.

To further the fraudulent Facebook scheme, Todd represented to Plaintiffs that the transactions would be secured by collateral valued at $12 million, consisting of mortgages 148 held against a property known as 1741-1751 Park Avenue, New York (Park Avenue Property). Id., ¶ 75. The complaint avers that defendant 121 Park had made a $6 million mortgage to Kahal securing the Park Avenue Property and recorded same in March 2008.[FN1] Id., ¶ 76. In November 2011, Kahal assigned the mortgage to 148, which was recorded in June 2012. However, in or about March 2012, 148 reassigned the mortgage to Kahal. Both of the collateral assignments were performed without any consideration, but rather were made to deceive Plaintiffs. Id., ¶¶ 79-81, 88.

The Complaint also avers that in September 2011, Belle Glade Gardens Realty Group, LLC (BGG), a Florida company owned and controlled by Schleider, entered into an agreement with Prince of Belle Glade Gardens, LLC to purchase Belle Glade Gardens, a 384-unit apartment complex, for $16.4 million. Complaint, ¶¶ 118-120. Schleider retained defendant Greenberg to represent BGG in the transaction. Id. Although BGG deposited $120,000, Greenberg returned the down-payment to BGG in November 2011, thus terminating the purchase agreement. Id., ¶ 121-122. In February and April 2012, Schleider represented to Plaintiffs that the BGG transaction was still active and that he would be matching their investment therein. Id., ¶¶ 123. Based on the representation, Plaintiffs wired $2.5 million to Greenberg in February 2012, which was deposited into an escrow account for Schleider and a subaccount for BGG. Id., ¶¶ 124-125. Schleider subsequently directed Greenberg to wire $2.5 million to 148, but misrepresented to Plaintiffs that the $2.5 million was being held by Greenberg for the transaction. Id., ¶ 128. In April 2012, Schleider induced Plaintiffs to make an additional $330,000 investment, but later directed Greenberg to deduct its legal fees from the $330,000 wired by Plaintiffs, without disclosing that the BGG deal was no longer active. Id., ¶¶ 129-132. Schleider intended to and fraudulently turned over the BGG funds to 148 for use by Schleider, Todd, Weinstein and 148. Id., ¶ 133.

In 2011, Weinstein was prosecuted by the United States in the United States District Court of New Jersey (2011 Action). Proskauer represented Weinstein from December 31, 2012 to May 30, 2013 in the 2011 Action. Complaint, ¶ 226. As compensation for its services, Proskauer charged Weinstein $1 million as a minimum non-refundable fee. On December 20, 2012, Kahal paid the fee with a check containing a reference stating "Loan Return for 148 LLC." Id., ¶¶ 227-228. The Complaint alleges that Proskauer did not perform adequate due diligence to insure that the retainer funds were not proceeds of Weinstein's criminal activities, and that Proskauer had "actual knowledge" that Weinstein was prohibited by the government in the 2011 Action from engaging in financial transactions of more than $1,000. Id., ¶¶ 230-231. On January 3, 2012, Weinstein entered into a plea agreement whereby he admitted to committing wire fraud and money laundering. On May 20, 2013, Weinstein was charged by the United States with various criminal activities (2013 [*3]Action). The indictment alleges that Proskauer received $1 million. The Complaint alleges that Proskauer spent the $1 million within two weeks of its receipt from Kahal, and that Proskauer paid "an unknown portion of these funds to persons unknown" for the benefit of Weinstein, and "thereby intentionally engaged in a scheme to defraud Plaintiffs by agreeing to launder' funds for Defendant Weinstein and prevent their recovery by Plaintiffs." Id., ¶¶ 240-241. Proskauer moved to be relieved as Weinstein's attorney in the 2011 Action, in light of the allegations in the 2013 Action. The motion was granted on May 30, 2013. Id., ¶¶ 236-237."

"To state a claim for aiding and abetting fraud, a plaintiff must allege the existence of the underlying fraud, actual knowledge, and substantial assistance. Oster v Kirschner, 77 AD3d 51, 55 [1st Dept 2010]; Stanfield Offshore Leveraged Assets, Ltd. v Metro. Life Ins. Co., 64 AD3d 472, 476 [1st Dept 2009].

In this case, the parties do not dispute that Weinstein committed fraud prior to 2011 involving victims other than Plaintiffs. In fact, Weinstein was sentenced for fraud in the 2011 Action. The dispute in this case lies in whether fraud perpetrated against Plaintiffs in 2012 is adequately stated in the Complaint, and whether Proskauer had "actual knowledge" and gave "substantial assistance." Notably, Plaintiffs' allegations in the Complaint are primarily based on sworn statements, dated May 13, 2013, made by an FBI agent, Karl Ubellacker, in connection with the government's complaint filed in the 2013 Action. A copy of Agent Ubellacker's statement is annexed as exhibit B to Plaintiffs' opposition to Proskauer's motion to dismiss.

In opposition to the motion, Plaintiffs contend that Proskauer's actual intent can be inferred from the following factual circumstances. Proskauer knew of the allegations against Weinstein in the 2011 Action because it served as his defense counsel. It knew that Weinstein was prohibited from engaging in transactions over $1,000 without the approval of the government's special counsel. It knew that the $1 million retainer was "probably directly or indirectly" proceeds of the 2011 Action. Kahal paid Proskauer's retainer with a check bearing a notation that it was a "Loan Return for 148 LLC." Proskauer accordingly knew that the check never went to 148, but was diverted to pay [*4]Weinstein's legal fees, just as he had diverted funds in the 2011 Action. Additionally, after learning that the government might try to seize the diverted funds, Proskauer was told by Weinstein to "minimally" inquire about the source of funds with Todd, who replied in a manner as directed by Weinstein. Lastly, Weinstein admitted that the fraudulent scheme in the 2011 and 2013 Actions "was a key component of both." Plaintiffs' opposition, ¶¶ 53-63.

Plaintiffs' contentions are insufficient to defeat the motion. That a law firm represents a client accused of a prior fraud against certain victims does not support an inference that the firm knew about, much less aided and abetted, a subsequent fraud committed by the client against other victims. Here, the government's complaints in the 2011 and 2013 Actions named different sets of victims and Plaintiffs were not named in the 2011 Action. Thus, Weinstein's retention of Proskauer as defense counsel in connections with the 2011 Action does not support an inference that Proskauer knew of the subsequent fraud allegedly perpetrated against the Plaintiffs, which fraud was the subject of the 2013 Action. See National Westminister Bank v Weksel, 124 AD2d 144, 150 [1st Dept 1987] (while a law firm gains access to information in the course of representing a client, "the fact of legal representation, even as to transactions allegedly the subject of subsequent [fraud], does not itself support the inference of the high degree of scienter necessary to extend fraud liability [against the firm] on an aiding and abetting theory").

Plaintiffs' attempt to overcome this flaw by relying on Weinstein's recent motion, filed by his new counsel in the New Jersey federal court, seeking "specific performance" of his plea agreement made with the government in connection with the 2011 charges,[FN2] is also misplaced. Even if his argument in that motion were true (i.e., the fraud scheme in the 2011 and 2013 Actions was "a key component of both"), it does not give rise to an inference that Proskauer knew of the fraud concerning the Facebook IPO and other transactions implicated in the 2013 Action. For the same reason, the fact that the retainer fee was paid via a third-party check, with a notation that it was a "Loan Return for 148 LLC," does not infer that Proskauer "substantially assisted" Weinstein in defrauding Plaintiffs by laundering funds that were "probably directly or indirectly fraudulent proceeds" of the 2011 Action. The 2011 Action did not involve Plaintiffs, 148 or the Kahal Defendants. There is no allegation that Proskauer had "actual knowledge "(as opposed to Plaintiffs' speculative phrase "probably directly or indirectly") of any connection between Weinstein and Plaintiffs at the time the retainer was paid. This remains true even if Proskauer "knew" that Weinstein was prohibited from engaging in financial transactions of more than $1,000 or failed to perform sufficient "due diligence" as to the source of the funds.

Moreover, even though the intent to commit fraud may be divined from the surrounding circumstances, "substantial assistance" in aiding and abetting fraud "means more than just performing routine business services for the alleged fraudster." CRT Invs., Ltd. v BDO Seidman, LLP, 85 AD3d 470, 472 [1st Dept 2011] (citations omitted). Here, it is not alleged that Proskauer provided substantial assistance to Weinstein, other than routine legal representation in the 2011 Action, by making fraudulent misrepresentation or inducing Plaintiffs in connection with transactions implicated in the 2013 Action.

Further, when a plaintiff seeks to extend an alleged fraud beyond the principal actors, the requirement of CPLR 3016(b) must be "strictly adhered" to because "the alleged aider and abetter, by hypothesis, has not made any fraudulent misrepresentation and should not be called to account for the intentional tort of another unless the circumstances of his connection therewith can be alleged in detail from the outset." National Westminster, 124 AD2d at 149. The allegations against Proskauer do not meet CPLR 3016 (b)'s requirements. Plaintiffs' reliance on Eurycleia Partners, LP v Seward & Kissel, LLP (12 NY3d 553 [2009]) is also misplaced. Indeed, in Eurycleia, the Court of Appeals dismissed the aiding and abetting fraud claim against the law firm that prepared the [*5]offering memoranda for a hedge fund that later collapsed. The Court held that even though "a plaintiff need not produce absolute proof of fraud," the allegations in the amended complaint were "conclusory" and did not give rise to a "reasonable inference" that the law firm committed fraud or aided and abetted fraudulent activities. Id. 560-561. Here, the Complaint fails to allege that Proskauer knew and substantially assisted Weinstein in those transactions in which Plaintiffs assert they were defrauded. Thus, the aiding and abetting fraud claim shall be dismissed.

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