Privity and Dismissal in Legal Malpractice

One of the ways in which legal malpractice is different from other torts is the requirement of privity of contract.  This principal, which for the most part no longer exists for torts, is strictly enforced in legal malpractice.  USHA SOHA Terrace, LLC v Robinson Brog  Leinwand Greene Genovese & Gluck, P.C.  2014 NY Slip Op 31813(U)  July 9, 2014  Supreme Court, New York County
Docket Number: 653377/2013  Judge: Melvin L. Schweitzer  is one example.

"This is a legal malpractice action in which plaintiffs assert both direct and derivative claims against legal counsel for the owner and the developer with regard to a construction project  in which plaintiff USHA SOHA Terrace, LLC was a minority investor in the developer. Defendants urge that plaintiffs cannot pursue their claims as either direct or derivative, and even if they could, the claims are insufficiently plead. The motion is granted and the amended complaint is dismissed"

"In moving to dismiss, defendants urge that as a minority, indirect investor in the Project, plaintiff Minority Member cannot claim any direct injury from actions taken by Legal Counsel. They also urge that plaintiffs lack standing to bring a derivative claim on behalf of 2280 FOB, 
because they are not shareholders of, nor entities which control, 2280 FOB. Further, defendants
argue that the claims are insufficient, because the legal malpractice,claim fails to allege proximate cause, the fiduciary duty claim is duplicative of the malpractice claim, and the Judiciary Law §487 claim fails to allege the requisite pattern of wrongdoing or deceit. "

"The motion to dismiss is granted. First, plaintiff Minority Member, as a member of a limited liability corporation, lacks standing to sue in its individual capacity for losses derived solely from injury to the limited liability company. See Yudell v Gilbert, 99 AD3d 108, 113-114 (1st Dept 2012]; Breslin Realty Dev. Corp. v Shaw, 72 AD3d 258, 266 (2d Dept 2010); Baker v Andover Assoc. Mgt. Corp., 30 Misc 3d 1218 [A], 2009 NY Slip Op 52788[U], * 16-17 (Sup Ct Westchester County 2009). To determine if a claim is direct or derivative, the court must look at the source of the claim of right. If the harm is from the defendants to the corporation, the harm to the shareholders or investors flows through the corporation, and is derivative. On the other hand, if the right flows from a breach of a duty owed directly to the shareholder, then the suit is direct. See Weber v King, 110 F Supp 2d 124, 132 (ED NY 2000); Baker v Andover Assoc. Mgt. Corp., 30 Misc 3d 1218 [A], 2009 NY Slip Op 52788 [U], * 16-17., A claim for diminution in value of the shares is harm to the corporation, the shareholder's injury flows through the corporation, and the claim is derivative even if the decrease in value derives from a breach of fiduciary duty. See Yudell v Gilbert, 99 AD3d at 113-144; O'Neill v Warburg Pincus & Co., 39 AD3d 281, 281-282 (1st Dept 2007). Here, in the amended complaint, plaintiff asserts losses as any "monies owed to [2280 FDB] and [Developer], which were in tum paid to [RGS Holdings and Futterman] resulted in actual monetary losses to [plaintiff Minority Member], in that [plaintiff Minority Member] retains a fourteen percent ( 14%) inter~st in assets of Developer" (amended complaint,~ 43). This claim for diminution in the value of plaintiff's shares involves harm to the corporation, and may only be pursued derivatively. In addition, the only other injury alleged is the failure of 2280 FOB to recover any portion of its award against Racanelli, which is a direct injury only to 2280 FDB. "


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