Privity and Legal Malpractice in the Modern Commercial Setting
Plaintiff is a 50% shareholder in a lucrative franchise operation, and at the end of a contract term both he and the entire franchise is faced with a difficult franchisor, which wants to upset the arrangement. An attorney is hired, and not only does the eventual franchisor-franchisee litigation end badly, but the individual plaintiff is advised to forego a consulting contract worth $800,000. May the individual sue the law firm?
Bayit Care Corp. v Einbinder 2013 NY Slip Op 51557(U) Decided on September 24, 2013 Supreme Court, New York County Bransten, J. holds that for the moment, he may sue. A motion to dismiss was denied as to him.
"Plaintiff Bayit is a corporation that provided healthcare services. Plaintiff Schreier is the 50% co-owner of Bayit, as well as its president and on-site manager. Defendant E & D is a law firm practicing, among other things, franchise law. Defendant Einbinder is an attorney at E & D.
As part of its business, Bayit had previously entered into a franchise agreement whereby Bayit, as franchisee, managed a healthcare center and paid the cost of [*2]administrative personnel. (Defs.' Order to Show Cause, Exhibit F ¶ 6.) The franchisor employed and paid the healthcare personnel, and coordinated billing and collection from customers of the center. (Id., Exhibit F ¶ 6.)
The instant litigation stems from the alleged failure of E & D and Einbinder to take certain actions with respect to the renewal of the Plaintiffs' franchise. In 2009, a dispute arose as a result of the imposition of certain business decisions by the franchisor on Bayit. (Am. Compl. ¶ 21.) Defendants were retained by Bayit and, according to the Amended Complaint, Schreier, in connection with this dispute. (Id. ¶ 19.) From January 2010 to June 2011, a total of three retainer agreements were executed between Plaintiffs and Defendants. (Id. ¶ 19.)
Following settlement discussions between the franchisor and Plaintiffs, on the advice of Einbinder, Plaintiffs commenced a lawsuit against the franchisor, rather than either renewing the franchise or accepting one of the buyout or termination offers made by the franchisor. (Id. ¶¶ 40-48.) According to Plaintiffs, Defendants likewise failed to advise them of the requirements for renewal of the franchise. (Id. ¶¶ 47, 87-89.) Defendants also advised Schreier to reject an offer to enter into a consulting agreement with the franchisor, which would have provided Schreier with up to $800,000 in income over a five-year period. (Id. ¶¶ 9, 43.) Plaintiffs maintain that Defendants knew or should have known that Plaintiffs wanted to renew the franchise and that the franchise had monetary value to the Plaintiffs, and that Defendants took no action to renew the franchise until after the deadline for doing so had passed. (Id. ¶¶ 79-80.) "
""It is well settled that a corporation's attorney represents the corporate entity, not its shareholders or employees." Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 NY3d 553, 562 (2009) (citations omitted). As the First Department has observed, "[a] lawyer's representation of a business entity does not render the law firm counsel to an [*4]individual partner, officer, director or shareholder unless the law firm assumed an affirmative duty to represent that individual." Campbell v. McKeon, 75 AD3d 479, 480-81 (1st Dep't 2010). That is, "[u]nless the parties have expressly agreed otherwise in the circumstances of a particular matter, a lawyer for a corporation represents the corporation, not its employees." Talvy v. American Red Cross, 205 AD2d 143, 149 (1st Dep't 1994), aff'd, 87 NY2d 826 (1995).
In this case, the record is unclear as to whether there was such an express agreement given the manner in which the retainer agreements were drafted. Each of the retainer agreements was addressed to Schreier personally, care of his business address at Bayit. (Am. Compl. ¶ 24.) " [T]he addition of a care of line . . . merely adds a person at that address who may claim the mail.'" Matter of Informart New York LLC v. Hugh O'Kane Elec. Co. LLC, 2003 WL 26094732, at *1 (Sup. Ct. NY County Jan. 6, 2003) (quoting Hoffenberg v. Commissioner, 905 F.2d 665, 666 (2d Cir. 1990)). See Russell & Annis v. Livingston & Wells, 16 NY 515, 518 (1858) (explaining that "[o]rdinarily, the address of a package to the care of any one is an authority to the carrier to deliver it to such person").
Moreover, the retainer letters do not clearly identify Bayit as the client. (Am. Compl. ¶ 25.) To the contrary, the January 11, 2010 retainer letter begins, "Dear Mr. Schreier: This retainer letter is intended to express our mutual understanding regarding our legal representation of you." (Defs.' Order to Show Cause, Exhibit C, at 1.) Similarly, the June 13, 2011 retainer letter begins, "Dear Shabsi: This confirms that you have retained Einbinder & Dunn, LLP ( E & D') to represent you in the above-referenced action." (Id., Exhibit D, at 1.) Likewise, the June 28, 2011 retainer letter begins, "Dear Shabsi: This confirms that you have retained Einbinder & Dunn, LLP ( E & D') to represent you in the above-referenced actions in New York and Louisiana and in the Louisiana action to work with the local attorney." (Id., Exhibit E, at 1.)
Also significant is the fact that Defendants made multiple references to Schreier as their client during a hearing in a consolidated action against the franchisor, and as part of that action, Schreier submitted sworn declarations to that court "focus[ing] on his personal contributions to the Franchisor." (Am. Compl. ¶¶ 69-70.) In Cooke v. Laidlaw Adams & Peck, Inc., 126 AD2d 453 (1st Dep't 1987), the First Department held that "[a]n attorney's appearance in a judicial or quasi-judicial proceeding creates a presumption that the attorney-client relationship exists." Cooke, 126 AD2d at 455 (citation omitted). Finding that an attorney-client relationship between a corporation's employee and corporate counsel did, in fact, exist, that court noted that it was "significant" that corporate counsel appeared at a proceeding involving an employee of a corporation and "admitted on the record before the SEC that they were appearing personally on [the employee's] behalf." Cooke, 126 AD2d at 455.
Accordingly, both the language of the retainer agreements and Defendants' conduct are sufficiently ambiguous as to create an issue of fact regarding the identity of [*5]Defendants' client.
Defendants separately argue that Schreier is not a third-party beneficiary of the retainer agreements between Bayit and E & D, and that there are no "special circumstances" present that would give Schreier standing to bring this legal malpractice claim against E & D notwithstanding the absence of an attorney-client relationship.
"While privity of contract is generally necessary to state a cause of action for attorney malpractice, liability is extended to third parties, not in privity, for harm caused by professional negligence in the presence of fraud, collusion, malicious acts or other special circumstances." Good Old Days Tavern, Inc. v. Zwirn, 259 AD2d 300, 300 (1st Dep't 1999) (citations omitted). "[S]pecial circumstances" are present where the relationship between the plaintiff and the defendant attorney is "tantamount to one of contractual privity." Good Old Days Tavern, Inc., 259 AD2d at 300. The First Department found that special circumstances were present where the plaintiff "was the president and sole shareholder" of the corporation that had retained the defendant attorney and running that corporation was the business from which "he derived his livelihood." Good Old Days Tavern, Inc., 259 AD2d at 300.
Defendants distinguish the holding in Good Old Days from the instant case, citing Topor v. Enbar, 841 N.Y.S.2d 824 (Sup. Ct. NY County 2007). In Topor, the plaintiff alleged that he and multiple related entities had retained and consulted the defendant attorney, and the court found that the plaintiff "held, at most, a minority interest" in the corporate client. Topor, 841 N.Y.S.2d at 824 (emphasis added).
However, the facts in Topor are distinguishable from those in this case. Here, Plaintiffs allege that Schreier was a 50% co-owner of Bayit, that he was Bayit's president and on-site manager, and that he was a "foreseeable third-party beneficiary" of certain agreements between Bayit and the franchisor. (Am. Compl. ¶¶ 2, 18.) Plaintiffs also allege that "Defendants knew or should have known" that the "Franchisor was motivated to terminate Bayit's Franchise," "that Bayit wanted to renew its franchise for an Additional Term of five (5) years until March 31, 2017, and that this renewal term had substantial monetary value to Bayit and Mr. Schreier." (Id. ¶¶ 41, 79.) Moreover, Plaintiffs allege that Defendants "counsel[ed] Mr. Schreier to decline" the offer to provide consulting services to the franchisor, and that as a result of failing to renew the franchise, Schreier lost his annual income of $300,000 and $800,000 in consulting fees. (Id. ¶¶ 9, 14-16.) "