Melnick v Farrell  2015 NY Slip Op 03658  Decided on May 1, 2015  Appellate Division, Fourth Department is an interesting case about upstate inventors, selling an invention to another company, protection in a future bankruptcy proceedings, and how a multi-million dollar asset can be lost without attorney malpractice.

“Memorandum: Plaintiffs commenced this legal malpractice action alleging that defendants were negligent with respect to the negotiation of an agreement to license and sell intellectual property for a medical device developed by plaintiffs Frank H. Boehm, Jr. and Benedetta D. Melnick and transferred to plaintiff Creative Neuroscience Applications, LLC (CNA). Supreme Court granted defendants’ motion seeking summary judgment dismissing the amended complaint both as time-barred and on the merits. Although we conclude that the court erred in determining that the action is time-barred, we agree with the court on the merits, and we therefore affirm.

On the merits, plaintiffs allege that defendants engaged in legal malpractice by failing to include in the agreement, or in the first amendment of the agreement, a provision protecting their financial interest in the intellectual property in the event that the buyer became insolvent or filed for bankruptcy protection (bankruptcy/buyback provision). In order to establish a cause of action for legal malpractice, plaintiffs must prove that the attorney failed to exercise the degree of care, skill and diligence commonly possessed by a member of the legal community; that the failure to do so proximately caused plaintiffs’ damages; and that plaintiffs would have been successful in [*2]the underlying action if the attorney had exercised due care (see Rudolf v Shayne, Dachs, Stanisci, Corker & Sauer, 8 NY3d 438, 442; Phillips v Moran & Kufta, P.C., 53 AD3d 1044, 1044-1045). “To succeed on a motion for summary judgment dismissing the complaint in a legal malpractice action, the defendant must present evidence in admissible form establishing that the plaintiff is unable to prove at least one essential element of his or her cause of action alleging legal malpractice” (Scartozzi v Potruch, 72 AD3d 787, 789-790).

It is undisputed that the agreement and subsequent amendments, some of which were negotiated solely by Boehm, did not provide for the financial protection of plaintiffs with respect to the intellectual property in the event that the buyer filed for bankruptcy protection, which occurred here. It is also undisputed that plaintiffs received the scheduled payments pursuant to the agreement and subsequent amendments, but they did not receive any future payments pursuant to the amended agreement because the necessary triggering events did not occur. Further, it is undisputed that, in July 2008, plaintiffs retained different counsel and engaged in mediation with the buyer, which resulted in a settlement agreement that superseded the original agreement and amendments. The settlement agreement also did not contain a bankruptcy/buyback provision. Plaintiffs thereafter commenced a breach of contract action with respect to the settlement agreement in federal court, which ultimately was dismissed, and, while that action was pending, the buyer applied for bankruptcy protection. Although CNA was listed as an unsecured creditor in the bankruptcy proceeding, plaintiffs did not receive any proceeds from the sale of the buyer’s assets. Those assets included over 50 patents, including the patent assigned by plaintiffs, products and inventory. The assets were sold for $9.2 million, which was not sufficient to satisfy the claims of secured creditors. Plaintiffs thereafter commenced this action seeking damages in the amount of $9.2 million.

We conclude that defendants met their initial burden by establishing that they did not fail to exercise the degree of care, skill and diligence commonly possessed by members of the legal community with respect to their representation of plaintiffs (cf. Scartozzi, 72 AD3d at 790;generally Rudolf, 8 NY3d at 442). Defendants established that defendant recommended that a bankruptcy/buyback provision be included in the agreement, that the buyer refused to include the provision, and that plaintiffs were aware of the buyer’s refusal and nevertheless executed the agreement and the first amendment without it. Even assuming, arguendo, that defendant should have advised plaintiffs not to execute the agreement without the bankruptcy/buyback provision, we conclude that defendants established “a reasonable strategic explanation’ for the alleged negligence” (Ackerman v Kesselman, 100 AD3d 577, 579). We further conclude that defendants [*3]established that any negligence was not a proximate cause of plaintiffs’ alleged damages because plaintiffs previously had entered into a similar agreement that included the relevant provision, and Boehm and Melnick knew that the agreement with this buyer would not include such a provision. Further, defendants established that plaintiffs would not have prevailed in the underlying bankruptcy proceeding, even with a provision placing them in a secured creditor position, because they had been paid $885,000 pursuant to the terms of the agreement and the first amendment of the agreement, and none of the triggering events for future payments had occurred. We therefore conclude that defendants established that plaintiffs would be “unable to prove at least one essential element of [their] cause of action alleging legal malpractice” (Scartozzi, 72 AD3d at 790).”