Real Estate rules Manhattan, and big (really big) money is attracted to the thought of new buildings in prime locations.  Bauhouse Group I, Inc. v Kalikow  2018 NY Slip Op 33055(U)
December 4, 2018  Supreme Court, New York County  Docket Number: 158277/2017
Judge: Saliann Scarpulla is the story of a Sutton Place project which started, started to sour, went bad and almost ended in Bankruptcy Court.  It then morphed into a lost legal malpractice case.

“This action arises out of a failed residential real estate development project (the “Project”) which resulted in several federal and state court actions. The facts of the underlying dispute have been set forth in extensive detail in a post-trial decision from a related adversary proceeding filed in the United States Bankruptcy Court of the Southern District of New York (“Bankruptcy Proceeding”), In re BH Sutton Mezz LLC, AP 16- 01187 (SHL), 2016 WL 8352445 (Bankr SDNY 2016) (hereinafter, the “Bankruptcy Decision”), of which I take judicial notice. ”

“The Principals set out to purchase plots of land located at 426-432 E. 58th Street, New York, New York I 0022 and the related air rights (the “Property”) on which to develop the Project. The Principals led the Project, and Bauhouse planned the development of the Project. Beninati hired numerous advisors to assist Plaintiffs and Debtors in completing the Project, including several debt and equity financing advisors.
On June 24, 2014, Beninati, on behalf of Sutton NY, retained Defendants to represent Sutton NY in the Project.3 The complaint alleges that Plaintiffs retained Defendants in November 2014 to represent them in the Project.
In June 2014, Debtors entered into an agreement to purchase the Property. Thereafter, the Principals, with the help of their advisors, sought equity and debt investors to finance the purchase of the Property and the development of Project. In November 2014, Kalikow and Beninati discussed the possibility of obtaining financing from Kalikow’s cousins, N. Richard Kalikow and Jonathan Kalikow (collectively, “Lenders”), who were the principals of Gamma Funding, LLC. Shortly thereafter, the Principals met with the Lenders to discuss their financing options and
subsequently sent the Lenders additional information about the Project.

During this time, the Principals, Debtors, and their advisors were actively pursuing other investors. These efforts later proved to be unsuccessful and “Debtors had significant difficulties getting financing because they had invested so little of their own money in the [P]roject, thus making traditional lenders unwilling to bankroll the project.” Bankruptcy Decision at 14. ”

“Debtors ultimately defaulted on their loan obligations and filed for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court of the Southern District of New York. The Debtors subsequently commenced an adversarial proceeding against the Lenders.
In November 2016, the Bankruptcy Court conducted a five-day trial, and the posttrial decision organized the Debtor’s remaining thirteen claims (Debtors originally asserted 26 claims against Lenders) into seven categories: unconscionability; lender liability; breach of contract; breach of implied covenant; equitable subordination; fraudulent transfer; and criminal usury. The court ruled in favor of Debtors only for the criminal usury claim5 and granted judgment for the defendants on all remaining claims.

Plaintiffs commenced this action in September 2017, asserting claims for professional negligence and/or legal malpractice, fraud under New York Judiciary Law §487, and breach of contract.
The complaint alleges that Plaintiffs retained Defendants to represent them in the Project in November 2014. During this period of representation, Kalikow introduced Plaintiffs to, and assisted them in obtaining financing for the Project from Lenders, who were principals of Gamma Funding, LLC and related to Kalikow. Kalikow allegedly failed adequately to inform Plaintiffs that he was related Lenders and that Defendants represented the Lenders on various other real estate matters, both of which constitute unwaivable conflicts of interest. To cover up these purportedly un-waivable conflicts, Defendants allegedly drafted and “coerced” Bauhouse to sign the Waiver Letter. ”

“Collateral Estoppel
“The doctrine of collateral estoppel, a narrower species of res judicata, precludes a party from relitigating in a subsequent action or proceeding an issue clearly raised in a prior action or proceeding and decided against that party or those in privity, whether or not the tribunals or causes of action are the same.” Ryan v New York Tel. Co., 62 NY2d 494, 500 (1984) (citations omitted); see also Physicians’ Reciprocal Insurers v Loeb, 291 AD2d 541, 543 (2d Dept 2002) (Collateral estoppel “prevents repetitive litigation and potentially inconsistent judgments by providing, in general, that once a particular question of fact has been decided in one judicial forum, that same question of fact may not be reopened for further litigation in the context of a subsequent judicial proceeding.” (citations omitted)). ”

“Plaintiffs’ argument that collateral estoppel cannot apply because the issue of Defendants’ malpractice was not litigated in the Bankruptcy Proceeding is without merit. “[C]ollateral estoppel precludes assertion of the same wrong under a different legal theory,” Korea First Bank of NY. v Noah Enterprises, Ltd., 12 AD3d 321, 323 (1st Dept  2004) (citations omitted), and an issue arising “in an entirely distinct cause of action is no impediment to collateral estoppel.” Fallek v Becker, Achiron & Isserlis, 246 AD2d 394, 395 (1st Dept 1998) (citations omitted).

Although there was no malpractice claim asserted against Defendants in the Bankruptcy  Proceeding, the Bankruptcy Decision necessarily decided and “addressed issues identical to those raised by” Plaintiffs’ malpractice claim here. Sanders v Grenadier Realty, Inc., 102 AD3d 460, 461 (1st Dept 2013) (precluding re-litigation of issues underlying state claim where identical issues underlying claim were decided by federal court that had refused to exercise jurisdiction over state claims); see also Hudson v Merrill Lynch & Co., Inc., 138 AD3d 511, 515 (1st Dept 2016), lv to appeal denied, 28 NY3d 902 (2016) (party estopped from relitigating “discrete factual issues” decided against that party in prior federal litigation); Women’s Interart Ctr., Inc. v New York City
Economic Dev. Corp. (EDC), 65 AD3d 426, 427 (1st Dept 2009). ”

“While Defendants have met their initial burden of proof, Plaintiffs have failed to meet their burden of demonstrating that they lacked a fair opportunity to litigate these issues or to contest the Bankruptcy Decision. Therefore, Plaintiffs here are precluded from relitigating the above findings, including the complaint’s allegations that Defendants negligently put Plaintiff’s into risky commercial transactions that were guaranteed to fail, that Defendants failed to explain the risks involved in entering into these financing transactions, and that Defendants and Lenders were engaged in a loan-to-own scheme. “