Cassaforte Ltd. v Pourtavoosi  2022 NY Slip Op 32063(U)  June 30, 2022 Supreme Court, New York County  Docket Number: Index No. 451426/2020 Judge: Margaret A. Chan is a complicated real estate breach of fiduciary duty and breach of contract case which cannot adequately be recited in a blog article.  However, this is a short version:

“This action arises out of a series of loan agreements and real estate dealings that plaintiffs allege non-party Aaron Johnson and his affiliated entities breached. A related action centers on the dispute of Cassaforte and FRF with Johnson directly (the Johnson Action, index number 653387/2019). Plaintiffs allege that they were damaged as a result of the refinancing of senior debt by the Fee Owners (the Refinancing), which were controlled by Johnson at the time of the Refinancing.

Prior to the Refinancing, Cassaforte and Johnson, in 2017, structured an arrangement whereby Cassaforte made loans to support the acquisition and development of Brooklyn real property (the Projects). The Projects were to be directly held by the Fee Owners. The corporate structure chart that resulted from this arrangement involved XYZ Holdings LLC (XYZ Holdings) owning all of the membership interests in the Fee Owners. XYZ Partners LLC (XYZ Partners) held 90% of the membership interests in xyz Holdings. Another special purpose entity, XYZ Group LLC (XYZ Group) held the remaining 10% of the membership interests in XYZ Holdings and also served as its operating manager. Johnson wholly owns
XYZ Group. Johnson was the common unit holder ofXYZ Partners, and he was also appointed to be its managing member. On April 20, 2018, FRF became the Preferred Mezzanine Unit Holder of XYZ Partners via a joinder agreement (NYSCEF # 215). XYZ Holdings managed the Fee Owners as their member. Although Cassaforte and Johnson had considered granting Cassaforte security interests directly in the real property, this was opposed by other potential lenders, so it was ultimately agreed that Cassaforte would instead receive LLC security
interests in the membership units of the Fee Owners, XYZ Partners, and XYZ Holdings.”

“Without obtaining the Cassaforte Authorization, Johnson proceeded with the Refinancing. Plaintiffs allege that, around the beginning of 2019, Johnson proposed refinancing the Old Mortgages but failed to share sufficient information about the proposal, or even required financial reports regarding the Projects, such that Cassaforte understood that Johnson was acting secretly to refinance the properties in his favor and to plaintiffs’ detriment. Cassaforte withheld the Cassaforte Authorization, but Johnson nonetheless proceeded. The Refinancing raised approximately $5.85 million by encumbering the Projects with replacement mortgages issued by Sharestates (the New Mortgages). Approximately $4.2 million
went to pay off the Old Mortgages. Plaintiffs allege that Johnson wrongfully diverted the balance, amounting to approximately $1.6 million (the Refinancing Net Proceeds). Sharestates later assigned the new 1535 Pacific mortgage and the 42 Van Buren mortgage to Toorak (the Toorak Mortgages). ”

“Counts One through Eight of the Complaint assert various claims against the Attorney Defendants for Pourtavoosi’s role in assisting Johnson complete the Refinancing. Plaintiffs assert claims for breach of fiduciary duty, professional negligence, violation of the Rule of Professional Conduct 1.13, aiding and abetting breach of fiduciary duty, negligence, tortious interference with contract, contribution, and indemnification. Plaintiffs assert that the Attorney Defendants were the attorneys for XYZ Partners, XYZ Holdings, and the Fee Owners, and, therefore, owed fiduciary duties to these entities, which they breached including by _assisting with the Refinancing even though Pourtavoosi understood the intricacies
of the operating agreements and loan documents and therefore the need to get the Cassaforte Authorization. ”

“The allegations in the Complaint are sufficient to state a claim for breach of fiduciary duty with respect to the claim of the Fee Owners but not with respect to the claim of Cassaforte and FRF.

“To establish a breach of fiduciary duty, the movant must prove the existence of a fiduciary relationship, misconduct by the other party, and damages directly caused by that party’s misconduct” (Poko1k v Poko1k, 115 AD3d 428, 429 [1st Dept 2014]). “[T]he relationship of client and counsel is one of unique fiduciary reliance” and an attorney has the “duty to deal fairly, honestly and with undivided loyalty” ( Ulico Gas. Co. v Wilson, Elser, Moskowitz, Edelman & Dicker, 56 AD3d 1, 9 [1st Dept 2008]). “[I]n the context of an action asserting attorney liability, the claims of malpractice and breach of fiduciary duty are governed by the same standard of recovery … [and] plaintiff must establish the ‘but for’ element of malpractice,”
which requires that “‘but for’ the attorney’s conduct the client … would not have sustained any ascertainable damages” (id. at 10; Weil, Gotshal & Manges, LLP v Fashion Boutique of Short Hi11s, Inc., 10 AD3d 267, 272 [1st Dept 2004]).

All the plaintiffs allege a breach of fiduciary duty against the Attorney Defendants (NYSCEF # 153, 1’s 97-104). Respecting the claim of Cassaforte and FRF, plaintiffs do not explain the basis for the Attorney Defendants owing Cassaforte and FRF a fiduciary duty, so this cause of action fails the first prong of a breach of fiduciary duty claim with respect to those two plaintiffs. Respecting XYZ Partners and XYZ Holdings, plaintiffs assert that the Attorney Defendants were counsel thereto (NYSCEF # 153, 1 98). Even if that were true, which the Attorney Defendants dispute, nonetheless this claim fails for the independent reason that those two are not parties to this action. “