In Gad v Kramer Levin Naftalis & Frankel, LLP 2022 NY Slip Op 34357(U) December 20, 2022 Supreme Court, New York County Docket Number: Index No. 156841/2021
Judge: Margaret A. Chan Siblings fight long and hard over a very lucrative business, resulting in years of litigation, costly attorney fees, and the ultimate try at selling a portion of the business at a vast profit. For one of the siblings, it goes very wrong. He turns to legal malpractice after the loss of the sale.
Two grounds were advanced to dismiss: lack of standing and speculative damages. We discuss standing in this article.
Albert is a 45% shareholder of Almod Diamonds Ltd. (Almod), a closely held New York corporation that is family owned and operated (NYSCEF #13 – amended complaint, ,r 8). Albert’s siblings, Morris Gad (Morris) and Donna Gad Hecht (Donna), own the remaining 45% and 10% of the shares, respectively (id.). The Gad siblings have been in conflict for years over the control and operations of Almod, and Donna brought a lawsuit in 2014 against Albert, Morris, and Almod in connection with those conflicts (the Donna Litigation) (id., ,r,r 9, 16).
In April or May 2016, Albert retained defendants for legal advice concerning the business disputes involving his family members, including the Donna Litigation (id., ,r,r 9-15). The parties agreed that defendants would charge a flat fee of $10,000 per month, which was subsequently increased to $15,000 per month starting from May 2018 (id.).
While defendants did not represent Albert in the Donna Litigation, they
represented Albert in negotiating and reaching a settlement with Donna (id., ,r,r 16-
19). Albert asked defendants to protect his financial interests and made clear that
any settlement documents must include certain key points, including that (1) any
“true-up” payments to Donna shall be calculated in consideration of her previous
sale of low-quality jewelry inventory to Almod, which was allegedly improper and
unauthorized, (2) a mechanism shall be included by which either Albert or Morris is
immediately elected as the CEO of Almod, (3) all shareholder distributions, salaries,
and expenses, including legal expenses, must continue to be allocated 45/45/10
according to each shareholder’s respective interest in Almod, and (4) if Almod was to
form an independent board of directors, defendants were to vet any potential
Albert-nominated directors who should represent Albert’s interests and be highly
experienced in running retail businesses (amended complaint, ,19-20).
On June 12, 2018, defendants presented Albert with finalized settlement documents, advising Albert to sign them and assuring him that the settlement agreement and the shareholder and voting agreement supplement contained all key provisions Albert wanted (id., ,r 23). Albert alleges that he reminded defendants that he was busy operating the company and was relying on defendants’ assurances when he executed the documents (id., ,r,r 22-24). After Donna and Morris executed the settlement documents, the documents became binding and the Donna Litigation was discontinued (id.).
Albert alleges that the settlement documents did not include the key
provisions defendants assured to be included, causing ascertainable damages to him
(id., ,r,r 26-39, 44).”
Standing
As a threshold matter, defendants move to dismiss the legal malpractice claim for lack of standing, arguing that as a shareholder of Almod, Albert has no individual cause of action for the injury to Almod. Defendants argue that since the harm Albert allegedly suffered is essentially the lost value of his investment in Almod, the claim is derivative but not direct.
Defendants’ arguments overlook the nature of this action. Although Albert is a shareholder of Almod and the at-issue settlement has impacts on the company, this action centers around defendants’ attorney-client relationship with Albert in their representation of Albert’s interest in settling the Donna Litigation. In the hearing held on July 19, 2022, defendants also made clear that they represented only Albert, not the company Almod, in the settlement (NYSCEF # 29-Tr 4:15-21). Also, the amended complaint alleges harm to Albert individually as opposed to Almod. As the settlement concerns the Donna Litigation in which Albert was personally named as a defendant, the settlement agreement directly impacts on Albert’s personal legal and financial interests. Therefore, Albert has standing to bring the legal malpractice claim with respect to defendants’ representation of him in the settlement (Delos Ins. Co. v Smith & Laquercia, LLP, 84 AD3d 668, 669 [1st Dept 2011] [“[plaintiff] has standing to pursue its claims against defendant since it is undisputed that defendant represented [plaintiff]” in the underlying litigation]; The Exeter Law Group LLP v Immortalana Inc., 2016 WL 7188559, *3 [Sup Ct, NY County, Dec. 9, 2016] [individual owners of a corporation have standing in a legal malpractice claim against their attorneys for negligently structuring their business ventures]).”