Partnerships and LLCs, real estate and plans to make a lot of money often unravel, and do so in messy ways.  Here, in Shapsis v Kogan ; 2011 NY Slip Op 50014(U) ; Decided on January 7, 2011 Supreme Court, Kings County ; Demarest, J.  we see the tail end of the proceedings, after a US District Court case and personal injury cases have concluded.  Quite a lot of money was at stake.
 

We’ll leave the partnership and LLC matters to others, but plaintiffs also sued the partnership attorneys on a mixed theory of legal malpractice in the way they proceeded with the cases and with a generalized conflict of interest.  The case against the attorneys founders on the lack of privity of the individual clients; it may have succeeded if the LLC had brought the case.

"Plaintiffs’ third cause of action alleges a breach of fiduciary duty by the Sklavos [*6]defendants, seeking damages against them. In order to state a prima face case for a breach of fiduciary duty, " a plaintiff must prove the existence of a fiduciary relationship, misconduct by the defendant, and damages that were directly caused by the defendant’s misconduct’" (Guarino v North Country Mortg. Banking Corp., 2010 WL 5095476 [2nd Dept 2010] quoting Kurtzman v Bergstol, 40 AD3d 588, 590 [2d Dept 2007]). "[W]here. . . the plaintiff’s claims of breach of fiduciary duty are essentially claims of legal malpractice, they are governed by the same standard [for legal malpractice]" (Boone v Bender, 74 AD3d 1111, 1113 "

"Here, plaintiffs’s third cause of action must be dismissed outright as plaintiffs have only alleged that the Slavos defendants were retained by 2417 Ocean Avenue, and thus owe the plaintiffs a fiduciary duty, failing to adequately allege the existence of a fiduciary duty between the Sklavos defendants and the plaintiffs themselves as individuals. It is clear that the Sklavos defendants had no duty to disclose any conflict, if one in fact existed, to the plaintiffs as none of them were represented by the Sklavos defendants or listed as individual parties in either the Mikucki action or the Bouri action. Instead of alleging that a fiduciary duty existed between the Sklavos defendants and themselves, plaintiffs assert an improper derivative claim on behalf 2417 Ocean Avenue, alleging that Sklavos failed to advise 2417 Ocean Avenue that it had no liability for the personal injury lawsuits instituted against it and failed to disclose the conflict of interest created by the Sklavos defendants’ simultaneous representation of 2417 Ocean Avenue and IBM. Although members of an LLC are permitted to bring derivative claims on behalf of the LLC (see Tzolis v Wolff, 10 NY3d 100 [2008]), here, two of the plaintiffs are not even members of the LLC and lack standing to bring a derivative action. Moreover, all three of the plaintiffs seek relief for themselves as individuals instead of relief for the LLC.

Plaintiffs also fail to adequately plead the remaining elements of the cause of action. They do not allege that the Sklavos defendants failed to successfully represent 2417 Ocean Avenue and prevail in the actions or that the LLC incurred damages. Plaintiffs only allege that 2417 Ocean Avenue paid a disproportionate share of the legal fees and settlement costs incurred by both it and IBM, but do not dispute that the Mikucki action was resolved in 2417 Ocean Avenue’s favor, and that no judgment was issued against 2417 Ocean Avenue in the Bouri action. Thus, the third cause of action is dismissed in its entirety. "

The last cause of action "is inadequate as they have failed to allege the existence of an attorney-client relationship between the Sklavos defendants and plaintiffs individually and have failed to submit a retainer agreement or describe the terms of an existing oral agreement. Plaintiffs have only alleged that Shapsis and Malishkevich sat in on some meetings with Sklavos, among others, related to the organization of 2417 Ocean Avenue and that Shekhets is member of 2417 Ocean Avenue, which was represented by Sklavos. These allegations fail to adequately plead the existence of an express agreement between the Sklavos defendants and the plaintiffs to perform legal services. "