Clients often feel that attorneys are less than trustworthy, and never more often than in the company-executive situation where the company believes that the lawyers are in cahoots with the executive.  Here, in FLYCELL, INC.,  -against- SCHLOSSBERG LLC and MICHAEL T. O’NEIL, Defendants.;No. 11-CV-0915-CM;UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK ;2011 U.S. Dist. LEXIS 126024; October 28, 2011,we see a stunning example.  From the decision:

"Plaintiff, a Delaware corporation with its principal place of business in New York, is a digital media company that primarily offers digital content — such as ringtones, graphics, and games (Compl. ¶ 9) — to the public through internet advertising (id. ¶ 18). Plaintiff can either place the advertising itself, or hire a third party to do so pursuant to an agency agreement. (Id.)

Schlossberg is a limited liability company engaged in the practice of law with five members. Schlossberg is organized and has its principal place of business in Massachusetts, and its five members are citizens of Massachusetts. (Id. ¶ 12.) O’Neil is a member of [*3] Schlossberg, and was the attorney primarily responsible for Plaintiff’s business; Plaintiff was one of Schlossberg’s clients. (Id. ¶ 13.) Schlossberg and O’Neil served as Plaintiff’s general outside counsel since 2005. (Id. ¶ 2.) Beginning at an undetermined time, but no later than 2009, Defendants also represented Flycell’s now-former CEO, Alberto Montesi ("Montesi").

The Court notes that Flycell has separately resolved its claims against Montesi and his network of companies. See Flycell Inc. v. Alberto Montesi and Smart Ads, LLC, No. 10 Civ. 6500 (CM) (THK) (S.D.N.Y.) (the "Smart Ads Action"). In this action, Montesi was ordered by Magistrate Judge Theodore H. Katz to produce communications with the Defendants pursuant to the crime-fraud exception to the attorney-client privilege. Smart Ads Action, Mot. to Compel Hearing Tr., 35:13-14 (Dec. 1, 2010). Magistrate Judge Katz stated at a hearing on December 1, 2010, "There’s no question in my mind that there have been specific facts that have been advanced that lead me to conclude that there’s probable cause to believe that establishing these companies and the business they were supposed to carry on was in furtherance of a crime or fraud." [*4] Id. at 33: 17-22.

B. The Glispa Kickback Scheme

In 2006, Montesi, Glispa LLC ("Glispa"), a company that places advertising on the internet for third parties (id. ¶ 10), and Matrix Management Group, LLC ("Matrix"), a company controlled by a friend of Montesi (id. ¶ 20), entered into a kickbacks scheme. (Id. ¶¶ 6, 22.) Under their arrangement, Glispa, through Gary Lin ("Lin"), its founder and president (id. ¶ 6), paid bribes to Montesi in exchange for Montesi awarding Glispa "lucrative agency agreements" with Flycell. (Id. ¶ 19-20.) These bribes were funneled through Matrix, which held the funds for Montesi’s benefit, and took a cut in exchange (Id. ¶ 22, 83) pursuant to a pair of "consulting agreements executed between the parties in 2006 and 2008 (Id. ¶ 23). Montesi was to receive between 20%-30% of the revenue Glispa received from placing ads with Plaintiff. (Id.)

Defendants Schlossberg and O’Neil came into the story when Glispa and Montesi entered into a third consulting Agreement in 2009, cutting out Matrix, the middleman (the "Consulting Agreement"). (Id.) In this agreement, Montesi agreed to perform "consulting services" for Glispa. (Id. ¶ 31.) In fact, Glispa simply paid Montesi [*5] for directing Flycell’s business its way. On May 29, 2009, Lin, on behalf of Glispa, purported to request that Montesi "provide documentation of [Flycell] board approval" of the Consulting Agreement to "make the illegal payments from Glispa to [Montesi] appear legitimate." (Id. ¶ 32.) Montesi replied, "You must be joking," (id.) and turned to Defendants for advice.

On June 1, 2009, Montesi approached O’Neil to represent him personally and provide advice with respect to this third consulting agreement between Glispa and Montesi. (Id. ¶ 31.) Defendants accepted the engagement without disclosure to or consent from Plaintiff. (Id. ¶ 31, 35.) On the same day, Montesi sent a copy of the Consulting Agreement to Defendants for review. (Id. ¶ 31.) At the time, Defendants were aware that Glispa had pre-existing contracts with Flycell, because O’Neil had reviewed those agreements as Flycell’s counsel in 2006 and March 2009. (Id. ¶ 25, 31.)

O’Neil reviewed the Consulting Agreement, and wrote to Montesi on June 2, 2009, stating that the "Only thing that concerns me here is that they are requiring you to get Flycell Board approval." (Id. ¶ 33.) O’Neil then allegedly revised the agreement so that it [*6] reflected a "false representation" from Montesi that Montesi had obtained board approval, rather than requiring actual board documentation. (Id. ¶ 34.) The parties entered into the agreement on August 1, 2009. (Id. ¶ 83.)

In total, Plaintiff paid Glispa over $3.8 million pursuant to these fraudulent agreements. (Id. ¶ 28.) Plaintiff estimates that Montesi received over $500,000 in kickbacks pursuant to these first two agreements, and $237,000 for the third. (Id. ¶ 23) All services that Glispa purported to perform for Plaintiff could have been performed by Plaintiff in-house. (Id. ¶ 29.) Defendants’ actions also hurt Flycell by allowing the scheme to continue through the Consulting Agreement. (Id. ¶ 35.)"

""A claim for aiding and abetting a breach of fiduciary duty requires: (1) a breach by a fiduciary of obligations to another, (2) that the defendant knowingly induced or participated in the breach, and (3) that plaintiff suffered damage as a result of breach." Lerner v. Fleet Bank, N.A.., 459 F.3d 273, 294 (2d Cir. 2006) (quoting Kaufman v. Cohen, 307 A.D.2d 113, 125, 760 N.Y.S.2d 157 (N.Y. App. Div. 2003)).

Plaintiff must allege that Defendants had actual knowledge of the breach of duty, not mere constructive knowledge. Kaufman, 307 A.D.2d at 125; Brasseur v. Speranza, 21 A.D.3d 297, 299, 800 N.Y.S.2d 669, 671 (N.Y. App. Div. 2005) ("bare allegations that the agent "knew or should have known" of numerous instances of the [primary] breach of fiduciary duty was insufficient to satisfy this element"). Additionally, Plaintiff must allege that Defendants provided "substantial assistance" to Montesi, the primary violator. Id. at 126. "Substantial assistance occurs when a defendant affirmatively assists, helps conceal or fails to act when required [*22] to do so, thereby enabling the breach to occur" or, if a defendant owes a fiduciary duty to the plaintiff, inaction of an alleged aider and abettor constitutes substantial assistance. Id.

As to the first element, the parties do not contest that the Complaint adequately alleges that Montesi breached his fiduciary obligations to Plaintiff. (Compl. ¶¶ 94, 99; Mot. to Dismiss at 19.)

Defendants vigorously contest the second element, however. Defendants claim that Plaintiff does not sufficiently allege that Defendants substantially assisted Montesi’s breach of fiduciary duty (Mot. to Dismiss at 19-20), and that Plaintiff fails to plead "actual knowledge" (Reply at 6-8). I disagree. Reading the "complaint generously, drawing all reasonable inferences" in Plaintiff’s favor, Lee, 557 F. Supp. 2d at 423, Plaintiff does allege that Defendants were "aware of [Montesi’s] fiduciary duties to [Plaintiff]" (Compl. ¶ 96), and yet provided Montesi with substantial assistance in breaching his fiduciary duties (id. ¶ 98).

First, Plaintiff alleges that "O’Neil knew that the companies [Defendants] set up for [Montesi] were being used to defraud [Plaintiff]," yet still prepared documents to conceal Montesi’s [*23] ownership of Smart Ads. (Compl. ¶¶ 47-49.) While the emails referred to may be far from damning, it is a reasonable inference that Defendants knew that Montesi created the Entities to usurp business opportunities that he should have secured or reserved for Plaintiff, and knowingly helped Montesi conceal this fact by hiding his ownership. (Id. ¶ 47-48.)

Plaintiff also alleges that Defendants had actual knowledge that the Consulting Agreement between Montesi and Glispa was illegal, yet persisted in helping Montesi keep the arrangement hidden from Plaintiff by inserting a false representation into the agreement. (Compl. ¶¶ 33-35.) In light of O’Neil’s email stating that he was concerned that Plaintiff’s Board would have to approve the Consulting Agreement, it is a reasonable inference that O’Neil had actual knowledge that Montesi’s arrangement with Glispa was a breach of Montesi’s duty to Plaintiff. (Id. ¶ 33.)

In addition, Plaintiff adequately alleges that Defendants had actual knowledge that Montesi’s activities with the Entities conflicted with his duties as Plaintiff’s CEO because Defendants knew that Montesi’s employment contract with Plaintiff required Montesi to devote substantially [*24] all of his time to Plaintiff’s business. (Compl. ¶ 46.) Plaintiff further alleges that Defendants still assisted Montesi in "carrying out [the Entities’] fraudulent purpose" (Compl. ¶¶ 51-52) in contravention of Montesi’s duties to Plaintiff.

Thus, Plaintiff adequately alleges Defendants’ actual knowledge of Montesi’s breach of fiduciary duty.