Bruges Realty, Corp. v Horowitz   2015 NY Slip Op 30634(U)  April 17, 2015  Supreme Court, New York County Docket Number: 651986/2010  Judge: Saliann Scarpulla is the story of overreaching by an attorney who has been given millions of dollars to invest for several trusts.  He leaves his law firm, engages in investments not suitable for a fiduciary, and loses a lot of money.  What happens?

“There is no dispute that Horowitz provided Diamond, her family and their companies with legal services since 1991. In 2000, Horowitz merged his prior firm with Moritt Hock & Hamroff, forming Moritt Hock Hamroff & Horowitz LLP. Horowitz became partner and head of the firm’s trusts and estates practice. Starting in 2001, Diamond retained Horowitz and Moritt Hock to create and provide legal services for Bruges Trust, a charitable remainder [* 2] unitrust created by Bruges Realty, Corp., a company controlled by Diamond’s family. Under the trust agreement forming Bruges Trust, dated May 31, 2001, Diamond and Cassell were named trustees and Diamond was named the lifetime beneficiary. At some point in 2003 or 2004, Horowitz ceased to be a partner and became senior tax counsel at the firm. 1 On November 17, 2004, Horowitz entered into an agreement with Diamond and Bruges Trust (the “2004 Agreement”), which gave Horowitz the discretion to invest three million dollars of Bruges Trust’s assets in investments “which may or may not be deemed suitable for fiduciary investments.” Starting in late 2004, and continuing through 2006, Horowitz invested over two million dollars of Bruges Trust’s assets in companies in which he held personal investments or other interests. He continued to manage these investment through 2007. In addition, Horowitz allegedly made a number of investments in Web2 Corp., a Moritt Hock client and in which Moritt Hock invested. By agreement dated February 28, 2005, Horowitz and Moritt Hock created 3111 Trust, another charitable unitrust, for 3111 Corp., which Diamond controlled. Under the trust agreement, 3111 Corp. was to receive an annual distribution and Diamond and Daphne Schwartz (“Schwartz”) were named trustees. On March 11, 2005, Horowitz replaced Schwartz as a trustee. Defendants drafted the instruments effecting the change. From late 2005 through 2007, Horowitz invested and managed over four million dollars on behalf of   the 3111 Trust. The investments were made in companies in which Horowitz held personal investments or other interests. Diamond asserts that Horowitz never advised her of his various conflicts of interest, never advised her to seek separate legal counsel after becoming an investment advisor for Bruges Trust and co-trustee for 3111 Trust, and never obtained written waivers for any of the conflicts. Horowitz testified that he informed Diamond of his personal interests in the companies he was investing in for the Trusts, but that he did not believe there was a conflict and so did not advise her as such or seek a written waiver. Horowitz and Moritt Hock acted as the Trusts’ legal counsel from their inception, and continued to do so during the period when Horowitz invested the Trusts’ assets. Plaintiffs allege that Horowitz’s investments caused losses of at least $2, 197 ,000 for Bruges Trust and $954,570 for 3111 Trust. On October 17, 2007, Horowitz entered into an agreement with Diamond and Cassell to repay the losses incurred by Bruges Trust (“2007 Agreement”). Henry E. Klosowski (“Klosowski”), a partner at Moritt Hock who did work for the Trusts, reviewed the 2007 Agreement. Klosowski testified that he did so as a friend and that he did not inform Moritt Hock of the 2007 Agreement, because it concerned Horowitz’s independent investment advice and was unrelated to Horowitz’s legal services for the Trusts. It is undisputed that Horowitz failed to comply with the 2007 Agreement. He remained a trustee of 3111 Trust until plaintiffs commenced this action. Moritt Hock remained plaintiffs’ attorneys through 2009.

Here, the record is replete with evidence of Horowitz’s self-dealing. as a trustee of 3 111 Trust and investment advisor for Bruges Trust. During his deposition, Horowitz admitted to investing the Trusts’ assets in companies in which he had personal investments or other interest. Moreover, 3111 Trust prohibits trustees from engaging in “any act of selfdealing, as defined in Section 4941 ( d) of the [Internal Revenue Code].” However, plaintiffs fail to demonstrate how Horowitz’s conflicts of interest proximately caused their losses. Vlico Cas. Co., 56 AD3d at 11; see also Laub v Faessel, 297 AD2d 28, 31 (1st Dept 2002) (“[a]n essential element of the plaintiffs cause of action for negligence, or for … any … tort, is that there be some reasonable connection between the act or omission of the defendant and the damage which the plaintiff has suffered” [internal quotation marks and citation omitted]). Plaintiffs argue that, but for the investments made by Horowitz while he was conflicted, “plaintiffs would not have suffered the losses resulting from those investments.” But they do not submit sufficient evidence to show that the prohibited investments caused their losses, as opposed to independent financial conditions. Cf Tabner v Drake, 9 AD3d 606, 609 (3d Dept 2004) (denying summary judgment on malpractice claim where parties disputed the substance oflegal advice provided and whether it or independent financial conditions caused client’s loss). Moreover, plaintiffs fail to articulate any distinction between their causes of action for breach of trust and breach of fiduciary, nor do they allege whether the two causes of [* 8] action arise out of common law, contract or both. Therefore, summary judgment is denied with respect to the breach of fiduciary duty and breach of trust causes of action.2 Plaintiffs also fail to demonstrate their prima facie entitlement to summary judgment with respect to the legal malpractice claim. Plaintiffs’ evidence of Horowitz’s conflicts of interest, for which Horowitz never obtained a written waiver, merely demonstrates a breach of the disciplinary rules. “A conflict of interest, even if a violation of the Code of Professional Responsibility, does not by itself support a legal malpractice cause of action.  Schafrann v N. V Famka, Inc., 14 A.D.3d 363, 364 (1st Dept 2005). See also Sumo Container Sta. v Evans, Orr, Pacelli, Norton & Lajfan, 278 A.D.2d 169, 170-171 (1st Dept 2000) (affirming summary judgment dismissal of legal malpractice claim premised on defendant-attorney’s undisclosed conflict of interest as the plaintiffs insurer-appointed attorney, where notice of the conflict of interest was implicit and no issues of fact existed as to whether attorneys breached their duty of care or proximately caused the plaintiff harm); Mergler v Crystal Props. Assoc., 179 A.D.2d 177, 183 (1st Dept 1992) (“the Code of Professional Responsibility was promulgated to establish an ethical standard and to vindicate society’s rights with respect to the conduct oflicensed attorneys, not to delineate substantive rules for the adjudication of the private rights, inter se, of parties”). “