The privity rule in legal malpractice is both a policy and a substantive nightmare for peripheral clients.  These include the beneficiary, the individual in a corporate setting and others.  The exception permits a law suit when there is fraud, collusion, malice or special circumstances.  The exception is rarely invoked, and the “special circumstances” portion even more rarely.  Thus, Deep Woods Holdings LLC v Pryor Cashman LLP,  2016 NY Slip Op 08156 .  Decided on December 6, 2016   Appellate Division, First Department is very unusual.

“Defendant Pryor Cashman LLP represented nonparty David Lichtenstein in a transaction in which Lichtenstein was to purchase $10 million worth of stock in nonparty Park Avenue Bank. Before the transaction could close, nonparty Savings Deposit Insurance Fund of the Republic of Turkey (SDIF) sued the holder of 99% of the bank’s shares and obtained a restraining order preventing any transfer of the shares (Deep Woods Holdings, L.L.C. v Savings Deposit Ins. Fund of the Republic of Turkey, 745 F3d 619, 621 [2d Cir 2014], cert denied __ US __, 135 S Ct 964 [2015]).

On June 22, 2004, Lichtenstein and SDIF entered into a stipulation, pursuant to which Lichtenstein had the right to exercise a call option to buy shares of stock in the bank for a specified sum, provided Lichtenstein exercised his right within 45 days after SDIF was able to deliver the shares. SDIF was able to deliver the shares on July 12, 2005, but Pryor Cashman did not exercise Lichtenstein’s call option until November 2, 2005 (Deep Woods, 745 F3d at 623), and SDIF then refused to honor it.

Thereafter, Pryor Cashman recommended to Lichtenstein that he, together with nonparties Donald Glascoff, chairman of the bank, and Charles Antonucci, form plaintiff Deep Woods Holdings LLC, and that Lichtenstein assign the call option to Deep Woods, which would then sue SDIF to exercise the call option. In or about 2007, Pryor Cashman organized Deep Woods, drafted the assignment, and insisted on acting as counsel for Deep Woods in the litigation against SDIF. The assignment read in its entirety: “In consideration of the issuance to David Lichtenstein (“Assignor”) of a 75% interest in Deep Woods Holdings LLC, a Delaware limited liability company (“Deep Woods”), as described in the Deep Woods Operating Agreement dated February 6, 2007, the Assignor hereby assigns, transfers and delivers to Deep Woods his entire right, title and interest in and to the option contained in Paragraph 8 of that certain Stipulation dated June 22, 2004 between the Assignor and [SDIF].” Pryor Cashman did [*2]not draft the assignment so as to specifically assign any tort claims Lichtenstein might have in connection with the exercise of the call option to Deep Woods.

According to Mr. Glascoff, when Pryor Cashman formed Deep Woods and prepared the assignment, it acted on behalf of Lichtenstein, the other members of Deep Woods, and Deep Woods itself. Mr. Glascoff further alleges that, during this process, Pryor Cashman was silent on the issue of whether the assignment transferred tort claims, but that it was Mr. Glasscoff’s understanding that it did, and, if he had understood that it did not, he would have insisted on adding any necessary language so that it did.

At the trial level, Deep Woods won $25.3 million in damages. However, the Second Circuit reversed, finding that the call option had not been not exercised in a timely manner (Deep Woods, 745 F3d at 620).”

“However, accepting plaintiff’s affidavit in opposition to defendants’ motion as true, we find that plaintiff sufficiently pleaded that defendants should be equitably estopped from arguing that the assignment did not assign tort claims. Contrary to defendants’ contention, estoppel can be based on silence as well as conduct (see e.g. Rothschild v Title Guar. & Trust Co., 204 NY 458, 462 [1912]). Under these circumstances, where defendants drafted the assignment at a time when it represented both Lichtenstein and plaintiff, and that interpreting the assignment to exclude tort claims would mean that neither the assignor nor plaintiff, the assignee, would be able to sue defendants for malpractice for failing to exercise the call option in a timely manner, we find that the “special circumstances” exception to the privity requirement applies (see [*3]generally Estate of Schneider v Finmann, 15 NY3d 306, 308-309 [2010]; Good Old Days Tavern v Zwirn, 259 AD2d 300 [1st Dept 1999]). To do otherwise might insulate defendants from liability for their alleged wrongdoing.”