In an otherwise run-of-the-mill contract case between an IT provider and a bank, Justice Kornreich illustrates a couple of interesting principles.  The first is that IT providers do not rise to the level of professional engineers for the purpose of allowing tort litigation against them.  The second is the “economic loss doctrine.”

 Cervalis LLC v RBS Holdings, USA, Inc.  2017 NY Slip Op 31973(U)  September 18, 2017
Supreme Court, New York County  Docket Number: 650405/2017  Judge: Shirley Werner Kornreich is a case about computers and a data center.  There were failures.

“Plaintiff provides computer information technology services, including colocation (rental, housing, and/or maintenance of computer servers), power and cooling, security, compliance, and network services. Answer at I ~ 2. Defendant is a Connecticut-based financial services provider who contracted for plaintiffs services, which were to be used by the global financial markets division of The Royal Bank of Scotland.”

“In its Counterclaims (Answer at 6-16), defendant alleges that on November 28, 2015, at approximately 12:50 P.M., plaintiff caused a power outage in the Data Center by failing to properly return the fire alarm control panel and related systems to normal operation following a test of the fire alarm system.~~ 10-18. Defendant contends that the power outage disrupted its computer systems, which were housed in the Data Center(~ 19); that plaintiff prolonged the outage by performing unnecessary troubleshooting (~ 20); that the outage lasted for more than eight hours (~ 23 ); and that plaintiff failed to promptly notify defendant of the power outage as it was required to do pursuant to contract.~ 25; Dkt. 20 at 8 (Addendum). Moreover, defendant claims that when defendant became aware of the outage, plaintiff refused certain access to defendant personnel, again in violation of contract.~ 27; Dkt. 20 at 7 (Addendum). Finally, defendant surmises that to avoid the contractual consequences of a power outage lasting longer than two hours (a “Catastrophic Failure,” discussed below), plaintiff attempted to restore power at the Data Center in an abrupt fashion, causing unnecessary damage to defendant’s equipment, data, and operations. At about 9: 15 P.M., normal operations at the Data Center were finally restored.”

Here are the interesting bits:

  1.  “[A] simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated.” Clark-Fitzpatrick, Inc. v Long Island R. Co., 70 NY2d 382, 389 (1987). Additionally, under the so-called economic loss doctrine, “a contracting party seeking only a benefit of the bargain recovery, viz., economic loss under the contract, may not sue in tort …. ” 17 Vista Fee Assocs. v Teachers Ins. & Annuity Ass ·n of Am., 259 AD2d 75, 83 (I st Dept 1999); see also Sommer v Fed. Signal Corp., 79 NY2d 540, 552 ( 1992) (“[W]here plaintiff is essentially seeking enforcement of the bargain, the acfion should proceed under a contract theory.”). 5 However, where a party to a contract breaches a “legal duty independent of contractual .obligations … imposed by law as an incident to the parties’ relationship,” that party “may be subject to tort liability for failure to exercise reasonable care, irrespective of their contractual duties.” Sommer, 79 NY2d at 551. “
  2. “While courts have recognized a professional duty for some engineers, see, e.g., Hydro Inv ‘rs, Inc. v Trafalgar Power, Inc., 227 F.3d 8 (2d Cir. 2000), operating a computing data center does not implicate the same policy concerns as traditional engineering professions. See Sommer, 79 NY2d at 551-52 (“In [some] instances, it is policy, not the parties’ contract, that gives rise to a duty of due care.”); see also Richard A. Rosenblatt & Co. v Davidge Data Sys. Corp., 295 AD2d 168, 169 (1st Dept 2002) (“[T]he courts of this State do not recognize a cause of action for professional malpractice by computer consultants.”).”

In this legal malpractice case, the attorney has the right to represent himself.  Question:  How does insurance filter into this?  In Herczl v Feinsilver  2017 NY Slip Op 06528 Decided on September 20, 2017 Appellate Division, Second Department

“In 2010, the defendant David Feinsilver, an attorney, commenced representing the plaintiff in a legal matter unrelated to this action. While that unrelated matter was pending, Feinsilver and the plaintiff entered into an arrangement to purchase properties and “flip” them for a profit. Feinsilver and the plaintiff agreed on the terms of the arrangement, which the plaintiff refers to as a “joint venture” and Feinsilver refers to as an “independent contractor” agreement. The agreement set out, among other matters, their roles and responsibilities, and the division and allocation of profits and losses.

A dispute arose with respect to two properties in Brooklyn, and, in August 2013, the plaintiff commenced this action against Feinsilver and other entities related to Feinsilver. The plaintiff alleged, among other things, breach of fiduciary duties, breach of contract, fraud, and legal malpractice. The defendants interposed various counterclaims.

In December 2013, as relevant here, the plaintiff moved to disqualify Feinsilver and his law firm, The Feinsilver Law Group, from representing the defendants in this action. In an order dated June 6, 2014, the Supreme Court, inter alia, granted the motion with respect to Feinsilver himself, disqualifying him from representing any of the defendants, including himself. The defendants appeal from so much of the order as disqualified Feinsilver from representing himself.

An attorney, like any other litigant, has the right, both constitutional (see NY Const, [*2]art I, § 6) and statutory (CPLR 321[a]), to self-representation (see Walker & Bailey v We Try Harder, 123 AD2d 256, 257). Although the right is not absolute, any restriction on it must be carefully scrutinized (see id. at 257; Oppenheim v Azriliant, 89 AD2d 522, 522). Here, the plaintiff failed to demonstrate any compelling reason why Feinsilver should not be allowed to represent himself in this action (see Old Saratoga Sq. Partnership v Compton, 19 AD3d 823, 825; Walker & Bailey v We Try Harder, 123 AD2d at 257; Oppenheim v Azriliant, 89 AD2d at 522). Accordingly, the Supreme Court erred in disqualifying Feinsilver from representing himself in this action (see Old Saratoga Sq. Partnership v Compton, 19 AD3d at 825; Walker & Bailey v We Try Harder, 123 AD2d at 257; Azriliant v Oppenheim, 91 AD2d 586, 587; Oppenheim v Azrilant, 89 AD2d at 522).

We’re proud to present our “Judiciary Law § 487 Suffers an Earthquake” article from today’s New York Law Journal.  It discusses the recent sweep of JL § 487 law, including Bounkhoun v. Barnes et al., Case No. 15-cv-631A,  which now awaits a decision by District Judge Joseph Arcara whether to accept the recommendation.

A recent Judiciary Law §487 case in the Western District of New York has violently shaken the basic understanding of the elements of this common-law cause of action. We predict a Second Circuit case, and potentially a Certified Question to the New York Court of Appeals. Here are the particulars.

Attorneys are interlaced throughout our country and world. In the United States litigation is rampant, all-encompassing and shot through with discontent. Clients are looking for superior work and fair pricing. Attorneys are interested in getting work, succeeding at that work and being paid. It is both obvious and simple to say that the two sets of desires do not always mesh.

When expectations are not met, there are a series of well-trodden paths down which the clients and the attorneys move. Legal malpractice claims are mirrored in attorney fee law suits. There is a symmetry to it all, from a perspective far enough above the fray to have a clear picture of the whole scene.

Here is a good example of a “no-damage” claim against an attorney.  The claim fails in this case for two reasons.  The first reason is that plaintiff has not been harmed.  No damages can be pled.  The second reason is that plaintiff cannot really say what the attorney might have done wrong.

Miami Capital, LLC v Hurwitz 2017 NY Slip Op 31925(U) September 12, 2017 Supreme Court, New York County Docket Number: 150310/2016 Judge: Saliann Scarpulla.

“In 2013, Miami Capital hired Hurwitz to provide legal services for its purchase of real property located at 218 West l l 6th Street, New York, New York (“the property”). The real estate transaction was consummated through two steps. First, the owner of the property, a non-for-profit corporation, Edith Pennamon Apartments Housing Development Fund Corporation (“Seller”), entered into a contract of sale for the property with 1111, Inc. Second, 1111, Inc. assigned all rights in the contract of sale and the property to Miami Capital. The purchase price of the property under the contract of sale was $1,400,000.

After the sale, West Harlem Community Organization, Inc. (“WHCO”) commenced an action against Miami Capital to rescind the purchase of the property and the deed. See West Harlem Communi_ty Organization, Inc. v. Miami Capital, LLC (Index No. 651003/2015). In that action, WHCO argued that the sale must be rescinded because the Seller’s officers failed to obtain approval from the New York State Supreme Court or the New York State Attorney General’s Office, as required under the New York Not-forProfit Corporation Law. In addition, WHCO alleged that Miami Capital knew or should have known that it was necessary to obtain approval for the purchase of the property. Shortly thereafter, Miami Capital commenced this legal malpractice action against Hurwitz. Miami Capital alleges that Hurwitz breached his duty of care by: (i) failing to obtain approval of the sale from New York Supreme Court; (ii) failing to obtain approval of the sale from the New York Attorney General; (iii) failing to comply with New York Not-for-Profit Corporation Law§ 510; (iv) failing to comply with New York Not-forProfit Corporation Law§ 511; and (v) failing to obtain clearance of title exceptions prior to the closing of the transaction. Miami Capital seeks $1,400,000 in damages, plus interest, costs, and attorney’s fees. Hurwitz now moves to dismiss the complaint because: (I) his representation did not fall below the standard of care for a New York attorney; (2) no proximate cause exists between the alleged negligence and damages; and (3) damages are not sufficiently alleged because Miami Capital remains the owner of the property and WHCO’s action against Miami Capital was discontinued.”

“Miami Capital does not plead that it suffered any damages from the WHCO action, which has been discontinued. Instead, the damages alleged by Miami Capital relate to a subpoena issued by the New York Attorney General’s Office. The subpoena seeks a deposition of “a person with knowledge concerning the title insurance for the sale of the Property” as well as documents related to Miami Capital’s purchase of the property. Although Miami Capital has received a subpoena frorn the Attorney General, Miami Capital does not plead any damages that it has suffered resulting from the subpoena or the Attorney General’s investigation. While Miami Capital anticipates that at some point in the future it could be subject to a rescission claim and could possibly lose the property because of the Attorney General’s investigation, at this point in time these alleged damages are purely speculative and not yet ripe. Accordingly, I find that Miami Capital failed to adequately plead damages to support a legal malpractice action. Moreover, Miami Capital does not adequately allege that Hurwitz breached his duty of care as a lawyer. NPCL § 510 requires a not-for-profit corporation to obtain . approval for the sale of substantially all its assets from the New York Supreme Court or Attorney General’s Office. The contract of sale for the property placed that burden on the Seller, requiring the Seller to obtain an order from the New York Supreme Court “[i]n the event that judicial consent is required in order for the Seller as a Not for profit Corporation to transfer and sell the Premises.” 1 . The Seller’s attorney informed Hurwitz by letter dated November 13, 2013 that the Seller “does not need [court] approval because the property is not ‘substantially all’ of our assets and/or real property.” The documents submitte.d thus show that the Seller, not Miami Capital was contractually obligated, to obtain court approval for the transaction if necessary, and that the Seller’s attorney represented to Miami Capital that court approval was not necessary under NPCL § 510. Under these circum~tances, Miami Capital has not adequately plead that Hurwitz breached his duty of care as its lawyer by not obtaining court approval for the sale. For the above stated reasons, Hurwitz’s motion to dismiss Miami Capital’s complaint is granted. “

In a fact pattern that could have come from a bar exam, Justice Bannon dissects the fraud-discovery-statute of limitations issues arising from a real-estate fraud scheme which is said to have involved attorneys, lenders, borrowers and developers.

D. Penguin Bros., Ltd. v City Natl. Bank  2017 NY Slip Op 31926(U)  September 8, 2017
Supreme Court, New York County  Docket Number: 158949/2014 is about some lenders who lost a large amount of money.

“The plaintiffs served the complaint in Action No. 1 on January 20, 2016, and the complaint in Action No. 2 on May 26, 2015, alleging that the defendants improperly diverted approximately $10 million rightfully belonging to the plaintiffs from numerous real estate investment accounts and escrow accounts maintained for the plaintiffs’ benefit. The Williams defendants moved to dismiss the complaint as against them (Action No. 1, SEQ 002) and Spiegelman moved to dismiss the complaint against him (Action No. 2, SEQ 002) but, by orders dated July 26, 2016, and July 20, 2016, respectively, the defendants were permitted to withdraw the motions when the plaintiffs filed amended complaints in both actions during the pendency of the motions.

The amended complaint in Action No. 1 asserts 52 causes of action and the amended complaint in Action No. 2 asserts 78 causes of action alleging, inter alia, conversion, fraud, forgery, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, gross negligence, professional malpractice, and breach of contract, and also seeking an accounting.

The amended complaints allege that, in 2005 and 2008, the plaintiffs were induced to invest $4,500,000 with the defendants by false representations that the defendants were going to develop residential buildings for inclusion in federally subsidized housing programs, and that several of the defendants forged deeds and various approvals required from municipal agencies to falsely show the plaintiffs that closings on the sales of the buildings were effected in 2009, and that municipal approvals were acquired thereafter. The amended complaints further alleged that the Williams defendants and Spiegelman misappropriated the invested and escrowed funds without ever entering into actual development agreements or obtaining necessary governmental approvals. The plaintiffs also assert that Spiegelman, on behalf of the Williams defendants and himself, obtained unauthorized loans in the plaintiffs’ names in the sum of $2,200,000, and pocketed the loan proceeds, leaving the plaintiffs responsible for repayment. The plaintiffs aver that the defendants provided them with forged and fraudulent memoranda, thus concealing their scheme from the plaintiffs, and that the plaintiffs did not discover the thefts until February 3, 2011. ”

“”Under res judicata, or claim preclusion, a valid final judgment bars future actions between the same parties on the same cause of action.” Parker v Blauvelt Volunteer Fire Co., 93 NY2d 343, 347 (1999); see Matter of Reilly v Reid, 45 NY2d 24 (1978). As a general rule, New York applies a “transactional approach” to analyzing the doctrine of res judicata, so that “once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy.” O’Brien v Syracuse, 54 NY2d 353, 357 (1981). ” “Since the prior federal court actions were dismissed for failure to state a claim under federal law, and the federal court declined to exercise supplemental jurisdiction over the pendent state-law causes of action, and thus not on the merits, the causes of action asserted here against the Williams defendants, save NBUF, as well as the causes of action asserted against Spiegelman, are not barred by res judicata. See Bielby v Middaugh, 120 AD3d 896 (4th Dept. 2014). The plaintiffs correctly contend that the dismissal of the state-court action against NBUF on the ground that it was time-barred does not have a res judicata effect upon the causes of action asserted against the remaining Williams defendants or Spiegelman because the statute of limitations defense was personal to NBUF and there was no privity between NBUF and the other Williams defendants. See Israel v Wood Dolson Co., 1 NY2d 116 (1956); see also John J. Kassner & Co., Inc. v City of New York, 46 NY2d 544 (1979). “

Professionals are often sued in both tort and contract.  So what is the difference?  One is a general wrong to the public and one is a specific wrong to a contracting party.  Judge Scarpulla discusses the issue in City of New York v Eastern Shipbuilding Group, Inc.
2017 NY Slip Op 31906(U)  September 7, 2017  Supreme Court, New York County  Docket Number: 452725/2014.  The case involves fireboats.

“This action arises out of the alleged defective design and construction of two fireboats, 343 and Firefighter II, for the Fire Department of New York (“FDNY”). In July 2005, FDNY contracted with RTL, an engineering firm, to design and oversee the construction of the fireboats, and selected ESG to complete the construction. Though no longer a defendant in this action, AMSEC, LLC (“AMSEC”) agreed with FDNY in May 2008 to act as the “owner’s representative.” The City formally accepted delivery of fireboats 343 and Firefighter II in 2010 after completing sea trials and final inspection. In 2014, both fireboats were taken from service and dry-docked for inspection and defect correction. The City alleges that the fireboats were a major investment for FDNY, and numerous design and construction flaws, including a lack of corrosion prevention measures, have caused severe and premature damage to the fireboats. To address the fireboats’ design and construction flaws, the City attests that it has spent nearly two million dollars in costs and repairs and expects to spend another million dollars in · additional necessary costs and repairs. ”

“Generally, “[ w ]here the plaintiff is merely seeking the benefit of its agreement, it is limited to a contract claim.” Dormitory Auth. Of State v. Samson Const. Co., 137 A.D.3d 433, 434 (1st Dep’t 2016). “Where, however, the particular project … is so affected with the public interest that the failure to perform competently can have catastrophic consequences; a professional may be subject to tort liability as well.” Id. (citations and quotations omitted). Here, there is a factual question whether the fireboats at issue were so affected with the public interest that RTL’s alleged failure to comply with the relevant standards could result in catastrophic consequences. RTL’s assertion that the fireboats merely failed to perform as anticipated does not eliminate the issue of fact of whether accessible fireboats to address an issue, e.g., a fire on the City waterfront, could have catastrophic consequences. “

Maroulis v Sari M. Friedman, P.C.  2017 NY Slip Op 06437  Decided on September 13, 2017
Appellate Division, Second Department is a textbook example of why approximately 40% of Judiciary Law § 487 cases are dismissed.  The Courts don’t really like them, and lack of damages proximately caused by the violation is the stated reason.  Here, the legal malpractice claims were dismissed on the theory after settlement, one must show that the attorneys effectively compelled that settlement.

“The defendants were also entitled to dismissal of the cause of action alleging a violation of Judiciary Law § 487, albeit on a ground different from that articulated by the Supreme Court. “[A]n injury to the plaintiff resulting from the alleged deceitful conduct of the defendant attorney is an essential element of a cause of action based on a violation” of Judiciary Law § 487 (Rozen v Russ & Russ, P.C., 76 AD3d 965, 968). Thus, to state a cause of action alleging a violation of Judiciary Law § 487 , the plaintiff must “plead allegations from which damages attributable to the defendants’ conduct might be reasonably inferred” (Mizuno v Nunberg, 122 AD3d 594, 595 [internal quotation marks and brackets omitted]; see Gumarova v Law Offs. of Paul A. Bornow, P.C., 129 AD3d 911, 912; Mizuno v Barak, 113 AD3d 825, 827). Here, the plaintiff failed to plead that he suffered any damages as a result of Friedman’s alleged misconduct.”

 

Privity is an essential element of standing to bring a legal or other professional malpractice claim.  Lack of privity reduces the ability to sue (some other person’s attorney) to fraud, malice or collusion.  So privity is ultra-important.  What happens when a stockholder wishes to sue the corporations attorney?  In that case the claim is either direct or derivative.

Judge Kornreich, in 1993 Trust of Joan Cohen v Baum   2017 NY Slip Op 30894(U)
May 2, 2017 Supreme Court, New York County Docket Number: 150058/2015 discusses how to determine whether the claim is direct or derivative.

“The First Department has adopted Delaware’s Tooley test for determining whether a claim is direct or derivative, which requires the court to examine “the nature of the wrong and to whom the relief should go.” Yudell v Gilbert, 99 AD3d I 08, 114 (I st Dept 2012), quoting TooleyvDonaldwn, Lufkin &.Jenrette, Inc., 845 A2d 1031, 1033 (Del 2004). For a claim to be direct, “[t]he stockholder’s claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.” Id. (emphasis added). “Thus, under Tooley, a court should consider ‘(I) who suffered the alleged harm (the corporation or the stockholders); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders individually).”‘ Id.; see NAF Holdings, LLC i: Li & Fung (Trading) Ltd., 118 A3d 175, 180 (Del 2015) (an “important initial question has to be answered: does the plaintiff seek to bring a claim belonging to her personally or one belonging to the corporation itself?”). “[E]ven where an individual harm is claimed, if it is confused with or embedded in the harm to the corporation, it cannot separately stand.” Serino v Lipper, 123 AD3d 34, 40 (1st Dept 2014). The Baum Parties’ claims against Manocherian are derivative. They are all based on Manocherian’s duties to Langham as its “Tax Matters Partner”. While the precise meaning of “Tax Matters Partner” is somewhat unclear, there is no dispute (and the court assumes for the purpose of this motion) that Manocherian had contractual and fiduciary duties to Langham and the Trusts with respect to the tax matters he handled on their behalf. A successful claim for breach of such duties would result in recovery going to Langham or the Trusts. Baum, to be clear, was not a beneficiary, and thus a loss suffered by the Trusts is not a loss that affects Baum. Baum, personally, could not recover from Manocherian . ”

 

Kimbrook Rte. 31, L.L.C. v Bass  2017 NY Slip Op 01083 [147 AD3d 1508]  February 10, 2017
is the Appellate Division, Fourth Department’s latest JL §487 case.  It reversed Supreme Court’s dismissal of the complaint. It has two significant lessons.

“Plaintiffs commenced this Judiciary Law § 487 action against defendant based on her conduct when representing plaintiffs’ adversary in a foreclosure action. We agree with plaintiffs that Supreme Court erred in granting defendant’s motion to dismiss the complaint. Although plaintiffs were aware of the alleged misconduct during the pendency of the prior foreclosure action, they are not precluded from bringing a plenary action alleging a violation of Judiciary Law § 487 provided that they are not collaterally attacking the judgment from the prior action (see Melcher v Greenberg Traurig LLP, 135 AD3d 547, 554 [2016]; Chevron Corp. v Donziger, 871 F Supp 2d 229, 261-262 [2012]; see generally Stewart v Citimortgage, Inc., 122 AD3d 721, 722 [2014]). Indeed, the language of the statute does not require the claim to be brought in a pending action (see § 487; Melcher, 135 AD3d at 554). Here, plaintiffs are seeking to recover damages for additional legal fees made necessary by defendant’s alleged misconduct in the foreclosure action, and they are not collaterally attacking the judgment of foreclosure (see generally Amalfitano v Rosenberg, 12 NY3d 8, 15 [2009]).

We further agree with plaintiffs that the doctrine of collateral estoppel does not preclude their claim. The doctrine of collateral estoppel has two requirements: (1) “the identical issue necessarily must have been decided in the prior action and be decisive of the present action,” and (2) “the party to be precluded from relitigating the issue must have had a full and fair opportunity to contest the prior determination” (Kaufman v Eli Lilly & Co., 65 NY2d 449, 455 [1985]; see Ackman v Haberer, 111 AD3d 1378, 1379 [2013]). In the foreclosure action, plaintiffs Kimbrook Route 31, L.L.C. (Kimbrook) and Philip J. Simao (Simao) moved before this Court to reduce the amount of the undertaking necessary to stay execution of the judgment of foreclosure pending the outcome of their appeal from that judgment. After we granted the motion in part, Kimbrook and Simao cross-moved for sanctions in this Court based on defendant’s conduct in procuring an affidavit from the receiver of the property in opposition to the motion to reduce the amount of the undertaking, and we denied the cross motion. A motion for sanctions for frivolous conduct (see 22 NYCRR 130-1.1 [c]) is not the same as a cause of action for attorney misconduct (see Judiciary Law § 487). We therefore conclude that collateral estoppel does not apply, inasmuch as the identical issue was not raised in the foreclosure action (see Melcher, 135 AD3d at 553-554).”

Last week we reported a stunning decision in the Melcher case which gutted its damage claim.  Today, Christine Simmons in the New York Law Journal reports that the trial is stayed pending an appeal.  It will be the third appeal in the case which has gone up to the AD, to the New York Court of Appeals, and back down.  She writes:

“Shortly after a Manhattan judge gutted a former hedge fund manager’s potential damages against Greenberg Traurig, the judge has stayed the upcoming trial to allow for an appeal.

The 2007 case is now on at least its third appeal, promising to prolong a legal battle that has spawned unwelcome headlines for the firm for a decade. Greenberg Traurig appealed twice before to the Appellate Division, First Department.

James Melcher, 77, was seeking about $16.5 million in damages from a Section 487 attorney deceit claim against Greenberg and its former shareholder, Leslie Corwin. Melcher claims Greenberg and Corwin helped their client deceive the court after the client claimed he accidentally burned a critical document while making tea.”