Plaintiff retains attorney to arrange for a tax free gift to her son.  The IRS cutoff for tax free gift v. taxable gift is $1 million.  She did not have a million in cash.  However, she owned a valuable building in Manhattan. So, the law firm selected a Real Estate appraiser and arranged for the transaction.  Problem?  The IRS challenged, and Plaintiff had to pay $ 180,000 in additional tax.  Was the law firm responsible for the mistake of the RE appraiser, or was the appraiser an independent contractor for whom they were not responsible?

Put another way, is this a Kleeman v. Rhinegold problem or not?  There the attorney was responsible for negligent process service.  Here, in Goldstein v Stern Keiser & Panken, LLC
2013 NY Slip Op 32666(U)  October 18, 2013  Supreme Court, New York County  Docket Number: 157177/12  Judge Joan A. Madden decided that the attorneys were not responsible.

From Kleeman : "The most often cited formulation is that a duty will be deemed nondelegable when "`the responsibility is so important to the community that the employer should not be permitted to transfer it to another’" (id., at 119, quoting Prosser and Keeton, op. cit., at 512). This flexible formula recognizes that the "privilege to farm out [work] has its limits" and that those limits are best defined by reference to the gravity of the public policies that are implicated (5 Harper, James and Gray, Torts § 26.11, at 73 [2d ed]; see also, id., at 76-77).

Viewed in the light of these principles, the duty at issue here — that owed by an attorney to his or her client to exercise care in the service of process — fits squarely and neatly within the category of obligations that the law regards as "nondelegable." Manifestly, when an individual retains an attorney to commence an action, timely and accurate service of process is an integral part of the task that the attorney undertakes (see, 5 Harper, James and Gray, op. cit., at 76-77; cf., Feliberty v Damon, supra, at 120). Furthermore, proper service of process is a particularly critical component of a lawyer’s over-all responsibility for commencing a client’s lawsuit, since a mistake or oversight in this area can deprive the client of his or her day in court regardless of how meritorious the client’s claim may be. Given the central importance of this duty, our State’s attorneys cannot be allowed to evade responsibility for its careful performance by the simple expedient of "farming out" the task to independent contractors.

The existence of an extensive and comprehensive Code of Professional Responsibility that governs the obligations of attorneys to their clients reinforces our conclusion. Under the Code, a lawyer may not "seek, by contract or other means, to 276*276 limit prospectively the lawyer’s individual liability to a client for malpractice" (DR 6-102, 22 NYCRR 1200.31). Moreover, the Code forbids lawyers from "[n]eglect[ing] legal matter[s] entrusted to [them]" (DR 6-101 [A] [3], 22 NYCRR 1200.30 [a] [3]), enjoins them to assist in "secur[ing] and protect[ing] available legal rights" (EC 7-1) and requires them to represent their clients as zealously as the "bounds of the law" permit (Canon 7). All of the latter ethical and disciplinary considerations are implicated when a client’s lawsuit is undermined — or even defeated — as a consequence of carelessness in the service of process.

Our conclusion is also supported by the perceptions of the lay public and the average client, who may reasonably assume that all of the tasks associated with the commencement of an action, including its formal initiation through service of   process, will be performed either by the attorney or someone acting under the attorney’s direction. While it may be a common practice among attorneys to retain outside agencies like Fischer’s to assist them in effecting service, that custom is not necessarily one of which the general public is aware. Even where a client is expressly made aware that a process serving agency will be retained, it is unlikely that the client will understand or appreciate that the process serving agency’s legal status as an "independent contractor" could render the retained attorney immune from liability for the agency’s negligence. Under established principles, the client’s reasonable expectations and beliefs about who will render a particular service are a significant factor in identifying duties that should be deemed to be "nondelegable" (see, Restatement, op. cit., § 429; see also, Feliberty v Damon, supra, at 120).

Finally, we conclude that permitting lawyers to transfer their duty of care to process servers would be contrary to sound public policy. In this State, licensed attorneys have been granted an exclusive franchise to practice law, with the understanding that they have both the specialized knowledge and the character required to represent clients in a competent, diligent and careful manner. Under this system, lawyers are authorized to hold themselves out as being uniquely qualified to manage their clients’ legal affairs, a task that unquestionably includes the commencement of lawsuits. While it is true that the State also licenses nonlawyers to perform certain discrete, law-related tasks such as service of process (see, General Business Law art 8), the existence of that licensing system certainly does not evince a governmental intent to 277*277 relieve attorneys of the responsibilities implicit in their franchise."

From Goldstein:   In the present matter, where there is no allegation that SKP was negligent in choosing JDM, where there is no non-delagable duty, or dangerous condition, the attorney defendants are not liable for JDM’s alleged negligence iri preparing the report.  Plaintiff has made no allegations which would establish that SKP I should be held vicariously liable for JDM’s  mistake. There is no showing that the attorney defendants’ negligence was the proximate cause of plaintiff’s injuries, or that "but foru their handling of any duty owed to plaintiff, plaintiff would not have
been injured. Consequently, the attorney defendants’ motion to dismiss the complaint is granted."
‘

Plaintiffs inIsaacson v Law Off. of Norman L. Horowitz, LLC    2013 NY Slip Op 32598(U) October 18, 2013;  Supreme Court, New York County;  Docket Number: 112174/2010;  Judge: Joan A. Madden were commercial tennants who became disenchanged with the building after a big burglary.  They had a ‘good guy" guarantee, and attempted to terminate their lease without penalty.  This attempt did not turn out well.  However, Supreme Court held that they could not prove exactly how the landlord would have handled the case, and could not show ascertainable damages.
 

"Upon instruction from defendants, plaintiffs sent the landlord written notice that they were vacating the premises as of July 31, 2009, with a line for the landord to countersign.  The landlord refused to do so, notifying plaintiffs of this fact in a letter to defendants, where the landlord also declined to accept surrender of the lease, and instructed defendants that the landlord would hold plaintiffs to their rent obligations.

Defendants apparently did not inform plaintiffs of this letter and continued to advise plaintiffs to move forward with vacating the premesis.

Plaintiffs retained their present counsel after the decision was rendered. On June 25, 2010, the court entered an order and judgment awarding the landlord $851,618.27 against the tenants,
representing unpaid rent, interest and penalties. An award of $595,235.92 was rendered against the guarantors, under the guaranty. However, plaintiffs’ new counsel eventually negotiated
a settlement of the entire matter for $500,000. In the present action, commenced on September 15, 2010,plaintiffs seek damages against defendants on the ground that, but for defendants’ faulty advice, plaintiffs could have settled with the landlord before vacating the premises, and before the
commencement of any lawsuits, at a much lower figure than the $500,000 settlement amount which was eventually reached. In the present motion, defendants move to dismiss the
complaint, on the ground that plaintiffs cannot prove that they would have fared better in settling the amount had they not heeded defendants’ advice."

"If proximate cause is not established, the action must be dismissed "regardless of whether it is demonstrated that the attorney was negligent." Schwartz v Olshan Grundman Frome & Rosenzweig, 302 AD2d at 198. Moreover, the damages claimed for legal malpractice must be "actual and ascertainable" resulting from the proximate cause of the attorney’s negligence. Ressis v. Wojick, 105 A.D.2d 565, 567 (3d Dept 1984), lv. denied 64 N.Y.2d 609 (1985)

Plaintiffs cannot prove that "but for" defendants’ advice they would have settled for less than $500,000. Specifically, there is no proof available that would show that the landlord would have discounted the rent in any amount, less a  specific amount, such as 41%. Moreover, contrary to plaintiffs’ position any testimony by the landlord’s representative would be insufficient to establish actual and ascertainable damages as he would be speculating as to what the landlord might  have done years earlier."

Here is a case in which the attorney has successfully shut down plaintiff’s case, plaintiff’s future cases, and in general, plaintiff himself.  It’s rare that defendant scores a victory so comprehensive.  The Appellate Division, and earlier, Justice Ling-Cohan in Banushi v Law Off. of Scott W. Epstein  2013 NY Slip Op 06930   Decided on October 24, 2013   Appellate Division, First Department    found plaintiff’s case most unworthy.

"Notwithstanding the public policy requiring free access to the courts, the motion court’s order barring plaintiff from initiating further litigation or motion practice against defendants without prior court approval unless he is represented by counsel was justified by plaintiff’s continuous and vexatious litigation against defendants (Matter of Robert v O’Meara, 28 AD3d 567 [2d Dept 2006], lv denied 7 NY3d 716 [2006]; Capogrosso v Kansas, 60 AD3d 522 [1st Dept 2009], cert denied ___ US ___, 133 S Ct 278 [2012]; see also Melnitzky v Apple Bank for Sav., 19 AD3d 252, 253 [1st Dept 2005]). Among other things, in addition to the instant action, plaintiff filed a lawsuit in state court and a lawsuit in federal court and a counterclaim in a third suit, as well as a disciplinary complaint, all alleging legal malpractice based on the same sparse allegations, and all unavailing.

Contrary to plaintiff’s contentions, the order is not overly broad; it granted the part of defendants’ motion that sought injunctive relief only as to litigation against them. "

Thomas F. Bello, an attorney from Staten Island is well known, and had many many clients. This week his resignation and disbarrment was accepted by the Appellate Division, Second Department.  What is shocking is the number of clients who had made complaints against him, and how long it took to resolve the matter.  Matter of Bello   2013 NY Slip Op 06859   Decided on October 23, 2013   Appellate Division, Second Department   Per Curiam. is worth reading to see how many clients he let down. 
 

"PER CURIAM.The Grievance Committee for the Second, Eleventh, and Thirteenth Judicial Districts served a petition and supplemental petition on the respondent. Following a preliminary conference held on December 28, 2011, and a hearing conducted in nine separate sessions in 2012, the Special Referee sustained all six charges, concluding that the respondent "neglected the legal matters entrusted to him, . . . failed to adequately communicate with his clients, . . . failed to comply with court directives, and . . . failed to honor a stipulation to which he agreed." The Grievance Committee now moves to confirm the report of the Special Referee and for the imposition of such discipline as the Court deems just and proper. The respondent has now submitted an affidavit sworn to February 25, 2013, wherein he tenders his resignation as an attorney and counselor-at-law (see 22 NYCRR 691.9), and cross-moves for its acceptance, and the striking of his name from the roll of attorneys. In his affidavit, the respondent acknowledges, in essence, that he cannot successfully defend himself against the merits of the charges.

Charge one, as amended, alleges that the respondent engaged in a pattern of neglecting legal matters entrusted to him, in violation of former Code of Professional Responsibility DR 6-101(a)(3) and DR 1-102(a)(7) (22 NYCRR 1200.30[a][3]; 1200.3[a][7]). Between 2004 and 2010, [*2]the respondent was retained to represent 19 different clients, and thereafter failed to diligently pursue those matters with respect to each of them.

Charge two alleges that the respondent engaged in a pattern of failing to maintain adequate communications with his clients, in violation of former Code of Professional Responsibility DR 6-101(a)(3) and DR1-102(a)(7) (22 NYCRR 1200.30[a][3]; 1200.3[a][7]). Between in or about 2001 and 2010, the respondent was retained to represent 18 different clients, and thereafter failed to adequately respond to those clients’ inquiries with respect to their cases.

Charge three alleges that the respondent failed to comply with numerous court directives, in violation of former Code of Professional Responsibility DR 1-102(a)(5) and (7) (22 NYCRR 1200.3[a][5], [7]). In or about December 2007, the respondent was retained to represent Tony Chin in a legal matter. In or about 2008, the respondent commenced an action on Mr. Chin’s behalf, entitled Chin v U. S. Postal Service, in the United States District Court for the Eastern District of New York. Although twice directed by the court to provide it with a status letter/report, the respondent failed to do so. The respondent also failed to comply with two orders directing the plaintiff to file, inter alia, affidavits of proper service on the defendant on or before December 22, 2008. By order dated June 16, 2009, the court dismissed the action, in view of the respondent’s "pattern of delay and inexplicable noncompliance."

Charge four, as amended, alleges that the respondent engaged in a pattern of neglecting legal matters entrusted to him. Between 1999 and 2010, the respondent was retained by five clients. Thereafter, the respondent failed to diligently pursue their legal matters, in violation of former Code of Professional Responsibility DR 6-101(a)(3) and DR 1-102(a)(7) (22 NYCRR 1200.30[a][3]; 1200.3[a][7]).

Charge five, as amended, alleges that the respondent engaged in a pattern of failing to maintain adequate communications with his clients. Between 1999 and 2010, the respondent was retained to represent six clients. Thereafter, the respondent failed to adequately respond to inquiries made by these clients with respect to their legal cases, in violation of former Code of Professional Responsibility DR 6-101(a)(3) and DR 1-102(a)(7) (22 NYCRR 1200.30[a][3]; 1200.3[a][7]).

Charge six alleges that the respondent failed to timely satisfy the terms of a settlement agreement, in violation of former Code of Professional Responsibility DR 1-102(a)(5) and (7) (22 NYCRR 1200.3[a][5], [7]). In or about 2008, the respondent was sued for legal malpractice in the Supreme Court, Richmond County, in a matter entitled Hayes v Bello. In or about February 2011, the respondent executed a settlement agreement, in which he agreed to pay the total sum of $25,000 to the plaintiff, as follows: "$5,000.00 within 90 days, and balance with [sic] 6 months thereafter." To date, the respondent has failed to satisfy the terms of the agreement.

The respondent acknowledges that his resignation is tendered freely and voluntarily, that he is not subject to coercion or duress, and that he is fully aware of the implications of its submission. He further acknowledges that the Court has the power to disaffirm the Special Referee’s report or issue discipline that could range from a public censure, to suspension, or disbarment. Nonetheless, he requests that the Court accept his resignation and strike his name from the roll of attorneys.

There are three (or perhaps four) elements of legal malpractice.  They are a departure from good and accepted practice, which proximately causes damage to plaintiff, "but for" which there would have been a better or different result, with ascertainable damages.  in Cobble Cr. Consulting, Inc. v Sichenzia Ross Friedman Ference LLP ;  2013 NY Slip Op 06820;  Decided on October 22, 2013 ; Appellate Division, First Department we see a decision which affirms dismissal on the basis that plaintiff cannot show how any negligence was the proximate cause of their damage. 
 

"The motion court properly dismissed the claim of legal malpractice, as plaintiffs failed to allege how any negligence was the proximate cause of their damages (see O’Callaghan v Brunelle, 84 AD3d 581, 582 [1st Dept 2011], lv denied 18 NY3d 804 [2012]; McLoughlin v Sullivan Papain Block McGrath & Cannavo, P.C., 18 AD3d 245, 246 [1st Dept 2005], lv denied 5 NY3d 709 [2005]). The motion court considered plaintiffs’ allegations, quoted in its decision, that defendant acted in a manner contrary to its discussions with plaintiffs by assisting the subject corporation in eliminating the Preferred A shares. As the motion court noted, plaintiffs alleged only that the parties had discussed, and defendant failed to include, a provision in the Certificate of Designation that prevented changes in the common stock structure from affecting the conversion rate of plaintiffs’ Preferred A Stock. Plaintiffs did not challenge the inclusion of language in the Certificate of Designation that allows changes in the value or voting rights of Preferred A shares by a majority vote of Preferred A shareholders. The complaint reveals that a vote held pursuant to this latter provision is what altered the conversion ratio, allegedly rendering plaintiffs’ stock virtually worthless. Thus, inclusion of the anti-dilution provision plaintiffs cite would not have altered the result. Accordingly, plaintiffs failed to set forth facts showing that, but for defendant’s conduct, plaintiffs would not have incurred any damages.

Plaintiffs further alleged, without elaborating, that defendant failed to advise them to seek independent counsel at any time. Plaintiffs failed to allege how this omission proximately caused their injuries. Any claim that independent counsel could have negotiated a provision prohibiting changes to the Certificate or any changes to the conversion ratio, even upon a majority vote, or could have insulated plaintiffs from incurring any losses upon a conversion, is speculative."

Legal malpractice in the criminal defense sphere does not, for the most part, exist.  Under well settled Court of Appeals cases a criminal defendant may not successfully sue the criminal defense attorney for legal malpractice absent "actual innocence", which is generally defined as acquittal, reversal or exoneration.  Britt v. Legal Aid Socy, 95 NY2d 443 (2000) ; Carmel v. Lunney, 70 NY2d 169 (1987).  Here is case where plaintiff might make an appropriate showing.

InPeople v Clermont;  2013 NY Slip Op 06806;   Decided on October 22, 2013;  Court of Appeals  we see a case which might be one of the rare possible candidates, if the gun is suppressed on remand.
 

"Defendant was charged with weapon possession offenses after he was found in possession of a gun as a consequence of a street encounter with the police. Three days before the suppression hearing, his assigned counsel made an application to be relieved as counsel, stating that his associate had quit, he was overwhelmed with work and could not competently represent defendant. Counsel restated these concerns on the record before the hearing commenced and the court stated that the motion would be granted after counsel completed the hearing. Thereafter, the hearing ensued, the court denied suppression, new counsel was appointed and the case proceeded to trial where defendant was convicted of criminal possession of a weapon in the second and third degrees.

On appeal, defendant sought reversal of his conviction based on the ineffective assistance of his first attorney. The Appellate Division affirmed the judgment in a divided decision. The majority concluded that counsel’s representation had not fallen below the constitutional standard but the dissent disagreed, reasoning that multiple errors by the attorney in relation to defendant’s suppression application warranted remittal of the case to Supreme Court. The Appellate Division dissenter granted defendant leave to appeal to this Court.

We agree with the dissent that defendant is entitled to relief. In his written motion requesting a hearing, counsel misstated the facts relating to the arrest, indicating that defendant had been involved in a motor vehicle stop rather than a street encounter with police. At the suppression hearing, the attorney did not marshal the facts for the court and made no legal argument. This, coupled with his failure to make appropriate argument in his motion papers or to submit a post-hearing memorandum, meant that the defense never supplied the hearing court with any legal rationale for granting suppression. Moreover, after the court issued a decision describing the sequence of events in a manner that differed significantly from the testimony of the police officer (the only witness at the hearing) and was adverse to the defense, defendant’s attorney made no motion to reargue or otherwise correct the court’s apparent factual error. Counsel never ascertained whether the court decided the motion based on the hearing proof or a misunderstanding of the officer’s uncontradicted testimony.

And this is not a case where any of these errors can be explained as part of a strategic design (assuming one could be imagined), given that defense counsel asked to be relieved, informing the court that he was unable to provide competent representation to defendant. Thus, although the attorney secured a hearing, his representation in relation to the application as a whole was deficient in so many respects — both before, during and after the proceeding — that defendant was not afforded meaningful representation at a critical stage of this [*3]prosecution. "

From the Rivera Dissent:

"Defendant was arrested and charged with criminal possession of a weapon. Prior to defendant’s trial, counsel moved as part of an omnibus motion to suppress the weapon, a gun seized shortly after defendant’s arrest. However, in that branch of defendant’s omnibus motion that sought suppression of physical evidence, counsel recited a wholly different factual scenario from the events actually leading up to defendant’s arrest and the seizure of the gun. Counsel incorrectly stated that police officers approached defendant while he was seated in an automobile, and that after they forcibly removed him from the vehicle, a gun fell out onto the ground. This was a complete fiction. The correct facts were that the officers had observed defendant walking on the street, arrested him after a chase on foot, and seized the gun from a [*4]private yard near where he was arrested. Additionally, because counsel’s legal argument was based on these incorrect facts, he also failed to tailor the legal standards to the specifics of defendant’s case. Although counsel’s motion papers stated that he was "unaware of many of the relevant facts necessary to [his] preparation of the defense," and requested permission to submit a post-hearing memorandum, "so that [he] might more effectively represent the interests of [defendant]," he never filed such memorandum.

In order to justify police pursuit, the officers must have "reasonable suspicion that a crime has been, is being, or is about to be committed" (People v Holmes, 81 NY2d 1056, 1058 [1993]). Reasonable suspicion encompasses a "quantum of knowledge sufficient to induce an ordinarily prudent and cautious [person] under the circumstances to believe criminal activity is at hand" (People v Martinez, 80 NY2d 444, 448 [1992][citation omitted]). We have found that "[f]light, combined with other specific circumstances indicating that the suspect may be engaged in criminal activity, could provide the predicate necessary to justify pursuit" (Holmes, 81 NY2d at 1058). "Flight alone, however, or even in conjunction with equivocal circumstances that might justify a police request for information is insufficient to justify pursuit" (id.[citations omitted]).

Nearly two decades ago, in a case on all fours with the present appeal, we held that flight in combination with a defendant grabbing at his waistband, "does not support a determination that the officers had reasonable suspicion to pursue defendant" (see People v Sierra, 83 NY2d 928, 930 [1994]). In Sierra, we found no reasonable suspicion to pursue a fleeing defendant where "the officers knew only that, after exiting from the back seat of a livery cab that had been stopped for defective brake lights, defendant grabbed at his waistband" (id. [emphasis added]).

Years later, we reiterated that flight must be accompanied by other suggestive conduct in order to support reasonable suspicion justifying a seizure (People v Pines, 99 NY2d 525,526 [2002][citing Martinez, 80 NY2d at 447-48]). In Martinez, we acknowledged that the "[d]efendant had a right to refuse to respond to a police inquiry and his flight when officers approached could not, in and of itself, create a reasonable suspicion of criminal activity" (id. at 448 [citation omitted]). Only after aggregating other compelling circumstances—namely that defendant was observed "removing an instrument known to the police to be used in concealing drugs"—did we find reasonable suspicion (id.) "

Mr. San LLC v Zucker & Kwestel LLP ; 2012 NY Slip Op 32119(U);  Sup Ct, Nassau County Docket Number: 601065/11;  Judge: Stephen A. Bucaria is an interesting example of the "whose lawyer is it" question that frequently arises in the formation of new businesses.

"This is an action for aiding and abetting fraud. Plaintiffs invested substantial amounts of money with Gershon Barkany who held himself out as a financial advisor and real estate investor. Plaintiffs allege that Barkany represented that the money was to be used to fund real estate loans and other investments but Barkany was actually running a Ponzi scheme. Plaintiffs further allege that Barkany presented defendants Zucker & K westel LLP and Steven K westel as his attorneys in connection with the sham real estate transactions, and the firm accepted wire transfers of plaintiffs ‘ funds into its escrow account."

"Absent fraud, collusion, malicious acts, or other special circumstances, an attorney is not liable to third parties, for harm caused by professional negligence, unless there is a relationship sufficiently approaching privity between the attorney and the alleged client Schneider v Finman 15 NY3d 306 309 (2010)). This rule protects attorneys from legal malpractice suits by indeterminate classes of plaintiffs whose interests may be at odds with the interests of the acknowledged client (Id). Since an attorney-client relationship does not depend upon a formal retainer agreement or upon payment of a fee, the court must look to the words and actions of the parties (Moran v Hurst 32 AD3d 909, 911 (2d Dept 2006)). The unilateral belief of a plaintiff alone does not confer upon him or her the status of a client (Id). Plaintiffs allege that Barkany presented defendants as his attorneys, rather than the attorneys for the plaintiffs. An attorney for an organization is not the attorney for its members (Professional Conduct Rule 1. 13). However, it appears that no company had been formed at the time that plaintiffs made their investment. At the time that plaintiffs invested
their funds, their interests seemed aligned with Barkany , at least as to the expected profitability of the venture. Moreover, the fact that Kwestel borrowed money from Barkany suggests that there may have been collusion between client and attorney and perhaps even knowledge on Kwestel’ s part as to Barkany s fraud upon the plaintiff. In these circumstances, the court must give plaintiffs the benefit of the possible favorable inference that an attorney-client relationship arose when defendants accepted plaintiffs ‘ money into their escrow account. Defendants’ motion to dismiss plaintiffs ‘ malpractice claim for a defense founded upon documentary evidence and failure to state a cause of action is denied. Fiduciary liability is not dependent solely upon an agreement, but results when one of the parties is under a duty to act for or give advice for the benefit of the other upon matters within the scope of the relationship EBC I, Inc v Goldman Sachs 5 NY3d 11 , 19-
(2005)). An attorney for a limited liability company may have a fiduciary duty towards an individual member, at least with respect the member s share of distributions of the company’s profits Kurtzman v Burgol 40 AD3d 588 (2d Dept 2007)). As noted, it appears that no company had been formed at the time that plaintiffs made their investment. Nevertheless, having accepted plaintiffs ‘ money into escrow , defendants may have had a fiduciary duty to make sure that the funds were applied to the real estate investment. Defendants’ motion to dismiss plaintiffs ‘ breach of fiduciary duty claim for a founded upon documentary evidence and failure to state a cause of action is denied."
 

We saw Margin Call.       Dexia SA/NV v Morgan Stanley  013 NY Slip Op 51696(U); Decided on October 16, 2013; Supreme Court, New York County; Bransten, J. is the litigation that might have followed the events in Margin Call.

Admittedly there is no legal malpractice claim in Dexia.  We wonder what will happen now that the Court has determined that the assignment of certificates in this mega multi-million dollar transaction laced the right to sue for fraud. 

"n this action for common-law fraud, aiding and abetting fraud, and fraudulent inducement, defendants Morgan Stanley ("MS"), Morgan Stanley & Co., Inc. ("MS & Co."), Morgan Stanley ABS Capital I Inc. ("MSAC"), Morgan Stanley Capital I Inc. ("MSC"), Morgan Stanley Mortgage Capital Inc. ("MSMC"), and Morgan Stanley Mortgage Capital Holdings LLC bring the instant motion to dismiss the amended complaint, pursuant to CPLR 3211. Defendants contend that plaintiffs lack standing to bring fraud claims and that plaintiffs have not pled the requisite elements to state a cause of action sounding in fraud. Plaintiffs FSA Asset Management LLC ("FSAM"), Dexia SA/NV, Dexia Holdings, Inc. ("DHI"), and Dexia Crédit Local SA ("DCL") oppose the motion.

[*2]I.Background

This action concerns 29 residential mortgage-backed securities ("RMBS"), which FSAM purchased from MS & Co in 2006 and 2007, for a total of $626 million. On June 30, 2009, FSAM assigned the securities to Dexia SA/NV, DHI, and DCL for face value, via a put option transaction. By the time this instant action was filed, all 29 RMBS at issue had been downgraded to "junk" status.

Investors in RMBS receive payments from the cash flow generated by thousands of mortgages, which have been deposited into designated pools. The actual securities held by the investor are pass-through participation certificates, which are an ownership interest in the issuing trust, the entity that holds the pools.

The first step in the securitization process is the creation of a pool of designated mortgages by the sponsor. The mortgages can be originated by the sponsor itself, purchased from other financial institutions, or be a mixture of self-originated and purchased loans. Before creating the pool, the sponsor reviews a sample of the mortgages in order to verify that they comport with underwriting guidelines.

After the pool of designated mortgages has been created by the sponsor, the mortgages are transferred to the depositor. The depositor carves up the projected cash flow from the mortgages into tranches; the tranches are ordered by seniority on the basis of risk, thus, any losses in the loan pool are applied to the junior (riskiest) tranches first. Once the tranche structure has been finalized, the proposed security is sent to rating agencies for evaluation. Next, the depositor transfers the mortgage pool to the issuing trust, which issues participation certificates for each tranche. The issuing trust then conveys the participation certificates to the depositor as consideration for the mortgages.

Once the depositor is in possession of the participation certificates, the underwriter will begin marketing the RMBS to potential investors, providing them with free writing prospectuses and term sheets. The depositor then transfers the certificates to the underwriter, who will sell them to investors and remit the proceeds to the depositor, minus underwriting fees.

In this action, MS & Co. underwrote and sold all the RMBS in dispute, MSMC was the sponsor of 15 of the 21 securitizations, MSAC served as depositor for 17 of the securitizations, and MSC served as depositor for three of the securitizations.

Plaintiffs allege they were fraudulently induced into purchasing the RMBS by defendants. Specifically, plaintiffs allege defendants misrepresented the due diligence and underwriting standards on the underlying mortgages, misrepresented the loan to value ("LTV") ratios of the mortgaged properties, and misrepresented the debt to income ("DTI") ratios of the borrowers. Plaintiffs further contend that defendants misrepresented the risks associated with the RMBS in general, and made misrepresentations to rating agencies, resulting in artificially high ratings. Plaintiffs assert that in reliance on defendants’ misrepresentations, they were damaged by paying far more for the RMBS than they were worth. Plaintiffs pray for compensatory, rescissory and punitive damages, as well as costs and expenses incurred in this action. "

"Furthermore, plaintiffs’ own pleadings contradict their assertion that FSAM intended to assign fraud claims, in that they allege that "[t]he Dexia Plaintiffs could not have uncovered Morgan Stanley’s fraud until 2011, at the earliest, regardless of the amount of due diligence that they performed." (Am. Compl. ¶ 259.) It is unclear how FSAM could have intended to convey fraud claims of which it was not aware, and were not discoverable for a year and a half after the assignment. "It is manifest that the plaintiff did not intend to assign the cause of action . . . because neither at the time of the assignment, nor of the execution of the conveyance, had the plaintiff discovered the fraud." Fox, 157App. Div. at 368. If FSAM had intended to assign fraud claims which they had not yet discovered, it could have included express language to that effect.

The court concludes that FSAM did not assign fraud claims to assignee-plaintiffs Dexia SA/NV, DHI and DCL; to the extent any fraud claims exist, they remain with FSAM alone. "

"In an action for fraud, "[t]he true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong or what is known as the out-of-pocket’ rule." Lama Holding Co. v. Smith Barney, 88 NY2d 413, 421 (1996) (internal quotation marks and citations omitted). "Damages are to be calculated to compensate plaintiffs for what they lost because of the fraud, not to compensate them for what they might have gained." Id. FSAM sustained no losses on the RMBS it purchased; it received exactly the purchase price upon the sale to the Dexia plaintiffs. There is also no allegation that pass-through payments due to FSAM as holders of the participation certificates were missed. To the extent FSAM did receive pass through payments, the RMBS were profitable to them, and there can be no claim of damages. See Jung Hing Leung v. Lotus Ride, 198 AD2d 155, 156 (1st Dep’t 1993).

Even if the court is to accept as true that there have been material misrepresentations, scienter, and justifiable reliance by FSAM, without damages, the claims must be dismissed. [*6]Deception without damages is not actionable, nor is deception, in and of itself, a legally cognizable injury. Small v. Lorillard Tobacco Co., 94 NY2d 43, 56-57 (1999). "