Izko Sportswear Co., Inc. v Flaum ; 2009 NY Slip Op 04387 [63 AD3d 687] ; June 2, 2009 ; Appellate Division, Second Department  is a somewhat famous case in Legal Malpractice.  In earlier decisions, the Appellate Division determined that plaintiff stated a cause of action in Judiciary Law 487.  Now, the case has ended with a dismissal;   The Court of Appeals then denied leave to appeal.  Two lessons are to be learned here:
 

1.  Violation of Judiciary Law 487 may be demonstrated either by deceit or by chronic extreme pattern of delinquency; and

2.  Judicial determinations of attorney fees act as collateral estoppel to a later legal malpractice or Judiciary Law 487 determination.

Reviewing the findings of the Appellate Division, we see:

"A violation of Judiciary Law § 487 may be established "either by the defendant’s alleged deceit or by an alleged chronic, extreme pattern of legal delinquency by the defendant" (emphasis supplied) (Knecht v Tusa, 15 AD3d 626, 627 [2005]; see O’Connell v Kerson, 291 AD2d 386, 387 [2002]; see also Bridges v 725 Riverside Dr., 119 AD2d 789 [1986]; Trepel v Dippold,2005 WL 1107010, 2005 US Dist LEXIS 8541 [May 9, 2005]). "

Now the AD affirms the dismissal of the case:  "On a prior appeal, this Court found that the plaintiffs stated a cause of action pursuant to Judiciary Law § 487, against the defendants, who were the former bankruptcy attorneys for the plaintiff Izko Sportswear Co., Inc. (hereinafter Izko). The plaintiffs alleged in the complaint that the defendants concealed their relationship with Heartland Rental Properties Partnership (hereinafter Heartland), who was Izko’s primary creditor, and also denied having a relationship with any of Izko’s creditors (see Izko Sportswear Co., Inc. v Flaum, 25 AD3d 534 [2006]). In so doing, this Court noted that on a motion to dismiss pursuant to CPLR 3211 (a) (7), the plaintiffs’ allegations must be accepted as true, and "whether the defendants would be entitled to summary judgment" was not an issue (see Izko Sportswear Co., Inc. v Flaum, 25 AD3d 534, 537 [2006]).

After discovery, the defendants moved for summary judgment dismissing the complaint based upon evidence which established, as a matter of law, that the plaintiffs were not [*2]deceived, and that the plaintiffs learned of the defendants’ representation of Heartland on March 3, 2000, at the latest. In opposition, the plaintiffs failed to raise a triable issue of fact.

Thus, the revelation of the defendants’ representation of Heartland occurred prior to May 31, 2000, when the Bankruptcy Court approved of a stipulation with respect to the amount of fees payable by Izko to the defendants. Accordingly, the plaintiffs’ claim pursuant to Judiciary Law § 487 based upon the defendants’ prior representation of Heartland is barred by the doctrines of collateral estoppel and res judicata, as the plaintiffs had a full and fair opportunity to raise the issue before the Bankruptcy Court (see generally Lefkowitz v Schulte, Roth & Zabel, 279 AD2d 457 [2001]).

The folks over at Attorney.org recently contacted me about an interview for their website. If you don’t know who they are, check them out.  . In addition to legal news, they also highlight noteworthy attorneys from around the country. One of their upcoming features is a highlight of local Attorney Generals and District Attorneys. They interviewed me for an article about how to decide if you need a Legal Malpractice Attorney and whether or not you have a case. You can view the article here: Attorney.org
 

A prime worry for the legal malpractice practitioner, on either side of the aisle, is whether there is legal malpractice insurance.  For the defendant, it is paramount; for the plaintiff it is significant.  Much thought has gone into how to determine whether the target defendant has adequate [or indeed, any] insurance, and planning has to go into the target’s application for insurance."

One prime weapon that the insurer has is the "prior acts" doctrine.  It says in essence that you must report all past prior acts that one might reasonably believe could lead to a law suit for legal malpractice, whether it has been started or not.  We remember one managing attorney who shouted at least once a week: "Put the Carrier on Notice!"  Sometimes he was right.

Here, in Executive Risk Indemnity v, Pepper Hamilton, LLP, we see Justice Jone’s decision on this issue:

"We are asked to determine, under Pennsylvania law, whether excess insurers Executive Risk Indemnity Inc. and Twin City Fire Insurance Company, based upon their prior knowledge exclusions, and Continental Casualty Company, based upon rescission of its policies, were entitled to summary judgment declaring that they have no obligation to indemnify defendants Pepper Hamilton LLP and one of its members W. Roderick GagnÉ (collectively, the law firm defendants) in actions asserted against them for, among other claims, professional malpractice."

"Executive Risk commenced this action against the law firm defendants and Westport, seeking a declaration that it had no obligation to indemnify defendants in the underlying actions. The law firm defendants counterclaimed for a declaration in their favor and brought third-party claims against Twin City and Continental Casualty. Executive Risk and Twin City relied upon Westport’s prior knowledge exclusion, expressly incorporated into their policies, and Continental Casualty cross-claimed for rescission of its excess policies for 2002-[*4]2003 and 2003-2004. "

"Here, it is undisputed that the law firm defendants knew of SFC’s securities fraud months prior to the effective dates of the Executive Risk and Twin City policies. The courts below noted that GagnÉ subjectively believed, and informed Mr. Wilcox at least one month prior to the submission of one of the law firm’s insurance applications, that he and the law firm could be subject to a lawsuit from their representation of SFC. Such a belief, although subjective, was also reasonable, but Pepper Hamilton did not provide that information to its insurers. Given the law firm defendants’ role in the securitization of the loans and GagnÉ’s close involvement with SFC, a reasonable attorney with the law firm defendants’ knowledge should have anticipated the [*5]possibility of a lawsuit, particularly when millions of dollars may have been lost from activities of which they were aware. Here, the law firm’s knowledge of its client’s fraudulent payments prior to its application for excess coverage coupled with the fact that a reasonable attorney would have concluded that the law firm defendants would likely be included in the litigation because of their role in their client’s business satisfy the test of Coregis and create an obligation for the law firm to inform its insurers of this potential litigation.

Contrary to the Appellate Division’s holding, the prior knowledge exclusion in this case does not require the known of act, error, omission or circumstance to be "wrongful conduct on the part of the insured" (Executive Risk Indem. Inc. v Pepper Hamilton LLP, 56 AD3d 196, 204 [1st Dept]). It excludes coverage of "any act, error, omission, circumstance . . . occurring prior to the effective date of the [policy] if any [insured] at the effective date knew or could have reasonably foreseen that such act, error, omission, circumstance . . . might be the basis of a [claim]." Here, on October 27, 2002, the effective date of the Executive Risk and Twin City policies, the law firm defendants knew of acts that occurred prior to that date, which they could have foreseen to be the basis of a claim. Thus, the prior knowledge exclusions apply to those policies.
 

In    PETER GIANOUKAS, DORIS GIANOUKAS and NICHOLAS TARSIA, Plaintiffs, – against – PETER CAMPITIELLO, ESQ., LEVY & BOONSHOFT P.C., DAVID M. LEVY, ESQ., STEPHEN BOONSHOFT, ESQ. and EAST WEST ACQUISITIONS, LLC, Defendants.;09 Civ. 1266 (PAC);UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK;2009 U.S. Dist. LEXIS 95354;October 13, 2009   we see the outer reaches of a breach of fiduciary duty and of legal malpractice in a well written and reasoned decision by Judge Paul Crotty of Southern District of New York. The facts and allegations are simple:

"The Amended Complaint alleges five separate fraudulent transactions: (1) Codine(x), (id. PP 41-68); (2) Pay Pad, (id. PP 69-87); (3) LIMPE, (id. PP 88-106); (4) Acellus, (id. PP 107-16); [*3] and (5) UTTI, (id. PP 117-34). Throughout the Amended Complaint, Campitiello is portrayed as the architect of the fraudulent transactions which bilked Plaintiffs out of in excess of $ 400,000. He did this as an employee of L&B, and used L&B’s escrow account to receive funds from the Plaintiffs and thereafter funds were disbursed from the account to consummate the fraud. The Amended Complaint does not allege that Levy and Boonshoft were involved in, or knew of, the fraud"

"According to the Amended Complaint, the L&B escrow account is an "interest on lawyer account," also known as an "IOLA" account. (Am. Compl. PP 10-11); see N.Y. JUD. LAW § 497. Plaintiffs contend that Levy and Boonshoft owed them a fiduciary duty as escrow agents and as "signatories on the defendant law firm IOLA account."  "Next, Plaintiffs claim that Levy and Boonshoft are liable for breach of fiduciary duty as "signatories" on the L&B IOLA account. An IOLA account "is a creation of New York State statute, and is defined as ‘an unsegregated interest-bearing deposit account … for the deposit by an attorney of qualified funds.’"

"Plaintiffs argue that lawyers "who accept funds from persons [*11] in escrow or make a decision to have funds in the firm IOLA accounts are fiduciaries to such persons with respect to those funds." (Pls.’ Opp’n at 10.) The Amended Complaint does not, however, allege that Levy and Boonshoft agreed to accept funds from the Plaintiffs or that they were involved in the decision to have the Plaintiffs transfer funds to the L&B IOLA account. Nor does the Amended Complaint allege that Levy and Boonshoft misappropriated or commingled Plaintiffs’ funds; it is Campitiello who allegedly misappropriated the Plaintiffs’ money."
 

"Most importantly, "[w]hatver may be the constraints imposed by the Code of Professional Responsibility with the associated sanctions of professional discipline . . . [New York] courts have not recognized any liability of the lawyer to third parties . . . [for violations of disciplinary [*12] rules] where the factual situations have not fallen within one of the acknowledged categories of tort or contract liability." Drago v. Buonagurio, 386 N.E.2d 821, 46 N.Y.2d 778, 779-80, 413 N.Y.S.2d 910 (N.Y. 1978). Plaintiffs do not contend that they had an attorney-client relationship with Levy or Boonshoft. (Pls.’s Opp’n at 3.) As shown above, Levy and Boonshoft were not the Plaintiffs’ escrow agents. Thus, to the extent Plaintiffs rely on DR 9-102 as the basis for their breach of fiduciary duty claim, the claim fails because "an alleged violation of a disciplinary rule ‘does not, without more, generate a cause of action.’

In Santiago v Fellows, Epstein & Hymowitz, P.C. ; 2009 NY Slip Op 07393 ; Decided on October 13, 2009 ;Appellate Division, Second Department we see a rather stark and short decision from the Appellate Division after dueling summary judgment motions are decided in defendant’s favor.  There is not a lot of factual background, but plaintiff aparently thought that a $1 million offer was made, and defendant denied that any offer was made.  If no offer was made, then how can there be malpractice?
 

From the decision:  "In support of that branch of their cross motion which was for summary judgment, the defendants established, prima facie, that during their representation of the plaintiff in the underlying action, Selective Insurance Company (hereinafter Selective), the insurer of two of the four defendants in the underlying action, did not offer to settle the matter on behalf of its insureds for the $1,000,000 policy limit. The defendants submitted an affidavit from the individual defendant Robert L. Fellows, who categorically denied that Selective ever made a $1,000,000 settlement offer to the defendants or to the plaintiff during [*2]the defendants’ representation of the plaintiff. Rather, he explained that by letter dated August 6, 2002, from Selective to Travelers Insurance Company (hereinafter Travelers), the insurer of one of the defendants in the underlying action, Selective "tendered its $1 million single limit policy to Travelers. Selective requested that Travelers assume the handling and defense of the action. On August 15, 2002, a mere nine days after Selective’s letter tender to Travelers of its policy limits, Selective retracted the tender." According to Fellows, it was not until June 2003 that the plaintiff directed him to settle the underlying action with Selective for a total sum of $1,000,000. However, Selective never made such an offer, and thus, Fellows could not possibly have acted on the plaintiff’s behalf to settle the case, and his failure to do so cannot be deemed malpractice."

In Pu v. Mitsopoulos, Supreme Court, New York County recalls what every CLE program tells its audience:  Fee suits invite legal malpractice counterclaims.  Invariably, the suing attorney says that the counterclaim has no merit, and that it is sour grapes, and motivated solely by a deadbeat who refuses to pay wholly justified legal fees for work well done.

Here, the situation seems just a little different.  Plaintiff represented defendants when a franchisor sued the defendant-pharmacist over unpaid royalties.  Defendant, who became educated through the litigation, arbitration, appeals and other proceedings, says that the franchisor never had the right to sue in NY courts; it was a foreign corporation doing business in NY and had not paid taxes.  Under Business Corporation Law section 1312, a foreign corporation which conducts business in the state without authority cannot maintain an action in the state, and any action initiated by that corporation must be dismissed.

So, reasons defendant, a simple motion to dismiss would have succeeded, and a debt of $ 231,000 would not have turned into a total debt of $ 1,2 Million.  Who is right?

Justice Feinman, for the Court, found that defendant’s counterclaims have merit, and has allowed the case to go forward. 

In Acosta v. Falick & RochmanPLATZER, FALLICK & STERNHEIM, LLP, 05 Civ. 8254 (KTD)UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; 2009 U.S. Dist. LEXIS 70878 we see a case brought pro-se and "in forma pauperis against his former lawyer, Barry M. Fallick, and his former lawyer’s firm, Rochman, Platzer, Fallick & Sternheim, LLP (collectively, "Defendants"). Acosta seeks the return of legal fees paid to Defendants plus other incidental costs arising out of Defendants’ representation of him in a criminal matter." 

There, Judge Duffy "satisfied myself of both the guilt of the defendant and that the plea was being made voluntarily by a person who knew exactly what his rights were and knew exactly what he was doing. Indeed I remember thinking about the arguments that must have been raised by defense counsel in bargaining with the government, and I still marvel at the wonderful result defense counsel obtained for his client. The government had originally charged Acosta with dealing in narcotics–a charge reduced by the bargain to use of a "communication facility" in connection with drug dealing. I knew that Acosta, as a police officer, would face a tough time in prison, but believed that he was not exempt from jail time. On January 9, 2001, I sentenced him to forty-eight months’ imprisonment, two years’ supervised release, and charged the mandatory $ 100 special assessment."

Apparently there was no diversity jurisdiction, so plaintiff " alleges violations of 41 U.S.C. § 37 and 28 U.S.C. § 1927, but neither of these statutes provide a legal basis for his claims. First, 41 U.S.C. § 37 authorizes the Comptroller General of the United States to distribute to certain government agencies lists of persons who have breached public contracts. See 41 U.S.C. § 37. The fee agreement in this case is not a public contract, so it is not covered under the statute. Further, the statute does not authorize a private right of action or money damages at all."
"However, Plaintiff’s complaint in this case, broadly construed, alleges only facts most closely resembling state law breach of contract and legal malpractice claims over which this Court does not have subject matter jurisdiction. As Defendants point out, complete diversity is lacking and Plaintiff does not claim more than $ 75,000 in damages, so 28 U.S.C. § 1332(a) cannot provide a basis for jurisdiction. Therefore, as Acosta’s complaint lacks any basis in law and is consequently frivolous under 28 U.S.C. 1915 (e) (2) (B) (i), I must dismiss it."
 

Different result in State Court?

X is sued by defendants.  He loses at trial using target attorneys.  He hires new attorneys, mediates, settles, and assigns his rights to a legal malpractice action against his former [target] attorneys to plaintiff, who now sues target attorneys in the place of X.  Is there still any confidentiality to the mediation asks the target attorney?

Yes, there is, says Judge Bernstein of US Bankruptcy Court, SDNY in In re: TELIGENT, INC., Reorganized Debtor. SAVAGE & ASSOCIATES, P.C., as the Unsecured Claims Estate Representative for and on behalf of TELIGENT, INC., et al., Plaintiff, — against — ALEX MANDL, Defendant.

Chapter 11, Case No. 01-12974 (SMB), Adv. Proc. No. 03-2523; UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; 2009 Bankr. LEXIS 3037; 
September 24, 2009

"Non-party K&L Gates LLP ("K&L") formerly represented the defendant Alex Mandl. The parties engaged in unsuccessful pre-trial mediation, and following trial, the Court entered a judgment in excess of $ 12 million against Mandl and in favor of the plaintiff, Savage & Associates, P.C. ("Savage"), the Unsecured Claims Representative for and on behalf of Teligent, Inc. ("Teligent"). After the entry of [*2] judgment, Mandl discharged K&L, participated in a second round of mediation with new counsel, and eventually settled with Savage. As part of the settlement, Mandl assigned to Savage a portion of the proceeds derived from his legal malpractice claim against K&L. As contemplated by the settlement, Mandl sued K&L for legal malpractice in the District of Columbia (the "DC Action").

K&L contends that it needs the documents and communications generated during the two mediations to defend itself in the DC Action. (Memorandum of Points and Authorities in Support of [K&L’s] Motion to Lift Mediation Confidentiality Restrictions, dated March 5, 2009 (the "Motion"))(ECF Doc. # 227.) 1 Toward that end, it has moved for relief from the confidentiality provisions contained in this Court’s General Order M-143, dated Jan. 17, 1995 ("General Mediation Order") and the specific mediation order entered in this case.

K&L offers several reasons why the Mediations communications and the mediator’s testimony "may be relevant." First, they may shed light on the issues of causation, mitigation, and damages, and in particular, why Mandl settled at the price he did rather than pursue his post-trial motions or an appeal. (See id., at 13-14.) K&L speculates that Mandl may have settled without regard to his actual exposure, which GT had estimated to be $ 3.19 million, (id., at 14-15), or because Savage threatened Mandl with criminal and tax-related liability. (Id., at 15.) Moreover, Savage discontinued the fraudulent conveyance action against Susan Mandl and ASM without extracting a separate payment from either defendant. The release of his wife and affiliate may have affected Mandl’s decision to settle at a higher number than his potential exposure. (Id., at 15-16.)

Second, the Mediations communications may be relevant to Mandl’s damages. The parties valued the Settlement at $ 16 million (i.e., the Agreed Valuation), but the amount of consideration that Mandl committed to pay, aside from half of the net proceeds of the DC Action, was far [*12] less. (Id., at 16-17.) The mediator’s report stated that he was "not aware of any reason why that amount is not a reasonable approximation of the value of the settlement," and Savage asserted at the time that she sought judicial approval of the Settlement that the Settlement would include a claim of $ 16 million against K&L. (Id., at 16-17.) Lastly, Mandl responded to an interrogatory that the Agreed Valuation was based on the probabilities assigned by each party to the outcome of the post-trial motions, and K&L’s failure to exercise due diligence in discovering important evidence that surfaced after the trial. (Id., at 17.)

Third, K&L contends that the Proceeds Assignment is invalid, and suggests that the Mediations communications may be relevant in establishing that the assignment was improper. (Id., at 18-19.)
 

K&L has plainly failed to meet its burden. Although the Mediations communications may be relevant to some of the issues in the DC Action, K&L has not explained satisfactorily why they are critically needed. Mandl has not charged K&L with committing malpractice in connection with the 2004 Mediation, and K&L did not participate in the 2008 Mediation. Hence, K&L’s conduct during the Mediations is not material to the malpractice [*21] claim."