John Napolitano, appellant, v Markotsis & Lieberman, et al., respondents. (Index No. 3514/05)

2007-04674

SUPREME COURT OF NEW YORK, APPELLATE DIVISION, SECOND DEPARTMENT

2008 NY Slip Op 2980; 2008 N.Y. App. Div. LEXIS 2951

Plaintiff loses summary judgment motion for a case in which defendant represented him at trial, ultimately losing plaintiff’s case on the defense of unclean hands. “On their motion for summary judgment, the defendants made a prima facie showing that the plaintiff would be unable to prove at trial that, but for their alleged malpractice, he would have overcome the affirmative defense of "unclean hands" and prevailed in the underlying action. In opposition, the plaintiff failed to raise a triable issue of fact. Accordingly, the Supreme Court [*2] properly granted the defendants’ motion for summary judgment dismissing the complaint

John F. Sitar, et al., appellants, v Steven Sitar, et al., defendants, Kevin J. McGraw, et al., respondents. (Index No. 21538/05)

2007-00122

SUPREME COURT OF NEW YORK, APPELLATE DIVISION, SECOND DEPARTMENT

2008 NY Slip Op 2990; 2008 N.Y. App. Div. LEXIS 2964

April 1, 2008, Decided

In this sale of a business, plaintiffs alleged sufficient conflict of interest to keep the attorney in the case. “The owner agreed to sell the assets and operations of his company to his son’s company. The attorney, who was a member of the company’s board of directors, acted as attorney for both the owner and the owner’s son in the transaction. Although the owner never received the books and records of the company, the sale took place. The owner claimed that the attorney was aware that his son and daughter-in-law had engaged in intentional and unauthorized behavior that had caused the value of the company to be diminished, but the attorney did not disclose that information to him. The appellate court found that the complaint adequately pleaded a cause of action alleging legal malpractice against the attorney and the law firm based on a conflict of interest and failure to disclose critical information concerning the purchase price of the company. The complaint also adequately pleaded a cause of action alleging breach of duty of loyalty and breach of duty of care against the attorney. The remaining causes of action were properly dismissed as duplicative or insufficient.

REENA KUMAR AND PRADEEP KUMAR, AS ASSIGNEES OF JEFFREY A. TISACK, PLAINTIFFS-RESPONDENTS, v AMERICAN TRANSIT INSURANCE COMPANY, DEFENDANT. AMERICAN TRANSIT INSURANCE COMPANY, THIRD-PARTY PLAINTIFF-APPELLANT, ROBERT E. GALLAGHER, JR., AND HISCOCK & BARCLAY, LLP, THIRD-PARTY DEFENDANTS-RESPONDENTS. JEFFREY A. TISACK, NONPARTY RESPONDENT.

1431 CA 07-01317

SUPREME COURT OF NEW YORK, APPELLATE DIVISION, FOURTH DEPARTMENT

2008 NY Slip Op 2674; 2008 N.Y. App. Div. LEXIS 2608

March 21, 2008, Decided
March 21, 2008, Entered

One of the bedrock principals of legal malpractice is the requirement of privity, Privity is the direct relationship between an attorney and client. Here is an interesting variation on the theme, in which an insurer is permitted to continue the action based upon equitable subrogation.

“Subrogation is the principle by which an insurer, having paid losses of its insured, is placed in the position of its insured so that it may recover from the third party legally responsible for the loss" (Winkelmann v Excelsior Ins. Co., 85 NY2d 577, 581, 650 N.E.2d 841, 626 N.Y.S.2d 994; see Teichman v Community Hosp. of W. Suffolk, 87 NY2d 514, 521, 663 N.E.2d 628, 640 N.Y.S.2d 472; Humbach v Goldstein, 229 AD2d 64, 66-67, 653 N.Y.S.2d 950, lv dismissed 91 NY2d 921, 692 N.E.2d 132, 669 N.Y.S.2d 263). We agree with American that, "[a]t this stage of the litigation, where there has been no disclosure held, the parties should not be foreclosed, particularly where, as here, the pleadings raise serious issues involving ethical considerations’ " (Great Atl. Ins. Co. v Weinstein, 125 AD2d 214, 216, 509 N.Y.S.2d 325; see Allianz Underwriters Ins. Co., 13 AD3d at 174-175, 787 N.Y.S.2d 15). [**4] We reject the contention of the Hiscock attorneys that the principle of equitable subrogation does not apply because American has not yet paid the loss of its insured (see Allianz Underwriters Ins. Co. v Landmark Ins. Co., 13 AD3d 172, 175, 787 N.Y.S.2d 15; see also Krause v American Guar. & Liab. Ins. Co., 22 NY2d 147, 152-153, 239 N.E.2d 175, 292 N.Y.S.2d 67). Furthermore, unlike the complaint in Federal Ins. Co., the third-party complaint alleges that the loss sustained by American’s insured resulted from the malpractice of the Hiscock attorneys, specifically their failure to appear and defend the insured. Viewing the complaint in the light most favorable to American and according American the benefit of every favorable inference, we therefore conclude that the complaint alleges sufficient facts to withstand the motion to dismiss, inasmuch as we deem it to state a cause of action for equitable subrogation (see generally Great Atl. Ins. Co., 125 AD2d at 215; cf. Federal Ins. Co., 47 AD3d at 62). Contrary to the dissent’s conclusion, we need only determine that American has a cause of action, not whether it has stated one (see Leon, 84 NY2d at 88; Guggenheimer v Ginzburg, 43 NY2d 268, 275, 372 N.E.2d 17, 401 N.Y.S.2d 182).

Lisa A. Serradilla, et al., Plaintiffs-Respondents, v.Lords Corporation, et al., Defendants, Ronald Vargo, et al., Defendants-Appellants.

SUPREME COURT OF NEW YORK, APPELLATE DIVISION, FIRST DEPARTMENT

2008 NY Slip Op 3092; 2008 N.Y. App. Div. LEXIS 3037

April 8, 2008, Decided
April 8, 2008, Entered

This case involves plaintiffs who wanted to purchase a former SRO hotel and convert it to a single family home. They found out after closing that the City had issued vacate orders which prevented plaintiffs from doing the conversion. They successfully avoided dismissal against the architect and the attorney, but lost against the city. “Concerning the cause of action against the attorney for legal malpractice alleging, inter alia, his failure to advise plaintiffs of the need for a certificate of no harassment, the attorney failed to meet his initial burden of coming forward with evidence establishing, inter alia, that his only obligation to plaintiffs was to ensure that marketable title was transferred at closing and that the requisite standard of care did not require that he advise plaintiffs, prior to closing, of the need for a certificate of no harassment.”

Thomas E. Erdman, et al., respondents, v Joseph G. Dell, et al., appellants. (Index No. 11303/05)

SUPREME COURT OF NEW YORK, APPELLATE DIVISION, SECOND DEPARTMENT

2008 NY Slip Op 2959; 2008 N.Y. App. Div. LEXIS 2933

April 1, 2008, Decided

Plaintiffs obtained summary judgment against attorneys, which was reversed. However, the case goes on.

“The Supreme Court incorrectly [**2] found at this point in the action that the plaintiff Thomas E. Erdman would have succeeded on his cause of action to recover damages pursuant to Labor Law § 240(1) but for the defendants’ failure to sue the general contractor before the statute of limitations expired. Issues of fact exist as to whether the scaffold from which Erdman fell provided proper protection and whether his failure to lock the wheels underneath the scaffold was the proximate cause of the accident”

Marc Edme, respondent, v Richard Tanenbaum, appellant, et al., defendants. (Index No. 29870/06)

2007-02921

SUPREME COURT OF NEW YORK, APPELLATE DIVISION, SECOND DEPARTMENT

2008 NY Slip Op 2956; 2008 N.Y. App. Div. LEXIS 2944

April 1, 2008, Decided

Plaintiffs and attorney defendant had an arrangement for sums of money to be put aside and used to pay monthly mortgage obligations. Something went wrong, and plaintiffs were in default on the mortgage.

Plaintiffs won the motion to dismiss, and the case continues. “Contrary to the contention of the defendant Richard Tanenbaum, the documentary evidence that he submitted in support of his motion did not conclusively refute the plaintiff’s allegations of legal malpractice against him so as to warrant dismissal of the action pursuant to CPLR 3211(a)(1) insofar as asserted against him. Rather, those documents suggested that at least some of the funds at issue were supposed to be set aside to pay the plaintiff’s [**2] monthly mortgage obligation, and Tanenbaum’s evidence failed to address the plaintiff’s allegations that he neglected to set up and maintain an escrow account for those funds, thereby facilitating the default on the mortgage

22 NYCRR 1215 is a section of the law that governs attorney fees and engagement letters or retainer agreements. Until recently, courts have had differeing interpretations of the penalty when an attorney seeks fees but has no retainer agreement or engagement letter.

The cases were decided in three different ways: the first allowed the attorrney fees determined in quantum meruit, the second was that the attorney could keep collected fees but no future fees, and the third was to allow no fees at all.

Along came the case of Rubenstein v. Ganea held:

"We find that a strict rule prohibiting the recovery of counsel fees for an attorney’s noncompliance with 22 NYCRR 1215.1 is not appropriate and could create unfair windfalls for clients, particularly where clients know that the legal services they receive are not pro bono and where the failure to comply with the rule is not willful (see Matter of Feroleto, supra at 684). Our holding would be different were this matter a matrimonial action governed by the more stringent disciplinary requirements of 22 NYCRR 1400.3 and Code of Professional Responsibility DR 2-106 (c) (2). Here, Ganea concedes in her reply brief that "she did not think all legal services received would be free." Rubenstein’s failure to comply with 22 NYCRR 1215.1 was unintentional, no doubt attributed to the promulgation of the rule only seven weeks prior to his retention. Accordingly, the{**41 AD3d at 64} Supreme Court correctly held that Rubenstein could seek recovery of attorneys’ fees upon the theory of quantum meruit.[FN7]"

Now, the case of Mallin v. Nash in New York County adopts the Second Department’s holding:

"Public policy dictates that courts pay particular attention to fee arrangements between attorneys and their clients, as it is important that a fee contract be fair, reasonable, and fully known and understood by the client (see Jacobson v Sassower, 66 NY2d 991, 993, 499 NYS2d 381, 489 NE2d 1283 [1985]; Shaw v Manufacturers Hanover Trust Co., 68 NY2d 172, 176, 507 NYS2d 610, 499 NE2d 864 [1986]; Matter of Bizar & Martin v U.S. Ice Cream Corp., 228 AD2d 588, 644 NYS2d 753 [2d Dept 1996]). If the terms of a retainer agreement are not established, or if a client discharges an attorney without cause, the attorney may recover only in quantum meruit to the extent that the fair and reasonable value of legal services can be established (see Matter of Cohen v Grainger, Tesoriero & Bell, 81 NY2d 655, 658, 602 NYS2d 788, 622 NE2d 288 [1983]; Campagnola v Mulholland, Minion & Roe, 76 NY2d 38, 43, 556 NYS2d 239, 555 NE2d 611 [1990]; Matter of Schanzer, 7 AD2d 275, 182 NYS2d 475 [1st Dept 1959], affd 8 NY2d 972, 204 NYS2d 349, 169 NE2d 11 [1960]).

In Mallin, the attorney was awarded no fees under quantum meruit.

Here, from Anthony Lin of the NYLJ is a story of Donald Trump suing Morrison Cohen for legal malpractice.  Admirably, the story does not use the tag line, "you’re fired" anywhere.  Story:  Morrison Cohen represents Trump and a country club in a construction dispute and wins $ 2 million + along with attorney fees.  Now, Trump says he was churned. 

"In his malpractice suit, Trump maintains that Morrison Cohen should have advised against pursuing the infrastructure contract claims because it was foreseeable the legal costs incurred would far outstrip any recovery.

Trump said Monday the law firm was preoccupied with fees throughout the case.

"Ninety percent of the conversations I had with David Scharf were about legal fees, not the case," he said.

Trump also downplayed Scharf’s contributions in the courtroom.

"We won the case because I’m a great witness," he said.

Scharf Tuesday said he stood by his work. It was necessary to address the infrastructure issues because they had been raised by the opposing side, he said. Scharf added that he was "disappointed and disheartened" to be in a collection dispute with Trump after the firm achieved "a great result." He said that Trump was aware from past representation of the firm’s business model. "
 Stay tuned for the results, which will likely be publicised.  Read the story for the MC billing philosophy.

Continuing a trend in bankruptcy legal malpractice filings, here is the story, from NY Lawyer, of Pillsbury Winthrop Shaw Pittman and Levene, Neale, Bender, Rankin & Brill  all being asked to disgorge fees and expenses.in the amounts of $4.2 million $1.2 million.

"The filings ask for compensatory damages of at least $11 million from Pillsbury, former counsel for SonicBlue; $5 million from Levene, former counsel for the creditors’ committee; and $14 million from the group of three creditors. The trustee also asks that the court consider punitive damages for Pillsbury and the creditors. "

In this Federal Case, Cobalt Multifamily Investors I, LLC v. Shapiro, 06 Civ. 6468, Decided March 28, 2008 ,District Judge Kimba M. Wood
U.S. DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK  

The Court ultimately determined that under the Wagoner rule trustee lacks standing, and that the bankruptcy trustee’s powers are limited.

"The court-appointed receiver (the "Receiver") for Plaintiffs Cobalt Multifamily Investors I, LLC, and its related, defunct entities (collectively, the "Cobalt entities"), filed this lawsuit against three individuals alleged to have been the principals of the Cobalt entities, and three sets of attorneys who provided professional services to the Cobalt entities at various times during their active corporate lives. The three individuals named as defendants are Defendants Mark A. Shapiro, Irving J. Stitsky, and William B. Foster (collectively, the "Individual Defendants"). The three sets of attorneys named as defendants are Defendants Robert F. Cohen and his firm, Cohen & Werz LLC (the "Cohen Defendants"); Martin P. Unger and his firm, Certilman Balin Adler & Hyman LLC (the "Certilman Defendants"); and Philip Chapman and his firm, Lum, Danzis, Drasco & Positan LLC (the "Lum Defendants") (collectively, the "Law Firm Defendants").

The Complaint alleges that the Individual Defendants engaged in a massive fraud on the investing public by setting up the Cobalt entities, and persuading members of the public to invest millions of dollars in these same entities through various misrepresentations and cold-calling schemes. (Compl. §§4, 51-87.) The Individual Defendants then allegedly misappropriated the majority of the funds invested in the Cobalt entities for their own personal use. (Compl. §§83-85.) The Complaint alleges that the Law Firm Defendants assisted the Individual Defendants in committing this investor fraud, and in subsequently looting the Cobalt entities of corporate assets. (Compl. §§94-137"

A. The Wagoner Rule.

In challenging the Receiver’s standing, the Law Firm Defendants rely principally on the line of decisions beginning with Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991) ("Wagoner"), which addresses the issue of standing in the bankruptcy context. (Report 32-37.) In Wagoner, the Second Circuit stated the "well settled" principle that a bankruptcy trustee has standing to assert only those claims held by the bankrupt corporation. Id. at 118 (citing Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 434 (1972)). A bankrupt corporation lacks standing to assert fraud claims against third parties where those third parties assisted corporate managers in committing the alleged fraud.6 Wagoner, 944 F.2d at 120; In re CBI Holding Co., Inc., 311 B.R. 350, 368-69 (S.D.N.Y. 2004) ("CBI Holding I"). Thus, under Wagoner, a bankruptcy trustee also lacks standing to assert such fraud claims against third parties. See In re Bennett Funding Group, Inc., 336 F.3d 94, 99-100 (2d Cir. 2003).

In Hirsch v. Arthur Anderson & Co., 72 F.3d 1085 (2d Cir. 1995), the Second Circuit applied the Wagoner rule to also preclude a bankruptcy trustee from asserting certain claims against third parties that are based in fraud, but are denominated as claims other than fraud (e.g., malpractice or breach of contract). See Hirsch, 72 F.3d at 1094-95 (applying Wagoner rule to preclude bankruptcy trustee’s malpractice claim where the claim was based on allegations that the defendant assisted corporation managers in defrauding the corporation); see also In re CBI Holding Co., Inc., 318 B.R. 761, 766 (S.D.N.Y. 2004) ("CBI Holding II") (applying Wagoner rule to bar plaintiff’s breach of contract, negligence, and fraud claims against defendant accounting firm where the claims were "premised on allegedly deficient auditing by [defendant] that failed to discover fraudulent acts committed by certain members of [corporate] management"); Breeden v. Kirkpatrick & Lockhart, LLP, 268 B.R. 704, 709 (S.D.N.Y. 2001) (applying Wagoner rule to preclude plaintiff’s various claims against defendant professionals where the claims alleged that defendants’ misconduct "allowed the [corporate principals] to perpetuate their fraudulent scheme"). "

Today’s Outside Counsel Column in the NYLJ by Garber and Vaughn does not mention or discuss legal malpractice.  Nevertheless, its thesis is highly relevant. 

"The 212 people exonerated by DNA evidence since 1989 have raised significant awareness about the criminal justice system’s failure to protect the innocent from wrongful conviction and have led to reform in the handling of criminal investigations and prosecutions.

As 149 of these DNA exonerations have come in the last seven years, a body of data has recently developed that can now be relied upon for meaningful analysis of the causes of erroneous convictions. Cases most likely to result in the conviction of the innocent involve faulty eyewitness identification, misleading forensic evidence, false confessions, or unreliable informant testimony."

Beyond systematic problems in criminal prosecution, there is the lurking elephant of poor work by a criminal defense attorney.  Regularly unavailable for a legal malpractice case, in the absence of actual innocence, the cases of these 212 should similarly be examined for attorney shortcoming.

Incidentally, the legal malpractice statute of limitations starts to run with exoneration.

 

Here is a primer in how litigation can go sour, starting with one problem, leading to one after another.  This  NJ case discusses affidavits of merit in NJ legal malpractice cases, pro-se litigants and potential dispensations to them, and the statute of limitations in bankruptcy cases. SHIRLEY A. GOODHEART, v. STEVEN P. KARTZMAN, ESQ.; WACKS, MULLEN & KARTZMAN; GLEN SAVITS, ESQ.; LUCAS, SAVITS AND MAROSE, LLC; and GREEN AND SAVITS, LLC,

"Plaintiff now argues that (1) the statute of limitations did not bar the amended complaint because the discovery rule should apply and no malpractice claim accrued until the bankruptcy plan was confirmed on June 17, 2002; and (2) the trial court erred in failing to enter an order memorializing the trial judge’s instruction that plaintiff file an amended complaint within thirty days, thereby prejudicing a pro se plaintiff.

With respect to the statute of limitations, it is unclear in the complaint whether the allegations arise from confirmation of the bankruptcy plan in 2002 or the reopening of the Chapter 7 bankruptcy proceeding in 1999. We are, therefore, constrained to remand for a hearing pursuant to Lopez v. Swyer, 62 N.J. 267 (1973), to determine when the cause of action actually accrued.

With respect to plaintiff’s second point, she is entitled to no special consideration as a pro se plaintiff. She must be aware of the law and compliant with the Rules of Court as does any other litigant. Tuckey v. Harleysville Ins. Co., 236 N.J. Super. 221, 224 (App. Div. 1989). The judge instructed her to file the amended complaint within thirty days of the July 14, 2006 case management conference. She did not file her motion to restore and amend the complaint until August 27, 2006; however, we expressly decline to reverse the February 16, 2007 order at this juncture. Rather, the matter is remanded for a Lopez hearing to determine whether plaintiff filed the complaint within the statute of limitations. If the court finds that she did, plaintiff may move to restore the complaint and proceed with the litigation. If, on the other hand, the trial court finds that the cause of action accrued in 1999, rather than 2002, the complaint shall remain dismissed.

This front page article from the NYLJ tells of a new type of legal malpractice case originating in a securities law suit, by a non-client, stretching the bounds of privity:

"A federal judge in Manhattan has ruled that a lawsuit brought under Oregon "Blue Sky" law may proceed against the New York law firm Seward & Kissel for allegedly aiding and abetting securities fraud by a client hedge fund.

Aider and abettor claims against lawyers or accountants in securities fraud cases are barred under federal law. But Southern District Judge Harold Baer has ruled they are permissible under a state securities fraud statute, or Blue Sky law.

The suit by Oregon-based investor Howard Houston stems from Seward & Kissel’s representation of Wood River Partners, a hedge fund that collapsed in 2005 after a sharp decline in the stock of Endwave Corp., the small technology company that comprised more than 60 percent of the fund’s holdings.

Mr. Houston claims he invested $2.75 million in Wood River based on offering documents and marketing materials that stated Wood River would pursue a diversified investment strategy. He claims Seward & Kissel helped Wood River perpetrate fraud because the law firm drafted some of the documents and allowed its name to be used in the fund’s prospectus"

Bankruptcy Legal Malpractice cases are on the rise.  Trustees have greater powers than do regular plaintiffs, there are longer statutes of limitation in Bankruptcy situations, and the numbers are really big.  Here is a case from the NY Lawyer site.

"Gibson, Dunn & Crutcher is the latest law firm to be named in a suit stemming from the breakdown of the commodities firm Refco, Inc. The action, filed by liquidators and the trustee for Sphinx Funds, a family of funds that collapsed after doing business with Refco, was filed March 8 in New York trial court; a notice of removal to federal district court in Manhattan was filed by one of the defendants March 28.

Refco filed for bankruptcy in October 2005. Several lawsuits and criminal proceedings have followed. This latest action claims the funds lost $263 million as a result of Refco¹s meltdown; Gibson, Dunn’s representation of various Sphinx entities also contributed to the loss, the suit claims.

Gibson, Dunn represented Sphinx Funds and its investment manager, PlusFunds, Inc., as well as fund directors and entities controlled by those directors.

Work for those entities was a conflict of interest that the firm never disclosed, the complaint says. The plaintiffs also charge Gibson, Dunn with helping to conceal the nature of numerous loans made by Refco to Sphinx directors that were in fact payments to those directors in exchange for Sphinx’s business with Refco. "