Opinion
Index No. 156841/2021 MOTION SEQ. No. 002
12-20-2022
ALBERT GAD, Plaintiff, v. KRAMER LEVIN NAFTALIS & FRANKEL, LLP, J. MICHAEL MAYERFELD, SCOTT S. ROSENBLUM Defendant.
Unpublished Opinion
DECISION + ORDER ON MOTION
HON. MARGARET A. CHAN JUDGE.
The following e-filed documents, listed by NYSCEF document number (Motion 002) 16, 17, 18, 19, 20, 21,22,23,24,25,26,27,29 were read on this motion to/for DISMISS
In this action arising from defendants' alleged legal malpractice, defendants Kramer Levin Naftalis & Frankel LLP (Kramer Levin), J. Michael Mayerfeld, and Scott S. Rosenblum (together, defendants) move pursuant to CPLR 3211(a)(1) and (a)(7) for an order dismissing plaintiff Albert Gad's (Albert or plaintiff) verified amended complaint. Plaintiff opposes the motion.
Background
Albert is a 45% shareholder of Almod Diamonds Ltd. (Almod), a closely held New York corporation that is family owned and operated (NYSCEF #13 - amended complaint, ¶ 8). Albert's siblings, Morris Gad (Morris) and Donna Gad Hecht (Donna), own the remaining 45% and 10% of the shares, respectively (id). The Gad siblings have been in conflict for years over the control and operations of Almod, and Donna brought a lawsuit in 2014 against Albert, Morris, and Almod in connection with those conflicts (the Donna Litigation) (id., ¶¶ 9, 16).
In April or May 2016, Albert retained defendants for legal advice concerning the business disputes involving his family members, including the Donna Litigation (id., ¶¶ 9-15). The parties agreed that defendants would charge a flat fee of $10,000 per month, which was subsequently increased to $15,000 per month starting from May 2018 (id.).
While defendants did not represent Albert in the Donna Litigation, they represented Albert in negotiating and reaching a settlement with Donna (id., f ¶ 16-19). Albert asked defendants to protect his financial interests and made clear that any settlement documents must include certain key points, including that (1) any "true-up" payments to Donna shall be calculated in consideration of her previous sale of low-quality jewelry inventory to Almod, which was allegedly improper and unauthorized, (2) a mechanism shall be included by which either Albert or Morris is immediately elected as the CEO of Almod, (3) all shareholder distributions, salaries, and expenses, including legal expenses, must continue to be allocated 45/45/10 according to each shareholder's respective interest in Almod, and (4) if Almod was to form an independent board of directors, defendants were to vet any potential Albert-nominated directors who should represent Albert's interests and be highly experienced in running retail businesses (amended complaint, ¶¶ 19-20).
On June 12, 2018, defendants presented Albert with finalized settlement documents, advising Albert to sign them and assuring him that the settlement agreement and the shareholder and voting agreement supplement contained all key provisions Albert wanted (id., f 23). Albert alleges that he reminded defendants that he was busy operating the company and was relying on defendants' assurances when he executed the documents (id., ¶¶ 22-24). After Donna and Morris executed the settlement documents, the documents became binding and the Donna Litigation was discontinued (id.).
Albert alleges that the settlement documents did not include the key provisions defendants assured to be included, causing ascertainable damages to him (id., ¶¶ 26-39, 44). For instance, first, the settlement agreement explicitly excluded in the "true-up calculation" the improper sale profits made by Donna and her husband. Albert alleges that this forfeited his ability to claw back the roughly $19 million sale profits, further diluting his financial interests in Almod (id., ¶ 26). Second, despite Donna's mere 10% shares in Almod, the settlement agreement provided Donna with a salary that was more than 10% of her siblings' salaries and that Almod was to pay all the legal fees Donna incurred (id., ¶ 27). Third, the settlement agreement allowed for hourly fee-based legal fees for defendants' services which overrode and were hundreds of thousands of dollars higher than the previously agreed flat monthly fees (id., ¶ 30). Further, an independent board of directors was formed following the settlement, but the director endorsed by defendants and named to represent Albert was not an expert in retail business and regularly opposed Albert on company issues, preventing either Albert or Morris from being elected as Almod's CEO (id., ¶f 33-37). In this connection, Albert further alleges that in or about early 2019, Almod "procured a bid of $850 million" from a private equity firm called CVC for a prospective acquisition of Almod; however, the internal company disputes delayed the process, causing CVC to withdraw from the deal when the COVID-19 pandemic hit (id., f 38). Albert contends that he would have realized hundreds of millions of dollars from the acquisition but for the delay.
Albert alleges that by proposing such settlement documents and urging him to sign, defendants did not act in furtherance of Albert's stated goals and desires but intentionally and/or recklessly failed to disclose to Albert material facts and the risks of signing the documents. Albert alleges that had he known the true contents of those documents, he never would have agreed to the settlement terms and would not have sustained those damages (id., ¶¶ 39, 42-46).
As such, Albert commenced this action by filing a summons and complaint on July 21, 2021, alleging three causes of action: legal malpractice, fraud, and breach of New York Judiciary Law § 487. After defendants moved to dismiss the original complaint in its entirety, Albert filed an amended complaint on November 1, 2021, voluntarily withdrawing the fraud claim and Judiciary Law claim and amending certain factual allegations regarding the legal malpractice claim (NYSCEF # 24).
On January 14, 2022, defendants made a motion to dismiss the legal malpractice claim, the only cause of action left in this action, arguing that Albert lacks standing to bring this action because the alleged harm occurred to Almod, and if there was any harm to Albert, that could only be indirect harm sustained in his capacity as a shareholder. Further, defendants argue that Albert fails to allege causation and damages for every "criticism" he has against defendants (NYSCEF # 24 - defs brief in support).
In opposition, Albert argues that he has standing to bring a legal malpractice action since an attorney-client relationship existed between him and defendants. Albert also argues that the amended complaint adequately alleges causation since it can be reasonably inferred from the alleged facts that defendants' negligence was a substantial factor in Albert's damages, and that damages are also sufficiently alleged since he does not bring this action as Almod's shareholder, but rather as an individual whose financial interests were harmed.
After hearing the parties' oral arguments on July 19, 2022, the court referred this case to the Alternative Dispute Resolution Program of the Commercial Division for a mediation proceeding to resolve the issues in this case and a companion case commenced by Kramer Levin against Albert for legal fees (Index No. 655720/2021) (NYSCEF # 29 - order of reference to ADR program). On October 3, 2022, the parties informed the court that the mediation was unsuccessful (NYSCEF # 30).
Discussion
On a CPLR 3211(a)(7) motion to dismiss, the court must afford the pleadings a liberal construction, accept the allegations of the complaint as true and provide the plaintiff with "the benefit of every possible favorable inference" (Leon v. Martinez, 84 N.Y.2d 83 [1994]). A motion to dismiss pursuant to CPLR 3211(a)(1) may be appropriately granted "only if the documentary evidence submitted conclusively establish a defense to the asserted claims as a matter of law" (Morgenthow & Latham v. Bank of N.Y.Co., Inc., 305 A.D.2d 74, 78 [1st Dept 2003] [internal citations and quotations omitted]). Under these circumstances, "legal conclusions and factual allegations [in the complaint] are flatly contradicted by documentary evidence [such that] they are not presumed to be true or accorded every favorable inference" (id. [internal citation and quotation omitted]).
Standing
As a threshold matter, defendants move to dismiss the legal malpractice claim for lack of standing, arguing that as a shareholder of Almod, Albert has no individual cause of action for the injury to Almod. Defendants argue that since the harm Albert allegedly suffered is essentially the lost value of his investment in Almod, the claim is derivative but not direct.
Defendants' arguments overlook the nature of this action. Although Albert is a shareholder of Almod and the at-issue settlement has impacts on the company, this action centers around defendants' attorney-client relationship with Albert in their representation of Albert's interest in settling the Donna Litigation. In the hearing held on July 19, 2022, defendants also made clear that they represented only Albert, not the company Almod, in the settlement (NYSCEF # 29 - Tr 4:15-21). Also, the amended complaint alleges harm to Albert individually as opposed to Almod. As the settlement concerns the Donna Litigation in which Albert was personally named as a defendant, the settlement agreement directly impacts on Albert's personal legal and financial interests. Therefore, Albert has standing to bring the legal malpractice claim with respect to defendants' representation of him in the settlement (Delos Ins. Co. v. Smith & Laquercia, LLP, 84 A.D.3d 668, 669 [1st Dept 2011] ["[plaintiff] has standing to pursue its claims against defendant since it is undisputed that defendant represented [plaintiff]" in the underlying litigation]; The Exeter Law Group LLP v. Immortalana Inc., 2016 WL 7188559, *3 [Sup Ct, NY County, Dec. 9, 2016] [individual owners of a corporation have standing in a legal malpractice claim against their attorneys for negligently structuring their business ventures]).
The cases defendants rely on in arguing that a shareholder has no standing to bring an individual claim for the company's loss are inapposite as they either do not involve a legal malpractice claim or there was no attorney-client relationship between the shareholder and the attorneys (NYSCEF # 24 at 10-11; see e.g. Vaughan v. Standard Gen. L.P., 154 A.D.3d 581 [1st Dept 2017]).
Defendants' reliance on Evangelista v. Slatt, 20 A.D.3d 349 (1st Dept 2005) in their reply brief is also misplaced since the malpractice claim was dismissed on the ground of lack of damages instead of standing (id., at 350 ["Accordingly, even if it is assumed that defendants represented Evangelista in the Bronx County action and neglected the prosecution of that action, such malpractice (if any) did not result in any loss to Evangelista"]; see also brief for defendants-appellants, available at 2004 WL 5359253, HM2).
The authority defendants cite that involves an attorney-client relationship is Glaubach v. Miller, 2021 WL 755522 (Sup Ct, NY County, Feb. 26, 2021), affd200 A.D.3d 414 (1st Dept 2021). Yet, Glaubach is distinguishable. In Glaubach, the plaintiffs legal malpractice claim is premised on defendants' allegedly deficient pleading of claims under Business Corporation Law (BCL) § 720 (Glaubach, 2021 WL 755522, *4). Under BCL § 720, an individual, in his capacity as officer or director, is permitted to sue the corporate management without having to make a pre-suit demand as required for shareholder derivative claims (id.). The court held that "although a BCL § 720 claim does not need to be brought in the name of the corporation, the cause of action and right of recovery belongs solely to the corporation," thus any legal malpractice claim arising from the BCL § 720 claim can only be brought by the corporation (id.', Glaubach, 200 A.D.3d at 414). Here, unlike a BCL § 720 claim that belongs to the corporation, the underlying action -defendants' representation of Albert in settling the Donna Litigation brought against Albert - belongs to Albert and concerns Albert's personal interests for which defendants were retained to protect.
Ca usa tion and Damages
Although Albert has standing to bring the legal malpractice claim, for the reasons stated below, the claim must be dismissed for failure to adequately allege causation and damages.
"[A]n action for legal malpractice requires proof of three elements: the negligence of the attorney! that the negligence was the proximate cause of the loss sustained; and proof of actual damages" (Schwartz v. Olshan Grundman Frome & Rosenzweig, 302 A.D.2d 193, 198 [1st Dept 2003]). To satisfy the pleading requirement for causation, a plaintiff must allege that '"but for' the attorney's conduct [or nonfeasance], the client would have prevailed in the underlying action or would not have sustained any ascertainable damages" (Weil, Gotshal & Manges, LLP v. Fashion Boutique of Short Hills, Inc., 10 A.D.3d 267, 272 [1st Dept 2004]; Cosmetics Plus Group, Ltd. v. Traub, 105 A.D.3d 134, 140-141 [1st Dept 2013]). Regarding damages, "to survive a ... pre-answer dismissal motion, a pleading need only state allegations from which damages attributable to the defendant's conduct [or nonfeasance] may be reasonably inferred" (Lappin v. Greenberg, 34 A.D.3d 277, 279 [1st Dept 2006] [internal citations omitted]). However, conclusory allegations of damages predicated on speculation cannot suffice for a legal malpractice action (Bua v. Purcell & Ingrao, P.C., 99 A.D.3d 843, 847-848 [2d Dept 2012]).
Under these standards, the court finds that the amended complaint fails to adequately plead causation. Notably, even if Albert had been informed by defendants of the content and risks of the settlement terms and had refused to sign the documents, the settlement agreement would still have become effective. Under Section 1 of the settlement agreement, the settlement stipulation shall become effective upon the approval of Almod board of directors and shall be binding on Albert regardless of whether he executes it or not, so long as Donna and Morris both execute the agreement (NYSCEF # 21 - settlement agreement, §§ 1.a, 1.b). In fact, Donna and Morris executed the agreement and the board of directors approved it. Thus, the amended complaint does not sufficiently allege that "but for" defendants' alleged negligence related to their failure to inform Albert of the terms and risks of the settlement documents, the settlement agreement would not have become effective and he would not have been damaged by it (Silverstein v. Pillersdorf, 199 A.D.3d 539, 540 [1st Dept 2021]).
The relevant part provides that: "b. In the event that one or more Defendants [in the Donna Litigation] does not execute this stipulation of settlement, the stipulation of settlement will nevertheless be binding on the other Defendants, and such other Defendants will take all actions reasonably within their power to cause Almod, and in the case of Albert, AICo, and in the case of Morris, MoCo, to perform the obligations herein. Within two (2) business days after Donna and one or more of Albert and Morris executes this Agreement, and the board of directors of Almod approves this stipulation of settlement, the Parties will file a stipulation of settlement, the Parties will file a stipulation of discontinuance of the Action." (NYSCEF # 21, § l.b).
Moreover, the amended complaint fails to allege that but for defendants' negligence, the outcome of the settlement would have been more favorable with respect to the "true-up" payment to Donna, Donna's salary and benefits, and the legal fee provisions. In this regard, the parties in the Donna Litigation have complete discretion as to how they chose to arrange the terms of the settlement. For instance, the "true-up" payment was the subject of the Donna Litigation that Donna sued Albert personally to pay for. Under the settlement, the "true-up" would instead be paid to Donna by Almod, not Albert, while Albert forfeited the right to claw back any funds Donna profited from her allegedly improper sale of inventory to Almod. Essentially, to find the "but-for" causation, plaintiff is inviting the court to review the settlement terms and speculate how the Donna Litigation would proceed and what other alternative settlement terms would be like if Albert had objected to the settlement agreement. Thus, the alleged causation and damages are too speculative to support the legal malpractice claim (Perkins v. Norwick, 275 A.D.2d 48, 51-52 [1st Dept 1999] [finding that plaintiffs suggestion that he might have later renegotiated different terms but for defendant's negligence is simply "gross speculation on future events"]).
Further, the damages which allegedly flowed from naming an unsatisfactory independent director, delay in the election of a CEO, and the loss of the CVC acquisition caused by the delay and COVID-19 pandemic are speculative as well, and the causal relationship between those events and defendants' negligence is even more remote. When a plaintiffs claim "requires speculation about future events," it "does not sufficiently establish that defendants proximately caused him ascertainable damages" (Ferguson v. Hauser, 156 A.D.3d 425, 425-426 [1st Dept 2017]; Sherwood Group v. Dornbush, Mensch, Mandelstam & Silverman, 191 A.D.2d 292, 294 [1st Dept 1993] [hypothetical course of events on which any determination of damages would have to be based constitutes a chain of "gross speculations on future events"]). Albert's claim here is grounded on multiple assumptions including that the Gad siblings would have agreed to the mechanism he wanted to elect a CEO, that a different independent director would have changed the decision regarding CEO election made by the new board that consists of eight directors, and that if a CEO had been timely elected, the CVC acquisition would have gone through and been completed before the COVID-19 pandemic. Therefore, read in the light most favorable to Albert, the allegations do not give rise to an inference that "but for" defendants' negligence, he would not have sustained the alleged damages, which are speculative and unascertainable here.
Conclusion
In view of the above, it is
ORDERED that the motion of defendants Kramer Levin Naftalis & Frankel LLP, J. Michael Mayerfeld, and Scott S. Rosenblum to dismiss the verified amended complaint is granted, and the verified amended complaint is dismissed in its entirety, with costs and disbursements to defendants as taxed by the Clerk of the Court,' and it is further
ORDERED that the Clerk is directed to enter judgment accordingly.
This constitutes the Decision and Order of the court.