Hinshaw Culbertson v. E-Smart Tech.

Full title: HINSHAW CULBERTSON, LLP, Plaintiff-Counterclaim Defendant, v. E-SMART…

Court: Supreme Court of the State of New York, New York County

Date published: Mar 18, 2011

2011 N.Y. Slip Op. 30651 (N.Y. Sup. Ct. 2011)

Opinion

113108/09.

March 18, 2011.

DECISION/ ORDER

JUDITH J. GISCHE, Judge.

Recitation, as required by CPLR § 2219 [a] of the papers considered in the review of this (these) motion(s):

Papers Numbered

HC, Maranda n/m (3211) w/JRS and EKL affirms, exhs ........... 1 e-Smart, IVI opp .............................................. 2 HC, Maranda reply w/EKL, BRB, MEF affirms .................... 3 e-Smart, IVI opp/sur-reply (convert to 3212)................... 4 HC, Maranda response w/JRS affirm ............................ 5 Transcript of OA 1/6/11 ....................................... 6 Upon the foregoing papers, the decision and order of the court is as follows:

Plaintiff Hinshaw Culbertson, LLP ("Hinshaw") seeks to recover unpaid legal fees due from its former client, defendant e-Smart Technologies, Inc. and IVI Smart Technologies, Inc. (collectively "Smart"). Smart has asserted counterclaims against Hinshaw and commenced a third party action against third party defendants Maranda E. Fritz and Maranda E. Fritz, P.C. (collectively "Fritz") for legal malpractice, breach of fiduciary duty and defamation. Hinshaw and Fritz have jointly moved to dismiss the counterclaims and certain defenses Smart has asserted on the grounds that they are without a factual basis, are not pleaded with particularity, the claims are conclusory and (as to certain legal advice) premature. Smart opposes Hinshaw's motion and has cross moved for permission to serve a 2^nd amended complaint.

At the outset, the court denies the application by Fritz and Hinshaw (first raised in reply) to convert this motion to a motion for summary judgment. Summary judgment is never available unless or until issue has been joined (Chun v, North American Mortgage, 285 AD2d 42 [1^st Dept 2001]). Although the court can, on notice to the parties, convert a dismissal motion to one for summary judgment, Fritz and Hinshaw's submissions do not justify this conversion, or such expedited treatment (CPLR § 3212 [c]).

In the context of a motion to dismiss pursuant to CPLR 3211, the court must afford the pleadings a liberal construction, take the allegations of the complaint as true, and provide the plaintiff with the benefit of every possible inference (Goshen v. Mutual Life Ins. Co. of N.Y., 98 NY2d 314, 326; Leon v. Martinez, 84 NY2d 83; Morone v. Morone, 50 NY2d 481; Beattie v. Brown Wood, 243 AD2d 395 [1^st Dept. 1997]). In deciding Hinshaw and Fritz's motion to dismiss, the court must also consider whether, accepting all of Smart's facts, they support the causes of action asserted (Rovello v. Orofino Realty Co., 40 NY2d 633, 634) and whether they fit within any cognizable legal theory (Goldman v. Metropolitan Life Ins. Co., 5 NY3d 561). Whether Smart can ultimately establish its allegations is not part of the calculus in determining this motion to dismiss (Goshen v. Mutual Life Ins. Co. of N.Y., supra at 326).

The court's decision is as follows:

Facts Alleged and Arguments Raised

Smart hired Fritz to provide legal services. Later, Fritz joined the Hinshaw firm. The Hinshaw firm has asserted a claim for unpaid legal services. In its answer with counterclaims and 3^rd party complaint, Smart alleges that Fritz committed legal malpractice on a number of occasions by negligently providing Smart with erroneous legal advice before and after she joined the Hinshaw firm. Smart notified Fritz and Hinshaw they were being discharged as the lawyers for e-Smart and IVI Smart by letter dated August 1, 2008.

According to Smart, Fritz held herself out to be a "special securities counsel" but she was, in fact, incompetent, as demonstrated by her negligent legal advice she provided to Smart which has damaged the value of the company. Due to Fritz's incompetence, the SEC launched an investigation into Smart's operations, believing that Smart had engaged in a illegal scheme to evade federal and state securities laws. Not only did Fritz negligently provide Smart with erroneous legal advice, once SEC notified Smart of the alleged SEC violations (the "Wells notice"), Fritz and Hinshaw mishandled that investigation as well by producing privileged documents to the SEC without first consulting with Smart.

Other alleged instances of Fritz's negligence include the manner in which she handled two lawsuits involving Smart in the District of California courts, her helping a third party to file an involuntary bankruptcy petition on Smart's behalf and providing "inside" information to a disgruntled e-Smart shareholder/director ("Berwick") who then commenced a shareholder derivative action against Smart's board of managers. Smart contends Fritz and Hinshaw cavalierly provided privileged and confidential documents to third parties.

It is further alleged that Fritz fed Borowitz with information that he then incorporated into his complaint and that these statements were false, damaging and defamatory. The statements attributed to Fritz and reportedly restated in Berwick's complaint in the shareholder derivative action pertain to whether Smart owned certain patents, their value, the status of business transactions and potential revenues. Other false and defamatory statements attributed to Fritz are about Smart's president and CEO ("Grace"). Fritz reportedly said that: 1) Grace was moving around Smart's assets, 2) she had illegally taken control of Smart's shares and issued millions of common shares illegally and 3) the company had never formed any compensation, audit, ethical or executive committees nor put any alternative financial controls in place.

In addition to its defamation and legal malpractice claims, Smart contends Fritz and Hinshaw violated their fiduciary duty to the company by, among other things, responding to an SEC demand for documents that Smart contends were privileged and confidential. Smart contends that had they been notified of the subpoena, they could have taken legal action to quash it.

Fritz and Hinshaw argue that the defamation action does not satisfy the pleading requirements of CPLR § 3016 because the Borwick complaint is only referenced in, not annexed to, the third party complaint in this action. Fritz and Hinshaw also seek the dismissal of the legal malpractice claim on the basis that the factual allegations do not permit an inference that, but for Fritz and Hinshaw's negligence, Smart would not have sustained damages. According to Fritz and Hinshaw, since Smart has not identified any of the "confidential" or "privileged" documents that were purportedly divulged by them, such conclusory allegations do not support Smart's claim for breach of fiduciary duty.

Discussion

Defamation is the injury to one's reputation, either by written expression (libel) or oral expression (slander) (Morrison v. National Broadcasting Co., 19 N.Y.2d 453). CPLR § 3016 (a) requires that the particular words complained of be set forth in a complaint alleging defamation. Smart's defamation claim is not pleaded with specificity. A copy of the complaint in the Borwick derivative action was not included with the third party complaint. Consequently, plaintiff is specifically bound by the alleged defamatory words contained in the four corners of the complaint (See, Sassower v. Finnerty, 96 AD2d 585 [2^nd Dept. 1983] app dismd 61 NY2d 756).

Even assuming, arguendo, that references to and quotes from the complaint in the Borwick derivative action have substantially satisfied the requirements of CPLR § 3016 (a), they do not support a defamation action. The elements of libel are: [1] a false and defamatory statement of fact; [2] regarding the plaintiff; [3] which are published to a third party and which [4] result in injury to plaintiff (Idema v. Wager, 120 FSupp2d 361 [SDNY 2000]; Ives v. Guilford Mills, 3 FSupp2d 191 [NDNY 1998]).

Where, however, certain statements are made in the context of litigation, those statements, although defamatory, are privileged (Park Knoll Associates v. Schmidt, 59 NY2d 205). The absolute privilege will apply to any statement that may possibly or plausibly be relevant or pertinent, "with the barest rationality" to a pending action (Joseph v. Larry Dorman, P.C., 177 AD2d 618, 619 [2^nd Dept. 1991]).

Accepting as true the allegations that Fritz contacted Borwitz and/or his lawyers, and without deciding whether this was a violation of any ethical rule, the damage to Smart was that Borwitz used or incorporated this information into the complaint in his derivative shareholder action because Borwitz and Fritz had a grudge against Grace and the other board members. Where a defamatory communication is made about the plaintiff to another like-minded party, who shares a common interest with the defamer, there is no claim for defamation (Rossignol v. Silvernail, 146 A.D.2d 907 [3^rd Dept 1989] citing Romer v. Portnick, 78 Misc.2d 404 [N.Y.City Civ.Ct. 1974]). Smart is not suing Fritz because of statement she made to Borwick — a "like minded" individual who, like Fritz (allegedly) disliked Grace and the other managers. This lawsuit is about the statements published in the Borwick complaint. That publication (i.e. the complaint) was in the context of litigation. Furthermore, the lawsuit was brought derivatively against the individual board members (i.e. Black, Cole, Volpe and Grace). In this action, the defamation claim is being asserted by Smart, the company that was the subject of the derivative action. Thus, Smart has no cause of action against Fritz and Hinshaw for defamation because: 1) they are not being sued for the statements made to a like-minded person, 2) the statements they are being sued for were published in a court document, and 3) the company was not defamed. Therefore, the motion to dismiss the defamation cause of action is granted and the counterclaim/third party claim for defamation against Fritz and Hinshaw is severed and dismissed.

Where a motion to dismiss is premised upon the existence of documentary evidence, such evidence must definitively dispose of plaintiffs claims (Bronxville Knolls Inc. v. Webster Town Center Partnership, 221 AD2d 248 [1^st Dept 1995]). Fritz and Hinshaw have successfully established — and Smart does not disagree — that Fritz and Hinshaw were discharged as their lawyers August 1, 2008. It is also unrefuted that there was a pending motion in one of the California cases in which Smart's opposition was due August 4, 2008. Smart's argument, that it was negligent for Fritz and Hinshaw to wait until the last moment to work on the motion, which is why they were discharged, does not support a claim for legal malpractice. No deadline was missed. The supplemental claim, that Smart had to scramble to find new lawyers, is also unavailable. To establish a prima facie case of legal malpractice or negligence, the client must plead and prove facts tending to show that the law firm: 1) failed to exercise that degree of care, skill, and diligence commonly possessed and exercised by an ordinary member of the legal community, 2) that such negligence was the proximate cause of the actual damages sustained by the plaintiff and, 3) that "but for" the defendant's negligence, the plaintiff would have been successful in the underlying matter (Laventure v. Galeno, 307 AD2d 255 [1^st Dept. 2003]; Wexler v. Shea Gould, 211 AD2d 450, 621 NYS2d 858 [1^st Dept. 1995]). The facts do not support any of these elements and the claim for legal expenses spent to hire another attorney is not a malpractice claim. Therefore, Fritz and Hinshaw's motion to dismiss the legal malpractice claim based upon the failure to timely prepare a response to the motion in the California action granted and that aspect of the malpractice claim is severed and dismissed.

The facts supporting the involuntary bankruptcy branch of the legal malpractice claim are insufficient to sustain that action and defeat Fritz's and Hinshaw's motion to have it dismissed. Without deciding whether any of the actions alleged were ethical violations (assuming they are true for the limited purpose of this motion), even if Fritz and Hinshaw "instigated" the filing of that petition, that is not legal malpractice.

The SEC and Wells notice based claims, however, are supported by facts and withstand the dismissal motion by Fritz and Hinshaw. Their motion to dismiss is, therefore, denied.

Although Smart states that Fritz and Hinshaw breached their fiduciary duty by providing confidential and/or privileged documents to the SEC and other persons, they have not specified, even in the most general way, what kind of documents they are referring to with two exceptions, one being a single document attached as an exhibit to Fritz's motion to be relieved as counsel in one of the California cases. It is unrefuted she attached this document, it was obtained by defense counsel in the other California action and that, eventually, the file was sealed by the court because the document was privileged. At the pleading stage, Smart's facts support the claim of breach of fiduciary duty asserted as to that document.

Other documents readily identified are those Fritz provided to the SEC without Smart's consent. Though the documents were produced pursuant to a subpoena, that defense can be raised in Fritz and Hinshaw answer.

To the extent that Smart contends Borwitz obtained confidential documents from Fritz and Hinshaw, these facts do not support a claim for breach of fiduciary duty because Smart only speculates this is how Borwitz knew certain information about the company because there was no other possible source for this information other than Fritz. Having failed to specify what those documents might be or why only Fritz could have been their source, Smart has failed to state facts to support this claim and this aspect of the breach of fiduciary claim is severed and dismissed as well.

In deciding Fritz and Hinshaw's motion to dismiss, the court did not consider the sworn affidavits of Brent R. Baker, Esq., the attorney who represented Borwitz in the derivative action or that of Maranda E. Fritz, Esq. . In these affidavits, the attorneys only assert the inaccuracy of Smart's allegations. In the context of a motion to dismiss such affidavits cannot be considered for the purpose of determining whether there is evidentiary support for the complaint and does not otherwise conclusively establish a defense to the asserted claims as a matter of law (Tsimerman v. Janoff, 40 A.D.3d 242 [1^st Dept 2007]).

The court has also examined the affirmative defenses asserted by Smart that Frtiz and Hinshaw argue should be dismissed. Those defenses assert payment (3^rd AD), laches (4^th AD) and statute of frauds (part of 7^th AD). The payment defense remains as does the defense of laches. However, to the extent that Smart claims the failure to provide a written retainer or engagement agreement is a bar to Fritz and Hinshaw's recovery of its legal fees, that defense is stricken. A law firm's failure to obtain a written retainer agreement or letter of engagement with a non-matrimonial client, in violation of rule requiring such written agreements, does not preclude the firm from seeking to recover in quantum meruit the fair and reasonable value of the services rendered on behalf of client prior to discharge as counsel (Kramer, Levin, Naftalis Frankel, LLP v Canal Jean Co., Inc., 73 AD3d 604, 605 [1^st Dept 2010]; Nabi v. Sells, 70 A.D.3d 252 [1^st Dept 2009]; Nicoll Davis LLP v Ainetchi, 52 AD3d 412 [1^st Dept 2008]; Rubenstein P.C. v. Ganea, 41 AD3d 54 [1^st Dept 2007]).

Although Smart has cross moved for permission to serve a second amended complaint if the court decides to dismiss any of its claims, aside from making this blunderbuss application, it has not identified what it would amend or provided any proposed pleading for the court's consideration. The cross motion is, therefore, denied.

Having only partly granted Fritz and Hinshaw's motion, issue must be joined as to the remaining claims. Therefore, Fritz and Hinshaw's time to answer the third party complaint and counterclaims is extended as provided under CPLR 3215 [f].

No preliminary conference has yet been held in this case. In anticipation of issue being joined, the court hereby schedules the Preliminary Conference for April 28, 2011 at 9:30 a.m. No further notices will be sent.

Conclusion

The pre-answer motion to dismiss by the third party defendant (Fritz) and the counterclaim defendant (Hinshaw) is partly granted and partly denied. The defamation claims are all dismissed. The legal malpractice claims based upon the involuntary bankruptcy filings are also dismissed as are the breach of fiduciary duties based upon claims that Borwitz obtained confidential documents from Fritz and Hinshaw.

Any relief requested but not specifically addressed is hereby denied.

This constitutes the decision and order of the court.