Opinion
INDEX NO. 153853/2019
10-15-2020
MVNY HOLDINGS, THE NOAH N. LEVY REVOCABLE TRUST, THE ISRAEL LEVY REVOCABLE TRUST, DANA GORDON, ALBERT LEVY, DAFNA LEVY, GABRIEL ZELWIN, ARIE MAOR, ESTER MAOR Plaintiff, v. THE ESSES LAW GROUP, LLC,LEO ESSES, CLARICK GUERON REISBAUM, LLP, ISAAC ZAUR, Defendant.
NYSCEF DOC. NO. 67 PRESENT: HON. CAROL R. EDMEAD Justice MOTION DATE 9/24/2020 MOTION SEQ. NO. 001 002
DECISION + ORDER ON MOTION
The following e-filed documents, listed by NYSCEF document number (Motion 001) 7, 8, 9, 10, 11, 12, 13, 14, 15, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 53, 54, 55, 61, 63 were read on this motion to/for DISMISS. The following e-filed documents, listed by NYSCEF document number (Motion 002) 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 41, 42, 43, 44, 45, 46, 47, 48, 49, 50, 51, 52, 62 were read on this motion to/for DISMISS. Upon the foregoing documents, it is
ORDERED that motion sequence numbers 001 and 002 are granted and the action is dismissed; and it is further
ORDERED that the Clerk of the Court shall enter judgment accordingly; and it is further
ORDERED that counsel for the Esses and CGR defendants shall serve a copy of this order, along with notice of entry, on all parties within twenty (20) days.
Memorandum Decision
In this lawsuit, plaintiffs MVNY Holdings, The Noah N. Levy Revocable Trust, The Israel Levy Revocable Trust, Dana Gordon, Albert Levy, Dafna Levy, Gabriel Zelwin, Arie Maor, and Ester Maor (plaintiffs) allege that defendants the Esses Law Group, LLC and Leo L. Esses (collectively, Esses), and Clarick Gueron Reisbaum, LLP and Isaac B. Zaur (collectively, CGR), committed legal malpractice in Village Green Mishawaka Holdings, LLC v Romanoff (657290/2017, Cohen, J. [Village Green]) and, consequently, also breached their fiduciary duty to plaintiffs. Plaintiffs seek $4 million in damages plus interest, costs, and attorney's fees. Currently, the court has two pre-answer motions to dismiss - by Esses and CGR, respectively. The court consolidates the motions and, for the reasons below, grants both motions and dismisses the action. The Village Green Lawsuit
These statements are taken from the amended complaint in Village Green (Village Green, NYSCEF Doc. No. 63).
Village Green is a manufactured housing community in Mishawaka, Indiana, and the plaintiffs in the underlying lawsuit, Village Green Mishawaka Holdings, LLC, and VGM Holdings, Inc. (collectively, VGM) were, respectively, the owner and managing member of the community. The defendant Stuart Romanoff (Romanoff) owned the defendant Double Black Ventures, LLC (DBV). The defendant Darryl Romanoff (D. Romanoff) is the brother of Romanoff. Romanoff asserted a 14.575% interest in Village Green. The defendant Michael Wainstein (Wainstein) owned the defendant PCG Mishawaka, LLC (PCG), which purportedly owned 5% of VGM.
"Manufactured housing community" is the name for what was once called a "mobile home community."
The allegations against D. Romanoff relate to his participation in the prosecution of an action against the plaintiffs in Indiana, along with the filing of a notice of pendency. The plaintiffs allege that these actions cost them at least $100,000 and caused them to lose them a sale worth millions of dollars.
VGM filed the original complaint on December 8, 2017. According to the amended complaint, which VGM filed on March 29, 2018, VGM began its efforts to purchase Village Green in 2013. Wainstein offered to procure financing for the project and to introduce VGM to Romanoff. The Village Green complaint alleged that the plaintiffs lost two principal lenders because of Romanoff's delays, and that this forced VGM to proceed with financing through Romanoff's choice, Ladder Capital Finance LLC (Ladder). Among other things, Ladder required bad boy guarantees, which two of VGM's principals provided. Romanoff agreed to provide a third guarantee in exchange for 3% interest in VGM, and to provide a "very substantial check" in exchange for ownership in class B interests (Village Green, NYSCEF Doc. No. 63 ¶ 23).
The closing date for the deal was set for April 24, 2014. The day before the closing, Romanoff allegedly changed the terms of his agreement. In particular, he demanded a 12% rather than a 3% interest in VGM, a backup guarantee that would cover his interest if the bad boy guarantee was triggered, and a finder's fee for Wainstein's company in the form of an interest in the plaintiffs. The plaintiffs contended that because Romanoff made these demands on the eve of closing, the defendants effectively coerced the plaintiffs to accept these terms. In addition, the plaintiffs said that the defendants subsequently thwarted the plaintiffs' attempt to refinance the Ladder loan and otherwise worked to harm the plaintiffs. The complaint challenged the ownership interests of the defendants, sought rescission of the contracts with the defendants and a return of the defendants' certificates and membership units, and sought a minimum of $7 million in damages.
On February 18, 2018, the defendants Romanoff, Wainstein, PCG, and DBL filed a second amended answer with counterclaims against the plaintiffs. The pleading also incorporated a third-party complaint that was brought by these parties individually and on behalf of the members of VGM against the VGM entities, Daniel Wainstein (D. Wainstein), and several others (Village Green, NYSCEF Doc. No. 203). Esses represented the Romanoffs and Michael Wainstein, and CGR represented Stuart Romanoff, Darryl Romanoff, DBV, and the Darryl Romanoff Childrens' Trust. Essentially, the defendants and third-party plaintiffs (claimants) contended that, among other things, the third-party defendants withheld critical financial data and improperly shifted the percentages of ownership so that they could approve a sale of the property without the need for the claimants' approval; incurred debts, resulting in at least one lien and two lawsuits; and improperly took money from Village Green's funds for their personal use. Justice Joel M. Cohen presided over the matter after Justice Charles E. Ramos, who initially handled the matter, retired.
Darryl filed a separate amended answer with counterclaims on June 11, 2018 (Village Green, NYSCEF Doc. No. 116).
Before the eventual assignment to Justice Cohen, the case was transferred to Justice Andrew Borrok. However, Justice Borrok recused himself from the matter.
The parties to Village Green discussed the settlement of the action. The proposed settlement stated that, after a sale of Village Green for over $17 million concluded and the attorneys, managers, banks, and other debtors were paid, the named plaintiffs would receive $1.4 million of the approximately $6 million that was left. The remaining funds would be distributed to the other investors, including plaintiffs in this action, on a proportionate basis. The closing took place on November 30, 2018. Under the proposed settlement, $1.4 million was placed in escrow with the intention that the funds ultimately would be paid to the Village Green plaintiffs.
Around March 28, 2019, plaintiffs in the case before this court moved to intervene in the Village Green action (Village Green, NYSCEF Doc. No. 522). Plaintiffs are all shareholders of Village Green. The proposed intervenor complaint recounted the history of the purchase of Village Green and the subsequent disputes (id., NYSCEF Doc. No. 529). It also requested the release of the $1.4 million and the disbursement of the funds to the proposed intervenor-plaintiffs and the other shareholders on a proportionate basis. Justice Cohen heard argument on this and other matters on April 17, 2019 (id., NYSCEF Doc. No. 542). He denied the motion without prejudice, based on both its untimeliness given the movants' prior knowledge of the lawsuit and third-party complaint, and on the prejudicial impact intervention might have had at the stage of the litigation and the advanced stage of the settlement negotiations (id., NYSCEF Doc. No. 541). The Current Lawsuit
An additional party, Martin Enterprises, Inc. Pension Plan and Trust, was also a proposed intervenor.
On April 15, 2019, a few days before the oral argument before Justice Cohen in Village Green, plaintiffs commenced the action at hand by way of summons with notice (NYSCEF Doc. No. 1). The verified complaint followed on May 13, 2019 and alleged both legal malpractice and breach of fiduciary duty (NYSCEF Doc. No. 5). According to the complaint, because the third-party complaint stated that it was brought not only individually but also on behalf of all shareholders of VGM, this imposed a burden on defendants to represent plaintiffs' interests along with the interests of their clients. The complaint claims that, instead, defendants' "litigation strategy was designed to cost the corporation and its other members money, despite purportedly acting on their behalf, thereby causing irreparable harm to the other members" (id. ¶ 23). The complaint asserts that the proposed settlement would have distributed funds to the named third- party plaintiffs regardless of the disadvantage this might have casued the other shareholders, such as plaintiffs. According to the complaint, plaintiffs' damages exceed $4 million, which plaintiffs seek along with interest, costs, and attorney's fees. In response, Esses and CGR have made separate pre-answer motions to dismiss the complaint.
In motion sequence number 001, Esses argues that the complaint cannot satisfy even the liberal standards of CPLR § 3211 (a) (7). It maintains that the firm only represented PCG, DBV, Wainstein, Romanoff, and D. Romanoff (the litigating shareholders) in the Village Green lawsuit, and that it never communicated with plaintiff (citing, e.g., Wei Cheng Chang v Pi, 288 AD2d 378, 380-381 [2d Dept 2001] [the facts in the record, including the plaintiff's belief as to representation, did not render the plaintiff a client]). It submits the affirmation of Leo Esses, in which he states that he had no relationship with plaintiffs and that he never signed a retention agreement with them (NYSCEF Doc. No. 12). Moreover, Esses argues, the fact that the third-party complaint included derivative claims was not sufficient to create privity of contract. Esses further notes that plaintiffs were represented by a separate law firm, Morrison Cohen, in their motion to intervene in Village Green, and this underscores that Esses was not their counsel. Accordingly, Esses states, plaintiffs have no legal right to maintain this lawsuit (citing, e.g., Moran v Hurst, 32 AD3d 909, 910-911 [2d Dept 2006], lv denied 99 NY2d 501 [2002]). Esses also argues that plaintiffs' breach of fiduciary cause of action is duplicative of their legal malpractice claim (citing, e.g., AmBase Corp. v Davis Polk & Wardell, 30 AD3d 171, 172 [1st Dept 2006], affd 8 NY3d 428 [2007]). Not only is the claim based on the same facts, but the damages are identical (citing Financial Servs. Veh. Trust v Saad, 72 AD3d 1019, 1020-1021 [2d Dept 2010]).
In opposition, plaintiffs urge that the court's job in considering a CPLR § 3211 (a) (7) motion is to decide whether the complaint states a cause of action, not to determine whether the facts are correct (citing Stukuls v State of New York, 42 NY2d 272, 275 [1977]), and that if any rational view of the statements in the complaint supports a claim, the court must deny the motion (citing 219 Broadway Corp. v Alexander's, Inc., 46 NY2d 506, 509 [1979]). Plaintiffs argue that they have alleged a viable malpractice claim. First, they reiterate their positions that the third-party plaintiffs in Village Green asserted their claims on behalf of all the members of VGM and that this was sufficient to establish an attorney-client relationship. They quote Leo Esses' statement that he represented the third-party plaintiffs as evidence of this relationship. They argue that the legal malpractice action is premised on Esses' litigation strategy and the fiduciary duty claim relies on the alleged conflict of interest, and therefore the claims are not duplicative.
Esses' reply states that plaintiffs' assertions do nothing to remedy the defects in their complaint. It points out that plaintiffs take Leo Esses' statement that he represented the third-party plaintiffs in Village Green out of context, as he immediately identified his clients as Romanoff, D. Romanoff, Wainstein, DBV, and PCG. Further, Esses argues that the affirmation of plaintiff's counsel has no evidentiary value and therefore does not refute the Leo Esses affirmation that Esses submitted in support of its motion. Esses argues that, regardless, plaintiffs' attempt to distinguish the fiduciary duty and malpractice claims is misguided, as they admittedly are based on the same events and seek equivalent damages.
In motion sequence number 002, CGR emphasizes that it was hired by the Romanoffs and DBV, along with the Darryl Romanoff Childrens' Trust only (NYSCEF Doc. No. 17 ¶ 7), and for the sole purpose of finalizing the Village Green settlement (see NYSCEF Doc. No. 18 [Engagement Letter]). It provides a copy of its notice of appearance in Village Green, which expressly states that CGR appeared "on behalf of defendants Darryl Romanoff, Stuart Romanoff, and [DBV]" (NYSCEF Doc. No. 26). It asserts that this documentary evidence is sufficient to warrant dismissal under CPLR § 3211 (a) (1) (citing, e.g., Zanett Lombardier, Ltd. v Maslow, 249 AD3d 495, 495 [1st Dept 2006]). Like Esses, it contends that there was no attorney-client relationship and therefore dismissal is proper for failure to state a claim under CPLR § 3211 (a) (7) (citing, e.g., Seifuloski v. Michelstein & Assoc., PLLC, 137 AD3d 549, 550 [1st Dept. 2016]). For the same reason, CGR alleges that no fiduciary relationship exists. CGR contrasts this case with People v Coventry First LLC, in which the Court of Appeals found a fiduciary duty because the settlement brokers in Coventry First were "under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation" (13 NY3d 108, 115 [2009] [internal quotation marks and citations omitted]). CGR also agrees with Esses that the fiduciary duty claim is duplicative of the legal malpractice claim (citing, e.g., Cosmetics Plus Group, Ltd. V Taub, 105 AD3d 134, 143 [1st Dept 2013], lv denied 22 NY3d 855 [2013]). CGR states that plaintiffs, as shareholders, lack the capacity to sue for harm done by defendants' former clients to the corporation (citing, e.g., Serino v Lipper, 123 AD3d 34, 39 [1st Dept 2014]; O'Neill v Warburg, Pincus & Co., 39 AD3d 281, 281-282 [1st Dept 2007]). Thus, they argue that dismissal is proper under CPLR 3211 (a) (3). The only claim plaintiffs can raise is one on behalf of the corporation, CGR asserts, and because CGR did not represent the corporation there is no claim against it.
Plaintiffs oppose CGR's motion. They restate their position as to the existence of an attorney-client relationship. They repeat that the third-party action damaged the corporation, and this economic damage harmed plaintiffs here. They stress that, on February19, 2019, CGR represented to the Village Green Court that it represented the third-party plaintiffs (NYSCEF Doc. No. 45, at 21 lines 18-20). Plaintiffs also argue that regardless of their damages, they have legal capacity because they are the appropriate parties to commence this suit (citing, e.g., Community Bd. 7 of Borough of Manhattan v. Schaffer, 84 NY2d 148, 154-155 [1994]). Plaintiffs rely on Matter of Kelly (23 NY2d 368, 375 [1968]), which involved disciplinary charges against lawyers who had potential conflicts of interest between insurers and their claimants, in support of their position that a conflict between the named third-party plaintiffs and the unnamed shareholders existed in Village Green.
In reply, CGR states that plaintiffs have failed to overcome the documentary evidence establishing that there was no attorney-client relationship between itself and plaintiffs. CGR points to Denenberg v Rosen (71 AD3d 187, 195-196 [1st Dept 2010], lv dismissed 14 NY3d 910 [2010]), in which the First Department dismissed a legal malpractice claim. The Denenberg Court concluded that a tax opinion letter and a limited power of attorney for a specified transaction did not show an attorney-client relationship where there was no allegation that plaintiff communicated with counsel about the matter in question, and "no objective facts or actions to show the existence of an attorney-client relationship or the parties' mutual agreement that [the law firm] would perform ongoing legal services for plaintiff" (id. at 196). In support, CGR points to defendants' documentary evidence, including its engagement letter and notice of appearance in Village Green, neither of which names the current plaintiffs as its clients. It argues that CGR appeared on behalf of its clients in their individual capacities, and that representation did not extend to the plaintiffs in the current lawsuit.
Even if the derivative claims created an attorney-client relationship with all shareholders - a position that CGR rejects - that representation was based on injury to the company and not to the shareholders themselves (citing Yudell v Gilbert (99 AD3d 108, 113-114 [1st Dept 2012] [discussing the nature of both direct and derivative claims]). CGR notes that a lawyer representing a corporation owes no duty to the corporation's shareholders absent an express agreement to the contrary (citing, e.g., Campbell v McKeon, 75 AD3d 479, 480-481 [1st Dept 2010]). As plaintiffs did not allege any such agreement or relevant facts, CGR argues, it had no duty to plaintiffs and the claims against CGR must be dismissed. Further, it notes, CGR took on the representation of the third-party plaintiffs in Village Green only after the third-party action had been commenced and a proposed settlement had been reached. Therefore, it claims that plaintiffs' allegation that plaintiffs were damaged by the commencement of the third-party complaint does not relate to CGR's conduct. Absent an attorney-client relationship, CGR states, there was no fiduciary duty to plaintiffs. CGR reiterates its positions that the fiduciary duty claim is duplicative, that plaintiffs lack standing to file a lawsuit for their own injuries on behalf of the corporation, and that plaintiffs' damages argument is too speculative to form the basis of a viable claim. Analysis
When a court considers CPLR § 3211 motions, it accepts the allegations as true and gives the plaintiffs the benefit of every favorable inference (Landmark Ventures, Inc. v InSightec, Ltd., 179 AD3d 493, 494 [1st Dept 2020]). However, the court does not allow inferences that "constitute legal conclusions or are inherently incredible or unequivocally contradicted by documentary evidence" (id.). Documentary evidence is sufficient under CPLR § 3211 (a) (1) if it utterly refutes a cause of action (Seaman v Schulte Roth & Zabel LLP, 176 AD3d 538, 538 [1st Dept 2019]). A complaint may be dismissed under CPLR § 3211 (a) (3) when the plaintiffs lack "the power to appear and bring [their] grievance before the court" (Siri Med. Assoc., PLLC v Paradise Ct. Mgt. Corp., 158 AD3d 516, 516 [1st Dept 2018] [internal quotation marks and citation omitted]). Finally, courts grant motions under CPLR § 3211 (a) (7) if the facts alleged do not "fit within any cognizable legal theory" (Grassi & Co., CPAS, P.C. v Honka, 180 AD3d 564, 564-565 [1st Dept 2020] [denying motion]).
The lack of an attorney-client relationship bars a legal malpractice claim (Seaman v Schulte Roth & Zabel LLP, 176 AD3d 538, 539 [1st Dept 2019]). Here, CGR argues that documentary evidence shows the absence of a relationship between CGR and plaintiffs (CPLR § 3211 [a] [1]). Among other things, CGR has provided the engagement letter and notice of appearance, both of which show that the firm was hired by the Romanoff parties alone and that CGR did not commence its representation of these parties until after the third-party action in Village Green had begun. CGR also shows, through court filings, that plaintiffs in this action engaged in motion practice in Village Green, and that they were represented by other counsel. In response, plaintiffs provide no evidence indicating that they ever communicated with CGR or relied on its guidance. Moreover, they do not assert that CGR "either affirmatively led [plaintiffs] to believe that they were acting as [their] attorney[s] or knowingly allowed [them] to proceed under that misconception" (Moran, 32 AD3d at 911). Even if plaintiffs held the subjective belief that CGR was their counsel - and plaintiffs have not shown that they held this belief - that would have been insufficient to establish an attorney-client relationship (see Matter of Segal v Five Star Elec. Corp., 165 AD3d 613, 613 [1st Dept 2018], lv denied 32 NY3d 919 [2019]).
As CGR notes, to the extent that plaintiffs claim the commencement of the third-party action was the malpractice, this is conduct that predates CGR's involvement in the lawsuit for which it is not accountable (see Pellegrino v File, 291 AD2d 60, 63 [1st Dept 2002], lv denied 98 NY2d 606 [2002]).
For the same reasons, plaintiffs fail to state a cause of action for legal malpractice, thus warranting dismissal under CPLR § 3211 (a) (7) as well (see Seaman, 176 AD3d at 539). Like CGR, Esses has shown that it did not represent plaintiffs in the Village Green litigation - in Esses' motion, through copies of plaintiffs' motion to intervene and proposed pleading in Village Green and the affidavit of Leo Esses (see Prudential-Bache Metal Co. v Binder, 121 AD2d 923, 926 [1st Dept 1986] ["When evidentiary material submitted in support of a complaint demonstrates that a material fact claimed by the plaintiff is not a fact at all, there is no bar to a dismissal of the complaint for failure to state a cause of action."]; accord Ladera Partners, LLC v Goldberg, Scudieri & Lindenberg, P.C., 157 AD3d 467, 467 [1st Dept 2018]). Defendants also point out that the use of the words "on behalf of" all of VGM's shareholders in the caption means that the claims, in part, are derivative (see Valyrakis v 346 West 48th St. Hous. Devel. Fund Corp., 161 Ad3d 404, 405 [1st Dept 2018]), and that this does not mean that the plaintiffs, in their own capacities, were clients of defendants in Village Green. Logic also militates against plaintiffs' argument. If plaintiffs were correct, every unnamed shareholder in every shareholder's derivative suit could assert a malpractice claim against the named shareholders' attorneys in those actions.
In addition, the court concludes that plaintiffs' breach of fiduciary duty claim fails as against both defendants. Such a cause of action does not lie where "it alleges mismanagement and diversion of corporate assets, which are wrongs to the corporation" (Shyer v Shyer, 170 AD3d 577, 577 [1st Dept 2019]). Although plaintiffs argue that they do not allege harm to the corporation but to the individual plaintiffs, this argument lacks merit. The diminished value of the corporation belongs to the corporation and thus is a derivative claim (see Simon v FrancInvest, S.A., 178 AD3d 436, 436 [1st Dept 2019], lv dismissed 35 NY3d 1057 [2020] [addressing allegation that stock was sold for less than market value]). Plaintiffs' additional alleged damages - the cost they incurred because they attempted to intervene in Village Green - does not relate to any fiduciary duty the attorneys for the third-party plaintiffs in Village Green owed to the current plaintiffs in their individual capacities. Thus, plaintiffs do not have the right to sue here in their individual capacities. Instead, plaintiffs' argument is that they have the right to sue for breach of fiduciary duty because the third-party complaint in Village Green was brought on behalf of all the shareholders (see NYSCEF Doc. No. 5 ¶ 20; NYSCEF Doc. No. 30 ¶¶ 11-16). Thus, they rely on what they claim is a shareholder's derivative complaint. Where the alleged harm impacts all shareholders, the claim is derivative rather than direct (see Valyrakis v 346 West 48th St. Hous. Devel. Fund Corp., 161 AD3d 404, 405, 408 [1st Dept 2018]). Therefore, even if there were a fiduciary duty, it would be a derivative duty rather than one owed to plaintiffs in their individual capacities.
Because the court dismisses on these grounds, it need not reach the parties' other arguments. However, it notes that, among other things, their claims of malfeasance, proximate cause, and damages are speculative and/or conclusory (Pellegrino v File, 291 A.D.2d 60, 63 (1st Dept 2002).
Defendants argue that plaintiffs' claim - that the Village Green settlement unfairly disadvantaged them - lacks merit because the settlement did not go forward and the claim is therefore speculative. This argument is moot because after the submission of the motion, the $1.4 million in escrow was released (Village Green, NYSCEF Doc. Nos. 793, 796), and the action was discontinued (id., NYSCEF Doc. No. 800). Neither plaintiffs nor defendants informed the court of the resolution of Village Green or of the underlying details. This does not change the court's conclusion, which rests on the documents and arguments presented in this action.
CONCLUSION
Accordingly, it is
ORDERED that motion sequence numbers 001 and 002 are granted and the action is dismissed; and it is further
ORDERED that the Clerk of the Court shall enter judgment accordingly; and it is further
ORDERED that counsel for the Esses and CGR defendants shall serve a copy of this order, along with notice of entry, on all parties within twenty (20) days. 10/15/2020
DATE
/s/ _________
CAROL R. EDMEAD, J.S.C.