Opinion
Index No. 655055/2021 Motion Seq. No. 001
05-02-2022
CUTIE PIE BABY INC., ELI YEDID Plaintiffs, v. SASSON LAW PLLC, AKIN GUMP STRAUSS HAUER & FELD LLP, Defendants.
Unpublished Opinion
DECISION + ORDER ON MOTION
Margaret Chan Judge:
HON. MARGARET CHAN:
The following e-filed documents, listed by NYSCEF document number (Motion 001) 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32 were read on this motion to/for DISMISSAL
In this action seeking damages for legal malpractice, defendant Sasson Law PLLC (Sasson) moves under CPLR 3211(a)(1) and (a)(7) to dismiss the complaint based on documentary evidence and for failure to state a cause of action, including on the grounds that plaintiffs have not adequately pleaded causation, and that the doctrine of judicial estoppel precludes plaintiffs from asserting claims against Sasson. Plaintiffs oppose the motion.
Background
Except when otherwise noted, the following facts are based on the allegations in the complaint (NYSCEF #1-Complaint). Plaintiff Cutie Pie Baby Inc. (CPB) is a children clothing manufacturer based in New York City (id., ¶ 11). At the time of CPB's formation, pursuant to a shareholder agreement, non-party Simon Yedid (SY) owned 34% of the shares of CPB, while his sons, plaintiff Eli Yedid (EY) and nonparty Jack Yedid (JY) each owned 33% of the shares (id., ¶ 12). Since CPB's formation, SY, EY and JY have held officer and board positions (id., ¶ 14). In July 2010, Moshe Sasson (Attorney Sasson) was retained as CPB's general counsel and Sasson was retained as counsel to CPB (id., ¶ 15).
Subsequent to execution of the shareholder agreement, SY transferred his interest in CPB to two irrevocable trusts (id, ¶ 13).
In December 2018, SY and EY began to consult with Attorney Sasson as to steps necessary to remove JY as a director and officer of CPB, and also retained defendant Akin Gump Strauss Hauer & Feld LLP (Akin Gump) to advise them as to the removal of JY (id., ¶¶ 17, 18). As a result of meetings held with Attorney Sasson and various lawyers from Akin Gump, it was agreed that CPB would hold a special meeting (Special Meeting) called by SY and EY, who together held the majority of shares of CPB and that at the meeting, a vote would be taken to amend the shareholder agreement to remove JY (id., ¶ 21). At no time did either Attorney Sasson or the lawyers from Akin Gump advise SY or EY that JY was required to have notice of such meeting (id., ¶ 22). Under Business Corporation Law (BCL) § 605(a) and § 711, all shareholders (and not simply a majority of shareholders) entitled to vote must receive notice of any special board meeting, at least 10 days before the meeting (id, ¶¶ 31-36).
On December 14, 2018, the Special Meeting was held by SY and EY, who, through a First Amendment to the shareholder agreement, removed JY from his position as director and co-president of CPB (id., ¶ 23). During the Special Meeting, Attorney Sasson circulated a memo listing JYs misconduct, and the majority shareholders signed a document entitled "Action by Written Consent of the Shareholders" which resolved to remove JY as a director and co-president, and to temporarily suspend him from any role or positions with CPB pending an investigation as to JYs misconduct (id., ¶¶ 24, 25). Despite the holding of the Special Meeting, the opening paragraph of the Action by Written Consent states that "the majority shareholders . . . consent, pursuant to Section 615 of the [BCL] to adoption of the following resolution, and that such action be taken without a meeting of the shareholders" (id., ¶ 26 [emphasis supplied in complaint]).
As a result of his removal as a director and officer, and his suspension without pay, JY commenced an arbitration proceeding against EY and SY before the American Arbitration Association (AAA) seeking (1) nullification of all actions taken at the Special Meeting, (2) dissolution of CPB, (3) damages against EY for knowingly unlawful conduct, (3) the imposition of a constructive trust over the assets of CPB, and (4) a permanent injunction restraining EY and SY from interfering with his right as a shareholder, officer, and director (id., ¶¶ 37, 38).
On March 1, 2021, the arbitration panel issued a Partial Final Award, finding that the statement in the Action by Written Consent that the resolution was made without a meeting was "false on its face" as a special meeting took place on December 14, 2018. (NYSCEF # 12-Partial Final Award at 7). Additionally, the panel found that the Special Meeting was unlawful, mainly because of the lack of notice to JY, which gave rise to "shareholder oppression" (id. at 13, 14).
On April 28, 2021, the arbitration panel issued a Final Award (Award), which incorporated the Partial Final Award, and ruled in favor of JY finding that JY was entitled to a buyout of his shares in CPB for $7,972,511 and to $2,186,932 in legal, expert, and administration fees (NYSCEF # 1, ¶¶ 43, 44; NYSCEF # 4-Award at 4, 5).
On August 19, 2021, plaintiffs filed this action asserting two legal malpractice claims-one against Sasson and the second against Akin Gump (NYSCEF # 1, ¶¶ 49-57; 58-67). The complaint alleges that defendants committed legal malpractice by failing to advise plaintiffs to send notice of the Special Meeting to JY which caused damages to plaintiffs (id., ¶¶ 55, 67). Specifically, the complaint seeks to recover $4,844,451 consisting of (1) $2,186,932 for JYs legal fees incurred in the arbitration, which CPI was required to pay as part of the arbitration panel's Final Award, (2) $1,064,992 in legal fees that plaintiffs paid its counsel in connection with the arbitration proceeding, (3) $731,000 in costs and expenses arising out of the arbitration, (4) $397,343.59 in legal fees paid by plaintiffs to Akin Gump, and (5) $464,513.56 in legal fees to Sasson (id. ¶¶ 44-48)
While Akin Gump has answered the complaint (NYSCEF # 22), Sasson makes this motion to dismiss the legal malpractice claim against it based on documentary evidence and for failure to state a cause of action (NYSCEF # 21).
Sasson argues that the legal malpractice claim must be dismissed because plaintiffs cannot show that Sasson's alleged malpractice in failing to advise plaintiffs to give JY notice of the Special Meeting caused any losses. In particular, Sasson argues that plaintiffs cannot show that had they notified JY of the Special Meeting, plaintiffs would have avoided the costs and time of the arbitration and simply paid JY the fair market value for his shares. In this connection, Sasson argues that even if JY had been provided notice of the Special Meeting, JY would have objected to any efforts to oust him as invalid and unlawful, and would have sought relief through arbitration. Additionally, Sasson argues that plaintiffs could have paid JY for the value of his shares at any time including before the arbitration was commenced.
Sasson also argues that even if JY had been provided with notice of the Special Meeting, the arbitration panel would have ruled in favor of JY since it found that none of JYs alleged wrongdoing justified his removal as an officer and director and his replacement by SY and EY Sasson next argues that plaintiffs should not be able to sue for legal malpractice because they failed to appeal the arbitrators' decision (citing Grace vLaw, 24 N.Y.3d 203 [2014] [holding that the failure to pursue an appeal in an underlying action bars legal malpractice action where the client was likely to have succeeded on appeal in the underlying action]).
Sasson further contends that its legal advice was reasonable and the result of the exercise of professional judgment, and that plaintiffs' claim is the result of their dissatisfaction with the arbitration result. Sasson finally argues that the doctrine of judicial estoppel precludes plaintiffs from asserting a claim based on Sasson's failure to advise them of the notice requirement since plaintiffs previously took the position that notice to and consent of JY were not necessary as CPB was a small family-owned business which was not required to follow the requirements of the BCL. In this regard, Sasson maintains that plaintiffs' prior inconsistent position was instrumental in obtaining a favorable outcome in an emergency hearing in which JY was denied injunctive relief reinstating him while the arbitration was pending (NYSCEF # 47 at 9, 10).
Plaintiffs oppose the motion, arguing that defendants' position is without merit and that its complaint sufficiently states a claim for legal malpractice, including as to proximate clause. Regarding causation, plaintiffs argue that although they were required to pay JY the fair market value for his shares, the alleged malpractice caused harm to them since Sasson's failure to advise plaintiffs of their duty to notify under BCL § 605(a) and § 711 resulted in the unlawful removal of JY and precipitated a costly arbitration process, the damage of which could have been avoided or minimized but for that failure. Furthermore, plaintiffs argue that the Sasson's malpractice cannot be excused as an error in judgment.
Plaintiffs also argue that they were not required to appeal the Award since under New York law exhaustion of the appellate process is not a condition precedent to the commencement of a legal malpractice action when, as here, an appeal is unlikely to succeed. As for Sasson's argument that judicial estoppel bars this action, plaintiffs assert the circumstances here do not warrant the application of the doctrine, including because any inconsistent position taken by plaintiffs in the prior proceeding was unsuccessful.
Discussion
When considering a motion to dismiss under CPLR 3211(a)(7), the court must evaluate "whether the pleading states a cause of action, and if from its four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law a motion for dismissal will fail" (African Diaspora Mar. Corp. v Golden Gate Yacht Club, 109 A.D.3d 204, 211 [1st Dept 2013]). The court must also "accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference," and "determine only whether the facts as alleged fit into any cognizable legal theory" (Siegmund Strauss, Inc. v. E. 149th Realty Corp., 104 A.D.3d 401, 403 [1st Dept 2013]).
Significantly, "whether a plaintiff... can ultimately establish its allegations is not taken into consideration in determining a motion to dismiss" (Phillips S. Beach LLC v ZC Specialty Ins. Co., 55 A.D.3d 493, 497 [1st Dept 2008], lv denied 12 N.Y.3d 713 [2009]). At the same time, "[i]n those circumstances where the legal conclusions and factual allegations are flatly contradicted by documentary evidence they are not presumed to be true or accorded every favorable inference" (Morgenthow & Latham v. Bank of N.Y. Co., Inc., 305 A.D.2d 74, 78 [1st Dept 2003] [internal citation and quotation omitted]). However, dismissal based on documentary evidence may result "only when it has been shown that a material fact as claimed by the pleader is not a fact at all and no significant dispute exists regarding it"(Acquista v. N.Y. Life Ins. Co., 285 A.D.2d 73, 76 [1st Dept 2001] [quoting Guggenheimer v Ginzburg, 43 N.Y.2d 268, 275 [1977]]).
"[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]). Negligence is shown if a plaintiff can demonstrate that "the attorney failed to exercise that degree of care, skill and diligence commonly possessed by a member of the legal profession, and that this failure caused damages" (Cosmetics Plus Group, Ltd. v Traub, 105 A.D.3d 134, 140 [1st Dept], lv denied 22 N.Y.3d 855 [2013]).
To satisfy the pleading requirement for causation, it must be alleged 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 at 140). 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]).
Under these standards, the court finds that the complaint adequately pleads professional negligence based on allegations that Sasson failed to use "the level of skill and knowledge possessed common to my members of the legal profession" by incorrectly advising plaintiffs that JY could be removed at a special meeting and that they were not obligated to provide JY notice of the meeting (NYSCEF # 1, ¶¶ 50, 56). And contrary to Sasson's position, dismissal is not warranted on the ground that the alleged failure to properly advise plaintiffs was a matter of professional judgment.
Regarding causation, the complaint alleges that because Sasson gave the wrong advice to plaintiffs -- that notice of the Special Meeting to JY was not necessary -- CPB was forced into arbitration with JY, and it was Sasson's improper legal advice on notice that caused the arbitrators ruled in JYs favor (id., ¶¶ 52-54). The complaint also alleges that "[a]s a result of [Sasson's] improper legal advice, Plaintiffs have been damaged in the amount of $4,844,451.00" (id, ¶ 55).
These allegations are sufficient to plead that "but for" the alleged malpractice, plaintiffs would not have been required to incur the legal fees, costs, and expenses associated with the arbitration proceeding. And while JY would have been entitled to payment for the value of his shares even if he were provided with notice, plaintiffs are not seeking to recover the $7,972,511 that the Award required them to pay for JYs shares. Instead, plaintiffs seek legal fees, costs, and expenses resulting from the allegedly unnecessary arbitration (Rudolph v Shayne, Dachs, Stanisci, Corker & Sauer, 8 N.Y.3d 438, 443 [2007] [damages in a legal malpractice action may include "litigation expenses incurred in an attempt to avoid, minimize or reduce the damage caused by the attorney's wrongful conduct").
Moreover, the documentary evidence, including the Partial Arbitration Award, does not flatly contradict the allegations in the complaint, including that defendants' failure to advise plaintiffs to provide JY notice caused their losses. In this regard, Sasson's assertions -- that even if JY had been provided notice of the Special Meeting, an arbitration would still have been required and its outcome would have been the same - are not supported by the Partial Arbitration Award, which found that plaintiffs' failure to provide JY notice constituted shareholder oppression (NYSCEF # 12 at 13, 14). In any event, Sasson's argument that the same losses would have been incurred by plaintiffs had notice been provided to JY is insufficient to support a pre-answer motion to dismiss the complaint.
The Partial Arbitration Award states that: "Here, JY clearly satisfies both criteria [for purposes of BCL §1104-a violation], however, by CPB's actions taken before the December 14 meeting, not giving JY any notice of its occurrence, they effectively disenfranchised JYs entitlement to vote (since he did not know to come to the meeting). We view this (in addition to a violation of BCL Article 6 and stripping of his management positions) to be a violation of § 1104-a, and accordingly an act of oppression" (NYSCEF # 12 at 14).
Next, Sasson's argument that plaintiffs were required to exhaust appellate review in order to bring this action is unavailing, since Sasson has not shown that plaintiffs would have been likely to succeed on the appeal (Grace v Law, 24 N.Y.3d 203, 211-212 [2014]/ see also Florists' Mut. Ins. Co., Inc. v Behman Hambelton, LLP, 160 A.D.3d 502, 502 [1st Dept 2018] [affirming trial court's finding that an appeal to Workers' Compensation Board was not required prior to filing a malpractice claim where such appeal was unlikely to succeed]).
Regarding Sasson's final argument as to the doctrine of judicial estoppel, also known as preclusion of inconsistent positions, the court notes that the doctrine "bars a party who took a certain position in a prior legal proceeding, and who secured a favorable judgment, from assuming a contrary position in another action simply by reason of a change in interests" (Stop & Shop Supermarket Co. v Vornado Realty Trust, 35 A.D.3d 241, 243 [1st Dept 2006])."The policies underlying preclusion of inconsistent positions are general consideration[] of the orderly administration of justice and regard for the dignity of judicial proceedings" (Envtl. Concern, Inc. v Larchwood Const. Corp., 101 A.D.2d 591, 593 [2d Dept 1984] [internal citations and quotations omitted]).
Here, even assuming arguendo that plaintiffs' position in the arbitration regarding notice to JY is inconsistent with that taken by plaintiffs in the instant action, judicial estoppel is inapplicable since plaintiffs did not succeed in the arbitration proceeding in arguing that notice to JY was not required. To the contrary, the arbitration panel found that the failure to provide notice resulted in shareholder oppression. Moreover, the equities here weigh against the application of the doctrine since the asserted inconsistent position was the result of the allegedly negligent advice provided by defendants. Under these circumstances, the judicial estoppel doctrine is inapplicable.
Conclusion
Accordingly, it is
ORDERED that defendant Sasson Law PLLC's motion to dismiss is denied; and it is further
ORDERED that defendant Sasson Law PLLC shall file an answer to the complaint within 20 days of entry this decision and order; and it is further
ORDERED that a preliminary conference shall be held by telephone on June 29, 2022 at 2:30 pm, with the call-in number to be provided by the court.