Genesis Merch. Partners, L.P. v. Gilbride, Tusa, Last & Spellane, LLC

Full title: GENESIS MERCHANT PARTNERS, L.P., and GENESIS MERCHANT PARTNERS II, L.P.…

Court: SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: IAS PART 42

Date published: Feb 27, 2017

2017 N.Y. Slip Op. 30430 (N.Y. Sup. Ct. 2017)

Opinion

Index No. 653145/2014

02-27-2017

GENESIS MERCHANT PARTNERS, L.P., and GENESIS MERCHANT PARTNERS II, L.P., Plaintiffs v. GILBRIDE, TUSA, LAST & SPELLANE, LLC, JONATHAN M. WELLS, KENNETH M. GAMMILL, JR., and CHARLES S. TUSA, Defendants.

NANCY M. BANNON, J.

NYSCEF DOC. NO. 168 DECISION AND ORDER MOT SEQ 003 NANCY M. BANNON, J. :

I. INTRODUCTION

In this action to recover damages, inter alia, for legal malpractice, the plaintiffs move pursuant to CPLR 3212 for summary judgment on the issue of liability on so much of the first cause of action as alleges that the defendants committed legal malpractice in failing to perfect security interests in certain life insurance policies, and dismissing the defendants' counterclaims for unpaid legal fees. The defendants oppose the motion. The motion is granted.

II. BACKGROUND

The plaintiffs are two related finance companies. Between 2008 and 2011, they agreed to make four loans to Progressive Capital Solutions, LLC (Progressive), to finance Progressive's purchase of several portfolios of life insurance policies. The loans were to be secured by the policies themselves, and loan number three was allegedly also to be secured by a mortgage on real property in Pennsylvania.

The plaintiffs retained the defendant law firm Gilbride, Tusa, Last & Spellane, LLC (the law firm), to represent them, among other things, in structuring and drafting the loan documents and closing on the loans. The first loan was repaid by Progressive. The plaintiffs commenced this action against the law firm and the defendants Jonathan M. Wells, Kenneth M. Gammill, Jr., and Charles S. Tusa, who were partners in the law firm (collectively the partners), alleging, inter alia, that they committed legal malpractice in failing to perfect their security interests in the policies securing the second, third, and fourth loans. Specifically, the plaintiffs contended that the defendants improperly filed UCC-1 financing statements with the Secretary of State, which was insufficient to perfect those interests. They asserted that security interests in such policies may only be perfected by possession of the original policies or the delivery, to the underwriters of the policies, of collateral assignment forms properly executed by Progressive. The plaintiffs further contended that the defendants failed to record the mortgage referable to loan number three, thus causing them to sustain damages.

The plaintiffs asserted five causes of action: (1) legal malpractice, (2) breach of contract, (3) negligence, (4) the right to disgorgement of profits, and (5) breach of fiduciary duty. The defendants answered the complaint insofar as it was addressed to the loan number four, denying all substantive allegations of wrongdoing, and counterclaimed for unpaid attorneys' fees under theories of quantum meruit and on an account stated. In a decision and order dated June 16, 2015, this court directed the dismissal of the breach of contract, negligence, disgorgement, and breach of fiduciary duty causes of action insofar as addressed to loans two and three, concluding that they were duplicative of the legal malpractice cause of action. The court also directed the dismissal of so much of the legal malpractice cause of action as was premised on the defendants' failure to record the Pennsylvania mortgage to partially secure loan number three, concluding that documentary evidence established that any failure to record the mortgage did not damage the plaintiffs. The court otherwise denied the motion as to the legal malpractice cause of action, concluding that it stated a cause of action and was timely interposed. The defendants thereafter answered the remainder of the complaint, denying all substantive allegations of wrongdoing.

The plaintiffs now move for summary judgment on so much of the first cause of action as alleges that the defendants committed legal malpractice in failing to perfect their interests in the subject life insurance policies with respect to loans two, three, and four, and dismissing the counterclaims for unpaid legal fees. As relevant here, the plaintiffs allege that it was their understanding that the law firm, as part of its representation, was obligated to ensure that their interests in the policies were properly secured and collateralized.

In support of their motion, the plaintiffs submit the pleadings, an affirmation of counsel, the affidavit of their Senior Portfolio Manager, Steven Sands, the loan agreements with Progressive, emails between the defendants and them, invoices for legal services billed by the law firm, a conditional settlement agreement in an action that they prosecuted against Progressive in Connecticut, the underwriting insurers' rejections of their requests to recognize their security interests in the subject policies, and discovery requests and responses. Sands avers that the parties did not enter into a written retainer agreement, and the law firm did not provide the plaintiffs with a letter of engagement. Sands asserts that the defendant Wells assured the plaintiffs that their security interests were indeed perfected, and that no one at the law firm ever contradicted that representation. He avers that the plaintiffs never limited the scope of the law firm's representation by instructing it to refrain from perfecting the security interests or informing the law firm that the plaintiffs themselves would take all steps to perfect those interests.

According to Sands, the law firm amended several of the loan agreements without informing the plaintiffs that the security interests therein had not been perfected, and Wells wrote to the plaintiffs, informing them that he would file UCC financing statements after the loans were funded and Progressive obtained the loan proceeds. Sands further asserts that the plaintiffs were invoiced for the law firm's purported work in perfecting the plaintiffs' security interests in the insurance policies, a contention that is supported by the bill for legal services that he submits with his affidavit, which invoiced the plaintiffs for legal fees for "policy collateralizations."

The plaintiffs thus argue that, although the obligation to perfect the security interests was impliedly within the scope of the defendants' legal representation of the plaintiffs, the defendants should be held liable regardless of any agreed-upon scope of representation, since the defendants concededly undertook to perfect the security interests by their act of filing UCC-1 financing statements with the Secretary of State, but committed malpractice inasmuch this method was improper and ineffective. The plaintiffs further contend that the defendants' voluntary assumption of the obligation to perfect the security interests may also be inferred by their billing the plaintiffs for collateralizing the policies.

As Sands describes it, after Progressive defaulted on three of the four loans, the plaintiffs commenced an action against Progressive in Connecticut, and the plaintiffs and Progressive reached a tentative settlement of the matter, but the settlement fell through, while Progressive essentially has no assets to pay any judgment that might be entered against it in that action. He asserts that the plaintiffs thereafter made claim upon the various underwriters of the subject policies to recognize the plaintiffs' security interests in the policies, but the underwriters rejected the requests, inasmuch as the plaintiffs did not have possession of the relevant policies, and no executed collateral assignment forms were ever delivered to the underwriters. According to Sands, blank collateral assignment forms had been included in the packets of closing documents prepared by the law firm, but were never executed, let alone delivered to the various underwriters.

In opposition to the plaintiffs' motion, the defendants submit an attorney's affirmation, an affidavit from the defendant Wells, discovery demands and responses, term sheets referable to the loans, the loan agreements and amendments, the UCC financing statements with proof of filing, the documents generated at the closings of the subject loans, proposed but unexecuted collateral assignment forms, the law firm's invoices to the plaintiffs, and email correspondence between the parties.

Wells asserts that the plaintiffs left it to Progressive to provide proof that the plaintiffs' security interests were perfected. He further alleges that attorney Christopher Kelly, who is the former Chief of Compliance, Chief Operating Officer, and General Counsel of Sands Bros., an entity controlled by the plaintiffs' principals, acted as the plaintiffs' agent. Wells states that Kelly explicitly gave the law firm oral instructions to refrain from delivering executed collateral assignment forms to the underwriting insurers, and that Kelly told the law firm that either Kelly or the plaintiffs would be responsible for perfecting the security interests in the policies, thus expressly limiting the scope of the law firm's legal representation of the plaintiffs. Wells further avers that, when he asked Kelly whether the security interests were indeed perfected, Kelly responded that it was "[d]one."

In reply, the plaintiffs submitted a memorandum of law, arguing, among other things, that there was no factual proof that the plaintiffs left it to Progressive to assure that their security interests in the policies were perfected, and that the defendants' allegations concerning the communications that purportedly limited the scope of representation must, under applicable rules of professional conduct, be deemed unworthy of belief. They reiterated that the defendants must be held liable in any event since they voluntarily assumed the obligation to perfect the security interests by their filing of UCC-1 financing statements with the Secretary of State and their invoicing the plaintiffs for attempting to collateralize the policies in that manner.

III. DISCUSSION

A. LEGAL MALPRACTICE CAUSE OF ACTION

The plaintiffs established their prima facie entitlement to judgment as a matter of law on the issue of liability on so much of the legal malpractice cause of action as is premised on the failure to perfect security interests in the insurance policies. A cause of action to recover for legal malpractice requires proof "that the attorney failed to exercise ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession and that the attorney's breach of this duty proximately caused plaintiff to sustain actual and ascertainable damages." Rudolf v Shayne, Dachs, Stanisci, Corker & Sauer, 8 NY3d 438, 442 (2007). Where, as here, an attorney fails to properly record a security interest or mishandles an express task for which he or she was engaged, it is a per se breach of the standard of care, and does not require expert testimony to establish a prima facie case, since ordinary experience of a fact finder would provide a sufficient basis for judging the adequacy of the professional service rendered. See Lory v Parsoff, 296 AD2d 535, 536 (2^nd Dept. 2002); Deb-Jo Const., Inc. v Westphal, 210 AD2d 951, 951 (4^th Dept. 1994); S & D Petroleum Co. v Tamsett, 144 AD2d 849, 850 (3^rd Dept. 1988). A security interest in a life insurance policy may not be perfected by filing a UCC-1 financing statement with the Secretary of State (see UCC 9-109 [d][8]), but only by the actual possession of the original policy or the delivery of a properly executed collateral assignment to the underwriter of the policy. See Matter of Bickford, 265 App Div 266 (3^rd Dept. 1942). Moreover, the plaintiffs established, prima facie, that the defendants' failure to properly perfect the security interests in the policies proximately led to the plaintiffs' inability enforce a lien on the policies after Progressive defaulted, and that the plaintiffs were unable to collect from Progressive in their Connecticut breach of contract action. Cf. Gladstone v Ziegler, 46 AD3d 366 (1^st Dept. 2007) (plaintiffs established liability, but could not demonstrate, prima facie, that their attorney's failure to perfect a security interest proximately caused damages).

In opposition to the plaintiffs' showing, the defendants contend only that there is a triable issue of fact as to whether any obligation to perfect the security interests was within the scope of their retention. They assert that the plaintiffs explicitly limited the scope of representation by virtue of oral directives made by Kelly, as the plaintiffs' agent, that the defendants were to refrain from perfecting those interests.

Rule 1.2(c) of the Rules of Professional Conduct provides that "[a] lawyer may limit the scope of the representation if the limitation is reasonable under the circumstances, the client gives informed consent and where necessary notice is provided to the tribunal and/or opposing counsel." Generally, where the scope of representation is properly limited, an attorney may not be held liable for his or her failure to undertake a task that falls outside of the scope of representation. See generally AmBase Corp. v Davis Polk & Wardwell, 8 NY3d 428, 435 (2007). The court, however, rejects the defendants' contention that their submission is sufficient to defeat summary judgment. Even if there are factual disputes as to whether the defendants received any limiting instructions from Kelly and whether Kelly had authority to bind the plaintiffs with respect to the scope of representation, the plaintiffs established that the defendants, by filing the UCC-1 statements and billing the plaintiffs for that work, voluntarily assumed the obligation to perfect the security interests.

Where one assumes a duty to act, the failure to perform the act in a proper fashion constitutes a breach of the assumed duty, and may render the actor liable in negligence. See Applewhite v Accuhealth, Inc., 21 NY3d 420, 431, 434 (2013); Palka v Servicemaster Mgt. Servs. Corp., 83 NY2d 579, 587 (1994); Podesta v Assumable Homes Dev. II Corp., 137 AD3d 767, 769 (2^nd Dept. 2016); see generally Katz v United Synagogue of Conservative Judaism, 135 AD3d 458, 461 (1^st Dept. 2016). Therefore, where a fiduciary, by its conduct, voluntarily assumes the obligation to properly deliver to, or file documentation with, a particular entity or governmental agency, the fiduciary's failure to timely or properly deliver or file the documentation constitutes actionable negligence if it proximately causes damage to the plaintiff. See Nilazra, Inc. v Karakus, Inc., 136 AD3d 994, 996 (2^nd Dept. 2016) (failure to file a certain notice with the Department of Taxation & Finance); see also AG Capital Funding Partners, L.P. v State Street Bank & Trust Co., 5 NY3d 582, 594 (2005) (failure to deliver secured indebtedness statement to a bank); Podesta v Assumable Homes Dev. II Corp., supra (failure to record partial satisfaction of mortgage).

The plaintiffs' submissions establish, prima facie, that the defendants voluntarily undertook the obligation to perfect the security interests in the insurance policies, and invoiced the plaintiffs for all of the work associated with their attempt to perfect those interests. The submissions further establish that the defendants breached the duty that they assumed by electing an improper method for perfection of the interests, and that this breach of the voluntarily assumed duty proximately caused damage to the plaintiffs. In opposition, the defendants' allegations that the scope of their retention was limited, even if ultimately true, are insufficient to raise a triable issue of fact as to whether they voluntarily assumed the duty to perfect the security interests, and negligently discharged that duty by choosing an ineffective method of perfection. B. COUNTERCLAIMS TO RECOVER UNPAID LEGAL FEES

An attorney's commission of legal malpractice constitutes an affirmative defense to a cause of action seeking compensation for the provision of legal services. See John Grace & Co. v Tunstead, Schechter & Torre, 186 AD2d 15, 19-20 (1^st Dept. 1992). As explained above, the plaintiffs' submissions established, prima facie, that the defendants committed legal malpractice, and the defendants failed to raise a triable issue of fact in opposition. For the same reasons, the plaintiffs established their prima facie entitlement to judgment as a matter of law dismissing the counterclaims for unpaid attorneys' fees, which sought payment for the very work that constituted malpractice, and the defendants failed to raise a triable issue of fact in opposition.

IV. CONCLUSION

In light of the foregoing, it is

ORDERED that the plaintiffs' motion for summary judgment on the issue of liability on so much of the first cause of action as seeks to recover for legal malpractice based on the defendants' failure to perfect security interests in the subject insurance policies, and dismissing the defendants' counterclaims, is granted.

This constitutes the Decision and Order of the court. Dated: February 27, 2017

ENTER: /s/_________

J.S.C.