Opinion
00 CIV. 3091 (DLC)
January 24, 2001
Roger B. Kaplan, Wilentz, Goldman Spitzer, New York, NY, Attorney for the Plaintiff
Janice J. DiGennaro, Douglas Tischler, Rivkin, Radler Kremer LLP, Uniondale, NY, Attorneys for Defendants Gersten, Savage Kaplowitz, LLC and Jay. M. Kaplowitz, Esq.
OPINION ORDER
On April 21, 2000, plaintiff Neeraj Gupta ("Gupta") filed a verified complaint in this diversity action. This Court stayed the action on July 20, 2000, pending a ruling by the United States District Court of the Southern District of Florida in Northern Financing Group, Ltd. v. Rubin, 00 Civ. 1419 (the "Florida Action"). By letter of October 6, 2000, plaintiff's counsel represented that the Florida Action had been dismissed, and the Court thereafter lifted the stay. On October 23, 2000, in advance of any answer, defendants Gersten Savage Kaplowitz, LLC ("Gersten Firm") and Jay M. Kaplowitz, Esq. ("Kaplowitz") (collectively, the "Gersten Defendants") filed a motion to dismiss pursuant to Rules 9(b), 12(b)(1) and 12(b)(6), Fed.R.Civ.P. For the reasons discussed below, the motion is denied without prejudice to its renewal if the defects noted below are not cured in an amended pleading.
BACKGROUND
The facts in the verified complaint relevant to this motion include the following. The plaintiff, Gupta, and his family founded DiamondDepot Corporation ("DDC") on or around July 31, 1998. Gupta served as President and Chief Executive Officer and "substantially managed and controlled" DDC's operations and affairs through 1999. In late 1998, and continuing through 1999, DDC created and operated an e-commerce business selling diamonds, fine jewelry and watches over the Internet through the website DiamondDepot.com. By 1999, the website had generated substantial revenues, and DDC began seeking capital financing in order to expand its operations. To that end, Gupta contacted numerous investment bankers, underwriters and venture capitalists. Eventually Gupta came into contact with Robert Rubin ("Rubin"), whom he met with in late April or early May 1999, at the New York offices of M.S. Farrell Co. ("M.S. Farrell"). M.S. Farrell subsequently transmitted to Gupta a proposed term sheet for a capital transaction involving M.S. Farrell as the underwriter as well as a proposal for a bridge loan for DDC. At a meeting to discuss these proposals with Rubin, the Guptas indicated that they, as well as DDC, were represented by McCarter English ("McCarter"). Rubin explained that the Guptas and DDC would need to use the Gersten Firm which had "a great deal of experience" in similar deals. In late July, pursuant to Rubin's request, Gupta spoke by telephone with principals and partners of the Gersten Firm. At that point, "Gupta retained the Gersten Firm to negotiate with M.S. Farrell." It is unclear from the wording of the Complaint whether Gupta hired the Gersten Firm solely on behalf of DDC or on behalf of himself as well. Gupta alleges that at no time did the Gersten Firm or Kaplowitz reveal business or social relationships with Rubin, which Gupta calls "substantial conflicts of interest." In particular, Gupta alleges that Kaplowitz had "substantial business relationships" with Rubin and was a "substantial co-shareholder" with Rubin in corporations, including StyleSite Marketing, Inc. which Kaplowitz and Rubin were at that time "actively working to take public" as principals and for which the Gersten Firm served as corporate counsel. Gupta further alleges that, unknown to him at that time, Rubin was a customer/runner for M.S. Farrell who was in the practice of directing transactions to M.S. Farrell for an interest in deals, using the Gersten Firm and Kaplowitz to further these objectives. After the Gerstein Firm informed M.S. Farrell that Gupta was represented, M.S. Farrell transmitted on August 6, two proposals to the plaintiff and DDC, the first for an IPO of DDC and the second for a bridge loan by M.S. Farrell for the amount of $500,000.00 to $750,000.00.
The plaintiff alleges that the M.S. Farrell proposals contained no reference to Rubin or to Rubin receiving or having the right to receive any stock from DDC. On August 11, 1999, however, the plaintiff received a fax from "Robert M. Rubin, Esq." in which Rubin stated that he was enclosing a check for $20,000 which represented a down payment for a proposed subscription by Rubin for 620,000 shares of DDC common stock, at a price of $100,000.00, or .0620 cents per share. The check was never received. The letter also stated that Rubin had proposed to introduce DDC to "various strategic relationships," and that DDC would consider forgiving all or a portion of the balance owed for the subscription based on the results of these introductions. The plaintiff later learned that the letter was prepared by the Gersten Firm and signed on behalf of Rubin pursuant to Kaplowitz's instructions. The plaintiff alleges that this letter was an offer by Rubin to obtain an equity interest in DDC independent of the M.S. Farrell transaction. Gupta rejected the letter and provided Kaplowitz with an unsigned counter-proposal, which proposed providing Rubin with "the right to have a contingent purchase of $620,000 shares of [DDC], contingent on the successful closing of an underwritten public offering by M.S. Farrell on behalf of [DDC]" (emphasis in original). On or about August 28, 1999, Gupta, on behalf of DDC, executed the commitment letter and the bridge loan commitment letter of August 6.
In its proposal, M.S. Farrell specified a 2.5% "breakup" commission to which Gupta objected. M.S. Farrell explained that, although such a commission was unenforceable under NASDAQ rules, it desired the clause anyway.
Gupta alleges that M.S. Farrell unreasonably delayed the closing of the bridge loan and IPO. As a result, Gupta began exploring other options for equity financing and closed a transaction on November 18 with defendants Northern Financing Group, Ltd., Lenorth Holdings, S.A., Data Investments Investment LLC and Lipton Partnership No. 2, Ltd. ("Investor Defendants"), by which the companies purchased an 85% equity interest in DDC for $6,700,000.00. DDC subsequently changed its name to Odimo.com, Inc. ("Odimo"). While Gupta and DDC disclosed the discussions with M.S. Farrell and the letters of August 6, 1999, it did not disclose "any prior negotiations which had not resulted in an obligation or contract concerning the sale of capital stock of [DDC]," including the letter from, and conversation with, Rubin concerning the request to obtain a right to purchase DDC shares (emphasis in original).
Gupta retained 10%, or 669,000 shares, of the outstanding capital stock of Odimo. Pursuant to the agreement, Gupta pledged 667,666 of his common stock with defendant Shaul Olmert, the investor companies' Pledge Escrow Agent, as security for the representations and warranties agreed to by Gupta and DDC.
Gupta alleges that during a telephone conversation with Rubin, Gupta "confirmed to Rubin that the proposed deal with M.S. Farrell was dead." At no time during the conversation, or in response to Gupta's letter of December 1, 1999, to Rubin and Kaplowitz confirming the telephone conversation, did Rubin "in any way assert or suggest that Gupta or [DDC] was in any way obligated to sell any stock of [DDC] to Rubin." Gupta and the Gersten Firm concluded their relationship on December 6, 1999.
Sometime later, Rubin asserted his rights to Odimo's stock. The plaintiff alleges that, although he knew that his claims were "utterly false," Rubin argued that Gupta had "entered into an unwritten, unsigned verbal agreement" with him. In support of his claims, Rubin provided Odimo with draft private placement memoranda ("PPMs") where were prepared by Kaplowitz in connection with the M.S. Farrell deal and which "purported to reflect an agreement" between DDC and Rubin. The plaintiff alleges that Rubin and Kaplowitz added the language into the drafts and then, in order to "lull Gupta and to advance Rubin's position," assured Gupta that the drafts were "only drafts" and "not binding." Rubin has threatened to sue Odimo. Gupta has been threatened with suit by the Investor Defendants, and he has been sued in a Florida action by two of them. Gupta alleges that the Florida suit is an attempt to squeeze Gupta and his family out of Odimo and to improperly use Gupta's stock to satisfy Rubin's demands.
As against Kaplowitz and the Gersten Firm, the Complaint alleges one count of fraud and one count of malpractice, negligence and breach of fiduciary duty. In particular, Count II alleges that Rubin, Kaplowitz, and the Gersten Firm "engaged in a scheme and artifice to defraud Gupta and [DDC] by false pretenses and misrepresentations in an effort to unfairly and improperly extort stock from the Corporation in advance of its planned initial public offering." Count III alleges that Kaplowitz and the Gersten Firm owed the plaintiff — as his attorneys — a fiduciary duty of loyalty and the utmost good faith and fair dealing as well as a duty to act with diligence and with reasonable professional care. Plaintiff alleges that Kaplowitz and the Gersten Firm breached these obligations when they failed to disclose their "substantial business relationships" with Rubin and "conspired to assist Rubin in fraudulently obtaining an equity interest" in Odimo.
On October 3, 2000, the Florida action was dismissed for lack of personal jurisdiction over Gupta. On October 26, 2000, defendant Rubin filed and served his Answer to the Verified Complaint in this action and asserted counterclaims against the plaintiff and cross-claims against DDC. All of the remaining defendants, with the exception of the Gersten Firm and Kaplowitz, filed and served an Answer and asserted a counterclaim against the plaintiff on December 1, 2000. In their motion to dismiss, the Gersten Firm and Kaplowitz make four arguments: (1) that this Court lacks subject matter jurisdiction over the plaintiff's claims; (2) that the plaintiff has no standing to sue for the alleged wrong done to DDC; (3) that the complaint fails to state claims of malpractice, breach of fiduciary duty, and negligence; and (4) that the complaint fails to state a claim for fraud or fails to state the claim with particularity.
Rubin asserts two counterclaims against the plaintiff: (1) that Gupta committed fraud in that Rubin relied to his detriment on the representations made by Gupta on behalf of DDC concerning an alleged agreement giving stock to Rubin if M.S. Farrell raised "significant capital" for DDC and that Gupta and DDC failed to disclose their abandonment of the agreement with M.S. Farrell; and (2) that Rubin is entitled to a declaratory judgment that he is the owner of 620,000 shares of stock.
These defendants assert that Gupta is obligated to indemnify them for any claim relating to or arising from the "untruth, inaccuracy or breach" of any agreements or warranties made by Gupta. In particular, these defendants demand indemnification from the liability or expense resulting from Rubin's demands for stock.
DISCUSSION
I. Choice of Law
The parties do not address choice of law but do rely on New York law in making their arguments. In a diversity action, the choice of law analysis is based on the forum state's choice of law rules. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97 (1941). In Babcock v. Jackson, 240 N.Y.S.2d 743, 749 (N.Y. 1963), the New York Court of Appeals adopted a flexible approach to choice of law, focusing on the law of the state with the most significant interest in the dispute. See also Padula v. Lilarn Properties Corp, 620 N.Y.S.2d 310, 311 (N.Y. 1994). In this case, plaintiff is a citizen and resident of New Jersey, while defendants include individuals, partnerships, limited liability companies, or corporations which are either residents of New York, have their principal place of business in New York, conduct and transact business on a continuous basis in New York, conduct and transact business on a continuous basis in New York, and/or conduct substantial transactions and business in New York with respect to the transactions and occurrences alleged in the Complaint. The critical meetings in this action occurred in New York and were the sites of the alleged malpractive, negligence, breach of fiduciary duty, and fraud at issue in this motion. In conjunction with the parties' reliance on New York law in their submissions on this motion, the Court concludes that New York law in their submissions on this motion, the Court concludes that New York law applies in this case. See, e.g. Walter E. Heller Co. v. Video Innovations, Inc., 730 F.2d 50, 52 (2d Cir. 1984) ("[I]n the absence of a strong countervailing public policy, the parties to a litigation may consent by their conduct to the law to be applied.").
II. Subject Matter Jurisdiction and Standing
The Gersten Defendants appear to make two arguments concerning subject matter jurisdiction and standing. First, they contend that the case is not ripe because the plaintiff has suffered no injury and thus no justiciable case or controversy exists. Second, they argue that the plaintiff lacks standing because he has not personally suffered any injury.
Article III of the Constitution permits federal courts to hear only those disputes which are ripe, that is "real and substantial controversies admitting of specific relief. [They may not issue] an opinion advising what the law would be upon a hypothetical state of facts." Auerbach v. Board of Educ. of the Harborsfield Cent. Sch. District of Greenlawn, 136 F.3d 104, 108 (2d Cir. 1998) (internal quotation omitted). An Article III court "cannot entertain a claim which is based upon contingent future events that may not occur as anticipated, or indeed may not occur at all." Thomas v. City of New York, 143 F.3d 31, 34 (2d Cir. 1998) (internal quotation omitted). Consequently, "when resolution of an issue turns on whether there are nebulous future events so contingent in nature that there is no certainty they will ever occur, the case is not ripe for adjudication." Id. (internal quotation omitted).
Related to the doctrine of ripeness is the concept of standing. "Under Article III of the Constitution, it is `axiomatic' that a federal court may not exercise jurisdiction over a dispute unless the plaintiff shows `that he personally has suffered some actual or threatened injury as a result of the putatively illegal conduct of the defendant.'" Jones v. Unum Life Insurance Co. of America, 223 F.3d 130, 141 (2d Cir. 2000) (quoting Blum v. Yaretsky, 457 U.S. 991, 999 (1982)). Standing requires three elements: "(1) that the plaintiff suffered personal injury or threat of injury; (2) that the injury fairly can be traced to the action challenged (`causation'); and (3) that the injury is likely to be redressed by the requested relief (`redressibility')." Fund for Animals v. Babbitt, 89 F.3d 128, 134 (2d Cir. 1996) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992)). The injury must be "concrete in nature and particularized to the plaintiff." Hirsch v. Arthur Anderson Co., 72 F.3d 1085, 1091 (2d Cir. 1995) (internal quotation omitted).
The Gersten Defendants argue that the case is not ripe because no injury has yet occurred to the plaintiff. Specifically, the plaintiff has not been compelled to pay over any corporate stock to Rubin, the plaintiff has not been adjudged liable to Odimo, and the Florida action discussed in the Complaint has been dismissed. There is, as the Florida lawsuit and the counterclaims lodged in this suit underscore, an active dispute between Rubin and the plaintiff over ownership of certain shares of Odimo, and between the plaintiff and the Investor Defendants concerning Rubin's claims. Moreover, the plaintiff has presented sufficient information to allege successfully, as discussed below, that these disputes and injuries arise in part from the actions of the Gersten Defendants. The plaintiff has argued in his submissions that the documents prepared by the Gersten Defendants have precluded him from obtaining possession of his shares of Odimo stock.
In a related argument, the Gersten Defendants argue that the plaintiff lacks standing because the Gersten Firm represented DDC and not Gupta. Therefore, any suit against them must be brought by DDC. As already noted, the plaintiff presented sufficient facts to show that he has been injured by the Gersten Defendants' actions, and therefore has standing, to assert his claims. These injuries constitute the actual or threatened personal injury required to allege ripeness and standing. Whether the legal theories he has pleaded survive shall be addressed below.
III. Malpractice, Negligence, and Breach of Fiduciary Duty
The Gersten Defendants argue that the complaint should be dismissed pursuant to Rule 12(b)(6), Fed.R.Civ.P., because the plaintiff has failed to state a claim for malpractice, negligence, and breach of fiduciary duty. A court may dismiss an action pursuant to Rule 12(b)(6) only if "it appears beyond doubt, even when the complaint is liberally construed, that the plaintiff can prove no set of facts which would entitle him to relief." Jaghory v. New York State Dep't of Education, 131 F.3d 326, 329 (2d Cir. 1997). The court must "accept all factual allegations in the complaint as true and draw inferences from those allegations in the light most favorable to the plaintiff." Id. The court is generally prohibited from considering matters outside the pleadings for a motion to dismiss for failure to state a claim upon which relief can be granted. Tewksbury v. Ottaway Newspapers, 192 F.3d 322, 325 n. 1 (2d Cir. 1999). The court can dismiss the claim under Rule 12(b)(6) only if, assuming all facts alleged to be true, the plaintiff still fails to plead the basic elements of a cause of action. "General, conclusory allegations need not be credited, however, when they are belied by more specific allegations of the complaint." Hirsch, 72 F.3d at 1092.
A. Malpractice and Negligence
Under New York law, an action for damages for legal malpractice or for negligence requires proof of the following elements: (a) a duty; (b) a breach of duty; and (c) actual damages "proximately caused by the breach of the duty." Tinelli v. Redl, 199 F.3d 603, 606 (2d Cir. 1999) (malpractice); see also Integrated Waste Servs., Inc. v. Akzo Nobel Salt, Inc., 113 F.3d 296, 299 (2d Cir. 1997) (negligence). An attorney must "exercise ordinary skill and diligence in his representation of clients." Skinner v. Stone, Raskin Israel, 724 F.2d 264, 266 (2d Cir. 1983); see also Barry v. Liddle, O'Connor, Finkelstein Robinson, No. 93 Civ. 8707 (CSH), 1997 WL 736725, at *2 (S.D.N Y Nov. 25, 1997).
In general, only the party retaining the services of an attorney can bring a legal malpractice action against him. Catizone v. Wolff, 71 F. Supp.2d 365, 368 (S.D.N.Y. 1999). The defendants argue that they represented DDC and not the plaintiff individually, as indicated by an unsigned retainer agreement between DDC and the defendants. While the attorney-client relationship arises only when an individual "contacts an attorney in his capacity as such for the purpose of obtaining legal advice or services," formality is "not an essential element in the employment of an attorney." Id. Instead, courts must "look at the words and conduct of the parties." Id. Courts have considered several factors in determining whether an attorney-client relationship exists, including whether a fee arrangement was entered into or a fee was paid, whether a written retainer exists, whether the attorney actually represented the individual, for example at a deposition, and whether the purported client reasonably believed that the attorney was representing him. Id. A party's "unilateral belief" that he is represented by counsel "does not confer upon him the status of client unless there is a reasonable basis for his belief." Id. at 371.
The Complaint does not indicate with sufficient clarity whether the defendants were hired solely on behalf of DDC or for the plaintiff as well, but the plaintiff asserts in his affidavit that the defendants "advised me directly on aspects of the negotiations that were particular to my individual interests," such as his salary, stock options, and the non-recourse nature of the bridge loan. The affidavit further asserts that the plaintiff made decisions based on the defendants' advice and that "[a]t all relevant times, it was my understanding that the Gersten defendants were providing this advice to represent my best interests in addition to their representation of [DDC]" (emphasis in original). To avoid dismissal of his claims of negligence and malpractice, the plaintiff must amend his Complaint to assert explicitly that he was a client of the Gersten Firm in connection with the events which form the basis of these causes of action.
The Complaint alleges that Rubin told the Guptas at a meeting in July 1999 that "the Guptas and the Corporation had to use the Gersten Firm," but the Complaint also alleges that a letter from David Broderick of McCarter to M.S. Farrell indicated that only DDC would be retaining a New York law firm. Further, as noted earlier, the Complaint alleges only that "Gupta retained the Gersten Firm to negotiate with M.S. Farrell on the proposed M.S. Farrell deal."
The Gersten Defendants next argue that the Complaint fails to allege any breach of duty because the alleged ethical violations do not rise to the level of an actionable tort. Plaintiff alleges that the Gersten Defendants breached their duty of care to the plaintiff because of their representation of Rubin on other matters and the "substantial business relationships" between Kaplowitz and Rubin, constituting a conflict of interest.
Under New York rules of professional conduct, a lawyer generally cannot simultaneously serve clients with conflicting interests. Disciplinary Rules "are mandatory in character" and "state the minimum level of conduct below which no lawyer can fall without being subject to disciplinary action." Kittay v. Kornstein, 230 F.3d 531, 538 n. 3 (2d Cir. 2000) (internal quotation omitted). Disciplinary Rule 5-105 of the New York Code of Professional Responsibility provides that
(a) A lawyer shall decline proffered employment if the exercise of independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve the lawyer in representing differing interests . . .
(b) A lawyer shall not continue multiple employment if the exercise of independent professional judgment in behalf of a client will be or is likely to be adversely affected by the lawyer's representation of another client, or if it would be likely to involve the lawyer in representing differing interests."
Rule 5-105(a) and (b), N.Y. Code of Professional Responsibility; see also Kittay, 230 F.3d at 537-38. A lawyer may only represent multiple clients in the situations presented in Rule 5-105(a) and (b) if "it is obvious that the lawyer can adequately represent the interest of each and if each consents to the representation after full disclosure of the implications of the simultaneous representation and the advantages and risks involved." Rule 5- 105(c), N.Y. Code of Professional Responsibility (emphasis added); see also Kittay, 230 F.3d at 538. Further, Rule 5-101(a) prohibits a lawyer from accepting "employment if the exercise of professional judgment on behalf of the client will be or reasonably may be affected by the lawyer's own financial, business, property, or personal interests." Rule 5-101(a), N.Y. Code of Professional Responsibility; see also In re Edelstein, 214 F.3d 127, 129 (2d Cir. 2000). The cases cited by the defendants principally involve associated sanctions of professional discipline bringing "baseless legal proceedings" on behalf of their clients, or laws governing suits brought by third parties. See Hashemi v. Shack, 609 F. Supp. 391, 397 (S.D.N Y 1984); Drago v. Buonagurio, 413 N.E.2d 821, 822 (N.Y. 1978). Neither situation applies here. The plaintiff has alleged facts sufficient to support his claim that the Gersten defendants simultaneously represented him and Rubin, that the Gersten defendants were involved in substantial business transactions with Rubin, that the joint representation adversely affected the plaintiff and that in any event it was not disclosed to him.
B. Breach of Fiduciary Duty
Under New York law, the elements for inducing or participating in a breach of fiduciary duty are: (a) a breach by a fiduciary of obligations to another; (b) that the defendant knowingly induced or participated in the breach; and (c) that the plaintiff suffered damages as a result of the breach. See Whitney v. Citibank, N.A., 782 F.2d 1106, 1115 (2d Cir. 1986); Antonios A. Alevizopoulos and Assoc., Inc. v. Comcast Int'l Holdings, Inc., 100 F. Supp.2d 178, 188 (S.D.N.Y. 2000). The Gersten Defendants' motion raises no issues that are unique to this cause of action or that have not been addressed in connection with the negligence and malpractice claims. Accordingly, for the reasons discussed above, the defendants' motion to dismiss for failure to state a claim of breach of fiduciary duty is denied.
IV. Fraud
Defendants argue that the plaintiff fails to state a claim for fraud. Under New York law, a plaintiff must prove five elements by clear and convincing evidence to prevail on a claim of fraud: (a) a material misrepresentation or omission of fact; (b) made with knowledge of its falsity; (c) with an intent to defraud; and (d) reasonable reliance on the part of the plaintiff; (e) that causes damage to the plaintiff. Schlaifer Nance Co. v. Estate of Andy Warhol, 119 F.3d 91, 98 (2d Cir. 1997). A plaintiff may state a claim for fraudulent misrepresentation if "he relied to his detriment on the defendant's misrepresentation" and "the defendant intended the misrepresentation to be conveyed to him." Securities Investor Protection Corp. v. BDO Seidman, LLP, 222 F.3d 63, 71 (2d Cir. 2000). The Gersten Defendants argue that the plaintiff has failed to allege a sufficiently material misrepresentation, asserting that the sole allegations are (1) that Kaplowitz inserted language into a draft PPM which purported to reflect an agreement between Rubin and DDC, and (2) that Kaplowitz told the plaintiff that the PPM was "only" a draft and could be changed. Defendants argue that Kaplowitz's statement to the plaintiff that the draft language could be changed was an accurate statement of the law.
Defendants also argue that the plaintiff failed to state the claim with the particularity required under Rule 9(b), Fed.R.Civ.P. As discussed below, the defendants focus the entirety of their argument on the statement made by Kaplowitz regarding the draft PPM, citing Rule 9(b) law for material misrepresentations. Because the plaintiff also alleges a material omission for the defendants' failure to disclose their relationship with Rubin, and the defendants have failed to contest the adequacy or particularity of that claim, it is unnecessary to address their Rule 9(b) argument.
The Gersten Defendants have not recited each of the Complaint's relevant allegations. The Complaint also asserts that the defendants failed to reveal their relationship with Rubin to the plaintiff at the time they were retained even though that simultaneous representation constituted a conflict of interest. Moreover, in his affidavit, the plaintiff states that he made decisions to his detriment based on the defendants' advice and without the knowledge of their relationship with Rubin. With these additional facts alleged in an amended complaint plaintiff will adequately plead the materiality of the omission, satisfying Rule 9(b) as well as the elements of a claim for fraud. The Court grants him leave to amend.
CONCLUSION
For the reasons discussed above, the defendants' motion to dismiss is denied without prejudice to its renewal if the defects are not cured in an amended pleading filed by February 7, 2001.
SO ORDERED: