Opinion
Index No. 105061/11
11-02-2011
JOHN HELLER and JO ANNA PILLITTERI, Plaintiff, v. GOLDBERG, SCUDIERI & LINDENBERG, P.C., GOLDBERG SCUDIERI, LINDENBERG & BLOCK, P.C, ALAN J. GOLDBERG, DAVID G. SCUDIERI, MARK K. LINDENBERG, PAUL S. BLOCK, Defendants.
Mot. Seq. 001
Decision and Order
HON. , J.S.C.
Plaintiffs bring this action for legal malpractice, failure to supervise, and fraudulent misrepresentation, as a result of legal representation by Paul S. Block, while he was an associate, and while he was a partner practicing at the defendant law firm of Goldberg Scudieri Lindenberg & Block, PC. ("the Firm").
According to the complaint, plaintiffs met with Block in 1994, while he was still an associate, and retained the Firm to represent them in litigation over numerous issues that arose as a result of their tenancy. Block was plaintiffs' counsel in all matters related to those issues.
The malpractice allegedly began in 1997 when Block lied and told plaintiffs that he had filed two claims against their landlord, that he had made several court appearances on plaintiffs' behalf, and secured default judgments in the total amount of $675,000. In 1999 Block lied to plaintiffs again and told them that he was filing a lien against the landlord's property in order to secure the two judgments.
Also in 1999, Block negotiated a buy-out of plaintiffs' rent-stabilized apartment by the landlord for $60,000, from which the Firm was paid a fee of $10,000. As part of the settlement, plaintiffs allege that Block induced them to execute a general release in favor of the landlord by convincing them that the release would not have any bearing on their ability to collect on the fictitious default judgments.
In 2005 Block represented to plaintiffs that the landlord's building had sold for $3,500,000, and that a judge had directed the funds to be place in an escrow account by the New York City Department of Finance ("DOF"). In 2006 Block conveyed to plaintiffs that he had "persuaded" the City Department of Finance to transfer the funds into a separate account, but that he could only disburse small amounts per month to them until the money was released.
The monthly stipends were paid out of the Firm's escrow account. In the meantime, Block told plaintiffs that their judgment was now valued at over $14,200,000 due to penalties imposed by the judge on the DOF. In or around 2008 Block claimed that he secured a default judgment against the DOF in the amount of $5,000,000.
Block continued to make ever increasing payments to plaintiffs out of the firm's escrow funds until September 28, 2010. On November 9, 2010 Block told plaintiffs that they could expect a $7,000,000 disbursement the following day. When plaintiffs called the office to inquire further, Defendant Alan J. Goldberg answered and told plaintiffs that Block had been suspended from the practice of law and that the Firm had no active cases on file for them.
After plaintiffs learned that all of the representations made by Block were false, they filed the instant action. Defendants started a criminal action against Block for stealing from the Firm's escrow account, and a civil action was also commenced against Block by defendants. The defendants are jointly represented in this action, except for Block. Plaintiffs bring claims for fraudulent misrepresentation, as against Block and as against the individual partners. The third cause of action is for failure to supervise Block when he was an associate at the firm, and the fourth cause of action is for failure to supervise Block after he was made partner. The fifth cause of action is for legal malpractice as against all parties.
Defendants now move to dismiss the claims against them pursuant to CPLR 3211(a)(1), CPLR 3211(a)(7) and CPLR 3016(b). Plaintiffs oppose the motion. Block does not submit papers. In support of their motion, defenants submit: their affidavits; two printouts from the NYS Department of State Division of Corporations; a copy of the complaint; a list of checks disbursed from the Firm's escrow account; and a copy of a Grand Jury indictment.
Defendants contend that the individual members of the PC cannot be held liable for Block's malpractice because plaintiff cannot show that they participated in, or had knowledge of Block's misconduct. Defendants claim that the "Adverse Interest Exception" bars the malpractice claim against the Firm.
Plaintiffs, in opposition, claim that defendants had direct supervision and control over Block, and were active participants themselves in Blocks wrongdoing. Plaintiffs argue that defendants affirmatively undertook the duty to supervise Block after his 2001 disciplinary hearing. At that hearing, Block was suspended for six months from the practice of law for deliberately deceiving another husband and wife "through lies and fabrication of documents to corroborate those lies, and by neglecting the clients' affairs ... [and making] false assurances to his client as to the status of their case when, in fact, the matter was never commenced . . ."(Matter of Block, 282 AD2d 12[lst Dept. 2001]). Plaintiffs allege that the partners knew of the suspension. Indeed, Goldberg represented Block at the hearing.
CPLR 3211 provides, in relevant part:
(a) a party may move for judgment dismissing one or more causes of action asserted against him on the ground that:In determining whether dismissal is warranted for failure to state a cause of action, the court must "accept the facts alleged as true ... and determine simply whether the facts alleged fit within any cognizable legal theory." {People ex rel. Spitzer v. Sturm, Ruger & Co., Inc., 309 AD2d 91 [1st Dept. 2003]) (internal citations omitted) (see CPLR §321l[a][7]).
(7) the pleading fails to state a cause of action.
The elements of a fraud claim are: a material misrepresentation of fact, made with knowledge of its falsity, with the intent to deceive, justifiable reliance and damages. (Mergler v. Crystal Properties Associates, LTD, 179 AD2d 177[1st Dept. 1993]). The circumstances constituting the fraud shall be stated in detail in order to permit the inference of fraudulent intent.(see; CPLR 3016[b] and National Westminster Bank USA v. Weksel, 124 AD2d 144[1st Dept. 1987]).
First, the facts alleged do not support an inference that the defendant partners participated in Block's fraudulent activities. Plaintiffs never state, as they must, that any partner, other than Block, made a material misrepresentation of fact. The general allegation that plaintiffs "often saw and spoke briefly with other partners ..." when they visited the office to meet with Block, is insufficient to state a cause of action for fraud, or to meet the pleading requirements of CPLR 3 016(b). Indeed, the first time plaintiffs allege that they spoke directly to another partner about the "status" of their cases was when Goldberg answered the phone and told them that Block had been suspended.
A shareholder, employee or agent of a professional service corporation ("PC") is only held personally liable for negligent or wrongful acts or misconduct committed by him or her, or by a person under his or her direct supervision and control. (Business Corporation Law §5015(a)["BCL 5015"]).
The malpractice cause of action as against the partners remains as plaintiff sufficiently alleges that the partners either "[permitted tortious conduct by [Block]. . .or fail[ed] to exercise proper control over[him]." (Wise v. Greenwald, 208 AD2d 1141 [3rd Dept. 1994, also see; Connell v. Hoyden, 83 AD2d 30[2nd Dept. 1981]). Plaintiff alleges that the partners were aware that Block was suspended in 2001 for misconduct that is almost identical to that which is alleged here. Block represented at the 2001 hearing that there had been "increased supervision by senior partners .. .," and an unnamed partner testified that Block was being "monitored. " (Matter of Block, 77 AD3d 214[1st Dept. 2010]).
Generally, a corporation is liable for the acts of its agents "even if those acts are unauthorized." (Kirschner v. KPMG, LLP, 15 NY3d 446[2010]). An exception to this rule exists when an agent has "totally abandoned his principal's interests and [is] acting entirely for his own or another's purposes."(Id. at 466). The exception is a narrow one and is applicable where the agent commits "outright theft or looting or embezzlement—where the insider's misconduct benefits only himself or a third party; i.e., where the fraud is committed against a corporation rather than on its behalf." (Id.).
There is no dispute that Block issued funds from the Firm's escrow account. Block was indicted on twelve counts of grand larceny, and sued by the Firm in a separate action to recover stolen funds. However, the alleged malpractice spanned over ten years. It is premature to dismiss the malpractice claim against the Firm at this stage, as it cannot be shown that Block's interests were adverse to that of the Firm's for the entirety of that time.
On July 12, 2011, this Court granted Defendants' summary judgment motion in their separate action against Block, and issued a judgment in the amount of $302,000.
As to the failure to supervise Block as an associate, Rule 5.1 of the Rules of Professional Conduct requires a partner with "direct supervisory authority" over another lawyer to "adequately supervise the work of the other lawyer." Although violation of a disciplinary rule does not give rise to a private cause of action. (Mergler v. Crystal Properties Associates, Ltd., 170 AD2d 177[1st Dept. 1992]), some of the conduct constituting a violation of a disciplinary rule may also constitute evidence of misconduct (see; William Kaufman Organization, Ltd. v. Graham and James, LLP, 269 AD2d 171 [1st Dept. 2000]).
Wherefore it is hereby
ORDERED that the motion to dismiss is granted only to the extent that the second cause of action is dismissed; and it is further
ORDERED that defendants are directed to serve an answer to the complaint within 20 days after service of a copy of this order with notice of entry; and it is further
ORDERED that the parties shall appear for a preliminary conference on Tuesday December 13, 2011 at 9:30 a.m. in Room 308 at 80 Centre Street; and it is further
This constitutes the decision and order of the Court. All other relief requested is denied.
EILEEN A. RAKOWER, J.S.C.