Opinion
Index No.: 160298/2016
11-16-2017
STEVEN LISI, Plaintiff, v. LOWENSTEIN SANDLER LLP, MARIE T. DEFALCO, and WILLIAM I. GREENBAUM, Defendants.
NYSCEF DOC. NO. 68
DECISION & ORDER
SHIRLEY WERNER KORNREICH, J.:
Defendants Lowenstein Sandler LLP, Marie DeFalco, and William Greenbaum (together, LS) move, pursuant to CPLR 3211(a)(1) and (7), to dismiss the amended complaint (the AC). Plaintiff Steven Lisi opposes the motion. For the reasons that follow, LS's motion to dismiss is granted.
I. Factual Background & Procedural History
As this is a motion to dismiss, the facts recited are taken from the AC (Dkt. 3) and the documentary evidence submitted by the parties.
References to "Dkt." followed by a number refer to documents filed in this action on the New York State Courts Electronic Filing system (NYSCEF). All citations are to the pdf pagination on NYSCEF.
In May 2012, Lisi hired LS, a law firm with its principal office in New York City, to negotiate the terms of his employment as a Senior Vice President with Avadel Pharmaceuticals f/k/a as Flamel Technologies SA and Eclat Pharmaceuticals, LLC (Flamel). AC ¶¶ 2, 9-11; Dkt. 49 (Retainer Letter). Defendants DeFalco and Greenbaum were partners at LS; DeFalco was the LS attorney primarily responsible for representing Lisi in the negotiations with Flamel. AC ¶¶ 3-6; Dkt. 49 at 1.
On May 17, 2012, DeFalco sent Lisi an email (the DeFalco Email) concerning the ongoing negotiations, attaching a revised draft of Lisi's employment agreement. Dkt. 22 (DeFalco Email); Dkt. 60 (copy of DeFalco Email with attachments included). In the email, DeFalco discussed the possibility of making an 83(b) election under the Internal Revenue Code with respect to a grant of restricted stock that was part of Lisi's compensation under the attached draft of his employment agreement. See DeFalco Email; Dkt. 60 at 6. DeFalco began the discussion by informing Lisi that "restricted stock [received] in connection with the provision of services . . . is taxable to the recipient as compensation income (since it is received in connection with employment); i.e., ordinary income subject to payroll taxes," based on the stock's value less any amount paid for it. DeFalco Email (emphasis in original). Lisi's employment agreement was executed on May 28, and took effect on June 25, 2012. Employment Agreement at 1.
The restricted stock, for which no payment from Lisi was required, was ultimately not included in the final employment agreement. Compare Dkt. 60 at 6, with Dkt. 17 (Employment Agreement) at 3. As DeFalco explains in the email, an 83(b) election allows an individual receiving restricted stock to "pay tax in the year of receipt (at compensation income rates) on the value of the stock on the date of receipt," rather than on the (potentially) increased value of the stock after it vests. See DeFalco Email.
Under the employment agreement, Lisi's compensation included stock options to purchase 275,000 shares of Flamel common stock, pursuant to the company stock option plan for 2012, with the possibility of additional stock option grants at the company's discretion. Id. at 3; AC ¶¶ 30-31; see Dkt. 23 (2012 Plan Grant Letter), 24 (2012 Plan Rules). Flamel subsequently granted Lisi a total of 220,000 additional option shares under three successive stock option plans. AC ¶¶ 30-31; Dkt. 25-28 (Feb. 2013 Grant Letter; Plan Rules for Feb. 2013, Dec. 2013, Dec. 2014), 29 (Separation Agreement) at 9, ¶¶ 5-6 (detailing number of options granted pursuant to Dec. 2013 & Dec. 2014 stock option plans). The stock option plans provided that Lisi's options would vest on a rolling basis; required that, should Lisi be terminated, he exercise his vested options within sixty days of termination; and stated that any unexercised options would automatically expire. Dkt. 23; 24 at 2-3; 25; 26 at 2-3; 27 at 1, 3-4; 28 at 1, 3-4.
The stock options granted to Lisi under the employment agreement and Flamel's stock option plans were non-qualified stock options. AC ¶ 31.
On April 4, 2015, Lisi hired LS to negotiate the terms of his separation from Flamel. AC ¶¶ 9, 12, 17. Lisi's separation agreement, which was executed on April 7, 2015, accelerated the vesting of the 495,000 stock options granted to Lisi under his employment agreement and Flamel's stock option plans, and extended the period in which Lisi could exercise his options. Separation Agreement at 7, 9; AC ¶ 18. The separation agreement also required Flamel "to make appropriate withholdings from [Lisi's] Severance Benefits for federal and state taxes and other customary matters in accordance with applicable law." Separation Agreement at 7. Lisi alleges that LS failed to give him any advice regarding the tax treatment of his stock options in connection with the negotiation and execution of the separation agreement. AC ¶¶ 19-21, 27, 41. Lisi does not allege that he ever affirmatively requested such advice.
The separation agreement required that Lisi exercise his options within sixty days of the end of the "Severance Period", which was defined as a one-year period beginning on June 25, 2015. Separation Agreement at 9 ¶¶ 1, 5-6. Accordingly, Lisi had until approximately the end of August 2016 to exercise his options.
Following his termination, Lisi began shorting Flamel's stock "to 'lock in' the price of [the] stock pending the receipt of [his option] shares from Flamel, and did so to his utmost capacity . . . ." AC ¶ 56; Dkt. 50 (Lisi Aff.) ¶ 11 (stating that Lisi "short[ed] the stock to the fullest of [his] ability"). On September 11, 2015, Lisi submitted the paperwork to exercise all 495,000 of his option shares; he completed the transfer of funds to pay the strike price for those shares on September 17, 2015. AC ¶¶ 55, 57. Lisi received all 495,000 shares from Flamel on September 24, 2015 at an exercise price of $24.03, based on the closing price of Flamel stock on September 17, 2015. ¶ 58; Dkt. 56 (Fidelity Stock Charts) at 2 (showing Flamel stock prices for 9/17/15). By the time Lisi received his shares on September 24, Flamel's stock price had dropped from $24.03 to $19.84. Dkt. 56 at 4. Although Flamel's stock price continued to drop substantially, Lisi waited almost two months, until November 20, 2015, when the price of Flamel's stock was down to $13.74, before he began selling his shares. AC ¶ 60; Dkt. 56 at 6; Dkt. 43 (Trading Activity Chart, 9/24/15 - 9/15/16) at 1.
LS submits a Morgan Stanley trading activity chart, produced by Lisi, which indicates that between August 17, 2015, the date on which he began shorting Flamel stock, and September 10, 2015, Lisi shorted approximately 206,303 shares. Dkt. 40. According to Lisi, he shorted a total of 177,000 Flamel shares. Dkt. 67 (8/30/17 Tr.) at 18 (counsel for Lisi stating "[Lisi] sold 177,000 shares short").
The strike prices for Lisi's options ranged from $3.39 to $16.30. See Dkt. 45 (January 25, 2016 Eclat Letter) at 1. The average strike price for his options was $7.26. See Lisi Aff. ¶ 11.
The plunge in Flamel's stock price coincided with a steep, industry-wide decline in the price of biotech and pharmaceutical stocks. See Dkt. 44 & 55 (articles discussing decline in biotech and pharmaceutical stock prices).
On February 1, 2016, Lisi received a letter from Flamel, dated January 25, 2016, notifying him that the exercise of his options was subject to ordinary income tax, based on the stock's closing price of $24.03 on the date of exercise, resulting in a tax liability to him for 2015 in excess of $4,000,000. AC ¶¶ 61, 66; Dkt. 45 (Letter). The letter further informed Lisi that Flamel had not made the necessary withholdings for the income tax due on his option exercise, and that he was therefore personally responsible for payment of the taxes due. AC ¶ 59; Dkt. 45. Lisi alleges that he mistakenly assumed, based on "the entirety of [his] career in finance," that his option exercise would subject him only to capital gains tax on disposition of his Flamel shares, and that at no time prior to February 1, 2016, "did [LS] advise [him] that the exercise of options would constitute taxable income as opposed to a capital gain on any realized sale above the strike price." Lisi Aff. ¶ 13; AC ¶ 62. Lisi subsequently liquidated his remaining Flamel shares to pay his income taxes, sustaining a net loss on the sale. ¶¶ 63-64.
Lisi sold the bulk of his Flamel shares by March 3, 2016. See Dkt. 43. Flamel's stock price closed on that date at $8.23. Dkt. 56 at 7. Lisi completed the liquidation of his shares in July 2016. See Dkt. 57 (Morgan Stanley Trade Confirmation Statements from 4/27/16 to 7/14/16).
On December 8, 2016, Lisi commenced this action by filing his summons and initial complaint. Dkt. 1. He subsequently filed the AC on February 6, 2017. Dkt. 3. The AC asserts a single cause of action for legal malpractice, seeking $5,300,000 in damages. AC ¶¶ 75-85. It alleges that LS negligently failed to advise Lisi that he would be taxed at the ordinary income rate on the increase in the value of his option shares upon exercise, rather than at the capital gains rate upon disposition of the shares. It further alleges that, but for this failure to advise, Lisi would not have been "left vulnerable to market fluctuations in the stock price of Flamel," because he "would have" employed alternative investment strategies, that accounted for the true amount of his tax liabilities, to "receive the optimal market value for [his] Flamel shares." AC ¶¶ 68-83. LS moved to dismiss on March 21, 2017. Dkt. 13. The court reserved on the motion after oral argument. See Dkt. 67 (8/30/17 Tr.).
II. Discussion
On a motion to dismiss, the court must accept as true the facts alleged in the complaint as well as all reasonable inferences that may be gleaned from those facts. Amaro v Gani Realty Corp., 60 AD3d 491 (1 st Dept 2009); Skillgames, LLC v Brody, 1 AD3d 247, 250 (1 st Dept 2003), citing McGill v Parker, 179 AD2d 98, 105 (1st Dept 1992); see also Cron v Hargro Fabrics, Inc., 91 NY2d 362, 366 (1998). The court is not permitted to assess the merits of the complaint or any of its factual allegations, but may only determine if, assuming the truth of the facts alleged and the inferences that can be drawn from them, the complaint states the elements of a legally cognizable cause of action. Skillgames, 1 AD3d at 250, citing Guggenheimer v Ginzburg, 43 NY2d 268, 275 (1977). Deficiencies in the complaint may be remedied by affidavits submitted by the plaintiff. Amaro, 60 NY3d at 491. "However, factual allegations that do not state a viable cause of action, that consist of bare legal conclusions, or that are inherently incredible or clearly contradicted by documentary evidence are not entitled to such consideration." Skillgames, 1 AD3d at 250, citing Caniglia v Chicago Tribune-New York News Syndicate, 204 AD2d 233 (1st Dept 1994). Further, where the defendant seeks to dismiss the complaint based upon documentary evidence, the motion will succeed if "the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law." Goshen v Mutual Life Ins. Co. of N.Y., 98 NY2d 314, 326 (2002) (citation omitted); Leon v Martinez, 84 NY2d 83, 88 (1994).
"[A]n action for legal malpractice requires proof of the attorney's negligence, a showing that the negligence was the proximate cause of the injury, and evidence of actual damages." Fielding v Kupferman, 65 AD3d 437, 439 (1st Dept 2009), quoting Russo v Feder, Kaszovitz, Isaacson, Weber, Skala & Bass, 301 AD2d 63, 67 (1st Dept 2002). In other words, plaintiff must establish that but for the defendant attorney's malpractice, he would not have been damaged. Davis v Klein, 88 NY2d 1008, 1009-10 (2010); Fielding, 65 AD3d at 439.
LS argues that the crux of Lisi's malpractice claim—that LS negligently failed to advise him that his option shares would be taxed as ordinary income—is refuted by the DeFalco Email, in which Lisi is advised that stock "received in connection with employment" is subject to taxation "as compensation income . . . i.e., ordinary income subject to payroll taxes." An email can qualify as documentary evidence under CPLR 3211(a)(1) when "there is no dispute as to its genuineness, and its content is 'essentially undeniable.'" DSA Realty Servs., LLC v Marcus & Millichap Real Estate Inv. Servs. of New York, Inc., 128 AD3d 587, 588 (1st Dept 2015), citing Amsterdam Hosp. Grp., LLC v Marshall-Alan Assocs., Inc., 120 AD3d 431, 432 (1st Dept 2014).
Lisi does not contend that the substance of the DeFalco Email fails to convey the tax advice at issue. To the contrary, he claims in his opposition that the email "prove[s] that Defendants were aware that [Lisi's] stock options were taxable as ordinary income," and that the tax treatment of those options was "important enough on which to offer legal advice." Dkt. 51 (Opp.) at 10 (emphasis in original). Nor does Lisi forthrightly deny that he received the DeFalco Email. Rather, he asserts that the court should decline to consider the DeFalco Email because he has no record or recollection of having received it. Lisi Aff. ¶¶ 6-8; Dkt. 67 (8/30/17 Tr.) at 16 (Lisi's counsel stating that "my client is not saying he never got [the DeFalco Email]. He's saying he doesn't remember.").
Lisi offers no explanation as to why he would not have received the DeFalco Email, and additional, contemporaneous email correspondence demonstrates that the DeFalco Email was sent to Lisi's correct email address, which he regularly used to correspond with DeFalco. Dkt. 62 & 63 (emails sent by Lisi to DeFalco on May 23 and 24, 2012 from the same email address to which the DeFalco Email was sent). Given the unambiguous documentary evidence showing that the DeFalco Email was sent to Lisi's proper email address, which he regularly used to correspond with his attorneys, and his own care to avoid an outright denial of receipt, Lisi's bare assertion that he has no record or recollection of having received the DeFalco Email are not entitled to an assumption of truth or the benefit of every favorable inference. CIBC Bank & Tr. Co. (Cayman) v Credit Lyonnais, 270 AD2d 138, 138-39 (1st Dept 2000) ("Although on a motion to dismiss for failure to state a cause of action the facts pleaded are presumed to be true and accorded every favorable inference . . . factual claims that are contradicted by documentary evidence, are not entitled to such consideration."); Skillgames, 1 AD3d at 250. As such, Lisi's asserted inability to remember having received the DeFalco Email does not require an inference that the email was not in fact received, and the most reasonable inference to be drawn from Lisi's asserted inability to locate the DeFalco Email in his records is that the email was deleted.
Lisi claims that it is his practice to retain all emails, and that he also does not remember having reviewed or deleted the DeFalco Email. Lisi Aff. ¶¶ 6 & 8. But, again, given the documentary evidence, these factual claims are not entitled to an assumption of truth.
Although Lisi's lack of records and recollection are insufficient to challenge the authenticity of the DeFalco Email, the court finds that the content of the email itself does not unambiguously refute Lisi's allegation of professional negligence. The DeFalco Email does mention stock options in passing, but not in the portion of the email that discusses the tax treatment of stock "received in connection with employment." That portion of the email is specifically couched as a general description of the tax consequences that attach to the receipt of restricted stock. And although the email may easily be read to imply that other forms of stock—such as non-qualified stock options—are likewise subject to ordinary income tax because they are "received in connection with employment," that advice is never explicitly stated. Accordingly, the DeFalco Email does not refute Lisi's allegation of negligence in a manner that is "essentially undeniable." See Amsterdam Hosp. Grp., 120 AD3d at 432.
Lisi's malpractice claim nevertheless fails because his allegations are insufficient to show that but for LS's failure to give proper tax advice, his trading losses would have been avoided. See Leder v Spiegel, 31 AD3d 266, 268 (1st Dept 2006) ("The failure to demonstrate proximate cause mandates the dismissal of a legal malpractice action regardless of whether the attorney was negligent."). Lisi does not (and cannot) allege that LS's failure to advise him had any effect on the nature of his tax liability—the exercise of his options was always going to be subject to ordinary income tax. He does not allege that he would not have executed the separation agreement had he been properly advised. Rather, Lisi's theory of loss causation is that, absent proper tax advice, he was unaware of the true amount of the tax liability incurred by the exercise of his options, and was therefore unable to strategically manage his investment post-exercise in a manner that minimized market risk and allowed him to realize "the optimal market value" of his shares. AC ¶¶ 68-71. He acknowledges that the exercise of his options exposed him to "market fluctuations in the stock price of Flamel," but asserts that, with proper advice, he would not have been left vulnerable to such fluctuations because he "would have locked in his sales price for all options exercised to allow and account for the fixed exercise price and tax basis," and "would have capitalized on the sale of the shares at a fixed and higher price." ¶¶ 74, 82-83.
Though vague, Lisi appears to allege that, properly advised, he would have: shorted more Flamel stock, thereby eliminating market risk for a corresponding number of options by locking in the price for those shares; only exercised options that he could hedge with a corresponding short sale; and exercised his options and/or sold his shares at different, more opportune times. Such speculative allegations of what Lisi might have done differently, made with the benefit of hindsight, do not suffice to establish the causal link necessary to state a prima facia claim of legal malpractice. See Heritage Partners, LLC v Stroock & Stroock & Lavan LLP, 133 AD3d 428, 429 (1st Dept 2015) (affirming dismissal of malpractice claim based on "allegations 'couched in terms of gross speculations on future events'"), quoting Sherwood Group, Inc. v Dornbush, Mensch, Mandelstam & Silverman, 191 AD2d 292, 294 (1st Dept 1993); Leff v Fulbright & Jaworski, LLP, 78 AD3d 531, 533 (1st Dept 2010) ("[P]laintiff cannot recover damages that are grossly speculative."); Barbara King Family Trust v Voluto Ventures LLC, 46 AD3d 423, 424-25 (1st Dept 2007) ("mere speculation" insufficient to demonstrate proximate cause).
Lisi's suggestion that he would have eliminated market risk by engaging in more short sales is belied by his allegation that, when he exercised his shares, he had already shorted Flamel stock "to his utmost capacity." AC ¶ 56; Dkt. 50 (Lisi Aff.) ¶ 11. He alleges no facts to suggest that additional short sales were possible, but nevertheless speculates that he might have pursued such a strategy. Equally speculative is Lisi's suggestion that he might not have exercised option shares that he could not hedge with a corresponding short sale. Such a course of action makes sense only with hindsight knowledge that Flamel's stock price was about to collapse. By not exercising, Lisi would have potentially allowed more than half of his options to expire at a point in time when the value of the associated shares well exceeded his tax liabilities. The suggestion that Lisi would have left millions of dollars on the table to avoid exposure to market risk is simply not credible. Lisi knowingly assumed the very market risk that he now, with the benefit of hindsight, claims that he would have sought to avoid when he exercised all his options, and not just those that were hedged by a corresponding short sale.
According to Lisi, his break-even point, factoring in his average strike price and his tax liability, was approximately $15.50 per share. Lisi Aff. ¶ 15; Dkt. 51 (Opp.) at 3. On September 17, 2015, when Lisi exercised his options, Flamel's stock price was $24.03. Dkt. 56 at 2.
Lisi's strongest argument is that, had he been properly advised, he might have sold his shares sooner, before their value sank below his tax liabilities. Though intuitively compelling, this contention is still entirely speculative. Lisi held on to his shares for months before he began selling, despite Flamel's declining stock price. His choice not to immediately liquidate his shares when they began to lose value suggests that Lisi was waiting for Flamel's stock price to recover before selling, and again belies his claim that he sought to avoid all market risk. Moreover, Lisi was free to sell his shares whenever he wanted; if he believed that Flamel's stock price would recover, he could have held onto his shares and liquidated other assets to pay his tax liabilities. Had he done so, and Flamel's stock price improved, Lisi conceivably could have realized a net gain.
In sum, by exercising all his options Lisi knowingly assumed the risk that the value of his Flamel shares might decline. When that risk materialized, with the industry-wide decline in biotech and pharmaceutical stocks, Lisi chose to compound his risk by trying to ride out the down market rather than immediately sell his shares. He then chose to sell his shares at a loss to pay his taxes rather than liquidate other assets and continue to speculate on a recovery in Flamel's stock price. Neither the risk of a market downturn, nor Lisi's decision to speculate in the market, were caused by any lack of tax advice from LS. And Lisi's suggestion, with the benefit of hindsight, that properly advised he would have avoided his losses by charting a different course, is entirely speculative and insufficient to state a legal malpractice claim. See Heritage Partners, 133 AD3d at 429.
Finally, the AC also includes allegations that it was foreseeable to LS that Flamel would fail to withhold the taxes due on Lisi's option exercise, and that LS was negligent in not investigating Flamel's "procedures and protocols . . . regarding the exercise of stock options and the withholding of taxes," and in not negotiating for a clause in the separation agreement imposing liquidated damages on Flamel for such a failure to withhold. AC ¶¶ 25-26, 36, 38-39. To the extent that these allegations are meant to constitute an independent basis for Lisi's malpractice cause of action, they too are insufficient to state a claim.
Of course, it is speculative to assume that Flamel would have agreed to this.
The assertion that Flamel's failure to withhold was foreseeable to LS is conclusory, as is the contention that LS's purported negligence with respect to Flamel's withholding obligation was a proximate cause of Lisi's injury. See Skillgames, 1 AD3d at 250; Fielding, 65 AD3d at 439. The sole allegation of damages stemming from LS's alleged negligence in this regard, offered without any further explanation, is that "Lisi was left vulnerable to the foreseeable consequence of [Flamel's] breach of the [Separation] Agreement." ¶ 73. But the only foreseeable consequence of Flamel's failure to withhold would be Lisi's personal responsibility for payment of the income taxes due on his option exercise, and Lisi does not claim that he was damaged by the necessity to personally pay his taxes. Rather, his alleged injury is the net loss sustained on the sale of his Flamel shares, which, as already discussed, stemmed from the drop in Flamel's stock price and Lisi's failure to liquidate his shares while their value still exceeded his tax liabilities, not the fact that he was personally responsible for payment of his taxes. Accordingly, it is
ORDERED that the motion to dismiss the amended complaint is granted, and the amended complaint is dismissed. Dated: November 16, 2017
ENTER:
/s/_________
J.S.C.