Opinion
Index No. 504378/20 Mot. Seq. No. 4
04-09-2024
MILLENIUM DEVELOPMENT & CONSTRUCTION LLC, KRZYSTOF KIELAN, and BERNA PERLOWSKA, Plaintiffs, v. DOUGLAS PICK and PICK & ZABICKI, LLP, Defendants.
Unpublished Opinion
PRESENT: HON. KATHERINE A. LEVINE, JUSTICE.
DECISION/ORDER
Katherine A. Levine, Judge
The following e-filed papers read herein: NYSCEF Doc Nos.:
Notice of Motion, Affirmations, and Exhibits Annexed ........ 59-79
Affirmations (Affidavits) in Opposition .................... 80
Reply Affirmation and Exhibits Annexed ...................81-83
In this action to recover damages for legal malpractice, pro se defendants Douglas Pick ("Pick") and Pick & Zabicki, LLP (the "Pick firm" and, collectively with Pick, defendants") move, pre-answer, for an order dismissing the Verified Complaint, dated May 3, 2021 (the "complaint"), as barred by documentary evidence arid for failure to state a cause of action, pursuant to CPLR 3211 (a) (1) and (7), respectively . Plaintiffs Millenium Development &Construction LLC ("MDC"), Krzystof Kielan ("Kielan"), and Berna Perlowska ("Perlowska" and collectively with MDC and Kielan, "plaintiffs") object by way of (among other submissions) Kielan's Affidavit in Opposition to Motion to Dismiss, dated September 22, 2022.
Background
The instant action arises out of the underlying chapter 11 liquidation case, entitled In re Millenium Dev. & Cpnstr. LLC, Case No. 114-42411-css (Bankr ED NY) (the "bankruptcy case"), in which Kielan, as the sole member of MDC, retained defendants, as successor counsel, to represent MDC, as debtor-in-possession, for the period from June 5, 2014 (the date of defendants' substitution as successor counsel) through March 27, 2017 (the date of the final decree closing the bankruptcy case). MDC's sole asset (aside from $ 1,000 in its bank account) was a parcel of unimproved real property located at 387 Manhattan Avenue in Brooklyn, New York (the "underlying property"). At the time, the underlying property was subject to: (1) a recorded purchase-money mortgage then held by Mei Ling Property LLC as assignee ("Mei Ling"); and (2) a secured lien held by NYCTL 2013-A Trust on account of certain real property tax obligations associated with the underlying property.
Bankruptcy Case Docket Nos. 15 (NYSCEF Doc No. 64) and 273. All references to the bankruptcy court documents are to those listed in the Bankruptcy Case Docket which is annexed to defendants' motion as Exhibit C (NYSCEF Doc No. 63). Because defendants' submission of selected documents from the Bankruptcy Case Docket did not encompass all of the relevant documents, the Court took judicial notice of the additional bankruptcy case documents which are listed in the Bankruptcy Case Docket. See e.g. Lewis v Holliman, 176 A.D.3d 1048, 1049 (2d Dept 2019). Such additional documents are referenced solely by the Bankruptcy Case Docket No, without the accompanying NYSCEF Doc No.
In the course of defendants' representation of MDC in its bankruptcy case, defendants performed the following services (as listed in the chronological order below):
On June 17, 2014, defendants obtained the bankruptcy court's approval of the deadline of July 30, 2014, by which creditors (such as Kielan and Perlowska) were required to file their proofs of claim
Bankruptcy Case Docket No. 23 ("Notice of Deadline Requiring Filing of Proofs of Claim," etc.) (NYSCEF Doc No. 75).
On June 24,2014, defendants filed the amended schedules of assets and liabilities of MDC. As relevant herein, the amended schedules did not list either Kielan or Perlowska as MDC's creditors. As unscheduled creditors, Kielan and Perlowska were required (but failed) to file a proof of claim.
Bankruptcy Case Docket No. 37 (NYSCEF Doc No. 74).
Although defendants further amended Schedule F ("Creditors Holding Unsecured Nonpriority Claims") on October 1, 2014, neither Kielan nor Perlowska were listed as MDC's creditors. Bankruptcy Docket No. 135.
On August 18 and 22,2014, defendants obtained the bankruptcy court's approval of the stipulated rejection of three prepetition executory contracts for the purchase of the underlying property (collectively, the "executory contracts"),
Bankruptcy Case Docket Nos. 70. 74, and 69 (each a "Stipulation and Order, Pursuant to 11 USC § 365 [a] Authorizing the Debtor to Reject Executory Contract [with applicable counterparty] and Granting Related Relief') (NYSCEF Doc No. 68).
On November 14, 2014, defendants obtained the bankruptcy court's allowance of their first and final fee application for legal services rendered to MDC for the period from June 5, 2014 to November 10, 2014 in the sum of $111,280. plus$4,660.93 in expenses (for a total of $115,940.93), subject to the payment of $5,000 by Mei Ling, as a surcharge under 11 USC § 506 (c), toward defendants' allowed fees/expenses (the "collateral surcharge").
Bankruptcy Case Docket Nos. 159 and 164 ("Order Granting First and Final Applications of Chapter 11 Professionals for Allowances of Compensation for Services Rendered and for Reimbursement of Expenses Incurred" and "Order Authorizing Payment of a Portion of the Debtor's Professional Fees and Expenses from the Collateral of Mei Ling Property LLC [as a Surcharge Under 11 USC § 506 (c)J," respectively). Because defendants provided the Court with the fee-applications order only as was: filed under Bankruptcy Case Docket No. 159 and was refiled in this action under NYSCEF Doc No. 72, the Court took judicial notice of the collateral-surcharge order under 11 USC § 506 (c) as was filed under Bankruptcy Case Docket No. 164, In relevant part, the collateral-surcharge provides (on page 2 thereof) that "the law firm Pick & Zabicki LLP, as 'Disbursing Agent' under the Debtor's confirmed Amended Chapter 11 Plan of Reorganization dated September 24,2014 . .., is hereby authorized and directed to pay the Agreed Amount [of $5,000] to Pick & Zabicki LLP from the [sale] Proceeds [of the underlying property] which [amount] it shall subsequently apply against any Fees and Expense Amounts awarded to Pick & Zabicki LLP by this Court as counsel to the Debtor."
On November 17, 2014, defendants obtained the bankruptcy court's confirmation of the First Amended Chapter 11 Plan for MDC (the "chapter 11 plan"), after dissemination of the court-approved disclosure statement. The chapter 11 plan designated the Pick firm as the disbursing agent.
Bankruptcy Case Docket Nos. 107, 108, 155, and 160 ("First Amended Chapter 11 Plan of Reorganization Proposed by Debtor," "First Amended Disclosure Statement in Connection with First Amended Chapter 11 Plan of Reorganization Proposed by Debtor," "Declaration of Kryzst of Kielan in Support of Confirmation of First Amended Chapter 11 Plan of Reorganization Proposed by Debtor," and "Order Confirming First Amended Chapter 11 Plan of Reorganization of the Debtor," respectively). Only the latter two documents (the declaration and the order are attached to defendants' papers under NYSCEF Doc Nos. 77 and 69, respectively) were submitted by defendants. For the sake of completeness, the Court notes that the chapter 11 plan was amended by the "Order Amending Debtor's Confirmed Chapter 11 Plan," dated February 28,2017 (Bankruptcy Case Docket No. 265).
Chapter 11 Plan, §§ 1.24 and 8.1 (Bankruptcy Case Docket No. 107).
On November 20, 2014, defendants obtained the bankruptcy court's approval of the auction sale of the underlying property to the highest third-party bidder for S3.4 million, under the confirmed chapter 11 plan.
Bankruptcy Case Docket NO. 163 ("Order Approving Sale of Debtor's Real Properly' Under Confirmed Plan") (NYSCEF Doc No. 70).
Starting as early as August 25,2014 and until February 28, 2017, defendants litigated, negotiated, and settled multiple motions for summary judgment which had been filed by the counterparties to the rejected executed contracts (collectively, "plaintiff-creditors"). On November 21, 2016, Kielan individually, and on January 13, 2017, Kielan, by his newly retained counsel William L. McCormick ("McCormick"), filed separate written objections to the adverse positions taken by the plaintiff-creditors. Notwithstanding Kielan's objections (both individually and by his counsel McCormick), Kielan ultimately agreed to the terms of the global stipulation of settlement with plaintiff-creditors, by way of a stipulation that was so ordered by the bankruptcy court on February 28, 2017. As part of the foregoing settlement, Kielan received a sum of $220,000. apparently on account of its equity ownership interest in MDC,
Bankruptcy Case Docket Nos. 75-77 ("Motion to Object/Reclassify/Reduce/Expunge Claim Number[s]," etc.).
Bankruptcy Case Docket No. 266 ("Stipulation and Order Settling Motions of Creditors Astral Weeks, LLC, Agime Group, LLC, and Rocco Basile, for Summary Judgment Pursuant to Fed.R.Civ.P. 56 and Bankruptcy Rule 7056 Fixing Creditor Claims") (NYSCEF Doc No. 73).
McCormick filed a notice of appearance on Kielan's behalf on November 28, 2016. See Bankruptcy Case Docket No. 251; NYSCEF Doc No. 67.
Bankruptcy Case Docket Nos. 250 and 254 ("Declaration of Krzyst of Kielan in Opposition to the Motions for Summary Judgment Filed by Astral Weeks, LLC., Agime Group, LLC and Rocco Basile" and McCormick's letter brief, captioned "Memo Pertaining to Benefit of Bargain Damage[s] Recovery by Purchasers in Real Estate Contract Cases," respectively).
Bankruptcy Case Docket No. 266 ("Stipulation and Order Settling Motions of Creditors Astral Weeks, LLC, Agime Group, LLC, and Rocco Basile, for Summary Judgment Pursuant to Fed; R. Civ. P. 56 and Bankruptcy Rule 7056 Fixing Creditor Claims") (NYSCEF Doc No. 73).
Settlement Stipulation, page 7, § 6 (Bankruptcy Case Docket No. 266; NYSCEF Doc No. 73),
The following day, March 1, 2017, defendants filed a "Closing Report in Chapter 11 Case" (the "closing report"), indicating (as relevant herein) that they (Ze., Pick and the Pick firm) received a total of $115,941 in the previously allowed fees and expenses "from [the] case inception through [the] Effective Date of the confirmed [chapter 11] plan." It is unclear to the Court from the bankruptcy case docket: (1) when the "Effective Date" occurred; (2) whether defendants were paid any additional sums from MDC's estate after the Effective Date; and (3) whether the $115,941 which defendants received included the collateral surcharge payment of $5,000 from Min Ling.
Bankruptcy Case Docket No. 268. The seven-cent difference between the SI 15.940.93 that was allowed by the bankruptcy court in connection with defendants' first and final fee application, and the $ 115,941 that was noted in the closing report, is due to rounding.
The Instant Action
Plaintiffs' legal malpractice claim, as pleaded in their complaint and as amplified by Kielan's affidavit in opposition, can be broken down into five categories or "points," with Point I applying to Kielan and Perlowska only, and with Points II through V apply ing to MDC only, as follows:
Point I: Defendants allegedly failed to file and/or schedule Kielan and Perlowska's claim against MDC totaling $1,120,000 (the "insider claim"). According to Kielan and Perlowska, the insider claim should have been filed and/or scheduled as a secured claim, even though they had taken no steps before the commencement of MDC's bankruptcy case to collateralize their claim by filing a lien against the underlying property.
Complaint, ¶ 34.
Complaint, ¶ 35.
Point II: Defendants allegedly failed to obtain (and/or accept) on MDC's behalf a higher bid for the underlying property.
Point III: Defendants allegedly delayed in applying for bankruptcy court's approval of MDC's rejection of the executory contracts with plaintiff-creditors.
Point IV: Defendants allegedly failed to obtain for MDC a more favorable settlement with plaintiff-creditors.
Point V: Defendants allegedly engaged in self-dealing at the expense of MDC. According to plaintiffs, "[u]pon information and belief,.., Pick paid himself an additional substantial fee, bringing the cost of his representation [of MDC in the bankruptcy case] to approximately $25 0,000." whereas the bankruptcy court allowed defendants' fees and expenses in the amount of $115.941 (as rounded up) for the period "from [the] case inception through [the] Effective Date of the confirmed [chapter 11J plan," inclusive of Min Ling's payment of $5,000 toward those fees/expenses in the form of collateral surcharge. The difference between the higher alleged amount of approximately $250,000 and the lower allowed amount of $115,941 (less the $5,000 payment by Min Ling to defendants) is referred to as the "overpayment claim."
Complaint, ¶ 45. See also Kielan's Affidavit in Opposition, ¶ 6 ("At the end, Pick took more than $250,000 for himself, more than [Kielan] received from the settlement [with plaintiff-creditors].'').
As noted, defendants have moved to dismiss the complaint as barred by documentary evidence and for failure to state a cause of action, pursuant to CPLR 3211 (a) (1) and (7). respectively. The recitation of the well-established standards of review under the foregoing provisions has been omitted in the interest of brevity.
See e.g, Coalition of Landlords v S.&A. Neocronon, Inc., 224 A.D.3d 658, 659 (2d Dept 2024).
Discussion
Plaintiffs Kielan and Perlowska (Point I)
"In a legal malpractice action, a plaintiff must establish, inter alia, that an attorney-Client relationship existed." Siemsen v Mevorach, 160 A.D.3d 1004, 1005 (2d Dept 2018).
''[F]ormality is not essential to the formation of an attorney-client relationship; rather, it is necessary to look at the words arid actions of the parties to ascertain if such a relationship was formed." McLenithan v McLenithan, 273 A.D.2d 757, 758 (3d Dept 2000) (internal quotation marks omitted). "The unilateral belief of a plaintiff alone does not confer upon him or her the status of a client." Moran v Hurst, 32 A.D.3d 909, 911 (2d Dept 2006). "Rather, an attorney-client relationship is established where there is an explicit undertaking to perform a specific task''' Wei Cheng Chang v Pi, 288 A.D.2d 378, 380 (2d Dept 2001) (emphasis added), lv denied 99 N.Y.2d 501 (2002).
Here, Kielan and Perlowska's legal malpractice claim against defendants fails for two reasons. First, the bankruptcy case docket (as reviewed and summarized above) is devoid of any written or oral agreement suggesting that defendants would perform any specific task for Kielan and Perlowska, including the tiling and/or scheduling of their insider claim against MDC. See Mid City Elec. Corp, v Peckar & Abramson, 214 A.D.3d 646, 648 (2d Dept 2023); Wei Cheng Chang, 288 A.D.2d at 380-381.
Second, even if (assuming for the sake of argument) Kielan and Perlowska were defendants' clients for the purpose of filing and/or scheduling their insider claim, Kielan and Perlowska's legal malpractice would fail for lack of causation. "An attorney's conductor inaction is the proximate cause of a plaintiff's damages if but for the attorney's negligence the plaintiff would have succeeded on the merits of the underlying action, or would not have sustained actual and ascertainable damages." Nomura Asset Cap. Corp, v Cadwalader, Wickersham & Taft LLP, 26 N.Y.3d 40, 50 (2015) (internal quotation marks and: citations omitted; emphasis added), rearg denied 27 N.Y.3d 957 (2016). "Conclusory allegations of damages or injuries predicated on speculation cannot suffice for a [legal] malpractice action." Bua v Purcell & Ingrao, P. C., 99 A.D.3d 843, 848 (2d Dept 2012), lv denied 20 N.Y.3d 857 (2013).
Here, Kielan and Perlowska's allegation (in ¶ 35 of the complaint) that "[h]ad Pick properly established with the [Bankruptcy] Court that [they] were secured creditors, then the amount of the[ir] .. . loan would have been recouped," is a textbook example of speculative risk and remote possibilities. It is hornbook law that "a bankruptcy court has the power to recharacterize a claim from debt to equity." In re AutoStyle Plastics, Inc., 269 F.3d 726, 749 (6th Cir 2001). "Recharacterization of a claim from debt to equity is appropriate where the circumstances show that a debt transaction was actually an equity contribution ab initio'' In re TransCare Corp., 602 BR 234, 243 (Bankr S.D. NY 2019) (internal quotation marks omitted). New York bankruptcy courts have adopted an eleven-factor analysis: set forth in AutoStyle Plastics. Under this test, the bankruptcy court considers: "(1) the names given to the instruments, if any, evidencing the indebtedness; (2) the presence or absence of a fixed maturity date and schedule of payments; (3) the presence or absence of a fixed rate of interest and interest payments; (4) the source of repayments; (5) the adequacy or inadequacy of capitalization; (6) the identity of interest between the creditor and the [equity interest holder]; (7) the security, if any, for the advances; (8) the [entity's] ability to obtain financing from outside lending institutions; (9) the extent to which the advances were subordinated to the claims of outside creditors: (10) the extent to which the advances were used to acquire capital assets; and (11) the presence or absence of a sinking fund to provide repayments." In re AutoStyle Plastics, 269 F.3d at 749-750. "No one factor is dispositive of either the intent of the parties or whether a loan should be recharacterized as equity." In re Lyondell Chem. Co., 544 BR 75, 94 (Bankr S.D. NY 2016) (footnote omitted). Indeed, "a court can find recharacterization to be appropriate even if less than all of the factors weigh in favor of a capital contribution." (Id. [footnote omitted).
As one bankruptcy court summarized the essence of the aforecited factors:
"A critical group of factors concern the formality of the alleged loan agreement. The more specific and complete the patties are in identifying and codifying the terms of the alleged loan agreement, the more like a loan the transaction appears. By contrast, if the terms of such an agreement are vague and non-specific, such a transaction appears more like [an equity holder] contributing capital to keep his investment afloat. A second important group of factors relate to the financial situation of the [entity] at the time the purported loan is made. If investing in the [entity] appears to have been especially risky (e.g. it was thinly capitalized), or the source of funds to repay the loan is not made clear, then the transaction has more of the earmarks of an equity contribution."In re Cold Harbor Assoc., L.P., 204 BR 904, 916 (Bankr ED Va 1997) (emphasis added).
Here, the lack of any formal written agreements memorializing the terms and conditions upon which Kielan and Perlowska's loans were to be repaid by MDC; the absence of a fixed maturity date, payment schedule, and interest rate; as well as the expectation of repayment only upon a successful sale of the underlying property by MDC - all evince an intent by Kielan and Perlowska to provide liquidity to MDC as their family business, while avoiding the formal and financial obligations associated with an arm's length financing. See In re Eternal Enter., Inc., 557 BR 277, 293 (Bankr D Conn 2016). Thus, assuming that defendants were negligent in filing and/or scheduling Kielan and Perlowska's insider claim, the latter cannot establish that such negligence proximately caused them any loss, since the hypothetical course of events on which any determination of damages would have to be based (namely, the potential recharacterization of their insider claim as equity by the bankruptcy court; the adverse positions of other parties with preexisting liens in the underlying property, such as Mei Ling and the tax lienor; and the adverse positions of plaintiff-creditors), constitutes "a chain of gross speculations on future events which is incapable of proof." Phillips-Smith Specialty Retail Group II, L.P. v Parker Chapin Flattau & Klimpl, LLP, 265 A.D.2d 208,210 (1st Dept 1999) (internal quotation marks omitted), lv denied 94 N.Y.2d 759 (2000); see also Heritage Partners LLC v Stroock & Stroock & Layan LLP, 155 A.D.3d 561 (1st Dept 2017), lv denied 31 N.Y.3d 902 (2018).
Plaintiff MDC (Points II Through V)
With the exception of Point V (the overpayment claim), MDC's remaining Points II through IV are barred by documentary evidence. The bankruptcy case docket conclusively refutes MDC's allegations that defendants failed to obtain (and/or accept) on MDC's behalf a higher bid for the underlying property; that defendants delayed in applying for bankruptcy court's approval of MDC's rejection of the executory contracts with plaintiff-creditors; and that defendants failed to obtain for MDC a more favorable settlement with plaintiff-creditors (Points II, III, and IV, respectively). As recited in the background section, each of the foregoing transactions was approved by the bankruptcy court as being in the best interests of MDC's estate and its creditors. See 11 USC §§ 363 (b), 365 (a), and 1123 (b); Bankruptcy Rule 9019 (a).
Point V alleging the overpayment claim, however, stands on a different footing. Whereas the bankruptcy court allowed defendants' fees and expenses in the aggregate amount of $115,941 (minus the collateral surcharge payment of $5,000 by Min Ling) for the period "from [the] case inception through [the] Effective Date of the confirmed [chapter 11] plan," MDC alleges that "Pick paid himself an additional substantial fee, bringing the cost of his representation [of MDC] to approximately $250,000'' Contrary to defendants' contention, MDC's overpayment claim is not barred by res judicata because the bankruptcy case docket fails to reflect that the bankruptcy court approved a total payment of "approximately $250,000" to Pick or the Pick firm. Cf Source Enters., Inc. v Windels Marx Lane & Mittendorf, LLP, 83 A.D.3d 556 (1st Dept 2011), lv denied 18 N.Y.3d 807 (2012); In re Image Innovations Holdings, Inc., 391 BR 255, 260 (Bankr S.D. NY 2008). Because defendants have failed to show that a material fact as claimed by MDC (i.e., the overpayment claim) is not a fact at all, and that no significant dispute exists regarding the alleged fact, dismissal of the complaint as to such claim is unwarranted. See e.g. Langley v Melville Fire Dist., 213 A.D.3d 748, 750 (2d Dept 2023).
See Complaint, ¶ 35 (emphasis added); see also Kielan's Affidavit in Opposition, ¶ 6.
The parties did not brief (and the Court did not inquire into) whether the reorganized debtor's attorney's fees and expenses for the period immediately following the debtor's chapter 11 plan confirmation but immediately before the chapter 11 plan-effective date are subject to review and allowance by the bankruptcy court.
Conclusion
Accordingly, it is
ORDERED that defendants' pre-answer motion to dismiss (in Seq. No. 4) is granted to the extent that: (1) all claims by Kielan and Perlowska, and (2) with the exception of MDC 's overpayment claim (as defined herein), all other MDC's claims are dismissed; and the remainder of their motion is denied; and it is further
ORDERED that for the avoidance of doubt, this action shall proceed solely on MDC's overpayment claim (as defined herein); and it is further
ORDERED that defendants are directed to answer the extant portions of the complaint within ten days after electronic service of this decision/order with notice of entry by plaintiffs' counsel on the pro se defendants; and it is further
ORDERED that to reflect the dismissal of co-plaintiffs Kielan and Perlowska from this action, the caption is amended to read in its entirety as follows:
MILLENIUM DEVELOPMENT & CONSTRUCTION LLC, Plaintiff
v.
DOUGLAS PICK and PICK & ZABICKI, LLP, Defendants.
Index No. 504378/20
; and it is further
ORDERED that after discovery is completed on MDC's overpayment claim against defendants, either side may move for summary judgment on that claim;: and it is further
ORDERED that plaintiffs' counsel is directed to electronically serve a copy of this decision/order on the pro se defendants and to electronically file an affidavit of service thereof with the Kings County Clerk.
The foregoing constitutes the decision/order of the Court.