Opinion
Index No. 155790/2015
11-15-2019
PETER ALPHAS and ALPHAS COMPANY OF NY, INC., Plaintiffs v. SCOTT SMITH and MCCORMICK & O'BRIEN LLP, Defendants
APPEARANCES: For Plaintiff Robert Spinak Esq. 2 Crosfield Avenue, West Nyack, NY 10994 For Defendants Philip Furia Esq. Lewis Brisbois Bisgaard & Smith LLP 77 Water Street, New York, NY 10005
NYSCEF DOC. NO. 179
DECISION AND ORDER
APPEARANCES: For Plaintiff
Robert Spinak Esq.
2 Crosfield Avenue, West Nyack, NY 10994 For Defendants
Philip Furia Esq.
Lewis Brisbois Bisgaard & Smith LLP
77 Water Street, New York, NY 10005 LUCY BILLINGS, J.S.C.:
In plaintiffs' verified fourth amended complaint, Peter Alphas and Alphas Company of NY, Inc., sue for legal malpractice against attorney Scott Smith and his law firm McCormick & O'Brien LLP. Alphas is currently the sole shareholder of Alphas Company of NY, a produce wholesaler. Defendants move to dismiss plaintiffs' claims based on C.P.L.R. § 3211(a)(1), (3), and (7).
I. THE FOURTH AMENDED COMPLAINT
The current complaint alleges that plaintiffs retained defendants on or about September 1, 2012, to represent plaintiffs Alphas and Alphas Company of NY and a separate corporation, Alphas Company, Inc., in several pending actions. Alphas is currently the sole shareholder of Alphas Company of NY and a 50% shareholder with his brother, Yanni Alphas, of Alphas Company, Inc., based in Boston, Massachusetts.
Plaintiffs claim they retained defendants' legal services after being served with a complaint in an underlying action against Alphas Company of NY seeking $11,450.04 for its delinquent contributions to its employees' union Pension Fund. A letter dated September 20, 2012, from the Pension Fund to Yanni Alphas, then Chief Executive Officer of Alphas Company of NY, notified it of the Pension Fund's determination that it had ceased contributions to the Pension Fund, thus effecting its withdrawal from the Pension Fund for that year and incurring a liability of $983,579.74 to the Pension Fund. The withdrawal letter further notified Alphas Company of NY that this liability was payable in 44 quarterly installments, that Alphas Company of NY was entitled within 90 days to request the Pension Fund to review its determination, and that the final avenue of relief was arbitration. 29 U.S.C. § 1399(b). The Pension Fund sent a copy of this letter to Smith.
Plaintiffs allege that defendants never informed plaintiffs of the withdrawal letter and its consequences, let alone addressed its contents on the clients' behalf. As a result, plaintiffs neither paid the required installments nor sought review or the ultimate remedy of arbitration within the specified periods.
Consequently, the complaint in the underlying action was amended February 13, 2013, to claim that Alphas Company of NY owed $14,312.55 for delinquent contributions, plus the withdrawal liability of $983,579.74. Plaintiffs allege that they never received the amended complaint, as no one authorized to accept service on Alphas Company of NY's behalf matched the description of the person served as an agent of Alphas Company of NY, C.P.L.R. § 311(a)(1), but Smith did receive notice of the amended complaint. Plaintiffs further allege that they relied on defendants for all communications and updates regarding the underlying litigation because, unlike Smith, plaintiffs were not registered with the court's electronic filing system. Yet defendants never informed plaintiffs of the amended complaint nor responded to it on Alphas Company of NY's behalf.
Consequently, the plaintiffs in the underlying litigation moved for a default judgment. Plaintiffs allege that Smith knew of the hearing on the motion for a default judgment scheduled April 26, 2013, but failed to appear at the hearing or inform plaintiffs of it, resulting in a default judgment against Alphas Company of NY entered April 30, 2013. According to plaintiffs, the judgment totaled $1,209,419.35: $14,312.55 for delinquent contributions; $983,579.00 in withdrawal liability; $39,915.70 in interest; $11,948.60 in attorney fees; and the remainder as liquidated damages. Plaintiffs claim that Alphas Company of NY never owed the original amount sought nor withdrew from the Pension Fund, because Alphas Company of NY never permanently ceased its operations covered by the Pension Fund, and therefore would have prevailed in the underlying litigation. 29 U.S.C. §§ 1381, 1383(a).
Plaintiffs allege that they only learned of the amended complaint and default judgment from the plaintiffs' attorney in the underlying action when they encountered him in other litigation in May 2013. Plaintiffs then retained a new attorney and in July 2013 moved to vacate the default judgment. Plaintiffs allege that in the meantime they received multiple loan offers totaling approximately $1,500,000.00 to keep Alphas Company of NY viable and maintain its proprietary lease and shares in the Hunts Point Terminal Produce Cooperative. Once the prospective lenders learned of the outstanding $1,209,419.35 judgment against the prospective borrower, however, according to plaintiffs the judgment caused those lenders to withdraw their loan offers. Therefore Alphas Company of NY could not access the funds needed to cure its default under its proprietary lease with the Cooperative and ultimately lost its shares in the Cooperative and its space at the Hunts Point Terminal Produce Market.
When Alphas Company of NY moved to vacate the default judgment in the underlying action, the plaintiffs there claimed that Alphas Company of NY had willfully failed to attend the hearing on the motion for a default judgment and the assessment of damages. To resolve this question, the court issued a subpoena for Smith to appear. The hearing was not scheduled until March 26, 2014. In the meantime, due to Alphas Company of NY's financial condition, Alphas Company of NY petitioned for bankruptcy March 4, 2014, disabling the corporation from proceeding with the motion to vacate the default judgment. 11 U.S.C. § 362(a)(1). See Cardinal Holdings, Ltd. v. Indotronix Intl. Corp., 73 A.D.3d 960, 962 (2d Dep't 2010); Corman v. LaFountain, 38 A.D.3d 706, 708 (2d Dep't 2007); St. Paul Fire & Mar. Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 697, 704 (2d Cir. 1989).
Plaintiffs filed their fourth amended complaint January 29, 2019, claiming defendants' professional negligence in the underlying action. Plaintiffs claim defendants failed to: inform plaintiffs of the withdrawal letter, advise plaintiffs of its effects, challenge it within the required 90 days, demand arbitration, answer the amended complaint, oppose the motion for a default judgment, appear and defend Alphas Company of NY at the hearing and assessment of damages, or seek to vacate the judgment. Alphas Company of NY's claimed damages include the default judgment; the bankruptcy and forfeiture of cooperative shares; approximately $1,400,000.00 paid by the Bankruptcy Estate to the Bankruptcy Trustee and his agents; and approximately $950,000.00 owed for taxes on the sale of the cooperative shares. Alphas's claimed damages include his liability for his guarantees of Alphas Company of NY's debts; loss of his license to conduct business, income, and loans to Alphas Company of NY; a lower credit score; attorneys' fees to move to vacate the judgment and to address his personal liabilities; and cancellation of agreements for loans to and investments in the corporation. See Alphas v. Smith, 147 A.D.3d 557, 558 (1st Dep't 2017)
II. DEFENDANTS' MOTION
Defendants base their motion to dismiss the fourth amended complaint pursuant to C.P.L.R. § 3211(a)(1), (3), and (7) on four main grounds. First, all claims by Alphas must be dismissed because there was no attorney-client relationship between him and defendants; it was only between Alphas Company of NY and defendants, for litigation in which Alphas was not a party. Second, Alphas Company of NY lacks capacity to sue because it commenced its action against defendants during the bankruptcy proceeding when only the Bankruptcy Trustee was authorized to commence an action on the bankrupt corporation's behalf. Third, defendants owed no duty to represent plaintiffs' interests related to the withdrawal letter dated September 20, 2012, even to the extent that the withdrawal letter related to the underlying litigation, because the Letter of Engagement between plaintiffs and defendants nowhere referred to the withdrawal letter. Therefore the claimed legal malpractice was all outside the scope of the agreed representation. Finally, defendants are not liable as a matter of law for any damages related to the default judgment, because plaintiffs' retention of a new attorney to move to vacate the judgment and their petition for bankruptcy constitute superseding causes of their damages, such that their claimed legal malpractice is not the proximate cause of the default judgment and its consequences.
III. ALPHAS'S CLAIM
A motion to dismiss claims based on documentary evidence pursuant to C.P.L.R. § 3211(a)(1) will succeed only if admissible documentary evidence completely refutes plaintiffs' factual allegations, resolving all factual issues as a matter of law. Nomura Home Equity Loan, Inc., Series 2006-FM2 v. Nomura Credit & Capital, Inc., 30 N.Y.3d 572, 601 (2017); Goshen v. Mutual Life Ins. Co. of NY, 98 N.Y.2d 314, 326 (2002); Calpo-Rivera v. Siroka, 144 A.D.3d 568, 568 (1st Dep't 2016); Kolchins v. Evolution Mkts., Inc., 128 A.D.3d 47, 58 (1st Dep't 2015). Defendants rely on Alphas's 2012 income tax return to establish that he owned only 50% of Alphas Company of NY's shares in 2012 and maintain that the Appellate Division allowed him to pursue an individual claim for legal malpractice on the basis that he owned 100% of the corporation's shares. Alphas v. Smith, 147 A.D.3d at 558; Good Old Days Tavern v. Zwirn, 259 A.D.2d 300, 300 (1st Dep't 1999). Upon the principle that a party to litigation may not take a position contrary to his sworn income tax return, Mahoney-Buntzman v. Buntzman, 12 N.Y.3d 415, 422 (2009), defendants insist that Alphas, as a mere 50% owner, may not benefit from Alphas Company of NY's attorney-client relationship with defendants as required for him to sustain a legal malpractice claim against them. Learning Annex, L.P. v. Blank Rome LLP, 106 A.D.3d 663, 663 (1st Dep't 2013); Fortress Credit Corp. v. Dechert LLP, 89 A.D.3d 663, 663 (1st Dep't 2011).
Peter Alphas acknowledges that he was a 50% owner of Alphas Company of NY with his brother until his brother resigned from his position and assigned to Peter Alphas the brother's interest in the corporation October 23, 2012, effective August 30, 2012. Nevertheless, defendants may rely on Peter Alphas's tax return claiming a 50% ownership in 2012 to contradict his claim in this action of a 100% ownership in the later months of that year. A party's claim on a tax return estops the party from taking a different position in litigation and forecloses any factual dispute of the issue. Mahoney-Buntzman v. Buntzman, 12 N.Y:3d at 422; Goldwater v. Amicus Assoc. L.P., 168 A.D.3d 405, 405-406 (1st Dep't 2019); Ansonia Assoc. L.P. v. Unwin, 130 A.D.3d 453, 454 (1st Dep't 2015). Even assuming that Peter Alphas was not a 100% shareholder until 2013, however, he demonstrates circumstances entitling him to claim an attorney-client relationship with defendants in two ways.
First, the Appellate Division held that Alphas was "allowed to assert an individual malpractice claim, even though defendants represented only Alphas NY in the federal action in which they allegedly committed malpractice." Alphas v. Smith, 147 A.D.3d at 558. Although the court recited the allegation that Alphas was Alphas Company of NY's sole shareholder, the court did not limit its holding to that single fact. Instead, the key fact on which the court focused was that Alphas "derived his livelihood from Alphas NY." Id. Defendants' documentary evidence does not refute this fact, nor do defendants even contend otherwise. The only limitation the Appellate Division placed on Alphas's claim was that his "damages are limited to those he suffered individually." Id.
Since this action is in the same "procedural posture . . . (a CPLR 3211 motion to dismiss)" as it was before the Appellate Division, in accordance with the law of the case, this court must allow Alphas to pursue an individual malpractice claim against defendants. Id. Even if Alphas is not considered the sole shareholder of Alphas Company of NY when he and defendants executed the Letter of Engagement October 1, 2012, and is not considered the sole shareholder until January 1, 2013, "special circumstances" still permit him to pursue an individual legal malpractice claim against defendants, at least at this stage of the action. Good Old Days Tavern v. Zwirn, 259 A.D.2d at 300; Town Line Plaza Assocs. v. Contemporary Props., 223 A.D.2d 420, 420 (1st Dep't 1996). See Alphas v. Smith, 147 A.D.3d at 558.
Second, while plaintiffs stipulate that the Letter of Engagement is authenticated and admissible for the purpose of determining defendants' motion, the letter's execution date does not bar Alphas's legal malpractice claim against defendants either. The execution date may commence the attorney-client relationship, but is not the single determinative factor in evaluating whether Alphas may claim legal malpractice against defendants. Later dates during the attorney-client relationship determine when his legal malpractice claim accrued: most significantly, when the malpractice and injury occurred. Johnson v. Proskauer Rose LLP, 129 A.D.3d 59, 67 (1st Dep't 2015); Cabrera v. Collazo, 115 A.D.3d 147, 150 (1st Dep't 2014); Goldman v. Akin Gump Strauss Hauer & Feld LLP, 46 A.D.3d 481, 481 (1st Dep't 2007). Plaintiffs allege that defendants' malpractice occurred well into 2013, when Alphas undisputedly was the sole shareholder Of Alphas Company of NY. Because there was an attorney-client relationship between Alphas and defendants based on Alphas's sole ownership of Alphas Company of NY when the alleged malpractice occurred, Alphas may pursue an individual claim regardless whether he was less than a 100% owner in 2012. Johnson v. Proskauer Rose LLP, 129 A.D.3d at 67; Cabrera v. Collazo, 115 A.D.3d at 150; Goldman v. Akin Gump Strauss Hauer & Feld LLP, 46 A.D.3d at 481.
For all these reasons, defendants' documentary evidence does not resolve the issue whether Alphas maintained an attorney-client relationship with defendants when plaintiffs' legal malpractice accrued, as a matter of law, and Alphas at minimum raises a factual issue of such a relationship. Therefore the court denies defendants' motion to dismiss Alphas's action based on documentary evidence. C.P.L.R. § 3211(a)(1).
IV. ALPHAS COMPANY OF NY'S CAPACITY TO SUE
Pursuant to C.P.L.R. § 3211(a)(3), defendants meet their burden to establish that Alphas Company of NY lacked the capacity to sue when the corporation commenced its independent action April 18, 2016, before that action was consolidated with this action, originally commenced only by Alphas in 2015. Since Alphas Company of NY commenced a bankruptcy proceeding March 4, 2014, which still was pending April 18, 2016, only the Bankruptcy Trustee was authorized to commence an action on the bankrupt corporation's behalf, and the corporation itself lacked the capacity to do so. 11 U.S.C. § 541(a); Barranco v. Cabrini Med. Ctr., 50 A.D.3d 281, 282 (1st Dep't 2008); Williams v. Stein, 6 A.D.3d 197, 198 (1st Dep't 2004); Cardinal Holdings, Ltd. v. Indotronix Intl. Corp., 73 A.D.3d at 962; Corman v. LaFountain, 38 A.D.3d at 708.
To defeat defendants' motion to dismiss the fourth amended complaint on this ground, Alphas Company of NY must present evidence that at least raises a factual question of this plaintiff's capacity to sue. DLJ Mtge. Capital v. Mahadeo, 166 A.D.3d 512, 513 (1st Dep't 2018); Deutsche Bank Trust Co. Ams. v. Vitellas, 131 A.D.3d 52, 59-60 (2d Dep't 2015); US Bank N.A. v. Faruque, 120 A.D.3d 575, 578 (2d Dep't 2015). Plaintiffs demonstrate that the Bankruptcy Trustee assigned the legal malpractice claim to Alphas April 22, 2016. This assignment in fact supports Alphas Company of NY's lack of capacity to sue both on April 18, 2016, and afterward, but also demonstrates that Alphas assumed the capacity to maintain Alphas Company of NY's claims. The assignment also supports Alphas's own claim that he was a real party in interest who maintained an attorney-client relationship with defendants and whose interests were injured by their alleged legal malpractice, so as to sustain a malpractice action by him against defendants.
Defendants, on the other hand. fail to demonstrate why, at minimum, when Alphas filed his third amended complaint March 23, 2017, when the court (Mendez, J.) consolidated Alphas Company of NY's action with Alphas's action without opposition September 18, 2017, and when plaintiffs filed their fourth amended complaint January 29, 2019, Alphas lacked the capacity to maintain Alphas Company of NY's claims. Because Alphas Company of NY raises no factual issue regarding its capacity to sue, the court grants defendants' motion to dismiss Alphas Company of NY as a plaintiff. Giuliano v. Gawrylewski, 122 A.D.3d 477, 479 (1st Dep't 2014); Ullman v. Hillyer, 106 A.D.3d 579, 579 (1st Dep't 2013); Williams v. Stein, 6 A.D.3d at 198. Because its claims were assigned to Alphas, however, he maintains the claims originally instituted by Alphas Company of NY and retained in the fourth amended complaint. See Rodriguez v. River Val. Care Ctr., Inc., 175 A.D.3d 432, 433 (1st Dep't 2019).
V. THE SCOPE OF DEFENDANTS' REPRESENTATION OF PLAINTIFFS
Regarding defendants' duty to represent plaintiffs' interests related to the withdrawal letter dated September 20, 2012, defendants rely on the Letter of Engagement between them and plaintiffs as well as the withdrawal letter itself as documentary evidence supporting dismissal of plaintiffs' allegations of malpractice related to the withdrawal letter. C.P.L.R. § 3211(a)(1). The withdrawal letter was addressed to Yanni Alphas as Chief Executive Officer of Alphas Company of NY before plaintiffs executed the Letter of Engagement October 1, 2012. The withdrawal letter notified Alphas Company of NY that it had ceased contributions to, withdrawn from, and incurred a liability of $983,579.74 to the union Pension Fund; that the liability was payable in installments; and that Alphas Company of NY was entitled to request review and demand arbitration. Because the Letter of Engagement between plaintiffs and defendants, 19 days later, nowhere referred to the withdrawal letter, defendants insist that any representation related to the withdrawal letter exceeds the scope of the agreed representation.
First, defendants fail to show that plaintiffs ever received the withdrawal letter before they executed the Letter of Engagement. Defendants present no affidavit of service or other evidence of plaintiffs' receipt of the withdrawal letter. E.g., Tower Ins. Co. of N.Y. v. Ray & Frank Liq. Store, Inc., 104 A.D.3d 482, 483 (1st Dep't 2013); Matter of State Farm Mut. Auto, Ins. Co. (Kankam), 3 A.D.3d 418, 419 (1st Dep't 2004); 8112-24 18th Ave. Realty Corp. v. Aetna Cas. & Sur. Co., 240 A.D.2d 287, 288 (1st Dep't 1997); Gelbart v. Borglum, 195 A.D.2d 416, 416 (1st Dep't 1993).
In any event, the complaint's allegations unmistakably show how the withdrawal letter related to the underlying litigation in which defendants concede they had undertaken to represent Alphas Company of NY, even before the Letter of Engagement. The court need only refer to the amended complaint in the underlying litigation to find that it sought the very relief that flowed from the failure to respond to the withdrawal letter. Although defendants attempt to use the withdrawal letter to absolve themselves of any related representation, even to the extent that the withdrawal letter related to the underlying litigation, to the contrary, the very fact that the withdrawal related to the litigation incorporates the letter within the scope of the representation undertaken. As plaintiffs' retained attorneys, defendants owed a duty to represent all plaintiffs' interests that in any way bore on the underlying litigation, even relating to issues about which plaintiffs may have been unaware. Those interests included the interests implicated in the withdrawal letter. Macquarie Capital (USA) Inc. v. Morrison & Foerster LLP, 157 A.D.3d 456, 457 (1st Dep't 2018).
In sum, defendants' attempt to exclude the withdrawal letter or any part of the underlying litigation from the scope of representation contradicts the very reason for the attorney-client relationship. According to the fourth amended complaint, plaintiffs retained defendants to represent plaintiffs in several pending actions, including the underlying litigation at issue here, and to handle anything that affected plaintiffs' defense of that litigation. It was the foundation of the attorney-client relationship, the reason why plaintiffs retained defendants' legal services. Because neither the Letter of Engagement nor the withdrawal letter limits defendants' duty to represent plaintiffs' interests related to the withdrawal letter or any part of the underlying litigation, the court denies defendants' motion to dismiss plaintiffs' claims of malpractice arising from defendants' omissions in responding to the withdrawal letter or any part of the underlying litigation. C.P.L.R. § 3211(a)(1).
VI. THE PROXIMATE CAUSE OF PLAINTIFFS' DAMAGES
Upon a motion to dismiss claims pursuant to C.P.L.R. § 3211(a)(7), the court must accept plaintiffs' allegations in the fourth amended complaint as true, liberally construe them, and draw all reasonable inferences in plaintiffs' favor. JF Capital Advisors, LLC v. Lightstone Group, LLC, 25 N.Y.3d 759, 764 (2015); Miglino v. Bally Total Fitness of Greater N.Y., Inc., 20 N.Y.3d 342, 351 (2013); ABN AMRO Bank, N.V. v. MBIA Inc., 17 N.Y.3d 208, 227 (2011); Drug Policy Alliance v. New York City Tax Commn., 131 A.D.3d 815, 816 (1st Dep't 2015). Dismissal is warranted only if the complaint fails to allege facts that fit within any cognizable legal theory. ABN AMRO Bank, N.V. v. MBIA Inc., 17 N.Y.3d at 227; Lawrence v. Graubard Miller, 11 N.Y.3d 588, 595 (2008); Nonnon v. City of New York, 9 N.Y.3d 825, 827 (2007); Mill Fin., LLC v. Gillett, 122 A.D.3d 98, 103 (1st Dep't 2014).
The fourth amended complaint alleges that plaintiffs hired a new attorney who in July 2013 moved to vacate the default judgment against plaintiffs in the underlying litigation, but plaintiffs then petitioned for bankruptcy before allowing their new attorney to succeed in vacating the judgment. This new attorney's opportunity to obtain a favorable result for plaintiffs in the underlying litigation would sever the causal connection between defendants' legal malpractice and the default judgment that the malpractice originally caused, so that, despite defendants' legal malpractice, Alphas Company of NY still would have succeeded on the merits of that litigation. Davis v. Cohen & Gresser, LLP, 160 A.D.3d 484, 487 (1st Dep't 2018); Maksimiak v. Schwartzapfel Novick Truhowsky Marcus, P.C., 82 A.D.3d 652, 652 (1st Dep't 2011).
Plaintiffs claim, however, that the default judgment precipitated the corporation's bankruptcy before plaintiffs' successor attorney "had sufficient time and opportunity" to protect plaintiffs' rights. Id. Between April 2013, when the default judgment was entered, and March 2014, when Alphas Company of NY petitioned for bankruptcy, plaintiffs allege that, once the prospective lenders learned of the unpaid judgment against the prospective borrower, Alphas Company of NY lost multiple loan offers totaling approximately $1,500,000.00. Those loans were the funds Alphas Company of NY needed to cure its default under its proprietary lease with the Hunts Point Terminal Produce Cooperative. Once the court in the Cooperative's eviction proceeding against Alphas Company of NY lifted a stay on the lessee's eviction in early 2014, its only recourse to protect the value of its principal asset, its shares in the Cooperative, was to petition for bankruptcy.
The fair inference from the fourth amended complaint is that plaintiffs staved off the eviction and the bankruptcy as long as possible and made every possible attempt to keep Alphas Company of NY's shares in the Cooperative and maintain its business, but the default judgment impeded that effort. If plaintiffs had the means to vacate the judgment in time to avert the bankruptcy, they would have done so. Therefore plaintiffs' allegations demonstrate that, but for defendants' legal malpractice, Alphas Company of NY would not have incurred the default judgment and that it precipitated the corporation's bankruptcy, foreclosing any opportunity to vacate the judgment. Roth v. Ostrer, 161 A.D.3d 433, 434 (1st Dep't 2018); Macquarie Capital (USA) Inc. v. Morrison & Foerster LLP, 157 A.D.3d at 456-57; Garnett v. Fox, Horan & Camerini, 82 A.D.3d 435, 435-36 (1st Dep't 2011).
VII. CONCLUSION
For the reasons explained above, the court grants defendants' motion to the extent of dismissing Alphas Company of NY as a plaintiff because it lacked the capacity to sue. C.P.L.R. § 3211(a)(3). Plaintiff Alphas, however, maintains the claims originally instituted by Alphas Company of NY and retained in the fourth amended complaint. The court denies the remainder of defendants' motion. C.P.L.R. § 3211(a)(1) and (7). DATED: November 15, 2019
/s/_________
LUCY BILLINGS, J.S.C.