Opinion
Index No. 451426/2020 MOTION SEQ. Nos. 002 003
06-30-2022
CASSAFORTE LIMITED, FRF 348 QUINCY LLC, XYZ DEVELOPMENT II LLC, XYZ 42 VAN BUREN LLC and XYZ 1535 PACIFIC LLC, Plaintiffs, v. BABAK POURTAVOOSI, THE LAW OFFICES OF BABAK POURTAVOOSI, P.C., SHARESTATES INVESTMENTS DACL, LLC, TOORAK CAPITAL PARTNERS LLC, AMTRUST FINANCIAL SERVICES, INC., and ATLANTIS NATIONAL SERVICES, INC., Defendants.
Unpublished Opinion
MOTION DATE 07/28/2021, 07/28/2021
DECISION + ORDER ON MOTION
Margaret A. Chan Judge
The following e-filed documents, listed by NYSCEF document number (Motion 002; 003) 179, 180,181, 182, 183, 184, 185, 186, 187, 188, 189, 190, 191, 192, 193, 194, 195, 196, 197, 198, 199, 200, 201, 202, 203, 204, 205, 206, 207, 208, 209, 210, 211, 212, 213, 214, 215, 216, 217, 218, 219, 220, 221, 222, 223, 224, 225, 226, 227, 228, 229, 230, 231, 232, 233, 234, 235, 236, 237, 238, 239 were read on this motion to/for MOTION TO DISMISS; MOTION TO DISMISS
Plaintiffs Cassaforte Limited (Cassaforte), FRF 348 Quincy, LLC (FRF), XYZ Development II LLC (XYZ Development), XYZ 42 Van Buren LLC (Van Buren), and XYZ 1535 Pacific LLC (XYZ 1535 Pacific and, together with XYZ Development and Van Buren, the Fee Owners) bring this action against Babak Pourtavoosi (Pourtavoosi), The Law Offices of Babak Pourtavoosi, P.C. (together with Pourtavoosi, the Attorney Defendants), Sharestates Investments, LLC s/h/a Sharestates Investments DACL, LLC (Sharestates), and Toorak Capital Partners LLC (Toorak and Sharestates, the Lender Defendants). Plaintiffs seek, inter alia, monetary damages against the Attorney Defendants and a declaratory judgment against the Lender Defendants. Now present before this court are two motions to dismiss the Second Amended Complaint (NYSCEF # 153 - the Complaint). One motion is by the Lender Defendants (MS 002) and another is by the Attorney Defendants (MS 003).
BACKGROUND
Unless otherwise noted, the following facts are based on the allegations in the Complaint. This action arises out of a series of loan agreements and real estate dealings that plaintiffs allege non-party Aaron Johnson and his affiliated entities breached. A related action centers on the dispute of Cassaforte and FRF with Johnson directly (the Johnson Action, index number 653387/2019). Plaintiffs allege that they were damaged as a result of the refinancing of senior debt by the Fee Owners (the Refinancing), which were controlled by Johnson at the time of the Refinancing.
Prior to the Refinancing, Cassaforte and Johnson, in 2017, structured an . arrangement whereby Cassaforte made loans to support the acquisition and development of Brooklyn real property (the Projects). The Projects were to be directly held by the Fee Owners. The corporate structure chart that resulted from this arrangement involved XYZ Holdings LLC (XYZ Holdings) owning all of the membership interests in the Fee Owners. XYZ Partners LLC (XYZ Partners) held 90% of the membership interests in XYZ Holdings. Another special purpose entity, XYZ Group LLC (XYZ Group) held the remaining 10% of the membership interests in XYZ Holdings and also served as its operating manager. Johnson wholly owns XYZ Group. Johnson was the common unit holder of XYZ Partners, and he was also appointed to be its managing member. On April 20, 2018, FRF became the Preferred Mezzanine Unit Holder of XYZ Partners via a joinder agreement (NYSCEF # 215). XYZ Holdings managed the Fee Owners as their member.Although Cassaforte and Johnson had considered granting Cassaforte security interests directly in the real property, this was opposed by other potential lenders, so it was ultimately agreed that Cassaforte would instead receive LLC security interests in the membership units of the Fee Owners, XYZ Partners, and XYZ Holdings.
The operating agreements of the Fee Owners provide for member-management of each company (NYSCEF 4fs 201-03). Section 5 of the operating agreements has the relevant authorization, except that the provision providing for member-management of Van Buren appears in section 6 of that company's operating agreement, and section 5 therein provides for management by Johnson. As Johnson managed XYZ Holdings through his ownership of XYZ Group, this distinction in Van Buren's operating agreement does not matter for the present purposes.
Each Fee Owner was created as a single-purpose entity with financing limitations. The Fee Owners are governed by mostly identical transaction documents that include loan agreements and operating agreements. The operating agreements of the Fee Owners restrict the authorization of indebtedness other than certain preexisting mortgages (the Indebtedness Restrictions! the Old Mortgages).The operating agreement of the Fee Owners' member, XYZ Holdings, also has limitations on authorizing financing by the Fee Owners (NYSCEF # 4). Section 5.2 requires the consent of Cassaforte, as Supervising Manager, prior to modifying the Old Mortgages or entering any financing arrangement encumbering any of the properties (the Cassaforte Authorization).
The Indebtedness Restrictions appear in Section 3.a.xviii of all of the Fee Owners' operating agreements; the Old Mortgages are specifically authorized by Section 16 of each of the operating agreements of XYZ Development and XYZ 1535 Pacific and Section 17 of the operating agreement of Van Buren.
Without obtaining the Cassaforte Authorization, Johnson proceeded with the Refinancing. Plaintiffs allege that, around the beginning of 2019, Johnson proposed refinancing the Old Mortgages but failed to share sufficient information about the proposal, or even required financial reports regarding the Projects, such that Cassaforte understood that Johnson was acting secretly to refinance the properties in his favor and to plaintiffs' detriment. Cassaforte withheld the Cassaforte Authorization, but Johnson nonetheless proceeded. The Refinancing raised approximately $5.85 million by encumbering the Projects with replacement mortgages issued by Sharestates (the New Mortgages). Approximately $4.2 million went to pay off the Old Mortgages. Plaintiffs allege that Johnson wrongfully diverted the balance, amounting to approximately $1.6 million (the Refinancing Net Proceeds). Sharestates later assigned the new 1535 Pacific mortgage and the 42 Van Buren mortgage to Toorak (the Toorak Mortgages).
Counts One through Eight of the Complaint assert various claims against the Attorney Defendants for Pourtavoosi's role in assisting Johnson complete the Refinancing. Plaintiffs assert claims for breach of fiduciary duty, professional negligence, violation of the Rule of Professional Conduct 1.13, aiding and abetting breach of fiduciary duty, negligence, tortious interference with contract, contribution, and indemnification. Plaintiffs assert that the Attorney Defendants were the attorneys for XYZ Partners, XYZ Holdings, and the Fee Owners, and, therefore, owed fiduciary duties to these entities, which they breached including by assisting with the Refinancing even though Pourtavoosi understood the intricacies of the operating agreements and loan documents and therefore the need to get the Cassaforte Authorization.
Cassaforte and FRF amended their original complaint, including to add the Fee Owners as additional plaintiffs and delineate certain of their causes of action in the name of the Fee Owners alone. Although Cassaforte and FRF assert claims against the Fee Owners in the Johnson Action, in this case the Fee Owners are plaintiffs along with Cassaforte and FRF. This change came about after September of 2019 when, via a Uniform Commercial Code foreclosure sale, Cassaforte successfully bid for the membership interests in XYZ Partners and XYZ Holdings (which Cassaforte assigned to Duke Property Administrators LLC) and therefore indirectly obtained control and ownership of the Fee Owners.
The Attorney Defendants argue that Pourtavoosi served as transactional counsel for Johnson on a transaction-bytransaction basis without a written retainer agreement and merely presided over the loan refinance closings at issue herein. They assert that Cassaforte's attorneys, SBA Law Firm, represented XYZ Partners and XYZ Holdings. They assert that Pourtavoosi cannot be liable for negligence to plaintiffs as they claim that Pourtavoosi did not breach any duty to the Fee Owners. They also argue that even the Fee Owners and Johnson had no fiduciary duty to Cassaforte and FRF. They further claim that plaintiffs neglect to present any facts in the Complaint indicating that Pourtavoosi would have had knowledge that Johnson was not entitled to complete the Refinancing. Additionally, although they agree that Pourtavoosi represented the Fee Owners, they assert that their sole fiduciary duty thereby was to further the interests of refinancing the Old Mortgages, which had passed maturity, and obtaining funds to complete the Projects. They also claim that the purported loss of the $1.6 million cannot be attributed to any act of Pourtavoosi.
Plaintiffs dispute the portrayal of Pourtavoosi as merely a transactional counsel. Plaintiffs also assert that Pourtavoosi's privity with Cassaforte and FRF is not necessary when liability may be based on fraudulent, collusive, and tortious acts. They highlight the alleged knowing preparation by Pourtavoosi of a false certificate Johnson provided to Sharestates (the False Development Certificate). The False Development Certificate provided an outdated operating agreement of XYZ Development in which Johnson was listed as the 100% owner rather than the first amended operating agreement which properly lists XYZ Holdings as the 100% owner. They further assert that the Attorney Defendants were unquestionably aware of the rights and obligations of the various parties, including the necessity for Johnson to obtain the Cassaforte Authorization prior to completing the Refinancing.
Count Nine of the Complaint seeks declaratory judgment that the New Mortgages of the Lender Defendants are null, void, and invalid. Plaintiffs allege that the Refinancing proceeded without actual or apparent authority and that the Lender Defendants knew or should have known as much. The Lender Defendants argue that Cassaforte and FRF do not have any ownership interest in the Projectsso do not have standing. The Lender Defendants further assert that documentary evidence demonstrates that the Fee Owners authorized the execution of the New Mortgages; that the plaintiffs have unclean hands; and that plaintiffs having ratified the New Mortgages through accepting the benefits thereof cannot now seek to invalidate them.
{or argue don't have membership interests?}
Pourtavoosi asks "that the Court deny any further requests by Plaintiffs to amend the Complaint" (NYSCEF # 219 at 25). Pourtavoosi's request is denied as premature.
DISCUSSION
On a motion to dismiss pursuant to CPLR 3211 (a) (7), the court must "accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference," and "determine only whether the facts as alleged fit into any cognizable legal theory" (Siegmund Strauss, Inc. v E. 149th Realty Corp., 104 A.D.3d 401, 403 [1st Dept 2013]). Significantly, "whether a plaintiff...can ultimately establish its allegations is not taken into consideration in determining a motion to dismiss" (Phillips S. Beach LLC v ZC Specialty Ins. Co., 55 A.D.3d 493, 497 [1st Dept 2008], Iv denied 12 N.Y.3d 713 [2009]). At the same time, "[i]n those circumstances where the legal conclusions and factual allegations are flatly contradicted by documentary evidence, they are not presumed to be true or accorded every favorable inference'" (Morgenthow & Latham v Bank of New York Company, Inc., 305 A.D.2d 74, 78 [1st Dept 2003] [internal citation and quotation omitted]). However, dismissal based on documentary evidence may result "only when it has been shown that a material fact as claimed by the pleader is not a fact at all and no significant dispute exists regarding it"' (Acquista v New York Life Ins. Co., 285 A.D.2d 73, 76 [1st Dept 2001]), quoting, Guggenheimer v Ginzburg, 43 N.Y.2d 268, 275 [1977]).
The Lender Defendants' Motion to Dismiss (MS 002)
The allegations in the Complaint are sufficient to state a cause of action against the Lender Defendants for a declaratory judgment that the New Mortgages are null, void, and invalid (Count Nine), and accordingly, the Lender Defendants' motion to dismiss is denied.
"A mortgagee is not a bona fide encumbrancer where, despite being aware of facts that would lead a reasonable, prudent lender to make inquiries of the circumstances of the transaction at issue, it fails to make such inquiries" (334 Corp. v Jericho Plaza, LLC, 128 A.D.3d 679 [2d Dept 2015]). "An agent's power to bind his principal is coextensive with the principal's grant of authority. One who deals with an agent does so at his peril, and must make the necessary effort to discover the actual scope of authority .... Upon failure to properly determine the scope of authority, and in the face of damages resulting from an agent's misrepresentations, 'apparent authority' is not automatically available to the injured third party to bind the principal. Rather, the existence of'apparent authority' depends upon a factual showing that the third party relied upon the misrepresentations of the agent because of some misleading conduct on the part of the principal-not the agent" (Fed. Ins. Co. v Diamond Kamvakis & Co. Inc., 144 A.D.2d 42, 45 [1st Dept 1989], lv denied 74 N.Y.2d 604 [1989], quoting Ford v Unity Hosp., 32 N.Y.2d 464, 472-73 [1973]).
On this motion to dismiss, it is taken as true for the present purposes that Sharestates knew or should have known that Cassaforte's written consent was needed to authorize the Fee Owners' closing of the Refinancing. Although Sharestates "expressly denies these allegations," the Lender Defendants also admit that they "have to accept plaintiffs' allegations as true" (NYSCEF # 234 at 6; NYSCEF # 239 - transcript of oral argument at 23:25-24:2). It being here uncontradicted that Cassaforte did not give written consent, and the Lender Defendants having otherwise failed to flatly contradict the assertion that Johnson was not authorized to complete the Refinancing, accordingly the Lender Defendants have not established that Sharestates was a bona fide encumbrancer entitled to dismiss the Complaint (see e.g. (1230 Park Assocs., LLC v N. Source, LLC, 48 A.D.3d 355, 355 [1st Dept 2008] [finding that lender did not have a valid and enforceable security interest in real property pledged as collateral where loans were secretly undertaken by an unauthorized member of the limited liability companies]; Fleet Bank v Consola, Riccitelli, Squadere Post No. 17Inc., 268 A.D.2d 627 [3d Dept 2000] [vacating mortgages on real property where officer of corporation lacked authority to execute loans on corporation's behalf]).
It is without merit, at this stage, that in seeking to "demonstrate that the [Fee Owners] authorized the execution of the [New] Mortgages" the Lender Defendants point to member consents and title affidavits that Johnson signed (NYSCEF # 177 at 13; NYSCEF #'s 187-89 - the Member Consents; NYSCEF # 190 - the Title Affidavits). This is because, first, the operating agreements of the Fee Owners included the Indebtedness Restrictions. This contradicts the Lender Defendants' assertion that "nothing in the operating agreements for the [Fee Owners] indicated to Sharestates that the [New] Mortgages were not authorized by the [Fee Owners]" as the operating agreements indicate that the Fee Owners were inhibited without member consent from undertaking the Refinancing (NYSCEF # 234 at 3). Second, if the Lender Defendants had reviewed the operating agreement of XYZ Holdings to see how XYZ Holdings, as member, could override the Indebtedness Restrictions, they could have seen limit's on Johnson's actual authority to direct XYZ Holdings to conduct the Refinancing without the Cassaforte Authorization. Third, the Lender Defendants fail to establish that Johnson had apparent authority to undertake the Refinancing as they do not point to misleading conduct on the part of any principal; Johnson's acts, including signing the Member Consents and Title Affidavits, are insufficient as "an agent cannot, [through] his own acts, cloak himself with apparent authority" (1230 Park Assocs., LLC, 48 A.D.3d at 355-56).
It is unavailing that Johnson was the owner of XYZ Group, which was the Sponsor of XYZ Holdings, and the Sponsor was designated Operating Manager (NYSCEF # 4, Section 5.1). While in such role Johnson could have authorized certain actions of XYZ Holdings, nonetheless the Operating Manager was limited in undertaking any "Major Decision" without consent of the Supervising Manager, Cassaforte (NYSCEF # 4, Section 5.2). A Major Decision included modifying the Old Mortgages or otherwise refinancing any of the Projects. The Lender Defendants similarly have not established the reasonableness of their reliance on the Title Affidavits' representation that the transaction had been "duly authorized by the sole member/managing member/president/vice president/secretary" if they knew or should have known of the necessity of the Cassaforte Authorization (NYSCEF # 190, Section 5).
Two lines of cases that the Lender Defendants cite are also unavailing to support dismissal at this stage because of similar issues with establishing that the Refinancing was authorized. Unlike in Decana Inc. v Contogouris (55 A.D.3d 325 [1st Dept 2008]) and like cases upholding the validity of mortgages where actual authority to enter into mortgages existed, here the Lender Defendants have not established that actual authority existed. Furthermore, the Lender Defendants cite 334 Corp. v Jericho Plaza, LLC (128 A.D.3d 679 [2d Dept 2015]) and like cases for the idea that once presented with sufficient evidence of authority to enter into a mortgage a lender is under no duty to independently verify the validity of documentation presented by an individual who claims to have authority to act on behalf of a borrower corporation or entity (NYSCEF # 177 at 14). These cases are unavailing because, even if the Lender Defendants were not under a duty to verify the truthfulness of the Member Consents, nonetheless the Lender Defendants have not established the reasonableness of relying on the Member Consents in the first place for evidence of Johnson's authority when a review of the XYZ Holdings operating agreement, as explained above, would have revealed the clauses respecting the Cassaforte Authorization.
It is clear that the Member Consent for XYZ Development falsely indicated that Johnson was its sole member, rather than XYZ Holdings, and that all Member Consents failed to recognize FRF's status as Preferred Mezzanine Unit Holder of XYZ Partners and Cassaforte's involvement as Supervising Manager of XYZ Holdings.
Material questions of fact preclude application of the Lender Defendants' equitable defenses at this time (see e.g. ERS Enterprises, Inc. v Empire Holdings, LLC, 286 A.D.2d 206, 207 [1st Dept 2001] [finding that determination that plaintiff came to court with unclean hands should not be made prior to a hearing on that issue]). Questions of fact include the Lender Defendants' knowledge respecting the requirement of the Cassaforte Authorization as the "doctrine of unclean hands is not an applicable defense to ... equitable claims [against] 'willing wrongdoers'" and "one who seeks equity must do equity and must come with clean hands" (Tai v Broche, 115 A.D.3d 577, 578 [1st Dept 2014]; (Site Five Hous. Dev. Fund Corp. v. Est. of Bullock, 112 A.D.3d 479, 481 [1st Dept 2013]).
The Lender Defendants have not established at this point that plaintiff Fee Owners ratified the New Mortgages by receiving the financial benefits thereof as factual questions are presented that are not properly decided on a motion to dismiss. The Lender Defendants' reliance on, inter alia, Banque Nationale de Paris v 1567Broadway Ownership Assocs. (214 A.D.2d 359, 361 [1st Dept 1995]) and Agrama Tr. of 1984 v O'Mara (67 Misc.3d 1244(A) [Sup Ct, NY County 2020]) is unavailing as those cases were on a motion for summary judgment.
The Attorney Defendants' Motion to Dismiss (MS 003)
1. Breach of Fiduciary Duty (Count One)
The allegations in the Complaint are sufficient to state a claim for breach of fiduciary duty with respect to the claim of the Fee Owners but not with respect to the claim of Cassaforte and FRF.
"To establish a breach of fiduciary duty, the movant must prove the existence of a fiduciary relationship, misconduct by the other party, and damages directly caused by that party's misconduct" (Pokoik v Pokoik, 115 A.D.3d 428, 429 [1st Dept 2014]). "[T]he relationship of client and counsel is one of unique fiduciary reliance" and an attorney has the "duty to deal fairly, honestly and with undivided loyalty" (Ulico Cas. Co. v Wilson, Elser, Moskowitz, Edelman & Dicker, 56 A.D.3d 1, 9 [1st Dept 2008]). "[I]n the context of an action asserting attorney liability, the claims of malpractice and breach of fiduciary duty are governed by the same standard of recovery ... [and] plaintiff must establish the 'but for' element of malpractice," which requires that "'but for' the attorney's conduct the client ... would not have sustained any ascertainable damages" (id. at 10; Weil, Gotshal & Manges, LLP v Fashion Boutique of Short Hills, Inc., 10 A.D.3d 267, 272 [1st Dept 2004]).
All the plaintiffs allege a breach of fiduciary duty against the Attorney Defendants (NYSCEF# 153, ¶'s 97-104). Respecting the claim of Cassaforte and FRF, plaintiffs do not explain the basis for the Attorney Defendants owing Cassaforte and FRF a fiduciary duty, so this cause of action fails the first prong of a breach of fiduciary duty claim with respect to those two plaintiffs. Respecting XYZ Partners and XYZ Holdings, plaintiffs assert that the Attorney Defendants were counsel thereto (NYSCEF # 153, ¶ 98). Even if that were true, which the Attorney Defendants dispute, nonetheless this claim fails for the independent reason that those two are not parties to this action.
Respecting the claim of the Fee Owners, plaintiffs have adequately pled that the Attorney Defendants served as counsel (NYSCEF # 153, ¶ 98). The Attorney Defendants' conclusory denial of such a duty is unavailing (NYSCEF # 233 at 5). This conclusion is not based on the Fee Owners having been acquired by Cassaforte after the alleged breach and does not "retroactively alter" (as suggested by the Attorney Defendants) the fiduciary duty (id. at 6). Rather, the duty is adequately pled to have existed at the time the Refinancing was conducted.
Plaintiffs have also adequately alleged misconduct by Pourtavoosi, including that he allegedly prepared the False Development Certificate presented to Sharestates and misrepresented the operational provisions of the Fee Owners (id., ¶ 84-85). The Attorney Defendants' argument that the presentation of the wrong operating agreement falsely showing that Johnson was sole member of XYZ Development in the False Development Certificate was an "inadvertent mistake" is unavailing (NYSCEF 239 - Transcript of Jan 25, 2022 Oral Argument, at 33:13-14). Even if the certificates presented to Sharestates for the other two Fee Owners correctly presented XYZ Holdings as sole member, nonetheless all three certificates still represented that XYZ Holdings as the Fee Owners' member had authorized the Refinancing, which the Attorney Defendants have not established could have been done properly without the Cassaforte Authorization. The Attorney Defendants' claim that the operating agreement of XYZ Holdings gave Johnson "authority with respect to all matters and to manage the Company and each Property Owner..." neglects the lead-in phrase limiting such authority "to the extent provided herein" (NYSCEF # 219 at 12; NYSCEF # 200, Section 5.1). As explained above, it has not been established that Johnson had authority to authorize the Refinancing without Cassaforte's prior written consent.
The Attorney Defendants' reliance on Art Cap. Grp., LLC v Neuhaus (70 A.D.3d 605 [1st Dept 2010]) for the idea that Pourtavoosi's work on the Refinancing is not actionable as it was within the scope of his proper functions as an attorney is unavailing as the plaintiffs have sufficiently pled Pourtavoosi's knowing involvement in Johnson's having provided the member consents to Sharestates. The Attorney Defendants fail to explain how such allegedly knowing involvement constitutes conduct done "in good faith and for the honest purpose of protecting" clients' interests (Art Cap. Grp., LLC, 70 A.D.3d at 606). That the Attorney Defendants deny plaintiffs allegations that Pourtavoosi knew the terms of the various operating agreements, including the necessity of obtaining the Cassaforte Authorization prior to completing the Refinancing, is unavailing on a motion to dismiss where the facts as alleged in the Complaint are accepted as true.
Causation and damages are adequately alleged in that Pourtavoosi's substantial assistance in preparing the member consents and otherwise handling the Refinancing for the Fee Owners and Johnson led to damages to the Fee Owners after Johnson allegedly converted $1.6 million (see e.g. InKine Pharm. Co. v Coleman, 305 A.D.2d 151, 152 [1st Dept 2003]) [finding that plaintiff "is not obliged to show, at this stage of the pleadings, that [it] actually sustained damages ... [it need only plead] allegations from which damages attributable to [defendant's conduct] might be reasonably inferred"] [quoting Tenzer, Greenblatt, Fallon & Kaplan v Ellenberg, 199 A.D.2d 45 [1st Dept 1993]). Addressing causation in a separate claim, the Attorney Defendants argue that "had [Pourtavoosi] declined the representation, Johnson would have simply retained another attorney" (NYSCEF # 219 at 23). This is too speculative at this early stage to negate the "but for" causation, however, particularly where another attorney may not have been willing to prepare, as alleged by plaintiffs, false member consents to present to Sharestates. This, and the question of whether the alleged $1.6 million loss can be attributed to any act of Pourtavoosi present questions of fact not properly determined at this stage.
2. Professional Negligence (Count Two)
The allegations in the Complaint, made by the Fee Owners, are sufficient to state a claim for professional negligence. "[A]n action for legal malpractice requires proof of three elements: the negligence of the attorney! that the negligence was the proximate cause of the loss sustained; and proof of actual damages" (Schwartz v Olshan Grundman Frome & Rosenzweig 302 A.D.2d 193, 198 [1st Dept 2003]). Negligence is shown if a plaintiff can demonstrate that "the attorney failed to exercise that degree of care, skill and diligence commonly possessed by a member of the legal profession, and that this failure caused damages" (Cosmetics Plus Group, Ltd. v Traub, 105 A.D.3d 134, 140 [1st Dept], lv denied 22 N.Y.3d 855 [2013]). It must also be established that "but for" the malfeasance or nonfeasance alleged the damage would not have been sustained (id. at 141). "While proximate cause is generally a question for the factfinder..., it can, in appropriate circumstances, be determined as a matter of law" (180 Ludlow Dev. LLC v Olshan Frome Wolosky LLP, 165 A.D.3d 594, 595 [1st Dept 2018]).
For similar reasons described above for the allegation of the breach of fiduciary duty, this claim also sets forth a claim, including on the alleged theory that Pourtavoosi's failure to prepare proper member consents for Johnson to present to Sharestates could demonstrate that Pourtavoosi "failed to exercise that degree of care, skill and diligence commonly possessed by a member of the legal profession" (Cosmetics Plus Group, Ltd., 105 A.D.3d at 140).
3. Violation of the Rule of Professional Conduct 1.13 (Count Three)
The allegations in the Complaint are insufficient to state a claim for violation of the rule of professional conduct 1.13. Even accepting, for argument's sake, that Pourtavoosi violated the directive of Rule 1.13 (b) for a lawyer to "proceed as is reasonably necessary in the best interest of the organization" or otherwise violated the rule, nonetheless "there is no private right of action against an attorney or law firm for violations of the Code of Professional Responsibility or disciplinary rules" (Weinberg v Sultan, 142 A.D.3d 767, 769 [1st Dept 2016]). Plaintiffs argue that a violation of Rule 1.13 "may impact the Attorney Defendants' ultimate liability ... as related to other claims" (NYSCEF # 225). To the extent plaintiffs' argument of the relevance of Rule 1.13 and need for associated discovery is correct as to other claims, plaintiffs have nonetheless failed to state an independent cause of action for the purported violation.
4.Aiding and Abetting Breach of Fiduciary Duty (Count Four)
The allegations in the Complaint are sufficient to state a claim for aiding and abetting breach of fiduciary duty with respect to FRF and the Fee Owners but are insufficient with respect to Cassaforte.
"A claim for aiding and abetting a breach of fiduciary duty requires: (1) a breach by a fiduciary of obligations to another, (2) that the defendant knowingly induced or participated in the breach, and (3) that plaintiff suffered damage as a result of the breach" (Kaufman v Cohen, 307 A.D.2d 113, 125 [1st Dept 2003]). While a "plaintiff is not required to allege that the aider and abettor had an intent to harm, there must be an allegation that such defendant had actual knowledge of the breach of duty" (id). "A person knowingly participates in a breach of fiduciary duty only when he or she provides 'substantial assistance' to the primary violator... [which] occurs when a defendant affirmatively assists, helps conceal or fails to act when required to do so, thereby enabling the breach to occur" (id. at 126). Attorneys, "in the exercise of their proper functions as such, shall not be civilly liable for their acts when performed in good faith and for the honest purpose of protecting the interests of their clients" (Art Cap. Grp., LLC, 70 A.D.3d at 606).
Plaintiffs fail to explain on what basis XYZ Holdings, XYZ Partners, or Johnson owed a fiduciary duty to Cassaforte; as the Attorney Defendants correctly point out, borrowers generally do not owe lenders a fiduciary duty (Oddo Asset Management v. Barclays Bank, PLC, 19 N.Y.3d 584 [2012]). Accordingly, plaintiffs fail to state a claim with respect to Cassaforte.
Respecting the other plaintiffs, the Complaint, read broadly, sufficiently alleges a fiduciary duty owed by Johnson to FRF and to the Fee Owners. The fiduciary duty owed to FRF, at minimum, is derived from FRF's joinder as Mezzanine Member of XYZ Partners with Johnson, as managing member of XYZ Partners (see e.g. Klein v. Wasserman, 2019 WL 2296027, at *4 [Del Ch 2019] [noting that by default "limited liability company managers owe fiduciary duties akin to those owed by directors of a corporation"]; compare Oddo Asset Management, 19 N.Y.3d 584 [finding that mezzanine notes were a form of debt so no fiduciary duty owed to note holder]). Meanwhile, Johnson and XYZ Holdings' fiduciary duty to the Fee Owners was adequately alleged because of Johnson's ownership of XYZ Group, which served as the Sponsor and Operating Manager of XYZ Holdings, which in turn served as the member-manager of the Fee Owners(see e.g. McKinnon Doxsee Agency, Inc. v Gallina, 187 A.D.3d 733, 736 [2d Dept 2020] [noting that "managing member of an LLC owes a fiduciary duty to the LLC... In addition, a non-member manager of an LLC owes a fiduciary duty to the LLC"] [citing New York Limited Liability Company Law 409 (a), which provides: "A manager shall perform his or her duties as a manager ... in good faith and with that degree of care that an ordinarily prudent person in a like position would use under similar circumstances"]).
Respecting Van Buren, the fiduciary duty is more direct as Johnson was explicitly named Manager pursuant to Section 5 of the operating agreement.
The Complaint's allegations that Pourtavoosi provided substantial assistance to Johnson who breached his fiduciary duties to FRF and the Fee Owners and thereby caused damages adequately state a claim for aiding and abetting a breach of fiduciary duty (NYSCEF # 153, fa 125-26). Plaintiffs also sufficiently alleged that Pourtavoosi's knowing involvement in Johnson's misrepresentation of "the ownership and/or the operational provisions of the Fee Owners" and Johnson's alleged failure to account for the Refinancing Net Proceeds (id., ¶'s 84, 79). The Attorney Defendants' reliance on Section 4.1 (f) of the operating agreement of XYZ Partners and Section 13 of the operating agreements of the Fee Owners (or respecting Van Buren, Section 14) is unavailing as those sections do not exclude fiduciary duties, or with respect to the Fee Owners, exculpate liability for a breach thereof for a breach involving bad faith or intentional misconduct.
5. Negligence (Count Five)
The allegations in the Complaint, made by Cassaforte and FRF, are insufficient to state a claim for negligence. "In order to establish a claim for negligence, a plaintiff must show that the defendant owed the plaintiff a duty and breached that duty, and that the breach proximately caused the plaintiff harm" (Katz v United Synagogue of Conservative Judaism, 135 A.D.3d 458, 459 [1st Dept 2016]). "An attorney does not owe a duty of care to his adversary or one with whom he is not in privity" (Aglira v Julien & Schlesinger, P.C., 214 A.D.2d 178, 183 [1st Dept 1995]).
In this case, plaintiffs cause of action fails, at minimum, for lack of duty. Plaintiffs do not address the basis for finding that the Attorney Defendants owed a duty to Cassaforte and FRF (NYSCEF# 225, 17-18). The Complaint's conclusory reference to "the applicable standard of care" also fails to indicate where such a duty would originate (NYSCEF # 153, ¶ 128). Plaintiffs' reliance on St. James Cap. Corp. v Breslow & Walker (1994 WL 284087, at *3 [Sup Ct, NY County 1994]) is unavailing. In St. James, the court denied a motion to dismiss a negligence claim against an attorney who was not in privity with the plaintiff. The court found that duty sufficient for a negligence claim could exist because defendant law firm, representing the debtor in a financing transaction, having indicated it would file certain security agreements benefiting plaintiff-lender, "agreed to take certain steps for plaintiff but failed to do so" (id. at 3). Here on the contrary, Cassaforte and FRF fail even to allege any such agreement that would extend a duty where they were otherwise not in privity with Pourtavoosi. Furthermore, plaintiffs' reliance on Bankers Tr. Co. v Cerrato, Sweeney, Cohn, Stahl & Vaccaro (187 A.D.2d 384, 385 [1st Dept 1992]) for the idea that an attorney may be held liable to third parties for wrongful acts if guilty of a tortious act is inapposite as that case analyzed a cause of action for the tort of misappropriation, which, unlike a claim for negligence, does not involve the element of duty (id.).
6. Tortious Interference with Contract (Count Six)
The allegations in the Complaint are sufficient to state a claim for tortious interference with contract, but only with respect to Cassaforte's claim. "To state a cause of action for tortious interference with contract, it is necessary to demonstrate the existence of a valid contract between the plaintiff and a third party, defendant's knowledge of that contract, defendant's intentional procurement of the third-party's breach of the contract without justification, actual breach of the contract, and damages resulting therefrom" (330 Acquisition Co., LLC v Regency Sav. Bank, F.S.B., 293 A.D.2d 314, 315 [1st Dept 2002]). A complaint fails to state a cause of action for tortious interference with contract when it fails to allege that an attorney has acted outside the scope of authority as agent (Little Best Twelve, Inc. v Zajic, 137 A.D.3d 540, 541 [1st Dept 2016]). In the presence of fraud or collusion, or of a malicious or tortious act, however, an attorney may be liable to third parties for purported injuries caused by services performed on behalf of a client or advice offered to that client (Burger v Brookhaven Med. Arts Bldg., Inc., 131 A.D.2d 622, 624 [2d Dept 1987]).
The existence of a valid contract is only pled with respect to Cassaforte. The Complaint states that this action is based on the Attorney Defendants' acts being significant factors in Johnson completing the Refinancing "without the required written consent from Cassaforte, in violation of Section ll.l(vii) of the" Cassaforte loan agreements (NYSCEF # 153, ¶ 134; NYSCEF #'s 204-06 - the Loan Agreements). The Loan Agreements referred to were with XYZ Partners as borrower and Cassaforte as lender and not any other plaintiff.
The Cassaforte Loan Agreements required Cassaforte's prior written consent before undertaking new debt. Plaintiffs adequately plead Pourtavoosi's knowledge that undertaking the Refinancing without Cassaforte's prior written consent constituted a breach of the Loan Agreements. That the Attorney Defendants deny plaintiffs' allegations that Pourtavoosi knew the terms of the Loan Agreements and various operating agreements, including the necessity of obtaining the Cassaforte Authorization prior to completing the Refinancing, is unavailing on a motion to dismiss where the facts as alleged in the Complaint are accepted as true.
Plaintiffs have also adequately pled that Pourtavoosi's actions in assisting Johnson with the Refinancing were "significant factors in causing the breach of the" Loan Agreements" and that "[a]s a direct and proximate result, Plaintiffs have suffered damages" (NYSCEF # 153, ¶ 134-35). The Attorney Defendants' reliance on Pursuit Inv. Mgmt. LLC v Alpha Beta Cap. Partners, L.P. (127 A.D.3d 580, 581 [1st Dept 2015]) for the idea that an attorney's conduct is not actionable "in the absence of fraud, collusion, malice or bad faith" is unavailing. As noted above for the breach of fiduciary duty claim, the Attorney Defendants fail to explain how Pourtavoosi's allegedly knowing involvement in Johnson's alleged misrepresentations to Sharestates constitutes conduct done in good faith (see e.g. Leiderman v Gilbert, 176 A.D.2d 525, 526 [1st Dept 1991] [declining to dismiss tortious interference with contract claim against attorney who was alleged to have made "deliberate falsehoods"]).
Finally, the Attorney Defendants' argument that Johnson's presentation of the False Development Certificate "was not relevant to the refinance closings" so that therefore plaintiffs "cannot show that any act by Attorney Pourtavoosi was the 'but for' cause of any alleged damages" is unavailing (NYSCEF # 233 at 13). Presumably the Attorney Defendants mean the False Development Certificate was not relevant because of their assertion that the Refinancing also closed respecting the two Fee Owners whose certificates to Sharestates correctly identified XYZ Holdings as member. The Attorney Defendants have not established that the certificates of the other two Fee Owners were correct, however, in that they attached consents that allegedly misrepresented that Johnson was thereby granted authorization to sign the Refinancing transaction documents, which the Attorney Defendants have not established was true as Cassaforte had not given prior written consent, and they also failed to identify FRF as a member of XYZ Partners (NYSCEF #'s 187-89, Exhibits C).
7. Contribution (Count Seven) and Indemnification (Count Eight)
The allegations of the Fee Owners in the Complaint are sufficient to state claims for contribution and indemnification.
When "two or more persons who are subject to liability for damages for the same personal injury, injury to property or wrongful death, may claim contribution among them whether or not an action has been brought or a judgment has been rendered against the person from whom contribution is sought." (CPLR 1401). "A party seeking contribution must show that the party from whom contribution is sought owes a duty either to him or to the injured party and that a breach of this duty has contributed to the alleged injuries" (Crimi v Black, 219 A.D.2d 610, 611 [2d Dept 1995]). Meanwhile, "the key element of a common-law cause of action for indemnification is ... [a] duty owed the indemnitee by the indemnitor... liability arises from the principle that everyone is responsible for the consequences of his own negligence, and if another person has been compelled ... to pay the damages which ought to have been paid by the wrongdoer, they may be recovered from him" (Raquet v Braun, 90 N.Y.2d 177, 183 [1997] [internal quotation marks and citations omitted]).
As the Fee Owners' claim for professional negligence has already been upheld at this stage, the motion to dismiss the contribution and indemnification claims is denied. The Fee Owners have properly stated a claim that the Attorney Defendants owed them duties, which were breached, and that the Fee Owners are entitled to recover damages equal to the "contributory negligence" of the Attorney Defendants or to indemnification "in whole or in part" (NYSCEF # 153, ¶ 137-40; 145).
The Attorney Defendants' reliance on Bd. of Educ. of Hudson City Sch. Dist. v Sargent, Webster, Crenshaw & Folleyill N.Y.2d 21, 26 [1987]) for the notion that "purely economic loss resulting from a breach of contract does not constitute 'injury to property' within the meaning of New York's contribution statute" is misplaced. The court takes notice of the Complaint in the Johnson Action, which, as plaintiffs point out, includes tort causes of action of breach of fiduciary duty (Count 6), fraudulent concealment (Count 12), and conversion (Count 13) by Cassaforte and FRF against, among others, the Fee Owners (NYSCEF # 230 in the Johnson Action). The Attorney Defendants respond that "[t]hese claims are meritless" (NYSCEF # 233 at 14). This is insufficient where, at this stage, the resolution of those claims in the Johnson action are still pending and, here, the Fee Owners' claims against the Attorney Defendants for breach of fiduciary duty and professional negligence may move forward. Further, the Attorney Defendants fail to explain the basis for their conclusory assertion that the tort claims "are redundant of the breach of contract claims" (id.).
CONCLUSION
In view of the above, it is
ORDERED that the Attorney Defendants' motion to dismiss Count One is denied except to the extent that dismissal of Cassaforte Limited and FRF 348 Quincy, LLC's claims is granted; and it is further
ORDERED that the Attorney Defendants' motion to dismiss Count Two is denied; and it is further ORDERED that the Attorney Defendants' motion to dismiss Count Three is granted; and it is further
ORDERED that the Attorney Defendants' motion to dismiss Count Four is denied except to the extent that dismissal of Cassaforte Limited's claim is granted; and it is further
ORDERED that the Attorney Defendants' motion to dismiss Count Five is granted; and it is further
ORDERED that the Attorney Defendants' motion to dismiss Count Six is denied except to the extent that dismissal of the claims of Cassaforte Limited, FRF 348 Quincy, LLC, XYZ Development II LLC, XYZ 42 Van Buren LLC, and XYZ 1535 Pacific LLC is granted; and it is further
ORDERED that the Attorney Defendants' motion to dismiss Count Seven and Eight is denied; and it is further
ORDERED that the motion of Sharestates Investments, LLC s/h/a Sharestates Investments DACL, LLC, and Toorak Capital Partners LLC to dismiss the second amended complaint as against them is denied; and it is further
ORDERED that based on the parties' stipulation of discontinuance (NYSCEF # 149), the caption is amended to reflect the dismissal of the Second Amended Complaint against defendants Am trust Financial Services, Inc., and Atlantis National Services, Inc. and shall read as follows: and it is further
ORDERED that plaintiffs shall serve a copy of this order with notice of entry on the Clerk of General Clerk's Office and the County Clerk, who are directed to mark their records to reflect the change in the caption; and it is further
ORDERED that such service upon the General Clerk's Office and the County Clerk shall be made in accordance with the procedures set forth in the Protocol on Courthouse and County Clerk Procedures for Electronically Filed Cases (accessible at the "E-Filing" page and on the court's website at the address (www.nycourts.gov/supctmanh).