Opinion
14514/2006.
Decided February 22, 2011.
Jonathan Scher, Esq., The Scher Law Firm, LLP, Carle Place, NY, Attorney for Plaintiffs.
Rodney Brown, Esq., Brown Whalen, New York, NY, Attorney for Intervenor-Plaintiff.
Edward A. White, Esq., Hartman Craven, LLP, New York, NY, Attorney for Defendant Fred Deutsch.
Scott Kossove, Esq., L'Abbate, Balkan, Colavita Contini, Garden City, NY, Attorney for Defendants Marcum Kliegman LLP and Proposed Defendants Ashe and Azuritti.
Peter Shapiro, Esq., Lewis Brisbois Bisgaard Smith LLP, New York, NY, Attorney for Proposed Defendants Ira Stechel and Wormser, Kiely, Galef Jacobs LLP.
Vincent Syracuse, Esq., Tannenbaum Helpern Syracuse Hirschtritt, New York, NY, Attorney for Proposed Defendants Flemming Zulack Williamson Zauderer LLP, Lupkin and Zauderer.
Ira Greenberg, Esq., Edwards Angell Palmer Dodge, New York, NY, Attorney for Proposed Defendants Barger Wolen, LLP and Levin.
Faust Goetz Schenker Blee LLP, New York, NY, Proposed Defendants Video Save LLC, Deutsch Family Trust No 1, Deutsch Family Trust No 2, The Deutsch Family LLC, DB Partners Inc., Margarita Holdings LLC, Pacific Flats II LLC, (Did not Appear) c/o Fred Deutsch, New York, NY, Attorney for Proposed Defendant Lilling Company, LLP.
The following papers numbered 1 to 17 read on this motion:Papers Numbered
Notice of Motion/Order to Show Cause/Petition/ Cross Motion and Affidavits(Affirmations)Annexed 1, 5 Opposing Affidavits (Affirmations) 8, 9, 11, 13, 16 Reply Affidavits(Affirmations) 3, 17 Other Papers (Memoranda of Law) 2, 4, 6, 7, 10, 12, 14, 15The instant action was initially commenced in May of 2006 by Diedrich Holtkamp, the limited partner of a real estate partnership, against the partnership, Parklex Associates ("Parklex"), Bruce C. Ratner (against whom the action was discontinued on June 15, 2006) and Arie Deutsch. Subsequently, in three amended complaints, additional limited partners were added as plaintiffs and additional defendants were added, including Parklex's general partner, Parklex Associates, Inc. (PAI), PAI's controlling principal, Fred Deutsch (Deutsch), and various family members and business enterprises of Deutsch (collectively the Deutsch Defendants), as well as the attorneys and accountants that assisted Deutsch, Parklex and PAI in effecting the sale, in May of 2006, of Parklex's primary asset, a commercial office building at 112-114 East 32nd Street in New York County (the Parklex Office Building). Plaintiffs now move for leave to file and serve a fourth amended complaint.
A more detailed description of the case can be found in prior decisions of this court rendered in this action ( see, e.g., Parklex Assoc. v Parklex Assoc., Inc., 15 Misc 3d 1125(A) [Sup Ct, Kings County 2007] on April 16, 2007 and April 23, 2007; Parklex Assoc. v Flemming Zulack Williamson Zauderer LLP, Sup Ct, Kings County, December 14, 2010, Demarest, J., index No. 30174/09.
The gravamen of the action is that the defendants colluded to defraud plaintiffs of their rightful portion of the proceeds of the 55 million dollar sale by, among other things, secreting the sale proceeds in shell entities, advancing allegedly fraudulent arguments regarding Deutsch's membership interest in Parklex and failing to file accurate tax returns. At the time of the sale, Parklex, Deutsch and PAI were represented by Sukenik, Segal Graff P.C. ("SS G"). In July of 2006, SS G, along with Deutsch and PAI, were named as defendants in the first amended complaint, requiring SS G to withdraw as counsel for Parklex and Arie Deutsch. In August of 2006, Flemming Zulack Williamson Zauderer LLP (the "Flemming Firm") were retained by Deutsch to represent himself, his son, Arie Deutsch, and two of his entities, FAL and 244 East. In September of 2006, the Flemming Firm was also retained to represent Parklex and PAI. In December of 2006, a second amended complaint was filed containing derivative allegations on behalf of Parklex and naming Parklex as plaintiff, as a result of which, in February of 2007, Barger Wolen, LLP (the "Barger Firm") was retained and substituted as counsel for Parklex. In May of 2007, a third amended complaint was filed which omitted Parklex as a plaintiff, reverting to the earlier caption reflecting a suit brought by the limited partners against the partnership. Although the Barger Firm was retained to represent Parklex, the Flemming Firm continued to represent Deutsch and PAI and Deutsch-related entities until August 13, 2009, when it withdrew as counsel and Hartman Craven LLP (the "Hartman Firm") was substituted as counsel.
The premise of plaintiffs' additional claims contained in the proposed fourth amended complaint is that Deutsch, with the assistance of various attorneys and accountants, fabricated and asserted a fraudulent "debt-to-equity conversion" defense whereby Deutsch claimed, as a result of his purchase of a "wrap" mortgage on the Parklex Office Building, to have acquired a greater interest in Parklex than that reflected in the Partnership Agreement and was therefore entitled to that portion of the proceeds from the sale of the Parklex Office Building that he took. The defense was founded upon the contention that Deutsch, as the sole shareholder of PAI, the general partner of Parklex, was the holder of a wraparound note and mortgage given by Parklex upon the purchase of the property, and that, upon the due date, instead of foreclosing on the wrap mortgage, the wraparound debt was converted into a 95% limited partnership interest in Parklex. This defense, supported by a sworn affidavit of Deutsch, dated June 7, 2006, was first propounded by SS G in response to Holtkamp's motion for appointment of a receiver, on June 8, 2006, and was later adopted by the Flemming firm in the answer and amended answer to plaintiffs' second amended complaint, dated March 2, 2007 and March 5, 2007, respectively, which contained a 34th and 35th counterclaim-cross-claim for damages based upon the wrap debt.
According to the proposed complaint, Deutsch acquired the shares of PAI in an asset purchase agreement and became the holder of the wrap in 1991 through 114 East 32nd Realty Corp., which he owned.
For a more in-depth discussion of the debt-to-equity defense, see this court's April 16, 2007 decision, Parklex Associates v Parklex Associates, Inc., 15 Misc 3d 1125(A) [Sup Ct, Kings County 2007], denying plaintiffs' motion to dismiss the debt-to-equity defense.
In August of 2007, the parties agreed to a litigation moratorium pending the exchange and analysis of documents and settlement negotiations, which lasted nearly two years and culminated in the execution of a settlement agreement. On April 13, 2009, this court issued an order approving the terms of the settlement, but issued another order that same day which sealed the terms of the settlement, noting that whereas every partner of Parklex had executed the settlement, "[t]he public has no interest in this matter and knowledge of the terms of settlement could be used to undermine performance." Deutsch ultimately defaulted upon the settlement and a confession of judgment for over $15 million, which was to be entered upon his failure to make timely payments, or upon the occurrence of other defined events of default, resulted in the entry of judgment in Supreme Court, New York County on July 20, 2009, which has not been fully satisfied. Pursuant to the terms of the settlement, the action was restored and litigation resumed.
Plaintiffs have now moved, pursuant to CPLR 3025 (b), for an order granting leave to serve and file a supplemental summons and fourth amended complaint, which contains new claims against both current and new parties. The proposed complaint also converts this action, characterized as a derivative action brought by the limited partners of Parklex, into a direct action, brought by Parklex Replacement General Partner Inc. ("PRGPI"), which replaced PAI as the general partner of Parklex. The proposed caption omits defendants Penny Baird, Arie Deutsch, Joshua Deutsch, SS G, Jehoshua Graff, 244 East LLC, Morgan 32 Holding, LLC and Voxonic Incorporated, against whom the action has been discontinued. Plaintiffs have deleted any allegations or claims against these defendants which were present in the third amended complaint and eight of the earlier causes of action, including the first cause of action in the third amended complaint for a declaratory judgment voiding the sale of the Parklex building, the second cause of action seeking a constructive trust upon 233 East 62nd Street, the third cause of action for an accounting, the sixth cause of action for breach of fiduciary duty against SS G, the ninth cause of action for legal malpractice against SS G, the sixteenth cause of action for aiding and abetting a breach of fiduciary duty against SS G and Graff and the thirty-first cause of action for unjust enrichment against Baird, all of which have been rendered moot by settlement or other intervening events.
As the original caption and the first amended complaint indicated, the instant action was not initiated as a derivative suit on behalf of the partnership, but was brought as a direct suit by the limited partners against the partnership. The second amended complaint named Parklex as a plaintiff, but the caption of the third amended complaint reverted to listing only partners of Parklex as plaintiffs though the complaint included derivative claims.
Plaintiffs erroneously state that they have added thirteen new causes of action to the proposed fourth amended complaint and dismissed seven causes of action. However, the third amended complaint contains thirty-two causes of action, yet the proposed fourth amended complaint contains only thirty-five causes of action. If, as plaintiffs claim, they truly dismissed seven causes of action from the third amended complaint and added thirteen new causes of action, the proposed complaint would contain thirty-eight causes of action. Rather, it appears that the plaintiffs are seeking to dismiss eight causes of action, add eleven new causes of action, amend a significant number of the causes of action to either add new parties or delete discontinued parties, and have mistakenly duplicated one cause of action, which appears in identical form twice. In particular, the proposed complaint eliminates the first, second, third, sixth, ninth, sixteenth, thirty-first and thirty-second causes of action currently in the third amended complaint. The proposed first, second, third, fourth, fifth, seventh, eighth, ninth, tenth, fifteenth, and thirty-fifth causes of action in the proposed fourth amended complaint are new. The proposed twenty-ninth and thirty-fifth causes of action are identical and, but for amended language discussing the proposed Deutsch entities, corresponds to the twenty-fifth cause of action in the third amended complaint.
The plaintiffs seek, however, to interpose new parties and new causes of action, claiming that such causes of action have only recently been discovered or ripened in the past several months. With respect to the proposed additional parties, plaintiffs move to add nine entities they claim were used by Deutsch to secret and divert money rightfully owed to Parklex, including Videosave LLC, Deutsch Hill Partners LLC, Deutsch Family Trust No. 1, Deutsch Family Trust No. 2, Deutsch Family LLC, DB Partners I LLC, DB Partners Inc., Margarita Holdings LLC and Pacific Flats LLC (collectively, "proposed Deutsch entities"). Plaintiffs also seek to add accountants and attorneys retained, at various points in time, by Deutsch. In particular, plaintiffs claim that James Ashe, a partner at defendant Marcum Kliegman LLP ("Marcum"), and Fran Azuritti, also an accountant at Marcum, and Lilling Company ("Lilling"), an accounting firm retained by Deutsch individually after Marcum was named a defendant in this action, should be added as defendants, alleging that they were the accountants who prepared false drafts of tax returns which helped Deutsch conceal and divert Parklex's money. Plaintiffs likewise claim that Mark Zauderer, Esq. and Jonathan Lupkin, Esq., partners at proposed defendant Flemming Firm, who were retained by Deutsch to represent him in this action from September 2006 through August 13, 2009, and Ira Stechel, Esq., a partner at proposed defendant law firm Wormser, Kiely, Galef Jacobs LLP (the "Wormser Firm"), who was retained prior to the commencement of this action as tax counsel, should be added, alleging that the proposed defendants assisted Deutsch in the creation and assertion of the purportedly fraudulent debt-to-equity defense. Plaintiffs also move to add the Barger Firm and its partner Michael Levin, Esq., retained to represent Parklex in February of 2007, after the second amended complaint converted the action into a derivative suit.
Plaintiffs also seek to add numerous new causes of action in the proposed amended complaint, some relating to current defendants and some of which are newly interposed against the proposed additional defendants. Against the proposed attorney defendants Stechel, the Wormser Firm, the Flemming Firm, Lupkin and Zauderer, a first cause of action for violation of Judiciary Law § 487 is alleged. A second cause of action for breach of fiduciary duty and a third cause of action for legal malpractice is alleged against the Barger Firm and Levin. Plaintiffs also propose to add a fourth cause of action for aiding and abetting a fraud against current accountant defendant Marcum and proposed accountant defendant Ashe, as well as against proposed attorney defendants Stechel and the Wormser Firm. Plaintiffs also seek to add four new causes of action solely against the accountant defendants: a fifth cause of action for gross negligence against Marcum and proposed defendants Azuritti and Ashe, a seventh cause of action for aiding and abetting fraud against Marcum and Ashe, an eighth cause of action for aiding and abetting a breach of fiduciary duty against Marcum, Azuritti and Ashe, and a ninth cause of action for aiding and abetting a breach of fiduciary duty against proposed defendant Lilling. The plaintiffs also propose to add a tenth cause of action to impose a constructive trust upon the shares of current defendants Videosave Inc. and Videosave.com Incorporated and the membership interests in proposed defendant Videosave LLC. Although not discussed by plaintiffs, the proposed complaint, in the fifteenth cause of action, contains a new cause of action against Deutsch for "diversion of partnership opportunity," alleging that Deutsch purchased a mortgage using Parklex partnership funds, referred to in the proposed complaint as the "Collateral Acquisition Corporation mortgage," for his own personal benefit.
As for the amended causes of action, in addition to deleting all references to the dismissed parties, plaintiffs seek to add Azuritti and Ashe to the sixth cause of action for accountant malpractice, currently brought only against Marcum in the eighth cause of action of the third amended complaint. Plaintiffs also seek to add all of the proposed Deutsch entities to the proposed twenty-seventh cause of action for conversion, the proposed twenty-eighth cause of action for use and occupancy fees and the proposed thirtieth cause of action for unjust enrichment.
The proposed twenty-seventh, twenty-eighth and thirtieth causes of action correspond to the twenty-third, twenty-fourth and twenty-sixth causes of action in the third amended complaint.
ANALYSIS
CPLR 3025 (b) provides: "A party may amend his pleading, or supplement it by setting forth additional or subsequent transactions or occurrences, at any time by leave of court or by stipulation of all parties. Leave shall be freely given upon such terms as may be just including the granting of costs and continuances." The Appellate Division, Second Department, has recently examined the requirements set forth in CPLR 3025 (b) and held that motions for leave to amend pleadings should be freely granted "unless the proposed amendment is palpably insufficient or patently devoid of merit" ( Lucido v Mancuso , 49 AD3d 220 , 222 [2d Dept 2008]; see Norman v Ferrara, 107 AD2d 739 [2d Dept 1985], Sleepy's Inc. v Orzechowski , 7 AD3d 511 [2d Dept 2004]). Rejecting a requirement that the plaintiff make an evidentiary showing of merit, the Second Department has explicitly held that "[t]he legal sufficiency or merits of a pleading will not be examined unless the insufficiency or lack of merit is clear and free from doubt"' ( Lucido at 227, quoting Sample v Levada , 8 AD3d 465 , 467-468 [2d Dept 2004]). When evaluating a motion for leave to amend a complaint to add a new cause of action, "the motion for leave to amend will be denied, in the absence of prejudice or surprise, only if the new cause of action would not withstand a motion to dismiss under CPLR 3211 (a) (7)" ( Lucido v Mancuso at 225 [2d Dept 2008], citing Norman v Ferrara, 107 AD2d 739 [2d Dept 1985]); see also Arcuri v Ramso, 7 AD3d 741 [2d Dept 2004], Nikac v Rukaj, 276 AD2d 537 [2d Dept 2000]) (discussing the barriers to a motion for leave to amend the complaint presented by prejudice and surprise)).
Plaintiffs' motion for leave to amend the complaint is unopposed to the extent that the proposed fourth amended complaint substitutes Parklex's new general partner, PRGPI, for the plaintiff limited partners suing on their own behalf and as members of a class, amends the caption to reflect the discontinuance against certain parties, removes Baird, Arie Deutsch, Joshua Deutsch, SS G, Graff, 244 East LLC, Morgan 32 Holding, LLC and Voxonic Incorporated from the action, removes seven causes of action alleged in the third amended complaint, namely, the first, second, third, sixth, ninth, sixteenth, and thirty-first causes of action, adds the proposed Deutsch entities and adds a proposed fifteenth cause of action against Deutsch for diversion of partnership opportunity. Because these aspects of the proposed fourth amended complaint are unopposed, leave to amend in accordance therewith is granted as there is no prejudice to any adverse party nor unreasonable delay in requesting the amendments to the complaint. It is noted, however, that the seventh cause of action for breach of fiduciary duty brought on behalf of limited partner Rosen is not viable as the new plaintiff, PRGPI, does not have standing to litigate an individual claim.
Proposed Attorney Defendants
Plaintiffs seek to interpose in their first cause of action claims against proposed attorney defendants Stechel, the Wormser Firm, the Flemming Firm, Lupkin and Zauderer, pursuant to Judiciary Law § 487. Plaintiffs allege that the Wormser Firm and Stechel, a partner at the firm, created the allegedly false debt-to-equity defense and directed the fabrication of documentation showing Deutsch had converted the wrap debt into a 94% equity interest in Parklex, thus entitling him to the majority of the proceeds of the sale of the Parklex Office Building. Although not asserted by the Wormser Firm and Stechel in court, the complaint alleges that the Wormser Firm and Stechel knew this argument to be false and knew that it was to be used to deceive the court. The complaint alleges that the argument was presented to this court by the Flemming Firm and its partners, Lupkin and Zauderer, who knew the argument to be false.
All prospective parties named in the cause of action were served with the motion at this court's direction and have submitted opposition. Stechel and the Wormser Firm have also cross-moved to supplement their opposition to plaintiffs' motion with an argument that plaintiffs' proposed claim is barred by the statute of limitations. As the cross-motion is unopposed, it is granted and the statute of limitations argument will be considered by the court.
At least in the Second Department, the statute of limitations for a Judiciary Law § 487 claim is the same as the statute of limitations for legal malpractice, which is three years ( see CPLR 214, Lefkowitz v Appelbaum, 258 AD2d 563 [2d Dept 1999]; Kuske v Gellert Cutler, P.C., 247 AD2d 448 [2d Dept 1998]; compare Guardian Life Ins. Co. of America v Handel, 190 AD2d 57, 62-63 [1st Dept 1993]] (cited by plaintiffs)). Because plaintiffs allege that Stechel and the Wormser Firm's alleged violations occurred in and before 2006, their claim is time-barred. As the plaintiff fails to "aver evidentiary facts establishing that the case falls within an exception to the Statute of Limitations," ( Savarese v Shatz, 273 AD2d 219 [2d Dept 2000](internal quotations omitted)), this cause of action cannot be interposed as against Stechel and the Wormser Firm.
As for the Flemming Firm, Lupkin and Zauderer, plaintiffs correctly contend that their claim is not time-barred as it relates to these proposed defendants. Because the debt-to-equity defense was not dismissed until December 1, 2009, and was never withdrawn by the Flemming Firm, it remained an effective defense throughout the Flemming Firm's representation of Deutsch, which ended on August 13, 2009.
However, the Judiciary Law § 487 claims are factually duplicative of the allegations brought against the Flemming Firm, Lupkin and Zauderer in a prior action pending before this court, brought by plaintiff Parklex under index No. 30174/09, entitled Parklex Associates v Flemming Zulack Williamson Zauderer LLP (the "Flemming Firm Action"). Plaintiff commenced that action by summons and notice on November 25, 2009, and filed and served a verified complaint in April 2010, alleging, inter alia, legal malpractice, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and aiding and abetting fraud. The complaint in the Flemming Firm Action contains identical allegations to those contained in the proposed cause of action plaintiffs seek to interpose in the instant action under Judiciary Law § 487, namely, that the Flemming Firm improperly asserted the allegedly false debt-to-equity defense.
The identical allegations are included in the third cause of action for aiding and abetting breach of fiduciary duty and the fourth cause of action for aiding and abetting fraud contained in the Flemming Firm Action's complaint.
Plaintiffs claimed in oral argument on October 26, 2010, that this cause of action must be interposed in the instant action, as relief sought under Judiciary Law § 487 must be obtained within the underlying action wherein the deceit or collusion took place. Although it has been held that the "[p]laintiff's remedy [under Judiciary Law § 487] for [an] alleged fraud by defendant law firms and attorneys in obtaining an adjournment of the trial of plaintiff's prior action against defendants' clients lies exclusively in that lawsuit itself . . . not a second plenary action'" ( Curtis v Scherer, 261 AD2d 158, 159 [1st Dept 1999], quoting Yalkowsky v Century Apts. Assocs., 215 AD2d 214, 215 [1st Dept 1995] (in which it was falsely represented by counsel that a certificate of occupancy had been issued, thus causing dismissal of plaintiff's prior suit)), an exception to that rule has been recognized in which "a separate lawsuit may be brought where the alleged perjury or fraud in the underlying action was merely a means to the accomplishment of a larger fraudulent scheme'" ( Specialized Indus. Serv. Corp. v Carter , 68 AD3d 750 , 751-752 [2d Dept 2009] quoting Newin Corp. v Hartford Acc. Indem. Co., 37 NY2d 211, 217). Reciting the general rule that a judgment obtained by fraud or false testimony may not be collaterally attacked in a separate plenary action but requires a motion to vacate the judgment in the underlying action, in Specialized, the court nevertheless found such larger fraudulent scheme to justify the collateral attack. Similarly, here, the alleged fraudulent representation made by counsel on Deutsch's behalf was merely ancillary to Deutsch's purported original scheme to defraud plaintiffs. See also Rock City Sound, Inc. v Bashian Farber, LLP , 74 AD3d 1168 (2d Dept 2010), in which the court also permitted a separate plenary action to proceed against the attorneys for legal malpractice and violation of Judiciary Law § 487 based upon advice by counsel in violation of an injunction and contrary to Business Corporation Law § 909.
Here, no adverse judgment has been obtained against plaintiffs and the merit of plaintiffs' underlying claims of fraud against Deutsch remain to be tested. A lawsuit has already been commenced against the Flemming Firm involving claims of malpractice and sounding in fraud. Thus, the instant action is distinguishable from the Curtis or Yalkowsky actions, wherein allegedly fraudulent judgments had been obtained which the court held required vacatur in the original action rather than commencement of a separate plenary action. In this case, a final judgment has not been obtained, and a prior pending action provides an adequate vehicle to litigate the alleged wrongs committed. Plaintiffs' motion to interpose the proposed first cause of action against the Flemming Firm, Zauderer and Lupkin, currently not parties in the underlying action, must therefore be denied ( see Colon v Gold, 166 AD2d 406, 407 [2d Dept 1990] (denying plaintiff leave to amend the complaint when an identical complaint naming defendant had already been served and answered)).
Moreover, based upon the history of this case and the court record, the proposed Judiciary Law § 487 claim is entirely without merit as to the Flemming Firm, Zauderer and Lupkin. Judiciary Law § 487 provides that "[a]n attorney or counselor who . . . [i]s guilty of any deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party . . .[i]s guilty of a misdemeanor, and in addition to the punishment prescribed therefor by the penal law, he forfeits to the party injured treble damages, to be recovered in a civil action." The primary purpose of Judiciary Law § 487 is to protect the integrity of the courts by enforcing the duty of all attorneys to be honest and truthful in performing the role of an advocate ( see Amalfitano v Rosenberg , 12 NY3d 8 , 14).
Plaintiffs allege that the Flemming Firm "knew or should have known that the Debt-To-Equity Defense was deceitful and fraudulent" (proposed complaint ¶ 194). In support of their allegation that the debt-to-equity defense is deceitful and fraudulent, plaintiffs refer to documents voluntarily produced during the litigation moratorium prior to the execution of the settlement agreement and this court's December 11, 2009 order, which they claim "determined the Debt-To-Equity Defense is utterly refuted by the documentary evidence produced by the Plaintiffs in support of their Motion" (proposed complaint ¶ 204). Plaintiffs' contention, with respect to this court's order, is entirely without merit. This court has, in fact, never made a final determination on the merits concerning the validity of the debt-to-equity conversion, and the issue has not been adjudicated. The December 11, 2009 order, cited by the plaintiffs, only grants plaintiffs' motion to dismiss the debt-to-equity affirmative defense "without opposition as reflected in the so-ordered stipulation executed on behalf of the parties." As the order makes clear, the plaintiffs' motion to dismiss the affirmative defense was only granted on consent in compliance with the agreement reached by the parties and does not establish that this court evaluated the documentary evidence and rendered a decision on the merits. The stipulation referred to in the December 11, 2009 order was dated one day earlier and signed by plaintiffs' counsel and Deutsch's counsel. It stated: "[t]he defendant Fred Deutsch agrees not to oppose the PRGPI's Motion to Dismiss (Motion Sequence No. 27), pursuant to CPLR Rule 3211 (a) (1), dismissing Cross-Claimants' Thirty Fourth (34th) Affirmative Defense and First Counterclaim to the extent it pleads that a 94% Debt/Equity Conversion took place," and further, "[b]y entering into this Stipulation, the Defendant Fred Deutsch neither makes any admissions as to any facts nor admits to any wrongdoing."
Furthermore, the Global Settlement Agreement approved by this court in April of 2009, which was reached only after extensive disclosure, incorporated the debt-to-equity conversion claim to the extent of acknowledging Deutsch's 49.5% limited ownership interest in Parklex. In the settlement agreement, plaintiffs expressly withdrew their objections to the "Debt to Equity Conversion Claim" (Global Settlement Agreement at 29 of 126). Plaintiffs' present attempt to claim fraud and misrepresentation on the part of the Flemming Firm, relating to a fact that was actually adopted by the limited partners, apparently for tax purposes, in the settlement, is duplicitous. "The doctrine of in pari delicto mandates that the courts will not intercede to resolve a dispute between two wrongdoers." Kirschner v KPMG, LLP , 15 NY3d 446 , 464 (2010). Assuming any merit to the allegations against the attorneys who represented Deutsch in this litigation, plaintiffs share the responsibility for any fraud upon the court and any resultant adverse consequences to the partnership.
The settlement, which was approved by this court on April 13, 2009, was subsequently sealed. However, the document is part of the court record.
Notwithstanding the general rule permitting liberal amendment of pleadings, the court should not permit the pleading of causes of action or joinder of parties where the court's own records indicate the lack of merit to the proposed amendments. This court recognizes that plaintiffs' claim under Judiciary Law § 487 is premised upon pre-answer arguments made in reliance upon the debt-to-equity conversion defense beginning in June 2006, before the Flemming Firm was engaged in this case, in order to defeat plaintiffs' request for "restraining orders, injunctions, appointment of a receiver and the appointment of a conservator" (proposed complaint ¶¶ 206-207), much of which was denied for various reasons, although plaintiffs did obtain the requested restraining orders with respect to the bank accounts of Parklex and PAI. The defense was subsequently adopted in motions and pleadings filed by the Flemming Firm. It is well-established, however, that the "[a]ssertion of unfounded allegations in a pleading, even if made for improper purposes, does not provide a basis for liability under Judiciary Law § 487" ( Ticketmaster Corp. v Lidsky, 245 AD2d 142, 143 [1st Dept 1997], quoting Thomas v Chamberlain, D'Amanda, Oppenheimer Greenfield, 115 AD2d 999, 999-1000 [4th Dept 1985]) (internal quotations omitted)). Moreover, plaintiffs' contention that their losses were the result of counsel's alleged misrepresentation is pure speculation, unsupported by the facts subsequently revealed of Deutsch's diversion of the Parklex sale proceeds through his complex network of businesses, the identities of which were not learned until later in the litigation. The failure to plausibly identify a loss proximately caused by the attorney's alleged deceit or chronic delinquency mandates dismissal of a Judiciary Law § 487 cause of action ( see Knecht v Tusa , 15 AD3d 626, 627 [2d Dept 2005]; Boglia v Greenberg , 63 AD3d 973, 975-76 [2d Dept 2009]). Thus, the cause of action sought to be interposed would not survive a motion to dismiss and should not be permitted.
Plaintiffs cite the New York Rules of Professional Conduct and the Rules of the Chief Administrator in support of their contention that the Flemming Firm, Lupkin and Zauderer made a frivolous claim, within the meaning of 22 NYCRR 130-1.1 and 130-1.1-a, and failed to correct the record, in violation of Rule 3.3 of Professional Conduct and DR 7-102 [B] of the Code of Professional Responsibility. Plaintiffs' reliance is misplaced. Not only is there no private right of action for a violation of the Code of Professional Responsibility ( see Arkin Kaplan LLP v Jones , 42 AD3d 362 , 366 [1st Dept 2007], citing Kantor v Bernstein, 225 AD2d 500, 501-502 [1st Dept 1996]), but the mere fact that the debt-to-equity defense may not be meritorious does not mean that the defense was frivolous ( see Northern Adirondack Central School District v L.H. La Plante Co. Inc., 229 AD2d 764, 766 [3d Dept 1996]). Moreover, the Code of Professional Responsibility, which was in effect during the Flemming Firm's representation of Deutsch, required that an attorney "represent a client zealously" (DR 7-101, former 22 NYCRR § 1200.32) and "preserve the confidences and secrets of a client" (DR 4-101, former 22 NYCRR § 1200.19; Mancheski v Gabelli Group Capital Partners, Inc ., 22 AD3d 532, 534 [2d Dept 2005]). While this duty is qualified both by the terms of DR 4-101 [c] [5] and by the duty to the court imposed by DR 7-102 [B] [1] ( People v DePallo, 275 AD2d 60, 62 [2d Dept 2000]), plaintiffs' arguments would effectively make an attorney the guarantor of the truth and accuracy of facts conveyed to him or her by the client. Deutsch had already submitted his sworn affidavit describing the debt-to-equity conversion before the Flemming Firm was retained. The claim was supported by the Asset Purchase Agreement dated September 25, 1991 (Ex. M to plaintiffs' motion). It is not reasonable to suggest that the attorneys had a duty to second-guess or independently verify the factual representations of their client. The alleged misrepresentation regarding Deutsch's status as a limited partner contained in a letter to SDL Brokerage was possibly not actually false as it appears that the wrap mortgage was acquired and held by Deutsch through corporate entities, rather than personally, and his partnership interest may also have been held beneficially ( see, e.g., Parklex Assoc. v Parklex Assoc., Inc., 15 Misc 3d 1125(A) at 7-8 [Sup Ct, Kings County April 16, 2007]; Amended Answer to Second Amended Complaint, 34th Affirmative Defense and Counterclaim). Moreover, whereas, in the course of disclosure, as plaintiffs admit, the inconsistent tax returns were provided to them, and will be available at trial to impeach the purportedly fraudulent claims, no actual fraud has been perpetrated upon the court, nor appears to have been intended by the attorneys.
The proposed fourth amended complaint also adds the Barger Firm and its partner, Levin, as new parties to the action, asserting two causes of action against them: the proposed second cause of action for breach of fiduciary duty and the proposed third cause of action for legal malpractice. In the breach of fiduciary duty claim, plaintiffs allege that the Barger Firm, and its partner, Levin, which represented Parklex from February 2007 until August 2009, breached their fiduciary duty when they "failed to take the necessary steps to prevent the Defendant Fred from wasting the sale proceeds of the sale of the Parklex Office Building" (proposed complaint ¶¶ 212-213). In the legal malpractice claim, plaintiffs make identical factual allegations, claiming that the Barger Firm and Levin breached their professional duties by failing "to take the necessary steps to prevent the Defendant Fred from wasting the sale proceeds of the sale of the Parklex Office Building" (proposed complaint ¶¶ 222-223).
In order to state a cause of action for a breach of fiduciary duty, a plaintiff must allege "the existence of a fiduciary relationship, misconduct by the defendant, and damages that were directly caused by the defendant's misconduct"'( Guarino v N. Country Mortg. Banking Corp. , 79 AD3d 805 [2nd Dept 2010], quoting Kurtzman v Bergstol , 40 AD3d 588 , 590 [2d Dept 2007]). Here, plaintiffs' proposed breach of fiduciary duty claim is predicated upon the same facts as the legal malpractice claim and does not allege distinct damages, and accordingly must be dismissed as duplicative of the malpractice claim ( see Sitar v Sitar , 50 AD3d 667 , 670 [2d Dept 2008], Mecca v Shang, 258 AD2d 569, 570 [2d Dept 1999]).
To state a cause of action for legal malpractice, plaintiffs must allege that the attorney "failed to exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession and that the attorney's breach of this duty proximately caused plaintiff to sustain actual and ascertainable damages" and "but for" the defendants' conduct, plaintiffs would have prevailed in the underlying matter or would not have sustained any ascertainable damages( Guarino, 79 AD3d 805). Plaintiffs have alleged that the Barger Firm and Levin breached their "professional duty to Parklex when [they] failed to take the necessary steps to prevent the Defendant Fred from wasting the sale proceeds of the sale of the Parklex Office Building" (proposed complaint ¶¶ 222-223), and, but for that breach of their professional duty, "Fred was able to waste approximately Eighteen Million Dollars ($18,000,00.00) of the sale proceeds from the sale of the Parklex Office Building to the detriment of Parklex" (proposed complaint ¶¶ 224-225).
In opposition to plaintiffs' motion, the Barger Firm and Levin contend that they were only retained to represent Parklex as a nominal defendant and that a court order dated June 29, 2006, put into place months before they even began representation of Parklex, already restrained and enjoined the defendants "from distributing any funds in any and all accounts held or maintained in the name of [Parklex] or Parklex Associates Corp. without further order of this court" (Ex. B, Levin Opp.). Levin and the Barger Firm contend they had no duty to ensure that their client, Parklex, complied with the order. The proposed additional defendants note that, under the terms of their engagement letter, they represented only Parklex, the limited partnership, in "defense of the [instant] action", and not PAI, the general partner, or its principal Deutsch, both of whom, at the time the Barger Firm and Levin were retained, were represented by the Flemming Firm. Thus, the Barger Firm and Levin only owed a duty to Parklex, but did not have control over Parklex which, at that time, was controlled by its general partner PAI. The power to divest that control from PAI was in the hands of the plaintiff limited partners under the terms of the Partnership Agreement. As the Barger Firm and Levin note in their brief, attorneys acting in good faith are not liable for the actions of their clients and certainly are not liable for the actions of those who are not their clients ( see Weisman, Celler, Spett Modlin v Chadbourne Parke, 271 AD2d 329, 330 [1st Dept 2000]). Moreover, an attorney has no duty to investigate and discover alleged fraud perpetrated upon its client or "to draw up a list of possible misuses of plaintiff's money, and then unleash a team of investigators, lawyers, and accountants to see if any misuse theory held water" ( Schimenti v Whitman Ransom, 208 AD2d 470 [1st Dept 1994] (internal quotations omitted)).
Furthermore, plaintiffs fail to plead a cause of action for malpractice by failing to allege any specific instances in which the Barger Firm or Levin affirmatively acted to harm Parklex or waste Parklex's assets and by failing to allege facts sufficient to establish that defendants' acts or omissions proximately caused plaintiffs' alleged damages (see CPLR 3211 [a] [7]; Hallman v Kantor , 72 AD3d 895, 897 [2d Dept 2010]). In fact, plaintiffs have not even alleged that Deutsch diverted any of Parklex's assets during the Barger Firm's representation of Parklex. Accordingly, plaintiffs' motion for leave to interpose the proposed third cause of action for legal malpractice against the Barger Firm and Levin is denied.
Proposed Accountant Defendants
The plaintiffs further move to add Ashe and Azuritti, the individual accountants at Marcum who allegedly performed work for Parklex, to the proposed sixth cause of action for accountant malpractice, currently brought only against Marcum, based upon an alleged breach of their professional duty to act in Parklex's best interests from 1998 through 2006 by drafting accurate tax returns and providing tax advice (proposed complaint ¶ 285-318). In opposition, defendants Ash and Azuritti contend that any attempts to add them to the action are barred by the statute of limitations as plaintiffs were aware of Ashe and Azuritti's involvement over three years ago, in or about May or June of 2007, when Marcum produced billing records revealing Ashe and Azuritti's involvement.
The statute of limitations to commence an action for accountant malpractice is three years (see CPLR 214), beginning "upon the client's receipt of the accountant's work product since this is the point that a client reasonably relies on the accountant's skill and advice" ( Ackerman v Price Waterhouse, 84 NY2d 535, 541). The proposed complaint alleges that Marcum, Ashe and Azuritti's services to Parklex ended in 2006, requiring any claims against them to be brought by 2009, at the latest. Plaintiffs, however, claim that Ashe and Azuritti may now be added to the proposed sixth cause of action for accounting malpractice as Marcum, with whom Ashe and Azuritti are joined in interest, is already a co-defendant. Plaintiffs rely upon the relation-back doctrine, as codified in CPLR 203, to permit Ashe and Azuritti to be added to the cause of action. The Court of Appeals has adopted a three-part test for evaluating when the relation-back doctrine permits new parties to be added to an earlier pleading even when the statute of limitations for the new parties has expired:
In order for a claim asserted against a new defendant to relate back to the date a claim was asserted against another defendant, the plaintiff must establish that (1) both claims arose out of the same conduct, transaction, or occurrence, (2) the new party is united in interest with the original defendant, and by reason of that relationship, can be charged with notice of the institution of the action and will not be prejudiced in maintaining his or her defense on the merits by virtue of the delayed, and otherwise stale, assertion of those claims against him or her, and (3) the new party knew or should have known that, but for a mistake by the plaintiff as to the identity of the proper parties, the action would have been timely commenced against him or her as well. The "linchpin" of the relation-back doctrine is whether the new defendant had notice within the applicable limitations period. ( Alvarado v Beth Israel Medical Center, 60 AD3d 981, 982 [2d Dept 2009], citing Buran v Coupal, 87 NY2d 173, 178).
Here, the plaintiffs have adequately established that Ashe and Azuritti may be added as defendants as the claim for accounting malpractice against them meets the standards set forth in the relation-back test. As the employees and/or partners of Marcum who actually prepared the allegedly defective or fraudulent accounting documents, clearly, Ashe and Azuritti are united in interest with Marcum and certainly had notice of the institution of the action. The claims against Ashe and Azuritti arise out of exactly the same transaction as the claims against Marcum. Plaintiffs also provide a reasonable explanation for the failure to timely commence the action against Ashe and Azuritti, contending that the statute of limitations was tolled because the parties entered into a moratorium on litigation between August 2007 and April 2009, in which all parties agreed to forbear from making any motions in the action in order to encourage settlement prospects. They claim that the action only became active again in September of 2009, after Deutsch's settlement agreement was voided.
Although reliance upon a defendant's "purported assurances that the matter would be settled is insufficient to justify a finding of estoppel [from asserting a statute of limitations] [where] there is no evidence that the defendant engaged in protracted settlement negotiations for the purpose of lulling the plaintiff into inactivity" ( Green v Albert, 199 AD2d 465, 467 [2d Dept 1993]; see also Murphy v Wegman's Food Mkts., 140 AD2d 973, 974 [4th Dept 1988]("To be entitled to an estoppel, the plaintiff must show that by engaging in protracted settlement discussions, defendant intended to lull the plaintiff into inactivity and to induce plaintiff to continue negotiations until after the statute of limitations had run")), here, the parties, including Marcum, the party with which Ashe and Azuritti are united in interest, had expressly agreed to the litigation moratorium, which precluded the joinder of these additional parties since a motion would have been required. Furthermore, Ashe and Azuritti knew or should have known that they were potential parties since Marcum's responses to plaintiffs' interrogatories, dated May 18, 2007, and verified by Ashe, identified "Jim Ashe" and "Francine Azzarati" as the two individuals who "were provided with the Wraparound Mortgage by Fred" (Graff Aff., Exhibit N). Thus, plaintiffs may add Ashe and Azuritti as new parties to the proposed sixth cause of action. In the absence of any prejudice to the proposed defendants, to preclude such pleading under these circumstances would be inconsistent with the statutory purpose "to secure the just, speedy and inexpensive determination of . . . [the] proceeding" ( Buran v Coupal, 87 NY2d 173, 181 quoting CPLR 104).
The plaintiffs also move to add four new causes of action involving Ashe and Azuritti. Plaintiffs propose a fourth cause of action against, inter alia, Marcum and Ashe for aiding and abetting a fraud, alleging that, in response to a March 30, 2006 letter from plaintiff Holtkamp, requesting copies of his Parklex K-1 tax statements, Marcum and Ashe, at the direction of proposed defendants Stechel and the Wormser Firm, created false tax returns for the years 1999 through 2005, "that revised the limited partnership interests of Parklex's limited partners to reflect a conversion of the Wrap Debt to a ninety-five percent (95%) limited partnership interest for the Defendant Fred in Parklex in August 2006" (proposed complaint, ¶ 232). The proposed complaint further alleges that Ashe and Marcum "knew or should have known that the conversion never occurred" (proposed complaint, ¶¶ 237-238) and "knew or should have known that the tax returns were false" (proposed complaint, ¶¶ 241-242). In support of their motion, plaintiffs include billing records from Marcum, which lists work completed by Ashe for Parklex.
The statute of limitations for aiding and abetting fraud is the same as the statute of limitations for fraud. CPLR 213 (8) states that, for an action based upon fraud, "the time within which the action must be commenced shall be the greater of six years from the date the cause of action accrued or two years from the time the plaintiff . . .could with reasonable diligence have discovered it." Here, the plaintiffs allege that the fraud was committed in August of 2006, so the claim is not barred by the statute of limitations.
Marcum and Ashe, however, oppose the proposed cause of action as incapable of withstanding a motion to dismiss pursuant to CPLR 3211 (a) (7) as pleaded. "In order to plead properly a claim for aiding and abetting fraud, the complaint must allege: (1) the existence of an underlying fraud; (2) knowledge of this fraud on the part of the aider and abettor; and (3) substantial assistance by the aider and abettor in achievement of the fraud'" ( Stanfield Offshore Leveraged Assets, Ltd., v Met. Life Ins. Co., 64 AD3d 472, 476 [1st Dept 2009], quoting UniCredito Italiano Spa v JPMorgan Chase Bank, 288 FSupp2d 485, 502 [SD NY 2003]). Actual, not constructive knowledge, must be alleged ( Goldson v Walker , 65 AD3d 1084 [2d Dept 2009]). Although fraud claims are subject to the heightened pleading requirements set forth in CPLR 3016 (b), "the pleading requirements should not be narrowly construed, and a plaintiff alleging an aiding-and-abetting fraud claim may plead actual knowledge generally, particularly at the prediscovery stage, so long as such intent may be inferred from the surrounding circumstances" ( DDJ Mgt., LLC v Rhone Group L.L.C. , 78 AD3d 442 [1st Dept 2010], citing Oster v Kirschner , 77 AD3d 51 [1st Dept 2010]).
In their opposition, Marcum and Ashe contend that plaintiffs have only alleged constructive knowledge, and not actual knowledge, because of their use of the phrases "knew or should have known that the conversion never occurred" (proposed complaint, ¶¶ 237-238) and "knew or should have known that the tax returns were false" (proposed complaint, ¶¶ 241-242). Although not specifically alleging actual knowledge, actual knowledge can be inferred from the totality of the allegations in the proposed complaint, which alleges that Marcum, as Deutsch's accountant from 1998 to 2006, knew that it was assisting in the perpetration of a fraud when Ashe was asked to revise tax returns to reflect an allegedly fraudulent debt-to-equity conversion. Mindful of its obligation to liberally permit amendment of the pleadings, this court finds that plaintiffs have adequately stated a cause of action for aiding and abetting fraud. Thus, plaintiffs' motion for leave to amend the complaint to add the proposed fourth cause of action as against Marcum and Ashe is granted.
Stechel and the Wormser Firm also oppose their inclusion in the proposed fourth cause of action. The proposed cause of action alleges that Stechel and the Wormser Firm "directed the Defendant Ashe to create false tax returns for the years 1999, 2000, 2001, 2002, 2003, 2004 and 2005 that revised the limited partnership interests of Parklex's limited partners to reflect a conversion of the Wrap Debt to a ninety-five percent (95%) limited partnership interest for the Defendant Fred in Parklex in August 2006" (proposed complaint ¶¶ 231-232). The complaint further alleges that Stechel and the Wormser Firm "knew or should have known that the conversion never occurred" and "knew or should have known that the tax returns were false" (proposed complaint ¶¶ 236-237, 239-240). Plaintiffs contend that Stechel and the Wormser Firm, as Deutsch's individual tax counsel since 2000, had actual knowledge that the debt-to-equity defense was false and that Marcum's time records, which reflect a conversation between Stechel and Azuritti on July 1, 2006 relating to Parklex, demonstrate that Stechel instructed Marcum and Ashe to prepare the purportedly false tax returns.
In opposition, Stechel and the Wormser Firm contend that plaintiffs fail to meet the heightened pleading standards for fraud of CPLR 3016 (b) and that Marcum's time records are insufficient to support an inference of fraud. They further argue that, even if Deutsch had committed a fraud by setting forth the allegedly false debt-to-equity conversion defense, plaintiffs have failed to state a cause of action against Stechel and the Wormser Firm, as they have failed to allege any facts supporting the inference that these proposed defendants were even aware of the alleged fraud, let alone facts supporting the claim that Stechel and the Wormser Firm substantially assisted in its perpetration. Plaintiffs have also failed to allege that any parties relied upon the alleged fraud to their detriment.
Defendants' contentions that plaintiffs have failed to set forth sufficient facts is rejected as plaintiffs are not required to prove the evidentiary merit of their claims under a motion for leave to amend pursuant to CPLR 3025 (b) ( see Lucido v Mancuso, supra at 227). Moreover, upon evaluation of the elements required for aiding and abetting fraud (s ee Stanfield Offshore Leveraged Assets, Ltd., v Met. Life Ins. Co., 64 AD3d 472, 476 [1st Dept 2009]), this court finds that the plaintiff should be permitted to assert this cause of action against Stechel and the Wormser Firm as defendants have not demonstrated that the claim is clearly lacking in merit. The plaintiffs have adequately alleged that Deutsch committed a fraud by creating false documents to support his contention that he owned a majority interest in Parklex and was entitled to the proceeds from the sale of the Parklex Office Building. Plaintiffs further allege that Stechel and the Wormser Firm, as Deutsch's tax counsel since 2000, knew of the alleged fraud by virtue of their lengthy relationship with Deutsch, and assisted in the perpetration of the fraud by directing Marcum and Ashe to create false documents. In light of New York policy to liberally permit amendments of pleadings, these allegations are sufficiently particular to state a cause of action for aiding and abetting fraud.
Plaintiffs also move to add a proposed fifth cause of action against Marcum, Ashe and Azuritti for gross negligence, alleging that the parties were grossly negligent in failing to file tax returns and in preparing inaccurate tax returns reflecting the debt-to-equity conversion. The statute of limitations for gross negligence is three years. The accountants are alleged to have prepared the inaccurate tax returns in 2006, more than three years prior to the filing of this motion. However, the claim is not time-barred against Ashe and Azuritti under the relation-back doctrine as the claim against them arises out of the same chain of events as the existing accounting malpractice claim, contained in the proposed sixth cause of action, against Marcum, and Ashe and Azuritti were certainly on notice of the action and had a reasonable expectation that, but for the litigation moratorium, they would have been added to the action earlier. Plaintiffs' negligence claim against Marcum is not time-barred as the new proposed claim relates back to the existing claim for accounting malpractice against Marcum and is therefore deemed to have been interposed at the time the initial claim against Marcum was filed (see CPLR 203 (f)).
Defendants correctly contend, however, that the negligence claim is "patently devoid of merit" under the standard of CPLR 3205 (b) because it is duplicative of the accounting malpractice claim contained in the proposed sixth cause of action. A review of the allegations in the proposed fifth and sixth causes of action reveals that both causes of action seek relief based on defendants' failure to draft true and accurate tax returns. Thus, plaintiffs' motion to add the proposed fifth cause of action for gross negligence is denied as the claim is duplicative of the proposed sixth cause of action for malpractice which is viable as to all of these defendants ( see Feldman v Finkelstein Partners, LLP , 76 AD3d 703 , 705 [2d Dept 2010]; Rock City Sound, Inc. v Bashian Farber, LLP , 74 AD3d 1168 , 1171-1172 [2d Dept 2010]).
Plaintiffs further move for leave to add the proposed seventh cause of action against Marcum and Ashe for aiding and abetting a fraud, alleging that Marcum and Ashe disclosed false and misleading documents, which they presented as filed tax returns to "Plaintiff Rosen" in or about 2002, but which were not actually filed. This proposed cause of action is denied as patently devoid of merit as the claim belongs to Rosen individually, against whom the fraud was allegedly perpetrated, and not to Parklex. As the proposed fourth amended complaint converts the action into a direct action in which Parklex Associates is the only plaintiff, Rosen lacks standing to interpose his claim in the action. The proposed cause of action is also barred by the statute of limitations as the alleged fraud occurred in 2002 and had already been discovered in 2006, when the complaint was filed alleging that Parklex had failed to file tax returns.
Plaintiffs move to add a proposed eighth cause of action against Marcum, Ashe and Azuritti for aiding and abetting a breach of fiduciary duty, alleging that they assisted Deutsch in his breach of his fiduciary duty to file accurate tax returns as the controlling principal of Parklex's general partner. Plaintiffs' motion for leave to add this cause of action is also denied as duplicative of the proposed sixth cause of action for malpractice as they both seek relief for identical allegations arising out of the same transaction ( see Leon Petroleum, LLC v. Carl S. Levine Associates, P.C., 2011 WL 105868 [2d Dept 2011]; Feldman v Finkelstein Partners, LLP 76 AD3d 703 , 705 [2d Dept 2010]; Rock City Sound, Inc. v Bashian Farber, LLP , 74 AD3d 1168 , 1171-1172 [2d Dept 2010]).
Plaintiffs move to add the proposed ninth cause of action against Lilling, as an accountant for Deutsch, for aiding and abetting a breach of fiduciary duty. "A cause of action [alleging the] aiding and abetting [of a] breach of fiduciary duty merely requires a prima facie showing of a fiduciary duty owed to plaintiff . . . a breach of that duty, and defendant's substantial assistance . . . in effecting the breach, together with resulting damages'" ( Monaghan v Ford Motor Co. , 71 AD3d 848 , 850 [2d Dept 2010], quoting Yuko Ito v Suzuki , 57 AD3d 205 , 20 [1st Dept 2008]). "Substantial assistance occurs when a defendant affirmatively assists, helps conceal or fails to act when required to do so, thereby enabling the breach to occur. However, the mere inaction of an alleged aider and abettor constitutes substantial assistance only if the defendant owes a fiduciary duty directly to the plaintiff" ( Kaufman v Cohen, 307 AD2d 113, 126 [1st Dept 2003] (citations omitted)). "Actual knowledge, as opposed to merely constructive knowledge, is required and a plaintiff may not merely rely on conclusory and sparse allegations that the aider or abettor knew or should have known about the primary breach of fiduciary duty'" ( Bullmore v Ernst Young Cayman Islands , 45 AD3d 461 [1st Dept 2007], quoting Global Minerals Metals Corp. v Holmes , 35 AD3d 93 , 101-102 [1st Dept 2006]).
Plaintiffs allege that Lilling was the accounting firm hired to prepare Deutsch's individual tax returns in 2006. Plaintiffs claim that Deutsch breached his fiduciary duty to Parklex by converting the proceeds of the Parklex sale and that Lilling knowingly participated in the breach. Specifically, the proposed ninth cause of action alleges that "Defendant Lilling's participation included, but is not limited to actions regarding the drafting of the Defendant Fred's tax returns and assisting the Defendant Stechel in the preparation of tax filings with the IRS" (proposed complaint ¶ 355). In opposition, Lilling correctly contends that the plaintiffs' motion should be denied as the proposed cause of action fails to allege that Lilling had actual knowledge of Fred's breach of fiduciary duty to Parklex and fails to articulate any damages suffered by plaintiff as a consequence of Lilling's drafting of Fred's personal tax returns. There is no suggestion that Lilling owed a duty directly to Parklex.
The plaintiffs' sparse allegations and conclusory statements are inadequate to sustain a cause of action for aiding and abetting a breach of Deutsch's fiduciary duty. The proposed complaint does not even allege that Lilling had knowledge of Deutsch's fiduciary duty to plaintiff. The attorney's affirmation submitted in support of plaintiffs' motion alleges only constructive knowledge, claiming that "Lilling knew or should have known that Deutsch and his entity PAI were the general partner [ sic] of Parklex in 2006" (Graff Affirmation at 20). The attorney's affirmation submitted in reply further speculates that Lilling gained actual knowledge through the questions it "surely asked . . . prior to drafting tax returns," asserting that "[t]hose questions were certainly answered honestly by Deutsch" (Graff Reply Affirmation to Lilling at 3). Such speculation is insufficient to support an inference of actual knowledge. The proposed cause of action also fails to allege how Lilling substantially assisted the fraud or even that Deutsch's individual tax returns were inaccurate. Rather, it is simply asserted that, by preparing and filing Deutsch's individual 2006 tax returns, Lilling aided Deutsch in secreting Parklex's assets. Accordingly, notwithstanding the liberal pleading standards afforded plaintiffs, the motion to add the proposed ninth cause of action is denied as the pleading is deficient.
Lastly, plaintiffs' proposed thirty-fifth cause of action for breach of fiduciary duty against Deutsch and PAI is rejected as identical to, and thus duplicative of, plaintiffs' proposed twenty-ninth cause of action, and plaintiffs are denied leave to add it to their fourth amended complaint.
CONCLUSION
The motion for leave to amend is granted in part and denied in part. Plaintiffs are granted leave to file and serve a fourth amended complaint in compliance with this decision within thirty days of the date of this order.
This constitutes the decision and order of the court.