Opinion
Index No. 151586/2021 MOTION SEQ. Nos. 004 005
12-08-2022
MARCUM LLP, Plaintiff, v. L'ABBATE, BALKAN, COLAVITA & CONTINI, L.L.P., MARIANNE S. CONKLIN Defendants.
Unpublished Opinion
DECISION + ORDER ON MOTION
Joel M. Cohen Judge:
HON. JOEL M.COHEN:
The following e-filed documents, listed by NYSCEF document number (Motion 004) 80, 81, 82, 83, 84, 85,88,94,95,97,98, 106 were read on this motion to DISMISS
The following e-filed documents, listed by NYSCEF document number (Motion 005) 89, 90, 91, 92, 93, 96, 99, 100, 101, 102, 103, 104, 105, 108 were read on this motion for LEAVE TO AMEND COMPLAINT
This is a legal malpractice action brought by Plaintiff Marcum LLP ("Marcum") against Defendants L'Abbate, Balkan, Colavita & Contini, LLP's ("L'Abbate") and Marianne Conklin ("Conklin") (collectively, "Defendants").
On December 2, 2021, this Court granted in part Defendants' motion to dismiss the original complaint (NYSCEF 55). That decision dismissed Plaintiffs claim relating to its partial loss of insurance coverage because it was based on an impermissibly speculative theory of proximate cause (the "Coverage Claim"). Plaintiffs claim against Conklin was also dismissed because no specific allegations were asserted against her. Plaintiffs remaining claim sought recovery of legal fees paid to L'Abbate in connection with allegedly negligent work and compensation for its increased legal expenses arising out of L'Abbate's late withdrawal as counsel (the "Excess Legal Fee Claim"). The decision noted that "[b]ecause dismissal of [the] claim [against Conklin] is based on a pleading deficiency rather than on the merits, the dismissal is without prejudice to seeking leave to amend the Complaint to cure the deficiency" (id.)
Defendants filed a motion to reargue, which was denied on June 17, 2022 (NYSCEF 107).
On February 11, 2022, Plaintiff filed its First Amended Complaint (NYSCEF 70 [the "FAC"]), without seeking leave to amend. Defendants moved to dismiss the FAC (Mot. Seq. 004). Defendants argued in their motion to dismiss, and elsewhere (see NYSCEF 71), that the FAC is improper because Plaintiff disregarded this Court's decision dismissing any claim founded upon partial loss of insurance coverage and violated the Court's specific directive that Marcum was required to seek permission to amend its claim against former individual Defendant Conklin. During the briefing of the motion to dismiss, Plaintiff filed a motion for leave to file its amended complaint (Mot. Seq. 005), which is the same amended complaint filed on February 11, 2022.
DISCUSSION
A. Motion to Amend
CPLR 3025(a) provides that "[a] party may amend [its] pleading once without leave of court within twenty days after its service, or at any time before the period for responding to it expires, or within twenty days after service of a pleading responding to it." There is no dispute that Plaintiff filed the FAC within twenty days of Defendants filing their Answer.
However, the Court did direct Plaintiff to seek leave to file an amendment against Conklin. Accordingly, Plaintiff should have proceeded by seeking leave to amend in the first instance. Plaintiff remedied this defect by filing Motion Sequence 005 seeking leave to amend. In those circumstances, the most efficient course is to grant the motion to amend and then assess the merits of the FAC in connection with Defendants' motion to dismiss.
Accordingly, Plaintiffs motion for leave to amend is granted.
B. Defendants' Motion to Dismiss
In considering a motion to dismiss a complaint pursuant to CPLR 3211(a)(7), the court must accept the facts as alleged in the complaint as true, accord the plaintiff the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory (Mehrhof v Monroe-Woodbury Cent. School Dist., 168 A.D.3d 713, 714 [2d Dept 2019]).
a. Coverage Claim
Defendants' motion to dismiss the FAC as it relates to the Coverage Claim is granted. In its new complaint, Plaintiff still alleges that Defendants committed malpractice by: failing to timely produce relevant documents in discovery; negligently producing privileged and protected materials; failing to comply with court orders in the Litigation requiring Marcum to produce all responsive information by deadlines in 2016; and by withdrawing from the representation of Marcum in the Litigation just months before trial with a motion for sanctions pending (FAC ¶77). However, Plaintiff now abandons its argument that the grand jury information as contained in the Declarations and Supplemental Production should have been produced prior to the April 2016 document production deadline, and that Defendants' failure to timely abide by discovery obligations led to a damaging chain of events (NYSCEF 1 ¶28, ¶49(a) [Complaint]). Plaintiff now claims instead that the grand jury information should never have been provided to the Liquidators, or its own Insurers (FAC ¶31, ¶38-41, ¶45, ¶50-51, ¶63, ¶67, ¶77). Regardless of the theory, and its conflict with Plaintiffs prior position, the amendment does not make the Coverage Claim any less speculative.
Under the prior knowledge provisions of Marcum's insurance policies, Marcum was obligated to disclose to its Insurers its involvement in a grand jury proceeding (NYSCEF 8, 9). Further, the Investigation itself, and in particular the Marcum employees interviewed by prosecutors in the Investigation, were matters of public record. Thus, while the Clawback motion in the underlying Litigation was never decided due to settlement, L' Abbate argued-as Plaintiff argues here-that these materials were immune from discovery due to grand jury secrecy rules. In opposition, the Liquidators cited to numerous contemporaneous press reports covering the Investigation and associated grand jury proceedings into NIR, as evidence that the grand jury privilege was not warranted (see Conway v Marcum & Kliegman, LLP, et al, NY County Index No. 652236/2014, Dkt Nos. 539 (June 24, 2009 Forbes article), 540 (June 24, 2009 Wall Street Journal article), 541 (February 26, 2010 Wall Street Journal article), 542 (February 26, 2010 Connecticut Post article), 543 (Investigation Interview List filed April 13, 2012).
In the Original Complaint, Marcum alleged that when L'Abbate made its supplemental production of documents in June 2020, which included the "responsive, non-privileged" Grand Jury information, it also invertedly produced other (non-specified) materials subject to attorney-client privilege (Compl. ¶¶22-23), and L'Abbate filed a motion to claw back the privileged documents (id. ¶24). In the Amended Complaint, Marcum alleges that L'Abbate should have never produced the Grand Jury information, in addition to other privileged information, and all of these documents were subject to the claw back motion (Amend Compl. ¶¶41-46). The claw back motion was filed together with a motion to seal (Conway, et al. v Marcum & Kliegman LLP, et al., Index No. 652236/2014 (Sup Ct New York County) (Mot. Seq. 015)). The branch of the motion requesting sealing/redating was granted (dkt. 615). Thus, the court is unable to determine exactly which documents were subject to the claw back motion. In any event, it is clear that L'Abbate sought to claw back at least some of the grand jury information as evidenced by the Liquidators' response.
Plaintiffs amendments, including the allegations with respect to Conklin, assume that if L'Abbate had withheld the grand jury documents, despite concluding that they were non-privileged and responsive to discovery requests, the Liquidators would have never requested or compelled those documents, nor would Marcum's insurers ever have learned of the grand jury investigation, despite the Investigation being in the public record. Plaintiff cannot avoid its own failure to disclose this information to its Insurers by arguing that its attorneys should have helped conceal it. Thus, even if the Court were to accept Plaintiffs new theory of negligence, the malpractice claim remains impermissibly speculative, e.g., that but-for L'Abbate's conduct, Marcum's Insurers would have fully funded (or contributed more to) the settlement. Plaintiffs re-configured legal malpractice claim is still defective and Defendants' motion to dismiss the Coverage Claim is, again, granted.
Indeed, as noted in the December 2, 2021 Decision and Order, Plaintiff argued at oral argument "that the Insurers knew about the purportedly withheld information prior to L'Abbate's late document production, but the late production opened the door for the Insurers to change their mind. Essentially, Plaintiffs argue that L'Abbate's misstep gave the Insurers an opportunity to act in bad faith. Such a proximate causation theory remains impermissibly speculative" (NYSCEF 55 at 6 n.3).
b. Excess Fee Claim
Marcum's proposed amended Excess Fee Claim has two parts: (1) recovery of legal fees paid to L'Abbate in connection with allegedly negligent work (which Plaintiff refers to as "disgorgement"), and (2) compensation for its increased legal expenses arising out of L'Abbate's late withdrawal as counsel (the "Legal Fees" claim).
Plaintiff seeks disgorgement of legal fees on the ground that L'Abbate purportedly operated under a conflict of interest, was incompetent, and was disloyal, citing to Baugher v Cullen and Dykman, LLP (173 A.D.3d 959, 961 [2d Dept 2019]). In that case, the court held that "[a] cause of action for forfeiture of legal fees based on an attorney's discharge for cause due to ethical violations may be maintained independent of a cause of action alleging legal malpractice or breach of fiduciary duty, and does not require proof or allegations of damages" (see also Ulico Cas. Co. v Wilson, Elser, Moskowitz, Edelman & Dicker, 56 A.D.3d 1, 13 [1st Dept 2008] [noting that where there were factual issues as to whether attorney had operated under a conflict of interest, the issue of whether the attorney should be required to disgorge the compensation received during the period of alleged disloyalty would be properly entertained on a full record after trial]).
Here, Plaintiff does not allege disgorgement as an independent cause of action. Moreover, L'Abbate was not discharged for cause from representing Marcum. The FAC only claims that when L'Abbate placed its insurance carrier on notice of the sanctions motion, this "effectively discharge[d] L'Abbate for cause" (FAC ¶ 85) (emphasis added). In fact, L'Abbate moved to be relieved as Marcum's counsel due to the potential conflict and the motion was not decided because the Litigation settled two days after it was filed (see Conway v Marcum & Kliegman, LLP, et al, NY County (Index No. 652236/2014), Dkt Nos. 605, 611, 617). Furthermore, there was no finding in the underlying Litigation that L'Abbate violated any disciplinary rule, and the sanctions motion was never heard due to the settlement. The fact that L'Abbate acknowledged a conflict of interest as the reason for withdrawal does not indicate that there was a violation, only the existence of a potential claim. Finally, L'Abbate has submitted unrebutted evidence that it did not charge legal fees for any work associated with the Sanctions Motion, the Clawback Motion, or the Withdrawal Motion, and thus neither Marcum nor its insurers incurred these costs (NYSCEF 60 [Rice Affidavit, ¶7, ¶9, ¶13]). Accordingly, the claim for disgorgement is dismissed.
Turning to the Legal Fees claim, Plaintiff seeks damages for the additional attorneys' fees paid to Hodgson Russ (who had already been retained as co-counsel) to prepare to first-chair the trial of the Litigation after L'Abbate's withdrawal as counsel, and attorney's fees incurred by having to retain outside coverage counsel at the law firm of Reed Smith LLP to represent Marcum in a coverage dispute with its insurers. However, according to Defendants, under Marcum's primary insurance policy, Marcum was responsible for the first $2 Million in loss amounts, which are defined to include defense costs, inclusive of L'Abbate's legal fees, and settlements (see NYSCEF 8). Defendants contend that any excess legal costs incurred as a result of the matters alleged in the Complaint were borne by Marcum's insurers, not Marcum itself. Marcum disputes factual predicate of Defendants' argument. This is not an issue that can be resolved on a motion to dismiss. Thus, the motion to dismiss the Legal Fees branch of the Excess Fee Claim is denied. The issue, including the applicability of the collateral source rule, can be addressed on a more complete factual record on summary judgment or at trial.
Accordingly, it is
ORDERED that Plaintiffs Motion for Leave to File its First Amended Complaint (Mot. Seq. 005) is granted; it is further
ORDERED that Defendants' motion to dismiss (Mot. Seq. 004) is granted with respect to all branches of the single cause of action asserted in the First Amended Complaint other than the Legal Fees claim (as to which the motion is denied); it is further
ORDERED that Defendants answer the First Amended Complaint within 30 days of the date of this Decision and Order; and it is further
ORDERED that the parties appear for a preliminary conference on January 17, 2023, at 10:30 a.m., with the parties circulating dial-in information to chambers at SFC-Part3@nycourts.gov in advance of the conference.
If the parties agree on a proposed preliminary conference order in advance of the conference date (consistent with the guidelines in the Part 3 model preliminary conference order, available online), they may file the proposed order and email a courtesy copy to chambers with a request to so-order in lieu of holding the conference.
This constitutes the Decision and Order of the Court.