…issue of collateral estoppel concerning a matter previously litigated…

In Gobindram v Ruskin Moscou Faltischek, P.C., 175 AD3d 586, 589-91 [2d Dept 2019], the state court considered the issue of collateral estoppel concerning a matter previously litigated in the federal bankruptcy court. The court held:

“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 N.Y.3d 446, 464, 912 N.Y.S.2d 508, 938 N.E.2d 941). “[T]he principle that a wrongdoer should not profit from his own misconduct is so strong in New York that … the defense applies even in difficult cases and should not be weakened by exceptions” (id. at 464, 912 N.Y.S.2d 508, 938 N.E.2d 941 [internal quotation marks omitted] ). “The defense requires intentional conduct on the part of the plaintiff” (Sacher v. Beacon Assoc. Mgt. Corp., 114 A.D.3d 655, 657, 980 N.Y.S.2d 121; see Kirschner v. KPMG LLP, 15 N.Y.3d at 474, 912 N.Y.S.2d 508, 938 N.E.2d 941).

Scales of justice illustrating article about legal malpractice.

Collateral estoppel precludes a party from relitigating in a subsequent action or proceeding an issue raised in a prior action or proceeding and decided against that party, whether or not the tribunals or causes of action are the same (see Buechel v. Bain, 97 N.Y.2d 295, 303, 740 N.Y.S.2d 252, 766 N.E.2d 914; Shifer v. Shifer, 165 A.D.3d 721, 723, 85 N.Y.S.3d 92). There must be an identity of issue which has necessarily been decided in the prior action and is decisive of the present action, and there must have been a full and fair opportunity to contest the decision now said to be controlling (see Buechel v. Bain, 97 N.Y.2d at 303–304, 740 N.Y.S.2d 252, 766 N.E.2d 914; Shifer v. Shifer, 165 A.D.3d at 723, 85 N.Y.S.3d 92).

Here, the federal courts in the plaintiff’s bankruptcy proceeding finally adjudicated a mixed issue of law and fact identical to that raised by the in pari delicto defense asserted by the defendants in the current legal malpractice action, i.e., the plaintiff’s culpability in connection with the filing of the inaccurate bankruptcy petition. Those courts found that the plaintiff knowingly and intentionally made a false and fraudulent statement under oath by swearing that he had read the SOFA and that it was true and correct, and that the plaintiff’s alleged reliance on the defendants to accurately prepare the bankruptcy submissions did not negate his fraudulent intent. These findings established that the plaintiff was in pari delicto with the defendants to the extent that he alleges they acted negligently in preparing and filing the inaccurate bankruptcy petition. Accordingly, we agree with the Supreme Court’s determination granting that branch of the defendants’ motion which was to dismiss so much of the legal malpractice cause of action as sought to recover damages for the defendants’ preparation and filing of the inaccurate bankruptcy petition based on the doctrines of collateral estoppel and in pari delicto.

However, we disagree with the Supreme Court’s determination granting that branch of the defendants’ motion which was to dismiss so much of the legal malpractice cause of action as sought to recover damages for the defendants’ failure to amend the bankruptcy petition. The findings of the federal courts regarding the knowing and fraudulent conduct on the plaintiff’s part related solely to the initial filing; they made no determination that the plaintiff acted knowingly and fraudulently in failing to file an amended petition. Accordingly, that part of the plaintiff’s legal malpractice cause of action is not subject to dismissal on the grounds of collateral estoppel and in pari delicto.

As an alternative ground for affirmance (see Parochial Bus Sys. v. Board of Educ. of City of N.Y., 60 N.Y.2d 539, 545–546, 470 N.Y.S.2d 564, 458 N.E.2d 1241), the defendants contend that the legal malpractice cause of action should have been dismissed in its entirety pursuant to CPLR 3211(a)(7), since the parties’ evidentiary submissions on the motion established that the plaintiff hired subsequent counsel who had ample opportunity to rectify their alleged error in this regard (see e.g. Perks v. Lauto & Garabedian, 306 A.D.2d 261, 262, 760 N.Y.S.2d 231). This contention lacks merit.

On 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 plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory” (Leon v. Martinez, 84 N.Y.2d 83, 87–88, 614 N.Y.S.2d 972, 638 N.E.2d 511; see Nonnon v. City of New York, 9 N.Y.3d 825, 827, 842 N.Y.S.2d 756, 874 N.E.2d 720). “When evidentiary material is considered, the criterion is whether the proponent of the pleading has a cause of action, not whether [she or] he has stated one, and, unless it has been shown that a material fact as claimed by the pleader to be one is not a fact at all and unless it can be said that no significant dispute exists regarding it, … dismissal should not eventuate” (Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 275, 401 N.Y.S.2d 182, 372 N.E.2d 17).

Here, the record reveals that the plaintiff did not retain the services of new counsel until December 2011. By that time, the bankruptcy trustee had already noted inconsistencies in the petition and requested an accounting relating to the omitted tax refund transfers, and the plaintiff’s creditors had commenced the adversary proceeding. Giving the plaintiff the benefit of every favorable inference (see Leon v. Martinez, 84 N.Y.2d at 87–88, 614 N.Y.S.2d 972, 638 N.E.2d 511), this time line suggests that the defendants, not the subsequent attorney, represented the plaintiff at the time when a voluntary amendment to the petition could have significantly reduced the prospect of a finding that the plaintiff made a false and fraudulent statement in the bankruptcy petition (see In re Tully, 818 F.2d 106, 111 [1st Cir.]; Matter of Kilson, 83 B.R. 198, 203 [D. Conn.]). Accordingly, at this preliminary stage of the litigation, the defendants have failed to conclusively demonstrate that the plaintiff’s subsequent attorney had a sufficient opportunity to correct their alleged error in failing to amend the petition, such that they did not proximately cause any damages flowing from that error (see generally Tooma v. Grossbarth, 121 A.D.3d 1093, 1096, 995 N.Y.S.2d 593; Grant v. LaTrace, 119 A.D.3d 646, 647, 990 N.Y.S.2d 227).

We find unpersuasive the defendants’ additional alternative contention that the legal malpractice cause of action was properly dismissed pursuant to CPLR 3211(a)(3) because that cause of action belongs to the bankruptcy estate and the plaintiff lacked standing to assert it. “On a defendant’s motion to dismiss the complaint based upon the plaintiff’s alleged lack of standing, the burden is on the moving defendant to establish, prima facie, the plaintiff’s lack of standing” (BAC Home Loans Servicing, LP v. Rychik, 161 A.D.3d 924, 925, 77 N.Y.S.3d 522; see CPLR 3211[a][3]; MLB Sub I, LLC v. Bains, 148 A.D.3d 881, 881–882). “[T]he motion will be defeated if the plaintiff’s submissions raise a question of fact as to its standing” (U.S. Bank N.A. v. Clement, 163 A.D.3d 742, 743, 81 N.Y.S.3d 116 [internal quotation marks omitted]; see MLB Sub I, LLC v. Bains, 148 A.D.3d at 882, 50 N.Y.S.3d 410).

Here, in response to the defendants’ prima facie showing that the plaintiff’s legal malpractice cause of action was the property of the bankruptcy estate (see Wright v. Meyers & Spencer, LLP, 46 A.D.3d 805, 849 N.Y.S.2d 274; Williams v. Stein, 6 A.D.3d 197, 198, 775 N.Y.S.2d 255; In re Strada Design Assoc., Inc., 326 B.R. 229, 237–240 [S.D. N.Y.]), the plaintiff raised a question of fact as to whether the bankruptcy trustee had abandoned the cause of action in accordance with Bankruptcy Code (11 USC) § 554(a) and had authorized the plaintiff to pursue it. Accordingly, dismissal of the legal malpractice cause of action for lack of standing is not available at this juncture.

R. A. Klass
Your Court Street Lawyer

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Plaintiff claimed attorney malpracticed with regard to a settlement

In Freeman v Brecher, 2017 NY Slip Op 07949 [1st Dept Nov. 14, 2017], the plaintiff claimed that the attorney malpracticed with regard to a settlement. In affirming the dismissal of the case, the appellate court held that,

Plaintiff’s claim for legal malpractice in connection with an underlying settlement fails to state a cause of action in the absence of allegations that the “settlement … was effectively compelled by the mistakes of [defendant] counsel” (Bernstein v. Oppenheim & Co., 160 A.D.2d 428, 430, 554 N.Y.S.2d 487 [1st Dept.1990] ) or the result of fraud or coercion (see Beattie v. Brown & Wood, 243 A.D.2d 395, 663 N.Y.S.2d 199 [1st Dept.1997] ). Plaintiff’s equivocal denial of knowledge of the terms of the settlement is flatly contradicted by the clear terms of the settlement agreement (see Bishop v. Maurer, 33 A.D.3d 497, 499, 823 N.Y.S.2d 366 [1st Dept.2006], affd. 9 N.Y.3d 910, 844 N.Y.S.2d 165, 875 N.E.2d 883 [2007] ). Additionally, plaintiff’s speculative and conclusory allegations of proximately caused damages cannot serve as a basis for a legal malpractice claim (see Pellegrino v. File, 291 A.D.2d 60, 63, 738 N.Y.S.2d 320 [1st Dept.2002], lv. denied 98 N.Y.2d 606, 746 N.Y.S.2d 456, 774 N.E.2d 221 [2002] ). Plaintiff’s cause of action for breach of fiduciary duty arising from the same conduct was correctly dismissed as duplicative of the legal malpractice claim (see Garnett v. Fox, Horan & Camerini, LLP, 82 A.D.3d 435, 436, 918 N.Y.S.2d 79 [1st Dept.2011]; InKine Pharm. Co. v. Coleman, 305 A.D.2d 151, 152, 759 N.Y.S.2d 62 [1st Dept.2003] ).”

The Producer: overselling available interests

The Rehearsal Onstage (detail), c. 1874, by Edgar Degas (1834–1917) illustrating article by Richard Klass about overselling available interests.opens IMAGE file
The Rehearsal Onstage (detail), c. 1874, by Edgar Degas (1834–1917).

Mel Brooks’ movie and musical The Producers may have been a fictional story of fraudsters selling more shares in the production of their Broadway show “Springtime for Hitler” than actually existed, but such fraudsters exist in real life, overselling available interests not only in Broadway productions, but in every type of investment, including real estate.

In this modern day The Producers story, a particular real estate broker (we’ll give him the name “Bob”) had a plan. The idea behind this particular investment was simple: purchase a house in Passaic, New Jersey; fix it up; and then resell it for a profit—the classic real estate “ flip. ” This broker solicited a number of investors. Each investor would purchase a membership interest in a limited liability company [LLC]. With the funds provided by the members, the LLC would buy the house. A contractor-partner would be hired to renovate the house. Each investor was promised a certain percentage of the net proceeds from the ultimate sale of the house. Unfortunately, the real estate market tanked, construction costs soared and the investment became a huge loss before construction was ever completed.

New Jersey state court action

One of the investors (we’ll call him “John”) brought a lawsuit in the Superior Court in New Jersey for breach of contract, misappropriation of funds, and fraud. In that case, the judge appointed a special fiscal agent (similar to a court-appointed receiver) to manage the operations of the house, list the house for sale, and take all steps necessary to sell the house and distribute the net proceeds to the LLC’s investors.

Real estate broker files for bankruptcy

Bob filed for personal bankruptcy in the New Jersey Bankruptcy Court to avoid his liability to the investors. John filed a lawsuit (known as an adversary proceeding) against Bob in the New Jersey bankruptcy case to have Bob’s liability in this house-investment-gone-wrong declared “nondischargeable.” (The adversary proceeding here was a mini-lawsuit inside of the bankruptcy case, intended to have the effect that Bob would remain liable to John for the collapse of the real estate deal.) In the adversary proceeding, John alleged that Bob brought too many investors into the deal without telling the other investors. A settlement was reached between John and Bob in the “adversary proceeding” and John negotiated with the bankruptcy trustee to purchase the house directly from the trustee to recoup some of his (John’s) losses.

Another investor (we’ll call her “Sally”) who lost money in the same Passaic real estate deal then sued John (now the owner of the Passaic real estate) in New York City’s Civil Court, claiming that John defrauded Sally by not including her in the buy-out of the house. This is when John sought help from Richard A. Klass, Your Court Street Lawyer. The aim was to have Sally’s lawsuit, brought in New York, dismissed.

Lack of jurisdiction in the New York Civil Court

There is a basic concept involving any court system that a particular court maintains the authority (“jurisdiction”) to make decisions and orders over a particular controversy.

According to New York’s Civil Practice Law and Rules [CPLR] Section 302, New York State courts may exercise jurisdiction over nonresidents under certain circumstances, when the defendant:

1. Transacts any business within the state or contracts anywhere to supply goods or services in the state; or 2. Commits a tortious act within the state, except as to a cause of action for defamation of character arising from the act; or 3. Commits a tortious act without the state causing injury to person or property within the state.

There is a separate rule as to when New York City’s Civil Court may exercise jurisdiction over cases because it is considered a court of “limited” jurisdiction (See Civil Court Act Section 202).

In asking the judge to dismiss the New York Civil Court case, Richard A. Klass argued that any action that could be brought by Sally must be brought in the State of New Jersey, and not in New York. The project-house was located in New Jersey; the LLC was a New Jersey entity; both the New Jersey Superior Court and New Jersey Bankruptcy Court had pending cases involving the house and the LLC; and all of the events transpired in New Jersey. It was urged that New York was the wrong forum for Sally to bring this dispute, citing to Epstein v. Sirivejkul, 48 NY2d 728 [1979]; Irrigation and Industrial Development Corp. v. Indag S.A., 37 NY2d 522 [1975].

The Civil Court judge agreed with the arguments of Richard A. Klass and determined that the New York Civil Court lacked jurisdiction over the case. The judge specifically found that the transaction in dispute occurred in New Jersey and the plaintiff presented no allegations that there was tortious conduct within New York State; also, the fact that there were existing proceedings in New Jersey courts confirmed the conclusion that New Jersey was the proper forum for any dispute. The court then dismissed the plaintiff’s case.

 
by Richard A. Klass, Esq.

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copyr. 2013 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.comcreate new email with any questions.
Prior results do not guarantee a similar outcome.

R. A. Klass
Your Court Street Lawyer

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Constructive Fraud

When property is transferred to a stranger for no consideration, there is a presumption that the transaction was unfair. Rosevear v. Sullivan, 47 AD 421, 62 NYS 447 (2d Dept. 1900), “and where one party has the advantage of the other, then the burden is on the other party to furnish satisfactory proof that the transaction was in all respects fair.”  Id at 423; Arakjinjian v. Arakian, 268 AD 41, 48 NYS2d 501 (1st Dept. 1944); Greenfield v. Greenfield, 123 NYS2d 19 (Sup. Ct., Kings Co. 1953).

An explanation of the reason for the shifting of the burden of proof is provided in Greenfield, infra at page 21, quoting Green v. Roworth, 113 NY 462:

“As was said by Judge Hand in Cowee v. Cornell, 75 NY [91] 99: ‘We return, then, to the question whether this case was one for constructive fraud.  It may be stated as universally true that fraud vitiates all contracts, but as a general thing it is not presumed, but must be proved by the party seeking to relieve himself of an obligation on that ground.  Whenever, however, the relations between the contracting parties appear to be of such a character as to render it certain that they do not deal on terms of equality, but that, either on the one side from superior knowledge of the matter derived from a fiduciary relation, or from overmastering influence, or, on the other, from weakness, dependence, or trust justifiably reposed, unfair advantage in a transaction is rendered probable, there the burden is shifted, the transaction presumed void, and it is incumbent upon the stronger party to show affirmatively that no deception was practiced , no undue influence was used, and that all was fair, open, voluntary, and well understood.’ “

The holding of the cases requires that the burden of proof should be shifted to the defendant/transferee of property to prove at the onset of trial, “that no deception was practiced, no undue influence was used, and that all was fair, open, voluntary and well understood.”

– R. A. Klass
Your Court Street Lawyer

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