LOUIS GALPERN and EVA GALPERN, Plaintiffs,
-against- DE VOS & CO. PLLC, Attorneys and Counselors and LLOYD DE VOS,
Esq., Defendants.
10-CV-1952 (CBA) (JMA)
UNITED STATES DISTRICT COURT FOR THE EASTERN
DISTRICT OF NEW YORK
2011 U.S. Dist. LEXIS 117095
September 30, 2011, Decided
September 30, 2011, Filed
NOTICE: NOT FOR
PUBLICATION
CASE SUMMARY:
OVERVIEW: The
amended complaint did not properly plead the identity of the speaker in the
fraud cause of action. Although the validity of the accord was now disputed, a
representation based on a good faith misinterpretation of the legal effect of
an agreement did not provide a basis for a fraud claim. Although the validity of
the accord was disputed, a representation based on a good faith
misinterpretation of the legal effect of an agreement did not provide a basis
for a fraud claim. Therefore, the clients failed to state fraud with
particularity as required by Fed. R. Civ. P. 9(b).
OUTCOME: Summary
judgment granted in part and denied in part.
CORE TERMS: summary
judgment, duress, causes of action, retainer agreement, tax returns, voluntary
disclosure, affirmative defenses, legal fees, foreign bank, invoice, breach of
fiduciary duty, collection action, particularity, shareholder, counterclaim,
fiduciary duty, reimbursement, settlement, fraudulent, excessive, disputed,
amnesty, fraudulent statements, negotiation, breached, information obtained,
agreed to pay, genuine issue, over-billing, confidential
LexisNexis(R)
Headnotes
Civil Procedure >
Summary Judgment > Burdens of Production & Proof > Movants
Civil Procedure >
Summary Judgment > Burdens of Production & Proof > Nonmovants
Civil Procedure >
Summary Judgment > Standards > General Overview
[HN1] Summary judgment
is appropriate if the pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to
judgment as a matter of law. Fed. R. Civ. P. 56. The court's function is not to
resolve disputed issues of fact, but only to determine whether there is a
genuine issue to be tried. The court is required to view the evidence in the
light most favorable to the nonmoving party. Nevertheless, the non-moving party
cannot rest on mere allegations or denials, but must instead set forth specific
facts showing there is a genuine issue for trial. Fed. R. Civ. P. 56(e). No genuine
issue exists unless there is sufficient evidence favoring the nonmoving party
for a jury to return a verdict for that party. If the evidence is merely
colorable, or is not significantly probative, summary judgment may be granted.
Contracts Law >
Defenses > Duress & Undue Influence > General Overview
[HN2] Under New York
law, a contract is voidable on the ground of duress when it is established that
the party making the claim was forced to agree to it by means of a wrongful
threat precluding the exercise of his free will. In order to plead duress, the
party must satisfy four elements: (1) a threat; (2) which was unlawfully made;
(3) and caused involuntary acceptance of contract terms; (4) because the
circumstances permitted no other alternative. Generally, taking action which is
legally permissible does not constitute an unlawful threat. For example, an attorney
threatening to stop representing a client until he is paid is typically lawful,
provided the withdrawal would not cause prejudice to the client. Where the
attorney is demanding excessive and unreasonable fees, however, such action may
be deemed unlawful.
Contracts Law >
Defenses > Duress & Undue Influence > General Overview
[HN3] Even if a
threatened action is considered unlawful for purposes of duress, the party
claiming duress must also show that they had no other alternative than to agree
to the contract in question. That element places a burden on the threatened
party to show that the threatened breach would result in irreparable harm. The
party must show, for example, that there was no other source of supply for the
withheld items and that there were no available adequate remedies at law,
namely a breach of contract action. Although a claim of duress is evaluated
under an objective standard, a court will consider a party's objective choices
based on the facts and circumstances as they were reasonably understood by the
party at the time of the decision. Thus, where a party to a contract soundly
and reasonably believed he faced irreparable harm, with no other feasible
remedy than to agree to a defendant's demand, it could be sufficient to constitute
duress.
Contracts Law >
Defenses > Duress & Undue Influence > General Overview
[HN4] The fact that a
party participates in negotiations can be evidence that their free will was not
overcome. Courts have found, however, that parties that agree to a settlement
of disputed claims may be subject to duress.
Contracts Law >
Defenses > Duress & Undue Influence > General Overview
[HN5] Under the theory
of duress, a contract is voidable, not void. It is well-settled that one who
would repudiate a contract procured by duress, must act promptly, or will be
deemed to have elected to affirm it. The court must determine whether the party
claiming duress acted reasonably under the circumstances in asserting the
claim. The burden on a party seeking to avoid contractual obligations on the
grounds of economic duress increases proportionately with the delay in
initiating suit or otherwise repudiating the contract in question, since it is
well established under New York law that a party asserting duress must do so
promptly. Pleading duress nine months after an agreement was not prompt enough
to render the agreement void.
Torts > Intentional
Torts > Breach of Fiduciary Duty > General Overview
[HN6] To plead a breach
of fiduciary duty, a plaintiff must allege that there was a breach of a duty
owed to the plaintiffs and that the plaintiffs incurred an injury as a result
of the breach. New York courts recognize the fiduciary nature of the
relationship between an attorney and his or her client. It is well-settled that
the relationship of client and counsel is one of unique fiduciary reliance and
that the relationship imposes on the attorney the duty to deal fairly, honestly
and with undivided loyalty including maintaining confidentiality, avoiding
conflicts of interest, operating competently, safeguarding client property and
honoring the clients' interests over the lawyer's.
Legal Ethics > Client
Relations > Confidentiality of Information
Torts > Intentional
Torts > Breach of Fiduciary Duty > Elements
[HN7] One fiduciary duty
an attorney owes to his or her client centers upon maintaining the
confidentiality of the information obtained during a representation. Under N.Y.
R. Prof. Conduct 1.6 (22 NYCRR 1200.0), a lawyer shall not knowingly reveal
confidential information, as defined in N.Y. R. Prof. Conduct 1.6, or use such
information to the disadvantage of a client or for the advantage of the lawyer
or a third person. N.Y. Comp. Codes R. & Regs. tit. 22, ß 1200 (2011).
However, under N.Y. R. Prof. Conduct 1.6(b)(5)(ii) (22 NYCRR 1200.0), a lawyer
may use the confidential information to collect a fee. Courts have held that
the duty of confidentiality may be waived in a collection action to the extent
that it is necessary to establish or collect such fees, and consequently such
action does not constitute a breach of fiduciary duty.
Legal Ethics > Client
Relations > Attorney Fees > Fee Agreements
[HN8] Although an
attorney must shoulder the burden of demonstrating that a fee contract is fair,
reasonable, and fully known and understood by the client, there is no rule of
law suggesting that an attorney is required to provide notice to a client as to
every forum where the attorney might pursue a collection action. An attorney
has the burden of proving that the arrangement for compensation was fair and
reasonable and fully comprehended by the client. However, under New York law, a
private retainer agreement is viewed as presumptively fair in the absence of
fraud, deceit, overreaching, or undue influence.
Contracts Law >
Breach > Causes of Action > Elements of Claims
Legal Ethics > Client
Relations > Attorney Fees > Excessive Fees
Torts > Intentional
Torts > Breach of Fiduciary Duty > Elements
[HN9] Overbilling and
padding of costs can constitute a breach of contract and give rise to a cause
of action in favor of a client against an attorney. Overbilling may also create
a cause of action for breach of fiduciary duty.
Civil Procedure >
Pleading & Practice > Pleadings > Heightened Pleading Requirements
> Fraud Claims
[HN10] In all averments
of fraud or mistake, the circumstances constituting fraud or mistake shall be
stated with particularity. Fed. R. Civ. P. 9(b). Thus, Fed. R. Civ. P. 9(b)
requires that fraud claims be pleaded with a level of specificity beyond the usual
short and plain statement standard of Fed. R. Civ. P. 8. A complaint alleging
fraud must: (a) specify the statements that the plaintiff contends were
fraudulent; (b) identify the speaker; (c) state where and when the statements
were made; and (d) explain why the statements were fraudulent. The United
States Court of Appeals for the Second Circuit has held that the complaint must
specifically link the alleged fraudulent statements to particular defendants.
Civil Procedure >
Pleading & Practice > Pleadings > Heightened Pleading Requirements
> Fraud Claims
[HN11] To plead fraud
under New York law, a party must establish that a material misrepresentation,
known to be false, has been made with the intention of inducing its reliance on
the misstatement, which caused it to reasonably rely on the misrepresentation,
as a result of which it sustained damages. A representation based on a good
faith misinterpretation of the legal effect of an agreement does not provide a
basis for a fraud claim. When a contract or agreement is made under economic
duress it is voidable, not void ab initio.
Legal Ethics > Client
Relations > Attorney Fees > Fee Agreements
[HN12] In Ween v. Dow,
the Supreme Court of New York held that a reimbursement provision in a retainer
agreement between an attorney and his client in which the attorney would be
reimbursed for fees incurred in a collection action brought against the client
was invalid. With regard to attorney fee arrangements, the courts, as a matter
of public policy, give particular scrutiny to the reasonableness of the fee
arrangements between attorneys and clients pursuant to their interest in, and
statutory power to, regulate the practice of law. Upholding Ween as controlling
in federal court, the United States District Court for the Southern District of
New York stated, Ween is a per se bar on nonreciprocal fee provisions.
Business & Corporate
Law > Limited Liability Companies > Management Duties & Liabilities
Contracts Law >
Breach > Causes of Action > Elements of Claims
Torts > Intentional
Torts > Breach of Fiduciary Duty > Elements
[HN13] Although N.Y.
Ltd. Liab. Co. Law ß 1205 does hold shareholders or officers personally liable
for certain acts, the provision is simply a reflection of the common law rule
that a shareholder is liable for those torts of the corporation in which he is
a participant. Individual defendants are not liable for a breach of agreement
made with a corporation. Under New York law, an individual who signs a contract
on behalf of a corporation, indicates her representative capacity on the
contract, and exhibits no intention to assume personal liability for the
corporation's breaches is not subject to personal liability. Over-billing
claims have been held to sound in both breach of contract, and breach of fiduciary
duty. Under New York law, breach of fiduciary duty is a tort.
Civil Procedure >
Judgments > Preclusion & Effect of Judgments > Res Judicata
[HN14] Res judicata, or
claim preclusion, bars relitigation of a claim where the earlier decision was a
final judgment on the merits rendered by a court of competent jurisdiction, in
a case involving the same parties or their privies, where the same cause of
action is asserted in the later litigation. Collateral estoppel bars litigants
from relitigating any fact or issue that has been litigated and necessarily
decided in a prior proceeding that produced a final judgment on the merits. The
party seeking the benefit of collateral estoppel with respect to an issue must
demonstrate that the issue decided in the prior proceeding is identical to the
issue in the subsequent action, but the party resisting the application of
collateral estoppel has the burden of establishing the absence of a full and
fair opportunity to litigate the issue.
Civil Procedure >
Trials > Jury Trials > Jury Demands
[HN15] Under Fed. R.
Civ. P. 38(b), a party may demand a jury no later than 14 days after the last
pleading directed to the issue is served. Failure to demand a jury trial within
the period designated by Fed. R. Civ. P. 38(b) constitutes a waiver of that right
as to all issues raised in the complaint. In some instances, however, an
amended pleading may revive the right to demand a jury. Where an amended
pleading covers the same general area of dispute as was covered in the original
pleading, the filing of an amended complaint does not revive the right to
demand a jury. By contrast, an amended complaint may revive the right to a jury
trial if it presents new factual issues not fully discussed in the original
pleadings, or new legal theories not based on facts previously pleaded.
COUNSEL: [*1] For Louis Galpern, Eva
Galpern, Plaintiffs: David H. Singer, David H. Singer & Associates LLP, New
York, NY.
For De Vos & Co.
PLLC, Attorneys and Counselors, LLoyd De Vos, Defendants: Lloyd De Vos, Lloyd
De Vos & Co. LLP, New York, NY.
For De Vos & Co.
PLLC, Attorneys and Counselors, LLoyd De Vos, Counter Claimants: Lloyd De Vos,
Lloyd De Vos & Co. LLP, New York, NY.
For Eva Galpern, Louis
Galpern, Counter Defendants: David H. Singer, David H. Singer & Associates
LLP, New York, NY.
JUDGES: Carol Bagley
Amon, Chief United States District Judge.
OPINION BY: Carol Bagley
Amon
OPINION
MEMORANDUM & ORDER
AMON, Chief
United States District Judge.
This case
arises out of a dispute over legal fees. Plaintiffs Louis Galpern
("Galpern") and Eva Galpern (collectively the "Galperns" or
"plaintiffs") bring claims based upon their contention that
defendants Lloyd De Vos ("De Vos") and De Vos & Co. PLLC
("DVC" and collectively "defendants") over-billed
plaintiffs and sought extra fees in violation of the terms of their retainer
agreement with the Galperns. They also assert related causes of action based
upon defendants' efforts to collect claimed unpaid legal fees. Defendants move
for summary judgment on plaintiffs' claims and defendants' [*2] counterclaims and to strike
plaintiffs' jury demand. Plaintiffs move for summary judgment with respect to
defendants' counterclaim and defendants' second, third, fourth, and seventh
affirmative defenses.
BACKGROUND AND
PROCEDURAL HISTORY
On February
21, 2009, DVC sent a retainer letter (the "Retainer Agreement") to
the Galperns that contained the terms under which DVC was prepared to provide
legal services to them. (Pl. 56.1 Stmt. ¶ 1; Def. 56.1 Stmt. ¶ 1.) In a letter
dated February 21, 2009, which the parties refer to as the "Retainer
Agreement," the defendants set out two potential fee arrangements. (De Vos
Aff. ¶ 10; Am. Compl., Exhibit A.) The first option was a fixed fee of $60,000.
(Id.) In the second option, defendants would proceed on a time and disbursement
basis of $500.00 per hour for De Vos's time and $300.00 per hour for the time
of Sherry Ellenzweig, an associate at DVC. (Id.) The fees in the second option
were to be capped at $75,000.00 unless the matter was referred to the United
States Department of Justice. (Id.) To accept the second option, plaintiffs had
to submit a check to defendants for $15,000.00. (Id.) Both parties acknowledge
that an agreement was reached pursuant
[*3] to which DVC would perform legal services. (Pl. 56.1 Stmt. ¶
2; Def. 56.1 Stmt. ¶ 2.) Louis Galpern states that he chose the second
alternative and paid Lloyd De Vos $15,000.00. (Galpern Aff. ¶ 14.) Defendants
provide no facts controverting that assertion.
According to
Galpern, in February 2009, he received notice that UBS might be releasing
information regarding his foreign bank accounts to the Internal Revenue Service
(the "IRS"). (Galpern Aff. ¶ 4.) He states that he was aware from
various newspaper articles that the IRS had an amnesty program with respect to
foreign bank accounts, and he wanted to take advantage of the amnesty program.
(Id. ¶ 5.) It is for that reason, he states, that he entered into the Retainer
Agreement with defendants. (Id. ¶ 6.) He asserts that Lloyd De Vos explained to
him that Amended Tax Returns and Foreign Bank Account Reports ("FBARs")
would have to be filed and that they relied on defendants to comply with the
requirements of the Voluntary Disclosure Program. (Id. ¶ 7.) Galpern states
that Lloyd De Vos advised him that it was important that amended tax returns be
filed as soon as possible and that the deadline for taking advantage of the
Voluntary Disclosure [*4]
Program was September 15, 2009. (Id. ¶ 8.) He attests that Lloyd De Vos advised
him that all tax returns and FBARs had to be filed by that date and that
it was imperative that the Galperns' tax returns be filed as rapidly as
possible to prevent a criminal referral. (Id. ¶¶ 8-9.)
Between
February 26, 2009 and October 14, 2009, Galpern states that he paid defendants
a total of $56,000.00. (Id. ¶¶ 14, 20.) In conversations in August and
September 2009, Galpern states that De Vos told him that the IRS had extended
the filing due date to October 15, 2009. (Id. ¶ 37.) Galpern states that on
October 14, 2009, he was advised that he could pick up the tax returns and FBARs
for timely filing in order to comply with the Voluntary Disclosure Program.
(Id. ¶ 42.) At a meeting at defendants' office on October 14, 2009, he states,
defendants demanded payment of $112,000.00. (Id. ¶ 43.) Plaintiffs have
submitted copies of defendants' invoices, which total $160,643.97 for the
relevant time period, (Singer Aff., Exs. A-H.), and Galpern acknowledges that
he received invoices totaling $168,937.46 in charges, which, less the
$56,000.00 Galpern states that he had paid, would correspond to roughly
$112,000.00 [*5] in unpaid
charges at that time. (Galpern Aff. ¶ 56.) Galpern states that defendants
refused to give him the amended tax returns and FBARs unless he agreed
to pay the sum defendants claimed was owing. (Id. ¶ 43.) Galpern states that he
left defendants' office at that time. (Id. ¶ 44.)
Galpern
states that De Vos called him later that day and told him to return to
defendants' office, which the Galperns did. (Id. ¶ 47.) Both parties
acknowledge that at that meeting plaintiffs agreed to pay DVC an additional
$50,000.00 in legal fees in settlement of all outstanding fees owed to DVC for
services through that date. (Pl. 56.1 ¶ 3; Def. 56.1 ¶ 3.) Both Galpern and De
Vos state that after that agreement was reached, defendants turned over the tax
returns and FBARs to plaintiffs. (Galpern Aff. ¶ 54; De Vos Aff. ¶ 8.)
Defendants performed additional work after October 14, 2009, and submitted an
invoice for an additional $3,000.00. (Def 56.1 ¶ 6-7; Pl. 56.1 ¶ 6; Singer
Aff., Ex. I.) Plaintiffs, however, have not paid defendants the $50,000.00 or
the $3,000.00 invoiced for additional work. (Galpern Aff. ¶ 55; Def. 56.1 ¶ 5.)
Galpern
states that on or about December 30, 2009, Lloyd De Vos filed a proceeding [*6] against him in Zurich, Switzerland,
which resulted in the seizure of his bank account in Switzerland in the
approximate amount of $50,000.00. (Galpern Aff. ¶ 61.) In that proceeding, Galpern
contends, De Vos made a representation that Galpern was indebted to De Vos in
an amount in excess of $50,000.00. (Id. ¶ 62.)
Plaintiffs
filed this action in New York State Supreme Court. The action was removed on
April 30, 2010. On August 27, 2010, plaintiffs filed an amended complaint,
alleging four counts. The first cause of action appears to be for breach of
contract. In the second cause of action, plaintiffs appear to allege that
defendants breached their fiduciary duty by using information obtained from the
plaintiffs to seize the plaintiffs' foreign bank account in an in rem
proceeding in Switzerland. The third cause of action alleges over-billing, and
the fourth cause of action alleges that De Vos made fraudulent statements to
the court in Switzerland. Defendants now move for summary judgment on the
complaint in full or, in the alternative, to strike plaintiffs' jury demand.
Plaintiffs cross-move for summary judgment on defendants' counterclaim and
defendants' second, third, fourth and seventh [*7] affirmative defenses.
STANDARD OF REVIEW
[HN1] Summary judgment is appropriate if
the pleadings, depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to judgment as a matter
of law. Fed. R. Civ. P. 56; accord Celotex Corp. v. Catrett, 477 U.S. 317,
322-23, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986); Belfi v. Prendergast, 191
F.3d 129, 135 (2d Cir. 1999). The Court's function is not to resolve disputed
issues of fact, but only to determine whether there is a genuine issue to be
tried. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S. Ct. 2505,
91 L. Ed. 2d 202 (1986).
The Court is
required to view the evidence in the light most favorable to the nonmoving
party. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S. Ct. 1598,
26 L. Ed. 2d 142 (1970). Nevertheless, the non-moving party cannot rest on mere
allegations or denials, but must instead set forth specific facts showing there
is a genuine issue for trial. Fed. R. Civ. P. 56(e); Nat'l Westminster Bank USA
v. Ross, 676 F. Supp. 48, 51 (S.D.N.Y. 1987) (speculation, conclusory
allegations, and mere denials are not enough to raise genuine issues of fact).
No genuine issue exists unless [*8]
there is sufficient evidence favoring the nonmoving party for a jury to return
a verdict for that party. If the evidence is merely colorable, or is not
significantly probative, summary judgment may be granted. Anderson, 477 U.S. at
249-50 (citations omitted).
DISCUSSION
I. Summary Judgment as
to the Amended Complaint
Defendants
Lloyd De Vos and De Vos & Co. move for summary judgment on each of the
plaintiffs' causes of action.1
1 Lloyd De
Vos also asserts that all claims against him as an individual must be
dismissed. The Court agrees. This issue is discussed infra Section II.3.
1. First Cause of Action
Plaintiffs
allege that on October 14, 2009 defendants breached their contract by refusing
to turn over their work product unless plaintiffs paid fees in excess of the
$75,000.00 cap specified in the Retainer Agreement. Defendants argue that they
could not have breached that contract because the plaintiffs and defendants
agreed on October 14 that plaintiff would pay $50,000.00 to settle all
outstanding legal fees in exchange for defendants' work product. Plaintiffs
counter that any agreement reached on October 14, 2009 was procured through
duress and therefore unenforceable. Both parties acknowledge [*9] that plaintiffs agreed to
the accord. Thus, the only question, as the claim is argued to this court, is
whether the accord was procured by duress.
[HN2] Under New York law, "[a]
contract is voidable on the ground of duress when it is established that the
party making the claim was forced to agree to it by means of a wrongful threat
precluding the exercise of his free will." Austin Instrument v. Loral
Corporation, 29 N.Y.2d 124, 130, 272 N.E.2d 533, 324 N.Y.S.2d 22 (1971). In
order to plead duress, the party must satisfy four elements: "(1) a
threat; (2) which was unlawfully made; (3) and caused involuntary acceptance of
contract terms; (4) because the circumstances permitted no other
alternative." Kamerman v. Steinberg, 891 F.2d 424, 431 (2d. Cir. 1989)
(citing Gulf & W. Corp. v. Craftique Prod., Inc., 523 F. Supp. 603, 610
(S.D.N.Y. 1981)).
Defendants
argue that plaintiffs cannot satisfy the second and fourth elements: that the
alleged threat was unlawfully made and that the circumstances permitted no
other alternative. Generally, "tak[ing] action which is legally
permissible" does not constitute an unlawful threat. Kamerman v.
Steinberg, 891 F.2d 424, 432 (2d Cir. 1989) (citing Hammelburger v. Foursome
Inn Corp., 54 N.Y.2d 580, 593 n.4, 431 N.E.2d 278, 446 N.Y.S.2d 917
(1981)). [*10] For example,
an attorney threatening to stop representing a client until he is paid is typically
lawful, provided the withdrawal would not cause prejudice to the client.
Ehrlich v. Tullo, 274 A.D.2d 303, 710 N.Y.S.2d 572, 573 (App. Div., 1st Dep't.
2000) (explaining an attorney's "'threats' to cease representing [the
defendant, client, as attorney] unless [the attorney's fees] were paid were not
wrongful," but noting that the client "would not have been prejudiced
had her attorney actually withdrawn"); see also Duane Morris LLP v. Astor
Holdings Inc., 61 A.D.3d 418, 877 N.Y.S.2d 250, 252 (App. Div., 1st Dep't.
2009) (finding an attorney's threat to cease representation of the client until
paid was not unlawful). Where the attorney is demanding excessive and
unreasonable fees, however, such action may be deemed unlawful. See First Nat'l
Bank of Cincinnati v. Pepper, 547 F.2d 708, 714-15 (2d Cir. 1976) (finding
attorney's actions in withholding documents until the plaintiffs agreed to pay
fees was unlawful because the amount attorney demanded was excessive and
unreasonable). The reasonableness of defendants' demands is a contested issue, see
infra Section I.3.
[HN3] Even if a threatened action is
considered "unlawful" for
[*11] purposes of duress, the party claiming duress must also
show that they had no other alternative than to agree to the contract in
question. This element "places a burden on the threatened party to show
that the threatened breach would result in irreparable harm." Indus.
Recycling Sys., Inc. v. Ahneman Assocs., P.C., 892 F. Supp. 547, 550 (S.D.N.Y.
1995). The party must show, for example, that there was no other source of
supply for the withheld items and that there were no available adequate
remedies at law, namely a breach of contract action. See e.g., Austin
Instrument, Inc. v. Loral Corp., 29 N.Y.2d 124, 130-31, 272 N.E.2d 533, 324
N.Y.S.2d 22 (1971); Sosnoff v. Carter, 165 A.D.2d 486, 568 N.Y.S.2d 43, 46
(App. Div., 1st Dep't. 1991); U S West Fin. Servs., Inc. v. Tollman, 786 F.
Supp. 333, 339-40 (S.D.N.Y. 1992); Universal Reinsurance Co., Ltd. v. St. Paul
Fire and Marine Ins. Co., No. 95 Civ. 8436 (WHP), 1999 U.S. Dist. LEXIS 14947,
1999 WL 771357, at *10 (S.D.N.Y. Sept. 29, 1999).
Defendants
argue that plaintiffs cannot make a showing of duress because plaintiffs were
not required to submit the tax returns and FBARs in order to qualify for
the Voluntary Disclosure Program and, in any event, plaintiffs were not eligible.
Defendants submit three memoranda issued
[*12] by the Internal Revenue Service on March 23, 2009 that
purportedly constitute the framework of the Voluntary Disclosure Program (De
Vos Aff., Ex. 3), as well as a set of Frequently Asked Questions, or FAQs,
about the Program, issued by the IRS on May 6, 2009 and updated on June 24,
2009 (De Vos Aff., Ex. 4). Defendants argue that these documents support their
contention that plaintiffs need not have submitted the tax returns and were not
eligible for the amnesty. Louis Galpern, however, has submitted an affidavit in
which he states defendants specifically advised him that he and his wife were
eligible to participate in the IRS's Voluntary Disclosure Program and that
"Amended Tax Returns and Foreign Bank Account Reports would have to be
filed," that "the deadline for taking advantage of the Amnesty
Program was September 15, 2009, and that all tax returns and Foreign Bank
Account Reports (FBARS) had to be filed by then." (Galpern Aff. ¶¶
7-8.) Galpern states that De Vos later advised him that the filing date for the
Voluntary Disclosure Program had been extended to October 15, 2009. (Galpern
Aff. ¶ 37.)
Additionally,
plaintiffs provide a letter from Lloyd De Vos to Louis Galpern in which [*13] De Vos writes, "It
will be necessary as we go through this process of addressing this
matter to prepare amended Federal and State tax returns." (Galpern Aff.,
Ex. A, at 3.) (emphasis added). The letter does not indicate the date by which
the tax returns needed to be filed. However, it does specify that "[t]here
is time sensitivity in [preparing the amended tax returns and FBARs] because
of our concern that your actions appear to be voluntary and that a criminal
referral not be issued as a result of disclosures from the Swiss Federal Tax
Administration to the Internal Revenue Service that took place last Wednesday,
February 16, 2009, in Switzerland." (Id.) Thus, based on the statements
allegedly made by De Vos, it would have been reasonable for Galpern to infer
that the documents in question were required to be filed prior to the deadline
for voluntary disclosure.
Although a
claim of duress is evaluated under an objective standard, see Berman v. Parco,
No. 96 Civ. 0375, 1996 U.S. Dist. LEXIS 11921, 1996 WL 465749, at *8 (S.D.N.Y.
Aug. 15, 1996); DuFort v. Aetna Life Ins. Co., 818 F. Supp. 578, 583
(S.D.N.Y.1993), a court will consider a party's objective choices based on the
facts and circumstances as they were
[*14] reasonably understood by the party at the time of the
decision. Thus, where a party to a contract "soundly and reasonably
believed [he] faced irreparable harm, with no other feasible remedy than
to" agree to a defendant's demand, it could be sufficient to constitute
duress. First Nat'l Bank of Cincinnati v. Pepper, 547 F.2d 708, 715 (citing
First Nat'l Bank of Cincinnati v. Pepper, 454 F.2d 626 (2d Cir. 1972)).
Although the
case is not cited by either party, the Second Circuit Court of Appeals
considered similar circumstances in First National Bank, 547 F.2d at 715.
There, the Second Circuit considered the case of a lawyer, Pepper, who
threatened to retain corporate documents unless certain fees were paid. Pepper
had helped arrange a deal with the prospective purchaser of a corporation.
Pepper, however, threatened that he would not turn over corporate papers and
stock certificates that were required for the deal to close unless he was paid
fees in the amount of $100,000.00. Id. at 713. The court found, first, that
Pepper was entitled to the payment of some fees. Id. at 713-14. However, the
court found that the claim for duress could proceed because the particular
demand at issue was [*15]
excessive. Id. at 714-15.
The court
next turned to the question of whether shareholders, who had agreed to a
settlement with Pepper so as to consummate the sale, had "no reasonable
alternative" to settling. Id. at 715. The court found that the buyer might
have temporarily delayed the closing, but that even under that circumstance,
the shareholders had to be certain they could deliver in a timely fashion. Id.
To deliver on the closing, Pepper's availability was essential. Id. However,
Pepper's own representative stated that Pepper was about to leave on vacation,
and that Pepper usually took a month or two off and traveled abroad. Id. Pepper
later claimed that he in fact had no intention to engage in international
travel during the relevant period. Id. at 715. The court found, however, that
the shareholders were entitled to rely on the statements of Pepper's
representative. Id. Thus the question was not whether Pepper would in fact have
been available, but whether the shareholders could reasonably believe, based on
the representations made, that Pepper may not be available. Id.
Here,
likewise, defendants argue that plaintiffs were in fact under no pressure to
file the amended tax returns [*16]
and FBARs, as they were not required to file the documents and, in any
event, were not even eligible for the voluntary disclosure program. But under
the circumstances, the Galperns were entitled to rely on the representations of
their attorney, who appears to have at least strongly implied that the
documents must be filed and that the Galperns were required to do so by October
14, 2009, or else face potential financial and criminal liability.
Defendants
also contest plaintiffs' characterization of the nature of their
representation, arguing that Galpern's assertion that he entered into the
Retainer Agreement with defendants "for the purpose of taking whatever
steps were necessary to meet all the terms and conditions of the Amnesty
Program" (Galpern Aff. ¶ 6.) is false. Defendants argue that plaintiffs
could not have hired them for their assistance in participating in the
Voluntary Disclosure Program because the Voluntary Disclosure Program for UBS
AG accountholders was not introduced until March 23, 2009. However, the documents
do indicate that defendants were hired to assist plaintiffs with some form of
voluntary disclosure. Indeed, a letter from Lloyd De Vos to Louis Galpern,
dated [*17] February 23,
2009, before the Voluntary Disclosure Program was allegedly announced,
discusses the possibility of negotiated settlement with the IRS and that it was
important that the Galperns' actions "appear to be voluntary". (See
Galpern Aff., Ex. A, at 2-3.)
Moreover,
defendants' invoices indicate that De Vos was in fact working on tasks related
to voluntary disclosure. The invoices state that on February 25, 2009, for example,
the defendants made "multiple telephone calls with IRS to establish
voluntary disclosure procedures." (Pl. Aff., Ex. A.) Another invoice
describes some of the defendants' activities on March 4, 2009 as follows:
"E-mails to and from Urs [sic] regarding identification of documents
turned over by UBS to IRS; Review Amnesty proposals." (Pl. Affirmation
Exhibit B.) On March 5, 2009, the invoices list: "E-mail from and to Urs
[sic] regarding confirmation of handover of files by UBS to IRS." (Id.)
Even if defendants were not hired for the express purpose of complying with the
specific Voluntary Disclosure Program allegedly announced in March 2009, that
does not negate the assertions made in Galpern's affidavit that Galpern had
multiple conversations with De Vos subsequent [*18] to the announcement in
which he alleges that he expressed concern that the returns were not ready on a
timely basis, but was assured that the IRS had extended the filing due date for
the Voluntary Disclosure Program to October 15, 2009 (Galpern Aff. ¶ 37), and
that he was advised that on October 14, 2009 he could pick up the tax returns
and FBARs for timely filing in order to comply with Program (Galpern
Aff. ¶ 42).
Defendants
next argue that any predicament plaintiffs found themselves in as a result of
defendants' decision to withhold the tax returns and FBARs was the
result of the plaintiffs' own conduct, and therefore cannot make out a claim of
duress. "Mere hard bargaining positions, if lawful, and the press of
financial circumstances not caused by defendant, will not be deemed duress. The
alleged duress must be proven to have been the result of defendant's conduct
and not of plaintiff's own necessities." U.S. West, 786 F. Supp. at 340.
However, this is not a case of mere hard bargaining. Although it is true that
plaintiffs were potentially subject to criminal prosecution because they
allegedly evaded United States taxes, it was the defendants' conduct in
with-holding the tax returns [*19]
and FBARs that caused the immediate crisis.
Finally,
defendants argue in their reply brief that plaintiffs cannot maintain a claim
of duress because plaintiffs in fact negotiated with defendants. Galpern
attests that he left defendants' office when first asked to pay more money and
later came back to the office, at which point the parties agreed to a reduced
fee demand of $50,000.00. (Galpern Aff. ¶¶ 44, 47, 50.) However, defendants
have cited no case law standing for the proposition that a party subject to
duress can not have conducted any negotiations. Nor have defendants cited case
law that suggests that there can be no claim for duress where a party leaves a
negotiation and subsequently returns.
Certainly, [HN4] the fact that a party participates
in negotiations can be evidence that their free will was not overcome. See,
e.g., Duane Morris LLP v. Astor Holdings Inc., 61 A.D.3d 418, 877 N.Y.S.2d 250
(App. Div., 1st Dep't 2009) (finding client's free will was not overborn where
client admitted participating in significant negotiations with attorney over
legal fees and was represented by independent counsel). Courts have found,
however, that parties that agree to a settlement of disputed [*20] claims may be subject to
duress. See, e.g., First Nat'l Bank, 547 F.2d at 715. Defendants have presented
no evidence regarding the contents or timing of any such negotiations except
that the parties eventually agreed to a settlement sometime on the same day
that the plaintiffs made their demand. On the current record, the Court finds
that there are disputed issues of material fact and accordingly will not grant
summary judgment.
Although the
issue was not raised by the parties, the Court notes here that [HN5] under the theory of duress, a
contract is voidable, not void. Universal, 1999 U.S. Dist. LEXIS 14947, 1999 WL
771357, at *10 (citing Indus. Recycling Sys., Inc. v. Ahneman Assocs., P.C.,
892 F. Supp. 547, 550 (S.D.N.Y. 1995). "It is well-settled that 'one who
would repudiate a contract procured by duress, must act promptly, or will be
deemed to have elected to affirm it.'" Indus. Recycling Systems, 892 F.
Supp. at 551 (quoting Fayard v. Henry Holt & Co., 726 F. Supp. 438, 447
(S.D.N.Y. 1989)). The Court must determine "whether the party claiming
duress acted reasonably under the circumstances in asserting the claim."
U.S. West, 786 F. Supp. at 340. "The burden on a party seeking to avoid
contractual obligations on [*21]
the grounds of economic duress 'increases proportionately with the delay in
initiating suit or otherwise repudiating the contract in question, since it is
well established under New York law that a party asserting duress must do so
promptly.'" VKK Corp. v. National Football League, 244 F.3d 114, 123 (2d
Cir. 2001) (quoting Int'l Halliwell Mines, Ltd. v. Cont'l Copper and Steel
Indus., Inc., 544 F.2d 105, 108 (2d Cir. 1976)).
Here, no
claim of duress was made until the amended complaint was filed in August 2010,
a total of ten months after the alleged accord. In Universal Reinsurance, the
court found that pleading duress nine months after the agreement was not prompt
enough to render the agreement void. Universal, 1999 U.S. Dist. LEXIS 14947,
1999 WL 771357, at *10; see also DiRose v. PK Mgmt. Corp., 691 F.2d 628, 634
(2d Cir. 1982) (collecting cases in which delays ranging from six months to two
years constituted forfeiture of duress claim). Moreover, the Galperns
acknowledge that after the alleged accord, they requested that defendants'
perform additional work for them, work for which the defendants were not
remunerated. In a December 7, 2009 letter from Lloyd De Vos, submitted by the
Galperns, De Vos states that [*22]
he received a telephone call from the Galperns on November 20, 2009, and that
they "promised that we would receive the $53,000 for past services
referred to in our letter of November 14, 2009 by wire transfer no later than
Tuesday, November 24, 2009." As plaintiffs agreed to pay in November, not
just the accord's amount but also the $3,000 for the services rendered in the
month following the accord, plaintiffs delay in pleading duress may not be
reasonable.
Because the
parties have not briefed this issue, supplementary briefing is necessary as to
whether the Galperns have acted promptly enough to repudiate the accord they
claim was procured under duress.
2. Second Cause of
Action
Plaintiffs'
second cause of action alleges that defendants breached their fiduciary duty by
using plaintiffs' confidential foreign bank account information to seize
plaintiffs' assets. Plaintiffs further allege that defendants breached their
fiduciary duty by bringing a collection action outside of New York. Defendants
argue that summary judgment is proper because an attorney may use confidential
information obtained during the representation in order to collect a fee and
that jurisdiction for the collection [*23] action was not limited to
New York.
[HN6] To plead a breach of fiduciary
duty, a plaintiff must allege that there was a breach of a duty owed to the
plaintiffs and that the plaintiffs incurred an injury as a result of the
breach. Ulico Cas. Co. v. Wilson, Elser, Moskowitz, Edelman & Dicker, 56
A.D.3d 1, 865 N.Y.S. 2d 14 (App. Div., 1st Dep't. 2008) (citing Prudential Ins.
Co. of Am. v. Dewey, Ballantine, Bushby, Palmer & Wood, 80 N.Y.2d 377, 605
N.E.2d 318, 590 N.Y.S.2d 831 (1992)). New York courts recognize the fiduciary
nature of the relationship between an attorney and his or her client. Ulico,
865 N.Y.S. 2d at 21 ("It is well-settled that the relationship of client
and counsel is one of unique fiduciary reliance and that the relationship
imposes on the attorney the duty to deal fairly, honestly and with undivided
loyalty . . . including maintaining confidentiality, avoiding conflicts of
interest, operating competently, safeguarding client property and honoring the
clients' interests over the lawyer's." (citations omitted)).
[HN7] One fiduciary duty an attorney owes
to his or her client centers upon maintaining the confidentiality of the information
obtained during a representation. Under New York Rule of Professional Conduct
1.6, "a [*24] lawyer shall
not knowingly reveal confidential information, as defined in this Rule, or use
such information to the disadvantage of a client or for the advantage of the
lawyer or a third person." N.Y. Comp. Codes R. & Regs. tit. 22, ß 1200
(2011). However, under Rule 1.6(b)(5)(ii), a lawyer may use the confidential
information "to collect a fee."2 Id.; see also Model Rules
of Prof'l Conduct R. 1.6 (2006 ed.).
2 Plaintiffs
assert that a portion of Rule 1.6 was repealed. That portion has no relevance
to this case.
Courts have
held that the duty of confidentiality may be waived in a collection action to
the extent that it is "necessary to establish or collect [such
fees]," and consequently such action does not constitute a breach of
fiduciary duty. See Eckhaus v. Alfa-Laval, Inc., 764 F. Supp. 34, 37 (S.D.N.Y.
1991) ("confidences or secrets necessary to establish or collect the
lawyer's fee" may be revealed); see also Treasure Lake Assocs. v.
Oppenheim, 165 F.3d 15, 1998 WL 7774477, at *2 (2d Cir. 1998) ("The defendant[]
[attorneys] did not have a fiduciary duty to refrain from suing [plaintiff] to
recover legal fees after their representation of [plaintiff] had ended.").
With respect
to plaintiffs' [*25]
allegations regarding the limit on jurisdiction, plaintiffs argue:
the written
Retainer Agreement never indicated that the Plaintiffs would use information
obtained during the attorney/client relationship with the Plaintiffs in breach
of their fiduciary duty to institute an action in a foreign jurisdiction with
respect to a New York Plaintiff retaining a New York attorney to perform
services wholly within the State of New York.
(Pl. Mem 11.) Plaintiffs
assert that these actions constitute "a classic example of an attorney
using his superior knowledge of the law to the disadvantage of his
client." Plaintiffs rely on the following provision from the Retainer
Agreement:
By asking us
to perform legal services, you understand that we retain both a charging and a
retaining lien under New York law on all matters and files in respect of which
we have acted on your behalf for any sums due and owing to us. This lien shall
attach to any of your money or property, including but not limited to all
records or property in our possession. In the event of our termination or
withdrawal, all unpaid fees and disbursement shall immediately become due.
(Am. Compl., Ex. A, at
3.) The plain meaning of that clause,
[*26] however, in no way limits the jurisdiction in which
defendants were permitted to pursue a collection action.
[HN8] Although an attorney "must
shoulder the burden of demonstrating that a fee contract is fair, reasonable,
and fully known and understood by the client," Ween v. Dow, 35 A.D.3d 58,
822 N.Y.S.2d 257, 261 (App. Div., 1st Dep't. 2006) (citing Jacobson v.
Sassower, 66 N.Y.2d 991, 993, 489 N.E.2d 1283, 499 N.Y.S.2d 381 (1985)), the
Court is aware of no rule of law, and the parties have cited none, suggesting
that an attorney is required to provide notice to a client as to every forum
where the attorney might pursue a collection action. See Carey v. Mui-Hin Lau,
140 F. Supp.2d 291, 296 (S.D.N.Y. 2001) ("An attorney has the burden of
proving that the arrangement for compensation was fair and reasonable and fully
comprehended by the client. However, under New York law, a private retainer
agreement is viewed as presumptively fair in the absence of fraud, deceit,
overreaching, or undue influence.") (citing Cohen v. Ryan, 34 A.D.2d 789,
311 N.Y.S.2d 644, 645 (App. Div., 2d Dep't, 1970)); see also Uy v. Bronx Mun.
Hosp. Ctr., 182 F.3d 152 (2d Cir. 1999) (internal quotations omitted); Baye v.
Grindlinger, 78 A.D.2d 690, 432 N.Y.S.2d 624, 625 (App. Div., 2d Dep't 1980).
If [*27] plaintiffs deposited
substantial assets in foreign bank accounts, it is not surprising that a
creditor would seek to collect on a debt in that forum. Additionally, the mere
assertion that certain liens exist under New York law in the Retainer Agreement
cannot be transformed into a blanket choice of forum clause in the event of a
fee dispute. Even if the quoted language is read to be a choice of law clause
selecting New York law, such a clause would not prevent the defendants from
filing a collection action in another jurisdiction. Accordingly, summary
judgment is granted on the second cause of action.
3. Third Cause of Action
In the third
cause of action, plaintiffs allege that defendants over-billed for legal fees
incurred during the time that the defendants represented the plaintiffs in
2009. [HN9] "Overbilling and
padding of costs can constitute a breach of contract and give rise to a cause
of action in favor of a client against an attorney." See O'Connor v.
Blodnick, Abramowitz & Blodnick, 295 A.D.2d 586, 744 N.Y.S.2d 205, 206
(App. Div., 2d Dep't 2002) (citing Graphic Offset Co. v. Torre, 78 A.D.2d 788,
433 N.Y.S.2d 13, 14 (App. Div., 1st Dep't 1980)). Overbilling may also create a
cause of action for breach of fiduciary
[*28] duty. See U.S. Ice Cream Corp. v. Bizar, 240 A.D.2d 654,
659 N.Y.S.2d 492, 493-94 (App. Div., 2d Dep't 1997) (finding allegation that
attorney charged client fees so excessive that client forced to enter into
settlement with opposing party sufficient to raise cause of action for breach
of fiduciary duty).
Defendants
argue that to state a plausible claim for relief, plaintiffs must allege that
they in fact overpaid for the services rendered. But plaintiffs do allege that
they paid $56,000.00 to the defendants (Am. Compl. ¶¶ 20-21) and that defendants'
billing was excessive even with respect to the amount plaintiffs paid. For example,
plaintiffs allege that defendants billed for consultations conducted prior to
their entering into the Retainer Agreement. (Am. Compl. ¶ 62). Plaintiffs
attach invoices from DVC corroborating that assertion. (Singer Aff., Exs. A-J).
They also allege that work was assigned to Ellenzweig at $300 per hour that the
parties had agreed should be assigned to an accountant with a lower hourly
rate. (Galpern Aff.; Mem. in Opp. at 12).
The manner in
which the defendants assigned work and the diligence with which it was
completed are disputed. The plaintiffs' amended complaint and supporting [*29] affidavits adequately
allege facts that, taken in the light most favorable to them, establish that
they overpaid for the services rendered. In the alternative, defendants again
argue that plaintiffs' allegations of excessive billing are refuted by the
accord allegedly forged on October 14, 2009. However, as stated before, the
validity of the accord is contested based on the plaintiffs' claim of duress.
Accordingly, the Court will not grant summary judgment on the third case of
action at this time.
4. Fourth Cause of
Action
The fourth
cause of action alleges that defendants made fraudulent statements in pursuing
their in rem action before the Swiss court. Defendants argue that
summary judgment is proper because plaintiffs failed to plead fraud with
particularity. Defendants also contend that the undisputed facts show that the
alleged statements were not fraudulent.
As a
preliminary matter, the Court has its doubts that plaintiffs in the Galperns'
position have a free-standing tort claim for damages against a defendant merely
for procuring an allegedly fraudulent default judgment against them. At most,
it would seem that plaintiffs may seek to attack the validity of the foreign
judgment. [*30] See, e.g.,
Clarkson Co., Ltd. v. Shaheen, 544 F.2d 624, 630-31 (2d Cir. 1976). And such a
claim would require not simply the "mere assertion of the party that the
judgment was erroneous in law or in fact" or "a mere assertion of
fraud," but rather "[c]lear and convincing evidence of fraud."
Id. at 631. The parties have not addressed this issue. In any event, however,
plaintiffs fail to state fraud with particularity as required by Fed. R. Civ.
P. 9(b) and cannot establish the substantive elements of any cause of action
for fraud, which thus entitles the defendants to judgment as a matter of law.
A. Particularity
Defendants
first argue that plaintiffs failed to plead fraud with particularity. [HN10] "[In] all averments of fraud
or mistake, the circumstances constituting fraud or mistake shall be stated
with particularity." Fed. R. Civ. P. 9(b). Thus, Fed. R. Civ. P. 9(b)
requires that fraud claims be pleaded with a level of specificity beyond the
usual "short and plain statement" standard of Fed. R. Civ. P. 8. A
complaint alleging fraud must: "(a) specify the statements that the
plaintiff contends were fraudulent; (b) identify the speaker; (c) state where
and when the statements were made; and
[*31] (d) explain why the statements were fraudulent." See
Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004) (quoting Mills v. Polar
Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)).
Plaintiffs do
not satisfy the second prong.3 The Second Circuit has held that the
complaint must specifically "link[] the alleged fraudulent statements to
particular [defendants];" thus, asserting in the complaint, as plaintiffs
do in this case, that "defendants" made the statements is not
sufficient to satisfy Rule 9(b). Mills, 12 F.3d at 1175; DiVittorio v. Equidyne
Extractive Industries, Inc., 822 F.2d 1242, 1249 (2d Cir. 1987) (allegations of
fraud were insufficient where the complaint did not link any of the defendants
to the alleged fraudulent statement). In Mills, the Second Circuit further
found that even if the plaintiff alleged that the company, one of the
defendants, made the statements, it would not be specific enough to meet the
particularity requirement against the company or its directors, the other named
defendants. 12 F.3d at 1175 ("The mere fact that the Directors were
controlling persons at Polar, [the company], does not link them to the
statements; the plaintiffs also had to allege that [*32] the Directors personally
knew of, or participated in, the fraud."). Thus, the amended complaint
does not properly plead the identity of the speaker in the fraud cause of
action.
3 Defendants
also argue that plaintiffs do not satisfy the requirements of the first and
third prongs. The Court disagrees. Under Rule 9(b), "the 'mere gist' of
the nature of the fraudulent statements is insufficient;" the complaint
should allege "the precise nature of the statements." Brown v. Royal
Caribbean Cruises, Ltd., 2000 WL 34449703, at *4-5 (S.D.N.Y. 2000). However,
quoting the exact words of the alleged statements is unnecessary. Giuliano v.
Everything Yogurt, Inc., 819 F. Supp. 240, 244 (E.D.N.Y. 1993). Here, the
amended complaint alleges the specific amount of money the defendants stated
was owed to them by the plaintiffs to the Swiss court and the specific amount
of money that was seized from their bank account as a result of the default
judgment.
Plaintiffs
also satisfy the third prong by adequately pleading when the statements were
made. In Shaw v. Shaw, the Southern District found that a complaint alleging
that statements were made "[i]n or around 1993," however
"vague," was sufficient to satisfy [*33] the "when" requirement
dictated by the Second Circuit. 356 F. Supp. 2d 383, 386 (S.D.N.Y. 2005). Here,
the plaintiffs allege that the statements were made "on or about December
30, 2009."
B. Substantive Elements
of Fraud
Even if the
complaint is read to allege a particular speaker, defendants argue that summary
judgment is proper because the alleged statement was not fraudulent. [HN11] To plead fraud under New York
law, "a party must establish that a material misrepresentation, known to
be false, has been made with the intention of inducing its reliance on the misstatement,
which caused it to reasonably rely on the misrepresentation, as a result of
which it sustained damages." Nigro v. Lee, 63 A.D.3d 1490, 882 N.Y.S. 2d
346, 348 (App. Div., 3d Dep't. 2009) (citing Cohen v. Colistra, 233 A.D.2d 542,
649 N.Y.S.2d 540 (1996)).
Defendants
argue that because plaintiffs agreed on October 14, 2009 to pay the $50,000.00
as part of the alleged accord and DVC subsequently performed services for which
they billed $3,000.00, plaintiffs cannot show that a statement that defendants
were owed such money was fraudulent. The Court agrees. Although the validity of
the accord is now disputed, "a representation based on a good faith
misinterpretation [*34] of
the legal effect of an agreement does not provide a basis for a fraud
claim." Allen v. WestPoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir. 1991)
(citing George Backer Mgmt. Corp. v. Acme Quilting Co., 46 N.Y.2d 211, 220, 385
N.E.2d 1062, 413 N.Y.S.2d 135 (1978)).
Plaintiffs
allege in a conclusory fashion that defendants knew or should have known that
their statement to the Swiss court was false; however, they acknowledge that
they in fact agreed to pay the defendants that sum of money. There are no
factual allegations supporting the claim that the defendants knowingly
misrepresented the validity of the accord. Moreover, when a contract or
agreement is made under economic duress it is voidable, not void ab initio.
Universal, 1999 U.S. Dist. LEXIS 14947, 1999 WL 771357, at *10 (citing Indus,,
892 F. Supp. at 550). Plaintiffs did not file this action until March 2010 and
did not claim duress until August 2010. There is no evidence in the record that
they disputed the validity of the accord prior to that point. Accordingly, the
Court finds that defendants' alleged statement to the Swiss court cannot have
constituted a knowing misrepresentation at the time it was made. It therefore
could not, as a matter of law, be fraud.
II. Summary Judgment as
to [*35]
Defendants' Counterclaim and Affirmative Defenses
Plaintiffs
move for summary judgment as to defendants' counter-claim and defendants'
second, third, fourth, and seventh affirmative defenses. Defendants cross-move
for summary judgment with respect to the counter-claim.
1. Counterclaim
Counterclaim-plaintiffs
(Lloyd De Vos and De Vos & Co.) and counterclaim-defendants (the Galperns)
both move for summary judgment as to the counterclaim, which alleges that De
Vos & Co. are to be reimbursed for legal fees for the present action in
accordance with the Retainer Agreement. The relevant portion of the Retainer
Agreement reads:
Should we be
brought into any legal action involving you or any related company either as a
witness or as a party, you agree to reimburse us for our fees and disbursements
for the time and expenses we are required to expend or deem necessary to expend
in connection with that matter as if these services were provided to you.
Counterclaim-plaintiffs
argue that summary judgment is proper because of the clear import of this
provision and because the provision was not modified by the October 14, 2009
accord. Counterclaim-defendants submit that summary judgment in their
favor [*36] is proper
because the provision is invalid under New York law.
[HN12] In Ween v. Dow, 35 A.D.3d 58, 822
N.Y.S.2d 257, 261 (App. Div., 1st Dep't 2006), the court held that a reimbursement
provision in a retainer agreement between an attorney and his client in which
the attorney would be reimbursed for fees incurred in a collection action
brought against the client was invalid. Id. at 261-262. The court began by
explaining that "with regard to attorney fee arrangements, the courts, as
a matter of public policy, give particular scrutiny to the reasonableness of
the fee arrangements between attorneys and clients pursuant to their interest
in, and statutory power to, regulate the practice of law." Id. at 261. In
upholding this policy, the court examined the provision at issue and determined
that it was unlawful for two reasons. Id. at 261-262. First, it lacked mutuality
because the clients were not afforded the same right to reimbursement as the
attorneys if they brought an action against the attorney.4 Id.
Second, "[a]side from its lack of mutuality, the clause, even if not so
designed, has the distinct potential for silencing a client's complaint about
fees for fear of retaliation for the nonpayment of even unreasonable [*37] fees." Id. Upholding
Ween as controlling in federal court, the Southern District of New York stated,
"Ween [i]s a per se bar on nonreciprocal fee provisions." In re
Ernst, 382 B.R. 194, 198 (S.D.N.Y. 2008).
4 The Court
does not consider the validity of the clause in a situation where the attorney
is sued by a third-party.
Counterclaim-plaintiffs
argue that Ween's holding is limited to reimbursement agreements in which the
attorney grants himself the right to reimbursement in actions that the attorney
brings himself, whereas the provision at issue here affords the attorney
reimbursement only in those actions brought by the client or third parties in
which the attorney becomes involved. However, the provision nevertheless lacks
mutuality by granting only the attorney the right to be reimbursed and by not
affording the client the same right should the client be brought into a
subsequent action and prevail. Second, although it is true that "fear of
retaliation for the nonpayment of even unreasonable fees" is not
implicated by this particular provision, other deterrent effects are.5
Indeed, for all it appears, the provision at issue in this case requires that a
client pay a legal fee even [*38]
if the client wins. The provision thus deters even perfectly meritorious
actions by offsetting the potential recovery by the costs of litigation.
5 Of course,
that fear is implicated by the following provision in the retainer agreement,
which is nearly identical to that rejected in Ween.
Accordingly,
the reimbursement provision of the Retainer Agreement is invalid as applied in
this action.6 The Court grants summary judgment for
counterclaim-defendants as to the counterclaim.
6 The Court
is not entirely convinced that, despite its capacious language, this provision
was meant to apply at all to fee disputes between clients and attorneys.
Accordingly, the Court reiterates that its holding is limited to De Vos's
attempt to invoke the provision in this particular action.
2. Second Affirmative
Defense
Plaintiffs
also move for summary judgment as to several of defendants' affirmative
defenses. The second affirmative defense alleges that plaintiffs have failed to
state a claim against DVC. Since the first and third causes of action state a
claim for which relief may be granted, summary judgment is entered as to the
second affirmative defense with respect to those causes of action.
3. Third
Affirmative [*39]
Defense
The third
affirmative defense alleges that the plaintiffs failed to state a claim against
De Vos as an individual. De Vos moved for summary judgment on this defense and
the Galperns moved for summary judgment against it. De Vos is not a party to
the retainer agreement. Plaintiffs argue that under NY LLC Law ß 1205, since De
Vos is a principal attorney, manager, shareholder and partner of DVC, he is
"personally and fully liable and accountable for any negligent or wrongful
acts or misconduct committed by him" while rendering professional services
on behalf of the professional limited liability company ("PLLC").
[HN13] Although the statute does hold
shareholders or officers personally liable for certain acts, the provision is
"simply a reflection of the common law rule that a shareholder is liable
for those torts of the corporation in which he is a participant." We're
Assocs. Co. v. Cohen, Stracher & Bloom, P.C., 103 A.D.2d 130, 132-36, 478
N.Y.S.2d 670 (App. Div., 2d Dep't 1984). "[I]ndividual defendants are not
liable for a breach of agreement made with the Corporation . . . ." Tannenbaum
v. Reichenbaum & Silberstein, P.C., 226 A.D.2d 700, 642 N.Y.S.2d 43, 44
(App. Div. 1996); see also See San Diego Cty. Employees Retirement Ass'n v.
Mauonis, 749 F. Supp. 2d 104, 128 (S.D.N.Y. 2010) [*40] ("Under New York law,
an individual who signs a contract on behalf of a corporation, indicates her
representative capacity on the contract, and exhibits no intention to assume
personal liability for the corporation's breaches is not subject to personal
liability.") (quoting Hudson Venture Partners, LP v. Patriot Aviation Group,
Inc., 1999 U.S. Dist. LEXIS 1518, 1999 WL 76803, at *6 (S.D.N.Y. 1999)). The
Galperns therefore may not hold Lloyd De Vos personally liable for their first
claim, which is based on breach of contract. The first cause of action as
asserted against Lloyd De Vos is dismissed.
The Galperns'
other remaining claim is for over-billing. As noted above, over-billing claims
have been held to sound in both breach of contract, O'Connor v. Blodnick,
Abramowitz & Blodnick, 295 A.D.2d 586, 744 N.Y.S.2d 205, 206 (App. Div., 2d
Dep't 2002), and breach of fiduciary duty, See U.S. Ice Cream Corp. v. Bizar,
240 A.D.2d 654, 659 N.Y.S.2d 492, 493-94 (App. Div., 2d Dep't 1997). Under New
York law, breach of fiduciary duty is a tort. Marino v. Grupo Mundial Tenedora,
S.A., 2011 U.S. Dist. LEXIS 27543, 2011 WL 1142887, *4 (S.D.N.Y. 2011). The
parties have not briefed whether ß 1205 applies to over-billing claims sounding
in breach of fiduciary duty. Accordingly, the Court [*41] does not think it
appropriate to dismiss the third cause of action against Lloyd De Vos at this
time.
4. Fourth Affirmative
Defense
Defendants'
fourth affirmative defense argues that the plaintiffs failed to plead fraud
with particularity. Pursuant to the analysis supra Section I.4 regarding
the fourth cause of action, summary judgment for plaintiffs is denied.
5. Seventh Affirmative
Defense
Defendants'
seventh affirmative defense asserts that plaintiffs' claims are barred by the
doctrines of res judicata and collateral estoppel due to the judgment rendered
in Switzerland. [HN14] Res
judicata, or claim preclusion, bars relitigation of a claim "where the
earlier decision was a final judgment on the merits rendered by a court of
competent jurisdiction, in a case involving the same parties or their privies,
where the same cause of action is asserted in the later litigation."
Amalgamated Sugar Co. v. NL Industries, Inc., 825 F.2d 634, 639 (2d Cir. 1987)
(citing In re Teltronics Services, Inc., 762 F.2d 185, 190 (2d Cir. 1985)).
Collateral estoppel bars litigants from relitigating any fact or issue that has
been litigated and necessarily decided in a prior proceeding that produced a
final judgment [*42] on the
merits. See Bank of New York v. First Millenium, Inc., 607 F.3d 905, 918 (2d
Cir. 2010); Kaufman v. Eli Lilly & Co., 65 N.Y.2d 449, 455, 482 N.E.2d 63,
492 N.Y.S.2d 584 (1985). The party seeking the benefit of collateral estoppel
with respect to an issue must demonstrate that the issue decided in the prior
proceeding is identical to the issue in the subsequent action, but the party
resisting the application of collateral estoppel "has the burden of
establishing the absence of a full and fair opportunity to litigate the
issue." Evans v. Ottimo, 469 F.3d 278, 281-82 (2d Cir. 2006) (internal
quotation marks omitted).
The
plaintiffs' motion is denied because this issue has not been sufficiently
briefed for the Court to make a reasoned judgment. Here, the plaintiffs assert
only that the Swiss court lacked jurisdiction based on the purported forum
selection clause in the Retainer Agreement. As this Court decided above,
however, the Retainer Agreement does not limit the forums in which either party
may bring an action against the other. Whether the Swiss in rem default
judgment has preclusive effect in this action is a complex legal question.
Because the briefing on this issue is so scant, and because the Court has [*43] so few of the facts
underlying the Swiss proceeding before it, the Court will not grant summary judgment
as to seventh affirmative defense at this time.
III. Jury Demand
Defendants
move to strike plaintiffs' jury demand of the amended complaint as untimely
under Fed. R. Civ. P. 38(b). Plaintiffs submit that their amended complaint
presented two new causes of action, changed the issues, and therefore revived
their right to demand a jury.
[HN15] Under Rule 38(b), a party may
demand a jury "no later than 14 days after the last pleading directed to
the issue is served." Id. "[F]ailure to demand a jury trial within
the period designated by Rule 38(b) constitutes a waiver of that right as to
all issues raised in the complaint." Lanza v. Drexel & Co., 479 F.2d
1277, 1310 (2d Cir. 1973) (en banc). In some instances, however, an amended
pleading may revive the right to demand a jury. "Where... an amended pleading
covers the same 'general area of dispute' as was covered in the original
pleading, the filing of an amended complaint does not revive the right to
demand a jury." Sea Carriers Corp. v. Empire Programs, Inc., 2007 U.S.
Dist. LEXIS 7812, 2007 WL 221521, at *1 (S.D.N.Y. 2007) (citing Tuff-N-Rumble
Mgmt., Inc. v. Sugarhill Music Publ'g, Inc., 75 F. Supp. 2d 242, 245 (S.D.N.Y.
1999)).
By [*44] contrast, an amended
complaint may revive the right to a jury trial if it presents new "factual
issues . . . [not] fully discussed in the original pleadings," or
"new legal theories [not] based on facts previously pleaded." Swan
Brewery Co. Ltd. v. U.S. Trust Co. of N.Y., 143 F.R.D. 36, 39 (S.D.N.Y. 1992)
(citing Lanza, 479 F.2d at 1310; Rosen v. Dick, 639 F.2d 82, 94-96 (2d Cir.
1980); Royal Am. Mgrs., Inc. v. IRC Holding Corp., 885 F.2d 1011, 1018 (2d Cir.
1989). Here, each of the new causes of action arises out of the same facts and
circumstances, and to the extent new legal theories are asserted, they arises out
of those same facts. Accordingly, the jury demand is struck.
CONCLUSION
For the
reasons stated, the Court denies summary judgment for De Vos & Co. with
respect to the first and third causes of action; grants summary judgment in
favor of De Vos & Co. and Lloyd De Vos with respect to the second and
fourth causes of action; grants summary judgment in favor of Lloyd De Vos
individually with respect to the first cause of action; denies summary judgment
for Lloyd De Vos with respect to the third cause of action; grants summary
judgment in favor of the Galperns with respect to the [*45] counter-claim; grants
summary judgment on the second affirmative defense as it applies to the first
and third causes of action; and strikes the Galperns' jury demand.
SO ORDERED.
Dated:
Brooklyn, New York
September 30, 2011
Carol Bagley
Amon
Chief
United States District Judge