WILLIAM O'DOWD v. BARRY MANDELBAUM

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0

WILLIAM O'DOWD, individually and

derivatively on behalf of himself

and FOREMOST REAL ESTATE, INC.,

Plaintiffs-Appellants/

Cross-Respondents,

v.

BARRY MANDELBAUM, individually,

YALE LAZRIS, individually,

CRAIG ALEXANDER, individually,

and MANDELBAUM, SALSBURG, GOLD,

LAZRIS, DISCENZA & STEINBERG, P.C.,

Defendants-Respondents/

Cross-Appellants,

and

THOMAS A. BUONOCORE, individually,

and THOMAS A. BUONOCORE, P.C.,

Defendants.

________________________________________________________________

October 31, 2014

Argued February 26, 2014 Decided

Before Judges Sapp-Peterson, Maven and Hoffman.

On appeal from the Superior Court of New Jersey, Law Division, Essex County, Docket No. L-7722-11.

Philip G. Mylod argued the cause for appellants.

Elliott Abrutyn argued the cause for respondents (Morgan Melhuish Abrutyn, attorneys; Mr. Abrutyn, of counsel and on the briefs; Jeffrey S. Leonard, on the briefs).

The opinion of the court was delivered by

MAVEN, J.A.D.

Plaintiff William O'Dowd and his company Foremost Real Estate, Inc.1 appeals from the March 5, 2013 order granting summary judgment and dismissing the legal malpractice action against defendants Mandelbaum, Salsburg, Gold, Lazris, Discenza & Steinberg, P.C. (the Mandelbaum Firm or the Firm).2 Plaintiff argues the trial court erred in deciding that as a non-client, it was not owed a duty of care by the Mandelbaum Firm. We affirm.

I.

The claim of legal malpractice arises out of a dispute between plaintiff and its real estate investment partner, Kevin J. Wilk. We begin with an overview of the two projects that underlie the instant legal malpractice litigation.

A. The Hamilton Farms Project

The Hamilton Farms project (HF Project) involved O'Dowd, Wilk, doing business as KJW Development Company (KJW), Ronald A. Schiavone, and others as investment partners, to develop three lots in Somerset County into high end single family homes. In December 1999, Wilk formed a limited liability company (LLC), and in February 2000, Wilk executed an operating agreement that, among other things, designated each party's respective ownership interest in the project. As the appointed managing partner of the LLC, Wilk had responsibility for the project's finances.

After receiving loans to finance the project, the LLC began developing the lots, but for various reasons, the lots were not developed within the timeframe contemplated by the promissory notes. As of March 2002, all of the promissory notes were in default. In 2003, the LLC sold one lot, and in January and May, 2005 the other two lots were sold. On August 5, 2005, O'Dowd, Schiavone, and other investors filed a twenty-four count complaint against Wilk and others for breach of fiduciary duty, breach of contract, and fraud based upon two allegations of "tortious and fraudulent acts." Schiavone v. Wilk, MRS-2279-05 ("Schiavone litigation").3

B. The Independence Project

In 1996, O'Dowd acquired contractual rights to purchase 11.98 acres of land in Independence Township, Warren County (the Independence property). In a memorandum dated July 24, 2001, O'Dowd and Wilk agreed on terms upon which they would jointly develop the Independence property. The memo includes two provisions specific to O'Dowd, notably stating, "At his choice, Bill shall be a member of the LLC or merely participate in the profit [on a 50:50 basis]," and a handwritten insertion that stated, "This is a non-binding agreement. It is subject to attorney review and a subsequent written agreement." O'Dowd testified he asked Wilk to add the handwritten notation. Plaintiff signed the memorandum indicating his consent to the terms.

In February 2002, O'Dowd entered into an agreement with Wilk, KJW and investors related to the Independence property (the assignment agreement). The agreement was consistent with the July 2001 memorandum except it named Foremost instead of O'Dowd individually.4 The assignment agreement expressed the mutual intent to develop the Independence property into thirty-nine age restricted residential units, and then sell the property to Woodmont Properties, owned by Donald Witmondt (IP project). The assignment agreement also delineated, among other things, that Wilk would form a limited liability company (company) and create a company operating agreement; Foremost would assign its purchase rights to the Independence property to the company; and Wilk would manage the development of the IP project. In addition, plaintiff would be named as a fifty percent member of the company, and the operating agreement would designate plaintiff to receive fifty percent of the net profits upon the sale of the IP project. The assignment agreement was drafted by Wilk's attorney, defendant Thomas Buonocore. Plaintiff was represented by Philip Mylod, then and at all times through to this ensuing litigation.

In December 2002, Wilk's counsel created the company, known as KJW/I, and prepared the Certificate of Formation. Wilk was listed as its registered agent, and he and KJW were the only parties listed on the certificate. The certificate did not list plaintiff as a member of the company.5 The Firm did not participate in the preparation of these documents.

In March 2005, Buonocore prepared the operating agreement, which Wilk executed as President, Secretary, and individually as a member. The operating agreement did not identify either plaintiffs as members or as having any interest in KJW/I. Though O'Dowd's counsel requested a copy of the operating agreement in April, Wilk sent O'Dowd a copy of the document on August 4, 2005. He forwarded the operating agreement to his attorney.

As stated previously, O'Dowd initiated the Schiavone litigation related to the Hamilton Farms project on August 5, 2005. On September 21, 2005, O'Dowd amended that complaint to allege Wilk's failure to name either himself or Foremost in the operating agreement for the IP project. As a result, a lis pendens was temporarily placed on the Independence property, though it was eventually discharged. Defendant Yale Lazris, of the Mandelbaum Firm, represented Wilk in the Schiavone litigation and attorney Mylod represented O'Dowd.

In September 2005, KJW/I and Woodmont continued negotiations toward the sale of the IP project. Craig Alexander, another Mandelbaum Firm attorney, represented Woodmont and prepared the IP Purchase and Sale Agreement. Steve Cusma, Esquire, represented Wilk, reviewed the agreement and informed the Firm that Wilk approved of its form and substance. The Contract of Sale, and a Memorandum of Purchase and Sale Agreement, were both dated and signed September 28. A $100,000 mortgage on the Independence property in favor of Woodmont, and a related promissory note were prepared by the Firm and recorded.

On October 12, 2005, Lazris wrote to Wilk indicating a potential conflict of interest existed because the Firm represented Wilk in the Schiavone litigation and Woodmont in the purchase of the IP project. Wilk signed a waiver of "any potential conflicts" with the Mandelbaum Firm. Witmondt testified at his deposition that he was unsure if the Firm represented both himself and Wilk in the IP project, but explained that if that had been the case, he would have had no objection.

At about the same time the IP documents were being prepared, O'Dowd received an offer from a different developer to purchase the Independence property at a price that exceeded the price agreed to between the company and Woodmont. On October 17, O'Dowd, through counsel, advised Woodmont's counsel Lazris, of the offer, but received no response.

On October 24, 2005, O'Dowd received a copy of the Purchase and Sale Agreement from Wilk.6 A certification, prepared by attorney Mylod in connection with the Schiavone litigation, indicated that prior to receiving the Purchase and Sale document on October 24, neither he nor O'Dowd had been made aware of the executed agreement between KJW/I and Woodmont, the $100,000 mortgage on the property, or the Memorandum of Purchase and Sale dated September 28 and recorded September 30. Nor was he informed that Cusma or any other attorney represented KJW/I.

Thereafter, on January 6, 2006, O'Dowd instituted litigation against Wilk, KJW, KJW/I, and Woodmont raising claims of tortious and fraudulent acts, among other things, based upon Wilk's failure to name plaintiffs in the operating agreement. The court denied O'Dowd's 2007 motion to implead the Mandelbaum Firm as untimely. The case ultimately settled for $11,000.

C. The Legal Malpractice Litigation

On September 22, 2011, O'Dowd instituted this suit against the Mandelbaum Firm alleging the Firm represented the company in the IP project, and therefore owed a legal duty of representation to plaintiffs as a de facto member of the company. O'Dowd also raised claims of fraud and tortious interference with prospective economic advantage.

Based on discovery conducted in the earlier lawsuits,7 the Firm moved for summary judgment. At oral argument before Judge Patricia K. Costello, the Firm argued it had no duty to obtain O'Dowd's consent before entering into a contract to sell the IP project because neither plaintiff was named as a member of the company in the operating agreement, and it had no reason to know O'Dowd would have relied on its actions as it represented its clients.

O'Dowd argued the Firm, having represented Wilk in the Schiavone litigation and Woodmont in the IP project, should have known from a review of documents that plaintiff had an interest in the IP project. From that premise, O'Dowd contended the Firm surreptitiously represented Wilk and the company through other attorneys who, when representing Wilk and KJW/I, were acting as "mere conduits" for the Firm's indirect representation. Thus, by virtue of the Firm's representation of the company, it also owed a duty of care to plaintiff, as a de facto member of the company.

On March 5, 2013, Judge Costello issued her written decision and order granting the Firm's motion for summary judgment. The judge determined that the Firm owed no duty to O'Dowd under Petrillo v. Bachenberg, 139 N.J. 472 (1995), and Banco Popular N. Am. v. Gandi, 184 N.J. 161 (2005), because O'Dowd failed to establish that the Firm "knew or should have known that plaintiff[] [was] relying on them," or that "Mandelbaum undertook any affirmative act or obligation upon which plaintiff[] could have relied."

The judge rejected O'Dowd's claim that "the Mandelbaum Firm was on notice that plaintiffs were a part of KJW/I," finding that argument "too remote to defeat summary judgment," first because a pleading in a complaint is only an allegation and not a proven fact. Second, she reasoned that even if it were established that the Firm knew either plaintiffs should have been members of KJW/I, under RPC 1.3, the Firm's representation of the business entity would not extend to plaintiffs or to any of the entity's individual members. The judge likewise rejected O'Dowd's claim that the other attorneys who represented Wilk and KJW/I were "mere conduits" for the Firm's indirect representation.

Next, the judge found that O'Dowd could not establish causation or damages because Woodmont and KJW/I never completed the transaction. The complaint and cross-claims were dismissed with prejudice.

On appeal, plaintiffs raise the following arguments

I. SHOULD ATTORNEYS WHO PREPARED AND RECORDED A CONTRACT OF SALE AND MORTGAGE FOR THE BENEFIT OF THEIR CLIENT ON REAL ESTATE, KNOWINGLY OWNED AS A JOINT VENTURE, BE PERMITTED TO INVOKE LACK OF PRIVITY AS A DEFENSE TO OTHER KNOWN ADVERSARIAL PARTNERS WHOSE INTERESTS ARE IMPAIRED BY THE ATTORNEYS' CONDUCT.

A. The Direct Attorney Client Relationship between Mandelbaum to Wilk/KJW/I on Independence.

B. Privity is Not Required Between the Attorney and One Harmed by His Breach of Duty Where the Attorney Had Reasons to Foresee the Specific Harm Which Occurred.

II. IT WAS ERROR FOR THE COURT TO GRANT SUMMARY JUDGMENT WITHOUT CONSIDERING PLAINTIFFS' CLAIM FOR WRONGFUL INTERFERENCE WITH PROSPECTIVE ECONOMINC ADVANGAGE.

III. THE COURT BELOW FAILED TO CONSIDER PLAINTIFFS' FRAUD CLAIMS WHICH ARE QUESTIONS FOR THE JURY.

IV. SUMMARY JUDGMENT IS INAPPROPRIATE WHERE THE COURT VIEWED THE EVIDENCE IN A LIGHT MOST FAVORABLE TO THE MOVING PARTY AND THE DISCOVERY IS INCOMPLETE.8

Having closely canvassed the record, and viewing the facts in the light most favorable to plaintiffs, we conclude there are insufficient facts from which a jury could infer that the Firm did anything to induce plaintiffs to reasonably rely upon it. In as much as O'Dowd had his own counsel throughout the entire course of the IP development project, we conclude the Firm did not owe a duty to provide information or to seek his consent with respect to the IP project.

II.

We review a grant of summary judgment de novo, applying the same standard under Rule 4:46 that governed the motion court. See Gray v. Caldwell Wood Prods., Inc., 425 N.J. Super. 496, 499 (App. Div. 2012). The motion judge's "'interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference[.]'" Estate of Hanges v. Metro. Prop. & Cas. Ins. Co., 202 N.J. 369, 382 (2010) (quoting Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995)). In a legal malpractice action, "summary disposition is appropriate only when there is no genuine dispute of material fact." Ziegelheim v. Apollo, 128 N.J. 250, 261 (1992).

We begin by considering whether the Firm owed a duty to plaintiffs as a matter of law under the circumstances presented. The lawsuit centered on whether the Firm committed malpractice by not providing notice of the IP purchase contract negotiations between KJW/I and Woodmont after O'Dowd amended the Schiavone complaint asserting his interest in the IP project.

Plaintiffs argue that to establish the duty owed to a non-client. It must first demonstrate that the Firm represented the company, KJW/I, in the IP project. This argument presupposes that plaintiffs' asserted interests in the IP project would have been recognized even though it was not named in the operating agreement. Hence, plaintiffs contend its entitlement is derived from being a de facto member of the company, KJW/I.

Plaintiffs' argument is misplaced as there is no requirement in a non-client legal malpractice claim for a relationship to exist between the Firm and the company. Plaintiffs' point to evidence of meetings and correspondence between Wilk and attorneys from the Firm from which it argues a jury can infer the Firm represented the company in the IP project. See In Re Palmieri, 76 N.J. 51, 58-59 (1978) (recognizing that attorney's "acceptance [of representation] need not necessarily be articulated, in writing or speech but may, under certain circumstances, be inferred from the conduct of the parties"). The Firm argues the same evidence could show that Wilk had contact with the Firm with regard to its legal representation related to the Schiavone litigation, or the Firm's representation of Woodmont in the IP project. We agree with the Firm, and are not persuaded that this evidence creates a genuine issue of material fact on the question of the Firm's representation of the company in the IP project.

Nevertheless, assuming arguendo an attorney-client relationship between the Firm and KJW/I existed for the IP project, that legal relationship would not result in legal representation to the members of the company. A lawyer representing a corporation or other business entity is not automatically deemed to represent its officers or subsidiaries. See Restatement (Third) of the Law Governing Lawyers 96 comment b (2000) ("By representing the organization, a lawyer does not thereby also form a client-lawyer relationship with all or any individuals . . . who direct its operations or who have an ownership or other beneficial interest in it, such as its shareholders."); RPC 1.13 ("A lawyer employed or retained to represent an organization represents the organization as distinct from its directors, officers, employees, members, shareholders or other constituents."). Thus, plaintiff would not become the Firm's client, and the Firm would not owe him a duty of care by virtue of his membership in the company. Moreover, in this case, the Firm could not have represented plaintiff. O'Dowd had placed himself in an adversarial position, having amended the Schiavone litigation to add claims against the company in the IP project. This adverse position would have created a conflict of interest. Under RPC 1.7, the Firm could not have simultaneously represented the company and plaintiff when the parties were in litigation. For all the foregoing, we agree with the motion judge that this argument is "too remote" to survive summary judgment.

Furthermore, this argument lacks merit as it misconstrues the elements required to establish a non-client legal malpractice claim. The relevant focus in this case is upon the Firm and plaintiff, the non-client. In general, to establish legal malpractice, a plaintiff must demonstrate: "(1) the existence of an attorney-client relationship creating a duty of care upon the attorney; (2) the breach of that duty; and (3) proximate causation." Fitzgerald v. Linnus, 336 N.J. Super. 458, 467 (App. Div. 2001) (internal citations and quotation marks omitted). However, if an action alleging legal malpractice action is brought by a non-client, an attorney may owe a limited duty of care if it is shown that the lawyer knows, or should have known, that the non-client will rely on the attorney's representations and the non-client is not too remote from the attorney to be entitled to protection. Petrillo, supra, 139 N.J. at 483-84.

A successful non-client legal malpractice claim requires evidence showing an affirmative act by the attorney. In Banco Popular, the Court held that "[i]f the attorneys actions are intended to induce a specific non-client's reasonable reliance on his or her representations, then there is a relationship between the attorney and the third party. Contrariwise, if the attorney does absolutely nothing to induce reasonable reliance by a third party, there is no relationship to substitute for the privity requirement." Banco Popular, supra, 184 N.J. at 180. Thus, it is the attorney's representations "made to induce reliance" that result in a duty to the non-client. Id. at 183.

In addition, it must also be shown that a non-client's reliance on the attorney's actions or representations was reasonably foreseeable by the attorney. Petrillo, supra, 139 N.J. at 483-84. It is the reasonably foreseeable reliance by the non-client on the attorney's representation that imposes the duty of care. Ibid.

Applying those principles to the facts in this case, we agree with Judge Costello that O'Dowd failed to present evidence sufficient to create a genuine issue of material fact as to whether any act or representation by the Firm could have reasonably and foreseeably induced his reliance.

O'Dowd has not provided any evidence of an affirmative act by any member of the Mandelbaum Firm upon which he relied. The Firm was not involved in the preparation of the assignment or operating agreements. It is undisputed the company was represented by attorneys other than the Firm. It is also undisputed and O'Dowd concedes in his brief there was no direct attorney-client relationship between O'Dowd and the Firm. Further, attorney Mylod made clear in his certification that no attorney at the Firm informed him or O'Dowd of the ongoing negotiations or the status of the contracts or mortgages. This evidence does not indicate any affirmative acts by the Firm.

O'Dowd urges that the Firm knew or should have known from the Schiavone pleading, and its review of the assignment and operating agreements that he had an interest in the IP projects, but does not present any fact establishing what actions of the Firm upon which he relied. As Wilk's counsel in the Schiavone litigation and Woodmont's counsel in the IP project, it is reasonable to expect that the Firm would review the assignment and operating agreements. Attorney Mylod's certification indicated that Wilk admitted to him that the Firm reviewed the assignment agreement prior to September 2005. Again, even if it were true that the Firm reviewed the agreements, we perceive no obligation on the part of the Firm to provide O'Dowd notice of the IP negotiations since plaintiff was not a member of the company.

Next, O'Dowd failed to produce sufficient evidence from which a jury could infer that he relied upon the Firm for any information regarding the IP project. It is undisputed that O'Dowd had been represented by the same attorney since 2000. The evidence reveals that attorney Mylod provided plaintiff advice on the assignment agreement, and that counsel was aware of the execution of the operating agreement and requested a copy of the document in April 2005. Plaintiff did not need to rely on the Firm for legal advice. Plaintiff had his own counsel to review documents and monitor the development of the project on his behalf, though it appears neither plaintiff nor his counsel took action to assert his interests in the IP project until amending the Schiavone complaint, and filing the lis pendens against the IP.

In addition, O'Dowd had opportunities to seek information about the project directly from Wilk. The record reflects that he had previously discussed his interests and concerns in the IP project directly with Wilk. In 2001, he engaged in meetings and written correspondence with Wilk outlining the initial terms for cost and profit-sharing upon the sale of the property to Woodmont. In 2003, he received copies of the assignment agreement, the Certificate of Formation for KJW/I, and in August 2005, he received the operating agreement. Importantly, he and Wilk had previously been in business as investors in the Hamilton Farms project, which overlapped the timing of the IP project. There were meetings in the month preceding the initiation of the Schiavone litigation during which O'Dowd stated he was not upset or concerned with Wilk and the IP project. O'Dowd could have contacted Wilk directly to express his interest or concern with the agreements.

In sum, we agree with the motion judge that plaintiffs failed to show the Firm "undertook any affirmative act or obligation upon which plaintiffs could have relied." As Justice Long noted in Banco Popular, the Court never suggested in Petrillo, "even obliquely, that a duty would arise in [ ] circumstances . . . involving no representations" by the lawyer to a third party. Id. at 182. Here, the Firm took no action to induce any reliance by plaintiff.

We add also that in Petrillo, the Court instructs that the non-clients must not be "too remote from the attorneys to be entitled to protection." Petrillo, supra, 139 N.J. at 484. In this case, we find that remoteness exists because plaintiff was represented by his own counsel and because there was no contact between O'Dowd and the Firm. Thus, we conclude summary judgment was properly granted as the Firm owed no duty to plaintiffs.

In reaching this decision we are mindful that claims by non-clients against attorneys are permitted sparingly. LoBiondo v. Schwartz, 199 N.J. 62, 102 (2009). In LoBiondo, the Court explained the reasons for constraining such actions

The absence of a direct relationship between an attorney and a non[-]client ordinarily negates the existence of any duty and, by extension, affords no basis for relief. The requirement that there be an underlying duty to the non[-]client, as a practical matter, has limited the circumstances in which a non[-]client may file suit against another's attorney to relatively few situations.

[Id. at 101.]

Thus, the Court created a high threshold in suits brought by non-clients against attorneys; one that plaintiff failed to reach here.

To the extent we have not specifically addressed any of plaintiffs' remaining arguments, we find them to be without sufficient merit to warrant additional discussion. R. 2:11-3(e)(1)(E).

Affirmed.

1 For convenience, we will hereafter use plaintiff to refer to both O'Dowd and his company, unless the context makes clear that we refer to either individually.

2

Claims filed against defendant Buonocore and the Buonocore Firm were settled and are not part of this appeal.

3 In that action, O'Dowd and other development partners alleged they loaned Wilk in excess of $1.4 million to be used in the purchase, development, and sale of a separate and unrelated property, and that Wilk diverted the profits instead of repaying the loan.

4 O'Dowd testified he had asked his attorney to protect him from personal liability.

5 At his deposition, Wilk testified O'Dowd did not want Foremost or himself individually named as a member of the company or the operating agreement. According to Wilk, O'Dowd was worried about his personal liability.

6 Ultimately, the sale of the property between Woodmont and KJW/I was never completed, as KJW/I defaulted on its mortgage, and the property was foreclosed and sold at Sheriff's auction.

7 Plaintiff argued that depositions had not been taken and other discovery had not been completed in this action at the time of the summary judgment motion hearing.

8 Defendants cross-appealed asserting the trial court should have also dismissed plaintiffs' fraud, aiding and abetting fraud, and tortious interference claims. Given our disposition of plaintiffs' appeal, we shall not address the points on defendants' cross-appeal.