Fortnow v Hughes Hubbard & Reed, LLP

[*1] Fortnow v Hughes Hubbard & Reed, LLP 2005 NY Slip Op 52140(U) [10 Misc 3d 1064(A)] Decided on November 30, 2005 Supreme Court, New York County Edmead, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on November 30, 2005
Supreme Court, New York County

Matthew Fortnow, MICHAEL GERSH, KHALED MATAR, PETER PEZARIS AND JAMES PRICE, Plaintiffs,

against

Hughes Hubbard & Reed, LLP and KENNETH A. LEFKOWITZ, Defendants.



125924/02

Carol Robinson Edmead, J.

In the motion at bar, defendants Hughes Hubbard & Reed LLP ("HHR") and Kenneth A. Lefkowitz ("Lefkowitz") (collectively "defendants"), move for an order striking the demand for punitive damages in the verified amended complaint of plaintiffs Matthew Fortnow, Michael Gersh, Khaled Matar, Peter Pezaris and James Price ("plaintiffs"), on the ground that they fail to set forth legally sufficient claims, or in the alternative, for a protective order staying discovery regarding punitive damages until after a determination has been made whether punitive damages are appropriate. Plaintiffs oppose this motion, and urge that defendants be directed to comply with plaintiffs' discovery demands 72 hours after the Jury Determination.[FN1] This motion was prompted by plaintiffs' Second Notice of Discovery and Inspection and Second Set of Interrogatories to defendants seeking financial information about defendants that would purportedly be needed only to determine the amount of punitive damages that should be awarded.

The Verified Amended Complaint

Plaintiffs stress that the first and fourth causes of action do not sound in malpractice.[FN2] [*2]The second and third causes of action rely on a theory of malpractice, and contain allegations of negligence; the first and fourth causes of action rely instead on tortious conduct.

The two causes of action in which defendants center their punitive damages claim are the first and the fourth causes of action.[FN3]

Plaintiffs are former shareholders of Daedalus World Wide Corporation ("Daedalus"), which developed software for use in operating online sports "fantasy leagues." In 1998, Daedalus began providing sports fantasy content to SportsLine.com ("SportsLine"), which operated a website with sports-related content. In October 1999, Daedalus retained defendant HHR to render legal services in connection with the proposed merger transaction between SportsLine and Daedalus. Defendant Kenneth Lefkowitz was the principal HHR attorney who was involved in this engagement. In or around October 1999, Daedalus hired Broadview International PLC ("Broadview") to act as its financial adviser with respect to the proposed transaction with SportsLine.

The first cause of action in the verified amended complaint, specifically paragraphs 36, 37 and 38, contains allegations that defendants violated their fiduciary duties to plaintiffs when, while having a conflict of interest, they negotiated the Broadview retainer agreement, that they concealed the fact that Broadview was an existing client deliberately and with the intent to favor the interests of Broadview as against those of plaintiffs. Plaintiffs allege that defendants recommended Broadview to Daedalus without disclosing that HHR represented Broadview in unrelated matters. As a result, plaintiffs entered an agreement that was onerous and unreasonable in that Broadview's percentage fee was required to be paid in cash, and would be based on the value of stock plaintiffs would receive at the time of the merger with SportsLine without taking into account any subsequent decline in value during any period when plaintiffs might be restricted from selling their shares. There should have been a discount on Broadview's fee based on the fact that the stock plaintiffs received was not freely tradable. This conduct of the defendants was wanton, dishonest and evinced a high degree of moral turpitude.

The defendants were supposed to be acting on behalf of Daedalus. The interests of Daedalus and Broadview were adverse to one another, as is apparent and as specifically alleged in paragraph 23 of the Amended Complaint. Thus, the defendants were representing one client in negotiating with another client when the interests of both clients were adverse.

The allegations in the fourth cause of action, specifically, paragraphs 65 through 72, assert that defendants violated their fiduciary duties to plaintiffs when they concealed that Viacom was an existing client deliberately and with the intent to favor Viacom's interests as against that of plaintiffs and that the conduct of the defendants was wanton, dishonest and evinced a high degree of moral turpitude.

According to the defendants, plaintiffs allege that defendants, their former lawyers, committed legal malpractice and breach of duty by permitting them to sell their small Internet company to a larger Internet company at the height of the Internet stock bubble. As [*3]consideration for this sale, plaintiffs received shares in the acquiring company as well as employment agreements. As is customary in such transactions, the shares plaintiffs received could not be sold immediately. The acquiring company also restricted its employees' right to trade the company's shares. By the time plaintiffs' shares became freely tradable, the Internet bubble had burst and the market price of the shares had declined substantially. Plaintiffs seek to hold their lawyers responsible for the paper losses they suffered as a result of this decline. Herein also lies the basis for the punitive damages claim.

Plaintiffs counter stating that although defendants base the assertion that punitive damages cannot be awarded for a malpractice claim, the first cause of action alleges something more than negligence or malpractice. Instead, it asserts that defendants acted deliberately, wantonly, and dishonestly, with the intention to favor the interests of their client, Broadview, and that their conduct evinced a high degree of moral turpitude.

By the same token, plaintiffs argue that the fourth cause of action relates to the concealment by the defendants of the fact that Viacom was their client and their acting as attorneys for Daedalus and plaintiffs while having a conflict of interest. In the fall of 1999, SportsLine had made an offer to acquire all the shares of Daedalus. At that time, CBS, Inc. owned 20% of the outstanding shares of SportsLine. However, a public announcement had been made regarding the acquisition of CBS by Viacom. Upon completion, the merger would result in Viacom becoming the owner of the shares of SportsLine stock owned by CBS. The CBS-Viacom merger had been approved by the boards of directors of both corporations so it was highly likely that the merger would occur. In fact, the merger did occur. These facts gave Viacom an interest and a stake in the Daedalus-SportsLine merger - - it was in Viacom's interest to see that SportsLine made the best possible deal. It was in Daedalus' best interest, however, to negotiate the best deal for itself and its shareholders, and their interests were therefore adverse to those of Viacom. This created another conflict for defendants and the plaintiffs.

Since defendants never advised plaintiffs that Viacom was a client and that a merger between Viacom and CBS had been announced, the plaintiffs were deprived of any opportunity to object or waive the conflict.

Analysis

Plaintiffs allege that on two closely related transactions, the defendants had two separate conflicts of interest. Plaintiffs claim that this was more than mere coincidence and that the failure to disclose both conflicts demonstrates that defendants acted intentionally, in order to confer benefits upon their two existing clients, Broadview and Viacom.

CPLR §3211 [a] [7]: Dismiss for Failure to State a Cause of Action

Although not stated, defendants have fashioned a motion to dismiss, based on the fact that punitive damages are not recoverable in this case.

In determining a motion to dismiss, the Court's role is ordinarily limited to determining whether the complaint states a cause of action (Frank v DaimlerChrysler Corp., 292 AD2d 118, 741 NYS2d 9 [1st Dept 2002]). The standard on a motion to dismiss a pleading for failure to state a cause of action is not whether the party has artfully drafted the pleading, but whether deeming the pleading to allege whatever can be reasonably implied from its statements, a cause of action can be sustained (see Stendig, Inc. v Thom Rock Realty Co., 163 AD2d 46 [1st Dept 1990]; Leviton Manufacturing Co., Inc. v Blumberg, 242 AD2d 205, 660 NYS2d 726 [1st Dept 1997] [on a motion for dismissal for failure to state a cause of action, the court must accept [*4]factual allegations as true]). When considering a motion to dismiss for failure to state a cause of action, the pleadings must be liberally construed (see, CPLR §3026). On a motion to dismiss made pursuant to CPLR §3211, the court must "accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit into any cognizable legal theory" (Leon v Martinez, 84 NY2d 83, 87-88, 614 NYS2d 972, 638 NE2d 511 [1994]). However, in those circumstances where the bare legal conclusions and factual allegations are "flatly contradicted by documentary evidence," they are not presumed to be true or accorded every favorable inference (Biondi v Beekman Hill House Apt. Corp., 257 AD2d 76, 81, 692 NYS2d 304 [1st Dept 1999], affd 94 NY2d 659, 709 NYS2d 861, 731 NE2d 577 [2000]; Kliebert v McKoan, 228 AD2d 232, 643 NYS2d 114 [1st Dept], lv denied 89 NY2d 802, 653 NYS2d 279, 675 NE2d 1232 [1996], and the criterion becomes "whether the proponent of the pleading has a cause of action, not whether he has stated one" (Guggenheimer v Ginzburg, 43 NY2d 268, 275, 401 NYS2d 182, 372 NE2d 17 [1977]; see also Leon v Martinez, 84 NY2d 83, 88, 614 NYS2d 972, 638 NE2d 511 [1994]; Ark Bryant Park Corp. v Bryant Park Restoration Corp., 285 AD2d 143, 150, 730 NYS2d 48 [1st Dept 2001]; WFB Telecom., Inc. v NYNEX Corp., 188 AD2d 257, 259, 590 NYS2d 460 [1st Dept], lv denied 81 NY2d 709, 599 NYS2d 804, 616 NE2d 159 [1993] [CPLR §3211 motion granted where defendant submitted letter from plaintiff's counsel which flatly contradicted plaintiff's current allegations of prima facie tort]).

On a motion to dismiss for failure to state a cause of action pursuant to CPLR §3211[a] [7] where the parties have submitted evidentiary material, including affidavits, the pertinent issue is whether claimant has a cause of action, not whether one has been stated in the complaint (see Guggenheimer v. Ginzburg, 43 NY2d 268, 275 [1977]; R.H. Sanbar Projects, Inc. v Gruzen Partnership, 148 AD2d 316, 538 NYS.2d 532 [1st Dept 1989]). Affidavits submitted by a plaintiff may be considered for the limited purpose of remedying defects in the complaint (Rovello v Orofino Realty Co., 40 NY2d 633, 635-36 [1976]; Arrington v New York Times Co., 55 NY2d 433, 442 [1982]).

On a motion to dismiss directed at the sufficiency of the complaint, the plaintiff is afforded the benefit of a liberal construction of the pleadings: "The scope of a court's inquiry on a motion to dismiss under CPLR 3211 is narrowly circumscribed" (1199 Housing Corp. v International Fidelity Ins. Co., NYLJ January 18, 2005, p. 26 col.4, citing P.T. Bank Central Asia v Chinese Am. Bank, 301 AD2d 373, 375 [2003]), the object being "to determine if, assuming the truth of the facts alleged, the complaint states the elements of a legally cognizable cause of action" (id. at 376; see Rovello v Orofino Realty Co., 40 NY2d 633, 634 [1976]).

Punitive Damages

"Punitive damages are awarded in tort actions '[w]here the defendant's wrongdoing has been intentional and deliberate, and has the character of outrage frequently associated with crime" (Prozeralik v Capital Cities Communications, Inc., 82 NY2d 466, 605 NYS2d 218, 626 NE2d 34 [1993], quoting Prosser and Keeton, Torts § 2, at 9 [5th ed. 1984]). That author also teaches that: "Something more than the mere commission of a tort is always required for punitive damages. There must be circumstances of aggravation or outrage, such as spite or 'malice,' or a fraudulent or evil motive on the part of the defendant, or such a conscious and deliberate disregard of the interests of others that the conduct may be called wilful or wanton" (Prosser and Keeton, Torts § 2, at 9-10 [5th ed.1984]). [*5]

Thus, the harmful conduct must be "intentional, malicious, outrageous, or otherwise aggravated beyond mere negligence" (McDougald v Garber, 73 NY2d 246, 538 NYS2d 937, 536 NE2d 372 [1989]). Furthermore, an award of punitive damages must be supported by "clear, unequivocal and convincing evidence" (Munoz v Puretz, 301 AD2d 382, 753 NYS2d 463 [1st Dept 2003]).

Further, it is well settled that the purpose of punitive damages is not to remedy private wrongs but to vindicate public rights (see Garrity v Lyle Stuart, Inc., 40 NY2d 354, 358 [1976]). Thus, a private party seeking to recover punitive damages must not only demonstrate egregious tortious conduct by which he was aggrieved and which is actionable as an independent tort, but also that such conduct was part of a pattern of similar conduct directed at the public generally (see New York University v Continental Ins. Co., 87 NY2d 308, 315-316 [1995]; Rocanova v Equitable Life Assurance Society of United States, 83 NY2d 603, 613 [1994]; RTC Industries, Inc. v Goodtimes Home Video Corp., 1997 WL 35524 [SDNY 1997]).

"Punitive damages are available only in those limited circumstances where it is necessary to deter defendant and others like it from engaging in conduct that may be characterized as 'gross' and 'morally reprehensible' and of 'such wanton dishonesty as to imply criminal indifference to civil obligations' " (New York University v Continental Ins. Co., supra, at 316.

Such damages, however, may be recovered in addition to compensatory damages upon a showing that conduct complained of was part of a pattern of similar conduct directed at the public generally, aggravated by evil or a wrongful motive or that there was wilful and intentional misdoing, or a reckless indifference equivalent intentional wrongdoing (Walker v Sheldon, 10 NY2d 401, 404-405 [1961]; see, also Rocanova v Equitable Life Assur. Soc., supra.)

"Even where there is gross negligence, punitive damages are awarded only in 'singularly rare cases' such as cases involving an improper state of mind or malice or cases involving wrongdoing to the public" (Karen S. "Anonymous" v Streitferdt, 172 AD2d 440, 441, quoting Rand & Paseka Mfg. Co. v Holmes Protection, 130 AD2d 429, 431, lv denied 70 NY2d 615.)

Conclusion

Plaintiffs have failed to sufficiently state a cause of action for punitive damages. The court cannot conclude that the defendants' behavior was "so outrageous as to evince a high degree of moral turpitude" (see Rosenkrantz v Steinberg, 13 AD3d 88, 786 NYS2d 35 [1st Dept 2004]; see also Cohen v Mazoh, 12 AD3d 296, 784 NYS2d 857 [1st Dept 2004] ["the facts alleged do not establish gross, wanton or willful fraud or other morally culpable conduct to a degree sufficiently warranting punitive damages"]; Camillo v Geer, 185 AD2d 192, 587 NYS2d 306 [1st Dept 1992] [record does not support a finding of outrageous conduct warranting award of punitive damages]).

The plaintiff has also failed to state claims supporting an award of punitive damages, sufficient to overcome the instant motion, through specific evidentiary allegations, that the alleged conduct was of an egregious nature, and aimed not solely at this plaintiff, but at the public, generally (American Transitions. Co. v Associated International Ins. Co., 261 AD2d 251[1st Dept 1999]).

A claim for punitive damages is cognizable only in circumstances where plaintiff has [*6]made sufficient evidentiary allegations of ultimate facts of fraudulent and deceitful scheme in dealing with general public as to imply criminal indifference to civil obligations (Porter v Allstate Inc. Co., 184 AD2d 685 [2d Dept 1992]).

Defendants' alleged failures to disclose that HHR represented Broadview and Viacom in unrelated matters do not evince a high level of moral turpitude, nor could these alleged failures remotely be considered to approach criminal conduct.

Based on the foregoing, it is hereby

ORDERED that the motion of defendants Hughes Hubbard & Reed LLP and Kenneth A. Lefkowitz, for an order striking the demand for punitive damages in the verified amended complaint of plaintiffs Matthew Fortnow, Michael Gersh, Khaled Matar, Peter Pezaris and James Price, on the ground that they fail to set forth legally sufficient claims, is granted. It is further

ORDERED that counsel for defendants shall serve a copy of this order with notice of entry within twenty days of entry on counsel for defendants.

This constitutes the decision and order of this court.[FN4]

Dated:November 30, 2005_________________________

Carol Robinson Edmead, J.S.C. Footnotes

Footnote 1: At the conference on this motion on November 15, 2005, the court stayed discovery pending its decision on the instant motion.

Footnote 2: Interestingly, plaintiffs' attorney affidavit of Robin Nelson Wolfe, paragraph 5, contradicts this position: "These documents.....were confined to seeking information and/or documents relating to the income/compensation of defendants during the period when they allegedly committed malpractice (1999-2000) and the net worth of defendants. Obviously the information and documents were sought solely in connection with plaintiff's [sic] claims for punitive damages." (Emphasis added)

Footnote 3: The second and third causes of action are denominated as sounding in malpractice. The first and fourth causes of action do not refer specifically to malpractice. Instead, the first and fourth causes of action are claims for damages resulting from the tortious conduct arising from conflicts of interest, the concealment by the defendants of material facts and other related facts.

Footnote 4: This decision has been modified for publication.