Madey v Carman

[*1] Madey v Carman 2006 NY Slip Op 52685(U) [24 Misc 3d 1207(A)] Decided on December 6, 2006 Supreme Court, Nassau County Austin, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 December 6, 2006
Supreme Court, Nassau County

Diane Madey, Individually, and as Shareholder of Hardscrabble Acres, Inc., and Heritage Homes at Bethpage Park Estates Inc., Plaintiffs,

against

Gregory W. Carman, Jr. And Hardscrabble Acres, Inc., Defendants.



13538-02



COUNSEL FOR PLAINTIFF

Jeffrey Levitt, Esq.

330 Broadway - Suite 2

Amityville, New York 11701

COUNSEL FOR DEFENDANT

Steinberg & Cavaliere, LLP

50 Main Street

White Plains, New York 10606

Leonard B. Austin, J.

Defendant Gregory W. Carman, Jr. moves pursuant to CPLR 3212, for summary judgment dismissing the complaint. Plaintiffs cross-move to strike Gregory W. Carman Jr.'s answer based upon discovery abuse, for summary judgment and to dismiss his counterclaims.

BACKGROUND

This action arises out of a failed real estate development venture. Plaintiff Diane Madey [*2]("Madey") and Defendant Gregory W. Carman, Jr. ("Carman") are the sole shareholders of the developer, Plaintiff Hardscrabble Acres, Inc. (now known as Heritage Homes Park Estates, Inc.) ("Hardscrable"). Although completed, the venture failed to return a profit.

In 1986, Madey purchased a 2 acre undeveloped flag shaped parcel of real property situated at 8 Merritt Road in Farmingdale, New York (the "property") for a purchase price of $180,000.00 from Ronald and Alice Harmon. The contract of sale called for an $11,000.00 down payment, $25,000.00 on closing and a purchase money mortgage for the balance of $144,000.00. Madey intended to subdivide the parcel into four lots for development purposes.

Between 1985 and 1996, prior to her association with Carman, Madey did not commence physical development on the subdivision, except for landscaping to clear shrubs and undergrowth. Madey testified at her deposition that during this time period she secured multiple extensions for payment on the purchase money mortgage. Her lack of funds at one time (1994) resulted in a tax lien sale. In 1996, Madey retained Carman, an attorney, to provide legal representation in connection with the filing of the deeds for the subdivision.

Subsequently, in 1997, Carman sought to join Madey in the development enterprise. Pursuant to a written Shareholder's Agreement and an "Agreement About Properties" (collectively the "1997 Agreement") Carman became a shareholder in Hardscrabble Acres, Inc., the corporate developer, and took a one third interest in the real property. In exchange, he assumed one third of the venture's underlying debt. He also obligated himself to provide financing and legal services to Hardscrabble and to secure an easement from the Harmons who were still contiguous property owners inasmuch as the project required an access road over a portion of their property due to site distance problems with the flag shaped parcel. Carman did not advise Madey to seek independent counsel to review the arrangement, notwithstanding that he had acted as her attorney.

Carman assumed management of the development/construction process, advancing personal funds, hiring contractors and arranging for certain financing from private lenders, including one Thomas Gubitosi ("Gubitosi"). With respect to the private roadway easement, engineering plans were prepared but the effects upon the Harmon property were unacceptable to them and they refused to grant the easement. Alternate access remained necessary due to the parcel's site distance problems on Merritt Road. An additional contiguous parcel fronting on another public highway became available. Carman purchased that parcel with his own and borrowed funds. He granted the necessary easements to Hardscrabble Acres and then resold the parcel. The net proceeds of sale went into Hardscrabble Acres accounts.

It appears from the documents submitted and the deposition testimony taken that the development venture faced delays, was constantly behind in its construction schedule and these and other problems operated to increase costs and render the existing financing insufficient. The reasons for the failure are disputed.

Madey lays full blame for delays in construction and financing upon Carman. She nevertheless appears to have been a willing participant, signing all written agreements to hire contractors and borrow from private lenders. Indeed, notwithstanding her dissatisfaction with Carman, she entered into an Amended Shareholder's Agreement in August 2001 ("2001 Amended Agreement"), after conferring with independent counsel. Madey testified at deposition that she did so because Carman had refused to provide further personal financing without an amended agreement, threatened to have Gubitosi foreclose for non-payment on outstanding loans, and because she feared a lawsuit from one of the purchasers for delays in [*3]construction of their home. With regard to the 2001 Amended Agreement, Madey was represented by Jeffrey Levitt, counsel of record in this matter. She testified at deposition that he was authorized to negotiate the new agreement and was present for its execution.

The 2001 Amended Agreement provided for Madey and Carman each to acquire one of the four subdivision lots and to personally assume responsibility for its mortgage, construction and other costs. Additional financing for construction was secured from Gubitosi with respect to the remaining two lots. Carman also advanced funds to Madey for construction on her lot and took a mortgage to secure the loan.

Madey brought this action against Carman after the construction and sale of the two remaining lots. The first cause of action alleges that Carman fraudulently induced Plaintiff to enter the 1997 agreement by falsely promising to secure an easement over the Harmon property and to provide funding without interest. The written agreement provides for interest at 15% upon a certain $13,129.25 loan advanced by Carman. Madey also alleges that Carman had a conflict of interest due to her status as his client, and that he should have, but did not, advise her to seek guidance from independent counsel. She seeks rescission of the 1997 Agreement or damages of approximately $1,700,000.

The second cause of action is by asserted by Madey personally and as a shareholder in a derivative claim alleging breach of contract based upon the same alleged failures to secure an easement from the Harmons and provide interest-free funding.

The third cause of action is a shareholder's derivative claim seeking an accounting and to impress a constructive trust on the parcel conveyed to Carman pursuant to the 2001 Amended Agreement.

The fourth cause of action by Madey and Plaintiff Heritage Homes at Bethpage Park Estates Inc. ("Heritage") alleges that the 2001 Amended Agreement should be rescinded by reason of their claim that it was secured by economic duress.

The fifth cause of action by Madey, Hardscrabble and Heritage seeks an accounting but does not appear to allege any cognizable legal theory. The cause of action ostensibly seeks to avoid a finding of ratification based upon completion of the venture.

The sixth cause of action by Madey, Hardscrabble and Heritage alleges legal malpractice based upon Carman's failure to advise Madey to seek independent counsel and damages flowing from the conflict of interest, and his failure to promptly provide contract documents. It also alleges that Carman "negligently" assumed "the operation of the land development".

DISCUSSION

To the extent that the causes of action or portions thereof are based upon the original 1997 Agreement they must be dismissed since such agreement was superceded by the 2001 Amended Agreement.

Madey was represented by counsel in the negotiation and execution of the 2001 Amended Agreement. She testified that she was aware it replaced the 1977 Agreement which was no longer to be operative. She responded "yes" when asked if she understood that the 2001 Amended Agreement "was modifying the prior agreements" that she had with Carman, and that the 1997 Agreement would "no longer be the agreement" between them (Madey Tr. 1153).

The question of whether a substituted agreement "discharges liability for breach of a prior agreement is a question of law for the court." American Prescription Plan v. American Postal Workers Union, 170 AD2d 471, 473 (2nd Dept. 1991). The question rests upon the parties' [*4]intention. Mallad Construction Corp. v. County Fed. Sav. & Loan Assn., 32 NY2d 285, 286 (1973).

The 2001 Amended Agreement states, in relevant part, that the parties desire to "modify the SHAREHOLDER'S AGREEMENT . . . executed September 28, 1997" and that they agree "in light of changed circumstances they will not seek adjustments for anything other than what is set forth in this amendment to their agreement ."

Madey acknowledged that the 2001 Amended Agreement was intended to replace the 1997 Agreement. Thus, both the written document and the parties' stated and acknowledged intentions indicate that the 2001 Amended Agreement was intended to supersede the original 1997 commitments and, as a result, "discharge[d] all obligations arising under them." Mallad Construction Corp. v. County Fed. Sav. & Loan Assn., Id. at 286. Accordingly, the causes of action alleging breach of the 1997 Agreement and fraudulent inducement must be dismissed.

In the fourth cause of action, Madey asserts that the 2001Amended Agreement should be voided as a product of economic duress. Financial pressures such as those faced by Madey do not constitute economic duress. See, Matter of Bruno v. City of Poughkeepsie, 121 AD2d 629, 630 (2nd Dept.), lv. app. den. 69 NY2d 602 (1986).An agreement may only be avoided on the ground of economic duress "where the complaining party was compelled to agree to its terms by means of a wrongful threat which precluded the exercise of . . . free will." 767 Third Ave. LLC v. Orix Capital Markets, LLC, 26 AD3d 216, 218 (1st Dept. 2006), quoting, Stewart M. Muller Construction Co. v. New York Tel. Co., 40 NY2d 955, 956 (1976). A threat to exercise a legal right, such as one to foreclose , is not wrongful and cannot constitute duress Id. Thus, any claim that Carman would persuade Gubitosi to foreclose on Madey's lot does not constitute economic duress. Nor has Plaintiff shown that Carman's refusal to further lend his personal funds to the venture constituted wrongful conduct, as she has not shown that he was under any continuing legal or contractual obligation to do so. Cf. Friends Lumber, Inc. v. Cornell Development Corp., 243 AD2d 886, 888 (3rd Dept. 1997) ("economic duress is demonstrated by proof that one party to the contract has threatened to breach the contract by withholding performance unless the other party agrees to some further demand'").

In any event, assuming arguendo that there was a wrongful threat not to perform for purposes of this motion, Plaintiff was under a duty to promptly disavow the 2001 Amended Agreement. She was not free to wait until the venture and all transactions thereunder were completed before doing so. "One who would disaffirm a contract made under duress must act promptly to repudiate it or be deemed to have elected to

affirm." Sosnoff v. Carter, 165 AD2d 486, 492 (1st Dept 1991). See, Morad v. Morad, 27 AD3d 626 (2nd Dept. 2006). See also, Beutel v. Beutel, 55 NY2d 597 (1982); and Weinstein v. Weinstein, 109 AD2d 881 (2nd Dept. 1985). Accordingly, the fourth cause of action must be dismissed.

Plaintiff also claims, with regard to the 1997 Agreement, that Carman was under an ethical duty to advise her as his client to seek independent legal advice before entering into a business arrangement with him, and that this failure must result in rescission.

An attorney owes a unique fiduciary duty. Counsel is "imbued with ultimate trust and confidence" and an attorney's obligations "transcend those prevailing in the commercial market place." Schlanger v. Flaton, 218 AD2d 597, 601 (1st Dept. 1995), lv. app. den., 87 NY2d 812 (1996). The duty "to deal fairly, honestly and with undivided loyalty superimposes onto the [*5]attorney-client relationship a set of special and unique duties, including maintaining confidentiality, avoiding conflicts of interest, operating competently, safeguarding client property and honoring the clients' interests over the lawyer's". Id. Thus, although an attorney is not "prohibited" from entering into a contract with a client, it "is not advisable." Greene v. Greene, 56 NY2d 86, 92 (1982).

For purposes of this motion, it is assumed that Carman breached DR 5-104[a][2] (22 NYCRR 1200.23) by failing to advise Madey to seek independent legal counsel in connection with the 1997 Agreement. The evidence establishes that Madey's continued association with Carman and the execution of an additional agreement — — the 2001

Amended Agreement — — after consulting with independent counsel, has operated to ratify any prior ethical breach.

The evidence shows that in 1998, Plaintiff consulted Jeffrey Levitt, Esq., now counsel of record, who wrote to Carman raising the ethical breach stating that Carman had "overreached " in entering the venture with his client. Plaintiff's failure to act upon this assumed ethical transgression, and her entry into an additional agreement superceding the one complained of while represented by independent counsel, constitutes a ratification of Carman's conduct. King v. Fox, 7 NY3d 181,190 (2006). See also, Morad v. Morad, supra.

Ratification is established by a showing that the client "acquiesced" in the agreement "with full knowledge of all the material circumstances" and that "such acquiescence was not brought about by fraud on the attorney's part, or misconception on the part of the client." King v. Fox, supra. After securing independent legal advice concerning the 1997 Agreement Madey did not repudiate that agreement. Instead she offered to buy Carman's interest. He refused the offer, and she continued her association with him. Thereafter, she entered into the 2001 Amended Agreement. As Madey's ratification was not induced by misconduct or fraud, it is valid. Id.Accordingly, Plaintiff's claims of attorney misconduct must be dismissed.

The third cause of action asserts a derivative claim for an accounting and a constructive trust on the real property parcel deeded to Carman under the 2001 Amended Agreement. Madey alleges waste and mismanagement on Carman's part. Specifically, the complaint alleges that Carman failed to secure a written agreement with one contractor ("Giglio") which resulted in a lawsuit, and that Carman failed to secure an easement from the Harmons which required purchase of additional property and caused delay. There are no allegations of fraud, self dealing or bad faith.

Carman's actions on behalf of the corporate Plaintiffs are protected by the business judgment doctrine which bars judicial inquiry "into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes." Auerbach v. Bennett, 47 NY2d 619, 629 (1979). In part, the business judgment rule is founded upon "the prudent recognition that courts are ill equipped and infrequently called on to evaluate what are and must be essentially business judgments" and on the assumption that "there can be no available objective standard by which the correctness of every corporate decision may be measured . . . " Id at 630-1. The doctrine shelters even "unwise or inexpedient" decisions. Id.

Madey has failed to submit evidence to rebut the "presumption" that Carman exercised his "honest judgment to promote the lawful and legitimate interests of the corporation." Horwitz v. 1025 Fifth Ave., 7 AD3d 461, 462 (1st Dept. 2004), and accordingly the third cause of action must also be dismissed. [*6]

Finally, Madey alleges legal malpractice. In order to prevail on a claim of legal malpractice, a plaintiff must demonstrate a duty owed by the attorney, a breach of that duty and proof that actual damages were proximately caused by the breach. Ippolito v. McCormack Damiani Lowe & Mellon, 265 AD2d 303 (2nd Dept. 1999). In order to prove proximate cause a plaintiff must prove that, "but for" the attorney's breach, he/she would have obtained a better result. See, Parksville Mobile Modular v. Fabricant, 73 AD2d 595, 599 (2nd Dept. 1979). A failure in any one element will result in a dismissal of the claim. Albanese v. Hametz, 4 AD3d 379, 381 (2nd Dept. 2004).

Madey first alleges that Carman failed to exercise due care on behalf of Hardscrabble in litigation brought by Giglio. The Giglio action, which sought compensation for services provided, was settled for approximately $20,000. This portion of the claim must fail as Carman was not counsel of record in that action. The documentary evidence shows that Madey and Hardscrabble were represented by James Carman, Esq.; not Defendant Gregory W. Carman, Jr.

Madey also alleges that Carman committed malpractice by failing to advise her to seek counsel before entering the 1997 Agreement, by failing to promptly provide contracts to buyers, and by "negligently assuming operation" of the project.

Notwithstanding such claim, Madey ratified the failure to advise by entering a superceding agreement after consulting with and being represented by independent counsel. Furthermore, the hiring of contractors and borrowing of funds were clearly not provided in Carman's professional capacity. Thus, "assuming operation" of the project, and any errors or omissions in this function do not constitute legalmalpractice.

With respect to the alleged failure to timely produce a contract for a prospective purchaser, Plaintiff alleges that Caman's delay in preparing a contract for John Cucci, who signed a binder dated June 7, 1998, resulted in a loss of the sale and subsequent damages. This claim fails on several grounds. Initially, it is time barred under the three year statute of limitations for legal malpractice. CPLR 214(6). See, Brothers v Florence, 95 NY2d 290 (2000), as this action was not commenced until August 15, 2002, more than four years later.

Even were the Court to find that there was continuous legal representation until September 2, 1999, when Levitt advised Carman by letter that he was "representing Diane Madey and Hardscrabble Acres", there remains an evidentiary failure. Madey has merely alleged that Carman delayed preparing a contract "for months". She has not offered any evidence to show that such delay caused Cucci to abandon the sale. Accordingly, so much of the sixth cause of action as claims contract delay must also be dismissed.

With respect to Plaintiff's application to dismiss the counterclaims, the motion papers do not address this application. Accordingly, it must be denied without prejudice.

So much of Plaintiff's cross-motion as seeks dismissal based upon disclosure misconduct cannot be granted. Deposition testimony reveals that, during disclosure, Carman received several letters addressed to Levitt which were unsigned and otherwise unidentified. Such letters were not from Plaintiff. Thus, they were not subject to the attorney-client privilege. Nor was it apparent that they were confidential attorney work product or wrongfully taken or retained. Cf. Matter of Wisehart, 281 AD2d 23, 24 (1st Dept.), lv. app. den., 96 NY2d 935 (2001) (documents which "on their face clearly

were attorney work product" were delivered in error and should have been returned to opposing counsel). Accordingly, the cross-motion must be denied. [*7]

Inasmuch as the complaint herein is being dismissed, the Court need not reach the issue of the disqualification of Mr. Levitt.

Accordingly, it is,

ORDERED, that Defendant'ss motion for summary judgment dismissing the complaint is granted; and it is further,

ORDERED, that Defendant's motion to disqualify Jeffrey Levitt, Esq. as counsel for Plaintiff is denied as academic; and it is further,

ORDERED, that Defendant's motion for summary judgment on its counterclaims is denied without prejudice with leave to renew; and it is further,

ORDERED, that Plaintiff's cross-motion for summary judgment is denied.

This constitutes the decision and Order of the Court.

Dated: Mineola, NY_____________________________

December 6, 2006Hon. Leonard B. Austin, J.S.C.