Jade Sec., LLC v Gunnallen Fin., Inc.

[*1] Jade Sec., LLC v Gunnallen Fin., Inc. 2009 NY Slip Op 51429(U) [24 Misc 3d 1212(A)] Decided on June 26, 2009 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 June 26, 2009
Supreme Court, New York County

Jade Securities, LLC, ABRAHAM MIRMAN, and MICHAEL MIRMAN, Plaintiffs,

against

Gunnallen Financial, Inc., DAVID H. JARVIS, ESQ., and PADUANO & WEINTRAUB, LLP, Defendants.



109349/08

Carol R. Edmead, J.

FACTUAL BACKGROUND

Motion sequence numbers 003 and 004 are consolidated for disposition.

In motion sequence 003, defendants GunnAllen Financial, Inc. (GunnAllen) and David H. Jarvis, Esq. (Jarvis) move, pursuant to CPLR 3211 (a) (7) and (8), to dismiss the first amended complaint as against them. In motion sequence 004, defendant Paduano & Weintraub, LLP move to dismiss the first amended complaint as against it, pursuant to CPLR 3211 (a) (7). By stipulation received by the court on April 20, 2009, plaintiffs have withdrawn the complaint, with prejudice, against Paduano & Weintraub, LLP, rendering motion sequence 004 moot.

In November, 2007, plaintiff Jade Securities, LLC (Jade) commenced arbitration against GunnAllen and Jarvis before FINRA Dispute Resolution, FINRA Case No. 07-03404, alleging the same basic causes of action against GunnAllen and Jarvis as are alleged in the instant lawsuit. By order of this court, dated May 20, 2008, that arbitration proceeding was permanently stayed, the court having determined that the matter was not arbitrable.

In the present action, Jade and Abraham Mirman and Michael Mirman (the Mirmans) (collectively, plaintiffs) have asserted six causes of action: (1) breach of contract against GunnAllen; (2) unjust enrichment against GunnAllen; (3) breach of an implied covenant of good faith and fair dealing against GunnAllen; (4) conversion against GunnAllen; (5) attorney malpractice-professional negligence against Jarvis; and (6) attorney malpractice-professional negligence against Paduano & [*2]Weintraub, LLP, which cause of action has been withdrawn.

On or about February 10, 2005, Jade's predecessor-in- interest (hereinafter referred to collectively, with Jade, as Jade) and GunnAllen entered into an Affiliation Agreement-Term Sheet (Opposition Affidavit, Ex. 2), by which Jade became an independent affiliated branch of GunnAllen, a registered broker-dealer and registered investment advisor. Pursuant to this agreement, Jade was to receive 85% of the first $5,000,000 in gross banking revenue that Jade would generate, and 90% of the gross banking revenue that Jade would generate in excess of $5,000,000. The term "gross banking revenue" is not defined in the agreement.

Through Jade's efforts, GunnAllen entered into an Exclusive Investment Banking Agreement (Opposition Affidavit, Ex. 1) with Charys Holding Company, Inc. (Charys) on May 11, 2005. Between November, 2005, and March, 2007, GunnAllen engaged in numerous transactions on behalf of Charys, entitling GunnAllen to a total fee from Charys of $15,348,250, of which Jade alleges, pursuant to its agreement with GunnAllen, it is owed $11,297,175, $1,995,000 having already been paid.

GunnAllen states, and it is not controverted, that it never actually received any payment from Charys, and that Charys is now in bankruptcy. During the period in question, plaintiffs allege that, because they had no privity with Charys, they could not negotiate with Charys for payment. Plaintiffs assert that GunnAllen failed to sign any compromise with Charys to obtain payment, despite plaintiffs' attempts to have the matter resolved. Jade attempted to have GunnAllen assign its rights to the Charys payments to Jade, which Jade maintains was an idea initiated by GunnAllen, but GunnAllen never signed the assignment. Plaintiffs also tried to negotiate a promissory note directly with Charys, which never came to fruition.

Plaintiffs allege that during all these attempts to obtain payment from GunnAllen and Charys, they believed that Jarvis, GunnAllen's Executive Vice President and General Counsel, was acting as their legal counsel to resolve the Charys matter, an allegation that Jarvis and GunnAllen deny.

In the Charys bankruptcy proceedings, GunnAllen has filed a claim for 10% of the Charys fees that it is owed. Plaintiffs state that Jarvis attempted to assign 90% of the total amount owed to it by Charys to plaintiffs, but plaintiffs refused. Plaintiffs assert that, by GunnAllen only seeking 10% of the fees to which it is entitled from Charys, it has effectively destroyed plaintiffs' right to their compensation emanating from the Charys transactions.

GunnAllen's primary office is in Florida, which is where Jarvis lives and works. Jarvis is not licensed to practice law in the state of New York, and insists that his only contacts with [*3]the New York plaintiffs, Jade and the Mirmans, were minimal, basically limited to two or three telephone calls and a few e-mails.

DISCUSSION

CPLR 3211 (a), "Motion to dismiss cause of action," states that"[a] party may move for judgment dismissing one or more causes of action asserted against him on the ground that:

(7) the pleading fails to state a cause of action...

On a motion to dismiss pursuant to CPLR 3211, the pleading should be liberally construed, the facts alleged by the plaintiff should be accepted as true, and all inferences should be drawn in the plaintiff's favor (Leon v Martinez, 84 NY2d 83 [1994]); however, the court must determine whether the alleged facts "fit within any cognizable legal theory." Id. at 87-88. Further, "[a]llegations consisting of bare legal conclusions ... are not presumed to be true [or]accorded every favorable inference." Biondi v Beekman Hill House Apt. Corp., 257 AD2d 76, 81 (1st Dept 1999), affd 94 NY2d 659 (2000).

Defendants' motion to dismiss the first cause of action for breach of contract is denied.

Both sides agree that an agreement exists between them covering the matter in controversy. The argument concerns the parties' varying definition of the term "gross banking revenue." Plaintiffs insist that the term refers to income to which GunnAllen is entitled to receive, regardless of actual payment, similar to an accounts receivable item on a balance sheet. Conversely, GunnAllen maintains that the term can only mean funds actually received. To support these contentions, plaintiffs cite the Securities and Exchange Commission Guidelines on Revenue Recognition in Financial Statements, 17 CFR Part 211, and GunnAllen refers to Black's Law Dictionary.

"[T]he interpretation of the terms of a contract is

normally the province of the court, unless a provision

is ambiguous, requiring parol evidence of the parties'

intent. ... [W]here the intention of the parties may

be gathered from the four corners of the instrument,

interpretation of the contract is a question of law,

and ... no trial is necessary to determine the legal

effect of the contract [internal quotation marks and

citations omitted]."

Unisys Corporation v Hercules Incorporated, 224 AD2d 365, 369 (1st Dept 1996).

In the instant matter, the parties failed to define the term "gross banking revenues" in their agreement, and the court finds the term to be ambiguous. Some courts and contracts interpret the term "gross revenues" to mean funds that have actually been collected (Redlands Surgical Services v Commissioner, 113 TC 47 [*4][1999]), whereas other courts and contracts define the term to include funds due and owing, but not yet received (US v ASCAP, 559 F Supp 2d 332 [SD NY 2008]). Furthermore, there is a distinction in the use of the term between cash and accrual taxpayers, and the tax reporting status of the parties also does not appear in the agreement. Consequently, "issues of fact

exist with regard to material terms of the agreement and as to

whether there was a meeting of the minds to formulate a valid

contract ... ." Khazzam v Tremont Advisors, Inc., 214 AD2d 515, 517 (1st Dept 1995)(question as to whether compensation is based on fees or revenues).

Defendants' motion to dismiss the second cause of action for unjust enrichment is granted.

The existence of a valid contract bars a cause of action in quantum meruit. Hawthorne Group, LLC v RRE Ventures, 7 AD3d 320 (1st Dept 2004); see also Sheiffer v Shenkman Capital Mgt., 291 AD2d 295 (1st Dept 2002).Since both parties agree that they have an agreement that covers the issue in contention, plaintiffs cannot maintain a separate cause of action for unjust enrichment.

Defendants' motion with respect to the third cause of action for breach of an implied covenant of good faith and fair dealing is denied.

In the complaint, plaintiffs have alleged that GunnAllen wilfully refused to collect its fees from Charys, and ultimately, in presenting its claim to the bankruptcy court, waived the right and ability to collect 90% of the fees to which it was entitled, thereby frustrating plaintiffs' ability to be compensated for their efforts.

Assuming that it is determined that a valid contract did exist between the parties, under New York, law every contract carries with it an implied covenant of good faith and fair dealing. 511 West 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144 (2002). "Encompassed within the implied obligation of each promissor to exercise good faith are any promises which a reasonable person in the position of the promissee would be justified in understanding were included [internal quotation marks and citations omitted]." Dalton v Educational Testing Service, 87 NY2d 384, 389 (1995).

In the instant matter, it would be reasonable for plaintiffs to assume that GunnAllen would make every effort to collect its debt from Charys, so that plaintiffs could receive their compensation. The complaint raises the issue as to whether GunnAllen made good faith efforts to do so. Since the right to collect the debt rested exclusively with GunnAllen, at this juncture, it would be premature to assume that, based on the [*5]allegations, GunnAllen did not breach the implied covenant of good faith and fair dealing, if its actions frustrate the purpose of the Affiliation Agreement-Term Sheet.

Defendants' motion to dismiss the fourth cause of action for conversion is granted.

Conversion is defined "as an intentional act of dominion or control over a chattel which so seriously interferes with the right of another to control it that the actor may justly be required to pay the other the full value of the chattel [internal quotation marks and citation omitted]." Thyroff v Nationwide Mutual Insurance Company, 8 NY3d 283, 288 (2007).

In the complaint, plaintiffs' assertion against GunnAllen with respect to the cause of action for conversion is that, by GunnAllen failing to assert a claim for 100% of the fees owed to it by Charys in the bankruptcy proceeding, GunnAllen has misappropriated plaintiffs' right to their share of the fees owing to GunnAllen. However, plaintiffs also state that GunnAllen offered to assign to them their share of the Charys fees so that they, plaintiffs, might present their own claim to the bankruptcy court. Plaintiffs refused to accept this assignment. Considering these facts, it cannot be maintained that GunnAllen has dominated or controlled plaintiffs' chattel so as to deprive plaintiffs of the ability to receive the funds in question.

Defendants' motion to dismiss the fifth cause of action for attorney malpractice-professional negligence is granted.

Jarvis first asserts, pursuant to CPLR 3211 (a) (8), that the court lacks jurisdiction over him, since he is a non-domiciliary who did not transact any business in the state of New York.

"CPLR 302 (a) (1) permits a New York court to exercise

personal jurisdiction over a nondomiciliary if the

nondomiciliary conducts purposeful activities' within

the state and the claim against the nondomiciliary

involves a transaction bearing a substantial relationship'

to those activities. This is a single act statute' and

proof of one transaction in New York is sufficient to

invoke jurisdiction, even though the defendant never

enters New York as long as the purposeful activities and

the connection between the activities and the transaction

are shown [internal quotation marks and citations omitted]."

Deutsche Bank Securities, Inc. v Montana Board of Investments, 21 AD3d 90, 93-94 (1st Dept 2005), affd 7NY3d 65 (2006).

However,

"[i]n order to satisfy the minimum contacts requirement,

it is essential that there be some act by which the

defendant purposefully avails itself of the privilege [*6]

of conducting activities within the forum State, thus

invoking the benefits and protections of its laws.

While electronic communications, telephone calls or letters in and of themselves are generally not enough to establish jurisdiction, they may be sufficient if used by the defendant deliberately to project itself into business transactions occurring within New York State [internal quotation marks and citations omitted]."

Id. at 94.

Under the facts of the case as alleged in the complaint, it does not appear that Jarvis' actions reach the level requisite to find that this court has acquired personal jurisdiction over him.

Although there is no question that the purpose of the Affiliation Agreement-Term Sheet was to allow GunnAllen to have a New York business presence, that agreement was between the corporations, not the individual officers. Additionally, the limited contact by Jarvis with persons in this state by means of two or three telephone calls and a handful of e-mails, does not evidence Jarvis' intent to avail himself of the benefits and protections of New York laws. Id.

Furthermore, plaintiffs have failed to allege sufficient facts to find, even at this preliminary stage, that Jarvis was acting as their legal advisor or committed malpractice.

In Federal Insurance Company v North American Specialty Ins. Co., (47 AD3d 52, 59 [1st Dept 2007]), the Court said that

"New York courts impose a strict privity

requirement to claims of legal malpractice; an attorney

is not liable to a third party for negligence in

performing services on behalf of his client [internal

quotation marks omitted]."

See also Ulico Casualty Co. v Wilson, Elser, Moskowitz, Edelman & Dicker, 56 AD3d 1 (1st Dept 2008).

In order to maintain a cause of action for legal malpractice-professional negligence, plaintiffs must demonstrate either that an actual attorney-client relationship existed between them and Jarvis, or that sufficient privity existed between them to create an attorney client relationship. Without such privity, no cause of action for legal malpractice can be maintained. Welsker v Kane Kessler, P.C., 2009 WL 1661071, 2009 NY App Div LEXIS 4881 (1st Dept 2009); Baystone Equities, Inc. v Handel-Harbour, 27 AD3d 231 (1st Dept 2006); Linden v Moskowitz, 294 AD2d 114 (1st Dept 2002).

Plaintiffs aver that sufficient privity exists to hold Jarvis liable in malpractice. To support this contention, plaintiffs allege that their contract with GunnAllen created privity between them and Jarvis as GunnAllen's General Counsel, [*7]and that GunnAllen's instructions that plaintiffs were to communicate directly with Jarvis, who would represent them in connection with the Charys fee discussions, created an attorney-client relationship. The court finds both these arguments unpersuasive.

Jarvis is an officer and General Counsel to GunnAllen, and as such, his legal obligation is to his client, GunnAllen. Even though GunnAllen and plaintiffs have a legal relationship, that relationship does not extend, without specific agreement, to having Jarvis act as plaintiffs' legal advisor, especially since such representation could cause a conflict of interest, as evidenced by the instant lawsuit. "A lawyer for a corporation represents the corporation, not its employees." Talvy v American Red Cross in Greater New York, 205 AD2d 143, 149 (1st Dept 1994), affd 87 NY2d 826 (1995).

Further, Jarvis' discussions with Charys to obtain payment of fees does not, in and of itself, create an attorney-client relationship between Jarvis and plaintiffs. Jarvis' negotiations with Charys are not dissimilar to such negotiations entered into by non-attorney officers of corporations. The mere fact that Jarvis is an attorney does not automatically mean that, when performing his corporate functions, he is acting as a lawyer.

"To determine whether an attorney-client relationship

exists, a court must consider the parties' actions. [A]n

attorney-client relationship is established where there

is an explicit undertaking to perform a specific task.

While the existence of the relationship is not dependent

upon a fee or an explicit agreement, a party cannot create

the relationship based on his or her own beliefs or

actions [internal quotation marks and citations omitted]."

Pellegrino v Oppenheimer & Co., Inc., 49 AD3d 94, 99 (1st Dept 2008).

In the case at bar, there was no explicit agreement by Jarvis to represent plaintiffs in a legal capacity, and plaintiffs' own beliefs as to Jarvis' role is insufficient to create an attorney-client relationship.

CONCLUSION

Based on the foregoing, it is hereby

ORDERED that defendants' motion to dismiss the first amended complaint is granted only with respect to the second, fourth and fifth causes of action; and it is further

ORDERED that defendant Paduano & Weintraub, LLP's motion to dismiss the sixth cause of action is moot, based on a stipulation of dismissal, with prejudice, filed with the court; and it is further

ORDERED that defendants are directed to serve an answer to the complaint within 10 days after service of a copy of this [*8]order with notice of entry; and 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 plaintiffs.

Dated: June 26, 2009

ENTER:

_____________________________

Carol Robinson Edmead, J.S.C.