Johnson v. Nextel Communications, Inc., No. 09-1892 (2d Cir. 2011)
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Appellants appealed the dismissal of their class action complaint against Nextel, the law firm of Leeds, Morelli & Brown, P.C. (LMB), and seven of LMB's lawyers (also LMB). Appellants were former clients of LMB who retained the firm to bring discrimination claims against Nextel. The complaint asserted that, inter alia, LMB breached its fiduciary duty of loyalty to appellants and the class by entering into an agreement with Nextel in which Nextel agreed to pay: (i) $2 million to LMB to persuade en masse its approximately 587 clients to, inter alia, abandon ongoing legal and administrative proceedings against Nextel, waive their rights to a jury trial and punitive damages, and accept an expedited mediation/arbitration procedure; (ii) another $3.5 million to LMB on a sliding scale as the clients' claims were resolved through that procedure; and (iii) another $2 million to LMB to work directly for Nextel as a consultant for two years beginning when the clients' claims had been resolved. The court held that appellants have alleged facts sufficient to state a claim against LMB for, inter alia, breach of fiduciary duty and against Nextel for aiding and abetting breach of fiduciary duty. Therefore, the court vacated and remanded for further proceedings.
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09-1892-cv Johnson v. Nextel Communications, Inc. 1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 August Term, 2009 4 5 (Argued: June 8, 2010 Decided: September 26, 2011) 6 Docket No. 09-1892-cv 7 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 MICHAEL S. JOHNSON, individually and on behalf of the class, DONNA DYMKOWSKI, individually and on behalf of the class, PATRICIA LONG CORREA, individually and on behalf of the class, ANTONIO SAMUEL, individually and on behalf of the class, VINCENT HALL, individually and on behalf of the class, and ANGELETTE WATERS, individually and on behalf of the class, Plaintiffs-Appellants, v. NEXTEL COMMUNICATIONS, INC., a Delaware Corporation, LEEDS, MORELLI & BROWN, LENARD LEEDS, STEVEN A. MORELLI, JEFFREY K. BROWN, JAMES VAGNINI, FEDERIC DAVID OSTROVE, BRYAN MAZOLLA, SUSAN FITZGERALD, JOHN DOE 1-10 a fictitious designation for presently unknown defendants, and JANE DOE 1-10 a fictitious designation for presently unknown defendants, Defendants-Appellees. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - B e f o r e: WINTER and HALL, Circuit Judges, and CEDARBAUM, District Judge.* * The Hon. Miriam Goldman Cedarbaum of the United States District Court for the Southern District of New York, sitting by designation. 1 1 Appeal from a dismissal by the United States District Court 2 for the Southern District of New York (George B. Daniels, Judge) 3 of appellants complaint pursuant to Fed. R. Civ. P. 12(b)(6). 4 Appellants claim that the law firm of Leeds, Morelli & Brown, 5 P.C., violated, inter alia, its fiduciary obligations by entering 6 into an agreement with Nextel, the putative defendant in 7 discrimination actions the law firm was hired to bring, which 8 involved unconsentable conflicts of interest. 9 hold that the complaint states a claim against the law firm for Principally, we 10 breaching its fiduciary obligations to appellants. 11 that the complaint states a claim against Nextel for aiding and 12 abetting a breach of fiduciary duty. 13 dismissal and remand for further proceedings. 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 We also hold We therefore vacate the KENNETH S. THYNE, Roper & Twardowsky, LLC, Totowa, New Jersey, for Plaintiffs-Appellants. MICHAEL MCCONNELL (Traci Van Pelt, Robert W. Steinmetz, McConnell, Fleischner, Houghtaling & Craigmile, LLC, Denver, Colorado; Janice J. DiGennaro & Shari Claire Lewis, Rivkin Radler LLP, Uniondale, New York, on the brief), McConnell, Fleischner, Houghtaling & Craigmile, LLC, Denver, Colorado, for Defendants-Appellees Leeds, Morelli & Brown, Lenard Leeds, Steven A. Morelli, and Jeffrey K. Brown. LAWRENCE R. SANDAK (Thomas A. McKinney, on the brief), Proskauer Rose LLP, Newark, New Jersey and New York, New York, for DefendantAppellee Nextel Communications, Inc. 2 1 2 3 4 5 6 7 8 9 Jason S. Feinstein, Sterns & Weinroth, Trenton, New Jersey, for Defendants-Appellees Bryan Mazolla and Susan Fitzgerald. WINTER, Circuit Judge: This is an appeal from Judge Daniel s dismissal of 10 appellants class action complaint against Nextel Communications, 11 Inc., the law firm of Leeds, Morelli & Brown, P.C. ( LMB ), and 12 seven of LMB s lawyers (also LMB ). 13 clients of LMB who retained the firm to bring discrimination 14 claims against Nextel. 15 587 clients who retained LMB for the same purpose. 16 asserts a number of claims, including one alleging that LMB 17 breached its fiduciary duty of loyalty to them and the class by 18 entering into an agreement with Nextel in which Nextel agreed to 19 pay: 20 approximately 587 clients to, inter alia, abandon ongoing legal 21 and administrative proceedings against Nextel, waive their rights 22 to a jury trial and punitive damages, and accept an expedited 23 mediation/arbitration procedure; (ii) another $3.5 million to LMB 24 on a sliding scale as the clients claims were resolved through 25 that procedure; and (iii) another $2 million to LMB to work 26 directly for Nextel as a consultant for two years beginning when 27 the clients claims had been resolved. 28 conditioned on recovery by any of LMB s clients. 29 that appellants have alleged facts sufficient to state a claim 30 against LMB for, inter alia, breach of fiduciary duty and against Appellants are former The class is composed of approximately The complaint (i) $2 million to LMB to persuade en masse its 3 None of the payments were We conclude 1 Nextel for aiding and abetting breach of fiduciary duty. 2 We therefore vacate and remand for further proceedings. 3 BACKGROUND 4 Because this is an appeal from a dismissal under Fed. R. 5 Civ. P. 12(b)(6), we view the facts alleged in the complaint in 6 the light most favorable to appellants. 7 463 F.3d 130, 133 (2d Cir. 2006). 8 a) The Hiring of LMB and the Dispute Resolution and Settlement 9 Agreement 10 See Faulkner v. Beer, The complaint alleges that LMB conducted a meeting at which 11 appellants and some 587 individuals (collectively, the 12 claimants ) hired LMB to pursue employment discrimination claims 13 against Nextel, a Delaware corporation. 14 with LMB, a New York law firm, was executed in New Jersey. 15 alleged that extravagant promises of recoveries against Nextel 16 were made at the meeting. 17 contingency fee to go to LMB. 18 The retainer agreement It is The agreement specified a one-third The complaint alleges that LMB never intended to bring, and 19 never brought, any discrimination actions against Nextel. 20 Instead, LMB intended to follow a prior LMB practice of seeking 21 direct payments, including payments as a legal consultant, from 22 putative defendant-employers, in this case, Nextel. 23 28, 2000, LMB and Nextel met in New York and signed an agreement 24 styled the Dispute Resolution and Settlement Agreement ( DRSA ). 25 Under the DRSA, LMB was to be paid $2 million if it persuaded the 26 claimants to: On September (i) drop all pending lawsuits and administrative 4 1 complaints against Nextel within two weeks (excluding already 2 filed worker s compensation claims); and (ii) sign within ten 3 weeks individual agreements in which each claimant agreed to be 4 bound by the DRSA. 5 upon which those conditions were met (the Effective Date ). 6 $2 million was to be paid to LMB within 3 days of that date. The DRSA was to become effective on the date The 7 The DRSA set forth a three-stage Dispute Resolution Process 8 ( DRP ) that was designated as the exclusive means of settlement 9 for all claimants then represented by LMB. The first stage 10 consisted of an interview and direct negotiation between Nextel 11 and each individual claimant. 12 binding mediation of any unresolved claims. 13 called for binding arbitration of any remaining unresolved 14 claims. The second stage called for nonThe third stage 15 The DRSA provided that Nextel would pay another $1.5 million 16 to LMB upon the resolution of half of the claimants claims and a 17 final $2 million upon resolution of the remaining claims. 18 claims had to be either resolved or submitted to binding 19 arbitration within 45 weeks of the Effective Date, or Nextel 20 would be entitled to withhold final payment from LMB and deduct 21 $50,000 for each month that claims remained to be resolved or 22 submitted to arbitration. 23 claimant would agree to be represented by LMB throughout the DRP, 24 to be bound by the result of the DRP and not to pursue any other 25 relief in any other forum for any claim against Nextel, to waive All The DRSA also stated that each 5 1 punitive damages and non-monetary relief, to execute a general 2 release as a prerequisite for receiving any award, and to adhere 3 to a confidentiality agreement concerning the DRSA. 4 LMB also promised not to accept any new clients with claims 5 against Nextel, not to refer any non-claimant individual with 6 claims against Nextel to another lawyer or law firm, and not to 7 accept compensation for any prior referrals. 8 provided that Nextel would retain LMB as a legal consultant (the 9 consultancy agreement ) for a period of two years following the Finally, the DRSA 10 resolution of all claims for an additional consultancy fee of 11 $83,333.35 per month, or $2 million, bringing the total value of 12 the DRSA to LMB to $7.5 million. 13 b) The Individual Agreements and Settlements 14 The complaint alleges that, in the weeks following the 15 execution of the DRSA, LMB approached the claimants to obtain 16 signed Individual Agreements and Pledges of Good Faith. 17 Individual Agreement, the particular claimant had to state that 18 he or she reviewed the [DRSA]; had the opportunity to discuss 19 that Agreement with [LMB] or any other counsel of [his or her] 20 choosing; and agree to comply fully with the terms of that 21 Agreement. 22 Individual Agreements stated only that I acknowledge and 23 understand that . . . Nextel has agreed to pay an amount of money 24 to [LMB] to cover the attorneys fees and expenses, other than 25 expert fees, that Claimants might otherwise pay to [LMB] . . . . In the With respect to the payment of legal fees, the 6 1 The Pledges of Good Faith stated that, for purposes of keeping 2 the DRSA confidential, each claimant consented to selecting two 3 (2) representatives in my area to maintain a copy of the [DRSA]. 4 Upon request to either of the area representatives, claimants 5 will be allowed to review the [DRSA]. 6 The six appellants, along with all but fourteen of the 7 claimants, signed Individual Agreements and Pledges of Good 8 Faith. 9 statements in the Individual Agreements and Pledges of Good The complaint alleges that, notwithstanding the 10 Faith, LMB did not allow the claimants to review the full DRSA, 11 but rather provided only the signature page of the DRSA, the 12 Individual Agreements, and a document entitled Highlights of 13 Settlement Agreement (the Highlights Document ). 14 Highlights Document outlined the major provisions of the DRSA, 15 including the DRP, the requirement that claimants drop all 16 pending lawsuits and complaints, the confidentiality requirement, 17 and the consultancy agreement. 18 specifically stated that the consultancy agreement posed a 19 conflict of interest for LMB, which the claimant agreed to waive 20 by signing the Individual Agreement. 21 contractual payments to LMB, the Highlights Document stated only 22 that Nextel is paying each Claimant s attorneys fees, costs, 23 and expenses (other than expert witness fees) in consideration 24 for each Claimant participating in the DRP and honoring all of 25 the conditions. The The Highlights Document With respect to the The document did not make any mention of the 7 1 amounts LMB was to be paid or the various conditions on those 2 payments, as described above. 3 In February 2001, LMB and Nextel executed a second 4 amendment1 to the DRSA to account for the fourteen non- 5 participating claimants ( Amendment 2 ). 6 agreed that Nextel would reduce LMB s final payment from $2 7 million to $1,720,000, a reduction of $20,000 per non- 8 participating claimant. 9 escrow account until the end of the consultancy period, at which In Amendment 2, LMB The sum of $280,000 was to remain in an 10 point it would be paid to LMB minus any amount Nextel paid to 11 defend, settle, or satisfy judgments in lawsuits by the fourteen 12 non-participating claimants, up to $20,000 for each claimant. 13 Between August and December 2001, all six appellants settled 14 their disputes with Nextel through the DRP for relief not 15 specified in the complaint. 16 c) The Present Action 17 On October 12, 2006, appellants filed this action, both 18 individually and as class representatives of the remaining 19 claimants, against LMB and Nextel in the Superior Court of New 20 Jersey, Passaic County. 21 and Nextel removed the case to the district court for the 22 District of New Jersey, and then filed motions to dismiss the 23 complaint. Based on diversity of citizenship, LMB LMB also moved to change venue to the Southern 1 LMB and Nextel executed Amendment 1 on September 28, 2000, in which Nextel agreed to a limited waiver of the DRSA s confidentiality provisions in order to obtain administrative approval of the withdrawal of all Agency Complaints. . . . 8 1 District of New York. 2 transferred to the Southern District on September 21, 2007. 3 The motion was granted and the case Appellants complaint alleges that the DRSA amounted to a 4 conspiracy between LMB and Nextel by which Nextel secretly bought 5 LMB s loyalty through payment of the designated amounts. 6 complaint asserted a host of claims against LMB, including breach 7 of fiduciary duty, commercial bribery, fraud, unjust enrichment, 8 legal malpractice, breach of contract, unauthorized practice of 9 law, conversion, and violation of the New Jersey RICO statute. 10 The complaint also asserted claims against Nextel for tortious 11 interference with contract, commercial bribery, and aiding and 12 abetting or conspiring with LMB in its breach of fiduciary duty, 13 fraud, legal malpractice, and breach of contract. 14 The On March 31, 2009, the district court granted appellees 15 motions to dismiss for failure to state a claim against either 16 LMB or Nextel. 17 and concluded that New York law governed the matter. 18 held that, by signing the Individual Agreements and Pledges of 19 Good Faith, appellants confirmed as a matter of law that they had 20 the opportunity to review the DRSA. 21 that appellants failed to state a claim under New York law for 22 breach of fiduciary duty or fraud because both claims rested on 23 appellants allegations that LMB failed to disclose the DRSA s 24 compensation agreement. 25 claim, the court found that the complaint did not contain any The court applied New York s choice of law rules The court It concluded, therefore, With respect to appellants malpractice 9 1 factual allegations regarding how [LMB] ineffectively or 2 inadequately represented [appellants] during the DRP. 3 extent that the malpractice claims rested on the DRSA s 4 compensation structure, the court found that appellants failed to 5 state a claim because they did not allege that the money paid by 6 Nextel to LMB would otherwise have gone to appellants. 7 found the remainder of appellants claims to be without merit. 8 To the The court This appeal followed. 9 DISCUSSION 10 Appellants have briefed on appeal the dismissal of their 11 claims of breach of fiduciary obligation, breach of contract, 12 fraud, malpractice, and New Jersey RICO claims. 13 those claims after a brief discussion of choice of law. 14 We deal with With regard to the choice of law issues, we review the 15 district court s choice of law de novo. 16 Inc., 562 F.3d 163, 190 (2d Cir. 2009) (internal quotation marks 17 omitted). 18 New York s choice of law rules. 19 law rules apply because New Jersey law would have governed had 20 there been no change of venue. 21 U.S. 612, 639 (1964); see also Abdullahi, 562 F.3d at 190. 22 Jersey applies a two-step flexible governmental-interests 23 analysis. 24 (2007). 25 26 Abdullahi v. Pfizer, In this case, the district court erroneously applied In fact, New Jersey s choice of See Van Dusen v. Barrack, 376 New Rowe v. Hoffman-La Roche, Inc., 189 N.J. 615, 621 The first step in the analysis is to determine whether a conflict exists between 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Id. at 621-22 (internal citations and quotation marks omitted). 21 The parties appear to agree that there is no difference between 22 New York and New Jersey law as to all of appellants claims, save 23 for the New Jersey RICO claim.2 24 for reconsideration in light of this opinion s conclusion that 25 New Jersey s choice of law rules apply and its discussion of the 26 events giving rise to this action. 27 the laws of [New York and New Jersey]. Any such conflict is to be determined on an issue-by-issue basis. If there is no actual conflict, then the choice-of-law question is inconsequential, and the forum state [here New York] applies its own law to resolve the disputed issue. If there is an actual conflict, the second step seeks to determine the interest that each state has in resolving the specific issue in dispute. The Court must identify the governmental policies underlying the law of each state and determine whether those policies are affected by each state s contacts to the litigation and to the parties. We must apply the law of the state with the greatest interest in governing the particular issue. We vacate and remand that claim We turn now to the merits of the other claims briefed on 28 appeal. We review the district court's dismissal of a complaint 29 for failure to state a claim de novo . . . . Faulkner, 463 F.3d 30 at 133. 31 complaint as true, drawing all reasonable inferences in the 32 plaintiff s favor. The court accepts all well-pleaded allegations in the In order to survive a motion to dismiss under 2 Nextel s letter brief does not go into whether there is a difference between New York and New Jersey law, but rather maintains that New York law applies under the New Jersey choice of law rules because New York has a greater governmental interest. 11 1 Rule 12(b)(6), a complaint must allege a plausible set of facts 2 sufficient to raise a right to relief above the speculative 3 level. 4 Fund Mgmt. LLC, 595 F.3d 86, 91 (2d Cir. 2010) (quoting Bell Atl. 5 Corp. v. Twombly, 550 U.S. 544, 555 (2007)). 6 a) Fiduciary Obligation Operating Local 649 Annuity Trust Fund v. Smith Barney 7 The elements of a claim for breach of a fiduciary obligation 8 are: (i) the existence of a fiduciary duty; (ii) a knowing breach 9 of that duty; and (iii) damages resulting therefrom. See Barrett 10 v. Freifeld, 883 N.Y.S.2d 305, 308 (N.Y. App. Div., 2d Dep t 11 2009); accord F.G. v. MacDonell, 150 N.J. 550, 563-64 (1997). 12 The existence of a fiduciary duty between LMB and appellants 13 is beyond dispute. It is also plain that, if there was a breach, 14 it could not have been due to negligence but rather, given the 15 nature of the DRSA and the complaint s allegations, had to be 16 knowing and intentional on LMB s part. 17 Appellants contend that LMB breached its fiduciary duty to 18 the claimants by signing the DRSA because the terms of the DRSA 19 created a conflict of interest between LMB and its claimant 20 clients -- a conflict that was not consentable, that is, one that 21 could not be obviated by procuring the clients consent. 22 Moreover, they allege that even if the conflicts were 23 consentable, LMB failed to properly disclose them. 24 further argue that as a result of LMB s undisclosed conflicts of 25 interest, their settlement awards were unreasonably low and did 12 Appellants 1 not approximate the true value of the[ir] claims. LMB and 2 Nextel contend that any conflicts of interest created by the DRSA 3 were consentable and that, as a matter of law, appellants cannot 4 claim to have been unaware of the terms of the DRSA in light of 5 their signatures on the Individual Agreements, which stated that 6 appellants had reviewed the DRSA. 7 were unconsentable. We conclude that the conflicts 8 The DRSA created overriding and abiding conflicts of 9 interest for LMB and thoroughly undermined its ability to deal 10 fairly, honestly, and with undivided loyalty to [appellants]. 11 Elacqua v. Physicians Reciprocal Insurers, 860 N.Y.S.2d 229, 232 12 (N.Y. App. Div., 3d Dep t, 2008) (quoting Matter of Cooperman, 83 13 N.Y.2d 465, 472 (1994)). 14 The DRSA on its face created enormous incentives on LMB s 15 part to obtain from each and every one of its clients waivers of 16 important rights. If LMB were to cause all claimants to (i) waive 17 their rights to jury trials and various kinds of monetary damages 18 and non-monetary relief, (ii) drop all existing legal or 19 administrative proceedings, (iii) agree to submit all claims to 20 the DRP, and (iv) waive the right to hire new counsel during the 21 DRP, LMB would be paid $2 million by Nextel even though not a 22 single claimant had recovered anything or even begun any of the 23 DRP steps. 24 25 LMB had ten weeks to obtain these waivers. The overriding nature of the conflict is underscored by the fact that, when fourteen of the 587 clients failed to agree, 13 1 Nextel s final, but pre-consultancy, payment to LMB was reduced 2 from $2 million to $1,720,000, or $20,000 per non-agreeing 3 client. 4 be paid $1.5 million when half of the claimants claims were 5 resolved through the DRP, regardless of the individual outcomes. 6 Another $2 million ($1,720,000 after Amendment 2) would be paid 7 to LMB when the remaining claims were resolved, again without 8 regard to individual outcomes. 9 reduced on a sliding scale if less than all the claims were Under the DRSA, after obtaining the waivers, LMB would However, the $2 million would be 10 resolved within forty-five weeks from the effective date. 11 become entitled to the $2 million, LMB would have to process over 12 thirteen claims per week starting on the effective date, or over 13 two claims per work day. 14 To Once all the claims were processed, LMB would formally go to 15 work for Nextel as a consultant for two years at $1 million per 16 year. 17 with claims against Nextel, not to refer any such client to 18 another lawyer or firm, and not to accept compensation for any 19 prior referral. 20 LMB also promised in the DRSA not to accept new clients It cannot be gainsaid that, viewed on its face alone, the 21 DRSA created an enormous conflict of interest between LMB and its 22 clients. 23 client through informed consent. 24 Levin, 579 F.2d 271, 282 (3d Cir. 1978); Filippi v. Elmont Union 25 Free Sch. Dist. Bd. of Educ., 722 F. Supp. 2d 295, 310-11 Such a conflict is permissible only if waivable by a 14 See Int l Bus. Machs, Corp. v. 1 (E.D.N.Y. 2010). 2 conflict is not consentable. 3 BabyCenter, L.L.C., 618 F.3d 204, 212 n.2 (2d Cir. 2010); CenTra, 4 Inc. v. Estrin, 538 F.3d 402, 412 (6th Cir. 2008); Cohen v. 5 Strouch, No. 10 Civ. 7828, 2011 WL 1143067, at *2-3 (S.D.N.Y. 6 Mar. 24, 2011). 7 However, there may be circumstances in which a See GSI Commerce Solutions, Inc. v. For two reasons, this is such a case. First, because LMB was not lead counsel in a class action, 8 the class-protective provisions of Fed. R. Civ. P. 23 were not 9 triggered. See In re Agent Orange Prod. Liab. Lit., 818 F.2d 10 216, 222 (2d Cir. 1987) ( Fed. R. Civ. P. 23(e) . . . places the 11 court in the role of protector of the rights of the class when 12 such a settlement is reached and attorneys fees are awarded. ). 13 Therefore, LMB s clear duty as counsel to the parties seeking 14 relief from Nextel was to advise each client individually as to 15 what was in his or her best interests taking into account all of 16 the differing circumstances of each particular claim. 17 Ziegelheim v. Apollo, 128 N.J. 250, 260-61 (1992); Jones Lang 18 Wootton USA v. LeBoeuf, Lamb, Greene & MacRae, 674 N.Y.S.2d 280, 19 284-85 (N.Y. App. Div., 1st Dep t. 1998). 20 antagonistic to that duty. 21 See The DRSA was flatly On the face of the DRSA, its inevitable purpose was to 22 create an irresistible incentive -- millions of dollars in 23 payments having no relation to services performed for, or 24 recovery by, the claimants -- for LMB to engage in an en masse 25 solicitation of agreement to, and performance of, the DRSA s 15 1 terms from approximately 587 claimant clients. The effectiveness 2 of the DRSA, and therefore the payments to LMB, depended on 3 Nextel s conclusion that a sufficient number of clients had 4 agreed to it.3 5 have no obligation to pay anything, as Amendment 2 demonstrated 6 by reducing the final, pre-consultancy $2 million payment to LMB 7 to $1,720,000, a reduction of $280,000, or $20,000 apiece for the 8 fourteen clients LMB failed to deliver. 9 agreeing to be bound by its terms and accepting the financial Any number short of all 587, and Nextel would By entering the DRSA, 10 incentives available therein, LMB violated its duty to advise and 11 represent each client individually, giving due consideration to 12 differing claims, differing strengths of those claims, and 13 differing interests in one or more proper tribunals in which to 14 assert those claims.4 15 accord Matter of Educ. Law Ctr., Inc., 86 N.J. 124, 133 (1981). 16 See Elacqua, 860 N.Y.S.2d at 232-33; This already abiding conflict was severely aggravated by two 17 other provisions in the DRSA: (i) the sliding scale of payments 18 from Nextel to LMB depending on how quickly LMB s clients claims 3 The first payment to LMB was to be made within three business days of the effective date of the agreement, and the DRSA stated that the agreement would become effective once all pending legal and administrative actions were withdrawn or dismissed and all claimants had signed the Individual Agreements. 4 We do not necessarily preclude clients from giving informed consent to some form of group treatment where manageable numbers of claimants are involved and putative defendants are not paying the claimants lawyer to aggregate the claims. Nor do we preclude the ordinary arms-length settlement agreement in which one party agrees to pay the costs and fees of another. For the reasons stated, the DRSA is a far cry from such an agreement, notwithstanding transparently cosmetic language portraying it as such. 16 1 were resolved; and (ii) the commencement of the $2 million 2 consulting contract and the payment of those fees, which would 3 occur only after all the claims were resolved. 4 DRSA required the claimants, LMB s clients, to waive the right to 5 hire unconflicted counsel to pursue the claimant s recovery in 6 the DRP. 7 its duty to represent clients as individuals with differing 8 claims and interests that might require differing amounts of time 9 and preparation vigorously to pursue a recovery. 10 Moreover, the Again, LMB was being paid by Nextel in effect to ignore Finally, although Nextel agreed to pay $5.5 million with 11 regard to the processing of LMB s clients claims according to 12 the DRSA s provisions, and agreed to pay LMB another $2 million 13 to serve as Nextel s consultant, none of the payments to LMB was 14 in any way contingent on claimant clients receiving a recovery. 15 Any assertion by appellees, therefore, that the payments were 16 part of a settlement that simply included LMB s clients 17 attorneys fees does not meet the straight-face test.5 18 4, supra. 19 See Note Indeed, we express our candid opinion that the DRSA was an 20 employment contract between Nextel and LMB designed to achieve an 21 en masse processing and resolution of claims that LMB was 5 Although the fact is in no way dispositive, we do note that the amount deducted from the final, pre-consultancy payment was to cover not only Nextel s costs and attorneys fees, but amounts paid in settlements and judgments to the 14 non-signing claimants. Moreover, any part of the deducted amount not paid to resolve the claims of those claimants was to be paid to LMB. A trier of fact might infer from this that the $2 million payment (and all other payments for that matter) was intended to reduce Nextel s monetary exposure to settlement payments and judgments. 17 1 obligated to pursue individually on behalf of each of its 2 clients. 3 interest by the DRSA is in the provisions in which LMB promises 4 not to represent new clients, or refer new claims, against 5 Nextel. 6 avoiding conflicts that could have an impact on LMB s new-found 7 relationship with Nextel. 8 The only sensitivity shown to potential conflicts of Tellingly, this sensitivity appears aimed only at Second, we believe that, under the above circumstances, the 9 opportunity for the claimants to give informed consent was so 10 burdened that the DRSA is not consentable for that reason as 11 well. 12 from LMB to its claimant clients could not possibly be 13 independent advice untainted by the counter-incentives of the 14 DRSA such that the resulting consent would be valid. 15 magnitude, and -- from a lay client s perspective -- complexity 16 of LMB s conflict of interest is such that informed consent would 17 require the hiring of an independent lawyer to review the twenty- 18 nine page DRSA and to explain the multiple conflicts embraced by 19 LMB, including the scheduling and amount of payments to LMB, the 20 waiver of multiple rights, and the important and often difficult- 21 to-analyze consequences of abandoning ongoing legal or 22 administrative proceedings. 23 allowed to consult with another attorney, but an initial attorney 24 hired to bring a discrimination action does not fulfill his or 25 her representational obligations by presenting a client with a Certainly, given the conflicts described above, any advice The To be sure, the claimants were 18 1 proposal that can be considered in an informed manner only by 2 hiring a second attorney. 3 The elements of a breach of fiduciary duty are therefore met 4 by the complaint s allegations. There was: (i) a duty; (ii) a 5 knowing breach of the duty; and (iii) damages resulting 6 therefrom. 7 563-64. 8 the claimants is undeniable. 9 knowing breach. Barrett, 883 N.Y.S.2d at 308; MacDonell, 150 N.J. at The existence of a fiduciary duty on LMB s part toward For reasons stated, there was a As for damages, the nature of the DRSA itself 10 creates a presumption of damages. 11 have entered into it unless each believed that it would profit 12 more by that arrangement than by one in which a law firm 13 vigorously represented claimants as individuals. 14 supra. 15 the difference between what they received with representation by 16 LMB under the DRSA and what they would have received if 17 represented by unconflicted counsel. 18 damages, such as disgorgement, are available must await further 19 proceedings. 20 Neither Nextel nor LMB would See Note 5, Appellants have, therefore, plausibly alleged injury in Whether other measures of Appellants also allege that Nextel is liable for aiding and 21 abetting LMB in the breach of its duties to appellants. 22 Jersey and New York authorize civil liability for aiding and 23 abetting the commission of a tort. 24 abetting [under New Jersey law] are: (1) the commission of a 25 wrongful act; (2) knowledge of the act by the alleged 19 Both New The elements of aiding and 1 aider-abettor; and (3) the aider-abettor knowingly and 2 substantially participated in the wrongdoing. 3 Morganroth v. Norris, McLaughlin & Marcus, P.C., 331 F.3d 406, 4 415 (3d Cir. 2003). 5 fiduciary duty [under New York law] requires: (1) a breach by a 6 fiduciary of obligations to another, (2) that the defendant 7 knowingly induced or participated in the breach, and (3) that 8 plaintiff suffered damage as a result of the breach. 9 Cohen, 760 N.Y.S.2d 157, 169 (N.Y. App. Div., 1st Dep t, 2003). Morganroth & A claim for aiding and abetting a breach of Kaufman v. 10 Both jurisdictions look to the Restatement (Second) of Torts, 11 which does not require wrongful intent by the third party, but 12 only that the third party knew of the breach of duty and 13 participated in it. 14 843, 848 (2d Cir. 1987); Morganroth, 331 F.3d at 415 n.3; 15 Restatement (Second) of Torts § 876(b). 16 York requires that the third party provide substantial 17 assistance to the primary violator. 18 170. 19 definitions, New York law applies. 20 Madoff, No. 09-816 (SRC), 2009 WL 2928913, at *16 (D.N.J. Sept. 21 9, 2009) (finding no true conflict between New York and New 22 Jersey regarding aiding and abetting breach of fiduciary duty). 23 S & K Sales Co. v. Nike, Inc., 816 F.2d Like New Jersey, New Kaufman, 760 N.Y.S.2d at Because there is no actual conflict between the two See Lautenberg Found. v. For reasons stated, appellants have adequately alleged a 24 breach of fiduciary obligations by LMB. 25 against Nextel for aiding and abetting, they must allege facts 20 To sustain their claim 1 sufficient to show that Nextel knowingly provided substantial 2 assistance to LMB by affirmatively assist[ing], help[ing] 3 conceal or fail[ing] to act when required to do so, thereby 4 enabling the breach to occur. 5 Appellants have easily met that burden, for reasons stated. 6 Kaufman, 760 N.Y.S.2d at 170. Viewed in the light most favorable to appellants, therefore, 7 they have sufficiently alleged that Nextel negotiated and signed 8 the DRSA with the knowledge, and intent, that it would undermine 9 LMB s ability to fairly represent appellants. We therefore 10 vacate the district court s dismissal of appellants claim 11 against Nextel for aiding and abetting LMB s breach of fiduciary 12 duty. 13 b) Breach of Contract 14 The district court also erred in holding that plaintiffs 15 failed to state a claim for breach of their original retainer 16 agreement. 17 complaint must allege: 18 the parties; (ii) performance by the plaintiff; (iii) failure of 19 defendant to perform; and (iv) damages. 20 Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 177 21 (2d Cir. 2004); accord Murphy v. Implicito, 392 N.J. Super. 245, 22 265 (App. Div. 2007). 23 elements have been pled. 24 25 In order to state a claim of breach of contract, the (i) the formation of a contract between Eternity Global Master We have no difficulty holding that these The district court held that LMB did not fail to perform their obligations under the contract because they negotiated the 21 1 DRSA with Nextel and carried out the DRP proceedings. In the 2 court s view, those acts constituted the legal representation 3 that LMB was obligated to provide under the retainer agreements 4 with the appellants. 5 that appellants assert was a breach of contract. 6 allege that the retainer agreements provided that LMB would 7 represent appellants individually but, according to the 8 complaint, LMB simply aggregated the plaintiffs to gain a group 9 settlement that ultimately benefitted LMB rather than the But signing the DRSA is the very conduct Appellants 10 claimants. 11 and relying on our earlier discussion of the DRSA and LMB s 12 fiduciary obligations, LMB never provided the type of 13 representation required by the retainer agreements. 14 Thus, assuming the facts in the complaint to be true The district court also stated that the settlement agreement 15 superceded the retainer agreements, extinguishing appellants 16 claims for breach of the original agreements. 17 supra, the settlement agreement was not valid because it was 18 obtained while LMB suffered from an unconsentable conflict of 19 interest. 20 c) Fraud 21 As discussed Appellants also claim fraud in the inducement of the 22 retainer agreement. To state a claim for fraud in the 23 inducement, the party must allege: 24 misrepresentation of a presently existing or past fact; (ii) an 25 intent to deceive; (iii) reasonable reliance on the 22 (i) a material 1 misrepresentation by appellants; and (iv) resulting damages. 2 Ross v. Louise Wise Servs., Inc., 8 N.Y.3d 478, 488 (2007); 3 accord Banco Popular N. Am. v. Gandi, 184 N.J. 161, 172-73 4 (2005). 5 to the fraud, including the misleading statements, speaker, time, 6 place, individuals involved, and specific conduct at issue. 7 R. Civ. P. 9(b); Acito v. IMCERA Grp., Inc., 47 F.3d 47, 51 (2d 8 Cir. 1995). 9 claim for fraud. 10 In addition, the plaintiff must allege specific facts as Fed. We believe that appellants allegations state a The complaint alleges that the retainer agreements stated 11 that LMB would investigate and pursue appellants' claims 12 individually, but never intended to provide such representation. 13 Instead, LMB intended to aggregate the claimants to negotiate a 14 group settlement with Nextel benefitting LMB. 15 satisfied by the allegations that: 16 meeting with the claimants, at which rosy promises of recovery 17 were made and agreement to the individual retainer agreements was 18 obtained; and (ii) LMB s actual intent was demonstrated by past 19 agreements like the DRSA between LMB and putative defendant- 20 employers providing for direct payments, including consulting 21 agreements, to LMB that interfered with LMB s professional 22 responsibilities in representing earlier clients.6 6 Rule 9(b) is (i) LMB conducted a specific Appellants also assert a fraud in the inducement claim with regard to the Individual Agreements. However, the harm to appellants from that alleged fraud is in the Individual Agreements to abide by the DRSA. Because we have invalidated the DRSA as a breach of LMB s fiduciary duty, there is no need to address this fraud claim. 23 1 2 d) Malpractice For reasons stated, appellants have also sufficiently stated 3 a claim for malpractice. 4 e) Claims Against Nextel 5 Finally, the district court dismissed appellants claims 6 against Nextel for aiding and abetting fraud, aiding and abetting 7 breach of contract, aiding and abetting malpractice, and tortious 8 interference of contract, relying on the dismissal of the 9 underlying claims against LMB and appellants consent to the 10 terms of the DRSA. 11 vacated, and the district court shall in the first instance 12 reconsider any motions to dismiss those claims in light of the 13 discussion above. 14 15 The dismissal of these claims is also CONCLUSION For the reasons stated we vacate and remand. 16 17 24
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