Gursky & Ederer, LLP v GMT Corp.

[*1] Gursky & Ederer, LLP v GMT Corp. 2004 NY Slip Op 51508(U) Decided on October 5, 2004 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 October 5, 2004
Supreme Court, New York County

GURSKY & EDERER, LLP, Plaintiff,

against

GMT CORPORATION, Defendant.



109011/03

Carol R. Edmead, J.

MEMORANDUM DECISION

In this action to recover sums for costs and disbursements advanced in connection with legal services rendered, plaintiff, Gursky & Ederer, LLP ("plaintiff"), moves pursuant to CPLR 3211 [a] [1] and [7] and CPLR 3016 [b] to dismiss the counterclaims of defendant GMT Corporation ("defendant"). Defendant cross moves for partial summary judgment on one of its counterclaims. Plaintiff's motion is denied in part, and granted in part. Defendant's cross motion is denied.

Plaintiff's Complaint

In 1999, plaintiff was hired to represent defendant with respect to an exclusive licensing agreement entered into between defendant and Quiksilver, Inc. ("Quiksilver"), which permitted defendant to use Quiksilver's trademarks in connection with manufacturing, promoting, selling, and distributing watches and related accessories. Between 1999 and May 2003, plaintiff performed legal work for defendant in connection with the license, and represented defendant in two distinct legal proceedings in the United States District Court, Southern District of New York and Central District of California (the "California litigation").[FN1] In connection with the legal work, plaintiff expended various costs and disbursements on behalf of defendant. Although plaintiff rendered to defendant statements of the account for the legal work and money advanced, and defendant promised to pay same, defendant retained the statements without objection and failed to reimburse plaintiff.

Amended Verified Answer and Counterclaims

Defendant admits that plaintiff performed legal services in connection with the California litigation, that defendant received several invoices, and that it failed to pay certain sums demanded by plaintiff. [*2]

However, defendant claims that in or about January 2003, while still representing defendant in the California litigation, plaintiff assisted Robert Baker, an employee of defendant, in forming a competing business. Defendant claims that plaintiff improperly discussed confidential information with Baker in violation of plaintiff's obligations to defendant. In March 2003, weeks before the California litigation was supposed to go to trial, Baker wrote an anonymous letter (the "Letter")[FN2] to Quiksilver's attorney in the California litigation alleging that defendant engaged in various wrongdoings in connection with that case, which resulted in a six-month adjournment. Defendant believes that plaintiff discussed such Letter with Baker before it was sent. After the Letter was sent, plaintiff announced that it had a conflict of interest in representing defendant and Baker, and moved to withdraw as defendant's California counsel. It is alleged that plaintiff knew of the conflict of interest well before it moved to withdraw. As a result, defendant hired new counsel, at substantial expense. It is also alleged that when the new California counsel tendered the defense of the California litigation to two of defendant's insurance carriers, one of them, American Manufacturers Mutual Insurance Company ("AMM") accepted the tender. Defendant believes that plaintiff never tendered the defense of the California litigation to such carriers. Thus, defendant alleges that it suffered damages in "amounts to be determined at trial," and alleges the following counterclaims: (1) breach of fiduciary duty and duty of loyalty, (2) legal malpractice based on a lack of ordinary skill and knowledge, (3) and legal malpractice resulting from the failure to tender the defense.

Instant Motion

Plaintiff argues that both counterclaims for attorney malpractice fail to allege specific facts and plead all the elements necessary for such cause of action. By defendant's own pleading, Baker was the proximate cause of any alleged damages, and thus, defendant failed to allege that but for plaintiff's alleged negligence, it would to have suffered some actual ascertainable damages. Plaintiff also claims that the non-specific, bald and conclusory allegations regarding G&P's (Gursky & Partners, LLP) disclosure of confidential information are insufficient. Further, plaintiff's submissions flatly rebut defendant's vague and conclusory allegation that Baker was employed by defendant when Gursky assisted him in forming Yummi Corp., or that plaintiff had advance knowledge of the Letter.

In support, plaintiff submits an affidavit of Steven Gursky, a member of Gursky & Partners, LLP ("G&P"), formerly known as plaintiff herein. In his affidavit, Gursky states that [*3]the initial representation of Baker arose out of his friendship with Baker, his neighbor, and continued from 1990 through January 2002, in a variety of legal matters.

Gursky states that G&P's representation of defendant also arose out of a social contact, in that defendant's principals were good friends of the in-laws of his former partner, Louis Ederer. Also, defendant's principals, Baker and his wife, and Ederer and his wife all attended Gursky's daughter's Bat Mitzvah in 2000. The Bakers, Ederers and defendant's principals went to dinner in 2001, and with the exception of the Ederers, again in 2002.

Prior to late January 2003, Baker told Gursky of defendant's failure to pay a bonus due to him, and Gursky advised Baker that he "would not be able to get involved on his behalf or on behalf of" defendant. Then sometime at the end of January 2003, Baker told him that he no longer worked for defendant and requested Gursky to conduct a search for the possibility of using the mark "Yummi" in connection with watches.[FN3] Gursky conducted such research. In mid to later February 2003, Baker then asked Gursky to form a corporation for him named Yummi Corp., and in March 2003, such corporation was formed. Other than having a corporate service company form the corporation, Gursky's representation of Baker consisted of only three hours, and solely involved providing general business advice concerning compensation issues, trade secret protection and capitalizing a new business. According to Gursky, none of these services were adverse to defendant or involved disclosure of defendant's confidences, since plaintiff's representation of defendant involved a dispute concerning the license agreement. Gursky further states that although he knew that Yummi Corp. would use the mark "Yummi" in connection with Yummi brand watches and accessories, he did not understand that Baker's prospective company would compete with defendant or seek to obtain licenses from any company with which defendant did business.

Thereafter on March 17, 2003, at a conference in the California litigation, Ederer learned that the California Court received the Letter, and telephoned Gursky. Gursky and Ederer later agreed that Baker was the author of the Letter. Gursky later took issue with Ederer's need to damage the credibility of his "friend [and] long time client," Baker, in order to defend defendant during the California litigation, and therefore, discussed the conflict of interest with defendant's principals. G&P hired an expert in legal ethics, who recommended that G&P withdraw from representation as a result of the conflict of interest created by the Letter. Thus, since the conflict arose solely because of the Letter, G&P would have had to resign from representation of defendant even if the Yummi Corp. representation had not occurred. Further, and consistent with his deposition testimony submitted in support, Gursky denies ever seeing the Letter before hearing about it and seeing it from Ederer.

Plaintiff also submits the deposition testimony of Brian Beare, defendant's principal, who testified that he was unaware of any evidence that Gursky knew of the Letter before it was sent, or that anybody knew of the Letter before it was received by the California Court. Plaintiff also points out that Beare submitted a declaration to the California Court regarding plaintiff's motion to withdraw as counsel, stating that defendant had "no viable alternative but to consent to Gursky [*4]& Ederer's application. . . ." Therefore, it is argued, such extrinsic evidence conclusively demonstrates that defendant's second counterclaim for legal malpractice is not viable.

Plaintiff also argues that the third counterclaim for malpractice based on a failure to tender defense of the California litigation to defendant's insurer must be dismissed because extrinsic documentary evidence, to wit, the coverage letter and first amended complaint, conclusively demonstrate that no insurance coverage was available. In support, plaintiff provides a copy of AMM's coverage letter, which indicated that the allegations against defendant "may fall within the scope of the AMM Policy's 'advertising injury' offense for 'Infringement of copyrighted advertising materials.'" The subject policy was stated to "only afford[] 'advertising injury' coverage for an enumerated offense that is committed by the insured in the course of the insured's advertising activities." Thus, although AMM agreed to defend defendant, it reserved its right "to seek reimbursement" and "deny coverage for indemnification of, any claim that does not allege damages caused by [defendant's] alleged infringement of copyrighted advertising materials in the course of [defendant's] advertising activities." The coverage letter also stated that while AMM agreed to defend defendant against the breach of contract claim as part of AMM's defense of the entire litigation, it reserved its right to reimbursement of fees incurred in the defense of such claims under the breach of contract exclusion.

Further, it is alleged that defendant's first counterclaim for breach of fiduciary duty must be dismissed as a matter of law as it is duplicative of defendant's second counterclaim for attorney malpractice, and that documentary evidence disposes of this claim.

Defendant opposes the motion and cross-moves for partial summary judgment. In opposition, defendant argues that (1) its first counterclaim properly pleads plaintiff's breach of fiduciary duty and plaintiff's documentary evidence fails to refute those allegations; (2) the second counterclaim for attorney malpractice sufficiently pleads plaintiff's violation of ethical duties to defendant by accepting representation of an adverse interest; and (3) defendant's third counterclaim properly pleads that plaintiff's failure to tender the defense of the California litigation was negligence and constitutes malpractice.

Defendant relies upon an affidavit by Ederer, wherein he states that when he joined plaintiff in 1998, Gursky was representing Baker in an attempt to salvage a business venture, and that he understood them to be close friends for many years. In January 2003, while as lead counsel for defendant in the California litigation, Ederer became aware of an allegation by Baker that Beare reneged on his promise to pay Baker a bonus. At this time, Baker began to raise concerns about defendant's ability to pay its legal fees, and repeatedly stated that the firm had to protect itself from a financial disaster with defendant, which would renege on its obligation to pay legal fees just as it reneged on paying Baker his bonus. Although Ederer, the billing attorney, understood that most of the hundreds of thousand dollar fees were for the trial and had not been billed, only $50,000 was actually past due. Gursky insisted that the firm withdraw as counsel; however, the remaining partners at the firm disagreed.

After the Letter surfaced in the California Court, Ederer brought it to Gursky, who remarked "I never thought he would actually go ahead with this." At a firm meeting to discuss the import of the Letter, Gursky declared that no one from the firm would depose or cross-exam Baker, as Baker was a client of the firm. Gursky then revealed that he had resumed his representation of Baker in January 2003 in helping him set up a new company to license and sell [*5]watches in competition with defendant.

In his affidavit, Brian Beare, "President" of defendant, states that Gursky never warned defendant of Baker's intention to send the Letter. Further, defendant claims that of the $550,000 balance allegedly due, $490,000 was for time incurred from January 2003 when plaintiff took on the conflicting Baker representation forward, and that most of that time was spent in preparation for a trial it never conducted.[FN4]

With respect to the tender of defense claim, defendant contends that subsequent to the February 17, 2002 coverage letter, AMM reimbursed $100,000 in defense costs, albeit under a reservation of rights.[FN5]

In support of its cross-motion, defendant contends that it is undisputed that as of January 2003, Gursky knew of an ongoing dispute between Baker and defendant and defendant's principal when he undertook this new representation to help Baker form his own watch business. Therefore, by accepting work that put it at odds with defendant's interests, plaintiff violated the disciplinary rules, thereby forfeiting its fee as a matter of law. Further, plaintiff's failure to tender the defense to defendant's carriers also constitutes negligence. Also, defendant never received the benefit of any of plaintiff's work in preparation for trial, and is entitled to a refund of the amounts already paid, or at a minimum, is free from paying any fees for January 2003 forward.

In reply, plaintiff argues that the alleged disclosure of confidences fails to conform to the specificity pleading requirements in connection with a breach of fiduciary duty claim. Plaintiff also claims that the affidavits and deposition transcripts do not cure defendant's defective pleading. Further, as there is no private right of action for violation of the Disciplinary Rules, any alleged violation of a Disciplinary Rule alone is an insufficient basis for liability. Under the Code of Professional Responsibility, plaintiff was permitted to undertake the "Yummi" representation since it was unrelated and distinct from the issues in the California litigation, and would have no impact on plaintiff's representation of defendant in that matter. Further, the disciplinary rules do not prohibit an attorney from representing competing economic interests, so as to result in a breach of fiduciary duty or attorney malpractice. In any event, plaintiff's work for Baker in forming Yummi Corp. was formative, and the mere possibility that defendant and Yummi Corp. would be competitors in the future is insufficient to sustain an breach of fiduciary duty or attorney malpractice claim. In addition, plaintiff was permitted to represent Baker even if he was an employee of defendant, where the attorney is convinced that differing interests are not present. In this respect, when Baker was allegedly still an employee of defendant from January 28 through February 3, 2003, plaintiff's trademark search for "Yummi" was not remotely adverse to defendant, and did not create an appearance of impropriety. Furthermore, even if this Court were to find that plaintiff violated a Disciplinary Rule or engaged in misconduct, plaintiff is not required to forfeit all of its fees, as such would be inequitable and against caselaw. [*6]

Further, plaintiff claims that AMM's payment to defendant was made under threat from defendant's counsel to sue for breach of contract, and prior to AMM's completion of its review.

In reply, defendant distinguishes the cases on which plaintiff relies and reargues points made in its cross-motion.

Discussion

In determining a motion to dismiss a pleading for failure to state a cause of action, the Court's role is ordinarily limited to determining whether the complaint states a cause of action (Frank v DaimlerChrysler Corp., 292 AD2d 118 [1st Dept 2002]). When considering such a motion, the pleadings must be liberally construed (see, CPLR §3026), and 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 [1994]; Leviton Manufacturing Co., Inc. v Blumberg, 242 AD2d 205 [1st Dept 1997]). The standard on such motion 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 [1st Dept 1997]). However, 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 [1st Dept 1989]).

Pursuant to CPLR 3211 [a] [l], a party may move for judgment dismissing one or more causes of action asserted against him on the ground that "a defense is founded upon documentary evidence." Thus, where the "documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law," or where undisputed facts negate or dispose of the claims in the complaint, dismissal is warranted (Leon v Martinez, 84 NY2d 83, 88 [1994]; Scott v Bell Atlantic Corp., 282 AD2d 180 [1st Dept 2001]; IMO Indus., Inc. v Anderson Kill & Olick, P.C., 267 AD2d 10, 11 [1st Dept 1999]; Biondi v Beekman Hill Housing Apt. Corp., 257 AD2d 76, 692 NYS2d 304 [1st Dept 1999]; Kliebert v McKoan, 228 AD2d 232 [1st Dept 1996]; Gephardt v Morgan Guaranty Trust Co. of NY, 191 AD2d 229 [1st Dept 1993]; Juliano v McEntee, 150 AD2d 524 [1st Dept 1989]; see Frank v DaimlerChrysler Corp., 292 AD2d 118 [1st Dept 2002]).

Legal Malpractice

In order to properly plead a claim for legal malpractice, defendant must allege (1) the negligence of the attorney, that is to say, that the attorney failed to exercise "the ordinary reasonable skill and knowledge" commonly possessed by a member of the legal profession (Darby & Darby, P.C. v VSI Intern., Inc., 268 AD2d 270 [1st Dept] affd, 739 NE2d 744 [2000]); (2) that the negligence was the proximate cause of the loss, and (3) proof of actual damages as a direct result of the attorney's actions (Franklin v Ward, 199 AD2d 220 [1st Dept 1993]). As to the latter of the three elements, a legal malpractice cause of action is subject to dismissal where the complaint fails to set forth the requisite allegation, that "but for" the attorneys' alleged malpractice, the plaintiff would not have sustained some actual ascertainable damages (Franklin, [*7]supra; Stroock & Stroock & Lavan v Beltramini, 157 AD2d 590, 591 [1st Dept 1990]). In support of its second counterclaim for attorney malpractice, defendant alleges that in January 2003, plaintiff assisted Baker in forming a competing business while Baker was still employed by defendant, plaintiff disclosed defendant's confidences to Baker and also knew of Baker's Letter before it was sent, and subsequently failed to warn defendant of Baker's Letter. It is also alleged that plaintiff therefore caused (1) defendant to incur significant additional litigation expenses and (2) Quiksilver to obtain and use documents at the trial.

Plaintiff relies upon the deposition testimony of Gursky, Baker's affidavit, and the deposition testimony of defendant's President, Beare, to rebut defendant's allegations. At the outset, plaintiff cannot rely upon such documents to support its motion to dismiss under CPLR 3211 [a][1], since "documentary evidence" under such section does not include affidavits and deposition transcripts (see Realty Investors v Bhaidaswala, 254 AD2d 603, 679 NYS2d 179 [3d Dept 1988]; Williamson, Picket, Gross, Inc. v Hirschfeld, 92 AD2d 289 [1st Dept 1983] [an affidavit does not qualify as "documentary evidence" which will support a motion to dismiss under CPLR 3211 (subd [a], par 1)]; Kearins v Gruberg, McKay & Stone, 2 Misc 3d 1001, 2004 WL 316521 [Supreme Court Bronx County 2004]). Therefore, the Court cannot consider such documents to determine whether dismissal is warranted under CPLR 3211 [a][1].

Furthermore, plaintiff's motion to dismiss such counterclaim on the ground that it fails to state a cause of action is denied. Contrary to plaintiff's contentions, the submissions, including the affidavit of Ederer and the verified complaint of an action commenced in New Jersey by defendant sufficiently alleges facts from which it may be inferred that Baker was still employed with defendant at the time plaintiff undertook to assist Baker in forming Yummi Corp. and that Baker's interests were adverse to defendant at the time of plaintiff's undertaking. From the submissions, it may also be inferred that plaintiff knew at the time of its undertaking that Baker was a disgruntled employee and that Baker's newly formed competing watch business would potentially create a conflict of interest or have a negative impact on plaintiff's representation of defendant in the California litigation. Additionally, it may be inferred that Gursky was aware of the Baker Letter before it was sent. Furthermore, although defendant's pleading does not specifically assert the "but for" language allegedly lacking, defendant's amended verified answer and submissions allege that plaintiff disclosed confidential information to Baker during the course of plaintiff's representation of Baker, which provided the basis of Baker's Letter giving rise to the conflict of interest. The Court notes that plaintiff's contention that it was permitted to represent Baker even if he were an employee of defendant at the time does not warrant dismissal of the second counterclaim. Although plaintiff's internet search for the trademark Yummi while Baker was still employed with defendant in and of itself may not establish that the defendant's interest were adverse to that of Baker's, the record discloses that plaintiff may have been aware of the conflict between defendant and Baker and of the fact that the Yummi Corp. was a direct competitor of defendant.

Therefore, plaintiff's motion to dismiss the second counterclaim for attorney malpractice is denied.

However, the allegations contained in defendant's amended answer are insufficient to support the third counterclaim for attorney malpractice based on the failure to tender the defense. [*8]"In the absence of a factual assertion that the scope of the task for which plaintiff was retained specifically included inquiry into the nature and extent of defendant's insurance coverage and whether it was applicable to the claims" in the California litigation, the retention of counsel for the defense of the California action "simply does not include any responsibility for assisting the client in determining whether sources exist from which to pay for that defense" (Darby & Darby, P.C. v VSI Intern., Inc., 268 AD2d at 271, supra] [dismissing attorney malpractice claim under CPLR 3211 as there are no cases to support proposition that an attorney retained to defend a business client in intellectual property litigation has a duty to inquire into the existence, nature and scope of insurance policies previously procured by the client, and to determine whether any such policy provides the client with any entitlement in relation to the claim being litigated]). Furthermore, although the successor counsel pursued the question of insurance coverage with successful results, this Court "will not impose an obligation upon a law firm not otherwise imposed by law, based upon the tasks performed by successor counsel" (Id. at 273). Since defendant's allegations are insufficient to give rise to any duty of plaintiff to ascertain the availability of insurance coverage for the defense of the California litigation, any alleged failure to tender the defense is insufficient to support a legal malpractice claim on this ground.

Breach of Fiduciary Duty Counterclaim

It has been held that when a breach of fiduciary duty arises from the same facts as the legal malpractice claim and alleges similar damages, the claims are duplicative and the breach of fiduciary duty claim should be dismissed for failure to state a cause of action (Sonnenschine v Giacomo, 295 AD2d 287 [1st Dept 2003]; Turk v Angel, 293 AD2d 284 [1st Dept 2002]). In its amended verified answer, the first and second counterclaims for breach of fiduciary duty and legal malpractice are premised upon "facts commons to all" counterclaims, and therefore are duplicative of each other. The Court also notes that defendant concedes that "the facts supporting GMT's breach of fiduciary duty claim are based upon those actions which also constitute one of its legal malpractice counterclaims." Accordingly, the breach of fiduciary duty counterclaim is dismissed.[FN6]

Cross-Motion for Partial Summary Judgment

In light of the issues of fact that exist as to whether plaintiff's acts constitute attorney malpractice, partial summary judgment dismissing plaintiff's complaint is denied at this juncture.

Based on the foregoing, it is hereby

ORDERED that plaintiff's motion to dismiss defendant's counterclaims are granted to the extent that defendant's first counterclaim for breach of fiduciary duty and third counterclaim for attorney malpractice based on a failure to tender are dismissed; and it is further

ORDERED that defendant's cross-motion for partial summary judgment dismissing the complaint is denied. [*9]

This constitutes the decision and order of the court.[FN7]

_________________________

Dated: October 5, 2004Hon. Carol R. Edmead, J.S.C. Footnotes

Footnote 1: The plaintiff in the California litigation initially sought a declaratory judgment declaring that defendant had no right to renewals of the license agreement. The complaint was later amended to seek damages from defendant for breach of license agreement.

Footnote 2: The Letter accuses defendant's principals of manipulating their computers and employees' testimony and states, among other things, that defendant's principals "have been doing all they can to make the figures and damages Look [sic] so much worse than they really are." Baker admits in an affidavit dated March 24, 2004, that he authored the letter at his "own free will and without any coercion or undue influence being exerted upon [him] at any time, by any individual and/or entity." Baker attests that at no time prior to or since the letter did he receive any advice from Steven Gursky (of plaintiff) concerning the letter, or discussed, communicated and/or conveyed directly or indirectly to Gursky, any member, any associate and/or employee of his law firm or member of his immediate family that he intended or had actually written, published or disseminated the letter.

Footnote 3: Plaintiff contends that Gursky also testified at his deposition that at the time he accepted the engagement to help Baker form Yummi Corp., Baker was no longer working at defendant, and that he did not discuss the Letter with Baker prior to it being written.

Footnote 4: According to defendant, after nine months of delay and costly discovery, Quiksilver abandoned its efforts to prove the allegations in Baker's Letter, but introduced certain unrelated documents it found scouring defendant's computer system.

Footnote 5: Defendant also states that discovery pursuant to the Court's Compliance Conference Order, dated April 27, 2004, is outstanding.

Footnote 6: Based on the foregoing, the Court does not reach the issue of whether the counterclaim for breach of fiduciary duty has been pleaded with the level of specificity required by CPLR 3016(b).

Footnote 7: This decision has been modified for publication.