Pui Sang Lai v Shuk Yim Lau

[*1] Pui Sang Lai v Shuk Yim Lau 2006 NY Slip Op 52694(U) [24 Misc 3d 1227(A)] Decided on December 7, 2006 Supreme Court, Nassau County Bucaria, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 7, 2006
Supreme Court, Nassau County

Pui Sang Lai a/k/a Paul Lai and Sui Kwong Lai, Plaintiffs,

against

Shuk Yim Lau a/k/a Shuk Yim Li, Che Sun Li a/k/a Thomas C.S. Li and Barry I. Siegel, Defendants.



8597/05

Stephen A. Bucaria, J.

This motion, by defendant Barry Siegel, for summary judgment dismissing the complaint is granted; the motion, by defendant Barry Siegel, to disqualify Po W. Yuen from representing plaintiff and for the assessment of costs and sanctions is denied, and the cross-motion, by defendants Shuk Yim Lau and Che Sun Li, for summary judgment dismissing the complaint is denied.

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This is an action for an accounting as between partners in a real estate venture and for attorney misconduct in connection with the disposition of the partnership asset.Defendant Shuk Yim Lau, who is also known as Shuk Yim Li, is married to defendant Che Sun Li, who is also known as Thomas C.S. Li (hereinafter "Shuk Yim" [*2]and "Thomas Li"). On or about July 18, 1986, plaintiff Pui Sang Lai, who is also known as Paul Lai, and plaintiff Sui Kwong Lai entered into a contract with Thomas and Shuk Yim Li. In the contract, the parties agreed to purchase jointly a mixed commercial and residential building located at 619 Lorimer Street in Brooklyn. According to defendants, the parties agreed to share the expenses associated with the property on an equal basis. In order to secure financing for the transaction, it was necessary for title to be taken only in Shuk Yim Li's name. On July 18, 1986, Shuk Yim did in fact acquire title to the 619 Lorimer Street property. The name of the lender who was the original mortgagee is not disclosed, but the mortgage was eventually assigned to the Marine Midland Bank.

Paul Lai and Shuk Yim were also partners with respect to a warehouse located at 110 West 6th Street in Plainfield, New Jersey which they had acquired on January 24, 1986. Title to the Plainfield property was held by a corporation, Fantaly International, Ltd. Paul Lai was the owner of 50% of the stock of Fantaly International, and Shuk Yim and an undisclosed third party were the holders of the other 50% of the stock of the corporation. According to defendants, the expenses with regard to the Plainfield property were also to be shared equally.

Fantaly International had purchased the warehouse in Plainfield with a purchase money mortgage loan from Horizon Bank. When Fantaly fell in arrears on the loan, it became necessary to refinance the mortgage. On October 1, 1987, pursuant to the refinancing, Horizon took a note from Fantaly International in the amount of $300,000 together with a mortgage on the Plainfield, NJ property, and also a guaranty by Shuk Yim and Thomas Li as well as a mortgage on their home located at 28 Edgemont Road in West Orange, NJ. The loan was also secured by a $100,000 mortgage on plaintiffs' residence on Staten Island.

On June 29, 1990, Paul Lai and Shuk Yim Li, each acting alone, entered in a written agreement. With no mention of Sui Kwong Lai or Thomas Li, the agreement recites that Paul and Shuk Yim were each 50% owners of the 619 Lorimer Street property. Pursuant to the agreement, Shuk Yim was to transfer her 50% interest in 619 Lorimer Street to Paul, and Paul was to transfer his 50% interest in Fantaly International to Shuk Yim. To adjust for the difference in value of the properties, the agreement also called for Shuk Yim to pay Paul $120,000 in two installments.

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The contract was contingent upon Shuk Yim's arranging a cash-out refinancing of the mortgage on the Plainfield, New Jersey property in an amount sufficient to allow her to pay Paul the $120,000. The agreement further provided that each party would [*3]indemnify the other "if their new respective obligations are not met." More specifically, if Shuk Yim did not pay her "respective share" of the mortgage payments on the Plainfield property, she would indemnify Paul for "any claims made by the bank in connection therewith." Similarly, if Paul did not timely pay the mortgage on the 619 Lorimer Street property, he was to indemnify Shuk Yim for any claims made against her by the bank. The agreement contemplated that the closing of the transaction, and the first $60,000 installment payment, would occur on or about October 31, 1990.

The exchange of properties contemplated by the June, 1990 agreement never took place, apparently because Shuk Yim was not successful in refinancing the mortgage upon the Plainfield, NJ property. Nevertheless, on January 24, 1992, Shuk Lim obtained a $150,000 loan from Marine Midland by giving the bank a mortgage upon the 619 Lorimer Street property. By 1997, the mortgagors, that is Fantaly International and Shuk Lim, were in arrears with respect to the mortgage loans on both properties.

Chase Manhattan Bank, the assignee of the mortgage on Shuk Lim's home in West Orange, commenced a foreclosure action in Superior Court, Essex County. Chase obtained a judgment of foreclosure, and a sheriff's sale was scheduled for March 18, 1997. Chase had also commenced foreclosure actions in Superior Court, Union County against the Plainfield property and in Supreme Court, Richmond County against plaintiffs' residence.

On March 14, 1997, Fantaly International, as borrower, and Thomas and Shuk Yim Li, as guarantors, entered into a forbearance agreement with Chase. The forbearance agreement recited that as of January 21, 1997, the outstanding principal balance on the note was $206,000. There was also accrued interest in the amount of $34,595 and attorney's fees and costs outstanding in the amount of $16,855. The forbearance agreement provided in essence that in exchange for a payment of $20,000 upon the signing of the agreement and payment of the balance of the arrears, or $51,485.19, by April 21, 1997, the lender would forbear from exercising its rights under the residential foreclosure judgment. Defendant Barry Siegel is the attorney who represented Thomas and Shuk Yim Li in the foreclosure action and negotiated the forbearance agreement.

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In November, 1997, plaintiffs commenced an action against Thomas and Shuk Yim Li in Supreme Court, Kings County. Plaintiffs alleged that Shuk Yim breached her [*4]implied duty of good faith and fair dealing by refusing to fulfill the terms of the June,

1990 agreement. In the Kings County action, plaintiffs were represented by Yuen & Yuen, their current counsel. Thomas and Shuk Yim Li continued to be represented by Siegel.

Thomas and Shuk Yim moved to dismiss the complaint in the Kings County action based upon the statute of limitations. Although the complaint alleged only one cause of action, a breach of the implied covenant of good faith and fair dealing, Justice Herbert Kramer characterized the complaint as alleging a cause of action for breach of the indemnity provision in the agreement. Justice Kramer held that the indemnity clause was an independent and severable agreement, which was enforceable even though the exchange of properties have never taken place. Since a claim for indemnity accrues upon payment, and the mortgage debt had not yet been paid, Justice Kramer concluded that the breach of contract action was timely. In a decision dated February 11, 1998, Justice Kramer denied the motion to dismiss the complaint.

Meanwhile, Marine Midland Bank had commenced a foreclosure action against Shuk Yim with respect to the 619 Lorimer Street property. A judgment in favor of Marine Midland and against Shuk Lim was entered on January 5, 1998 in the sum of $121,042.63 together with interest. On May 1, 1998, Shuk Yim Li entered into a forbearance agreement with Marine Midland. The agreement provides, in essence, that Shuk Yim would pay Marine $50,000 upon execution of the agreement, and Marine would exercise its right of set off with respect to a money market account maintained by the debtor at the bank. Shuk Yim was then to pay $10,000 per month for seven consecutive months and then make a final payment, equal to the outstanding balance plus accrued interest and less payments, on December 30, 1998. As long as the debtor was not in default of any provision of the agreement, Marine agreed to forbear from exercising its rights to enforce the judgment of foreclosure. Siegel continued to represent Shuk Yim in connection with the Marine foreclosure action and forbearance agreement. Defendants assert that they paid over $516,000 to satisfy the two mortgages without any contribution from plaintiffs.

On March 10, 2000, Shuk Yim sold the 619 Lorimer Street property to a third party. Defendants assert that the net proceeds from the sale were $220,086. Siegel was the attorney who represented Shuk Yim in connection with the transaction. Plaintiffs

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allege that they did not learn about the sale until January, 2002. Plaintiffs discontinued [*5]the Kings County action with prejudice on January 22, 2002, apparently unaware of the sale at that time.

This action was originally commenced on June 3, 2004 in Supreme Court, Kings County. Upon Siegel's motion for a change of venue, the action was transferred to this court. In the first cause of action, plaintiffs allege that defendants breached the July,

1986 agreement by failing to deliver to plaintiffs 50% of the net proceeds of the sale of the 619 Lorimer Street property. In the second cause of action, plaintiffs allege that defendants were unjustly enriched by failing to account to plaintiffs upon the sale of the property. In the third cause of action, plaintiffs allege that defendants converted plaintiffs' share of the proceeds from the sale of the property. In the fourth cause of action, plaintiffs allege that defendants fraudulently induced them to contribute 50% of the monies necessary to purchase the 619 Lorimer Street property by falsely representing that plaintiffs would be entitled to a 50% ownership interest in the property. Plaintiffs allege that Siegel aided and abetted defendants in the fraud by acting as their attorney in connection with the sale of the property. In the fifth cause of action pursuant to § 487 of the Judiciary Law, plaintiffs allege that Siegel committed attorney misconduct by representing defendants in connection with the sale of the property and defrauding plaintiffs of their 50% share of the proceeds. In the sixth cause of action, plaintiffs seeks to impose a constructive trust upon the proceeds of the sale of the 619 Lorimer Street property. Plaintiffs seek compensatory damages with regard to their claims for breach of contract and unjust enrichment and compensatory and punitive damages with respect to their conversion, fraud, and attorney misconduct claims.

In their answer, Shuk Yim and Thomas Li counterclaim against plaintiffs for their share of the liabilities, including the carrying charges on the mortgage, insurance payments, and real estate taxes for both properties. Defendants assert that even after deducting for the proceeds of the 619 Lorimer Street property they are owed over $700,000 from the plaintiffs.

Siegel's motion to disqualify plaintiffs' counsel and for sanctions

Defendant Siegel moves to disqualify Po Yuen, a member of Yuen & Yuen, from representing plaintiffs in this action and to assess sanctions against him. The basis of the motion for sanctions relates to plaintiffs' prior motion for leave to serve an amended complaint. The proposed amendment alleged that plaintiffs had discontinued the Kings

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County action in reliance upon upon Siegel's representation that the mortgage on plaintiffs' residence in Richmond County had been satisfiedThe basis for claiming that the mortgage was still unsatisfied was a title report. Although plaintiffs' counsel had not received the satisfaction and it had not yet been recorded, the mortgage had in fact been satisfied. When Mr. Yuen learned that the mortgage on the Richmond County property had been satisfied, the motion for leave to amend was withdrawn. Since counsel had a

reasonable basis for the allegation that the mortgage had not been satisfied, the claim was not frivolous(See 22 NYCRR § 130-1.1). Accordingly, Siegel's motion for sanctions is denied.

The basis of the motion for disqualification is that Po Yuen participated in the settlement negotiations leading up to the discontinuance of the Kings County action. Disciplinary Rule DR5-102(A) provides that a lawyer shall not act as an advocate on issues of fact before any tribunal if the lawyer knows that the lawyer ought to be called as a witness on a significant issue on behalf of the client.Paragraph B sets forth the disqualification rule where the lawyer or another lawyer in the lawyer's firm may be called on a significant issue other than on behalf of the client. The rationale of the disqualification rules is that the roles of an advocate and a witness are inconsistent(Code of Prof. Resp. EC 5-9). From a public image point of view, it is "unseemly" for a lawyer in a trial also to argue his own credibility as a witness (S & S Hotel Ventures v. 777 S. H. Corp., 69 NY2d 437, 444,1987). Nonetheless, the advocate/witness disqualification rules provide guidance, not binding authority, for courts in determining whether a lawyer or law firm should be disqualified during litigation. Disqualification of counsel is a discretionary determination for the trial court. In ruling upon a motion for disqualification, the court must consider a party's valued right to chose his own counsel and the fairness and effect in the particular factual setting of granting or denying disqualification. In particular, disqualification of a plaintiff's law firm may stall the proceedings and redound to the strategic advantage of one party over another (69 NY2d at 443).

The court notes that defendant Siegel is moving to disqualify only Po Yuen and not his entire law firm. However, despite Po Yuen's participation in the discussions leading up to the discontinuance of the prior action, it does not appear that Po Yuen is likely to be called as a witness on a significant issue upon the trial of the present proceeding. The gravamen of the claims in the complaint relate to Shuk Yim and Thomas' sale of the 619 Lorimer Street property without accounting to plaintiffs for the proceeds of the transaction. To the extent that plaintiffs characterize their claims as based

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upon fraud, the alleged false representation concerns plaintiffs' entitlement to an ownership interest in the property (complaint ¶ 43). Moreover, the alleged reliance consists of plaintiffs' having contributed 50% of the purchase price rather than the discontinuance of the Kings County action (complaint ¶ 44) .

The court concludes that the discussions which Po Yuen may have had with Siegel prior to the signing of the stipulation of discontinuance would be of only marginal relevance to the present action. The court notes in this regard that although Siegel was a

party to the discussions with Po Yuen, Siegel makes no offer of proof as to what Yuen is likely to testify to at trial. Indeed, Siegel does not even indicate whether Yuen is likely to give testimony on behalf of the plaintiffs or the defendants. Finally, the court notes that Yuen & Yuen has obtained co-counsel for plaintiffs, namely the firm of Miranda &

Sokoloff, LLP. Thus, it is unclear whether Po Yuen will actually conduct the courtroom proceedings during the trial of the action (S & S Hotel Ventures, supra, 69 NY2d at 445). In these circumstances, defendant's motion to disqualify Po Yuen as attorney for plaintiffs is denied.



Shuk Yim and Thomas' motion for summary judgment

In moving for summary judgment dismissing the complaint, Shuk Yim and Thomas contest the legal sufficiency of plaintiffs' claims for breach of contract, unjust enrichment, conversion, and fraud. However, defendants do not dispute that they entered into a partnership with plaintiffs with respect to the 619 Lorimer Street property.

Partnership Law §44 provides that any partner shall have the right to a formal account as to partnership affairs in specific situations and when the circumstances render it just and reasonable. Where a partnership is formed to acquire real property and a partner who takes title in his own name later disposes of the property, the other partner is clearly entitled to an accounting (Chamberlain v. Amato, 259 AD2d 1048, 4th Dept., 1999).Misconduct on the part of a partner, including his own breaches of the partnership agreement, will not deprive the partner of his right to an accounting, if it is otherwise just and reasonable to order an accounting (Bell v. Herzog, 39 AD2d 813, 3rd Dept., 1972). Thus, an allegation of unclean hands will not defeat a partner's right to an accounting (Pittoni v. Boland, 249 AD2d 458, 2d Dept., 1998).

On the other hand, a plaintiff who repudiates the partnership by refusing to contribute financially or otherwise failing to participate in the partnership for a prolonged

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period of time is not entitled to an accounting (Simons v. Ross, 309 AD2d 667, 1st Dept., 2003).While plaintiffs failed to contribute their share of expenses, they nonetheless participated in the partnership affairs by giving a mortgage on their personal residence in an effort to secure the loan on the Plainfield property. Plaintiffs further participated in the partnership affairs by entering into the June, 1990 swap agreement and attempting to obtain the financing to implement it. Thus, the court concludes that plaintiffs did not repudiate the 619 Lorimer Street real estate venture.

An action at law will not lie against a wrongdoing partner or his agents or coconspirators for otherwise lawful acts committed with an intent to harm the plaintiff

during the life of the partnership (Pace v.Perk, 81 AD2d 444, 453, 2d Dept., 1981). While plaintiffs are entitled to an accounting with respect to the partnership affairs of 619 Lorimer, an accounting is their exclusive remedy. Thus, plaintiffs' claims for breach of

contract, unjust enrichment, conversion, and fraud must be dismissed for failure to state a cause of action.

However, it does not follow that summary judgment must be granted to defendants. "Long before enactment of the CPLR, on motion for summary judgment courts looked beyond the pleadings to discover the nature of the case" (Alvord & Swift v. Muller Construction Co. , 46 NY2d 276, 281, 1978). Thus, where the submissions of the parties make out a cause of action not contained in the pleading, summary judgment may not be granted to defendant. Prior to the CPLR, the practice was occasionally to grant summary judgment with leave to amend the complaint. However, with the advent of the "modern principles underlying the CPLR," that is, focusing on the merits of the case rather than the form of the pleadings, it is no longer necessary to dismiss with leave to amend(46 NY2d at 281).Accordingly, defendants Shuk Yim and Thomas Li's motion for summary judgment is denied, and the court directs an accounting as to the affairs of the 619 Lorimer Street venture.

Siegel's motion for summary judgment

Plaintiffs fraud claims against Siegel are based upon his representing Shuk Yim and Thomas Li in the sale of the 619 Lorimer Street property. As noted above, an action at law will not lie against a wrongdoing partner or his agents or coconspirators for otherwise lawful acts committed with an intent to harm the plaintiff during the life of the partnership (Pace v.Perk, 81 AD2d 444, 453, 2d Dept., 1981).While a partner in a real estate venture is under an obligation to account to his partners upon disposition of the

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partnership asset, there is nothing otherwise unlawful about conveying real property. Accordingly, Siegel's motion for summary judgment is granted as to the fourth cause of action in which he is charged with aiding and abetting the fraud of the other defendants.

Judiciary Law § 487 provides in pertinent part that, "An attorney or counselor who is guilty of any deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party...forfeits to the party injured treble damages, to be recovered in a civil action." A violation of this statute requires that the attorney be guilty of deceit or a "chronic, extreme pattern of legal delinquency" (Izko Sportswear Co. v. Flaum, 25 AD3d 534, 537, 2d Dept., 2006). Furthermore, the wrongful conduct by the attorney must occur in a suit actually pending (Tawil v. Wasser, 21 AD3d 948, 949, 2d Dept., 2005).

Canon 5 of the Code of Professional Responsibility provides that, "A lawyer should exercise independent professional judgment on behalf of a client." However,

ethical consideration 7-8 provides, "A lawyer should exert best efforts to insure that decisions of the client are made only after the client has been informed of all relevant considerations." Furthermore,

Advice of a lawyer to the client need not be confined to purely legal

considerations. A lawyer should advise the client of the possible effect

of each legal alternative....In assisting the client to reach a proper

decision, it is often desirable for a lawyer to point out those factors

which may lead to a decision which is morally just as well as legally

permissible.

(EC 7-8; See also ABA Model Rules of Prof. Cond. 2.1). In view of the large amount owned to them, it may have been legally permissible for Shuk Yim and Thomas Lee to dispose of 619 Lorimer without notifying their partners. However, Shuk Yim and Thomas might have been better served if Siegel had pointed out their legal and moral obligation to render a voluntary accounting to their partners, rather than requiring their partners to seek a judicial accounting.

Nonetheless, the court concludes that Siegel's representation of the sellers in a conventional real estate transaction does not constitute deceit or collusion, even though Siegel did not require his clients to account to their partners. Accordingly, defendant Siegel's motion for summary judgment dismissing the complaint is granted as to

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plaintiffs' claim for violation of Judiciary Law § 487.

Upon the filing of a note of issue by any party, the clerk is directed to place this case on the non-jury calendar for an accounting.

This shall constitute the decision and order of the court.

DatedJ.S.C.