Macnish-Lenox, LLC v Simpson

[*1] Macnish-Lenox, LLC v Simpson 2007 NY Slip Op 52055(U) [17 Misc 3d 1118(A)] Decided on October 23, 2007 Supreme Court, Kings County Demarest, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. As corrected in part through October 31, 2007; it will not be published in the printed Official Reports.

Decided on October 23, 2007
Supreme Court, Kings County

Macnish-Lenox, LLC, derivatively on behalf of Gentry Apartments, Inc., et ano., Plaintiffs,

against

Charles E. Simpson, et al., Defendants, - and - Gentry Apartments, Inc., Nominal Defendant.



26021/04



Attorneys for Defendants Simpson & Windels Marx:

Samuel B. Mayer, Esq.

Edwards, Angell, Palmer & Dodge, LLP 750 Lexington Avenue

New York, NY 10022

Attorneys for Plaintiff

Stephen H. Orel, Esq.

Wolf, Haldenstein, Adler, Freeman & Herz, LLP

270 Madison Ave.

New York, NY 10016

Attorneys for Defendants Mary Cooper & Wendy Williams

Scott S. Greenspun, Esq.

Braverman & Associates, P.C.

331 Madison Avenue

New York, NY 10017

Attorneys for Defendant Gentry Apartments

Brandy Wityak, Esq.

Cantor, Epstein & Degenshein, LLP

49 West 37th Street, 7th Floor

New York, NY 10018

Attorneys for Diversified

Ralph Drabkin, Esq.

Drabkin & Margulies

291 Broadway

New York, NY 10007

Carolyn E. Demarest, J.

Upon the foregoing papers in this action by plaintiffs Macnish-Lenox, LLC (Macnish), derivatively, on behalf of nominal defendant Gentry Apartments, Inc. (Gentry), and James J. Houlihan (Houlihan), as a director of Gentry, (collectively, plaintiffs), alleging breach of fiduciary duties and waste, aiding and abetting a breach of fiduciary duties and waste, legal malpractice, negligence, and unreasonable legal charges, defendants Charles E. Simpson (Simpson) and Windels Marx Lane & Mittendorf, LLP (Windels Marx) move for summary judgment dismissing plaintiffs' complaint as against them. Defendants Mary Feaster Cooper (Cooper) and Wendy Williams (Williams) separately move for summary judgment dismissing plaintiffs' complaint as against them. [*2]

Gentry [FN1] is a cooperative corporation, which owns two residential apartment buildings located at 310 and 330 Lenox Road, in Brooklyn, New York. Gentry acquired the buildings, which have 247 residential apartments, in June 1986, pursuant to a cooperative offering plan dated October 31, 1985. Lenox Brooklyn Associates (Lenox) was the sponsor of the cooperative conversion, which held the unsold shares of Gentry allocated to apartments not purchased in the conversion. Lenox converted to a limited liability company, Macnish, effective June 20, 1995. Macnish became the successor in interest to the holder of Gentry's unsold shares, and Macnish currently owns 44.2% of Gentry's shares. Houlihan is a controlling principal of both Lenox and Macnish.

Gentry's board of directors has five members. Three of the five members are resident shareholders of Gentry (unaffiliated with Lenox or Macnish). These resident members consist of Cooper (who became a member in 1994 and served through 1995, and served, again, from 1998 through January 18, 2005), Williams (who served from about 1999 through January 18, 2005) and Lee Clark [FN2] (who became a member prior to January 7, 1999 and served during the relevant time period). During the relevant times, Cooper was Gentry's president and Williams was Gentry's treasurer. Gentry's other two directors, who are controlled by the sponsor, are principals or employees of Macnish. These directors consist of Houlihan (who has been a member of the board continually since at least June 1986) and James McCaffrey (McCaffrey). Simpson is an attorney and a partner in Windels Marx, a law firm. Simpson was first retained by Gentry in 1994 and has continued to represent Gentry as its general outside counsel in a variety of co-op, corporate, real estate, bankruptcy and insurance matters.

Cooper and Simpson have been long-time friends, having first met through the mutual association of Simpson and Cooper's mother with Congressman Edolphus Townes. Cooper has been to events honoring Simpson in her church. In April 2002, Simpson wrote a $10,000 check to Gentry to pay for Cooper's maintenance arrears. The source of these funds from Simpson was allegedly cash that Cooper's mother had given to Simpson. Simpson also provided legal assistance without charge to Cooper during her divorce.

On June 25, 2002, a contractor improperly used a propane torch to make repairs to the roof of Gentry's building at 330 Lenox Road, setting the roof of the building on fire. The fire destroyed the roof at 330 Lenox Road, and did extreme damage to that building, rendering a substantial number of units in it uninhabitable for approximately one year. Residents of the building had to be relocated to substitute housing. Due to the fire, Gentry had to retain a contractor to restore the building and obtain payments from its insurance company, [*3]Diamond State Insurance Co. (Diamond), which insured the Gentry building for property damage.

Diamond retained Edward R. Reilly Co. as its public adjuster, who, in turn, hired the firm of Blaise Muscianesi & Associates (BMA) to perform an appraisal of the costs to perform the repair work. By letter dated August 28, 2002, BMA estimated the cost of repair of the apartments and public corridors to be $2,821,829, and, adding to this the sum of $345,542 for the cost of roof repairs, it estimated a total repair cost figure of $3,167,371.

Although Cooper had already signed a contract with an independent public adjuster, Mr. Azus, to negotiate on Gentry's behalf with Diamond, Houlihan and McCaffrey objected to this, and Houlihan suggested that Gentry retain Stuart Greenfield (Greenfield) of the firm Bentley James who had previously provided services as an insurance adjuster to Houlihan on fire losses at other buildings. The other members of Gentry's board and Simpson agreed to this. The Gentry board authorized Greenfield to retain Casella Construction Corp. (Casella), on its behalf, to repair the roof and to prepare an estimate for the cost of the rest of the repairs needed due to the fire damage. Casella's estimate dated August 29, 2002 was $4,001,526. The roof repair was performed by Casella. The cost of this job was estimated as $220,000 but ultimately cost $345,000.[FN3] This repair was done immediately after the fire because of water damage which was occurring to the apartments.

The resident members of Gentry's board expressed a preference to award the larger contract for repair of the fire damage to a community-based (minority) contractor, to which Houlihan had no objection. Gentry's board of directors then authorized Simpson to undertake the task of identifying minority contractors who could be solicited to submit bids to perform the repair work. Simpson turned to his long-time friend DeCosta Headley [FN4] (Headley), who was a principal of Diversified Inch by Inch, Inc. (Diversified ), seeking the names of other prospective bidders and a preliminary inspection and estimate of the work required to repair the fire damage. The entity that submitted the preliminary inspection was not Diversified, but, rather, Direct Contracting Corp. (Direct). Direct's preliminary inspection report was faxed to Simpson from Diversified on July 10, 2002. Simpson also claims to have made inquiries regarding other possible bidders to Greenfield, attorneys within Windels Marx, and Michael Schwartz, a consultant hired by the sponsor (i.e., Macnish). On September 24, 2002, Simpson then claims to have sent bid packages to Diversified, Direct, Housescapes Ltd. (Housescapes), and Affordable Housing Group (Affordable). Simpson did not send a bid package to Casella. According to Simpson, the bid package sent to Direct was returned [*4]based upon an incorrect address. Plaintiffs contend that Simpson told the Board that Direct had "declined" to bid.

In response to these solicitations, Simpson received a bid from Housescapes dated October 3, 2002 in the amount of $6,348,800, and a bid from Affordable dated October 4, 2002 in the amount of $6,457,704.10. Unbeknownst to plaintiffs at that time, Affordable and Housescapes were and remain owned by the same person, i.e., Gary Marcus (Marcus); their offices are at the same address; the address on Housescapes' bid was, in fact, Marcus' home address; and the name on Housescapes' bid, i.e., David Burke, is of someone who has never been an owner, officer, director, or employee of Housescapes. Simpson also received a bid from Diversified, dated October 4, 2002, which was signed by Roland Edwards, Jr., who, at that time, was on the payroll of Affordable. Diversified's bid was in the amount of $6,106,445.

This first round of bids, which were in amounts approximately twice what Diamond would pay, used an improper scope of work that was beyond that resulting from the fire damage. As a result, all of these bids were rejected, by letter dated October 21, 2002, from Windels Marx, by Simpson, and the bidders were notified that they could each submit another bid using the correct scope of work. Williams, and allegedly Cooper, then suggested to Houlihan that Casella be approached to see if it would submit a bid.

New bid packages were sent out, seeking replacement bids using the correct scope of work, to Diversified, Affordable, and Housescapes. Affordable and Housescapes did not bid. Diversified's revised bid, in the form of a contract, was for $4,165,447. Casella also submitted a bid through Greenfield, which was a one-page document, without specification, for only $1,995,000, approximately half of Diversified's bid.

At the board meeting on October 29, 2002, the Gentry board voted to direct Simpson to go back to Diversified one last time to see if it would lower its bid to $2.1 million. The board also instructed Simpson that if he could not get Diversified to lower its bid to $2.1 million within 24 hours, he was to go to contract with Casella for $1.995 million. Diversified failed to meet the $2.1 million price, but Simpson did not contact Casella for two weeks.By letter dated November 14, 2002, Alexander N. Casella (the principal of Casella), on behalf of Casella, clarified Casella's bid by stating that his recommendations to restore the building to its prior condition consisted of: securing releases to remove personal property from all vacant apartments, removing personal property from all fire and water damaged apartments, repairing and replacing all windows at fire damaged apartments, and performing necessary repairs at apartments with minor fire and water damage in order to return these apartments to the rent roll. The letter stated that "[a]fter the above items have been completed, [Casella would] assess the work required to repair the mold in various apartments." The letter further stated that Casella would "[p]repare an agreed scope of work for contract purposes" and that Casella "budget[ed] the above work to cost approximately $250,000." According to Alexander Casella, this letter was meant to account for the necessity of the remediation of mold at the premises, and he asserted that the mold damage [*5]was inextricably intertwined with his bid.[FN5] Simpson claims that based upon this letter and a conversation he claims to have had with Alexander Casella, he became convinced that Casella would not do the job for the $1,995,000 which it had bid, and that Casella was repudiating its bid so that the $1,995,000 bid could no longer be relied upon.

A hearing was scheduled to take place on November 15, 2002,[FN6] at which Gentry was faced with the prospect of the vacatur of a preliminary injunction which had restrained the New York City Department of Housing Preservation and Development (the HPD) from making emergency repairs to the damaged units at a potentially greater cost to Gentry. Gentry, therefore, sought to be able to inform the court that it had a contract to repair the fire damage. In an affidavit sworn November 7, 2002, submitted to the Court in support of continuing the stay, Mr. Simpson represented that the Board had "chosen" to give the contract for repair work to a "joint venture of Diversified and Affordable." However, the board had directed, at its meeting on October 29, to award the contract to Casella unless Diversified would lower its bid to $2.1 million within 24 hours. Simpson continued negotiating with Diversified, who ultimately lowered its bid to $3,528,074, but did not contact Casella again until November 12, 2002. As a result of Simpson's advice to the members of the Gentry board, including that Casella had repudiated its bid, the board ultimately chose Diversified without objection from Houlihan or his designee, McCaffrey. Houlihan claims that the reason he did not object was that, given that the three resident board members were in favor of awarding the contract to Diversified, he believed it was a fait accompli and that he had no choice in the matter. With the approval of the board, on behalf of Gentry, Williams executed an AIA form contract with Diversified dated November 13, 2002 for the sum of $3,528,074 (the Diversified contract).

Subsequent to entering into the Diversified contract with Gentry, Diversified entered into an AIA subcontract dated December 2, 2002 with Direct for approximately $1,515,000 (the Direct subcontract). It is undisputed that Coopers and Williams were unaware of Diversified's intention to subcontract the remedial work to Direct at the time Gentry entered into the Diversified contract. The Diversified contract had contained no restriction upon Diversified to subcontract any portion of the work. There were 18 subcontractors paid by Diversified in connection with the repair of the fire damage. According to the principals of Direct and Diversified, Diversified hired other subcontractors, in addition to Direct, to perform certain portions of the job, including electrical work and plumbing work, and to supply kitchen cabinets, wood floors, appliances, and other materials. Plaintiffs, on the other hand, claim that Direct's subcontract with Diversified was actually for the whole job, and that Diversified received credits from Direct for any amount that Diversified paid to other subcontractors. There were change orders, which raised the original Diversified contract [*6]price of $3,528,074 to $4,294,000. However, the change orders were the subject of a dispute between Diversified and Direct, and Headley tore up the change orders upon the belief that Direct was defrauding it. It appears to be agreed that Diamond paid Gentry a total of $3,570,250.27 in insurance proceeds for all the remedial work, including the roof repair, plus $280,989.27 for loss of rent. The sum attributed to physical remediation, including the roof repairs by Casella, Diversified's work, mold remediation, emergency repairs and architect's fee is $3,289,264.

At the end of June 2003, after the work was satisfactorily completed by Diversified, Houlihan first learned of the Direct subcontract. Noting that the $3,528,074 contract price greatly exceeded the subcontract price with Direct of $1,515,000, Houlihan believed there was a substantial overcharge to Gentry. There were also alleged errors in the Diversified contract since there was an inclusion of sales tax when sales tax should not have legally been charged.[FN7] In addition, there were charges for plaster (which is more expensive), despite the fact that Diversified was only installing sheet rock. After Houlihan raised the issues concerning the sales tax and plaster, Simpson volunteered to take care of the overcharges. After negotiations between Simpson and Diversified, Diversified reduced its price to $3,128,074. The Gentry board agreed to this reduction.

Plaintiffs claim that they only recently learned that Affordable and Housescapes were owned by Marcus. They assert that Simpson had been aware of this, pointing to the fact that he knew Marcus' nickname, the "fat man." In July 2003, Houlihan also learned for the first time that Headley had a prior relationship with Simpson. Although Simpson's friendship with Headley was known to at least some of the board members earlier, it is undisputed that Simpson never told the Gentry board that Diversified was, in fact, his client. Indeed, as of September 2002, Windels Marx was representing Diversified in as many as eight open matters. At year end 2002, Diversified had an account receivable at Windels Marx of approximately $60,000, and at year end 2003, Diversified had an account receivable at Windels Marx of approximately $150,000.

In addition, plaintiffs contend that Gentry has been paying Simpson's law firm, Windels Marx, exorbitant and unreasonable legal fees. Specifically, they assert that Windels Marx billed Gentry for over $900,000 from 2002 to 2004. Plaintiffs contend that $250,000 was paid to Simpson in December 2004,[FN8] rendering Gentry insolvent, without consideration or action by the full board. Similarly, plaintiffs complain that in May 2003, Gentry paid Windels Marx $250,000 from its construction loan without approval or review by the full [*7]board. Although Simpson has represented to Gentry that he was charging Gentry at a discounted rate, plaintiffs allege that he was billing at higher than market rates for co-op counsel, and that co-op attorneys generally have lower rates than those charged by Windels Marx.

Plaintiff's contend that Simpson's billing records show many of Simpson's charges were patently excessive. Many charges were for: (1) non-legal work which could have been performed by Gentry's managing agent (Larry Malitzky [Malitzky] of Galster Apartments, Inc. [Galster]) or a construction manager, (2) travel time within the New York City limits, (3) the time of paralegals or attorneys, including Simpson himself, to deliver packages and/or pick up and deliver checks, and for clerical tasks such as file organization, (4) such non-billable matters as preparing a retainer letter for Gentry, for working on Simpson's bills to Gentry, and for preparing billing memoranda relating to Gentry, and (5) duplication for services previously billed.

Windels Marx's bills were routinely paid by Gentry's managing agent Malitzky. It is undisputed that neither Cooper nor Williams ever reviewed Windels Marx's bills for basic errors, such as duplication, nor did either of them ever challenge a single item in any bill from Windels Marx. Additionally, Williams (who, as noted above, was Gentry's treasurer) never learned what Simpson's hourly rate was at any time while she was on Gentry's board.

Simpson's routine was to send the billing memoranda to Williams and Cooper, and send the actual statement, seeking payment, to the managing agent, Malitzsky of Galster, some time later, usually, in December. When Williams received Simpson's billing memoranda, she "skimmed through" them, but never discussed their amount with anyone, including Cooper, and would then file them away. Williams admits that she did not know whether Gentry received all of the discounts to which it was entitled from Windels Marx.

When Cooper saw Windels Marx's billing memoranda, she also just looked through them and filed them away, and they were eventually shredded. Cooper, although the president of Gentry, relied on Malitzky to review the bills. Gentry's contract with Galster, however, did not give Galster unfettered discretion to pay any and all bills. Malitzky claims that he "did not read" the bills, but just "glanced at them." Beginning no later than the summer of 2003, plaintiffs protested Windels Marx's bills.

In August 2004, plaintiffs filed the instant action against Simpson, Windels Marx, Cooper, and Williams. Plaintiffs' complaint alleges [FN9] claims of breach of fiduciary duties and [*8]waste against Cooper, Williams, and Simpson, aiding and abetting a breach of fiduciary duties and waste against Simpson, legal malpractice against Simpson and Windels Marx, negligence against Cooper, Williams, and Simpson, and unreasonable legal charges against Windels Marx. Cooper and Williams have filed a third-party action against Diversified. The gravamen of plaintiffs' complaint is that, instead of competitive bidding for the fire repair contract, there was bid-rigging, which resulted in the diversion of Gentry's corporate funds and an enormous windfall to Diversified at Gentry's expense. Specifically, plaintiffs assert that Housescape's bid and Affordable's bid were both shams since these entities were owned by the same person (i.e., Marcus), and that Affordable, Housecapes, Diversified, Cooper, and Simpson colluded in the bidding process, intending that Diversified would submit a high bid which would be lower than the others. Plaintiffs further assert that Simpson, through this sham bidding process, manipulated the bidding to enable Diversified (who was a client of Windels Marx, and whose principal, Headley, was a close friend of Simpson) to be the successful bidder for the fire repair contract.

In support of their motion, Simpson and Windels Marx contend that plaintiffs have not shown that Simpson breached any fiduciary duty owed to Gentry. "In order to establish a breach of fiduciary duty, a plaintiff must prove the existence of a fiduciary relationship, misconduct by the defendant, and damages that were directly caused by the defendant's misconduct." Kurtzman v. Bergstol, 40 AD3d 588, 590 [2nd Dep't 2007]. There is no question that "[a]n attorney stands in a fiduciary relation to [his or her] client" (Graubard Mollen Dannett & Horowitz v Moskovitz, 86 NY2d 112, 118 [1995]), and that an attorney "is charged with a high degree of undivided loyalty to his [or her] client" (Matter of Kelly, 23 NY2d 368, 375 [1968]).

As a fiduciary, an attorney "is obliged to exercise the highest degree of good faith, honesty, integrity, fairness, and fidelity" (Condren v Grace, 783 F Supp 178, 182 [SD NY 1992]). The unique, fiduciary nature of the attorney-client relationship mandates that an attorney "not place himself [or herself] in a position where a conflicting interest may, even inadvertently, affect, or give the appearance of affecting, the obligations of the professional relationship" (Matter of Kelly, 23 NY2d at 376).

Under the Code of Professional Responsibility, DR 5-105 (22 NYCRR 1200.24), a lawyer may not take on a representation in conflict with his or her representation of another client, or where his or her judgment could be adversely affected by the new representation, without the consent of each client "after full disclosure of the implications of the simultaneous representation and the advantages and risks involved." Code of Professional Responsibility Ethical Consideration (EC) 5-2, further provides that a lawyer must disclose [*9]not only conflicting representations, but any circumstance that might influence his or her judgment in representing a particular client. While the violation of a disciplinary rule is not per se actionable as malpractice, where a client has suffered actual damages as a result of a conflict of interest on the part of counsel, liability may be imposed. Tabner v. Drake, 9 AD3d 606, 610 (3d Dep't 2004).

An attorney has a fiduciary obligation to bring to his or her client's attention "all relevant considerations" when recommending a course of conduct (Summit Rovins & Feldesman v Fonar Corp., 213 AD2d 201, 201-202 [1995]). An attorney who fails to disclose a conflicting representation or circumstance that causes him or her to represent a client with diminished rigor, breaches his or her fiduciary duty to his or her client (see Estate of Re v Kornstein Veisz & Wexler, 958 F Supp 907, 927-928 [SD NY 1997]). Indeed, it has been held that a breach of a disciplinary rule is "conclusive evidence" of a breach of fiduciary duty. Avianca, Inc. V. Corriea, 705 F. Supp. 666, 679 [DDC 1989], aff'd 70 F.3d 637. Both malpractice and breach of fiduciary duty causes of action require proof that "but for" the attorney's conduct a specified loss would not have been sustained. See Weil, Gotshal & Manges v. Fashion Boutique, Inc., 10 AD3d 267, 271 [1st Dep't, 2004]. In many cases, the claims are coextensive and are thus redundant. Id. Such is not the case here.Here, plaintiffs assert that Simpson breached his fiduciary duty to Gentry by orchestrating a sham bidding process which steered an inflated contract to his friend, Headley, and his client, Diversified, and that he failed to disclose that the owner of Diversified was his friend and that Diversified was his client. Simpson and Windels Marx concede that there was no disclosure to Gentry that Simpson and Windels Marx represented Diversified, and, hence, Gentry could not have consented to such dual representation. Thus, DR 5-105 was indisputably breached. Furthermore, Diversified owed Windels Marx over $60,000 at the end of 2002 and over $150,000 a year later, facts that were never disclosed to plaintiffs, but which would provide a significant incentive to counsel to assist their one client in obtaining a highly profitable contract from their other client. While Simpson claims to have disclosed his prior acquaintance with Headley to the Gentry board at a meeting in June 2002, plaintiffs deny learning of any relationship between Simpson and Headley before July 2003, after the Diversified contract had been executed and performed. There is also a factual dispute as to whether Simpson, in fact, had been aware that Affordable and Housescapes were owned by the same person and that their bids were, thus, not actually independent, competitive bids. Thus, there are material triable issues of fact as to whether Simpson was serving Diversified's interests, rather than Gentry's interests, in breach of his fiduciary duty to Gentry, in overseeing the bidding process and in advising Gentry as to the award of the contract to Diversified.

As to plaintiffs' legal malpractice claim, it is well settled that a plaintiff asserting a claim of legal malpractice must establish the failure of an attorney to exercise the degree of skill commonly exercised by an ordinary member of the legal community which proximately results in damages to the client (see Dimond v Kazmierczuk & McGrath, 15 AD3d 526, 527 [*10][2005]). Simpson was responsible for rendering proper advice with respect to the Diversified contract (see e.g. Bistricer v Singer, Bienenstock, Zamansky, Ogele & Selengut, LLP, 14 AD3d 468, 469 [2005]; National Enters. Corp. v Dechert Price & Rhoads, 246 AD2d 481, 482 [1998]; Summit Rovins & Feldesman, 213 AD2d at 201-202). In advising the Gentry board to contract with Diversified, Simpson rendered his opinion that Casella had repudiated its bid. There is deposition testimony by Alexander Casella which calls into doubt that Casella had, in fact, actually repudiated it, and plaintiffs sharply dispute that Casella had done so. Plaintiffs contend that according to Alexander Casella's deposition testimony, Casella was not, in fact, demanding $250,000 to prepare a new scope of work, but that the $250,000 was the cost of the first four items in his letter, all of which were included in his bid of $1,995,000. Plaintiffs assert that Casella's items 5 and 6 - "assess the work required to abate the mold" and "[p]repare an agreed scope of work" - would not have been charged to Gentry, and that a new scope of work was required only to address mold remediation. Plaintiffs claim that Simpson's alleged negligent misinterpretation of Casella's statements and negligence in failing to follow the board's instructions to award the contract to Casella if Diversified's bid was not reduced to $2.1 million resulted in Gentry's execution of the allegedly inflated Diversified contract. Plaintiffs further claim that Simpson's recommendation of Diversified over Casella benefitted Diversified (Simpson's client) and was a disservice to Gentry and constituted legal malpractice.

Defendants' argument that Gentry was under extreme time pressure for HPD to produce a fire repair contract, and that Simpson and the board, therefore, acted appropriately in awarding the contract to Diversified, is unavailing. Plaintiffs have raised triable issues of fact as to Simpson's credibility regarding his representations that Casella had repudiated its bid and that Diversified was the only remaining bidder, and whether Simpson created an artificial "crunch time" in his representations regarding the impending action involving HPD.Plaintiffs also assert that Simpson never consulted or retained, or recommended that Gentry consult or retain, an architect or engineer at any time before Gentry's contract with Diversified was executed. Plaintiffs claim to have advised Simpson that there were substantial overcharges (i.e., improper charges for sales tax and for plaster), in addition to the huge discrepancy between the amount of Diversified's bid and Casella's bid, which should have raised concerns regarding the bid by Diversified. "Whether [a defendant's] conduct fell below the ordinary and reasonable skill and knowledge possessed by other members in his [or her] community presents an issue of fact" (Fireman's Fund Ins. Co. v Farrell, 289 AD2d 286, 288 [2001]).

Thus, although both malpractice and breach of fiduciary duty may be predicated upon counsel's failure to reveal his conflict of interest in representing opposing contracting parties, construing the complaint broadly, the sixth cause of action alleging breach of fiduciary duty by Simpson, while encompassing the entire litany of plaintiffs' allegations, seems to be focused upon the bid rigging scheme which would constitute a fraud deliberately perpetuated, whereas the eighth cause of action alleging malpractice against both Simpson and the law [*11]firm of Windels Marx seems to rest upon their general negligence in providing legal advice and services. The two causes of action are therefore not redundant. See Ulico Casualty Co. v. Wilson, Elser, Moskowitz, Edelman & Dicker, 16 Misc 3d 1051 (Sup. Ct., NY Co., 2007). Moreover, the alleged breach of fiduciary duty may also relate to the issue of legal fees charged. See id. at *9; see also, Feiger v. Iral Jewelry, Ltd.,41 NY2d 928 [1977] ("One who owes a duty of fidelity . . . and who is faithless in the performance of his services is generally disentitled to recover his compensation.").

Simpson and Windels Marx argue that there are no damages shown to have been sustained by Gentry and that both the malpractice and breach of fiduciary duty claims must therefore be dismissed. They contend that since Gentry received $3,289,264 from Diamond for the repairs to the premises and Gentry paid only $3,128,074 to Diversified after the settlement negotiated by Simpson, the insurance proceeds paid by Diamond covered the cost of repairs and, thus, Gentry did not suffer any out-of-pocket loss. It is beyond cavil that an element of plaintiffs' malpractice claim is damages and a failure to meet this threshold requirement would necessitate the dismissal of such claims (see generally Dimond, 15 AD3d at 527). A proximately caused loss is also an element of a claim for breach of fiduciary duty. See Kurtzman v. Bergstol, 40 AD3d at 590. However, plaintiffs vehemently dispute that no damages were sustained by Gentry. They allege various damages, including consequential damages, which would exceed the insurance proceeds.

Simpson and Windels Marx have not demonstrated that Gentry was made whole by the insurance payment of $3,289,264 from Diamond for all of its out-of-pocket expenses caused by the fire. There is evidence that this sum was applied not only to pay Diversified the sum of $3,128,074, but also to pay: $345,000 to Casella for the roof repair, over $100,000 in architect's fees, the legal fees to Windels Marx, and thousands of dollars in mold remediation costs paid to contractors other than Diversified. Thus, there is sufficient evidence of consequential damages which would not have otherwise been sustained to meet plaintiffs' burden to demonstrate that a question of fact is present which is within the province of a jury to determine. See IMO Indus. V. Anderson Kill & Olick, 267 AD2d 10, 11 [1999]; Estate of Louise Nevelson v. Carro, Spanbock, Kaster & Cuiffo, 290 AD2d 399 (1st Dep't 2002).

Simpson also contends that he cannot be held liable for aiding and abetting a breach of fiduciary duty. Such a cause of action has three elements: "(1) a breach by a fiduciary of obligations to another, (2) that the defendant knowingly induced or participated in the breach, and (3) that [the] plaintiff suffered damage as a result of the breach" (Kaufman v Cohen, 307 AD2d 113, 125 [2003]). Here, plaintiffs have submitted adequate evidence raising triable factual issues as to whether Simpson, by his representations and actions, knowingly induced or participated in a breach by Cooper and Williams of their fiduciary obligations to Gentry as officers and directors in approving the Diversified contract and in their failure to review the bills submitted and paid for legal fees. [*12]

In support of their motion for summary judgment dismissing plaintiffs' complaint as against them, Cooper and Williams rely upon the business judgment rule. "[T]he business judgment rule prohibits judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes'" (Levandusky v One Fifth Ave. Apt. Corp., 75 NY2d 530, 537-538 [1990], quoting Auerbach v Bennett, 47 NY2d 619, 629 [1979]). Under the business judgment rule, "[s]o long as the corporation's directors have not breached their fiduciary obligation to the corporation, the exercise of [their powers] for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient'" (Levandusky, 75 NY2d at 538, quoting Pollitz v Wabash R.R. Co, 207 NY 113, 124 [1912]).

However, "[i]t is black letter, settled law that when a corporate director or officer has an interest in a decision, the business judgment rule does not apply" (In re Croton River Club v Half Moon Bay Homeowners Assn., 52 F3d 41, 44 [2d Cir 1995]). Moreover, a director's self-interest is not the only basis for avoiding the business judgment rule, and corporate transactions are not immunized from judicial scrutiny simply because directors are disinterested in the transactions (see Barr v Wackman, 36 NY2d 371, 381 [1975]).

It is well established that the business judgment rule does not apply when directors fail to act or abdicate their directorial responsibilities (see Frater v Tigerpack Capital, Ltd., 1999 WL 4892, *4 [SD NY 1999]; Barr, 36 NY2d at 380). Directors owe a further duty of care to the corporation's shareholders; "[t]he business judgment doctrine . . . cannot shelter individuals from responsibility for breaches of duty of care they owe as directors" (Ench v Breslin, 241 AD2d 475, 476 [1997]).

Thus, even where directors "may not have personally profited from challenged actions [,this] does not necessarily end the question of their potential liability to the corporation" (Barr, 36 NY2d at 380). "It is not enough that directors merely be disinterested and thus not disposed to self-dealing or other indicia of a breach of the duty of loyalty [;d]irectors are also held to a standard of due care, [and t]hey must meet this standard with conscientious fairness'" (Hanson Trust PLC v ML SCM Acquisition, Inc., 781 F2d 264, 274 [2d Cir 1986], quoting Alpert v 28 Williams St. Corp., 63 NY2d 557, 569 [1984]; see also Barr, 36 NY2d at 380).

Pursuant to Business Corporation Law § 717 (a) and § 715 (h), directors and officers are required to perform their duties not only "in good faith," but also with "that degree of care which an ordinarily prudent person in a like position would use under similar circumstances" (see also Giblin v Murphy, 97 AD2d 668, 670 [1983], affd 73 NY2d 769 [1988]). Specifically, this duty of care is to be measured by what ordinarily prudent persons "would do in similar circumstances being in possession . . . of the knowledge and information they possessed or could have possessed by diligent attention to all their duties" (Syracuse Tel. v Channel 9, Syracuse, 51 Misc 2d 188, 197 [1966]). Thus, while courts may not second-guess cooperative boards by inquiring into the reasonableness of particular [*13]decisions, plaintiffs may maintain an action and the business judgment rule will not apply where they can show that the directors breached their duty of care and that their action could not have resulted from the reasonable exercise of business judgment (see Hanson Trust PLC, 781 F2d at 274; Levandusky, 75 NY2d at 540; Van Camp v Sherman, 132 AD2d 453, 454-455 [1987]; Giblin, 97 AD2d at 671; Higgins v New York Stock Exch., Inc., 10 Misc 3d 257, 278 [2005]).

Plaintiffs assert that Cooper and Williams' decision was not an informed one that was made on the basis of reasonable diligence in gathering and considering material information. Plaintiffs allege that Cooper and Williams, in breach of their duty to exercise due care, never reasonably made a business judgment that the Diversified contract, with its overcharges, was a beneficial contract for Gentry but, instead, simply approved the contract at Simpson's urging, despite Casella's bid for $2 million less and irregularities in the bid and bidding process, abdicating their responsibilities.

Furthermore, with respect to Cooper, plaintiffs assert that there is sufficient evidence regarding Cooper's relationship with Simpson to permit a jury to determine whether she colluded with him in rigging the bid. A director's collusion in activities harmful to a corporation is not protected by the business judgment rule (see generally Board of Mgrs. of 229 Condominium v J.P.S. Realty Co., 309 AD2d 314, 316 [2003]).

Cooper argues that there is no evidence that she engaged in fraud or did anything improper in connection with the retention of Diversified. As noted above, however, there is evidence that Cooper knew Headley and Diversified prior to the award of the Diversified contract. Simpson's relationship with Cooper also led to at least one extremely unusual and suspect transaction, i.e., the $10,000 check which Simpson wrote to pay for Cooper's maintenance. As previously discussed, Simpson also provided free legal services to Cooper during her divorce. In addition, Cooper immediately alerted Simpson to Houlihan's suspicions, preventing any investigation from taking place before he was aware of the charges and was instrumental in getting certain alleged overcharges in legal fees paid to Simpson and Windels Marx.

While Cooper asserts that Houlihan's deposition testimony shows that she suggested obtaining a bid from Casella, this merely creates factual issues and is not dispositive of her participation in an improper bid-rigging process. Although plaintiffs do not claim that Williams' participated in the bid-rigging, plaintiffs do assert that Williams breached her fiduciary duties and abdicated her responsibilities as a director and officer in approving the Diversified contract. Thus, triable issues of fact exist as to whether Cooper and Williams' actions are shielded by the business judgment rule (see Hanson Trust PLC, 781 F2d at 274; Ackerman v 305 E. 40th Owners Corp, 189 AD2d 665, 667 [1993]; Bryan v West 81 St. Owners Corp., 186 AD2d 514, 515 [1992]).

Cooper and Williams further assert that they relied upon Simpson's advice and recommendations in selecting Diversified due to their lack of expertise. They claim that Simpson had advised them that they had no choice other than to enter into a contract with [*14]Diversified because Casella had repudiated its bid. They also claim that Simpson had advised them that he had reviewed the Diversified contract, that the sums in the Diversified contract reflected the approximate costs to perform the remedial work, and that he would address Houlihan's concerns about overcharges. Cooper and Williams argue that the foregoing shows their reliance on the advice of counsel, which constitutes a defense shielding them from liability.

Business Corporation Law § 715 (h) (2) and § 717 (a) (2) permit officers and directors to rely on the opinions prepared or presented by an attorney as to matters which the officer or director believes to be within such person's professional or expert competence. However, a director has oversight obligations and cannot mindlessly defer to outside advice without fulfilling his or her obligation to conduct his or her own review of the pertinent facts (see Hanson Trust PLC, 781 F2d at 275). Rather, "the advice-of-counsel defense requires the defendant to establish that his [or her] reliance on the advice was reasonable" (Matsushita Electronics Corp. v Loral Corp., 1995 WL 527640, *2 [SD NY 1995]). The testimony and evidence adduced upon these motions create a question of fact as to the degree of care exercised by Cooper and Williams and their reasonable reliance on Simpson's advice.

Cooper and Williams also claim that they cannot be liable to Gentry in connection with the legal fees charged by Windels Marx. However, under Cooper and Williams' direction, Gentry paid out $915,000 in fees to Windels Marx from 2002 to 2004. Yet, during that time neither of these officers and directors ever reviewed Simpson's bills for basic errors, such as duplication. There was no meaningful review of Windels Marx's bills by President Cooper who claimed it was not her job to review them. Treasurer Williams admitted that she did not check the legal bills, but just skimmed them. Malitzky, Gentry's managing agent, simply paid them without question. While Cooper may be less culpable than Williams with respect to the legal bills, as the president of Gentry, she shares in the fiduciary obligation to oversee the affairs of the corporation.

With respect to the claim of excessive legal fees charged by Windels Marx and Simpson, the court notes, and it is conceded, that there is some duplication of fees. There are also issues raised as to the discount given to Gentry, the reasonableness of the fees charged, and the calculation of the bills. Such questions are most efficiently addressed in arbitration or mediation pursuant to Part 137 of the Rules of the Chief Administrator (22 NYCRR § 137.0 et. seq.). While Part 137 does not apply to disputes involving a sum of more than $50,000, an arbitral body may hear disputes involving higher amounts if the parties consent (see 22 NYCRR 137.1 [b] [2]). The parties herein are urged to resolve their dispute regarding legal fees by such arbitration since such dispute is more appropriately resolved in that forum.

Defendants Simpson and Windels Marx's reliance upon an unpleaded affirmative defense that plaintiffs' challenges to their bills is precluded upon an account stated is unavailing. Plaintiffs rely, in part, on Disciplinary Rule 2-106 [22 NYCRR §1200.11] which prohibits the charging of "excessive" fees , citing In re Cooperman, 83 NY2d 465 [1994], [*15]to support their argument that this general professional stricture supercedes the doctrine of account stated. Consistent with the general caveat that equitable considerations must be taken into account in enforcing a bill for legal fees upon an account stated (Rodkinson v. Haecker, 248 NY 480, 489 [1928]), fraud or mistake will relieve a party from liability based merely upon the prior statement of sums due. Rosenman Colin Freund Lewis & Cohen v. Neuman, 93 AD2d 745 (1st Dep't 1983). Moreover, "[a] nonfrivolous claim of legal malpractice is, by nature, inextricably intertwined' with a claim for fees for the same representation claimed to have been deficient." Tabner v. Drake, 9 AD3d at 611, quoting, Couch White v. Kelly, 286 AD2d 526, 528 (2001). In Tabner, summary judgment upon an account stated was held to be premature where malpractice was alleged. Under comparable circumstances here, it is inappropriate to grant defendants' motion on that theory.

In pleading the sixth (breach of fiduciary duty and waste against Cooper, Williams and Clark), seventh (aiding and abetting Cooper, Williams and Clark in their breach of duty), eighth (malpractice by Simpson and Windels Max), ninth (breach of fiduciary duty by Simpson), tenth (negligence by Cooper, Williams, Clark and Simpson) and eleventh (unreasonable legal charges) causes of actions, plaintiffs have "realleged" all of the preceding allegations. The ninth cause of action specifically states that Simpson was "active" in managing Gentry and breached his fiduciary duty in that role. This cause of action cannot be distinguished however from the sixth and eighth causes of action and accordingly is dismissed as redundant.

Similarly, the tenth cause of action alleges negligence against Cooper, Williams, Clark and Simpson in "the management of Gentry" and is factually indistinguishable from the sixth and eighth causes of action in that all of the defendants named therein had a fiduciary relationship to Gentry, as directors and officers and legal counsel, and a concommitant duty to perform in "good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances." See BCL § 715(h), § 717(a); Arnav Industries, Inc. Retirement Trust v. Brown, Raysman, Millstein, Felder and Steiner, LLP, 96 NY2d 300, 303-04 [2001](legal malpractice is failure "to exercise the reasonable skill and knowledge commonly possessed by a member of the legal profession." Thus, the duty of care applicable in the negligence cause of action alleged herein is actually no different than the standard of care required for the competent performance of defendants' fiduciary duties. Compare, PJI 2:10: "Negligence is lack of ordinary care. It is a failure to use that degree of care that a reasonably prudent person would have used under the same circumstances." Since the gravamen of the sixth cause of action, as set forth in the surviving allegations, is the failure of the various defendants to faithfully perform their duties to the corporation, without compromise to other interests of friendship or personal gain or to mere indifference, there is no distinction to be made between the sixth and tenth causes of action. Accordingly, the tenth cause of action is dismissed as redundant.

A similar result might also be reached with respect to the eighth cause of action for malpractice by Simpson and Windels Marx. However, there are no other claims against [*16]Windell's Marx regarding their performance of services to Gentry (the eleventh cause of action relates only to "unreasonable" bills) and, since various members and employees of the firm rendered services to Gentry, it is not possible to conclude that this claim would be redundant of other claims.

Defendants specifically seek dismissal of the breach of fiduciary duty claims against Simpson as redundant of the malpractice cause of action, however, it cannot be said, based on the pleadings, that both claims are premised upon the same acts. See Weil, Gotshal & Manges, LLP v. Fashion Boutique, 10 AD3d 267. Reading the pleadings broadly, it appears, as previously noted, that the alleged breaches of fiduciary duty are premised both upon collusive bidding allegedly orchestrated by Simpson and Cooper and upon Cooper and Williams' failure to exercise independent judgment in approving the Diversified contract and to diligently review the bills submitted by Windels Marx prior to authorizing payment and upon Simpson's failure to use appropriate professional care in reviewing documents and advising Gentry's board, as well as his failure to disclose his conflicting role as attorney for Diversified. While the failure to disclose a conflict of interest would provide grounds for both malpractice and a breach of fiduciary duty (see id. at 271), in this case, the deliberate orchestration of a scheme of collusive bidding designed to result in the award of an inflated contract to another client is a far more egregious breach of the attorney's fiduciary duty to his client than his mere failure to exercise reasonable skill in performing services for the client, which is deemed to be the substance of the malpractice claim. Hence, dismissal of either cause of action is unwarranted.

All defendants assert that plaintiffs' claims of bid-rigging are based on conjecture, suspicion, and speculation, and that there is no evidentiary foundation from which reasonable inferences supporting plaintiffs' claims can be drawn. They argue that the issues of fact raised by plaintiffs are, thus, not genuine or material, or lack sufficient basis in the factual record.

"Summary judgment is a drastic remedy and should not be granted where there is any doubt as to the existence of a material and triable issue of fact" (Jablonski v Rapalje, 14 AD3d 484, 486 [2005], quoting Anyanwu v Johnson, 276 AD2d 572, 573 [2000]). Since "issue finding and not issue resolution is a court's proper function on a motion for summary judgment," the court is bound to draw all reasonable inferences in favor of the non-moving party (Cruz v American Export Lines, 67 NY2d 1, 13 [1986], cert denied sub nom. Bussanich v United States Lines, 476 US 1170 [1986]). Collusions of the nature of that alleged herein are not generally dispositively documented or openly admitted. Rather, intent and knowledge and the defendant's culpability must be established in court through direct testimony, cross-examination, circumstantial evidence, and the inferences reasonably drawn therefrom (see Staples v Sisson, 274 AD2d 779, 781 [2000]).

Here, there are vast disparate representations by the parties as to the facts and numerous substantial material disputed issues which require an assessment of credibility based upon the testimony of the parties and witnesses, subject to cross-examination. No legal [*17]issue is alone dispositive of this case, and, thus, plaintiffs' claims against Simpson and Windels Marx and Cooper and Williams cannot be resolved upon their summary judgment motions. The conflicting deposition testimony and evidence and the inferences to be drawn therefrom give rise to issues of fact and credibility, which warrant further inquiry and which may only be properly resolved by the trier of fact. Consequently, the court finds that plaintiffs have amply satisfied their burden, at this stage of the action, to raise triable issues of fact regarding the remaining allegations of bid-rigging, various other alleged breaches of fiduciary duty and malpractice and excessive legal fees so as to require denial of the motions for summary judgment except as previously noted.

The court further notes, in response to movants' contentions that plaintiffs concurred in the decisions they now challenge, the general principle that a shareholder who participated in the challenged activity or "did not oppose the challenged actions" is estopped and "may not subsequently challenge its legality in a derivative suit" (Pinnacle Consultants, Ltd. v Leucadia Nat. Corp., 94 NY2d 426, 433 [2000]; see also Diamond v Diamond, 307 NY 263, 266 [1954]; Kranich v Bach, 209 App Div 52, 54 [1924]; Winter v Bernstein, 149 Misc 2d 1017, 1020 [1991], affd as mod on other grounds 177 AD2d 452 [1991]). However, this principle does not apply where the shareholder lacked full knowledge of the facts or where it can be demonstrated that complaining to the directors would have been futile since the transaction would have, in any event, been consummated (see Pinnacle Consultants, Ltd., 94 NY2d at 433).

In the case at bar, Houlihan, as the principal of Macnish, claims that he did not learn the full extent of the relationship between Simpson and Headley until after the Diversified contract was executed, and that he lacked full knowledge of the facts concerning what had transpired with respect to the alleged bid-rigging. Houlihan further claims that the award of the contract to Diversified was presented to him as a fait accompli and that he was not asked for his vote; he denies approving of the Diversified contract. With respect to the legal fees, unlike Cooper and Williams, Houlihan was not an officer of Gentry and was not given access to the legal bills. Thus, it cannot now be concluded that Houlihan's own participation as a member of the Gentry board deprives him of standing to bring this action. A shareholders' derivative action may, therefore, be maintained by him (as a principal of Macnish) and by Macnish, which is a shareholder (see Business Corporation Law § 626).

C O N C L U S I O N

Simpson and Windels Marx's and Cooper and Williams' motions for summary judgment dismissing plaintiffs' complaint as against them are granted only to the extent that the ninth cause of action alleging breach of fiduciary duty against Simpson and the tenth cause of action alleging negligence against Cooper, Williams and Simpson are dismissed as redundant of other claims and are otherwise denied.

The parties are directed to appear for a final settlement conference on November 14, 2007.

This constitutes the decision and order of the court. [*18]

E N T E R,

J. S. C. Footnotes

Footnote 1: Gentry is separately represented, but Gentry did not appear at oral argument and it has taken no position on the motions.

Footnote 2: Although plaintiffs named Lee Clark as a defendant in this action, he was not served with process. Plaintiffs state that he sold his shares in Gentry and cannot be located.

Footnote 3: Casella paid a "kick-back" fee of $47,000 to Greenfield for Greenfield's referring to Casella the roof repair which Casella performed. Upon Houlihan's learning of this improper payment, Houlihan immediately demanded that Greenfield return the $47,000 to Gentry, and Greenfield returned this sum.

Footnote 4: Cooper also knew Headley since he had done a job at her church well before the fire occurred.

Footnote 5: Plaintiffs contend that mold remediation was also excluded from Diversified's bid.

Footnote 6: That court hearing was actually adjourned to one week later.

Footnote 7: Pursuant to Tax Law § 1105 (c) (3) and (5), the service of installing, servicing, or repairing tangible personal property or real property is not subject to sales tax when the service will constitute a capital improvement.

Footnote 8: A hearing was held on a motion by plaintiffs for the return of fees regarding the $250,000 payment in December 2004. Plaintiffs, subsequently, withdrew that motion.

Footnote 9: The first five causes of action for removal of directors, removal of officers, direction of an annual meeting, appointment of a receiver, and an injunction were rendered moot as a result of an election which this court directed, by order dated December 1, 2004, and which was held on January 18, 2005, at which Cooper and Williams were voted out of office. Plaintiffs have abandoned the claims, in their complaint, which alleged the failure of Cooper to rent apartments possessed by Gentry at market rate and the failure of Cooper and Williams to collect maintenance arrears from defaulting shareholders. These allegations were not pleaded as separate causes of action. Plaintiffs have also withdrawn their claims against Williams insofar as they alleged her participation in fraud and bid-rigging. Plaintiffs, however, maintain their claims of negligence and breach of fiduciary duty against Williams with respect to the Diversified contract and with respect to her failure to monitor Windels Marx bills.