FKB's Andrew Kowlowitz wins appeal in the Appellate Division, First Department, which unanimously affirms the dismissal of a $1.3 million third party legal malpractice claim arising from the defendant law firm's representation of a local union and various Taft-Hartley funds. 10/26/09

FKB's client, a Manhattan law firm, served as general counsel to a local union and various Taft-Hartley funds. The matter arises from a 2001 investigation by the Department of Labor of improper/excessive allocations (i.e., payments/reimbursements) totaling $1.3 million to union officials and the Funds' trustees. Claims related to these excessive/improper allocations were subsequently paid by the union fidelity bond insurer. Thereafter, the fidelity bond insurer filed suit against the union's CPA accounting firm for failing to properly audit the union funds and prevent the excessive/improper allocations. In turn, the CPA firm filed a third-party suit against the law firm, general counsel to the union and the funds, seeking contribution alleging that the firm breached their fiduciary duties and committed legal malpractice for failing to properly advise the Funds causing them to make improper payments/allocations.

FKB filed a pre-answer CPLR §3211 motion to dismiss the third-party complaint, arguing that the CPA's third-party claim fails for lack of privity (as the law firm was retained to represent the funds and Union only, and never entered into an attorney-client relationship with the CPA firm) and that the CPA firm's claims for contribution/subrogation were deficiently pled. FKB also argued that the first-party subrogation claim arose from a straight-forward auditing blunder (i.e., the failure to detect the approval and payment of the improper expense allocations), a task solely within the purview of the CPA's responsibilities as set forth in the retainer agreement. Thus, the law firm could not be responsible for the loss.

By Order dated July 28, 2008, Hon. Milton A. Tingling, J.S.C. (Supreme Court, New York County) dismissed the third-party claim, finding that the CPA firm lacked standing to assert a legal malpractice claim and that the CPA's claim for contribution could not lie since the first-party subrogation action sought purely economic arising from the CPA's actions and omissions covered in the scope of the CPA's retainer agreement.

On Appeal, FKB argued that the lower court properly determined that a claim for contribution cannot lie, as the measure of damages sought in the first-party subrogation was purely economic, arose from a breach of the CPA firm's retainer agreement, and since the measure of damages sought by the fidelity insurer/first-party plaintiff for its causes of action labeled "malpractice" and "breach of contract" was identical. FKB also argued that the documentary evidence demonstrates that the cause of the first-party loss arose from a straight-forward auditing miscue and that the auditing task fell exclusively within the scope of the CPA firm's retainer agreement.

On October 15, 2009, the Appellate Division, First Department unanimously affirmed the lower court's decision. The First Department agreed that the measure of damages sought in the first-party was the critical component in evaluating whether a third-party action for contribution may lie. In this instance, the First Department determined that no claim for contribution may lie since the first-party plaintiff sought the recovery of purely economic damage. The First Department also upheld the denial of the CPA firm's motion seeking leave to amend the pleadings, finding that the proposed amended pleadings were devoid of merit.

FKB's Andrew S. Kowlowitz represented the Manhattan law firm in this appeal, which is reported at 2009 WL 3296680.

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