FKB's Joshua Sandberg wins motion to dismiss legal malpractice claim in New York County concerning underlying real estate closing. 6/15/2011

Hon. Paul G. Feinman of New York County Supreme Court granted FKB's pre-answer motion seeking dismissal of a legal malpractice action against our clients in connection with their representation of a plaintiff corporation in its sale of an apartment building in Manhattan.

Plaintiff's former counsel entered into a contract of sale to sell the subject apartment building despite lacking authority to do so. While plaintiff's former counsel cancelled the contract of sale, the buyer sought an order requiring specific performance of the agreement. The buyer prevailed at trial, obtaining an order requiring plaintiff to sell the building and a judgment against plaintiff for broker's fees, which judgment was executed against plaintiff's bank accounts, causing plaintiff to fall behind on its mortgage payments resulting in a foreclosure action.

FKB's clients were retained to handle the appeal of the specific performance order and post-trial proceedings. As a motion to stay the specific performance order pending appeal was denied, FKB's clients advised plaintiff to file a voluntary petition in bankruptcy, recommending another attorney to handle the petition. Plaintiff thereafter filed a voluntary petition for bankruptcy in the United States Bankruptcy Court, Southern District of New York. During these proceedings, pursuant to plaintiff's plan for reorganization and under the aegis of the Bankruptcy Court, the building was sold with the closing date of August 27, 2004. FKB's clients represented plaintiff at the closing, and were listed as the escrow agent. After the closing, it was discovered that an error had been made with regard to the calculations as a $50,000 deposit held in escrow had been mistakenly released to the seller instead of plaintiff. Despite FKB's clients' multiple good-faith demands, the seller refused to return the deposit funds.

On February 17,2005, after a hearing on notice, the Bankruptcy Court issued an order granting the separate fee and expense applications of plaintiff's bankruptcy counsel and FKB's clients, as “Special Counsel to the Debtor.”

Plaintiff subsequently commenced a legal malpractice action against its bankruptcy counsel, FKB's clients, and the purchaser, alleging that but for the negligence of defendants, it would have received the escrowed funds. FKB moved to dismiss the complaint, arguing that the allegations against it had already been conclusively resolved by the Bankruptcy Court which, in awarding FKB's clients their legal fees, necessarily decided that there was no legal malpractice. After oral argument, Justice Feinman granted the motion to the extent the complaint alleged FKB's clients provided negligent legal representation in connection with and/or during the course of the bankruptcy proceeding, but denied the motion to the extent the complaint alleged FKB's clients provided negligent representation before the filing of the bankruptcy petition and/or after the bankruptcy proceeding concluded. Plaintiff was granted leave to re-plead its complaint.

Plaintiff then filed an amended complaint that was nearly identical to the original complaint, except plaintiff alleged that FKB's clients performed acts prior to and after the bankruptcy proceeding was concluded. However, plaintiff asserted no factual allegations as to what specific negligent tasks FKB's clients performed. Accordingly, FKB moved to dismiss the amended complaint on the grounds that: 1) the amended complaint failed to cure the defects of the original complaint; and 2) the only alleged negligence occurred both in connection with and during the course of the bankruptcy proceeding, thus requiring dismissal.

After oral argument, Justice Feinman fully agreed with FKB's arguments, dismissing the amended complaint and holding that: 1) the Bankruptcy Court, in fixing the value of FKB's clients' fees, necessarily decided there was no legal malpractice in connection with or during the course of the bankruptcy proceeding (including the subject closing); and 2) none of the negligent acts/omissions asserted in the amended complaint were alleged to have taken place prior to or after the bankruptcy proceeding concluded.

FKB's clients were represented by Joshua Sandberg.

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