| Adirondack Capital Mgt., Inc. v Ruberti, Girvin & Ferlazzo,P.C. |
| 2007 NY Slip Op 06599 [43 AD3d 1211] |
| September 13, 2007 |
| Appellate Division, Third Department |
| Adirondack Capital Management, Inc.,Appellant-Respondent, v Ruberti, Girvin and Ferlazzo, P.C., et al., Defendants andThird-Party Plaintiffs-Respondents-Appellants. Richard T. Corvetti, Third-PartyDefendant-Respondent-Appellant. |
—[*1] Smith, Sovik, Kendrick & Sugnet, Syracuse (Robert P. Cahalan of counsel), Syracuse, fordefendants and third-party plaintiffs-respondents-appellants. Donohue, Sabo, Varley & Huttner, L.L.P., Albany (Kenneth G. Varley of counsel), forthird-party defendant-respondent-appellant.
Spain, J. Cross appeals from an order of the Supreme Court (Aulisi, J.), entered March 17,2006 in Hamilton County, which, inter alia, denied defendants' motion for summary judgmentdismissing the complaint.
This is a legal malpractice action commenced by plaintiff, a corporation whose president andsole shareholder is third-party defendant, Richard T. Corvetti. In 1994, plaintiff loaned $300,000to Alice Carney and Burnell Carney, the owners of Sunnyside Nursing Home and SunnysideAdult Home (hereinafter collectively referred to as the property) located in the Town of Manlius,Onondaga County, ostensibly for the purpose of partially satisfying federal tax liens against theproperty so that it could be sold. The loan was secured by a mortgage on the property and a deedto the property was to be held in escrow by defendant Salvatore Ferlazzo for use if necessary inlieu of foreclosure. In addition, the Carneys' personal residence was deeded to plaintiff for$10,000 and leased back to the Carneys with an option for the Carneys to repurchase. The loanwas arranged at a meeting between Corvetti, the Carneys and others, with Corvetti usingcommitment documents modeled after papers that had been drafted by defendants, as plaintiff'scounsel, for a prior similar transaction.
After the meeting, Corvetti contacted Ferlazzo and requested that defendants prepare for andhandle the closing. A title insurance policy obtained on the property in favor of plaintiff excludedfrom coverage unpaid 1993 and 1994 real property taxes. Corvetti was admittedly aware thatliens for unpaid property taxes would be superior to plaintiff's mortgage and that these taxeswould not be paid out of the loan proceeds. At Corvetti's request, defendants provided an opinionletter which, among other things, outlined plaintiff's rights in the event of a default by theCarneys. The opinion letter was dated the same day as the closing, September 16, 1994.According to Corvetti, upon presenting the opinion letter, Ferlazzo verbally advised him that,should the tax liens be foreclosed, plaintiff would have the opportunity to stop the property fromgoing to auction by paying the back taxes.
Unbeknownst to any party, Onondaga County had already held a public tax sale of theproperty—in October 1993—based on the 1993 delinquency, and the County itselfhad purchased the tax sale certificate. In October 1994, at another public sale, the Countypurchased the tax sale certificate pertaining to the 1994 tax delinquency. The tax sale certificateswere subsequently sold to Tax Certificate Associates, Inc. (hereinafter TCA). Pursuant to theOnondaga County Tax Act, TCA—as the owner of the tax certificates—wasentitled, after providing the owner and mortgagees of record the proper statutory notice andopportunity to redeem, to apply for a tax deed from the County—a deed which wouldextinguish any mortgages on the property, including plaintiff's.[*2]
In April 1995, the Carneys defaulted on the loan. Variouslawsuits ensued, resulting in a July 1996 stipulation between the Carneys andplaintiff—who were, at that point, still unaware of the tax sale—with terms designedto enable them to cooperate in the marketing and sale of the property. In accordance with thateffort, it was agreed with the Carneys that plaintiff would not foreclose on its mortgage or recordthe escrowed deed in lieu of foreclosure. When, in November 1996, TCA sent a notice to redeemto the Carneys, the parties to this action first became aware that a tax sale had occurred prior tothe closing. Corvetti then requested a second opinion letter from defendants advising him of hisrights and the risks involved should he purchase the tax sale certificates from TCA personally.Defendants' December 19, 1996 letter indicated that such a purchase could be construed asinterference in the stipulation between plaintiff and the Carneys which could give rise to alawsuit for tortious interference; further, defendants advised Corvetti that a court might pierceplaintiff's corporate veil and find that, in purchasing the certificates, Corvetti had unlawfullyinterfered with the stipulation. Ultimately, however, defendants advised Corvetti that he had alegitimate business justification for taking the action which would amount to a defense againstsuch possible lawsuits and that purchasing the certificates in his individual capacity was his mostprudent course.
Thereafter, Corvetti and his wife purchased the tax sale certificates from TCA for $182,916and, after a delay caused by the fact that the Carneys filed for chapter 11 bankruptcy protection,eventually obtained a deed from the County for the property. After investing an additional$475,000 in the property, Corvetti and his wife sold it, free and clear of any encumbrances, forover $1.5 million.
Plaintiff then commenced this action against defendants, essentially alleging that, at the timeof the 1994 closing, defendants should have discovered that the 1993 tax sale certificate had beensold and should have advised plaintiff of the impact that the tax sale could have on plaintiff'smortgage. The complaint also alleges that defendants failed to perfect plaintiff's security interestin personal property associated with the property by failing to file a UCC financing statement,and that defendants were negligent in reading a survey of the property and failing to detectanother defect in the title, namely, that the property's septic system encroached upon an adjoiningparcel. Defendants answered, denying the allegations, and commenced a third-party actionagainst Corvetti for indemnification and/or contribution, alleging that Corvetti breached hisfiduciary duty to plaintiff and improperly usurped plaintiff's corporate opportunity. Defendantslater moved to amend their answer to assert CPLR article 14, res judicata and collateral estoppeldefenses and then moved for summary judgment dismissing plaintiff's complaint. Plaintiffcross-moved for partial summary judgment and to dismiss certain defenses, and Corvetti movedto dismiss the third-party complaint. Supreme Court, among other things, granted defendants'motion to amend their answer and denied plaintiff's and defendants' motions for summaryjudgment and Corvetti's motion to dismiss. All parties have appealed.
Because plaintiff has not been damaged by defendants' alleged malpractice, we conclude thatdefendants are entitled to summary judgment. The gravamen of plaintiff's claim is that, by [*3]the alleged malpractice, it suffered the loss of its mortgage andsecurity interest which were intended to protect its original $300,000 investment. The value ofany mortgage, however, is dependent on the value of the mortgaged property and, at best, givesthe mortgagee the right to acquire ownership of the mortgaged property through foreclosure.Under the circumstances present here, we conclude that, ultimately, plaintiff was not placed inany worse position by the tax sales and the alleged malpractice of defendants than it would havebeen had it had the opportunity to utilize its mortgage and foreclose upon the property.
It is undisputed that prior to accepting the mortgage, plaintiff was aware that its $300,000loan—which carried a 16% interest rate—was a high risk transaction, as the Carneyshad in excess of $1 million in judgments and liens at the time the loan was made. Indeed, theCarneys indebtedness to the Internal Revenue Service alone exceeded $955,000. Significantly,the $300,000 loan proceeds check was made directly payable to the Internal Revenue Service,which accepted this sum in partial satisfaction of the Carneys' indebtedness and agreed tosubordinate its remaining liens to plaintiff's mortgage. Hence, the value of plaintiff's securityinterest, even before the tax certificates were sold, was impacted by the superior liens of theunpaid property taxes. Had plaintiff acquired the property through foreclosure, for example, thetaxes still would have had to be satisfied, the Carney debt would have been eliminated and, assuch, so would any damages to plaintiff stemming from defendants' alleged malpractice (seeCentral Hanover Bank & Trust Co. v Roslyn Estates, Inc., 266 App Div 244, 248-249[1943], affd 293 NY 680 [1944]).
We must also reject plaintiff's assertion that it has, nevertheless, been damaged by the loss ofits opportunity to foreclose on the mortgage because the tax sale certificates had already beensold when the Carneys defaulted, giving the holder of the certificates the right to apply for a deedfree of plaintiff's mortgage. Plaintiff knew that in order to protect the mortgage, the rapidlyaccumulating unpaid real property tax liability would ultimately have to be satisfied. Thus, anyfailure by defendants to report the precise significance of the real property tax liability as of theclosing is of no real consequence under these circumstances.[FN1]When plaintiff became aware that [*4]the tax sale certificates hadbeen sold, an opportunity still existed to purchase them from their holder. The resultingdevaluation of plaintiff's security interest was no greater than it had been as a result of plaintiff'sacceptance of the mortgage with full knowledge of the outstanding tax liens. In fact, Corvetti wasable to purchase the tax sale certificates from TCA in December 1996 at essentially the thencurrent cost of satisfying the original tax liens.[FN2]
Thus, we conclude that the purchase of the tax sale certificates and ultimate acquisition of theproperty would have placed plaintiff in essentially the same position that it would have been inhad it been able to foreclose on the property. Plaintiff argues, however, that it remains damagedbecause it was Corvetti and his wife, rather than plaintiff, that ultimately took title to theproperty. We reject this argument because, in our view, the facts presented represent one of thoserare opportunities where we are able to find, as a matter of law, that a breach of fiduciary dutyoccurred (see Matter of Greenberg [Madison Cabinet & Interiors], 206 AD2d 963, 964[1994]). By acquiring the property personally rather than on behalf of plaintiff, Corvettimisappropriated a corporate opportunity in breach of his fiduciary duty as president of plaintiff.Thus, any damage to plaintiff as a result of the tax sale was caused by Corvetti, rather than thealleged negligence of defendants.
As a fiduciary to plaintiff, Corvetti was prohibited from profiting personally at the expense ofthe corporation or promoting personal interests which were incompatible with the superiorinterests of the corporation (see Howard v Carr, 222 AD2d 843, 845 [1995]; Bertoniv Catucci, 117 AD2d 892, 894-895 [1986]). Likewise, a corporation's fiduciary may notdivert and exploit an opportunity that should be deemed an asset of the corporation (seeAlexander & Alexander of N.Y. v Fritzen, 147 AD2d 241, 246 [1989]); i.e., Corvetti shouldnot have acquired property in which plaintiff had a "tangible expectancy" (id. at 247),something " 'which the corporation needs or is seeking, or which [he was] otherwise under a dutyto the corporation to acquire for it' " (id. at 248, quoting Burg v Horn, 380 F2d897, 899 [2d Cir 1967]).
To conclude here that Corvetti had an obligation to acquire the property on behalf ofplaintiff, rather than for himself and his wife, personally, requires only to consider the nature ofthe transaction juxtaposed against the relationship between Corvetti and plaintiff. Given itsmortgage against the subject property and the present lawsuit in which it claims injury due to the[*5]loss of the opportunity to foreclose on that mortgage, plaintiffhad a tangible expectancy in acquiring title to the property.[FN3]Inasmuch as Corvetti and his wife were the sole sources of all capital for plaintiff, including the$300,000 loan to the Carneys, Corvetti had the opportunity to fulfill his obligation to undertakethe profitable purchase and resale of the property on plaintiff's behalf[FN4](see Howard v Carr, supra at 845-846; Matter of Greenberg [Madison Cabinet &Interiors], supra at 964; Bertoni v Catucci, supra at 894-895; cf. Moser v Devine Real Estate, Inc.[Florida], 42 AD3d 731 [2007]).[*6]
Instead, it was Corvetti, a sophisticated businessman whohad orchestrated plaintiff's transactions with the Carneys from their inception, who ultimatelyprocured the tax deed and extinguished plaintiff's mortgage.[FN5]When Corvetti paid $182,916 in December 1996 to purchase the two tax sale certificates fromTCA, he was merely removing a superior lien against the property which had existed from theday of the closing on the Carney mortgage. It was thereafter, namely, in June 1997, that Corvetti,admittedly on the advice of counsel, paid an additional $272,000 in past due taxes which hadaccumulated subsequent to 1994 and accepted a deed to the premises from the County. It was thislatter business decision, itself legal and prudent, and not the earlier purchase of the tax salecertificates or any alleged malpractice of defendants, which led to the recordation of the tax deedand the extinguishment of plaintiff's mortgage. In other words, it was Corvetti himself, inviolation of his fiduciary duty to plaintiff, who created the alleged "damages" suffered by hiscorporation.
We conclude, therefore, that to the extent that plaintiff was damaged, if at all, by the loss ofthe security interests designed to protect plaintiff's original investment of $300,000, suchdamages were caused by the actions of its fiduciary, rather than the alleged malpractice ofdefendants. Accordingly, defendants are entitled to summary judgment dismissing the complaintin its entirety.
Cardona, P.J., Peters, Carpinello and Kane, JJ., concur. Ordered that the order is reversed, onthe law, without costs, defendants' motion for summary judgment and third-party defendant'smotion to dismiss granted, complaint and third-party complaint dismissed, and appeals withrespect to the remaining motions dismissed as academic.
Footnote 1: Indeed, we have previously heldin related litigation that the subject tax sale certificates represent "only an inchoate right to aconveyance of the real property, which matures only in the event that the sum prescribedfor redemption is not paid before the end of the redemption period and there is compliance withthe notice and filing requirements of the Onondaga County Tax Act" (Corvetti v FidelityNatl. Tit. Ins. Co. of N.Y., 258 AD2d 32, 35 [1999], lv denied 94 NY2d 753 [1999][internal quotation marks and citations omitted]).
Footnote 2: The County paid a total of$133,764.98 for the two tax certificates. TCA paid the County $139,782.41 plus nominalexpenses. It appears that TCA did not extract a premium for its sale of the tax sale certificates toCorvetti and his wife ($182,916), but merely charged interest from the time it bought thecertificates from the County plus permissible costs.
Footnote 3: We reject plaintiff's claim that itwas prohibited from purchasing the tax sale certificates by its stipulation with the Carneys.According to plaintiff, the Carneys had already breached the stipulation and, in any event, thestipulation did not address the unforeseen situation that the tax liens for 1993 and 1994 had beensold at tax sales.
Footnote 4: In his own words, Corvettidescribed the relationship between his business and personal finances as follows: "[W]e managedthe cash flow between our personal assets and the company's [sic] in a fusion tomaximize the return. Just like the bank will move money at night to another bank to earn interestand then get it back in the morning, we were moving the funds around between companies."When specifically asked whether the installment loan payments to plaintiff on the subject loanwould ultimately pass to him, Corvetti responded that such payments were just a part of a "poolof money" divided among the entities controlled by him and allocated as business dictated.
Even if we had not found that Corvetti had the ability to finance plaintiff's acquisition of theproperty, plaintiff's alleged lack of funds would not alter the conclusion that Corvetti diverted acorporate opportunity by procuring the property for himself (see Foley v D'Agostino, 21AD2d 60, 67-68 [1964]).
Footnote 5: Additionally, prior to the sale ofthe property by Corvetti and his wife, Corvetti—on behalf of plaintiff, as itspresident—executed a mortgage release in favor of himself and his wife, personally.