| Art Capital Group, LLC v Neuhaus |
| 2010 NY Slip Op 01600 [70 AD3d 605] |
| February 25, 2010 |
| Appellate Division, First Department |
| Art Capital Group, LLC, et al., Respondents, v Beth SaraNeuhaus, Appellant. |
—[*1] Wollmuth Maher & Deutsch LLP, New York (Jennifer L. Rudolph of counsel), forrespondents.
Order, Supreme Court, New York County (Richard B. Lowe, III, J.), entered December 1,2008, which denied defendant's motion to dismiss the complaint, reversed, on the law, withcosts, and the motion granted. The Clerk is directed to enter judgment in defendant's favor.
Plaintiffs are in the business of providing financial and consulting services to art owners, forthe purpose of enhancing the liquidity of works of art held by individual owners and art galleries.This action stems from the fact that plaintiffs' former employees, Christopher Krecke andAndrew Rose, now compete with plaintiffs through entities they have formed. Three years beforethis action was commenced, plaintiffs sued Krecke, Rose and their entities, alleging various tortsplus claims for declaratory relief and an accounting. In that still pending action, it is alleged,among other things, that Krecke and Rose defrauded and engaged in unfair competition withplaintiffs. All of the instant complaint's seven causes of action, which include aiding and abettingbreach of fiduciary duty, fraud and conspiracy to defraud, and aiding and abetting fraud arebased upon defendant's role as an attorney retained by Rose for the purpose of starting his newbusiness venture with Krecke. Plaintiffs allege that Krecke and Rose needed to secure the aidand assistance of legal counsel in order to carry out the conspiracy against them. Accordingly,defendant is alleged to have substantially facilitated and advanced the Krecke-Rose conspiracyto defraud and unfairly compete with plaintiffs.
The issue on this appeal is whether the complaint sets forth any basis for defendant's liabilityfor the alleged conduct of Krecke and Rose. "In general, all who aid and abet the commission ofa trespass are liable . . . But where one acts only in the execution of the duties of hiscalling or profession, and does not go beyond it, and does not actually participate in the trespasshe is not liable, though what he does may aid another party in its commission." (Ford vWilliams, 13 NY 577, 584 [1856].)
Moreover, it is recognized that public policy demands that attorneys, in the exercise of theirproper functions as such, shall not be civilly liable for their acts when performed in good faithand for the honest purpose of protecting the interests of their clients (Hahn v Wylie, 54[*2]AD2d 629 [1976]). As to defendant's specific conduct,plaintiffs allege that she gave Krecke and Rose indispensable legal advice and counsel,documented and negotiated loan transactions between their competing entities and plaintiffs'current and prospective clients, and provided legal services to secure office space for Krecke andRose. Guided by Ford, we find that plaintiffs' causes of action are not viable because allof the aforementioned acts fall completely within the scope of defendant's duties as an attorney.The five quotes from the complaint cited by the dissent do not warrant a contrary conclusioninasmuch as they do not even suggest that defendant acted in any capacity other than as anattorney.
Even apart from Ford and Hahn, this Court has held that a viable tort claimagainst a professional requires the underlying relationship between the parties to be one ofcontract or the bond between them so close as to be the functional equivalent of contractualprivity (Jacobs v Kay, 50 AD3d526, 527 [2008], citing Ossining Union Free School Dist. v Anderson LaRoccaAnderson, 73 NY2d 417 [1989]). The existence of such a relationship is not alleged here.Moreover, rule 1.2 (d) of the Rules of Professional Conduct (22 NYCRR 1200.0), also cited bythe dissent, does not bear upon the sufficiency of plaintiffs' claims. Standing alone, an ethicalviolation will not create a duty giving rise to a cause of action that would otherwise not exist atlaw (Shapiro v McNeill, 92 NY2d 91, 97 [1998]).
Also, the dissent merely begs the question by invoking Judiciary Law § 487, authorityplaintiffs do not cite. That statute provides for criminal and civil liability for an attorney who"[i]s guilty of any deceit or collusion, or consents to any deceit or collusion, with intent todeceive the court or any party." (Subd [1].) The "indication of fraud and collusion" discerned bythe dissent falls short of an allegation that defendant tortiously acted outside the scope of her roleas an attorney. By illustration, the tenor of the complaint is revealed by its following language:"In order to accomplish the aforementioned conspiracy, Krecke and Rose needed to secure theaid and assistance of legal counsel," and "Beth Neuhaus' legal advice and counsel wassubstantial and indispensable to Krecke and Rose." The "advice of counsel with respect to aclient's course of conduct, even if pleaded as 'condonation', does not thereby and without moremetamorphose into a cause of action by a third party against that counsel" (Pearl v 305 E.92nd St. Corp., 156 AD2d 122, 122 [1989]). It is also of no moment that discovery has notbeen conducted. Plaintiffs have not asserted that facts essential to justify opposition to themotion may have existed but could not be stated (see CPLR 3211 [d]).
Plaintiffs' claims of fraud, conspiracy to defraud and aiding and abetting fraud are deficientfor an additional reason. The elements of fraud are a material misrepresentation of fact,knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff, anddamages (Eurycleia Partners, LP vSeward & Kissel, LLP, 12 NY3d 553, 559 [2009]). In this case, plaintiffs do not allegethat any misrepresentations were made to them. Concur—Andrias, J.P., Friedman,Buckley and DeGrasse, JJ.
Acosta, J., dissents in part in a memorandum as follows: I believe that plaintiffs have stated aviable cause of action for aiding and abetting a breach of fiduciary duty, and aiding and abettingfraud.
Plaintiffs are in the business of providing financial and consulting services to individual[*3]art owners and art galleries. Apart from engaging in art sales,purchases and advisory services, plaintiffs also offer recourse and nonrecourse asset-based loansto individuals, galleries and other businesses, using their art assets as collateral in securing theloan or as a component of the collateral package.
Nonparty Christopher Krecke was an employee of plaintiff Art Capital and served as itschief financial officer and chief operating officer. He also served as the chief financial officerand chief operating officer of plaintiff ACG Credit, and as president of plaintiff Fine ArtFinance. Krecke administered the loans for each of ACG Credit's lending clients, as well asmanaging and developing key banking and credit relationships. Nonparty Andrew C. Rose was aconsultant for Art Capital Group, and was managing director of ACG Credit. Rose's employmentand consulting arrangement was terminated on December 28, 2004.
According to the complaint, while Rose was consulting for Art Capital, he "started planningto compete secretly against plaintiffs and appropriate ACG Credit's corporate loans andplaintiffs' business opportunities for himself and Krecke." On or about October 2004, Roseformed a company called Art Capital Holdings, Inc., "to provide financial consulting servicesand established e-mail accounts with 'artcapitalgroup.com' domain names."
After Rose was terminated, Krecke continued his employment with plaintiffs for anadditional three months. The complaint alleges that during that time, Krecke helped Roseconceal the efforts of the competing business. Krecke resigned from his employment withplaintiffs on April 1, 2005, and reported for employment with Rose three days later. It is furtheralleged that during that three-month period, "Krecke and Rose facilitated the transfer ofnumerous lending clients and prospective clients to Rose's new company."
On or about January 26, 2005, defendant, an attorney, met with Krecke and Rose at heroffice, and was retained as Rose's legal counsel. It is alleged that she "knowingly anddeliberately enabled, assisted, and counseled Krecke and Rose to unfairly compete withPlaintiffs, to defraud Plaintiffs, and to disregard the fiduciary duties they each owed toPlaintiffs." It is further alleged that defendant "worked on loan transactions with Krecke andRose with counterparties that were borrowers of, potential clients of, or had signed term sheetswith Plaintiffs," assisted in "appropriat[ing] many loan transactions away from Plaintiffs, andotherwise . . . interfere[d] with Plaintiffs' ongoing and prospective businessrelationships."
The complaint makes specific reference to a loan extended by Rose and Krecke's newcompany to plaintiffs' largest borrower, Berry-Hill Galleries (BH), in violation of an existingloan agreement between BH and plaintiffs. It alleges that defendant represented Rose and Kreckein the transaction and assisted them in concealing it from plaintiffs by using a shell company,Coram Capital, to receive the loan, removing references to BH's address from the loandocuments and concealing the fact that artwork that had already been pledged as collateral toACG Credit was used to secure the loan. In addition, the complaint alleges that defendantprovided unspecified legal services to Krecke and Rose in connection with loans made to threeof plaintiffs' borrowers.
The complaint further alleges that defendant concealed her involvement with Krecke andRose by disclaiming any wrongdoing with respect to certain loan transactions in the ensuinglitigation by plaintiffs against Krecke and Rose.[FN1][*4]Additionally, the complaint alleges that defendant helped towrongfully divert business from plaintiffs by assisting Rose and Krecke in securing financingwith SageCrest, plaintiffs' lender.
Plaintiffs brought the instant action in June 2008. In August, defendant moved, pre-answer,to dismiss the complaint or, in the alternative, to stay the action pending the outcome of theaction against Krecke and Rose. The motion court denied defendant's motion, and this appealensued. Defendant argues that the complaint should be dismissed because there is no privitybetween herself and plaintiffs, barring a claim on the legal advice she provided to her clients.She thus asserts that by documenting and negotiating the loan transactions, she was providinglegal services within the scope of her authority as an attorney, conduct that cannot give rise toliability to third parties.
An attorney is generally not liable to third parties for the acts of her clients if the attorneyhas acted in good faith (Weisman, Celler, Spett & Modlin v Chadbourne & Parke, 271AD2d 329, 330 [2000], lv denied 95 NY2d 760 [2000]). An attorney, however,"may be held liable to third parties for wrongful acts if guilty of fraud or collusion or of amalicious or tortious act" (Kahn v Crames, 92 AD2d 634, 635 [1983]; see alsoBankers Trust Co. v Cerrato, Sweeney, Cohn, Stahl & Vaccaro, 187 AD2d 384 [1992]). I donot disagree with the majority's citing to the general rule. Where, however, as here, there is anindication of fraud and collusion, I believe it was error to dismiss the complaint in its entirety(see also Judiciary Law § 487 [providing for a civil cause of action against anattorney based on the attorney's intent to deceive]; Mokay v Mokay, 67 AD3d 1210 [2009]).
"A claim for aiding and abetting a breach of fiduciary duty requires: (1) a breach by afiduciary of obligations to another, (2) that the defendant knowingly induced or participated inthe breach, and (3) that plaintiff suffered damage as a result of the breach" (Kaufman vCohen, 307 AD2d 113, 125 [2003]). A defendant knowingly participates in the breach offiduciary duty when she provides "substantial assistance" to the primary violators, which occurs"when a defendant affirmatively assists, helps conceal or fails to act when required to do so,thereby enabling the breach to occur" (id. at 126).
Here, accepting the facts as alleged in the complaint as true, and according plaintiffs thebenefit of every possible favorable inference (Leon v Martinez, 84 NY2d 83, 87 [1994]),plaintiffs properly stated a claim for aiding and abetting a breach of fiduciary duty. Specifically,they alleged that even though defendant knew that Rose was a former employee of Art Capitaland that Krecke continued to be employed by Art Capital in a fiduciary relationship, she stillhelped Rose and Krecke take business away from plaintiffs by securing financing for them andhelping negotiate a loan that violated the terms of existing agreements between plaintiffs andtheir borrowers. Plaintiffs specifically alleged that defendant assisted Krecke and Rose with theBH transaction, knowingly transferring artwork to Coram Capital, BH's alter ego, even thoughshe knew that artwork had already been pledged as collateral to plaintiffs (see Operative Cake Corp. v Nassour,21 AD3d 1020 [2005]).
Plaintiffs likewise adequately stated a cause of action for aiding and abetting fraud byalleging the facts in sufficient detail to afford defendant the requisite notice, particularly sincethe relevant surrounding circumstances lie peculiarly within her knowledge (Knight Sec. v Fiduciary Trust Co., 5AD3d 172, 173-174 [2004]). The complaint alleges that defendant, as attorney for Rose,knew of the fraud by Rose and Krecke, and defendant advanced its commission by [*5]providing substantial assistance in advancing loans to clients thatwere secured by collateral already pledged to plaintiffs (see Goldson v Walker, 65 AD3d 1084 [2009]). Specifically, thecomplaint alleges that defendant had actual knowledge that the transaction with BH (plaintiffs'biggest borrower, as noted), was in violation of its loan agreement with plaintiffs. The complaintfurther alleges that defendant aided and abetted Krecke and Rose in concealing the loan fromplaintiffs by using a shell company to receive the loan and removing the references to BH'saddress from the loan documents, thus concealing the fact that artwork already pledged ascollateral to ACG Credit was used to secure the loan. Accordingly, in my opinion, the courterred in dismissing these two causes of action.
Notwithstanding defendant's position that her role as an attorney advising her client insulatesher from liability, based on these facts there remains a question of whether she simply actedzealously on behalf of her client, or whether she engaged in activity that crossed thatline.[FN2]We have drawn that line at the point where a lawyer begins to be a participant in the unethical orcriminal conduct of her client (see e.g. Bankers Trust Co., 187 AD2d at 385). The dutyof zealous representation cannot be absolute. At bottom, lawyers are guardians of the publicgood, albeit with a responsibility to play their role to advance the ethical and noncriminalinterests of their clients. New York courts have long recognized this. The majority cites Fordv Williams (13 NY 577, 584 [1856]) for the proposition that "where one acts only in theexecution of the duties of his calling or profession, and does not go beyond it, and does notactually participate in the trespass he is not liable" (emphasis added).[FN3]That, however, is precisely the point. At this procedural juncture, where discovery has not takenplace, and plaintiffs have adequately pleaded that defendant provided substantial assistance toKrecke and Rose in breaching a fiduciary duty to plaintiffs and advancing a fraud, I wouldreinstate those causes of action.
Footnote 1: Prior to the commencement ofthe instant action, plaintiffs commenced an action against Krecke and Rose and their newlyformed companies.
Footnote 2: Rule 1.2 (d) of the Rules ofProfessional Conduct (22 NYCRR 1200.0) provides that "[a] lawyer shall not counsel a client toengage, or assist a client, in conduct that the lawyer knows is illegal or fraudulent, except thatthe lawyer may discuss the legal consequences of any proposed course of conduct with a client."
Footnote 3: The court affirmed thejudgment of Supreme Court which, after a jury trial, found that defendant attorney was not liableas a trespasser. Rather, the attorney transmitted the instructions of his clients that the sheriffseize specific property, and did not actively participate in the tortious seizure.