| Hecht v Andover Assoc. Mgt. Corp. |
| 2014 NY Slip Op 00632 [114 AD3d 638] |
| February 5, 2014 |
| Appellate Division, Second Department |
| Charles J. Hecht,Respondent-Appellant, v Andover Associates Management Corp. et al.,Defendants, and Citrin Cooperman & Co., LLP,Appellant-Respondent. |
—[*1] Wolf Haldenstein Adler Freeman & Herz LLP, New York, N.Y. (Daniel Tepper,Alan McDowell, and Charles J. Hecht, pro se, of counsel), forrespondent-appellant.
In an action, inter alia, to recover damages for professional negligence, the defendantCitrin Cooperman & Co., LLP, appeals, as limited by its brief and a letter dated June 5,2013, from so much of an order of the Supreme Court, Nassau County (Bucaria, J.),entered March 16, 2010, as denied its motion pursuant to CPLR 3211 (a) to dismiss theamended complaint insofar as asserted against it, and the plaintiff cross-appeals, aslimited by its brief and a letter dated June 5, 2013, from so much of the same order as,upon denying the motion of the defendant Citrin Cooperman & Co., LLP, pursuant toCPLR 3211 (a) to dismiss the amended complaint insofar as asserted against it, limitedthe damages recoverable against Citrin Cooperman & Co., LLP.
Ordered that the order is affirmed insofar as appealed from; and it is further,
Ordered that the order is reversed insofar as cross-appealed from, on the law; and itis further,
Ordered that one bill of costs is awarded to the plaintiff.
This action involves losses sustained by an investment fund which invested with thefirm of Bernard Madoff, who was convicted of crimes related to his operation of a Ponzischeme. The plaintiff is a member of Andover Associates, LLC I (hereinafter Andover),and is suing derivatively on behalf of Andover. He originally asserted claims against,among others, Andover Associates Management Corp. (hereinafter AAMC), themanaging member of Andover, AAMC's principals, the investment consultant Ivy AssetManagement, LLC (hereinafter Ivy), and Citrin Cooperman & Co., LLP (hereinafterCitrin Cooperman), an independent auditor.
According to the amended complaint, Ivy introduced and recommended Madoff toAAMC and its principals to be an investment manager for a prospective fund whichwould become Andover. Andover was originally a limited partnership named AndoverAssociates, LP I. The partnership agreement provided that AAMC was the generalpartner of Andover, with the full and [*2]exclusive rightto manage and control Andover, entitling AAMC to a general partner fee. Andoveroffered limited partnership interests to qualified investors through a confidential offeringmemorandum dated August 9, 2004. The plaintiff became a limited partner of Andoverin January 2006.
In 2008, Andover was reorganized as a limited liability company, and an operatingagreement replaced the partnership agreement. AAMC was made managing member,with full control over the operation of Andover, entitling AAMC to a managing memberfee. The plaintiff was converted into a non-managing member of Andover, andmembership interests were offered through a new confidential offering memorandum.According to the amended complaint, when Madoff's Ponzi scheme was discovered inDecember 2008, approximately 25% of Andover's assets, valued at approximately $14million, was invested with Madoff.
The amended complaint asserts a cause of action against Citrin Cooperman torecover damages for professional negligence in connection with the auditing services itprovided to Andover. Citrin Cooperman moved pursuant to CPLR 3211 (a) to dismissthe amended complaint insofar as asserted against it. The Supreme Court denied themotion, although, upon doing so, it concluded that the plaintiff may not recover theamount of profit which Madoff fraudulently claimed that Andover earned and limitedAndover's recoverable damages to the amount of its un-recouped investment. CitrinCooperman appeals from so much of the order as denied its motion, and the plaintiffcross-appeals from so much of the order as limited the damages recoverable againstCitrin Cooperman.
The Supreme Court properly denied that branch of Citrin Cooperman's motion whichwas pursuant to CPLR 3211 (a) (3) to dismiss the amended complaint insofar as assertedagainst it for lack of standing. The plaintiff sufficiently pleaded with particularity thatdemand upon AAMC to assert the claim against Citrin Cooperman on Andover's behalfwould have been futile (seeBansbach v Zinn, 1 NY3d 1, 9 [2003]; Marx v Akers, 88 NY2d 189,200-201 [1996]; see generallyTzolis v Wolff, 10 NY3d 100 [2008]). The amended complaint alleges thatAAMC had a direct financial interest in Citrin Cooperman's issuance of clean auditopinions in the form of continued higher fees for maintaining the investment withMadoff, as well as inflated fees based on a percentage of Andover's fictitious profits.Further, it alleges that AAMC's principals did not fully inform themselves about thechallenged transaction to the extent reasonably appropriate under the circumstances (see Matter of Comverse Tech., Inc.Derivative Litig., 56 AD3d 49, 55 [2008]).
The Supreme Court also properly denied that branch of Citrin Cooperman's motionwhich was pursuant to CPLR 3211 (a) (7) to dismiss the amended complaint insofar asasserted against it. On a motion to dismiss pursuant to CPLR 3211 (a) (7), the complaintis to be afforded a liberal construction (see CPLR 3026). The facts alleged arepresumed to be true, the plaintiff is afforded the benefit of every favorable inference, andthe court is to determine only whether the facts as alleged fit within any cognizable legaltheory (see Leon v Martinez, 84 NY2d 83, 87 [1994]; Thomas v LaSalle Bank N.A.,79 AD3d 1015, 1017 [2010]). Here, the plaintiff sufficiently pleaded that CitrinCooperman's alleged negligence proximately caused Andover to sustain damages. Thequestion of whether responsibility for Andover's losses may be reasonably attributed toCitrin Cooperman's alleged negligence in light of Madoff's criminal scheme is an issuefor determination by the fact-finder (see Bell v Board of Educ. of City of N.Y.,90 NY2d 944, 947 [1997]; Kush v City of Buffalo, 59 NY2d 26, 33 [1983];Derdiarian v Felix Contr. Corp., 51 NY2d 308, 315 [1980]). Likewise, whetherAndover could have obtained a return of its investment had Citrin Coopermandiscovered the fraud may not be determined on this motion to dismiss and, in any event,the plaintiff pleaded further damages related to fees paid on the fictitiously inflatedinvestment balance.
Contrary to the plaintiff's contention, Citrin Cooperman raised the issue of themeasure of Andover's damages before the Supreme Court. Further, damages mayproperly be limited on a motion to dismiss (see Howard S. v Lillian S., 14 NY3d 431, 437 [2010];Sand v Chapin, 238 AD2d 862, 863 [1997]; Swersky v Dreyer & Traub,219 AD2d 321, 328 [1996]; Crossland Sav. v Foxwood & S. Co., 202 AD2d544, 546 [1994]). When a party seeks damages for lost profits, the profits may not beimaginary (see Kenford Co. v County of Erie, 67 NY2d 257, 261 [1986]; O'Neill v Warburg, Pincus &Co., 39 AD3d 281, 283 [2007]). It is undisputed that the profits reported byMadoff were completely imaginary. [*3]The fictitiousprofits never existed and, thus, Andover did not suffer any loss with respect to thefictitious sum (see JacobsonFamily Invs., Inc. v National Union Fire Ins. Co. of Pittsburgh, PA, 102 AD3d223, 233-234 [2012]). However, the Supreme Court did not merely determine thatthe plaintiff may not recover the amount of the fictitious profits, but specifically limiteddamages to the amount of Andover's un-recouped investment. The plaintiff pleaded factsbased on which other damages related to the payment of fees may be recoverable andthus, it was error for the Supreme Court to limit damages to the amount of Andover'sun-recouped investment. Rivera, J.P., Leventhal, Chambers and Lott, JJ., concur.