Commercial Division Blog
Posted: April 15, 2020 / Categories Commercial, Fraud/Misrepresentation, Law Firms and Professional Ethics
Attorney Can Be Liable for Participating in a Client's Tortious Misconduct
On March 31, 2020, Justice Schecter of the New York County Commercial Division issued a decision in FGP 1, LLC v. Dubrovsky, 2020 NY Slip Op. 30899(U), holding that an attorney can be liable for participating in a client's tortious misconduct, explaining:
The parties dispute, however, whether Stewart, given his status as Dubovsky’s attorney, can be held liable for aiding and abetting her alleged breach of fiduciary duty and conversion. To state a claim for aiding and abetting a breach of fiduciary duty, a plaintiff must plead a breach of fiduciary duty, that defendant knowingly induced or participated in the breach, and damages resulting from the breach. One knowingly participates in a breach by providing substantial assistance’ to the primary violator. Substantial assistance exists where (1) a defendant affirmatively assists, helps conceal, or by virtue of failing to act when required to do so enables the fraud to proceed, and (2) the actions of the aider/abettor proximately caused the harm on which the primary liability is predicated.
Plaintiffs allege that Stewart – Dubrovsky’s attorney who was fully familiar with the FGP agreements and the Company’s state of affairs – knowingly aided Dubrovsky’s breaches by misrepresenting her ownership of the Company and its supposed lack of debt and by helping her violate FGP’s right of first refusal. While these allegations plausibly state a claim, Stewart asserts that he has immunity by virtue of his status as an attorney. He does not.
While attorneys are immunized from liability under the shield afforded attorneys in advising their clients, there is no immunity for attorneys engaged in fraud or collusion or who act with malice or bad faith. Stewart’s actual knowledge is sufficiently pleaded based on his representation of Dubrovsky in the negotiation and execution of the assignment to FGP and the subsequent disputes between the parties, which would have made him well aware, among other things, that the MIC Assignment Agreement purported to sell the same 49% membership interest in the Company that had already been sold to FGP. Stewart nevertheless negotiated the MIC Assignment Agreement, thereby rendering substantial assistance to Dubrovsky in breaching her fiduciary duties. Bad faith may be further inferred by the backdating of the MIC Assignment Agreement and its execution on the very day plaintiffs commenced this action.
Stewart, however, cannot be held liable for aiding and abetting conversion of the Watches. A conversion takes place when someone, intentionally and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that person’s right of possession. While the Watches are alleged to have been converted (and defendants did not move to dismiss this claim), Stewart is not alleged to have provided substantial assistance. Nor is he alleged to have acted in bad faith. All of Stewart’s alleged actions with respect to the Watches were within the scope of his duties as counsel for Dubrovsky. While plaintiffs plausibly plead bad faith on the part of other defendants with respect to their role in obtaining the Watches and then lying about the nature of the alleged agreements and their location, the most that can be reasonably inferred from plaintiffs’ allegations is that after the Watches were given to defendants, they sought to defraud plaintiffs. Plaintiffs do not plead, however, any facts suggesting that Stewart intended to defraud plaintiffs at the time the Watches were provided or that he lied about his initial intention to hold them in escrow. There is no misconduct alleged in connection with the Watches that is sufficient to vitiate his immunity. The claim is dismissed without prejudice to amendment if there is ultimately evidence of Stewart’s misconduct with respect to the Watches (for example, a showing that that he had knowledge, prior to the Watches’ remittance, that defendants intended to keep them). Stewart, who is not alleged to possess the Watches, cannot be held liable for their conversion based on the current allegations.
(Internal quotations and citations omitted).
We both bring and defend motions relating to attorney conflicts and alleged misconduct and do appeals of the decisions on those motions. Contact Schlam Stone & Dolan partner John Lundin at firstname.lastname@example.org if you face a situation where counsel may be--or is accused of being--conflicted or engaging in misconduct.