Cite as: Leggiadro, Ltd. v. Winston & Strawn, LLP, 154749/2012, NYLJ 1202591661055, at *1 (Sup., NY, Decided March 1, 2013)

Justice Shirley Werner Kornreich

Decided: March 1, 2013

ATTORNEYS

For the Plaintiff: Robinson Brog Leinwand Greene Genovese & Gluck, P.C.

For the Defendant: Mound Cotton Wollan & Greengrass.

DECISION & ORDER

 

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Defendant Winston & Strawn, LLP (W&S) moves to dismiss the Amended Complaint pursuant to CPLR 3211(a)(1) & (7). Defendant's motion is granted in part and denied in part for the reasons that follow.

I. Factual Background & Procedural History

Plaintiffs Leggiadro, Ltd. (Leggiadro), Brooks Ross, and Ann Ross commenced this action on July 20, 2012 by filing a Complaint that asserted three causes of action against W&S: (1) breach of contract; (2) legal malpractice; and (3) negligent misrepresentation. On September 11, 2012, W&S filed the instant motion to dismiss the Complaint. On October 18, 2012, plaintiffs filed their opposition to the motion and also filed an Amended Complaint (the AC), which limited their claim to a single cause of action for legal malpractice. The parties stipulated to apply the instant motion to the AC. As this decision involves a motion to dismiss, the facts recited are taken from the AC.

Brooks and Ann (collectively, the Rosses) are shareholders of Leggiadro, a New York S-Corporation that sells high-end women's apparel. AC ¶¶2-4, 6. On April 3, 2002, Leggiadro

 

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entered into a fifteen year lease (the Lease) with Carlton House, Inc. (Carlton) to operate its flagship store at 680 Madison Avenue (the Building). ¶8. The expiration date of the Lease was June 14, 2017. ¶14. Leggiadro chose the Madison Avenue location for its proximity to other stores frequented by its high end clientele, such as Barneys and Bloomingdales. ¶9.

After the Lease was executed, Carlton sold the Building and assigned the Lease to AGE 680 Madison LLC (the Landlord). ¶11. In 2010, the Landlord notified Leggiadro that it wished to negotiate an early termination and buy-out of the Lease because it sought to convert the Building into residential and commercial cooperative units. ¶12. Leggiadro retained W&S to negotiate a buy-out with the Landlord whereby Leggiadro would obtain a "net settlement sum" that would provide an adequate amount of post-tax money to cover the costs of relocating its flagship store. ¶15. Brooks specifically requested that W&S advise plaintiffs of any and all tax liabilities arising from the buy-out. ¶16.

Leggiadro and the Landlord eventually executed a buy-out agreement, the terms of which were not disclosed to the court pursuant to a Confidentially and Nondisclosure Agreement. ¶24. Plaintiffs subsequently became aware that they incurred unexpected New York State and New York City tax liabilities by virtue of differences in how the State, the City, and the IRS treat S-Corporations for tax purposes. ¶25. Plaintiffs contend that W&S failed to inform them of these tax issues and, if they had, they would have negotiated a higher buy-out settlement amount with the Landlord that would have been sufficient to cover Leggiadro's moving costs. ¶31.

W&S moves to dismiss on two grounds: (1) that no attorney — client relationship existed between it and the Rosses; and (2) failure to properly plead that the alleged malpractice was the proximate cause of non-speculative damages. W&S submitted the Engagement Letter between

 

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W&S and Leggiadro dated December 17, 2010, which sets forth that "the firm's client will be [Leggiadro] and not any affiliate." It also submitted the Leggiadro Lease Buy Out Calculation prepared by Brooks (the Calculation), which lists the categories of costs to be factored into the settlement sum.

II. Discussion

On a motion to dismiss, the court must accept as true the facts alleged in the complaint as well as all reasonable inferences that may be gleaned from those facts. Amaro v. Gani Realty Corp., 60 NY3d 491 (2009); Skillgames, L.L.C. v. Brody, 1 AD3d 247, 250 (1st Dept 2003) (citing McGill v. Parker, 179 AD2d 98, 105 (1992)); see also Cron v. Harago Fabrics, 91 NY2d 362, 366 (1998). The court is not permitted to assess the merits of the complaint or any of its factual allegations, but may only determine if, assuming the truth of the facts alleged, the complaint states the elements of a legally cognizable cause of action. Skillgames, id. (citing Guggenheimer v. Ginzburg, 43 NY2d 268, 275 (1977)). Deficiencies in the complaint may be remedied by affidavits submitted by the plaintiff. Amaro, 60 NY3d at 491. "However, factual allegations that do not state a viable cause of action, that consist of bare legal conclusions, or that are inherently incredible or clearly contradicted by documentary evidence are not entitled to such consideration." Skillgames, 1 AD3d at 250 (citing Caniglia v. Chicago Tribune-New York News Syndicate, 204 AD2d 233 (1st Dept 1994)). Further, where the defendant seeks to dismiss the complaint based upon documentary evidence, the motion will succeed if "the documentary evidence utterly refutes plaintiff's factual allegations, conclusively establishing a defense as a matter of law [citation omitted]." Goshen v. Mutual Life Ins. Co. of N.Y., 98 NY2d 314, 326 (2002); Leon v. Martinez, 84 NY2d 83, 88 (1994).

 

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To establish an attorney's negligence, a party must show that an attorney "failed to exercise the reasonable skill and knowledge commonly possessed by a member of the legal profession." Arnav Indus. v. Brown, Raysman, Millstein, Felder & Steiner, LLP, 96 NY2d 300, 303-04 (2001) (citing Darby & Darby v. VSI Intl., 95 NY2d 308, 313 (2000); Prosser and Keeton, Torts §32, at 185-93 (5th ed)). "'[A]n action for legal malpractice requires proof of the attorney's negligence, a showing that the negligence was the proximate cause of the injury, and evidence of actual damages.'" Fielding v. Kupferman, 65 AD3d 437, 439 (1st Dept 2009) (quoting Russo v. Feder, Kaszovitz, Isaacson, Weber, Skala & Bass, 301 AD2d 63, 67 (1st Dept 2002)). In other words, plaintiff must establish that but for the defendant attorney's malpractice, he would not have been damaged. Davis v. Klein, 88 NY2d 1008, 1009-10 (2010); Fielding, 65 AD3d at 439.

"New York courts impose a strict privity requirement to claims of legal malpractice; an attorney is not liable to a third party for negligence in performing services on behalf of his client." Lavanant v. General Acc. Ins. Co. of America, 164 AD2d 73, 81 (1st Dept 1990). However, "[w]hile privity of contract is generally necessary to state a cause of action for attorney malpractice, liability is extended to third parties, not in privity, for harm caused by professional negligence in the presence of fraud, collusion, malicious acts or other special circumstances." Good Old Days Tavern, Inc. v. Zwirn, 259 AD2d 300 (1st Dept 1999).

The allegations in the AC and the documentary evidence establish that the scope of W&S's representation was to negotiate a settlement sum that would cover Leggiadro's moving costs. Such costs were not limited to increases in operational costs such as rent. Rather, the Calculation also considers (though it does not ascribe a dollar amount to) goodwill loss from the company leaving its Madison Avenue location. The Calculation does not account for out-of-

 

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pocket costs to the shareholders. While the Calculation does consider the federal long term capital gains tax, which all of the involved parties knew would be paid by the shareholders by virtue of Leggiadro's S-Corporation status, this alone is not enough to expand the scope of W&S's representation of the company to include the representation of its shareholders. If consideration of pass-through tax liability was sufficient to constitute the representation of shareholders, by this logic, a lawyer who represents a company necessarily also must represent its shareholders because all financial liabilities of a company ultimately impact the finances of the shareholders. This is not the law.

Nevertheless, the Rosses argue that the special circumstances of the representation created a near-privity relationship under the doctrine set forth in Good Old Days Tavern, supra, which arises from the principle that a provider of professional services is liable for negligent misrepresentations to third-parties where the "relationship is so close as to approach that of privity." Prudential Ins. Co. of America v. Dewey, Ballantine, Bushby, Palmer & Wood, 80 NY2d 377 (1992). Critically, it is important to remember that reasonable reliance is an essential element of a claim based on a negligent misrepresentation or omission. See J.A.O. Acquisition Corp. v. Stavitsky, 8 NY3d 144, 148 (2007). Thus, even assuming W&S had a duty to consider the tax liabilities of the Rosses, the Rosses cannot claim to have reasonably relied on any representation or omission made by W&S as to the existence of their individual pass-through tax liability because they knew that such liability existed by virtue of their long history of paying these taxes as stockholders of an S-Corporation. Therefore, the Rosses' claims against W&S are dismissed.

However, Leggiadro may maintain its claim against W&S related to the New York City general corporation tax. See AC ¶26. The scope of W&S's representation included obtaining a

 

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settlement sum from the Landlord that accounted for the company's tax liabilities. Assuming, for the purposes of this motion to dismiss, that W&S failed to account for city taxes and that such failure led to a lower settlement amount with the Landlord, W&S might be liable to Leggiadro for the difference between the settlement amount that Leggiadro obtained and the amount it would have received if the amount accounted for city taxes. Contrary to W&S's contentions, this damages calculation is not speculative.

Finally, all of Leggiadro's other claims against W&S, which do not involve a loss to the company because they merely affected the shareholders' individual tax liability, are dismissed. Accordingly, it is

ORDERED that the motion to dismiss by defendant Winston & Strawn, LLP against plaintiffs Leggiadro, Ltd., Brooks Ross, and Ann Ross is granted in part as follows: (1) plaintiffs Brooks Ross and Ann Ross' claims against said defendant are dismissed with prejudice; and (2) plaintiff Leggiadro, Ltd.'s claims are dismissed except for the claim related to the New York City general corporation tax; and it is further

ORDERED that the Clerk shall enter judgment accordingly; and it is further

ORDERED that the parties are to appear in Part 54, Supreme Court, New York County, 60 Centre St., rm. 228, New York, N.Y., for a preliminary conference on March 12, 2013 at 10:00 in the forenoon.

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