Last post, we discussed Gad v Kramer Levin Naftalis & Frankel, LLP 2022 NY Slip Op 34357(U) December 20, 2022 Supreme Court, New York County Docket Number: Index No. 156841/2021 Judge: Margaret A. Chan where siblings fight long and hard over a very lucrative business, resulting in years of litigation, costly attorney fees, and the ultimate try at selling a portion of the business at a vast profit. For one of the siblings, it goes very wrong. He turns to legal malpractice after the loss of the sale.
Two grounds were advanced to dismiss: lack of standing and speculative damages. We discuss speculative damages in this article.
Albert is a 45% shareholder of Almod Diamonds Ltd. (Almod), a closely held New York corporation that is family owned and operated (NYSCEF #13 – amended complaint, ,r 8). Albert’s siblings, Morris Gad (Morris) and Donna Gad Hecht (Donna), own the remaining 45% and 10% of the shares, respectively (id.). The Gad siblings have been in conflict for years over the control and operations of Almod, and Donna brought a lawsuit in 2014 against Albert, Morris, and Almod in connection with those conflicts (the Donna Litigation) (id., ,r,r 9, 16).
In April or May 2016, Albert retained defendants for legal advice concerning the business disputes involving his family members, including the Donna Litigation (id., ,r,r 9-15). The parties agreed that defendants would charge a flat fee of $10,000 per month, which was subsequently increased to $15,000 per month starting from May 2018 (id.).
While defendants did not represent Albert in the Donna Litigation, they
represented Albert in negotiating and reaching a settlement with Donna (id., ,r,r 16-
19). Albert asked defendants to protect his financial interests and made clear that
any settlement documents must include certain key points, including that (1) any
“true-up” payments to Donna shall be calculated in consideration of her previous
sale of low-quality jewelry inventory to Almod, which was allegedly improper and
unauthorized, (2) a mechanism shall be included by which either Albert or Morris is
immediately elected as the CEO of Almod, (3) all shareholder distributions, salaries,
and expenses, including legal expenses, must continue to be allocated 45/45/10
according to each shareholder’s respective interest in Almod, and (4) if Almod was to
form an independent board of directors, defendants were to vet any potential
Albert-nominated directors who should represent Albert’s interests and be highly
experienced in running retail businesses (amended complaint, ,19-20).
On June 12, 2018, defendants presented Albert with finalized settlement documents, advising Albert to sign them and assuring him that the settlement agreement and the shareholder and voting agreement supplement contained all key provisions Albert wanted (id., ,r 23). Albert alleges that he reminded defendants that he was busy operating the company and was relying on defendants’ assurances when he executed the documents (id., ,r,r 22-24). After Donna and Morris executed the settlement documents, the documents became binding and the Donna Litigation was discontinued (id.).
Albert alleges that the settlement documents did not include the key provisions defendants assured to be included, causing ascertainable damages to him
(id., ,r,r 26-39, 44).”
“Causation and Damages
Although Albert has standing to bring the legal malpractice claim, for the reasons stated below, the claim must be dismissed for failure to adequately allege causation and damages.
· “[A]n action for legal malpractice requires proof of three elements: the negligence of the attorney; that the negligence was the proximate cause of the loss sustained; and proof of actual damages” (Schwartz v Olshan Grundman Frame & Rosenzweig, 302 AD2d 193, 198 [1st Dept 2003]). To satisfy the pleading requirement for causation, a plaintiff must allege that “‘but for’ the attorney’s conduct [or nonfeasance], the client would have prevailed in the underlying action or would not have sustained any ascertainable damages” ( Weil, Gotshal & Manges, LLP v Fashion Boutique of Short Hills, Inc., 10 AD3d 267, 272 [1st Dept 2004]; Cosmetics Plus Group, Ltd. v Traub, 105 AD3d 134, 140-141 [1st Dept 2013]). Regarding damages, “to survive a … pre·answer dismissal motion, a pleading need only state allegations from which damages attributable to the defendant’s conduct [or nonfeasance] may be reasonably inferred” (Lappin v Greenberg, 34 AD3d 277, 279 [1st Dept 2006] [internal citations omitted]). However, conclusory allegations of damages predicated on speculation cannot suffice for a legal malpractice action (Bua v Purcell & Jngrao, P.C., 99 AD3d 843, 847·848 [2d Dept 2012]).
Under these standards, the court finds that the amended complaint fails to adequately plead causation. Notably, even if Albert had been informed by defendants of the content and risks of the settlement terms and had refused to sign the documents, the settlement agreement would still have become effective. Under Section 1 of the settlement agreement, the settlement stipulation shall become effective upon the approval of Almod board of directors and shall be binding on Albert regardless of whether he executes it or not, so long as Donna and Morris both execute the agreement (NYSCEF # 21- settlement agreement,§§ 1.a, 1.b).2 In fact, Donna and Morris executed the agreement and the board of directors approved it. Thus, the amended complaint does not sufficiently allege that “but for” defendants’ alleged negligence related to their failure to inform Albert of the terms and risks of the settlement documents, the settlement agreement would not have become effective and he would not have been damaged by it (Silverstein v Pillersdorf, 199 AD3d 539, 540 [1st Dept 2021]).
Moreover, the amended complaint fails to allege that but for defendants’ negligence, the outcome of the settlement would have been more favorable with respect to the “true-up” payment to Donna, Donna’s salary and benefits, and the legal fee provisions. In this regard, the parties in the Donna Litigation have complete discretion as to how they chose to arrange the terms of the settlement. For instance, the “true-up” payment was the subject of the Donna Litigation that Donna sued Albert personally to pay for. Under the settlement, the “true-up” would instead be paid to Donna by Almod, not Albert, while Albert forfeited the right to claw back any funds Donna profited from her allegedly improper sale of inventory to Almod. Essentially, to find the “but-for” causation, plaintiff is inviting the court to review the settlement terms and speculate how the Donna Litigation would proceed and what other alternative settlement terms would be like if Albert had objected to the settlement agreement. Thus, the alleged causation and damages are too speculative to support the legal malpractice claim (Perkins v Norwick, 275 AD2d 48, 51-52 [1st Dept 1999] [finding that plaintiffs suggestion that he might have later renegotiated different terms but for defendant’s negligence is simply “gross speculation on future events”]).
Further, the damages which allegedly flowed from naming an unsatisfactory independent director, delay in the election of a CEO, and the loss of the CVC
acquisition caused by the delay and COVID· 19 pandemic are speculative as well,
and the causal relationship between those events and defendants’ negligence is even
more remote. When a plaintiffs claim “requires speculation about future events,” it
“does not sufficiently establish that defendants proximately caused him ascertainable damages” (Ferguson v Hauser, 156 AD3d 425, 425·426 [1st Dept 2017]; Sherwood Group v Dornbush, Mensch, Mandelstam & Silverman, 191 AD2d 292, 294 [1st Dept 1993] [hypothetical course of events on which any determination of damages would have to be based constitutes a chain of “gross speculations on future events”]).”