The opinion of the court was delivered by: PETER K. LEISURE
In this legal malpractice action, with jurisdiction asserted based on diversity of citizenship and the presence of a federal question, defendants, Colton, Hartnick, Yamin & Sheresky ("Colton Hartnick") and Newman, Tannenbaum, Helpern, Syracuse & Hirschtritt ("Newman Tannenbaum"), now move the Court, pursuant to Fed. R. Civ. P. 12(b)(6) and 12(c), to dismiss the claims against them raised by plaintiffs, Chrisal Investments Ltd. ("Chrisal") and Georg H.G. Heine (collectively "Heine"). For the following reasons, the motions are granted in part, denied in part.
For the purposes of this motion to dismiss, the factual allegations in the Complaint are assumed to be true. See Easton v. Sundram, 947 F.2d 1011, 1014-15 (2d Cir. 1991); Allen v. Westpoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir. 1991). However, the Court need not defer to legal conclusions asserted in the Complaint. See United States v. Bonanno Organized Crime Family, 879 F.2d 20, 27 (2d Cir. 1989) ("the district court was constrained to accept the complaint's allegations as true but only to the extent that they were factual"); McCoy v. Goldberg, 748 F. Supp. 146, 153 (S.D.N.Y. 1990) ("while the court [must] accept as true the allegations of the complaint . . . such deference must only be paid to factual allegations and not to legal conclusions") (citing O'Brien v. National Property Analysts Partners, 719 F. Supp. 222, 229 (S.D.N.Y. 1989) (Leisure, J.)).
This action has its roots in the activities of Alvin Ashley ("Ashley"), a former partner in the Colton Hartnick law firm. Between 1986 and 1990, Ashley allegedly induced Heine to make payments to him aggregating $ 2,322,309.20, purportedly for investments in real estate and fast food ventures. However, after Ashley was dismissed by Colton Hartnick in 1990, allegedly for engaging in "a large pattern of financial transactions appearing to be lacking in substance," Complaint P46, Heine came to believe that he had been the victim of a fraud. Accordingly, in April 1991, Heine commenced the instant litigation, seeking recovery for over $ 1.5 million in losses allegedly suffered through Ashley's fraudulent deals and through alleged improprieties in the purchase and sale of a condominium in the Cityspire Building, 150 West 56th Street, New York, New York ("Cityspire condominium").
Heine's Complaint alleges 18 causes of action against Ashley, Colton Hartnick and Newman Tannenbaum. Apparently as a result of these and similar activities, Ashley pleaded guilty to five counts of grand larceny in the Supreme Court of the State of New York, New York County, on September 24, 1991. In addition, Ashley confessed judgment of $ 1,539,345 in favor of Heine in the instant action on February 6, 1992. See Affidavit of Confession of Judgment, sworn to on February 6, 1992. Following the confession of judgment, five claims remain in the Complaint: two arising out of Colton Hartnick's alleged role in Ashley's purportedly fraudulent schemes, and three concerning Colton Hartnick's and Newman Tannenbaum's alleged roles in the Cityspire real estate transaction.
According to the Complaint, the relationship between Heine, Ashley and Colton Hartnick began in 1985, when Colton Hartnick represented George Bastis ("Bastis"), a friend of Ashley's, in matrimonial litigation. In connection with this litigation, Heine agreed to be deposed and provided Colton Hartnick with Chrisal documents that were relevant to the matrimonial proceeding. Colton Hartnick arranged for Heine to be represented by Morrison Cohen Singer & Weinstein ("Morrison Cohen") during the deposition. However, Heine alleges that, throughout these proceedings, he "looked upon Colton Hartnick as his actual counsel." Complaint P10.
Subsequently, under unspecified circumstances in January 1986, Ashley proposed a deal to Heine, in which Heine would pay money to Ashley personally, allegedly for use in "a profit making venture, such as real estate development and sales or fast-food operations." Complaint P11(a). In return, Heine would receive a series of post-dated checks written by Ashley personally and guaranteed by Ashley personally and "as a partner in Colton Hartnick." Complaint P11(d). The post-dated checks would be payable over two years, providing Heine with a return on his investment and the ultimate return of his principal. In response to this proposal, Heine alleges that he asked Ashley, in January 1986, whether the deal was lawful, and Ashley, as his attorney and as a partner in Colton Hartnick, responded that the deal met all legal requirements.
Accordingly, in February 1986, Heine provided Ashley with a check for $ 30,000, and received in return five checks written by Ashley personally, totaling $ 45,000: four checks for $ 3,750 each, dated at six month intervals from August 1986 to February 1988, and a final check for $ 30,000, dated February 1988. As calculated by Colton Hartnick, these checks provided Heine with a return of 25% interest annually. See Memorandum of Law of Defendant [Colton Hartnick] in Support of its Motion to Dismiss, Exh. A.
After Heine cashed the first $ 3,750 check in August 1986, Ashley proposed that Heine invest more of his own money and additional funds belonging to Chrisal, Heine's wholly owned corporation, in further deals. Heine agreed to continue participating, and wrote to Ashley a series of checks, totalling $ 620,000, from December 1986 to May 1987. In return, Heine received checks payable from June 1987 to May 1988, totaling $ 860,500, at annual rates of return ranging from 37.5% to 45%. Continuing from this time through and including September 1990, Heine continued to provide Ashley with current checks, receiving post-dated checks, with annual return rates ranging from 12% to 240%, in return. Also, beginning in June 1987, Heine began rolling funds back into these deals as checks became due. According to Heine, he ultimately provided Ashley with over $ 2 million, of which more than $ 1.5 million was never returned.
The first cause of action asserts that Colton Hartnick committed legal malpractice for failing to advise Heine that Ashley's deals did not meet the registration requirements of the federal securities laws. The second cause of action alleges that Colton Hartnick breached its duty of ordinary care by not supervising Ashley's activities and by not preventing him from using Colton Hartnick's facilities to conduct an unregistered securities business. Colton Hartnick has moved to dismiss both of these causes of action, claiming that it did not have an attorney-client relationship with Heine with respect to the deals, and that the deals were actually a series of usurious loans that were not within the scope of the federal securities laws.
B. The Cityspire Real Estate Transaction
The post-dated check schemes were not the only transactions in which Heine and Ashley were involved in the late 1980s. In December 1988, Heine engaged Colton Hartnick to represent him in the purchase of the Cityspire condominium. As part of this retainer agreement, Heine opened a customer's account at Colton Hartnick, and, in February 1989, Colton Hartnick represented Heine at the closing on the purchase of the condominium. In connection with the closing, Heine appointed Nancy Lang, Esq., an attorney at Colton Hartnick, as his attorney-in-fact, and funds from Heine's customer account were used to cover the expenses related to the closing.
After the closing, Heine and Ashley entered into a side agreement, which provided that Ashley would be the co-owner of the Cityspire condominium, despite documentation showing Heine to be the sole owner, that Ashley would pay maintenance fees and mortgage carrying charges and assessments relating to the condominium, that Ashley would furnish the apartment and recover the cost of the furnishings if the apartment were sold, and that Ashley would occupy the apartment.
There is no allegation that Colton Hartnick had any knowledge of this side agreement. See Complaint P29.
At the beginning of 1990, Heine decided to sell the Cityspire condominium, and turned to Ashley for assistance. On March 2, 1990, Ashley informed Heine that a purchaser had been located, and Heine subsequently executed a power of attorney, giving Ashley the power to take all steps necessary to execute the sale of the condominium. Pursuant to this power of attorney, Ashley retained Newman Tannenbaum to represent Heine and to handle the closing. However, despite his execution of a power of attorney, Heine has claimed that the retention of Newman Tannenbaum on his behalf was improper, because he never consented to the representation and never received communications from Newman Tannenbaum concerning the sale. In addition to being represented by Newman Tannenbaum, Heine also alleges that Ashley served as his attorney-in-fact during the closing. Moreover, Heine alleges that he continued to use Colton Hartnick as his attorneys during the sale, although he does not allege that he entered into a retainer agreement with Colton Hartnick to represent him with respect to the sale, as he did with respect to the purchase of the condominium.
Despite the confusion concerning who represented Heine during the sale of the condominium, the closing on the sale took place on July 12, 1990. The proceeds of the sale, after expenses, were $ 181,248.89. The funds were disbursed in five checks: one payable to Heine, for $ 9,702.62, and four, payable to Ashley, for the remainder of the proceeds. Heine did not receive a closing binder for the transaction until December 1990. Moreover, Ashley allegedly misappropriated the proceeds of the sale, including the check issued to Heine, invested the money in United States Treasury Bills, and has failed to turn over these funds to Heine.
The first two claims for relief arising out of the sale of the Cityspire condominium are contained in the third and fourth causes of action in the Complaint, and appear to the Court to be substantially identical. These two causes of action seek damages from Colton Hartnick for Ashley's failure to turn the proceeds of the sale over to Heine, and assert that Colton Hartnick failed to prevent Ashley from entering into the side agreement, which allegedly was void for lack of consideration; breached its contract to provide legal services for Heine with respect to the sale; and breached the fiduciary duty it assumed incident to the power of attorney that was granted to Ashley. Underlying these causes of action are Heine's claim that there was an attorney-client relationship between Heine and Colton Hartnick with respect to the sale of the condominium, and the puzzling assertion that "Ashley had actual and apparent authority to bind Colton Hartnick to the sale of the Cityspire condominium." Complaint P61.
The fifth cause of action stated in the Complaint is directed at Newman Tannenbaum. This claim for relief begins by alleging that Newman Tannenbaum was "Heine's designated attorney at the closing of Mr. Heine's sale of the Cityspire condominium." Complaint P69. The Complaint then asserts that Newman Tannenbaum engaged in malpractice and breached its duty of care towards Heine by permitting the checks from the sale of the condominium to be drawn to the order of Ashley rather than Heine, and by not assuring that Heine received the proceeds from the sale of the Cityspire condominium.
A. Standard Governing Dismissal under Rule 12(b)(6)
The Court now turns to consider the sufficiency of the Complaint under Fed. R. Civ. P. 12(b)(6). "The court's function on a Rule 12(b)(6) motion is not to weigh the evidence that might be presented at a trial but merely to determine whether the complaint itself is legally sufficient." Festa v. Local 3, Int'l Bhd. of Electrical Workers, 905 F.2d 35, 37 (2d Cir. 1990); see also Ryder Energy Distrib. Corp. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir. 1984) ("The function of a motion to dismiss 'is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof.'" (quoting Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980))).
A motion to dismiss must be denied "unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)); see also Oliver Schools, Inc. v. Foley, 930 F.2d 248, 252 (2d Cir. 1991). Although the Court must limit its analysis to the four corners of the Complaint, it also can consider documents incorporated into the Complaint by reference and information that can be judicially noticed. Allen, supra, 945 F.2d at 44. In addition, the Court must draw all reasonable inferences in plaintiff's favor. Papasan v. Allain, 478 U.S. 265, 283, 92 L. Ed. 2d 209, 106 S. Ct. 2932 (1986); Allen, supra, 945 F.2d at 44; Murray v. Milford, 380 F.2d 468, 470 (2d Cir. 1967); Hill v. Sullivan, 125 F.R.D. 86, 90 (S.D.N.Y. 1989) ("All allegations in plaintiffs' amended complaint must be accepted as true and liberally construed.").
B. Claims Arising from Ashley's Deals
1. Existence of Attorney-Client Relationship
The court first turns to consider whether there was an attorney-client relationship between Heine and Colton Hartnick. Under New York law, "the relationship of an attorney and client is contractual, and the rules governing contract formation determine whether such a relationship has been created." Hashemi v. Shack, 609 F. Supp. 391, 393 (S.D.N.Y. 1984); accord Jordan v. Lipsig, Sullivan, Mollen & Liapakis, P.C, 689 F. Supp. 192, 195 (S.D.N.Y. 1988); see also Bingham v. Zolt, 683 F. Supp. 965, 976 (S.D.N.Y. 1988) ("For an attorney to act as a legal representative, a contract of employment, either express or implied, must exist between the attorney and the party for whom he purports to act."); Brenner v. Miller, 121 Misc.2d 1, 467 N.Y.S.2d 123, 124 (Sup. Ct. ...