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ESTATE OF RE v. KORNSTEIN VEISZ & WEXLER

March 31, 1997

ESTATE OF JOSEPH RE (by Vivian R. Re and Patricia Re Coarsely, the personal representatives of the Estate of Joseph Re), -- and -- VIVIAN R. RE, JOHN M. RE and JOSEPH O. RE, Plaintiffs, against KORNSTEIN VEISZ & WEXLER, DANIEL J. KORNSTEIN, HOWARD S. VEISZ and MARVIN WEXLER, Defendants.


The opinion of the court was delivered by: SOTOMAYOR

 Plaintiffs bring this action, advancing four claims arising out of defendants' allegedly inadequate representation of Joseph Re during arbitration proceedings held in connection with Mr. Re's removal from his position as a partner with Bear Stearns & Co. ("Bear Stearns"). Specifically, plaintiffs seek damages flowing from defendants' alleged breach of contract, breach of fiduciary duty, legal malpractice, and unjust enrichment. In an initial round of briefing, defendants moved for summary judgment as to the alleged breach of fiduciary duty and unjust enrichment claims, arguing that these claims are barred under an applicable three year limitations period. Though conceding that Mr. Re did not bring suit until four years after his claims accrued, plaintiffs responded that the applicable limitations period for a claimed breach of fiduciary duty, to the extent that it involves a relationship formed pursuant to a contract, is six years. Before the Court had an opportunity to resolve this issue, defendants submitted an omnibus motion for summary judgment, interposing numerous additional grounds for the dismissal of all four claims. Following the Court's receipt of voluminous materials submitted by the parties in connection with this new motion, New York's legislature amended the statute of limitations applicable in malpractice actions to three years, "regardless of whether the underlying theory is based in contract or in tort." See C.P.L.R. 214[6] as amended by chapter 623 of the Laws of 1996.

 For the reasons that follow, the Court finds that plaintiffs' claims were timely when filed, and that it would offend notions of due process under New York law to dismiss those claims by the retroactive application of the amended limitations period. With respect to the merits of plaintiffs' claims, there is insufficient evidence either of negligence or of causation to support plaintiffs' theories of malpractice and breach of contract. There are sufficient factual questions, however, to preclude summary judgment as to the alleged breach of fiduciary duty. *fn1"

 BACKGROUND

 In February 1985, Mr. Re was asked to resign from his position as a general partner with Bear Stearns. He was told, in essence, that he was no longer making any contribution to the partnership. Given no real choice in the matter, Mr. Re did not resist the formal termination of his partnership interest on April 30, 1985. Several months later, in October 1985, Bear Stearns "went public." Mr. Re concluded that the partnership's earlier decision to remove him from their ranks had been motivated by their desire to deprive him of the financial benefits of participating in Bear Stearns' public offering.

 In the Fall of 1987, Mr. Re contacted the law firm of Kornstein, Veisz & Wexler ("Kornstein Veisz"), to represent him in an action against Bear Stearns. Though advising Mr. Re that he was unlikely to succeed in any action against his former colleagues, defendant Wexler accepted Mr. Re's ultimate decision to proceed with a lawsuit. (Wexler 4/18/96 Aff. Ex. 6, Ltr. from Wexler to Re of 6/1/88.) Hoping to avoid a binding arbitration provision in the Bear Stearns partnership agreement, defendants filed a state court action on Mr. Re's behalf, in August of 1988, alleging breach of fiduciary duty against the individual members of the Bear Stearns Executive Committee. Under Mr. Wexler's theory of the case, defendants had breached their fiduciary duties by concealing from Mr. Re, as of the time they forced his resignation, their then existing intention to take Bear Stearns public.

 After considerable discovery, including depositions by defendant Wexler of the Bear Stearns defendants, the arbitration took place in December 1989. The proceedings lasted for three days, with defendant Wexler calling two witnesses on Mr. Re's behalf: Mr. Re as well as one of his former partners with Bear Stearns, Nicholas Purpura. Stroock called three witnesses for Bear Stearns, including two of the individual defendants, and Ernest Rubenstein, a partner with the law firm of Paul, Weiss, Rifkind, Wharton & Garrison ("Paul Weiss"). Paul Weiss had long been Bear Stearns' corporate counsel, and Mr. Rubenstein had advised Bear Stearns on the possibility of going public. Following the presentation of witnesses and evidence before Mr. Finley, defendant Wexler submitted a 93 page post-hearing brief, which prompted an opposition by Stroock, a reply by defendants, and a surreply by Stroock. (Wexler 4/18/96 Aff. Ex.'s 21, 22, 23, 24.)

 At the conclusion of the arbitration proceedings, Mr. Finley complemented counsel for both sides on the "thoroughly professional" manner in which they conducted themselves. (Arbitration Hearing Tr. at 421.) Shortly thereafter, in February 1990, Mr. Finley ruled against Mr. Re. (Wexler 4/18/96 Aff. Ex. 26.) The ruling was issued without any written opinion. More than four years later, in April 1994, Mr. Re commenced this action, alleging that defendants failed to alert Mr. Re to a conflict of interest bearing upon their ability to provide him adequate representation, and that they made numerous tactical errors in connection with the arbitration. Mr. Re died during these proceedings, and his estate has been substituted as plaintiffs.

 I. Defendants' Representation Of Plaintiffs During Arbitration

 A. Alleged Conflict Of Interest

 The alleged conflict of interest involves defendants' professional relationship with Bear Stearns' corporate counsel, Paul Weiss. Defendant Wexler, like the other individual defendants (all partners with Kornstein Veisz), had worked as associates at Paul Weiss at various times between 1973 and 1981. (Wexler 4/18/96 Aff. P 36; Pl.'s 3(g) stmt. P 11.) After leaving Paul Weiss, defendants continued work on approximately five matters in which they were involved while associates, and have since had approximately a dozen cases referred to them from their former firm. (Wexler 4/18/96 Aff. Ex. 31.) In at least one instance, during the same period that they represented Mr. Re, defendants served as co-counsel with Paul Weiss. (Detiere 5/16/96 Aff. Ex. 31.) None of these cases are alleged to have involved matters at issue in Mr. Re's dispute with his former partnership. These cases amounted to approximately $ 500,000 of business for defendants, with under $ 200,000 of this coming after 1986. (Wexler 4/18/96 Aff. Ex. 31.) Paul Weiss referrals thus accounted for approximately 2%-3% of defendants' business during the mid to late 1980's, the period during which Kornstein Veisz represented Mr. Re.

 In their capacity as Bear Stearns' corporate counsel, Paul Weiss was consulted by the partnership during the time that it was contemplating going public, or otherwise reorganizing. (Wexler 4/18/96 Aff. Ex. 32.) Prior to the arbitration, in an effort at "informal discovery" into the specifics of this consultation, Mr. Wexler visited with Mr. Rubenstein. (Wexler 4/18/96 Aff. P 36.) In a letter to Mr. Re, Mr. Wexler reported that Mr. Rubenstein "had tried to persuade" Mr. Wexler that there was "no merit" to Mr. Re's claim. (Wexler 4/18/96 Aff. Ex. 30.) Mr. Wexler characterized the specific information provided by Mr. Rubenstein as "not favorable" to Mr. Re, and reiterated his earlier concern that Mr. Re's claim was "highly problematic." (Id.)

 Though Bear Stearns was not represented by Paul Weiss during the arbitration against Mr. Re, Mr. Rubenstein was one of only three witnesses called to testify on Bear Stearns' behalf. Mr. Rubenstein's testimony centered upon the timing and nature of Paul Weiss's involvement in Bear Stearns' decision to go public. (Arbitration Hearing Tr. 402-418.) Mr. Rubenstein further testified that he had recounted these same matters in a meeting with Mr. Re, which Mr. Re attended with an attorney (not one of the defendants), several months after Bear Stearns' public offering. Mr. Wexler did not cross examine Mr. Rubenstein. Plaintiffs contend that Wexler "may (or should)" have questioned Mr. Rubenstein, and that his failure to do so reflects defendants' friendly relationship with Paul Weiss. (Opposition and Cross Motion at 13.) Defendants insist that they had the greatest chance of neutralizing Mr. Rubenstein's testimony, not by refuting it, but by persuading the arbitrator that it was, as a matter of law, irrelevant. (Wexler 4/18/96 Aff. P 35(c).)

 B. Alleged Malpractice

 In their amended complaint, plaintiffs point to numerous other examples of defendants' alleged "diminished rigor" in representing Mr. Re. The two most egregious errors, according to plaintiffs, concern defendants' failure to present the arbitrator with sufficient evidence as to Mr. Re's damages, and defendants' failure sufficiently to emphasize a particular legal argument during the arbitration proceedings.

 Though he briefly consulted Mr. Re's accountant, Ms. Halpern, concerning the extent of Mr. Re's losses in connection with Bear Stearns' public offering, Wexler had no expert or other witness testify on the issue of damages during the arbitration hearing. (Halpern 4/26/96 Aff. P 3.) According to plaintiffs, Wexler disregarded Mr. Finley's clear and repeated requests for evidence on the damages question. Mr. Wexler explains that he sought to avoid the risk that a damages witness would be subject to unfavorable cross-examination. (Wexler 4/18/96 Aff. P 35(d).) Therefore, Wexler decided to rely upon documentary evidence introduced during the proceedings and to submit a full evaluation of damages in his post-hearing brief. In the post-hearing brief, there is a discussion of damages, referencing assorted documentary evidence from the proceedings, and requesting approximately $ 4 million in relief. (Wexler Aff. Ex. 21 at 76-91.) Plaintiffs criticize the discussion as both substantively flawed and procedurally too late.

 Plaintiffs' other major complaint concerns defendants' failure, during the arbitration, to emphasize a supposedly "compelling" breach of contract theory. (Detiere 5/16/96 Aff. P 58.) Plaintiffs rely upon Section 10.16 of Mr. Re's partnership agreement with Bear Stearns, which provides:

 
If, after the final payment of his Capital is made to a Withdrawing Partner ... an asset of the Partnership ... shall become known and liquidated, the Withdrawing Partner shall receive that share of such asset to which he was entitled (directly or indirectly) during the period or periods to which the asset is attributable.

 (Letter from Detiere to the Court of 11/26/96.) According to plaintiffs, "since the, conversion of the partnership into a public corporation ... would have arguably been an asset discovered very shortly 'after the final payment of his Capital,' Re was presumably entitled to 'receive that share of such asset' under ┬ž 10.16 of the partnership agreement." (Detiere 5/16/96 Aff. Ex. P, at 82.) Defendants depict this argument as having little or no merit: its success depending upon a favorable reading of the term "asset," and the phrase "after the final payment." (Letter from Wexler to the Court of 12/20/96.) Defendants also point out that, in any event, they made the argument in their post-hearing brief. Plaintiffs note, however, that defendant Wexler gave the issue only cursory attention, relegating it to the tail end of his 93 page submission, and setting out the argument in little more than a page.

 A number of plaintiffs' other allegations concern Mr. Finley's suitability to preside over the dispute between Mr. Re and Bear Stearns. Plaintiffs also question defendants' decision to proceed before a single arbitrator instead of before a panel of three. (Am. Comp. P 46.) As for the particular selection of Mr. Finley, plaintiffs complain that Mr. Finley was of counsel at a law firm that had been retained to advise Bear Stearns on issues unrelated to Mr. Re's case, and that defendants never alerted Mr. Re to this potential conflict. (Id. P 49.) Defendant Wexler responds that he viewed Mr. Re's case to be weak, and that he therefore thought it unlikely that two out of three arbitrators could be persuaded to rule in his client's favor. Moreover, Mr. Finley disclosed any potential conflict to the attorneys in Mr. Re's case, and assured both sides that his judgment would in no way be compromised. (Wexler 4/18/96 Aff. Ex. 16.) Defendants explain that they decided to remain with Mr. Finley because he was an experienced and well-regarded attorney who had himself been involved in a conflict with his former partners.

 II. The Motions For Summary Judgment

 Defendants initially moved for summary judgment solely as to the alleged breach of fiduciary duty and unjust enrichment, and argued that those claims were untimely filed under an applicable three year statute of limitations. Conceding that they did not commence this action until four years after Mr. Re's claims accrued, plaintiffs responded that New York's six year statute of limitations, applicable to contract actions, governs the present dispute.

 In an "omnibus" motion for summary judgment, filed before briefing concluded on the limitations question, defendants asserted numerous substantive grounds for the dismissal of all four of plaintiffs' claims. They argued that the alleged mistakes in representation were actually reasonable strategic decisions, and that defendants' relationship with Paul Weiss did not create any conflict of interest and did not give rise to any breach of fiduciary duty. Moreover, defendants argued that any negligence by counsel was not the "but for" cause of plaintiffs' defeat at arbitration. In response, plaintiffs made a cross motion for summary judgment as to two sets of their allegations: i) the alleged malpractice arising out of defendants' failure to provide the arbitrator with evidence on the question of damages, and ii) the alleged breach of fiduciary duty involving defendants' relationship with Paul Weiss. As to their remaining claims and allegations, plaintiffs argued that there were facts in dispute requiring a trial.

 Following this second round of briefing, New York's legislature amended C.P.L.R. 214[6], essentially for the purpose of overruling the very line of authority upon which plaintiffs had relied to defend their action as timely. Under the amended provision, a claim for legal malpractice must be brought within three years of accrual, whether that claim is framed in contract or in tort. The passage of this provision precipitated another round of letter briefing in which the parties argued as to whether the recent amendment to C.P.L.R. 214[6] can apply retroactively to bar plaintiffs' claims, even to the extent that those claims were timely when filed.

 In short, there are numerous issues which have been raised by the parties, and the Court has had the opportunity to review a voluminous record in assessing the arguments which have been made. For the reasons which follow, defendants' motion for summary judgment is granted in part, and denied in part. Plaintiffs' motion for summary judgment is denied.

 DISCUSSION

 Summary judgment is required when "there is no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). "The moving party has the initial burden of 'informing the district court of the basis for its motion' and identifying the matter 'it believes demonstrate[s] the absence of a genuine issue of material fact.'" Leibovitz v. Paramount Pictures Corp., 948 F. Supp. 1214, 1996 WL 733015, *3 (S.D.N.Y. 1996) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 323, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986)). Once the movant satisfies its initial burden, the nonmoving party must identify "specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e). In assessing the parties' competing claims, the Court must resolve any factual ambiguities in favor of the nonmovant. See McNeil v. Aguilos, 831 F. Supp. 1079, 1082 (S.D.N.Y. 1993). It is within this framework that the Court must finally determine "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." *fn2" Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986).

 The Court will begin its analysis by considering the question initially briefed by the parties -- i.e., whether plaintiffs' action was timely when filed. See Section IA, infra. Because plaintiffs' claims were timely when filed, the Court will proceed to consider whether C.P.L.R. 214[6], as amended, applies retroactively to require the dismissal of plaintiffs' Complaint. See Section IB, infra. Though it appears likely that New York's legislature intended for the amended C.P.L.R. 214[6] to apply retroactively, the Court finds that such an application would offend basic notions of due process under New York law. Because plaintiffs' claims cannot be barred by the revised limitations period, the Court must consider the sufficiency of the evidence in support of those claims. See Section II, infra. As the Court ultimately concludes, plaintiffs' malpractice and contract claims cannot survive defendants' motion for summary judgment, but plaintiffs have raised a sufficient factual dispute to proceed with the claimed breach of fiduciary duty.

 I. Statute of Limitations

 A. Pre-Amendment SOL

 For reasons set forth by New York's Court of Appeals in Santulli v. Englert, Reilly & McHugh, 78 N.Y.2d 700, 579 N.Y.S.2d 324, 586 N.E.2d 1014 (1992), plaintiffs' action was timely when filed. Like the plaintiffs here, the plaintiff in Santulli waited until four years after his claims accrued before filing an action alleging attorney malpractice. Defendants moved to dismiss the complaint against them relying upon C.P.L.R. 214[6], which announces a three year limitations period applicable to malpractice actions. Acknowledging that their holding might effectively "nullify" this provision, the Court in Santulli rejected defendants' position, and permitted plaintiffs to proceed with their claims pursuant to the six year limitations period applicable in contract actions. Santulli, 78 N.Y.2d at 709.

 As was the case in Santulli, plaintiffs in this action have framed a variety of different claims around defendants' alleged failure to perform adequately as plaintiffs' legal counsel. Under the reasoning of Santulli, the limitations period applicable to these claims must accordingly be a function of the remedy plaintiffs seek, and not the theories they advance. Santulli, 78 N.Y.2d at 707; see also Matter of Paver & Wildfoerster (Catholic High School Assn.), 38 N.Y.2d 669, 672, 382 N.Y.S.2d 22, 23, 345 N.E.2d 565 (1976) ("the general principle [is] that time limitations depend upon, and are confined to, the form of the remedy."). In this regard, all of plaintiffs' claims against defendants arise out of a relationship formed between the parties pursuant to a retainer agreement (i.e. a contract), and plaintiffs are seeking to recover pecuniary losses they ascribe to defendants' misconduct. Under the logic of the Santulli line of authority, then, however plaintiffs' claims are characterized -- as breach of fiduciary duty, malpractice, or breach of contract -- plaintiffs filed their complaint within the six year limitations period then applicable.

 Defendants resist this conclusion, at least as to the alleged breach of fiduciary duty, by relying upon the Court of Appeals decision in Loengard v. Santa Fe Industries, Inc., 70 N.Y.2d 262, 519 N.Y.S.2d 801, 514 N.E.2d 113 (1987). In Loengard, the minority shareholders of Kirby Lumber Corp. ("Kirby"), alleging breach of fiduciary duty, sought to be restored to their status as full stockholders following a freeze out merger between Kirby and the defendant corporation. Reasoning that "legal remedies would not be adequate," the Court characterized plaintiffs' desired relief as "equitable ...


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