The opinion of the court was delivered by: Spatt, District Judge.
MEMORANDUM OF DECISION AND ORDER
In this case, the Plaintiff, New York Islanders Hockey Club, L.P.
("Islanders") has brought this action against the Defendant, Comerica
Bank-Texas ("Comerica"), and one of its executives, Joseph D. Lynch,
alleging that Comerica and Lynch assisted one John Spano in a fraudulent
attempt to purchase the team. Comerica filed a third-party complaint for
contribution against the Islanders' law firm, Richards & O'Neil, LLP
("R&O") pursuant to N.Y. Gen. Obl. L. § 15-108, alleging that legal
malpractice by R&O in failing to diligently investigate Spano's ability
to make the purchase is partially or wholly responsible for the
Islanders' loss. Presently before the Court is R&O's motion to dismiss
the third-party complaint for failure to state a claim under Fed. R.
Civ. P. 12(b)(6).
The Court's recitation of the facts is set forth in its prior opinion,
New York Islanders Hockey Club v. Comerica BankTexas, 71 F. Supp.2d 108
(E.D.N.Y. 1999), and is incorporated by reference. In short, in 1996,
Islanders was contacted by Spano, who expressed interest in purchasing
the team. When Islanders inquired about Spano's financial means to pay a
nearly $100 million asking price, Spano contacted Comerica, who sent
Islanders a letter stating that "Mr. Spano maintains a net worth in
excess of more than $100,000,000.00. We consider Mr. Spano to be a valued
customer of our Bank, and he conducts his business in a satisfactory
manner." In actuality, Spano had no significant assets. Taken in by this
and other alleged deceptive acts by Spano and Comerica, Islanders
proceeded to negotiate a sale and held a closing in April 1997. At that
time, Islanders owner John O. Pickett turned over control of the team to
Spano, even though Spano failed to produce the $16.8 million cash payment
called for as part of the closing. In the weeks ahead, Spano continued
stall, offering excuses for his failure to make the payment and promising
that a check was forthcoming. Eventually, however, the scheme unraveled,
and Pickett took back control of the team in 1997.
Alleging that Spano caused $10 million in damages to the club during
his brief tenure as "owner," Islanders commenced this lawsuit against
Comerica and its Senior Vice President Lynch on September 15, 1998. The
complaint alleged, among other things, fraud and negligent
misrepresentation, in that Comerica aided Spano in concealing his lack of
resources to purchase the team. On October 9, 1999, this Court denied the
Defendants' motion to dismiss the case. Islanders, 71 F. Supp.2d 108. On
November 8, 1999, Comerica filed a third-party complaint for contribution
against R&O, alleging that the law firm negligently failed to act with
due diligence in regard to Spano's finances prior to the sale, and
negligently failed to take action even though suspicious evidence
revealing Spano's fraud began emerging after the closing. The third-party
complaint contends that R&O's legal malpractice contributed to Islanders'
damages, and thus, R&O may be partially or wholly liable for any judgment
obtained by Islanders against Comerica.
R&O now moves to dismiss the third-party complaint, arguing that it has
secured a release from Islanders, and thus, is immune to contribution
suits under the provisions of New York General Obligations Law §
15-108(b). In addition, R&O contends that the third-party complaint
fails to state a claim for legal malpractice because: it had no duty to
conduct the due diligence suggested by Comerica; Comerica cannot allege
that R&O's negligence, if any, was the proximate cause of Islanders'
loss; any damages caused by R&O's negligent acts will be chargeable to
its principal, Islanders, and thus, offset any claim for contribution,
rendering the third-party complaint unnecessary; and permitting R&O to be
sued as Third-Party Defendants would subvert public policy, depriving
Islanders of their chosen counsel.
In opposition, Comerica argues that the release obtained from Islanders
was not given in good faith, and is thus outside of the provisions of
Gen. Obl. L. § 15-108(b); that the third-party complaint adequately
states a claim for legal malpractice; and that the contribution claim is
necessary to protect Comerica's rights and does not offend public
policies. Without obtaining leave of the Court, Comerica also filed a
sur-reply brief, purporting to address issues raised by R&O for the first
time in its reply brief. The Court has examined the sur-reply and finds
that it raises no arguments that could not have been address by Comerica
in its initial opposition brief. Therefore, the Court has not considered
any of the arguments in Comerica's surreply. Bonnie & Co. Fashions Inc.
v. Bankers Trust Co., 945 F. Supp. 693, 707 (S.D.N.Y. 1996).
The court may not dismiss a third-party complaint under Fed.R.Civ.P. 12
(b)(6) unless it appears beyond doubt that the defendant can prove no set
of facts in support of its claim which would entitle it to relief. King
v. Simpson, 189 F.3d 284, 286 (2d Cir. 1999); Beruheim v. Litt,
79 F.3d 318, 321 (2d Cir. 1996). The court must accept as true all
factual allegations in the third-party complaint as true and draw all
reasonable inferences in favor of defendant. Id.; Jaghory v. New York
State Dep't of Educ., 131 F.3d 326, 329 (2d Cir. 1997). The issue to
consider is not whether the defendant will ultimately prevail on the
third-party complaint, but whether the claimant is entitled to offer
evidence to support the claims. Villager Pond, Inc. v. Town of Darien,
56 F.3d 375, 378 (2d Cir. 1995). The court must confine its consideration
"to facts stated on the face of the third-party complaint, in documents
appended to the complaint or incorporated in the complaint by reference,
and to matters of which judicial notice may be taken." Tarshis v. Riese
Organization, 211 F.3d 30, 39 (2d Cir. 2000); Leonard F. v. Israel
Discount Bank of N.Y., 199 F.3d 99, 107
(2d Cir. 1999); Hayden v. County of Nassau, 180 F.3d 42, 54 (2d Cir.
R&O's first argument is that it has been granted a release by Islanders
and is thus immune from contribution claims under Gen Obl. L. §
15-108(b). This theory relies on a document- the release itself —
that is neither appended to nor incorporated by reference in the
third-party complaint, nor any of the other pleadings filed to date.
Because Comerica contests the validity of the release, given the
less-than-arm's-length relationship between Islanders and R&O and the
nominal consideration of $10 paid by R&O for the release when Islanders
are claiming damages of $10 million against Comerica, the Court cannot
rule on the issue without converting the instant motion to a motion for
summary judgment under Rule 56. Leonard F., 199 F.3d at 107, citing Rule
12(b) ("[if] matters outside the pleading are presented to and not
excluded by the court, the motion shall be treated as one for summary
judgment and all parties shall be given reasonable opportunity to present
all material made pertinent to such a motion by Rule 56"). Because
converting the instant motion to a summary judgment motion under Rule 56
would necessarily entail adjourning the matter to permit Comerica to
conduct discovery on the issues regarding the release, the Court finds
that the more appropriate course of action is to exclude the release
defense and deny R&O's motion without prejudice on this ground.
However, the Court finds that the third-party complaint should be
dismissed on another ground. As Comerica alleges, R&O served as counsel
to Islanders throughout the transaction in question. As such, Islanders
is bound by the acts and omissions of R&O, and suffers the consequences
of any missteps made by R&O in the course of its authorization. Link v.
Wabash RR Co., 370 U.S. 626, 633-34, 82 S.Ct. 1386, 8 L.Ed.2d 734
(1962); S.E.C. v. McNulty, 137 F.3d 732, 739 (2d Cir. 1998); Prate v.
Freedman, 583 F.2d 42, 48 (2d Cir. 1978). Consequently, any culpable
conduct by R&O, such as a negligent failure to properly investigate
Spano's financial means, would be attributable to Islanders through agency
principles. Connell v. Weiss, 1985 WL 428 (S.D.N.Y. 1985) ("any recovery
by the Connells against Weiss would be subject to an appropriate
reduction for their agent's negligence" alleged in the third-party
Comerica cites Schauer v. Joyce, 54 N.Y.2d 1, 444 N.Y.S.2d 564,
429 N.E.2d 83 (1981), for the proposition that the New York law permits
just such an action. In Schauer, the plaintiff retained Joyce as her
attorney in a divorce action, and secured a divorce judgment including
alimony. However, because of Joyce's negligence in filing a false
affidavit, the plaintiff's ex-husband was able to have the alimony order
dismissed. 54 N.Y.2d at 4, 444 N YS.2d at 564, 429 N.E.2d 83. The
plaintiff terminated Joyce and retained a second attorney, Gent, who was
eventually able to partially restore the order. The plaintiff then sued
Joyce for malpractice, and Joyce commenced a contribution action against
Gent, alleging that Gent negligently failed to seek reinstatement of the
order earlier. 54 N.Y.2d at 4-5, 444 N YS.2d at 565, 429 N.E.2d 83.
Reversing the dismissal of Joyce's claim against Gent, the Court of
Appeals observed that both attorneys were potentially liable for the same
harm-namely, the plaintiff's loss of alimony following Gent's retention
— and that Joyce thus had a viable claim for contribution under
CPLR § 1401. 54 N.Y.2d at 6, 444 N.Y.S.2d at 565-66, 429 N.E.2d 83.
However, in doing so, the Court of Appeals observed that this cause of
action for contribution existed even though Joyce could assert the
plaintiff's failure to mitigate damages as a defense to the main action.
54 N.Y.2d at 6-7, 444 N.Y.S.2d at 566, 429 N.E.2d 83.
While Schauer superficially appears to authorize Comerica's third-party
complaint, a closer reading reveals it to be distinguishable on several
bases. First, in Schauer, the Court of Appeals stated that
a party may assert an affirmative defense of failure to mitigate and a
third-party action for contribution against the main plaintiff's attorney
simultaneously. However, in this case, Comerica's allegations that R&O
was negligent are not in the nature of an affirmative defense of failure
to mitigate, but rather, are an element of Islanders' claims for fraud
and misrepresentation on which Islanders, not Comerica, will bear the
burden of proving that R&O was not negligent. An essential element of a
claim for fraud or negligent misrepresentation is that the plaintiff
justifiably relied on the misleading statements. Cofacredit, S.A. v.
Windsor Plumbing Supply, 187 F.3d 229, 239 (2d Cir. 1999). In other
words, to prove its case, Islanders must demonstrate that it was
justified in continuing to rely on Comerica's representations of Spano's
wealth, even as the evidence that no such wealth existed slowly
accumulated. Id. at 241 ("[w]here sophisticated businessmen engaged in
major transactions enjoy access to critical information but fail to take
advantage of that access, [courts] are disinclined to entertain claims of
justifiable reliance"), quoting Grumman Allied Indus. v. Rohr Indus.,
Inc., 748 F.2d 729, 737 (2d Cir. 1984). The Court of Appeals' decision in
Schauer does not necessarily compel the conclusion that a defendant can
maintain a third-party action for contribution where the claim
essentially duplicates an element of the plaintiff's own cause of
Finally, R&O cites several cases in which courts have dismissed
third-party actions for contribution where the third-party plaintiff's
interests were adequately protected by application of the doctrine of
comparative fault in the main action. See Eurocom, S.A. v. Mahoney, Cohen
& Co., 522 F. Supp. 1179 (S.D.N.Y. 1981); Hercules Chemical Co. v. North
Star Reinsurance Corp., 72 A.D.2d 538, 421 N.Y.S.2d 67 (1st Dept. 1979).
At least one of these cases, Connell v. Weiss, supra., was decided after
the Court of Appeals' decision in Schauer. In Connell, the seller in a
failed real estate transaction brought an action for tortious
interference with contract against the buyer's attorney, alleging that
the attorney misrepresented to his client that the sellers had canceled a
scheduled closing. Id. The buyer's attorney then commenced a third-party
action for contribution against the seller's attorneys, claiming that
their own negligence or misrepresentations caused the cancellation of the
closing. The court dismissed the third-party action, finding that any
acts by the sellers' attorney would be imputed to the seller for purposes
of the main action against the buyer's attorney, ...