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September 16, 2005.

SCOTT BALBER, Esq., KELLY & BALBER, LLP, THE KELLY GROUP P.C., (Successor-in-interest to Kelly & Balber, P.C.) and JOHN Q. KELLY, Defendants.

The opinion of the court was delivered by: CHARLES HAIGHT, District Judge


Plaintiffs Craig R. Nazzaro and Richard Doran filed a complaint in the Supreme Court of the State of New York, New York County against defendants Scott Balber, Kelly & Balber, LLP, The Kelly Group P.C. (successor-in-interest to Kelly & Balber, P.C.), and John Q. Kelly (collectively "the Balber attorneys"), alleging various claims for legal malpractice. Defendants filed a notice of removal to this Court. Plaintiffs timely moved to remand the case to state court. In a prior opinion reported at 2005 WL 1251785 (S.D.N.Y. May 25, 2005), familiarity with which is assumed, I denied plaintiffs' motion to remand. Defendants now move pursuant to Rule 12(b)(6), Fed.R.Civ.P., to dismiss the complaint for failure to state a claim upon which relief can be granted.


  Defendants in this action were formerly plaintiffs' counsel in an action in this Court captioned Augienello v. Coast-to-Coast Fin. Corp., No. 01 Civ. 11608 (S.D.N.Y.). Opinions I"), aff'd, 64 F.App'x 820 (2d Cir. May 9, 2003) ("Augienello II"). Plaintiffs in this action were also plaintiffs, again represented by defendants as their counsel, in a second action commenced in this Court, Augienello v. Federal Deposit Ins. Corp., No. 02 Civ. 4317, which was related to 01 Civ. 11608. Opinions in that action are reported at 310 F.Supp.2d 582 (S.D.N.Y. March 25, 2004) ("Augienello III") and 2004 WL 965918 (S.D.N.Y. May 5, 2004) ("Augienello IV"). Familiarity with all these opinions is assumed. However, in order to place plaintiffs' claims that defendants committed legal malpractice in the underlying actions in context, it is necessary to describe those actions in detail. The descriptions which follow are based primarily on the cited opinions.

  A.S.D.N.Y. No. 01 Civ. 11608

  Plaintiffs in this initial action, which included the plaintiffs in the present malpractice action, were former employees of a non-party, Superior Bank FSB ("Superior"). Superior was subject to regulation by the Federal Deposit Insurance Corporation ("FDIC"). On July 27, 2001, Superior was closed by the federal Office of Thrift Supervision ("OTS"). The FDIC was then appointed receiver of Superior.

  On July 1, 1997, the plaintiffs in 01 Civ. 11608 had entered into written employment agreements with Superior. Certain Superior employees, including the present plaintiff Nazzaro, also received riders to their employment agreements. The agreements provided for the payment of salary, incentive compensation monies, deferred compensation monies, and continued compensation payments for stated periods of time in the event of an involuntary termination of the plaintiffs' employment. The riders provided for the payment of additional deferred monies. The plaintiffs began to receive deferred compensation payments on July 31, 2000, prior to OTC's closing of Superior and the appointment of FDIC as receiver on July 27, 2001. While plaintiffs received additional payments of deferred monies after July 27, 2001, those payments ultimately ceased. Plaintiffs commenced their action in 01 Civ. 11608 on December 20, 2001. The case was assigned to District Judge Sweet.

  Plaintiffs' complaint named one corporate defendant, six named individual defendants, and 100 "John Doe" defendants. Superior was not named as a defendant. The corporate defendant was Coast-to-Coast Financial Corp. ("CCFC"), which plaintiffs alleged formed an Employee Retirement Income Security Act ("ERISA") plan to provide retirement income to employees of Superior. The six identified individual defendants were named Dworman, Pritzker, Stephenson, Kurs, Sexton, and Halleran. It is apparent that there was a close intercorporate relationship between CCFC and Superior. That relationship is evidenced by plaintiffs' employment agreements with Superior, in which involuntary termination of employment was defined to include a "change of control event" that "results in the reduction of the aggregate ownership interests of the then-existing CCFC investors in Superior to less than 50%." Augienello I, 2002 WL 1822926, at *1. In addition, the six named individual defendants included individuals who were officers of both CCFC and non-party Superior Holdings, Inc. ("SHI"), a subsidiary of CCFC, or were members of the boards of directors of both CCFC and Superior, or were officers of both CCFC and SHI.

  Plaintiffs' complaint, drafted by the Balber attorneys, stated three claims for relief. First, plaintiffs claimed the defendants were beneficiaries of Superior's ERISA plan and that the defendants breached their fiduciary duties to plaintiffs under that plan. Second, the complaint alleged that CCFC, Dworman and Pritzker breached the employment contract that plaintiffs had entered into with Superior. Third, plaintiffs claimed that CCFC, Dworman, and Pritzker were unjustly enriched by taking money from the ERISA plan and by unjustly using the plaintiffs' labor.

  The defendants moved to dismiss the complaint pursuant to Rules 12(b)(2) and 12(b)(6). Judge Sweet granted the motion in Augienello I. His opinion posed the governing issue as follows:
The parties agree that a central question underlying the instant motion is whether the plaintiffs had rights to continued deferred compensation or severance pay that had already "vested" prior to the appointment of the FDIC as receiver for Superior. Defendants contend that the plaintiffs' contractual rights to future deferred compensation and severance payment had not vested prior to the institution of the receivership, thereby precluding recovery. Plaintiffs, by contrast, argue that the rights vested on the date that the Employment Agreements and the accompanying riders were executed.
2002 WL 1822926, at *2.

  Judge Sweet dismissed plaintiffs' complaint, holding that "the provisions of [12 C.F.R.] Section 563.39, as incorporated in plaintiffs' Employment Agreements, [were] sufficient for purposes of [Fed.R.Civ.P.] Rule 12(b)(6) to dismiss plaintiffs' claims." Augienello I, 2002 WL 1822926, at *5. 12 C.F.R. § 563.39 is one of a number of federal regulations governing employment contracts entered into by savings associations subject to federal oversight. Each of the plaintiffs' employment contracts stated: "All obligations under this Agreement shall be terminated pursuant to 12 C.F.R. § 563.39(b)(5) . . . when the Bank is determined by the Director of the OTS to be in an unsafe or unsound condition. . . ." Augienello I, 2002 WL 1822926, at *3. The contracts also provided that "obligations under this Agreement shall terminate as of the date of" any "default, as defined in . . . 12 U.S.C. § 1813(x)(1)" or "at the time the [FDIC] enters into an agreement to provide assistance to or on behalf of the Bank." Id. The contracts explicitly exempted "vested rights" from termination. Id. Judge Sweet held that pursuant to section 563.39, read together with the terms of plaintiffs' employment contracts, plaintiffs' contracts automatically terminated when the FDIC placed Superior into receivership. Therefore, he reasoned, plaintiffs would be entitled to their contractual benefits only if those benefits had "vested." Based on the terms of plaintiffs' employment agreements, Judge Sweet concluded that plaintiffs' rights had not vested and consequently they were not owed deferred compensation or severance pay. Id. at *3-*5.

  Represented by counsel other than the Balber attorneys, plaintiffs appealed from Judge Sweet's decision. Affirming the dismissal of the complaint by summary order, the Second Circuit said that "[w]e agree, for substantially the same reasons as those given by the district court, that according to the terms of the contract the plaintiffs did not have any vested rights at the time the contracts terminated." Augienello II, 64 F. App'x at 821. The Second Circuit noted that "[o]n appeal, the plaintiffs have also argued that even if defendants did not violate the express terms of the contracts, they violated the implied covenant of good faith and fair dealing." Id. at 822. Because the plaintiffs had not included that claim in their complaint, asserting it for the first time on appeal, the court of appeals declined to consider it. Id.

  B.S.D.N.Y. No. 02 Civ. 4317

  Meanwhile, just prior to the district court's decision in Augienello I, plaintiffs had filed a second complaint in this Court, No. 02 Civ. 4317 (S.D.N.Y.), based on the same underlying facts. That complaint was drafted by the Balber attorneys. The case was assigned to Judge Sweet as related to No. 01 Civ. 11608. In that action, plaintiffs asserted claims not against CCFC or the individuals involved, but against the FDIC, as receiver for Superior, due to the FDIC's repudiation of plaintiffs' employment agreements and refusal to remit previously earned compensation. See Plaintiffs' Amended Complaint, dated Nov. 5, 2003, ¶¶ 1-5, found in Defendants' Memorandum of Law in Opposition to Motion to Remand, Mar. 10, 2005, Ex. 4. Plaintiffs asserted that their claims arose under the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA"), 12 U.S.C. § 1821 et seq. Id. ¶ 13.

  The parties agreed that further proceedings in plaintiffs' action against the FDIC would be deferred until after the disposition of Augienello II, which the Second Circuit decided on May 9, 2003. After the Second Circuit's ruling, the Balber attorneys sought and obtained the Court's permission to withdraw as counsel for plaintiffs in 02 Civ. 4317. Plaintiffs, now proceeding pro se, filed an amended complaint in that action which was identical to their original complaint except for the addition of a new claim alleging a cause of action against the FDIC-receiver for breach of its asserted duty of good faith and fair dealing in its dealings with plaintiffs.

  The FDIC moved to dismiss plaintiffs' amended complaint in 02 Civ. 4317 pursuant to Rule 12(b)(1) for lack of subject matter jurisdiction and Rule 12(b)(6) for failure to state a claim upon which relief could be granted. Judge Sweet dismissed the complaint on the first ground. Augienello III, 310 F. Supp. 2d 582. He reasoned that under FIRREA, which governed the action, subject matter jurisdiction existed only in the district in which the failed bank's principal place of business was located or in the United States District Court for the District of Columbia, and found that Superior's principal place of business was in Illinois. In consequence, subject matter jurisdiction did not lie in the Southern District of New York.

  Plaintiffs, still appearing pro se, moved under Local Rule 6.3 and Rule 60(b), Fed.R.Civ.P., for reconsideration of and relief from the opinion in Augienello III or for an order under 28 U.S.C. § 1631 transferring the case to the District of Columbia, where subject matter jurisdiction would exist. Judge Sweet denied that motion in its entirety. Augienello IV, 2004 WL 965918. As for Local Rule 6.3, he denied reconsideration because plaintiffs failed to demonstrate controlling decisions or factual matters put before the Court on the underlying motion that might have altered the result, as required to succeed on a motion under the Rule. Id. at *1-*2. As for Rule 60(b), Judge Sweet denied relief from the judgment of dismissal in Augienello III because "[t]he heart of the underlying decision is that Superior's principal place of business was in Illinois," nothing submitted by plaintiffs "has shown that this conclusion was incorrect," and "[p]laintiffs have therefore not met their burden of showing that any exceptional circumstances merit a grant of relief under Rule 60(b)." Id. at *3. As for plaintiffs' request for an order transferring the case to the District of Columbia, Judge Sweet held:
Under Plaintiffs' Rule 60(b) motion, the request could only be considered under exceptional circumstances. A district court may transfer an action after a finding of want of jurisdiction "if it is in the interest of justice." 28 U.S.C. § 1631. However, the Second Circuit has held that it is not in the interest of justice to transfer a meritless claim under § 1631. In its brief on the underlying motion, the FDIC demonstrated convincingly that Plaintiffs' contract claim had been considered by this Court in the related action and that decision was affirmed by the Second Circuit. Further, the cause of action for breach of an implied covenant of good faith and fair dealing would not be enforceable as the federal regulations which terminated the Defendant's obligations under the contract preempt state law in the area of savings and loan industry regulation. Therefore, no exceptional circumstances exist which would justify transferring this action.
Id. at *4 (emphasis added) (citations omitted).

  C. The Present Action

  Plaintiffs did not appeal from the district court's orders in Augienello III and Augienello IV. Instead, now represented by new counsel, they commenced the present action for legal malpractice against the Balber attorneys, their former counsel. The gravamen of plaintiffs' complaint is that during the period they represented plaintiffs, the Balber attorneys failed to render competent legal service, as specifically described in Part III, supra. ...

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