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Cobalt Multifamily Investors I, LLC v. Shapiro

March 28, 2008

COBALT MULTIFAMILY INVESTORS I, LLC, ET AL., PLAINTIFFS,
v.
MARK A. SHAPIRO, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Kimba M. Wood, U.S.D.J.

OPINION AND ORDER

The court-appointed receiver (the "Receiver") for Plaintiffs Cobalt Multifamily Investors I, LLC, and its related, defunct entities (collectively, the "Cobalt entities"), filed this lawsuit against three individuals alleged to have been the principals of the Cobalt entities, and three sets of attorneys who provided professional services to the Cobalt entities at various times during their active corporate lives. The three individuals named as defendants are Defendants Mark A. Shapiro, Irving J. Stitsky, and William B. Foster (collectively, the "Individual Defendants"). The three sets of attorneys named as defendants are Defendants Robert F. Cohen and his firm, Cohen & Werz LLC (the "Cohen Defendants"); Martin P. Unger and his firm, Certilman Balin Adler & Hyman LLC (the "Certilman Defendants"); and Philip Chapman and his firm, Lum, Danzis, Drasco & Positan LLC (the "Lum Defendants") (collectively, the "Law Firm Defendants").

The Complaint alleges that the Individual Defendants engaged in a massive fraud on the investing public by setting up the Cobalt entities, and persuading members of the public to invest millions of dollars in these same entities through various misrepresentations and cold-calling schemes. (Compl. §§ 4, 51-87.) The Individual Defendants then allegedly misappropriated the majority of the funds invested in the Cobalt entities for their own personal use. (Compl. §§ 83-85.) The Complaint alleges that the Law Firm Defendants assisted the Individual Defendants in committing this investor fraud, and in subsequently looting the Cobalt entities of corporate assets. (Compl. §§ 94-137.)

As against the Individual Defendants, the Receiver asserts claims of common-law fraud, conversion, breach of fiduciary duty, breach of contract, and unjust enrichment.*fn1 As against the Law Firm Defendants, the Receiver asserts claims of breach of contract, breach of fiduciary duty, and legal malpractice. The Receiver also asserts separate claims of conversion and aiding and abetting fraud, conversion, and breach of fiduciary duty against the Cohen Defendants; and a claim of unjust enrichment against Defendant Cohen personally.

In October 2006, the Law Firm Defendants each filed a motion to dismiss the complaint on various grounds, including that the Receiver lacks standing to assert his claims. By report and recommendation, dated November 28, 2007 (the "Report"), familiarity with which is assumed, Magistrate Judge Michael H. Dolinger recommended that the motions be granted in part and denied in part. Specifically, the Report concluded, in relevant part, that the Receiver has standing to assert his various claims against the Law Firm Defendants only to the extent that such claims are based on (1) the receipt by the Law Firm Defendants of fees or other payments from the Cobalt entities for professional services that were deficient, and (2) the alleged looting of the Cobalt entities' corporate assets.*fn2 (Report 48-49, 57-58.)

Based on this conclusion, the Report recommended that the Court dismiss the Receiver's claims of aiding and abetting fraud and breach of fiduciary duty against the Cohen Defendants.*fn3 The Receiver would therefore retain his legal malpractice claims against the Law Firm Defendants as delimited by the Report's standing ruling, his claims for conversion and aiding and abetting conversion against the Cohen Defendants, and his claim of unjust enrichment against Defendant Cohen personally. (Report 63.) The Receiver, the Certilman Defendants, and the Lum Defendants each filed timely written objections to portions of the Report.

The Court has carefully reviewed the Report's thorough and nuanced analysis, and the parties' corresponding objections. For the reasons set forth below, the Court grants the motions to dismiss.

DISCUSSION

The Court must review de novo those portions of the Report to which timely written objections have been filed. See 28 U.S.C. § 636(b)(1) (2008); Fed. R. Civ. P. 72(b) (2008).

The parties' principal objections to the Report address the scope of the Receiver's standing to assert his legal malpractice claims against the Law Firm Defendants.*fn4 The Report concluded that the Receiver has standing to assert his legal malpractice claims only to the extent that such claims are based on (1) the receipt by the Law Firm Defendants of fees and other payments for the provision of professional services that were deficient, and (2) the alleged looting of the Cobalt entities' corporate assets. (Report 48-49, 57-58.) The Receiver contends that his legal malpractice claims should not be so limited, and that he has standing to assert the full extent of his legal malpractice claims as pleaded in the Complaint. The Certilman Defendants and the Lum Defendants contend that the Receiver lacks standing to assert his legal malpractice claims in any form, including as limited by the Report's standing ruling. Reviewing the standing issue de novo, the Court concludes that the Receiver lacks standing to assert any of his claims, whether framed as legal malpractice or otherwise, against the Law Firm Defendants.*fn5

I. THE RECEIVER LACKS STANDING TO ASSERT ANY OF HIS CLAIMS AGAINST THE LAW FIRM DEFENDANTS

A. The Wagoner Rule

In challenging the Receiver's standing, the Law Firm Defendants rely principally on the line of decisions beginning with Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991) ("Wagoner"), which addresses the issue of standing in the bankruptcy context. (Report 32-37.) In Wagoner, the Second Circuit stated the "well settled" principle that a bankruptcy trustee has standing to assert only those claims held by the bankrupt corporation. Id. at 118 (citing Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 434 (1972)). A bankrupt corporation lacks standing to assert claims against third parties for defrauding the corporation where those third parties assisted corporate managers in committing the alleged fraud.*fn6 Wagoner, 944 F.2d at 120; In re CBI Holding Co., Inc., 311 B.R. 350, 368-69 (S.D.N.Y. 2004) ("CBI Holding I"). Thus, under Wagoner, a bankruptcy trustee also lacks standing to assert such claims against third parties. See In re Bennett Funding Group, Inc., 336 F.3d 94, 99-100 (2d Cir. 2003).

In Hirsch v. Arthur Anderson & Co., 72 F.3d 1085 (2d Cir. 1995), the Second Circuit applied the Wagoner rule to also preclude a bankruptcy trustee from asserting certain claims against third parties that are based in fraud, but are denominated as claims other than fraud (e.g., malpractice or breach of contract). See Hirsch, 72 F.3d at 1094-95 (applying Wagoner rule to preclude bankruptcy trustee's malpractice claim where the claim was based on allegations that the defendant assisted corporation managers in defrauding the corporation); see also In re CBI Holding Co., Inc., 318 B.R. 761, 766 (S.D.N.Y. 2004) ("CBI Holding II") (applying Wagoner rule to bar plaintiff's breach of contract, negligence, and fraud claims against defendant accounting firm where the claims were "premised on allegedly deficient auditing by [defendant] that failed to discover fraudulent acts committed by certain members of [corporate] management"); Breeden v. Kirkpatrick & Lockhart, LLP, 268 B.R. ...


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