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Kaminsky v. Herrick

December 18, 2008


Plaintiff appeals from a judgment of the Supreme Court, New York County (Louis B. York, J.), entered January 17, 2008, granting defendants' motion for summary judgment dismissing plaintiff's first cause of action for legal malpractice and dismissing the complaint, and bringing up for review an order, same court and Justice, entered February 27, 2007, which granted defendants' pre-answer motion for dismissal of plaintiff's second cause of action for damages under Judiciary Law § 387 and third cause of action for rescission.

The opinion of the court was delivered by: Tom, J.P.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.

Peter Tom, J.P., David Friedman, John T. Buckley and James M. Catterson, JJ.

Index 150010/06

In this action for legal malpractice, plaintiff claims that his attorneys' failure to offer sufficient expert testimony concerning the valuation of his damages resulted in an inadequate arbitration award. However, plaintiff fails to offer any viable legal basis upon which the arbitration panel could have reached a substantially different result. Thus, plaintiff cannot establish that the outcome of the proceedings would have been more favorable but for defendants' asserted failure to present evidence, and the complaint must be dismissed.

This dispute has its origins in two identical verbal agreements entered into by nonparty Spencer Segura with plaintiff and James Agate, under which each was to receive 5% of Segura's $2 million interest in NextLevel Communications, a telecommunications company, for an investment of $100,000. Segura held his stake in NextLevel by virtue of his 20% interest in Spencer Trask Investors, LLC which, according to the complaint, is a special purpose entity formed to purchase an ownership interest in NextLevel. The shares were ultimately distributed in an initial public offering (IPO) consisting of NextLevel stock and accompanying warrants.

Plaintiff discussed his proposed investment in NextLevel with Segura on a number of occasions in the year and a half since their verbal IPO agreement was made. Plaintiff asserts that Segura reneged on the deal in mid-October 1999, refusing to accept plaintiff's tender of a $100,000 check. Instead, Segura proposed that plaintiff accept a cash settlement together with the right to purchase an unspecified amount of shares at the IPO price in exchange for his consent to rescind their agreement.

Plaintiff declined this and other proposed settlement offers and instituted an action on the verbal agreement. He retained defendant Herrick, Feinstein LLP, a firm that had formerly employed him as an associate, to represent him. The firm commenced an action in Supreme Court in early November 1999 seeking $5 million in damages. It named Segura and Spencer Trask Securities as defendants and stated causes of action for breach of contract and specific performance. The NextLevel IPO took place on November 10, 1999. The complaint alleges, "Shortly after the IPO, plaintiff's investment in Next Level would have been worth tens of millions of dollars. Segura offered to settle the case for approximately $3.25 million and plaintiff rejected the offer."

Several months later, it became clear that Segura had also reneged on his agreement to sell 5% of Investor's stake in NextLevel to James Agate, with the result that Agate sought to join in plaintiff's lawsuit. Herrick, Feinstein, LLP filed a similar complaint on behalf of Agate in late February 2000, and Supreme Court later consolidated the actions. In late 2000, confronted with a motion by Segura to compel arbitration under the terms of the brokerage agreements signed by plaintiff and Agate as clients of Spencer Trask Securities, plaintiff consented to have the matter heard by an NASD arbitration panel.

The arbitrators conducted extensive hearings, amassing a record of some 4,839 pages. Because Segura did not dispute the existence of his verbal agreements with Agate and plaintiff, the arbitration primarily concerned the determination of damages sustained as a result of the prospective investors' loss of the opportunity to participate in the NextLevel IPO. Segura took the position that damages should be assessed as of the time of breach, that is, on a pre-IPO basis; plaintiff sought damages based on the price at which NextLevel shares actually traded, that is, on a post-IPO basis. Thus, on plaintiff's direct case, his expert calculated damages based on the market price of NextLevel stock on two alternative dates-February 9 and May 10, 2000. After Segura presented his own expert, who testified that plaintiff would not have been able to liquidate his NextLevel stock and warrants on those dates due to various restrictions barring their sale, plaintiff sought to present a rebuttal witness to testify concerning the use of option strategies to overcome the transfer restrictions. The arbitration panel refused to hear from the proposed witness, noting that plaintiff had the opportunity to present such evidence on his case-in-chief and during cross-examination of Segura's expert witness. In August 2003, the panel issued an award in favor of plaintiff and Agate, directing Segura to pay $294,000 in compensatory damages and $50,000 in punitive damages to each.

Plaintiff and Agate, unhappy with the amount assessed as damages, commenced a special proceeding challenging the award on the ground of arbitral misconduct (CPLR 7511[b][1][iii]), asserting that by precluding testimony from his proposed rebuttal witness, the arbitrators had refused to hear pertinent and material evidence. Supreme Court denied the petition and confirmed the award (4 Misc 3d 1019A, 2004 NY Slip Op 50963[U] [2004] [Cahn, J.], affd 26 AD3d 188 [2006]).

Supreme Court based its ruling on procedural due process grounds, reasoning that the petitioners had not established that they were "prejudiced by corruption, fraud, misconduct, partiality or an abuse of power by the arbitrator" (2004 NY Slip Op 50963[U] *4, citing CPLR 7511[b]). The court noted that the petitioners had been on notice during the pendency of the case and throughout the arbitration hearings of the position taken by Segura that damages should be calculated on the basis of NextLevel's pre-IPO valuation on the date of breach. Instead of addressing this issue on their direct case, the court observed, the petitioners "gambled on the Panel adopting their post-breach damage analysis" (id. at *6). Finally, the court found a failure to demonstrate that the proposed testimony was material and necessary, rather than merely "intended to bolster testimony and ...

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