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Cosmetics Plus Group, Ltd., et al., Plaintiffs-Appellants v. Paul Traub

February 28, 2013

COSMETICS PLUS GROUP, LTD., ET AL., PLAINTIFFS-APPELLANTS,
v.
PAUL TRAUB, ET AL., DEFENDANTS-RESPONDENTS.



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

Cosmetics Plus Group, Ltd. v Traub

Appellate Division, First Department

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.

Decided on February 28, 2013

Angela M. Mazzarelli,J.P. John W. Sweeny, Jr. Karla Moskowitz Dianne T. Renwick Helen E. Freedman, JJ. Index 11324/09

Plaintiffs appeal from the judgment of the Supreme Court, New York County (Judith J. Gische, J.), entered September 30, 2011, dismissing the complaint pursuant to an order, same court and Justice, entered August 5, 2011, which, to the extent appealed from as limited by the briefs, denied plaintiffs' motion for summary judgment on their causes of action for negligence and legal malpractice, breach of fiduciary duty, and violation of Judiciary Law § 487, and granted defendants' cross motion for summary judgment dismissing said claims, and from the aforesaid order. Martin J. Rubenstein, Staten Island, for appellants. Hinshaw & Culbertson, LLP, New York (Richard Supple of counsel), for respondents. MAZZARELLI, J.P.

In August 2001, plaintiffs, business entities that operated retail stores and their principals, retained defendant law firm Traub, Bonaquist & Fox, LLP (TBF) to commence a Chapter 11 bankruptcy proceeding in the Southern District of New York. One month later, two of the stores were destroyed in the terrorist attack at the World Trade Center. Plaintiffs retained special counsel to bring an adversary action in the bankruptcy court against their insurer, which refused to pay a claim under a business interruption policy. The adversary action settled on January 7, 2008, for the sum of $350,000, subject to the approval of the bankruptcy court. On February 26, 2008, the bankruptcy court issued an order approving the settlement. The approved settlement agreement provided that the proceeds would be delivered to plaintiffs in care of TBF. On March 6, 2008, the proceeds were delivered to Dreier LLP, the firm to which individual defendants Traub and Fox had moved their practice in August 2006. The funds were deposited into Dreier LLP's client trust escrow account number 5966 (the 5966 account). Unbeknownst at the time to plaintiffs, Traub and Fox or apparently anyone else, Marc Dreier, the sole equity owner of his eponymous law firm, was actively engaged in a Ponzi scheme which involved the sale of fraudulent notes. Much of the money entrusted to Marc Dreier by the defrauded investors was deposited by him into the 5966 account.

Defendants could not release the escrowed funds to their clients until the bankruptcy case was formally dismissed. They sought a "structured dismissal" of the case, negotiating with the creditors' committee and the U.S. trustee as to when and how the various interested parties would be paid by the estate. Defendants had advised plaintiffs that winding up the estate could "take some time." On September 26, 2008, after agreement with all of the necessary parties had been reached, Fox submitted a motion to the bankruptcy court to approve the voluntary dismissal of the bankruptcy proceeding. The bankruptcy court approved the dismissal in an order dated October 30, 2008. The order provided, in relevant part, for distribution of the cash held for plaintiffs within 15 days, with U.S. trustee fees being paid first, administrative expenses in the amount of $61,972.94 second, and all remaining cash to be paid to the secured creditors [*fn1] in partial satisfaction of the secured claim.

Following the bankruptcy dismissal order, Fox distributed $61,972.94 from a TBF escrow account [*fn2] to pay the administrative fees, which largely consisted of its own legal fees. On December 2, 2008, after reconciliation of outstanding accounts with the U.S. trustee had been finalized, $3,475 was paid out of the TBF escrow account to the U.S. trustee in full satisfaction of fees. The remaining cash in the TBF escrow account belonged to plaintiffs, and was paid to them. On the same date, Fox sent an internal email to Dreier LLP accounting personnel requesting that a check payable to plaintiffs for $350,000 be drawn from the 5966 account and forwarded to Fox for delivery to plaintiffs.

Unfortunately and coincidentally, Marc Dreier was arrested the next day. Upon learning of the arrest, Traub immediately repeated his demand that Dreier LLP transfer funds being held in the 5966 account to the TBF escrow account. Dreier LLP acceded to this request, and the next day wired $441,145.58 to the TBF escrow account. These monies included the settlement payment to plaintiffs, as well as funds belonging to other clients of defendants. After the monies were transferred, Fox and Traub resigned from Dreier LLP and returned to TBF. On December 10, 2008, a federal district judge appointed a receiver for Dreier LLP and restrained the firm's assets. On December 16, 2008, Dreier LLP filed for bankruptcy.

Plaintiffs demanded that the settlement funds being held in the TBF escrow account be released to them. In response, Fox sent them an email on December 19, 2008 asserting that while those funds were "presently . . . safe in the TB & F escrow account," they could not be released, because other former Dreier LLP clients were likely to assert competing claims for the monies that had been held in the 5966 account. Fox assured plaintiffs that he and Traub were "using every means and resource available to obtain the earliest possible release of the escrow monies." On February 27, 2009, following the directions of the Dreier LLP Trustee, TBF transferred its own escrow funds that had been in the Dreier LLP escrow account to the Dreier LLP bankruptcy trustee, to be held in a separate escrow account under the auspices of the bankruptcy court. Plaintiffs ended their attorney-client relationship with Fox and Traub shortly thereafter.

In this action plaintiffs assert causes of action for negligence and legal malpractice, breach of fiduciary duty, breach of Judiciary Law § 487, and violations of partnership law. They allege that the delay between approval of the settlement with their insurer and the dismissal of the bankruptcy proceeding was inordinately long and that TBF should have acted more diligently in ensuring release of the funds. They also claim that TBF improperly violated the dismissal order by permitting more than 15 days to elapse before the settlement funds were disbursed. Plaintiffs further allege that after Dreier, LLP transferred the settlement funds from the 5966 account into the TBF escrow account, defendants wrongly decided to remit all of plaintiffs' funds to the Dreier LLP bankruptcy trustee. They claim that TBF should first have sought permission from the bankruptcy judge who had overseen plaintiffs' own bankruptcy proceeding.

Plaintiffs moved for summary judgment on the first three causes of action in their complaint. Defendants opposed the motion and cross-moved for summary judgment dismissing the complaint in its entirety. In support, defendants submitted an expert report from Francis G. Conrad, a retired bankruptcy court judge. Conrad opined that the time taken to negotiate and present the structured dismissal did not deviate from the standard of care and skill of an average New York bankruptcy attorney, and that defendants acted properly in transferring the funds to the Dreier Trustee. The expert also opined that distribution deadlines ...


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