United States District Court, E.D. New York
A. KATHLEEN TOMLINSON, Magistrate Judge.
Plaintiff Abcon Associates, Inc, ("Abcon" or "Plaintiff") brings this breach of contract action to recover legal fees it paid to Defendants Haas & Najarian and Haas & Najarian LLP (collectively, "H&N" or "Defendants") in connection with H&N's representation of Abcon in a separate action against the United States Postal Service ("USPS"). Abcon claims that H&N breached three legal services agreements and therefore should return the legal fees that were paid in connection with those agreements.
H&N moves for an Order, pursuant to Federal Rule of Civil Procedure 37, sanctioning Abcon for the alleged spoliation of evidence in the form of: (1) an adverse inference that Abcon's liabilities exceeded the amounts sought to be recovered in this litigation; and (2) monetary sanctions for the legal fees incurred in preparing for the February 12, 2013 hearing and for the preparation of this motion. DE 75. Having reviewed the arguments advanced by both parties in their written submissions, as well as the applicable case law, the Court hereby DENIES Defendants' motion.
I. RELEVANT BACKGROUND
A. Roslyn Savings Bank/New York Community Bancorp, Inc. Loan
In May 1996, Abcon was retained by the USPS for a construction project at a USPS processing facility in Queens, New York. On or about December 31, 1997, the USPS terminated its contract with Abcon. After the USPS terminated the contract, the United States Fidelity and Guaranty Company ("USF&G") paid claims in connection with various performance and payment bonds issued to Abcon and guaranteed by its president, Michael Zenobia, Jr. and his wife Theresa Zenobia (collectively, the "Zenobias"). After making those payments, USF&G commenced an action against Abcon, the Zenobias, and three related entities, as indemnitors under the bonds, and obtained a judgment in the amount of approximately $2 million (the "USF&G Judgment'"). In order to pay the USF&G Judgment, on March 12, 2002, the Zenobias and South Setauket Associates ("SSA") (an entity owned by Michael Zenobio which was not named under the USF&G Judgment) borrowed $2 million from Roslyn Savings Bank (now known as New York Community Bancorp, Inc. ("NYCB"). This loan, referred to in the parties' papers as the NYCB loan, was secured by mortgages on the Zenobios' home and SSA's commercial property. The repayment of this loan is at the center of the current dispute.
B. Abcon's Retention of H&N
1. The Legal Services Agreement
In April 1998, H&N was retained by Abcon in connection with the termination of Abcon's construction contract with USPS. In July 1998, H&N filed a Complaint on Abcon's behalf against USPS in the United States Court of Federal Claims. Abcon and H&N entered into a Legal Services Agreement ("LSA") on January 2, 2002 concerning H&N's outstanding legal fees in the amount of $183, 489.60. Pursuant to the LSA, the parties agreed that H&N would retain a lien in any amounts recovered from USPS and that such lien would be subordinate to the lien securing NYCB's $2 million loan to "Abcon and certain of its principals to [NYCB]." Compl. Ex. A.
2. Abcon's Judgment Against USPS and the Filing of the Interpleader Action
Abcon obtained a judgment against USPS (the "USPS Judgment"), for which, on June 28, 2005, Abcon was awarded $2, 405, 150.32. In the interim, USPS received notice of various judgments and claims against Abcon and initiated an interpleader action in this Court (the "Interpleader Action"). USPS obtained leave of the Court and deposited the approximately $2.4 million with the Clerk of the Court (the "Interpleader Fund"). United States of America v. Abcon Associates et al., 05-CV-3178 (LDW) (the "Interpleader Action").
3. The First Amendment to the LSA
In August 2005, Abcon and H&N executed a First Amendment to the LSA ("First Amendment"), which acknowledged that the funds from the USPS Judgment were the subject of the Interpleader Action and that $260, 000 was owed to H&N, which fees were subject to a charging lien by H&N. Id. Ex. B. The First Amendment further acknowledged that H&N's charging lien was subordinate to "any and all sums owed by Abcon to [NYCB]." Id. It also stated that H&N would provide legal services to Abcon in an appeal to recover additional money from USPS and outlined how H&N would be paid from any money recovered by that appeal. By paragraph 6, the "parties reaffirm[ed] and reacknowledg[ed] the provisions of the LSA." Id.
4. The June 2007 Letter Agreement
In June 2007, Abcon and H&N executed a letter agreement, which by its terms was to "serve as a modification to the First Amendment to the Legal Services Agreement." ("Letter Agreement"). Id. Ex. C. This letter, written by Louis Haas of H&N and agreed to and accepted by Michael Zenobia as President of Abcon, states that $263, 000 was owed to H&N from the Interpleader Funds; the letter also describes how future monies received would be divided by Abcon, H&N and NYCB. Id. The Haas letter further states that "the above distribution agreement is contingent upon your [Abcon's] satisfaction with the resolution you are able to achieve with NYCB concerning the balance of Abcon's debt to NYCB as guaranteed and collateralized by you." Id.
C. The Interpleader Action
In the Interpleader Action, motions were made addressing whether NYCB possessed a perfected security interest for the amount of the $2 million loan. By Order dated December 18, 2006, Judge Wexler found that NYCB had a priority perfected interest in the Interpleader Fund. On August 13, 2007, Judge Wexler entered an Order for the Distribution of the Interpleader Fund (the "Distribution Order''), pursuant to which various claims were paid, including $263, 000 to H&N, with the remaining balance paid to NYCB, leaving insufficient funds to pay the remaining stakeholders. Thereafter, on December 15, 2008, Judge Wexler entered an Amended Order (1) directing further distribution of Interpleader Funds and (2) ordering distribution of an additional $200, 000 to H&N and $655, 416.60 to NYCB. At the time of the second distribution of the Interpleader Fund, Abcon was "satisfied" with the distribution resulting from Judge Wexler's December 15, 2008 Order because it "significantly reduced the amount of the NYCB Loan, and because Defendant again advised that additional monies should be forthcoming from the USPS Case which could be used to satisfy the balance of the NYCB." Compl. ¶ 49.
One claimant, Goldberg & Connolly ("G&C") appealed to the Second Circuit, which on May 9, 2009, reversed and remanded, finding the NYCB's interest was unperfected and junior to G&C's interest. On June 30, 2009, a conference was held and Judge Wexler ordered NYCB to deposit back into Court the monies that it had received from the Interpleader Fund within two days. At that time, Abcon stated that it was no longer "satisfied" with the interpleader money paid to NYCB pursuant to its agreement with H&N and argued that H&N should therefore return the money H&N received from the Interpleader Fund, namely $463, 000.00. H&N refused to do so.
After meeting that same day with Magistrate Judge Lindsay, all parties - other than Abcon - agreed to a settlement of the case, which was thereafter put on the record before Judge Wexler. Specifically, NYCB agreed to pay the $904, 129.78 it received from the Interpleader Fund to the other claimants. Other than G&C, which recovered a bit more for taking and winning the appeal, all other claimants received a pro rata distribution. Abcon objected to the distribution on the record on the grounds that any amounts paid to H&N should have been subordinated to the monies paid to NYCB. Judge Wexler ruled that Abcon had no standing to object to the settlement since Abcon was not entitled to receive any of the funds at issue. See Tr. of June 30, 2009 Proceedings Before Hon. Leonard D. Wexler at 7, Case No. 05-CV-3178, attached as Ex. B to Mar. 3, 2014 Decl. of Jeffrey T. Strauss ("Strauss Decl."), DE 75-3.
D. Plaintiff's Complaint and Judge Wexler's July 16, 2013 Memorandum and Order
1. The Complaint and Defendants' Motion to Dismiss
As originally filed, the Complaint asserted three breach of contract claims against H&N. In particular, Abcon claimed that the LSA, the First Amendment, and the Letter Agreement each constituted a separate agreement between Abcon and H&N, and that H&N breached all three agreements by failing to subordinate its fees to the satisfaction of the $2, 000, 000 NYCB loan. H&N moved to dismiss the Complaint, claiming that these issues were already decided in the Interpleader Action and that Abcon was collaterally estopped from raising them again. Further, H&N argued that if there was a valid breach of contract claim, all three documents constituted one agreement, not three separate contracts. Finally, Defendants argued that since Abcon had no entitlement to any of the Interpleader Fund - since all the claimants ultimately were paid less than their claims - Abcon had not suffered any injury and, therefore, its breach of contract claims failed.
2. Judge Wexler's July 16, 2013 Memorandum and Order
By Memorandum and Order dated July 16, 2013, Judge Wexler denied Defendants' motion to dismiss. Specifically, he found that Abcon was not collaterally estopped from claiming that H&N breached its agreement with Abcon because "the issue of the legal fees to which H&N was entitled under its agreements with Abcon was never fully litigated as required for the doctrine of collateral estoppel to apply." DE 55 at 9. He also found that the LSA, the First Amendment ...