Patterson Belknap Webb & Tyler LLP v. Marcus & Cinelli LLP

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2023 NY Slip Op 31026(U)

PATTERSON BELKNAP WEBB & TYLER LLP, Plaintiff, v. MARCUS & CINELLI LLP, DAVID P. MARCUS, BRIAN L CINELLI, JOHN DOES Defendants.

Index No. 652711/2022, Motion Seq. No. 007 008

Supreme Court, New York County

March 29, 2023

Unpublished Opinion

PRESENT: HON. ARLENE P. BLUTH Justice

DECISION + ORDER ON MOTION

ARLENE P. BLUTH, J.S.C.

The following e-filed documents, listed by NYSCEF document number (Motion 007) 95, 96, 97, 98, 99, 100, 101,102, 103, 104, 105 106, 107, 108, 109, 110, 111, 112, 113, 114, 115, 116, 117 118, 119, 120, 121, 122, 123, 124, 125, 126, 127, 128, 129 130, 131, 132, 133, 134, 135, 136, 137, 138, 139, 140, 154 were read on this motion to/for DISMISS.

The following e-filed documents, listed by NYSCEF document number (Motion 008) 146, 147 were read on this motion to/for SANCTIONS.

Motion Sequence Numbers 007 and 008 are consolidated for disposition. Defendants' motion (MS007) to dismiss the amended complaint is granted in part and denied in part. Plaintiffs motion (MS008) for sanctions is denied.

Background

Plaintiff obtained a judgment in 2013 against non-party Barbara Stewart for over $2 million arising out of past legal services and served her with a restraining notice in 2013. That restraining notice prohibited her from selling or transferring any property until the judgment was satisfied. Plaintiff claims that it also sent defendants, lawyers who were then representing Mrs. Stewart, a copy of the restraining notice by email. Plaintiff has not received a single payment and the judgment now exceeds $3 million (as interest has accrued).

Plaintiff alleges that Stewart was also getting divorced at the same time and the divorce court found that she made misrepresentations about giving away jewelry and disclosing her offshore accounts. Plaintiff took a post-judgment deposition of Ms. Stewart where she testified that that she didn't have any jewelry and that her former daughter in law had taken a diamond ring. It contends that these statements were wholly untrue.

Plaintiff alleges that defendants, and specifically defendant Marcus, had actual knowledge about the plaintiff s judgment and the restraining notice and nevertheless organized and facilitated the sale of Mrs. Stewart's 24.79 carat diamond ring in 2016. Not only did he arrange to sell it, but Marcus chose to do a private sale (which the auction house purportedly advised would get much less money than a public sale); the private sale yielded $2,375 million. Plaintiff insists defendants paid off some of Stewart's debts (including unpaid legal fees owed to defendants and others) and then deposited the remaining funds (about $1.74 million) into an IOLA and escrow account for Stewart. It contends that defendants used the funds to make sporadic payments on Ms. Stewart's behalf, including additional payments to defendants.

Plaintiff alleges that defendants and Ms. Stewart then entered into a new retainer agreement in 2017 that included a retainer of more than $700,000 (the remaining proceeds from the ring sale). In the retainer agreement, defendants agreed to offer legal service to Ms. Stewart specifically in connection with plaintiff s creditor action, among other matters. Plaintiff stresses that the retainer agreement did not provide any details about the scope of the work, the estimated duration of work or the estimated fees. Plaintiff asserts that it learned about the sale in 2021 while reviewing filings in a federal case between Ms. Stewart and her former daughter in law. It asserts it sought discovery from defendants about the ring sale but those efforts were rebuffed and this case followed.

Discussion

"On a motion to dismiss pursuant to CPLR 3211, the pleading is to be afforded a liberal construction. We accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory. Under CPLR 3211(a)(1), a dismissal is warranted only if the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law" (Leon v Martinez, 84 N.Y.2d 83, 87-88, 614 N.Y.S.2d 972 [1994]).

Plaintiff's Debtor and Creditor Law Causes of Action

Plaintiffs first through third causes of action seek relief under the Debtor and Creditor Law §§ 273, 274, 275, 273-a and 276.

"Pursuant to the version of Debtor and Creditor Law § 273 applicable at the time of the subject convey an ce[s], a conveyance that renders the conveyor insolvent is fraudulent as to creditors without regard to actual intent, if the conveyance was made without fair consideration. Pursuant to the version of Debtor and Creditor Law § 274 applicable at the time of the subject conveyances, a conveyance is fraudulent as to creditors without regard to actual intent when it is made without fair consideration when the person making it is engaged or is about to engage in a business or transaction for which the property remaining in his or her hands after the conveyance is an unreasonably small capital. To constitute fair consideration, the value given in exchange must be fairly equivalent and proportionate to the value of the property conveyed "(Palmerone v Staples, 195 A.D.3d 736, 737-38, 150 N.Y.S.3d 723 [2d Dept 2021] [internal quotations and citations omitted]).

Section 275 "requires, in addition to the conveyance and unfair consideration elements established supra, an element of intent or belief that insolvency will result" (Wall St. Assoc, v Brodsky, 257 A.D.2d 526, 528, 684 N.Y.S.2d 244 [1st Dept 1999] "DCL § 276, unlike sections 273 and 275, addresses actual fraud, as opposed to constructive fraud, and does not require proof of unfair consideration or insolvency. Due to the difficulty of proving actual intent to hinder, delay, or defraud creditors, the pleader is allowed to rely on "badges of fraud" to support his case, i.e., circumstances so commonly associated with fraudulent transfers "that their presence gives rise to an inference of intent" (id. at 529).

Defendants move to dismiss these causes of action and claim that they are not transferees or beneficiaries of the sale proceeds. They claim that they never exercised dominion or control over the funds they held in trust for Ms. Stewart. Defendants claim that they submitted documentary evidence that the sale proceeds of the ring were put in their IOLA accounts and that these funds were handled pursuant to an engagement letter. They insist the funds, which are solely controlled by the client (Ms. Stewart) were used to satisfy debts owed to defendants for their legal work. Defendants contend that plaintiffs allegations are mere speculation. They emphasize that no lien was obtained over Stewart's personal property and so plaintiff has no priority of rights over any payments made to defendants from the sale proceeds.

The Court denies the branches of the motion that seek to dismiss these causes of action. As an initial matter, defendants' contentions all require the Court to adopt their view of the facts, something the Court cannot do on a motion to dismiss. The Court must take the allegations by plaintiff as true and those allegations state cognizable claims under the first, second and third causes of action.

The facts, as presented by plaintiff, show that plaintiff had a judgment against Stewart in 2013 and served a restraining notice on Stewart. Plaintiff claims it emailed this restraining notice to defendants, which defendants do not deny. That the restraining notice was only purportedly emailed does not absolve defendants of any liability here. It might be a persuasive argument about defendants' knowledge, but the Court cannot find, as a matter of law on a motion to dismiss, that an attorney is permitted to ignore a restraining notice addressed to one of his or her clients. The Court declines to issue a ruling that an attorney can summarily ignore it under circumstances where the client is allegedly not paying a judgment.

Moreover, subsequent actions raise further questions, to be explored in discovery, about what defendants knew about plaintiff s judgment. A 2017 retainer agreement between defendants and Stewart (NYSCEF Doc. No. 139) included a retainer of $769,493.55 that was allegedly money from the sale proceeds of the ring. And the retainer contains a curious paragraph about representation in certain matters, including for "Protection against Creditor Actions (Patterson Belknap)" (id. at 3). That raises questions about the purpose of the retainer agreement-was it set up to funnel the money from the ring sale to defendants so that plaintiff could not reach it or was it a routine retainer agreement? As plaintiff points out, it has long been held that the promise of future services is not fair consideration under the Debtor and Creditor Law (Petition of National City Bank of N.Y., 269 AD 1040, 58 N.Y.S.2d 620 [2d Dept 1945]; see also Sardis v Frankel, 113 A.D.3d 135, 144, 978 N.Y.S.2d 135 [1st Dept 2014]) and it is an open query about the validity of this retainer agreement.

Plaintiff claims, and defendants do not dispute, that Mr. Marcus (on Stewart's behalf) sold the ring at a private sale instead of at a public auction. The proceeds were then used to pay off certain of defendants' debts and were then held in trust for Ms. Stewart. Those actions, allegedly taken with the knowledge of plaintiff s judgment, state claims for fraudulent conveyances because Ms. Stewart has not paid off any of plaintiff s judgment and is allegedly insolvent. Discovery may shed light on why defendants would choose to do a private sale, which would allegedly yield a lower sale price, instead of a public sale. Was this part of an effort to hide the...