Lawyers can be sued for aiding an abetting a fraudulent act or scheme. Such cases are rare, but not unheard of. Harpia Asset Management, LLC v. Shanbaum, 2020 NY Slip Op 30953(U) is one such case. Plaintiff alleged that the defendant lawyer aided and abetted another party’s wrongful conduct in connection with a foreclosure sale. (These are allegations that have not been proven.) The key allegation is that the lawyer favored one client over another in connection with a foreclosure sale.
The opinion summarizes the facts this way:
Harpia Asset Management LLC, 434 Throop Avenue LLC, Harpia Throop JV LLC, Harpia NYC Throop Holdings LLC, and Kris Henry (collectively, the Plaintiffs) operated a joint venture for the purpose of developing a property located at 434 Throop Avenue, Brooklyn, New York (the Property). The Shanbaum Defendants represented the Plaintiffs in a foreclosure action involving the Property captioned Nationstar Mortgage LLC v. Kris Henry et al., Index No. 506082/2014 (the Foreclosure Action). And, on January 30, 2019, the court (Dear, J.) in the Foreclosure Action signed a Final Judgment of Foreclosure (the Foreclosure Judgment), which ordered the sale of the Property within 90 days (NYSCEF Doc. No. 1, ¶ 35). On March 27, 2019, Nationstar Mortgage LLC (Nationstar) filed a Notice of Sale scheduling an auction sale (the Auction) of the Property on April 18, 2019 (id., ¶ 38). However, inasmuch as when the Foreclosure Judgment was entered on February 5, 2019, the Foreclosure Judgment was entered with the incorrect block number for the Property (id., ¶¶ 36-37), on March 29, 2019, Nationstar filed a motion to correct the Foreclosure Judgment nunc pro tunc, to correct the block number and extend the time for the Auction (id., ¶ 39).
During telephone calls which occurred on March 6, 2019 and March 26, 2019, the Complaint alleges that Omar Slowe, managing partner of Harpia Asset Management LLC, 434 Throop Avenue LLC, Harpia Throop JV LLC, and Harpia NYC Throop Holdings LLC, discussed the Foreclosure Action with Mr. Shanbaum and advised Mr. Shanbaum (i) of the Plaintiffs’ extensive pre-development work on the Property, (ii) that Plaintiffs were working with lenders to secure a loan, and (iii) that Plaintiffs intended to negotiate payment of the mortgage (id. ¶ 44). Subsequently on April 5, 2019, during a conference call between Mr. Slowe, Kris Henry, and Mr. Shanbaum, Mr. Slowe further advised, among other things, that the Plaintiffs had selected a winning bidder for construction work on the Property and that the Plaintiffs would sign a term sheet to obtain funds to pay off the mortgage or purchase the Property at the Auction (id. ¶¶ 46-47). During the conference call, the Complaint alleges that Mr. Shanbaum advised that the Auction would not take place on April 18, 2019 (id.). On April 8, 2019, Mr. Henry and Mr. Slowe signed a retainer agreement with the Shanbaum Defendants pursuant to which these individuals sought legal advice to, among other things, vacate the Foreclosure Judgment and/or stay the Foreclosure Action (id., ¶ 50). The Auction took place on April 18, 2019 and Isaac Broyn, who was also a client of the Shanbaum Defendants, purchased the Property for $835,000 (id., ¶ 59).
The Complaint alleges that on the day of the Auction, when Mr. Slowe heard from another developer that the Property was in fact being sold at the Brooklyn courthouse on that day (despite the advice that he had been given from Mr. Shanbaum that the Auction was not going to occur on that date), Mr. Slowe called Mr. Shanbaum for advice (id., ¶ 62) and Mr. Shanbaum not only confirmed that the Auction was not going forward but also instructed Mr. Slowe not to go to the courthouse (id., ¶¶ 63-64). The Shanbaum Defendants did not file a motion to vacate the Foreclosure Judgment and/or stay the Foreclosure Action before the Auction (id., ¶¶ 51-54).
After the Auction, the Plaintiffs allege that Mr. Shanbaum acknowledged that the Auction took place as originally scheduled and admitted that the winning bidder, Mr. Broyn, was one of his clients (id., ¶ 68). Further, the Plaintiffs allege, on information and belief, that Mr. Shanbaum had disclosed to Mr. Broyn confidential and privileged information about the Plaintiffs’ pre-development work of more than $400,000, the value of the Property, and the Plaintiffs’ intent to purchase the Property at the Auction and develop it to earn millions of dollars in sale proceeds (id. ¶¶ 57, 60).
On April 22, 2019, Mr. Shanbaum texted Mr. Slowe to ask whether to file a motion to vacate the sale (id., ¶ 72). On April 23, 2019, Mr. Slowe emailed Mr. Shanbaum to request that a motion to vacate the sale be filed, along with an explanation that the Plaintiffs did not attend the auction on Mr. Shanbaum’s instructions (id., ¶ 73).
On April 29, 2019, some 11 days following the Auction, the Shanbaum Defendants filed a motion to stay the Foreclosure Auction and vacate the Foreclosure Judgment (id., ¶ 78). On May 8, 2019, the Shanbaum Defendants submitted opposition to Nationstar’s motion to correct the block number for the Property (id., ¶¶ 78-79). Both motions were denied on June 24, 2019 (id., ¶ 86).
Around the same time that the above motions were filed in late April, the Plaintiffs assert that Mr. Shanbaum attempted to persuade them, by phone, to pay Mr. Broyn $10,000 so that Mr. Broyn would not oppose the motion to vacate (id. ¶ 82). The Plaintiffs refer to a text on May 6, 2019, from Mr. Shanbaum to Mr. Slowe whereby the $10,000 payment was discussed:
Mr. Slowe: Dealt with lender(s) and other stuff all day. Nacmias said he’ll call me back. Haven’t had a change to talk to Kenny yet about your email. You or Kenny can talk to Isaac. My offer was for him to sign whatever affidavit or affirmation supporting out motion to have it voided. I’ll call you in the morning.
Thanks for the update, by the way. Appreciated.
Mr. Shanbaum: Oh ya he’s not gonna want to do $10k to reverse but I can ask him… I thought you were offering $10k to not object.(NYSCEF Doc. No. 68).
After the court heard the Plaintiffs’ motion to vacate on May 15, 2019, the Plaintiffs further assert that Mr. Shanbaum told them that Mr. Broyn rejected an offer of $10,000 and advised Mr. Slowe that the offer be increased to $50,000 (NYSCEF Doc. No. 1, ¶ 85). The same evening, Mr. Shanbaum allegedly told Mr. Slowe to speak directly to Mr. Broyn and when Mr. Slowe called Mr. Broyn the next day, Mr. Broyn stated that he would not accept less than $100,000 and that this amount was not negotiable (id. ¶ 85).
Subsequently, the Plaintiffs brought this action, alleging (1) legal malpractice, (2) breach of fiduciary duty, (3) fraud, as against the Shanbaum Defendants, and (4) aiding and abetting fraud, (5) injunctive relief, and (6) a declaratory judgment the Auction was null and void as against Mr. Broyn (NYSCEF Doc. No. 1, the Complaint). The Plaintiffs also filed a Notice of Pendency (NYSCEF Doc. No. 2, the Notice of Pendency) against the Property. Both the Shanbaum Defendants and Mr. Broyn moved to dismiss.
The Fraud Count Against the Law Firm
The Law Firm argued that the fraud count was duplicative of the legal malpractice claim. The court rejected that argument:
The Plaintiffs allege that the Shanbaum Defendants made the following false representations: (i) that Nationstar’s nunc pro tunc motion had stayed the Foreclosure Action, (ii) that the Auction would not be held on April 18, 2019, (iii) that Mr. Shanbaum did not communicate with Mr. Broyn about the Property before the Auction, and (iv) that there was no conflict of interest as to the Shanbaum Defendants’ simultaneous representation of both the Plaintiffs and Mr. Broyn (NYSCEF Doc. No. 1, ¶ 109).
Inasmuch as the Plaintiffs seek to frame their fraud claim as one of conspiracy against all defendants (NYSCEF Doc. No. 52 at 16), this is impermissible as a separate cause of action because New York does not recognize an independent cause of action for civil conspiracy (Kovkov v Law Firm of Dayrel Sewell, PLLC, 2020 NY Slip Op 02166 [1st Dept 2020]). However, to the extent that the claim is one for fraud against the Shanbaum Defendants based on the above false statements, this is sufficient at the pleading stage even under the heightened pleading requirements of CPLR § 3016(b) as the Plaintiffs allege that the Shanbaum Defendants knowingly made materially false statements, reasonable reliance and resulting damages. More is not required at this juncture.
Nor is the fraud claim duplicative as the fraud alleged is not simply based on the same conduct as the legal malpractice (Johnson v Proskauer Rose LLP, 129 AD3d 59, 68-69 [1st Dept 2015]). The First Department explained the difference in Mitschele v Schultz, where a client sued an accounting firm, which had been recommended to her by her employer, for numerous errors in her tax returns, and also alleged that the firm had represented to her that the way in which it declared her earnings was “the way it’s got to be” but that this was really to benefit her employer’s tax liability at her expense (36 AD3d 249 [1st Dept 2006]). As the Court wrote:
defendant’s alleged fraud is not simply the failure to disclose the malpractice based upon accounting errors. Rather, defendants are alleged to have perpetrated a fraud on plaintiff from the time they were retained to provide accounting services, in failing to disclose their concern with protecting the interests of another entity….(36 AD3d at 254).
Here, similarly, the Plaintiffs do not simply allege that the Shanbaum Defendants committed malpractice by failing to timely file the appropriate motion to stop the foreclosure, or otherwise committing errors in their legal representation, but they allege that the Shanbaum Defendants took deliberate steps to mislead the Plaintiffs in favor of their other client without disclosing this conflict to the Plaintiffs and by affirmatively lying about the fact instead. The “essences of the fraud and malpractice claims” are, thus, “sufficiently distinct from one another” so as to not be duplicative (Johnson, 129 AD3d at 69). For the avoidance of doubt, to the extent that the Shanbaum Defendants’ also seek dismissal of the fraud claim on the basis of documentary evidence — i.e. a text message and email chain (NYSCEF Doc. No. 29) — such evidence fails to conclusively establish a defense to the alleged fraud. Accordingly, that branch of the Shanbaum Defendants’ motion to dismiss the third cause of action for fraud must be denied.
Aiding and Abetting Fraud
Although a much closer call, the motion to dismiss the claim for aiding and abetting fraud against Mr. Broyn also must be denied. The Plaintiffs allege that Mr. Broyn did not randomly obtain the information about the Auction. Had this been the case, the mere fact that Mr. Broyn is also a client of the Shanbaum Defendants would not necessarily raise concern. Rather, the Complaint alleges that “upon information and belief,” the Shanbaum Defendants told Mr. Broyn about the Property and when the Auction was taking place, and “conspired” with him to “defraud Plaintiffs to reap a financial benefit,” which they did with his “substantial assistance” (NYSCEF Doc. No. 1, ¶¶ 119-123). In other words, the allegations are that Mr. Broyn obtained the information from the Shanbaum Defendants who owed a conflicted duty. And, the argument is that Mr. Broyn may very well have encouraged the Shanbaum Defendants to breach their duty to the Plaintiffs.
To wit, as discussed above, Mr. Broyn allegedly demanded $10,000 to forebear from opposing the motion to vacate (NYSCEF Doc. No. 1, ¶ 82) and $100,000 to flip his interest post sale (id. ¶ 85). This was communicated first by the Shanbaum Defendants (id. ¶ 82) and then subsequently by Mr. Broyn himself (id. ¶ 85). These facts taken as true as the court must at this stage of the proceedings are sufficient allegations of knowing wrongdoing to make out a claim for aiding and abetting and go well beyond mere allegations based on information and belief alone (cf., Kaufman v Cohen, 307 AD2d 113, 126 [1st Dept 2003]). To the extent that Mr. Broyn relies on Apfelberg v E. 56th Plaza, Inc., 78 AD2d 606, 607 [1st Dept 1980], the case does not suggest a different result.
Comment: The allegations are unproven and have not been verified by a trier of fact. This case is a simple conflict of interest case. If the allegations are true, there is a breach of the duty of care. The lawyer cannot favor one client over another in any legal proceeding, including a foreclosure. Once the lawyer learns that another client may be bidding at the foreclosure sale, he should have moved to withdraw after making a full disclosure of the conflict to both clients.
Ed Clinton, Jr.