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August 13, 2010

The First Department Holds that Attorney is Not Liable for Allegedly Aiding and Assisting Her Clients' Conspiracy to Defraud and Unfairly Compete

Generally speaking, attorneys acting within the scope of their duties to their clients cannot be held civilly liable to third-parties when their acts are performed in good faith and to protect the interests of their clients. In Art Capital Group, LLC v Neuhaus, 70 A.D.3d 605 (1st Dep't 2010), the First Department relied upon this principle to dismiss a legal malpractice action premised on allegations that the defendant attorney assisted and enabled her clients with a conspiracy to defraud and unfairly compete with the clients' former employer.

The plaintiffs in Art Capital Group were in the business of providing financial and consulting services to art owners. After first bringing an action against their former employees, they commenced a legal malpractice action against the attorney who represented two of their former employees in the formation of competing a business. In the action against the attorney, it was alleged that the attorney knowingly and deliberately enabled, assisted, and counseled plaintiffs' former employees to unfairly compete with them, to defraud them and to disregard the fiduciary duties their former employees owed to them. The defendant attorney made a pre-answer motion to dismiss, arguing that there was no privity between her and the plaintiffs, and thus the complaint failed to state a cause of action. The Supreme Court denied the defendant's motion and the defendant attorney appealed.

On appeal, the First Department reversed and granted the defendant's motion to dismiss. The First Department held that because all of the defendant attorney's alleged acts squarely fell within the scope of her duties as an attorney, the plaintiffs' complaint did not state a cause of action for legal malpractice. Furthermore, the Court held that the plaintiffs' failure to allege a relationship with the defendant attorney either contractual in nature or so close as to the functional equivalent of privity was fatal to their claims.

The First Department reasoned that "public policy demands that attorneys, in the exercise of their proper functions as such, shall not be civilly liable for their acts when performed in good faith and for the honest purpose of protecting the interests of their clients."

In response to the dissent's invocation of Judiciary Law § 487, which provides for criminal and civil liability for an attorney who "[i]s guilty of any deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party" (which the Court noted was not even alleged by the plaintiff), the Court ruled that the "advice of counsel with respect to a client's course of conduct, even if pleaded as condonation,' does not thereby and without more metamorphose into a cause of action by a third party against that counsel." The Court also held that the plaintiffs' failure to allege that any misrepresentations were made to them was fatal to their fraud claim.

The dissenting Justice noted that while he was not in disagreement with the majority's citation to the general rule that an attorney is not liable to third party, he found where, as in the plaintiffs' complaint, there is an indication of fraud and collusion, it was error to dismiss the complaint in its entirety.

The dissent found it was significant that the complaint alleged that the defendant attorney knew of her clients' fraud and advanced its commission by providing substantial assistance in advancing loans to clients that were secured by collateral already pledged to plaintiffs. As such, the dissent found that based on these facts there remains a question of whether the defendant simply acted zealously on behalf of her client, or whether she engaged in activity that crossed that line.

The Court's decision in Art Capital Group demonstrates the high hurdle faced by a plaintiff attempting to state a valid cause of action for legal malpractice. While legal malpractice actions are becoming more common, many are dismissed because of an ignorance of what allegations are necessary to sustain a claim for legal malpractice.

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Practice Area.


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