Supreme Court, New York County, July 31, 2017

Catalano, Gallardo & Petropoulos, L.L.P., Jericho (Matthew K. Flanagan of counsel), for defendants.

Halperin Law Firm, PLLC, New York City (Guy S. Halperin of counsel), for plaintiff.

Plaintiff limited liability company sues to recover damages for legal malpractice by defendant Ferber and his law firm, defendant Ferber Chan Essner and Coller, LLP, when representing plaintiff in the purchase of a condominium unit from nonparty sponsor Madison Park Group Owner LLC, of which nonparty Slazer Enterprises, LLC, was the majority owner. Its controlling members in turn were nonparties Marc Jacobs and Ira Shapiro.

In an order dated January 14, 2013, the court denied defendants' motion to dismiss the complaint. Defendants now move for summary judgment dismissing the complaint. (CPLR 3212 [b].) Plaintiff cross-moves for summary judgment on defendants' liability and plaintiff's damages for the claimed malpractice.{**58 Misc 3d at 710} (Id.) For the reasons explained below, the court denies defendants' motion, grants plaintiff's cross motion to the extent of awarding summary judgment on defendants' liability, and otherwise denies plaintiff's cross motion. (CPLR 3212 [b], [e].)

To obtain summary judgment, the moving parties must make a prima facie showing of entitlement to judgment as a matter of law, through admissible evidence eliminating all material issues of fact. (CPLR 3212 [b]; Friends of Thayer Lake LLC v Brown, 27 NY3d 1039, 1043 [2016]; Nomura Asset Capital Corp. v Cadwalader, Wickersham & Taft LLP, 26 NY3d 40, 49 [2015]; Voss v Netherlands Ins. Co., 22 NY3d 728, 734 [2014]; Vega v Restani Constr. Corp., 18 NY3d 499, 503 [2012].) If the moving parties fail to satisfy this standard, the court must deny summary judgment despite any insufficiency in the opposition. (Voss v Netherlands Ins. Co., 22 NY3d at 734; Vega v Restani Constr. Corp., 18 NY3d at 503; Smalls v AJI Indus., Inc., 10 [*2]NY3d 733, 735 [2008]; JMD Holding Corp. v Congress Fin. Corp., 4 NY3d 373, 384 [2005].) Only if the moving parties meet their initial burden, does the burden shift to an opposing party to rebut that prima facie showing, by producing evidence, in admissible form, sufficient to require a trial of material factual issues. (De Lourdes Torres v Jones, 26 NY3d 742, 763 [2016]; Nomura Asset Capital Corp. v Cadwalader, Wickersham & Taft LLP, 26 NY3d at 49; Morales v D & A Food Serv., 10 NY3d 911, 913 [2008]; Hyman v Queens County Bancorp, Inc., 3 NY3d 743, 744 [2004].)

In a stipulation dated April 14, 2016, the parties stipulated to the authenticity and admissibility of the condominium's offering plan, the form purchase agreement for the unit plaintiff was to purchase, the second and third riders to the agreement, and emails between Ferber and Neil Yaris, one of plaintiff's members. In evaluating the evidence for purposes of the motion and cross motion, the court construes the evidence in the light most favorable to the opposing parties. (De Lourdes Torres v Jones, 26 NY3d at 763; Vega v Restani Constr. Corp., 18 NY3d at 503; Cahill v Triborough Bridge & Tunnel Auth., 4 NY3d 35, 37 [2004].)

Section 4.1 of the purchase agreement provided that the condominium unit's purchase price was $9,850,000 and that the{**58 Misc 3d at 711} deposit was $985,000, 10% of the purchase price. In connection with the purchase, plaintiff, whose members were nonparties Neil Yaris, Alan Green, and Wendy Maitland, executed the second and third riders to the purchase agreement regarding the 10% deposit required by the agreement. The riders provided for payment of the deposit to the sponsor and its controlling owners, instead of the escrow agent as the purchase agreement specified. Specifically, the second rider required plaintiff to pay a nonrefundable deposit of 1% of the purchase price to the sponsor itself. The third rider required plaintiff to pay a deposit of the remaining 9% of the purchase price by making a loan to the sponsor's majority owner and the majority owner's individual members Marc Jacobs and Ira Shapiro.

Plaintiff contends that defendants committed legal malpractice by failing to advise plaintiff that the arrangement to pay the deposit directly to the sponsor and its controlling entity and individuals instead of to an escrow agent was void under the applicable statute and regulations. (General Business Law § 352-h; 13 NYCRR 20.3 [o] [2], [3] [xii].) Defendants do not dispute that, had plaintiff's deposit complied with the law, plaintiff would have recouped its deposit from the escrow agent when plaintiff invoked its right to rescind the purchase and the sale never closed. Defendants contend that the statute and regulations were inapplicable and that plaintiff's members were aware that the deposit arrangement with the sponsor posed heightened risks.

To establish legal malpractice, plaintiff must demonstrate that defendants failed to use the ordinary reasonable skill and knowledge of members of the legal profession and that the breach proximately caused plaintiff actual, ascertainable damages. (Nomura Asset Capital Corp. v Cadwalader, Wickersham & Taft LLP, 26 NY3d at 49; Dombrowski v Bulson, 19 NY3d 347, 350 [2012].) Plaintiff establishes proximate cause by demonstrating that plaintiff would not have sustained ascertainable damages but for defendants' negligence. (Nomura Asset Capital Corp. v Cadwalader, Wickersham & Taft LLP, 26 NY3d at 50; LaRusso v Katz, 30 AD3d 240, 243 [1st Dept 2006]; Brooks v Lewin, 21 AD3d 731, 734 [1st Dept 2005]; see Stackpole v Cohen, Ehrlich & Frankel, LLP, 82 AD3d 609, 610 [1st Dept 2011].)

For defendants to prevail by summary judgment, they must show that they advised plaintiff with the due diligence and skill of members of the legal profession or that a breach of that{**58 Misc 3d at 712} standard was not the proximate cause of plaintiff's damages. (Nomura Asset Capital Corp. v Cadwalader, Wickersham & Taft LLP, 26 NY3d at 50.) While defendants' failure to advise plaintiff of an inapplicable statute or regulation would not support a legal malpractice claim (Gabrielli v Dobson & Pinci, 51 AD3d 571, 572 [1st Dept 2008]) defendants fail to show that the statute or regulations on which plaintiff relies did not apply. (See Lichtenstein v Willkie Farr & Gallagher LLP, 120 AD3d 1095, 1098 [1st Dept 2014].)

A. Whether Plaintiff's Purchase was through a Public Offering

Defendants present the affidavit of Kenneth Jacobs, a real estate attorney, who reviewed the evidence presented and concluded that General Business Law § 352-h and the regulation that implements the statute did not apply because the securities for the condominium had not been offered to the public. Part of this evidence on which defendants rely is the deposition testimony by Susan Green, a real estate broker on site to facilitate unit sales, that plaintiff's purchase of a unit was pursuant to a "friends and family" deal available to her as a broker on site. (Aff of Matthew K. Flanagan, exhibit E at 49.) This deal permitted her to contact friends and family about purchasing units before sales were offered to the public, enabling the early purchasers to pay the original price, which was lower than after sales were publicized.

To determine whether an offering of condominium units for sale is public, the court considers the offering's circumstances, including the number of purchasers, their relationship to each other and to the sponsor, the information about the sponsor available to purchasers, and whether their relationship with the sponsor substituted for the statutory protections. (People v Landes, 84 NY2d 655, 661-662 [1994].) A small number of investors and lack of advertising indicate that an offering is not public. (Roni LLC v Arfa, 74 AD3d 442, 443 [1st Dept 2010], affd 18 NY3d 846, 848-849 [2011].)

Susan Green's testimony regarding use of the "friends and family" deal does not indicate that it was necessarily an insider deal. Her testimony described both how she was permitted to implement the same process for purchase of the building's units for any "friends," who were undefined, as well as family members, and how other brokers, including Wendy Maitland, were permitted to do likewise.

{**58 Misc 3d at 713}[1] Nor does the deposition testimony by Neil Yaris, Alan Green, and Wendy Maitland, who formed plaintiff for the purpose of purchasing the unit, undermine the offering's public character, as their testimony nowhere indicates a long or close relationship or a history of many past dealings either among themselves or with the sponsor. (People v Landes, 84 NY2d at 662.) The testimony by Neil Yaris and Alan Green indicated a desire to work with the sponsor, but not any familiarity with the sponsor or its managers or members. (See id. at 663.) Although Wendy Maitland worked as a broker for Brown Harris Stevens, which had entered an exclusive sales agreement with Slazer Enterprises, she largely left negotiations for the purchase of plaintiff's unit to Neil Yaris and Alan Green. Finally, the testimony by all three of plaintiff's members revealed no knowledge of the purchasers of any other units in the building. (See id.) In sum, although factual issues whether the offering was public would preclude summary judgment in plaintiff's favor (Clark Constr. Corp. v BLF Realty Holding Corp., 54 AD3d 604, 605 [1st Dept 2008]) defendants' evidence, recounted above, shows no such issues.

B. General Business Law § 352-h's Further Applicability to Plaintiff's Circumstances

Attorney Jacobs also concludes that General Business Law § 352-h's intent was to protect sponsors, not purchasers like plaintiff. The best indicator of the statute's intent is its terms, which the court must construe to effectuate its plain meaning. (Matter of Albany Law School v New York State Off. of Mental Retardation & Dev. Disabilities, 19 NY3d 106, 120 [2012]; Yatauro v Mangano, 17 NY3d 420, 426 [2011]; Matter of DaimlerChrysler Corp. v Spitzer, 7 NY3d 653, 660 [2006].) If the statute's terms are clear, resort to other means of interpreting the statute is unnecessary. (Matter of Amorosi v South Colonie Ind. Cent. School Dist., 9 NY3d 367, 373 [2007]; Matter of Raritan Dev. Corp. v Silva, 91 NY2d 98, 107 [1997]; City of New York v Stringfellow's of N.Y., 253 AD2d 110, 116 [1st Dept 1999].) General Business Law § 352-h expressly prohibits plaintiff purchaser's arrangement with the sponsor regarding payment of the deposit. General Business Law article 23-a's companion statutes, moreover, impose requirements on the sponsor to protect condominium unit purchasers by disclosing the risks of the purchase and thus allowing purchasers to analyze those risks. (East Midtown Plaza Hous. Co., Inc. v Cuomo, 20 NY3d 161, 169 [2012].){**58 Misc 3d at 714}

General Business Law § 352-h and 13 NYCRR 20.3 in fact limit their applicability to the [*4]circumstances specified in General Business Law § 352-e (1) or 13 NYCRR 20.1 (a): protecting the public against fraudulent exploitation in the purchase of securities. (General Business Law § 352-e [1] [a]; East Midtown Plaza Hous. Co., Inc. v Cuomo, 20 NY3d at 169-170.) Yet defendants fail to negate those narrowly drawn circumstances or to demonstrate otherwise that they bore no obligation to advise their client of the applicable law. (See Serradilla v Lords Corp., 50 AD3d 345, 347 [1st Dept 2008].)

C. Plaintiff's Awareness of the Deposit Arrangement's Implications

At most, defendants' evidence demonstrates plaintiff's awareness of an increased risk in proceeding as plaintiff did, but not an awareness of the statutory and regulatory prohibition of which defendants failed to advise plaintiff. (See Ableco Fin. LLC v Hilson, 109 AD3d 438, 438 [1st Dept 2013].) Plaintiff's awareness of a risk posed by the deal plaintiff negotiated with the sponsor, even if offset by potential benefits such as the interest on the loan, does not absolve defendants of their failure to advise plaintiff regarding the statute and regulation of which plaintiff was unaware: an unawareness defendants never dispute. (See Garten v Shearman & Sterling LLP, 102 AD3d 436, 437-438 [1st Dept 2013].) Ferber attests merely that he knew of the statute, but did not discuss it with Yaris, plaintiff's member negotiating the purchase, because the statute was inapplicable. Ferber never contradicts Yaris's deposition testimony that Yaris did not know that a statute voided the payment of the deposit through the loan transaction and hence the purchase agreement's protection against loss of the deposit.

Defendants thus fail to meet their burden of demonstrating entitlement to summary judgment based on their lack of professional negligence. (See Fielding v Kupferman, 104 AD3d 580, 580 [1st Dept 2013].) On the other hand, given the absolute statutory and regulatory prohibition of the arrangement into which plaintiff and the sponsor entered, contrary to the purchase agreement, defendants' failure to advise plaintiff of the applicable statute and regulation departed from the standard of professional care. (Benitez v United Homes of N.Y., LLC, 142 AD3d 867, 867 [1st Dept 2016].) Although conflicting testimony would raise factual issues precluding summary judgment on plaintiff's legal malpractice claim (Silva v Worby, Groner, Edelman, LLP, 54 AD3d 634, 634 [1st Dept 2008]), defendants{**58 Misc 3d at 715} fail to show any such dispute. (See SS Marks LLC v Morrison Cohen LLP, 133 AD3d 441, 441 [1st Dept 2015].)

Yaris's uncontradicted affidavit that he would not have agreed to the terms of the transaction he entered for plaintiff, had he known that a statute and regulation prohibited the transaction on those terms, establishes that defendants' failure to provide that advice proximately caused plaintiff's damages from the transaction. (Russo v Rozenholc, 130 AD3d 492, 497 [1st Dept 2015]; see Heritage Partners, LLC v Stroock & Stroock & Lavan LLP, 133 AD3d 428, 429 [1st Dept 2015]; Candela Entertainment, Inc. v Davis & Gilbert, LLP, 126 AD3d 656, 656 [1st Dept 2015]; Stackpole v Cohen, Ehrlich & Frankel, LLP, 82 AD3d at 610.) Defendants neither dispute that plaintiff retained them to represent it in purchasing the condominium unit and thus to provide advice applicable to the purchase, nor contradict Yaris's testimony that he would have followed any advice by plaintiff's attorneys to keep its deposit in escrow.

For plaintiff to recover its damages caused by legal malpractice, the damages sustained must be more than mere speculation. (Gallet, Dreyer & Berkey, LLP v Basile, 141 AD3d 405, 406 [1st Dept 2016]; Heritage Partners, LLC v Stroock & Stroock & Lavan LLP, 133 AD3d at 428; Engelke v Brown Rudnick Berlack Israels LLP, 111 AD3d 444, 444 [1st Dept 2013]; Hass & Gottlieb v Sook Hi Lee, 55 AD3d 433, 433 [1st Dept 2008].) Defendants' failure to advise plaintiff of the impact of the statute and regulation transformed plaintiff's nonrefundable deposit into a gift and the loan into a simple loan, instead of a deposit toward purchase of the unit. The failure to place the deposit into escrow eliminated any recourse for plaintiff to recoup its deposit. Plaintiff's loss of its deposit and its expenses in endeavoring to recover the deposit constitute its damages. (See Hass & Gottlieb v Sook Hi Lee, 55 AD3d at 433.)

Defendants claim plaintiff's damages are attributable to its own conduct because (1) [*5]plaintiff would have prevented any damages had it required the sponsor to place the deposit into escrow under the purchase agreement; (2) the promissory note for the loan to the sponsor's controlling owners was enforceable by plaintiff; and (3) it obtained a $1,083,700.14 judgment against them. First, plaintiff's damages are not attributable solely to its own conduct in negotiating the deal, because plaintiff demonstrates without contradiction that it would have{**58 Misc 3d at 716} required the sponsor to place the deposit into escrow under the purchase agreement had defendants advised plaintiff of the legal requirement to do so. (See Kodsi v Gee, 100 AD3d 437, 438 [1st Dept 2012]; Lederer de Paris Fifth Ave., Inc. v Jordan & Hamburg, LLP, 57 AD3d 229, 229 [1st Dept 2008].) Even assuming plaintiff's members were sophisticated businesspeople, thus appreciating the business risks, albeit not the illegalities, any negligence on their part in proceeding despite business risks would bear only on plaintiff's failure to mitigate its damages. (Mandel, Resnik & Kaiser, P.C. v E.I. Elecs., Inc., 41 AD3d 386, 388 [1st Dept 2007].)

Plaintiff's ability to recover its deposit based on the promissory note by Slazer Enterprises, Marc Jacobs, and Ira Shapiro and plaintiff's judgment against them again bears on plaintiff's mitigation of its damages or failure to mitigate, which is defendants' burden to establish. (Assouline Ritz1 LLC v Edward I. Mills & Assoc., Architects, PC, 91 AD3d 473, 474 [1st Dept 2012]; Lindenman v Kreitzer, 7 AD3d 30, 35 [1st Dept 2004]; see Matter of Corwin v City of New York, 141 AD3d 484, 490 [1st Dept 2016]; LaSalle Bank N.A. v Nomura Asset Capital Corp., 72 AD3d 409, 411 [1st Dept 2010].) Plaintiff's failure to recover its deposit based on the promissory note and judgment does not bar plaintiff from any recovery, but simply may reduce the amount of plaintiff's recovery. (Assouline Ritz1 LLC v Edward I. Mills & Assoc., Architects, PC, 91 AD3d at 475.)

This concept is distinct from collectibility, which pertains to the recovery plaintiff claims it lost through defendants' negligence. (Lindenman v Kreitzer, 105 AD3d 477, 478-479 [1st Dept 2013]; Cosentino v Sullivan Papain Block McGrath & Cannavo, P.C., 95 AD3d 603, 603 [1st Dept 2012].) Defendants do not dispute that plaintiff would have recovered the deposit had plaintiff not relinquished the purchase agreement's protection. As long as plaintiff establishes an entitlement to damages from the lost deposit, moreover, any issue as to noncollectibility may be established in a separate hearing. (Lindenman v Kreitzer, 105 AD3d at 479.)

[2] The extent to which plaintiff may have mitigated its damages, however, as well as the imprecision of plaintiff's losses based on the admissible evidence in the current record, precludes summary judgment on damages. While defendants bear the burden to show (1) the extent to which plaintiff{**58 Misc 3d at 717} mitigated its damages or (2) its failure to make diligent efforts to mitigate its damages and the extent to which such efforts would have reduced its loss, defendants raised this defense in their answer. Then, in support of their motion and in opposition to plaintiff's cross motion for summary judgment, they presented plaintiff's judgment against the sponsor's owners. (Corwin v City of New York, 141 AD3d at 490; Mitchell v Fidelity Borrowing LLC, 40 AD3d 557, 558 [1st Dept 2007].) Since the object of compensatory damages is simply to make defendants' injured client whole (e.g. Campagnola v Mulholland, Minion & Roe, 76 NY2d 38, 42 [1990]), now, for plaintiff to establish entitlement to a specified amount of damages, plaintiff must both specify its calculation of damages and show that it may not be reduced by any part of that judgment. (Mitchell v Fidelity Borrowing LLC, 40 AD3d at 558.) Yet plaintiff presents only a United States Bankruptcy Court order dated September 14, 2012, discharging Marc Jacobs's debt, but nothing regarding Slazer Enterprises or Ira Shapiro except various judgments against these other two debtors, not necessarily evidence of their inability to pay plaintiff's judgment.

Even if the $985,000 deposit amount is not reduced by plaintiff's ability to mitigate its damages, however, plaintiff fails to establish conclusively the date when it would have been entitled to a refund of a deposit paid to the escrow agent, to determine the interest owed. While plaintiff also is entitled to recover its payments to defendants for their negligent services, the invoices for their services that plaintiff presents are not authenticated on personal knowledge and in any event do not show that plaintiff actually paid the invoices; when to determine the interest [*6]owed; or that all of them are for the services that constituted defendants' malpractice. (Campagnola v Mulholland, Minion & Roe, 76 NY2d at 43-44.) The invoices for services by plaintiff's current attorney that plaintiff presents again do not show when payment was due or made, to determine the interest owed. For these reasons, at minimum, a trial is necessary to determine how much, if any, must be deducted for mitigation of plaintiff's damages or for failure to mitigate its damages and, even if no deductions are warranted, the precise amounts of its losses.

For all the above reasons, the court denies defendants' motion for summary judgment (CPLR 3212 [b]); grants plaintiff's{**58 Misc 3d at 718} cross motion for summary judgment on defendants' liability, including their causation of damages; but denies plaintiff's cross motion for summary judgment on the amount of its damages. (CPLR 3212 [b], [e]; Benitez v United Homes of N.Y., LLC, 142 AD3d at 867; Mitchell v Fidelity Borrowing LLC, 40 AD3d at 558; see Rudolf v Shayne, Dachs, Stanisci, Corker & Sauer, 8 NY3d 438, 443 [2007].)