FKB’s A. Michael Furman, Benjamin M. Oxenburg, and Aaron M. Barham secured a decision from the Appellate Division, First Department, dismissing a legal malpractice action on behalf of FKB’s client, a prominent New York law firm. In the underlying action, FKB’s client represented the plaintiff, a national accounting and advisory firm, in a complex six (6) year, multi-million dollar accounting malpractice/fraud litigation brought by the liquidators of several offshore hedge funds. After a supplemental document production several months before the scheduled trial revealed that the accounting firm itself had been a subject of a government investigation, a coverage dispute arose with the accounting firm’s insurers. Plaintiff separately retained new co-counsel for the litigation, and ultimately agreed to settle for $16.5 Million, which included an approximate $1.4 Million contribution to resolve the coverage dispute. Plaintiff then sued FKB’s client, claiming the supplemental document production resulted in the coverage dispute and plaintiff’s out of pocket contribution.
Hon. Joel M. Cohen of New York County Supreme Court’s Commercial Division initially granted FKB’s pre-answer motion to dismiss in part, ruling that it was speculative for the accounting firm to assume that the insurers would have fully funded the litigation settlement but for counsel’s alleged conduct. Justice Cohen dismissed plaintiff’s disgorgement claim seeking recovery of legal fees in connection with allegedly negligent work, but declined to dismiss the portion of the claim associated with additional attorney’s fees plaintiff allegedly paid to new co-counsel and coverage counsel. The First Department, however, issued a unanimous decision dismissing the litigation entirely. The First Department agreed with FKB that plaintiff’s claim rested on the speculative assumption “that if defendants had not produced the documents, its adversaries and insurers would not have requested or compelled them, so the insurers would not have initiated the coverage dispute and would have instead fully funded the settlement,” thus negating proximate causation. The First Department went further, finding that plaintiff had also failed to allege that defendants’ conduct breached its duty of care. The Court also found that the disgorgement claim must be dismissed because of the malpractice claim’s dismissal. Finally, the First Department held that plaintiff did not establish that it “incurred litigation expenses as a result of defendants’ conduct to minimize or correct defendants’ mistakes” and in particular that plaintiff “failed to specifically allege what attorneys’ fees, if any, it paid to co-counsel to remedy any alleged shortcomings by defendants in the wake of the supplementary disclosures and defendants’ motion to withdraw from the representation.”
A copy of the First Department’s decision is available here.