Dec 19th, 2017

FKB’s A. Michael Furman and Benjamin M. Oxenburg obtain dismissal of a legal malpractice action in the Appellate Division, First Department

FKB successfully obtained the First Department’s reversal of a New York County Supreme Court decision denying our pre-answer motion to dismiss.

Plaintiff was the former co-CEO of Majestic Capital, Ltd. f/k/a CRM Holdings, Ltd. (“Majestic”), a public company traded on the NASDAQ exchange which managed a group of self-insured workers’ compensation funds. In March 2009, Plaintiff and Majestic entered into an agreement calling for Plaintiff’s departure from the company along with a payment of $3.3 Million. Shortly thereafter, the New York State Attorney General’s Office (“AGO”) began investigating Majestic and Plaintiff personally for violations of the Martin Act and stock manipulation related to Majestic’s December 2005 initial public offering. The AGO issued a formal notice of intent to pursue civil fraud charges against Plaintiff for falsely and actively misrepresenting the financial health and actuarial value of under-funded trusts under Majestic’s management to the Workers’ Compensation Board. FKB’s client and a prominent criminal defense firm represented Plaintiff in negotiations with the AGO, which resulted in an agreement for the $3.3 Million to be held in escrow by the AGO while the investigation proceeded. Before a formal settlement involving the forfeiture of the $3.3 Million was reached, however, Majestic filed for Chapter 11 protection with the Bankruptcy Court for the Southern District of New York. The AGO chose not pursue charges and deposited the funds with the court. Plaintiff began an adversary proceeding against Majestic, which had claimed the funds as an asset of its bankruptcy estate, and eventually settled for $825,000.

Plaintiff then began a legal malpractice action against his attorneys, claiming that he would have received his entire separation payment but for the attorneys’ alleged errors in drafting the agreement with the AGO. Plaintiff’s action sought damages in excess of $2.3 Million.

FKB argued before the Supreme Court and the First Department that Plaintiff’s claims were fatally flawed in that: (1) his choice to sign the agreement with the AGO was a reasonable strategic decision to avoid prosecution, (2) Plaintiff was a sophisticated client and signed the agreement with full knowledge of its implications, (3) the “but for” proximate cause allegations were hopelessly speculative by assuming that the AGO and Majestic would have assented to a different agreement or acted differently once Majestic filed for bankruptcy, and even if they did, Plaintiff assumed that the bankruptcy trustee would not have unwound any distribution of the funds as a preferential transfer.

In reversing the lower court’s decision, the First Department found that Plaintiff’s action “must be dismissed, because plaintiff’s claim that, but for defendants’ negligence, he would have recovered the full $3 million that he was owed during the bankruptcy filed by nonparty Majestic Capital, Ltd., consists of ‘gross speculations on future events,’” citing to cases provided in FKB’s briefs.

If you have any questions about this decision, or the defense of attorneys in general, please contact A. Michael Furman or Benjamin M. Oxenburg.