Foreborne Is Forearmed

The dismissal of a legal malpractice claim has been reversed by the New York Appellate Division for the First Judicial Department

The complaint alleges the following facts. In 2019, plaintiff-appellant Kenneth Salamone retained defendant Deily & Glastetter, LLP (D&G) and its partner, defendant Leigh A. Hoffman, Esq., to provide legal advice and drafting assistance in connection with plaintiff’s 30-day loan of $2,000,000 jointly to nonparties EIP Global Fund, LLC and Sridhar Chityala, plaintiff’s partner in another company (the nonparties). Hoffman drafted a demand note for the loan, which plaintiff and the nonparties executed on October 11, 2019. Mr. Chityala signed the note personally and on behalf of EIP. The demand note was due and payable on November 10, 2019 and required the nonparties to pay 10% annual interest on the principal. When the nonparties failed to repay the loan, plaintiff and the nonparties agreed that plaintiff would forbear from enforcing his rights under the demand note for an additional 30 days and the nonparties would pay plaintiff an additional sum of $300,000 to compensate him for his lost opportunity damages resulting from his inability to promptly repurchase Apple stock he had liquidated to fund the original 30-day loan. D&G drafted and counseled plaintiff to sign a forbearance agreement that: (1) imposed a higher interest rate of 20% per year on the unpaid principal commencing on November 27, 2019; (2) set forth the nonparties’ agreement to pay plaintiff $300,000 as a “forbearance fee”; (3) provided that the nonparties would be liable for plaintiff’s counsel fees incurred to enforce the demand note or the forbearance agreement; and (4) granted plaintiff a security interest in certain of Mr. Chityala’s membership interests in EIP and other companies (the Membership Interests), in order to secure the nonparties’ obligations under the demand note and the forbearance agreement.

The forbearance agreement did not set a specific date for payment, but provided that if the nonparties paid the sums due under the default notice by December 4, 2019, the forbearance fee would be reduced to $250,000, and the total sums due to plaintiff would be $2,319,876.70 “plus per diem interest at 20%.” It further provided, “[u]pon payment of the Default Amounts plus all accrued interest, plus the Forbearance Fee on or before December 17, 2019,” plaintiff would deliver a release to the nonparties.

When the nonparties failed to comply with the terms of the forbearance agreement, D&G commenced an action against them on plaintiff’s behalf seeking: (1) a declaratory judgment that plaintiff is entitled to certain financial disclosure provided for in the forbearance agreement; (2) a declaratory judgment that he is entitled to the Membership Interests; (3) damages for fraud; (4) damages for breach of the demand note and forbearance agreement in the amount of $2,369,918.502 “plus interest from November 27, 2019 in the amount set forth in the forbearance agreement”; and (5) injunctive relief.

The nonparties moved to dismiss, arguing, among other things, that the claims for relief based on breach of contract should be dismissed because the rate of interest was usurious. Specifically, the nonparties argued that since plaintiff sought payment of $2,369,918.50 as of November 27, 2019 on the October 11, 2019 loan of $2,000,000, plaintiff sought interest totaling 143.6% per year.

Stated claim

Plaintiff in a malpractice action must ultimately prove that the attorney “failed to exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession” (Rudolf v Shayne, Dachs, Stanisci, Corker & Sauer, 8 NY3d 438, 442 [2007]). “An attorney is obligated to know the law relating to the matter for which he/she is representing a client and it is the attorney’s duty, if he has not knowledge of the statutes, to inform himself, for, like any artisan, by undertaking the work, he represents that he is capable of performing it in a skillful manner” (Fielding v Kupferman, 65 AD3d 437, 440 [1st Dept 2009] [internal quotation marks omitted]). On this record, we find that D&G did not meet their obligation to exercise ordinary skill in representing plaintiff in this transaction by drafting an unenforceable provision that made the forbearance agreement facially usurious.

We also reject the argument that plaintiff’s damages claim is “speculative.” “To survive a pre-answer motion to dismiss pursuant to CPLR 3211(a)(7), a pleading need only state allegations from which damages attributable to the defendant’s conduct may reasonably be inferred” (Fielding, 65 AD3d at 442 [internal quotation marks omitted]). Here, plaintiff seeks damages to reimburse him for the counsel fees he incurred in attempting to “avoid, minimize or reduce the damage caused” by the facially usurious forbearance agreement defendants drafted and advised him to sign (see Rudolf, 8 NY3d at 443). Accordingly, plaintiff’s damages attributable to defendants’ conduct are not speculative and can be easily inferred from the complaint.

However, plaintiff is not entitled to pursue his claim that but for defendants’ actions, he would have “separately documented the [prior] agreement [by discussions and communications with the nonparties] to compensate Plaintiff for his lost opportunity to immediately repurchase the Apple stock he liquidated to fund the 30-day loan.” As made clear in this decision, plaintiff is not entitled to recoup his lost opportunity costs beyond the amount he has already obtained a judgment for as that would result in an unenforceable usurious loan, whether or not an estoppel claim lies.

(Mike Frisch)