Legal Malpractice

Aiding and Abetting a Breach of Fiduciary Duty Lawsuit

By (Andrew Lavoott Bluestone)

Today's New York Law Journal reports as news, and the Appellate Division, First Department reports as law a decision in McCagg v Schulte Roth & Zabel LLP ;2010 NY Slip Op 05463
Decided on June 22, 2010 ;Appellate Division, First Department  an unusual case in which it is alleged that a law firm aided and abetted a breach of fiduciary duty.  Note that this case is at least two levels of abstraction away from a typical legal malpractice case.  On the first level, it is a breach of fiduciary duty rather than a straight malpractice; on the second level, it is the law firm allegedly aiding, not directly doing.
 

"In 2000 and 2001, defendant Clingman and others formed a company called Marquis Jet Partners, Inc. Marquis is one of a handful of fractional jet ownership companies that maintain fleets of aircraft and sell the rights to travel on those planes for fixed periods of time to frequent users of jet travel. In August 2002, Marquis terminated Clingman. Clingman retained 12% of Marquis common stock, and refused an offer to sell back his shares and sign a non-compete agreement.

In November of the same year, Clingman invited plaintiff McCagg to attend a meeting in Florida with the senior management of Flexjet/Bombardier, a Canadian jet manufacturer. The purpose of the meeting was to discuss creating a company to compete with Marquis. Clingman allegedly thought the new company could have a competitive advantage over Marquis by offering the sale of airplane usage in smaller blocks of time.

McCagg and Clingman decided to pursue the venture. On December 17, 2002, the law firm of Schulte Roth & Zabel (SRZ), handled the incorporation of the corporation, which was called Clearjets, in the State of Delaware. SRZ had done legal work for Clingman, and he recommended it to McCagg to handle the incorporation.

Two days later, on December 19, 2002, Marquis's counsel demanded that Clingman abandon any plans to engage in any venture that would compete with his former firm. The letter threatened that if Clingman did not accede, Marquis would take necessary legal action to protect its rights. SRZ responded by letter dated December 24, 2002. The correspondence stated, among other things, that Clingman had been terminated by Marquis, that he was not given any severance when he was terminated, that he had not executed a non-competition agreement, and that he was not otherwise bound to suspend involvement in any competing venture in the industry.

By complaint dated May 19, 2004, McCagg brought this action against the SRZ defendants and Clingman (the SRZ litigation). Clearjets was not a named plaintiff. The complaint contained eight causes of action. The first five were asserted against Clingman. They alleged: (1) breach of contract; (2) breach of fiduciary duty; (3) common-law fraud; (4) misappropriation of corporate opportunity and unjust enrichment; and (5) a claim for an accounting and constructive trust. The sixth through eighth causes of action were asserted against the SRZ defendants and certain SRZ partners. These claims were for: (6) breach of fiduciary duty; (7) aiding and abetting breach of fiduciary duty and fraud; and (8) legal malpractice. "

""[W]here the primary purpose for the creation of Clearjets was to compete with Marquis, I cannot say as a matter of law that Clingman's negotiation and execution of a non-competition agreement with Marquis, while still chairman and CEO of Clearjets, was not a breach of his fiduciary duty owed to Clearjets. Nor can I say, as a matter of law, based on the parties' submissions - including redacted and incomplete billing statements - that [the SRZ defendants] did not aid and abet Clingman in the alleged breach. As noted above, the statements show that [SRZ] advised Clingman on "all aspects of Marquis relationship including . . . non-competition and release agreements"

"The Marquis action and this SRZ litigation are separate lawsuits, and, under the express language of 8 Del Code § 278, Clearjets no longer existed when, more than three years after its dissolution, plaintiff moved to add it as a party in this action (see Marsh v Rosenbloom, 499 F3d 165, 172-73, 175 [2d Cir 2007]; In re Citadel Indus., 423 A2d at 502-503; Smith-Johnson S.S. Corp. v United States, 231 F Supp 184 [D Del 1964];). Finally, the motion court incorrectly concluded that because the derivative claims sought to be raised in this litigation related back to the commencement of the Marquis litigation (see CPLR 203[f]), they were not barred by 8 Del Code § 278. In view of these conclusions, we need not reach the SRZ defendants' contentions relating to the merits of a proposed seventh cause of action sought to be asserted derivatively by McCagg on behalf of Clearjets.

In the second order appealed, the motion court correctly ruled that plaintiff acted improperly in filing, without its permission, an amended complaint that differed substantially from the proposed amended complaint that the court had granted plaintiff leave to file in its August 4, 2008 order (see CPLR 3025[b]; cf. CPLR 2001]). Indeed, plaintiff's attorney conceded at the oral argument before the motion court that he should have obtained further permission to file the amended complaint. However, in view of this concession, our preference for resolving controversies on the merits (see Spira v New York City Tr. Auth., 49 AD3d 478 [2008]), and the absence of a pattern of willful or contumacious conduct by plaintiff (see Kaplan v KCK Studios, 238 AD2d 264 [1997]), it was an improvident exercise of discretion for the motion court to dismiss the amended complaint with prejudice (see Grant v Rattoballi, 57 AD3d 272, 273 [2008]; Kaplan, 238 AD2d at 264-265; cf. Corsini v U-Haul Intl., 212 AD2d 288, 291 [1995], lv dismissed in part and denied in part 87 NY2d 964 [1996]). "

Full post as published by New York Attorney Malpractice Blog on June 24, 2010 (boomark / email).