Barack v. Seward and Kissel, LLP
OPINION & ORDER: on re: 26 MOTION to Dismiss the Amended Complaint, filed by Seward & Kissel, LLP. Seward & Kissel's motion to dismiss is denied. The Clerk of Court is directed to terminate the motion pending at ECF No. 26, and as further set forth in this order. Motions terminated: 26 MOTION to Dismiss the Amended Complaint, filed by Seward & Kissel, LLP. (Signed by Judge William H. Pauley, III on 9/12/2017) (ap)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-againstSEWARD & KISSEL, LLP,
OPINION & ORDER
WILLIAM H. PAULEY III, District Judge:
Mitchell Barack brings this legal malpractice action against the law firm Seward
& Kissel, LLP. Barack seeks damages for Seward & Kissel’s alleged malpractice in negligently
advising him on the sale of his company. Seward & Kissel moves to dismiss the complaint
under Fed. R. Civ. P. 12(b)(6). For the following reasons, Seward & Kissel’s motion to dismiss
The allegations in the First Amended Complaint (“Complaint” or “FAC”) are
presumed true for the purposes of this motion. The Complaint asserts a single legal malpractice
claim arising out of a corporate transaction gone awry. Barack was the founder and sole owner
of ESCO Energy Services Company Inc. (“ESCO”), a Massachusetts corporation in the business
of “energy efficiency upgrades and lighting retrofit projects.” (FAC ¶ 9.) Approaching
retirement, Barack retained BCMS Capital Advisors, Inc. (“BCMS”), to assist with locating a
suitable purchaser for ESCO. (FAC ¶¶ 2, 45.)
On July 21, 2014, Barack executed a letter of intent to sell ESCO to ForceField
Energy, Inc. (“ForceField”). (FAC ¶ 14; see Ex. A to Declaration of Maria H. Keane, ECF No.
28 (“Keane Decl.”).1) The letter of intent memorialized the pricing terms, under which Barack
would receive a total minimum purchase consideration of $7.5 million, consisting of $2.5 million
in cash, $2.5 million in a deferred payment note collateralized by ForceField’s restricted
common stock, and $2.5 million in ForceField’s restricted common stock. (Keane Decl. Ex. A,
§ 1(a).) Under the letter of intent, ESCO was also not obligated to consummate the transaction.
(Keane Decl. Ex. A, § 10(c).) Finally, the letter of intent contained a provision permitting—but
not requiring—each party, its accountants, its attorneys, and other advisers to “conduct a
thorough due diligence examination” of the other party. (Keane Decl. Ex. A, § 7.)
That same day, on BCMS’ referral, Barack approached Seward & Kissel to
represent him in connection with the potential stock sale of ESCO to ForceField. (FAC ¶¶ 11,
45.) Seward & Kissel assured Barack that it had the competence, experience, and expertise in
handling all aspects of the type of corporate transaction that Barack was contemplating from the
beginning to the close of the deal, which included protecting Barack from the risks of the
transaction. (FAC ¶ 11.) As a result, Barack, ESCO, and Seward & Kissel executed an
engagement letter on July 21, 2014 (the “Engagement Letter”) that defined ESCO and Barack as
the client and described the scope of representation as follows:
Representation of the Client as lead transaction counsel in
connection with the proposed sale of Client’s common stock to
ForceField Energy, Inc. and related agreements, documents and
(FAC ¶¶ 14-15; Keane Decl. Ex. B.)
On a motion to dismiss, a court may “consider any written instrument attached to the complaint, statements
or documents incorporated into the complaint by reference, legally required public disclosure documents filed with
the SEC, and documents possessed by or known to the plaintiff upon which it relied in bringing the suit.” Tongue v.
Sanofi, 816 F.3d 199, 209 (2d Cir. 2016). Exhibits B-H are explicitly quoted or referenced by the Complaint. (FAC
¶¶ 14-16, 18, 35-36, 40-42.) Although this July 21, 2014 letter of intent is not expressly referenced in the
Complaint, the Complaint relies upon information contained within that letter, including the transaction’s payment
terms. (E.g., FAC ¶¶ 21-22.) Accordingly, this Court may consider the exhibits accompanying the Keane
Seward & Kissel’s invoices reflect that between October 8, 2014 and October 15,
2014, it conducted 28.5 hours of due diligence for the ESCO-ForceField transaction. (FAC
¶ 17.) While Seward & Kissel performed due diligence on ESCO, it did none for ForceField, nor
did it discuss with Barack what due diligence it could, would, or should do on ForceField. (FAC
¶¶ 17, 43-44.) Barack alleges that if Seward & Kissel had performed due diligence, it would
have discovered several publicly available “red flags” regarding fraud and financial misconduct
by ForceField executives, including the manipulation of ForceField’s stock price. (FAC ¶¶ 31,
Less than a week before the transaction closed, ForceField informed Seward &
Kissel that it did not have sufficient cash to pay Barack the $2.5 million cash payment at closing,
and instead sought to defer $1.5 million of that amount to several months after the consummation
of the deal. (FAC ¶ 22.) Seward & Kissel relayed this information to Barack, who inquired
about the implications of ForceField’s lack of cash and whether he should still proceed with the
transaction. (FAC ¶ 22.) In response, Seward & Kissel advised Barack to proceed with the
closing and rely on ForceField’s promise that the remaining $1.5 million of the cash payment
would come later, reassuring him that the lack of cash was “routine” and “not unusual.” (FAC ¶
22.) Despite knowledge of ForceField’s ostensible financial troubles, Seward & Kissel still did
not perform any due diligence on the purchaser. (FAC ¶¶ 43-44.)
The ESCO-ForceField transaction closed on October 17, 2014. (FAC ¶ 21.) At
that time, ESCO had a fair market value between $8 million and $12 million. (FAC ¶ 49.)
Barack received a $1 million cash payment, $2.5 million in ForceField’s restricted common
stock, and $4 million in deferred payment notes secured by ForceField’s assets. (FAC ¶¶ 21,
29.) Under the terms of the transaction, Barack was to receive a $175,000 salary, along with
benefits and bonuses, for at least two years. (FAC ¶ 21.) Finally, ForceField agreed to fund a
line of credit to ensure ESCO’s liquidity in the future. (FAC ¶ 21.) For its work on the
transaction, Seward & Kissel charged Barack $100,000. (FAC ¶ 49.)
Roughly six months after the closing, a chain of events hamstrung ForceField’s
ability to meet its deferred funding commitments. On April 17, 2015, the Executive Chairman of
ForceField’s Board of Directors, Richard St. Julien, was arrested and charged with securities
fraud and conspiracy. (FAC ¶ 25.) That same day, a securities fraud class action lawsuit was
filed against ForceField and some of its senior management. (FAC ¶ 25.) After this news broke,
ForceField’s stock price plummeted. Around the same time, the SEC suspended the public
trading of ForceField’s shares based on concerns about stock market manipulation and the
accuracy of information provided to investors, and ultimately, ForceField delisted itself from
public trading. (FAC ¶ 28.) These events rendered Barack’s restricted stock and deferred
payment notes worthless. (FAC ¶ 29.) Additionally, ForceField could no longer fund the
promised line of credit or satisfy its obligation to pay Barack the $175,000 annual salary. (FAC
¶ 29.) As a result, Barack repurchased ESCO at a “fire sale” price of $900,000 on July 1, 2015
and resold it to another buyer for $1 million—a mere fraction of the $7.5 million in
compensation that was originally negotiated. (FAC ¶ 30.) Seward & Kissel charged Barack
another $50,000 for representing him in this repurchase. (FAC ¶ 49.)
On a motion to dismiss under Rule 12(b)(6), the factual allegations in a complaint
are accepted as true and all reasonable inferences are drawn in the plaintiff’s favor. Gonzalez v.
Hasty, 802 F.3d 212, 219 (2d Cir. 2015). To survive a motion to dismiss, the complaint “must
contain sufficient factual matter” to “state a claim to relief that is plausible on its face.” Ashcroft
v. Iqbal, 556 U.S. 663, 678 (2009) (citation omitted). In other words, the “[f]actual allegations
must be enough to raise a right to relief above the speculative level.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555 (2007). A pleading that merely recites conclusory allegations or a
“formulaic recitation of the elements of a cause of action” fails to state a claim. Iqbal, 556 U.S.
at 678 (citation omitted).
In a diversity action for legal malpractice, state substantive law applies.
Nordwind v. Rowland, 584 F.3d 420, 429 (2d Cir. 2009). The parties assume that New York law
governs, and accordingly, this Court applies the substantive law of New York. See Joseph
DelGreco & Co. v. DLA Piper L.L.P. (U.S.), 899 F. Supp. 2d 268, 276 (S.D.N.Y. 2012). To
state a claim for legal malpractice under New York law, a plaintiff must allege: (1) negligence on
the part of the attorney; (2) that the negligence is the proximate cause of plaintiff’s injury; and
(3) actual, ascertainable damages. Achtman v. Kirby, McInerney & Squire, LLP, 464 F.3d 328,
337 (2d Cir. 2006); see also Janker v. Silver, Forrester & Lesser, P.C., 24 N.Y.S.3d 182, 184
(N.Y. App. Div. 2016).2
The negligence prong requires the plaintiff to allege that the attorney’s conduct
“fell below the ordinary and reasonable skill and knowledge commonly possessed by a member
of his profession.” Achtman, 464 F.3d at 337 (quotation marks omitted). The standard to which
the attorney’s conduct is compared is “not that of the most highly skilled attorney,” but that of a
“competent and qualified” attorney. Bua v. Purcell & Ingrao, P.C., 952 N.Y.S.2d 592, 597 (N.Y.
The parties spar over the extent to which the alleged violations of various provisions of the New York
Rules of Professional Conduct constitute actionable legal malpractice. But because Barack concedes that the alleged
violations are simply additional facts that support the single cause of action for malpractice, and Barack has stated a
cause of action for malpractice, this Court need not address those arguments.
App. Div. 2012). Expert testimony is “normally needed to establish that the attorney” fell below
this standard. Healy v. Finz & Finz, P.C., 918 N.Y.S.2d 500, 502 (N.Y. App. Div. 2011).
Moreover, an attorney is generally “not a guarantor of a particular result, and may not be held
‘liable in negligence for . . . the exercise of appropriate judgment that leads to an unsuccessful
result.’” Bua, 952 N.Y.S.2d at 597. In other words, a complaint that merely alleges an “error of
judgment” or a “selection of one among several reasonable courses of action” fails to state a
claim for malpractice. Achtman, 464 F.3d at 337.
Seward & Kissel contends that Barack fails to plead the negligence prong,
arguing in essence that it cannot be held responsible for advising on the prudence of a business
decision, and that because it was retained only to close the sale of ESCO to ForceField, the scope
of its representation did not include due diligence on ForceField. As an initial matter, the scope
of Seward & Kissel’s representation set forth in the Engagement Letter is facially broad and
contemplates without qualification that Seward & Kissel will serve as “lead transaction counsel”
for the proposed transaction “and related agreements, documents and transactions.” (FAC ¶¶ 1415; Keane Decl. Ex. B.) Nowhere does the Engagement Letter explicitly carve out specific due
diligence responsibilities from Seward & Kissel’s retention. Nor does the Engagement Letter
define “lead transaction counsel” or shed additional light on the scope of Seward & Kissel’s
responsibilities. But at least one case from this Circuit illustrates that the scope of transaction
counsel’s responsibilities is broader than that which Seward & Kissel proposes. See Schweizer
v. Sikorsky Aircraft Corp., 10-cv-6547, 2014 WL 5460504, at *10 (W.D.N.Y. Oct. 27, 2014)
(observing that the seller’s transaction counsel also negotiated specific language in a stock
Seward & Kissel points to AmBase Corp. v. Davis Polk & Wardwell to support
the proposition that it cannot be held liable for failing to act outside the scope of its retention.
But Seward & Kissel’s reliance on AmBase is misplaced. In that case, AmBase was embroiled
in a tax dispute with the IRS and brought a malpractice action against Davis Polk for that law
firm’s alleged failure to advise that certain tax liability belonged to a third party. AmBase Corp.
v. Davis Polk & Wardwell, 866 N.E.2d 1033, 1036-37 (N.Y. 2007). In finding that Davis Polk
“exercised the ordinary reasonable skill and knowledge commonly possessed,” the Court of
Appeals explained that “[t]he plain language of the retainer agreement indicates that Davis Polk
was retained to litigate the amount of tax liability and not to determine whether the tax liability
could be allocated to another entity.” AmBase Corp., 866 N.E.2d at 1037. Here, by contrast, the
Engagement Letter does not contain any similar specification of the scope of Seward & Kissel’s
representation—much less a clear one.
Indeed, the July 21, 2014 letter of intent and Seward & Kissel’s own invoices
raise the inference that “competent and qualified” transaction counsel might be expected to
conduct some due diligence on ForceField, or at the very least communicate with Barack about
the scope of due diligence to be conducted. While the July 21, 2014 letter of intent does not
require due diligence to be conducted on ForceField, it certainly contemplates that ESCO’s
attorneys may do so. (Keane Decl. Ex. A, § 7.) And according to Seward & Kissel’s invoices, it
even reviewed and discussed a draft of the letter of intent. (Keane Decl. Ex. C, at 2.) Moreover,
these invoices reflect that four of its attorneys reviewed, revised, drafted, or provided comments
on the stock purchase agreement between October 3, 2014 and October 15, 2014, suggesting that
Seward & Kissel may have played a part in negotiating the terms of the agreement. (See Keane
Decl. Ex. C, at 2.) Finally, Seward & Kissel’s invoices reveal that on August 5, 2014, it
“review[ed] ForceField Energy information and prior deal documents.” (Keane Decl. Ex. C, at
2.) Thus, on these allegations, Seward & Kissel may have had a duty to conduct due diligence
on ForceField, or at minimum, discuss with Barack what and how much diligence was
appropriate. Cf. Campbell v. Fine, Olin & Anderson, P.C., 642 N.Y.S.2d 819, 821 (N.Y. Sup.
Ct. 1996) (observing that “an attorney has an affirmative duty to ensure that the client
understands any limits imposed by the attorney on the extent of the work to be performed”).
Drawing all reasonable inferences in Barack’s favor, the Complaint plausibly
alleges that Seward & Kissel’s conduct fell below the ordinary and reasonable skill and
knowledge possessed by a member of the legal profession by neglecting to perform any due
diligence on ForceField or even communicate with Barack about the amount of due diligence it
could or should perform. Accord Sohns v. Little Prince Prods., Ltd., 791 F. Supp. 88, 93
(S.D.N.Y. 1992) (finding that corporate client had stated legal malpractice claim against attorney
based in part on allegations that the attorney failed to conduct a due diligence investigation of the
proposed merger partner and its past business dealings).
An attorney’s “conduct or inaction is the proximate cause of a plaintiff’s damages
if ‘but for’ the attorney’s negligence the plaintiff . . . would not have sustained ‘actual and
ascertainable’ damages.” Nomura Asset Capital Corp. v. Cadwalader, Wickersham & Taft LLP,
41 N.E.3d 353, 360 (N.Y. 2015) (citations omitted) (quotation mark omitted). Stated differently,
the “but for” prong “demands a hypothetical re-examination of the events at issue absent the
alleged malpractice.” Even Street Prods., Ltd. v. Shkat Arrow Hafer & Weber, LLP, 643 F.
Supp. 2d 317, 322 (S.D.N.Y. 2008). The proximate cause requirement is a “high bar to attorney
malpractice liability, seek[ing] to insure a tight causal relationship exists between the claimed
injuries and the alleged malpractice.” Farrell Family Ventures, LLC v. Sekas & Assocs., LLC,
863 F. Supp. 2d 324, 330 (S.D.N.Y. 2012). But at the motion to dismiss stage, Barack “need[s]
only [to] allege, not prove,” the proximate cause prong of his claim. Even Street Prods., Ltd.,
643 F. Supp. 2d at 322. To adequately plead causation, the Complaint must allege that if Seward
& Kissel had conducted adequate due diligence on ForceField, Barack would not have sustained
Here, Barack alleges explicitly that he would not have sold ESCO to ForceField
had Seward & Kissel advised him of the “red flags” relating to ForceField and its senior
management. (FAC ¶¶ 4, 51, 55.) While a hypothetical chain of speculative future events is
“insufficient to establish that the defendant lawyer’s malpractice, if any, was a proximate cause
of any such loss,” Brooks v. Lewin, 800 N.Y.S.2d 695, 698 (N.Y. App. Div. 2005), there is no
such chain of attenuation here. These allegations are sufficient to survive a motion to dismiss.
Tellingly, Seward & Kissel does not contest that the Complaint alleges that had
Seward & Kissel conducted adequate due diligence, Barack would not have proceeded with the
transaction and subsequently incurred damages. Instead, the crux of Seward & Kissel’s
argument is that its inaction cannot constitute the “but for” cause of Barack’s damages either
because it is negated by Barack’s own knowledge of the red flags concerning ForceField or
because it is otherwise superseded by the fraud perpetrated by ForceField’s senior managers.
But neither of Seward & Kissel’s arguments is availing.3
First, Seward & Kissel urges that Barack’s own awareness or possession of “red
flag” information about ForceField and its senior managers precludes Seward & Kissel’s failure
to identify those red flags from being the “but for” cause, citing Macquarie Capital (USA) Inc. v.
Seward & Kissel also argues that inaction outside the scope of the representation cannot support “but for”
causation. However, because Barack has plausibly alleged that Seward & Kissel’s failure to perform due diligence
on ForceField falls within the scope of the representation, this Court need not address this argument at the pleading
Morrison & Foerster LLP, Index No. 650988/2015, 2016 WL 3927648 (N.Y. Sup. Ct. July 14,
2016). Specifically, Seward & Kissel points to three examples of red flags known or possessed
by Barack: (1) that ForceField was a small company; (2) that ForceField had a limited operating
and reporting history; and (3) that ForceField lacked the cash to meet its closing obligations. But
as Seward & Kissel concedes, having a limited operating and reporting history is not itself a red
flag, and simply having a small capitalization is not necessarily one either. Moreover, while the
Complaint alleges that Barack learned that ForceField lacked the cash to close, the essence of
those allegations is not that Seward & Kissel should have discovered this red flag and brought it
to Barack’s attention, but that Seward & Kissel should have performed some due diligence on
ForceField after learning this information instead of advising Barack to proceed with the
transaction. As for the other red flags, there is no indication from the Complaint and exhibits to
the Keane Declaration that Barack actually knew of or “indisputably possessed” that
information. See Macquarie Capital (USA) Inc., 2016 WL 3927648, at *1, 4. And to the extent
that Seward & Kissel suggests that Barack should have investigated publicly available red flags
himself, this Court rejects any such contention. Cf. Escape Airports (USA), Inc. v. Kent, Beatty
& Gordon, LLP, 913 N.Y.S.2d 47, 49 (N.Y. App. Div. 2010) (“It is axiomatic that counsel ‘may
not shift to the client the legal responsibility it was specifically hired to undertake because of its
Second, Seward & Kissel contends that the fraud perpetrated by ForceField and
some of its senior management post-closing acted as an intervening cause for the damages to
Barack. Under New York law, an intervening act is “deemed a superseding cause and will serve
to relieve defendant of liability when the act is of such an extraordinary nature or so attenuates
defendant’s negligence from the ultimate injury that responsibility for the injury may not be
reasonably attributed to the defendant.” Kush v. City of Buffalo, 449 N.E.2d 725, 729 (N.Y.
1983). However, when the intervening act is a “natural and foreseeable consequence of a
circumstance created by defendant, liability will subsist.” Kush, 449 N.E.2d at 729. And while
an “intervening intentional or criminal act will generally sever . . . liability,” this doctrine does
not apply if the intervening act is reasonably foreseeable. Kush, 449 N.E.2d at 729. In this case,
the crux of Barack’s malpractice allegations is precisely that ForceField’s criminal activity was
foreseeable based on the red flag information that Seward & Kissel purportedly failed to uncover
(see FAC ¶¶ 34-42), and was accordingly a foreseeable consequence of Seward & Kissel’s
negligence. Thus, Barack has also adequately pled the causation prong of his malpractice claim.
See Winters v. Dowdall, 882 N.Y.S.2d 100, 101 (N.Y. App. Div. 2009) (holding that where
counsel failed to properly investigate an entity prior to selecting it as an intermediary for an
exchange transaction under 26 U.S.C. § 1031, the subsequent theft of the client’s exchange funds
by the entity “did not relieve [counsel] from the consequences of their own initial negligence”).
Legal malpractice damages are designed “to make the injured client whole.” Bua,
952 N.Y.S.2d at 598 (citing Campagnola v. Mulholland, Minion & Roe, 76 N.Y.2d 38, 42 (N.Y.
1990). The measure of damages for a legal malpractice action based on negligence in giving
advice “is the difference in the pecuniary position of the client from what it should have been
had the attorney acted without negligence.” 76 N.Y. Jur. 2d Malpractice § 99; see also Flynn v.
Judge, 133 N.Y.S. 794, 796 (N.Y. App. Div. 1912). Under New York law, “[c]onclusory
allegations of damages or injuries predicated on speculation cannot suffice for a malpractice
action, and dismissal is warranted where the allegations in the complaint are merely conclusory
and speculative.” Janker, 24 N.Y.S.3d at 185 (quotation marks omitted); Zarin v. Reid & Priest,
585 N.Y.S.2d 379, 382 (N.Y. App. Div. 1992) (affirming motion to dismiss pursuant to CPLR
§ 3211 where the damages claimed were “too speculative and incapable of being proven with
any reasonable certainty”).
Here, Barack alleges a loss of over $10 million, consisting of (1) the losses
sustained on the transaction; (2) his subsequent repurchase and sale of ESCO at a “fire sale”
price; (3) the notes; (4) the loss of his employment contract; and (5) the $150,000 in legal fees
that Seward & Kissel charged him in connection with the ForceField transaction and the
subsequent repurchase of ESCO. (FAC ¶ 49.) The parties’ disagreement centers on the losses
sustained by Barack on the transaction. Seward & Kissel contends that these alleged losses,
which are essentially for lost profits, are speculative because Barack does not identify any actual
bids or offers from prospective buyers of ESCO for over $10 million, but instead merely alleges
that he had “interest” from other purchasers. Barack counters that he does not seek lost profits,
but rather lost value damages based on the loss of ESCO’s market value, measured from the time
of the transaction.
But this Court need not wade into the thick of the parties’ dispute at this juncture.
Long v. Marubeni Am. Corp., 406 F. Supp. 2d 285, 301-02 (S.D.N.Y. 2005) (“A motion to
dismiss is directed to the complaint, and not to the theories spun out in plaintiffs’ opposition
papers.”). Accordingly, what matters for purposes of this motion are whether “the allegations
actually plead[ed]” establish actual and ascertainable damages. Ifill v. United Parcel Serv., 04cv-5963, 2005 WL 736151, at *4 (S.D.N.Y. Mar. 29, 2005). Barack alleges that had Seward &
Kissel conducted adequate due diligence, he would not have proceeded with the transaction
(FAC ¶ 4, 49, 51, 55). The Complaint also alleges that the fair market value of ESCO at the time
of the transaction was between $8 million and $12 million. (FAC ¶ 49.) Taken together, these
allegations plausibly assert that consummating the ForceField transaction placed Barack in a
worse financial position than the financial position he would have been in had he not proceeded
and simply retained the value of his company. See Flynn, 133 N.Y.S. at 796.
Seward & Kissel’s motion to dismiss is denied. The Clerk of Court is directed to
terminate the motion pending at ECF No. 26.
Dated: September 12, 2017
New York, New York
WILLIAM H. PAULEY III
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?