GANSETT ONE LLC v. Robert E. Ham, et al., Defendants. (2019)

Judgment, Supreme Court, New York County (O. Peter Sherwood, J.), entered December 6, 2017, dismissing the complaint, unanimously reversed, on the law, without costs, the judgment vacated, and the claims for aiding and abetting fraud and negligent supervision reinstated.  Appeal from order, same court and Justice, entered November 28, 2017, which granted defendants Husch Blackwell, LLP and Diane T. Carter's (defendants) motion to dismiss the complaint with prejudice pursuant to CPLR 3016(b) and 3211(a)(7), unanimously dismissed, without costs, as subsumed in the appeal from the judgment.

The complaint fails to state a claim for fraudulent misrepresentation, because the only representation attributed to defendants—Diane T. Carter's statement that nonparty Kamran Nezami was the most conservative person she knew—is “nonactionable opinion that provide[s] no basis for a fraud claim” (Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 179, 919 N.Y.S.2d 465, 944 N.E.2d 1104 [2011] ).  For the same reason, the complaint fails to state a claim for negligent misrepresentation (see McBride v. KPMG Intl., 135 A.D.3d 576, 580, 24 N.Y.S.3d 257 [1st Dept. 2016] ).

The complaint fails to state a claim for fraudulent omission or concealment, because it fails to allege that defendants had a duty to disclose material information to plaintiffs (see Mandarin, 16 N.Y.3d at 179, 919 N.Y.S.2d 465, 944 N.E.2d 1104).  Under New York law, on which plaintiffs rely on appeal, a law firm does not have an “ethical obligation to disclose what knowledge it might have had concerning its client's alleged impending fraud” (National Westminster Bank v. Weksel, 124 A.D.2d 144, 148, 511 N.Y.S.2d 626 [1st Dept. 1987], lv denied 70 N.Y.2d 604, 519 N.Y.S.2d 1027, 513 N.E.2d 1307 [1987];  see also Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 562, 883 N.Y.S.2d 147, 910 N.E.2d 976 [2009] ).

The complaint fails to state a claim for negligent misrepresentation, because it does not allege a special relationship between plaintiffs—the buyers of membership interests from Nezami—and defendants (Nezami's attorneys) (see Gregor v. Rossi, 120 A.D.3d 447, 448, 992 N.Y.S.2d 17 [1st Dept. 2014] ).  On appeal, plaintiffs claim that such a relationship existed because defendants sent them opinion letters.  However, this is not pleaded in the complaint.  In any event, it would not avail plaintiffs, because the opinion letters say that they were prepared for a nonparty and were not to be relied on by third parties, and there is no connection between plaintiffs' losses and defendants' opinion that physicians could invest in pharmacies (see Laub v. Faessel, 297 A.D.2d 28, 30, 745 N.Y.S.2d 534 [1st Dept. 2002] ).

However, the complaint states a claim for aiding and abetting fraud.  Contrary to defendants' contention, the complaint adequately alleges that Nezami fraudulently induced plaintiffs to invest in his companies via various misrepresentations and omissions.  It also sufficiently alleges that defendants had actual knowledge of the fraud (see e.g. Oster v. Kirschner, 77 A.D.3d 51, 55, 905 N.Y.S.2d 69 [1st Dept. 2010];  Weinberg v. Mendelow, 113 A.D.3d 485, 488, 979 N.Y.S.2d 29 [1st Dept. 2014] ).  The complaint alleges that Carter was the one who came up with the idea of disguising Nezami's embezzlement from his companies as “loans” or “draws,” that she and/or other lawyers at Husch Blackwell drafted promissory notes and security agreements documenting these supposed loans, that it was due to Carter's advice that the loans/draws were not included on the financial statements shown to plaintiffs, and that Carter was present at one or more meetings where it was specifically said that plaintiffs should not be told of Nezami's embezzlement lest they fail to invest or withdraw their investments.  Finally, the complaint sufficiently alleges substantial assistance;  it alleges that defendants drafted the very purchase agreements by which plaintiffs bought membership interests from Nezami—agreements that, it is alleged, contained misrepresentations (see Oster, 77 A.D.3d at 52–53, 56–57, 905 N.Y.S.2d 69).

The complaint also states a claim against Husch for negligently supervising Carter (see e.g. Kenneth R. v. Roman Catholic Diocese of Brooklyn, 229 A.D.2d 159, 161, 654 N.Y.S.2d 791 [2d Dept. 1997], cert denied 522 U.S. 967, 118 S.Ct. 413, 139 L.Ed.2d 316 [1997], lv dismissed 91 N.Y.2d 848, 667 N.Y.S.2d 683, 690 N.E.2d 492 [1997] ).

In view of the foregoing, plaintiffs' argument that dismissal should have been without prejudice so that they could amend the complaint applies to the fraud and negligent misrepresentation claims only.  However, amendment cannot cure the fundamental deficiencies in these claims, i.e., as indicated, the failure to allege that defendants—as opposed to Nezami—made any misrepresentations to plaintiffs or the fact that defendants had no duty under New York law to disclose their clients' wrongdoing to plaintiffs (see e.g. Laub, 297 A.D.2d at 32, 745 N.Y.S.2d 534).

Plaintiffs' contention that the motion court misapplied law of the case is of no moment;  the doctrine of law of the case does not apply to a court reviewing an order on appeal (People v. Evans, 94 N.Y.2d 499, 503 n 3, 706 N.Y.S.2d 678, 727 N.E.2d 1232 [2000] ).