Genesis Merch. Partners, L.P. v. Gilbride, Tusa, Last & Spellane, LLC

• Decision Date: 11 January 2018
• Docket Number: Index 653145/14,5051
• Parties: GENESIS MERCHANT PARTNERS, L.P., et al., Plaintiffs–Respondents, v. GILBRIDE, TUSA, LAST & SPELLANE, LLC, et al., Defendants–Appellants.
• Court: New York Supreme Court — Appellate Division

157 A.D.3d 479

69 N.Y.S.3d 30

GENESIS MERCHANT PARTNERS, L.P., et al., Plaintiffs–Respondents,

v.GILBRIDE, TUSA, LAST & SPELLANE, LLC, et al., Defendants–Appellants.

5051

Index 653145/14

Supreme Court, Appellate Division, First Department, New York.

ENTERED: JANUARY 11, 2018

Wilson Elser Moskowitz Edelman & Dicker LLP, New York (Judy C. Selmeci of counsel), for appellants.

Law Office of Wallace Neel, P.C., New York (Wallace Neel of counsel), for respondents.

Richter, J.P., Kapnick, Webber, Oing, Singh, JJ.

Order, Supreme Court, New York County (Nancy M. Bannon, J.), entered March 2, 2017, which granted plaintiffs' motion for summary judgment on the issue of liability for legal malpractice and for summary judgment dismissing the counterclaims, unanimously reversed, on the law, without costs, and the motion denied.

At issue on this appeal is whether plaintiffs Genesis Merchant Partners, L.P. and Genesis Merchant Partners II, L.P. (collectively, Genesis) are entitled to summary judgment on liability in this legal malpractice action premised the failure of defendant Gilbride, Tusa, Last & Spellane, LLC, and defendant attorneys in that firm, Jonathan M. Wells, Kenneth M. Gammill, Jr., and Charles S. Tusa (collectively, Gilbride) to perfect security interests in life insurance policies. Because issues of fact exist, Supreme Court erred in granting Genesis summary judgment.

The plaintiffs are related venture capital firms. Between 2008 and 2011, Genesis agreed to make four secured loans totaling $4.425 million to nonparty Progressive Capital Solutions

LLC (Progressive) to finance Progressive's purchase of several portfolios of life insurance policies. The loans were to be secured, in part, by the insurance policies themselves. Portions of the loan proceeds were to be used to buy life insurance policies to collateralize the loans.

In May 2008, Genesis retained Gilbride to represent it in connection with the first of the loans, which Progressive repaid. Gilbride also represented Genesis in connection with three additional loans, issued on December 22, 2008, July 31, 2009, and February 3, 2011 (respectively, the second, third and fourth loans).

It is undisputed that Gilbride drafted the loan documents, including the Collateral Assignment of Contracts and the UCC–1 financing statements for each loan. Gilbride filed a UCC–1 financing statement on May 27, 2008, for the first loan, listing Progressive as the Debtor and Genesis as the Secured Party and broadly declaring a security interest in all of Progressive's assets. The UCC–1 financing statements for the second, third and fourth loans, also filed by Gilbride, contained similar declarations. However, the UCC–1 financing statement for the fourth loan also listed, for the first time, the policy numbers of each insurer for seventeen life insurance policies pledged as additional collateral.

Progressive defaulted on the latter three loans. Genesis brought a lawsuit against Progressive in Connecticut. The parties entered into a settlement that imposed additional performance and payment obligations upon Progressive. Progressive defaulted on the settlement. Thereafter, Genesis contacted the underwriting insurers to collect on the life insurance policies. The underwriters refused to give Genesis any information or proceeds in connection with the insurance policies because they had no record of the collateral assignments to Genesis.

Genesis commenced this action, alleging that Gilbride committed legal malpractice by failing to perfect Genesis's security interests in the life insurance policies that served as collateral on the second, third and fourth loans, resulting in the loss of millions of dollars on life insurance policies valued at more than $84 million. Gilbride denied committing legal malpractice and counterclaimed for $112,000 in unpaid attorneys' fees on the theories of quantum meruit and account stated.

The crux of the factual dispute is whether Gilbride had a duty to perfect Genesis's security interests in the collateral. Genesis alleges that Gilbride was retained to advise it on the loans, including drafting the loan documents and ensuring that Genesis's security interests in the collateral were secured and perfected under applicable law. Gilbride maintains that it was retained only to draft the loan documents and that this limited representation was at the express instruction of Genesis.

Article 9 of the UCC regulates security interests to personal property, permitting creditors to protect their interest in collateral held by debtors or third parties ( Badillo v. Tower Ins. Co. of N.Y., 92 N.Y.2d 790, 794, 686 N.Y.S.2d 363, 709 N.E.2d 104 [1999] ). However, article 9 "does not apply to... a transfer of an interest in or assignment of a claim under a policy of insurance" ( UCC 9–109[d][8] ).

A security interest in the proceeds of an insurance policy may be created by possession of the policy ( Matter of Bickford's Estate, 265 A.D. 266, 268, 38 N.Y.S.2d 785 [3d Dept. 1942] ; Cornell v. Cornell, 54 N.Y.S.2d 434, 435–436 [Sup Ct., N.Y. County 1945], affd 269 A.D. 931, 58 N.Y.S.2d 216 [1st Dept. 1945] ). Alternatively, a creditor may obtain collateral assignment of the policies. This process entails obtaining signed documents that assign the benefits to the creditor—in this case, Genesis—and then filing them with the carriers for the insurance policies. Here, it is undisputed that the security interests in the life insurance policies were not perfected.

Supreme Court granted Genesis summary judgment, rejecting Gilbride's contention that perfecting the security interests was outside the scope of its representation. The court held—on a theory not raised by the parties in the briefing below—that even if Gilbride ultimately established that the scope of representation was limited at Genesis's instructions, Gilbride "voluntarily assumed the obligation to perfect the security interests," by filing the UCC–1 financing statements and billing Genesis for that work, and that Gilbride negligently discharged that duty. The court dismissed the counterclaims for unpaid attorneys' fees, as Gilbride sought payment for the same work that constituted malpractice.

Standard of Review

We start with the familiar legal principle that summary judgment is a drastic remedy, to be granted only where the moving party has "tender[ed] sufficient evidence to demonstrate the absence of any material issues of fact" ( Kebbeh v. City of New York, 113 A.D.3d 512, 512, 979 N.Y.S.2d 50 [1st Dept. 2014], quoting Vega v. Restani Constr. Corp., 18 N.Y.3d 499, 503, 942 N.Y.S.2d 13, 965 N.E.2d 240 [2012] ). When the movant fails to make this prima facie showing, the motion must be denied, "regardless of the sufficiency of the opposing papers" ( id. ). When deciding a motion for summary judgment, the court's function is issue finding rather than issue determination ( Kershaw v. Hospital for Special Surgery, 114 A.D.3d 75, 82, 978 N.Y.S.2d 13 [1st Dept. 2013] ). Moreover, the evidence will be construed in the light most favorable to the nonmoving party ( id. ). Summary judgment must be denied "where there is any doubt as to the existence of a triable issue" ( Rotuba Extruders v. Ceppos, 46 N.Y.2d 223, 231, 413 N.Y.S.2d 141, 385 N.E.2d 1068 [1978] [internal quotation marks omitted] ) or where "the issue is arguable" ( Glick & Dolleck v. Tri–Pac Export Corp., 22 N.Y.2d 439, 441, 293 N.Y.S.2d 93, 239 N.E.2d 725 [1968] [internal quotation marks omitted] ).

The Scope of Gilbride's Representation

On this record, the parties' competing affidavits, the Collateral Assignment of Contracts, and the emails raise issues of fact as to whether Gilbride's role was limited to drafting the loan documents and preparing the closing binders at the specific instructions of Genesis.

There is no engagement letter that defines the scope of Gilbride's representation. Steven Sands, Senior Portfolio Manager of Genesis, states in an affidavit that "[Genesis] initially retained [Gilbride] to draft loan documents for a loan to [Progressive] that required collateral assignments of life insurance policies and other assets as collateral for the loan. This engagement included perfecting the collateral."

Jonathan Wells, an attorney at Gilbride who represented Genesis, disputes that the law firm had a duty to perfect the security interests. He states that "Genesis specifically restricted Gilbride from undertaking" the tasks of the actual filing of the collateral assignment forms.

In order for Gilbride to limit the scope of its representation, it had a duty to ensure that Genesis understood the limits of its representation (see Unger v. Horowitz, 8 A.D.3d 62, 63, 777 N.Y.S.2d 648 [1st Dept. 2004] ; Rules of Professional Conduct [ 22 NYCRR 1200.0 ] rule 1.2[c] ["A lawyer may limit the scope of the representation if the limitation is reasonable under the circumstances, the client gives informed consent and where necessary notice is provided to the tribunal and/or opposing counsel"] ). An attorney may not be held liable for failing to act outside the scope of the retainer ( AmBase Corp. v. Davis Polk & Wardwell, 8 N.Y.3d 428, 834 N.Y.S.2d 705, 866 N.E.2d 1033 [2007] ).

Here, the Collateral Assignment of Contracts raises a question as to the scope of the representation. Section 11(c) of the contract provides, in relevant part, that

"[a]dditionally, [Progressive] shall deliver to [Genesis] evidence of perfection of [Genesis's] security interest in, and evidence of the acceptance of filing of Assignments of Policy as Collateral Security Agreements, or their equivalent, in favor of [Genesis], from the respective insurance carriers with regard to the Contracts within twenty one (21) business days of the date hereof."

The provision unambiguously requires Progressive to deliver to Genesis documents evidencing perfection of Genesis's security interest in, and the acceptance of, the collateral assignment agreements from the insurance carriers.

Gilbride asserts that the final...