Heine v. Colton, Hartnick, Yamin & Sheresky

• Decision Date: 09 March 1992
• Docket Number: No. 91 Civ. 2904 (PKL).,91 Civ. 2904 (PKL).
• Court: U.S. District Court — Southern District of New York
• Parties: Georg H.G. HEINE and Chrisal Investments Ltd., Plaintiffs, v. COLTON, HARTNICK, YAMIN & SHERESKY and Newman, Tannenbaum, Helpern, Syracuse & Hirschtritt, Defendants.

786 F. Supp. 360

Georg H.G. HEINE and Chrisal Investments Ltd., Plaintiffs, v. COLTON, HARTNICK, YAMIN & SHERESKY and Newman, Tannenbaum, Helpern, Syracuse & Hirschtritt, Defendants.

No. 91 Civ. 2904 (PKL).

United States District Court, S.D. New York.

March 9, 1992.

COPYRIGHT MATERIAL OMITTED

Stults Balber Horton & Slotnick, New York City (Louis Lauer, Philip A. Byler, of counsel), for plaintiffs.

D'Amato & Lynch, New York City (Robert E. Meshel, of counsel), for defendant Colton, Hartnick, Yamin & Sheresky.

Wilson, Elser, Moskowitz, Edelman & Dicker, New York City (Marshal S. Endick, Edward A. Taylor, of counsel), for defendant Newman, Tannenbaum, Helpern, Syracuse & Hirschtritt.

OPINION AND ORDER

LEISURE, District Judge.

In this legal malpractice action, with jurisdiction based on diversity of citizenship and the presence of a federal question, defendants, Colton, Hartnick, Yamin & Sheresky ("Colton Hartnick") and Newman, Tannenbaum, Helpern, Syracuse & Hirschtritt ("Newman Tannenbaum"), now move the Court, pursuant to Fed.R.Civ.P. 12(b)(6) and 12(c), to dismiss the claims against them raised by plaintiffs, Chrisal Investments Ltd. ("Chrisal") and Georg H.G. Heine (collectively "Heine"). For the following reasons, the motions are granted in part, denied in part.

BACKGROUND

For the purposes of this motion to dismiss, the factual allegations in the Complaint are assumed to be true. See Easton v. Sundram, 947 F.2d 1011, 1014-15 (2d Cir.1991); Allen v. Westpoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir.1991). However, the Court need not defer to legal conclusions asserted in the Complaint. See United States v. Bonanno Organized Crime Family, 879 F.2d 20, 27 (2d Cir. 1989) ("the district court was constrained to accept the complaint's allegations as true but only to the extent that they were factual"); McCoy v. Goldberg, 748 F.Supp. 146, 153 (S.D.N.Y.1990) ("while the court must accept as true the allegations of the complaint ... such deference must only be paid to factual allegations and not to legal conclusions") (citing O'Brien v. National Property Analysts Partners, 719 F.Supp. 222, 229 (S.D.N.Y.1989) (Leisure, J.)).

This action has its roots in the activities of Alvin Ashley ("Ashley"), a former partner in the Colton Hartnick law firm. Between 1986 and 1990, Ashley allegedly induced Heine to make payments to him aggregating $2,322,309.20, purportedly for investments in real estate and fast food ventures. However, after Ashley was dismissed by Colton Hartnick in 1990, allegedly for engaging in "a large pattern of financial transactions appearing to be lacking in substance," Complaint ¶ 46, Heine came to believe that he had been the victim of a fraud. Accordingly, in April 1991, Heine commenced the instant litigation, seeking recovery for over $1.5 million in losses allegedly suffered through Ashley's fraudulent deals and through alleged improprieties in the purchase and sale of a condominium in the Cityspire Building, 150 West 56th Street, New York, New York ("Cityspire condominium").

Heine's Complaint alleges 18 causes of action against Ashley, Colton Hartnick and Newman Tannenbaum. Apparently as a result of these and similar activities, Ashley pleaded guilty to five counts of grand larceny in the Supreme Court of the State of New York, New York County, on September 24, 1991. In addition, Ashley confessed judgment of $1,539,345 in favor of Heine in the instant action on February 6, 1992. See Affidavit of Confession of Judgment, sworn to on February 6, 1992. Following the confession of judgment, five claims remain in the Complaint: two arising out of Colton Hartnick's alleged role in Ashley's purportedly fraudulent schemes, and three concerning Colton Hartnick's and Newman Tannenbaum's alleged roles in the Cityspire real estate transaction.

According to the Complaint, the relationship between Heine, Ashley and Colton Hartnick began in 1985, when Colton Hartnick represented George Bastis ("Bastis"), a friend of Ashley's, in matrimonial litigation. In connection with this litigation, Heine agreed to be deposed and provided Colton Hartnick with Chrisal documents that were relevant to the matrimonial proceeding. Colton Hartnick arranged for Heine to be represented by Morrison Cohen Singer & Weinstein ("Morrison Cohen") during the deposition. However, Heine alleges that, throughout these proceedings, he "looked upon Colton Hartnick as his actual counsel." Complaint ¶ 10.

A. Ashley's Deals

Subsequently, under unspecified circumstances in January 1986, Ashley proposed a deal to Heine, in which Heine would pay money to Ashley personally, allegedly for use in "a profit making venture, such as real estate development and sales or fastfood operations." Complaint ¶ 11(a). In return, Heine would receive a series of post-dated checks written by Ashley personally and guaranteed by Ashley personally and "as a partner in Colton Hartnick." Complaint ¶ 11(d). The post-dated checks would be payable over two years, providing Heine with a return on his investment and the ultimate return of his principal. In response to this proposal, Heine alleges that he asked Ashley, in January 1986, whether the deal was lawful, and Ashley, as his attorney and as a partner in Colton Hartnick, responded that the deal met all legal requirements.

Accordingly, in February 1986, Heine provided Ashley with a check for $30,000, and received in return five checks written by Ashley personally, totaling $45,000: four checks for $3,750 each, dated at six month intervals from August 1986 to February 1988, and a final check for $30,000, dated February 1988. As calculated by Colton Hartnick, these checks provided Heine with a return of 25% interest annually. See Memorandum of Law of Defendant Colton Hartnick in Support of its Motion to Dismiss, Exh. A.

After Heine cashed the first $3,750 check in August 1986, Ashley proposed that Heine invest more of his own money and additional funds belonging to Chrisal, Heine's wholly owned corporation, in further deals. Heine agreed to continue participating, and wrote to Ashley a series of checks, totalling $620,000, from December 1986 to May 1987. In return, Heine received checks payable from June 1987 to May 1988, totaling $860,500, at annual rates of return ranging from 37.5% to 45%. Continuing from this time through and including September 1990, Heine continued to provide Ashley with current checks, receiving post-dated checks, with annual return rates ranging from 12% to 240%, in return. Also, beginning in June 1987, Heine began rolling funds back into these deals as checks became due. According to Heine, he ultimately provided Ashley with over $2 million, of which more than $1.5 million was never returned.

Heine asserts that he entered into and continued participating in these deals in reliance on Ashley's representation in January 1986 that the deals met all lawful requirements. Moreover, he asserts that Ashley used Colton Hartnick's facilities in arranging the deals, that Colton Hartnick knew that Ashley was engaging in this conduct and that partners in the firm also participated in the deals. Based on these allegations, Heine concludes that he had an attorney-client relationship with Ashley and Colton Hartnick with respect to the deals, and asserts two causes of action arising out of this purported relationship.

The first cause of action asserts that Colton Hartnick committed legal malpractice for failing to advise Heine that Ashley's deals did not meet the registration requirements of the federal securities laws. The second cause of action alleges that Colton Hartnick breached its duty of ordinary care by not supervising Ashley's activities and by not preventing him from using Colton Hartnick's facilities to conduct an unregistered securities business. Colton Hartnick has moved to dismiss both of these causes of action, claiming that it did not have an attorney-client relationship with Heine with respect to the deals, and that the deals were actually a series of usurious loans that were not within the scope of the federal securities laws.

B. The Cityspire Real Estate Transaction

The post-dated check schemes were not the only transactions in which Heine and Ashley were involved in the late 1980s. In December 1988, Heine engaged Colton Hartnick to represent him in the purchase of the Cityspire condominium. As part of this retainer agreement, Heine opened a customer's account at Colton Hartnick, and, in February 1989, Colton Hartnick represented Heine at the closing on the purchase of the condominium. In connection with the closing, Heine appointed Nancy Lang, Esq., an attorney at Colton Hartnick, as his attorney-in-fact, and funds from Heine's customer account were used to cover the expenses related to the closing.

After the closing, Heine and Ashley entered into a side agreement, which provided that Ashley would be the co-owner of the Cityspire condominium, despite documentation showing Heine to be the sole owner, that Ashley would pay maintenance fees and mortgage carrying charges and assessments relating to the condominium, that Ashley would furnish the apartment and recover the cost of the furnishings if the apartment were sold, and that Ashley would occupy the apartment.¹ There is no allegation that Colton Hartnick had any knowledge of this side agreement. See Complaint ¶ 29.

At the beginning of 1990, Heine decided to sell the Cityspire condominium, and turned to Ashley for assistance. On March 2, 1990, Ashley informed Heine that a purchaser had been located, and Heine subsequently executed a power of attorney, giving Ashley the power to take all steps necessary to execute the sale of the condominium. Pursuant to this power of attorney, Ashley retained Newman Tannenbaum to represent Heine and to handle the closing. However, despite his execution of a power of attorney, Heine has claimed that the retention of Newman Tannenbaum on his behalf was improper, because he never consented...