Kittay v. Kornstein
| Decision Date | 01 August 2000 |
| Docket Number | Docket No. 00-7306 |
| Citation | 230 F.3d 531 |
| Parties | (2nd Cir. 2000) DAVID R. KITTAY, Trustee, Plaintiff-Appellant, v. DANIEL J. KORNSTEIN AND KORNSTEIN VEISZ & WEXLER, Defendants-Appellees |
| Court | U.S. Court of Appeals — Second Circuit |
Appeal from a judgment of the United States District Court for the Southern District of New York (Alvin K. Hellerstein, Judge), dismissing, partly on the merits and partly with leave to replead, plaintiff's claims against bankrupt's attorneys alleging breach of fiduciary duty, breach of contract, and legal malpractice.
We hold that dismissal of part of the complaint for failure to state a claim was appropriate, but that dismissal of the remaining claims on the ground that they were not pleaded in a clear or straightforward fashion was inappropriate.
Affirmed in part, vacated in part, and remanded.
[Copyrighted Material Omitted]
[Copyrighted Material Omitted] BARRY S. GOLD, Kittay, Gold & Gershfeld, White Plains, NY, for Plaintiff-Appellant.
DAVID K. BERGMAN, Pollack & Greene, New York, NY, for Defendants-Appellees.
Before: KEARSE, JACOBS, and STRAUB, Circuit Judges.
Plaintiff-Appellant David R. Kittay, the trustee in a Chapter 7 bankruptcy proceeding of debtor Luckey Platt Centre Associates ("Luckey Platt"), appeals from a judgment of the United States District Court for the Southern District of New York (Alvin K. Hellerstein, Judge), dismissing his complaint against Daniel J. Kornstein and Kornstein's law firm, Kornstein Veisz & Wexler (collectively "Kornstein"). Kittay's complaint alleges that Kornstein breached his fiduciary duties and contractual obligations and committed legal malpractice by serving as special counsel to Luckey Platt in its bankruptcy proceeding while simultaneously representing Burstin Investors ("Burstin"), an entity competing with Luckey Platt for proceeds of a New York state court judgment against Luckey Platt's former general partner. These breaches, Kittay alleges, prevented Luckey Platt from collecting the state court judgment, resulting in a loss to the estate of approximately nine million dollars.
The District Court granted Kornstein's motion to dismiss, partly on the merits and partly with leave to replead. The District Court found that Kittay's allegations that Kornstein impermissibly represented multiple clients failed to state a claim upon which relief can be granted, and thus dismissed those claims with prejudice under Federal Rule of Civil Procedure 12(b)(6). The District Court then found that Kittay's allegations regarding improper actions taken by Kornstein after appeal of the state court judgment could state a claim for relief, but were not pleaded in a clear and straightforward fashion. The court thus dismissed those claims with leave to replead. Kittay disclaimed intent to replead, allowing review in this Court.
For the reasons given below, we conclude that Kittay's allegations regarding Kornstein's multiple representation fail to state a claim upon which relief can be granted. We find, however, that Kittay's allegations regarding Kornstein's conduct after appeal of the state court judgment were adequately pleaded.
Accordingly, we affirm in part, vacate in part, and remand for further proceedings.
Taking the plaintiff's allegations to be true, as we must on review of a grant of a motion to dismiss, see Boyd v. Nationwide Mut. Ins. Co., 208 F.3d 406, 409 (2d Cir. 2000), the record reveals the following events.
Luckey Platt, a real estate development firm, was a limited partnership consisting of K.N. Investors, Ltd. ("KNIL") as sole general partner and Burstin as sole limited partner. Nachum Kalka controlled KNIL. In 1990, Burstin, represented by Kornstein, sued KNIL and Kalka in New York state court for fraud, breach of fiduciary duty, and other tortious conduct relating to KNIL's misconduct as general partner of Luckey Platt. The suit's claims were also brought derivatively for the benefit of Luckey Platt. That is, Luckey Platt was named as a nominal defendant, but the claims in the state court complaint were brought partly for the benefit of the partnership.
In March 1996, Burstin recovered a judgment in the state court awarding approximately nine million dollars, removing KNIL as general partner of Luckey Platt, appointing Burstin as receiver of Luckey Platt, and declaring Kalka personally liable for all of Luckey Platt's debts to third-parties. KNIL immediately appealed from this judgment, filing its notice of appeal also on behalf of Luckey Platt, inasmuch as Luckey Platt was a nominal defendant in the action. Luckey Platt, however, asserts that Kornstein actually represented Luckey Platt in the state court action, since Kornstein represented Burstin and Burstin had asserted derivative claims on behalf of Luckey Platt. In any event, the parties briefed the case between June and August 1996. In its briefs, KNIL argued, inter alia, that if a judgment were to be awarded, it should belong to the Luckey Platt partnership, not Burstin.1 Burstin, through Kornstein, argued in its brief, inter alia, that the judgment in favor of Burstin was proper.
In May 1996, during the pendency of the appeal of the state court judgment, Luckey Platt filed a petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 101 et seq. It retained Tracy Klestadt as its bankruptcy counsel. Kornstein, however, had been representing Luckey Platt in a mortgage foreclosure action brought by Bank Leumi in connection with property Luckey Platt owned. Knowing that Kornstein was intimately familiar with the Kalka matter and that Kornstein already represented it in the Bank Leumi matter, Luckey Platt moved, soon after filing its bankruptcy petition, to retain Kornstein as special counsel in the bankruptcy proceeding. In October 1996, after briefing but before oral argument of the state court appeal, the Bankruptcy Court for the Southern District of New York (Jeffry H. Gallet, Bankruptcy Judge) appointed Kornstein as special counsel to Luckey Platt to pursue claims related to the state court action against Kalka, as well as claims involving Bank Leumi. The appointment, made pursuant to 11 U.S.C. § 327(e), occurred after a hearing at which the parties discussed Kornstein's potentially conflicting roles as counsel to Burstin in the state court appeal and special counsel to Luckey Platt in the bankruptcy action. KNIL and Bank Leumi objected to Kornstein's retention, asserting that Kornstein would argue that the state court judgment was properly awarded to Burstin. The court nonetheless appointed Kornstein as special counsel to Luckey Platt, noting that Luckey Platt and Burstin had the common goal of pursuing the assets of KNIL and Kalka and that, absent Kornstein, Luckey Platt would be unable effectively to pursue its claims against KNIL and Kalka. The court resolved the potential conflict by ruling in a retention order that recoveries against KNIL or Kalka would be placed in escrow with Kornstein, subject to the Bankruptcy Court's later determination as to who would be entitled to what amounts. The court conditioned Kornstein's retention on Burstin's agreement to the escrow order, which Burstin provided. Luckey Platt, represented by Klestadt, did not object to the court's decision.
Oral argument in the state court appeal took place in January 1997. At argument, Kornstein asserted, consistent with his brief, that Burstin, and not necessarily Luckey Platt, should be awarded the state court judgment. Luckey Platt was not separately represented in the appeal. In May 1997, the Appellate Division essentially affirmed the state trial court, with a slight modification by which $91,000 (about 1% of the judgment) was shifted from Burstin to Luckey Platt.
Burstin then attempted to enforce the judgment against Kalka. Burstin retained an attorney in Israel, Avigdor Klagsbald, to search for assets Kalka owned in that country. Klagsbald located shares of stock and real property owned by Kalka, but was unable to seize them because the New York judgment was not yet final due to an attempt to mount a subsequent appeal. Upon discovering that Kalka was planning to sell his stock, Klagsbald decided to bring an action in Israel on the New York judgment to enjoin Kalka's planned stock sale. Klagsbald turned to Kornstein for information regarding the state court judgment and the New York court system, and Kornstein obliged with information and various documents. Kornstein also prepared an affidavit to be used in the Israeli proceeding.
Klagsbald succeeded in enjoining Kalka from selling his stock, and also obtained an attachment with respect to Kalka's real estate in Israel. As a result, over $16 million of Kalka's assets were frozen. Kalka thereupon decided to enter into a settlement with Burstin through Klagsbald in January 1998, pursuant to which Kalka agreed to pay the full amount of the judgment-over nine million dollars-to Burstin.
Soon thereafter, in February 1998, Luckey Platt's Chapter 11 proceeding was converted into a Chapter 7 liquidation, and Kittay was appointed trustee. Kittay moved, and the Bankruptcy Court ordered, that Burstin's settlement with Kalka should be deposited into escrow, pursuant to the Bankruptcy Court's retention order. Several months passed, however, without the settlement being placed in the escrow account, due to various ministerial obstacles and other delays. During that time, Kornstein engaged in discussions with Klestadt and Burstin regarding the possibility of dismissing Luckey Platt's bankruptcy case so as to avoid the effect of the escrow order. Ultimately, no action was taken to dismiss the bankruptcy case, but, as it turns out, the proceeds of the Israeli settlement were...
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