Opinion
Index No.: 654343/2013
02-24-2015
WACHTELL, LIPTON, ROSEN & KATZ, Plaintiff, v. CVR ENERGY, INC.; ICAHN ENTERPRISES, L.P.; ICAHN ENTERPRISES HOLDINGS L.P.; and CARL C. ICAHN, Defendants.
DECISION AND ORDER
Mot. Seq. No. 002
O. PETER SHERWOOD, J.:
Plaintiff Wachtell, Lipton, Rosen & Katz (Wachtell) moves to dismiss defendants CVR's counterclaim for malpractice. Wachtell's motion is made pursuant to CPLR 3211(a) (5) and (7) for failure to state a cause of action and based on collateral estoppel. As this motion seeks to dismiss a counterclaim, the facts alleged in the counterclaim are assumed to be true.
I. FACTS
This dispute arises out of the same transaction as the related actions; Goldman Sachs & Co. v CVR Energy, Inc. (Index No. 652149/2012) and Deutsche Bank Securities, Inc. v CVR Energy (Index No. 652800/2012) (the Bank Actions). In January 2012, CVR Energy, Inc. (CVR) learned that Carl Icahn and his affiliated companies (collectively, Icahn) had acquired a substantial minority interest in CVR. CVR believed Icahn was preparing to acquire or influence control over CVR. CVR wanted to resist this attempt. Wachtell was CVR's counsel. CVR hired Goldman Sachs and Deutsche Bank (the Banks) to act as CVR's financial advisors. CVR entered into initial agreements with each of the Banks. The agreements were embodied in letters of engagement (the Initial Engagement Letters). Each Initial Engagement Letter memorialized CVR's retention of that Bank to provide advisory and investment banking services to CVR and its board of directors (the Board) in connection with, among other things, their evaluation of a range of financial and strategic alternatives, including any challenge to its business plan or capitalization, or any actual or threatened contested solicitation of proxies.
Each Initial Engagement Letter provided for flat rate fees, applicable in a variety of transactions or situations in which CVR may become involved, and for reimbursement of each Bank's reasonable out-of-pocket expenses. In each Initial Engagement Letter, the contracting parties anticipated that, in the event of a sale or similar transaction, the parties would enter into a second agreement governing the specific transaction and setting forth new fee provisions. After Icahn announced a tender offer for outstanding CVR stock, each Bank advised CVR that it required a new fee arrangement.
CVR then entered into a new engagement letter with each Bank (the Second Engagement Letters). The Second Engagement Letters confirmed CVR's retention of the Banks to provide advisory and investment banking services to CVR and its Board relating to Icahn's attempt to obtain control over CVR. Each letter also set forth schedules of flat rate fees, including an independence fee, an announcement fee, a proxy contest fee, and a termination fee, and fees based upon a percentage of the value CVR stock, such as a sale transaction fee and a success fee, each payable upon different triggering events and dates, among other terms.
CVR claims the Board was never aware the Second Engagement Letters were operative and did not understand the terms of those agreements. Mr. Frank Pici, CVR's Chief Financial Officer, signed the Second Engagement Letters on behalf of CVR. Mr. Edmund Gross, General Counsel of CVR, was also aware of the Second Engagement Letters, but did not understand that the Banks would earn the fee for a successful sale if the Icahn tender offer succeeded (counterclaim, ¶ 28). CVR's counterclaim alleges Wachtell "failed to advise CVR that under the terms of the [Second Engagement Letters], CVR would face claims by [the Banks] for $36 million even if [Icahn] acquired control of CVR . . . , double the fees that [the Banks] would charge if CVR remained independent" (counterclaim, ¶ 3). CVR claims it would not have agreed to the Second Engagement Letters if it had understood the fee term (id.).
CVR eventually decided to work with Icahn to get the best tender offer possible. On April 18, 2012, CVR and Icahn entered into a transaction agreement that facilitated the Icahn tender offer. At the same meeting, the Board approved paying fees to the Banks, although CVR claims the Board believed it was approving fees under the First Engagement Letters. Following that meeting, the Board continued a telephone call with Pici and Gross. Pici then told the Board about the Second Engagement Letters and explained that each Bank might seek fees of over $18 million under that agreement. The Board then had Pici ask the Banks not to seek those fees. The Banks declined. On May 2, 2012, Wachtell submitted draft Board meeting minutes, but did not draw the Board's attention to the fee provisions of the Second Engagement Letters. CVR also claims a description in the February 28, 2012 minutes of a presentation by Wachtell regarding the Second Engagement letters was false. The Board approved all of the minutes. On May 3, 2012, the Banks submitted their invoices.
CVR did not pay the Banks, and litigation followed. The Banks began the Bank Actions, seeking their fees pursuant to the Second Engagement Letters. On October 24, 2013, CVR sued Wachtell and two individual partners of the firm for legal malpractice in the United States District Court for the District of Kansas (the "Federal Action"), claiming that Wachtell advised it poorly about how much it could end up owing Deutsche Bank and Goldman Sachs. That action was removed to the Southern District of New York. Meanwhile, on December 18, 2013, Wachtell filed this action with claims for (1) a declaratory judgment stating that Wachtell's representation of CVR was consistent with the standards of the legal profession and caused no loss to CVR; (2) breach of a protective order and agreement regarding the production of documents against all defendants, claiming that documents produced by Wachtell pursuant to protective orders in the Bank Actions were improperly disclosed to Icahn and used in the Federal Action; and (3) abuse of process, claiming defendants were using the Bank Actions and the Federal Action to harass and elicit funds from Wachtell.
On November 10, 2014, defendants filed an answer and included a counterclaim, against Wachtell. CVR's counterclaim alleges Wachtell committed professional malpractice by: failing to advise CVR it could owe the Banks over $18 million each under the terms of the retention agreements, even if Icahn succeeded with its tender offer; failing to "competently represent CVR in negotiating fair and appropriate fee terms" with the Banks; not advising the Board about the existence or terms of the Second Engagement Letters; not communicating to Mr. Lipinski (then-president of CVR) about the Second Engagement Letters; not explaining the fee terms of the Second Engagement Letters to anyone at CVR; falsifying the minutes of the February 28, 2012 meeting of the board of directors to reflect a presentation to the board about the fee; and failing to represent CVR's best interests with respect to the fee terms (answer and counterclaims, NYSCEF Doc. No. 42 at ¶ 44).
The two individual Wachtell partners named as counterclaim-defendants in the body of the counterclaim, Benjamin M. Roth and Andrew R. Brownstein, are not named in the caption of this action and do not appear to have been served. There is no indication they have been properly joined in this action. The claims against them will be disregarded.
Plaintiff Wachtell moves to dismiss the malpractice counterclaim on the grounds that since this Court determined in the Bank Actions that CVR ratified the Second Engagement Letters, Wachtell's alleged actions could not be the proximate cause of any damage to CVR. In each of the Bank Actions, this Court granted summary judgment to the Banks based on undisputed evidence that the Board had ratified the Second Engagement Letters. The Court held that, "[a]fter learning the probable amount of the fees, the Board did not question, modify, or vacate the fee resolution or express any objection to the fee provisions of the second engagement letters" (Goldman Sachs & Co. v CVR Energy, Inc., Sup Ct, New York County, September 30, 2014, Sherwood, J., index No. 652149/2012, NYSCEF Doc. No. 169, at 7; Deutsche Bank Securities, Inc., v CVR Energy, Inc. Sup Ct, New York County, September 30, 2014, Sherwood, J., index No. 652800/2012, NYSCEF Doc. No. 166, at 7)(the Bank Action Decisions). The Bank Action Decisions noted that "[o]n April 18, 2012, the Board passed a resolution authorizing CVR to pay all fees incurred by it 'in connection with the Transaction Agreement [with Icahn] and the other transactions contemplated thereby, including, without limitation, fees and expenses of [CVR's] financial advisors'" (id. at 7). Additionally, after specifically being informed of the fees, the Board approved the minutes of the April 18 meeting without objecting to the Second Engagement Letters (id.).
II. DISCUSSION
The motion to dismiss is made pursuant to CPLR 3211 (a)(5), which permits dismissal if "the cause of action may not be maintained because of . . . collateral estoppel," and CPLR 3211(a)(7), failure to state a cause of action.
Failure to State a Cause of Action
On a motion to dismiss a plaintiff's claim pursuant to CPLR 3211 (a)(7) for failure to state a cause of action, the court is not called upon to determine the truth of the allegations (see Campaign for Fiscal Equity v State of New York, 86 NY2d 307, 317 [1995]; 219 Broadway Corp. v Alexander's, Inc., 46 NY2d 506, 509 [1979]. Rather, the court is required to "afford the pleadings a liberal construction, take the allegations of the complaint as true and provide plaintiff the benefit of every possible inference [citation omitted]. Whether a plaintiff can ultimately establish its allegations is not part of the calculus in determining a motion to dismiss" (EBC I, Inc. v Goldman, Sachs & Co., 5 NY3d 11, 19 [2005]). The Court's role is limited to determining whether the pleading states a cause of action, not whether there is evidentiary support to establish a meritorious cause of action (see, Guggenheimer v Ginzburg, 43 NY2d 268, 275 [1977]; Sokol v Leader, 74 AD3d 1180 [2d Dept 2010]).
Legal Malpractice
To state a claim for legal malpractice, a plaintiff must allege negligence of the attorney, which was the proximate cause of the loss sustained, and proof of actual damages (Reibman v Senie, 302 AD2d 290 [1st Dept 2003]; Schwartz v Olshan Grundman Frome & Rosenzweig, 302 AD2d 193, 198 ). To show proximate cause, a plaintiff must demonstrate that "but for" the attorney's negligence, the plaintiff would not have sustained any "ascertainable damages" (Brooks v Lewin, 21 AD3d 731, 734 [1st Dept 2005], lv denied 6 NY3d 713 [2006]; Reibman, 302 AD2d at 290-291). Wachtell does not dispute that the counterclaim alleges negligence and damages. CVR alleges that Wachtell failed to provide CVR with information about the Second Engagement Letters, failed to "competently represent CVR in negotiating fair and appropriate fee terms," falsified the minutes of a board meeting to make it appear that Wachtell had provided information about the Second Engagement Letters, and failed to represent CVR's best interests with respect to the fee terms in the Second Engagement Letters (answer and counterclaim, N YSCEF Doc. No. 42, at ¶ 44). CVR claims the amounts it will be required to pay the Banks are its damages. Wachtell argues that because the Board ratified the Second Engagement Letters, CVR's allegation that Wachtell's negligence proximately caused CVR's damages must fail.
Ratification
When a party has the option to void an agreement, it ratifies, or affirms, the agreement by affirmatively validating the contract, or by failing to speak or act after discovering its rights (In re Marketxt Holdings Corp., 361 BR 369, 402 [Bankr SDNY 2007][applying New York law]; Schenck v State Line Tel. Co., 238 NY 308, 313 [1924]). If CVR's Board had full knowledge of the fee terms of the Second Engagement Letters and failed to object or take immediate action to void the agreements, it ratified those agreements, and is responsible for fulfilling its obligations. Further, CVR's ratification of the Second Engagement Letters would mean its obligation to pay the Banks pursuant to those agreements could not be caused by any negligence by Wachtell. Therefore, if CVR ratified the Second Engagement Letters, the chain of causation is broken between the alleged negligence and the alleged damages, and the counterclaim must be dismissed.
In the Bank Actions, this court determined that CVR ratified the Second Engagement Letters. CVR is collaterally estopped from arguing that there was no ratification.
Collateral Estoppel
"Collateral estoppel, or issue preclusion, 'precludes a party from relitigating in a subsequent action or proceeding an issue clearly raised in a prior action or proceeding and decided against that party . . . , whether or not the tribunals or causes of action are the same' " (Parker v Blauvelt Volunteer Fire Co., Inc., 93 NY2d 343, 349 [1999], quoting Ryan v New York Tel. Co., 62 NY2d 494, 500 [1984]). "The doctrine applies if the issue in the second action is identical to an issue which was raised, necessarily decided and material in the first action, and the plaintiff had a full and fair opportunity to litigate the issue in the earlier action" (Parker v Blauvelt Volunteer Fire Co., 93 NY2d at 349). Collateral estoppel will only be applied "to matters actually litigated and determined in a prior action" (Kaufman v Eli Lilly and Co., 65 N Y2d 449, 456 [1985] [internal quotation marks omitted] citing Restatement [Second] of Judgements §27).
In the Bank Actions, this court determined, on motions for summary judgment, that the Board, with knowledge of the fee terms, ratified the Second Engagement Letters. The undisputed facts there were that the Board "passed a resolution authorizing CVR to pay all fees incurred" pursuant to the Second Engagement Letters on April 18, 2012, that the amounts to be paid under those agreements were made explicitly clear to the Board later that same day, and that the Board made no objection to the Second Engagement Letters, either on that day or at the May 4, 2012, meeting when the board approved the minutes of the April 18, 2012 meeting (Bank Action Decisions at 7). At that point, regardless of Wachtell's alleged prior misrepresentations, failures to provide information, or CVR's original intentions regarding engaging the Banks, it was undisputed that the Board had all of the relevant information and ratified the Second Engagement Letters. That issue was necessary and material in the Bank Actions, it was thoroughly litigated, and the parties here are estopped from rearguing that point.
The issue is currently under appeal.
CVR suggests the ratification be disregarded for this action because Wachtell's malpractice caused the ratification by "the creation of inaccurate minutes and vague resolutions that failed to specify the amounts to be owed thereunder," or failing to suggest CVR revoke the ratification and (CVR Opp. at 15). The cases relied upon by CVR in support of its arguments are distinguishable, and do not apply to these facts. In Avon Dev. Enterprises Corp. v Samnick, the First Department declined to apply collateral estoppel to preclude a malpractice claim because the issue in dispute was a pure question of law, unlike the question of ratification, here (see 286 AD2d 581, 582 [1st Dept 2001]). In Houraney v Burton & Assoc., P.C., the plaintiff had alleged the defendant, acting as counsel in a prior lawsuit, failed to plead certain claims and made various errors at trial (08 CV 2688 CBA LB, 2010 WL 3926907, at *7 [EDNY Sept. 7, 2010] report and recommendation adopted, 08-CV-2688 CBA LB, 2011 WL 710269 [EDNY Feb. 22, 2011]). That court held collateral estoppel did not apply to the question of whether the defendant had been negligent, as that question had not been at issue in the previous litigation (id.). Here, collateral estoppel applies to the question of CVR's ratification, which was fully litigated in the Bank Actions, not to the question of Wachtell's negligence. Additionally, the malpractice alleged in each of the cases cited by CVR occurred in an underlying litigation. Here, no malpractice is alleged to have occurred in the litigation of the Bank Actions. CVR does not argue that the Bank Action Decisions were the result of Wachtell's negligence. Therefore, CVR is not being "precluded from rearguing issues decided adversely to [it] because of [Wachtell's] negligence" (id.).
Schwarz v Shapiro is closer to the facts in this case (202 AD2d 187 [1st Dept 1994]). Schwartz sued his former attorney, Shapiro. Shapiro had drafted a letter agreement for Schwartz. In an earlier decision, the Appellate Division First Department had determined that Schwartz could not rescind the agreement because he had ratified it and accepted its benefits. As that court noted subsequently, "the doctrine of collateral estoppel prevents the plaintiff from now claiming that the agreement which he ratified and accepted did not express his understanding. Accordingly, the agreement cannot now serve as the basis for a claim of malpractice or other misdeeds on the part of the attorney who drafted the agreement" (id. citing Schwartz v Public Administrator of County of Bronx, 24 NY2d 65 [1969]).
Here, CVR, while in possession of all of the relevant information about the fee terms, ratified the Second Engagement Letters. CVR also accepted the benefits of the Banks' work performed pursuant to those agreements. Accordingly, New York State law precludes CVR claiming its attorney's malpractice caused it to enter into those agreements (see id.). As CVR alleges those agreements are the sole source of its damages, it has failed to allege the causation element of a malpractice claim.
The court has considered CVR's remaining arguments and finds them similarly to be without merit. For example, insofar as CVR alleges that Wachtell falsified board meeting minutes and "washed [its] hands of any responsibility for what had occurred by informing [CVR] that [it] needed to retain separate counsel to deal with the fee claims" by the Banks, CVR does not allege this conduct was the proximate cause of any damages, aside from those discussed and disposed of above. For the foregoing reasons, the motion to dismiss the counterclaim is granted.
Accordingly, it is
ORDERED that motion sequence number 002 in the action bearing index number 654343/2013 is granted and the counterclaim is hereby dismissed.
This constitutes the decision and order of the court.
DATED: February 24, 2015
ENTER,
/s/ _________
O. PETER SHERWOOD
J.S.C.