NY: Underlying Misappropriation Action
Student Contributor: Mordechai Goldenberg
Facts: Plaintiff sued a former employee to recover $7 million he allegedly misappropriated. Due to the former employee’s failure to answer the complaint, Plaintiff obtained a default order directing that the matter be set down for an inquest. Plaintiff alleges that, after entry of the default order, he retained defendant attorneys to represent him in the damages action. Defendants, however, deny ever having agreed to undertake such representation. In either event, the action ultimately was dismissed due to plaintiff’s failure to timely file a note of issue for an inquest. Plaintiff now sues defendants for legal malpractice for the alleged failure to timely file a note of issue for an inquest. (Ed. Note: An "inquest" in NY practice is a hearing on damages after a default has been entered against a defendant.)
Issue: Did plaintiff show that he suffered an actual loss due to the alleged legal malpractice?
Ruling: No. The court explained that even assuming the truth of the disputed contention that defendants agreed to represent Plaintiff in the lawsuit, the record establishes that Plaintiff would not have been entitled to any recovery in that action, notwithstanding the default order that was entered. Plaintiff failed to identify any specific misappropriation of Plaintiff’s personal funds that could have been proven at the inquest. Rather, plaintiff relied solely on allegations of misappropriation from the corporate entities in whose names Plaintiff did business. Whatever right of recovery the corporations might have had against former the employee for such alleged misappropriations, Plaintiff individually — who was the sole plaintiff in the underlying action— had no right to such a recovery.
Lesson: In order to maintain a legal malpractice action in New York, the plaintiff must be able to demonstrate that he suffered an actual loss due to attorney’s misconduct. Entry of a default goes only as to liability; not proximate cause nor damage and does not absolve plaintiff from the burden of shown that he sustained actual loss.