So, you are very unhappy with your lawyer. Or the opposing side lawyer for that matter, who might not have played by the rules in your case. You might have a claim against him.
Michael Avenatti’s conviction [wire fraud and aggravated identity theft] for misleading and defrauding his client Stephanie Clifford (Daniels Stormy) highlights vulnerability of clients. Avenatti’s criminal conviction was under the federal laws. Clients betrayed by their lawyer are not without remedies. Besides regular contractual and common law tort remedies including malpractice, New York provides claim for treble damage [triple the loss amount] under New York Judiciary Law § 487. Yes, it is not civil racketeering claim under 18 U.S.C. § 1964(c), which also grants threefold the damages including attorney’s fees. Even though attorney misconduct could be a subject of a civil RICO lawsuit, with its complexities and stringent pleading requirements, it might not result in a viable claim. And claim under RICO is highly circumscribed by enumerated predicates, 18 U.S.C. § 1961. Section 487 is not so circumscribed. Section 487 seeks to redress actual damages caused to a party by the deceit and fraud of an attorney either upon party or the court in a judicial proceeding.
New York Judiciary Law § 487 creates a Claim, Section 487 reads:
An attorney or counselor who:
1. Is guilty of any deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party; or,
2. Willfully delays his client's suit with a view to his own gain; or, willfully receives any money or allowance for or on account of any money which he has not laid out, or becomes answerable for,
Is guilty of a misdemeanor, and in addition to the punishment prescribed therefor by the penal law, he forfeits to the party injured treble damages, to be recovered in a civil action.
Thus, in New York, a client aggrieved by his attorney can have a claim against him. Section 487 declares that an attorney who “[i]s guilty of any deceit ... or consents to any deceit ... with intent to deceive the court or any party ... [i]s guilty of a misdemeanor, and in addition to the punishment prescribed therefor by the penal law, he forfeits to the party injured treble damages, to be recovered in a civil action.” Even an attempted deceit is compensable. “Judiciary Law § 487 focuses on the attorney's intent to deceive, not the deceit's success.” Betz v. Blatt, 160 A.D.3d 696, 699, 74 N.Y.S.3d 75, 80 (2018). “The operative language at issue— “guilty of any deceit”—focuses on the attorney's intent to deceive, not the deceit's success.” Amalfitano v. Rosenberg, 12 N.Y.3d 8, 14, 903 N.E.2d 265, 268 (2009).
Time limit to bring the claim against the attorney. Section 487 claim is governed by the six-year statute of limitations in CPLR 213(1). Melcher v. Greenberg Traurig, LLP, 23 N.Y.3d 10, 15, 11 N.E.3d 174, 177 (2014).
The Parties suable under Section 487. It could be anyone if that person sued is an attorney. Thus, under section 487, a litigant could sue his own attorney and or the adversary’s attorney if the said attorney has acted with deceit and fraud. An attorney-client relationship is not necessary. “The plain text of Subsection 1 of Section 487 requires an intent to deceive any party and provides for treble damages for the party injured. . . . Section 487 claims have been routinely upheld when brought against an adversary's counsel.” Trepel v. Dippold, No. 04 CIV. 8310 (DLC), 2005 WL 1107010, at *5 (S.D.N.Y. May 9, 2005).
How much is paid to the successful claimant? Treble damages as per the statute, however the statute is silent as to the attorney’s fees [unlike attorney fees under RICO section 1964(c) a mandatory one way fees shifting provision]. Trebling, it seems is automatic and not subject to any judicial discretion once the damages have been fixed. There is no interest granted in the relief of treble damages—“preverdict interest is inconsistent with an award of treble damages under Judiciary Law § 487.” Resnick v. Socolov, 5 A.D.3d 125, 126, 771 N.Y.S.2d 889, 890 (1st Dep't 2004).
Where should the claim be brought? It is very generally accepted and or stated that the section 487 claim must be brought in the same court where the misconduct happened. It “lies exclusively in that lawsuit itself: and not [in] a second plenary action collaterally attacking the judgment in the original action.” action. Yalkowsky v. Century Apts. Assocs., 215 A.D.2d 214, 215, 626 N.Y.S.2d 181 (1st Dept. 1995). But if the misconduct is something happening on a bigger scale, repetitively or it has impacted several parties including the person wanting to sue, then that claim could be filed in a separate lawsuit. Specialized Indus. Servs. Corp. v. Carter, 68 A.D.3d 750, 752, 890 N.Y.S.2d 90, 92 (2009)(“Under an exception to that rule, a separate lawsuit may be brought where the alleged perjury or fraud in the underlying action was “merely a means to the accomplishment of a larger fraudulent scheme.”)
The Claim must arise in and during the Litigation. “[A] Judiciary Law § 487 cause of action requires that the alleged deceit occurred during a judicial proceeding in which the plaintiff was a party.” Gorbatov v. Tsirelman, 155 A.D.3d 836, 840, 65 N.Y.S.3d 71, 76 (2017).
What kind of Deceit would violate Section 487? “Given the requirement that the conduct involve ‘deceit or collusion’ and be intentional, liability under the statute does not extend to negligent acts or conduct that constitutes only legal malpractice, evincing a lack of professional competency.” Bill Birds, Inc. v. Stein L. Firm, P.C., 35 N.Y.3d 173, 178, 149 N.E.3d 888, 891 (2020). Also, “the statute does not encompass the filing of a pleading or brief containing nonmeritorious legal arguments.” Id. However, “the making of a false statement of fact in the complaint regarding the client's partnership status in a family business . . . fell squarely within the scope of the statute because the misrepresentations at issue there were made in the context of an action pending in court.” Id. So, it “is aimed at a particular type of deceit or collusion—done by an attorney with the intent to mislead the court or a party such as a “fraud on the court or a party.” Id.
Injury must be caused by deceit or fraud of the attorney. “Since Judiciary Law § 487 authorizes an award of damages only to ‘the party injured,’ an injury to the plaintiff resulting from the alleged deceitful conduct of the defendant attorney is an essential element of a cause of action based on a violation of that statute.” Gumarova v. L. Offs. of Paul A. Boronow, P.C., 129 A.D.3d 911, 12 N.Y.S.3d 187 (2015). Merely showing that that one was injured by the conduct of the attorney is not enough, one has to show the proximate cause emanating from the deceit or the fraud. One has to trace one’s injury to that deceit or the fraud upon the court by the attorney. “To recover under section 487, a plaintiff must plead and prove both actual deceit by the attorney and causation, that is, that the deceit or collusion actually caused plaintiff's damages.” Schweizer v. Mulvehill, 93 F. Supp. 2d 376, 408 (S.D.N.Y. 2000). The question is simple—whether the alleged deceit or fraud led directly to the client’s injury? It is unclear if there has to be a direct relationship between the attorney’s misconduct and injury sustained—how about indirect injury which was foreseeable by the attorney? Such analysis is more thought about in civil RICO damages claim. See Hemi Group, LLC v. City of New York, 559 U.S. 1 (2010) (“under civil RICO, the plaintiff is required to show that a RICO predicate offense not only was a ‘but for’ cause of his injury, but was the proximate cause as well”). See also Holmes v. Securities Investor Prot. Corp, 503 US 258, 268 (1992)(holding that claimant must show that “the defendant’s violation not only was a ‘but for’ cause of his injury, but was the proximate cause as well”). But this is making its entry in section 487 jurisprudence now.
One act is enough, or a pattern is needed under section 487? If a single incident of fraud and deceit would suffice or is it necessary to show a pattern? See Aurora Loan Services, Inc. v. Posner, Posner & Associates, P.C., 513 F.Supp.2d 18, 21–22 (S.D.N.Y. 2007) (“[A] chronic, extreme pattern of legal delinquency is a necessary condition to a finding of liability under § 487.”). “A violation of this provision “requires a showing of ‘egregious conduct or a chronic and extreme pattern of behavior’ on the part of the defendant attorneys that caused damages.” Pruss v. AmTrust N. Am. Inc., 204 A.D.3d 620 (N.Y. App. Div. 2022). See also, Facebook, Inc. v. DLA Piper LLP (US), 134 A.D.3d 610, 615, 23 N.Y.S.3d 173, 178 (2015) (holding that “relief under a cause of action based upon Judiciary Law § 487 is not lightly given and requires a showing of egregious conduct or a chronic and extreme pattern of behavior on the part of the defendant attorneys that caused damages”). However it is difficult to reconcile these cases with the reasoning of Amalfitano v. Rosenberg, 12 N.Y.3d 8, 14, 903 N.E.2d 265, 268 (2009) (“The operative language at issue—“guilty of any deceit”—focuses on the attorney's intent to deceive, not the deceit's success.”). Would a litigant need to show several attempts to deceive? No doubt, “neither the language of the statute nor the holdings of several decisions applying Section 487 impose any such requirement. A single act or decision, if sufficiently egregious and accompanied by an intent to deceive, is sufficient to support liability.” Trepel v. Dippold, No. 04 CIV. 8310 (DLC), 2005 WL 1107010, at *4 (S.D.N.Y. May 9, 2005)
Not all courts follow the pattern of behavior. The showing of pattern as an essential element is rejected now at least in the New York Second Department. “To the limited extent that decisions of this Court have recognized an alternative predicate for liability under Judiciary Law § 487 based upon an attorney's “chronic, extreme pattern of legal delinquency . . . they should not be followed, as the only liability standard recognized in Judiciary Law § 487 is that of an intent to deceive.” Dupree v. Voorhees, 102 A.D.3d 912, 959 N.Y.S.2d 235 (2013).
What if foregoing conditions are not met? Since section 487 is a penal provision, it is strictly construed. In the case of Bill Birds, the Court of appeals in a footnote assured the litigants of other remedies that could be utilized to “address the filing of frivolous lawsuits, among other attorney shortcomings, such as litigation sanctions, attorney misconduct proceedings and legal malpractice actions.” Bill Birds 35 N.Y.3d 173, 180, 149 N.E.3d 888, 892 (2020). But these are not treble damages claims.
What about a New York attorney’s misconduct happening in a non-New York court? The Second Circuit Court of Appeals in 1978 held that section 487 applies only to conduct happening within the territorial boundaries of State of New York. Schertenleib v. Traum, 589 F.2d 1156 (2d Cir.1978) (“we believe that section 487 is . . . intended to regulate, through criminal and civil sanctions, the conduct of litigation before the New York courts”). Both state and federal courts in New York have followed it barring one outlier, a case from Kings County Supreme Court. But the state courts are not bound by second circuit decision. Cinao v. Reers, 893 N.Y.S.2d 851 (Sup. Ct. 2010). Cinao rejects Schertenleib and declares: A New York court has sufficient interest in supervising the conduct of attorneys admitted before its bar, and protecting resident clients who have been harmed by the deceit of an admitted attorney, to apply Judiciary Law § 487 to the attorney's conduct no matter where the action is pending. Id at 859. Keep in mind that barring a United States Supreme Court’s decision, federal courts decisions are not binding on the state courts. So, would a federal court be bound by New York’s Cinao v. Reers a trial court decision? Pursuant to U.S. Supreme Court it might be yes. See Fidelity Union Trust Co.. v. Field, 311 U.S. 169 (1940)(holding that “in the absence of a more convincing evidence of what the state law is,” the federal court was bound to follow a decision of a trial court of state-wide jurisdiction). The territoriality of the application is still undefined and is disputed. All. Network, LLC v. Sidley Austin LLP, 43 Misc. 3d 848, 864, 987 N.Y.S.2d 794, 807 (N.Y. Sup. 2014)(“The reach of Section 487 extends only to misconduct by attorneys in connection with proceedings before New York courts.”).
Would an insurance policy cover the attorney? No, as section 487 damages are deemed to be punitive. And “New York public policy precludes insurance indemnification for punitive damage awards including awards of statutory treble damages.” McCabe v. St. Paul Fire & Marine Ins. Co., 79 A.D.3d 1612, 1614, 914 N.Y.S.2d 814, 817 (2010). It is unclear as to how the coverage could be denied in its entirety when section 487 is partially compensatory in nature (“forfeits to the party injured treble damages”). However, it has been held that “treble damages awarded under Judiciary Law § 487 are not designed to compensate a plaintiff for injury to property or pecuniary interests.” Specialized Indus. Servs. Corp. v. Carter, 99 A.D.3d 692, 693, 952 N.Y.S.2d 97, 98 (2012). It seems though that Specialized did not consider that the statute results in two clear distinct treatment to the misconduct under section 487. One it finds the attorney “guilty of a misdemeanor,” and subject “to the punishment prescribed therefor by the penal law,” and secondly, the attorney “forfeits to the party injured treble damages, to be recovered in a civil action. Specialized seems to have obliterated that distinction of two liabilities.
What is the tax consequence to the successful claimant and to the attorney paying? Since any income exceeding the compensation of the damages [two-third] is punitive, it an ordinary income. Comm'r v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955) (“undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. The mere fact that the payments were extracted from the wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable income to the recipients.”)
As far as the attorney paying the damages is concerned, the Attorney could deduct the payment including the treble damages amount as ordinary business. Rev. Rul. 80-211, 1980-2 C.B. 57 ("[P]ayments made in settlement of lawsuits are deductible if the acts which gave rise to the litigation were performed in the ordinary conduct of the taxpayer's business."). However, section 487 states that the attorney is guilty of misdemeanor and then if the attorney is convicted of the crime, then the payment shall not qualify to be a business expense. Also, as the insurance company might not compensate the damages suffered by the attorney and section 165(a) of the Tax Code even though allows a deduction for “any loss sustained during the taxable year and not compensated for by insurance or otherwise,” it might still not be allowed. See Tank Truck Rentals v. Comm'r, 356 U.S. 30 (1958) (holding that “[w]here a taxpayer has violated a federal or a state statute and incurred a fine or penalty he has not been permitted a tax deduction for its payment.”)