American E Group LLC v. LiveWire Ergogenics Inc.

Background

AEG sued LiveWire to enforce a note that LiveWire had executed with AEG. LiveWire filed third-party claims against Elana Hirsch, Sunny Joseph Barkats, and JS Barkats PLLC. This opinion addressed only Hirsch’s motion to dismiss the claims against her.

LiveWire alleged that JSB and Barkats represented LiveWire in obtaining financing while also representing or having financial and personal connections to AEG. LiveWire alleged that the note’s terms were unfavorable and that the attorneys recommended accepting those terms without adequately disclosing the conflicts. LiveWire further alleged that Hirsch, AEG’s principal member and Barkats’s wife, helped conceal the relationships by causing the note to list an address different from the address that AEG and JSB allegedly shared.

The third-party complaint asserted claims against Hirsch for aiding and abetting a breach of fiduciary duty and for civil conspiracy. The court treated Hirsch’s filing as a motion to dismiss the third-party complaint under Federal Rule of Civil Procedure 12(b)(6), which asks whether the pleaded facts plausibly state a legal claim.

Applicable Law

The court applied New York law because the parties agreed in their briefing that New York law governed the claims.

To state an aiding-and-abetting claim under New York law, LiveWire had to plausibly allege: (1) a fiduciary’s breach of duty to LiveWire; (2) Hirsch’s knowing participation in that breach; and (3) damages. For civil conspiracy, LiveWire had to allege an underlying tort, an agreement, an act advancing the agreement, intentional participation, and resulting injury.

Aiding and Abetting a Breach of Fiduciary Duty

The court concluded that LiveWire plausibly alleged an underlying breach by the Barkats Defendants. As LiveWire’s attorneys, they owed LiveWire fiduciary duties. LiveWire alleged that their simultaneous involvement with LiveWire and AEG created a conflict of interest, that the note’s terms were unfair to LiveWire, and that the conflict substantially contributed to LiveWire’s alleged damages.

Hirsch argued that LiveWire had waived any conflict in the engagement letter. The court explained that conflicts can be waived in some circumstances, but the attorneys must reasonably believe they can provide competent and diligent representation, and the affected client must give informed written consent. The court was skeptical that the engagement letter’s general reference to future conflicts was an effective waiver because it did not disclose the specific conflict at issue. The court did not finally decide whether the waiver was effective because that decision was unnecessary to resolve the motion.

The court also found that LiveWire plausibly alleged Hirsch’s knowing participation and substantial assistance. The alleged marriage between Hirsch and Barkats, Hirsch’s position as AEG’s principal member, and the alleged shared office supported an inference that Hirsch knew Barkats represented LiveWire and owed it fiduciary duties. The allegation that Hirsch caused the note to identify a different AEG address supported an inference that she helped conceal the relationship between AEG and the Barkats Defendants. LiveWire also plausibly alleged damages from the note’s allegedly unfair terms.

Civil Conspiracy

The court held that LiveWire plausibly pleaded civil conspiracy. LiveWire adequately alleged underlying torts, including breach of fiduciary duty and aiding and abetting that breach. It also alleged that Hirsch, AEG, and the Barkats Defendants agreed to commit wrongful acts against LiveWire, and it identified alleged conduct supporting that claim, including the concealment of AEG’s office relationship with JSB and the presentation of the note.

The court concluded that these allegations supported a reasonable inference that Hirsch and Barkats agreed to deceive LiveWire into accepting the note’s terms. LiveWire also adequately alleged intentional participation and resulting damage.

Disposition

Judge Gregory H. Woods denied Hirsch’s motion to dismiss the third-party claims asserted against her. The Clerk of Court was directed to terminate the pending motion at docket entry 104.