Commercial Litigation and Arbitration

Legal Malpractice and Choice of Law — A State Has a Paramount Interest in Regulating Lawyers Practicing within Its Borders — Elements of Judicial Estoppel (Majority Rule) and Law of the Case Doctrine — Law Governing Claim Governs Affirmative Defenses

Cobalt Multifamily Investors I, LLC v. Shapiro, 857 F. Supp. 2d 419 (S.D.N.Y. 2012):

B. Choice of Law Issues

The Receiver argues that the claims against the Law Firm Defendants are controlled by the laws of their respective domiciles, such that New York law governs the Certilman Defendants, Connecticut law governs the Cohen Defendants, and New Jersey law governs the Lum Defendants. ***

The Cohen and Lum Defendants argue that the Receiver, having consistently relied upon New York law in this litigation, is estopped from arguing that New York law does not apply to them, and that, in any case, New York law controls the claims against them. For the following reasons, the Court finds that the Receiver is not so estopped, and proceeds to conduct a choice of law analysis to determine which law or laws should apply to the claims in this case.

1. Estoppel

The Receiver is not estopped from arguing that New York law does not apply to the claims against the Cohen and Lum Defendants. Judicial estoppel "applies only in situations where a party both takes a position that is inconsistent with one taken in a prior proceeding, and has had that earlier position adopted by the tribunal to which it was advanced." Stichting Ter Behartiging Van De Belangen Van Oudaandeelhouders In Het Kapitaal Van Saybolt Int'l B.V. v. Schreiber, 407 F.3d 34, 45 (2d Cir. 2005) (citing Rodal v. Anesthesia Grp. of Onondaga, P.C., 369 F.3d 113, 118 (2d Cir. 2004)). Although the Receiver has consistently relied upon New York law in previous stages of the case, the Court has never adopted his prior position. Rather, the Court has proceeded on the basis that New York law applies because none of the parties had asked it to decide the choice of law question.

For the same reason, the Law Firm Defendants cannot invoke the law of the case doctrine. The law of the case doctrine prevents re-litigation of an issue decided at an earlier point in an action only if the "court was ever squarely presented with the question . . . ." Stichting, 407 F.3d at 44; see also 18B Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 4478 (2d ed. 2011). Because the Court has not made a legal decision as to which law or laws apply to the Receiver's claims, the law of the case doctrine does not preclude the Receiver from arguing that the Court do so now.

2. Applicable Law

In a federal action based on diversity of citizenship, a court applies the choice of law rules of the forum state. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S. Ct. 1020, 85 L. Ed. 1477 (1941). Under New York law, the court must resolve, as a threshold matter, whether there is an actual conflict between the bodies of law that each party seeks to have applied. Curley v. AMR Corp., 153 F.3d 5, 12 (2d Cir. 1998). An actual conflict exists when a difference in the substantive law of each jurisdiction is relevant to, and has a significant possible effect on, the outcome of the suit. Fin. One Pub. Co. v. Lehman Bros. Special Fin., Inc., 414 F.3d 325, 331 (2d Cir. 2005). If a conflict exists, then the court must conduct a choice of law analysis. Curley, 153 F.3d at 12.

New York employs an "interest analysis," which "give[s] controlling effect to the law of the jurisdiction which, because of its relation or contact with the occurrence or the parties, has the greatest concern with the specific issue raised in the litigation." Babcock v. Jackson, 12 N.Y.2d 473, 481, 191 N.E.2d 279, 240 N.Y.S.2d 743 (1963). When conducting an interest analysis for any tort claim, the most "'significant contacts are, almost exclusively, the parties' domiciles and the locus of the [alleged] tort.'" AroChem Int'l, Inc. v. Buirkle, 968 F.2d 266, 270 (2d Cir. 1992) (quoting Schultz v. Boy Scouts of Amer., Inc., 65 N.Y.2d 189, 197, 480 N.E.2d 679, 491 N.Y.S.2d 90 (1985)). With respect to the specific tort of legal malpractice, "a state has a strong interest in regulating the conduct of a law firm [or lawyer] licensed to practice within its borders, and a law firm [or lawyer] consents to be so regulated when it locates its offices in a particular state." LNC Invests., Inc. v. First Fidelity Bank, 935 F. Supp. 1333, 1350-51 (S.D.N.Y. 1996) (Mukasey, J.) (applying New York choice of law rules); accord The Diversified Grp. v. Daugerdas, 139 F. Supp. 2d 445, 453 (S.D.N.Y. 2001) (Scheindlin, J.) ("A state has a paramount interest in regulating the conduct of attorneys licensed to practice within its borders."). ***

The Cohen and Lum Defendants argue that New York law controls the claims against them because the controlling interest is not the regulation of attorney conduct, but rather, the application of an affirmative defense that alleges wrongdoing by Cobalt. They argue that because New York has the strongest interest in preventing lawsuits brought against third parties by culpable plaintiffs who allegedly participated in the fraud, New York law should govern the application of the in pari delicto defense. However, the Defendants offer no legal support for the proposition that a New York court would apply one jurisdiction's law to the underlying claim and apply another jurisdiction's law to an affirmative defense to that claim. Nor could they, because in this Circuit, the law governing an affirmative defense to a claim is the same as the law governing the claim itself. Lazard Freres & Co. v. Protective Life Ins. Co., 108 F.3d 1531, 1540-41 (2d Cir. 1997). Even if claims and the affirmative defenses to those claims could be governed by the laws of different jurisdictions, the states in which the Defendants are domiciled have a greater interest in the application of the defense than New York does. Because they have the greater interest in litigation of the underlying claims, they have an acute interest in the availability of defenses to those claims.

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