NY Firm Loses Bid to Sue Ex-Client for Defamation

By Anthony Lin
New York Lawyer
New York Law Journal
January 9, 2007

A Manhattan appellate court has thrown out a law firm's defamation suit against a former client whose husband wrote a letter and copied to others questioning the competence and honesty of lawyers at the firm.

New York firm Sexter & Warmflash was hired by Elizabeth Margrabe in 2001 to represent her and her brother, Anthony Rusciano, in a Westchester County lawsuit against a cousin to whom the siblings wanted to sell their interests in a family business. The retention agreement provided that the firm would work at a reduced rate until the case was resolved, after which it would be entitled to a 50 percent premium over its total bills.

In 2003, the cousin agreed to settle the case and buy out both Ms. Margrabe and her brother for around $8.4 million over a period of several years. But following the agreement, Ms. Margrabe's husband, William, complained that Sexter & Warmflash was moving too quickly to finalize the settlement and failing to demand security provisions in the documentation to ensure all future settlement payments were made. Mr. Margrabe brought two additional lawyers into the case and relations between him and Sexter & Warmflash grew increasingly hostile.

In an April 9, 2004, letter to Sexter & Warmflash lawyers David Warmflash and Michael Present, Mr. Margrabe fired the firm and accused the attorneys of pursuing their own interests at the expense of their clients.

"Some of the concessions you offered your adversaries ensured earlier payment of your fees while consigning one of your clients to likely insolvency," Mr. Margrabe wrote.

The letter, which was copied to Mr. Rusciano and to the other lawyers engaged by Mr. Margrabe, also accused the firm of charging a usurious interest rate on its fee. It further stated the firm'swork had from the beginning been "fraught with missteps, poor legal judgments, failure to protect your client's rights on repeated occasions, and poor, adversarial, or misleading communications with your clients."

Sexter & Warmflash sued the Margrabes for defamation based on the contents of the letter, seeking at least $1 million in damages.

Manhattan Supreme Court Justice Shirley Werner Kornreich denied the Margrabes' motion to dismiss and granted summary judgment to Sexter & Warmflash regarding the Margrabes' liability for the usury allegation. But the Appellate Division, First Department, reversed on the grounds that Mr. Margrabe's letter was absolutely privileged as part of a judicial proceeding and ordered the dismissal of the defamation suit.

Sexter & Warmflash had argued that the privilege did not apply because Mr. Margrabe's letter had discharged the firm from the case and because it had no purpose other than malice.

Privilege Applied

But the appellate court, in a ruling by Justice David Friedman, said the letter was sufficiently "pertinent" to the proceeding, noting that only the most outrageous out-of-context statements would have escaped the privilege.

"In this case, the allegedly defamatory statements in the April 9 letter concern, on their face, the quality of S&W's representation of Ms. Margrabe in the Westchester County action and in the negotiations to settle it, and the propriety of S&W's fee arrangement for that representation," Justice Friedman wrote in

, 107569/04. "The statements were made in a letter that, besides being sent to S&W itself, was directed solely to parties legitimately involved in the proceeding with which the letter was concerned."

He added, "Plainly, the Margrabes had motives other than the desire to defame for sharing their criticisms of S&W."

The court emphasized that, in deciding to apply the absolute privilege, it was expressing no opinion concerning the merits of the underlying dispute between the firm and Margrabes, or the validity of the latter's criticisms.

"Having determined that the statements are so protected, we are required to dismiss the complaint regardless of any damage to S&W's reputation that may have resulted from the Margrabe's limited distribution of the April 9 letter," Justice Friedman wrote.

The Margrabes were represented by Greenberg & Massarelli of Purchase, N.Y. Sexter & Warmflash appeared pro se.