Manhattan Signs & Designs, Ltd. et al v. Ladak et al
Filing
54
ORDER granting 45 Motion to Disqualify Counsel. Joseph Sferrazza and Sferrazza & Keenan, PLLC are disqualified as counsel for Mr. Nifenecker. This case is stayed until August 23, 2013 to permit Mr. Nifenecker to obtain new counsel. A status conference will be held with the parties on August 27, 2013 at 10:00 a.m in Courtroom 11C. See attached. Ordered by Magistrate Judge Marilyn D. Go on 7/23/2013. (Albertsen, Joanne)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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MARC A. PERGAMENT, CHAPTER 7 TRUSTEE IN
THE BANKRUPTCY CASE OF SIGNS & DESIGNS,
LTD.,
ORDER
Plaintiff,
CV 2011-2797 (ARR)(MDG)
- against MURTAZA LADAK, et al.,
Defendants.
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This action was commenced by Manhattan Signs & Designs, Ltd.
("MSD") and Eugene Nifenecker, the former CEO, president and sole
shareholder and director of MSD, against M.S. Signs, Inc. and its
officers, Murtaza Ladak and Kevin Cherashore, who were former
employees and officers of MSD.
The original two plaintiffs
alleged that Mr. Ladak and Mr. Cherashore breached their fiduciary
duty and defrauded MSD by retaining payments made by MSD customers
for work completed using MSD resources and staff.
In an Amended
Complaint filed on August 5, 2011, only MSD is named as plaintiff.
Messrs. Ladak and Cherashore alleged in their answer to the
Amended Complaint that Mr. Nifenecker appropriated the missing
funds and asserted counterclaims against MSD and Mr. Nifenecker
for unpaid wages owing to both individual defendants.
After an involuntary petition of bankruptcy was filed against
MSD, Marc Pergament, the Trustee appointed for MSD in the
bankruptcy action, was substituted as plaintiff.
Defendants
subsequently moved to disqualify Joseph Sferrazza and his firm,
Sferrazza & Keenan ("S&K"), as counsel for Mr. Nifenecker claiming
a conflict of interest arising from S&K's prior representation of
MSD and in the bankruptcy proceedings involving MSD.
BACKGROUND
At commencement of this action, Eugene Nifenecker represented
the two original plaintiffs, MSD and himself; Douglas Lieberman
later appeared on behalf of both plaintiffs.
When Mr. Nifenecker
was sued as a counterclaim defendant after being dropped in the
Amended Complaint, Mr. Lieberman again represented both MSD and
Mr. Nifenecker.
Relatively little discovery took place before an involuntary
Chapter 7 bankruptcy petition was filed against MSD in the Eastern
District of New York.
See Letter to the Court from Douglas
Lieberman dated Feb. 21, 2012 (ct. doc. 24).
All proceedings in
this matter were stayed until August 3, 2012, after Marc Pergament
was appointed the Trustee of MSD and was substituted as party
plaintiff in this action in place of MSD.
See Minute Entry filed
Apr. 5, 2012; Order of the Court filed July 20, 2012; Minute Entry
filed July 27, 2012.
While the case was stayed, Mr. Sferrazza
replaced Mr. Lieberman as counsel for Mr. Nifenecker.
See Minute
Entry filed July 11, 2012.
Defendants argue in the present disqualification motion that
S&K should not be permitted to represent both MSD in the
bankruptcy action and Mr. Nifenecker in this action because MSD's
interests are directly contrary to that of Mr. Nifenecker, in that
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Mr. Nifenecker is likely guilty of the wrongs of which they have
been accused and because S&K previously represented MSD and an
affiliate wholly owned by Mr. Nifenecker.
of Mot. to Disqualify (ct. doc. 45-16).
Defs.' Memo. in Support
Besides disputing these
contentions, Mr. Nifenecker argues that defendants lack standing
to make this motion, which is more appropriately raised by the
Trustee in the bankruptcy court.
doc. 47).
Aff. of Eugene Nifenecker (ct.
The Trustee states that while he does not believe that
the evidence currently available establishes that Mr. Nifenecker
is guilty of embezzling funds from MSD or that S&K's prior
representation requires the disqualification of Mr. Sferrazza in
this action, he supports disqualification of S&K in the interest
of ensuring the undivided loyalty of MSD's counsel in the
bankruptcy action.
Aff. of Mark Pergament (ct. doc. 48).
DISCUSSION
I.
Standing
As an initial matter, this Court finds that defendants have
standing to make this motion.
Courts rarely deny disqualification
motions for lack of standing because "[p]rinciples of standing are
matters of public policy, and in the area of regulating the
practice of law, those principles must be flexible enough to allow
a court to insure that the integrity of proceedings before it is
maintained, especially where a court recognizes the existence of a
conflict."
Paladino v. Skate Safe, Inc., 28 Misc.3d 1227(A), 2010
WL 3359550, at *4 (N.Y. Sup. 2010).
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Because resolution of
potential conflicts of interest is essential to maintaining the
integrity of court proceedings, "[e]thical concerns dictate that
other persons, especially other attorneys, be permitted to raise
the issue . . ."
Planning & Control, Inc. v. MTS Group, Inc.,
1992 WL 51569 (S.D.N.Y. 1992); see also Principal Life Ins. Co. v.
McMillan, 2010 WL 2075873, at *1 n.1 (E.D.N.Y. 2010) ("all
attorneys, regardless of their position in the litigation, have an
obligation to call to the Court's attention possible disciplinary
rule violations") (internal quotations omitted).
This Court thus
declines to deny defendants' motion on the basis of standing.
II.
Disqualification
Federal courts have inherent power to disqualify attorneys in
order to "preserve the integrity of the adversary process."
of Educ. v. Nyquist, 590 F.2d 1241, 1246 (2d Cir. 1979).
Bd.
In
determining disqualification motions, courts must balance two
competing concerns: "the client's right to select counsel of his
choice [and] the need to maintain the integrity and high standards
of the legal profession."
(2d Cir. 2009).
Nordwind v. Rowland, 584 F.3d 420, 435
Disqualification is warranted only where "an
attorney's conduct tends to taint the underlying trial."
GSI
Commerce Solutions, Inc. v. Babycenter LLC, 618 F.3d 204, 209 (2d
Cir. 2010).
Although the movant has a high burden of proof, "any
doubt is to be resolved in favor of disqualification."
Celanese Corp., 513 F.2d 568, 571 (2d Cir. 1975).
Hull v.
However,
"because courts must guard against the tactical use of motions to
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disqualify counsel, they are subject to fairly strict scrutiny."
Murray v. Metropolitan Life Ins. Co., 583 F.3d 173, 178 (2d Cir.
2009) (internal quotations removed).
Specifically, defendants argue that S&K should be
disqualified from representing Mr. Nifenecker in this action
because of a conflict arising from the firm's prior representation
of MSD and its affiliate, SolarSmart, of which Mr. Nifenecker was
the sole shareholder and CEO.
Ct. doc. 45-16, at 7-10.
They also
argue that a conflict arises from S&K's concurrent representation
of Mr. Nifenecker in this action and MSD in the bankruptcy
proceedings because Mr. Nifenecker engaged in conduct adverse to
MSD.
A.
Successive Representation
Different standards apply in determining motions for
disqualification depending on whether the representation is
concurrent or successive.
Hempstead Video, Inc. v. Incorporated
Village of Valley Stream, 409 F.3d 127, 133 (2d Cir. 2005). In
cases of successive representation, a former client may seek to
prohibit an attorney from representing another client if:
(1) the moving party is a former client of the adverse
party's counsel;
(2) there is a substantial relationship between the
subject matter of the counsel's prior representation of
the moving party and the issues in the present lawsuit;
and
(3) the attorney whose disqualification is sought had
access to, or was likely to have had access to, relevant
privileged information in the course of his prior
representation of the client.
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Nordwind, 584 F.3d at 435.
The central concern underlying
disqualification based on successive representation is the
possibility "however slight, that confidential information
acquired from a client during a previous relationship may
subsequently be used to the client's disadvantage."
Stratton v.
Wallce, 2012 WL 3201666, at *3 (W.D.N.Y. 2012) (quoting Emle
Indust., Inc. v. Patentex, Inc. 478 F.2d 562, 571 (2d Cir. 1973)).
Defendants contend that there is a substantial relationship
between S&K's representation of MSD and SolarSmart because "the
damages [MSD] allegedly suffered were a direct, proximate and
foreseeable result of the conduct of Nifenecker during the periods
that MSD was represented by Sferrazza & Keenan."
Id. at 8.
Setting aside defendants' inability to satisfy the first
factor that they be former clients of S&K, defendants also fail to
meet the second criteria – the existence of "substantial
relationship" between the subjects of the prior and current
matters."
A "substantial relationship" exists where "the
relationship between the issues in the prior and present cases is
'patently clear' . . . 'identical' or 'essentially the same.'"
Bank of America, N.A. v. Klein, 2011 WL 63910, at *4 (D.Conn.
2011) (quoting Gov't of India v. Cook Indus., Inc., 569 F.2d 737,
737 (2d Cir. 1978)).
The Second Circuit has not provided
definitive guidelines on what issues in the past and current
actions must be "identical" or "essentially the same," but it is
clear that the relevant inquiry extends beyond "whether there are
common legal claims or theories (. . .) to whether there are
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common factual issues that are material to the adjudication of the
prior and current representations."
Mitchell v. Metropolitan Life
Ins. Co., Inc., 2002 WL 441194, at *8 (S.D.N.Y. 2002); see also
Employers Ins. Co. v. Munich Reinsurance America, Inc., 2011 WL
1873123, at *5 (S.D.N.Y. 2011) ("In this context, 'issues' does
not mean procedural issues . . . but factual issues on which
confidential information concerning the client was likely
acquired"); Revise Clothing, Inc. v. Joe's Jeans Subsidiary, Inc.,
687 F.Supp.2d 381, 392 (S.D.N.Y. 2010) (citing cases).
Regardless of the precise nature of the relationship between
MSD and SolarSmart, S&K's representation of those two entities did
not pertain to "essentially the same" issues that dominate this
case.
Defendants describe S&K's prior representation of MSD and
SolarSmart as involving the "Chapter 7 Liquidation proceeding" of
SolarSmart, the "MSD-Decree Signs, Inc. Asset Purchase Agreement"
and the "MSD-Wachovia Loan work-out" related to the transaction
between MSD and Decree Signs.
doc. 45-1).
See Aff. of Thomas Marino ¶ 12 (ct.
These other legal matters concern discrete financial
transactions having nothing to do with the alleged embezzlement of
MSD's funds and Mr. Nifenecker's alleged misconduct in this
action.
Even if S&K "may have knowledge of facts that are
relevant to the issues brought before the Court" from their prior
representation of MSD and SolarSmart, the purported relationship
with current concerns is simply too attenuated "to conclude that
the services [counsel] provided . . . are substantially related to
the issues presented in the instant Complaint."
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Pacheco Ross
Architects, P.C. v. Mitchell Assocs., 2009 WL 1514482, at *5
(N.D.N.Y. 2009).
Because defendants have failed to establish the first two
requisite factors, this Court need not consider whether S&K had
access to privileged client information in its prior
representation to warrant disqualification.
B.
Concurrent Representation
The Second Circuit has long recognized that it is "prima
facie improper" for an attorney to represent one existing client
in a matter adverse to another existing client.
Hempstead Video,
409 F.3d at 133 (citing Cinema 5, Ltd. v. Cinerama, Inc., 528 F.2d
1384, 1387 (2d Cir. 1976)).
In such cases, the burden is on the
attorney "to show, at the very least, that there will be no actual
or apparent conflict in loyalties or diminution in the vigor of
his representation."
Id. (emphasis in original).
"so heavy that it will rarely be met."
This burden is
GSA Commerce Solutions,
618 F.3d at 209-210 (emphasis in original) (quoting Gluek v.
Jonathan Logan, Inc., 653 F.2d 746, 750 (2d Cir. 1981)).
Similarly, Rule 1.7 of the New York Rules of Professional
Conduct precludes a lawyer from engaging in representation where
"representation will involve the lawyer in representing differing
interests."
22 N.Y.C.R.R. § 1200.0, Rule 1.7.
However, as Rule
1.7 specifies, where a conflict arises between two jointlyrepresented parties, the "[c]lient consent may, under appropriate
circumstances, provide a basis for permitting continued
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representation."
Paladino, 28 Misc.3d 1227(A), 2010 WL 2010 WL
3359550, at *2; see also Bulkmatic Transport Co. v. Pappas, 2001
WL 504841, at *4 (S.D.N.Y. 2001) ("regardless of the actual
relationship between various parties . . . the relevant question
is whether an attorney has fulfilled the obligation to inquire
into, and inform the clients about, the possible pitfalls of joint
representation").
In order to proceed, a reasonable lawyer in
counsel's position must "have a reasonable belief that the
attorney 'will be able to provide competent and diligent
representation to each affected client.'"
Paladino, 2010 WL
3359550, at *3 (quoting Professional Conduct Rule 1.7(b)(1)).
Where there are adverse interests between the parties
represented by counsel, consent from all affected parties is
necessary.
See, e.g., 22 N.Y.C.R.R. § 1200.0, Rule 1.7(b)
("Notwithstanding the existence of a concurrent conflict of
interest . . . a lawyer may represent a client if . . . each
client gives informed consent, confirmed in writing"); Cohen v.
Strouch, 2011 WL 1143067, at *5 n. 3 (S.D.N.Y. 2011) ("Even if the
conflict of concurrent representation in related matters were
waivable, [counsel] could not cure it without the waiver of [one
client]").
In fact, the court in Anderson v. Nassau Cty. Dept. of
Corrections, 376 F.Supp.2d 294, 299 (E.D.N.Y. 2005) disqualified
counsel because client consent was not obtained prior to counsel's
undertaking representation of adverse interests; consent given in
response to a motion to disqualify did not suffice.
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Mr. Nifenecker attempts to downplay S&K's role in the
bankruptcy action and claims that the firm "has no further role as
Chapter 7 counsel to MSD except to cooperate with any request the
Trustee might have."
Ct. doc. 49 ¶ 12.
However, it is undisputed
that Ms. Sarah Keenan is representing MSD in the bankruptcy action
while Mr. Sferrazza is representing Mr. Nifenecker in this action.
See In re: Manhattan Signs & Designs, Ltd., Pet. 12-70904 (docket
sheet).
S&K
is plainly engaged in concurrent representation of
MSD and Mr. Nifenecker.
Therefore, the Court must examine whether
defendants' allegations create adversarial interests between the
parties and the effect of the Trustee's lack of consent to S&K's
continued representation.
1.
Adversarial Interests
The simple fact of joint representation where "a defendant
asserts a counterclaim against one of the multiple plaintiffs
represented by the same counsel" is not in itself sufficient to
trigger automatically disqualification of counsel.
2001 WL 504841, at *4.
Bulkmatic,
Courts should distinguish between
instances where "defendants have stated a viable counterclaim"
which "could be said to put [non-movant's] counsel in a position
where they are advocating for [one client] to the detriment of the
[other client]" and those where "defendants' counterclaim has no
basis in law" and "do[es] not specify any provision of law on
which defendants rely for the legal existence of such
counterclaims."
Copantitla v. Fiskardo Estiatorio, Inc., 788
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F.Supp.2d 253, 280 (S.D.N.Y. 2011).
Thus, the court in Bulkmatic
denied a disqualification motion where it found that the
defendants' "attempt to establish the potential for an adverse
relationship between [plaintiff] and its employees . . . [was]
cast entirely in terms of rhetorical, often self-contradictory
questions, presenting little more than hypothetical scenarios of
conflict."
Bulkmatic, 2001 WL 504841, at *3.
However, where a defendant's pleading "has raised a direct
conflict and created adverse interests among plaintiffs" so that
co-plaintiffs could "ultimately be liable to their fellow
plaintiffs," disqualification is required because plaintiffs
"whose pecuniary interest are in conflict with one another [have
an] irreconcilable conflict in the professional allegiance of
counsel [that] cannot be waived."
Big Brows LLC v. Devitt, 2011
WL 3557061, at *3 (N.Y.Sup. 2011).
Even where, as in this matter,
the party opposing disqualification argues the movant's
allegations lack merit, disqualification may be warranted.
See
Rodolico v. Unisys Corp., 189 F.R.D. 245, 255 (E.D.N.Y. 1999).
In
Rodolico, the disqualified firm represented putative class
plaintiffs as well a union, which it had also represented in prior
matters, that was impleaded as a third-party defendant by
defendants.
Rodolico, 189 F.R.D. at 255.
The Court concluded
that representation of the plaintiffs was improper because "their
claims may ultimately be adverse" to the union.
Similarly,
disqualification of plaintiffs' counsel was warranted in Big Brows
where defendants alleged that individual plaintiffs "participated
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in the decisions upon which plaintiffs base their suit" and thus
had violated fiduciary duties toward the corporate plaintiff
because "litigation of the issues presented in the complaint
[would] necessarily require plaintiffs . . . to defend themselves
against their fellow plaintiffs' claims."
Big Brows, 2011 WL
3557061, at *2.
A conflict due to concurrent representation can also occur
where an attorney represents clients in two separate actions.
In
In re Trevis, 347 B.R. 679 (9th Cir. BAP 2006),1 the court found a
conflict where a law firm represented a trustee in bankruptcy
proceeding and debtors in unrelated adversary proceeding, "even
though the simultaneous representations may have nothing in
common, and there is no risk that confidences from one client may
be used against that client, disqualification is virtually
automatic."
Id., at 691 (internal citations omitted).
In contending that S&K should be disqualified for
simultaneously representing MSD in the bankruptcy action and Mr.
Nifenecker herein, defendants claim that documentary evidence
presented suggests that Mr. Nifenecker diverted funds from MSD,
resulting in a potential or actual conflict by placing MSD and Mr.
Nifenecker in "adversarial legal positions."
6.
Ct. doc. 45-16, at
They argue that S&K, counsel for MSD in the bankruptcy action,
1
"9th Cir. BAP" refers to the Ninth Circuit Bankruptcy
Appellate Panel. See BAP Court Information, United States
Courts for the Ninth Circuit,
http://www.ca9.uscourts.gov/bap/view.php?pk_id=0000000254
(last visited July 22, 2013).
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"cannot turn against it as they must in order to represent
Nifenecker."
Id. at 7.
As an initial matter, this Court notes that the diversion of
funds is central to plaintiff's claims.
Plaintiff's claims in the
Amended Complaint are based in large part on allegations that
during the time that defendants Ladak was an officer and he and
Cherashore were employees of MSD, these defendants failed, inter
alia, to enter customers and jobs on the MSD database,
appropriated MSD customers as customers of MS Signs, used MSD
personnel, equipment and supplies to perform jobs and retained
monies received.
See Am. Compl. (ct. doc. 14) at ¶¶ 40-45.
Among
the MSD customers and jobs that defendants appropriated, plaintiff
specifically alleges that defendants used MSD materials and
personnel for the fabrication, installation and maintenance of
signs, light boxes and banners for Crib & Teen City Inc. ("Crib &
Teen").
Id. at ¶¶ 46-47.
Plaintiff alleges that Crib & Teen was
a customer of Monroe Signs and that after plaintiff acquired
Monroe Signs in 1999-2000, there were no records of payments on
plaintiff's database or reports made by Monroe Signs of work
performed for Crib & Teen.
Id. at ¶¶ 119-122.
Plaintiff alleges
that additional work was performed for Crib & Teen in 2002, 2003,
2004, 2006 and 2007 using MSD personnel and equipment, but the
jobs were not entered on the MSD database.
Id. at ¶¶ 123-212.
Although one or both defendants were involved in arranging for the
jobs, the work was not entered on plaintiff's database and no
payments forwarded to MSD.
Id. passim.
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Defendants allege as their Fourth Affirmative Defense that
Mr. Nifenecker received cash payments from several of MSD's
customers and failed to report the payments as income.
to Am. Compl. (ct. doc. 16) ¶¶ 439-40.
See Answer
In their motion,
defendants point to evidence indicating that Crib City was known
to be an established cash customer of MSD.
Robin McCabe, a sales
person of MSD,2 sent reports to Mr. Nifenecker about Crib City
work and listed Crib City on a memo for commissions she was to
receive.
See Decl. of Thomas Marino dated Aug. 9, 2012 ("Marino
Decl.") (ct. doc. 45-6), Exhs. E-G.
Defendants provide some
receipts indicating that Ms. McCabe received cash from Crib City,
id. at Ex. G, and testimony by Edward Kloss, the owner of Crib
City that payments in cash would be picked up by Kevin Cherashore,
Ken McCabe or Robin McCabe.
Decl. of Thomas Marino dated Sept.
12, 2012 ("Marino Reply Decl."), Ex. N.
Such evidence is not
sufficient to prove that Mr. Nifenecker was the person who
absconded with payments intended for MSD, as contended by
defendants.
However, since he had knowledge of at least some cash
transactions with Crib City and, as the CEO of the company, was
likely to have been aware of the production of the large signs for
Crib City, defendants' contention is not entirely farfetched.
2
See
Mr. Marino also states in his declaration that Robin
McCabe and her husband, Ken McCabe, were owners of Monroe
Signs. Marino Decl. at ¶ 17. However, since he provides no
source for the other information he provides about the
McCabes and their roles in MSD, which is not evident from the
documentation provided, this Court will not consider his
unsupported statements.
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Reply Decl., Ex. O (ct. doc. 50-2).
In any event, as defendants
correctly note, "MSD . . . is in no position to determine who
committed the defalcation."
Id. at 9.
Not surprisingly, the Trustee likewise "believe[s] that
Nifenecker's representation by a law firm without any involvement
in [the Bankruptcy Action] is the best course" because "a
situation may arise that threatens S&K's undivided loyalty to
[MSD]."
Ct. doc. 48 ¶ 10.
This Court agrees with the Trustee's
position that defendants' allegations have raised a reasonable
possibility, although they have so far not definitively
established, that Mr. Nifenecker could "ultimately be liable" to
MSD for the alleged misconduct.
Big Brows, 2011 WL 3557061, at
*3.
While this Court is cognizant of the potential tactical use
of motions to disqualify, defendants' allegations do not suffer
the infirmities that have led the other courts in the cases cited
by plaintiff to deny motions to disqualify.
In Copantitla, the
Court found that counterclaims underlying the defendants' motion
for disqualification were "legally insufficient" since defendants
had no basis to claim entitlement to certain set-offs which would
reduce the amount of any judgment awarded to certain plaintiffs.
Copantitla, 788 F.Supp.2d. at 281.
As the Court observed, "if
defendants ha[d] stated a viable counterclaim, then pursuing [the
claim] could be said to put plaintiffs' counsel in a position
where they are advocating" for one group of plaintiffs over
another, and disqualification would presumably be appropriate.
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Id.
If the defendants here are able to prove their factual
contentions, there is little question that Mr. Nifenecker could
also be liable for the payments that plaintiff seeks from
defendants.
Also, unlike the defendants in Bulkmatic, who relied on broad
generalizations and hypothetical questions to argue that the joint
representation at issue was "fraught with potentials for
conflicts,"
Bulkmatic, 2001 WL 504841, at *3, n. 4, defendants
have come forward with some, albeit sparse, evidence in support of
their motion.
However, very little discovery has yet taken place.
Although it is a close question, particularly in light of the
timing of defendants' motion, the Court concludes that defendants'
allegations that Mr. Nifenecker was aware of the cash payments
intended for MSD, ct. doc. 16 ¶¶ 439-440, suffices to establish a
potential conflict of interests between MSD and Mr. Nifenecker.
Absent the consent of both clients, S&K's continued representation
of Mr. Nifenecker in this action is improper because the claims of
their other client, MSD, "may ultimately be adverse" to him.
Rodolico, 189 F.R.D. at 255.
Therefore, the Court must examine
the effect of the Trustee's objection to S&K's continued
representation of MSD and Mr. Nifenecker.
2.
Trustee's Objection to Representation
In the special context of a trustee or receiver in
bankruptcy, a trustee has broad powers and authority over the
affairs of the bankrupt debtor, as explained by the Supreme
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Court's decision in Commodity Futures Trading Comm'n v. Weintraub,
471 U.S. 343 (1986).
In holding that a bankruptcy trustee may
assert the attorney-client privilege on behalf of a corporate
debtor he represents, the Supreme Court recognized that just as
"control of a corporation passes to new management, the authority
to assert and waive the corporation's attorney-client privilege
passes as well" to the bankruptcy trustee.
Id., 471 U.S. at 348.
The Supreme Court also noted that "[t]he [Bankruptcy] Code's goal
of uncovering insider fraud would be substantially defeated if the
debtor's directors were to retain the one management power that
might effectively thwart an investigation into their own conduct."
Id., 471 U.S. at 353-354.
Thus, "if the Receiver is to be
permitted to pursue litigation on [the debtor's] behalf, there is
no reason why he should be unable to exercise his discretion to
waive its corporate privilege in connection with that litigation
or other contests."
United States v. Shapiro, 2007 WL 2914218, at
*6 (S.D.N.Y. 2007).
Although Weintraub "address[es] only whether a receiver
exercises control over a corporation's privilege, the same legal
principles determine whether opposing counsel should be
disqualified . . . " under state rules regarding subsequent
representation.
Jo Ann Howard & Assocs., P.C. v. Cassity, 2012 WL
1247271, at *4 (E.D. Mo. 2012).
Because "[i]n bankruptcy, the
rights of a corporation with respect to its present or former
counsel are controlled by the trustee, the trustee should control
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the right to demand or waive the duty of loyalty or present or
former counsel."
In re Jaeger, 213 B.R. 578, 592 (Bkrtcy. C.D.
Cal. 1997).
Notwithstanding Mr. Nifenecker's attempt to minimize the role
of S&K as MSD's bankruptcy counsel, bankruptcy debtors are "under
a duty to disclose information [to] assist the Trustee in his
efforts to recover assets of the estate."
Allboro Waterproofing
Corp. v. Allboro Building Maintenance, 224 B.R. 286, 292 (E.D.N.Y.
1997).
A law firm that represents a bankruptcy debtor as well as
a potentially adversarial party in a civil proceeding also must
possess "undivided allegiance to the [adversary party] [which]
per force compels an adversarial posture at odds with those
statutory duties in the bankruptcy proceeding . . ."
Id.
The
Allboro court concluded that "allowing the simultaneous
representation to continue would result in an ongoing,
impermissible conflict."
Allboro, 224 B.R. at 291; see also Jo
Ann Howard, 2012 WL 1247271, at *3 ("when an attorney has
represented a corporation before it entered bankruptcy, the courts
have disqualified that attorney from representing defendants
adverse to the corporation in its bankruptcy proceedings").
The Trustee's lack of consent to S&K's continued
representation in this matter persuades the Court that S&K must be
disqualified.
As the Trustee for MSD, the Trustee has the right
to demand undivided loyalty from MSD's counsel.
Although he does
not necessarily perceive an existing conflict based on the
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evidence presented to date by defendants, the Trustee is not
sufficiently confident of S&K's "undivided loyalty" to MSD while
it simultaneously represents Mr. Nifenecker.
Since there is
actual potential for a conflict between the interests of MSD and
Mr. Nifenecker, no more than this is needed to disqualify S&K;
joint representation may not continue when one party does not
consent.
CONCLUSION
For the foregoing reasons, Joseph Sferrazza and Sferrazza &
Keenan, PLLC are disqualified as counsel for Mr. Nifenecker.
This
case is stayed until August 23, 2013 to permit Mr. Nifenecker to
obtain new counsel.
A status conference will be held with the
parties on August 27, 2013 at 10:00 a.m in Courtroom 11C.
SO ORDERED.
Dated:
Brooklyn, New York
July 23, 2013
/s/___________________________
MARILYN D. GO
UNITED STATES MAGISTRATE JUDGE
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