Askari v. Mcdermott, Will & Emery, LLP

• Decision Date: 27 November 2019
• Docket Number: Index No. 606862/15,2016–04472
• Citation: 179 A.D.3d 127,114 N.Y.S.3d 412
• Parties: Kevin ASKARI, et al., Appellants, v. MCDERMOTT, WILL & EMERY, LLP, et al., Respondents.
• Court: New York Supreme Court — Appellate Division

179 A.D.3d 127

114 N.Y.S.3d 412

Kevin ASKARI, et al., Appellants,

v.MCDERMOTT, WILL & EMERY, LLP, et al., Respondents.

2016–04472

Index No. 606862/15

Supreme Court, Appellate Division, Second Department, New York.

Argued - March 13, 2018

November 27, 2019

James Sawyer, Jericho, NY, for appellants.

McDermott, Will & Emery, LLP, New York, NY (James A. Pardo and Allison E. Fleischer of counsel), respondent pro se.

Holland & Knight, LLP, New York, NY (Christopher G. Kelly and Katherine A. Skeele of counsel), for respondent Oncomed Specialty, LLC.

ALAN D. SCHEINKMAN, P.J., RUTH C. BALKIN, LEONARD B. AUSTIN, SYLVIA O. HINDS–RADIX, JJ.

OPINION & ORDER

AUSTIN, J.

On this appeal we are asked to address a conflict between New York and Delaware law relating to which law applies, and implicating who or which entity may assert the attorney-client privilege, in the context of the merger and restructuring of businesses, the sale of membership interests, and related transactions which occurred in connection with those events.

Upon concluding that, under Delaware law, the right of the plaintiffs, Kevin Askari and Sina Drug Corp. (hereinafter Sina), as sellers, to transactional documents contained in the file of the defendant law firm McDermott, Will & Emery, LLP (hereinafter McDermott), relating to the reorganization, merger, and sale of Sina, was transferred to the new entity/buyer, the defendant Oncomed Specialty, LLC (hereinafter Specialty), post- merger/reorganization, the Supreme Court denied the plaintiffs' motion for summary judgment on the complaint and granted the defendants' separate cross motions for summary judgment dismissing the complaint insofar as asserted against each of them. We reverse the order appealed from for the reasons set forth herein.

I. Background

A. Reorganization of Sina and Creation of Specialty

Askari and nonparty Burt Zweigenhaft were the sole shareholders of Sina, a corporation formed under the laws of the State of New York in October 2001. Sina provided pharmacy and clinical services to cancer

patients pursuant to prescriptions which were required for the administration of chemotherapy and the side-effect pharmaceutical management of cancer

patients. Sina did business as "Oncomed." Askari was Sina's president as well as its controlling shareholder. Zweigenhaft was Sina's chief executive officer and secretary. The legal services of McDermott were used during the restructuring of certain corporations, including Sina, the subsequent sale of a percentage of shares of those restructured corporations to an unrelated corporate entity, and all related transactions with respect to those events.

1. McDermott's Engagement Letter Regarding a Potential Asset Sale to Nonparty PharMerica Corporation

By letter dated January 30, 2013, Robert H. Cohen, a senior partner at McDermott, wrote to Zweigenhaft, Askari, and "Onco360," an entity which was not in existence as of that date, to memorialize that McDermott had been engaged to represent "Onco360 and its affiliated entities in connection with the sale of all or substantially all of its assets to PharMerica Corporation" (hereinafter the engagement letter). Cohen, while a member of another firm, had previously represented Askari and Sina in an unrelated action concerning the ownership of shares of Sina and also with respect to a potential sale of Sina to Medco, which never came to fruition.

In the engagement letter, Cohen stated that he, along with another member of the firm, would "be principally responsible for services provided to you" with respect to the sale involving PharMerica Corporation (hereinafter PharMerica). Cohen wrote that:

"In order to avoid misunderstandings concerning potential conflicts of interest, it is our policy to clarify the identity of our clients and the circumstances under which we may represent other clients with interests which are or may be adverse to yours. In that regard, it is our policy that our representation does not extend to the employees, officers, directors, shareholders, partners or other affiliates of Onco360."

Included with the engagement letter was a document entitled "What Clients Should Know." This separate document stated, inter alia, "if you are a corporation, our representation does not include any of your parents, subsidiaries, employees, officers, directors, shareholders, or partners, or any entities in which you own an interest."

2. Plan of Business Reorganization

Subsequently, on October 8, 2013, McDermott reorganized Sina and two related corporations owned by Askari and Zweigenhaft, Oncomed Pharmaceutical Services of Jersey City, New Jersey, Inc. (hereinafter Oncomed NJ), and Oncomed Pharmaceutical Services of MA, Inc. (hereinafter Oncomed MA; hereinafter collectively with Sina and Oncomed NJ, the operating companies), and transferred the ownership of Sina, Oncomed NJ, and Oncomed MA from Askari and Zweigenhaft to Specialty, a limited liability company formed under the laws of Delaware. To do so, McDermott created a "Plan of Business Reorganization" (hereinafter the reorganization plan), which went into effect as of December 3, 2013. Pursuant to the reorganization plan, Askari and Zweigenhaft contributed all of their shares of stock in Sina to Onco360 Holdings 1, Inc. (hereinafter Holdings 1), a subchapter S corporation organized under the laws of Delaware, which owned all of the equity interests in a New York corporation named Onco360 Merger Sub NY, LLC (hereinafter N.Y. Merger LLC). Once the shares had been transferred, Holdings 1 converted Sina into a subchapter S subsidiary and then merged Sina "with and into" N.Y. Merger LLC. The reorganization plan provided that upon the merger, "the separate legal existence of Sina shall cease, and N.Y. Merger LLC shall continue as the surviving company." Finally, Holdings 1 transferred its ownership of N.Y. Merger LLC to Specialty.

Similarly, Askari and Zweigenhaft contributed all of their shares of stock in Oncomed NJ to Onco360 Holdings 2, Inc. (hereinafter Holdings 2), and all of their shares of stock in Oncomed MA to Onco360 Holdings 3, Inc. (hereinafter Holdings 3; hereinafter collectively with Holdings 1 and Holdings 2, the holding entities). Oncomed NJ and Oncomed MA were then converted into subchapter S subsidiaries, and Holdings 2 and Holdings 3 transferred their ownership of those companies to Specialty.

Section 12 of the reorganization plan provided that it "shall be governed by and construed in accordance with the internal laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of Laws of any jurisdiction other than those of the State of Delaware."

Askari signed the reorganization plan solely as an individual, while Zweigenhaft signed it on his own behalf and, as chief executive officer and secretary, on behalf of the operating companies, the holdings entities, and Specialty.

According to the New York State Division of Corporations record pertaining to Sina, Sina "merged out" and became inactive as of December 5, 2013.

3. Membership Interest Purchase Agreement

Along with the reorganization plan for Sina and its related corporations, McDermott prepared a "Membership Interest Purchase Agreement" (hereinafter the MIPA) for the sale of 37.5% of Specialty's membership interests. The parties to the MIPA were (1) Pharmacy Corporation of America, a California corporation, which the MIPA referred to as the "Buyer,"¹ (2) Specialty, (3) Askari and Zweigenhaft, who were referred to together as the "Selling Shareholders," (4) the holding entities, which were collectively referred to as the "Sellers," (5) the operating companies, and (6) Askari, who was referred to separately as "Sellers' Representative." As of October 10, 2013, the date the MIPA was executed, Askari and Zweigenhaft owned the operating companies and the holding entities.

Pursuant to article XII of the MIPA, entitled "Sellers' Representative," Askari was "designated as the agent and attorney-in-fact of each of the Selling Shareholders, the [holding entities], [Specialty] (solely with respect to pre-Closing matters) and the [o]perating [c]ompanies (solely with respect to pre-Closing matters)."

Article XII also provided that Askari had "exclusive authority to make all decisions and determinations and to take all actions (including giving consents and waivers to this Agreement) required or permitted hereunder on behalf of the Selling Shareholders, the [holding entities], [Specialty] (solely with respect to pre-Closing matters) and the [o]perating [c]ompanies (solely with respect to pre-Closing matters)." This article specified that Askari would act as the sellers' representative with respect to, inter alia, "the investigation, prosecution, defense and/or settlement of any claims pursuant to Article XI of [the MIPA], or otherwise related to [the MIPA] or the transactions contemplated hereby."

Article XI of the MIPA was titled "Indemnification," and set forth which representations and warranties in the MIPA survived the closing. Section 11.2(a) set forth the situations in which Askari and Zweigenhaft, as the selling shareholders, and the holding entities had agreed to indemnify Pharmacy Corporation of America and its affiliates, and section 11.2(b) set forth the situations in which Pharmacy Corporation of America was to indemnify them in return. Specifically, pursuant to section 11.2(a), after the closing the selling shareholders and sellers were to jointly and severally indemnify and hold harmless Pharmacy Corporation of America and its affiliates from losses incurred by them arising, inter alia, from any breach of representation or warranty contained in or made pursuant to the MIPA by Askari and Zweigenhaft, the holding entities, Specialty, or the operating companies, from any nonfulfillment or breach by those parties of any covenant contained in the MIPA, or from a subpoena duces...