CROCKER UNITED FACTORS, INC. v. Schultz

• Decision Date: 08 August 1980
• Docket Number: No. 79 Civ. 6039.,79 Civ. 6039.
• Citation: 496 F. Supp. 141
• Parties: CROCKER UNITED FACTORS, INC. and Springs Mills, Inc., Plaintiffs, v. Joseph SCHULTZ, Harold Hiltzik, Solomon Sperling and Jerry Schneider, Individually and d/b/a Schultz, Hiltzik, Sperling & Schneider, a Partnership, Defendants.
• Court: U.S. District Court — Southern District of New York

496 F. Supp. 141

CROCKER UNITED FACTORS, INC. and Springs Mills, Inc., Plaintiffs, v. Joseph SCHULTZ, Harold Hiltzik, Solomon Sperling and Jerry Schneider, Individually and d/b/a Schultz, Hiltzik, Sperling & Schneider, a Partnership, Defendants.

No. 79 Civ. 6039.

United States District Court, S. D. New York.

August 8, 1980.

Hahn, Hessen, Margolis & Ryan, New York City, for plaintiffs; David I. Blejwas, New York City, of counsel.

Kantor, Davidoff, Winston & Ferber, P. C., New York City, for defendants Solomon, Sperling and Schultz, Hiltzik, Sperling & Schneider; Robin N. Wolfe, New York City, of counsel.

Hall, Dickler, Lawler, Kent & Howley, New York City, for defendants Jerry Schneider and Harold Hiltzik; Norman L. Faber, New York City, of counsel.

Arnold Davis, New York City, for defendant Joseph Schultz.

OPINION

EDWARD WEINFELD, District Judge.

Plaintiffs seek reconsideration pursuant to 28 U.S.C., section 636(b)(1)(A),¹ of an order of Magistrate Kent Sinclair dated May 22, 1980 denying their motion to compel the production by the defendant Solomon Sperling of certain accountants' work papers. For the reasons stated hereafter, the motion is granted and the matter is remanded to the magistrate for further proceedings not inconsistent with this opinion.

This action is one for malpractice in the field of public accounting. The defendants are the former partners of Schultz, Hiltzik, Sperling & Schneider ("SHS&S"), a dissolved partnership that had engaged in the practice of certified public accounting. The plaintiffs are two creditors of The Eastern Isles, Inc. ("Eastern Isles"), a now-insolvent corporation that had been a client of SHS & S. The complaint alleges that Eastern Isles' consolidated financial statement for 1978 was prepared and certified by SHS & S; that the statement was materially misleading in that Eastern Isles' net worth was grossly inflated; that the misstatements were due to the willful and reckless disregard of generally accepted accounting principles and auditing standards in the preparation of the financials by SHS&S and that the plaintiffs relied on the certified statement to their detriment in dealing with Eastern Isles.

In the course of discovery, the plaintiffs sought from each defendant, by notice to produce, inter alia, "all work papers prepared by any of the defendants relating to accounting services performed for the Eastern Isles, Inc. from January 1, 1977 through February 13, 1980." The defendant Sperling refused to produce any of the work papers called for, asserting his constitutional privilege under the Fifth Amendment against self-incrimination.² The plaintiffs moved before the magistrate to compel Sperling to produce the documents, on the ground that he had no personal privilege against self-incrimination with respect thereto since they were prepared while he was a member of a partnership and in furtherance of its business. The magistrate, however, upheld Sperling's position finding that his claim of personal privilege against self-incrimination was applicable since he prepared the work papers for the 1978 statements on his own and since they were retained by him after the dissolution of SHS&S and were "in his possession, custody and control."³

The factual background relevant to the determination of this matter is not significantly disputed. Prior to the end of 1975 there had existed two separate entities, two-member partnerships engaged in the practice of public accounting — Hiltzik & Schneider and Schultz & Sperling. In late 1975 these two firms merged to form SHS&S, a partnership consisting of the four members of the predecessor firms, the defendants herein. In February 1976 they filed a Business Certificate for Partners under that name with the New York County Clerk. The new firm remained in existence for about two years. On February 21, 1978 they agreed to dissolve the partnership as of January 31st of that year. It was agreed that the partners would reactivate the former two-man partnerships; Sperling and Schultz signed a separate agreement forming anew the partnership, Schultz & Sperling and Hiltzik and Schneider likewise continued to function as a separate partnership under the name of Hiltzik & Schneider. The dissolution agreement further provided that the two reconstituted firms would, for a limited time, each have the right to use the name SHS&S in their now separate practices. The use of that name extended to their operations, financial reports, client relationships, billing procedures and maintenance of bank accounts. Such use was to terminate at the request of any one of the four ex-partners.

Eastern Isles had originally been a client of Schultz & Sperling from the 1930s or 1940s under a different name and as Eastern Isles since the 1960s. At least since 1960 all of the work done by Schultz & Sperling for Eastern Isles was performed by Sperling. Eastern Isles became a client of SHS&S when that firm came into existence and Sperling continued to handle the account exclusively. After the dissolution of SHS&S in January 1978, Eastern Isles again became a client of Schultz & Sperling and, as always, Sperling handled that account and prepared the material which is the core of this litigation and the work papers in connection therewith that are sought to be produced.

In July 1979, a year after the preparation and issuance of the 1978 financial statement upon which plaintiffs' claims are based, an action was commenced against the four defendants.⁴ Sperling's three co-defendants say that this was the first knowledge they had with respect to the charges made by Eastern Isles' creditors based upon the financial statement. Upon confronting Sperling, he allegedly acknowledged to them that he had grossly falsified the statement.⁵ When they attempted to locate the Eastern Isles records in the partnership files, they discovered that Sperling had removed them and refused to produce them. The lawsuit triggered the dissolution of the partnership of Schultz & Sperling on September 25, 1979. It also led to the filing in the same month of a Certificate of Discontinuance of Business of SHS&S in the office of the New York County Clerk.

In determining that Sperling was free to assert his Fifth Amendment privilege vis-a-vis the requested Eastern Isles work papers, the magistrate approached the issue on the basis that Sperling was asserting a privilege in personal papers; he apparently overlooked or disregarded the significant fact that Sperling prepared the work papers sought while a partner in either SHS&S or in Schultz & Sperling,⁶ in the course of those partnerships' businesses; and the impact, given this factor, of the Supreme Court's decision in Bellis v. United States.⁷ It is not disputed that had Sperling prepared the work papers while practicing as a sole proprietor,⁸ the magistrate's determination would have been proper, but a fact that cannot be downed is that Eastern Isles was a client of the reactivated partnership of Schultz & Sperling and that the 1978 financial statement and all work papers here at issue were prepared by Sperling as a partner of either that firm or SHS&S and those records are held in that representative capacity. This fact, in light of Bellis, requires a different result.

Prior to the Bellis decision, the Supreme Court had held that neither corporations nor unincorporated associations possessed a constitutional privilege against self-incrimination and that individuals in possession of the records of such entities could not assert their personal privilege with respect to such records, even though the documents may incriminate them personally.⁹ In Bellis this rule was expanded to preclude the assertion of the privilege by a partner with respect to the records of a partnership in his possession. The facts of Bellis are strikingly similar to those presented here. Bellis had been a partner in a small (three partner) law firm. During his tenure with the firm, the partnership's financial records were maintained by his secretary in his office. Bellis left the partnership and it was dissolved. Thereafter he took possession of the defunct firm's records, and when these were sought by a federal grand jury, refused to produce them on Fifth Amendment grounds. Finding that the records sought were not personal records but the records of an entity with an established institutional identity, and that Bellis possessed these records not in a personal but in a representative capacity, the Supreme Court held that his personal privilege against compulsory self-incrimination was inapplicable.¹⁰

Unless Bellis is inapposite to this case, its rule that a partner possesses no Fifth Amendment privilege in partnership records must control the outcome of plaintiffs' motion. The magistrate distinguished and dismissed Bellis in a footnote,¹¹ noting only that in Bellis the records were held in a representative capacity on behalf of the firm of which Bellis had been a member and "related to the finances of the law partnership, not to a client matter handled by any member thereof," whereas Sperling "retained both permission to use the name of the partnership while working alone and custody of the papers — of his own authorship — relating to Eastern Isles as the sole accountant for that client after dissolution of SHS&S." This statement disregards the fact that the reactivated partnership of Schultz & Sperling, not Sperling alone, was the accountant for Eastern Isles.¹² In any event, neither of these distinctions compels a different result from that reached by the Supreme Court in Bellis.

There is no basis to conclude that the capacity in which Sperling possesses the Eastern Isles work papers is any different, or more personal, than that in which Bellis held the records of his firm. In both cases the partnership for which the documents were created was dissolved at the time the records were sought and one partner retained physical custody of the records.¹³

The...