Essex Equity Holdings U.S., LLC v. Lehman Bros., Inc.

• Decision Date: 10 June 2010
• Citation: 29 Misc.3d 371,909 N.Y.S.2d 285
• Parties: In the Matter of the FINRA Arbitration between ESSEX EQUITY HOLDINGS USA, LLC (f/k/a Maher Terminals Holdings Corp.), M. Brian Maher and Basil Maher, Claimants, v. LEHMAN BROTHERS, INC., Jeffrey L. Chernick, Peter C. Gambee, William C. Gourd, Neil J. Greenspan, Sanford A. Haber and Mark J. Stevenson, Respondents. Jeffrey L. Chernick, Peter C. Gambee, Neil J. Greenspan, Sanford A. Haber, and Mark J. Stevenson, Petitioners, Essex Equity Holdings USA, LLC, (f/k/a Maher Terminals Holdings Corp.), M. Brian Maher and Basil Maher, Respondents. Jeffrey L. Chernick, Peter C. Gambee, Neil J. Greenspan, Sanford A. Haber, and Mark J. Stevenson, Petitioners, v. Essex Equity Holdings USA, LLC, (f/k/a Maher Terminals Holdings Corp.), M. Brian Maher and Basil Maher, Respondents.
• Court: New York Supreme Court

909 N.Y.S.2d 285

29 Misc.3d 371

In the Matter of the FINRA Arbitration between ESSEX EQUITY HOLDINGS USA, LLC (f/k/a Maher Terminals Holdings Corp.), M. Brian Maher and Basil Maher, Claimants,

v.LEHMAN BROTHERS, INC., Jeffrey L. Chernick, Peter C. Gambee, William C. Gourd, Neil J. Greenspan, Sanford A. Haber and Mark J. Stevenson, Respondents.

Jeffrey L. Chernick, Peter C. Gambee, Neil J. Greenspan, Sanford A. Haber, and Mark J. Stevenson, Petitioners,

Essex Equity Holdings USA, LLC, (f/k/a Maher Terminals Holdings Corp.), M. Brian Maher and Basil Maher, Respondents.

Jeffrey L. Chernick, Peter C. Gambee, Neil J. Greenspan, Sanford A. Haber, and Mark J. Stevenson, Petitioners,

v.Essex Equity Holdings USA, LLC, (f/k/a Maher Terminals Holdings Corp.), M. Brian Maher and Basil Maher, Respondents.

Supreme Court, New York County, New York.

June 10, 2010.

Krebsbach & Snyder, P.C., New York City (Barry S. Gold, Theodore A. Krebsbach, and Theodore R. Snyder of counsel), for petitioners.

Law Offices of Michael S. Ross, New York City (Michael S. Ross of counsel), for Essex Equity Holdings USA, LLC and others, respondents.

JAMES A. YATES, J.

In 1999, the New York Court of Appeals held, in Kassis v. Teacher's Ins. & Annuity Assoc., 93 N.Y.2d 611, 695 N.Y.S.2d 515, 717 N.E.2d 674 (1999), that screening was ineffectual to save a law firm from disqualification when an attorney "side-switches", i.e., begins employment with the law firm after having worked for an adversary on the same matter, and when that attorney had acquired significant and material confidential information at the first firm. Notwithstanding Kassis, Rule 1.11 of the New York Rules of Professional Conduct(22 NYCRR Part 1200, effective April 1, 2009) ("Rules") permits a private law firm to avoid disqualification by timely and effective screening when a government official leaves public service to work at the firm even where: (1) the official had acquired confidential government informationwhich could be used to the material disadvantage of an adverse party; and (2) the official has participated personally and substantially in the same matter. The question arises whether Kassis precludes a law firm from continuing to represent a client in a matter, where the government is not a party, after hiring a prosecutor who has acquired significant and material confidential government information and has personally participated in connection with the same matter, if the firm complies with the screening and notice provisions of Rule 1.11.¹

Petitioners move to disqualify the law firm of Kobre & Kim ("K & K"), from continuing to represent respondents in an arbitration proceeding that respondents commenced at the Financial Industry Regulation Authority ("FINRA"), Case No. 08-00156. Petitioners argue that disqualification of K & K "is required because Sean Casey, former Deputy Chief of the Business and Securities Fraud Unit of the U.S. Attorney's Office in the Eastern District of New York, recently joined K & K as a partner." (Verified Petition ¶ 2). Further it is alleged, and not disputed,² that, "While at the U.S. Attorney's Office, Casey led a criminal investigation ... of Lehman's sale of auction rate securities ("ARS") to Respondents, among others. As part of the Investigation, subpoenas were issued under Casey's name requiring three of the Petitioners to appear and give testimony before a grand jury. The same ARS transactions that were a subject of the federal government's Investigation are the subject of the pending Arbitration." (Emergency Affirmation of Barry S. Gold, Esq., ¶ 2). For the following reasons, Petitioners' motion to disqualify is granted.

I. Background

A. Underlying Arbitration Action

Respondents allege that in March 2007, respondents "M. Brian Maher and Basil Maher negotiated the sale of their family business," which specialized in the operation of marineterminals in existence for over 60 years ( Id., exhibit A [second amended statement of claim] ¶ 27). "By approximately July 26, 2007, [Respondents] had wired a total of U.S. $600 million to Lehman" Id. ¶ 2). Respondents then claim that petitioners "invested it in ways that differed radically from" the provided sample investment portfolio and Respondents' investment objectives given to petitioners ( Id. ¶ 2, exhibit A [second amended statement of claim] ¶ 46). As aresult, Respondents assert they lost "the ability to access or invest their approximately U.S. $286 million" ( Id. ¶ 2, exhibit A [second amended statement of claim] ¶ 110).

On January 17, 2008, "K & K, acting as counsel to Respondents, filed the Statement of Claim that commenced the Arbitration on behalf of Respondents against Lehman and Petitioners" (Verified Petition ¶ 19). On September 19, 2008, "Lehman filed for bankruptcy, which, among other things, automatically stayed the Arbitration as against Lehman" ( Id. ¶ 20). Twenty-five days later, on October 14, 2008, K & K asked that the arbitration be placed on "hold" while it considered whether to pursue claims against the remaining parties. Respondents further allege that on October 1, 2009, Casey joined K & K and six days after that, on October 7, 2009 ³, K & K informed FINRA that it intended to proceed against Petitioners. (Verified Petition ¶ 21).

B. Procedural History

By Order to Show Cause dated April 16, 2010, Petitioners sought to stay the arbitration and to disqualify K & K from representing respondents in the arbitration. The Court heard testimony on April 26 and 27, 2010 by Casey and Michael Kim, a senior partner at K & K. The Court credits their testimony as truthfully given.

The issue of disqualification is before the Court rather than the arbitration panel because "matters of attorney discipline are beyond the jurisdiction of arbitrators" ( Bidermann Indus. Licensing, Inc. v. Avmar N.V., 173 A.D.2d 401, 402, 570 N.Y.S.2d 33 [1st Dept. 1991] ). "Issues of attorney disqualification similarly involve interpretation and application of the Code of Professional Responsibility and Disciplinary Rules, as wellas the potential deprivation of counsel of the client's choosing, and cannot be left to the determination of arbitrators selected by the parties themselves for their expertise in the particular industries engaged in" ( Id. [internal citations omitted] ).

As well, the Court is mindful of the admonition that:

"Motions to disqualify are generally not favored. They are often tactically motivated; they cause delay and add expense; they disrupt attorney-client relationships sometimes of long standing; in short, they tend to derail the efficient progress of litigation. Thus, parties moving for disqualification carry a heavy burden' and must satisfy a high standard of proof.' But if there are doubts ... doubts should be resolved in favor of disqualification.' Thus, a balance must be struck between being solicitous of a client's right freely to choose his counsel,' and protecting the need to maintain the highest standards of the profession' and the integrity of the adversary process.' "

Felix v. Balkin, 49 F.Supp.2d 260, 267 (S.D.N.Y.1999)(internal citations omitted).

Although reference is made to the Rules of Professional Conduct by the parties and throughout this opinion, the Court recognizes that a "violation of a Rule does not necessarily warrant any other nondisciplinary remedy, such as disqualification of a lawyer in pending litigation. The Rules are designed to provide guidance to lawyersand to provide a structure for regulating conduct through disciplinary agencies." (Rules of Professional Conduct [22 NYCRR 1200.0] Scope [6], [12].) "[T]he rules contained in the Code of Professional Responsibility, which have been superseded by the Rules of Professional Conduct, provide guidance, but are not binding authority, for the courts in determining whether a party's attorney should be disqualified during litigation" ( Falk v. Gallo, 73 A.D.3d 685, 686, 901 N.Y.S.2d 99 [2d Dept. 2010] [concerning lawyer as witness under Rule 3.7] [emphasis added] ); cf. Armstrong v. McAlpin, 625 F.2d 433, 446 n. 26 (2d Cir.1980) (although ABA committee that drafted Code has indicated rules were intended for use in disciplinary proceedings rather than in disqualification proceedings, Court refers to Code for guidance), cited with approval by S & S Hotel Ventures Ltd. Partnership v. 777 S.H. Corp., 69 N.Y.2d 437, 444-45, 515 N.Y.S.2d 735, 508 N.E.2d 647 (1987); See also People v. Abar, 99 N.Y.2d 406, 757 N.Y.S.2d 219, 786 N.E.2d 1255 (2003); People v. Smart, 96 N.Y.2d 793, 726 N.Y.S.2d 343, 750 N.E.2d 45 (2001); People v. Longtin, 92 N.Y.2d 640, 684 N.Y.S.2d 463, 707 N.E.2d 418 (1998); GD Searle & Co., Inc. v. Pennie & Edmonds LLP, N.Y.L.J., Jan. 26, 2004, at 18, col. 1 (Sup. Ct., N.Y. County); Gidatex, S.r.L. v. Campaniello Imports, Ltd., 82 F.Supp.2d 119 (S.D.N.Y.1999).

II. Discussion

Casey does not dispute that he participated personally and substantially in connection with the matter which is the subject of the arbitration proceeding. As well, he does not contest the allegation that he acquired confidential government information.⁴ The Government is not a party to the arbitration. Still, Casey recognizes that he is personally disqualified from participating in the proceeding because Rule 1.11 is not limited to cases where the Government agency is itself a party. Comment 3 to the Rule cautions, in part, that the disqualification provisions apply "regardless of whether a lawyer is adverse to a former client and are thus designed not only to protect the former client, but also to prevent a lawyer from exploiting public office for the advantage of another client. For example, a lawyer who has pursued a claim on behalf of the government may not pursue the same claim on behalf of a private client after the lawyer has left government service ..." (Rules of Professional Conduct [ 22 NYCRR 1200.0] rule 1.11 cmt. 4).⁵

Nevertheless, K & K contends that it has complied with the screening and notice provisions outlined in ...