Royzenshteyn v. Pathak, 080620 NJSUP, A-1810-19T2

Docket Nº:A-1810-19T2
Opinion Judge:PER CURIAM
Party Name:STANISLAV ROYZENSHTEYN and ROMAN GERASHENKO, Plaintiffs-Appellants, v. PRASHANT PATHAK, CAREY KURTIN, EKAGRATA, INC., IN COLOUR CAPITAL, INC., ONYX ENTERPRISES CANADA, INC., and J. WILLIAM KURTIN, Defendants-Respondents, and ONYX ENTERPRISES INT'L CORPORATION, Defendant.
Attorney:Daniel Ginzburg argued the cause for appellants. Brian J. Pendleton, Jr. argued the cause for respondents (DLA Piper LLP (US), attorneys; Brian J. Pendleton, Jr., Marc A. Silverman, Amanda Laufer Camelotto, Kristin A. Pacio, Jenny Xiaoying Zhang, and Gina Trimarco, on the brief).
Judge Panel:Before Judges Messano, Ostrer and Vernoia.
Case Date:August 06, 2020
Court:Superior Court of New Jersey
 
FREE EXCERPT

STANISLAV ROYZENSHTEYN and ROMAN GERASHENKO, Plaintiffs-Appellants,

v.

PRASHANT PATHAK, CAREY KURTIN, EKAGRATA, INC., IN COLOUR CAPITAL, INC., ONYX ENTERPRISES CANADA, INC., and J. WILLIAM KURTIN, Defendants-Respondents,

and

ONYX ENTERPRISES INT'L CORPORATION, Defendant.

No. A-1810-19T2

Superior Court of New Jersey, Appellate Division

August 6, 2020

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued telephonically May 26, 2020

On appeal from an interlocutory order of the Superior Court of New Jersey, Chancery Division, Monmouth County, Docket No. C-000045-18.

Daniel Ginzburg argued the cause for appellants.

Brian J. Pendleton, Jr. argued the cause for respondents (DLA Piper LLP (US), attorneys; Brian J. Pendleton, Jr., Marc A. Silverman, Amanda Laufer Camelotto, Kristin A. Pacio, Jenny Xiaoying Zhang, and Gina Trimarco, on the brief).

Before Judges Messano, Ostrer and Vernoia.

PER CURIAM

Plaintiffs Stanislav Royzenshteyn and Roman Gerashenko formed Onyx Enterprises Int'l Corp. (Onyx), a New Jersey corporation, in 2008 and were its sole shareholders and directors until 2015.1 That year, in exchange for a capital investment in the corporation (the transaction), plaintiffs agreed that defendants Prashant Pathak and Carey Curtin (Carey), residents of Ontario, Canada, would become majority shareholders and directors in Onyx.2 Pathak, through his private equity firm Ekagrata Inc. (Ekagrata), and Carey formed In Colour Capital, Inc. (ICC), and Onyx Enterprises Canada, Inc. (OEC), to facilitate the transaction. William, another Ontario resident, was allegedly the source of funds for the investment.3 Plaintiffs claimed to have agreed to the terms of the transaction because Pathak allegedly assured them that Canadian Tire Corporation (CTC), a multi-billion-dollar Canadian company with which Pathak had influence, agreed to acquire a stake in Onyx. CTC never did.

Following the closing, plaintiffs were minority shareholders in Onyx, and OEC owned the majority of its shares. Disputes arose shortly after the transaction closed in July 2015. Plaintiffs' second amended complaint claimed among other causes of action that defendants committed legal and equitable fraud in the inducement, securities fraud, breach of fiduciary duties, minority shareholder oppression, and interference with plaintiffs' prospective economic relations. Plaintiffs sought rescission of the transactional agreements and a return to the status quo ante before the transaction, plus compensatory and punitive damages.

In addition to a general denial, defendants filed a counterclaim asserting, in part, breach of contract, shareholder oppression, breach of fiduciary duty, unjust enrichment, and conversion. They sought an accounting, imposition of a constructive trust, a forced sale of plaintiffs' Onyx shares to OEC, or conversely, plaintiffs' forced purchase of OEC's shares in Onyx, or the forced sale of Onyx to a third-party buyer, and other relief.

After plaintiffs responded to defendants' discovery requests, defendants moved to compel plaintiffs' further production due to allegedly inadequate responses. In his January 2019 order, the judge granted defendants partial relief and required plaintiffs to produce a revised privilege log that was in "readable form." In March, defendants moved for sanctions because of plaintiffs' non-compliance with the January order. It is unclear from the record how the court resolved that motion.

Plaintiffs did not furnish the revised privilege log until July 17, 2019, identifying 1276 communications over which plaintiffs asserted attorney-client privilege. In a July 25, 2019 letter to plaintiffs' counsel, defense counsel noted the upcoming discovery end date and claimed that plaintiffs were improperly refusing to produce the communications "based on Onyx's privilege." Counsel claimed that as majority shareholder of the company, OEC possessed the privilege, not plaintiffs. In addition, defendants claimed there were "no attorneys involved in [some] emails" listed in the log, and others involved attorneys who did not represent either plaintiffs or Onyx. Lastly, defendants asserted there were "at least [two-hundred-ninety-one] communications that [p]laintiffs [were] not even involved in[.]"

In an email to defense counsel, plaintiff's counsel asserted that his clients "own the privilege on their emails prior to July 17, 2015[, ] because they were looking to sell their own shares in exchange for funding for Onyx." He ultimately advised defense counsel to make his threatened motion to compel production as necessary. On July 31, 2019, defendants again moved to compel further document production from plaintiffs.

The judge heard oral argument on defendants' motion. Defense counsel reprised the arguments made in his letter to plaintiffs' counsel. He also noted that Onyx's attorney, who was present in court, was not asserting any privilege over the items in the log. Defense counsel also argued that plaintiffs waived any claim of privilege by asserting fraud in the inducement, thereby making their knowledge, state of mind and any reliance on defendants' representations critical issues in the lawsuit.

Plaintiffs' counsel argued that his clients retained the right to assert the attorney-client privilege because Onyx was a "closely-held corporation[.]" He claimed that even if the privilege was the corporation's, Royzenshteyn, as its chief executive officer, had not waived the privilege and Onyx's board of directors had not approved release of the communications.

The judge asked if plaintiffs objected to Onyx's counsel reviewing the putatively privileged communications. Plaintiff's counsel responded, "My clients only have an objection . . . as to the transaction-related documents, . . . because again . . . they control the privilege as to those documents because they were the clients . . . ." The judge reserved decision.

The judge's October 25, 2019 order (the October order) required plaintiffs to "produce all documents identified on their revised privilege log." Plaintiffs moved for reconsideration and to quash defendants' subpoenas duces tecum and ad testificandum served on David Sorin, a lawyer intimately involved with the transaction and a partner at McCarter & English (McCarter). The judge entered two orders on December 20, 2019 (the December orders), denying the requested relief. He also entered an order on December 23, 2019, denying plaintiffs' motion for a stay.

We granted plaintiffs' motion for leave to appeal, but only as to the orders "related to the compelled production of documents over which plaintiffs assert attorney-client privilege." We entered a stay pending our further review, and we required plaintiffs to file their privilege log, along with copies of the allegedly privileged communications referenced in the log, for our in camera review.

I.

In large part, the crux of plaintiffs' appeal involves the nature and scope of Sorin's retention. During the fall of 2014, negotiations with defendants were progressing. Royzenshteyn sent an email to Sorin on December 21, 2014, thanking him for a meeting earlier that day, and stating: "Although we have no NDA [non-disclosure agreement] in place, I assume all information is confidential based on 'Attorney Client Privilege.'" Sorin responded in short order, "Yes, everything is indeed confidential. No worries on that front whatsoever."

However, it was not until April 24, 2015, that, expressly on behalf of Onyx, Royzenshteyn countersigned an engagement letter sent by Sorin. Sorin specified that McCarter would "provide legal services to Onyx," and "represent Onyx . . . in connection with a proposed transaction with Ekagrata . . . ." A separate "Terms of Engagement" document accompanied Sorin's letter and made clear that McCarter's representation was limited to "you," a term defined as the "client or clients identified in [the] engagement letter." The term did not include "[i]ndividuals or entities that [were] related to or affiliated with you, such as partners, officers, directors, stockholders, parent companies, related companies, or family members, [who] are not clients, unless we otherwise agree in writing." In his deposition, when asked whether he was "represented by counsel on all the transactions" with defendants through July 2015, Royzenshteyn replied, "Onyx was."

The transaction closed on July 17, 2015, with the execution of five agreements: the Preferred Stock and Warrant Purchase Agreement; the Investor Rights Agreement; the Stockholders Agreement; and two, three-year employment contracts, one with each plaintiff. Onyx was a signatory on all five documents. Sorin drafted only the employment agreements and submitted them to defendants' counsel for approval. At closing, OEC paid Onyx $5 million, approximately $1.5 million of which cancelled Onyx's indebtedness to OEC as the result of a bridge loan, and Onyx issued fifty-two percent of its voting shares to OEC. Under the Stockholders Agreement, plaintiffs, Pathak and Carey became Onyx's board of directors.4

In a written statement of reasons supporting the October order, apparently without conducting any review of the communications in the privilege log, the judge provided several alternative reasons for rejecting plaintiffs' claim of privilege over all the communications in the log. Given "the patent language of the retainer agreement," the judge rejected plaintiffs' contention that they, not Onyx, were "the clients [r]elated to the transaction." The judge also stated that "[e]ven if [p]laintiffs were clients, they would . . . be joint[]clients with Onyx and would be unable to assert privilege against Onyx. . . . Defendants, like [p]laintiffs, own the privilege and have an...

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