S & S Hotel Ventures Ltd. Partnership v. 777 S.H. Corp.

• Decision Date: 30 April 1987
• Citation: 508 N.E.2d 647,515 N.Y.S.2d 735,69 N.Y.2d 437
• Court: New York Court of Appeals Court of Appeals
• Parties: , 508 N.E.2d 647 S & S HOTEL VENTURES LIMITED PARTNERSHIP, Appellant, v. 777 S.H. CORP., Respondent.

Page 735

515 N.Y.S.2d 735

69 N.Y.2d 437, 508 N.E.2d 647

S & S HOTEL VENTURES LIMITED PARTNERSHIP, Appellant, v. 777 S.H. CORP., Respondent.

Court of Appeals of New York.

April 30, 1987.

Allen Green and Jacob H. Zamansky, New York City, for appellant.

Jonathan M. Herman and Scott T. Tross, New York City, for respondent.

OPINION OF THE COURT

KAYE, Judge.

The advocate-witness disqualification rules contained in the Code of Professional Responsibility provide guidance, not binding authority, for courts in determining whether a party's law firm, at its adversary's instance, should be disqualified during litigation. Courts must, in addition, consider such factors as the party's valued right to choose its own counsel, and the fairness and effect in the particular factual setting of granting disqualification or continuing representation. Concluding that the court below failed to exercise any discretion, and that disqualification was not required by the circumstances presented, we reverse the Appellate Division order and deny defendant's motion.

Plaintiff (S & S Hotel Ventures Limited Partnership) owned a hotel and office building complex in Houston, Texas. In February 1981, in exchange for a $15 million loan from defendant (777 S.H. Corp.), plaintiff executed a promissory note secured by a deed of trust, including a provision that the loan would fall due immediately if plaintiff transferred title without consent but that defendant would not unreasonably withhold or delay its consent. Beginning in late 1982, and culminating in a sale of the property in March 1983, plaintiff proposed two purchasers and communicated with defendant in an effort to secure its consent. In the present action, plaintiff alleges that defendant unreasonably withheld and delayed its consent so as to favor one of the proposed purchasers and also to secure better terms for itself, ultimately resulting in the sale of the property at a greatly reduced price.

The complaint--charging that defendant breached its contract and tortiously interfered with plaintiff's contracts to sell the properties--was served March 22, 1984; there are no counterclaims. Nine months after the action was commenced, on January 3, 1985, after Special Term and the Appellate Division denied defendant's motion to dismiss the tort claim, and after an exchange of documents and plaintiff's answers to defendant's interrogatories, defendant moved to disqualify plaintiff's counsel, the firm of Bell, Kalnick, Beckman, Klee & Green, a firm of more than 20 attorneys, on the ground that Herman Sassower, "of counsel" to the firm, and Stephen Seldin, one of its real estate partners, "ought to be called as witnesses at trial on behalf of plaintiff." No question is raised regarding client confidences and secrets (Code of Professional Responsibility Canon 4).

Special Term ordered disqualification of the law firm on the ground that Sassower ¹ ought to be called as plaintiff's witness, finding that he had knowledge of the circumstances surrounding the deed of trust that "would be material in determining the intent of the parties regarding the alleged unreasonable withholding or delay in consenting to a transfer." While itself believing that the materiality of such knowledge would be "questionable" in the present action, the court nonetheless held that, because all doubts were to be resolved against continuing representation, both Sassower and the entire firm should be disqualified. The court rejected plaintiff's allegation of financial hardship, because financial hardship was "insufficient under DR 5-101(B)(4) to avoid such disqualification if Herman Sassower 'ought to be called as a witness' ". Acceding to plaintiff's request, however, the disqualification was limited to trial (see, Norman Norell, Inc. v. Federated Dept. Stores, 450 F.Supp. 127). The Appellate Division, over the dissent of two Justices, affirmed, agreeing that Sassower ought to be called as a witness because of his intimate involvement in the events in issue, and therefore the firm must be disqualified. The court further found that Special Term had struck an appropriate balance by limiting the disqualification to trial, and it granted leave to appeal on a certified question (CPLR 5713).

The following background facts are taken from the parties' affidavits. Sassower is "of counsel" to Bell Kalnick, which he describes as a facilities-sharing arrangement; he claims that he maintains an "independent legal practice" and on a case-by-case basis also uses the law firm. Until January 1, 1982 Sassower was plaintiff's sole general partner. As such, on February 17, 1981, he executed the loan agreement on plaintiff's behalf. Sassower was succeeded as general partner by S & S Realty, Inc., owned by his brother, Philip Sassower (as president) and Lawrence Schneider. Between January 1, 1982 and March 1983, Sassower in his affidavit in opposition to disqualification states that he served plaintiff only as its lawyer. ² Both Sassower and Seldin--neither a litigator--are said to have participated in negotiating the loan agreement that was allegedly breached as well as plaintiff's sale agreements that were allegedly interfered with. Sassower additionally signed several documents on plaintiff's behalf.

While acknowledging their participation, plaintiff urges that neither Sassower nor Seldin has firsthand knowledge of the disputed facts regarding the key issue in the case--defendant's wrongful refusal or delay in consenting to the sale. Plaintiff insists that only Philip Sassower has firsthand knowledge pertinent to defendant's unlawful purposes in refusing or delaying consent. Herman, Philip and the firm have each submitted affidavits attesting that the relevant conversations with defendant's representatives regarding sale of the property and defendant's consent were with Philip, not Herman; that Philip was the person who repeatedly requested defendant's consent and knows of defendant's wrongful conduct; and that it will present its case at trial through documents and the testimony of Philip Sassower. Both plaintiff and counsel represent in their affidavits that neither Herman Sassower nor Stephen Seldin has participated in the conduct of the litigation, nor will they, and that the firm has no intention or need to call either of them as a witness at trial. Finally, plaintiff emphasizes that disqualification will impose hardship arising out of the need to duplicate hundreds of hours of legal work, and delay the litigation.

Plaintiff thus adamantly resists disqualification of its law firm, declaring that Sassower will not be a witness; defendant with equal fervor argues that Sassower has relevant knowledge of the negotiation of the loan agreement, its meaning and intent, and the communications between the parties regarding consent, and therefore must be a witness.

The majority below found that Sassower ought to be a witness because of his involvement in the relevant transactions, and it then simply imposed disqualification of the firm as the mandated consequence under the Code of Professional Responsibility. We conclude that this was error.

The Code of Professional Responsibility establishes ethical standards that guide attorneys in their professional conduct, and its importance is not to be diminished or denigrated by indifference (see, Matter of Weinstock, 40 N.Y.2d 1, 6, 386 N.Y.S.2d 1, 351 N.E.2d 647). When raised in litigation, however--which in addition to matters of professional conduct directly involves the interests of clients and others--the Code provisions cannot be applied as if they were controlling statutory or decisional law. "When we agree that the Code applies in an equitable manner to a matter before us, we should not hesitate to enforce it with vigor. When we find an area of uncertainty, however, we must use our judicial process to make our own decision in the interests of justice to all concerned." (Foley & Co. v. Vanderbilt, 2nd Cir., 523 F.2d 1357, 1360 [Gurfein, J., concurring].)

Disqualification of a law firm during litigation implicates not only the ethics of the profession but also the substantive rights of the litigants. Disqualification denies a party's right to representation by the attorney of its choice (see, Matter of Abrams [John Anonymous], 62 N.Y.2d 183, 476 N.Y.S.2d 494, 465 N.E.2d 1). The right to counsel of choice is not absolute and may be overridden where necessary--for example, to protect a compelling public interest--but it is a valued right and any restrictions must be carefully scrutinized (id., at 196, 476 N.Y.S.2d 494, 465 N.E.2d 1). Moreover, we cannot ignore that where the Code of Professional Responsibility is invoked not in a disciplinary proceeding to punish a lawyer's own transgression, but in the context of an ongoing lawsuit, disqualification of a plaintiff's law firm can stall and derail the proceedings, redounding to the strategic advantage of one party over another (see, e.g., Allegaert v. Perot, 2nd Cir., 565 F.2d 246; see also, Note, The Advocate-Witness Rule: If Z, Then X. But Why?, 52 N.Y.U.L.Rev. 1365). ³ Already more than three years have elapsed since the present action was instituted.

We recognize that the motion involves other interests as well. The Code provisions pertaining to...