Scher Law Firm v Fleming, Zulack,Willimason, Zauderer LLPAnnotate this Case
Decided on March 22, 2011
Supreme Court, Kings County
The Scher Law Firm,, Petitioner,
Fleming, Zulack,Willimason, Zauderer LLP, Respondent.
Attorney for Petitioner:
Jonathan Scher, Esq.
The Scher Law Firm, LLP
One Old Country Road, Ste. 385
Carle Place, NY 11514
Attorney for Respondent:
Vincent Syracuse, Esq.
Tannenbaum Helpern Syracuse & Hirschtritt
900 Third Ave.
New York, NY 10022
Carolyn E. Demarest, J.
The following papers numbered 1 to 12 read on this motion:Papers Numbered
Notice of Motion/Order to Show Cause/
Petition/Cross Motion and
Affidavits (Affirmations) Annexed1,7,12
Opposing Affidavits (Affirmations)3,9
Reply Affidavits (Affirmations)5,10
Other PapersObjections in Law, Memoranda2,4,6,8,11 [*2]
Respondent Flemming Zulack Williamson Zauderer LLP (Flemming) moves to dismiss this special proceeding, brought pursuant to CPLR § 5225(b), seeking an order directing Flemming to turn over to petitioner, acting as nominee for its clients, the limited partners of Parklex Associates (Parklex), funds "and personal property"alleged to be funds of the judgment debtor Fred Deutsch which are alleged to have been fraudulently conveyed to Flemming. In fact, the funds sought to be obtained from Flemming are legal fees paid to Flemming for services rendered to their client Deutsch in defending against a case brought by plaintiff law firm on behalf of its clients against Deutsch, Holtkamp v Parklex Associates, Kings County Index No. 14514/06 (Holtkamp), which remains pending before this court. Plaintiff has also commenced a separate action on behalf of Parklex seeking damages against respondent law firm for alleged malpractice, breach of fiduciary duty, and aiding and abetting Deutsch to commit fraud and breach of fiduciary duty, Parklex Associates v Flemming Zulack Williamson Zauderer LLP, Kings County Index No. 30174/09, also still pending before this court. The premise of the instant proceeding is substantially that alleged in other actions brought against respondent: plaintiff's claim that respondent pursued a defense in litigation that plaintiff claims is fraudulent. See, e. g., Holtkamp v Parklex, decision and order of this court dated February 22, 2011 (30 Misc 3d 1226(A). In the alternative to outright dismissal, pursuant to CPLR §§ 404 and 3211, for failure to state a cause of action and based upon the pendency of other cases between the same parties seeking substantially the same relief, respondent seeks a stay pending adjudication of the related case against it.
Petitioner, in response to respondent's motion, has cross-moved, pursuant to CPLR §408, to conduct discovery in this Special Proceeding. Petitioner seeks copies of all checks, wire transfers and other evidence of payments made to respondent by or on behalf of Fred Deutsch, Management Services LLC or Management Associates LLC, all defendants in Holtkamp, and respondent's time logs and billing records, as well as depositions of three of repondent's partners and six non-parties, including respondent's former clients, Fred, James, Arie, and Joshua Deutsch and Fred's wife, Penny Baird, and David Segal, respondent's predecessor counsel to the Deutsch defendants in the Holtkamp case. According to petitioner's counsel, Austin Graff, the discovery is necessary "to refute the statements made in the Affidavit of Mark C. Zauderer", to determine "the extent to which Deutsch was involved and controlled the defense of the Parklex Action" and to "support the Petitioner's argument that the Respondent performed no due diligence into the debt-to-equity conversion defense before it was submitted to the Court, evidencing the constructive knowledge that the defense was Deutsch's effort to defraud the plaintiffs in the Parklex Action"(Graff Affirmation in Support of Cross-Motion, ¶¶ 3, 18, 21).
In response and opposition to petitioner's cross-motion, as exhibits to the Affirmation of Jonathan D. Lupkin, a member of respondent, the client ledger and copies of all checks paid to respondent on behalf of Fred Deutsch and the various Deutsch entities named as defendants in the Holtkamp litigation which were represented by respondent in that, and related litigation, were provided to petitioner and this court. Such documents do corroborate the representations by Attorney Mark Zauderer that a total of $1,950,362.42 was billed to Deutsch, of which $1,833,168.31 [FN1] was [*3]paid, leaving a balance due to respondent in excess of $117,000. While the daily time logs for the various attorneys were not provided, copies of the retainer agreements reflect the hourly charges for the legal services to be rendered which are clearly within the parameters of reasonable rates for attorneys handling this type of litigation in New York City at the time. A hearing would be necessary to conclusively establish the reasonable value of the services rendered, although the years spent in litigation and the complexity of the issues would suggest that such fees were earned.
Responding to respondent's motion to dismiss, petitioner does not, however, contest that the sums paid to respondent by its clients in the Holtkamp action were earned legal fees and has not argued that Deutsch expects to receive any of the funds back from respondent or that Deutsch is entitled to a refund of such payments. There is no suggestion that the funds in respondent's possession are being "parked", to be later retrieved for Deutsch's use. Rather, petitioner's claim is based upon 1) its contention that the payments to respondent were actually derived from the money Deutsch received from the sale of the Parklex property which, petitioner contends, was fraudulently diverted and hidden from the Parklex partners in an investment account at RBC Dain Rauscher held in the name of D B Partners, a wholly-owned entity of Fred Deutsch, and thus the funds are actually the property of Parklex, and 2) its contention that Deutsch's purpose in hiring respondent to defend the Holtkamp action was primarily to hinder, delay and defraud petitioner in its efforts to recoup what is rightfully the property of the Parklex Partnership. Petitioner emphasizes that its claim that the subject funds were fraudulently conveyed to respondent is based upon Section 276 of New York's Debtor and Creditor Law, not Section 273, and that the sufficiency of the consideration for such transfer is not at issue, except perhaps as a "badge" or indicia of fraudulent intent (In re Sharp, 403 F 3d 43, 56 [2d Cir 2005]).
Respondent's motion is based on the sufficiency of the pleading and the fact that petitioner is already litigating an action against it in which issues fundamental to petitioner's right to relief in this special proceeding will be determined. Respondent contends that petitioner can be afforded complete relief in the other actions pending before this court and that the instant proceeding must be dismissed as a matter of law.
Reciting the long and complex history of the Holtkamp litigation, including arguments relating to petitioner's claim that respondent acted improperly in advocating certain positions on behalf of its clients, the petition demands disgorgement of legal fees paid upon the allegation that such payments constituted a fraudulent conveyance under Debtor and Creditor Law §276. That statute provides:
Every conveyance made and every obligation incurred with actual
intent, as distinguished from intent presumed in law, to hinder, delay,
or defraud either present or future creditors, is fraudulent as to both
present and future creditors.
Petitioner devotes 20 of its 28 page petition recapitulating the circumstances of the Holtkamp litigation and arguing the merits of the debt-to-equity conversion defense interposed therein by respondent on behalf of its clients, tracking the allegations contained in its complaint in Parklex Associates v Flemming Zulack Williamson Zauderer LLP, Index No. 30174/09, pending before this court, as evidence of Deutsch's fraud and respondent's imputed awareness thereof and complicity therein. The petition alleges that respondent had both actual (complaint ¶¶105, 106, 107) and [*4]constructive (complaint ¶¶ 108, 109,110) knowledge of Deutsch's intent to hinder(complaint ¶¶ 99, 102), delay (complaint ¶¶ 100, 103) and defraud (complaint ¶¶ 101, 104) "petitioner, a future creditor, when the Respondent was directed to make the Debt/Equity Conversion argument in the Parklex Action". The petition concludes with a demand for "judgment against the Respondent for Four Million Dollars ($4,000,000.00) as transferee of Deutsch's fraudulent [sic] conveyed property" (complaint ¶ 111).
As respondent notes, the instant proceeding has been brought under CPLR §5225(b) seeking the turnover to petitioner, as a judgment creditor, of property to which the judgment debtor is entitled or where "the judgment creditor's rights to the property are superior to those of the transferee". Clearly, based upon petitioner's own contentions, the judgment debtor, Fred Deutsch, has no present rightful claim to the money paid to respondent and respondent's arguments with respect to Deutsch's lack of entitlement to the sums paid to respondent are irrelevant. However, notwithstanding its unequivocal avowal that "[t]his Special Proceeding does not turn on the issue of what source of funds were used to pay [respondent]" (Memorandum of Law in Support of Petitioner's Opposition to Motion to Dismiss at p.1), petitioner has presented evidence that the funds paid to Deutsch at the closing on the Parklex property can be traced directly through various bank accounts to their ultimate transfer to respondent in payment of legal fees. Thus, argues petitioner, those funds actually belonged to the Parklex partners it represents before the transfer to respondent, implying that its claim is therefore superior to that of respondent.
Petitioner insists, however, that its claim in this special turnover proceeding is limited to the standard set forth in Debtor and Creditor Law §276, that the transferor have made the transfer with the intent to defraud a creditor, citing In re Sharp International Corp., 403 F 3d at 56. Petitioner claims that Deutsch retained respondent and orchestrated a fraudulent defense, using respondent to advocate on his behalf against enforcement of subpoenas that would have revealed the location of the funds alleged to have been fraudulently diverted, and that respondent knew or should have known that Deutsch's purpose was to hinder, delay and defraud petitioner's clients. Although petitioner insists, on the one hand, that "Petitioners' [sic] fraudulent conveyance claims are not based upon the underlying fraud that resulted in Deutsch's conversion of all of Parklex's sale proceeds" (Memorandum of Law at p.4)[FN2], it later asserts "[t]he Petitioner argues that Deutsch's effort to defraud the plaintiffs in the Parklex Action is the assertion of the debt-to-equity conversion defense" (Memorandum of Law at p. 9). Essentially, the petitioner alleges that Deutsch's retention of respondent as legal counsel was not to mount a defense against the allegations of fraud and breach of fiduciary duty brought against him by the Holtkamp plaintiffs, but to delay petitioner in uncovering the merits of such allegations and securing the allegedly converted funds for recovery by petitioner. As such, without regard to the merits of such accusations, according the pleading the deference to which it is due upon a motion pursuant to CPLR 3211(a)(7) (Leon v Martinez, 84 NY2d 83), the petition does state a cognizible claim under CPLR 5225(b) (See 511 W. 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 152 ). [*5]
But the question as to Deutsch's right to 95% of the proceeds of the sale of the Parklex property is precisely the issue in both the Holtkamp case and in Parklex Associates v Flemming Zulack Williamson Zauderer LLP. As this court recently stated, although disputed by petitioner, "[t]his court has, in fact, never made a final determination on the merits concerning the validity of the debt-to-equity conversion, and the issue has not been adjudicated" (Holtkamp, Decision dated February 22, 2011). Were Deutsch to prevail upon this alleged defense, he would have been entitled to most of the funds from the Parklex sale. Even if unsuccessful on that theory, Deutsch was the holder of a mortgage on the property and would have been entitled to certain payments in satisfaction at closing, the precise amount of which have yet to be determined. This court is unable to discern how petitioner can prevail in this special proceeding without an adjudication of the merits of the allegedly fraudulent defense that forms the basis of petitioner's claim of a fraudulent conveyance to respondent pursuant to Debtor and Creditor Law §276.
Petitioner's present claim is based upon a settlement agreement pursuant to which Fred Deutsch provided a confession of judgment which was subsequently entered when he defaulted upon payment. Petitioner seeks to boot-strap that settlement judgment into an adjudication as to the ultimate merits of its claims of fraud, not only by defendant and judgment debtor Deutsch, but also by his attorneys in defending him against petitioner's suit, based upon the accusation that the defenses raised were fraudulent and known to be so by counsel. Putting aside the potential damage to our adversarial system of justice and the sanctity of the attorney-client relationship implicated in petitioner's claims, the simple fact is that other actions, currently pending before this court, will provide full redress to petitioner should there be merit to its contentions that respondent, by advocating on Deutsch's behalf, essentially facilitated his purpose to hinder, delay or defraud petitioner's clients in obtaining their rightful recovery. As an adjudication of the merits of the debt-to-equity defense is a necessary predicate to petitioner's claim, that the sums paid to respondent as legal fees were funds that belonged to the parties petitioner represents which were actually fraudulently conveyed, entitling petitioner to have such funds turned over, this proceeding must defer to the other pending actions.
Whereas the two other actions pending before this court provide more than adequate opportunity for full discovery on all relevant issues, the cross-motion for discovery in this special proceeding is denied. Moreover, the pendency of the other actions, though different in character from this special turnover proceeding, requires the dismissal of the instant proceeding pursuant to CPLR 3211(a)(4), as those cases have been brought by the same plaintiffs represented by petitioner here, against the same parties, for compensation for the same alleged wrongs that serve as the predicate for the relief sought herein. In all of these cases it is Deutsch's alleged fraudulent conversion of the assets of Parklex and respondent's alleged facilitation of Deutsch's fraud upon the Parklex limited partners that is at issue. In Parklex Associates v Flemming Zulack Williamson Zauderer LLP, petitioner has alleged that respondent aided Deutsch in defrauding petitioner's clients. That action will therefore provide petitioner with sufficient redress against respondent, rendering the instant proceeding duplicative. Under such circumstances, the instant proceeding must be dismissed. See Simonetti v Larson, 44 AD3d 1028 [2d Dept 2007]; Cherico, Cherico & Associates, 67 AD3d 622 [2d Dept 2009].
Respondent's motion to dismiss is granted. The cross-motion for discovery is denied. [*6]
This constitutes the decision and order of the court.
CAROLYN E. DEMAREST
JUSTICE OF THE SUPREME COURT Footnotes
Footnote 1:In his Affirmation, Mark Zauderer states that the Flemming Firm was paid $1,833,171.91. However, the checks annexed to Mr. Lupkin's Affirmation total $1,833,168.31, indicating a mathematical error in Mr. Zauderer's calculations.
Footnote 2:This is not an accurate statement of fact as there were distributions made to the limited partners following sale of the Parklex building, albeit not in the sums to which the partners believed they were entitled.