Mayers v Stone Castle Partners, LLC

[*1] Mayers v Stone Castle Partners, LLC 2014 NY Slip Op 50461(U) Decided on March 28, 2014 Supreme Court, New York County Kornreich, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on March 28, 2014
Supreme Court, New York County

Matthew R. Mayers, Plaintiff,

against

Stone Castle Partners, LLC, GEORGE SHILOWITZ, JOSHUA S. SIEGEL, CHARLESBANK EQUITY FUND VI, LIMITED PARTNERSHIP, CHARLESBANK EQUITY COINVESTMENT FUND VI, LIMITED PARTNERSHIP, CHARLESBANK COINVESTMENT PARTNERS, LIMITED PARTNERSHIP, CB-SC ACQUISITION, INC., CB-SC II, INC., and CIBC CAPITAL CORPORATION, Defendants.



Stone Castle Partners, LLC, Plaintiff,

against

Matthew R. Mayers and RRWT, LLC, Defendants.



650410/2013



Jaffe & Asher LLP, for Matthew Mayers.

Quinn Emanuel Urquhart & Sullivan, LLP for the Charlesbank Defendants.

Shirley Werner Kornreich, J.

Matthew R. Mayers moves to disqualify Quinn Emanuel Urquhart & Sullivan, LLP (Quinn Emanuel) from representing Stone Castle Partners, LLC (the Company), Joshua S. Siegel, Charlesbank Equity Fund VI, Limited Partnership, Charlesbank Equity Coinvestment Fund VI, Limited Partnership, Charlesbank Coinvestment Partners, Limited Partnership, CB-SC Acquisition, Inc., and CIBC Capital Corporation (collectively, the Charlesbank Defendants). Defendant George Shilowitz is represented by separate counsel and did not participate in this motion. Mayers' motion is granted for the reasons that follow.

[*2]Factual Background & Procedural History

The court assumes familiarly with the allegations regarding Mayers' involvement with Tropic CDO IV (Tropic), which are discussed at length in an order dated February 19, 2014 (the February Order). See Dkt. 86; 42 Misc 3d 1227(A). As context, before the court are two, joined lawsuits. In the first, commenced on February 6, 2013, Mayers challenges his termination from the Company as being deemed "For Cause". Index No. 650410/2013. The February Order was a decision granting the Charlesbank Defendants' partial motion to dismiss, paring down the bases for Mayers' claims. In the second case, commenced on November 25, 2013, the Company asserts claims against Mayers for engaging in numerous illegal schemes while employed at the Company, including the Tropic scheme, ventures related to Argentinean debt litigation, and qui tam litigation in New York and New Jersey. Index No. 654075/2013. On the instant motion, Mayers seeks to disqualify Quinn Emanuel from representing the Company and the Charlesbank Defendants.

In May 2011, Mayers made an unsolicited call to Jonathan E. Pickhardt, an attorney at Quinn Emanuel. Pickhardt is not involved in this litigation. Mayers sought to have Pickhardt, who has expertise with CDOs, represent him in litigation against the Tropic trustee as part of his scheme to procure "consent payments" for selling Tropic's collateral. According to Mayers, he and Pickhardt spoke for 30 minutes to an hour, but it is unclear what details were divulged. It also is unclear if Mayers lied about whether he still worked for the Company, an allegation that is hotly disputed. In any event, Pickhardt declined the representation because he represented Hildene Capital Management (Hildene), one of the Tropic noteholders, a clear conflict. The parties agree that this conversation, on its own, does not warrant disqualifying Quinn Emanuel.However, Pickhardt eventually discussed the call with Kevin S. Reed, the Company's

lead counsel in this litigation. As a result, the Company's complaint against Mayers alleges:

Mayers formed TP Investments in a manner designed to hide his connection to the company, and as detailed below, he was careful to keep his name off of other documents necessary to execute his strategy. Additionally, in or about May 2011, at or near the time he began transacting with the Holders, Mayers contacted an attorney about the possibility of representing him in connection with his Tropic CDO strategy. He falsely told the attorney that he was no longer with Stone Castle, again apparently seeking to conceal his actions from SCP. The attorney, who represented Hildene Capital in related matters, declined the representation. On or about June 1, 2012, Hildene Capital informed Siegel of Mayers' approach and inquired whether Stone Castle was once again seeking consent payments in connection with the Tropic CDO. Siegel and Shilowitz immediately asked Mayers to explain his conduct, and Mayers dissembled and claimed he was merely seeking to gather information from the attorney. Siegel and Shilowitz reiterated to him that Stone Castle did not have interest in pursuing consent fees related to the Tropic CDO at that time and that Mayers should not be involving himself or the firm in the pursuit of any such transaction. Siegel and Shilowitz had no idea at that time that Mayers was pursuing a business strategy outside of Stone Castle, nor did Mayers tell them that, even though he had by this time executed Management Agreements with at least three of the Holders.

See Dkt. 49 at 10, ¶ 33.

Mayers argues that Pickhardt's discussion with Reed, the basis for the above allegations in the Company's complaint, was improper and warrants disqualification. Quinn Emanuel [*3]contends that Mayers' disqualification motion is nothing more than gamesmanship, designed to delay the case and deprive the Company of Quinn Emanuel's representation. Given the quality of Quinn Emanuel's representation, its take on the motive for Mayers' motion may very well be correct. Nonetheless, under the governing law discussed below, the court is obligated to disqualify Quinn Emanuel.

Discussion

It is well established that the right to be represented by counsel of one's choice is "a valued right [and] any restrictions must be carefully scrutinized." Ullmann-Schneider v Lacher & Lovell-Taylor PC, 110 AD3d 469, 469-70 (1st Dept 2013), quoting S & S Hotel Ventures Ltd. Partnership v 777 S.H. Corp., 69 NY2d 437, 443 (1987). Moreover, "in the context of an ongoing lawsuit, disqualification ... can [create a] strategic advantage of one party over another." Id. The Court of Appeals has long recognized that "motions to disqualify are frequently used as an offensive tactic, inflicting hardship on the current client and delay upon the courts Such motions result in a loss of time and money, even if they are eventually denied. This Court and others have expressed concern that such disqualification motions may be used frivolously as a litigation tactic when there is no real concern that a confidence has been abused." Solow v W.R. Grace & Co., 83 NY2d 303, 310 (1994). For these reasons, "movant must meet a heavy burden of showing that disqualification is warranted." Ullmann-Schneider, 110 AD3d at 470, citing Broadwhite Assocs. v Truong, 237 AD2d 162 (1st Dept 1997).

However, the right to choose one's attorney is not absolute. Matter of Abrams, 62 NY2d 183, 196 (1984). Even where, as here, no attorney-client relationship existed between the movant and the law firm, disqualification is warranted when an attorney violates his "fiduciary obligation to preserve the confidential secrets of prospective clients" pursuant to Rule 1.18 of the New York Rules of Professional Conduct.[FN1] Sullivan v Cangelosi, 84 AD3d 1486, 1487 (3d Dept 2011).

Rule 1.18, which addresses a lawyer's duties to prospective clients, provides:

(a) A person who discusses with a lawyer the possibility of forming a client-lawyer relationship with respect to a matter is a "prospective client."

(b) Even when no client-lawyer relationship ensues, a lawyer who has had discussions with a prospective client shall not use or reveal information learned in the consultation, except as Rule 1.9 would permit with respect to information of a former client.

(c) A lawyer subject to paragraph (b) shall not represent a client with interests materially adverse to those of a prospective client in the same or a substantially related matter if the lawyer received information from the prospective client that could be significantly harmful to that person in the matter, except as provided in paragraph (d). If a lawyer is disqualified from representation under this paragraph, no lawyer in a firm with which that lawyer is associated may knowingly undertake or continue representation in such a matter, except as provided in paragraph (d). [*4]

(d) When the lawyer has received disqualifying information as defined in paragraph (c), representation is permissible if:

(1) both the affected client and the prospective client have given informed consent, confirmed in writing; or

(2) the lawyer who received the information took reasonable measures to avoid exposure to more disqualifying information than was reasonably necessary to determine whether to represent the prospective client; and

(i) the firm acts promptly and reasonably to notify, as appropriate, lawyers and nonlawyer personnel within the firm that the personally disqualified lawyer is prohibited from participating in the representation of the current client;

(ii) the firm implements effective screening procedures to prevent the flow of information about the matter between the disqualified lawyer and the others in the firm;

(iii) the disqualified lawyer is apportioned no part of the fee therefrom; and

(iv) written notice is promptly given to the prospective client; and

(3) a reasonable lawyer would conclude that the law firm will be able to provide competent and diligent representation in the matter.

(e) A person who:

(1) communicates information unilaterally to a lawyer, without any reasonable expectation that the lawyer is willing to discuss the possibility of forming a client-lawyer relationship; or

(2) communicates with a lawyer for the purpose of disqualifying the lawyer from handling a materially adverse representation on the same or a substantially related matter, is not a prospective client with the meaning of paragraph (a).

22 NYYCRR § 1200.0.

Quinn Emanuel's use of Pickhardt's discussion with Mayers in paragraph 33 of the Company's complaint mandates disqualification. This is so even though: Reed did not affirmatively seek this information in his discussion with Pickhardt; the information is not particularly damning in the context of the more troubling allegations about Mayers' actions; and most of these facts were public knowledge at the time and would have (and indeed did) come to light on their own. In fact, a primary impetus of this litigation was the revelation that Mayers was the person who directed the Tropic trustee to sell the collateral, a revelation which came about through Mayers' own conduct.

To explain, when directing a CDO trustee to sell collateral, contact information must be provided to the trustee. Mayers did not wish to reveal his identity and did not disclose his name (only the entities owning and controlling the equity, RRWT and TPI). But, he gave the trustee his cell phone number, which the trustee disseminated to the debt holders. As mentioned earlier, Hildene owned Tropic debt, and, therefore, was concerned about the sale of Tropic's collateral. Hildene's president called the cell number provided by the trustee and was taken aback when Mayers answered the call. Hildene immediately contacted Siegel. This occurred on December 1, 2012. Two days later, on December 3, Mayers was confronted at the Company board meeting about his Tropic scheme, as discussed in the February Order. Quinn Emanuel was retained by the Company on December 5, long before Reed's discussion with Pickhardt and the filing of the Company's complaint. [*5]

After carefully scrutinizing the allegations and weighing the strategic motives of the motion, the court concludes that Mayers has not met his "heavy burden" of establishing a "significant harm" caused by Quinn Emanuel's representation of the Company. Nonetheless, Quinn Emanuel's disqualification is still necessary because, as the appellate courts have long held, the inquiry must go beyond the strict determination of whether a technical violation has occurred. Tekni-Plex, Inc. v Meyner & Landis, 89 NY2d 123, 131 (1996) ("courts should avoid mechanical application of blanket rules" and disqualify counsel if there is any question that he violated a Rule). This inquiry arises from the "undeniable maxim of the legal profession that an attorney must avoid even the appearance of impropriety". Matter of Hof, 102 AD2d 591 (2d Dept 1984). Consequently, "doubts as to the existence of a conflict of interest must be resolved in favor of disqualification", because a "lawyer may not place himself in a position where a conflicting interest may, even inadvertently, affect, or give the appearance of affecting, the obligations of the professional relationship." Seeley v Seeley, 129 AD2d 625, 626 (2d Dept 1987), quoting Matter of Kelly, 23 NY2d 368, 376 (1968); see also Rose Ocko Found., Inc. v Liebovitz, 155 AD2d 426 (2d Dept 1989). Thus, disqualification is mandated "irrespective of any actual detriment — that is, even when there may not, in fact, be any conflict of interest' — [since] the rule also avoids any suggestion of impropriety on the part of the attorney." Tekni-Plex, 89 NY2d at 131, quoting Solow, 83 NY2d at 309. In other words, the movant need not suffer any harm from the violation.

The most recent application of these principles by this court arose in two securities fraud cases where the attorney consulted by a potential client, the defendant bank, went on to work for plaintiff's counsel. See Bank Hapoalim B.M. v WestLB AG, Index No. 603458/2009, Dkt. 57 (Sup Ct, NY County Aug. 23, 2010) and Justinian Capital SPC v WestLB AG, Index No. 600975/2010, Dkt. 42 (Sup Ct, NY County May 19, 2011). In both cases, it was unclear whether confidential information was disclosed. Unlike the Company's complaint, confidential communications were not explicitly used in the pleadings. This court, nonetheless, disqualified plaintiff's counsel. The Appellate Division affirmed.

In Bank Hapoalim, the Appellate Division explained:

Although defendants' initial consultation about taking on the defense of the case did not lead to counsel's retention, defendants' description of the matters, coupled with the circumstances surrounding the meeting, gives rise to a reasonable inference that confidences were revealed, which establishes a fiduciary relationship of loyalty with respect to those communications.

82 AD3d 433 (1st Dept 2011). In Justinian, the Appellate Division held that disqualification was warranted even though "there is no evidence that the investment vehicle at issue in this case was specifically discussed at the meeting" because, as explained earlier, "doubts as to the existence of a conflict of interest must be resolved in favor of disqualification." 90 AD3d 585 (1st Dept 2011), quoting Rose Ocko, 155 AD2d at 428.

The law in this state weighs heavily in favor of disqualification upon a showing of a possible Rule violation, irrespective of an actual violation, harm, or gamesmanship. Though courts have long paid homage to the notion that gamesmanship may be ground to deny a motion for disqualification, in practice, the movant's motive is not what tips the scales. This court is loath to grant this motion because doing so will significantly delay this case, especially given the complexity of the subject matter and the quality of Quinn Emanuel's representation. However, public policy as set forth in the case law requires such disqualification. Accordingly, it is [*6]

ORDERED that the motion by Matthew R. Mayers to disqualify Quinn Emanuel Urquhart & Sullivan, LLP (Quinn Emanuel) as counsel for Stone Castle Partners, LLC, Joshua S. Siegel (Siegel), Charlesbank Equity Fund VI, Limited Partnership, Charlesbank Equity Coinvestment Fund VI, Limited Partnership, Charlesbank Coinvestment Partners, Limited Partnership, CB-SC Acquisition, Inc., and CIBC Capital Corporation (collectively, the Former Clients) is granted; and it is further

ORDERED that Quinn Emanuel shall serve a copy of this order by regular mail on the Former Clients within 3 days of the entry of this order of the NYSCEF system and advise them that they are to retain new counsel within 30 days; and it is further

ORDERED that this action is stayed until May 8, 2014 at 3:30 pm, at which time a telephone conference will be held (646-386-3363); and it is further

ORDERED that all new counsel shall e-file a Notice of Appearance before the telephone conference; and it is further

ORDERED that oral argument on Motion Sequence Numbers 005 & 006, currently scheduled for April 1, 2014, is adjourned, and a new argument date will be scheduled on the telephone conference.

Dated: March 28, 2014ENTER:

__________________________

J.S.C. Footnotes

Footnote 1: The Rules, which went into effect on April 1, 2009, govern because the subject conversations did not occur until 2011.