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September 6, 1978

Henry Hart RICE, Abram Barkan and James Felt & Company, Inc., Plaintiffs,
Irwin BARON, Defendant, v. HARROW PROPERTY CORPORATION and James Felt Realty Services, Inc., Additional Defendants on Counterclaims

The opinion of the court was delivered by: CARTER

Plaintiffs, Henry Hart Rice, Abram Barkan and James Felt & Co. ("Felt") commenced this action against the defendant, Irwin Baron, alleging that Baron had violated certain provisions of the federal securities laws *fn1" and had committed common law fraud in connection with his sale of Felt shares to the plaintiffs in 1971. In his answer, Baron denied the material allegations of the complaint, raised certain affirmative defenses, asserted two counterclaims, and joined two additional parties as counterclaim defendants Harrow Property Corporation ("Harrow") and Felt Realty Corporation ("Felt Realty").

Defendant seeks summary judgment pursuant to Rule 56, F.R.Civ.P., as to all of Felt's pending claims against him on the grounds that all such claims are barred by the applicable statute of limitations. In addition, Baron seeks to disqualify the firm of Bachner Tally & Mantel ("Bachner Tally"), which currently represents all of the plaintiffs and counterclaim defendants in this action, from further representing any of these clients on the grounds that (1) Charles Tally, one of the senior partners at the Bachner Tally firm, will be called upon at trial to give testimony which will or may be prejudicial to his clients; and (2) that Bachner Tally suffers from a disabling conflict of interest in attempting to represent All of the plaintiffs and counterclaim defendants in this action simultaneously. For the reasons set out below, defendant's motion for summary judgment is granted, and his motion for disqualification is granted in part.


 In February of 1969, a severe fire broke out in a building located at 595 Fifth Avenue, New York City, a building owned by Acruem Associates ("Acruem") and managed by Felt. Litigants Rice, Barkan and Baron were all affiliated with Felt at the time of the fire, but, on the present record, the precise positions each of them held cannot be determined. As a result of that conflagration, several people died and numerous others were injured. The catastrophe spawned litigation by the survivors of the blaze and by the relatives of those who did not survive to recover damages for the injuries caused by the fire. The first summons in these "Fire Actions" was served on Felt on December 29, 1969.

 Soon thereafter, on January 1, 1970, the Felt corporate leadership underwent some reorganization. Barkan, who had been Felt's Executive Vice President, was named President of the company. Rice, who had been Felt's Vice President, was designated Senior Vice President. Baron became Chairman of Felt's Board of Directors. And Ralph R. Russ, a non-party to this action, continued to occupy the same position he had held prior to the corporate reshuffling Treasurer.

 One month later, on February 17, 1970, Russ, acting on Felt's behalf, sought to engage John J. Bower to represent Felt in the Fire Actions. Bower had already been designated to represent Acruem in that litigation. On March 18, 1970, Bower accepted the proffered employment. Russ also arranged for Milton Lebe to represent Felt's interest in the Fire Actions to the extent that its liability in those actions might exceed the applicable insurance coverage, at which point the interests of Acruem's insurer and Felt would diverge. In that connection, Felt was advised by the Bower firm on June 11, 1970, that the total amount of damages demanded in the Fire Actions far exceeded the insurance coverage applicable to satisfy claims arising from the fire.

 In January of 1971, the allocation of power at Felt was again redistributed. At that time, the Board of Directors elected Barkan, Rice and Russ as a three-member Executive Committee invested with all the power of the Board itself. Concurrently, the Board approved the sale of 500 shares of Felt from Baron back to the corporation at a price of $ 250 per share. That sale of shares was consummated on January 28, 1971.

 On April 13, 1971, Felt's financial statements for the fiscal year ending January 31, 1971, were issued by Eisner & Lubin, a firm of certified public accountants. Footnote "G" of that statement provided that:

"The corporation . . . (Felt) is a co-defendant in a suit for damages arising from a fire at 595 Fifth Avenue, a building managed by it. The aggregate of the claims exceeds the insurance coverage but, in the opinion of counsel, the amount of recovery will be within the limits of the liability insurance carried by the building owner."

 It is that footnote which plaintiffs allege was materially misleading in that it understated the potential liability of Felt in the Fire Actions and upon which plaintiffs appear to focus the bulk of their claims of securities law violations and common law fraud. *fn2"

 On June 2, 1971, Baron effected two additional sales of Felt shares. On that date, Baron sold 190 shares to Rice for an aggregate purchase price of $ 103,900 and 190 shares to Barkan at an equivalent price. On that same day, Baron entered into an employment contract with Felt for the period beginning February 1, 1971, and ending on January 31, 1977 ("Employment Contract"). That contract provided for Baron to receive a fixed salary plus a percentage of Felt's annual earnings before taxes each year.

 On March 31, 1972, a decision on the issue of liability in the Fire Actions was rendered. Both Acruem and Felt were held to be active tortfeasors and to be liable for all the damages arising from the fire.

 Soon after the filing of decision, Barkan scheduled a meeting for April 13, 1972, of certain of Felt's officers and professional advisors at the Bachner Tally offices. Those attending included Rice, Russ, Barkan, representatives of Eisner & Lubin (Felt's accountants), Milton Lebe (Felt's counsel as to excess liability in the Fire Actions), William Brach of Brach, Eichler, Rosenberg & Silver (Barkan's personal counsel), and both Charles Tally and Charles Salfeld of the Bachner Tally firm. Baron did not attend that meeting.

 The purpose of the April 13th meeting was to discuss the ramifications for Felt and those connected to it of the decision on liability in the Fire Actions. In connection with that meeting, Rice sent a memorandum to Charles Tally, dated April 13, 1972 ("Rice Memorandum"), detailing certain considerations which needed to be taken into account in determining the proper course of action for Felt to follow now that it had been held liable in the Fire Actions. Those considerations included: (1) avoiding any increase in the net worth of Felt; (2) trying to avoid the embarrassment of a Felt bankruptcy; and (3) trying to set up some kind of vehicle to carry on the business of Felt should the liability from the Fire Actions threaten to destroy the corporation. Specifically Rice suggested that they

"might consider bringing into being a new company which would use the name "Felt' but not necessarily "James Felt'; that this new entity conduct their consulting and brokerage business; that the old company remain in business and continue management. At some point within the next year, (he) would like to change the name of the old company to J.F. Management or some similar derivation which would avoid the word "Felt' in its title in case it became necessary to sacrifice (Felt)."

 At the April 13th meeting, a memorandum prepared by Charles Salfeld ("Bachner Tally Memorandum") addressing the issues raised in the Rice Memorandum was distributed to those in attendance, including Barkan and Rice. That memorandum stated the following conclusions: (1) if officers and directors of one corporation acted simultaneously as the officers and directors of a second corporation, to which new business was diverted to the detriment of the former, those officers or directors would have violated their fiduciary obligations to the first corporation; (2) if the officers and directors of Felt resigned their positions en masse and created a second, competing corporation to which they attracted most of Felt's business, they probably would have violated their fiduciary obligations to Felt; and (3) if the acts of the officers and directors in depriving a corporation of a business opportunity were detrimental to that corporation's creditors, those creditors would have standing to sue the officers and directors derivatively on behalf of the corporation.

 On June 13, 1972, some two months after the meeting at the Bachner Tally offices, Barkan wrote to Tally on a Felt letterhead, thanking him for his "wise counsel and support in their moment of crises." Included with Barkan's letter was a $ 1,000 check made out from Felt to Bachner Tally.

 The Fire Actions were ultimately settled on June 16, 1972, for a total amount of $ 2,370,000. Felt did not participate in that settlement, and Acruem and its insurer reserved their rights to seek contribution from Felt.

 In March of 1973, Felt underwent a structural transformation. Its shareholders joined together with the shareholders of the unrelated corporation of Huberth & Huberth ("H & H") to form a new corporation James Felt-Huberth & Huberth, Inc. ("JF-H & H"). All Felt stockholders exchanged their Felt stock for shares in the new company, and all H & H stockholders made a similar exchange with respect to their H & H shares. Felt then ceased active operations and its activities were carried on by JF-H & H. The new corporation assumed all of Felt's obligations under its Employment Contract with Baron pursuant to an agreement entered into by it, Felt and Baron on March 13, 1973 ("Assumption Agreement").

 The threatened contribution suit against Felt by Acruem and its insurer finally materialized in December of 1973. In an action entitled Emil v. James Felt & Co., Inc., 45 A.D.2d 677, 356 N.Y.S.2d 303, and instituted in New York County Supreme Court, Acruem and its insurer sought to recover a portion of that sum which they had paid out in settlement of the Fire Actions.

 In July of 1975, while the Emil suit was percolating, the corporate structure of the young JF-H & H underwent its own transformation. All the original H & H shareholders turned back their shares of JF-H & H in return for the H & H shares they had once held in effect undoing their earlier transaction. The name of JF-H & H was then changed to Harrow and it continued to operate as before and to hold all of the shares of Felt.

 In September of 1975, the final corporate actor in this scenario came into being; Felt Realty was created and commenced operations. Rice became Chairman of the Board of the new company as well as the owner of 45% Of its shares. Barkan became the company's President and he too held 45% Of its shares. Felt Realty, it appears, soon succeeded to the business, assets and personnel of Harrow, which then, like its predecessor Felt, ceased active operations.

 In December of 1975, Bachner Tally, which had not represented Felt or its directors since the April 13, 1972 meeting at its offices, was retained by Felt to assume the management of the Emil litigation. Some months later, on March 3, 1976, Martin Polevoy of the Bachner Tally firm sent a copy of the Bachner Tally Memorandum concerning fiduciary responsibilities to Rice and Barkan. And in March of 1977, the Emil litigation was finally concluded by virtue of a settlement agreement entered into by the parties.

 The following month, on April 20, 1977, plaintiffs commenced this action claiming that Baron had defrauded them by inducing them in 1971 to purchase his Felt shares on the basis of the allegedly misleading Felt financial statement coupled with additional oral misrepresentations, all of which significantly underestimated Felt's potential liability in the Fire Actions. In his answer, Baron denied plaintiff's allegations and asserted his own claims for damages against the plaintiffs and the additional counterclaim defendants Harrow and Felt Realty. Defendant alleges in his first counterclaim that Felt and Harrow defaulted on their obligations to him under the Employment Contract and Assumption Agreement respectively by failing to pay him his fixed salary from June 1, 1976, through January 31, 1977, and by failing to pay him his profit percentage from February 1, 1975, through January 31, 1977. In his second counterclaim, Baron alleges that Rice and Barkan breached their fiduciary duties to Felt and Harrow by creating Felt Realty and diverting business, revenues and profits from Felt and Harrow to Felt Realty, thereby injuring Baron by reducing the amounts he would be paid under the Employment Contract and ...

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