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ACKERMAN v. NATIONAL PROP. ANALYSTS

July 1, 1993

FRED ACKERMAN, et al., Plaintiffs,
v.
NATIONAL PROPERTY ANALYSTS, INC., et al., Defendants. STEVEN S. REMINGTON, M.D., et al., Plaintiffs, v. ALAN TALANSKY, et al., Defendants.


FREEH


The opinion of the court was delivered by: LOUIS J. FREEH

LOUIS J. FREEH, U.S.D.J.

 In these related fraud actions, defendants Alan Talansky ("Talansky"), United Growth Properties ("United Growth"), First Atlantic Investment Corp., United Properties of America, AST Properties (collectively, the "United Growth Defendants"), National Property Analysts, Inc., Edward Lipkin, and Howard Brownstein, (collectively the "NPA Defendants"), Price Waterhouse, The Travelers Indemnity Company ("Travelers"), Weiner Zuckerbrot & Weiss ("Weiner Zuckerbrot"), and Spengler Carlson Gubar Brodsky & Frischling ("Spengler Carlson") move to disqualify plaintiffs' counsel and to dismiss plaintiffs' complaints, as well as other ancillary relief.

 The motions are based upon plaintiffs' improper use of information obtained from Leonard Hirschhorn, Esq. ("Hirschhorn"), former in-house counsel to the NPA and United Growth Defendants, in drafting the two complaints against the defendants. Plaintiffs oppose both motions. For the reasons stated below, plaintiffs' counsel are disqualified from any further participation in this litigation, and both actions are dismissed without prejudice.

 Background

 Familiarity with the facts stated in the Court's September 9, 1992 Opinion and Order are assumed and will not be repeated here except where necessary to an understanding of the issues presently before the Court. Plaintiffs in this consolidated action are all investors in one or more of twelve National Community Center Partnerships (the "NCCs") created by defendants in 1985 and 1986. According to the two complaints, defendants defrauded plaintiffs into investing in the initial NCCs and then further defrauded plaintiffs in 1989 when they combined the NCCs into one partnership known as United Growth.

 In the September Opinion, the Court dismissed plaintiffs' federal securities and civil RICO claims, as well as some of plaintiffs' state law claims (the "September Opinion"). *fn1" The issues now before the Court is whether the remaining claims should also be dismissed and plaintiffs' counsel disqualified based on the alleged violation of the Code of Professional Responsibility (the "Code").

 It is undisputed that plaintiffs have based a substantial number of their allegations against defendants on information provided by an "insider" to the NCC partnerships. For example, prior to its September Opinion, the Court held oral argument on the various motions to dismiss. The primary issue at that time was the sufficiency of the two complaints under Fed. R. Civ. P. 12(b)(6) and 9(b). In an effort to persuade the Court of the sufficiency of the Ackerman complaint, counsel for the Ackerman plaintiffs, John Triggs, ("Triggs") of the law firm Jacobson & Triggs, stated:

 
We have information. We are talking to people who were there at the time. We were talking to them since last summer when this ad hoc committee asked us to take a look at this case. These people told us in detail things that you never have in a case like this. Generally, the kind of firms that specialize in this area don't have people talking to them six months before you file this complaint . . .

 (Tr. at 47-48).

 In addition, shortly after the Court issued its September Opinion, Solomon Jaskiel ("Jaskiel") of the law firm of Beigel & Sandler, counsel for the Remington plaintiffs, wrote a letter to the Court requesting permission to amend the Remington complaint a second time. *fn2" In support of that request, Jaskiel stated that "plaintiffs only learned of the fraud from an insider who provided information which could not have been obtained from any other source." (Jaskiel Ltr. at 2).

 On or about September 25, 1992, Triggs informed defendants that Hirschhorn was the "insider" from whom plaintiffs were receiving information. Counsel for defendants immediately notified the Court of their concern that the communications with Hirschhorn constituted a breach of the Code and requested an evidentiary hearing on the matter. *fn3" The Court granted that request.

 On November 4, 1992, Hirschhorn, an attorney a member of the New York Bar since 1976, testified before the Court concerning the information he provided to Triggs and a group of individuals who had invested in the partnerships and were exploring the possibility of litigation (the "ad hoc committee"). Although Triggs and Jaskiel both attended the hearing and had an opportunity to testify, they declined to do so. (Tr. at 145).

 According to Hirschhorn, he first began working for NPA as in-house counsel in January 1982. (Tr. at 40-41). His primary responsibility at NPA was to draft private placement memoranda, work he had learned to do while employed for three years as an attorney for the law firm of defendant Weiner Zuckerbrot. (Tr. at 42-44, 53, 107). In fact, Hirschhorn drafted the PPMs for all of the NCC partnerships at issue in this case, and distributed drafts of those PPMs to the outside professionals such as Price Waterhouse and Travelers for review. *fn4" (Tr. at 56-58, 71).

 While Hirschhorn insists that he was not just an attorney for NPA, he never advised the defendant professionals, that he was not acting as anything but NPA's in-house counsel. Moreover, Hirschhorn initially reported to the General counsel of the legal department, had an attorney who reported to him, identified himself in correspondence as NPA's counsel and represented himself as an attorney to the IRS. (Tr. 120-21, 7-17, 50-51, 72).

 In November 1986, the United Growth Defendants hired Hirschhorn as their in-house counsel. (Tr. at 10-11, 37). As such, Hirschhorn participated in writing and preparing the PPM for United Growth, the roll-up partnership. (Tr. at 81-82).

 Hirschhorn resigned as in-house counsel for the United Growth Defendants in May 1991. Nevertheless, he continued to provide legal services to them as outside counsel through July 1992, two months after the filing of the amended complaints in this case. (Tr. at 10-12).

 On November 15, 1991, Triggs went to Hirschhorn's Westchester office to discuss the NCC and United Growth partnership offerings with Hirschhorn in person. Triggs knew that Hirschhorn had been in-house counsel to NPA and at their meeting Hirschhorn reminded Triggs that he could not discuss any privileged information regarding his former client and employer. NPA. However, neither man mentioned the need to avoid discussion concerning the NPA or United Growth Defendants' "secrets". (Tr. at 24-25, 129).

 Although Hirschhorn was still billing United Growth for legal services, he never informed them of the meeting with Triggs nor asked for their consent. *fn5" (Tr. at 26). Not willing to have his time uncompensated, however, Hirschhorn billed the ad hoc committee for the time he spent with Triggs discussing the creation of the NCCs. (Tr. at 70-71).

 During the November 15th meeting, which lasted approximately three hours, Triggs and Hirschhorn discussed potential legal claims arising out of the NCC partnerships. Specifically, the two men discussed eight different topics relating to the NCC partnership offerings: (1) the creation and method of operation of the HUB license and its impact on potential investors; (2) the inquiries (if any) by the third-party professionals, lenders or sureties as to how the money generated from the HUB license was being spent; (3) Travelers' role in the deal, specifically whether Travelers had made any special arrangements in connection with any of the NCC partnerships; (4) Admiral Insurance Company's role in the NCC partnerships; (5) the reason, if any, why the NCC XVI partnership went forward without a surety; (6) communications with investors concerning their votes in the roll-up; (7) communications with lenders concerning their consents to the roll-up; and (8) communications with third parties concerning the possible refinancing of some of the more attractive properties. (Tr. at 26, 74-75; Triggs Ltr. at 3). Both the Ackerman and Remington amended complaints contain specific factual allegations relating to each of these eight topics.

 In addition to discussing the partnerships with Triggs, Hirschhorn also reviewed the initial Ackerman complaint before it was filed. (Tr. at 96). Hirschhorn again billed the ad hoc committee for his time. (Tr. at 97). *fn6"

 After the hearing, the Court informed the parties that it was sufficiently disturbed about the possibility of unethical conduct by plaintiffs' counsel to suspend all discovery pending its resolution of the motion to disqualify. The Court directed counsel for the Ackerman plaintiffs to provide to the Court in camera the notes Triggs made during the November 15th meeting he had with Hirschhorn, as well as any subsequent notes relating to any other conversations with Hirschhorn after that date. The Court further directed ...


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