the law firms of Fischbein Badillo Wagner Harding ("Fischbein Badillo") and Fleming Roth & Fettweis ("Fleming Roth") be subject to an order of attachment, temporary restraining order, and preliminary injunction previously entered by the Court in this case.
At issue are three transfers: (1) $ 500,000 paid to Fischbein Badillo for fees; (2) $ 270,000 advanced to Fischbein Badillo for disbursements; and (3) $ 150,000 paid to Fleming Roth for fees and disbursements. Hewlett Packard contends that these funds are subject to attachment either because Gala retains an interest in the funds or because the transfers constituted fraudulent conveyances.
For the reasons that follow, I hold that: (1) factual issues exist with respect to whether the $ 500,000 or some portion thereof was fraudulently conveyed; (2) the $ 270,000, or at least a portion thereof, is subject to attachment as the clients have retained an interest in the funds; and (3) the $ 150,000 is not subject to attachment because Gala has not retained an interest in the funds and the funds were not fraudulently conveyed.
From the fall of 1995 through the spring of 1996, Gala sold certain computer parts to Hewlett Packard. These purchases were negotiated in part by Jason Turner, an employee of Hewlett Packard, who allegedly was receiving money and other things of value from Gala and its principals, unbeknownst to Hewlett Packard. Gala contends that it shipped computer parts to Hewlett Packard, for which it has only been paid in part. Hewlett Packard contends that it paid more than $ 1.7 million to Gala for parts that were either overpriced or never shipped at all.
On May 9, 1996, Gala mailed Hewlett Packard a statement of account, reflecting an indebtedness for computer parts of $ 287,000. Hewlett Packard refused to pay the bill. Consequently, Gala brought this action on June 3, 1996 in the Supreme Court for the State of New York. Hewlett Packard removed the case to this Court and filed an Answer with Counterclaims, alleging that Gala and two of its employees, Abbott Solomon and Albert Mascolo, conspired with Turner to defraud Hewlett Packard. Hewlett Packard also filed a motion for a temporary restraining order and an order of attachment, which I granted on June 27, 1996. At a hearing on August 13, 1996, I confirmed the attachment order and granted a preliminary injunction.
In the meantime, on April 8, 1996, Turner was arrested and charged with grand larceny for his involvement with these transactions. He is currently being prosecuted by the United States Attorney's Office for the Eastern District of California. On September 19, 1996, the same United States Attorney's Office obtained indictments against Mascolo and Solomon. Ms. Fleming, of the Fleming Roth firm, is currently counsel for Mascolo, and Mr. Ruvoldt, of the Fischbein Badillo firm, is currently counsel for Solomon in the criminal case, United States v. Abbott Solomon and Albert Mascolo, No. CR-5-96-397 WBS (E.D. Cal.). On April 28, 1997, Mascolo was convicted on 15 counts.
B. The Transfers
Three transfers are at issue. They are:
1) $ 500,000 transferred on April 10, 1996, from Gala's bank accounts ($ 40,000 from a European American Bank ("EAB") account and $ 460,000 from a Citibank account) to Fischbein Badillo; these funds were initially placed into Fischbein Badillo's client escrow account, but were then transferred on April 12, 1996 to its operating account. (Blum. Decl. Ex. C, D, & E, at 5).
2) $ 270,000 transferred on June 14, 1996, to a "Fischbein Badillo Trust Account" from Gala's EAB account via a check to Fischbein Badillo and signed by Mascolo. (Blum Decl. Ex. F).
3) $ 150,000 transferred on April 26, 1996, to Fleming Roth's business account via wire transfer from Gala's EAB account for representation of Mascolo. (Blum Decl. Ex. G).
Hewlett Packard alleges that after Turner's arrest on April 8, 1995, Mascolo and Solomon withdrew approximately $ 370,500 from Gala's account by writing checks written to themselves and to cash. Hewlett Packard further contends that Gala's only assets at this time are the funds held by Fischbein Badillo and Fleming Roth.
C. The Retainer Agreements
1. Fischbein Badillo
a) The $ 500,000
The $ 500,000 was paid to Fischbein Badillo pursuant to a retainer agreement dated April 10, 1996. Fischbein Badillo has submitted a redacted copy of the agreement for the Court's in camera review. The agreement has been redacted to eliminate the names of the clients, and Fischbein Badillo has stated in its papers that, even though the money came from Gala's bank accounts, "[Hewlett Packard] assumes incorrectly the Fee was paid with Gala's funds." (Gala Mem. at 2).
According to Gala's attorneys, the agreement was redacted and submitted in camera "for the purpose of protecting communications between attorney and client and the individual clients' Fifth Amendment rights against self-incrimination." (Id. at 1 n.1).
The agreement describes the scope of representation as covering "any and all matters relating to the transactions of Gala Enterprises Inc. with Hewlett-Packard Inc. including all corporate, civil and criminal matters." It provides for a "retainer fee" of $ 500,000, which is described as "a fixed fee for legal services." It further states:
This fee has been set in consideration of the complexities of the matter, the possibility of multiple partners being involved[,] the fact that multiple jurisdictions and areas of the law will be involved and the fact, among others, that upon its execution a number of other matters scheduled to be handled by partners and associates assigned to this matter must be reassigned and or foregone.
The agreement clarifies that the $ 500,000 is for fees only and was not inclusive of disbursements, which were to be billed and reimbursed separately. The agreement also identified two Fischbein Badillo partners who were to be made "available to perform any legal services that arise during the next twelve months."
The agreement is silent as to the refundability of the $ 500,000 or any portion thereof.
b) The $ 270,000
The $ 270,000 was deposited into one of Fischbein Badillo's trust accounts on June 14, 1996. There apparently was no written agreement entered into between Fischbein Badillo and its clients specifically with respect to these funds, although the April 10, 1986 retainer agreement does provide for the clients to be responsible for disbursements. The retainer agreement did not contemplate payment of expenses in advance, however, as it provided that Fischbein Badillo would tender bills for expenses on a monthly basis, which bills were "due and payable upon receipt."
2. Fleming Roth
Fleming Roth, a New Jersey law firm, was retained "officially" on April 26, 1996 to represent Mascolo. It is not clear whether there was a written retainer agreement, but Fleming Roth has represented that the agreement provided for a "fixed fee" of $ 150,000, inclusive of expenses. Pursuant to the agreement, Fleming Roth was obliged to represent Mascolo both in the criminal grand jury investigation and in the resulting criminal case in the Eastern District of California. In addition, Fleming Roth has appeared on behalf of Mascolo in the instant case.
Fleming Roth has not indicated whether any provision was made in the agreement with respect to refundability of the $ 150,000 or any portion thereof. The firm does state that if its services were to be terminated, Mascolo would have a "potential future interest" in any portion of the money exceeding the quantum meruit value of the services rendered to that point.
Hewlett Packard contends that the three transfers of funds to the two law firms are subject to the attachment and other orders entered in this case because the funds represent monies that Gala "stole" from it. Hewlett Packard contends further that the monies are subject to attachment because they are funds in which Gala has an interest. In particular, it argues that both Fischbein Badillo's retainer agreement (providing for the $ 500,000 fee) and Fleming Roth's retainer agreement (providing for the $ 150,000 fee) are unenforceable because they are nonrefundable retainer fee agreements that violate the Code of Professional Responsibility. See In re Cooperman, 83 N.Y.2d 465, 611 N.Y.S.2d 465, 468-70, 633 N.E.2d 1069 (N.Y. 1994). Alternatively, Hewlett Packard argues that the three transfers are "fraudulent conveyances" that must be set aside.
I will discuss each of the three transfers separately. Before doing so, I will discuss the applicable legal standards governing attachments, attorney retainer agreements, and fraudulent conveyances.
A. Applicable Legal Standards
1. Standards for Attachment
Attachment serves "to provide security for the enforcement of any money judgment which may be recovered by the plaintiff in the main action." 29 N.Y. Jur. 2d, Creditors' Rights § 16 (1983). As a general matter, Fed. R. Civ. P. 64 permits attachment "under the circumstances and in the manner provided by the law of the state in which the district court is held." Under section 6202 of the New York Civil Practice Law and Rules, "any debt or property against which a money judgment may be enforced as provided in section 5201 is subject to attachment." CPLR § 6202 (McKinney 1980).
Section 5201(b) generally describes what property may be subject to enforcement of a judgment (and hence subject to attachment):
A money judgment may be enforced against any property which could be assigned or transferred, whether it consists of a present or future right or interest and whether or not it is vested, unless it is exempt from application to the satisfaction of the judgment.
CPLR 5201(b) (McKinney 1978).
Section 5201(a) addresses the specific situation of when a debt owed by a third party to the judgment debtor is subject to enforcement by a judgment creditor. Section 5201(a) provides in part:
A money judgment may be enforced against any debt, which is past due or which is yet to become due, certainly or upon demand of the judgment debtor . . . unless it is exempt from application to the satisfaction of the judgment. . . .