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January 8, 1998

GALA ENTERPRISES, INC., Plaintiff, against HEWLETT PACKARD COMPANY, Defendant. HEWLETT PACKARD COMPANY, Counterclaim-Plaintiff, - against - GALA ENTERPRISES, INC. and AL MASCOLO, Counterclaim-Defendants.

The opinion of the court was delivered by: CHIN


 Hewlett Packard Company ("Hewlett Packard") seeks an order holding that a $ 500,000 fee paid by Gala Enterprises, Inc. ("Gala") to the law firm Fischbein . Badillo . Wagner . Harding (the "Firm") was a fraudulent conveyance subject to attachment in this case. On May 28, 1997, after reviewing the parties' initial submissions, I determined that an evidentiary hearing was necessary because certain facts were unclear, including: who had actually paid the fee; for whom services were to be provided; whether $ 500,000 was fair consideration for the services contemplated; whether an additional advance payment of $ 270,000 for disbursements was reasonable; whether it made sense for the clients to retain to represent them in criminal proceedings in California a New York law firm that did not have a reputation for doing criminal defense work; whether the transfer of $ 770,000 to the Firm rendered Gala insolvent; and whether the transfer of those funds constituted a fraudulent conveyance. See Gala Enters. v. Hewlett Packard Co., 970 F. Supp. 212 (S.D.N.Y. 1997).

 I conducted an evidentiary hearing on July 15 and 21, 1997. The Firm and Hewlett Packard submitted letter briefs thereafter. Having heard the evidence presented at the hearing and having considered each side's arguments, I conclude that the payment of the $ 500,000 fee to the Firm did not constitute a fraudulent conveyance. Accordingly, Hewlett Packard's request for an order holding the fee subject to attachment is denied.

 The following constitute my findings of fact and conclusions of law.


 From the fall of 1995 through the spring of 1996, Gala sold computer parts to Hewlett Packard. These purchases were negotiated by Jason Turner, an employee of Hewlett Packard. In return for certain alleged kickbacks from Gala and its principals, Turner arranged for Hewlett Packard to pay Gala for parts that were grossly overpriced or never delivered at all. Between November 1995 and April 1996, Hewlett Packard paid some $ 2.1 million to Gala and it alleges in this lawsuit that it is entitled to a return of all or a substantial part of that money. Gala alleges that Hewlett Packard still owes it some $ 287,000.

 On April 8, 1996, Turner was arrested in California and charged with grand larceny for his involvement in these transactions. Abbott Solomon and Albert Mascolo, the officers and sole shareholders of Gala, and Gala itself were implicated.

 On April 9, 1996, Solomon called Bruce Lederman at the Firm for legal assistance. Solomon turned to Lederman because Lederman had been friends with the Solomon family for some 25 years. *fn1" Lederman was a litigator, but he did not have much experience in criminal law. Lederman called on his partner, Harold Ruvoldt, Jr., who did have substantial experience in criminal law, both as a prosecutor and as a defense lawyer. Ruvoldt joined the Firm in July 1995 precisely for the purpose of helping the Firm develop a white-collar criminal defense practice. *fn2"

 On April 9 and 10, 1996, members of the Firm had several internal discussions about taking on the matter and whether to charge a "flat fee" or bill on an "hourly" basis. Members of the firm also met with Solomon and Mascolo. On April 9 or 10, 1996, in discussions as to the resources available to Gala, Solomon, and Mascolo for attorneys' fees, Lederman learned that Gala had approximately $ 1.3 million in banking accounts. He did not ask Solomon and Mascolo what the source of those funds was, nor did they volunteer the information.

 According to Ruvoldt and Lederman, Solomon and Mascolo were adamant about wanting a flat fee arrangement. *fn3" There was some disagreement within the Firm in this respect. Lederman initially believed that a fixed fee of only some $ 350,000 to $ 400,000 would be sufficient. Lederman was comfortable with a flat fee arrangement, as the Firm had previously undertaken some civil matters on a flat fee basis. In addition, in his opinion there were certain advantages to flat fee arrangements:

Knowing what it is going to cost up front, if I can't manage the case better, then it becomes partly my fault. If the fee is decided up front, it is paid up front, you don't have to worry about clients being unhappy [that] the bill is too high, you don't have to chase them, the money is in the house . . . .

 (Tr. 317; see also Tr. 19). *fn4" Eventually, a $ 500,000 flat fee was proposed.

 Ruvoldt preferred an hourly arrangement. He believed the proposal of a $ 500,000 flat fee was insufficient to cover the time that would be required to litigate a criminal case in California as well as an eventual civil suit. He felt that $ 600,000 or $ 650,000 or more was necessary. Although he believed that $ 500,000 was insufficient to cover the amount of time that would be required, he eventually acquiesced because of the "deep personal relationship" between Lederman and Solomon. In addition, the case was an "interesting" one and the Firm was trying to develop a white-collar practice. (Tr. 171). Indeed, Ruvoldt viewed the case "almost like a loss leader." (Id.).

 Ruvoldt spoke with Solomon and Mascolo at the time, both separately and together, about the merits as well. Lederman also participated in some or all of these conversations. Both Solomon and Mascolo "vehemently denied" having committed any crimes and both denied any involvement in any kickback scheme. (Tr. 285; see Tr. 150, 154).

 It was apparent to Ruvoldt and perhaps others that a potential conflict existed as to the Firm's representation of both Solomon and Mascolo. Although Solomon and Mascolo agreed that the Firm should represent both initially, they and the Firm understood that in all likelihood separate counsel would eventually have to be obtained for Mascolo. Solomon, Mascolo, and the Firm further understood that in the event separate counsel were to be required, the fees for separate counsel would have to be paid for separately.

 In the end, the Firm agreed to take the matter on for a flat fee of $ 500,000, not including costs and disbursements. Solomon and Mascolo and the Firm executed a retainer agreement. (PX 1). The Firm agreed to represent Gala, Solomon, and Mascolo in any and all matters relating to the transactions between Gala and Hewlett Packard, including civil, criminal, and tax matters, for a flat fee, exclusive of costs, of $ ...

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