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FEINGBERG v. KATZ

February 3, 2003

HERBERT FEINGBERG, AS ASSIGNEE OF I.A. ALLIANCE CORP., F/K/A APPEL CORPORATION AS ASSIGNEE OF THE CLAIMS OF CREDITORS OF I. APPEL CORPORATION, PLAINTIFF
v.
NORMAN KATZ AND STEPHEN KATZ, DEFENDANTS.



The opinion of the court was delivered by: Charles S. Haight, Jr., United States Senior District Judge

MEMORANDUM OPINION AND ORDER
This long-standing feud between plaintiff Herbert Feinberg and his former business partner, Norman Katz ("Norman"), has spawned a veritable frenzy of litigation embodied in three consolidated cases that pit Feinberg against Norman, Norman's son Stephen Katz ("Stephen"), and their business associate Jose Peschard. The background of these disputes is described in the Court's opinion in a related case filed by Norman Katz to confirm an arbitration award issued in his favor against Feinberg. See Katz v. Feinberg, 167 F. Supp.2d 556 (S.D.N.Y. 2001), aff'd, 290 F.3d 95 (2d Cir. 2002) (the "Arbitration Opinion"),*fn1 familiarity with which is assumed. This case is currently before the Court on a motion of plaintiff Feinberg to disqualify Alvin B. Davis, Esq. ("Davis"), counsel to defendants Norman and Stephen Katz (collectively "the Katzes").

Procedural History

A brief recitation of the related matters currently before this Court and the motions pending within them helps understand the nature of the plaintiff's present motion. A complaint was originally filed under docket number 99 Civ. 45 by Feinberg and his company, I. Appel Corporation ("I. Appel"), now known as I.A. Alliance Corp. ("Alliance"), on January 5, 1999 against Stephen Katz. The complaint alleged common law fraud, arising out of Stephen's purported misappropriation of Alliance's assets, and falsification of its financial statements. Feinberg and Alliance filed another complaint on January 31, 2000 under docket number 00 Civ. 17 against Norman, Stephen, and Jose Peschard, alleging breach of their fiduciary duties to Alliance and misappropriation Alliance's assets and business opportunities by scheming to take over one of Alliance's Mexican subsidiaries. The third complaint was filed by Alliance as assignee of the claims of I. Appel's bankruptcy creditors under docket number 01 Civ. 2739. It asserts breach of fiduciary duty and fraud against the Katzes for allegedly obscuring Alliance's true financial condition from its creditors.

The Court's Arbitration Opinion prompted the plaintiffs to amend all three complaints and delete claims that would have been barred by collateral estoppel. As a result, on October 5, 2001, the first complaint (99 Civ. 45) was amended to delete certain claims and incorporate some of the claims in 00 Civ. 17. Because the complaint in 00 Civ. 17 was so incorporated, that second complaint is now essentially obsolete. The Amended Complaint in 99 Civ. 45 survived, in part, a motion to dismiss, yielding a Second Amended Complaint that prompted yet another motion to dismiss currently pending before this Court.*fn2

The third complaint, 01 Civ. 2739, was amended on March 19, 2002 and now advances fraud, RICO and breach of fiduciary duty claims by Feinberg and Alliance as assignees of the claims of I. Appel's creditors. Defendants brought a motion to dismiss the Amended Complaint in 01 Civ. 2739, and herein lies the focus of the procedural labyrinth described thus far.*fn3 Plaintiffs contend that because the motion to dismiss argues in part that the Arbitration Award precludes litigation of certain claims, Davis, who served as a party arbitrator in the tripartite panel that produced the Arbitration Award, should be disqualified from representing the party who selected him.*fn4

The Court is presented with what may be a question of first impression: whether an attorney who served as an arbitrator appointed by a party on a tripartite arbitration panel is the arbitral process has been completed, to serve as counsel in a related matter for that party.

Factual Background

On July 1, 1996 Norman sold his interest in I. Appel & Co., a women's lingerie company, to Feinberg pursuant to a written purchase agreement (the "Purchase Agreement"). Disputes arose between the two over the calculation of the purchase price, the valuation of the company at that time, and allegedly fraudulent statements that induced Feinberg to buy. Memorandum in Opposition to the Motion to Disqualify Alvin B. Davis ("Opposition Brief") at 2-3. The Purchase Agreement required "all disputes" between the parties to be arbitrated, and in relevant part, the arbitration provision stated:

Arbitration may be commenced at any time by either party hereto giving written notice to the other party. . . . One of the arbitrators shall be selected by the Seller [Norman], one shall be selected by the Buyer [Feinberg] and the third shall be selected by the other two arbitrators. If such arbitrators cannot agree on the third arbitrator, the selection shall be made by the rules of and from the panels of arbitrators maintained by the [American Arbitration] Association. . . . Each party shall pay its own expenses of arbitration and the expenses of the arbitrator appointed by such party; the expenses of the third arbitrator shall be equally shared.
Declaration of Alvin Davis (August 26, 2002) ("Davis Decl."), Ex. A, Purchase Agreement ¶ 14(g).

As per this provision, Norman chose Alvin B. Davis, a partner at the Miami law firm of Steel Hector & Davis, as his arbitrator, and Feinberg selected Jerome S. Boros, an attorney at Robinson Silverman Pearce Aronsohn & Merman LLP in New York. Dana H. Freyer, a member of Skadden Arps Slate Meagher & Flom, was selected as the third arbitrator. Opposition Brief at 3. Davis and Boros questioned witnesses during hearing sessions and acted as advocates on behalf of the parties that had chosen them. Davis Del. ¶ 3. Neutral arbitrator Freyer stated in a declaration that she "understood throughout the Arbitration that Messrs. Davis and Boros were partisan arbitrators who did not purport to act as neutrals." Declaration of Dana H. Freyer (August 21, 2002) ("Freyer Del.") ¶ 2. Furthermore, Freyer makes clear that she "was the principal author of the Panel's Award;" she completed the Award draft, sent it to the two other arbitrators for comments, and incorporated their comments into the final version of the Award.*fn5 Id. ¶ 3.

Once the arbitration was complete, Davis began to represent the Katzes in their continued disputes with Feinberg. As noted supra, Feinberg commenced three new lawsuits against the Katzes in federal court, and additionally commenced a lawsuit against Norman in state court, as well as a second arbitration against Norman before the AAA. Davis Decl. ¶ 6. Davis is representing or has represented the Katzes in (1) certain settlement discussions with Feinberg and his counsel, (2) the new arbitration before the AAA, (3) the federal lawsuit docketed under 00 Civ. 17, which as noted supra is functionally obsolete, and (4) the above-captioned action. Id. Feinberg made no objection to Davis's long representation of the Katzes until the filing of this motion on August 1, 2002.

To rebut the allegation that the late filing of such an objection amounts to nothing more than a tactical maneuver, Feinberg contends that the ethical violation of DR 9-101 "was not clear until June 2002, when Mr. Davis, in papers filed on behalf of the Katz Defendants, began arguing the applicability of the 1999 Arbitration Award. . . . The unseemliness of permitting Mr. Davis to argue the collateral estoppel effect of his own Award was of sufficient concern that the plaintiff felt it was appropriate to take action." Reply Brief at 2.

Discussion

"Whether to disqualify counsel is a matter subject to the trial court's sound discretion." Blue Cross and Blue Shield of New Jersey, et al. v. Philip Morris, Inc., 53 F. Supp.2d 338, 342 (E.D.N.Y. 1999) (citing among others Cresswell v. Sullivan & Cromwell, 922 F.2d 60, 72 (2d Cir. 1990)). However, there is a general aversion to motions to disqualify in the Second Circuit. Felix v. Balkin et al., 49 F. Supp.2d 260, 267 (S.D.N.Y. 1999); Stratavest Ltd. v. Rogers, 903 F. Supp. 663, 666 (S.D.N.Y. 1995); Bennet v. Silvershein Associations v. Furman, 776 F. Supp. 800, 802 (S.D.N.Y. 1991); Blue Cross and Blue Shield, 53 F. Supp.2d at 346; Society for Good Will to Retarded Children, Inc. v. Carey, 446 F. Supp. 722, 724 (E.D.N.Y. 1979).

This reluctance to disqualify results from two factors. First, disqualification separates the client from his counsel of choice, Blue Cross and Blue Shield, 53 F. Supp.2d at 346 (citing Board of Education of the City of New York v. Nyquist, 590 F.2d 1241, 1246 (2d Cir. 1979)). Second, motions to disqualify "are often tactically motivated; they cause delay and add expense; they disrupt attorney-client relationships sometimes of long standing; in short, they tend to derail the efficient progress of litigation," Felix, 49 F. Supp.2d at 267 (citing Evans v. Artek Systems Corp., 715 F.2d 788, 791 (2d Cir. 1983)). Thus parties moving for disqualification of counsel carry a heavy burden and must satisfy a high standard of proof to succeed on the motion. Id. However, the Second Circuit counsels that any doubts that exist "should be resolved in favor of disqualification." Cheng v. GAF Corp., 631 F.2d 1052, 1059 (2d Cir. 1980), vacated on other grounds, 450 U.S. 903 (1981). Reading these admonitions together, it seems a "balance must be struck between being `solicitous of a client's right freely to choose his counsel, ' and protecting the `need to maintain the highest standards of the profession' and the `integrity of the adversary process.'" Felix, 49 F. Supp.2d at 267 (citing Evans, 715 F.2d at 782).

It is against this legal backdrop that Feinberg advances three arguments in favor of disqualifying Davis. Plaintiff cites the New York Code of Profession Responsibility ("New York Code"), EC 5-20 ("EC 5-20"), which prohibits an attorney who has acted as an "impartial arbitrator or mediator" from representing any of the parties involved in that dispute. Memorandum in Support of Motion to Disqualify ("Support Brief") at 6. Feinberg also calls upon the New York Code, Disciplinary Rule ยง 1200.45 ("DR 9-101(A)"), which states that "[a] lawyer shall not accept private employment in a matter upon the merits of which the lawyer has acted in a judicial capacity." Support Brief at 5. Finally, he relies most heavily on the injunction against the appearance of impropriety embodied in Canon 9 of the New York Code, and as articulated in General ...


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