United States District Court, S.D. New York
June 13, 2005.
DOMINICA MANAGEMENT, INC., Plaintiff,
AMERICAN UNIVERSITY OF ANTIGUA COLLEGE OF MEDICINE, NEAL S. SIMON and SOL WELTMAN, Defendants.
The opinion of the court was delivered by: FRANK MAAS, Magistrate Judge
MEMORANDUM DECISION AND ORDER
This lawsuit involves two competing medical schools in the
Carribean: Ross University School of Medicine ("RU"), located on
the island of Dominica, and the American University of Antigua
College of Medicine ("AUA"), on the island of Antigua. The suit
was commenced by Dominica Management, Inc. ("DMI"), which
previously had a management contract to provide services to, and
now is also an indirect owner of, RU. The matter comes before the
Court on DMI's motion to disqualify Leonard A. Sclafani, Esq.,
and his firm, Polatsek & Sclafani ("P&S"), from any further
representation of one of the defendants in this case. For the
reasons set forth below, that motion is denied. I. Background
RU has been in operation for 27 years. (Aff. of John T. St.
James, sworn to Feb. __, 2005 ("SJ-I"), ¶ 5).*fn1 AUA was
formed in 2001, held its first classes in 2004, and can fairly be
described as an unwelcome competitor of RU. (See id. ¶ 9).
The complaint names three defendants: AUA; Neal S. Simon
("Simon"), the President of AUA, who previously served as
President and General Counsel of RU and as an employee of DMI;
and Sol Weltman ("Weltman"), whom the complaint describes as a
former computer programmer in the information technology
department of DMI. (Compl. ¶¶ 5, 24-28, 38-40).
The complaint alleges, inter alia, that AUA and Simon (a)
wilfully infringed RU's 2002 Student Handbook, which was
copyrighted by DMI; (b) misappropriated a proprietary DMI
computer system developed by Weltman and other DMI trade secrets;
(c) aided and abetted breaches of the duty of loyalty owed to DMI
by its employees; and (d) engaged in unfair competition. (Id.
¶¶ 47-85). Because the parties agreed to engage in limited
document and deposition discovery so that DMI could determine
whether there was a basis to seek a preliminary injunction, the
defendants have not answered and their counsel have yet to enter
formal notices of appearance in this case. The first witness deposed by AUA was Weltman. At the outset of
that deposition, Mr. Sclafani stated for the record that the full
scope of his engagement had yet to be determined, but that he was
representing Simon "[f]or the purposes of this deposition"
because there appeared to be a conflict between Simon and AUA.
(SJ-I, Ex. B at 9-10). The other attorneys attending the
deposition including AUA's counsel appear not to have voiced
any objection to this arrangement. (See id.). Thereafter,
however, DMI's counsel wrote to Mr. Sclafani to ask that he and
P&S withdraw from the case because they previously had
represented both RU and DMI. (Id. Ex. C). The letter from DMI's
attorney noted that Simon himself also had been "of counsel" to
P&S. (Id.). After Mr. Sclafani declined the request, (id. Ex.
D), DMI filed this motion to disqualify him and his firm from
further representation of Simon.
The motion is now fully submitted. (See Docket Nos. 11-17).
Because the parties agree as to the applicable legal principles,
Simon has not submitted a memorandum of law as part of his
II. Relevant Facts
Mr. Sclafani began to represent RU in the mid-1980s, at first
individually, and soon thereafter through P&S, his newly-formed
firm. (Affirm. of Leonard A. Sclafani, Esq., dated Mar. 4, 2005
(Sclafani Affirm."), ¶ 21). At the outset, the firm's work for RU
consisted of bringing collection actions, dealing with
landlord-tenant matters, and the prosecution and defense of suits
involving suppliers. (Id. ¶ 22). Over time, the firm added to its repertoire the defense of civil
rights actions brought by students, tax advice, and corporate
work. (Id. ¶ 23). This representation continued until the
spring of 2000. (Id. ¶ 24).
In 1997, P&S incorporated DMI in New York State at the request
of Dr. Robert Ross, the President of RU. (See id. ¶¶ 27-28;
SJ-I ¶¶ 24, 28 & Ex. E). Dr. Ross was also the sole shareholder
of DMI. (SJ-II at ¶ 6).
In 2000, Dr. Ross sold his controlling interest in both RU and
DMI to The Leeds Group ("Leeds"), an investment banking firm.
(Sclafani Affirm. ¶ 34; SJ-II ¶ 6). Some time prior to the sale,
Dr. Ross entered into a retainer agreement ("Retainer Agreement")
with P&S on behalf of RU.*fn2 (SJ-I Ex. G). The Retainer
Agreement provided for P&S to act as RU's "general outside
counsel and legal representative." (Id.). The Agreement further
provided for RU to pay P&S $10,000 per month over a five-year
period for legal services, and stated that it could be terminated
only for "cause," which was defined as "malpractice, fraud,
deceit or dishonesty," or the death or disability of Mr.
Sclafani. (Id.). The Agreement was prepared on P&S letterhead,
which discloses that, in addition to his other roles, Simon was
"of counsel" to P&S. (Id.).
Although Mr. Sclafani alleges that the sale of RU was expressly
made subject to the Retainer Agreement, The Leeds Group declined
to continue the retainer arrangement following its acquisition of RU. (Sclafani Affirm. ¶¶
43, 49). As a consequence, by early summer 2000, P&S had ceased
all representation of RU and DMI. (Sclafani Affirm. ¶ 52).
Indeed, the only potential legal matter that tied them together
was a dispute as to P&S's entitlement to recover the legal fees
that it contends remain unpaid pursuant to the Retainer
In 2003, Leeds sold RU and DMI to DeVry, Inc. (Id. ¶ 53;
SJ-II ¶ 10). It appears that Simon left RU after this second sale
occurred and began the steps necessary to form AUA. (Sclafani
Affirm. ¶¶ 55-56). Ross remained and was a DMI employee until
October 6, 2000, when he was terminated. (SJ-II at 17 & Ex. C).
The termination letter states that Ross was fired because of his
"dishonesty in submitting a fraudulent [Retainer A]greement to
[DMI] and asking [DMI] to honor that [A]greement." (Id. Ex. C).
As the Second Circuit has noted, disqualification motions
interfere with the ability of parties to choose their own
counsel, often are employed for tactical reasons, and, even in
the best of circumstances, cause delay. Bd. of Educ. v.
Nyquist, 590 F.2d 1241, 1246 (2d Cir. 1979); Gov't of India v.
Cook Indus., Inc., 569 F.2d 737, 739 (2d Cir. 1978).
Accordingly, a party moving for disqualification carries a "heavy
burden," Evans v. Artek Sys. Corp., 715 F.2d 788, 794 (2d Cir.
1983), and must satisfy a "high standard of proof." Gov't of India, 569 F.2d at 739. Although the
conclusion in any particular case "can be reached only after
painstaking analysis of the facts and precise application of
precedent," United States v. Standard Oil Co.,
136 F. Supp. 345, 367 (S.D.N.Y. 1955), the question ultimately is one of
preserving the public's trust in the "scrupulous administration
of justice and in the integrity of the bar." Hull v. Celanese
Corp., 513 F.2d 568, 572 (2d Cir. 1975). For that reason, any
lingering doubt must be resolved in favor of disqualification.
Id. at 571.
In this case, DMI contends that disqualification is mandated
because Mr. Sclafani and P&S, who represent Simon, previously had
served as counsel for RU and DMI. To prevail on such a claim, DMI
must make a three-part showing that:
(1) the movant is a former client of the adverse
(2) there is a substantial relationship between the
subject matter of the counsel's prior representation
of the moving party and the issues in the present
(3) the attorney whose disqualification is sought had
access to, or was likely to have had access to,
relevant privileged information in the course of his
prior representation of the client.
Evans, 715 F.2d at 791.
This "substantial relationship" test first was promulgated by
Judge Weinfeld in T.C. Theatre Corp. v. Warner Bros. Pictures,
Inc., 113 F. Supp. 265, 268 (S.D.N.Y. 1953). See Leber
Assocs., LLC v. Entm't Group Fund, Inc., No. 00 Civ. 3759 (MHD), 2001 WL 1568780, at *3 n. 5 (S.D.N.Y. Dec. 7, 2001). The test
gives effect to the proscriptions in Canons 4 and 5 of the New
York Code of Professional Responsibility against an attorney's
improper use of the confidences of a former client to the former
client's disadvantage. See Battagliola v. Nat'l Life Ins.
Co., No. 03 Civ. 8558 (AJP), 2005 WL 101353, at *7 (S.D.N.Y.
Jan. 19, 2005) (quoting Cleverly Minded Ltd. v. Anthony Sicari
Apparel Group Indus., Inc., No. 02 Civ. 4489 (FM), 2003 WL
161317, at *2 (S.D.N.Y. Jan. 23, 2003)); Leber Assocs., 2001 WL
1568780, at *3; N.Y. Code of Prof. Resp., Canons 4 & 5, D.R.
4-101(B) & 5-108(A). The test, however, does not mandate
disqualification. Rather, when the movant has made all three
required showings, the Court may, but is not required to,
exercise its discretion to disqualify opposing counsel.
Battagliola, 2005 WL 101353, at *16.
1. Former Client
As noted earlier, this suit is brought in the name of DMI, not
RU. In an effort to show that this plaintiff is not P&S's former
client, Mr. Sclafani has furnished the Court with a printout from
an information website which suggests that another DMI entity was
incorporated in New Jersey on September 10, 2002. (Sclafani
Affirm. ¶¶ 11-13 & Ex. A). The reliability of the website that
generated the report supplied by Mr. Sclafani has not been
established. Nevertheless, Mr. Sclafani alleges on the basis of
the printout that the duties previously performed by the company
that he incorporated are now being handled by the New Jersey
corporation, which never was his client. (Id.). Contrary to Mr. Sclafani's speculation, the complaint in this
action plainly states that the plaintiff is a New York
corporation which is headquartered in New Jersey. (Compl. ¶ 4).
Furthermore, DMI contends that what actually occurred in New
Jersey on September 10, 2002, is that DMI filed a certificate
authorizing it to do business in New Jersey as a foreign
corporation. (See SJ-II ¶ 12 & Ex. B). Even if one were to
assume that a New Jersey DMI corporation exists, Mr. Sclafani's
assertions regarding its alleged role in this case are amply
refuted by the reply affidavit of Mr. St. James, DMI's Vice
President and Chief Financial Officer, who confirms that the DMI
entity previously incorporated by P&S in New York State is the
plaintiff in this action by reason of its indirect ownership of
RU. (SJ-II ¶¶ 12-13).
It is undisputed that P&S previously represented the DMI entity
incorporated in New York in a lawsuit against that entity and RU
brought by RU's former registrar, who claimed that he was owed
pension benefits. See Friedenberg v. RU, Index No. 600133/01
(Sup.Ct. N.Y. County).*fn3 Accordingly, because the DMI
entity bringing the present claim was a former client of P&S, the
first element of the showing necessary to disqualify a party's
former counsel is satisfied.
P&S argues that any representation that it may have provided to
DMI did not extend beyond the defense of the Friedenberg
pension benefits suit. (Sclafani Affirm. ¶¶ 32-33). To satisfy
the first element of the Artek test, however, a party need not demonstrate that an ongoing attorney-client relationship was
formed; rather, the question is "whether there exist sufficient
aspects of an attorney-client relationship for purposes of
triggering inquiry into the potential conflict." Moss v. Moss
Tubes, Inc., No. 96 Civ. 1407, 1998 WL 641362, at *5 (N.D.N.Y.
Sept. 9, 1998) (quoting Glueck v. Jonathan Logan, Inc.,
653 F.2d 746, 749 (2d Cir. 1981) (internal quotation marks omitted)).
For this reason, courts have found a sufficient relationship when
a law firm performs services for the alter ego of its former
client. See, e.g., Guerrilla Girls, Inc. v. Kaz, No. 03 Civ.
4619 (LLS), 2004 WL 2238510, at * 3 (S.D.N.Y. Oct. 4, 2004)
(attorney's representation of unincorporated association deemed
"tantamount to . . . representation of each of its members");
Moss, 1998 WL 641362, at *5 (finding "sufficient aspects of an
attorney-client relationship" where there was a "unity of
interest" between the plaintiff and defendant); Hartford
Accident & Indem. Co. v. RJR Nabisco, Inc., 721 F. Supp. 534,
538-40 (S.D.N.Y. 1989) (law firm deemed to have represented
defendant based on prior representation of defendant's subsidiary
during which defendant played an active role).
In this case, although DMI was created to provide
"administrative services for RU in the United States," the
relationship between the two entities obviously was and is close.
Thus, Dr. Ross, who was the owner of RU, engaged P&S to form DMI.
(SJ-II ¶ 3; Sclafani Affirm. ¶ 6). Following its formation, Dr.
Ross also controlled both DMI and RU. (Affirmation of Neal S.
Simon, dated March 4, 2005, ¶ 3). Moreover, the relationship
between RU and DMI was spelled out in considerable detail in an Administrative Services Agreement, dated November 27, 1997, which
Dr. Ross signed in his capacity as Chairman of DMI. (SJ-I ¶ 26,
Ex. F). The Agreement provided, among other things, that DMI
shall arrange for the provision of professional assistance to
[RU] through accountants, attorneys, and other advisors. (SJ-I
Ex. F, § 1.2.10). Pursuant to the Agreement, DMI also was
assigned the responsibility of making payments to "trade
accounts" and for "all other United States obligations incurred
by [RU]." (Id. § 1.2.8(a)). Thus, even if P&S did not work
directly for DMI in connection with other litigations against RU
in the United States, DMI presumably played a role in the
retention of other outside counsel representing RU and the
payment of their fees.
In these circumstances, although P&S evidently performed most
of its services for RU, DMI has established indicia of an
attorney-client relationship sufficient for the Court to inquire
further into the alleged conflict of interest.
2. Substantial Relationship
In addition to the Friedenberg pension suit, P&S defended two
other lawsuits for RU which Mr. Sclafani has specifically
identified. In Babiker v. RU, P&S defended a suit brought pro
se by a former RU student who contended that the decision to
expel him was discriminatory. RU was granted summary judgment in
that case. See Babiker v. RU, No. 98 Civ. 1429 (THK), 2000 WL
666342 (S.D.N.Y. May 19, 2000). In the second case, New York v.
RU, No. L-00138-99 (Sup.Ct. Albany County), P&S represented RU
in connection with charges that it had failed to comply with New
York State's lobbying statutes. (Sclafani Affirm. ¶ 41). Mr. Sclafani
also indicates that in the early years of his representation of
RU, he and his firm handled suits concerning unpaid tuition,
landlord-tenant matters, and suits for or against suppliers.
(Id. ¶ 22). Near the end of its representation of RU, P&S also
provided an opinion letter to Price Waterhouse Coopers LLP in
connection with Dr. Ross's sale of RU to Leeds. (Id. ¶ 42;
SJ-II Ex. H at 2).
When a disqualification motion is based, as here, on counsel's
prior representation of his client's adversary in a lawsuit, the
movant must show that the substantial relationship between the
issues in the past and present cases is "patently clear." Gov't
of India, 569 F.2d at 739-40 (quoting Silver Chrysler Plymouth,
Inc. v. Chrysler Motors Corp., 518 F.2d 751, 754-56 (S.D.N.Y.
1975)). This requires proof that the issues involved are
"identical" or "essentially the same." Id. at 740. As Mr.
Sclafani correctly notes, however, there is no clear identity of
issues between this case and the cases in which he previously
defended RU and DMI. Moreover, to the extent that Mr. Sclafani
became aware of DMI's general litigation strategies during his
prior representation of RU/DMI in lawsuits, it does not appear
that he will have any special insight into how DMI will prosecute
this case since there have been at least two changes in the
ownership of RU/DMI in the years since P&S last represented those
entities. There also have been management changes, including
Simon's departure and the termination of Dr. Ross. I therefore find that the fact that Mr. Sclafani and his firm
previously represented RU/DMI in connection with the lawsuits
discussed above is not enough to meet DMI's heavy burden under
the substantial relationship test.
In addition to the prosecution and defense of lawsuits, P&S
also provided corporate and tax advice to RU/DMI. As Judge
Leisure has noted, determining the substantiality of the
relationship between two engagements of counsel "is more
difficult . . . when the former representation entailed not
litigation but general background legal work." United States
Football League v. Nat'l Football League, 605 F. Supp. 1448,
1459 (S.D.N.Y. 1985). However, even in that context, "[i]t is the
congruence of factual matters, rather than areas of law, that
establishes a substantial relationship between representations
for disqualification purposes." Id. at 1460 n. 26 (emphasis in
original). To prevail on the basis of such a former relationship,
a movant therefore must show that "the later litigation puts in
issue the entire background of the movant." Id. at 1459. "Thus,
knowledge of a former client's financial and business background
is not in itself a basis for disqualification if the client's
background is not in issue in the later litigation." Id. at
In its complaint in this case, DMI alleges four specific
wrongs. Of these, the only one that conceivably relates to the
way in which RU/DMI generally conducts its business is the claim
that AUA sought to misappropriate DMI's trade secrets. With
respect to that claim, DMI contends that Weltman developed a
proprietary computer system for DMI, while he was its employee, and that AUA
improperly sought to purchase a purloined copy of that system
from him. (See Compl. ¶¶ 9-10, 36-45). However, Mr. Sclafani
and his firm apparently had no involvement with any issues
related to DMI's computer system, which may, in fact, have been
developed after they ceased to represent RU.*fn4 (Sclafani
Affirm. ¶¶ 69-73). DMI therefore has not shown that this suit
puts in issue the "entire background" of DMI or RU during the
period that Mr. Sclafani and his firm were serving as RU's
Accordingly, notwithstanding the extensive services that P&S
evidently provided to RU/DMI over the years, DMI has not shown,
as it must, that there is a substantial relationship between the
subject matter of this lawsuit and that prior representation.
3. Access to Privileged Information
The last element of the substantial relationship test relates
to counsel's access to privileged information. Suffice it to say,
DMI alleges, and Mr. Sclafani denies, that he and his firm
received privileged information relevant to this case during the
course of their prior representation of RU/DMI. There is no need
to resolve this issue because DMI's motion to disqualify its
former counsel fails at the second step of the "substantial
relationship" analysis. It nevertheless bears mention that the
disqualification of Mr. Sclafani and P&S, even if granted, would
likely be a pyrrhic victory. Although one of DMI's claims in this suit relates to an alleged breach of its
employees' duty of loyalty, there has been no showing that Simon
would be restricted in any way from disclosing to successor
counsel the detailed information concerning RU and DMI that DMI
alleges was furnished to Mr. Sclafani and P&S during the period
that they represented RU/DMI.*fn5 Circumstances such as
these raise the concern that the disqualification motion in this
case has been interposed purely for tactical purposes.
For the foregoing reasons, the motion filed by plaintiff DMI to
disqualify Mr. Sclafani and his firm from further service as
counsel for defendant Neal S. Simon (Docket No. 11) is denied.
Additionally, because this case is assigned to me for general
pretrial supervision and has been on hold for several months, the
Court will conduct a further pretrial conference in Courtroom 11C
on July 23, 2005, at 10 a.m. Counsel (and Mr. Weltman) are directed to confer prior to the conference in an
attempt to agree on a proposed discovery schedule.