The opinion of the court was delivered by: Charles J. Siragusa United States District Judge
This is an action brought pursuant to the Perishable Agricultural Commodities Act ("PACA"), 7 U.S.C. § 499a et seq. Now before the Court are the following applications: 1) a motion (Docket No. [#29]) by Dibble & Miller to vacate or modify a Stipulation and Order [#3] of settlement in this action dated July 15, 2008, pursuant to Federal Rule of Civil Procedure ("FRCP") 60(b), and for an accounting; 2) a motion [#61] by David Shults and Barbara L.S. Finch to intervene in this action; 3) a motion [#67] by the law firm of Lacy Katzen to intervene in this action and to obtain payment of money held in the Court's registry; and 4) a motion [#74] by Cambridge Farms, Inc., H.C. Schmieding Produce, Inc., and E.K. Bare & Sons, Inc., for an order directing payment to them of money held in the Court's registry. For reasons discussed below, the motions to intervene are granted, Dibble & Miller's motion to vacate the Stipulation and Order is granted, and the motions for payment are denied.
This case has an unusually complicated history, which begins in 2003. Prior to 2003, Thomas Case ("Case") and his brother Antone Case ("Antone") were partners in the Case Brothers Partnership, a potato farming operation. In 2003, the brothers acrimoniously dissolved the partnership, and Case sued Antone in New York State Supreme Court, Livingston County, in an action entitled Thomas V. Case v. Antone R. Case, et al ., Index No. 297-2003 ("the Case Brothers litigation"). The Honorable Gerard Alonzo, Livingston County Court Judge, appointed John J. Considine, Jr., Esq. ("Considine") as receiver of the partnership's property.
Case was initially represented in the Case Brothers litigation by the law firm of Phillips Lytle LLP ("Phillips Lytle"). In March 2004, Case also retained the law firm of Dibble & Miller ("Dibble & Miller") to handle certain tax matters before the Internal Revenue Service ("IRS"). According to Case, he paid Dibble & Miller in full for its handling of those tax matters, which were separate from the Case Brothers state-court litigation.
While the Case Brothers litigation was pending, Case and his wife, Nancy Case, formed a corporation entitled TNC Packing Corporation ("TNC"), a potato packaging company. Case also formed another company, Buffalo Sixty Three, LLC ("Buffalo 63"). In connection with this new potato-packaging venture, TNC and Buffalo 63 purchased real property and equipment. *fn1 To obtain the necessary financing, Case borrowed approximately $260,000.00 from David Shults, Esq. ("Shults"), an attorney in Hornell, New York, and Shults's sister, Barbara L.S. Finch ("Finch"). Case provided various security to Shults and Finch for the loan. For example, on June 27, 2005, Case executed security agreements, giving Shults and Finch a security interest in all of the accounts, inventory, and equipment owned by Case, TNC, and Buffalo 63. Further, on November 9, 2005, Case gave Shults and Finch a mortgage on real property owned by Buffalo 63.
TNC soon ran into problems with creditors. Between December 12, 2005 and January 26, 2006, TNC purchased $31,186.57 worth of produce from Eastern Potato Dealers, Inc. ("Eastern Potato") on credit, but then failed to pay. TNC also failed to pay at least three other agricultural producers for their products: Cambridge Farms, Inc. ("Cambridge"), H.C. Schmieding Produce, Inc. ("Schmieding"), and E.K. Bare & Sons, Inc. ("Bare"). On the present record, the exact date when TNC incurred these debts to Cambridge, Schmieding, and Bare is unclear.
Because of various financial problems involving TNC, Case retained David MacKnight ("MacKnight"), of the law firm of Lacy Katzen LLP ("Lacy Katzen") to represent him, TNC, and Buffalo 63, in connection with these debts. MacKnight had some knowledge of PACA, and believed that the assets of Case, TNC, and Buffalo 63, were subject to PACA claims. MacKnight was also aware that Case had an interest in the Case Brothers litigation, which interest MacKnight did not believe was subject to PACA claims, since the partnership was dissolved prior to TNC being formed. MacKnight believed that TNC could be profitable if he could keep the creditors at bay, including Shults. In that regard, Shults had threatened to "pull the plug" on TNC and Buffalo 63, "because of his perception that TNC's business failure was inevitable." MacKnight Aff. ¶ 15. MacKnight therefore decided that "the initial step" in saving TNC was to urge Shults and Finch not to pursue foreclosure on their security interests. Id . at ¶ 17. In that regard, MacKnight informed Shults that Shults' and Finch's security interests might not be too secure, since the property of Case, TNC and Buffalo 63 was subject to PACA claims, which would have priority. MacKnight advised Shults that he would be better off taking a security interest in Case's share of the Case Brother's litigation proceeds, since such money was not subject to PACA claims. Subsequently, on February 2, 2006, Case gave Shults and Finch an Assignment of Interest, covering all of Case's anticipated share of the proceeds from the Case Brothers litigation. In that regard, Case assigned to Shults and Finch,
1. All the right, title, interest in and to all proceeds from the dissolution of Case Bros. partnership.
2. All the right, title, interest in and to all proceeds in an action entitled Case v. Case , Livingston County Index Number: 297-2003.
3. All the right, title, interest in and all proceeds received
from John J. Considine, Jr., Receiver appointed in the action entitled
Case v. Case , Livingston County Index Number:
4. All the right, title and interest in and to Case Bros. Partnership.
Shults Affidavit, ¶ 5. On February 9, 2006, Shults filed this assignment with the Livingston County Clerk. In addition to getting Shults and Finch to "stand still," *fn2 MacKnight also urged TNC's PACA creditors not to file PACA claims against TNC, since doing so could have resulted in the loss of TNC's license to do business. *fn3
Meanwhile, Phillips Lytle continued to represent Case in the Case Brothers litigation until March 2006, when the firm moved to withdraw from representing Case. *fn4
On May 3, 2006, the Honorable Gail A. Donofrio, Acting Supreme Court Justice, entered an Order in the Case Brothers litigation, granting Phillips Lytle's motion to withdraw as counsel, and granting Phillips Lytle a charging lien on any proceeds of the action, stating in pertinent part:
Ordered, that Phillips Lytle LLP be granted a charging lien on the proceeds of any recovery, judgment or settlement pending the outcome of this action, provided that the aforesaid lien of Phillips Lytle LLP shall be second and subordinate to the charging lien and the retaining lien of any new counsel secured by Plaintiff [Case]; and
Ordered that compensation to Phillips Lytle LLP for legal services, costs, and disbursements shall be made upon application and hearing before this court upon the conclusion of this action by judgment, settlement or otherwise and shall, subject to the subordination required by paragraph 3 hereof, be paid solely out of the proceeds of any recovery, judgment or settlement due Plaintiff, if any.
Affidavit of David A. Shults, Exhibit G. Case subsequently retained Dibble & Miller to replace Phillips Lytle as his attorneys in the Case Brothers litigation.
Subsequently, TNC's business failed, despite MacKnight's efforts to rehabilitate the business and see that creditors were paid. Sometime prior to November 2006, Eastern Potato filed a PACA complaint against TNC with the U.S. Secretary of Agriculture. On November 14, 2006, the Secretary of Agriculture issued an Order awarding Eastern Potato "$31,186.57 plus interest at the rate of 5.03% per annum from March 1, 2006, plus $300.00." Complaint ¶ 12. However, TNC did not pay Eastern Potato.
At around this time, MacKnight and Case were apparently interested in finding a way to pay the various PACA creditors. Apart from the assets of TNC and Buffalo 63, though, the only asset that Case had to pay such creditors was his expected share of the Case Brothers partnership litigation. As indicated above, however, MacKnight had already concluded that such property was not PACA trust property. Additionally, Case had already assigned his interest in that litigation to Shults and Finch. Nonetheless, MacKnight had Case more carefully examine his financial records, to determine whether any TNC money could be connected to Case's expected share of the Case Brothers litigation. In that regard, MacKnight believed, and still maintains, that if any TNC money could be connected to the Case Brothers partnership property, then all of the partnership property would be subject to PACA claims. *fn5 Following Case's examination of his records, he determined that he had used $25,250.00 of TNC money in connection with the Case Brothers litigation. Specifically, Case paid Dibble & Miller a $25,000.00 retainer and $250.00 for disbursements, using TNC funds. Such money was never commingled with the partnership property in Considine's custody, but was paid directly to Dibble & Miller. Upon learning that Case had used $25,250.00 of TNC property to pay Dibble & Miller in connection with the Case Brothers litigation, MacKnight apparently convinced Shults that all of Case's expected share of the partnership assets, which Case had assigned to Shults and Finch, was subject to superior PACA claims.
In early May 2008, the trial in the Case Brothers litigation began before Judge Alonzo. During the trial, the relationship between Case and Dibble & Miller turned sour, though they disagree as to why that happened. Case contends, for example, that Dibble & Miller forced him to agree to an increase in the firm's hourly rate, and then browbeat him into accepting an unfavorable settlement. Norton Reply Aff., Exhibit K. Case also maintains that Dibble & Miller failed to include a non-disparagement clause in the proposed settlement order, contrary to his wishes. On the other hand, Dibble & Miller contends that Case had an unrealistic sense of the value of his claim, inasmuch as Case had taken far more money from the partnership than Antone during the period prior to the dissolution. Dibble & Miller further contends that Case unfairly demanded that the firm reduce its fee. In any event, shortly after the trial began Case agreed to settle the case against his brother. The actual share that Case would receive, however, was subject to Considine submitting his accounting for the Court's review.*fn6
On June 26, 2008, Eastern Potato commenced this PACA action against TNC, Case, and Case's wife, Nancy Case. The Complaint alleged that Case and Mrs. Case were the principals of TNC. Further, the Complaint recited the fact that between December 12, 2005 and January 26, 2006, Eastern Potato sold and delivered $31,186.57 worth of produce to TNC, for which TNC later refused to pay, and that on November 14, 2006, the Secretary of Agriculture issued an Order awarding Eastern Potato "$31,186.57 plus interest at the rate of 5.03% per annum from March 1, 2006, plus $300.00." Complaint ¶ 12. The attorney for Eastern Potato was Bruce Levinson, Esq. ("Levinson").
By the time this action commenced, Case, MacKnight, and Shults had apparently decided to liquidate TNC and Buffalo 63. On June 28, 2006, an auction was conducted to sell personal property belonging to Case, Mrs. Case, and TNC. According to MacKnight, the auction resulted in proceeds of approximately one hundred twenty thousand dollars ($120,000.00). From these auction proceeds, MacKnight and Lacy Katzen were paid eight thousand dollars ($8,000.00) for legal services.
Around this same time, MacKnight, Shults, and Levinson began exploring a global settlement of the various claims involving Case and TNC. In this regard, as discussed above, MacKnight and Shults were working under at least two assumptions:
1) that all of Case's expected share from the Case Brothers litigation was subject to PACA claims; and 2) that such PACA claims would have priority over Shults' and Finch's security interests. Shults informed Levinson of the loans that Shults and Finch had made to Case, and of the security interests that Case had given to secure the debt. According to MacKnight, Levinson demanded, as part of a settlement, that the Case Brothers partnership assets be designated as a PACA trust asset. MacKnight Aff. ¶ 32. *fn7
According to Shults, "Levinson was receptive to a settlement as were the defendants and as a result, we entered into a Stipulation drafted by Mr. Levinson which provided that [Finch] and I would recover 78% of the proceeds of the partnership dissolution and the [expected] sale of real property [owned by Buffalo 63] and equipment that had been purchased by Mr. Case with the funds borrowed from [Finch] and me. Mr. Levinson's clients would take 22%." Shults Aff. at ¶ 10. By that point, Levinson's clients included Eastern Potato, Cambridge, Schmieding, and Bare, though only Eastern Potato was ...