Opinion
15575/11
12-12-2011
New England Securities Corporation, Plaintiff, v. Douglas Stone, Esq., Michael S. Arteca, Michael F. Vetere, Nichohas J. Timpone, and Giovanna R. Aquilino, Defendants.
Plaintiff Attorney: Proskauer Rose, LLP, One Newark Center, Newark NJ 07102 The following papers numbered 1 to 11 read herein: Papers Numbered Affidavits (Affirmations) Annexed1-5 Opposing Affidavits (Affirmations)6-9 Reply Affidavits (Affirmations) Affidavit (Affirmation) Other PapersMemoranda of Law10-11 Plaintiff Attorney: Proskauer Rose, LLP. Defendant Attorney: Douglas Stone.
Plaintiff Attorney: Proskauer Rose, LLP, One Newark Center, Newark NJ 07102 The following papers numbered 1 to 11 read herein: Papers Numbered Affidavits (Affirmations) Annexed1-5 Opposing Affidavits (Affirmations)6-9 Reply Affidavits (Affirmations) Affidavit (Affirmation) Other PapersMemoranda of Law10-11
Plaintiff Attorney: Proskauer Rose, LLP.
Defendant Attorney: Douglas Stone.
David Schmidt, J.
The following papers numbered 1 to 11 read herein:
Papers Numbered
Notice of Motion/Order to Show Cause/
Petition/Cross Motion and
Affidavits (Affirmations) Annexed1-5
Opposing Affidavits (Affirmations)6-9
Reply Affidavits (Affirmations)
Affidavit (Affirmation)
Other PapersMemoranda of Law10-11
Upon the foregoing papers, in this special proceeding pursuant to CPLR 7502 (c), petitioner New England Securities Corporation (NES) moves, by order to show cause, for a preliminary injunction enjoining respondent Douglas Stone, Esq. (Stone), who is the attorney for respondents Michael S. Arteca (Arteca), Michael F. Vetere (Vetere), Nicholas J. Timpone (Timpone), and Giovanna R. Auqilino (Aquilino) in the arbitration between the parties pending before the Financial Industry Regulatory Authority (FINRA), designated as Arbitration Case No. 11-597 (the Arbitration), from: (1) participating in the selection of members of the panel of arbitrators to be appointed in the Arbitration (2) communicating with and/or appearing before the arbitrators (after they have been appointed in the Arbitration) prior to the hearing, (3) representing any respondent before the arbitration panel as counsel of record, and (4) appearing at the Arbitration hearing in any capacity other than as a fact witness. NES, by its motion, also seeks to preliminarily enjoin Arteca, Vetere, Timpone, and Aquilino from employing, utilizing, or retaining Stone in any capacity for the above purposes with respect to the Arbitration. In essence, NES, by its motion, seeks to disqualify Stone as Arteca, Vetere, Timpone, and Aquilino's attorney in the Arbitration pursuant to rule 3.7 (a) and /or rule 1.7 (a) (2) of the Rules of Professional Conduct (22 NYCRR Part 1200.0).
NES is the registered broker dealer for the New England Life Insurance Company (collectively, the Firm), and is engaged in the business of selling insurance and insurance related products. Arteca, Vetere, Timpone, and Aquilino were formerly affiliated with the Firm. Arteca became affiliated with the Firm on or about January 6, 2003 and Vetere became affiliated with the Firm on or about June 1, 2009. On July 19, 2010, NES terminated Arteca's affiliation with the Firm due to an alleged antisemitic rant. On August 20, 2010, Vetere resigned from the Firm, following NES's investigation of him concerning a potential violation of Firm policy and Vetere's alleged admission of a violation of such policy.
Both Arteca and Vetere retained Stone as their legal counsel upon their respective separations from NES. Stone then contacted Michele Kayne, Esq. (Kayne), the Firm's in-house counsel, in order to discuss the language and characterizations to be used in the "Uniform Termination Notice for Securities Industry Registration" (Form U-5). Broker-dealers, investment advisers, or issuers of securities must use this Form U-5 to terminate the registration of an individual in the appropriate jurisdictions and/or self-regulatory organizations; it is required to be filed with FINRA to provide a written explanation where the reason for termination or separation of the individual is anything other than "voluntary" or "deceased."
According to Kayne (in her sworn affidavits and as evidenced by the submissions of copies of e-mails), she and Stone engaged in extensive back and forth communications via telephone and e-mails, spanning nearly two months between July 20 and September 9, 2010, concerning the language to appear in Arteca and Vetere's respective Form U-5s. While Kayne asserts that she made it clear to Stone that the Firm did not negotiate Form U-5 language, she stated that she "would be open to suggestions if they made sense." To that end, Stone provided Kayne with suggestions, edits, and proposed language to appear in the Form U-5s. Following these discussions and Stone's proposals, Stone informed Kayne that Arteca and Vetere accepted the proposed final language. Specifically, Stone, with respect to Arteca, wrote, in an e-mail dated August 6, 2010, that Arteca "accepts [the Form] U-5 language, and, with respect to Vetere, wrote, in an e-mail dated September 10, 2010, that "[t]he text [of the Form U-5] is fine." The Firm filed Arteca's Form U-5 with FINRA on August 6, 2010, and it filed Vetere's Form U-5 with FINRA on September 13, 2010. The Form U-5s included the language which had been stated to be acceptable by Stone.
In February 2011, the Firm commenced the Arbitration against Arteca, Vetere, Timpone, and Aquilino. NES's claims in the Arbitration allege that shortly after Arteca's affiliation with it terminated, he breached his continuing contractual and other obligations to them by: (1) soliciting its policyholders and contract holders for the purpose of inducing them to lapse, cancel, fail to renew, and/or replace their products, and (2) inducing Vetere, Timpone, and Aquilino to simultaneously resign en masse on August 20, 2010 and to join him in direct competition with it. The Firm's Statement of Claim in the Arbitration, dated February 11, 2011, alleges claims of breach of contract, unjust enrichment, breach of the duty of loyalty, misappropriation of confidential information, tortious interference, conversion, unfair competition, and the return of compensation in accordance with the faithless servant doctrine.
On April 14, 2011, Arteca, Vetere, Timpone, and Aquilino interposed an answer, asserting eight counterclaims against NES and third-party claims against Louis Aidala and Lorraine Padilla (who are associated persons registered with NES). As is relevant here, the second counterclaim for tortious interference with prospective business advantage, the third counterclaim for negligence, the fourth counterclaim for failure to supervise, the first cross claim for tortious interference with prospective business advantage, and the second cross claim for negligence, all allege or are predicated on allegations that the language in Arteca and Vetere's Form U-5s was "false" and "inaccurate."
On July 8, 2011, NES filed its instant petition for injunctive relief in aid of arbitration, requesting that the court issue a preliminary injunction disqualifying Stone as Arteca, Vetere, Timpone, and Aquilino's counsel in the Arbitration pursuant to rule 3.7 (a) and rule 1.7 (a) (2) of the Rules of Professional Conduct. A temporary restraining order was granted on July 8, 2011, but was dissolved by an order dated July 14, 2011. By an order dated August 16, 2011, the Arbitration was stayed, pending this decision of NES's motion to disqualify Stone.
The Code of Arbitration Procedure for Industry Disputes § 13209 provides that "[i]ssues regarding the qualifications of a person to represent a party in arbitration are governed by applicable law and may be determined by an appropriate court." Pursuant to CPLR 7502 (c), the court may grant a preliminary injunction "in connection with an arbitration that is pending . . . upon the ground that the [arbitration] award to which the applicant may be entitled may be rendered ineffectual without such provisional relief.".
"A party seeking relief under [CPLR 7502 (c)] must also make a showing of the traditional equitable criteria for the granting of [a preliminary injunction] under CPLR [6301]" (Winter v Brown, 49 AD3d 526, 529 [2008]; see also Matter of Advanced Digital Sec. Solutions, Inc. v Samsung Techwin Co., Ltd., 53 AD3d 612, 613 [2008]; Matter of K.W.F. Realty Corp. v Kaufman, 16 AD3d 688, 689-690 [2005]; Matter of Ottimo v Weatherly Sec. Corp., 306 AD2d 287, 287 [2003]). "[I]n order to prevail on a motion for a preliminary injunction [under CPLR 6301], the movant has the burden of demonstrating (1) a likelihood of ultimate success on the merits, (2) irreparable injury absent the granting of the preliminary injunction, and (3) that a balancing of equities favors the movant's position" (Walter Karl, Inc. v Wood, 137 AD2d 22, 26 [1988]; see also Aetna Ins. Co. v Capasso, 75 NY2d 860, 862 [1990]; W.T. Grant Co. v Srogi, 52 NY2d 496, 517 [1981]; Matter of Advanced Digital Sec. Solutions, Inc., 53 AD3d at 613; Winter, 49 AD3d at 529; Matter of K.W.F. Realty Corp., 16 AD3d at 689-690; Olabi v Mayfield, 8 AD3d 459, 459 [2004]; New York City Off-Track Betting Corp. v New York Racing Assn., 250 AD2d 437, 441 [1998]).
In support of its motion, NES argues that since Stone's continued representation of Arteca, Vetere, Timpone, and Aquilino is in direct violation of rule 3.7 (a) and rule1.7 (a) (2) of the Rules of Professional Conduct, it fundamentally compromises the integrity of the Arbitration and any relief which it may obtain thereunder. It is well established that while "[a] party's entitlement to be represented by counsel of his or her choice is a valued right which should not be abridged absent a clear showing that disqualification is warranted" (Falk v Gallo, 73 AD3d 685, 685-686 [2010]), "[t]he right to counsel of choice is not absolute and may be overridden where necessary" (S & S Hotel Ventures Ltd. Partnership v 777 S. H. Corp., 69 NY2d 437, 443 [1987]; see also Parnes v Parnes, 80 AD3d 948, 952 [2011]). The decision to disqualify an attorney lies within the court's sound discretion (see Falk, 73 AD3d at 685; Horn v Municipal Info. Servs., 282 AD2d 712, 712 [2001]).
Rule 3.7 (a) of the Rules of Professional Conduct provides that "[a] lawyer shall not act as advocate before a tribunal in a matter in which the lawyer is likely to be a witness on a significant issue of fact," with certain exceptions not relevant here. Although not binding upon the courts, this advocate-witness rule "provide[s] guidance . . . for the courts in determining whether a party's attorney should be disqualified" (Falk, 73 AD3d at 686; see also S & S Hotel Ventures Ltd. Partnership, 69 NY2d at 443-445).
In order to show a violation under rule 3.7 (a), NES must demonstrate that it is likely that the testimony to be given by Stone is necessary to the Firm's defense to the counterclaims in the Arbitration (see S & S Hotel Ventures Ltd. Partnership, 69 NY2d at 445-446). "A finding of necessity takes into account such factors as the significance of the matters, weight of the testimony, and availability of other evidence" (Id. at 446).
In order to satisfy this showing of necessity, NES contends that Stone is an indispensable witness in the Arbitration for both it and Arteca and Vetere. Specifically, NES asserts that Stone was in direct communication with Kayne regarding the Form U-5s, that Stone ultimately informed Kayne that Arteca and Vetere had accepted the final proposed language used therein, and that Arteca and Vetere are now alleging that this same language is "false" and "inaccurate" as a basis for their counterclaims in the Arbitration. NES, therefore, maintains that it needs Stone's testimony since he is the only person who can explain why he represented to it (through Kayne) that the proposed Form U-5 language was acceptable to Arteca and Vetere without exception and because he was privy to both sides of the Form U-5 discussion.
Since rule 3.7 (a) could potentially lend itself to "opportunistic abuse," it has been held that courts must guard against tactical motions to disqualify counsel by subjecting such motions to "fairly strict scrutiny" (Murray v Metropolitan Life Ins. Co., 583 F3d 173, 178 [2d Cir 2009]). In Murray (583 F3d at 178), the Second Circuit identified four risks which rule 3.7 (a) was designed to eliminate, to wit:
"(1) the lawyer might appear to vouch for his [or her] own credibility; (2) the lawyer's testimony might place opposing counsel in a difficult position when [he or] she has to cross-examine [his or] her lawyer-adversary and attempt to impeach his [or her] credibility; (3) some may fear that the testifying attorney is distorting the truth as a result of bias in favor of his [or her] client; and (4) when an individual assumes the role of advocate and witness both, the line between argument and evidence may be blurred, and the jury confused."
While this policy behind rule 3.7 (a) mentions jury confusion, the purview of this rule is not limited to cases involving juries and applies equally to this Arbitration (see Matter of Essex Equity Holdings USA, LLC [Lehman Bros. Inc.], 29 Misc 3d 371, 393 [Sup Ct, NY County 2010] [where a law firm was disqualified in representing a party in an arbitration proceeding since its "continued involvement would leave a question mark hanging over the validity and integrity of the ensuing arbitration"]; UBS Fin. Servs. Inc. v Luboja & Thau Empl. Profit Sharing Plan, 26 Misc 3d 1208[A], 2009 NY Slip Op 52684[U], *3-4 [Sup Ct, NY County 2009] [addressing the issue of attorney disqualification under rule 3.7 (a) in the context of an arbitration proceeding]).
The case of Kattas v Sherman (32 AD3d 496, 497 [2006]) is particularly instructive here. In Kattas (32 AD3d at 497), the contract at issue required the defendant therein to obtain a letter in lieu of a certificate of occupancy and the plaintiffs alleged that the defendant had refused to obtain the letter and thereby anticipatorily repudiated the contract. The Appellate Division, Second Department, in Kattas (32 AD3d at 497), held that the plaintiffs' counsel should have been disqualified because he was a potential witness in the determination of the breach of contract issue, and was intimately involved in the failed purchase of the property. Specifically, plaintiffs' counsel, in Kattas (32 AD3d at 497), had dealt with the defendant directly during the latter's application for the letter, and the defendant had alleged that plaintiffs' counsel had failed to submit the application as they had previously agreed. In addition, the defendant, in Kattas (32 AD3d at 497), had conversed directly with the plaintiffs' counsel via phone when the defendant indicated that he would obtain the letter after his alleged prior refusal to do so. The Appellate Division, Second Department, in Kattas (32 AD3d at 497), held that, under those circumstances, "the plaintiffs' counsel became a witness with information about relevant and material facts and thus should have been disqualified."
Similarly here, Stone was a direct participant in the communications that are at issue, rendering his testimony indispensable in order for the Firm to defend Arteca, Vetere, Timpone, and Aquilino's counterclaims. Stone is the only person who can explain why he informed Kayne that Arteca and Vetere accepted the Form U-5 language, which Arteca and Vetere now, in their counterclaims, contend is false and inaccurate. Only Stone can explain how his representations to Kayne concerning the Form U-5 language do not directly contradict these counterclaims.
Thus, NES has demonstrated that Stone's testimony is necessary to the Firm's defense to the counterclaims in the Arbitration and that Stone is a necessary witness on a significant issue of fact, thereby mandating his disqualification pursuant to rule 3.7 (a) (see S & S Hotel Ventures Ltd. Partnership, 69 NY2d at 446; Blue Diamond Group Corp. v Klin Constr. Group, Inc.,73 AD3d 958, 959 [2010]; Falk, 73 AD3d at 686; Skiff-Murray v Murray, 3 AD3d 610, 611 [2004]; Matter of Stober v Gaba & Stober, 259 AD2d 554, 554-555 [1999]; Fairview at Old Westfield v European Am. Bank,186 AD2d 238, 239 [1992]).
NES further argues that Stone's disqualification is warranted pursuant to rule 1.7 (a) (2) of the Rules of Professional Conduct, which provides that "a lawyer shall not represent a client if a reasonable lawyer would conclude that . . . there is a significant risk that the lawyer's professional judgment on behalf of a client will be adversely affected by the lawyer's own financial, business, property or other personal interests." NES asserts that disqualification is required under this rule because any claim that Arteca and Vetere's Form U-5 language is false potentially subjects Stone to a professional malpractice claim. Specifically, NES contends that if Arteca and Vetere are to succeed on their counterclaims, Arteca and Vetere must prove that Stone committed legal malpractice when he recommended that they consent to the Form U-5 language which he (and they) knew to be false or should have known was false, or when he failed to accurately convey his clients' position concerning the Form U-5s. In response, Arteca, Vetere, Timpone, and Aquilino, in opposition to this branch of NES's motion, assert that they "are unaware of any legal precedent suggesting that one party to a dispute can have the lawyer for the other party disqualified because the lawyer for the first party claims his adversary has committed malpractice," and that NES, consequently, has no standing on this issue.
NES, in making this argument for disqualification under rule 1.7 (a) (2), relies upon Decker v Nagel Rice LLC (716 F Supp 2d 228, 233-234 [SD NY 2010]), where an attorney was disqualified since, given his involvement with the underlying lawsuit and the prior malpractice action brought against him, his testimony might cause jurors and the court "to fear that he [wa]s distorting the truth as a result of bias in favor of [the] plaintiffs or to protect his own interests." NES argues that, as was the case in Decker (716 F Supp 2d at 234 [internal quotation marks and citations omitted]), Stone's "simultaneous representation of [Arteca and Vetere] and his need to defend his own conduct will blur the line between argument and evidence [such] that the jury's ability to find facts [will be] undermined." Notably, though, the lawyer, in Decker (716 F Supp 2d at 234), was disqualified on the above basis pursuant to rule 3.7 (a). While the lawyer, in Decker (716 F Supp 2d at 234), was also disqualified under rule 1.7 (a) (2), that disqualification was based upon a conflict of interest due to the lawyer's presence as both an attorney and a third-party defendant for contribution and/or indemnification named by the defendants therein. Here, NES has not brought any claim against Stone and he has not been named as a party in the Arbitration, nor is he being sued by Arteca or Vetere for legal malpractice.
In further arguing that Stone should be disqualified under rule 1.7 (a) (2), NES also relies upon the case of Chang v Chang (190 AD2d 311, 317 [1993]), in which it was held that an attorney should have been disqualified because his testimony could have exposed him "to the possibility of a finding of professional malpractice or being part of a scheme to defraud," and a finding against his own clients might well exonerate him of all liability. Here, though, it has not been shown that a finding against Arteca and Vetere on their counterclaims in the Arbitration would exonerate Stone from a malpractice claim, and, as previously noted, no malpractice claim been raised by Arteca or Vetere against Stone. In any event, it is unnecessary for the court to reach the issue of whether there has been a violation of rule 1.7 (a) (2), since the court finds that Stone must be disqualified under rule 3.1 (a).
Thus, NES has sufficiently demonstrated, pursuant to CPLR 7502 (c), that the arbitration award to which the Firm may be entitled may be rendered ineffectual without provisional relief disqualifying Stone from representing Arteca, Vetere, Timpone, and Aquilino in the Arbitration. Stone's disqualification is essential to protect the integrity of the Arbitration and avoid tainting that proceeding because of the conflict of interest that Stone's actions and participation in this matter have created. Unless Stone is so enjoined, the Arbitration and the relief to be awarded therein will be fundamentally compromised.
In addition, NES has sufficiently satisfied the traditional criteria for the granting of a preliminary injunction. "As to the likelihood of success on the merits, a prima facie showing of a right to relief is sufficient" (McLaughlin, Piven, Vogel v Nolan & Co.,114 AD2d 165, 172-173 [1986]). Since, as discussed above, NES has shown that it needs Stone's testimony in order to defend against the counterclaims, it has made such a showing.
With respect to showing irreparable harm if the preliminary injunction is not granted, NES "must show that the irreparable harm is imminent, not remote or speculative,'" and is not compensable by monetary damages (Family-Friendly Media, Inc. v Recorder Tel. Network, 74 AD3d 738, 739 [2010], quoting Golden v Steam Heat, 216 AD2d 440, 442 [1995]). Here, NES has demonstrated that Stone, by continuing to act as both advocate and witness, undermines the Arbitration and the integrity of the arbitration process as a whole, causing the Firm irreparable harm, which is imminent and not compensable by monetary damages. Indeed, NES has shown that the Firm will be irreparably harmed due to the very fact that Stone will be permitted to select the very individuals who will be called upon to evaluate his credibility as both an advocate and a witness.
As to a balancing of equities, as pointed out by NES, such a balancing weighs in favor of Stone's disqualification since Arteca, Vetere, Timpone, and Aquilino will suffer no hardship at this early juncture in the Arbitration. While Arteca, Vetere, Timpone, and Aquilino contend that disqualification would work a substantial hardship on them because of the distinctive value of the lawyer they have selected in this case, this position is speculative and unsupported since they fail to elaborate on how Stone's disqualification would impose a substantial hardship upon them at this early juncture.
Accordingly, NES's motion is granted insofar as it seeks preliminary injunctive relief disqualifying Stone, pursuant to rule 3.7 (a), from acting as Arteca, Vetere, Timpone, and Aquilino's counsel in the Arbitration. The stay presently in effect in the Arbitration shall remain in effect for a period of 30 days after service upon Arteca, Vetere, Timpone, Aquilino, and Stone of a copy of this decision and order in order to afford Arteca, Vetere, Timpone, and Aquilino an opportunity to engage new counsel to be substituted for Stone.
This constitutes the decision, order, and judgment of the court.
ENTER,
J. S. C.