Opinion
113227/2009
07-18-2019
Michael KNOPF, Norma Knopf, and Delphi Capital Management, LLC, Plaintiffs, v. Michael SANFORD, Pursuit Holdings, LLC, Sanford Partners, LP, MH Sanford & Co., LLC, and Wyndclyffe, LLC, Defendants.
BerryLaw PLLC, New York City (Eric W. Berry of counsel), for plaintiffs. Michael Hayden Sanford pro se. Dorsey & Whitney LLP and Nathaniel H. Akerman, New York City (Nathaniel H. Akerman, Amanda M. Prentice, and Peter M. Lancaster, pro hac vice, of counsel), for non-parties Dorsey & Whitney, LLP, and Nathaniel H. Akerman, Esq. Feldman & Associates, PLLC (Edward S. Feldman of counsel), for non-parties Feldman & Associates, PLLC, and Edward S. Feldman, Esq.
BerryLaw PLLC, New York City (Eric W. Berry of counsel), for plaintiffs.
Michael Hayden Sanford pro se.
Dorsey & Whitney LLP and Nathaniel H. Akerman, New York City (Nathaniel H. Akerman, Amanda M. Prentice, and Peter M. Lancaster, pro hac vice, of counsel), for non-parties Dorsey & Whitney, LLP, and Nathaniel H. Akerman, Esq.
Feldman & Associates, PLLC (Edward S. Feldman of counsel), for non-parties Feldman & Associates, PLLC, and Edward S. Feldman, Esq.
Gerald Lebovits, J. The present motions arise out of a long history of litigation between plaintiffs, Norma and Michael I. Knopf, and defendant Michael H. Sanford, and are related to the Knopfs' efforts to enforce a money judgment this court entered on February 22, 2018, for $9,867,832.61 against defendant Pursuit Holdings, LLC (Pursuit), Sanford's hedge fund. (See Knopf v. Sanford , 2018 N.Y. Slip Op. 30611 [U], 2018 WL 1769299 [Sup. Ct, N.Y. County 2018].) In particular, in May 2018, plaintiffs served subpoenas on Sanford, as a judgment debtor, and two non-parties, Dorsey & Whitney, LLP, and Nathaniel (Nick) H. Akerman, Esq., to obtain information to enforce the judgment against Pursuit. (Sanford Subpoena, NYSCEF No. 239; Dorsey & Whitney Subpoena, NYSCEF No. 158; Akerman Subpoena, NYSCEF No. 162.)
On February 4, 2019, this court granted plaintiffs' motion in a related action to hold Sanford personally liable on an alter-ego or veil-piercing theory for this money judgment. (See Knopf v. Sanford , 2019 N.Y. Slip Op. 30269 [U], 2019 WL 429469 [Sup. Ct., N.Y. County 2019].)
In April 2019, plaintiffs served subpoenas on non-parties Edward S. Feldman, Esq., and Citibank, seeking additional information to enforce the judgment against Pursuit. (See Feldman and Citibank Subpoenas, NYSCEF No. 388.)
This revised decision and order, which resolves litigation over the subpoenas, addresses motion sequences 030, 032, and 033, consolidated here for disposition.
On their face, these motions relate directly only to subpoenas the Knopfs issued to trace Sanford and Pursuit's assets. But to resolve whether the subpoenas should be quashed or enforced, this court must also evaluate the Knopfs' two chief allegations: First, that to prevent the Knopfs from collecting on a potential judgment, Sanford corruptly influenced an attorney and his wife, then a special master in the Appellate Division, First Judicial Department. And second, that a First Department order from June 2016 has inadvertently but incorrectly shielded Sanford's wrongdoing.
This court does not undertake the evaluation of these issues lightly — nor fail to recognize the anomaly inherent in an acting Justice of the Supreme Court's assessing the circumstances of the issuance of an order by a five-member panel of the First Department, which reviews this court's decisions. Yet upon much consideration, this court concludes that such an evaluation is necessary to resolve the important motions before it.
To aid in collecting their judgment, the Knopfs seek, among other things, communications between Sanford and several of his attorneys. The Knopfs contend that they are entitled to those communications, notwithstanding the attorney-client privilege, in part because Pursuit and Sanford have each waived the privilege as to the Knopfs. This court agrees that Pursuit and Sanford have waived the privilege, as set forth in more detail below. (See infra at Subsection II.C.1.)
As discussed further below (see infra at Subsection II.A.3), the information sought by the subpoena to Feldman (as distinct from the subpoenas to Sanford, Dorsey & Whitney, and Akerman) has since been obtained from other sources. This court quashes the Feldman subpoena as, effectively, academic.
The Knopfs also argue, though, that the attorney-client privilege has been broken , because probable cause allegedly exists to believe that Sanford (and possibly others) engaged in wrongful or fraudulent acts and used attorney-client communications to further those acts.
In essence, the Knopfs contend that Sanford went to extraordinary lengths to evade an October 2015 First Department interim order that required him to escrow any proceeds from the sale of real property owned by Pursuit. The Knopfs further allege that the First Department intended its escrow order to preserve funds to help satisfy a potential multi-million-dollar damages award against Sanford and Pursuit in the Knopfs' favor.
After the First Department issued its escrow order, Sanford moved to vacate it. A full panel of the Court denied Sanford's motion. Shortly afterward, Sanford retained an attorney (Frank M. Esposito, Esq.) whose wife (Melissa Ringel, Esq.) was a First Department special master. The Knopfs contend that the day after Esposito was retained, Sanford directed his other attorneys to make an ex parte telephone call to Ringel. The Knopfs claim that this phone call was intended merely to secure a conclusion from Ringel (in her capacity as an Appellate Division attorney) that the First Department's interim escrow order, which the parties knew the Appellate Division had just refused to vacate, had actually been dissolved already by a different First Department ruling that had not even mentioned the interim escrow order.
The Knopfs contend that when Sanford's attorneys spoke to Ringel, she conveniently and improperly gave the advice Sanford needed for the buyer of the property to be willing to close on the sale; and that with Ringel's opinion in hand, Sanford was able to sell Pursuit's real property for $3 million without putting any of the proceeds into escrow — violating the Court's October 2015 escrow order.
The Knopfs claim that Sanford successfully dissipated 85% of the $3 million in sale proceeds before the Knopfs figured out what Sanford had done. They further claim that when they asked the First Department to hold Sanford in contempt and force him to disgorge the sale proceeds he had dissipated, Sanford's attorneys argued that they had merely relied on the opinion of an Appellate Division attorney — without revealing to the Appellate Division that the attorney who profferred the legal advice was the wife of one of Sanford's attorneys; that she had spoken to Sanford's other attorneys outside the scope of her job responsibilities; and that she had done so without opposing counsel on the line.
These allegations of conspiracy against Sanford and his prominent attorneys would ordinarily appear implausible and far-fetched. Indeed, a U.S. District Judge for the Southern District of New York in a related federal action had sanctioned counsel for the Knopfs — and the Knopfs themselves — in part for making those very allegations.
This court may take judicial notice of official court records and filings from other state and federal actions and proceedings. (See e.g. RGH Liquidating Trust v. Deloitte & Touche LLP , 71 A.D.3d 198, 207-208, 891 N.Y.S.2d 324 [1st Dep't 2009] [collecting cases], revd on other grnds 17 N.Y.3d 397, 931 N.Y.S.2d 22, 955 N.E.2d 329 [2011].)
But this court takes note that in July 2017, the Presiding Justice of the First Department asked the Inspector General of the New York State Office of Court Administration to investigate the Knopfs' allegations; and that following a thorough investigation, the Inspector General's Office issued a March 16, 2018, report that confirmed many of the Knopfs' allegations.
The Inspector General's report found that the conversation between Ringel and Sanford's attorneys — which allowed Pursuit's property to be sold without escrowing the proceeds — was ex parte and improper. The report concluded that Ringel's "involvement in this matter is extremely troubling and at the very least created an appearance of impropriety and reflects poorly on the impartiality of the court." (OCA Report, NYSCEF No. 164, at 20.) Additionally, after receiving the OCA Report, the federal District Court substantially reduced the sanctions against the Knopfs and their counsel. According to the District Court, the report's contents made the Knopfs' allegations of conspiracy plausible and raised many questions about Esposito and Ringel's conduct.
It is also true, however, that in June 2016 a panel of the First Department issued an order denying the Knopfs' subsequent motion to hold Sanford in contempt and disgorge the sale proceeds; and that the Court explained in a revised version of this order that it denied contempt based on the Court's legal conclusion that the Court itself had vacated the escrow order before Sanford sold Pursuit's property. Nonetheless, this court concludes, reluctantly, that the First Department's revised June 2016 order refusing to hold Sanford in contempt does not, for the purposes of the current motions to quash or enforce subpoenas, exonerate Sanford or his attorneys.
The evidence indicates that Sanford was able to close on the PHC sale only through quietly obtaining ex parte and erroneous legal advice from the wife of one of his own attorneys. The First Department's revised order of June 2016 did not retroactively cure the wrongfulness of this conduct.
Additionally, when opposing the Knopfs' contempt motion in spring 2016, Sanford's attorneys withheld from the Court material information about Sanford's misconduct and the circumstances under which Sanford was able to sell Pursuit's property. If the First Department panel that issued the June 2016 order had known the truth about what happened in their Court when it considered the Knopfs' contempt motion, the Justices might have rejected Sanford's claim that the escrow order had already been dissolved when Pursuit sold the PHC — and therefore ruled against him, rather than for him.
Full disclosure would have alerted the First Department to the unusual and unethical steps Sanford undertook to keep the Knopfs from satisfying an imminent damages award.
It is under these uncommon circumstances that this court concludes that the First Department's revised June 2016 denial-of-contempt order does not alone require this court to find, for present purposes, that Sanford acted ethically or lawfully in selling Pursuit's property without escrowing the proceeds.
This court emphasizes that its conclusion on this point is limited. This court holds only, with respect to an attorney-client-privilege issue, that to decide the motions before this court, the issuance of the First Department's revised order of June 16, 2016, denying the Knopfs' motion for contempt does not require this court to find Sanford's conduct proper. This court does not, therefore, address, or question, the validity of the First Department's two ultimate conclusions in that order: that Sanford's conduct did not constitute contempt of court and that he should not be required to disgorge the sale proceeds. This court also neither addresses nor questions the validity of the Court's decision denying Sanford's cross-motion to sanction the Knopfs.
And ample probable cause compels this court to conclude instead that Sanford acted wrongly regarding the sale of Pursuit's property (and the dissipation of the sale proceeds), and that he used communications with his attorneys to further his wrongdoing.
The wrongful-act exception to the attorney-client privilege therefore applies, and movants are required to produce the documents and information the Knopfs seek notwithstanding movants' assertion of the privilege. I. BACKGROUND
After this court issued its initial decision and order of July 11, 2019, Akerman wrote two letters to this court dated July 15 and July 16. (See NYSCEF Nos. 442, 448.) The letters questioned whether this court was aware of a First Department order dated November 2, 2017, and the motion papers filed in connection with the order. That First Department order had denied, without explanation, the Knopfs' motion to reargue the Court's Revised June 2016 Order. Akerman suggests that the Court's November 2017 reargument denial shows that the Court believed its Revised June 2016 Order to be correct — even if the Court by November 2017 had "full knowledge of the facts and circumstances ‘under which Sanford was able to sell Pursuit's property.’ " (NYSCEF No. 442, at 2 [quoting this court's initial decision and order of July 11, 2019, NYSCEF No. 436].)
This court was aware of the Court's November 2017 reargument order, although it did not have the parties' papers. (Akerman has now uploaded them onto the court's NYSCEF system.) In the interest of completeness, this court issues a revised decision and order. This revised decision and order addresses why the First Department's order denying reargument does not alter this court's conclusion that notwithstanding the Revised June 2016 Order, Sanford used attorney-client communications to further a wrongful act. (See Subsection II.C.2, infra .) In short: The First Department's reargument order did not address the Knopfs' proffered evidence of wrongdoing. Nor did its order suggest that the Court would have issued its Revised June 2016 Order even if the Knopfs' evidence of wrongdoing had been before the Court when it rendered that order. The Court's reargument order does not, therefore, affect this court's decision.
A. The Knopfs' Action Against Pursuit and Sanford for Breach of Contract
In 2006, the Knopfs made two loans to Pursuit: one for $1,690,860; the other, $3,250,000. The parties agreed at the time that Pursuit would use the $1,690,860 loan to buy a penthouse condominium unit at 44 East 67th Street (PHC) and the $3,250,000 loan to buy three additional condominium units, all in New York County. In exchange, Pursuit agreed to execute in the Knopfs' favor mortgage liens on the properties.
Pursuit failed to repay the loans or execute the mortgage liens. The Knopfs sued Pursuit and Sanford for breach of contract — the action now before this court. (See Knopf v. Sanford, Sup. Ct., N.Y. County, Index No. 113227/09.) On September 18, 2009, the Knopfs filed notices of pendency (Initial Notices) against the four condominium units. The notices restricted Pursuit's ability to sell the units.
The filing of a notice of pendency in an action affords constructive notice of the filer's claim in the action to an interest in the property, so that "any person who records a conveyance or encumbrance after" the filing of the notice "becomes bound by all of the proceedings taken in the action." (Mallick v. Farfan , 66 A.D.3d 649, 649-650, 885 N.Y.S.2d 774 [2d Dept. 2009].) Filing a notice of pendency substantially impaired the alienability of the real property at issue.
In October 2013, the First Department extended the notices until September 17, 2015. (See Knopf v. Sanford , 110 A.D.3d 502, 502, 972 N.Y.S.2d 893 [1st Dept. 2013].) Sanford later listed the PHC for sale and found a buyer, Michael Phillips. Phillips offered Sanford $2.9 million, conditioned on the Initial Notices' termination. (See OCA Report, Attachment I.) Pursuit accepted Phillips's offer in December 2013.
A year later, on December 11, 2014, the First Department granted summary judgment in the Knopfs' favor on their breach-of-contract claim but did not assess damages. (See Knopf v. Sanford , 123 A.D.3d 521, 521, 1 N.Y.S.3d 18 [1st Dept. 2014].) Shortly thereafter, Sanford, to sell the PHC, asked then-New York County Supreme Court Justice Milton A. Tingling, Jr., to cancel the Initial Notices. Justice Tingling did so on December 24, 2014. (See Knopf v. Sanford , 130 A.D.3d 407, 407, 13 N.Y.S.3d 365 [1st Dept. 2015].)
The Knopfs appealed Justice Tingling's order to the First Department (Appeal No.1). The Knopfs wanted to keep the Initial Notices in place and thereby impair Sanford's ability to sell the properties to third parties. The First Department affirmed Justice Tingling's order on July 2, 2015, on the ground that the Knopfs had failed to show that money damages would be an inadequate remedy but denied Sanford's request for costs involved in obtaining the cancellation. The Court found that Sanford did not show that the Knopfs acted in bad faith. (See id. at 407, 13 N.Y.S.3d 365.) B. The Knopfs' Legal Efforts to Prevent Pursuit from Selling Property Without Putting the Sale Proceeds into Escrow Upon learning of Sanford's efforts to sell the PHC, the Knopfs made numerous (and overlapping) attempts over the next several months to stay the sale of the property — or, at least, to obtain an order requiring the sale proceeds to be put into escrow — as they waited for Supreme Court to assess damages on their breach-of-contract claim under the First Department's December 2014 decision.
The resulting complex procedural history underlies the Knopfs' subpoena requests at issue here.
After the First Department affirmed the cancellation of the Initial Notices on July 2, 2015, the Knopfs moved in Supreme Court for a prejudgment attachment against the PHC. On July 23, 2015, Justice Richard Braun, to whom the case had been reassigned from Justice Tingling, denied that motion. (See Knopf v. Sanford , 137 A.D.3d 662, 662, 26 N.Y.S.3d 866 [1st Dept. 2016].) The Knopfs immediately noticed an appeal of Justice Braun's decision denying prejudgment attachment to the First Department (Appeal #2). (See McGuire Affirmation, NYSCEF No. 218, at 2.)
A prejudgment attachment of property under CPLR article 62 "effects the prejudgment seizure of a debtor's property, to be held by the sheriff, so as to apply the property to the creditor's judgment if the creditor should prevail in court," thereby also denying the debtor "the free use" of that property. (Koehler v. Bank of Bermuda Ltd. , 12 N.Y.3d 533, 538, 883 N.Y.S.2d 763, 911 N.E.2d 825 [2009].)
Now-retired Justice Braun later recused himself, and this matter was randomly reassigned to this court.
In connection with the appeal of Justice Braun's decision, the Knopfs also filed a motion in the First Department in July 2015 for two alternative forms of relief: a prejudgment attachment (essentially the same request they had made before Justice Braun) or, alternatively, a preliminary injunction preventing Sanford from selling the PHC. (See Index No. 113227/2009, First Dept Mot. No. 3660, or M-3660.) First Department Justice Judith J. Gische set a briefing schedule for that motion, with opposition papers due August 7, 2015, and the motion fully returnable on August 10. (NYSCEF No. 218, at 2-3 2.)
By separate motion, the Knopfs also moved in the First Department to reargue the Court's July 2 decision in Appeal #1, which had affirmed Justice Tingling's cancellation of the initial notices of pendency. (See Index No. 113227/2009, M-3726.) On October 6, 2015, the First Department granted reargument and substituted a new decision. (See Knopf v. Sanford , 132 A.D.3d 416, 417, 17 N.Y.S.3d 674 [1st Dept. 2015] ; see also Knopf v. Sanford , 2015 N.Y. Slip Op. 86551 [U], 2015 WL 5797955 [1st Dept. 2015]. ) The only change from the decision of July 2 to that of October 6 was that the October 6 decision now remanded to Supreme Court to determine whether to award Sanford costs under CPLR 6514 (c), rather than denying costs outright. (See Knopf v. Sanford , 132 A.D.3d at 417, 17 N.Y.S.3d 674.) Thus, as of October 7, 2015, the only pending matter before the First Department was Appeal #2 — the appeal of Justice Braun's decision and the motion filed in connection with that appeal seeking alternative forms of relief.
The Court explained that although Sanford had still not shown that the Knopfs acted in bad faith, First Department precedent permits costs to be awarded under CPLR 6514 (c) upon the cancellation of notices of pendency even absent bad faith. (See Knopf v. Sanford , 132 A.D.3d at 417, 17 N.Y.S.3d 674.)
On October 22, 2015, though, the Knopfs filed another motion in the First Department. This new motion sought to reargue the Court's October 6 reargument order on Appeal #1, which had again affirmed Justice Tingling's cancellation of the notices and remanded on costs. (See Index No. 113227/2009, M-5459; NYSCEF No. 427, Ex. I, at 1-2, 9-21 [reproducing motion papers].) The October 22 motion also requested that the Knopfs' appeal of Justice Braun's decision be recalendared from the Court's March 2016 Term to its December 2015 Term. (See NYSCEF No. 427, Ex. I, at 2, 21-22.) The motion briefly incorporated by reference and reiterated the request for a preliminary injunction the Knopfs had made in connection with their appeal of Justice Braun's decision (i.e. , in M-3660, the motion filed in Appeal #2). (See id. at 2, 22.)
The same day this new motion was filed, the Knopfs also applied for interim relief in the First Department. This application sought two forms of relief: one related to Appeal #1 — the Knopfs' appeal from Justice Tingling's order cancelling the Initial Notices; the other to Appeal #2 — the Knopfs' appeal from Justice Braun's order denying the prejudgment attachment.
As noted above, the First Department had ruled on October 6 that its decision on Appeal #1 from Justice Tingling's cancellation of the Initial Notices should stand (except that portion of the order dealing with costs), and the Knopfs had filed a motion on October 22 seeking reconsideration of the Court's October 6 ruling. In connection with the October 22 motion's request for reconsideration, the Knopfs sought an interim order staying any sale of the PHC. (See NYSCEF No. 428 at 2-3 & n.1; id. at Ex. 1 [application for interim relief].)
Separately, as noted above, the Knopfs had brought Appeal #2 from Justice Braun's order denying the prejudgment attachment on the PHC; and they had filed a motion in July 2015 (M-3660) seeking attachment of the PHC or, alternatively, a preliminary injunction barring Pursuit and Sanford from transferring or encumbering the PHC pending that appeal. The October 22 motion (M-5459) requested that the First Department expedite oral argument on Appeal #2. In connection with that branch of the motion, the Knopfs also sought an interim order moving up oral argument on the appeal from the Court's March 2016 Term to its December 2015 Term. (See OCA Report Attachment A [application for interim relief].)
In other words, upon filing the October 22 interim application, the Knopfs were asking the First Department, in two different motions filed in connection with two different appeals, to grant the same form of relief (blocking a sale of the PHC) and to expedite one of those two appeals.
First Department Justice John W. Sweeny, Jr., issued an order on the October 22 interim application (October 2015 Order, or October 2015 escrow order) that granted partial relief on each branch of the application.
As to the request to halt any sale of the PHC pending a decision on the motion to reargue the Court's decision on Appeal #1 — the appeal from Justice Tingling's order — Justice Sweeny declined to block the sale altogether, but he required that any sale "proceeds [were] to be placed in escrow pending further court order." (OCA Report, Attachment A.)
As to the request to expedite oral argument on the appeal from Justice Braun's order (Appeal #2), Justice Sweeny directed that this "appeal [be] recalendared to January 2016 Term" (rather than to the December 2015 Term as the Knopfs had requested).
Additionally, Justice Sweeny's order set a briefing schedule for the motion to reargue: opposition papers to the motion to be filed on November 6, and the Knopfs' reply papers to be filed on November 12. (Id. ) The parties later stipulated to extend that schedule, so that opposition papers would be due on November 20 and reply papers on December 8. (See NYSCEF No. 429, at 4.) On November 12, 2015 (November 2015 Order), the First Department denied the Knopfs' July 2015 motion for an attachment or preliminary injunction in connection with Appeal #2. The November 2015 Order did not mention the Knopfs' October 2015 reargument motion on Appeal #1 or Justice Sweeny's October 2015 escrow order entered in connection with that reargument motion.
The First Department's omission makes perfect sense. Under the parties' stipulation, no opposition papers (let alone reply papers) had yet been filed on the reargument motion involving Appeal #1. Any reference in the November 2015 Order to the October 2015 reargument motion — let alone to any interim relief granted in connection with that motion — would have been wildly premature.
That said, the November 2015 Order's denial of the Knopfs' request for a preliminary injunction halting the sale of the PHC raised an obvious issue: whether the escrow requirement in connection with Appeal #1 should remain in place in light of the First Department's denial of a preliminary injunction on Appeal #2 that would have halted the sale of the PHC altogether.
Thus, when Sanford and Pursuit filed their papers on November 20 opposing the Knopfs' October 2015 reargument motion, they also cross-moved to vacate the escrow requirement that Justice Sweeny had imposed in connection with the motion to reargue Appeal #1. (See Notice of Mot., NYSCEF No. 428, Ex. 2.)
Sanford and Pursuit's motion papers did not claim that Justice Sweeny's October 2015 escrow order on Appeal #1 was somehow automatically vacated after the First Department's November 2015 Order on Appeal #2. Sanford and Pursuit argued only that because the Court had denied an injunction preventing the sale of the property in Appeal #2, the interim restraint related to Appeal #1 that imposed an escrow requirement on sale of the property should now be vacated on the merits. (See Mem. of Law in Support of Mot. to Vacate, NYSCEF No. 428, Ex. 3, at 9, 31.)
On December 29, 2015, the First Department issued an order denying the Knopfs' October 22 reargument motion. That order also expressly denied Sanford and Pursuit's cross-motion to vacate Justice Sweeny's October 2015 escrow order. (See Knopf v. Sanford , 2015 N.Y. Slip Op. 94969 [U], 2015 WL 9466364 [1st Dept. 2015], reproduced at OCA Report Attachment C.) In other words, although the First Department was unwilling to block the sale of the PHC altogether, it explicitly kept in place Justice Sweeny's requirement that the proceeds of any sale be put into escrow.
See also Knopf v. Sanford, 2019 N.Y. Slip Op. 30269 [U], at *7 n. 1, 2019 WL 429469 [Sup. Ct., N.Y. County 2019] [discussing the First Department's orders surrounding the Court's Revised June 2016 Order] ).
Viewed objectively, this result was obvious and just. The Knopfs had successfully sued Sanford and Pursuit and were expecting a large damages award. In anticipation of that award, the Knopfs sought to prevent Pursuit from selling assets. The First Department, however, consistently agreed with Justice Tingling that because money damages would adequately redress the Knopfs' injury from Sanford and Pursuit's wrongs, the Knopfs should not be able to block Pursuit altogether from alienating its real property. Justice Sweeny's escrow order was consistent with those rulings, because it refused to block Pursuit from selling its property yet recognized that the Knopfs maintained a significant interest in the sale proceeds. The First Department's subsequent denial of Sanford and Pursuit's motion to vacate the escrow order can be viewed only as recognizing the Knopfs' continuing interest in the proceeds of any sale.
Unsurprisingly, now-retired First Department Justice Karla Moskowitz — who was on the panel that issued the November 2015 Order — would later issue an interim order holding that the escrow requirement remained in place after both the November 2015 Order (denying a preliminary injunction blocking the sale) and the December 2015 Order (denying vacatur of the escrow order). (See OCA Report at 5 n 13 [quoting Justice Moskowitz's order].)
Justice Moskowitz's February 2016 interim order is discussed further at Paragraph I.D.1.c, infra .
Accordingly, as of December 31, 2015, the First Department had determined two things relevant here: First, that the PHC sale could go forward; and second, that, to enable the Knopfs to use the proceeds of any PHC sale to satisfy any judgment it would likely obtain against Pursuit, Sanford had to put those sale proceeds into escrow.
C. Sanford's Apparent Efforts to Obtain Legal Cover to Ignore the First Department's Escrow Orders
1. Chronology of Sanford's Efforts Between December 29, 2015 and January 16, 2016 Sanford appears to have been unwilling to sell the PHC with an escrow requirement in place. (See NYSCEF No. 168 [email between title-company employees stating that Sanford found the escrow requirement unacceptable].) Sanford's conduct after the First Department issued its December 29, 2015, order denying his cross-motion to vacate the escrow requirement suggests that he was trying to find an excuse to disregard that order and sell the PHC without escrowing the proceeds. That way he could keep the funds and never pay the Knopfs. Conversely, with the escrow requirement in place, Sanford had little incentive to sell the PHC, since in the end he would likely be unable to realize any proceeds from a sale.
Beginning in August 2015 and continuing through January 2016, Sanford engaged in ongoing discussions with Frank Esposito about the possibility of Sanford's retaining Esposito to perform transactional legal services for some of Sanford's companies. (See Esposito Deposition, Index No. 153821/2019, NYSCEF No. 111, at Transcript (Tr.) 51-56.)
Esposito, of Esposito Partners, PLLC, is an experienced transactional lawyer and an Acting Village Justice of the Village Court of Oyster Bay in Nassau County, New York. Esposito was introduced to Sanford through mutual acquaintances while Esposito was participating in an August 2015 charity sailing race off Oyster Bay. (See Index No. 153821/2019, NYSCEF No. 111, at Tr. 44-52.)
Esposito's wife, Melissa Ringel, was then the special master in charge of the First Department's Pre-argument Conference Program, also called the Special Master's Program or the Office of the Special Master, which mediates cases on appeal. (OCA Report at 6.) Ringel had been employed in various roles at the First Department for about 15 years. (OCA Report at 14.)
Sanford suggested in a deposition in a related federal action that he might not have known Esposito's wife's name when he hired Esposito. (Excerpts from Sanford Deposition, NYSCEF No. 202, at Tr. 137.) Esposito has denied ever disclosing his wife's position to Sanford. (See OCA Report at 15 n 22.)
Because Ringel is not a party to the action, this court notified her that the Knopfs had made allegations against her in the motions before the court and offered her the opportunity to file a letter addressing the motions and the Knopfs' allegations. Ringel submitted a letter to the court dated July 1, 2019. (NYSCEF No. 435.)
Sanford later gave deposition testimony that from the beginning of Esposito and Sanford's conversations about representation, Sanford had warned Esposito that Sanford "had assets, but not liquidity," as a result of his inability to sell the PHC; and that as a result, Sanford would have difficulty paying lawyers — to the point that a lawyer representing him might "have to take it on a contingency basis or other type of representation." (Sanford Deposition, Index No. 153821/2019, NYSCEF No. 113, at Tr. 31.)
After Justice Sweeny imposed an escrow requirement on selling the PHC and after the First Department denied vacatur of that requirement, Sanford expressed disagreement with the First Department's orders to Esposito and gave him a copy of the November 2015 and December 2015 Orders. (See OCA Report at 15.) Esposito then discussed Sanford's concerns with Ringel, who asked to see the orders. (Id. ) Ringel stated in a January 17, 2018, interview with the OCA Inspector General's Office, though, that Esposito gave her the November 2015 and December 2015 Orders, but not the October 2015 Order that restricted Sanford's use of the sale proceeds, which Esposito got from Sanford. (Id. )
It is not apparent whether Sanford shared the October 2015 Order with Esposito.
Ringel also stated during the Inspector General's interview that upon her reviewing the orders, she told Esposito that Sanford was not "aggrieved" by the First Department's December 2015 Order denying Sanford's cross-motion to vacate the escrow requirement. (OCA Report at 16.)
What Ringel intended to convey to Esposito by using the word "aggrieved" is in doubt — whether it was that the December 2015 Order did not affect Sanford because the October 2015 escrow order had already been dissolved, or some other meaning. For present purposes, it is relevant merely that before Sanford even retained Esposito, Ringel had seen and expressed an opinion on the effect on Sanford of the December 2015 Order.
Sanford hired Esposito as general counsel to M.H. Sanford & Co. on January 11, 2016. Esposito's hourly rate typically was $1125 an hour. But Esposito agreed, "considering [their] mutual friendships," to "charge a project based, non-refundable fee of $55,000 for the six-month term of [the] agreement." (OCA Report, Attachment D, at 1.)
Given Sanford's liquidity problems, Esposito had a financial incentive to help Sanford find a way to generate cash by selling the PHC without an escrow requirement so that Sanford could pay Esposito's fee instead of his debt to the Knopfs.
Also on January 11, Ringel called Evan Glassman, Esq., a litigation partner at Steptoe & Johnson LLP, to inquire whether Glassman would be interested in working with Esposito on a pending matter. Glassman told Ringel that he did not have time to discuss her inquiry. He was extremely busy due to an impending court hearing in another case, he said. (See Excerpts from Glassman Deposition, NYSCEF No. 177 at Tr. 29, 31.)
The record does not reflect whether it was usual for Ringel to help her husband find counsel to assist him when a transactional matter also involved litigation.
That same day, Sanford instructed his attorneys, Akerman of Dorsey & Whitney (litigation counsel) and Feldman (real-estate counsel Sanford retained in connection with the PHC sale), to call the First Department to clarify the meaning of the Court's December 2015 Order. (OCA Report at 7.) On January 12, Akerman and Feldman called Ringel on her direct line at the First Department. They called Ringel's number at least three times that day. They spoke with her for several minutes on one of those occasions about the relationship among the Court's October, November, and December 2015 Orders — without opposing counsel on the line. (See OCA Report at 17, 19, and Attachment J.)
Akerman gave testimony regarding the call at a deposition in Knopf v. Phillips, No. 16-CV-06601, an action before Judge Denise L. Cote in the U.S. District Court for the Southern District of New York. Akerman testified that he had been speaking with Feldman on the phone and that he then called the First Department and patched in the person who answered. (Excerpts from Akerman Deposition, NYSCEF No. 174, at Tr. 22.)
Akerman also testified that when he and Feldman reached Ringel, he described to her the October 2015 and November 2015 Orders and asked her how the November Order affected the October Order and what the October Order's status was. (OCA Report at 11.) Akerman testified that it seemed as though Ringel had the orders in front of her when she told him that the November 2015 Order had "basically nullified" the October 2015 Order and that the December 2015 Order had no effect on the October 2015 Order because that order had already been nullified. (Id. )
In spring 2016, the First Department Clerk of Court, Hon. Susanna Molina Rojas, asked Ringel informally about the circumstances of the January 12 call. Ringel told Rojas that she had merely answered "a simple procedural question" by advising Akerman and Feldman "that once the court decides a motion, any interim orders would no longer be in effect." (OCA Report at 7.) Ringel later told the Inspector General's Office that she had informed Akerman and Feldman that "the interim order [i.e. , the October 2015 Order] was no longer in effect once there was a summary judgment by the bench." (Id. at 17.)
The context of this statement suggests that Ringel intended to refer to the Court's November 2015 Order. It is not clear, though, why she described that order as "a summary judgment." The First Department's only summary-judgment ruling in the case was issued in December 2014. A First Department December 2014 ruling could not have prospectively overruled its October 2015 ruling.
Immediately after the conference call with Ringel, Feldman wrote a memorandum to file memorializing the call. He forwarded his memorandum to Phillips's title company. (OCA Report at 14.) Feldman's memo stated that Ringel "confirmed" to him and Akerman that the "October 22, 2015 Interim Order with restraints was only in effect until motion decided" and that "[o]nce full [First Department] panel decided motion and entered the November 12, 2015 Order denying the restraints, all restraints were vacated." (OCA Report at 15 & Attachment D.) Akerman, who wrote a substantively identical memorandum about the call, gave his memorandum to Pursuit. (See Ackerman Aff., NYSCEF No. 190, at 5-7.) These memorandums, relying entirely on Ringel's legal opinions, allowed the sale of the PHC to close three weeks later in violation of the First Department's October 2015 escrow order.
On January 14, two days after Akerman and Feldman's call with Ringel, Glassman called Ringel back. They discussed whether Glassman would be willing to help Esposito with the litigation matter Ringel mentioned to Glassman on January 11. (NYSCEF No. 177, at Tr. 29, 31.) Glassman ultimately declined to act as Esposito's co-counsel.
Also on January 14, Ringel used her court email account to contact James M. McGuire, Esq., at Sanford's request, relayed through her husband, Esposito, to ask whether McGuire would be interested in helping Esposito represent Sanford in the Knopf litigation. (See OCA Report at 18; January 14 Emails.) McGuire was then a partner at the Dechert, LLP, law firm (Dechert). From 2005-2011, McGuire served as an Associate Justice of the Appellate Division, First Department. Ringel served as McGuire's Principal Law Clerk for three years. (OCA Report at 4.) Esposito also telephoned McGuire in early January 2016 to ask whether McGuire and Dechert would represent "MH Sanford & Company and other corporate defendants in certain litigation." (Esposito Deposition, Index No. 153821/2019, NYSCEF No. 111, at Tr. 71.) McGuire later agreed to join Sanford's team.
The January 14, 2016, emails between Ringel and McGuire appear in Attachment E of the OCA Report, filed under seal. The emails were also later included as an exhibit to an affirmation the Knopfs filed in the Knopf v. Esposito federal action. (See Decl. of Eric W. Berry in Support of Knopfs' Rule 60 (b) Mot., Ex. 16, Knopf v. Esposito , No. 17-CV-5833, ECF No. 140-16 [SD NY May 21, 2018] [January 14 Emails].)
The record does not reflect whether Sanford knew McGuire before the events at issue here or whether Sanford's only connection to McGuire came through Esposito and Ringel.
This court notified McGuire, like Ringel, of the motions relating to his representation of Sanford and offered him the opportunity to file a letter responding to the allegations in the motions. McGuire submitted a letter to the court dated July 1, 2019. (See NYSCEF No. 434.) In this letter, McGuire generally denied all the Knopfs' allegations and specifically denied any suggestion that he knew or believed that the January 12, 2016, call between Akerman and Feldman and Ringel was prearranged. (Id. ) (This decision does not make such a suggestion.)
On January 16, 2016, Sanford made an initial payment of $5000 to Esposito's firm. (Checks Made to Esposito at 2, NYSCEF No. 187.)
On February 1, 2016, the sale of PHC closed for $3 million. Neither Pursuit nor Sanford put any of the proceeds into escrow (OCA Report at 5), in violation of the First Department's October 2015 Order.
2. Troubling Aspects of Sanford's Efforts
The January 12, 2016, call among Akerman, and Feldman, and Ringel has several troubling aspects that merit consideration in light of their implications for the Knopfs' challenged subpoenas.
First , why Akerman and Feldman called Ringel to begin with is in controversy. Sanford gave deposition testimony in 2017 that the impetus for this call initially came from Lori Braverman, Esq., the closing attorney for Phillips, the PHC buyer. According to Sanford, the title company from which Phillips needed to obtain title insurance to close the sale wanted to "clarify[ ] that there were no further restraints on the unit being sold" and that "good title [could] be transferred" to Phillips. (Excerpts from Sanford Deposition, NYSCEF No. 175, at Tr. 58.) Sanford testified that Braverman told Feldman "that she was going to walk over to the Appellate Division" to "ask someone there for clarification that she could then give the title company." (Id. ) Sanford said that he had thought her doing so "would be ill-advised because Lori doesn't understand litigation matters" and that "it would be far more appropriate and effective if someone like Mr. Feldman, who is both a closing attorney, and a litigator," got clarification from the First Department instead. (Id. at Tr. 58-59.) Sanford said that he asked Akerman to be on the call as a witness. (Id. at 60.) Braverman testified at her deposition in Knopf v. Phillips , however, that her concern was with the First Department's October 2015 escrow order, not the Court's December 2015 Order. Braverman voiced concerns that the meaning of "proceeds" in the October 2015 Order was ambiguous. Braverman said she did not want Phillips, her client, "to disburse money in a [manner] that would not be compliant with a court order." (Braverman Deposition, NYSCEF No. 393, at Tr. 37-38, 43.) Braverman flatly denied saying that she wanted to walk over to the Appellate Division to find out the answer herself. (Id. at Tr. 24-25.)
Counsel for the Knopfs deposed Sanford in the Knopf v. Phillips federal action.
In other words, Braverman assumed that an escrow order was in place. She merely wanted clarity on where her client's money would have to go, given the Court's escrow order. Instead of working with Braverman to address her concerns, Sanford cut her out of the loop. He had his own attorneys ask Ringel whether the October 2015 escrow order was still in effect.
Also, it is undisputed that Akerman called the Court to ask questions of Ringel with Feldman serving as a witness, rather than the other way around, as Sanford suggested in his deposition.
Second , if the lawyers representing the parties to the PHC sale needed clarification about the meaning and current status of the First Department's October, November, and December 2015 Orders, a logical step would have been to call the First Department Clerk's Office to ask for assistance. Instead, Akerman and Feldman called Ringel — although her job responsibilities did not involve deciding motions or interpreting motion orders outside the specific context of conducting mediations assigned to her as the Court's special master.
Akerman and Feldman gave deposition testimony in Phillips that their call was made to a general number at the First Department and then transferred internally to Ringel. (See OCA Report at 9-10 [Akerman], 12 [Feldman].) Akerman also testified in that action that he saw no need to have counsel for the Knopfs on the call, precisely because he and Feldman were "just calling the Clerk's Office to get the status of the Order," rather than "calling a judge." (NYSCEF No. 174, at Tr. 39.) Akerman further testified expressly that he had not only called the Clerk's Office, but also that he double-checked with the person who answered to make sure he had reached that Office. (See id. at Tr. 50.)
Akerman and Feldman's testimony in this regard is at best inaccurate. Telephone records collected as part of the Inspector General's investigation show that Akerman and Feldman never called the First Department's Clerk's Office. The call was instead placed from Dorsey & Whitney, Akerman's law firm, to Ringel's direct line at the Court. (OCA Report at 17 & Attachment J.) Moreover, given Ringel's position as special master in charge of the First Department's mediation program, there would have been no reason for a First Department clerk to transfer to Ringel a call about orders in the Knopf v. Sanford litigation. Knopf v. Sanford was not in mediation.
The record does not reflect how Akerman and Feldman even knew Ringel's direct telephone number. Ringel told the Inspector General's Office that her direct line was not listed on the First Department's website and that she was unsure how Akerman and Feldman would have had that number. (See OCA Report at 17.) In a July 1, 2019, letter to this court, Ringel notes that her telephone number was publicly available on other websites (such as her attorney-registration page). (See NYSCEF No. 435, at 4.) But unless Sanford had told Akerman and Feldman to call Ringel in particular (which they all deny), there would have been no occasion for Akerman and Feldman to look up her phone number in publicly available sources.
Third , it is entirely unclear why Ringel thought it appropriate to answer Akerman and Feldman's questions. Ringel was an experienced First Department attorney, appointed by the Court as a special master. (OCA Report at 1, 4 n 10; January 14 Emails, supra note 19, at 1.) She knew that Akerman and Feldman were calling as Sanford's attorneys (see OCA Report at 16); that only the day before, Sanford retained Esposito, her husband, as an attorney (OCA Report at 4); and that she herself attempted the previous day to secure additional counsel, Glassman, to work with her husband on Sanford's behalf (NYSCEF No. 177, at Tr. 29, 31).
Ringel also knew that Akerman and Feldman were calling her with substantive, non-administrative questions wholly unrelated to her official job responsibilities, notwithstanding their lack of previous interaction. She knew or should have known that their questions arose in the context of a contentious appeal currently pending before the First Department. And she knew that counsel for the Knopfs was not on the call. Yet Ringel spoke to and answered Akerman and Feldman's legal questions anyway.
It was improper for Ringel to do so. As a First Department special master, Ringel was subject to the New York State Rules Governing Judicial Conduct. These Rules provide that anyone "who perform[s] judicial functions within the judicial system shall comply with [these] rules in the performance of their judicial functions." ( 22 NYCRR § 100.6 [A].) A special master responsible for mediating cases is performing the classically judicial function of determining whether a case can be resolved without further litigation — especially in cases in which the Court itself has directed the parties to appear for mediation. (See 22 NYCRR §§ 600.3, 1250.3 [c].) As then-Supreme Court Justice Helen E. Freedman wrote in the context of asbestos litigation, "[i]n general a special master or referee should be considered a judge for purposes of judicial ethics rules." ( Matter of Joint Eastern & Southern Districts Asbestos Litig. , 737 F. Supp. 735, 739-740 [E.D.N.Y. & S.D.N.Y. 1990] [opinion of Weinstein & Freedman, JJ.].)
The Rules Governing Judicial Conduct are drafted to preserve room for judicial actors to engage in mediation: The Rules create an exception from the ordinary prohibition on ex parte contact between judges and parties by permitting a judge, "with the consent of the parties," to "confer separately with the parties and their lawyers on agreed-upon matters." (22 NYCRR 100.3 [B] [6] [d].)
Ringel might have violated three of the Rules Governing Judicial Conduct simply by talking to Akerman and Feldman outside the Knopfs' counsel's presence: First, the Rules provide that a judge "shall not initiate, permit, or consider ex parte communications," unless those communications concern purely "scheduling or administrative matters that do not affect the substantial rights of a party," or are otherwise authorized by law. ( 22 NYCRR § 100.3 [b] [6].) Second, a judge may not "consider other communications made to the judge outside the presence of the parties or their lawyers concerning a pending or impending proceeding." (Id. ) Thus, whether or not the telephone call among Akerman, Feldman, and Ringel was an ex parte communication, Ringel violated the Rules Governing Judicial Conduct by considering and responding to Akerman and Feldman's questions without the Knopfs' counsel on the line. Third, the Rules provide that a judge may not preside over a matter in which the judge knows that she or her spouse "has an economic interest in the subject matter in controversy" or has "any other interest that could be substantially affected by the proceeding." (Id. § 100.3 [E] [1] [c].) Here, Esposito had obvious financial and legal interests in the outcome of the conversation among Akerman, Feldman, and Ringel.
Ringel did state in her interview with the Inspector General's Office that it made her "uncomfortable" to receive a telephone call from lawyers involved in a case that she had discussed with her husband and that she "could not wait to get off" the telephone. She appears not to have said, however, that she was uncomfortable with the ex parte nature of the call or with advising litigants on a matter in which her husband had a clear financial stake. And she said that because she did not know whom to transfer the call to, she did not transfer Akerman and Feldman to the Clerk's Office. (OCA Report at 17.)
In her July 1 letter to this court, Ringel also refers to her deposition testimony in Phillips that she had "attempted to end the call immediately by suggesting that [Akerman and Feldman] speak with the Clerk's Office." (NYSCEF No. 435, at 3.) At her deposition, Ringel stated that after she suggested that Akerman and Feldman speak with the Clerk's Office, they asked her whom in the Clerk's Office they should speak to. When she could not give them a specific name, Ringel testified, Akerman and Feldman persisted in asking her questions that she then answered. (NYSCEF No. 435, Ex. 1, at Tr. 44.)
Neither Akerman nor Feldman indicated in their depositions, though, that Ringel had suggested they speak with someone else at the First Department. (See NYSCEF No. 174, at 27-28, 37-39 [Akerman]; Excerpts of Feldman Deposition, NYSCEF No. 176, at Tr. 32-34.) And it is not clear why an attorney of Ringel's experience and position at the First Department would let attorneys she did not know browbeat her over the telephone into answering questions she herself said she found inappropriate.
Additionally, notwithstanding her asserted discomfort (and the other questionable aspects of the call), Ringel told no one at the First Department about it at the time. (OCA Report at 18.) And First Department Clerk Rojas told the Inspector General's Office that when she asked Ringel informally about the call several months later, Ringel "never mentioned that her husband had been retained" in another capacity by Sanford. Rojas said that she learned that fact on her own only by reading the complaint in one of the federal actions between the Knopfs and Sanford. (See OCA Report at 8.)
Ringel claimed to the Inspector General's Office that had mentioned that fact to Rojas in their 2016 conversation. (See OCA Report at 18.)
Fourth, taking Ringel at her word about what happened, she did not take any step necessary to give Akerman and Feldman an informed and accurate answer to their legal question. Ringel told the Inspector General's Office that Akerman and Feldman asked her "what the denial of the cross-motion meant." (Id. at 16-17.) Ringel said that she knew the orders to which they were referring, because she had previously seen them. She did not, however, pull up copies of any of the orders to refer to them during the call. Nor, she said, had she even looked up the case in the First Department's internal database. (OCA Report at 17.)
This question presumably referred to the First Department's December 29, 2015, order denying Sanford's cross-motion to vacate the Court's escrow order of October 22, 2015.
Akerman and Feldman evidently thought it necessary to have the orders in front of them to ask Ringel what the orders meant. (See OCA Report at 9-10.) It is unclear why Ringel thought she did not need to have the orders in front of her to answer that question.
Ringel has also repeatedly said that Akerman asked her only a "simple procedural question" (OCA Report at 7) and that she merely gave him a "statement of procedural fact." (NYSCEF No. 435, at 3.) But as noted above (see supra at Subsection I.C.1), Akerman's deposition testimony reflects that he did not ask her about general procedural principles, but rather about how three specific orders — which Akerman described to her — interacted with one another. (See NYSCEF No. 174, at Tr. 27-28.) And in light of the complex and tangled procedural context of these orders, Akerman's question was anything but simple. It could not be answered properly by mere resort to the "procedural fact" that temporary provisional relief granted pending a decision on a motion ends when the motion is decided, as Ringel contends. (See id. at 2.)
Even if one were to take at face value Ringel's account of Akerman's question (and her response), Ringel's answer to that question would have been wholly inadequate — as would have been clear had she looked the matter up in the Court's computer system.
And, as discussed in more detail above (see supra at Section I.B), Ringel's answer was wrong. The October 2015 escrow order and the November 2015 Order pertained to different motions — the Knopfs' October 2015 reargument motion (M-5459) and their July 2015 attachment/preliminary-injunction motion (M-3660), respectively.
In fact, the October 2015 Order made it clear on its face that it was not issued in connection the motion decided by the November 2015 Order: the October 2015 Order set a briefing schedule for an underlying motion (see OCA Report Attachment A), whereas the parties had fully briefed M-3660 by mid-August. (See NYSCEF No. 218 at 2-3, 2.) And, because of the parties' later stipulation modifying the schedule set in the October 2015 Order, the November 2015 Order was decided before Sanford and Pursuit had even filed their opposition to the Knopfs' October 2015 motion. (See OCA Report Attachment A; NYSCEF No. 429, at 4.)
That briefing schedule also was not modified in light of the Court's November 2015 Order.
Contrary to what Ringel told Akerman and Feldman, therefore, the entry of the November 2015 Order did not vacate by operation of law the Court's October 2015 Order's escrow requirement.
Nor, as discussed above (see supra at Section I.B), did even Sanford's lawyers contend at the time that the November 2015 Order had of its own force vacated the escrow requirement.
Yet based on the (inaccurate) information Ringel gave Akerman and Feldman in their brief and improper conversation on January 12, 2016, Sanford was able on February 1, 2016, to close on the sale of the PHC for $3 million, without putting any part of that sum into escrow.
D. Sanford's Disbursements of the Unrestricted Proceeds from Pursuit's Sale of the Real Property Between February 1, 2016 and February 25, 2016
1. Disbursements.
In the weeks following the PHC's closing, Sanford made a series of large disbursements to Esposito and others.
a. The check from Pursuit to Esposito
On the day of the closing, February 1, 2016, Feldman's firm wrote a check to Esposito's firm for $50,000 out of Feldman's
firm's escrow account. This $50,000 was deposited into an account, apparently Esposito's firm's escrow account, on February 2. Esposito transferred it to an account in his own name the next day, February 3. That day, February 3, he appears to have used that transferred $50,000 to pay his $48,000 American Express bill. (See NYSCEF No. 419, at 5, 7-8; Index No. 153821/2019, NYSCEF No. 103, at 1.)
Sanford deposited this check in the same Esposito PLLC account as other February 2016 checks Sanford made payable to the firm's escrow account. (See NYSCEF No. 187; Index No. 153821/2019, NYSCEF No. 97.)
The last four digits of the account to which Esposito transferred the money match the last four digits appearing on checks in the name of "Frank M. Esposito" (rather than Esposito P.C. or Esposito Partners, PLLC) that Esposito wrote later in February 2016. (See Index No. 15382/2019, NYSCEF Nos. 97, 100.)
b. The checks from Sanford to Dechert and Esposito
Three days later, on February 4, Sanford paid, from the sale proceeds, a $500,000 retainer to Dechert, McGuire's law firm. (See Knopf v. Esposito , 2017 WL 6210851, at *4, 2017 U.S. Dist LEXIS 201830, at *10 [S.D.N.Y. Dec. 7, 2017, No. 17-CV-5833] [Cote, J.].)
Between February 6 and February 8, Sanford remitted three additional checks, totaling $154,000, to the escrow account of Esposito's law firm. (NYSCEF No. 187, at 3-5.)
Also on February 8, the late Hon. Ira Gammerman, then a judicial hearing officer, issued a report finding that the Knopfs were entitled to $10,937,850 in damages against Sanford, with Pursuit jointly liable for $8,336,488. (OCA Report at 5 n 12.)
Esposito deposited the three additional checks from Sanford on February 9. On February 11, Esposito transferred another $50,000 from his escrow account to his personal account. (This $50,000 was separate from the initial $50,000 check and was drawn instead from the three checks Esposito deposited on February 9.) (NYSCEF No. 419, at 5.)
On February 24, SP Voyager Fund, LLC (an investment vehicle Sanford controlled) wrote a $10,000 check to Esposito Partners' escrow account, labeled "For Accountant." (NYSCEF No. 187.)
In total, Sanford paid Esposito $50,000 on February 2, 2016, plus $164,000 to Esposito's firm's escrow account between February 6 and February 24, 2016. c. The checks from Esposito back to Sanford
On February 25, 2016, after learning that Sanford sold the PHC without depositing any money into escrow, the Knopfs moved the First Department to compel Dechert to disgorge the $500,000 retainer that Sanford had paid Dechert for the services of McGuire and other Dechert attorneys and staff. The Knopfs also sought a preliminary injunction against Sanford, M.H. Sanford, Pursuit, and Dechert to prevent them from further dissipating assets, including the proceeds from the PHC sale. The Knopfs additionally sought contempt sanctions against Sanford for allegedly violating the Court's October 2015 escrow order. (See Notice of Motion, NYSCEF No. 214.)
Also on February 25, the Knopfs applied for interim relief requiring Sanford, Pursuit, Dechert, and any party to whom they had transferred PHC sale proceeds to put the proceeds into escrow immediately. Now-retired First Department Justice Karla Moskowitz granted the Knopfs' application. She entered an interim order requiring, by close of business on February 29, 2016, that all remaining proceeds from the PHC sale "be placed in escrow as had been directed by Justice Sweeny in 10/22/15 order, vacatur of which was denied by this Court's 12/29/15 order." (OCA Report at 5 n 13 [quoting order].)
Justice Moskowitz was on the First Department motions panel that issued the order of November 12, 2015. (See OCA Report Attachment B.) Her opinion was that the key order affecting the status of the escrow requirement was the Court's December 2015 Order (not the November 2015 Order). And she emphasized that the December Order had denied vacatur of the escrow requirement. This, too, demonstrates that the November 2015 Order did not affect the October 2015 escrow order — let alone dissolve it sub silentio by operation of law.
On February 27, Esposito transferred to the account in his own name the $114,000 remaining in the escrow account from the four February checks. (See NYSCEF No. 419, at 5.) He also wrote a check drawn on that account to SP Voyager Fund for $144,000. (See Index No. 153821/2019, NYSCEF No. 100, at 2-3.) Esposito further transferred an additional $15,217 directly to a Sanford account. (Id. at 3.)
The February 27 transfers from Esposito to Sanford left approximately $5000 remaining from the $164,000 that Sanford previously paid into Esposito's escrow account. The record does not show what Esposito did with this missing $5000. The record shows, however, that Esposito never returned the $50,000 that Sanford paid him through the February 1, 2016, check drawn on the Pursuit sale proceeds.
Esposito affirmed in the Knopf v. Esposito federal action before Judge Cote that all funds Sanford escrowed with him were returned in compliance with Justice Moskowitz's order of February 25, 2016. (See Index No. 153821/2019, NYSCEF No. 99, at 2.) And Sanford affirmed in a related action in Supreme Court, New York County, that Esposito returned on or about February 27, 2016, all funds that Sanford provided to him. (See Index No. 160455/2017, NYSCEF No. 20, at 4.) It is unclear why the February 27 transfers from Esposito to Sanford still leave $5000 unaccounted-for.
Justice Moskowitz's February 25, 2016, escrow order led to the placement of approximately $430,000 into escrow. (See NYSCEF No. 100, at 2.) That sum was less than 15 percent of the total PHC sale proceeds of $3 million — all of which, under the First Department's October 2015 Order, should have been put into escrow immediately at closing.
2. Peculiarities of Sanford's Post-Closing Disbursements.
A number of troubling questions exist about the disbursements Sanford made after the PHC sale closed.
First , even on Esposito's own account of his actions, he failed to return $50,000 in PHC sale proceeds to escrow, as Justice Moskowitz's February 25 order required, because he self-servingly credited Sanford's false representations about the source of the $50,000 check that Esposito received on February 2.
As discussed above, this check was written from the PHC sale proceeds on February 1, 2016, and deposited by Sanford into Esposito's firm's escrow account on February 2. (See Index No. 153821/2019, NYSCEF No. 97 at 7-8, No. 101.) Under Justice Moskowitz's order of February 25, 2016, this $50,000 was required to be put back into escrow. It was not.
The Knopfs later brought a special proceeding against Esposito and others before this court, seeking among other things an order directing turnover of the $50,000. (See Knopf v. Feldman & Assocs. , Index No. 153821/2019, 2019 WL 3211388 [Sup. Ct., N.Y. County].) Esposito vigorously contested the Knopfs' turnover petition, including filing strongly worded opposition papers. He argued among other things that ordering him to turn over the money would be inappropriate because he had no funds from Pursuit in his possession.
This court issued an order in the turnover proceeding on July 11, 2019, concurrently with the initial version of this decision. The order directed Esposito to pay to Pursuit's Trustee the $50,000 plus appropriate interest. (See Knopf v. Feldman & Assocs. PLLC , Index No. 153821/2019, 2019 N.Y. Slip Op. 51145 [U], 2019 WL 3211388 [Sup. Ct., N.Y. County July 11, 2019].)
In particular, Esposito relied on Sanford's emphatic statements that " Pursuit did not pay Esposito " and that any suggestion that Pursuit (rather than Sanford) paid Esposito's firm in 2016 was " factually false ." (Index No. 153821/2019, NYSCEF No. 71, at 9-10 [Esposito's bolding and underlining] ). At oral argument on the turnover proceeding in May 2019, Esposito told this court that he "never saw the check," "never touched the check," and "never had possession of the check" — and that the check did not appear on his bank statement, either. (Oral Argument Transcript, Index No. 153821/2019, NYSCEF No. 102, at 31.)
Esposito himself never said in this filing that he was paid from Sanford's own funds, rather than Pursuit's funds. He merely quoted Sanford as saying so, and bolded and underlined Sanford's statements.
Thus, Esposito claimed, his only information was "what I have been told by Mr. Sanford," i.e. , that Sanford was "saying he paid [Esposito] from his personal funds." (Id. at 28.) And when this court asked Esposito why he thought that Sanford was correct that the $50,000 check was drawn on Sanford's personal funds, Esposito could say, only, "well, I don't know," but "certainly someone tells you something, you believe them." (Id. at 30.)
Esposito did not explain why he failed to take steps to learn the source and nature of this $50,000 deposit in light of his record-keeping obligations under Rule of Professional Conduct 1.15 (d) (1) (i).
Yet the record indicates that Esposito might have had reason to believe that Sanford's statements were untrue. In particular, Sanford testified at a deposition in Phillips that he had told Esposito months before retaining him that Sanford was experiencing liquidity trouble due to his inability to sell the PHC, and that as a result he might be forced to hire an attorney only on a contingency basis — or refrain from hiring counsel altogether. (See supra at Subsection I.C.1.)
Esposito has not indicated whether he had ever asked Sanford directly between February 3, 2016, and February 25, 2016, whether the $50,000 check came from Sanford's personal funds or PHC sale proceeds. Nor has he indicated whether, given the context and emphatic language of Justice Moskowitz's February 25 escrow order, Esposito then asked Sanford about the source of the funds — and thus about whether the $50,000 was subject to Justice Moskowitz's escrow order.
This omission is strange in light of statements Esposito made at oral argument in Manhattan Leasing v. Esposito , Index No. 160455/2017, a related proceeding in Supreme Court, New York County, before Justice John J. Kelley, in which another of Sanford's creditors sought turnover from Esposito of funds alleged to have been escrowed with him by Sanford. There, Esposito characterized Sanford as taking Justice Moskowitz's order very seriously and demanding that Esposito "return any money [he was] holding for [Sanford], immediately" — to the point that Esposito arranged for immediate transfer of $144,000 to Sanford while Esposito was traveling on vacation. (See Excerpts from Oral Argument Transcript, Index No. 153821/2019, NYSCEF No. 98, at Tr. 10-11.)
It is disturbing that Esposito — a capable and experienced attorney who bills more than $1000 an hour and serves as an Acting Village Justice — might have chosen not to ask too many questions about whether the $50,000 was subject to Justice Moskowitz's escrow order, or even that Esposito might have knowingly ignored that order altogether. It is more disturbing still that in opposing turnover of the $50,000, Esposito attempted to persuade this court to deny turnover by relying on statements by Sanford that Esposito might have had reason to believe were false.
In the turnover proceeding, this court considered whether Esposito's conduct had gone so far as to merit sanctions. (See Knopf v. Feldman & Assocs. PLLC , Index No. 153821/2019, 2019 N.Y. Slip Op. 51145 [U], at *4 n. 6, 2019 WL 3211388 [Sup. Ct., N.Y. County July 11, 2019].) Although this court concluded that sanctions were not warranted under the particular circumstances of that proceeding, this court remains troubled by Esposito's actions in this matter.
Regardless, the evidence has since demonstrated that the statements by Sanford on which Esposito at least professed to believe and rely were knowingly or recklessly false when Sanford made them.
Second , significant questions exist about why Sanford paid Esposito the initial $50,000 check on February 1 from the PHC sale proceeds.
In a June 9, 2019, letter to this court in the turnover proceeding, Esposito asserted — seemingly for the first time — that "the $50,000 received by my firm on February 3 [of 2016] was in relation to the engagement agreement with M.H. Sanford & Co." (Index No. 153821/2019, NYSCEF No. 103, at 1.) But the check was drawn on funds held by Pursuit (from the PHC sale), not M.H. Sanford. Esposito did not give a reason why Sanford would, or properly could, pay the bills of one company using the funds of another company.
Esposito also does not explain why Sanford, to pay an outstanding bill for services rendered, deposited the check into Esposito's firm's escrow account, rather than an operating account. And Esposito does not explain why he transferred the money immediately after its deposit from the firm escrow account to an account in his own name, rather than to a law-firm operating account.
Moreover, Esposito's representation in his June 9 letter that the check went toward Esposito's fee under his engagement agreement with M.H. Sanford conflicts with Esposito's own prior deposition testimony.
It is undisputed that Esposito's agreed-upon fee under the engagement agreement was $55,000 (OCA Report Attachment D); and that Sanford paid an initial $5000 toward that fee on January 16, 2016. (See supra at Subsection I.C.1.) Had the $50,000 payment to Esposito on February 3 also been directed toward Esposito's fee, that $50,000 would have fully satisfied Sanford's remaining balance under the engagement agreement. But Esposito testified in 2017 in his deposition in the Knopf v. Phillips federal action that Sanford had not yet paid the full amount of Esposito's fee — and that Esposito believed that Sanford had only made one payment toward that fee. (See Esposito Deposition Transcript at 63-64, 66, Knopf v. Phillips , Docket No. 16-cv-06601 [SD NY], reproduced at Index No. 153821/2019, NYSCEF No. 111.)
Similarly, Sanford affirmed in December 2017 in the Manhattan Leasing action that M.H. Sanford "still owes [Esposito's firm] a portion of the engagement fee it contracted for" and that M.H. Sanford "is indebted to Esposito for the remainder of the engagement fee." (Index No. 160455/2017, NYSCEF No. 20, at 3.)
Esposito has not attempted to reconcile the contradiction between his June 9 representation, his prior sworn testimony, and Sanford's sworn statements.
Third , with respect to the additional checks Sanford wrote in February 2016 payable to Esposito's firm's escrow account, Esposito has never explained why he moved another $50,000 from those additional checks from escrow and into a personal account — or how such a transfer was permissible under the commingling restrictions imposed by Rule of Professional Conduct 1.15 (a) and (b). Nor has Esposito said what he did with that second $50,000 transfer once it was in his personal account.
In his letter to this court of June 9, 2019, Esposito emphasized that he has never commingled client and personal funds into his escrow account. (See Index No. 153821/2019, NYSCEF No. 103, at 1-2.) He did not address whether he has ever commingled client and personal funds into a personal account.
Fourth , following the issuance of Justice Moskowitz's February 25 escrow order, Esposito did not comply with the order by writing a check or checks drawn on his firm's escrow account and payable to a bank escrow account. Nor, for that matter, did Esposito write a check or checks to Sanford drawn on his firm's escrow account.
Instead, Esposito transferred the portion of the Sanford checks remaining in his firm's escrow account (approximately $114,000) to his personal account, wrote a check on that personal account to SP Voyager Fund for $144,000, and transferred another $15,000 to a Sanford bank account. (See Index No. 153821/2019, NYSCEF No. 100.) Esposito has never satisfactorily accounted for why he proceeded in this atypical fashion.
At oral argument in the Manhattan Leasing action, Esposito told Justice Kelley that after Justice Moskowitz issued her escrow order, Sanford contacted Esposito while Esposito was traveling and directed him to return immediately the full amount Sanford escrowed with Esposito. Esposito said that even before seeing the order, he had already promised Sanford that he would send Sanford the amount by personal check. (See Index No. 153821/2019, NYSCEF No. 98, at Tr. 10.) When Justice Kelley pressed whether Esposito "realize[d] how weird" his actions appeared, Esposito's only response was that "this is what the client asked me to do" and that he "complied with the client's request." (Id. at Tr. 11.) Esposito also suggested to Justice Kelley that he transferred the money to his personal account and wrote a check to SP Voyager Fund on that account because "from that account [he could] give [Sanford] a Chase check," which would "be like an immediate transfer because [Sanford] banked with Chase." (Id. at Tr. 10.) But both Esposito's personal and escrow accounts were Chase accounts. (See Index No. 153821/2019, NYSCEF No. 97, at 5, 9.) It is thus unclear what transferring the money to a personal account accomplished.
3. The Knopfs' state-court motions against potential recipients of the PHC sale proceeds
As noted above (see supra at Paragraph I.D.1.c), Justice Moskowitz entered her February 25, 2016, escrow order as interim relief on the Knopfs' motion asking the First Department to grant a preliminary injunction, disgorgement, and contempt sanctions.
In early March 2016, Sanford, Dechert, and Pursuit responded to the Knopfs' motion for disgorgement and contempt sanctions; these parties also cross-moved for sanctions against counsel for the Knopfs, arguing that the Knopfs' motion for contempt and disgorgement against Dechert, in particular, was frivolous. (See NYSCEF Nos. 427 [motion papers], 429 [memorandum of law].)
Sanford filed an affidavit in support of his opposition to the Knopfs' motion. The affidavit stated that he had "solicited and received legal advice that the proceeds of the PHC sale did not need to be escrowed," in the form of memorandums from Akerman and Feldman; that the memorandums stated that the "October 22, 2015 interim injunction had been vacated and dissolved as a matter of law by the November 12, 2015 full panel decision"; and that Pursuit's sale of the PHC without putting the proceeds into escrow was made "[p]ursuant to the legal advice [Sanford] received." (See NYSCEF No. 217 at 2-3, reproduced at NYSCEF No. 427, at 2-3.)
McGuire also submitted an affirmation in support of the opposition to the motion and in support of the cross-motion for sanctions — asserting, in essence, that Sanford should not be held in contempt because he had reasonably relied on the advice of counsel that the October 2015 escrow order was no longer in place.
The Knopfs also then moved in Supreme Court before Justice Braun for a new order of attachment because the PHC was sold without the proceeds being put into escrow. In opposing that motion, Sanford and Akerman submitted affirmations that again raised an advice-of-counsel defense, based on Akerman and Feldman's memorandums describing their January 12, 2016, call with Ringel. (See Sanford Aff., NYSCEF No. 309, at3, 35-39; Akerman Aff., NYSCEF No. 310, at6-7.) Neither Sanford's affidavit nor Akerman's affirmation described Ringel by name. The Knopfs continued to be unaware of Ringel's involvement.
McGuire affirmed that Sanford "solicit[ed] the advice of two attorneys, both of whom informed him in writing after consulting with and being told by an attorney employed by this Court" that the October 2015 escrow order "had no legal force or effect as a result of issuance" of the November 2015 Order. (McGuire Aff., NYSCEF No. 189, at 6, ¶ 22, reproduced at NYSCEF No. 427, at 15.)
But McGuire's affirmation contained notable omissions. McGuire possessed the Feldman and Akerman memorandums memorializing the January 12 call with Ringel and offered to provide those memorandums to the First Department for in camera review. (NYSCEF No. 189 at 6, 20.) Yet McGuire did not disclose in his affirmation that Akerman and Feldman had spoken to Ringel . (Id. at 6, ¶ 22.)
McGuire waived the privilege about that advice when he disclosed in his affirmation and memorandum of law of the substance of the advice Akerman and Feldman gave Sanford. McGuire had no basis, therefore, not to attach the memorandums themselves as exhibits to his motion papers — which would have immediately disclosed Ringel's involvement — as opposed merely to offering to provide the memos upon request.
In May 2016, the Court asked McGuire to provide copies of the Feldman and Akerman memorandums. The First Department did not request that the copies of the memorandums be provided only for in camera inspection; but McGuire nonetheless submitted the memorandums to the Court alone, rather than to both the Court and the Knopfs. (See NYSCEF No. 191, reproduced at NYSCEF No. 430; see also Excerpt from McGuire Deposition, NYSCEF No. 433, at Tr. 111.) Counsel for the Knopfs objected to the Court's considering the two memos without giving him a chance to review the memos as well, arguing that Sanford waived the attorney-client privilege because he used the advice-of-counsel defense. (See NYSCEF No. 432.) The First Department panel ultimately determined that it would not consider either memorandum. The Court returned them to McGuire; no Justice had read it. (OCA Report at 7.) Short of reading the memos themselves, the panel had no way to learn that Ringel was the "attorney employed by the Court" referenced in McGuire's affirmation.
McGuire also knew from Ringel that she was not just any First Department court attorney. She was the Court-appointed special master in charge of the Court's Special Master's mediation program. (See January 14 Emails, supra note 19, at 1-3.) Nonetheless, McGuire's affirmation artfully referred to Ringel as an "attorney employed by this Court." (NYSCEF No. 189 at 6, 22.) He did not even use Akerman and Feldman's description of Ringel as a "court attorney" — a better description than McGuire's, though still one that avoided describing Ringel's title and role at the First Department in a way that would alert the Court that Akerman and Feldman had spoken to Ringel, in particular, on January 12, rather than to a court attorney ethically offering conflict-free information through the Clerk's Office as a service to the public.
McGuire's artful description of Ringel's job sent First Department Clerk Rojas on a wild goose chase. Rojas later told the OCA Inspector General's Office that upon reading McGuire's affirmation, she initially assumed that Akerman and Feldman had spoken with an appropriate court attorney reached through the Clerk's Office. Rojas became aware that Akerman and Feldman had instead spoken with Ringel only when McGuire submitted the memorandums to the Court two months later. (See OCA Report at 7.) Additionally, McGuire knew that Esposito — Ringel's husband — was representing Sanford at the time of the January 12 call. (See January 14 Emails, supra note 19, at 1.) And McGuire knew that Ringel had herself been recruiting counsel for Sanford the same week as the call, because Ringel had recruited McGuire himself . (OCA Report at 4; see also January 14 Emails.) This information, too, was absent from McGuire's affirmation.
Rojas also told the Inspector General's Office that she had looked at the memorandums before the First Department Justices decided to return the memorandums without reviewing them. (See OCA Report at 7.) McGuire's conduct put Rojas in the untenable position of knowing important information — Ringel's hidden involvement in the January 12 telephone call — that the Justices did not have.
Noteworthy also is that both McGuire's affirmation defending Sanford's reliance on Ringel's opinion (see NYSCEF No. 427, at 10-19) and McGuire's accompanying memorandum of law (NYSCEF No. 429) themselves implicitly concede that Ringel incorrectly advised Akerman and Feldman about the escrow requirement.
When she spoke to Akerman and Feldman, Ringel apparently assumed, without checking, that the October 2015 and November 2015 Orders related to the same motion. She told Akerman and Feldman that because the October 2015 "Interim Order with restraints was only in effect until motion decided," once the "full panel decided motion and entered the November 12, 2015 Order denying the restraints, all restraints were vacated." (OCA Report Attachment F [Feldman Memo]; see also supra at Subsection I.C.1.)
But as McGuire conceded in opposing the Knopfs' contempt motion, the October 2015 and November 2015 Orders did not relate to the same motion. Rather, the October 2015 Order granted interim relief on the Knopfs' October 22, 2015, motion, whereas the November 2015 Order denied the Knopfs' July 24, 2015, motion. (See NYSCEF No. 427, at 2-4; NYSCEF No. 429, at 3-6.) McGuire's argument to the Court implicitly suggests that Ringel lacked a proper foundation to tell Akerman and Feldman that the escrow order had been dissolved.
To get around the (significant) problem that Akerman, Feldman, and Sanford had relied on Ringel's incorrect legal advice in failing to put the sale proceeds into escrow, McGuire devised for the First Department a new and creative argument why the Court's November 2015 Order vacated the October 2015 escrow order. McGuire contended that because (i) the Knopfs' July 24, 2015, motion sought a preliminary injunction and that because (ii) the Knopfs' October 22, 2015, motion also sought a preliminary injunction as alternative relief, (iii) the First Department's November 2015 Order denying the July 24 preliminary-injunction motion also denied, impliedly, the preliminary-injunction request in the October 22 motion. And McGuire contended (iv) that the October 2015 escrow order was (assertedly) entered based on the October 22 motion's request for injunctive relief, and therefore (v) that because the November 2015 Order had, impliedly, denied that request for injunctive relief, the October 2015 escrow order was thereby, impliedly, dissolved as moot by operation of law. Thus, (vi) the December 2015 Order, had, impliedly, denied Sanford's motion to vacate the escrow order solely on the ground that the motion to vacate was purely academic. (See NYSCEF No. 429, at 6-9.)
This convoluted argument thus defended Sanford's conduct on an entirely different basis from the one Ringel gave. But even on its own terms, McGuire's argument had several shortcomings. McGuire's argument ignored that the Knopfs' October 22, 2015, application for interim relief had sought a stay in connection with the October 2015 motion's request for reargument of the Court's October 6, 2015, order — not the motion's request for a preliminary injunction. (See NYSCEF No. 428 Ex. 1.) Nor did it address that the October 2015 motion's request for reargument pertained ultimately to the appeal from Justice Tingling's order cancelling notices of pendency, whereas the Knopfs' July 2015 motion pertained to their appeal from Justice Braun's order denying a request for attachment.
McGuire's argument also stemmed from a close reading of the First Department's October 2015, November 2015, and December 2015 Orders. Ringel admitted that she had not even looked at the orders when giving Akerman and Feldman her legal opinion. (See supra at Subsection I.C.2.)
McGuire's argument required its readers to assume that the First Department would intend, without ever saying so, its order on one motion to have multiple collateral effects on another motion filed in connection with a different appeal; and that the First Department would later, again without saying so, deny a motion as having been made academic before it was even filed .
Sanford's own prior lawyers, moreover, had not understood the First Department to have operated in the uncharacteristic manner McGuire says it did. As noted above (see supra at Section I.B), Sanford's November 2015 motion to vacate the escrow requirement argued that the escrow requirement should be vacated in light of the November 2015 Order, not that the November 2015 Order had already (silently) vacated the escrow requirement. Although McGuire later characterized Sanford's lawyers as having made the motion to vacate merely "for the avoidance of any conceivable doubt" (NYSCEF No. 429, at 7), that characterization is belied by the vacatur motion papers themselves. (See NYSCEF No. 428, Ex. 3, at 9, 31.)
Sanford was represented at the time by attorneys from the law firm Holwell Shuster & Goldberg LLP. (See NYSCEF No. 428 Ex. 2.) McGuire himself left Dechert in summer 2016 for Holwell Shuster.
Further, McGuire's explanation that the November 2015 Order had vacated the October 2015 escrow order, and that the December 2015 Order therefore denied Sanford's motion to vacate the escrow requirement as academic, cannot account for why Sanford had sought clarity about the effect of those orders in such a circuitous, surreptitious, and improper fashion. If Sanford believed that the cumulative effect of the Court's orders was that no escrow requirement was in place, Sanford could simply have gotten confirmation from the First Department Clerk's Office — without needing to direct two of his attorneys to make an ex parte call to the wife of an attorney he retained that day.
McGuire also did not disclose to the Court any of the questionable aspects of the January 12, 2016, call between Akerman and Feldman and Ringel. Nor, for that matter, did he acknowledge that Justice Moskowitz — who had been on the First Department panel that issued the November 2015 Order — had the previous month stated that the escrow requirement remained in place following the November 2015 Order. (See supra at Paragraph I.D.1.c.)
On June 16, 2016, the First Department issued an order denying the Knopfs' motion for contempt and disgorgement and denying Sanford's cross-motion for sanctions. (OCA Report Attachment G.) The order did not give a reason for its denial.
That same day, though, the First Department substituted a revised order (Revised June 2016 Order) to explain its reasoning. (See OCA Report at 6.) The Revised Order held that "[t]he motion for contempt is denied because the [October 2015] TRO [temporary restraining order] was vacated once plaintiffs' prior motion for a preliminary injunction was denied" and that the "cross motion is also denied in all respects." (OCA Report, Attachment H.) The Court's explanation for the denial of contempt appears to have been based on McGuire's arguments in his memorandum of law, although the Court expressed them much more simply.
Among other things, the Revised June 2016 Order cited an older First Department case, People v. Asiatic Petroleum, 45 A.D.2d 835, 357 N.Y.S.2d 542 [1st Dept. 1974] ), referenced in McGuire's memorandum of law. (See NYSCEF No. 429, at 7.)
The Revised June 2016 Order (unlike the order it replaced) did not reference the Knopf's request for disgorgement. (See OCA Report Attachments G and H.) In otherwise disposing of the motion, the Revised June 2016 Order denied that request by implication.
4. The Knopfs' federal actions against potential recipients of the PHC sale proceeds
On June 21, 2017, after discovering that Ringel was the First Department attorney who had advised Akerman and Feldman that the escrow order had been vacated, the Knopfs sued Esposito, Dorsey & Whitney, Akerman, Feldman, and Sanford in the Southern District of New York for conspiracy to violate the Knopfs' due-process rights. (See Knopf v. Esposito , 2017 WL 6210851, 2017 U.S. Dist LEXIS 201830 [S.D.N.Y., Dec. 7, 2017, No. 17-CV-5833] [Cote, J.].)
In July 2017, after finding out that the conversation among Ringel, Akerman, and Feldman was the subject of litigation in federal court, the Presiding Justice of the First Department referred the Knopfs' allegations regarding this conversation to the OCA Office of the Inspector General. (OCA Report at 1, 8.) After interviewing Ringel and First Department Clerk Rojas (and reviewing numerous court filings and deposition transcripts), the Inspector General's Office issued a report in March 2018.
In December 2017, apparently without knowing that the First Department had referred the matter to the Inspector General, the District Court dismissed the Knopfs' federal claims in the Knopf v. Esposito action. ( See Esposito , 2017 WL 6210851, 2017 U.S. Dist LEXIS 201830.) Akerman, Feldman, Dorsey & Whitney, and Esposito moved for sanctions. In March 2018, the District Court granted Dorsey & Whitney and Esposito's motions for sanctions: The court awarded Dorsey & Whitney $177,857.50 in attorney fees jointly and severally against the Knopfs and their counsel, Eric W. Berry, Esq., and it awarded Esposito $20,000 against Berry individually. (See Knopf v. Esposito , 2018 WL 1226023, 2018 U.S. Dist LEXIS 35533 [S.D.N.Y., Mar. 5, 2018, No. 17-CV-5833].)
The Knopfs' appeal of the District Court's rulings in the Esposito action is pending before the U.S. Court of Appeals for the Second Circuit.
The District Court awarded Dorsey & Whitney sanctions against the Knopfs based on the court's finding that the Esposito action was frivolous in two ways: (i) the Knopfs' claim that Akerman conspired with Sanford, Esposito, Ringel, and others to harm the Knopfs was groundless and unsupported; and (ii) the Knopfs lacked a colorable basis to argue that the January 12 call with Ringel affected any encumbrances on the sale of the PHC, because the November 2015 Order had already removed those encumbrances. ( Esposito , 2018 WL 1226023, at *5-*6, 2018 U.S. Dist LEXIS 35533 at *13-*19.)
The District Court made the Dorsey & Whitney sanctions award joint and several against Berry as well because, the court concluded, Berry brought the Esposito action against Dorsey & Whitney vexatiously, as part of a larger pattern of harassment of individuals and entities associated with Sanford, and had otherwise acted in bad faith (for example, covertly videotaping Sanford during a deposition, while falsely denying on the record that he had done so, for use as a means of threatening Esposito with reputational harm). (Esposito , 2018 WL 1226023, at *2-*3, *6, 2018 U.S. Dist LEXIS 35533, at *7-*9.)
The District Court awarded Esposito sanctions against Berry personally because "Esposito was personally the target of a number of Berry's improper threats of reputational harm," including "the unsupported bribery allegations" in the First Amended Complaint and a letter from Berry to Ringel accusing Esposito of bribery. ( Id. at *7.)
Upon becoming aware of the District Court's sanctions order, OCA gave the court a copy of its Inspector General's Report. The District Court made the OCA Report public when it issued an order on April 23, 2018, that it "would entertain motions pursuant to Rule 60 (b), Fed. R. Civ. P., to vacate or modify the final judgment and sanctions order issued in this case." ( Knopf v. Esposito , 2018 WL 1961105, 2018 U.S. Dist LEXIS 85046 [S.D.N.Y., Apr. 23, 2018, No. 17-CV-5833].)
On May 14, 2018, the Knopfs filed a Rule 60 (b) motion and sought leave to file a second amended complaint. On July 25, 2018, the District Court denied the Knopfs' motion for leave to file a second amended complaint but vacated the sanctions awarded to Esposito and reduced to $88,928.75 the sanctions awarded to Dorsey & Whitney against the Knopfs and Berry. (See Knopf v. Esposito , 2018 WL 3579104, 2018 U.S. Dist LEXIS 124451 [S.D.N.Y. July 25, 2018, No. 17-CV-5833].)
With respect to the Esposito sanctions, the District Court explained that the OCA Report's description of Ringel's conduct relating to the January 12 call raised "many questions ... about Esposito's role in these events," rendering an award of sanctions in his favor "unwarranted." ( Id. , 2018 WL 3579104, at *6, 2018 U.S. Dist LEXIS 124451, at *17.)
As for the Dorsey & Whitney sanctions award, the District Court acknowledged that the OCA Report had removed one of the two bases for the award, because the report "makes more plausible the existence of a conspiratorial agreement among at least some of the defendants to have Esposito's wife, who is the Court Employee, offer an opinion that would permit the sale of PHC to proceed unencumbered by any court-issued restraints." ( Id. , 2018 WL 3579104, at *3, 2018 U.S. Dist LEXIS 124451, at *9.)
But the District Court concluded that even after taking the OCA Report into account, the second ground for awarding sanctions remained intact. The court held that the Revised June 2016 Order essentially established that the Knopfs' federal action was frivolous when filed, given the Order's ruling that the November 2015 Order had vacated the escrow requirement. The District Court therefore reduced the Dorsey & Whitney sanctions award only by half. ( Id. , 2018 WL 3579104, at *5-*6, 2018 U.S. Dist LEXIS 124451, at *12-*15.)
In reaching this conclusion, the District Court acknowledged that "the Knopfs correctly note that the motion numbers on the Appellate Division orders are different" — in other words, that the October 2015 and November 2015 Orders were issued on different motions. ( Id. , 2018 WL 3579104, at *4, 2018 U.S. Dist LEXIS 124451, at *10.) That fact indicates strongly that the November 2015 Order did not , as the District Court had earlier believed, vacate the October 2015 escrow order. But the District Court ultimately relied on the Revised June 2016 Order as having unequivocally established before the Knopfs filed their federal action that no escrow requirement existed at the time of the January 12, 2016, call between Akerman and Feldman and Ringel (or when Pursuit sold the PHC to Phillips on February 1, 2016). ( Id. , 2018 WL 3579104, at *4, 2018 U.S. Dist LEXIS 124451, at *10-*12.)
E. The Knopfs' Subpoenas in Support of Satisfying Their Money Judgment Against Pursuit On February 22, 2018, this court entered a judgment against Pursuit for $9,867,832.61. (See Knopf v. Sanford , 2018 N.Y. Slip Op. 30611 [U], at *20, 2018 WL 1769299 [Sup. Ct., N.Y. County 2018].)
On May 3, 2018, the Knopfs served Akerman with a deposition subpoena duces tecum under CPLR 5223 and 5224 (a) (1) and (2) to obtain information relevant to satisfy the Knopfs' judgment against Pursuit. The subpoena requires Akerman to appear for a deposition and to bring with him documents concerning communications between Sanford and Akerman and between Feldman and Akerman from December 29, 2015, through January 12, 2016, inclusive. (Akerman Subpoena, NYSCEF No. 162.) The Knopfs also served an information subpoena on Dorsey & Whitney under CPLR 5224 (a) (3), seeking certain additional details regarding documents created around the time of the January 12 call that Dorsey & Whitney withheld under the attorney-client and work-product privileges. (See Dorsey & Whitney Subpoena, NYSCEF No. 158.)
Akerman and Dorsey & Whitney each now move under CPLR 2304 and 3103 to quash the deposition subpoena to Akerman and the document and information subpoenas to Akerman and Dorsey & Whitney, and for a protective order. (Amended Notice of Motion, NYSCEF No. 154.) The Knopfs cross-move to enforce the subpoenas. (Notice of Cross-Motion, NYSCEF No. 192.)
On May 9, 2018, the Knopfs served on Sanford a deposition and document subpoena under CPLR 5223 and 5224 (a) (1) and (a) (2). (Sanford Subpoena, NYSCEF No. 239.) The subpoena requires Sanford to appear for an oral deposition. It also seeks communications between Sanford and Akerman from December 29, 2015 to January 12, 2016, inclusive, and between Sanford and McGuire between August 1, 2015 and February 7, 2016, inclusive. It further seeks documents the Knopfs assert are relevant to collecting their judgment against Pursuit.(Id .) Sanford moves under CPLR 2304 and 3103 to quash the subpoena and for a protective order under CPLR 5240. (Final Amended Notice of Motion, NYSCEF No. 193.) Here, too, the Knopfs cross-move to enforce the subpoena. (Notice of Cross-Motion, NYSCEF No. 237.) On September 12, 2018, Sanford caused Pursuit to file for bankruptcy relief under Chapter 7 of the federal Bankruptcy Code. On March 12, 2019, United States Bankruptcy Judge Martin Glenn approved an agreement between Pursuit's Chapter 7 Trustee, Deborah J. Piazza (Trustee), and the Knopfs and their company Delphi Capital Management, LLC, which settled the litigation between the Knopfs and Pursuit while leaving the Knopfs free to pursue related claims against other defendants (Bankruptcy Settlement). (See Bankruptcy Settlement, NYSCEF No. 308; Matter of Pursuit Holdings (NY), LLC , 2019 WL 1220928, 2019 Bankr LEXIS 785 [Bankr S.D.N.Y. Mar. 12, 2019, No. 18-12738] [order approving settlement], reproduced at NYSCEF No. 319.)
On March 20, 2019, the Knopfs moved by order to show cause to direct Dechert to turn over the balance of the retainer that Sanford paid to Dechert (approximately $75,000) from Dechert's escrow account. Sanford, a non-party, received proper notice but did not appear. This court granted the order on March 20, 2019. (See Knopf v. Dechert , LLP , Index No. 152519/2019, NYSCEF No. 23 [Sup Ct, NY County Mar. 20, 2019].)
On April 17, 2019, the Knopfs served additional subpoenas on Feldman and Citibank under CPLR 5223 and 5224 (a) (1)-(3). (See NYSCEF No. 388.) These subpoenas were aimed at obtaining information regarding the disposition of $75,000 of the PHC sale proceeds that still remained unaccounted-for. Feldman moved to quash and for a protective order (see NYSCEF No. 386); the Knopfs cross-moved to enforce (NYSCEF No. 394).
The Knopfs have since determined that approximately $25,000 of the $75,000 was paid toward legitimate closing-related expenses. (See Index No. 153821/2019, NYSCEF No. 88.) With respect to the remaining $50,000, as noted above (see supra at Subsection I.D.2), this court has issued an order directing Esposito to turn over that sum plus appropriate interest to the Trustee. (See Knopf v. Feldman & Assocs. PLLC , Index No. 153821/2019, 2019 N.Y. Slip Op. 51145 [U], 2019 WL 3211388 [Sup. Ct., N.Y. County July 11, 2019].)
II. DISCUSSION
The court-approved Bankruptcy Settlement between Pursuit's Trustee and the Knopfs expressly preserved the Knopfs' right to pursue "[t]hird-Party Discovery, and the prosecution of any third-party claims (i.e. , claims against entities other than the Debtor that may be jointly liable or liable as accessories for the damages underlying the Judgment)." (Bankruptcy Settlement, NYSCEF No. 308, at 6.)
Under CPLR 5223, a "judgment creditor may compel disclosure of all matter relevant to the satisfaction of a judgment" any time before the judgment is satisfied or vacated. This broad standard applies to the various subpoena devices detailed in CPLR 5224, including a subpoena duces tecum under CPLR 5224 (a) (2) and an information subpoena under CPLR 5224 (a) (3). A subpoena duces tecum accomplishes disclosure through the production of documents at a specified time and place. An information subpoena is a set of questions asked and answered by mail. It is analogous to a discovery interrogatory.
Among the grounds to quash a subpoena is that the subpoena seeks irrelevant information (see Velez v. Hunts Point Multi-Serv. Ctr., Inc. , 29 A.D.3d 104, 112, 811 N.Y.S.2d 5 [1st Dept. 2006] ) or that the material covered by the subpoena is shielded by a privilege, such as the attorney-client privilege. (See Bohn v. 176 W. 87th St. Owners Corp. , 106 A.D.3d 598, 600, 966 N.Y.S.2d 42 [1st Dept. 2013].) This court discusses both these grounds in turn.
A. Whether the Knopfs' Subpoenas to Sanford, Akerman and Dorsey & Whitney, and Feldman Should Be Quashed as Seeking Irrelevant Information
Sanford, Akerman and Dorsey & Whitney, and Feldman each argue that the Knopfs' subpoenas to them should be quashed as seeking irrelevant information. A party seeking to quash a subpoena duces tecum on this ground must establish that the requested documents are utterly irrelevant to any proper inquiry. (See e.g. Velez , 29 A.D.3d at 112, 811 N.Y.S.2d 5.)
This court concludes that the subpoenas to Sanford and to Akerman and Dorsey & Whitney seek in large part relevant information and therefore may not be quashed on this ground. The subpoena to Feldman, on the other hand, seeks only information the Knopfs have since separately obtained. Feldman's motion to quash is granted.
1. Sanford's Motion to Quash (Motion Sequence 030)
Sanford argues that the Knopfs do not seek relevant information from him but are instead improperly attempting to discover information about his personal assets and business relationships. (Sanford Aff., NYSCEF No. 258, at 4, ¶ 17.) This court largely disagrees.
Many items in the subpoena duces tecum issued to Sanford relate to the January 12, 2016, call among Akerman, Feldman, and Ringel that ultimately allowed the sale of the PHC to close; to the PHC sale itself; and to the immediate disbursements of PHC-sale proceeds (including to Esposito and to Dechert, McGuire's former law firm). The circumstances surrounding the January 12 telephone call and these distributions are relevant to satisfying this court's judgment of February 22, 2018. The evidence suggests that both the extraordinary telephone call and the curious post-closing disbursements were part of Sanford's larger effort to evade paying his debts to the Knopfs in violation of the Court's October 2015 escrow order.
This point is discussed in more detail in Subsection III.C.2, infra .
For this reason, the following Sanford-subpoena items seek relevant information: items 1 through 3, which concern communications between Sanford and Akerman around the time of the January 12 telephone call; item 5, seeking documents reflecting transfers of money between Sanford and Ringel and between Esposito and his law firm; item 6, requesting documents concerning any communication between Sanford and McGuire; and item 8, which seeks documents reflecting all loans granted by PHC buyer Phillips to Sanford and to companies or other business entities owned or controlled by Sanford.
Subpoena items 4 and 9 seek information relating to Sanford's business affairs and financial circumstances. These items seek relevant material as well, albeit for a different reason.
Under Chapter 7 of the revised 1978 Bankruptcy Code, corporations may not be discharged of their debts, and "any successor or alter ego of these corporations will become liable for those obligations." ( Matter of Goodman , 873 F.2d 598, 602 [2d Cir. 1989].)
In light of this court's February 4, 2019, decision in the Related Action determining Pursuit to be Sanford's alter ego, Sanford is also responsible for the judgment against Pursuit. (See Knopf v. Sanford , 2019 N.Y. Slip Op. 30269 [U], 2019 WL 429469 [Sup. Ct., N.Y. County 2019].) Information about his business relationships and financial circumstances is relevant to satisfying the Knopfs' judgment against Pursuit.
This basis for relevance applies to item 4 of the Sanford subpoena, requesting specific financial information for Sanford's numerous companies from December 29, 2015, to the present; and item 9, which documents bills received from and payments to various law firms that have worked with Sanford's companies.
The Knopfs have not, however, explained the relevance of materials sought in item 7 of the subpoena: the agreements between Sanford, 10 Bedford Condominium, LLC, or Pursuit with Howard Altman, Drew Barrymore, Clockwork Orange Trust, or any attorney acting on behalf of the foregoing.
Sanford's motion to quash is granted only with respect to item 7.
This court also grants the Knopfs' cross-motion compelling Sanford to appear for an oral deposition. Sanford's motion for a CPLR 3103 protective order regarding the deposition subpoena is granted to the limited extent that Sanford is required to appear for a deposition only in New York County rather than East Northport in Suffolk County, where, Sanford alleges, he neither resides nor has an office for the regular transaction of business (NYSCEF No. 258, at 2, ¶ 8). (See CPLR 3110.)
2. Akerman and Dorsey & Whitney's Motion to Quash (Motion Sequence 032)
Akerman and Dorsey & Whitney seek to quash the subpoenas the Knopfs served on them and for a protective order. Akerman and Dorsey & Whitney assert that the subpoenas are overly broad and irrelevant to enforcing the Knopfs' judgment against Pursuit. This court disagrees.
The subpoenas may shed light on why Sanford was able to close on the PHC sale without escrowing the sale proceeds and also on the subsequent whereabouts of those proceeds.
Additionally, the information subpoena served on Dorsey & Whitney requires the firm to review only nine emails for information concerning the January 12, 2016, phone call among Akerman, Feldman, and Ringel. (See NYSCEF No. 158.) The Akerman subpoena asks for emails limited to a two-and-a-half-week period to gain more information about why Akerman and Feldman called Ringel, and how the call related to the decision not to escrow the proceeds of the PHC sale. (See NYSCEF No. 239.)
The Knopfs are entitled, moreover, to collect evidence to support a potential fraudulent-conveyance claim involving third parties before they bring any special proceeding to enforce their judgment. (See Berry Aff., NYSCEF No. 161, at 10, citing Ateni Mar. Corp. v. Great Marine Ltd ., 225 A.D.2d 573, 573, 639 N.Y.S.2d 116 [2d Dept. 1996] [holding that a disclosure subpoena may be used to discover facts relevant to satisfying a judgment, including evidence of a fraudulent conveyance, to support commencing a special proceeding].)
Emails between and concerning the individuals involved in the January 12, 2016, call are relevant to determine whether anyone fraudulently conveyed assets or received such assets. Although the Knopfs voluntarily dismissed their fraudulent-conveyance claims against Akerman and Dorsey & Whitney, the Knopfs could have viable claims against other parties involved in the telephone call, such as Sanford and Esposito. (See Berry Reply Aff., NYSCEF No. 200, at 1, ¶ 2.) 3. Feldman's Motion to Quash (Motion Sequence 033)
Feldman seeks to quash the subpoenas and for a protective order. He contends that the subpoenas do not seek information relevant to enforcing the Knopfs' judgment against Pursuit, and instead are improper harassment. (See NYSCEF No. 392.) This court finds no evidence of improper harassment as far as the subpoenas are concerned. Nonetheless, the subpoenas must be quashed in light of information that has come to light since they were issued.
In particular, the Knopfs' justification for these subpoenas was the need to trace approximately $75,000 of unaccounted-for proceeds of the PHC sale. But counsel for the Knopfs has made this court aware in the turnover proceeding that they have since obtained information regarding the $75,000 by other means. Approximately $25,000 of that sum went to concededly legitimate title-related services. (See Index No. 153821/2019, NYSCEF No. 88.) The other $50,000 was the February 1, 2016, check to Esposito's law firm from the sale proceeds, discussed above at Subsection I.D.2. (See Index No. 153821/2019, NYSCEF No. 96.)
The purpose of the subpoenas has now been satisfied; the Knopfs have not articulated a reason why this court should still enforce the subpoenas.
B. Whether the Subpoenas to Akerman and Dorsey & Whitney (Motion Sequence 032) Must Be Quashed as a Matter of Issue Preclusion
Akerman and Dorsey & Whitney claim that issue preclusion bars enforcing the subpoenas to them. (See NYSCEF No. 314.) This claim lacks merit.
Akerman and Dorsey & Whitney cite an August 2018 order from Supreme Court, Nassau County (Denise L. Sher, J.), that quashed a subpoena seeking similar information in an action before it. (See Manhattan Leasing Enters. v. M.H. Sanford & Co. , Index No. 602118/2014, NYSCEF No. 188, at 2 [Sup Ct, Nassau County, Aug. 21, 2018].)
Those subpoenas, though, were issued against different parties (Manhattan Leasing Enterprises, Sanford, Esposito, and Feldman & Associates). And they sought information and documents to enforce a different judgment held by a different party — $107,773.85 held by Manhattan Leasing Enterprises against Sanford and M.H. Sanford & Co. (See id. at 1-2, 13-14.) Supreme Court quashed the subpoenas, moreover, upon concluding that they "were not issued in a good faith attempt to satisfy plaintiff's judgment in this case, but rather, to secure information for the unrelated state and federal matters detailed above." (Id. at 13.) Here, on the other hand, the Knopfs' subpoenas relate directly to enforcing the judgment they have obtained in the case before this court.
Akerman and Dorsey & Whitney also rely on a May 2017 order in the Knopf v. Phillips federal action, in which Judge Cote found that the attorney-client privilege barred Knopfs' request for the same documents at issue here. (See Knopf v. Phillips , US Dist Ct, SD NY, 16-CV-6601, ECF No. 77 at 1 [May 30, 2017], reproduced at NYSCEF No. 198].) But this court is not bound by a federal judge's discretionary evidentiary ruling under the Federal Rules of Evidence. In any event, that decision was made before OCA issued its Report and was based on evidence different from the evidence before this court.
C. Whether the Subpoenas to Sanford, Akerman, and Dorsey & Whitney (Motion Sequence 032) Must Be Quashed Due to the Attorney-Client Privilege
Sanford, Akerman, and Dorsey & Whitney argue that the subpoenas to them should be quashed because they seek documents and information shielded by the attorney-client privilege. These arguments fail on two independent grounds. First , Pursuit has wholly waived its attorney-client privilege as to the Knopfs, and Sanford has waived his attorney-privilege as to the Knopfs in significant respects. Second , to the extent the privilege has not been waived, the information and documents sought here come within the wrongful-act exception to the attorney-client privilege.
1. Whether the Attorney-Client Privilege Has Been Waived
a. Whether Pursuit waived its attorney-client privilege
The attorney of a client who waives the attorney-client privilege must disclose confidential client communications in response to a proper subpoena. ( CPLR 4503.) A bankruptcy trustee, entrusted with the vast responsibilities of a corporation, "has the power to waive the corporation's attorney-client privilege with respect to prebankruptcy communications." ( Commodity Futures Trading Com'n v. Weintraub , 471 U.S. 343, 358, 105 S.Ct. 1986, 85 L.Ed.2d 372 [1985].)
In the bankruptcy proceeding, the Trustee for Pursuit has expressly waived Pursuit's attorney-client privilege as against the Knopfs. The Trustee and the Knopfs agreed upon a settlement in the bankruptcy proceeding of the extant litigation between the Knopfs and Pursuit, which the Bankruptcy Court approved in a thorough and careful decision. (See NYSCEF No. 319.) The settlement agreement provides that "the Trustee on behalf of the Debtor [Pursuit] and its estate, waives any attorney-client privilege on behalf of the Debtor [Pursuit] and its estate," and agrees not to "object to the Knopfs obtaining any documents or testimony in discovery which may otherwise be subject to an attorney-client privilege held by the Debtor and its estate." (Bankruptcy Settlement, NYSCEF No. 308, at 6.)
The Trustee (acting for Pursuit) has waived Pursuit's attorney-client privilege. Sanford may not object to producing documents (or answering questions) on the ground that doing so would require him to divulge attorney-client communications of Pursuit. Nor may Akerman and Dorsey & Whitney object to producing documents (or Akerman to answering questions) on the ground that doing so would require divulging their attorney-client communications with Pursuit.
b. Whether Sanford waived his attorney-client privilege
A party that affirmatively uses its own privileged information to assert a claim or defense waives the privilege. (E.g. Deutsche Bank Tr. Co. of Americas v. Tri-Links Inv. Tr. , 43 A.D.3d 56, 63, 837 N.Y.S.2d 15 [1st Dept. 2007].) Privileged information includes advice from legal counsel affirmatively used to support a defense. (See id. at 64, 837 N.Y.S.2d 15.) Courts enforce waiver in this circumstance to afford the opposing party access to information needed to investigate the claim's accuracy and to respond meaningfully. ( Id . ) A party may not disclose self-serving communications while depriving the opposing party of damaging information. (See id. )
Here, Sanford selectively disclosed privileged information to raise a defense against multiple claims brought by the Knopfs: (i) the Knopfs' request in the First Department for a preliminary injunction, contempt sanctions, and disgorgement; (ii) the Knopfs' renewed request for an order of attachment in Supreme Court before Justice Braun; and (iii) the Knopfs' federal claims brought in the Southern District before Judge Cote. As discussed above, after learning of the closing of the PHC sale, the Knopfs moved the First Department in February 2016 for a preliminary injunction, disgorgement, and contempt sanctions. (See NYSCEF No. 214.)
In opposing this contempt motion, Sanford filed an affidavit stating that (i) he had solicited legal advice from Akerman and Feldman about whether the Court's November 2015 Order vacated the First Department's October 2015 escrow order; (ii) Akerman and Feldman had each provided him with memorandums advising that the November 2015 Order vacated the October 2015 Order; (iii) Akerman expressly advised Sanford that due to the November 2015 Order, no restraints existed on the sale of the PHC; and (iv) Sanford relied on this advice in selling the PHC without placing any of the sale proceeds into escrow. (See NYSCEF No. 217 at 3, 4-6.)
Sanford also submitted a supporting attorney affirmation from McGuire. The affirmation stated that Sanford had concluded based upon the advice of counsel that there was no need to place the PHC sale proceeds — and described the advice Sanford's counsel gave him. (See supra at I.D.3.)
Additionally, as noted above, the Knopfs also moved in Supreme Court before Justice Braun for a new order of attachment. In opposing that motion, Sanford and Akerman each submitted affirmations raising an advice-of-counsel defense based on the Akerman and Feldman memorandums describing the January 12, 2016, call with Ringel. (See note 44, supra .)
At Sanford's deposition in the Knopf v. Phillips federal action, Sanford also described the circumstances leading to the call with Ringel — including details of his pre-call conversations with Akerman and Feldman. (See NYSCEF No. 175, at Tr. 60-61.)
By selectively disclosing self-serving privileged information to defend against the Knopfs' claims and motions, Sanford has waived the attorney-client privilege about the circumstances of the January 12, 2016, call between Akerman and Feldman and Ringel. (See e.g. Vill. Bd. of Vill. of Pleasantville v. Rattner , 130 A.D.2d 654, 655, 515 N.Y.S.2d 585 [2d Dept. 1987] [holding that asserting the affirmative defense of reliance on advice of counsel waives attorney-client privilege].) This waiver applies to the communications with Sanford that are sought here in the subpoenas to Akerman and Dorsey & Whitney and to items 1-3 of the subpoena to Sanford (seeking certain of his communications with Akerman). It also covers questions that Sanford might be asked at a deposition about his communications with Akerman, Dorsey & Whitney, Feldman, Esposito, and Ringel related to the January 12 call and Sanford's reliance on Ringel's statements on that call.
The waiver does not, however, apply to other Sanford-Esposito communications that pertain instead solely to Esposito's non-PHC-related representation of Sanford.
Similarly, Sanford has not relied on or selectively disclosed privileged information from his communications with McGuire. The attorney-client privilege shielding those communications — which the Knopfs seek in item 6 of the Sanford subpoena — has not been waived.
2. Whether the Wrongful-Act Exception to the Attorney-Client Privilege Applies
To the extent that the Knopfs' subpoenas seek information about attorney-client communications not subject to the privilege waivers discussed above, the wrongful-act exception to the attorney-client privilege applies here. The privilege does not shield between Sanford and his attorneys any communication that relates to the January 12 call, the decision not to place the PHC sale proceeds into escrow, or the post-closing distributions of sale proceeds.
The attorney-client privilege does not extend to communications that "may have been in furtherance of a fraudulent scheme, an alleged breach of fiduciary duty or an accusation of some other wrongful act." ( Ulico Cas. Co. v. Wilson, Elser, Moskowitz, Edelman & Dicker , 1 A.D.3d 223, 224, 767 N.Y.S.2d 228 [1st Dept. 2003] [internal quotation omitted].) "A party seeking to invoke the crime-fraud exception must demonstrate that there is factual basis to show probable cause suggesting that a fraud or crime has been committed and that the communications in question were in furtherance of the fraud or crime.' " ( Matter of New York City Asbestos Litig. , 109 A.D.3d 7, 10-11, 966 N.Y.S.2d 420 [1st Dept. 2013], quoting United States v. Jacobs, 117 F.3d 82, 87 [2d Cir. 1997].) The requisite factual basis "must strike a prudent person as constituting a reasonable basis to suspect the perpetration or attempted perpetration" of a wrongful act "and that the communications were in furtherance thereof." ( Jacobs , 117 F.3d at 87 [quotation marks omitted].) Additionally, "it is the client's intent to engage in criminal activity, not counsel's, that is relevant; counsel need not even be aware that their assistance was sought for criminal purposes." ( Linde v. Arab Bank, PLC , 608 F. Supp. 2d 351, 357 [E.D.N.Y. 2009].)
a. Whether probable cause exists to believe Sanford furthered a wrongful act through attorney-client communications
Akerman and Dorsey & Whitney contend that the Knopfs have not provided facts sufficient to show probable cause that either they or Sanford committed a wrongful act. The court disagrees. The Knopfs' evidence (discussed in more detail above at Sections I.C and I.D, supra ) could support the following conclusions:
Sanford wanted to close on the PHC sale and shield the proceeds from the Knopfs, his multi-million-dollar creditor. He knew that he could not accomplish that goal without circumventing the First Department's October 2015 Order compelling him to put the sale proceeds into escrow to satisfy any later judgment against Pursuit or himself, as Pursuit's alter ego.
Shortly after the First Department denied Sanford's motion to vacate the escrow requirement, Sanford contacted Esposito about the possibility of representing him. Sanford discussed with Esposito the First Department orders related to the PHC sale and why Sanford objected to them.
Sanford then retained Esposito to serve as general counsel for one of his companies. When Sanford hired Esposito, Sanford was short on cash and needed to liquidate additional assets before he could pay his lawyers. On the same day Sanford retained Esposito, Ringel tried to find additional litigation counsel for Sanford.
The day after retaining Esposito, Sanford directed two of his attorneys, Akerman and Feldman, to call Ringel at the First Department about the Court's October 2015 escrow order. In that improper, unusual, and ex parte call, Ringel gave the inaccurate opinion, favorable to Sanford, that no Court order required Sanford to put the PHC sale proceeds into escrow. Akerman and Feldman later claimed they had called the general number at the First Department Clerk's Office and been transferred to Ringel. OCA-obtained phone records show that they called her directly from Akerman's line.
Two days after the call, Ringel emailed former First Department Justice McGuire — for whom Ringel had worked as a law clerk — to recruit him to help Esposito represent Sanford.
As a result of Ringel's statement to Sanford's attorneys that no escrow order was in effect, and only eight days before the Knopfs were awarded over $10 million in damages, Sanford was able to close on the PHC sale for $3 million without Sanford's putting any funds into escrow.
The same day the PHC sale closed, Sanford directed that Esposito receive a $50,000 check from the sale proceeds. That payment, which Esposito used that day to pay a $48,000 personal credit-card bill, has not been satisfactorily explained. Shortly thereafter, Sanford made a series of payments to Esposito's firm's escrow account. Esposito then handled those payments in a manner that was irregular at best.
$5000 of the funds that Sanford escrowed with Esposito remain altogether unaccounted-for. (See supra at Paragraph I.D.1.c.)
Several weeks after the sale closed, a First Department Justice issued an order that (i) directed Sanford on a Thursday to put the remaining sale proceeds into escrow by the following Monday; (ii) noted that this escrow directive tracked the order Justice Sweeny had already issued in October 2015; and (iii) emphasized that the Court in December 2015 had denied Sanford's motion to vacate the October 2015 escrow order.
At that point — just 24 days after the sale — Sanford had already dissipated approximately 85% of the $3 million in sale proceeds. Esposito did not return the $50,000 check from the sale proceeds after Justice Moskowitz's order was issued — despite having reason to believe that the check was subject to the escrow order.
Two weeks later, in defending Sanford's conduct with respect to the PHC sale and the handling of the sale proceeds, McGuire submitted an affirmation to the First Department that omitted significant information about the circumstances under which the sale, and the failure to escrow the sale proceeds, occurred.
For example, McGuire knew that the court attorney referred to in Feldman's memorandum was Ringel. He knew that Ringel had been his law clerk. He knew that Ringel was married to Esposito, who was representing Sanford. He knew that only two days after the call, Ringel herself contacted him to inquire whether he would be interested in helping Esposito represent Sanford. He knew that Akerman and Feldman had called Ringel on Sanford's behalf without counsel for the Knopfs being on the line or aware of the call. And he knew that Ringel was now special master for the First Department's mediation program — rather than "an attorney employed by the Court" (as McGuire put it) or "a Court Attorney" (as Akerman and Feldman put it) who might legitimately be called upon to answer the public's questions regarding orders. And McGuire knew that his firm's $500,000 retainer came from the proceeds of the transaction at issue before the Court.
McGuire had an interest in a successful resolution for Sanford, his client. Had the First Department found that the escrow order remained in place and that Sanford violated its terms, Dechert would presumably have had to return the $500,000 retainer that Sanford paid from the unescrowed PHC sale proceeds.
It would have been material for the Court, in assessing whether Sanford's actions relating to the PHC sale were wrongful and contumacious, to know that the legal opinion Sanford needed to circumvent the escrow requirement had been not only inadequately reasoned but also obtained from an individual with an obvious conflict of interest and in abnormal circumstances.
Yet McGuire omitted all this information from his affirmation.
In short, evidence in the record constitutes a reasonable basis to suspect that Sanford made an improper arrangement with one of his attorneys and that attorney's wife — then a First Department special master — to get out from under a binding First Department escrow order, dissipate 85% of the funds subject to that order, avoid being held in contempt, and dodge returning $3 million he had improperly dissipated. Evidence in the record also creates a reasonable basis to believe that Sanford used communications with his various attorneys (Akerman, Feldman, Esposito, and McGuire) to carry out an outrageous scheme that perverted the administration of justice.
b. Whether the Revised June 2016 Order or the November 2017 reargument order preclude a conclusion that Sanford committed a wrongful act
The Revised June 2016 Order's statement that the November 2015 Order vacated the escrow requirement does not alter this court's conclusion on the wrongful-act issue. This is so for two reasons. First , much of Sanford's conduct was wrongful regardless what any court might have written after the fact. In particular, the PHC's sale was able to close only because of the ex parte advice Ringel gave Sanford's attorneys. Ringel gave that advice to Akerman and Feldman under what the evidence suggests were dubious circumstances; and even Sanford's own attorney (McGuire) did not try to defend the substance of that advice. That McGuire persuaded the First Department in June 2016 to accept Ringel's conclusion — if not her reasoning — does not ameliorate the wrongful nature of Sanford's conduct between December 29, 2015, and February 25, 2016.
Second , and relatedly, the evidence indicates that when it issued the Revised June 2016 Order, the First Department did not possess material information regarding Sanford's conduct, in part because McGuire had withheld that information from the Court. That information, had it been before the Court at that time, might have cast Sanford's actions in a different light and undermined the force of McGuire's arguments about the November 2015 Order and the escrow requirement. At the least, this court is not persuaded that it should ignore the evidence indicating that Sanford (and perhaps others) might have committed a wrongful act in light of a First Department order issued without the benefit of that very evidence.
This Court re-emphasizes, though, that its limited conclusion here does not suggest one way or the other that the First Department erred in its ultimate conclusions of June 2016: that Sanford did not commit a contempt of court and should not be required to disgorge the PHC sale proceeds.
After this court issued its initial decision and order of July 11, 2019, Akerman submitted to this court letters dated July 15 and July 16, 2019, regarding this second reason. (See NYSCEF Nos. 442, 448.) The letters addressed a statement by this court in the opening paragraphs of its decision. This court wrote that had Sanford's attorneys provided rather than withheld information about Sanford's misconduct and the circumstances of the PHC sale, the First Department might have discredited Sanford's factual recitations and rejected his legal arguments.
Akerman wrote in his July 15 letter that this statement "and others" in this court's initial decision suggested to him that this court might have been unaware that the First Department had denied the Knopfs' motion to vacate the Revised June 2016 order, "based in substantial part upon the very facts and circumstances surrounding the sale of Pursuit's property that Your Honor addresses in the Decision and Order." (NYSCEF No. 442, at 1-2.) Akerman wrote that he was not seeking any specific relief, but "simply wanted the Court to have an opportunity to correct any statements resulting from any misimpression on the part of the Court arising from its possible unawareness of the Appellate Division's November 2, 2017 Order." (Id. at 2.)
Akerman's letters suggest, in other words, that the First Department believed that its revised June 2016 Order should stand — even taking into account the circumstances surrounding the January 12 call. (These circumstances included that Ringel was the attorney to whom Akerman and Feldman had spoken; that Esposito was married to Ringel; that Sanford retained Esposito prior to the call; and that Sanford paid Dechert and McGuire a $500,000 retainer out of PHC sale proceeds.) As a result, Akerman implies, this court mistakenly concluded that the wrongful-act exception applied notwithstanding the Revised June 2016 Order because, he argues, this court's conclusion rested on the incorrect view that the First Department would not have issued the Revised Order had it been aware of the January 12 call's full context.
Though this court did not have (and was not provided with) copies of the reargument motion papers themselves, this court knew that the First Department had denied the Knopfs' motion to reargue the Revised June 2016 Order.
This court's conclusion that the wrongful-act exception applies notwithstanding the Revised June 2016 Order rests on two bases, not one: (i) that any wrongdoing by Sanford and his attorneys prior to the Revised Order was not cured by issuance of the order; and (ii) that material omissions by Sanford's attorneys in opposing the Knopfs' contempt motion might have skewed the First Department's decision-making process in issuing the Revised Order. Akerman's letter pertains only to the latter ground. This court's conclusion thus would remain regardless what inferences one might draw from the Court's denial of the Knopfs' reargument motion.
Nonetheless, for clarity and in the interests of completeness, this court addresses Akerman's suggestion that this court was mistaken about the implications of the Revised June 2016 Order on whether to apply the wrongful-act exception. The First Department's denial of the Knopfs' motion to reargue does not undermine this court's conclusion about the Revised Order for at least five distinct reasons. First , the First Department's November 2017 order denying reargument did not say that it was reaffirming the Court's conclusion in the Revised Order that the October 2015 escrow order had been dissolved prior to the PHC sale, despite the additional facts the Knopfs provided in their reargument motion. Indeed, the reargument order did not explain its ruling at all. (See NYSCEF No. 445.) Akerman's implicit argument relies on the Court's bare denial of reargument alone. But declining to grant reargument of an order is different from having decided initially to issue that order. Merely because the First Department declined to revisit its Revised Order a year after issuance does not suggest that the First Department would still have issued the Revised June 2016 Order in the first place had it possessed the entire story about the January 12 telephone call.
Second , the Knopfs did not argue that additional context around the January 12 call showed that the Court had erred in concluding that the November 2015 Order dissolved the October 2015 escrow order, and therefore that the First Department should modify or vacate the Revised June 2016 Order on that ground.
Instead, the Knopfs asked the First Department to revisit the Revised Order principally because the Court had (supposedly) given improper in camera consideration to the Akerman and Feldman memorandums in reaching the Revised Order's conclusion. (See Aff. of Eric W. Berry, NYSCEF No. 443, at 7, 15, 18-19, 22-23; Reply Aff. of Eric W. Berry, NYSCEF No. 444, at 10-12.) The Knopfs' request itself relied on a mistaken factual premise: the record is clear that, contrary to the Knopfs' assumptions, the Justices did not consider — or even read — either of the two memorandums before issuing its Revised June 2016 Order. (See OCA Report at 7.)
Thus, the First Department's denial of reargument could easily have rested merely on the fact that the Knopfs' motion to reargue misapprehended the Court's decision-making process in issuing the Revised June 2016 Order. A denial on that ground says nothing about whether the First Department's understanding of the relationship among the October, November, and December 2015 Orders would have changed had the Court possessed more information in spring 2016 about those orders and the January 12 call.
Third , the Knopfs' motion to reargue did not seek to reargue the Court's denial of contempt itself. Instead, the Knopfs asked the Court only to remove the Revised Order's brief explanation it added to the initial June 2016 Order, that the "motion for contempt is denied because the TRO was vacated once plaintiffs' prior motion for a preliminary injunction was denied." (NYSCEF No. 164, Attachment H.) The Knopfs stated that they sought this relief because a denial of their motion for contempt alone, in "the absence of a stated reason," would not have "any collateral estoppel effect" in future litigation between the Knopfs and Sanford. (See NYSCEF No. 443 at 23; id. at 7-8; NYSCEF No. 444, at 10-11.)
This request for relief underscores that the Knopfs' reargument motion was not asking the Court to revisit whether it had properly analyzed the relationship among the October, November, and December 2015 Orders. Denying the motion to reargue on this basis also would not show how the Court would have ruled had Sanford and his attorneys been candid with the Court in spring 2016. The Court could readily have concluded simply that the Knopfs' unusual reason for seeking reargument would not warrant vacating the Revised Order.
Fourth , the additional evidence at issue about the circumstances of the January 12 call (evidence about the relationships among Sanford, Esposito, and Ringel; Sanford's directions to Akerman and Feldman about the call; Sanford's post-closing payments to Dechert and McGuire; and so on) did not appear in the Knopfs' initial motion papers, which focused largely on the issuance of the Revised June 2016 Order itself. (See Aff. of Eric W. Berry, NYSCEF No. 443, at 11-12, 19-22.) Instead, the Knopfs submitted their additional evidence for the first time only on reply. (See Reply Aff. of Eric W. Berry, NYSCEF No. 444, at 2-3.) The First Department could have rested its denial of reargument on that ground alone; and such a denial would again not undercut this court's conclusions about the Revised June 2016 Order. (See e.g. Meade v. Rock-McGraw, Inc. , 307 A.D.2d 156, 159, 760 N.Y.S.2d 39 [1st Dept. 2003].)
Fifth , Akerman is incorrect that the Knopfs' reargument motion relied on "the very facts and circumstances" addressed above. (See NYSCEF No. 442, at 1-2.) At a minimum, the Knopfs' motion lacked a crucial piece of evidence underlying this court's conclusions in this decision: the March 2018 OCA Report. As to the January 12 Akerman-Feldman-Ringel telephone call, the OCA Report contributed substantial and new information that undercut the credibility of Sanford and his attorneys: for example, that Ringel had recruited McGuire to represent Sanford two days after the call; that Akerman gave inaccurate deposition testimony about how he had come to call Ringel in particular; and that in opposing the Knopfs' motion for contempt, McGuire's description of the call misled the First Department Clerk of Court about whom at the Court Akerman and Feldman had spoken to. That the First Department denied the Knopfs' reargument motion without the benefit of the OCA Report does not establish that the Court would still have issued the Revised June 2016 Order had the Court possessed at the time all the information discussed in the OCA Report.
III. CONCLUSION
This court acknowledges the possibility that many of the alleged acts summarized in Paragraph II.C.2.a, considered individually, might have innocent explanations. And the court does not mean to suggest that all these acts, or each attorney's conduct or testimony about their conduct, will necessarily prove wrongful in the end.
The question for these motions, though, is different, and more narrow. This court must ask whether the Knopfs' evidence, taken as a whole, establishes probable cause to believe that a wrongful act was committed — whether by Sanford or by the other individuals involved — and that communications among and between Sanford, Akerman, Feldman, Ringel, McGuire, Esposito, and others furthered that wrongful act. This court concludes that the Knopfs have met that burden.
As a result of this finding, and to the extent that Sanford is questioned at his oral deposition about attorney-client communications with Esposito, Sanford may not claim the attorney-client privilege as a basis to refuse to answer questions pertaining to (i) the January 12, 2016, call between Akerman and Feldman and Ringel; (ii) the decision by Sanford, Phillips, and their counsel that the PHC sale could close without the proceeds being placed into escrow; (iii) Sanford's post-closing distributions of sale proceeds, and (iv) any subsequent interactions, discussions, or communications between Sanford and Esposito regarding topics (i) through (iii).
To the extent that the subpoena duces tecum issued to Sanford seeks attorney-client communications with McGuire, as to which the privilege has not been waived, this court determines in its discretion that Sanford must, within 14 days, produce to the court for in camera review the McGuire emails sought under the subpoena. (See Jacobs , 117 F.3d at 87 [describing procedure for in camera review of emails sought under the wrongful-act exception to the attorney-client privilege].)
Accordingly, for the foregoing reasons, it is
ORDERED that Sanford's motion to quash the deposition subpoena and for a protective order is denied, except to the extent that Sanford shall appear for an oral deposition in New York County rather than East Northport, Suffolk County; and it is further
ORDERED that Sanford's motion to quash the subpoena duces tecum and for a protective order is denied with respect to all items but item 7; and it is further
ORDERED that plaintiffs' cross-motion to require Sanford to comply with that subpoena is granted in full as to items 1-5 and 8-9; and it is further ORDERED that plaintiffs' cross-motion to require Sanford to comply with item 6 of that subpoena is granted to the extent that Sanford is directed to produce the documents requested in item 6 to this court for in camera review within 14 days of service of this order with notice of entry; and it is further
ORDERED that plaintiffs' cross-motion to require Sanford to comply with item 7 of that subpoena is denied; and it is further
ORDERED that Sanford produce all documents and information requested in the subpoena duces tecum (except for documents and information requested in items 6 and 7), to the extent that they have not already been provided, within 30 days of service of this order with notice of entry; and it is further
ORDERED that Akerman's motion to quash the deposition subpoena is denied; and it is further
ORDERED that Akerman's motion to quash the subpoena duces tecum and Dorsey & Whitney's motion to quash the information subpoena is denied, and plaintiffs' cross-motion requiring Akerman and Dorsey & Whitney to comply with the document and information subpoenas is granted; and it is further
ORDERED that Akerman and Dorsey & Whitney produce all documents and information requested in the subpoenas, to the extent that they have not already been provided, within 30 days of service of this order with notice of entry; and it is further
ORDERED that Akerman and Dorsey & Whitney's motion for a protective order is denied; and it is further
ORDERED that Feldman's motion to quash the information subpoena and subpoenas duces tecum directed to himself and to Citibank is granted, and plaintiffs' cross-motion to enforce those subpoenas is denied; and it is further
ORDERED that plaintiffs serve a copy of this revised decision and order with notice of entry on all parties and on Akerman, Dorsey & Whitney, Esposito, Feldman, McGuire, and Ringel.