Opinion
Index No. E2022010777
09-10-2023
Christine OWEN, individually and derivatively as a shareholder of ROHM Services Corporation and RHH Mendon Properties, Inc., and as Executor of the Estate of Barbara A. Hurlbut, Plaintiff, v. Robert W. HURLBUT and Hurlbut Health Consulting, LLC, Defendants.
In this shareholder derivative action, which is merely one chapter in the long-running and internecine conflict between siblings Christine Owen ("Christine") and Robert W. Hurlbut ("Robert W.") over the estate of their father, decedent Robert H. Hurlbut, Sr. ("Robert Sr.") and mostly playing out in Monroe County Surrogate's Court, plaintiff Christine moves to disqualify the attorneys at the law firm of Pullano & Farrow and/or a partner with the firm, attorney Christian Valentino, from representing their client, defendant Robert W. Hurlbut, on the theory that the attorneys at Pullano & Farrow conspired with their client to destroy the value of a corporation in which the plaintiff had an interest.
That corporation was called ROHM Services Corporation ("ROHM"). It was formed in 1979 by Robert H. Hurlbut, Sr. to provide back-office, administrative and management services exclusively to the many skilled nursing home facilities he had founded and owned. Robert Sr. operated ROHM largely on a "break-even" basis (see Exhibit G, email chain, statements by Rob Nasso, accountant for the Trust), charging the nursing homes, its only clients, enough to cover its operating expenses plus a "small profit" (id. ).
To emphasize, ROHM had no clients other than the Hurlbut Nursing Facilities.
For an unspecified period, ROHM also provided administrative, purchasing and accounting services to an entity called RHH Mendon, the owner of property in the Town of Mendon, and which was formed by Robert H. Hurlbut, Sr., the shares of which went into the Marital Trust. It also performed work for the marital trust. The court has not been made aware of any work done for entities not related to the estate of Robert H. Hurlbut Sr.
Before he died, Robert Sr. transferred ownership of the Hurlbut nursing homes to his two children, with Robert W. receiving majority ownership interests of between 60% and 70% and Christine receiving minority ownership interest of between 30% and 40%. Robert W. became the president and chief operating officer of the corporate entities that managed the nursing homes.
Upon Robert Sr.’s death, his estate poured into a marital trust for the benefit of his wife Barbara, including 100% of the ownership interest in ROHM. Christine and Robert W. were the residual beneficiaries (50% each) of the Marital Trust.
In 2016 Robert W. purchased Christine's minority ownership interest in the Hurlbut nursing homes. As part of the Purchase and Sale Agreement, Christine agreed to resign from all positions that she held at ROHM, effective on or before December 31, 2016. Robert W. became president of ROHM, and ROHM continued to provide back-office, administrative, and management services to the skilled nursing home facilities previously owned by Robert Sr. and now owned and operated by Robert W.
It is unclear whether Robert assumed the position of president and chief operating officer of ROHM at the time his father transferred ownership of the nursing homes.
In 2017 Robert W. organized a new company, Hurlbut Health Consulting, LLC, which to make a long story short, eventually assumed the entirety of the services previously performed by ROHM, hiring its employees, purchasing it tangible assets, and taking over management of its retirement plan, leaving ROHM as nothing more than a shell corporation with little or no value.
This, the plaintiff claims, constituted, among other tortious acts, a breach of Robert W.’s fiduciary duty as president of ROHM as well as a breach of his duty as de facto trustee of the Barbara Hurlbut Marital Trust (see Decision of Monroe County Surrogate's Court, dated),
Christine alleges Pullano & Farrow "aided and abetted" the destruction of the value of ROHM, and now moves for an Order disqualifying the attorneys at Pullano & Farrow from representing Robert W., arguing that there is sufficient evidence to "allow the conclusion that Pullano & Farrow was directly involved in structuring and effectuating" the creation of Hurlbut Health Consulting and the evisceration of the value of ROHM, and that it was involved "in the subsequent campaign to cover-up and avoid the disclosure of evidence relating" to the destruction of ROHM.
Thus, says Christine, Pullano & Farrow cannot represent Robert W., because one, it has a financial stake in the outcome of the litigation and is thus conflicted out, and two, its attorneys may be called to testify as material witnesses to the transactions undertaken by Robert W.
Under the Rules of Professional Conduct, either allegation, if shown, would prevent Pullano & Farrow and/or its attorneys from representing Robert W.
Financial Stake
"A lawyer is strictly forbidden from undertaking a representation where the lawyer possesses a personal, business, or financial interest at odds with that of his or her client" ( Jay Deitz & Assoc. of Nassau County, Ltd. v Breslow & Walker, LLP , 153 AD3d 503, 505 [2d Dept 2017], lv denied 30 NY3d 907 [2017] ).
Rule 1.7 (a) (2) of the Rules of Professional Conduct states that "a lawyer shall not represent a client if ... there is a significant risk that the lawyer's professional judgement on behalf of a client will be adversely affected by the lawyer's own financial, business, property or other personal interests" (Rules of Prof Conduct [ 22 NYCRR 1200.0 ] rule 1.7 [a] [2]).
"Any doubts as to the existence of a conflict should be resolved in favor of disqualification" ( Chang v Chang , 190 AD2d 311, 319 [1st Dept 1993], citing Flushing Sav. Bank v FSB Props., 105 AD2d 829 [2D Dept 1984] ; Narel Apparel v American Utex Int., 92 AD2d 913 [2d Dept 1983] ). An attorney must not only avoid impropriety but even the mere appearance thereof ( Greene v Greene , 47 NY2d 447, 451 [1979] ; Cardinale v Golinello, 43 NY2d 288, 296 [1977] ).
Here, Christine asserts that Pullano & Farrow has a financial stake in the outcome of the action because, one, it "may" (see Plaintiff's Memorandum of Law p. 16, NYSCEF # 84) become liable to her for "aiding and abetting" their client's breach of fiduciary duty, and two, because it "may" (id. ) be sued for malpractice, because it advised Robert W. at "he could lawfully engage in the underlying conduct at issue," and thus Robert W. "himself may have claims against Pullano & Farrow for malpractice" (id. , citing Chang , 190 AD2d at 316 ).
The court cannot agree that the possibilities envisioned by Christine are likely.
The contrasts with the established facts in Chang are striking. There, the breaches of fiduciary duty and self-dealing were clear. The Special Referee held (after a hearing) that the defendants, directors and officers in charge of a corporation, altered corporate records, secured corporate bank loans for personal benefit, caused unauthorized shares of stock to be issued to themselves, and committed other acts of self-dealing, all "aided and abetted" (so it was held) by their long-time lawyer, Cartelli, who was a named defendant and who had represented the Changs in each of the complained-of transactions.
The Appellate Division, Second Department reversed the decision of the Special Referee, finding that Cartelli's representation of the Changs was a "... violation of the canons of ethics," and "irreparably tainted the proceedings" (Chang at 316) because, among other things, "a finding against his own clients, the Changs, even as to the fifth cause of action, might well exonerate him (Cartelli) of all liability" (Chang at 317).
In other words, Cartelli was motivated to lose. His financial interest was clear and put him at odds with his own client.
Here, Robert W.’s attorneys have not been named as defendants and nothing before the court indicates that they will be working against their clients’ interests to avoid financial losses. The possibility that they "may" be named sometime in the future does not require disqualification at this juncture (nor will it necessarily mandate disqualification if they are brought in as parties).
Moreover, it is not clear that the destruction of the value of ROHM constituted a breach of Robert W.’s fiduciary duty (and equally unclear is that Pullano & Farrow may be held liable for malpractice for advising Robert W.). The accountant Rob Nasso stated in an email that ROHM had a "valuation" of over $800,000, however, that was subject to and would likely be diminished by its lack of marketability, since it had only served one client for its entire existence, and then only on a "break-even" basis. Also, Nasso referred to only one asset, an insurance policy, but the details of that policy — for instance, who is the beneficiary - are not part of the record.
Robert W. is the president of the nursing home entities, and pursuant to that role was within his rights as a fiduciary of those companies - his duty, actually - to continue to determine whether to continue to retain ROHM or fire it and form a new company, so as to remove Christine from having any role with respect to the operation of the nursing homes, which was his stated goal in forming the new company.
Calling to mind Matthew 6:24 — "no one can serve two masters." To which entity did Robert W. owe the greater fiduciary duty?
Having said that, the court recognizes that "Whether a lawyer has a conflict of interest is not dependent on the outcome of the factual question at issue. It is the integrity of the fact-finding process itself that is protected by the ethical guidelines governing attorneys, which require independent and vigorous representation of a client's interests" [ Chang v Chang , 190 AD2d 311, 317 [1st Dept 1993] ).
Even assuming that Christine has presented evidence of breach of fiduciary duty and self-dealing with quantifiable damages, she offers insufficient evidence to carry her burden that there is a "clear" indication ( Jozefik v Jozefik , 89 AD3d 1489, 1490 [4th Dept 2011] ) that Pullano & Farrow "aided and abetted" Robert W.’s alleged transgressions. The emails produced as part of this motion suggest at best only a minimal degree of communication between Robert W. and Pullano & Farrow that could be characterized as rendering advice on the creation of Hurlbut Health Consulting and the take-down of ROHM. Rather, Robert W. seems to be a client over which Pullano & Farrow has minimal control and who acts on his own over the advice of counsel.
The acts committed by Cartelli, the lawyer for the Changs and a co-defendant in that action, went far beyond anything shown to have been done by Pullano & Farrow as suggested by the email chains attached to the motion. Tellingly Chang is the only appellate case cited by Christine.
Mallory Smith of Pullano & Farrow was apparently consulted on an aspect of the pension plan, but it is not known to what degree or the scope of the consultation. Pullano & Farrow was copied in on emails that clearly express Robert W.’s intention to keep the valuation of ROHM away from Tompkins, but there is little indication, other than by a dubious inference, that Pullano & Farrow was involved in that deception, let alone whether the deception even constitutes evidence of a breach of fiduciary duty.
Pullano & Farrow's work in preparing and closing on a Purchase and Sale Agreement of the assets of ROHM raises eyebrows, although it has been asserted that it occurred at such time that Robert W. had no authority to sell ROHM — he may have been the president of ROHM, but he didn't own the shares, which were owned by the marital trust at the time - in which case the agreement is a nullity. Any insight it may have offered into whether Pullano & Farrow "aided and abetted" the destruction of ROHM by processing the Purchase and Sale Agreement is equally a net zero.
Accordingly, disqualification because Pullano & Farrow has a conflict of interest is denied.
Attorney as Witness
Rule 3.7 (a) of the Rules of Professional Conduct states that a "lawyer shall not act as advocate before a tribunal in a matter in which the lawyer is likely to be a witness on a significant issue of fact" (Rules of Prof Conduct [ 22 NYCRR 1200.0 ] rule 3.7 [a]).
Disqualification under the advocate-witness rule is required where the attorney's testimony is considered "necessary" ( Sokolow, Dunaud, Mercadier & Carreras v Lacher , 299 AD2d 64, 74 [1st Dept 2002], citing S & S Hotel Ventures Ltd. Partnership v 777 S. H. Corp. , 69 NY2d 437, 446 [1987] ).
Rule 3.7 (b) of the Rules of Professional states that "[a] lawyer may not act as advocate before a tribunal in a matter if ... another lawyer in the lawyer's firm is likely to be called as a witness on a significant issue other than on behalf of the client, and it is apparent that the testimony may be prejudicial to the client" (Rules of Prof Conduct [ 22 NYCRR 1200.0 ] rule 3.7 [b]).
"Any doubt concerning the necessity for the attorney's testimony should be resolved in favor of disqualification" ( Zagari v Zagari , 295 AD2d 891, 891—892 [4th Dept 2002] [reversing order denying motion to disqualify a law firm, a member of which was an attorney who was "an active participant in a disputed transaction and ha[d] personal knowledge of the underlying circumstances"]). The burden on the party seeking to disqualify counsel is to demonstrate that "at least one member of the law firm representing defendant ought (emphasis added) to be called as a witness on behalf of the defendant ..." (id. ).
Nonetheless, the party seeking to disqualify the law firm of an attorney whose testimony "may be prejudicial" to the client must show that the prejudice is "visible, as opposed to merely speculative, conceivable or imaginable, i.e., the prejudice ‘has to be a real possibility, not just a theoretical possibility’ " ( HoganWillig, PLLC v Swormville Fire Co., Inc. , 210 AD3d 1369, 1372, 1373 [4th Dept 2022] [internal quotation mark omitted], quoting Simon's NY Rules of Prof Conduct § 3.7:22 [Dec 2021 Update]).
Tempering the application of the advocate-witness disqualification rule, the Fourth Department reminds that the rule "provide(s) guidance, not binding authority, for courts in determining whether a party's law firm, at its adversary's instance, should be disqualified during litigation" ( HoganWillig, PLLC v Swormville Fire Co., Inc. , 210 AD3d 1369, 1372 [4th Dept 2022], citing S & S Hotel Ventures Ltd. Partnership v 777 S. H. Corp. , 69 NY2d 437, 440 [1987] ).
Such guidance should include consideration of the "party's valued right to choose its own counsel"; "the substantive rights of the litigants"; and whether the motion to disqualify has been brought to gain a "strategic advantage of one party over another" ( HoganWillig, PLLC v Swormville Fire Co., Inc. , 210 AD3d 1369, 1372 [4th Dept 2022] ).
Thus, "[c]onsidering all the significant interests to be balanced" (id. ) the "party seeking disqualification of a law firm or an attorney bears the ‘burden of making a clear showing that disqualification is warranted’ " ( HoganWillig, PLLC v Swormville Fire Co., Inc. , 210 AD3d 1369, 1372-1373 [4th Dept 2022] [internal quotation marks omitted], quoting Lake v Kaleida Health , 60 AD3d 1469, 1470 [4th Dept 2009] ; see S & S Hotel Ventures Ltd. Partnership , 69 NY2d at 445 ; Jozefik v Jozefik , 89 AD3d 1489, 1490 [4th Dept 2011] ).
Here it is held that the plaintiff Christine Owen has not made the requisite "clear showing" that disqualification is warranted. Rather, her motion is premised on "speculative, conceivable or imaginable" evidence, not a "real possibility" of prejudice.
The court balances Robert W.’s right to choose counsel which has represented him for years and which is familiar with the facts surrounding all of the matters associated with the estate of Robert H. Hurlbut Sr., against what it perceives is the dim possibility that Pullano & Farrow or any of its attorneys have testimony to offer that will inure to the detriment of Robert W. He admits most if not all the transactions claimed to have been a breach of his fiduciary duty. He admits purchasing and transferring the "assets," such as they were, of ROHM to his new consulting company. He admits hiring its employees. He admits taking over management of the pension plan. He denies that ROHM had any value. Legal arguments may and probably will be made as to whether these acts constituted a breach of his fiduciary duty, but the court does not discern the existence of disputed factual issues that the attorneys at Pullano & Farrow "ought" to testify about that will be prejudicial to Robert W.
In that regard it has been held that whether an attorney-witness "ought" to testify is determined by whether the testimony is "necessary," taking "into account such factors as the significance of the matters, weight of the testimony, and availability of other evidence" ( S & S Hotel Ventures Ltd. Partnership v 777 S.H. Corp. , 69 NY2d 437, 445-46 [1987] ). "Testimony may be relevant and even highly useful but still not strictly necessary" (id. ). Intimate involvement in the questionable transactions and the "flow of information" is not enough to justify disqualification (id. ).
Here Robert W.’s own testimony constitutes the best evidence of his acts that comprise the alleged "breach of fiduciary duty." On all the evidence presented to the court, it appears that Pullano & Farrow can do no more than confirm what he did.
Accordingly, disqualification based on a violation of the advocate-witness rule is denied.
Motion to Supplement the Record
Subsequent to her motion to disqualify Pullano & Farrow, plaintiff Christine moved to supplement the record and add as an additional ground for disqualification Rule 1.7 of the New York Rules of Professional conduct (22 NYCRR part 1200), which states that
(a) A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.
NY ST RPC Rule 1.9
The motion to supplement the record is denied, on the ground that the supplemental evidence should have been submitted with the original motion, which has been pending since March 2023. Yet, even if allowed, the proposed new evidence would not alter the court's decision to deny disqualification.
Christine's filings are voluminous, both in this matter and in Surrogate's Court. Her attorneys have doggedly uncovered and produced for the court's review dozens of what she claims are inculpatory emails. No stone has gone unturned in this matter and indeed, in all the litigation involving the dispute between Christine and Robert W. (of which this court can and will take judicial notice) thousands of documents have been produced and depositions taken. For Christine to now say, at this juncture and while the progress of the case has been stalled by the disqualification motion (and which if granted, will delay this case and the matters pending in Surrogate Court by many more months while new counsel gets up to speed on the proceedings) that in July 2023 she has uncovered previously unknown evidence that Pullano & Farrow represented ROHM before the United State Trademark Office and in eleven cases pending in the Monroe County Supreme Court, is to state a non-compelling reason to allow the court to consider the "evidence." The court discerns no "good cause" ( CPLR 2214[c] ) to allow supplemental evidence.
As the First Department held (albeit in the context of a summary judgment motion, which limits its relevance) in Ostrov v Rozbruch , 91 AD3d 147, 155, (1st Dept 2012) and cited by Christine, "Supplemental affirmations, however, should be sparingly used to clarify limited issues, and should not be utilized as a matter of course to correct deficiencies in a party's moving or answering papers." Here no reason has been given as to why the supplemental evidence wasn't provided with the original moving papers. Christine has known all along that Robert W. took over ROHM's assets. This is no secret, and she must have known, or her attorneys must have known, long before the disqualification motion was filed, that the trademark transfer would have been part of the transaction. While Christine asserts that she need not prove that the evidence is new or impossible to obtain earlier, the court in the exercise of its discretion declines to consider it.
But even if the court were to grant the motion to allow the supplemental filings, the court's decision to deny disqualification would not change.
It is undisputed that Pullano & Farrow represents ROHM in eleven matters pending in New York State Supreme Court. However, none of those matters, as set forth in the affirmation of Langston McFadden, counsel for Robert W., are related in any way to the matters pending in this court, and there is no evidence to rebut his position.
Christine also asserts that Pullano & Farrow represented ROHM before the United Patent and Trademark Office, allowed its trademarks to be cancelled and simultaneously registered for the same trademarks on behalf of its other client, Hurlbut Health Consulting.
While related in a superficial way to the takeover and termination of ROHM, the representation before the Trademark Office bordered on ministerial. Rule 1.9 refers to representation on a "matter." Litigation is a "matter." Stock transfers, contract negotiations, labor disputes, are all "matters." The court agrees that Pullano & Farrow's "representation" of ROHM was nothing more than recording its representation so the trademark "Hurlbut Care Communities — which shared a name with the Hurlbut nursing home communities of which Christine was no longer an owner - would not laps. It was not a "substantially related matter" (Rules of Professional conduct 1.9 ).
In response to any argument that Pullano & Farrow represented ROHM, not Christine individually, Christine cites to Matter of Greenberg , 206 AD2d 963, 614 NYS2d 825 [4th Dept 1994]. There, on facts which mirror those in the underlying proceeding, "Greenberg (a director or officer) unilaterally seized the tangible and intangible assets of Madison Cabinet, transferred them to his new corporation, Meyer's Cabinet, and used that new entity as the vehicle for usurping the corporate opportunities of Madison Cabinet, in breach of his fiduciary duty to Madison Cabinet and its other shareholders." ( Matter of Greenberg , 206 AD2d 963, 964 [4th Dept 1994] ).
Greenberg's estate had filed an action seeking to dissolve Madison Cabinet. Alan Plotnik, a shareholder of Madison Cabinet, countered with an action for damages for breach of fiduciary duty and moved to disqualify Greenberg's counsel. In reversing the trial court, which had denied the motion to disqualify, the Fourth Department held that "One who has served as attorney for a corporation may not represent an individual shareholder in a case in which his interests are adverse to other shareholders (Greenberg at 965; citing to Matter of Fleet v Pulsar Constr. Corp., 143 AD2d 187 ).
The difference between the facts in Greenberg and here is that Robert W. as de facto trustee of the marital trust, which owned the shares of ROHM, and as president of ROHM, had the authority to act unilaterally in transferring the assets of ROHM. Mr. Greenberg, as far as can be discerned, did not have the authority to act unilaterally, and to the extent that he did, he was aided in doing so by his attorneys.
Robert W. was not only president of ROHM, but he was also in a sense ROHM. The nursing homes he owned were ROHM's only clients . As president of the nursing homes, he had ultimate authority how much to pay ROHM, whether to continue to retain ROHM or hire a new company to do the administrative work of the nursing homes.
Christine has submitted an expert affidavit (NYSCEF # 241) which states "ROHM performed work on behalf of dozens of clients, including the Hurlbut nursing homes and related real estate holding companies, additional real estate investment companies, and the Marital Trust." The court is unaware of work done on behalf of "dozens of companies" other than entities related to the estate of Robert Hurlbut Sr.
Pullano & Farrow represented ROHM, not Christine. While Greenberg speaks to the rights of an individual shareholder, in that case the parties seeking disqualification were actively involved in the management of the corporation.
Christine on the facts presented had nothing to do with the management of ROHM. At the time of the representation in question, she was not an owner, but a beneficiary of the marital trust which owned the shares. After the trust divested 50% of the shares to her, she had no role to play in the operation of ROHM. Thus, Christine is unable to show — certainly has not shown — that confidential communications between her and Pullano & Farrow that may be used against her in this litigation.
In denying disqualification, the court has considered the words of the Court of Appeals in Tekni—Plex, Inc. v. Meyner & Landis, 89 NY2d 123 (1996) in which Justice Judith Kaye (who in private practice was an experienced commercial litigation lawyer) cautioned against a "mechanical application of blanket rules," because "(d)isqualification of counsel conflicts with the general policy favoring a party's right to representation by counsel of choice, and it deprives current clients of an attorney familiar with the particular matter ( id., at 131-132 )
Judge Kaye added that "Disqualification motions, unfortunately, have also been used as a litigation tactic to gain strategic advantage over an adversary" (id., citing S & S Hotel Ventures Ltd. Partnership v. 777 S.H. Corp., 69 NY2d at 443 [1987] ). It is not clear what strategic advantage Christine believes she will achieve by disqualifying Pullano & Farrow, but given the ferocity of the litigation pending before this court and in Surrogate's Court, it would seem that any "win" will achieve for Christine a measure of satisfaction.
Plaintiff's motion for permission to supplement the record of the disqualification motion with "newly-discovered evidence" is denied.
Plaintiff's motion for permission to assert Rule 1.9 of the New York Rules of Professional Conduct (22 NYCRR part 1200) as an additional ground for disqualifying Pullano & Farrow is denied.