Harvey M. Stone and Richard H. Dolan
Harvey M. Stone and Richard H. Dolan ()

This column reports on several significant, representative decisions handed down recently in the U.S. District Court for the Eastern District of New York. Judge Arthur D. Spatt remanded for further consideration a bankruptcy court decision disqualifying debtors’ counsel. Judge Brian M. Cogan declined to let a lawyer appear pro hac vice at a retrial in light of his deficient performance in earlier proceedings. Judge Spatt ordered an interlocutory sale of forfeitable property to preserve the value of the property and protect defrauded investors. And Judge Denis R. Hurley gave pretrial guidance as to potential damages in an employment discrimination action.

Bankruptcy Counsel

In KLG Gates LLP v. Roy E. Brown, 13 CV 4972 (EDNY, Feb. 18, 2014), Judge Spatt rejected one of the bankruptcy court’s two grounds for disqualifying debtors’ counsel, and remanded for renewed consideration as to whether disqualification was warranted by the remaining ground, standing alone.

KLG Gates LLP served as bankruptcy counsel to Brown Publishing Company (BPC) and Brown Media Holdings Company (BMH). In 2008, prior to the bankruptcy filing, BPC’s general counsel, Joel Dempsey, had sent a legal memorandum to KLG partner Edward Fox, soliciting input with respect to a plan by certain BPC insiders, including its president and CEO Roy Brown, to transfer its assets to a newly formed entity in a way that would avoid successor liability and advance the prospect of favorable tax treatment. In 2009, in connection with the anticipated retention of KLG as bankruptcy counsel for BPC/BMH, Dempsey signed a waiver of any conflict. BPC and BMH filed for bankruptcy protection in 2010, with KLG as their counsel.

In July 2010, the assets of BPC and BMH were sold at a §363 auction. Though a group of insiders were the high bidders, their financing fell through and an outside bidder, PNC Bank, emerged as purchaser. Brown Publishing Liquidating Trust succeeded to the remaining assets of BPC and BMH, which consisted principally of legal claims.

In 2011, shortly before confirmation of the third amended plan for reorganization of BPC and BMH, Brown learned that he was likely to be sued by the Liquidating Trust. He did not raise any objection to confirmation of the plan.

Approximately one year later, Brown moved to disqualify KLG from representing the Liquidating Trust, BPC or BMH in the litigation against him, arguing that KLG was acting for the benefit of Brown and other insiders, to help them obtain the debtor’s assets in bankruptcy, rather than exclusively for BPC and BMH. He subsequently amended the motion to include “newly-discovered facts” that KLG had represented PNC Bank and Wilmington Trust (a creditor of BPC/ BMH) in unrelated bankruptcy matters, and had failed to adequately disclose the nature of these various conflicts in the affidavit it submitted, pursuant to Bankruptcy Rule 2014, when successfully seeking authorization to represent BCP/BMH.

The bankruptcy court (Judge Dorothy T. Eisenberg) granted the motion, disqualifying KLG and directing it to disgorge $100,000 in fees that had been previously approved and paid. KLG appealed.

Spatt found that Brown—who had admittedly waited for “tactical reasons” to bring his motion—had waived any right to object to the conflicts he complained of by failing to raise them for almost three years (in the case of the BCP/BMH conflicts) and for nearly nine months (in connection with the Liquidating Trust conflicts.) Spatt also found, however, that KLG’s Rule 2014 statement—which merely disclosed “all of its 483 former and current clients, in alphabetical order, who may have had conflicts with the Debtors” without specifying the conflicts with respect to Brown and the BCP/BMH insiders—was insufficient to call the bankruptcy court’s attention to significant facts that should have been squarely placed before it. Slip op. 23-28.

The matter was remanded to the bankruptcy court to determine whether disqualification remained appropriate. Slip op. 29-30.

Pro Hac Vice

In Southerland v. Woo, 99 CV 3329 (EDNY, Feb. 24, 2014), Judge Cogan denied an attorney’s motion for leave to appear pro hac vice at a retrial where counsel’s prior conduct showed him to be unqualified to practice before the court.

Plaintiffs—a father and his now-grown children—brought this §1983 action against a former caseworker for the New York City Administration for Children’s Services. The complaint alleged that defendant had improperly gained entrance to the family home and removed the children without a court order, resulting in their placement in foster care. The case has a long history, including remands from the U.S. Court of Appeals for the Second Circuit.

Before the initial trial, attorney Brian King appeared pro hac vice to represent Sonny Southerland, the father of the children. King is admitted to practice in New York State but not in the Eastern District. That trial ended in a hung jury.

After the mistrial, King appeared at a conference for Southerland, who later told the court that King had attended the conference without authority. The court issued an Order to Show Cause requiring King to show why he should not be relieved as counsel. Receiving no response, the court ordered the termination. Motion practice and conferences ensued, with Southerland representing himself.

At the retrial, on the morning of jury selection, King appeared again, moving for pro hac vice admission. Given counsel’s prior performance, the court denied the motion from the bench.

As Cogan concluded, at the first trial counsel had shown both lack of familiarity with federal practice and contempt for the court. The following are some of the many examples cited in the opinion here:

• Counsel “had difficulty with arriving on time for conferences or trial” and refused to acknowledge his obligation to be punctual (“Your Honor, I can never assure anyone I won’t be late”).

• He inaccurately stated that he had obtained a stipulation allowing a document to be admitted into evidence.

• Contrary to practice in the district, he refused the court’s direction to disclose his client’s witnesses for the next day.

• Counsel “displayed an unawareness of the workings of Fed. R. Civ. P. 50 when he argued that co-plaintiffs’ counsel should move for judgment as a matter of law before the defense case had even been put on.” Slip op. 5.

• Counsel diverted discussion on an evidentiary issue to confront the court personally, saying “Your Honor looks irritated” and, when told he was misreading the judge’s look, adding, “When someone rolls their eyes—”

• In his closing argument, counsel defiantly made irrelevant assertions about the procedural history of the case that went beyond the trial record, and made other points that distorted the record or had no support in the record. Slip op. 8-9.

At the retrial the jury returned a verdict in plaintiffs’ favor, awarding $10,000 to Southerland, who had represented himself, and $75,000 to each of the children, who had counsel. See NYLJ, March 12, 2014.

Interlocutory Sale

In United States v. The Real Property Located at 272 Old Montauk Highway, Montauk, New York, 11954, and All Proceeds Traceable Thereto, 12 CV 1880 (EDNY, Feb. 22, 2014), an in rem forfeiture action stayed pending resolution of a related criminal investigation, Judge Spatt granted in part and denied in part the government’s motion for an interlocutory sale of forfeitable properties.

The government claimed that the defendant properties were derived from the proceeds of securities fraud and money laundering committed by Brian Callahan. Moving to sell one of the four defendant properties—the Montauk Property—the government alleged that Callahan diverted investor funds to purchase co-op shares in the property and pay loans securing the property. The loans on the Montauk Property were in default since July 2012 with a total due as of April 2013 of $14.6 million. In spite of the default, the Montauk Property was allegedly well maintained.

In June 2012, the Montauk Property was appraised at between $52 million and $88 million. A later appraisal estimated a market value of $75 to $80 million. The government received several Letters of Intent to purchase the Montauk Property—all of which were at the low end of the first appraisal. In May 2013 the government submitted the instant motion for the court’s approval of an interlocutory sale and an order directing monthly accountings of revenue and expenses and deposit of any excess income with the U.S. Marshalls Service.

Rule G(7) of the Supplemental Rules of Certain Admiralty and Maritime Claims and Asset Forfeiture Actions provides that when the government does not have actual possession of property, the court “may enter any order necessary to preserve the property, to prevent its removal or encumbrance, or to prevent its use in a criminal offense.” Slip op. 12 (citations omitted). Where a civil forfeiture proceeding is stayed during a related criminal investigation and prosecution, 18 U.S.C. §981(g)(6) gives the court the authority to enter any order necessary to preserve the value of the property or to protect the rights of lienholders or others.

An interlocutory sale of the Montauk Property was appropriate because of the ongoing default of the loan and the continued accrual of interest and late charges, resulting in a $3.5 million diminution of the property value to date. This continuing loss of value provided “good cause” for an interlocutory sale. Spatt rejected, however, the government’s proposed sale at a price of $54.15 million, because “the combination of the lower-end offer with the breakup fee or the broker’s commission…will seriously reduce the potential amount that will be available to repay alleged defrauded investors…,” leaving only $36 million for that purpose. Slip op. 20. Finally, the court ordered the requested accounting and deposit of excess income with the Marshals Service.

Employment Discrimination

In Delia v. Patrick R. Donohoe, Postmaster General US Postal Service, 03 CV 3367 (EDNY, Feb. 27, 2014), Judge Hurley provided the parties with a guide to the scope of damages available to the plaintiff if he can prove his employment discrimination action against his employer.

In 1999 plaintiff, a postal worker, was placed on emergency suspension without pay for allegedly speaking in a threatening way to a supervisor during a phone call. After an investigation revealed that plaintiff had not listed certain violation convictions on his application, the Postal Service issued a Notice of Removal. Plaintiff filed a grievance regarding the Notice of Removal. An arbitrator determined that while failing to prove the workplace charges against plaintiff, the Postal Service had proved plaintiff’s failure to list violations. The arbitrator’s July 2000 decision provided that plaintiff would be terminated if he committed a future act warranting termination. Awarding no back pay, the arbitrator treated plaintiff’s removal between June 1999 and August 2000 as an unpaid suspension period for falsifying his employment application.

In 2002 a Notice of Removal for Improper Conduct and Failure to Follow Instruction was issued to plaintiff prompted by his violation of a training facility’s no smoking policy and disabling a smoke detector and fire enunciator. An arbitrator found that plaintiff’s conduct warranted termination, and in April 2004 plaintiff was terminated as of July 15, 2002.

Prior to plaintiff’s official termination, he filed this action alleging that the Postal Service violated Title VII by discriminating against him based on his national origin and by retaliating against him because he had filed administrative complaints of discrimination. Plaintiff based his discrimination claims on the unproven 1999 Notice of Removal and his retaliation claims on the second warning in 1999, his emergency placement on unpaid off-duty status and the August 1999 Notice of Removal.

As Hurley noted, there was no dispute that plaintiff was entitled to seek back pay for the unpaid suspension period. The issue was whether he was entitled to seek damages in three categories: (1) compensatory damages and additional equitable relief for the unpaid suspension period; (2) compensatory damages and equitable relief for the period between the time he was reinstated in August 2000 and the time he was terminated pursuant to the Notice of Removal in 2002; and/or (3) compensatory damages and equitable relief for the period after his 2002 termination.

First, in addition to compensatory damages relating to the two letters of warning issued in 1999, plaintiff could seek “compensatory damages for the entire Unpaid Suspension Period for the emotional distress he suffered, provided that Plaintiff establishes at trial that the compensatory damages were caused by the alleged unlawful conduct.” Slip op. 7. Compensatory damages would include back pay with lost earnings and fringe benefits.

For the period between reinstatement and termination, plaintiff alleged that he was placed in a position where his overtime opportunities were limited. Hurley concluded that plaintiff was entitled to “seek an award of economic damages for the Reinstatement Period to the extent that Plaintiff can prove that, but for the Postal Service’s alleged unlawful conduct, he would not have suffered a loss in overtime wages.” Slip op. 8. He could also seek compensatory damages for past mental pain and suffering for this period.

For the period after his termination in July 2002 resulting from his breach of the smoking rules, plaintiff was not entitled to seek damages or equitable relief. As the court stated: “No reasonable jury could find that but for the Postal Service’s alleged discriminatory and retaliatory acts in 1999, Plaintiff would not have been terminated for disabling a smoke detector and violating the Postal Service training facility’s no smoking policy.” Slip op. 11. In short, there was no causal nexus between the Postal Service’s alleged discriminatory conduct and plaintiff’s actions three years later.

Harvey M. Stone and Richard H. Dolan are partners at Schlam Stone & Dolan. Bennette D. Kramer, a partner of the firm, assisted in the preparation of the article.