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A veteran Manhattan bankruptcy lawyer may have to face trial on allegations that he failed to disclose to his client and to a U.S. bankruptcy judge a possible conflict of interest arising out of his prior representation of one of the client’s creditors. The Appellate Division, 2nd Department, last week revived a portion of the former client’s suit against Manhattan bankruptcy lawyer Neil R. Flaum and his firm more than a year after a Suffolk County Supreme Court justice had dismissed the case. While the four-judge panel upheld the December 2003 ruling of Justice Arthur G. Pitts that the malpractice claims brought by the Izko Sportswear Co. and its principal, Ira Soblick, were barred once the bankruptcy court judge approved Flaum’s fee, the panel reinstated the plaintiffs’ cause of action under New York State Judiciary Law �487. Section 487 deals with attorney misconduct and provides both civil and criminal penalties in cases where an attorney is proven to have intentionally deceived, or colluded to deceive, a court or any party to litigation pending before the court. The statute provides trebled damages for victims seeking recourse through the civil courts. A criminal violation of the statute constitutes a misdemeanor punishable by a $1,000 fine or up to three years’ probation. Attorney Jeffrey Levitt of Amityville, who represents the plaintiffs in Izko Sportswear v. Flaum, No. 2004-00279; -01167 and -05260, said in an interview that his clients would not have filed for bankruptcy, but for the advice they received from Flaum. Izko Sportswear “had more than enough assets to pay its debts,” Levitt said. The company’s primary dispute was with its landlord, the Heartland Rental Properties partnership, which had sued Izko to recover unpaid rent totaling less than $15,000, Levitt said. According to Levitt, Flaum was representing Heartland at the time he took on the Izko matter. While Flaum disclosed to Heartland his relationship with the apparel company and its principal, he did not similarly advise Soblick, Levitt said. The plaintiffs also claim that Flaum disclosed to Heartland that Izko was considering filing for Chapter 11 bankruptcy protection, revealing confidential information that affected Heartland’s case strategy. Prior to the bankruptcy court’s approval of Flaum’s representation of Izko in February 1998, he submitted to the court an affirmation stating, “neither I nor any members of my firm have any connection with [Izko], its creditors, or any other party in interest or their respective attorneys or accountants,” the Appellate Division said. Merril S. Biscone of Uniondale’s Rivkin Radler, is one of the attorneys representing Flaum. In a telephone interview, she said, “It’s our position that there was no conflict of interest. Once the facts are borne out, we are confident that the �487 claims will be dismissed as well.” Rivkin partner Carol Lastorino added that while it is true that Flaum represented Heartland Rental Properties, that occurred “years before the bankruptcy proceeding was commenced.” Under bankruptcy law, prior representation of a creditor does not disqualify an attorney from representing its debtor, she said. Lastorino said that Izko’s prior counsel was aware of that representation, meaning that there was no undisclosed conflict. Levitt said that his clients dismissed Flaum midway through Izko’s Chapter 11 filing after a dispute over the lawyer’s handling of the case. The bankruptcy court fixed Flaum’s fee at approximately $45,000, Levitt said. It was not until June 2002, some two years after Flaum’s discharge, that Soblick learned that his company’s former counsel had also represented its principal creditor, Levitt said. Soon after, his client filed suit. The Appellate Division panel found malpractice claims failed because in the course of approving Flaum’s fee, the bankruptcy court “necessarily determined that the fee was appropriate and that there was no malpractice.” But the panel reinstated the plaintiffs’ Judiciary Law claim because the alleged deceitful act was not revealed until after the bankruptcy court fee application had been approved. The plaintiffs demanded damages in excess of $500,000 on the �487 action. That sum, Levitt said, represents the fee paid to Flaum, plus costs associated with the bankruptcy proceeding. Those awards could be trebled. Levitt said that he will not recommend that his client press the criminal side of �487. “The issue,” he said, “should be compensatory damages to the client. If the case is proved, I believe the attorney will be subject to disciplinary action.” But, Lastorino and Biscone cautioned that the appellate panel’s ruling addressed only the pleadings and not the merits of the case. The plaintiffs will still have to raise a triable issue of fact that they sustained damages, Lastorino said.

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