In a rare move, a judge has ordered the disclosure of communications between attorneys and a New York businessman facing a civil suit alleging he and others misappropriated $13 million in a real estate deal.
Communications between defendant Moses Stern and attorneys at Buchanan Ingersoll & Rooney; Herrick Feinstein; and Hoffinger Stern & Ross concerning certain transactions "are deemed unprotected" by the attorney-client privilege and the work-product doctrine, Southern District Magistrate Judge Gabriel Gorenstein (See Profile) found in Amusement Industry v. Stern, 1:07-cv-11586.
"We find probable cause to believe that Stern’s communications with BIR, Herrick and HSR concerning the subject matter of the four transactions at the time they were being undertaken were communications ‘in furtherance of a crime or fraud,’" wrote Gorenstein, citing United States v. Jacobs, 117 F.3d 82 (2d Cir. 1997).
Disclosing communications under the crime-fraud exception is "unusual generally and particularly rare in civil cases," said Stephen Gillers, a professor at New York University School of Law who focuses on professional responsibility.
The case arises out of an agreement by Stern to purchase a portfolio of 11 shopping centers from Colonial Realty Limited Partnership, according to court documents. Amusement Industry, doing business as Westland Industries, sued Stern and others in 2007, alleging the real estate company was induced to invest $13 million in the deal.
Last year, the company moved to compel the disclosure of all communications between Stern and attorneys who performed services for him on the Colonial transaction and related transactions.
Stern’s current attorneys at Hoffinger Stern & Ross opposed the motion to compel, writing that the request was "short on the law warranting the invasive-type relief sought."
"Plaintiff’s Motion is no more than a patent groundless fishing expedition, based upon the unsurprising garden variety fact that there were attorney-client communications around the time a ‘defendant’ allegedly committed fraud," wrote Mark Geisler and Stephen Stern, who is unrelated to his client, Moses Stern.
Stephen Friedman, an attorney formerly at Buchanan Ingersoll, which represented Stern in the Colonial transaction, also responded to Amusement’s motion to compel, writing to correct "inaccurate statements by plaintiffs against Friedman." Friedman didn’t take a position on whether it should be granted or denied, he said, because the attorney-client privilege belongs to the client, not the attorney.
"Amusement ‘cherry picks’ through the testimony and documents in this case to construct an argument to support this motion even if that evidence conflicts with its own theories of the case or the testimony of its witnesses," wrote Friedman’s attorney, Justin Y.K. Chu, special counsel at Steptoe & Johnson.
In his decision, Gorenstein said Amusement has shown probable cause to believe Stern engaged in four fraudulent or illegal schemes: his efforts to obtain financing from JPMorgan; his efforts to obtain financing from Citigroup; his acquisition and theft of Amusement’s $13 million; and Stern’s effort to obtain financing from Petra Mortgage Capital Corp.
"Stern could not and did not effectuate these transactions without the assistance of attorneys. Indeed, the evidence shows that Stern frequently communicated with or transmitted documents to other parties to these transactions exclusively through his attorneys," Gorenstein wrote.
For example, Friedman acted on Stern’s behalf to obtain $13 million from Amusement and Stern used Buchanan Ingersoll to transmit documents to Petra, Gorenstein said.
The judge said Stern used Herrick to negotiate with Citigroup and outlined a series of correspondence with Herrick attorneys Steven Fleissig and Dena Cohen.
Gorenstein wrote that Herrick’s opinion letters for Stern were submitted to Citigroup; Herrick attorneys had conversations with Stern regarding the deal expenses submitted to Citigroup; and Herrick attorneys received emails from an account attaching documents bearing a forged signature, which they then transmitted to Citigroup.
Stern used Hoffinger Stern attorneys to communicate directly with the seller in the Colonial transaction and by involving them in an analysis of the expenses Stern and Colonial each assumed under the purchase and sales agreement, the judge added.
"Stern’s attorneys were being used by him precisely to undertake various tasks that were required to effectuate the financial transactions at issue. Stern does not and cannot contest this fact. Obviously, Stern could direct these attorneys only through his own communications with them," Gorenstein said.
"Because we have found the transactions on which these attorneys worked to each constitute illegal schemes devised by Stern, Stern’s communications with his attorneys to effectuate them were necessarily ‘in furtherance of’ his illegal conduct," the judge said.
Gorenstein said the court doesn’t find the privilege has been lost regarding all communications with the attorneys. He said only Stern’s communications with his attorneys to effectuate the four transactions must be revealed.
The magistrate judge said the court makes no finding that any of the attorneys had any knowledge that they were being used by Stern for fraudulent or illegal purposes, "nor is such a finding necessary for the crime/fraud exception to be applicable."
The five-year-old case has spawned counterclaims and cross claims. In a pending related suit, Amusement is suing Buchanan Ingersoll and Friedman for legal malpractice, among other causes of action.
Representatives from Herrick and Buchanan Ingersoll declined to comment. Friedman, no longer at Buchanan Ingersoll, could not be reached. Chu, who represents Friedman, did not return calls seeking comment.
Stephen Stern, the Hoffinger Stern & Ross partner who represents Moses Stern, did not return messages, nor did former Herrick attorney Fleissig, who is now a shareholder at Greenberg Traurig.
Craig Missakian, general counsel of Amusement Industry in Long Beach, Calif., declined to comment.
Gillers, the NYU law professor who is not involved in the case, said the crime fraud exception occurs most often in criminal cases when prosecutors are alleging that a person they are investigating or prosecuting consulted a lawyer for a criminal purpose.
"In civil cases, the invocation of the exception is rare by comparison," he said.
"Lawyers subscribe to the unwritten commandment ‘know your client’ so they take care to ensure themselves that the client’s goals are legitimate," Gillers said.
"Lawyers hate to reveal privileged information," he said.
"The privilege and work-product protection mean to protect true attorney-client relationships by insuring that clients are completely candid with counsel. That in turn promotes the rule of law," Gillers said. "But if the client is using the lawyer to commit a crime or fraud, there was never a true attorney-client relationship. The rule of law is instead being subverted."
Christine Simmons is a reporter for the New York Law Journal, a Legal affiliate