A lawyer who filed two bogus bankruptcies to fend off a foreclosure that threatened his own financial interests has been hit with a two-year suspension — the second in his career.
The state Supreme Court on June 4 adopted the recommendation of the Disciplinary Review Board, which called Nicholas Khoudary "a proven danger to the public" who showed "once again, that he cannot be trusted to act in accordance with the high standards required of attorneys of this state."
Disciplinary proceedings against Khoudary, an East Brunswick solo, were commenced based on the findings of the bankruptcy judge, who sanctioned him personally in the amount of $11,628 for his abusive filings.
Knowing that a tax lien certificate holder was about to foreclose on three parcels of land in Union Township, collectively known as the Schaefer Salt Factory, Khoudary paid $20,000 to acquire mortgages and a default judgment against the property, on the condition that he would pay another $200,000 if it ever turned a profit. To do that, he had to foreclose on it or sell it before the lien holder, Carol Segal, completed his foreclosure.
To slow Segal down, Khoudary incorporated an entity called Schaefer Salt Recovery Inc. in May 2004, placing all the stock in his wife’s name. Days later, he filed a Chapter 11 petition for the company. The "bare bones" petition — lacking the necessary financial statement and schedule — was nevertheless enough to trigger the automatic stay.
Though the bankruptcy case was based on the company’s supposed insolvency and need to reorganize to repay its debts, its sole assets were the mortgage assignments and default judgment and its only debt was the $20,000 paid for them, plus some minor expenses.
On July 6, 2004, U.S. Bankruptcy Judge Novalyn Winfield in Newark granted Segal’s motion to dismiss the petition as filed in bad faith. But she struck from the order standard language that barred filing another petition within 180 days. As she explained later, she expected that Khoudary "well knew the law" and "would not be so foolish as to file a case that did not meet the requirements of a good-faith filing."
The foreclosure action resumed and on Aug. 7, 2004, the same day the judge in that case struck Khoudary’s opposition papers because they failed to present a meritorious defense, he filed a Chapter 7 petition.
On the day of the hearing on Segal’s motion to dismiss the new bankruptcy, Khoudary consented. This time, Winfield left the 180-day bar in the dismissal order, saying, "I will not allow this bankruptcy court to be used as a litigation tool by a party who in truth has not so much a reorganizational intent, but intends to use the bankruptcy court as an offensive weapon."
Segal sought sanctions for both filings. Winfield, although agreeing both were abusive, granted fees and costs only as to the second, saying she had no power regarding the first. She later vacated the sanctions because they were requested after final judgment and thus, she believed, not authorized by case law.
The U.S. Court of Appeals for the Third Circuit reversed in a precedential opinion on Sept. 9, 2008, saying that "any suggestion that sanctions were not warranted or should not have been awarded would be absurd."
On remand, Winfield imposed the $11,628 sanction, saying she was "aggravated at the blatant, blatant misuse of the bankruptcy code," and she thought Khoudary violated ethics rules.
The ethics grievance was filed by Segal’s son, Benjamin Segal, according to Khoudary, who adds that the District VIII Ethics Committee decided in January 2010 that the accusation, even if true, did not constitute unethical conduct and declined to docket the complaint.
The Office of Attorney Ethics then appointed as a special ethics master, Robert Grundlock Jr., of Rubin Ehrlich & Buckley in Lawrenceville, who recommended a two-year suspension despite Khoudary’s attempt to blame his bankruptcy lawyer and health problems.
The DRB, in turn, found violations of Rules of Professional Conduct 3.1, for filing a frivolous claim; 8.4(c), for conduct involving dishonesty and 8.4(d), for conduct prejudicial to the administration of justice.
Khoudary’s earlier two-year suspension, the federal felony conviction on which it was based and his lack of remorse were aggravating factors in the DRB’s recommended discipline.
Khoudary had deposited four checks totaling $296,233 into his attorney trust account for a client and then wrote numerous checks against the funds for amounts below $10,000, thereby evading the requirement for the bank to report the transactions to the government, under a law meant to combat money laundering. In return, he got half the client’s "commission." He was convicted and sentenced to five years’ probation and was suspended in 2001, retroactive to 1999.
In the current case, the DRB found that Khoudary learned nothing from that experience, which should have led him to exercise "extraordinary care" in his future business dealings. Instead, he exhibited the "same hubris, the same faulty moral compass, and the same willingness to leverage his license to practice law, all for personal gain."
Four of the nine DRB members, including two of the three nonlawyers, thought a one-year suspension would suffice.
Khoudary denies he was trying to delay the foreclosure or that he was knowledgeable about bankruptcy, as Winfield assumed.
He calls a two-year suspension harsh, pointing out it is the same penalty as for the federal conviction, while frivolous filings tend to draw reprimands.
Segal’s lawyer, Stephen Falanga of Connell Foley in Roseland, was out of the office and could not be reached.
Stephen Orlofsky of Blank Rome in Princeton, a former federal judge who presented the case for the OAE, declines comment.