Motions sequence numbers 002 and 003 are consolidated for disposition.

This is an action to recover damages plaintiffs suffered due to allegedly fraudulent misrepresentations made by defendants Gregory Karzhevsky, Emily Karzhevsky, and Kasil Karzhevsky (the "Karzhevskys") during plaintiff LCA Holding Inc.'s acquisition of all of the outstanding stock in Loving Care Agency, Inc. ("Loving Care")from the Karzhevskys. [*2]

Defendants now move, under motion sequence number 002, for an order pursuant to 22 NYCRR § 602.2 admitting William D. Wallach, Esq., a Partner in the law firm of McCarter & English ("M & E") who is admitted to the Bar of the State of New Jersey, pro hac vice to participate in all proceedings in this action.

Plaintiffs oppose the motion and move, under motion sequence number 003, for an order disqualifying M & E from serving as defendants' counsel in this action pursuant to DR §§ 5-108(A)(1) and 5-102(B).

Background

Defendants entered into a Stock Purchase Agreement ("SPA") with LCA Holding dated January 20, 2006, in which they represented to LCA Holding that Loving Care was "in compliance with, and has conducted the Business in accordance with ... all applicable Laws." (Section 4.10). Plaintiffs claim that defendants knew this statement was false when they made it.

Specifically, plaintiffs allege that from approximately 1996 through 2004, Loving Care substantially underreported the number of employees on its payroll to the insurance companies that provided it with workers' compensation insurance.

Plaintiffs claim that based on those allegedly false payroll figures, Loving Care paid premiums that were significantly lower than what it would have paid had it accurately reported its payroll figures. Plaintiffs further claim that the Karzhevskys obstructed attempts by the insurers to audit Loving Care's payrolls at the end of each policy year in order to determine the proper premium, or caused Loving Care to switch insurers.

Plaintiffs contend that as a result of the Karzhevskys' alleged scheme to avoid payment of workers' compensation premiums, Loving Care's stock was, as of the date of the acquisition, worth substantially less than the amount LCA Holding paid to acquire it.

Plaintiffs' Complaint seeks to recover damages against the Karzhevskys for the difference between the amount LCA Holding paid to acquire Loving Care's stock and the amount that the Loving Care stock was actually worth at the time of the acquisition.

Discussion

Plaintiffs argue that Mr. Wallach and M & E should be barred pursuant to DR 5-108(A)(1) from representing the defendants, because Mr. Wallach previously represented plaintiff LCA Holding and Loving Care in a variety of matters, including two matters relating to workers' compensation premium fraud.

22 NYCRR § 1200.27. [DR 5-108] ("Conflict of interest; former client") provides, in relevant part, as follows: [*3]

(A) Except as provided in DR 9-101 [1200.45](B) with respect to current or former government lawyers, a lawyer who has represented a client in a matter shall not, without the consent of the former client after full disclosure:

(1) 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.^[FN1]

The Court of Appeals has held that

[u]nder DR 5-108(A)(1), a party seeking disqualification of its adversary's lawyer must prove: (1) the existence of a prior attorney-client relationship between the moving party and opposing counsel, (2) that the matters involved in both representations are substantially related, and (3) that the interests of the present client and former client are materially adverse (citation omitted). Satisfaction of these three criteria by the moving party gives rise to an irrebuttable presumption of disqualification (citation omitted).

This rule of disqualification fully protects a client's secrets and confidences by preventing even the possibility that they will subsequently be used against the client in related litigation. This prophylactic measure thus frees clients from apprehension that information imparted in confidence might later be used to their detriment, which, in turn, "fosters the open dialogue between lawyer and client that is deemed essential to effective representation" (citation omitted).

Plaintiffs contend that the three criteria set forth in Tekni-Plex, Inc. v Meyner and Landis, supra, have been satisfied because Mr. Wallach and M & E appeared on behalf of Loving Care and the Karzhevskys in an action brought against them by New Jersey Casualty Insurance Company ("NJCIC") in 2004, which alleged, inter alia, that the Karzhevskys had fraudulently underreported Loving Care's payroll to NJCIC for the purpose of evading the full payment of workers' compensation insurance premiums.

In addition, the Office of the Insurance Fraud Prosecutor in the New Jersey Attorney General's Office (the "Fraud Prosecutor") conducted a follow-up inquiry in late 2004 and early 2005. Mr. Wallach served as counsel for Loving Care in connection with its response to a series of investigative subpoenas served by the Fraud Prosecutor upon Loving Care seeking documents regarding its workers' compensation insurance coverage (underwritten by NJCIC and several other insurers) for the period from 1994 through 2004.

Significantly, LCA Holding, which did not enter into the SPA until 2006, was not a party to the NJCIC action and was not involved in any way with the Fraud Prosecutor's inquiry.

Two lawsuits were, however, brought after LCA Holding acquired Loving Care; namely, a lawsuit brought by American Zurich Insurance Company ("Zurich") in Superior Court of New Jersey, Law Division -Morris County, in June 2006 (the "Zurich action"), and a lawsuit brought by Reliance Insurance Company ("Reliance") in the United States District Court for the District of New Jersey in August 2006 (the "Reliance action").

Zurich and Reliance both alleged deceptive practices by the Karzhevskys relating to the underpayment of workers' compensation premiums. Wallach accepted service on behalf of the Karzhevskys, as well as Loving Care, which was named as a defendant in both actions, and LCA Holding, which was named as a defendant in the Reliance action only. Mr. Wallach also filed an Answer on behalf of the Karzhevksys, Loving Care and LCA Holding, but LCA Holding and Loving Care subsequently retained new counsel, Sills Cummis & Gross PC, to represent them. LCA Holding and Loving Care did not thereafter move to disqualify either Mr. Wallach or M & E from continuing to represent the Karzhevskys.

LCA Holding and Loving Care asserted cross-claims in those actions against the Karzhevskys which mirror certain of the claims asserted herein. The Zurich action was subsequently discontinued without prejudice, and the Reliance action was eventually dismissed for lack of diversity jurisdiction.^[FN2]

Defendants dispute that the Reliance and Zurich actions constitute "substantially related" matters within the meaning of DR 5-108. Specifically, Mr. Wallach claims that "[o]ther than responding to litigations filed against [LCA and Loving Care] and handling administrative subpoenas [*5]served by the State of New Jersey, the Firm was never involved in advising the Karzhevskys or Loving Care regarding the premiums it should pay for workers' compensation insurance or whether the Karzhevskys or Loving Care were in compliance with any workers' compensation laws."

In addition, defendants deny that LCA Holding divulged any confidential information relevant to the matters at issue herein. Moreover, defendants argue that the substantial relationship test set forth in DR 5-108 does not apply here because counsel's prior representation was in the context of a joint representation. Defendants contend that LCA Holding thus could not have reasonably expected that confidences it imparted to Mr. Wallach during the course of the joint representation would be withheld from the Karzhevskys. See, Allegaert v Perot, 565 F2d 246, 250 (2nd Cir. 1977) which held that because the party seeking disqualification "necessarily knew that information given to [the attorneys] would certainly be conveyed to their primary clients ..., the substantial relationship test is inapposite."

Plaintiffs argue that Allegaert v Perot, supra, is not controlling because it was decided under Canon 4 of the ABA Code of Professional Responsibility "(A Lawyer Should Preserve the Confidences and Secrets of a Client)," and not under DR 5-108[A][1]. However, the Second Circuit in Allegaert v Perot, supra at 250, specifically addressed the substantial relationship test, the very standard set forth in DR 5-108.

Moreover, in Volo Logistics, LLC v Varig Logistica, S.A., 51 AD3d 554, 555 (1st Dep't 2008), which directly involved DR 5-108, the Appellate Division, First Department, held as follows:

In this action for breach of a loan agreement representing $29.7 million worth of Brazilian airline financing, even if plaintiff lenders' attorneys did represent both sides in the loan transactions at issue, defendants knew at all times that they represented plaintiffs, did not have a reasonable expectation of confidentiality in their dealings with them, and thus cannot seek their disqualification in litigation over the loan obligations (citations omitted). We note that [defendant] failed to identify any confidential information that might have been divulged to the attorneys (citations omitted).

In the instant case, LCA Holding necessarily knew that information it gave to Mr. Wallach or another attorney at M & E would certainly be conveyed to the Karzhevskys. Significantly, there is no dispute that Mr. Wallach and M & E had a longstanding relationship with defendants, having represented the Karzhevsky family and all of the businesses owned by them, including Loving Care, since 1994. [*6]

Moreover, plaintiffs have failed to identify any confidential information that they divulged to any attorney at M & E, including Mr. Wallach "which would bear upon the issues of the present litigation." Yasuda Trust & Banking Co., Ltd. v 250 Church Associates, 206 AD2d 259, 260 (1st Dep't 1994).

Accordingly, based on the papers submitted and the oral argument held on the record on February 25, 2009, this Court finds that there is an insufficient basis to disqualify M & E pursuant to DR 5-108(A)(1).

Plaintiffs alternatively argue that Mr. Wallach and M & E should be barred pursuant to DR 5-102 from representing the defendants, because he is an essential witness in this case whose testimony will likely be prejudicial to the Karzhevskys.

Section 1200.21 [DR 5-102] ("Lawyers as Witnesses") provides as follows:

(B) Neither a lawyer nor the lawyer's firm shall accept employment in contemplated or pending litigation if the lawyer knows or it is obvious that the lawyer or another lawyer in the lawyer's firm may be called as a witness on a significant issue other than on behalf of the client, and it is apparent that the testimony would or might be prejudicial to the client.

(D) If after undertaking employment in contemplated or pending litigation, a lawyer learns or it is obvious that the lawyer or a lawyer in his or her firm may be called as a witness on a significant issue other than on behalf of the client, the lawyer may continue the representation until it is apparent that the testimony is or may be prejudicial to the client at which point the lawyer and the firm must withdraw from acting as an advocate before the tribunal.^[FN3]

Plaintiffs claim that Mr. Wallach will be called to testify at trial because he participated in at least one telephone call in which defendant Gregory Karzhevsky allegedly made misrepresentations about workers' compensation insurance upon which plaintiffs claim to have relied in purchasing Loving Care.

Mr. Wallach, however, represents that "[w]ith respect to the one alleged telephone conversation in December or January 2006, between Gregory Karzhevsky, Kenton Rosenberry,^[FN4] and Mr. Wallach, Mr. Wallach has no recollection of Gregory Karzhevsky making the representation regarding the NJCIC and Fraud Prosecutor matters that the Plaintiffs allege he made." He further represents that "[t]he Karzhevskys have no intention of calling me or any other member of the Firm as a witness in this case," and argues that disqualification would cause substantial hardship to defendants.

It is not clear from the papers submitted that Mr. Wallach is likely to be called as a witness at trial, or that any testimony which he might offer would be prejudicial to his clients. See, S & S Hotel Ventures Limited Partnership v 777 S.H. Corp., 69 NY2d 437 (1987); O'Donnell, Fox & Gartner, P.C. v R-2000 Corp., 198 AD2d 154 (1st Dep't 1993); NYK Line (North America) Inc. v Mitsubishi Bank, Ltd., 171 AD2d 486 (1st Dep't 1991).

Accordingly, this Court finds that there is no basis for disqualification pursuant to DR 5-102 at this time.

Finally, plaintiffs argue that Mr. Wallach should not be admitted pro hac vice because he has violated, and continues to violate, New York law by refusing to provide plaintiffs with the files he and his firm currently have in their possession that stem from his past representations of LCA Holding and Loving Care in the Zurich and Reliance matters.

Mr. Wallach, however, represented on the record that copies of all the documents have been provided to Sills Cummis & Gross, the firm which represented LCA Holding and Loving Care in those matters. Moreover, this Court has no reason to believe that Mr. Wallach would not comply with any discovery directives issued by this Court.

Accordingly, defendants' motion for an order admitting Mr. Wallach pro hac vice is granted, and plaintiffs' motion to disqualify M & E from serving as defendants' counsel is denied. [*8]

It is hereby

ORDERED that Mr. Wallach shall at all times be associated herein with counsel who is a member in good standing of the Bar of the State of New York and is attorney of record for the party in question and all pleadings, briefs and other papers filed with the court shall be signed by the attorney of record, who shall be held responsible for such papers and for the conduct of this action; and it is further

ORDERED that, pursuant to Section 520.11 of the Rules of the Court of Appeals and Section 602.2 of the Rules of the Appellate Division, First Department, Mr. Wallach shall abide by the standards of professional conduct imposed upon members of the New York Bar, including the Rules of the Courts governing the conduct of attorneys and the Rules of Professional Conduct; and it is further

ORDERED that Mr. Wallach shall be subject to the jurisdiction of the courts of the State of New York with respect to any acts occurring during the course of his participation in this matter; and it is further

ORDERED that Mr. Wallach shall notify the court immediately of any matter or event in this and any other jurisdiction which affects his standing as a member of the Bar.

This constitutes the decision and order of this Court.

Dated: February , 2010

BARBARA R. KAPNICK

J.S.C.