Tuesday, May 26, 2009

Law Firm May Be Sued For Collusion

A decision today from the New York Appellate Division for the First Judicial Department:

Plaintiff, a member of Alliance Network LLC (a limited liability company), had standing to bring this derivative action alleging that the law firm and one of its partners representing the LLC and its managers in other litigation had a conflict of interest as a result of the managers' involvement and the partner's hidden financial interest in a competing project. The motion court correctly discerned the plain meaning of the company's operating agreement and the unambiguous governing Nevada statute (Nev. Rev Stat Ann ยง 86.483), in finding that plaintiff was not prohibited from bringing derivative claims and that resort to legislative history was unnecessary.

Plaintiff NAMA may also assert an individual claim against defendants as the attorneys for the LLC, because plaintiff has alleged, inter alia, that these defendants colluded with the managers of the LLC to drive NAMA from the underlying project.

The arbitration ruling denying disqualification of the attorneys at a preliminary stage of that proceeding does not preclude the disqualification claim. The doctrine of res judicata does not apply, absent a final adjudication on the merits. Nor does the doctrine of collateral estoppel conclusively bar plaintiff's claim, because the scope of the arbitral ruling is not entirely clear. Moreover, the issue in this action is particularly fact-laden and its resolution should await further factual development. We note, however, that the burden is on plaintiff, as the opponent of collateral estoppel, to demonstrate the absence of a full and fair opportunity to be heard in the arbitration (id.), and plaintiff failed to carry this burden. The allegations regarding defendants' obstruction of discovery also are not precluded because the claim in this action is not to obtain discovery, but to show how the attorneys allegedly committed misconduct in obstructing it.

However, the court should have granted a stay pursuant to CPLR 2201 in the interest of judicial economy. There are overlapping issues and common questions of fact, and the hearings in the arbitration, that began a year before the commencement of this action, are nearly complete. (citations omitted).

(Mike Frisch)


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