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MANOIR-ELECTROALLOYS CORP. v. AMALLOY CORP.

April 20, 1989

MANOIR-ELECTROALLOYS CORP., MANOIR INDUSTRIES, S.A., POMPEY STEEL, INC. and MANOIR-POMPEY, INC., Plaintiffs,
v.
AMALLOY CORP., ELECTROALLOYS, INC., ARTHUR A. BORIN and ALLEN J. UNDERWOOD, Defendants/Third-Party Plaintiffs, v. HENRI LACHMANN, ROGER HUBERT, GUY ALLOUCHERY, CARMELO IACONO and FINANCIERE STRAFOR, Third-Party Defendants



The opinion of the court was delivered by: BARRY

 Presently before the court is the motion of Coudert Brothers ("Coudert") and Carpenter, Bennett & Morrissey ("CBM"), brought on behalf of all plaintiffs and on behalf of third-party defendants Carmelo Iacono ("Iacono") and Guy Allouchery, seeking an order disqualifying the firm of Hannoch Weisman ("Hannoch") from representing the defendants/third-party plaintiffs in this matter. Because I find that Iacono was Hannoch's client at the time Hannoch filed a third-party action leveling serious charges against him on behalf of yet another client, the motion for disqualification will be granted.

 FACTS

 In late 1986, Arthur Borin, President of Abex Corporation ("Abex"), was approached by representatives of Manoir- ElectroAlloys Corp. ("Manoir-ElectroAlloys"), Manoir Industries, S.A. ("Manoir Industries") and Pompey Steel, Inc. ("Pompey Steel"), regarding the sale of the assets of a foundry in Elyria, Ohio ("the Foundry"). Manoir-ElectroAlloys, Manoir Industries and Pompey Steel are all subsidiaries of, or companies related to, a French conglomerate, Financiere Strafor ("Financiere"), which owned several foundries in Europe and sought to enter the United States market. *fn1"

 During March of 1988, Abex and a group of partners formed by Borin ("the Borin Group") completed a transaction involving the leveraged buy-out of several Abex facilities, including the Foundry, by the Borin Group. *fn2" Thereafter, in April of 1988, Borin traveled to France and entered into a written agreement to sell the assets of the Foundry to Financiere.

 A series of detailed negotiations between Financiere and the Borin Group followed, with Financiere being represented by Coudert. The Borin Group was represented by Hannoch, the same law firm that had negotiated and concluded the leveraged buy-out between Abex and the Borin Group. A final Asset Purchase Agreement and Stockholders Agreement were entered into between the parties on October 5, 1988.

 I will not engage, at this time, in a detailed analysis of the agreement reached between Financiere and the Borin Group. Suffice it to say that Manoir-ElectroAlloys, a newly-formed corporation, was to own the assets of the Foundry. Financiere, through Manoir-Pompey, Inc. ("Manoir-Pompey"), a Delaware holding company, was to own 80% of the new corporation and the Borin Group was to own the remaining 20% interest. A part of the purchase price was paid to the Borin Group at closing, with the balance to be determined based on the performance of the Foundry through February of 1989.

 Hannoch's representation of Iacono had, in fact, begun in approximately 1976, when Iacono was referred to the firm by E.F. Hutton, whose personal financial management services Iacono had enlisted. Since that time, Hannoch has handled several matters for Iacono and his wife, Josephine. *fn3" Hannoch prepared the wills of both Mr. and Mrs. Iacono, retaining the wills at its Roseland office, and established a trust fund for their children. Additionally, it assisted Iacono with tax planning and provided him with income, estate and gift tax advice. (D'Avella Aff. at para. 4).

 In 1983, D'Avella wrote to Iacono, informing him of recent changes in the tax laws and suggesting that Iacono contact the firm to update his will. (D'Avella Aff. at para. 7). According to D'Avella, Iacono never responded to that letter. Also in 1983, however, Iacono was re-negotiating his employment contract with Pompey Steel and wrote to D'Avella requesting advice as to certain provisions of the new contract. (See August 30, 1983 letter to D'Avella, Attachment to Supplemental Iacono Aff.). Apparently, D'Avella turned the matter over to Marcus who provided the requested advice to Iacono and enlisted the aid of a New York attorney, Joseph Sierchio, to interpret the contract with regard to New York law. In a letter to Sierchio, Marcus referred to Iacono as "our client" no less than five times. (See Attachment to Supplemental Iacono Aff.). On April 3, 1984, Marcus wrote a letter to Iacono confirming the advice rendered. Iacono was billed for the services performed by Hannoch and, on May 2, 1984, Marcus wrote a letter informing Iacono that, because Sierchio's bill had not yet been paid, it had been charged to Iacono's account as an out-of-pocket disbursement. (Id.). This was the last matter for which Hannoch billed Iacono.

 Iacono contends that following the July 22, 1988 negotiating session, and while at the Hannoch offices, he visited D'Avella and discussed the possibility of updating his will. (Iacono Reply Aff. at para. 3). D'Avella agrees that this meeting took place, and states, referring to Iacono, "I commented to him that he had never responded to my letters suggesting that he consider updating his will to take into consideration changes in the tax laws." (D'Avella Aff. at para. 10). According to Iacono, D'Avella "agreed that it was a good idea that his firm update [Iacono's] will. . . ." (Iacono Reply Aff. at para. 3). D'Avella claims that the discussion ended without either party making a commitment to get back to the other. (D'Avella Aff. at para. 10).

 According to plaintiffs, during the week of October 22, 1988, Arthur Anderson & Co., retained by Financiere to audit the Foundry's financials, reported to Financiere that significant inconsistent and invalid adjustments to the Foundry's income statements had been made by the Borin Group. (Hubert Dep., Vol. II at 39-40; Wiese Dep. at 26-27, 34-35, 302). These income statements, prepared by the Borin Group and delivered to Financiere with a representation as to their accuracy, had been relied upon by Financiere to project the Foundry's annual earnings. (Wiese Dep. at 207-09, 273, 306; Borin Dep. at 127-29). The projected earnings were important elements of the formula used by the parties to calculate the purchase price of the Foundry's assets. (Id.) As a result, plaintiffs contend that the Borin Group inflated the purchase price of the assets and, thereby, defrauded plaintiffs.

 On October 28, 1988, plaintiffs, represented by Coudert and CBM, commenced the present lawsuit against the Borin Group, alleging fraud, breach of warranty and unjust enrichment. Shortly thereafter, on November 2, 1988, Theodore Margolis, a litigation partner at Hannoch, informed Edwin R. Alley of CBM that Hannoch would be representing the Borin Group in the litigation. Iacono received a copy of this letter as President of Pompey Steel, a plaintiff in the action.

 On November 23, 1988, the Borin Group filed an answer and thirteen count counterclaim, charging plaintiffs with conspiracy to commit fraud, fraud, and fraud in the inducement, among other charges, in connection with the asset purchase agreement. Count One, the conspiracy count, alleges that as a result of the wrongful acts of the conspirators, the Borin Group has suffered damages "well in excess" of $ 5,000,000 on that count alone and seeks those damages as well as punitive damages and assorted other relief. The Borin Group also filed a third-party complaint, which named Iacono, Financiere, Henri Lachmann (President of Financiere), Roger Hubert (President of Manoir Industries) and Guy Allouchery (an employee of Manoir Industries and a Director of Manoir-ElectroAlloys) as defendants. The third-party complaint charged that "by virtue of the wrongful conduct of the Third Party Defendants, as enumerated at the First Count through the Thirteenth Count of the Counterclaim", i.e. conspiracy to commit fraud, fraud, fraud in the inducement, for starters, the third party plaintiffs have been damaged and seek as against Iacono and the other third party defendants the same relief recited in the various counts of the counterclaim.

 The third-party complaint was served on Iacono on December 2, 1988. Also on December 2, Hannoch sent a letter to Iacono and his wife, urging them to call Hannoch to arrange a meeting to discuss changes in the tax laws and their impact on Iacono's retirement benefits. (See Attachment to Iacono Reply Aff.). The letter began, "Dear Mel and Josephine," and was signed by D'Avella. It discussed the changes in the law and concluded:

 
This subject must be dealt with before year end. Thus, you should accumulate the appropriate information as soon as possible so we have sufficient time to properly deal with this important matter.

 Id.

 Iacono alleges that he highlighted certain portions of the letter for the purpose of discussing those sections with D'Avella. (Iacono Reply Aff. at para. 3). He phoned D'Avella on December 8, 1988 to reiterate his desire to update his will. Several days later, after consulting with the firm's attorneys representing the Borin group, D'Avella told Iacono that Hannoch could not provide further services to Iacono. Accordingly, in spite of Iacono's "strong personal preferance that Hannoch Weisman continue to represent me personally because I have enjoyed a long relationship of confidence and trust with them, have relied on them for advice in my personal affairs for many years, . . . have confided many of the details of my personal and financial affairs to that firm" (Iacono aff. at para. 24), and "would have retained [the firm to ...


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