20 Misc. 2d 149 | N.Y. Sup. Ct. | 1959
This is a consolidated stockholders’ derivative action. The subject corporation is Shahmoon Industries, Inc., formerly known as Warren Foundry & Pipe Corporation. Solomon E. Shahmoon is a director of the company, its principal (if not majority) stockholder and its president and chief executive officer. He and the other individual defendants, also officers or directors, are charged in the complaints with certain transactions alleged to have been in fraud of the corporation and its stockholders generally. These involve the sale by the corporation to Shahmoon personally of a substantial number of shares of the company’s treasury stock and the granting of an option by the corporation to Shahmoon to purchase an additional large block of stock (which transactions the plaintiffs seek to have set aside for the benefit of the corporation) and alleged waste and personal utilization of corporate assets in the sum of $10,000,000 (for which sum the plaintiffs demand judgment for the benefit of the corporation against Shahmoon and the other individual defendants). Shahmoon Industries, Inc., in whose behalf rescission and recovery are sought, is, of course, named as a defendant in the action (Carruthers v. Waite Min. Co., 306 N. Y. 136, 140).
Prior to commencement of these suits, the law firm of Shatzkin & Cooper were counsel to the corporation, with whom
In 1958 Shahmoon and Shatzkin & Cooper came to a parting of the ways. After some maneuvers between attorneys and clients by way of communication and litigation, a substitution of attorneys by consent was arranged for, covering both Shahmoon individually and the company, as well as the other persons who had been named as defendants and whom the attorneys represented. The stipulations of substitution were entered into without prejudice to any retaining lien to which the outgoing attorneys were entitled. Accordingly, the papers received from Shahmoon were and still are in the possession of the attorneys, who have instituted a plenary suit against Shahmoon personally, alleging that their services to him were of the reasonable value of $165,000, for which sum they demanded judgment against him. Shahmoon denied liability for the payment of fees in any amount. Summary judgment was sought by the attorneys in that action (Rules Civ. Prac., rule 113), but their application therefor was denied, and such determination was affirmed on appeal (8 A D 2d 621). The action is now pending undetermined in the Supreme Court, Kings County. There is no suggestion by the clients of unprofessional conduct on the attorneys’ part; nor is there any assertion by the attorneys that they were discharged in violation of agreement.
The present stockholders’ derivative suits resulted in a number of controversial motions and appeals therein, and bid fair to require a protracted trial. By special direction of the Presiding Justice of the Appellate Division, or of the calendar Judge presiding when the cause came on for trial, or both, the consolidated action was assigned for prompt trial. It is now being
During the course of the trial, the present attorney for the defendants Shahmoon individually and Shahmoon Industries, Inc., duly served a subpoena duces tecum upon Shatzkin & Cooper, requiring production at the trial of “ all your books, papers and records and files with respect to the ” stockholders’ derivative suits on trial, “ as well as the entire file ” in a related case. The former attorneys moved at Special Term for Motions to quash the subpoena. The defendants Shahmoon Industries, Inc., and Solomon E. Shahmoon thereupon countered with a cross motion for an order directing the attorneys ‘ ‘ to forthwith turn over to Shahmoon Industries, Inc., all its corporate books, papers and records now in their possession ”. The learned Justice presiding at Special Term for Motions referred these applications to me, as the Trial Judge, for disposition. Objection is interposed by Shatzkin & Cooper that I do not have jurisdiction in the premises, first, because the cross motion is not the special proceeding or plenary action contemplated by law to facilitate a client’s recovery of possession of papers retained by an attorney under a professional lien, and, second, because the defendants’ application under such cross motion had already been presented some months ago to another Justice at Special Term for Motions and such prayer had been disposed of by him adversely to the defendants, and, therefore, the present applications should be referred to and passed upon by him and not by me.
As to this alleged prior proceeding, suffice it to say that the record thereon shows that the attorneys are in error as to the basic facts. It may be that the attorneys’ other contention — that proper practice would entail a special proceeding, rather than a cross motion in this action — is a sound one. But the
On the merits, the basic question is that projected by the contention of the defendants that whatever lien the attorneys may have is inapplicable as against Shahmoon Industries, Inc., since the papers in their possession are corporate records and not the personal property of the defendant Solomon E. Shahmoon, against whom alone the retaining lien is being asserted.
It is not clear, on the present submission, whether all of the documents sought belong to the corporation or whether some of them are Shahmoon’s personal property. Since there is no suggestion by the former attorneys that they have any claim for fees against the company, it would ordinarily be helpful to separate the corporate papers from the individual client’s personal papers, direct the return of the former without further ado, and proceed further in respect of an appropriate disposition of the subpoena and of the application of Shahmoon personally. The individual and corporate defendants, who subpoenaed the papers and who seek to obtain possession of them, draw no such line of demarcation. And, in the view I take of the case, I have concluded that, in the circumstances here existing, I should not, on my own, make any such distinction.
There appears to be no issue raised as to whether it was Shahmoon who delivered the records to the attorneys, or in any event that they were delivered by others at his direction. Nor is there any contention that, when such delivery was so made, Shahmoon had transcended his powers as president and as chief executive officer of the company, of which he was also the controlling shareholder. There would, therefore, seem to be no doubt that if, while acting in a representative capacity, Shah-moon had delivered corporate papers to the corporation’s attorneys in aid of professional services to be rendered solely in the corporation’s behalf, the attorneys could retain such papers by way of lien for payment of any obligation of the corporation for fees due them (see 7 O. J. S., Attorney and Client, p. 1169, n. 89, for comparable cases where, for example, a guardian, trustee or executor acted in a Representative capacity, and the
In Davis v. Davis (90 F. 791, 792) Judge Lowell said: “ That an attorney’s lien on his client’s papers should not be permitted to embarrass a third person in no way liable for the debt is reasonable, but, if an attorney’s lien upon his client’s papers amounts to anything, I think he may assert it as against the client, even when summoned by him to produce the papers by a subpoena duces tecum.” But, because of the interrelationship in the instant case between the individual and corporate defendants and because of their joint professional representation by the same attorneys, I do not find that the Davis case is adequate sustenance in the present context. No decisions in point are cited by either party to guide me as to what should be done in a situation such as this, and independent research has been equally unsuccessful in unearthing any helpful precedents. The matter must therefore be determined as an original question — and in doing so I must take into account the purpose of a retaining lien and the nature of a stockholders’ derivative action.
Viewing the issue in that light, it is plain to me that the attorneys ’ claim of lien in the case at bar should not be ignored. In a stockholders ’ suit, such as that now being tried before me, the corporation is but a nominal defendant (Monahan v. Kenny, 248 App. Div. 159, 160). The derivative action is, in substance, directed against the officer or director charged with wrongdoing, not against the corporation. Indeed, the company is, theoretically at least, the prospective beneficiary of the action, and it is the corporation that will be the gainer if the individuals who are the actual targets of the lawsuit fail in their defense (Holmes v. Camp, 180 App. Div. 409, 412). On the other hand, if the plaintiffs’ complaint in this stockholders’ derivative suit is dismissed, the corporation may — by virtue of appropriate statutory, charter or by-law provision — be called upon to reimburse Shahmoon for the reasonable expenses incurred by him in successfully defending this lawsuit (cf., as to a New York
As has already been pointed out, Shahmoon is coneededly a principal stockholder, a director, the president and the chief executive officer of the corporation, and, in respect of the controversy as to the attorneys’ fees at least, appears to be the corporation’s controlling factor. In any event, there are very close ties, indeed, between this individual defendant and the defendant corporation. Whether the attorneys were to have been paid by Shahmoon or whether (by virtue of special agreement or the stipulated corporate retainer) they were to defend Shahmoon as well, will presumably be determined in the action instituted against him for fees. I need not here speak of “ piercing the corporate veil ”, although it does seem to me that, in the circumstances present, that veil is not to be donned and doffed at will by the corporation’s manager (cf. Sasmor v. Vivaudou, Inc., 200 Misc. 1020, 1030-1031). In this case, the corporation remains an entity, but, as I see the picture, the rights of the attorneys will be so impaired if their lien is not protected, that I hold that the corporate papers delivered to the attorneys by Shahmoon may be retained even as against a subpoena or an application by the corporation for their return. For present purposes, and for such purposes only, I hold simply that Shahmoon and Shahmoon Industries, Inc., are inseparable, and that Shatzkin & Cooper are entitled to retain the papers in their possession pending a disposition of their claim for fees against Shahmoon.
That, of course, does not — in the present posture of the trial now in progress before me in respect of the controversies between the minority stockholders and Shahmoon and his associates— definitively dispose of the pending applications involving the claim of lien asserted by Shahmoon’s former attorneys. In opposition thereto, the defendants Shahmoon rely most heavily upon Matter of Makames (238 App. Div. 534) where the court said (pp. 535-536): “ If the only purpose of the petitioner [the client] was to compel the production of these [insurance] policies upon the trial of the actions which he had
I do not go along with the contention of the defendants that this language in the Mahames opinion charts my course in the case at bar. (Cf. Kemp v. King, 2 Moody & R. 437; 174 Eng. Rep. 342.) It may be that, in certain circumstances, the court might direct the production of documents by counsel, and not their turnover to the former client (see note, 3 A. L. R. 2d 152-153). But, in such instances, this procedure would preserve the lien only if the papers had intrinsic value (e.g., bearer bonds). Where, as here, the value of the documents lies in the information they contain, such production (with the consequent opportunity for examination and copy) would, in effect, vitiate the lien.
It should also be noted at this point that the documents subpoenaed, and possession of which is sought, by the defendants Shahmoon, not only have no inherent worth as such, but are not by law required to be filed in court and there are no special circumstances justifying, as a matter of public policy, judicial frustration of the attorneys ’ lien. Accordingly, the cases cited by the defendants Shahmoon are not in point. These are, in addition to Matter of Makames (238 App. Div. 534, supra), Matter of Reiss (200 Misc. 697, where the attorney sought to withhold a testamentary document, which, under the law, must be produced for probate upon the client’s demise), and Matter of Hauptmann (243 App. Div. 613, 616, where the former client was on trial for his life as an accused murderer, and the papers withheld by the attorneys were deemed relevant to his defense).
In The Flush (277 F. 25, cert, denied 257 U. S. 657) the opinion deals at length with the question of whether the client has a right to inspection of the papers upon which his attorney claims a lien (pp. 29-30). The court discusses the English cases on the point, which are in disagreement, and says (p. 30): “In this country there seems to be very little authority upon the question * * *. As a matter of principle, and without regard
The argument that the value of a lien is necessarily affected by the measure of the client’s need for the documents retained is a most cogent one. A lien on useless papers is itself useless. The very nature and purpose of an attorney’s retaining lien involve inconvenience to the client. The function of the lien is essentially one of compulsion — its aim being to assure payment of the fee due the attorney for services rendered. The lien, therefore, is not to be disregarded merely because its enforcement renders it effective (Matter of San Juan Gold, Inc., 96 F. 2d 60). A reading of the cases readily discloses that, throughout the years, there is a consistently strong pattern of legislative and judicial protection of an attorney’s lien — whether retaining or charging (Fischer-Hansen v. Brooklyn Heights R. R. Co., 173 N. Y. 492, 496-498; Robinson v. Rogers, 237 N. Y. 467, 471-473; Judiciary Law, § 475).
At the same time, I am of the view that the plea by Shahmoon — that he needs the documents withheld from him by his former attorneys in order adequately to defend the action now being prosecuted against him — should not fall on deaf ears. When an attorney’s valid retaining lien comes into conflict with a bona fide subpoena duces tecum, the court must reconcile the laywer’s interest in the collection of his fee with the client’s interest in being able to submit at the collateral trial all available relevant evidence in his behalf. And, not alone should there be a weighing of these conflicting interests, but there should, I think, be placed on the scales two more ingredients — the economic interest of the community in having all just debts paid and the social interest of the community in having all relevant material presented to a court engaged in the resolution of a justiciable controversy.
There is no plea of poverty on the part of Shahmoon, and no claim that he is financially unable to furnish adequate security. In the circumstances, if he desired or felt impelled to engage in litigation — although defensive — he must give assurance that his attorneys will be paid for the professional services rendered by them. For it has long ago been recognized, generally, that “ [t]here can be no litigation without lawyers; no lawyers without fees; no fees from [a non-paying client] without a lien ” (Fry v. Calder, 74 Ga. 7, 9).
This determination as well as that of the Referee is without prejudice as to whether Shahmoon is in fact personally liable to Shatztin & Cooper for fees and without prejudice to the amount of the fees, if any, that he should in fact be required to pay. These are matters for definitive resolution in the plenary action now pending or in any special proceeding the respective parties may appropriately institute.
Settle order.