MEDIA

October 13, 2000

On Conflicts Of Interest, Unsealing Indictments, Derivative Actions

Published in: New York Law Journal | volume 224
Written by: Peter R. Schlam and Harvey M. Stone

This column reports on a significant decisions handed down recently in the U.S. District Court for the Eastern District of New York; at issue were conflicts of interest, unsealing indictments and derivative actions.

Conflict of Interest

In United States v. Duran-Benitez, 97 CR 974 (EDNY Aug. 30, 2000), Judge David G. Trager dealt with a motion for a downward departure under 5K1.1 of the Sentencing Guidelines where the defense attorney’s conflict of interest caused defendant Jaime Duran-Benitez (Duran) to delay any effort to cooperate with the government until his information had become stale. Treating the motion as a 2255 claim of ineffective assistance of counsel, Judge Trager ruled that a downward departure was appropriate to restore Mr. Duran to the position he would have been in but for his attorney’s "unethical intrusion" into the case.

Mr. Duran and co-defendant Ms. Ivonne Rodas-Bustamante (Rodas) were arrested in September 1997 for heroin offenses. In November, the government sent Mr. Duran a proposed plea agreement estimating a range of imprisonment of 70-87 months. Attorney Robert Blossner began representing Mr. Duran in December. At about the same time Ms. Rodas started cooperating with the government, and provided information increasing the alleged scope of the conspiracy. This information almost doubled the estimated range of Mr. Duran’s imprisonment. Ms. Rodas also testified in a federal case in Florida against Osvaldo Rosa, the main purchaser of the heroin imported by Mr. Duran and Ms. Rodas.

Ms. Rodas’s cooperation earned her a 5K1.1 letter and a significant downward departure at her sentencing. Mr. Duran pleaded guilty in November 1997. Mr. Blossner was relieved as counsel in March 1998. In April 1998, Mr. Duran sought to cooperate, but his information was by then deemed "stale."

In response to a presentence report estimating an imprisonment range of 188- 235 months, Mr. Duran filed the instant motion for a downward departure. He argued that his attorney had a conflict of interest due to his past representation of Mr. Rosa and his payment of Mr. Blossner’s fee to represent Mr. Duran. This conflict, Mr. Duran asserted, prevented his own timely cooperation.

Attorney Conflict

After a three-day hearing, Judge Trager made extensive fact findings and reached the following conclusions:

First, in representing Mr. Duran, Mr. Blossner had a conflict of interest because of his relationship with Mr. Rosa. As revealed at the hearing, "Blossner repeatedly accepted payment from Rosa for representing various members of Rosa’s heroin distribution ring, including Duran." Even if the money that paid Mr. Blossner’s fee came in part from Mr. Duran’s family in Colombia (the court believed Mr. Rosa to be the more likely source) and in part from Mr. Rosa’s repayment of a debt to Mr. Duran, Mr. Blossner’s financial interest in protecting his patron Mr. Rosa diverged from his client’s interest in obtaining leniency by cooperating. The evidence also showed that Mr. Blossner’s interest in protecting Mr. Rosa caused him to dissuade Mr. Duran from cooperation, thus precluding a "plausible alternative strategy of defense." This deprived Mr. Duran of his Sixth Amendment right to effective counsel.

Second, while ineffective assistance is not a basis for a downward departure at sentencing, a remedy had to be "specifically tailored" by restoring Mr. Duran, as much as possible, to the situation that would have existed had there been no constitutional error. Because there had already been a full hearing, Judge Trager saw no point to waiting until after sentence to apply a 2255 analysis.

Third, the court was "fairly certain that were it not for Blossner’s unethical influence, Duran would have pursued cooperation at an earlier date than when he did, although not as early as he claims he would have." In Judge Trager’s view Mr. Duran initially chose not to cooperate after determining that, on balance, the resulting risk of harm to himself and his family outweighed the risk he faced from the government when the proposed sentencing range was only 70-87 months.

Two subsequent events made the price of silence no longer acceptable – Ms. Rodas’s cooperation, which she discussed with Mr. Duran in January 1998, and the near doubling of Mr. Duran’s estimated prison term. Thus, the court found, by late January 1998, Mr. Duran would have approached the government and begun cooperating. Judge Trager had "no doubt" that, at that point, Mr. Duran had information of value to the government. By April 1998, when Mr. Duran actually tried to cooperate, his information was no longer needed.

This two-month delay in attempted cooperation, the court believed, resulted from the lapse of representation attributable to Mr. Blossner’s conflict. As the court stated: "In my mind, Duran reasonably sought to design and execute a plan to have Blossner removed as counsel without alerting him (and through him, Rosa and the Colombians) that Duran wanted to cooperate." This process was not complete until April 1998.

The necessary remedy was to sentence Mr. Duran as if he had been free to pursue cooperation in January 1998 and secured a 5K1.1 letter. The court concluded that a six-level downward departure, with a range of 97-121 months (about half of what Mr. Duran would otherwise face), would be appropriate.

Delay in Unsealing Indictment

In United States v. Deglomini, 98 CR 917 (EDNY, July 24, 2000), Judge Allyne R. Ross dismissed an indictment in which the government had unreasonably delayed unsealing the indictment and, during that delay, the limitations period had expired. Deciding an open question, the court held that defendants need not show prejudice from the delay in order to prevail on a statute of limitations defense.

The six-year limitations period was set to expire in October 1998. In September 1998, an indictment was returned charging defendants with conspiracy to commit tax offenses. The same day, a magistrate judge signed arrest warrants and, at the government’s application, sealed the indictment. Fourteen months later, in November 1999, the indictment was unsealed, and several defendants were arrested.

The government explained the delay in unsealing only by stating that "[a]fter the arrest warrants were issued, they were given to the [IRS] case agent. Due in part to a pressing caseload and in part to a certain lack of expediency, the execution of the arrest warrants did not occur until approximately 14 months after the indictment was filed." The government also implicitly conceded that the delay in unsealing was unreasonable.

As Judge Ross noted, "an indictment may remain sealed only for a reasonable time in light of the government’s prosecutorial needs." Where, as here, the unsealing was unreasonably delayed beyond the limitations period, requiring defendants to show prejudice would, as the court saw it, "undermine the statute of limitations" and "creat[e] potential for abuse."

Derivative Actions

In Weber v. King, 00 CV 2815 (EDNY, July 10, 2000), Judge Jacob Mishler ruled in an apparent case of first impression that members of a limited liability company have standing under New York law to bring derivative actions.

(Note:  The authors’ firm, Schlam Stone & Dolan, represented the defendants in Weber v. King.)

Kevin and Robert Weber, together with Kathleen King, were the members of Kathleen’s Bake Shop LLC, owner of a renowned retail bakery in Southampton, N.Y. The Webers and Ms. King had a dispute concerning the business of the company, and Ms. King sued the Webers, both individually and derivatively on behalf of the corporation, in state court. The Webers subsequently commenced this federal action against Ms. King and certain others to prevent what they characterized as picketing of the Southampton store by Ms. King’s supporters, and to obtain relief against Ms. King regarding corporate affairs. The federal defendants moved to dismiss the action before Judge Mishler on the ground that it was duplicative of the state court action, and because the Webers had failed to join the company, which they asserted was a necessary and indispensable party.

Judge Mishler found the company to be a necessary party because it had an interest in the action and that interest could not be adequately represented by its feuding members. (For example, part of the relief sought by the Webers was a declaration that they could use corporate funds to pay their obligations to Ms. King under certain promissory notes they had issued to her in acquiring their interests in the company.) As the court also concluded, the company’s presence would defeat federal jurisdiction because an LLC is a citizen of each state in which any of its members is a citizen. Because the Webers were plaintiffs and Ms. King was a defendant in the federal action, adding the company in either capacity would defeat diversity, the sole basis of federal jurisdiction. In addition, the court found it inappropriate to exercise its discretion to proceed in the absence of the company under the "equity and good conscience" standard of Fed. R. Civ. P. 19(b), since (among other reasons) any relief that might be obtained in the federal action was also available in the pending state court action, where jurisdiction over all parties was available.

Finally, the propriety of including the company as a party was underscored by the fact that the Webers’ federal claims were better classified as derivative, rather than individual. The Webers had argued that their claims were properly brought individually because, they asserted, the New York LLC Law does not permit derivative actions by members. The court found that, as the Legislature had deliberately left open for later development the question of derivative standing for LLC members, it was appropriate to consult case law regarding analogous entities in order to resolve the question. Citing Klebanow v. New York Production Exchange, 344 F2d 294 (2nd Cir. 1965), which authorized derivative actions by limited partners even before the limited partnership law had been amended to include that right, Judge Mishler concluded that, in light of their similarities to limited partnerships and corporations, LLCs likewise should be subject to derivative suits (Slip op. 17-18).

Section 1983

In Padberg v. McGrath-McKechnie, 00 CV 3355 (EDNY, Aug. 14, 2000), Judge Raymond J. Dearie denied the motion for a temporary restraining order and a preliminary injunction sought by plaintiffs on behalf of themselves and a putative class of New York City taxicab drivers. Plaintiffs sought to prohibit defendant NYC Taxi and Limousine Commission (TLC) from revoking plaintiffs’ taxicab drivers’ licenses.

Since November 1999, the TLC has imposed summary license suspensions and other penalties on NYC taxicab drivers found to have refused service for racially motivated reasons, with the goal of removing such drivers from NYC streets. Following numerous complaints that drivers were refusing to pick up minority passengers, or were refusing to convey them to destinations that the drivers were required to service, the TLC developed Operation Refusal, whereby undercover police officers and TLC agents posed as passengers and issued summonses to any taxicab driver who did not stop when hailed. Penalties ranged from small monetary fines to mandatory or discretionary suspension or revocation of the taxicab driver’s license.

In November 1999, the TLC invoked emergency authority to order prehearing suspension of taxicab licenses, which previously could be suspended only after a hearing before an ALJ. TLC agents issued summary suspensions on the spot with no prior notice or opportunity to be heard with a post-suspension hearing within five days.

Plaintiff Padberg and the others faced discipline for assertedly refusing to take fares. Plaintiffs claimed, inter alia, that the TLC policies of summary suspension and license revocation for a first service refusal offense violated 42 U.S.C. 1983 by depriving them of property rights without due process.

Judge Dearie found that Mr. Padberg had suffered irreparable harm due to the revocation of his license which resulted in his inability to operate his business or earn a living. The court also found that this action was indeed taken "under color of law," as required to state a claim under 1983. However, the court noted that Operation Refusal constituted government action taken in the public interest to end racially motivated service refusal. Thus, it found that Mr. Padberg had to prove that his 1983 claims would be likely to succeed before he could obtain an injunction.

Turning to the merits of Mr. Padberg’s 1983 claims, Judge Dearie rejected the plaintiff’s contention that TLC rules did not authorize the TLC to revoke his license for a first or second offense, and concluded that he had not shown a likelihood of success on the merits. Judge Dearie pointed to the statutory authority granted to TLC which permits discretionary license revocation.

Similarly, Judge Dearie rejected Mr. Padberg’s argument that he was denied a fair hearing because a TLC ALJ conducted the hearing. Judge Dearie observed that Mr. Padberg had not pointed to information to undermine the presumption that those who serve as adjudicators are possessed with honesty and integrity.

Applying the factors established by the Supreme Court in Mathews v. Eldridge, 424 U.S. 319 (1976), Judge Dearie concluded that the TLC’s summary, prehearing suspension did deprive Mr. Padberg of property without due process. However, in light of the fact that Mr. Padberg received a post-suspension ALJ hearing, which was coupled with the right to appeal from the ALJ’s penalty recommendation, the court concluded that "while Padberg may ultimately prevail on his due process claim, he is not a candidate for preliminary injunctive relief" (Slip op. at 24).

Peter R. Schlam and Harvey M. Stone are partners at Schlam Stone & Dolan.  Bennette D. Kramer, a partner of the firm, assisted in the preparation of the article.  The firm represented the defendants in Weber v. King, discussed in this article.

[Reproduced with permission from New York Law Journal Volume 224, Friday, October 13, 2000.  Copyright 2000 ALM Properties, Inc.  All rights reserved.]