Ricky Baker v. David Alan Dorfman, P.L.L.C. And David A. Dorfman

Citations: 232 F.3d 121; 2000 U.S. App. LEXIS 27867Docket: 2000

Court: Court of Appeals for the Second Circuit; November 6, 2000; Federal Appellate Court

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The United States Court of Appeals for the Second Circuit affirmed in part and vacated in part the judgment of the Southern District of New York regarding Ricky Baker's case against David Alan Dorfman, P.L.L.C. and David A. Dorfman. The court upheld key aspects of the district court's ruling, which held the P.L.L.C. liable for a malpractice judgment against Dorfman prior to its formation as a professional limited liability company. Baker was awarded a 75% interest in the P.L.L.C. until the judgment was satisfied, and Dorfman was ordered to pay Baker from his income and to turn over his individual retirement account. Baker's counsel was appointed as receiver for the P.L.L.C. The appellate court found the district court's application of successor liability principles to be appropriate and rejected the defendants' arguments as meritless. However, it vacated specific paragraphs of the Receiver Order and remanded them for potential modification, indicating that only those particular provisions required further review.

The Receiver Order grants the receiver extensive authority over the P.L.L.C., allowing collection of debts owed to Baker and the ability to enhance the company's profitability. This includes powers to attend client meetings, make personnel decisions, and initiate lawsuits. However, concerns regarding the protection of the attorney-client relationship under New York law and ethical rules were not addressed by either party or the district court. These concerns are significant enough that the appellate court raises them sua sponte, emphasizing the importance of attorney-client confidentiality and the potential infringement on this relationship due to the receiver's powers. 

The court identifies several specific issues for the district court to consider on remand, including: 

1. The potential breach of attorney-client confidentiality if the receiver has access to client confidences.
2. Whether granting the receiver access to the P.L.L.C.'s financial records violates confidentiality protections for client documents.
3. The appropriateness of the receiver's authority to influence operational decisions and profit objectives, which could contravene rules against outside influences on an attorney's professional judgment.

The appellate court does not resolve these legal issues but vacates certain paragraphs of the Receiver Order and remands for further consideration, urging the district court to address the implications of these ethical concerns in light of the specific case facts.

The legal ethics governing attorneys suing their own clients or allowing third parties, like collection agencies, to sue on their behalf may be violated by the twenty-third 'ORDERED' paragraph of the Receiver Order, which permits the receiver to sue for all unpaid debts owed to the P.L.L.C. New York State Bar Association ethics opinions emphasize strict limitations on attorneys turning over client collection matters to collection agencies, highlighting that a client's unpaid account is typically considered a confidential matter. Furthermore, New York Ethical Consideration 2-23 advises against suing a client for fees unless necessary to prevent fraud or severe disadvantage. The district court is urged to modify the Receiver Order to ensure compliance with legal ethics while fulfilling the receivership's objectives. The court affirms the district court's judgment and orders, except for the sixth, eleventh, twelfth, thirteenth, and twenty-third 'ORDERED' paragraphs of the Receiver Order, which are vacated and remanded for reconsideration and potential modification. Additional notes clarify that the malpractice judgment was previously affirmed, that there are waivers regarding certain legal issues raised by defendants-appellants, and that the clients of the P.L.L.C. are not clients of the receiver. The district court is also advised to adjust any other paragraphs in the Receiver Order that may raise similar ethical concerns.