A New York state appellate court has overturned a lower court's decision to give law firm Freeman Lewis an attachment against its former client for unpaid fees that could amount to $2 million, stating the lower court was too quick to set aside serious legal ethical concerns.

Freeman Lewis, a small firm with about three lawyers, has for years represented a failed Peruvian Pepsi bottler known by its Spanish initials, CEPSA. The firm has litigated on behalf of the bottler and affiliates for more than a decade to hold Pepsi liable for cutting off the company's business, racking up $600,000 in unpaid bills, according to court records.

The law firm sued its former clients for unpaid fees after learning that CEPSA's owners, members of the Heredia family in Peru, were inking a settlement with Pepsi that could result in the firm not getting paid.

Manhattan Supreme Court Justice Gerald Lebovits ruled last year that two members of the Heredia family and affiliated companies were “apparently” trying to settle in a way that would avoid paying Freeman Lewis what it was owed. The judge rejected the defendants' arguments that the law firm had violated an ethics rule by suing them while still formally being engaged to represent their interests, and ordered that up to $2 million could be restrained, an amount that includes interest and fees on the $600,000 in bills.

But the Appellate Division, First Department, set that decision aside on May 21.

“Whether some or all of plaintiff [Freeman Lewis]'s fee should be forfeited due to ethical violations is to be determined on a full record,” the panel wrote. “At this stage of the litigation, the allegations and arguments that plaintiff violated the Rules of Professional Conduct … preclude a finding that plaintiff is likely to succeed on the merits.”

The defendants argued that Freeman Lewis violated Rule 1.7 of the state legal ethics rules by suing CEPSA's holding company, called FIDEICOSA, while still being retained to represent its interests. Lebovits said the circumstances wouldn't raise concerns with a “reasonable attorney,” but the appellate court said the argument bore further consideration.

The First Department also noted that a clause in Freeman Lewis' retainer that “gave [it] a veto” over any potential settlement may have implicated Rule 1.2, which says lawyers must “abide by a client's decision whether to settle a matter.”

The appeals court also rejected the lower court's finding that two individuals and two companies “may be alter egos of FIDEICOSA” and could have their assets in New York attached, noting the companies observed corporate formalities and “did not use the corporate form to perpetuate a fraud or wrong upon the plaintiff.”

While the First Department panel upheld the decision below to reject the defendants' argument that the case required arbitration, the judges ultimately found that an attachment shouldn't have been ordered.

The panel included Justices John Sweeny, Dianne Renwick, Peter Tom, Barbara Kapnick and Jeffrey Oing.

Daniel Brown, a partner at Feuerstein Kulick who represented one of the Heredia family members on appeal, said his clients were “delighted with the Appellate Division's decision and order and will continue to vigorously defend themselves in this litigation.”

Patrick Bonner, a partner at Menz Bonner Komar & Koenigsberg who represents other members of the Heredia family and affiliated companies, couldn't be reached for comment.

Stephen Foreht of Foreht Associates, who represented Freeman Lewis, declined to comment.