Papers considered: Motion sequence #1 1. Notice of Motion dated January 5, 2024; Affirmation in Support of Jennifer J. Clark, Esq., dated January 5, 2024 with Exhibit 1; Affidavit of Bruce Levine in Support dated December 22, 2023, with Exhibits 1-4; and Memorandum of Law in Support. 2. Affirmation of David A. Davenport, Esq., in Opposition, dated February 20, 2024, with Exhibits 1-2; Affirmation of T. Eric Galloway dated February 20, 2024; Affirmation of Professor Patrick M. Connors, Esq., dated February 20, 2024; and Memorandum of Law in Opposition. 3. Reply Memorandum of Law. Motion sequence #2 1. Notice of Motion dated January 5, 2024; Affirmation in Support of Jennifer J. Clark, Esq., dated January 5, 2024 with Exhibits 1-3; and Memorandum of Law in Support. 2. Affidavit of Daniel Hubbell, Esq., in Opposition dated February 20, 2024; and Memorandum of Law in Opposition. 3. Reply Memorandum of Law. DECISION/ORDER In this action alleging breach of contract and breach of fiduciary duty, Defendants, Crosswinds Hudson, LLC, (“Crosswinds”), WNC Housing, L.P., and WNC Institutional Tax Credit Fund X New York Series 7, L.P., move to disqualify Plaintiffs’ counsel, Sean M. Zaroogian, Esq., David A. Davenport, Esq., and BC Davenport, LLC, (“Davenport”), from representing the Plaintiffs due to a conflict of interest. Defendants also move to compel arbitration. Plaintiffs, Galvan Housing Resources, Inc., (“Galvan”), Hudson City Housing Development Fund Company, Inc., and HRCC Homes, LLC, individually and derivatively on behalf of Hudson KTD Limited Partnership, oppose both motions. BACKGROUND Plaintiffs, and Nominal Defendant, Hudson KTD Limited Partnership (“the Partnership”) were formed to develop and operate 70 affordable housing units located in Hudson, NY. At the outset of the Partnership in 2006, Plaintiffs were affiliated with a small, grassroots nonprofit known as Housing Resources of Columbia County, Inc., (“HRCC”). The Partnership and HRCC entered into a Purchase Option and Right of First Refusal Agreement (“POA”). Eventually, Plaintiff, Galvan Housing Resources, Inc., (“Galvan”), acquired HRCC. Crosswinds, the Managing Partner of the Partnership, found Galvan uncooperative. Galvan failed to notify Crosswinds when it acquired HRCC. In 2012, when Crosswinds sought to refinance debt on the subject property, Galvan failed to cooperate, thereby thwarting same. In early 2022, Galvan advised the Limited Partners of the Partnership of its interest in exercising the Purchase Option under the POA, but did not initially advise Crosswinds. On March 17, 2022, Galvan issued a notice that it was exercising its option to purchase the property pursuant to the POA. It stated that it had already engaged Novogradac & Company LLP (“Novogradac”) to determine the fair market value of the property. Crosswinds demurred, as Paragraph 3(b) of the POA provides that the Managing General Partner — Crosswinds — has the right to select the appraiser. On November 28, 2022, Galvan sent Novogradac’s appraisal to the Limited Partners, but not to Crosswinds. It determined a fair market value of $2,900,000.00. Crosswinds is deeply suspicious of this value, in part because, ten years earlier, the property had been appraised at $4,850,000.00. In early 2023, Galvan notified the Limited Partners, without informing Crosswinds, that Galvan intended to exercise its right of first refusal under the POA. The Limited Partners advised Galvan that the right of first refusal can only become effective in response to a bona fide purchase offer from a third party. On January 17, 2023, Galvan sent the Limited Partners, without including Crosswinds, a letter from the Lantern Organization, Inc., (“Lantern”), offering to purchase the property. On February 7, 2023, Galvan sent the Defendants a formal notice of Galvan’s purported invocation of its right of first refusal. It was about this time Crosswinds learned of Galvan’s prior efforts to communicate with the Limited Partners without Crosswinds’ knowledge. Concerned that Galvan was attempting to mislead the Limited Partners into believing that it was aware of Galvan’s efforts to invoke the purchase offer, and Galvan’s right of first refusal, and that Crosswinds approved of same, it requested that its transactional counsel, Jeremy Root, Esq., interview potential attorneys to advise it on its rights under the Limited Partnership Agreement (“LPA”), the POA, and the applicable law in light of Galvan’s attempts to acquire the property for less than fair market value. Crosswinds also sought an attorney who might represent it in litigation over this matter. On March 10, 2023, a Member of Crosswinds, Bruce Levine, participated in a one-hour telephone call with David Davenport, Esq., and Alex Hagstrom, Esq., of the BC Davenport LLC firm about this matter. During this discussion, Levine shared many intimate/confidential details regarding Galvan’s actions, Levine’s views about Galvan’s behavior, the likelihood of success of the parties’ various legal arguments about the LPA, the POA and applicable law. Levine discussed the Novogradac appraisal, Galvan’s attempts to circumvent Crosswinds, the Purchase Option, the right of first refusal, and the circumstances surrounding the Letter of Intent from Lantern. Davenport eventually advised that his firm typically represents those seeking to enforce a right of first refusal, and that he could not accept this case as it would undermine his credibility. Nearly 7 months later, the BC Davenport LLC law firm filed this action on behalf of the Plaintiffs, including Galvan, and against Crosswinds, leading to this motion to disqualify. Plaintiffs submit the expert opinion of Professor Patrick M. Connors, Esq., in support of the proposition that BC Davenport LLC should not be disqualified because Davenport did not obtain information from Bruce Levine which could be significantly harmful to Crosswinds, and therefore, Davenport is not conflicted under Rule 1.18 of New York’s Rules of Professional Conduct. This Court disagrees. DISCUSSION/DISQUALIFICATION STANDARD — PROSPECTIVE CLIENT A party seeking to disqualify opposing counsel under Rule 1.18(a) of the Rules of Professional Conduct (22 NYCRR Rule 1.18[a]), must demonstrate that the lawyer received information from a prospective client that could “be significantly harmful to that person in the matter”. See, Eisner v. Cusumano Constr., Inc., 2014 N.Y. Misc. LEXIS 6118 (Sup. Ct., Nassau Co., 2014), rev’d on other grounds, 132 AD3d 940 (2d Dept., 2015); E.M.B. v. A.M.B., 2017 N.Y. Misc. LEXIS 965 (Sup. Ct., Monroe Co., 2017). Disqualification should be denied if the “conveyed information did not have the potential to be significantly harmful to the [prospective] client in the matter from which he seeks to disqualify counsel”. Mayers v. Stone Castle Partners, LLC, 126 AD3d 1 (1st Dept., 2015). In addition, a reasonable probability of disclosure is sufficient to disqualify counsel and it is for the court to determine the “reasonable probability of disclosure of confidences from the nature of the situation itself.” Forbush v. Forbush, 107 AD2d 375, 379-380, 485 N.Y.S.2d 898 (4th Dept., 1985). E.M.B. v. A.M.B., supra. A litigant’s choice of counsel is a valued right which should not be abridged absent a clear showing that disqualification is warranted. Kelleher v. Adams, 148 AD3d 692 (2d Dept., 2017). In resolving such a motion, a court must balance “the vital interest in avoiding even the appearance of impropriety [against] concern for a party’s right to representation by counsel of choice and danger that such motions can become tactical derailment weapons for strategic advantage in litigation”. NYAHSA Servs., Inc., Self-Ins. Trust v. People Care Inc., 156 A.D.3d at 1206, quoting Jamaica Pub. Serv. Co. v. AIU Ins. Co., 90 NY2d 631, 638 (1998); see also, Patrolmen’s Benevolent Ass’n v. New York State Pub. Emples. Rels. Bd., 2019 N.Y. Misc. LEXIS 25623 (Sup. Ct., Albany Co., 2019). Here, Crosswinds’ interests unquestionably are materially adverse to Galvan’s. The Court finds a reasonable probability exists that confidential information imparted by Levine to the Davenport firm may be used by Galvan against Crosswinds in this litigation. Here, Levine discussed with Davenport critical aspects of the current litigation including the specific documents involved, concerns he had about Galvan’s behavior, and the likelihood of success of the parties’ various legal arguments. He discussed his thoughts about the Novogradac appraisal, and the Letter of Intent from Lantern. Thus, Crosswinds has made a clear showing that this information has the potential to be significantly harmful to Crosswinds in this proceeding. Accordingly, the law firm of BC Davenport LLC is disqualified. DISCUSSION/ARBITRATION Defendants also seek an order compelling the parties to submit their dispute to binding arbitration. Defendants initially misidentified the relevant arbitration clause as being part of the LPA, whereas the arbitration clause Defendants seek to enforce is contained in the Development Fee Agreement. Nonetheless, Defendants argue that the Development Fee Agreement, (“DFA”), is incorporated by reference into the LPA, thus incorporating the Arbitration Clause. Defendants, in their Reply, contend that a second arbitration clause, found within the POA, and incorporated by reference into the LPA, likewise requires that this matter be submitted to binding arbitration. The Arbitration Clause of the DFA provides, “Any person enforcing this Agreement may require that all disputes, claims, counterclaims, and defenses (“Claims”) relating in any way to this Agreement or any transaction of which this Agreement is a part (the “Transaction”) be settled by binding arbitration…”. Plaintiffs contend that none of the claims asserted in this action have anything to do with the DFA and none of the Plaintiffs are signatories to the DFA. The DFA is signed by 3D Development Group, LLC, Kinderhook Development, LLC, and Hudson KTD Limited Partnership. Of those three entities, only Hudson KTD Limited Partnership is a party herein. Nonsignatories to an arbitration agreement generally may not be compelled to arbitrate except in limited circumstances where the intent to arbitrate may be imputed upon the nonsignatory (see Matter of Belzberg v. Verus Invs. Holdings Inc., 21 NY3d 626, 630, 999 NE2d 1130, 977 NYS2d 685 [2013]; TNS Holdings v. MKI Sec. Corp., 92 NY2d 335, 339, 703 NE2d 749, 680 NYS2d 891 [1998]; Matter of Long Is. Power Auth. Hurricane Sandy Litig., 165 AD3d 1138, 1141 [2d Dept., 2018]). The intent to arbitrate may be imputed on a nonsignatory where, for example, an arbitration agreement is incorporated into another contract by reference, the nonsignatory has been directly benefitted by the agreement containing the arbitration clause or the nonsignatory is an intended third-party beneficiary of the agreement. Matter of Alliance Masonry Corp. (Corning Hosp.), 178 A.D.3d 1346, 1347 (3d Dept., 2019). Although the DFA’s Arbitration Clause is incorporated by reference into the LPA, the non-signatory Plaintiffs, Galvan, Hudson City Housing Development Fund Company, Inc., and HRCC Homes, LLC, have not been shown to have directly benefitted from the DFA, nor are they intended third-party beneficiaries of the DFA. Accordingly, the Court will not direct that this dispute be submitted to binding arbitration pursuant to the DFA’s Arbitration Clause. As the Defendants first sought arbitration under the POA’s Arbitration Clause in their Reply papers, depriving Plaintiffs of an opportunity to respond, the Court will not direct arbitration under the POA. Any other contentions of the parties have been considered and are deemed to be without merit or have been rendered academic. Accordingly, it is hereby ORDERED, that attorneys David A. Davenport, Esq. and Sean M. Zaroogian, Esq., and the law firm of BC Davenport, LLC, are hereby disqualified from representing the Plaintiffs in this action; and it is further ORDERED, that the motion to compel arbitration pursuant to the terms of the Developer Fee Agreement (“DFA”) is denied; and it is further ORDERED, that the motion to compel arbitration pursuant to the terms of the Amended and Restated Purchase Option and Right of First Refusal Agreement (“POA”) is denied without prejudice; and it is further ORDERED, that Defendants are directed to serve and file their Answer within 20 days of the date of this Decision/Order; and it is further ORDERED, that counsel shall appear for an in-person conference on June 18, 2024 at 10:00 AM. This shall constitute the Decision/Order of the Court. The Court is electronically filing the originally of this Decision/Order, relieving the parties of their obligations under CPLR §2220 regarding filing and entry thereof, but does not relieve the parties of their obligations regarding service with notice of entry. Dated: April 19, 2024
