Alleged Oral Cross-Purchase Agreement Fails Under New York Statute of Frauds; Counsel Disqualified
In a recent decision from New York, there was a decision, not extraordinary in and of itself, with respect to enforcement of an alleged oral cross-purchase agreement between the members of an LLC. Perhaps of greater interest, the court disqualified the LLCs attorney from further involvement in the dispute. Deerin v. Ocean Rich Foods, LLC, 2018 N.Y. Slip Op. 00820, 2018 WL 736212 (App. Div. 2nd Dept. N.Y. Feb. 7, 2018).
Ocean Rich Foods was organized in 2006 amongst Richard Marino, Dean Berman and Douglas Deerin. In 2008, the company bought $1.5 million life insurance policies on each of the members; the LLC was the beneficiary of each policy. At some point in time cross-purchase agreements were drafted providing, inter alia, that upon a member’s death, the LLC would use the proceeds of the life insurance policy to in whole or in part fund the redemption of the interest of the deceased member. Those agreements were not, however, ever executed by any of the members. After Deerin passed away, his estate would assert that there existed an oral cross-purchase agreement pursuant to which the proceeds of the policy on his life should be paid over to the estate. Under New York law, a contract must be in writing if it “is not to be completed before the end of a lifetime.” N.Y. General Obligations Law § 5-701(a)(1). As the cross-purchase agreement, alleged to have been orally (but not in writing) existed between the members could not be completed before the end of a lifetime (i.e., it would require a death before it would be triggered), the alleged oral agreement failed under the New York statute of frauds. 2018 WL 736212,*2.
Turning to the question of disqualification, it appears this effort was initiated only after Marino and Berman submitted affidavits to the effect that the members had decided to not execute the written cross-purchase agreement. The plaintiff’s argument for disqualification was summarized by the court as follows:
Here, the plaintiff alleged in an affidavit that the defendants’ counsel was involved in the formation of Ocean Rich, and the defendants’ counsel admitted that he had represented Ocean Rich in “various past matters.” Council’s prior representation of Ocean Rich “was in fact representation of its three shareholders,” whose competing interest are at issue in this action. Likewise, council’s involvement in the formation of Ocean Rich and his representation of it against third parties was “substantial related” to the present action. 2018 WL 736212,*3 (citations and editorial edits omitted).
From there the court determined that disqualification was appropriate, writing:
Since the defendants’ counsel was “in a position to receive relevant confidences” from the decedent, whose estate’s interests “are now adverse to the defendant[s’] interests,” the Supreme Court should have granted that branch of the plaintiff’s cross motion which was to disqualify the defendants’ counsel.
A pair of thoughts on this decision. First, with respect to the statute of frauds barring the alleged oral cross-purchase agreement, the statutes of fraud of the various states are different from one another. Kentucky does not have the limitation relied upon in New York. That doesn’t mean that an oral cross-purchase agreement is enforceable and does not violate the statute of frauds, but rather that, under Kentucky law, the alleged oral agreement would need to be compared to the Kentucky statute of frauds. To that end, the statute of frauds under the Uniform Commercial Code might as well apply.
With respect to the disqualification, I cannot speak to New York law, but if Kentucky law were applied, this nonchalant disqualification of counsel would be inappropriate. Under Supreme Court Rule 1.13, representation of a business entity does not mean that the attorney is in an attorney-client relationship with the constituents (in this instance the members of an LLC). If the deceased disclosed confidential information to the LLC’s attorney when there was no existing attorney-client relationship between the attorney and the decedent, he did so without a reasonable expectation of privilege or that the information could not later, when advantageous to the LLC and disadvantages to him, be utilized. All in all, this case should not be allowed to stand for the proposition that the attorney who serves as counsel for an LLC may not, when a member later brings suit against the LLC, continue to represent its interests.