NEW JERSEY LAW JOURNAL - JUNE 21, 1993

LAMPF, LIPKIND FACING RECEIVERSHIP Firm Must Post $525,000 Bond or Risk Execution on Legal Malpractice Judgment

By Tim O'Brien

West Orange's Lampf, Lipkind, Prupis, Petigrow & LaBue, under siege since its disastrous entanglement with a Florida surety bon company, must post a $525,000 bond by today or face the possibility of receivership.

June 2, Essex County Superior Court Judge Kenneth Levy ordered the 15-lawyer tax boutique to show cause on July 9 why he should not appoint a receiver to manage the firm. The extraordinary order was requested by a former Lampf, Lipkind client, Marprowear Corp. of Fairfield, to aid it in executing a $538,000 legal malpractice judgment against the firm.

In March, a jury in Newark found the firm negligent and awarded Marprowear's profit-sharing trust the judgment of $449,600, plus interest.

Marprowear's attorney Glenn Bergenfield, a solo practitioner in Princeton, claimed that Lampf, Lipkind violated Rule of Professional Conduct 1.8 in 1986 by touting to its client the stock and bonds of the Florida surety, Southeastern Insurance Group Inc. Partners in the firm had a conflict, Bergenfield argued, because they were owners, officers, directors, landlords, lenders, and general counsel to the surety. Bergenfield argued successfully that Lampf, Lipkind's partners failed to adequately instruct their client that it should have obtained independent counsel.

SIG went bankrupt less than four years after raising $30.1 million from the 1986 private placement, with most of the money coming from Lampf, Lipkind clients, although the firm's partners and their families also invested heavily.

Nine days after Levy's show cause order---and eight weeks after senior partner Neil Prupis certified to the court that the firm was too broke to post a bond---the firm returned to the trial judge on the malpractice case, Superior Court Judge Donald Goldman, and said that it could find the cash to post a bond.

Because a supersedeas bond is required, the firm must comp up with 100 percent of the bond. Says Prupis "The firm didn't have it. We got it from friends and family and individually."

Goldman on June 11, signed an order further staying the execution of the judgment for 10 more days on Lampf, Lipkind's representation that it would post a $525,000 bond by today. Bergenfield, the attorney for Marprowear, a wholesale clothier, consented.

As of late Friday afternoon, according to a court clerk, the bond had not been posted. But Prupis, who was a driving force behind the SIG debacle and whose brother was SIG's president, says that the firm would be ready to post the bond this morning.

Meanwhile, both sides acknowledge that settlement talks are continuing.

If the bond is posted, or the case settled, the issue of whether a receiver should be named will be moot.

Attorneys for both sides in the bitter dispute, Bergenfield for the plaintiff and Frederic Becker, a partner with Wilentz, Goldman & Spitzer of Woodbridge, for the defense, say the appointment of a receiver to run a law firm in aid of execution of judgment is rare, if not unprecedented. Bergenfield said it has never been done in New Jersey.

Law firm consultant Francis Musselman, of Hildebrandt Inc. in Somerville, agrees, saying the remedy is not only rare but "dumb." He adds: "A law firm can't operate in a receiver ship. Clients will go away. You can't do it. Clients will have no confidence, and lawyers will leave with their clients because of their obligation to provide those clients with the best representation."

Musselman is a former partner with New York's Milbank, Tweed, Hadley & McCloy who was the bankruptcy trustee for the now-defunct Finley, Kumble, Wagern, Heine, Underberg, Manley, Myerson & Casey. He says a few courts in California have place firms in receivership. In fact, it was a motion of two Finley, Kumble partners in California who sought to have a receiver named that led to several New York banks placing the firm---one of the highest-grossing in the would before it went under in the late 1980s---into involuntary bankruptcy.

Says Wilentz, Goldman's Becker, "It's a pretty drastic remedy, and I so advised the court." He says that his argument before Levy on June 2 was twofold: "First, on the facts, none were presented that there was any need for a receiver; and second, on the law, while the statute [N.J.S.A. 2A:17-66] has a provision for a receiver, it's rarely used, and in the lone case law that I found, the court described the debtor as uncooperative, as secreting assets, and as refusing to show up in court. It's wholly inappropriate to this situation."

Bergenfield, playing hardball all the way, said in a May 27 certification to Levy that a receiver was needed to guard against Lampf, Lipkind's equity partners misappropriating funds, diverting the firm's assets to themselves, or "misinforming client's about how, where and whether to pay their bills."

Bergenfield reminded Levy that Judge Goldman, in a May 25 post-judgment ruling, had characterized Lampf, Lipkind's partners' behavior in pitching the SIG private placement to their clients as "reprehensible" and a "blatant violation of RPC 1.8."

Marprowear's attorney acknowledged that naming a receiver for a firm is extreme, but noted in his court papers that "a receiver is the usual remedy employed by the Client Security Fund when an attorney's conduct creates a risk of loss of client funds."

Hildebrandt consultant Musselman says that in getting a judge to sing a show cause order form receivership, Bergenfield "got a powerful weapon, the ultimate weapon because you can only use it once. The firm has to jolly well get bonded or settle."

Bergenfield wrote that Manprowear, which lost all of its $449,600 investment in SIG, "fears that the controlling [Lampf, Lipkind] shareholders will improperly divert to themselves assets of the corporation---especially [Neil] Prupis" because the "have significant judgments against them and it is feared that they would use the assets to satisfy personal debts."

To bolster his argument, Bergenfield attached to his certification a May 27 judgment search of the firm and its five name partners. The search shows only one judgment against the firm---$15,462 owed to the state for unemployment insurance funds not sent to Trenton. According to a spokesman for the state Department of Labor, that debt was cleared as of last Wednesday with a final payment of $4,000.

PRUPISS OPERATING ON CASH BASIS

But the judgment shows almost $3.5 million of debt owed by Lampf, Lipkind name partner Neil Prupis, individually or with others.

The creditors for the largest judgment, though, for $2.5 million against Prupis, William Lipkind, and five other SIG officials, have within the past month released Prupis and Lipkind, according to the creditors' lawyers, Michael Rosenbaum of Budd Larner Gross Rosenbaum Greenberg & Sade of Short Hills. Rosenbaum, who represents a group of former Lampf, Lipkind clients who ultimately took over SIG in a futile effort to salvage their investment, said he was barred by a confidentiality agreement from disclosing the court settlement that released the pair from the debt.

The $2.5 million was initially part of a $7.5 million loan from First Fidelity Bank to SIG, which was personally guaranteed by Prupis, Lipkind and the other SIG officials.

Nevertheless, Prupis individually still has judgments against him totaling almost $1 million of which almost $880,000 is owed to the Federal Deposit Insurance Corp. for unpaid loans by the now-defunct Mountain Ridge State Bank of West Orange. The FDIC took over the West Orange bank after its failure in October 1990.

Prupis says that the Mountain Ridge loans were for SIG or SIG investors, loans that he personally guaranteed. "I believed in [SIG]. My family got wiped out in it. All the problems with the firm stem from SIG."

Prupis, who held 15 positions with the surety company and its affiliates, shays he is not only broke but has been forced to live solely on cash; he says he as not credit cards or bank accounts.

According to three of his creditors, Prupis indeed has no bank account. Three Atlantic City casinos---Trop World, Bally's Grand and the Taj Majal---have a total of $44,000, including interest, in judgments outstanding against Prupis. Attorneys for the casinos say that between Aug. 10 and Aug. 12, 1990, Prupis signed markers or checks for a total of $40,000, receiving chips with which to gamble. In each case, though, Prupis had closed the bank account, against which he had written the checks.

"I closed those accents because I had to. I had no choice because I was being sued and that was around the time those judgments form those SIG loans started coming," says Prupis. He adds: "I meant to pay the casinos but I had no choice. If I had a checking account they [the judgment creditors' would take it: I couldn't write a check."

In fact, the first judgment obtained by Mountain Ridge State Bank was signed on Aug. 23, 1990, nine days after Prupis wrote bad checks to two of the casinos.

Prupis and the firm's attorney, Becker of Wilentz, Goodman, bristle at Bergenfield's attachment of Prupis' personal judgments to the motion of r receivership. They point out that Bergenfield did not name the individual partners and only has a judgment against Lampf, Lipkind, a professional corporation.

Becker, who along with fellow Wilentz, Goldman partner Roger Kaplan have been called in by Lampf, Lipkind to handle the appeal of the malpractice verdict, says, "It's totally irrelevant."

Bergenfield counters that his fears that the controlling Lampf, Lipkind shareholders would divert the assets are justified, and he points to Levy's order to support his position. Levy, on June 2, not only ordered the firm to show cause why a receiver should not be named, he temporarily enjoined the firm and anyone associated with it from diverting any assets "personally or as a different entity." Levy, in a handwritten insertion, said the assets include "proceeds from every file transferred."

NAME PARTNER AS EMPLOYEE

But Prupis says that his is not a shareholder in his firm. "I'm on the board of directors, but I'm just an employee," saying he pulled out as a member of the firm about three-and-half years ago to protect himself and the firm from creditors. As an employee, he acknowledges that his wages are being garnished, with several wage execution judgments lined up behind the current one.

Levy's asset-freeze order, meanwhile, is in effect until Goldman rules again on whether to life the stay of execution f the judgment pending appeal.

To date, Lampf, Lipkind has lost every major battle with its client, whim it had been representing since the 1970s, not only as tax counsel but in effect as general counsel, including representation of individual Marprowear owners. In 1982, Marprowear, a family-owned business, loaned the firm $500,000 to help it close a shopping mall deal in which the firm was involved according to Bergenfield. The loan was cited by Judge Goldman when he denied several Lampf, Lipkind post-judgment motions.

Manprowear was among 21 Lampf, Lipkind clients who filed a shareholder' derivative action against SIG in federal court in 1988. That suit, which alleged that Lampf, Lipkind treated SIG as a "cash cow," was dismissed in 1990 when U. S. District Judge Alfred Lechner, Jr. ruled that the statute of limitations had expired.

But Marprowear went to state court and filed its legal malpractice complaint, finally getting a trial date last March.

After the verdict, the firm's lawyer at the time of trial, James Keegan, a partner with West Orange's Bendit, Weinstock & Sharbaugh, moved to dismiss the verdict on several grounds. He argued that the case belonged in federal court because Marprowear's profit-sharing trust falls under the jurisdiction of the federal ERISA statute.

Keegan also argued that Marprowear's executives were judicially estopped from claiming that they relied on the sales pitch of Prupis and Lipkind in investing in SIG. Keegan contended that Marprowear's lawyer in the federal suit testified that those oral representations had only a "relatively minor" effect on Marprowear's decision to buy. Keegan further argued that Marprowear failed to prove that malpractice was the proximate cause of damage.

Goldman not only rejected every motion, he excoriated the firm. After he labeled the firm's actions "reprehensible" and in "blatant violation" of the ethics code barring conflict of interest with clients, he questioned the firm's judgment in going pro se until the eve of the trial, speculating that Lampf, Lipkind damaged itself by not bringing its motions until the 11th hour.

Goldman then wrote: "Lawyers who fail to inform clients of their own interest, fail to advise clients to seek other counsel, unabashedly sell their clients the notion that an investment with them or their colleagues is a good and safe one, and use their clients as sources of investment funds, must accept the responsibility for the outcome. Lawyers may not burrow their way into their client's confidences and then exploit those confidences for their own ends. This is the law in New Jersey."

Says Prupis, who vows that the firm, 26-lawyers strong until the SIG-related problems began, will continue. "I'll never do this again. All I want to be is a lawyer. "I'll never get involved in investments with clients. I could go out and give a lecture on this subject."