Stanislav Royzenshteyn v. Prashant Pathak ( 2024 )

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court ." Although it is posted on the
internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-1386-22
STANISLAV ROYZENSHTEYN
and ROMAN GERASHENKO,
Plaintiffs-Appellants,
v.
PRASHANT PATHAK, CAREY
KURTIN, EKAGRATA, INC.,
ONYX ENTERPRISES CANADA
INC., ONYX ENTERPRISES INT'L
CORP., IN COLOUR CAPITAL,
INC., and J. WILLIAM KURTIN,
Defendants-Respondents,
and
PRASHANT PATHAK and CAREY
KURTIN,
Defendants/Third-Party
Plaintiffs-Respondents,
v.
ONYX ENTERPRISES INT'L CORP.,
Third-Party Defendant-Respondent.
__________________________________
Argued October 23, 2023 – Decided January 2, 2024
Before Judges Gilson, DeAlmeida, and Berdote Byrne.
On appeal from an interlocutory order of the Superior
Court of New Jersey, Chancery Division, Monmouth
County, Docket No. C-000045-18.
Daniel Ginzburg argued the cause for appellants (The
Ginzburg Law Firm, PC, attorneys; Daniel Ginzburg,
on the briefs).
Christopher R. Carton argued the cause for respondents
Prashant Pathak, Carey Kurtin, Ekagrata, Inc., Onyx
Enterprises Canada Inc., In Colour Capital, Inc., and J.
William Kurtin (Bowman and Brooke, LLP, attorneys;
Christopher R. Carton and Patrick Ferris Lynott, on the
briefs).
PER CURIAM
This matter, which is before us for a second time, involves a discovery
dispute over who controls the attorney-client privilege of communications with
the law firm McCarter & English (McCarter). Plaintiffs Stanislav Royzenshteyn
and Roman Gerashenko appeal from a December 1, 2022 order denying their
motion to reject a report by a special master and compelling them to produce
their communications with McCarter to defendants.
Plaintiffs contend that McCarter had represented Onyx Enterprises Int'l
Corp. (Onyx) and plaintiffs jointly in a transaction in which plaintiffs sold the
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majority of Onyx's shares. Following an evidentiary hearing, a special master
found that McCarter had represented only Onyx, and that McCarter had not
represented plaintiffs as individuals in the transaction. The trial court adopted
the findings of the special master and, because Onyx had waived the attorney-
client privilege, ordered plaintiffs to produce their communications with
McCarter to all defendants. Because the findings of fact concerning McCarter's
representation are supported by substantial, credible evidence, and because
those findings as applied to the law establish that McCarter had represented only
Onyx, we affirm.
I.
Plaintiffs founded Onyx in 2008 as a New Jersey subchapter S
corporation. Onyx is engaged in the business of selling automotive after-market
products through e-commerce.1
From 2008 until 2015, plaintiffs were Onyx's only shareholders and
directors. In 2014, plaintiffs explored selling an ownership interest in Onyx to
raise capital for the business. During that process, plaintiffs had discussions
with defendants Prashant Pathak and Carey Kurtin. In connection with that
1
Onyx's successor in interest by reverse merger is Parts iD, LLC. Because this
reverse merger occurred after the transaction giving rise to this appeal, we refer
to this party as Onyx.
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potential transaction, Onyx retained McCarter to provide legal advice. David
Sorin was the lead attorney at McCarter providing that advice.
The parties eventually reached an agreement for the transaction, and
Pathak, through Ekagrata, Inc., an investment company he controlled, and
Kurtin established Onyx Enterprises Canada Inc. (OE Canada) and In Colour
Capital, Inc. OE Canada then invested $5 million in Onyx in exchange for fifty-
two percent of Onyx's outstanding common stock. The parties' agreements were
memorialized in several contracts, including employment agreements with
plaintiffs.
The transaction closed in July 2015. Following the closing, OE Canada
owned the majority of Onyx's shares (fifty-two percent), Pathak and Kurtin
became members of Onyx's board of directors, and plaintiffs became minority
shareholders of Onyx with new employment contracts.
In 2018, plaintiffs filed a lawsuit related to the transaction. In their second
amended complaint, plaintiffs named as defendants Pathak, Kurtin, Ekagrata, In
Colour Capital, Onyx, OE Canada, and J. William Kurtin, and alleged various
causes of action, including legal and equitable fraud in the inducement,
securities fraud, breaches of fiduciary duties, and tortious interference with
plaintiffs' prospective economic relationships. Plaintiffs claimed that as part of
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the 2015 transaction, Onyx was supposed to enter a business relationship with
Canadian Tire Corporation (CT Corp.), which plaintiffs believed would greatly
expand Onyx's business and profits.
In their answers, defendants made a general denial and asserted
counterclaims, alleging that plaintiffs had breached the contract, engaged in
shareholder oppression, breached fiduciary duties, been unjustly enriched, and
engaged in conversion. Defendants maintain that the CT Corp. relationship was
never guaranteed as part of the transaction and that when OE Canada made its
investment, Onyx was in deep financial difficulties.
The parties then conducted discovery. During that process, plaintiffs
asserted privilege over a wide range of documents and refused to produce those
documents. Following various motions and orders, plaintiffs furnished a revised
privilege log, listing 1,276 communications over which they asserted the
attorney-client privilege. Defendants responded by contending that some of
those documents involved communications with attorneys representing Onyx
and, therefore, Onyx, not plaintiffs, had the right to assert or waive the privilege.
In July 2019, defendants moved to compel production of the documents
listed in the privilege log. On October 25, 2019, the trial court issued an order
directing plaintiffs to produce all documents identified on their privilege log.
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Plaintiffs moved for reconsideration, but the trial court denied that motion in an
order entered on December 20, 2019. The trial court also denied plaintif fs'
motion for a stay.
Thereafter, we granted plaintiffs' motion for leave to appeal the orders
"related to the compelled production of documents over which plaintiffs
assert[ed] attorney-client privilege" and entered a stay pending the appeal. On
August 6, 2020, we issued an opinion reversing the trial court's October 25, 2019
order and remanding the matter. Royzenshteyn v. Pathak, No. A-1810-19 (App.
Div. Aug. 6, 2020). We directed the trial court to conduct an in camera review
of the privileged documents and determine which attorneys were representing
which clients. Regarding the communications with McCarter, we rejected
plaintiffs' claim that they were McCarter's sole client for purposes of the 2015
transaction. Id. at 18. Because we could not conclude whether McCarter
represented just Onyx or jointly represented Onyx and plaintiffs on the record
of the first appeal, we directed the trial court to address that issue on remand.
On remand, the trial court appointed a special master to conduct a review
of the communications on the privilege log and issue a report and
recommendation. On March 15, 2021, the special master issued his first report.
In that report, the special master found that plaintiffs had properly asserted the
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attorney-client privilege over communications between plaintiffs and their
individual attorneys, members of the firm Reitler, Kailas & Rosenblatt, and
Vincent Miletti. The special master also found that for several matters, plaintiffs
were jointly represented with Onyx. Accordingly, the special master
recommended that Onyx, but not the other defendants, be allowed to see those
documents. In his first report, the special master also found that the record was
insufficient for him to determine whether McCarter was representing Onyx and
plaintiffs jointly. The special master, therefore, directed that he would conduct
a plenary hearing and issue a second report focused on that issue.
On August 31, 2021, the trial court entered an order adopting the special
master's first report. No party has appealed from that order.
On January 10, 2022, the special master conducted a plenary hearing. One
witness testified at that hearing: Sorin. Plaintiffs and defendants also submitted
numerous exhibits. After the one-day plenary hearing, the parties submitted
post-hearing briefs. In their submission, plaintiffs proffered a certification from
Royzenshteyn that disputed Sorin's testimony.
On January 21, 2022, the special master issued a second report addressing
whom McCarter represented. The special master refused to consider the
Royzenshteyn certification, pointing out that plaintiffs could have called
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Royzenshteyn at the plenary hearing but elected not to do so. Instead, the special
master considered Sorin's testimony and the exhibits submitted at the plenary
hearing.
Based on Sorin's testimony and the exhibits, the special master found that
McCarter had represented only Onyx and there was no express or implied
attorney-client relationship between McCarter and plaintiffs. The special master
found that the exhibits either corroborated Sorin's testimony or did not support
plaintiffs' contention that McCarter had represented Onyx and them jointly. In
particular, the special master pointed to McCarter's retainer letter. The special
master found that the retainer letter clearly identified Onyx as the only client
and stated that if any individual were to be represented, there would have to be
a written agreement memorializing that representation.
The special master also reviewed and discussed the term sheet related to
the transaction, plaintiffs' employment agreements, and the tax ramifications of
the transaction. The special master found that there was no "personal
representation [of plaintiffs] involved in the tax issues or the indemnity issues"
because those issues were "ancillary to the transaction and not stand[-]alone
personal concerns of [plaintiffs]." Ultimately, the special master concluded that
none of the testimony or exhibits supported a finding of an implied attorney-
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client relationship between McCarter and plaintiffs, and that plaintiffs did not
carry their burden to prove that they had been individually represented by
McCarter. Accordingly, the special master found that McCarter had represented
only Onyx, and Onyx therefore controlled the attorney-client privilege
concerning communications with McCarter.
Plaintiffs objected to the special master's second report and requested the
trial court reject the findings and recommendations in that report. On December
1, 2022, the court held a hearing on the special master's second report. After
hearing argument from counsel, the court discussed the evidence supporting the
findings by the special master. The court then adopted the special master's
findings and recommendations and memorialized its ruling in an order entered
that same day. The court's order did not specify what documents plaintiffs were
required to produce. Instead, the court's order stated: "Defendants' [m]otion to
[c]ompel, dated July 31, 2019[,] is granted." The court also denied plaintiffs'
request for a stay pending an appeal.
We granted plaintiffs' request to file an emergent motion and, thereafter,
stayed the trial court's December 1, 2022 order pending this appeal.
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II.
The central and controlling issue on this appeal is whether McCarter had
represented Onyx and plaintiffs individually in the 2015 transaction. That
question involves factual determinations concerning the scope of McCarter's
representation and application of the facts to the law governing attorney -client
relationships and privileges. We review the fact findings made by the trial court
and the special master to determine whether they are supported by substantial ,
credible evidence in the record. Pami Realty, LLC v. Locations XIX Inc., 468
N.J. Super. 546, 556 (App. Div. 2021); Little v. Kia Motors Am., Inc., 242 N.J.
557, 593 (2020). We review the law de novo. Pami Realty, 468 N.J. Super. at
556.
A client is "a person or corporation or other association that, directly or
through an authorized representative, consults a lawyer or the lawyer's
representative for the purpose of retaining the lawyer or securing legal services
or advice from [the lawyer] in [the lawyer's] professional capacity." N.J.S.A.
2A:84A-20(3)(a); N.J.R.E. 504. The attorney-client "relationship is governed
both by the Rules of Professional Conduct [(RPC)] and the Supreme Court's
exclusive jurisdiction to regulate the conduct of attorneys." Kamaratos v. Palias,
360 N.J. Super. 76, 84 (App. Div. 2003) (citing N.J. Const. art. VI, § 2, ¶ 3).
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When a corporation retains an attorney, the attorney normally represents
"the [corporation] as distinct from its directors, officers, employees, members,
shareholders, or other constituents." RPC 1.13(a). There is no exception for
closely held corporations. McCarthy v. John T. Henderson, Inc., 246 N.J. Super.
225, 230 (App. Div. 1991). In our opinion on the first appeal, we declined
defendants' request to adopt a rule where shareholders in closely held
corporations are presumed to hold the privilege individually as distinct from the
corporate entity. We continue to decline to make that rule in this opinion.
An attorney representing a corporation "may also represent any of [the
corporation's] directors, officers, employees, members, shareholders or other
constituents," but each client must give informed consent to "the dual
representation" if it would involve "a concurrent conflict of interest." RPC
1.13(e); RPC 1.7(b). In addition, "[i]n dealing with a [corporation]'s directors,
officers, employees, members, shareholders or other constituents, a lawyer shall
explain the identity of the client when the lawyer believes that such explanation
is necessary to avoid misunderstanding on their part." RPC 1.13(d).
An attorney-client relationship "'may be implied "when (1) a person seeks
advice or assistance from an attorney, (2) the advice or assistance sought
pertains to matters within the attorney's professional competence, and (3) the
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attorney expressly or impliedly agrees to give or actually gives the desired
advice or assistance."'" Herbert v. Haytaian, 292 N.J. Super. 426, 436 (App.
Div. 1996) (quoting Bays v. Theran, 639 N.E.2d 720, 723 (Mass. 1994)). "[A]n
attorney-client relationship is created with respect to a particular matter when .
. . the lawyer fails to manifest lack of consent to do so, and the lawyer knows or
reasonably should know that the person reasonably relies on the lawyer to
provide the services." Dixon Ticonderoga Co. v. Est. of O'Connor, 248 F.3d
151, 169 (3d Cir. 2001) (quoting Restatement (Third) of the Law Governing
Lawyers § 26 (Am. L. Inst., Proposed Final Draft No. 1, 1996)).
"It is well-settled under New Jersey law that communications between
lawyers and clients 'in the course of that relationship and in professional
confidence' are privileged and therefore protected from disclosure." Hedden v.
Kean Univ., 434 N.J. Super. 1, 10 (App. Div. 2013) (quoting N.J.S.A. 2A:84A-
20(1)). The attorney-client privilege "generally applies to communications (1)
in which legal advice is sought, (2) from an attorney acting in his [or her]
capacity as a legal advisor, (3) and the communication is made in confidence,
(4) by the client." Ibid. The client holds the privilege and may waive it.
N.J.S.A. 2A:84A-20; Hedden, 434 N.J. Super. at 15.
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The trial court reviewed and analyzed the findings made by the special
master and adopted them. In doing so, the trial court found that the documents
and testimony supported the finding that McCarter had represented only Onyx.
The court also found that any belief by plaintiffs that they were individually
represented was unreasonable.
Having reviewed the record in its entirety, we conclude that there is
substantial, credible evidence supporting the trial court's finding that McCarter
represented only Onyx. There is no evidence that there was an express or
implied attorney-client relationship between McCarter and plaintiffs. Plaintiffs
contend that the special master erred in declining to consider Royzenshteyn's
certification contesting Sorin's testimony. Even assuming the special master
was obligated to consider that certification, it would not have undermined the
substantial, credible evidence in the record supporting the special master's
conclusion.
Onyx waived the privilege concerning the communications with McCarter
as to the other named defendants. Therefore, defendants are entitled to receive
the McCarter communications that were listed on plaintiffs' privilege log. The
trial court's December 1, 2022 order was not clear in identifying those
documents. In that regard, defendants acknowledged that while the original
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privilege log, as revised, included 1,276 documents, the communications with
McCarter involved only 493 documents. Accordingly, on remand, we direct the
trial court to enter an order expressly identifying by bates numbers the McCarter
documents and directing that those documents be produced to all named
defendants.
Affirmed and remanded. The stay that we entered is vacated. We do not
retain jurisdiction.
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