SUPREME COURT: NEW YORK COUNTY DANIEL B.

HAYES, Petitioner, - against DAVIS, SHAPIRO, LEWIT & HAYES, LLP, STEVEN G. SHAPIRO AND PETER LB WIT, Respondents. STATE OF NEW YORK, COUNTY OF NEW YORK, YOAV M. GRIVER, pursuant to NY CPLR 2106 and under the penalties of perjury, affirms: 1. I am a member of Zeichner Eliman & Krause LLP, counsel to Petitioner
ATTORNEYS STATEMENT AND AFFIRMATION OF GOOD FAITH

Index No.:

Daniel B. Hayes ("Petitioner"). I make this statement in support of the Petitioners motion pursuant to CPLR 7502(c), 6201et seq. and et 6301 seq., seeking, (i) entry of an Order of

Attachment over Respondents Davis Shapiro Lewit & Hayes LLP ("DSLH" or "Partnership Respondent"), Steven G. Shapiro ("Shapiro") and Peter Lewit ("Lewit") (jointly, the "Individual Respondents"), attaching and returning certain funds in the amount of $500,000 (the "Funds") improperly disbursed from the DSLH operating account at Chase Manhattan Bank on or about October 18, 2012, and (ii) entry of a Temporary Restraining Order and Injunction restraining Respondents from disbursing the Funds or any other monies in the DSLH operating account for partnership distributions until DSLHs line of credit has been paid and the underlying arbitration between Petitioner and the Individual Respondents has been completed.

2.

The relief requested is narrow in scope. As set forth below, Petitioner,

Shapiro, and Lewit are the three equity partners of DSLH. All Petitioner seeks is an Order of at status Attachment that will restore and preserve the prior quo DSLH, and ensure the continued operation of the law firm Petitioner helped build, while he, Shapiro, and Lewit arbitrate issues regarding appropriate partnership compensation and Shapiro and Lewit's retaliatory attempt to expel him from DSLH. The Order of Attachment is necessary because the Individual

Respondents are improperly dissipating partnership assets to the irreparable detriment o Petitioner, DSLH, and DSLH's creditors. Without this relief, DSLH may well cease to exist. 3. Specifically, in violation of their partnership agreement and fiduciary

duties as partners, Shapiro and Lewit have improperly taken $500,000 from DSLH's operating account as purported partnership distributions. This leaves only $100,000 in the operating account, which is not enough to cover DSLH's monthly expenses of approximately $366,000.00, and a $400,000 current outstanding balance, on the firm's $1,000,000 line of credit, that must be paid by no later than November 13, 2012. Shapiro and Lewit have done so knowing that their own assets will be insufficient to cover their share of DSLH's liabilities, and that, not only will DSLH no longer be able to function, but that Petitioner will be left holding the bag, as many of DSLH' s liabilities, including the line of credit, have been personally guaranteed by Petitioner. BACKGROUND FACTS/PROCEDURAL HISTORY 4. The underlying facts are set forth in the Affidavit of Daniel B. Hayes

(attached hereto as Exhibit 1) and the various exhibits appended to his affidavit. For the Court's convenience, the following is a brief summary of the relevant facts.

The Management and Operation of DSLH

5.

In April 2002, Petitioner became a named partner at DSLH, a law firm

specializing in entertainment law, then known as Davis Shapiro Lewit Montone and Hayes. In or 2005, all of the partners except Montone, who had previously left the firm, about January 1, Exhibit A entered into a written partnership agreement (the "Partnership Agreement"). See (Partnership Agreement).

6.

Sections 6.01 and 6.02 of the Partnership Agreement provides that "all of

the Partners" would be responsible for managing DSLH, and any determination affecting the Partnership Agreement, Partnership would be "made by unanimous consent of the Partners." p. 4) (emphasis added).

7.

Regarding net cash flow, the Partnership Agreement further provides that

the Partnership "shall distribute Net Cash Flow (to the extent cash is available for distribution) to the Partners from time to time (but no less frequently than annually) in such amounts as shall be determined in the discretion of the Partners." (5ee Partnership Agreement added). 3.03) (emphasis

DSLH And Its Recent Financial Problems

8.

For many years, DSLH operated successfully, with 2008 being the firms

best year when its revenues reached $13.6 million, with 50-60% profit margins. See Hayes Aff.

10. DSLHs success was due in large part to the firms billing model; charging clients a

percentage of the clients gross revenue rather than an hourly rate. However, conditions in the music industry were changing due to a decline in CD sales and the growth of the Internet. See id.

9.

In November 2009, Fred Davis, the firms founder and managing partner,

left DSLH to join an investment bank and Petitioner then became the firms managing partner. See Hayes Aff.J 11,1

10.

Today, DSLHs partner compensation model operates on "what feels fair"

to the three equity partners after taking into account four variables: (1) available cash to distribute, (2) each partners collections, (3) each partners contribution to overhead, and (4) each partners resulting percentage compensation. See Hayes Aff. 12. For example, in 2010,

(55%) whereas Petitioners collections were $1.6 million and his compensation was $885,000.00

Respondent Shapiros collections were $1.9 million and his compensation was $1.1 million (59%). The difference in percentage compensation was due to the partners belief it was fair to have Shapiro contribute $783,000.00 to overhead, compared to Petitioners $717,000.000 in overhead (in contrast to the $800,000 and $950,000 they would have contributed respectively to 50% overhead under the Davis model). Id. The partner compensation model is applied pursuant to an end-of-the-year conversation among the three equity partners and requires unanimous consent prior to distribution. Id.

11.

With Davis departure, DSLH lost Davis $2 million in business. From

2010 through 2011, the firms revenue decreased by an additional $1.5 million because of the

On September 28, 2012, Petitioner resigned as Managing Partner and turned those duties over to Shapiro. See Hayes Aff. .

loss of significant clients and the departure of contract partner Laurie Soriano. By the end of 2011, the firms revenues had dropped to million. See Hayes Aff. $6.5 13.

12.

For 2011, the firm had a net operating loss of approximately $437,000.

This loss led DSLH to use approximately draw down $700,000 of its $1,000,000 line of credit with JPMorgan Chase Bank, N.A., (the "Credit Line") in order to make the agreed-upon partner distributions. See Hayes Aff. 14.

13.

Although DSLH had used its Credit Line previously to cover cash flow

and make partner payments, it was unprecedented for the firm to start, as it did 2012, with

15. $700,000.00 already drawn on its Credit Line. See Hayes Aff.

Requirements Of The Credit Line

14.

It is a requirement of the Credit Line that its balance be paid in full, and

maintained at a zero balance for thirty consecutive days during its term. As the line of credit is scheduled to mature on December 13, 2012, DSLH must pay the $400,000.00 currently due on the Credit Line and maintain a zero balance for thirty (30) days. Thus, to avoid a default, 2 repayment to zero must take place no later than November 13, 2012. See Hayes Aff. alsoExhibit B. 16; see

Over the course of 2012, DSLH reduced the amount owed on the Credit Line from $700,000 to $400,000. See Hayes Aff. 16,

15.

Payment of the Credit Line is jointly, severally, and personally guaranteed

by Petitioner, Shapiro, and Lewit pursuant to a written guaranty of payment (the "Guaranty"). $ Hayes Aff. Exhibit 17. A copy of the Guaranty is attached as C.

The Underlying Dispute and Respondents' Actions That Threaten DSLH's Continued Existence and Operation 16. In January 2012, Petitioner became very concerned about the firms

finances and its ability to survive. 2012 firm revenues were initially projected at approximately $5.3 $6.3 million, and subsequently lowered to million; monthly expenses were projected at approximately $366,000.00. See Hayes Aff. 18. This left a slim projected profit margin of

around 17%, far below the historic 45-55% profit margin of prior years.Through a series of [4. emails and telephone conversations, Petitioner expressed his concerns to the Individual Respondents.

17.

Despite the firms financial condition and likely prospect of little to no

profit, in August 2012, Respondents Lewit and Shapiro demanded to be paid $865,000, reflecting approximately 40% of their actual collections to date. Because the firm only had approximately $ 600,000 in its operating account, Petitioner suggested that any partnership distributions be considered only after DSLH paid the Credit Line off for the required 30 days. Shapiro and Lewit disagreed, and blocked Petitioner from paying down the Credit Line. See Hayes Aff. 19.

18.

On October 2, 2012 (and again on October 10), the Individual

Respondents proposed that an additional $350,000 be drawn on the Credit Line (in addition to the then-balance owed of $400,000), so Shapiro and Lewits desired partnership distributions of

$865,000 could be made. Petitioner withheld his consent to this proposal and instead requested that each partner post collateral before the line of credit was drawn down any further or partner distributions made to any of the partners, especially given that the line of credit had to be repaid by no later than November 13, 2012, one month before the end of the term. See Hayes Aff. Ex. B. 20;

19.

Petitioners concern was understandable. As of October 2, DSLH (i) had

only about $600,000.00 in cash in the operating account; (ii) had collected $4,300,000 of the $5,300,000 revenue projected for 2012, while still owing over $1,000,000 in projected 2012 expenses; (iii) still owed $400,000 on the Credit Line; and (v) has additional unbudgeted moving

costs, bonuses, and equipment and furniture expenses of $100,000 to 300,000 for 2012. See Hayes Aff. 21. Clinching the matter, Petitioner was jointly and severally liable to payback the

Credit Line (and many of DSLHs other debts and obligations), and understood that neither Lewit or Shapiro had the financial wherewithal to be able to pay back their share of the Credit Line on or before November 13, 2012, if the money in the operating account was first distributed to them. Id.

20.

On October 17, 2012, when Lewit and Shapiro continued their refusal to

post collateral and continued insisting on an immediate draw that threatened DSLH s future, Petitioner demanded arbitration, as provided for by Exhibit D. 9.07 of the Partnership Agreement. See

21.

In retaliation, Respondents Shapiro and Lewit purported to terminate

Petitioner on October 18, 2012, and then unilaterally distributed $500,000.00 to themselves. Hayes Aff. Exhibit E. 3 23 and

22.

The Individual Respondents unilateral actions violated the Partnership

First, Agreement in a number of independent ways. Petitioner was terminated without the required 30-day prior notice provided under Second, 8.02 of the Partnership Agreement. the

Individual Respondents unilaterally disbursed $500,000.00 to themselves without Petitioners consent, in violation of Third, 6.02 of the Partnership Agreement. the Individual Respondents 3.03 of the

disbursing $500,000.00 when cash was unavailable to do so, in violation of

Partnership Agreement. See Ex. A (Partnership Agreement). Further, as the Individual Respondents did this to benefit themselves at the expense of Petitioner and DSLH, they have breached their fiduciary duties .as partners to the firm and to Petitioner.

23.

The Individual Respondents actions show an unmistakable intent to

dissipate assets and deprive Petitioner of the ability to recover anything in arbitration. See Hayes Aff.J25.

24.

If the TRO does not issue and Attachment is not granted, Petitioner will be J 25-26. Bluntly put, without the money Shapiro and Lewit

irreparably harmed. See Hayes Aff.

unilaterally and improperly removed from DSLHs operating account, DSLH will not have

They also sent Petitioner a $96,138.83 check, reflecting a distribution weighted in favor of the Individual Respondents, and which does not reflect the sum to which Petitioner is entitled. Hayes Aff. 23. Petitioner has not cashed the check, so that part of the Funds remains with Respondents. Id. This and other issues will be addressed i the arbitration Petitioner commenced on October 17, 2012. See Ex. D (Demand for Arbitration).

[,] [4]

enough money to continue operating, or to meet the November 13, 2012 Line of Credit deadline. One cannot put a price on the deliberate and unnecessary destruction of the law firm Petitioner helped build over many years and much effort. Likewise, the failure of DSLH, where Petitioner is a named partner, will negatively and irreparably harm Petitioners reputation, his ability to find other work, continue at DSLH, or join or start another firm, and his ability to maintain existing clients and develop new clients. Id. 26. Depending on the circumstances, Petitioner may even

be forced into personal bankruptcy should he be forced to pay all the firms debts on his own. ARGUMENT I. AN ORDER OF ATTACHMENT PRESERVING THE PETITIONER IS ENTITLED TO AND MAINTAINING THE PRIOR STATUS QUO AND IN AID OF ARBITRATION

25.

Under NY CPLR

6212, the Court may grant an order of attachment upon

a showing that: (a) there is a cause of action; (b) it is probable that the Petitioner will succeed on the merits; (c) one or more grounds for attachment provided in NY CPLR 6201 exists; and (d)

the amount demanded from the respondents exceeds all counterclaims known to the Petitioner. Petitioner satisfies each of these elements.

26.

First, as set forth above, Petitioner has a claim for various breaches of the

Partnership Agreement and Breach of Fiduciary Duty. These issues are arbitrable under the Partnership Agreement, and Petitioner has served Respondents with a Demand for Arbitration. See Ex. D (Demand for Arbitration).

27.

Second, it is probable that Petitioner will succeed on the merits of his

claims, since by terminating Petitioner without prior notice, and by distributing unavailable

partnership assets without unanimous consent, the Individual Respondents clearly breached Sections 3.03 (distribution without adequate cash flow), 6.02 (distribution without unanimous consent of the partners), and Section 8.02 (expulsion without 30 days advance written notice) of the Partnership Agreement. The Individual Respondents also breached their fiduciary duties by inaccurately calculating the amount to which Petitioner is entitled under the Partnership Agreement,, and by placing themselves ahead of the partners and clients of DSLH. See, Birnbaum v. Birnbaum, 73 N.Y.2d 461, 466 (1989) (fiduciary "is bound to single-mindedly pursue the interests of those to whom a duty of loyalty is owed"); Meinhard v. Salmon, 249 N.Y. 458, 464 (1928) (trustee bound to standard "stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive"); In re Van Deusens Estate, 37 A.D.2d 131, 133 (lstDept. 197 1) (same).

28.

Third, one of the grounds for attachment provided in NY CPLR

6201

exists here. NY CPLR 620 1(3) provides: An order of attachment may be granted in any action, except a matrimonial action, where the Petitioner has demanded and would be entitled, in whole or in part, or in the alternative, to a money judgment against one or more Respondents, when:

the defendant, with intent to defraud his creditors or frustrate the 3. enforcement of a judgment that might be rendered in Petitioners favor, has assigned, disposed of, encumbered or secreted property, or removed it from the state or is about to do any of these acts As set forth above and in the Hayes Affidavit, Respondents have taken affirmative steps to dissipate the partnership assets, which will not only frustrate the enforcement of Petitioners

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eventual judgment, but was done with the intent to defraud/frustrate DSLHs creditors, to Petitioners and DSLHs detriment. Knowing that cash flow will be insufficient to cover DSLHs obligations, and that their own assets are insufficient to cover their share of the liabilities, Shapiro and Lewit have colluded to leave Petitioner holding the bag, particularly with respect to the liabilities Petitioner has personally guaranteed. Thus, the instant Order of Attachment readily meets the criteria of 6201(3), which permits attachment where, as here, a

real risk exists that Defendant will dispose or dissipate the Funds, and the other monies in the DSLH operating account, in the absence of attachment. By making a distribution - in deliberate and knowing violation of the Partnership Agreement while DSLH is on the verge of insolvency Respondents created the type of risk contemplated by CPLR 620 1(3).

29.

Finally, as required by CPLR

6212, the amount demanded from 3 ("This amount

Respondents exceeds all counterclaims known to Petitioner. See Hayes Aff. exceeds all counterclaims of which I have knowledge.")

30. Specifically, CPLR

Petitioner also is entitled to attachment under CPLR Article 75. 7502(c) provides:

The supreme court in the county in which an (c) Provisional remedies. arbitration is pending or in a county specified in subdivision (a) of this section, may entertain an application for an order of attachment or for a preliminary injunction in connection with an arbitration that is pending or that is to be commenced inside or outside this state . . . upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief. Here, Petitioner has commenced arbitration over Respondents actions, and any award to which Petitioner "may be rendered ineffectual without such provisional relief for the reasons described above. 11

II. PETITIONER IS ENTITLED TO INJUNCTIVE RELIEF

31.

In addition to an order of attachment compelling the Individual

Respondents to return the disbursed Funds, injunctive relief is warranted to protect Petitioner, DSLH, and DSLH's creditors during the pendency of the Court's decision on this motion and during the pending arbitration.

32.

For an injunction to issue, a party must demonstrate: (1) likelihood of

success on the merits; (2) irreparable injury absent a granting of the preliminary injunction; and 52 (3) a balancing of the equities in favor of the injunction. See W.T. Grant Co. v. Srogi, N.Y.2d 496, 517 (1981). Petitioner satisfies the requirements for a preliminary injunction. III. PROBABILITY OF SUCCESS ON THE MERITS

33.

At its essence, this case is really quite simple. The Individual Respondents

have knowingly and improperly transferred essentially all of DSLH's operating cash, rendering it unable to pay its debts, which is a clear breach of the Partnership Agreement and fiduciary duties owed to Petitioner and DSLH.

34.

Injunctive relief is also sought in aid of arbitration, to ensure the firm

survives and remains viable during the pendency of the current arbitration which will adjudicate, on the merits, Lewit and Shapiro's breaches of contract and fiduciary duty, issues of partnership compensation, and the validity of their attempted retaliatory expulsion of Petitioner. 12

35. merits.

Under the circumstances, it is likely that Petitioner will succeed on the

INVA IRREPARABLE HARM

36.

Here, Petitioner will sustain irreparable harm if this motion is not granted

because it is all but certain that the Funds will be dissipated and unreachable by the time the arbitration is adjudicated, rendering any award therein ineffectual. The Individual Defendants do not have the money to pay any judgment or contribute to DSLH's continued solvency. Absent the return of the disbursed funds, DSLH will not have sufficient funds to cover all of its debt obligations, thus triggering Petitioner's personal guarantees. Accordingly, given the conduct of Respondents to date, there is no reason to continue to allow them access to the disbursed funds. To do so would spell disaster for Plaintiff and DSLH.

37.

Should DSLH default, Petitioner may be the only one of the partners who

can financially honor their personal guarantee. If the preliminary injunction is not granted, Petitioner will suffer irreparable injury. If, on the other hand, the Court grants a preliminary injunction, Respondents will not be harmed. Rather, the Funds and operating account that is the subject of this motion will not be dissipated and Respondents will retain the opportunity to have all of their defenses, if any, addressed, on the merits.

38.

Further, should DSLH default or be unable to continue to operate,

Petitioner will suffer the destruction of the law firm he helped build over many years and much

13

effort. The failure of DSLH, where Petitioner is a named partner, will negatively and irreparably harm Petitioner's reputation, his ability to find other work, continue at DSLH, or join another firm, and his ability to maintain existing clients and develop new clients. ky A BALANCING OF THE EQUITIES FAVORS PETITIONER

39.

In the absence of adequate cash flow, none of the Respondents has a viable

claim to any of the funds disbursed from the DSLH operating account. Petitioner, as an existing partner who has little control but remains liable for the partnership debts, on the other hand, has incurred losses in the full amount of the defalcated Funds.

40.

Further, the relief sought is narrow. Petitioner asks only that the money in

the operating account (including the amounts attached and returned) not be disbursed for partnership distributions for a short period of time - j, until DSLH's line of credit has been paid on or before November 13, 2012. By contrast, to not grant the limited injunctive relief sought risks the insolvency and dissolution of DSLH and activation of Petitioner's personal guarantees.

41.

Therefore, the equities lie in granting Petitioner's motion and issuing a

preliminary injunction.

IEI

42.

Under these circumstances, to protect Petitioner and respondent DSLH, it

is appropriate that this Court enter the requested injunctive relief with respect to the disbursements. VI. ADDITIONAL RECITATIONS

43.

No previous application for this relief has been made, and no other

provisional relief has been sought.

44.

On October 26, 2012, I sent an email to the email addresses of respondents

Shapiro and Lewit and informed them that Petitioner would be seeking the provisional relief requested by this motion on Monday, October 29, 2012 at 9:30 a.m., and invited them to coordinate further with me if they so desired. As of the signing of this attorney's statement, they have not responded.

45. in its entirety.

Accordingly, I respectfully request that the Court grant Petitioner's motion

Dated: New York, New York October 28, 2012

YOAV M. GRIVER

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