# Appendix — Bain v. Buechel

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 2002
- **Citation:** 535 U.S. 1096

## Text

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APPENDIX A — OPINION OF THE COURT OF
APPEALS, STATE OF NEW YORK
DATED DECEMBER 20, 2001

COURT OF APPEALS OF NEW YORK

' No. 134
Dec. 20, 2001

Frederick F. Buechel, M.D., et al.,
Respondents,
V.
John N. Bain, et al.,
Appellants, et al., Defendants.
SMITH, J.:

The primary issue before this Court is whether parties
should be precluded from relitigating the validity of fee
arrangements determined to be illegal in an earlier action,
when they were in privity with the person against whom the
issue was decided. We conclude that collateral estoppel bars
relitigation.

Plaintiffs, Frederick F. Buechel, an orthopedic doctor
and Michael J. Pappas, a mechanical engineer, are the
inventors of a prosthetic shoulder device called the floating
center prosthetic joint. They retained the firm of Bain,
Gilfillan & Rhodes, P.C. “to undertake the preparation and
prosecution of a patent application covering the invention
on a contingency basis.” The fee agreement, executed on

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Appendix A

November 12, 1974, provided that the law firm would receive
a one-third interest in monies, profits or income resulting
from the invention.

In July 1975, the parties formalized their relationship
and incorporated Biomedical Engineering Corporation (BEC)
in New Jersey. The attorneys’ interests in the corporation
mirrored their fee agreement. Plaintiffs each held one-third
of the shares of the corporation, with the remaining one-third
interest divided equally among Bain, Gilfillan and Rhodes.
Plaintiffs, who had continued to collaborate on development
of prosthetic devices, assigned to BEC their interests in the
floating center prosthetic joint and any future prosthetic
devices invented by them. Significantly, Rhodes failed to
advise plaintiffs of the potential for conflicts of interest that
could result from converting the one-third interest in a single
invention into a one-third equity interest in a corporation
that would exploit all future inventions. A dispute
subsequently arose among the attorneys, resulting in Rhodes’
departure from the firm in December 1981. Defendants Bain
and Gilfillan, however, continued to render legal services to
plaintiffs on BEC matters.

In 1983, for tax purposes, BEC was dissolved, and its
assets were transferred to a newly formed entity, the
Biomedical Engineering Trust (Trust I), also with plaintiffs
as trustees. Again, the trust agreement continued the parties’
prior arrangement. The three attorneys, as shareholders of
the dissolved corporation, received equivalent equity interests
in the trust. In 1984, a second trust, the Biomedical
Engineering Trust II (Trust II) was created, again with
plaintiffs as trustees, and it held the marketing rights to a

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Appendix A

self-centering hip device. While neither Bain nor Gilfillan
held an interest in Trust II, their former partner, Rhodes,
provided patent protection services to the entity.

In 1987, after a dispute arose over trust distributions,
Rhodes commenced an action against plaintiffs as trustees
to recover monies that the trustees allegedly improperly paid
themselves. In response to plaintiffs’ motion to dismiss for
failure to join all the trustees, Rhodes amended his complaint,
adding defendants Bain and Gilfillan ia their capacity as trust
beneficiaries. In 1991, four years after Rhodes commenced
the action, plaintiffs asserted counterclaims against Rhodes
for breach of fiduciary duty and malpractice, alleging among
other things that “the agreements were unfair” and that
Rhodes “while acting as their attorney, induced [plaintiffs]
to enter into the unfair agreements by taking unfair advantage
of his fiduciary capacity and superior knowledge, by
deceiving [plaintiffs] as to the value of his and/or the law
firm’s services and by failing to disclose * * * the value of
the one-third interest relinquished by the inventors.” Plaintiffs
additionally asserted malpractice on the part of Rhodes in
that he represented that he and his law firm were qualified,
competent and experienced in patent and business affairs,
which representations were false. Plaintiffs did not, at that
time, name defendants as adverse parties. In a later letter
sent to defendants, Rhodes’ attorney made clear that if the
counterclaims were established, recovery for the
counterclaims “[would] be subject to contribution by
[defendants] Rhodes’ former partners.”

Recognizing their unity with Rhodes in regard to the
validity of the challenged fee arrangement, on March 12,

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Appendix A

1992, Bain wrote plaintiffs that he was unclear as to how the
counterclaims could be narrowly construed solely against
Rhodes. Bain wrote that he and Gilfillan were “concerned
that the counterclaims could be interpreted broadly to assert
overreaching either by the law firms in which Rhodes,
Gilfillan and I were involved or, at the least by Rhodes as a
partner or agent of those law firms, thereby potentially
extending the consequences of the alleged wrongdoing by
Rhodes to Gilfillan and myself.”

On January 5, 1995, after a number of disputes, Gilfilian
wrote plaintiffs:

“With the trial date apparently becoming
imminent, you have placed John [Bain] and I[sic]
in a position where we have to deal with the
question of whether or not we must become active
in the Rhodes’ litigation to protect our rights, vis-
a-vis the position of the Trustees regarding legal
fees. I would certainly not like to have to do that.
However, I will not waive any rights. We are
gravely concerned that if we do not raise the issue
in this litigation or otherwise provide for
preservation rights, we will be estopped in the
future from challenging the Trustees on this highly
improper conduct. Needless to say, we cannot let
this happen.”

On January 10, 1995, plaintiffs fired Bain and Gilfillan and
moved to amend their counterclaims in the Rhodes action to
assert specific claims against them. Defendants opposed the
motion. Supreme Court denied plaintiffs’ motion because
they failed to offer an acceptable excuse for the delay.

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Appendix A

Plaintiffs then commenced the present action against
defendants Bain and Gilfillan, alleging breach of fiduciary
and ethical obligations and legal malpractice. Plaintiffs
sought the termination of trust payments to defendants and -
the turnover of trust files. At defendants’ request, Supreme
Court stayed the action pending resolution of the Rhodes
action. In support of their request for a stay, defendants
submitted an affidavit to the court, arguing:

“Because of the similarity of the underlying facts
and transactions in both the Rhodes action and
this one, proceeding with this action at this time
would be duplicative and a waste of judicial
resources. Indeed, a decision in the Rhodes case
may estop or bar certain claims in this action.”

In 1998, following a bench trial, Supreme Court
determined in the Rhodes action that the fee arrangement
between plaintiffs and their original counsel, the firm of Bain,
Gilfillan & Rhodes, was invalid. The court found that, from
the outset of the attorney-client relationship, there had not
been full disclosure regarding the possibility of the firm’s
conflict of interest. The court further found that plaintiffs
were never advised to seek independent counsel before
entering into a business relationship with their attorneys, and
that Rhodes had “exploited his clients through affirmatively
pursuing a business relationship with them absent full
disclosure.” The court noted that Rhodes’ extensive ethical
violations constituted serious breaches of his fiduciary
obligation “not to take advantage of his superior knowledge
and position,” and that he failed to inform his clients that he
could be discharged as their attorney at any time.

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Appendix A

Consequently, Supreme Court held that the fee agreement,
from which Rhodes derived his interest in the trusts, was
unethical and unenforceable, and in its decision the court
ordered that “the trust agreements are rescinded.”

The Appellate Division affirmed, concluding “neither the
initial arrangement nor its subsequent incarnations were
entered into upon adequate disclosure * * * of other possible
fee arrangements and potential conflicts of interest, or with
the aid of independent counsel * * *. Rescission of the parties’
arrangements ab initio, with payment to plaintiff in quantum
meruit for his services, is an equitable result * * *”
(258 A.D.2d 274 [1999] [citations omitted] ). This Court
declined to hear the appeal (93 N.Y.2d 806 [1999] ).

By order dated February 5, 1998, Supreme Court lifted
the stay in the present suit, and on March 23, 1998, defendants
Bain and Gilfillan answered the complaint and asserted
counterclaims, seeking their reinstatement as beneficiaries
of the Trust. Defendants alleged that plaintiffs “repudiated
their agreements with Bain and Gilfillan and now contend
that all such agreements are void ab initio.” Both parties
moved for summary judgment. Supreme Court granted
plaintiffs’ motion for partial summary judgment, rescinding
and terminating defendants’ equity interests in Trust I and
ruled the fee agreements between plaintiffs and defendants
unenforceable, ab initio, “because they were entered into in
violation of the ethical duties owed to plaintiffs.” The court
directed defendants to return to plaintiffs all monies
distributed less reasonable attorneys’ fees.

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Appendix A

The court-explained that the issue of rescission was
thoroughly litigated in the Rhodes action, and that defendants
had elected to elude every opportunity to participate actively.
Supreme Court determined that defendants were in privity
with Rhodes, that they “actually did cooperate somewhat in
[his] trial preparation,” and that on “this score absolutely no
adverse relationship existed between them.” Finally, the
defendants had not shown that their failure to more fully
participate in the Rhodes action prejudiced them or affected
its outcome. The court stated, “judging by the context of
defendants’ affidavits in the present action, their testimony
in the Rhodes’ action, even assuming its veracity, would not
have met the standard of professional conduct applied in the
prior case, having failed to allege inter alia, that plaintiffs
were informed their attorneys could be replaced without
penalty.”

The Appellate Division unanimously affirmed. The court
rejected the contention that “Bain and Gilfillan were merely
nominal parties to the Rhodes matter,” explaining that:

“The issue presented for decision in Rhodes was
whether or not Buechel and Pappas, as trustees,
were required to make payments to an attorney
whose rights as a trust beneficiary derived from
the fee agreement between Buechel and Pappas,
individually, and the law firm of Bain, Gilfillan
& Rhodes. This action similarly addresses the
status of attorney-beneficiaries whose rights to
receive proceeds from the trust are predicated on
the identical fee agreement”

(275 A.D.2d 65, 71-72 [emphasis in Original]).

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Appendix A

On motion for reargument, defendants contended that
the claims against them for nullification of the fee agreement
were not precluded. They also argued, for the first time, that
plaintiffs were barred from bringing suit against them under
the doctrine against claim splitting. The Appellate Division
denied the reargument motion and certified the following
question to this Court: “Were the orders of the Supreme
Court, as affirmed by this Court, properly made?”
We conclude that they were.

Analysis

The equitable doctrine of collateral estoppel is grounded
in the facts and realities of a particular litigation, rather than
rigid rules. Collateral estoppel precludes a party from
relitigating in a subsequent action or proceeding an issue
raised in a prior action or proceeding and decided against
that party or those in privity (Ryan v. New York Tel. Co.,
62 N.Y.2d 494, 500 [1984] ). The policies underlying its
application are avoiding relitigation of a decided issue and

the possibility of an inconsistent result (D ‘Arata v. New York ,

Cent. Mut. Fire Ins. Co., 77 N.Y.2d 659, 664 [1990]).

Two requirements must be met before collateral estoppel
can be invoked. First, the litigant seeking the benefit of
collateral estoppel must demonstrate that the decisive issue
was necessarily decided in the prior action against a party,
or one in privity with a party (see, Gilberg v. Barbieri,
53 N.Y.2d 285, 291 [1981]). Second, the party to be precluded
from relitigating the issue must demonstrate the absence of
a full and fair opportunity to contest the prior determination.

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Appendix A

The doctrine, however, is a flexible one, and the
enumeration of these elements is intended merely as a
framework, not a substitute, for case-by-case analysis of the
facts and realities. “In the end, the fundamental inquiry is
whether relitigation should be permitted in a particular case
in light of * * * fairness to the parties, conservation of the
resources of the court and the litigants, and the societal
interests in consistent and accurate results. No rigid rules
are possible, because even these factors may vary in relative
importance depending on the nature of the proceedings * * *”
(see, Staatsburg Water Co. v. Staatsburg Fire Dist.,72 N.Y.2d
147, 153 [1988] [citations omitted] ).

Applying these principles, we conclude that defendants
are barred from now once again litigating the validity of a
trust agreement that was — after extensive pretrial and trial
proceedings involving them—found to be invalid.

In determining whether collateral estoppel applies here,
the initial question is whether defendants — parties in the
Rhodes action who were not named in the plaintiffs’
counterclaim — should, nevertheless, be bound by the
determination rescinding the Trust. Because for purposes of
collateral estoppel, defendants were in privity with their
former law partner Rhodes as to the validity of the fee
arrangements, we conclude they should be bound.

In the context of collateral estoppel, privity does not have
a single well-defined meaning (Matter of Juan C. v. Cortines,
89 N.Y.2d 659, 667 [1997] ). Rather, privity is “an amorphous
concept not easy of application * * * and includes those who
are successors to a property interest, those who control an

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Appendix A

action although not formal parties to it, those whose interests
are represented by a party to the action, and (those who are)
coparties to a prior action” (id., at 667-668 [citations
omitted]). In addressing privity, courts must carefully analyze
whether the party sought to be bound and the party against
whom the litigated issue was decided have a relationship that
would justify preclusion, and whether preclusion, with its
severe consequences, would be fair under the particular
circumstances. Doubts should be resolved against imposing
preclusion to ensure that the party to be bound can be
considered to have had a full and fair opportunity to litigate.

For present purposes, Bain and Gilfillan were in
privity with their former law partner, Rhodes, as he was a
co-signatory to the fee agreement and co-beneficiary to the
Trust proceeds arising from the fee agreement. Considering
the facts and realities of the matters before us, we agree with
the Appellate Division that defendants should be deemed to
be in privity with Rhodes for purposes of litigating the
validity of their fee arrangements as embodied in the trust.
Defendants’ rights to receive payments were coextensive with
Rhodes and derived from the identical arrangement entered
into when the three were law partners. As the Appellate
Division concluded, “[a]s partners in the law firm that entered
into the fee agreement with plaintiffs, [Bain and Gilfillan’s]
right to receive trust income-stands or falls with the contract.”
Indeed, defendants themselves recognized that adjudication
of Rhodes’ conduct as a partner or agent of the law firm would
have consequences for them. Defendants’ interests were
aligned with Rhodes with respect to the lawfulness of the
fee arrangements where millions of dollars were at issue.
Thus, it is appropriate to bind them by the judgment in Rhodes
under the doctrine of collateral estoppel.

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Appendix A

Defendant trustees — parties to the Rhodes action with
notice of the issues to be decided in that case —
acknowledged that they were themselves “unclear as to how
the wording of portions of the counterclaim [could be]
narrowly construed” to exclude them. Given these facts, asa
policy matter we agree with the Appellate Division that a
“party to a lawsuit cannot sit by idly while a contract, to
which he is also a party, is judicially construed without being
precluded by the result” (supra, 275 A.D.2d, at 74).

Knowing that the validity of the trust was being
vigorously contested in Rhodes, and knowing the potential
serious adverse consequences of the litigation, in this
particular case it is appropriate to deem defendants’ interests
represented by Rhodes. Defendants cannot be rewarded for
their conscious, tactical decision not to take a more active
role in that litigation by now allowing the very same issues
and facts to be relitigated. A contrary determination would
undermine a policy interest that is at the heart of collateral
estoppel — discouraging relitigation of issues and the
potential for inconsistent outcomes.

We turn next to whether the two basic requirements for
collateral estoppel have been met.

A comparison of the issue raised in the present action
with the issue raised in the Rhodes action reveals that the
identical issue was already litigated and decided. In the
Rhodes action, Supreme Court determined, after extensive
pretrial and trial proceedings, that the original fee agreement
was unlawful as it was procured in violation of the canons
of ethics. Supreme Court further concluded “that with regard

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Appendix A

to fees, the Trust Agreement merely recodified the prior fee
arrangements entered into” and that because “plaintiffs did
not have the benefit of truly independent counsel and were
never instructed to seek [independent legal] advice * * * the
trust agreements are rescinded.” This is the very issue that
defendants seek to relitigate in the present action hoping that
the second time around a court will reach a contrary
determination.

Defendants, moreover, have failed to establish the lack
of a full and fair opportunity to litigate the validity of the fee
agreement in the Rhodes action. Because defendants were in
privity with Rhodes, the critical question is whether Rhodes
had a full and fair opportunity to litigate the issue
(see, D’Arata v. New York Cent. Mut. Fire Ins. Co., supra,
76 N.Y.2d, at 666). We conclude that he did. In extensive
proceedings, Rhodes vigorously defended the validity of the
trust. Moreover, as noted by the Appellate Division,
defendants were not just nominal parties but, as trust
beneficiaries, were essential parties whose rights were
affected by the outcome of the Rhodes action. The record
reflects that defendants produced documents for the litigation,
received copies of select documents used in the trial
(including deposition transcripts), and agreed to testify as
witnesses on behalf of Rhodes before changing their minds
at the last minute.

Defendants make much of the fact that Supreme Court
denied plaintiffs’ motion to amend their counterclaims to
assert claims-against defendants. While true, this fact does
not undermine the holding of Rhodes which disposed of the
essential claim in the instant action in holding the fee

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Appendix A

agreement was unenforceable. All that denial of the motion
to amend guaranteed was that defendants would not be
subject to a monetary judgment in the Rhodes action.
Additionally, it was defendants who beseeched the trial court
to stay this action pending a determination in Rhodes, fully
intending to invoke the benefits of the judgment if the
outcome was favorable to them. Although, as the dissenting
opinion points out, abolition of the mutuality of estoppel
doctrine authorizes such use of issue preclusion, nothing in
our case law correspondingly prohibits taking this fact into
account in analyzing whether-defendants — parties in the
Rhodes action whe had notice of all the proceedings—should
be bound by a determination against one with whom they
are united in interest as to the particular issue.” Moreover, it
was defendants who vigorously opposed the expansion of
the Rhodes case to include specific claims by Buechel and
Pappas against Bain and Gilfillan. Defendants based their
opposition on the prospect of additional delay in the Rhodes
litigation.

Finally, defendants’ claim that the present matter
is subject to exclusive Federal jurisdiction is without merit.

* Further addressing the dissent, no one factor is determinative
in our conclusion that defendants here were in privity with Rhodes.
It is, rather, a confluence of factors that persuades us to affirm,
including defendants’ relationship with Rhodes vis-a-vis the fee
arrangements, their involvement in the action, their awareness of
issues that would be decided, and their acknowledged tactical
decisions regarding the Rhodes litigation. Additionally, because we
hold that collateral estoppel bars relitigation of the validity of the”
trust, defendants’ conclusory affidavits (Dissenting Opinion, at 6)
are irrelevant in this action.

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Appendix A

~

This case is not preempted by patent law because plaintiffs,
the inventors, did not plead any substantive questions of
patent law as an element of the claims asserted against
defendants. A case arises under patent law “when a well-
pleaded complaint establishes either that federal patent law
creates the cause of action or that plaintiffs right to relief
necessarily depends on resolution of a substantial question
of federal patent law, in that patent law is a necessary element
of one of the well-pleaded claims” (Kroll v. Finnerty, 242
F3d 1359, 1363 [2d Cir 2001] ). Here, we agree with the
determination of Supreme Court that this case does not sound
in patent law because the “interpretation of the patent laws
on the issues of priority and infringement are hardly at issue.”
Further, Federal patent statutes do not preempt State law in
this case (see, 37 CFR § 10 .1 [stating that nothing in the
[code] “shall be deemed to be construed to preempt the
authority of each State to regulate the practice of law, except
to the extent necessary for the Patent and Trademark
Office to accomplish its Federal objectives”] ). Nor do lower
court decisions invalidate a patent attorney’s right to receive
an interest in a client’s patent as full or partial payment
(see, 37 CFR § 10.64 [3] ).

Rather, this case addresses the necessary disclosures
attorneys must make and the ethical obligations they must
maintain in the course of their interaction with clients.
Although Federal patent law recognizes that attorneys may
receive an interest in patents in lieu of traditional fee
arrangements, the need for disclosure mandated by the Code
of Professional Responsibility governing the practice of law
in this State is not obviated (see, 37 CFR § 10.1; see also,
Kroll v. Finnerty, supra, 242 F3d, at 1364-1365).

Vr

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Appendix A

The basic problem with the dissent is that it does not
acknowledge that the Rhodes judgment rescinded Rhodes’
interest in the trusts because it found that the agreements
from which the interest arose were invalid. Supreme Court
stated: “[It is] Ordered, Adjudged and Decreed that since all
of the agreements which purport to provide compensation
for legal services, by the payment of money or by providing
an interest in any trust * * * were entered into in violation of
ethical duties owed by attorneys to their clients * * * the
relief sought in the Third Counterclaim in the Verified
amended Answer to the Third Amended Complaint * * * is
granted, thereby terminating and rescinding, ab initio, any
interests Rhodes holds, or may have held, in Trusts I and II.”
Plaintiffs here raise a question that has already been
adjudicated, specifically, whether the fee agreement is invalid
as resulting from a breach of duty by attorneys to their clients.

The dissent also misconstrues the test for privity that
the Court employs. We do not adopt the so called “Virtual
Representation Doctrine.” That doctrine states that a nonparty
may be bound by the results of a trial where the nonparty has
sufficient ties to a litigant.

“Virtual representation demands the existence of
an express or implied legal relationship in which
parties to the first suit are accountable to non-
parties who file a subsequent suit raising identical -
issues. In reviewing cases decided under the
doctrine, we have described the types of
relationships contemplated: ‘estate beneficiaries
bound by administrators, presidents and sole
stockholders by their companies, parent

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Appendix A

corporations by their subsidiaries, and a trust
beneficiary by the trustee’. Southwest Airlines Co.
v. Texas Intern. Airlines, 546 F.2d 84, 97
(5 Cir. 1977)”

(Pollard v. Cockrell, 578 F.2d 1002, 1008-1009 [1978] ).

Moreover, Green v. Santa Fe Indus., Inc. (70 N.Y.2d 244
[1987] ) is clearly distinguishable. There this Court held that
an action by former minority stockholders against several
cornorations for breach of fiduciary duty was not barred by
collateral estoppel. In Green, the only relationship between
the party to be bound, and against whom the issue was
decided, “was that they owned separate blocks of stock in
the same company.” Plaintiffs were not litigants in the prior
Feaucral action and were determined by this Court not to be
in privity with plaintiffs in that action. Here, by contrast, the
relationship between defendants and Rhodes — former
partners and co-trustees entitled to trust funds based on the
identical fee agreement — coupled with defendants’ litigation
posture, compel a different result.

In the end, we cannot agree with our dissenting colleague
that defendants’ strategy was “understandable and legitimate”
(Dissenting Opinion, at 12). Rather, we agree with the trial
court and the unanimous Appellate Division that defendants,
as parties to the action, were well aware that their own fee
agreements were being challenged and construed, and they
had an obligation to take an active role in that litigation —
which went on for nearly a decade — or accept the
consequences. Indeed, the record shows that defendants
themselves knew of the potential costs of their gamble.

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Appendix A

Our holding makes plain that the law will not sanction such
tactical maneuvering at the price of efficiency and consistent
judgments where parties have not shown that they lacked a
full and fair opportunity to be heard.

Accordingly, the order of the Appellate Division should
be affirmed, with costs, and the certified auestion answered
in the affirmative.

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Appendix A

LEVINE, J. (dissenting):

I respectfully dissent. In this case, the majority upholds
the application of collateral estoppel to bar defendants from
litigating an issue that had been resolved, not against them,
but against a third party, at a prior trial. The majority so holds
notwithstanding that the judge in that trial had ruled that it
would have been unfair to bring them in as actual parties for
the litigation of that issue in that forum. This anomalous
(to say the least) result is purportedly reached by the majority
on the ground that defendants were in privity with the losing
party in the prior action. Nevertheless, the majority’s writing
is laced with party preclusion concepts, and it quotes
approvingly from the portion of the Appellate Division’s
decision relying on that ground for preclusion. Thus, I will
address both grounds, each of which-is unsoundly applied
here.

Party Preclusion

Defendants’ former law partner, R. Gale Rhodes,
commenced the prior action in 1987 against plaintiffs as
trustees of two trusts, the corpuses of which were patents
covering prosthetic devices plaintiffs had invented. Plaintiffs
were the named trustees and each a one-thirc beneficiary in
the two trusts. Rhodes and defendants were each a one-ninth
beneficiary of the total royalty income derived from the
patents held in “Trust I.” Their beneficial interests accorded
with the terms of a 1974 retainer agreement the plaintiffs
had signed when Rhodes’ and defendants’ law firm undertook
to provide the legal services for obtaining those patents,
mostly accomplished before Rhodes withdrew from the firm

Wey

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Appendix A

in 1981. Rhodes, but not defendants, was a beneficiary of
“Trust II,” compensating him for patent-related legal services
to plaintiffs after he left the firm.

Count I of Rhodes’ complaint pertained exclusively to
plaintiffs’ alleged breaches of fiduciary duty as the trustees
of Trust I. He charged that plaintiffs unlawfully diverted and
mishandled trust income for their own personal interests.
Rhodes sought an accounting from plaintiffs and that they
be personally surcharged and removed as trustees.
As beneficiaries of Trust I, defendants would have been
directly affected by the relief Rhodes requested. Hence, they
concededly were necessary parties as to that cause of action,
and Rhodes joined them as “defendant-beneficiaries”
in response to plaintiff’s motion to dismiss based upon
nonjoinder. It is uncontroverted that they did not actively
participate in the lawsuit, however.

Some four years after Rhodes initiated suit, plaintiffs,
as individuals, interposed five counterclaims against him
alone. Their third counterclaim sought ab initio rescission
of Rhodes’ interest in Trust I, on the ground that, as their
attorney in processing the applications for the patents held
in the trust, he had a conflict of interest and breached his
fiduciary duty to them by inducing them to enier into a
retainer agreement giving him a proprietary interest in their
inventions. Four years later, plaintiffs sought for the first time
to amend their answer to extend that counterclaim to

defendants. That motion was denied.

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Appendix A

Plaintiffs then brought this separate action against
defendants, which was stayed while Rhodes’ suit proceeded
to trial. The trial concluded with a judgment in plaintiffs’
favor on their third counterclaim.

On the foregoing procedural facts, the majority agrees
with the Appellate Division that defendants are collaterally
estopped, on the basis of their presence as “essential parties”
in the prior action (i.e., party preclusion), from defending
the validity of their interests in Trust I. The majority
quotes with approval the Appellate Division’s statement
that “ ‘[a] party to a lawsuit cannot sit by idly while a contract,
to which he 1s also a party, is judicially construed’ ”
(__N.Y.2d_.,at__ [Slip Opn, at 12] [emphasis supplied]).

There are two fatal factual flaws in the foregoing
reasoning, as a close examination of the pleadings and
procedural history of the prior suit discloses. First, defendants
were not parties to the entire prior litigation. Rhodes merely
joined them as trust beneficiaries on his claim in Count I of
his complaint. That cause of action related solelv to alleged
misconduct of plaintiffs as trustees of Trust I. In defending
against Rhodes’ claim in Count I, plaintiffs neither placed in
issue the validity of Trust I nor defendants’ status as trust
beneficiaries. Then, in counterclaiming individually (not as
trustees) against Rhodes to rescind only his beneficial
interests in Trust I and Trust II, plaintiffs again refrained from
challenging the validity of Trust I or defendants’ beneficial
interests in it. Had they done so, obviously, defendants would
have been necessary parties to the counterclaim, requiring
cross-claim joinder by plaintiffs, just as joinder had been
required on Rhodes’ Count I cause of action (see, CPLR

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Appendix A

3019[b]; Siegel, Prac Commentaries, McKinney’s Cons Laws
of NY, Book 7B, CPLR 3019, at 216).

Furthermore, in the former litigation, plaintiffs
themselves must have determined that defendants’ nominal
party status on Rhodes’ Count I cause of action was
insufficient to bind them conclusively to any judgment
favorable to plaintiffs on their third counterclaim. Otherwise,
plaintiffs would not have moved to join defendants on the
counterclaim, a totally unnecessary procedure if the liti gation
on the counterclaim with Rhodes alone would have preclusive
effect on defendants.' Plaintiffs, not defendants, were the
parties who “s[at] by idly” through eight years of the
litigation, including protracted discovery, before attempting
to join defendants as parties to the counterclaim—the _
procedural relief necessary to give the adjudication on their
counterclaim in the Rhodes action preclusive effect against
defendants.

The majority’s further conclusion, that defendants, as
“parties to the Rhodes action with notice of the issues to be
decided in that case”(__N.Y.2d__,at__ [Slip Opn, at 12]),
had a full and fair opportunity to litigate the validity of Trust
J and of their rights under it, is also unsupported by the record
and contrary to our collateral estoppel jurisprudence.

1. This conclusion is confirmed by plaintiffs’ averments in
support of their motion to join defendants on the counterclaim that
“[i]f the motion is denied, two full trials will be required to resolve
the issues herein” (emphasis supplied). This is an unmistakable
concession that par’y preclusion could not be applied against
defendants on their counterclaim, solely based upon their joinder as
nominal parties on Rhodes’ Count I cause of action.

22a

Appendix A

The trial judge in the prior action denied plaintiffs’ 1995
motion to amend their answer to extend their third
counterclaim to defendants. That ruling, which was not
appealed, was based in part on findings that the request came
after “the note of issue was filed following protracted
discovery,” and that to grant the request would have either
curtailed necessary additional discovery, or further delayed
the trial of “this eight-year-old lawsuit.”

New discovery would have been vital to all parties and
especially defendants, if they had been joined on the
counterclaim, because their affidavits herein show that they
had extensive dealings with plaintiffs separate from Rhodes,
both before and after his withdrawal from the law partnership.
Of pasticular importance in this regard, defendants have
averred that, independently of Rhodes, at or near the inception
of the lawyer-client relationship, they advised plaintiffs of
the potential conflict of interest and to seek independent
counsel regarding the parties’ proprietary interests/contingent
fee arrangement. Indeed, the majority finds especially critical
that Rhodes failed to so address plaintiffs at the time of the
proposed incorporation of Biomedical Engineering
Corporation (BEC) which resulted in “converting the
one-third interest in a single invention into a one-third
equity interest in a corporation that would exploit all future
inventions” (__N.Y.2d _, at __ [Slip Opn, at 2] ). While
Rhodes conceded never giving such advice, defendant Bain
stated in a sworn affidavit in this action:

“At this point and before the corporation was
formed, I personally undertook to advise Buechel
and Pappas that they should consult an

23a
Appendix A

independent attorney with respect to their dealings
with us which now was in the nature of a business
rather than legal representation alone. I did this
on two separate occasions in 1974 in our law
offices. On one occasion I was alone with Buechel
and Pappas and on the other Gilfillan, Buechel,
Pappas and I were present. On each occasion, |
explained to them that there was an inherent
conflict of interests in the proposed relationship.
I also explained to them that they should seek
independent counsel and could seek our services
from other attorneys.”

It would seem self-evident that, had the Rhodes trial court
granted the motion to join defendants on plaintiffs’
counterclaim and then ordered that the trial proceed
expeditiously, the resultant curtailment of defendants’ right
to engage in discovery would have denied them a full and
fair opportunity to defend the validity of their beneficial
interests in Trust I. Surely, then, the total absence of
participation, including the entire loss of opportunity for
discovery, occasioned by the Rhodes v. Buechel trial court’s
refusal to grant plaintiffs’ motion to join defendants on their
counterclaim, must also be a denial of a full and fair
opportunity to litigate.

The majority also disregards entirely our precedents
holding that a party is denied a full and fair opportunity to
litigate in a prior action when “a practical inquiry into ‘the -
realities of litigation’ ” reveals that the party lacked any
serious incentive to fully and vigorously participate (Gilberg
v. Barbieri, 53 N.Y.2d 285, 292-293). Under the uncontested

24a

Appendix A

facts in the record in Rhodes v. Buechel, defendants had every
disincentive to fully litigate there the issue of the validity of
Trust I and of their beneficial interests in it.

First, they were unwilling participants in that action,
joined only as “defendant-beneficiaries” when plaintiffs
moved to dismiss Rhodes’ complaint for failure to join them
__ aS necessary parties. Second, it is entirely undisputed that,
until the falling out between plaintiffs and defendants in 1995,
leading quickly to plaintiffs’ motion to amend the answer to
force defendants’ active trial participation on the issues raised
by their counterclaim, defendants continued to furnish legal
services to plaintiffs and the trust and to regularly receive
from plaintiffs as trustees their fractional share of the
substantial trust income. Third, defendants had no direct stake
in the outcome of the Rhodes suit. Plaintiffs’ counterclaim
unequivocally sought only to invalidate Rhodes’ interests in
Trust I because of his breach of fiduciary duty.” Indeed, in
their affirmative defenses, plaintiffs relied upon provisions

2. The counterclaim never ascribes any breach of fiduciary duty
to the Rhodes/defendants partnership or lawfirm as such, only to
Rhodes individually. Thus, “Rhodes knew that the agreements were
unfair” (counterclaim par. 93); “Rhodes, while acting as their attorney,
induced Drs. Buechel and Pappas to enter into the unfair Agreements”
(id., par. 94); “In breach and violation of his duties under the
Agreements, and of his fiduciary duties in connection therewith,
Rhodes failed fully, properly, accurately and truthfully to advise
Drs. Buechel and Pappas * * *” (id. par. 97). Most crucially, the ad
damnum clause of the counterclaim states: “By reason of his aforesaid
conduct, including, without limitation, his overreaching while a
fiduciary and his breach of his representation and warranties, Rhodes’
interests in Trust I and Trust II should be terminated and rescinded”
(counterclaim par. 107 [emphasis supplied] ).

25a

Appendix A

of the trust instrument and upon defendants’ approval, in their
Capacities as trust beneficiaries, of plaintiffs’ conduct as
trustees. Certainly then, through the nearly eight years of
litigation prior to plaintiffs’ 1995 motion to amend the
counterclaim, the last thing plaintiffs would have wanted was
the conversion of their harmonious lawyer/client, trustee/
beneficiary relationships with plaintiffs into a fully
adversarial one in the Rhodes. Buechel litigation.

It follows from the foregoing that here, even more than
in Staatsburg Water Co. v. Staatsburg Fire Dist. (72 N.Y.2d
147, 154), defendants were “[a]t most * * * interested, albeit
unwilling participant[s]” in the prior action. Likewise, “the
lack of any direct stake in the outcome of the proceeding left
defendant[s] with little incentive to fully litigate the issue”
(id.). Thus, even if it could be argued here that defendants
were “granted the opportunity to participate [in the
Rhodes litigation], this did not necessarily amount to a full
and fair opportunity to contest the determination” (id. ).

Apparently addressing the total absence of defendants’
incentive to litigate plaintiffs’ counterclaim in Rhodes v.
Buechel, the majority relies upon a January 1995 letter from
defendant Bain to plaintiffs’ counsel in which he questioned
“whether or not we must become active in the Rhodes
litigation to protect our rights” (__ N.Y.2d _, at__
[Slip Opn, at 5] ). The majority implies that this letter
demonstrated that defendants anticipated the preclusive effect
of a judgment in plaintiffs’ favor on their counterclaim. There
are two short answers to that suggestion.

26a
Appendix A

First, the issue raised by defendants in that letter had no
relationship whatsoever to plaintiffs’ counterclaim. It
concerned whether, under the terms of Trust I, the legal fees
paid to outside counsel in a specific foreign litigation, the
“Link suit,” regarding one of the trust’s patents were
chargeable to the lawyers/beneficiaries rather than
“considered to be out-of-pocket expenses or disbursements
[of the trusts].” That issue directly pertained to the kind of
trustee misconduct alleged in Rhodes’ Count I of the
complaint, to which defendants were nominal parties.
Defendants, on that issue, could very well have been
apprehensive as to whether they should participate in the
Count I litigation in Rhodes v. Buechel to protect their rights
“vis-a-vis the position of the trustees regarding [outside
counsel] legal fees.” Plaintiffs’ counterclaim, on the other
hand, dealt with the entirely separate issue of Rhodes’
misconduct as their attorney.

Even if the majority’s implication that defendants’ letter
demonstrated their apprehension as to the preclusive effect
of a judgment on the counterclaim in the former action is a
fair one (which it is not), it would not be sufficient to establish
an incentive to litigate on the part of defendants in their
individual capacity in the Rhodes v. Buechel action.
As we said in Staatsburg Water Co., “it would be * * *
fundamentally unfair to give preclusive effect to a
determination where the only incentive to litigate stems from
its potential collateral effects. Such a ruling would ill serve
the litigation-limiting purposes of collateral estoppel” (id.,
at 155 [emphasis supplied] ).

car J ne Se"
be er 8 LE fe Pe

27a

Appendix A

Defendants’ disincentive to fully litigate their rights
under Trust I in the Rhodes v. Buechel case did not cease
when hostilities between them and plaintiffs arose in 1995,
followed promptly by plaintiffs’ motion to amend their
counterclaim in Rhodes. These developments occurred after
protracted discovery and the filing of the note of issue, when
the trial of the action was imminent. As previously discussed,
to enter the litigation at that point would have entailed waiver
of the opportunity to engage in full discovery, a great
handicap for defendants. ;

Moreover, there was an even more imperative strategic
reason for defendants to avoid joinder on the countei :laim
in Rhodes v. Buechel, derived from New York’s earlier
abandonment of the mutuality of estoppel doctrine. Prior to
B.R. DeWitt, Inc. v. Hall (19 N.Y2d 141), New York
ostensibly adhered to the “so-called rule of mutuality of
estoppel, which provided that unless both parties [to the
subsequent action] are bound by the prior judgment, neither
may use it” (id., at 144). In B.R. DeWitt, however, we
announced that the “ ‘doctrine of mutuality’ is a dead letter”
(id., at 147) and that, henceforth, collateral estoppel could
be invoked, either defensively or offensively by a nonparty
to the prior litigation, providing that the requirements for
collateral estoppel (identity of issues and full and fair
opportunity to litigate) were met as to the party sought to be
precluded (see, id., at 148).

There being no mutuality of estoppel, defendants had
everything to lose and nothing to gain from active
participation in the counterclaim litigation regarding the
validity of the 1974 retainer agreement and of their beneficial

28a

Appendix A

interests in Trust I. Had those issues been resolved against
plaintiffs on their counterclaim in Rhodes, defendants could
have used the judgment defensively in any subsequent suit
by plaintiffs, such as the instant one, to preclude plaintiffs
from attacking the validity of the retainer and trust
instruments. On the other hand, as nonparties to the
counterclaim litigation in Rhodes, defendants ordinarily
would not be bound by a disposition of that counterclaim
favorable to plaintiffs.’

Refraining from active participation in the trial of the
issues raised by plaintiffs’ counterclaim in the Rhodes case,
was, thus, a completely understandable and legitimate
strategy for defendants. The umbrage against defendants
taken by the majority and the Appellate Division for “sit[ting]
idly by” in implementation of that strategy is better directed
at this Court’s abandonment of the mutuality of estoppel
doctrine, not at defendants for taking advantage of that
abandonment.

3. Nonmutuality of estoppel, under which plaintiffs would be
precluded in a subsequent litigation with defendants by an
unfavorable disposition of their counterclaim in Rhodes v. Buechel,
but not vice versa, as to defendants, nonparties to this counterclaim,
explains their averments supporting a stay of the instant action, relied
upon by the majority (see, __ N.Y.2d __, at __ [Slip Opn, at 5-6,
14-15] ). By no means can they be construed as an awareness that
defendants would be bound by a resolution of the counterclaim
favorable to plaintiffs.

"Bae Speen ges

29a

Appendix A
Privity

The majority’s primary ground for imposing issue
preclusion here is on the basis of defendants’ privity with
Rhodes in the Rhodes v. Buechel case. In adopting that theory,
the majority applies a standard which is contrary to our
precedents, is of highly dubious constitutionality and will
create uncertainty of application destructive to the litigation-
limiting purposes of collateral estoppel.

Our courts, adhering to the approach of the Restatement
(Second) of Judgments (Introductory Note to Chapter 4, at
344), have identified three general categories of privity that
have been applied to collaterally estop a nonparty in a
subsequent suit involving the same issue. Privity will be
found if the nonparty (1) “ha[s] a relationship with a party to
the prior litigation such that his own rights or obligations in
the subsequent proceeding are condition[al] * * * or
derivative of, the rights of the party to the prior litigation”
(D’Arata v. New York State Central Mutual Fire Ins. Co.,
76 N.Y.2d 659, 664; see, Matter of Juan C. v. Cortines,
89 N.Y.2d 659, 667); (2) controlled or substantially
participated in control of the prior action (see, David v.
Biondo, 92 N.Y.2d 318, 323-324; Matter of Juan C., supra;
Watts v. Swiss Bank Corp., 27 N.Y.2d 270, 277-278;
Restatement [Second] of Judgments § 39); or (3) had its
interests represented by the losing party in the prior litigation
(see, Matter of Juan C. v. Cortines, supra, at 668;
Restatement [Second] of Judgments § 41). Defendants fall
into none of these categories.

30a

Appendix A

There is no tenable basis to find that defendants’ rights
in the instant action are conditional or derivative of Rhodes’
rights in the prior litigation. In this respect, this case contrasts
decisively with D’Arata v. New York State Mutual Fire
Ins. Co. (supra), a quintessential derivative or conditional
rights privity case. There, the injured victim of an assault
asserted a claim against the liability insurance carrier of the
perpetrator solely as a subrogee of the insured’s rights under
the policy. As the insured’s subrogee, of course it was “subject
to whatever rules of estoppel would apply to the insured”
(id., at 665).

At stake here, according to the relief requested in
plaintiffs’ complaint, are defendants’ beneficial interests in
Trust I. Clearly and unmistakably, plaintiffs’ Rhodes v.
Buechel counterclaim was related exclusively to Rhodes’
interests in that trust. The trust agreement itself defines the
interests of each beneficiary separately and distinctly from
the others. Moreover, that instrument required defendants,
but not Rhodes, to provide legal services with respect to
enforcement or defense of the patents held in the trust.
Defendants’ juridical relationships and rights under the trusts
were thus separate and, in some aspects, quite different from
Rhodes’ interests.

The fact that Rhodes and defendants were law partners
when the 1974 retainer agreement was entered into does not
alter the conclusion that defendants’ rights were not
conditional or derivative of those of Rhodes in the prior
litigation over plaintiffs’ counterclaim. As the majority points
out, the original retainer agreement had been superseded and
broadened twice thereafter and no longer defined the rights

eee

3la

Appendix A

of any of the parties. Furthermore, even if the retainer
agreement had been in effect when plaintiffs’ counterclaim
was interposed, plaintiffs did not choose to assert any claim
against the partnership as such or sue Rhodes in any
representative capacity as a partner, and did not join or serve
defendants, Rhodes’ partners, as parties. Under such
circumstances, the judgment against Rhodes on the
counterclaim would not have had any preclusive effect
regarding the personal liability of defendants (see, CPLR
1025; CPLR 1501; Alexander, Practice Commentaries,
McKinney’s Cons Laws of NY, Book 7B, CPLR C1025:1, at
257; id., CPLR 1501, at 592). The fact that defendants, as
law firm members, might be bound by Rhodes’ conduct
during the existence of the partnership would have potential
relevance to the merits of this action but, as the foregoing
authorities establish, not to any preclusive effect of. the
judgment against Rhodes on the counterclaim in which
defendants were not joined as party litigants.

Nor can privity be established here because defendants
controlled or substantially participated in control of Rhodes’
defense to plaintiffs’ counterclaim. There is not a scintilla of
evidence that defendants and Rhodes shared key-titigation
decisions in defending against the counterclaim, such as
choice of counsel, legal strategy, presentation of evidence or
the order of proof. At most, they sporadically cooperated with
Rhodes following plaintiffs’ failed attempt to join them on
the counterclaim. Even a nonparty’s energetic cooperation
or assistance, such as testifying as a witness in the prior suit,
is insufficient to establish the requisite control (see, David
v. Biondo, supra, 92 N.Y.24d, at 324; see also, Bigelow v. Old
Dominion Copper Mining and Smelting Co., 225 U.S. 111,

32a

Appendix A

126, abrogated on other grounds by Parklane Hosiery Co. v.
Shore, 439 U.S. 322, 326-333 [recognizing the abandonment
of the doctrine of mutuality of estoppel] ). “To have control
of litigation requires that a person have effective choice as
to the legal theories and proofs to be advanced [on] behalf
of the party to the action. He must also have control over the
opportunity to obtain review” (Restatement [Second] of
Judgments § 39, comment c).

Privity likewise cannot be based on the theory that
Rhodes represented defendants’ interests on the counterclaim
in Rhodes v. Buechel. Rhodes had no fiduciary or other legal
obligation to act on defendants’ behalf in defending against
plaintiffs’ counterclaim, which implicated only his own
interests (see, Restatement [Second] of Judgments § 41[1] ).
Nor did Rhodes undertake or assume any de facto
responsibility to represent defendants’ interests in defending
against the counterclaim (cf, Matter of Slocum [on behalf of
Nathan A.] v. Joseph B., 183 A.D.2d 102, 104).

The record is devoid of any evidence that Rhodes would
have been motivated to protect defendants’ interests, or that
he did so in the prior litigation. The law partnership broke
up acrimoniously in 1981. Unquestionably, from Rhodes’
initiation of suit in 1987 until 1995, while defendants
continued to provide legal services to plaintiffs both
I mg as trustees of Trust I, the former partners’
interests were antithetical. In fact, after plaintiffs’
counterclaims were interposed, Rhodes threatened defendants
that he would cross-claim against them. Rhodes would not
have had any incentive to proffer evidence of separate lawyer-
client relations between plaintiffs and defendants, proof of

TT Ee |

33a

Appendix A

which might have mitigated or negated the taint of any alleged
breach of professional fiduciary duty under the 1974 retainer
agreement (see, Bain Affidavit, supra).

In actuality, the majority does not rely upon any of the
traditional privity grounds. The majority’s theory of privity
is explained instead as follows: “defendants should be
deemed to be in privity with Rhodes for purposes of litigating
validity of their fee arrangement as embodied in the trust
[because their] * * * rights to receive payments were
coextensive with Rhodes and derived from the identical
arrangement entered into when the three were law partners,”
and “[d]efendants’ interests were aligned with Rhodes with
respect to the lawfulness of the fee arrangements” (__ NY2
__,at__ [Slip Opn, at 11-12]).‘

Although the majority agrees that privity preclusion is
dependent upon “whether the party sought to be bound and
the party against whom the litigated issue was decided have

4. The majority finds a “basic problem” with the dissent in that
it does not acknowledge that “the Rhodes judgment rescinded Rhodes’
interest in the trusts because it found that the [fee] agreements from
which the interest arose were invalid” (__ N.Y.2d __, at __ [Slip
Opn, at 17] ). That finding, however, has no significance for
preclusion purposes absent an independent establishment of privity;
it does not itself demonstrate that privity exists. Thus, the majority’s
point begs the question.

Also irrelevant is the majority’s additional reliance on a portion
of the Rhodes court’s decision which “ordered that ‘the trust
agreements are rescinded’” (__ N.Y.2d_, at__ [Slip Opn, at 6] ).
Defendants protested that ruling because plaintiffs “did not seek
recission of the trusts themselves” (letter to Justice Lowe, 4/20/98),
and it was removed from the final judgment.

34a

Appendix A

a relationship” (id., at__ [Slip Opn, at 11] ), they have not
identified any formal or even informal relationship which
existed between Rhodes and defendants when plaintiffs’
counterclaim was litigated. For the majority, it is entirely
sufficient to establish privity that the rights of the losing
litigant and the nonparty were coextensive, derived from the
same source, and “aligned,” i.e., substantially identical.
Notice to nonparties that their interests are to be adjudicated
is not deemed necessary. Nor is the losing party required to
have assumed a duty of representation.

The majority’s rationale, thus, amounts to nothing more
than an application of the broad-form “Virtual Representation
Doctrine” which had a vogue in some Federal Circuits for a
period of time (see, Richards, Richards v. Jefferson County:
The Supreme Court Stems the Crimson Tide of Res Judicata,
38 Santa Clara L Rev 691, 706-710 [1998]; Johnson,
Due or Voodoo Process: Virtual Representation as a
Justification for the Preclusion of a Nonparty’s Claim,
68 Tul L Rev 1303, 1318-1320 [1994] ). Under the expansive
version of that doctrine, “a person may be bound by a
judgment even though not a party if one of the parties to the
suit is so closely aligned with his interests as to be his virtual
representa‘ive” (Aerojet Gen. Corp. v. Askew, 511 F.2d 710,
719, cert denied sub nom Metropolitan Dade County vy.
Aerojet Gen. Corp., 423 U.S. 908 [emphasis added] ). A
leading text on Federal procedure states that “[t]he broadest
form of [the virtual representation] theory would preclude
relitigation of any issue that had once been adequately tried
by a person sharing a substantial identity of interests with a
nonparty” (18 Wright & Miller, Fed Practice and Procedure
§ 4457, at 494 [emphasis supplied] ).

35a
Appendix A

This Court should not adopt any such version of virtual
representation, permitting preclusion merely because an issue
“had once been adequately tried by a person sharing a
substantial identity of interests with a nonparty” (id.). First,
it plainly is inconsistent with our own precedents. In Green
v, Sante Fe Indus. (70 N.Y.2d 244), the Court considered the
preclusive effect of an action commenced in Federal court.
The defendant parent corporation had utilized Delaware’s
“short form, freeze-out merger” procedure (id., at 249) to
acquire all remaining outstanding shares of its subsidiary.
A member of the five-percent minority class of shareholders
in the subsidiary brought the action in Federal court alleging,
among other things, a breach of fiduciary duty to minority
shareholders in offering them an unfairly low price for their
shares. The Federal suit was ultimately dismissed. The action
in Green was commenced in our State courts by other
shareholders of the same minority class seeking to attack the
same transaction. It was undisputed in Green that the minority
shareholder plaintiffs in the Federal suit had “made claims
identical in legal theory to those plaintiffs assert here” (id.,
at 252 [emphasis supplied] ). Additionally, the same counsel
represented the complaining minority shareholders in each
action. In Green, our Court rejected the application of privity
to preclude the shareholders who were not parties to the
Federal suit and instead decided the case on the merits.

Green vy. Sante Fe Industries is virtually indistinguishable
from the instant case with respect to the criteria relied upon
by the majority to find privity here. In Green, the rights of
the minority stockholders who sued in Federal court and those
who sued in New York Supreme Court were truly
coextensive. Plaintiffs in both suits were members of the

36a

Appendix A

same class of minority shareholders; their shares of corporate
stock were identical choses in action; their theory of recovery
was identical, as was their legal representation. The causes
of action asserted in the Federal and State courts arose out
of the identical transaction — the use of the Delaware short
form freeze-out merger procedure to eliminate their minority
interests. We soundly rejected privity in Green. The Federal
plaintiffs had not purported in any way to represent the State
plaintiffs, nor had the Federal court in any way undertaken
adjudication of the latter’s interests. The rejection of privity
in Green should be a fortiori controlling here.

The broad virtual representation standard for privity
applied by the majority is based solely on coextensiveness
(i.e., substantial identity) and alignment of the interests of
the parties in the successive litigations, and offends
traditional notions of due process guaranteeing that parties
must have their day in court before their rights are adjudicated
(see, Johnson, 68 Tul L Rev, supra, at 1323-1325).

That is why the Federal courts subsequently retreated
from applying a broad virtual representation doctrine, holding
that it would “transgress the bounds of due process” to base
privity solely on the identity of party and nonparty interests,
legal positions or the need to prove the same set of facts
(Hardy v. Johns-Manville Sales Corp., 681 F.2d 334, 340
[Sth Cir] ). Those courts that previously applied only the
foregoing virtual representation criteria for privity purposes
now further require “the existence of an express or implied
legal relationship in which parties to the first suit are
accountable to nonparties who file a subsequent suit raising
identical issues” (Pollard v. Cockrell, 578 F.2d 1002, 1008

37a

Appendix A

[5th Cir] [emphasis supplied]; see, Hardy v. Johns-Manville
Sales Corp., supra, at 340).

Richards v. Jefferson County (517 U.S. 793, 796) also
represents a rejection of privity-preclusion as violative of
due process when it is based solely on the fact that the party’s
and nonparty’s “respective interests [in the successive
litigations] were ‘essentially identical.’ ” The factors which
the Court weighed in Richards were, first, that the parties to
the prior suit never gave the petitioners (the plaintiffs in the
suit before the Supreme Court) notice that the earlier case
“would conclusively resolve their legal rights” (id., at 799).
Second, and even more crucial, the plaintiffs in the first suit
“did not sue on behalf of a class; their pleadings did not
purport to assert any claim against or on behalf of any
nonparties; and the judgment they received did not purport
to bind any * * * nonparties” (id., at 801). Thus, the Supreme
Court concluded, the nonparties to the prior litigation were
not represented adequately there to meet the requirements of
due process, despite the identity of their interests and those
of the plaintiffs in the first action.

Defendants here fall squarely under the factors relied
upon in Richards to find a due process violation. Never were
they put on notice that their interests in Trust I would be
adjudicated in the resolution of plaintiffs’ counterclaim in
Rhodes v. Buechel. Indeed, the denial of plaintiffs’ motion
to add them as parties in the counterclaim litigation sent the
diametrically opposite message.* Moreover, nowhere in the

5. The concerns expressed by defendants to plaintiffs’ counsel
in response to Rhodes’ threats to cross-claim for contribution — i.e.,
(Cont’d)

38a

Appendix A

record is there any indication that, in defending against the
counterclaim in that action, Rhodes purported to represent
defendants’ interests.

Thus, as in Richards, there was no full and fair
consideration of defendants’ individual interests in the
Rhodes v. Buechel case. That is because, especially after the
trial court rejected plaintiffs’ motion to join defendants on
their counterclaim, “there is no reason to suppose that [the
Rhodes court] took care to protect the interests of
[defendants], * * * [nJor is there any reason to suppose that
* * * [Rhodes] understood [his] suit to be on behalf of
[defendants]. Thus, to contend that * * * [Rhodes] somehow
represented [defendants], let alone in a constitutionally
adequate manner, would be ‘to attribute to [him] a power
that it cannot be said that [he] had assumed to exercise’ ”
(id., at 802).

Finally, in addition to its unconstitutional application
here, the broad “coextensive rights” standard announced in
this case to find privity will inevitably inject elements of
insecurity and uncertainty for nonparties who may be
substantially interested in the issues in litigation to which
the parties chose not to join them. Res judicata and collateral
estoppel, because of their harsh results, however, are areas

(Cont'd)

that defendants were unclear whether the counterclaims could be
interpreted as asserting claims against the former partners’ lawfirm
— cannot be construed as an acknowledgment of the preclusive effect
of the counterclaim litigation against defendants in their individual
capacity. No cross claim was ever interposed against defendants either
as Rhodes’ partners or individually.

39a

Appendix A

crying out for foreseeability and predictability. To avoid the
risk of preclusion, interested nonparties will be forced to
intervene in litigation to protect their rights. The imperative
to intervene flowing from the majority’s privity standard
stands on its head the traditional rule “put[ting] the burden
of joinder on the person who wishes to obtain the benefits of
the rules of preclusion, requiring him to bring in third parties
involved in the transaction. Hence, as between a silent
bystander and the party to prior litigation, the latter properly
bears the risk that the original litigation will not terminate
the controversy” (Restatement [Second] of Judgments § 62,
comment a; see also, Chase Manhattan National Bank v.
Norwalk, 291 U.S. 431, 441 [Brandeis, J.]; Johnson, 68 Tul
L Rev, supra, at 1314-1315).

In presumptively forcing formal early intervention by
an interested nonparty in pending litigation, the majority’s
privity rule “[will] ill-serve litigation-limiting purposes of
collateral estoppel; it would simply encourage over litigation
at an earlier stage” (Staatsburg Water Co. v. Staatsburg Fire
Dist., supra, 72 N.Y.2d, at 155). Therefore, I would vote to
reverse and remit for trial on all issues.

KEEKKEKHKKKKKKKKEKKKK KKK KK KK KK KOK OK KOK

Order affirmed, with costs, and certified question answered
in the affirmative. Opinion by Judge Smith. Chief Judge Kaye
and Judges Ciparick, Wesley, Rosenblatt and Graffeo concur.
Judge Levine dissents and votes to reverse in an opinion.

Decided December 20, 2001

a

40a
APPENDIX B — DECISION OF THE SUPREME COURT,
APPELLATE DIVISION, STATE OF NEW YORK
DATED SEPTEMBER 28, 2000

SUPREME COURT, APPELLATE DIVISION
First Department, June 2000

Betty Weinberg Ellerin J.P.
Israel Rubin
. David B. Saxe
John T. Buckley, JJ.
1567-1568
Frederick F. Buechel, M.D., et al.,
Plaintiffs-Respondents,
-against-
John N. Bain, et al.,
Defendants-Appellants,
-and-

Carella, Byrne, Bain, Gilfillan,
Cecchi, Stewart & Olstein,

Defendant,

4la

Appendix B
-and-
R. Gale Rhodes, Jr., et al.,
Defendants-Beneficiaries.

Defendants John N. Bain and JohnG. Gilfillan, III, appeal
from an order of the Supreme Court, New York
County (Richard Lowe, III, J .), entered January
19, 2000, which denied their motion to dismiss
the amended complaint, and order, same court
and Justice, entered February 4, 2000, which
granted plaintiffs’ motion for partial summary
judgment and denied defendants’ cross motion.

RUBIN, J.

This matter involves the propriety of an agreement to
compensate defendants for legal services rendered to
plaintiffs Frederick F. Buechel, M.D. and Michael J. Pappas,
Ph.D. in connection with the patenting of certain prosthetic
devices plaintiffs had developed. At issue is the preclusive
effect to be given to a decision rendered in a lawsuit brought
by R. Gale Rhodes, Jr., a former law partner of defendants
John N. Bain and John G Gilfillan, III, in which the same
Court (Richard Lowe, III, J .) ruled that the fee agreement
was improper and limited the amount due Rhodes to the value
of the services he had rendered to the two inventors (Rhodes
v. Buechel, Sup Ct, NY County, April 30, 1998, index
No. 8055/87). This Court affirmed the judgment, finding that
“neither the initial arrangement nor its subsequent
incarnations were entered into upon adequate disclosure to
defendants [plaintiffs herein] of other possible fee
arrangements and potential conflicts of interest, or with the

5 42a

Appendix B

aid of independent counsel retained for the purpose of
safeguarding [their] interests. Rescission of the parties’
arrangements ab initio, with payment to [Rhodes] in quantum
meruit for his services, is an equitable result (see, Howard v
Murray, 43 NY2d 417, 421; Matter of Cooperman, 83 NY2d
465, 473; Schlanger v. Flaton, 218 AD2d 597, lv. denied 87
NY2d 812)” (Rhodes v. Buechel, 258 A.D.2d 274, 275). No
further appeal was taken from this order.

In the present action, in which plaintiffs seek to terminate
any interest defendants might have in a certain trust,
defendant attorneys raise contentions that were not advanced
by their former partner. First, they note that the fee
arrangement found io be void in Rhodes v Buechel (supra)
is specifically permitted by a Federal regulation (37 CFR
§ 10.64). Second, they argue that the Federal courts have
exclusive jurisdiction over this issue, which they construe
as a matter of patent law, and that the Rhodes decision is
therefore void for lack of subject matter jurisdiction.

The essential facts are not in dispute. Plaintiff Buechel,
a resident in orthopedic surgery, and plaintiff Pappas, a
mechanical engineer, developed a prosthetic shoulder device
(the floating center prosthetic joint) which they sought to
protect with a patent. They retained the firm of Bain, Gilfillan
& Rhodes, PC “to undertake the preparation and prosecution
of a patent application covering the invention on a
contingency basis.” The subject fee agreement entered into
by the two inventors on September 12, 1974 provides that
the law firm will contribute capital to finance research and
marketing of the device and that “any or all monies, profits
or other income or benefits received, whether by way of

43a

Appendix B

royalties or otherwise, shall be shared proportionately
between the parties hereto on a one-third (1/3) basis”.

The gravamen of the dispute is the extent of the
disclosure made by the members of the law firm concerning
the potential conflict of interest arising from the attorneys’
stake in the devices they had undertaken to protect
against infringement. Affidavits submitted, respectively, by
defendants Bain and Gilfillan state that, on the suggestion
of their former partner, R. Gale Rhodes, the parties
subsequently agreed to form a corporation, both for tax
considerations and to insulate the entrepreneurs from
personal liability. With respect to the propriety of the fee
agreement, it is averred that, preliminary to the formation of
the corporation, defendant Bain specifically advised plaintiffs
of the potential conflict of interest inherent in the
arrangement. It is further alleged that the plaintiffs were
advised to obtain independent counsel, but elected not to do
so. Plaintiffs Buechel and Pappas, however, take the position
that at no time were they were advised either of the potential
conflict of interest or of their right to discharge the firm as
their counsel at any time. >

Biomedical Engineering Corporation was incorporated
in New Jersey on July 16, 1975. The corporation took title
to the prosthetic shoulder device and to other prosthetic
devices developed by plaintiffs in the interim. In accordance
with the fee agreement, Buechel and Pappas each held
one-third of the shares of the corporation, while the remaining
one-third interest was divided equally among the three
attorneys. A dispute subsequently arose among the law
partners, culminating in the departure of Rhodes in December

44a

Appendix B

1981. Bain and Gilfillan continued to perform legal work
for plaintiffs, and their responsibilities were expanded to
include litigation and patent maintenance. Gilfillan alleges,
however, that following his departure from the firm, Rhodes
covertly formed a corporation in Florida with plaintiffs, also
known as Biomedical Engineering Corporation, to hold any
future patents Buechel and Pappas might obtain.

In late 1982 or early 1983, an attorney named John Power
was retained by plaintiffs to assess the feasibility of
dissolving the original Biomedical Engineering Corporation.
The decision was made to dissolve the New Jersey
corporation and transfer its assets to a newly formed entity,
the Biomedical Engineering Trust (Trust I), with Pappas and
Buechel as trustees. The shareholders of the dissolved
corporation, including the three attorneys, received
equivalent equity interests in the trust, which thereupon
received royalty payments from the sale of some of the
prosthetic devices. At the trial in Rhodes v Buechel (supra),
John Power testified to conversations with Buechel and
Pappas, in which he “told them what they already knew * * *
that they had to rely upon the advice of the attorney partner
of theirs who possibly might have a financial disincentive to
give them advice that perhaps they should be receiving.”

In 1984, a second trust was formed, again with Pappas
and Buechel as trustees, designated the Biomedical
Engineering Trust II (Trust II), which held the marketing
rights to a self-centering hip device. While neither defendant
held any interest in Trust II, their former partner, R. Gale
Rhodes, undertook to provide legal patent protection services
to this entity. In 1987, a dispute arose over trust distributions,

45a
Appendix B

and Rhodes commenced his action against Buechel and
Pappas to recover millions of dollars which the trustees were
alleged to have improperly paid to themselves (Rhodes v
Buechel, supra). The ensuing judgment duly recites that his
former partners, Bain and Gilfillan, were joined as defendants
in their capacity as trust beneficiaries and that they were
represented by counsel in the Rhodes action.

Four years after Rhodes commenced the action, Buechel
and Pappas asserted counterclaims for breach of fiduciary
duty and malpractice, asserting that Rhodes had acted in
violation of his ethical responsibilities as a lawyer. They did
not, at that time, assert any claims against Bain and Gilfillan,
who apparently continued to provide legal services to
Trust I. It was not until 1995 that Buechel and Pappas sought
to expand their counterclaims to seek relief against Bain and
Gilfillan. Supreme Court denied their motion to amend the
counterclaims, noting that the attorneys had been
counterclaim defendants for seven years and that Buechel
and Pappas had brought their motion to amend some five
months after the filing of a note of issue, following protracted
discovery and without the proffer of any excuse for the
delay.

Pappas and Buechel commenced the instant action in
March 1995, naming Bain and Gilfillan as defendants.
The complaint contains five causes of action, alleging breach
of fiduciary and ethical obligations and legal malpractice.
This action, which seeks termination of trust payments to
Bain and Gilfillan and turnover of Trust files maintained by
the attorneys, was stayed by Supreme Court pending
resolution of the Rhodes matter.

46a

<——————_ Appendix B

The Rhodes litigation produced over 5,000 pages of trial
transcript and resulted in a 42-page decision, invalidating
the fee arrangement between plaintiffs and their original
counsel, the firm of Bain, Gilfillan & Rhodes. As Supreme
Court’s opinion states at the inception, the complaint was
brought against Buechel and Pappas, both individually
and as trustees of the two Biomedical Engineering Trusts.
It charged them with making improper payments to
themselves from the trusts and ought to remove them as
trustees and compel payment to Rhodes of his share of trust
income alleged to have been withheld since 1987. However,
Supreme Court found that the fee agreement from which
Rhodes derived his interest in the trusts was unethical. The
judgment recites the court’s finding that the complaint’s
allegation of a breach of fiduciary duty by the trustees was
without merit and, in any event, rendered moot by the
rescission, ab initio, of any interest Rhodes might have
acquired in either Trust I or Trust II under the fee agreement.
The court found that plaintiffs were never advised to seek
independent counsel before entering into a business
relationship with their attorneys and that Rhodes had
“exploited his clients through affirmatively pursuing a
business relationship with them absent full disclosure”
(DR 5-104[A]).

On this appeal, the parties dispute whether or not Bain
and Gilfillan, who portray themselves as merely nominal
parties in the unsuccessful suit by their former partner, were
afforded a full and fair opportunity to litigate the question of
the propriety of the fee arrangement in the Rhodes action.
Specifically, the attorneys regard as dispositive the denial of
the motion by Buechel and ‘Pappas (plaintiffs herein) to

47a

Appendix B

amend their counterclaims of breach of fiduciary duty and
malpractice in Rhodes to include Bain and Gilfillan.
Defendant attorneys note that the fee arrangement in question
is “expressly permitted under federal law governing the
conduct of federal patent practitioners” (citing 37 CFR
§ 10.64 [emphasis in original] ), which “permits patent
attorneys to take an interest in a patent in lieu of a fee.”
Furthermore, they argue that the determination in Rhodes
that “the parties’ fee agreement was void ab initio because it
violated New York ethics rules” is without effect on the
ground that “federal courts have exclusive jurisdiction over
all claims arising under federal patent law.”

Plaintiffs Pappas and Buechel claim that the jurisdiction
of the Federal courts is not exclusive; that Bain and Gilfillan’s
respective interests in Trust I did not survive their discharge
as attorneys in January 1995; that Bain and Gilfillan failed
to disclose fully the options available to the inventors in
retaining them as attorneys; that Bain’s and Gilfillan’s
violation of the Canons of Ethics warranted return of the
legal fees paid to them less the value of services actually
rendered; and that Bain and Gilfillan had a full and fair
opportunity to litigate all issues in the course of the Rhodes
litigation.

As the parties frame it, the issue presented on this appeal
is whether defendant attorneys have had their day in court so
as to invoke the principle of collateral estoppel on the
question of the validity of the fee agreement and,
consequently, the validity of their respective interests in
Trust I. This formulation suggests that the judgment rendered
in Rhodes determines the extent of the inventors’ obligation

48a
Appendix B

to defendants’ former partner under the fee agreement. It is
the attorneys’ position that, because their involvement in the
Rhodes action was merely that of nominal defendants, they
did not contest the validity of the fee agreement or otherwise
actively participate in the litigation. Therefore, they argue,
they should now be granted the opportunity to be heard with
respect to the contract dispute and to advance their theory
that Federal law is controlling.

The parties misapprehend the nature of the adjudication
rendered in the Rhodes matter, the role of defendants in that
litigation and, therefore, the application of the doctrines of
res judicata and collateral estoppel. The Court of Appeals
explained the distinction in Ryan v New York Tel. Co.,
(62 NY2d 494, 500):

This rule of res judicata is founded upon the belief
that “ ‘it is for the interest of the community that
a limit should be prescribed to litigation, and that
the same cause of action ought not to be brought
twice to a final determination. Justice requires that
every cause be once fairly and impartially tried;
but the public tranquillity demands that, having
been unce so tried, all litigation of that question,
and between those parties, should be closed
forever.’ ” (Fish v Vanderlip, 218 NY 29, 36-37,
quoting Greenleaf’s Evidence, §§ 522, 523;
see also, Schuylkill Fuel Corp. v Nieberg Realty
Corp., 250 NY 304; Hendrick v Biggar,
209 NY 440.)

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49a

Appendix B

The doctrine of collateral estoppel, a narrower
species of res judicata, precludes a party from
relitigating in a subsequent action or proceeding
an issue clearly raised in a prior action or
proceeding and decided against that party or those
in privity, whether or not the tribunals or causes
of action are the same. (Ripley v Storer, 309 NY
506, 517; see, also, Restatement, Judgments 2d,
§ 27; 46 Am Jur 2d, Judgments, § 415; 9 Carmody-
Wait 2d, NY Prac., Judgments, § 63:205.)

What the parties overlook is that the decision in Rhodes
is not simply a determination of the extent of the contractual
obligation undertaken by Buechel and Pappas under the fee
agreement. Rather it is an adjudication of their obligation
as trustees to make payment under the terms of Trust I, of
which defendants herein and Rhodes are all beneficiaries,
and Trust II, which concerns only Rhodes (see, Levine v
Gross, 177 AD2d 290, 291- 292). The issue presented for
decision in Rhodes was whether or not Buechel and Pappas,
as trustees, were required to make payments to an attorney
whose rights as a trust beneficiary derived from the fee
agreement between Buechel and Pappas, individually, and
the law firm of Bain, Gilfillan & Rhodes. This action similarly
addresses the status of attorney-beneficiaries whose rights
to receive proceeds from the trust are predicated on the
identical fee agreement. Therefore, Bain and Gilfillan, who
were parties to the Rhodes case, are barred by the doctrine of
res judicata from relitigating the question of their entitlement
to trust proceeds. That defendant attorneys did not participate
actively in the Rhodes action is immaterial, as is their failure

50a

Appendix B

to raise the preemption issue or their own measures to comply
with the Canons of Ethics. As this Court observed in Boorman
v Deutsch, 152 AD2d 48, 53, appeal dismissed 76 NY 2d 889,
“res judicata embraces not only those matters
which are actually litigated before a court but also those
relevant issues which could have been litigated (Schuylkill
Fuel Corp. v Nieberg Realty Corp., 250 NY 304), including
jurisdiction (Angel v Bullington, 330 US 183; Johnson v
Muelberger, 340 US 581; Reich v. Cochran, 151 NY 122.”

The contention that Bain and Gilfillan were merely
nominal parties to the Rhodes matter is without
merit. The parties’ freedom to chart their own procedural
course before the courts is not without limits (Stevenson v
News Syndicate Co., 302 NY 81, 87; Matter of Malloy, 278
NY 429). CPLR 1001(a) provides, “Persons who ought to
be parties if complete relief is to be accorded between the
persons who are parties to the action or who might be
inequitably affected by a judgment in the action shall be made
plaintiffs or defendants.” It further provides: “When a person
who should join as a plaintiff refuses to do so, he may be
made a defendant.”

The beneficiary of a trust has no legal estate in trust
property but has only the equitable power of enforcement
(EPTL § 7-2.1 [a]; Duvall v English Evangelical Lutheran
Church, 53 NY 500 [1873] ). Where the extent of the duty of
the trustees to disburse trust income is raised by one of its
beneficiaries, the resulting judgment will necessarily affect
the concomitant right of other beneficiaries, similarly
situated, to receive such payments. They are therefore not
merely incidental but essential parties to the action, subject

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Appendix B

to joinder under CPLR 1001(a). The purpose of the
compulsory joinder rule is both to prevent duplicative
litigation and to protect the rights of persons who may be
adversely affected by the outcome (see, Manufacturers
Hanover Trust Co. v Crossland Sav., 177 AD2d 78, 79, 82;
Parker v 151 East 83rd Street Tenants Corp., 171 AD2d 599;
3 Weinstein-Korn-Miller, N.Y. Civ. Prac. § 1001 .01). Having
been joined as parties to the Rhodes action for the purpose
of permitting them to protect their interests as beneficiaries
of Trust I, Bain and Gilfillan cannot complain that they failed
to avail themselves of the opportunity presented.
They certainly may not require the courts to entertain an issue
that could have been decided in the Rhodes action had it
been timely raised. Apart from avoiding the imposition on
limited judicial resources (see, Smith v Daca Taxi, 222 AD2d
209, 211 [vacatur]; Rabov v McCrory Corp., 210 AD2d
145, 147 [consolidation]), the bar against duplicative
litigation obviates the potential for “conflicting rulings
on identical issues” (Bank of Tokyo-Mitsubishi, Ltd. v
Kvaerner a.s., 243 AD2d 1, 9). The judgment rendered in
Rhodes decides not only the propriety of the conduct of the
trustees, but also the validity of the agreement under which
the attorney-beneficiaries, as partners in a law firm, derived
their interest in the trusts. No appeal was taken from this
Court’s affirmance of the judgment in that case, and the
outcome is conclusive of the issues sought to be raised by
defendants in this matter. 7

Application of the doctrine of collateral estoppel,
as urged by defendants, does not alter the disposition.
In applying the doctrine, “the fundamental inquiry is whether
relitigation should be permitted in a particular case in light

52a
Appendix B

of what are often competing policy considerations, including
fairness to the parties, conservation of the resources of the
court and the litigants, and the societal interests in consistent
and accurate results” (Staatsburg Water Co. v Staatsburg
Fire Dist., 72 NY2d 147, 153). To be estopped, the party to
the present litigation must either have been a party to the
prior proceeding or in privity with a party to that proceeding
(D’Arata v New York Cent. Mut. Fire Ins. Co., 76 NY2d
659, 664). Under the concept of privity, collateral estoppel
has been said to extend to “those whose interests are
represented by a party to the action” (Watts v Swiss Bank
Corp., 27 NY2d 270, 277, citing Restatement of Judgments
§§ 81-90).

As this Court recently noted in A// Terrain Props. v Hoy,
265 AD2d 87, 93:

Privity has been described as “an amorphous term
not susceptible to ease of application” (Gramatan
Home Investors Corp. v. Lopez, 46 NY2d
481, 486). The doctrine extends to “persons who
were not parties to the previous action but who
were connected with it to such an extent that they
are treated as if they were parties” (id.). “What is
controlling is the identity of the issue which has
necessarily been decided in the prior action or
proceeding” (Ryan v. New York Tel. Co., supra,
62 NY2d 494, 500).

Privity clearly extends to the partners comprising the law
firm that is party to the subject contract, and Supreme Court’s
assessment of the validity of the fee agreement before it in

53a

Appendix B

Rhodes was essential to its determination that the trustees
have no obligation to make any payments to a beneficiary
who derives his interest from that agreement. Irrespective of
their capacity in the Rhodes litigation, whether as essential
or merely nominal parties, Bain and Gilfillan are clearly in
privity with Rhodes. As partners in the law firm that entered
into the fee agreement with plaintiffs, their right to receive
trust income stands or falls with the contract. The three
attomeys are united in interest with respect to the enforcement
of the agreement and are therefore estopped from relitigating
its validity, an identical issue necessarily decided in the prior
action (id.).

Defendant Bain additionally asserts that “there was
simply no basis to apply New York’s code of ethics to an
agreement entered into in New Jersey between federal patent
practitioners resident in New Jersey and their New Jersey
clients involving conduct governed — and expressly
sanctioned — by federal patent law.” The question of what
state’s law should be applied to the obligation of the trustees
to make payments to the attorney beneficiaries, likewise,
could have been raised in the context of the Rhodes litigation,
but was not. A party to a lawsuit cannot sit by idly while a
contract, to which he is also a party, is judicially construed
without being precluded by the result. Implicit in.a court’s
entry of judgment is a determination of its power to render it
and, similarly, the preemption of State law was an issue
necessarily resolved in Rhodes with preclusive effect against
the parties and their privies.

Were this Court to reach the arguments sought to be
advanced by defendants herein, it would find them to be

54a

Appendix B

without merit. That a Federal regulation (37 CFR 10.64)
permits an attorney to take an interest in a patent in lieu of a
fee for services rendered is not dispositive of either the
validity of defendants’ conduct nor the jurisdiction of the
courts of this State. As 37 CFR 10.1 of the regulations
provides, “Nothing in this part shall be construed to preempt
the authority of each State to regulate the practice of law,
except to the extent necessary for the Patent and Trademark
Office to accomplish its federal objectives”. While the patent
regulations are pertinent with respect to the interest bestowed
on the attorneys by the inventor-clients, the regu_ations do
not obviate the full disclosure required by the Canons of
Ethics governing the practice of law in this State.
Consequently, the propriety of the fee arrangement at issue
in this case is not a question that arises exclusively under
patent law, and Supreme Court had subject matter jurisdiction
to rescind the fee agreement upon the finding that it was
made without the necessary disclosure of the potential
conflict of interest and without the advice of independent
counsel.

Accordingly, the order of Supreme Court, New York
County (Richard Lowe, III, J.), entered January 19, 2000,
which denied defendants’ motion to dismiss the amended
complaint, should be affirmed, without costs. Order, same
court and Justice, entered February 4, 2000, which granted
plaintiffs’ motion for partial summary judgment and denied
defendants’ cross motion for summary judgment, should be
affirmed, without costs.

All concur.

55a

Appendix B

THIS CONSTITUTES THE DECISION AND
ORDER OF THE SUPREME COURT, APPELLATE
DIVISION, FIRST DEPARTMENT.

ENTERED: SEPTEMBER 28, 2000

s/ Catherine [illegible] Wolfe
CLERK

56a
APPENDIX C — ORDER OF THE SUPREME COURT,
COUNTY OF NEW YORK, STATE OF NEW YORK
FILED FEBRUARY 4, 2000

SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK: IAS PART 22

PRESENT:
Hon. Richard B. Lowe, III
Index No. 106963/95
FREDERICK F. BUECHEL, M.D. and MICHAEL J.
PAPPAS, Ph.D., individually and as Trustees of certain trusts
entitled Biomedical Engineering Trust,
Plaintiffs,
-against-
JOHN N. BAIN, JOHN G. GILFILLAN, III] and CARELLA,
BYRNE, BAIN, GILFILLAN, CECCHI, STEWART &
OLSTEIN,
Defendants,
-and-
R.GALE RHODES, JR. and PAUL A. WITTE, as beneficiaries
of a certain trust entitled BIOMEDICAL ENGINEERING
TRUST,

Defendant-Beneficiaries.

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Appendix C
ORDER

Plaintiffs, Frederick F. Buechel and Michael J. Pappas
having moved far partial summary judgment pursuant to
CPLR Section 3212, and defendants John N. Bain and John G
Gilfillan, I, and Carella, Bye, Bain, Gilfillan, Cecchi, Stewart
& Olstein, having cross-moved for partial summary judgment
pursuant to CPLR Section 3212, and such motions having
regularly come to be heard on the 19" day of January, 1999;

Now, upon reading and filing plaintiffs’ Complaint, dated
March 21, 1995 (the “Complaint”), plaintiff’s notice of
motion, dated July 27, 1998, the affidavits of Arnold Weiss,
Esq., sworn to, respectively, February 10, 1995, July 24, 1998
and February 19, 1999, the affidavit of David N. Ellenhorn,
Esq., sworn to November 18, 1998, the affidavit of Michael
J. Pappas, sworn to February 10, 1995, and the exhibits
annexed thereto, in support of plaintiffs’ motion for partial
summary judgment and in opposition to defendants’ cross
motion for partial summary judgment, and defendants’ notice
of cross-motion, dated September 18, 1998, the affidavits of
John N. Bain, sworn to, respectively, October 2, 1998,
December 11, 1998, February 8, 1999 and March 2, 1999,
the affidavits of John G Gilfillan, II, sworn to, respectively,
September 18, 1998, December 11, 1998, February 8, 1999 and
February 26, 1999, the affidavits of Lorna McKenzie, Esq.,
sworn to, respectively, September 17, 1998 and December
11, 1998, and the exhibits annexed thereto, in opposition to
plaintiffs’ motion for partial summary judgment and in
support of defendants’ cross-motion for partial summary
judgment, and due deliberation having been had and the Court
having rendered its written decision, dated May 26, 1999,

58a

Appendix C

NOW, upon motion of Power, Weiss & Kurnit, LLP and
Solomon, Zauderer, Ellenhorn, Frischer & Sharp, attorneys
for plaintiffs, it is

ORDERED, that plaintiffs’ motion for partial summary
judgment on the First, Second and Third Causes of Action in
the Complaint (which assert the same claims as the First,
Second, and Third Causes of Action in the Amended
Complaint, dated April 12, 1999 (the “Amended
Complaint”)) is granted in its entirety and the interests of
defendants Bain and Gilfillan in the Biomedical Engineering
Trust (“Trust I’) are hereby rescinded and terminated ab initio,
and it is further

ORDERED, that the fee agreements, whether in the form
of a trust, corporate entity, partnership and/or contingent fee
agreement, between plaintiffs and defendants Bain and
Gilfillan, are unenforceable and rescinded ab initio because
they were entered into in violation of the ethical duties owed
to plaintiffs, and it is further

ORDERED, that defendants’ motion for partial summary
judgment is granted to the limited extent that two claims in
the Fourth Cause of Action of the Complaint alleging
malpractice with respect to inventions that are the subject
matter of U.S. Patent Nos. 4,619,658 and 3,916,451 are
dismissed with prejudice, but the claim in the Fourth Cause
of Action of the Complaint alleging malpractice concerning
the invention entitled the “Floating Rotating Platform
Bearing,” (which alleges the same claims as the Fourth Cause
of Action of the Amended Complaint) which was not the
subject of defendants’ cross motion, is not dismissed, and is
severed, and it is further

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59a

Appendix C

ORDERED, that Bain and Gilfillan are jointly and
severally liable to return to plaintiffs the total amount of
compensation they received from Trust 1, or its predecessors,
as well as interest, accruing from the date of each payment
to Bain and Gilfillan through entry of judgment, and costs
and disbursements, less the quantum meruit value of the legal
services provided by Bain and Gilfillan in an amount to be
determined by the Court, appropriate accrued interest to be
also applied thereto, and it is further

ORDERED, that the issues of the precise aggregate fees
received by the attorneys plus accrued interest and the
quantum meruit value of their legal service are referred to a
Special Referee to hear and report (with recommendations),
the parties to submit affidavits and supporting documentation
on each issue by the first hearing date together with requests
for any disclosure that may still be required, and it is further

ORDERED, that the motion are held in abeyance pending
receipt of the report and recommendations of the Special
Referee [Judicial Hearing Officer] and a motion pursuant to
CPLR 4403, and it is further

ORDERED, that a copy of this order with notice of entry
shall be served on the Legal Support Office (Room 311) to
arrange a date for the reference to a Special Referee [Judicial
Hearing Officer].

ENTER:

J.S.C.

a 60a

APPENDIX D — ORDER OF THE SUPREME COURT,
COUNTY OF NEW YORK, STATE OF NEW YORK
FILED JANUARY 19, 2000

SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK: IAS PART 22

INDEX No:106963/95

FREDERICK F. BUECHEL, M.D. and MICHAEL J.
PAPPAS, PhD., individually and as Trustees of certain trusts
entitled Biomedical Engineering Trust,

Plaintiffs,
- against -

JOHN N. BAIN, JOHN G GILFILLAN, III, and CARELLA,
BYRNE, BAIN, GILFILLAN, CECCHI, STEWART
& OLSTEIN,

Defendants,
- and -
R. GALE RHODES, JR. and PAUL A. WITTE, as

beneficiaries of a certain trust entitled BIOMEDICAL
ENGINEERING TRUST,

Defendant-Beneficiaries.

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6la

Appendix D

RICHARD B. LOWE, III, J.:

Motions Nos. 8 and 9 and the calendar of October 14,
1999 are consolidated for disposition.

The individual defendants, patent attorneys, move by
separate applications to dismiss the amended complaint
sounding in legal malpractice and recission of their long term
fee arrangement with plaintiffs, as pre-empted by Federal
Patent Law, or in the alternative, to stay this action pending
a ruling by the federal courts on the substantive issues raised
herein. Defendants also seek to vacate this court’s order dated
February 8, 1999, enjoining defendants from having recourse
to “any (other) court to adjudicate the merits of any
substantive claim at issue in the instant matter ... ,”
and related procedural relief. Defendants’ motion and
cross-motion are disposed of as follows.

Firstly, there is no merit to the defendants’ contention
that “plaintiffs’ exclusive remedy for alleged violation
of federal patent laws lies in the federal courts.”
The interpretation of the patent law on issues of patent
priority and infringement are hardly at issue in this action.
Nor have defendants made any showing to support their
contention that the issues of professional ethics central to
this litigation fall under the exclusive jurisdiction of the
Patent Trademark Office (PTO Code) enacted to guide the
performance of patent and trademark attorneys. Rather,
the holdings cited to support this novel thesis merely stand
as authority for the general principle that state courts may
not abridge rights accorded to patent attorneys under the
ethical-code applicable to their legal specialty. To prevail on

62a

Appendix D

this point defendants would have to establish that plaintiffs’
successful allegation in their first, second and third causes
of action (i.e. that defendants were lacking candor as to the
potential consequences of certain profit-sharing agreements)
violated rights acquired by the patent attorneys under the
PTO Code. No serious effort has been made in this regard
nor with respect to the single malpractice claim now pleaded
in the fourth cause of the amended complaint (cf. Sperry v.
Florida. 373 US 379, 396, 397; Silverman v. State Bar of
Texas, 405 F2d 410, 413).

Equally untenable is defendants’ argument that this
court’s decision of May 26, 1999 (entered June 1, 1999) is
invalid because plaintiffs served an amended complaint on
June 2, 1999 alleging the identical recission claims originally
pleaded and repleaded a revised fourth cause of action for
legal malpractice omitting two of the three patent matters
concededly time-barred patent application claims specified
in the original complaint. While defendant correctly invoke
a principal of law generally applicable in this area, i.e.,
that “orderly procedure contemplates that a defendant be
afforded an opportunity to answer an amended complaint,”
(Inland Credit Corp. v. Blvds, 27 AD2d 928), this salutary
procedural rule does not rigidly apply without exception
regardless of the circumstances of a given case.
Even assuming the amended complaint technically
superseded the original complaint before the decision
granting recession on res judicata grounds was rendered, the
court was not thereby bound to await the formal service of a
predictably repetitive answer before ruling on plaintiffs’
recission claims. Defendants submitted comprehensive
affidavits in response to plaintiffs’ motion for summary
judgment, thereby obviating the need for the court to await

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63a

Appendix D

service of a formal answer. The parties having charted their
own procedural course, defendants may not now rightly urge
that summary disposition of the recession claims be
recalendered. (See, Huggins v. Whitney, 239 AD2d 174).

Parenthetically, the court wishes to clarify its May 26,
1999 decision insofar as it inadvertently dismissed the
entire original fourth cause of action as time-barred. The court
intended to dismiss only the two patent applications
referred to on Page “5S” of the decision that were addressed
in defendant’s cross-motion to dismiss and overlooked the
more current “Bahlen patent malpractice claims”

~ that were never challenged by the defendants. The May 26,

1999 decision is so amended while the main motion and
cross-motion are denied insofar as they seek to dismiss the
amended complaint or obtain a stay of further proceedings.

Finally, the branch of defendant’s applications seeking,
in effect, reconsideration of the order of February 8, 1999 is
granted relieving defendants of the injunctive relief awarded
in that order. In the court’s view barring defendants from
recourse to the federa! courts in connection with the
already resolved recission claims would tend to further the
need for “the harmonious cooperation of federal and
state tribunals,” emphasized in Princess Lida v. Thompson,
305 U.S. 456, 466. Nevertheless, it has been clearly decided
in a later Supreme Court decision that a defeated party in
state court litigation may still raise before a federal court
issues already decided against him, regardless of the
likelihood of the issuance of an additional adverse decision
under the doctrine of res judicata (See, Donovan v. City of
Dallas, 377 U.S. 408, 412).

64a
Appendix D
This shall constitute the decision and order of the court.
Dated: January , 2000
s/ Richard B. Lowe III

Judge Richard B. Lowe III
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APPENDIX E — MEMORANDUM DECISION OF
THE SUPREME COURT, COUNTY OF NEW YORK,
STATE OF NEW YORK FILED MAY 26, 1999

SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK: IAS PART 22

INDEX NO:106963/95
FREDERICK F. BUECHEL, M.D. and MICHAEL J.

PAPPAS, PhD., individually and as Trustees of certain trusts
entitled Biomedical Engineering Trust,

Plaintiffs,
- against -
JOHN N. BAIN, JOHN G. GILFILLAN, IT], and CARELLA,

BYRNE, BAIN, GILFILLAN, CECCHI, STEWART
& OLSTEIN,

Defendants,
- and -
R. GALE RHODES, JR. and PAUL A. WITTE, as
beneficiaries of a certain trust entitled BIOMEDICAL
ENGINEERING TRUST,

Defendant-Beneficiaries.

66a

Appendix E

RICHARD B. LOWE, II], J:

Plaintiffs, an orthopedic surgeon and a mechanical
engineer engaged in the invention, research and
extraordinarily successful marketing of prosthetic devices
over the past 25 years (the plaintiffs) move for partial
summary judgment on their first three causes of
action seeking to rescind all equity interest held by two
attorneys in a trust agreement (Trust 1) entered into in
December 1983 with one R. Gale Rhodes, Esq. and his then
former patent law partners John N. Bain and John G. Gilfillan
(the defendants, both of whom were discharged as attorneys
for the trust in January 1995) who cross move to dismiss the
first four causes in the complaint. Defendants, residents of
New Jersey, participated in the operation of the business
venture until 1983 while prosecuting and defending numerous
patents from its inception in 1974 until their discharge
in January 1995.

The first three causes of action seek, essentially, to
recover the approximately $7,000,000 in rovalties received
by the defendants pursuant to their combined 22% interest
in the various business ventures and to relegate them to the
payment of legal fees on a quantum meruit basis in reliance
on a similar outcome in the earlier litigation (the Rhodes
action) tried under index no. 8055/87, in which plaintiffs
prevailed under the doctrine of collateral estoppel invoked
on their counterclaims in the Rhodes’ action. This courts
judgment, following a lengthy trial, was issued on May 14,
1998 (aff , NYLJ, 2-8-99 p 26 c3), “rescinding ab initio any
interests Rhodes holds, or may have held in Trusts I and IT”
(the second trust was formed to segregate certain inventions

67a

Appendix E

on which Rhodes had performed all relevant patent law
services) based on the finding that the business ventures
jointly formed by plaintiffs and Rhodes “were entered into
in violation of the ethical duties owed by attorneys to their
client.” According to the appellate affirmance” the record
supports the trial court’s findings that neither the initial
arrangement (a partnership formed in October 1 974) nor its
subsequent incarnations (Biological Engineering Corp.,
(BEC) established in July 1975 and its successor-in-interest
created by the 1983 trust agreements) were entered into upon
adequate disclosure “of other possible fee arrangements and
potential conflicts of interest.”

The main motion is granted rescinding Trust I and
awarding a conditional judgment for all moneys distributed
to defendants less reasonable attorney fees and dismissing
plaintiffs’s fourth cause for legal malpractice. Conversely,
the cross motions are denied and defendants’ counterclaims
alleging breach of contract and fiduciary duty and seeking
an accounting on the parties invalid trust agreement are
dismissed as moot with the exception of the attorney fees
pleaded in the sixth counterclaim. The issue of rescission
was essential to the outcome and was thoroughly litigated in
the Rhodes trial, in which defendants had ample opportunity
to participate. Actively recision issue was squarely placed in
issue in the counterclaims served in December 1991 in the
Rhodes action and defendants were fully familiar with the
ethical scope of these claims. Their basic awareness of the
“potential preclusive effect” of an outcome favorable to
Rhodes is conceded in the opposing papers by defendants’
counsel and defendants acknowledged informally during the
course of the Rhodes litigation that their own stake in the

68a
Appendix E

business venture might very well hinge on its outcome.
It fact, they applied in 1995 to stay this action pending
resolution of the Rhodes trial arguing the likelihood of its
having an estoppel effect.

Nevertheless, defendants, who were nominal parties in
the Rhodes case, elected to elude every opportunity afforded
them to participate actively in trial preparation or the trial
itself, where Rhodes presented extensive expert testimony
on the central issue of professional ethics and otherwise
offered a vigorous defense to the rescission counterclaims.
Defendants successfully opposed a belated motion to add
them on the eve of trial as parties to the counterclaims along
with Rhodes and later quashed subpoenas citing them as
witnesses based on their New Jersey residence. In addition,
Rhodes’ attorneys announced at the trial’s inception the
well-founded intention of calling defendants to the stand as
voluntary witnesses. Hence, defendants protestations of
entitlement to litigate de novo because they were never in a
position to oppose plaintiffs’ rescission claim is manifestly
unconvincing. :

Defendants’ contentions that they were not in legal
privity with and had actually adverse interests vis a vis
Rhodes during the prior litigation, is also unpersuasive and
runs counter to fundamental principles of fairness and equity.
The three attorneys had identical interests in the success of
BEC and defendants maintained their same beneficial
share in the successor Trust 1 entered into after Rhodes left
the law firm. The fact that their role in the management of
the business venture was curtailed and the 1983 trust
documents created a separate source of income for Rhodes

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69a

Appendix E

(i.e., Trust 1), thereby reducing defendants’ equity tees on
plaintiffs prosthetic inventory did not alter the three attorneys’
basic mutuality of interest on the litigated issue of
professional ethics. That is, all three were equally exposed
to financial loss in the event plaintiffs prevailed on their
counterclaims for rescission. On this score absolutely no
adverse relationship existed between them. On the contrary,
having acted in concert in the formation of their business
venture with plaintiffs in 1974 the attorneys had every
incentive to join forces in the Rhodes action and actually
did cooperate somewhat in Rhodes trial preparation. More
importantly, they have not shown that their failure to fully
participate in the Rhodes action affected its come.

In sum, judging by the context of defendants’ affidavits
in the present action, their testimony in the Rhodes action,
even assuming its veracity, would not have met the standard
of professional conduct applied in the prior case, having
failed to allege, inter alia, that plaintiffs were informed their
attorneys could be replaced without penalty.

Moreover, there is no merit to the contention that
plaintiffs waived their right to rescind Trust 1 by continuing
to retain defendants vntil their discharge in January 1995
and by lulling them into a sense of security by not proceeding
against them directly in the context of the Rhodes action.
First, since it was most unreasonable for defendants to rely
on a disputed laymen’s oral exchange with plaintiffs on the
complex legal issues of professional ethics and estoppel,
no material issue of fact is raised on the rescission claims by
the purported reassurance given by plaintiffs. Also, no
prejudice has been shown since defendants are fully entitled

70a

Appendix E

to recover for all legal services rendered until their discharge.
Further, defendants’ claim of deceptive conduct as to their
continued retention without complaint long after defendant
became aware by 1982 of alleged deficiencies in the
prosecution of two patent applications has been mooted by
the dismissal of plaintiffs’ time barred fourth cause of action
for legal malpractice. ;

Nevertheless, while defendants maintain correctly that
these discreet transaction are not covered by the doctrine of
continuous representation relied by plaintiffs, the doctrine
clearly applies to the issue of professional ethics at the heart
of the present litigation. In short, given the fact that
“the parties relationship ... remained at all times that of
attorney-client” (as noted in the appellate affirmance cited
above), the Statute of Limitations did not accrue until the
termination of plaintiffs uninterrupted course of reliance
on defendants’ legal representation in January 1995.
This conclusion is especially compelling here, where the
fundamental issue of professional ethics is at stake rather
than the far less serious issue of professional negligence
raised in plaintiffs’ fourth cause of action.

Accordingly, plaintiffs are awarded partial summary
judgment on their first, second and third causes of action
terminating and rescinding ab initio defendants’ equity
interest in the three legal entities negotiated by the parties
and Rhodes between i974 and 1983 and directing defendants
to return all fees distributed to them less the reasonable value
of their legal services rendered following resolution of the
attorney fee issue on a quantum meruit basis. The fourth cause
of action for legal malpractice is dismissed.

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Appendix E

Settled order, providing for a severance of the remaining
claims.

Dated: May 26", 1999 .

s/ Richard B. Lowe III
JUDGE RICHARD B. LOWE III

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72a
APPENDIX F — ORDER OF THE SUPREME COURT,

COUNTY OF NEW YORK, STATE OF NEW YORK
FILED FEBRUARY 23, 1995

SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK: IAS PART 25

Index No.: 8055/87
Cal. No.: 222 of 2/17/95
R.GALE RHODES, JR..,
Plaintiff,
-against-
FREDERICK F. BUECHEL and MICHAEL J. PAPPAS,
individually and as Trustees of certain trusts entitled
Biomedical Engineering Trust and Biomedical Engineering
Trust II,
Defendants,
-and-
JOHN N. BAIN and JOHN G. GILFILLAN, III, as
beneficiaries of a certain trust entitled Biomedical
Engineering Trust, and PAUL A. WITTE, as beneficiary
of certain trusts entitled Biomedical Engineering Trust and

Biomedical Engineering Trust II,

Defendants-Beneficiaries.

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73a

Appendix F
DeGRASSE, J.:

This motion by defendants for leave to amend their
counterclaims is denied. The stated purpose of the proposed
amendment is to expand the prayer for relief against John N.
Bain and John G Gilfillan II] who have been counterclaim
defendants for the past seven years. The instant motion was
made five months after the note of issue was filed following
protracted discovery. Defendants have not offered an
acceptable excuse for their delay in making the instant
application. The supporting affidavit alludes to an October
1994 decision of the German High Court for Patents.
However, it has not been shown that the proposed amended
counterclaims did not accrue and could not have been
interposed at a more appropriate time. To grant the requested
relief would require plaintiff to either waive discovery to
which he would be entitled or face the prospect for further
delay of this eight year old lawsuit.

Plaintiff's cross-motion for an order striking defendants’
supplemented responses to plaintiff’s expert interrogatories
is granted to the extent that defendants shall be precluded
from calling Geoffry C. Hazard, Jr., Michael P. Ambrosio
and Eugene Rzucedlo as expert witnesses unless defendants
pay the firm of Leventhal, Slade & Krantz a counsel fee of
$8,000 and produce the said witnesses for depositions to be
conducted at defendants’ expense on March 13, 1995 at 10:00
a.m. at the office of plaintiff’s counsel or at such other time
and place as the parties shall agree to in writing. The expert
witness interrogatories which relate to defendants’
counterclaims were served on November 4, 1993.
Defendants’ December 8, 1993 response indicated that as of

~ 74a

Appendix F

that date defendants had not decided who their expert
witnesses would be. The supplemental response naming the
expert witnesses was not served until January 10, 1995, four
months after the note of issue had been filed. Plaintiff has
been prejudiced by defendants’ delayed response which limits
plaintiff’s time to engage his own expert witness to offer
testimony in rebuttal. Accordingly, the conditions imposed
herein are within the sound exercise of this court’s discretion
(see, McDermott v. Alvey, Inc., 198 AD2d 95). The required
counsel fee shall be paid by March 13, 1995. Plaintiff’s
application for sanctions is denied in light of the foregoing.
Copies of this order have been mailed to the parties on the
date of signature.

This constitutes the decision and order of the court.

DATE: February 23, 1995 _ s/ [illegible]

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APPENDIX G — ORDER OF THE SUPREME COURT,
COUNTY OF NEW YORK, STATE OF NEW YORK
FILED MARCH 4, 1998

SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK: IAS PART 54

Index No. 8055/87
R. GALE RHODES, JR.,
Plaintiff,
-against-
FREDERICK F. BUECHEL and MICHAEL J. PAPPAS,
individually and as Trustees of certain trusts entitled

Biomedical Engineering Trust and Biomedical Engineering
Trust II,

Defendants,
-and-

JOHN N. BAIN and JOHN G. GILFILLAN, III, as
beneficiaries of a certain trust entitled Biomedical
Engineering Trust, and PAUL A. WITTE, as beneficiary
of certain trusts entitled Biomedical Engineering Trust and
Biomedical Engineering Trust II,

Defendants-Beneficiaries.

76a

Appendix G

HON. RICHARD B. LOWE, III:

A bench trial was held before me from April 24,1995 through
July 10, 1998. R. Gale Rhodes, Jr., plaintiff sued Frederick F.
Buechel and Michael J. Pappas, individually and as Trustees
of Biomedical Engineering Trust and Biomedical Engineering
Trust II. Plaintiff seeks to recover millions of dollars for
improper trust payments which defendant trustees Buechel
and Pappas have made to themselves. Further, plaintiff seeks
to remove them as trustees and to require the trusts to pay
plaintiff his share of trust income which has been withheld
since 1987. In sum, Plaintiff seeks more than $6 million
dollars, also a share of future royalties.

Defendants Buechel and Pappas counterclaim, seeking
the forfeiture of trust income to Rhodes as a result of alleged
unethical activity. Further, defendants seek monetary
damages of $4,013,367.00 plus interest, as a result of the
alleged acts of patent malpractice. More specifically, defendants
Buechel and Pappas claim that Rhodes was negligent in
connection with two patent applications. First, defendants claim
that they incurred $2,013,367.00 in damages as of April 25,
1995 for the °451 Patent. Additionally, defendants Buechel
and Pappas seek $2,000,000.00 in damages as a result of
Rhodes’ alleged negligence in the prosecution of the 658 patent.

In an effort to render a concise decision this Court has
elected to address the ethical issues raised by defendants
Buechel and Pappas at the outset, because any conclusion
that plaintiff Rhodes acted in violation of his ethical
responsibilities may result in the forfeiture of legal fees.

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Appendix G

The Court’s findings of fact and conclusions of law are
as follows:

FINDINGS OF FACT

Plaintiff R. Gale Rhodes, Jr., is a member of the Bar of the
State of New Jersey, whose practice is primarily in the area of
patent law. He received his training in the area of patent law at
Western Electric and has been a private practitioner since 1964.

Defendant Frederick F. Buechel is an orthopedic surgeon
associated with several New Jersey medical institutions.

He is also a professor of orthopedic surgery at New Jersey
Medical School.

Defendant Michael Pappas is a mechanical engineer who
has worked on inventions since 1958. His past employment
included working as a professor at the New Jersey Institute of
Technology and for Lockheed and Sheppard Industries. He was
the proud owner and operator of Orginetics, a company which
commercially exploited many of his inventions.

In 1974, at the suggestion of the Chief of Orthopedics at
the New Jersey Medical School, Frederick F. Buechel and
Michael Pappas met. This was the beginning of a successful
and prosperous joint venture, the collaboration to invent
prosthetic devices. Their goal clearly was to enhance the
quality of existing products on the market thereby enhancing
the quality of life for persons in need of prosthetic devices and
to make money in the process. Today, they are extremely
successful businessmen, both holding a large number of patents
on important developments in the field of joint replacement.

78a

Appendix G

As a result of their accomplishments being widely published
they have gained great notoriety and success.

Defendants began working together and soon developed
drawings and a prototype for a “Floating Center Prosthetic
Joint.” In September 1974, they displayed a brass model of
their shoulder prosthesis device to Howmedica, a prominent
manufacturer of prosthetic devices. During their conversations
with Howmedica they learned that Howmedica was working
on a similar device with others. Therefore, Howmedica declined
the opportunity to work with them. :

The knowledge that Howmedica was working on a similar
device caused them to become anxious. They wanted their
invention patented and on the market first. Thereafter, believing
that they needed urgent legal assistance, Pappas recommended
to Buechel that they immediately consult Rhodes, a patent lawyer
with whom he had previously worked.

At this time, Rhodes was in a partnership with two other
patent lawyers, John N. Bain, Esq. and John Jack Gilfillan Il, Esq.
The partnership dissolved in December 1981.

The parties met several times during the fall of 1974
and agreed that Rhodes and his law partners, Bain and
Gilfillan, would receive one-third interest in any inventions
that Buechel and Pappas would bring to them, in return for
legal work to include drafting and prosecuting patent
applications, both foreign and domestic, working on licenses
for exploiting the inventions, and providing other assistance
and advice as became necessary. Rhodes and his law partners
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Appendix G

services. Further, the testimony revealed that the acceptance
of a contingency fee is not a customary practice in the area
of patent law.

In an effort to indu

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386010_1630%3A2. Public record. Not legal advice.