SUPREME COURT: NEW YORK COUNTY In The Matter Of An Article 75 Proceeding DANIEL B.

HAYES, Petitioner, - against DAVIS, SHAPIRO, LEWIT & HAYES, LLP, STEVEN G. SHAPIRO AND PETER LEWIT, Respondents. STATE OF CALIFORNIA COUNTY OF LOS ANGELES DANIEL B. HAYES, being duly sworn deposes and says: 1. I am a named equity partner in the law firm of Davis Shapiro AFFIDAVIT Index No.:

Lewit & Hayes LLP ("DSLH") and make this affidavit in support of Petitioners Motion for an Order of Attachment, pursuant to NY CPLR Order, pursuant to NY CPLR 6301. 6201, and Temporary Restraining

2.

I make this affidavit based upon my personal knowledge of the

facts set forth herein, and my review of DSLHs books and records kept in the ordinary course of business.

3. and

I am entitled to an order, pursuant to NY CPLR

6201 et seq.

6301 et seq. against Respondents Davis, Shapiro, Lewit & Hayes, LLP ("DSLH or

Partnership Respondent"), Steven G. Shapiro ("Shapiro") and Peter Lewit ("Lewit")

(jointly, the "Individual Respondents"), attaching and returning certain monies in the amount of $500,000 (the "Funds") which were improperly disbursed from the DSLH operating account at Chase Manhattan Bank on or about October 18, 2012, and entry of a Temporary Restraining Order and Injunction restraining Respondents from disbursing the Funds or any other monies in DSLH's operating account for partnership distributions until DSLH's line of credit has been paid and the arbitration between myself and the Individual Respondents has been completed. This amount exceeds all counterclaims of which I have any knowledge.

4.

Respondent DSLH is a law firm established as a New York

limited liability partnership with offices in New York and California. The firm specializes in entertainment law.

5. in DSLH.

Respondents Shapiro and Lewit are the other two equity partners

6.

In violation of our partnership agreement and their fiduciary

duties as partners, Shapiro and Lewit have improperly taken $500,000 from DSLH's operating account as purported partnership distributions. This leaves only $100,000 in the operating account, which is not enough to cover DSLH's monthly expenses of approximately $366,000, and a $400,000 current outstanding balance, on the firm's $1,000,000 line of credit, that must be paid by no later than November 13, 2012.

Shapiro and Lewit have done so knowing that their own assets will be insufficient to cover their share of DSLHs liabilities, and that, not only will DSLH no longer be able to function, but that I will be left holding the bag, as many of DSLHs liabilities, including the line of credit, have been personally guaranteed by me. The Management and OperationDSLH of 7. In April 2002, I became a named partner at DSLH, which was

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

8.

Sections 6.01 and 6.02 of the Partnership Agreement provide that

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

9.

Regarding net cash flow, the Partnership Agreement further

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

DSLII and Its Recent Financial Problems 10. For many years, DSLH operated successfully, with 2008 being

50-60% the firm's best year when its revenues reached $13.6 million, with profit margins. DSLH's success was due in large part to the firm's billing model; charging clients a percentage of the client's gross revenue rather than an hourly rate. However, conditions in the music industry were changing due to a decline in CD sales and the growth of the Internet.

11.

In November 2009, Fred Davis, the firm's founder and managing

partner, left DSLH to join an investment bank. I then became the firm's managing partner,

12.

Today, DSLH's partner compensation model operates on "what

feels fair" to the three equity partners after taking into account four variables: (1) available cash to distribute, (2) each partner's collections, (3) each partner's contribution to overhead and (4) each partner's resulting percentage compensation. For example, in 2010, my collections were $1.6 million and my compensation was $885,000 (55%) whereas Shapiro's collections were $1.9 million and his compensation was $1.1 million (59%). The difference in our percentage compensation was due to the partners' belief it was fair to have Shapiro contribute $783,000 to overhead, compared to my $717,000 in overhead (in contrast to the $800,000 and $950,000 we would have 50% contributed respectively to overhead under the Davis model). The partner

compensation model is applied pursuant to an end-of-the-year conversation among the three equity partners and requires unanimous consent prior to distribution.

13.

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

From 2010 through 2011, the firm's revenue decreased by an additional $1.5 million because of the loss of significant clients and the departure of contract partner Laurie $6.5 to Soriano. By the end of 2011, the firm's revenues had dropped million.

14.

For 2011, the firm had a net operating loss of approximately

$437,000. This loss led DSLH to use approximately $700,000 of its $1,000,000 line of credit with JPMorgan Chase Bank, N.A. (the "Credit Line") in order to make the agreed upon partner distributions.

15.

Although DSLH had used its Credit Line previously to cover cash

flow and make partner payments, it was unprecedented for the finn to start, as it did in 2012, with $700,000 already drawn on its Credit Line. Reiuirements Of The Credit Line 16. It is a requirement of the Credit Line that its balance be paid in

full, and maintained at a zero balance for thirty consecutive days during its term. As the line of credit is scheduled to mature on December 13, 2012, DSLH must pay $400,000

currently due on the Credit Line' and maintain a zero balance for thirty (30) days. Thus, to avoid a default, repayment to zero must occur by no later than November 13, 2012. SeeExhibit B.

17.

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

guaranteed by me, Shapiro and Lewit pursuant to a written guaranty of payment (the "Guaranty"). A copy of the Guaranty is attached hereto Exhibit C. as The Underlying Dispute and Respondents' Action That Threatens DSLH's Continued Existence and Operation 18. In January 2012, I became very concerned about the firm's

finances and its ability to survive. 2012 firm revenues were initially projected at approximately $6.3 million, and subsequently lowered to $5.3 million; monthly expenses were projected at approximately $366,000. This left a slim projected profit 45-55% profit margin of prior years. margin of around 17%, far below the historic Through a series of emails and telephone conversations, I expressed my concerns to Shapiro and Lewit, the Individual Respondents.

19.

Despite the firm's financial condition and likely prospect of little

$865,000,reflecting to no profit, in August, Lewit and Shapiro demanded to be paid 40% of their actual collections to date. Because the firm only had approximately

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

n.

$600,000 inits operating account, I suggested that any partnership distribution be considered only after DSLH paid the Credit Linefor the required 30 days. Shapiro off and Lewit disagreed, and blocked me from paying down the Credit Line.

20,

On October 2, 2012 (and again on October 10), Shapiro and

Lewit proposed that an additional $350,000 be drawn on the Credit Line, (in addition to the then-balance owed of $400,000), so Shapiro and Lewit's desired partnership distributions of $865,000 could be made. I withheld my consent to this proposal and instead requested that each partner post collateral before the line of credit was drawn down any further, or any partner distributions be made to any of the partners, especially given the Credit Line had to be repaid by no later than November 13, 2012, one month before the end of the term.

21.

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

only about $600,000.00 in cash in the operating account; (ii) had collected $4,300,000 of the $5,300,000 revenue projected for 2012, while still owing over $1,000,000 in projected 2012 expenses; (iii) still owed $400,000 on the Credit Line; and (v) has additional unbudgeted moving costs, bonuses, and equipment and furniture expenses of $100,000 to $300,000 for 2012. Clinching the matter, I was jointly and severally liable to pay back the Credit Line (and many of DSLH's other debts and obligations), and understood that neither Lewit or Shapiro had the financial wherewithal to be able to pay back their share of the Credit Line on or before November 13, 2012, if the money in the

operating account was first distributed to them.

22.

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

refusal to post collateral and continued insisting on an immediate draw that threatened DSLHs future, I demanded arbitration, as provided for by Exhibit D (Demand for Arbitration). Agreement. See 9.07 of the Partnership

23.

In retaliation, Shapiro and Lewit terminated me on October 18,

2 See 2012, and then unilaterally distributed $500,000.00 to themselves. Exhibit E (Termination Notice).

24.

Shapiro and Lewits unilateral actions violated the Partnership

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

Second, Shapiro and Lewit unilaterally disbursed $500,000 to themselves without my consent, in violation of 6.02 of the Partnership Agreement. Third, they disbursed 3.03 of the Partnership

$500,000 when cash was unavailable to do so, in violation of

Agreement. Further, as Shapiro and Lewit did this to benefit themselves at my expense and that of DSLFI, they have breached their fiduciary duties as partners to me and to the firm.
2 They also sent me a check in the amount of $96,138.83, reflecting a distribution weighted in favor of Shapiro and Lewit, and which does not reflect the sum to which I am entitled. I have not cashed the check, so that part of the Funds remains with Shapiro and Lewit. This and other issues will be addressed in the arbitration I commenced on October 17, 2012. See Exhibit D (Demand for Arbitration).

[J

25.

Shapiro and Lewits conduct shows an unmistakable intent to

dissipate assets and deprive me of any ability to recover anything in arbitration. If the requested relief is not granted, any arbitration award to me will be illusory.

26.

Further, if the TRO does not issue and Attachment is not granted,

I will be irreparably harmed. Bluntly put, without the money Shapiro and Lewit unilaterally and improperly removed from DSLHs operating account, DSLH will not have enough money to continue operating, or to meet the November 13, 2012 Credit Line deadline. One cannot put a price on the deliberate and unnecessary destruction of the law firm I helped build over many years and much effort. Likewise, the failure of DSLH, where I am a named partner, will negatively and irreparably harm my reputation, my ability to find other work, continue at DSLH, or join or start another firm, and my ability to maintain existing clients and develop new clients. Depending on the circumstances, I may even be forced into personal bankruptcy should I be forced to pay all the firms debts on my own.

27. 7502(c) and warranted.

Under these circumstances, an order of attachment under CPLR 7502(c) 6201(3), and a restraining order under CPLR and 6201 is

28. action.

No other provisional remedy has been secured or sought in this

29.

No prior application has been made for the relief

herein.

MM
Sworn to before me this day of October, 2012
ko
4. f

imp

Notary P bIle

j'..:.j:.

ELAINE E. LOVE Commission # 1878064 Notary Public California My Comm. Angeles County mm. xpires Feb 21, 2014
.

#68648 1v2/TD/1 1201.001

IC