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1998 Letter from the Special Counsel

Actual Copies of the Letter

CONFIDENTIAL - PROTECTED BY ATTORNEY-CLIENT PRIVILEGE

The Honorable Township Council
Township of Scotch Plains
430 Park Avenue
Scotch Plains, New Jersey 07076

Re: 2435 Plainfield Avenue
Block 4303, Lot 12

Township of Scotch Plains
vs. 2435 Plainfield Avenue

Donald T. DiFrancesco - Status as
Township Attorney

Dear Council Members:

I am writing as a follow up to out meetings May 19, 1998 and June 16, 1998 with specific regard to the status of Donald T. Difrancesco, Esq. continuing to act as Township Attorney for Scotch Plains. The May 19 meeting was attended by all five (5) Council members, Township Manager, Thomas E. Atkins and attorneys, Douglas W. Hansen, Gary Jacobson, Nancy Isaacson and myself. The June 16 meeting was attended by all five (5) Council members, Mr. Atkins, Mr. Hansen and myself.

In my January 31, 1997 letter to Thomas E. Atkins, I advised that, in my opinion, Mr. DiFrancesco should resign immediately as Township Attorney. In that letter, I set forth the reasons why it was improper for him to continue as the Township Attorney. My January 31, 1997 letter is incorporated herein. At the May 19, 1998 meeting, all four (4) attorneys opined that RPC 1.7 required Mr. DiFrancesco's resignation or termination as Township Attorney. This opinion was again reiterated at last evening's meeting.

As Mr. Hansen and I advised last evening, the matter was reviewed again in detail on Monday, June 15 1998 by Mr. Hansen, Ms. Isaacson,

The Honorable Township Council
Page 2
| June 17, 1998

Lawrence A. Woodruff and myself. We spent a great deal of time and reviewed the matter from its inception. We have again concluded that RPC 1.7 requires Mr. DiFrancesco to immediately resign or be discharged. His actions and non-actions vis--vis the Council not only give the appearance of impropriety but are clearly improper and replete with conflicts that cannot be ignored or waived. The following are the facts and bases for the opinion requiring Mr. DiFrancesco's resignation or discharge.

Let me again remind you that RPC 1.7 prohibits a lawyer from representing a client if the representation of that client may be materially limited by the lawyer's own interests. While a private client may consent to the representation under such circumstances, a public entity cannot do so. It is clear that RPC 1.7 prohibits Mr. DiFrancesco from continuing to represent Scotch Plains because his own interests in this matter, and it is equally clear that the Township Council cannot waive the provision of this RPC.

1. Donald T. DiFrancesco's January 15, 1997 Certification

Mr. DiFrancesco signed a certification dated January 15, 1997 in support of the application of 2435 Plainfield Avenue to reopen the Final Judgment of Foreclosure. In paragraph 15 of the certification, Mr. DiFrancesco indicated that he believed that the "governing body and administrative staff of the Township of Scotch Plains, including the Tax Collector and the attorney, Ms. Mendiola, had actual knowledge of facts making receipt of the mailed notice to me unlikely." In paragraph 19, he stated that he was "concerned about the issues of good faith and fair dealing" referred to the (sic) in the certification of his cousin, Ernest DiFrancesco. The certification was filed despite the fact that Mr. DiFrancesco indicated that his mother's mortgage was discharged and therefore his mother's estate had no interest in the property. The certification per se created a conflict between Mr. DiFrancesco and his client, the Township of Scotch Plains, whom he accused of failing to act in good faith. No attorney can serve two masters. If Mr. DiFrancesco felt the need to act on behalf of his mother's estate or to support other family members in their attempt to overturn the foreclosure judgment, he should have immediately tendered his resignation. He cannot act as the Township's chief legal officer at the same time that he is accusing his client of failing to act in good faith. Mr. Hansen disagrees with me on this issue but concurs on all of the following issues.

2., Robert H. Kraus' December 26. 1996 Fax to Carmen E. Mendiola and Donald T. DiFrancesco.

The December 26, 1996 fax was attached to my January 31, 1997 letter. The fax indicated that Mr. Kraus had been trying to reach Carmen Mendiola since December 2 regarding a Consent Order to reopen the August 30, 1996 judgment of foreclosure. The fax stated that "Mr. DiFrancesco advised me on December 9 that the Township will consent." Although the Mr. DiFrancesco mentioned is not delineated, it is clear that the Township Attorney is the Mr. DiFrancesco referred to as he is the only

The Honorable Township Council
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June 17, 1998

Mr. DiFrancesco with any ostensible authority to offer such advice. Additionally, Robert Kraus told Mr. Atkins that the Mr. DiFrancesco referred to was the Township Attorney, Donald T. DiFrancesco . Mr. Kraus also advised Mr. Atkins that he spoke to Donald T. DiFrancesco on December 9 and was advised that the Township would consent.

Mr. DiFrancesco was told by me on June 19, 1995 that he was to have no involvement with the subject property. His conduct is an egregious conflict of interest and improper conduct and is a clear violation of RPC 1.7.

3. Donald T. DiFrancesco's failure to disclose his involvement with George W. Scott regarding the property in question, as well as his interest in the property.

As you know, George W. Scott instituted suit in July 1992, in Monmouth County against Donald T. DiFrancesco, Paul M. DiFrancesco, Ernest DiFrancesco, the DiFrancesco Partnership and Hooley, Butler, DiFrancesco and Kelly. Dr. Scott alleges that on or about September 17, 1987, he loaned the sum of $200,000 to the DiFrancesco partnership, which partnership was comprised of Paul and Ernest DiFrancesco. The loan was secured by a Note and Mortgage on property owned by the DiFrancesco Partnership located at 1785 Front Street in Scotch Plains. The Complaint further alleges that in late April 1989, the DiFrancesco Partnership, through its attorneys, Hooley, Butler, DiFrancesco and Kelly, delivered to him a Mortgage Note dated April 21, 1989 on a different piece of property. The allegations are that Dr. Scott was advised by Donald T. DiFrancesco that the substitute Mortgage Note was better collateral than the original Mortgage Note. Donald T. DiFrancesco recommended to Dr. Scott that he accept this Mortgage Note in substitution of the original one. The substitute Mortgage Note and Mortgage was for the subject property. More specifically, the Mortgage covered lots 9, 10 and 12 in Block 4303. Mr. Difrancesco had a duty to disclose to the Township Council his involvement with Dr. Scott and both Dr. Scott's and Mr. DiFrancesco's interest in the property. He did not do so. Mr. DiFrancesco had an obligation to advise Council of the lawsuit against Mr.(sic) Scott involving the property in question due to Mr. DiFrancesco's involvement. He failed to do so.

On January 26, 1995, a judgment was entered in favor of George W. Scott against Donald T. DiFrancesco (and others) in the amount of $553,359.56. Mr. DiFrancesco satisfied the judgement in April 1996 by payment of $250,000 to Dr. Scott. In consideration for the satisfaction of the judgment, Dr. Scott assigned his mortgage to Donald T. DiFrancesco on April 17, 1996. Mr. DiFrancesco thereafter assigned the mortgage to K. Hovnanian Companies of New Jersey, Inc. by and assignment dated September 20, 1996. Both the assignment from Dr. Scott to Mr. DiFrancesco and the subsequent assignment from Mr. DiFrancesco to Hovnanian were recorded simultaneously on December 9, 1997, after the foreclosure judgment on the subject property was obtained, and the recorded documents were returned to Hovnanian. This information was secured in a recent title search. Mr. DiFrancesco failed to disclose all of the above to Council in a timely manner. His failure to do so is a

The Honorable Township Council
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June 17, 1998

4. The payment of $225,000 from Hovnanian to Donald T. DiFrancesco

On January 28, 1997, I called Donald T. DiFrancesco and told him that I was going to advise Township Attorney because of a violation of RPC 1.7 and a conflict of interest. (I did so by letter dated January 31, 1997.) In that telephone conversation, Mr. DiFrancesco advised me that Hovnanian paid him $225,000 in November 1996 so that Mr. DiFrancesco could repay a loan he made to satisfy the Scott judgment. This payment was made just prior to the filing of the Order to Show Cause seeking to overturn the In Rem Tax Foreclosure Judgment. Hovnanian certified that it had a contractual interest in the property, however did not produce the contract at that time. It was not until recent filing with the Bankruptcy Court that the Township received a copy of the contract involving DiFrancesco entities and Hovnanian.

Hovnanian paid these monies to Mr. DiFrancesco at a time when there was over $85,000 outstanding in taxes on the subject property. Mr. DiFrancesco, all the DiFrancesco entities and Hovnanian knew of the outstanding tax obligation and of the tax foreclosure proceedings. The contract itself refers to the foreclosure. In my opinion, the $225,000 payment was clearly improper. The payment of $225,000 to a junior unsecured creditor was not commercially reasonable. Hovnanian preferred an unsecured creditor (Mr. DiFrancesco) over the Township of Scotch Plains which had a priority tax lien. Mr. DiFrancesco's acceptance of the money and failure to advise Council of same was an egregious ethical breach. The reason for the payment from Hovnanian to Mr. DiFrancesco is obvious. The payment was made at a time when Hovnanian had an interest in three (3) separate parcels in Scotch Plains, two of which were before land use boards.

5. While being personally involved with Hovnanian on the subject premises, Donald T. DiFrancesco ruled on other projects in the Township involving Hovnanian.

Hovnanian was the purchaser under contract of the subject property from one of the DiFrancesco entities. In papers filed with the Court, Hovananian alleges that it has spent substantial sums in connection with the subject property. As set forth in #4 above, part of those sums included a $225,00 payment to Mr. DiFrancesco. Despite being beholden to Hovnanian, Mr. DiFrancesco as Township Attorney continued to be involved on other projects in the Township involving Hovnanian. On such project is the Donato property which Hovnanian is attempting to develop. Weldon, an adjoining neighbor, is a vociferous opponent to the project. The minutes of the March 28, 1997 Township Council Meeting clearly indicates that Mr. DiFrancesco participated in a discussion involving an ordinance supplementing and amending Chapter XXIII entitiled "Zoning of the Revised General Ordinances of the Township of Scotch Plains, 1978". (sic)

The Honorable Township Council
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June 17, 1998

The meeting involved a second reading on an ordinance to amend the zoning ordinance. William Butler, attorney for Weldon, appeared to oppose the ordinance. The pros and cons of the ordinance are not the issue. Mr. DiFrancesco, the Township Attorney, participated in the discussion. He should have totally absented himself from any involvement whatsoever with the ordinance and with the property because of his involvement with Hovnanian. This is a clear conflict.

6. Discussions between Donald T. DiFrancesco and Robert Johnston in 1994, 1995 and 1996 regarding the Planning Board's rezoning the property in question.

At various times in 1994, 1995 and 1996, Mr. DiFrancesco had discussions with Councilman Johnston, who was a member of the Planning Board, urging the Planning Board to rezone the subject property. The discussions took place without any disclosure by Mr. DiFrancesco of Dr. Scott's lawsuit, judgment and various assignments as set forth in #2 above. The discussions with Mr. Johnston were totally improper and left the Township Council vulnerable to criticism. Despite the discussion that I had with Mr. DiFranceso on June 19, 1995, he continued to be involved with the subject property. Such activities are clearly improper.

7. Donald T. DiFrancesco's April 28, 1998 telephone conversation with Mayor Papen.

On or about April 28, 1998, Mr. DiFrancesco and Mayor Papen had a telephone conversation regarding the recreation grant resolution to convert the property in question into a park. The resolution was removed from the Agenda after the telephone call. I am advised that the Council had clearly made a decision on April 21, 1998 to apply for funds to develop the field. Mr. DiFrancesco's conversation with Mayor Papen was entirely inappropriate. The Council is aware of the contents of the conversation and suffice it to say that Mr. DiFrancesco's discussion which resulted in removing the resolution from consideration is highly improper and a blatant conflict of interest.

8. The economic impact on the taxpayers of Scotch Plains resulting from Mr. DiFrancesco's actions.

No less than six (6) attorneys have been involved with the subject property. Carmen Mendiola, Lawrence A. Woodruff, Douglass W. Hansen, Gary S. Jacobson, Nancy Isaacson and I have all been involved with the subject property in various capacities. The large number of attorneys has been caused solely by Mr. DiFrancesco's involvement with the subject premises. Admittedly, the Township would have retained more than one attorney because of the issues involved, but it is only due to Mr. DiFrancesco's involvement that six (6) attorneys were ultimately involved. Throughout the entire litigation, Mr. DiFrancesco has continued to act as Township Attorney and has been paid substantial sums at the same time that the Township has had to hire other counsel because of his conflict. I

The Honorable Township Council
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June 17, 1998

Believe this would be very difficult for Council to explain to its citizens.

For the reasons set forth in my January 31, 1997 letter, this letter and our discussions on May 19 and June 16, 1998, Mr. DiFrancesco must be told to resign immediately as Township Attorney. If he refuses to do so, it is our opinion that he must be discharged by the Council. His actions are clearly improper and in violation of RPC 1.7. The entire matter as outlined above presents an egregious appearance of impropriety.

Very truly yours

(signed) Lewis M. Markowitx
Special Counsel

(signed) Douglas W. Hansen
Special Counsel



LMM/kal
#15429-002 (bankruptcy)
cc: Mr. Thomas E. Atkins, Municipal Manager
Gary S. Jacobson, Esq.
Nancy Isaacson, Esq.

V:\USERS\SCOTCH\DIFRANC\BANKRUPT\COUNCIL.LTR

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