Opinion
98 Civ. 5269 (BSJ)
April 27, 2000.
MEMORANDUM ORDER
Having considered the submissions of the parties and heard oral argument on November 2, 1999, the Court resolves in this decision the issue of disqualification of counsel raised by plaintiff. Plaintiff HH Acquisition Corporation moves to disqualify the law firm of Beckman, Millman and Sanders, L.L.P., ("BMS") from representing defendants Ben B. Stein ("Stein"), Financial Intranet Holdings ("Holdings"), and Steven A. Sanders, Esq., and the Law Office of Steven A. Sanders, P.C. (collectively "Sanders"). For the reasons set forth below, the motion is denied.
I. Background
Plaintiff brings claims alleging violations of Section 10(b) of the Securities and Exchange Act of 1934 ( 15 U.S.C. § 78j(b)), Rule 10b-5 ( 17 C.F.R. § 240.10b-5), New York common law, Chapter 78 of the Nevada Revised Statutes, Florida common law, the Maryland Uniform Commercial Code, and Maryland common law. The action is brought by the plaintiff both as an individual and as a derivative action by plaintiff as a shareholder of one of the defendants.
In short, plaintiff alleges in its complaint that defendant Stein defrauded plaintiff in connection with the sale of defendant Financial Intranet, Inc., ("FNTN") stock, breaching the purchase agreement and later breaching a subsequent settlement agreement. Plaintiff further alleges that Sanders, the escrow agent for this stock transaction, breached the escrow agreement, conspired in or at least aided in the alleged fraud by Stein, and later also breached a settlement agreement. Plaintiff sues the law firm BMS, primarily alleging vicarious liability for the complained of conduct of Sanders while he was a member of the law firm BMS. Plaintiff also brings shareholder's derivative claims against Stein, allegedly an officer and director of FNTN at times relevant to the lawsuit.
II. A General Perspective on Disqualification
Courts have broad powers to regulate the professional conduct of lawyers. See Felix v. Balkin, 49 F. Supp.2d 260, 263; see also Red Ball Interior Demolition Corp. v. Palmadessa, 908 F. Supp. 1226, 1245 (S.D.N.Y. 1995) ("A trial judge has the inherent authority to regulate lawyers' professional conduct.");Ceramco, Inc. v. Lee Pharmaceuticals, 510 F.2d 268, 271 (2d Cir. 1975) ("[C]ourts have not only the supervisory power but also the duty and responsibility to disqualify counsel for unethical conduct prejudicial to his adversaries."); Hull v. Celanese Corp., 513 F.2d 568, 571 (2d Cir. 1975) ("The district court bears the responsibility for the supervision of the members of its bar.")
Motions to disqualify, however, are generally not favored. See Felix, 49 F. Supp. 2d at 267; see also Bennet Silvershein Assocs. v. Furman, 776 F. Supp. 800, 802 (S.D.N.Y. 1991). The reluctance to disqualify an attorney "derives from the fact that disqualification has an immediate adverse effect on the client by separating him from counsel of his choice, and that disqualification motions are often interposed for tactical reasons." Bd. of Educaction v. Nyquist, 590 F.2d 1241, 1246 (2d Cir. 1979). In addition, motions to disqualify cause delay and add expense; they disrupt attorney-client relationships sometimes of long standing; in short they tend to derail the efficient progress of litigation. See Felix, 49 F. Supp. 2d at 267. Thus parties moving for disqualification carry a "heavy burden" and must satisfy "a high standard of proof." Id.; see also Evans v. Artek Systems Corp., 715 F.2d 788, 791-92 (2d Cir. 1983).
Given that plaintiff does not object to the joint representation of FNTN and Michael Sheppard, allegedly the President, CEO and a director of FNTN at times relevant to the lawsuit, the Court is particularly sensitive to the danger that plaintiff interposes its motion to disqualify BMS for purely tactical reasons.
On the other hand, any doubt should be resolved in favor of disqualification. See Cheng v. GAF Corp., 631 F.2d 1052, 1059 (2d Cir. 1980), vacated on other grounds, 450 U.S. 903 (1981) Thus a balance must be struck between being "`solicitous of a client's right freely to choose his counsel,' and protecting the `need to maintain the highest standards of the profession' and the `integrity of the adversary process.'" Felix, 49 F. Supp. 2d at 267 (quoting Evans, 715 F.2d at 791)
III. Discussion
Plaintiff asserts two bases for disqualifying BMS as counsel to Stein, Holdings and Sanders. First, plaintiff argues that as a defendant in the lawsuit, BMS's obvious interest in shifting liability from Sanders and itself to co-defendants Stein and Holdings creates a hopelessly compromised situation that requires the Court to disqualify BMS from representing the other codefendants. Second, plaintiff argues that BMS cannot represent a director or an officer of a corporation who is a defendant in a shareholder's derivative action because BMS previously represented the corporation.
A.
With respect to the first argument, defendant Stein, for himself and presumably on behalf of his corporate alter ego Holdings, waives any objection to the potential conflict of interest inherent in BMS's representation of him as a codefendant, and advises the Court that he does so knowingly, after consulting with outside counsel. See Stein Decl. ¶ 33. In light of Stein's knowing waiver and the lack of any actual conflict of interest at this time, I will not preemptively disqualify Stein's chosen counsel simply on the motion of Stein's adversary.
In Bottaro v. Hatton Assocs., 680 F.2d 895 (2d Cir. 1982), the Second Circuit articulated a "restrained approach" that calls for disqualification "only upon a finding that the presence of a particular counsel will taint the trial by affecting his or her presentation of the case." Id. at 896 (citations omitted). The Bottaro Court continued:
We have conceded that this test will not "correct all possible ethical conflicts," but have also noted that this laudable goal cannot be attained through rulings in the course of litigation without inviting the wholesale filing of motions for tactical reasons. The result would be needless disruption and delay of litigation, thereby impairing the efficient administration of justice. Where a threat of tainting the trial does not exist, therefore, the litigation should proceed.Id. (citations omitted). In balancing Stein's right freely to choose his counsel against the need to maintain the highest standards of the profession, the Court is satisfied that it has done all that it can to preserve the integrity of the adversary system at this time.
In allowing Stein to retain BMS, I do not read Chang v. Chang, 190 A.D.2d 311 (N.Y.App.Div. 1993) to create a per se rule barring an attorney-defendant in a shareholder's derivative action to represent both himself and co-defendant shareholder-officer-directors. In Chang, there was no knowing waiver by the co-defendants, as Stein has provided in the instant case. Further, in Chang, the case was on appeal, and the record provided proof that the co-defendants had been disadvantaged as a result of their attorney's conflict of interest. See Chang, 190 A.D.2d at 317-18. In the case at bar, the conflict is merely potential. Again, in the event that an actual conflict of interest manifests itself, the parties may avail themselves of a number of remedies at that time.
B.
Plaintiff further urges the Court to disqualify BMS from representing Sanders, a BMS partner. However, the Court does not find disqualification of BMS necessary to preserve the integrity of the adversary system, following the Second Circuit's "restrained approach" to disqualification of counsel. See Bottaro 680 F.2d at 896. The Second Circuit has squarely held that a lawyer-litigant-witness — such as Sanders will be in the instant case — may select a law partner as trial counsel, just as Sanders has done. See id.
True, BMS is a co-defendant, but the threat of tainting the trial is de minimis with respect to BMS's representation of its partner and co-defendant Sanders. First, Sanders is a lawyer and therefore uniquely qualified to appreciate the potential conflicts of interest inherent in BMS's representation of him. Sanders opposes the motion to disqualify and avers that he does so knowingly. See Sanders Decl.. Second, Sanders is represented by his partners at BMS and therefore will not act as both a witness and an advocate. BMS and Sanders thereby avoid the risks of distorting the trial process created whenever a lawyer is both an advocate and a witness. See Bottaro 680 F.2d at 897 (quoting International Electronics Corp. v. Flanzer, 527 F.2d 1288 (2d Cir. 1975))
BMS has the right to defend itself pursuant to 28 U.S.C. § 1654 and will be part of the defense no matter how the Court decides the disqualification issues. Disqualifying BMS from representing co-defendants Stein and Sanders would serve as little more than window dressing given that BMS could still bear the laboring oar at trial. For the foregoing reasons, the Court finds no genuine threat of tainting the trial is created by BMS's representation of Sanders and Stein.
28 USCA § 1654 (1999) provides: "In all courts of the United States the parties may plead and conduct their own cases personally or by counsel as, by the rules of such courts, respectively, are permitted to manage and conduct causes therein."
C.
Plaintiff's second asserted basis for disqualification of BMS from representing Stein urges the Court to read Schmidt v. Magnetic Head Corp., 101 A.D.2d 268 (N.Y.App.Div. 1984) as a per se bar to this type of representation. Quite to the contrary, Schmidt is a very fact specific holding that turns on several facts not present in the case at bar.
First, BMS does not represent both a corporate defendant and co-defendant directors in a shareholder's derivative action. The defendant corporation FNTN has retained its own counsel separate and apart from BMS. See FNTN's Answer. Therefore, the rule articulated by Schmidt barring, in certain circumstances, the joint representation of a corporate defendant and co-defendant directors is simply inapposite. See Schmidt, 101 A.D.2d at 278-79.
Second, the corporate litigant in Schmidt was not a passive litigant at the time the court decided the motion to disqualify. See id. The Schmidt Court, noting that the corporate defendant had asserted counterclaims against the plaintiff but not against the co-defendant directors, held that "there is a clear potential conflict between the interests" of the corporation and the codefendant directors requiring the disqualification of counsel from representing all parties. Id. at 279. In the case at bar, the corporate defendant is relatively passive, having asserted no counterclaims, while at the same time avoiding the conflicts problem by retaining separate counsel.
Third, unlike in Schmidt, there is simply no way to keep BMS out of this litigation, in light of the fact that plaintiff named BMS as a defendant. BMS may or may not have had access to confidential information in the course of its prior representation of FNTN that would put the plaintiff at an undue disadvantage. However, BMS's conduct in this case remains constrained by the ethics rules, and BMS may disclose confidential information only in the very limited circumstances contemplated by those rules. While I have no reason at this time to believe that BMS will abuse any confidential information to which it may have had access as counsel to FNTN, I emphasize that the disciplinary machinery of the state and federal bars combined with plaintiff's obvious close attention to this potential problem should be a sufficient safeguard against the threat of unauthorized use and disclosure of confidential information.
Fourth, I note that plaintiff does not object on Schmidt grounds to the joint representation of the corporate defendant and director Michael Sheppard in this case. This leads me to believe that tactical considerations more than concerns over the integrity of the profession or the unfair use of confidential information motivate the pending motion. The needless delay caused by this motion is precisely what the Second Circuit meant to avoid. See Bd. of Education, 590 F.2d at 1246.
For these reasons, the case at bar is not squarely within Schmidt, but there remains the question of whether BMS may represent Stein in a trial, taking a position that is arguably adverse to its former client FNTN. To determine whether disqualification is required in a subsequent representation, the Second Circuit applies a "substantial relationship" test, granting disqualification only upon a showing that the relationship between issues in the prior and present cases is "patently clear." Government of India v. Cook Industries, Inc., 569 F.2d 737, 739-40 (2d Cir. 1978) (citations omitted). This situation more commonly arises in the context of successive representations in litigation, but, here, the issue is whether BMS's prior representation of FNTN in corporate transactions disqualifies BMS from subsequently representing a one-time FNTN director. The defendants aver that no confidences were revealed to BMS that would merit disqualification, and the Court finds that the plaintiff has not demonstrated that the issues involved in the two representations are "identical" or "essentially the same," as this Circuit requires for disqualification. See Government of India, 569 F.2d at 740. Given these circumstances, I will not disqualify BMS.
Conclusion
For the foregoing reasons, plaintiff's motion to disqualify the law firm Beckman, Millman and Sanders from representing defendants Stein, Holdings, Sanders and Sanders, P.C., is denied.
SO ORDERED:
____________________________ Barbara S. Jones UNITED STATES DISTRICT JUDGE
New York, New York April 26, 2000