Opinion
Case No. 2:00-CV-936-ST
November 16, 2001
This matter came before the court on September 21, and October 19, 2001, for hearings on Defendant Kearns-Tribune's Motion to Disqualify the law firms of Jones Waldo Holbrook McDonough (Jones Waldo) and Winston Strawn.
Defendant Kearns-Tribune, LLC (Kearns-Tribune) is a former client of the law firms Jones Waldo and Winston Strawn. Kearns-Tribune moves to disqualify those firms and attorneys James Lowrie and Thomas Fitzgerald of those firms, from representing Plaintiff Salt Lake Tribune Pubiishing Company, LLC (Tribune Publishing) pursuant to Rules 1.9 and 3.7 of the Utah Rules of Professional Conduct and the Rules of Practice for this court (DUCivR 83-1.1(h)).
After careful consideration the court will deny the Motion to Disqualify as to the law firm of Winston Strawn but grant as to attorney, Thomas Fitzgerald, a member of that firm, and will grant the Motion to Disqualify the entire Jones Waldo law firm, including Mr. Lowrie.
II A
The background of this case is set forth in the previous Orders and will not be repeated here except as necessary for ruling on the present motion. The parties stipulated to the admissibility of the evidence at the hearings except for the Declaration of Geoffrey C. Hazard, Jr. That Declaration was submitted shortly before the Jones Waldo evidentiary hearing and Kearns-Tribune did not have a chance to depose or otherwise examine the declarant on his proffered expert opinion. Accordingly, the court will not consider the Declaration. See U.S. v. Penn, 151 F. Supp.2d 1322 (D. Utah 2001) (declining to consider an affidavit on hearsay grounds in considering a criminal defendant's Motion to Disqualify for alleged conflict of interest).
As for affidavits submitted by the law firms, the carelessness with which they were prepared undermines their credibility. In accordance with the court's observations during the Winston Strawn hearing in this matter, it is a very serious matter for the Winston Strawn attorneys to have omitted the substantial work their firm performed for Kearns-Tribune from 1995 through late 1996, and to have claimed Winston Strawn's representation began in 1997, instead of 1995. See W S Opp'n Mem. Tab A (Fitzgerald Aff. ¶ 3-4) and Tab B (Frisch Aff. ¶¶ 3-4).
B
The record at the hearings establishes the following. For many years, Kearns-Tribune owned and operated The Salt Lake Tribune newspaper. It also owned several smaller newspapers. Prior to 1995, Jones Waldo represented Kearns-Tribune for a variety of matters including real estate, media, contract, employment and First Amendment issues. In the 1950s, Jones Waldo worked for Kearns-Tribune on the creation of the Newspaper Agency Corporation (NAG), the entity responsible for the circulation, printing, distribution and advertising of two competing newspapers, The Salt Lake Tribune and the The Deseret News. Deseret News Publishing and Kearns-Tribune each own half of NAC's stock. The NAG originally operated pursuant to the 1952 Joint Operating Agreement (JOA), and later pursuant to the 1982 Amendments and the 1982 JOA.
Between 1980 and 1982, Jones Waldo represented Kearns-Tribune in negotiating and drafting amendments to the 1952 JOA (the 1982 Amendments). The 1952 JOA and the 1982 amendments are restated as the 1982 JOA. W S Ex. 15. The parties to those negotiations and to the JOAs are Kearns-Tribune and Deseret News Publishing. Dominic Welch, current publisher of the The Salt Lake Tribune was involved in the negotiations for the 1982 JOA. The other persons who negotiated the 1982 amendments and the 1982 JOA for Kearns-Tribune were Jack Gallivan and Jones Waldo attorney Don Holbrook.
The 1952 JOA contains the following provision:
The parties hereto shall not assign, sell, transfer, mortgage, pledge or otherwise dispose of said stock in said agency corporation nor voluntarily permit alienation thereof by any means during the term of this agreement or any renewal thereof, and such stipulation shall be printed on the face of said stock certificates issued to the parties hereto as aforesaid.
Def's Ex. 39.
In Jones Waldo's files is a draft of the 1982 JOA amendments with a handwritten note to "Don," presumably Mr. Holbrook, now of counsel for the firm, regarding the NAG stock. The note, from an unnamed person, says:
Don, this "non alienation" clause was in the prior draft, but does the Tribune want it? Should we quality it to specify "no alienation" without the consent of the other party? Wouldn't justice also have to approve any new party?
Def's Ex. 1, at 3 (draft with note).
The provision appears in the following form in the 1982 Amendments and the 1982 JOA under the heading "STOCK RESTRICTIONS":
The parties hereto shall continue the operations of the Agency Corporation and shall not assign, sell, transfer, mortgage, pledge or otherwise dispose of their stock in the Agency Corporation nor voluntarily permit alienation thereof by any means during the term of this Agreement or any renewal [or extension] thereof and such stipulation shall remain printed on the face of the stock certificates heretofore issued to the parties hereto as aforesaid, or any stock certificates representing shares of the Agency Corporation hereafter issued.
Included in the 1982 Amendment but not the 1982 JOA.
Def's Ex. 2 at 3 (1982 Amendment); W S Ex.15 at 3 (1982 JOA).
In addition to the newspaper related assets, Kearns-Tribune also owned stock in a company called Tele-Communications, Inc., or TCI. In 1995, the TCI stock was Kearns-Tribune's most valuable asset. For several years TCI had proposed acquiring its stock from Kearns-Tribune.
In 1995, seventy percent of Kearns-Tribune's stock was owned, directly or through trusts, by various descendants of Thomas Kearns, a prominent Utahn, who purchased The Salt Lake Tribune in 1901. Stock was also held by Dominic A. Welch, The Salt Lake Tribune's CEO and Publisher. In 1995-1997, Mr. Welch was also the CEO of Kearns-Tribune and President of NAG.
In 1995, the Board of Directors of Kearns-Tribune hired the law firm Winston Strawn to develop strategies that would maximize the proceeds of sale of the TCI stock for the shareholders of Kearns-Tribune and "at the same time preserve operating control of one of the main assets of [Kearns-Tribune], The Salt Lake Tribune." W S Ex. 1 at 1. This was the first work Winston Strawn performed for Kearns-Tribune. Thomas Fitzgerald was the lead Winston Strawn attorney performing this work as special tax counsel for Kearns-Tribune. Mr. Fitzgerald understood that he was working to further the interests of the Kearns-Tribune shareholders. To this end, he interviewed the members of the Board of Directors, most of whom were, or represented, major shareholders of the corporation, regarding their respective concerns, including the interest of some of the shareholders in retaining control of the newspaper. Def's Ex. 49. These interviews revealed that the Kearns descendants were not a single unified group, but were comprised of several groups, with sometimes differing concerns.
Jones Waldo attorneys also worked for Kearns-Tribune on the 1995 initial planning stage of the TCI merger. Bruce Babcock was the lead Jones Waldo attorney working on sale/merger issues.
On August 16, 1995, Winston Strawn proposed several alternatives to the Board of Kearns-Tribune, all involving sale or merger with TCI. Winston Strawn and Jones Waldo were paid by Kearns-Tribune for their work on the planning stage.
The alternatives developed by Winston Strawn all focused on maximizing the return to the shareholders, specifically by structuring the transaction to be tax-free to the shareholders. The tax-free benefit to Kearns-Tribune was also noted — but was considered as part of the plan to increase the value to the shareholders.
On July 17, 1996, Jones Waldo responded to Kearns-Tribune's request for an opinion on whether the proposed merger would violate the JOA.
Specifically, you have asked us to provide an opinion as to whether the Merger would result in a breach by Kearns-Tribune of the restrictions in the JOA on the transferability of Newspaper Agency Corporation's (NAC's) stock, and/or would allow Deseret News to terminate the JOA.
* * *
In our opinion a Merger where Kearns-Tribune is the surviving corporation: (1) will not result in a violation of the stock transfer restriction in the JOA; and (2) will not trigger the optional termination provisions in the JOA.
Def.'s Ex. 14 at 1-2.
The July 17, 1996, opinion letter also opined that the "restriction on the transferability of NAC's stock is specifically authorized by" Utah statute. Id. at 2 n. 4. James Lowrie, now Jones Waldo's lead attorney in this case, signed the letter for the firm.
Ultimately, the Kearns-Tribune shareholders and Directors decided on the reverse subsidiary merger alternative and, in late 1996, its Board of Directors hired Winston Strawn to implement this choice (the merger). The Kearns-Tribune Board again directed Winston Strawn that the primary concern in the merger was the maximization of value to the shareholders and allowing some shareholders to maintain control, of and then to repurchase, the newspaper.
Under this plan, a subsidiary of TCI, TCI KT Merger Sub, Inc., (the TCI merger subsidiary), would be merged into Kearns-Tribune. Although Kearns-Tribune would be the surviving entity, the certificate of incorporation and the bylaws of the TCI merger subsidiary would become the certificate of incorporation and the bylaws of Kearns-Tribune. Similarly, the directors of the TCI merger subsidiary would become the officers and directors of the post-merger Kearns-Tribune. Thus, afterthe merger, Kearns-Tribune would have different articles of incorporation, different bylaws, different officers and directors and different ownership. Under the merger, Kearns-Tribune became a wholly owned subsidiary of TCI.
Also, under the merger the former Kearns-Tribune shareholders who wanted to retain control of The Salt Lake Tribune and retain an option to reacquire its assets formed a new company, the Salt Lake Tribune Publishing Company (Tribune Publishing), for that purpose.
From 1995 through 1997, attorney Sharon Sonnenreich worked for NAC as its general counsel and for The Salt Lake Tribune as its general counsel. Part of her duties included work for Kearns-Tribune. When she worked for Kearns-Tribune, that portion of her salary was charged to that entity. Prior to the merger, she was also corporate secretary for Kearns-Tribune.
Beginning in late 1996, merger details were negotiated with TCI. During the negotiation and finalization of the merger, Kearns-Tribune was represented by Winston Strawn, Jones Waldo and Sharon Sonnenreich. During this phase Jones Waldo and Winston Strawn believed they represented the interests of the pre-merger Kearns-Tribune, its shareholders and the entity that would emerge after the merger as Tribune Publishing. The interests of the merged entity that would bear the name Kearns-Tribune Corporation, but would be a wholly owned and controlled TCI subsidiary, were represented by TCI's in-house counsel and the law firm Baker Botts.
Throughout the negotiations for, and completion of, the merger, Mr. Fitzgerald of Winston Strawn, with the permission of the Kearns-Tribune Corporation Board of Directors, and the encouragement of Mr. Welch, shared confidential information with its shareholders.
No provision of the JOA impacted Winston Strawns tax advice and Mr. Fitzgerald did not discuss the JOA with either Kearns-Tribune or Jones Waldo prior to the merger. He did however, review the 1982 JOA as one of the many contracts to which Kearns-Tribune was subject.
Prior to the merger, Mr. Fitzgerald, Mr. Babcock and other attorneys for Jones Waldo, Mr. Welch, Ms. Sonnenreich, Randy Frisch, and Jack Gallivan, negotiated with TCI representatives for the interests of pre-merger Kearns-Tribune and its shareholders. This same team also negotiated the Management Agreement and Option Agreement on behalf of the new entity, Tribune Publishing, formed by the former Kearns-Tribune shareholders. Mr. Welch, then CEO of Kearns-Tribune, and Mr. Gallivan, then-Chairman of the Kearns-Tribune Board of Directors, asked Mr. Fitzgerald to assist in negotiating the Management Agreement and Option Agreement on behalf of Tribune Publishing. Kearns-Tribune was fully aware of and consented to Winston Strawn's representation of Tribune Publishing in this regard.
Prior to the merger, TCI's management, its in-house counsel, and the TCI-hired law firm Baker Botts, negotiated for the entity that would emerge as the TCI-owned and controlled subsidiary under the name Kearns-Tribune. TCI, as the soon-to-be owner of the post-merger Kearns-Tribune, was fully aware of and acquiesced in both Jones Waldo's and Winston Strawn's representation on behalf of Tribune Publishing even though the same firms had formerly, and were currently, representing the company TCI was acquiring.
During the negotiations TCI's counsel, Baker Botts, prepared the Management Agreement and Option Agreement which are at the heart of this case. Baker Botts focused on the form of the Management Agreement because it was of particular importance to them as they were representing the entity that would be created by the merger and would, therefore, be bound by the Management Agreement.
Mr. Fitzgerald of Winston Strawn made changes to Baker Botts' proposed Option Agreement because he believed the most efficient way to handle the transfer contemplated by the Option Agreement was an asset transfer rather than a stock transfer. Def's Ex. 28. In order to opine on the tax free nature of the transaction, Winston Strawn required Tribune Publishing's representations of several facts. Def.'s Ex. 52. One fact was that Tribune Publishing had no claim of ownership or control of the post-merger Kearns-Tribune or its assets during the five-year Management Agreement term and was acting only as Kearns-Tribune's agent under that Agreement. Id. at ¶ 2.
On April 21, 1997, Plaintiff Tribune Publishing Company, LLC, was formed by shareholders of Kearns-Tribune, including some Kearns descendants, Mr. Welch, and A.L. Alford.
On April 17, 1997, the Merger Agreement was executed. There were several conditions precedent to the consummation of the merger. Pl.'s Ex. A. Art. VII. One such condition was the obtaining of a tax opinion from Winston Strawn. Further required were opinions from Jones Waldo as counsel for Kearns-Tribune and Baker Botts as counsel for TCI.
Winston Strawn provided the tax opinion that the transaction "will be" tax-free as required as a condition precedent to the merger. Def's Ex. 24. In addition to opining that the transaction was tax-free to the shareholders, the opinion also stated that the transaction was tax-free to Kearns-Tribune. This opinion was given for the benefit of Kearns-Tribune and its shareholders. The opinion also said there would be no tax consequences to TCI or to the TCI merger subsidiary. Throughout the merger process, the tax interests of the entity that would be created by the merger were independently represented by TCI's in-house counsel and its retained counsel, Baker Botts.
Jones Waldo's July 31, 1997, opinion letter was provided by the firm. The letter lists Mr. Babcock and three other Jones Waldo attorneys who gave substantive legal attention to the representation of Kearns-Tribune in connection with "the Transaction." Def.'s Ex. 15 at 5. Among other things, the Jones Waldo letter opined Kearns-Tribune was operating lawfully and in accordance with its various contractual obligations. It further opined regarding any necessary consents. Del's Ex. 15, ¶ 5 at 3. In that context, the July 31, 1997, opinion letter stated:
This Opinion Letter does not comment on nor apply in any respect to the possible future exercise by SLT [Salt Lake Tribune Publishing] of its option under the Option Agreement to purchase all of the Tribune Assets and the consequences thereof. We note in this regard that, if this option is exercised by SLT, the transfer by the Company [Kearns-Tribunel to SLT of the Company's [Kearns-Tribune's] shares in NAG will require the consent of Deseret News Publishing.
Id. at 3-4 (underlined emphasis added).
A TCI/Kearns-Tribune proxy statement prepared in connection with the merger disclosed Winton Strawn's opinion, as tax counsel, that the merger would result in no gain or loss to Kearns-Tribune shareholders. W S Ex. 11 at 21. This information was accompanied by several disclaimers, including that no IRS opinion had been sought or obtained, that changes to the IRS Code and Regulations or a judicial opinion could affect tax counsel conclusions, and general disclaimers for the shareholders.
Although Jones Waldo and Winston Strawn opined in various documents that the merger was a tax-free transaction for Kearns-Tribune, that opinion is incidental to the essential focus of their work on the merger — that it be a tax-free transaction for the purpose of maximizing benefits to the pre-merger Kearns-Tribune shareholders. If the merger were found to not be tax-free, it would be those shareholders who would incur the tax liability.
Execution of the Management Agreement and Option Agreement were conditions precedent to the merger and they were made part of the Merger Agreement. They were executed on July 31, 1997. The merger closed on that day, immediately after the execution of those contracts. At the direction of TCI's counsel, Ms. Sonnenreich signed the Management Agreement and Option Agreement as Kearns-Tribune's corporate secretary. She ceased being general counsel for Kearns-Tribune upon closing of the merger.
After the merger, Ms. Sonnenreich remained as general counsel for NAG. She also was counsel for Tribune Publishing and assisted it in its duties as manager. After the merger she continued to be paid by the NAC. When she worked for The Salt Lake Tribune, NAC charged her time to either Kearns-Tribune or to "Salt Lake Tribune," the record is unclear on whether this charge was to the newspaper or to the managing entity, Tribune Publishing.
Mr. Welch signed the Merger Agreement for Kearns-Tribune. He also signed the Management Agreement and Option Agreement for the newly-formed Tribune Publishing.
The Management Agreement and Option Agreement provide that all notices required to be sent under those agreements on behalf of Kearns-Tribune shall be sent to TCI and also to Baker Botts. Pl.'s Ex. 2 at 13-14 and Pl.'s Ex. 3 at 4-5. The Management Agreement and Option Agreement provide that required notices to Tribune Publishing be sent to it, to the attention of Ms. Sonnenreich, with a copy also to be sent to Jones Waldo. Id.
The new post-merger entity created by the July 31, 1997, merger of Kearns-Tribune with the merger sub (TCI KT Merger Sub, Inc.) was still called Kearns-Tribune Corporation, but as noted above, it had new articles of incorporation, new bylaws, new officers, new directors and a new owner.
At the time of the merger, Winston Strawn billed $144,000 to Kearns-Tribune in attorneys' fees. It also requested a bonus of $1 million because it was taking a risk by rendering an unqualified tax opinion. Mr. Welch, acting for Kearns-Tribune agreed to pay a bonus or premium fee of $750,000. John C. Malone, co-founder and then Chairman of the Board and CEO of TCI opposed the bonus. According to Mr. Welch, he decided to pay the bonus over Mr. Malone's objection and explained to Mr. Malone that the payment by the pre-merger company would be accounted for by reducing the Kearns-Tribune cash balance at closing. The $750,000 check cleared after the merger. Winston Strawn has not represented Kearns-Tribune since the merger.
Jones Waldo's fees in connection with the merger were all paid by Kearns-Tribune. Its final fee of $43,825.81 was paid out of Kearns-Tribune funds after the merger closed.
In September 1997, Mr. Alford, one of Kearns-Tribune's former shareholders and directors and by then a director of Tribune Publishing, asked Winston Strawn and Jones Waldo to represent a group of investors in acquiring the smaller newspapers from Kearns-Tribune, then wholly owned by TCI. W S Ex. 13. Mr. Fitzgerald testified that he did not think a conflict waiver/consent letter was necessary from Kearns-Tribune or TCI. However, Winston Strawn's conflicts department asked for one. Mr. Fitzgerald wrote TCI's counsel disclosing its prior representation of Kearns-Tribune in connection with TCI merger and requesting consent to represent Mr. Alford. TCI provided the consent. A similar letter was sent by, and consent obtained for, Jones Waldo's representation of Mr. Alford and his investor group. Def.'s Ex. 16.
Tribune Publishing currently manages The Salt Lake Tribune pursuant to the 1997 Management Agreement. In its capacity as manager of The Salt Lake Tribune, Tribune Publishing has hired Jones Waldo to pursue various actions on behalf of Kearns-Tribune, such as libel litigation. E.g. Ex. 46 at 2, Vol. IV. After the merger Jones Waldo did not represent Kearns-Tribune on matters relating to the Management Agreement and Option Agreement.
In her capacity as counsel for Tribune Publishing as manager of The Salt Lake Tribune, Ms. Sonnenreich has consulted with Jones Waldo and Winston Strawn about various matters, including the Management Agreement.
In 1999, ATT acquired TCI and thereafter TCI became ATT Broadband. Through a new merger on March 5, 1999, Kearns-Tribune Corporation became Kearns-Tribune, LLC.
When ATT obtained control of TCI and Kearns-Tribune, notices of various matters, including changes of address for Kearns-Tribune, continued to be sent to Tribune Publishing with a copy to its counsel Jones Waldo. After the filing of this case, when MediaNews purchased Kearns-Tribune, MediaNews sent notices to Tribune Publishing with a copy to its counsel, Jones Waldo. Such notices continued through May 29, 2001. Pl.'s Exs 6 through 13.
In 1999 and 2000, ATT negotiated for the sale of Kearns-Tribune with, among other potential buyers, Tribune Publishing. The disputed facts involved in the sale negotiations with various parties during this period form part of Tribune Publishing's Complaint in this case. During these negotiations, counsel for ATT/Kearns-Tribune dealt with Jones Waldo and Winston Strawn acting on behalf of Tribune Publishing.
In late 1999, Deseret News Publishing threatened a lawsuit against Kearns-Tribune and ATT. See Third Amended Compliant Ex. J (proposed Complaint by Deseret News Publishing). In January 2000, the New York City law firm representing ATT and Kearns-Tribune, and ATT's in-house counsel, met with, among others, Mr. Fitzgerald of Winston Strawn and Mr. Lowrie of Jones Waldo, both representing Tribune Publishing. There was no objection by either ATT or Kearns-Tribune to those `firms' representation of Plaintiff.
ATT and ATT Broadband (TCI's successor in interest) hereafter are collectively referred to as AT T.
Pursuant to the threatened Deseret News Publishing lawsuit, Winston and Strawn represented Tribune Publishing in its dealings with counsel for ATT and Kearns-Tribune. As part of this representation, on February 21, 2000, Mr. Fitzgerald sent a detailed 10-page letter to ATT articulating, among other things, Tribune Publishing's position regarding the following: Deseret News Publishing's threatened lawsuit; the stock restriction clause of the JOA; Kearns-Tribune's legal obligations, or lack of legal obligations, to The Deseret News; a request to sell Kearns-Tribune to Tribune Publishing to avoid litigation exposure; and, Tribune Publishing's position that the Option Agreement prevents a sale of Kearns-Tribune to Deseret News Publishing. See W S Ex. 6. Among other assertions, the February 21, 2000, Winston Strawn letter asserts several reasons why "the stock restrictions contained in the JOA are void and unenforceable." Id. at 2-3.
Despite this representation of Tribune Publishing's interests in a manner expressly adverse to Kearns-Tribune on issues regarding the Management Agreement, the Option Agreement and the JOA, neither Kearns-Tribune nor ATT made any objection to such
representation by Winston Strawn.
In May 2000, Jones Waldo hired two attorneys who had previously represented ATT on unrelated lobbying mailers. Jones Waldo obtained a May 9, 2000, waiver of conflicts letter (the Waiver Letter) from ATT that shows ATT had full knowledge of and acquiesced in Jones Waldo's representation of Tribune Publishing on matters relating to the JOA, the Management Agreement and the Option Agreement. The Waiver Letter recognized that Jones Waldo:
already represents three clients who are adverse or potentially adverse to ATT in various unrelated and separate matters [from those involving the two new attorneys]. Those matters involve [other matters] and a potential controversy between Salt Lake Tribune Publishing Company, LLC and ATT. . . .
Specifically those matters are.
Jones Waldo represents The Salt Lake Tribune Publishing Company, LLC, which operates The Salt Lake Tribune newspaper (collectively "The Tribune"), pursuant to a Management Agreement and related purchase Option Agreement. The other named party to these agreements is ATT's affiliate, Kearns-Tribune Corp., which has now merged into K-T, LLC. When last we talked, there was a controversy which included issues regarding the allocation of power between The Tribune and The Deseret News Publishing Company . . . under a newspaper Joint Operating Agreement, and corresponding issues respecting Management and Option Agreements. The possible controversy between The Tribune and ATT arose from The Tribune's conflict with The Deseret News, and threatened litigation by The Deseret News against The Tribune and ATT. However, it appears that The Deseret News is no longer threatening litigation, and is negotiating with The Tribune to work out an amicable solution.
* * *
You have indicated your belief that Jones Waldo will be able to properly represent ATT in its lobbying efforts and such representation would not be adversely affected . . . by Jones Waldo's representation of the The Tribune,
Accordingly, ATT is willing to waive on a limited basis any conflict of interest arising from [the new lawyer] joining your firm. . . . Moreover, we do not waive any future conflicts that may arise in the event litigation were to ensue between ATT and a client of your firm.
In all events, ATT relies on the expectation that your firm will bring to our attention any conflict that may arise in this or any other matter wherein your firm seeks to represent a client with an adverse interest to ATT or one of its subsidiaries or affiliates.
Def's Ex. 32 (italics in original, underlined emphasis added).
On December 1, 2000, ATT announced it would sell Kearns-Tribune to MediaNews.
This case was filed that same day. The Complaint sought to block ATT's proposed sale of Kearns-Tribune to MediaNews and alleged violation of the Management Agreement and the Option Agreement. Although Plaintiff's Sixth Claim for Relief alleges that Defendants attempted to interfere with Tribune Publishing's rights under the Management Agreement, the Option Agreement and the 1982 JOA, it does not clearly allege how the JOA is involved.
On December 5, 2000, ATT and ATT Broadband, LLC, sent a letter to Mr. Lowrie, then Tribune Publishing's lead lawyer on this case. The letter stated:
As you know, this office represents defendants ATT Corporation and ATT Broadband, LLC in the above-captioned case. I have been asked by these defendants to advise you that they object to Jones, Waldo, Holbrook McDonough's representation of plaintiff in this case and that they object specifically to your individual [Mr. Lowrie's] representation of plaintiff in this case. . . . In light of that fact that Kearns-Tribune, LLC is a wholly owned subsidiary of defendant ATT Broadband, LLC in the above-captioned case, the ATT parties believe that your representation of plaintiff in this case constitutes a violation of Rule 1.7(a), Utah Rules of Professional Conduct. For the same reason, the ATT parties believe that your representation of Newspaper Agency Corporation — fifty percent (50%) of which is owned by Kearns-Tribune, LLC — constitutes a violation of the same rule.
In addition, the ATT parties believe that you are likely to be a witness in this case should the complaint be amended to allege the existence of an agreement to sell Kearns-Tribune, LLC's equity to Salt Lake Tribune Publishing Company. . . . If this case goes to trial, it is likely that the participants in those negotiations will testify at trial. It is our understanding that you would appear as a witness adverse to Kearns-Tribune LLC. For these reasons, the ATT defendants believe that your further participation as counsel for the plaintiff is inconsistent with the terms of Rule 3.7, Utah Rules of Professional Conduct.
For the foregoing reasons, the ATT parties respectfully ask you and your firm to withdraw as counsel for plaintiff in this case.
Please be advised that the ATT defendants do not waive or consent to the representation of Salt Lake Tribune Publishing Company by you or your firm. Please also be advised that the ATT defendants will not consent to that representation.
If you believe I am mistaken as to the facts relating to you or your firm's representation of Kearns-Tribune, LLC or Newspaper Agency Corporation, I would appreciate your providing me with accurate facts promptly.
Kearns-Tribune Reply Br. Ex. 1 (underlined emphasis in original).
Jones Waldo failed to respond to ATT's December 5, 2000, letter alleging it had a conflict. Jones Waldo offers no explanation for why it did not answer ATT's letter. Jones Waldo did inform Tribune Publishing, through Mr. Welch, of the allegation that the law firm had a conflict, although the date of conveying that information is not clear. Jones Waldo also informed Tribune Publishing, through Mr. Welch, that it did not believe disqualification would be necessary. According to Mr. Welch, Tribune Publishing viewed this case as the continuation of a dispute that started several years earlier and he felt the dispute was too far along to switch counsel.
On December 5, 2000, Plaintiff filed its Amended Complaint adding MediaNews — the then-prospective purchaser of Kearns-Tribune — as a defendant. On December 15, 2000, Judge Campbell issued her first preliminary injunction order finding generally in favor of Defendants and refusing to block the sale.
On January 2, 2001, MediaNews purchased Kearns-Tribune. That same day Kearns-Tribune and Deseret News Publishing amended the JOA (the 2001 JOA). Plaintiff immediately filed its second preliminary injunction motion.
Extrinsic evidence of the negotiations for the Management Agreement and Option Agreement were considered by Judge Campbell in connection with the preliminary injunction proceedings. E.g. February 21, 2000, Order, 2001 WL 670928 *8-10. ATT and ATT Broadband, Kearns-Tribune's owners at the time of the first injunction hearings, and MediaNews, Kearns-Tribune's owner at the time of the second injunction hearing, did not make any objection in this case to Jones Waldo's representation of Plaintiff on those matters during those extensive preliminary injunction proceedings. Thus, despite the December 5, 2001, objection letter, ATT, MediaNews and Kearns-Tribune all failed to promptly bring the issue before the court.
On January 8, 20011 Plaintiff sought leave to amend the Complaint to name Kearns-Tribune as a party. On February 21, 2001, Judge Campbell issued an order on granting an injunction.
On April 9, 2001, Deseret News Publishing, the other party to the JOA, filed a state court action against Tribune Publishing, ATT and others. In that action, Deseret News Publishing sought a declaration that the 1982 and 2001 JOAs prohibit the sale, assignment, transfer, or otherwise disposing of the NAC stock without its consent. It also sought a declaration that the 1997 Option Agreement is unenforceable and, in the alternative, if it is enforceable, exercise of the Option Agreement requires Deseret News Publishing's consent to any sale of Kearns-Tribune's NAC stock. On November 13, 2001, Deseret News filed its Answer Counterclaim Crossclaim in this case seeking this same relief.
According to the parties, Deseret News Publishing has now dismissed the state court action.
On June 6, 2001, Kearns-Tribune's counsel wrote to Mr. Fitzgerald of Winston Strawn contending that it recently learned from the "bcc" notation at the bottom of a letter that Winton Strawn was part of Plaintiff's legal team and expressing concern that it had a conflict of interest. Unlike Jones Waldo, Winston Strawn immediately responded to the claim of conflict. On June 19, 2001, Winston Strawn wrote Kearns-Tribune's counsel setting forth its position and supporting facts for why it believed it had no conflict. Def.'s Ex. 56.
On June 22, 2001, Plaintiff filed a Second Amended Complaint formally adding Kearns-Tribune as a party. Currently, the same law firms represent defendant Media News and the company it owns and controls, Defendant Kearns-Tribune. As noted in this court's Order Denying MediaNews' Motion to Dismiss, versions of the Second Amended Complaint naming Kearns-Tribune as a party had been circulating for some time prior to actual filing, pending resolution of the dispute over the proposed Amended Complaint. On July 16, 2001, Kearns-Tribune filed its Answer.
Also, on July 16, 2001, Jones Waldo responded to a June 25, 2001, letter from Kearns-Tribune counsel and generally denied it had a conflict. Def.'s Ex. 47. These communications were made in connection with discovery requests made upon Jones Waldo by Kearns-Tribune.
On July 19, 2001, this case was set for trial to begin on June 24, 2002. On July 30, 2001, Kearns-Tribune filed the present Motion to Disqualify.
Kenneth Kristl, of Winston Strawn, had attended the December 6, 2000, deposition of Randy Frisch on behalf of Plaintiff. Prior to the filing of the Motion to Disqualify Winston Strawn, that firm had assisted Plaintiff in this case but had not made a formal entry of appearance. Winston Strawn requested and obtained leave to file a special appearance for the purpose of contesting this motion.
Kearns-Tribune offers two excuses for why it did not file its Motion to Disqualify earlier. First, that it was not formally made a party until July 22, 2001. Second, that its owner, MediaNews, was busy with more pressing matters in this fast-moving case.
Since the filing of this case, Jones Waldo attorneys have spent approximately 4,000 hours on this case and have charged Plaintiff approximately $1 million in fees.
III
Kearns-Tribune moves to disqualify Jones Waldo and Winston Strawn from representing Plaintiff pursuant to Rules 1.9 and 3.7 of the Utah Rules of Professional Conduct. Rule 1.9 prohibits an attorney from representing a new client (Tribune Publishing) against a former client (Kearns-Tribune) in a matter that is substantially factually related to the former representation, unless the former client (Kearns-Tribune) consents. Kearns-Tribune contends the issues in this lawsuit are "substantially factually related" to the matters for which the law firms formerly represented Kearns-Tribune and therefore the law firms cannot represent Tribune Publishing without Kearns-Tribune's consent. Rule 3.7 of the Utah Rules of Professional Conduct prohibits a lawyer from acting as an advocate at a trial where he or she is likely to appear as a "necessary witness." Kearns-Tribune contends James Lowrie of Jones Waldo and Thomas Fitzgerald of Winston Strawn may be called to testify at trial about their work for Kearns-Tribune.
The law firms contend they have not violated Rules 1.9 or 3.7; that even if those Rules are found to be applicable that Kearns-Tribune has waived any conflict; and, even if there is not a waiver, disqualification would not be the proper remedy where there is no prejudice to Kearns-Tribune and disqualification would result in great prejudice to Plaintiff.
IV
The Utah Rules of Professional Conduct are made applicable in this court by DUCIvR. 83-1.1(h). Those Rules provide:
Rule 1.9. Conflict of interest: Former Client. A lawyer who has formerly represented a client in a matter shall not thereafter:
(a) Represent another person in the same or a substantially factually related matter in which that person's interests are materially adverse to the interests of the former client unless the former client consents after consultation; or
(b) Use information relating to the representation to the disadvantage of the former client except as Rule 1.6 would permit with respect to a client or when the information has become generally known.
Rule 19, Utah Rules of Professional Conduct (underlined emphasis added).
Rule 1.10 Imputed disqualification: general rule.
(a) While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them would be prohibited from doing so by Rule 1.7, 1.8(c), 1.9 or 2.2.
Rule 1.10, Utah Rules of Professional Conduct.
Rule 3.7. Lawyer as witness.
(a) A lawyer shall not act as advocate at a trial in which the lawyer is likely to be a necessary witness except where:
(1) The testimony relates to an uncontested issue;
(2) The testimony relates to the nature and value of legal services rendered in the case; or
(3) Disqualification of the lawyer would work substantial hardship on the client.
(b) A lawyer may act as advocate in the trial in which another lawyer in the lawyers firm is likely to be called as a witness unless precluded from doing so by Rule 1.7 or Rule 1.9.
Rule 3.7, Utah Rules of Professional Conduct (underlined emphasis added).
The Rules of Practice of this court provide:
Standard of Professional Conduct. All attorneys practicing before this court, . . . are governed by and must comply with the rules of practice adopted by this court, and unless otherwise provided by these rules, with the Utah Rules of Professional Conduct, as revised and amended and as interpreted by this court.
DUGivR. 83-1.1(h).
Kearns-Tribune has the burden of showing disqualification is warranted. Parkinson v. Phonex Corp., 857 F. Supp. 1474, 1480 (D. Utah 1994). The law to be applied to disqualification motions is discussed in Cole v. Ruidoso Municipal Schools, 43 F.3d 1373, 1383 (10th Cir. 1994), applying New Mexico's Rules of Professional Conduct, which are similar, but not identical to, the Utah Rules of Professional Conduct.
Motions to disqualify are governed by two sources of authority. First, attorneys are bound by the local rules of the court in which they appear. Federal district courts usually adopt the Rules of Professional Conduct of the states where they are situated. Second, because motions to disqualify counsel in federal proceedings are substantive motions affecting the rights of the parties, they are decided by applying standards developed under federal law. In re American Airlines, Inc., 972 F.2d 605, 610 (5th Gir. 1992), Therefore, motions to disqualify are governed by the ethical rules announced by the national profession and considered "in light of the public interest and the litigants' rights.". . .
Cole, 43 F.3d at 1383.
Thus, the "legal standard applicable is the law of the Tenth Circuit or this district." Parkinson, 857 F. Supp. at 1480.
It should be observed that federal courts have treated a motion for disqualification as one that should only rarely be granted. A motion to disqualify is to be viewed with extreme caution, but recognizing the possible unfair advantage that may result depending on the circumstances. There is no broad rule of disqualification of counsel and a motion for such relief can itself be harassment and involve vexatious factors.
Id., at 1480-81 (citations omitted).
In considering motions to disqualify, each case must be considered on its individual facts in light of the purpose of the Professional Rule at issue.
Utah's Rules of Professional Conduct differ slightly from the Model Rules of Professional Conduct. When comparing former and current representation, Utah's Rule 1.9 looks to whether the matters at issue are "substantially factually related" and the Model Rule 1.9 looks to whether they are "substantially related." In Poly Software International, Inc. v. Su, 880 F. Supp. 1487, 1492 n. 7 (D. Utah 1995), the court noted that the Tenth Circuit had previously discussed the difference as follows:
In commenting upon the Utah Prof. Conduct Rules, Rule 1.9, the Tenth Circuit has observed that Utah's
variation from the ABA model code [appears] to be a codification of [the Tenth Circuit's] existing definition of substantiality by focusing on the factual nexus between the prior and the current representations rather than a narrower identity of legal issues. Substantial factual relation should not be read to require attorneys to have worked on exactly the same matter for both sides of the dispute before they are disqualified.
Id., (quoting SLC Ltd. V v. Bradford Group West Inc., 999 F.2d 464, 467 (10th Cir. 1993)).
A "substantially factually related matter,". . . is not defined by any particular, discrete legal proceeding. By its terms, it includes aspects of past controversies which are similar, but not necessarily identical, to those encompassed within a present dispute. So long as there are substantial factual threads connecting the two matters, the criteria of Rule 1.9 are met.
Poly Software, 880 F. Supp. at 1492.
In Poly Software, the court listed three factors that must be demonstrated by "a party wishing to disqualify opposing counsel under Rule 1.9":
(1) that a previous attorney-client relationship arose with the moving party; (2) that the present litigation is "substantially factually related" to the previous representation; and (3) that the attorney's present client's interests are material adverse to the movant.
Id., 880 F. Supp. at 1490.
V A
Jones Waldo and Winston Strawn take different approaches to the first factor. Jones Waldo contends that Rule 1.9 does not apply because the entity it represented in connection with the 1997 merger no longer exists. Jones Waldo contends that because of Kearns-Tribune's metamorphous through the changes of ownership, form, assets and control, the pre-merger entity Kearns-Tribune Corporation it represented no longer exists. Jones Waldo traces Kearns-Tribune's company history and assigns a different name for each change of ownership and/or form. In support of its position Jones Waldo relies on such cases as International Electric Corp. v. Flanzer, 527 F.2d 1288 (2nd Cir. 1975); Tekni-Plex, Inc. v. Meyner and Landis, 674 N.E.2d 663 (New York Ct. App. 1996); Bass Public Ltd. Co. v. Promus Companies Inc., 1994 WL 9680 (S.D.N.Y. Jan 10, 1994) and Brennan v. Sun Healtheare Group, Inc., 1998 U.S. Dist. LEXIS 22889 (S.D. Ind. 1998).
In International Electric Corp. v. Flanzer, 527 F.2d 1288 (2nd Cir. 1975), the Second Circuit held that where a corporation was defunct as a result of a merger that was, in a practical sense, a sale, "the selling stockholders — not the buyer, were the clients of the law firm." 527 F.2d at 1292 ("The law firm and the plaintiffs were on opposite sides of the negotiations which were conducted at arm's length."). Accordingly, the court held that the "earlier relationship of the law firm to the merged corporation cannot be a source of disqualification in these circumstances, even though a former client is surely entitled to protection." Id.
Kearns-Tribune asserts it is the same company and it is the former client of Jones Waldo and Winston Strawn. It points out that it is the successor in interest, is still in the same business and owns the The Salt Lake Tribune, and the Tribune assets under the same name. Kearns-Tribune rejects the pre-merger/post-merger entity distinction and distinguishes cases cited by Plaintiff. It relies on cases such as Weasler v. Weasler Engineering, Inc., 1999 WL 203567 (Wis.Ct.App. 1999); Thompson U.S. Inc. v. Gosnell, 581 N.Y,.2d 764 (N.Y.Sup.Ct. A.D. 1992); Casco Northern Bank v. JBI Ass., Ltd., 667 A.2d 856, (Me 1995); Koch v. Koch Industries, 789 F. Supp. 1525 (D. Kan 1992); and Tekni-Plex, supra.
This court has found, supra, that Jones Waldo and Winston Strawn did represent Kearns-Tribune in the 1995 planning stage up through closing the merger in 1997. Although the law firms make much of the fact that the essential task of the merger was maximizing the value to be realized by the shareholders by structuring a tax-free transaction, that direction was given to the law firms via their client's Board of Directors. The firms were representing Kearns-Tribune, and Kearns-Tribune required that the merger maximize benefits to be obtained by its shareholders. This does not convert the law firm's representation into representation of the shareholders — especially where, apart from maximizing value from the stock, the shareholders did not otherwise have identical interests in the merger.
On the issue of whether there is sufficient continuity for the post-merger Kearns-Tribune to retain the pre-merger Kearns-Tribune's status as a former client, there is no controlling law in this district or the Tenth Circuit. In Tekni-Plex, supra, the court looked at a somewhat similar merger and, applying the Supreme Court's Weintraub case, found the attorney-client relationship survived the merger.
When ownership of a corporation changes hands, whether the attorney-client relationship transfers as well to the new owners turns on the practical consequences rather than the formalities of the particular transaction. In Commodity Futures Trading Commn. v. Weintraub, 471 U.S. 343 [1985], the Supreme Court held that power to exercise the attorney-client privilege of an insolvent corporation passed to the bankruptcy trustee, who assumed managerial responsibility for operating the debtor company's business (see, id., at 352-353). In reaching this conclusion, the Court noted with regard to solvent corporations that "when control of a corporation passes to new management, the authority to assert and waive the corporation's attorney-client privilege passes as well. New managers installed as a result of a takeover, merger, loss of confidence by shareholders, or simply normal succession, may waive the attorney-client privilege with respect to communications made by former officers and directors" (id., at 349).
Weintraub establishes that, where efforts are made to run the pre-existing business entity and manage its affairs. successor management stands in the shoes of nor management and controls the attorney-client privilege with respect to matters concerning the company's operations. It follows that. under such circumstances the nor attorne -client relationship continues with the newly formed entity.
By contrast, the mere transfer of assets with no attempt to continue the pre- existing operation generally does not transfer the attorney-client relationship.
* * *
Following the merger, the business of old Tekni-Plex remained unchanged, with the same products, clients, suppliers and non-managerial personnel. Indeed, under the Merger Agreement, new Tekni-Plex possessed all of the rights, privileges, liabilities and obligations of old Tekni-Plex, in addition to its assets. Certainly, new Tekni-Plex is entitled to access to any relevant pre-merger legal advice rendered to old Tekni-Plex that it might need to defend against these liabilities or pursue any of these rights.
As a practical matter, then, old Tekni-Plex did not die. To the contrary, the business operations of old Tekni-Plex continued under the new managers. Consequently, control of the attorney-client privilege with respect to any confidential communications between ML and corporate actors of old Tekni-Plex concerning these operations passed to the management of new Tekni-Plex (see, Commodity Futures Trading Commn. v. Weintraub, 471 U.S. at 349, supra). An attorney-client relationship between ML and new Tekni-Plex necessarily exists.
Tekni-Plex, Inc., 674 N.E.2d at 668-69 (underlined emphasis added).
In Tekni-Plex, the court found that a certain category of claims, those arising from indemnity agreements, were independent of the merger and intended by the parties to remain independent and adverse to the rights of the buyer. 674 N.E.2d at 671. Therefore, under the structure of that particular merger and the particular transaction involving the sale of a corporation owned by one individual, the court held the acquiring corporation did not acquire the right to the communications between the selling corporation and its firm. Id. at 671-72.
This case is similar to Tekni-Plex in that under the structure of the merger transaction, there was a category of agreements where the rights of the sellers were intended to remain independent of and adverse to the rights of the buyer, i.e. the Management Agreement and Option Agreement.
Although in this case, the business operations of the surviving corporation Kearns-Tribune, are contracted out to an agent during the term of the Management Agreement and the major assets are encumbered during the term of the Option Agreement, Def.'s Ex. 32 at 3 ¶ 6 (agreement not to sell), this case is nonetheless similar to Tekni-Plex, in that the business operation and assets continue in the ownership of Kearns-Tribune. Thus, this is not a case like Flanzer where the successor corporation is defunct or the assets basically sold leaving an empty shell. After all, Kearns-Tribune is an entity that was recently purchased for approximately $200 million, based upon its valuable assets, including its newspaper operation. Unless and until the Option Agreement is successfully exercised, the valuable assets and the on-going newspaper business remain the property of the successor entity Kearns-Tribune.
Based on the foregoing, the court finds that post-merger Kearns-Tribune remains, through all of its successors in interest, a former client of Jones Waldo.
B
Winston Strawn contends that Kearns-Tribune is not its former client for a different reason. It contends that it was the shareholders and not the corporation that were the "substantive beneficiaries" of its representation, including the opinion letter. W S Opp'n Mem. at 5. Therefore, it contends that its clients were the pre-merger Kearns-Tribune and its shareholders rather than the post-merger Kearns-Tribune. Winston Strawn cites Cole, supra, 43 F.3d 1373, for the proposition that under the first factor of the test for disqualification, an actual attorney-client relationship, the movant must show two things. First, that "it submitted confidential information to a lawyer" and second, that "it did so with the reasonable belief that the lawyer was acting as the party's attorney." Cole, 43 F.3d at 1384. See also Poly Software, 880 F. Supp. at 1490.
Winston Strawn contends that Kearns-Tribune did not provide it with confidential information because, pursuant to the direction of its Board of Directors, all confidential information Winston Strawn received was shared between, made known, or already known to pre-merger Kearns-Tribune and its shareholders. Winston Strawn further contends that because post-merger Kearns-Tribune was represented by counsel hired by its future owner TCI, and because Kearns-Tribune knew and agreed that it was hired to further the interests of the shareholders, it had no reasonable basis to believe that Winston and Strawn represented it. Thus, Winston Strawn contends that Kearns-Tribune has not shown the existence of an actual attorney-client relationship with the post-merger company.
Although it is clear that confidences regarding the merger and the tax ramifications were, pursuant to the express direction of Kearns-Tribune's directors, shared with the shareholders, the court rejects the proposition that this prevented an attorney-client relationship between Winston Strawn and Kearns-Tribune. The court finds that a client attorney relationship existed between Winston Strawn and Kearns-Tribune and, as discussed above, not between Winston Strawn and the shareholders. Based on the foregoing, the court finds that post-merger Kearns-Tribune remains, through all of its successors in interest, a former client of Winston Strawn.
C
However, that does not end the matter. In addition to representing Kearns-Tribune in connection with the merger, Jones Waldo and Winston Strawn, with the knowledge and implicit consent of Kearns-Tribune, also concurrently represented Plaintiff in connection with the Management Agreement and Option Agreement. In the Management Agreement and Option Agreement transaction, as noted above, the interests of Kearns-Tribune were represented by TCI and its attorneys. The Management Agreement and Option Agreement were executed as a condition precedent to, and together with, the merger closing, whereby TCI acquired Kearns-Tribune.
Thus, the law firms had two clients during the 1996-97 merger period — first Kearns-Tribune and second, Tribune Publishing, whom they represented in connection with the Management Agreement and Option Agreement. After the merger, these same firms continued to represent Tribune Publishing in connection with the Management Agreement and Option Agreement.
VI A
The court now turns to the second factor to consider in a motion to disqualify. When considering whether the present litigation is "substantially factually related" to the previous representation, it is significant to note that this case does not involve, except in a peripheral background way, the merger itself. It does not involve the parties' rights under the Merger Agreement or allegations of breaches of warranties or representations made in connection with the merger, the more common situation in which disqualification motions arise. It does not involve a dispute over the tax status of the merger or any gain or loss to any shareholder or entity involved — the matters for which Winston Strawn was specifically hired and provided services to Kearns-Tribune.
Allegations of the breach of or misconduct in connection with the merger/sale agreement is the common situation giving rise to motions to disqualify counsel formerly representing corporation from subsequently representing its shareholders. E.g. Waste Management, Inc. v. Sims, 875 F. Supp. 501 (N.D. In 1995) (buyer of corporate shares alleged breach of warranties and representations by selling shareholders and sought to bar sellers from obtaining legal advise from law firm that had acted as counsel for corporation); Int'l Elec. v. Flanzer, supra, 527 F.2d 1288 (purchasing company sought to disqualify defunct corporation's counsel from representing selling stockholders against claims that in connection with the sale/merger they made misrepresentations, violated securities laws and breached the contact). Koch, supra, 798 F. Supp. at 1528 (corporation's former counsel disqualified from representing selling shareholders in suit against corporation alleging fraudulent misrepresentation, misconduct and breaches of warranties contained in the stock sale agreement).
Instead, this case basically consists of variations of the parties' disputes over the Management Agreement and Option Agreement. Neither Jones Waldo nor Winston Strawn represented Kearns-Tribune on those matters.
B
Kearns-Tribune contends that Jones Waldo's prior representation is "substantially factually related" to this case because the JOAs are involved. Kearns-Tribune acknowledges, based upon representations made to the court, that Plaintiff does not currently seek to affect Deseret News Publishing under the JOA's stock restriction clause. However, Kearns-Tribune suggests that the validity of the JOA's stock restriction clause is an issue that will "wiggle back in" this case.
The Complaint in this case has been amended several times. Under the recently filed Fourth Amended Complaint, Plaintiff seeks to enforce the Option Agreement and to pursue rights it believes it has under the Management Agreement. It also seeks to show that Defendants MediaNews, ATT, and Deseret News Publishing interfered with the performance of the JOA by directing, requiring or inducing Kearns-Tribune and/or Plaintiff to breach the JOA by the 2001 Amendments. None of these claims are brought against Kearns-Tribune itself.
The court agrees with Jones Waldo that these claims are not substantially factually similar to its representation of Kearns-Tribune regarding the 1952 JOA and the 1982 JOA. Tribune Publishing's claims involving the JOAs concern the 2001 JOA amendments. Jones Waldo did not represent Kearns-Tribune in connection with the 2001 JOA and it is nota party to the 2001 JOA. Further, the 2001 JOA matters have already been the subject of evidence in this case and are currently subject to a Preliminary injunction — all without any objection by MediaNews to Tribune Publishing's representation by the law firms.
Kearns-Tribune's counterclaims involving the JOAs generally involve alleged post 1997, actions by Plaintiff. Although Tribune Publishing is not a party to any of the JOAs, the Management Agreement assigns it, in its capacity as manager and agent, a list of services to be performed, including, to "act on behalf of KT [Kearns-Tribune] with respect to all action required or permitted to be taken by KT under the Joint Operating Agreement." Def's Ex. 31, § 3.02 (ii). The Management Agreement prohibits Plaintiff as manager and agent, from amending, altering or modifying the JOA. Id. at § 3.03.
Kearns-Tribune's counterclaim for declaratory relief alleges:
The exercise of the option under the Option Agreement is subject to the condition precedent that Deseret News Publishing give its consent to the sale of certain assets, without which consent the sale is precluded. The Option Agreement is unenforceable by operation of the doctrines of impossibility and frustration of purpose.
Def's Ex. 34, Answer to Second Amended Complaint and Counterclaims, ¶ 50.
In its most recent pleading, the November 5, 2001, Answer to Fourth Amended Complaint and Counterclaims, Kearns-Tribune expands on this counterclaim and seeks declaratory relief as follows:
The Option Agreement precludes that sale of the Tribune Assets to Salt Lake Publishing without the consent of Deseret News Publishing, and is not breached by MedaNews or Kearns LLC if the sale of the Tribune Assets is precluded because of the failure of Salt Lake Publishing to obtain the required consent of Deseret News Publishing Company.
Id. at ¶ 59(a).
In addition, Kearns-Tribune's affirmative defenses include impossibility (Twentieth Affirmative Defense) and hindrance of contract (Eleventh Affirmative Defense). Def's Ex. 34, Answer to Second Amended Complaint and Counterclaims, at 20-21. See also Answer to Fourth Amended Complaint and Counterclaims, Eleventh Affirmative Defenses (hindrance of contract) and Twentieth Affirmative Defense (impossibility and/or frustration of purpose).
The court finds Kearns-Tribune's counterclaim, Count I, and its affirmative defenses do involve the 1982 JOA and its stock restriction clause and, therefore, are substantially factually related to matters for which Jones Waldo previously represented Kearns-Tribune in this case. Additionally, this case is substantially factually similar to one of the matters on which Jones Waldo gave Kearns-Tribune the July 31, 1997, opinion letter — that consent is required for Kearns-Tribune to transfer the NAG stock in connection with exercising the Option Agreement. Def.s Ex. 15 at 4.
The court finds that the present litigation is, on material issues, "substantially factually related" to Jones Waldo' previous representation of Kearns-Tribune.
C
Kearns-Tribune contends that Winston Strawn's prior representation is "substantially factually similar" because the prior representation and the representation in this case both involve issues of the amount of control Tribune Publishing retains over the operation of the newspaper.
The amount of control has already been a disputed issue in this case. See February 21, 2001, Order, 2001 WL 670928 at *10. However, the issue of control for purposes of the merger remaining eligible as a tax-free transaction under a section of the IRS Code is a peripheral matter in this case. As such the tax issues are not substantially factually related to this case which is about the extent of the rights granted to Plaintiff pursuant to a contract. As discussed above, this case does not directly involve factual issues for which Winston Strawn served as tax counsel in connection with the merger.
Because this case is not "substantially factually related" to the matters for which law firm Winston Strawn previously represented Kearns-Tribune, Kearns-Tribune has not met its burden of showing a violation of Rule 1.9 by Winston Strawn.
VII A
Concerning Jones Waldo, the court turns to the third factor, whether the attorney's present client's interests are materially adverse to the movant. Poly Software, 880 F. Supp. at 1492. Jones Waldo contends that Tribune Publishing's interests are not materially adverse to that of movant Kearns-Tribune because the entity that its attorneys' represented, Kearns-Tribune Corporation, no longer exists and Defendant Kearns-Tribune is not the same entity Jones Waldo previously represented.
The court rejects this position for the reasons stated above in connection with the first factor. Movant Kearns-Tribune is the successor in interest to Kearns-Tribune Corporation and is the former client of Jones Waldo. The court finds that the interests of Jones Waldo's present client, Tribune Publishing, are materially adverse to movant Kearns-Tribune.
B
Where the matters are substantially factually related and materially adverse, representation is prohibited "unless the former client consents after consultation." Rule 1.9(a). In this case Jones Waldo contends that the ATT Waiver Letter of May 2000, is such consent. The present motion may have been avoided or brought to resolution earlier had Jones Waldo provided formal disclosure and obtained written consent/waiver letters from its former client Kearns-Tribune, and its current client, Tribune Publishing, in connection with this lawsuit. Such was done, for example, in the above-noted Alford representation concerning the purchase of certain Kearns-Tribune assets. Contrary to Jones Waldo's position, the court finds that the May 9, 2000, ATT Waiver Letter is a qualified waiver for conflicts arising from two new lawyers joining the firm, and is not a general waiver/consent to the representation in this matter.
VIII A
Having found that the three factors are met as to Jones Waldo attorneys, and therefore there is a violation of Rule 1.9, the court turns to the issue of whether the drastic remedy of disqualification is warranted on the individual facts of this case. The court need not address this issue regarding Winston Strawn because there is no showing of a rule 1.9 violation.
Contrary to Kearns-Tribune's position, the court finds that a showing of prejudice is a consideration in granting what is characterized in this jurisdiction as the "drastic" and disfavored remedy of disqualification.
However, disqualification of counsel is a "drastic" measure and a court should hesitate to impose it except when "necessary." Bullock v. Carver 910 F. Supp. 551, 559 (D. Utah 1995). The facts of particular situations involving a claim of disqualification must be individually considered. SLC, Ltd. V v. Bradford Group West, Inc., 999 F.2d 464, 468 (10th Gir. 1993); Bullock, supra at 558; Poly Software International v. Su, 880 F. Supp. 1487, 1494 (D. Utah 1995). A functional analysis is required, Id. at 559; Graham v. Wyeth Laboratories, 906 F.2d 1419 (10th Cir. 1990). Critical to the evaluation is whether the objectionable circumstance taints the litigation. Parkinson v. Phonex Corp., 857 F. Supp. 1474, 1476 (D. Utah 1994). The elements pertinent to such an evaluation are set forth in Parkinson, although not involving the same circumstance as this case, they should be considered and are also of value in this case in assessing the need for the relief requested. The egregiousness of the violation, prejudice, and diminution of counsel's effectiveness are among the relevant factors.
Proctor Gamble v. Haugen, 183 F.R.D. 571 (D. Utah 1988) (underlined emphasis added). Proctor Gamble involved the attempt to disqualify an expert and all counsel with whom the expert had discussions.
In any event, a finding that a violation has occurred does not necessarily end the inquiry. "The sanction of disqualification of counsel in litigation situations should be measured by the facts of each particular case as they bear upon the impact of counsel's conduct upon the trial. . . . The essential issue to be determined in the context of litigation is whether the alleged misconduct taints the lawsuit." Parkinson v. Phonex Corp., 857 F. Supp. 1474, 1476 (D. Utah 1994).
* * *
Parkinson also suggested a number of factors to be considered in determining whether the lawsuit has been "tainted." Proposed factors included egregiousness of the violation, degree of prejudice resulting from the violation, extent of diminution of effectiveness of counsel, and equitable consideration such as hardship in obtaining new counsel. 857 F. Supp. at 1467-77. While elements such as egregiousness and prejudice will likely always be relevant, other considerations will vary from case to case, depending on the individual circumstances and the policies underlying the particular ethical rule at issue.
Poly Software, 880 F. Supp. at 1494, 1495 n. 12 (underlined emphasis added) (applying Rule 1.9 "substantially factually related" standard to mediators).
Considering the factors listed in Proctor Gamble, Poly Software, and Parkinson, the court finds Jones Waldo's violation of Rule 1.9 was not "egregious" because of the knowledge of and acquiescence by MediaNews and Kearns-Tribune as well as its prior owners, who freely dealt with the two firms on matters adverse to Kearns-Tribune up until the filing of the Motion to Disqualify. This is especially true where the matters that make this case "substantially factually related" to the prior representation are not asserted by Jones Waldo's current client but are raised recently by counterclaim of their former client.
B
Confidentiality is, of course, the issue at the forefront of the analysis of whether there is "prejudice" to the former client. Kearns-Tribune need not "reveal the substance of its communication to the lawyer," in order to show prejudice requiring disqualification. Parkinson, 857 F. Supp. at 1480.
It is apparent there were pre-merger confidences shared between Kearns-Tribune's Board of Directors, its general counsel, Ms. Sonnenreich, and Jones Waldo. Although the factual basis for the confidences may also be known to persons who are now principals in Tribune Publishing, there is no indication that the Board of Directors did not intend those confidences to be retained by Jones Waldo.
Jones Waldo contends that because the confidences were shared, they are "generally known" within the meaning of Rule 1.9(b). The court does not find that such confidences are "generally known" within the meaning of Rule 1.9(b). Further, subsection (b) relates to the use of such information to the disadvantage of the former client and is not an exception to the representation prohibition of subsection (a) of Rule 1.9.
Kearns-Tribune contends that it would be prejudiced by Jones Waldo's continued representation of Tribune Publishing because Jones Waldo has years of "institutional knowledge" of this case which it gained during the years it represented Kearns-Tribune, which will be lost to Kearns-Tribune. Furthermore, Kearns-Tribune argues as in Poly-Software, the firm has a professional expertise which afforded it "a perspective on the legal significance of the confidences" that Kearns-Tribune "could not itself possibly obtain or communicate to new counsel." 880 F. Supp. at 1495. Kearns-Tribune also contends that will be prejudiced in this case because the Jones Waldo firm will use against it the "institutional knowledge" gained in its years of representation in all areas of its business.
This factor is balanced by Tribune Publishing's contention that to deprive it of Jones Waldo as counsel will deprive it of the benefit of the firms's vital "visceral knowledge" of the case and the Option Agreement and Management Agreements which it helped negotiate and prepare.
Kearns-Tribune also contends that it will be prejudiced because extrinsic evidence will be required at the trial and it will be unable to confer freely with and enlist the aid of opposing counsel — allegedly key witnesses — to conduct its factual investigation and develop its legal theory regarding the JOA, merger, Management Agreement and Option Agreement. The court finds that this is a prejudicial factor to Kearns-Tribune.
As to factual investigation, it must be admitted that deposition examination or other investigation of opposing counsel as fact witnesses will be awkward for Kearns-Tribune at best. It is no reflection on the honesty of the lawyer/witnesses to acknowledge that loyalty affects perception and cooperation. It must be acknowledged that it will be prejudicial to former client Kearns-Tribune's discovery and trial preparation to require it to make discovery of attorney/witnesses from a firm that now represents the opposing party. While alleged bias can be addressed on cross-examination, one of the reasons for Rules of Conduct is to avoid such situations which undermine the public confidence and trust in the legal profession. This is one such situation.
The court finds the most serious prejudice to Kearns-Tribune in this case is that it must establish its case, in part, by relying on evidence prepared by and signed by the law firm representing the other side. It is ironic enough that Kearns-Tribune paid Jones Waldo for all of its legal representation during the merger process, but to now have to deal with its own former attorneys as hostile witnesses on substantially factually related matters undermines its case. Similarly, the very fact that its former lawyers now take the opposite side on substantially factually related matters undermines the position of Kearns-Tribune.
Tribune Publishing contends that if its attorneys were called to give testimony on an issue that was favorable to Kearns-Tribune it would help, rather than prejudice, Kearns-Tribune. However, that is a simplistic view of a complicated dilemma. For example, in its opposing brief, Jones Waldo now purports to be neutral on the meaning and validity of contracts for which it previously represented Kearns-Tribune (the JOAs) and matters upon which it previously gave Kearns-Tribune opinion letters. E.g. Pl's Supp. Mem. at 13 n. 20 ("But Jones Waldo has never taken a position in this litigation or in a formal opinion letter either questioning the validity of the [nonalienation] provision or specifically opining that it is valid."). Neutrality is not possible — it appears that the testimony of firm attorneys on the JOAs, testimony of Mr. Lowrie on the 1996 Opinion letter, and of Mr. Babcock or other attorneys on the 1997 Opinion Letter, and what they mean in connection with the Option Agreement and the JOAs, is of necessity to be adverse to either Jones Waldo's current client or to its former client.
Even if it were adverse to only the firm's current client, the helpfulness of such testimony to Kearns-Tribune must necessarily be undermined by the fact that the law firm that negotiated the JOAs and issued those opinion letters now represents its opponent. In such a situation, the jury may draw an adverse inference about the credibility of the attorneys who will appear to have switched sides — diminishing their effectiveness as factual witnesses for their former client. or the jury may draw an adverse inference about the merits of Kearns-Tribune's case because its own attorneys are now opposed to it.
Restated, this is not a case where a lawyers testimony could only prejudice his own client. This is a case where the conflicting loyalty of the Jones Waldo firm will prejudice its former client's case both in connection with discovery and trial testimony. This is the prejudice that Rules 1.9 and 1.10 together seek to avoid. The court finds that Kearns-Tribune has shown substantial prejudice from allowing attorneys involved in representing Kearns-Tribune in connection with the JOAs, the merger, or the opinion letters, to continue representation of the adverse party in this case on substantially factually related matters.
Balancing the prejudice, it is apparent that disqualification will prejudice Tribune Publishing. It will be difficult to obtain new counsel with the experience to provide adequate litigation representation and who are also able to devote sufficient time to become educated on this case and prepared for trial by the current trial date. Further, the cost of educating new counsel will not be inexpensive. However, most of the fees already incurred in this case will not need to be duplicated by new counsel because they involve issues not to be replicated — the injunction hearings, the motions to dismiss, to intervene, to stay, to impose a bond and to obtain discovery. Further, having developed a familiarity with this case over the last months, the court finds that it is not unusually factually complex, and the legal issues are no more difficult than other contract disputes involving large amounts of money. Thus, it is not beyond the ability of diligent new counsel to prepare this case for trial by the June 2002, trial setting.
Taken together, all of the factors involved in this case show that Jones Waldo's continued representation of Tribune Publishing violates Rules 1.9 and 1.10(a). Despite the prejudice to Tribune Publishing, these objectionable circumstances do "taint" this lawsuit such that the extreme remedy of disqualification of Plaintiff's chosen counsel is warranted.
IX
This finding, that the circumstances do "taint" this lawsuit and therefore require disqualification, is difficult only because the timing of this disqualification motion may have been chosen to gain tactical advantage.
It is well-established in the Tenth Circuit that deliberate delay of the filing of a Motion to Disqualify will justify its refusal, even where it would otherwise merit "serious attention and consideration." Redd v. Shell Oil Co., 518 F.2d 311, 315 (10th Cir. 1975).
The parties have extensively briefed the case law examining whether particular periods of time were sufficient delay to warrant waiver. Kearns-Tribune contends that its motion was timely because it was filed shortly after it was formally named a party and before formal discovery had commenced. However, it is not necessary for a motion to disqualify to be filed on the "eve of trial" as in Redd for the court to find delay constituting a waiver.
Although the length of the delay in bringing a motion to disqualify is obviously important, it is not dispositive. A court should also consider such factors as when the movant learned of the conflict; whether the movant was represented by counsel during the delay; why the delay occurred; and whether disqualification would result in prejudice to the nonmoving party.
Chemical Waste Management Inc. v. Sims, 875 F. Supp. 501, 504 (N.D.Ill. 1995) (citations omitted); accord Alexander v. Primerica Holdings, Inc., 822 F. Supp. 1099 (D. New Jersey 1993) (denying motion filed three years after litigation and only four months prior to trial).
Jones Waldo's representation of Tribune Publishing was well-known to Kearns-Tribune from its inception. All of the parties understood the representation, as well as the purpose of the representation and knew that it was adverse to the soon-to-be TCI -owned and controlled Kearns-Tribune. It has been clear to all of Kearns-Tribune's subsequent owners that such representation is adverse to the interest of Kearns-Tribune on the issue of the Management Agreement and Option Agreement. Since the merger with TCI, Kearns-Tribune has been consistently represented by experienced counsel. Although ATT initially raised the issue by letter at the inception of this case, it did not bring a motion to disqualify.
It was not until a trial date was set that this motion was filed. Plaintiff relies on the case In re ATT Paramus, Co., 253 BR. 606 (Bankr. D. N.J. 1999), wherein the bankruptcy court found that where the moving party did not file a formal objection, but waited to object and the other party relied upon the seeming acquiescence, there was a waiver.
The court acknowledges that there was a great deal going on in the present case from its inception. It is also true that Kearns-Tribune was not formally made a party and did not file its Answer until shortly before filing the Motion to Disqualify.
On the facts of this case, the court finds that there was delay in not promptly asserting Jones Waldo's and Mr. Lowrie's alleged conflict. The fact that ATT's letter raised the alleged conflict in a timely manner does not fully excuse the delay in bringing the motion before the court. However, that delay is partly balanced by Jones Waldo's decision to totally ignore the request to disqualify made by ATT in December 2000.
Considering and balancing prejudice from the delay further, It appears as follows: General discovery has proceeded between Plaintiff and other Defendants. Discovery has proceeded between Plaintiff and Kearns-Tribune in connection with the current motion. This Motion was brought shortly after Kearns-Tribune was made a formal party and filed its Answer asserting affirmative defenses and Counterclaims that were substantially factually related to the former representation. The disqualification is still in advance of the January 31, 2002, discovery deadline and the February 1, 2002, dispositive motion deadline. As a practical mailer, Kearns-Tribune can expect its delay will be taken into account in adjusting scheduling matters, such as discovery deadlines, to allow Tribune Publishing's replacement counsel to "catch up." Further, Winston Strawn is not disqualified as a firm and has great familiarity with this case.
The court remains committed to the trial date. The date is important because the court believes that all parties to this case would be prejudiced if the option were to ripen with this contentious litigation still unresolved. As shown by the pleadings in the recent Motion to Impose a Bond, it is difficult for the parties to conduct their necessary business together while simultaneously engaging in acrimonious litigation.
The court finds that despite the delay, the full circumstances of this case and Rules 1.9 and 1.10 require that the Jones Waldo attorneys be disqualified from this case.
X
In addition to seeking to disqualify the law firms under Rule 1.9, Kearns-Tribune also seeks to disqualify Mr. Lowrie of Jones Waldo and Mr. Fitzgerald of Winston Strawn under Rule 3.7(a) and the law firms under Rule 3.7(b).
The comments to Rule 3.7 explain:
Combining the roles of advocate and witness can involve a conflict of interest between the lawyer and client and can prejudice the opposing party. If a lawyer is both counsel and witness, the lawyer becomes more easily impeachable for interest and thus may be a less effective witness. Conversely, the opposing counsel may be handicapped in challenging the credibility of the lawyer when the lawyer also appears as an advocate in the case. An advocate who becomes a witness is in the unseemly and ineffective position of arguing his or her own credibility.
The opposing party has proper objection where the combination of roles may prejudice that party's rights in the litigation. A witness is required to testify on the basis of personal knowledge, while an advocate is expected to explain and comment on evidence given by others. It may not be clear whether a statement by an advocate-witness would be taken as proof or as an analysis of the proof
Rule 3.7 Utah Rules of Professional Conduct, Comment.
As to Mr. Lowrie or any other Jones Waldo attorney, it is not necessary to analyze their disqualification under Rule 3.7 because they are already disqualified pursuant to Rules 1.9 and 1.10.
Although "necessary" has been more narrowly construed, the court concludes that a "lawyer is a `necessary' witness if his or her testimony is relevant, material and unobtainable elsewhere." Religious Technology Center v. F.A.C.T. Net Inc., 945 F. Supp. 1470, 1473 (D. Colo. 1996) (construing Colorado's Rule 3.7 and quoting World Youth Day, Inc. v. Famous Artists Merchandising Exchange, 866 F. Supp. 1297, 1299 (D Colo. 1994)). The court finds that Mr. Fitzgerald is "likely to be a necessary" witness in this case within the meaning of Rule 3.7(a). It does not appear to the court that the assertion that his testimony is likely to be necessary is merely a litigation tactic. His testimony appears to be legitimately relevant, material and unobtainable elsewhere.
Although the court may delay ruling on a motion to disqualify until it can determine whether another witness can testify on the facts, Religious Technology Center 945 F. Supp. at 1473, the court will not do so in this case because it appears Mr. Fitzgerald is likely to be necessary and an early decision to that effect allows other attorneys to prepare for trial, if necessary.
Kearns-Tribune contends that attorneys disqualified under Rule 3.7 must be disqualified from the entire case. This is not the rule. As noted in Morganroth Morganroth v. DeLorean, Rule 3.7 "prohibits acting as counsel at trial when the attorney is likely to be a necessary witness, unless the testimony relates to an uncontested issues." 213 F.3d 1301, 1309 (10th Cir. 2000) (italicized emphasis in original). See also Massachusetts School of Law at Andover Inc. v. American Bar Ass/n, 872 F. Supp. 1346, 1380 (E.D. Pa. 1994) (Rule 3.7's express terms do not preclude a lawyer from acting as an advocate at pretrial proceedings even if the lawyer would be a necessary witness at trial).
The case cited by Kearns-Tribune to the contrary, Smith v. Whatcott 757 F.2d 1098, 1100 (10th Cir. 1985), is a Model Code case where there was a per se rather than the functional analysis required under the current Model Rules.
Rule 3.7(a)(c) provides that disqualification is not required for the attorney/witness if "disqualification of the lawyer would work substantial hardship on the client." There is insufficient evidence to show that Mr. Fitzgerald's disqualification would work a "substantial hardship" on client Tribune Publishing. See Freeman v. Vicchiarelli, 827 F. Supp. 300, 305 (D.N.J. 1993) (factors to consider in determining hardship for Rule 3.7 purposes include proximity to trial date of the disqualification and the amount of time and resources already spent by the disqualified lawyer).
Kearns-Tribune contends that the Winston Strawn firm must be disqualified under Rule 3.7(b). That subsection allows other attorneys in the firm to continue to act on the case "unless precluded from doing so by" Rule 1.9. The court has found that Rule 1.9 does not preclude the representation of any Wnston Strawn attorney. Thus, the disqualification of Mr. Fitzgerald does not require the disqualification of the entire Winston Strawn firm under Rule 3.7(b).
XI
In conclusion, the court makes the following observation. To the extent that this lawsuit has been tainted, it has not been solely from matters that result in today's disqualifications. This lawsuit has been characterized by bitterness and personalization. The court would encourage the parties to redirect their energies to settlement discussions, and, if necessary, preparation for trial in an efficient manner. They should remember their responsibility as officers of the court to cooperate and facilitate this litigation. Further, all of the parties must not lose sight of the fact that they are respected and influential members of this community. They should keep that fact in mind as they conduct affairs related to this lawsuit, both in and out of court.
It is therefore
ORDERED that Defendant Kearns-Tribune's Motion to Disqualify is GRANTED in part. It is further
ORDERED that the law firm Jones Waldo Holbrook McDonough and its attorneys are DISQUALIFIED from representing Plaintiff in this case. It is further
ORDERED that attorney Thomas Fitzgerald of Winston Strawn is DISQUALIFIED from representing Plaintiff at trial in this case. It is further
ORDERED that Defendant Kearns-Tribune's Motion to Disqualify the law firm Winston Strawn is DENIED.