Opinion
602567/02.
Decided June 23, 2004.
As a preliminary matter, the court has raised the issue of whether plaintiffs' attorneys should be disqualified from also representing third-party defendants (Code of Professional Responsibility DR 5-105 [ 22 NYCRR § 1200.24]).
This decision and order also addresses a pending motion to dismiss the third-party complaint (seq. no. 006) ( infra, at 5).
Plaintiffs/investment funds (the "Franklin Funds") brought this action, alleging losses caused by misrepresentations of defendants, the issuers of securities in which plaintiffs invested. Defendants, thereafter, brought the third-party action against the third party defendants, Franklin Funds' investment advisers (the "Franklin Fund Advisers") for contribution. Defendants allege, inter alia, that the Franklin Fund Advisers were negligent in their overall management of the Funds, and thereby contributed to the Franklin Funds' losses. Based on these allegations, the third party plaintiffs seek contribution from Franklin Fund Advisers.
During a conference on June 2, 2004, the court was informed that counsel representing Franklin Funds herein, had also been retained by the Franklin Fund Advisers to undertake their defense of the third-party action. The court thereupon raised the issue of a possible conflict caused by the simultaneous representation of plaintiffs and third-party defendants, and sought submissions from the parties on this point. Upon deliberation, the court issues the following decision and order.
Simultaneous representation of "differing interests" in litigation is prohibited unless:
a disinterested lawyer would believe that the lawyer can competently represent the interest of each and if each consents to the representation after full disclosure of the implications of the simultaneous representation and the advantages and risks involved.
(DR 5-105 [A]-[C].) "Because dual representation is fraught with the potential for irreconcilable conflict, it will rarely be sanctioned even after full disclosure has been had and the consent of the parties obtained." ( Greene v. Greene, 47 NY2d 447, 451-52.) "[W]ith rare and conditional exceptions, the lawyer may not place himself in a position where a conflicting interest may, even inadvertently, affect, or give the appearance of affecting, the obligations of the professional relationship." ( Matter of Kelly, 23 NY2d 368, 376.) "[D]oubts as to the existence of a conflict of interest must be resolved in favor of disqualification." ( Heelan v. Lockwood, 143 AD2d 881, 883 [2nd Dept 1988].)
The Franklin Funds have no independent, paid, employees, as evidenced by the Form 10-K, filed by Franklin Resources, Inc., with the Securities and Exchange Commission (Hine Aff. Ex. A at 12). Rather, plaintiffs/Franklin Funds are managed by distinct affiliates third-party defendants/Franklin Advisers ( id., Ex. B at 108, 111-12). Underlying the third-party complaint's claim for contribution is the allegation that the Franklin Advisers breached their managerial duties to the Franklin Funds by favoring other investment funds, and providing reckless advice, causing some of the economic injuries which the action-in-chief seeks to recoup from defendants (Third-Party Complaint ¶¶ 37-39). If this claim is proven, the Franklin Funds may possess an independent cause of action against Franklin Advisers, arising out of managerial neglect. Thus, the Franklin Funds and the Franklin Advisers represent potentially "differing interests" of the type which the Disciplinary Rule cautions against, in terms of simultaneous representation by counsel (DR 5-105 [A], [B]). A disinterested lawyer, or judge, would have doubts as to the ability of plaintiffs' counsel to completely represent both interests.
Plaintiffs' counsel's simultaneous representation of third-party defendants has the dangerous potential of compromising viable claims which the Franklin Funds may (or may not) have against the Franklin Advisors. For example, if there are settlement negotiations, Franklin Funds' counsel will be expected to press for the maximum recovery for plaintiffs. Franklin Advisers, on the other hand, may be in favor of a lesser recovery if it included a release of the third party claims. Such a possible conflict compromises the ability of the attorney to properly represent both parties. At a bare minimum, the Franklin Funds and the Franklin Advisers have differing, if not opposing, interests, by virtue of the claims asserted in the third-party complaint ( see also, Boyd v. Trent, 287 AD2d 475 [2nd Dept 2001] [attorney disqualified from representing vehicle owner and passenger, due to the possibility of an independent claim by the passenger against the owner], appeal dismissed 98 NY2d 671; Wood v. Beacon Factors Corp., 137 AD2d 752 [2nd Dept 1988] [attorney disqualified from representing multiple shareholders of a close corporation, due to the possibility of cross-claims among the shareholders]).
Plaintiffs' counsel submits what purport to be three "Consent[s] to Representation and Waiver[s] of Conflict," dated May 13, 2004 post-dating their appearance, seemingly, on behalf of third-party defendants (Banko Aff. Exs. C-E). All three were executed by Richard L. Kuersteiner, who identifies himself as Assistant Vice President of the Franklin Funds, and Associate General Counsel of Franklin Advisers ( id.). Moreover, even if Kuersteiner demonstrated that he could, in a general sense, act on behalf of the Franklin Funds, he may not possess that capacity in this instance, given his simultaneous affiliation with the Franklin Advisers, as their Associate General Counsel ( see, Rice v. Baron, 456 F Supp 1361, 1376 [SD NY 1978] [rejecting consents to simultaneous representation on the ground that "[t]here is no indication of any participation by `non-interested' directors in the execution of those corporate consents. . . ."]).
Finally, even if a proper representative of the Franklin Funds executed the consents, be it Kuersteiner or otherwise, this appears to be a case where the potential conflict is simply not waivable. As the Court of Appeals states, "where a lawyer represents parties whose interests conflict as to the particular subject matter, the likelihood of prejudice to one party may be so great that misconduct will be found despite disclosure and consent." ( Matter of Kelly, supra, at 378.)
The court rejects plaintiffs' counsel's suggestion that a favorable disposition of third-party defendants' pending motion to dismiss would obviate the need to address the issue of disqualification. The grant of such a motion might well lead to an appeal, which would again require the third party defendant to be represented by counsel.
Accordingly, it is
ORDERED that Kostelanetz Fink, LLP and Grant Eisenhofer, P.A., plaintiffs' counsel, are disqualified from representing third-party defendants in this action; and it is further
ORDERED that third-party defendants' motion to dismiss (seq. no. 006) is denied, without prejudice to renew upon their retention of new counsel; and it is further
ORDERED that third-party defendants are afforded until the next conference date, August 2, 2004, at 9:30 a.m., to retain new counsel.