Opinion
No. 8:97CV3230
September 1999.
ORDER
This matter is before me pursuant to 28 U.S.C. § 636 and the general order of referral on plaintiff's motion to disqualify defense counsel (#117), plaintiff's motion for leave to file a reply brief (#122), and plaintiff's motion for leave to file a supplemental evidence index (#124). The motion to disqualify defense counsel (#117) came on for hearing August 16, 1999. Defendants have no objection to the motion for leave to file a reply brief. Because it resolves issues anticipated during oral argument, I find that plaintiff's motion for leave to file a supplemental evidence index should be granted.
Having carefully considered the parties' oral arguments, briefs, and evidentiary materials, I find that the motion to disqualify defense counsel should be granted.
BACKGROUND
Plaintiff ("ABC") was a subcontractor for electrical work pursuant to an oral contract between Nebraska Beef, Ltd. ("Nebraska Beef") and J.B. Contracting Services, Inc. ("J.B.") for improvements in 1995 to a beef processing and packing plant owned by Nebraska Beef. ABC obtained an $880,000 performance bond from Universal Surety Company ("Universal"), naming J.B. as the obligee. The performance bond provided that, in event of default, (1) J.B. could promptly remedy the default, or (2) ABC or J.B., after reasonable notice, could arrange for performance of ABC's obligation. If J.B. completed the work and the cost exceeded the balance of the subcontract price, Universal was to pay the excess. ABC defaulted, the electrical work was completed by another contractor, and J.B. paid the replacement subcontractors.
Nebraska Beef and J.B. subsequently became involved in a number of lawsuits in the District Court for Douglas County, Nebraska attempting to recover their costs under the Universal performance bond. These lawsuits include:
1. J.B. v. Nebraska Beef, Inc ., Docket 959, No. 074, filed March 11, 1997. This suit was based on Nebraska Beef's failure to pay J.B. for finishing the construction project. Nebraska Beef countered that J.B. was responsible to Nebraska Beef for damages caused by ABC's failure to complete the subcontract. J.B. was represented by attorney Dean Suing and Nebraska Beef was represented by the law firm of Koley, Jessen, Daubman Rupiper, P.C. Nebraska Beef and J.B. reached a settlement in this case. Pursuant to the November 14, 1997 settlement agreement, Nebraska Beef paid J.B. $45,000. J.B. transferred to Nebraska Beef its right to pursue claims against Universal relating to the performance bond. Nebraska Beef was given the "sole discretion to select legal counsel to represent [J.B.]" in any such proceeding. J.B. agreed to fully cooperate with Nebraska Beef in pursuing claims against Universal. The parties agreed that the Koley, Jessen firm would initially represent J.B. and Nebraska Beef in presenting and defending such claims. They also acknowledged that they received full and adequate disclosure from their legal counsel and from Koley, Jessen as to potential conflicts of interest. Each party waived "all objections to the conflicts of interest which may exist" in Koley, Jessen representing both J.B. and Nebraska Beef. Paragraph 10 of the agreement provides:
Each party, jointly and severally, further covenants not to institute, participate in, or prosecute any suit . . . against each other . . . which arise out of or relate in any way to the matters herein resolved, excepting only those rights and obligations set forth in this Agreement.
2. J.B. and Nebraska Beef, Ltd. v. Universal , Docket 966, No. 988, filed November 19, 1997. After defendant's demurrer was sustained and Nebraska Beef's claims were dismissed, J.B. filed an amended petition alleging that ABC breached the subcontract, J.B. paid the replacement subcontractors, and Universal breached its obligation under the performance bond to reimburse J.B. The Koley, Jessen firm initially represented J.B. and Nebraska Beef. Koley, Jessen withdrew on July 15, 1998, and the firm of Lieben, Whitted, Houghton, Slowiaczek Cavanagh, P.C. entered its appearance on March 22, 1999.
3. Nebraska Beef, Ltd. v. Universal , Docket 968, No. 266, filed January 6, 1998. Nebraska Beef alleged that on May 22, 1995, Norwest Bank Nebraska was named as an additional obligee under the performance bond in connection with financing provided by Norwest to Nebraska Beef. Nebraska Beef proceeded on the theory that it was a third-party beneficiary of the Universal performance bond. On May 29, 1998, the state court sustained Universal's demurrer finding (1) that Nebraska Beef was not a party to the performance bond and was not entitled to proceed as a third-party beneficiary; and (2) Nebraska Beef could not sue Universal in tort based on a contractual duty. Nebraska Beef's appeal is now pending in the Nebraska Court of Appeals. The Koley, Jessen law firm initially represented Nebraska Beef. The Lieben, Whitted firm now represents Nebraska Beef in this lawsuit.
4. J.B. and Nebraska Beef, Ltd. v. Universal , Docket 983, No. 418, filed May 24, 1999. The Lieben, Whitted firm represents both plaintiffs. Citing the settlement agreement in J.B. v. Nebraska Beef, Docket 959, No. 074 (lawsuit #2, above) J.B. and "Nebraska Beef, as assignee of [J.B.'s] rights against Universal" sued Universal for bad faith and an unfair insurance claims settlement practice, under Neb. Rev. Stat. § 44-1540. Universal has filed a demurrer which is set for hearing September 21, 1999.
ABC filed this lawsuit on July 10, 1997 seeking damages against J.B. and Nebraska Beef for breach of contract, interference with a business opportunity, and recovery on the basis of quantum meruit. Attorney Dean Suing filed an answer (#6) on behalf of J.B., and the Koley, Jessen firm responded on behalf of Nebraska Beef. The Koley, Jessen firm was eventually retained to represent both J.B. and Nebraska Beef in this lawsuit, but was allowed to withdraw on July 30, 1998, when attorneys Joseph E. Andres and Terrence J. Salerno entered an appearance for the defendants. By October 1998, defendants were again searching for new attorneys (see #51). The Lieben, Whitted firm entered its appearance on October 30, 1998 on behalf of both defendants (#53).
The court conducted a lengthy final pretrial conference and the case was set for a jury trial to commence July 19, 1999. On July 12, however, defendants filed a motion to continue the trial in light of the state court's June 29, 1999 ruling in J.B. v. Universal, Docket 966, No. 988 (lawsuit #2, above), granting summary judgment in favor of Universal and against J.B. The state court found that Nebraska Beef, not J.B., paid for the substitute electrical work. J.B. therefore, suffered no "loss" and failed to prove damages under the performance bond. This ruling generated a potential conflict of interest between J.B. and Nebraska Beef.
Defense counsel took the position that the state court's ruling substantially frustrated the principle purpose of the November 14, 1997 settlement agreement reached in J.B. v. Nebraska Beef, Docket 959, No. 074 (lawsuit #1, above), in which J.B. transferred to Nebraska Beef its right to pursue claims against Universal on the performance bond. Although plaintiff's counsel proposed bifurcating the trial of its claims against each defendant, I determined that procedure would not solve the ethical dilemma faced by the Lieben, Whitted firm. Depending on the positions taken by Nebraska Beef and J.B. in the state court cases, the firm could be precluded from representing either defendant in this case. See Wendell's, Inc. v. Malmkar, 225 Neb. 341, 405 N.W.2d 562 (1987); State ex rel. Freezer Services, Inc. v. Mullen, 235 Neb. 981, 458 N.W.2d 245 (1990). Defense counsel informed the court that J.B. intended to ask the state district court to reconsider its decision. On July 14, I granted the motion for continuance and ordered the parties to provide a status report by September 10, 1999, regarding the status of J.B.'s motion for a new trial of the state court decision.
On July 21, however, plaintiff filed the instant motion to disqualify defense counsel (#117), arguing that the Lieben, Whitted firm must be disqualified because, notwithstanding the November 14, 1997 agreement waiving such conflicts, defense counsel had expressly acknowledged there is now a conflict of interest between J.B. and Nebraska Beef. On this issue, the court took judicial notice of defendants' July 12, 1999 motion for continuance of trial.
In their responsive brief, defendants argue that ABC did not have standing to file the motion to disqualify. In the alternative, the motion to disqualify was premature because the state court had not yet ruled on J.B.'s motion for new trial, which was set for hearing on August 25, 1999. If the state court set aside its summary judgment in J.B. v. Universal, Docket 966, No. 988, there would be no conflict between J.B. and Nebraska Beef. In the alternative, defendants should be given until September 10, 1999, to decide whether they should waive any conflict of interest caused by the state court decision.
In addition to their written arguments, defense counsel orally argued that J.B. and Nebraska Beef might not be bound by the November 14, 1997 settlement agreement because the state court decision had frustrated the purpose of that agreement. Defense counsel denied acknowledging an actual conflict of interest between J.B. and Nebraska Beef. Citing Judge Cambridge's ruling on ABC's motion for summary judgment on J.B.'s counterclaim in this case, counsel argued that the state court had grounds for setting aside its summary judgment in favor of Universal. Counsel took the position that there existed only a "potential" conflict, not an "actual" conflict between J.B. and Nebraska Beef.
At the time of the hearing, the Lieben, Whitted firm had not received any information that J.B. wished to change counsel in this case. Neither Nebraska Beef nor J.B. had decided on a particular response to the state court ruling. Defense counsel did inform the court that J.B. had consulted Dean Suing and Nebraska Beef had consulted attorney Cletus Blakeman regarding this matter.
On August 18, 1999, plaintiff filed its motion for leave to file a supplemental evidence index (#124). Attached to the index is a copy of a Petition and Jury Demand filed August 13, 1999 by Nebraska Beef against J.B. in the District Court for Douglas County, Nebraska, Docket 985, No. 874. Briefly, the petition alleges that J.B. breached its contract with Nebraska Beef by failing to complete the electrical work on the Nebraska Beef construction project.
By letter dated August 27, 1999, plaintiff's attorney advised that, on August 25, the state district court overruled J.B.'s motion for new trial in J.B. v. Universal, Docket 966, No. 988. The state court also granted Lieben, Whitted's motion to withdraw as counsel for J.B. in that matter.
LEGAL ANALYSIS
1. Standing
The United States District Court bears responsibility for supervision of the members of its bar. Jenkins v. State of Missouri, 931 F.2d 470, 484 (8th Cir. 1991). In NELR 83.4(b), this court adopted the standards of conduct prescribed by the Code of Professional Responsibility adopted by the Supreme Court of Nebraska and any amendments thereto or any standards set out in the Local Rules of this court. Although this court has adopted the Code of Professional Responsibility, it is not strictly bound to follow the Nebraska Supreme Court's interpretations of the Code. I agree with Senior Judge Urbom's conclusion in Doe v. State of Nebraska, 4:CV95-3381, that "[w]hen federal courts rely on law in the state in which they sit, as NELR 83.4(b) so requires, that state's law should be considered the rule of the federal court, unless doing so would be inappropriate when compared with widely-recognized national law."
Citing the Nebraska Supreme Court's ruling in Hawkes v. Lewis, 255 Neb. 447, 586 N.W.2d 430 (1998), defendants argued that plaintiff does not have standing to seek disqualification of defense counsel. In Hawkes, the plaintiff moved to disqualify an attorney who had previously represented a codefendant in the same case. The Nebraska Supreme Court found that the plaintiff did not have standing to seek disqualification. The court held that, in general, "courts do not disqualify an attorney on the grounds of conflict of interest unless the former client moves for disqualification." Id. at 454, 586 N.W.2d at 435. The court acknowledged that "some courts have recognized exceptions to the general rule that only a former client has standing to seek disqualification based on a conflict of interest. Assuming without deciding that certain exceptions may exist, this case still falls outside the boundaries of any type of exception."
In Hawkes, the Nebraska Supreme Court relied heavily on the fact that the former client expressly waived the conflict of interest.Hawkes must be distinguished from the present case in this respect. The defendants have not expressly waived any conflicts on the record in this case and the status of the 1997 settlement agreement between Nebraska Beef and J.B. is uncertain.
Turning to federal law, "[W]here the rights of a particular party may be compromised by representation in which opposing counsel is engaged, then that party has standing to bring a motion to disqualify, regardless of whether the party is a client or former client of the attorney or firm whose representation the party challenges." Davis v. Southern Bell Telephone Telegraph Co., 149 F.R.D. 666, 673 (S.D.Fla. 1993).
I find that ABC's interest in obtaining a timely resolution of this lawsuit has been compromised by the now adverse relationship between J.B. and Nebraska Beef. Under the facts of this case, ABC has standing to seek disqualification of defense counsel.
2. Conflicts of Interest
The Code of Professional Responsibility does not prohibit attorneys from representing multiple clients in a legal proceeding. For example, Ethical Consideration 5-17 recognizes that
[t]ypically recurring situations involving potentially differing interests are those in which a lawyer is asked to represent co-defendants in a criminal case, co-plaintiffs in a personal injury case, an insured and his or her insurer, and beneficiaries of the estate of a decedent. Whether a lawyer can fairly and adequately protect the interests of multiple clients in these and similar situations depends upon an analysis of each case. In certain circumstances, there may exist little chance of the judgment of the lawyer being adversely affected by the slight possibility that the interests will become actually differing; in other circumstances, the chance of adverse effect upon the lawyer's judgment is not unlikely.
Similarly, Ethical Consideration 5-19 provides:
A lawyer may represent several clients whose interests are not actually or potentially differing. Nevertheless, a lawyer should explain any circumstances that might cause a client to question the lawyer's undivided loyalty. Regardless of the belief of a lawyer that he or she may properly represent multiple clients, the lawyer must defer to a client who holds the contrary belief and withdraw from representation of that client.
A lawyer should not accept or continue employment that will adversely affect his or her judgment on behalf of or dilute loyalty to a client. EC 5-14. Multiple representation, therefore, is permitted only under certain circumstances. Nebraska Disciplinary Rule 5-105 provides, in part:
(A) A lawyer shall decline proffered employment if the exercise of the lawyer's independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve the lawyer in representing differing interests, except to the extent permitted under DR 5-105(C).
(B) A lawyer shall not continue multiple employment if the exercise of his or her independent professional judgment in behalf of a client will be or is likely to be adversely affected by the lawyer's representation of another client, or if it would be likely to involve the lawyer in representing differing interests, except to the extent permitted under DR 5-105(C).
(C) In the situations covered by DR 5-105(A) and (B), a lawyer may represent multiple clients if it is obvious that the lawyer can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of his or her independent professional judgment on behalf of each.
* * * *
In this case, the Lieben, Whitted firm began representing Nebraska Beef and J.B. after the settlement was reached in J.B. v. Nebraska Beef, Inc., Docket 959, No. 074. At that time, the interests of J.B. and Nebraska Beef were closely aligned. The state court's subsequent summary judgment in J.B. v. Universal, Docket 966, No. 988, caused the interests of N.B. and Nebraska Beef to become adverse. The enforceability of the 1997 settlement agreement has been questioned. The state district judge has denied J.B.'s motion for new trial and declined to set aside the summary judgment entered in J.B. v. Universal. Neither J.B. nor Nebraska Beef have gone on the record in this case to waive any conflicts of interest caused by the state court decision. Finally, Nebraska Beef has filed a new lawsuit against J.B. concerning the electrical work on the Nebraska Beef construction project.
The Model Code does not allow Lieben, Whitted to represent one defendant to the detriment of the other defendant. There does not appear to be a short-term solution to this problem. While the interests of J.B. and Nebraska Beef may again become aligned in this matter, it would not be reasonable to require ABC to wait indefinitely for such an event to occur. While Lieben, Whitted's decision to undertake multiple employment was made in good faith, the alliance between its clients has so far deteriorated that multiple representation is no longer possible.
For these reasons, I find that the motion to disqualify defense counsel should be granted; that the Lieben, Whitted firm should be required to withdraw from its representation of both J.B. and Nebraska Beef; and that the defendants should be required to retain substitute counsel to enter an appearance in this case by September 17, 1999.
For the reasons explained above,
IT IS ORDERED:
1. Plaintiff's motion for leave to file a reply brief (#122) is granted.
2. Plaintiff's motion for leave to file a supplemental evidence index (#124) is granted.
3. Plaintiff's motion to disqualify defense counsel (#117) is granted as follows:
a. The law firm of Lieben, Whitted, Houghton, Slowiaczek Cavanagh, P.C. is hereby disqualified from representing defendants J.B. Contracting Services, Inc. and Nebraska Beef, Ltd.
b. Defendants J.B. Contracting Services, Inc. and Nebraska Beef, Ltd. shall retain separate substitute counsel, who shall enter an appearance in this case on or before Friday, September 17, 1999.