Opinion
02 Civ. 416 (RPP)
May 21, 2002
John Kimball, Healy Baillie, LLP, New York, NY, Counsel for Plaintiff
Brian D. Starer, Haight Gardner Holland Knight, York, NY, Counsel for Defendant
REVISED OPINION AND ORDER
Defendant The Swedish Club ("TSC") moved to disqualify plaintiff's law firm, Healy Baillie, LLP ("HB") from any participation in this litigation adverse to the interests of its client, TSC, on behalf of plaintiff, Atrotos Shipping Company. HB argues that TSC is only a "vicarious client," and therefore it may continue to represent plaintiff.
Background
TSC is a mutual Hull and Protection and Indemnity ("PI") association existing under the laws of Sweden with offices in London, Piraeus, Greece, Hong Kong, Tokyo and its primary headquarters in Gothenburg, Sweden. As members of a PI club, the shipowner members of TSC agree to pool their monies in an effort to lower the risks associated with the shipping industry. The risk is minimized because each member of TSC agrees to contribute to the joint fund and cover each other's losses in case disaster befalls one or more of the members of the group. TSC offers its members Hull, PI, and Freight, Demurrage Defense ("FDD") cover. (Mem. of Law in Supp. of Def.'s Mot. to Disqualify HB as Counsel for P. ("Def.'s Mem."), at 2.)
FDD cover provides legal representation and, subject to the rules, pays for the legal costs incurred by members in pursuing or defending claims which may arise in disputes relating to freight, demurrage, salvage, general average and repair and construction, etc. TSC normally chooses the law firms involved, but a shipowner may choose a law firm, subject to TSC's approval. If a shipowner chooses a law firm TSC does not approve of, TSC has the right to refuse their appointment. Rule 7 of the FDD Insurance Rules of TSC provides that attorneys appointed to represent TSC members are to act "as if such [attorneys] had been appointed to act and had at all times been acting on behalf of the Association and notwithstanding that any such advice, reports, documents or information would otherwise be the subject of legal or any other form of privilege." (Starer Aff., Ex. D.)
In the present case, the M/V ANEMONE was a general cargo ship owned by Atrotos and managed by Pyrsos Shipping Company Ltd. Atrotos insured the vessel under a fixed premium hull and machinery policy with TSC. On August 8, 2000, the vessel suffered major damage due to flooding in the engine room and was abandoned at sea. There is a dispute between the parties over the cause of the flooding. The ship was subsequently salvaged and towed to Trinidad. The present case concerns plaintiffs claim against defendant under the Hull insurance policy. Plaintiff contends the vessel became a Constructive Total Loss, that the cost of repairs exceeded the insured value of the vessel. Alternatively, plaintiff claims the vessel suffered unrepaired damage for which the defendant is liable. Defendant has denied cover under the policy, alleging that plaintiff failed to exercise due diligence in hiring a competent crew, and, alternatively, denies that the cost of repairs made the vessel a Constructive Total Loss. Defendant has also counterclaimed for amounts it expended in connection with the salvage of the vessel.
Plaintiff filed its Complaint on January 17, 2002 and its first discovery demands on February 6, 2002. Defendant answered the complaint on February 28, 2002 and served discovery demands that same day. On April 3, 2002, defendant filed the present motion. Argument was heard on May 1, 2002.
HB's Concurrent Representation of TSC
There is no dispute that HB is currently acting as attorney for TSC on two active matters and acted as attorneys for TSC on a recently closed matter. They are: 1) the M/V OPAL SUN arbitration in New York in which TSC's London office retained HB to represent the Japanese shipowner of the OPAL SUN in a dispute with the charterer of the vessel, O.N.E. Shipping, Inc. HB reported to TSC (Japan) with a copy to TSC (UK) and TSC paid their legal fees. An award in favor of TSC's member was rendered on December 20, 2001, but the matter is pending because monies have yet to be collected and within the last month HB partner Richard Singleton has made recommendations as to how he thinks TSC should proceed to collect the monies owed to its member. In all other respects this representation by HB is completed;
2) The HONGKONG SENATOR, CALIFORNIA SENATOR, LONDON SENATOR, WASHINGTON SENATOR, and IBN SINA ("NSB") matters which involve claims by Global Terminal and Container Services, Inc. ("Global") against the NSB vessels which are covered for FDD claims by defendant. The vessels were scheduled to call at New York between December 2001 and March 20002, and Global threatened to arrest them if suitable security was not provided. On December 18, 2001 Lars Rhodin, of TSC's Gothenburg office, wrote to HB requesting that it issue a Letter of Undertaking ("LOU") to Global in respect of the first vessel, which it did. HB then drafted four more LOUs on TSC's behalf, on December 28, 2001, January 17, 2002, January 28, 2002 and March 1, 2002. In the LOUs, in consideration for Global refraining from arresting any of the five vessels connected with the member, TSC agreed to pay a judgment up to a certain amount described in the letters. TSC may have to request HB's advice as to its liability under the terms of the LOUs if Global decides to proceed against TSC. 3) the JUPITER LIGHT matter in which a member asked TSC's assistance in collecting unpaid hire from a defaulting charterer and TSC, after having received legal advice from HB partner Mr. Singleton, instructed him to draft a letter on TSC's behalf to the charterer in an effort to recoup the shipowners' monies which Singleton did on March 13, 2002. (Singleton Aff. at ¶¶ 28-29; Bright Decl. at ¶ 19.) Mr. Singleton, of HB, then contacted John Kimball, the partner of HB involved in the present case, about whether acting in the JUPITER LIGHT matter created a conflict situation. (Singleton Aft at ¶ 30.) TSC has ordered the withdrawal of Mr. Singleton from the JUPITER LIGHT matter since becoming aware of the conflict.
The Applicable Standard
The New York Code of Professional Responsibility, Disciplinary Rule ("DR") 5-105(A) (1999) provides that "[a] lawyer shall decline proffered employment if the exercise of 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 interest, except to the extent permitted under DR 5-105(C)."
There are two rules that pertain to disqualification. When there is a continuous attorney-client relationship, "adverse representation is prima facie improper . . . and the attorney must be prepared to show, at the very least, that there will be no actual or apparent conflict in loyalties or diminution in the vigor of his representation." Cinema 5 Ltd. v. Cinerama, Inc., 528 F.2d 1384, 1387 (2d Cir. 1976). The strict rule against adverse representation of existing clients is a product of the courts' concern for both the loyalty and vigor of legal representation and for the maintenance of public confidence in the bar and courts. Id. at 1386. Therefore, "an attorney must avoid not only the fact, but even the appearance of representing conflicting interests."Id. at 1387 (citation omitted).
The more stringent of the two, known as the 'per se' rule, pertains to situations involving the continuous, simultaneous representation of 'traditional' clients. The second rule, requiring the courts to apply a 'substantial relationship' test, pertains in two situations: 1) when disqualification concerns a former client; and 2) 'for cases of vicarious or attenuated representation.' New York Marine General Insurance Company v. Tradeline (L.L.C.), 186 F.R.D. 317, 319 (S.D.N.Y. 1999)quoting Chemical Bank v. Affiliated FM Ins. Co., 1994 WL 141951 (S.D.N Y April 20, 1994).
The second, less stringent, substantial relationship test is used for "vicarious" clients. "[W]hen an adverse party is only a vicarious client by virtue of membership in an association, the risks against which Canon 5 guards will not inevitably arise. A law firm that represents the American Bar Association need not decline to represent a client injured by an automobile driven by a member of the ABA." Glueck v. Jonathon Logan, Inc., 653 F.2d 746, 749 (2d Cir. 1981).
Discussion
There is no dispute that TSC is currently a client of HB's. Plaintiff argues, however, that TSC is an attenuated, vicarious, or non-traditional client of HB and therefore that the 'substantial relationship' rather than the per se test should be used. Plaintiff argues that defendant is a "vicarious" client of HB and not a "traditional" client because: the two matters relied upon by defendant involve FDD policies in which the member of TSC is the true client, and HB's issuance of LOUs for defendant was as "attorney-in-fact" and did not create or evidence an attorney-client relationship as LOUs are rarely more than a ministerial task. (Pl.'s Mem. of Law in Opp'n to Def.'s Mot. to Disqualify HB, LLP as Pl.'s Counsel ("PL.'s Mem."), at 15-16.)
Plaintiff argues that FDD cover is markedly different from virtually all other forms of insurance in that it provides cover only for fees and costs associated with pursuing or defending certain types of claims which arise out of the operation of a vessel, and not for the potential underlying liability itself. With FDD cover, the insurer will have no "stake" in the underlying claim. Plaintiff argues that it is the association member which has ultimate control over the handling of any such litigation. Plaintiff cites to Rule 8 of TSC's FDD rules that TSC's sole recourse in the event the member refuses to follow TSC's direction in the handling of the matter is to reduce the member's recovery under the FDD policy, "to the amount he would have recovered if he had acted as required by the Association." Plaintiff admits that defendant is "in the loop" insofar as communications and strategy discussions are concerned, but asserts that its involvement is solely derivative of the member's. (Id. at 18.)
For support for its position that TSC is a vicarious client of HB, plaintiff points to two cases, New York Marine General Insurance Company v. Tradeline (L.L.C.), 186 F.R.D. 317 (S.D.N Y 1999) and Commercial Union Insurance Company v. Marco International Corp., 75 F. Supp.2d 108 (S.D.N.Y. 1999). In New York Marine ("NYMGIC") at 319, the Court concluded that NYMGIC was a former client, but goes on to conclude, that "in any event, it is clear that Mr. Nicolletti gave NYMGIC only 'vicarious or attenuated representation'" on the matters in question taking into account that:
"when it came to guiding [the attorney's] actions . . . an entity stood between" Mr. Nicoletti and NYMGIC. That entity was the Leading Underwriter. None of the following underwriters, including NYMGIC, participated in the investigation of either claim, nor in the decision to select Mr. Nicoletti, nor in deciding litigation strategy. . . . NYMGIC paid a percentage of the legal fees, was copied on correspondence, and attended three or four meetings with Mr. Nicoletti and the Leading Underwriter. But NYMGIC does not allege that it ever had a private, one-on-one meeting with Mr. Nicoletti or any lawyer in his firm.
In Commercial Union Insurance Company v. Marco International Corp.,supra, at 111, Marco International had sustained a loss unrelated to the one at issue in the case and made a claim against Commercial. Commercial paid the loss and brought suit, as subrogee, in Marco's name to recover from a third party.
Under the terms of the policy, Marco was obligated to assign and subrogate to Commercial its right to prosecute and recover any claim against third parties responsible for the loss on which Commercial made payment. The subrogation case, although brought in Marco's name, is Commercial's alone. Marco has no pecuniary or other interest in the subrogation suit. Its role in the suit is limited to providing documents and testimony as required by the cooperation clause of the policy. Moreover, Marco did not retain NHS to prosecute the suit, it pays none of NHS's fees, and it has no control over the prosecution, settlement or dismissal of the matter.Id.
In the OPAL SUN matter, it is undisputed that HB actually nominally represents the member of TSC, but works directly, and almost exclusively with TSC, and that TSC, or to a much lesser extent, HB, periodically informs the member as to HB's progress. (Bright Decl., at ¶ 11.) TSC retained HB, paid its bills, and all correspondence was directed to TSC, not the member. (Singleton Aff., at ¶¶ 9-10.) TSC's London office, and to an extent the Japan office, completely controlled the litigation and dealt exclusively with HB as to whatever legal decisions had to be made. The member played no substantive role in the direction of the arbitration. (Bright Decl., at ¶ 11.) HB has not disputed this, but rather asserts that hypothetically the member could have differing views from TSC, and in that case HB would have to follow the member's views, and the member might compromise its FDD cover. That hypothetical possibility does not change the nature of the actual relationship between TSC and HB. Although TSC is not the named party in the litigation, TSC is still HB's client. HB is representing TSC's interests, as well as the member's. In this case, the interests of the member and TSC are aligned and HB represents the best interests of both and TSC plays an active role in the litigation. In Marco, relied on by plaintiff, the interest of the insured was not the same as the insurer. The insured had already collected from the insurer and the insurer brought suit in Marco's name to recover from a third party. Marco had no role at all in directing or controlling the litigation. In NYMGIC, the other case relied on by plaintiff, "NYMGIC was merely one of several following underwriters and was contractually bound to follow the Leading Underwriter in all respects on policy and claim settlements." NYMGIC at 319. NYMGIC also did not play an active role in the litigation and, in any case, did not deal directly or one-on-one with the law firm, which is not the case here.
The five LOUs that HB attorney Mr. Lambert posted to protect against Global's threats to arrest the vessels also do not meet the standard for vicarious representation. Each LOU bound TSC personally for any judgment up to the amount set forth in the letters and TSC's actual name appears as guarantor on each of the letters. While it is true that the shipowner posts security with TSC, it may be inadequate, or if the shipowner is bankrupt, TSC is ultimately liable. These letters all remain open to date and the obligations continue until the matters are finalized. Although each of the LOUs may start with a form that is signed as TSC's attorney-in-fact, drafting the LOUs involved negotiations about what law applies, where it applies and how it's going to be enforced. Therefore, TSC entrusts this legal advice and work only to attorneys admitted in the jurisdiction, and in this case TSC entrusted it to HB. (5/2/02 Tr. at 20-22.)
Because HB has not established that TSC is a vicarious or attenuated client, the per se rule should apply. The per se rule shifts the "heavy burden" to the attorney seeking to undertake adverse representation "to show, at the very least, that there will be no actual or apparent conflict in loyalties or diminution in the vigor of his representation."Cinema 5 at 1387. Although courts will not lightly grant a motion to disqualify, any doubt must be resolved in the favor of disqualification.Hull v. Celanese Corp., 513 F.2d 568, 571 (2d Cir. 1975). Were the rule to be otherwise, HB attorneys would continue to represent TSC in other ongoing matters, while at the same time other HB attorneys may be preparing to depose those same individuals in the instant litigation.
In this case, the Complaint demands damages against TSC and an award of attorneys fees and expenses for TSC's bad faith. (Compl. at 7.) At the same time, HB has been representing TSC's interests in other ongoing matters. Although plaintiff provides statements of two HB lawyers who currently represent TSC that the current litigation will have no bearing on how they perform their duties, that is not enough to meet the high burden set in Cinema 5. See Travelers Indemnity Co. v. Gerling Global Reins. Corp. 2000 WL 1159260, at *6 (S.D.N.Y. 2000). Plaintiff has not made a sufficient showing that would meet the heavy burden that there be no actual or apparent conflict in loyalties. "A lawyer should avoid even the appearance of professional impropriety." New York Code of Professional Responsibility, Cannon 9 (1999).
Conclusion
For the above reasons, defendant's motion to disqualify HB as plaintiff's attorney is granted.
IT IS SO ORDERED.