Opinion
Civil Action No. 04-2200 Section "A" (5).
March 18, 2005
ORDER AND REASONS
Before the Court is Defendant's Motion to Disqualify Counsel for the Plaintiffs (Rec. Doc. 18) filed by J. Kevin Lally. Plaintiff, Brian D. Burnett, opposes the motion. The motion, set for hearing on March 9, 2005, is before the Court on the briefs without oral argument. For the reasons that follow, the motion is GRANTED.
I. BACKGROUND
Sometime in 2002, defendants John Kevin Lally ("Lally") and Donald A. Olson ("Olson") (sometimes referred to collectively as "Defendants") began soliciting investors in the New Orleans area in order to purchase and operate a cruise ship out of the Port of New Orleans. (Comp. ¶ 3). In furtherance of that goal, Defendants formed a series of business entities including but not limited to S.S. Big Easy, Mermaid Agency, LLC, Mermaid Gulf, Inc., Mermaid Gulf Agency, LLC, Big Easy Cruises, SA, Big Easy Cruise Line, SA, Big Easy, SA (Panamanian corporation), Big Easy, SA (Belize corporation), and Nu Cruises, SA. (Comp. ¶ 5). Plaintiffs allege that Defendants did not minimally capitalize these businesses or observe corporate formalities. (Comp. ¶ 6). Plaintiffs claim that Defendants intended to use these various entities to raise technical defenses to potential claims for payment made by creditors. (Comp. ¶ 6).
Burnett alleges that on February 16, 2003, Lally contacted him in California and induced him to invest $50,000.00 into the venture in exchange for a 10 percent share of Mermaid Agency, LLC. (Comp. ¶ 7). Burnett also claims that as further inducement Lally hired him as "Director of Marketing" for "the combined and joint enterprise" at a salary of $7,500.00 per month, with an annual bonus of $30.000.00, and a guaranteed severance package of $22,500.00 (Comp. ¶ 7). Burnett alleges that he commenced work on April 1, 2003, and ultimately resigned on November 10, 2003. (Comp. ¶ 9). Burnett is suing for $193,163.50 in salary, expenses, bonus payments, and severance payments plus rescission of his $50,000.00 investment along with applicable statutory penalties, attorney fees, and punitive damages. (Comp. ¶ 13).
Plaintiff Long claims that on November 1, 2002, Defendants hired him as "Chief Executive Officer" of Big Easy, SA and all affiliated companies for a salary of $10,000.00 per month. (Comp. ¶ 8). He claims that his salary was raised to $12,500.00 per month on June 1, 2003 with an annual bonus of one-third of his annual salary. (Id.). Long resigned on November 10, 2003, and claims that he is owed $259,666.42 in salary and expenses. (Id.).
Both plaintiffs are attempting to hold Lally and Olson personally liable for the monies owed by arguing that the respective corporate veils should be ignored. (Comp. ¶ 12).
Defendants moved to dismiss the case and oral argument was set for January 12, 2005. Shortly before oral argument, plaintiffs' counsel John Caskey ("Caskey") contacted chambers and advised the Court that Brent Burley ("Burley") would be enrolling as co-counsel due to Caskey's ill health. Burley appeared for oral argument on January 12, 2005, and hand-delivered to the Court a motion to enroll. The Court granted Burley's motion to enroll but inexplicably Burley's motion did not make it into the official court record. The Court granted a replacement motion to enroll subject to the instant motion to disqualify.
Just as arguments were to begin, counsel for Olson informed the Court that documents he had received the night before strongly suggested that Caskey had a conflict because he had previously represented Defendants in conjunction with the cruise ship venture. The Court then denied the motion to dismiss as premature pending resolution of the conflict issue. On January 26, 2005, Caskey informed the Court that he would withdraw from the case due to his continuing health problems and because the defense had now designated him as a witness. Caskey attempted to explain the parameters of his prior representation of Defendants and denied any conflict in his current representation of Plaintiffs. In a letter dated January 27, 2005, Burley advised the Court that he would not voluntarily withdraw because he had not received any confidential information from Caskey.
Defendant Lally now moves to disqualify Caskey and Burley. II. DISCUSSION
Lally notes that Caskey has agreed to voluntarily withdraw due to his health problems. Lally points out, however, that one of the bases for disqualifying Burley is his association with Caskey on this case. Lally correctly notes that in order to prevail on this theory he will first have to establish that Caskey himself would have been disqualified due to a conflict. Naturally, if Caskey had no conflict there would be no basis to find that Burley became "tainted" by his joining Caskey as co-counsel on the case. Although Burley's memorandum does not address Caskey's conflict, Caskey took the opportunity to explain in great detail the scope of his prior dealings with Lally in his January 26, 2005, letter to the Court. Caskey copied that letter to all counsel and it appears as Exhibit A to Lally's motion (although without the attached exhibits). The Court will therefore consider the contents of Caskey's letter as part of the opposition to Lally's motion to disqualify.
The Parties' Contentions
Lally argues that Caskey should be disqualified under Rule 1.9(a) of the Rules of Professional Conduct because Caskey's current representation is "substantially related" to matters he handled while previously representing Lally. Lally argues that Caskey possesses confidential information as a result of that prior representation and that he is using that information against his former client.Lally asserts that Burley should be disqualified because he has received confidential information from Caskey. Lally also argues that Burley should be disqualified under Rule 3.7 because he will be called as a witness to impeach Caskey's credibility at trial. Lally points out that Burley and Caskey were involved in a bitter dispute after they dissolved their former law practice and that Burley accused Caskey in court documents of a panoply of unlawful and unethical conduct.
Rule of Professional Conduct 3.7, Lawyer as Witness, provides in pertinent part:
(a) A lawyer shall not act as advocate at a trial in which the lawyer is likely to be necessary as a witness unless:
(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.
Rule 3.7, La. Rules of Prof. Conduct (eff. Mar. 1, 2004).
In opposition, Burley explains that Caskey did not thoroughly brief him on the details of the instant case but rather gave him only the most cursory explanation of the facts and issues. Burley asserts that Lally has no evidentiary basis to support his allegation that Burley obtained confidential information from Caskey. Furthermore, Burley asserts that Lally waived his attorney-client privilege because counsel for Olson (Daniel Lund) was given copies of the documents that had been exchanged between Lally and Caskey in the prior representation. Burley reminds the Court that Mr. Lund displayed such a collection of documents to the Court at the January 12th hearing. Moreover, Burley argues that the attorney-client privilege should not be used as a shield to protect information that reveals criminal and intentional wrongdoing. Finally, Burley asserts that he would never be a witness in this litigation because any knowledge that he has regarding Caskey's credibility would be inadmissible at trial.
Law and Analysis
Motions to disqualify counsel are governed by state and national ethical standards adopted by the court. Horaist v. Doctor's Hosp., 255 F.3d 261, 266 (5th Cir. 2001) (citing FDIC v. U.S. Fire Ins. Co., 50 F.3d 1304, 1311 (5th Cir. 1995)). Ethical cannons relevant to a motion to disqualify include 1) the local rules of the district court, 2) the American Bar Association's Model Rules of Professional Conduct, and 3) the forum state's rules of attorney conduct. Id. "In considering a disqualification motion, [the court] view[s] the rules in light of the litigant's rights and the public interest considering `whether a conflict has 1) the appearance of impropriety, 2) a possibility that a specific impropriety will occur, and 3) the likelihood of public suspicion from the impropriety outweighs any social interests which will be served by the lawyer's continued participation in the case.'" Id.
The United States District Court for the Eastern District of Louisiana has adopted the Rules of Professional Conduct adopted by the Supreme Court of the State of Louisiana. LR 83.2.4E; LR83.2.10E. Rule 1.9 of the Rules of Professional Conduct, entitled Duties to Former Clients, provides in pertinent part:
(a) A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.
. . . .
©) A lawyer who has formerly represented a client in a matter . . . shall not thereafter:
(1) use information relating to the representation to the disadvantage of the former client except as these Rules would permit or require with respect to a client, or when the information has become generally known; or
(2) reveal information relating to the representation except as these Rules would permit or require with respect to a client.
. . . .
Rule 1.9, La. Rules of Prof. Conduct (eff. Mar. 1, 2004). The pertinent provisions of the Louisiana rule are identical to Rule 1.9 of the ABA's Model Rules. Nevertheless, in this circuit motions to disqualify are treated as substantive motions affecting the rights of the parties. In re American Airlines, Inc., 972 F.2d 605, 610 (5th Cir. 1992). While federal courts are free to adopt state or ABA rules as their ethical standards, the question of "whether and how" these rules are to be applied are questions of federal law. Id. Motions to disqualify counsel are therefore determined by applying standards developed under federal law. Id. (quoting In re Dresser Indus., 972 F.2d 540 (5th Cir. 1992)).
The Fifth Circuit has long applied the "substantial relationship" test to disqualifications based on prior representation. Under this test a party seeking to disqualify opposing counsel on the basis of a former representation must establish two elements: 1) an actual attorney-client relationship between the moving party and the attorney he seeks to disqualify, and 2) a "substantial relationship" between the subject matter of the former and present representations. American Airlines, 972 F.2d at 614 (citing Johnston v. Harris County Flood Control Dist., 869 F.2d 1565, 1569 (5th Cir. 1989; In re Corrugated Container Antitrust Litig., 659 F.2d 1341, 1345 (5th Cir. 1981);Duncan v. Merrill Lynch, Pierce, Fenner Smith, 646 F.2d 1020, 1028 (5th Cir. 1981)).
The substantial relationship test does not require the past and present matters to be so similar that a lawyer's continued involvement threatens to actually taint the trial. American Airlines, 972 F.2d at 616. Moreover, the Fifth Circuit has steadfastly refused to limit the reach of the substantial relationship test to the former client's interest in preserving confidential information. Id. Rather, the substantial relationship test is concerned with both a lawyer's duty of confidentiality and his duty of loyalty to his former client.American Airlines, 972 F.2d at 619. Thus, even where there is no danger that confidences will be revealed a lawyer may nevertheless be precluded from the subsequent representation because he is obligated not to use information obtained during the course of the prior representation to the detriment of his former client. See Brennan's Inc. v. Brennan's Rests., Inc., 590 F.2d 168, 172 (5th Cir. 1979). Nevertheless, once a substantial relationship is established an irrebuttable presumption that confidential information was disclosed during the former representation applies. American Airlines, 972 F.2d at 614 (citing Duncan, 646 F.2d at 1028, Corrugated, 659 F.2d at 1347).
A lawyer who has given advice in a substantially related matter must be disqualified, whether or not he has gained confidences and the advice rendered need not be relevant in the evidentiary sense to the present litigation in order to be substantially related. American Airlines, 972 F.2d at 618-19 (quotingCorrugated, 659 F.2d at 1346). Advice rendered need only be "akin to the present action in a way reasonable persons would understand as important to the issues involved." Id.
The party seeking disqualification bears the burden of proving that the present and prior representations are substantially related. American Airlines, 972 F.2d at 614 (citing Duncan, 646 F.2d at 1028). As part of this burden the moving party must delineate with specificity "the subject matters, issues and causes of action" common to prior and current representations.American Airlines, 972 F.2d at 614. Then, the court must engage in a "painstaking analysis of the facts and precise application of precedent." Id. at 614 (quoting Duncan, 646 F.2d at 1029). Once the moving party establishes a substantial relationship between the past and present representations the test is categorical in requiring disqualification. Id.
In the instant case the existence of a prior attorney-client relationship between Caskey and Lally it not disputed. Accordingly, the Court need only focus its attention on whether a substantial relationship exists between the instant lawsuit and the former representation.
The following information comes directly from Caskey's letter to the Court dated January 26, 2005. According to Caskey, his relationship with Lally began in 2002 while Caskey was an associate in a Baton Rouge law firm. Lally and Mr. Warren Reuther, who is not a party to this litigation, retained Caskey's firm to brief them on the maritime law relative to cruise operations, a subject with which Caskey had specific expertise. Lally and Reuther were interested in possibly acquiring the M/V Enchanted Capri, a vessel then for sale in the Port of New Orleans. Following multiple meetings, Caskey purchased a Panamanian "shelf corporation" called Big Easy, S.A. (Panama) to serve as a vehicle to purchase the vessel. When the corporate documents arrived from Panama Caskey delivered them to Lally. Neither Lally nor Reuther paid the bill for the legal work performed by Caskey's firm so the firm took the position that Lally and Reuther were not free to conduct business in the Panamanian corporation until the legal bills were satisfied. Lally and Reuther did not return the corporate documents to Caskey when asked to do so.
In 2003 Caskey left his former firm and opened his own firm in New Orleans. Caskey asserts that Lally assured him that the outstanding legal bills were going to be paid so Caskey, who apparently brought Lally with him as a client, renamed one of his limited liability companies to North American Gulf, LLC, to serve as agent for the Panamanian corporation. Caskey states that he "may have executed one or more formal documents pertaining to the company" and that he gave Lally a form for the proposed purchase of an ocean going vessel. Thereafter, Caskey claims that Reuther announced that the venture was not going forward and Caskey had nothing further to do with Lally. Caskey returned all relevant files to his former law firm. Caskey does not deny that he represented both Reuther and Lally but Caskey does make an overt attempt to de-emphasize Lally's role in the joint venture. Caskey's letter likewise gives the impression that he had somewhat of a perfunctory relationship with Reuther and Lally.
Nearly a year later, creditors of Lally and a new partner, defendant Olson, contacted Caskey about being owed money. Caskey asserts that the documents presented to him at the time suggested that Lally and Olson had formed several new corporate entities subsequent to Lally's venture with Reuther, and that the creditors' causes of action appeared to be based on dealings with those new entities. Although one of the entities was called Big Easy, S.A. the entity was in fact a Belize corporation and not the Panamanian corporation that Caskey had procured.
On February 13, 2004, Caskey wrote a demand letter to Lally and Olson on behalf of his new clients, aggrieved creditors who include plaintiffs herein, in which he expressly addressed the issue of a potential conflict. (1/26/05, letter to the Court, Exh. A). Caskey expressed his doubts as to any conflict but nevertheless stated that he would possibly recuse himself if Lally objected. On February 18, 2004, counsel for Big Easy, S.A. and Lally, who also represents Lally in the instant litigation, accepted a settlement offer on behalf of one of the creditors. (1/26/05, letter to the Court, Exh. B). The issue of Caskey's conflict was not mentioned.
Lally submitted several documents in support of his motion to disqualify. These documents confirm that Caskey represented Lally and they likewise belie any suggestion that Caskey was not intimately involved with his clients' attempt to purchase a vessel in furtherance of the joint venture. Lally's Exhibit C is a letter that Caskey wrote to him giving legal advice regarding deposit obligations for the purchase of the vessel. The addressee information on this letter suggests that it was written to Lally in his capacity as an officer of Mermaid Agency, LLC — the very corporation in which plaintiff Burnett received an ownership interest in exchange for his $50,000.00 investment. Exhibit D is minutes from an August 1, 2002, board of directors meeting of Big Easy, SA wherein Mermaid Agency LLC was named as shipping agent for the company. Those minutes appear to be signed by Caskey as secretary of the corporation. Exhibit E is a letter from Caskey to a shipping broker regarding the purchase of a vessel. That letter, which mentions Lally by name, is written on North American Gulf, LLC letterhead — Caskey's LLC which he renamed in furtherance of the joint venture. Finally, Lally has submitted several emails between the vessel owner and the vessel broker regarding the vessel purchase. These emails unarguably support Lally's assertion that Caskey was substantially involved in the efforts to purchase the vessel on behalf of his clients.
An actual attorney-client relationship clearly existed between Lally and Caskey. Moreover, the evidence of record establishes to the Court's satisfaction that a substantial relationship exists between the subject matter of the former and present representations. The crux of the former representation was Reuther's and Lally's efforts to purchase a vessel in order to enter the cruise ship business. Caskey was actively involved in his clients' efforts to purchase a vessel. Caskey was also retained specifically to brief Lally and Reuther on the maritime law relative to cruise operations. Caskey either procured/renamed/created legal entities in order to allow his clients to accomplish their goals. The timeline of events in this case suggest that Lally immediately continued the cruise ship effort with Olson when the venture with Reuther cratered. Thus, the "cover" for the allegedly fraudulent scheme that Plaintiffs allege is the exact same business venture that Lally had attempted with Reuther and in which Caskey had played a significant role. In fact, the instant litigation arises out of contacts that Defendants allegedly made with Plaintiffs during late 2002 and early 2003 — the very time frame during which Caskey continued to represent Lally in conjunction with his efforts to enter the cruise ship business.
Caskey argues that no conflict is present because the instant claims involve different legal entities than those involved in the prior representation and a different business partner. The Court finds this argument unpersuasive. Mermaid Agency, LLC, an entity directly implicated in this litigation, became associated with Big Easy, SA via a document executed by Caskey himself during the prior representation. Further, the facts of this case remain sketchy to date and given the close similarity between the Lally/Reuther venture and the Lally/Olson venture discovery might very well reveal that the contracts Plaintiffs are suing upon involved entities with which Caskey was involved. The temporal aspects of the case, i.e., that Caskey represented Lally in the cruise ship venture during the time frame that Plaintiffs allegedly contracted with the cruise ship operation, also undermine Caskey's assertion that the instant litigation is not substantially related to the prior representation.
Because Caskey's prior representation of Lally is substantially related to his current representation of Plaintiffs, the Court must assume that Caskey possesses confidential information relating to that former representation that could be used adversely to Lally. Moreover, the Court considers Caskey as having given legal advice in conjunction with the Lally/Olson venture because that venture appears to be the very same one that Lally had attempted with Reuther in what appears to be the same time frame. Under the clear law of the Fifth Circuit, Caskey must be disqualified.
Further, the Court is not persuaded that Lally waived any potential conflict when he allowed his lawyer to confect a settlement with another potential plaintiff who Caskey represented prior to the filing of this lawsuit. Plaintiffs cite no authority for the proposition that Lally's actions with respect to this other individual's claims constitute an inadvertent waiver of his rights to challenge Caskey's representation of Plaintiffs in the current lawsuit. Likewise, the Court has no basis to conclude that the documents Mr. Lund brandished at the January 12th hearing served as a blanket waiver of Lally's right to object to Caskey's representation of Plaintiffs. The Court suspects that many of those documents, while probative of the prior relationship between Caskey and Lally, were communications sent to third parties from Caskey on behalf of Lally. In short, if Caskey had refused to voluntarily withdraw from the representation, the Court would have nonetheless disqualified him due to a conflict.
The disqualification of Burley based upon Caskey's conflict is a far more difficult question. It is undisputed that Burley had no prior relationship with any of the parties in this case. However, Lally points out that Burley came to the January 12th hearing prepared to argue a substantive motion and that he admitted having at least one discussion with Caskey for the purpose of "generally getting familiar with the basics of the complaint and what is filed." (Part. Trans. of 1/12/05, hearing, Def. Exh. J). In his opposition and in his January 27, 2005, letter to the Court, Burley denies having received any confidential information from Caskey. Burley asserts that he downloaded documents from PACER to become familiar with the case and that he received only the most cursory explanation of the facts from Caskey. (Oppo. at 2).
The Court's research has revealed only one Fifth Circuit decision which addresses the "tainted" co-counsel issue. InBrennan's Inc. v. Brennan's Restaurants, Inc., 590 F.2d 168, 172 (5th Cir. 1979), the Fifth Circuit held that the district court properly disqualified attorney Wegmann from representing defendants with respect to the use of certain service marks. Wegmann had jointly represented the plaintiffs and the defendants in their family business prior to internecine disputes which eventually led to Wegmann severing his representation of the plaintiffs. The court concluded that Wegmann could not use information attained in the prior representation against his former clients notwithstanding that the joint nature of the former representation had made all parties privy to all information. Id. However, the Fifth Circuit vacated the district court's order disqualifying Wegmann's co-counsel. Id. at 173. The court rejected a per se approach to the disqualification of co-counsel of disqualified counsel. Id. The court refused to presume that confidences had been disclosed and stated that co-counsel should not be disqualified unless he had actually learned confidential information from Wegmann. Id.
The clear import of Brennan's is that Burley is not subject to disqualification unless he actually learned confidential information from Caskey, a fact which Burley adamantly denies. Nevertheless, the Court concludes that the balance weighs in favor of disqualification under the facts of this case.
Caskey undisputedly possesses confidential information pertaining to his former representation of Lally. It is undisputed that Burley and Caskey had at least one conversation pertaining to this case before Burley appeared at the January 12th hearing. And the Court must naturally assume that Burley, who appeared to be genuinely unaware of the conflict issue, contacted Caskey after the January 12th hearing for some type of explanation regarding the accusations made in open court that morning. The Court has no reason to question the veracity of Burley's statements and the assertions he has made as an officer of the court. But Lally, against whom Plaintiffs allege fraud for which they seek to hold him personally liable, need not be so magnanimous in taking Burley at his word. Lally is entitled to defend himself against the potentially criminal conduct alleged in this suit without the specter of unfairness. If he is ultimately found liable, he must be sure that his accusers did not use information that he freely disclosed to his former attorney to their advantage. Moreover, given that Burley has had so little involvement with this case to date, the Court is not convinced that he would realize at this stage that something seemingly minor that Caskey told him might very well have been information that Caskey obtained during the prior representation of Lally.
Burley suggests that the Court can conduct some sort of hearing to ascertain whether he has obtained confidential information from Caskey. The Court rejects such a suggestion because in order to lay Lally's concerns to rest, the Court would have to allow him to extensively question Caskey and Burley regarding their conversations about this case. Such questioning would surely impinge on the rights of the Plaintiffs herein, whose interests Caskey and Burley currently represent, and whose rights must also be protected. In this vein, the Court notes that Plaintiffs themselves did not retain Burley. Rather, Plaintiffs retained Caskey who then asked Burley, his former law partner, to assist him on the case when his declining health became an issue. Given that Plaintiffs are not from Louisiana they very likely have never met Burley.
In sum, the Court finds that it would be unfair to force Lally to defend this matter under the specter of unfairness that has currently befallen this case. If Plaintiffs were to ultimately prevail in this matter, Lally would always have to wonder if they were advantaged by information obtained during a relationship that this Court considers "sacrosanct." Further, Lally would surely raise the disqualification issue on appeal if he's on the receiving end of an adverse judgment. A reversal on this issue would require Plaintiffs to relitigate this whole case from the beginning with new counsel and Lally would have to pay for legal expenses to defend this case twice. Olson also might possibly incur additional legal expenses. Meanwhile, this case is in the very early stages of litigation and Burley's role thus far has been limited to filing an opposition to the motion to disqualify. For the protection of all parties, including plaintiff Burnett who opposed this motion, Caskey and Burley are disqualified from continuing in this matter.
Accordingly;
IT IS ORDERED that the Defendant's Motion to Disqualify Counsel for the Plaintiffs (Rec. Doc. 18) filed by J. Kevin Lally should be and is hereby GRANTED; IT IS FURTHER ORDERED that this case is STAYED for a thirty (30) day period during which Plaintiffs will be allowed to enroll new counsel.