Opinion
05 Civ. 7262 (DC).
November 15, 2005
GIBSON, DUNN CRUTCHER LLP, By: Mitchell A. Karlan, Esq. Richie Falek, Esq., New York, NY, For Plaintiff.
Brian P. Miller, Esq., AKERMAN SENTERFITT, Miami, FL, and Chester B. Salomon, Esq., Constantine Pourakis Esq., STEVENS LEE, New York, NY, For Defendants Glaser, Glosson, Dell, and Augustin and Intervenor MapleWood Partners LP.
Douglas E. Motzenbecker, Esq., PODVEY, MEANOR, CATENACCI, HILDNER, COCOZIELLO CHATTMAN, New York, NY, For Robert J. Reale.
MEMORANDUM DECISION
In this case, plaintiff Eugenia VI Venture Holdings, Ltd. ("Eugenia") sues four individuals for the alleged breach of their fiduciary duties as officers and directors of nominal defendant AMC Computer Corp. ("AMC Computer"). Defendants — Robert V. Glaser, Burton C. Glosson, Glen Dell, and Ron Augustin — are also affiliated, directly or indirectly, with proposed intervenor MapleWood Partners LP ("MapleWood"). Gibson, Dunn Crutcher, LLP ("GDC"), Eugenia's counsel in this case, previously represented MapleWood. Defendants move to disqualify GDC from representing Eugenia in this action because of a purported conflict of interest created by GDC's prior representation of MapleWood. MapleWood moves to intervene for the limited purpose of joining in the disqualification motion. For the reasons that follow, MapleWood's motion to intervene for this purpose is granted, but the motion to disqualify is denied.
In a related action in this Court, Eugenia VI Venture Holdings, Ltd. v. Reale, No. 05 Civ. 5816 (DC), Eugenia sues Robert J. Reale for breach of his duties to AMC Computer. By letter dated October 24, 2005, Reale joins in the instant motion to disqualify GDC.
BACKGROUND
Beginning in 1998, certain lawyers at Chadbourne Parke, LLP ("Chadbourne"), including Dennis Friedman, Scott Kislin, and Hyeon Lee, provided legal services to MapleWood. (See Glaser Decl. ¶ 3; Tr. 22; see also Tr. 4; Reale Decl. ¶ 5). In September 2000, a number of Chadbourne attorneys, including Friedman, Kislin, and Lee, moved to GDC. (Tr. 22; Friedman Decl. ¶ 2; Kislin Decl. ¶ 2; see also Becker Decl. ¶ 2). Lee has since left GDC. (Tr. 22).GDC represented MapleWood in certain general corporate and personal matters, but not in any litigation matters. (Kislin Decl. ¶ 4; Becker Decl. ¶ 4). MapleWood is not presently a client of GDC, however, and no GDC attorney has worked on any matters for MapleWood for almost two years. (Pl. Mem. at 4; Kislin Decl. ¶ 4; Becker Decl. ¶ 4; Friedman Decl. ¶ 3). On June 9, 2005, GDC sent a letter to MapleWood advising that GDC was "formally" closing its files because more than a year had passed since GDC last "handled any active matters" for MapleWood. (Reale Decl. Ex. F).
While they were at Chadbourne, Kislin, Friedman, and Lee represented MapleWood in the latter's initial investments in AMC Computer. (Kislin Decl. ¶ 6). MapleWood itself never owned stock in AMC Computer, but it is the manager of two affiliates, MapleWood Equity Partners L.P., and MapleWood Equity Partners (Offshore) Ltd. (together, the "MapleWood Funds"). The MapleWood Funds own a majority of the membership interests in AMC Investors, LLC, and AMC Investors II, LLC (the "AMC Investor Entities"), and the AMC Investor Entities own approximately 35% of the common stock of AMC Computer. (Augustin Decl. ¶¶ 3, 4; Reale Decl. ¶ 2). In 2000 and 2001, after they joined GDC, Kislin, Friedman, and Lee provided legal services to MapleWood in connection with these investments. (Kislin Decl. ¶ 7).
In 2002, MapleWood contemplated a restructuring of AMC Computer. (Becker Decl. ¶ 6). Casita LP ("Casita"), a shareholder in one of the MapleWood Funds, asked GDC to represent it in connection with any such restructuring, and GDC agreed to do so. Because GDC had previously represented MapleWood, GDC executed a conflict of interest waiver, dated September 19, 2002 (the "Waiver"), which apparently was signed and agreed to by MapleWood, AMC Computer, and Casita. (Id. ¶ 6 Ex. A).
The Waiver defined as the "Transaction" a proposed restructuring of AMC Computer "currently being contemplated" by MapleWood and Casita. (Id. Ex. A at 1). The Waiver provided:
Our representation of Casita in the Transaction presents a conflict of interest given our representation of MapleWood in other matters. . . .
This letter is to confirm that MapleWood, AMC [Computer] and Casita consent to GDC's representation of Casita in connection with the Transaction. . . .
In the event that any litigation or dispute resolution proceedings should arise among MapleWood, Casita and AMC [Computer] in connection with the Transaction, we would not act as counsel to any of such parties.
(Id.).
In November 2002, certain investors in AMC Computer — Surinder Chabra and several of his related companies — agreed to restructure AMC Computer's obligations by subordinating certain of their rights "to make the Company more attractive for future investors and future sources of debt financings." (Karlan Decl. Ex. A at 1). They executed a "Debt Restructuring Agreement," dated November 21, 2002, which was also signed on behalf of AMC Computer and the AMC Investor Entities. (Id. Ex. A).
In January 2003, Eugenia and AMC Computer entered into an "Amended and Restated Credit Agreement," dated January 30, 2003, whereby they agreed to modify a Loan and Security Agreement, dated September 4, 2001, pursuant to which Eugenia had loaned funds to AMC Computer. (Augustin Decl. Ex. A).
The parties disagree as to whether the Transaction in the Waiver referred to the November 2002 debt restructuring, as Eugenia argues, or the January 2003 loan modification, as Defendants argue. Based on the record before the Court, I conclude that the Transaction referred to both. In September 2002, the interested parties were contemplating an investment, by Casita or related entities, of additional funds into AMC Computer. Casita was prepared to provide, or arrange for, additional funding only if the existing debt were restructured. The November 2002 agreement apparently laid the groundwork for the January 2003 loan modification, which extended credit facilities for AMC Computer.
Unfortunately, AMC Computer encountered financial difficulties. Its assets are now being liquidated. (Pl. Mem. at 1). As a secured creditor of AMC Computer (indeed, the only secured creditor), Eugenia brought this action alleging that AMC Computer was defrauded by its former employees and that Defendants, as actual or de facto officers and directors of AMC Computer, breached their fiduciary duties by failing to oversee and supervise the activities of the former employees. (Tr. 17, 20). This conduct is alleged to have occurred in 2003, 2004, and the first half of 2005, after GDC's representation of MapleWood ended. (Id. 20). This is not a debt collection action in that Eugenia is not suing to recover on its loans; rather, this is a derivative action, and any damages that are recovered will be paid to AMC Computer, with Eugenia then seeking to recover its financial interests in the liquidation proceedings. (Id. 25-26).
GDC represents that it has not gained any confidences from its representation of MapleWood that it could use in this litigation. (Id. 23-24). In addition, GDC has set up an ethical wall within the firm so that Friedman and Kislin will not communicate about the case in any way with the GDC litigators working on the matter, nor will they have access to any of the documents produced in discovery. (Id. 24).
There were some initial conversations with the GDC corporate attorneys as the litigators investigated the disqualification issue when it was first raised, but the lawyers in question were not aware of, and did not disclose, any relevant confidences. (Tr. 23; Kislin Decl. ¶ 11; Friedman Decl. ¶ 6; Becker Decl. ¶ 11).
DISCUSSION
A. Applicable LawThe federal courts have the inherent power to disqualify attorneys "to preserve the integrity of the adversary process."Bd. of Educ. v. Nyquist, 590 F.2d 1241, 1246 (2d Cir. 1979). In considering whether to grant a disqualification motion, a court must balance the client's right to choose counsel "against the need to maintain the highest standards of the profession." Gov't of India v. Cook Indus., Inc., 569 F.2d 737, 739 (2d Cir. 1978). The Second Circuit recently observed that "not every violation of a disciplinary rule will necessarily lead to disqualification."Hempstead Video, Inc. v. Inc. Village of Valley Stream, 409 F.3d 127, 132 (2d Cir. 2005). Rather, disqualification motions generally are "viewed with disfavor," Papyrus Tech. v. N.Y.S.E., 325 F. Supp. 2d 270, 275 (S.D.N.Y. 2004), and, accordingly, a party seeking disqualification "bear[s] a heavy burden." Evans v. Artek Sys. Corp., 715 F.2d 788, 794 (2d Cir. 1983). Indeed, disqualification is warranted only where an attorney's conduct would tend to "taint" the trial. Nyquist, 590 F.2d at 1246.
In the circumstance where, as here, attorneys are involved in litigation against a former client, the courts have applied a three-part test:
(1) the moving party is a former client of the adverse party's counsel;
(2) there is a substantial relationship between the subject matter of the counsel's prior representation of the moving party and the issues in the present lawsuit; and
(3) the attorney whose disqualification is sought had access to, or was likely to have had access to, relevant privileged information in the course of his prior representation of the client.Hempstead Video, 409 F.3d at 133 (quoting Evans v. Artek Sys. Corp., 715 F.2d at 791).
Where an attorney is affiliated with a firm, the attorney's conflicts ordinarily are imputed to the firm "based on the presumption that `associated' attorneys share client confidences." Hempstead Video, 409 F.3d at 133. Although some courts have treated this presumption as irrebutable, inHempstead Video the Second Circuit held that it was "join[ing]" the "`strong trend' . . . toward allowing the presumption of confidence sharing within a firm to be rebutted." Id.
The Second Circuit in Hempstead Video also discussed the efficacy of ethical walls — "procedures that may screen and safeguard client confidences." Id. at 137. The Court rejected the view taken by certain district courts that it had, in prior cases, held that ethical walls were "categorically" ineffective. Id.; see also id. at 138 ("We did not suggest any broad categorical rejection of the efficacy of isolation as protection against taint."). The Court held instead that:
We see no reason why, in appropriate cases and on convincing facts, isolation — whether it results from the intentional construction of a[n ethical wall] or from de facto separation that effectively protects against any sharing of confidential information — cannot adequately protect against taint.Id. B. Application
Defendants have not met their "heavy burden" of showing that disqualification is warranted — that the trial of this case would be "tainted." I am not persuaded that GDC has had, or is likely to have had, access to relevant privileged information that could be used in this litigation.
First, although it is not free from doubt, I assume that Defendants are former clients of GDC. GDC represented MapleWood, not the individual officers, employees, and directors, but nonetheless I assume that Defendants have established the first prong of the three-prong test.
Second, I find there is no substantial relationship between the subject matter of GDC's prior representation of MapleWood and the issues in the present lawsuit. There may be a relationship, but not a substantial one. It is true that Kislin, Friedman, and Lee represented MapleWood in connection with its initial investments in AMC Computer; the bulk of this work was when they were at Chadbourne, and some carried over to GDC. But all of this work was corporate work from 1998 through 2001, and none of this work is directly related to the issues at the heart of this lawsuit — whether Reale and Chabra defrauded AMC Computer and whether Defendants, in 2003, 2004, and 2005, failed to meet their fiduciary obligations.
Defendants argue that Kislin, Friedman, and Lee were involved in giving MapleWood officers advice in connection with the management of AMC Computer's affairs, and their counsel submitted a number of documents for in camera inspection that purportedly support the assertion. I have reviewed these documents, and while they do show, as a general proposition, that Kislin and Lee did give some advice in this respect, ultimately the documents underscore the lack of a substantial relationship. None of the arguably relevant e-mails, for example, are dated after 2001. Most address such basic matters as, for example, the requirements under New York law with respect to having an annual meeting or the requirements for issuing new shares. There is one e-mail, dated April 6, 2001, regarding the proposed discharge of an employee for cause, but that employee was employed by AMC Computer only from November 1, 2000 through June 25, 2001 and he has nothing to do with this case. There is nothing in the documents reviewed by the Court to suggest that Kislin or Friedman or Lee or any GDC attorney gave any advice to any representative of MapleWood regarding the obligation to supervise or oversee AMC Computer officers or employees.
Third, I also find that no GDC attorney had access to, or was likely to have had access to, privileged information that would be relevant in this lawsuit. To be sure, Kislin, Friedman, and Lee undoubtedly had communications of a privileged nature with representatives of MapleWood — but none that would be of any significance to this lawsuit.
As for the Waiver, even assuming the Transaction included the January 2003 modification of Eugenia's loans to AMC Computer, this suit is not an action to collect on that debt. Nor is this a case arising from the "restructuring" of AMC Computer's debt. No issue is being raised as to the interpretation of the November 2002 debt restructuring agreement or the January 2003 loan modification. Rather, this is a derivative action brought on behalf of AMC Computer alleging wrongful conduct unrelated to and occurring after those agreements were made.
Finally, even assuming there was somehow an arguably disqualifying conflict on the part of Kislin or Friedman, I am satisfied that this is one of those cases where the presumption of shared confidences is rebutted and an ethical wall will effectively protect against "taint." The Chadbourne lawyers who worked on MapleWood's investment in AMC Computer did not join GDC until September 2000. It does not appear that GDC did any work for MapleWood relating to AMC Computer after September 2002. GDC has done no work for MapleWood at all for almost two years. None of the GDC litigators ever represented MapleWood. I accept GDC's representations that it has not had access to any GDC's representations that it has not had access to any confidences that could be used in this lawsuit. Lee is no longer at GDC, and I am confident that the ethical wall that GDC has already established that prohibits Kislin and Friedman, two corporate attorneys, from communicating with the GDC litigators about this case will adequately protect against any taint.
CONCLUSION
MapleWood's motion to intervene for the limited purpose of joining in Defendants' motion to disqualify is granted. Defendants' motion to disqualify is denied, on the condition that GDC maintain an ethical wall whereby Kislin and Friedman are prohibited from communicating with any GDC litigators about this case.
SO ORDERED.