Opinion
3:02-CV-2112-P.
June 13, 2003.
MEMORANDUM OPINION AND ORDER
Plaintiff insurer issued a directors and officers liability policy to Defendants. Pursuant to a cooperation clause in the policy, an insured and his attorney met with the insurer's counsel and disclosed information that was not to be disseminated to third parties. Plaintiff subsequently sued to rescind the policy due to alleged misrepresentations or material omissions in the application for insurance. Defendant Conrad A. Kalitta now moves to disqualify Plaintiff's counsel from representing Plaintiff in the rescission suit on grounds that a de facto attorney-client relationship or a fiduciary duty arose during his meetings with Plaintiff's counsel. After considering the briefing and the relevant law, the Court DENIES the Motion to Disqualify.
I. Factual Background
On March 22, 2000, Defendant James R. Craig, vice president and general counsel for Kitty Hawk, Inc., signed a Proposal Form seeking to obtain insurance under a directors and officers policy from Plaintiff. Plaintiff subsequently issued such a policy for the period covering March 13, 2000, through April 1, 2002. Less than three weeks after Craig submitted the Proposal Form, Kitty Hawk made certain public disclosures that caused its stock price to drop. On May 1, 2000, Kitty Hawk filed for bankruptcy protection. Shareholder lawsuits soon followed.
Defendant Conrad A. Kalitta (a director of Kitty Hawk) and others subsequently sought indemnification from Plaintiff under the DO policy. The DO policy includes a so-called "cooperation clause," which requires the insured persons to "provide the Insurer with all information and particulars it may reasonably request in order to reach a decision as to [its consent to incur costs of defense]." Pl.'s Resp. at 4. Attorney Stephen Rosenfeld of Mandell Menkes Surdyk, LLC ("MMS") informed Defendant Kalitta (through his attorney David French) that Great American would not consent to advance Kalitta's costs of defense unless he agreed to an interview. French Aff. ¶¶ 10-11. Rosenfeld interviewed Kalitta concerning his "knowledge of the claims against him." Rosenfeld Aff. ¶ 4. Cf. French Aff. ¶ 11 (interview concerned Kalitta's "activities as a Director for Kitty Hawk, Inc. and the facts and circumstances giving rise to the [shareholder suits]").
According to Rosenfeld, Kalitta was told that "the information [he] was providing would be used by MMS and [Great American] to investigate Kalitta's claim and to determine the availability of coverage" and that it "would not be disseminated to third parties." Rosenfeld Aff. ¶ 5. Rosenfeld also told Kalitta that neither MMS nor Great American would contend that the provision of such information constituted a waiver of the attorney-client privilege. Id. ¶ 6. He also avers that he "never advised Kalitta that MMS was acting as [his] attorney. Indeed David A. French and I negotiated extensively regarding the terms of Kalitta's interview by MMS, recognizing the fact that MMS and [Great American] stood in an actually [or] potentially adversarial position with respect to Mr. Kalitta." Id. ¶ 7.
French avows that there was an "understanding that [MMS] and Great American had a reciprocal and corresponding duty to utilize any provided information only to reach a good faith decision on whether to consent to Mr. Kalitta incurring costs of defense in the [shareholder] litigation." French Aff. ¶ 11.
Great American subsequently agreed to advance (in behalf of Kalitta and certain other Defendants) the costs of defending against the shareholder suits. Pl.'s Resp. at 5. On January 30, 2001, Great American entered into an Interim Fee Advancement Agreement with Kalitta to that end. Id. The Interim Fee Agreement provided, inter alia, that Great American
expressly reserv[es] its rights to contest coverage for all or any portion of the Underlying Litigation. Moreover, it is understood and agreed by all parties hereto that nothing contained in this Agreement or performance hereunder shall be construed to be a waiver of any of said rights, remedies or defenses and [Great American] shall not in any way be barred from asserting such rights, remedies or defenses or grants of waiver, estoppel, laches, statutes of limitation or for any other reason, . . .Id., Ex. B ¶ 7. The Interim Fee Agreement also provided that
Each of the parties hereto recognizes the mutuality of interest in active coordination and cooperation to present the most efficient, economical and effective defense and hereby agrees to give each other party cooperation and information as the latter may reasonably request, to the extent the parties share common interests with respect to the Underlying Litigation and subject at all times to the right of each party to invoke rights of privilege or confidentiality or otherwise to refuse cooperation and information if the party or its counsel in good faith determines protection of its interests in the Underlying Litigation requires such particular cooperation or information not be provided.Id. ¶ 8. In a letter dated April 3, 2002, counsel for Great American (Robert Baker) directed Kalitta and other addressees to keep the company "continuously advised of all developments in the Litigation, and [to] provide [Great American] with copies of all pleadings, discovery, motions, court papers, expert and other reports, orders, rulings and any and all other information material to the litigation." Def.'s Mot., Ex. B at 5. Great American also stated that it "reserves the right to disclaim coverage in its entirety as to the Litigation and/or to move to rescind the [DO] Policy and to withdraw from the Interim Fee Advancement Agreements" in the event that the answer to question 6(d) or 13 in the Proposal Form turned out to be untrue. Id. at 3-4.
Subsequently, having "determined that it had been induced to issue the [DO] Policy based upon material misrepresentations regarding Kitty Hawk's financial condition," Rosenfeld Aff. ¶ 9, Great American instituted this lawsuit to rescind the DO policy. Defendant Kalitta now moves this Court to disqualify Mandell Menkes Surdyk, LLC, from representing Plaintiff in this suit.
II. Motion to Disqualify
Defendant Kalitta makes two arguments in support of his contention that MMS should be disqualified from representing Plaintiff in this suit to rescind the DO policy. One argument is that a de facto attorney-client relationship arose between MMS and Kalitta during Great American's investigation into the claim against the DO policy. By this theory, MMS's present representation of Plaintiff in this suit amounts to a representation adverse to a former client in a matter substantially related to the former representation. Alternatively, Kalitta argues that, even in the absence of an attorney-client relationship, the firm assumed a fiduciary duty of confidence that cannot feasibly be honored so long as MMS represents Plaintiff in this suit against Kalitta.
Motions to disqualify an attorney are substantive motions determined by standards developed under federal law. In re American Airlines, 972 F.2d 605, 610 (5th Cir. 1992). Although federal courts may adopt state or American Bar Association rules as their ethical standards, whether and how those rules should be applied remains a question of federal law. Id. Thus, while the Texas Disciplinary Rules are relevant to the disqualification of counsel from litigation, they are not dispositive. In re Dresser Indus., 972 F.2d 540, 545 n. 12 (5th Cir. 1992). The Fifth Circuit takes a hands-on approach to preventing conflicts of interest, holding that a district court is "obligated to take measures against unethical conduct occurring in connection with any proceeding before it." American Airlines, 972 F.2d at 611 (quoting Woods v. Covington County Bank, 537 F.2d 804, 810 (5th Cir. 1976)).
A. No De Facto Attorney-Client Relationship
A motion to disqualify an attorney due to a conflict arising from his former representation of a party may be granted where (1) there was an attorney-client relationship between the moving party and the attorney he seeks to disqualify and (2) there is a substantial relationship between the subject matter of the former and present representations. American Airlines, 972 F.2d at 614. An attorney-client relationship is a contractual relationship whereby an attorney agrees to render professional services for a client. Mellon Serv. Co. v. Touche Ross, 17 S.W.2d 432, 437 (Tex.App.-Houston 2000). This relationship may be expressly created or it may be implied from the actions of the parties. Perez v. Kirk Carrigan, 822 S.W.2d 261, 265 (Tex.App.-Corpus Christi 1991). The hallmark of an attorney-client relationship is the manifestation of an intention to create such a relationship. Parker v. Carnahan, 772 S.W.2d 151, 156 (Tex.App.-Texarkana 1989). Courts have found an attorney-client relationship to exist even where the attorney had no intention of forming such a relationship. E.g., Kirk Carrigan, 822 S.W.2d at 265.
Conceding there to be no contract between himself and MMS, Defendant Kalitta argues that MMS's activities "could be sufficient to give rise to an attorney-client relationship in the [shareholder litigation]." Def.'s Mot. at 11. Plaintiff's counsel "received numerous documents [including billing statements subject to the attorney-client privilege] pertaining to Mr. Kalitta's defense in the 10b5 Litigation with the understanding that they would be kept confidential." Id. MMS "has also been party to discussions regarding defense strategy in the 10b5 litigation and has even conducted an extensive interview of Mr. Kalitta regarding his role as a Director of Kitty Hawk and the facts surrounding the 10b5 Litigation . . ." Id. This de facto attorney-client relationship, Kalitta contends, satisfies the first requirement for disqualification based on former representation.
In support of his theory that limited disclosure of confidential documents and participation in discussions concerning defense strategy can give rise to a de facto attorney-client relationship, Kalitta cites Perez v. Kirk Carrigan, 822 S.W.2d 261 (Tex.App.-Corpus Christi 1991) and Insurance Co. of North America v. Westergren, 794 S.W.2d 812 (Tex.App.-Corpus Christi 1990). Neither of these cases gives much support to Kalitta's argument. In Perez, it was alleged that the defendant attorneys had told the plaintiff that they were his attorneys, a fact plainly missing in the case at hand. See 822 S.W.2d at 265. See also Rosenfeld Aff. ¶ 7 ("I never advised Kalitta that MMS was acting as Kalitta's attorney."). In Westergren, the attorney in question made an appearance in court on behalf of the surety company that was alleged to be his client. 794 S.W.2d at 813. There is no evidence that MMS acted as Kalitta's representative in a legal proceeding, such as making an appearance or filing a document in court.
When a court is asked to find a de facto relationship, it is asked to focus not so much on the legal facts as on the facts and circumstances as a whole. The facts highlighted by Kalitta are not inconsistent with an attorney-client relationship. However, facts not emphasized by Kalitta lead the Court to conclude that no such relationship was intended or existed in point of fact. The most significant fact is that Kalitta was represented by separate counsel at all times relevant to this motion. Indeed, the Interim Fee Agreement, signed by Kalitta, expressly recites that "Kalitta is being represented by the law firm of Miller Canfield Paddock Stone, P.L.C." It is undisputed that Kalitta's attorney negotiated the contours of the interview before Kalitta met with Rosenfeld.
The circumstances surrounding Kalitta's disclosure of confidential information and his discussion of defense strategy with MMS are analogous to a joint-defense relationship. Co-defendants and parties who share a common interest in litigation routinely agree to share confidences in pursuit of those common interests without any implication that a de facto attorney-client relationship will arise. See RESTATEMENT, LAW GOVERNING LAWYERS, § 14, cmt. b ("A client-lawyer relationship is not created . . . by the fact of receiving some benefit of the lawyer's service, for example when the lawyer represents a co-party."). In fact, the issue of whether the attorney-client privilege is surrendered by such collaboration arises precisely because there is no attorney-client relationship between the person making confidential communications and someone else's attorney. See Schachar v. Am. Academy of Opthamology, Inc., 106 F.R.D. 187, 191-192 (N.D. Ill. 1985) (citing cases finding no surrender of privilege in common-interest cases).
To impute an attorney-client relationship in this case would be inconsistent with other well-settled law. For example, "confidential communications between a lawyer for an organization and an employee or agent of the organization about a matter of interest to the organization does [ sic] not thereby make the lawyer counsel for the associated person with respect to that person's own interests in the same matter." RESTATEMENT, LAW GOVERNING LAWYERS, § 14, reporter's note, cmt. b at 135. In fact, "the organization may continue to employ the lawyer to oppose the person in the same or a substantially related matter." Id. See, e.g., Ferranti Intern. plc v. Clark, 767 F. Supp. 670 (E.D. Pa. 1991) (employee who hired outside law firm to conduct investigation could not object to its representing the corporation in a suit against that employee for activities uncovered in investigation, where firm made clear that they did not represent any individual).
The Court therefore rejects the contention that a de facto legal relationship existed between Kalitta and MMS.
B. MMS' Duty to Protect Confidences Does Not Prevent Suit On Behalf of Plaintiff
In the absence of an attorney-client relationship, Defendant Kalitta argues that MMS owes him fiduciary duties that require the firm's disqualification from this case. It is well settled that a fiduciary duty attaches when, in the course of conducting a joint defense, an attorney undertakes a duty to preserve the confidences of a nonclient. Nat'l Medical Enterps., Inc. v. Godbey, 924 S.W.2d 123, 129 (Tex. 1996) ("Every authority of which we are aware . . . concurs with this view."). "In such a situation, an attorney who is the recipient of [a nonclient's confidential] information breaches his fiduciary duty if he later, in his representation of another client, is able to use this information to the detriment of one of the co-defendants." Wilson P. Abraham Construction Corp. v. Armco Steel Corp., 559 F.2d 250, 253 (5th Cir. 1977). See also RESTATEMENT OF LAW GOVERNING LAWYERS § 132, cmt g( ii) ("A lawyer who learns confidential information from a person represented by another lawyer pursuant to a common-interest sharing arrangement . . . is precluded from a later representation adverse to the former sharing person when information actually shared by that person with the lawyer or the lawyer's client is material and relevant to the later matter.").
It is undisputed that there was no actual "joint defense" arrangement in the case at hand. Rather, Kalitta disclosed information to counsel for Great American pursuant to the cooperation clause in the DO policy. The confidential nature of these communications is also not disputed. Indeed, Rosenfeld avows that he "advised Kalitta and his counsel that the information Kalitta was providing would be used by MMS and [Great American] to investigate Kalitta's claim and to determine the availability of coverage, but that information [Rosenfeld] obtained would not be disseminated to third parties." Rosenfeld Aff. ¶ 5. He also advised Kalitta and his attorney that Great American would not subsequently argue that his decision to provide information constituted a waiver of the attorney-client privilege between French and Kalitta. Id. ¶ 6.
However, there is also no avoiding of the fact that MMS is not representing "another client" as that language was used in Wilson P. Abraham. Rather, MMS is now representing the same client it was representing when Kalitta made his disclosures. None of the cases cited by Kalitta squares with this undisputed fact. In Wilson P. Abraham, an attorney — who represented one of several entities being investigated by a grand jury for criminal antitrust violations — was barred from representing a third-party plaintiff in an antitrust suit against one of the other entities investigated by the grand jury because he had become privy to co-defendant confidences. See 559 F.2d at 251-252. In National Medical Enterprises, Inc. v. Godbey, 924 S.W.2d 123, 124-125 (Tex. 1996), the law firm of an attorney — who (before joining the firm) advised former health-system employees concerning civil and criminal proceedings — was barred from representing a group of third-party plaintiffs in a suit against the health system because he had become privy to the health system's confidences. In Westinghouse Electric Corp. v. Kerr-McGee Corp., 580 F.2d 1311 (7th Cir. 1978), a law firm — which lobbied Congress on behalf of the American Petroleum Institute — was barred from representing a third-party plaintiff (Westinghouse, which was not a member of API) in a suit against several members of API because it had agreed not to disclose to third parties or API (except in aggregated form) confidential information provided by the member companies. See also Analytica, Inc. v. NPD Research, Inc., 708 F.2d 1263 (7th Cir. 1983) (law firm that represented company and employee was barred from suing company on behalf of third party); Erich v. Binghamton City Sch. Dist., 210 F.R.D. 17 (N.D.N.Y. 2002) (attorney — who, as a legal consultant, became privy to school district's confidential information — was barred from representing third party in suit against school district).
None of the cases cited by Kalitta involves an attorney representing a client in a suit against a person from whom he had learned confidences during the discussion of matters of common interest to the client and the other person. For that matter, neither does the case on which Plaintiff relies so heavily. See Morrison Knudsen Corp. v. Hancock, Rothbert Bunshoft, LLP, 81 Cal.Rptr.2d 425 (Cal.App. 1999) (when an insured disclosed confidences to underwriter's counsel pursuant to cooperation clause, underwriter's counsel was barred from subsequently representing a third party in a suit against the insured or its parent).
Regardless of this crucial factual distinction, Texas law is clear that an assumed duty to preserve confidences "[does] not preclude an attorney and client from acting in their own best interests, even to the point of using information disclosed by others in ways that conflict with the others' interests." Nat'l Med. Enterps., 924 S.W.2d at 129. That this rule controls the disposition of the present motion is made clear by considering the nature of the relationship between Kalitta and MMS. It is not that of attorney and client, and any duty of MMS to preserve the confidences of Kalitta is not an ethical duty. ABA Formal Opinion 95-395. Rather, any such duty arises from law other than the rules of professional responsibility. RESTATEMENT OF LAW GOVERNING LAWYERS § 132 cmt. g( ii). Any fiduciary aspect of a duty to preserve confidences thus derives not from the law governing lawyers but from the law of agency or some other fiduciary relationship an attorney might have with a nonclient, such as executor, trustee, corporate officer or director, or public official. See generally id. § 135 cmts. c, d, e, f.
Kalitta does not argue that the fiduciary nature of MMS's duty to preserve his confidences derives from any of the abovementioned relationships. He appears, rather, to rely on Mr. Rosenfeld's promise not to disseminate the confidences to third parties. See Reply at 1-2 (citing Rosenfeld Aff. ¶¶ 5-6). Citing Crim Truck Tractor Co. v. Navistar Int'l Transp. Corp., 823 S.W.2d 591 (Tex. 1992), Kalitta contends that a fiduciary duty attached when "Mr. Kalitta relied upon [MMS's] promise not to disseminate his confidential information to third parties and to cooperate in planning his defense in the 10b5 Litigation to his and Plaintiff's mutual interest in that action." The Crim case describes the circumstances under which an "informal relationship may give rise to a fiduciary duty." 823 S.W.2d at 594. While "not every relationship involving a high degree of trust and confidence rises to the stature of a formal fiduciary relationship," Texas courts have found an informal fiduciary duty where "`influence has been acquired and abused, [where] confidence has been reposed and betrayed.'" Id. (quoting Tex. Bank Trust Co. v. Moore, 595 S.W.2d 502, 507 (Tex. 1980). This rule coexists, however, with the rule holding that "a party to a contract is free to pursue its own interests, even if it results in a breach of that contract . . ." Id. (citing Amoco Prod. Co. v. Alexander, 622 S.W.2d 563, 571 (Tex. 1981)).
Whereas Kalitta had a reasonable expectation that his disclosures would not be used by MMS in a subsequent representation of a third party, he could not expect loyalty from MMS at the expense of Great American. See Morrison, 81 Cal.Rptr.2d at 432. Indeed, considering the clarity with which the Interim Fee Agreement reserves the rights of the parties against one another, it would be unreasonable for Kalitta to assume that counsel for Great American owed him any duty of loyalty. See Interim Fee Agreement ¶ 7. Plainly, "[MMS's] loyalty ran to its client, [Great American], not to [Kalitta], and [Kalitta] could expect that the information might be used against [him] to further [Great American's] interests." Morrison, 81 Cal.Rptr.2d at 432. "[MMS's] duty to keep the information confidential for other purposes," that is, for purposes other than furthering Great American's interests against Kalitta, remains intact, but is not implicated in the case at hand. Id. Though MMS's representation of Great American in this suit against Kalitta puts certain information obtained from Kalitta into the public record, thereby revealing secrets to "third parties," it cannot be said that MMS betrays confidences in violation of a fiduciary duty.
A contrary conclusion would require the Court to ignore the always potentially adverse relationship between an insurer and its insured. Policies of the type at issue in this case are negotiated at arm's length by sophisticated parties. And the leverage either of the parties enjoys in any negotiations over coverage is set by the terms of the policy. To impose on insurer's counsel a fiduciary duty to preserve the confidences of a represented insured — even in actions on behalf of the insurer against the insured and in spite of an express reservation of rights by the insurer — would alter the contracted-for relationship in favor of the insured. The effects of such a decision go far beyond the present litigation. It would all but require insurers to retain separate counsel for their collaborative and antagonistic encounters with insureds. The Court is loathe to require this result.
Kalitta further argues that MMS "will be unable to fulfill its duty to vigorously represent its client . . . due to [its] agreement . . . not to disseminate Mr. Kalitta's confidential information to third parties." Reply at 1-2. This argument echoes ABA Model Rule 1.7(b) and RESTATEMENT § 135, which describe the ethical obligations of an attorney whose ability to represent a client is materially and adversely limited by his fiduciary or other legal duties to a person other than the client. Inasmuch as the Court finds that MMS owes Kalitta no fiduciary duty, and Kalitta fails to identify a legal obligation that would materially and adversely limit MMS's representation, the Court infers that Plaintiff has consented to MMS's representation under these circumstances.
Finally, Kalitta argues that "[MMS's] representation of Plaintiff in the instant action jeopardizes Plaintiff's interests because dissemination of Mr. Kalitta's confidential information to third parties . . . could provide plaintiffs in the 10b5 Litigation with the ability to prevail in that action." Kalitta identifies no cases in which a court has disqualified an attorney on such grounds.
III. Conclusion
In sum, an attorney — who (in the course of representing his or her client) becomes privy to confidences of a nonclient represented by separate counsel — may represent the same client in an action against the nonclient in a substantially related matter and may even rely on the nonclient's disclosures in pursuit of his client's interests. Defendant Kalitta's motion to disqualify Plaintiff's counsel is DENIED.