The opinion of the court was delivered by: BRYAN
This is a stockholders' derivative suit charging former directors of Blue Ridge Corporation and others alleged to be co-conspirators with wrongful diversion of corporate assets to their own profit and advantage and to the large damage of the corporation.
Plaintiff administrator claims to be the owner of 35 shares of Blue Ridge Corporation common stock. The individual defendants named in the complaint are former directors of the corporation, executors of a deceased former director, and other alleged participants in the transactions under attack. Named as nominal defendants entitled to the proceeds of the action are parties referred to as 'blue Ridge Corporation, now Blue Ridge Mutual Fund, Inc.' and Ridge Realization Corporation. The latter is the alleged assignee of the rights of Blue Ridge Corporation to the claims which are the subject of the suit.
The firm of Sullivan & Cromwell has appeared in the suit as attorneys for the only individual defendants who have been served. These defendants are former directors of Blue Ridge Corporation and executors of the deceased former director. Defendant Ridge Realization Corporation has moved to disqualify Messrs. Sullivan & Cromwell from representing the individual defendants upon the ground that such representation violates Canons 6 and 37 of the Canons of Professional Ethics.
The motion is based on the theory that since Messrs. Sullivan & Cromwell were general counsel for Blue Ridge Corporation at the times when the transactions complained of took place they are barred from representing the accused former directors of that corporation in this stockholders' derivative action brought for its benefit.
Since the motion involved important questions of professional ethics the court requested The Association of the Bar of the City of New York and the New York County Lawyers' Association, through their Committees on Professional Ethics, to submit briefs as amicus curiae. The court is grateful to both of these Associations, and to the gentlemen who acted as counsel for them, for their assistance.
Blue Ridge Corporation was an investment company organized in 1929 by Goldman Sachs Trading Corporation and Central States Electric Company, who became its controlling stockholders. Goldman Sachs and Central States Electric were both clients of Messrs. Sullivan & Cromwell who handled the organization of Blue Ridge on behalf of these clients. The initial board of directors of Blue Ridge in 1929 consisted of two directors nominated by Goldman Sachs, two by Central States and a neutral director, then the senior partner of Sullivan & Cromwell. In 1930 a sixth member of the board was elected. All of the board's members, with the exception of the senior partner of Sullivan & Cromwell, were individual clients of that firm.
The transactions attacked in the present suit took place between 1929 and 1933. Sullivan & Cromwell represented both the corporation and the individual directors throughout the period of these transactions and in connection with them.
Shortly thereafter, however, control of Blue Ridge Corporation passed to a new group and a new board of directors was elected replacing all but one of the former directors. There were then other changes in control. In 1942 a petition for reorganization of Central States Electric Corporation under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., was filed and approved in the United States District Court for the Eastern District of Virginia. During the reorganization approximately two-thirds of the common stock of Blue Ridge Corporation was owned by Central States Electric through its trustees in reorganization and was one of its principal assets.
The present suit was commenced in this court in March 1958. However, the litigation involving the claims in suit has a long and somewhat involved history. The problems presented by the instant motion must be viewed against this background.
In 1936 Harry Marco, plaintiff's intestate, commenced a derivative stockholders' suit upon the same causes of action as are pleaded here against substantially the same defendants in the New York Supreme Court, Kings County. Blue Ridge Corporation was named as a nominal defendant. The complaint charged the former directors of Blue Ridge Corporation named as defendants with participating in an alleged conspiracy in fraud of that corporation to use it as a dumping ground for securities owned or underwritten by the directors or by the corporations whom they represented.
Messrs. Sullivan & Cromwell appeared for the former directors as individual defendants and represented them throughout this protracted litigation. The firm did not appear for or represent Blue Ridge Corporation. After obtaining extensions of time to answer or move, Sullivan & Cromwell early in 1937 wrote to the president of Blue Ridge advising that the interests of the defendants for whom it had appeared were not the same as the corporate interests, and that the corporation should employ special counsel to represent it in the action. The corporation did so and was represented throughout the state court action by successive independent counsel.
Apparently the action had not been vigorously pressed up to the time of the death of Marco, the original plaintiff, in 1942. An administratrix of his estate was appointed, and in 1944 the action was revived and continued by an ancillary administratrix and became active.
In the meantime the reorganization of Central States Electric under Chapter X commenced in 1942 had proceeded. In 1950 a plan of reorganization was duly promulgated and confirmed. Under the plan Blue Ridge Corporation assigned to the newly formed Ridge Realization Corporation various choses in action including the claims which were the subject of the Marco suit. Ridge Realization Corporation, in exchange therefor, issued all of its common stock to Blue Ridge Corporation, which in turn declared such stock as dividends to its stockholders. Each stockholder of Blue Ridge thus obtained as a dividend one share of the common stock of Ridge Realization Corporation for each share of Blue Ridge common stock held. Blue Ridge Corporation was then merged into another new corporation, Blue Ridge Mutual Fund, Inc., and its separate corporate existence was terminated.
The plan of reorganization of Central States was consummated in June 1951. Shortly thereafter Ridge Realization Corporation, as assignee from Blue Ridge Corporation of the claims which were the subject of the Marco suit, moved to be substituted for Blue Ridge Corporation as the nominal corporate party defendant in that suit. The motion for substitution was denied but Ridge Realization was permitted to be joined in the action as an additional nominal party defendant. Marco v. Sachs, 201 Misc. 928, 106 N.Y.S.2d 522.
In 1955, some four years after Ridge Realization had been joined, a motion was made by the nominal corporate defendants to disqualify Messrs. Sullivan & Cromwell from appearing for, representing, or aiding any of the individual defendants in that action. This motion was denied at Special Term without prejudice on the ground that it did not have jurisdiction to grant the motion. The order of denial was affirmed by the Appellate Division (1 A.D.2d 851, 149 N.Y.S.2d 486, 487) on the authority of Erie County Water Authority v. Western New York Water Co., 304 N.Y. 342, 107 N.E.2d 479, which held that only the Appellate Division of the New York Supreme Court had authority to deal with disqualification of counsel on grounds of professional ethics. Apparently no attempt was made by the corporate defendants to renew the motion in the Appellate Division.
In January of 1958 the Marco action was dismissed because of the failure of the plaintiff to appear for examination before trial.
In March of 1958 the present suit was commenced in this court by the plaintiff as substituted administrator for Harry Marco, predicated upon the same claims as had been the subject of the previous New York action. Jurisdiction in this court was founded on diversity of citizenship. It was alleged that this was a new suit for the same causes of action which had been previously sued on in the state court which was commenced within one year after ...