decided: December 22, 1975; As Amended April 8, 1976.
Appeals from orders of the United States District Court for the District of Connecticut (Blumenfeld, J.) granting plaintiffs-appellees' motion to disqualify Julius Apter and all members of his former law firm, Apter, Nahum & Lenge, who were defendants in the action, from participating at trial as a violation of Disciplinary Rule 5-101(B), and denying the defendants' motion to disqualify the law firm representing plaintiffs. The order granting plaintiffs motion is reversed, the order denying defendants' motion is affirmed, and the cause is remanded for further proceedings concerning the defendants' representation.
Lumbard, Gibbons*fn* and Gurfein, Circuit Judges.
We have been met recently with a number of appeals on matters involving the disqualification of lawyer-opponents.*fn1 The present appeal is by the law firm for the defendants from the granting of a motion by the plaintiffs to disqualify them from representing a former partner and former clients in a litigation.*fn2 Such moves and countermoves by adversaries appear to have become common tools of the litigation process. We accordingly requested four bar associations, the Connecticut Bar Association, the Vermont Bar Association, the New York State Bar Association, and the Association of the Bar of the City of New York to file briefs as amici curiae. We have received briefs from all but the Vermont Bar Association. We have found them very helpful, and we thank them for their thoughtful efforts to aid the court. The Association of the Bar and New York State Bar briefs speak clearly for reversal. The Connecticut Bar brief discusses the issues more generally but is, by implication, also clearly for reversal.
The complaint was filed in the United States District Court for Connecticut. The plaintiffs are two corporations: a parent International Electronics Corporation ("IEC") and its subsidiary Electro Motive Corporation ("EMC"). The action arises from a sale and merger transaction in which EMC (then named IECONN, Inc.) acquired for cash the assets and business of Electro Motive Manufacturing Company, Inc. ("Elmenco"), with certain payments withheld in an escrow fund. The defendants are seven individuals who were selling stockholders of Elmenco. Included among these defendants is Julius Apter. Julius Apter acted as counsel and chief negotiator for all the stockholders of Elmenco, including himself. He was an officer and director of Elmenco, as well as a stockholder. He was also trustee of seven trusts which were among the selling stockholders, as well as a trustee of a principal creditor which was required to modify its loan agreement as a condition of the sale.
Julius Apter has retired from the law firm of Apter, Nahum & Lenge ("the law firm"), in which Morris Apter and Nicholas Lenge were also partners. He is 76 years old with a degenerative eye condition and has not engaged in the practice of law since January 1974. He no longer occupies office space in the Apter, Nahum & Lenge office, no longer resides in Connecticut, has not renewed his Connecticut license to practice law and has not participated in the conduct of the case except as a party defendant.
The law firm was made a defendant as agent of an escrow fund created under the Agreement and Plan of Merger, since the escrow fund was under the joint control of IEC and the law firm; it was named "in order that all necessary parties for a proper adjudication of this matter are before the court." There is no claim for damages against the law firm.
The complaint alleges that the seven individual defendants, including Julius Apter, made misrepresentations during the negotiations for the sale, and claims violations of the Securities Act of 1933 and Section 10(b) of the 1934 Act, as well as common law fraud and breach of contract. In July 1974 the law firm filed a joint answer for six of the seven defendants and on its own behalf. The law firm, though only a nominal defendant, counterclaimed for legal fees principally claimed to be owing for services rendered "at the request of the plaintiffs" during the merger.*fn3 Plaintiffs' reply generally denied the counterclaim.
In October 1974 the plaintiffs moved before Judge Blumenfeld to disqualify the law firm from representing any of the defendants. They alleged that Julius Apter was a partner in the law firm when the litigation was instituted in June 1974, had played the principal role in the negotiation of the sale and merger and would be a material witness. Plaintiffs moved for disqualification of the law firm on the ground that their continued involvement would violate Disciplinary Rules (DR) 5-101(B), 5-102(A), 5-105(A) and 5-105(B) of the Code of Professional Responsibility.*fn4
In response, Julius Apter filed an affidavit in which he swore that he has not practiced law since January 1974 and that he had retired from the Apter firm. There seems to be no real dispute that he is no longer in the firm or practicing law.
Judge Blumenfeld, on February 27, 1975, granted plaintiffs' motion to disqualify Julius Apter and all members of the law firm from participating at trial on the ground that such disqualification would assure compliance with DR 5-101(B), but he allowed the firm to continue to conduct the pre-trial proceedings. This appeal is from the granting of the disqualification motion which appellants contend should not have been granted. Plaintiffs-appellees contend that the court should have disqualified Julius Apter and the law firm from all proceedings and not only from the trial itself. To bolster its position, plaintiffs now urge the applicability of Canons 4 and 9 which were not briefed below but which were allegedly asserted in oral argument. We shall deal with the possible applicability of these canons as well, beginning with Canon 4.
The District Court made no mention of Canon 4, either because it thought it unnecessary to discuss it in light of its decision under Canon 5 or because it thought Canon 4 inapplicable to the state of facts before it. We think the court probably thought Canon 4 to be inapplicable, for its recognition would have required disqualification at once, even before trial. We agree that Canon 4 is not applicable.*fn5
Under Canon 4 and its offspring, EC 4-5 and 4-6, and DR 4-101(B), a lawyer may not accept employment against a former client where the matter is substantially related to the subject-matter of his earlier representation.*fn6 We have emphasized that we will not tolerate any deviation from the time-honored ethic of not revealing or using the confidences of a former client. See Silver Chrysler Plymouth, Inc. v. Chrysler Motors Corp., 518 F.2d 751 (2d Cir. 1975); Emle Industries, Inc. v. Patentex, Inc., 478 F.2d 562 (2 Cir. 1973); Hull v. Celanese Corp., 513 F.2d 568 (2 Cir. 1975); Ceramco, Inc. v. Lee Pharmaceuticals, 510 F.2d 268 (2 Cir. 1975); General Motors Corp. v. City of New York, 501 F.2d 639 (2 Cir. 1974). Indeed, most of our cases involving the Canons have arisen under Canon 4.
Assuming that the corporation now defunct as a result of merger is still a "client" deserving of protection for its confidences, there is no claim here that the law firm seeks to represent a third party against the successor by merger and to use its secrets to the advantage of the third party. Cf. Opinion No. 395, New York State Bar Association (1975); Informal Opinion No. 516, Comm. on Ethics and Professional Responsibility, American Bar Association (1962). While in form the transaction here involved ended in a merger, it was, in a practical sense, a sale. The law firm and the plaintiffs were on opposite sides of the negotiations which were conducted at arm's length. The plaintiffs' attack is now on the bona fides of the selling stockholders. These defendants -- the selling stockholders -- not the buyer, were the clients of the law firm. They have a right to defend themselves as adversaries. An attack on their counsel may even permit the divulging of confidences in defense. DR 4-101(C)(4); Marco v. Dulles, 169 F. Supp. 622 (S.D.N.Y.), appeal dismissed, 268 F.2d 192 (2 Cir. 1959); Meyerhofer v. Empire Fire & Marine Ins. Co., 497 F.2d 1190 (2 Cir.), cert. denied, 419 U.S. 998, 42 L. Ed. 2d 272, 95 S. Ct. 314 (1974). The earlier relationship of the law firm to the merged corporation cannot be a source of disqualification in these circumstances, even though a former client is surely entitled to protection. Cf. EC 4-6; Emle Industries, Inc. v. Patentex, Inc., supra.
Nor by the counterclaim for fees does the law firm adopt the status of counsel to the plaintiffs. The claim of the law firm is not that they earned fees for representing the plaintiffs, but that the plaintiffs had allegedly agreed to payment of ...