The opinion of the court was delivered by: BONSAL
Defendants move by order to show cause for an order disqualifying Patterson, Belknap & Webb, Esqs. ("PB&W") from acting as attorneys for plaintiff United States Industries, Inc. ("USI") and from advising or counseling plaintiff USI with respect to this action; enjoining PB&W from otherwise engaging in litigation arising out of the same facts upon which this action is based or making any disclosures regarding the facts of this case; sealing the record herein; and dismissing the action with prejudice against plaintiff, on the ground that there is a conflict of interest since PB&W was allegedly "general counsel" to USI during the period when defendant Myron Goldman ("Goldman") was a director of USI and president of various companies which are divisions of USI, and during which period the complaint alleges that Goldman caused one division, Excelled Leather Coat Co. ("Excelled"),
to make false financial reports to USI.
USI acquired Excelled from defendants on January 30, 1970 in exchange for USI common stock and Excelled became one of approximately 100 divisions of USI. The agreement of acquisition between defendants and USI provided inter alia that as part of the consideration for the Excelled stock, USI would deliver to defendants on or before May 31, 1975 shares of USI common stock as a "Final Contingency Payment" if Excelled exceeded certain pre-tax profit levels in the years 1969 through 1974. On or about May 31, 1975, allegedly in reliance on the financial reports of Excelled for the years 1969 through 1974 submitted by defendants to USI showing an aggregate pre-tax profit of $9,072,908, USI delivered to defendant 263,023 shares of USI common stock having a total market value of $1,000,000.
From January 30, 1970, the date of the USI acquisition, until December, 1975, Goldman was employed by USI as chief executive officer in charge of Excelled. From December 20, 1973 until June 11, 1975, Goldman was a director of USI.
The Complaint. Plaintiff USI alleges in the complaint that the Excelled financial reports for "1974 and prior years" contained untrue statements of material facts which overstated Excelled's pre-tax profits by more than $3.6 million, and that therefore defendants were not entitled to the Final Contingency Payment of May 31, 1975. USI seeks return of the 263,023 shares of its common stock or restitution, damages in the sum of $2,737,976, and punitive damages of $5-million for Goldman's breach of fiduciary duty and for fraud.
Defendants' Motion and Contentions. Defendants move for disqualification of PB&W as counsel for plaintiff USI, contending that a corporation's attorneys owe a "dual obligation" to the directors as well as to the corporation; that there is a confidential and fiduciary relationship between a corporation's attorneys and the corporation's directors; that there is a likelihood that PB&W obtained knowledge and information with respect to the issues involved in this action during the period when Goldman was a director of USI; that investors in a publicly held corporation have an interest in having independent counsel pursue the action for the corporation; and that the "appearance of impropriety" should be avoided.
At the Court's direction, the deposition of Goldman was taken on May 26, 1976. In addition, the parties deposed several attorneys at PB&W who allegedly worked on USI matters, and deposed two "in-house" attorneys for USI. Several affidavits from additional attorneys were also submitted for consideration.
Goldman testified that PB&W attorneys were "involved" in drafting or reviewing contracts in 1971 and 1972 among Excelled and other companies to import leather goods manufactured in Poland and Hungary made from leather originating in Lebanon or Argentina; that transactions arising from these contracts are the basis for certain of USI's allegations in the complaint;
that PB&W was involved in USI's acquisition of Excelled in 1970; and that PB&W attorneys attended four USI Board of Directors meetings while Goldman was director. However, Goldman testified that he personally had only one meeting with any attorney from PB&W (which took place in 1970); that he did not correspond with PB&W, but rather followed USI "general business procedure" of dealing with USI's in-house counsel on legal matters; and that he had no authority to retain counsel for Excelled. Goldman further testified that his knowledge of PB&W's "involvement" in the drafting of Excelled's contracts was based upon discussions with USI in-house counsel and that it was his "opinion that [PB&W] would be involved as they had been in the past with these very sophisticated transactions", but that he could not recall which contracts PB&W attorneys actually worked on.
Defendants do not contend that PB&W ever represented Goldman personally or that any "specific disclosures with respect to any of the facts of this case . . . have been made by Myron Goldman to any member of [PB&W]." Def.'s Br. at 5. Defendants do not present any examples of any other possible confidential disclosures made to PB&W in the course of performance of the latter's services to Excelled.
Relationship Between USI or Excelled and PB&W. The depositions and affidavits of several PB&W attorneys and USI in-house attorneys reveal that PB&W was "general counsel" to USI until 1967 when Sanford Kaynor was given the title of general counsel, and an in-house counsel staff, and PB&W became "special counsel". Thereafter, assignments to outside counsel, including PB&W, were made by Kaynor or one of his staff and were made when the in-house counsel staff was overburdened or the matter required special expertise. Since 1967, PB&W has had access to USI files, books and records only upon request and upon a "need-to-know" basis. Since 1967, USI and its divisions have utilized the services of at least eight other law firms in New York City for various purposes.
These depositions and affidavits further indicate as to matters related to this litigation that in 1970 the PB&W attorneys assisted the in-house counsel in drafting a contract between Excelled and other companies for the importation of leather goods manufactured in Hungary from leather originating in Lebanon; that in 1970 and 1972, PB&W attorneys assisted in drafting a security agreement and financing statement and did other legal research in connection with said contract; and that in 1972 PB&W attorneys spent several hours assisting Excelled in dealings through the Argentinian consul. It appears that in each instance, the PB&W attorneys submitted their drafts to the in-house attorney who had requested them and had no further contact with USI or Excelled on the matters. In 1970 and in 1975, PB&W attorneys worked on the computation of the Final Contingency Payment. The depositions indicate that the only PB&W attorney who attended USI Board of Directors meetings while Goldman was a director was Richard G. Moser, Esq. Mr. Moser stated that he attended four such meetings and did so at the request of USI's general counsel, but he did not participate in discussions of matters pertaining to Excelled.
According to PB&W time records, no services were rendered to USI on Excelled matters by PB&W from March, 1974 to June 11, 1975. It would appear from the depositions that the total time spent by PB&W between January 30, 1970 and June 11, 1975 was 160 hours, and of these, only 65 were ...