Appeal from an order of the United States District Court for the Southern District of New York, Constance Baker Motley, Judge, disqualifying appellant's law firm as counsel in this action for ethical considerations under Canons 4 and 9 of the Code of Professional Responsibility.
Smith, Mansfield and Oakes, Circuit Judges.
We are called upon once again, as we have been in several recent cases,*fn1 to review an order of disqualification of counsel for breach of Canons 4 and 9 of the Code of Professional Responsibility (Code).*fn2 This case presents yet another variation of the case posited when a lawyer is retained as counsel in a suit against his former client. As in Hull v. Celanese Corp., 513 F.2d 568 (2d Cir. 1975), the triangle of conflict here is somewhat novel: the question presented is whether a law firm may represent a corporate officer against his former corporate employer when the firm and the client have both consulted with the former corporate house counsel on subjects at issue in the suit and the latter's testimony may bear on those issues. We conclude that the public's interest in the preservation of confidentiality in the attorney-client relationship requires that the order of disqualification of the United States District Court for the Southern District of New York, Constance Baker Motley, Judge, be affirmed.
This action was brought by the NCK Organization, Ltd. (ORG) against Walter Bregman, former director and senior vice president of ORG and former president and director of ORG's wholly-owned subsidiary, Norman, Craig & Kummel, Inc. (NCK). In dispute is Bregman's right as third party beneficiary to exercise an August 31, 1972, option to purchase 5,000 shares of ORG stock from one William Greene, plaintiff here; Bregman also asserts that a June 17, 1970, contract entitles him to require ORG in turn to repurchase these shares from him at current book value. Bregman's Standard Stockholder's Agreements of 1967 and 1968 required him to hold ORG stock for three years before ORG would repurchase it at book value at the termination of his employment. On June 17, 1970, however, Bregman entered into a special contract with ORG's corporate predecessor requiring it immediately to repurchase any ORG shares owned by Bregman at current book value, regardless of length of time owned, in the event of his termination. A second agreement of August 31, 1972, between ORG and William Greene conferred upon certain ORG executives including Bregman an option to purchase 5,000 ORG Class B shares from Greene at $5.47 per share. Bregman alleges that his 1970 agreement entitled him on his termination from ORG in October, 1973, and upon the exercise of his option to purchase shares from Greene, to require ORG's immediate repurchase of these shares at the then book value of approximately $12.75 per share (which would yield him a $36,000 profit plus interest). After Bregman demanded the exercise of his option, ORG and Greene brought this suit for a declaratory judgment that Greene was not obligated to such a sale, nor ORG to such a repurchase, and the action was consolidated with Bregman's pending claim against Greene for $45,000 damages for failure to perform after exercise of the option to purchase.
This motion to disqualify the firm of Weil, Lee, and Bergin, now Weil, Guttman & Davis (the Weil firm), as Bregman's trial counsel was made in December, 1974, after ORG's counsel discovered that Donald Randall, formerly house counsel for NCK and ORG and vice president of the latter until July, 1973, had become Bregman's counsel and had conferred with Bregman and the Weil firm as to Bregman's contract rights against ORG. The motion was referred to Magistrate Raby, who recommended Randall's disqualification and reserved the issue of the Weil firm's disqualification for Judge Motley's decision pending her rulings on cross-motions for summary judgment. On the basis of the pleadings, affidavits and depositions of Bregman and Randall, Judge Motley denied both motions for summary judgment, which orders are not appealed. The Weil firm and Randall were both ordered disqualified for ethical considerations under Canons 4 and 9 of the Code, pursuant to Hull v. Celanese Corp., supra, and Emle Industries, Inc. v. Patentex, Inc., 478 F.2d 562, 571 (2d Cir. 1973).*fn3 Appellant Bregman appeals only the order of disqualification of his counsel of record, the Weil firm, although he contests the findings of impropriety of Randall's representation and consultation.
The district court's findings are made in the exercise of its duty to supervise members of its bar, and will be disturbed only upon a showing of abuse of discretion. Hull v. Celanese Corp., supra 513 F.2d at 571. As has been true in each case in this field of ethical judgments, turning as it does upon the precise activities of the lawyer vis a vis adverse clients, a detailed consideration of the record is required.
Randall served as house counsel to ORG and NCK and their corporate predecessors from 1967 until his employment was terminated on July 15, 1973. On that date he immediately became personal counsel to appellant Bregman who remained with ORG and NCK only until October, 1973. Randall's description of his job was as typical house counsel, requiring "management supervision" of the legal aspects of every transaction of ORG, even when outside counsel were also involved. He had significant connection in a legal capacity with the very legal instruments here in litigation. He prepared the June 17, 1970, contract signed by Kaplan, a vice president of ORG, and Bregman, about to assume presidency of NCK. Randall was also present at the first executive group discussion of the Greene option agreement of August 31, 1972, edited its draft, brought the relevant documents to the board of directors for confirmation, and signed the option agreement in his capacity as a vice president of ORG. He also procured a draft indemnity agreement from Kaplan, the seller of ORG shares to Greene, for ORG's "protection" regarding New York stock transfer tax.
When Randall began to represent Bregman in July, 1973, he advised the latter as to his rights under the Greene option contract and the Stockholder's Agreements as amended by the 1970 contract. Bregman later retained the Weil firm regarding the termination of his job, and both Bregman and Randall agreed the Weil firm should handle any litigation of the Greene option matter because of its trial expertise. Randall drafted a letter for appellant to Norman, then president of ORG, in October, 1973, demanding ORG's purchase of shares held by Bregman at book value. Randall also accompanied Bregman to the Weil firm's office at least three times that fall to discuss appellant's rights against ORG, and advised both Weil and Bregman on the matter. Randall participated with Weil in drafting a letter from appellant to Greene, giving notice of exercise of the option in November, 1973. Although Randall did not continue to give advice to the Weil firm regarding the litigation after January 24, 1974, he did characterize his relationship with it as one of "cocounsel" up until that time.
Bregman inquired as to the propriety of Randall's representing him in July, 1973, but Randall assured him he had no qualms to the extent his counseling did not betray professional confidences. Weil knew that Randall had been house counsel to ORG but accepted Randall's assurance that there would be no impropriety since no confidences were involved to which Bregman was not already privy because of his former positions at ORG and as director and chief operation officer of NCK.
We think it crucial, as did Judge Motley, that one of ORG's claims, indeed its central claim, in this action is that Bregman is not entitled to repurchase of the option shares because his acceptance of the 1970 and 1972 contracts together constituted an improper appropriation of a corporate opportunity or breach of fiduciary duty. The success of this claim depends in part upon proof of ORG's corporate state of mind, as well as Bregman's, at the time of execution of the contracts. Thus it may well be that Randall will be called to testify as to the corporation's awareness in 1972 of the potential benefit being conferred upon Bregman, given his rights under the 1970 contract. Randall's knowledge of ORG's confidences regarding the contract rights in issue thus represent much more than information with an abstract potential for disclosure.*fn4 To the contrary, his information regarding ORG's knowledge and intent is material in which not only Bregman and the Weil firm must have been vitally interested, but of which ORG is entitled to the benefit, irrespective of any taint arising from employment of Randall by Bregman or disclosure to the Weil firm (outside the scope of ordinary discovery). The potential of unfair discovery and use of it through private consultation rather than through the normal modes of interrogatories, deposition and trial examination is critical in this case.*fn5
Bregman raises essentially two arguments on appeal: one regards Randall's work for ORG and the other Randall's contacts with the Weil firm. Appellant contends that the district court erred in finding that Randall as house counsel worked on matters substantially related to the issues in the present action, and erred in viewing any such matters as confidential or secret in light of Bregman's own knowledge of them as Randall's corporate superior. It is also asserted that, whatever the propriety of Randall's acceptance of Bregman as a client, Randall's contact with the Weil firm was insufficient to demonstrate any actual impropriety on the firm's part; such impropriety, it is argued, can be proved only by explicit evidence of the firm's actual receipt of confidences possessed by Randall.
This court has consistently held that, for attorney disqualification to be appropriate, see note 1 supra, matters within the pending suit must be "substantially related" to the matters involved in the prior representation. Judge Weinfeld's decision in T.C. Theatre Corp. v. Warner Bros. Pictures, 113 F. Supp. 265, 268-69 (S.D.N.Y. 1953), is oft cited for this proposition. It is clear that Bregman's rights under both the 1970 contract and the 1972 Greene option contract are at issue in the pending suit, and that Randall, ORG's house counsel, participated in the formation of both contracts. Having done so, his testimony may well be relevant, if not critical, to the issue of Bregman's possible breach of fiduciary duty.*fn6 (In this respect it is significant, as Judge Motley pointed out, that Bregman's special contract entitling him to a corporate repurchase was in contradistinction to that of all other corporate executives who had to hold their stock for three years.)
Appellant argues that there is no "substantial relation" between Randall's work for ORG and the present suit because Randall's connection to the contracts was only peripheral and required no legal advice. Appellant bases this contention on Randall's deposition testimony that his preparation of the 1970 draft was made from express written instructions given by Kaplan and Bregman, and his editing of the 1972 contract was done merely for its "aesthetic" improvement. This characterization of his role as peripheral and nonlegal - in essence as "errand boy" - has to be measured, however, in the light of Randall's own characterization of his draft of at least one paragraph of the 1970 contract as involving "legal advice," and his attempt to procure an indemnity agreement for ORG's protection relating to the 1972 stock option agreement. More importantly, we cannot perceive a real distinction, in terms of the ...