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ALLEGAERT v. PEROT

May 17, 1977

WINTHROP J. ALLEGAERT, as Trustee of duPont Walston Incorporated, Plaintiff, against H. ROSS PEROT, ELECTRONIC DATA SYSTEMS CORPORATION, duPONT GLORE FORGAN INCORPORATED, WILLIAM K. GAYDEN, MORTON H. MEYERSON, MILLEDGE A. HART, III, MARGOT PEROT, MERVIN L. STAUFFER, PHM & CO., CHARLESTON INVESTMENT COMPANY, E.D. SYSTEMS CORPORATION, NEW YORK STOCK EXCHANGE, INC., DANIEL J. CULLEN, WILLIAM D. FLEMING, GEORGE T. THOMSON, CHARLES W. COX, DOUGLAS E. DeTATA, JOHN J. DOUGHTY, ALLAN BLAIR, and D. TIPP CULLEN, Defendants.


The opinion of the court was delivered by: KNAPP

MEMORANDUM AND ORDER

KNAPP, D.J.

 Plaintiff, the trustee in bankruptcy of duPont Walston, Inc. (Walston), has moved pursuant to Canon 4 to disentitle several of the defendants in this action from the continued services of their attorneys on the ground that such attorneys formerly represented Walston on matters substantially related to the instant action.*

 The Trustee seeks an order disqualifying the firm of Weil, Gotshal, and Manges ("Weil Gotshal") from representing defendants H. Ross Perot ("Perot"), Milledge A. Hart, III ("Hart"), Morton H. Myerson ("Myerson"), PHM & Co. ("PHM") and duPont Glore Forgan Inc., and it seeks an order disqualifying the firm of Leva Hawes, Symington, Martin & Oppenheimer ("Leva Hawes") from representing Electronic Data Systems Corp. ("Electronic") and E.D. Systems Corp. ("E.D. Systems"). The trustee alleges that Weil Gotshal and Leva Hawes represented Walston on matters substantially related to this lawsuit and that both firms now threaten to use to the trustee's disadvantage confidential information acquired in the course of such representation. In order to evaluate this allegation, we turn first to the substance and background of the complaint in this action.

 The Complaint

 This action arises out of the bankruptcy of Walston, one of the largest Wall Street brokerage firms, following its entry into a series of agreements with duPont Glore Forgan ("DGF Inc."), another large Wall Street brokerage firm, pursuant to which the two companies, while maintaining their separate identities realigned into a combined operation. Pursuant to these agreements Walston undertook to carry out all front office operations including the operation of a branch office system and DGF Inc. undertook to carry out all back office operations including the maintaining and processing of individual customer's accounts, the clearing of securities, and the accounting.

 The trustee alleges the following in connection with this realignment as the basis for his twenty-four claims charging violations of the Securities and Bankruptcy Acts. We here express no view as to the validity of any of these allegations.

 Prior to the realignment DGF Inc. was on the verge of liquidation. This jeopardized Perot's considerable investment in DGF Inc., which he controlled, and in turn jeopardized Perot's investment in Electronic and in E.D. Systems, its wholly owned subsidiary, since Electronic held a lucrative computer services contract with DGF Inc. The realignment agreements obligated Walston-in return for inadequate or no consideration-to assume certain of DGF Inc.'s liabilities, to assume responsibility for its losses, and to pay certain of its expenses. In addition, the realignment agreements entitled DGF Inc. to share in the profits at no risk or loss and gave Perot voting control of Walston without his having to pay for it. *fn1" / Specifically, the agreements obligated Walston, among other things, to take over the failing branch offices of DGF Inc., to pay it a sum in excess of market value for certain fixed assets in these offices, and to assume their lease liabilities even though many of these branch offices were already closed or would have soon to be closed. Perot and persons and companies controlled by him ("the Perot interests") drafted these realignment agreements and railroaded them through the Walston Board of Directors. They gave the Walston Directors insufficient time prior to the Board meeting of July 1, 1973 to analyze these lengthy and complex agreements, and at that meeting made numerous misrepresentations and omissions of material information to induce approval.

 Finally, the trustee alleges that the Perot interests drafted the realignment agreements and induced their approval in order to save Perot's investment in DGF Inc., Electronic and E.D. Systems by fraudulently foisting DGF Inc.'s liabilities on Walston and draining Walston of its assets. The trustee asserts that the acts leading up to and following the implementation of the realignment agreements amount to fraud, breach of fiduciary duty and fraudulent and preferential transfers of Walston property.

 The Role of the Law Firms

 By way of background, it is undisputed that for many years prior to the realignment Weil Gotshal represented DGF Inc. and Perot, its clients here, and Leva Hawes represented Electronic and E.D. Systems, also its clients here. On occasion Leva Hawes also represented DGF Inc.Weil Gotshal was involved in every aspect of the birth in 1971 of DGF Inc., and thereafter it continued to act with Leva Hawes as DGF Inc.'s counsel on a broad range of matters. It is further undisputed that neither firm represented Walson prior to or during the period of negotiating the terms of the realignment agreements which were approved in July, 1973.Weil Gotshal in conjunction with Leva Hawes represented DGF Inc. in drafting and negotiating these agreements, and Leva Hawes also represented Electronic and E.D. Systems in connection with the same. (Gruenberger Aff. [*] 18; Shlakman Aff. [*] 13) Leva Hawes had, prior to this lawsuit, served as counsel to Electronic and to E.D. Systems in a broad range of matters for over a decade. *fn2" / It is also undisputed that after the realignment Weil Gotshal continued to represent DGF Inc. and Leva Hawes continued to represent Electronic and E.D. Systems.

 The trustee alleges that after the realignment Weil Gotshal and Leva Hawes represented Walston on matters substantially related to this lawsuit. Specifically, the trustee alleges that after the realignment Weil Gotshal and Leva Hawes represented Walston in connection with a derivative action filed by Nella Walston, which action is concededly substantially similar to this one. Nella Walston v. duPont Glore Forgan Inc., et al (Index No. 625/74 Sup. Ct. N.Y. Cty. 1974) The trustee's basis for this assertion is that Weil Gotshal and Leva Hawes billed Walston for services rendered in connection with the Nella Walston action and, in addition, Leva Hawes was on "retainer" to Walston during the period that action was initiated In addition, the trustee alleges that these firms represented Walston on a broad range of other matters of which some, he contends, are substantially related to this lawsuit. He further contends that these firms must have gained general confidential information substantially related to this lawsuit from their alleged representation of Walston on a broad range of matters.

 Weil Gotshal and Leva Hawes assert that the services they performed for Walston after the realignment were in no way substantially related to this lawsuit. Leva Hawes claims that its "retainer" was a fee arrangement and that it was not Walston's general counsel. *fn3"

 Both firms agree with the trustee that the derivative action filed by Nella Walston against Walston and many of the defendants here is substantially similar to this action. However, they claim that Shearman and Sterling, not they, represented Walston in the initial stages of that action, and that at all times Weil Gotshal represented DGF Inc. and Perot and Leva Hawes represented Electronic and E.D. Systems in connection with that action. They contend that they billed Walston for services rendered to DGF Inc., Electronic and E.D. Systems in connection with the Nella Walston action because the realignment agreements specifically provided that Walston would reimburse the latter for their legal expenses.

 At oral argument all agreed that the facts are not in dispute and that the court is in a position to decide the motion on the basis of inferences to be drawn from the facts before it. Turning to the Nella Walston case first, the following facts, unless otherwise noted, are not in dispute. From 1966 until 1974 when Walston filed for bankruptcy Shearman and Sterling was general counsel to Walston. Shearman and Sterling had represented Walston in connection with the negotiation of the realignment agreements. (Affidavit of Thomas L. Higginson of Shearman and Sterling) At the July, 1973 Board meeting attorneys from Shearman and Sterling were present on behalf of Walston and attorneys from Weil Gotshal and Leva Hawes were present on behalf of their long standing clients DGF Inc. and Electronic. At oral argument it was stated that each of these firms attended the Board meeting on behalf of their respective clients because it was obvious to anyone that a lawsuit might well result from approval of the realignment agreements to which substantial stockholders such as Mrs. Walston violently objected.

 In December, 1973 Mrs. Walston's counsel sent a draft of a complaint to Shearman and Sterling, who then showed it to Weil Gotshal. On December 19, 1973 Mrs. Walston's counsel met with Mr. Higginson of Shearman and Sterling and Mr. Gruenberger and Mr. Lang of Weil Gotshal and discussed this contemplated lawsuit. On January 10, 1974 counsel for Mrs. Walston wrote Mr. Lang of Weil Gotshal that she had instructed him to file the complaint the next day unless the defendants made a bona fide proposal for settlement.Mrs. Walston's counsel did not send this letter or a copy to Shearman and Sterling. However, Mr. Lang of Weil Gotshal forwarded a copy to Mr. Higginson at Shearman and Sterling.One of Mr. Higginson's partners then wrote Mrs. Walston's counsel a letter in which he stated:

 "We confirm the information we gave you over the telephone that we are authorized on behalf of our client, duPont Walston Incorporated, to accept service of process of a summons and a complaint of which you have previously furnished us a draft copy." (Higginson Affidavit, Exhibit B)

 Upon receiving the summons and complaint and acknowledging service of process on behalf of Walston, the same Shearman and Sterling partner wrote:

 "Please note that this is merely an acceptance of service of process and that it does not constitute an appearance by us in the action as attorneys for defendant duPont Walston Incorporated. We have not yet been retained to be the attorneys of record for that defendant." (Higginson Affidavit, Exhibit C)

 He then wrote the Clerk of the Supreme Court, New York County, Special Term, Part II requesting the Clerk to notify Shearman and Sterling on behalf of Walston and Weil, Gotshal on behalf of DGF Inc. should Mrs. Walston seek any ex parte relief before the defendants' time to appear or answer had expired. (Higginson Affidavit, Exhibit D) Mr. Higginson states in his affidavit that Weil Gotshal had authorized Shearman and Sterling to request such notification.

 Thereafter, in late January, 1974 Walston retained McHugh, Heckman, Smith and Leonard ("McHugh Heckman") to represent it in the Nella Walston action. ...


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