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Armstrong v. McAlpin

decided: June 20, 1980.


Appeal en banc from order entered in the United States District Court for the Southern District of New York, Henry F. Werker, J., denying defendants' motion to disqualify plaintiffs' counsel. Affirmed. Prior opinion of the panel, 606 F.2d 28 (2d Cir. 1979), vacated. Silver Chrysler Plymouth, Inc. v. Chrysler Motors Corp., 496 F.2d 800 (2d Cir. 1974), overruled.

Before Kaufman, Chief Judge, and Feinberg, Mansfield, Mulligan, Oakes, Timbers, Van Graafeiland, Meskill and Newman, Circuit Judges.*fn*

Author: Feinberg

FEINBERG, Circuit Judge (with whom KAUFMAN, Chief Judge, and MANSFIELD, OAKES and TIMBERS, Circuit Judges, concur):

In this en banc proceeding, we are called upon to consider two significant issues: the appealability of orders denying a motion to disqualify an attorney and the standard to be applied by the trial judge in ruling upon such motions. Clovis McAlpin and Capital Growth Real Estate Fund, Inc., two of numerous defendants in a suit seeking over $24 million for violation of federal securities laws, appeal from an order of the United States District Court for the Southern District of New York, Henry F. Werker, J., denying their motion to disqualify the law firm representing plaintiffs. The appeal was first heard by a panel of this court, which concluded that the trial judge had erred in denying defendants' disqualification motion. 606 F.2d 28 (2d Cir. 1979). A majority of this court voted to grant en banc reconsideration of the appeal, and directed the parties to brief both the merits of the appeal and also the question whether an order granting or denying a disqualification motion should be appealable. Subsequently, the parties and a number of amici filed comprehensive briefs on the issues before the en banc court. After full consideration, we affirm the order of the district court and vacate the earlier decision of the panel. We also hold that henceforth orders denying disqualification motions will not be appealable, thus overruling our en banc decision in Silver Chrysler Plymouth, Inc. v. Chrysler Motors Corp., 496 F.2d 800 (2d Cir. 1974). The reasons for these rulings are fully set forth below.

I. The Facts

Appellants' motion to disqualify is based on the prior participation of Theodore Altman, now a partner in the law firm representing plaintiffs-appellees, in an investigation of and litigation against appellants conducted when he was an Assistant Director of the Division of Enforcement of the Securities and Exchange Commission (the SEC). In September 1974, after a nine-month investigation, the SEC commenced an action in the United States District Court for the Southern District of New York against Clovis McAlpin and various other individual and institutional defendants. The complaint alleged that McAlpin and the other defendants had looted millions of dollars from a group of related investment companies, referred to here collectively as the Capital Growth companies; McAlpin was the top executive officer of these companies. The SEC suit sought, among other things, the appointment of a receiver to protect the interests of shareholders in the Capital Growth companies. When McAlpin fled to Costa Rica and certain other defendants failed to appear, the SEC obtained a default judgment; in September 1974, Judge Charles E. Stewart appointed Michael F. Armstrong, the principal appellee in this appeal, as receiver of the Capital Growth companies. See SEC v. Capital Growth Company, S. A. (Costa Rica) et al., 391 F. Supp. 593 (S.D.N.Y.1974).

One of Armstrong's principal tasks as receiver for the Capital Growth companies is to recover all moneys and property misappropriated by defendants; to further this task, Armstrong was authorized to initiate litigation in the United States and abroad. In October 1974, Judge Stewart granted Armstrong's request to retain as his counsel the New York firm of Barrett Smith Schapiro & Simon.*fn1 Shortly after the appointment of Armstrong, the SEC made its investigatory files available to him, in accordance with its practice, we are informed in its brief, of assisting "the efforts of receivers who have been appointed by the courts in Commission law enforcement actions." Cf. SEC v. Everest Management Corp., 475 F.2d 1236, 1240 (2d Cir. 1972). The Barrett Smith firm reviewed these files, conducted its own investigation for the receiver, and assisted him in taking possession of various Capital Growth properties in the continental United States and in Puerto Rico. For the next year and a half, we are told, Barrett Smith devoted approximately 2,600 hours to assisting the receiver, which included the services of five partners and eight associates; a little over half of this time was spent preparing for litigation.

In early 1976, however, the receiver and Barrett Smith became aware of a potential conflict of interest involving an institutional client of Barrett Smith that might become a defendant in litigation brought by the receiver. Thus, despite Barrett Smith's substantial investment of time, the receiver concluded that it was necessary to substitute litigation counsel. The task, however, was not an easy one; McAlpin had fled to Costa Rica with most of the assets of the Capital Growth companies and hence the funds available to Armstrong to secure new counsel were quite limited.*fn2 It was therefore necessary to find a firm that could not only handle difficult litigation in Costa Rica and in the United States, but would also commit itself to conclude the task, even if little or no interim compensation was available.*fn3 Moreover, it was important to retain a law firm large enough to cope with the immense paper work soon to be generated by the firms that would probably represent the institutional defendants.*fn4

Because of these considerations, appellees assert, the receiver focused on firms already involved in litigation against Robert L. Vesco, who, like McAlpin, had fled to Costa Rica rather than face possible prosecution for numerous alleged securities fraud violations. After abortive negotiations with two such firms, the receiver in April 1976 retained the law firm of Gordon Hurwitz Butowsky Baker Weitzen & Shalov, the firm that is the target of appellants' disqualification motion. According to Armstrong, the Gordon firm was chosen in part because one partner, David M. Butowsky, was then Special Counsel to International Controls Corporation and was involved in legal work in Costa Rica relating to the alleged Vesco defalcations, while another partner had specialized experience in prosecuting complex fraud cases. In accepting the representation, the Gordon firm agreed to "conduct all Capital Growth litigation through to a conclusion" even if the receiver could not compensate the firm as the litigation progressed.

In October 1975, some seven months before the receiver obtained substitute counsel for Barrett Smith, Theodore Altman ended his nine-year tenure with the SEC to become an associate with the Gordon firm. At the time of his resignation, Altman had been an Assistant Director of the Division of Enforcement for three years, and had about twenty-five staff attorneys working under him. As a high-ranking enforcement officer of the SEC, Altman had supervisory responsibility over numerous cases, including the Capital Growth investigation and litigation. Although he was not involved on a daily basis, he was generally aware of the facts of the case and the status of the litigation. The SEC's complaint was prepared and filed by the staff of the New York Regional Administrator, and the litigation was handled by the New York office. Altman's name appeared on the SEC complaint, although he did not sign it.

At the time that Altman joined the Gordon firm, the receiver had no reason to know that Altman had left the SEC or to be aware of his new affiliation. Subsequently, during the initial meetings with the Gordon firm, Armstrong first learned that Altman had recently become associated with the firm. Both the Gordon firm and Barrett Smith researched the question of the effect of Altman's prior supervisory role in the SEC suit. The two firms concluded that under applicable ethical standards discussed in Part IV of this opinion, Altman should not participate in the Gordon firm's representation of the receiver, but that the firm would not be disqualified if Altman was properly screened from the case. The matter was brought to the attention of Judge Stewart, who nonetheless authorized the receiver to retain the Gordon firm. Shortly thereafter, the firm asked the SEC if it had any objection to the retention, and was advised in writing that it did not, so long as Altman was screened from participation. Barrett Smith then turned over its litigation files to the Gordon firm, including those received from the SEC; in September 1976, the receiver filed the action by plaintiffs-appellees against defendants-appellants that gave rise to this appeal.*fn5

In June 1978, almost two years after the commencement of this action, appellants filed their motion to disqualify the Gordon firm because of Altman's prior activities at the SEC. In December 1978, Judge Werker, to whom the case had been reassigned, denied the motion. In his opinion, the judge concluded that the Gordon firm had carried out the letter and spirit of the relevant bar association ethical rulings, that the firm's representation of the receiver was not unethical and did not threaten the integrity of the trial, and that appellants had suffered no prejudice as a result of the representation. 461 F. Supp. 622 (S.D.N.Y.1978). As already indicated, in September 1979 a panel of this court reversed the decision of the district court; in December 1979, this en banc proceeding was ordered and a briefing schedule fixed. We now turn to the issues before us.

II. Appealability

On our own motion, we asked the parties to brief the question of appealability because we have become concerned over the practical effects of our decision six years ago in Silver Chrysler Plymouth, Inc. v. Chrysler Motors Corp., 496 F.2d 800 (2d Cir. 1974) (en banc), which overruled our prior practice and allowed immediate appeals from orders denying disqualification. That concern now leads us to re-examine the conceptual basis of Silver Chrysler.

As we pointed out recently in Eckles v. Furth, 557 F.2d 953, 955 (2d Cir. 1977), "(the) appealability of disqualification orders has had a checkered history in this court." Before Silver Chrysler, orders granting a motion to disqualify were generally held to be appealable, albeit without much discussion. See, e.g., W. E. Bassett Co. v. H. C. Cook Co., 302 F.2d 268 (2d Cir. 1962) (per curiam). The rationale was stated to be that "(an) order granting disqualification seriously disrupts the progress of the litigation and decisively sullies the reputation of the affected attorney . . . ." Fleischer v. Phillips, 264 F.2d 515, 517 (2d Cir.), cert. denied, 359 U.S. 1002, 79 S. Ct. 1139, 3 L. Ed. 2d 1030 (1959). On the other hand, orders denying a motion to disqualify were usually viewed as nonappealable. Id. However, our unanimous en banc opinion in Silver Chrysler changed the latter rule so that orders granting and orders denying disqualification motions were henceforth both immediately appealable as a matter of right.

The result of obtaining that surface symmetry soon manifested itself. In recent opinions, many members of this court have noted that the availability of an immediate appeal has seemingly contributed to the proliferation of disqualification motions and the use of such motions for purely tactical reasons, such as delaying the trial. See, e.g., Allegaert v. Perot, 565 F.2d 246, 251 (2d Cir. 1977);*fn6 W. T. Grant Co. v. Haines, 531 F.2d 671, 677-78 (2d Cir. 1976);*fn7 Lefrak v. Arabian American Oil Co., 527 F.2d 1136, 1138-39 (2d Cir. 1975);*fn8 J. P. Foley & Co., Inc. v. Vanderbilt, 523 F.2d 1357, 1359 (2d Cir. 1975) (Gurfein, J., concurring); see also Van Graafeiland, Lawyer's Conflict of Interest A Judge's View (Part II), N.Y.L.J., July 20, 1977, p. 1, col. 2. While we cannot determine with precision the amount of the increase in such motions, we are left with the clear impression that they have substantially grown in number.*fn9 More significantly, we see in microcosm in this appeal the practical effect on the progress of a litigation of a rule allowing appeals from denials of disqualification motions. Since June 1978, when appellants moved to disqualify the Gordon firm, the litigation in the district court has been frozen in its tracks. We recognize that the en banc procedure has inevitably contributed to the period of delay, but the bulk of the delay has stemmed from the initial appeal of the denial of disqualification. Such a prolonged interruption in a litigation charging serious abuses of the securities laws raises grave questions of judicial administration. And while such concerns by themselves do not justify a conclusion that Silver Chrysler was improperly decided, they do suggest that a careful reconsideration of the issue of appealability is appropriate. That reconsideration, we find, reveals that the conceptual basis of Silver Chrysler was flawed.

The basis of our decision in Silver Chrysler was that appeals from denials of disqualification motions fell within the narrow exception to the final judgment rule recognized by the Supreme Court in Cohen v. Beneficial Loan Corp., 337 U.S. 541, 545-47, 69 S. Ct. 1221, 1225-26, 93 L. Ed. 1528 (1949). Cohen held that certain orders were immediately appealable (1) if they were collateral to the merits; (2) if denial of an immediate appeal would result in irreparable damage to the party seeking review; and (3) if the issue raised was "too important" to "be deferred until the whole case is adjudicated." In concluding that denials of disqualification motions were immediately appealable, Silver Chrysler simply noted that "(all) three prerequisites of Cohen are met" without providing any detailed analysis. 496 F.2d at 805. While it is clear that rulings on disqualification motions are collateral to the merits, thus satisfying the first requirement of Cohen, the second and third requirements are not so easily disposed of.

With regard to the adequacy of review on appeal after final judgment, Silver Chrysler flatly concludes that it would be "fatuous to suppose that (such) review . . . will provide adequate relief." 496 F.2d at 805. It is true that a party whose disqualification motion is denied will be forced, if denied an immediate appeal, to bear the time and expense involved in a trial that may possibly be tainted. Nonetheless, we do not think the harm caused by erroneous denial of a disqualification motion differs in any significant way from the harm resulting from other interlocutory orders that may be erroneous, such as orders requiring discovery over a work-product objection or orders denying motions for recusal of the trial judge. In those situations, we have held that no immediate appeal is available as a matter of right. American Express Warehousing, Ltd. v. Transamerica Ins. Co., 380 F.2d 277, 281-82 (2d Cir. 1967); Rosen v. Sugarman, 357 F.2d 794, 796 (2d Cir. 1966). Moreover, the harm caused by an erroneous denial of a disqualification motion is usually not irreparable since this court retains its traditional power to grant a new trial if the district court's ruling ultimately turns out to be incorrect. Furthermore, in those rare cases where irreparable harm is truly threatened, an immediate appeal might be available through certification pursuant to section 1292(b) or, possibly, through a writ of mandamus. See Note, The Appealability of Orders Denying Motions for Disqualification of Counsel in the Federal Courts, 45 U.Chi.L.Rev. 450, 468-80 (1978) (hereafter referred to as Chicago Note). Finally, it should be remembered that the trial judge also retains power to protect the trial against taint, either through the issuance of protective orders or, if necessary, through reconsideration of the need for disqualification.*fn10

(1) Similarly, we now think that Silver Chrysler misconstrued the third Cohen requirement that the issue be "too important to be denied review" by an immediate appeal. Cohen dealt with the legal issue whether defendants in stockholder derivative actions had the right to require plaintiffs to post security for costs; the Court, however, specifically noted that its decision did not mean that "every order fixing security is subject to appeal." 337 U.S. at 547, 69 S. Ct. at 1226. Thus, the Cohen exception to the final judgment rule appears to have been primarily, though perhaps not exclusively, directed towards interlocutory appeals raising potentially decisive legal, as opposed to factual, questions.*fn11 In contrast, most disqualification motions involve primarily factual, rather than legal, determinations, e.g., is there a threat of taint; is the screening adequate; is there a "substantial relationship" between prior and present representations. Such determinations therefore do not usually present "serious and unsettled question(s)" within the meaning of Cohen. 337 U.S. at 547, 69 S. Ct. at 1226. Cf. Weight Watchers of Philadelphia, Inc. v. Weight Watchers Int'l, Inc., 455 F.2d 770, 773 (2d Cir. 1972); Donlon Industries, Inc. v. Forte, 402 F.2d 935, 937 (2d Cir. 1968). Furthermore, in disqualification cases that do raise important and unresolved legal issues, immediate review under section 1292(b) or by mandamus might be available.*fn12 See Community Broadcasting of Boston, Inc. v. F.C.C., 178 U.S. App. D.C. 256, 546 F.2d 1022, 1028 & n. 40 (D.C.Cir. 1976). Finally, we do not think that the public importance of the ethical questions raised by disqualification motions requires the right to an immediate appeal. The normal appellate process, coupled with the judicious use of certification and mandamus, is perfectly adequate to vindicate this interest, as it has been held to be in the related, but more serious, situation when a district judge has denied a motion for his recusal. See Rosen, supra, 357 F.2d 794.

Thus, because we conclude that the requirements of Cohen are not met, we overrule Silver Chrysler and hold that orders denying disqualification motions are not immediately appealable.*fn13 We realize that in doing so we part company with several circuits that have accepted the Silver Chrysler rule. See, e.g., Schloetter v. Railoc of Indiana, Inc., 546 F.2d 706 (7th Cir. 1976); Fullmer v. Harper, 517 F.2d 20 (10th Cir. 1975). However, we are more persuaded by the arguments against the Silver Chrysler rule raised by other courts, see, e.g., In re Multi-Piece Rim Products Liability Litigation, 612 F.2d 377 (8th Cir.) (en banc), cert. granted sub nom. Firestone Tire & Rubber Co. v. Risjord, 446 U.S. 934, 100 S. Ct. 2150, 64 L. Ed. 2d 786 (1980);*fn14 Melamed v. ITT Continental Baking Co., 592 F.2d 290 (6th Cir. 1970); Community Broadcasting, supra, 546 F.2d 1022, and by such commentators as Professor Moore. See 9 Moore's Federal Practice, P 110.13(10) at p. 190 (2d ed. 1975) (approving 2d Circuit pre-Silver Chrysler rule).

(2) We do not reach the same conclusion, however, with respect to orders granting disqualification motions. In such cases, the losing party is immediately separated from counsel of his choice. If the order is erroneous, correcting it by an appeal at the end of the case might well require a party to show that he lost the case because he was improperly forced to change counsel. This would appear to be an almost insurmountable burden. In addition, permitting an immediate appeal from the grant of a disqualification motion does not disrupt the litigation, since the trial must be stayed in any case while new counsel is obtained. Moreover, the grant of a disqualification motion may effectively terminate the litigation if the party whose counsel is disqualified cannot afford to hire new counsel to begin the litigation anew. Such considerations are obviously pertinent, for example, in this case. See notes 2-3 and accompanying text supra. Furthermore, the granting of a disqualification motion by a district judge is a fair indication that a nonfrivolous issue has been raised; there is no similar assurance that appeals from denials of disqualification motions will raise a substantial question. Thus, it is far less likely that appeals from orders granting disqualification motions will be taken purely for tactical reasons. Finally, disqualification often impairs the reputation of the disqualified firm or attorney, and this injury may never be corrected on appeal if the party is satisfied with the ...

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