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March 15, 1983


The opinion of the court was delivered by: MACMAHON

MacMAHON, Senior District Judge.

 GAF Corporation (GAF) has moved, pursuant to Canons 4, 5 and 9 of the Code of Professional Responsibility, for an order disqualifying the firm of Finley, Kumble, Wagner, Heine, Underberg & Casey (Finley Kumble) as counsel for Samuel Heyman in these actions. The basis for these motions is that an associate of Finley Kumble, Robert B. Smith, has recently represented GAF on substantially related matters as an associate of the firm of Hannoch, Weisman, Stern, Besser, Berkowitz & Kinney (Hannoch Weisman). On March 9, 1983, the motions for disqualification were denied. This opinion follows.


 In early 1982, Heyman, a substantial minority stockholder of GAF, prepared to initiate a proxy contest to unseat the corporation's board of directors at the annual meeting. As part of this effort, Heyman hired professional advisers and assembled a slate of nominees for election as GAF directors. However, Heyman abandoned his plan, and on March 21, 1982 entered into an agreement with GAF (the Agreement) in order to avoid a proxy contest. In the Agreement, Heyman represented that he had expended in excess of $250,000 in connection with the contemplated proxy fight. GAF agreed to pay Heyman $250,000 toward these expenses, and Heyman promised to reimburse GAF should his final expenses amount to less than that sum. Pursuant to the Agreement, GAF issued the following press release on March 22, 1982:

GAF Corporation has announced that it has received inquiries from a major corporation asking whether GAF would be willing to consider being merged into that company, and from two other corporations asking whether GAF would be willing to consider selling its building materials business. GAF has replied in the affirmative to these inquiries and has retained Morgan Stanley & Co. to assist GAF in pursuing opportunities arising from such inquiries with a view towards maximizing near term benefits to its shareholders. Morgan Stanley will also assist GAF in structuring a possible leveraged buyout in the event the building materials business is sold.

 In the Agreement, GAF represented that it would pursue the opportunities described above, and in the event that it was unsuccessful, would enlist the aid of Morgan Stanley or other investment bankers in seeking similar opportunities.

 In GAF Corp. v. Heyman, 82 Civ. 6319, GAF sued Heyman for breach of the Agreement and fraud in its inducement, seeking an accounting, rescission and punitive damages. In its complaint, GAF alleges that Heyman made false representations with respect to his expenses and refused to account for them as required by the Agreement. In his answer, Heyman pleaded fraudulent representations as an affirmative defense, representations which were allegedly designed to induce Heyman to drop his proxy fight. Essentially, Heyman asserts that the statements in the press release set out above were false.

 In Heyman v. GAF, 82 Civ. 7442, Heyman alleges that the directors of GAF have mismanaged the corporation for the purpose of perpetuating the control of Dr. Jesse Werner, Chairman of the Board and Chief Executive, and otherwise benefitting themselves. In particular, Heyman claims that the directors have approved compensation for Werner which is excessive, wasteful and unreasonable. Moreover, Heyman contends that the March 22 press release was but one of a series of three statements (the others dated late June and September 30, 1982) designed to procure proxies and forestall a proxy fight in an effort to maintain control of GAF. It is Heyman's contention that there were never serious, good faith negotiations to effect a merger of GAF or a sale of its building materials business, and that representations that there were such negotiations were made "recklessly and with negligent disregard of the truth." Heyman asserts five claims in total, in an individual and derivative capacity, based upon alleged violations of Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a) (1976), the rules and regulations thereunder, and Delaware law.

 These cases are in their pretrial stage at a time when Heyman is preparing to mount a proxy contest in connection with GAF's 1983 annual meeting. In disposing of these motions, we have heard argument by counsel and have examined the motion papers, which include numerous affidavits submitted by the parties.


 Robert Smith was employed as a litigation associate by Hannoch Weisman from January 2, 1980 to February 26, 1982. Hannoch Weisman has represented GAF in a wide variety of matters and plays a particularly important role in coordinating product liability litigation relating to GAF's building materials business. In 1981, GAF's building materials business accounted for $372 million out of total corporate sales of $673 million. "Built-up" roofing, which is commercial roofing constructed on site, accounts for 20% of the sales of the building materials business; prepared roofing, consisting of residential shingles, comprises the remainder.

 There has been a flood of litigation relating to the building materials business, especially built-up roofing. These suits typically allege breach of warranty, negligence and strict liability in tort, and seek damages in the range of $100,000 to $500,000. On occasion, particularly in cases involving "coated felt" roofing, plaintiffs seek punitive damages on the ground that GAF intentionally marketed defective products in an effort to augment short term profits. In three recent coated felt actions, juries have awarded punitive damages against GAF totalling $4.5 million.

 In addition, GAF has become embroiled in litigation as a result of its sales of asbestos products. There are 8,700 such suits pending against GAF nationwide. A particularly important case is a declaratory judgment action by GAF against the Insurance Company of North America (INA) and other insurers, in which the terms and existence of GAF's insurance coverage for the asbestos cases is at issue. Hannoch Weisman played an important role in preparing this case, which is now pending in California.

 While associated with Hannoch Weisman, Smith spent 950 hours on GAF cases, 685 of which were devoted to built-up roofing litigation. He worked principally on roofing felt cases involving claims of negligence, breach of warranty, and strict liability. The tasks Smith performed included legal and factual research, drafting of motions and briefs, conducting depositions, and making court appearances in connection with his cases. Smith worked largely under the supervision of Joseph Fleischman, who is the ...

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