United States District Court, Southern District of New York
January 31, 1991
STRATAGEM DEVELOPMENT CORP., PLAINTIFF,
HERON INTERNATIONAL N.V. AND HERON PROPERTIES, INC., DEFENDANTS.
The opinion of the court was delivered by: Kram, District Judge.
MEMORANDUM OPINION AND ORDER
Defendants in this case, involving claims of breach of a
real estate joint venture
agreement, have moved for disqualification of Epstein, Becker
& Green ("Epstein Becker" or the "Firm") as plaintiff's
counsel, because of alleged dual representation.*fn1 Epstein
Becker has taken certain steps to withdraw as counsel in other
legal matters in which it represented a subsidiary of the
defendants in this case; but there remains a question about
the effectiveness of the Firm's withdrawal as counsel in the
Epstein Becker represents plaintiff Stratagem Development
Corporation in the instant action, involving an alleged breach
of a joint venture agreement to develop certain properties.
The real estate in question comprises buildings in midtown
Manhattan known as "Heron Tower I" and "Heron Tower II,"*fn2
and the present dispute involves Heron Tower II. Plaintiff
Stratagem's role in the venture was to acquire parcels of land
for real estate development. The role of the defendants, Heron
International N.V. and Heron Properties, Inc. (hereinafter
"Heron entities") was to develop the sites for the joint
benefits of the participants in the venture. Complaint ¶¶
The "Bevona Matters"
During the same time period, plaintiff's counsel, Epstein
Becker, also represented a wholly-owned subsidiary of
defendant Heron Properties.*fn3 That representation is in the
context of a labor lawsuit and a related labor arbitration
involving the security guards at Heron Tower I, and is
essentially unrelated to this action. The subsidiary is known
as Fidelity Services Corporation ("FSC"),*fn4 and the labor
matters are referred to by the parties as the "Bevona
matters."*fn5 Affidavit of Peter K. Kompaniez, dated October
16, 1990 (hereinafter "Kompaniez Moving Aff."), at ¶ 3;
Affidavit of Jerrold F. Goldberg, dated October 24, 1990, ¶¶ 8,
10. The Bevona lawsuit is currently on the suspense docket of
the United States Court of Appeals for the Second Circuit
pending settlement discussions; the related labor arbitration
is in the discovery phase, with Epstein Becker, until recently,
assisting in the union's audit of FSC's books and with document
production. Kompaniez Moving Aff. at ¶ 8.
The Present Action
On November 10, 1989, Jerrold F. Goldberg, a member of
Epstein Becker, wrote to Kathleen Panciera, an officer of
Heron, to review the status of the Bevona matters.
Goldberg-Panciera letter of 11/10/89, attached as Exhibit A to
Kompaniez Moving Aff.
On June 27, 1990, Heron terminated the agreement between it
and Stratagem relating to Heron Tower II. Letter from Gerald
Ronson to Simon Shane, dated June 27, 1990, annexed as Exhibit
B to Kompaniez Moving Aff.
Just over two weeks later, Goldberg again wrote to Panciera.
After listing the active matters in which his firm represents
FSC "and other Heron Entities," he stated:
In light of the recent unfortunate developments
between Heron and Stratagem Development Corp., of
which I am sure you are aware, we must raise the
question of our continued representation of
Fidelity Services Corporation in connection with
this labor matter.
Goldberg-Panciera Letter of 7/13/90, attached as Exhibit C to
Kompaniez Moving Aff., at 1-2.
Kenneth J. Kelly, Esq., of Epstein Becker, followed up with
a letter, dated August 3, 1990, to Ms. Panciera. The letter
We will soon commence an action against Heron
Properties and Heron International. Unless we
hear otherwise from you, we plan to resign as
Heron's counsel in the federal action and
arbitration on the day we file Stratagem's
Kelly-Panciera Letter of 8/3/90, attached as Exhibit D to
Kompaniez Moving Aff.
On August 8, 1990, Peter Kompaniez, the CEO of FSC, wrote
back, expressing "surprise at your statement that your firm
`will soon commence an action against Heron Properties and
Heron International.'" He stated that it would be a violation
of various provisions of New York's Code of Professional
Responsibility for Kelly's firm to sue Heron. Kompaniez-Kelly
letter of 8/8/90, attached as Exhibit E to Kompaniez Moving
Another Epstein Becker lawyer, Samuel Goldman, replied on
August 14, 1990, as follows:
From the tone and tenor of your letter, it is
apparent that you would feel uncomfortable if we
were to continue to represent Fidelity Service
Corp. in the captioned litigation. Accordingly,
we hereby notify you that we are withdrawing as
counsel to Fidelity in this lawsuit.
As you are aware, we have represented Stratagem
Development Corp. in all of its dealings with
Heron since the inception of the relationship
between these two companies. There is no conflict
in our continued representation of Stratagem.
Goldman-Kompaniez Letter of 8/14/90, attached as Exhibit F to
Kompaniez Moving Aff.
The parties' attorneys exchanged two further letters in
subsequent weeks; by September 4, 1990, Michael Delikat, Esq.,
of the law firm of Baer Marks & Upham ("Baer Marks") had
contacted Epstein Becker to advise that it would take over the
representation of FSC in the Bevona matters. During that
conversation, as related in a confirming letter from Mr.
Delikat to Mr. Goldberg, Mr. Delikat indicated that he would
"prepare a formal substitution and forward same to you under
separate cover. In the meantime, I would appreciate receiving a
copy of the entire file at your earliest convenience."
Delikat-Goldberg letter of 9/4/90, attached as Exhibit A to
Affidavit of Michael Delikat, dated October 29, 1990, at 1.
The contemplated exchange of files and substitution forms
did not take place at that time.*fn6 Less than a month later,
on October 2, 1990, Epstein Becker filed the complaint in this
Defendants point out that coincidentally, also on October 2,
1990, Mr. Goldberg wrote to Stanley Bass, Staff Counsel of the
United States Court of Appeals for the Second Circuit to
attend to some ministerial matters in the Bevona actions. In
that letter, he identified Epstein Becker as the attorneys for
Fidelity Service Corp.*fn7 By way of explanation, Mr. Goldberg
now submits that he was left no alternative but to describe
himself as FSC's counsel because
of Baer Marks' failure to forward the signed substitution
On October 9, 1990, Heron's counsel in the instant action
wrote to this Court, indicating its intention to file the
present motion; that same day, Epstein Becker sent the files
in the Bevona matter to Baer Marks. Two days later, Mr.
Goldberg forwarded to Baer Marks a substitution of counsel
form. The substitution form has not yet been filed.
Canon 5 of the New York Code of Professional Responsibility,
provides that an attorney owes a duty of undivided loyalty to
the client.*fn9 Where an attorney takes part in a suit
against an existing client, the propriety of the conduct ". .
. must be measured not so much against the similarities in
litigation, as against the duty of undivided loyalty which an
attorney owes to each of his clients." Cinema 5, Ltd. v.
Cinerama, Inc., 528 F.2d 1384, 1386 (2d Cir. 1976). The duty
applies with equal force where the client is a subsidiary of
the entity to be sued. See Glueck v. Jonathan Logan, Inc.,
512 F. Supp. 223, 227 (S.D.N.Y.), aff'd, 653 F.2d 746 (2d Cir. 1981)
(firm representing trade association could not also represent
individual client in suit against corporation belonging to
association); see also Rosman v. Shapiro, 653 F. Supp. 1441
(S.D. N.Y. 1987) (disqualifying defendant's attorneys because
firm represented closely held corporation in which plaintiff
and defendant each held 50% of the stock). In the case at bar,
the relationship between the two entities represented by
Epstein Becker, that of parent and wholly-owned subsidiary, is
even closer than that between the parties in Glueck and
Shapiro, because the liabilities of a subsidiary corporation
directly affect the bottom line of the corporate parent. A
fortiori, the duty of undivided loyalty, as set forth in Canon
5, attaches in this case. As the Glueck Court noted:
the Bar has an independent interest in avoiding
even the appearance of impropriety, and that
interest mandates a clear margin of protection
against potentially conflicting arrangements. . .
. [A]ny doubt in the disqualification situation
is to be resolved in favor of disqualification.
512 F. Supp. at 228.
The Court must therefore consider whether Epstein Becker's
actions in this case should disqualify it from representing
plaintiff Stratagem. There are two different standards by
which courts evaluate disqualification motions because of
alleged dual representation; which standard to apply depends
on whether the representation of the two clients is
simultaneous or successive. When the firm concurrently
represents both parties, Courts are to apply a per se
prohibition; but if the case involves former clients of the
firm, the Court will inquire into whether there is a
"substantial relationship" between the two matters. Fund of
Funds Ltd. v. Arthur Andersen & Co., 435 F. Supp. 84, 95
(S.D.N.Y.), aff'd in part, rev'd in part, 567 F.2d 225 (2d Cir.
1977) (citing Cinema 5, supra, 528 F.2d at 1386 (2d Cir. 1976);
Silver Chrysler Plymouth, Inc. v. Chrysler Motors Corp.,
518 F.2d 751 (2d Cir. 1975); Emle Industries, Inc. v. Patentex,
Inc., 478 F.2d 562 (2d Cir. 1973)) (other citations omitted).
Defendants in the present case argue that Epstein Becker did
not effectively withdraw from its representation of FSC in the
Bevona matters until at least October 9, when it finally sent
the files to Baer Marks, and perhaps later, because the
substitution form has not been filed to this day.*fn10 They
therefore advocate the application
of the per se rule. Equally predictably, plaintiffs argue for
application of the "substantial relationship" test, stating
that FSC "has not been Epstein Becker's client since September
4, 1990," approximately one month before the instant complaint
was filed. Plaintiff's Memorandum of Law, at 8.
As the Second Circuit has explained, in order to justify
application of the more lenient "substantial relationship"
test the firm in question must show that "the representation
of a former client has been terminated and the parameters of
such relationship have been fixed." Cinema 5, supra, 528 F.2d
at 1387. In the present case, the parties vigorously dispute
the question of precisely when, if ever, Epstein Becker
effectively withdrew from representing FSC. However, Epstein
Becker does concede that it represented FSC as late as
September 4, 1990. Id. Accordingly, the record is undisputed
that the Firm was clearly contemplating, if not actively
planning, litigation against its client's parent corporation as
early as July 13, 1990. See Goldberg-Panciera Letter of
7/13/90, supra. The Court must therefore conclude that the Firm
was still in FSC's employ when it investigated and was drafting
the complaint against FSC's parent company. See Fund of Funds,
supra, 435 F. Supp. at 94 (deeming Arthur Andersen [the client]
an "existing client" because Morgan Lewis [the firm]
represented it at the time of the investigation and filing of
the complaint). Because Epstein Becker had not clearly
terminated its representation of FSC and fixed the parameters
of its representation of FSC by the time preparations for the
instant litigation were begun, Epstein Becker is per se
ineligible to represent Stratagem in this matter. Cinema 5,
supra, 528 F.2d at 1387.
Moreover, even if Epstein Becker could have resolved this
problem by obtaining both clients' consent, such consent was
forthcoming from FSC. The Court of Appeals has explained that:
Under the Code, the lawyer who would sue his own
client, asserting in justification the lack of
`substantial relationship' between the litigation
and the work he has undertaken to perform for
that client, is leaning on a slender reed indeed.
Putting it as mildly as we can, we think it would
be questionable conduct for any attorney to
participate in any lawsuit against his own client
without the knowledge and consent of all
In the present case Epstein Becker did seek, in its letter
of July 13, 1990, to "raise the question of our continued
representation of Fidelity Services Corporation in connection
with this labor matter." However, the letter was phrased, not
as a request for FSC's consent to proceed with the Stratagem
litigation, but as a request for FSC's consent to continue
with the labor representation. The letter stated:
Should you feel that a conflict, actual or
potential, may exist, or should you want us to
resign from this case because of our ongoing
representation of Stratagem and affiliates,
please let us know and we will resign as counsel
in the labor matter.
Goldberg letter at 2. The follow-up letter dated August 3,
1990, reads less like a request for consent and more like a
threat: "We will soon commence an action against Heron
Properties and Heron International. Unless we hear otherwise
from you, we plan to resign as Heron's counsel in the federal
action and arbitration on the day we file Stratagem's
complaint. Please advise." Kelly-Panciera letter of 8/3/90, at
1. Heron's reply, listing the provisions of the New York Code
of Professional Responsibility which it believed Epstein
Becker would be violating by suing Heron, is hardly the
"knowledge and consent" that
the Code requires in such a situation. Epstein Becker's third
missive on the subject does not even purport to seek Heron's
consent: "From the tone and tenor of your letter, it is
apparent that you would feel uncomfortable if we were to
continue to represent [FSC]. . . . Accordingly, we hereby
notify you that we are withdrawing as counsel to Fidelity in
this lawsuit." Goldman-Kompaniez Letter of 8/14/90, at 1.
As is evident from this series of letters, Epstein Becker
was not able to obtain the requisite consent from its client
FSC before undertaking representation adverse to FSC's parent
company. See New York Code of Professional Responsibility,
Ethical Consideration 5-16. Absent such prior consent, a firm
is to remain with the client in the already-existing litigation
and seek new counsel to represent the other, not vice-versa.
See Fund of Funds, supra, 435 F. Supp. at 91, 96.
Epstein Becker points out that Samuel Goldman has been
Stratagem's real estate lawyer since 1983. Affidavit of Simon
R. Shane, Chairman of Stratagem, dated October 24, 1990, at
¶ 7. It thereby attempts to refute Heron's theory that Epstein
Becker dropped FSC "like a hot potato" in order to represent a
more favored client. Pl.Mem. at 12; Def.Mem. I at 29-31 (citing
Picker Int'l v. Varian Assocs., 670 F. Supp. 1363, 1365-1366
Epstein Becker's obligations to Stratagem do not trump those
it owes to FSC, even if they pre-dated them. Once Epstein
Becker undertook to represent FSC, it assumed the full panoply
of duties that a law firm owes to its client. Epstein Becker
may not undertake to represent two potentially adverse clients
and then, when the potential conflict becomes actuality, pick
and choose between them. Nor may it seek consent for dual
representation and, when such is not forthcoming, jettison the
uncooperative client. Picker Int'l, supra, 670 F. Supp. at 1365.
Under these circumstances, Epstein Becker has no choice but to
withdraw from representing either client in this case.
For the reasons stated above, defendants' motion for
disqualification of plaintiff's counsel is GRANTED. Plaintiff
shall file with the Court a Substitution of Counsel form, in
accordance with Local Rule 3(c), signed by its principal and
the replacement firm. This procedure shall be undertaken as
quickly as possible so as not to further delay the