The opinion of the court was delivered by: Jed S. Rakoff, U.S. District Judge.
Even in an age of convenience, for a law firm to bring a multi-million
dollar claim on behalf of one corporate client against the primary
subsidiary of another of that law firm's corporate clients might be
expected to raise some eyebrows. In this case, it also requires the law
The law firm in question is the well regarded New York firm of Davis
Polk & Wardwell ("Davis Polk"). The party seeking Davis Polk's
disqualification is Federal Insurance Company ("Federal"), a large
insurance company and one of the defendants here. In 1967, Davis Polk,
acting as counsel for Federal, helped organize and incorporate The Chubb
Corporation ("Chubb") a holding company, the primary holding of which was
Federal. Declaration of Joanne L. Bober, sworn to January 7, 2002 ("Bober
Dec.") at ¶¶ 2, 8. Since that time Davis Polk has represented Chubb
in a wide variety of matters, including, inter alia, capital market
transactions, securities filings, bank financings, and ERISA work; and
Davis Polk's representation of Chubb continues to the present. Affidavit
of Dennis S. Hersch, sworn to January 17, 2002 ("Hersch Aff.") at ¶
3; Bober Dec. ¶¶ 8, 9. In addition, Davis Polk has periodically
represented Federal on discrete projects, though none since 1996. Hersch
Aff. ¶ 5.
Although Chubb and Federal have resisted claims that they are simply
"alter egos" of one another, see Levy v. Chubb Corp. 2001 WL 204793, *3
(N.D.Ill.); Electrographics Int'l Corp. v. Federal Ins. Co., 1998 WL
646831, *3 (E.D. Pa.); FileNet Corp. v. Chubb Corp., 324 N.J. Super. 419,
424-25, 735 A.D.2d 1170, 1172 (App. Div. 1999), the relationship is
extremely close and interdependent, both financially and in terms of
direction. Financially, Federal accounts for over 95% of Chubb's total
revenue and over 90% of Chubb's total net income. Declaration of Henry
B. Schram, sworn to January 7, 2002 ("Schram Dec.") at ¶ 3;
transcript of hearing and oral argument, January 23, 2002 ("tr.") at 18.
In terms of direction, Chubb and Federal operate from the same New Jersey
headquarters and, since 1967, have shared the same Board of Directors.
Bober Dec. ¶ 5, 6. They also share certain common officers; of
particular relevance here, the General Counsel (and a Senior Vice
President) of Chubb, Joanne L. Bober, is also the General Counsel (and a
Senior Vice President) of Federal. Bober Dec. ¶ 1.
In October 2001, Davis Polk was retained by JPMorgan Chase Bank ("JPM
Chase"), the plaintiff here, to represent that bank in connection with
matters arising from the burgeoning difficulties of the Enron Corporation
("Enron") and its affiliates. By late November, Davis Polk,
notwithstanding its representation of Chubb (and without Chubb's
knowledge or consent), had begun examining, inter alia, the obligation to
JPM Chase (acting for and on behalf of Mahonia Limited and Mahonia
Natural Gas Limited, collectively "Mahonia") of Chubb's primary
subsidiary, Federal, on no less than $183 million in surety bonds
guaranteeing Enron obligations. Affidavit of Frank S. Moseley, sworn to
January 18, 2002 ("Moseley Aff.") at ¶¶ 2-3.
Davis Polk did not seek Chubb's or Federal's consent to undertake this
inquiry. When, on December 7, 2001, Ms. Bober learned of the
representation, she telephonically informed Frank S. Moseley, the Davis
Polk partner working on the matter, that she thought that Davis Polk
needed Chubb's consent to undertake representation adverse to Federal and
that, at least until she learned more of the relationship between JPM
Chase and Mahonia, she would not waive the conflict. Moseley Aff. ¶¶
12-14. Davis Polk nonetheless continued the representation and began
preparing the instant lawsuit against Federal.
Meanwhile, as part of its ongoing representation of Chubb, Davis Polk
was also preparing an SEC Form S-3, a disclosure form related to a
so-called "shelf registration." On December 11, 2001, Davis Polk filed
the S-3. Under the heading "Recent Developments" the S-3 stated that
"Chubb has obligations under outstanding surety bonds relating to Enron
affiliates [of] approximately $220 million", Bober Dec. Ex. C, Form S-3
Registration Statement Under the Securities Act of 1933, The Chubb
Corporation, filed on December 11, 2001, at 4 (emphasis added). Although
the bulk of this obligation consisted of the very surety bonds on which
Chubb's subsidiary, Federal, allegedly was obligated to Mahonia, Davis
Polk did not reveal to Chubb that it was preparing, on behalf of Davis
Polk's other client, JPM Chase, a lawsuit demanding payment of $183
million from Federal. Rather, without Chubb's prior knowledge or
consent, Davis Polk, acting for JPM Chase, filed the instant lawsuit on
the very same day (Dec. 11) that, acting for Chubb, it filed the S-3.
The next day, December 12, 2001, Ms. Bober wrote to Mr. Moseley,
demanding that Davis Polk either withdraw as counsel for JPM Chase or
provide legal justification for its dual representation. Moseley Aff.,
Ex. B. Moseley responded on December 14, 2001, contending that because
Davis Polk only represented Chubb and not Federal, New York law did not
preclude its representating JPM Chase against Federal. Moseley Aff., Ex.
C. In turn, Gary L. Leshko, the outside counsel hired to represent
Federal in the instant lawsuit, wrote to Davis Polk on January 2, 2002,
advising it that Federal intended to file a motion to disqualify Davis
Polk in this action. On January 7, 2002, Federal filed such a motion.
Following review of papers from both sides, the Court heard oral argument
(and conducted a brief evidentiary inquiry) on January 23, 2002. See tr.
The parties agree that the issue of disqualification is essentially
governed by New York law. See Local Rules of the United States District
Courts for the Southern and Eastern Districts of New York, Local Civil
Rules 1.3(a)(6); 1.5(b)(5) (adopting New York law for this purpose). In
particular, DR 5-105(B) of the New York Code of Professional
Responsibility, 22 N.Y.C.R.R. § 1200.24, provides in pertinent part
that "A lawyer shall not continue multiple employment . . . if it would
be likely to involve the lawyer in representing differing interests."
Even if one views Davis Polk's current representations as only involving
JPM Chase and Chubb, one need look no further than the aforementioned S-3
to see how Davis Polk has already entangled itself in conflicts of
interest; for while it is clearly to JPM Chase's interest that Chubb has
already acknowledged that the Federal security bonds are obligations of
Chubb, it is doubtful that Chubb would have approved such wording,
drafted with the aid of Davis Polk, if it had known that Davis Polk would
simultaneously bring suit on these bonds against Federal.
Furthermore, it is wholly artificial to separate Chubb and Federal for
purposes of analyzing Davis Polk's responsibilities in this context. Just
from the fact that Federal accounts for more than 90% of Chubb's business
and that Chubb and Federal share identical corporate headquarters, an
identical board, and an identical general counsel, see Bober Aff. ¶¶
1, 5, 6, it is obvious that the two share a wealth of common interests
adversely impacted by the lawsuit in question. Cf. Hartford Accident and
Indemnity Co. v. RJR Nabisco, Inc., 721 F. Supp. 534 (S.D.N Y 1989).
Thus, this case is patently unlike Brooklyn Navy Yard Cogeneration
Partners L.P. v. PMNC, 174 Misc.2d 216, 663 N.Y.S.2d 499 (Sup. Ct. Kings
Cty. 1997), aff'd, 254 A.D.2d 447, 679 N.Y.S.2d 312 (2d Dep't 1998)
— the case principally relied upon by Davis Polk to support their
argument that representation of Chubb is not here tantamount to
representation of Federal — for in that case, the court held that
the fact that a law firm advised a defendant's remote subsidiary based in
Moscow on Russian law matters that had "absolutely nothing in common with
the subject matter" of the controversy did not preclude the same firm
from suing the parent. Id. at 220.
Given the practical realities of the situation, then, the doctrine of
concurrent representation applies and the burden of avoiding
disqualification then shifts to Davis Polk to "show, at the very least,
that there will be no actual or apparent conflict in loyalties or
diminution in the vigor of his representation." Cinema 5 Ltd. v.
Cinerama, Inc. 528 F.2d 1384, 1387 (2d Cir. 1976). Davis Polk would
minimize and shift back this burden by arguing that, in light of
subsequent Second Circuit cases, disqualification of Davis Polk is not
required unless Federal, the movant, can show that Davis Polk's
representation of JPM Chase would adversely affect Federal at trial. But
in all of the circuit cases relied on by plaintiff for this proposition,
the underlying conflict of interest was not based on concurrent, ongoing
representation of two clients. See Armstrong v. McAlpin, 625 F.2d 433 (2d
Cir. 1980), overruled on other grounds, 449 U.S. 1106 (1981) (alleged
conflict arose from use by plaintiff of a law firm whose members included
a former SEC assistant director who had been involved in SEC's action
against movant defendant); Board of Educ. v. Nyquist, 590 F.2d 1241 (2d
Cir. 1979) (alleged conflict arose from lawyer for an association
representing one set of members of a union that provided financial
support for that association in a dispute against another set of members
of the union); Glueck v. Jonathan Logan, Inc., 653 F.2d 746 (2d Cir.
1981) (alleged conflict arose from a law firm's representing a client in
a suit against a corporation with a division that is a member of an
association that the plaintiff's firm also represented).
By contrast, where, as here, there is in effect concurrent
representation of two adverse clients, the potential for conflict is
hardly limited to the trial context but can infect, actually or
potentially, a broad spectrum of activities, as the aforementioned S-3
demonstrates. Moreover, in contrast to most (if not all) of the "trial
taint" cases, the Court here confronts the issue of disqualification near
the very outset of the litigation when, on the one hand, determining the
potential for "trial taint" is difficult, and where, on the other hand,
the prejudice to plaintiff in having to substitute new counsel is
For the forgoing reasons, Davis Polk is disqualified from representing
JPM Chase against Federal in this matter. Since there is no good reason
to sever Federal from the other defendants, the effect is to remove Davis
Polk from the case altogether. The Court will, however, stay all
proceedings in this case for two weeks, to enable plaintiff to ...