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RELLA v. NORTH ATLANTIC MARINE

United States District Court, S.D. New York


November 1, 2004.

FRANK RELLA, Plaintiff,
v.
NORTH ATLANTIC MARINE, LTD d/b/a FREEDOM MARINE, KENNETH TESLER, and GLOBAL YACHTS INTERNATIONAL, LTD., Defendants.

The opinion of the court was delivered by: GERARD E. LYNCH, District Judge

OPINION AND ORDER

In this action for conversion and breach of a joint venture agreement, plaintiff Frank Rella has brought claims against defendants Global Yachts International Ltd. ("Global") and North American Marine, Ltd., d/b/a Freedom Marine ("Freedom"). Initially aligned together in denial of Rella's claims, Global and Freedom soon brought claims against each other, and now present independent, arguably inconsistent, defenses against Rella's claims. Although the litigation has been pending for over two years, summary judgment motions have been decided, and the case has reached the very eve of trial, at this late date Global has moved to disqualify counsel for Freedom, based on a conflict of interest. The motion will be granted. BACKGROUND

  Many of the facts regarding the underlying litigation are set forth in the Court's earlier opinion on the motions for summary judgment, Rella v. North Atlantic Marine, Ltd., No. 02 Civ. 8573, 2004 WL 1418021 (S.D.N.Y. June 23, 2004), and will not be repeated here. Briefly, Rella contends that Global and Freedom damaged and converted a yacht that he purchased in connection with a joint venture agreement under which Freedom was permitted to use the yacht for demonstration purposes in furtherance of its and Global's efforts to market boats of similar make and model. Summary judgment was awarded against Freedom on Rella's claim for return of his deposit on a second yacht. The claims regarding breach of contract and conversion of Rella's first yacht remain to be tried, and trial has been scheduled for November 29, 2004. In addition to the instant matter, four other lawsuits involving Global and Freedom are pending, in state and federal courts in New Jersey and Florida. (Affidavit of Douglas F. Doyle, dated October 12, 2004 ("Doyle Aff."), ¶ 3.) The record before this Court provides few details of the nature of these actions.

  The facts regarding the disqualification motion are largely undisputed.*fn1 Jay Joseph Friedrich ("Friedrich"), a part owner of Freedom (Certification of Jay Joseph Freidrich, dated October 20, 2004 ("Friedrich Cert."), ¶ 11), initially appeared on behalf of both defendants in this case. (Id. ¶ 3.) At the initial case management conference, however, counsel for plaintiff Rella noted the likely conflict of interest between the two defendants, and suggested that Friedrich reconsider his representation of both parties. (Id.) Friedrich evidently accepted that suggestion, and undertook to represent only Freedom, recommending to Global's principal that he retain Edwards & Caldwell LLC ("E&C"), a law firm where Friedrich's son David was employed as an associate. (Id. ¶ 4.) Douglas Doyle, the managing partner of E&C, entered an appearance on behalf of Global.

  Initially, Global and Freedom appear to have cooperated in opposing Rella's lawsuit, and in negotiating a possible settlement with Rella, although Friedrich acknowledges that there was never a joint defense agreement between the two defendants. (Id. ¶ 7.) In January 2004, in fact, Friedrich formally represented to the Court that the matter had been settled. See Rella, 2004 WL 1418021, at *2. The representation was premature, however, as the settlement was never consummated. See id. at * 3-*4. Following the breakdown in negotiations, the conflict between Global and Freedom ripened into full-blown opposition. (Friedrich Cert. ¶ 14.)

  David Friedrich ("David") actively worked for E&C on behalf of Global in the pending litigation. According to Doyle, David worked on the Rella matter concerning discovery, "strategic decisions about the strengths and weaknesses" of Global's case, preparing "our client's [presumably Gerald Berton, the principal of Global] potential testimony in the event of a trial," and discussing the client's settlement position. (Doyle Aff. ¶ 6.) Billing records submitted by E&C corroborate these assertions, reflecting David's work on discovery, conferences with Berton, engaging in strategy conferences, and drafting motion papers in connection with the summary judgment proceedings. (Id. ¶ 7 & Ex. B.) Freedom does not seriously contest these assertions; significantly, it submits no affidavit or comment of any kind from David Friedrich, and Friedrich père merely asserts some inconsequential quibbles concerning the redaction of the billing records, without indicating any way in which the entirely proper redactions could undermine the uncontested showing of David's work on the case, or otherwise cast light on the matters in question. (Friedrich Cert. ¶ 19.)

  At some point after the breakdown of the settlement discussions and during the course of the summary judgment litigation,*fn2 David Friedrich left E&C and joined his father's law practice, Jay Joseph Friedrich, LLC ("the Friedrich firm").*fn3 While Friedrich asserts that Doyle "understood that [David] would one day join my firm" (Friedrich Cert. ¶ 11), he does not specify when this "understanding" was created, or whether it encompassed the possibility that "one day" would come amidst litigation between clients represented by E&C and Friedrich. Certainly, Friedrich does not contend that either Global or E&C consented to David's participating in litigation against Global that was related to matters on which David had worked at E&C.

  Since joining the Friedrich firm, David has actively worked on litigation in New Jersey in which Global and Freedom are adversaries, and which Freedom itself has characterized as involving similar issues to those in the present litigation. (Doyle Aff. ¶¶ 8, 9.) Although Global has presented no evidence that David has worked directly on the Rella matter, Freedom does not contend that the Friedrich firm has taken any steps to insulate David from the present matter, or to insulate Friedrich from obtaining confidential information about the case from David. Freedom does not dispute Global's assertion that David has worked on other litigation on behalf of Freedom in which Freedom and Global are adversaries, nor does it dispute the accuracy of Global's contention (supported by quotations from Freedom's own papers in that other litigation) that the issues in that case substantially overlap those in the instant case.

  On October 12, 2004, with trial of this case impending, Global moved to disqualify the Friedrich firm from representing Freedom, citing David Friedrich's prior representation of Global in connection with the instant case while employed at E&C, and his apparent active involvement in related litigation adverse to Global since joining the Friedrich firm.

  Friedrich responded to the motion on behalf of Freedom on October 21. That response did nothing to reassure the Court concerning Friedrich's competence or ethical sensitivity. In the first place, the response is scanty and procedurally deficient. It includes no memorandum of law, and indeed refers to no legal authority whatsoever. In its entirety, the response consists of two "certifications," one from Friedrich and one from Kenneth Tesler, the majority shareholder in Freedom. These "certifications" are unsworn, and Tesler's is submitted in the form of a facsimile without an original signature. While unsworn declarations are permitted to substitute for sworn affidavits under federal law, such declarations are required to be attested in "substantially" the form specified by statute, to wit, declaring "under penalty of perjury that the foregoing is true and correct." 28 U.S.C. § 1746. Neither the Tesler nor Friedrich certifications provide this declaration.*fn4

  The substance of the response is equally deficient. As noted above, although the involvement of David Friedrich in this and related litigation is at the heart of this motion, Friedrich submitted no affidavit from David concerning the extent of his work on behalf of Global while at E&C, the extent of his participation (if any) in this matter on behalf of Freedom since joining the Friedrich firm, the nature of his involvement in related matters adverse to Global, or any steps taken by the Friedrich firm to insulate him from this litigation or to prevent the disclosure of any of Global's confidences and secrets to Friedrich or Freedom. Friedrich's own factual response similarly avoids these critical topics, failing to discuss any measures taken to protect Global's confidences, and conspicuously failing to assert that David has not participated in this litigation on behalf of Freedom. Indeed, Friedrich does not even disclose when David joined the Friedrich firm or his status in that firm.*fn5

  In place of a direct response to Global's argument for disqualification, Freedom and Friedrich respond with a melange of allegations about the cozy relations between Freedom and Global while they were united in opposition to Rella, before formally taking opposing positions in this action. (Friedrich Cert. ¶¶ 3-18.) The purported legal significance of these allegations is never made clear, though Freedom appears to be opposing the motion by asserting some combination of waiver, lack of prejudice, and unclean hands.*fn6 Finally, Freedom's response suggests further grounds for concern regarding Friedrich's standard of professional responsibility. First, Friedrich effectively acknowledges that Freedom has failed to comply with this Court's judgment against it and in favor of Rella. (See Friedrich Cert. ¶¶ 21-22; Global Reply Br. 2 n. 1). Friedrich maintains that after trial, the Court will determine that Global must "reimburse" Freedom for the amount of that judgment (Friedrich Cert. ¶ 22), ignoring that fact that Freedom has asserted no claim against Global in this litigation, and has already been ordered to restore the amount of the deposit to Rella. See Rella, 2004 WL 1418021, at *4-*6, *9. Second, while commendably noting that he has taken steps to secure new counsel for Freedom in the event of disqualification (Friedrich Cert. ¶ 24), Friedrich goes on to indicate that if disqualified he nevertheless plans to participate with new counsel in the representation of Freedom, including "sitting at counsel table" during the trial. (Id.) Third, Friedrich inadvertently presents yet another potential ground for disqualification, at least as trial counsel, by indicating that he may well be a relevant witness at the behest of Freedom, Global, and/or Rella. (Id.)

  DISCUSSION

  In considering this disqualification motion, this Court proceeds "cautiously because disqualification represents a drastic measure which has the potential to severely prejudice the client." Siverio v. Lavergne, No. 86 Civ. 6584, 1989 WL 31531, at *3 (S.D.N.Y. Apr. 13, 1989). Nevertheless, courts are obligated both to enforce the ethical standards of the legal profession, and to protect parties from prejudice that may ensue when lawyers who formerly represented them switch sides to represent an adverse party against them. "[A] client's right freely to choose his counsel . . . must be balanced against the need to maintain the highest standards of the profession." Gov't of India v. Cook Indus., Inc., 569 F.2d 737, 739 (2d Cir. 1978). The New York Code of Professional Responsibility specifically provides that "a lawyer who has represented a client in a matter shall not, without the consent of the former client after full disclosure: (1) Thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client." DR 5-108(a)(1), 22 NYCRR1200.27(a)(1).

  When a party seeks disqualification on the ground that its adversary is represented by a lawyer who formerly represented the moving party, courts in this Circuit proceed with appropriate restraint, "balancing a party's right to choose its own counsel against the danger of misuse of client secrets and the appearance of impropriety." Siverio, 1989 WL 31531 at *3. A lawyer will not be disqualified simply because he once represented the moving party. Rather, the Second Circuit has applied a three-part "substantial relationship" test, which requires the party seeking disqualification to establish that "(1) the moving party is a former client of the adverse party's counsel; (2) there is a substantial relationship between the subject matter of the counsel's prior representation of the moving party and the issues in the present lawsuit; and (3) the attorney whose disqualification is sought had access to, or was likely to have had access to, relevant privileged information in the course of his prior representation of the client." Evans v. Artek Sys. Corp., 715 F.2d 788, 791 (2d Cir. 1983); see also Arifi v. De Transport du Cocher, Inc., 290 F. Supp. 2d 344, 349 (E.D.N.Y. 2003). Moreover, any disqualification required under this principle extends not merely to the lawyer in question, but also to the entire law firm of which that lawyer is a part, since the disciplinary rules binding attorneys in this jurisdiction provide that "[w]hile lawyers are associated in a law firm, none of them shall knowingly accept or continue employment when any one of them practicing alone would be prohibited from doing so under [DR 5-108(a)]." Code of Professional Responsibility, DR 5-105(d), 22 NYCRR 1200.24(d).

  On the record in this matter there is no doubt that Global has met this burden with respect to David Friedrich. Global has set forth substantial evidence, in the form of an affidavit from its present counsel and billing records whose authenticity is undisputed, that David actively represented Global while employed as an associate at E&C. Moreover, the same evidence demonstrates that this representation occurred not merely in a "substantially related" matter, but in this very action. Finally, the evidence further establishes that David likely had access to relevant privileged information, since both the Doyle affidavit and the billing records document that David participated in strategic conferences, including conferences at which the client's settlement position was discussed, conferred with a principal of Global, and indeed drafted an affidavit for that principal in connection with a summary judgment motion in this case. It is inconceivable that such intimate involvement in strategic planning of the litigation and client conferences did not involve David in discussing the client's confidences and secrets, or in the exchange of information covered by the attorney-client privilege. While Global offers no direct evidence that David is playing a role in his firm's present representation of Freedom in the instant litigation, it documents that David has actively participated on behalf of Freedom, by filing at least one motion, in what Global represents is a closely-related parallel litigation in another court in which Global's and Freedom's interests are assertedly adverse.

  This prima facie showing stands entirely unrebutted by Freedom. Freedom has submitted no affidavit from David at all concerning his involvement in this litigation, either formerly on behalf of Global or currently on behalf of Freedom. The submissions it has offered, even ignoring their procedural deficiencies, contain not even a hearsay denial of the facts set forth above, nor even a conclusory denial that David is participating in some way in representing Freedom in the instant litigation or in related proceedings, nor any facts disputing Global's characterization of the other litigation.

  There is no question that David Friedrich must be disqualified from representing Freedom in this case. Despite the general reluctance of courts to order disqualification of a party's chosen attorney, "disqualification will be ordered" when the attorney "is potentially in a position to use client confidences to the advantage of the present client." Siverio, 1989 WL 31531 at *5 n. 3, citing Fund of Funds, Ltd. v. Arthur Andersen & Co., 567 F.2d 225, 233 (2d Cir. 1977), and Emle Industries, Inc. v. Patentex, Inc., 478 F.2d 562, 565 (2d Cir. 1973). The undisputed facts are that David had access to Global's privileged information in connection with this litigation before joining the firm representing Global's adversary, Freedom, and that he is "at least potentially" in a position, if permitted to represent Freedom in this matter, to utilize that privileged information to the detriment of his former client.

  Moreover, that disqualification extends to the entire Friedrich firm. DR 5-105(d). While recent caselaw has questioned whether the total disqualification rule is without exception in an era of large law firms or legal departments, in which firewall procedures to insulate conflicted lawyers from matters in which they may not participate may perhaps be effective barriers to the exchange of confidential information, Decora Inc. v. DW Wallcovering, Inc., 899 F.Supp. 132, 139-42 (S.D.N.Y. 1995); Solow v. W.R. Grace & Co., 83 N.Y. 2d 303, 313-14 (1994), no such exception applies here. The Friedrich firm is not a large institution in which a nominal "partner" of a conflicted lawyer may be one of hundreds of members of a mega-law firm, located in another city and perhaps having only a nodding acquaintance with other members of the firm, and which has regular established procedures for dealing with such conflict situations. Rather, the Friedrich firm is a two-member firm, the partners in which are father and son who evidently share the same offices. Under these circumstances, the inference that the partners cannot effectively avoid sharing information is strong. In any event, there is no need for inference in this case, nor for assessment of the effectiveness of hypothetical firewall procedures. Far from attempting to wall off David Friedrich from matters in which the firm's client Freedom is adverse to Global, the firm has permitted David to participate as counsel for Freedom in one such matter, and does not deign to offer even the blandest or most conclusory assertions that he is walled off from this case — the very one in which he represented Global — or that his father and partner has not discussed the case with him or acquired privileged information of Global's from him.

  None of the "defenses" implied — but neither formally asserted nor supported by legal argument or authority — in Freedom's response provides any basis for avoiding this result. Friedrich asserts that Doyle knew that David "would one day join [the Friedrich] firm." (Friedrich Cert. ¶ 11.)*fn7 To the extent that this assertion is intended to argue some form of waiver of the conflict of interest on the part of Global, it is woefully inadequate. The factual assertion is (whether artfully or inartfully) worded to avoid indicating when Doyle formed this understanding, or when David was expected to move. Friedrich does not assert that Doyle, let alone his client, approved David's joining the Friedrich firm during the pendency of this matter, or David's participating in litigation adverse to Global. While it may have been incautious for Doyle to assign David to work on a matter in which his father represented a potentially adverse party, Global and E&C were entitled to rely upon David's ethical obligation to maintain Global's "confidences and secrets," DR 4-101, and not to undertake employment in which his duty to Global would present a conflict, DR 5-105(A). Under these circumstances, the fact that David was expected "one day" to join his father's firm cannot be construed as a waiver of these obligations on the part of Global.*fn8

  Friedrich's implicit argument that Global waived its rights by failing to move for disqualification sooner (Friedrich Cert. ¶¶ 10, 15) is no more persuasive. First, Friedrich provides insufficient facts for the Court even to determine when the conflict first arose, appearing to suggest that Global should have asked him to withdraw as soon as Global's and Freedom's interests became adverse, even while David remained employed at E&C. (Id.) To the extent that this is Friedrich's argument, it is meritless. Friedrich's conflict arose not from the fact that his son was employed at E&C and working on a matter adverse to Friedrich's client, although this fact certainly should have led ethically prudent attorneys on both sides of the matter, including both Friedrichs and Doyle, to reassess whether it was wise for David to continue to work on this litigation. Cf. DR 5-101(A) (lawyer not to undertake employment where his professional judgment may be affected by, inter alia, "personal" interests). The conflict affecting Friedrich's continued participation arose when David, having worked on this matter on behalf of Global, went over to the law firm representing Freedom, whose interests in this matter are adverse to Global's. Friedrich's submission does not even make clear when that event occurred. While Global undoubtedly could and should have promptly moved, or at least brought the matter to its adversary's and the Court's attention, as soon as David joined the Friedrich firm, there is little basis on this record to conclude that Global unduly slept on its rights. Global maintains that it continued to expect the matter to be settled amicably (Doyle Aff. ¶¶ 10, 11, 13), and the earliest event in the record reflecting any affirmative action by David adverse to Global is his submission of a motion in the New Jersey matter in mid-June 2004 (id. ¶ 8). Global moved for disqualification in October 2004. Friedrich cites no authority, and the Court is aware of none, permitting a finding of waiver on such a limited record.*fn9

  Friedrich also sets forth a number of factual allegations that appear to suggest either that Global was not prejudiced by any participation of David in litigation against it (since Global and Freedom shared information freely before David switched sides) or unclean hands on the part of Global and E&C (in that Doyle allegedly had improper contacts with Freedom's principal, Tesler, outside Friedrich's presence, see DR 7-104(A)).*fn10 Since Friedrich makes no coherent argument of either sort, the Court can only guess at the relevance of these asserted facts. Once again many of the assertions are, artfully or otherwise, worded in such a way as to suggest impropriety on the part of E&C or some sort of joint defense arrangement between Global and Freedom, without actually stating the conclusion that the Court is expected to draw, or containing all of the facts that would be necessary to reach a conclusion permitting denial of the motion. Even accepting arguendo the facts asserted by Friedrich as far as they go, they fall far short of establishing a reason to deny Global's motion. Friedrich admits that there was in fact no joint defense agreement between Global and Freedom (Friedrich Cert. ¶ 7), and his characterization of information sharing between the defendants, or of discussions among the attorneys and the principals of Global and Freedom do not assert that either party shared privileged information with the other, or went beyond discussions typical between co-defendants and their lawyers, such that the defection of a lawyer with privileged information of one co-defendant to the law firm representing a co-defendant with conflicting or adverse interests would be merely harmless in light of the prior relationships among the parties. Nor would any alleged improper contact between Doyle and Tesler affect the merits of Global's motion. Friedrich does not allege that any such contact actually resulted in the disclosure of privileged information, or indeed of any specific information at all, nor does he articulate any resulting prejudice to Freedom. Even assuming such impropriety occurred and prejudiced Freedom, moreover, Freedom seeks no remedy against Global, Doyle, or E&C,*fn11 and articulates no reason why any impropriety on the part of Doyle or E&C would excuse or mitigate the facts requiring disqualification of the Friedrich firm.

  That disqualification, moreover, is total. Contrary to Friedrich's apparent belief (Friedrich Cert. ¶ 24), unlike the situation when a lawyer is disqualified because he may also be witness in the case, in which case the lawyer is disqualified only from appearing before the jury as trial counsel, Paretti v. Cavalier Label Co., 722 F. Supp. 985, 986 (S.D.N.Y. 1989); see U.S. ex rel. Sheldon Elec. Co. v. Blackhawk Heating & Plumbing Co., 423 F. Supp. 486, 488-89 (S.D.N.Y. 1976), when a lawyer or firm is disqualified for laboring under a conflict of interest and actually or potentially possessing privileged information belonging to the adverse party, such disqualification is complete, and permits no participation of the disqualified lawyer or firm in the representation of his or its new client. See Mitchell v. Metropolitan Life Ins. Co., No. 01 Civ. 2112, 2002 WL 441194 (S.D.N.Y. Mar. 21, 2002). Manifestly, it would be pointless to disqualify a lawyer from representing a client in the courtroom because of his possession of privileged information of an adversary, and then to permit the lawyer to go on representing that very client behind the scenes as co-counsel with another attorney who takes on the public face of the representation. By granting Global's motion, the Court prohibits the Friedrich firm from undertaking any involvement on the part of Freedom in this litigation, including advising new counsel on strategy or "sitting at counsel table . . . during the trial" (Friedrich Cert. ¶ 24).

  Finally, while the record is not sufficiently clear to determine whether Friedrich would be disqualified as trial counsel by the "lawyer-witness" rule, DR 5-102(a), 22 NYCRR 1200.21(a), in balancing the interests relating to disqualification the Court is cognizant of the fact that the reasons stated above for disqualifying the Friedrich firm do not represent the only ethical issues implicated by Friedrich's continued participation in the case. Friedrich blithely asserts that he expects to remain as trial counsel for Freedom, notwithstanding the possibility that he would be called as a witness by his own client, or even by either adverse party, and that he "will be prepared to give testimony" if so called, without indicating any awareness of the ethical rules that could prohibit his participation in the dual capacity of trial counsel and witness. See DR 5-102, 22 NYCRR 1200.21 (setting forth the various circumstances in which a lawyer must decline employment or withdraw when he will be a witness for his own client or for an adverse party). Friedrich's similar failure to see any problem with the apparent continued failure of his client (a company in which he is, in fact, a part owner) to pay a judgment ordered by the Court casts further doubt on his respect for the system of justice that as an officer of the court he is sworn to uphold.

  CONCLUSION

  For all of the above reasons, Global's motion to disqualify the Friedrich firm from further representation of Freedom in the instant case is granted.

  SO ORDERED.


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