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Bakken Resources, Inc. v. Edington

United States District Court, S.D. New York

March 29, 2017



          ANDREW L. CARTER, JR., United States District Judge

         Plaintiff Bakken Resources, Inc. brings this suit against Defendants Jerod Edington, Ryan Edington, Joseph R. Edington, IWJ Consulting Group, Inc., Triax Capital Management, Inc., Marycliff Investment Corp., and American Cordillera Mining Corporation, alleging that Defendants engaged in a conspiracy to defraud them in violation of the Civil Racketeering Influenced and Corrupt Organizations Act, the Securities Exchange Act of 1934, the Securities Act of 1933, and other related common law claims, in connection with a reverse merger transaction. Defendants have moved to disqualify Plaintiffs counsel, Wesley Josiah Paul and the Paul Law Group, LLP. Plaintiff opposes the motion and also has filed a related motion for attorney's fees. For the reasons that follow, Defendants' motion is denied without prejudice. Plaintiffs motion for attorney's fees also is denied.


         I. Factual Background

         Plaintiffs Amended Complaint is 147 pages long, and the Court only recites those facts necessary to contextualize Defendants' pending motion. See ECF No. 41 ("Am. Compl."). In short, Plaintiff alleges that Joseph R. Edington ("Edington"), members of his family, and entities associated with him engaged in a variety of fraudulent behavior in connection with facilitating a reverse merger that ultimately resulted in the creation of Bakken Resources, Inc., the Plaintiff here. In a reverse merger transaction, a publicly-traded company with few or no assets merges with a non-public company that has assets or business operations, thereby creating a publicly-traded company with assets. Am. Compl. ¶ 52.

         Edington first met Val Holms, a former plaintiff in this action, in late 2009 and proposed that Holms engage in a reverse merger transaction to create a public company holding certain mineral assets Holms owned in North Dakota. Id. ¶¶ 57-60. Edington suggested they use a shell company he controlled, APD Antiquities, Inc. ("APD"), as the public company in the reverse merger. Id. ¶ 117. Ultimately, this transaction did not close. Id. ¶¶ 161-65. Plaintiff alleges that Edington made numerous misrepresentations to Holms and others during the course of this aborted transaction. Among other things, Plaintiff alleges that Edington failed to disclose that he was subject to a permanent injunction by the Securities and Exchange Commission ("SEC"). Id. ¶¶ 15, 105-06.

         After the APD reverse merger fell through, Edington proposed that they use Multisys Language Solutions ("MLS"), another public shell company allegedly controlled by Edington, for the reverse merger. Id. ¶¶ 169-72. Unlike the transaction with APD, the parties successfully merged MLS with Holms Energy, LLC, a private company which held Holms' mineral rights. The transaction closed in November 2010. Id. Plaintiff alleges that Edington made misrepresentations and engaged in self-dealing during the course of this transaction as well. See, e.g., Id. ¶¶ 78-81, 85-87. Plaintiff further alleges that, after the reverse merger was finalized, Edington and others continued to harm Plaintiff through a number of malicious prosecutions brought in state court. Id. ¶¶ 396-423.

         Both before and during this same time frame, Plaintiffs counsel Paul had numerous interactions with Edington and represented entities that Edington was "consulting for." ECF No. 60 (Declaration of Joseph R. Edington dated Apr. 28, 2016 ("Edington Decl.")), at ¶ 3. Edington contends that Paul also represented him, personally. Id. Paul was involved in the formation and private offering of LPath Therapeutics, Inc. Id. ¶¶ 4-6. Edington also solicited SEC-compliance advice from Paul, while Paul sought Edington's help in identifying public shell companies for use in reverse merger transactions with Paul's clients. Id. ¶¶ 9-10; Ex. B at 3-7.[1] According to Edington, in some instances, upon identifying a viable company for a reverse merger, Paul would prepare offering documents, act as an escrow agent, or serve as attorney for the newly-formed company. Edington Decl. ¶ 19. Edington does not identify any companies besides LPath Therapeutics for which Paul served any of these functions, however.

         Paul also was involved in the Bakken transaction, both prior to being retained as Bakken's counsel and after. Edington Decl. ¶¶ 12-15; Ex. B. at 10-11. Neither party pinpoints precisely when Bakken retained Paul, but it appears to have been some time in the first half of 2011. See Am. Compl. ¶¶ 102-06; Edington Decl. ¶¶ 8, 13-16. Edington states that, prior to Bakken retaining Paul, he and Paul "discussed the formation and private offering undertaken by Multisys Language Solutions." Edington Decl. ¶ 12.

         II. Procedural Background

         On June 7, 2016, Defendants moved to disqualify Paul and his firm. ECF Nos. 58 ("Defs' Motion"), 59 ("Defs' Memo."), 60 (Edington Deck). Plaintiff opposed the motion, but due to Defendants' repeated electronic filing difficulties, Plaintiffs response was docketed after Defendants' reply. ECF Nos. 61 ("Defs' Reply"), 62 ("Pi's Memo."). Plaintiff also moved for its attorney's fees and costs incurred in opposing the motion. ECF No. 63.


         A court's authority to disqualify attorneys "derives from [its] inherent power to 'preserve the integrity of the adversary process."' Hempstead Video, Inc. v. Inc. Vill. of Valley Stream, 409 F.3d 127, 132 (2d Cir. 2005) (quoting Bd. of Educ. v. Nyquist, 590 F.2d 1241, 1246 (2d Cir. 1979)). Decisions regarding disqualification balance a party's right to choose his or her own attorney with the need to preserve the integrity of the legal profession and the court system. Id. Although motions for disqualification are governed by the law of this Circuit, courts often look for guidance in the relevant rules of professional conduct. Id.

         I. Disqualification under the Successive ...

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