• Disqualification of Counsel in Business Divorce Proceedings
  • March 3, 2011 | Author: Peter A. Mahler
  • Law Firm: Farrell Fritz, P.C. - New York Office
  • Scenario #1:  Shareholders Moe, Larry and Curly jointly retain attorney Foghorn to form WoobWoobWoob Corp. and to prepare and supervise the execution of a shareholders' agreement.  Foghorn thereafter serves as WoobWoobWoob's outside general counsel until a pie-throwing incident precipitates a judicial dissolution petition by Curly.  Moe and Larry hire Foghorn to oppose the petition, arguing that the shareholders' agreement was not validly executed and that Curly is not a shareholder.  Curly moves to disqualify Foghorn from representing Moe and Larry.  Should the court grant Curly's motion?

    Scenario #2:  Moe and Larry are the original shareholders of NyukNyukNyuk Corp.  Curly subsequently enters into a stock purchase agreement, thereby becoming the third shareholder, along with an amended and restated shareholders' agreement with Moe and Larry.  The  agreements are prepared by attorney Throckmorton acting on behalf of Moe and Larry.  Curly was represented by his own counsel.  Three years later, following an eye-poking incident, Curly petitions for judicial dissolution of NyukNyukNyuk.  Curly also moves to disqualify Throckmorton from representing Moe and Larry on the grounds that, in preparing the agreements, Throckmorton learned confidential information about the operation of NyukNyukNyuk concerning a central issue in the dissolution litigation, and that Throckmorton may have to testify as a witness.  Is the motion a winner?

    Before you say, "I'm trying to think but nothing happens," the answers can be found in two recent court decisions requiring disqualification in circumstances resembling Scenario #1 but not in Scenario #2.

    The first scenario is drawn from Boylan v. O'Loughlin, Short Form Order, Index No. 22665/09 (Sup Ct Suffolk County June 3, 2010), decided last year by Suffolk County Commercial Division Justice Elizabeth H. Emerson.  The subject corporation, Audell Petroleum Corp., was formed in 1976 purportedly by three shareholders, Boylan, Cunningham and O'Loughlin.  In 1986, attorney Weiner prepared and supervised the execution of a shareholders' agreement naming the three.  The agreement included a mandatory stock buyback by the corporation upon the death of a shareholder, as well as a reciprocal right of first refusal upon death as between Boylan and Cunningham.  Weiner served as the company's general counsel from 1986 through 2010.  Cunningham died in 2008.  His will, naming Weiner executor, bequeathed his shares to his children apparently without any acknowledgement of the first refusal or share redemption provisions in the shareholders' agreement.  Weiner, as executor, denied the validity of the shareholders' agreement and contested Boylan's status as a shareholder.  Weiner's law firm represented Cunningham's estate in the subsequent dissolution proceeding filed by Boylan as 27.5% shareholder.

    O'Loughlin moved to disqualify Weiner's law firm under Rule 1.9 of the New York Rules of Professional Conduct based on conflict of interest, and under the attorney-witness rule contained in Rule 3.7.  As to the former, Justice Emerson summarizes the applicable law as follows:

    A party seeking to disqualify an attorney or law firm must establish (1) the existence of a prior attorney-client relationship and (2) that the former and current representations are both adverse and substantially related (Mancheski v. Gabelli Group Capital Partners, 22 AD2d 532, 534, citing Solow v. Grace & Co., 83 NY2d 303, 308).  Under such circumstances, the presumption of disqualification is irrebutable (Id.).  One who has served as attorney for a corporation may not represent an individual shareholder in a case in which his interests are adverse to the other shareholders (Morris v. Morris, 306 AD2d 449, 452; Matter of Greenberg [Madison Cabinet & Interiors], 206 AD2d 963, 965, citing Matter of Fleet v. Pulsar Constr. Corp., 143 AD2d 187).

    Justice Emerson concludes that disqualification of Weiner's law firm is required.  Her ruling cites (1) Weiner's long-time service as the company's general counsel, (2) his role as drafter of the disputed shareholders' agreement, and (3) the adverse positions in the litigation, on the one hand, of the Cunningham estate represented by Weiner's law firm and, on the other hand, the company and the two other shareholders.  Justice Emerson also finds disqualification warranted "because it is likely that [Weiner] will be called as a witness on the issue of whether or not the shareholder agreement was executed."

    Scenario #2 is drawn from Adams v. Gallagher, 2011 NY Slip Op 30277(U) (Sup Ct Nassau County Jan.13, 2011), decided last month by Nassau County Commercial Division Justice Timothy S. Driscoll.  The petitioner Adams sought judicial dissolution of a real estate brokerage business named Babylon Century, LLC based on the respondents' alleged misrepresentations made to induce Adams to merge her existing business into Babylon Century and on respondents' alleged financial misconduct and exclusion of Adams from decision-making.  Adams moved to disqualify the respondents' law firm, Abrams Fensterman, on the grounds it previously represented Babylon Century and that counsel from the firm may be called as a witness.  Abrams Fensterman had prepared the membership purchase agreement, the new operating agreement for Babylon Century and related documents upon the merger with Adams' prior business.  Abrams Fensterman performed those tasks as counsel for the individual respondents.  Adams was represented by separate counsel.

    Adams contended that Abrams Fensterman learned confidential information about the operation of Babylon Century which is a central issue in the litigation, that the matters involved in the litigation and the law firm's prior representation are substantially related, and that the interests of the members of Babylon Century represented by Abrams Fensterman are materially adverse to the interests of Babylon Century.  Respondents argued that Abrams Fensterman never represented Babylon Century and that its work with respect to the company's formation and reconstitution is not substantially related to the current litigation concerning alleged breach of fiduciary duty.  Respondents also argued that Adams failed to show that the testimony of any attorney from Abrams Fensterman was necessary or would not duplicate testimony by the parties.

    After setting forth at some length the law governing disqualification (see decision at pp. 10-12), Justice Driscoll denies Adams' disqualification motion, reasoning as follows:

    Plaintiff has not established that there is a prior attorney-client relationship between counsel and Babylon Century.  Moreover, even assuming, arguendo, that there is a prior attorney-client relationship between Babylon Century and counsel, Plaintiff has not demonstrated that the matters involved in both representations are substantially related.  The Court is not persuaded that counsel's preparation of documents related to the formation of Babylon Century is substantially related to Plaintiff's allegations that Defendants have breached the agreements among the parties, or violated their fiduciary duties to Plaintiff.  Plaintiff also has not established that counsel's testimony would be necessary, particularly given the ability of the Defendants to testify regarding the relevant agreements among the parties.

    When business partners form a start-up venture they will often utilize the legal services of an attorney who has a pre-existing relationship with one of the partners.  The Boylan and Adams decisions underscore the importance -- both to the attorney and the principals -- of documenting the capacity in which the attorney is providing legal services and specifically identifying the client or clients for whom he or she is providing the services.  Such documentation is not necessarily limited to the engagement letter; it also may warrant a written communication by the attorney to any unrepresented non-clients involved in the transaction, confirming that the attorney does not represent them and recommending that they consult with independent counsel.