RENDERED: APRIL 2, 2015 TO BE PUBLISHED
*intim (Court of rPhrt\ 2014-SC-000172-MR LI
FRANK D. MARCUM; JAMES D. CONWAY; FOSTER NORTHROP; AND MARK CHENEY APPELLANTS
ON APPEAL FROM COURT OF APPEALS V. CASE NO. 2013-CA-002146-OA FAYETTE CIRCUIT COURT NO. 12-CI-00040
HON. ERNESTO SCORSONE, JUDGE, HON. FAYETTE CIRCUIT COURT APPELLEE
AND
PAUL R. PLANTE, JR. REAL PARTY IN INTEREST
OPINION OF THE COURT BY JUSTICE NOBLE
REVERSING AND REMANDING
Appellants, Frank D. Marcum, James D. Conway, Foster Northrop, and
Mark Cheney, sought a writ of prohibition in the Court of Appeals to bar
enforcement of an order disqualifying their lawyers, the firm Miller, Griffin, &
Marks, PSC (MGM), in a shareholder-derivative suit brought by the Real Party
in Interest, Paul R. Plante, Jr., where the order was granted based on a finding
of an "appearance of impropriety." The Court of Appeals denied the writ,
concluding that one of the prerequisites for a writ, specifically a showing of
irreparable harm, had not been made. This Court concludes that the
Appellants have adequately shown the prerequisites for the availability of a writ
and that the trial court applied an incorrect legal standard ("an appearance of impropriety") in disqualifying the firm. Moreover, disqualification was improper
under the correct standard (a showing of actual conflict), at least based on the
current record and findings of the trial court. Thus, this Court reverses and
remands for entry of the requested writ.
I. Background
The shareholder-derivative suit underlying this writ action gives an
excellent corporate representation of the infamous "Gordian knot." The Real
Party in Interest (Plante) and the Appellants (Marcum, Conway, Northrop and
Cheney), along with Bill Seanor, began their journey as the shareholders of
Arthrodynamic Technologies Animal Health Division, Inc. (ADT), a Kentucky
corporation that sells veterinary products. Originally, Marcum and Conway
each owned 37.5% of the shares; Cheney owned 10%; and Northrop, Plante,
and Seanor each owned 5%. All six shareholders were originally on the board of
directors. Over time, disputes among the shareholders led to changes in the
officers and membership of the corporate board.
In late 2010, Plante and Seanor seized control of the board, apparently
having convinced a majority of the directors that Marcum and Conway had
acted improperly, and caused Marcum and Conway to be removed from the
board. 1 Plante and Seanor were installed as the secretary and president
respectively. In February 2011, Conway and Marcum, holding a total of 75% of
1 There is some suggestion in the record that at that time, Marcum and Conway agreed to leave the board, though there is no written document signed by all of the board members, as arguably required by the shareholder agreement, executing this action. 2 the shares of ADT, returned to the board, though Plante and Seanor remained
in their role as officers.
In March 2011, a majority of the board caused the corporation to file a
lawsuit against Marcum and Conway in Fayette Circuit Court alleging breach
of fiduciary duties, misappropriation of corporate funds, and other claims. The
suit was later transferred to Woodford Circuit Court. Miller, Griffin and Marks
(MGM) represented Marcum and Conway individually in that action through
the services of Thomas Miller.
On August 29, 2011, Bioniche Animal Health USA, Inc., which had been
ADT's manufacturer, filed suit against ADT in federal court over a contract
dispute. ADT was defended in the litigation by Stites 86 Harbison PLLC, a
Kentucky law firm, and Sutherland Asbill 86 Brennan LLP, a firm
headquartered in Atlanta.
In October and November 2011, there was some shaking up of the
board's membership related to Marcum's claimed purchase of shares owned by
Northrop, Cheney, and Conway. 2 Northrop tendered his resignation from the
board, which was accepted at an October board meeting. In October, Cheney
also executed a resignation letter, addressed to Seanor as president, but the
2 Plante has, at times, disputed that these purchases actually occurred, citing a right of first refusal for ADT to purchase the shares in the shareholder agreement. Whether Marcum's purchases actually occurred, however, is not a question that this Court must decide in order to resolve this case or, more pertinently here, to lay out the factual background sufficiently to understand the case. Indeed, whether Marcum actually purchased the shares or was required to allow ADT to exercise the right of first refusal, and thereby increase the overall value of the remaining shares, appears to be part of the underlying litigation. That Marcum purported to buy the shares is discussed only to explain the apparent change of heart of the board. Even the Appellants' brief describes the Appellants, as collectively owning 90% of the shares, suggesting all still had an ownership stake, at the time of the October and November meetings. 3 letter was never delivered and was instead held by Marcum's counsel. Upon
acceptance of Northrop's resignation, Bob Watson 3 was named to the board in
his stead. On October 31, 2011, a board meeting was held at which Seanor was
removed as president and replaced by Marcum, Cheney was made vice-
president, Seanor was made secretary, and Watson was made Treasurer.
At the board meetings in October and November 2011, MGM attorneys
were present, recorded minutes, and participated in discussions with the board
members. Before the November meeting, Marcum, acting as president, sent
letters to the litigation firms asking that they take no further action in the
Bioniche litigation. At the November 2011 meeting, MGM advised the directors
to settle with Bioniche. Plante was a director at the time, and he objected to the
settlement. Three of the four Appellants (Marcum, Cheney, and Conway) were
also on the board at that time, however, and they, along with Watson, voted in
favor of settling. Though the record does not disclose the exact timing, it
appears that the lawsuit by ADT against Marcum and Conway was also
discussed at these meetings, and it was dismissed soon after.
That, however, means that the suit by ADT against Marcum and Conway
overlapped with the Bioniche litigation against ADT. Both were ongoing actions
as of the October and November 2011 board meetings. As a result, MGM
represented the two individuals, Marcum and Conway, in an action brought by
ADT, at the board's behest, at the same time that the firm was advising the
board in some capacity about the Bioniche suit.
3 Watson was employed by a bank that had dealings with ADT. 4 On January 3, 2012, the underlying shareholder derivative action was
filed by Plante and Seanor (who has since settled his claim) in Fayette Circuit
Court. 4 The original complaint named only two of ADT's directors, Marcum and
Conway, as defendants. On April 18, 2012, Northrop came back on the board,
replacing Watson. After some discovery, the complaint was amended to also
name Cheney and Northrop as defendants. The suit alleges, among other
things, that the Appellants had violated various provisions of ADT's
shareholder agreement with respect to sales of stock. MGM was retained to
represent Appellants as they defended against this claim. Another law firm,
Stoll Keenon Ogden, represents ADT, which was included in the suit as a
nominal party on whose behalf Plante has brought the suit.
On June 18, 2012, Plante moved to disqualify MGM as the counsel for
the Appellants, alleging that because MGM had represented the board,
including Plante, in giving advice on the Bioniche litigation, and because MGM
had represented Marcum and Conway individually in ADT's suit against them
in Woodford County, MGM's participation in the underlying shareholder action
created a conflict of interest or at least an appearance of impropriety sufficient
to require MGM's disqualification. In other words, because MGM represented
Marcum and Conway against ADT (of which Plante was a board member) in the
Woodford County suit, and then represented the board in the Bioniche suit (by
advising the board), MGM effectively acted as counsel both against the board
4 Plante had also filed suits in federal and state courts in Florida in December 2011. 5 and for the board. By extension, Plante, as a shareholder, argued that MGM
had taken a position against him and represented him at the same time.
In January 2013, Marcum, Conway, Cheney, and Northrop met, acting
as a quorum of the board. They adopted a resolution stating that there was no
conflict of interest in MGM's representation of them "with respect to ADT," and
purporting to waive any conflict that might exist.
Briefing and arguments regarding this motion and other matters
occurred for some period of time. (The exact scope of these proceedings is not
clear because a writ action does not contain the entire record of an underlying
lawsuit.) Eventually, however, the motion was submitted for decision, and the
trial court ruled in Plante's favor, granting his motion to disqualify MGM from
representing the Appellants. The court specifically found that "[d]uring the
course of MGM's representation of Conway and Marcum in the lawsuit filed
against them by ADT, MGM also provided legal advice to the board of directors
of ADT in a separate lawsuit with Bioniche."
But then the trial court specifically found, in the next two sentences, -that
it was making "no finding on whether Miller and MGM provided legal advice in
their capacity as representative of Conway and Marcum or with the intent to
represent ADT in settlement negotiations with Bioniche," and "no finding as to
any actual impropriety on the part of Miller and MGM." (Emphasis added.) The
court then said that it was difficult to see how Plante, as a part owner of the
corporation ADT, could perceive that he got "utmost advocacy" when MGM
represented "both the corporation [in advising about Bioniche] and individuals
adverse to the corporation [in the suit against Conway and Marcum]." The 6 court then concluded that disqualification of MGM was required based on "the
appearance of impropriety" under Lovell v. Winchester, 941 S.W. 2d 466 (Ky.
1997).
The Appellants filed a writ action at the Court of Appeals. The court
denied the writ because they had not shown irreparable injury, one of the
usual prerequisites for issuance of such a writ.
The case is appealed to this Court as a matter of right.
II. Analysis
The issuance of a writ of prohibition or mandamus is an extraordinary
remedy that interferes with the ordinary trial and appellate processes. As a
result, this Court has always been cautious and conservative in granting such
relief. Grange Mut. Ins. Co. v. Trude, 151 S.W.3d 803, 808 (Ky. 2004). Because
writs are disfavored, a court's first task in a writ action is to determine whether
the remedy is even available. Bender v. Eaton, 343 S.W.2d 799, 801 (Ky. 1961).
This is done before looking at the merits of the allegation of legal error claimed
to support issuance of the writ. Id.; see also Cox v. Braden, 266 S.W.3d 792,
796 (Ky. 2008). To this end, "this Court has articulated a strict standard to
determine whether the remedy of a writ is available." Cox, 266 S.W.3d at 796.
That standard divides writs into two separate classes: where the lower
court is alleged to be proceeding outside its jurisdiction and where the lower
court is within its jurisdiction but is alleged to be acting or about to act
erroneously. Hoskins v. Maricle, 150 S.W.3d 1, 10 (Ky. 2004). Appellants invoke
the second class of writ cases, alleging that the trial court acted erroneously
but within its jurisdiction. Accordingly, they generally are required to pass two 7 "tests" by showing (1) that they lack an adequate remedy by appeal or
otherwise, and (2) that great injustice and irreparable injury will result if their
petition is not granted. Id. Failure to show these prerequisites usually results
in denial and dismissal of the writ action, Bender, 343 S.W.2d at 801, as the
Court of Appeals did in this case.
As we have noted on multiple occasions, this standard "require[s] the
petitioner to pass the first test; i.e., he must show he has no adequate remedy
by appeal or otherwise." Id. But unlike the lack of an adequate remedy by
appeal, the second test (great injustice, irreparable injury) "is not an absolute
prerequisite." Hoskins, 150 S.W.3d at 20.
Instead, if great injustice and irreparable injury cannot be shown, a writ
is still available in "certain special cases," that is, if "a substantial miscarriage
of justice will result if the lower court is proceeding erroneously, and correction
of the error is necessary and appropriate in the interest of orderly judicial
administration." Id. (quoting Bender, 343 S.W.2d at 801). By granting a writ "in
such a situation the court is recognizing that if it fails to act the administration
of justice generally will suffer the great and irreparable injury." Bender, 343
S.W.2d at '801.
Here, the Court of Appeals held that the Appellants could not show
irreparable harm from being deprived of representation by MGM as the basis
for denying the writ. That determination requires further scrutiny by this
Court, however, because the Court of Appeals did not address the first
prerequisite, i.e., whether there is an adequate remedy by appeal or otherwise,
8 and because it did not consider the special-cases exception to the second
prerequisite.
It is undeniably true here that the first prerequisite is met because there
is no adequate remedy by appeal. If a client is forced to trial without the
attorney of his choice, losing the services of a particular attorney is simply not
an appealable matter in a civil case. Issues that will be considered on appeal go
to the substantive issues, not to a collateral issue that has no direct bearing on
the legal issues in the case. Even an attorney not of one's choosing can
successfully try a case, resulting in nothing to appeal once the case is
concluded. And if the attorney makes mistakes that affect the outcome of the
case adversely to the client, the remedy lies in a malpractice claim against the
lawyer, not in reversal of the case for another trial. 5 Thus while the question of
disqualification has been addressed during a trial, it cannot be the subject of a
direct appeal based on the outcome of the trial. This effectively means that
unless trial courts are to be allowed to rule in a vacuum as to who can
represent a litigant—a situation rife with potential for abuse—there must be
some avenue of review, either through an interlocutory appeal or a writ action.
And denial of the right to counsel of choice has never fallen within the small
class of cases in which interlocutory appeals are allowed.
And it is certainly problematic if a decision of a trial court to disqualify
an attorney cannot be adequately reviewed on appeal. The effect of this is to
5 That is not necessarily the case if the trial court declines to disqualify the
attorney and it turns out the attorney had an actual conflict. If the party claiming the conflict loses, the disqualification could taint the judgment and allow reversal. See, e.g., Whitaker v. Commonwealth, 895 S.W.2d 953, 954-58 (Ky. 1995). 9 allow trial court action that gets no review, regardless of the propriety of the
ruling. The unreviewability of the decision is troubling, given that if the shoe
were on the other foot, with the trial court declining to disqualify a lawyer with
an actual conflict, a writ would certainly be an appropriate remedy. See
Commonwealth v. Maricle, 10 S.W.3d 117, 121 (Ky. 1999). While this concern
may not go directly to a finding of irreparable harm, it raises alarm bells about
the orderly administration of justice.
As to this second test, whether the Appellants can show great injustice
and irreparable injury, it is true that we have stated recently that the denial of
counsel of choice in a civil case did not rise to this level. See Robertson v.
Burdette, 397 S.W.3d 886, 890 (Ky. 2013). But we did not say in that case that
denial of counsel of choice could never rise to the level of great injustice and
irreparable injury. In fact, we held that the appellant had failed to make the
requisite showing "[u]nder the circumstances described" in that case, id. at
891, while noting, and distinguishing, another case in which this Court had
previously found that a trial court's disqualification of a lawyer had risen to the
level of great injustice and irreparable injury and thus justified a writ, id. at
890 (discussing Zurich Ins. Co. v. Knotts, 52 S.W.3d 555 (Ky. 2001)).
More importantly, we did not address the special-cases exception in
Robertson beyond noting that the appellant had not argued the exception and
summarily concluding in a footnote that the case did not fall under it. See id.
at 890 n.4. Although the Appellants have likewise not argued in favor of the
exception, this Court cannot so readily dismiss its applicability in this case.
And this case is readily distinguished from Robertson factually, given that the 10 trial judge in Robertson found the existence of an actual conflict of interest,
whereas the judge in this case found only an appearance of impropriety. Unlike
Robertson, this case is a prime example of when the special-cases exception
could apply, at least when considered in light of this Court's decision as to the
appearance-of-impropriety standard as laid out below.
In disqualifying MGM, the trial judge, to his credit, was simply following
precedent, namely, Lovell v. Winchester, 941 S.W.2d 466 (Ky. 1997). He
justified the disqualification because he saw an appearance of impropriety. He
was bound by this Court's decision to apply that standard.
But this Court is not so bound, except by the force of stare decisis. And
this Court has concluded that disqualification based on an appearance of
impropriety is inappropriate under the existing Rules of Professional Conduct.
It is telling that the appearance-of-impropriety standard does not appear in
those rules, except in commentary condemning its use and noting that it has
been deleted from the rules. See SCR 3.130-1.9 Sup. Ct. Cmt. 5 (2009).
Although this Court has previously upheld the use of that standard in deciding
lawyer disqualification questions in Lovell, 941 S.W.2d at 469, the standard
must now be rejected. Disqualification under that standard is "little more than
a question of subjective judgment by the former client." SCR 3.130-1.9 Sup. Ct.
Cmt. 5. In essence, all the former client has to do is claim discomfort with the
subsequent representation to create the appearance that something untoward
is going on and thus that there is an appearance of impropriety. Moreover,
"since 'impropriety' is undefined, the term 'appearance of impropriety' is
question-begging." Id. Even if impropriety is the same as an actual conflict, 11 there should be something more substantive than just a possible conflict before
disqualification takes place.
The simple fact is that disqualification is easier to achieve under the
appearance-of-impropriety standard. While that is appropriate for judicial
recusal questions, see SCR 4.300, Canon 2 ("A judge shall avoid impropriety
and the appearance of impropriety in all of the judge's activities."), because
there is a heightened concern about public confidence in the judiciary, that
concern is less pressing when dealing with the private lawyer-client
relationship. If anything, use of such a low standard in that context creates a
"greater ... likelihood of public suspicion of both the bar and the judiciary" and
"would ultimately be self-defeating," Woods v. Covington County Bank, 537 F.2d
804, 813 (5th Cir. 1976), because it creates the impression that courts are
ruling based on appearances rather than facts. Before a lawyer is disqualified
based on a relationship with a former client or existing clients, the complaining
party should be required to show an actual conflict, not just a vague and
possibly deceiving appearance of impropriety. And that conflict should be
established with facts, not just vague assertions of discomfort with the
representation.•
There is no doubt that personal choice of representation is based on a
litigant's belief in the competency of chosen counsel, and the confidence placed
in counsel. Even though all practicing lawyers are presumed to be competent,
common sense dictates that not all lawyers share the same degree of
competence. Otherwise, clients would not care who their lawyers were, and
there would be little competition among lawyers for business. A litigant has the 12 reasonable expectation that he will have the best representation he can and is
willing to afford, and taking his chosen counsel away based on an "appearance"
alone creates the belief that the court is arbitrary or capricious. That
undermines faith in the judicial process, which, in turn, clearly affects the
orderly administration of justice negatively in general and, in that specific case,
irreparably. On the other hand, specific findings of an actual conflict refute
arbitrariness, and promote faith in the fairness of the proceeding.
Lovell applied a standard that is no longer a part of the Rules of
Professional Conduct and is simply inadequate to preserve the interests
involved when a conflict of interest is alleged. To the extent that Lovell and
other cases have approved the appearance-of-impropriety standard, they are
overruled. Instead, in deciding disqualification questions, trial courts should
apply the standard that is currently in the Rules of Professional Conduct,
which at this time requires a showing of an actual conflict of interest.
To resolve that question, the trial court must hold an evidentiary
hearing. And before disqualifying counsel, the court must find that an actual
conflict exists, and state on the record what that conflict is. To the extent that
the trial judge did not do this, consideration of a special-cases writ is
appropriate in this case. Thus, a writ is available as a remedy.
Moreover, this Court concludes that the writ should issue. In many ways,
the trial court in this case complied with what we require today for
disqualification of counsel. The trial court ordered briefing on the
disqualification issue, and conducted multiple hearings. The court heard
evidence and did not rely merely on allegations in motions and pleadings. And, 13 as noted above, the trial court applied the standard previously approved by this
Court.
But, also as noted above, that standard is no longer appropriate under
the Rules of Professional Conduct. A mere appearance of impropriety, as found
by the trial court in this case, cannot support disqualification of counsel. Such
an extreme remedy must be based on an actual conflict of interest. And the
trial court's order specifically stated it was not finding an actual impropriety,
that is, an actual conflict.
Although the Court's order stated that MGM had represented ADT at the
same time that it represented individuals adverse to ADT, that does not, by
itself, support disqualification in the shareholder-derivative suit. First, it is not
entirely clear that MGM actually represented the corporation when providing
advice on whether to settle the Bioniche litigation. In fact, the trial court's order
specifically states that it "makes no findings on whether Miller and MGM
provided legal advice in their capacity as representatives of Conway and
Marcum or with the intent to represent ADT in settlement negotiations with
Bioniche." And ADT, as a corporate entity, had been represented by other
counsel in that litigation. Although Plante has argued that MGM represented
the corporation, whether that was actually the case is less than clear. Thus,
the concern that MGM may have been both for and against ADT at the same
time may be unfounded. At the very least, there are insufficient findings in the
trial court's order to show an actual conflict.
Second, even if there was an actual conflict when MGM advised the
board about the Bioniche litigation, while also representing Marcum and 14 Conway against ADT, that conflict only extended to the Bioniche litigation.
Once that case settled, and the Marcum-Conway case was dismissed, there
was no longer a conflict stemming from the simultaneous representation—and
certainly not one that extends to the derivative suit underlying this action.
For that reason, this Court concludes the trial court's disqualification
order was improper under the standard articulated today. A writ of prohibition
barring its enforcement is the appropriate remedy.
This is not to say, however, that Plante cannot show a sufficient conflict
to have MGM disqualified once this case returns to the trial court. It is possible
that by advising the board, of which Plante was a member, about the Bioniche
litigation, MGM was representing Plante. Since the allegedly improper
resolution of the Bioniche litigation is part of the underlying derivative suit,
among other things, it is possible that MGM may have an actual conflict under
Rule of Professional Conduct 1.9, which governs duties to former clients. There
has also been some suggestion that MGM now represents the entire board,
including Plante, in the derivative action, although only the Appellants appear
to have been named as defendants. If MGM is representing the entire board,
that could give rise to a conflict with an existing client under Rule 1.7.
But the focus in the trial court appears not to have been these possible
conflicts, but the conflict that previously existed in the Bioniche litigation itself.
Regardless, the trial court's order does not have findings sufficient to show
such a conflict based on duties to former clients, and this Court cannot make
such findings, especially based on the limited record in a writ action. If the
issue is raised again in the trial court, it will be necessary to establish exactly 15 who represents and has represented whom, and when the representation
occurred before the conflict issues can be resolved. It will also be necessary to
establish the precise relationship of the parties to each other and in what
capacities they have sued or been sued.
III. Conclusion
The Court concludes that review of the disqualification order in this case
is available through the special-cases exception for writs. Further, this Court
concludes the trial court applied a disqualification standard that is no longer
appropriate under the Rules of Professional Conduct, and that the trial court's
factual findings are insufficient to allow disqualification under the proper
standard of a showing of actual conflict. For those reasons, a writ of prohibition
barring enforcement of the trial court's order is appropriate at this time, even
though the issue of disqualification may be revisited in the trial court. The
Court of Appeals' decision to deny the writ is therefore reversed, and this
matter is remanded to that court to issue the writ.
All sitting. Minton, C.J.; Abramson, Barber, Cunningham, Keller, JJ.,
concur. Venters, J., concurs in result only by separate opinion.
VENTERS, J., CONCURRING IN RESULT ONLY: I concur in the result
reached by the Majority, but I believe it is unnecessary to invoke the "special"
case writ. As the majority holds, the trial court's disqualification of Appellants'
trial counsel on the mere appearance of a conflict of interest, rather than a
finding of an actual conflict of interest, was error. However, I am satisfied that
the erroneous disqualification of one's trial counsel does irreparable damage to
the attorney-client relationship, an injury for which there exists no adequate 16 remedy by way of appeal or otherwise. Therefore, I believe Appellant's are
entitled to relief under the more conventional "second-class" writ recognized in
Hoskins. I would reserve the "special" case writ for circumstances that more
generally jeopardize the orderly administration of justice in the Commonwealth.
COUNSEL FOR APPELLANTS:
Thomas W. Miller Elizabeth C. Woodford Michelle Lynn Hurley Miller, Griffin 85 Marks, PSC 271 West. Short Street, Suite 600 Lexington, Kentucky 40507
APPELLEE:
Hon. Ernesto Scorsone Judge, Fayette Circuit Court Robert F. Stephens Courthouse 120 North Limestone Lexington, Kentucky 40507
COUNSEL FOR REAL PARTY IN INTEREST:
William B. Rambicure Miller Wells, PLLC 300 East Main Street, Suite 360 PO Box 34188 Lexington, Kentucky 40507-1464
Albert F. Grasch, Jr. Crista Dittert Hollingsworth James L. Thomerson Grasch Law, PSC 302 West High Street Lexington, Kentucky 40507