In Re Epic Holdings, Inc.

985 S.W.2d 41, 42 Tex. Sup. Ct. J. 235, 1998 Tex. LEXIS 162, 1999 WL 2518
CourtTexas Supreme Court
DecidedDecember 31, 1998
Docket96-1131, 96-1133
StatusPublished
Cited by199 cases

This text of 985 S.W.2d 41 (In Re Epic Holdings, Inc.) is published on Counsel Stack Legal Research, covering Texas Supreme Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
In Re Epic Holdings, Inc., 985 S.W.2d 41, 42 Tex. Sup. Ct. J. 235, 1998 Tex. LEXIS 162, 1999 WL 2518 (Tex. 1998).

Opinions

Justice HECHT

delivered the opinion of the Court,

in which Chief Justice PHILLIPS, Justice OWEN, Justice ABBOTT, Justice REX D. DAVIS (Assigned),1 and Justice STEPHEN B. ABLES (Assigned)2 join.

Three corporations and their former chief executive officer, defendants in certain pending litigation, contend in these two original mandamus proceedings that the lawyers representing plaintiff should be disqualified from doing so because they have violated Rule 1.09 of the Texas Disciplinary Rules of Professional Conduct, which provides in pertinent part:

(a)Without prior consent, a lawyer who personally has formerly represented a client in a matter shall not thereafter represent another person in a matter adverse to the former client:
(1) in which such other person questions the validity of the lawyer’s services or work product for the former client; [or]
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(3) if it is the same or a substantially related matter.
(b) [W]hen lawyers are or have become members of or associated with a firm, none of them shall knowingly represent a client if any one of them practicing alone would be prohibited from doing so by paragraph (a).
(c) When the association of a lawyer with a firm has terminated, the lawyers who were then associated with that lawyer shall not knowingly represent a client if the lawyer whose association with that firm has terminated would be prohibited from doing so by paragraph (a)(1).... 3

After hearing evidence from relators, the district court denied their motions to disqualify plaintiffs counsel. We conclude that plaintiffs counsel must be disqualified, and that the district court’s refusal to grant rela-tors’ motions was a clear abuse of discretion for which relators have no adequate appellate remedy.

I

In the litigation out of which these original mandamus proceedings arise, plaintiff Vicki Anderson alleges that Kenneth George, while chief executive officer of EPIC Holdings, [44]*44Inc., and two other directors of that corporation breached their fiduciary duties by exorbitantly compensating themselves and other executives in connection with the acquisition of EPIC Holdings’ by HealthTrust, Inc.-The Hospital Company. Anderson also alleges that HealthTrust conspired to assist the directors in their self-dealing in order to gain their approval of the acquisition.

George has moved to disqualify Anderson’s legal counsel under Rule 1.09, contending that the pending case is substantially related to matters in which their former law firm, Johnson & Gibbs, represented George and an EPIC Holdings’ subsidiary, EPIC Healthcare Group, Inc., and that Anderson’s counsel are questioning the work Johnson & Gibbs did for George and EPIC Healthcare. These two EPIC companies and another EPIC Holdings’ subsidiary, EPIC Healthcare Management Company, none of which is presently named as a defendant in Anderson’s lawsuit, have intervened in that suit to move to disqualify Anderson’s counsel for the same reasons urged by George. Anderson denies that her lawyers have violated Rule 1.09 and counters that relators have waived their disqualification claims. Following the district court’s denial of the motions to disqualify, George and the three EPIC companies initiated the mandamus proceedings now before us. Before we set out in more detail the parties’ contentions here, we recount, first, the events that led to the pending litigation and the issues raised by the motions to disqualify, and then the proceedings in the courts below.

A

In 1988, American Medical International, a for-profit hospital company, decided to divest itself of more than thirty of its lower revenue-producing hospitals and offered Kenn George, a senior vice president, the opportunity to become chief executive officer of the new corporation formed to acquire the hospitals. George accepted the offer and recruited two other AMI vice presidents, Marliese E. Mooney and Thomas T. Schleck, to go with him. The new company was to be owned largely by its several thousand employees through common stock allocated to their retirement income accounts as permitted by the federal Employee Retirement Income Security Act.4 Vesting ownership in its employees afforded the new company favorable treatment under federal tax laws, strong-incentives for employee industry and loyalty, and good publicity.

The new corporation, EPIC Healthcare Group, Inc., acquired the hospitals from AMI in exchange for cash, notes, preferred stock, and assumption of debt. EPIC Healthcare’s common stock was issued to an employee stock ownership plan — an “ESOP” — for cash borrowed from various lenders. The ESOP’s stock was pledged to secure these loans. Each year EPIC Healthcare contributed retirement benefits to the ESOP that were equal to the principal and interest payments on the loans. As the ESOP used the contributions to pay down the debt, the stock was released and allocated to individual employees’ retirement accounts. Some of AMI’s preferred stock was convertible to common stock, and EPIC Healthcare could issue common stock for other purposes. But even when the ESOP’s interest was fully diluted, it would remain the majority owner of EPIC Healthcare.

The ESOP stock was voted by a trustee. Employees to whose accounts stock was allocated were entitled to direct the trustee’s vote of that stock — a right referred to as “pass-through voting” — -but only on certain fundamental matters such as mergers and liquidations, not on election of directors. In voting for directors, and in voting the stock that remained pledged as security, the trustee was subject to direction by the committee overseeing the plan. The members of the ESOP Committee, as well as the trustee, were named by EPIC Healthcare’s board of directors, which was always dominated by George and his management team. The directors’ control of the ESOP trustee through the ESOP Committee gave them complete control of the corporation, even though they owned no stock themselves. In 1991, employees’ pass-through voting rights were enlarged to include election of EPIC [45]*45Healthcare’s directors, and in later years the preferred stock AMI held was converted to common stock and EPIC Healthcare issued common stock to others besides the ESOP. Even with these changes, however, there could be no serious threat to the directors’ effective control of the corporation until almost all the ESOP’s stock was allocated to individual employees’ retirement accounts, thereby giving the employees the right to vote a majority of EPIC Healthcare’s outstanding stock.

George and his senior management were employed by EPIC Healthcare Management Company, a wholly owned subsidiary of EPIC Healthcare. Incentive compensation, mostly to senior executives, was provided in the form of stock appreciation rights— “SARs” — convertible to cash or stock under certain conditions. SARs minimized the tax consequences of the incentive compensation to George and the other executives. The SAR plan was administered by a committee appointed by EPIC’s board and thus controlled by George.

We have described only those basic elements of EPIC Healthcare’s structure necessary to place in perspective the issues before us. Our brief summary belies the complexity of the transaction.

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Bluebook (online)
985 S.W.2d 41, 42 Tex. Sup. Ct. J. 235, 1998 Tex. LEXIS 162, 1999 WL 2518, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-epic-holdings-inc-tex-1998.