09-3716-cv In re MetLife Demutualization Litigation
1 UNITED STATES COURT OF APPEALS 2 3 FOR THE SECOND CIRCUIT 4 5 6 August Term, 2009 7 8 (Argued: September 3, 2009 Decided: September 29, 2009) 9 10 Docket No. 09-3716-cv 11 12 - - - - - - - - - - - - - - - - - - - -x 13 14 DARREN F. MURRAY, MARY A. DEVITO, KEVIN L. HYMS, HARRY S. 15 PURNELL III, KATHY VANDERVEUR, and MICHAEL A. GIANNATTASIO, 16 17 Plaintiffs-Appellees, 18 19 - v.- 20 21 METROPOLITAN LIFE INSURANCE COMPANY and METLIFE, INC., 22 23 Defendants-Appellants. 24 25 - - - - - - - - - - - - - - - - - - - -x 26
27 Before: JACOBS, Chief Judge, WESLEY and HALL, 28 Circuit Judges. 29 30 Defendants-appellants Metropolitan Life Insurance
31 Company and MetLife, Inc. appeal an order of the United
32 States District Court for the Eastern District of New York
33 (Platt, J.), disqualifying its counsel Debevoise & Plimpton
34 LLP shortly before trial. On September 22, 2009, this Court
35 reversed the disqualification order, with opinion to follow.
36 This is that opinion. 1 TERESA WYNN ROSEBOROUGH, KEVIN 2 S. FINNEGAN, DUNCAN J. LOGAN, 3 Metropolitan Life Insurance 4 Company, New York, New York; 5 MICHAEL B. MUKASEY, MARY JO 6 WHITE, BRUCE E. YANNETT, MARK P. 7 GOODMAN, Debevoise & Plimpton 8 LLP, New York, New York, for 9 Appellants. 10 11 JARED B. STAMELL, Stamell & 12 Schager, LLP, New York, New York 13 (John C. Crow, David K. Bowles, 14 Robert A. Skirnick, and Samantha 15 H. Evans, on the brief), for 16 Appellees. 17 18 DENNIS JACOBS, Chief Judge: 19 20 Plaintiffs in this class action were policyholders of
21 Metropolitan Life Insurance Company when it was a mutual
22 insurance company. They complain that they were misled and
23 shortchanged in the transaction by which the company
24 demutualized in 2000. Nine years after the action was
25 commenced and five weeks before trial was scheduled to
26 begin, plaintiffs moved to disqualify the lead counsel for
27 Metropolitan Life Insurance Company and MetLife, Inc.
28 (“MetLife”), Debevoise & Plimpton LLP (“Debevoise”). The
29 grounds alleged related to that firm’s representation of
30 MetLife in the underlying demutualization. The United
31 States District Court for the Eastern District of New York
32 (Platt, J.) granted the motion to disqualify on September 1;
2 1 the district court then stayed its order and immediately
2 certified the issue to this Court pursuant to 28 U.S.C.
3 § 1292(b). We accepted the certification on September 2,
4 and on September 3 we heard oral argument. After time
5 allotted for additional briefing, a short delay caused by
6 the recusal of two judges, and the observance of national
7 and religious holidays, we reversed the disqualification by
8 order dated September 22, with opinion to follow. This is
9 that opinion.
10 The district court disqualified Debevoise on the ground
11 that its representation of MetLife in the 2000
12 demutualization made it counsel to the policyholders as
13 well. On appeal, plaintiffs urge affirmance on that ground,
14 and also on the independent ground that the witness-advocate
15 rule requires disqualification because four Debevoise
16 lawyers who worked on the demutualization will give
17 testimony adverse to MetLife at trial.
18 We conclude that (i) Debevoise did not have an
19 attorney-client relationship with the policyholders by
20 virtue of its representation of MetLife; and (ii) plaintiffs
21 have failed to establish that the purported violation of the
22 witness-advocate rule in this case would warrant
3 1 disqualification. Accordingly, we reverse.
2 I
3 In 1915, MetLife converted from a stock life insurance
4 company to a mutual insurance company. On April 7, 2000,
5 MetLife completed a months-long process of demutualization
6 back to a stock insurance company. Debevoise served as
7 MetLife’s corporate counsel in that transaction.
8 On April 18, 2000, plaintiffs filed this class action
9 lawsuit in the Eastern District of New York, alleging that
10 MetLife violated federal securities laws by misrepresenting
11 or altogether omitting certain information from the
12 materials provided to its policyholders during the
13 demutualization process. In June 2007, MetLife invoked the
14 attorney-client privilege to prevent plaintiffs’ discovery
15 of particular communications between MetLife and its in-
16 house and outside counsel. The district court denied a
17 protective order on the ground that the plaintiff
18 policyholders were the owners of the mutual company and were
19 therefore clients of Debevoise during the demutualization.
20 Following discovery and the usual preliminaries, the
21 trial was set to begin on September 8, 2009. When last-
22 minute settlement negotiations failed, plaintiffs moved to
4 1 disqualify Debevoise on July 31, 2009--more than nine years
2 after the action was commenced, more than two years after
3 the court ruled that plaintiffs were clients of Debevoise,
4 and five weeks before trial. Plaintiffs argued that
5 disqualification was appropriate for the same reason
6 articulated by the district court to support its 2007
7 discovery ruling: Debevoise had been counsel to plaintiffs
8 in the demutualization and cannot now jump sides to become
9 adverse to plaintiffs at trial. Plaintiffs also argued that
10 disqualification was required by the witness-advocate rule,
11 because four Debevoise lawyers are scheduled to testify
12 about disclosures and documents related to the
13 demutualization.
14 MetLife’s response invoked the doctrine of laches;
15 argued that as a matter of law the policyholders of a mutual
16 insurance company are not a priori the clients of that
17 company’s corporate counsel; denied that the testimony of
18 the Debevoise lawyers would be adverse to MetLife (or even
19 significant); and charged that the motion was made for
20 improper tactical purposes.
21 On September 1, the district court granted plaintiffs’
22 motion and disqualified Debevoise. The following colloquy
5 1 explains the court’s decision:
2 [MetLife]: . . . [B]ut Debevoise represents in 3 this litigation MetLife Inc. and 4 Metropolitan Life Insurance Company, 5 and not the shareholders of MetLife 6 Inc. 7 8 The Court: I understand that and that’s the 9 result of the demutualization 10 process, and I fully understand 11 that. But the problem is whether 12 your representation of the 13 policyholders which turned into a 14 representation of the corporation is 15 tainted because of a conflict. 16 17 [MetLife]: And your Honor is aware that our 18 position is that Debevoise & 19 Plimpton never represented the 20 policyholders of Metropolitan Life 21 Insurance Company or--either before 22 this litigation began or presently. 23 24 The Court: You did represent the policyholders, 25 because there was--they were the 26 corporation. That’s the problem. 27 The problem was that all of the 28 former or the policyholders were the 29 owners of the corporation. So you 30 represented them and the track if 31 you will because there was no--they 32 were your clients. 33 34 Having granted the motion, the court immediately stayed
35 its order and certified the following question to this
36 Court: “Should Debevoise & Plimpton be disqualified from
37 representing MetLife in this case based on a conflict of
38 interest[?]” We accepted certification and now reverse.
6 1 II
2 Plaintiffs argue that the district court’s 2007
3 discovery ruling (that plaintiffs are clients of Debevoise)
4 is now law of the case, which we lack jurisdiction to
5 review. We conclude, first, that we have jurisdiction to
6 consider the question; and second, that under New York law,
7 the policyholders of a mutual insurance company are not the
8 clients of that company’s outside counsel. New York law is
9 applicable to this case because Metropolitan Life Insurance
10 Company was a mutual life insurance company that was
11 reorganized into a stock insurance company under New York
12 law, with its principal place of business in New York, doing
13 business in all fifty states.
14 Under 28 U.S.C. § 1292(b), a district court can certify
15 a question for interlocutory appeal if the issue “involves a
16 controlling question of law as to which there is substantial
17 ground for difference of opinion and [if] an immediate
18 appeal from the order may materially advance the ultimate
19 termination of the litigation.” In ruling on a certified
20 question of law, “we have the discretion to entertain an
21 appeal of another ruling of the district court if the two
22 rulings were ‘inextricably intertwined’ or if ‘review of the
7 1 [latter] decision was necessary to ensure meaningful review
2 of the former.’” Ross v. Am. Express Co., 547 F.3d 137, 142
3 (2d Cir. 2008) (quoting In re Methyl Tertiary Butyl Ether
4 (“MTBE”) Prods. Liab. Litig., 488 F.3d 112, 122 (2d Cir.
5 2007) (quoting Swint v. Chambers County Comm’n, 514 U.S. 35,
6 51 (1995))); see also Golino v. New Haven, 950 F.2d 864, 868
7 (2d Cir. 1991) (“[W]here we have jurisdiction to consider
8 some questions on appeal, we may exercise our discretion to
9 take pendent jurisdiction over related questions.”).
10 The district court’s 2007 and 2009 decisions are
11 clearly related. In 2007, the court determined that prior
12 to demutualization, “MetLife’s policyholders were the
13 clients for MetLife’s in-house and outside counsel, because
14 they were MetLife’s beneficiaries and the beneficiaries of
15 MetLife counsel’s advice.” In re MetLife Demutualization
16 Litig., 495 F. Supp. 2d 310, 314 (E.D.N.Y. 2007). The 2009
17 ruling explained similarly that “the problem, and
18 Debevoise’s problem, is they represented the policyholders
19 up until the day on the closing when they walked over across
20 the aisle and started representing the stockholders, if you
21 will, and [ ] the corporation more exactly . . . .” Because
22 these two rulings are “inextricably intertwined,” we have
8 1 jurisdiction to decide whether plaintiffs were, in fact,
2 clients of Debevoise.
3 III
4 We conclude that plaintiffs were not clients of
5 Debevoise. It is well-settled that outside counsel to a
6 corporation represents the corporation, not its shareholders
7 or other constituents. Evans v. Artek Sys. Corp., 715 F.2d
8 788, 792 (2d Cir. 1983) (“A ‘corporate attorney’--whether an
9 in-house lawyer or a law firm that serves as counsel to the
10 company--owes a duty to act in accordance with the interests
11 of the corporate entity itself. [The] client is the
12 corporation.”). This rule is entirely consonant with Rule
13 1.13 of the New York Rules of Professional Conduct, N.Y. R.
14 Prof’l Conduct § 1.13(a) (“[A] lawyer employed or retained
15 by an organization . . . is the lawyer for the organization
16 and not for any of the constituents.”), and with the
17 Restatement (Third) of the Rule Governing Lawyers, § 96 cmt.
18 b (explaining that a lawyer retained by a corporation has an
19 attorney-client relationship with the corporation, but the
20 lawyer “does not thereby also form a client-lawyer
21 relationship with all or any individuals employed by it or
22 who direct its operations or who have an ownership or other
9 1 beneficial interest in it, such as shareholders”).
2 These principles apply as well to a mutual insurance
3 company. Under New York law, “[a] mutual insurance company
4 is a cooperative enterprise in which the policyholders
5 constitute the members for whose benefit the company is
6 organized, maintained and operated.” Fid. & Cas. Co. of
7 N.Y. v. Metro. Life Ins. Co., 248 N.Y.S.2d 559, 565 (N.Y.
8 Sup. Ct. 1963). But a policyholder, “even in a mutual
9 company, [is] in no sense a partner of the corporation which
10 issued the policy, and . . . the relation between the
11 policy-holder and the company [is] one of contract, measured
12 by the terms of the policy.” Uhlman v. N.Y. Life Ins. Co.,
13 17 N.E. 363, 365 (N.Y. 1888).
14 The district court’s 2007 decision reasoned that
15 plaintiffs were clients of Debevoise during the
16 demutualization “because they were MetLife’s beneficiaries
17 and the beneficiaries of MetLife counsel’s advice.” In re
18 MetLife Demutualization Litig., 495 F. Supp. 2d 310, 314 (2d
19 Cir. 2007). But this does not distinguish a mutual
20 insurance company from any other corporation.
21 Not every beneficiary of a lawyer’s advice is deemed a
22 client. See N.Y. R. Prof’l Conduct 2.3(a) (“A lawyer may
10 1 provide an evaluation of a matter affecting a client for the
2 use of someone other than the client if the lawyer
3 reasonably believes that making the evaluation is compatible
4 with other aspects of the lawyer’s relationship with the
5 client.”) (emphasis added); see also Fiala v. Metro. Life
6 Ins. Co., 6 A.D.3d 320, 322, 776 N.Y.S.2d 29, 32 (1st Dep’t
7 2004) (“[A]n insurance company does not owe its policyholder
8 a common-law fiduciary duty except when it is called upon to
9 defend its insured.”); N.Y. State Bar Ass’n, Comm. on Prof’l
10 Ethics, Op. No. 477 (1977) (explaining that the lawyer for
11 the executor of an estate need not provide substantive legal
12 advice to potential beneficiaries because doing so would
13 violate the lawyer’s duty to provide undivided loyalty to
14 his client, the executor).
15 In light of these principles, and without any
16 extraordinary circumstances raised by the parties, we
17 conclude that the policyholders in this case were not
18 clients of Debevoise.
19 IV
20 Plaintiffs make the separate argument that
21 disqualification of Debevoise is proper by virtue of the
22 witness-advocate rule set out in Rule 3.7 of the New York
11 1 Rules of Professional Conduct. Subsection (a) of the Rule
2 provides, with certain exceptions, that “[a] lawyer shall
3 not act as an advocate before a tribunal in a matter in
4 which the lawyer is likely to be a witness on a significant
5 issue of fact.” N.Y. R. Prof’l Conduct § 3.7(a).
6 Subsection (b) is broader, as it addresses imputation: “A
7 lawyer may not act as an advocate before a tribunal in a
8 matter if . . . another lawyer in the lawyer’s firm is
9 likely to be called as a witness on a significant issue
10 other than on behalf of the client, and it is apparent that
11 the testimony may be prejudicial to the client.” See N.Y.
12 R. Prof’l Conduct § 3.7(b)(1).
13 Rule 3.7 lends itself to opportunistic abuse. “Because
14 courts must guard against the tactical use of motions to
15 disqualify counsel, they are subject to fairly strict
16 scrutiny, particularly motions” under the witness-advocate
17 rule. Lamborn v. Dittmer, 873 F.2d 522, 531 (2d Cir. 1989).
18 The movant, therefore, “bears the burden of demonstrating
19 specifically how and as to what issues in the case the
20 prejudice may occur and that the likelihood of prejudice
21 occurring [to the witness-advocate’s client] is
22 substantial.” Id. “Prejudice” in this context means
12 1 testimony that is “sufficiently adverse to the factual
2 assertions or account of events offered on behalf of the
3 client, such that the bar or the client might have an
4 interest in the lawyer’s independence in discrediting that
5 testimony.” Id.
6 As this definition suggests, the showing of prejudice
7 is required as means of proving the ultimate reason for
8 disqualification: harm to the integrity of the judicial
9 system. We have identified four risks that Rule 3.7(a) is
10 designed to alleviate: (1) the lawyer might appear to vouch
11 for his own credibility; (2) the lawyer’s testimony might
12 place opposing counsel in a difficult position when she has
13 to cross-examine her lawyer-adversary and attempt to impeach
14 his credibility; (3) some may fear that the testifying
15 attorney is distorting the truth as a result of bias in
16 favor of his client; and (4) when an individual assumes the
17 role of advocate and witness both, the line between argument
18 and evidence may be blurred, and the jury confused. Ramey
19 v. Dist. 141, Int’l Ass’n of Machinists & Aerospace Workers,
20 378 F.3d 269, 282-83 (2d Cir. 2004) (internal citations and
21 alterations omitted). These concerns matter because, if
22 they materialize, they could undermine the integrity of the
13 1 judicial process. See Hempstead Video, Inc. v. Inc. Vill.
2 of Valley Stream, 409 F.3d 127, 132 (2d Cir. 2005) (“The
3 authority of federal courts to disqualify attorneys derives
4 from their inherent power to preserve the integrity of the
5 adversary process.”) (internal quotation marks omitted); see
6 also id. (emphasizing “the need to maintain the highest
7 standards of the profession”) (internal quotation marks
8 omitted).
9 In imputation cases (Rule 3.7(b)), the witness is not
10 acting as trial counsel; these concerns are therefore
11 “absent or, at least, greatly reduced.” Ramey, 378 F.3d at
12 283 (internal quotation marks omitted); see also A.B.A.
13 Model Rules of Prof’l Conduct § 3.7 cmt. 5 (“Because the
14 tribunal is not likely to be misled when a lawyer acts as
15 advocate in a trial in which another lawyer in the lawyer’s
16 firm will testify as a necessary witness, [Model Rule
17 3.7(b)] permits the lawyer to do so except in situations
18 involving a conflict of interest.”). Accordingly,
19 disqualification by imputation should be ordered sparingly,
20 see Kubin v. Miller, 801 F. Supp. 1101, 1114 (S.D.N.Y.
21 1992), and only when the concerns motivating the rule are at
22 their most acute.
14 1 Therefore, we now hold that a law firm can be
2 disqualified by imputation only if the movant proves by
3 clear and convincing evidence that [A] the witness will
4 provide testimony prejudicial to the client, and [B] the
5 integrity of the judicial system will suffer as a result.
6 This new formulation is consistent with our prior efforts to
7 limit the tactical misuse of the witness-advocate rule.
8 See, e.g., Lamborn, 873 F.2d at 531.
9 A
10 In this case, four Debevoise lawyers are likely to be
11 called to testify at trial. Three of them are transactional
12 lawyers who are not and will not be trial advocates; the
13 fourth, a litigator, is a member of the trial team, but will
14 not act as an advocate before the jury. None of these
15 witnesses, then, is properly considered trial counsel for
16 purposes of Rule 3.7(a). See Ramey, 378 F.3d at 283 (“The
17 advocate-witness rule applies, first and foremost, where the
18 attorney representing the client before a jury seeks to
19 serve as a fact witness in that very proceeding.”) (first
20 emphasis added). If the rule applies here at all,
21 therefore, it will be subsection (b) (imputation), and
22 plaintiffs do not contend otherwise.
15 1 B
2 The parties dispute whether the Debevoise lawyer-
3 witnesses will give testimony so prejudicial to MetLife that
4 the integrity of the judicial system may be threatened and
5 disqualification warranted. Our review of the record
6 suggests that the Debevoise witnesses will do little more
7 than authenticate documents and confirm facts that do not
8 appear to be in dispute. For example, plaintiffs state that
9 they intend to use the testimony of Wolcott Dunham, a
10 Debevoise transactional lawyer, to show that MetLife
11 “intentionally or recklessly omitted material facts from the
12 prospectus.” A review of the cited deposition excerpts,
13 however, reveals only that Dunham testified that it was
14 inaccurate to characterize a policyholder’s interest in the
15 company as “ownership.” MetLife argues that this testimony
16 is not adverse to its position in this litigation.
17 Plaintiffs assert that MetLife is wrong, but do not explain
18 why.
19 Plaintiffs contend that they will use the testimony of
20 James Scoville, another Debevoise transactional lawyer, to
21 establish that “MetLife revealed that a significant portion
22 of the value of the Demutualization that it had said was set
16 1 aside for policyholders was in fact earmarked for new
2 stockholders.” A review of the cited deposition testimony,
3 however, shows that Scoville testified only to what various
4 written documents clearly state. It appears that at most
5 Scoville will be asked to authenticate those documents. And
6 the same is true for the remaining witnesses.
7 We doubt that, on this record, the testimony at issue
8 is sufficiently prejudicial to MetLife to warrant
9 disqualification. We recognize, however, that we are not in
10 a good position to answer this question; and there is no
11 finding by the district court on this issue of fact.
12 Even if we assume that some portion of the Debevoise
13 lawyers’ testimony will be adverse to MetLife (when
14 considered in a context that we cannot fully evaluate or
15 appreciate on this interlocutory appeal), plaintiffs have
16 failed to establish the clear and convincing evidence of
17 prejudice necessary to justify the extreme remedy of
18 disqualification by imputation.
19 First (as noted above), the concerns motivating Rule
20 3.7 are attenuated where, as here, the witness-“advocate” is
21 not someone who will be trying the case to the jury.
22 Therefore, plaintiffs seeking disqualification under Rule
17 1 3.7(b) must make a considerably higher showing of prejudice
2 than would be required under Rule 3.7(a). From the outset,
3 then, we are inclined to conclude that disqualification is
4 inappropriate in this case.
5 Second, MetLife’s desire to keep Debevoise as its trial
6 counsel, plainly evidenced by MetLife’s position in this
7 appeal, militates strongly against a finding of prejudice.
8 This appeal has been prosecuted in large part by MetLife’s
9 in-house lawyers, who have argued to this Court that
10 disqualification was improper and that Debevoise should be
11 reinstated, notwithstanding that Debevoise non-advocate
12 lawyers are scheduled to testify as fact witnesses during
13 trial. We are reluctant to conclude that MetLife, a
14 sophisticated client with sophisticated in-house counsel,
15 has a radically defective understanding of the case after
16 nine years of litigation.
17 C
18 Even if plaintiffs could convince us that allowing
19 Debevoise to remain as MetLife’s trial counsel poses some
20 threat to the integrity of the judicial process, we must
21 also consider whether that vital interest may be harmed by
22 disqualification. Parties have a well-recognized and
18 1 entirely reasonable interest in securing counsel of their
2 choice. Prospective jurors, who must leave their homes and
3 occupations to serve, have an interest in judicial
4 efficiency, an interest that we respect. Other litigants,
5 whose pending matters are affected or delayed by
6 developments in other cases, are also harmed by the
7 uncertainties caused by disqualification. And the public in
8 general has an interest in the swift and orderly
9 administration of justice.
10 In this case, disqualification would require MetLife to
11 retain new counsel. Appreciable time and money would be
12 spent to bring new counsel to the state of readiness that
13 Debevoise attained after more than nine years of work. And
14 other circumstances intensify the harm to MetLife: several
15 billions of dollars are at stake, the legal issues are
16 complex, pretrial litigation has been ongoing for more than
17 nine years, and disqualification occurred on the eve of
18 trial.
19 Finally, plaintiffs’ lengthy and unexcused delay in
20 bringing its motion to disqualify weighs against
21 disqualification. When plaintiffs filed this lawsuit in
22 2000, they knew that Debevoise had represented MetLife
19 1 during demutualization and that it would continue to
2 represent MetLife in this litigation. But plaintiffs did
3 not move to disqualify even when, seven years later, the
4 district court ruled that plaintiffs were clients of
5 Debevoise. Instead, plaintiffs waited until after
6 settlement negotiations broke down, five weeks before trial
7 was scheduled to begin, to finally file their motion.
8 Plaintiffs’ delay, which suggests opportunistic and
9 tactical motives, magnify the harms to the judicial system
10 that already inhere in any disqualification by imputation,
11 abuse the expectations of jurors, and has the general
12 tendency to impair rather than promote confidence in the
13 integrity of the judicial system.
14 The foregoing reasons, which weigh against finding an
15 adverse impact on the integrity of the judicial system,
16 reinforce our conclusion that plaintiffs have failed to show
17 by clear and convincing evidence that any of the Debevoise
18 lawyers’ testimony would be so prejudicial to MetLife that
19 the integrity of the judicial system would be threatened.
20 Consequently, the witness-advocate rule does not justify
21 disqualification in this case.
20 1 CONCLUSION
2 Based on the foregoing analysis, we reverse the
3 disqualification order and reinstate Debevoise as trial
4 counsel to MetLife in the underlying securities litigation.