Nathan v. Shea (In re Marks & Goergens, Inc.)

199 B.R. 922, 1996 Bankr. LEXIS 1138
United States Bankruptcy Court, E.D. Michigan·Decided August 29, 1996·No. Bankruptcy No. 93-52783; Adversary No. 95-4668·Published·Cited by 3 cases

Opinion

MEMORANDUM OPINION AND ORDER

STEVEN W. RHODES, Chief Judge.

The matter before the Court is the trustee’s motion to disqualify the law firm of Sommers, Schwartz, Silver & Schwartz from representing defendants John T. Shea and John F. Clark. The Court heard oral argument and took this matter under advisement. The Court concludes that the trustee’s motion should be granted.

I.

Shea and Clark are the majority shareholders and officers of the debtor. Sommers, Schwartz represented the debtor in April of 1993. The representation involved the sale of the debtor’s assets to defendant Paul Inman Associates.

Prior to the sale, the debtor had terminated all business operations. An involuntary chapter 7 was filed against the debtor on November 29, 1993.

Subsequently, in August of 1995, the trustee initiated this adversary proceeding. In the complaint, the trustee claims that the consideration paid by Paul Inman to the debtor for its assets in the April 1993 sale was for less than reasonably equivalent value. The trustee further claims that the sale enabled Shea and Clark to receive preferential transfers on account of their antecedent obligations and/or fraudulent conveyances on account of their stock interests in the debtor.

At the time the trustee filed the adversary, he was aware that Sommers, Schwartz might possibly represent Shea and Clark. Som-mers, Schwartz did not file their appearance until October 17, 1995. Three days later, when the Court held a status conference in the case, the conflict of interest issue was raised. The matter was not resolved at that time; the Court ordered Shea and Clark to answer the trustee’s complaint by November 6, 1995, and, as Paul Inman had filed a jury demand, issues regarding a jury trial were [924]*924discussed. The Court recommended the district court withdraw its reference, and an order withdrawing the reference was issued on November 21, 1995. In the meantime, Sommers, Schwartz filed an answer to the complaint on behalf of Shea and Clark.

The district court issued a scheduling order for the case in late December, 1995. Shortly thereafter, Paul Inman withdrew its jury demand. Consequently the case was referred back to this Court on February 8, 1996. The trustee brought this motion to disqualify Sommers, Schwartz almost immediately afterwards, on February 16, 1996.

II.

The trustee contends that Sommers, Schwartz’s representation of Shea and Clark violates Rules 1.9(a) and 1.10 of the Michigan Rules of Professional Conduct. Specifically, the trustee alleges that through its representation of the debtor, Sommers, Schwartz was privy to information regarding the facts and motivations underlying the April 1993 sale, the steps taken to sell the debtor’s assets, and the reasons why the sale was arranged as it was. The trustee contends this is significant because he is challenging the sale price and the fact that the sale enabled Shea and Clark to recover their equity from the debtor without satisfying creditor claims in full. The trustee maintains that Sommers, Schwartz possesses information about the debtor and the sale which can be used against the trustee in the present adversary. Additionally, the trustee asserts that valuable information regarding the debtor is unavailable or limited because of lack of cooperation from Sommers, Schwartz and/or attorney-client privileges in favor of Shea and Clark, to the prejudice of the estate.

The trustee further notes that Rule 3.7(b) of the Michigan Rules of Professional Conduct will be violated unless Sommers, Schwartz is disqualified because it is likely that one or more of the firm’s lawyers will be called as witnesses in the case.

Sommers, Schwartz contends that it should not be disqualified from representing Shea and Clark. First, Sommers, Schwartz argues that this adversary is not substantially related to its prior representation of the debtor. The firm maintains that it represented the debtor for approximately two weeks only, and that when it was retained, the allocation and economic structure of the April 1993 sale had already been agreed upon by the parties. In fact, Sommers, Schwartz asserts, it was Paul Inman Associates who dictated the terms of the sale. Second, Sommers, Schwartz asserts that it possesses no secrets of the debtor that might be divulged to harm the trustee in the present adversary. The firm maintains that any information it may have with respect to the debtor was obtained from Shea and Clark as shareholders and officers of the debtor, and that the debtor could not expect such information to be confidential. The law firm therefore contends that the trustee’s motion should be denied because the potential damage resulting from a breach of its duty of loyalty to the debtor would be de minimis. Moreover, Sommers, Schwartz suggests that the trustee’s motion is motivated by purely tactical considerations.1

III.

Rule 1.9(a) of the Michigan Rules of Professional Conduct provides:

A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client consents after consultation.

Further, under Rule 1.10(a), one lawyer’s disqualification under Rule 1.9(a) will be imputed to the lawyer’s entire firm.

Under Rule 1.9(a), when an attorney has been directly involved in a specific transaction, that attorney is prohibited from [925]*925later representing another client with materially adverse interests. In moving for disqualification, the former client need only demonstrate that an attorney-client relationship previously existed between itself and the attorney appearing on behalf of an adversary, and that the subject matter of the pending proceeding is substantially related to the prior representation. General Elec. Co. v. Valeron, 608 F.2d 265, 267 (6th Cir.1979), cert. denied, 445 U.S. 980, 100 S.Ct. 1318, 63 L.Ed.2d 763 (1980). A substantial relationship between the two representations exists if there are common factual questions, i.e., “ ‘if facts pertinent to problems for which the original legal services were sought are relevant to the subsequent litigation.’ ” Anchor Packing Co. v. Pro-Seal, Inc., 688 F.Supp. 1215, 1221 (E.D.Mich.1988) (quoting U.S. Football League v. National Football League, 605 F.Supp. 1448, 1459 (S.D.N.Y.1985)).

If the court determines that a substantial relationship exists, a presumption is created that the attorney will use information received from the former client in the ethical obligation to vigorously represent the present client, thus violating the ethical obligations of loyalty and confidence. Anchor Packing, 688 F.Supp. at 1221.

This presumption is generally not re-buttable. Id. at 1225 (citing Duncan v. Merrill Lynch, Pierce, Fenner & Smith, 646 F.2d 1020, 1028 (5th Cir.), cert. denied, 454 U.S. 895, 102 S.Ct. 394, 70 L.Ed.2d 211 (1981); Analytica, Inc. v. NPD Research, Inc.,

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Nathan v. Shea (In re Marks & Goergens, Inc.), 199 B.R. 922, 1996 Bankr. LEXIS 1138 (Mich. 1996).

199 B.R. 922 (Nathan v. Shea (In re Marks & Goergens, Inc.)) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.

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