The Business Court on Wednesday disqualified a law firm from representing its longtime corporate client in a lawsuit against the corporation’s former CEO and Chairman of its Board of Directors.
The basis for the ruling in Kingsdown Inc. v. Hinshaw, 2015 NCBC 27 was that a partner in the law firm (now deceased) had represented the former CEO/Chairman of the corporate plaintiff (Hinshaw) on a personal basis in some of the transactions that were at issue in the lawsuit.
Hinshaw moved to disqualify the law firm over its protestations that its representation was permitted by Rule 1.10 of the Revised Rules of Professional Conduct. If that Rule isn’t uppermost in your mind, it says that:
When a lawyer has terminated an association with a firm, the firm is not prohibited from thereafter representing a person with interests materially adverse to those of a client represented by the formerly associated lawyer and not currently represented by the firm, unless:
(1) the matter is the same or substantially related to that in which the formerly associated lawyer represented the client; and
(2) any lawyer remaining in the firm has information protected by Rules 1.6 and 1.9(c) that is material to the matter.
So, to succeed on his disqualification motion, Hinshaw had to show that he had an attorney-client relationship with a former lawyer at the firm, and that the matters on which he had been represented were the "same or substantially related to" the matters involved in the lawsuit before the Business Court, and the law firm had the burden to show that it did not have access to material confidential information protected by Rules 1.6 and 1.9(c).
Kingsdown contended that the law firm had never opened a client matter for Hinshaw, had never sent him an engagement letter, and had never been paid any money by Hinshaw. Hinshaw, from his side, presented affidavit testimony that the law firm’s senior partner, since deceased, had often advised him personally.
Some of the advice concerned his compensation from Kingdown and a transaction regarding a beach house owned by Hinshaw which he traded to Kingsdown for an undeveloped beach property owned by Kingsdown which Hinshaw then leased back to Kingsdown.
Both of those matters — Hinshaw’s compensation from Kingsdown and the curious beach house deal — were at the front and center of Kingsdown’s lawsuit against Hinshaw for breach of his fiduciary duty.
Judge Bledsoe didn’t waste much of his opinion in finding "ample evidence" that Hinshaw could have "reasonably inferred" that he had an attorney-client relationship with the deceased partner, and therefore the law firm. Op. par. 30.
The law firm fought hard to show that none of its current attorneys had any of Hinshaw’s confidential information. That was the lawyers’ burden to carry, per Ferguson v. DDP Pharmacy, 174 N.C. App. 532, 539, 621 S.E.2d 323. 328 (2005)(“The burden rests upon the law firm to prove the former attorney did not share any information about the former client with the remaining attorneys in the firm.”). Op. ¶37.
The argument of the lawyers rested partly on an affidavit from a lawyer representing Kingsdown as to his review of his firm’s billing records. The affiant stated that the records showed that none of the lawyers still at the firm had represented Hinshaw on the matters at issue in the lawsuit. Other lawyers at the firm who had worked on Kingsdown matters presented affidavits stating that they were "not aware" of any of Hinshaw’s confidential information.
Judge Bledsoe found that insufficient. He noted that the situation before the Court was not the usual paradigm presented by Rule 1.10 of an attorney leaving a law firm and taking a client’s files and records containing confidential information with her. Here, the attorney who had personally represented Hinshaw had passed away and the law firm had continued in existence. The Court held that:
the client’s files and confidential documents presumably remain at the Firm and are available to the other attorneys in the firm. As such, the Court concludes that the failure of the Firm to provide competent and persuasive evidence of the existence and whereabouts of these files, and the clients’ confidential documents and information that may be contained therein, is a significant factor in determining whether Kingsdown and the Firm have met their burden under Rule [1.]10(b).
What could the law firm have done to persuade Judge Bledsoe that its lawyers did not have access to or knowledge of Hinshaw’s confidential information? He didn’t say specifically, but wrote that Kingsdown had:
not brought forward competent evidence that the Firm has conducted a sufficient investigation of the Firm’s attorneys and files to ascertain whether the Firm has knowledge of [Hinshaw’s] material confidential information, or if such an investigation has been conducted, provided evidence of what the investigation involved, who and what was consulted, and what the investigation found.
So, if you ever find yourself in the unenviable position of representing a corporate client against a former officer/director on transactions where a deceased partner was personally advising that individual, you now have somewhat of a road map to avoiding disqualification.
Appearance of Impropriety
The "overarching consideration" in considering a motion to disqualify is to "prevent even the appearance of impropriety and thus resolve any and all doubts in favor of disqualification." Op. ¶48.
While Hinshaw obviously had angst at being sued by the same law firm that he said had given him the advice that he claimed to have followed, the Court pointed out another significant concern that might create the "appearance of impropriety."
The law firm’s attorneys were likely to be witnesses in the lawsuit. Judge Bledsoe pointed out that:
those attorney-witnesses may potentially face divided loyalties between their allegiance to the Firm and the defense of the Firm’s advice, on the one hand, and their duty of loyalty to, and zealous advocacy for, their clients, on the other, as that advice, and the parties’ actions in alleged reliance on that advice, comes under intense scrutiny.
This Opinion was issued at the same time as another published opinion in the case, Kingsdown Inc. v. Hinshaw, 2015 NCBC 28 That decision — which I may write about tomorrow — concerns a motion to dismiss one of the Defendant’s counterclaims and third party claims.