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In re Richardson ex rel. Internet Med. Grp., Inc.

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION
Mar 7, 2016
DOCKET NO. A-4169-14T1 (App. Div. Mar. 7, 2016)

Opinion

DOCKET NO. A-4169-14T1

03-07-2016

ROBERT W. RICHARDSON, M.D., and JAMES V. AGRESTI, D.O., individually and derivatively on behalf of INTERNET MEDICAL GROUP, INC., and its related entities, Plaintiffs-Appellants, v. ERNEST DEFAZIO, M.D., individually and in his representative capacities, RUBINO & COMPANY, P.C., FRANK RUBINO, individually and in his representative capacities, EDWARD T. KALMAR, M.D., EDWARD J. VECCHIONE, D.O., and JOHN S. D'ACONTI, D.O., Defendants-Respondents, and ERNEST DEFAZIO, M.D., EDWARD T. KALMAR, M.D., EDWARD J. VECCHIONE, D.O., and JOHN S. D'ACONTI, D.O., derivatively on behalf of INTERNET MEDICAL GROUP, P.C., Third-Party Plaintiffs, v. JAMES V. AGRESTI, III, M.D., Third-Party Defendant.

Christopher L. Deininger argued the cause for appellants (Bubb, Grogan & Cocca, L.L.P., attorneys; Michael S. Bubb, of counsel; Mr. Deininger, on the brief). Charles X. Gormally argued the cause for respondents (Brach Eichler L.L.C., attorneys; Mr. Gormally, Thomas Kamvosoulis, and Paul M. Bishop, of counsel and on the brief).


NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION Before Judges Fuentes, Koblitz, and Gilson. On appeal from an interlocutory order of Superior Court of New Jersey, Law Division, Morris County, Docket No. L-3093-13. Christopher L. Deininger argued the cause for appellants (Bubb, Grogan & Cocca, L.L.P., attorneys; Michael S. Bubb, of counsel; Mr. Deininger, on the brief). Charles X. Gormally argued the cause for respondents (Brach Eichler L.L.C., attorneys; Mr. Gormally, Thomas Kamvosoulis, and Paul M. Bishop, of counsel and on the brief). PER CURIAM

This is the third time we have granted leave to appeal to address plaintiffs' contentions that the law firm of Brach Eichler L.L.C. (BE) has conflicts of interest requiring its disqualification from representing defendants in a dispute among physicians of a medical practice. The medical practice is organized as a private corporation with six physician-shareholders. In 2013, two physician-shareholders sued the other four physician-shareholders, as well as the corporation's chief financial officer and his accounting firm. Plaintiffs allege claims as individuals and derivatively on behalf of the corporation. The four physician-shareholder defendants assert counterclaims as individuals and derivatively on behalf of the corporation. BE is currently representing all of the defendants and the corporation as the counterclaimant. We now vacate the most recent order, filed on April 2, 2015, denying plaintiffs' motion to disqualify BE and remand for a determination of defendants' pending motion to dismiss plaintiffs' derivative action and, if that motion is granted, fact findings concerning the remaining alleged conflicts of interest.

I.

Internet Medical Group, P.C. (IMG) is a professional corporation through which its shareholders operate a medical practice. IMG is owned by six physician-shareholders, one of whom (Ernest DeFazio, M.D.) is the president of the corporation. IMG also has a non-shareholder officer, Frank Rubino, whose accounting firm provides services to IMG. In November 2013, two of the physician-shareholders, Robert Richardson, M.D. and James Agresti, D.O., brought claims against the other four physician-shareholders (DeFazio, Edward Kalmar, M.D., Edward Vecchione, D.O., John D'Aconti, D.O.), as well as Rubino, individually, and his accounting firm, Rubino & Company, P.C. Plaintiffs allege that defendants have mismanaged the finances of IMG and engaged in self-dealing and potentially illegal activities. Plaintiffs have, therefore, asserted claims against defendants for breach of contract, breach of fiduciary duty, and other similar causes of action. Plaintiffs have also asserted tortious interference and professional negligence claims against Rubino and his accounting firm. Plaintiffs have asserted all of these claims individually and derivatively on behalf of IMG.

Defendants, together with IMG, have denied plaintiffs' claims and contend that plaintiffs' suit is really an effort to coerce them into buying plaintiffs' shares in IMG, forgiving debts plaintiffs owed to IMG, and releasing plaintiffs from their restrictive covenants. The four physician-shareholder defendants, individually and on behalf of IMG, have filed counterclaims against plaintiffs alleging plaintiffs breached various contracts and fiduciary obligations by diverting revenues and patients of IMG and by competing against IMG in violation of their restrictive covenants. Thus, the four defendants and IMG have asserted claims against plaintiffs for breach of contract, breach of fiduciary duty, misappropriation of IMG's assets, breach of loyalty, conversion, unfair competition and other similar causes of action. The four defendant-shareholders have also filed a third-party complaint on behalf of IMG against the son of one of the plaintiffs, alleging Agresti is violating various contracts by practicing medicine with his son (John Agresti, III, M.D.) in a medical practice that competes with IMG.

BE has represented IMG for over ten years. When the disputes among the shareholders of IMG began to surface, BE provided advice to IMG and, thereafter, investigated various claims made by both plaintiffs and defendants. Before any lawsuit was filed, counsel for plaintiffs sent IMG a letter announcing their position that BE would have a conflict of interest if it tried to represent IMG and any of the physician-shareholders. Responding on behalf of IMG, BE stated it had evaluated the claim of a potential conflict of interest and found there was no ethical basis precluding the firm from representing IMG or the remaining individual shareholders. When plaintiffs filed suit against defendants, BE undertook the representation of all of the defendants, as well as IMG in the counterclaim and third-party complaint.

In February 2014, plaintiffs moved to disqualify BE from representing defendants or IMG in this lawsuit. Plaintiffs contend BE has several different conflicts, including (1) a concurrent conflict by representing IMG and defendants, while IMG is derivatively suing defendants; and (2) concurrent conflicts among all of the defendants whose interests are adverse to IMG. In response, BE maintains it has no conflicts. It argues plaintiffs' derivative claim should be dismissed as a matter of law. Consequently, any potential conflict of interest arising from a concurrent representation of IMG in plaintiffs' meritless derivative action would be rendered moot. BE also contends there is no conflict in the firm representing defendants and IMG because all of the defendants have consented to BE's joint representations.

Plaintiffs have sought to disqualify BE from representing defendants in this suit three times to date. Initially, the motion judge heard argument by counsel and denied the motion in an order filed on June 11, 2014. We granted leave to appeal, summarily vacated the June 11, 2014 order, and remanded for reconsideration in light of our decision in Comando v. Nugiel, 436 N.J. Super. 203 (App. Div. 2014). Our remand order stated: "The trial court, in its discretion, may order discovery specifically directed to the conflict of interest issues implicated by Comando, and it may also conduct an evidentiary hearing if there are material factual disputes dependent upon credibility."

In an order filed on October 30, 2014, the motion judge denied the motion to disqualify without holding an evidentiary hearing and without making any findings of fact. In response to plaintiffs' motion, we again granted leave to appeal, summarily reversed, and remanded "to allow oral argument or a plenary hearing and [for the trial court to] articulate reasons for its decision." On remand, the motion judge heard oral argument, distinguished Comando, and denied the motion to disqualify BE in an order filed on April 2, 2015. The motion judge did not, however, conduct an evidentiary hearing nor did he make findings of fact concerning the alleged conflicts of interest. We again granted plaintiffs' motion for leave to appeal and, thus, this matter is now before us on appeal from the order filed on April 2, 2015.

II.

We use a de novo standard of review to evaluate an order granting or denying a motion to disqualify counsel. Twenty-First Century Rail Corp. v. N.J. Transit Corp., 210 N.J. 264, 274 (2012). "[A] motion for disqualification calls for us to balance competing interests, weighing the 'need to maintain the highest standards of the profession' against a 'client's right freely to choose his [or her] counsel.'" Dewey v. R.J. Reynolds Tobacco Co., 109 N.J. 201, 218 (1988) (quoting Gov't of India v. Cook Indus., Inc., 569 F.2d 737, 739 (2d Cir. 1978)). In striking that balance, we acknowledge that "a person's right to retain counsel of his or her choice is limited in that 'there is no right to demand to be represented by an attorney disqualified because of an ethical requirement.'" Ibid. (quoting Reardon v. Marlayne, Inc., 83 N.J. 460, 477 (1980)); see also Comando, supra, 436 N.J. Super. at 213 (citing Dewey and applying the same balancing test).

In examining motions to disqualify counsel, courts must sometimes engage in a "painstaking analysis of the facts." Dewey, supra, 109 N.J. at 205 (quoting Reardon, supra, 83 N.J. at 469). The court should also be cognizant that disqualification motions can be misused as a litigation tactic that can delay an examination of the merits of the claims and can undermine the judicial process. See id. at 218, 221. Consequently, courts must conduct a careful balancing analysis.

Plaintiffs argue the conflicts of interest here are concurrent conflicts governed by RPC 1.7. BE, in contrast, contends there is no direct adversarial conflict pursuant to RPC 1.7(a)(1), and if there were, they were obviated when defendants consented to BE's joint representation pursuant to RPC 1.7(b). Thus, BE argues the alleged conflicts here should be analyzed pursuant to RPC 1.9 (Duties to Former Clients) and RPC 1.13 (Organization as the Client). We first address RPC 1.7, and, where appropriate, also discuss RPC 1.13.

BE certified that it never represented Richardson individually and that it only previously represented Agresti in an unrelated matter. In the record before us, plaintiffs did not present any evidence disputing BE's claims in this respect. Consequently, unless plaintiffs present additional evidence on remand, RPC 1.9 will not be applicable. See Dewey, supra, 109 N.J. at 222.

RPC 1.7 provides, in relevant part:

(a) Except as otherwise provided in paragraph (b), a lawyer shall not represent
a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:

(1) the representation of one client will be directly adverse to another client; or

(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client, or a third person or by a personal interest of the lawyer.

[RPC 1.7(a).]

Thus, RPC 1.7 prohibits two types of concurrent representations: (1) direct adversarial representations, and (2) representations that pose a significant risk of material limitation in the lawyer's responsibility to a client.

RPC 1.7(a)(1) is clear in prohibiting a lawyer from representing a client in a litigation when another client is adverse to that client. Comando, supra, 436 N.J. Super. at 214; McDaniel v. Man Wai Lee, 419 N.J. Super. 482, 497 (App. Div. 2011). Here, based on the current pleadings such a concurrent conflict exists. Plaintiffs have asserted a derivative action on behalf of IMG. BE is representing all of the named defendants in this derivative action, including IMG in the counterclaim.

BE contends plaintiffs' derivative action has no merit and the litigation is really a dispute among physician-shareholders of IMG. The motion judge, without actually ruling on the merits of plaintiffs' derivative action, reasoned that the litigation was a dispute between two groups of shareholders and, thus, not a true derivative action. That reasoning ignored the existing actual parties to the litigation. As it currently stands, IMG is a named plaintiff and BE is representing the named defendants in direct opposition to IMG at the same time that it continues to represent IMG. Until the legal viability of plaintiffs' derivative action is decided, IMG has a direct adversarial position to defendants.

There is a pending motion to dismiss plaintiffs' derivative claims being asserted on behalf of IMG. That motion must be decided before there is any further decision on the disqualification motion. If the motion to dismiss plaintiffs' derivative claims is denied, then there will be a concurrent conflict requiring BE to be disqualified. Indeed, BE conceded this point before us at oral argument before this court.

If, on the other hand, the motion to dismiss plaintiffs' derivative claims on behalf of IMG is granted, there will no longer be a direct adversarial conflict between plaintiffs and defendants. Nevertheless, further fact finding and analysis will be necessary to determine if a conflict exists among BE's joint representation of all defendants and IMG.

Under RPC 1.7(a)(2), a lawyer cannot represent a client if "there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client." "RPC 1.7 reflects 'the fundamental understanding that an attorney will give complete and undivided loyalty to the client [and] should be able to advise the client in such a way as to protect the client's interests, utilizing his [or her] professional training, ability and judgment to the utmost.'" J.G. Ries & Sons, Inc. v. Spectraserv, Inc., 384 N.J. Super. 216, 223 (App. Div. 2006) (first alteration in original) (quoting State ex rel. S.G., 175 N.J. 132, 139 (2003)). Accordingly, a conflict of interest may preclude a lawyer from representing co-defendants. See In re Petition for Review of Opinion 552, 102 N.J. 194, 208 (1986) (recognizing potential conflict of interest in representing co-defendants in the context of municipal government and its officers); Kramer v. Ciba-Geigy Corp., 371 N.J. Super. 580, 602-05 (App. Div. 2004) (discussing conflicts of interest in the joint representation of a corporation and individual defendants).

Here, there are several potential conflicts that need to be evaluated. First, the trial judge needs to ensure that all defendants have consented to BE's joint representation. RPC 1.7(b) allows for joint representation of parties on one side of a litigation or transaction if the lawyer has explained the potential conflicts to each client and each client provides written consent. The record before us does not contain written consent from all defendants. Instead, there are statements in two certifications, one from DeFazio and another from defendant's counsel, stating that all defendants have consented to BE's joint representation. Such certifications are insufficient.

Second, the trial judge must evaluate any potential conflicts between IMG and defendants. Plaintiffs contend defendants DeFazio and Rubino have engaged in self-dealing to advance their interests to the detriment of IMG and in violation of the fiduciary duty they owed to the other individual physician-shareholders. Thus, on remand, the trial judge must evaluate that contention and do so in light of our decision in Comando. As part of the evaluation, the judge should also consider RPC 1.13.

Third, the trial judge must evaluate any potential conflict among the defendants who are physician-shareholders. Plaintiffs contend DeFazio and Rubino have improperly assumed control over IMG and made decisions that are adverse to the interests of the other physician-shareholders. If that allegation is true, there might be a conflict among the defendants.

Fourth, the trial judge must evaluate any potential conflict among the defendants who are physician-shareholders whose interests could be adverse to Rubino and his accounting firm. Plaintiffs claim Rubino and his accounting firm have enriched themselves by performing and charging IMG for unnecessary accounting services, and as a result, also committed accounting malpractice. If any of these allegations have merit, there might be a concurrent conflict among the defendants.

Finally, the trial judge must evaluate whether any of BE's partners or associates may be a fact witness at trial and, if so, what effect, if any, that will have on BE's ability to continue to represent all of the individual defendants and IMG. See RPC 3.7 (Lawyer as Witness); J.G. Ries & Sons, Inc., supra, 384 N.J. Super. at 230.

Each of these potential conflicts requires an evaluation based on factual findings supported by competent evidence in the record. In some situations, a motion to disqualify counsel can be evaluated on the submission of certifications; in other situations, an evidentiary hearing may be necessary. See Twenty-First Century Rail Corp., supra, 210 N.J. at 271 n.3; O Builders & Assocs., Inc. v. Yuna Corp. of NJ, 206 N.J. 109, 114 (2011); Comando, supra, 436 N.J. at 218-19; Van Horn v. Van Horn, 415 N.J. Super. 398, 416 (App. Div. 2010). Given that plaintiffs' motion to disqualify BE has been addressed unsuccessfully three previous times without an evidentiary hearing, on remand the trial court should make a threshold determination as to whether an evidentiary hearing is necessary. The trial judge can thereafter decide whether further discovery is warranted. After making factual findings, the trial judge will need to independently evaluate potential conflicts. BE points out that it conducted its own evaluation and determined there were no ethical impediments in representing defendants. Such an evaluation by the attorney is a necessary first step and the RPCs make it clear that lawyers must engage in their own evaluation. When a motion to disqualify counsel is made, however, the court must make its own independent evaluation.

In summary, we reverse and vacate the April 2, 2014 order denying plaintiffs' motion to disqualify BE. We remand for further proceedings. First, the trial judge must determine the pending motion to dismiss plaintiffs' derivative action on behalf of IMG. If that motion is denied, there will be a concurrent conflict precluding BE from representing defendants. If the motion is granted, the trial judge must then hold an evidentiary hearing to make factual findings concerning the remaining allegations of conflicts of interest. The facts found must be articulated either on the record or in a written statement of reasons. R. 1:7-4(a).

It is our understanding that the motion to dismiss plaintiffs' derivative action claim has been assigned to a trial judge who is different from the judge who heard the three previous disqualification motions. In the interest of judicial consistency and efficient case management, we suggest that on remand, all further proceedings concerning the motion to disqualify be assigned to the judge who will decide the motion to dismiss plaintiffs' derivative action. We recognize, however, that these type of case assignment decisions are left to the sound discretion of the Presiding Judge of the Civil Division. --------

Reversed and remanded for further proceedings. We do not retain jurisdiction. I hereby certify that the foregoing is a true copy of the original on file in my office.

CLERK OF THE APPELLATE DIVISION


Summaries of

In re Richardson ex rel. Internet Med. Grp., Inc.

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION
Mar 7, 2016
DOCKET NO. A-4169-14T1 (App. Div. Mar. 7, 2016)
Case details for

In re Richardson ex rel. Internet Med. Grp., Inc.

Case Details

Full title:ROBERT W. RICHARDSON, M.D., and JAMES V. AGRESTI, D.O., individually and…

Court:SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION

Date published: Mar 7, 2016

Citations

DOCKET NO. A-4169-14T1 (App. Div. Mar. 7, 2016)