Opinion
60288604.
Decided March 21, 2005.
Plaintiffs Jonathan Kinlay and Investment Analytics (Bermuda) Ltd. move to disqualify Jared Stamell, Esq., and Stamell Schager, LLP, (SS) from representing defendants in this action on the ground of prior representation. Defendants Caissa Fund Management LLC, Caissa Capital Partners LLC, Caissa Capital Management Ltd., Caissa Capital LP, and Caissa Capital International Ltd. (collectively, Caissa) cross-move to disqualify Morgan, Lewis Bockius LLP from representing plaintiffs in this action pursuant to the advocate-witness rule.
This action arises out of the break-up of Caissa, several hedge fund management partnerships, formed by Kinlay and individual defendants Ronald Henley and Paul Wilmott.
Investment Analytics was formed by Kinlay in 2003 to supply Caissa with daily trading sheets and weekly volatility forecasts used in trading stock options. In the complaint, plaintiffs allege that defendants used certain proprietary information and strategies relating to the conducting of daily trading of the hedge funds without authorization. By doing so, they allegedly breached a separation agreement and release executed on August 10, 2004, to facilitate Kinlay's departure from Caissa.
In the answer and counterclaims, defendants deny all the allegations of improper conduct and assert counterclaims for fraudulent inducement to enter into the separation agreement, for breach of contract, and for repudiation.
Defendants base their claims on allegations that Kinlay, while still a partner with Henley and Wilmott, decided to put them out of business. To accomplish this, he started a competing business (nonparty Proteom) and negotiated certain terms of the separation agreement. The separation agreement, drafted by Richard Schager, Esq., an SS partner, provides for the sale of Kinlay's interest in Caissa to defendants and for Kinlay's withdrawal from Caissa. During contract negotiations, Kinlay was represented by separate counsel.
In relevant part, the agreement obligates Kinlay to cause Investment Analytics to continue to provide Caissa with daily trading sheets and weekly stock volatility forecasts for option trading, through 2007 pursuant to the terms of a royalty-free license to which the parties would agree in the near future. The agreement further provides for early termination of the current license and that "the parties have agreed to conclude this [Separation] Agreement without preparation of the successor license agreement, but with the goal that such successor license will address issues of confidentiality and the protection of trade secrets" (Separation Agr. at § C [4]).
Defendants allege that, unknown to them when they executed the separation agreement, Kinlay had negotiated the agreement to include terms in furtherance of his scheme by providing defendants with an unacceptable royalty-free license immediately prior to expiration of the previous license. Defendants further allege that, when the separation agreement was executed, Kinlay intended to, and later did, breach it. He did this by revealing confidential proprietary information on the Internet, by demanding "draconian" terms in the proposed royalty-free license, and then using defendants' refusal to execute the license as a basis of the instant action for breach of contract.
Plaintiffs now seek to disqualify Stamell and SS on grounds that Kinlay was a partner at the time Stamell and the law firm were retained to represent Caissa and that they were therefore privy to Kinlay's confidential communications, documents, and proprietary information.
In opposition, defendants contend that disqualification is not warranted because Kinlay had no expectation of confidentiality during Stamell's and SS's representation of Caissa.
The motion for disqualification is denied. "Disqualification of a law firm during litigation implicates not only the ethics of the profession but also the substantive rights of the litigants. Disqualification denies a party's right to representation by the attorney of its choice" ( S S Hotel Ventures Ltd. Partnership v. 777 S.H. Corp., 69 NY2d 437, 443). "The rule is well established that a party seeking to disqualify an attorney or a law firm on the ground of prior representation must establish `(1) the existence of a prior attorney-client relationship and (2) that the former and current representations are both adverse and substantially related'" ( Talvy v. American Red Cross in Greater NY, 205 AD2d 143, 148 [1st Dept 1994], affd 87 NY2d 826, quoting Solow v. Grace Co., 83 NY2d 303, 308 [citations omitted]; Code of Professional Responsibility DR 4-101 [B] [ 22 NYCRR § 1200.19 (b)]; DR 5-108 [ 22 NYCRR § 1200.27]). The purpose of the substantial relationship test is to protect "a client's secrets and confidences by preventing even the possibility that they will subsequently be used against the client in related litigation" ( Tekni-Plex, Inc. v. Meyner Landis, 89 NY2d 123, 131; Talvy v. American Red Cross in Greater NY, 205 AD2d 143, supra).
However, "before the substantial relationship test is even implicated, it must be shown that the attorney was in a position where he could have received information which his former client might reasonably have assumed the attorney would withhold from his present client" ( Allegaert v. Perot, 565 F2d 246, 250 [2d Cir 1977]). Thus, the test is not applicable where "the law firm's alleged disqualification arises out of simultaneous representation of two clients, if each client was aware of the other's relationship to the firm and had no reason to believe that confidences of one party would be withheld from the other" ( Kempner v. Oppenheimer Co., 662 F Supp 1271, 1277 [SD NY 1987]).
Kinlay's contention that Stamell and SS must be disqualified because Kinlay disclosed confidential information to them is unpersuasive, even assuming, arguendo, that they represented Kinlay. Where the lawyer or law firm represented two or more clients united in interest in a prior related matter, no reasonable expectation of confidentiality exists ( Allegaert v. Perot, 565 F2d 246, supra; Talvy v. American Red Cross in Greater NY, 205 AD2d 143, supra). Kinlay's own factual allegations make it clear that Stamell represented him, not individually, but solely in the context of his representation of Caissa's predecessor corporations and Caissa itself. None of the conversations with Stamell described by Kinlay concerned a client confidence since Kinlay, at all relevant times, knew that Stamell and his firm represented Caissa's predecessors in a trademark infringement action ( see K2 Advisors, LLC v. K2 Volatility Fund, LP, 2002 WL 31235701 [SD NY 2002]) or Caissa during the separation agreement negotiations. All of Kinlay's communications took place in the context of that representation.
Moreover, Kinlay bore a fiduciary duty as a partner to disclose to Caissa's predecessors, Caissa, and his individual partners any information in his possession relevant to that legal representation. In addition, Stamell and SS were obligated to disclose to their client, Caissa's predecessors or Caissa, whatever they learned from Kinlay that was relevant to the representation. Therefore, Kinlay could not reasonably believe that his communications to Stamell and his firm during the course of that representation would not be shared with Caissa's predecessors, Caissa, or his individual partners ( see Talvy v. American Red Cross in Greater NY, 205 AD2d 143, supra, and cases cited therein).
In addition, it is important to note that Stamell and SS have not changed sides, but have continued to represent Caissa's predecessors and, later, Caissa at all times. No reason to disqualify exists where the attorney has not changed sides from a former client to a current client whose interests are adverse ( id.).
For these reasons, plaintiffs' motion to disqualify Stamell and SS from representing defendants in this action, is denied.
Caissa cross-moves to disqualify Morgan Lewis from representing plaintiffs in this action on the ground that such representation violates the advocate-as-witness rule.
The motion is denied with leave to renew when a Note of Issue is filed, if Caissa be so advised. Pursuant to the advocate-witness rule, "[d]isqualification may be required only when it is likely that the testimony to be given by the [attorney] witness is necessary [citation omitted]. Testimony may be relevant and even highly useful but still not strictly necessary. A finding of necessity takes into account such factors as the significance of the matters, weight of the testimony, and availability of other evidence" ( S S Hotel Ventures Ltd. Partnership v. 777 S.H. Corp., 69 NY2d at 445-446; Talvy v. American Red Cross in Greater NY, 205 AD2d 143, supra; Code of Professional Responsibility DR 5-102 [B] ["Neither a lawyer nor the lawyer's firm shall accept employment in contemplated or pending litigation if the lawyer knows or it is obvious that the lawyer or another lawyer in the lawyer's firm may be called as a witness on a significant issue other than on behalf of the client, and it is apparent that the testimony would or might be prejudicial to the client" 22 NYCRR § 1200.21 (b)]). Caissa has failed to demonstrate on the record now before the court that any Morgan Lewis attorney ought to be called to testify.
Caissa contends that Morgan Lewis lawyers ought to be called as fact witnesses on the ground that they received written instructions and background information prepared by Kinlay regarding the negotiation, drafting, and timing of the separation agreement and proposed royalty-free license. Caissa contends that their anticipated testimony and the written instructions evidence the existence of a scheme to put defendants out of business by fraudulently inducing them to execute the separation agreement and pay Kinlay for his interest in Caissa, while paving the way for Kinlay's breach, and repudiation, of the agreement by the last-minute provision of a license including "draconian" terms to which Caissa could not agree.
On their face, the written instructions and background information prepared by Kinlay, and cited by Caissa, evidences, at most, Kinlay's opinion that his own conduct was appropriate, justified, and above-board and that his partners had not acted in good faith, his concern that they were trying to ruin or steal the business, and a perceived need to zealously protect his business interests from their reach. Nothing in the documents conclusively evidences the existence of a scheme hatched months before. Kinlay, as the author of the documents, is in the best position to interpret them and place them in context. In addition, Henley and Wilmott are available to testify regarding Kinlay's actions and motives, as perceived by them. No party depositions have yet been taken; therefore, any discussion as to content of a party's deposition testimony and the need for testimony by Morgan Lewis attorneys is mere speculation. Significantly, Caissa does not allege that Morgan Lewis attorneys knowingly aided and abetted Kinlay in his actions. Therefore, at this juncture of the litigation, it does not appear that testimony by any Morgan Lewis attorney will be necessary. If, upon completion of discovery, it is apparent that such testimony will be necessary, Caissa may renew the motion.
Accordingly, the motion and cross motion are denied.
This constitutes the decision and order of the Court.