CONFLICT OF INTEREST -- FORMER CLIENT -- ATTORNEY DISQUALIFICATION
COUNSEL FOR A CLOSELY HELD CORPORATION MAY NOT REPRESENT THE FORMER SOLE
SHAREHOLDER IN A DISPUTE WITH THE BUYER OVER THE SELLER'S REPRESENTATIONS.
] | [ISSUE & DISPOSITION
| [AUTHORITIES CITED
] | [COMMENTARY
Tekni-Plex ("old Tekni-Plex") retained the law firm of Meyner and Landis
("M & L") to obtain an environmental compliance permit and execute
a merger with TP Acquisition Corporation ("new Tekni-Plex"). At the time
of the merger, M & L also represented the sole shareholder of old Tekni-Plex,
Tom Y.C. Tang, in several personal matters. Following the merger, new Tekni-Plex
alleged breach of representations and warranties against Tang concerning
issues of environmental compliance. Tang retained M & L in the arbitration,
and new Tekni-Plex opposed the representation on conflict of interest grounds.
The trial court disqualified M & L from representing Tang and ordered
M & L to turn over all files concerning its prior representation of
old Tekni-Plex to new Tekni-Plex.
ISSUE & DISPOSITION
Whether long-time counsel for the seller corporation and its sole shareholder
may continue to represent the shareholder in a subsequent dispute with
Whether the attorney-client privilege as to pre-merger communications transfers
to the buyer.
No. When buyer continues the pre-existing business operation the buyer
displaces the seller corporation, and former shareholder; the buyer controls
the attorney-client privilege in matters concerning the company's operation.
Yes. The control of the privilege for all pre-merger communications transfers
to the buyer.
Order modified, without costs, and, as so modified, affirmed.
Cases Cited by the Court
Futures Trading Comm'n v. Weintraub, 471 U.S. 343 (1985).
International Elecs. Corp. v. Flanzer, 527 F.2d 1288 (2d Cir. 1975).
Medcom Holding Co. v. Baxter Travenol Lab. Inc., 689 F. Supp. 841
(N.D. Ill. 1988).
Federal Deposit Ins. Corp. v. Amundson, 682 F. Supp. 981 (D. Minn.
Solow v. W.R.
Grace & Co., 83 N.Y.2d 303 (N.Y. 1994).
Spectrum Sys. v. Chemical Bank, 78 N.Y.2d 371 (N.Y.1991).
S&S Hotel v. 777 S.H. Corp., 69 N.Y.2d 437 (N.Y.1987).
People v. Mitchell, 58 N.Y.2d 368 (N.Y. 1983).
Cardinale v. Golinello, 43 N.Y.2d 288 (N.Y. 1977).
Thomson United States Inc. v. Gosnell, 573 N.Y.S.2d 375 (N.Y. Sup.
Ct. 1991), aff'd, 581 N.Y.S.2d 764 (N.Y. App. Div.), appeal dismissed
mem., 80 N.Y.2d 893 (N.Y. 1992).
Other Sources Cited by the Court
Bass Public Ltd. Co. v. Promus Cos., No. 92 CIV. 0969 (SWK), 1994
WL 9680 (S.D.N.Y. Jan. 10, 1994).
Metro-Goldwyn-Mayer, Inc. v. Tracinda Corp., 43 Cal.Rptr. 2d 327
State of the Law Before Tekni-Plex
In Solow v.
W.R. Grace & Co., 83 N.Y.2d 303, 309 (N.Y. 1994)
, the Court
of Appeals, in considering disqualification, looked to Disciplinary Rule
5-108. See generally
N.Y. Comp. Codes R. & Regs. tit. 22, §
(1996) (codifying DR 5-108). The court found that the burden of proof rests
with the party seeking disqualification. Solow
, 83 N.Y.2d at 308.
The court required that three prongs be met before it would find for disqualification:
(1) the moving party must be a former client of the lawyer; (2) the present
matter must be "substantially related" to the prior representation; and
(3) the interests of the present client must be materially adverse to those
of the former client. Id.
The Southern District of New York in Bass Public Ltd. Co. v. Promus
Cos., applied a "community of interests" theory in an action for disqualification
No.92 CIV. 0969 (SWK), 1994 WL 9680 at *4 (S.D.N.Y. Jan. 10, 1994) . In
Bass, the court denied the motion to disqualify when the law firm
represented the seller and the pre-merger company against the buyer in
the prior matter. In the second matter, the law firm represented the seller
against the buyer. The greatest distinction between Bass and Tekni-Plex
is that the Bass court did not merge the identity of the buyer with
that of the purchased corporation.
The Bass court followed the Second Circuit's decision in International
Elecs. Corp. v. Flanzer, 527 F.2d 1288 (2d Cir. 1975), a case distinguished
by the New York Court of Appeals in Tekni-Plex. In Flanzer,
as in Bass, jurisdiction rested on a federal question (i.e., securities
law). It is important to note, as the Bass court did, that although
the Second Circuit will "frequently look to the ABA Model Code or the N.Y.
Code," when deciding cases based on professional conduct, "[t]here is no
statutory duty, however, for [the court] to apply those codes, and disqualification
remains in the [c]ourt's discretion." Bass, 1994 WL 9680 at *5 n.2.
Effect of Tekni-Plex on Current Law
, the Court of Appeals applied the traditional three-prong
conflict of interest test of DR5-108(a)(1) without considering the flexible
"community of interests" analysis or inquiring into the loyalties or reasonable
expectations of the interested parties. While Tekni-Plex
the straightforward application of DR 5-108 for disqualification motions,
the Court noted that "courts should avoid mechanical application of blanket
rules." See Tekni-Plex
at para. 20.
Under the first prong the court found that new Tekni-Plex was a former
client of M & L. Although Tang and old Tekni-Plex structured the transaction
as a sale of assets, the Court of Appeals found that "[a]s a practical
matter," old Tekni-plex did not die. Id. at para. 28. Instead its
business operations continued under new managers. The court then applied
the dicta of the United States Supreme Court in Commodity Futures Trading
Comm'n v. Weintraub and found that new Tekni-Plex possessed the right
to assert the attorney-client privilege of old Tekni-Plex. Commodity
Futures Trading Comm'n v. Weintraub, 471 U.S. at 352-53 ("[W]hen control
of a corporation passes to new management, the authority to assert and
waive the corporation's attorney-client privilege passes as well."). The
Court of Appeals concluded that since new Tekni-Plex could invoke the privilege
of old Tekni-Plex, new Tekni-Plex qualified as a "former client" of M &
The second prong of the test for disqualification was met because a
substantial relationship existed between the current and former representations.
M & L had assisted old Tekni-Plex on at least two matters that were
substantially related to its current representation of Tang. M & L
counseled old Tekni-Plex concerning environmental compliance and assisted
the company in obtaining a permit for a machine whose compliance with environmental
laws was in question.
The fact that the interests of M & L's present client, Tang, and
M & L's former client, new Tekni-Plex, were adverse satisfied the third
prong for disqualification. M & L's earlier representation of old Tekni-Plex
provided M & L with access to confidential information conveyed by
old Tekni-Plex concerning the environmental matters at issue in the suit
between new Tekni-Plex and Tang. M & L's duty of confidentiality regarding
these matters passed to new Tekni-Plex. Allowing M & L to represent
Tang in the suit involving new Tekni-Plex would create the potential for
the firm to use these confidences against new Tekni-Plex.
The court divided the confidential communications into two categories:
(1) general business communications and (2) communications relating to
merger negotiations. Id. at para. 41. When there is a continuation
of the pre-merger business entity, the court will likely hold that the
control of the attorney-client privilege passes to the new entity if the
communications did not arise out of the disputed transaction. The post-merger
entity will have the right to assert the attorney-client privilege to preclude
the attorney from disclosing pre-merger general business communications.
Id. at para. 42. However, communications arising out of the disputed
transaction will not be protected by the attorney-client privilege. Id.
at para. 45. The court will not allow the post-merger entity to assume
the attorney-client privileges of one of the buyer's adversaries (old Tekni-Plex)
while pursuing an action related to the transaction against another of
the the buyer's adversaries (Tang).
The court's opinion does not address the "community of interests" approach.
Nonetheless, the court recognized that "the parties contemplated a unity
of interest between old Tekni-Plex and Tang should a dispute arise between
the buyer and seller regarding representations and warranties." See
at para. 35. Whether the "community of interests" approach
remains viable after Tekni-Plex
The court's finding that new Tekni-Plex qualified as a "former client"
virtually compelled the conclusion that new Tekni-Plex's interests were
adverse to Tang's. Although new Tekni-Plex's interests were adverse to
Tang's, old Tekni-Plex's interests never conflicted with those of Tang.
As Tang's attorney, M & L would have been called upon to defend interests
identical to those of old Tekni-Plex and Tang. Yet under the court's analysis,
M & L's loyalty shifted from old Tekni-Plex and Tang to new Tekni-Plex.
Traditionally, attorney disqualification motions applied when an attorney
switched sides by concluding representation of one party and then beginning
representation of the other side. The Tekni-Plex court applied the
traditional analysis although the client switched sides while the attorney
continued to represent the same community of interests. When M & L
represented old Tekni-Plex and Tang before the merger, M & L advocated
the position that old Tekni-Plex complied with environmental laws. If M
& L continued to represent Tang, M & L would not change its stance
on this environmental issue. But if M & L were called upon to represent
new Tekni-Plex, then M & L would be expected to change its stance on
these environmental issues and advocate that old Tekni-Plex did not comply
with environmental laws.
The Court of Appeals expressly declined to address the exception to
the attorney-client privilege for co-clients who subsequently become adversaries.
Tekni-Plex, at para. 12 (noting that the record does not support
Tang's status as client on environmental compliance matters). If Tang had
established himself as a co-client of old Tekni-Plex, the court likely
would have resolved all privilege issues in favor of Tang and M & L.
The joint representation exception to the attorney-client privilege prevents
a lawyer from continuing to represent any co-client (new Tekni-Plex or
Tang) once common representation can no longer be impartial and without
improper effect on the responsibilities the lawyer has to all of the clients.
See generally N.Y. Comp. Codes R. & Regs. tit. 22, § 1200.24(b)
(1996) (codifying DR5-105(B)&(C)).
Survey of the Law in Other Jurisdictions
The California Court of Appeals in Metro-Goldwyn-Mayer, Inc. v. Tracinda
, 43 Cal.Rptr. 2d 327 (1995), demanded attorney disqualification
under a more attenuated set of facts. At issue was Christensen White's
representation of MGM and two of several shareholders, Kerkorian and Tracinda,
in a merger and a subsequent bankruptcy. The bankruptcy proceeding was
aborted when the bank funding the merger, Credit Lyonnais Bank Nederland
N.V. (CLBN), pledged additional funds for MGM's operations. CLBN then filed
a lawsuit against shareholders, including Kerkorian and Tracinda, for various
counts of fraud and negligent misrepresentation. Kerkorian and Tracinda
then hired Christensen White to represent them in the CLBN action. The
court viewed the issue as a problem of simultaneous representation of clients
with potentially adverse interests. Id.
at 330. MGM argued Christensen
White owed it a duty of loyalty because of a "long dormant class action
brought by certain shareholders of MGM prior to the 1990 merger." Id.
at 331. But the court resolved that the duty of loyalty Christensen White
owed MGM was "an outgrowth of what is arguably the most significant corporate
transaction MGM has been involved in to date, the merger." Id.
331. The court declared that a corporate attorney's first duty is to the
corporation. The court noted that when "a change in control occurs or is
threatened . . . , members [of the bar] must rely on case law.Metro-Goldwyn-Mayer,
Inc. v. Tracinda Corp.
, 43 Cal. Rptr. 2d at 333. California case law
makes it clear that "[e]ven where counsel for a closely held corporation
treats the interests of the majority shareholders and the corporation interchangeably,
it is the attorney-client relationship with the corporation that is paramount
for purposes of upholding the attorney-client privilege . . .." Id.
43 Cal. Rptr. 2d at 333 (quoting Hoiles v. Superior Court
, 204 Cal.
Rptr. 111 (1984). The court found the fact that the adversary that Christensen
White faced was not MGM but CLBN to be a "distinction without a difference."
at 334. The proscription exists whenever counsel's employment
is adverse to the client or former client and "can exist even though a
prior client is not a party to the litigation." Id.
Special thanks to Charles W. Wolfram, Professor of Law, Cornell Law
School, for his assistance in the preparation of this commentary.
Richard J. Colosimo, '97
Rene M. Devlin, '97
Christopher M. Dube, '98
Denise A. Johnson, '98
Kelly M. Mann, '98
Rafael E. Morell, '98
Anne R. Myers, '97
Jason A. Shrensky, '98