Notwithstanding general public opinion of attorney ethics, most people (including attorneys) believe that an attorney cannot dump a client in the middle of litigation to represent the other side. However, attorneys in the First Department may be surprised to learn that, in certain circumstances, a representation adverse to their former clients, even in litigation arising from substantially similar facts and issues, is sometimes allowed. Justice Shirley W. Kornreich of the New York County Supreme Court recently discussed these circumstances in two related decisions (found here and here) over the past year (Omnivere, LLC v. Friedman, No. 154544/2016).
First, some brief factual background. In 2013, Marcie Balint sold her legal staffing company, B3, to various individuals and companies referred to in subsequent litigation as “the Friedman Parties,” who then sold B3 to Omnivere, LLC. In 2014, Balint, represented by attorney Robert Bernstein of Eaton & Van Winkle, sued Omnivere, LLC and the Friedman Parties to enforce a consulting agreement. In response, the Friedman Parties asserted a third-party claim against the former CEO of B3, Gadi Rosenfeld, for allegedly approving a version of Balint’s consulting agreement that was different from the version that had been authorized.
On October 20, 2014, Rosenfeld met with Bernstein and provided documents and information to assist Balint in her actions against Omnivere, LLC and the Friedman Parties. In exchange, Bernstein agreed to represent Rosenfeld at a reduced hourly rate in the Friedman Parties action only (in May 2015, Rosenfeld, represented by separate counsel, commenced an action against Omnivere, represented at the time by Perkins Coie, alleging nonpayment of consulting fees).
At some point during the following year (when, exactly, was the subject of debate between the parties), Bernstein claimed to have become aware that Rosenfeld assisted the Friedman Parties in lying to Omnivere about the financial condition of B3 and other companies that Omnivere purchased from the Friedman Parties. In September of 2015, Balint settled with Omnivere, and together they joined forces with Bernstein as counsel in the remaining litigations with the Friedman Parties and Rosenfeld. Consequently, in November of 2015 Bernstein withdrew as counsel to Rosenfeld and replaced Perkins Coie as counsel of record to Omnivere.
On May 27, 2016, Omnivere commenced a new action against the Friedman Parties asserting causes of action for fraud, breaches of the asset purchase agreement governing the sale of B3, and conversion. Although Rosenfeld was not a named defendant, Omnivere’s complaint alleged Rosenfeld’s participation in the fraudulent scheme. If Omnivere prevails, Rosenfeld will lose shares of Omnivere equity.
Based on Bernstein’s prior representation of Rosenfeld, the Friedman Parties and Rosenfeld moved to disqualify Bernstein. Justice Kornreich denied the motion.
The Friedman Parties’ motion was denied because they had never been former clients of Bernstein and therefore lacked standing. The court held that it lacked authority to grant disqualification motions to non-clients, especially where such motions were intended as a litigation tactic, because the power to sanction attorneys for ethical violations is “principally vested in the Appellate Divisions.”
As for Rosenfeld’s motion, the court found that there was insufficient proof that Rosenfeld had actually provided information to Bernstein during the prior representation that would be prejudicial to Rosenfeld. Citing the First Department’s decision in Mayers v Stone Castle Partners, LLC, 126 AD3d 1, 6 (1st Dept 2015), the court held that rather than simply resolving all doubts in favor of disqualification to avoid the appearance of impropriety, as was required under the old rules, disqualification should be denied if “the conveyed information did not have the potential to be significantly harmful to the former client in the matter from which he seeks to disqualify counsel.” This standard required an evidentiary hearing to determine what information was actually conveyed from Rosenfeld to Bernstein and whether it had the potential to be significantly harmful to Rosenfeld. The Special Referree conducted a two-day hearing and issued a report finding that no “confidences that were harmful to Rosenfeld” had been disclosed to Bernstein.
Justice Kornreich appeared to have had misgivings about the proper application of the First Department’s decision in Mayers, noting that other Appellate Division Departments (as well as the First Department, occasionally) still apply the rule that doubts must be resolved in favor of disqualification. Justice Kornreich therefore explicitly appealed to the First Department for additional “guidance” on the continued applicability of this rule, as well as whether the requirement that the conveyed information have the potential to be “significantly harmful” is consistent with the Court of Appeal’s apparent holding to the contrary in Tekni-Plex, Inc. v Meyner & Landis, 89 NY2d 123, 131 (1996) (“By mandating disqualification irrespective of any actual detriment—that is, ‘even when there may not, in fact, be any conflict of interest’—the rule also avoids any suggestion of impropriety on the part of the attorney.”). Indeed, other recent decisions by the First Department involving legal professionals “switching sides” indicates continued adherence to the rule that “whether there is a conflict of interest must be resolved in favor of disqualification.” See USA Recycling, Inc. v Baldwin Endico Realty Assocs., Inc., 147 AD3d 697 (1st Dept 2017).
Until further clarification is received from the First Department, attorneys for now may evaluate representations adverse to former clients based on whether there would be actual prejudice to the former client, without regard to the appearance of impropriety or unfairness to other (non-client) parties.