Opinion
CIVIL ACTION FILE NO. l:01-CV-2845-TWT
May 13, 2003
ORDER
This is a securities fraud action. It is before the Court on the Defendants' Motion to Disqualify Frank Rosen as Attorneys for Plaintiffs [Doc. 107]. For the reasons stated below, the motion is granted.
I. BACKGROUND
In June 2000, Mr. Joseph Hafner sued InfoCure as a result of a dispute arising from the sale of his company to InfoCure. Mr. Hafner received InfoCure stock in exchange for his company. He was represented in the underlying transaction and in the litigation by the firm of Frank Rosen. Ultimately eight other shareholders, also represented by Frank Rosen, filed suit against InfoCure and certain InfoCure officers and directors. They also sued Morris, Manning Martin, InfoCure's corporate counsel. The actions were consolidated for discovery and pretrial proceedings. In early 2002, InfoCure and the individual Defendants settled the claims of the Plaintiffs against those Defendants. This left the Plaintiffs' breach of contract claims against Morris, Manning Martin.
The settlement with the InfoCure Defendants involved three elements that are pertinent to this motion. First, InfoCure assigned its legal malpractice claim against Morris, Manning Martin to the Plaintiffs. But, InfoCure retained a 40% net (after attorneys fees) interest in the claim. The Plaintiffs also gave InfoCure a 40% net interest in their direct claim against Morris, Manning Martin. Both claims were to be prosecuted by Frank Rosen. Second, if the assignment was invalid, Frank Rosen agreed to prosecute the malpractice claim in the name of InfoCure. Third, the settlement agreement provided that the InfoCure Defendants and the Plaintiffs would cooperate in the prosecution of the assigned claims. In this connection, the agreement provided that in their "representation of InfoCure" the Plaintiffs' counsel would continue to communicate with InfoCure through its counsel, King Spalding.
Plaintiffs' counsel consulted with InfoCure in the drafting of a complaint against Morris, Manning Martin. After consultation with InfoCure and King Spalding, the settlement agreement was amended to assign the malpractice claim to a new corporation, Restitution, Inc. The Restitution Complaint and the Amended Complaint in this action both allege that InfoCure misrepresented or failed to disclose information to its shareholders in December 1999.
This action was filed in April 2001 in state court in Indiana. Plaintiffs were represented by an Indianapolis law firm. The Defendants removed the case to federal court. The district court in Indiana denied the Plaintiffs' motion for injunctive relief and entered an order transferring the case to this district. The Plaintiffs appealed to the Court of Appeals for the Seventh Circuit which ultimately affirmed the order of the district court. While this action was on appeal, Frank Rosen negotiated a settlement of InfoCure's legal malpractice claim against Morris, Manning Martin. Pursuant to the settlement agreement, InfoCure received 40% of the net proceeds of the settlement. InfoCure received nothing from the Plaintiffs' direct claim against Morris, Manning Martin because this Court granted Morris, Manning Martin's Motion for Summary Judgment as to all claims against it by those Plaintiffs. Shortly after InfoCure received its portion of the settlement proceeds, Mr. Frank notified counsel for InfoCure of the substitution of Frank Rosen as counsel for Plaintiffs in this case. Defendants have moved to disqualify Frank Rosen as attorneys for the Plaintiffs in this case.
II. ATTORNEY DISQUALIFICATION STANDARD
Local Rule 83.1(c) states that all lawyers practicing before this Court are governed by the Georgia Rules of Professional Conduct and the decisions of this Court interpreting those Rules. See L.R. 83.1(c); see also Worldspan. L.P. v. Sabre Group Holdings Inc., 5 F. Supp.2d 1356, 1357(N.D.Ga. 1998). This Court "has the power and responsibility to regulate the conduct of attorneys who practice before it." Glover v. Libman, 578 F. Supp. 748, 750 (RD. Ga. 1983). Both the Georgia Rules of Professional Conduct and courts in this District have adopted the "substantial relationship" test for disqualification of counsel representing an adversary against a former client. Id. at 759. Rule 1.9(a) of the Georgia Rules of Professional Conduct states that "[a] lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client consents after consultation."The "substantial relationship" test requires that a party seeking to disqualify counsel for another party show "no more than that the matters embraced within the pending suit wherein his former attorney appears on behalf of his adversary are substantially related to the matters or cause of action wherein the attorney previously represented him, the former client." Id. If the "substantial relationship" test is met, the Court is to assume that confidences were disclosed during the course of the prior representation and will not so inquire. Id. Where an attorney actually represented a party, the attorney is charged with a "virtually unrebuttable presumption" of the receipt of confidential information from the former client. Cox v. American Cast Iron Pipe Co., 847 F.2d 725, 729 (11th Cir. 1988).
In summary, a determination on whether to disqualify an attorney is a two-step process: (1) was there a previous attorney-client relationship and, if so, (2) did that relationship involve a matter substantially related to the current proceeding? "[A]ny doubts as to the existence of a violation of the rules should be resolved in favor of disqualification."Graco Children's Products. Inc. v. Regalo Intern, LLC. No. Civ. A. 97-6885, 1999 WL 553478, at *2 (E.D. Pa. July 29, 1999).
III DISCUSSION
A. Attorney-Client Relationship
The first determination for this Court is whether the Defendant has met the threshold requirement of showing that an attorney-client relationship existed between Frank Rosen and InfoCure. In similar situations, courts have found such a relationship. In Westinghouse Elec. Corp. v. Kerr-McGee Corp., 580 F.2d 1311, 1319 (7th Cir. 1978), the Seventh Circuit found that where an insured cooperates with counsel for his insurer pursuant to a cooperation clause in the insurance policy, counsel for the insurer may not represent a third party suing the insured or even continue to represent the insurer if a conflict arises. In that situation, disqualification is warranted even though the insurer's counsel never formally represented the insured. Rather, it is the insurer's counsel's access to the insured's confidential information through the insurance policy's cooperation clause that warrants disqualification.
Other courts seem to be in agreement. In Brennan v. Independence Blue Cross, 949 F. Supp. 305 (E.D. Pa. 1996), the court considered a motion to disqualify pursuant to the same rule of professional conduct at issue in this case, Rule 1.9. In that case, in a malpractice suit against a hospital, the plaintiff's attorney represented both the plaintiff and the subrogation rights of the plaintiff's insurance company. After settling the case against the hospital, the insured's attorney sent Independence a check reflecting its subrogation lien on the settlement. Subsequently, the plaintiff sued the insurance company for medical coverage arising out of the same condition at issue in the underlying malpractice suit. The insurance company moved to disqualify the plaintiff's attorney on the grounds that he had represented Independence in the underlying malpractice action. The plaintiff contended that there was no attorney-client relationship between Independence and the plaintiff's attorney. The court disagreed with the plaintiff, finding that the attorney's agreement to protect Independence's subrogation claim in the underlying lawsuit rose to the level of an attorney-client relationship. Id. at 307-308.
In this case, the Defendants assert that by prosecuting the assigned claims and the shareholders' direct claims against Morris, Manning Martin (and InfoCure's 40% interest therein) Frank Rosen represented InfoCure's interests. This triggers the "substantial relationship" test. Plaintiffs, on the other hand, argue that an attorney-client relationship never existed between Frank Rosen and InfoCure. This is not consistent with the undisputed facts. First, the settlement agreement expressly provided that Frank Rosen was to represent InfoCure's interests in the prosecution of the claims against Morris, Manning Martin. (Ex. C, ¶ 11.) Second, Frank Rosen had to rely on confidential information from InfoCure to prosecute the assigned claims, and InfoCure had an obligation to provide such information. The purpose and intent of the assignment clause of the original settlement agreement was to split any proceeds from the malpractice claims on a 60/40 basis (minus Frank Rosen's contingency fee). The named plaintiff in that case would be a product of the Court's ruling on whether those claims could be assigned. InfoCure's role in the prosecution of those claims (and its relationship with Frank Rosen) was the same regardless. It had an obligation to cooperate and provide any information Frank Rosen requested. Defendants assert that InfoCure was prepared to and did provide such information to Frank Rosen. (Hicks Aff. ¶ 4.)
Plaintiffs contend that there was no attorney-client relationship with InfoCure because Frank Rosen was required to communicate with InfoCure through King Spalding. Defendants argue that this provision of the settlement agreement was principally a way to streamline the transmittal of information from InfoCure to Frank Rosen. King Spalding had represented InfoCure in defense of the plaintiff shareholders' claims since before Stephen Hicks' arrival at the company. Many clients request that their lawyers communicate with the company through a contact person. InfoCure requested that Frank Rosen communicate with it through King Spalding. Defendants contend that King Spalding was acting as de facto in-house counsel for InfoCure, not adversarial counsel to Frank Rosen. With respect to the claim against Morris, Manning Martin, the Court agrees.
As further evidence of the relationship, Defendants note that InfoCure assisted Frank Rosen in the drafting of the Restitution Complaint. (Defendants' Brief at 7-8, Ex. F.) Mr. Hicks suggested changes to the draft complaint, more specifically that Frank Rosen remove a reference to InfoCure's 40% interest in the claim. (Hicks Supp. Aff. ¶ 3; Green Supp. Aff. ¶ 5.) Frank Rosen made the requested change. (Green Supp. Aff. ¶ 5.) The Court finds that the present case is factually similar to the Brennan case. Just as the attorney inBrennan represented both the plaintiff and the insurer in the underlying malpractice claim, Frank Rosen represented both Restitution, Inc. and InfoCure in the Restitution, Inc. case. In addition, just as the attorney in Brennan both received a fee from Independence for his services and sent Independence a check reflecting its interest in the malpractice settlement, Frank Rosen received a contingency fee from InfoCure's portion of the settlement and sent InfoCure its portion of the settlement proceeds. (Hicks Supp. Aff. ¶ 4.) Plaintiffs have failed to explain how Frank Rosen could collect a fee from InfoCure's portion of the settlement without an attorney-client relationship. Accordingly, the Court holds that there is sufficient evidence to show that an attorney-client relationship existed between Frank Rosen and InfoCure. Thus, the Court must turn to the "substantial relationship" test.
B. Substantial Relationship Test
The "substantial relationship" test requires that a party seeking to disqualify counsel for another party show "no more than that the matters embraced within the pending suit wherein his former attorney appears on behalf of his adversary are substantially related to the matters or cause of action wherein the attorney previously represented him, the former client." Glover v. Libman, 578 F. Supp. 748, 759 (N.D. Ga. 1983). If the "substantial relationship" test is met, the Court is to assume that confidences were disclosed during the course of the prior representation and will not so inquire. Id. In determining whether there is a substantial relationship between this case and the matter in which Plaintiffs' counsel represented InfoCure's interests, this Court must examine both the reasonableness of inferring that the confidential information allegedly given in the previous matter would have been given to a lawyer representing a client in those matters as well as the scope and relevance of the information to the issues raised in the pending litigation. Ramada Franchise System v. Hotel of Gainesville Associates, 988 F. Supp. 1460, 1463 (N.D. Ga. 1977).
In the Restitution Complaint and in the Plaintiffs' Amended Complaint, it is alleged that InfoCure misrepresented or failed to disclose certain information to its shareholders in December 1999. This alone is sufficient to show that the two actions are substantially related. Plaintiffs' counsel had access to confidential information about the alleged misrepresentations that could be used to InfoCure's detriment in this case. Whether they actually received such confidential information is irrelevant under well established case law. See Summerlin v. Johnson, 176 Ga. App. 336, 337 (1985). It appears that Frank Rosen has changed sides. Thus, the Court holds that the matters are substantially related and given the substantial relationship between the two relevant matters, there is a virtually irrebuttable presumption that confidential information was exchanged. Cox v. American Cast Iron Pipe Co., 847 F.2d 725, 729 (11th Cir. 1988); Brotherhood Mut. Ins. Co. v. National Presto Industries. Inc., 846 F. Supp. 57, 59 (M.D. Fla. 1994). There is no claim that Defendants failed to raise the disqualification issue in a timely fashion. Therefore, although the Court is always reluctant to deprive parties of their right to choose their own counsel, the motion to disqualify must be granted.
IV. CONCLUSION
For the reasons set forth above, Defendants' Motion to Disqualify Frank Rosen as Attorneys for Plaintiffs [Doc. 107] is GRANTED.
SO ORDERED.