ALETA A. TRAUGER, District Judge.
On March 18, 2015, plaintiff Wyndham Vacation Resorts, Inc. ("Wyndham") filed a sealed Motion to Disqualify McKellar Hyde from representing defendants Michael Dean Spigner, Ray Spigner, and The Consultant Group (collectively, the "Spigner Defendants"). (Docket No. 382.) On June 10, 2015, after extensive briefing and an evidentiary hearing, the Magistrate Judge issued an Order that disqualified McKellar Hyde from representing the customers of a third-party entity owned by Michael Dean Spigner (neither that entity nor its customers are parties to this case). (Docket No. 461.) The Spigner Defendants and their counsel, McKellar Hyde, PLC ("McKellar Hyde"), whose own interests are implicated, have filed a Motion for Review of the Magistrate Judge's Order (Docket No. 517), to which Wyndham filed a Response in opposition (Docket No. 536), the Spigner Defendants and McKellar Hyde filed a Reply (Docket No. 548), and Wyndham filed a Sur-Reply (Docket No. 557).
For the reasons stated herein, the Motion for Review will be granted and the Magistrate Judge's Order will be reversed.
On September 28, 2012 (just a few months after the Spigner Defendants opened shop), Wyndham filed this lawsuit, which aimed to shut down the TCG/Superior business model. (Docket No. 1.) Wyndham alleged that the Spigner Defendants' sales presentations contained false and misleading representations about Wyndham's business and the nature of the timeshare interests, that the Spigners were working with Superior to facilitate fraudulent transactions to fictitious "sham purchasers" who inevitably defaulted on their maintenance fee obligations, and that Dean Spigner was violating the non-competition and non-solicitation terms of his Salesperson Agreement with Wyndham. Wyndham later filed an Amended Complaint, which remains the operative pleading in this case. (Docket No. 84.) Through June 2, 2014, both the Spigner Defendants and Superior were represented by attorney Greg Oakley, formerly of the now-dissolved law firm of DHPM, P.C., and more recently of the law firm of Oakley Rieger PLLC.
In April 2013, Wyndham deposed Dan Garrett and Christal Franklin, two principals of Superior (collectively, the "Superior Defendants"). Garrett all but admitted to facilitating fraudulent timeshare transfers to non-consenting third-party "purchasers." Dean Spigner claims that he was not aware of Superior's fraud before Garrett's deposition.
Dean Spigner has testified that, unbeknownst to Wyndham, he switched business models following the April 2013 Garrett deposition. Although the record concerning this new business model is only just developing, it appears that Dean Spigner registered a new company called "Vacation Transfers Unlimited, LLC" ("VTU") in March 2013, and claims to be the company's sole owner.
Meanwhile, proceedings in this lawsuit continued relative to the TCG/Superior business model at issue. On May 15, 2014, the court issued a Preliminary Injunction, which essentially forbade the Spigners and the Superior Defendants from continuing to facilitate fraudulent transactions and from holding themselves out as Wyndham affiliates — in other words, to cease the TCG/Superior business model. At that time, neither the court nor Wyndham was aware of the TCG/VTU business model, even though it may have been in effect for nearly a year by that point.
After the court issued the Preliminary Injunction, Greg Oakley withdrew as counsel for the Superior Defendants and the Spigner Defendants, citing an unspecified conflict.
Since McKellar Hyde appeared in this case, the parties have been engaged in repeated, vitriolic disputes about discovery. In most relevant part, while represented by McKellar Hyde, the Spigner Defendants dragged their feet (at best) in responding to discovery served by Wyndham. Among other disputed items, TCG belatedly produced a list of its customers in March 2015.
On March 18, 2015, perhaps in a "shoot first and ask questions later" approach, Wyndham filed the instant Motion to Disqualify (Docket No. 382), contending that McKellar Hyde should be disqualified from representing both the Spigner Defendants and their "victims" (the timeshare owners) at the same time. Wyndham alleged that McKellar Hyde was representing these customers in an effort to help the Spigner Defendants "clear" deeds that were in the TCG/Superior pipeline when the court issued the Preliminary Injunction against the TCG/Superior business model in May 2014. Wyndham's motion did not cite the violation of a particular ethical rule, nor did it articulate any form of prejudice other than an "impediment" to its ability to conduct "informal discovery" of "material witnesses" to the case.
In its Reply, Wyndham presented evidence showing that, notwithstanding Ms. Hyde's declaration, McKellar Hyde in fact had represented numerous customers of TCG. At 6:49 p.m. on May 26, 2015 (the night before the evidentiary hearing on the Motion to Disqualify), McKellar Hyde filed the Supplemental Declaration of Lyndsey Smith Hyde, in which Hyde conceded that her previous representation was "not completely accurate" and that she had, in fact, represented some TCG clients. She averred that she received referrals from VTU (not TCG) and did not realize at the time of her initial affidavit that clients referred by VTU were sometimes also customers of TCG.
On May 27, 2015, Magistrate Judge Brown held a hearing, a transcript of which is in the record. (Docket No. 473.) Wyndham introduced several exhibits into evidence, but it presented no witnesses. McKellar Hyde introduced exhibits, presented fact testimony from Dean Spigner, and presented expert testimony on the ethical issues from William Tripp Hunt, III, former Ethics and Disciplinary Counsel for the Tennessee Board of Professional Responsibility (the "BPR"). Among the exhibits, McKellar Hyde filed a copy of its form retention agreement with VTU-referred customers for review in camera. Dean Spigner testified concerning VTU's business model. Hunt testified that he perceived no conflict of interest that required disqualification. Nevertheless, Hunt admitted that McKellar Hyde had retained him the afternoon before the hearing, leaving him limited time to prepare, and it became clear that he had reviewed only a truncated record before testifying. During the hearing, the Magistrate Judge expressed some confusion concerning the nature of the entities involved (TCG, VTU, Superior, and the Spigners) and their interrelationships. Over objections from McKellar Hyde as to relevance, the Magistrate Judge heard testimony from Hunt concerning whether the VTU arrangement violated ethical rules relating to fee splitting and client solicitation. As to those two ethical concerns, Hunt testified that he could not render a confident opinion without seeing the terms of the agreement between McKellar Hyde and VTU.
Following the hearing, both Dean Spigner and Lindsey Smith Hyde submitted affidavits that provided additional testimony concerning VTU, TCG, McKellar Hyde, and TCG/VTU customers. (Docket Nos. 462 and 462.)
On June 10, 2015, the Magistrate Judge issued a four-page Order that granted in part and denied in part the Motion to Disqualify. (Docket No. 461.) Without citing the applicable legal standard, the Magistrate Judge found that McKellar Hyde "has a conflict" in representing both VTU customers and the Spigner Defendants at the same time. The Order did not specifically address a conflict relative to TCG. In reaching this decision, the Magistrate Judge discounted Hunt's opinion testimony, believing that Hunt had testified based on the incorrect assumption that all of McKellar's Hyde work for the individual clients had already concluded, and that Hunt had only a limited understanding of the case record. The Order directed McKellar Hyde to terminate its relationship with current clients of VTU, although its implementation was stayed.
On June 29, 2015, the Spigner Defendants and McKellar Hyde filed the instant Motion for Review (Docket No. 517), in support of which they filed the Declaration of William Walter Hunt, III (Docket No. 519) and a Notice of Filing that attaches unpublished cases (Docket No. 528). The Hunt Declaration recites assumed facts concerning the business operations of TCG and VTU and the relationships among TCG, VTU, VTU's customers, and McKellar Hyde. In substance, Hunt avers that McKellar Hyde's representation of VTU customers does not create a conflict with McKellar Hyde's representation of VTU because their interests are not "materially adverse." Hunt also avers that Tennessee Rule of Professional Conduct ("RPC") 1.7(b) permits an attorney to continue the representation despite a conflict, provided that the attorney "reasonably believes" that she can represent the client competently, that no law prohibits the representation, and that the clients do not have claims against each other in the same proceeding — all conditions that Hunt believes are satisfied here. Furthermore, Hunt contends that, under RPC 1.7(c), even if there were a conflict, it could be waived. Hunt also avers that McKellar Hyde clients whose timeshare contracts were terminated constitute "former clients" subject to RPC 1.9(a), under which a conflict exists only if the current client is "materially adverse" to the interest of a former client in the same or a substantially related matter — conditions not present here.
On July 6, 2015, Wyndham filed a Response to the Motion for Review. (Docket No. 536.) After the court issued an Order indicating that it would rule on the papers (Docket No. 539), McKellar Hyde filed a Reply (Docket No. 548), and Wyndham filed a Sur-Reply (Docket No. 557).
Under Fed. R. Civ. P. 72(a) and 28 U.S.C. § 636(b), a district court may modify or set aside a Magistrate Judge's ruling on non-dispositive preliminary matters only where that ruling is "clearly erroneous or contrary to law." This is a "limited standard of review." Massey v. City of Ferndale, 7 F.3d 506, 509 (6th Cir. 1993). A ruling is clearly erroneous "where it is against the clear weight of the evidence or where the court is of the definite and firm conviction that a mistake has been made." Galbraith v. N. Telecom, Inc., 944 F.2d 275, 281 (6th Cir. 1991) (internal citations omitted). The test is "not whether the finding is the best or only conclusion that can be drawn from the evidence, or whether it is the one the reviewing court would draw. Rather the test is whether there is evidence in the record to support the lower court's finding, and whether its construction of the evidence is a reasonable one." Heights Cmt'y Congress v. Hilltop Realty, Inc., 774 F.2d 135, 140 (6th Cir. 1985).
Although a district court possesses the inherent authority to disqualify an attorney in order to aid the fair representation of justice, it is not to use this remedy lightly; that is, courts must remain sensitive to the parties' choice of counsel and weigh that interest against the public's interest in fair judicial process. See Manning v. Warning, Cox, James, Sklar, & Allen, 849 F.2d 222, 224 (6th Cir. 1988); Cavender v. U.S. Express Enters., Inc., 191 F.Supp.2d 962, 965 (E.D. Tenn. 2002) (describing motions to disqualify as being "very sensitive" and as requiring the court to "exercise judgment with an eye toward upholding the highest ethical standards of the profession, protecting the interest of the litigants in being represented by the attorney of their choosing, . . . and the overriding societal interests in the integrity of the judicial process.") The standard for professional conduct of lawyers practicing before this court incorporates the Tennessee Rules of Professional Conduct. M.D. Tenn. Local Rule 83.01(e)(4).
To prevail on a motion to disqualify, the movant bears "the burden of proving that opposing counsel should be disqualified." McKinney v. McMeans, 147 F.Supp.2d 898, 900 (W.D. Tenn. 2001) (citing Bartech Indus. v. Int'l Baking Co., 910 F.Supp. 388, 392 (E.D. Tenn. 1996)).
The court sympathizes with the Magistrate Judge's impression, expressed at the evidentiary hearing, that something about the Spigners' current TCG/VTU business model does not "pass the smell test." As the court understands it, McKellar Hyde went into business with its own clients during the course of this litigation — perhaps from its outset — in a business model designed to woo customers away from Wyndham for profit. The evidence indicates that Dean Spigner at some point modified his business model in such a way that it (1) differed from the TCG/Superior model directly at issue in this lawsuit, (2) omitted evidence of his involvement in peeling business away from Wyndham, and (3) continued a significant revenue stream premised on targeting Wyndham timeshare owners. Furthermore, neither McKellar Hyde nor Dean Spigner was entirely forthcoming in disclosing and describing VTU's business model and its relationship to the Spigners, choosing to disclose the nature of that business model in bits and pieces, in ways that (at least initially) attempted to obscure the depth of their business relationship.
The court also recognizes why Wyndham's hackles were raised upon discovering that McKellar Hyde was representing TCG clients. Only after repeated badgering was Wyndham able to obtain the information necessary to make that connection, and even then, Wyndham had only a vague understanding as to why McKellar Hyde was sending demand letters on behalf of TCG clients. Although Dean Spigner maintains that he (and his father), TCG, and VTU are distinct entities, there may be legitimate grounds to question whether these entities are alter egos of one another. Dean Spigner continues to operate through multiple companies and under multiple names.
There does seem to be an inherent ethical issue in McKellar Hyde's procurement, via VTU, of clients in return for a fixed fee. As the court understands it, these clients are not reaching out to McKellar Hyde in the first instance; instead, the Spigners are convincing customers that they should divest their timeshare in favor of a substitute vacation club, signing the customers up for a substantial fee, and assigning McKellar Hyde as attorneys to them. There is no indication that McKellar Hyde has informed its clients of the allegations against the Spigners in this lawsuit, in which Wyndham essentially alleges that the Spigners are fraudsters.
Although these are legitimate concerns, they do not establish that McKellar Hyde should be disqualified from representing VTU's clients. The Magistrate Judge's Order does not recite the legal standard for disqualification or state where the burden lies, nor does the Order indicate that the Magistrate Judge applied the standard and the burden. Furthermore, the Magistrate Judge does not explain what authority the court has to disqualify an attorney from representing non-parties. These considerations alone constitute independent grounds for reversal. The Magistrate Judge's Order was clearly erroneous for additional reasons. With respect to Hunt's testimony, the Magistrate Judge should not have discounted Hunt on the grounds that he did not know that McKellar Hyde had current clients. Although McKellar Hyde could have been clearer in its presentation as to the distinction between past and present conflicts, the record contains references to current conflicts of interest, and Hunt testified that he perceived no conflicts relative both to current and former clients of McKellar Hyde. Regardless, even if the Magistrate Judge fairly interpreted McKellar Hyde's representations at the hearing, the court on review also has the benefit of Hunt's supplemental affidavit, in which Hunt explicitly opines that there are no conflicts relative to current or former McKellar Hyde clients because VTU and its customers are not adverse to one another. Moreover, although the Magistrate Judge legitimately questioned whether to place much stock in Hunt's conclusions at the time, the opinions in Hunt's post-Order declaration are based on a thorough understanding of the record that he lacked at the hearing.
Furthermore, the Magistrate Judge's Order does not distinguish between the TCG/Superior model and the TCG/VTU model. Although the record is limited concerning this the TCG/VTU business model, it appears to bear some similarities to the TCG/Superior model (targeting timeshare owners and convincing them to relinquish their timeshare asset or to purchase a substitute vacation club package), but it does not involve the procurement of fraudulent deed transfers and the associated transfer of fraudulent paperwork to Wyndham.
Finally, Wyndham has not explained why "impeding" its purported "efforts to conduct informal" discovery of TCG/VTU customers is a sufficient consideration to justify disqualification. Wyndham has shown, at best, only a speculative and incidental impact on its discovery efforts and the potential trial of this case.
In sum, the burden was on Wyndham to show that disqualification is warranted. It did not meet this burden before the Magistrate Judge, and it has not done so now. For the reasons explained herein, the court finds that the Magistrate Judge's Order was clearly erroneous and will be reversed.
On a final note, as to the parties' dispute concerning fee-splitting and solicitation, the court finds that discussion to be irrelevant to the issue of disqualification.
An appropriate order will enter.
