ROBERT G. MAYER, Bankruptcy Judge.
First Owners Association of Forty Six Hundred Condominium, Inc., ("FOA"), one of the defendants in this adversary proceeding, asks that Reed Smith LLP, counsel for the plaintiffs, be disqualified because Reed Smith previously represented it in substantially related matters. Va. Rules of Professional Conduct Rule 1.9(a).
FOA has been in litigation with Gordon Properties, LLC and its related entities and individuals for more than four years. There have been at least seven law suits, two bankruptcies, an arbitration and numerous appeals, all of which, according to statements of counsel in various hearings, have cost FOA more than a million dollars in attorneys fees. FOA and Gordon Properties recently reached a global settlement which is scheduled for a hearing
Before the ink was dry on the global settlement — before it was even finalized and reduced to writing — eleven unit owners (several of whom previously sat on the Board of Directors and two of whom previously sat on the Special Litigation Committee) filed this suit against FOA and three of its directors (all three of whom are affiliated with Gordon Properties) in the Circuit Court for the City of Alexandria. The suit sought to have the Circuit Court declare that the three Gordon Properties-affiliated directors were invalidly elected; that a change in the membership of the Special Litigation Committee was invalid; that the prior Special Litigation Committee be reinstated; that the Board of Director's action in temporarily hiring Condominium Services, Inc. ("CSI"), a subsidiary of Gordon Properties, was invalid; and that the three Gordon Properties-affiliated directors may not participate in any Board action involving Gordon Properties. It further sought to have the three Gordon Properties-affiliated directors "temporarily and/or permanently enjoined from voting or taking any action on any matters that involve any settlement of the claims arising out of or relating to Gordon Properties, CSI or Gordon Residential." Complaint for Declaratory Judgment and Injunctive Relief at 20. Lindsay Wilson, one of the individual defendants, removed the case to this court under 28 U.S.C. § 1452. The plaintiffs are represented by Reed Smith. FOA, a defendant, seeks to disqualify Reed Smith from participating in this case.
There are two competing principles. On the one hand, a party should have the right to retain counsel of his choice. On the other hand, a party has the right to have his confidences preserved by his counsel both during and after the representation. Chantilly Const. Corp. v. John Driggs Co., 39 B.R. 466, 468 (Bankr. E.D.Va.1984) (Bostetter, C.J.). A client is entitled to his lawyer's considered advice. In order to give full and fair advice, a lawyer needs his client to fully and freely discuss the matter with him and to give him all the information that the client possesses, even unfavorable or unflattering information.
There are three types of confidential information: privileged communications;
The confidentiality rules are common-sense rules. They assure that a client — whether an individual, a corporation or a condominium unit owner's association — can confide in his lawyer without fear that his lawyer will divulge that information to others or use it to the client's disadvantage.
The confidentiality rules lead directly to limitations on a lawyer's ability to represent a new client in matters involving a former client. When confidentiality conflicts with the right to choose counsel, confidentiality prevails. Tessier v. Plastic Surgery Specialists, Inc., 731 F.Supp. 724, 729 (E.D.Va.1990) ("the right ... to retain counsel of his choosing is `secondary in importance to the Court's duty to maintain the highest ethical standards of professional conduct to insure and preserve trust in the integrity of the bar.'"). The confidentiality rules protect both the former client from the obvious threats of divulging confidential information or using it to the former
"[O]nce an attorney-client relationship has been established, an irrebuttable presumption arises that confidential information was conveyed to the attorney in the prior matter." Tessier, 731 F.Supp. at 734, citing Chantilly. This does not mean that a lawyer is forever barred from representing a new client against a former client. Rule 1.9(a) addresses this. A lawyer may represent a new client against a former client, but not "in the same or a substantially related matter" in which the lawyer represented a prior client. Rule 1.9. The determination of whether a new matter is substantially related to the prior matter is not always easily resolved as is illustrated by Tessier.
Id. at 731. The factors considered in Tessier provide a good, nonexclusive list of factors helpful in determining whether two matters are substantially related.
Tessier looked at the parties to the prior and new litigation. The parties in these two cases are substantially the same.
Reed Smith previously represented FOA in two disputes: the termination of CSI and the additional assessment of Gordon Properties' restaurant condominium unit. In addition to representing FOA in the two disputes, Reed Smith was also general counsel to FOA. As general condominium counsel, it assisted Ms. Sarvadi of LeClair Ryan in the second injunction suit that resulted in the court-supervised 2011 election.
Reed Smith describes its prior representations of FOA in the first portion of the complaint it filed in this case against FOA. Complaint for Declaratory Judgment and Injunctive Relief at ¶¶ 1-62. The complaint describes the two key disputes between Gordon Properties, CSI and FOA in the section titled "Nature of Dispute Between FOA, Gordon Properties and CSI." Complaint at ¶¶ 20-30. In the first dispute, the termination of CSI by the Board of Directors as management agent for FOA, CSI asserted that only the unit owners association — not the Board of Directors — had the authority to terminate it. CSI resorted to self-help by continuing to collect condominium fees rather than suing for damages for breach of contract. FOA ultimately sued CSI and recovered a judgment in the amount of $161,792 in compensatory damages and $275,000 in punitive damages.
The second dispute was over condominium fees assessed by the Board of Directors against Gordon Properties for its street-front condominium unit. The condominium consists of a high-rise building, a gas station and a restaurant. The gas station and the restaurant are physically separate from the high-rise. Each is a separate condominium unit and are called the street-front units. Gordon Properties owns the street-front condominium unit presently used as a restaurant. The condominium documents divide responsibility for expenses between the high-rise units and the street-front units. After about thirty years of operations, the Board of Directors determined that FOA had been underassessing Gordon Properties' street-front unit. The Board issued a supplemental assessment of about $250,000 which covered the preceding five years. Litigation ensued. Gordon Properties sought,
The representation became more involved and complicated when Gordon Properties filed bankruptcy on October 2, 2009.
The membership of the Board of Directors changed significantly as a result of the election for directors at the October 2011 annual meeting. Most of the directors on the old Board were not reelected. Gordon Properties was successful in electing three members to the Board.
The second major piece of litigation was Gordon Properties' objection to FOA's proof of claim. This court followed the state court as to the method of allocating assessments. After determining the method by which assessments should be calculated and that FOA's proof of claim did not use that method, the presumption of the correctness of the amount claimed in the
There were other matters. One was a motion in this court to substantively consolidate the two bankruptcy cases. The prospects of FOA collecting its $436,792 judgment against CSI were, at best, dim. The effect of substantive consolidation would require Gordon Properties to pay the CSI judgment in full. This court ruled against FOA but was reversed by the District Court. The matter is now pending on remand. The matter was handled by Reed Smith in this court and on appeal.
FOA filed an additional suit in state court in light of the then-upcoming 2011 board election seeking to adjudicate the issue of the number of seats that related entities could hold on the Board of Directors at one time as established by the Board of Director's 2009 resolution. The case was removed to this court and remanded. It was then sent to arbitration where it is now pending.
All matters in the bankruptcy court except the substantive consolidation motion are now on appeal to the District Court. In 2011 the District Court ordered the parties to mediation. The mediation did not result in a settlement.
The second portion of Reed Smith's complaint sets out the basis for the present suit. Complaint at ¶¶ 44-62. The allegations are principally of actions taken by the boards elected in October 2011 and October 2012. The gist of this portion of the complaint concerns the Board's handling of the Special Litigation Committee. After the 2011 annual meeting, the Board appointed a three-person Special Litigation Committee two of whom, Abdon Alexandre Zoghaib and Betty Gilliam, are plaintiffs. Mr. Zoghaib was a member of the Board of Directors. None was affiliated with Gordon Properties. The 2011 Board also terminated Reed Smith as counsel on June 19, 2012. Motion of Reed Smith LLP for Leave to Withdraw as Counsel for First Owners' Association of Forty Six Hundred Condominium, Inc. at ¶ 3. The Board did not terminate LeClair Ryan at that time. The Special Litigation Committee retained John Donelan as its counsel and rehired Reed Smith to handle the matters on appeal. The Special Litigation Committee was not successful in bringing the matters to a conclusion prior to the October 2012 annual meeting.
After the October 2012 annual meeting, the new Board reconstituted the Special Litigation Committee. Mr. Zoghaib and Ms. Gilliam were replaced with two newly elected board members, Maratina Hernandez and William Reichenback, neither of whom is affiliated with Gordon Properties.
This court requested the Hon. Kevin R. Huennekens mediate the matters. The mediation was successful. The 2012 Special Litigation Committee on behalf of FOA reached an agreement with Gordon Properties which was approved by the Board of Directors by a 6 to 0 vote, with one abstention. A motion to approve the settlement was filed with the court on January 28, 2012. Approval of the proposed settlement is scheduled for a hearing on March 21, 2013.
Count I seeks declaratory relief. There are eight specific forms of relief requested. The first seeks to declare that the election of the three Gordon Properties-affiliated members of the Board was invalid.
Reed Smith stated at the hearing on the disqualification motion that it would withdraw this prayer for relief.
Three prayers for relief challenge the composition and authority of the Special Litigation Committee. The complaint seeks to invalidate the change in the membership of the Committee. The Committee hired John Donelan who was not previously involved in any of the matters and, with his assistance, negotiated the settlement now before the court. The effect of the relief requested would be to invalidate the Committee's efforts and scuttle the settlement agreement.
The last three prayers for relief relate to the three Gordon Properties-affiliated directors. The complaint seeks to invalidate actions that they participated in and to prohibit them from voting on matters affecting Gordon Properties or CSI. The effect of this relief would be to hinder and perhaps prevent the proposed settlement from being approved by the court.
Count II seeks damages from the three Gordon Properties-affiliated directors for alleged breaches of their fiduciary duties.
This case is substantially related to the prior cases in which Reed Smith represented FOA against Gordon Properties and its representation of FOA as general condominium counsel. The facts underlying the representations are substantially the same. While it is true that some of the allegations arose after Reed Smith was terminated by FOA, they are inextricably intertwined with the facts that arose and existed during Reed Smith's prior representation. The parties are essentially the same. At least four of the eleven unit owners who are the present plaintiffs were previously on the Board of Directors when Reed Smith represented FOA. Some of the prayers for relief overlap the relief sought in prior representation. Others would
The most important factor is that this suit seeks to prevent what Reed Smith was hired by FOA accomplish: to collect money from CSI and to collect a supplemental assessment from Gordon Properties. These matters may be resolved by litigation or settlement, or a combination of both. Reed Smith had not achieved a resolution when it was discharged. FOA's new Board with new counsel did. Reed Smith represents eleven unit owners who want to prevent the proposed settlement and Reed Smith presents a way to achieve this. But the matters FOA seeks to settle and the eleven unit owners seek to prevent being settled are the same that Reed Smith was hired to resolve: to collect money from CSI and to collect an additional assessment from Gordon Properties. The prior representation and the current representation are substantially related matters in which Reed Smith's current clients' interest — the eleven unit owners' interests — are materially adverse to the interests of Reed Smith's former client, FOA.
The purpose of this suit is to hinder, delay or prevent the current Board of Directors from settling the disputes between FOA and Gordon Properties. The plaintiffs are unhappy with the proposed settlement. Without knowing the full terms of the settlement — the settlement had not been finalized at that time the complaint was filed, the allegations in the complaint being "upon information and belief" — the plaintiffs assert that the proposed settlement would, "if approved" cause:
Complaint at ¶ 60. Reed Smith restates this in its opposition to the disqualification motion. It asserts that the various actions of the three Gordon Properties-affiliated directors would "force FOA to agree to an unfavorable settlement agreement." Opposition to Motion to Disqualify Reed Smith LLP at 6. Later in its opposition to the disqualification motion it states:
Opposition at 7.
The effort to prevent the settlement is further illustrated by Mr. Dingman's argument after the court made its oral ruling. He requested an immediate stay pending appeal of the ruling on the disqualification motion. The path that counsel sought is shown in the colloquy that followed. Reduced to its basics, he wanted a stay pending appeal to the District Court; a reversal in the District Court; a remand to the Bankruptcy Court; a remand of the removed case from the Bankruptcy Court to the Circuit Court; and a determination by the Circuit Court that the three Gordon Properties-affiliated directors had acted
The substantial relationship of the two matters is further shown by the ability of the plaintiffs to raise all of the matters referred to in the complaint at the settlement hearing. All the issues go to the propriety of the settlement and to the legitimacy and authority of the Board of Directors. Resolution of all of them is necessary for approval of the settlement. This is true even when the question of authority is directed to the non-debtor counterparty to an agreement. The court cannot approve an agreement or a settlement unless all parties have the authority to enter into it and have properly exercised that authority. The court frequently makes determinations concerning a non-debtor counterparty. For example, the court determines whether a purchaser is a good faith purchaser under § 363(m) of the Bankruptcy Code. The court cannot approve an illusory agreement, one that would not effectively bind the parties. These types of challenges are not generally raised because the consent and authority of the parties to a proposed settlement is generally readily apparent. But, when raised, they are a necessary part of the Rule 9019 settlement process.
The purpose of this suit is most succinctly stated in the plaintiff's eighth prayer for relief, that the three Gordon Properties-affiliated directors be "enjoined from voting or taking any action on any matters that involve any settlement of the claims arising out of or relating to Gordon Properties, CSI or Gordon Residential." Complaint at 20. It is this purpose that Rule 1.9 prohibits. The very confidential information that Reed Smith obtained when it sought to resolve these very matters may now be used to prevent resolution of them.
Reed Smith raises other arguments. It asserts that this court has no jurisdiction to hear the disqualification motion because the complaint was improperly removed to the bankruptcy court. The short answer is simply that the case is pending in this court whether it has jurisdiction or not. Every court has jurisdiction to determine whether it has jurisdiction and this court will consider that matter. However, before it can consider that matter, it must be determined who may speak for the eleven unit owners, that is, who may represent them. That is the issue addressed by the disqualification motion. Ruling on it is a necessary first step to determining whether this court has jurisdiction.
Reed Smith changed sides.
Rule 1.9(c), Conflicts of Interest: Former Client, states:
Reed Smith also identifies the four defendants in its complaint. FOA is one of the four defendants. The other three are three of the four members of Gordon Properties, LLC. They were elected to the Board of Directors for two-year terms in October 2011. Complaint at ¶¶ 13, 17-19, 43-44.
Complaint at 19.
