Trone v. Smith

• Decision Date: 23 June 1980
• Docket Number: No. 77-1832,77-1832
• Citation: 621 F.2d 994
• Parties: Fed. Sec. L. Rep. P 97,557 Curvin J. TRONE, Jr., Trustee for Westgate-California Corp., et al., Appellees, v. C. Arnholt SMITH, James F. Mulvaney, Richard P. Woltman, William B. Connoley, Voler L. Viles, et al., Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 994

621 F.2d 994

Fed. Sec. L. Rep. P 97,557

Curvin J. TRONE, Jr., Trustee for Westgate-California Corp., et al., Appellees, v. C. Arnholt SMITH, James F. Mulvaney, Richard P. Woltman, William B. Connoley, Voler L. Viles, et al., Appellants.

No. 77-1832.

United States Court of Appeals,

Ninth Circuit.

June 23, 1980.

Thomas R. Sheridan, Simon & Sheridan, Los Angeles, Cal., Robert G. Steiner, Luce, Forward, Hamilton & Scripps, San Diego, Cal., for appellants.

Alan D. Croll, Los Angeles, Cal., argued for appellees; Wyman, Bautzer, Rothman & Kuchel, Los Angeles, Cal., on brief.

Appeal from the United States District Court for the Southern District of California.

Before GOODWIN and KENNEDY, Circuit Judges, and HILL ^*, District Judge.

GOODWIN, Circuit Judge:

We review ¹ the district court's refusal to grant a motion to disqualify plaintiff's counsel. Whether the refusal was correct on the facts of this case turns upon the effect of the rule against suing a former client.

This appeal is one aspect of the complex litigation filed by the trustees in bankruptcy for Westgate-California Corporation (Westgate) and other entities, against a large number of individuals and entities, seeking compensatory damages of at least $500,000,000 and punitive damages of not less than $1,000,000,000. The 110-page complaint, incorporating 194 counts, alleges numerous violations by defendants of provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, the National Banking Act, and the Federal Reserve Act, as well as breaches of duties under state law.

Defendant C. Arnholt Smith was chairman of the board and chief executive officer of Westgate from its date of incorporation until November 2, 1973. Until May 24, 1973, Smith was also the principal shareholder, chairman of the board, president, and chief executive officer of the United States National Bank (USNB). Defendant C. Hugh Friedman was former counsel for Smith, Westgate, and USNB. The remaining defendants are former officers or directors of USNB or of related entities more or less controlled by Smith.

Plaintiffs are represented in this litigation by the firm of Wyman, Bautzer, Rothman & Kuchel (Wyman). Wyman's representation began with its appointment as special counsel for Westgate pursuant to an equitable consent judgment entered in Securities Exchange Comm'n v. Westgate-California Corp., No. 73-217-N (S.D.Cal., Oct. 31, 1973). Wyman was thereby empowered to conduct an investigation into the financial affairs of Westgate and to take appropriate action in connection with that investigation, including the prosecution of actions for the benefit of Westgate or its shareholders to recover wasted or misappropriated assets. In February 1974, Westgate went into Chapter X reorganization proceedings, and Wyman assumed the capacity of general counsel to the trustees, pursuant to court order.

The pending action was filed in April 1975, after plaintiffs had completed their extensive investigation of Westgate's affairs. The district court referred pretrial and discovery proceedings to a magistrate pursuant to 28 U.S.C. § 636(b)(2). On August 9, 1976, at a hearing before the magistrate, counsel for Smith raised the possibility of a conflict of interest because of Wyman's prior representation of Smith. ² A formal motion seeking Wyman's disqualification was filed shortly thereafter by all appellants.

The motion was based upon Wyman's legal services in 1972, at the request of Smith, in connection with a proposed secondary offering of 400,000 shares of Smith's personally-owned or controlled USNB stock. Salomon Brothers, a firm of underwriters, agreed to assist in the public offering. In connection with preparation of the offering, Salomon Brothers asked Smith to obtain a legal opinion letter from a law firm independent of Smith, USNB, and Friedman, who then represented both Smith and USNB. Smith accordingly retained Wyman, initially contacting Frank Rothman, a senior partner in the firm.

The Wyman firm then began evaluating the circumstances of the offering for the preparation of a legal opinion letter to Salomon Brothers for inclusion in the offering circular. An interoffice memorandum prepared by Jerold Sherman, the Wyman attorney primarily responsible for the case, detailed the matters the firm believed required investigation in order to evaluate the need for disclosure in the circular. These matters included the following:

"11. * * * all sales and purchases of bank stock by Mr. Smith, Westgate, etc. to determine possible 16b violations or problems * * *.

"12. * * * how the bank approves all loans, * * *. We should determine what procedures they follow when the loan is to Mr. Smith, Westgate, etc. Is Mr. Smith's involvement disclosed at the time of the loans?

"14. * * * all sales of assets owned personally by Mr. Smith or owned by Westgate or its subsidiaries, etc. to third parties whereby the purchaser finances the purchases through the bank, etc. (e. g. sale of Golden West Airlines).

"34. Apparently the bank leases most of its offices from Westgate. We should determine if the bank financed the construction of the buildings owned by Westgate.

"45. We should determine if there are any presently existing contractual arrangements between the bank and Westgate, US Holding, etc."

In carrying out the proposed investigation, Sherman reviewed major news stories involving the participants in the offering, examined the financial statements of relevant corporations, and inspected other public documents. He also participated in meetings with USNB employees, which were attended by at least one member of the Friedman firm, as well as by Smith and often by a representative of Salomon Brothers. Believing that information with respect to "sensitive" areas was not being provided, Sherman requested Rothman's assistance in convincing Smith that further disclosure was required. At a meeting between Sherman, Rothman, Friedman, and Smith in August 1972, Smith indicated that he had decided not to go ahead with the offering at that time because the timing was not right.

In October 1972, Wyman billed Smith for its efforts in the amount of $15,000 plus costs, as follows:

"SERVICES RENDERED through August 27, 1972 in connection with proposed registration, including meetings with principals, counsel and underwriters, review of corporate structure and preliminary review of various material contracts and transactions to determine scope of disclosures required under federal securities laws."

At the time of billing, Wyman contemplated that the matter might resume in the early part of 1973 and deferred a portion of its bill with that in mind. Wyman was paid in November 1972 by a cashier's check from USNB.

We turn next to Wyman's appointment as counsel for the trustee and the motion to disqualify. Prior to the firm's appointment as special counsel for Westgate in January 1974, Rothman told the court that Wyman had handled the sale of a produce business in 1969 and had participated in litigation involving Air California. Certain other of Wyman's legal services for Smith, but not the representation on the stock offer, had previously been disclosed to and considered by the district court. Following Rothman's disclosures, the district court approved the appointment. Wyman's representation of the trustees for Westgate was also considered by the district court at the request of the FDIC as receiver of USNB, prior to the resolution of litigation between the FDIC and the trustees. The court again approved the representation.

Obviously, a substantial amount of legal work had been done by the time the magistrate considered the disqualification motion. The magistrate recommended that the motion be denied on the grounds that there was no substantial relationship between Wyman's representation of Smith in 1972 with respect to the scope of disclosure required under Rule 10b-5 for the stock offering and Wyman's role in bringing this action against Smith and others charging breach of fiduciary duty while serving as officers and directors of Westgate and USNB.

The district court reviewed de novo the magistrate's conclusions and denied the motion for disqualification of the Wyman firm, making the following findings of fact and conclusions of law:

" * * * (T)he law firm of Wyman, Bautzer, Rothman & Kuchel represented only C. Arnholt Smith, and not United States National Bank (U.S.N.B.) or its directors, in the proposed secondary offering of U.S.N.B. securities in June 1972; that the representation was with respect to the stock offering only and continued for approximately one month; and that members of the Wyman firm gathered public information pursuant to that representation but were denied access to any confidential information by Mr. Smith.

"Accordingly, the court concludes that counsel for plaintiffs did not obtain any confidential information in their prior representation of Smith, and that the legal services rendered in the stock offering were not so related to the instant litigation to justify disqualification of counsel."

The relevant test for disqualification is whether the former representation is "substantially related" to the current representation. See Gas-A-Tron of Arizona v. Union Oil Co. of California, 534 F.2d 1322, 1325 (9th Cir.), cert. denied, 429 U.S. 861, 97 S.Ct. 164, 50 L.Ed.2d 139 (1976); Westinghouse Electric Co. v. Gulf Oil Corp., 588 F.2d 221, 223 (7th Cir. 1978); Government of India v. Cook Industries, Inc., 569 F.2d 737, 739 (2d Cir. 1978). The interest to be preserved by preventing attorneys from accepting representation adverse to a former client is the protection and enhancement of the professional relationship in all its dimensions. It is necessary to preserve the value attached to the relationship both by the attorney and by the client. These objectives require a rule that prevents attorneys from accepting representation adverse to a former client if the...