Armstrong v. McAlpin

• Decision Date: 20 June 1980
• Docket Number: D,No. 745,745
• Citation: 625 F.2d 433
• Parties: , Fed. Sec. L. Rep. P 97,542 Michael F. ARMSTRONG, et al., Plaintiffs-Appellees, v. Clovis McALPIN, et al., Defendants-Appellants. ocket 79-7042.
• Court: U.S. Court of Appeals — Second Circuit

Page 433

625 F.2d 433

51 A.L.R.Fed. 646, Fed. Sec. L. Rep. P 97,542

Michael F. ARMSTRONG, et al., Plaintiffs-Appellees, v. Clovis McALPIN, et al., Defendants-Appellants.

No. 745, Docket 79-7042.

United States Court of Appeals,

Second Circuit.

Submitted to the En Banc Court Feb. 22, 1980.

Decided June 20, 1980.

Gordon, Hurwitz, Butowsky, Baker, Weitzen & Shalov, New York City (Franklin B. Velie, Paul D. Wexler, Bruce Siegel, New York City, of counsel), for plaintiffs-appellees.

Barrett Smith Schapiro Simon & Armstrong, New York City (Michael F. Armstrong, Martin F. Richman, Eric T. Singer, New York City, Susan L. Gotbetter (not yet admitted), of counsel), for receiver Michael F. Armstrong.

Lunney & Crocco, New York City (J. Robert Lunney, Michael J. McAllister, James J. DeLuca, New York City, of counsel), for defendants-appellants.

Alice Daniel, Asst. Atty. Gen., Washington, D. C. (Robert E. Kopp, Frederick D. Cohen, Attys., Civ. Div., Dept. of Justice, Washington, D. C., of counsel), for the United States as amicus curiae.

Ralph C. Ferrara, Gen. Counsel, Securities and Exchange Commission, Washington, D. C. (Paul Gonson, Sol., John P. Sweeney, Asst. Gen. Counsel, Anne C. Flannery, Sp. Counsel, Washington, D. C., Harlan W. Penn, Atty., of counsel), for the Securities and Exchange Commission as amicus curiae.

Robert S. Burk, Acting Gen. Counsel, I. C. C., Washington, D. C. (Frederick W. Read, III, Associate Gen. Counsel, Washington, D. C., of counsel), for the Interstate Commerce Commission as amicus curiae.

Brien E. Kehoe, Gen. Counsel, Federal Maritime Commission, Washington, D. C. (Edward G. Gruis, Deputy Gen. Counsel, John C. Cunningham, Atty., Washington, D. C., of counsel), for the Federal Maritime Commission as amicus curiae.

John G. Gaine, Gen. Counsel, Commodity Futures Trading Commission, Washington, D. C., for the Commodity Futures Trading Commission as amicus curiae.

Erwin N. Griswold, Washington, D. C. (Donald I. Baker, Griffin B. Bell, Robert H. Bork, Calvin J. Collier, Jr., Ronald J. Dolan, Michael J. Egan, Washington, D. C., Ralph E. Erickson, Los Angeles, Cal., John R. Ferguson, Rudolph W. Giuliani, Robert B. Hummel, Owen M. Johnson, Thomas F. Kauper, Edward H. Levi, Michael R. McQuinn, Gerald P. Norton, Jonathan C. Rose, William D. Ruckelshaus, Antonin Scalia, Laurence H. Silberman, Joe Sims, William E. Swope, Donald F. Turner, Washington, D. C., Harold R. Tyler, Jr., New York City, Alan S. Ward, Washington, D. C., of counsel), for certain lawyers as amici curiae.

Before KAUFMAN, Chief Judge, and FEINBERG, MANSFIELD, MULLIGAN, OAKES, TIMBERS, VAN GRAAFEILAND, MESKILL and NEWMAN, Circuit Judges. ^*

FEINBERG, Circuit Judge (with whom KAUFMAN, Chief Judge, and MANSFIELD, OAKES and TIMBERS, Circuit Judges, concur):

In this en banc proceeding, we are called upon to consider two significant issues: the appealability of orders denying a motion to disqualify an attorney and the standard to be applied by the trial judge in ruling upon such motions. Clovis McAlpin and Capital Growth Real Estate Fund, Inc., two of numerous defendants in a suit seeking over $24 million for violation of federal securities laws, appeal from an order of the United States District Court for the Southern District of New York, Henry F. Werker, J., denying their motion to disqualify the law firm representing plaintiffs. The appeal was first heard by a panel of this court, which concluded that the trial judge had erred in denying defendants' disqualification motion. 606 F.2d 28 (2d Cir. 1979). A majority of this court voted to grant en banc reconsideration of the appeal, and directed

the parties to brief both the merits of the appeal and also the question whether an order granting or denying a disqualification motion should be appealable. Subsequently, the parties and a number of amici filed comprehensive briefs on the issues before the en banc court. After full consideration, we affirm the order of the district court and vacate the earlier decision of the panel. We also hold that henceforth orders denying disqualification motions will not be appealable, thus overruling our en banc decision in Silver Chrysler Plymouth, Inc. v. Chrysler Motors Corp., 496 F.2d 800 (2d Cir. 1974). The reasons for these rulings are fully set forth below

I. The Facts

Appellants' motion to disqualify is based on the prior participation of Theodore Altman, now a partner in the law firm representing plaintiffs-appellees, in an investigation of and litigation against appellants conducted when he was an Assistant Director of the Division of Enforcement of the Securities and Exchange Commission (the SEC). In September 1974, after a nine-month investigation, the SEC commenced an action in the United States District Court for the Southern District of New York against Clovis McAlpin and various other individual and institutional defendants. The complaint alleged that McAlpin and the other defendants had looted millions of dollars from a group of related investment companies, referred to here collectively as the Capital Growth companies; McAlpin was the top executive officer of these companies. The SEC suit sought, among other things, the appointment of a receiver to protect the interests of shareholders in the Capital Growth companies. When McAlpin fled to Costa Rica and certain other defendants failed to appear, the SEC obtained a default judgment; in September 1974, Judge Charles E. Stewart appointed Michael F. Armstrong, the principal appellee in this appeal, as receiver of the Capital Growth companies. See SEC v. Capital Growth Company, S. A. (Costa Rica) et al., 391 F.Supp. 593 (S.D.N.Y.1974).

One of Armstrong's principal tasks as receiver for the Capital Growth companies is to recover all moneys and property misappropriated by defendants; to further this task, Armstrong was authorized to initiate litigation in the United Statess and abroad. In October 1974, Judge Stewart granted Armstrong's request to retain as his counsel the New York firm of Barrett Smith Schapiro & Simon. ¹ Shortly after the appointment of Armstrong, the SEC made its investigatory files available to him, in accordance with its practice, we are informed in its brief, of assisting "the efforts of receivers who have been appointed by the courts in Commission law enforcement actions." Cf. SEC v. Everest Management Corp., 475 F.2d 1236, 1240 (2d Cir. 1972). The Barrett Smith firm reviewed these files, conducted its own investigation for the receiver, and assisted him in taking possession of various Capital Growth properties in the continental United States and in Puerto Rico. For the next year and a half, we are told, Barrett Smith devoted approximately 2,600 hours to assisting the receiver, which included the services of five partners and eight associates; a little over half of this time was spent preparing for litigation.

In early 1976, however, the receiver and Barrett Smith became aware of a potential conflict of interest involving an institutional client of Barrett Smith that might become a defendant in litigation brought by the receiver. Thus, despite Barrett Smith's substantial investment of time, the receiver concluded that it was necessary to substitute litigation counsel. The task, however, was not an easy one; McAlpin had fled to Costa Rica with most of the assets of the Capital Growth companies and hence the funds available to Armstrong to secure new counsel were quite limited. ² It was therefore necessary to find a firm that could not only handle difficult litigation in Costa Rica and in the United States, but would also

commit itself to conclude the task, even if little or no interim compensation was available. ³ Moreover, it was important to retain a law firm large enough to cope with the immense paper work soon to be generated by the firms that would probably represent the institutional defendants. ⁴

Because of these considerations, appellees assert, the receiver focused on firms already involved in litigation against Robert L. Vesco, who, like McAlpin, had fled to Costa Rica rather than face possible prosecution for numerous alleged securities fraud violations. After abortive negotiations with two such firms, the receiver in April 1976 retained the law firm of Gordon Hurwitz Butowsky Baker Weitzen & Shalov, the firm that is the target of appellants' disqualification motion. According to Armstrong, the Gordon firm was chosen in part because one partner, David M. Butowsky, was then Special Counsel to International Controls Corporation and was involved in legal work in Costa Rica relating to the alleged Vesco defalcations, while another partner had specialized experience in prosecuting complex fraud cases. In accepting the representation, the Gordon firm agreed to "conduct all Capital Growth litigation through to a conclusion" even if the receiver could not compensate the firm as the litigation progressed.

In October 1975, some seven months before the receiver obtained substitute counsel for Barrett Smith, Theodore Altman ended his nine-year tenure with the SEC to become an associate with the Gordon firm. At the time of his resignation, Altman had been an Assistant Director of the Division of Enforcement for three years, and had about twenty-five staff attorneys working under him. As a high-ranking enforcement officer of the SEC, Altman had supervisory responsibility over numerous cases, including the Capital Growth investigation and litigation. Although he was not involved on a daily basis, he was generally aware of the facts of the case and the status of the litigation. The SEC's complaint was prepared and filed by the staff of the New York Regional Administrator, and the litigation was handled by the New York office. Altman's name appeared on the SEC complaint, although he did not sign it.

At the time that Altman joined the Gordon firm, the receiver had no reason to know that Altman had left the SEC or to be aware of his new affiliation....