EF Hutton & Company v. Brown, Civ. A. No. 68-H-592.

• Court: United States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Southern District of Texas
• Writing for the Court: Reynolds, White, Allen & Cook, Houston, Tex., for defendant
• Citation: 305 F. Supp. 371
• Parties: E. F. HUTTON & COMPANY, Inc., Plaintiff, v. John D. BROWN, Defendant.
• Decision Date: 18 September 1969
• Docket Number: Civ. A. No. 68-H-592.

305 F. Supp. 371

E. F. HUTTON & COMPANY, Inc., Plaintiff,
v.
John D. BROWN, Defendant.

Civ. A. No. 68-H-592.

United States District Court S. D. Texas, Houston Division.

September 18, 1969.

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COPYRIGHT MATERIAL OMITTED

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COPYRIGHT MATERIAL OMITTED

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Bracewell & Patterson, Houston, Tex., for plaintiff

Reynolds, White, Allen & Cook, Houston, Tex., for defendant.

MEMORANDUM OPINION

I. PREFACE

NOEL, District Judge.

A. Introduction

Plaintiff E. F. Hutton & Company, Inc. ("Hutton"), a national brokerage

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firm, brought this action against defendant John D. Brown, its former Houston regional vice-president, for alleged negligence and breach of fiduciary duty to the corporation. Jurisdiction exists under 28 U.S.C. ? 1332 as to the entire case, and under 28 U.S.C. ? 1331 as to a portion of the case

In this litigation Hutton is represented by a Houston law firm (hereinafter called "the Houston firm"), which appears as Hutton's counsel of record. Hutton's corporate general counsel, Cahill, Gordon, Sonnett, Reindel & Ohl of New York City (hereinafter called "the New York firm") has not entered a formal appearance and does not appear "of Counsel" on the pleadings filed by the Houston firm on Hutton's behalf, but (as will be shown later in more detail) has participated in the investigation of Hutton's claim against Brown and in Hutton's prosecution of this litigation. Defendant Brown has moved to disqualify both of these firms from continuing to represent or to advise Hutton in connection with this litigation and to enjoin them from turning over certain information in their files to Hutton or to new counsel whom Hutton may retain.

In part, this litigation is an outgrowth of the collapse of Westec Corporation in August, 1966. In late July or early August, a man named John Hurbrough approached Brown seeking a substantial loan from Hutton to be secured by Westec common stock. After negotiations, Brown authorized and made a loan to Hurbrough in the amount of $650,000, and caused Hutton to lend that sum to Hurbrough upon receipt of the collateral. Shortly after the loan was completed, however, the American Stock Exchange and the Securities and Exchange Commission (SEC) suspended trading in Westec stock. In due course, Brown and other Hutton personnel were asked by the SEC to testify in a formal investigation into the internal affairs of Westec and into trading in Westec stock. Subsequently, these same personnel were asked to testify at public hearings instituted by Westec's trustee in bankruptcy. In accordance with its usual practice in such cases, the New York firm dispatched one of its members (hereinafter called "the New York partner") to accompany Brown to each hearing. A member of the Houston firm (hereinafter called "the Houston partner") also accompanied Brown to the bankruptcy hearing.

With the suspension of trading, the value of the Westec stock given as collateral, evaporated. Hutton sought through negotiations to obtain either additional collateral or repayment from Hurbrough. Its efforts were fruitless. Ultimately, Hurbrough filed suit against Hutton and others, seeking against Hutton a declaration that the loan agreement was unenforceable.¹

Several months after the Hurbrough suit was filed, Hutton terminated Brown's employment on the advice of counsel and commenced this action. The complaint alleges that Brown was negligent in authorizing and making the Hurbrough loan, and that he also breached his fiduciary duty to the corporation by failing to supervise an account executive adequately, a failure which allegedly resulted in the embezzlement of substantial sums of money from Hutton.²

In this litigation, the Houston partner is counsel of record for Hutton. As more fully appears hereafter, the New York partner and other members of the New York firm have cooperated with the Houston partner in the preparation and presentation of Hutton's case. Shortly after suit was filed, Brown's present attorney requested the Houston partner and his firm to withdraw from further representation of Hutton in this litigation. The Houston partner refused, whereupon Brown filed the pending motion.

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In support of his motion to disqualify, Brown asserts that the New York and Houston partners represented him individually when he appeared at the SEC and bankruptcy hearings and testified about the Hurbrough loan transaction. He asserts that the instant lawsuit may well turn in substantial part on his understanding of that transaction, and contends that counsel's continued representation of Hutton violates their subsisting duty to him as their former client. In opposition, Hutton denies that the partners ever represented Brown individually, and contends that even if they did, Brown is not now entitled to insist on their disqualification.

Exhaustive briefs and affidavits have been submitted by both parties. Brown has submitted an affidavit and supplementary affidavit of his own, an affidavit of his present counsel, and an affidavit prepared by the attorney for the Westec trustee who examined him at the bankruptcy hearing. The affidavits submitted by Hutton include one by the New York partner, one by an associate of the New York firm (hereinafter called "the New York associate"), one by the Special Master who presided over the bankruptcy hearing, and an affidavit and two supplementary affidavits by the Houston partner. In addition, the record of this case includes two copies of the transcript of the bankruptcy hearing,³ and the Court has also referred to the transcript of Brown's testimony in the SEC proceeding.⁴

Both Hutton and Brown have stated in their briefs that they consider this record complete, and neither has asked to offer any live testimony or requested an evidentiary hearing. Although each originally requested oral argument, both later waived oral argument and agreed to submit the motion on the lengthy briefs already filed.

After careful consideration of the briefs, affidavits, and transcripts, the Court granted Brown's motion to disqualify, but denied the requested injunctive relief. Thereafter, Hutton filed a motion to reconsider, and offered further argument with reference to the Houston partner's appearance with Brown at the bankruptcy hearing. In this motion, which will be denied, Hutton urges contentions which will be discussed in conjunction with the issues raised by the motion to disqualify.

Many of the issues raised by Brown's motion to disqualify have generated well established rules, for the attorney's duty not to represent conflicting interests nor to discharge inconsistent obligations has long been recognized. In the first place, courts agree that the duty to avoid conflicts subsists after the attorney-client relationship which caused it to arise has ceased.⁵

The proper method for a litigant to bring the issue of a conflict of interest before the court is by a motion to disqualify.⁶ Although a court's authority to disqualify counsel is based upon its duty to supervise the conduct of the attorneys practicing before

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it,⁷ a motion to disqualify normally can be made only by a former client.⁸ Moreover, a former client may move to disqualify only if the subject of the adverse representation is substantially related to the subject of the former one.⁹

In this case it is undisputed that Brown's role in the making of the Hurbrough loan was the subject of lengthy questioning at both hearings at which he testified. The parties also agree that this issue may become one of the material issues here. These stipulations establish the requisite relationship between the alleged prior representations and the current adverse representation, but three issues presented by the motion to disqualify remain to be resolved:

(1) Whether Brown is a former client; i. e., whether the New York and Houston partners represented him individually, as well as the corporation, at the SEC and bankruptcy hearings.

(2) Whether corporate counsel who have represented a corporate officer individually should be disqualified even though all of the officer's communications with counsel were intended to be conveyed to his corporate employer and were made for the benefit of the corporation.

(3) Whether the requested injunction should issue.

The Court answers the first two of these questions in the affirmative, and will direct present counsel for plaintiff to terminate their representation of plaintiff in this case and to refrain from aiding, consulting or advising new counsel retained by plaintiff, except to the limited extent reasonably necessary to the transfer of their duties to new counsel. The request for an injunction will be denied.

One preliminary matter remains. In its opposition to Brown's motion, Hutton has not questioned the Court's power to grant any of the relief Brown seeks, although it has defended the motion vigorously on the merits. Similarly, in

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arguing to the Court that the relief he seeks should be granted, Brown has done no more than cite and discuss previous decisions in which courts have granted motions to disqualify

The Court has given very careful consideration to the question of its power to grant relief, particularly against the New York attorneys. The reported decisions are far from satisfactory. Courts asked to entertain motions to disqualify invariably have not considered whether an order of disqualification would be enforceable. This apparently is a question which is left unresolved pending subsequent enforcement proceedings. Upon reflection, this Court believes the better course to be to resolve this issue now, and will conclude this preface by discussing its power to grant the relief sought by Brown.

Following the discussion of jurisdiction, in the central portion of this necessarily extended memorandum opinion, the events which occurred at the SEC and bankruptcy hearings will be found as...