Berg v. Marine Trust Co., N.A., 86-2100

• Decision Date: 08 October 1987
• Docket Number: No. 86-2100,86-2100
• Parties: Vernon R. BERG, Sr., Plaintiff-Appellant, v. The MARINE TRUST COMPANY, N.A., Berg Engineering, Inc., Berg Hydro-Man, Inc., Simplex, Inc., Farmway Co., Inc., Wilber Equipment Corporation, Berg and Berg, Inc., Berg Equipment Company, Berg Industries, Inc., Richard G. Hugo and Vernon R. Berg, Jr., Defendants-Respondents.
• Court: Wisconsin Court of Appeals

Page 643

416 N.W.2d 643

141 Wis.2d 878

Vernon R. BERG, Sr., Plaintiff-Appellant, v. The MARINE TRUST COMPANY, N.A., Berg Engineering, Inc., Berg

Hydro-Man, Inc., Simplex, Inc., Farmway Co., Inc., Wilber

Equipment Corporation, Berg and Berg, Inc., Berg Equipment

Company, Berg Industries, Inc., Richard G. Hugo and Vernon

R. Berg, Jr., Defendants-Respondents.

No. 86-2100.

Court of Appeals of Wisconsin.

Argued Aug. 25, 1987.

Opinion Released Oct. 8, 1987.

Opinion Filed Oct. 8, 1987.

Earl H. Munson and Janet L. Kelly (argued), and LaFollette & Sinykin, Madison, and John E. Shannon, Jr. and Anderson, Shannon, O'Brien, Rice & Bertz, Stevens Point, for plaintiff-appellant.

Francis J. Podvin (argued), and Richard D. Weymouth, and Nash, Podvin, Detlefsen, Tuchscherer & Weymouth, S.C., Wisconsin Rapids, for defendants-respondents.

Before GARTZKE, P.J., EICH and SUNDBY, JJ.

EICH, Judge.

We granted Vernon Berg, Sr., leave to appeal from an order denying his motion to disqualify the law firm retained by the respondents Berg Industries, Inc., and Farmway Co., Inc. The issue is whether the trial court abused its discretion in declining to disqualify the firm. We conclude that there was an abuse of discretion and reverse.

Berg commenced this shareholder's derivative action in January, 1986, naming Berg Industries, Farmway, and several other corporations and individuals, including his son, Vernon, as defendants. The complaint alleged, inter alia, that the board of directors of Berg Industries had permitted Vernon to "siphon" assets from the corporation and move them to his own businesses. Berg Industries and Farmway answered the complaint, appearing by Francis Podvin of the law firm of Nash, Podvin, Detlefsen, Tuchscherer & Weymouth.

Berg moved to disqualify the Nash law firm on grounds that one of the firm's partners had represented him in a 1983 dispute with Vernon involving the Berg family corporations, including Berg Industries. The motion was accompanied by an affidavit in which Berg asserted that the firm's services to him in 1983 related to Vernon's efforts to remove him (Berg) as an officer and director of Berg Industries and other family corporations and related family trusts, and that these matters were "directly related" to his claim in this action that Vernon has been diverting assets from one of the corporations to his own use.

The court held an evidentiary hearing on the motion, and the material facts are not in dispute. In 1961, Berg transferred the assets of several manufacturing companies and other properties to a family trust. Under the terms of the trust, Berg served as a trustee and continued in his position as chief executive officer of the several corporations. Attorney Larry Chambers, a member of the Nash law firm, was Berg's attorney at the time, representing Berg personally, as well as the various Berg companies. He continued in this capacity until July 7, 1983.

In early 1983, Vernon, who, together with Berg's other children and grandchildren, was a beneficiary of the trust, filed a petition to amend the trust to remove Berg as trustee and head of the corporations. Although Berg was not notified of the petition and did not appear in the proceedings, the court entered an order on May 12, 1983, removing him from his trust and corporate offices. Berg first learned of the existence of the petition when Vernon presented him with the court's order on May 13, 1983.

Berg immediately contacted Chambers and consulted with him about the case and other matters relating to the intrafamily disputes. The law firm's records indicate billings to Berg for approximately forty hours of legal services from May 13 to July 7, 1983, when Chambers informed Berg that he could no longer represent him because of a "possible conflict of interest." Up until that time Chambers was, in Berg's words, his "major attorney."

Chambers acknowledged that he had represented Berg and the several family companies for many years. He testified that he felt he did not want to represent either Berg or Vernon in the 1983 "removal" proceedings because "having known them both ... [he] would not feel comfortable representing either one." After Berg consulted with him about the case, Chambers suggested that he retain another attorney, Earl Munson, to handle the representation. However, Chambers continued to participate with Munson in the matter until he formally resigned as Berg's attorney on July 7, 1983. Even thereafter, into November, he was billing Berg for his services in attempting to settle the ongoing dispute between Berg and Vernon. Finally, he stated that he "didn't think" he talked to his partner, Francis Podvin (the lawyer now representing Berg Industries and Farmway), about the dispute, or that "any confidence[ ] of any kind ... was exchanged" between them. Chambers retired from the firm in 1985.

Berg commenced this action in January, 1986, seeking an accounting of all transactions between Vernon (and the companies under his control) and Berg Industries. The complaint recited Vernon's 1983 efforts to remove Berg from his trust and corporate offices and alleged that Vernon had been diverting money and other assets from Berg Industries. As indicated, Berg Industries retained the Nash firm to represent it, and Berg petitioned for disqualification. The trial court denied the petition, concluding that Berg had failed to establish a "substantial relationship" between Chambers's representation of Berg prior to July 7, 1983, and the firm's representation of Berg Industries in this action.

There are few Wisconsin cases on the subject of disqualification of an attorney on grounds that he or she has undertaken representation of a client whose interests are adverse to those of a former client, and none has adopted a methodology for determining when disqualification is appropriate. In Ennis v. Ennis, 88 Wis.2d 82, 276 N.W.2d 341 (Ct.App.1979), we held that an attorney who represented the wife in a postjudgment divorce proceeding, where another member of his law firm had represented the husband in the original action, was guilty of "a serious breach of the Code of Professional Responsibility" and should be disqualified. Id. at 98, 276 N.W.2d at 347. Noting that the attorney's conflict of interest was "obvious," id. at 99, 276 N.W.2d at 348, we did not discuss the matter further.

In City of Whitewater v. Baker, 99 Wis.2d 449, 299 N.W.2d 584 (Ct.App.1980), an attorney represented Baker in connection with his purchase of real estate, drafting the deed, and providing related services. A few years later, Baker became involved in a dispute with the city over the widening of an adjoining street. He brought an action to declare his interest in the property and was promptly sued by the city to force removal of several alleged encroachments on the street right-of-way. Baker's former lawyer represented the city in both actions, and we held that the trial court erred when it declined to disqualify him. We noted that a court need not find that the attorney has actually engaged in unethical conduct or disclosed the former client's confidences in order to be disqualified on grounds of conflict of interest. All that is required is that "the attorney has undertaken representation of a client whose interests are adverse to those of the former client." Id. at 453, 299 N.W.2d at 586. This is so, we said, because "[a]ttorneys are obligated to avoid even the appearance of impropriety." Id; Ennis, 88 Wis.2d at 98-99, 276 N.W.2d at 348.

In Whitewater, 99 Wis.2d at 455, 299 N.W.2d at 587, as in Ennis, the conflict was "obvious," and we were not called upon to analyze the facts under any particular test for disqualification. The Whitewater opinion does, however, acknowledge the existence of two tests for disqualification based on inconsistent or adverse representations. One test was said to be whether the new employment will require the attorney to do anything "that will injuriously affect a former client in any matter in which he formerly represented him and also whether the attorney will be called on ... to use against a former client any knowledge or information acquired in the former relationship." Id. at 454, 299 N.W.2d at 587, citing 7 Am.Jur.2d Attorneys at Law, sec. 156, p. 140 (1963) [now sec. 186, pp. 238-39] (footnote omitted). The Whitewater court also referred to a "federal" test for inconsistent employment--"whether a 'substantial relation' exists between the subject matter of the former representation and the issues in the later adverse representation," id. at 454-55 n. 1, 299 N.W.2d at 587--and suggests that the attorney would have been subject to disqualification under either standard because his subsequent representation was "obviously adverse" to his representation of the former client. Id. at 455, 299 N.W.2d at 587.

In this case the parties argued, and the trial court applied, the "substantial relationship" test. The test has been applied in every federal circuit for more than thirty years, ¹ and in most state courts as well. ² Because we believe it to be the appropriate test to be utilized in attorney disqualification cases, we adopt and apply it here.

Simply stated, the test is as follows: "where an attorney represents a party in a matter in which the adverse party is that attorney's former client, the attorney will be disqualified if the subject matter of the two representations are 'substantially related.' " Westinghouse Elec. Corp. v. Gulf Oil Corp., 588 F.2d 221, 223 (7th Cir.1978). The rule is said to "embod[y] the substance of Canons 4 and 9 of the A.B.A. Code of Professional Responsibility," which requires lawyers to "preserve the confidences and secrets of a client," and to "avoid ... even the appearance of professional impropriety." Id. at 224. Both canons have been adopted in Wisconsin. See SCR 20.21 and 20.48.

In this case, Podvin, the present "adverse" attorney, was not himself involved in the earlier...