El Camino Resources, Ltd. v. Huntington Nat. Bank

• Court: U.S. District Court — Western District of Michigan
• Writing for the Court: Joseph G. Scoville
• Citation: El Camino Resources, Ltd. v. Huntington Nat. Bank, 623 F.Supp.2d 863 (W.D. Mich. 2007)
• Decision Date: 13 September 2007
• Docket Number: Case No. 1:07-cv-598.
• Parties: EL CAMINO RESOURCES, LTD., et al., Plaintiffs, v. HUNTINGTON NATIONAL BANK, Defendant.

623 F.Supp.2d 863

EL CAMINO RESOURCES, LTD., et al., Plaintiffs, v. HUNTINGTON NATIONAL BANK, Defendant.

Case No. 1:07-cv-598.

United States District Court, W.D. Michigan, Southern Division.

September 13, 2007.

COPYRIGHT MATERIAL OMITTED

Duane Lee Coleman, Lewis Rice & Fingersh LC, St. Louis, MO, John E. Anding, Thomas Vincent Hubbard, Drew Cooper & Anding, Grand Rapids, MI, Raynor D. Zillgitt, Jr., Willingham & Cote, PC, East Lansing, MI, John Albert Graham, Jeffer Mangels Butler & Marmaro LLP, Los Angeles, CA, for Plaintiff.

Charles Nedwin Ash, Jr., Dennis W. Archer, Dickinson Wright, PLLC, Matthew J. Lund, Robert Steven Hertzberg, Pepper Hamilton LLP, Detroit, MI, Laurence Z. Shiekman, Nicole G. Tell, Pepper Hamilton LLP, Philadelphia, PA, Jon R. Muth, Monica Cook Inhulsen, Miller Johnson PLC, Grand Rapids, MI, Robert P. Hurlbert, Dickinson Wright, PLLC, Bloomfield Hills, MI, for Defendant.

OPINION ON MOTION TO DISQUALIFY DEFENSE COUNSEL

JOSEPH G. SCOVILLE, United States Magistrate Judge.

This is a civil action falling within the district court's diversity jurisdiction. The case is one of the many criminal, civil, and bankruptcy actions now pending in this court arising from the massive Cyberco fraud. Plaintiffs El Camino Resources, Ltd. and ePlus Group, Inc. are computer leasing companies that engaged in commercial transactions with Cyberco: El Camino purchased over $11.5 million in computer equipment and ePlus Group over $14.5 million in computer equipment for purposes of leasing the equipment to Cyberco. Plaintiff Bank Midwest is a national banking association that entered into a secured loan transaction with Cyberco in 2004 for $4.925 million. All three plaintiffs allege that they were the victims of fraud by Cyberco and that defendant Huntington National Bank, Cyberco's principal financial institution and depository, aided and abetted Cyberco's fraud. They therefore seek judgment against Huntington National Bank in an amount exceeding $30 million. Huntington is represented in this action by Pepper Hamilton, LLP.

Presently pending before the court are motions by plaintiffs ePlus Group and Bank Midwest to disqualify Pepper Hamilton as defense counsel, on the ground that the firm has a conflict of interest arising from its status as counsel for each of the two moving plaintiffs in other litigation. They assert that Pepper Hamilton's decision to defend Huntington National Bank in this case against the claims brought by plaintiffs is a breach of the firm's duty of undivided loyalty to them and that disqualification is required pursuant to Michigan Rule of Professional Conduct 1.7(a). In connection with the motion to disqualify, both Huntington National Bank and the Pepper Hamilton firm have retained special counsel. Special counsel have argued that the conflict of interest was "thrust upon" Pepper Hamilton through no fault of its own and that the "flexible approach" adopted by some courts allows Pepper Hamilton to continue its representation of Huntington National Bank in this case while withdrawing from its admitted attorney/client relationship with the two moving plaintiffs. Additionally, they argue that Bank Midwest executed a written conflict of interest waiver broad enough to comprehend the present litigation.

On July 31, 2007, the district judge referred this motion to me for decision pursuant to 28 U.S.C. § 636(b)(1)(A). Pursuant to the reference, I conducted a hearing on September 6, 2007, at which plaintiffs' counsel of record presented their positions and special counsel (Dennis Archer, Esq. for Pepper Hamilton and Jon Muth, Esq. for Huntington National Bank) argued in opposition to the motion. Having considered the record and submissions of counsel, I conclude that (1) Pepper Hamilton violated its duty of loyalty to each moving defendant by taking a position in this case directly adverse to them; (2) Pepper Hamilton is ethically precluded from attempting to discharge the moving plaintiffs as clients in order to free itself of the conflict; (3) plaintiff Bank Midwest did not waive its right to object to the conflict of interest raised by this case; and (4) the "flexible approach" to conflicts of interest that are thrust upon an attorney does not apply in the circumstances of this case. Plaintiffs' motions to disqualify will therefore be granted.

Findings of Fact

In support of its motion, plaintiff Bank Midwest submitted the affidavit of Douglas Neeb, Senior Litigation Counsel for its parent company. (docket # 20). ePlus Group submitted the affidavit of Erica Stoeker, General Counsel. (docket # 33-2). In response, Huntington National Bank submitted the affidavit of Managing Counsel John Liebersbach. (docket # 61-2). Pepper Hamilton submitted the following affidavits, all filed under docket number 68: Attorneys Robert Hertzberg, Laurence Shiekman, David Fournier, David Murphy, and Jeremy Frey. All parties were given the opportunity to call any of their witnesses live, but declined to do so. The facts found in this opinion are gleaned from those affidavits and the exhibits thereto, as well as the record in this case and other related cases pending in this court and the Bankruptcy Court, proper subjects of judicial notice.

A. Parties

1. Plaintiff El Camino Resources, Ltd. is a California corporation with principal place of business located in the State of California. On or about May 27, 2004, El Camino executed a master equipment lease with Cyberco Holdings, Inc. Pursuant to the master equipment lease, during the remainder of 2004, Cyberco purported to lease equipment from El Camino in an aggregate amount exceeding $11.5 million. El Camino alleges that Cyberco fraudulently converted the money earmarked for the leases.

2. Plaintiff ePlus Group is a Virginia corporation with principal place of business in the State of Virginia. ePlus Group entered into a master lease agreement with Cyberco effective March 3, 2004, pursuant to which Cyberco thereafter purported to lease computer equipment from ePlus valued in excess of $14 million. ePlus alleges that Cyberco fraudulently converted the monies earmarked for the equipment.

3. Plaintiff Bank Midwest is a national banking association organized under federal law with branches in the States of Missouri and Kansas. In early November 2004, Bank Midwest entered into a secured loan transaction with Cyberco, pursuant to which Cyberco borrowed $4.925 million for the ostensible purpose of acquiring equipment that would stand as security for the loan. Bank Midwest alleges that Cyberco fraudulently converted the proceeds of the loan.

4. Defendant Huntington National Bank is a national banking association organized under federal law with principal place of business in Columbus, Ohio. Plaintiffs allege that Huntington established a comprehensive banking relationship with Cyberco beginning in 2002 and ultimately extended loans to it exceeding $19 million.

5. Pepper Hamilton, LLC is a national law firm with principal offices in Philadelphia, Pennsylvania, and a substantial presence in several other cities, including Detroit, Michigan. Pepper Hamilton is counsel of record for defendant Huntington National Bank in this matter, having filed its appearance on July 10, 2007. As chronicled below, at the time Pepper Hamilton agreed to represent Huntington National Bank in this case, it had an active attorney/client relationship with both ePlus Group and Bank Midwest.

6. Plaintiffs' complaint asserts four counts against Huntington National Bank: aiding and abetting Cyberco's fraud (count I); aiding and abetting Cyberco's conversion of plaintiffs' funds (count II); statutory conversion (count III); equitable recovery of stolen property, unjust enrichment and constructive trust (count IV, brought by El Camino only). The gravamen of plaintiffs' claims against Huntington National Bank is that Huntington aided and abetted Cyberco in its fraud and that the bank accepted from Cyberco and its affiliate Teleservices Group "laundered money" that represented proceeds of the fraud worked by Cyberco on plaintiffs. For the sake of simplicity, this opinion refers to plaintiffs' claims as the "aiding and abetting claims."

B. Related Cyberco Litigation

7. The Cyberco scam came to a halt on November 17, 2004, when agents of the FBI executed search warrants on Cyberco's office and seizure warrants for the bank accounts and other assets of Cyberco and its affiliates. Through seizure warrants, the federal government sequestered millions of dollars in bank accounts held in the name of Cyberco or nominees. The United States began a series of in rem forfeiture actions to condemn these funds to the use and benefit of the United States under proceedings established by 18 U.S.C. §§ 981(a)(1)(A) and 981(a)(1)(C), on the theory that the proceeds of the bank accounts were traceable to violations of numerous federal criminal laws. Relevant to the present case, the United States initiated the following forfeiture actions in this court:

(a) United States of America v. One J.P. Morgan Case Bank Account Number 026073870865 In the Amount of $750,000.00, case no. 1:05-cv-59 (filed 1/24/05);

(b) United States of America v. One Comerica Bank Account Number 6811948139 In the Amount of $700,000.00, case no. 1:05-cv-60 (filed 1/24/05);

(c) United States of America v. One Huntington National Bank Account Number 01159630935 In the Amount of $705,168.60, case no. 1:05-cv-61 (filed 1/24/05);

(d) United States of America v. One Independence Community Bank Account Number 92043867 In The Amount of $750,000.00, case no. 1:05-cv-62 (filed 1/24/05);

(e) United States of America v. One Chemical Bank Shoreline Account Number 5024019400 In The Amount of $100,000.00, case no. 1:05-cv-294 (filed 4/21/05);

(f) United States of America v. One Silicon Valley Bank Account Number 3300355711 In The Amount of $113,952.62, case no. 1:05-cv-295 (filed 4/21/05);

(g) United States of America v. One Fifth Third Bank...