Duncan v. Merrill Lynch, Pierce, Fenner & Smith, Inc.
| Decision Date | 01 June 1981 |
| Docket Number | No. 79-3112,79-3112 |
| Citation | 646 F.2d 1020 |
| Parties | Fed. Sec. L. Rep. P 98,017 Carl R. DUNCAN, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Defendant-Appellee. . Unit B |
| Court | U.S. Court of Appeals — Fifth Circuit |
George W. Wright, Jr., James W. Crabtree, Miami, Fla., for plaintiff-appellant.
Brown, Wood, Ivey, Mitchell & Petty, E. Michael Bradley, New York City, Walton, Lantaff, Schroeder & Carson, Bennett Falk, Miami, Fla., for defendant-appellee.
Appeal from the United States District Court for the Southern District of Florida.
Before GODBOLD, Chief Judge, MORGAN and HENDERSON, Circuit Judges.
This is an appeal from a district court order granting the defendant's motion to disqualify the law firm representing the plaintiff in a complex securities fraud action. Two questions are presented for our review. First, we must decide whether an order granting a disqualification motion is a "final decision" immediately appealable to this court under 28 U.S.C. § 1291. Finding that such an order is an appealable final decision, we have jurisdiction to consider the second question of whether the district court properly determined that disqualification of the law firm representing the plaintiff was required in this case. For reasons discussed below, we conclude that the district court misallocated the burden of proof applicable in a disqualification proceeding and failed to make the painstaking factual analysis required by our cases. We therefore remand for further proceedings.
In November 1978 Carl R. Duncan filed a complaint against Merrill Lynch, Pierce, Fenner & Smith, Inc., alleging that Merrill Lynch had made untrue statements of material fact and had omitted to state material facts in connection with the sale of certain municipal bonds to Duncan. Duncan retained the law firm of Smathers & Thompson to represent him in the action. Suing on behalf of himself and all others similarly situated, 1 Duncan asserted that Merrill Lynch had violated unspecified provisions of the federal securities laws, Regulation T of the Federal Reserve Board, 12 C.F.R. § 220, and the Florida blue sky statute, Chapter 517, Fla.Stat. He also alleged common law fraud and breach of fiduciary duties and, in an amended complaint, claimed violations of the Florida usury laws.
The complaint briefly sketched the common questions of fact upon which the alleged violations were founded. Duncan claimed that in purchasing and selling bonds for its customers Merrill Lynch had (1) acted as an undisclosed principal, (2) sold bonds out of its own inventory without disclosing that the bonds were available elsewhere at a lower price, (3) obtained commitments from customers for bond purchases at a specified price and then had purchased the bonds in the market at a lower price, (4) purchased bonds from customers at below the market price without advising that the bonds would obtain a higher price in other markets, and (5) failed to advise customers that it charged a commission on its bond transactions. Duncan further alleged that Merrill Lynch had, in violation of Regulation T, manipulated "buying power" generated in customers' margin accounts to reduce the amount of cash necessary for purchases in customers' cash accounts. Duncan, for himself and on behalf of the purported class, demanded compensatory damages in an amount estimated to exceed $10,000,000, punitive damages in an amount estimated to exceed $100,000,000, attorneys fees and costs, and an injunction against future occurrences of the alleged violations.
Rather than responding to the complaint, Merrill Lynch filed a motion to disqualify the law firm of Smathers & Thompson from representing Duncan or any other member of the purported class in the action. Merrill Lynch asserted that Smathers & Thompson had previously represented it in a number of cases that bore a "substantial relationship" to the issues raised in Duncan's action. Relying on Canons 4 and 9 of the American Bar Association Code of Professional Responsibility, 2 Merrill Lynch argued that Smathers & Thompson should be prohibited from utilizing the confidential and privileged information acquired by the firm during its previous representation of Merrill Lynch.
As evidence of the requisite "substantial relationship" between the prior representation and the present suit, Merrill Lynch filed an accompanying affidavit of one of its vice presidents listing ten different matters in which Smathers & Thompson had represented Merrill Lynch over a ten year period. The affidavit did not separately discuss the nature of these cases but stated generally that these matters
involved stock, commodities, municipal and government securities, margin accounts, Merrill Lynch's relationships with its customers, Merrill Lynch's relationships with its employees, Merrill Lynch's procedures and its records, the rules and regulations of various regulatory bodies, the federal securities laws, the Florida securities laws and specifically Chapter 517, class actions and common law. The work performed by the Smathers firm has included reviews of Merrill Lynch records, conferences with Merrill Lynch officers and employees, legal research, depositions, interrogatories, requests to produce, expert witnesses, hearings, motions, trials and appeals. The Smathers firm has performed its work in various parts of Florida and in New York, and attorneys in the Merrill Lynch Law Department have worked closely with lawyers from the Smathers firm, as have other Merrill Lynch representatives who were involved in the matters. In connection with these listed cases, Merrill Lynch has paid the Smathers firm some $85,000 in the last five years.
The affiant then noted that in the case McCormick v. Esposito, 500 F.2d 620 (5th Cir. 1974), cert. denied, 420 U.S. 912, 95 S.Ct. 834, 42 L.Ed.2d 842 (1975), Smathers & Thompson had defended a stock brokerage firm, Goodbody & Co., which had been acquired by a wholly owned subsidiary of Merrill Lynch in 1970. The affiant observed that the plaintiff in McCormick had alleged violations of Regulation T and of the New York Stock Exchange Rules relating to maintenance margin requirements and suggested that the McCormick case involved issues "remarkably similar" to those presented in the Duncan case. 3
In the memorandum accompanying its disqualification motion Merrill Lynch, in addition to restating each allegation made in the affidavit, elaborated somewhat upon two of the ten cases listed by the vice president in his affidavit. Merrill Lynch stated that in Alderson v. Citrus Associates of the New York Cotton Exchange, Inc., Smathers & Thompson had represented Merrill Lynch and three of its employees in a securities action brought by a plaintiff who had maintained a margin account with Merrill Lynch. The memorandum stated that
(t)he Alderson case involved substantial amounts of discovery, including the deposition of a Merrill Lynch vice president who was an individual defendant early in the litigation. In the course of preparing responses to interrogatories and to document production requests, the Smathers firm was in frequent communication with Merrill Lynch for the purpose of developing the necessary information and documentation both with regard to the actions of the Citrus Associates in August, 1971 and with regard to Merrill Lynch procedures for handling margin accounts.
The memorandum further noted that in Merrill Lynch, Pierce, Fenner & Smith v. Byrne, Smathers & Thompson had defended Merrill Lynch against allegations that the brokerage firm had mishandled a customer "stop-order" in violation of the anti-fraud provisions of the Florida blue sky statute and of its duties under the Florida common law of fraud, negligence, and contract.
In opposition to the motion to disqualify, Duncan argued that Merrill Lynch had failed to demonstrate any relationship, much less a "substantial relationship," between Smathers & Thompson's representation of Duncan and its former representation of Merrill Lynch. Duncan described and distinguished from the present suit each of the matters referred to by Merrill Lynch in its affidavit and memorandum. Responding to the cases upon which Merrill Lynch had placed its greatest emphasis, Duncan argued that the McCormick case was totally inapposite because it involved events that occurred prior to the Merrill Lynch acquisition of Goodbody & Co., Smathers & Thompson's client in that action, and therefore presented no opportunity for Smathers & Thompson to learn secrets and confidences of Merrill Lynch. Duncan also presented affidavits of the two opposing counsel in McCormick and in Alderson, in which each affiant stated that his case involved issues that were unrelated to those raised by the Duncan complaint.
The district court, after hearing oral argument regarding the disqualification question, entered an order granting the motion to disqualify Smathers & Thompson from representing Carl R. Duncan in his action against Merrill Lynch. Relying primarily on the Seventh Circuit opinion in Westinghouse Electric Corp. v. Gulf Oil Corp., 588 F.2d 221 (7th Cir. 1978), and on the facts outlined in the Merrill Lynch affidavit, the district court concluded that "(a)lthough the previous cases may not involve the identical issues involved here, the court feels that Smathers & Thompson would certainly have been exposed to information which would be substantially related to the instant case." Because it could not "clearly discern that the issues in this case are unrelated to those previous matters," the court determined that Canons 4 and 9 were implicated and that disqualification was required.
Before addressing the merits of Duncan's appeal, we must determine whether an order granting a motion to disqualify opposing counsel is appealable prior to the entry of a final judgment in the underlying action.
...
To continue reading
Request your trial
-
Koller By and Through Koller v. Richardson-Merrell, Inc.
...'effectively unreviewable' on appeal from a final judgment on the merits." 717 F.2d at 1417. We cited Duncan v. Merrill Lynch, Pierce, Fenner & Smith, 646 F.2d 1020, 1026-27 (5th Cir.), cert. denied, 454 U.S. 895, 102 S.Ct. 394, 70 L.Ed.2d 211 (1981), in which the Fifth Circuit considered a......
-
Freund v. Butterworth
... ... Mills to the law firm (Foley, Colton and Duncan, P.A.) that represented him. Second, he ... that under this court's decision in Smith v. White, a petitioner may establish an actual ... Merrill Lynch, Pierce, Fenner & Smith, Inc., 646 F.2d ... ...
-
In re Bellsouth Corp.
...The party moving to disqualify counsel bears the burden of proving the grounds for disqualification. Duncan v. Merrill Lynch, 646 F.2d 1020, 1028 (5th Cir. Unit B 1981); accord A.J. by L.B. v. Kierst, 56 F.3d 849, 859 (8th Cir.1995); see also American Airlines, 972 F.2d at 611 (holding that......
-
Law Offices of Seymour M. Chase, P.C. v. F.C.C.
... ... Court's decision in Richardson-Merrell, Inc. v. Koller, 472 U.S. 424, 105 S.Ct. 2757, 86 ... See also Duncan v. Merrill Lynch, Pierce, Fenner & Smith, Inc., ... ...
-
Table of Cases
...Cir. 1998): 16.4(6) DBSD N. Am., Inc., In re, 634 F.3d 79 (2d Cir. 2011): 16.14(7) Duncan v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 646 F.2d 1020 (5th Cir. 1981): 11.5(3) Exennium, Inc., In re, 715 F.2d 1401 (9th Cir. 1983): 16.14(1) Foster, In re, 188 F.3d 1259 (10th Cir. 1999): 16.1......
-
Friends and Lovers: Conflicts of Interest and New Aba Opinion
...v. Chicago Musical Instrument Co., 689 F.2d 715, 720 (7th Cir. 1982). See also, Duncan v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 646 F.2d 1020, 1025 n.6, 1027 (5th Cir.) (attorney is subjected to loss of both reputation and fees), cert. denied, 454 U.S. 895 (1981). [31] Zimmerman v. B......
-
Friends and Lovers: Conflicts of Interest and New Aba Opinion on Relationships Between Opposing Counsel
...v. Chicago Musical Instrument Co., 689 F.2d 715, 720 (7th Cir. 1982). See also, Duncan v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 646 F.2d 1020, 1025 n.6, 1027 (5th Cir.) (attorney is subjected to loss of both reputation and fees), cert. denied, 454 U.S. 895 (1981). [31] Zimmerman v. B......
-
§11.5 - Former Client Conflicts of Interest—RPC 1.9
...from representing plaintiff in a labor dispute with the corporation). But see Duncan v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 646 F.2d 1020 (5th Cir. 1981) refused to disqualify plaintiff 's attorney even though the attorney defended the brokerage in similar prior cases). See also AB......