Exterior Systems, Inc. v. Noble Composites, Inc.

• Decision Date: 04 December 2001
• Docket Number: No. 3:01-CV-217-RM.,3:01-CV-217-RM.
• Citation: 175 F.Supp.2d 1112
• Parties: EXTERIOR SYSTEMS, INC. d/b/a Fabwel, Inc., a wholly-owned subsidiary of Fibreboard, Inc., a wholly-owned subsidiary of Owens Corning, Plaintiff, v. NOBLE COMPOSITES, INC., Larry Farver, Kenneth Farver, and Edward Welter, Defendants.
• Court: U.S. District Court — Northern District of Indiana

Page 1112

175 F.Supp.2d 1112

EXTERIOR SYSTEMS, INC. d/b/a Fabwel, Inc., a wholly-owned subsidiary of Fibreboard, Inc., a wholly-owned subsidiary of Owens Corning, Plaintiff, v. NOBLE COMPOSITES, INC., Larry Farver, Kenneth Farver, and Edward Welter, Defendants.

No. 3:01-CV-217-RM.

United States District Court, N.D. Indiana, South Bend Division.

December 4, 2001.

Paul J. Peralta, Eric J. Groen, Alison G. Fox, Baker and Daniels, South Bend, IN, for Plaintiff.

John D. Ulmer, Yoder, Ainlay, Ulmer and Buckingham, Goshen, IN, for Defendants.

Cynthia S. Gillard, Michaelle C. Hilary, Warrick and Boyn, Elkhart, IN, for Edward Welter.

MEMORANDUM AND ORDER

NUECHTERLEIN, United States Magistrate Judge.

Plaintiff Exterior Systems, Inc. d/b/a Fabwel, Inc. ("ESI") seeks to disqualify counsel for Defendant Edward Welter. After reviewing all of the evidence (both in-camera and non-in-camera), the Court concludes that Attorney Cynthia Gillard's current representation of Welter conflicts with her past representation of Fabwel. Consequently, ESI's motion to disqualify counsel is GRANTED.

I. FACTUAL BACKGROUND

Defendant Welter's present counsel, Cynthia Gillard, is a member of a firm, Warrick & Boyn, that has represented Welter since 1972. In that year, Welter founded Fabwel, Inc. ("Fabwel") as an Indiana corporation that made fiberglass panels used in recreational vehicles. Welter served as Fabwel's majority shareholder, president and chief executive officer until he sold the company to ABF Investors, Inc. ("ABF") in 1987. Welter continued as president and chief executive officer of Fabwel under ABF's ownership. Warrick & Boyn continued to serve as counsel for Fabwel. As part of this representation, Attorney Gillard represented Fabwel in the purchase of Master Fab, Inc., a company owned and controlled by Defendant Larry Farver. Gillard prepared numerous contracts and other acquisition documents on behalf of Fabwel, including a February 10, 1988 non-competition/non-disclosure agreement between Fabwel and Larry Farver.

In 1985, Welter established the Executive Benefit Plan for executives of Fabwel. The initial plan used life insurance policies and forms supplied by a local Elkhart insurance agent. Fabwel supplemented the life insurance policies with its own funds held in trust. The Plan consisted of a series of separate agreements with individual Fabwel executives, including Welter. On June 11, 1990, Gillard drafted an amended Plan agreement between Fabwel and Welter. The 1990 amendment completely terminated and replaced the initial 1985 agreement.

In July 1992, Welter and twenty other minority investors bought Fabwel back from ABF. Among the twenty minority employee investors were Raymond Stout, ESI's current President; Larry Farver, a Defendant and current investor in Defendant Noble Composites; and John Gardner, Fabwel's Chief Financial Officer until 1999 when he left and became a shareholder of Noble Composites. Welter continued as chairman of the board of directors and chief executive officer of Fabwel. Welter's counsel, including Ms. Gillard, continued as counsel for Fabwel.

In 1994, Attorney Gillard represented Fabwel in its initial public offering. In 1994 and 1995, she assisted Fabwel with its purchase of ITI Tuco, Inc. She prepared non-competition/non-disclosure agreements on behalf of Fabwel in conjunction with the ITI acquisition.

Welter and the other shareholders sold Fabwel to Fibreboard Corporation on May 5, 1997. On that day, Welter signed a consulting and non-competition/non-disclosure agreement with Fabwel. Welter and Fabwel also signed a May 5, 1997 amendment to the Executive Benefit Agreement. Gillard represented Welter and some of the other shareholders during these transactions, including Stout, Gardner, and Larry Farver. On May 22, 1997, Fabwel and Welter signed a second non-competition agreement. The second agreement enabled Welter to receive early retirement benefits as described by the Executive Benefit Agreement. Gillard represented Welter during this transaction.

In June 1997, Owens Corning bought Fibreboard and thus Fabwel. In December 1999, Owens Corning merged Fabwel into ESI, which is a subsidiary of Fibreboard, which is a subsidiary of Owens Corning. Fabwel, Inc., the Indiana corporation, ceased to exist. Fabwel is now operated as a division of ESI.

ESI receives legal advice from Owens-Corning's in-house counsel. When necessary in-house counsel hires outside law firms on particular matters. Since the May 1997 sale, Owens-Corning has hired Warrick & Boyn on three matters, all unrelated to the present dispute. In November 1997 Owens Corning asked for a copy of the Indiana statute relating to bribery, blackmail, and extortion. In January 2000 Owens-Corning contacted Warrick & Boyn about a possible collections case that was never filed. Finally, in March 2000 Warrick & Boyn appeared in Elkhart Superior Court in a case involving a fire at Fabwel in 1998. The suit was settled and dismissed in June 2001.

In April 2000, Larry Farver, ESI's general manager, resigned and formed Noble Composites, Inc. with several other investors including, allegedly, Welter. ESI alleges that Noble Composites manufactures the same product as ESI and competes directly against it. Further, ESI alleges that Larry Farver and Welter breached their non-competition/non-disclosure agreements and raided ESI's workforce. In October 2000, ESI terminated the Executive Benefit Plan and allegedly stopped paying Welter early retirement benefits.

ESI filed suit in March 2001 claiming breach of the non-competition/non-disclosure agreements, misappropriation of trade secrets, intentional interference with employment relationships, and other claims. Defendants filed a motion to dismiss for lack of subject matter jurisdiction, which delayed matters for several months before the Court denied the motion. Defendants filed their answers in June 2001. They alleged counterclaims of abuse of process, unfair competition, and other antitrust claims. In addition, Welter sought a judgment declaring the May 22, 1997 non-competition/non-disclosure agreement to be null and void once ESI stopped paying Welter's early retirement benefits in breach of the Executive Benefit Agreement.

This Court has the authority to decide this motion pursuant to 28 U.S.C. § 636(b)(1)(A) and the June 12, 2001 order of referral.

II. DISQUALIFICATION IS WARRANTED IF AN ATTORNEY'S REPRESENTATION FAILS THE SUBSTANTIAL RELATIONSHIP TEST

The critical importance of two considerations, the sacrosanct privacy of the attorney-client relationship and the prerogative of a party to proceed with counsel of its choice, requires a court to proceed with careful and thoughtful analysis when deciding motions to disqualify counsel. Schiessle v. Stephens, 717 F.2d 417, 420 (7th Cir.1983).

The Seventh Circuit warns that disqualification "is a drastic measure which courts should hesitate to impose except when absolutely necessary." Cromley v. Board of Educ., 17 F.3d 1059, 1066 (7th Cir.1994) (citing Freeman v. Chicago Musical Instrument Co., 689 F.2d 715, 721 (7th Cir. 1982)). Disqualification motions "should be viewed with extreme caution for they can be misused as techniques of harassment." Freeman, 689 F.2d at 722. Yet, the Seventh Circuit has instructed courts to resolve doubts in favor of disqualification. United States v. Goot, 894 F.2d 231, 235 (7th Cir.1990).

The Local Rules of the United States District Court for the Northern District of Indiana adopt Indiana's version of the Model Rules of Professional Conduct. N.D.Ind.L.R. 83.5(f). Indiana Rule of Professional Conduct 1.9 states as follows:

A lawyer who has formerly represented a client in a matter shall not thereafter:

(a) represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client consents after consultation; or

(b) use information relating to the representation to the disadvantage of the former client except as Rule 1.6 or Rule 3.3 would permit or require with respect to a client or when the information has become generally known.

Subsection (a) addresses the problem of attorney loyalty; subsection (b) deals with client confidences. Subsection (a)'s loyalty requirement extends beyond situations where client confidences are actually learned and used, but the duty of loyalty does not extend to the point of never allowing an attorney to take a position adverse to a former client. Subsection (a) extends the duty of loyalty to situations where it reasonably can be inferred that the attorney learned related confidences during the prior representation on a "substantially related matter."

In addition to the Indiana rule, the Seventh Circuit has adopted a federal common law standard for attorney disqualification. That standard, derived from the venerable T.C. Theatre Corp. v. Warner Bros. Pictures, 113 F.Supp. 265 (S.D.N.Y.1953), and followed by every jurisdiction in the United States, is known as the "substantial relationship" test:

[T]he former client need show no more than that the matters embraced within the pending suit wherein his former attorney appears on behalf of his adversary are substantially related to the matters or cause of action wherein the attorney previously represented him, the former client. The Court will assume that during the course of the former representation confidences were disclosed to the attorney bearing on the subject matter of the representation. It will not inquire into their nature and extent. Only in this manner can the lawyer's duty of absolute fidelity be enforced and the spirit of the rule relating to privileged communication be maintained.

Id. at 268-69. Like Rule 1.9, the rule in T.C. Theatre sought to enforce (1) "the lawyer's duty of absolute fidelity" and (2) protection of "privileged communications" with former clients. Rule 1.9 is merely a...