FDIC v. Sierra Resources, Inc., Civ. A. No. 86-F-2301.

• Decision Date: 16 November 1987
• Docket Number: Civ. A. No. 86-F-2301.
• Citation: 682 F. Supp. 1167
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, a federally chartered corporation, acting in its corporate capacity, and Shearson Lehman Brothers, Inc., a Delaware corporation, Plaintiffs, v. SIERRA RESOURCES, INC., a Colorado corporation, and Mountain States Stock Transfer Agents, Inc., a Colorado corporation, Defendants.
• Court: U.S. District Court — District of Colorado

682 F. Supp. 1167

FEDERAL DEPOSIT INSURANCE CORPORATION, a federally chartered corporation, acting in its corporate capacity, and Shearson Lehman Brothers, Inc., a Delaware corporation, Plaintiffs, v. SIERRA RESOURCES, INC., a Colorado corporation, and Mountain States Stock Transfer Agents, Inc., a Colorado corporation, Defendants.

Civ. A. No. 86-F-2301.

United States District Court, D. Colorado.

November 16, 1987.

Jane Michaels and Lynn Bolinske, Holland & Hart, Denver, Colo., for plaintiffs.

Christa Taylor, Hart & Trinen, Denver, Colo., for defendant Mountain States Stock Transfer Agents, Inc.

David Kozma, Paul G. Goss, Denver, Colo., for defendant Sierra Resources, Inc.

MEMORANDUM OPINION AND ORDER

SHERMAN G. FINESILVER, Chief Judge.

This matter is before the Court on plaintiffs' Motion to Disqualify Counsel for Defendant Mountain States Stock Transfer Agents, Inc. ("Mountain States"), filed October 15, 1987. The Court directed the parties to brief the relevant issues, and we held a hearing¹ on the motion in accordance with the Tenth Circuit's mandate in Fullmer v. Harper, 517 F.2d 20 (10th Cir. 1975). After review of the papers submitted, consideration of oral argument presented at the hearing, and examination of the relevant case law, the Court GRANTS plaintiffs' motion to disqualify for the reasons set forth herein.

FINDINGS OF FACT

The Tenth Circuit requires trial courts to make specific findings of fact and conclusions of law when ruling on motions for disqualification of counsel. Fullmer v. Harper, 517 F.2d 20 (10th Cir.1975). We do so here, but the Court emphasizes that use of the findings made below shall be restricted to our decision on this motion and, of course, to any appellate court review of our order. These findings shall not bind the parties for any other purposes in the course of this litigation.

I.

On March 24, 1982, Euro-American Exploration Corporation ("Euro-American"), James T. Hays ("Hays"), and Bengal Oil and Gas Corporation executed, as co-makers, a promissory note to the First National Bank of Midland Texas in the amount of $70,000.00. On April 21, 1982, Euro-American and Hays executed, as co-makers, another promissory note to the First National Bank of Midland in the amount of $106,095.89. On May 5, 1982, Euro-American and Hays executed, as co-makers, two additional promissory notes to the bank in the amounts of $456,844.13 and $330,000.00. Plaintiffs contend, and defendants deny, that as collateral for these notes, Euro-American and Hays pledged 4,227,593 shares of Sierra Resources Inc. ("Sierra") common stock.

On October 14, 1983, the First National Bank of Midland was declared insolvent, and the Federal Deposit Insurance Corporation ("FDIC") was appointed receiver of the bank. The above-described notes and collateral were sold to the FDIC in its corporate capacity.

On January 1, 1986, Euro-American and Hays defaulted on the notes. By letter dated January 8, 1986, FDIC notified Euro-American that the shares of Sierra common stock pledged as collateral would be sold through a broker chosen by the FDIC. The FDIC selected Shearson Lehman Brothers, Inc. ("Shearson").

The Sierra stock certificates in question were restricted securities not registered under the Securities Act of 1933. A restrictive legend appeared on the face of each stock certificate. Plaintiffs contend the shares nonetheless could have been sold pursuant to Rule 144(k) of the Securities Act of 1933. During February, March, and April, 1986, Shearson sold the shares to third parties. At all relevant times, Mountain States acted as the transfer agent for the Sierra stock.

Defendants requested, and plaintiffs did not provide, a formal opinion on the legality of the sale of the shares under the Securities Act. Plaintiffs allege that applicability of Rule 144(k) was clear, and that no formal legal opinion was required. However, defendants refused to authorize the transfer of shares of Sierra stock from FDIC to Shearson. Plaintiffs claim that defendants' refusal to transfer the stock without a formal legal opinion was a breach of their duties of good faith and fair dealing under the Uniform Commercial Code (UCC) as adopted in Colorado, C.R.S. §§ 4-8-401 et seq. Defendants deny the material allegations set forth in the complaint and assert several affirmative defenses. The case is set for trial to a jury on February 1, 1988.

II.

William T. Hart is a member of the Denver law firm of Hart & Trinen. Hart & Trinen, with two partners and one associate, specializes in securities matters and securities litigation. Some time prior to the instigation of this lawsuit on November 4, 1986, Mountain States obtained legal advice from Mr. Hart, its counsel with whom it has maintained a long-standing relationship. Mountain States specifically consulted Mr. Hart in order to obtain his opinion on whether it should transfer the Sierra stock without a legal opinion. Mr. Hart told his client that he believed that any potential lawsuit that the FDIC and Shearson might bring against it in connection with the Sierra stock transaction was without merit. (Defendant's Response at 1). After plaintiffs filed this lawsuit, Mountain States retained Donald T. Trinen, Mr. Hart's partner, to represent its interests in the litigation.

On September 2, 1987, Donald Trinen wrote to plaintiffs' counsel to notify plaintiffs that Mountain States had designated William Hart to testify at trial as a material witness and as an expert witness. Based upon this designation, plaintiffs filed this motion to disqualify the law firm of Hart & Trinen as counsel for defendant Mountain States, alleging violation of Disciplinary Rule 5-102(A) of the Code of Professional Responsibility.

CONCLUSIONS OF LAW

Plaintiffs' motion rests upon Canon 5 of the American Bar Association's Code of Professional Responsibility and Disciplinary Rule 5-102(A) ("DR 5-102(A)") promulgated thereunder.² Canon 5 mandates that, "A lawyer should exercise independent professional judgment on behalf of his client," and DR 5-102(A) elaborates as follows:

If, after undertaking employment in contemplated or pending litigation, a lawyer in his firm ought to be called as a witness on behalf of his client, he shall withdraw from the conduct of the trial, and his firm, if any, shall not continue representation in the trial....

The rationale for disqualifying a testifying attorney is discussed in Ethical Considerations 5-9 and 5-10. The rule operates to protect the interests of all parties to the litigation as well as the integrity of the legal profession. This Court previously has had the opportunity to discuss these ethical considerations at length. See Greenebaum-Mountain Mortgage Co. v. Pioneer Nat'l Title Ins. Co., 421 F.Supp. 1348, 1353-54 (D.Colo.1976). The same reasons supporting disqualification of the testifying attorney also support disqualification of the testifying attorney's law firm. In so far as the testifying partner has a stake in the outcome of the trial, his credibility is impaired. Comden v. Superior Court, 20 Cal.3d 906, 145 Cal.Rptr. 9, 576 P.2d 971, cert. denied, 439 U.S. 981, 99 S.Ct. 568, 58 L.Ed.2d 652 (1978). When a client's case is proffered through the testimony of the trial attorney's partner, the advocate partner must awkwardly argue his testifying partner's credibility. MacArthur v. Bank of New York, 524 F.Supp. 1205, 1208 (S.D.N.Y.1981).

We recognize our obligation to take measures against unethical conduct occurring in any proceeding before this Court. Musicus v. Westinghouse Elec. Co., 621 F.2d 742, 744 (5th Cir.1980). The decision on disqualification is within the sound discretion of the trial judge. Council for Nat'l Register of Health Service Providers in Psychology v. Amer. Home Assurance Co., 632 F.Supp. 144, 147 (D.D.C.1985); Greenebaum, 421 F.Supp. at 1351. In our discretion, this Court has declined to take a literal approach to application of DR 5-102. Greenebaum, 421 F.Supp. at 1352-53. Rather, we will decide whether this litigation can be conducted in fairness to all, with all parties properly represented, if we permit Mr. Trinen and his firm to continue their representation of Mountain States.

We emphasize that counsel cannot be disqualified on the basis of speculation or conjecture, and the Court may rule on disqualification only after the moving party has alleged facts which demonstrate a potential violation of the disciplinary rules. Brotherhood Railway Carmen v. Delpro Co., 549 F.Supp. 780, 788 (D.Del.1982). The moving party has the burden to establish grounds for disqualification. Field v. Freedman, 527 F.Supp. 935, 941 (D.Kan. 1981).

Mountain States does not dispute that, on its face, DR 5-102(A) mandates that Hart & Trinen withdraw as trial counsel due to its own designation of partner William Hart as both a material and expert witness. Plaintiffs' motion to disqualify sets forth specific facts which support their contention prejudice to the parties will result if the Court permits Hart & Trinen to continue to represent defendant in this action. In particular, the Court believes that the jury will be confused and may attribute too much or too little weight to Mr. Hart's important testimony. The jury likely would be unable to adequately distinguish among Mr. Hart's multiple roles, including those of: (1) an expert on the legality of stock transfers; (2) a critical fact witness on the issue of Mountain States' good faith and fair dealing; (3) an attorney responsible for upholding the standards of ethical conduct; and (4) a named-partner in the law firm representing the defendant. Neither party disputes that Mr. Hart's credibility is of great importance in establishing Mountain States' good faith defense to this action. The great potential for confusion and prejudice, coupled with the justifiable concern about how the public would perceive this situation, justifies disqualification under DR 5-102(A).

Mountain States argues,...