FIRST WIS. MORTG. TRUST v. First Wis. Corp.

• Decision Date: 16 November 1976
• Docket Number: Civ. A. No. 75-C-127.
• Citation: 422 F. Supp. 493
• Court: U.S. District Court — Eastern District of Wisconsin
• Parties: FIRST WISCONSIN MORTGAGE TRUST, a Massachusetts Business Trust, Plaintiff, v. FIRST WISCONSIN CORPORATION, a Wisconsin Corporation, et al., Defendants.

422 F. Supp. 493

FIRST WISCONSIN MORTGAGE TRUST, a Massachusetts Business Trust, Plaintiff, v. FIRST WISCONSIN CORPORATION, a Wisconsin Corporation, et al., Defendants.

Civ. A. No. 75-C-127.

United States District Court, E. D. Wisconsin.

November 16, 1976.

L. C. Hammond, Jr., Samuel J. Recht, Milwaukee, Wis., Bernard Nussbaum and Otis H. Halleen, Chicago, Ill., for plaintiff.

David E. Beckwith, Milwaukee, Wis., for defendants.

REYNOLDS, Chief Judge.

In this action brought under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.106-5, the plaintiff complains of the conduct of the various defendants in connection with the underwriting and administration of certain Participation Agreements. The matter is now before the Court on the plaintiff's motion to disqualify the defendants' counsel. In support of its motion, the plaintiff has submitted the affidavits of George H. Kline, Bernard J. Nussbaum, Gerald J. Sherman, the supplemental affidavit of Gerald J. Sherman, and accompanying exhibits. In opposition to the motion, the defendants have submitted the affidavits of Hal C. Kuehl, Jere D. McGaffey, and David Shute with accompanying exhibits. Oral argument was had on September 24, 1976. For the reasons hereinafter stated, the motion will be granted.

Due to the past relationship among the parties and their common counsel, it is necessary to set forth the facts in some detail.

The plaintiff is a real estate investment trust ("Trust") that was sponsored by the defendant First Wisconsin Corporation ("FWC") and established on November 3, 1971. The Trust was advised on its investments by the defendant First Wisconsin Mortgage Company ("Adviser") which is a wholly-owned subsidiary of FWC. The Adviser was staffed by employees of the Mortgage Loan Division of the defendant First Wisconsin National Bank ("Bank"), also a subsidiary of FWC. The Trust was established to provide investors with an opportunity to invest in a portfolio of mortgage and real property investments.

The law firm of Foley & Lardner served as general counsel to the Trust, FWC, the Adviser, and the Bank from November 3, 1971 until September 4, 1974, when it withdrew as general counsel for the Trust. On February 1, 1974, the Trust retained the Chicago law firm of Sonnenscheim, Carlin, Nath and Rosenthal as special counsel to represent the Trust in connection with loans to borrowers in financial difficulty.

While operating as general counsel for the Trust and at the same time as general counsel for the FWC, the Adviser, and the Bank, Foley & Lardner's legal work consisted, among other things, of advising the Trust respecting securities and tax matters, listing of the Trust's shares on the New York Stock Exchange, filing of proxy statements, periodic reports to the Securities and Exchange Commission, review of public releases, and tax advice with respect to tax qualifications as a real estate investment trust ("REIT"). In addition to rendering these legal services, Foley & Lardner, as general counsel for FWC, the Adviser, and the Bank, performed legal work in connection with the creation of the Trust. In particular, on the advice of Foley & Lardner, the Declaration of Trust establishing the structure of the Trust was adopted. This Declaration was essentially patterned after those in widespread use in the REIT industry and suggested by the consulting firm of David C. Cates and Co. Among other things, the Declaration determined the constitution of the Trust. Also on the advice of Foley & Lardner, the Advisory Agreement defining the relationship between the Trust and its investment Adviser was adopted. The Agreement, like the Declaration, was patterned after those in widespread use in the REIT industry. Foley & Lardner also drafted the standard form Participation Agreements used by the Bank and the Trust when they participated in real estate loans. These Agreements defined the relationship between the Bank and the Trust with regard to specific loans. Finally, Foley & Lardner attended and kept the minutes of all the Trustees' meetings, at which meetings the Adviser recommended investments and the Trustees decided whether the Trust would accept the recommendations.

The parties entered into numerous loan transactions. One of those transactions included a loan to Jack P. DeBoer & Associates. The Bank was the lead lender on most of the DeBoer loans, and the Trust participated in a number of them.

During early 1975, at a meeting between Bernard J. Nussbaum of the Sonnenschein firm and David Beckwith of Foley & Lardner, Mr. Beckwith asked for the Trust's consent to Foley & Lardner's representation of the instant defendants in any litigation with the Trust. This action was filed on March 12, 1975. In a letter dated March 14, 1975, Foley & Lardner requested the consent of the Trust to its representation of the defendants. The letter provides in pertinent part as follows:

"We have advised you previously that after careful examination we have concluded that Foley & Lardner as a firm can represent First Wisconsin Corporation, First Wisconsin Mortgage Company and First Wisconsin National Bank of Milwaukee in the action that has been * * * filed in the United States District Court for the Eastern District of Wisconsin by First Wisconsin Mortgage Trust, providing that the Mortgage Trust consents to our representation of the defendants. * * * We have concluded that, with the consents of the Mortgage Trust and each of the defendants, there is no ethical or other prohibition that precludes us from representing the defendants in the action."

The Trust refused to give its consent.

Other pertinent facts will appear in the course of the Court's decision.

In support of Foley & Lardner's disqualification, the plaintiff advances several contentions: (1) that Foley & Lardner engaged in significant prior representation of the Trust on matters that bear a substantial relation to the subject matter of the pending suit; (2) that continued representation is a violation of general counsel's fiduciary duty to the plaintiff; (3) continued representation of the defendants creates an appearance of impropriety; and (4) that members of Foley & Lardner may be called to testify.

The defendants respond with the contentions that the legal services provided to the Trust by Foley & Lardner did not consist of advice on the proper underwriting and administration of loans by the Adviser until special counsel had been obtained for the Trust; that complete disclosure of the potential conflict to the Trust at the time of its creation permits it to continue; that it should be allowed to defend any attacks on its legal advice; that no confidentiality is involved; and that a plaintiff cannot disqualify counsel simply by calling its members adversely.

Marketti v. Fitzsimmons, 373 F.Supp. 637, 639 (W.D.Wis.1974), sets forth the general rule as to when counsel should be disqualified:

"* * * Absent a clear waiver of objection to potential conflicts, the undivided fidelity owed a former client requires disqualification in the subsequent situation whenever the following criteria are satisfied:

"`. . . (1) the former representation, (2) a substantial relation between the subject matter of the former representation and the issues in the later lawsuit, and (3) the later adverse representation.' E. F. Hutton &

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