Gen-Cor, LLC v. Buckeye Corrugated, Inc.

• Decision Date: 31 August 2000
• Docket Number: No. IP99-1564-C-B/S.,IP99-1564-C-B/S.
• Citation: 111 F.Supp.2d 1049
• Parties: GEN-COR, LLC, an Indiana Limited Liability Company, and Russell C. Stooks, an individual residing in Arizona, Plaintiffs, v. BUCKEYE CORRUGATED, INC., an Ohio Corporation, and Roy Allen, an Ohio Resident, in his individual capacity, Defendants.
• Court: U.S. District Court — Southern District of Indiana

111 F.Supp.2d 1049

GEN-COR, LLC, an Indiana Limited Liability Company, and Russell C. Stooks, an individual residing in Arizona, Plaintiffs, v. BUCKEYE CORRUGATED, INC., an Ohio Corporation, and Roy Allen, an Ohio Resident, in his individual capacity, Defendants.

No. IP99-1564-C-B/S.

United States District Court, S.D. Indiana, Indianapolis Division.

August 31, 2000.

Paul J. Peralta, Baker & Daniels, South Bend, IN, for Plaintiffs.

Jeffrey S. Nickloy, Campbell Kyle & Proffitt, Noblesville, IN, Mark J. Skakun, Buckingham Doolittle & Burroughs, Akron, OH, for Defendants.

ENTRY DENYING DEFENDANTS' MOTION TO DISQUALIFY PLAINTIFFS' COUNSEL

BARKER, Chief Judge.

Gen-Cor, LLC (Gen-Cor) and Russell C. Stooks sued Buckeye Corrugated, Inc. (Buckeye) and Roy Allen for breach of the Consulting Agreement and Side Letter Agreement formed in conjunction with the sale of Cra-Gen, Inc. (Cra-Gen), the sole owner of Cra-Wal, Inc. (Cra-Wal), from Stooks to Buckeye. Plaintiffs allege that Defendants failed to use reasonable best efforts to maximize profit margins for Cra-Wal; failed to keep accurate and complete books of account and records for the business of Cra-Wal; deliberately understated Cra-Wal's 1998 pretax earning and thereby understated the amount of the Earnout Payments due to Gen-Cor; failed to tender the 1998 Earnout Payment now due and owing; implemented accounting changes and system changes which have resulted in lowering Cra-Wal's reported pretax earning; and denied Gen-Cor, despite its reasonable request, the right to examine the records, financial statements, accountant's work papers, and books of Cra-Gen and Cra-Wal relating to the calculation of pretax earnings and Earnout Payments.

The law firm of Baker & Daniels serves as counsel on behalf of Gen-Cor and Stooks in this matter. Baker & Daniels has also represented Cra-Wal, now a subsidiary of Buckeye, in various matters since at least 1994. On February 23, 2000, Buckeye and Allen filed a Motion to Disqualify Plaintiffs' Counsel ("Defs.' Mot.") accompanied by a Memorandum in Support ("Mem. in Supp. of Defs.' Mot."). On March 8, 2000, Plaintiffs' Response to Defendants' Motion to Disqualify Plaintiffs' Counsel ("Pls.' Resp. in Opp'n.") was filed. Defendants filed a Reply to Plaintiffs' Response to Motion to Disqualify ("Defs.' Reply") on March 24, 2000. By leave of the Court, on April 26, 2000, Plaintiffs filed a Sur-Reply in Opposition to Motion to Disqualify Counsel ("Pls.' Sur-Reply").

For the reasons set forth below, the Court DENIES Defendants' Motion to Disqualify Plaintiffs' Counsel.

Facts

Some of the facts surrounding this lawsuit are undisputed. On May 27, 1997, Buckeye purchased Cra-Gen, the parent to subsidiary Cra-Wal (a corrugated packaging manufacturer), from Stooks. Mem. in Supp. of Defs.' Mot. at 3; Pls.' Resp. in Opp'n. at 2. During the negotiations for the purchase of Cra-Gen, Buckeye was represented by the law firm of Buckingham, Doolittle & Burroughs, and Baker & Daniels represented Stooks. Mem. in Supp. of Defs.' Mot. at 3; Pls.' Resp. in Opp'n. at 2. In conjunction with the purchase of Cra-Gen, Buckeye and Stooks also executed Consulting and Side Letter Agreements ("the Agreements"). Mem. in Supp. of Defs.' Mot. at 3; Pls' Resp. in Opp'n. at 3-4. These agreements provided that Gen-Cor would provide consulting to Buckeye in exchange for compensation based on the financial performance of Cra-Wal and that Buckeye would operate Cra-Gen and Cra-Wal in the ordinary course of business using its reasonable best efforts to maximize Cra-Wal's profits. Mem. in Supp. of Defs.' Mot. at 3; Pls.' Resp. in Opp'n. at 3-4. The Agreements also maximized tax advantages. Pls.' Resp. in Opp'n. at 2-4.

Gen-Cor and Stooks allege that Allen and Buckeye breached the Agreements. They also sue under theories of constructive fraud, promissory estoppel, breach of covenant of records access and disclosure, and civil conversion. Plaintiffs claims total at least $1.4 million.

The parties dispute the duration and nature of Baker & Daniels' representation of Cra-Wal. Defendants maintain that Cra-Wal first entered into a lawyer-client relationship with Baker & Daniels in 1992. Affidavit of John DeLoughery ("DeLoughery Aff.") ¶ 2. Plaintiffs state that Baker & Daniels "began to handle a series of discrete legal matters for Cra-Wal" in 1994. Pls.' Resp. in Opp'n. at 2. The Court need not decide exactly when the business relationship between Baker & Daniels and Cra-Wal began. Prior to the sale of Cra-Gen on May 27, 1997, Stooks owned Cra-Wal. No impermissible conflict could have arisen due to Baker & Daniels' representation of Cra-Wal because Buckeye had no interest in Cra-Wal.

The parties disagree on how to characterize the nature of Baker & Daniels' relationship with Cra-Wal. Buckeye and Allen claim that "Baker & Daniels' ongoing representation of Cra-Wal is extensive." Mem. in Supp. of Defs.' Mot. at 11. Plaintiffs counter that "Baker & Daniels' representation of Cra-Wal involves discrete, minor labor and employment issues." Pls.' Resp. in Opp'n. at 13 (emphasis added). The billing record of Baker & Daniels for Cra-Wal provides the basic facts on the scope of representation. See Exhibit A-1, Pls.' Resp. in Opp'n. Since May of 1997, when Cra-Gen was sold to Buckeye, Baker & Daniels has provided legal services to Cra-Wal on the issues of ERISA, Occupational Health & Safety regulations, collection from a Cra-Wal debtor, Cra-Wal's drug testing policy, executive employee agreements, workplace violence, and an account payable matter concerning the design of a parking lot disputed to the amount of $22,000. Id.; DeLoughery Aff. ¶ 4.

The final important factual element concerns whether Baker & Daniels obtained consent to its dual representation. Peter G. Trybula, a partner at Baker & Daniels, engaged in a telephone conversation with Robert W. Malone, a lawyer for the firm of Buckingham, Doolittle, & Burroughs and a director of Buckeye, on September 8, 1999. Affidavit of Robert W. Malone ("Malone Aff.") ¶¶ 1-2; Affidavit of Peter G. Trybula ("Trybula Aff.") ¶¶ 1, 11-12. During the conversation, Trybula stated that Baker & Daniels represented CraWal in certain matters and that Baker & Daniels was working on behalf of Gen-Cor and Stooks in a dispute with Buckeye concerning payments under the Agreements. Malone Aff. ¶¶ 2-3; Trybula Aff. ¶ 12. Malone did not object to the representation at that time and stated that he would consult with Buckeye regarding the issue. Id.

Applicable Law

This case is before the Court under its diversity jurisdiction, 28 U.S.C. § 1332(a). As a diversity case, there is some question as to the law governing the issue of attorney disqualification. See 19 Charles A. Wright, Arthur R. Miller, & Edward H. Cooper, Federal Practice and Procedure § 4511 n. 105 (2d ed.1996) ("the following list of legal issues ... reflect[s] the wide range of contexts not involving the application of a specific Federal Rule of Civil Procedure in which questions regarding the application of state or federal law have arisen in the federal courts: ... the ethical standards governing the conduct and misconduct of attorneys"). Pursuant to Local Rule 83.5(f), the conduct of attorneys practicing in this Court is governed by the Rules of Professional Conduct, as adopted by the Indiana Supreme Court. For the specific question of disqualification, "federal common law independently supplies standards." Brennan v. Sun Healthcare Group, Inc., 1998 WL 1567451, at *2 (S.D.Ind. Jan.29, 1998) (citing LaSalle National Bank v. County of Lake, 703 F.2d 252, 255 (7th Cir.1983) and Analytica, Inc. v. NPD Research, Inc., 708 F.2d 1263, 1266-67 (7th Cir.1983)). Fortunately, for the sake of simplicity, neither party has suggested a divergence between the relevant Rules of Professional Conduct and the disqualification standards set forth by the Seventh Circuit and the Supreme Court. Rule of Professional Conduct 1.7 sheds the most light on the facts here, and decisions of the federal courts fill in gaps not covered by Indiana sources.

Analysis

With regard to the rule governing conflicts of interest between current clients,¹ Indiana adopted Model Rule of Professional Conduct 1.7 of the American Bar Association. Indiana Rule of Professional Conduct 1.7 provides:

Conflict of interest: General rule.

(a) A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless:

(1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and

(2) each client consents after consultation

(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:

(1) the lawyer reasonably believes the representation will not be adversely affected; and

(2) the client consents after consultation.

This Rule protects the client's expectation of loyalty from counsel. See Comment to Rule 1.7 Indiana Rules of Professional Conduct ("Loyalty is an essential element in the lawyer's relationship to a client.").

No Violation of Rule 1.7(b)

Rule 1.7(b) will be discussed first. This section prohibits Baker & Daniels from representing Gen-Cor and Stooks in this action if its representation of the Plaintiffs would "materially limit" its representation of Cra-Wal, unless the firm "reasonably believes the representation will not be affected" and Cra-Wal consents. Rule 1.7(b). Defendants have failed to establish that Baker & Daniels' representation of either client will be "materially limited" by Gen-Cor and Stooks suit against Allen and Buckeye.

Since October of 1999, Baker & Daniels' representation of Cra-Wal has been limited to labor and employment issues and an account payable matter arising out of a dispute over the paving of a parking lot. See Neighbours ...