H. F. Ahmanson & Co. v. Salomon Brothers, Inc.

Decision Date07 May 1991
Docket NumberNo. B049202,B049202
Citation229 Cal.App.3d 1445,280 Cal.Rptr. 614
CourtCalifornia Court of Appeals Court of Appeals
PartiesH.F. AHMANSON & COMPANY, a corporation; Home Savings of America, F.A., a federal savings and loan association; Bowery Holding Corp., a corporation; and the Bowery Savings Bank, a New York state chartered savings bank, Plaintiffs and Appellants, v. SALOMON BROTHERS, INC., a corporation, and Salomon Brothers Holding Company, Inc., a corporation, Defendants and Respondents.

Belin & Rawlings and Daniel N. Belin, Douglas M. Rawlings and Lisa D. Norlander, Los Angeles, for plaintiffs and appellants.

Wachtell, Lipton, Rosen & Katz and Douglas S. Liebhafsky, New York City, Alschuler, Grossman & Pines and Frank Kaplan and Michael Linfield, Los Angeles, for defendants and respondents.

JOHNSON, Associate Justice.

Plaintiffs appeal from an order denying their motion to disqualify defendants' attorneys on the ground of conflict of interest. We affirm.

FACTS AND PROCEEDINGS BELOW

Plaintiffs H.F. Ahmanson & Company and others (hereafter Ahmanson) hired defendant Salomon Brothers, Inc. to provide financial advice and investment banking services in connection with Ahmanson's acquisition of Bowery Savings Bank. Ahmanson contends it suffered over $100 million in damages as a result of Salomon Brothers' negligent and self-serving advice in the course of the Bowery transaction. Ahmanson filed a complaint against Salomon Brothers alleging breach of fiduciary duty, fraud, negligence, negligent misrepresentation and breach of contract. Salomon Brothers filed a cross-complaint against Ahmanson for breach of contract.

Before us is the question whether the trial court erred in refusing to disqualify the lead counsel representing Salomon Brothers, the New York law firm of Wachtell, Lipton, Rosen & Katz (hereafter Wachtell). 1

Prior to any involvement by Wachtell, the Bowery Savings Bank found itself in severe financial difficulty resulting from the fact the interest it was required to pay to attract depositors exceeded the income the bank earned on its fixed-rate loans. In order to avoid insolvency, Bowery and the Federal Deposit Insurance Corporation (FDIC) entered into an assistance agreement designed to protect Bowery from credit and interest rate risks.

Under the interest rate risk protection, Bowery paid the FDIC the fixed rate of income received from its assets and the FDIC paid Bowery a variable rate of interest on those same assets based on current market rates. Thus, Bowery's interest cost and interest income were both variables. When interest rates went up, Bowery's income from interest payments by the FDIC also went up guaranteeing Bowery's income would stay ahead of its interest obligations to its depositors.

Under the credit risk protection, the FDIC promised, with respect to certain Bowery assets, that if the asset went into default the FDIC would purchase it from Bowery. However, if Bowery sold one of these protected assets to a third party and replaced it with another asset the FDIC credit protection was lost as to that asset and did not apply to the replacement asset.

One problem with the assistance agreement was that some of the assets protected by the agreement would not mature until after the agreement expired. Thus, after the agreement expired, Bowery once again would be exposed to the same financial problems it had before the agreement. Bowery engaged the services of the First Boston Corporation to advise it how to eliminate or minimize risks of interest rate variables and defaults once the assistance agreement expired. First Boston advised Bowery to replace assets maturing after the assistance agreement expired with assets maturing within the life of the assistance agreement. By matching the maturity of its assets to the life of the FDIC assistance agreement, Bowery would avoid the short-fall caused by variable interest rates. However, once a later maturing asset was sold Bowery lost the credit protection on that asset and the replacement asset. The FDIC could not be forced to purchase the new asset if it went into default. Thus, under the plan proposed by First Boston, Bowery would be trading credit protection for interest rate protection.

At this point Bowery engaged the services of Wachtell, and principally, Harold S. Novikoff, a partner in the firm, to provide advice about the advice it had received from First Boston. The parties agree Wachtell, through Mr. Novikoff, provided Bowery with advice about the credit risks associated with the types of transactions proposed by First Boston. This advice included explaining the mechanics of the transactions, the degree of protection that could be obtained, drafting or revising legal documents regarding Bowery's contemplated transactions and negotiating with other participants in the transaction. The parties also agree Mr. Novikoff attended two meetings with Bowery top management, both on the same day, at which he explained the credit risks involved in a particular transaction Bowery was contemplating with First Boston. Mr. Novikoff insists his advice to Bowery at these meetings was limited to the credit risks involved in the proposed Bowery-First Boston transaction. He denied advising or receiving information on any other aspect of Bowery's business. Bowery's former chairman, Richard Ravitch, filed a declaration supporting Mr. Novikoff's version of events. Mr. Ravitch stated, "Bowery asked Wachtell ... only for advice on how to protect against credit risks on certain kinds of transactions with other financial institutions which Bowery contemplated undertaking in the future." Ahmanson submitted declarations from other Bowery officials to the effect that while attending these meetings Mr. Novikoff either discussed or overheard discussions concerning Bowery's broader business strategies.

In 1987, Ahmanson set out to acquire the Bowery Savings Bank. Ahmanson hired Salomon Brothers to provide advice in connection with the acquisition. Salomon Brothers advised Ahmanson it should renegotiate Bowery's interest rate protection under the FDIC assistance agreement. The FDIC was unwilling to agree to modification in the interest rate protection without concessions from Ahmanson. Based on Salomon Brothers' advice, Ahmanson agreed to relinquish credit risk protection on over $1 billion of Bowery assets and to a six-year reduction in the term of interest rate risk protection. Then, just before the Bowery acquisition was to close, Salomon Brothers advised Ahmanson the new interest rate protection it had negotiated with the FDIC actually had a negative $25 million value to Bowery and Ahmanson should cancel the interest rate protection altogether and replace it with a series of interest rate swaps which Salomon Brothers would arrange. Upon Salomon Brothers' advice, Ahmanson cancelled the FDIC interest rate protection agreement. Notwithstanding cancellation of the interest rate protection, Ahmanson was still bound by the earlier concessions to the FDIC including the loss of credit protection on a large amount of Bowery's assets.

A few days after the acquisition of Bowery closed, Salomon Brothers advised Ahmanson it had made a mistake in evaluating the FDIC interest rate protection. Instead of a $25 million negative value, the interest rate protection actually had a $30 million positive value. Anticipating the litigation that was to follow, Salomon Brothers retained Wachtell to represent it. In the course of discovery proceedings in this litigation, Ahmanson learned that Wachtell had once advised Bowery Savings Bank with respect to credit risk protection. Ahmanson then moved to disqualify Wachtell on the ground of conflict of interest.

DISCUSSION
I. SUCCESSIVE REPRESENTATION AS GROUNDS FOR DISQUALIFICATION.

It is beyond dispute a court may disqualify an attorney from representing a client with interests adverse to those of a former client. (Wutchumna Water Co. v. Bailey (1932) 216 Cal. 564, 573-574, 15 P.2d 505; Gregori v. Bank of America (1989) 207 Cal.App.3d 291, 298, 254 Cal.Rptr. 853.) Disqualification in cases of successive representation is based on the prohibition against "employment adverse to a ... former client where, by reason of the representation of the ... former client, the [attorney] has obtained confidential information material to the employment...." (Rule 3-310, Rules of Professional Conduct (23 West's Ann.Civ. & Crim.Court Rules, pt. 2 (1990 Supp.), p. 445).) Where such a conflict of interest exists, and the former client has not consented to the current representation, disqualification follows as a matter of course. The court does not engage in a "balancing of equities" between the former and current clients. The rights and interests of the former client will prevail. (River West, Inc. v. Nickel (1987) 188 Cal.App.3d 1297, 1304, 1308, 234 Cal.Rptr. 33.)

II. STANDARD OF APPELLATE REVIEW.

In our review of disqualification motions, as elsewhere, the judgment of the lower court is presumed correct and all intendments and presumptions are indulged to support it on matters as to which the record is silent. (Centinela Hospital Assn. v. City of Inglewood (1990) 225 Cal.App.3d 1586, 1595, 275 Cal.Rptr. 901.) Conflicts in the declarations are resolved in favor of the prevailing party and the trial court's resolution of factual issues arising from competing declarations is conclusive on the reviewing court. (Gregori v. Bank of America, supra, 207 Cal.App.3d at p. 300, 254 Cal.Rptr. 853; Chadwick v. Superior Court (1980) 106 Cal.App.3d 108, 115, 164 Cal.Rptr. 864.)

III. AHMANSON FAILED TO ESTABLISH WACHTELL POSSESSES ADVERSE CONFIDENTIAL INFORMATION FROM BOWERY.

A former client may seek to disqualify a former attorney from representing an adverse party by showing the former attorney actually possesses confidential information adverse to the former client. However, it is well settled actual possession of confidential...

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