In re Proeducation Intern., Inc.
| Decision Date | 30 October 2009 |
| Docket Number | No. 08-20398.,08-20398. |
| Citation | 587 F.3d 296 |
| Parties | In The Matter Of: PROEDUCATION INTERNATIONAL, INC., doing business as ProEducation Support Services, doing business as Data Dynamics, Inc., doing business as ProEd Venture LLC, Debtor. Kirk Allen Kennedy; Mark D'Andrea, Appellants-Cross-Appellees, v. Mindprint, Appellee-Cross-Appellant. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Kirk Allen Kennedy (argued), Houston, TX, pro se and for D'Andrea.
Stephen R. Cochell (argued), Epstein, Becker, Green, Wickliff & Hall, P.C., Houston, TX, for D'Andrea.
Lionel Mark Schooler (argued), Jackson Walker, L.L.P., Houston, TX, for Mindprint.
Appeal from the United States District Court for the Southern District of Texas.
Before KING, DAVIS and BENAVIDES, Circuit Judges.
Kirk A. Kennedy, an attorney, was an associate in the law firm of Jackson Walker L.L.P. from February 2003 to November 2004. Another Jackson Walker attorney, Lionel Schooler, had been representing MindPrint, Inc., a creditor in the bankruptcy proceeding of ProEducation International, Inc., since 1999. Kennedy had no knowledge of or involvement with MindPrint while at Jackson Walker. In September 2006, Kennedy entered an appearance on behalf of Dr. Mark D'Andrea, a creditor in the ProEducation proceeding. Upon motion by MindPrint, the bankruptcy court disqualified Kennedy based on an imputed conflict of interest but declined to impose monetary sanctions. The district court affirmed the bankruptcy court on both issues. Kennedy appeals the disqualification order and MindPrint cross-appeals the denial of monetary sanctions. For the following reasons, we REVERSE the disqualification order.
Attorney Kirk A. Kennedy seeks to represent Dr. Mark D'Andrea in his efforts to collect a judgment from ProEducation International, Inc. (ProEducation). Kennedy worked in the bankruptcy section of the Houston firm of Jackson Walker L.L.P. from February 2003 to November 2004. His office was located down the hall from Lionel Schooler, who also worked in the bankruptcy section. Unbeknownst to Kennedy, since 1999 Schooler had been representing MindPrint, Inc. (MindPrint) in a state court case against ProEducation. Several shareholders of ProEducation, including D'Andrea, intervened in the state court suit and took positions adverse to MindPrint. In November 2000, during the pendency of the state court case, ProEducation filed for Chapter 7 bankruptcy. The state court case was removed to bankruptcy court as an adversary proceeding shortly thereafter. Schooler continued to represent MindPrint throughout the adversary proceeding and in all matters pertaining to the ProEducation bankruptcy. D'Andrea was represented in the adversary proceeding by attorney Tom Schmidt.
While Kennedy worked at Jackson Walker, Schooler provided legal services to MindPrint in connection with the bankruptcy case and the adversary proceeding. At the conclusion of the adversary proceeding in July 2005, the bankruptcy court entered judgment in favor of both MindPrint and the shareholders (including D'Andrea) against ProEducation. MindPrint moved for sanctions against the shareholders, which the bankruptcy court denied. MindPrint appealed the denial of sanctions.
After Kennedy left Jackson Walker in November 2004, the Gulf Coast Cancer Center—where D'Andrea works as medical director—hired Kennedy as general counsel. In November 2005, during the appeal from the denial of sanctions in the adversary proceeding, Schmidt informed Schooler that he was planning to withdraw from representing D'Andrea and that Kennedy would replace him. MindPrint objected to Kennedy's involvement because of his previous association with Jackson Walker. Kennedy did not officially enter an appearance as D'Andrea's attorney at this point; but despite MindPrint's objections, Kennedy contributed to a brief filed on D'Andrea's behalf.
In July 2006, MindPrint discovered that Kennedy was attempting to conduct discovery about the appeal from the adversary proceeding. Schooler emailed Kennedy on two occasions, objecting to his representation of D'Andrea on the ground of imputed conflict of interest. Kennedy did not respond to either email, and he continued to work on behalf of D'Andrea in his collection efforts and in the appeal. On September 29, 2006, Kennedy filed a notice to appear on behalf of D'Andrea in the main bankruptcy case.
In October 2006, MindPrint moved to disqualify Kennedy from representing D'Andrea in the bankruptcy case and in the appeal. The bankruptcy court granted MindPrint's motion to disqualify but did not award any monetary sanctions. The bankruptcy court found that Jackson Walker's "knowledge of MindPrint's client confidences extends to former employees." Relying on In re American Airlines, Inc., 972 F.2d 605, 614 & n. 1 (5th Cir.1992), and Kraft, Inc. v. Alton Box Board Co. (In re Corrugated Container Antitrust Litigation), 659 F.2d 1341, 1346 (5th Cir.1981), the bankruptcy court applied two irrebuttable presumptions: first, "confidential information has been given to the attorney actually doing work for the client," and second, "confidences obtained by an individual lawyer will be shared with the other members of his firm." The bankruptcy court did not allow Kennedy to attempt to rebut the second presumption, relying on American Can Co. v. Citrus Feed Co., 436 F.2d 1125, 1129 (5th Cir.1971), for the proposition that "in the Fifth Circuit, liability for disqualification extends to former employees of the attorney who established the attorney-client relationship." Noting that "disqualification alone is a sanction," the bankruptcy court did not award monetary sanctions against Kennedy or D'Andrea.
After distribution of the bankruptcy estate, Kennedy appealed the disqualification order to the district court, and MindPrint cross-appealed on the issue of monetary sanctions. The district court affirmed the order on both issues. This appeal was timely filed, and we have jurisdiction under 28 U.S.C. §§ 158(d) and 1291.1
When a court of appeals "review[s] the decision of a district court, sitting as an appellate court, [it] appl[ies] the same standards of review to the bankruptcy court's findings of fact and conclusions of law as applied by the district court." Caillouet v. First Bank & Trust (In re Entringer Bakeries, Inc.), 548 F.3d 344, 348 (5th Cir.2008) (per curiam). The standard of review for a grant or denial of a motion to disqualify counsel is abuse of discretion; however, "in applying this standard, we will review fact-findings for clear error, and we will perform a careful examination, or de novo review, of the [lower] court's application of the relevant rules of attorney conduct." FDIC v. U.S. Fire Ins. Co., 50 F.3d 1304, 1311 (5th Cir.1995) (internal quotation marks omitted).
When considering motions to disqualify, courts should first look to "the local rules promulgated by the local court itself." U.S. Fire Ins., 50 F.3d at 1312. The Local Rules of the Southern District of Texas provide that "the minimum standard of practice shall be the Texas Disciplinary Rules of Professional Conduct" (Texas Rules), and that violations of the Texas Rules "shall be grounds for disciplinary action, but the court is not limited by that code." S.D. TEX. LOCAL R.APP. A, R. 1A & 1B. Therefore, the Texas Rules "are not the sole authority governing a motion to disqualify." In re Am. Airlines, 972 F.2d at 610 (internal quotation marks omitted). A reviewing court also "consider[s] the motion governed by the ethical rules announced by the national profession in light of the public interest and the litigants' rights." Id. The Fifth Circuit has recognized the ABA Model Rules of Professional Conduct (Model Rules) as the national standards to consider in reviewing motions to disqualify. Id. Therefore, we shall consider both the Texas Rules and the Model Rules.
The Fifth Circuit's approach to ethical issues has remained "sensitive to preventing conflicts of interest." Id. at 611. Under this approach, a "[d]istrict [c]ourt is obliged to take measures against unethical conduct occurring in connection with any proceeding before it." Id. (emphasis and alterations in original; internal quotation marks omitted). Yet, "[d]epriving a party of the right to be represented by the attorney of his or her choice is a penalty that must not be imposed without careful consideration." U.S. Fire Ins., 50 F.3d at 1313. Because of the severity of disqualification, we do not apply disqualification rules "mechanically," but we consider "[a]ll of the facts particular to [the] case ... in the context of the relevant ethical criteria and with meticulous deference to the litigant's rights." Id. at 1314 (citing Church of Scientology of Cal. v. McLean, 615 F.2d 691, 693 (5th Cir.1980)). Stated plainly, this sanction "must not be imposed cavalierly." Id. at 1316.
Texas Rule 1.09 states:
(a) Without prior consent, a lawyer who personally has formerly represented a client in a matter shall not thereafter represent another person in a matter adverse to the former client:
(1) in which such other person questions the validity of the lawyer's services or work product for the former client;
(2) if the representation in reasonable probability will involve a violation of Rule 1.05 []; or
(3) if it is the same or a substantially related matter.
(b) Except to the extent authorized by Rule 1.10, when lawyers are or have become members of or associated with a firm, none of them shall knowingly represent a client if any one of them practicing alone would be prohibited from doing so by paragraph (a).
(c) When the association of a lawyer with a firm has terminated, the lawyers who were then associated with that lawyer shall not knowingly...
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