Manning v. Waring, Cox, James, Sklar and Allen

• Decision Date: 09 June 1988
• Docket Number: No. 86-6239,86-6239
• Citation: 849 F.2d 222
• Parties: J. Frank MANNING, an individual, suing on his own behalf and on behalf of all other persons similarly situated, Plaintiff, Fort Deposit Bank, a corporation, Defendant and Third-Party Plaintiff-Appellee, v. WARING, COX, JAMES, SKLAR AND ALLEN, a partnership composed of Allen Cox, Jr., Roane Waring, Jr., Erick William James, Robert Lee Cox, H. Sklar, Louis F. Allen, and Rodger D. Fish as general partners, Third-Party Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 222

849 F.2d 222

56 USLW 2721

J. Frank MANNING, an individual, suing on his own behalf and on behalf of all other persons similarly situated, Plaintiff, Fort Deposit Bank, a corporation, Defendant and Third-Party Plaintiff-Appellee, v. WARING, COX, JAMES, SKLAR AND ALLEN, a partnership composed

of Allen Cox, Jr., Roane Waring, Jr., Erick William James,

Robert Lee Cox, H. Sklar, Louis F. Allen, and Rodger D. Fish

as general partners, Third-Party Defendants-Appellants.

No. 86-6239.

United States Court of Appeals, Sixth Circuit.

Argued Nov. 13, 1987.

Decided June 9, 1988.

James S. Cox, Memphis, Tenn., for third-party defendants-appellants.

Carl H. Langschmidt, Jr., C. Kimbrough Brown (argued), Memphis, Tenn., for defendant and third-party plaintiff-appellee.

Before MERRITT and NORRIS, Circuit Judges; and CELEBREZZE, Senior Circuit Judge.

ALAN E. NORRIS, Circuit Judge.

The law firm of Waring, Cox, James, Sklar & Allen ("Waring, Cox"), third-party defendant, appeals from an order of the district court granting the motion of defendant and third-party plaintiff, Fort Deposit Bank, to disqualify the law firm of Heiskell, Donelson, Bearman, Adams, Williams & Kirsch ("Heiskell, Donelson") from serving as counsel for Waring, Cox in the claim brought against it by the bank. 619 F.Supp. 1327. Pursuant to 28 U.S.C. Sec. 1292(b), the district court certified the order for immediate appeal, and appeal was permitted by a panel of this court.

In 1972, the town of Grand Junction, Tennessee issued industrial revenue bonds to finance the construction of a manufacturing plant. Waring, Cox served as bond counsel to the town. The bonds were to be repaid through rents received by the town; payment was guaranteed by the two individuals who proposed to operate the manufacturing plant. These guarantors submitted financial statements which were circulated as an attachment to the prospectus.

An Oklahoma bank served as trustee for the bond issue. The bonds were marketed through underwriters, one of which was Fort Deposit Bank, of Fort Deposit, Alabama. In other words, Fort Deposit bought bonds from the Oklahoma bank and sold them to investors.

By October 1974, payment on the bonds was in default. In February 1975, the Oklahoma bank and Grand Junction filed a complaint in state court against the guarantors. An amended complaint added the bondholders as defendants (as a class), and sought a declaratory judgment that the Oklahoma bank had properly administered the bond issue. The bondholders counterclaimed against the Oklahoma bank and added Waring, Cox as a third-party defendant, alleging malpractice. Waring, Cox retained Memphis attorney Leo Bearman, Jr., of the Heiskell, Donelson firm, as counsel.

In February 1977, while the state court action was pending, this action against Fort Deposit Bank was filed in the same state court, as a class action by the bondholders who had purchased their bonds from Fort Deposit. The complaint alleged violations of state securities laws, including misrepresentation of the net worth of the guarantors. Fort Deposit removed the action to federal district court. Attorney Daniel Hatzenbuehler, of the law firm of Boone, Wellford, Clark, Langschmidt & Pemberton ("Boone, Wellford"), undertook Fort Deposit's representation. Action on this federal lawsuit was informally stayed pending the outcome of the state court action.

In the state court action, all claims were either settled or dismissed, with the exception of the one by the bondholders against Waring, Cox. The trial court awarded judgment to the bondholders, but the state court of appeals reversed on the ground that the claim against Waring, Cox had not been filed timely under the applicable statute of limitations. The Supreme Court of Tennessee affirmed. See Security Bank & Trust Co. v. Fabricating, Inc., 673 S.W.2d 860 (Tenn.1983), cert. denied sub nom. Podrog v. Waring, Cox, James, Sklar & Allen, 469 U.S. 1038, 105 S.Ct. 515, 83 L.Ed.2d 405 (1984).

In April 1984, with Fort Deposit's knowledge, Hatzenbuehler joined Heiskell, Donelson, and the bank continued his employment as its counsel in this action. In October 1984, Fort Deposit decided it should join Waring, Cox as a third-party defendant and Hatzenbuehler terminated his relationship with the bank. Boone, Wellford then undertook Fort Deposit's defense and, in December 1984, filed a third-party complaint alleging that Waring, Cox was liable to the bank for contribution should plaintiffs prevail against it, since Waring, Cox had served as bond counsel. Waring, Cox again retained Heiskell, Donelson. The bank then sought to disqualify Heiskell, Donelson as counsel for Waring, Cox, due to Hatzenbuehler's prior involvement with the case. Although the bank alleged that Hatzenbuehler was privy to its confidences and secrets as the result of his representation, it did not suggest that he had disclosed them.

Waring, Cox conceded that Hatzenbuehler's prior representation of the bank mandated his disqualification, but argued that the harsh remedy of disqualifying the entire law firm of Heiskell, Donelson was not warranted. Waring, Cox pointed out that Heiskell, Donelson was uniquely qualified to represent its interests in this lawsuit, in view of its representation throughout the prolonged state litigation, and, that to deny Waring, Cox that firm's services would result in substantial hardship. It also contended that as soon as Hatzenbuehler joined Heiskell, Donelson, efforts were undertaken to prevent disclosure of confidential information. The result, Waring, Cox contended, was that Hatzenbuehler was "screened" from Heiskell, Donelson's efforts on behalf of Waring, Cox, even before the bank asserted a claim against Waring, Cox, since Heiskell, Donelson was sensitive to the potential for future conflict between the two. Cited as factors which assured the success of the screening devices were the size of Heiskell, Donelson (at fifty lawyers, the largest in Tennessee); division of the firm into six departments with Hatzenbuehler serving in a different department than the attorney handling Waring, Cox's defense; a prohibition against communication between Hatzenbuehler and other members of the firm about the litigation; and segregation of Hatzenbuehler's files from other law firm files.

In its memorandum opinion, the district court thoroughly discussed the issues raised by the bank's motion, and noted that the bank was entitled to the benefit of a well-recognized presumption that the confidences in Hatzenbuehler's possession would be shared with other members of the firm. The court concluded that "Chinese wall" screening devices cannot rebut the presumption of shared confidences when the confidences were obtained by the "quarantined" lawyer from the former client while representing him in the same proceedings in which other members of the firm are now representing an opposing party. The district court also considered that disqualification of Heiskell, Donelson would not unduly prejudice Waring, Cox, since the litigation was in its early stages and Waring, Cox had ample resources to retain new counsel and prepare for trial.

This court has not been confronted previously with the precise issue raised by this appeal. ¹ We conclude that the district court erred in holding that screening devices can never be effective to protect confidences under the circumstances presented above.

If the case reports are any indication, a motion to vicariously disqualify the law firm of an attorney who is himself disqualified as the result of his possession of the confidences of a former client, is becoming an increasingly popular litigation technique. Unquestionably, the ability to deny one's opponent the services of capable counsel, is a potent weapon. Confronted with such a motion, courts must be sensitive to the competing public policy interests of preserving client confidences and of permitting a party to retain counsel of his choice.

Perhaps these motions have become more numerous simply because the changing nature of the manner in which legal services are delivered may present a greater number of potential conflicts. Certainly, the advent of law firms employing hundreds of lawyers engaging in a plethora of specialties contrasts starkly with the former preponderance of single practitioners and small firms engaging in only a few practice specialties. In addition, lawyers seem to be moving more freely from one association to another, and law firm mergers have become commonplace. At the same time that the potential for conflicts of interest has increased as the result of these phenomena, the availability of competent legal specialists has been concentrated under fewer roofs.

Consequently, these new realities must be at the core of the balancing of interests necessarily undertaken when courts consider motions for vicarious disqualification of counsel.

A reading of the cases would lead one to believe that the maintenance of confidentiality has been accorded paramount effect. And this is understandable, given the traditional concerns of the legal profession that client confidences be protected ² and that appearances of professional impropriety be avoided. ³ In addition, courts have frequently pointed to the prohibition against other lawyers in a firm accepting or continuing employment when a member of the firm has been required by ethical considerations to decline or withdraw from that employment. ⁴

In our view, the Court of Appeals for the Seventh Circuit has taken the most realistic view of the methodology to be followed in resolving competing interests raised by such a disqualification motion. ⁵ Where, as here, it has been demonstrated that disqualification will work a hardship, it is clear that the quarantined lawyer was privy to confidential information received from the former client now seeking disqualification of the lawyer's present firm, and there is a substantial relationship between the subject...