SECURITIES INVESTOR v. RD Kushnir & Co.
| Decision Date | 30 March 2000 |
| Docket Number | Bankruptcy No. 99-A-858 SIPA. |
| Citation | 246 BR 582 |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff, v. R.D. KUSHNIR & CO., Debtor/Defendant. |
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Melanie R. Cohen, Altheimer & Gray, Chicago, IL, for plaintiff.
John B. Schwartz & Associates, Chicago, IL, for Debtor/Defendant.
This matter is before the court on the Motion of Securities Investor Protection Corporation ("SIPC") to disqualify attorney Steven B. Nagler ("Nagler") as counsel to the individual Richard Kushnir and certain other parties in this case or in related proceedings. SIPC is the trustee for the liquidation of R.D. Kushnir & Co. (the "Debtor") under 15 U.S.C. § 78 aaa et. seq. (the "SIPA" Act).
SIPC's motion to disqualify is based on the following asserted basis: (1) Nagler's current representation of Richard Kushnir is substantially related to his prior representation of Debtor and J.E. Liss and Company ("Liss"); (2) there is an actual or at least highly probable likelihood of interest conflict between Debtor's SIPA estate and both Richard Kushnir and Liss; (3) SIPC, as Debtor's Trustee, holds and has not waived Debtor's attorney-client privilege; and (4) Nagler's representation of Richard Kushnir and other parties in the proceeding creates the appearance of impropriety. SIPC also contends the same concerns exist as to other possible parties who Nagler might seek to represent.
The assertion by SIPC that there is an actual or highly probable conflict of interest between Debtor's estate and Richard Kushnir and Liss rests on the following contentions: Richard Kushnir may have personal liability to the Debtor's estate arising from customer claims; Richard Kushnir and Liss will likely be an adverse party in an avoidance action to be brought by SIPC seeking to recover assets.
For reasons stated below, attorney Steven Nagler will only be disqualified to the extent requested from representing Richard Kushnir and J.E. Liss, and the motion to disqualify from representing other parties will be denied.
From the undenied portions of pleadings the following undisputed history has been presented:
Debtor was an introducing securities broker with its principal place of business in Northbrook, Illinois. Richard Kushnir was the president and chief executive officer of the Debtor, as well as the Debtor's Senior Compliance Registered Option Principal. On or about June 30, 1998 Debtor ceased its operations. Richard Kushnir and other personnel of Debtor subsequently opened a branch office of J.E. Liss Financial Services, Inc., a Milwaukee, Wisconsin based brokerage firm, in the Northbrook office space previously occupied by the Debtor. Some of Debtor's customers became customers of the Liss Northbrook office. All Debtor's former employees, including its brokers and account representative, allegedly were offered employment with Liss. Richard Kushnir is the compliance officer for the new Northbrook office of Liss.
SIPC, a nonprofit membership corporation created by the Securities Investor Protection Act ("SIPA"), 15 U.S.C. § 78aaa et seq., commenced the instant proceeding against Debtor on June 2, 1999 by filing an application to the District Court for the Northern District of Illinois, seeking an order determining that the customers of the Debtor were in need of the protections afforded by SIPA and commencing a liquidation proceeding pursuant to Chapter 7 of Title 11. The case was assigned to District Judge Milton Shadur. Nagler of Steven B. Nagler Ltd. and Leslie J. Weiss and Norman J. Ginsparg of Sugar, Friedberg & Felsenthal ("SF & F") entered appearances on behalf of Debtor.
Pursuant to the provisions of SIPA, the District Court entered an order which inter alia appointed the SIPA Trustee and Altheimer & Gray as counsel for the Trustee, and then removed the liquidation proceeding to the United States Bankruptcy Court for the Northern District of Illinois pursuant to 15 U.S.C. § 78eee(b)(4). Initially Nagler and SF & F contested SIPC's jurisdiction on behalf of the Debtor, and opposed the liquidation proceeding and/or SIPC's investigation of customer claims. However, Debtor consented to the SIPA liquidation proceeding on July 14, 1999.
When this case was filed in the District Court, the Debtor was party to several arbitration proceedings conducted pursuant to rules promulgated by the National Association of Securities Dealers as well as other related actions pending in the federal courts (collectively "Arbitration Proceedings"). These proceedings were instituted by customers of Debtor who alleged that Debtor or its account representative had improperly managed their accounts. The Arbitration Proceedings against Debtor were stayed under 11 U.S.C. § 362 upon commencement of this case seeking liquidation of Debtor pursuant to the SIPA. In each of the Arbitration Proceedings, Nagler entered an appearance on behalf of one or more parties in interest. In addition, Nagler has represented Liss, whom SIPC alleges is the effective assignee of the Debtor's business. SIPC also alleges that Nagler continues to represent Liss in other matters possibly related to the instant case.
On July 14, 1999, prior to removal of this case from the District Court, Nagler and SF & F requested leave to withdraw their appearance on behalf of the Debtor. Judge Shadur granted their request at the July 14, 1999 hearing.
Nagler has appeared on behalf of Richard Kushnir at hearings before this Court as well as in the Arbitration Proceedings. SIPC has refused to waive Debtor's attorney-client privilege, and has objected and continues to object to Nagler's representation of Richard Kushnir or any other person or entity involved in this case. Accordingly, SIPC seeks to disqualify Nagler from representing Liss, Richard Kushnir or any other party herein in this and related proceedings.
Nagler's argument against his disqualification is that he represented both Debtor and Mr. Kushnir jointly. Therefore under the "joint defense doctrine" he says that any information obtained by him during the representation was and is not subject to the attorney-client privilege. Thus, he argues there is no threat that confidential information will be revealed and thus no conflict of interest.
The parties dispute when Nagler's representation of Debtor began. SIPC alleges that Nagler represented both Debtor and Kushnir for years prior to the present litigation, and was essentially Debtor's general counsel. Nagler contends that he has represented Richard Kushnir and Debtor only since March 1998 after Kushnir allegedly learned that Paul Carney ("Carney"), one of Debtor's brokers, had engaged in improper conduct concerning the handling of certain of his client's accounts. Nagler withdrew from Debtor's representation before Judge Shadur in July 1999 when SIPC was appointed the trustee in liquidation. Nagler contends that his representation of both Kushnir and Debtor has been at all times limited to defending them against claims by some of Carney's customers both in the arbitration proceedings filed by those customers, and also before the District Court. Further Nagler contends that he represents Liss for the sole purpose of defending Liss against claims of these same customers. Nagler has also represented William Cunningham in the Arbitration Proceedings; Cunningham was the vice president and sales manager of Debtor.
No evidentiary hearing has been held on the instant motion. Although the parties have some differences as to various details, those asserted and conceded by Nagler have been viewed for reasons stated below to be sufficient to warrant his disqualification. The discussion that follows will stand as Findings of Fact and Conclusions of Law.
The United States District Court for the Northern District of Illinois has exclusive jurisdiction over this proceeding pursuant to 15 U.S.C. § 78eee(b)(2)(A) and has removed this matter to this Court pursuant to 15 U.S.C. § 78eee(b)(4). The Court also has bankruptcy subject matter jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and Local Rule 15(a) of the United States District Court for the Northern District of Illinois. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A).
Disqualification of counsel "is a drastic measure which courts should hesitate to impose except when absolutely necessary," and disqualification "motions should be viewed with extreme caution for they can be misused as techniques of harassment." Freeman v. Chicago Musical Instrument Co., 689 F.2d 715, 721-22 (7th Cir.1982). While disqualification of counsel protects the attorney-client relationship, it also serves to destroy a relationship by depriving a party of representation of their own choosing. Id. However, "courts have a duty to safeguard the sacrosanct privacy of the attorney-client relationship so as to maintain public confidence in the legal profession and to protect the integrity of the judicial proceeding." Chemical Waste Management, Inc. v. Sims, 875 F.Supp. 501, 503 (N.D.Ill.1995).
The Rules of Professional Conduct adopted by the District Court for the Northern District of Illinois apply to proceedings before this bankruptcy court. The Rules of Professional Conduct for the Northern District of Illinois were originally adopted as of November 12, 1991, General Order of 29 October 1991, and generally follow with some variations the Model Rules promulgated by the ABA (1983). See Local Bankruptcy Rule 608. Thus, those same rules apply to this SIPC proceeding.
Local District Court Rule 83.51.9 is the rule which addresses conflicts of interests involving former clients and provides that:
A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which...
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