Smith v. NEW ORLEANS FEDERAL SAV. & L. ASS'N

• Decision Date: 11 July 1979
• Docket Number: 79-125.,Civ. A. No. 78-4008
• Parties: Mark C. SMITH, III, Plaintiff, v. NEW ORLEANS FEDERAL SAVINGS AND LOAN ASSOCIATION et al., Defendants.
• Court: U.S. District Court — Eastern District of Louisiana

474 F. Supp. 742

Mark C. SMITH, III, Plaintiff, v. NEW ORLEANS FEDERAL SAVINGS AND LOAN ASSOCIATION et al., Defendants.

Civ. A. Nos. 78-4008, 79-125.

United States District Court, E. D. Louisiana.

July 11, 1979.

COPYRIGHT MATERIAL OMITTED

Henry L. Klein, New Orleans, La., for plaintiff.

Michael S. Fawer, Matthew H. Greenbaum, New Orleans, La., for defendants.

CASSIBRY, District Judge:

I. INTRODUCTION

Plaintiff Mark Smith is the former Chairman of the Board of Directors of the New Orleans Federal Savings and Loan Association (NOF or the homestead). In October, 1978, he was removed as Chairman of the Board of NOF and in November, 1978, he was removed from the Board entirely. He has brought two actions before this Court. In one, Smith challenges his removal from the Board of NOF. In the other, Smith, on behalf of a class consisting of all members of NOF, seeks the removal of the current Directors. In each case, the current Directors and the homestead are named as defendants.

The defendants claim that prior to his ouster Smith had committed numerous improprieties, some of them drawing the critical attention of the Federal Home Loan Bank Board (FHLBB). They contend that Smith was removed from the Board for legal and sufficient cause. Smith charges that his removal was wrongful. He claims that he was removed in retaliation for his having uncovered massive improper securities transactions on the part of certain homestead personnel. He seeks the removal of the current Board because of his wrongful ouster, the securities transactions, and certain other alleged illegal acts.

Smith is represented by Henry Klein, of the firm of Klein and Rouse. Klein has been Smith's attorney for the past eight years. While Smith was associated with NOF, however, Klein served as the homestead's attorney on various matters. Further, Klein's current partner, Gary Rouse, was formerly associated with the firm of Kavanaugh and Talley, which is NOF's regular counsel and receives a retainer from the homestead. While at that firm, Rouse represented NOF on several occasions. These legal associations of Messrs. Klein and Rouse with the homestead constitute one ground for defendants' motion to disqualify their firm as plaintiff's counsel. Defendants claim that they cannot be sued here by attorneys who have represented them in the past.

The other ground for the motion is based upon the ethical proscription against an attorney being a witness in a case that he tries. The defendants claim that both Klein and Rouse have been exposed to occurrences and events about which they will likely be called to testify at trial, thus requiring disqualification of their law firm.

II. THE INSTANT LITIGATION

A. The facts

In March, 1976, the Federal Home Loan Bank Board issued a Cease and Desist Order against NOF, to which the homestead consented. The Order was based upon a series of legal violations with which the FHLBB charged the homestead. A substantial portion of the incidents set out in the FHLBB's Notice of Charges involved Mark Smith, who was then Chairman of the Board of NOF. The FHLBB charged Smith with conflicts of interest in several areas of the homestead's business. For example, the FHLBB charged that a wholly-owned subsidiary of NOF had purchased real property from a corporation in which Mark Smith and a member of his immediate family had financial interests, and it cited NOF's financial dealings with a company named Tall Pines, Inc. as an instance of this kind of conflict of interest. The homestead remained under close FHLBB scrutiny after the entry of the Order.

From about August, 1977, through May, 1978, various persons at the homestead engaged in large-scale securities transactions. David Gatto, the President of NOF, was involved in some of these transactions. Gatto claims that his participation was an appropriate attempt to extricate the homestead from a dangerous situation. Mark Smith charges that Gatto's involvement was improper and illegal, and that he (Smith) was in the process of uncovering the wrongdoing of Gatto and others when he was ousted.

Mark Smith was removed from his position as Chairman of the Board of NOF on October 19, 1978. On the same day, a committee of Directors was appointed by the Board to investigate the recent securities transactions. That Committee consisted of Mark Smith and Conrad Franz. On October 24, Smith served a set of interrogatories concerning the securities transactions on each Board member, and on October 26, a second set of interrogatories was served on these same persons.

On November 22, 1978, the Board of Directors of NOF passed a Resolution removing Mark Smith as a Director "for cause." Eight examples of Smith's "unsuitable" conduct were set out. One such ground was the conduct by Smith that led to the FHLBB's Cease and Desist Order of March, 1976. Another was the Board's charge that Smith had misapplied to his own benefit services or other things of value that belonged to the homestead.

In December, 1978, First Bank of Slidell, Louisiana, seized Mark Smith's accounts at NOF in satisfaction of a judgment it had against him. Smith has apparently been unable to open new savings accounts at NOF.

B. The issues

In the instant lawsuits, Mark Smith has brought into question the grounds for his removal from the Board of Directors of NOF. The defendants contend that the causes set out in the November 22 Resolution have a basis in fact and are sufficient to support Smith's removal. Smith claims to the contrary. Accordingly, the alleged improprieties on the part of Mark Smith will be disputed issues before the court.

A related issue will concern the motivation of the Directors in removing Smith. Smith has explicitly alleged that his removal was motivated by a bad-faith desire to thwart his uncovering the securities transaction. Defendants, of course, contend that they acted with the interests of NOF in mind.

The securities transactions themselves present another important matter in dispute here. Smith contends not only that they underlie his removal, but also that they should constitute a ground for the removal of certain Directors.

Finally, the court will be asked to consider whether any Directors participated in other improper actions directed toward Mark Smith. Specifically, Smith has claimed that certain Directors caused his savings accounts at NOF to be closed and to remain closed, in an effort to prevent Smith from being qualified to be a Director of the homestead.

III. THE FORMER REPRESENTATION OF THE HOMESTEAD BY MESSRS. KLEIN AND ROUSE

A. The legal standards to be applied

Under Canons 4 and 9 of the Code of Professional Responsibility, the possible conflict of interest presented by an attorney representing interests adverse to those of a former client is resolved, in this Circuit, under the following basic rule:

. . . a former client seeking to disqualify an attorney who appears on behalf of his adversary, need only to show that the matters embraced within the pending suit are substantially related to the matters or cause of action wherein the attorney previously represented him.

Wilson P. Abraham Const. Co. v. Armco Steel Corp., 559 F.2d 250, 252 (5th Cir. 1977) (emphasis in original). Accord In Re Yarn Processing Patent Validity Litigation, 530 F.2d 83 (5th Cir. 1976); Brennan's, Inc. v. Brennan's Restaurants, Inc., 5th Cir. 1979, 590 F.2d 168; United States v. Kitchin, 5th Cir. 1979, 592 F.2d 900.

In Abraham, the Fifth Circuit elaborated that:

This rule rests upon the presumption that confidences potentially damaging to the client have been disclosed to the attorney during the former period of representation. The Court may not even inquire as to whether such disclosures were in fact made or whether the attorney in fact is likely to use the damaging disclosures to the detriment of his former client.

559 F.2d at 252. However, the Abraham panel remanded the case to the district court for factual findings as to the "content of the information which was exchanged." 559 F.2d at 253. Klein argues that I should follow this action of the Fifth Circuit and make similar findings. I disagree. The Abraham case presented a unique factual situation in which it was not a former client seeking disqualification, but rather co-defendants of a former client. The court pointed out that under those circumstances, there was no presumption that confidential information was exchanged. 559 F.2d at 253. Where, as in the instant case, there has formerly been a direct attorney-client relationship between the attorney and the person seeking his disqualification, such a presumption does exist. Abraham, supra, 559 F.2d at 253; Brennan's, supra, at 173; Kitchin, supra, at 904.

These strict rules rest on sound policy. A client must be able frankly and freely to provide information to his attorney without fear that the information might later be used against him. Were an attorney allowed to misuse such information, the client would feel justifiably wronged and public confidence in the legal system would be undermined. See Abraham, supra, 559 F.2d at 253; Brennan's, supra, at 172. Further, if in deciding disqualification questions courts routinely inquired into the contents of the information exchanged between attorney and client, that would result in the disclosure of the very materials that should remain secret. Kitchin, supra, at 904; Emle Industries, Inc. v. Patentex, Inc., 478 F.2d 562, 571 (2d Cir. 1973).

Accordingly, the "substantial relationship" test is an indirect mechanism for establishing the likelihood that confidential information was exchanged, without taking direct testimony about the contents of that information. In deciding whether such a relationship exists, the judge must make a "realistic appraisal of the possibility that confidences have been disclosed in the one matter which will be harmful to the client in the other." Westinghouse Elec. Corp. v. Gulf Oil Corp., 588 F.2d 221, 225 (7th...