Tekni-Plex, Inc. v. Meyner and Landis

• Decision Date: 22 October 1996
• Docket Number: INC,TEKNI-PLE
• Citation: 674 N.E.2d 663,651 N.Y.S.2d 954,89 N.Y.2d 123
• Parties: , 674 N.E.2d 663, 65 USLW 2305 , Respondent, v. MEYNER AND LANDIS, a New Jersey Partnership, Appellant., Respondent, v. Tom Y.C. TANG, Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 954

651 N.Y.S.2d 954

89 N.Y.2d 123, 674 N.E.2d 663, 65 USLW 2305

TEKNI-PLEX, INC., Respondent, v. MEYNER AND LANDIS, a New Jersey Partnership, Appellant.

TEKNI-PLEX, INC., Respondent, v. Tom Y.C. TANG, Appellant.

Court of Appeals of New York.

Oct. 22, 1996.

Geoffrey C. Hazard, Jr., of the Pennsylvania Bar, admitted pro hac vice, for appellant in the first and second above-entitled actions; Meyner and Landis (Cynthia Brooks, of the New Jersey Bar, admitted pro hac vice, of counsel), appellant pro se in the first above-entitled action; and Curtis, Mallet-Prevost, Colt & Mosle, New York City (Turner P. Smith, of counsel), for appellant in the second above entitled action.

Richard Spears Kibbe & Orbe, New York City (Linda Imes and Adam D. Mitzner, of counsel), and Bruce A. Green, for respondent in the first and second above-entitled actions.

OPINION OF THE COURT

KAYE, Chief Judge.

Central to this appeal, involving a dispute over a corporate acquisition, are two questions. First, can long-time counsel for the seller company and its sole shareholder continue to represent the shareholder in the dispute with the buyer? And second, who controls the attorney-client privilege as to pre-merger communications? We conclude that counsel should step aside, and that the buyer controls the privilege as to some, but not all, of the pre-merger communications.

A. Facts

Tekni-Plex, Inc., incorporated under the laws of Delaware in 1967, manufactured and packaged products for the pharmaceutical and other industries. For nearly 20 years, from 1967 to 1986, Tekni-Plex had 18 shareholders and was managed by a five-member Board of Directors. Appellant Tom Y.C. Tang was both a director and a shareholder of the company.

In 1986, Tang became the sole shareholder of Tekni-Plex. From that time until the corporation's sale in 1994, Tang was also the president, chief executive officer and sole director of Tekni-Plex.

Appellant Meyner and Landis (M&L), a New Jersey law firm, was first retained as Tekni-Plex counsel in 1971. During the ensuing 23 years, M&L represented Tekni-Plex on various legal matters, including environmental compliance. As the record indicates, M&L in the mid-1980's assisted Tekni-Plex in securing an environmental permit for the operation of a laminator machine at its Somerville, New Jersey, plant. Similarly, the law firm apparently assisted the company in an investigation by the New Jersey Department of Environmental Protection into Tekni-Plex's compliance with environmental laws. Additionally, during this period M&L represented Tang individually on several personal matters.

In March 1994, Tang and Tekni-Plex entered into an Agreement and Plan of Merger (the Merger Agreement) with TP Acquisition Company (Acquisition), whereby Tang sold the company to Acquisition for $43 million. M&L represented both Tekni-Plex and Tang personally. The two instant lawsuits grow out of that transaction.

Acquisition was a shell corporation created by the purchasers solely for the acquisition of Tekni-Plex. Under the Merger Agreement, Tekni-Plex merged into Acquisition, with Acquisition the surviving corporation, and Tekni-Plex ceased its separate existence. Tekni-Plex conveyed to Acquisition all of its tangible and intangible assets, rights and liabilities. Acquisition in return paid Tang the purchase price "in complete liquidation of Tekni-Plex," and all of Tang's shares in Tekni-Plex--the only shares outstanding--were canceled.

The Merger Agreement contained representations and warranties by Tang concerning environmental matters, including that Tekni-Plex was in full compliance with all applicable environmental laws and possessed all requisite environmental permits. It further provided for indemnification of Acquisition by Tang for any losses incurred by Acquisition as the result of misrepresentation or breach of warranty by either Tang or Tekni-Plex. Acquisition, in turn, agreed to indemnify Tang and Tekni-Plex for any similar losses suffered by them.

Following the transaction, Acquisition changed its name to "Tekni-Plex, Inc." (new Tekni-Plex). In June 1994, new Tekni-Plex commenced an arbitration against Tang, alleging breach of representations and warranties contained in the Merger Agreement regarding the former Tekni-Plex's (old Tekni-Plex) compliance with environmental laws.

Among other things, new Tekni-Plex claimed that Tang falsely represented that a laminator machine at the Somerville facility did not emit volatile organic compounds (VOCs). New management, however, allegedly learned that the machine did indeed emit VOCs into the air. New Tekni-Plex further claimed that the permit for the laminator machine had been obtained on the false premise that it did not emit VOCs and that VOC emissions were therefore not authorized. New Tekni-Plex also contended that Tang and old Tekni-Plex had taken steps to conceal from Acquisition the emission of VOCs at the Somerville facility.

Tang retained M&L to represent him in the arbitration. New Tekni-Plex moved to disqualify the law firm from representing Tang, but the arbitrator concluded that he lacked authority to rule on the motion. New Tekni-Plex then moved by order to show cause in Supreme Court for an order disqualifying M&L. By separate order to show cause in Supreme Court, new Tekni-Plex moved for an order against M&L (1) enjoining the law firm from representing Tang in any action against new Tekni-Plex, (2) enjoining M&L from disclosing to Tang any information obtained from old Tekni-Plex, and (3) ordering M&L to return to new Tekni-Plex all of the files in the law firm's possession concerning its prior legal representation of old Tekni-Plex. Tang and M&L each cross-moved for orders dismissing the complaints on the ground that there was another action pending in New Jersey. ¹

Supreme Court concluded that New York was the proper forum for resolution of the disqualification issue and that the arbitrator's conclusion that he did not have authority to decide the issue was proper. The court held that M&L should be disqualified from representing Tang in the arbitration. It further enjoined M&L from representing Tang in the arbitration, enjoined M&L from disclosing to Tang any information obtained from old Tekni-Plex, and directed M&L to return to new Tekni-Plex all of the files in M&L's possession concerning its prior representation of old Tekni-Plex. Finally, the court denied both cross motions to dismiss. The Appellate Division affirmed.

We agree with the courts below that, in the circumstances presented, M&L should be disqualified from representing Tang in the arbitration. As for confidential communications between old Tekni-Plex and M&L generated during the law firm's prior representation of the corporation on environmental compliance matters, authority to assert the attorney-client privilege passed to the corporation's successor management. Moreover, because the record fails to establish that M&L also represented Tang individually on these matters, the exception to the privilege for co-clients who subsequently become adversaries in litigation is inapplicable. Thus, the Appellate Division correctly concluded that M&L should be enjoined from disclosing the substance of these communications to Tang and directed the law firm to return the files relating to this representation to new Tekni-Plex.

New Tekni-Plex, however, does not control the attorney-client privilege with regard to discrete communications made by either old Tekni-Plex or Tang individually to M&L concerning the acquisition--a time when old Tekni-Plex and Tang were joined in an adversarial relationship to Acquisition. Consequently, new Tekni-Plex cannot assert the privilege in order to prevent M&L from disclosing the contents of such communications to Tang. Nor is new Tekni-Plex entitled to the law firm's confidential communications concerning its representation of old Tekni-Plex with regard to the acquisition.

B. The Applicable Ethics Principles

Attorneys owe fiduciary duties of both confidentiality and loyalty to their clients (see, Solow v. W.R. Grace & Co., 83 N.Y.2d 303, 306, 610 N.Y.S.2d 128, 632 N.E.2d 437). The Code of Professional Responsibility thus imposes a continuing obligation on attorneys to protect their clients' confidences and secrets. Even after representation has concluded, a lawyer may not reveal information confided by a former client, or use such information to the disadvantage of the former client or the advantage of a third party (Code of Professional Responsibility DR 4-101[B] [22 NYCRR 1200.19(b) ]; see also, Code of Professional Responsibility DR 5-108[A][2] [22 NYCRR 1200.27(a)(2) ] ). An attorney, moreover, "must avoid not only the fact, but even the appearance, of representing conflicting interests" (Cardinale v. Golinello, 43 N.Y.2d 288, 296, 401 N.Y.S.2d 191, 372 N.E.2d 26; see also, Code of Professional Responsibility Canon 9).

In accordance with these duties, the Code precludes attorneys from representing interests adverse to a former client on matters substantially related to the prior representation. This ethical proscription is set forth in DR 5-108 as follows:

"A Except with the consent of a former client after full disclosure a lawyer who has represented the former client in a matter shall not:

"1. Thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client" (22 NYCRR 1200.27[a][1] ).

Under DR 5-108(A)(1), a party seeking disqualification of its adversary's lawyer must prove: (1) the existence of a prior attorney-client relationship between the moving party and opposing counsel, (2) that the matters involved in both representations are substantially related, and (3) that the interests of the present client and former client are materially adverse (see, Solow v. W.R. Grace & Co., 83 N.Y.2d at 308, 610 N.Y.S.2d 128, 632 N.E.2d 437). Satisfaction...