by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
ATTORNEY/CLIENT; CONFLICTS: New York court discusses problems of conflicts involving transient lawyers and lawyer/receivers.
Bank of Tokyo Trust v. Urban Food Malls, 650 N.Y.S.2d 654 (App. Div. 1996)
In what appears to be a bitterly contested debtor/creditor dispute, the court appointed a retired judge as a receiver to collect sublease revenues from a tenant who allegedly was in default on mortgages on the tenant's interests. The transaction was a $75 million financing involving complex letter of credit backup arrangements and numerous limited partnership interests. Central to the deal was the tenant debtor, a corporation which apparently held master leases on "food court" properties and then derived revenue by subletting to fast food operators in the courts.
The court appointed a receiver, a retired New York judge, to collect the subtenants' rents and the receiver in turn retained as receiver's counsel the New York law firm where he had formed an "special counsel" relationship. The debtor sought dismissal of both the law firm and the receiver. The trial court dismissed the law firm as counsel to avoid "appearance of impropriety," and that ruling was not appealed (although perhaps the law firm regretted its decision not to appeal following the instant ruling).
The trial court refused to dismiss the receiver, and that ruling became the basis of the instant appeal. The debtor's allegations regarding the basis for dismissing the receiver were that an associate in the law firm to which the receiver was special counsel formerly had been a an attorney, and ultimately a partner, for twenty years in the law firm that represented principals of the debtor - who were members of the same family. Indeed, this lawyer, it was alleged, had drafted the original documents forming the debtor corporation and the original drafts of the master leases on which the instant transaction was predicated (although these leases had been amended and "restated" by another lawyer as part of the financing.) Debtor alleged that this attorney had regularly advised and counseled with the family during the last ten years of his relationship with his prior firm, ending in 1988, being principally responsible for the general business and corporate affairs of the debtor in the firm. The instant financing transaction occurred a year later.
The appeals court first indicated that the allegations concerning the involvement of this lawyer in the affairs of the debtor were contained entirely in an unsupported self-serving memo filed by the debtor's counsel, and indicated that it would have affirmed the trial court on that basis alone (without indicating what procedures were available for the debtor's counsel to substantiate those claims, or whether they in fact were denied by the receiver).
It then stated that even if the allegations were true, they would not reflect on the suitability of the receiver to serve because a conflict of interest in the receiver's law firm should not be regarded as "infecting" the receiver, who is an officer of the court.
Following its conclusion that the receiver should not be subject to conflicts analysis, because the receiver's role is not adverse to the debtor, the court then went on to evaluate the conflict claim anyway. It stated that for a conflict to arise, the matter on which a lawyer previously worked must be "substantially related" to the current litigation. It concluded that the allegations concerning the lawyer's work as "principle lawyer" for the debor's business affairs was not "substantially" related to the instant financing, even though that work ended only one year prior to the financing. It stated that "[k]nowleddge of a former client's financil and business backgroun is not a basis for disqualification if that background is not an issue in the subsequent litigation."
Even though the court assumed the truth of the allegation that the attorney had had "unrestricted access to the [debtor's] personnel and dcouments, the court found that there was no specific allegation that identified confidential information available to that attorney was "substantially related" to the instant action.
Finally, the court concluded that even if the firm, because of the presence of this lawyer, was properly disqualified (a conclusion which the court's prior comments belie), and even accepting the notion (which it had rejected) that a receiver stands in a potential conflict position, the "taint" of conflict of interest would not run to the receiver in this case because "there is no allegation that [the receiver] learned any alleged [debtor] confidences. Noting that the firm in question was a 140 lawyer "departmentalized" firm, the court refused to attribute knowledge held by one of the associates to another lawyer in the firm.
Just to add a little spice, the court went on to discuss the fact that the judge who originally appointed the receiver, and then refused to dismiss the receiver, ultimately recused herself on the basis of a "long past 'romantic relationship'" with the receiver. The court concluded that if the judge had not recused herself voluntarily there would have been no basis to order recusal, and consequently the fact that the judge had made the questioned ruliings prior to recusal was of no consequence.
Comment 1: There is so much here that the editor views a deserving of criticism that it is hard to know where to start. Perhaps the editor should start with an admission - that others would make for him - that the editor does not make his living in the practice of law. Some would argue therefore that the editor can hardly appreciate the complexities of conflict of interest issues in the modern area of collapsing law firms and peripatetic lawyers. In fact, the editor is of counsel to a law firm about the size of the one involved in this case and regularly confronts these issues in that connection. He hopes that the fact that his financial survival does not depend on their resolution may give him a more objective, and therefore more helpful perspective, than some others. But that is certainly a subject that could be debated.
Comment 2: As the editor has stated in earlier postings, ethical standards are virtually the only thing that justify the existence of professional status, and the consequent benefits of monopoly, that the bar enjoys in modern society. There no longer can be an argument that accountants in major firms or experience commercial real estate brokers have training and experience that is less relevant to the resolution of their client's specific legal needs than a buck lawyer just out of law school. Yet that lawyer in many states has authority to draft documents and provide legal advice that others cannot. The only justification is that the lawyer is subject to professional controls not applicable to others - and the most significant of those controls (the only controls regularly policed and enforced) are our ethical standards. These standards should not be compromised because of "business reality," if for no other reason than that their compromise ultimately will destroy that very business.
Comment 3: The notion that a receiver appointed, at the behest of the mortgagee, to collect rents following a mortgage default is not in a conflict position with the interests of the debtor is insultingly incorrect. It is right up there with the notion that once ruled the bar that "a gentlemen needs no ethical standards because a gentleman is always ethical." Ask any debtor, or for that matter, any creditor, whether the receiver's position is in conflict with the debtor's. All will admit that it is, whether or not it might also be in conflict with the interests of the creditor. The notion that any problems are resolved because the receiver proceeds only according to judicial order is naive at best. Most judicial appointments are so broad that the receiver is vested with considerable discretion, and the court frequently will defer to that discretion when the receiver's actions are challenged. The receiver's "spin" on the rights and wrongs of the events involved in the collection process are a critical factor in the judicial supervision. The receiver should not hold conflicting interests.
Many receivers are not lawyers, and it may follow that receivers who are lawyers ought not to be subject to the same ethical constraints that would apply to a lawyer. This is a different question, and one that the court does not really address. But even if all ethical rules concerning lawyers do not apply to receivers, a receiver nevertheless ought to be a party who is in a position to act fairly and impartially, and who is not in a position to take advantage of confidences obtained while that receiver was in a confidential relationship with one of the parties. Further, a lawyer who functions as a receiver nevertheless has an ethical duty to protect prior clients from conflicts arising from prior relationships.
Comment 4: The court assumes, for discussion purposes, an identity of knowledge between the receiver and the other lawyers in the firm, and concludes that the firm had no knowledge that would lead to a conflict here. This is perhaps the weakest part of the opinion. The editor views as absurd the court's premise that a lawyer who has been principally responsible for the affairs of the debtor over a seven year period just proceeding a financing in question probably has no knowledge that likely would compromise the debtor's position in a subsequent dispute over that financing. In a case such as this, the court should assume that the lawyer, either consciously or subconsciously has information that was obtained in a confidential relationship that might now jeapordize the debtor's position. The debtor has shown enough when the debtor shows complete access to its business affairs in a recent, relevant period. The requirement imposed by the court here - that there be a more specific showing of confidential information - should apply only when the lawyer's access to information of the client has been limited.
Comment 5: Assuming that the firm did have "bad" information, the court concludes that the mere size and departmentalization of the firm would preclude the receiver from obtaining such information. The court does not rely upon any special details of the receiver's "special counsel" status. It appears to assume that the receiver is no different from any other lawyer. If this assumption is correct, the court's analysis of this question is woefully inadequate.
The editor has not yet completely worked out in his own mind the question of whether confidential information held by members of a firm can be shielded by a "Chinese wall" from other firm members to avoid ethical conflicts. But clearly something must be done to insure that the information is not exchanged. The court does not require any kind of "wall building" here. The notion that a 140 person law firm need not demonstrate specifically what actions it has taken to insulate a lawyer with confidential information from another lawyer in a conflicts position is an unacceptable ethical judgment. It suggests that big firms don't have the same ethical responsibilities as small ones - a concept that the editor sees touted all too frequently in modern ethical discussions.
Final Comment: The editor is less concerned with the actual outcome in this case as he is with the significant mischief that might be wrought by the generous and forgiving language of the appeals court in the context of future ethical judgments made by trial courts in New York and elsewhere. Much of what the court offers here deals with the overall ethical position of the law firm in ordinary conflicts disputes. The court's language easily would apply to ethical question in which a receiver is not involved; indeed such an application appears to be intended by the court. The editor frequently has grumbled that New York state decisions don't say enough about their reasoning. Here the court said far, far too much.
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