iHealthcare Inc v. Greene et al
Filing
55
OPINION AND ORDER granting 36 and granting 23 Motions to Disqualify Counsel. Attorney Harold E Collins PHV must be disqualified under Rule 3.7. Signed by Magistrate Judge Andrew P Rodovich on 6/5/12. (mc)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
HAMMOND DIVISION
iHEALTHCARE, INC.,
Plaintiff
v.
BARBARA GREENE; HILTON HUDSON,
MD; PAUL JONES, MD,
Defendants
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CIVIL NO. 2:11 cv 396
OPINION AND ORDER
This matter is before the court on the Motion to Disqualify
Counsel [DE 23] filed by the defendant, Paul Jones, on January 9,
2012, and the Motion to Disqualify Counsel [DE 36] filed by the
defendant, Barbara Greene, on January 29, 2012.
For the reasons
set forth below, both motions are GRANTED.
Background
Heartland Memorial Hospital was an Indiana limited liability
company that operated a number of for-profit physician practices
and owned other healthcare businesses and medical practices in
Indiana and Illinois.
The plaintiff, iHealthcare, owned 100% of
the equity membership interests of Heartland Hospital and controlled its business affairs. iHealthcare is an Indiana Corporation owned in part by Harold Collins, iHealthcare’s attorney in
the present matter.
Collins also was a member of iHealthcare’s
Board of Directors from 1994 until March 20, 2006, and served as
General Counsel and Chief Financial Officer of iHealthcare and
Heartland Hospital from 1994 until October 2005.
From 2002 until November 2004, iHealthcare, on behalf of
Heartland Hospital, undertook the development of an acute care
hospital facility.
iHealthcare arranged and guaranteed Heartland
Hospital’s major financing and capital requirements, including,
but not limited to, approximately $3.5 million of iHealthcare
convertible debentures, the proceeds of which were loaned to
Heartland Hospital and used as money to construct the new facility.
On August 30, 2004, Heartland Hospital entered into a refinancing agreement, commonly referred to as a “sale/leaseback”.
Under the agreement, Heartland Hospital agreed to sell its
Munster Hospital Facility to Munster Holdings, an Indiana limited
liability company, for the sum of $30 million dollars.
time the facility was valued at $40,000,000.
At the
Heartland Hospital
agreed to lease the facility back from Munster Holdings pursuant
to a long-term lease with a repurchase option for $30,000,000.
In June 2005, iHealthcare was approached by Wright Captial
Partners, LLC, as prospective buyers for the Heartland Hospital
assets and iHealthcare’s equity interest in Heartland Hospital.
Wright subsequently created a new business entity to effect the
iHealthcare stock purchase that was ultimately named HM Holdings.
2
On October 10, 2005, iHealtcare executed a merger agreement
whereby Wright Capital committed to lend iHealtcare $2.5 million
dollars on behalf of Heartland Hospital provided that LeRoy
Wright be named as Chairman of the Board, Alfred Sharp as Chief
Financial Officer, and Jeffrey Yessenow as Chief Executive
Officer.
The loan amount was later increased to $4.8 million.
iHealthcare alleges that the financial condition of iHealthcare and Heartland began to deteriorate after the merger under
the new management.
iHealthcare was forced to file Chapter 11
bankruptcy on March 16, 2007, in the United States Bankruptcy
Court for the Northern District of Indiana.
iHealthcare alleges
that the new management breached its fiduciary duties by a number
of acts including: transferring the facility and its equipment
for $20,000,000 less than fair market value to Sisters of St.
Francis Health Services; failing to get an appraisal of the
facility; failing to supervise the hospital to prevent looting;
bankrupting the companies by entering detrimental transactions;
and various other activities.
iHealthcare further complains that
the defendants made false and deceitful representations to induce
all parties to enter into the St. Francis sale/leaseback agreement. One of the agreements St. Francis made was that it would
settle the contractual claims of Vijay Gupta M.D. and Collins,
the target of both motions.
3
Collins previously had negotiated an employment contract for
himself and Gupta with iHealthcare.
In a separate action in the
Circuit Court of Cook County, Illinois, iHealthcare is suing
Collins for malpractice, alleging that the contracts were bogus,
never approved by the iHealthcare board, and were unfair and
unreasonable.
iHealthcare has taken the position that the
contracts were procured by fraud and that Collins knowingly made
fraudulent representations to iHealtchare’s corporate parent to
induce the contracts.
iHealthcare’s wholly owned subsidiary,
Heartland Hospital, also has litigation pending against Collins
for malpractice and breach of fiduciary duties with respect to
the 2004 and 2006 employment agreements.
Collins filed a lawsuit
against iHealthcare for fraudulent conspiracy and breach of two
separate employment agreements iHealthcare allegedly entered with
Collins in 2004 and 2006 respectively.
The defendants now move to disqualify Collins as iHealthcare’s attorney in the present matter, arguing that the pending
litigation in the Circuit Court of Cook County conflicts with his
duty to exercise professional judgment on behalf of his client.
In this matter, Collins’ and Gupta’s contracts are entangled in
iHealtchcare’s fraud claims against Jones, Greene, and Hudson.
Specifically, Collins argues here, on behalf of iHealthcare, that
the contracts were valid and that the sale/leaseback was approved
4
in part because St. Francis agreed to settle the contract claims.
In the state court malpractice case, iHealthcare has taken the
opposite position, arguing that Collins procured the contracts by
fraud.
In light of the conflicting positions, the defendants
argue that Collins cannot represent iHealthcare because his
personal and financial interest in the pending state court
litigation may interfere with his ability to exercise professional judgment in this matter.
Moreover, the defendants argue
that Collins' role in procuring the contracts, which are entangled in iHealthcare’s claim against the defendants, renders him a
necessary witness and provides further reason why he cannot
continue representing iHealthcare.
Discussion
The defendants move to disqualify Collins as iHealthcare’s
attorney, arguing that his representation violates Indiana Rules
of Professional Conduct 1.7 and 3.7 because iHealthcare and
Collins have ongoing litigation arising from the same events in
state court and Collins will be a necessary fact witness to the
present litigation. A motion to disqualify should be viewed with
caution and considered a drastic remedy. Owen v. Wangerin, 985
F.2d 312, 317 (7th Cir. 1993).
The local rules of this court
state that "Indiana’s Rules of Professional Conduct and the
Seventh Circuit Standards of Professional Conduct (an appendix to
5
these rules) govern the conduct of those practicing in the
court." Local Rule 83.5(e)
Rule 1.7 of the Indiana Rules of Professional Conduct reads:
(a) Except as provided in paragraph (b), a
lawyer shall not represent a client if the
representation involves a concurrent conflict
of interest. A concurrent conflict of interest exists if:
(1) the representation of one client
will be directly adverse to another
client; or
(2) there is a significant risk that the
representation of one or more clients
will be materially limited by the lawyer's responsibilities to another client, a former client or a third person
or by a personal interest of the lawyer.
(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph
(a), a lawyer may represent a client if:
(1) the lawyer reasonably believes that
the lawyer will be able to provide competent and diligent representation to
each affected client;
(2) the representation is not prohibited
by law;
(3) the representation does not involve
the assertion of a claim by one client
against another client represented by
the lawyer in the same litigation or
other proceeding before a tribunal; and
(4) each affected client gives informed
consent, confirmed in writing.
6
Here, the defendants urge that Collins has a personal interest in
the litigation because he has a financial stake in the outcome of
the litigation and he is setting forth an argument contrary to
the position iHealthcare is taking against him in the separate
state court litigation.
An attorney cannot advance his own interests at the expense
of his client.
Matter of Strutz, 652 N.E.2d 41, 47 (Ind. 1995).
"A lawyer commits a breach of trust going to the very essence of
the attorney-client relationship when he takes a position adverse
to that of his client, or former client, in a business transaction."
Bell v. Clark, 653 N.E.2d 483, 490 (Ind. App. 1995). This
includes accepting employment "if the exercise of his professional judgment on behalf of his client will be or reasonably may
be affected by his own financial or business interests unless the
client consents after full disclosure."
47.
Strutz, 652 N.E.2d at
If the lawyer’s conduct in a transaction raises a serious
question, it is unlikely that the lawyer can fulfill his duty and
give a client independent advice.
Rule 1.7, Cmt. 10.
Moreover,
the comments to Rule 1.7 explain that a lawyer is prohibited from
acting as an advocate "in one matter against a person the lawyer
represents in some other matter, even when the matters are wholly
unrelated."
7
Collins, on behalf of iHealthcare, advances several arguments in opposition to the defendants’ motions.
First, Collins
argues that the bankruptcy court addressed whether Collins had a
conflict of interest when the defendants opposed his appointment
as special counsel.
Collins argues that further consideration is
barred by stare decisis or collateral estoppel.
Collins further
contends that the defendants lack standing to raise the conflicts
because they are not and never have been represented by Collins.
Should the court consider the defendants’ motions on the merits,
Collins maintains that iHealthcare consented to the conflicts and
the underlying malpractice claims were voluntarily dismissed and
no longer pose a conflict.
Before the court may hear the merits of the case, it first
must determine whether the defendants have standing to question
Collins’ continued representation of iHealthcare. Collins argues
that because he never represented the defendants and an attorneyclient relationship never was created, the defendants lack standing to raise any potential conflicts between Collins and iHealthcare.
Three elements must be satisfied to impart standing: injury,
causation, and redressability.
Lujan v. Defenders of Wildlife,
504 U.S. 555, 560-61, 112 S.Ct. 2130, 2136, 119 L.Ed.2d 351
(1992); American Civil Liberties Union of Illinois v. Alvarez,
8
2012 WL 1592618, *5 (7th Cir. 2012).
A party must suffer an
injury to his own rights to have standing.
Freedom From Religion
Foundation, Inc. v. Obama, 641 F.3d 803, 806 (7th Cir. 2011).
The Seventh Circuit has not addressed whether any circumstances
exist where a third-party to the attorney-client relationship has
suffered a personal injury sufficient to confer standing.
See
Rudzinski v. Metropolitan Life Insurance Co., 2007 WL 3171338, *4
(N.D. Ill. Oct. 25, 2007).
However, other Circuit Courts and
District Courts within this Circuit routinely have determined
that third-parties have standing to bring a motion to disqualify
under certain circumstances.
Rudzinski, 2007 WL 3171338 at *4
(citing Kevlik v. Goldstein, 724 F.2d 844, 847-48 (1st Cir.
1984); United States v. Clarkson, 567 F.2d 270, 271 n.1 (4th Cir.
1977); Brown & Williamson Tobacco Corp. v. Daniel Int'l Corp.,
563 F.2d 671, 673 (5th Cir. 1977)).
It is generally the responsibility of the lawyer undertaking
the representation to resolve conflicts, however, when that
attorney has neglected his duty, opposing counsel may raise the
question if he has "evidence clearly calling into question the
fair and efficient administration of justice."
tee Notes; Rudzinski, 2007 WL
3171338 at *4.
Rule 1.7, CommitThe third-party
may satisfy this burden by presenting evidence that the attorney
intends to take a position contrary to the interest of the client
9
or by establishing that the attorney with the conflict is an
essential witness and his testimony will prejudice his client.
See Rudzinski, 2007 WL 3171338 at *4.
The defendants have presented evidence showing that Collins
will personally benefit from taking a position that may be
contrary to iHealthcare’s best interest.
Collins stands to
receive a personal benefit if he pursues the fraud claim against
St. Francis for failing to settle his claim for breach of contract.
To succeed, Collins, on behalf of iHealthcare, will need
to prove that the contract was valid.
This is contrary to the
position iHealthcare is pursuing in its case against Collins in
the Circuit Court of Cook County.
It is unlikely that Collins
will be able to provide professional, unbiased service to his
client as to which theory is in its best interest to pursue when
he stands to gain by establishing that the contract is valid.
The defendants have presented sufficient evidence to establish
that this conflict is viable and, for this reason, have standing
to pursue their motion to disqualify.
Collins next argues that the motion is barred by stare
decisis, collateral estoppel, or res judicata because the Bankruptcy Court for this district determined that Collins could
serve as special counsel for iHealthcare over the creditor’s
objections.
Stare decisis is "[t]he doctrine of precedent, under
10
which a court must follow earlier judicial decisions when the
same points arise again in litigation."
p. 1537 (9th ed. 2009).
Black’s Law Dictionary
Under this doctrine, courts are bound to
follow the law as set forth by higher courts.
on stare decisis is misplaced.
Collins’ reliance
This court is bound to follow the
law as set forth by the Seventh Circuit and the Supreme Court.
However, Collins is not asking the court to follow the law set
forth by another court but to find that a previous decision
relating to this factual matter is binding on the court.
This is
more appropriately evaluated under the collateral estoppel
doctrine.
Collateral estoppel, or issue preclusion, limits the litigation of issues that have been decided between parties in a prior
action, and it applies only when the same issue is involved in
the second proceeding and the determination of that question is
"essential" to the prior judgment. King v. Burlington Northern &
Santa Fe Ry. Co., 538 F.3d 814, 818 (7th Cir. 2008).
The Supreme
Court reiterated the requirements for issue preclusion, noting
that "[i]ssue preclusion . . . bars successive litigation of an
issue of fact or law actually litigated and resolved in a valid
court determination essential to the prior judgment, even if the
issue recurs in the context of a different claim."
11
Taylor v.
Sturgell, 553 U.S. 880, 128 S.Ct. 2161, 2171, 171 L.Ed.2d 155
(2008).
If the issue was not litigated in an earlier proceeding but
it could have been, "the resulting preclusive effect is claim
preclusion."
Leal v. Krajewski, 803 F.2d 332, 335 (7th Cir.
1996). See also Lewis v. Suthers, 2012 WL 1564132, *1 (7th Cir.
May 4, 2012); Hayes v. City of Chicago, 670 F.3d 810, 813 (7th
Cir. 2012); Miller Brewing Co. v. Indiana Department of State
Revenue, 903 N.E.2d 64, 70 (Ind. 2009); Afolabi v. Atlantic
Mortgage & Investment Corp., 849 N.E.2d 1170, 1174 (Ind. App.
2006).
Under Indiana law, when a party argues that the claim
preclusion component of res judicata applies, four factors must
be present, namely: (1) the former judgment must have been
rendered by a court of competent jurisdiction; (2) the former
judgment must have been rendered on the merits; (3) the matter
now in issue was, or could have been, determined in the prior
action; and (4) the controversy adjudicated in the former action
must have been between parties to the present suit or their
privies. In re L.B., 889 N.E.2d 326, 333 (Ind. App. 2008).
The parties dispute whether the bankruptcy court reached the
issues raised in the present motion to disqualify when determining whether to appoint Collins as special counsel.
Title 11
U.S.C. §327 allows the trustee in a bankruptcy proceeding to
12
appoint special counsel to assist the trustee in carrying out his
duties.
The special counsel must not hold an interest adverse to
the estate and must be disinterested.
11 U.S.C. §327(a).
Under
the Bankruptcy Code, a non-disinterested party is one who may
have an economic or practical interest that would lessen the
value of the estate, including creditors, insiders, and directors
who held the position within two years before the date the
bankruptcy petition was filed.
9 Am.Jur.2d Bankruptcy §206.
The creditors opposed Collins’ appointment, arguing that he
was an interested party because he served as a director of the
company and represented that he may become involved as the
attorney for a member of the Board of Managers in the claim
settlement process as the shareholder representative of the
former iHealthcare, Inc.
However, Collins’ involvement in the
present matter was not an actual conflict at the time the Bankruptcy Court reached its decision.
The defendants’ motion did
not address the malpractice or fraud claims pending in state
court, nor did it address the standard set forth by Indiana’s
Rules of Professional Conduct.
The issue decided by the Bank-
ruptcy Court was distinctly different and analyzed under a
different standard. Because the Bankruptcy Court did not determine whether Collins had a conflict of interest under the Indiana
Rules of Professional Conduct, or even whether Collins was
13
disinterested in spite of the malpractice and fraud claims
pending between Collins and iHealthcare in state court, collateral estoppel is inapplicable as there was no prior decision on
point governing how this court must rule.
The only viable argument Collins may assert is that the
issue is barred by claim preclusion because it could have been
raised in an earlier proceeding.
Claim preclusion applies only
when the same parties, or their privies, were parties to the
prior litigation.
Collins ignores that Jones was not a party to
the case before Bankruptcy Judge Harry Dees or in the cases
pending in the Circuit Court of Cook County.
Therefore, claim
preclusion does not bar Jones from raising any issues Judge Dees
reached in his decisions at the present time.
Collins also relies on Judge Dees’ orders to show that all
matters that may have created a conflict have been resolved and
that there is no risk of prejudice to iHealthcare.
Specifically,
Collins argues that the February 19, 2010 and July 22, 2010,
Orders dismissed iHealthcare’s fraudulent conveyance claims
against Collins pursuant to Federal Rule of Civil Procedure
41(b).
Collins maintains that any issues, including the malprac-
tice and breach of fiduciary duty claims, should have been raised
with the fraudulent conveyance claims, and because they were not,
14
iHealthcare is precluded from pursuing these claims and there no
longer remains a conflict of interest.
Regardless, iHealthcare’s malpractice and breach of fiduciary duty claims remain pending.
The Circuit Court of Cook
County has not dismissed the case despite Judge Dees' previous
orders.
There is no guarantee that the judge presiding over
iHealthcare’s fraud and malpractice claims will find res judicata
applicable and will dismiss the claims.
The court also is unable
to foresee whether any future problems will arise from the
apparent conflict of interest.
Collins next points to an informed consent waiver, arguing
that iHealthcare has waived any potential conflict.
Conflicts of
interest may be waived by consent, provided (1) the lawyer
reasonably believes that the lawyer will be able to provide
competent and diligent representation to each affected client;
(2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client
against another client represented by the lawyer in the same
litigation or other proceeding before a tribunal.
Rule 1.7(b).
Collins attached the waiver of conflicts iHealthcare signed,
which disclosed the pending litigation and potential conflicts.
However, the defendants maintain that Collins’ representation of
iHealtchare conflicts with his self representation against and in
15
defense of iHealthcare’s claims in another tribunal, and therefore cannot be waived.
The court agrees with this analysis.
Collins is representing himself in claims that directly conflict
with iHealthcare’s position in this matter, and this type of
conflict is not subject to waiver.
Collins has a personal in-
terest in establishing that the contracts he negotiated with
iHealthcare are valid, which may harm iHealthcare’s position in
the pending state court litigation.
iHealthcare deserves an
independent, unbiased opinion on which theory to pursue.
The defendants also complain that Collins’ representation of
iHealthcare violates Rule 3.7 of the Indiana Rules of Professional Conduct, which states:
(a) A lawyer shall not act as advocate at a
trial in which the lawyer is likely to be a
necessary witness unless:
(1) the testimony relates to an uncontested issue;
(2) the testimony relates to the nature
and value of legal services rendered in
the case; or
(3) disqualification of the lawyer would
work substantial hardship on the client.
(b) A lawyer may act as advocate in a trial
in which another lawyer in the lawyer's firm
is likely to be called as a witness unless
precluded from doing so by Rule 1.7 or Rule
1.9.
16
The primary consideration under Rule 3.7 is whether the
lawyer is a "necessary witness." Knowledge A-Z, Inc. v. Sentry
Insurance, 857 N.E.2d 411, 418 (Ind. App. 2007). By its own
terms, the rule does not extend automatically its proscription to
members of a testifying attorney's firm. See Harter v. University
of Indianapolis, 5 F.Supp.2d 657, 667 n.4 (S.D. Ind. 1998).
Rather, the rule protects against the risk that an individual
attorney's role as an advocate will be diminished by also serving
as a witness. Harter, 5 F.Supp.2d at 663 (quoting Gusman v.
Unisys Corporation, 986 F.2d 1146, 1148 (7th Cir. 1993). Commonly, courts find the rule's necessity requirement met when the
attorney's testimony is "relevant, material, and unobtainable
elsewhere."
Stewart v. Bank of America N.A., 203 F.R.D. 585, 586
(M.D. Ga. 2001); Carta ex. rel. Estate of Carta v. Lumbermens
Mutual Casualty Company, 419 F.Supp.2d 23, 29 (D. Mass. 2006)
(quoting Merrill Lynch Business Financial Svcs., Inc. v. Nudell,
239 F.Supp.2d 1170, 1173 (D. Colo. 2003); Macheca Transport Co.
v. Philadelphia Indemnity Insurance Company, 463 F.3d 827, 833
(8th Cir. 2006) (quoting State ex rel. Wallace v. Munton, 989
S.W.2d 641, 646 (Mo. App. 1999)("[The rule] has been interpreted
to mean an attorney is a 'necessary witness' only if 'there are
things to which he will be the only one available to testify.'").
The rule requires that the court weigh the client's interest in
17
continued representation against the risk of prejudice to the
opposing party. Hutchinson v. Spanierman, 190 F.3d 815, 828 (7th
Cir. 1999).
The plain language of the rule regards testimony given
during the course of a trial. See Rule of Professional Conduct
3.7, comments 3, 6. See also Main Events Productions, LLC v.
Lacy, 220 F.Supp. 353, 356 (D.N.J. 2002) (collecting cases
regarding similar rules based on ABA model rules).
However, the
likelihood that an attorney is a necessary witness does not
require certain proof that the attorney will be a witness. See
Freeman v. Vicchiarelli, 827 F.Supp. 300, 303 (D.N.J. 1993);
Stewart, 203 F.R.D. at 586. The party seeking disqualification of
opposing counsel bears the burden of proving the relevancy and
need for the attorney's testimony. Estate of Carta, 419 F.Supp.2d
at 29; Macheca Transport Company, 463 F.3d at 833 ("Blanket
allegations that an attorney's testimony is relevant to a party's
claim is an insufficient basis upon which to discern whether the
attorney will truly be a necessary witness in the sense that
there are things to which he will be the only one available to
testify.").
Collins served as CFO and General Counsel to iHealthcare and
its affiliated entities for a lengthy period of time, much of
which is relevant to the present dispute.
18
Collins may be called
to testify about his service in these capacities.
However, the
defendants state that he certainly will be called to testify to
his actions related to the creation of the 2004 and 2006 employment contracts between iHealthcare, Collins, and Gupta that
Collins negotiated and executed.
The employment contracts are
entangled in iHealthcare’s claim against the defendants. iHealthcare argues that St. Francis agreed to settle Collins’ and
Gupta’s claims.
However, the validity of the contracts must be
established, especially because iHealthcare alleges in a separate
action that Collins executed the agreement without approval of
the board, failed to disclose material facts, failed to advise
iHealthcare to obtain independent counsel, and entered a contract
with his client that was unfair.
Because the validity of both
Collins' and Gupta’s contracts is an issue that must be established as part of iHealthcare’s fraud claim against St. Francis,
and Collins was the individual who executed the 2004 contract and
participated in the negotiations for the 2006 contracts, his
testimony will be essential to establishing the validity of the
contract and Collins will be required to testify at least with
respect to the contracts.
When an attorney’s testimony is
necessary to the litigation, the conflict cannot be waived.
Therefore, Collins must be disqualified under Rule 3.7.
19
_______________
Based on the foregoing, the Motion to Disqualify Counsel [DE
23] filed by the defendant, Paul Jones, on January 9, 2012, is
GRANTED, and the Motion to Disqualify Counsel [DE 36] filed by
the defendant, Barbara Greene, on January 29, 2012, is GRANTED.
ENTERED this 5th day of June, 2012
s/ ANDREW P. RODOVICH
United States Magistrate Judge
20
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