HLP Properties, LLC et al v. Consolidated Edison Company of New York, Inc.
Filing
115
OPINION AND ORDER re: 54 MOTION to Disqualify Counsel Gibson Dunn & Crutcher LLP. filed by Consolidated Edison Company of New York, Inc.. For the foregoing reasons herein, Defendant's motion is DENIED. Gibson Dunn is directed to undertake all measures to protect the interests of its clients and to uphold its own ethical obligations. The Clerk is directed to close the motion at Docket No. 54. (Signed by Judge Lorna G. Schofield on 10/16/2014) (kgo)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
HLP PROPERTIES, LLC, et al.,
:
:
Plaintiffs, :
:
-against:
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CONSOLIDATED EDITSON COMPANY OF :
NEW YORK, INC.,
:
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Defendant. :
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USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #:
DATE FILED:10/16/2014
14 Civ. 01383 (LGS)
OPINION AND ORDER
LORNA G. SCHOFIELD, District Judge:
Defendant Consolidated Edison Company of New York, Inc. (“CECONY”) moves to
disqualify Gibson, Dunn & Crutcher LLP (“Gibson Dunn”) as counsel for Plaintiffs. For the
following reasons, the motion is denied.
I.
BACKGROUND
The facts are taken from the allegations in the Complaint and affidavits and exhibits
submitted with the parties’ briefing. These facts are assumed to be true for purposes of the
present motion only.
A.
Gibson Dunn’s Representation of Plaintiffs
This is an action under the Comprehensive Environmental Response, Compensation, and
Liability Act, 42 U.S.C. § 9601, et seq. (“CERCLA”) and New York common law. Plaintiffs are
the owners, past owners and developers of a parcel of land located in West Chelsea (the “Site”).
Defendant CECONY is a previous owner of the Site. On March 3, 2014, Plaintiffs brought suit
against CECONY, alleging that CECONY polluted the Site and seeking reimbursement for
remediation costs.
Plaintiffs’ litigation counsel is Gibson Dunn, by Randy Mastro, a litigation partner in the
firm’s New York office. Plaintiffs are also represented by Sive, Paget & Riesel, P.C., which
primarily advises on environmental and technical aspects of the case. Gibson Dunn has
represented Plaintiffs in connection with the Site since 1999.
From the time Gibson Dunn was initially retained until now, it has been in contact with
CECONY representatives. In connection with the early stages of negotiations between Plaintiffs
and CECONY, Gibson Dunn met with or corresponded with CECONY representatives on at
least four occasions, including in June 1999, May 2000, June 2000 and July 2000. Gibson Dunn
continued to have contact with CECONY representatives in later stages of the negotiations,
including in 2011, when Gibson Dunn spoke directly with an executive of CECONY in
connection with the negotiations; in December 2013, when Plaintiffs and CECONY entered into
a six-month tolling agreement; and in January 2014, just before the Complaint in this action was
filed, when Mastro sent CECONY a letter terminating the tolling agreement.
B.
Gibson Dunn’s Representation of CEI
In 2003, CECONY’s parent company, Consolidated Edison, Inc. (“CEI”), retained
Gibson Dunn by John Olson, a corporate partner in the firm’s Washington, D.C. office. The
engagement letter executed by Gibson Dunn and CEI identified CEI as the client, and stipulated
that “[u]nless expressly agreed, [Gibson Dunn] [is] not undertaking the representation of any
related or affiliated person or entity, nor any family member, parent corporation or entity,
subsidiary, or affiliated corporation or entity, nor any of [CEI’s] or their officers, directors,
agents, partners or employees.” (emphasis added). Gibson Dunn did not seek a conflicts waiver
from CEI at the time.
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Olson submitted a sworn affidavit in opposition to the disqualification motion, describing
the scope of Gibson Dunn’s engagement as “limited to advising the CEI board and one
committee of CEI – the Corporate Governance and Nominating Committee . . . – solely with
respect to corporate governance matters relating to public companies and NYSE-listed
companies.” Olson states that he did not attend any CECONY board meetings or perform any
work for CECONY. Notwithstanding this statement, he notes that in two instances, work he
performed for CEI may have benefitted CECONY. The first instance was in 2012, when Olson
reviewed and commented on portions of CEI’s proxy statements; according to Olson, some of
his commentary may have been applicable to CECONY’s annual information statement. The
second instance was in 2009, when Olson provided advice to CEI regarding a third-party audit
relating to governance issues at CEI and CECONY.
In his affidavit, Olson describes one additional matter in which Gibson Dunn represented
CEI, which occurred in early 2013 and lasted several weeks. The matter involved a state court
action filed by shareholders against CEI and arose out of disclosures in a CEI proxy statement
that were made on the advice of Olson and his corporate team. CECONY was not involved in
the lawsuit. Olson affirms that he has never provided advice directly to CECONY or its Board,
or represented CECONY in any way.
C.
Gibson Dunn’s Representation of Other Parties Adverse to CECONY
Between 2002 and 2008, Mastro represented three clients, in addition to Plaintiffs, that
were adverse to CECONY and/or CEI. For two of the representations, involving Crow Holdings
and Verizon New York Inc., respectively, which commenced after Gibson Dunn’s concurrent
representation of CEI, Gibson Dunn sought and obtained waivers to allow it to sue CEI. Mastro
states that he sought a written waiver for the Crow Holdings matter because it was potentially
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adverse to both CEI and CECONY. Likewise, Mastro affirms that he sought a waiver in the
Verizon matter because it arose out of the same facts as the Crow Holdings with the same
potential to be adverse to CEI.
D.
Relationship Between CECONY and CEI
There is significant overlap, both financial and operational, between CECONY and CEI.
The corporate secretary of CEI and CECONY, Carole Sobin, submitted a sworn affidavit in
support of CECONY’s motion to disqualify Gibson Dunn, representing that CEI and CECONY
share corporate headquarters, a computer system, a payroll system, a human resources
department and benefit plans. Sobin further states that CEI and CECONY share management,
including their legal department and officers. Sobin affirms that CECONY is CEI’s principal
subsidiary and represents 84% of its operating revenues, 96% of its net income and 89% of its
assets.
E.
CECONY’s Motion to Disqualify
On July 31, 2014, a CECONY in-house attorney approached Sobin about collecting
certain documents responsive to a document request by Mastro. Sobin claims that she was
surprised to learn that Plaintiffs were represented by Gibson Dunn and accordingly asked the
CECONY legal department if there was a conflict issue. Four current and former attorneys with
the CECONY and CEI legal department submitted sworn affidavits in support of CECONY’s
motion to disqualify, stating that they were not aware that Gibson Dunn had a conflict of interest
“due to its representation of both CEI and CECONY.”
On August 1, 2014, CECONY’s outside counsel advised Gibson Dunn that it had just
learned of Gibson Dunn’s representation of CEI, and demanded that Gibson Dunn withdraw as a
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result of an alleged conflict of interest. Gibson Dunn attorneys assert that this was the first time
a conflict was alleged or even raised as a concern.
On August 4, 2014, Olson called Sobin to ask whether CEI would waive any conflict of
interest on Gibson Dunn’s part. After speaking with the legal department, Sobin informed Olson
that CEI was not willing to grant a waiver.
On August 27, 2014, CECONY brought this motion to disqualify Gibson Dunn. In the
motion, CECONY argues that Gibson Dunn must be disqualified because it has a conflict of
interest arising from its concurrent representation of Plaintiffs, CEI and CECONY.
II.
STANDARD
Motions to disqualify counsel are “committed to the discretion of the district court.”
Papyrus Tech. Corp. v. N.Y. Stock Exch., Inc., 325 F. Supp. 2d 270, 275 (S.D.N.Y. 2004). “The
authority of federal courts to disqualify attorneys derives from their inherent power to preserve
the integrity of the adversary process.” Hempstead Video, Inc. v. Inc. Vill. of Valley Stream, 409
F.3d 127, 132 (2d Cir. 2005) (internal quotation marks and citation omitted). Although
“decisions on disqualification motions often benefit from guidance offered by the American Bar
Association (ABA) and state disciplinary rules, such rules merely provide general guidance and
not every violation of a disciplinary rule will necessarily lead to disqualification.” Id. (citations
omitted). The “only truly binding authority on disqualification issues” is the Second Circuit.
Skidmore v. Warburg Dillon Read LLC, No. 99 Civ. 10525(NRB), 2001 WL 504876, at *2
(S.D.N.Y. May 11, 2001).
“In deciding whether to disqualify an attorney, a district court must balance a client’s
right freely to choose his counsel against the need to maintain the highest standards of the
profession.” GSI Commerce Solutions, Inc. v. BabyCenter, L.L.C., 618 F.3d 204, 209 (2d Cir.
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2010) (internal quotation marks and citation omitted). Courts in this Circuit show “considerable
reluctance to disqualify attorneys” because “disqualification has an immediate adverse effect on
the client by separating him from counsel of his choice” and “disqualification motions are often
interposed for tactical reasons [a]nd even when made in the best of faith . . . inevitably cause
delay.” Bd. of Ed. v. Nyquist, 590 F.2d 1241, 1246 (2d Cir. 1979) (citation omitted).
Accordingly, “unless an attorney’s conduct tends to ‘taint the underlying trial,’ . . . courts should
be hesitant to disqualify an attorney.” Id. As the Second Circuit has explained, “disqualification
has been ordered only in essentially two kinds of cases: (1) where an attorney’s conflict of
interests . . . undermines the court’s confidence in the vigor of the attorney’s representation of his
client, or more commonly (2) where the attorney is at least potentially in a position to use
privileged information concerning the other side through prior representation.” Bobal v.
Rensselaer Polytechnic Inst., 916 F.2d 759, 764-65 (2d Cir. 1990) (citation and alterations
omitted).
In the Second Circuit, it is “prima facie improper” for an attorney to represent an existing
client in a matter adverse to another existing client. Hempstead Video, 409 F.3d at 133 (citing
Cinema 5, Ltd. v. Cinerama, Inc., 528 F.2d 1384, 1387 (2d Cir. 1976)). In many cases, such a
conflict can be cured by written consent from all affected parties. See, e.g., 22 N.Y.C.R.R.
§ 1200.0, Rule 1.7(b) (“Notwithstanding the existence of a concurrent conflict of interest . . . a
lawyer may represent a client if . . . each affected client gives informed consent, confirmed in
writing”); Cohen v. Strouch, No. 10 Civ. 7828, 2011 WL 1143067, at *5 n.3 (S.D.N.Y. Mar. 24,
2011) (“Even if the conflict of concurrent representation in related matters were waivable,
[counsel] could not cure it without the waiver of [both clients]”). Absent consent from all the
parties, the burden is on the attorney “to show, at the very least, that there will be no actual or
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apparent conflict in loyalties or diminution in the vigor of [its] representation.” GSI Commerce
Solutions, 618 F.3d at 209 (emphasis in original).
III.
DISCUSSION
CECONY argues two theories upon which Gibson Dunn should be disqualified, both
premised on Gibson Dunn’s alleged concurrent representation of adverse clients. First,
CECONY asserts that Gibson Dunn has served both CECONY and CEI directly as clients.
Because the evidence in the record does not establish that Gibson Dunn provided any legal
services directly to CECONY, this argument is rejected. Second, CECONY asserts that, even if
Gibson Dunn provided services only to CEI, CECONY and CEI must be considered the same
client for purposes of disqualification. This contention is correct, and accordingly the burden is
on Gibson Dunn to demonstrate that “there will be no actual or apparent conflict in loyalties or
diminution in the vigor of his representation.” Id. Because Gibson Dunn has met its burden, and
because other factors counsel against disqualification, the motion is denied.
CECONY’s argument that it was a client of Gibson Dunn is not supported by the
evidence. First, the engagement letter in the CEI matter explicitly states that Gibson Dunn is not
undertaking the representation of any of CEI’s subsidiaries absent express agreement. The
parties agree that there was no such agreement. Second, Olson denies having performed work in
any capacity for CECONY. Third, the two instances in which Gibson Dunn allegedly rendered
services to CECONY – Gibson Dunn’s review of CEI’s proxy statements and Gibson Dunn’s
advice to CEI in respect of a third party audit relating to issues at both CEI and CECONY – were
not rendered to CECONY or with the express purpose of assisting CECONY, although they may
have indirectly benefitted CECONY. On this record, no attorney-client relationship existed
between Gibson Dunn and CECONY. See generally Merck Eprova AG v. ProThera, Inc., 670 F.
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Supp. 2d 201, 210 (S.D.N.Y. 2009) (citing six-factor test for determining existence of attorneyclient relationship).
The question remains whether a conflict exists by virtue of the parent-subsidiary
relationship between CEI and CECONY. The Second Circuit addressed the contours of socalled “corporate affiliate conflicts” in GSI Commerce Solutions, Inc. v. Babycenter LLC, 618
F.3d 204, 209 (2d Cir. 2010). In GSI, the Second Circuit clarified that “affiliates should not be
considered a single entity for conflicts purposes based solely on the fact that one entity is a
wholly-owned subsidiary of the other, at least when the subsidiary is not otherwise operationally
integrated with the parent company.” Id. at 211. However, the court recognized that
“representation adverse to a client's affiliate can, in certain circumstances, conflict with the
lawyer's duty of loyalty owed to a client,” id. at 210, depending on “(i) the degree of operational
commonality between affiliated entities, and (ii) the extent to which one depends financially on
the other.” Id. The court concluded that the district court did not abuse its discretion in granting
a motion to disqualify on grounds that “substantial operational commonality” existed between
the defendant in that case, to which the law firm in question was adverse, and the parent
company of the defendant, which was a client of the law firm, where (1) the subsidiary relied on
the parent for accounting, audit, cash management, employee benefits, finance, human resources,
information technology, insurance, payroll, and travel services and systems; (2) the subsidiary
and the parent had the same in-house legal department; and (3) there was at least some overlap in
management. Id. at 212.
The same operational commonalities exist here – namely, CEI and CECONY share
corporate headquarters, a computer system, a payroll system, a human resources department,
benefits plans and their law department. Further, the two companies share management – all of
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CEI’s six officers are also officers of CECONY. Finally, there is substantial financial
dependence between the two companies – CECONY is CEI’s principal subsidiary and represents
84% of its operating revenues, 96% of its net income and 89% of its assets. Accordingly, CEI
and CECONY are the same corporate entity for conflicts purposes.
The inquiry does not end there, however. The burden shifts to Gibson Dunn to show that
“there will be no actual or apparent conflict in loyalties or diminution in the vigor of [its]
representation.” Hempstead Video, 409 F.3d at 133 (citing Cinema 5, 528 F.2d at 1387)
(emphasis omitted). In addition, because “the conclusion in a particular case can be reached only
after painstaking analysis of the facts,” Fund of Funds, Ltd. v. Arthur Andersen & Co., 567 F.2d
225, 227 (2d Cir. 1977), it is appropriate to consider any tactical motivations in bringing the
motion and the prejudice that Plaintiffs may suffer in the event their chosen counsel is
disqualified. See Universal City Studios, Inc. v. Reimerdes, 98 F. Supp. 2d 449, 455 (S.D.N.Y.
2000); see also Univ. of Rochester v. G.D. Searle & Co., Inc., No. 00-CV-6161, 2000 WL
1922271 (W.D.N.Y. Dec. 11, 2000) (considering, inter alia, effect of depriving non-movant of
counsel of its choice after concluding that there was no actual or apparent conflict in loyalties).
While Gibson Dunn engaged in troubling conduct in failing to obtain a waiver from CEI
and Plaintiffs when it undertook to represent CEI, that conduct does not warrant disqualification.
First, the record provides no indication of an actual or apparent conflict in loyalties or diminished
vigor in Gibson Dunn’s representation. Plaintiffs have attested to their confidence in Gibson
Dunn’s continuing as their litigation counsel and Gibson Dunn has already represented Plaintiffs
for fifteen years without complaint from either Plaintiffs or CEI.
Second, the record contains no evidence that there is any risk of trial taint, and Defendant
does not suggest otherwise. Gibson Dunn’s dual representations involve unrelated subjects,
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different attorneys, different Gibson Dunn departments (transactional versus litigation), different
offices, and different legal entities—a parent and a subsidiary. The responsible Gibson Dunn
partners have expressly disavowed any inside knowledge relevant to this litigation gained as a
result of the representation of CEI. Olson attested in a sworn declaration that he attended only
portions of CEI board meetings where corporate governance was discussed, that he does not
recall being present when litigation matters were discussed, and that he has never heard any
discussion of any matter relating to the instant dispute. He also affirmed that his interactions
with CEI executives and legal staff related solely to corporate governance issues and that he has
never participated in any discussion relating to any dispute involving CECONY. Mastro
likewise submitted a sworn affidavit stating that the two representations involve different teams
of lawyers and that no information has been shared between the teams. These sworn statements
are undisputed and sufficiently demonstrate that Gibson Dunn’s representation of CEI has not
resulted in Gibson Dunn’s obtaining confidential information related to this litigation or
otherwise tainting these proceedings. See Univ. of Rochester, 2000 WL 1922271, at *7-8 (law
firm satisfied burden to demonstrate that there was no actual or apparent conflict in loyalties or
diminution in the vigor of its representation where attorneys submitted sworn declarations
asserting that they had obtained no confidential information as a result of their allegedly
concurrent representations); Team Obsolete Ltd. v. A.H.R.M.A. Ltd., No. 01 Civ. 1574, 2006 WL
2013471, at *8 (E.D.N.Y. July 18, 2006) (same).
In addition, the timing of CECONY’s motion suggests that tactical considerations may
have played a role. Although the parties hotly contest when Gibson Dunn’s conflict “became
apparent” to CECONY,1 the law does not impose a burden on the client to assert that a conflict
CECONY essentially argues that, despite the operational integration of parent and subsidiary,
including identical Boards and a shared law department, the left hand did not know what the
1
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exists. Regardless of what any individual at CEI or CECONY may have known and when, it
seems clear that until July 31, 2014, the day litigation counsel in this matter discovered the
conflict, no one at the company fully appreciated the risks of a conflicted representation, or the
potential tactical benefits of ousting Gibson Dunn from the litigation, if that could be
accomplished. The demand that Gibson Dunn withdraw from the representation followed the
next day.
The final consideration is whether Plaintiffs will suffer significant prejudice if Gibson
Dunn is disqualified. Were it not for this consideration, the outcome of this motion might well
have been different, but the issue of prejudice given the duration of the parties’ dispute – 15
years – is critical and weighs heavily against disqualification. Gibson Dunn has represented
Plaintiffs in connection with the Site since 1999. The case involves complex environmental and
regulatory matters. It is doubtful, to say the least, that new counsel could acquire the knowledge
accumulated over the years by Gibson Dunn in the time it will take for this case to run its course.
Gibson Dunn’s co-counsel credibly states that it is responsible for the environmental aspects of
this case, and not for the litigation strategy, and that Gibson Dunn would have to be replaced
with new litigation counsel. Gibson Dunn’s clients, the Plaintiffs in this case, have submitted
right hand knew – that some of the companies’ executives and lawyers knew about Gibson
Dunn’s advice to the Board, and others knew of Gibson Dunn’s adverse role in this matter.
However, CECONY stops short of saying that no one at the companies knew about the dual
representation. Indeed it seems likely that at least one or more of the management directors were
aware of who was providing advice to the CEI Board on corporate governance matters, and who
was adverse on a matter critical to CECONY. The current record shows that the President of
CEI and the Chief Executive Officer of both CEI and CECONY from 2005 to 2013 knew of
Gibson’s Dunn’s, and specifically John Olson’s, advisory role to the CEI Board. He also
apparently knew of Gibson Dunn’s, and specifically Randy Mastro’s, role, acting on behalf of
Plaintiffs in the current dispute prior to the filing of this lawsuit. His brief declaration is not
necessarily inconsistent as it does not address specific facts, but generally disclaims knowledge
of any conflict and this lawsuit, which was filed after he retired.
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sworn testimony asserting that they will be severely prejudiced by loss of counsel for multiple
reasons, including that Gibson Dunn has already conducted numerous interviews, collected
substantial data, and spearheaded the search, review and production of data – which is hosted on
Gibson Dunn’s server, at significant cost to Plaintiffs.
In contrast, Defendant identifies very modest prejudice to Defendant in the event that
Gibson Dunn is not disqualified – that Gibson Dunn will be unable to advise CEI on document
production obligations in this case. The Gibson Dunn partner who advises the CEI Board on
corporate governance matters, clarifies, however, that he has never been asked for advice
concerning document production in the context of a litigation. Defendant suggests no other
potential prejudice or injustice that it would suffer as a result of Gibson Dunn’s continued
representation of Plaintiffs, nor is any prejudice apparent from the record. Cf. Universal City
Studios, 98 F. Supp. 2d at 455 (denying motion to disqualify where movant “failed to establish
any material risk that it would be prejudiced inappropriately by allowing the . . . firm to continue
in this litigation . . . .”).
Denying Plaintiffs their chosen counsel of fifteen years is a harsh remedy. Absent any
identifiable, material prejudice to Defendant and any indication that the integrity of the present
legal proceedings will be compromised by Gibson Dunn’s continued representation of Plaintiffs,
such a remedy is not warranted. Accordingly, Defendant’s motion is denied.
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IV.
CONCLUSION
For the foregoing reasons, Defendant’s motion is DENIED. Gibson Dunn is directed to
undertake all measures to protect the interests of its clients and to uphold its own ethical
obligations. The Clerk is directed to close the motion at Docket No. 54.
Dated: October 16, 2014
New York, New York
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