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Current Developments in the Commercial Divisions of the
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Posted: January 5, 2015

Court Refuses to Disqualify Counsel from Defending Both the Nominal Defendant and Other Defendants in a Derivative Action

On December 30, 2014, the First Department issued a decision in Stilwell Value Partners IV, L.P. v. Cavanaugh, 2014 NY Slip Op. 09061, denying a motion to disqualify counsel.

In Stilwell Value Partners, the court denied the plaintiff’s motion to disqualify a nominal defendant’s counsel in a derivative action, explaining:

Plaintiff failed to show that [counsel’s] representation of . . . the nominal defendant, as well as of the other defendants, in this derivative action, presents a conflict of interest because [the nominal defendant] would benefit from a judgment in plaintiff’s favor on its behalf. [The nominal defendant] interests are not adverse to those of the other defendants; Northeast Community Bancorp, MHC, and the directors have not asserted any counterclaims against plaintiff, and [the nominal defendant] has not asserted any cross claims against them. [The nominal defendant] is a passive litigant, and [counsel’s] appearance on its behalf is merely nominal.

Even if we were to find that a conflict of interest existed, we would nevertheless agree with the motion court that plaintiff waived its objection to the representation. Plaintiff’s delay of more than two years after this action was commenced before moving to disqualify, during which time its counsel discussed settlement with [the nominal defendant’s counsel], supports the court’s finding that the motion is an attempt to gain a tactical advantage.

(Internal quotations and citations omitted). The law on disqualification of counsel has running through it the court’s distaste for disqualification motions made by an opponent for tactical reasons based on technical or potential, rather than real claims of prejudice.

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