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Posted: March 2, 2015

Former Transactional Counsel Disqualified From Serving as Litigation Counsel

On February 17, 2015, Justice Kornreich of the New York County Commercial Division issued a decision in Nineteen Twenty Four, Inc. v. Parachini, 2015 NY Slip Op. 30236(U), disqualifying counsel.

In Nineteen Twenty Four, Inc., the defendant moved to disqualify the plaintiffs’ counsel, who represented the corporation of which the plaintiffs were shareholders, against the defendant, also a shareholder. The court granted the motion, explaining:

Defendant relies on Morris v Morris, 306 AD2d 449 (2d Dept 2003), Dembitzer v Chera, 285 AD2d 525 (2d Dept 2001), and Fleet v Pulsar Constr. Corp., 143 AD2d 187 (2d Dept 1988), cases which disqualified counsel for corporations and a partnership who represented shareholders against other shareholders of the corporations or an individual partner against another partner. Morris and Dembitzer, decided under the old rules of conduct, simply cited to previous DR 5-108, which prohibited an attorney from representing a party in a lawsuit against a former client in the same or a substantially related matter. Fleet explained that disqualification in such circumstances was grounded on the obligation of the attorney to preserve the confidences and secrets of the former client and on the appearance of impropriety. Plaintiffs oppose the disqualification motion arguing that no conflict and no prejudice exist since defendant has never revealed any confidential information to corporate counsel, and if he did, it was information already known by plaintiffs. The court need not reach the question of whether [the defendant] confided in the Helbraun Firm and would be prejudiced thereby since Rule 1.13 dictates the firm’s disqualification.

The Helbraun Firm represented the Corporation before the individual parties sought to sever their ties and continues to represent the Corporation. It presently also represents the individual plaintiffs, who are a director, officers and shareholders of the Corporation. Under Rules 1.13(d) and 1.7(a), the Helbraun Firm may not continue such representation both because it represents differing interests of key directors, officers and shareholders of the Corporation, but, more importantly, because the interests of the Corporation and the individual plaintiffs differ. The defendant’s counterclaims plausibly allege that Hoy and Mirarchi breached their duties to the Corporation in negotiating a buyout of defendant’s shares for the individual plaintiffs, not the Corporation, improperly put the Corporation in debt to do so, and violated the shareholder agreement in doing so. Under these circumstances where serious charges of self-dealing and usurpation of corporate opportunity by a director and officers of the Corporation are alleged, a conflict exists between the Corporation and the individual plaintiffs. Indeed, it is questionable that such a conflict could possibly be waived given the fact that counsel’s representation involves the assertion of a claim-by one client [the Corporation] against another client the individual plaintiffs represented by the lawyer in the same litigation. The representation of the corporation will be directly adverse to Hoy and Mirarchi, and the Helbraun Firm could not possibly exert its best efforts in representing both.

(Internal quotations and citations omitted).

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