What happens when an attorney represents a corporate entity in the formation of that entity and then represents one of the shareholders in a corporate dissolution proceeding? Should the attorney be disqualified because of the knowledge he/she obtained while forming the corporation? Will that attorney be considered a necessary witness? The Commercial Division in Suffolk County recently ruled on these issues deciding that, at least in this instance, the attorney should not be disqualified and would not be a witness.
In Altungeyik v. Ayknat, et al. (J. Pines), Plaintiff shareholder commenced a shareholder’s derivative action/dissolution proceeding against the other shareholder of the corporation and the corporation. The matter proceeded to trial for the sole purpose of determining the value of the corporation – Euro Planet, Inc. (“Euro Planet”). Once the matter had been set for trial, Plaintiff obtained new counsel who then sought to have Defendant’s counsel, Walter Drobenko, Esq., (“Drobenko”) disqualified on a number of grounds, specifically: (a) Drobenko previously represented the Plaintiff in the preparation of the shareholder’s agreement for Euro Planet; (b) Drobenko previously represented the Plaintiff in the preparation of a pre-nuptial agreement and an immigration application; and (c) Plaintiff and Drobenko negotiated to be partners in a new restaurant venture together. Plaintiff claimed that Drobenko obtained personal and private information about Plaintiff while representing him and that the Drobenko would be a necessary witness in determining the value of Euro Planet because he drafted the shareholder’s agreement and determined the value of the shares.
In opposition to the disqualification motion, Drobenko stated that he only represented Euro Planet, not the Plaintiff or Defendant when the corporation was formed. Additionally, although he acknowledged assisting the Plaintiff with a pre-nuptial agreement and immigration application, he argued that neither of those matters are substantially similar to the determining the valuation of Euro Planet. He also stated that he never discussed partnering with the Plaintiff in the purchase of a restaurant. Drobenko further argued that he had no personal knowledge of the value of Euro Planet and would not be a necessary witness. Lastly, Drobenko argued that Plaintiff’s disqualification motion was untimely because it was made after the commencement of trial.
In its decision, the Court noted that the party seeking to disqualify an attorney carries a heavy burden because every party has the right to be represented “by counsel of its own choosing” which is “a valued right which should not be abridged absent a clear showing that disqualification is warranted.” Mediaceja v. Davidov, 119 A.D.3d 911 (2d Dep’t 2014). To obtain disqualification of an adversary’s attorney, the moving party must prove: “(1) the existence of a prior attorney-client relationship between the moving party and opposing counsel, (2) that the matters involved in both representations are substantially related, and (3) that the interests of the present client and former client are materially adverse.” Tekni-Plex, Inc. v. Meyer & Landis, 89 N.Y.2d 123, 131 (1996). Rule 1.18(c) of the Rules of Professional Conduct also prohibits a lawyer from representing “a client with interests materially adverse to those of a prospective client in the same or a substantially related matter if the lawyer received information from the prospective client that could be significantly harmful to that person in that matter.”
Ultimately, the Court here decided that Drobenko should not be disqualified from representing the Defendant. With respect to his prior representation of Euro Planet in the formation of the corporation, the Court noted that the Second Department has rejected Plaintiff’s exact argument and that Drobenko should not be disqualified in a valuation proceeding simply because of his prior representation. The Court also noted that Plaintiff failed to show that Drobenko’s prior representation of the corporation concerned any confidential information regarding the value of the corporation.
The Court also held that Drobenko’s prior representation of Plaintiff with a pre-nuptial agreement and immigration application, as well as discussions about partnering in the purchase of a restaurant (if it was true), had no relation to the corporate valuation of Euro Planet. The Court also took issue with Plaintiff waiting as long as he did to make the disqualification motion which delayed the trial of what was intended to be an expedited matter. Lastly, the Court found that Drobenko’s testimony would not be necessary as a witness because there was no evidence that he had any first-hand knowledge of the value of Euro Planet.
It is important to note that a Court’s analysis of whether to disqualify a particular adversary’s attorney will be a very fact-specific inquiry. However, it appears, based on this decision at least, that the Courts are not going to disqualify an attorney unless the moving party can truly show that the matter is substantially related to prior representation and that the attorney learned information that could be harmful to the prior client. Here, the Court agreed with Drobenko that he only represented the corporation, not the individual shareholders, when he assisted with the formation of the company and he is neither a witness nor should he be disqualified based upon such representation.