A litigant won his bid to disqualify Quinn Emanuel Urquhart & Sullivan from representing his former employer based on a prospective client call whose contents were detailed in a single paragraph of the firm’s 30-page countersuit.
Timing-wise, the ruling bucks expectation: Quinn Emanuel has represented Stone Castle Partners, an investment advisory firm, for more than a year in this litigation. Manhattan Supreme Court Justice Shirley Kornreich has already made one ruling on a motion to dismiss in one of two joined actions, and said she was “loath” to disqualify the firm since it would “significantly delay this case, especially given the complexity of the subject matter and the quality of Quinn Emanuel’s representation.”
But disqualification was necessary to avoid even the “appearance of impropriety on the part of the attorney,” Kornreich held in her March 28 ruling in Matthew Mayers v. Stone Castle Partners, 650410/2013, a contentious feud between a Delaware LLC managing more than $5 billion in assets and one of its founders.
The dispute stems from Matthew Mayers’ termination “for cause” from Stone Castle in early 2013 based on his involvement in a collateralized debt obligation known as Tropic IV via a side company called RRWT. Stone Castle, which specializes in advising CDOs and counts among its members Charlesbank Capital Partners and Canadian Imperial Bank of Commerce, alleged that this transaction was undisclosed and unauthorized and competed against its own business.
Mayers’ termination for cause required him, under the parties’ LLC agreement, to forfeit 50 percent of his ownership interest in the company, spurring his June 17, 2013 complaint against Stone Castle.
On Nov. 25, 2013, Stone Castle filed a countersuit against Mayers for declaratory relief, arguing that his challenge was meritless because there was proper cause for termination. It also alleged that it was entitled to a “multi-million dollar commission” due to Mayers’ alleged theft of the CDO transaction plus millions in remedy for Mayers’ alleged involvement in other illegal schemes while employed at the firm.
That case is Stone Castle Partners v. Matthew R. Mayers, 654075/2013.
In her Feb. 19, 2014 decision, Kornreich narrowed the Mayers v. Stone Castle suit, dismissing claims for breach of fiduciary duty, breach of the duty of good faith and fair dealing, but allowing claims for breach of the LLC agreement and breach of contract to move forward.
Her ruling on Mayers’ motion to dismiss the countersuit is pending.
The Motion to Disqualify
In the latest wrinkle to the saga, Mayers moved to disqualify Quinn Emanuel as opposing counsel in early January 2014, two months after Stone Castle filed its countersuit.
The catalyst to that motion was a phone call Mayers placed with Quinn Emanuel partner James Pickhardt, who is not involved in this litigation, in May 2011. At the time, Mayers was still with Stone Counsel and sought an attorney to assist in his litigation against a Tropic IV trustee.
Pickhardt, an expert in CDOs, did not take Mayers on as a client due to Pickhardt’s existing, conflicting representation of a Tropic IV noteholder.
After these suits commenced, Pickhardt discussed the 2011 call with Quinn Emanuel partner Kevin Reed, lead counsel in the Stone Castle suits.
Stone Castle’s countersuit against Mayers makes reference to this prospective client call, if not the identity of the attorney in question. States Paragraph 33, “Mayers contacted an attorney about the possibility of representing him in connection with his Tropic CDO strategy” and that Mayers “falsely told the attorney that he was no longer with Stone Castle, again apparently seeking to conceal his actions from SCP.”
The complaint does not indicate this attorney was Pickhardt.
In his motion to disqualify, Mayers argued it would be an “unfair advantage for defendants to be confronted by attorneys who have intimate knowledge of Mayers’ strategy and views regarding his Tropic IV Preferred Shares investments.”
During March 12 oral arguments, Quinn Emanuel’s Reed downplayed the inclusion of this paragraph. “I would dispute that it’s a central feature of the case,” he told the judge, per a transcript of the hearing. “I think it’s an example cited of efforts to conceal. If I would be required to excise it, I don’t think it would impact my ability to prove my case.”
“The issue in this case is, does Quinn Emanuel have confidential information that can be used to harm Mr. Mayers in the context of this litigation. And we submit he doesn’t even come close,” Reed argued to Kornreich.
Marshall Potashner, partner at Jaffe & Asher and counsel to Mayers, argued to the court that this exchange did give rise to confidential information.
“Here it’s limited, it’s a much broader definition, anything that may be embarrassing or detrimental to my client,” he argued, adding it is “the substance of what you tell an attorney, that’s what’s confidential, and that’s what shouldn’t be disclosed.”
In her ruling, Kornreich agreed with Quinn Emanuel that the information relayed from the Mayers-Pickhardt call wasn’t detrimental. She wrote it was “not particularly damning in the context of the more troubling allegations,” and that it was public knowledge that would have eventually emerged. She also wrote that Mayers had not met his burden of showing “significant harm” by the firm’s continuing representation in light of this fact.
Despite voicing these strong reservations, plus conceding that Quinn Emanuel’s objection to the motion “may very well be correct,” the judge held disqualification was necessary even in the absence of “any actual detriment,” citing Tekni-Plex v. Meyner & Landis, 89 NY2d (1996).
“The law in this state weighs heavily in favor of disqualification upon a showing of a possible rule violation, irrespective of an actual violation, harm, or gamesmanship,” the judge stated.
In an interview, Potashner told CLI, “It seems a pretty straightforward decision. As the judge said, Mayers contacted Quinn Emanuel to represent him. Rather than walling [Pickhardt] off, [Reed] interviewed him.”
Reed declined to comment on the ruling.
Quinn Emanuel does have the option to ask the judge to reconsider the ruling or appeal to the Appellate Division, First Department.
When contacted by CLI, representatives at Stone Castle Partners declined to comment on their next steps.
In any event, Kornreich has stayed the action until May 8, by when Stone Counsel’s new attorneys are required to e-file notice of appearance.