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Exposing the pitfalls of representing two clients trying to make a friendly deal, a judge has disqualified Newark, N.J.-based McCarter & English as counsel to a corporation sued by a minority shareholder. Essex County, N.J., Superior Court Judge Benjamin Cohen ruled that the firm couldn’t defend Heisler Industries Inc. of Fairfield, N.J., because a partner was privy to confidential information of the plaintiff when both sides were in amicable negotiations in the early 1990s. McCarter & English partner William Wallach produced a waiver that showed the plaintiff shareholder, Joseph Reilly of Chatham, N.J., had agreed — even after hiring his own transaction lawyer — to let the firm continue to represent the corporation. But the judge found that the waiver didn’t apply to the litigation that eventually erupted. He also ruled that the plaintiff didn’t implicitly waive his rights by waiting seven months into the litigation to file a disqualification motion. Higher courts apparently agreed. The Appellate Division refused to review Cohen’s decision, issued last June, and on Nov. 15 the state supreme court denied the firm’s motion for leave to appeal. Wallach said in pleadings that it was a novel case, and outside lawyers say the decision serves as a warning to lawyers who act as intermediaries between shareholders of close corporations. They say lawyers who obtain waivers that allow them to serve both sides should make sure the waivers also apply to any litigation that might break out. Unfortunately, that’s the kind of waiver few corporate lawyers would seek. Frederick Whitmer, a partner in Morristown, N.J.’s Pitney, Hardin, Kipp & Szuch, says: “It’s like before a wedding. When the bride and groom are walking down the aisle, who wants to tell them they might end up in Chancery Division, Family Part?” Marc Farley, a partner at Newark’s Kirkpatrick & Lockhart who represents Reilly, agrees that such a request could destroy the friendly atmosphere conducive to getting a deal done. He says the message in this case is, once the rosy glow is over and litigation begins, the firm should realize it has a conflict and bow out. In Reilly v. Heisler, Esx-C-411-00, plaintiff Reilly is the former president and owner of 16 percent of the shares of Heisler Industries, a close corporation that makes packaging machinery for companies all over the world. Reilly’s November 2000 fraud and breach of contract complaint says that majority shareholders Ronald and Richard Heisler reneged on a promise to give him one-third of the stock in return for his energetic advancement of the company’s business and profits. More than $1 million are at stake, says Farley. During the early 1990s, while Reilly and the Heislers were negotiating a stock purchase agreement between themselves and among other shareholders, McCarter & English partner David Ludgin represented all three men, and that was OK with Reilly. After all, it was a deal among friends, and the firm’s job was to get a consensus on the worth of the company and Reilly’s value to the operation, and then draft an agreement. When things bogged down, however, Reilly hired David Dreifuss of what is now Nagel Rice Dreifuss & Mazie in Livingston, N.J. Ironically, Dreifuss had also represented the corporation over the years, which meant to him that lawyers on both sides had a conflict. Not to worry. In an April 1999 letter to Ludgin, Dreifuss noted that both sides had discussed the potential conflicts. For his part, he concluded, “Please note that I have discussed same with Joe who has no objection to your proceeding on behalf of Rick and Ron Heisler. Joe has authorized me to expressly waive any such conflict and I would appreciate it if you would do so on behalf of Rick and Ron.” When the negotiations soured, though, Dreifuss dropped out and he later said in a certification that he was surprised McCarter & English didn’t bow out, too. The waiver was only for the negotiation, not for any ensuing litigation, “as I believe that all involved understood,” he said in the certification. Cohen agreed. He ruled that the waiver was limited to what he called “ongoing amicable negotiations which everyone expected would result in a negotiated settlement.” “No one was then thinking about or even contemplating litigation and there was no mention of waiving the conflict with regard to any litigation down the road,” he said. He also brushed aside McCarter & English’s contention there was a prejudicial delay in the filing of the disqualification motion. He noted, for example, that the conflict issue was raised early in the litigation but wasn’t pursued because everyone thought mediation would settle the underlying case. Ultimately, he ruled, McCarter & English’s continued involvement would violate the rules of professional conduct. RPC 1.9(a)(2), for example, prohibits the use of information to the disadvantage of a former client. Michael Ambrosio, a professor at Newark’s Seton Hall University School of Law who serves as a litigator and expert in ethics cases, says lawyers who act as intermediaries between clients are often confronted with the problem that McCarter & English faced. The best course is to make sure the clients understand their rights and that future relationships are clearly spelled out in writing, including what will happen if there is a falling out. Joel Leyner, of Jersey City, N.J.’s Chasan, Leyner, Bariso & Lamparello, says that even if the lawyer has no confidential information that could hurt a former client, it might still be unfair to let the lawyer remain as an adversary. Knowing how the former client thinks and reacts on an emotional level can be used to advantage during a trial or a settlement effort, he says. Last week, Heisler Industries was looking for a new litigation counsel in the case against Reilly. “We are discussing with the client the selection of replacement counsel to ensure that the plaintiff does not gain a tactical advantage at this stage of the litigation,” Wallach says. “We continue to maintain that the former client both implicitly and expressly waived any potential conflict of interest, but recognize the judiciary did not seem to agree with us,” he says.

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