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Richardson v. Hamilton International Corp.


decided: November 17, 1972.


Staley, Van Dusen and Max Rosenn, Circuit Judges.

Author: Van Dusen


VAN DUSEN, Circuit Judge.

This is an appeal from an opinion and order of November 3, 1971,*fn1 disqualifying the plaintiff, Mr. James M. Richardson, from maintaining a class action and shareholders' derivative suit against Alexander Hamilton Life Insurance Company of America (hereafter Hamilton Life), its directors, certain of its officers,*fn2 and its parent company, Hamilton International Corporation (hereafter Hamilton International).*fn3

Mr. Richardson's complaint asserts that a proxy statement, dated May 19, 1969, proposing a merger between Hamilton Life and Hamilton International was false, misleading, and failed to disclose certain material facts in violation of 15 U.S.C. ยงยง 78j(b) and 78n, and Rule 10(b)-5 and Regulation 14a issued thereunder.

The defendants claim that former Canons 6 and 37 of the Professional Ethics of the American Bar Association, now embodied in Canon 4 of the new Code of Professional Responsibility,*fn4 and Rule 11 of the Local Rules of the United States District Court for the Eastern District of Pennsylvania*fn5 require Mr. Richardson's disqualification as a party plaintiff.

The defendants, in support of their motion, note that Mr. Richardson, while an associate with the law firm of Schnader, Harrison, Segal and Lewis, performed extensive and detailed legal work for Hamilton Life. The record shows that his services commenced in September 1964, when the firm was retained as special counsel for Hamilton Life. At that time, the SEC was investigating whether Hamilton Life had violated the federal securities laws during an intrastate offering in Michigan. Mr. Richardson traveled to Michigan on a number of occasions to visit the Hamilton Life offices, and to conduct detailed investigations into the files of Hamilton Life, and into the personal files of its officers and directors. During these visits the plaintiff also conducted interviews with a number of the officers and director, who are now defendants in the present action.*fn6 He also reviewed stock subscription agreements and prepared memoranda for registration statements filed by Hamilton Life with the SEC.

During June of 1965, Mr. Richardson devoted a considerable amount of time preparing Messrs. Owens, Bruce and Safford for an SEC hearing in Washington, D.C. The preparation included the discussion of strategy with those officers and other attorneys in the Schnader firm.*fn7

In October of 1965 the SEC issued "An Order for Public proceedings and Notice of Hearing Pursuant to Sections 15(B), 15(A) and 19(A) of the Securities and Exchange Act of 1934." Upon receipt of the order, Mr. Richardson drafted a memorandum evaluating it and suggesting possible defenses. In November of that year, responsibility for the defense of Hamilton Life and its officials shifted to counsel in Chicago.*fn8

The rationale underlying Canon 4 is the principle that a client should be encouraged to reveal to his attorney all possibly pertinent information. See Canon 4 of the Code of Professional Responsibility, Notes 1 and 2. A client should not fear that confidences conveyed to his attorney in one action will return to haunt him in a later one. It is readily apparent that if an attorney is permitted to reveal confidences "the free flow of information from client to attorney, so vital to our system of justice, will be irreparably damaged." United States v. Standard Oil Company, 136 F. Supp. 345, 355 (S.D.N.Y.1955); see ABA, Informal Opinion No. 287 (1953).

Therefore, the courts, in order to protect the communications between attorney and client, have generally disqualified an attorney whenever the subject matter of the second representation is "so closely connected with the subject matter of the earlier representation that confidences might be involved." ABA, Informal Opinion No. 1233 (Aug. 24, 1972).*fn9

The plaintiff contends that it is incumbent on the defendants to come forward with evidence to demonstrate that the previous representation is related to the present representation. The rule, however, is clear that the defendants need not show by direct evidence that Mr. Richardson acquired information in the course of the previous litigation which is to be used in the pending action. They only need to show that Mr. Richardson might have acquired substantially related material. T.C. Theatre Corp. v. Warner Bros. Pictures, supra.*fn10 This position was well stated by Judge Weinfeld in that decision as follows:

"In cases of this sort the Court must ask whether it can reasonably be said that in the course of the former representation the attorney might have acquired information related to the subject matter of his subsequent representation." Id. 113 F. Supp. at 269.

Mr. Richardson spent a considerable amount of time interviewing officers and directors, who are presently defendants, and examining their personal files, as well as the files of Hamilton Life. Although the exact nature of the information he received is unknown, it is known that he had access to confidential information about Hamilton Life's finances, corporate structure and operations, which he would not have received had he not been its attorney. We believe that the district court was justified in concluding that the information Mr. Richardson received in the prior SEC action might be related to the subject matter of his subsequent representation.

While we do not doubt that Mr. Richardson acted in good faith and had the best interests of his class at heart when he brought this suit, we do not believe that he should be permitted to place himself in a position where, even unconsciously, he will be tempted, or it appears to the public and his former clients that he might be tempted, in the interests of his new client, to take advantage of information derived from confidences placed in him by Hamilton Life and its officials. See Estates Theatres, Inc. v. Columbia Pictures Industries, Inc., 5 CCH Trade Reg.Rep. para. 74,106, at 92,620 (S.D.N.Y., July 17, 1972); T.C. Theatre Corp., supra; cf. Fleischer v. A.A.P., Inc., 163 F. Supp. 548 (S.D.N.Y.1958). We note that Mr. Richardson is not the only member of the class available to maintain an action such as this, and the district court order does not preclude an action by others based on the subject matter of this suit.

Whenever an allegation is made that an attorney has violated his moral and ethical responsibility, an important question of professional ethics is raised. It is the duty of the district court to examine the charge, since it is that court which is authorized to supervise the conduct of the members of its bar.*fn11 The courts, as well as the bar, have a responsibility to maintain public confidence in the legal profession. This means that a court may disqualify an attorney for not only acting improperly but also for failing to avoid the appearance of impropriety.*fn12

We have held that the regulation of attorneys appearing before the district court in these matters will be disturbed only when, on review of the record, we can say that the district court abused its permissible discretion.*fn13 Greene v. Singer, 461 F.2d 242 (3d Cir. 1972); cert. denied, 409 U.S. 848, 93 S. Ct. 54, 34 L. Ed. 2d 89, (Oct. 10, 1972).

On this record the district court has not exceeded the bounds of its permissible discretion,*fn14 and the above-mentioned November 3, 1971, order (see note 1 supra) will be affirmed.

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