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IN RE CENDANT CORPORATION SECURITIES LITIGATION.

December 11, 2000

IN RE: CENDANT CORPORATION SECURITIES LITIGATION THIS DOCUMENT RELATES TO ALL MATTERS.


The opinion of the court was delivered by: Walls, District Judge.

OPINION

Ernst & Young, LLP ("E & Y") moves for declaratory judgment that Theodore Wells, Esq., may represent E & Y in this litigation despite that (1) Mr. Wells left Lowenstein Sandler, PC ("Lowenstein") in January 2000 to join Paul, Weiss, Rifkind, Wharton and Garrison ("Paul Weiss"); (2) Paul Weiss has for the last two years represented Amy N. Lipton, former Vice President and General Counsel of CUC and former Executive Vice President and Deputy General Counsel of Cendant; and (3) Ms. Lipton has not consented to the simultaneous representation of her and E & Y by Paul Weiss. The motion is opposed by Cendant Corporation ("Cendant") and Ms. Lipton. The motion is denied.

BACKGROUND

Since April 1998, the Paul Weiss firm has represented Amy N. Lipton, former Vice President and General Counsel of CUC and former Executive Vice President and Deputy General Counsel of Cendant. Ms. Lipton had been Vice President and General Counsel of CUC before it merged with HFS to form Cendant in 1997. After the merger, she served as General Counsel of Cendant's CUC Division and as Deputy General Counsel and Executive Vice President of Cendant. Before she became General Counsel to CUC, Ms. Lipton had served as outside counsel to CUC beginning in the early 1980s. Ms. Lipton was named as a defendant in one of the numerous Cendant actions, Deutch v. Silverman, but in August 1999 was dismissed from the action by this court because of a lack of personal jurisdiction. See In re Cendant Corporation Derivative Action Litigation, 189 F.R.D. 117 (D.N.J. 1999).

Ms. Lipton's representation by Paul Weiss has continued since her dismissal as a defendant in the Silverman matter. Recently, she was served (through Paul Weiss) with a subpoena which requested documents relating to various aspects of the alleged fraud in this matter. Ms. Lipton will be represented by Paul Weiss with regard to her responses to this subpoena. See Cendant Brief at 10. Cendant asserts that this representation is likely to continue in connection with investigations by the SEC and the United States Attorney's Office. See Cendant Brief at 10. Ms. Lipton asserts in her Certification that she has disclosed to Paul Weiss privileged and confidential matters of CUC, Cendant, and its CUC Division and has discussed in confidence with Paul Weiss activities of E & Y and communications between E & Y and Cendant. Lipton Cert. ¶¶ 6-7.

Earlier this year, E & Y, through Lowenstein, reached out to Ms. Lipton's counsel to inquire whether Ms. Lipton would consent to Mr. Wells' representation of E & Y in the litigation between E & Y and Cendant. See Lipton Cert. ¶ 8. Ms. Lipton retained Daniel Bookin, Esq. of O'Melveny & Myers to advise her on this issue. Id. Ms. Lipton states that she also consulted Cendant's counsel with regard to her decision. Ultimately, Ms. Lipton declined to give her consent to the representation by Mr. Wells in the Cendant litigation.

E & Y contends that to avoid any possible inference of impropriety, Paul Weiss instituted ethical protections immediately upon Mr. Wells' arrival at the firm.*fn1 These protections include: (1) a prohibition on any communication between Mr. Wells and anyone at the firm concerning "the substance" of the firm's representation of Ms. Lipton (and conversely, a prohibition against Mr. Wells' sharing information regarding the representation of E & Y with attorneys who represent Ms. Lipton); (2) a prohibition on Mr. Wells' access to any files regarding Ms. Lipton; (3) a requirement that Mr. Wells remain "disassociated" with any aspects of the case which directly involve Ms. Lipton; and (4) an arrangement that co-counsel for E & Y, and not Mr. Wells, will conduct any future discovery regarding Ms. Lipton or cross-examination of her.

Although E & Y consented to the dual representation, Ms. Lipton did not. E & Y argues that as evidenced by a July 6, 2000 letter from Carl Greenberg, Cendant "undermined" the discussions by persuading Ms. Lipton to withhold her consent. E & Y argues that this conduct by Cendant is nothing more than "a vexatious attempt to deprive E & Y of its existing counsel of choice." E & Y Brief at 4. E & Y argues that Ms. Lipton's consent is not necessary and that it only sought her consent out of an abundance of caution. E & Y now asks this Court to find that there is no impermissible conflict of interest between Ms. Lipton and E & Y that would prevent Paul Weiss from representing both Ms. Lipton and E & Y (or, if there is such a conflict, it can be removed by the use of the ethical safeguards described above). E & Y argues that Ms. Lipton has never been a "party adverse" to E & Y and is "at most" a potential witness. E & Y Brief at 9.

Cendant argues that Ms. Lipton's testimony is vital to this litigation and that she is expected to be a "key witness" regarding E & Y's work with the CUC merger reserves. Cendant argues that this is one of the most significant parts of the fraud at CUC. Cendant refers to E & Y's reliance in its cross-claims against Cendant on a memo that purports to summarize a conference call among Ms. Lipton and others at E & Y which reads that Ms. Lipton "confirmed that she understood the requirements of FAS 5 and that in her opinion the reserve that management was creating of $75,000,000 is a reasonable estimation of how much it would cost to settle such cases." Cendant Brief at 7-8, quoting Ex. B at 1. Cendant argues that because Ms. Lipton gave a different account of this conference call to the Audit Committee, it will be a contested issue at trial. Cendant Brief at 8. Cendant also contends that Ms. Lipton will be a key witness on other topics such as (1) the establishment of a $90 million litigation component of the "Ideon reserve"; (2) the improper charging of $30 million against the Cendant merger reserve in connection with the renegotiation of CUC's contract with CNA; (3) a meeting at which E & Y's Mark Rabinowitz assured former HFS executives that CUC's accounting treatment of the Ideon merger reserve was proper. Cendant Brief at 8-9. E & Y responds that Ms. Lipton is not likely to be adverse to E & Y because there is additional evidence that apparently contradicts her accounts to the Audit Committee. E & Y also contends that there is evidence that she did not have knowledge of certain issues, while Cendant contends to the contrary. Cendant Reply Brief, at 2. Thus, E & Y disputes how critical Ms. Lipton's testimony will be and exactly how "adverse" it will be to E & Y's position. Ms. Lipton asserts her own belief that her testimony will be adverse to E & Y.

E & Y frames the issue before the Court as follows:

. . . whether an attorney who has relocated his practice to a large firm may continue to represent a party to complex securities proceedings where one (or more) of his new partners represents a non-party witness, where stringent ethical safeguards were established at the outset of the situation, where the party/client has consented to the arrangement but where the potential witness/client has withheld such consent at the insistence of her former employer/client.

E & Y Brief at 6, n. 6. E & Y's simple answer is that there would be no ethical violation under these circumstances.

Cendant argues that the proposed dual representation by Paul Weiss of both E & Y and Ms. Lipton is unprecedented and would violate the following four provisions of the New Jersey Rules of Professional Conduct ("RPC" or "RPCs"):

1. Rule 1.7(a), which prohibits a lawyer from representing one client whose interests are "directly adverse to another client" absent the consent of both clients;
2. Rule 1.7(b), which prohibits a lawyer from representing one client when such representation would "materially limit" the ability of the lawyer to represent the first client, absent the consent of both clients;
3. Rule 1.9, which Cendant says prohibits a lawyer from representing a party's former lawyer and a party's adversary on the same or a substantially related matter; and
4. Rule 1.7(c), which prohibits dual representation in circumstances that would create an "appearance of impropriety," regardless of the consent of the clients.

Cendant Brief at 2-3. Cendant further claims that the "firewall" erected by Paul Weiss, which according to E & Y is sufficient to overcome any potential conflict, cannot solve any of the potential conflicts because (1) New Jersey does not allow the use of such ethical screens for private lawyers with conflicts of interest; and (2) such safeguards would not overcome the conflict even if they were permitted. Cendant Brief at 4. This is because Cendant expects Ms. Lipton to be a critical witness in the litigation and believes Paul Weiss cannot represent at the same time both interests without risking to compromise the interests of either Ms. Lipton or E & Y. Ms. Lipton asserts that she was within her rights to decline consent to the dual representation. She believes that her testimony is likely to be adverse to E & Y and she has a legitimate concern to protect the confidences of her former clients (CUC and Cendant). She further advances that:

[Ms. Lipton] is entitled to attorneys who will represent her without inhibition with respect to [E & Y], especially during discovery. Such representation may well include assertions of privilege, objections to discovery requests, and the multitude of other disputes that arise during hotly contested cases such as this one.

Lipton Brief, at 1. She maintains that "the danger that Ms. Lipton's attorneys may (even subconsciously) pull their punches against Mr. Wells' client is one that the Rules of Professional Conduct are designed to guard against." Id. (emphasis added). Like Cendant, Ms. Lipton contends that E & Y's proposed dual representation would violate Rules 1.7(a) and (b). She objects to the proposal of E & Y's co-counsel maintaining responsibility for all aspects of E & Y's representation that deal with her, arguing that "[e]ven if such legal gymnastics were possible, Paul Weiss cannot avoid its duty of loyalty to Ms. Lipton by having another law firm question her or address her role in the case." Lipton Brief at 2.

DISCUSSION

I. The Declaratory Judgment Act

The Declaratory Judgment Act allows: In a case of actual controversy within its jurisdiction, . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.

28 U.S.C. § 2201 (emphasis added). The Act requires that "there must be a dispute which 'calls, not for an advisory opinion upon a hypothetical basis, but for an adjudication of present right upon established acts.'" Ashcroft v. Mattis, 431 U.S. 171, 172, 97 S.Ct. 1739, 52 L.Ed.2d 219 (1977) (citation omitted). At the outset, Cendant argues that E & Y's current motion presents a nonjusticiable issue to the Court and seeks an impermissible advisory opinion because Mr. Wells has not filed a notice of ...


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