June 30, 2011
WELLINGTON PLACE CONDOMINIUM ASSOCIATION, PLAINTIFF,
MARIE CARTY, DEFENDANT-APPELLANT, AND HENRY HAMMOND, DEFENDANT-RESPONDENT, AND LAUREN CARTY, PROPERTY MAINTENANCE ASSOCIATES, INC., A NEW JERSEY CORPORATION, CHRISTOPHER REID, AMBOY NATIONAL BANK, COMMERCE BANK, N/K/A TD BANK, N.A., WACHOVIA BANK, N.A., MERRILL LYNCH OR MERRILL LYNCH, NMTC CORPORATION, BANK OF AMERICA, F/K/A FLEET BANK, COMMUNITY ASSOCIATION UNDERWRITERS OF AMERICA, INC., CONTINENTAL CASUALTY COMPANY, ZURICH AMERICAN INSURANCE COMPANY, ST. PAUL FIRE & MARINE INSURANCE COMPANY, QUINCY MUTUAL FIRE INSURANCE COMPANY, TRAVELERS CASUALTY & SURETY COMPANY, GREATER NEW YORK INSURANCE COMPANY, CREATIVE INSURANCE SERVICES, INC., T/A CREATIVE AGENCY GROUP, JACOBSON, GOLDFARB & SCOTT, INC., T/A JGS INSURANCE AGENCY AND LUBOWICKI INSURANCE AGENCY, DEFENDANTS.
On appeal from the Superior Court of New Jersey, Law Division, Monmouth County, Docket No. L-4020-08.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued June 8, 2011
Before Judges Payne and Baxter.
By leave granted, defendant Marie Carty (Marie)*fn1 appeals from a January 7, 2011 Law Division order that disqualified her attorney, Edwin R. Matthews, and his firm Bourne, Noll & Kenyon, from representing her in the present matter based upon the judge's conclusion that Matthews had a conflict of interest. We reverse.
The judge's conclusion that Matthews's disqualification was required arises from a matter having its genesis in 2004. The question before us is whether Matthews's representation of Henry Hammond in 2004 bars Matthews from representing Marie in 2010, in light of the fact that Hammond and Marie participated in a real estate transaction in 2004 during which Matthews represented Hammond. Hammond and Marie are co-defendants in the present matter.
In August 2004, Matthews was retained to represent Hammond, as well as Lauren Carty and Christopher Reid, who was Lauren's husband, in connection with their purchase of a residential property in Little Silver. The total purchase price was $555,000. Although all three applied for the $500,000 mortgage, the mortgage was issued solely in Hammond's name, because he was the only person qualified. Although the original contract purchasers were Hammond, Lauren and Reid, the title insurance company insisted that only Hammond take title to the property because he was the only person named on the mortgage. Hammond's purchase of the Little Silver property closed on September 15, 2004, with Matthews as his attorney.
At a hearing conducted on Hammond's motion to disqualify Matthews, Hammond testified that the only time he and Matthews met concerning the 2004 real estate transaction was at the closing that took place in Florham Park, at which Marie was also present. According to Hammond, he did not learn that he wouldbe the sole purchaser of the property until Marie told him so in the car on the way to Matthews's office. Matthews was not present in the car.
Hammond contradicted himself on the question of whether Marie repeated that information in Matthews's presence. Regardless of when he first learned that he would be the sole party on the mortgage, and whether Matthews was present during Hammond's discussion of the subject with Marie, Hammond does not contend that he provided any confidential information to Matthews during the real estate transaction involving the Little Silver property. Matthews did, however, review the closing documents with him, and acted as the settlement agent.
We now describe the relevant facts concerning the present litigation. In 1986, Marie served as the property manager for the Wellington Place Condominium Association (Association), an entity whose membership consists of condominium owners at One Wellington Place in Aberdeen. When Marie began her service as property manager, she was an employee of Wellington Place; however in 2000 or 2001, she opened her own property management firm known as Property Maintenance Associates, Inc. (PMA), through which she supplied property management services to the Association. While serving as the on-site property manager for the Association, her duties included collecting maintenance fee payments, hiring contractors and paying the bills submitted by contractors and vendors. In 2001 or 2002, Marie assigned to her daughter Lauren the responsibilities of on-site manager, at which time Lauren took over the duties previously performed by Marie.
Beginning in August 2006, contractors began contacting members of the Association's Board of Trustees regarding invoices they had submitted that had remained unpaid for a considerable period of time. In September 2006, the pool contractor notified a Board member that when he received checks from PMA in payment for services rendered, there were insufficient funds in the Wellington Place account to cover the amount of the checks.
Also in September 2006, an employee of Brown & Brown Insurance contacted Board member Artie Martino to report that the premises liability insurance issued by Brown & Brown to the Association was in danger of lapsing because the premium remained unpaid. Brown & Brown advised Martino that Lauren had provided various excuses for the lack of payment, ranging from problems with the mail, to the bank having made a wire transfer to the wrong account number.
Martino confronted Marie about these financial irregularities, directed her to attend the next Board meeting onSeptember 23, 2006 and to bring with her all of the financial records of the Association for the past year. At the Board meeting, neither Marie nor Lauren provided the information Martino had requested.
His suspicions heightened, Martino, along with Board member, Pat Dyer, reviewed the Association's financial records, and discovered numerous financial improprieties, including bank statements showing that Lauren had made unauthorized cash withdrawals from the Association's checking account, and had, without permission, obtained credit cards in the name of Wellington Place and was using them for personal shopping. Dyer and Martino also discovered that the former landscaping contractor for Wellington Place had obtained a default judgment against Wellington Place in the amount of $86,000.
Hammond was the Treasurer of the Board at the time the financial irregularities were discovered in 2006, and had been serving in that capacity for many years. At no time during his lengthy term as Treasurer did he ever reveal that he had a familial relationship with Marie and Lauren.
Martino reported his findings to a detective at the Aberdeen Police Department. When Martino and another Board member went to Wachovia Bank in Holmdel to change the signatory on the checking accounts, they learned, for the first time, that Lauren had, without permission, taken out a line of credit in the amount of $21,000 in the name of Wellington Place, and that the line of credit was in default. Wachovia had become suspicious of Lauren's activities, and filed a report with the Holmdel Police Department. Both police departments, Holmdel and Aberdeen, forwarded their findings to the Monmouth County Prosecutor's Office, which ultimately obtained an indictment against Marie, Lauren and Reid. A forensic audit conducted at the request of the Association established that approximately $1,000,000 had been embezzled by PMA, Marie, Lauren, Reid, Hammond and possibly others. During the course of discovery in the criminal proceedings, detectives learned that Hammond was the long-time paramour of Marie and that Lauren was his daughter.
On August 22, 2008, the Association filed suit against Marie, Lauren, PMA, Reid, Hammond, and numerous banks, financial institutions and insurance companies, alleging causes of action for theft, embezzlement, unlawful conversion, breach of fiduciary capacity and fraud. The Board sought compensatory and punitive damages.
Marie retained Matthews to represent her, and on October 14, 2008, Matthews filed an answer on her behalf, and asserted a number of crossclaims for contribution and indemnification against several of her co-defendants, including Hammond. On November 16, 2010, more than two years after Matthews had filed an answer on Marie's behalf, and more than two years after Hammond became aware that Matthews was representing Marie in the present matter, Hammond filed a motion to disqualify Matthews, citing Rule of Professional Conduct (RPC) 1.9, which concerns conflicts of interest with former clients. The judge conducted an evidentiary hearing on January 4, 2011 followed by oral argument three days later.
In an oral opinion rendered on January 7, 2011, the judge made findings of fact concerning the testimony he had heard three days earlier. The judge prefaced his remarks by stating that he found two portions of Hammond's testimony to be "quite frankly incredible," namely: 1) Hammond's claim that he did not learn until he and Marie were driving to Matthews's office for the closing that he would be the only party obligated on the mortgage; and 2) that Hammond would unwillingly obligate himself on a mortgage loan in excess of $400,000.
The judge then observed that Hammond's motion to disqualify Matthews should not be granted unless, as the Supreme Court held in City of Atlantic City v. Trupos, 201 N.J. 447, 467 (2010), Matthews's prior representation of Hammond was both relevant and material to Matthews's subsequent representation of Marie. Analyzing that issue, the judge stated:
But the problem is, in this court's mind, that the switcheroo . . . between Lauren and Hammond was done with what would appear to be Mr. Matthews's knowledge. And . . . that property is the subject of where the theft and where the money went. . . .*fn2
But what does it ultimately get down to? . . . Mr. Matthews at some point, because of Marie Carty's testimony at her deposition [that Hammond was aware well in advance that he would be the only party named on the mortgage, and was agreeable to that arrangement,] and because of Henry Hammond's testimony in front of this [c]court [that he did not learn of the switch until he and Marie were driving to Matthews's office for the closing], . . . there is a wide difference between their . . . positions on what happened here.
And there is a big allusion to Mr. Matthews being part and parcel of the conversation that took place about this switch. Obviously, that's where the problem arises because then Mr. Matthews does become a witness. I accept his representation . . . as an officer of the [c]court that nothing happened. That he simply was the closing agent and it was a routine real estate closing.
But because of their testimony, they've put his testimony, they've made him a witness, whether they like it or not. . . .
But be that as it may, I'm satisfied that Mr. Matthews has a conflict that can't be waived. It can't be distinguished away. And . . . he's going to have to be disqualified as counsel.
Thus, as is evident from the judge's remarks, the sole basis upon which he disqualified Matthews was his belief that Matthews would become a witness in the litigation between the Association, Marie, Lauren, and Hammond, and would be required to provide testimony on the circumstances under which Hammond became the sole party named on the mortgage for the Little Silver property in 2004.
The judge signed a confirming order on January 11, 2011, which disqualified Matthews as well as his firm. The order stayed the disqualification of Matthews for sixty days to permit Marie to seek interlocutory review from this court. After we granted leave to appeal on March 2, 2011, the judge extended the stay indefinitely, pending the disposition of the appeal.
On appeal, Marie maintains: 1) there is no conflict of interest that would disqualify Matthews or his law firm from representing her in the present matter, and RPC 1.9 is inapplicable; 2) RPC 3.7, which concerns trial counsel becoming a witness, does not require Matthews's disqualification; 3) the application to disqualify Matthews should have been denied because it was not brought in good faith; and 4) the judge erred in holding an evidentiary hearing.
RPC 1.9 is the section of the Rules of Professional Conduct that controls an attorney's ability to represent a client when there is a conflict of interest with a former client. RPC 1.9 will not result in the disqualification of an attorney unless three elements are present: a past client whom the lawyer "represented" in a matter; a present client whose interests are "materially adverse" to those of the past client; and a current matter that is the "same" or "substantially related" to the matter in which the lawyer represented the past client. RPC 1.9. Because it is undisputed that Hammond is a past client whose interests are materially adverse to those of Matthews's present client, Marie, the first two elements are satisfied. Thus, the sole issue before us is whether the judge erred when he concluded that the current matter is the "same" or "substantially related" to the matter in which Matthews represented the past client, Hammond. RPC 1.9.
In Trupos, supra, the Supreme Court developed the following "workable standard" to be applied when making the determination of whether the prior, and the present, matter are "substantially related." The Court stated:
[F]or purposes of RPC 1.9, matters are deemed to be "substantially related" if (1) the lawyer for whom disqualification is sought received confidential information from the former client that can be used against that client in the subsequent representation of parties adverse to the former client, or (2) facts relevant to the prior representation are both relevant and material to the subsequent representation. [Trupos, supra, 201 N.J. at 451-52.]
The burden of persuasion on all elements under RPC 1.9 "remains with the moving party, as it bears the burden of proving that disqualification is justified." Id. at 463 (internal quotation marks and citation omitted). The determination of whether counsel should be disqualified is an issue of law that we review de novo. Ibid.
Applying the "workable standard" that the Court issued in Trupos, we agree with Marie's contention that the judge erred when he disqualified Matthews. Despite Hammond's insistence that Matthews received confidential information from him at the time of the 2004 real estate closing on the Little Silver property, the record is devoid of any evidence to support such a contention.
As for the second prong of the Trupos test, we begin by observing that the judge's oral decision did not identify any facts that were "relevant to the prior representation" that are also "relevant and material to the subsequent representation." Id. at 452. This is not surprising, as there are none. Whether Hammond found out long before the closing that he would be the only party named on the mortgage, as Marie contends, or whether instead he learned of this only in the car on the way to Matthews's office, as he contends, is immaterial. Regardless of which version is true, it has no bearing on the present litigation, in which the Association seeks to recover from Lauren, Marie and Hammond the nearly $1,000,000 that was diverted and embezzled from the Association's coffers. It is also immaterial that Matthews might have been present while Marie and Hammond discussed the subject, as it was not a confidential communication between Hammond and Matthews.
In its discussion of the second Trupos prong, the Supreme Court spoke approvingly of the test articulated by the United States District Court for the Southern District of New York: "'whether facts which were necessary to the first representation are necessary to the present litigation.'" Id. at 465 (quoting U.S. Football League v. Nat'l Football League, 605 F. Supp. 1448, 1459 (S.D.N.Y. 1985)). Certainly, the facts concerning when Hammond learned that he would be the only person named on the mortgage for the Little Silver Property are not "necessary to the present litigation." Id. at 465 (quoting U.S. Football League, supra, 605 F. Supp. at 1459). We thus conclude that the judge misapplied the second Trupos prong.
We do recognize, however, that "for the purpose of impairing or supporting the credibility of a witness," the opposing party may "introduce extrinsic evidence relevant to the issue of credibility[.]" N.J.R.E. 607. Thus, it is certainly possible that at trial Hammond may seek to undermine Marie's credibility by challenging her assertion that he knew the true situation of the intended mortgage on the Little Silver property in 2004 long before arriving at the closing. To accomplish such an attack on her credibility, it is certainly possible that he might seek to call Matthews as a witness. Even this, which is the ground upon which the judge relied in ordering Matthews's disqualification, does not justify the result the judge reached.
RPC 3.7 provides that a lawyer shall not act as an advocate at a trial in which the lawyer is likely to be a necessary witness. The Rule does, however, expressly provide an exception when the "disqualification of the lawyer would work substantial hardship on the client." RPC 3.7(a)(3). In reaching a conclusion that Matthews's disqualification was required because he might become a witness in the present litigation, the judge ignored the "substantial hardship" exception. Had he applied the exception, he would have been required to deny the motion for Matthews's disqualification. Specifically, in his findings of fact, the judge concluded that the disqualification of Matthews would create significant practical difficulties for Marie. While he did not use the RPC 3.7(a)(3) "substantial hardship" language, it is evident that he made just such a finding. The judge stated:
I feel badly for Mr. Matthews in many respects because the other problem here is that through marriage, he is related to Marie Carty. He has spent a tremendous amount of time representing her in this matter. I think it was over 300 hours at a substantial cost to his law firm.
And he has advised the [c]court that she lives on a very modest income of Social Security and the like, has no real means to hire new counsel if he were disqualified, which creates a whole other issue for her. [(Emphasis added).]
Thus, the judge made a finding that it was highly unlikely that Marie would be able to afford counsel and would likely become pro se if Matthews were to be disqualified. That scenario constitutes "a substantial hardship" that should have caused the judge to deny Hammond's motion to disqualify Matthews. RPC 3.7(a)(3). Thus, we conclude that the very basis upon which the judge relied in ordering Matthews's disqualification constitutes a mistaken application of the applicable law. We therefore reverse the order under review, both because the judge misapplied both prongs of the Trupos test, and because the judge ignored the "substantial hardship" exception to RPC 3.7.
We make an additional observation. Even if the judge had been correct in disqualifying Matthews, the judge erred when he disqualified Matthews's entire firm from representing Marie. RPC 3.7(b) specifically provides that even if a lawyer is disqualified from representing a client because he or she is likely to be called as witness at trial, the lawyer's firm may still continue to represent the client. Thus, the disqualification of Matthews's law firm was error.
Reversed and remanded.