Opinion ID: 770881
Heading Depth: 2
Heading Rank: 1

Heading: Dismissal as to Claims Regarding the Alleged Conflict of Interest

Text: 17 We review a district court's grant of a motion to dismiss de novo, assuming the truth of all factual allegations contained in the complaint and drawing all reasonable inferences in the plaintiff's favor. Boyd v. Nationwide Mut. Ins. Co., 208 F.3d 406, 409 (2d Cir. 2000). A dismissal under Rule 12(b)(6) for failure to state a cognizable claim may be affirmed only where it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief. Id. (internal quotation marks omitted). To survive a motion for dismissal under Rule 12(b)(6), the complaint must allege facts that, if true, would create a judicially cognizable cause of action. South Road Assocs. v. International Bus. Mach. Corp., 216 F.3d 251, 253 (2d Cir. 2000). 18 Under the New York rules of professional conduct, a lawyer generally cannot simultaneously serve clients with conflicting interests. 2 A lawyer shall decline proffered employment and shall not continue multiple employment if the exercise of independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of employment or representation of another client, or if it would be likely to involve the lawyer in representing differing interests . . . . N.Y. Code of Professional Responsibility DR 5-105(A) & (B), reprinted in N.Y. JUD. LAW APP. (McKinney 1992). 3 However, at the time of the events in this case, a lawyer could represent multiple clients if it [was] obvious that the lawyer [could] adequately represent the interest of each and if each consent[ed] to the representation after full disclosure of the possible effect of such representation on the exercise of the lawyer's independent professional judgment on behalf of each. N.Y. Code of Professional Responsibility DR 5-105(C), reprinted in N.Y. JUD. LAW APP. (McKinney 1992) 4 ; see also Oneida of Thames Band v. New York, 757 F.2d 19, 22 (2d Cir.) (noting that clients may give informed consent to joint representation despite actual or potential adverse interests), cert. denied, 474 U.S. 823 (1985). 19 The first question, then, is whether a conflict situation existed when Luckey Platt sought to retain Kornstein. We believe that a close analysis of the professional responsibility rules leads to the conclusion that, initially, a conflict of interest did exist. Given that Luckey Platt and Burstin were competing for the same pot of money, Kornstein faced a situation in which he represented differing interests. N.Y. Code of Professional Responsibility DR 5-105(A), reprinted in N.Y. JUD. LAW APP. (McKinney 1992). Nonetheless, we believe that the Bankruptcy Court's retention and escrow order effectively resolved this conflict by, essentially, eliminating any incentive to compete. By acting in a manner that it believed would increase the chance of recovery, and by assuming the task of allocating that recovery, the Bankruptcy Court aligned the interests of Luckey Platt and Burstin for purposes of the state court appeal. See In re AroChem Corp., 181 B.R. 693, 703 (Bankr. D. Conn. 1995) (finding that agreement to pool proceeds from judgment for later allocation cured a conflict resulting from rivalry over the judgment), aff'd, 176 F.3d 610 (2d Cir. 1999). Luckey Platt and Burstin shared the common goal of obtaining a judgment against Kalka, and the Bankruptcy Court found-at the urging of Luckey Platt-that Kornstein was best able to procure that judgment. Bankruptcy judges' findings on conflict of interest questions are entitled to deference because a bankruptcy judge is on the front line, in the best position to gauge the ongoing interplay of factors and to make the delicate judgment calls which such a decision entails. In re AroChem Corp., 176 F.3d 610, 628 (2d Cir. 1999) (internal quotation marks omitted). The manner in which the judgment was allocated in the Appellate Division was rendered irrelevant by the fact that the parties had vested the Bankruptcy Court with the authority to divide the recovery between Luckey Platt and Burstin. [W]here the interest of the special counsel and the interest of the estate are identical with respect to the matter for which special counsel is retained, there is no conflict and the representation can stand. Id. at 622. As a result, we agree with the District Court that, by virtue of the escrow order, [t]he conflict alleged by plaintiff did not exist, and could not exist. 20 The question remains whether, even if the canonical conflict was cured, Kornstein's arguments for affirmance in the Appellate Division breached his fiduciary duty to Luckey Platt. We believe that Kornstein's arguments on appeal were not improper. The parties and the Bankruptcy Court were aware that Kornstein would argue for Burstin to be awarded the judgment: not only had Kornstein already made that argument in his brief, but Kalka and Bank Leumi challenged Kornstein's appointment on that very ground. Thus, the Bankruptcy Court-and Luckey Platt-were made aware that Kornstein would seek to affirm the judgment on appeal. Moreover, that approach made eminent sense. Kornstein, representing the appellee, could not have been expected to argue for anything but affirmance. It was probably a wise litigation strategy simply to argue for affirmance-to get the money-rather than argue for a reallocation of the judgment, especially since Kornstein knew that the Appellate Division's allocation would give way to the Bankruptcy Court's consensual dominion over the recovery. It is hard to imagine what else Kornstein could have done in the state court, and no reasonable alternatives have been suggested by Kittay. 5 21 Kittay asserts that, even though the Bankruptcy Court reserved the right to divide the judgment, it mattered in whose favor the Appellate Division granted judgment, because the fact that the judgment was in Burstin's name meant that Kalka was forced to settle with Burstin rather than with Luckey Platt. This assertion, however, misses the point. The settlement constituted proceeds of the judgment, and the Bankruptcy Court ordered that the proceeds be placed in escrow. Accordingly, whether Kalka settled with Burstin or with Luckey Platt, the money was to be placed in the common pot for later allocation by the court. As a result, as the District Court found, it did not matter in whose favor the Appellate Division would grant judgment. 22 Given that ultimately there was no conflict between the interests of Luckey Platt and Burstin during the course of the state court appeal, we agree that Kittay's allegations do not state a claim for relief. Under the Code of Professional Responsibility, at the time the events of this case occurred, a lawyer could represent multiple clients if it [was] obvious that the lawyer [could] adequately represent the interest of each and if each consent[ed] to the representation after full disclosure of the possible effect of such representation on the exercise of the lawyer's independent professional judgment on behalf of each. N.Y. Code of Professional Responsibility DR 5-105(C), reprinted in N.Y. Jud. Law App. (McKinney 1992). In our view, it was obvious, at the time, that Kornstein could adequately represent both Luckey Platt and Burstin, since the retention order placed the allocation of any judgment in the hands of the Bankruptcy Court. Moreover, it is quite clear that Luckey Platt consented to the dual representation after full disclosure of the advantages and risks involved. The Bankruptcy Court held a full hearing, and Luckey Platt argued for the retention of Kornstein. 23 The retention and escrow order also enabled the appointment to avoid running afoul of bankruptcy law. Title 11, section 327(e) of the United States Code allows the appointment of counsel to assist the trustee for a specified special purpose, if counsel does not represent an interest adverse to the estate. 6 The Bankruptcy Court here found that most of the interests of Luckey Platt and Burstin were the same, and that, absent Kornstein, Luckey Platt would be unable effectively to pursue its claims against Kalka. 7 This finding is accorded deference. See AroChem, 176 F.3d at 628. The escrow order meant that Burstin's interests in defending the state court appeal were not adverse to the estate. Cf. id. at 627 (noting that retention of law firm as special counsel is proper where there is an identity of interests between the trustee and special counsel's former client with respect to the specific matter for which special counsel is retained); In re American Avia Assoc.-SEA, 150 B.R. 24, 28 (Bankr. S.D. Tex. 1992) (allowing retention of law firm as special counsel to represent debtor and other related entities, some of which had also filed for bankruptcy, in state court litigation against some of debtor's joint venturers because case represented potentially major asset of bankruptcy estate and relief had been carefully structured to avoid conflict of interest). 24 While we hold that the Bankruptcy Court's escrow order effectively resolved any conflict of interest, the court's actions in this case may not be appropriate in all cases. Here, the conflict resolution was sufficient to cover the lawyer in his arguments before the Appellate Division, but, as we now know, did not protect Luckey Platt. [G]iven the fact-specific nature of parties' interests and their alignments . . . no general rule of simple application [regarding the retention of special counsel] . . . can be gleaned. Rather, each case must finally turn on its own circumstances, based on a common-sense divination of adversity or commonality. AroChem, 176 F.3d at 626-27 (internal quotation marks and citations omitted). Thus, we encourage courts to be aware of the myriad complications that can arise in conflict situations and to craft resolutions with prudence and utmost sensitivity for potential misstep by litigants and their counsel. 25 In any event, the settlement proceeds were not placed in the escrow account. This, however, could not have been the result of Kornstein's appointment or his arguments on appeal, but rather-assuming the truth of Kittay's allegations-was the result of the events that took place after appeal. Accordingly, we affirm the District Court's dismissal of the complaint insofar as it alleged improprieties in Kornstein's dual representation of Luckey Platt and Burstin during the state court appeal. 26