Court Opinion

ID: 2960501
Source: CourtListenerOpinion
Date Created: 2015-09-17 17:50:55.319996+00
Date Added: 2024-06-11T11:42:17.508343
License: Public Domain

09-3716-cv
     In re MetLife Demutualization Litigation

 1                       UNITED STATES COURT OF APPEALS
 2
 3                           FOR THE SECOND CIRCUIT
 4
 5
 6                               August Term, 2009
 7
 8   (Argued: September 3, 2009                 Decided: September 29, 2009)
 9
10                            Docket No. 09-3716-cv
11
12   - - - - - - - - - - - - - - - - - - - -x
13
14   DARREN F. MURRAY, MARY A. DEVITO, KEVIN L. HYMS, HARRY S.
15   PURNELL III, KATHY VANDERVEUR, and MICHAEL A. GIANNATTASIO,
16
17                     Plaintiffs-Appellees,
18
19               - v.-
20
21   METROPOLITAN LIFE INSURANCE COMPANY and METLIFE, INC.,
22
23                     Defendants-Appellants.
24
25   - - - - - - - - - - - - - - - - - - - -x
26

27         Before:           JACOBS, Chief Judge, WESLEY and HALL,
28                           Circuit Judges.
29
30         Defendants-appellants Metropolitan Life Insurance

31   Company and MetLife, Inc. appeal an order of the United

32   States District Court for the Eastern District of New York

33   (Platt, J.), disqualifying its counsel Debevoise & Plimpton

34   LLP shortly before trial.          On September 22, 2009, this Court

35   reversed the disqualification order, with opinion to follow.

36   This is that opinion.
 1                                 TERESA WYNN ROSEBOROUGH, KEVIN
 2                                 S. FINNEGAN, DUNCAN J. LOGAN,
 3                                 Metropolitan Life Insurance
 4                                 Company, New York, New York;
 5                                 MICHAEL B. MUKASEY, MARY JO
 6                                 WHITE, BRUCE E. YANNETT, MARK P.
 7                                 GOODMAN, Debevoise & Plimpton
 8                                 LLP, New York, New York, for
 9                                 Appellants.
10
11                                 JARED B. STAMELL, Stamell &
12                                 Schager, LLP, New York, New York
13                                 (John C. Crow, David K. Bowles,
14                                 Robert A. Skirnick, and Samantha
15                                 H. Evans, on the brief), for
16                                 Appellees.
17
18   DENNIS JACOBS, Chief Judge:
19
20       Plaintiffs in this class action were policyholders of

21   Metropolitan Life Insurance Company when it was a mutual

22   insurance company.   They complain that they were misled and

23   shortchanged in the transaction by which the company

24   demutualized in 2000.   Nine years after the action was

25   commenced and five weeks before trial was scheduled to

26   begin, plaintiffs moved to disqualify the lead counsel for

27   Metropolitan Life Insurance Company and MetLife, Inc.

28   (“MetLife”), Debevoise & Plimpton LLP (“Debevoise”).       The

29   grounds alleged related to that firm’s representation of

30   MetLife in the underlying demutualization.    The United

31   States District Court for the Eastern District of New York

32   (Platt, J.) granted the motion to disqualify on September 1;

                                    2
1    the district court then stayed its order and immediately

2    certified the issue to this Court pursuant to 28 U.S.C.

3    § 1292(b).   We accepted the certification on September 2,

4    and on September 3 we heard oral argument.   After time

5    allotted for additional briefing, a short delay caused by

6    the recusal of two judges, and the observance of national

7    and religious holidays, we reversed the disqualification by

8    order dated September 22, with opinion to follow.     This is

9    that opinion.

10       The district court disqualified Debevoise on the ground

11   that its representation of MetLife in the 2000

12   demutualization made it counsel to the policyholders as

13   well.   On appeal, plaintiffs urge affirmance on that ground,

14   and also on the independent ground that the witness-advocate

15   rule requires disqualification because four Debevoise

16   lawyers who worked on the demutualization will give

17   testimony adverse to MetLife at trial.

18       We conclude that (i) Debevoise did not have an

19   attorney-client relationship with the policyholders by

20   virtue of its representation of MetLife; and (ii) plaintiffs

21   have failed to establish that the purported violation of the

22   witness-advocate rule in this case would warrant

                                   3
1    disqualification.   Accordingly, we reverse.

2                                    I

3        In 1915, MetLife converted from a stock life insurance

4    company to a mutual insurance company.     On April 7, 2000,

5    MetLife completed a months-long process of demutualization

6    back to a stock insurance company.     Debevoise served as

7    MetLife’s corporate counsel in that transaction.

8        On April 18, 2000, plaintiffs filed this class action

9    lawsuit in the Eastern District of New York, alleging that

10   MetLife violated federal securities laws by misrepresenting

11   or altogether omitting certain information from the

12   materials provided to its policyholders during the

13   demutualization process.     In June 2007, MetLife invoked the

14   attorney-client privilege to prevent plaintiffs’ discovery

15   of particular communications between MetLife and its in-

16   house and outside counsel.     The district court denied a

17   protective order on the ground that the plaintiff

18   policyholders were the owners of the mutual company and were

19   therefore clients of Debevoise during the demutualization.

20       Following discovery and the usual preliminaries, the

21   trial was set to begin on September 8, 2009.     When last-

22   minute settlement negotiations failed, plaintiffs moved to

                                     4
1    disqualify Debevoise on July 31, 2009--more than nine years

2    after the action was commenced, more than two years after

3    the court ruled that plaintiffs were clients of Debevoise,

4    and five weeks before trial.   Plaintiffs argued that

5    disqualification was appropriate for the same reason

6    articulated by the district court to support its 2007

7    discovery ruling: Debevoise had been counsel to plaintiffs

8    in the demutualization and cannot now jump sides to become

9    adverse to plaintiffs at trial.    Plaintiffs also argued that

10   disqualification was required by the witness-advocate rule,

11   because four Debevoise lawyers are scheduled to testify

12   about disclosures and documents related to the

13   demutualization.

14       MetLife’s response invoked the doctrine of laches;

15   argued that as a matter of law the policyholders of a mutual

16   insurance company are not a priori the clients of that

17   company’s corporate counsel; denied that the testimony of

18   the Debevoise lawyers would be adverse to MetLife (or even

19   significant); and charged that the motion was made for

20   improper tactical purposes.

21       On September 1, the district court granted plaintiffs’

22   motion and disqualified Debevoise.    The following colloquy

                                    5
1    explains the court’s decision:

 2            [MetLife]:     . . . [B]ut Debevoise represents in
 3                           this litigation MetLife Inc. and
 4                           Metropolitan Life Insurance Company,
 5                           and not the shareholders of MetLife
 6                           Inc.
 7
 8            The Court:     I understand that and that’s the
 9                           result of the demutualization
10                           process, and I fully understand
11                           that. But the problem is whether
12                           your representation of the
13                           policyholders which turned into a
14                           representation of the corporation is
15                           tainted because of a conflict.
16
17            [MetLife]:     And your Honor is aware that our
18                           position is that Debevoise &
19                           Plimpton never represented the
20                           policyholders of Metropolitan Life
21                           Insurance Company or--either before
22                           this litigation began or presently.
23
24            The Court:     You did represent the policyholders,
25                           because there was--they were the
26                           corporation. That’s the problem.
27                           The problem was that all of the
28                           former or the policyholders were the
29                           owners of the corporation. So you
30                           represented them and the track if
31                           you will because there was no--they
32                           were your clients.
33
34       Having granted the motion, the court immediately stayed

35   its order and certified the following question to this

36   Court: “Should Debevoise & Plimpton be disqualified from

37   representing MetLife in this case based on a conflict of

38   interest[?]”   We accepted certification and now reverse.

                                   6
1                                    II

2        Plaintiffs argue that the district court’s 2007

3    discovery ruling (that plaintiffs are clients of Debevoise)

4    is now law of the case, which we lack jurisdiction to

5    review.   We conclude, first, that we have jurisdiction to

6    consider the question; and second, that under New York law,

7    the policyholders of a mutual insurance company are not the

8    clients of that company’s outside counsel.      New York law is

9    applicable to this case because Metropolitan Life Insurance

10   Company was a mutual life insurance company that was

11   reorganized into a stock insurance company under New York

12   law, with its principal place of business in New York, doing

13   business in all fifty states.

14       Under 28 U.S.C. § 1292(b), a district court can certify

15   a question for interlocutory appeal if the issue “involves a

16   controlling question of law as to which there is substantial

17   ground for difference of opinion and [if] an immediate

18   appeal from the order may materially advance the ultimate

19   termination of the litigation.”      In ruling on a certified

20   question of law, “we have the discretion to entertain an

21   appeal of another ruling of the district court if the two

22   rulings were ‘inextricably intertwined’ or if ‘review of the

                                     7
1    [latter] decision was necessary to ensure meaningful review

2    of the former.’”   Ross v. Am. Express Co., 547 F.3d 137, 142

3    (2d Cir. 2008) (quoting In re Methyl Tertiary Butyl Ether

4    (“MTBE”) Prods. Liab. Litig., 488 F.3d 112, 122 (2d Cir.

5    2007) (quoting Swint v. Chambers County Comm’n, 514 U.S. 35,

6    51 (1995))); see also Golino v. New Haven, 950 F.2d 864, 868

7    (2d Cir. 1991) (“[W]here we have jurisdiction to consider

8    some questions on appeal, we may exercise our discretion to

9    take pendent jurisdiction over related questions.”).

10       The district court’s 2007 and 2009 decisions are

11   clearly related.   In 2007, the court determined that prior

12   to demutualization, “MetLife’s policyholders were the

13   clients for MetLife’s in-house and outside counsel, because

14   they were MetLife’s beneficiaries and the beneficiaries of

15   MetLife counsel’s advice.”   In re MetLife Demutualization

16   Litig., 495 F. Supp. 2d 310, 314 (E.D.N.Y. 2007).     The 2009

17   ruling explained similarly that “the problem, and

18   Debevoise’s problem, is they represented the policyholders

19   up until the day on the closing when they walked over across

20   the aisle and started representing the stockholders, if you

21   will, and [ ] the corporation more exactly . . . .”     Because

22   these two rulings are “inextricably intertwined,” we have

                                   8
1    jurisdiction to decide whether plaintiffs were, in fact,

2    clients of Debevoise.

3                                 III

4        We conclude that plaintiffs were not clients of

5    Debevoise.   It is well-settled that outside counsel to a

6    corporation represents the corporation, not its shareholders

7    or other constituents.   Evans v. Artek Sys. Corp., 715 F.2d

8    788, 792 (2d Cir. 1983) (“A ‘corporate attorney’--whether an

9    in-house lawyer or a law firm that serves as counsel to the

10   company--owes a duty to act in accordance with the interests

11   of the corporate entity itself.    [The] client is the

12   corporation.”).   This rule is entirely consonant with Rule

13   1.13 of the New York Rules of Professional Conduct, N.Y. R.

14   Prof’l Conduct § 1.13(a) (“[A] lawyer employed or retained

15   by an organization . . . is the lawyer for the organization

16   and not for any of the constituents.”), and with the

17   Restatement (Third) of the Rule Governing Lawyers, § 96 cmt.

18   b (explaining that a lawyer retained by a corporation has an

19   attorney-client relationship with the corporation, but the

20   lawyer “does not thereby also form a client-lawyer

21   relationship with all or any individuals employed by it or

22   who direct its operations or who have an ownership or other

                                   9
1    beneficial interest in it, such as shareholders”).

2        These principles apply as well to a mutual insurance

3    company.    Under New York law, “[a] mutual insurance company

4    is a cooperative enterprise in which the policyholders

5    constitute the members for whose benefit the company is

6    organized, maintained and operated.”     Fid. & Cas. Co. of

7    N.Y. v. Metro. Life Ins. Co., 248 N.Y.S.2d 559, 565 (N.Y.

8    Sup. Ct. 1963).    But a policyholder, “even in a mutual

9    company, [is] in no sense a partner of the corporation which

10   issued the policy, and . . . the relation between the

11   policy-holder and the company [is] one of contract, measured

12   by the terms of the policy.”     Uhlman v. N.Y. Life Ins. Co.,

13   17 N.E. 363, 365 (N.Y. 1888).

14       The district court’s 2007 decision reasoned that

15   plaintiffs were clients of Debevoise during the

16   demutualization “because they were MetLife’s beneficiaries

17   and the beneficiaries of MetLife counsel’s advice.”     In re

18   MetLife Demutualization Litig., 495 F. Supp. 2d 310, 314 (2d

19   Cir. 2007).    But this does not distinguish a mutual

20   insurance company from any other corporation.

21       Not every beneficiary of a lawyer’s advice is deemed a

22   client.    See N.Y. R. Prof’l Conduct 2.3(a) (“A lawyer may

                                     10
1    provide an evaluation of a matter affecting a client for the

2    use of someone other than the client if the lawyer

3    reasonably believes that making the evaluation is compatible

4    with other aspects of the lawyer’s relationship with the

5    client.”) (emphasis added); see also Fiala v. Metro. Life

6    Ins. Co., 6 A.D.3d 320, 322, 776 N.Y.S.2d 29, 32 (1st Dep’t

7    2004) (“[A]n insurance company does not owe its policyholder

8    a common-law fiduciary duty except when it is called upon to

9    defend its insured.”); N.Y. State Bar Ass’n, Comm. on Prof’l

10   Ethics, Op. No. 477 (1977) (explaining that the lawyer for

11   the executor of an estate need not provide substantive legal

12   advice to potential beneficiaries because doing so would

13   violate the lawyer’s duty to provide undivided loyalty to

14   his client, the executor).

15       In light of these principles, and without any

16   extraordinary circumstances raised by the parties, we

17   conclude that the policyholders in this case were not

18   clients of Debevoise.

19                                IV

20       Plaintiffs make the separate argument that

21   disqualification of Debevoise is proper by virtue of the

22   witness-advocate rule set out in Rule 3.7 of the New York

                                  11
1    Rules of Professional Conduct.        Subsection (a) of the Rule

2    provides, with certain exceptions, that “[a] lawyer shall

3    not act as an advocate before a tribunal in a matter in

4    which the lawyer is likely to be a witness on a significant

5    issue of fact.”     N.Y. R. Prof’l Conduct § 3.7(a).

6    Subsection (b) is broader, as it addresses imputation: “A

7    lawyer may not act as an advocate before a tribunal in a

8    matter if . . . another lawyer in the lawyer’s firm is

9    likely to be called as a witness on a significant issue

10   other than on behalf of the client, and it is apparent that

11   the testimony may be prejudicial to the client.”        See N.Y.

12   R. Prof’l Conduct § 3.7(b)(1).

13       Rule 3.7 lends itself to opportunistic abuse.        “Because

14   courts must guard against the tactical use of motions to

15   disqualify counsel, they are subject to fairly strict

16   scrutiny, particularly motions” under the witness-advocate

17   rule.   Lamborn v. Dittmer, 873 F.2d 522, 531 (2d Cir. 1989).

18   The movant, therefore, “bears the burden of demonstrating

19   specifically how and as to what issues in the case the

20   prejudice may occur and that the likelihood of prejudice

21   occurring [to the witness-advocate’s client] is

22   substantial.”     Id.   “Prejudice” in this context means

                                      12
1    testimony that is “sufficiently adverse to the factual

2    assertions or account of events offered on behalf of the

3    client, such that the bar or the client might have an

4    interest in the lawyer’s independence in discrediting that

5    testimony.”   Id.

6        As this definition suggests, the showing of prejudice

7    is required as means of proving the ultimate reason for

8    disqualification: harm to the integrity of the judicial

9    system.   We have identified four risks that Rule 3.7(a) is

10   designed to alleviate: (1) the lawyer might appear to vouch

11   for his own credibility; (2) the lawyer’s testimony might

12   place opposing counsel in a difficult position when she has

13   to cross-examine her lawyer-adversary and attempt to impeach

14   his credibility; (3) some may fear that the testifying

15   attorney is distorting the truth as a result of bias in

16   favor of his client; and (4) when an individual assumes the

17   role of advocate and witness both, the line between argument

18   and evidence may be blurred, and the jury confused.     Ramey

19   v. Dist. 141, Int’l Ass’n of Machinists & Aerospace Workers,

20   378 F.3d 269, 282-83 (2d Cir. 2004) (internal citations and

21   alterations omitted).   These concerns matter because, if

22   they materialize, they could undermine the integrity of the

                                   13
1    judicial process.   See Hempstead Video, Inc. v. Inc. Vill.

2    of Valley Stream, 409 F.3d 127, 132 (2d Cir. 2005) (“The

3    authority of federal courts to disqualify attorneys derives

4    from their inherent power to preserve the integrity of the

5    adversary process.”) (internal quotation marks omitted); see

6    also id. (emphasizing “the need to maintain the highest

7    standards of the profession”) (internal quotation marks

8    omitted).

9        In imputation cases (Rule 3.7(b)), the witness is not

10   acting as trial counsel; these concerns are therefore

11   “absent or, at least, greatly reduced.”   Ramey, 378 F.3d at

12   283 (internal quotation marks omitted); see also A.B.A.

13   Model Rules of Prof’l Conduct § 3.7 cmt. 5 (“Because the

14   tribunal is not likely to be misled when a lawyer acts as

15   advocate in a trial in which another lawyer in the lawyer’s

16   firm will testify as a necessary witness, [Model Rule

17   3.7(b)] permits the lawyer to do so except in situations

18   involving a conflict of interest.”).   Accordingly,

19   disqualification by imputation should be ordered sparingly,

20   see Kubin v. Miller, 801 F. Supp. 1101, 1114 (S.D.N.Y.

21   1992), and only when the concerns motivating the rule are at

22   their most acute.

                                   14
1        Therefore, we now hold that a law firm can be

2    disqualified by imputation only if the movant proves by

3    clear and convincing evidence that [A] the witness will

4    provide testimony prejudicial to the client, and [B] the

5    integrity of the judicial system will suffer as a result.

6    This new formulation is consistent with our prior efforts to

7    limit the tactical misuse of the witness-advocate rule.

8    See, e.g., Lamborn, 873 F.2d at 531.

9                                  A

10       In this case, four Debevoise lawyers are likely to be

11   called to testify at trial.   Three of them are transactional

12   lawyers who are not and will not be trial advocates; the

13   fourth, a litigator, is a member of the trial team, but will

14   not act as an advocate before the jury.   None of these

15   witnesses, then, is properly considered trial counsel for

16   purposes of Rule 3.7(a).   See Ramey, 378 F.3d at 283 (“The

17   advocate-witness rule applies, first and foremost, where the

18   attorney representing the client before a jury seeks to

19   serve as a fact witness in that very proceeding.”) (first

20   emphasis added).   If the rule applies here at all,

21   therefore, it will be subsection (b) (imputation), and

22   plaintiffs do not contend otherwise.

                                   15
1                                   B

2           The parties dispute whether the Debevoise lawyer-

3    witnesses will give testimony so prejudicial to MetLife that

4    the integrity of the judicial system may be threatened and

5    disqualification warranted.    Our review of the record

6    suggests that the Debevoise witnesses will do little more

7    than authenticate documents and confirm facts that do not

8    appear to be in dispute.    For example, plaintiffs state that

9    they intend to use the testimony of Wolcott Dunham, a

10   Debevoise transactional lawyer, to show that MetLife

11   “intentionally or recklessly omitted material facts from the

12   prospectus.”    A review of the cited deposition excerpts,

13   however, reveals only that Dunham testified that it was

14   inaccurate to characterize a policyholder’s interest in the

15   company as “ownership.”    MetLife argues that this testimony

16   is not adverse to its position in this litigation.

17   Plaintiffs assert that MetLife is wrong, but do not explain

18   why.

19          Plaintiffs contend that they will use the testimony of

20   James Scoville, another Debevoise transactional lawyer, to

21   establish that “MetLife revealed that a significant portion

22   of the value of the Demutualization that it had said was set

                                    16
1    aside for policyholders was in fact earmarked for new

2    stockholders.”   A review of the cited deposition testimony,

3    however, shows that Scoville testified only to what various

4    written documents clearly state.   It appears that at most

5    Scoville will be asked to authenticate those documents.      And

6    the same is true for the remaining witnesses.

7        We doubt that, on this record, the testimony at issue

8    is sufficiently prejudicial to MetLife to warrant

9    disqualification.   We recognize, however, that we are not in

10   a good position to answer this question; and there is no

11   finding by the district court on this issue of fact.

12       Even if we assume that some portion of the Debevoise

13   lawyers’ testimony will be adverse to MetLife (when

14   considered in a context that we cannot fully evaluate or

15   appreciate on this interlocutory appeal), plaintiffs have

16   failed to establish the clear and convincing evidence of

17   prejudice necessary to justify the extreme remedy of

18   disqualification by imputation.

19       First (as noted above), the concerns motivating Rule

20   3.7 are attenuated where, as here, the witness-“advocate” is

21   not someone who will be trying the case to the jury.

22   Therefore, plaintiffs seeking disqualification under Rule

                                   17
1    3.7(b) must make a considerably higher showing of prejudice

2    than would be required under Rule 3.7(a).   From the outset,

3    then, we are inclined to conclude that disqualification is

4    inappropriate in this case.

5        Second, MetLife’s desire to keep Debevoise as its trial

6    counsel, plainly evidenced by MetLife’s position in this

7    appeal, militates strongly against a finding of prejudice.

8    This appeal has been prosecuted in large part by MetLife’s

9    in-house lawyers, who have argued to this Court that

10   disqualification was improper and that Debevoise should be

11   reinstated, notwithstanding that Debevoise non-advocate

12   lawyers are scheduled to testify as fact witnesses during

13   trial.   We are reluctant to conclude that MetLife, a

14   sophisticated client with sophisticated in-house counsel,

15   has a radically defective understanding of the case after

16   nine years of litigation.

17                                 C

18       Even if plaintiffs could convince us that allowing

19   Debevoise to remain as MetLife’s trial counsel poses some

20   threat to the integrity of the judicial process, we must

21   also consider whether that vital interest may be harmed by

22   disqualification.   Parties have a well-recognized and

                                   18
1    entirely reasonable interest in securing counsel of their

2    choice.   Prospective jurors, who must leave their homes and

3    occupations to serve, have an interest in judicial

4    efficiency, an interest that we respect.     Other litigants,

5    whose pending matters are affected or delayed by

6    developments in other cases, are also harmed by the

7    uncertainties caused by disqualification.     And the public in

8    general has an interest in the swift and orderly

9    administration of justice.

10       In this case, disqualification would require MetLife to

11   retain new counsel.     Appreciable time and money would be

12   spent to bring new counsel to the state of readiness that

13   Debevoise attained after more than nine years of work.        And

14   other circumstances intensify the harm to MetLife: several

15   billions of dollars are at stake, the legal issues are

16   complex, pretrial litigation has been ongoing for more than

17   nine years, and disqualification occurred on the eve of

18   trial.

19       Finally, plaintiffs’ lengthy and unexcused delay in

20   bringing its motion to disqualify weighs against

21   disqualification.     When plaintiffs filed this lawsuit in

22   2000, they knew that Debevoise had represented MetLife

                                     19
1    during demutualization and that it would continue to

2    represent MetLife in this litigation.   But plaintiffs did

3    not move to disqualify even when, seven years later, the

4    district court ruled that plaintiffs were clients of

5    Debevoise.   Instead, plaintiffs waited until after

6    settlement negotiations broke down, five weeks before trial

7    was scheduled to begin, to finally file their motion.

8        Plaintiffs’ delay, which suggests opportunistic and

9    tactical motives, magnify the harms to the judicial system

10   that already inhere in any disqualification by imputation,

11   abuse the expectations of jurors, and has the general

12   tendency to impair rather than promote confidence in the

13   integrity of the judicial system.

14       The foregoing reasons, which weigh against finding an

15   adverse impact on the integrity of the judicial system,

16   reinforce our conclusion that plaintiffs have failed to show

17   by clear and convincing evidence that any of the Debevoise

18   lawyers’ testimony would be so prejudicial to MetLife that

19   the integrity of the judicial system would be threatened.

20   Consequently, the witness-advocate rule does not justify

21   disqualification in this case.

22

                                   20
1                            CONCLUSION

2       Based on the foregoing analysis, we reverse the

3   disqualification order and reinstate Debevoise as trial

4   counsel to MetLife in the underlying securities litigation.

                                 21