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Disqualifying Opposing Counsel: How long to wait?

In re 444 North Northwest Hwy, LLC

444 North Northwest Hwy. LLC and Northbrook Bank & Trust were embroiled in a foreclosure action in the Illinois courts when 444 filed for Chapter 11 protection and became the Debtor in Possession.

The parties faced off over numerous issues in Bankruptcy Court; so the Judge consolidated the issues for trial. 3 days before the trial date however, the Debtor in Possession brought a motion to disqualify the lawyers for the bank, Much Shelist, based on “conflicts” arising from contact between a lawyer at Much Shelist and the principal of 444 North, John Heintz.

Of course neither the lawyer that spoke with Heintz, nor Much Shelist itself, had represented the Debtor. In fact, Heinz once stated on the record that he did not recognize that firm name. His memory had apparently failed right up until he swore out the affidavit days before trial.

Foul Play or Playing Foul?

In the Bankruptcy context Attorney disqualification means a lawyer or law firm can no longer serve the Client, period. The 444 Court described disqualification as “a drastic measure to be taken” only when “absolutely necessary.” Meanwhile, tactically a motion to disqualify can be useful whether or not it succeeds. Either it throws off the opponent’s momentum or it sows a seed of suspicion between the opposing party and it’s lawyers 

But the Debtor in Possession argued that Much Shelist should be disqualified under the plain meaning of the Illinois rules of professional conduct. No dirty tricks – just the law. The Court did not agree. First, it went out of its way to note that the Federal District Court’s local rules applied, not the Illinois rules. Then, it went on to apply Local Rules 83.51(9)(a) and 83.51.10.

Local Rule 83.51(9)(a) holds that a lawyer who previously represented a client may not represent another party in the same or substantially related matter in which that party’s interest is adverse to that of the former client – without written consent.

Local Rule 83.51.10 is a follow-up: it holds that a lawyer who becomes aware that another lawyer from that firm is barred from taking a case due to 83.51.9(a) cannot avoid the conflict by stepping in and taking the case instead. 

At first blush the Local Rules mean Much Shelist is in hot water. There was no doubt a Much Shelist lawyer had discussed aspects of the foreclosure with the Debtor but now represented one of 444’s creditors in the bankruptcy or that the rapidly approaching trial was substantially related to that advice. It looked like a case of foul play. 

Never Underestimate Logic

Ultimately the Court emphasized the delay between Much Shelist’s entry into the case for the bank and the Debtor’s last-minute revelations. It then came down on the side of logic by holding that the Debtor waited too long to reveal its bombshell.The result left little or no time for the bank to find new lawyers and clearly the Debtor was gaming the system.

The Court classified the delay as extraordinary and noted that, considering the pace of the trial, the bank would probably not be able to find new counsel at all; let alone counsel that could prepare in time. Finally, the Court noted that granting the motion would unduly reward an obvious ploy and prejudiced the bank. 

Reading Between the Lines

The Court’s Opinion never establishes whether the Debtor knowingly refrained from objecting to Much Shelist’s involvement until the last minute. But reading between the lines, the Court didn’t believe the Debtor.Once more the outcome was the logical one: that a business facing foreclosure doesn’t suddenly forget the law firms and lawyers that it consults. Furthermore, it looks like the timing of the Debtor’s revelation suggested a more nefarious intent.

Whether or not you believed the Debtor there were lessons here. Most importantly, it seems like a good idea to keep track of all lawyers and law firms contacted, even if via something as simple and informal as an e-mail or voice mail. A simple record of communications can repair even the most implausible story and satisfy the Court.

M. Hedayat & Associates, P.C.represents debtors in Chapter 11 and conducts trials in both State and Federal Court, including Bankruptcy Court. We represent small businesses as well as entrepreneurs. Call us at 630-378-2200 or reach us at mhedayat@mha-law.com for a no cost consultation.

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