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Delaware Bankruptcy Court Denies Motion to Disqualify Law Firm

By Justin R. Alberto

On February 2, 2015, Judge Christopher S. Sontchi of the Delaware Bankruptcy Court denied a motion to disqualify a law firm from representing a defendant in an adversary proceeding filed in the bankruptcy cases of Orchard Supply Hardware Stores (the “Debtors”).  The plaintiffs, Alamo Group and one of its affiliates (the “Plaintiffs”), sought damages from Defendant A&G Realty Partners (the “Defendant”) based on a transaction where the Plaintiffs purchased assets from the Debtors and the Defendant served as the Debtors’ retained real estate professionals. Specifically, the Plaintiffs alleged that the Defendants fraudulently concocted a competing bid to induce the Plaintiffs to increase their purchase price by approximately 375% from the opening bid.

After briefing was complete on the Defendant’s motion to dismiss, the Plaintiffs filed a motion to disqualify the Defendant’s counsel.  The Plaintiffs argued that counsel’s four previous representations of the Plaintiffs created a conflict that the Plaintiff has not waived.  In the first action, the law firm assisted the Plaintiffs in procuring local counsel, but did not have any substantive involvement.  In the second and third actions, the law firm actively litigated on behalf of the Plaintiffs, but ultimately withdrew as counsel.  In the fourth action, the law firm successfully negotiated a settlement on the eve of trial.  Each of the four engagements involved transactions different from the one at issue and each concluded several months before the current dispute.  Notwithstanding, the Plaintiffs alleged that counsel was conflicted from representing the Defendant because over the course of its prior representations of the Plaintiffs, it became privy to extensive confidential information regarding the Plaintiffs’ general investing and litigation strategies.

The Court disagreed with the Plaintiffs’ arguments.  Rule 1.9 of the Model Rules of Professional Conduct provides that a law firm cannot represent a client in a substantially related matter in which the client’s interests would be materially adverse to the interests of a former client.  To determine whether a substantial relationship exists, the Court inquired into whether the Defendant might have gained in the prior representation confidential information that may be used to the Plaintiffs’ detriment.  Ultimately, the Court found no substantial relationship between the current dispute and any of the four prior matters for which the Defendant represented the Plaintiffs.  Specifically, the prior actions arose out of different facts, legal theories and transactions and the allegation that mere litigation and investing strategies might have been learned by the Defendant is too attenuated an assertion to give rise to a conflict of interest.

A copy of the opinion can be found here.

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