Imputed-conflict-of-interest rules did not disqualify lawyer in bankruptcy case

November 4, 3:46 PMHouston U.S. District Court ExaminerFrank Taylor

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A three-judge panel of the United States Court of Appeals for the Fifth Circuit has reversed a ruling that an imputed conflict of interest disqualified a Houston attorney from representing a creditor whose interests were adverse to those of one of his former employer’s clients in a bankruptcy case. In a written opinion on October 30, 2009 (Fifth Circuit docket number 08-20398), the panel considered Rule 1.09 of the Texas Disciplinary Rules of Professional Conduct and Rule 1.9 of the Model Rules of Professional Conduct.

You can currently find the Texas Disciplinary Rules of Professional Conduct on the "Professional Requirements for Attorneys" page of the website of the State Bar of Texas. A version of the American Bar Association’s Model Rules of Professional Conduct is now available online at the website of Cornell University Law School’s Legal Information Institute, which also offers its American Legal Ethics Library.

The meaning of the term “conflict of interest,” by itself, seems relatively straightforward; a prominent law dictionary defines the term in part as “[a] real or seeming incompatibility between the interests of two of a lawyer’s clients, such that the lawyer is disqualified from representing both clients if the dual representation adversely affects either client or if the clients do not consent” [Black’s Law Dictionary 341 (9th ed. 2009)]. When you add “imputed” to the term, a conflict of interest could affect an attorney who does not personally represent a client. This was the situation in Kennedy v. Mindprint Inc. (case number 4:08-cv-01598 in the U.S. District Court for the Southern District of Texas).

The relevant facts can be found in the Fifth Circuit’s opinion and in a May 8, 2008, order from Bankruptcy Judge Karen Brown. The case involves an attorney, Kirk Allen Kennedy, who was an associate in the bankruptcy section of the Houston law firm of Jackson Walker L.L.P. during 2003 and 2004. Even before Mr. Kennedy joined the firm, another Jackson Walker lawyer, Lionel Schooler, had represented MindPrint Inc., one of the creditors in the bankruptcy proceeding and a party in a related state-court lawsuit. ProEducation International, Inc., was a defendant in the state-court lawsuit and the debtor in the bankruptcy case.

Mr. Kennedy’s office at Jackson Walker was down the hall from the office of Mr. Schooler. After he left Jackson Walker, Mr. Kennedy began to represent a ProEducation shareholder who had been a party in the state-court lawsuit and was involved in an adversary proceeding in bankruptcy court. Mindprint filed a motion to disqualify Mr. Kennedy from representing the shareholder in the adversary proceeding, and Bankruptcy Judge Karen Brown granted the motion. Judge Brown did not allow Mr. Kennedy to rebut, or disprove, a presumption that Mr. Schooler shared confidential information with other members of the law firm.

In a June 13, 2008, order, District Judge Lynn Hughes agreed with the disqualification because, “[a]lthough Kennedy did not directly work on MindPrint’s case in the bankruptcy of ProEducation International, Inc., he worked in the same section and branch that represented that client.” Judge Hughes further observed that “Kennedy at least should have known that representing an adversary of his former firm in continuing litigation was impermissible without MindPrint’s consent.”

On appeal, the Fifth Circuit panel determined that, “[u]nder both the Texas Rules and the ABA Model Rules, Kennedy should have had the opportunity to demonstrate that he did not obtain confidential information regarding MindPrint during his time at Jackson Walker.” The Panel further determined that "Kennedy presented uncontradicted evidence that he was unaware of MindPrint’s existence—let alone Schooler’s representation of MindPrint—during his affiliation with Jackson Walker." In the end, the panel concluded that, “[w]hen Kennedy ended his affiliation with Jackson Walker without personally acquiring confidential information about MindPrint, his imputed disqualification also ended.”

The panel’s decision is obviously good news for individual attorneys. The decision could also have an impact on the management of law firms, particularly large firms such as Jackson Walker.