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Enslein v. Mase

United States District Court, W.D. Missouri, Western Division

March 22, 2018

JERALD S. ENSLEIN, in his capacity as Trustee for Xurex, Inc., Plaintiff,
v.
GIACOMO E. DI MASE, et al., Defendants.

          ORDER AND OPINION DENYING DEFENDANT DURASEAL PIPE COATINGS COMPANY, LLC'S MOTION TO DISQUALIFY POLSINELLI PC

          ORTRIE D. SMITH, SENIOR JUDGE.

         Pending is Defendant Duraseal Pipe Coatings Company, LLC's (“DPCC”) motion to disqualify Polsinelli PC due to conflicts of interest. Doc. #142. Plaintiff, in his capacity as Chapter 7 Trustee for Xurex, Inc., hired the law firm of Polsinelli PC as litigation counsel to pursue various claims related to Xurex's bankruptcy. DPCC, a creditor of Xurex, is named as a Defendant in this suit brought by Polsinelli's attorney on behalf of the trustee, their client. For the reasons stated below, the Court denies the motion.

         The Court first considers whether DPCC's objection to Polsinelli's representation was waived by failing to timely bring the issue to the Court's attention. Next, the Court considers whether disqualification of Polsinelli is warranted on the facts presented in this matter. Local Rule 83.6(c)(1) of this Court adopts the Code of Professional Responsibility adopted by the Missouri Supreme Court. L.R. 83.6(c)(1). The Missouri Supreme Court has “emphasized that the public must have confidence in the integrity of the judicial system, and “every client has a right to expect the loyalty of his attorney in the matter for which he is retained.” Polish Roman Catholic St. Stanislaus Parish v. Hettenbach, 303 S.W.3d 591, 597-98 (quoting In re Carey, 89 S.W.3d 477, 496 (Mo. banc 2002)) (internal citation omitted). The Court must not only “dispense justice” but also “maintain the integrity of the judicial system.” Id. (citations and internal quotations omitted).

         The Court is mindful that “disqualification, as a prophylactic device for protecting the attorney-client relationship, is a drastic measure which courts should hesitate to impose except when absolutely necessary. A disqualification of counsel, while protecting the attorney-client relationship, also serves to destroy a relationship by depriving a party of representation of their own choosing.” Freeman v. Chicago Musical Instrument Co., 689 F.2d 715, 721 (7th Cir. 1982) (citations omitted). “Disqualification often results in increased expenses, delay in resolution of the proceedings, and always deprives a party of its choice of counsel.” Kinzenbaw v. Case, L.L.C., No. C01-133LRR, 2004 WL 1146462, at *4 (N.D. Iowa May 20, 2004).

         A. Timeliness

         When faced with a motion to disqualify counsel, the Court may consider the timeliness of the motion. Polish Roman Catholic St. Stanislaus Parish, 303 S.W.3d at 599 (citation omitted). “A timeliness requirement ensures that the Rules of Professional Conduct are applied for their intended purpose, to regulate the conduct of counsel, and not as a weapon against an attorney's client.” Id. The Eighth Circuit has held that waiver alone is a valid basis for the denial of a motion to disqualify. Cent. Milk Producers Coop. v. Sentry Food Stores, Inc., 573 F.2d 988, 992 (8th Cir. 1978).

         Accordingly, “[a] motion to disqualify should be made with reasonable promptness after the party becomes aware of the conflict to prevent the party from using disqualification as a strategic tool to deprive his opponent of counsel of his choice after substantial preparation has been completed.” Terre Du Lac Prop. Owners' Ass'n, Inc. v. Shrum, 661 S.W.2d 45, 48 (Mo.Ct.App. 1983). A party who knowingly refrains from asserting a prompt objection to opposing counsel is deemed to have waived the objection. Id. The relevant timeframe for filing a motion to disqualify “commences when the moving party either first learned or reasonably should have learned of the…conflict of interest.” Polish Roman Catholic St. Stanislaus Parish, 303 S.W.3d at 599 (citation omitted).

         On January 29, 2016, Plaintiff, acting as bankruptcy trustee for Xurex, Inc., submitted to the Bankruptcy Court an Application to Employ Polsinelli P.C. as Special Litigation Counsel for Trustee Nunc Pro to July 26, 2015. Bankr. Case #14-43536-drd7, Doc. #95. DPCC received notice of this application more than once. Bankr. Case #14-43536-drd7, Docs. #95, at 7; 96; 99. In the application, regarding potential conflicts, an affidavit submitted by Plaintiff's counsel Todd Bartels disclosed “another attorney at Polsinelli previously represented creditor Duraseal Coatings Company LLC, in a review of a non-disclosure agreement with a third-party and in the drafting of an agreement between Duraseal Coatings Company LLC and debtor Xurex, Inc. not at issue in this matter but said representation ceased in November 2013.” Bankr. Case #14-43536-drd7, Doc. #95, at 13.

         On February 23, 2016, the Bankruptcy Court granted Plaintiff's application to employ Polsinelli as special litigation counsel. Bankr. Case #14-43536-drd7, Doc. #102. DPCC received notice of the Bankruptcy Court's approval of Polsinelli to act as special litigation counsel on Plaintiff's behalf. Bankr. Case #14-43536-drd7, Doc. #106. On March 11, 2016, Plaintiff's counsel sent DPCC and Defendant Duraseal Holding, S.r.L. a litigation hold letter, notifying them of potential litigation concerning the exclusive license, marketing, and distribution agreements and amendments thereto between the Duraseal entities and debtor Xurex. Doc. #147-2. On August 31, 2016, Plaintiff filed an adversary proceeding (Adversary Proceeding Case #16-04103-drd, Doc. #1). The reference to the Bankruptcy Court was withdrawn, and the matter is now pending before this Court.

         When this matter commenced, DPCC was represented by Spencer Fane LLP (“Spencer Fane”), but it is unclear precisely when DPCC's engagement with Spencer Fane began. The Court believes DPCC was represented by Spencer Fane when Polsinelli issued the litigation hold letter in March 2016. Spencer Fane represented DPCC, Defendants Lee Kraus, Jose Di Mase, Giacomo Di Mase, and Duraseal Holdings S.r.L. until counsel moved to withdraw, citing non-payment of fees, on July 28, 2017. Docs. #64-65. The Court granted Spencer Fane's request. Doc. #66.

         Defendants DPCC, Duraseal Holdings S.r.L., Jose Di Mase, Giacomo Di Mase, and Lee Kraus then proceeded pro se until November 29, 2017, when new counsel entered an appearance in this matter on behalf of each of the above Defendants. Doc. #123. In December 2017, DPCC's counsel requested Duraseal files from Spencer Fane. Upon review of this information held by Defendants' prior counsel and accessible to Defendants, current counsel found invoices, marketing materials, and an engagement letter for work Polsinelli performed on behalf of DPCC from April to November 2013. After seeing these materials, DPCC's counsel inquired about the nature of the previous representation, and received copies of the DPCC client filed maintained by Polisnelli, as well as email communications between DPCC officers and two Polsinelli attorneys involved in the prior representation.

         Although DPCC's current counsel is a relatively new addition to this matter and is first to move for disqualification of Plaintiff's chosen attorney, the Court finds any objection by DPCC, or any other party, to Polsinelli's involvement in this matter has been waived for failure to timely raise it. Starting with the trustee's application to employ Polsinelli, DPCC and its officers were aware of Polsinelli's involvement in this matter. Polsinelli attorney Todd Bartels's affidavit submitted as part of that application informed the Bankruptcy Court and the parties that DPCC had been represented by Polsinelli previously. DPCC and others were then made aware of potential litigation via the March 2016 litigation hold letter sent by Polsinelli and printed on Polsinelli letterhead. Polsinelli attorneys spoke with DPCC CEO Lee Kraus and his former counsel on at least one occasion in April 2016. DPCC and its officers were then named in the Complaint filed by Polsinelli on behalf of Plaintiff in October 2016. Any of these moments would have been an appropriate time to investigate and ask about potential conflicts stemming from Polsinelli bringing suit against a former client.

         DPCC's counsel disputes whether anyone actually knew of Polsinelli's previous representation of DPCC. As a company, DPCC can obtain knowledge only through its agents and, under the well-established rules of agency, the knowledge of agents obtained in the course of their employment is imputed to the company. Wandersee v. BP Prod. N. Am., Inc., 263 S.W.3d 623, 629 (Mo. banc 2008) (citation omitted). According to the Complaint, Jose Di Mase is the controlling shareholder of DPCC. Doc. #1-2, at 4. Giacomo Di Mase, Jose's son, was a member of the DPCC Board of Directors. Doc. #1-2, at 3. Although the Complaint is not specific, and the Court does not know an exact date, Lee Kraus was a member of DPCC's Board of Directors, and served as its CEO “since late-2013.” Doc. #1-2, at 4. The Court finds it difficult to believe the Di Mases and Kraus, as either board members or in Kraus's role as CEO, would not have known which law firms the company engaged for various matters or would not have received reports from employees detailing such information.

         In further support of DPCC's allegation that no one actually knew of the potential conflict, DPCC notes Bruce Hollister and Jack Angel were “separated” from the company since November or December 2013. Hollister, DPCC's former Chief Financial Officer, and Angel, DPCC's former CEO, not only hired Polsinelli, but also served as contacts throughout the working relationship between DPCC and the firm. Eric DesRoche, Vice President of Business Development for the Automotive Division, was also ...


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