UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 93-9189
FEDERAL DEPOSIT INSURANCE CORPORATION,
AS MANAGER FOR THE FSLIC RESOLUTION FUND,
Plaintiff-Appellant,
versus
UNITED STATES FIRE INSURANCE COMPANY,
Defendant-Appellee.
Appeal from the United States District Court
For the Northern District of Texas,
(April 12, 1995)
Before REYNALDO G. GARZA, DeMOSS and BENAVIDES, Circuit Judges.
DeMOSS, Circuit Judge:
This is the second interlocutory appeal of an attorney
disqualification order. In the underlying litigation, plaintiff-
appellant, the Federal Deposit Insurance Corporation ("FDIC"),
successor to the rights of Irving Savings Association ("Irving
Savings"), seeks to recover on an insurance policy issued by
defendant-appellee, the United States Fire Insurance Company ("U.S.
Fire"). To establish certain of its affirmative defenses, U.S. Fire
1
plans to call as witnesses Ann Kenney and Jeff Hurt, two of the
attorneys representing the FDIC. U.S. Fire moved the district court
to disqualify Kenney, Hurt, and their law firm, Leonard, Marsh,
Hurt, Terry & Blinn, P.C. ("LMHT&B" or "the firm"), asserting that
the FDIC would be prejudiced if its attorneys served as both
advocates and witnesses at trial. The district court granted U.S.
Fire's motion to disqualify despite the FDIC's informed consent to
the representation. In the first appeal, we remanded the cause for
reconsideration in light of recent precedents. On remand, the
district court granted U.S. Fire's motion a second time and ordered
attorneys Kenney and Hurt, and LMHT&B, disqualified from
representing the FDIC in this case. Once again, the FDIC appealed,
challenging the disqualification of Hurt and the law firm, but not
appealing Kenney's disqualification. We AFFIRM the district court's
order as to the disqualification of Hurt. We VACATE the order to
the extent that it disqualifies LMHT&B, and we REMAND the matter to
the district court with instructions to deny the motion as to
LMHT&B.
I. FACTUAL BACKGROUND
In December 1982, U.S. Fire issued a savings and loan blanket
bond to Irving Savings. The bond insured against certain losses
that the savings and loan might suffer, including those arising
from the fraudulent or dishonest conduct of Irving Savings'
employees. Under the terms of the bond, Irving Savings was covered
2
for losses incurred through dishonesty only if it filed notice and
proof of loss with U.S. Fire no more than 100 days after
discovering the dishonesty.
In 1984 Irving Savings retained Hurt and LMHT&B to represent
it in several out-of-state collection matters. Earl Hall, a deputy
commissioner of the Texas Savings and Loan Department ("TSLD"),
contacted Hurt on behalf of Irving Savings in late August. In
September 1984, with the concurrence of Hall and the TSLD, Irving
Savings formally engaged LMHT&B to help collect on some of its
loans. The savings and loan, under the direction of the TSLD,
turned over various loan transactions to Hurt within the next few
weeks. On November 8, 1984, Hurt attended a meeting of the board of
directors of Irving Savings. At this meeting, the directors
discussed problem loans. According to the minutes of the meeting,
Hurt notified the board that it appeared that various officers of
Irving Savings had breached their fiduciary duties by making loans
that were uncollectible. Hurt stated that in his opinion some of
these loans had been uncollectible at the time they were made.
Hurt soon turned over day-to-day management of the Irving
Savings collection effort to Kenney, then an associate with LMHT&B.
By the first quarter of 1985, Kenney was Irving Savings' primary
contact at LMHT&B, and the savings and loan was referring matters
directly to her. One of Kenney's responsibilities was to serve as
a conduit for information between Irving Savings, its out-of-state
counsel, and another law firm employed by Irving Savings, Jenkins
& Gilchrist. Ronald Rosener was Irving Savings' primary contact at
3
Jenkins & Gilchrist.
Irving Savings retained John C. Eichman of Jenkins & Gilchrist
in the spring of 1985 to investigate the possibility of a bond
claim. On May 17, 1985, Eichman sent U.S. Fire a written notice of
loss on behalf of Irving Savings. At Eichman's request, Kenney sent
letters to Irving Savings' out-of-state counsel inquiring about
potential bond claims. Kenny prepared a written summary, dated June
21, 1985, which contained information she had received from these
out-of-state counsel, out-of-state publications, Irving Savings,
and Jenkins & Gilchrist attorneys. Based on the information he
received from Kenney and others, Eichman filed a claim with U.S.
Fire alleging a covered loss arising out of the dishonesty of four
Irving Savings employees.1 He prepared a proof of loss on behalf of
Irving Savings and sent it to U.S. Fire on August 14, 1985.
On July 21, 1986, Jenkins & Gilchrist turned over
representation of Irving Savings on the bond claim to LMHT&B. From
that date until December 10, 1987, Kenny acted as the liaison
between Irving Savings and U.S. Fire's retained counsel, the Law
Offices of Paul Vernon. In August or September 1986, Vernon turned
over the investigation to his associate Mike Duray.
The parties disagree about how to characterize what happened
next. Kenney was not immediately forthcoming with all of the
paperwork requested by Duray. On the ground that they contained
1
Irving Savings later broadened the claim to include the
dishonesty of a fifth employee. An additional claim was made
against the former president of Irving Savings for acts of
negligence.
4
privileged communications, she redacted portions of the minutes of
Irving Savings' board of directors meetings before sending them to
Duray. Kenney did not provide copies of some other documents
specifically requested by Duray. She also delayed executing an
amended reservation of rights agreement for several months despite
Duray's repeated inquiries. Duray and U.S. Fire accuse Kenney of
deliberate obstruction and bad faith. Kenny and the FDIC
characterize her conduct as innocent error or oversight.
II. PROCEDURAL BACKGROUND
On December 10, 1987, Irving Savings filed a complaint in the
district court, alleging that U.S. Fire had breached its
contractual obligations under the blanket bond. U.S. Fire answered
the lawsuit and denied liability under the bond. Shortly thereafter
Irving Savings was declared insolvent and the Federal Savings and
Loan Insurance Corporation ("FSLIC") was named as receiver.
U.S. Fire filed a motion to disqualify Kenney and Hurt as
counsel for the FSLIC on the ground that they might be called as
witnesses. On July 21, 1989, Irving Savings amended its complaint
to include an allegation of a breach of duty of good faith. In its
second amended answer, U.S. Fire asserted 21 affirmative defenses,
including three that are relevant to the issue of attorney
disqualification: comparative bad faith, discovery, and takeover.
Appellant FDIC was formally substituted for the FSLIC as plaintiff
in the litigation on January 3, 1990. Three weeks later, U.S. Fire
filed a supplemental motion to disqualify counsel for the FDIC.
In June 1991, the district court held a three-day evidentiary
5
hearing on U.S. Fire's motions to disqualify the FDIC's counsel. At
the hearing, U.S. Fire called as witnesses Robert Nelson, the
former executive vice-president and treasurer of Irving Savings,
and Duray, Kenney, and Hurt. Irving Savings cross-examined each of
the witnesses, and additionally, midway through its cross-
examination of Kenney and just before the hearing was recessed at
the end of the second day, Irving Savings called as a witness
Robert DeHenzel, senior attorney in the FDIC's professional
liability section. DeHenzel testified that he was familiar with
both the motion to disqualify FDIC's counsel and the testimony of
the previous three witnesses. As the FDIC supervisor responsible
for the instant action, DeHenzel verified that the FDIC consented
to the continuation of LMHT&B as counsel despite U.S. Fire's
argument that the FDIC might be prejudiced by the continued
representation of the firm. Notwithstanding this consent, after the
evidentiary hearing, the district court signed an order granting
U.S. Fire's motion to disqualify Kenney and Hurt, and the law firm
LMHT&B.
Pursuant to 28 U.S.C. § 1292(b), the district court granted
certification and we granted leave for an interlocutory appeal.
After briefing and oral argument, we vacated the order of the
district court and remanded the matter for reconsideration in light
of In re American Airlines, Inc., 972 F.2d 605 (5th Cir. 1992),
cert. denied 113 S. Ct. 1262 (1993), and In re Dresser Industries,
Inc., 972 F.2d 540 (5th Cir. 1992).
On remand, the district court again ordered that Kenney, Hurt,
6
and LMHT&B be disqualified as counsel for the FDIC. The district
court based its analysis of U.S. Fire's disqualification defenses
-- bad faith, discovery, and takeover2 -- on joint application of
three different canons of ethics, the Texas Disciplinary Rules of
Professional Conduct ("Texas Rules"),3 the American Bar Association
2
Although takeover is the third defense relevant to U.S.
Fire's disqualification motion, the takeover issue is not before us
in this interlocutory appeal. U.S. Fire had contended that the TSLD
and the Federal Home Loan Bank Board took over Irving Savings in
the fall of 1984 and that consequently, under the terms of the
bond, coverage was terminated at that time. The FDIC argued that
Kenney and Hurt are not necessary witnesses on this issue, because
whatever knowledge they possess about the takeover is also known by
many former Irving Savings employees. After consulting the relevant
ethical canons, the district court concluded that U.S. Fire's
takeover theory did not justify the disqualification of LMHT&B.
U.S. Fire has not cross-appealed the district court ruling on this
defense. Therefore, we do not address the question of takeover.
3
Patterned after the Model Rules, the Texas Rules came into
effect January 1, 1990. Texas Rule 3.08, Lawyer as a Witness,
provides:
"(a) A lawyer shall not accept or continue employment in
a contemplated or pending adjudicatory proceeding if the
lawyer knows or believes that the lawyer is or may be a
witness necessary to establish an essential fact on behalf of
the lawyer's client, unless:
(1) the testimony relates to an uncontested issue;
(2) the testimony will relate solely to a matter of
formality and there is no reason to believe that
substantial evidence will be offered in opposition to the
testimony;
(3) the testimony relates to the nature and value
of legal services rendered in the case;
(4) the lawyer is a party to the action and is
appearing pro se; or
(5) the lawyer has promptly notified opposing
counsel that the lawyer expects to testify in the matter
and disqualification of the lawyer would work substantial
hardship on the client.
(b) A lawyer shall not continue as an advocate in a
pending adjudicatory proceeding if the lawyer believes that
the lawyer will be compelled to furnish testimony that will be
substantially adverse to the lawyer's client, unless the
client consents after full disclosure.
(c) Without the client's informed consent, a lawyer may
7
Model Rules of Professional Conduct ("Model Rules"),4 and the ABA
Model Code of Professional Responsibility ("Model Code").5
not act as advocate in an adjudicatory proceeding in which
another lawyer in the lawyer's firm is prohibited by
paragraphs (a) or (b) from serving as an advocate. If the
lawyer to be called as a witness could not also serve as an
advocate under this Rule, that lawyer shall not take an active
role before the tribunal in the presentation of the matter."
SUPREME COURT OF TEXAS, RULES GOVERNING THE STATE BAR OF TEXAS art. X, § 9
(Texas Disciplinary Rules of Professional Conduct) Rule 3.08
(Vernon 1990).
4
The ABA adopted the Model Rules in 1983 as a replacement
for the Model Code. The Model Rule that addresses attorney
disqualification is Rule 3.7, Lawyer as Witness:
"(a) A lawyer shall not act as advocate at a trial in
which the lawyer is likely to be a necessary witness except
where:
(1) the testimony relates to an uncontested issue;
(2) the testimony relates to the nature and value of
legal services rendered in the case; or
(3) disqualification of the lawyer would work a
substantial hardship on the client.
(b) A lawyer may act as advocate in a trial in which
another lawyer in the lawyer's firm is likely to be called as
a witness unless precluded from doing so by rule 1.7 or rule
1.9."
MODEL RULES OF PROFESSIONAL CONDUCT, Rule 3.7 (1992).
5
In DR 5-102, Withdrawal as Counsel When the Lawyer Becomes
a Witness, the Model Code provides:
"(A) If, after undertaking employment in contemplated or
pending litigation, a lawyer learns or it is obvious that
he or a lawyer in his firm ought to be called as a
witness on behalf of his client, he shall withdraw from
the conduct of the trial and his firm, if any, shall not
continue representation in the trial, except that he may
continue the representation and he or a lawyer in his
firm may testify in the circumstances enumerated in DR 5-
101(B)(1) through (4).
(B) If, after undertaking employment in contemplated or
pending litigation, a lawyer learns or it is obvious that
he or a lawyer in his firm may be called as a witness
other than on behalf of his client, he may continue the
representation until it is apparent that his testimony is
or may be prejudicial to his client."
MODEL CODE OF PROFESSIONAL RESPONSIBILITY DR 5-102 (1980).
8
Although these rules promulgate conflicting standards, the lower
court concluded that all three required disqualification of the
FDIC's counsel.
U.S. Fire bases its bad faith defense on Kenney's conduct
during the claim investigation. Finding that Kenney may be called
as a witness on behalf of the FDIC, the district court disqualified
her under Texas Rule 3.08(a), Model Rule 3.7(a), and Model Code DR
5-102(A). Additionally, predicated on the charge of bad faith, the
district court concluded that Model Rules 1.7(b)6 and 1.10(a)7,
6
RULE 1.7 Conflict of Interest: General Rule
"(a) A lawyer shall not represent a client if the
representation of that client will be directly adverse to
another client, unless:
(1) the lawyer reasonably believes the
representation will not adversely affect the relationship
with the other client; and
(2) each client consents after consultation.
(b) A lawyer shall not represent a client if the
representation of that client may be materially limited by the
lawyer's responsibilities to another client or to a third
person, or by the lawyer's own interests, unless:
(1) the lawyer reasonably believes the
representation will not be adversely affected; and
(2) the client consents after consultation.
When representation of multiple clients in a single
matter is undertaken, the consultation shall include
explanation of the implications of the common
representation and the advantages and risks involved."
MODEL RULE 1.7 (1992).
7
RULE 1.10 Imputed Disqualification: General Rule
"(a) While lawyers are associated in a firm, none of them
shall knowingly represent a client when any one of them
practicing alone would be prohibited from doing so by Rules
1.7, 1.8(c), 1.9 or 2.2.
(b) When a lawyer has terminated an association with a
firm, the firm is not prohibited from thereafter representing
a person with interests materially adverse to those of a
client represented by the formerly associated lawyer and not
currently represented by the firm, unless:
(1) the matter is the same or substantially
related to that in which the formerly associated lawyer
9
regarding conflict of interest, Model Code DR 5-102(A), and
"questions of ethics and judicial integrity" required
disqualification of the entire firm.
U.S. Fire asserted in its discovery defense that coverage
under the blanket bond was voided because Irving Savings discovered
the claimed dishonesty more than 100 days before filing its proof
of loss. The district court determined that both Kenney and Hurt
ought to be called as witnesses on behalf of the FDIC to establish
the date of discovery, and therefore disqualified both attorneys.
However, the district court found that U.S. Fire's discovery
defense did not justify disqualification of LMHT&B.
For these reasons, the district court disqualified both of the
individual attorneys, Kenney and Hurt, and the law firm, LMHT&B.
The district court disqualified Kenney because, to rebut the claim
of bad faith, she would likely testify on behalf of her client, the
FDIC. Kenney was disqualified with regard to the discovery charge
as well, because her testimony on that issue might be adverse to
the FDIC. Hurt was disqualified because his testimony relative to
the discovery issue might be adverse to the FDIC. Additionally, the
district court found that the entire LMHT&B law firm must withdraw
as a result of U.S. Fire's bad faith defense.
represented the client; and
(2) any lawyer remaining in the firm has
information protected by Rules 1.6 and 1.9(c) that is
material to the matter.
(c) A disqualification prescribed by this rule may be
waived by the affected client under the conditions stated in
Rule 1.7."
MODEL RULE 1.10 (1992).
10
After granting U.S. Fire's disqualification motion a second
time, the district court entered another order of certification
allowing appeal under 28 U.S.C. § 1992(b). Once more we granted the
FDIC permission to appeal. Accordingly, the FDIC appeals the
disqualification of Hurt and LMHT&B. The FDIC does not appeal the
disqualification of Kenney on the basis of her status as a possible
witness; however, the FDIC challenges the district court's finding
of conflict of interest between itself and Kenney, which served as
a basis for disqualification of the firm.
III. STANDARD OF REVIEW
Fifth Circuit case law is not entirely clear on the proper
standard of review for the grant or denial of a motion to
disqualify counsel. The two cases that prompted remand of this case
on the first appeal, Dresser, 972 F.2d at 540, and American
Airlines, 972 F.2d at 605, were not direct appeals; both were
mandamus cases requiring a more stringent standard of review. The
Dresser opinion, however, discussed in a footnote what the proper
standard of review would be on a direct appeal:
"On appeal, the standard of review for the grant or
denial of a motion to disqualify would be for abuse of
discretion. Underlying determinations would be reversed
if findings of fact are clearly erroneous, but the
ethical standards applied would be carefully examined."
Dresser, 972 F.2d at 542 n.4 (internal citations and quotation
marks omitted). Dresser also contained language suggesting that the
"careful examination" of the district court's application of the
rules constituted a de novo standard of review:
"In evaluating a motion to disqualify, we interpret the
controlling ethical norms governing professional conduct
11
as we would any other source of law. When the facts are
undisputed, district courts enjoy no particular advantage
over appellate courts in formulating ethical rules to
govern motions to disqualify. Thus, in the event an
appropriate standard for disqualification is based on a
state's disciplinary rules, a court of appeals should
consider the district court's interpretation of the state
disciplinary rules as an interpretation of law, subject
essentially to de novo consideration."
Dresser, 972 F.2d at 543 (citations omitted). Our post-Dresser
disqualification cases, such as Resolution Trust Corp. v. Bright,
6 F.3d 336, 339 (5th Cir. 1993), have picked up on this overall
"abuse of discretion" standard, which includes "clear error" review
of fact-findings and de novo "careful examination" of the district
court's application of the relevant rules:
"In the specific context of a disqualification motion,
this circuit reviews fact findings for `clear error'
while `carefully examining' the district court's
application of relevant ethical standards."
Bright, 6 F.3d at 336 (citing American Airlines, 972 F.2d at 609).
A more recent Fifth Circuit case on disqualification states simply
that "we review the rulings only for abuse of discretion." Forsyth
v. Barr, 19 F.3d 1527 (5th Cir.), cert. denied sub nom., Forsyth v.
Vines, 115 S. Ct. 195 (1994)(citing Dresser, 972 F.2d at 542
n.4)(affirming attorney disqualification based on conflict of
interest finding); see also 1 STEVEN A. CHILDRESS & MARTHA S. DAVIS,
FEDERAL STANDARDS OF REVIEW § 4.08, at 4-55 (2nd ed.
1992)("Disqualification of counsel for conflict of interest has
been reviewed for abuse of discretion.")(citing cases from the
First Circuit, Ninth Circuit and Federal Circuit). The proper
standard of review for this appeal, then, is an abuse of discretion
standard. But in applying this standard, we will review fact-
12
findings for clear error, and we will perform a "careful
examination," or de novo review, of the district court's
application of the relevant rules of attorney conduct.
IV. ANALYSIS
The proscription against an attorney serving as both an
advocate and a witness in the same litigation is a long-standing
ethical rule. Its origin may be traced to the common law principle
of evidence that neither a party nor his agent is competent as a
witness on the party's behalf. During the nineteenth century, the
prohibition against lawyer-witnesses became a matter of
professional ethics. Bar associations in the United States included
the rule among their earliest standards of professional behavior.8
Over the years, various reasons have been offered for an ethical
prohibition against advocates testifying. The Model Code proposes
four justifications for the rule: (1) the lawyer may be a less
effective witness because he is more easily impeachable for
interest; (2) opposing counsel may be inhibited in challenging the
credibility of a lawyer who also appears as an advocate; (3) a
8
The Alabama State Bar Association adopted the first code of
ethics governing attorneys in the United States in 1887. Rule 18 of
the code provided:
"When a lawyer is a witness for his client, except
as to merely formal matters, such as the attestation or
custody of an instrument and the like, he should leave
the trial of the case to other counsel. Except when
essential to the ends of justice, a lawyer should avoid
testifying in court on behalf of his client."
H. DRINKER, LEGAL ETHICS, app. E (1953) (cited in James B. Lewis, The
Ethical Dilemma of the Testifying Advocate: Fact or Fancy?, 19 HOUS.
L. REV. 75, 81 (1981)). In 1908 the ABA adopted this rule verbatim
as Canon 19 of the Canons of Professional Ethics, the immediate
predecessor of the Model Code.
13
lawyer-witness must argue his own credibility; and (4), while the
role of a witness is to objectively relate facts, the role of an
advocate is to advance his client's cause. Another rationale
commonly advanced for the rule focuses on the appearance of
impropriety that may be created when a lawyer testifies on behalf
of his client. For one or more of the foregoing reasons, the
general prohibition against the lawyer-witness remains a prescript
reiterated in many contemporary ethical canons.
In American Airlines, 972 F.2d at 605, we made clear that
"disqualification cases are governed by state and national ethical
standards adopted by the court." Id. at 610. At least four separate
ethical canons are relevant to a review of the district court's
order to disqualify counsel in the instant case. Each of these
different sets of rules specifically addresses the issue of a
lawyer serving as witness. As authorized by 28 U.S.C. § 2071,
district courts such as the Northern District of Texas may adopt
rules for the conduct of attorneys. The local rules promulgated by
the local court itself are the most immediate source of guidance
for a district court.9 Therefore, the Local Rules of the United
States District Court for the Northern District of Texas ("Northern
9
Although we emphasized the state and national rules in
Dresser and American Airlines, it should be noted that we did not
disregard the local rule. Both of those cases were reviewed on
appeal from the Southern District of Texas, which had adopted the
Texas Rules for its own Code of Professional Responsibility.
14
District Rules"), are not irrelevant to our inquiry.10 Nonetheless,
parties cannot be deprived of the right to counsel of their choice
on the basis of local rules alone. Dresser, 972 F.2d at 543. Local
rules are not the "sole" authority governing motions to disqualify
counsel. Motions to disqualify are substantive motions. Therefore,
they are decided under federal law. When reviewing the
10
The local rule governing a lawyer-witness in the Northern
District of Texas was adopted by the Northern District in 1977 and
became effective on March 1, 1978. The rule was amended slightly in
1985. Local Rule 13.8: Attorney as a Witness, currently reads:
"(a) Acceptance of Employment. An attorney shall not
accept employment in contemplated or pending litigation if he
knows, or if it is obvious, that he or an attorney in his firm
ought to be called as a witness on behalf of the client,
except that the attorney may undertake the employment and he
or an attorney in his firm may testify:
(1) if the testimony will relate solely to an
uncontested matter.
(2) if the testimony will relate solely to a matter
of formality and there is no reason to believe that
substantial evidence will be offered in opposition to the
testimony.
(3) if the testimony will relate solely to the
nature and value of legal services rendered in the case
by the attorney or his firm to the client.
(4) as to any matter, if refusal would work a
substantial hardship on the client because of the
distinctive value of the attorney or his firm as counsel
in the particular case.
(b) Withdrawal From Representation. If, after
undertaking employment in contemplated or pending litigation,
an attorney learns or it is obvious that he or an attorney in
his firm ought to be called as a witness on behalf of the
client, the attorney and his firm shall withdraw from the
conduct of the trial and continued representation, unless one
of the exceptions listed in (a) is applicable.
(c) Testimony Prejudicial to Client. If, after
undertaking employment in contemplated or pending litigation,
an attorney learns or it is obvious that he or an attorney in
his firm may be called as a witness other than on behalf of
his client, the attorney and his firm may continue the
representation until it is apparent that his testimony is or
may be prejudicial to the client."
LOCAL RULES OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF
TEXAS, Rule 13.8 (1985).
15
disqualification of an attorney, we must "consider the motion
governed by the ethical rules announced by the national profession
in the light of the public interest and the litigant's rights." Id.
The norms embodied in the Model Rules and the Model Code are
relevant to our inquiry, "as the national standards utilized by
this circuit in ruling on disqualification motions." American
Airlines, 972 F.2d at 610. Additionally, consideration of the Texas
Rules is also necessary, because they govern attorneys practicing
in Texas generally, and because the Northern District Rules contain
language virtually identical to the state canon. By consulting
these four sets of governing rules, we must weigh the need for
disqualification of the FDIC's counsel in reference to the relevant
affirmative defenses raised by U.S. Fire. Unfortunately, the rules
do not enunciate a common standard. The Northern District Rules,
the Texas Rules, the Model Rules, and the Model Code delineate
dissimilar, arguably contradictory, rules for dealing with lawyer-
witnesses. Therefore, we must weigh the relative merits of each of
the various competing disqualification rules as we proceed through
each successive step of our analysis.
The Firm
The disqualification of the entire LMHT&B law firm is the most
sweeping result sought by U.S. Fire in its motion to disqualify.
This is an interlocutory inquiry of profound significance. The
ability of the FDIC to present its case at trial will be impacted
substantially if the firm that the FDIC has chosen to represent it
must withdraw. Depriving a party of the right to be represented by
16
the attorney of his or her choice is a penalty that must not be
imposed without careful consideration. Resolution of the firm
disqualification issue, however, is complicated by questions of
consent, conflict of interest, and imputed disqualification. In the
instant case, the district court found that bad faith was the only
affirmative defense that required the disqualification of LMHT&B.
Two different theories were advanced to support the bad faith
disqualification of the firm. First, after finding a conflict of
interest between Kenny and the FDIC, the district court determined
that, under the Model Rules, LMHT&B must withdraw. Second, although
contrary to the express language of Texas Rule 3.08, the district
court disregarded the FDIC's consent to continued representation by
LMHT&B, and, in deference to a perceived potential for an
appearance of impropriety, chose to disqualify the firm. We believe
that in both of these respects the district court misapplied the
rules. The district court correctly noted that its analysis must
include a balancing of competing interests. However, application of
ethical rules, such as those involved in the instant case, requires
"painstaking analysis of the facts and precise application of
precedent." Brennan's, Inc. v. Brennan's Restaurants, Inc., 590
F.2d 168, 173-74 (5th Cir. 1979)(quoting United States v. Standard
Oil Co., 136 F. Supp. 345, 367 (S.D.N.Y. 1955)). On the peculiar
facts of this case, we find that the lawyer-witness rule does not
mandate disqualification of LMHT&B and that, therefore, the law
firm may continue on behalf of the FDIC.
17
1. Kenney's Disqualification for Conflict of Interest
Kenney's disqualification, and the reasons for it, are central
to the district court's finding as to LMHT&B. Although the FDIC
does not appeal the disqualification of Kenney as an advocate at
trial under the lawyer-witness rule,11 the FDIC does contest
disqualification of the firm based on the district court's
additional finding of a conflict of interest as to Kenney.
Therefore, the distinction drawn between these two grounds for
disqualification is more than merely academic. Disqualification of
LMHT&B in this case is unwarranted unless there is a true conflict
of interest between Kenny and her client, the FDIC. We conclude
that there is not.
The FDIC concedes that Kenney is a likely witness at trial,
both for U.S. Fire, which might call her to testify to establish
when Irving Savings discovered the claimed dishonesty, and for the
FDIC, which will probably have to call her as a witness to rebut
U.S. Fire's charge of bad faith. The rules promulgated in three of
the governing ethical canons are relatively straightforward, albeit
conflicting. The Northern District Rules, the Texas Rules, and the
11
Kenney will likely need to testify on behalf of the FDIC
to rebut Duray's accusation of bad faith. Both the Northern
District Rules and the Model Code mandate Kenney's withdrawal. The
FDIC does not dispute this.
18
Model Code do not require a conflict of interest analysis.12 In
contrast, the lawyer-witness prescript in the Model Rules
specifically references the Model Rules' general rule on conflict
of interest.
Unless an impermissible conflict of interest exists between a
testifying lawyer and her client, Model Rule 3.7, "Lawyer as
Witness," does not mandate the vicarious disqualification of the
lawyer's firm. U.S. Fire argues that a conflict of interest arises
in connection with its bad faith defense, where Kenney's conduct is
at issue. U.S. Fire contends that the FDIC may have a claim against
Kenney and her firm if the FDIC's claim against U.S. Fire is
ultimately defeated on the basis of Kenney's actions. Consequently,
it is possible that, sometime in the future, the interests of
Kenney and the FDIC might diverge. U.S. Fire contends that this
potential conflict of interest between Kenney and her client
requires the disqualification of Kenney and the imputed
disqualification of her entire firm.
We find that the remote possibility that Kenney and the FDIC
may eventually find themselves at odds is much too tenuous a thread
to support the burdensome sanction of law firm disqualification.
In finding that Kenney had a conflict of interest, the district
court quoted from the comment to Model Rule 1.7: "[i]f the probity
of a lawyer's own conduct in a transaction is in serious question,
it may be difficult or impossible for the lawyer to give a client
12
Conflict of interest is not mentioned in the Texas lawyer-
witness rule itself, although it is referred to in passing in the
comment to the rule. TEXAS RULE 3.08, Cmt. 10 (1990).
19
detached advice." An examination of the context in which this
passage appears indicates that the ABA drafting committee was
primarily concerned with economic conflicts of interest -- for
example, those involving fees or business enterprises in which the
lawyer has an undisclosed interest. Notwithstanding one
hypothetical scenario wherein the interests of Kenney and the FDIC
might be characterized as tangentially conflicting, Kenney's
interests are otherwise consistent with those of her client. Just
as it is in the interest of U.S. Fire to show comparative bad
faith, it is in the interest of both Kenney and the FDIC to
disprove it.
Furthermore, a client may consent to representation despite a
possible conflict. Model Rule 1.7, dealing with the
disqualification of a single attorney, and Model Rule 1.10, dealing
with the imputed disqualification of his firm, provide that
disqualification is unnecessary where a client consents after
consultation. The corresponding rule published in the 1990 draft of
the Restatement of The Law Governing Lawyers is indicative of the
national consensus on this issue within the profession.13 Moreover,
13
Chapter 8, Conflicts of Interest, § 206 states:
"Unless the affected client consents to the
representation under the conditions and limitations
provided in § 202, a lawyer may not undertake or continue
to represent a client if a substantial risk exists that
a financial or other personal interest of the lawyer will
materially and adversely affect the lawyer's
representation of the client."
RESTATEMENT OF THE LAW: THE LAW GOVERNING LAWYERS Ch. 8, § 206 (Tentative
Draft No. 3, 1990).
§ 202 provides, in pertinent part, "Informed consent requires
that the client have adequate information about the risks and
advantages of such representation to that client."
20
consistent with the national norm, the Texas rule on conflict of
interest provides for client consent after full disclosure. It is
undisputed that the FDIC has given its consent to continued
representation by LMHT&B. Therefore, we hold that the
disqualification of the firm was inappropriate.
As we explained in Dresser, 972 F.2d at 544, whereas the
relevant local and national ethical canons provide a useful guide
for adjudicating motions to disqualify, they are not controlling.
In the instant case, the district court attached unwarranted
significance to the Model Rules and to the general provision on
conflict of interest. Such inflexible application of a professional
rule is inappropriate because frequently it would abrogate
important societal rights, such as the right of a party to his
counsel of choice and an attorney's right to freely practice her
profession. See Woods v. Covington County Bank, 537 F.2d 804, 813
(5th Cir. 1976). A court must take into account not only the
various ethical precepts adopted by the profession but also the
social interests at stake. Among the factors that we have
considered in the past are "whether a conflict has (1) the
appearance of impropriety in general, or (2) a possibility that a
specific impropriety will occur, and (3) the likelihood of public
suspicion from the impropriety outweighs any social interests which
will be served by the lawyer's continued participation in the
case." Dresser, 972 F.2d at 544. As we noted in another action to
disqualify counsel, "The rule of disqualification is not
mechanically applied in this Circuit." Church of Scientology of
21
California v McLean, 615 F.2d 691, 693 (5th Cir. 1980). All of the
facts particular to a case must be considered, in the context of
the relevant ethical criteria and with meticulous deference to the
litigant's rights.
The district court's finding of a conflict of interest between
Kenney and the FDIC, and the subsequent imputed disqualification of
the rest of the LMHT&B law firm, is improper under the facts of
this case. Ideally, conflict of interest problems should be settled
between the attorney and his client. Where an attorney's testimony
may prejudice only his own client, the opposing party should have
no say in whether or not the attorney participates in the
litigation as both advocate and witness. It is generally proper for
an opposing party to bring conflict of interest matters to the
attention of the court. American Airlines, 972 F.2d at 611. "Such
an objection should be viewed with caution, however, for it can be
misused as a technique of harassment." MODEL RULE 1.7 cmt. (1992).
Similarly, the comment to Texas Rule 3.08 advises that a conflict
of interest problem should be solved by the lawyer and his client
without interference or harassment by the opposing counsel.14 A
14
Comment 10 explains that Rule 3.08 applies to situations
where the opposing party is disadvantaged by a lawyer serving as
both advocate and witness. However, the comment cautions that:
"[the Rule] should not be used as a tactical weapon to deprive
the opposing party of the right to be represented by the
lawyer of his or her choice. For example, a lawyer should not
seek to disqualify an opposing lawyer under this Rule merely
because the opposing lawyer's dual roles may involve an
improper conflict of interest with respect to the opposing
lawyer's client, for that is a matter to be resolved between
the lawyer and client or in a subsequent disciplinary hearing.
Likewise, a lawyer should not seek to disqualify an opposing
lawyer by unnecessarily calling the lawyer as a witness. Such
22
tortured justification for disqualification such as that offered by
U.S. Fire, premised on a purported possible conflict of interest
sometime in the future, suggests not so much a conscientious
professional concern for the profession and the client of the
opposing counsel as a tactic designed to delay and harass.
2. The Appearance of Impropriety
In addition to the proposed conflict of interest
justification, the district court appeared to premise its
disqualification of counsel for the FDIC on an appearance-of-
impropriety rationale. Basing its bad faith analysis on a balancing
of competing interests, the lower court summarily discounted the
FDIC's consent to continued representation by LMHT&B. The district
court determined that the FDIC's consent was preempted by
"questions of ethics and judicial integrity." It is true that among
the historical justifications for the lawyer-witness rule is the
widely-held view that disciplinary rules, in addition to protecting
clients, "are also for the protection of the bar and the integrity
of the court." Harold A. Brown & Louis M. Brown, Disqualification
of the Testifying Advocate--A Firm Rule, 57 N.C. L. REV. 597, 602
(1979). Accordingly, where public confidence in the legal system
may be jeopardized by an attorney serving in the dual role of
advocate and witness, some courts have disqualified both the
attorney and the attorney's firm. See, e.g., FDIC v. Isham, 782 F.
unintended applications of this Rule, if allowed, would
subvert its true purpose by converting it into a mere tactical
weapon."
TEX. RULE 3.08 cmt. 10 (1990).
23
Supp. 524, 528 (D. Colo. 1992). In the instant case, however, we do
not find an erosion of public faith in the judicial system so
likely as to warrant the disqualification of the non-testifying
members of LMHT&B.
Moreover, both courts and commentators generally have rejected
the mere appearance of impropriety as a rationale for the lawyer-
witness rule. Proponents of the rationale have argued that an
appearance of impropriety is created when a lawyer testifies,
because a fact finder may believe that the lawyer is tailoring her
testimony to serve her client's interests. Commentators have noted,
however, that the same objection might be raised against former
counsel, because an appearance of impropriety would persist whether
the lawyer is disqualified as an advocate or not. An advocate
testifying as a witness would be no more readily impeachable for
bias than a former advocate. See GEOFFREY C. HAZARD & W. WILLIAM HODES,
1 THE LAW OF LAWYERING: A HANDBOOK ON THE MODEL RULES OF PROFESSIONAL CONDUCT,
§ 3.7:102, at 679 (1994). Either way, due to the possibility of
continuing loyalty to the client or the lawyer's expectation of
future representation, the former counsel's testimony would be
equally suspect. "The fact is that witnesses who at one time
represented a litigant are likely to be impeachable for interest
for any number of reasons, and forcing their firm to resign from
the particular case is not likely to resurrect their credibility."
Brown & Brown, 57 N.C. L. REV. at 611. In other words, compelling
a law firm to withdraw from a particular case is not likely to
resurrect the credibility of a testifying associate who once
24
represented one of the litigants. Such a witness will remain
impeachable for interest for a variety of reasons.
Neither the ABA nor the drafters of the Texas canons have
relied on the appearance of impropriety as a justification for the
lawyer-witness rule. In examining the traditional reasoning for the
proscription, the ABA acknowledges the weaknesses of the appearance
of impropriety rationale. ABA/BNA LAWYER'S MANUAL ON PROFESSIONAL CONDUCT,
61:501 (1984). The Model Code did not rely on the appearance of
impropriety as a justification for the lawyer-witness rule. The
Texas Code does not base its caution against the testifying lawyer
on an appearance of impropriety, but on the notion that a lawyer
serving as advocate is a less effective witness. Texas Code EC 5-9,
EC 5-10. Similarly, with regard to the lawyer-witness prohibition,
the comments to both the Model Rules and the Texas Rules emphasize
the possibility of confusion between an attorney's dual roles.
Neither comment mentions the appearance of impropriety as a
justification for the rule.
We have held that application of the disqualification rule
requires a balancing of the likelihood of public suspicion against
a party's right to counsel of choice. Cossette v. Country Style
Donuts, Inc., 647 F.2d 526, 530 (5th Cir. 1981). However, rather
than indiscriminately gutting the right to counsel of one's choice,
we have held that disqualification is unjustified without at least
a reasonable possibility that some identifiable impropriety
actually occurred. Woods, 537 F.2d at 813. A disqualification
inquiry, particularly when instigated by an opponent, presents a
25
palpable risk of unfairly denying a party the counsel of his
choosing. Therefore, notwithstanding the fundamental importance of
safeguarding popular confidence in the integrity of the legal
system, attorney disqualification, particularly the
disqualification of an entire firm, is a sanction that must not be
imposed cavalierly.
In view of the particular facts of this case, we find that the
FDIC's right to the counsel of its choice outweighs the harm of
possible public suspicion. We do recognize that preservation of a
popular faith in the judicial system is a primary consideration,
and that lawyers generally should avoid even the appearance of
impropriety. "It does not follow, however, that an attorney's
conduct must be governed by standards which can be imputed only to
the most cynical members of the public." Woods, 537 F.2d at 813. As
noted in the comments to both the Model Rules and the Texas Rules,
an opponent may be tempted to invoke the disqualification rule for
purposes of harassment. Unhappily, as often as the rule is misused,
the profession is disserved. When, for purely strategic purposes,
opposing counsel raises the question of disqualification, and
subsequently prevails, public confidence in the integrity of the
legal system is proportionately diminished. "Indeed, the more
frequently a litigant is delayed or otherwise disadvantaged by the
unnecessary disqualification of his lawyer under the appearance of
impropriety doctrine, the greater the likelihood of public
suspicion of both the bar and the judiciary." Woods, 537 F.2d at
813.
26
We find that no practical purpose would be served by
disqualifying the law firm representing the FDIC. Under the facts
of this case, we do not believe that there would be such an
appearance of impropriety in the continued representation of the
FDIC by LMHT&B as to warrant the firm's disqualification. On the
contrary, under these circumstances, should U.S. Fire succeed in
forcing the withdrawal of FDIC's counsel of choice, public faith in
the integrity of the legal system is more likely to be undermined
than vindicated.15 Any perceived bias on the part of the testifying
lawyers representing the FDIC would not be cured by withdrawal of
either the lawyers themselves or their firm. Driven solely by undue
preoccupation with the disqualification issue, prolonged delay in
addressing the merits of a case, in and of itself, can do little to
instill confidence in the judicial system. Moreover, the district
court's disdain of the FDIC's informed consent to continued
representation by LMHT&B was contrary to the substance and spirit
of the lawyer-witness rule. As previously explained, we find the
possibility of a conflict of interest between Kenny and the FDIC
15
Disturbingly, the rule on disqualification presupposes that
lawyers are more prone to perjury than other witnesses. This
assumption in itself may do more to erode the public's faith in
judicial integrity than any perceived appearance of impropriety.
"What is likely to reduce public confidence in lawyers and legal
ethics is the [lawyer-witness] rule's existence, because it
emphasizes the impeachability and even the untrustworthiness of
lawyer's testimony." Brown & Brown, 57 N.C. L. REV. at 613.
Furthermore, even if it is conceded that a fact finder may be
suspicious of a lawyer witness, this rationale would justify no
more than a narrow, waivable proscription against advocates
testifying, and not the broad, traditional rule that acknowledges
no exception regardless of client consent. See Robert P. Schuwerk
& John F. Sutton, A Guide to the Texas Disciplinary Rules of
Professional Conduct, 27A HOUS. L. REV. 1, 317 (1990).
27
too remote to justify disqualification of her entire firm. For the
foregoing reasons, we hold that, as to the law firm of LMHT&B, the
FDIC's right to the counsel of its choice must not be repudiated.
LMHT&B may continue to represent the FDIC in the instant action.
Jeff Hurt
U.S. Fire seeks disqualification of Hurt based primarily on
its asserted discovery defense. The blanket bond issued to Irving
Savings by U.S. Fire conditioned coverage on Irving Savings' filing
notice and proof of loss no more than 100 days after discovery of
the covered loss. Irving Savings retained Hurt to represent it in
several collection matters. U.S. Fire contends that Hurt discovered
facts about a potential loss more than 100 days before Irving
Savings filed the appropriate notice and proof of loss. Because
this discovery would potentially void the policy, U.S. Fire has
indicated it will call Hurt as a witness at trial. U.S. Fire
further contends that the lawyer-witness rule prohibits Hurt from
representing Irving Savings and the FDIC. The district court held
that Hurt is a necessary witness and that, as such, the lawyer-
witness rule requires his disqualification. The FDIC's consent
notwithstanding, we agree that Hurt must be disqualified, because
he will likely be compelled to furnish testimony that may be
substantially adverse to his client.
The lawyer-witness rule enunciated in three of the four
relevant ethical canons requires Hurt's disqualification. Only
Texas Rule 3.08 recognizes an exception for client consent. The
lawyer-witness rules of both the Northern District and the Model
28
Code mandate the withdrawal of an advocate once it becomes apparent
that his testimony may be prejudicial to his client. Model Rule
3.7(a) makes no distinction between testimony that is adverse to a
client and testimony made on behalf of a client. In contrast to its
approach to the imputed disqualification of an entire law firm, the
Model Rule flatly asserts that "[a] lawyer shall not act as
advocate at a trial in which the lawyer is likely to be a necessary
witness." MODEL RULE 3.7(a) (1992).
Whereas disqualification of the entire LMHT&B firm would be a
penalty disproportionate to the potential harm at issue, the
disqualification of one or two attorneys would not work such a
substantial hardship on the FDIC that their cause would be unfairly
injured. Hurt's participation at trial as both advocate and witness
would compromise his effectiveness and needlessly confuse his role.
These reasons are among those traditionally cited for the lawyer-
witness proscription and they justify articulation of the rule
within the ethical guidelines of the profession. Unlike an imputed
disqualification of his entire firm, Hurt's disqualification is
premised on a tangible and unavoidable scrambling of roles.
Therefore, on the basis of Hurt's likely testimony with regard to
the discovery issue, the district court properly granted U.S.
Fire's motion to disqualify Hurt.16 In the instant case, the
16
Although Hurt's disqualification is proper as based on the
discovery defense of U.S. Fire, it is not justified by the bad
faith defense. The district court found that U.S. Fire's bad faith
affirmative defense required the withdrawal of the entire LMHT&B
law firm. In the bad faith context, no explicit determination was
made as to Hurt in particular, but it is understood that as a
partner with LMHT&B, Hurt would be disqualified if the firm is
29
disqualification of Kenney and Hurt notwithstanding, as long as
LMHT&B is not required to withdraw, the FDIC's right to its counsel
of choice is not unduly abridged.
After a review of the facts and de novo consideration of the
relevant ethical standards, we find that the disqualification order
of the district court is overly expansive. The district court
correctly reasoned that the lawyer-witness rule requires the
withdrawal of both Kenney and Hurt. However, careful examination of
the asserted purposes of the rule belies the notion that, in this
instance, the profession is served by disqualification of the
entire law firm. Although the various relevant canons promulgate
different versions of the proscription against an attorney serving
as both advocate and witness, the underlying rationale common to
each of them is protection of the client and the opposing party.
These interests will not be served by depriving the FDIC of the
right to continued representation by the law firm it has chosen.
U.S. Fire has failed to offer any convincing argument that its
motion to disqualify LMHT&B serves a purpose any more noble than
dilatory maneuvering.
V. CONCLUSION
For the reasons stated in this opinion, and with regard to the
particular facts of this case, we hold that Hurt must be
disqualified as counsel for the FDIC, but that other attorneys
disqualified. As we have explained, the district court erred in
finding that the bad faith claim required disqualification of
LMHT&B. For the same reasons, U.S. Fire's bad faith defense does
not justify the disqualification of Hurt.
30
associated with LMHT&B may continue the representation. Because
Hurt is likely to be called as a witness at trial, the district
court correctly disqualified him by applying the lawyer-witness
rule promulgated variously in the Northern District Rules, the
Texas Rules, the Model Rules and the Model Code. Therefore, we
AFFIRM the disqualification of Hurt as ordered by the district
court. However, to the extent that the district court found that
Hurt's entire law firm must withdraw, the district court accorded
insufficient deference to the right of the FDIC to counsel of its
choice. Therefore, to the extent that it disqualifies the LMHT&B
law firm, we VACATE the district court's order and we REMAND the
matter with instructions to deny the motion.
AFFIRMED IN PART, REVERSED IN PART.
wjl\opin\93-9189.opn
ace 31