Memorandum and Order
CADEN, United States Magistrate Judge.
Plaintiff Elizabeth Costle, Vermont Commissioner of Banking, Insurance and Securities, Receiver of Ambassador Insurance Company, brings this motion to disqualify the accounting firm of Johnson, Lambert & Capron from providing accounting consulting services to defendant Coopers & Lybrand, L.L.P.
An evidentiary hearing on this motion was conducted by the undersigned on October 28 and 31, 1994. Based upon the following findings of facts and for the reasons set forth below, plaintiff's motion to disqualify Johnson, Lambert & Capron is denied.
This multi-district litigation consists of a series of suits arising out of the insolvency and liquidation of Ambassador Insurance Company ("Ambassador") and its subsidiary, Horizon Insurance Company. Ambassador is currently in court-supervised insolvency proceedings.
In November 1983, pursuant to a court order, the Vermont Commissioner of Banking, Insurance and Securities (the "Receiver") gained control over Ambassador's books, records and assets ($120 million). In the process of liquidating Ambassador, the Receiver is responsible for evaluating and paying claims against Ambassador as well as pursuing recovery of amounts due to Ambassador from various entities including reinsurers. Since 1983, the Receiver has paid out approximately $100 million in claims.
The Receiver is the plaintiff in one of the multi-district cases, Costle v. Chait (D.N.J. No. 85-8441), filed in May of 1985, in which Ambassador's former managers and former auditor, Coopers & Lybrand, are named as defendants. Coopers & Lybrand provided audit services to Ambassador prior to the Ambassador receivership (the final audit was performed on December 31, 1982). In Costle v. Chait, the Receiver alleges mismanagement, fraud and breach of fiduciary duty on the part of Ambassador's former managers. The Receiver further alleges that Coopers & Lybrand negligently failed to inform regulatory authorities of Ambassador's "true" condition. The Receiver seeks recovery for the insolvency or shortfall — the amount due to claimants after Ambassador's assets have been exhausted. The estimated amount of the shortfall has varied from a projected $20-$45 million in 1984 to a projected $100 million more recently. See Def.'s Memorandum in Opposition to Motion to Disqualify at 4-5 (Oct. 5, 1994).
The size of the shortfall has led Coopers & Lybrand to inquire of the actions of the Receiver and its staff, taken during the 10 years of the Receiver's stewardship of Ambassador. Coopers & Lybrand argues that because the Receiver claims Coopers & Lybrand is potentially liable for the entire shortfall amount, the methods used in calculating
Johnson, Lambert & Capron ("JLC") has offices in Washington, D.C.; Bethesda, Maryland; San Jose, California; Burlington, Vermont; and New York. Hearing Transcript ("Tr.") at 229-30. The firm has four partners, approximately 35 professionals and is one of the principal accounting firms doing work in Vermont. Tr. 111, 229.
At the heart of this disqualification motion are two professional contacts between JLC and the Receiver which, for convenience, will be characterized as engagements. In 1993, Deborah D. Lambert, the partner in charge of JLC's Vermont insurance practice, was retained by the Vermont Commissioner to perform audit work for Beverage Retailers Insurance Company Risk Retention Group — In Rehabilitation ("BRICO"). BRICO's statutory receiver is also the Vermont Commissioner of Banking, Insurance and Securities (referred to herein as the "Receiver" regardless if referenced in her capacity on behalf of BRICO or Ambassador). Secondly, in 1994, Lambert was contacted by Robert Savage (manager of the Ambassador receivership) to perform specific accounting services for the Ambassador receivership. Because of their significance to this motion, the two engagements are discussed with greater specificity below.
A. The JLC-Ambassador/RCA Engagement
Ambassador is a Vermont-domiciled casualty insurer and was placed into receivership by the Vermont Superior Court (Washington County) in 1983. The Ambassador receivership is organized with the Vermont Commissioner at the top of the hierarchy as the Receiver, George Bernstein as the court-appointed agent of the Receiver, Robert Savage as the full-time manager, and 17 employees.
Ambassador, a primary insurer, farms its insurance out to reinsurers. Consequently, a large portion of its assets is comprised of monies due to it from reinsurers. Accordingly, some of the Receiver's activities, inter alia, involve negotiation and settlement of disputes with reinsurers. On or about February 7, 1994, JLC (Lambert) was contacted by Savage to perform audit work with respect to one of Ambassador's reinsurers, Reinsurance Corporation of America ("RCA"). Tr. 181-82. RCA had informed the Receiver that it was unable to meet its obligations (i.e., to pay claims on behalf of Ambassador). RCA is a named defendant in proceedings instituted by the Receiver in Vermont state court. Because RCA's purported inability to meet its obligations was belied by its annual statements and balance sheets, the Receiver requested Lambert and her staff to investigate RCA's financial condition. Tr. 26.
To prepare Lambert for the RCA-Ambassador work, the Receiver provided her with RCA's annual financial statement (public information). Lambert and David Tatlock (a JLC associate in the Vermont office) placed a telephone call together to a RCA representative, during which JLC was denied access to RCA's books. Apart from this, no other work was done. Subsequently, the Receiver was informed that JLC could not do any more Ambassador-related work on her behalf.
B. The JLC-BRICO Engagement
BRICO, a Vermont-domiciled insurer, went into receivership on August 12, 1993. BRICO is in court-ordered rehabilitation pending the Receiver's recommendation on whether BRICO should continue its operations or undergo liquidation.
BRICO is structured similarly to Ambassador with the same individuals managing
BRICO is a captive insurer — all of its management functions are performed by Victor O. Shinnerer & Co., Inc. ("VOSCO"), a professional management company. VOSCO underwrites claims and receives premiums on behalf of BRICO as well as other insurance companies, pools these premiums and distributes them aliquot. Tr. 9.
JLC was initially retained, on or about October 21, 1993, by the Receiver to investigate the accuracy of VOSCO's allocation and management of BRICO's funds and accounts. On October 22, 1993, BRICO staff met with Lambert at JLC's Bethesda offices to discuss the VOSCO-related work. The ultimate objective was to gather information to help the Receiver determine whether or not to bring claims against VOSCO, in its capacity as management, for BRICO's condition. Tr. 15. Lambert, Savage and Hinchey spent approximately one week in VOSCO's offices inspecting its books and records and subsequently, Lambert prepared a draft report formalizing her findings. Tr. 19-20.
In March 1994, Savage and Bernstein contacted JLC about ascertaining how BRICO's predecessor auditor (coincidentally also Coopers & Lybrand) came up with its reserve numbers for the 1992 year-end (an audit that was never completed). Tr. 23. This work was put on hold due to expense considerations. Tr. 23.
The JLC-BRICO work consisted of: (1) the VOSCO inspection and a report of findings; (2) an audit for the 1993 year-end; (3) closing BRICO's accounts for 1993; and (4) preparing statutory financial statements. The Receiver also considered Tatlock a "resource person" for the receivership.
C. The JLC-Coopers & Lybrand Engagement
In February or March of 1994, Johnson was contacted by Jay Kelly Wright of Arnold & Porter, the attorney of record for Coopers & Lybrand, with regard to a proposed retention in the Ambassador litigation. Tr. 230. Because Lambert was the partner in charge of the Vermont practice, Johnson spoke with her about possible conflicts with the Ambassador work for Coopers & Lybrand. Tr. 232. Johnson testified that he focused on whether or not JLC had obtained any information relevant to Ambassador by virtue of its association with the Receiver. Tr. 235. Johnson ultimately reached the conclusion that while he thought — taking into consideration the applicable accounting standards — that JLC could have continued to do work for the Receiver on Ambassador (with appropriate confidentiality safeguards in place), together with the Coopers & Lybrand engagement, it was more prudent to decline the Ambassador work. Tr. 238. Specifically, Johnson explained that a conflict between the two assignments did not exist unless he had acquired confidential information about Ambassador by virtue of JLC's association with BRICO. Tr. 240. Further, he saw no client loyalty dilemma with respect to the BRICO work because he viewed BRICO as separate from Ambassador regardless of their overlapping staffs. Tr. 241. Johnson testified that precautions have already been taken to shield JLC employees working on the two different assignments, JLC-BRICO and JLC-Cooper's & Lybrand, from confidential information. Tr. 245-246.
Bernstein did not learn of the JLC-Coopers & Lybrand relationship until after April 28, 1994. Tr. 25. He testified that on April 28, 1994, at a BRICO-related meeting held at the Insurance Department in Vermont, the head of the "Captives Bureau" informed him of the JLC-Coopers & Lybrand relationship. Tr. 27. Bernstein questioned Tatlock, also present at this meeting, about the supposed retention. Tr. 28. When Johnson appeared at Bernstein's deposition in July 1994 (on the
At the hearing, Bernstein testified that he was under the impression that JLC was still providing services to BRICO. Tr. 12. According to Bernstein's testimony, JLC had been contacted regarding updating BRICO's balance sheet as of September 30, 1994. Tr. 20. Lambert testified that the most recent assignment from BRICO was put on hold pending resolution of the instant disqualification motion. By letter dated November 2, 1994, the undersigned was informed by counsel for the Receiver that BRICO has terminated its relationship with JLC.
In short, the Receiver perceives JLC's retention by Cooper & Lybrand as an "adverse engagement" which constitutes a conflict of interest and that, consequently, JLC is precluded from acting as a litigation consultant for Coopers & Lybrand. Additionally, the Receiver points to the seeming impropriety of the JLC-Coopers & Lybrand relationship given the prior involvement between JLC and the Receiver (on BRICO). Alternatively, Coopers & Lybrand views its retention of JLC as devoid of conflict — it claims that JLC was not privy to any confidential information about Ambassador. More specifically, Coopers & Lybrand asserts that because Johnson possesses no disqualifying information, Coopers & Lybrand will not be unfairly advantaged by JLC's predating relationship with the Receiver.
The different positions taken by the Receiver and Coopers & Lybrand reflect their different characterizations of the relationship between JLC and the Receiver. Specifically, the parties diverge on whether or not: (1) JLC was privy to confidential information on Ambassador based on the JLC-BRICO involvement; (2) JLC accepted the JLC-Ambassador engagement and the significance of that; and (3) JLC was part of the "BRICO team". The parties' papers reveal yet another discrepancy: the parties disagree whether Johnson was retained by Coopers & Lybrand to support Cooper's & Lybrand's attempt, as part of its defense, to transfer blame to the Receiver and/or the Receiver's staff, for mismanagement of the Ambassador receivership.
A. Applicable Legal Standards
It is inherently within a court's power to disqualify an expert. See Cordy v. Sherwin-Williams Co., 156 F.R.D. 575, 579 (D.N.J.1994); English Feedlot, Inc. v. Norden Labs., Inc., 833 F.Supp. 1498, 1501 (D.Colo.1993); Great Lakes Dredge & Dock Co. v. Harnischfeger Corp., 734 F.Supp. 334, 336 (N.D.Ill.1990). This power derives from the court's "judicial duty to protect the integrity of the legal process." Wang Labs, Inc. v. Toshiba Corp., 762 F.Supp. 1246, 1248 (E.D.Va.1991).
The Receiver sees JLC's association with Coopers & Lybrand as a clear example of "side-switching." Citing Marvin Lumber & Cedar Co. v. Norton Co., 113 F.R.D. 588 (D.Minn.1986) (Symchych, M.J.), the Receiver equates expert disqualification standards with those applicable to attorneys.
Motions to disqualify arise with great frequency in the area of attorney conflicts; consequently, the applicable guidelines for attorney disqualification are well-established.
In a thorough comparison of the roles of an attorney and expert and upon review of the applicable Canons of the American Bar Association Code of Professional Responsibility
Other courts have ruled similarly. See, e.g., English Feedlot v. Norden, 833 F.Supp. at 1501 ("[t]he expert disqualification standard must be distinguished from the attorney-client relationship because experts perform very different functions in litigation than attorneys"); Paul v. Rawlings Sporting Goods Co., 123 F.R.D. 271, 281 (S.D.Ohio 1988) (attorneys occupy "a position of higher trust, with concomitant fiduciary duties, to a client than does an expert consultant"). Further, while the issue has not been raised here, some courts have stressed that "if experts are too easily subjected to disqualification, unscrupulous attorneys and clients may attempt to create an inexpensive relationship with potentially harmful experts solely to keep them from the opposing party." English Feedlot v. Norden, 833 F.Supp. at 1505 (citing Paul v. Rawlings, 123 F.R.D. at 281-82). Accordingly, this court will not be guided by stringent attorney-client conflict standards in determining whether JLC should be disqualified.
Some federal courts have applied a two-pronged test when faced with a motion to disqualify an expert on the basis of the expert's prior relationship with a party: "First, was it objectively reasonable for the first party who retained the expert to believe that a confidential relationship existed? Second, did that party disclose any confidential information to the expert?" English Feedlot v. Norden, 833 F.Supp. at 1502 (citing Mayer v. Dell, 139 F.R.D. 1, 3 (D.D.C.1991)). See also Palmer v. Ozbek, 144 F.R.D. 66, 67 (D.Md.1992); Wang v. Toshiba, 762 F.Supp. at 1248.
While there are no cases in this circuit setting forth the test specifically as such, the expert disqualification cases undertake a similar analysis. See, e.g., Michelson v. Merrill Lynch Pierce Fenner & Smith, Inc., No. 83 Civ. 8898, 1989 WL 31514 (S.D.N.Y. March 28, 1989) (affirming magistrate judge's findings that in prior relationship with party, long-term relationship with expert was not commenced and that during the initial consultation, privileged communications were not divulged); Nikkal Industries, Ltd. v. Salton, Inc., 689 F.Supp. 187 (S.D.N.Y.1988) (affirming magistrate judge's findings that in prior relationship with party, expert was not retained and no privileged communications were divulged); E.E.O.C. v. Locals 14 and 15, Int'l Union, 1981 WL 163 at *5 (declining to "extend the same prophylactic rule governing attorneys to experts").
1. Existence of a Confidential Relationship
It appears that JLC accepted an engagement with the Receiver on the Ambassador-RCA related work. Tr. 152. However, the parties diverge on whether or not JLC actually commenced the engagement. The
Because of the involvement between JLC and the Receiver on BRICO, and for purposes of this analysis, the court finds that a relationship was established between JLC and the Receiver such that it was objectively reasonable for the Receiver to assume a confidential relationship.
The existence of a confidential relationship, however, does not end the inquiry. In order to warrant disqualification, disqualifying information about Ambassador must also have been transmitted to JLC. See Paul v. Rawlings, 123 F.R.D. at 279.
2. Disclosure of Confidential Information
Savage testified that he thought he discussed material about Ambassador, characterized by him as confidential, during the course of a conversation with Lambert.
b. BRICO and the Receiver's Modus Operandi
There is no doubt that JLC was privy to confidential information regarding the BRICO receivership and the parties do not dispute this. Rather, central to the Receiver's argument is that JLC was privy to the Receiver's modus operandi by virtue of its work on BRICO — and that this constitutes "confidential information" attributable to the Ambassador receivership. The court does not find this theory tenable, nor is it supported by the record.
Savage testified that the BRICO and Ambassador receiverships have operations and
The Receiver finds support for its position, summarized by Bernstein, in Marvin Lumber v. Norton, 113 F.R.D. 588 (D.Minn.1986). In Marvin Lumber, the plaintiff sought to disqualify defendant's consulting expert, a scientific testing laboratory, expected to testify at trial, on conflict grounds. The laboratory had an ongoing relationship with plaintiff wherein it provided a range of services (testing, product development, etc.) to plaintiff and also served as plaintiff's litigation expert in a case involving similar issues. Accordingly, the court found that:
Because, as discussed above, the court declines to adopt the same disqualification standards for experts as for attorneys, Marvin Lumber is not persuasive authority (i.e., a predicate showing that confidential information has been divulged is required).
The Receiver also fails to particularize how knowledge of the Receiver's modus operandi would be prejudicial to it in the Ambassador litigation. Coopers & Lybrand's purported attempt to transfer liability to the Receiver for the shortfall does not render the Receiver's methodology confidential. The Receiver's potential accountability for the Ambassador Receivership is simply not germane.
The record amply supports the conclusion that the Receiver's modus operandi is not confidential information on Ambassador. The BRICO and Ambassador receiverships are separate from each other except both receiverships are located on the same premises and are staffed by some of the same individuals. Tr. 89. The receiverships have separate letterheads, bank accounts, books and records. Tr. 50. At the hearing, Coopers & Lybrand's accounting expert testified that facts and circumstances are different in every receivership/liquidation; there are inevitably different contracts, different relationships and different creditors. Tr. 313. Similarly, common sense undermines the Receiver's modus operandi argument; as testified by Coopers & Lybrand's expert, the systems and procedures of the Receiver have "probably been already discovered in the ten years of Ambassador litigation." Tr. 314. The court, however, does not need to make such a finding.
Further, there is no evidence that even if, arguendo, information about BRICO was relevant to Ambassador, that any such information was relayed by Lambert to Johnson either before or during their conversation about possible conflicts between the two engagements.
The Receiver's position — that JLC was on the "BRICO team" — does not further its disqualification motion. Thereby, the Receiver intimates that JLC played an advocacy-like role. First as already determined above, confidential information about BRICO is not imputed to Ambassador. Second, the record does not sufficiently demonstrate that JLC was in fact a "BRICO team" member. Specifically, the expert explained that "independent auditors" cannot properly be team players: "Clearly, to be independent, [auditors] are not part of management, they don't make decisions ... team players take a little liberty."
B. Applicable Accounting Standards
The conclusion — that disqualification is not warranted — reached by applying the legal standards to the instant facts, is supported
The Coopers & Lybrand's expert testified that the key issue in finding a disqualifying conflict is "whether Mr. Johnson has access to or obtained information, confidential information related to this specific litigation engagement." Tr. 311. Johnson testified that he viewed the Ambassador and BRICO receiverships as two different clients because no one at JLC had "become aware of any information of a confidential matter related to the Ambassador receivership and in litigation concerning Coopers & Lybrand."
For all the foregoing reasons, the Receiver's motion to disqualify JLC from serving as litigation consultant to Coopers & Lybrand is denied.
In short, the Second Circuit's rationale for the above analysis is simply that "an attorney may not knowingly reveal a confidence of his client or use a confidence to the disadvantage of his client." In Re Del-Val, 158 F.R.D. at 273 (citing Evans v. Artek, 715 F.2d at 791).
Both Lambert and Tatlock testified that they were not privy to any confidential information about Ambassador. Tr. 186, 214.
According to Johnson, in the above hypothetical, Company A is Ambassador and George Carpenter is Johnson. Tr. 283, 285. Consequently, if JLC was not precluded from doing work for both Ambassador and Coopers & Lybrand, if it had been retained by the Receiver to do the RCA work, it would follow that BRICO, one further step removed, also did not present conflict problems. Tr. 284. Johnson further testified that because the Ambassador involvement was never realized, i.e. he believed that JLC never accepted the Ambassador assignment, Ambassador did not have to be notified of the JLC-Coopers & Lybrand relationship. Tr. 286-88.