Attorney Disqualification Not Warranted For Failure To Work For The Best Interest Of Corporate Principals

In Landon v Austin, 2015 N.Y. App. Div. LEXIS 4815 (3d Dep't June 11, 2015), a principal of a company argued that a law firm should be disqualified because it put the interests of the company's liability insurer over the personal interests of the principal by vigorously defending the company subjecting the principal to possible personal liability. It was irrelevant that the principal was harmed, however, because the law firm did not represent the principal, but rather the company, and there was no overt indication that the defense of the company was primarily intended to benefit the insurance company. As explained below, the Third Department found that such a situation did not justify disqualification.

In Landon, the plaintiff sought to recover for injuries sustained on a construction project owned by individual defendant Duane Austin ("Austin"). Austin, together with his wife, was the sole shareholder of co-defendant Austin Construction, Inc. ("ACI"), which had equipment and several employees on the site. Austin cross-claimed against ACI for contribution and/or indemnification.

ACI had commercial liability insurance coverage and was assigned as counsel the law firm Smith, Sovik, Kendrick & Sugnet P.C. ("SSKS"). Austin had homeowners insurance and was appointed separate counsel in his individual capacity. The plaintiff obtained summary judgment against Austin individually, but not ACI. The parties proceeded to trial wherein SSKS defended ACI on liability.

At trial, Austin asserted that ACI should be held liable for the excess verdict above his homeowner's policy limit, which was contrary to ACI's position, asserted by SSKS, that it was not liable. Consequently, Austin sought disqualification of SSKS, reasoning that since he is the "alter ego" of ACI, SSKS impermissibly placed the interests of ACI's insurance carrier ahead of his stated wishes. Austin had claimed that "he was acting in his corporate capacity in the lead-up to the injury, which would render ACI liable and bring the liability limits of its commercial liability insurance policy into play." Landon, 2015 N.Y. App. Div. LEXIS 4815 at 2. SSKS refused to assert strategy and instead argued that ACI is not liable and that Austin was acting in his individual, not corporate, capacity.

The Third Department affirmed the denial of Austin's motion for disqualification applying the standard that "[d]isqualification is"¦ appropriate 'where a conflicting interest [between the insurer and insured] may, even inadvertently, affect, or give the appearance of affecting, the obligations of the professional relationship." Id. at 3-4 (internal citations and quotations omitted).

In finding disqualification to be inappropriate, the Court noted that the fact that SSKS' defense of ACI could harm Austin personally was immaterial since SSKS did not represent Austin in his personal capacity. The Court further noted that the defense of ACI furthers its corporate interests and does suggest that the primary goal was to benefit ACI's commercial liability insurer. The Court concluded that "because Austin failed to demonstrate the existence of any conflict of interest between ACI and its insurer, Supreme Court did not abuse its discretion in denying his disqualification motion."

In order to avoid a potential disqualification of counsel, which may be very costly, defense counsel and insurance carriers should be mindful and particular of who exactly the client is and what their interests are. Counsel should be assigned, and strategies determined, based upon that analysis without allegiance to the interests of distinct parties with a financial interest in the insured (i.e. Austin) – which was appropriately accomplished by SSKS and ACI's carrier in Landon.