Rice v. Baron ( 1978 )

456 F. Supp. 1361 (1978)

Henry Hart RICE, Abram Barkan and James Felt & Company, Inc., Plaintiffs,
v.
Irwin BARON, Defendant,
v.
HARROW PROPERTY CORPORATION and James Felt Realty Services, Inc., Additional Defendants on Counterclaims.

No. 77 Civ. 1890(RLC).

United States District Court, S. D. New York.

September 6, 1978.

Bachner, Tally & Mantell, New York City, for plaintiffs and counterclaim defendants; Martin D. Polevoy and Sol V. Slotnik, New York City, of counsel.

Corbin & Gordon, New York City, for defendant Irwin Baron; Sol Neil Corbin, Stephen B. Silverman and Steven A. Schatten, New York City, of counsel.

ROBERT L. CARTER, District Judge.

OPINION

Plaintiffs, Henry Hart Rice, Abram Barkan and James Felt & Co. ("Felt") commenced this action against the defendant, Irwin Baron, alleging that Baron had violated certain provisions of the federal securities laws^[1] and had committed common law fraud in connection with his sale of Felt shares to the plaintiffs in 1971. In his answer, Baron denied the material allegations of the complaint, raised certain affirmative defenses, asserted two counterclaims, and joined two additional parties as counterclaim defendants — Harrow Property Corporation ("Harrow") and Felt Realty Corporation ("Felt Realty").

Defendant seeks summary judgment pursuant to Rule 56, F.R.Civ.P., as to all of Felt's pending claims against him on the grounds that all such claims are barred by the applicable statute of limitations. In addition, Baron seeks to disqualify the firm of Bachner Tally & Mantel ("Bachner Tally"), which currently represents all of the plaintiffs and counterclaim defendants in this action, from further representing any of these clients on the grounds that (1) Charles Tally, one of the senior partners at the Bachner Tally firm, will be called upon at trial to give testimony which will or may be prejudicial to his clients; and (2) that Bachner Tally suffers from a disabling conflict of interest in attempting to represent all of the plaintiffs and counterclaim defendants in this action simultaneously. For the reasons set out below, defendant's motion for summary judgment is granted, and his motion for disqualification is granted in part.

Facts

In February of 1969, a severe fire broke out in a building located at 595 Fifth Avenue, New York City, a building owned by Acruem Associates ("Acruem") and managed by Felt. Litigants Rice, Barkan and Baron were all affiliated with Felt at the time of the fire, but, on the present record, the precise positions each of them held cannot be determined. As a result of that conflagration, several people died and numerous others were injured. The catastrophe spawned litigation by the survivors of the blaze and by the relatives of those who did not survive to recover damages for the injuries caused by the fire. The first summons in these "Fire Actions" was served on Felt on December 29, 1969.

Soon thereafter, on January 1, 1970, the Felt corporate leadership underwent some reorganization. Barkan, who had been Felt's Executive Vice President, was named President of the company. Rice, who had been Felt's Vice President, was designated Senior Vice President. Baron became Chairman of Felt's Board of Directors. And Ralph R. Russ, a non-party to this action, continued to occupy the same position he had held prior to the corporate reshuffling — Treasurer.

One month later, on February 17, 1970, Russ, acting on Felt's behalf, sought to engage John J. Bower to represent Felt in the Fire Actions. Bower had already been designated to represent Acruem in that litigation. On March 18, 1970, Bower accepted the proffered employment. Russ also arranged for Milton Lebe to represent Felt's interest in the Fire Actions to the extent that its liability in those actions might exceed the applicable insurance coverage, at which point the interests of Acruem's insurer and Felt would diverge. In that connection, Felt was advised by the Bower firm on June 11, 1970, that the total amount of damages demanded in the Fire Actions far exceeded the insurance coverage applicable to satisfy claims arising from the fire.

In January of 1971, the allocation of power at Felt was again redistributed. At that time, the Board of Directors elected Barkan, Rice and Russ as a three-member Executive Committee invested with all the power of the Board itself. Concurrently, the Board approved the sale of 500 shares of Felt from Baron back to the corporation at a price of $250 per share. That sale of shares was consummated on January 28, 1971.

On April 13, 1971, Felt's financial statements for the fiscal year ending January 31, 1971, were issued by Eisner & Lubin, a firm of certified public accountants. Footnote "G" of that statement provided that:

"The corporation . . . [Felt] is a co-defendant in a suit for damages arising from a fire at 595 Fifth Avenue, a building managed by it. The aggregate of the claims exceeds the insurance coverage but, in the opinion of counsel, the amount of recovery will be within the limits of the liability insurance carried by the building owner."

It is that footnote which plaintiffs allege was materially misleading in that it understated the potential liability of Felt in the Fire Actions and upon which plaintiffs appear to focus the bulk of their claims of securities law violations and common law fraud.^[2]

On June 2, 1971, Baron effected two additional sales of Felt shares. On that date, Baron sold 190 shares to Rice for an aggregate purchase price of $103,900 and 190 shares to Barkan at an equivalent price. On that same day, Baron entered into an employment contract with Felt for the period beginning February 1, 1971, and ending on January 31, 1977 ("Employment Contract"). That contract provided for Baron to receive a fixed salary plus a percentage of Felt's annual earnings before taxes each year.

On March 31, 1972, a decision on the issue of liability in the Fire Actions was rendered. Both Acruem and Felt were held to be active tortfeasors and to be liable for all the damages arising from the fire.

Soon after the filing of decision, Barkan scheduled a meeting for April 13, 1972, of certain of Felt's officers and professional advisors at the Bachner Tally offices. Those attending included Rice, Russ, Barkan, representatives of Eisner & Lubin (Felt's accountants), Milton Lebe (Felt's counsel as to excess liability in the Fire Actions), William Brach of Brach, Eichler, Rosenberg & Silver (Barkan's personal counsel), and both Charles Tally and Charles Salfeld of the Bachner Tally firm. Baron did not attend that meeting.

The purpose of the April 13th meeting was to discuss the ramifications for Felt and those connected to it of the decision on liability in the Fire Actions. In connection with that meeting, Rice sent a memorandum to Charles Tally, dated April 13, 1972 ("Rice Memorandum"), detailing certain considerations which needed to be taken into account in determining the proper course of action for Felt to follow now that it had been held liable in the Fire Actions. Those considerations included: (1) avoiding any increase in the net worth of Felt; (2) trying to avoid the embarrassment of a Felt bankruptcy; and (3) trying to set up some kind of vehicle to carry on the business of Felt should the liability from the Fire Actions threaten to destroy the corporation. Specifically Rice suggested that they

"might consider bringing into being a new company which would use the name `Felt' but not necessarily `James Felt'; that this new entity conduct their consulting and brokerage business; that the old company remain in business and continue management. At some point within the next year, [he] would like to change the name of the old company to J.F. Management or some similar derivation which would avoid the word `Felt' in its title in case it became necessary to sacrifice [Felt]."

At the April 13th meeting, a memorandum prepared by Charles Salfeld ("Bachner Tally Memorandum") addressing the issues raised in the Rice Memorandum was distributed to those in attendance, including Barkan and Rice. That memorandum stated the following conclusions: (1) if officers and directors of one corporation acted simultaneously as the officers and directors of a second corporation, to which new business was diverted to the detriment of the former, those officers or directors would have violated their fiduciary obligations to the first corporation; (2) if the officers and directors of Felt resigned their positions en masse and created a second, competing corporation to which they attracted most of Felt's business, they probably would have violated their fiduciary obligations to Felt; and (3) if the acts of the officers and directors in depriving a corporation of a business opportunity were detrimental to that corporation's creditors, those creditors would have standing to sue the officers and directors derivatively on behalf of the corporation.

On June 13, 1972, some two months after the meeting at the Bachner Tally offices, Barkan wrote to Tally on a Felt letterhead, thanking him for his "wise counsel and support in their moment of crises." Included with Barkan's letter was a $1,000 check made out from Felt to Bachner Tally.

The Fire Actions were ultimately settled on June 16, 1972, for a total amount of $2,370,000. Felt did not participate in that settlement, and Acruem and its insurer reserved their rights to seek contribution from Felt.

In March of 1973, Felt underwent a structural transformation. Its shareholders joined together with the shareholders of the unrelated corporation of Huberth & Huberth ("H & H") to form a new corporation — James Felt-Huberth & Huberth, Inc. ("JF-H & H"). All Felt stockholders exchanged their Felt stock for shares in the new company, and all H & H stockholders made a similar exchange with respect to their H & H shares. Felt then ceased active operations and its activities were carried on by JF-H & H. The new corporation assumed all of Felt's obligations under its Employment Contract with Baron pursuant to an agreement entered into by it, Felt and Baron on March 13, 1973 ("Assumption Agreement").

The threatened contribution suit against Felt by Acruem and its insurer finally materialized in December of 1973. In an action entitled Emil v. James Felt & Co., Inc., 45 A.D.2d 677, 356 N.Y.S.2d 303, and instituted in New York County Supreme Court, Acruem and its insurer sought to recover a portion of that sum which they had paid out in settlement of the Fire Actions.

In July of 1975, while the Emil suit was percolating, the corporate structure of the young JF-H & H underwent its own transformation. All the original H & H shareholders turned back their shares of JF-H & H in return for the H & H shares they had once held — in effect undoing their earlier transaction. The name of JF-H & H was then changed to Harrow and it continued to operate as before and to hold all of the shares of Felt.

In September of 1975, the final corporate actor in this scenario came into being; Felt Realty was created and commenced operations. Rice became Chairman of the Board of the new company as well as the owner of 45% of its shares. Barkan became the company's President and he too held 45% of its shares. Felt Realty, it appears, soon succeeded to the business, assets and personnel of Harrow, which then, like its predecessor Felt, ceased active operations.

In December of 1975, Bachner Tally, which had not represented Felt or its directors since the April 13, 1972 meeting at its offices, was retained by Felt to assume the management of the Emil litigation. Some months later, on March 3, 1976, Martin Polevoy of the Bachner Tally firm sent a copy of the Bachner Tally Memorandum concerning fiduciary responsibilities to Rice and Barkan. And in March of 1977, the Emil litigation was finally concluded by virtue of a settlement agreement entered into by the parties.

The following month, on April 20, 1977, plaintiffs commenced this action claiming that Baron had defrauded them by inducing them in 1971 to purchase his Felt shares on the basis of the allegedly misleading Felt financial statement coupled with additional oral misrepresentations, all of which significantly underestimated Felt's potential liability in the Fire Actions. In his answer, Baron denied plaintiff's allegations and asserted his own claims for damages against the plaintiffs and the additional counterclaim defendants — Harrow and Felt Realty. Defendant alleges in his first counterclaim that Felt and Harrow defaulted on their obligations to him under the Employment Contract and Assumption Agreement respectively by failing to pay him his fixed salary from June 1, 1976, through January 31, 1977, and by failing to pay him his profit percentage from February 1, 1975, through January 31, 1977. In his second counterclaim, Baron alleges that Rice and Barkan breached their fiduciary duties to Felt and Harrow by creating Felt Realty and diverting business, revenues and profits from Felt and Harrow to Felt Realty, thereby injuring Baron by reducing the amounts he would be paid under the Employment Contract and Assumption Agreement. Baron also alleges that Felt Realty conspired with Rice and Barkan in their scheme to divert business, revenues and profits to Felt Realty, and that it wrongfully induced Felt and Harrow to default on their obligations to Baron under the Employment Contract and Assumption Agreement.

Discussion

1. Statute of Limitations

The first branch of Baron's instant motion focuses on Felt's securities and common law claims against him arising out of his sale of Felt shares back to the corporation pursuant to a contract entered into by the parties on January 28, 1971. That contract provided that Baron agreed to sell 500 shares of Felt common stock to Felt in return for a cash payment of $125,000. The contract further stated that "it contain[ed] the entire understanding of the parties with respect to the subject matter [thereof]," and that there were "no representations, warranties or understandings relating to the subject matter [thereof], except as expressly set forth [therein]." Baron now argues that he is entitled to have judgment entered in his favor as to all of those claims because they are barred by the applicable statute of limitations.

In actions alleging violations of the securities laws, this circuit has consistently applied the New York State statute of limitations governing actions based upon common law fraud. See, e. g., Stull v. Bayard, 561 F.2d 429, 431 (2d Cir. 1977), cert. denied, 434 U.S. 1035, 98 S. Ct. 769, 54 L. Ed. 2d 782 (1978); Klein v. Shields & Co., 470 F.2d 1344, 1346 (2d Cir. 1972); Klein v. Auchincloss, Parker & Redpath, 436 F.2d 339, 341 (2d Cir. 1971). Obviously, that statutory period also controls with respect to plaintiff's common law fraud claim. See N.Y.C. P.L.R. §§ 203(f), 213(8) (McKinney Supp. 1977-78). Thus, for Felt's claims to be timely, they must meet one of "two separately-timed and alternative limitations periods . . .: six years from accrual or two years from discovery, whichever is longer." Hoff Research & Development Laboratories, Inc. v. Philippine National Bank, 426 F.2d 1023, 1026 (2d Cir. 1970) (footnote omitted); accord, Stull v. Bayard, supra, 561 F.2d at 432.

Felt concedes, as indeed it must, that its action is barred under that portion of the limitations statute which requires that suit be brought within two years from the date of discovery^[3] because it is undisputed that plaintiff had actual knowledge of defendant's allegedly fraudulent conduct no later than December 5, 1973,^[4] but did not institute suit until April 20, 1977, well after the two year period had run. See Stull v. Bayard, supra, 561 F.2d at 432; Rickel v. Levy, 370 F. Supp. 751, 756-57 (E.D.N.Y. 1974). Thus, the only remaining question is whether plaintiff commenced this action within the alternative limitations period — six years from the date of accrual.

In fixing the date of accrual for Felt's causes of action, the court must of course "look to federal law . . . to determine when the limitation period starts to run" with respect to Felt's federal claims, Stull v. Bayard, supra, 561 F.2d 432; accord, Arneil v. Ramsey, 550 F.2d 774, 780 (2d Cir. 1977); Braunstein v. Laventhol & Horwath, 433 F. Supp. 1077, 1079 (S.D.N.Y. 1977) (MacMahon, J.), and to New York law to determine when the limitation period begins to run with respect to Felt's common law claims. Under both New York and federal law, however, the governing standard is the same. Compare Stull v. Bayard, supra, 561 F.2d at 432 (federal standard) with Dynamics Corp. v. International Harvester Co., 429 F. Supp. 341, 355 (S.D.N.Y. 1977) (Weinfeld, J.) (state standard).^[5] The statute of limitations began to run as to all Felt's claims from the time when plaintiff first suffered a loss as a result of defendant's fraudulent conduct, that is, when a plaintiff with assumed knowledge of the fraudulent wrong could first have asserted a claim for relief. Stull v. Bayard, supra, 561 F.2d at 432; accord, Koch v. Moseley, [1977-78 Transfer Binder] Sec.L.Rptr. (CCH) ¶ 96,283, at 92-809 (E.D.N.Y.1977).

It would seem to be beyond dispute that the date from which the statute of limitations began to run on Felt's claims was January 28, 1971, the date on which Felt entered into the written contract with Baron to repurchase its shares. See Stull v. Bayard, supra; Dynamics Corp. v. International Harvester Co., supra. But in an attempt to avoid the statutory bar to this suit which would inevitably follow from the determination that the January 28th date was controlling for statute of limitations purposes, Felt puts forward the somewhat novel argument that because its purchase was "part and parcel of [Baron's] plan to sell his remaining Felt shares to Rice and Barkan," the relevant date for computing the six-year statutory period applicable to Felt's claims ought to be June 2, 1971, the date on which Rice and Barkan entered into their respective contracts to purchase Baron's remaining Felt shares. Felt argues that since the statute of limitations only began to run on its claims from June 2, 1971, the commencement of this suit on April 20, 1977, was timely. I cannot agree.

Felt's claim in this litigation is that Baron fraudulently induced it to enter into a contract to repurchase its own shares. Felt allegedly suffered injury in that it bought shares it would not have purchased had the material facts concerning the Fire Actions been disclosed. The critical fact here is that Felt contracted to purchase Baron's shares on January 28, 1971, not June 2, 1971. There is no indication either in that contract or in any of the other materials submitted by the plaintiff that Felt's January 28th agreement to purchase Baron's shares was not to become final and binding on the parties until the subsequent execution of two similar agreements by Baron with Rice and Barkan respectively. In fact, the language of the January 28th contract specifically provides that there were "no representations, warranties or understandings" between the parties other than those expressly set forth in the contract. Thus, the obligations of both Felt and Baron under their contract became fixed on January 28, 1971. It was on that date that Felt allegedly suffered injury by purchasing shares it would not otherwise have purchased. It is manifest that if Felt had immediately discovered the misleading nature of Baron's representations, it could have instituted suit on that very same day raising all the claims which are being asserted here. See Stull v. Bayard, supra, 561 F.2d at 432; Dynamics v. International Harvester Co., supra, 429 F.Supp. at 355. Thus, it is from January 28, 1971, that the statutorily created time limitation began ticking away on plaintiff's rights. Plaintiff failed to bring this action within the requisite time period and, therefore, its suit is now time-barred. Accordingly, upon submission of an appropriate order, judgment will be entered in favor of defendant as to all of Felt's claims.

2. Disqualification Motion

Turning to the lawyer disqualification branch of defendant's motion, it should be noted at the outset that our Court of Appeals has recognized that such motions have become increasingly popular "`tools of the litigation process, being used . . . for purely strategic purposes.'" Allegaert v. Perot, 565 F.2d 246, 251 (2d Cir. 1977) (citation omitted); International Electronics Corp. v. Flanzer, 527 F.2d 1288, 1289 (2d Cir. 1975); J. P. Foley & Co. v. Vanderbilt, 523 F.2d 1357, 1360 (2d Cir. 1975) (Gurfein, J., concurring). Consequently, in ruling on such motions, courts must be careful "to prevent literalism from possibly overcoming substantial justice to the parties." J. P. Foley & Co. v. Vanderbilt, supra, 523 F.2d at 1360 (Gurfein, J., concurring); see United States ex rel. Sheldon Electric Co. v. Blackhawk Heating & Plumbing Co., 423 F. Supp. 486, 489 (S.D.N.Y.1976) (Cannella, J.). As the Court of Appeals stated in International Electronics Corp. v. Flanzer, supra:

"`It behooves this court, therefore, while mindful of the existing Code [of Professional Responsibility of the American Bar Association], to examine afresh the problems sought to be met by that Code, to weigh for itself what those problems are, how real in the practical world they are in fact, and whether a mechanical and didactic application of the Code to all situations might not be productive of more harm than good, by requiring the client and the judicial system to sacrifice more than the value of the presumed benefits.'"

527 F.2d at 1293. It is in that "spirit" that the court approaches the instant motion. Ibid.

A. Advocate as witness

Invoking Canon 5^[6] and Disciplinary Rule ("D.R.") 5-102^[7] of the ABA Code of Professional Responsibility ("Code"),^[8] Baron contends that Bachner Tally must be disqualified from further representing all of its present clients in this action under the so-called "advocate-witness rule" which "bars an attorney from acting as trial counsel in a case in which he or a member of his firm will be a material witness." Note, The Advocate-Witness Rule: If Z, then X. But Why?, 52 N.Y.U.L.Rev. 1365, 1366-67 (1977) (footnote omitted); see, e. g., International Electronics Corp. v. Flanzer, supra; J. P. Foley & Co. v. Vanderbilt, supra; Kroungold v. Treister, 521 F.2d 763 (3rd Cir. 1975); Ross v. Great Atlantic & Pacific Tea Co., 447 F. Supp. 406 (S.D.N.Y.1978) (MacMahon, J.); Foster Wheeler Corp. v. Babcock & Wilcox Co., 440 F. Supp. 897 (S.D.N.Y. 1977) (Conner, J.). Specifically, defendant relies on subsection (B) of D.R. 5-102 which requires that a lawyer discontinue his representation of a client when the "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" and "it is apparent that his testimony is or may be prejudicial to his client." D.R. 5-102(B) (emphasis added) (footnote omitted).

Baron asserts that he intends to call Charles Tally to testify at trial as to certain matters raised by Baron's second counterclaim.^[9] Baron states that Tally will be called to the stand to establish that:

(1) Rice telephoned Tally a few days prior to the April 13th meeting and expressed the view that in light of the liability opinion in the Fire Actions they (those owning shares in Felt) should avoid adding to the net worth of Felt and should create some kind of ongoing corporate vehicle to carry on Felt's business in case Felt collapsed under the weight of the Fire Action claims;

(2) the facts contained in the "Statement of Facts" of the Bachner Tally Memorandum concerning diversion of corporate assets and business opportunities were derived from conversations which Rice had with either Tally or Salfeld; and

(3) the Bachner Tally Memorandum was distributed to Rice and Barkan at the April 13th meeting, at which time Tally informed all those attending the meeting that he adopted the conclusions of the memorandum as his own.^[10]

Baron argues that Tally's testimony "will or may be prejudicial" to Rice, Barkan and Felt Realty in that it will aid Baron in establishing his claim that these counterclaim defendants "conspired to deprive Baron of his rights under the employment agreement."^[11] Consequently Baron contends that Bachner Tally must be disqualified from further acting as trial counsel in this action.

Bachner Tally vigorously opposes disqualification. It asserts that Tally's testimony would not be prejudicial to Rice, Barkan and Felt Realty because it would do no more than establish that those counterclaim defendants were, as early as 1972, seeking to protect the financial interests of all those connected to Felt, including Baron, and were not, as Baron contends, seeking to deprive him of his rights under the Employment Contract or Assumption Agreement. In addition, Bachner Tally claims that Tally's testimony is merely cumulative of that which has already been admitted by the parties to this action, as well as that which has been testified to by a third-party witness — Ralph R. Russ. Therefore, it is asserted that Tally's testimony could in no way be considered as "prejudicial" to Rice, Barkan or Felt Realty, and disqualification pursuant to D.R. 5-102(B) is not required.

In evaluating the defendant's claims as to the allegedly prejudicial nature of Tally's testimony, the court is mindful of the fact that motions made pursuant to D.R. 5-102(B) have been subjected to particularly strict judicial scrutiny because, as the drafters of the Code themselves pointed out, the rule "`was not designed to permit a lawyer to call opposing counsel as a witness and thereby disqualify him as counsel.'" Code, Canon 5 n. 31, quoting Galarowicz v. Ward, 119 Utah 611, 620, 230 P.2d 576, 580 (1951); accord, Kroungold v. Treister, supra; Freeman v. Kulicke & Soffa Industries, Inc., 449 F. Supp. 974 (E.D.Pa.1978); Ross v. Great Atlantic & Pacific Tea Co., supra; Connell v. Clairol, Inc., 440 F. Supp. 17 (N.D.Ga.1977); Harrison v. Keystone Coca-Cola Bottling Co., 428 F. Supp. 149 (M.D.Pa.1977). Just recently, in Freeman v. Kulicke Soffa Industries, Inc., supra, Chief Judge Lord weighed the strong potential for abuse inherent in this rule together with the important purpose the rule was designed to serve, i. e., assuring the client and the bar of the independent professional judgment of trial counsel in situations where it would be in the client's interest to attack the credibility of a lawyer-witness. Chief Judge Lord articulated a balanced standard for courts to apply in assessing the merits of disqualification motions made pursuant to D.R. 5-102(B). I find the reasoning of Freeman persuasive and adopt its standards here.

For testimony to be "prejudicial" within the meaning of the disciplinary rule, the "projected testimony of a lawyer or firm member must be sufficiently adverse to the factual assertions or account of events offered on behalf of the client, such that the bar or the client might have an interest in the lawyer's independence in discrediting that testimony." Id., 449 F.Supp. at 977. See also Nakasian v. Incontrade, Inc., 78 F.R.D. 229, 232 (S.D.N.Y.1978) (Lasker, J.). Furthermore, the moving party "bears the burden of demonstrating specifically how and as to what issues in the case the prejudice may occur and that the likelihood of prejudice occurring is substantial." Freeman v. Kulicke & Soffa Industries, Inc., supra, 449 F.Supp. at 978; see Kroungold v. Treister, supra, 521 F.2d at 766; Ross v. Great Atlantic & Pacific Tea Co., supra, 447 F.Supp. at 408.^[12]

Upon examining the relevant deposition excerpts tendered to the court by the parties, it is immediately apparent that defendant's broad characterization of the prejudice that would be inflicted on counterclaim defendants Rice, Barkan and Felt Realty, if Tally testifies at trial, is without substance. Defendant asserts that Tally's testimony will aid him in establishing that those counterclaim defendants "conspired to deprive Baron of his rights under [his] employment agreement."^[13] Yet there is not one segment of Tally's testimony which can in any way be construed as indicating that in April of 1972, when Rice, Barkan and others discussed the feasibility of setting up a new corporation to take over Felt's operations, they focused on, or were even aware of, the negative impact such a plan might have on defendant's rights under his Employment Contract. This does not mean, however, that Tally's testimony is without any potentially prejudicial elements. It simply means that the potential for prejudice is more limited than that which defendant urges. Any prejudice which Rice, Barkan and Felt Realty might suffer as a result of Tally's testimony would only arise from the extent to which such testimony indicates that Rice and Barkan contemplated a scheme to divert assets and revenues from Felt to a new corporation as early as 1972, and that they were well aware at that time that any such scheme would be a violation of their fiduciary duties to Felt. Testimony of that nature might shed light on the subsequent activities of Rice and Barkan in 1975 in setting up Felt Realty, particularly with respect to the defendant's allegations that their actions in 1975 were committed "willfull[y] and in bad faith," thus justifying the assessment of punitive damages against them. It is from that perspective that Tally's testimony must be examined and compared with the testimony of the parties themselves to determine its prejudicial or non-prejudicial nature.

1. Rice Phone Call

The first portion of Tally's testimony which is alleged to be prejudicial to Rice, Barkan and Felt Realty is Tally's account of a phone conversation with Rice wherein Rice stated that they should avoid adding to the net worth of Felt and should seek to create a new entity to carry on Felt's business. Rice admits, however, that he communicated with Tally either orally or in writing prior to the April 13th meeting concerning the question of setting up a new corporate entity to take over Felt's business. (Rice Tr. at 147). More importantly, Baron has in his possession a copy of the Rice Memorandum specifically detailing Rice's thoughts on how to deal with the corporate crises which were generated by the liability decision in the Fire Actions. There is nothing in Tally's testimony concerning his phone conversation with Rice that is not contained in the Rice Memorandum. Accordingly, the court finds it difficult to understand what possible prejudice could accrue to the counterclaim defendants as a result of this segment of Tally's testimony.

2. Statement of Facts in the Bachner Tally Memorandum

The second allegedly prejudicial element of Tally's testimony is his declaration that the "Statement of Facts" in the Bachner Tally Memorandum detailing a plan to divert assets and business from Felt to a new corporation was based on a conversation between Rice and either himself or Salfeld. Although Rice was not specifically asked at his deposition about the origin of the Statement of Facts, the papers now before the court do not suggest that any dispute exists as to its origin. Moreover, Rice has already testified that the purpose of the April 13th meeting was to discuss the possibility of setting up a new corporation to take over the business of Felt. (Rice Tr. at 90). Thus, testimony that the Statement of Facts, which details such a scheme, originated with Rice adds little, if anything, to that which Rice has already admitted. And even if it does add something, the origin of the Statement of Facts is a fact to which the parties could easily stipulate, thus obviating the need for any oral testimony by Tally on the issue. See Nakasian v. Incontrade, Inc., supra, 78 F.R.D. at 232.

3. April 13th Meeting

The final portion of Tally's allegedly prejudicial testimony concerns the April 13th meeting itself. Thus, Tally testified that Rice and Barkan each received a copy of the Bachner Tally Memorandum at that meeting and that Tally informed those attending the meeting that he adopted the conclusions set forth therein. But both Barkan and Rice admit that they attended the meeting. (Barkan Tr. at 261; Rice Tr. at 89-90). Rice also admits to having received the Bachner Tally Memorandum (Rice Tr. at 147), and although Barkan was not asked at his deposition whether he too received a copy, there is again nothing in the papers now before the court to suggest that any dispute on that issue exists. Moreover, Tally's testimony as to the discussions that took place at the meeting is not at all enlightening. Rice already testified that the parties focused on how to insulate the corporate principals from the impending doom of the Fire Actions; "[w]hether [they] could create an entity which would cut off the assets exposed to the litigation as of that date, and not continue to be working in a vulnerable corporate entity, which might be destroyed by the claims in the prior litigation." (Rice Tr. at 90). He also made clear that Tally advised all those attending the meeting to discard any proposal to set up a new corporation to which Felt's business could be diverted. (Rice Tr. at 92). Tally's testimony again adds nothing to that which has already been testified to by the parties themselves.

4. Conclusion

In sum, upon reviewing all the depositions and accompanying papers, I conclude that the defendant has simply not met its burden of establishing the necessary "prejudice" to warrant the disqualification of Bachner Tally pursuant to D.R. 5-102(B). Baron has not pointed to any segment of Tally's testimony which is at odds with the parallel account of events offered by the parties themselves. See Freeman v. Kulicke & Soffa Industries, Inc., supra. Nor has defendant really focused on any single issue and explained how and why the counterclaim defendants will be prejudiced by Tally's testimony on that issue. Ibid. Disqualifying Bachner Tally pursuant to D.R. 5-102(B) would result in depriving the counterclaim defendants of trusted counsel without giving rise to any countervailing benefit to either those clients themselves or to the judicial system. See International Electronics Corp. v. Flanzer, supra, 527 F.2d at 1293. Accordingly, the motion to disqualify counsel pursuant to D.R. 5-102(B) is denied.

B. Multiple Representation

Baron's alternative contention is that Bachner Tally must be disqualified from further representing all of its present clients in this suit simultaneously because such multiple representation places the firm under a disabling conflict of interest. He relies on Canons 5^[14] and 9^[15] of the Code and more specifically on D.R. 5-105(B) which provides:

"A lawyer shall not continue multiple employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by his representation of another client, except to the extent permitted under DR 5-105(C)." (Footnote omitted.)

The latter section of the Rule then provides:

"[A] lawyer may represent multiple clients if it is obvious that he can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of his independent professional judgment on behalf of each."

Defendant also points out that the ethical considerations ("E.C.") accompanying Canon 5 "provide that the professional judgment of a lawyer must be exercised solely for the benefit of his client, free of competing influences and loyalties, and this precludes his acceptance of employment that will adversely affect his judgment or dilute his loyalty." Cinema 5, Ltd. v. Cinerama, Inc., 528 F.2d 1384, 1386 (2d Cir. 1976); see Code, E.C. 5-1, 5-14.

Baron maintains that Bachner Tally's joint representation of Felt and Harrow, on the one hand, and Rice, Barkan and Felt Realty, on the other, violates these ethical precepts. The alleged conflict between these two groups is said to be generated by Baron's counterclaims. Thus, Baron argues that if he successfully recovers on his counterclaim against Felt and Harrow wherein he alleges that they defaulted on their respective obligations under the Employment Contract and Assumption Agreement, it will be in their interest to assert a claim for indemnification over against the remaining counterclaim defendants — Rice, Barkan and Felt Realty — thereby setting up the conflict of interest between the two groups.

This potential indemnification claim against Rice, Barkan and Felt Realty would be premised on precisely the same factual contentions that underly Baron's own second counterclaim, i. e., that Rice and Barkan breached their fiduciary obligations to Felt and Harrow by diverting assets, revenues, and business from Felt and Harrow to Felt Realty; that Felt Realty aided and abetted them in committing that breach; and that all of this activity was to the detriment of Baron's rights under the Employment Contract and Assumption Agreement. Since any default by Felt and Harrow on their obligations to Baron could be characterized as having been caused by the alleged fiduciary breaches of Rice and Barkan, breaches which Felt Realty is alleged to have aided and abetted, Baron maintains that Felt and Harrow could require Rice, Barkan and Felt Realty to indemnify them for any judgment rendered against them in Baron's favor. In addition, Baron suggests that based on those same factual contentions Felt, or Harrow, or one of Harrow's shareholders suing derivatively,^[16] might wish to institute an independent action against Rice, Barkan and Felt Realty to recover any additional monies that were wrongfully diverted from Felt and Harrow to Felt Realty.

Baron argues that the potentially adverse interests of these two sets of clients, as just outlined, make it impossible for Bachner Tally properly to exercise its independent professional judgment on behalf of each set of clients simultaneously, and that in attempting to do so, the firm creates, at the very least, the appearance of representing conflicting interests. See Cinema 5, Ltd. v. Cinerama, Inc., supra, 528 F.2d at 1387. Consequently, Baron urges that Bachner Tally must be disqualified from representing at least one set of its present clients.

In Estates Theatres, Inc. v. Columbia Pictures Industries, Inc., 345 F. Supp. 93 (S.D. N.Y.1972), Judge Weinfeld articulated the policy underlying the rule against dual representation where one client may be adversely affected by his lawyer's representation of a second client. As the court there stated:

"[C]onsiderations of public policy, no less than the client's interests, require rigid enforcement of the rule against dual representation where one client is likely to be adversely affected by the lawyer's representation of another client and where it appears he cannot exercise independent judgment and vigorous advocacy on behalf of the one without injuring the interests of the other. A lawyer should not be permitted to put himself in a position where, even unconsciously he will be tempted to `soft pedal' his zeal in furthering the interests of one client in order to avoid an obvious clash with those of another, at least in the absence of the express consent of both clients."

Id. at 99 (footnotes omitted). More recently our Court of Appeals has written that "`with rare and conditional exceptions, the lawyer may not place himself in a position where a conflicting interest may, even inadvertently, affect, or give the appearance of affecting, the obligations of the professional relationship.'" Cinema 5, Ltd. v. Cinerama, Inc., supra, 528 F.2d 1386, quoting Matter of Kelly, 23 N.Y.2d 368, 376, 296 N.Y. S.2d 937, 946, 244 N.E.2d 456 (1968).

If, in the present case, Felt and Harrow had already asserted a crossclaim for indemnification against Rice, Barkan and Felt Realty, "`no one could conscionably contend'" that Bachner Tally could simultaneously represent both the cross claim plaintiffs and the cross claim defendants in this action. Code, Canon 5 n.19, quoting Jedwabny v. Philadelphia Transportation Co., 390 Pa. 231, 235, 135 A.2d 252, 254 (1957); see Cinema 5, Ltd. v. Cinerama, Inc., supra, 528 F.2d at 1386. The question presented here then is whether in a situation which is one step removed from the hypothetical one just posed, i. e., where Felt and Harrow may assert a cross claim for indemnification, or perhaps, institute an independent action for damages based upon the same facts that would give rise to the indemnification claim, there exists a sufficient conflict of interest between these two sets of litigants to warrant having them represented by separate counsel. The answer to that question must be "yes."

By the very fact of advising Felt and Harrow that they have any right to indemnification or any independent claim for damages against the remaining counterclaim defendants, Bachner Tally would be acting adversely to the interests of their present clients Rice, Barkan and Felt Realty. See ABA Informal Ethics Opinions, 1119 (1975). Conversely, in failing to so advise Felt and Harrow, Bachner Tally would, quite obviously, be acting adversely to the interests of Felt and Harrow, who are also current Bachner Tally clients. See ibid. Thus, the conflict of interest to which Bachner Tally is subject is immediately apparent.

Furthermore, in deciding whether to assert an indemnity claim, or institute an independent suit, or even take no action whatsoever as against Rice, Barkan and Felt Realty, Felt and Harrow are entitled to the independent professional judgment of counsel "free of compromising influences and loyalties." Cinema 5, Ltd. v. Cinerama, Inc., supra, 528 F.2d at 1386; see Code, E.C. 5-1. But here, where Bachner Tally is currently representing those very parties against whom such an indemnification claim or independent suit might lie, in litigation where the basis for such an indemnification claim or independent suit is specifically at issue, Bachner Tally is subject to precisely the conflicting pressures and loyalties which the Code seeks to prohibit by virtue of its Canons and Disciplinary Rules. Cf. Messing v. FDI, Inc., 439 F. Supp. 776 (D.N.J.1977); Cannon v. U. S. Acoustics Corp., 398 F. Supp. 209 (N.D.Ill.1975), aff'd in relevant part, 532 F.2d 1118 (7th Cir. 1976); Lewis v. Shaffer Stores Co., 218 F. Supp. 238 (S.D.N.Y.1963) (McLean, J.).

Even if Bachner Tally's judgment were in no way impaired by its current multiple representation, that representation is certainly sufficient to give the firm the "`appearance of representing conflicting interests,'" Cinema 5, Ltd. v. Cinerama, Inc., supra, 528 F.2d at 1387, which is in and of itself sufficient to warrant disqualifying it from continuing to represent all of the counterclaim defendants simultaneously. Ibid.; see Fund of Funds, Ltd. v. Arthur Anderson & Co., 567 F.2d 225, 234-35 (2d Cir. 1977). Thus, unless Bachner Tally can justify its continued representation of both sets of litigants in this action under one of those "`rare and conditional exceptions,'" Cinema 5, Ltd. v. Cinerama, Inc., supra, 528 F.2d at 1386, to the ban against such multiple representation, the firm must be disqualified from continuing to represent all of its present clients in this action simultaneously.

The first exception pursuant to which Bachner Tally seeks to justify its multiple representation is what might be termed the "identity of interest" exception. See Brown & Williamson Tobacco Corp. v. Daniel International Corp., 563 F.2d 671 (5th Cir. 1977). In Brown & Williamson, for example, although two corporations were technically in adverse positions in ongoing litigation, one being a fourth party plaintiff and the other a fourth party defendant, the court held that the joint representation of those two corporate entities was proper because of the "substantial identity of interests" between the companies. Id. at 673. The stock of each company was all owned by the same three members of one family, except for a miniscule amount held by the children of two of those three co-owners. Ibid. Moreover, the court recognized that the only reason that the affiliate corporation was sued at all was to insure that a fifth party could be brought into the action with whom, both affiliate corporations agreed, any liability must lie. Ibid. Bachner Tally argues that the same result should apply here since any judgment against Felt or Harrow would affect substantially the same people as would a judgment against Felt Realty, and consequently these three corporations also maintain a "substantial identity of interests."

That argument must be rejected. Since Harrow owns 100% of Felt their interests are certainly identical. But the same cannot be said for the interests of Harrow and Felt Realty. Although Rice and Barkan are substantial shareholders of both corporations, each owning 33 1/3 of Harrow and 45% of Felt Realty, the corporate holdings of the remaining shareholders differ as between the two corporations. Arthur Beman owns 16% of Harrow, but only 10% of Felt Realty; Russ owns 14% of Harrow, but 0% of Felt Realty; and Baron owns 1 1/3 of Harrow, but 0% of Felt Realty. Thus, the stock ownership of Harrow and Felt Realty is sufficiently distinct so that it simply is not true that the same people would be affected financially in the same way regardless of whether Harrow or Felt Realty is forced to bear the financial responsibility of any judgment in Baron's favor. Moreover, in the present case, there exists the possibility of a successful indemnification claim by Felt and Harrow not only against Felt Realty, but also against the individual directors Rice and Barkan. Clearly Russ, Beman and Baron would benefit if either Rice or Barkan were forced to shoulder the full burden of any judgment against Felt or Harrow, rather than those corporations themselves. Therefore, the five counterclaim defendants here do not have the substantial identity of interests necessary to justify their joint representation by one law firm, and the result reached in Brown & Williamson cannot here obtain.

Alternatively, Bachner Tally maintains that all of its clients — Rice, Barkan, Felt, Harrow and Felt Realty — have freely and knowingly consented to their joint representation by the Bachner Tally firm. Accordingly, Bachner Tally argues that its continued representation of all of its present clients is proper under the governing ethical standards. See Petition of Trinidad Corp., 229 F.2d 423, 430 (2d Cir. 1955); Estates Theatres, Inc. v. Columbia Pictures Industries, Inc., supra, 315 F.Supp. at 99; Code, D.R. 5-105(C).

Bachner Tally's consent argument must also be rejected. Even had proper consents been submitted to the court on behalf of all five Bachner Tally clients, there would still be a serious question as to the propriety of the multiple representation in this action because of the potentially conflicting interests outlined above; it simply is not "obvious" that one firm can adequately represent the interests of both sets of counterclaim defendants. See Matter of Kelly, supra, 23 N.Y.2d 368, 378, 296 N.Y.S.2d 937, 945, 244 N.E.2d 456; Code, Canon 5 n.19; ABA Informal Ethics Opinions, C-723, 1119 (1975). But compare In re Taylor, 567 F.2d 1183 (2d Cir. 1977). In the present case, however, no such valid consents have ever been tendered to the court by Felt or Harrow. The consents submitted on behalf of those litigants were executed solely by Rice and Barkan — the very directors whom Baron alleges violated their fiduciary obligations to those same corporations. There is no indication of any participation by "non-interested" directors in the execution of those corporate consents, nor is there any suggestion of any other corporate procedure which was utilized to obviate the blatant conflict of interests that exists when the directors whose interests appear to be adverse to that of the corporation consent to joint legal representation on behalf of themselves and the corporation. See Cannon v. U. S. Acoustics Corp., supra, 398 F. Supp. 216 n.10. See also Messing v. FDI, Inc., supra, 439 F.Supp. at 784. In light of these circumstances, the purported consents of Felt and Harrow are insufficient to justify Bachner Tally's continued, joint representation of both Felt and Harrow, and the remaining counterclaim defendants. The court, therefore, concludes that these two sets of litigants must each be represented by separate counsel.

C. Remedy

Although it is clear that Bachner Tally cannot continue to represent all of its present clients in this action, the proper choice of which set of clients it should continue to represent is not similarly transparent.^[17] On the one hand, Bachner Tally represented Felt in connection with the April 13th conference, transmitted the Bachner Tally Memorandum to Rice and Barkan again in 1976 (presumably in their roles as Felt directors), and then represented Felt in connection with the Emil litigation which ultimately settled in 1977. On the other hand, Bachner Tally has never been general counsel to Felt and has maintained a continuing attorney-client relationship with Rice since the 1950s. If those factors were the only ones to be considered in resolving the present conflict, I would hold that Bachner Tally's sustained representation of Felt in connection with matters relating to the issues raised by Baron's counterclaims dictates that Bachner Tally remain as counsel for Felt and Harrow and that new counsel be found for the remaining counterclaim defendants. In this case, however, certain additional factors need be considered.

First, it is significant that Felt's original claims which prompted this litigation are no longer at issue, the court having held that they were barred by the applicable statute of limitations. Rice and Barkan's initial claims, on the other hand, are still very much alive. Thus, both the court and those two plaintiffs could benefit from Bachner Tally's familiarity and expertise with respect to that aspect of this case while no comparable benefit could accrue to Felt or Harrow.

Second, in light of the proceedings which have so far taken place here, Felt and Harrow may well be better off obtaining counsel other than Bachner Tally to represent them in this litigation. Bachner Tally has to date adopted the position on behalf of all five of its clients that all their interests are coterminous. Bachner Tally has also expressed its preference to continue as counsel for Rice, Barkan and Felt Realty, rather than for Felt and Harrow, if it is required to withdraw as counsel for one set of its present clients. While this expression of preference is, of course, not binding on the court, Estates Theatres, Inc. v. Columbia Pictures Industries, Inc., supra, 345 F.Supp. at 100, it, together with the position which Bachner Tally has espoused thus far in the litigation, suggests that a more detached and impartial view of this suit and of the legal alternatives available to Felt and Harrow might be had by counsel other than Bachner Tally. In sum, "I believe that it would be wise for [Felt and Harrow] to retain independent counsel, who have had no previous connection with the corporation[s], to advise [them] as to the position which [they] should take in this controversy." Lewis v. Shaffer Stores, supra, 218 F.Supp. at 240 (citation omitted).

Upon consideration of these additional factors, I conclude that Bachner Tally should continue as counsel for Rice, Barkan and Felt Realty, and that Felt and Harrow should engage new and independent counsel. Defendant's contention that there would be an "appearance of impropriety," see Code, Canon 9, in Bachner Tally representing Rice, Barkan and Felt Realty after having represented Felt on the related matters detailed earlier fails to persuade me that this resolution of the present conflict is inappropriate. It may well be that if, after consultation with counsel, Felt and Harrow decide that it would be in their interests to disqualify Bachner Tally from further participating in this suit, Bachner Tally would be subject to disqualification based upon the claim that matters raised in this litigation are "substantially related" to matters in which Bachner Tally previously represented Felt. See, e. g., Fund of Funds, Ltd. v. Arthur Anderson Co., supra; NCK Organization Ltd. v. Bregman, 542 F.2d 128 (2d Cir. 1976); Emle Industries, Inc. v. Patentex, Inc., 478 F.2d 562 (2d Cir. 1973). Such a motion would invoke the strictures of Canon 4^[18] as well as Canon 9.^[19] But the determination of that issue must await Felt and Harrow's decision as to where their interests in this litigation lie. "[That] is a matter for [them] to determine in the exercise of [their] independent legal and business judgment." In re Yarn Processing Patent Validity Litigation, 530 F.2d 83, 88 (5th Cir. 1976).

It is very possible that even after consulting with new and independent counsel, Felt and Harrow may determine that it is simply not in their interest to pursue an indemnification claim or an independent action against the remaining counterclaim defendants. They may, therefore, have no interest in seeking to disqualify Bachner Tally from further representing Rice, Barkan and Felt Realty in this action. After all, as Bachner Tally has pointed out, all of Harrow's shareholders, with the exception of Baron who owns only a miniscule portion of Harrow's shares, are connected in one way or another to Felt Realty.^[20] While the relationship between the shareholders of Felt Realty and the shareholders of Harrow is not sufficiently close to justify their joint representation under the doctrine of Brown & Williamson, see discussion supra, it may suffice in the world of practical realities to preclude any suit by Felt and Harrow against the remaining counterclaim defendants.^[21] Thus, it would seem premature to prohibit Bachner Tally from further representing Rice, Barkan and Felt Realty at present.

If, on the other hand, Felt and Harrow conclude that it is in their interest to seek the disqualification of Bachner Tally from further participating in this litigation, that interest is adequately protected by making it perfectly clear now that the court will promptly entertain any motion by them to bar Bachner Tally from engaging in any further activity in connection with this suit. This resolution of the present conflict adequately protects the interest of all the parties to this litigation without imposing any undue burdens on the litigants or the judicial system.

To recapitulate, defendant's motion for summary judgment as to all of Felt's claims is granted. Defendant's motion to disqualify Bachner Tally as counsel in this action is granted as to Bachner Tally's representation of Felt and Harrow and denied with respect to its representation of Rice, Barkan and Felt Realty.

IT IS SO ORDERED.

NOTES

[1] Plaintiffs allege that defendant violated § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) (1976), § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1976), and Rule 10b-5, 17 C.F.R. 240.10b-5 (1977).

[2] It is somewhat puzzling how Felt could have been misled in purchasing shares on January 28, 1971, by a financial statement which was issued some 2½ months later. In light of the ruling here, however, that puzzle need never be solved.

[3] Although federal law controls when the statutory period begins to run as to plaintiff's federal claims and state law controls as to his state claims, see, e. g., Stull v. Bayard, 561 F.2d 429, 432 (2d Cir. 1977), cert. denied, 434 U.S. 1035, 98 S. Ct. 769, 54 L. Ed. 2d 782 (1978), the governing standards with respect to the "date of discovery" prong of the statute of limitations are virtually the same. See ibid.

[4] On that date Barkan mailed a copy of the complaint in the Emil action for contribution to his attorney and to Rice.

[5] In Dynamics Corp. v. International Harvester Co., 429 F. Supp. 341 (S.D.N.Y.1977), Judge Weinfeld restated the governing state standard as follows:

"[W]hen the parties . . . have in fact entered into a formal written contract that by its terms supercedes all previous agreements and contains the entire understanding of the parties . . . the cause of action [for fraud] accrues when the document is executed and when the party alleging fraud has given consideration and thus suffered damage."

Id. at 355, citing, Hanlon v. Macfadden Publications, Inc., 302 N.Y. 502, 510, 99 N.E.2d 546 (1951); Inman v. Merchants Mut. Cas. Co., 274 A.D. 320, 83 N.Y.S.2d 801, 803 (1948); Cooke v. Colman, 150 Misc. 294, 269 N.Y.S.2d 21, 23 (1st Dept.1934).

[6] Canon 5 provides: "A Lawyer Should Exercise Independent Professional Judgment on Behalf of a Client."

[7] D.R. 5-102 provides:

"Withdrawal as Counsel When the Lawyer Becomes a Witness.

(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 D.R. 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." (Footnotes omitted.)

No claim is here raised that disqualification is required because a member of the Bachner Tally firm "ought to be called as a witness on behalf of his client" pursuant to subsection (A) of the rule. See, e. g., International Electronics Corp. v. Flanzer, 527 F.2d 1288 (2d Cir. 1975); J. P. Foley & Co. v. Vanderbilt, 523 F.2d 1357 (2d Cir. 1975). Rather the controversy here focuses exclusively on subsection (B) of the rule, i. e., whether a lawyer "may be called as a witness other than on behalf of his client." See discussion infra.

[8] "The Code has been adopted by the New York State Bar Association, and its canons are recognized by both Federal and State Courts as appropriate guidelines for the professional conduct of New York lawyers." Cinema 5, Ltd. v. Cinerama, Inc., 528 F.2d 1384, 1386 (2d Cir. 1976) (citation omitted).

[9] Prior to the taking of Tally's deposition, Baron also contended that Tally's testimony would be prejudicial to plaintiffs Rice, Barkan and Felt to the extent that it was inconsistent with their accounts of their lack of knowledge of the material facts concerning the Fire Actions that were allegedly omitted from the 1971 Felt financial statement. Defendant now seems to have abandoned that claim and, after reviewing Tally's testimony, the court sees no substance in it either.

[10] The remaining "Facts Adduced at Tally Deposition" upon which defendant relies in making this motion relate only to the disqualification issue itself and not to the underlying litigation. See Letter of Steven A. Schatten (Feb. 13, 1978).

[11] Defendant's Memorandum in Support of Statute of Limitations & Disqualification Motions, 22.

[12] Judge MacMahon of this court would impose an even heavier burden on the movant, i. e., that the moving party "show that the testimony to be elicited from his adversary will be prejudicial to the latter's client." Ross v. Great Atlantic & Pacific Tea Co., Inc., 447 F. Supp. 406, 408 (S.D.N.Y.1978) (emphasis added). Since movant had failed to meet his burden under the somewhat less stringent standard of Freeman, it is clear that he would also fail to meet the stricter standard adopted in Ross.

[13] Defendant's Memorandum in Support of Statute of Limitations & Disqualification Motions, 22. (emphasis added).

[14] See n. 6 supra.

[15] Canon 9 provides: "A lawyer Should Avoid Even the Appearance of Professional Impropriety."

[16] Obviously no Felt shareholder would sue derivatively since Felt is a wholly owned subsidiary of Harrow.

[17] It is, of course, for the court to decide the appropriate remedy in a case where a conflict of interest arises. Estates Theatres, Inc. v. Columbia Pictures Industries, Inc., 345 F. Supp. 93, 100 (S.D.N.Y.1972) (Weinfeld, J.)

[18] Canon 4 provides: "A Lawyer Should Preserve the Confidences and Secrets of a Client."

[19] See n. 15 supra.

[20] The following listing details the interrelationships of the shareholders of Harrow and Felt Realty.

"Name of                          Directors and
Entity        Stockholder         Officers
Harrow        Barkan (33 1/3 %)*     Barkan - Director**
(formerly                         President
James Felt-Huberth
&
Huberth,
Inc.)
Rice (33 1/3 %)*       Rice - Director
Vice President
Baron (1 1/3 %)*       Baron - Director
Arthur K. Beman     Beman - Director,
(16%)*              Vice President
Ralph R. Russ       Russ - Director
(14%)*
Felt          Harrow(100%)*       Barkan - Sole
Director, President
and Treasurer
Rice - Vice President

Jerome Catalano -
Vice President and
Secretary
Felt Realty   Barkan (45%)***     Barkan**** - Director
President and
Treasurer
Rice (45%)          Rice - Director
and Chairman
Arthur K. Beman     Beman - Director
(10%)               and Senior Vice
President
Russ - Director
and Consultant
* Approximately.
** There are other directors and officers of Harrow none
of whom are involved in this action.
*** Very recently some shares of Felt Realty were sold to
other directors and Rice and Barkan still own more than a
majority of the outstanding shares.
**** There are other directors and officers of Felt Realty
none of whom are involved in this action."

Affidavit of Martin Polevoy in Opposition to Motion to Dismiss Claims of James Felt & Co., Inc. and to Disqualify Counsel 5 (Jan. 9, 1978).

[21] If Felt and Harrow determine that no legal action with respect to Rice, Barkan and Felt Realty is warranted, but a Harrow shareholder disagrees and decides to institute suit derivatively based upon the same factual contentions which underly Baron's second counterclaim, then that shareholder could move to intervene in this action and seek to disqualify Bachner Tally from further participating in this litigation based upon the strictures of Canons 4 and 9. See In re Yarn Processing Patent Validity Litigation, 530 F.2d 83, 88 (5th Cir. 1976). However, the court declines to preclude Bachner Tally from further representing Rice, Barkan and Felt Realty solely on the grounds that a derivative action might be brought and that the shareholder litigant might move for the disqualification of Bachner Tally based upon the claim that it had formerly represented Felt on "substantially related" matters.