Massage parlor sale results in DQ for lawyer and points to lessons on former clients - Lexology

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A New Jersey lawyer’s involvement in the sale of a massage parlor rubbed the district court the wrong way and resulted in his disqualification from a later suit over the transaction. In its opinion last month, the court ruled that the buyer was the lawyer’s former client, and that the earlier work on the sale was “substantially related” to the later lawsuit in which the lawyer represented the seller against the buyer. The case highlights key aspects of the rules on former-client conflicts of interest — and violating them is a common way to get tossed from litigation.

Massaging the facts

In his complaint, the seller alleged that he had sold the managing membership of Massages 4 All NJ 7, a New Jersey LLC, but that the buyer failed to get a permit or register the business properly with the borough as a massage business; rather, the buyer continued to display the prior permit listing seller as the owner. Further, seller said in his complaint, buyer’s employee failed to register as a masseuse as required.

As a result of the permit transfer issues, said the seller, when the employees of Massages 4 All were arrested for prostitution, the police opened an investigation against the seller and he was eventually indicted on prostitution and money laundering charges. His bank accounts were frozen during the ensuing proceedings, he alleged.

The seller was eventually cleared, but sued the buyer asserting claims including breach of the covenant of fair dealing and negligent infliction of emotional distress.

The seller retained Matthew Jeon to represent him in the suit. That set up the later motion to disqualify, because the buyer asserted that Jeon was involved in the underlying purchase and sale transaction for the massage parlor, and had represented him in the deal. As his former lawyer, the buyer asserted, Jeon should be disqualified from suing him on behalf of the seller. According to the court’s opinion, the buyer spoke Korean and had limited English language skills, and Jeon was fluent in Korean.

Former-client conflict rule spotlighted

The district court granted the motion to disqualify, agreeing that Jeon formerly represented buyer in the massage parlor transaction and was now precluded from representing seller in suing the buyer.

New Jersey’s rule on former client conflicts, like its Model Rule 1.9 counterpart, provides that absent written consent, a lawyer may not represent a client against another client the lawyer has formerly represented in a “substantially related” matter. Applying the rule, the district court opinion has some good take-home lessons:

• The putative former client’s reasonable belief can create an attorney-client relationship and form the basis for disqualification. Here, said the court, the evidence included Jeon’s filing of paperwork in connection with the transaction; his invoice to the buyer for legal services; the memo line on buyer’s check in payment, marked “Legal Services;” and the buyer’s averment that he had confidential communications with Jeon in which Jeon advised him regarding the transaction.
• A “substantial relationship” can be shown based on likely exposure to relevant confidential information. Two factors — confidential information shared in the former representation and the relevance of that information to the current litigation — are always key to analyzing conflicts under Rule 1.9. Here, the court found that the buyer “likely” shared confidential information with Jeon, and that it was relevant to Jeon’s current representation adverse to the buyer. The likely exposure and the fact that the current adverse representation revolved around the sale and operation of the massage parlor including the lack of proper business registration was sufficient to satisfy the necessary “substantial relationship.”
• An open-ended prospective waiver can be insufficient to constitute consent to an actual conflict that arises later. A former-client conflict is always subject to the former client’s written consent. Here, Jeon argued that the buyer had waived the conflict in advance and in writing, including waiving any misunderstanding caused by the language barrier. But the court rejected the waiver as too open-ended to be enforceable, because it merely sought to hold Jeon harmless against any further action arising from the massage parlor transaction. That was insufficient, said the court, to identify what a future conflict would consist of or apprise the buyer of the material risks of the a potential future conflict. Both are required in order to constitute a valid prospective waiver the court noted.

Be on the lookout for former-client conflicts — and be aware that federal district courts most often provide in their local rules that in resolving motions to disqualify they will look to the Rules of Professional Conduct in the forum state, as the court did here.