In a case with broad ethical implications for lawyers trying to operate in the modern corporate world of conglomerates, takeovers and mergers, a federal judge in San Diego is scheduled to hold hearings tomorrow on how much money Richard Nixon's old law firm must pay for its role in the At issue is the role of the attorney who tries to represent the sometimes divergent and even conflicting interests of a corporation and directors who run it.
The specific case in question began in November 1972 when San Diego tycoon C. Arnholt Smith flew to New York City to seek the counsel of the Wall Street law firm of Mudge, Rose, Guthrie and Alexander in connection with a Securities and Exchange Commission investigation of his Westgate-California Corp. Westgate, a conglomerate, and the billion-dollar United States National Bank were the twin pillars of Smith's financial empire.
At the law firm, Smith met with former attorney general John N. Mitchell, who had resumed his partnership with Judge Rose after directing Nixon's reelection campaign. With Smith at the meeting were Philip A. Toft, an aide, and attorney C. Hugh Friedman.
Mitchell, in turn, summoned Joseph C. Daley to the meeting to discuss the case. Daley, who had joined Mudge Rose in 1967, previously had worked for the SEC.
After hearing out the Smith delegaton, Daley told Mitchell, "I think we probably can help them out."
That was the origin of Mudge Rose's representation of Westgate. But later, the firm -- primarily through Daley -- also accepted the United States Bank as a client. This second acceptance eventually led to a traumatic lawsuit against Westgate to those of the bank when it was supposed to be representing the interests of both.
The suit, filed by Westgate's trustees after its eventual bankruptcy, accused Mudge Rose of breaching its professional, ethical and fiduciary duties during a 15-month period from late 1972 to early 1974.
Tomorrow in U.S. Bankruptcy Court in San Diego, Judge Ross M. Pyle is scheduled to hold a conference to help him decide how much of more than $400,000 in total billings Mudge Rose must pay back to the Westgate trustees or simply write off as a result of its efforts at dual representation in the Westgage-United States Bank case. An estimated $150,000 is at stake.
In a mixed decision, Pyle dismissed a damage claim of $63.6 million against Mudge Rose, based upon its allege malpractice -- but ruled that during the 5 1/2-month period beginning in early May 1973, the firm had an impermissible conflict of interest.
Pyle said that period began when Daley larned that "massive" investigations of the bank being conducted by the comptroller of the currency and the SEC "can't be turned back." The period of conflict ended the following Oct. 18 when the Federal Deposit Insurance Corp. Formally took over as the bank's receiver.
Daley and others representing the bank and Westgate had held a round of meetings here with members of the staff of both the Sec/ and the comptroller. The agencies were about to end the total interdependence of Westgate and the bank.
The SEC was then only days away from filing a civil complaint charging Smith and Toft with defrauding the shareholders of USNBand Westgate. The commission was in what Pyle later would call an "intramural rivalry" with the comptroller's office, which regarded bank regulations as its turf.
Like the SEC, the comptroller and the FDIC also were only days away from decisive action against Smith: issuing a secret order tsking away control of the USNB, compelling Smith to work behind the scenes to indemnify the USNB for losses to Smith-related ventures such as Wesgate and forbidding the bank to make any loans or renew credit to such ventures.
It was at this point that the interests of Westgate and its 40 diverse subsidiaries and those of the bank came into conflict, according to Pyle. And it was at this point that Mudge Rose either "immediately" should have dropped USNB as a client or told the Westgate directors that their cozy protective relationship with the bank was over, Pyle said.
Mudge Rose took neither action and continued to represent the interests of both.
By continuing to represent both the bank and Westgate, Mudge Rose breached its "duty of care," Pyle said. "Without full disclosure and consent, the divided loyalty of Mudge Rose could not be excused."
After the various federal agencies had taken action against the bank, a member of the Mudge rose firm, Robert A. Cantor, negotiated a so-called indemnification agreement with Smith and Toft, who were Westgate's managers, that was designed to favor USNB.
Soley for purposes of the agreement, Cantor and Deley told Smith and Toft tht they were not representing the conglomerate in the action. But they did not tell this to the Wastgate directors, its treasurer or their co-counsel from the Washington branch of another New York law firm.
Later, still for purposes of the agreement, Daley told the Westgate directors that he was counsel only to USNB when he appeared before them to urge ratification of the agreement for the sake of Westgate.
Mudge Ross didn't havethe "undividel loyalty to make a determination of the best course to pursue for Westgate," Pyle wrote later. "It's independent professional judgment was impaired."
If Daley's primary aim had been to preserve Westgate rather than USNB, he would hve "perceived the potentials involved in Westage severing its ties with USNB and seeking the resolution of its problems in another way." Pyle said.
Drawing on the 7,382 pages of trial transcript and 331 exhibits in the case, Pyle noted: "Throughout the trial, Daley showed a remarkably hazy memory about facts when examined by the (Westgate) trustees' attorney as opposed to excellent recall of facts solicited by his own counsel."
Mudge Rose has argued that there was no conflict and, as a result, no duty to make any disclosure to Westgate. In any case, almost everyone in both San Diego and Washington knew of the firm's dual representation, said Mudge Rose partner John J. Kirby.
Pyle called this view "myopic... not one that a practitioner of ordinary skill should employ..."
In a subsequent telephone interview, Kirby said the firm was concerned about the apparent conflict. "It's only one judge's decision," he said. "But any time even one judge finds that a publicly conducted activifinds that a publicly conducted activity... gives rise to conflict, any law firm should be concerned. I think the judge was trying to make firms more concerned."
For Mudge Rose, Pyle's eventual ruling on the Westgate fees may not be the end ot its problems.
Regardless of the outcome of the fee case, the Westgate trustees well may appeal dismissal of its $63.6 million damage claim against the firm.
First, Pyle failed to hold a second trial on the damage issue. In his opinion in the Mudge Rose case, Pyle noted that the case "was bifurcated for trial in order that any liability of Mudge Rose... could first be determined, with the question of damages being reserved for further trial in the event the court found that there was such liability."
The trustees possibly could force a second trial on grounds that Pyle failed to hold a second hearing on the damage question.
Perhaps more ominous for Mudge Rose, three malpractice insurers have paid $3.2 million to settle suits brought by the FDIC and the Westgate trustees against a now-disbanded San Diego law firm that, for a time, served as cocounsel to Mudge Rose in the SEC proceedings as well as representing USNB, Westgate and Smith at one time or another.
During the SEC proceedings, that firm resigned as Mudge Rose's cocounsel, acknowledging a conflict of interests. By contrast, "Daley made only a "half-hearted attempt" to resign, Pyle noted during the hearing.