Supreme Court Seal
Supreme Court Seal
South Carolina
Judicial Department
2015-03-06-02
STATE OF SOUTH CAROLINA ) IN THE COURT OF COMMON PLEAS
  ) NINTH JUDICIAL CIRCUIT
COUNTY OF CHARLESTON )  
  )

Civil Action No. 2014-CP-1004494

NORTH AMERICAN TITLE LOANS,

)

 

LLC, d/b/a NORTH AMERICAN TITLE )  
LOANS, and d/b/a LOANMAX, )  
  )  
Plaintiff, )  
  )  
vs. )

 

  )

 

TITLEMAX OF SOUTH CAROLINA, )

 

INC., TMX CREDIT, INC., TMX )

 

FINANCE HOLDINGS, INC., and TMX )  

FINANCE, LLC,

)  
  )  
Defendants. )  

   

ORDER GRANTING MOTION TO DISQUALIFY
GREENBERG TRAURIG AS COUNSEL FOR DEFENDANTS

Plaintiff North American Title Loans, LLC, d/b/a North American Title Loans, and d/b/a LoanMax (“Plaintiff”) has moved the court to disqualify Greenberg Traurig, LLP (“Greenberg”) as counsel for Defendants TitleMax of South Carolina, Inc., TMX Credit, Inc., TMX Finance Holdings, Inc. and TMX Finance, LLC (collectively “Defendants”) in the above-captioned case. 

After consideration of Plaintiff’s Motion, Defendants’ Response in Opposition, Plaintiff’s Reply in Support of its Motion, the Affidavits of John McCloskey dated August 28, 2014, December 9, 2014, December 15, 2014 and December 18, 2014, the Affidavit of Joshua Portnoy, the Affidavit of Mark Trigg, and the Affidavits of J. Scott Sheehan dated November 21, 2014, December 16, 2014, and December 19, 2014, as well as the supplemental letter briefs provided by the parties, and other materials contained in the record, and following argument of counsel at the hearing on December 12, 2014, the Court GRANTS Plaintiff’s Motion to Disqualify Greenberg as Counsel for Defendants for the reasons set forth herein.

FACTS

A.        The Relationship between Plaintiff and Select Management Resources, LLC.

Plaintiff is a limited liability company organized under the laws of the State of South Carolina that, together with its close affiliates, operates over seven hundred title loan stores across twenty states, including South Carolina.  See Affidavit of John McCloskey, dated August 28, 2014 (“McCloskey Aff.”), ¶5.  Plaintiff’s close affiliate, Select Management Resources, LLC (“SMR”) provides business strategy, operating, and system support to each of its affiliated companies, including Plaintiff.  Id. ¶ 5.

With respect to the relationship between Plaintiff and SMR, Plaintiff has presented evidence showing that: (1) Plaintiff and SMR are owned by the same two persons; (2) Plaintiff and SMR utilize the same key management personnel, including the same manager (Plaintiff and SMR are LLC’s); (3) Plaintiff and SMR utilize the same legal department, overseen by General Counsel John McCloskey; (4) Plaintiff and SMR follow the same business philosophies and corporate principles; (5) Plaintiff and SMR keep consolidated financial books and records; (6) SMR President Kenneth Wayco is the President of Plaintiff and is responsible for all of its business operations; (7) Mr. Wayco is also the President of each of the other state entity affiliates of SMR; and (8) SMR provides the following back-office services for Plaintiff: accounting, audit, cash management, employee benefits, finance, human resources, information technology, insurance and payroll  See id., ¶¶ 5-9; Supplemental Affidavit of John McCloskey, dated December 8, 2014 (“Supp. McCloskey Aff.”), ¶¶ 5-8. 

B.        Plaintiff and SMR engaged Greenberg to provide legal advice and counsel.

John McCloskey first retained Greenberg to provide legal advice and counsel in 2006.  See McCloskey Aff., ¶ 10; Supplemental McCloskey Aff., ¶ 9; Affidavit of J. Scott Sheehan dated November 21, 2014 (“Sheehan Aff.”), ¶ 3.  The relationship was formalized with an engagement letter dated April 21, 2006 (“Engagement Letter”).  McCloskey Aff., ¶ 10; Supp. McCloskey Aff., ¶ 9.  The Engagement Letter does not exclude SMR’s affiliates from being clients of the Greenberg firm.  Supp. McCloskey Aff., ¶ 10.  Mr. McCloskey, Plaintiff and SMR’s General Counsel, testified that when he consults with Greenberg on legal matters, his understanding is that he is doing so on behalf of both SMR and the affiliated state entity.  Id., ¶ 10.  Mr. McCloskey further testified that he is the only person who has primary authority to, and responsibility for, obtaining legal advice on behalf of SMR and its affiliated state entities, including Plaintiff.  Id., ¶ 11.

During the course of this relationship, Greenberg previously sought a conflict waiver in order to represent another client on a particular transaction, and presented SMR with a conflict waiver form.  Id., ¶ 12.  Mr. McCloskey executed the conflict waiver form, where indicated by Greenberg, on behalf of both SMR and its affiliates.  Id., ¶ 13.  Mr. McCloskey testified that when he read and executed the conflict waiver, he understood that Greenberg was representing both SMR and its affiliates.  Id.  Greenberg presented no evidence to contradict Mr. McCloskey’s testimony in this regard.

C.        Greenberg’s on-going relationship with Plaintiff and SMR.

Since 2006, SMR has used Greenberg’s services for various regulatory issues involving consumer financial services and credit service organizations.  Sheehan Aff., ¶ 3; McCloskey Aff., ¶ 11.  The most recent matter Greenberg handled for SMR concerned a Texas regulatory matter.  Sheehan Aff., ¶ 3; Amended Affidavit of J. Scott Sheehan dated December 16, 2014 (“Amended Sheehan Aff.”), ¶ 4; McCloskey Aff., ¶ 11.  Specifically, in approximately July 2014, Mr. McCloskey consulted with Mr. Sheehan, a partner at Greenberg, on behalf of SMR and certain affiliates of SMR, concerning the legal and practical effects of certain regulations on their business operations in Texas.  Third Supplemental Affidavit of John McCloskey dated December 18, 2014 (“Third McCloskey Aff.”), ¶ 4.  On July 22, 2014, Mr. Sheehan e-mailed Mr. McCloskey a five-page, single-spaced, memorandum that contained a detailed analysis of SMR and certain of its affiliates’ business operations in light of such regulations.  Id., ¶ 4 & Ex. A.1 Mr. McCloskey testified that memorandum also contained Greenberg’s strategic legal advice concerning SMR and its affiliates’ business operations, which advice was directly related to gaining a competitive edge over their biggest competitor, Defendants’ affiliates.  Id. ¶ 4, note 1.

On July 24, 2014 and July 25, 2014, Mr. Sheehan and Mr. McCloskey corresponded via e-mail concerning the substance, analysis, and legal advice contained in that memorandum.  Id., ¶ 5 & Ex. B.  Thereafter, on July 29, 2014 and July 31, 2014, Mr. Sheehan and Mr. McCloskey corresponded via e-mail in an effort to set up a call during which they would discuss the substance, analysis, and legal and strategic advice contained in the memorandum.  Id., ¶ 6 & Ex. C.

On August 1, 2014, Mr. Sheehan and Mr. McCloskey continued to correspond via e-mail to set up a call to discuss the memorandum.  Id., ¶ 7 & Ex. D.  Thereafter, Mr. Sheehan and Mr. McCloskey held a call during which they discussed the substance, analysis, and legal and strategic advice provided by Greenberg’s memorandum.  Id., ¶ 8.  During that call, Mr. McCloskey testified that he and Mr. Sheehan also discussed the need for further legal advice and counseling between Greenberg and SMR and its affiliates.  Id., ¶ 9.  Mr. McCloskey also testified that:  (a) he advised Mr. Sheehan that he would be preparing documents internally for Greenberg’s advice and review concerning the advice and substance contained in the memorandum; and (b) Mr. Sheehan acknowledged that Mr. McCloskey would be preparing documents and confirmed that he would review them upon receipt.  Id. 

Mr. McCloskey further testified that at no time during the call that took place on or after August 1, 2014, or any time subsequent thereto, did Mr. Sheehan or anyone at Greenberg inform Mr. McCloskey that its relationship with SMR or its affiliates had been terminated.  Id., ¶ 10; Second Affidavit of John McCloskey dated December 15, 2014 (“Second McCloskey Aff.”), ¶ 6.    Additionally, SMR has received no written notice whatsoever, as required by the Engagement Letter, of Greenberg’s withdrawal as counsel.  Second McCloskey Aff., ¶ 6.   

D.        Plaintiff and SMR deny Greenberg’s request to waive the firm’s concurrent conflict with representing Defendants.

Plaintiff filed and served this action on July 21, 2014.  According to Defendants, Greenberg was formally retained to represent Defendants on August 1, 2014.  Affidavit of Mark G. Trigg dated December 12, 2014 (“Trigg Aff.”), ¶ 7.  Although Greenberg began working for Defendants on August 1, 2014, it was not until August 7, 2014, that Mr. Sheehan requested a waiver from Mr. McCloskey of Greenberg’s conflict with representing Defendants in the present action.  Third McCloskey Aff., ¶ 11 & Ex. E.  In his August 7, 2014 correspondence, Mr. Sheehan referenced his desire to “continue” Greenberg’s work on the Texas regulatory project on which Mr. Sheehan had provided legal advice to Mr. McCloskey about certain of SMR’s affiliates’ operations in Texas.  Id., Ex. E.  Mr. McCloskey testified that when he received the August 7, 2014 email from Mr. Sheehan, he was surprised that Greenberg was even considering representing SMR’s biggest competitor in litigation directly against Plaintiff, because his last discussion with Mr. Sheehan focused on the continuing advice Greenberg was providing, and that he was going to be providing Mr. Sheehan documents for his review and approval, which Mr. McCloskey was generating specifically based upon Greenberg’s legal advice.  Id., ¶ 12.

Ultimately, Mr. McCloskey refused to provide a waiver authorizing Greenberg to take a position fully adverse to SMR and Plaintiff by appearing in this action on behalf of its direct competitors.  McCloskey Aff., ¶ 14.  Greenberg nevertheless appeared in this action on behalf of all Defendants.  In response to Greenberg’s appearance, Plaintiff filed this motion to disqualify Greenberg from representing Defendants.

LEGAL STANDARD

Under South Carolina Rule of Professional Conduct 1.7, a lawyer shall not represent a client if he or she has a concurrent conflict of interest.  Rule 1.7, Rule 407, SCACR.  A conflict of interest exists if “the representation of one client will be directly adverse to another client.”  Id.; see also Donaldson v. City of Walterboro Police Dep’t, No. 2:06-cv-02492-PMD, 2008 WL 906707, (D.S.C. 2008) (disqualifying Plaintiff’s counsel because of that counsel’s concurrent representation of a defendant in other matters).  For purposes of this rule, close affiliates of a client must also be considered a client of the firm.  See GSI Commerce Solutions, Inc. v. BabyCenter, LLC, 618 F.3d 204, 207–11 (2d Cir. 2009) (affirming the disqualification of  plaintiff’s counsel who was currently representing an affiliated entity of the defendant); see also Snapping Shoals Elec. Membership Corp. v. RLI Ins. Corp., No. 1:05-CV-1714-GET, 2006 WL 1877078, at *5  (N.D. Ga. 2006) (applying equivalent Georgia rule of professional conduct and disqualifying plaintiff’s counsel due to representation of company affiliated with defendant); see also American Bar Association Committee on Professional Responsibility, Formal Opinion 95-390 at 259 (“ABA Opinion 95-390”) (finding that an affiliate of a client is also the client of the lawyer where there is “a complete identify of managements and boards of directors.”).

The comments to Rule 1.7 further provide that the two representations do not need to involve related matters: a lawyer may not act as an advocate in one matter against a person the lawyer represents in some other matter, even when the matters are wholly unrelated.  See Rule 1.7, Rule 407, SCACR, cmt. 6.  Further, the conflict rules apply regardless of whether the representations are for litigation or transactional matters.  See Rule 1.7, Rule 407, SCACR, cmt. 7.

South Carolina Rules of Professional Conduct, Rule 1.7(a)(2) provides an alternative ground for disqualification if a lawyer’s representation of a client is “materially limited” by the lawyer’s representation of another client.  Under Rule 1.7(a)(2), “[a] concurrent conflict of interest exists if . . . there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client . . . or by a personal interest of the lawyer.”  Rule 1.7(a)(2), Rule 407 SCACR; see, e.g., In re Allsep, 343 S.C. 503, 504-05, 541 S.E.2d 245, 246 (2001) (counsel’s representation of client materially limited because lawyer was also represented opposing party in an ongoing, unrelated matter); In re Hoffman, 70 N.E.2d 1138 (Ind. 1998) (attorney’s continued representation of client materially limited by attorney’s own in interest in avoiding malpractice action for filing client’s claim in wrong state).

LAW & ANALYSIS

A.        For purposes of assessing conflicts, SMR and Plaintiff constitute a single client of Greenberg.

The close relationship between SMR and Plaintiff requires that the two entities be treated as a single client for the purpose of determining conflicts.  When affiliated companies share an identity of interest, based on the individual facts and circumstances of the particular relationship, the affiliated company is considered a client for disqualification purposes.  Courts take a pragmatic approach to this conflict analysis and examine the specific relationship between the entities before determining whether conflicts must be imputed to the affiliate.  See GSI Commerce Solutions, Inc, 618 F.3d 204 at 210 (“the bar to concurrent representation applies if a firm’s representation adverse to a client's corporate affiliate ‘reasonably diminishes the level of confidence and trust in counsel held by [the client].’”) (citations omitted).

To make this determination, Courts look to whether the two entities are operated as one and the same, have similar management personnel, use the same legal department, have financial interdependence, and have similar corporate principles and shared business philosophies.  See e.g., Id. at 210–11 (determining that an affiliated entity was also a concurrent client of firm when the client and affiliated entity had operational commonality and financial interdependence);  Snapping Shoals, 2006 WL 1877078, at *5  (finding that a parent and subsidiary were the same client for conflict purposes because the two companies were “operated as one and the same,” shared the same management personnel, legal department, corporate principles, and business philosophies);  Ramada Franchise System, Inc. v. Hotel of Gainesville Assoc., 988 F. Supp. 1460, 1464 (N.D. Ga. 1997) (finding that parent and two subsidiaries shared an identity of interest when all three entities had substantially similar management personnel, shared a headquarters, had the same corporate principles and business philosophies, and were serviced by the same legal department); Hartford Acc. and Indem. Co. v. RJR Nabisco, Inc., 721 F. Supp. 534, 540 (S.D.N.Y. 1989) (holding that parent and subsidiary were the same client for conflict purposes because parent attached particular importance to litigation against subsidiary and steered the litigation as it saw fit).

Here, the evidence shows that (1) Plaintiff and SMR are owned by the same two persons; (2) Plaintiff and SMR utilize the same key management personnel, including the same manager (Plaintiff and SMR are LLC’s); (3) Plaintiff and SMR utilize the same legal department, overseen by General Counsel John McCloskey; (4) Plaintiff and SMR follow the same business philosophies and corporate principles; (5) Plaintiff and SMR keep consolidated financial books and records; (6) SMR President Kenneth Wayco is the President of Plaintiff and is responsible for all of its business operations; (7) Mr. Wayco is also the President of each of the other state entity affiliates of SMR; and (8) SMR provides the following back-office services for Plaintiff: accounting, audit, cash management, employee benefits, finance, human resources, information technology, insurance and payroll  See McCloskey Aff., ¶¶ 5-9; Supplemental Affidavit of John McCloskey, dated December 8, 2014 (“Supp. McCloskey Aff.”), ¶¶ 5-8.  As such, SMR and Plaintiff are so closely intertwined that they are considered a single client for purposes of determining whether Greenberg has a concurrent client conflict which requires Greenberg’s disqualification in this matter.2

B.        Greenberg must be disqualified because its representation of Defendants is directly adverse to SMR and Plaintiff.

South Carolina Rule of Professional Conduct 1.7(a) precludes Greenberg from representing Defendants because of Greenberg’s concurrent representation of SMR and its affiliates.  See Rule 1.7(a), Rule 407, SCACR (“a lawyer shall not represent a client if the representation involves a concurrent conflict of interest.”) (emphasis added).  “A concurrent conflict of interest exists if “the representation of one client will be directly adverse to another client.”  Rule 1.7(a)(1), Rule 407, SCACR.  “In simultaneous representation cases the paramount consideration is the duty of loyalty[.]”  Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft, LLP, 69 Cal. App. 4th 223, 233 (1999).  “Loyalty to a current client prohibits undertaking representation directly adverse to that client . . . . a lawyer may not act as an advocate in one matter against a person the lawyer represents in some other matter, even when the matters are wholly unrelated.”  Rule 1.7, Rule 407, SCACR, cmt. 6.  As a result, a counsel’s duty of loyalty prohibits the lawyer from being adverse to his or her client.

Here, the evidence shows that at the time Greenberg agreed to represent Defendants, SMR and Plaintiff were concurrent clients.  Greenberg assumed the representation of Defendants on August 1, 2014.  Trigg Aff., ¶ 7.  The evidence further shows that Greenberg was still representing SMR and its affiliates at that time.  Specifically, in email exchanges dated July 29, 2014 and August 1, 2014, between Greenberg (Scott Sheehan) and John McCloskey (Plaintiff’s and SMR’s General Counsel), Mr. Sheehan attempted to schedule a call with Mr. McCloskey for Monday, August 4, concerning the legal advice contained in a five-page, single-spaced, memorandum that Mr. Sheehan provided to Mr. McCloskey on July 22, 2014.  Third McCloskey Aff., ¶ 4–7.  That memorandum contained Greenberg’s key, strategic legal advice concerning SMR and certain of its affiliates’ business operations, which advice was directly related to gaining a competitive edge over SMR and its affiliates’ biggest competitor, Defendants’ affiliates.  Id. ¶ 4.3

When Mr. Sheehan and Mr. McCloskey spoke—after their email exchange date-stamped 5:17 p.m. on August 1, 2014 (the same date that Mr. Trigg swore Greenberg began work for Defendants in this matter)—Mr. Sheehan provided Greenberg’s substantive legal advice concerning the memorandum Greenberg prepared for SMR and certain of its affiliates merely a few days before.  Id. ¶ 8–9.  During that very phone call, Mr. McCloskey and Mr. Sheehan discussed the need for further legal advice and counseling.  Id.  Mr. McCloskey advised Mr. Sheehan that he would be preparing documents internally for Greenberg’s subsequent advice and review.  Id. ¶ 9.  Further, at no time during that same phone call, or any time afterwards, has Mr. Sheehan or anyone at Greenberg informed Mr. McCloskey that its relationship had been terminated. 4  Id. ¶ 10; Second McCloskey Aff., ¶ 6.  Additionally, Mr. McCloskey has received no notice, let alone written notice as required by the Engagement Letter, of Greenberg’s withdrawal as counsel.  Second McCloskey Aff., ¶ 6.5  

Finally, SMR has not consented to Greenberg’s representation of Defendants in this matter.  McCloskey Aff., ¶ 14.  Greenberg accordingly appeared in this matter in violation of Rule 1.7(a) because it has an unwaived conflict of interest, and thus must be disqualified from representing any Defendant in this action.

It is therefore ORDERED that the Motion to Disqualify Defendants’ counsel is GRANTED and Greenberg is disqualified from any further representation of any Defendant in or in connection with this action.

IT IS SO ORDERED.

March 6, 2015
Charleston, South Carolina
                                                                                   
Maité Murphy
Presiding Judge, Business Court

 

1  Plaintiff filed a redacted version of the Third McCloskey Affidavit and exhibits due to the sensitive and proprietary nature of the information contained therein.  Plaintiff, however, also provided un-redacted versions to the Court for in camera review.

2  The Court also finds that Mr. McCloskey reasonably believed that Greenberg would avoid representation adverse to SMR’s affiliates for a number of reasons, including, without limitation, that the Engagement Letter between Greenberg and SMR did not exclude SMR’s affiliates from being clients of Greenberg; when Greenberg previously sought conflict waivers from SMR on unrelated matters, it expressly sought such waivers on behalf of SMR and its affiliates; and because Greenberg never told Mr. McCloskey it was not representing SMR’s affiliates, despite the fact that it provided legal advice to Mr. McCloskey about the affiliates.  See Rule 1.7, Rule 407, SCACR, cmt. 32 (a lawyer is barred “from accepting representation adverse to an affiliate in an unrelated matter . . . [when] there is an understanding between the lawyer and the organizational client that the lawyer will avoid representation adverse to the client’s affiliates.”); see also Board of Managers of Eleventh Street Loftominium Ass. V. Wabash Loftominium, 876 N.E.2d 65, 74 (Ill. App. 2007) (affiliate regarded as client for conflicts purposes in part because the client had a reasonable expectation that the affiliate was also the lawyer’s client).

3  Greenberg claims that the attorney-client relationship ended on July 25, 2014, as that was the last time Sheehan billed SMR for any work.  Supplemental Affidavit of J. Scott Sheehan dated December 19, 2014 (“Supplemental Sheehan Aff.”), ¶ 4.  Greenberg, however, has failed to provide any legal support for the proposition that an attorney-client relationship ends on the last day an attorney chooses to bill a client.  In any event, Greenberg has failed to present any evidence that it communicated to Mr. McCloskey that it was no longer billing for its time.  See Tuten v. Joel, 410 S.C. 104, 109-110 (S.C. App. 2014) (Concluding that an attorney cannot unilaterally end an attorney-client relationship, but rather, “at a minimum, an attorney must communicate to his client his desire to withdraw from their attorney-client relationship in such a manner that the client understands her attorney will no longer represent her.”). 

4  Greenberg’s own evidence reveals that the earliest date it even attempted to inform Mr. McCloskey that Greenberg no longer considered SMR or its affiliates clients was December 12, 2014.  On that date, TitleMax filed an affidavit wherein one of Greenberg’s partners, Mark Trigg, testified that the attorney-client relationship between Greenberg and SMR ended in July 2015.  Thus, it appears that Greenberg may have attempted to “fire” SMR and its affiliates in order to represent Defendants in this action; however, Greenberg cannot circumvent its clear conflict by “firing” its smaller client, SMR.  Courts routinely disqualify counsel under the “Hot Potato” Doctrine who seek to avoid a clear conflict by firing a smaller client in an attempt to alleviate the conflict of representing an adverse and potentially more lucrative client.  See generally Merck Eprova Ag v. ProThera, Inc., 670 F. Supp. 2d 201, 208-09 (S.D.N.Y. 2009) (citing numerous cases recognizing the “Hot Potato” doctrine).

5  For all these reasons, the Court finds that Mr. McCloskey’s belief that Greenberg’s representation of SMR and its affiliates was continuing at the time Greenberg began representing Defendants in this action was reasonable.  See In re Carter, 400 S.C. 170, 177 (S.C. 2012) (finding that an attorney-client relationship exists when client “had reason to believe” that lawyer was representing the client, and it was the lawyers “responsibility to clearly inform the court and his client that the relationship had been terminated.”).