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NY: "Substantial Relationship" as the Test for a Conflict of Interest

Lightning Park, Inc. v. Wise Lerman & Katz, P.C., 197 A.D.2d 52 (1st Dep’t 1994).

NY: Contract action; real estate development

Student Contributor: Nicholas Tam

Facts: Plaintiffs entered into a series of agreements to develop property on West 42nd Street in Manhattan. Plaintiff retained legal counsel from an attorney from the defendant law firm. The law firm represented plaintiff to structure financing. After the financing deal soured, plaintiffs sued their attorneys in 1988 alleging that, as escrow account holders, they breached their fiduciary duty by having secret contact with the other party while representing plaintiffs.

Subsequently, plaintiffs sued defendant attorneys for not fully understanding the agreemend and negligently representing them in the deal. Defendant attorneys retained the law firm of Alkalay, Handler, Robbins & Herman to defend the legal malpractice action. However, Plaintiffs moved for disqualification of defendant’s legal counsel on the ground of conflict of interest. Plaintiffs contend that the same firm had represented them on the negotiations of the finance structuring, and thus, were conflicted out.

Issue: Whether there was a substantial relationship between the fiduciary breach litigation in 1988 and the present case dealing with incompetent representation, and thus, the law firm was conflicted out?

Ruling: Here, Herman’s mere representation of plaintiffs at some earlier point did not constitute a bar to the representation on defendant in the subsequent action because the issues were entirely different. The court reasoned that in order to meet the ‘substantial relationship’ test, the issues of the present litigation must be identical or essentially the same as those in the prior case. The first was a breach of fiduciary duty with secret dealings, while the second action is an incompetency issue where the defendants were not fully aware of the provisions in the agreement.

Lesson: Whether there is a substantial relationship between two actions is a fact-based question. Here, the court looked to the scope of the duties of the law firm in the first action and compared it to the second.

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Posted in: Conflicts of Interest, New York, Real Estate