Remember the motion by California’s public employees’ retirement system to disqualify Winston & Strawn from representing the bond insurer National Public Finance (the muni bond wing of MBIA) in the Chapter 9 bankruptcies of two California cities, Stockton and San Bernardino? Calpers’s lawyers at K&L Gatesargued last month that under California law, Winston must automatically be disqualified from representing National because it hired a K&L partner who had represented the pension fund, which is in direct conflict with the bond insurer over priority of payouts by the bankrupt municipalities.
Winston & Strawn filed National’s response on Friday in the San Bernardino case. As you’d expect, the filing disputes many of the particulars of Calpers’s account of Winston’s hiring of Felton Parrish, a former K&L partner who billed more than 350 hours on Calpers matters. According to Winston & Strawn, no one at K&L Gates – including lead Calpers lawyer Michael Gearin - suggested that the pension fund would seek to disqualify Winston until weeks after Winston established an ethical wall and Parrish moved over to his new firm. Despite Calpers’s inflammatory hyperbole, Winston argued, there was nothing “secretive and misleading” about Parrish’s “routine lateral move.” Nor was Parrish doing anything wrong when he forwarded Calpers material to his personal account when he worked at K&L Gates; according to Winston & Strawn, he was just making it easier to work on documents from home. Winston and its client accuse Calpers of gaming the disqualification process to deprive National of its longtime lawyers at Winston & Strawn, who are among the most experience in the country in Chapter 9 cases.
It’s always juicy to dig into these disqualification disputes, but this case also raises an issue of much wider significance than whether Calpers mischaracterized Winston & Strawn’s hiring process and ethical wall. Under California precedent in the 2010 case of Kirk v. First American Title Insurance, a lateral partner’s knowledge is presumptively imputed to his or her new firm, but the firm can rebut that presumption by showing that it walled off confidential information. There’s one big exception, though. In the “extreme” circumstances in which a lawyer switches from one side to another while a case is under way, that direct conflict means the new firm is automatically disqualified regardless of any ethical walls or other protections it has erected.
Calpers had asserted that the pension fund and National are in direct conflict in the Stockton and San Bernardino bankruptcies. As you know, Calpers believes that under state law, California municipalities must meet their pension obligations before paying other creditors. Muni bond insurers, of course, have vigorously rebutted Calpers, which they regard as just another creditor competing for scarce resources. In the Stockton bankruptcy, Calpers and National were on opposite sides of a contested hearing over whether the city – which had sided with Calpers – was eligible to seek protection under Chapter 9. In the San Bernardino case, which has progressed more slowly, National opposed a Calpers motion to lift the automatic stay on litigation to bring an enforcement action against the city, but that’s been the full extent of head-to-head confrontation between the pension fund and the bond insurer.
Winston & Strawn’s motion, which was filed in the San Bernardino case, argues that such glancing engagement does not amount to the sort of “extreme” direct conflict that requires disqualification, particularly because Calpers is not even an official party in the Chapter 9. According to National, there is no precedent holding that two parties in a bankruptcy that haven’t asserted any claims against one another are in direct conflict.