Article Archives >> Lead Stories >> August 1-31, 2006

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Attorney for Nonprofit Corporation
Not Disqualified in Suit by Founder
Original consultation is not related to issues
raised in current litigation, Court says

A federal District Court in Brooklyn has refused to disqualify a lawyer from advising a nonprofit corporation in litigation brought by the founder of the organization, even though the lawyer had worked with the founder in establishing the corporation. (Team Obsolete Ltd. v. AHRMA Ltd., No 01 CV 1574, E.D. NY, 7/18/06.)

Attorney Edward Bendelow had worked with Robert Iannucci in 1989 in converting a for-profit business, AHRMA Ltd, doing business as American Historic Racing Motorcycle Organization, to a nonprofit to promote historic motorcycle racing. Although Iannucci was part owner of the business corporation and the principal advocate of historic motorcycle racing, the nonprofit was controlled by a 12-person board representing the members of the association. Iannucci was given no official role with the new group.

Iannucci was made a “Special Adviser” to the Board, a position he claimed would entitle him to attend all board meetings and participate in discussions. Iannucci claimed that Bendelow advised against Iannucci’s being made a permanent member of the Board and claimed he was “pushed out” in 1991. His current suit, originally filed in 2001, involved breach of contract, trademark infringement and interference with business opportunities.

The Court said that disqualifying counsel is a “drastic measure” which is appropriate only where allowing the representation would pose “a significant risk of trial taint.” It should be done only where (1) the moving party is a former client of adverse party’s counsel; (2) there is a substantial relationship between the prior representation and the present suit; and (3) the attorney has or was likely to have had access to privileged information in the prior situation. The Second Circuit, it said, “disfavors disqualification” and “mere speculation” as to the facts is not sufficient.

Iannucci did not directly claim an attorney-client relationship in connection with the conversion to nonprofit, but claimed that an attorney owes a fiduciary duty to a person with whom the attorney deals where the attorney has or should have reason to believe that the person would rely on the attorney.

Iannucci testified to many hours of consultation concerning the new organization and argued he was the real party in interest, even though he had no official position with the old or new group. Bendelow showed engagement letters that made clear he was representing the new organization and not any individuals. The Court concluded that their “starkly different characterizations of the events leading to the formation of the ‘new’ AHRMA” might give rise to a factual issue of whether Bendelow gave Iannucci legal advice.

But the Court said that Iannucci’s argument that the issues were related was “weak.” Iannucci argued that the structure of the AHRMA fostered the anti-competitive behavior at the heart of the litigation and that Bendelow had used confidential information gained during the time of incorporation to drive Iannucci from the sport. Bendeow denied receiving confidences “of any kind.” The Court ruled that Iannucci had not articulated how the incorporation had anything to do with whether or not AHRMA breached Iannucci’s membership contract, tortiously interfered with his relationships with sponsors or promoters, or infringed a trademark.

The Court also noted that the suit was begun five years ago and that a claim for disqualification after so much time and effort was invested in the case would create a substantial hardship for the defendants.

YOU NEED TO KNOW

Whose organization is it? (See Ready Reference Page: “The Key Question: Whose Organization Is It?”) Although the attorney will normally state in the engagement letter that the client is the new organization, and not the individual asking to have the new organization created, the individual may have a different view. The answer to the question of whose organization it is will significantly affect the structure of the organization, and perhaps the attorney-client relationship.

Article Archives >> Lead Stories >> August 1-31, 2006