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January 29, 1998

MING Y WU, KEN KUO, and MOGO, INC., Defendants.

The opinion of the court was delivered by: HART


 Plaintiff Bernard Livers and his wife Rhonda Livers bring this action again Mogo, Inc. ("Mogo"), the Bernard's former employer. Also named as defendants are Ming Wu ("Wu"), Mogo's president, and Ken Kuo ("Kuo"). All three defendants are fiduciaries of Mogo's pension plan. Count I is an Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq., claim that defendants breached their duties as ERISA fiduciaries by converting to their own purposes funds that should have been deposited in Bernard's retirement plan. Count II is a claim against Mogo for breach of Bernard's written employment contract. Count III is a further claim against Mogo that its agents trespassed on plaintiffs' residence to seize a company car in Bernard's possession. Rhonda is a party only to Count III. Presently pending is defendants' motion for summary judgment and defendants' motion to disqualify plaintiffs' attorneys.


 On August 1, 1992, Bernard took up employment as national sales director for Mogo. The record is not exact regarding the nature and extent of Mogo's business, but it involves the sale of computer equipment. In 1996, Mogo had approximately 25 employees and, at all relevant times, Wu was not merely the president but also the principal, if not the sole, shareholder of the corporation. Bernard did not receive a written description of his duties but rather worked on matters by way of direct assignment from Wu. On December 23, 1992, Bernard and Mogo executed a written employment contract. The contract, which was drawn up on Mogo stationary and signed by Bernard and Wu contained the following terms:

We/I agree to the following for Bernard A. Livers,
I. Employment for a minimum of 4 years.
II. 15% of the net profit from Mogo Inc. to be paid on a Quarterly basis as long as under [sic] Bernard A. Livers is under Mogo Inc. employment.
III. If Mogo Inc. sells out with in 4 years, Bernard A. Livers will get a buy-out suitable to both parties.
IV. After 4 years if our client base has reached four thousand, Bernard A. Livers will be entitled to 5% ownership of Mogo Inc.

 Bernard's starting salary was $ 20,000.00 per annum plus commissions, but, by the date of the employment contract, his salary had increased to $ 43,333.00 per annum. During the course of his employment, Bernard was paid additional sums in response to specific requests: an unspecified sum with respect to the purchase of a home, $ 7,000.00 relating to the payment of taxes and $ 1,000.00 to assist in the funding of a vacation.

 Mogo's fortunes floundered over the next few years. It suffered a net loss every year, with the exception of 1994, when it had a net income of $ 60,013.00. Sometime in 1995, a decision was made to terminate the employment of a number of employees, including Bernard. On April 11, 1996, approximately eight months prior to the end of his four-year employment term, Bernard was discharged by Mogo.

 At the time of his discharge, Bernard was earning an annual salary of $ 60,000.00. Mogo subsequently offered to reemploy him as an independent contractor, to be paid solely on a commission basis, but Bernard rejected the offer. As regards the other terms of the employment contract, the record does not establish facts that would trigger an entitlement to a buy-out or to a 5% interest in Mogo. Mogo did not sell out within the four year term and, additionally, Mogo's client base did not reach even half the number required to create the 5% interest for Bernard. However, it is clear that Mogo failed to provide Bernard with an accounting of net profits and losses in respect of any quarter. While Mogo concedes that it did have a net profit of $ 60,013.00 in 1994, it does not dispute that it failed to pay Bernard any sum as a percentage of net profit. Mogo also failed to reimburse Bernard $ 505.28 in respect of a business trip to Arizona which he undertook on behalf of Mogo.

 At all times relevant to this lawsuit, Mogo operated a 401(k) salary retirement plan ("the Plan") which constituted an ERISA plan, as defined by 29 U.S.C. § 1002(2)(A). Wu, Kuo, and Mogo acted as fiduciaries of the Plan. Bernard participated in the Plan and, at his direction, from July 14, 1995 until April 15, 1996, Mogo withheld $ 250 from his salary for each twice-monthly pay period for contribution to the Plan. However, by April 15, 1996, the date of his last salary payment, deferred compensation in respect of the preceding nine months had not been deposited with the Plan trustee on his behalf. Only $ 2,500 of a total of $ 4,750 deferred compensation had been so deposited. The outstanding sum of $ 2,250 was subsequently deposited in two installments: $ 1,500 on June 12, 1996 and $ 750 on November 27, 1996. Defendants contend that additional sums were also deposited representing the amount of employer matching contributions as well as an amount equal to the income which the deferred and matching contributions would have earned had they been deposited with the trustee on the last day of the calendar month in which compensation was withheld.

 After his separation from Mogo, Bernard remained in possession of his company car, which was owned by Mogo. Bernard offered to return the car, but only upon payment by Mogo of all sums he considered owing to him. On June 28, 1996, an agent of Mogo came to the Livers residence and removed the vehicle. When the garage door was left open momentarily, he entered the vehicle with the aid of a key, backed it out of the garage and drove off. The repossession took place in plain view of Rhonda and her son and over Rhonda's screamed objections. Bernard was inside the house at the time the vehicle was removed. Rhonda's son was upset by the incident. Rhonda herself began to shake and cry uncontrollably and felt emotionally overwhelmed all that day and that night. However, she did not seek or receive any medical attention at the time. Approximately nine months later, she consulted a doctor who diagnosed her as suffering from depression. Rhonda says that she continues to endure repercussions from the incident involving the removal of the vehicle.


 Defendants move to disqualify C.D. Kasson and the law firm of Burditt and Radzius as attorneys for plaintiffs. Defendants contend that Kasson and his firm formerly represented Mogo in a matter substantially related to their representation of plaintiffs in the present case.

 The basis for defendants' motion is that Kasson and his firm formerly represented Mogo in a civil action that arose out of a transaction between Mogo and a Kentucky corporation, William L. Sanders, D.M.D., P.S.C. The transaction, which involved the sale of certain computer equipment by Mogo, was negotiated by Bernard, acting on Mogo's behalf. In March 1995, Sanders filed suit against Mogo seeking damages for breach of contract on the ground that the equipment was not capable of the performance promised by Mogo. There is no indication that Mogo directly hired the services of Kasson and his firm at any relevant time in connection with the Sanders lawsuit. Rather, defendants contend that an implied representation arose indirectly by virtue of Kasson's representation of Bernard. The events giving rise to the alleged representation are related in a fax dated June 25, 1997, sent by Kasson to Raymond Rossi ("Rossi"), defendants' lawyer in the present case. In the fax, Kasson states that Sanders' attorneys have been endeavoring to take Bernard's deposition in connection with that lawsuit and that he plans to refer the matter to Rossi's offices unless advised otherwise. He indicates that his firm has had several communications with Sanders' attorneys regarding coordination of the taking of depositions and has invoiced Bernard $ 400.00 in respect of time spent on the file. Kasson closes by stating that his firm will appreciate a payment by Mogo. See Exhibit H to Def. Mem.

 Disqualification is a drastic measure that the courts should impose only when absolutely necessary. Owen v. Wangerin, 985 F.2d 312, 317 (7th Cir. 1993); Weeks v. Samsung Heavy Industries Co., 909 F. Supp. 582, 583 (N.D. Ill. 1996). The movant has the burden of establishing facts requiring disqualification. Id. In determining whether disqualification is proper, the court applies the Rules of Professional Conduct of the Northern District of Illinois. Rule 9.1 addresses conflicts of interest involving former clients and provides in relevant part:

A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which the person's interests are materially adverse to the interests of the former client unless the former client consents after disclosure.

 See GTE North, Inc. v. Apache Products Co., 914 F. Supp. 1575, 1579 (N.D. Ill. 1996). Rule 10.1 disqualifies an entire law firm where a member of that firm is prohibited from representing the new client under Rule 9.1. Both rules operate to enforce the basic prohibition against an attorney using a client's confidential information against that client and on behalf of another client. See Rule 1.6; Analytica, Inc. v. NPD Research, Inc., 708 F.2d 1263, 1266 (7th Cir. 1983).

 In addressing disqualification questions, a district court must initially make a factual reconstruction of the scope of the prior legal representation. Westinghouse Elec. Corp. v. Gulf Oil Corp., 588 F.2d 221, 225 (7th Cir. 1978). Ordinarily, the proper method is for the court to conduct an evidentiary hearing or review evidence submitted in the form of affidavits. GTE North, 914 F. Supp. at 1581. However, neither party has requested an evidentiary hearing nor submitted affidavits. Defendants, as movants, have the burden of showing that Kasson and his firm had access to confidential or privileged information during the course of a prior representation. Weeks, 909 F. Supp. at 583; Hoban v. Strata Marketing, Inc., 1991 U.S. Dist. LEXIS 15736, 1991 WL 204965 *1 (N.D. Ill. Oct. 2, 1991).

 Defendants contend that Kasson and his firm performed legal services for Mogo while the present lawsuit was pending and that Kasson believes that his firm is entitled to payment by Mogo. Defendants contend further that the former representation was substantially related to the present representation of Bernard and Rhonda. This substantial relationship, defendants say, gives rise to a presumption that confidential information is exchanged and shared freely among the individuals of the law firm in question. Plaintiffs respond that there is no evidence that Kasson and his firm ever acted for Mogo in any capacity and they dispute the existence in defendants' motion of any factual allegation of actual or implied representation. Plaintiffs contend that the fact that Bernard is suing Mogo and seeks a sharing of his costs does not create an attorney-client relationship between Bernard's attorney and defendants. Finally, plaintiffs contend that, absent a direct attorney-client relationship, there is no presumption that confidential information was exchanged.

 The standard for disqualification is the substantial relationship test: a lawyer may not represent an adversary of his former client if the subject matter of the two representations is substantially related. Analytica, 708 F.2d at 1266; LaSalle National Bank v. County of Lake, 703 F.2d 252, 255 (7th Cir. 1983). But this test assumes the existence of a prior attorney-client relationship. Thus, the threshold question to be determined here is whether an attorney-client relationship existed between Kasson and Mogo. In the normal course of events, such a relationship is based upon a formal arrangement between the attorney and the client. But even absent a formal arrangement, there are circumstances in which a relationship will be implied and the attorney found to owe fiduciary obligations to the layperson. Westinghouse Electric v. Kerr-McGee Corp., 580 F.2d 1311 at 1319. Similarly, a professional relationship is not dependent upon the payment of fees. Id. at 1317. In order to establish an implied attorney-client relationship, it must be shown that the client believed that he or she was represented by the attorney. In other words, the privilege of attorney-client communications arises only when the client has manifest an intention to seek legal advice or consult with the attorney in that capacity. Westinghouse Electric, 580 F.2d at 1319; International Paper Co. v. Lloyd Manufacturing Co., 555 F. Supp. 125, 131 (N.D. Ill. 1982).

 In the present case, there is no evidence that Mogo believed that Kasson represented Mogo with regard to the Sanders lawsuit. On the contrary, defendants infer from Kasson's fax a belief on the part of Kasson that he represented Mogo in the matter. Plaintiffs dispute this inference, contending that Kasson merely sought the recovery from Mogo of legal costs which had been invoiced to his client, Bernard. In any event, whether an attorney-client relationship existed hinges upon Mogo's, rather than Kasson's, understanding of the situation and the facts presented suggest that Mogo did not believe that it had any form of professional relationship with Kasson or any member of his firm. At no point did Mogo communicate directly with Kasson, much less consult with him with a view to obtaining legal advice. Mogo had no need of Kasson's services with respect to the Sanders lawsuit and, to the extent that Kasson communicated with Sanders' attorneys, he did so on behalf of Bernard. These communications were due solely to the fact that Bernard, Kasson's client, was a witness in the Sanders lawsuit. Kasson states in his fax to Rossi that he plans to refer the matter to Rossi's offices, acknowledging that it relates to Mogo's business.

 Whether it was necessary or, indeed, prudent for Kasson to communicate with Sanders' attorneys in the circumstances is not clear and the parties have not furnished facts that would assist in reaching this determination. However, the issue is not crucial to a decision on the motion to disqualify. The central concern raised by this motion is whether Kasson received confidential information from Mogo that he can now use against Mogo on Bernard's behalf. Defendants have failed to show that any confidential information was exchanged between Mogo and Kasson or, indeed, that any opportunity arose for the exchange of such information.

 Since defendants have not established the existence of an attorney-client relationship, there is no need to reach the question of whether there is a substantial relationship between the Sanders lawsuit and the present lawsuit. ...

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