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Hasco Inc. v. Roche

September 11, 1998

HASCO, INC., A WEST VIRGINIA CORPORATION, AND HAROLD A. SNEDDON, PLAINTIFFS-APPELLEES,
v.
MICHAEL B. ROCHE, L. ANDREW BREHM, AND SCHUYLER, ROCHE AND ZWIRNER, DEFENDANTS-APPELLANTS (ARAUCA TRADING LIMITED PARTNERSHIP, AN ILLINOIS LIMITED PARTNERSHIP; ARAUCA GENERAL, INC., AN ILLINOIS CORPORATION; STEPHEN G. MACKLEM; HENRY GOSIENE; BRENT HARRISON; NEW ALLEGHENY, INC.; FIRST OPTIONS OF CHICAGO, INC.; AND NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., DEFENDANTS).



Appeal from the Circuit Court of Cook County. No. 96-CH-11982. Honorable Michael B. Getty, Judge Presiding.

The opinion of the court was delivered by: Justice Theis

JUSTICE THEIS delivered the opinion of the court:

Appellants, Michael B. Roche, L. Andrew Brehm and Schuyler, Roche & Zwirner (SRZ) (collectively the Schuyler parties), appeal from the circuit court's permanent injunction order disqualifying SRZ from representing certain clients in an arbitration proceeding before the National Association of Securities Dealers, Inc. (NASD). The clients, Arauca Trading Limited Partnership (ATLP), Arauca General, Inc. (AGI), Stephen G. Macklem and Dr. Henry Gosiene (collectively the Arauca parties), initially were parties to the appeal but voluntarily withdrew on July 11, 1997. *fn1

Appellees, Hasco, Inc., and Harold A. Sneddon (Hasco/Sneddon), *fn2 filed a motion to dismiss the appeal based on mootness and appellants' alleged lack of standing. First Options of Chicago, Inc. (FOC), filed a motion in support of the appellees' motion to dismiss the appeal. Although named as a defendant in the underlying suit, NASD filed no brief in this appeal. For the reasons that follow, we affirm the order of the circuit court.

To provide context for this appeal from the circuit court's permanent injunction order disqualifying counsel, we outline the four distinct and underlying disputes between the parties: (1) the initial "FOC Dispute"; (2) the later FOC "Settlement Allocation Dispute"; (3) the related "Settlement Amendment Dispute"; and finally (4) the "Disqualification Dispute."

The FOC Dispute

In August 1994, ATLP, an Illinois limited partnership engaged in trading equities and options on the Chicago Board Options Exchange, Inc. (CBOE), and AGI, an Illinois corporation and the sole general partner of ATLP, retained the law firm of Schuyler, Roche & Zwirner to represent them in a dispute with ATLP's clearing broker, FOC. SRZ represented ATLP, AGI, and Macklem in a series of actions against FOC including an arbitration before the CBOE, First Options Chicago, Inc. v. Arauca Trading Limited Partnership, Arauca General, Inc., and Stephen G. Macklem, case No. 94-M-08; an arbitration before the NASD, Arauca Trading Limited Partnership and Stephen G. Macklem v. First Options of Chicago, Inc., et al., case No. 94-03861; and a civil action in the chancery division of the circuit court of Cook County to determine the appropriate situs of the arbitration, First Options of Chicago, Inc. v. Arauca Trading Limited Partnership, Arauca General, Inc., and Stephen G. Macklem, case No. 94-CH-8402, aff'd, No. 1-95-0170 (1996) (unpublished summary order under Supreme Court Rule 23). The parties do not dispute that during these initial maneuvers, Harold A. Sneddon and Macklem were acting as agents for ATLP and AGI.

In late 1994, the subordinated lenders to Arauca, *fn3 [fn3] namely, Macklem, Gosiene, Harrison, Hasco, Inc., and New Allegheny, Inc., filed a civil action in the circuit court of Kanawha County, West Virginia, against FOC. New Allegheny, Inc., Hasco, Inc., Dr. Henry Gosiene, Dr. Brent Harrison and Stephen G. Macklem v. First Options of Chicago, Inc., case No. 94-C-2212. Pursuant to a letter agreement dated November 23, 1994 (retention letter), the subordinated lenders agreed to retain SRZ and the law firm of Campbell, Woods, Bagley, Emerson, McNear & Herndon (Campbell Woods) to represent the subordinated lenders in that suit. The retention letter included a paragraph regarding waiver of conflict of interest "associated with the representation by SRZ of Arauca and the representation of Clients by SRZ with respect to their claims against FOC."

In June 1995, the Arauca parties began negotiations with FOC in an attempt to settle the underlying dispute as well as the various outstanding litigations. Sneddon, Macklem, an accountant, two attorneys from Campbell Woods, and Michael Roche from SRZ all traveled to New York for the negotiations. Sneddon was one of the chief negotiators for the Arauca parties. Although Roche did not participate in the actual settlement negotiations with FOC, he did participate in Discussions regarding allocation of the settlement proceeds.

Substantial agreement was reached on June 14, but a written settlement and release agreement (FOC Settlement Agreement) was not executed until August 11, 1995. The FOC Settlement Agreement required FOC to pay a specified settlement amount to ATLP and set forth the terms of the clearing relationship between ATLP and FOC. FOC issued a check for the specified amount payable to "ARAUCA TRADING LIMITED PARTNERSHIP AND SCHUYLER, ROCHE AND ZWIRNER C/O SCHUYLER, ROCHE AND ZWIRNER."

The FOC Settlement Allocation Dispute

On August 17, 1995, SRZ wired the settlement proceeds to ATLP's West Virginia bank account. A dispute arose between Hasco, Inc., and the remaining Arauca parties regarding allocation of the FOC settlement funds and, specifically, payment of the attorney fees. Attempts to settle the dispute failed. In February 1996, Hasco filed a civil action in West Virginia to recover its loan to Arauca, Hasco, Inc., et al. v. Arauca Trading Limited Partnership, et al., No. 96-C-342.

The Settlement Amendment Dispute

In the meantime, ATLP sought to resume its trading activities with FOC. In early 1996, the Arauca parties and FOC agreed to an amendment to the FOC Settlement Agreement concerning the financial structure of the settlement. FOC believed that the Securities Exchange Act of 1934 (15 U.S.C. §§78g, 78h (1994)) and Regulation T promulgated thereunder required FOC to obtain signatures from all of the subordinated lenders. Because Hasco/Sneddon refused to sign the amendment as requested by FOC, FOC refused to resume clearing trades for ATLP.

On July 3, 1996, invoking paragraph 24 of the FOC Settlement Agreement, First Options filed a statement of claim with the NASD pursuant to the NASD Code of Arbitration Procedure to determine its rights and liabilities under the FOC Settlement Agreement, First Options of Chicago, Inc. v. Arauca Trading Limited Partnership, Arauca General, Inc., Stephen G. Macklem, Dr. Henry Gosiene, Dr. Brent Harrison, New Allegheny, Inc. and Hasco, Inc., case No. 96-02855 (NASD arbitration). SRZ entered an appearance on behalf of the ...


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