MEMORANDUM AND ORDER
Plaintiffs brought this action pursuant to 28 U.S.C. § 1331 against defendants alleging that violations of the Interstate Land Sales Full Disclosure Act, 15 U.S.C. § 1701, federal securities laws, 15 U.S.C. §§ 77b(1), § 3(a)(10), 77c(a)(10), § 77q and state law. Presently before the court is defendants' Motion to Disqualify plaintiffs' counsel, the law firm of O'Malley, Harris & Schneider, filed October 30, 1985. A brief in support of defendants' motion was filed November 19, 1985. Plaintiffs opposed the motion by brief dated December 2, 1985. Oral argument was heard January 29, 1986 after which the parties were given the opportunity to file supplemental briefs. All briefs having been filed, the motion is now ripe for disposition. For the reasons set forth below, defendants' Motion to Disqualify will be granted.
Plaintiffs in this action are the owners of building lots in the Penn Estates, a development in Monroe County, Pennsylvania. Named as defendants are: Cranberry Hill Corporation [Cranberry Hill]; Charles Poalillo [Poalillo], sole owner of Cranberry Hill and principal shareholder of Penn Hills Lodge, Inc.; Penn Hills Enterprises, also controlled by Poalillo; Penn Hills Lodge, Inc., a corporation which is the sole shareholder of Cranberry Hill Corporation; five sales agents of Cranberry Hill; and Cost Control Market and Management, a marketing company alleged to be involved in the sale of lots at Penn Estates.
Plaintiffs are represented by the law firm of O'Malley, Harris & Schneider. Defendants Cranberry Hill, Poalillo, Penn Hills Lodge and Penn Hills Enterprises move to disqualify the O'Malley, Harris & Schneider firm because an attorney in the firm currently represents them in a state court action.
Specifically, the facts unfold as follows: In June, 1983, an employee of Penn Hills Lodge embezzled monies from the corporation. After a plea of guilty and sentence of imprisonment of the employee, Penn Hills Lodge filed a theft loss with its insurance carrier, United States Fidelity & Guaranty Company [USF&G]. USF&G paid the loss and selected the O'Malley, Harris & Schneider firm to institute an action against the employee for recovery of the embezzled funds.
Russell O'Malley, Jr., an O'Malley, Harris & Schneider attorney, informed Penn Hills Lodge of O'Malley's representation of USF&G by contacting in-house counsel, William H. Robinson, Jr. O'Malley and Robinson met in early 1984 at which time they discussed the embezzlement scheme. At this time, Robinson provided O'Malley with photocopies of documents, including statements of employees, copies of checks and daily cash sheets and bank deposit slips. O'Malley then met with the current Penn Hills Lodge's bookkeeper to discuss bookkeeping procedures, and, according to defendants, "confidential records and accounts" were disclosed.
O'Malley then filed an action in state court entitled "Penn Hills Lodge, Inc. and Penn Hills Enterprises, Inc. v. Phillip Scaggs," Civil No. 85-392, filed in Monroe County Court of Common Pleas on February 13, 1985. The O'Malley, Harris & Schneider firm filed the instant action against defendants on June 25, 1985. By letter dated March 12, 1986, after oral argument and briefing, O'Malley informed the court that he had withdrawn his appearance in the state action against Scaggs.
Two standards of review are utilized to determine whether a Motion to Disqualify is meritorious. If the representation is against an existing client, a prima facie standard is appropriate; if the representation is against a former client, then the "substantial relationship" test is employed. See Kaminski Brother, Inc. v. Detroit Diesel Allison, 638 F. Supp. 414 (M.D. Pa., 1985)(Conaboy, J.)
(citing In Re Corn Derivatives Antitrust Litigation, 748 F.2d 157 (3d Cir. 1984) cert. denied sub. nom. Cochrane & Bresnahan v. Plaintiff Class Representatives, 472 U.S. 1008, 105 S. Ct. 2702, 86 L. Ed. 2d 718 (1985)). Under the prima facie standard, the propriety of the conduct is "measured not so much against the similarities in litigation, as against the duty of undivided loyalty which an attorney owes to each of his clients." Kaminski Brothers, supra, at 415 quoting Cinema 5 Ltd. v. Cinerama, Inc., 528 F.2d 1384, 1386 (2d Cir. 1976). Under the substantial relationship test, an examination is required of the similarities in the subject matter of each representation. Id. As a preliminary matter, however, the court must determine whether O'Malley, Harris & Schneider's withdrawal of its appearance for Penn Hills in Monroe County, while this motion was under the court's advisement, has any effect on the standard to be employed.
Because the action in state court involving the Penn Hills entities was existing when the present federal action was initiated, the court finds that the prima facie standard should still be applied. See Unified Sewerage Agency of Washington County, Oregon v. Jelco, Inc., 646 F.2d 1339, 1345 n.4 (9th Cir. 1981)(prima facie standard continues even if the representation ceases prior to filing of the motion to disqualify) (citation omitted); See also Equal Employment Opportunity Commission v. Orson H. Gygi Co., Inc., 749 F.2d 620, 621 (10th Cir. 1984).
In analyzing a disqualification issue, our Court of Appeals has stated appropriate guidance may be found in the American Bar Association Model Code of Professional Responsibility. In Re Corn Derivatives Antitrust Litigation, 748 F.2d 157, 160 (3d Cir. 1984). In the case sub judice, one involving concurrent representation of adverse interests, the ethical principles of Canon 5 and Disciplinary Rule 5-105 are implicated.
International Business Machines Corp. v. Levin, 579 F.2d 271, 279 (3d Cir. 1978). Canon 5 states: "A lawyer should exercise independent professional judgment on behalf of a client." Disciplinary Rule 5-105
provides as follows:
DR 5-105 Refusing to Accept or Continue Employment if the Interests of Another Client May Impair the Independent Professional Judgment of the Lawyer.
(A) A lawyer shall decline proffered employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, except to the extent permitted under DR 5-105(C).