The opinion of the court was delivered by: DITTER
J. WILLIAM DITTER, JR., UNITED STATES DISTRICT JUDGE
On August 15, 1989, the defendant, Earl Stout, was charged with one count of racketeering, one count of conspiracy to commit theft from programs receiving federal funds, thirteen counts of theft from programs receiving federal funds, and thirty-three counts of mail fraud. Stout's
attorney, Richard A. Sprague, Esquire, entered his appearance on behalf of the defendant on August 24, 1989. The following day, the government filed a motion for a hearing to determine whether Sprague's representation of Stout creates an unavoidable conflict of interest requiring his disqualification from this case. Hearings were held on Thursday, September 7, 1989, and Thursday, September 14, 1989, at which time the government made an oral motion for Sprague's disqualification. Both the government and the defendant presented documentary evidence and testimony to support their positions. For the reasons that follow, I find that the government's motion must be granted and that Sprague and the members of his law firm, Sprague, Higgins, Creamer & Sprague, must be barred from further participation in this case.
I will begin with a summary of the facts relevant to the government's motion, most of which are undisputed. I will then discuss the legal basis for my decision.
The defendant is a former president of District Council 33 of the American Federation of State, County and Municipal Employees, AFL-CIO ("District Council 33" or "the union"), as well as the chairman of the board of trustees of the District Council 33 Legal Services Fund and the District Council 33 Health and Welfare Fund, employee benefit funds managed by the union. He is also the former acting executive director and president of the John F. Kennedy Memorial Hospital ("JFK Hospital"), a nonprofit corporation administered by the board of trustees of the Health and Welfare Fund. The defendant served in these capacities for over thirteen years until May 10, 1988, when he was defeated in a bid for re-election.
Also charged in the indictment are the defendant's son, William C. Stout, the former assistant to the president of JFK Hospital; Cynthia Bullock, the former director of the District Council 33 Legal Service Plan; and Frances Rooney, the former vice-president of District Council 33. Specifically, the indictment charges that Stout used his "position and influence" within the union to direct the withdrawal of union funds totalling nearly one million dollars without the consent or authorization of the appropriate union officials. He is accused of fraudulently misappropriating and converting these funds to purchase various luxury items and generally to benefit himself and others.
Sprague represented the union, its members, and its affiliated entities, including its employee benefit funds, its boards of trustees, and JFK Hospital, in a wide variety of matters between 1979 and 1988. According to the defendant, "[Sprague's] law firm represented the [JFK] Hospital in several medical malpractice actions, represented union members in criminal cases, represented certain entities in defamation actions and in suits against the City of Philadelphia regarding benefits and pensions." Dft's Response to Govt's Supplemental Motion for Hearing at 1-2. In a letter of January 5, 1983, Sprague's law firm confirmed its agreement with Stout "to act as general counsel" to District Council 33 upon receipt of a non-refundable $ 75,000 retainer. Gov't Exh. 21.
In January of 1983, Sprague initiated an action against the City of Philadelphia on behalf of District Council 33 and its Health and Welfare Fund seeking monetary and injunctive relief on the grounds that the city had breached and was continuing to breach its collective bargaining agreement with the union by underpaying the union's Health and Welfare Plan from July 1, 1982, through June 30, 1984. See District Council 33, et al. v. City of Philadelphia, No. 3504, Philadelphia Court of Common Pleas, January Term 1983, No. 3504. The union claimed that the city had failed to make full payments for health and medical benefits for union members and their dependents pursuant to the agreement. Sprague decided to use the contractual period between July 1, 1982, and June 30, 1984, as a "test case," believing the city had breached similar contractual provisions in collective bargaining agreements dating back to 1975. If the union was successful in its test case, the hope was that this judgment would preclude the city from contesting liability as to the previous years. In May of 1985 and in June of 1986, the union filed companion lawsuits against the city concerning the contract periods between 1975 and 1982. See District Council 33, et al. v. City of Philadelphia, No. 4134, May Term 1985, Philadelphia Court of Common Pleas; District Council 33, et al. v. City of Philadelphia, No. 5932, June Term 1986, Philadelphia Court of Common Pleas.
Following the court's decision, Sprague contacted Robert C. Daniels, Esquire, whose practice is largely in the personal injury field, and requested that he and his law firm undertake the pending litigation on behalf of the union. No proceedings relating to the substantive issues in the lawsuit had begun in view of the pendency of the disqualification issue. By letter to Stout dated February 27, 1984, Daniels agreed to represent District Council 33 with regard to its rights under the contract extending from July 1, 1982, through June 30, 1984, in exchange for a $ 75,000 retainer fee. See Plaintiff's Motion for Leave to File Amended Complaint, District Council 33, et al. v. Daniels, et al. (hereinafter, "Plf's Motion to Amend, D.C. 33 v. Daniels ") at Exh. E, attached to Exh. A. Although the letter specifically excluded representation in connection with claims against the city for contract periods before July 1, 1982, it is unclear whether the initial agreement between Daniels and Stout for the $ 75,000 retainer fee was intended to cover any appeals of the original action. (In an affidavit by Daniels in a lawsuit recently filed against him by the union, he maintains that the initial fee agreement only contemplated representation in the preliminary injunction proceeding then pending before the court of common pleas. See Defendant's Answers to Plaintiffs' First Set of Interrogatories, District Council 33, et al. v. Daniels, et al., (hereinafter, "Dft's Answers to Interrog., D.C. 33 v. Daniels "), Exh. D at 2-3).
Daniels obtained an overwhelmingly favorable result for the union. The Honorable Lawrence Prattis, sitting as a chancellor in equity, granted the union's motion for a preliminary injunction on April 27, 1984, and entered findings of fact and conclusions of law which supported the union's position insofar as the issue of the city's liability was concerned. See id. at Exh. C, attached to Exh. D. Although the judge ordered on May 3, 1984, that the city's monthly payments under the collective bargaining agreement be increased retroactively effective January of 1983, the precise amount of damages and the city's monthly financial obligation to the union as set forth in the contract had yet to be determined. During the next twelve months, Daniels supervised the process of certifying medical bills for payment by the city and prepared the case for trial. Still contesting its liability, the city followed through with its original intentions to litigate. On April 4, 1985, following a hearing before Judge Prattis, the court found in favor of the union, and on April 26, 1985, issued an order awarding the union close to $ 21 million in damages, subject to credits due the city for payments made following the issuance of the preliminary injunction. See id. at Exh. I, attached to Exh. D.
Apparently confident with the strength of the union's position, notwithstanding the city's announced intention to appeal, Sprague appeared before the executive board of District Council 33 on April 9, 1985, and informed it that Judge Prattis' decision "probably makes this union one that will have the richest Health and Welfare Fund in the world." See Plf's Motion to Amend, D.C. 33 v. Daniels, Exh. F at 2, attached to Exh. A.
Daniels insisted on more money for continued representation. Two months earlier, at Daniels' request, Sprague had arranged with Stout for the union to pay Daniels an additional $ 125,000 in connection with the litigation. See Dft's Answers to Interrog., D.C. 33 v. Daniels, Exh. D at 11-13; N.T. 9/14/89 at 138. On April 22, 1985, the city paid the union's Health and Welfare Fund $ 8.5 million on account of the payments ordered by Judge Prattis. Two days later, the Fund paid $ 125,000 to Daniels toward the fee arranged in February. Despite the tremendous award in its favor, Stout informed Sprague that the union could not afford additional lump sum payments to Daniels. N.T. 9/14/89 at 139-40. Inexplicably, Stout, Sprague, and Daniels arranged for the union to pay Daniels a 25 percent contingent fee which was to apply to all sums recovered in excess of $ 14 million in the original and companion cases. The fee agreement is contained in a letter from Daniels to Stout dated May 20, 1985, executed by Stout on May 24, 1985. See Plf's Motion to Amend, D.C. 33 v. Daniels at Exh. G, attached to Exh. A.
Neither Daniels nor Sprague sought approval of this arrangement from any official union source other than Stout. See N.T. 9/14/89 at 140-41; Dft's Answers to Interrog., D.C. 33 v. Daniels at 32-35, Exh. D at 16. It appears that Stout unilaterally authorized the agreement on behalf of the union. Counsel for the defendant maintains that this was not at all unusual since "virtually every action that Earl Stout took from the time he took office until the day he left office was without seeking prior approval from any board. It was the way that union operated." N.T. 9/7/89 at 17.
When the city appealed, Daniels took only one exception to Judge Prattis' factual findings, claiming that the judge erred in calculating damages: the proper amount was close to $ 27 million, not $ 21 million. Success on the union's cross-appeal would increase its potential award with respect to all contract years since 1975 to between $ 80 and $ 100 million, N.T. 9/14/89 at 145, of which Daniels would get between $ 16.5 and $ 21.5 million.
Several months before the final hearing in the original case, Daniels asked Sprague to handle a personal injury case for him on appeal to the Pennsylvania Supreme Court, Reilly v. SEPTA, 330 Pa. Super. 420, 479 A.2d 973 (1984), aff'd in part, rev'd in part, 507 Pa. 204, 489 A.2d 1291 (1985), in consideration for $ 250,000. Daniels had already obtained a $ 10 million verdict before Judge Kremer of the Philadelphia Court of Common Pleas. SEPTA appealed to the superior court, claiming, inter alia, that Judge Kremer should have recused himself. Although it found no reversible error, the superior court remanded the case to the trial court on the issue of recusal. Upon allocator to the supreme court, Sprague argued the issue of disqualification and won. See Reilly, 507 Pa. 204, 489 A.2d 1291. The verdict was affirmed in its entirety.
The subsequent financial arrangements between Sprague, Daniels, and Stout in the spring of 1985 are, at best, difficult to comprehend. In June of 1985, one month after Sprague negotiated the union's contingent fee with Daniels, Daniels and Sprague reached an "oral agreement," approved only by Stout, whereby Sprague agreed to relinquish the $ 250,000 fee owed him by Daniels after the Reilly verdict in exchange for a 50 percent interest in Daniels' contingent fee. Neither Daniels, Sprague, nor Stout informed the executive board of the union or the board of trustees of the Health and Welfare Fund of this fee-splitting arrangement.
Following an appeal by the city and cross-appeal by the union to the superior court, in which the court affirmed Judge Prattis' injunctive relief and breach of contract finding, but denied the union's cross-appeal, 354 Pa. Super. 176, 511 A.2d 818 (1986), per order of February 26, 1988, the Pennsylvania Supreme Court affirmed the superior court on the city's appeal, and reversed its decision on the cross-claim. The union's award in the original case was increased to over $ 27 million. District Council 33, et al. v. City of Philadelphia, 517 Pa. 401, 537 A.2d 1367 (1988).
On May 20, 1988, District Council 33 and the Health and Welfare Fund filed a civil action against Daniels in the Philadelphia Court of Common Pleas following his efforts to attach part of the union's recovery from the city. The union alleged that the contingent fee agreement was improper, unauthorized, and excessive. In April of 1989, after the union had filed a first amended complaint, the Pennsylvania Supreme Court ordered that the case be transferred to the Chester County Court of Common Pleas for expedited proceedings. See District Council 33, et al. v. Daniels, et al., No. 89-03568, Chester County Court of Common Pleas. Howard J. Kaufman, Esquire, an attorney representing the union in its case against Daniels, testified that he first learned of Sprague's 50 percent interest in this fee when Daniels served his answers to plaintiffs' first set of interrogatories on August 8, 1989. N.T. 9/14/89 at 125; see Dft's Answers to Interrog., D.C. 33 v. Daniels at 42-42(a). Kaufman testified that the trustees of the Health and Welfare Fund were unaware of the fee-split until he brought it to their attention at a board meeting on September 6, 1989. N.T. 9/14/89 at 125. The union moved for leave to file a second amended complaint to add Sprague as a defendant to the action on September 13, 1989.
Stout was officially informed that he was the subject of an FBI investigation resulting from his conduct during his tenure as president of District Council 33 on February 23, 1989, when he received a target letter from the Office of the United States Attorney. N.T. 9/7/89 at 61. In May or June of 1989, the United States Attorney for the Eastern District of Pennsylvania, Michael M. Baylson, called Sprague to inform him that a subpoena was soon to be issued requiring his appearance as a witness before the grand jury in the matter concerning Stout. N.T. 9/7/89 at 23; N.T. 9/14/89 at 47. At that point, Baylson was aware that Sprague represented Stout. N.T. 9/14/89 at 47. Sprague immediately became concerned that the grand jury subpoena was an effort by the government to have him disqualified from the case once an indictment was returned against his client; he and Baylson disagree, however, as to whether he conveyed this suspicion to Baylson during this initial phone conversation. They also disagree about the extent and nature of their discussions following this phone conversation. In any event, it is undisputed that at a subsequent luncheon meeting, Baylson assured Sprague that his grand jury testimony would not be the basis of a motion to disqualify him. N.T. 9/7/89 at 50; Gov't Exh. 20. It appears that the government subpoenaed Sprague to obtain information about the nature of his fee arrangements with the union when he and his law firm represented it as "general counsel" and about Stout's involvement in the setting and payment of these fees. At the luncheon ...